Brett Hickey, Founder & CEO of Star Mountain Capital, LLC
Brett Hickey is the Founder & CEO of Star Mountain Capital, a specialized investment firm bringing large market capabilities and resources to established small and medium-sized private businesses.
Star Mountain’s distinctive investment platform provides superior information, relationships and resources to the lower middle-market through three complementary verticals: (i) Direct Investments in Businesses, (ii) Strategic Primary Fund Investments (including to SBIC funds), and (iii) Secondary Fund Investments. Star Mountain provides its portfolio companies (generally cash flow positive businesses with $10 million to $150 million of annual revenues) with strategic capital, human resources and relationships to grow and achieve their business objectives.
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Star Mountain Capital Named One of Crain’s 2017 Best Places to Work : https://www.businesswire.com/news/home/20171213005913/en/Star-Mountain-Capital-Named-Crain%E2%80%99s-2017-Places.
AUTOMATED EPISODE TRANSCRIPT
[00:00:01] You're listening to the scaling of services where we speak with entrepreneurs authors business experts and thought leaders to give you the knowledge and insights you need to scale your service based business faster and easier.
[00:00:15] And now here is your host Business Coach Bruce Eckfeldt.
[00:00:22] Welcome everyone. This is scaling up services. I'm Bruce Eckfeldt. I'm your host. Today we have a special guest Brett Hickey from Star mountain capital. Brett is CEO and founder there. Welcome to the program.
[00:00:34] Thanks Bruce. Nice to be introduced to everybody verbally.
[00:00:38] Yeah. So I always like to start these episodes with just a little bit of background.
[00:00:43] I would love to hear a little bit about your story about how you got into the business you know what is it that Star Mountain’s not just to give a little context to folks on the podcast.
[00:00:52] Yes sure. I guess the most relevant is I have been investing in private established small and medium sized businesses for the last 15 years have invested both directly where I've led investments indirectly through investing with other funds and other partners in over 250 companies over that 15 year time period and today Star mountain the firm that I founded and I'm the CEO of I believe we're the largest investor in established private small and medium sized businesses in America and with a portfolio of over 250 companies today that generally range from 10 million to 150 million of annual revenues. And other than that as far as a probably a couple little fun fact. Yes. I think any entrepreneur and people building small businesses can't be scared of labor and working hard. So I paid for college on the oil drilling rigs working there I grew up in Canada and I used to speed skate on the national team in Canada. So a couple of little facts about me prior to my moving to Wall Street New York in 2002 and building my career in the private equity industry. And other than that I started as an investment banker at Salomon Smith Barney. Prior to private equity and private lending investing great.
[00:02:13] And that gives us a good context and I'm always surprised about how many entrepreneurs have some kind of professional sports background.
[00:02:19] There must be something about the discipline and the focus of that that lends itself well to entrepreneurial.
[00:02:24] Yeah I think the concept and I've got second young kid on the way now so looking at education how it's changing the concept of grit and how important that is and I think there are a lot of ways to get grit but learn tenacity. But sports is certainly one of them. So as we think about hiring people building talent we really look for traits of high quality athletes more so than what their specific skills they might have from the past.
[00:02:53] And actually Brenton I know each others sort of vicariously through McGill and entrepreneurs organization and I was a rower at McGill and I always tie back a lot of my sort of business discipline to what I learned by having to wake up at 5 a.m. every day.
[00:03:08] Especially where it's cold in Montreal when it's brutal October practices that I read character building backlit.
[00:03:17] Good Joe. We're interested in kind of a service based business service sector.
[00:03:22] And one of the things I always like to point out to folks is I think everyone kind of goes into you know starting up companies with this idea you know I'm going to build an app and I'm going to put it on the App Store and I'm going to make a billion dollars read that there's going to be this up.
[00:03:33] I'm going to develop this thing that automatically sells itself. And I think if you look at the data. Most businesses in the U.S. have some other service based businesses or some kind of service component. So it is kind of core to most businesses and it is kind of a challenge. It's not comes with its own kind of obstacles its own constraints. But let's talk just from an investment point of view as you look at companies as an investor when new solutions come to define service based companies a little bit. What would you refer to as a service based company or how do you what do you look for when you look at as a company when you say that it's a service based company.
[00:04:11] Good question Bruce and I also agree with your point well. One out of a billion I'm not sure the exact stats are will become the next Zuckerberg or something of that nature. It's a pretty thin probability whereas I think that there are high quality business service opportunities and business models that folks can build and have built that are much more resilient and have a much higher probability of an attractive financial outcome. So you're less likely to become a multibillionaire running a service business but you're probably a lot more likely to become a 25 50 million dollar networth person. And so as I think about life I would rather remove the binary outcomes of living on a friend's couch or being a billionaire too rather just having a higher probability high quality of life and I think that's what business service industries can provide people much more easily and that's why we also as investors it's a large focus for us. I would define a business service company as a business that is predominantly providing service rather than a product too. It can be individuals or other businesses can be ABDC or B2B model but ultimately they tend to be pretty asset light businesses.
[00:05:34] For example we have a company that today as a matter of fact for something real time that we're providing a another investment to a company that does refrigeration install service and repairs. If you think of any grocery store or any Kuly machine in airports train stations anywhere you see those things need to be serviced and the people that own them and have them in their properties don't have the technicians and service people to do it. So busy like that has very little assets which makes banks not very good at lending to them yet can be very recession resilient because even in a down economy and at some juncture here your crystal ball is just as good as mine. But at some juncture here our next recession will be upon us and I would like to remind people that prior to any recession nobody re waves a red flag and says OK time to batten down the hatches. You know there are recessions going to be upon us. I think that good point for folks just keep in mind but that's for services they're helping other people. They're working with other businesses and they tend to be very asset light. So that's a pretty broad range. Healthcare Services business services technology services. You know I think there's even things that can be in and around you know related industries such as transportation logistics where there are also service in other people to get things done you know connecting dots and so forth.
[00:07:00] Yes. And I think you're on a good kind of range in the service industries and you have everything from you know highly skilled highly educated professional labor down to you know lower lower skilled labor manual labor type of services. They don't they all have sort of the same dynamic as I need I need people and deal with logistics. I have to deal with certain geographies and things like that that really make that you need to know the assets. I think is interesting because yes it makes it really tough. Relending as you don't have hard assets to be able to put a collateral against but it also means that they're easy to start and they can often be easy to scale at certain levels because you don't need a whole lot of upfront capital or money to infuse into the business. You often need short term capital to be able to handle training and hiring things.
[00:07:49] But but it is kind of a unique conundrum of service businesses is it easier to start sometimes harder to break through certain levels because of the dynamics. Any particularly things that you look for in terms of the financials or you know when you're looking at the operational performance of a service based business things that jump out to you or you typically go to when looking at their books.
[00:08:09] It's a good question Bruce. How do we analyze business service companies when you're investing in them. One of the advantages that we have it's turned around that we're fortunate is that we have I believe the largest amount of data and information on private businesses in America are on to the market with Beinke with more data information than anybody does and we have a custom built technology platform that allows us to really analyze that data and look at it. So we then take all that data and information and we do a real top down approach. I think the first thing to look at is the industry that the business is in. I would like to say that you know no matter how hard you pick you as a Rohnert matter how hard you're pulling. If the boats in the water and the water is frozen and your product can move very quickly.
[00:08:58] So that's a good analogy.
[00:08:59] But the oil versus the rights no matter how talented you are no matter how hard you work if you're fighting against brutal industry trends those are hard battles to win. And I think the oil and gas industry the real estate industry tend to have a lot more cyclical trends associated with them. And despite paying for college work on the oil rigs which I'm very thankful for we generally don't invest in those industries as a result of the cyclical nature of industry trends so one aspect around industry has cyclical aspects to look at. A second is just trends in general and I think starting with the macro perspective what's going on with competition from Asia or other emerging markets that are very large and have much lower costs of labor and trying to you know have some educated focus on what the next 10 years are going to look like.
[00:09:53] I think when you try to forecast too far out the relevance becomes really tough cop that's the first one the second thing after looking at the industry that the businesses in and making sure that it's got some tailwinds rather than headwinds associated with that is to look at the business model itself and aspects of the business including wanting to have a diversified customer base. And I think this is an important consideration for business owners. You may have a great customer you're scaling with but understanding and acknowledging that customer concentration risk or a supplier risk right if you can't quickly easily pivot out of a different supplier or a distribution channel partner or just clients in general.
[00:10:38] Mitigating those risks as you're building your business up to make it safer will make you sleep better at night. It will make your business valued higher. People will lend to you more readily. People will pay a higher price for a safer business. It's not just revenue. But it also matters the safety and stability of one's business which an obvious one for a smaller business. People fight through his customers.
[00:11:04] Let me ask a little bit on that one because I think this one comes up quite a bit. Typically what I see is that a business has found kind of a lead customer helped kind of establish it and grow it up to a certain point. And quite honestly it's been successful you know they use that one customer to really drive revenues drive some amount of cash flow that they can use to then build up the business but then yes they have to pivot out of that they have to get out of that kind of key customer risk is there and I'm sure this is an industry and situation specific to a Brit extent but is there any percentages or is there any kind of concentration that you kind of look at as being hey look this is unhealthy.
[00:11:43] This is like it's worrisome but okay. This is this is really where we want to be like What do you have any sense of that.
[00:11:50] Yeah. To quantify customer concentration what gives us concern you know to pick a pick a bit of a number. I would say it's nice have no single customer represents more than 15 percent of your not only not just revenue but also have your profits sometimes you might have a really large customer customer and they pay you differe rates for your services. So it's important to look at the revenue concentration as well as the profitability concentration and then a second aspect and customer concentration is looking at your top three top five and top 10 and ideal your top 10 represent less than 50 percent of your revenue. And again profits looking through those are a couple metrics. Thinking about customer concentration that I think are good to try to get to if you can.
[00:12:39] Yeah I think it's up 15 percent. No one customer more than 15 percent either profit or revenue. And I think the product is actually really good because I think a lot of people don't look at that they'll look at the revenues but when they actually go and sometimes it's hard. I've certainly seen as where it's hard for companies to really map profit to customer but if you've done a fairly good job on a project costing out your expenses and stuff you should be able to map or at least have a pretty good essence of what net profit contribution is for that customer and then top so top 10. No more than 50 percent. What are the numbers.
[00:13:13] Top 5 top yes the top 10. Less than 50 percent. And then I think you're if you look at it top three ideally those top three are less than 30 percent. You know that's probably the main one. No a single customer larger than 15 percent top3 less than 30 percent and top 10 less than 50 percent are some nice rules of thumb. You know some industries parameters and your point around the profitability of any one customer. There are variables that are hard to measure how much time and effort you put into any one customer that might be challenging but at least he can look at some basic things of what they're paying you for the same general service and what I like to advise business owners is that nothing's ever perfect but having no information and no dashboards that's definitely not perfect. So something is better than nothing. And over time you just kind of improve it and look at it. But thinking about privatizations as business owners are important. It's not granular to the penny. But at least being directionally accurate I think to be informed to analyze and evaluate and not just work in your business but also work on your business you need data to help do that.
[00:14:25] And then as you break kind of down more granular with that top down analytical approach in the business. The next thing that we really look at is the balance sheet analyzing how much debt for example you have in your business. Moody's did a really good report over about 25 years and they found that the single largest determinant of a business defaulting on its debt is how much leverage it has. So you don't have too much debt because a customer could leave and looking at those things and you know the more stable your business the more debt you can generally handle. But even with that said whether we look recently at Toys R Us will pick centrist Palace right. Really big companies get their challenges too much debt burden and so bigger doesn't always mean safer as far as businesses. You got to focus on keeping your business just like personal life prudently managed for challenging economic times and uncertainties. And so that's where we look at businesses tend to have a prudent balance sheet structure as far as debts. The biggest thing.
[00:15:33] Do you separate out debt going to care and in terms of how you look at categories of debt. You separate out some of the short term debt. I know a lot of companies that end up with these kind of short term lot of credit. You know some factory receivables like I've got up you know I've got to make payroll this month and essentially getting paid for all of that next month versus longer term debt that I'm taking on to you know build out operations or do a big marketing campaign or something. You look at that differently from an investor point B.
[00:16:00] We do yes we look it you know that's where you start to look at liquidity features that get into asset and liability matching. So if your account receivables are coming in and you have debt that is being paid from those accounts receivables and what kind of margin do you have there of access account receivable relative to your short term account payables and call it and putting debt in that category for that shorter term revolver. And we certainly do get into that.
[00:16:25] But just as the kind of high level stress test you know keep keeping leverage generally low mean we sort of have a bit of a rule of thumb of you know four times total debt to EBITDA or less so if your business is doing 5 million of annual earnings before interest tax depreciation amortization you know having been able to have less than 20 million total debt.
[00:16:51] That's just a starting point. You know you may want to whittle that down if you have customer concentration risks you may want to be lower if your business has more cyclicality or seasonality to it. You know those are things that are going to want to bring it down from there so it's not going up from there but it's coming down from that leverage ratio. But that's just a nice kind of rule of thumb ceiling I think for people to start with the other one that's really important. That's less prevalent in a lot of business service companies but nonetheless it still exists is taking EBITA minus Cappe x. So just like people own a home you know you can't just say well here's my annual monthly expenses. Need to say you know any year I might have to fix X Y or Z from the Ruffino to heating to you name it. And so you need to plan for that. That should not be a surprise. And so taking eBid and reducing it by your maintenance CapEx so you're reasonably probable capital expenditures so that if you're EBITA was 5 million and maybe you have another 500000 of you know reasonably probable annual cap packs. That means you're taking in your number down to 4.5 million and then you know that's really your basis of more predictable annual cash flows.
[00:18:08] And then when you dive a bit deeper from the balance sheet and leverage ratios and whatnot then then you also get into team is a critical one is team and alignment and when you look at Team side from ourselves of course you know nobody else you know nobody's perfect right. Everybody has strengths and weaknesses including ourselves and being cognizant of that having awareness that we really like to see that and say hey you know you've hit may have been the founder and you are a phenomenal engineer or a phenomenal creative or sales or marketing person or CFO oriented person that keeps the train on the tracks. How are you supplementing leadership around you that is showing awareness and really building out the right framework and then have you built redundancies because there's risks around team and anyone leaving getting sick things happen in real life. And so you know we look at that we think alignment is critical. There's not a lot of data that I'm aware of or research that explicitly tells people that you want your team aligned to want the same outcomes as you.
[00:19:15] But philosophically and certainly how we run our business at Star mountain even 100 percent of the employees at Star mountain have equity in our business. So I wake up every day feeling good that 100 percent of my employees are trying to achieve the same goals that I care about and that are our investors care about. So I personally think that's critical and I actually think that it is in my financially selfish long term best interest. You do it because I think that I will and my team will create more value work harder be more energized pay more attention care more about the nickels and dimes and do a better job. Well so you know both engage and retain people better by having the alignment of interest so I I strongly advise business owners to think about creating alignment plans and being smart about them vesting schedules and so forth so that when somebody leaves they don't just rip a whole bunch of equity out of the business that isn't there to be aligned with the rest of the employees who are working hard and aligned with and the other shareholders but you know happy to talk more about that statement.
[00:20:24] Well let's dig into that a little bit. Just go Nick you're hitting a really interesting one for me in terms of from an investor kind of financial performance.
[00:20:33] Look at the business let this whole team thing really becomes critical for you because I think that there is a there is a directory for a founder CEO you know and in the beginning of that process you're very short of customer sort of problem focused in terms of what does the customer need. How are we going to build a solution to that. How we deliberate they become a sales focus but ultimately they really need to pivot and focus about around how do I build a leadership team that is going to grow and scale this business. And quite honestly a lot of a lot of founders don't make that transition but they get they get very stuck in that early stage and so there's a certain amount of what do you want to do it. What are you really driven by and and do you want to make that switch to really leading the company in meeting the leadership team or do none. And if not we can find a role for you inside a leadership team that is technically focused or design focused or sales focused. But then we need to bring in that team to surround us around them that can actually lead the growth of the business.
[00:21:28] I mean other than kind of you know discussions and interviews.
[00:21:31] Is there anything that you're kind of looking for in milling that that has happened or knowing that they're seeing that and they're putting the things in place they need to be successful.
[00:21:40] Yeah. So you brought up a funny little saying that we like to talk to business owners about is would you like to be wealthy or be king and understand the difference to say that hey you can be the king of your castle control micromanage everything that is a really really low probability path of maximizing your financial wealth for yourself for your shareholders. And so I think it's important and it's one of the things that we do with business owners a lot of people on the biggest side of Star Mountains business people refer to us being a value added lender where we're effectively being your private equity partner where your McKinsey's flash Bain Consulting partner where your Goldman Sachs type of investing partner.
[00:22:23] So not only are we giving you capital but knowledge data resources relationships and how to structure and frame your management team your board of directors how to think about your growth path. What are businesses. Who's going to buy you. How are you as the end of the day and just work backwards just like any business plan to say hey if you think you're going to sell to a strategic buyer versus a private equity buyer you will do things differently. The strategic buyer might say I couldn't care less about certain operational things you haven't really going to buy you for your customers and your market penetration of certain region or what have you. So thinking about that as you get longer term with your business I think is really critical. And then also analyzing your own risks like for me personally I think a lot of private equity and private investors are really good at analyzing other people but not so much themselves and I think that's just part of life right. People love giving ice and opinions but then you say hey you know how much are you eating your own cooking and taking your own advice. And I look at things you know for for my business and I think about my family my my son and my daughter who's on route and my wife and making sure that if something happens to me I want to make sure they're taking care of. And so thinking you know things can happen. You know my my mom died when she was 39 years old of cancer and things happen it's not like any of us want to have that happen but things do occur.
[00:23:49] And I I personally get comfort actually investing time and effort into having a business that makes me feel proud that I'm protecting my family my business partners my employees and my shareholders alike. Because you have to find some motivation behind it because it's not structuring things to be protective is not driving. Short term value but it's creating long term value and I think that helps people attract the right type of investment partners and high quality investment partners and also the more sophisticated and high quality teammates and partners and they appreciate that you're working hard for them and understanding them and then you know people like yourself that help coach business owners and sit down and say hey I'm going to help you work through these things because they are reasonably complex and recognize this and audio. But as you can see behind you know our our walls are Weissbourd walls and stuff. Frame things out and map things out and draw them out and look for risks and then there are there's one technology software I'll share with people that takes Klemet work with it. It's not super user friendly but it's highly capable is called Lucid chart. And so we use that to frame out every work function of our business and also the people to look for any key type of risks any process type of risks and then we build our dashboards and other aspects to analyze and look at these different aspects of our business with rike star spoke w our I.K. which which we've found to be a pretty effective tool as well.
[00:25:28] And we have no stake in either Molchanov estrogen a capacity. Things that we've we've happened to find a pretty good balance of reasonable usability and also have enough functionality within them that you can really customize things. We put the time into it but I think mapping out your business and also presenting your business to other people so we have a very large advisory committee. Some of our advisory committee allies technologies some of them help with human resources so finding advisers that are specialists in different core functions of your business and your industry and things of that nature some might be able to help of customers some that might be help with team development some with tech development whatever it may be. And I present our work and I say here's what I'm thinking about here's how we're building. Here's where I perceive risks. Here's what we're doing to mitigate these risks. What do you think. And so I presenting things to people versus just verbally talking about it to be a massive difference. One you can see it yourself and the kind of self Analise but to you're giving people real data and real information to analyze and I know obviously when you're coaching people view you frame things out for them as well. But I think a lot of people don't do that. They don't want to talk about what they think about it. They chat over a glass of wine or beer and stuff and it makes them feel good but they're not really fundamentally structuring things for the best.
[00:26:52] You know long term risk reward and I think you're framing it in a really interesting way which is as you as you move into that kind of growth phase mean look at early in the business things are scrappy you're taking big risks just kind of the nature of getting off the ground and getting getting the business going. But once you get the business going it really becomes how do you get more thoughtful and calculating about the things that you're doing and certainly know mapping things out visualizing and getting input from lots of different sources getting diversity of opinion like all that stuff becomes really important and it's important because you want to understand what are the possible things you might face. And I think that risk analysis becomes really important particularly when you're dealing with service based businesses because you're dealing with people you know people go to Tumblr and people can change and you know things happen. And having always said that you should have an BNC for every role. So you have one of those has to be internal. So you have to you know how would I replace this person if they took another job if they got sick if we got hit by the bus right if they're if they're no longer able to perform their duties.
[00:27:53] What is your BNC plan. And one of those has to be internal maybe. Well we're going to put someone in and we know that they're going to need a lot of help. We hire a coach. We do something to kind of support them. But I have to have a plan for every road that we don't have a plan. Not only is it hard when we do things like getting investment and stuff like minister asking questions but it's really it gives us the ability to then move forward with confidence and if we don't know how would we handle certain situations we're always going to be a little gun shy we're always going to be hesitant about making the moves that we really need to make and I would argue it helps us make bolder moves when we know we've got we've got plans in place mitigation plans in place for the risk that we know we're going to face out calculated risk is there.
[00:28:35] I refer to this to a lot of people and some people would think that a smaller business might be riskier. And what is that. What's the Canadian Malkiel. In any event comes later but there is there's a really famous guy that talks about the dynamic of how people perceive risk and some things it's ignorance. You work at a really big company. You feel that it's safe. It's just because you have no transparency or data into anything and so you're not looking at risks you don't have information. Well sure if you're looking at nothing then of course that feels great because you're not analyzing or identifying the risks. Whereas a lot of business owners say I want to see and understand the risks so I can actually do something about them and be prepared to do something about them and that's certainly how I feel and even investing in the smaller private businesses we do. We've been quite successful in how we've been doing that over time the last 15 years that I've been doing it. But the one of the fundamental things I find is that we can get our arms around a small business. We can truly understand the team the culture the customers and on customers. There's also quality of customers and if you have a big customer what if they leave. What if they go bankrupt so analyzing one's customers suppliers one's employees you know as many variables possible and with a smaller company our average business that we're invested in has 50 million of annual revenue and about a 25 year operating history we can get our arms around a lot of things and most things when you compare that to a local large public company you know you're going to tell me you understand what worth is weener what they are or are meant to do. Never mind having any ability to troll that direction. I personally find that a lot riskier and truly understanding and industry a team that way.
[00:30:23] Yeah I agree. I agree. And we're going to hit time here in a second.
[00:30:26] I want to do this it's been great. I love the conversation around not only the financial but the actual sort of operational management side of things how to identify arrests and what plans and mitigate those and how those go into factoring like the attractiveness our company is from an investment point of view because I think a lot of these companies are in these positions where they have great opportunities to grow. But they need some kind of capital infusion some kind of support in terms of getting to that next stage and making sure that they've got everything in order to be able to do that successfully is really important if people want to find out more about you about Star Amoun what's the best way to contact you or find out more information.
[00:31:02] Two best ways to learn more about Star mountain and our investment platforms and different things we can do for our business owners and for people that are looking to invest in the private business marketplace industry. One is Star mountain capital dot com on our Web site is pretty comprehensive and different ways to engage including the roughly 85 events that we host and speak out across the country every year with local mayors and different things like sports teams to kind of make it fun and interesting which is also part of life. Second is our YouTube channel which is YouTube or slash the Ford slash star mountain Capitol. But if he's going to YouTube and type star mountain Capitol you'll find our channel that has our different videos and podcasts and different educational content and our CEO Interview series that will hopefully be some good information and data for business owners.
[00:31:53] Great I'll make sure that all of those links are in the show notes so people can click on them. Also make sure I get the names of the products or the systems that we recommend is that people can reference those as well. Thank you for that and read this has been a pleasure. Thanks so much for taking the time.
[00:32:07] Always a pleasure Bruce. Have a great day. All right take care.
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