[00:00:00 - 00:04:52]

Will Smith: Being a strategic buyer with enough time horizon in front of you, it's just got to be the most fun way to spend a career. So said today's guest, Mark Anderegg, who acquired Little Sprouts, a daycare business with 16 locations. Mark then grew the business much more by acquiring additional tiny child care businesses throughout New England, ultimately making it the largest private preschool company in the region. Six years into his tenure as CEO, Mark had a successful exit beyond programmatic acquisition, Mark and I hit on many more themes in today's conversation, including the temptation to spend too much time with owners who really aren't going to sell the preschool industry itself. Industry selection when buying a business.

Child care, after all, is a notoriously difficult industry. Building a house of brands versus a branded house and holding long term versus Exiting. You're going to enjoy this conversation with Mark and the thoughtfulness he brings to this journey of buying businesses. Here he is. Marc Anderegg, former CEO of Little Sprouts, adjunct professor at Dartmouth's Tuck Business School and co founder of Newberry Franklin, a business that we at Mines Capital are thrilled to have invested in Investing in search deals is considered very illiquid.

Investors don't know when they're going to get their money out of your deal, they just know that it's likely to be years. But search doesn't have to be such an illiquid asset. This coming Wednesday, Andy Rougeau will present a webinar on how you searcher can provide liquidity to your investors without selling or exiting your business, which is typically considered the only way to get liquidity. Andy will discuss the varied but overlooked options like tender offers, put and call options, or investors selling their stakes to a secondary firm. The webinar is Liquidity options for search investors and it is this coming Wednesday, September 24th at noon Eastern.

Link to register for the webinar is right at the top of this episode's show notes or on the Acquiring Minds homepage acquiringminds co and as you know, when buying a business, so much of your success comes down to the people. Attorneys Bill Barlow and James David Williams return for an office hours all about the legal questions related to this topic, specifically employee issues and non competes. Bill and James David will cover all the employment, non compete and non solicit issues that commonly come up on deals. That is today, Thursday, September 18th, noon Eastern. The webinar is employee issues and non competes when buying a business.

Link to register for the webinar is right at the top of this episode's show notes or on the Acquiring Minds. Homepage acquiringminds co.

Welcome to Acquiring Minds, a podcast about buying businesses. My name is Will Smith. Acquiring an existing business is an awesome opportunity for many entrepreneurs and on this. Podcast I talk to the people who do it. What do the following Acquiring Minds guests.

All have in common? Doug Johns, Morley Desai, Tim Erickson, Chirag Shah, Shane Ursam. They all went through the acquisition lap, the accelerator and community for people serious. About buying a business. But they represent just a sliver of.

The Lab success stories. The number of deals across the Lab's cohorts now stands at over 120, with over $300 million in aggregate transaction value. The acquisition Lab was founded by Walker Deibel, author of Buy Then Build, the book that introduced so many of you to the very idea of buying a business. The Lab offers a month long, intensive, almost daily Q and A sessions with. Advisors, live deal reviews with Walker, Deal.

Team introductions, and an active community of serious searchers. Check out acquisitionlab.com, link in the notes or email the Lab's co founder, Chelsea Wood. Chelseauythenbuild.com. Marc Anderegg welcome to Acquiring Minds. Thank you all.

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Mark Anderegg: Delighted to be with you. Mark, you acquired a regional child care business, Little Sprouts. As a traditional searcher, you grew the business aggressively, both organically and inorganically through more acquisitions and exited to private equity. We are going to learn from that. Epic journey as well as what you're doing today, which is as a professor, a teacher of ETA at Tuck at Dartmouth, and building a similar venture in.

[00:05:22 - 00:05:35]

Will Smith: Doggy daycare, which mines capital our fund happens to be in, which is we're really excited about. Let's start off. Mark, way back when you decided to search, what was your background? Why did you want to buy business? Yeah.

[00:05:35 - 00:07:17]

Mark Anderegg: Thanks, Waldo. And by the way, thank you for your investment in our dog daycare business. We're thrilled to be in business with you. Yeah, so I, my background was in finance, investment banking, private equity, and I would be in these private equity management meetings. The many folks listening to this can relate too.

And I always was more interested in what the folks on the other side of the table were doing. I, I really was drawn to this notion of like being a part of a team, showing up every day, trying to build something, linking arms and going into battle together. And, and yet I didn't have any good startup ideas. I didn't feel qualified to go into any particular industry. So I go to business school.

At the end of my first year, I'm having lunch with one of the partners in my old firm. And I'm, I'm telling him how I really want to go and do something entrepreneurial, but I don't know what. And he says, hey, why don't you go raise a search fund? I said, what's a search fund? Because this is back in 2009.

It was a bit of an off the beaten path kind of thing. He described it to me. I thought he was out of his mind. I thought it was asinine. I couldn't fathom how that was a real thing.

But as soon as I went, like. Too good to be true, too good. To be true, like vastly too good to be true, I was at the time, I was maybe 26, 27, who was going to give me money to wander around looking for a business and then more preposterously, like go and actually sit in the CEO seat. I, yeah, I couldn't imagine how someone would entrust me with any of those responsibilities. But he said, I know I would invest and I bet some of the other folks around here would too.

So I went away and raised the fund. During my second year, I ended up searching out of their offices a number of the folks there were investors and set off down the journey. And I'll disclaim right up front that I was the world's worst searcher. So I've got that going for me. So all of your listeners can enjoy stories from the worst ever searcher.

[00:07:18 - 00:08:36]

Will Smith: Well, I'm going to want to hear why you called yourself that. But before, before I ask you that, Mark. It's funny, just recently in an interview for the Mind's Capital podcast with an independent sponsor, Rick Apple, he says something like, so many investors or so many finance types want to be an operator, fantasize about being an operator. And Nicholas, my co host, and I were both like, oh, really? That's interesting, because our impression is that most people don't want to be in operations and they want to just be gentlemen investors making intellectual decisions, capital allocation decision.

And yet you were, you were exactly that. You were somebody who came from finance and rather than continuing, you just, you, you, you wanted to be on the other side of the table, get actually getting your hands dirty. And judging by the success that you've had at it, you did thrive at that and did in fact like it. Rick Apple's point was that people fantasize about that, but they're wrongheaded. They get into it and realize, oh wait, actually it was much better where I was before, just doing the spreadsheet thing.

Not so in Your case. Well, if I may, this is jumping way ahead and going super out of order. So if this is disorienting, just rein me in. But after exiting the business where I was a conventional operating CEO, I did in fact think that, gosh, maybe the grass was always greener on the investing side. Maybe I will just go and be a capital allocator.

[00:08:36 - 00:09:11]

Mark Anderegg: And I did that for some time and discovered that it just wasn't close enough to the action for me. Like, I really am, I think, more suited to being a business builder than a capital allocator. And so I have since gone on to establish Newbury Franklin where you're invested. And even as I've lived that journey, I have noticed an inclination to get closer and closer to the businesses and be more and more operationally involved. So much so that I even entertained the possibility of going and running something properly again, because I did really enjoy and feel well suited to sitting in that seat.

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Will Smith: That's fascinating, Mark. And I think I will make a point of having that be a theme of our conversation because just the, there are a lot of, there's a lot of pain and headaches, to state the obvious, in, in operations. And in fact, you felt those acutely. It was one of the reasons you decided to exit. We are so out of order now.

So, so, so I'll have, I'll want to have you reconcile the pain which you, which you felt with still being drawn to it. We'll get there. We'll. We'll lace it throughout. Very wonderful, wonderful point back to the story.

Why were you the world's worst searcher? Not enough volume and spent far too much time with business owners who are not motivated sellers. So I tell my students that was. Those were my fatal flaws. I.

[00:09:57 - 00:12:02]

Mark Anderegg: The amount of time I wasted. Yeah, just like engaging with folks like squinting and an opportunity, thinking that a deal might be had was there's just inexcusable. And then I had this perspective that I needed the outreach to be super high quality, really customized, and that resulted in, I think, above average yield. But it is fundamentally something of a numbers game and I just wasn't getting enough into the top of the funnel. So to summarize it, one of my favorite people in the whole community, one of my search fund investors, many people listening will know this name.

Bill Egan said to me, mark, gosh, I like you a whole lot, but I don't like anything you're working on. So that is among the reasons that I say that I was the worst ever searcher. Well, it's so Interesting again, Mark, because there's a lot of skepticism around proprietary outreach. First of all, it's way more crowded, obviously than it was back in. You said 2009.

Yes. So the idea that, you know, and we hear that owners are being blasted all the time by searchers and private equity alike. And so personalization is in fact the way you get your edge today in outreach. And, and yeah. So anyway, well, you're familiar with the, the, the acronym varping, right?

So volume at reasonable personalization. Well, I don't know if you're familiar with it. So there's a group of thought leaders who during COVID initiated something called the Surge project. Some of your listeners may have tuned into these and there was a series of, you know, kind of conversations with practitioners on the subject. And one of the sessions was on this notion of sourcing and the acronym varping was discussed.

And again, it is this idea of like volume at reasonable personalization. Because to your point, you do need to be highly personalized to break through the noise today, but equally you need to get enough volume into the top of your funnel that you give yourself enough looks. And that's a tough balance to strike, in my experience. Yep, yep. Well, before we get off this, I think that actually the more important thing that you said here was about how you were squinting to, to.

[00:12:02 - 00:12:46]

Will Smith: To convince yourself that there might be something there. What you weren't doing was I guess even once you got in front of or got on the phone with an owner, you weren't pre qualifying them well enough. So, so what do you teach your students to do? How do you get to. Whether or not a seller who at least has taken a call with you?

But what, how do you, how do you figure out if they're actually really in the mode to sell to you? Yes, I want to take this quick moment to reassure your listeners that I will become more qualified to answer Will's questions as we progress. This is a topic about which I don't feel terribly qualified. So I advise my students and this is not very helpful, but it's stylistic. For some people, it really does pay to spend a little more time building relationship before they get into the qualification.

[00:12:47 - 00:13:10]

Mark Anderegg: For others, it does feel rather natural and to be direct and to get into the qualifying discussion early on. And I do think it is as fundamentally personal. But what I would do is I would take the third and the fourth call before like really truly qualifying it. And that was the, the inexcusable waste of time that I was referring to. Gotcha.

[00:13:10 - 00:13:37]

Will Smith: So tell us about Your discovery and how the, the story of little sprouts and how the story really began with that business. Yeah, well, I, I don't always like to out myself about this, but I, I will. So I, I raised my search fund on the premise that I was going to focus on the education industry, but importantly, not bricks and mortar. So it was not meant to be like actual delivery of education. It was meant to be kind of services provided into the industry.

[00:13:38 - 00:15:22]

Mark Anderegg: Undertook my unproductive search for a couple of years and toward the end of those two years, I received a phone call from a former colleague from my private equity days. He and I had sort of traveled around the country buying a bunch of for profit assets. I was kind of his analyst, he was the CEO and he was calling because his son was applying to Vanderbilt, which is where I went to undergrad. And I'm sharing all this just to reinforce how obscenely lucky I got and that I could have done the same thing for two years and had the same outcome. So Pete calls me and says, my son's buying a Vanderbilt.

Let's talk about it. We're having a chat. And then as that conversation progresses, I go on to ask him how his business is performing. And he says, great, but we're going to sell a number of businesses to focus on this one. And he said, in fact, we're taking little sprouts to market.

So the, the full backstory is I, with Pete, had acquired that business back in 2006, no, 2007. So I'd done a bunch of diligence on it. I knew the story, I knew the hair on it. I had, I had like, you know, fully understood the risks and the business had performed over the ensuing several years. So I felt very comfortable with the business.

And I said to Pete, Pete, you know what I'm trying to do? You know, I'm trying to buy a single business to go and run, so let me buy it from you. And he said that's why, why do. You think I mentioned it? Yeah, exactly.

He said, I'm way ahead of you on this. Right, fantastic. So, you know, such a, such a theme of search where it's like all of those calls, all that outreach and where you found the deal was actually, you know, a deal you already kind of had worked on and knew about. But, you know, it's a surface area of luck thing. You just gotta, you just gotta go through the motions and, and spread your net as far as wide as possible.

[00:15:23 - 00:15:39]

Will Smith: And to get the, just takes one. Right. So wherever that one comes from, it just takes one. That's right. Great.

So tell us more about what you liked about Little Sprouts. Yeah. And tell us, and tell us about the business, please. Like too. Do you like when your, your guest answers questions that you didn't ask?

[00:15:39 - 00:17:38]

Mark Anderegg: So the things I didn't like about it and that my, my investors were rather resistant to included that it was, you know, pretty operationally complex by search standards. So very labor intensive as multi side in nature. At the time it had 16 locations, all geographically concentrated around Boston, but still, you know, a complicated operation relative to many search deals. Margin profile is pretty thin as a function of the labor intensity. So at the time it was maybe 10, 11, 12% EBITDA margin, heavily regulated.

So there was a bunch of stuff that I didn't like and consequently, or maybe not consequently, but equally my investors didn't like. What I did like about it is just that I didn't have to believe much of anything to see a path to a good outcome. If the company just kept doing what it had been doing for the preceding four or five years, just opening a couple of locations per year, like that was going to be adequate to generate a return that for me would achieve my aspiration which was not to hit a mega home run. My aspiration was I just want to post a win frankly. Well, I wanted like to demonstrate it to myself that I could go run one of these things.

Like that is a big part of what it was about. And so yeah, I had a belief that I could, you know, just keep doing what they're doing and it would work out and, and it had been growing and anyway, I'll stop there but I mean it was really just like there's nothing, there's nothing complicated I needed to underwrite. Yeah, well, one of the things that mind's capital that we look for in, in a business when a sponsor brings us an opportunity is can't, can the business without, can the business or the, the investment succeed without any of the levers working out? So of course you want there to be as many levers as possible, as many opportunities for growth, new ideas, et cetera. But if, if none of those work out and it just carries on doing what it's doing at a, you know, you know, at a, at a growth rate, but a growth rate consistent with, with historicals, will it work as an investment?

[00:17:38 - 00:17:56]

Will Smith: And it's a great baseline and, and in fact in the lower middle market there are a lot of opportunities like that. And so it sounds like you, you kind of, I'm sure You did have, you saw all kinds of opportunity to, to do more with the business. But that was your threshold and it passed that threshold. You're going to give me too much credit. I don't even know that.

[00:17:56 - 00:19:02]

Mark Anderegg: I did have a ton of vision on what else to do. I, I'm not like a terribly innovative, like bright guy. I was just like I, I' and execute and just, you know, keep doing what they've been doing and stay out of the way. And, and, and as we'll get into, there were some like deviations from that where we did undertake some different growth strategies. But I think it would have worked even if we had just done that.

As you, as you say, if you. Ask owners in the ETA and search community which insurance broker provides highest quality work, great outcomes and has a practice dedicated to searchers and acquisition entrepreneurs, one name comes up again and again. Oberle. Oberle Risk Strategies has worked with hundreds of searchers over nearly a decade and is in fact led by a two time successful searcher, August Felker, which makes Oberly a specialty insurance brokerage for searchers by a former searcher. And if you've got a business under loi, Oberle will provide complimentary due diligence on that business's insurance and benefits program.

[00:19:02 - 00:19:44]

Will Smith: An easy, no risk way to get. To know August and the team at. Oberle to take advantage. Check out oberle-risk.com that's o b e r l e-risk.com link in the notes.

Mark I am a father with kids in daycare. To be clear, we're talking about daycares here, people, little daycare centers where I don't know what 30 to 60 kids are in, you know, in a, in a, in the four walls sort of thing. You know what the average actually for us was about 140. Oh, so that's a, that's a big daycare, is it not? Yeah, and, and we had some as small as like 30, 40, 50, for sure.

[00:19:46 - 00:20:18]

Mark Anderegg: We had some actually above 200, if you can believe that. Oh wow. But really, you know, as we started being more programmatic about what we were building, the sweet spot was. Yeah, about 140. Licensed for 140.

So in the building at any given time you might have 120. Okay, okay. So these would be what, what we would call a daycare center as to, as opposed to like a mom and pop, which is like where my kids are there, where it's just like 30 to 40 kids in a really small space or relatively smaller space. So this is this is a daycare business. Daycare business at scale.

[00:20:18 - 00:20:52]

Will Smith: What about the obvious, the liability, the emotional charge as, as you put it to me on the pre call of, of dealing with parents most precious asset. I mean woe to the, to the poor ladies who take care of my children. Exactly. And now by the way, I could also talk about the dog daycare business and how people are I think being similarly protective of their, of their pet children so heavily, heavily charged emotionally. It just, it was a wonderful business.

[00:20:52 - 00:22:17]

Mark Anderegg: So by the way, I need to say this very clearly. I bought a very good business and I got lucky. It was a great culture with a lot of very experienced people. I mean I had people on the team that had been with the organization 20, 25 plus years. So that is a really fortunate circumstance to find yourself in as a first time CEO in a regulated industry to have folks that know what they're doing and, and would go and talk to the regulators on my behalf and say yeah, we've got this new guy in charge and yes, he's new to the industry but we believe in him anyway.

I share all of that because the stakes were really high and when things went wrong it was not small potatoes. And yeah, I, I remember when I got out of the business just feeling like a pretty overwhelming sense of relief that I imagine every exiting CEO experiences. But I think in particular in this industry that mantle of responsibility was, was pretty heavy. And, and yet these parents, you have to also keep this in mind for the parents who are listening. You'll understand this when your children are that young, like they haven't done anything wrong yet, they haven't become like the teenage jerks yet.

And so like you're extra, extra, extra, like nothing is good enough for your child kind of mindset and that, that becomes a difficult customer to satisfy. Sometimes it can only be the daycare's fault because what could my baby have done wrong? So in a sense what could they have done wrong? Yeah, yeah. Which frankly is kind of true.

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Will Smith: I mean that's not, that's not irrational. Yeah. And by the way, they can't even defend themselves verbally like you know, like the really young ones, I mean like they can't even talk about what went on there. So there is a lot that is. Yeah, it's heavy.

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Mark Anderegg: It's heavy. Yeah. Yeah. I'm reminded of just kind of an important nuance to essential businesses. I'm not sure this would qualify as essential but, but substantively it's, it's something the parents need and we all like essentialness.

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Will Smith: To, in. As a characteristic in the businesses that we buy. But of course, in, in many cases, the rub is that there's a lot of pressure to, to essentialness. The, the, the, the performance, the need for it. Is it.

Because it is essential, you can't screw it up. So it's just, you know, be careful what you wish for. Let me respond to that, if I may. Well, so something.

[00:23:11 - 00:24:03]

Mark Anderegg: Okay, I'm going to be a little bit on the soapbox for a moment. I think early education and early educators are the most undervalued members of society. I think the contribution to society relative to their compensation is criminal. And I. And happily, there wasn't a lot that was happy about COVID but one of the happy things about COVID was we as a society realized that early education is actually fundamental infrastructure to the economy.

Like you will with your young kids, you and your wife, like, you can't go to work if you work outside the home with your children, you just can't do it. And so the happy byproduct of that is I think the industry got the attention it has long deserved and the funding I think in many ways it has long deserved because it is an essential business and it was proven as an essential business. And you're right, there's. There's good and bad to that. But anyway, thank you for allowing me my soapbox.

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Will Smith: Yeah, no, it's great. And, and it's, it's very. That your point is very abstract until you're a parent and you. And you really feel it acutely and daily. Mark, let's.

Let's hear more about the positive culture of the business. We understand the value of that and how fortunate that is. Was there any way that, that you could have, or that you could teach listeners to screen for that? I heard you say that the tenure of some of the employees. That's usually a good indication.

[00:24:28 - 00:25:42]

Mark Anderegg: Gosh. Well, it's so interesting. I don't know that I've ever been asked that question, how to screen for culture. I think it's a phenomenally good question. I think tenure can be telling, and this is so amorphous.

But I also think just trusting your instincts, I mean, I think a way to screen out culture would be if there's like a really strongly held aversion to allowing the searcher or the entrepreneur to spend time with the team. I get that there's sensitivity around confidentiality and so forth, but, you know, I think by and large most business owners that have a good solid culture are willing at least to allow you know, the top two, three, four people to have exposure to the person pre closing. And then you do, you get a sense for the way the human beings interact with one another. And it's, it's, it's not so hard to discern whether the camaraderie is, is authentic or not. So I realize that's an, probably an unsatisfying answer, but I don't know, I don't actually know the right way to screen for culture.

This is a distasteful way of saying it. You can, you can edit this out. It's like whatever that senator who said. Like, I don't, I don't know how to define pornography, but I know it when I see it. It's a little bit of that with culture.

[00:25:43 - 00:26:21]

Will Smith: Yeah, but, but let me press you on that, Mark, because as it turned out, the leader of the business did things post transaction that weren't honorable, let us say. So this was an interesting one where the seller proved to be maybe not 100% the type of character that you'd want, which is, which is usually, by the way, the best proxy of all. If the seller is problematic in character, then you kind of walk, it's kind of a red flag. And yet that was kind of the case here. And, and yet still she left a, a very strong culture in her wake.

[00:26:21 - 00:27:31]

Mark Anderegg: Yeah, this, this requires a little bit of a nuanced explanation. So, so she, the founder, who is a, who is a wonderful person, sold the business to this guy Pete and his kind of education conglomerate that I, that I worked on. So she was actually no longer the owner or the seller. She was, she remained the leader of the business, to your point, but she was not, not the seller and. Right.

And, and so I, I, I share that distinction because when she left the business, she did so against her will and actually was attempting to buy the business back when the seller decided to, to sell it to me. So the things that she did that I found to be maybe less than high integrity and these things, to be specific, we're attempting to not united, not even always just attempting, actually hiring some of our key people, setting up a competitive business in the same geography. Those are things that I don't entirely begrudge her. I mean, she, she felt like, you know, slighted and. Yeah, so I have a lot of compassion for why she did it, and it made my life difficult.

[00:27:33 - 00:27:47]

Will Smith: Very enlightened of you, Mark.

Great. Okay, so you, you buy the business in what year was it? 2012. In 2012. Okay, take us into the journey.

[00:27:48 - 00:32:00]

Mark Anderegg: Yeah, 2012 the profile, 16 locations, 17 million of revenue, pushing 2 million of EBITDA. There were four or five locations that were relatively newer that had opened in the preceding couple of years that were ramping. So there was an earn out component to their performance over the ensuing 12 months. And yeah, I, I set about trying to do what I said I was going to do, which is to open a couple of locations per year. I'm glad Will, you brought up the, the founder of the business who hired away some of our key people because one of the key people she hired away was the person who had been responsible for opening the new locations.

And so with that person went all, or at least most of the institutional knowledge around how to do that. So there's quite a void in this pretty critical function. And when there's a void and you're the CEO of an entrepreneurial business, you, you become the, you fill the void. So I ended up becoming the real estate guy. So I learned how to open an early education business.

And I will tell you, I did not make it look easy. The first location we were meant to open was intended to open in September, which kind of matters in the, in the education business. It's not super correlated with the academic year, but there is a little bit. And yeah, we, we didn't open until November, which is a good way to disappoint your, your new customers and really aggravate your, your employees as well. Anyway, so made some expensive mistakes.

We opened a couple. If you were to look at my underwriting materials, it would tell you that I thought that they were going to cost about $250,000 per location. I can come back if you're interested, to why I was so egregiously off on that assumption. Because then the, the first couple that we opened ended up costing us more than a million dollars each. And it turned out that math was it actually, believe it or not, still worked, but it was nowhere near obviously as favorable as what we had expected it to be.

So we thought about, geez, are there other ways that we can grow this thing? And that led us into acquisitions. If you had underwritten to opening new locations to novo for 250 and it ends up costing four times that. While I hear you say unbelievably the math still work, it would still, the math worked in terms of like, you still have a profitable operation, but that must have really hurt projected returns. That must have been a very scary realization.

Yeah, no, I would say there were days that I would, I would come home and just think to Myself, there's, there's absolutely no way I'm going to make any money on this deal. Like, like, like the, the company is not going to go away. Like we'll be able to service our debt and probably, you know, generate some sort of underwhelming return to shareholders. But I myself am, am probably not going to make any money on this and for that exact reason. So, so yeah, how did I get it so wrong?

So I bought it in 2012, which if you work backwards means I was analyzing, when I was trying to get my head around what the new locations would cost, I was analyzing the last five that had opened, which had sort of opened in the 9, 10, 11 era, which if you work backward from that is on the heels of the financial crisis. And the thing I failed to account for very embarrassingly is a number of the locations that I was analyzing were actually failed childcare centers that had already been purpose built out for that use. And so the cost to little sprouts, to fitting it out was largely just a matter of like, you know, some FF&E and some, you know, reskinning it. And, and so I just totally whiffed on the fact that there was a bunch of actual build out that, that didn't, that wasn't required. So big shame on me.

So, yeah, that's how I got it so wrong. Thank you for that, Mark. And then, and of course that leads to a big part of why the inorganic strategy blossom. But, but, but before we get to that, let me just also highlight the fact that this was a $17 million business with 16 locations. So call it a million bucks, a location with a lot of kids per location.

[00:32:01 - 00:32:57]

Will Smith: And you've already told us that it was low margin. So yeah, this just starts to feel like. Well, there's a, there's a great expression that's basically like return on brain damage. A lot, a lot, a lot of. Moving pieces, a lot of like operational complexity as you said, as your investor said, to squeeze out $17 million of revenue approaching 2 of EBITDA.

It's just interesting because as we, as I led by saying this ends up being a great success. But I don't know what that, it's just an observation. Maybe the point is that these businesses become, it's, maybe it's a scale point. It's like a business like this, a very small mom and pop daycare business becomes interesting at 15 locations and above. But like, and maybe that's maybe the observations, that's why ETA is so powerful because you can buy in at that point, as opposed to being the one who builds it from 0 to 15 where it's just not making very much money in really hard.

[00:32:58 - 00:34:16]

Mark Anderegg: Well, I appreciate you introducing me to that metric. Rob D. Return on brain damage. So it was, it was, it was, it was low. Rob D. For sure. And yeah, I mean, I hope he won't mind me invoking his name here, but Coley Andrews of Pacific League Partners was a board observer.

And after a board meeting, I don't know, probably about year two, Coley pulls me aside afterwards and says to me, gosh, you know, Mark, there are easy ways to make money and hard ways to make money. And I think you may have found a hard way to make money. Like, okay. And I mean, you know, this is skipping ahead. That, that comment really hit me hard and in many ways kind of stiffened my spine to go in and bring the business to market.

I'm really jumping ahead. I mean, the staffing challenges are so immense and yeah, I just was not convinced that this was a business that over the long term was gonna, was gonna generate returns. So, yeah, vector if you want, but. We'Ll return to it because. Absolutely.

[00:34:16 - 00:34:34]

Will Smith: We want to hear why and when you chose to sell, especially since you would think that. Well, we'll get there. So. So now take us to the. The chapter where inorganic acquisition, inorganic growth acquiring into little sprouts became this incredible lever.

[00:34:34 - 00:36:16]

Mark Anderegg: Yeah. So although it was low, Rob D. I will say that like the business itself, it was a good equity efficient business. So what do I mean by that? We never had to infuse a dollar of growth equity for the totality of this, like, seven years that I was running the business. And that's very pertinent to the inorganic discussion because what we discovered after we started initiating outreach to all the mom and pop, the 1, 2, 3 center operators in New England was.

Yeah. If we were willing to be patient and buy when they were ready to sell outside of a process, yeah, we could pay two or three times and our lender was happy to extend us two or three times to finance these. So it just became so fun. Well, like this, this was the part that was so, so fun around year two or three as, like, you know, some of that initial de novo pain was, you know, I don't know, slowly softening. We started becoming the strategic buyer of choice in our industry, in our geography.

And so the phone would just start ringing and there's. I can't think of anything more fun as an entrepreneurial CEO than when, like, you're not having to make the outreach, but rather, you know, the inbound is coming to you outside of a process to buy super capital efficiently in your core market. So, and it's just fun because it's just like you're just growing. It's just a fast way to grow. And you get to look at these businesses, you know that, you know, you can, you can understand these businesses really quickly.

[00:36:16 - 00:36:29]

Will Smith: You do a site visit, you, you see all the improvements you can buy it for relatively inexpensively. What, what's so fun? Well, it's so interesting. So if you, if you put yourself in my shoes, let's, let's make the year, I don't know, 2015.

[00:36:31 - 00:38:08]

Mark Anderegg: A short three years earlier, I would have been desperate for a business owner to call me to say like, would you like to buy my business? And now it's happening not, not every day or even every week or month, but, you know, so happening often enough that it was just like this, this thing that I had like so yearned for, which was the opportunity to go and buy good businesses, was now coming my way. And I don't know, there's not a lot in my view that's more fun than going and sitting down with a business owner or more often than not in this industry, a husband and wife, and hearing their story and letting them talk about their baby, which is how they think of these businesses and, and being able to look them in the eye and assure them that you're going to do, do right by it if they entrust it to you. And, and I feel like I'm like really like sounding self absorbed right now, but like, you know, when you have people calling me and say like, you know, I hear you're like that high integrity and you do what you say you're going to do. You know, it feels good to have earned that kind of reputation.

So I don't know, there's, there's a bunch of like the, I don't know, my, call it external validation or whatever that, that feels good coming in. Well, and you also just start to see a path of faster growth because yeah, there are daycare centers, of course, thousands upon thousands in every, you know, across the country. So in every, every town there's multiple and you can just kind of imagining just the dot, the dots on the map proliferating. So this is not appealing to your higher sense of, but just the kind of the, the hungry growthy orientation. It's like, wow, we could, we could, we could just supercharge how quickly we grow with all this inbound.

[00:38:08 - 00:38:32]

Will Smith: Right? Okay, so I have to go on another tangent because I, you know, earlier I got on the soapbox about kind of the altruism aspect of early ed. But what I learned about myself as I was in this industry was it was, it was lovely that it was altruistic, but really, that was not what fired me up. What fired me up was building a business. And yeah, it was fun to see the dots on the map.

[00:38:32 - 00:39:37]

Mark Anderegg: And yeah, it was fun to. Fun to grow. And AJ Wasserstein, who I'm sure all of your listeners will be familiar with, who I think is just unbelievably wise, said to me when I was raising my search fund, I was pitching him on the search, and I told him I was going to do education, and I told him it was partly altruistic. And he said to me, mark, I think you will be more fulfilled building a great business in any industry where you take great care of your employees and great career customers than if you have kind of a mediocre business in an altruistic industry. And, boy, was he right, in my view.

So, anyway, yeah, it was a path like fast capital vision growth. And for me, there's not much more fun than that. Mark, just let's underline the point of capital, efficient financy. People will understand what that means, but let's just highlight it for people who might not be so fluent. What you met, you said earlier that you could acquire with just debt and balance sheet cash as opposed to equity.

[00:39:38 - 00:40:15]

Will Smith: Expand on why that's powerful, please. Yeah, so kind of Finance 101 here. Yeah, very simplistically, and this is maybe not the answer you're looking for, but if you put yourself in the position of the principal, so the, the, the CEO, the entrepreneur or whatever you want to describe yourself as. There's a million different structures, but almost all of them come back to, I make more money if my equity investors make more money. And the best way to make your equity investors more money is to grow without needing more of their money.

[00:40:16 - 00:40:43]

Mark Anderegg: So if you can compound their capital, like the initial equity capital that they give you, if you can compound that meaningfully, that's vastly better for you than having to kind of consistently bring new capital in, because then you've just got to generate a return on that capital as well to, to earn kind of the same net proceeds to them or net return to them, that triggers your economic incentive. So does that, does that. That's clear in my mind. Well, did I say it? Yes, clearly enough?

[00:40:43 - 00:42:31]

Will Smith: Okay, yeah, I think you did. And let me also just add Kind of the obvious, that if you have to take equity to grow or to, to, to acquire to do anything in a business, you are giving up your own ownership in the business, which is very permanent and very expensive. And in searchers, probably finance background or not, probably understand this intuitively, which is, you know, a self funded searcher is trying to buy a business without getting investors because they understand that those investors then will own 10, 20, 30, 40% of the business. They'd rather not do that. So that, that's a perfect distillation of debt while it's heavier and you've got this interest payment and it might be uncomfortable.

It's actually the most inexpensive way to, to grow. Well compare compared to equity, I guess. Yes. 100. So you want to be growing with that if you can.

That's, that's super capital efficient. Absolutely. Very, very well said. Yeah, great. Okay, let's talk about how some, some of the levers and some of the kind of the, the, the inflection points as you went.

House of brands versus branded house. I love this turn of phrase that you shared with me on the pre call. What did that mean? Yeah, so we completed our first couple of acquisitions and as we just discussed, they were, they were screamers economically, really good deals financially, but operationally they were so taxing. So we would buy these, you know, one or two or three center operators and we would go and you know, my team and I would go and like sit down with all the staff and we would go and sit down with all the, the families, you know, our customers and often each, the customers and the employees would be like thanks little sprouts.

[00:42:31 - 00:44:04]

Mark Anderegg: But actually like we kind of wanted this mom and pop. There's like a reason that we enrolled our children here and you're, you're kind of big corporate, which is sort of laughable to most of us that like we as a $20 million business were big corporate. But we were. So anyway, why do I share that there's this big resistance often us coming in and rebranding and doing things our way. And so over time we, we thought to ourselves, well geez, if we're buying a good brand and in its market it's got a good reputation, what if we should leave it alone?

And you know, we'll, we'll centralize the back office and like it will be integrated into our business. But the brand and like the customer facing stuff especially we, we leave it as is. And so that's what we did. So if a brand was kind of neutral to underperforming we would rebrand it as little sprouts. And if it was flourishing, we would leave it alone.

So little sprouts that began as a solitary brand, a branded house, we would call it, emerged into a house of brands where we had, you know, different brands in Vermont and different brands in Connecticut and yeah, so now different brands in Massachusetts even. So, yeah, it became a house of brands, which you can argue both ways. The, the counter argument to doing it is upon exit, does a buyer perceive that you are less of a really cohesive business and therefore ascribe a lower multiple to you, which we simply did not find to be the case. Although I readily admit that we may have, we may have just got lucky on that front. Yeah, because of course brand itself has goodwill value.

[00:44:05 - 00:44:36]

Will Smith: And so if you had and say if you haven't built a brand, you might get nicked there. But, but you didn't find that to be the case. You had said, Mark, that actually in, in your new venture with Newberry Franklin, that we're in the dog daycare, that this question has come up again. How are you thinking about it in this venture? The same way or is this very, a very case by case decision for entrepreneurs?

Yeah. So I think it is case by case. And the truth of the matter, well, on this one is we are unresolved as to how we're going to handle it today. We're so small, we've only got a couple of locations. They have different brands.

[00:44:37 - 00:45:09]

Mark Anderegg: We have an intention around a brand that we may harmonize around, but it's far from certain that we will do so. And some of it, we think has to do with the brands that you end up acquiring and inheriting. I mean, are they brands that you think are scalable and that you can build around or do you, you know, put together a smattering of brands that are, are fine independently but you wouldn't necessarily want to, you know, like make that your your go to market cohesively. So as you can hear in my that kind of wishy washy answer, we're sorry. Still early days and still very much figuring it out.

[00:45:11 - 00:46:42]

Will Smith: The team at Aspen HR recently published a short white paper targeted at searchers Entitled A New CEO's Guide to Human Resources. It lays out the key items you should be thinking about as you transition into CEO and owner of the business you bought. The link to download it is in the show notes. Aspen is a professional employer organization or peo, run by a searcher for searchers. Search fund veteran Mark Sinatra runs the.

Company which provides HR compliance, flawless payroll. Fortune 500 caliber benefits and HR due diligence support for your acquisition, all for. A fraction of the cost. Go to aspen hr.com or contact Mark. Directly@Markspenhr.Com you said something that I also think is key.

We were talking about the, the value of a cohesive brand, value ascribed to that on exit and how you might be leaving value on the table. But you also said that at the local level the customers were actually paying for, for a mom and pop brand. They wanted a mom and pop brand. So, so you could also. So as, as you basically said, if you change the brand, there's cost there, There may be costs there in changing the brand that you think that you're, you think you're getting all good profit, goodwill value as you sell with a unified brand, but you're not taking into account the fact that you might have left some money on the table by not retaining the original brand.

[00:46:42 - 00:47:20]

Mark Anderegg: Yeah, that's right. Yeah. If you buy, if I go buy a childcare center and I have a bunch of attrition customers or employees for that matter, because they're averse to maybe not just the brand, but really what the brand stands for or mean, you know, means to them. Yeah. Then, then a lot of what you've paid for is as probably the value has eroded.

But then there's a million other considerations. Right. Like you know, marketing dollars if you're, you know, if you're needing to go to market to, to advertise for a bunch of different brands versus one brand, that that's not costless, you know, and so on and so forth. Yeah, totally. Speaking of marketing, that was a big feature of your growth.

[00:47:20 - 00:47:53]

Will Smith: Talk to us about how that played out, please. Yeah, well, I say to folks that I think I did almost nothing good for little sprouts, but there was maybe like a small handful of things. And one was I realized early on that we were in a consumer facing business and our marketing function was substandard. And, and anyway, so then that's okay. You know, these small businesses are not going to be aces across all the functions.

[00:47:54 - 00:49:26]

Mark Anderegg: And I did become clear in my head though that it was going to be important to upgrade that, that function. And so I did not conduct an executive search. I just called my friend from business school, Sarah Clabby, and I just said, Sarah, she was in Chicago, she had this, she, she was the one that everyone loved in our business school class because she's wonderful and everyone hated because she got all the jobs they all wanted. So she had this like fancy, you know, marketing job at Pepsi, like international. She's traveling globally all the time.

And I was like, Sarah, you've got to come to Little Sprouts. Like I just, I need you to come. And I kept calling until she agreed to come. And so several months later she came and it was, it was like almost instantaneous the improvement that we saw in our, in our marketing function and importantly culturally. So she was my first, you know, key hire and she fit in beautifully into the culture.

So the team embraced her and she was one of these people like, like, I don't know, she's not a unicorn. But like she, she was so high functioning and so capable that like, yeah, she was like a partner this, she was basically like a partner that I could have searched with but didn't. And I'm immensely grateful for her skipping way ahead. When I stepped down as CEO in 2019, the board and I agreed to promote Sarah to CEO and she's now off on her next journey as CEO of a very successful childcare consolidation. So she's an absolute star.

[00:49:27 - 00:50:48]

Will Smith: Well, good for you. For, for getting her. One of the, one of the things that you said in our pre call and when we were talking about it, her and in this was demand was never a problem for you. So you, you, you, you know, the, the leads came, the customers came. It was interesting to me because one of the things that we often hear about the lower middle market broadly is that, is that actually that, that, that it's not hard to get customers and so often these businesses are handicapped by founders and the owners and the sellers who, who just aren't good at marketing or aren't doing the bare minimum or the best practices, aren't phone, aren't calling you back, aren't don't have a CRM, aren't following up, etc was this a question of that or was there more or what say, say more about what?

How, how you, you know what the delta was between what you had and what you got from Sarah. Yeah, absolutely. So the supply, demand imbalance is always very much in our favor. So that was like when you asked me the outset, what is one of the things I liked about it really what it boiled down to was there's vastly more demand for childcare services than there was supply. So you, you could very credibly think about opening new locations and having conviction that you know, if you build it, they will come so to speak, because there's more demand than supply in the market already.

[00:50:48 - 00:51:26]

Mark Anderegg: So that, that absolutely buoyed us. But then you know, Sarah was so good that I could, I could open anywhere. I could say to her, sarah, we're going to go, we're going to open in Watertown, Massachusetts, which is the global headquarters of Bright Horizons, which is the by far the gold standard in our industry. We opened up a mile from their, their global headquarters and we filled it up. It was just, you know, Sarah was, was that good and our, you know, we, the team was very good.

So, yeah, favorable dynamics industry wise, I think augmented by a very capable executive. The, this, this demand supply imbalance.

[00:51:28 - 00:51:38]

Will Smith: Is there a best practice to figure that out as an outsider to the industry? That's a great question. I don't know that I would have. I think industry selection is so hard. I think it's so hard.

[00:51:40 - 00:54:04]

Mark Anderegg: I think what you want. Why, why Mark, same word about that. Well, I mean, okay, so if you're, if you're really serious. So Will Thorndike says the single lever at your disposal as an entrepreneur in search that you can unilaterally pull to improve your chances of success is industry selection. He says it much more succinctly, but, but that, that's the long and short of it.

And so that means you want good recurring revenue, you want high returns on tangible capital, you want industry growth. And to get those three things in one industry that you don't have to pay obscene multiples to get into, like, I don't know, there's just not a ton of them. And so then you have to ask yourself, all right, if I'm going to trade, which of those three variables am I willing to, to flex on? And that's a tough question to answer. And foregoing any one of those is hard to swallow.

So I think it's really hard. I think once you have identified an industry that you want to learn about and that you think might be a good fit, I think it's very easy to get to the bottom of whether it's a good one or not. I think it's like the ideation for me anyway, that is the hard part. So with early ed is super easy to figure it out. I mean it's heavily regulated, so there's.

Every jurisdiction has license capacity published and then you can pull the census data for 0 to 5 population, compare the two and make some assumptions around how many folks might use nannies or you know, one. One parent stays home and you know, you can pretty quickly back into how. It's never a question of like, is the supply demand out of whack? There's always more demand than supply. But it's like how, how out of whack is it?

And those are the markets that we targeted. And then for us the beauty was we would go and try to buy into those industries because again we could fully debt finance them so those the most equity efficient. But then if there weren't any sellers we just go, okay, we'll build like you know, if we can't, if we can't buy into this in the end of your market, we'll just come build. And that wasn't meant to be like threatening but it was just like we had the, the like wonderful privilege of being able to grow either way which was very empowering because there was no market that we couldn't enter so long as you know, the, the rents for the real estate weren't, weren't ridiculous, which they were in in some limited cases. So you felt like you could, you could go into almost any market, either acquire your way in or de novo your way in and fill a daycare center.

[00:54:04 - 00:54:20]

Will Smith: It was just, it was just stack ranking which, which markets are most attractive. Let's go find, find the ones that are best first. And that's very well said. That's it. And we did, we had a stack ranked list and part of, and we developed that list very quantitatively in large part because I was not from the area.

[00:54:20 - 00:54:47]

Mark Anderegg: I didn't know the first thing about New England geography. And so we did, we commissioned this whole project to really try to objectively analyze and quantify what are the markets we ought to get into. And we did, we just, we kind of executed against that list and it worked. But I think even if we had not been that rigorous it would have worked because we were in quite literally the lowest income markets in Massachusetts and the highest income markets in Massachusetts and we can make it work in both places.

[00:54:49 - 00:55:06]

Will Smith: Do you think that the child care industry still suffers from a supply demand imbalance? What do you, what is your analysis today of that? Yeah, let's go back to my being under qualified to opine position. So I, I am, I've been like pretty fully out of the industry for several years now. So I don't really know.

[00:55:06 - 00:55:22]

Mark Anderegg: My sense though, just from search activity and otherwise is that you know, there is still tons of opportunity in that industry. So is the Spider man as out of whack at that? I don't know. But is there still a supply demand imbalance? I think for sure not knowing New England geography.

[00:55:22 - 00:55:26]

Will Smith: You remind me of my college roommate who said wait, Rhode island is not an island.

[00:55:28 - 00:55:34]

Mark Anderegg: That was exactly how uninformed I was. No disrespect to your college roommate when I got out out here. Yeah.

[00:55:38 - 00:56:00]

Will Smith: Now talk to us about the what we'll return to the pain of operating. We've heard a lot of the good stuff in, in staffing in particular, you, you said you called out. Talk to us now about kind of work us toward the end of your ownership or your CEO ship of the business. Yep. So, you know, everyone knows this about early education.

[00:56:00 - 00:58:50]

Mark Anderegg: So this is not some big insight. You know, when I was doing diligence, everyone said, gosh, the staffing is really hard. And, and it is. So you have to adhere to very strict student to teacher ratios and the cost to being out of ratio is not a slap on the wrist. It can be up to and including your license being revoked.

So these are grave consequences to being out of ratio. And to boot, to be in ratio in, in most jurisdictions you have to have a teacher with a certain credential and the teacher with that credential earns a wage. That is a true, I think many would consider it, I don't know technically if the following statement is true, but not a living wage. It was a very low wage industry and the challenge was, and I believe this remains in the industry today, that for many, not for all, there are some who are truly passionate about the youngest of the children. But for many it is a stepping stone to the public school district where your comp roughly doubles, you get state benefits, you get summers off.

I mean all sorts of things make it a much more pleasant place to work. So yeah, it was always like for many a short term way station. And that just has the effect of needing to constantly be hiring and training a lot of folks. And you know, like we had a whole call center full of recruiters. I mean we, we had a pretty well developed machine.

But even still, especially as you know, if you think about the, let's see, like the 13, 14, 15 era, really strong economic climate and unemployment at, you know, all time lows. It was just a very competitive labor market and we struggled to attract and retain teachers. And I had such a good team that I, I myself was not like fully tip of the spear on this. But Sarah, who I've mentioned previously, Melissa, who is my colleague that I actually the sister of the founder that I mentioned, who was a leader of the business. I mean it was a go to sleep every night thinking about it and wake up every morning thinking about it, not thinking about it, like panicking about it.

I mean there was a call every Morning to figure out how we're going to plug the staffing halls. Wow. And. And, you know, the school's open at 6am so it's like it was a. This is very, very taxing.

And, and the truth of the matter is we never solved it. They may have solved it in my, you know, after I left, I don't know, but during my tenure, we never solved it. And yeah, it was just, it became really, really taxing on all of us, truth be told. Yeah. Well, you are aware of other people in the industry, other colleagues in the industry who, who don't have the problem.

[00:58:50 - 00:59:13]

Will Smith: They have solved it. Discussed, if you'd say it in the business, what were some of that. Was some of the ideas for solving it, or is there a solution? Or is this just. I mean, you've kind of said that this is partly.

Could be a structural issue, no matter what, but there's got to be something, right? Yeah. So in my opinion, in conventional child care, which is what we were. I do think it's a structural issue, and I'm sure there are some who have solved it. I don't know how they've.

[00:59:13 - 01:01:38]

Mark Anderegg: How they've done it. And the truth is, I don't know if anyone's really solved it. The only CEO I know who has solved it, I'll keep him anonymous to respect his privacy and his business. But he has a unique aspect to the, the labor. His is like teaching labor that it is.

It's a fundamentally different source of labor or like, type of labor. And, you know, he, you know, I hired my, like, wonderful Sarah into the sales and marketing function. He hired his equivalent wonderful person into the people function. And so, you know, he just, he said to me, I just, I, I feel totally covered on the staffing front, which I never thought I would hear someone in early education say. But I realize that's a little, again, a little bit of an unsatisfying answer.

But that's also comes up for me and Mark. I used to ask this question a lot, and the answer was always the same. But it's been a while, so I'll ask it. Why was. Obviously, you want to protect margins, so, but, but why was not just basically paying everybody more part of the answer?

Well, gosh, I feel like now I'm invoking a bunch of names, but I mean, you know, Irv Grossbeck would say, you know, compensation and benefits are in finite supply, but praise and thanks are an infinite supply. And I just found that to be completely true. So there was one time that to your Point Will, we're like, all right, we like, we just have to, we've got to put through, you know, something beyond a cost of living increase. Like we've got to do something to try to stabilize the labor. And so we did, we put through a wage increase that for our little business, which at the time, honestly we might have been like 4 or 5 million of EBITDA.

It's not a big business. It was a million dollars. A million dollars incremental cost and we didn't see a move the needle one iota. Wow. And you know, maybe we didn't do it right or whatever, but my experience of human capital matters is yes, you've got to pay a competitive wage relative to their alternatives, but really it is about culture and it's about the way you treat people and helping them see other part of something bigger.

In my experience, like paying a dollar more than the competition, you might get a short term lift, but I don't, I don't think that's a sustainable, Sustainable way.

[01:01:40 - 01:01:46]

Will Smith: Yeah. Was there anything else in the store, the core story of growing it that I missed? I feel like we hit everything in the pre call, but I want to make sure.

[01:01:49 - 01:05:29]

Mark Anderegg: No, I mean we. No, there's a million other, you know, like scars I could share, but I would say one, just because we're talking about people stuff a little bit. So I hired a chief people officer and that was not, I think of that as like, like one of these surgeries where you put an organ into the body and the body kind of rejects it and it's such a critical one that it just, it didn't, it didn't go well. Notwithstanding that the person is a wonderful human and very capable, just wasn't a fit. And that was a big setback because I, I really was like at a stage where I'd finally internalized what I had long heard, but I just finally knew it in my bones, which is, it is all about the people.

All about the people. All about the people. All about the people. And so I decided to invest in this kind of expensive, fancy people person and it didn't work out. And so that was, that was disappointing, I guess I'd say.

So, yeah, that's, that was one kind of important part of the journey. But now, I mean, we cover most of it. So on the, on the exit considerations. So yeah, in 2015, I was told that I had found a hard way to make money and, and I thought buyers were paying unreasonable multiples for these businesses. And so I, I said to the board let's go to market and see what we can get.

And so there's only two board members, as I said, Coley was an observer, but two board members. One of them said to me, okay, let's go see what we can get. And the other one, and this is one of my favorite things I've ever heard in eta. He said to me, mark, you are only just now not a liability. Why on earth would you sell now?

So it was like the least flattering thing I'd ever heard. Like, you're only just now not a liability. And so it was, it was not unanimous among the board to go to sell that, you know, we ran a process and, and ended up getting some good offers. So we did, we decided to sell. And even though up until the very end that board member was, was very resistant to it and in hindsight I think he was dead right.

I think he was absolutely right that we ought not have sold. Oh really? Well, I mean, if. So here's the thing. If I allow myself to believe that the same ultimate buyer shows up just the same way, which is a big assumption and for reasons I'm about to tell you is probably a flawed assumption, well then I left.

I left like really by my balance sheet standards, like a huge, huge, huge amount of money on the table. So yeah, it's just like I, like, you know, the power of long term compounding, like was not allowed to fully set in when you said, you referenced it earlier as like dots on the map. And yeah, like when I think of the dots on the map, I just think to myself how much bigger we could have made it if I had had the maturity and the patience to really allow the long term compounding to set in. And I didn't. I had a, you know, some, I, I was feeling some financial scarcity around illiquidity anyway and was so desperate to post a win for my shareholders that I, I sold too early.

Which a Newbury Franklin is like a, a key tenet to what we're doing is like, is long term because I just don't ever want to make that mistake again. And Mark, so much of particularly people earlier in their careers doing ETA for the first time, getting a liquidity event and having a kind of solving the money problem. I've heard it said in Silicon Valley, just get that first slug of money in your account and then you can breathe in your career a little bit. The temptation is just very strong. The default is exit.

[01:05:30 - 01:05:49]

Will Smith: What do you say? Do you discourage students from thinking that way, given your own experience? Yeah, it's such a profound question. Well, because Will, as you know, especially now, now back, you know, I can give myself a little grace because 10 years ago these options weren't as well developed. Yeah, I could, but a more mature CEO would have developed them, him or herself.

[01:05:49 - 01:11:22]

Mark Anderegg: But nowadays there's tons of good options to continue to run a business with people that you know in your cap table by just exercising liquidity events, which you can do through any number of buy, sell, hold types of arrangements. And there's a lot of, you know, Will Thorndike and Ken Weaver and Cole, Chris Hendrickson. There's a lot of really smart, experienced people in our community giving a lot of thought to this. So, yeah, I wish I had just had the awareness and the maturity to impatience to say to my board, listen, I would like some liquidity, but I, I still see a huge opportunity here. So is there something that we can do to kind of lock in that I can like tell myself I posted a win for folks, I got a little bit of liquidity and then off we go and we keep building the thing.

And I, I am certain that that could have been arranged if I had, if I approached it differently. And I wish I had. So that is how I, how I counsel students and, and just colleagues in the, in the community. But the, the real question is like, do you actually sell fire in the belly to do it? Because if you don't or something is fundamentally changed about the industry, then yeah, right thing to do is to sell and move on.

But if you sell the fire in the belly, then like, it's like, what a, what a disaster to, to sell too early. Well, you mentioned AJ Wasserstein before, and he's got a great, well, he's got many great papers, but one of them is devoted specifically to this question of long term hold. And he basically lays out the math of, of holding as opposed to selling. And it's quite compelling. It is, it is required reading in my corset talk.

I agree. It is a very compelling paper. Oh, great. Okay. Yeah, as, as is a lot of the things that AJ has written.

So, so let me just say a bit more, if I may, about the exit because, because there was a whole huge important chapter that evolved from that. So we sold in 2015 to a private equity firm in New York called the WIX Group that focused not entirely, but largely on education. And the really exciting bit about that transaction was not the liquidity that I exercised, although that was lovely too. But right after the deal closed, the principal, the guy who'd kind of been at the firm for eight years, wasn't quite a partner, but wasn't the junior member of the team. He and I were celebrating having drinks with our wives.

And he pulled me aside and said, mark, I know you're looking to bring someone on to run business development. How about me? And I was like, kevin, you've. You've got to be kidding me. Why on earth would you leave your cushy Park Avenue office to come, you know, schlep up to Lawrence, Massachusetts?

And, you know, he had some really good reasons. He's from Boston area originally, and I think, like me, he was ready just to, like. Like I was a few years earlier. He was ready to bet on himself. And, yeah, so he joined the team, and it was, you know, as transformative as when.

As when Sarah came on. So really the three of us, plus Melissa, who, again, was the. The sister of the founder, it was really the four of us that they kind of went into battle together every day. And Kevin's presence on the team enormously accelerated the growth. So he is a run through the brick wall kind of guy and just will not take no for an answer.

And just growth is in his DNA. So we did a bunch more acquisitions, some larger acquisitions. He became very capable at the de novo work, so he actually sold his real estate development on the side. Now, we had a ton of fun, so much so that when we sold the second time, which I'll come back to after the dust settled on that, I said, kevin, that was really fun, like, can we please get back into business together? But this time it's equal partners.

So he is my business partner now at Newberry Franklin. And I should say this, he not only ran business development for us at Little Sprouts, he also became CFO and was just extremely gifted in that. In that way as well. So that was a totally unexpected byproduct of the first transaction, but a very happy one. And then, just to put a bow on the rest of the journey, continued growing.

Growth accelerated under some of Kevin's leadership. And we got approached in 2018 by a French childcare company that was looking to get into the U.S. they, at the time were in 12 countries, and we told them we were not for sale. And they said, well, everything is for sale. Name a price. So we made up of what we thought was a price that would compel them to walk away.

Instead, they said, okay, and they closed on it just a few short months later. So, again, that was also very unexpected. We, of course, were not on the market and while that transaction I would characterize as a very happy one economically, I would characterize the cultural fit as, as not so good. And Kevin and I and others, you know, left the, or late and kind of left our operational roles like pretty, pretty quick after that deal closed because it was as I say to people, they asked me to run the US and so I did that for a couple months. And it turns out being a country manager for a French conglomerate is, it's not as glamorous as it sounds.

It was, I felt. So I think once you've been an entrepreneur, as I've heard it said, you're kind of constitutionally unhirable. And I very much felt hired at that point rather than empowered as an entrepreneur. And that was, that was not going to work for me. But you did not feel hired after your first exit to, to.

[01:11:22 - 01:11:35]

Will Smith: Was it the WIX Group? Yeah, the wix. Yeah, that's right. And that is, and look, cognitively I get it like. And so, so I basically was CEO under three different ownership groups and I was very aware in each case that I was fireable.

[01:11:35 - 01:12:06]

Mark Anderegg: So like I knew I had a boss like I, and I knew I was like in many respects hired. And of course my search cap table felt the most entrepreneurial and I felt the most empowered and autonomous. But I'll tell you, the private equity board, I felt really empowered and autonomous there too. And I know that folks have a lot of different types of, types of experiences and I have friends that have not felt empowered or autonomous with their private equity boards. But it, but I did and I did not at all with the, the ultimate buyer.

[01:12:07 - 01:12:42]

Will Smith: And I heard you just characterize your. So, so you said you had basically three different boards that you were the CEO for. And your first one of course was you as a searcher, as the traditional searcher. The, the structure of a traditional search fund is such that your investors are your board and can fire you. This is one of the key distinctions between self funded search and traditional search.

Do, do you, do you take the point that pro self funded search folks will make that being a traditional searcher is a little more CEO than entrepreneur.

[01:12:45 - 01:14:05]

Mark Anderegg: So if there's a spectrum I would say yes, I'm a hired gun, private equity backed CEO over here. Let's call that like you know, 0% entrepreneur, 100% CEO like manager and then self funded is 100% entrepreneur, you know, not, not manager. I would put search CEO at like 92 and a half percent or something like really like close to, to, to the self funded searcher Because I think in, in almost all cases those CEOs are radically empowered and autonomous. And there's this misconception, I think increasingly that like the board is going to tell you when it's time to sell. And it has never been my experience that is the case.

It is almost always in my case, like personally, it has always been the case that is the CEO, the searcher, saying when it's time to get off the bus and the board listens. So I don't, I think it's a very entrepreneurial way of building a career. Yeah. Great. So let's return now, Mark, to this, this theme of you wanting to be close to the action, you know, so, so having the option at the end of a successful search journey to become a capital allocator by profession and actually choosing to go back into the field.

[01:14:05 - 01:14:42]

Will Smith: Even though, you know, we heard you say that one of the reasons that you wanted to exit from Little Sprouts was because of the operational challenges, in particular staffing. But I'm sure there were a hundred others. So, yeah, square the circle for us. Why? Why are you like a moth to a flame?

And maybe, and maybe, you know, help our listeners figure out what they are. Yeah, yeah. Oh, that, that last part of the question is a really provocative one. So I, I should say that I've had friends ask me, mark, do you have amnesia? Like, have you forgotten how hard it is?

[01:14:43 - 01:16:44]

Mark Anderegg: Why, why are you looking to get back closer to the action? And, and you know, we can invoke his name for a third time. I mean, AJ has a paper about this too. About, like, where are you on your, like how do you want to organize yourself? Do you really want to be an OpCo CEO or do you want to be like a Holdcoe type or even, you know, just like a private equity investor?

And, and one of them is not better than the others. And this starts to get to the last part of your question. It's like, what authentically suits you? And what I have discovered about myself is I spent a year after I exited, like really just investing in search funds, like pretty full time. And I'd been doing that just as a hobby on the side while I was CEO for the preceding three or four years.

And what I found to be really fun as a part time thing or hobby, I found just not to be fulfilling as a full time thing. And, and, and by the way, there are a lot of people who I love and respect who find that to be the most fulfilling thing they can imagine. And so it's just Again, there's not good or bad. It's just what suits you. And what suits me is I think I really derive satisfaction from waking up every day.

And again, I said it earlier, I'm kind of a simple guy, like thinking about one business, like getting out of bed thinking about one business, going to bed thinking about that same business and thinking about that same small group of people that I'm going into battle with every day. And to me, that is a really fulfilling way to spend your days. So I don't know if that, if that fully addresses your question, but yeah, for me it's just, I'd rather be more focused than less and, and spend time with fewer people than more. Maybe that's another way of saying it. And what about Mark, as you reflect on your years in little sprouts.

Just. How close to the action you were? Did one suit you more than the other? So, so, so in the early days, you know, you probably maybe showing up at centers here and there and maybe in the later days much less. So you were, you know, there was some distance between you and the front lines.

[01:16:44 - 01:17:05]

Will Smith: Was in that, in that spectrum, was there a place that you liked? I'm really glad you asked that. Well, because I could have left your listeners with the wrong impression. Like I, I don't consider myself like a very good, like maybe like conventional operator. Like the small, like the things that you're called to do when the company is subscale before you can afford a team.

[01:17:06 - 01:18:06]

Mark Anderegg: Like, I'm not suggesting that, I mean to get back into doing that. Like when I say, you know, be closer to the action, I mean as a CEO with a real team, like to me it's like, that's like, you know, AJ and Kent Weaver wrote this paper, the evolution of a search fund CEO, or sometimes we call it the 10x CEO paper. And they have these four different phases of, of like search entrepreneurs. You know, phase one, or maybe they call level one is like, you know, typical self funded, like really small, like deal at first and then like phase two, you're getting into like you've got a little bit of a team and you're starting to grow. But then level three is like when it becomes really fun.

Like you're, you're finally there's like some consistency to the growth and you've got a real team. And then level four, frankly is a level I never got to, which is like a really kind of like mature business where you're as much like statesman patriarch as you are kind of strategic CEO. And yeah, that Level three is like super fun. So that, that is where I want to be. So I'm really glad you asked the clarifying question.

[01:18:08 - 01:18:50]

Will Smith: I, I really want to underline what you said, Mark, about being focused on a single business versus multiple. Because, because among the many differences between being a CEO and, or, or, or owner, operator, you know, in the, in the, in a business versus a capital allocator, among many differences, that is a key one for all your focus on a single business versus, you know, spreading yourself across multiple businesses, which a lot of people will like that. You know, people say I have add, so I like being able to, you know, dip into a bunch of different businesses, learn a bunch, a bunch of different businesses. That strikes me as a, as a pretty clarifying distinction. Yeah, yeah, I think he summarizes super well.

[01:18:50 - 01:20:52]

Mark Anderegg: Yep. Mark, we're wrapping up here, but let's close with some of the interactions that you have with students and what you teach. First, share with us again the course or courses that you're teaching and where. Yes, I teach at the Tuck School of Business at Dartmouth College in Hanover, New Hampshire. I began teaching the Entrepreneurship through acquisition course, which I continue to teach.

And just this past spring I began offering a short form course that I call the First Time Manager. And that is based on two things, I guess. Number one, my students in the ETA course always left the course clamoring for more of the what actually happens when you're running the business? So the first half of the ETA course is how do you buy one of these things? And the second half is once you do, what can you reasonably expect to encounter?

Human capital stuff especially. And they always want more of that. And so, and frankly, that's the stuff I want to talk about too. I think it's for sure for me, the more interesting subject matter. That's number one.

Number two, David Dodson, who many of your listeners will be familiar with, like storied practitioner and ETA taught at Stanford for a long time, just a wealth of knowledge, tremendous board member, wrote a book that many have maybe already read called the Manager's Handbook. And I was so taken with that book that I was like, I mean, I think it ought to be a business school class textbook. So I made it one. So it's required. I mean, that is the course is based on his book.

And yeah, I think it's just a very effective book that I wish had been out when I was, when I was stepping into a CEO role. So that's what I teach. Super enjoy it. And yeah, it feels like a real Privilege to get to do that. I'm interested to hear, Mark, that the students actually clamor for more on the people stuff.

[01:20:52 - 01:21:26]

Will Smith: I make a point of always talking about, you know, it's about the people, people problems and so on, because I feel like that's actually what's underestimated and maybe not as interesting and sexy as, you know, headline numbers, but it is, of course, as anybody who's listened to this podcast or, or dabbled at all in the lower middle market understands that that's really the, the raw stuff of what you're doing. But I generally feel like it's, you know, talking about it is like eating your vegetables. It's not something that people. Not something that necessarily people interest people as much as making millions of dollars. That's interesting.

[01:21:26 - 01:22:32]

Mark Anderegg: So that's a funny perspective. And actually it makes total sense. As he said, I'm, I'm reacting to it that way because, like, it is so palpable in my class how much the human capital stuff gets their attention and, and, and who knows, it could just be because that's what really interests me. And so maybe there's some contagion, I don't know. But I think the other thing is I have, I have guests come to each of my classes.

And so they're typically the protagonist in the case that the students have prepared that week. And invariably, because they are CEOs, that's all they want to talk about too, because that really, they know that's what matters. And so I don't know if it's maybe a byproduct of that. Even over the first few weeks in eta, when we're talking about deal stuff like the human elements still always features. So maybe that spills over, I'm not sure.

And it could also be said, I don't know. Here's a little plug for Tuck. I do think Tuck students tend to be pretty well rounded and I think like skew pretty high on like eq. And I think maybe just have maybe on balance and natural affinity for, for people stuff perhaps. Yeah.

[01:22:32 - 01:22:52]

Will Smith: Mark, give us one of your favorite learnings or, or points made by David in his book. Oh, my goodness. I'll just say the first one that comes to mind because, you know, the stuff you read in a book like that you naturally focus on the things that you're not doing well. Right? So like it's easy.

[01:22:52 - 01:23:36]

Mark Anderegg: Like check, like, oh, good. He says I should do this. Great. I'm already naturally doing that. But it's like the stuff that you're not doing.

So one of the things that I took from it is his concept of immediate performance feedback. So this idea that like you leave the meeting, you get off the call, whatever, and you go and you seek it out like right then, not 20 minutes later, but like right then. And so I've taken the opportunity, you know, I'm a developing board member. Like I've been doing it for a while now, but like I still have a lot to learn as a board member in these search deals. And so after meetings I'll ask David, you know, all right, give me some immediate performance feedback.

And I'm like, what a great gift they get to learn from him. And yeah, I don't know. So like the importance of seeking feedback is what comes to mind. Yeah, but, but the immediacy is keep asking something for right then, right then later. Yeah, great.

[01:23:37 - 01:24:13]

Will Smith: Mark, let's close with what you're working on today, which is where our paths intersect. Other than this interview, you went back with some of your colleagues from before Kevin, namely, and you chose a market and you are pursuing a similar but slightly different playbook. So expand on all of that for us, please. Yeah, so this might be a lengthier answer than you want in our waning minutes here, but so Newberry Franklin, when I approached Kevin and said let's do this, the premise was the following. Kevin, it was really fun being a strategic buyer in a good solid industry.

[01:24:14 - 01:25:15]

Mark Anderegg: Let's go do that and let's do it a few more times and let's get as close to the action as we think we can be where we're really adding value. Let's collaborate with, let's fight back. CEOs who are entrepreneurial and want to build a great business over a long period of time in a particular industry. And let's support them with our experience being a strategic buyer and, and with like de novo expansion. So that's, that's what we're setting out to do.

New breed Franklin. Today we've got two platforms, one in the, an industrial end market and another in dog daycare and boarding as we've referenced a couple of times. So, so yeah, that, that's, that is, that's what we're up to. And I can't think of a more fun way to build a business than with a long term orientation, you know, being well capitalized to go and exploit both organic and inorganic opportunities. And the key difference there is you are bringing in partnering with CEOs.

[01:25:15 - 01:25:29]

Will Smith: You guys are not the CEOs you are running, you're at the platform level. That's right. That is right. And the thing that I want to clarify though is, you know, that distinction could make us sound private equity. Ish.

[01:25:29 - 01:26:14]

Mark Anderegg: Or which, which is fine. I mean there are like, objectively there's private equity aspects of what we do. But really Kevin and I are trying to build a business I really like, build Newberry Franklin as a business, you know, doing things, you know, the same ways and, and you know, really being. Yeah. Consistent with how we, how we go about things.

So that's like a, a point that I really do want to emphasize because it is different than I think some of the, the ways people go about this stuff. Which again, doesn't make it right or wrong. It's just our way that we're doing. It and the long term nature here. We've already heard how you feel some regret about your, your exits before with little sprouts.

[01:26:16 - 01:26:52]

Will Smith: Talk to us a little bit more about that. Talk to us about market pushback that you experienced, including from us. Despite my own personal affinity for long termism, having our own LPs and mind's capital, we need to be very attentive to get, you know, getting them back their capital. So contemplating an investment in a longer term play was a stretch for us. But we liked you guys so much and we like the opportunity so, so much.

We made an exception. But it was, you know, we, and, and I suspect that a lot of your LPs probably pressed you on that. Maybe I'm wrong. But talk to us about raising money around a long term. Yeah.

[01:26:52 - 01:28:56]

Mark Anderegg: Play. Absolutely. Well, I'll, I'll begin by thanking you yet again for making an exception to your, your typical approach.

So you said the word regret and I may have even used it myself earlier. I don't know that I would. It's, it's, it's hard to call it regret because it would be disingenuous not to acknowledge that there's a lot of goodness that comes from having some liquidity as a relatively, at a relatively early stage in your career. Because of course that affords you the luxury to invest back into these assets, which I found to be both lucrative and deeply fulfilling. Notwithstanding what I said about not identifying as a capital allocator, going on the boards, like the relationships of the CEOs.

Where I am on the boards, I, I treasure like, I absolutely like treasure those relationships. Okay, so. So raising money for, for long term hold. Yeah. I mean it, it, it totally eliminates the vast, vast majority of the investing population.

And what it leaves you with is a very self selecting group that in my view are like the absolute best partners. They're folks that are saying like I have one, one of my favorite investors, Dave Chandler says, you know Mark, this, this isn't for me. This is for my, my kids or their kids. And I, I just that like that mindset really, really resonates with me that like we're being serious about doing this for, for a long period of time and really compounding meaningfully. But yeah, I mean the long short of it is like in and around our search community there's a, a good number of people that are very serious about and put their money where their mouth is on long term hold and being in relationship with them has, has made the capital raising viable.

But I'll, I'll totally acknowledge it. It's far from easy. Yeah. Well, Will, Will Thorndike's name came up earlier and his name has come up on, on that episode. Shocking that Will's name has come up on this podcast.

[01:28:56 - 01:30:10]

Will Smith: Well, well, you'd be surprised. Actually it hasn't come up as much as. Oh my God, I would assume, I would assume it would be a, an every session occurrence. What do I know? Yeah, no, he's.

When we talk to folks who are plugged into the kind of traditional search and original search world, it absolutely does self funded searchers are a little less aware of him. But of course author of the Outsiders and a big influencer in our world and investor and it seems like more recently he's kind of publicly been talking about his name appears to be air in the air more. Maybe just because he came out with the second episode of his podcast where he's doing the Assurian story. But my understanding is that you know, he's, he's really pushing his own investment philosophy of long term, first of all long termism, but also kind of with a ETA and grow through acquisition playbook. And so I don't know if that maybe that's not new, maybe that's always been there among some of these folks, but it, it seems like it's in the air more and there might be a bit of a kind of mini trend there from, from a capital perspective.

[01:30:10 - 01:32:15]

Mark Anderegg: Yeah. So I can say a couple things in response to that. First, I think Will has always held that that view. I do think you're right though that it's in the air more. But like one of my favorite things I've heard Will say is, you know, the power of long term compounding is not limited to financial compounding and in fact it extends to relationships and knowledge and reputation and he, you know there's a number of these boards, these radically successful boards including Assurian and you know, Carol and assisted living that I don't know, I don't, I should come up short of like trying to do Will's biography.

But I mean I'm pretty sure that he was on like some of those boards for 20 plus years, maybe even longer and the long term compounding of like knowledge and relationship and all that that comes along with that is just astounding. So that's my way of like validating the s. Indeed. I think he's had this long term orientation for forever and yes, recently he has been outspoken in a good way in my view about the missed opportunity within the search community to keep good businesses in the community and not sold the private equity because often folks like me, you know, sell too early and the amount of wealth for the entrepreneurs and investors that was lost, lost as maybe a poor choice of words foregone as a function of selling to private equity is measured in the billions. And so I think he's taking, you know, something of a, he's making it his business to see what we can do as a community to, to keep those businesses in the, in the community for longer which I think is wonderful. How can people reach you?

Mark? Where do you prefer LinkedIn? Your page on Tuck or what? Yeah, and any, any of the, any of the above. Yeah, LinkedIn's usually pretty easy.

Mark. Newberryfranklin.com is my email address. Folks are welcome to reach out to me directly there or Tuck like whatever, whatever you want. Excellent. Mark Anderegg what a wonderful interview.

[01:32:15 - 01:33:08]

Will Smith: What a wonderful story. Loved having you. Thanks for doing it. Thanks for including me. Will really enjoyed it.

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