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Welcome back to the Raw Selection Private Equity Podcast. Joining us today is Paul Golden, with nine private equity-backed exits, operating as a CEO, private equity investor and operating partner within multiple industries. A huge amount of experience is unpacked in this podcast. This is an absolute cracker. Let's dive in. Paul, if you could.
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Show us a brief insight into you. Sure. Thanks for having me on, Alex. I think if you look at my background, there's kind of three phases. Early in my career, it was public company, where I rose to the number two position, learned a tremendous amount about operating in a highly scrutinized, highly regulated kind of environment, decided that I wanted to work more outside of having to deal with
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non-investors, if you will, analysts and kind of non-operating practices, and moved in the second phase into being a partner at a PE firm and looking at it really more from the acquisition and the building of those businesses post-acquisition. And then the third phase is moving into being more of an entrepreneur and kind of a hybrid operator, operating partner across a number of
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portfolio companies where I've sourced the companies, built the financing behind the companies, and then either led from a chairman/board role or led directly as CEO of those companies. Marvellous. Quite a lot to dive into and quite a lot to cover. What's one mistake that you see private equity or portfolio companies making, and what would you suggest to correct them? I would say that the
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biggest issue that private equity grapples with is making fast decisions on crafting the right team. So, you know, the importance of having the right people in place, the right people on the bus, is crucial to being able to execute. And, you know, a lot of private equity firms struggle with making tough management decisions because they feel that there's tremendous risk
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to making changes at the management level. So I think making sure that you've got the right team in place and doing that in the first six to 12 months is really crucial, particularly when you think about a traditional private equity hold period of that three, four, five years. If you don't get that team right and let that team have runway,
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it's really often a challenge in meeting your investment objectives. Now, obviously, we've made a career and a livelihood on the back of that statement. I'm certainly not going to disagree with you. It's easier said than done. And if we look at anybody who comes on this podcast, they always say, hey, get your team right. Get the jockey right. You can have a bad jockey with a good business, and it will be a bad business. You can have a good jockey with an average business
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and they can make it a good business. And ideally, you want great and great, obviously. What are some of the learnings that you've had with regards to making sure you get the right people on board? Maybe some of the mistakes that you've made that you've gone, oh, I wish I knew that then, but these are the kind of things that have worked more times than not. I think the importance of having a leader that is open to being challenged
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from different perspectives from the management team, as well as from the board. But, you know, the example I would use is if you've got a CEO or a leader with a very strong operations background, they need to be able to listen to the design and engineering perspective on where the product needs to migrate and be very open to being challenged
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in areas that they may not have expertise in, but feel that they need to show leadership in. So I think one aspect is definitely having a leader that is very comfortable and confident in themselves, but also comfortable and confident in being challenged by their management team and the board.
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And when you've interviewed executives, how have you kind of tested that to see if they have that level of transparency, they are happy to be questioned, to be queried, to build that relationship with the stakeholders? How have you known that, or what have people demonstrated in the interview process that's given you that level of confidence? One of the things that I think has always worked out
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for me, and it's not a universal that if this doesn't happen it's not going to be a good hire, but I believe that when I have seen this, it is going to be a good hire, is when the prospective executive comes in and, without prompting and without, you know, the cliché question of, "What are your weaknesses?"
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is very open that their career hasn't been just sunshine and rainbows. Their career has had challenges and they've made mistakes. And, you know, if they're very open about those mistakes, as well as taking responsibility for, hey, I was the leader, I led this division, I led this department,
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you know, while we made a decision, at the end of the day, I have to own it. That type of perspective and that type of response during an interview, not only do you get into further questions and further discussion around, you know, why did it happen? What did you learn? What did you do next? Kind of discussions. But it also, to me, demonstrates that there's real confidence on this person's part to be comfortable
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in those situations where they're challenged and being open that they may not have all the answers and that they're interested in other people challenging where the organization is going. And the more that you get that kind of perspective and openness during the interview process, I've always found that those executives have a much better time coming into the organization,
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as well as are much more successful longer term with their management teams because the management teams really do build trust in that person. Marvellous. So, talking about management teams, what's the single hardest decision you've made as a chief exec of a private equity-backed company, and how did it impact value creation? I would say that the most difficult decisions I've had to make actually
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haven't been about the team. Those are very difficult, but have been around customers and deciding whether or not you should continue with a particular customer or a particular group of customers. So, in essence, the decision to fire customers, I think, is one of the most challenging because nobody wants to walk away from revenue.
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You know, typically executives are problem solvers. And if there's a challenge with a customer, they believe they can fix it. And we all want to get in there and make things happen. And so the decision to walk away from a customer or a business segment, I think, has been the toughest decision. I can relate to that. Sometimes you want to make the difficult decisions to enable growth and take the business forward. And sometimes that can feel like a bit of a step, certainly a step back.
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Correct. You don't even need to say this, Paul, but you've had somewhat of an impressive private equity career. You've worked as an operator, you've worked as an operating partner, you've worked as an investor, you've had your blue-chip background, you've done the classic Danaher-type private equity, the Danaher background that private equity loves from your time there. And that's led you down to nine private equity-backed exits. Most people are happy with one. So what are the elements that stand out
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for the reason to complete an acquisition that has made the exit successful?
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So the first area that I would highlight is one that's very hard to do during due diligence, particularly if you're buying a private company, particularly from a founder. But that is the customers. Does the business have delighted customers? Because if the customer is doing business with the company because
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the service is exceptional, the product's exceptional, and their relationships with people in the organization are exceptional, that really sets a core foundation for being able to grow the business, as well as being able to look for levers to improve cash flow in the business. And so a key element that, again,
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is often hard in due diligence because people are very uncomfortable with prospective buyers talking to customers, is getting a really strong perspective on whether the customers are in love with the company or not. I think the other element, and I know this is popular and we've talked about it already, but do you have a strong management team? Because that management team, if the industry isn't supporting their growth,
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they will find ways to maintain the business or grow the business despite headwinds. And then I think the third element is: are there clear paths to growth in geographic segments, in different industries or adjacent customer segments, or in advancing product
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that has some competitive advantage? So what are those clear paths to growth outside of the existing customers that, if you've got the right management team in place, they can exploit?
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Given your extensive experience on the exit side and sitting at the boardroom table and having those discussions, what's something that you wish you knew at exit one that you learned during the course to exit nine?
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I would...
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I think that's a tough question. Probably for me, moving from being a pure operator, and what I mean by that is the title and the role being president or CEO, even though that involves acquisitions, it's very different than thinking about it as a private equity acquisition. And moving from that strictly operating role to the
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perspective of an investor, two things stand out to me. One is what I call deal fever. And when you move from being the operating leader to more of an investor perspective, it's very easy to get excited about each deal that comes across your desk because,
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from an operator's perspective, you can always find nuggets within the prospectus or the discussion with the business that you think you can exploit. And it's very easy to get blinded by those opportunities and not be strong enough in the due diligence side and the gates that you have to set up in terms of points where you should stop pursuing an acquisition. The second
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piece, I think, for me on the difference between kind of deal one and deal nine is also, to my earlier point, the speed at which you make decisions, and not just about the management team, but about the strategic direction, the channels, the customer growth opportunities, the speed at which you need to make those decisions in the first 18 to 24 months.
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Moving from, you know, public company world where you don't have a fund life and an exit expectation does mean that you can be a little more patient. It doesn't mean it's the right thing to do, but you can be a little more patient with those decisions after an acquisition. Whereas in the private equity world, it's, you know, right or wrong, it's driven by your rate of return.
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And the faster you can make an impact and generate growth and generate greater EBITDA, the better those rates of return are going to be. So the speed at which you need to move in those first 18 to 24 months, I would say, is the other factor that changed very much between deal one and deal nine.
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What's been the toughest cultural shift you've had to do or drive post the initial investment and acquisition? Without question, moving from a founder-owner culture that has been embedded for 30-plus years. Those are great cultures, and there's a lot of strength in those cultures.
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It's been very rare for me to be involved in an acquisition where you're moving from a founder-owner of 30-plus years and find a management team that has been, you know, asked to make decisions and to operate independently and with the speed that you need
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the culture and the management team to move with. So I think, you know, there's always been a lot of strength to a founder-owner culture that's long-time embedded, but the ability to accelerate thinking, accelerate people's comfort with taking different perspectives on product, on customers, on the way the business operates has
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always been a little more challenging than if you're buying either, let's say, a public company division from a public company, or you're the second, third or fourth private equity owner, where a lot of those changes in culture have already begun or already happened. And so I think that's been the hardest thing because of that element of speed that we talked about before in that first 18 to 24 months.
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And when you've got a culture that's been there for 30 or 40 years, again, there's great strength to it, but there's also a lot of challenges in making change. Yeah. We believe your biggest strength is your biggest weakness, and your biggest weakness is also your biggest strength. When you try and drive that change in people, that's what we're fundamentally talking about. We're talking about looking at people doing things differently.
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Now, it's very difficult in the world. You just want things as simple black and white. Hey, what we had to do is we fired the whole team and hired a new team, but that's rarely the case. But in your instance, do the majority of people change and adapt to the new processes and systems? Or does it need a change and reshuffle? And we're talking about it from a leadership perspective as opposed to the whole business. What's been your take on when you've taken over those founder-led businesses
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on what level of change needs to happen at the executive team level in order for the cultural element to begin to pivot?
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As I'm thinking through the various businesses, I can only think of one where we've stepped in from a founder-owner and not found one or two senior leadership members who are desperate to see change happen. Right. And so you've got to find those one or two people and
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understand why they believe the change needs to happen and also understand why it hasn't happened, because it's never just because the founder or owner was obstinate or, you know, not willing to hear different perspectives. There's always more layers to it. So, you know, first I think you have to find those folks that are very eager to see change happen, but then you've got to kind of vet
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the reasons for that change, as well as, you know, is part of the reason for the lack of change because those executives have failed in becoming influencers within the organization to make that change happen? And sort of trying to understand that, trying to understand that dynamic. In terms of overall turnover on the management team,
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you know, I would say typically the companies that I've acquired or been part of acquiring have a management team of six to eight senior leaders. There's typically been one or two that will leave on their own because they're nervous about the change and, you know, start to look for different opportunities even before the acquisition closes. And then there's, you know,
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maybe two more that clearly stand out as folks that are not going to be willing to work hard to make it, for their own psychology to change or their own minds to change. And you've got to make moves and changes with those folks, again, fairly quickly. But then you've got the core group of your management team, which is still the majority of the management team, that
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is either a strong advocate for change, or they are maybe not the advocates, but are interested in seeing what can develop and what can happen. And really, I think that's the group you have to work the hardest to convince to step out of their comfort zone, to take risks that they might not have been willing to take before.
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Yeah, but, you know, I certainly don't advocate that you need to change, like you said, the whole management team. I've actually never seen that and never can imagine that would be successful. But I will say that, you know, in just about every case, there's been one or two of the management team that clearly are going to be long-term resisters, and
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that's typically the turnover. And then you've got one or two that are at risk of leaving on their own.
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So, looking at cultural changes, add-on acquisitions poorly executed, more the integration side, could arguably sit at the actual acquisition phase. But you've completed over 20 add-on acquisitions. What's a couple of things that you've learned during that process and executed better at 20 than you did at one?
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The importance of the cultural fit between the two companies. You know, when it's a real bolt-on, let's say you're a $100 million revenue business and you're buying a small $5 million, $6 million business, the cultural fit is less important. But if you're a $100 million business and you're bringing in a $20 million add-on acquisition,
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even though that represents 20% of your base revenue, the cultural fit is, I think, crucially important because not only is it going to impact your existing company, but the reasons you're buying this company and making them part of your organization go beyond just the product that they bring
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or the customers that they're in. The ability for you to put a manager/leader into that new acquisition and for that acquisition to have a positive influence on your parent company culture and organization. I think when you're doing your due diligence and you're thinking about acquisitions,
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the easier part is understanding the industry dynamic, understanding the position of the company in that industry, the success of the products, you know, are customers happy? Those are all things that you can objectively assess and make part of the due diligence. What's very difficult in there, it's kind of like dating, is, you know,
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is there really a fit between you and the style that you propose and what the company, the acquisition, is bringing? And so, you know, that combined with, I think, the other element, is the willingness to walk away from potential acquisitions. Acquisitions always seem like great ideas for growth,
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always seem easier than organic growth. And so it's easy to fall into that deal fever kind of phase, that all these things line up and the industry makes sense, customers are happy, those types of things, and lose sight of the cultural impact. And so the ability to be objective about it and make the decision to walk away is the other piece.
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Consistency here of identifying when's the right time to walk away, I suppose. It's hard when you've done a lot of due diligence and you want to get over the line and get the add-on acquisition. It keeps the investors happy if that's the case, and then gets the EBITDA up, gets the revenue growing, but makes a mess of the business if it's not right. High number of deal flows, same principle we use with regards to candidates. If you've only got a choice of a limited number, then you're always going to feel like
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your best guy is going to be X. But if you've got a high choice, and I don't mean you're interviewing 20, 30 people. What I mean is that the recruiter is whittling that list of 500 down rather than the list of 100. In a prior role, you generated nothing short of $150 million-plus in free cash flow. Pretty apparent at the moment, a lot of businesses out there struggling, a lot of businesses, especially in private equity, heavily levered and debt-constrained. Walk us through what you did there, how you did it,
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and hopefully others can learn and leverage. Sure. In that particular role, it was a manufacturing-based business. Approaching the business from a cash flow perspective really focuses on your gross profit line and the elements of your gross profit, along with the
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fundamentals of receivables and inventory. And, you know, with that business, we had the opportunity to consolidate facilities. But in order to do that and do that smartly, you've got to focus on that, again, that gross profit line of what elements generate success within the manufacturing side of the business.
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And for me, that's always been focused on a lean enterprise and a lean enterprise culture. And with that, you know, it starts with understanding the customer and what the customer's value is that they're buying from you. Well, you know, why do they choose your product? And then getting everyone focused on what are all the things that stand in our way of delivering that value to our customer. And
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when you get that focus on the customer, resistance to change starts to become very difficult because it's hard to argue that we don't want to take care of our customer and that we want to keep practices that are negative for the customer in place because they're positive for an individual or the business operating practices.
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And so really then taking that focus on customer value and, with a very objective and critical eye, looking at the way the business operates, both at a gross, sorry, at a direct level. So where the manufacturing actually happens, which is often the easiest because it's tangible and you can see product moving and you can see where
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it sits, you can see where quality issues are, those types of things. But more importantly, or I shouldn't say more importantly, but of equal importance, is how the non-direct part of the organization operates, how engineering operates, how sales and marketing operates. And, you know, what practices do they have and processes do they have that cause problems in delivering value to your customer? So,
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you know, what's costing you time? What's costing you when it comes to defects and quality? You know, are engineering drawings always drawn correctly the first time, or do they go through 10 different quality checks and revisions? There's a key factor on cost, and that directly drives cash flow ultimately. And so looking at those processes, looking at where the value is created, where there's waste,
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and, you know, then looking with a very critical eye at things like your product SKUs and number of products, kind of the 80/20 rule of, you know, 80% of your revenue is going to come from 20% of your product SKUs. And that was very true in this business. And so we made a lot of decisions to obsolete product lines,
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having tough discussions with our customers of, you know, yes, this product's been out there for 15 years and you've got three of your customers that really like this particular product, but, you know, we can't afford to maintain this product. We've got to obsolete it. Let's transition them to one of these other products, and having those discussions and conversations.
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And with that, reducing your complexity reduces your costs, but it also reduces your need for inventory. You know, obviously, the less you have invested in inventory, the greater cash flow is going to be. And very importantly, the greater your service to your customer is going to be, which ultimately comes back to growth for the business. And obviously that generates cash flow with that growth.
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What is one skill that every CXO in a PE-backed business must master to succeed? I think they have to be open to, or have the confidence to, make mistakes and the confidence to own those mistakes. Businesses don't grow, in my experience, they don't grow by standing still and being very conservative about
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decisions and strategies. So you've got to have the confidence to make changes and, with those changes, accept that you're going to make mistakes, but very much stand in front of those mistakes. You can't blame others for them. Frankly, that doesn't look like strength. That looks like weakness to your board members. And at the same time, you want to be out front and upfront with your board
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and the investors that, hey, I made this decision. The team supported it. We tried to execute. It didn't work. Here's what we've learned. Here's what we're going to do differently this time around. You've got to have that confidence. The biggest skill gap I see with folks is trying to either not make decisions that could lead to mistakes or trying to hide from
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disclosing that you've made a mistake. I think having the confidence to own those is far more important to your board than the fact that you, you know, made a tough decision, made an aggressive decision, and it didn't work. People want that honesty and want you to be out in front of it and open with them about it. And from an education standpoint, what book, framework, resource
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has had the biggest influence on you and how you lead? It goes back to my days at Danaher, and actually prior to Danaher, I got exposed to the book Lean Thinking by Womack and Jones. And things just really clicked for me in the perspective they were putting forward of, you know, what I've mentioned before, focusing on what the customer values the most and then looking
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really critically at all the things that you do and asking why. And then, you know, learning techniques at Danaher that were built off of the Toyota Production System that became the Danaher Business System, that was heavily focused on that voice of the customer, value of the customer. With the Danaher Business System, you know, they also really focused on creating a linkage between your
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strategy and your execution. And that's something that I think most companies—and it didn't necessarily come out of the book Lean Thinking—and something that Danaher does exceptionally well. The other two things, you know, books or learnings, frameworks, one is Good to Great by Jim Collins. You know, the whole notion of
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the importance of having the right people and not a homogeneous crowd, but a very diverse crowd of perspectives and the importance of that, the importance of those folks being in the right positions, and that you may have an outstanding person in your organization that's in the wrong role. So they don't necessarily look like they're the right person, but if you really work with them and get them in the right position, they can shine. Good to Great
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was a significant bedrock kind of book for me. And then from a strategic standpoint, you know, core to my business school was Michael Porter's Five Forces. And I've consistently used that as a framework for analyzing all types of companies, public companies, acquisitions, add-on acquisitions,
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and the industries that they work in, and using that framework as something that helps clarify your thinking and clarify whether or not this company has sustainable competitive advantage in the industries they're in. And then do they have the ability to step into adjacent markets and be successful in growth
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and things? You know, the framework of the Five Forces by Porter was another key element for me.
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Paul, if anybody wishes to get in touch post this podcast, how best do they do so, please? Certainly, the easiest and simplest is to find me on LinkedIn. But also happy to share my email and cell phone contact. I don't know if that's appropriate, but happy to put it out. Welcome to do so. Yeah. So one email that will always find me is first initial, last name, pgolden@
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mba1998.hbs.edu. And then my cell phone is 630-605-6348. Marvellous. Well, we've had a business education today, Paul. At least certainly I have. So thank you very much for coming on the podcast. I have a ton of notes and a ton of detail that you've shared and value. So thank you very much. Thank you very much, Alex. I enjoyed the conversation. Hopefully others will find it of value.
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I doubt anybody would not take at least five things, I would say, from this one. And thank you very much to all of our listeners for tuning in to the Private Equity Podcast. Till the next time, keep smashing it.
