Prepping the Princess for the Party: Is Your Business Ready to Sell? Part Six


This week on “In Process: Conversations about Business in the 21st Century,” we reach the final podcast in our series dedicated to the topic of preparing your business for sale.

There’s a “new normal” in the marketplace. Too much money, chasing too few deals. We’re also now seeing a fairly dramatic reduction in the number of companies above 100 employees. That shrinkage, if you will, accounts for a lot of the competitiveness. And, the impact on the market? It’s driving the capital downstream.

In the final installment of our six-part podcast series, show hosts Evelyn Ashley and John Monahon speak with Doug Tatum, chairman of Newport Board Group, a national partnership of CEOs and senior executives who advise emerging middle-market companies and assist private-equity firms to invest in and grow portfolio companies. Doug is also the author of “No Man’s Land: Where Growing Companies Fail,” a leading text about growth companies that has been translated into several languages and has won four National Best Business book awards.

“If you take the notion that we’re in a cheap capital environment―both interest rates and equity―then I think the new normal, or the new financial calculus in the capital markets or private equity, is that it’s just cheaper to buy customers than it is to win them through a traditional sales channel, which is more expensive and takes too much time,” said Doug. “If you can’t find a platform company of any size to buy or they’ve already been bought, then you end up performing add-ons or what we refer to as bolt-ons. We’ve got research that shows as much as 85 percent of every deal in the United States is now an add-on, if you include private-equity firms buying from each other.”

Companies looking to navigate these uncharted waters need to be aware of today’s requirements and have in place a set of good fundamental principles in order to make a successful sale.

During the course of the podcast, entrepreneurs, business owners and C-level executives will learn about the:

  • Concept of fractional C-level officers
  • Succession planning process
  • Best practices for selecting a successor
  • Lessons-learned from the sales process
  • Qualities you should look for in a purchaser

Learn more about selling your business in today’s marketplace by streaming the conversation in its entirety in the player below, or download it to your mobile device via iTunes. Don’t miss a single episode, subscribe to our show “In Process Podcast” on iTunes to receive this episode as well as future episodes to your smartphone.






Is Your Business Ready to Sell? Part Six: 

How to Navigate the “New Normal” to Sell Your Company

(c) Trusted Counsel (Ashley) LLC. All Rights Reserved.

John Monahon:                Hello, and welcome to In Process, conversations about business in the 21st century, presented by Trusted Counsel, a corporate and intellectual property law firm. I’m John Monahon.

Evelyn Ashley:                  And I’m Evelyn Ashley.

John Monahon:                We are partners in Trusted Counsel. This is the final episode of a series of six episodes dedicated to the topic of preparing your business for sale. We had a physical event on April 19, and our event sponsors were Aprio, Wilmington Trust, Newport Board Group, Carabiner Communications, and FOCUS Investment Banking. It was a great event.

Evelyn Ashley:                  It was a great event, very educational. I think the benefit of these podcasts and the book that we produced for the event will continue to help our listeners for years to come, because our discussion topics are not just based on what’s happening currently. These are good, fundamental principles and requirements that companies need to know in order to sell.

John Monahon:                Right. Of course, one of our guests and also the sponsor is Doug Tatum of Newport Board Group, who not only has his own successful C-level consulting company but also has sold his former company years ago, and he’s going to talk to us about preparing his former business for sale and exiting and then also how his current company helps other companies grow as well.

Doug is chairman of Newport Board Group, a national partnership of CEOs and senior executives who advise emerging middle market companies and assist private equity firms to invest in and grow portfolio companies. Previously, Doug was chairman and CEO of Tatum LLC, which grew into a highly respected national professional services firm with 30 offices and over 1,000 professionals and employees. The company was sold to Spherion in 2010. Doug is the managing director of TIP Seed Fund LLC, a newly-formed seed stage VC fund with investments and investment rights in a diversified portfolio of companies with unique and proprietary products in the consumer high tech and …

Evelyn Ashley:                 Nutraceutical.

John Monahon:                Nutraceutical. That’s a [inaudible 00:02:48] to pharmaceutical marketplaces.

Evelyn Ashley:                 Clearly, we need to learn more about nutraceuticals.

John Monahon:                Yeah. You did a good job on that [inaudible 00:02:57]. Doug is the author of No Man’s Land: Where Growing Companies Fail, which is a great book. It’s a leading text about growth companies that has been translated into several languages and has won four national best business book awards. His insights about the economy and business have been cited in hundreds of media outlets, including Inc. magazine, the Financial Times, and the New York Times online. Doug, welcome to the show.

Doug Tatum:                    I’m glad to be here. Good to see y’all again.

Evelyn Ashley:                 It’s great to have you here. Doug, let’s start with the real, the core experience that so many sellers are interested in, talking a little bit about Tatum and how you built that business and essentially how you got it ready and attractive for sale.

Doug Tatum:                   Certainly. Some of your listeners might be familiar with the firm. As John had indicated in the bio, it grew to a large firm with 30 offices. I think at its peak, we had about 1,400 partners and employees, if you could think of it as a law firm or an accounting firm whose partners were chief financial officers and CIOs. We would end up being employed, deployed into emerging growth companies as fractional CFOs, for example, or CIOs. Then ultimately, we created kind of a unique co-employment model for private equity, where we would go in and sometimes as a team, sometimes as an individual CFO or CIO and then stay there through the exits.

I always give my brother credit for starting the firm. I was actually running a national firm as president, and he had this notion. He was with an investment banking firm, 20, I guess it’d be 28 years ago. I led the firm for 17 years and then was on the board for three more before we sold it. He had an idea about being a fractional CFO, and I left and joined him and then led the firm, with his help and a number of really talented folks over the years. It grew very rapidly, primarily, Evelyn and John, around private equity. We certainly had a huge … Kind of created the idea of a fractional CFO in the emerging growth market. We always hated the term rent a CFO. It wasn’t that as stringent of what it was, particularly with private equity, because there was no career with a private equity portfolio company. Right?

Evelyn Ashley:                 Mm-hmm (affirmative).

Doug Tatum:                    You asked the question about how it grew. We found a unique value proposition in the lower middle market in the private equity community. Then secondly, we really had two constituents. We had our own partners, because it was a partnership, where we effectively created a clear alternative that ultimately was more lucrative than being an executive employed in the middle market-

Evelyn Ashley:                   Interesting.

Doug Tatum:                      … of private equity. I actually remember hiring an economist to do a completely independent study of whether our partners made more money than their peers who were traditionally employed, and the answer was yes. Most people don’t realize that the average CFO tenure in the United States is probably three years or less. CIOs, we used to say that that stood for career is over.

Evelyn Ashley:                   Nice.

Doug Tatum:                      Anyway, the firm grew very nicely. It got large and that kind of sets the platform for that.

Evelyn Ashley:                   As part of it, though, Doug, I know that you were also very, not only innovative in the whole idea of fractional C-level officers, but you were also virtual for a really long time, weren’t you, at the beginning? I know that you ultimately did have offices, but it seems to me that there was a very long time when your partners would actually just meet at clubs, in conference rooms for your regular updates. Is that right?

Doug Tatum:                      Yeah. In fact, we were virtual before virtual was cool. If you looked at what we did as a firm, we would aggregate around private clubs. We were entertaining clients or referral sources. Typically, you don’t do that in the office. I guess you can. Right?

Evelyn Ashley:                   Yes.

Doug Tatum:                      The second thing is if you thought about the nature of our business model, our partners, whether they were fractional or whether they were a team … I’m always interested to point out that the three huge, Enron, the large conglomerate up in Pennsylvania, HealthSouth, were all huge blowups on the financial side. We got popped in to help restore the financial integrity of those companies.

We also, by the way, were selected … this is a whole other cigar … but to serve our country as a CFO in Iraq for the new country.

Evelyn Ashley:                   Wow.

Doug Tatum:                      That’s a long story. We really were very proud of that, but what was interesting is there was no need. Obviously, we had a corporate office where you had accounting, administrative, HR, those types of things, marketing, et cetera. Out in the hinterlands, there was no reason to congregate because we didn’t do work in an office. We always, we had our offices in our client’s-

Evelyn Ashley:                   Clients. Mm-hmm (affirmative).

Doug Tatum:                      Yeah. One of the interesting things that I will tell you is that one of the things that came out of that was that we ended up hiring administrative support staff, and they typically were very talented, educated, capable women who wanted flexibility between work and the house. I’ll bet we had 30, 40, or 50 of them, Evelyn, at one time. They were unbelievably important to us, because they would manage partner meetings. They would deal with contract issues, billing issues, all the administrative, training, getting materials out. We did a lot of events. What was interesting, nobody ever knew they weren’t in an office. They were out of their house. That infrastructure allowed us to be very quick and very flexible.

Evelyn Ashley:                   Flexible.

John Monahon:                  Doug, when you started the business, was it your goal to get very large? Did you have a plan? Because there’s plenty of CFO businesses and CIO fractional businesses that don’t get very large, and they’re quite satisfied with that.

Doug Tatum:                      Well, it’s interesting. When we started, there were none of them out there. Now, they’re all over the place. The industry’s matured. I think somebody referred to them … I’ve had a couple of people refer to them as little Tatums. We were really the only one that got to national status. I don’t know whether you ever sit down, quite frankly, and say, “We’re going to get this really, really big.” Businesses tend to be a little bit like as I understand bamboo is. Bamboo doesn’t grow a lot for the first five years, and then it shoots like crazy. That tended to be what happened.

I actually think what drove us, quite frankly, was private equity, because when they found out that they could get a CFO … Our average time to close an engagement when I was chairman and CEO was 72 hours. We had as many as 16 companies in a single private equity firm as clients. What would happen is they would buy a company. The company would have a CFO that was more likely a controller. They would upgrade with one of our partners, but I think the most interesting thing about the CFO position, as opposed to the CIO, is that it’s the only position in a company that reports, he or she reports on the performance of their boss. The reason I say that is if you’re the CFO, you work for the CEO, but every time you produce a set of financials or a forecast, you’re effectively reporting on the performance of the person that you report to and there’s always a dotted line to the board. It makes it a very interesting kind of situation. I think that that’s kind of what drove our growth was private equity. They wanted that strong relationship with the CFO.

John Monahon:                 Doug, we are talking about your growth of Tatum LLC and then also leading to your eventual exit. Tell us a little bit about the sale. What brought it about?

Doug Tatum:                     Well, it’s interesting, John. First of all, I had been leading the firm for 17 years. We had rolled the firm out nationally. I had kind of looked behind the curtains about international expansion and decided that wasn’t the right thing to do at the time. I actually didn’t make a decision to sell the firm. The firm was an outstanding financial situation. It had no debt. It had multiple millions of dollars on the balance sheet. I think the thing I’m proudest about is out of the 17 years, I think we only had one year where partner earnings did not go up, and that was through a couple of recessions, as y’all can remember.

Evelyn Ashley:                   Yes.

Doug Tatum:                      We were in pretty good shape. I think the growth rate, the average growth rate approached 20% a year over that tenure. I thought it was a really good time to bring a successor in. You got to remember … We were talking a little bit during the break. Professional services firms are uniquely challenging to lead. I was lucky we had a very flat organizational structure, so each office had a managing director who was a benevolent dictator and probably be what I was at the top. Then we had some good executives in various parts of the firm and a fantastic corporate support group that developed over time.

I felt like it was time to find a successor, so I put together a group of partners, some of the top partners in the firm. The guy that chaired it was a former CEO of a major, publicly traded private equity firm. I won’t disclose the name. Hired and fired a lot of CEOs. We did an internal and external search. We narrowed down a number of candidates. I actually ran those candidates by some major private equity firms, one in particular in Chicago, to have him vetted, and we made a selection.

I transitioned, obviously, into the board and we had a new CEO. The decision to sell the firm, interestingly enough, came really out of his performance, which I think was average or below.

Evelyn Ashley:                   Yeah, I was going to say. So how’d that transition go?

Doug Tatum:                      Yeah. It didn’t really go that very well. I think for your listeners, one of the lessons in that is that you can do the best process with the smartest people and still make a mistake.

John Monahon:                 Mm-hmm (affirmative).

Speaker 1:                         Yes.

Doug Tatum:                     We actually started bringing in independent board members to help us assess that. The first thing that’s interesting from an entrepreneur’s perspective, and we could have a whole session just on how to select a successor, especially given the mistakes I’ve made at it, which ultimately was my decision, so it was ultimately my fault. The thing that was interesting is during the transition, after me, my successor did a fairly significant acquisition and brought in some capital, some private equity capital to do it.

What’s interesting about that for your listeners is you do not bring in capital, institutional professional capital. When you do bring them in, you have made the decision to sell. That’s the bottom line. The bottom line was the decision to sell was actually made when the decision to buy, do an acquisition and bring that capital in to supplement what we had on the balance sheet, and between those two scenarios, you ultimately were going to tee up to sell. That’s what eventually happened. We sold it to Spherion. The firm’s still operating now through, well, Spherion and Randstad. Randstad bought Spherion a couple of years later.

Evelyn Ashley:                   Okay.

Doug Tatum:                      The firm’s still out there. It’s much smaller than it was. That was ultimately what drove it was you cannot take on private equity capital without ultimately exiting it. The board also felt like that they were either going to have to go through a CEO transition again or sell the firm. I endorsed selling the firm at that time.

John Monahon:                 So-

Evelyn Ashley:                   Okay, but rolling that back. You really weren’t conscious of the fact that taking in that capital was going to put you on an exit path.

Doug Tatum:                      No, I was.

Evelyn Ashley:                   Okay.

Doug Tatum:                      In fact, I argued against that. As you well know, a partnership is a very unique animal.

Evelyn Ashley:                   Yeah.

John Monahon:                 Mm-hmm (affirmative).

Doug Tatum:                      Up to that point in time, we’d been owned 100% by our partners. You bring in capital and you change that dynamic, so my vote was no on the board for that transaction. If you’re going to let somebody come in and run it, you got to let it play out the way it’s going to play out. Well, it didn’t play out to everybody’s satisfaction. We sold it for … It was a significant amount of money that got divided by around a significant number of people. No, I knew at that time that the minute you brought that outside capital in, you were going to have to face an exit, which partnerships, the cultural changes between partnerships and how we ran an open book, and the way it gets run in a large corporation can be very different.

Evelyn Ashley:                  Yeah. Very, very different.

John Monahon:                 Mm-hmm (affirmative).

Evelyn Ashley:                  Was it a relief to you, then, in a sense? Because it seems to me that if you have a failed hired CEO, was everyone going to be looking to you to become the CEO again?

Doug Tatum:                      Well, there was some rumblings around that, but here’s what’s interesting. If you’re an entrepreneur, and God knows if your name’s on the firm, right?

Evelyn Ashley:                   Mm-hmm (affirmative).

Doug Tatum:                      If you do a succession and then come back and run it, then nobody will ever believe. You will never, ever get a caliber person you want back in there because it doesn’t matter what the truth of the matter is, the perception is that you didn’t leave the-

Evelyn Ashley:                   Yeah. You never left.

Doug Tatum:                      … the predecessor alone to run it.

Evelyn Ashley:                   Yeah, that makes perfect sense.

Doug Tatum:                      Everybody who was on our board would acknowledge that we let him alone to run the firm, and they would acknowledge, I think, they made the decision that they needed to exit, but there’s no real way of that, of a large … It was pretty large. A professional services firm is a large firm. Not compared to GE or something like that. Anyway, the long and short of it is that you can’t go back and run it as an entrepreneur or you’re stuck with the notion that you can’t get anybody else in to do it.

Evelyn Ashley:                   Right. You’re not going to exit probably.

Doug Tatum:                      Yeah. Dell is still running Dell now.

Evelyn Ashley:                   Yeah, and we had a local company here, Brock Control, for a long time, and I think Richard Brock had to go in there two or three times. I think he’s back in it right now.

Doug Tatum:                      Yeah. Yeah, it’s not an easy thing. I don’t know if we mentioned it earlier, but I’m a faculty member down at Florida State University in their new School of Entrepreneurship. I was exposed to a gentleman in another university that did a magnificently mathematical analysis of transition CEOs, and what was interesting was that he found that outsiders did not do nearly as well as insiders, even in the corporate world. We sat around and smoked some cigars and said, “Why is there this tendency to not hire inside?” Well, part of it is the candidates that are insiders, you know their weaknesses. The candidates that are outsiders, you almost … Well, you have no knowledge of their weaknesses.

Evelyn Ashley:                   Right. Not really.

Doug Tatum:                      The new shiny toy looks better than the one you know, that you, that [crosstalk 00:22:18].

Evelyn Ashley:                   That’s been in the system. Yeah, really understandable.

Doug Tatum:                      Yeah. I think that I would, and I think everybody involved in the decision, including the board, in retrospect, I think would have gone with an insider. They were a highly, highly talented group of folks that we surfaced over the year that the committee was doing the search for my successor. Anyway, what drives-

Evelyn Ashley:                   But, Doug-

Doug Tatum:                      What drives an exit isn’t always what you think drives an exit, but I will tell you if you take on professional capital, you have made the decision to sell.

Evelyn Ashley:                   Awesome.

John Monahon:                What are some other mistakes or maybe some good lessons for people who are selling their business that they should be aware of?

Doug Tatum:                      Well, I think that number one, and we’ll get into this a little bit later on in the next section, because there is a new normal in the capital markets that is driving capital into companies, industries, creating competitive dynamics that are unique and I think requires that the entrepreneur gets strategic. In the context of lesson number one is that you do need to be prepared to sell, whether you want to sell or not. We call it capital market ready. The reason is you never know what set of circumstances or what curve balls or what opportunities get thrown your way, and you do not want to be positioning your company in an emergency exercise to get ready to sell when there’s plenty of time while you’re running the business to get it-

Evelyn Ashley:                   Prepared.

Doug Tatum:                      … ready to sell.

Evelyn Ashley:                   Yeah.

Doug Tatum:                      Yeah, I used to say … Somebody said, “What is your job, you know, strategically at Newport when you’re helping these entrepreneurs kind of position their companies through no man’s land and growing it?” I said, “Our job is to position the CEOs so they can always say no-

Evelyn Ashley:                   Yes.

Doug Tatum:                      “… and be-”

Evelyn Ashley:                   I think that’s really great, because we have many owners that will contact us, or CEOs that will contact us, saying, “Oh, I’ve been called by XYZ, and they want to acquire us, and what do I do now? Yes, I want to do it.”

Doug Tatum:                      Right.

Evelyn Ashley:                   They don’t really understand that they lose so much of their leverage by not taking the time to figure out, What do I have? What should I be thinking about strategically, valuation-wise, and everything else?

Doug Tatum:                      Well, I know you, Evelyn, and your firm do a lot of high tech, so it’s stomach-wrenching when a firm is rocking and rolling and then somebody comes in and says either they want to put more money in or put some money in or they want to sell, and then you find out that there’s some really talented programmers who are stringers have a work product agreement.

Evelyn Ashley:                   Mm-hmm (affirmative).

John Monahon:                Mm-hmm (affirmative).

Doug Tatum:                      There’s nothing like going to an eccentric technical talent and then trying not to let them know that there’s big money on the table, but we need to get their signature on a work product agreement and they start, “Well, some of that code, it’s kind of mine.” You go, “Oh, lord.” Years ago, I ran a national firm and we had some highly technical things in the prepress world, and we used a guy that had written an operating system for an F-15. Talk about eccentric, he literally dug a hole in his farm, covered it with tin, dropped electricity in there because he needed to be in the dark, near the earth to do some of the stuff, so you never know [inaudible 00:27:03] work with, but that’s an example of what we’re talking about. It’s crazy not to be prepared.

Evelyn Ashley:                   Yeah.

John Monahon:                Yeah.

Evelyn Ashley:                   Yeah, absolutely. We actually are working on an acquisition right now where the seller has exactly that problem; 25 years in business and their main engineer has not executed a work assignment.

John Monahon:                Yeah, crazy.

Doug Tatum:                      Mm-hmm (affirmative). Not good.

John Monahon:                When you were looking to sell, what were you looking for in a purchaser? Your name is on the company, Tatum LLC. It must have been a little bit maybe more important to you to see what happens to it on the other side.

Doug Tatum:                      Well, I was just on the phone with a gentleman who runs a multi-hundred million-dollar private business, very successful. He has a division that he wants to sell. I introduced him to a public company of very high integrity and somebody I felt like would be a match because I think his primary motivation was not to squeeze every dollar out of it, but what kind of home were his employees and his customers going to. That’s one motivation.

I will tell you, though, however, if you get, and I’m all for institutional investors, but if you have an institutional private equity or venture capitalist firm in there, that becomes secondary to maximizing the exit, because they have a different fiduciary. This gentleman I was referring to, he owns 100% of this large company, so he can do what he wants to do. If you have a private equity or venture capitalist involved in there, then that’s another constituency, and then you end up getting an investment banker. The reality of it is investment bankers do, they really do a good job at creating a competitive environment and so it becomes less what you would like it to be and more who is going to structure the best deal.

Evelyn Ashley:                   Right. Exactly. I think that’s one of the hardest, maybe one of the more challenging aspects of having an investor come in or getting ready for a sale, that whole idea that I’m about to disengage myself from this baby that I have created and operated for so many years and my thinking has to change. There are many owners that are very focused on loyalty and my people and there has to be a transition, because you do have a different quote, unquote, “master,” if you will.

Doug Tatum:                      Yep. You’re right.

Evelyn Ashley:                   Yeah. Then as part of kind of the next phase of … You’ve sold to Spherion, and so did you stay with the company, Doug, for any time, or-

Doug Tatum:                      No, no.

Evelyn Ashley:                   … you exited immediately?

Doug Tatum:                      Not at all.

Evelyn Ashley:                   Okay.

Doug Tatum:                      At that point in time, we had transitioned the board to an outside board, and I was on, obviously retained by the firm during that and up until we sold it. Then that was the end of it.

Evelyn Ashley:                   Okay, which is pretty unusual, actually. Well, you had created that opportunity for yourself, but many other-

Doug Tatum:                      Yeah, I had actually been out of day-to-day operations, I think, four years. That’s when I had written a book.

Evelyn Ashley:                   Oh, okay.

Doug Tatum:                      From that perspective, they knew it was not tied to me. The other thing is people buy the folks you leave them with, not yourself.

Evelyn Ashley:                 Mm-hmm (affirmative).

John Monahon:                Mm-hmm (affirmative).

Evelyn Ashley:                 Yep, absolutely.

Doug Tatum:                    We had some good folks.

John Monahon:                Yeah. I recently heard a podcast, and they were interviewing Kate Spade. She went into a store which she bought a Kate Spade purse, and they were asking her how she felt, because she sold the company, her name being on the product even after she sold. After you sold, your name is still part of Tatum LLC. I guess I’m just wondering how that feels to have your name sort of belong to a different entity that you’re not part of.

Doug Tatum:                     It’s weird. It’s weird, but it is the case.

John Monahon:                 Yeah.

Doug Tatum:                     When I refer to Tatum the firm, I don’t think of it in terms of my name, so to speak, but it is unusual. Now I couldn’t start another firm with my name. I really didn’t want it originally. I think my brother had already named it that way and we were stuck with it. It is a lot, so I wouldn’t recommend it necessarily.

Evelyn Ashley:                   You’re out for a number of years. You write this book on No Man’s Land: Where Growing Companies Fail. How did you segue to creating Newport Board Group? How did that come about?

Doug Tatum:                      Well, it was interesting. Newport actually came from some really talented former Tatum executives. Doug Payne was a CEO, contacted me and said, “Look. There’s some former colleagues, we’d love to do another firm.” I had started a board firm within Tatum for senior partners. I didn’t want … I would get a phone call from a partner and say, “Tatum, I’ve been with the firm for literally 15 years. I made a lot of money. I love it, but I don’t want to retire, but I don’t want to get onto the horse again with a private equity firm.” That was when Sarbanes-Oxley came out, so all of our partners were financially qualified. Right?

Evelyn Ashley:                   Mm-hmm (affirmative).

Doug Tatum:                      We got some early traction as a board firm. Literally, this is where you’d come to get really qualified folks to serve on your board. My successor didn’t like the idea, which was his prerogative, so he shut it down. Newport actually was a reestablishment of that around the emerging growth market rather than public companies. We literally serve as board members or substitute for a board member, an advisor for emerging growth companies and then go on the boards of some private equity firms to help them.

John Monahon:                Doug, I want to switch gears a little bit and talk about some research that you’ve been doing. I understand that you set up a large research database that tracks, I guess, pretty much every company in the U.S. over the last 20-year period. Can you tell us a little bit about this database and what you’re learning from it?

Doug Tatum:                      Yeah. Thank you for asking that. Yeah, I have spent years. The funding partners originally were SAP, a large software company. Nasdaq Foundation helped us put together the database. It now exists at the University of Wisconsin, and it is a database that tracks every company over a 20-year period. We were also able to get the data from the best private equity data source, in our opinion. PitchBook mashed into that database. We have an awful lot to look at.

What we’re finding is that there’s a new normal. There’s really too much money, if you would say, I guess would be the tagline, chasing too few deals. What’s happened is you’re seeing a fairly dramatic reduction in the number of companies above 100 employees. That shrinkage, if you will, accounts for a lot of the competitiveness, for example, you see in professional services, accounting fees, legal fees, insurance, where a lot of B-to-Bs out there going, “Why is it so tough to raise prices or get work?” Well, there’s less and less companies.

What it’s doing in the capital market is it’s driving the capital downstream, because if you can’t find a platform company of any size to buy or they’ve already been bought, then you end up doing add-ons or what we refer to as bolt-ons. That’s the last data we’ve looked at. If you include private equity firms buying from each other, it could be as much as 85% of every deal in the United States is now an add-on.

John Monahon:                Wow.

Evelyn Ashley:                 Wow.

John Monahon:                Wow.

Evelyn Ashley:                 Actually, that’s really interesting, because we have a couple of private equity-owned clients, and they were saying that those firms were actively going downstream, that they were looking at companies that no one would ever think that private equity would be interested in. Lots of services businesses and a lot of that was driven by the fact that they just couldn’t find anything really to deploy that capital into, which seems pretty outrageous, really, but makes [crosstalk 00:37:02].

Doug Tatum:                      Well, it’s here to stay. I looked at the data, and I don’t want to publish verbally what we’re trying to put in a paper yet over the radio, but I would suggest to you that the amount of companies owned by private equity in the U.S. as a percentage of the total companies in the middle market is stunning. They are going lower, and they’re going into … There’s just enormous amounts of money to deploy. The new normal, if you take the notion that we’re in a cheap capital environment, both interest rates and equity, I think the new financial calculus in the capital markets or private equity it’s just cheaper to buy a customer than it is to win them through a traditional sales channel, which is more expensive and takes too much time.

Evelyn Ashley:                   Interesting.

Doug Tatum:                      What you’re doing is … For your listeners that are smaller companies, I can say this because I know it. I speak to groups of entrepreneurs every month around the country. If I say, “How many of you are in an industry where private equity is either buying up your competitors, have called you, are buying up your suppliers and going around you?” every hand goes up. Companies that are much smaller that would never deal, think to have to deal with private equity are having to deal with it because the money is enormous.

Evelyn Ashley:                 Amazing.

John Monahon:                Well, Doug, this has been a fascinating conversation. We’ve really enjoyed it. Thank you for joining us and [crosstalk 00:38:42].

Doug Tatum:                    Well, thank you, guys, and I appreciate what y’all are doing to educate the owner operators and the companies out there that are growing. Appreciate it, and I look forward to next time.

John Monahon:                All right. We’d like to thank Doug Tatum for joining us. For more information on Newport Board Group, please visit their website at Also, I do highly recommend his book, No Man’s Land: Where Growing Companies Fail. I’ve read it and it’s a great read.

We hope you enjoyed In Process today. If you have any questions on the topic, please reach out to Thank you.

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