Buying or selling a business can be the most exciting and terrifying time for a business owner. Whether you're starting, growing or exiting a company, it's important to have the right team to support you at each stage of your business life. If you're lucky, you build a company with strong brand equity that's viable far after you have exited. When that's the case, it's usually time to work with a private equity group to make some difficult decisions.
In running Elevate My Brand, we come across businesses in diverse life cycles, and it always struck me as interesting that owners are often confused at the difference between institutional money, private equity and venture. What better way to address this than to sit down with Founder and Managing Partner of ClearLight Michael Kaye, a local private equity firm, to discuss their story and bring some clarity to the conversation.
L: Let's start with the firm's origin story.
M: Well, I started as an attorney. I briefly practiced law at a big L.A. firm - Gibson, Dunn & Crutcher. I didn't really like practicing law, but I had learned Japanese in college and spent time there in the early 80s when Japan was white hot. I represented a number of clients when I was in Japan, and one of them was Secom Co., Ltd., a large security company. When they went public, the founder was the youngest CEO in the history of the Tokyo Stock Exchange. Once public, they had 30 years of uninterrupted increases in revenue and profits, which only two or three companies in the history of the Tokyo Stock Exchange have ever done. While they were a client, and I got to know the founder, I represented them when they bought a regional security company in Southern California called Westec Security.
L: I'm familiar, they've been around a long time, in high-end residential security, right?
M: Exactly, and they got into some trouble, so Mr. Iida, asked me to come run Westec. So, I came back to the U.S. in 1985 when I was 31 years old. At the time Westec was about a 35-million-dollar revenue company with about 600 employees. It was a turnaround, and it really hadn't been well managed. So, I turned it around, and we formed a holding company that we diversified into health care and other services. We had about 250 million in revenue and about 4,000 employees with 60 locations around the U.S. when we started selling off the businesses.
We found ourselves in the late 1990s with the proceeds - about 300 million in cash, and we had to figure out what was next. At the time private equity wasn't nearly as well-known as it is today, but I had done my homework and we've been doing it ever since - investing in small companies and helping them grow.
L: Wow quite a journey. As an investor or as a business owner, what are the major life lessons that you've learned along the way?
M: Well, the two big things to look out for when you invest are the space and the people, mainly the CEO. If you were investing in the buggy whip space at the wrong time, when carriages were being replaced by the car no matter who was running it, it would fail. So, you want to invest someplace where the macro trends are in your favor. After that, the biggest issue is having the right person running the company.
The other thing is to just be as clear-eyed as you can be in your evaluation - as humans, we have a tendency to see what we want to see. Try to be as rational as you can to see the reality on the ground and not be biased or have an attachment to outcome.
L: Why do you think that laypeople are so confused by the different types of investors and investment strategies?
M: People in the industry tend to speak in jargon, so they use words that aren't as familiar even to operators, let alone the general public which creates confusion. We try not to do that.
L: I'm sure business owners find that refreshing and it's one of the reasons for your success. With all of this confusion, when is the right time for an owner to consider taking on an investment from a firm like ClearLight?
M: There are so many factors. The most important ones are the hardest to evaluate and are very personal (health, time, retirement). The other factors are more of a self-assessment. One of the hardest things for all of us to do is be objective with ourselves. So, what are you good at, what you are not good at, and what are the challenges facing the company?
A great reason to take on a partner is to get help if you're in a stage where you want to continue to grow the company, but are humble enough to know that you don't know how to take it to the next level. I have the greatest respect for founders, they tend to be pretty strong willed and a little crazy because they knew that the chance of their business working out was remote, yet they persisted anyway. So, they have a lot of determination and grit. Sometimes, these folks find that it's hard to share the power, which is what you're really doing if you take on an investor. So, you've got to think about that or whether you would rather just sell and walk away.
I've seen a number of owners "stay past midnight". It's very sad to see. For example, I know an owner who had great offers to sell, but he waited, the business got into trouble and he ultimately declared bankruptcy. The timing is a very important question with significant consequences.
L: Building trust and relationships is one of your core values. What are some of the questions a business owner should be asking of a firm with whom he or she is considering working?
M: Hopefully the owner is good at evaluating people. I think a mistake people make is that they fixate too much on the cash that an investor is bringing and not enough about the people. What they need to ask is whether they really want to hire or potentially work for this person. They need to ask what's worked for the firm and what hasn't? What's the relationship going to be like? What kind of reporting is there? How are decisions made? What happens when things aren't going well? It's always easy when things are going well just like in any relationship. I think with some funds there are only two chapters in their book. One is, you know, the investment is going great, we've got the best CEO in the world and the other is, so we missed a few quarters and we fired a CEO and got a new one. In my experience, most of life is in between. They should make sure they talk to references and other people at the firm, get it all on the table.
L: Can you tell me a little bit about one of the businesses that you've invested in that was a huge win and the reason behind that win?
M: We have several to choose from, fortunately. We exited one last year - it was in the alcohol ignition interlock business called Intoxalock. It helps keep drunk drivers off the road. The business was being sold by a couple owners, one of them was in poor health, and so the company had been throttling back for number of years, and we saw a lot of potential. The industry had tailwinds behind it, with more and more states adopting these laws, and we also saw a lot of things to fix. We brought in a new CEO, a woman named Kimberly Williams, who was outstanding, and we loved working with her. Ultimately, we went from third or fourth in terms of market share to number two, and number one in industry growth and profitability before exiting successfully.
L: What a great story. Other than your eye for talent both on the business trends and leadership side, what else sets ClearLight apart from other PE firms?
M: We're a small shop, but I think we have a pretty uniform group of capable and committed professionals. The financial engineering part of the private equity business is relatively straight forward, you don't have to be a genius at it. I think the real difference is that our DNA is on the operating side. Starting with myself as a former CEO, we've really been there, done that. As I mentioned earlier, when you're in that challenging section of life, we get out there and work with management teams to get them to a better place. It's also unusual that we have a single limited partner, Secom, rather than 20 or 30 pension funds. Our limited partner has a long-term perspective and patience if we need to stay in an investment longer. We don't have somebody breathing down our necks saying, "The term is up, give us our money back."
L: This is the last question, and this is the question I ask everyone that I interview and that is: what is your favorite word and why?
M: I'm not a good one for this because I'm not really a one-word guy. But, I suppose in this context it would be integrity. In today's world it's so critical to be able to have trust, to be able to count on people to do what they said they were going to do - that you can rely on them, and they'll be there for you.
I hope this has debunked some of the confusion and myth around the private equity world and helped business owners at all stages understand what to look out for when making these often once in a lifetime decisions.