Darrin Shillair: Inside a Self-Funded Acquisition

Craig Castelli (00:04):

Welcome to The Close M&A Podcast. I’m your host, Craig Castelli. Today we have my good friend Darrin Schillair, owner of Specialty Sales, an industrial distribution business based in the west suburbs of Chicago. Darrin, in 2018, you took a calculated risk. You left Guggenheim, which is not an easy place to get a job, in pursuit to buy a business. Tell us what was your idea and why’d you think it would work?

Darrin Shillair (00:30):

Yeah, so my main goal in leaving to buy my own business was focused mainly on really autonomy and control. I do think there’s probably easier ways to make money, but over the long term small business ownership for me was about being able to control my schedule, be able to control the things that I worked on, be able to put together [00:01:00] the strategic plan and the things that I thought were important and then go execute on those without a lot of red tape. So I spent most of my career in corporate jobs, consulting, banking, things like that. And then it seemed to me there was a lot of very obvious things we could do to build those businesses, but they were kind of caught up in bureaucracy or corporate politics and things like that. So I wanted to get out of that and just get into a place where [00:01:30] I could control my own destiny a little bit. So that was my main intention.

Craig Castelli (01:36):

I started, my first job was with one of the 20 largest companies in the entire world, and I’m grateful for a lot of the structure that it imparted on me and you learn a lot of things early going, working for big companies like that, but it’s refreshing to be on this side, to say the least.

Darrin Shillair (01:53):

Yeah, I think it was great to get that experience, and I think that I learned a lot in those roles and was really driven [00:02:00] by, I guess the pressure of those high-performing consulting type engagements, but ultimately wanted to just get out and do something on my own.

Craig Castelli (02:14):

So as you get out there and you start marketing yourself to business owners and brokers and bankers looking for a business to buy, you’re competing with private equity investors, well-capitalized buyers who have known names, big networks, and you’re just a guy. I mean, you’re a great guy. We’ve become good friends over the years, but you’re one man out there on your own trying to find a business to buy. How did you stand out in such a crowded field?

Darrin Shillair (02:43):

Yeah, naivety and unearned confidence at the time. I do think that that is probably the biggest struggle as an individual buyer when you’re competing against much better funded, much better experienced competitors [00:03:00] who are to some extent looking at the same businesses that you are. I think that you have to kind of lean into that a little bit and have that ultimately kind of be your differentiating factor.

(03:14):

I think looking back, for me, I think I was trying to somewhat act like a little mini private equity firm, and if I were to go over and do it over again, I would probably very much even lean harder into the fact that I was an individual buyer, [00:03:30] kind of being the anti private equity in the space and trying to appeal to that business owner who was looking for an alternative to that type of buyer who cared a lot about things like preserving their legacy and protecting their employees and preserving what they’ve built over time and was really just looking for that next generation of steward to their business to bring it forward. [00:04:00] So I think that if you’re really going to go out there and try to compete pound for pound with private equity buyers or strategic buyers, you’re likely to lose as an individual buyer. And so you’ve got to try to differentiate yourself on some of the softer factors that are away from that.

(04:19):

And then a lot of what I did with that, searching for a business buy is ultimately kind of a sales job, and so just pounding the pavement and trying to get [00:04:30] out there and meet face-to-face with as many people as you possibly can. So Craig, from your position, I’m sure you’re getting hammered all day long with prospective buyers who want to connect with you and want to buy a business. And if you’re just getting an email from ’em, I think it’s probably hard for you to differentiate or tell the difference between one and the other. But you and I connected face-to-face through a mutual contact. We ran into each other a couple more times [00:05:00] while I was still searching. And so I think that face-to-face sales, like any other relationship building, it was kind of critical to my success during that search. And just making sure people got to know me as an individual and not just someone looking to buy a business or not just a faceless firm with a check to write.

Craig Castelli (05:23):

Yeah, I mean, at the end of the day, people still do business with people and that’s how you shine through. [00:05:30] I get asked oftentimes by people who are just starting the search to buy a business for advice, what they should do to stand out. And I always say two things. Number one, you have to be somewhat specific and intentional to be memorable. And maybe that’s just me, but I remember the first time you and I met we’re introduced by a really close mutual friend who I trust implicitly, and you described your search like you [00:06:00] were a generalist PE fund, you wanted $3 million of EBITDA or larger and you were open to any industry. And I just remember leaving that meeting thinking, okay, it seems like a sharp guy, but how is he going to stand out and compete? Where are we going to find something that’s really a fit there?

(06:16):

By the time we met again, you had really narrowed that down and that intentionality is really what stuck with me the second time. I think the other thing I tell people, and this gets at what you were describing about the [00:06:30] sales process here, you really have to have a presence in every channel at all times. You have to be interfacing with the various intermediaries, which these days goes beyond your traditional brokers and bankers. You have attorneys and accountants making introductions. You have consultants trying to play investment banker on the side. Everybody’s trying to get into the introducing buyer and seller part of the game. And so you have to understand that you have to be in front of the business owners directly too and build your own proprietary sourcing engine. You really don’t know [00:07:00] where the right company is going to come from, so you can’t just rely on one channel and being more socially introducible like that just increases your odds tremendously. It’s a huge numbers game at the end of the day.

Darrin Shillair (07:12):

Yeah, I think that’s true. I talk with a lot of prospective searchers. They’re business buyers and they ask me, well, how should I source? Should I go through brokers? Should I do proprietary? Should I do? I’m like, yes, yes, and yes, it’s ultimately any way, any how. [00:07:30] And to some extent you’ve got to be doing it all.

Craig Castelli (07:34):

Right. Right, exactly. So why was Specialty Sales the right business for you?

Darrin Shillair (07:40):

Yeah, so Specialty Sales I guess has been great for me and I love the company and I really think I’ve made a great decision in buying this specific company from a business perspective. It had a lot of the characteristics that we’re told to look for as searchers, and I think that those are [00:08:00] critical. Most importantly, being kind of steady, consistent, reoccurring revenue, the type of business where it looks like it’s going to be kind of hard to mess up. And so as a first time business owner, you’re going to make a lot of mistakes and that reoccurring revenue is a bit of a safety blanket, I guess, in terms of making those mistakes.

(08:26):

I think also it lent itself well to my skillset. So [00:08:30] my background is all operations, my undergraduate is in industrial engineering, and so I was really looking for a business, once I narrowed down my criteria, that was going to be, that those skillset was going to be a core part of actually running it. And so I was looking at a lot of distribution businesses as well as kind of light manufacturing. So things like fill rates and inventory turns were to some extent second nature to me. [00:09:00] And I think from a skillset perspective, it was a good fit. The last thing, which is a little bit intangible is that in these small businesses, I think so they kind of are their owner. And so I think that when you’re going into a small business, evaluating the seller of that small business and whether or not they’re a person that you can trust, whether or not that [00:09:30] they’re a person that you feel has built a culture of a business that you think is transferable or that fits well with your personal values, I think is a big part of that.

(09:45):

As well as a lot of these small businesses, the owner owns all the sales relationships, and so I was kind of looking out for that as well. So Specialty Sales was a kind of unique [00:10:00] business in its size range in that the owner was heavily focused on managing the actual business and not actually responsible for all the customer relationships. She had a strong sales team that was staying on, and so that was a big benefit. And then her and I just really got along well and I really felt that I could trust her and that she was selling her business for the right reasons, that she believed in me as the buyer and was not just trying to [00:10:30] extract as much value from the highest dollar amount from the transaction as possible. And that’s continued to this day. So Karen and I are close, and she’s been fantastic for me throughout the transition and still comes to our Christmas party every year, and I think that’s a big factor in the success of the business. And I’ve heard a lot of horror stories with sellers and buyers, and I think that’s something that really needs to be diligence as you’re looking for the right business to buy.

Craig Castelli (11:00):

[00:11:00] Absolutely. And I will always remember what Karen said to me after the deal closed, just for those who don’t know, Specialty Sales was a client of ours. Karen was second generation owner, had inherited the business from her father, didn’t have a generation below her who wanted to be a third generation to run it. And so we took it to market, but there was a very clear mandate not to approach competitors or strategics that fit a certain criteria, but it really had to do with the legacy. [00:11:30] And after the deal closed, she said her father had passed years before. She said, I think my dad’s smiling down on me. I think this is the buyer that he would be most happy for me to sell the business too. And I don’t think she regrets it for a second either. It’s that perfect scenario where you can come in and inherit the legacy, make the improvements, and grow the business and shine where you can shine, but also not mess up what they were already doing well, which was a lot [00:12:00] at that point.

Darrin Shillair (12:00):

Yeah, yeah, absolutely. I think buyer-seller fit is one of those things that’s critically important and doesn’t really go in a spreadsheet anywhere.

Craig Castelli (12:09):

Right, exactly. So thinking through over the years since you’ve bought it, what do you think are some of the most impactful things you’ve done in your ownership?

Darrin Shillair (12:22):

That’s a great question. I mean, it is been over the course of eight years and we’ve grown the business rather well, but [00:12:30] it, it’s been a little bumpy along the way. There’s a lot of things that we did that were, it’s

Craig Castelli (12:35):

Not just up and to the right the entire time?

Darrin Shillair (12:37):

Yeah, no, we didn’t get that steady year over year exactly as it looked in the spreadsheet the whole time. But I think the most impactful decisions that we’ve made, we’ve made some great hires. And so I think that putting additional talented people into the business sounds [00:13:00] obvious, but is actually probably the most impactful thing to the business on a day-to-day basis as far as looking forward to our future and growing the business, is getting people on board who are in that growth mindset and are talented and willing to put in the work to do so. And as a small business, that’s always really hard. It is hard to recruit. You don’t have that [00:13:30] brand name, you probably can’t pay people as much as the larger companies can. And so you’ve got to find that right fit of hungry individual who are bought into you and bought into your mission and think that they can make a real impact.

(13:48):

Those are probably the most impactful decisions, is some core key hires. Then we did purchase another business, one of our customers, [00:14:00] which I was approached by I who just said, we’re a customer of yours. I like the way that we’re treated. I would like for my customers to continue to be treated that way after I retire. Would you be interested in buying us out and effectively transitioning our customers to yours and adding our product lines? And so we did that and that was great for us. We got a whole new batch [00:14:30] of products and a whole new batch of customers, and we were able to combine those businesses effectively and cross-sell in both directions and maintain both brand names and the reputation in the marketplace. So I think the key hires plus that acquisition were probably the most impactful things that I’ve done to the business or that we’ve accomplished over the last eight years.

Craig Castelli (14:54):

Yeah, it sounds like the acquisition was a creative in more ways than just increasing the size [00:15:00] of your P&L. If you have those cross-selling opportunities, that’s just a whole new layer of growth.

Darrin Shillair (15:07):

Those are those mythical synergies that everyone talks about, at least on the revenue side. And that was the strategy going in, but we had no idea how to really model or estimate or pencil that we just said, alright, we think we can do that strategy. And it actually really panned out for us, so we’re [00:15:30] really happy about that.

Craig Castelli (15:31):

Yeah, yeah, sounds like it. So how are you thinking about growth going forward? I was going to ask whether m and a was a part of that or not, obviously it has been, but more acquisitions or otherwise, what are the next several years of growth at Specialty Sales look like to you?

Darrin Shillair (15:47):

Yeah, so we are heavily focused on growth both organically and through acquisition now. So organically we’re doing a lot of the standard blocking tackling stuff that you might think of, [00:16:00] although in a industrial B2B environment, our competitors are not always as mature on that front. So we’ve done a lot of content marketing to drive our web presence, new e-commerce platform, new technology, all that fun stuff as an effort to get our voice and our brand of customer service out there in the marketplace. And that’s [00:16:30] been very effective at bringing in additional business and additional leads.

(16:34):

And then we’ve hired additional salespeople to go chase and close that business. So on the organic side, I think it’s been a combination of new people on the sales front as well as some of the technology and digital presence coupled with just kind of a culture and mindset shift to say, we are [00:17:00] driving towards growing this business. It is our intention to grow this business and everybody here needs to be aligned with that and focused on that goal. And so that’s been okay. I think that organic growth is, it’s always kind hard to tell, right? Is all the stuff you’re doing working or is it just the market’s going up and down? So I can’t say that we’ve got that a hundred percent figured out yet, but if I zoom out and look on a quarter by quarter, [00:17:30] year by year basis, it seems to be going fine.

Craig Castelli (17:33):

Somebody once told me, if you want to find out how I did today, ask me in six months.

Darrin Shillair (17:37):

Yeah, exactly. That rings really true. And then M&A, after we did that kind of opportunistic acquisition where he called me, that went really well. And now I’ve kind of decided, alright, I think we can do more of this. And I think there’s an opportunity in the marketplace [00:18:00] for us to fill that gap where some of our competitors or other industrial distributors that are in the market are in a similar place that Karen and Don were, where they’re looking towards their own retirement. They don’t have children that necessarily want to take over their businesses and they don’t want those businesses to fall into the hands of the wrong buyer. [00:18:30] They’re concerned about their customers, concerned about their legacy, want to see their businesses continue, and positioning myself and Specialty Sales as that individual, continually be family-owned buyer. I think that we can have success with that.

(18:48):

So we have put some kind of specific projects and efforts behind sourcing those businesses, which [00:19:00] as kind of back in the search and mode, but it’s still a little bit easier from this side of the table. And then just our businesses are relatively close and tight knit in the industry, so I know a lot of my competitors and their owners rather well. And so kind of just continuing to let them know that if they’re ever looking towards their retirement and transition their businesses that I would be interested. And so [00:19:30] we’ve got a couple of those active now that we’re working on, and hopefully we’ll continue to run down that path.

Craig Castelli (19:36):

Well, that’s great. As long as time is on your side, you own this business outright, you’re not beholden to a private equity hold period where you need to really accelerate this pipeline. You can build a five or 10 year relationship and be there when they’re ready. And I think, I know many sellers appreciate the buyer that they know. If they view you as [00:20:00] a good guy in the industry, they like what you are doing with the business and they develop the trust that you can continue to do that with theirs. That goes a long way. Somebody could always come in and write a much bigger check, and there will always be sellers that will just take the money and everything else be damned. But that’s only part of the market. And there’s a whole other universities, companies that are absolutely teed up for what you guys can offer.

Darrin Shillair (20:27):

Yeah, that’s what we’re coming at.

Craig Castelli (20:29):

What about, [00:20:30] I never like to ask the question about regrets because you make decisions in business, they work out, they don’t, you learn something either way. But what have been some of your biggest challenges thus far on the ownership journey or surprises? I guess I could ask it either way, challenges or surprises?

Darrin Shillair (20:52):

Yeah, I think that a couple of different things. I think the first challenge is kind [00:21:00] of my own impatience. I think that coming from that consulting, that kind of hard driving culture, it is very much like, well, we’re going to work 80 hours a week and we’re going to go, go, go, go, go, go. And I think that that has led me to one kind not evaluate things before doing them well enough. And that’s [00:21:30] led to a couple of mistakes around software selection and a botched DRP implementation and things like that. But I think that overall I’ve had to learn the lesson of it’ll, it starts to wear on your team a little bit and we’ve got to recognize when things are going well and give things a chance to work. And so I think that especially on the sales side, I have a tendency to implement a bunch [00:22:00] of stuff and then a month later being like, what the heck? Why isn’t it working? And I’ve kind of learned over time that it really takes quite a bit longer than you might think for some of those efforts to really bear fruit and really start to present themselves in the marketplace where like you said, how did I do today? Well, ask me in six months. And that’ll kind of determine it. And so I think [00:22:30] that having the patience to let things run a little bit and let some of our initiatives actually take effect has been a big learning.

(22:44):

And then I think that I have an entrepreneur’s optimism where I kind of always think that that things are going to work out. I’m like, yeah, it’ll definitely work. And that’s not always true. [00:23:00] And I think that for me, a blind spot is people and hiring. I tend to really see the best in people and want them to really do well, and sometimes that leads me to not be as objective as I really need to be. And so I’ve got some other people on my team now that help me out with interviewing and things like that who can kind of pull me back a little bit when I get excited about candidates or ideas. [00:23:30] And I think that that’s been really helpful.

Craig Castelli (23:33):

A lot of what you’re describing is art as well as science and in some cases more art. I mean, we can speak to the science of hiring with personality tests and things like that, and that has value, but your patience and managing people, your optimism. I, in the past, struggled kind of in the opposite way as you’re describing where my view was, I’m going to manage people the way that I would want to be managed, and [00:24:00] which was always pretty hands off. I’ve always been intrinsically motivated, and so I’m gunning and I’m impatient with myself, and that is all that drives me. Not everybody has the same level, and sometimes they need a little bit more assertiveness directed their way in order to achieve what’s expected, whereas others, you can just let ’em run and give ’em the flexibility and the freedom and they will deliver. And you just learn that [00:24:30] by doing and by managing people differently and understanding their personalities and figuring out what the business actually needs, what the business can offer them, what they can offer the business, how do you make that mesh?

Darrin Shillair (24:42):

Yeah, exactly. I think coming from a consulting environment, everybody that was in that environment was relatively cookie cutter from a motivational standpoint, everybody’s motivated by making more money and advancing their career and getting that next title bump, that promotion, whatever it [00:25:00] may be. And in small business, that’s just not always your reality. And I think that I spent a lot of time banging my head against the wall trying to make people do things that they didn’t agree with or weren’t willing to do. They just didn’t want to. They had a different vision of where their skill sets were valuable. And I think that not fighting that, there’s always some [00:25:30] people where, of course, it might not be an overall long-term good fit, but I think that we’ve been much more successful once we realize what people’s strengths are, what people’s motivations are, and try to put them into roles that they can be the most successful in, which ultimately leads to success for the business.

Craig Castelli (25:52):

Yeah, that right. But in the right-seat mentality, you’re right, it will help you achieve your growth goals more than [00:26:00] anything else. So this is an M&A podcast. So shifting towards some more of the future thinking eventually you’re going to have an exit could be way off in the distant future. But as a former consultant, I’m sure you think about how to be prepared today. So what are you doing to position the business so that it’s optimally primed to exit whenever you’re ready?

Darrin Shillair (26:24):

I mean, the biggest thing is just trying to grow it. So I’m not interested in exiting [00:26:30] the business anytime soon. I mean, there’s always a number if somebody called me up. But I really like operating and running the business and frankly didn’t really like the doing deals. So I bought this business when I was 34. I’m 41 this year, so I’ve got a pretty long runway ahead of me. So really as far as positioning the business for exit is number one, just growing [00:27:00] it to a size where it starts to appeal to a different type of buyer and we can get an exit that will be much more meaningful tactically, keeping clean books, not running a bunch of my personal expenses through the business, which we’ve all seen in any number of different small businesses. So keeping clean books, clean processes, trying to kind of professionalize [00:27:30] the business and build a package that would be attractive to a buyer.

(27:36):

I think that we are well poised for growth because we’ve put together a process and operational playbook as well as the technology to support that that could run us to a revenue level that’s higher than we are right now. And so I think that serves two purposes. One [00:28:00] is it allows us to grow, which we’re heavily focused on both organically and inorganically, but it provides a good package for a potential buyer when that day may come. So we’re just focused on running a good business and continuing to grow it, kind of understanding that a lot of the things that made this business attractive to me will continue to [00:28:30] be attractive to the next generation of buyer.

Craig Castelli (28:32):

Yeah, it’s not really rocket science, growth solves a lot of problems. And a good exit strategy is really fundamentally just a good business strategy. You run things the right way and it will be attractive to others. So last question here, and maybe we’ve already tapped this because I feel like you’ve given a lot of good advice to both owners and searchers here, but anything else that you’d share to a [00:29:00] business owner perhaps something that they haven’t heard somewhere else?

Darrin Shillair (29:04):

Yeah, I think the one thing that was really helpful for me during my business search and continues to be helpful as I’m looking at more acquisitions is what are you really trying to personally accomplish? What are the things that don’t go in the spreadsheet that anybody can look at an IRR and calculate an IRR and does it make money? But what [00:29:30] do you want your life to look like as a small business owner? Why are you going into this? Why do you want to do that as opposed to working consulting or anything else? And I think you’ve got to have a pretty good, clear reason for that and then be very intentional about fulfilling that, right? So I’ve had people tell me, well, I want to be a business owner to control my own schedule [00:30:00] and spend more time with my wife and my kids. And then in the next sentence they’re like, well, I’m looking at a catering company that does weddings and it’s three hours away from my house. So I was like, well, those things don’t add up. And so that I think is probably been the most valuable thing for me is try to keep that guidepost of my personal objectives and really what type of life [00:30:30] that I’m trying to live.

(30:33):

Again, there’s a lot of things that go into the spreadsheet, but you’ve really got to get a handle on what your day-to-day is going to look like. And is that something you want to do?

Craig Castelli (30:44):

Yeah, that’s fantastic advice because if it’s all just about the IRR, you can go work for a private equity firm, not to belittle what they do, but operating the business and living in it day in and day out is a totally different challenge. And it can afford a great lifestyle [00:31:00] and the ability to do all of those things, but only if you set it up the right way. Only if you run it the right way. And I’ve had, I know a lot of people who have missed games and mystifications everything because they’re too entrapped inside the business and never been able to get themselves to the point where they’re running it and it’s not running them.

Darrin Shillair (31:23):

And then those time periods will kind of always happen that every once in a while you’ll lose somebody [00:31:30] or whatever the case may be, and you’ll have to jump in. And I think being a small business owner is so, so different than working in a corporate role that you really have to be prepared for what that’s going to look like.

Craig Castelli (31:45):

Couldn’t agree more. So Darrin, if somebody wants to learn more about Specialty Sales, where do they go?

Darrin Shillair (31:51):

You can go to our website, which is specialty-sales.com. You can reach out to us there, or you can find me on LinkedIn and you [00:32:00] can always reach out to me there. I do respond to messages there, and I really believe in this path. It’s been fantastic for me over the past eight years. It’s very challenging, but also very personally fulfilling. So a lot of the reasons that I went out to do it have come to fruition for me. So I’m happy to support anyone who is interested in doing the same. And if you are a business [00:32:30] owner who is looking to buy hose tubing or fittings and valves and need a family-owned distributor that’s focused on customer service, definitely look us up because that’s what we’re out here trying to do every day.

Craig Castelli (32:44):

Specialty-sales.com. I can attest to two things. One, Darrin is very generous with his time. To those who are also looking to buy a business, perhaps sometimes too generous, but always happy to share what he’s gone through. And two, if the product mix [00:33:00] fits what you buy as a business owner, this is a great company to do business with. So Darrin, this is a lot of fun. Thanks for joining me on The Close. Thanks,

Darrin Shillair (33:07):

Thanks, Craig. Appreciate it.