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David Wood has a passion for the intricacies of dealmaking. Earlier in his career, he spent time at Kirtland Capital Partners where he played a lead role in acquiring five companies in the span of 18 months. He relished the opportunity to help smaller middle market companies take the next step in their respective journeys and wanted to do more of it.

In 2009, he branched out on his own and launched Foundation Investment Partners.

“There are a lot of good businesses out there, but not everyone fits our model,” says Wood, founder and managing partner at the private equity firm. “For us, it has to be some combination of why would we win that deal? What’s unique to us that would allow us to be competitive? How are we going to influence the outcome of that business? What tools can we bring? What difference will that make? And then, is the industry and challenge appropriate to our capital structure solution?”

We spoke with Wood about making smart acquisitions and the discerning approach he takes to dealmaking.

Find common ground

Wood’s first acquisition at FIP was struggling mightily to find an efficient pathway to growth. As Wood describes it, the company had “20 people making largely the same product in 20 different ways.”

“It’s a complicated process,” Wood says. “There are all these variables and everyone had their own way of doing it. It was a huge impediment to how we could scale the business.”

Since it was his new company’s first deal, Wood had a lot of time to think about how to solve this problem and develop a new strategy. He and his team came up with an idea they thought would work.

“We probably put together a 30- or 40-page PowerPoint on our strategy for that business,” Wood says. “I said, ‘This is not a price negotiation. I can’t pay a single nickel more than what I have here. But if you believe in what I put on this paper, and I’m telling you I will believe in this as much as you do because it means a huge amount to me, then pick us.’”

The owner took the offer and Wood went to work. Today, Advanced Probing Systems Inc. is a global leader in the manufacture of probe needles used in various sorts of testing. The ability of both parties to work collaboratively was a crucial element.

“The key is understanding what the business needs and what that entrepreneur wants and needs,” Wood says. “If we can create a situation that feels comfortable and works for them, it’s a perfect marriage. If we see a lot of daylight between what we think the business needs and what they want, we tend to move away because it might be a better opportunity for someone else.”

Refine your criteria

Process is an essential part of any dealmaking strategy. Early on, Wood had to refine FIP’s criteria.

“We’d be chasing companies that had another sponsor or some sort of institutional ownership and we just got creamed on those,” Wood says. “At the end of the day, we’re a value buyer. We’re buying in the fours, low fives multiple wise. We need to be fairly conservative. For the companies we’re buying, it’s a fair price. For the sellers, it still gives our investors and us a good opportunity to show some appreciation on our investment. It lets you be more conservative in the capitalization of the business so that you have a better ability to withstand the shocks, surprises and investments that often end up needing to be made.”

Repeatability and stability are valuable traits in an acquisition target, Wood says.

“We’re putting our capital structures together on a deal-by-deal basis at this point in our history,” he says. “Trying to structure around not having to write a second check is helpful. That being said, we’ve put second checks into a lot of the businesses where we’ve needed to support growth or a transition. It’s not that we can’t do it. But we want the capital structure to be pretty solid. We tend to under indulge on the senior debt. We put a lot of equity and a lot of mezzanine financing in as a percentage, so we have a really firm, deep capital base to build off of.”

Build a level of trust

Wood takes a hands-on approach to the work that goes into acquiring and growing companies.

“By and large, when we’re doing a pricing study or we’re trying to do some segmentation or carry the water on expanding in Europe or Asia, we’re doing that ourselves,” he says. “That’s different than the traditional private equity model. We expanded in Asia for our cosmetic packaging business at one point. I went over there for three or four weeks and called on prospective customers and suppliers to get a decent look at what the market had for us so we could understand at a very personal level whether this was going to be a good decision for us or not.”

Demonstrating that commitment has helped Wood win deals and build trust.

“It’s just having some empathy or understanding that this isn’t their day job,” Wood says. “This is a once-in-a-lifetime transaction for some of these folks. It’s something they have built over a period of time and you have to understand they are going to be emotional. If you can come at it by understanding what it’s like to be in their shoes, you can build that trust.”