Steve Cook’s experience — a combination of being an engineer plus well over 20 years in operating roles — plays a big role in how he assesses manufacturing companies as acquisition targets.

“When I look in the mirror,” Cook says, “I definitely still see an operator. And that is the lens that I look at just about everything through.”

Now the executive managing director of LFM Capital, the private equity firm he helped establish, he says the firm’s approach is generally to pair somebody who's more on the deal side of the business with someone who's more on the operating side of the business to get both views in every deal the firm considers.

As an operator, Cook likes to bring companies into LFM’s fold that need a little polishing up. Rather than a finished and polished product, Cook wants in with a company for which the firm can add value.

“We want to come out of the management meeting believing that we are the best buyer for that business in really a differentiated way — that we can add value that others can't, that we see opportunities that others might not.”

Smart Business Dealmakers spoke with Cook about what he looks for in a deal and how a company that’s been prepped for a sale might not be it.

Steve Cook will join a panel discussion on Keep vs. Sell: What to do with the family business at the upcoming Smart Business Dealmakers Conference on Feb. 27 at the Westin Nashville. Use code DEAL100 to save $100 off tickets.

Shiny penny

As an operator, Cook says he’s comfortable with key process indicators and drill downs of data, giving him the ability to see “the data behind the data” when he looks at a bank book, for instance. And when he meets with a management team or walks through the plant, he’s trying to pick up on the performance metrics that drive their financial metrics, the culture of the organization, leadership’s strength and where he believes that LFM can add value to the company.

“I think most private equity buyers are looking for what I call ‘the shiny penny,’” Cooks says, “meaning it's got a great leadership team that wants to stay with the business and be there through their hold period, the factory looks great and looks like it's world class, it's a great management presentation. And I would say LFM is kind of the opposite.”

Cook’s firm is interested in acquiring companies that need a little help. Because of this, Cook says LFM is not expecting to pay an EBITDA multiple that that reflects the “shiny penny multiple,” which he says in the current environment is 8x or above, and a lot of times in the double digits. LFM wants to make the company more valuable during its hold period by creating a better work environment, investing in the facilities, process improvements and more.

“When we meet with the management team and walk through the facilities, we are very specifically looking for that operational agenda that we would put in place if we were to buy the company after close.”

Choice of leader

Given the size of the companies in which LFM is looking to invest — generally 300 or fewer people — adding a few key people can be really impactful and help take that company to the next level. But to do that, the seller ideally needs to be enthusiastic about that prospect. And that’s why LFM ideally would prefer to get to an acquisition candidate before a deal professional does.

“The worst situation for us is when a banker has coached the seller that they should bring in a new leader 12 months before the sales process, and we're inheriting a new leader that might or might not be good,” Cook says. “We would prefer to work directly with the seller, if the seller is currently CEO, and part of the reason that they're selling is to transition out of the business. We would rather do that directly with the seller than them bring in what they believe is that next leadership team and we have to inherit it from them and hope that they did a good job of selecting the right people.”

Cook says LFM has a strong networks of world-class operators that a small, private company generally is not going to have the same access to. Additionally, the type of leader LFM is recruiting is looking for a certain set of circumstances that would enable them to add value.

“These executives are looking for the surety that down the road there will be a liquidity event and they don't want to be a part of a family business where there might be some family dynamics that make the playing field unlevel for them as far as performance.”

This move forces the next buyer to live with the leadership decision the banker made when that might not have been the person they would have selected. It’s a step that complicates a sale and may lead to a buyer walking away and looking for a more favorable situation.