David Tolmie has seen first hand the importance of a successful executive because he's been one. He served as CEO of Yesmail, Inc., a marketing services provider, which he led through a successful IPO and subsequent sale for $720 million, and was senior vice president of operations for Bally Total Fitness, overseeing the company’s $650 million annual revenue and its 13,000-person sales and operations workforce, a company he joined after building and selling a regional health club to Bally for $90 million.

Now, he's a senior partner with The Edgewater Funds, a private equity firm he co-founded in 2001, and has helped grow to more than $3 billion in committed capital. In this role, he's calling on his operator experience to find executives who could potentially realize similar successes. To that end, one primary characteristic of an executive that gives him the confidence to invest is experience.

Tolmie says he's looking for someone who's been a CEO and understands the dynamics of the industry in which the company operates — the acquisition targets, the customers, the regulatory environment, etc. The idea is to then partner with such executives and start to buy small companies and get bigger. If it works out, then they'll look to do it again

"That's our best approach," Tolmie says. "We have in the past and we continue to search for companies that are already of some scale — that maybe $50 (million) or $100 million in revenues — and that founder/CEO has demonstrated that they can run a company of significant scale. They're looking at making acquisitions — maybe they don't want to risk their own capital — and we would make either a majority or minority investment in that company and use our capital to make acquisitions."

Looking at their past experience and observing in their current roles CEOs who have already demonstrated the ability to make acquisitions give the firm a sense of confidence that they and the team have built are capable of growing the business to a much higher level.

"That's hard to find because oftentimes what it takes to be a successful startup company entrepreneur is a totally different set of skills than to run a more significant size company," he says. "Or, if you spend the first 30 years of your adult life doing that and you're now 60, 65 years old, you just don't want to do that anymore and you're looking to get out, and the next generation often doesn't have that same burning drive that the founder had in order to get there. So, in that case we're back to somebody else from the industry who can work well with that founder to take over to take them to the next level."

What he doesn't want, he says, is to be someone's first CEO experience.

"That's a risky bet," he says. "To me, this is more of a people business than it is a finance business. And so, the decision to partner with a CEO has to be based on what have they actually done."

He's not looking for somebody who has never made a misstep, nor someone who has had multiple failures. He's looking for somebody who's got the track record of success, which would include getting to an exit.

"Not everybody has this, but this would be the ideal candidate: somebody who wants to go back into the industry where they spent a significant part of their career and somebody who has a team of key executives — CFO, head of sales — and we get the band back together and do this again," he says. "Those are the ideal circumstances. You can't always get ideal, but we want to understand those potentialities as well as get to know that person and know that they've got the integrity that comes with running a business, as well as the same timeline investment that we want to make. We don't want somebody who's looking to get in and out in two years because it takes longer than that to build a good company. So, as we get to know them, then we get to the real, let's get to know you as a person rather than just as a resume."

Tolmie spoke on the Smart Business Dealmakers Podcast about what he looks for in an executive, investment red flags, preparing for exits and negotiating deal terms.