Growth Expansion Investing in B2B and B2C industries in the Upper Midwest

Ryan Alberg:

Absolutely. Thanks for having me.

Elana Margulies-Snyderman:

So to kick off the conversation, tell us about Duco Capital and how you got to where you are today, and also how you partner with management teams to bring in talent for your portfolio companies.

Ryan Alberg:

Sure. So we got Duco Capital started in the spring of 2022 with my partner Caleb Schmidt and myself. Caleb and I met each other at business school at the University of Minnesota, Carlson School of Management, and we both ended up at Ecolab afterwards. I was doing M&A work and Caleb was on the strategy and ops side. And then eventually we decided to get out of the corporate grind and start our own firm and make a go of buying companies. And then we added our third partner, Paul Meyering, also in the end of 2022. Paul has a wide array of deal experience being the former managing director at Spell Capital and the president of Medallion Capital.

Elana Margulies-Snyderman:

Ryan, as a follow-up, I would love to hear about your investments in Top Promotions and Klesk Metal Stamping, the story from start to finish on how you completed those transactions.

Ryan Alberg:

Yeah, absolutely. So both of those were banker-led processes. Klesk Metal Stamping we did first. We had that under LOI in the beginning of 2023. It's a third generation family-owned business where it was owned by two cousins that were looking to exit and they didn't have really a management team behind them to take over and run it. So this really was what you would think of as our typical thesis where we were bringing in a brand new CEO to run things and transitioning out the owners. And so from our end, we had a pool of potential candidates that we knew were available in the marketplace and ran a pretty rigorous interview process to find who we thought was the right blend of both leadership and financial acumen, plus experience working with a smaller company and understanding the family-owned dynamic and how to partner with the employee base. So we got that deal completed in the spring of 2023, and at that time we had already signed up Top Promotions and gotten that under LOI also through a banker. And that one was a little bit different. It was owned by the Institute for the Blind and Visually Impaired. And it was originally the owner that had sold his company to IBVI and then had never really been a great strategic fit. SO IBVI was looking to spin it out, but also they still needed them as a primary vendor. So they wanted to have a good partner that was going to be able to separate out the business but also continue to be their vendor going forward. And we partnered with the former owner to basically help him buy back that company since he saw a lot of upside and opportunity to keep growing it.

Elana Margulies-Snyderman:

And Ryan, more specifically, what are some of the greatest opportunities you saw with those transactions?

Ryan Alberg:

So Klesk Metal Stamping was really what was sort of a perfect prove out of our thesis of our ability to swap out leadership teams and bring in new and effective leaders to replace the owner and really help operationalize a family-run business. With a lot of family-owned businesses, they do what they do very well, but they need more help kind of going to the next level in terms of operationalizing the company. And so that was probably the largest opportunity was to take a solid foundation and keep growing it with new and existing customers and really operationalizing the business. And then on Top Promotions, it was really a story of pulling this company out from its parent company that had never really been able to make it work and integrate it and continue growing it on its own in a really highly fragmented space. There was a lot of opportunity with similar sized companies to roll them together and create larger, more effective promotional products company. And then we had partnered with the former owner who already had the connections in the industry and was able to really help facilitate that.

Elana Margulies-Snyderman:

Ryan, on the other hand, what are some of the greatest challenges you faced with regards to your transactions?

Ryan Alberg:

So on the transaction side for Klesk Metal Stamping, the largest challenge is probably a larger customer concentration inside of the company and also the sensitivity around the owners to leaving. So we had to work around getting comfortable with some of their largest customers, but at the same time, the owners didn't really want to let everybody know that they're transacting and risk any of those relationships. So we had to be pretty delicate in how we conducted diligence and verified out what we were seeing and then doing a lot of integration planning without necessarily knowing where the customers were and how we would transition those. And then on the Top Promotions side, honestly, that was a pretty easy transaction from the mechanics of it. The harder piece of it was really just aligning with the new CEO to help him buy that back and what that would look like. The actual diligence process itself was pretty straightforward.

Elana Margulies-Snyderman:

Ryan, that segues nicely into the follow-up question I have for you about the due diligence processes you used for both the transactions. Love for you to elaborate on how you navigated that.

Ryan Alberg:

Sure. Well, we used Eisner for financial diligence on both transactions. So we are happy to give you guys some credit for helping us skip through that piece of it. On Klesk, the metal stamper, in addition to financial and tax diligence, we also had a third party doing environmental due diligence and another firm doing customer surveys and calls, along with our legal team who did all of the legal diligence and drafting. And then on Top Promotions, we didn't have to do any environmental work and we were already buying it from their largest customers, so we didn't really need to do customer surveys on that end. So it really just came down to the legal diligence and ensuring that we were able to effectively transition all of their contracts.

Elana Margulies-Snyderman:

Ryan, as a follow-up, what are you looking for in the buy-side process to better ensure that a mutually beneficial and efficient transaction can be consummated in today's economic and transaction market?

Ryan Alberg:

Yeah, I think we're mainly looking for meaningful and actionable data. I mean, we want to make sure that we're partnering with diligence providers that are giving us information that is appropriate for the transaction that we're doing and is stuff that we can actually use as opposed to generating data for the sake of data. I've noticed that for a lot of larger QofE providers, they really struggle with middle market transactions and they have a hard time adapting their work to kind of the realities of some of these companies. I'm less concerned about financial controls in a company that doesn't have an accounting department and just has one person. But if you were to use big four transaction advisory team, you get a lot of extra work and additional fees that are layered on top of process controls that don't really apply to companies of this size. Whereas working with more kind of appropriate QofE and tax providers that can really understand what's going on inside of these smaller businesses and focus on what's important.

Elana Margulies-Snyderman:

Brian, we've covered a lot of ground today and wanted to see if you'd like to share your thoughts on the types of transactions you're eyeing for the future.

Ryan Alberg:

Well, we're basically looking for people who make stuff broadly within a reasonable driving distance of the Twin Cities. So we kind of define that as that half-day drive time. But if there's a production process involved and people are making a tangible product, we are probably interested in taking a look at it. And then like I mentioned, a big part of our thesis is the leadership transition component, whether that's an exiting owner or whether that's a corporate carve-out, something where there's an angle for us to step in and bring in new leadership talent and really ensure that the business continues to thrive for the next 10, 20 years.

Elana Margulies-Snyderman:

Ryan, I wanted to thank you so much for sharing your perspective with our listeners.

Ryan Alberg:

Again, thanks for having me. I really appreciate it. It's been great.

Elana Margulies-Snyderman:

And thank you for listening to the EisnerAmper podcast series. Visit eisneramper.com for more information on this and a host of other topics. And join us for our next EisnerAmper podcast when we get down to business.

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