August Felker Discusses Lessons Learned in Transitioning to the CEO role

Searchfunder Interview

We talked with August Felker, CEO of the Murphy Insurance Group with corporate offices in Waunakee, Wisconsin to discuss the arc of his searchfund experience from initial search to target acquisition to buy-out. Although the steps seem fairly straightforward, each Searchfunder will have a different path. August’s path is particularly unique in that he came to the searchfund model through having been employed by a searchfund company, Aero Logistics. Perhaps, this represents a path to opportunity for your interns or future employees in the future? August provides many insights we believe you’ll find useful on your path. Below is our interview. Some language has been edited for the sake of clarity.

How did you choose your acquisition target?

My background was primarily in insurance. The insurance distribution sector especially fit with the searchfund criteria -- good recurring revenue, good cash flow and is asset light. Having had some exposure to the searchfund world, the idea of buying a company was a better fit than starting up an agency. The searchfund model helped accelerate the process of building a nice agency much faster than starting from scratch.

How did you become acquainted with the Searchfund model?

I was exposed to the searchfund model through my prior experience working for a searchfund company, which is fairly unique. Montebello Capital, which was a searchfund with John Fowler and Josh Greenberg, acquired Aero Logistics, a provider of freight transportation and logistics services out of South San Francisco. I was one of the first sales hires for Aero and was fortunate to experience the growth of the sales team and the company, which eventually exited to a strategic.

What were your challenges in raising the funds?

I was fortunate in that John and Josh, the searchfunders from Montebello Capital, knew my skill set and sponsored my searchfund sufficiently to help me in raising money. They vouched for me. Because Aero has been successful, some of those investors came along as well. I also had some friends and family who invested. I launched my searchfund in 2009 which was a tough time to raise capital. A lot of investors loved the insurance model and the search strategy. The major challenge was that we raised smaller amounts from a larger number of investors due to the tough business cycle.

What were the challenges in conducting the search?

I was able to locate my deal within the first two months of searching. The largest contributor to the speedy search was having had experience with insurance and operations. I knew the industry sector that I wanted to be in and thus I was focused. My background in the sales side also helped me in conducting my search. Part of my strategy was to cold call folks who wrote about insurance M&A to let them know that I was looking for a deal. A short time later, a writer contacted me with a prospective deal.

What were the challenges in closing the deal?

I benefited greatly from having John & Josh’s insights on deal points in getting the deal done. We had help from other search fund investors as well.

Tell us about transitioning in as CEO?

I showed up the day after the deal. The 50 employees did not know that the company had been sold. The employees were gathered for a meeting that was set up more as an HR or 401k meeting. I was incredibly nervous. I diffused the situation by wearing a cheese head to the meeting. It made everyone laugh and realize that I wasn’t a Bears fan. I worked closely with the seller, especially in the initial months, during his 3 year earn out period. He introduced me to key contacts and hyped me up to the staff. He was 100% behind sale.

The seller had founded the company and had been running it for 20 years. He was very competitive; he didn’t want to sell to a competitor or a strategic. He did not have a kid in the business. I positioned the deal as being like the son he never had who would learn the business and take it over.

We fairly quickly had to start changing things to help grow the business. Even though he may have differed in his point of view, we were able to keep a common front with the staff over the 3 years.

Tell us about the sale of your business?

I ran the company for 5½ years. The multiples were high, we started to think that if we got a good offer we would take it; otherwise, we would keep growing the business. We received a good offer from Hub, which was also a good cultural fit for us. Our investors were positive and left the sale to the executive team and the Board, which I appreciated. Throughout my tenure as an operator, we strove to have good communication with the investors. Ultimately, the investors were in agreement with the sale.

What motivated you to stay on post-acquisition?

Insurance is such a relationship business that they expect key employees to stay for several years post-acquisition. Otherwise, it’s a customer risk. I was excited to work under the Hub umbrella, as well as learn more about how they operate their business. I am enjoying working with Hub [International]. It’s been a positive relationship.

What are your plans for the future? Do you think you’ll invest in searchfunds or do something entrepreneurial?

I’ve learned a ton, which gives you confidence and conviction in being an entrepreneur. In the distant future, I feel confident I’ll do something entrepreneurial again. I love insurance. There’s so many ways to build a great insurance business and so many ways to grow the business. It’s too far in the future to say what I’ll do. At the moment, I’m focused on Hub.

When you look at the arc of your searchfund experience, what was your biggest misconception or what would you have done differently if you had the knowledge today?

With a searchfund, the key is being able to grow it. A lot of that is how good you are in bringing in new business while keeping clients. In 2009, we didn’t have great tailwinds, and it took us a while to figure out how to grow it.

When I bought the business we were pretty flat. I felt that I could start to grow the business fairly quickly. I was probably over-confident in my ability to build out the revenue growth machine. What that came down to in our industry was hiring and building a great sales team. It probably took 2 or 3 years to really understand it and to do that well even though I had experience in the industry. Hindsight is always 20/20. It’s hard to learn those lessons without going through the experience first. Looking back, I might have been more thoughtful about how I built the sales team. That would have paid off in earlier and faster growth.

Anything else you would recommend to a Searchfunder who is transitioning into being an operator?

First, I strongly recommend hiring a high caliber CFO early on.

Second, I would be a little bit quicker on when I made a hiring mistake. I wish I would have moved more quickly on my gut and when I realized the person was not going to work suitably in the role. It’s probably better for the individual employee and for the company.

Third, it can be stressful running the business. It has a way of leaking out even when you try to hide it. I believe that managing that stress would have served me better and would recommend that to others in the same position.

Summary of Insights

There are so many fine takeaways from August’s experience that we decided to list handful of them:

• • It is possible to do a searchfund in a tough economy. It may require having others who can vouch for you and procuring smaller amounts from a greater number of investors.
• • It is possible to have a short search. It may require having a focused industry search, some savvy in how you conduct your search and a bit of luck.
• • If growth is your target, then hiring a quality CFO from the outset is a plus.
• • Although it’s human nature to want to delay on hiring mistakes, being proactive is better.
• • Managing the stress of the search and operating the business is a beneficial skill set for you (and everyone around you).
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