BLUE SKIES AHEAD FOR CO-SEARCHERS

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How did you meet your partner?

When I first met my future partner, I had been working in investment banking for about 7 years. I used to attend a number of networking events involving, what I would call, the deal community in Los Angeles. I had in the back of my mind that, at some point, I would like to run my own business. My father had run a business back in France and it was very fulfilling to him. When I met my future partner, he was with a family office. We started talking about common goals that we had. He actually brought the idea of the search fund model to me because he had had a couple of search funds trying to raise money with the family office he was working for. He knew about the model because of that work; I did not. After we met, we had a follow-up conversation about: What if we decided to partner together to raise a fund? Once I had a better understanding of what it would take and how the process worked to start a fund together, what really helped me make the decision was that we had very complementary backgrounds. My background was focused on operations, finance and administration. He had more of a technical sales background. He also has a PhD in science in computer science. Teaming up made a lot of sense for us because we had complementary skillsets.

Did you focus on a specific sector or conduct a broad search?

We were pretty broad. In investment banking, I covered aerospace and defense and also business services. Aerospace and defense is not necessarily, I would say, the best industry for search funds, but there are sub-segments of the broader industry that are potentially good. But, my exposure to business services gave me quite a few ideas of industries to target. We actually ended up buying a business that does a lot in the military and aerospace sector, which is probably because of my background. What really helped us make a decision was that the business we ended up buying had about 80% recurring revenue which was a great fit for the search fund model. We had a few ideas in terms of target sectors especially in the business services space. It was not a single industry that we were really excited about so we were pretty broad in our approach.

How did you find Blue Sky Network?

We found the company through a business broker in Los Angeles who was working with the seller’s wealth management advisor. The seller had given his wealth management company the mandate, but because they did not have the skills to run a process in-house they decided to partner with a broker based in Los Angeles. It was not a broad auction with hundreds of potential buyers on the list. It was a fairly small process, but still we did have to compete with other potential buyers.

We find there is broad spectrum on how searchers utilize brokers. Some do not engage any brokers, others just a few and then others construct broad broker networks. Where were you on the spectrum?

Our initial strategy, when we raised the fund, was to get our name out there. We reached out to a lot of small investment banks or brokers. We started networking in the broker community. Actually, it is because of that effort that this broker ended up reaching out to us about a year into our search. That was great for building deal flow. Initially, you are a new fund and no one knows you. This effort put us on the radar of the brokers. We hired interns pretty quickly and they quickly got busy analyzing deals. We all got very excited about the deals. We then switched to a more proprietary method of deal sourcing and almost bought a couple of companies through that channel. Eventually, it was because of this initial outreach to the broker network that we were able to acquire this company.

Talk about the broken deals. What were the reasons, for example, the culture or financial side?

There was one in particular that was, very broadly speaking, in the web hosting space. We did extensive financial due diligence. Then, we hired an expert to do an assessment of the technology and the infrastructure. The report we received was not pretty. We realized that there were a lot of deferred costs. It would have cost us a lot to upgrade the technology and to be able to sustain both the margins and the growth. We decided to walk. It was pretty late in the process and it was not an easy decision, but it was the right decision. It would not have been a good deal if we had moved forward.

The other one was on paper a very good company in the MSP space -- managed services provider space (IT services). There was a lot of dancing around with the seller. We met them multiple times and even brought some of our investors to the meeting. In the end, they got cold feet. It was the first time they had been through the process. They decided that they wanted to wait. The second time was a bit of a disappointment because we were excited about the deal and the sellers declined late in the process.

Talk about your due diligence of Blue Sky Network?

Blue Sky Network is probably a little bit unique in that the company has global operations. We provide satellite-based asset tracking and fleet management services. We have customers around the world in over 50 countries. We derive about half of our revenue from customers based outside the US. Since we are in the communications sector, we are subject to a number of regulations, including the FCC in the US. Our products, when they are installed in aircraft, have to be approved by the FAA and other international agencies. That created an added layer of diligence that was fairly complex. Add to that, the company also had a subsidiary in Brazil. We had to really think about basic financial/business due diligence. We had to make sure we had the right advice to diligence these other areas that we were not familiar with. It was a fairly long diligence process. If I recall, we signed the LOI in April of 2016 and didn’t end up signing the purchase agreement before September. We closed in October after we received the approval from the FCC.

Did the owner stay on for any length of time after the purchase?

The company was founded in###-###-#### The founder was the CEO and he also had a minority partner. The minority partner exited upon closing but the founder reinvested a meaningful amount. He also stayed on the Board of Directors. Since then, the relationship has worked very well. In addition to attending quarterly board meetings, he is also always available when we call him for advice. But, in the meantime, he does not interfere in day-to-day operations. For us, it is the perfect scenario. You have someone who knows a lot about the business and a vested in our success but does not interfere in the way we want to run the business.

How many employees are there?

As of today, we have about 20 employees.

What was your first day like?

That was great. To be quite frank, it was pretty seamless. The diligence process was fairly long. We met with the employees numerous times. We were conducting the search out of Los Angeles and the company is in San Diego which is only 120 miles. We spent a lot of time before the actual closing. We closed on Sunday, October 16th. So, we were actually in the office on that Monday for our first day. We gave an informal presentation. So, it was pretty seamless.

It’s been over a year since you purchased, what do you wish you had known back in October 2016 that you know now.

That’s a great question. One of the key things is that we had all of these great ideas of what needs to be done right away. I would probably have waited until we started implementing the great initiatives we had in mind. I think you must initially watch, observe and just learn. I think we underestimated the amount of learning we had to do. By not doing too much in terms of hiring new people in the first 3 months, you allow yourself to really understand the business better, such as understanding who the key customers are. That’s probably what I wish we had done differently.

Other than that, we did a very thorough diligence process. We knew what the issues were. We did not have any big surprises about the business. There was nothing where we thought: “I wish I had known that.”

Perhaps, the surprise is that as a searcher, it’s non-stop, very intense and you have to hustle every day. It doesn’t get better (chuckles) when you run a business. It’s non-stop, 24/7. I think that was a bit of a surprise to me. It never stops; you always have to deal with issues. Every day, you come into the office with your plan and your scheduled meetings and calls. Issues will come up and you have no idea of where they will come from. The good news is that every problem can be solved. It’s just a matter of prioritizing and shifting gears every time You have to be very reactive. That is what it takes to run a business. And, have fun doing it. I am enjoying every single minute of it, 24/7.

What do you enjoy about running your own business?

Being able to make an impact is just instant. You can make things happen very quickly. It’s very fulfilling. You have your team here. You identify an opportunity. Or, an opportunity presents itself. All it takes is a few steps to get it done. That’s very, very enjoyable to see the results of your action -- whether positive or negative. The feedback is pretty instant. That’s a very, very fulfilling thing.

Some operators have expressed surprise about how people intensive running a company is compared to substantive issues. Were you surprised by it? If not, how did you prepare for it?

I think I was prepared from my background. Sitting at a table when my father was running a business. I also was on a board of directors. I was fully aware of the time and attention needed to run a business. When I have multiple high priority items, I try to put anything that relates to a customer or employee on top of the list, especially when you have a small team. Everyone needs attention. You can really make an impact by taking good care of your people, whether it is recognizing their efforts or giving them feedback on a regular basis. It’s amazing the results you can get out of people by doing that. It is a constant work in progress. You can never assume you have the perfect organization or perfect system. I agree that emphasis on the people and nurturing the team is absolutely critical.

What about the culture?

Gradually, we are trying to make some changes. We inherited a good team. The culture was to a certain extent a 9 to 5 type of culture or 8 to 5. We would like to change that a little bit by empowering people, getting them to take ownership of their projects, so that they don’t see their job as just being here for face time. It’s taking a bit of time but we have been successful so far. We are not old school that you have to be at your desk eight hours before you leave. We’re gradually fostering a flexible work schedule. At the same time, we don’t want to go too quickly given the prior 9 to 5 culture.

Any other lessons learned?

One thing I would do slightly differently is to start, if possible, the customer diligence earlier in the process. Very often is it is left for the end of the process for good reasons because the seller does not want to give access to customers. It is so critical. You learn so much from talking to customers about the quality of the business and the services and products that the company provides. That would be one thing I would emphasize. This is how businesses thrive or die.

Other than relying on the seller, how did you get up to speed in this space?

For the diligence, we hired a consultant who knew specifically about mobile satellite communications. Also, we brought on a couple of strategic investors with a background in the defense and commercial aviation industries. They came on later in the process after our initial investors. They brought additional capital as well.

Looking ahead over the next 6 months or year, what will be your focus?  

For 2018 and beyond, we have 3 strategic objectives. There’s new mandate by the International Civil Aviation Organization (a branch of the United Nations). It has mandated that all airlines have global tracking for their flights. That’s not currently the case which is why we had some high-profile disappearances. Think about the Malaysia Airlines flight and the Air France from Brazil to France flight that disappeared. There is a new mandate that we are ideally positioned to address. That will be one of our key objectives. We have the product ready but need to work on our certifications. Secondly, we have a very significant opportunity to expand into the maritime market. The company had been focused on aviation since its founding. Now, we have significant customers including Chevron and Exxon. Thirdly, we have a growing market in Indonesia, as the 4th largest country in the world in terms of population. They have over 15,000 island and no reliable communications. It’s an ideal market for us in terms of providing satellite-based communications. Those are our 3 initiatives for 2018 and beyond.

Sounds like you have nothing but clear blue sky ahead of you with those initiatives?

(chuckles). Exactly. Those initiatives are at a more strategic level, we have also tactical initiatives in terms of the culture, such as putting in place an innovative employee performance review system.

Summary of Insights

Here are our a few of the key takeaways from our discussion with Gregoire:

• As a searcher, your initial outreach may lead to a deal down the road.

• Unique targets may require experts/consultants during the diligence process.

• The more thorough your diligence, the less likely there are to be surprises after closing.

• Try to obtain customer diligence as soon as it’s feasible for the seller to do so.

• As the new owner, spend some time in the initial phase to “watch, observe and just learn” to understand the business and its key customers.