Serial Exits & Roll-Ups: John McDonald’s M&A Roadmap for Parallel Entrepreneurs

Mark Cleveland

Welcome to the Parallel Entrepreneur. Today we're joined by John McDonald, Co-Founder and Senior Managing Director of Kensington Park Capital. Kensington Park is a boutique investment bank specializing in middle market mergers and acquisitions and sale of company engagements. John is a parallel entrepreneur, has worked with parallel entrepreneurs. I just want to say welcome to the show today, John. It's a pleasure to see you and work with you.

John M. McDonald III

Well, Mark, thank you for inviting me.

Mark Cleveland

So the audience for Parallel Entrepreneur is the kind of guy and gal that you've worked with hundreds and hundreds of times. Let's Go ahead and introduce Kensington Park, capital of the adventure that you're on right now and share with our listeners. What's exciting about that?

John M. McDonald III

Well, I think you may know Mark, This is my third investment bank that I've started. I call it my third rodeo and rodeos are a lot of fun. I mean, you know you've got horses and clowns and all kinds of crazy stuff. Kensington is all about boutique, middle market investment banking with a very specific focus on selling companies either in whole or in part.

It's really a play on a giant demographic movement, and that is the aging baby boomer. And so when you look at an average year for M&A in the United States, there are on average about 10,000 M&A transactions, 85 % of which are in the middle market is where we're focused.

There's different segments of the M&A market. You've got private equity firms turning over portfolio companies after they reach a certain holding period. That's really not our market. Our market, where I think all the fun is, is working with aging baby boomers who have built very nice companies over a fairly long period of time. They do not have any succession plan, meaning they don't have any kids or family or people to leave the company to.

Or if they do have they're, scared to death that they're going to screw up the company. And so they're at that point in their age where they want to monetize their blood, sweat, and tears that they put into their company for so long. And that's where we come in. We advise them. We assist them. We run a process that's basically been well-honed over my 36 years of experience in doing this. And it's a process that really ensures that my clients get the best price in terms that the market will bear.

Mark Cleveland

And you're an advocate like an entrepreneur's advocate for entrepreneurs, which I've found to be refreshing, not just Harvard, recent Harvard graduate crunch in numbers, but really understanding the business. For our audience, Kensington Park Capital is an advocate and sponsor for the Parallel Entrepreneur. And I've come to know some really tremendous business owners who have sold one or more companies through you. And I consider you a parallel entrepreneur, but I also consider you to have some great insights into what makes a parallel entrepreneur tick and how they decide it's time to sell or not sell, hold, grow, maybe even grow through acquiring other companies. So talk to me a little bit about some of the insights that you've picked up while working with parallel entrepreneurs, helping them with exits.

John M. McDonald III

I'd say a large number of my entrepreneur clients, they are clearly serial entrepreneurs, but they want to diversify the way they spend their time. And entrepreneurs, have dreams and they have passions that that expand well beyond their current and kind of main focus or their main company. I'll give you an example. Sometimes it happens not intentionally, but unintentionally. We're working with a very large roofing company. These big projects, commercial and residential, involve more than just putting a roof on. A lot of them involve putting solar panels on the roof. Or require a certain amount of construction work. And this serial entrepreneur, he started out as a roofing company, but because of his frustrations in getting all of these other jobs subbed out, he started a solar company. He started a construction company. So in that case, almost by necessity because he has very demanding clients wanting everything put together at the same time in a very tight timeline. That's just one example of hundreds where I've worked with entrepreneurs who became parallel entrepreneurs by necessity, but also I look at other parallel entrepreneurs and it's just out of interest in getting into different businesses, not for diversification from a risk point of view, but diversification from an interest point of view and from a time point of view.

Mark Cleveland

So far, working through the Parallel Entrepreneur interviews that we've done in season one, we have just had this recognition that there's a process called doing business right that you can duplicate in other marketplaces and you can bring core values. You can bring the way you treat a customer. from your roofing company to your solar company, the solar company goes out and sells and continues to grow on its own, but they're able to coordinate and get preferential service for that customer. That entrepreneur, That parallel entrepreneur looks at the customer as the business, not the thing that they're doing, but serving the needs of the client and how can they solve problems for the client.

We've actually had some conversations recently about heating and air conditioning as a space that's real Talk about what's happening with these roll ups in the industry and which industries are getting the attention of the people doing the roll up and what that is.

John M. McDonald III

Yeah, so you mentioned HVAC. Heating, ventilation, air conditioning. I'm selling my fourth one in the last two years. And why do I spend a lot time in HVAC is because that is a very hot area that's being rolled up by private equity. And what is a roll up?

What typically happens is some big blue chip private equity firm hires a big blue chip consulting firm like a McKinsey or a Bain or a Booz Allen and they say look we want you to develop some investment thesis that where we can make a lot of money and so let's say a Warburg Pincus gets a report from McKinsey and McKinsey says well the HVAC market is huge, it's fragmented and it's virtually it's immune from the ups and downs of the economy because you know, if your AC goes out, you're going to get it fixed or get it replaced. Same with, heating in the wintertime. So it's a very resilient industry. It's a growing industry. So what happens is that one of these big firms buys a big platform company and they say, okay, in order to achieve our... investment returns, we have to grow as fast as we possibly can in the next five years so we can deliver 35 % per annum internal rate return to our Lemming partner investors. And once that big blue chip firm makes that first investment, all of the other private equity firms are watching them. And they really, really truly are Lemmings. They see what the big guys do. And then all of sudden they're all jumping in. So everybody's now... running around trying to get by their own platform, and they grow these things two different ways. They grow them organically, but to achieve their return requirements, they have to also grow through very aggressive mergers and acquisitions. And to get the boost on their equity return, they typically use a moderate amount of leverage to get that equity kicker. So that's what's happening in HVAC. And to tie the roll up in HVAC to parallel entrepreneurship, the hardest part of getting businesses getting in that front door with, let's say a homeowner to take care of their HVAC issue. That's the hardest part. And it's the most expensive part of the business. But think about what these entrepreneurs have figured out is they can get the customer, if they can get in the door,

Mark Cleveland

Mm-hmm. Mm-hmm. Thanks

John M. McDonald III

and they can get the HVAC business. Well, these are the same people that have plumbing issues, they've got electrical issues, they've got roofing issues. Some of them want to do a bath or a kitchen remodeling, cabinets, garage doors. I mean, it opens the door literally to all these other services. And so what these really smart parallel entrepreneurs are figuring out is they can get that customer acquisition. Then let's leverage that relationship and get the plumbing business, get the roofing, get the electrical. So they start creating other LLCs and they bring in all their own people. Now they're capturing all the needs of the client, not just one very specific need. So that's an example of what's happening in the roll-up world, how these roll-ups are taking place, how they get started and how these roll-ups can turn very quickly into parallel entrepreneurship.

Mark Cleveland

And then, you you have to be careful, in my experience, who buys you, because the integration is a challenge. After you've sold your company, you're still a participant. You have an earn out. There's a lot of complexities in a merger or an acquisition that play themselves out after the transaction. A buyer might be looking for quality of earnings and a quality brand and a seller is looking for somebody that is representing their interests in that transaction. That's what you do. They're also cognizant, I think, of the challenges of integrating after. Can you speak to that? Picking the right buyer, making the right merger, right?

John M. McDonald III

Yeah, well, that's a very, very important part of what we do as investment bankers is that most of these entrepreneurs will tell you it's not just about the price and the terms. It's about the fit, the vision for the future, the chemistry, the rapport, the treatment of employees. That's what they really care about because they got where they got not being smart and working hard by themselves.

They got there because they hired the right people. Sometimes it's family members, but most of the time it's not. And they care deeply about the people that brought them to the party. So our job as investment bankers is to figure out who are the very best buyers, not only in price and terms, but in terms of fit and all these other things that I talked about. Because at the end of the day,

Mark Cleveland

Amen.

John M. McDonald III

These people are going to end up with a lot of money, probably a lot more than they'll ever be able to spend for the rest of their lives and their kids' lives. So what's important at that point? What's important is that they want to feel good that they turn their legacy baby over to a new owner that's going to take care of that legacy company, grow it, be good to the employees, because that allows for the selling entrepreneur to feel really good. They don't just go to bed feeling good about what their bank balance is. They want to go to bed knowing that they made a very good choice in who they sold the company to and that new owner's gonna take very good care of the baby that they've created.

Mark Cleveland

So this is your third investment bank startup. This is an incredible story. You have more than 300 transactions. talk about some of the lessons. Where did you listen to your gut and how did that benefit your client? And then other times, where did the clients give you some guidance that you said, there's a nugget. I'm going to implement that in my next engagement.

John M. McDonald III

Well, I mean, experience really does kind of give you that guide as to who to go with. We sold a big actually recently two big orthopedic groups, one in Georgia, one in Wisconsin. And my VP on that deal, very, very smart person, but not a lot of deal experience. And he was really wanting to have our client pick a particular buyer and I said, no, that's not the right buyer. And I was right in both cases because you get a gut feeling for who is going to close and who's going to stick to the original terms. And that ultimately comes from the relationships that you build with these buyers and the experience that you've had over a long period of time.

And I'm able to bring that to the table. My real value add is negotiating the best price in terms that the market will bear and helping you pick the absolute best buyer. We're with our client advising them on a daily, sometimes hourly basis for what could be up to six months and you're building the relationship. You're building the trust and you have to do that if you want to be successful because there will be bumps in the road and there'll be times where you've got to have the ear of the owner. You've got to win the trust so that by the end of the transaction process, we're giving them good advice and they're listening and taking that advice. And that will lead to a successful transaction. But you got to build that trust and build that confidence, build the friendship. Because at end of the day, I believe that in any business, but particularly a service business like ours, it's all about building the relationships.

Mark Cleveland

Yeah, that sounds like your north star, right? I've asked you earlier, what's your north star? And I think you just described it.

John M. McDonald III

Yeah. And my game plan for this third rodeo was to build a 100 % relationship-based investment bank. And that sounds obvious to a lot of people, but in our profession, I kind of look at investment bankers as in, and I put it in two different categories. You've got relationship bankers like us in one category. But you have another huge category, which I describe as transactional investment bankers. They're the ones that all they care about is getting as many deals done as fast as they can to make as much money as possible. And they don't really care about building the bridges and relationships along the way that would pave the road for them going forward. So it's a very different mindset. And I've worked with plenty of investment bankers that are in both categories. But for Kensington Park, I know which category of bankers will be the most successful. And that's why as we grow Kensington Park, one of the leading principles is that our main asset, which are people, and we're building this company one person at a time. And we're only choosing and allowing people that embrace the relationship doctrine that I'm talking about.

Mark Cleveland

Yeah, that's super motivating. And for full disclosure, I'm a part of that team. I'm so happy to be working through these complex transactions with you. And at the same time, I want to highlight, you you are an Ohio State fan and I am an Oregon fan. So there can be productive conflict as well, right?

John M. McDonald III

Conflict is not always bad.

Mark Cleveland

You were telling a story earlier about your experience in the franchise business. You were a franchisee of a small restaurant business called Rush Bowls up there across the street from the stadium in Ohio State. And it got me giggling because there's this natural rivalry right now with Oregon coming into the Big Ten. But there's also a perspective, I think, that big business and small business brings to you as an entrepreneur. And you can understand and meet, I think, your client where they are.

In the example where you had 14 different companies that you navigated an integration with, there was smaller entities and larger entities and uncommon ownership and common ownership as a terrific story. And at the same time, you're in the real estate business as you have grown as an investor over time and you are a franchise. What did you learn in each of those experiences that helps you connect with the entrepreneur that's trying to sell his business or her business and move on to something else exciting.

John M. McDonald III

Well, know, life is nothing but a collection of learning experiences. And so I learned something new on every single transaction. I learned something new from every relationship. And, God gave me a pretty good brain and I retain, the lessons, good and bad. You can't just think about the wins. You got to think about the losses because, you know, life is full of ups and downs, wins and losses. And you just hope that you conduct yourself in such a way that there's a lot more wins than losses, right? That's the plan. And that's what I try and do is I try and make educated guesses on all the decisions that I make. And just think about all the hundreds and hundreds of decisions you have to make in every day. And I have an engineering and math and science background. And one of the courses that I really enjoyed the most was decision making. How do you build a decision tree? And how do you put value on each branch and assign probabilities to each branch? And some of it gets very complex when you get into linear programming, decision making. But at its core, what I do is

For every decision that's important, I literally put together a mental tree, assigning values and assigning probabilities, and then assigning, you know, what are the risks of the different outcomes if I make a wrong decision? And by taking a very analytical approach to decision making, I've done pretty well. I've had a lot more wins than losses.

Mark Cleveland

Mmm, I like that.

John M. McDonald III

Nobody's gonna have a perfect record, but that whole process, it's a very analytical, mathematical type of process that comes naturally to me. So that approach to decision making has really worked well for me. and I incorporated it in really every major decision that I make, whether it's business-wise or personal, or even when I'm on a fishing boat, I'm always calculating, okay, do we go shallow? Do we go deep? Do we go bottom fishing? Do we go trolling? Where are we going to have the maximum yield? Where are the baits to use? Based on the weather, where are we going to do best? So it's a very thoughtful analytical process that I go through when I try to make important decisions.

Mark Cleveland

The decision to sell, it's so personal. It's so situational. But it may also have something to do with the marketplace. You recognize changes in the markets or markets decide to start rolling up in this category that you're in. How do you advise entrepreneurs who are thinking about whether it's time to sell?

John M. McDonald III

I've got this boat lift company that I'm working with and the owner, woman is still relatively young. She's not an aging baby boomer. She's got a lot of... life and energy left to grow this company. And we've had very long conversations about timing. And my advice to her was, Cheryl, now's not really the best time to sell. You've got to get your books cleaned up. You got to, start showing more of a profit. You got to expand your product line. You got to do all of these things because right now, if we go to market, you're not going to get a good price. You're not going to get a price that you're to be happy with. But if you do these five or six things over the next couple of years and you achieve these milestones, then, and if the market is still good at that point in time, that's the time you can sell and grow in to the valuation that you'll be happy with and you'll be set for rest of your life. So we spend a lot of time talking about timing. And sometimes the timing is right to move quickly. Sometimes it's like you really need to hit all these future milestones and grow into the valuations. So that's the kind of advice that we give.

Mark Cleveland

Yeah. So there are ways to get prepared for sale that could take time as you start repositioning your business for margin or maybe they were positioned for growth and they weren't positioned for margin maximization. Oftentimes they're in cash accounting instead of accrual accounting. So there are transitions that have to happen. What would be one of the things that you would advise an entrepreneur that's thinking about this future event where they're going to sell. What would you suggest they start doing now?

John M. McDonald III

By far, the biggest problem that we see with these privately held companies is they skimp on their finance and accounting systems. That is our biggest problem. So I tell all of my future sellers, you got to get your books in order. And they think of the money that they spend to do that, they think it's going to be a lot of money when relative to the size of the company, it's really not.

They think of it as an expense when actually it's an investment. and may go on your income statement as an expense, but you're making an investment because if you have really good, accurate, clean numbers going into a sale process, you're just going to get a higher price. So you got to think in those terms. So the first thing I ask is tell me about your books and records. what software do you use? Are you on a cash or a cruel system? Because you got to start keeping two sets of books, one cash for tax purposes and then accrual for financial reporting purposes. So that's kind of like the first place that we start because that one item is what prevents deals from getting done or causes significant problems in getting deals done. So that's number one. The other thing we talk about is growth because companies growing fast are worth a whole lot more than companies that are going slow. And so we talk about what are your constraints regarding growth. We need you to get up well into the double digits to be attractive and get good multiples and good valuations. So some of these companies are already there. They're on rapid growth projectories, but others, you know, they kind of flatten out. And that's why the owner starts thinking about selling because they've grown it as much as they possibly can and they're kind of, stuck in neutral. And so we said, look, we got to figure out how to put your foot back on that, accelerator. Let's talk about it. Are you constrained by the size of the market? Are you constrained by lack of capital? Are you constrained by lack of people to hire? What are the constraints? Where are the opportunities? Because we want to go into a sale process.

Mark Cleveland

Mm-hmm.

John M. McDonald III

with the companies that's going to be big enough to receive a lot of attention, but has the characteristics to get people super excited. You got to get rid of that customer concentration. You got to have a diverse product or service line. You got to go after large addressable markets. I mean, these are the things that we talk about as we advise them as to whether now's a good time or later's a good time. And if we're going to go the latter route, what are the things that you as an entrepreneur need to do to maximize and position yourself for maximum value.

Mark Cleveland

Some of these entrepreneurs, they're well-capitalized businesses. They're second-generation businesses. They're in blocking and tackling kinds of business. But they have the capacity to become an acquirer. Which is something that I don't think really crosses the mind of many entrepreneurs. They're focused on organic growth. So let's talk a little bit about the buy side engagement. How does that play itself out and what are leaders looking for when they start to think about this second growth strategy?

John M. McDonald III

Firms that are acquirers are typically entrepreneurs who have sold a majority interest in their business to a private equity firm. And it's the private equity firm that's driving a lot of the buy side activity because they need to grow this company. At least their common stated goals, want the EBITDA to grow five times over five years and that translates into 35 % internal rate how do you grow a company five times in five years? To do that organically is in most cases impossible. So they're the ones that are driving the buy side. What does private equity bring to a company other than just money? They bring sophistication, they bring professionalism, but they particularly bring M&A experience. So a lot of the buy side is being driven by them. Our firm, we do very little buy side because we don't get engaged by the private equity firms to buy other companies. And to me, it's high hanging fruit. And the reason I say it's high hanging fruit is because if you're on the buy side, you're working for someone that says, I wanna buy an A-Track company.

The first challenge is that you have to find an HVAC company that's willing to sell. And then secondly, if they're willing to sell, you've got to try and get them to only talk to you. Because if you convince them to sell and it's of any size and quality, they're going to say, well, you know what? In order for me to get a good deal, I need to hire my own investment bank. And then the new investment bank representing the selling company, runs their own process and all of a sudden we're in a competitive bidding process, which greatly brings down the probability that we're gonna win the competitive bidding process. And if you're on the other end of the competitive bidding process, then you're gonna get one of two calls. You're gonna get a call saying, hey, I'm sorry, you got outbid, thanks for your time and effort and your interest, or you're get a very different call. Then that call is gonna be, hey, congratulations, you won the deal. You outpaid 100 other bidders. Now, are you going to feel good about either call? No.

Mark Cleveland

Hmm. This is interesting. There's there's investment bankers out there that run competitive bid processes. And so you're describing a downside there.

John M. McDonald III

If you're on the buy side, you know, you don't like being in a competitive bidding process. That's where what we do at Kensington Park. We get enough players at least to make it competitive because if you only negotiate with one party, you don't really have a lot of negotiating strength. And we're not looking for the...necessarily the best price and terms. We're looking for good fit in addition to the price and terms. And we sell on a relationship basis. There's a lot of these transactional investment banks. They'll say, Mark, we're assigning you number 207, and we'll put that on the confidential information memorandum. And they treat you as a number, not as a human being. We are very different. We're not transactional.

What we would do is we would call you out, Mark, how's the kids? How's the family? How's Jenny doing? When you're coming back down fishing, by the way, I've got this new deal I want to talk to you about because I think it's going to be a really good fit for you. See how different that is? It's just a very different approach to the market. And that's how we sell our deals. And that's how we get our deals done. with buyers that are really good fit, it's because we know them through having a relationship with them.

Mark Cleveland

Yeah, long-term relationships, it's the constant theme.

It takes a lot of heart to be an entrepreneur, to build and grow value that could be generational wealth. It could be just a passion that you're pursuing. What does the typical entrepreneur look like one when they first come to you? It's the first business that they're ready to sell. How do you see the first time exit entrepreneur? And their approach to this transaction different than the second time exit entrepreneur? What are some of the patterns that have appeared to you in your what, 300 transactions now between the first time and the second time? What's the difference?

John M. McDonald III

Well, you phrased the question using the word typical entrepreneur. And I can tell you there's nothing typical about entrepreneurs. That's what makes them entrepreneurs. They're so unique in every way you can possibly imagine. They have different motivations, hugely different personalities, very different companies built very differently. And that's what makes this job fun is the uniqueness of each engagement and each client that I work with.

But they do have some some things that are in common. I mean to be an entrepreneur what I've learned is you have to be a very optimistic person. It is a rare day that I meet a pessimistic entrepreneur. Almost by definition you have to have a rosy view of the future. And so that's one thing that I see in common. The other thing I see in common is that in order to be successful the entrepreneur has to be very passionate about what they do. They do put their whole heart and soul into these companies. And it's not because they're solely trying to make a lot of money. Making a lot of money is certainly a motivation, but it's not the motivation.

These people like to build something. They've got passion for it. They can't sleep at night because they're so excited to get up in the morning the next day and, you know, conquer problems and hire more people and, you know, grow their companies. They're the ones you know driving the ship and are putting in the long hours and setting the good examples. And then I'd say I could go on forever, but I'd say the last element that's very important is that these are leaders. These are people who know how to lead. They build their teams, they lead their teams and set the examples for their teams. And they're just natural born leaders. And so those are the common elements that I see in the entrepreneurial clients that I've worked with in the past.

Mark Cleveland

And then when they come back to you, I mean, obviously, when you had a successful first transaction, they've sold their first company. They might have another one in the waiting that they've been building for years or they'll start another one that becomes serial entrepreneurs. But when when they are working with you your experience, how did they approach their second transaction differently than their first.

John M. McDonald III

Well, it's like anything in life. The second rodeo, you kind of know what you're doing or the first rodeo you're trying to figure it out on the job. And so the second time around, you know, they understand what an EBITDA is. They understand EBITDA multiples. They understand, annual recurring revenue. I mean, they go into the second rodeo with the knowledge that they've taken from the first transaction and they apply it. A good example is I'm on my third rodeo. This is my third investment bank and I've been doing this for over 35 years. I learned, you know, at Raymond James for 11 years what worked and what didn't work. I took, my best practices from Raymond James to my second rodeo when I co-founded Hyde Park Capital.

And we built that up to be a fantastic investment bank over the last 25 years. And now I've had, I had the opportunity of taking all of the best practices for my first two rodeos and apply it to my new rodeo, Kensington Park Capital. And guess what? It is, it is going to be the gem of my career because we're building something from a clean sheet of paper from the ground up, using 35 years of my best practices, but also my partners and yours and everybody else who's affiliated with us. We're bringing all these experienced people to the company and we're all using best practices and we're all learning off of each other.

You know, I'm just now learning all about AI. You know all about AI. You know, we're learning, you know, let's make sure that we bring forensic accountants into the company before we take companies to the market so that we don't find ourselves late in due diligence that the numbers don't hold up. I mean, you know, let's get rep and warranty insurance for every deal so we don't have to worry about negotiating big escrow accounts. I mean these are all the best practices that we're bringing to the table. And that's what I see with these serial entrepreneurs on their second rodeo. They know what they're getting into. They know how to build a company. They've done it before, and they know how to build it to maximize

Mark Cleveland

Both a cruel teacher and the best teacher. It's interesting to me that we've had a conversation about how people view themselves and confidence levels. I've started and sold six companies. I've been involved in a lot of exit transactions. And so I have some experience from that. We don't necessarily ourselves suffer from syndrome. I have learned to accept myself where I am and to value those lessons that I bring into the conversation. But also, as an entrepreneur, I always expected myself to have the answer. So people would come to me and I had this ridiculous expectation of myself that I would always have an answer or I could always figure the answer out. And I think I learned over time that it was often better to ask the question of the person that was presenting the question and learn what they already knew. What were they trying to uncover? How could we arrive at a better solution together. Put more heads into that conversation and maybe ask better questions and not expecting myself to have the answer to everything. Then we talked a little bit about this imposter syndrome topic. have you explored that topic lately and what do you find curious about that?

John M. McDonald III

Yeah, it's a term that I recently learned from my daughter. And she was telling me about it what it is and how all of her friends, you know, through high school and college, they all suffered from it. Including herself. But now that she's out in the real world and she's doing so well, she's figured out, well, you know, she's not an imposter. She's actually earned the right to sit in her seat in her position. And, you know, all of that concern that she's, in over her head or she's not the right person. She got into school by mistake or whatever it is that causes it. I found that to be really interesting.

As I think back, you know, growing up, you know, through school, I now see so many people that I knew, particularly in school, and I still see it today with seasoned veterans that, you know, they have certain imposter type symptoms. But they also have insecurities. They have phobias, regarding attrition, regarding levels of risk, regarding all kinds of business topics. And I really think that those syndromes and insecurities and phobias, if they're not overcome, they can really hurt a person's chances of reaching their full potential.

Mark Cleveland

In my experience, it's self-talk. not good enough. just I'm sitting at this table. I'm not good enough. And that is a very important self-limiting belief. And I have conversations with people I respect, we're always trying to figure out how do we identify and eliminate our self-limiting beliefs? We are unlimited beings. Your self-talk, John, because in our conversations, you're like, I never feel depleted. I'm always charged. I literally believe that of myself for the longest period of time. And I do think as I've gotten wiser, I've been able to recognize when I'm depleted, I need to pull back some of my attention and my intention and pay it to myself. And that's a helpful thing for me to recover. But I'm curious. I've observed it. I've seen it. I don't think you get depleted. So talk about that. How is John McDonald able to legitimately say I don't get depleted? I don't get defeated. Let's talk about that.

John M. McDonald III

Well, I think it's not just a physical thing. I think it's almost a philosophy. What was that song in Lion King, Akunama Tata or something like that? I mean, it really is a philosophy. And I just grew up always very optimistic about things. And I find that my optimism kind of feeds on itself. Negativity just doesn't do anything for a person, particularly worrying about negative things. So I really don't worry about anything because my dad, my mentor, he said worrying doesn't help anything. and then I had another mentor that taught me something that I never really understood before. And that is a person can control their thoughts just like you can control your mouth, your hands, your feet. You are in control of your brain. And I never realized that before, because when I go to sleep, the brain takes over and it just thinks about whatever it wants to think about because I let it. And then, you know, if you're worried about something, the brain starts worrying about it and then you can't sleep. And I always thought that the brain was in control.

But no, I'm in control. So I control my brain and like I don't let negative thoughts penetrate my brain. I keep it positive. And I have thoughts that take me into happy places. And so I never get down. I never get defeated because I've got the energy level. I've got the positive thinking. I don't have any negative thoughts. And I have the physical and mental stamina to always get the job done. Now I do have, you know, lousy outcomes like everybody does. And I learned from them, like, why did this go south? And I try and figure it out. You know, maybe we shouldn't have taken on this business to begin with. Maybe we should have done more due diligence upfront. Or maybe we should have foreseen this, you know, risk and we under assessed it. mean, so, you know, life isn't a hundred percent perfect, but it's, pretty good because of the philosophy that I have adopted at a very early age. And when I learned to control my thoughts, I can insulate myself from all the negative things that happened in this world. And I stay very focused on everything that is positive in the overall world, but in particularly my world, my family's world. And I wake up every day feeling awesome. I go to bed every night feeling awesome. So that's just the kind of life I live. And for me, it works great.

Mark Cleveland

Yeah, it's terrific. It's fun working with you. you bring that attitude to our meetings, to our transactions, to the client. And you bring it also to the buyer community, which I find, I like the way in my experience that you treating the buyer community the same happy, positive attitude, and you're also looking for really great fits. what would be a secret of success to finding a great fit?

John M. McDonald III

My secret is having a vast network of relationships and learning what the buyers like. What's happened is that over a career of what, 35, 36 years in investment banking, I have created so many relationships with so many buyers that I'm at the point in my career where I can say, if I see a HVAC company, like we just signed up my fourth one, I know exactly where to take it. And it makes the process simple. It makes it shorter.

It's more efficient because I like to joke and say that investment bankers don't get paid by the hour, which is true. We get paid to get deals closed. So if the objective is to close a deal, then let's figure out the most efficient and fastest path to get it done. But it has to be with the right counterparty and the right price and terms. And in most cases, I either already know who the buyers are going to be, and I like to give them an opportunity to preempt our process. Because if I can find a good preemptive buyer that preempts our entire process, just think about how efficient and streamlined that process is from signing of an engagement to closing a transaction. I mean, it just makes it so much easier and quicker. A lot of firms, every deal, you got to run through the whole process, put a book together, put a big buyer list together, go out to hundreds of people, sign 100 NDAs, send out 100 confidential information memorandums, and manage all of that work. Imagine how much work that is compared to me picking up the phone and saying, hey Joe, how's the family? Do you have any plans for the summer? By the way, I've got this really cool deal. It's right in your wheelhouse.

Why don't you take a quick look at it? Let's get an NDA in place. And if you like what you see, make a preemptive offer and let's get this thing done. I mean, that's a very different approach. And that's how I approach deals.

Mark Cleveland

Relationships, depth, yep, a common theme. So how do you approach experimentation? You have 35 years of experience. You've gotten this down pat. We're talking about AI today. We're talking about innovation as a discipline in organizations. We're talking about experience. The entrepreneur that has multiple experiences with exits usually is managing a better process.

Has better advisors. Talk about innovation. What would be your approach to innovation?

John M. McDonald III

Well, being a recovering engineer, I love the use of technology in our business. And so again, I'm all about efficiency and high yield outcomes. So there's always innovation that's taking place all around us, particularly with technology, but also with methods and procedures. So that's not necessarily tech, but I find that no matter what walk of life you're in, there's always room for improvement and there's always room for learning. I just got back from a fishing trip in Panama. In here, I think I'm a kind of world-class fisherman. And yet, I hired a captain who's an expat from New Jersey, and this guy has taken fishing to a whole other level. I mean, something I've never seen before. And I'm like asking him million questions. Why are you, why do you hook the bait this way? Why do you troll at this speed? Blah, blah, blah, blah, blah. I mean, there's so much room for learning and innovation. And, and I learned that there's some new deep diving lures out there that I never heard of before that are amazing. I taught him how to put a camera down a line to film the fight underwater. So he learned a lot from me as well. So we're trading all this information, but getting back to the company, I'm learning how to apply AI to our business, how I can use AI to write confidential information memorandums, how can I use AI in corporate valuations and financial analysis. So there's always room for improvement. And as the world continues to innovate, I want to be on the front lines of that innovation and figure out how to apply all of these innovative new tools and techniques, procedures, software, whatever, to make my company better, bigger, and more efficient.

Mark Cleveland

Tell us a story about a time when you were taking an entrepreneur's business to market. Where you took a client to market and you learned something new.

John M. McDonald III

Well, there's a recent one where it was very, very interesting. Most entrepreneurs, they hire the investment banker to sell their company. So we met with a large orthopedic practice in the Midwest. And we're talking about the whole process. I these are all doctors. But in this particular case, they're very busy, business savvy doctors. And we started talking about EBITDA and how companies that are non-tech traded multiples of EBITDA. And then we got into that bigger is better in the M&A world, meaning that the bigger you are, the more EBITDA you have, the higher the multiple will be, keeping it simple. And so they start scratching their head.

And they said, well, if bigger is better and we can get a higher multiple for bigger, then, you know, we have interests, ownership interests in a lot of different ancillary businesses that we work with. I said, well, tell me about them. He says, well, we're good friends with four other orthopedic practices and we own a piece of each other. We own interest in a physical therapy group. We own interests in imaging, you know all things related to orthopedics. We own interest in pain management. We own interest in two ambulatory surgery centers. We own a big interest in a orthopedic specialty hospital. And we also own interest in a anesthesia group. All of the ancillaries that you need. to deliver a complete orthopedic product. So we're all now scratching our head and saying, this is really interesting. Why don't we do something that I've never done before? That is, let's see if we can roll up these 12 different entities on paper, not legally, on paper and present it as a rolled up entity.

And let's take that to market because the EBITDA of the combined entity kind of goes through the roof. And let's see what kind of multiple expansion we can get. And we took this to the market and the market went crazy over it. They just loved it. And so we ended up selling it to a big public company at a very, very attractive multiple, something that we would never have been able to achieve if we sold all these entities individually. So there's something that I learned and working with my client that I have never done before. And it turned out to be a huge success for everybody involved.

Mark Cleveland

Fantastic. And it requires some patience. me what kind of patience it requires from the mergers and acquisitions advisor and what kind of patience does it require from the client?

John M. McDonald III

Well, you know the patience part of this actually worked to our favor because what we were trading off is complexity versus value. Okay, so we knew that if we pulled it off we're gonna get a lot more value, but the market could also look at this is like this is way too complicated I mean you're you're dealing with 12 different entities. You haven't even rolled them up legally. And there's gonna be all that legal work to try and put these 12 entities together. So it took, from start to finish, it took about two years. And so that's a long time to get a deal done. But everybody was patient for one main reason, is that with the passage of time, the entities kept getting better and better and better, meaning that their numbers were going up, up and up.

So nobody was too impatient to get a deal done because every day that went by, their valuations went up because they were growing and they were all growing very nicely. Nobody ever got impatient. Bankers always get a little impatient because they wanna get the deal done and then move on to the next deal. But they were wonderful people to work with. The senior leadership team are now, I consider, very close friends. So not only was this a great transaction financially for everybody involved, but there were some really wonderful lifelong friendships that came out of

Mark Cleveland

So once you've had the success, how do you celebrate success? What's John McDonald's formula for celebration?

John M. McDonald III

This is this you'll find this really funny when my daughter was very young someone asked her what does your father do? And real proudly she said my daddy does deals and when he closes the deal we go on vacation

Mark Cleveland

She's looking, she's your biggest cheerleader at that moment, right?

John M. McDonald III

I mean, I thought that was the funniest thing I've ever heard. But yeah, I do celebrate. I do believe in instant gratification, not just for me, but through my entire investment banking career. When we closed the deal at Hyde Park, my partner and I, we would immediately sit down and we would figure out what bonus checks, completely subjective bonus checks.

Are we going to pay to every single employee, whether they were on the deal or not on the deal. If you were the assistant you've got a check. Everybody got a check. And we were very generous about spreading the wealth. But we believed in instant gratification. So we would, for deals at least, close a deal. That same day, we would have a company-wide meeting in the conference room, we would break open bottles of champagne and we would hand out bonus checks. But you talked about what really motivates me.

I'm kind of well past the money aspect of what I do. I'm in it to give back and to make people rich and happy. I drive so much enjoyment sitting next to the owner and his wife and his family members and have them tell me how life changing this transaction was for them and will be going forward. And I just get so much joy out of that. I had a mentor early on. telling me that, you spend approximately a third of your life learning to education and learning. Then you spend a third of your life plus or minus applying what you've learned to make money and work hard and have fun and then you spend the last third of your life giving back and I'm really I'm in that last one third where you know, I've done well enough where I I am motivated by giving back. Not only through mentoring the young people but giving back in every single perspective. That franchise I bought, I didn't buy it for myself.

I bought it for a good buddy of mine who I met in first grade that fell on hard times and he needed a job. Another example, my, one of my lifelong best friends, his mom was in a memory ward and she was really lonely. Her husband had died a long time ago. So I came up with this idea. I think I read it somewhere that they make these robotic pets. So I bought her a robotic golden retriever. and you know what, Mark, it was life-changing.

Mark Cleveland

That's a cool idea. Yeah.

John M. McDonald III

Because she thought it was a real animal and she was around golden retrievers her whole life. And this was the most adorable golden retriever. You talk to it, it would move its head toward your voice. It wagged its tail and made all kinds of puppy noises. It was the cutest thing you've ever seen. So she carried that dog around everywhere until the day she died. And when she died, I went to the celebration of life and my friend gave a eulogy and talked about how this dog was life-changing and the head of the memory ward was at the celebration of life and I asked her I said how many people are in your memory ward? She said I don't know 50 and I said well, can you do me a favor? Can you find out which one's like dogs and which one's like cats because you can buy all different types of species and variety of animals so she got back to me with all the poodles and retreat white, the tabby cats, every kind of animal you can imagine. So I bought every single person a pet and I had my friend deliver them in holiday gift bags and they had a big holiday party right

Mark Cleveland

Noah's the Noah's Ark.

John M. McDonald III

before Christmas and he took a video of that. It was the most incredible thing you've ever seen in your entire life. It was just great. So I tell you that story because you asked me in the beginning kind of like what motivates me? Why do I do what I do? And it's because I want to give back and have experiences like that.

Mark Cleveland

So John, what's the question you expected me to ask that I did not ask?

John M. McDonald III

That is a good question. I would say, what is the most important question that entrepreneurs ask us when they're considering a sale of company? And you would think that it would be like, what would my price be? But it's actually not. It's actually about what their life would be post transaction. Because they know that they're gonna make a lot of money.

So it's not really financially driven, although that's an important component. But there's the point in their life, particularly if they're an aging baby boomer, they care more about how they spend their time and what are they going to do. Because a lot of these people, they've been going 100 miles an hour their whole life, and it would be difficult, if not impossible for them to go from 100 miles an hour to zero. So we spend a lot of time up front talking about, what is their potential role with the new owner? What about the family members? What about their key employees and managers? Because there is this tremendous care or duty of care that they have for the people who helped them grow to where they are. But a lot of people always think, all they care about is price, price, price, price, price, price. That is absolutely wrong. So I want to leave your audience with the understanding that yes, price is very important. Our job is to get the best price that we can in the best terms. But at the end of the day, it's the owner's duty of care to the people who brought them to the party that matters most.

Mark Cleveland

Yeah, sharing the wealth, both intellectual and capital, and the credit, because we all know as entrepreneurs that we don't get there to the top of that mountain alone. It's an entire team, and we're bringing as many to the summit as we possibly can together.

John M. McDonald III

Yep. Yep.

Mark Cleveland

Now it's time for the rapid fire. What's the last book you read, John?

John M. McDonald III

I have it right here. I'll show it to you. I'm a big Stephen King fan, so I haven't finished it yet. But yeah, Stephen King.

Mark Cleveland

Awesome. And what's the book you're going to read after that? What's next on your plate?

John M. McDonald III

I want to go back and start reading a lot of the classics. Like I've started reading all of Hemingway's stories, starting with The Old Man and the Sea. So, I'm going to read a lot of Hemingway. I'm going to read a lot of the classics that we grew up with that I read so long ago and I was so young that I don't remember them. So I want to go back and read the classics.

Mark Cleveland

I think you might've already answered this question earlier, but what's the best gift you've ever given?

John M. McDonald III

The pets, the memory ward.

Mark Cleveland

Yeah, that's such a great story.

If there were three words that defined your life, what would those three words be?

John M. McDonald III

Integrity, my faith in God, faith, and hope, because I'm a very hopeful, optimistic guy.

Mark Cleveland

I love it. Well, John, thank you for spending this part of your day and so much of your wisdom shared with our audience. Everybody wants to know how to make the best opportunity of their best effort from their life energy. And if they're a parallel entrepreneur, it often means knowing when it's time to sell and getting the right advisor. Thank you to you and your team at Kensington Park for supporting us here at Parallel Entrepreneur. And I really want to offer you the last word.

John M. McDonald III

Well, Mark, I want to say it's been a real pleasure and honor to be asked to participate in this podcast. You know, my goal here going into this was to try and convey as much information as possible in a very limited period of time. I could talk forever about a lot of topics.

Mark Cleveland

Yeah, for me it was a delight. I appreciate your time. The Parallel Entrepreneur Universe is grateful.

John M. McDonald III

Great. Well, Mark, thank you again. I really appreciate you having me.