How to Choose the Right Capital Partner, with DJ Hill

In this second episode, Jim Baker explains how his advisory firm Summus helps businesses become fundamentally sound so owners have options for a successful or unplanned exit. Joined by healthcare entrepreneur DJ Hill, who has completed multiple private equity transactions with his outpatient surgery center company, they break down sources of capital from founders and bank debt to family offices, venture capital, and private equity, emphasizing that “structure demands behavior” and time horizons vary by investor type. DJ outlines how investors make money (2% management fee and 20% of profits), why owners must professionalize operations and avoid surprising investors, and how fund “vintage year” and hold periods can create pressure. They discuss negotiating control, leverage, and management decisions, choosing value-add partners over the highest price, tracking net enterprise value and resource allocation, and how AI fits as a portfolio-level thesis, such as improving revenue cycle complexity in healthcare.

00:00 Welcome and Setup
01:17 What Summus Does
02:20 Meet DJ Hill
04:56 Private Equity Explained
06:25 Structure Drives Behavior
10:31 Choosing Capital Path
11:32 Owner Readiness to Raise
13:54 Professionalizing the Business
17:20 Investor Freedom and Fund Cycles
20:51 How VC and PE Make Money
25:15 Control Terms and Alignment
29:13 Picking the Right Investor
30:59 Picking The Right Investor
32:12 Avoiding The Highest Bid Trap
35:12 Negotiating Control And Leverage
37:13 Bankers Versus Direct Talks
39:02 Preparing To Raise Capital
44:48 Reality Checks And Founder Ego
46:32 Net Enterprise Value Focus
51:18 CEO Resource Allocation
52:26 AI Strategy In PE Portfolios
56:53 Five Takeaways And Closing

Creators and Guests

Host

Bill LuMaye

Talk Host WPTF and Voice Over Talent

Host

Jim Baker

Author of "The Adventure Begins When The Plan Falls Apart" Converting a Crisis into Company Success, Jim is a husband and father of 4, Baker has spent the last 30 years in the business world as an entrepreneur, investor, and advisor. He had a successful exit in 2014 after owning and managing a CRO and functional services company, Ockham, specializing in Oncology. During that time prior to exit, Baker grew ASG and then Ockham both organically and through M&A. Over time Baker has experience in acquiring and selling companies, working with investment bankers, private equity, and mezzanine debt funding. In addition, has vast experience in business branding and managing and leading people. After the sale to Chiltern International, Baker started Sumus Development Group, an advisory business focused on operational excellence, exit strategy and marketing. In addition, Baker is an active investor in the business community.

Guest

DJ Hill

Co-founded Compass with President Sean Rambo

What is Hot Takes, Presented by Sumus?

Hot Takes with Jim Baker is where real-world business experience meets honest conversation with Host, Bill LuMaye.

Hosted by entrepreneur, advisor, investor, and CEO Jim Baker, this podcast explores the challenges leaders face every day—from raising capital and managing growth to hiring, firing, sales, culture, leadership, acquisitions, and long-term value creation.

Through the Hot Takes series, Jim sits down with business owners, executives, investors, and industry leaders to discuss timely issues shaping today’s business landscape. These candid conversations offer practical insights, hard-earned lessons, and perspectives you won’t find in a textbook.

The podcast also features the Wisdom Series, in which Jim and Bill interview accomplished guests whose decades of experience offer timeless lessons on business, leadership, success, failure, and life.

Whether you’re a CEO, entrepreneur, business owner, executive, or aspiring leader, Hot Takes with Jim Baker delivers actionable insights to help you build stronger organizations, create greater value, and lead with confidence.

Presented by Sumus Development Group, LLC. Helping organizations enhance value, strengthen leadership, and prepare for what’s next.

35 - Hot Takes
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[00:00:00]

Bill: Hello, everyone, and welcome. This will be our second episode. Summus, and that is a company that Jim has started after he's already had many other successful companies, Jim Baker, of course.

And he advises other companies to find an exit in their businesses, something I hadn't thought about, but he made a great point the other day when he said everybody exits at some point whether you want it or not. But Jim, it is great to be back and we thank you for this. And you're looking good, my friend.

Jim: Yes.

Bill: We, we're gonna talk about how people can get out of business, huh? [00:01:00]

Jim: No sport coat today. Um- Thank you for the kind words, but you clearly, you forgot about the success, success of 50 Cups.

Bill: Well, you know, someone once said that the, the way to learn how to win is you have to lose sometimes.

Jim: That's true. And, and, You learn from your

Bill: experiences

so yeah, yeah, absolutely. But you've won plenty. And, um, you wanna tell us, everybody, I know we talked a little bit about it- Yeah ... at the beginning of the podcast the other day, but Summus and what it's all about and, and the direction we're going now.

Jim: Sure, yeah. So Summus has been around for a little bit over 12 years now.

Mm-hmm. And it's an advisory company. And basically, as you said earlier we work with companies to get them fundamentally sound. It's almost as if I'm a, a, a physical trainer, I'm gonna get you in better shape- Oh, okay ... so then you'll have choices in life. So in this case, um, from a business perspective, I wanna get you in shape so if you decide to exit, it'll be successful.

If you have an untimely exit, unplanned exit, then hopefully [00:02:00] there'll be legacy and the, and paperwork, et cetera, contracts will be in place where the business will survive without you. So it's all about that. So I don't actually sell you, I'm not an investment banker, but we just get you ready. So that's how it works.

Bill: Right. And the podcast is not only your wisdom, but you've brought on some folks that are- Oh,

Jim: yeah ... We're honored today. This is great. Yeah. You know, we have DJ Hill with us today. Um, a great friend, I've known him for a number of years. But also one of the very few people that has had a successful relationship with private equity.

Right. Sometimes you hear horror stories about companies that sell to private equity, and then suddenly they're out in the cold, they no longer have a job. Um, they're just a m- a silent shareholder, they're off the board. PE takes them someplace else. W- for whatever reason, um, sometimes the private equity deals don't ne- actually work out the way the owner thought they would work out.

And so DJ is unique 'cause he's not only done this once, but he's now done this twice. [00:03:00] And he's a founder and owner of a, a business that he'll tell us about, um, that he had the exit. So I thought today just for our audience, we would just look at, you know, the relationship with private equity and, um, why certain companies need them.

And then what are the pitfalls and what are some of the things that they need, as owners, you need to think about when you're dealing with private equity. So on that note, DJ, welcome.

Dj Hill: Great, thank you. I'd like to say it's an honor to be here. Jim as he said, Jim and I are friends. I have learned a ton from Jim, so I appreciate the opportunity to spend more time with you and to share a few of my, Um, I'll call it hard-won wisdom and lessons from along the journey

Jim: Yeah.

So, well, just so the audience gets to know, tell us a little bit about your background.

Dj Hill: Sure. Happy to. So longtime healthcare entrepreneur. Most recently and currently I started, grew, um, and I've had transactions with [00:04:00] PE related to a surgery center company, so it is an outpatient surgery center company.

We build and manage them across the country, always in partnership with surgeons and healthcare systems. And so that company was started in 2011, and we have a private equity partner. I'm currently chairman of the board of that enterprise. I, I, I would interject early, I have had three different turns, if you will, on the way.

I've had companies where we were self-funded. I've had companies where we had family office money At companies that had venture capital, private equity. And so I was excited about this conversation because, um, I've had the opportunity to see this play out in several different structural iterations, and I think that can lead to a rich conversation today between us.

Jim: Yeah, man. That's even better. Bonus round. You've done everything.

Bill: Absolutely. Well, here's my first question. Yep. I've told you before we went on that [00:05:00] I'm gonna be the guy who asks the dumb questions. Right. All right?

Dj Hill: Fantastic.

Bill: Um, I'm sure most of our audience probably understand what private equity is, but for those who may not, what, what is it?

Dj Hill: Yeah. Fantastic. So most companies at some point need, Well, all companies need capital. At some point, companies may need external capital, capital from another source. There are several ways you can go. So one is the owners pass a hat, so to speak, and put in their own capital. Um, I'll call it, like, a founder's round.

That is one thing. T- traditional bank debt that most folks are familiar with often mortgages would be one example. Bank debt on the business is another type. And then, then after that, we start moving into more institutional flavors of equity capital. So one would be family office, which would be a, um let's say a wealthy family has a mo- has money, or a pool of families have put together money to invest in companies.

Or venture capital... I'm working my way up here. Venture capital [00:06:00] or VC, we'll use that term today, VCs typically invest in startup companies. And then we get to the big kahuna, private equity, or PE, private equity. They typically write bigger checks, much bigger checks, and participate in a different slot in a company's life cycle.

And so that, that kinda walks you through the various iterations that are out there. I'm gonna start with one concept, though, if I may.

Bill: Sure.

Dj Hill: Um, structure demands behavior. Structure demands behavior, and so when we think about which type of capital we might deploy into our business, we have to understand their structure because their structure will demand behavior from them, and then, thus us as the business owners.

And for, for the audience, I'm a longtime operator, business owner, so I will be approaching it from the entrepreneur's seat, if you will, as opposed to, um, an investor seat.

Jim: [00:07:00] So m- the family office, what behavior are, are they looking for from an owner? VC, same thing. PE, same thing.

Dj Hill: So o- one way that's helpful for me to categorize it is if you start with the concept of, of value and what is value creation and what is value capture.

And so if you segment, I'll call it business at its fundamental core is you are providing some sort of value to a customer. The customer pays you for those goods or services. The cost of those goods or services need to be less than the value the customer gets, right? And so if that happens, you have a sustainable business over time for the most part.

So if we start with this co- concept of value, and then we think about it not just at the, um, goods or services level, but at the company level, o- one way to think about these different players in a market would be Um, like a startup, friends and [00:08:00] family, that's really about, like you have a value thesis. I'm gonna start this company because I think if I provide these goods or services, somebody will pay me, and then you, you, you kinda launch the endeavor.

As you move into that, you're in this value thesis testing experiment, and as the company gains traction that's often where a venture capitalist will play. So they, they sometimes will start companies, but really what they're doing is they're, they're seeing, I'll call it signal in the noise early indications that your company can have success, and so they will enter or invest early stage in your company to help really create value, right?

So to grow, if you will. I think about private equity more on the value capture side in the sense of the company has proven its ability to create value have customers, um, and needs to grow. And so now you're trying to take that [00:09:00] value creation opportunity and expand it over a much wider geography or, or vertical market or that type of thing.

Um, and so then back to your question, which was around family offices. Family offices are a newer entrant into the equation. The single biggest determinant, if we go back to structure create demanding behavior they h- they simply have a longer time horizon, and venture capitalists and private equities funds typically have much shorter durations.

So venture capital might be, classic would be five to seven years. Private equity would be three to five years. Family office may be 10, 20, or even generational in their, their mindset or their approach. And so if we go back to this concept, which is structure demanding behavior, one question for the entrepreneur in terms of deciding what type of capital to bring in would be what, what is the time [00:10:00] horizon that you need to operate in?

And some markets force you to move very quickly because it's a winner-take-all environment. In some markets, you can evolve over time. The other is just what does the founder or owner want? Do they, do they wanna grow really quickly, take risk associated with, I'll call it the fast car, um, or do they wanna grow slowly over, over a longer period of time?

That will actually help them figure out which, which type of capital would make the most sense.

Bill: Is there a preference, or is it Dependent upon what the owner's desire is. I mean, would you prefer to go PE or VC, or is the ... Are these steps in a, in a long process?

Dj Hill: Oh, that's a great question. So the answer would be it depends.

It's, it's often, in, in a classic growth environment, it would often be steps. You would start with the founder and a little bit of money, and then maybe some friends and family join. [00:11:00] And then you, you prove the concept a little further and you bring in venture capital and then, then you grow a good bit, and then you can bring in bigger capital, if you will private equity.

Having said that I've been involved in companies that had three rounds of venture and an exit and no private equity. I've been involved with a company that was venture capital, prove the thesis on scale, and then bring in private equity beyond that. And then of course some founder only rounds as well.

Bill: Well, it seem- And I'm gonna go to you, Jim, because it seems like maybe this falls into a lot of what you do. It, it seems, and I could be wrong, so please... Seems like the business owner has a desire and then a plan, whether he starts with VC or PE, but it, look, I would seem that the company has to have the necessary muscles to speak to, to be able to, to be attractive to any of [00:12:00] this.

Does that make sense?

Dj Hill: That's a great question. Jim, do you wanna

Jim: take that one? Yeah, well, I think the ... Agree. I think the bigger, the biggest impediment, I think, to any of this fundraising/growth is the actual owner themselves. Um, you have a couple different buckets of people. You have one that's a dreamer. Um, he's got this great idea, and it's, his idea is better than anybody else's, and he doesn't wanna listen to anybody else but he wants money.

So he goes to friends and family, um, and then they, they give, and then he keeps asking them for more and more money because he wants to develop the latest, in this case, AI tool for his business or this or that. And meanwhile, you have a bunch of friends and family saying, "When are you gonna generate revenue?"

And DJ hit it earlier, he said, "You gotta find somebody that's gonna pay for your goods and services." And they don't seem to understand that once you do that, the f- as fast as you can do that, then that gives you opportunity to go to family office or go to [00:13:00] VC and eventually, when you're really cooking, go to private equity.

Um, but they wanna make sure that that ... 'Cause they know everything, call 'em know-it-alls, um, and they, they wanna make sure it's perfect before it goes out. Right? Right. And then you have the second person who, yes, maybe they have the ability to generate revenue, but they have no idea how to execute, but they're phenomenal about telling the story and raising money.

Mm-hmm. So now I have all this money, but nothing's happening.

Dj Hill: Mm-hmm.

Jim: So one of the questions... And so you may wanna add to that, but the, from a follow-up to that is realistically when you pick up a partner-

Dj Hill: Mm-hmm ...

Jim: you know, in this case family office or VC-

Dj Hill: Yep ...

Jim: as the owner-

Dj Hill: Mm ...

Jim: and the majority shareholder, what behavior now do you have to exhibit?

What do you need to change- That's great ... to make sure it's successful?

Dj Hill: So it, it, it is, um, standard practice when you go [00:14:00] from a internal founders only mode, whether it's one or several to bringing in an outside investor that the business must professionalize. It's not optional. So at that point, they're going to ne- need to see tighter financial reportings on faster timelines, better leading and lagging indicator dashboards and metrics so that they can understand the business, um, et cetera, et cetera.

Better policies and procedures in terms of control, whether it's compliance, um, conflict of interests disclosures, that type of thing. And so if you go back to that concept around what are the demands placed on, let's say, venture capital, they have investors in their fund, and when an, a venture capitalist chooses to invest in your company, they're often not personally investing.

They're betting on you, but they're not personally investing. They're investing somebody else's money. And so [00:15:00] they are essentially extending trust that was granted to them to you. And so when you think about what bargain are you making, in, in my head, at least in the in the partnerships or transactions that I've done, it, it was a, I'll call it a willingness on my part to respect the trust th- th- they were extending to me that had been given to them by somebody else.

And so I thought about that carefully in terms of then what needs to be true with me or with my partners or with the business to kinda honor that trust. And so at the end of the day, that will end up looking like driving an economic return that helps them achieve the returns they have promised other people.

But if we focus just on the economic part, I think we actually miss the, the richness and importance of what's actually happening day to day. We, we just had a rule, like we will never surprise our [00:16:00] investors, right? So the number one thing that they can't have happen to them is that they can't be burned.

They... You can't surprise them with bad news for two reasons. One is because then they would be embarrassed with their own LPs or limited partners would be what, what their investors would be called. Um, but also you've then cut them off at the knees. They have no ability to help you solve the problem or share their wisdom or their learning from how other companies have solved similar problems, introduce you to experts um, or even provide manpower and resources in those times.

And so, um, w- each time, both for family office, for venture capital and private equity, I actually only ever made a few promises to the principal who I was interacting with. Number one was w- we were going to try really hard, like this is a full effort, um, exercise. Another was [00:17:00] we were gonna stick to our ne- knitting, like we had a thesis, we were gonna work and test against our thesis, and another was no surprises.

Like w- like beyond the Boy Scout, you know, tell the truth and don't lie. It was like, "No, we are... We will not ever surprise you. If there's something, some news we need to share, you will hear it from us first. You won't hear it from some, some other person in your orbit."

Bill: when you're looking at these different ways of injecting cash?

How are they limited? I mean, is there one that gives them more freedom, or is there one that dictates

Jim: what

Bill: they do with their business?

Dj Hill: Great question. Jim, can I take that first?

Jim: Oh, yeah, of

Dj Hill: course. Yeah. Yeah. Yeah, so w- what, what I would say is the single most important question to start with is, um, is that fund or, or are those investors familiar with your business?

And you just have to start with this basic premise: Do they understand the seasonality and the pressures with your business? I'm gonna start there. [00:18:00] That, that's one. If they do, that alignment where alignm- alignment will trump intent, that alignment where they have that experience will take a lot of pressure off the owner, um, because then rather than having to explain why, in our case, medical visits go, you know, up at the end of the year as people meet their deductibles and then drop off in January, um, they will just intuitively know that.

So, so that's number one, the, this question of do they have familiarity with your industry. And then the second would be w- where is their fund in its life cycle? So if I can, I'll break that down just for a minute. A venture capitalist or a private equity... Let's take private equity. There are fi- about 5 to 7,000 private equity firms in the country today.

So there are a lot. That's just private equity, another 5,000 for venture capitalist venture capital firms. Those, let's call it 6,000 PE [00:19:00] firms have 18,000 funds So a private equity firm might have a fund vintage 2020, 2023, 2026. And the vintage is the year the fund was raised and closed, and all that, that money's basically in the bank, and they can start investing out of that pool of money into businesses like ours.

Now, here's, here's, here's the trick of it. If a company, um enters, receives capital, enters a relationship with PE, and it is late in their fund cycle, so if it's a 2020 vintage fund and a five-year hold period is the target, and they're investing, let's say, today, last year or the year before, there's going to be immense pressure because that capital will need to be deployed a return achieved, and then an exit very quickly.

And so what you're looking for is to match [00:20:00] your intended time that you need to execute your strategy with the hold period of the fund with the vintage of the actual underlying fund. Most, not most, many entrepreneurs can miss that one question, and if you enter a fund cycle late, there will be massive additional pressure than if you worked with the same exact people at the same exact company, but just in a, in a newer vintage fund.

Jim: Yeah, 'cause in most cases, too, they wanna close the fund in 10 years, right?

Dj Hill: For sure.

Jim: Yeah.

Dj Hill: That's right, and so they'll need that exit. And so the example in Jim's case would be they can force you or, or put a lot of pressure on you to sell earlier in terms of your value creation cycle than you might want to, um, where you haven't actually achieved the fullness of your plan, just because their, their shot clock, if you will- Right

their time ran out.

Jim: Yeah. Kind of walk us through how VC makes their money.

Dj Hill: Mm-hmm.

Jim: How they exit.

Dj Hill: The,

Jim: yep. [00:21:00] Family office. Sure. And then obviously private equity at the end.

Dj Hill: Yeah, so for, for professional investors in the, on the institutional side, so that would be just loosely that would be the VC or PE.

The common approach would be a 2 and 20, so 2% and 20%. And so the 2% would be let's say let's say we give Jim $100 million. He would actually, and he's the venture capitalist or private equity, he would get 2% of, of that amount every year for managing, for finding opportunities, sourcing those opportunities, doing due diligence on those opportunities working with the managers of the companies, helping them execute their business plan.

So he would get 2% per year, basically to run his shop. That's not the upside. The upside would be Jim then would get 20% of the profits. And so if he deploys, let's say [00:22:00] 100, just to make the math easy, $100 million, and he turns that into $200 million, he would get 20% of the upside. So you start with 100, you get to 200, there's 100 million of upside Jim would get 20 million of it.

So when you hear about I'll call... You know, the kids who wanna go work in private equity or venture capital, the opportunity is there for them to make a lot of money by participating in identifying the right companies and then helping the owners do well. And if they create a lot of value, they get to capture a fair amount of the upside economics, um, on behalf of you know, their firm.

The investors, on the other hand are making that horse trade. They're paying the management fee and giving up the full upside because it takes a lot of time and effort and expertise to have the investment, um, the investors go, go [00:23:00] search for opportunities and sort through everything.

Jim: And just, and then to that point too, as you're trying to fundraise The VCs look for friends and family that have already participated, right?

That they want some skin in the game from the original investors. Yeah. Um, and if you don't have that, then it's almost impossible to get a VC deal done. Mm-hmm. Right? So then taking it up the food chain then, the VCs then invest, and then what do the private equity people like to see- Mm-hmm ... um, when it's comes time to invest with them?

Dj Hill: So th- this would be true... So I love the way we started the conversation. So the conversation began around Jim helps people do the exit planning and, and get ready for a potential exit. And so part of the understanding, I'll call it, for our exit would be to a VC or PE, would be what does their exit look like?

And if you just work backwards [00:24:00] now from they have a fund, and that fund needs to generate a return, um, that return often looks like, in private equity, if it's a huge fund, it might be a two times multiple of money. So if you put in 100 million, they're looking for 200 million, or a million, they're looking for you know, 2 million coming out.

In smaller funds, that multiple money, often referred to as MOM, actually goes up, right? So if they deploy less money, they actually wanna generate a higher multiple of money. If they put in a million, they're trying to make it look like three, as opposed to if you're investing a billion- Mm-hmm ... it's hard to actually- Right

have that turn into 3 billion, so you may only be shooting for two. And so kind of back to that question, if you, if, if as a, as an operator or owner, the most important thing to do is understand what targets are they shooting for, and then build your business plan and your timelines and your strategies and your capital [00:25:00] deployment backwards and forwards if you will, against what they're trying to, um, exit at.

And then that actually tells you, to a large extent, what you should do and how you should exit and how you should structure. Does that, that make sense?

Bill: Mm-hmm.

Dj Hill: Yeah.

Bill: I'm just trying to wrap my head a little bit around this. If, if you're expected to make X, X amount, that's the goal.

Dj Hill: Yep.

Bill: Do they at any point, any of these avenues of cash injection, do they, can they dictate to the business owner or founder that, "Well, you need to reduce staff"?

Or are they pressured into that bec- or, or c- or cut areas that might actually be the human element- Mm-hmm ... for, let's say, going AI? Yep. I, not to switch that t- Yep ... topic, but I mean- Sure ... you can see where you could cut your, your expense and increase your profit quickly by doing that. Do, can they dictate those terms?

Dj Hill: Yeah. They, o- of course. Like any- Okay ... a- a- any investor can impose or try to impose [00:26:00] any set of terms that they want onto a business. And so then, then the question would be, are you selling a majority of the company or a minority of the company? Are you selling it early before the thesis is proven, or are you selling at a point where there's a system that is repeatable and proven and they're investing into it?

The other question would be, is it a very hot space where investors are fighting to get in because there's not many opportunities in the space to invest, or is it in a, we'll call it a commoditized space, where they have lots of options? So if an investor... And let's play it backwards. If an investor has a lot of options to invest in, let's say HVAC companies, then they're gonna dictate the terms.

Bill: Right.

Dj Hill: But if the investor is looking for a firm, let's say, that has 10 to 30 million of revenues in the Southeast you know, with one owner, then that pool gets very s- small. And so [00:27:00] at that point, the, the, the entrepreneur or the founder can dictate all, all sorts of terms. So then your question was really around, like, how much control do they have, we'll call it, at dictating into the business?

And, and I would argue if we have set it up correctly, The goal would be that they're aligned with you and you are aligned with them around a forward business plan in how you will grow, how you will create value, how you will capture value, the salary and staff ranges, bandwidths that it will take to get there.

And if you're on plan, in general, they tend to leave you alone because you're executing against the promise. Now, what always happens is there's some version of introduction of, you know, problems in the business. And so at that point you have to work your way through [00:28:00] that and how you're gonna solve it.

And I think, um, my experience has been most investors are very thoughtful, and if you go to them with a proactive plan of how to solve the problem you'll have a healthy debate ab- about it, but it, it often will stand. If you go... If you don't have a plan of how you're going to address the problem and honor the promise that you made them and that they made their LP investors then that's actually where you start to see that rub where they- they're pushing, um mandates on you to improve profitability.

So

Bill: that's back to your original position that no surprises.

Dj Hill: No, yeah.

Bill: Yeah. No surprises you, you have a good working relationship, I guess.

Dj Hill: [00:29:00] So, so let's get to that point of, like, what happens. That's kind of where Jim started- Right ... as well. Like, what happens when you have pressure in the business? And so I would argue that the, the point when you have pressure in the business is the absolute worst possible time to have to figure out what you're gonna do.

The right time to figure out, okay, how do I work with my investor partners, is far before you ever select them. And so I, I will give you at least the way I approached it and then hopefully this will be, be helpful. The first one was this premise that capital is a commodity. It is a commodity. I... Like, we literally just established [00:30:00] there's 6,000 PE firms and 18,000 funds, and you know what they all have in common?

They all have money Right. So- Right ... so we as owners and entrepreneurs are nervous, like, will they value us? Will they love us? Will they, you know, respect all the work that I've done? And that is one view. Another view would be there's 18,000 funds who are looking, and each fund can have many, many investments in it.

So there's tens and tens and tens and tens of thousands of companies that are being invested in. So if you kind of take that view, capital's a commodity, and so then you're looking for your investors to bring something more than just money. So my view was, the very first rule was, do you understand our industry?

'Cause if you don't, I'm not gonna talk to you. 'Cause I am not gonna spend my time educating somebody on a space that they don't know anything about. [00:31:00] Because in almost every sector of the economy, you don't have to if you're the owner. There, there are investors who understand your space, you just need to find them.

Number two they had to bring value. If, if they didn't have something other than money it wouldn't work. Sometimes it was they had systems or tools or processes or sister companies or, um scaling know-how that would be a benefit to the management team. So they had to add value. I gave you a few examples there.

And then the third was we just had to get along. Like, we just... There, there are good people in the world that I jive with, and good people in the world that I am happy, you know, to say hi to, but I wouldn't want them living in my house every day, all day, and that's what an investor does. And so the last one was we had to be culturally simpatico enough, um, that when the going got tough, we would [00:32:00] still enjoy each other's company while we're solving hard problems.

Yeah. So...

Jim: That's a, that's a good point, too, 'cause you have to... You know that not everything's gonna be Disney World. You're gonna have some bad times.

Dj Hill: Mm-hmm.

Jim: And how do you advise certain owners to not take the best deal sometimes? 'Cause believe it or not, private equity does overpay.

Dj Hill: Yep.

Jim: And when they realize that a year into it when the numbers aren't matching what they paid- Yeah

it's not because the business did anything different-

Dj Hill: Yep ...

Jim: just that the owner got a great deal.

Dj Hill: That's right.

Jim: But now the pressure comes.

Dj Hill: Right.

Jim: Right? And that could almost make things worse. Even though the owner got the money, um, there's always an earn-out- Yep ... or a second bite of the apple- Yep ... in private equity.

So what advice would you give an owner not to just take the best possible deal? Because that could actually make things a lot more stressful for you in year one and year two post-deal.

Dj Hill: This will sound funny, but let, let's, let's assume for a minute that the owner [00:33:00] isn't selling all of their stake. That's the underlying premise.

Jim: Let's say 70%.

Dj Hill: Yeah, let's say 70%. I will say this. When I've, um, um, done a transaction of this nature, I've never taken the highest price There's always a bidder who is willing to pay more. And so if you go back to capital being a commodity, the, the bidder who pays more is often writing you a higher check for a failure that they have.

Their failure is they don't have a system, they don't have a network, they don't have the know-how, they don't... They, like, they're trying to get into the industry. So I'm not saying the answer would be never take the highest, that's clearly not. But if you've culled it down pretty well, it you know, that bandwidth gets a little tighter.

But my attitude was that the chasing the money was, um, was a bit like a [00:34:00] mirage in that it became very distracting. Um, if you're only gunning for the highest dollar, you overlook their ability to create value, or that you really wouldn't like to spend- Right ... as much time with them as you're about to. And you convince yourself, "Well, the money's really good, so I'll take that and we'll- I'll deal with the pain later."

I was... This is stylistic at this point, but I was never willing to do that. The second part is the point I think Jim made, which is fantastic, which is if somebody, instead of investing 100 million or let's say a million into your business, they invest, Let's say they pay you a lot, a million five into the same business, and they're trying to get a three X.

Well, in one case, you've got to grow your enterprise to a $3 million enterprise. In the other case, in the second case, you've actually got to grow it to a $4.5 million business. Just that's... My math was... The way I did that was a little funky, but the, the premise holds in terms of [00:35:00] you're setting your mark and the pressure that you're willing to endure, um, at a much higher level, um, as the valuation of your company goes up relative to one investor versus the other.

Jim: Doesn't private equity also leverage the business? They borrow against the business, the business has to pay it back.

Dj Hill: Yeah. And so one... Yeah, so now let, let's say we're the entrepreneur. This is, in my case, I've done this several times. You're the entrepreneur negotiating kind of with and against a potential investor partner.

I thought that the key decisions related to, I'll call it their participation, related to if and when you'd sell the business, who would be on your management team or wouldn't be on your management team, and how much leverage they could put on, and if they could bring more capital in. If you can solve those four issues while retaining I'll call it owner or [00:36:00] founder or CEO either control, um, or, or rights and protections that would be 100% be the right way to go.

Anything less than that, you can find yourself in a stretched situation where they put a lot of leverage on your business that, um You know, put- puts even more pressure on you. Right. Or they put somebody in or would take somebody out of your business, which I would argue is a, a horrible decision.

Mm-hmm. The, the role for most investors should be invest in the senior leader, and then the senior manager, the CEO gets to decide who's on the team or not on the team.

Jim: Yeah.

Dj Hill: And so, and so you can negot- sorry, so you can negotiate that straight into the, um into the agreement what you'll allow or not allow.

Bill: Well, that's what I was gonna ask. Isn't that something that can be negotiated and signed onto before you have to face something like that?

Dj Hill: Absolutely. Right. And that, that's a bit of the [00:37:00] conversation that needs to happen. I think this is gonna ... And kinda I have a opposing view of how that negotiation, I'll call it, should happen.

That was a g- I'm glad you brought that up. So there's this other question around having an investment banker who's shopping for money on your behalf. And, and one of the challenges is, I think a lot of owners, because it's very difficult to emotionally separate with equity in your company and go through this process, which is new to us, and run the business all at the same time a lot of times we will hire an investment banker to go raise money on our behalf.

I think that's fine. That's great. I've used investment bankers and had great success, except or until you get to the type of negotiation we're now talking about. That [00:38:00] negotiation, like almost by definition, should happen directly between the CEO and the, and, and the, I'll call it, target investor or VC or PE fund.

And the reason for that is the investment banker's gonna go on to the next engagement as they're done, when they're done. And let's say it's Jim and I, we're gonna be sitting at the same table trying to figure out, okay, how much leverage do we wanna put on the business? How much will help us, what will hurt us?

And we may have similar views, or we may have different views, and we've gotta work that out before we get into the live fire exercise. And in our case, we would put collars on kinda ranges on what we were willing to tolerate and what levels of approvals were needed. Um, like, you know, how many votes, or did it in- include founders or not include founders, um, that type of thing.

Every business can get a little different in there, but the key is to map all that out, um, ahead of time. [00:39:00]

Bill: I'll ask both of you this then. If you've made a decision that this is something you want to, to do as a founder, as a, as a company to, to go after these investments, what do you need to do, those who might be watching, to enhance your position to attract that?

Or is it, as you say, there's so, so many people out there that maybe the market isn't as tight as a lot of people might envision it?

Dj Hill: Well, I'll give you the, I'll call it, it's not the contrarian answer, but the best practice answer, and somebody had advised me of this, so I was fortunate enough to be able to do it.

If you decide you want it, it's already too late You should already kn- like, you, you should have already, like, the best case scenario is you should start talking to VC and private equity years, like years and years before you ever need it. And so the goal is simply just ask other people in [00:40:00] the industry, "Hey, who are the credible investors in our space?

Who, who adds value? Who, who has gr- you know, who are great, you know, have great returns and work well with owners? Who are, who has the right type of limited partners behind them that will be patient for example, or value add in their own right?" And so that process of identifying and creating this k- kind of relational trust, if you will, very early, I think can be extraordinarily important.

That's not available to everybody, depending on when you started the business, how fast your business environment or market is moving. Um, but it is idea- it would be ideal to start very early, um, in the process. If you've been in the same industry for a while, it gets easier and easier. If you're in a new, if you're a newer operator or a, um, it's a newer industry itself, then using an investment banker to help synthesize or cull the pool so that instead of talking to 6,000 [00:41:00] you're talking to the, you know, top 20, and then they help you get down to the, you know, three, four, five that you should actually be spending some time with.

Jim: Yeah, I think too, to that point, in addition to getting, building relationships with venture capital, private equity, to build them with multiple investment bankers also. I think a lot of times owners don't really... They think they understand the market, but they really don't because they're insular. They don't talk, you know, to other people.

They don't talk to their competition. You know, if they're going to a conference, for example, they tend to stick to themselves. And the more you know about your market, the more realistic you then become as an owner. Um, and then to DJ's point, knowing what they want in a business, then you build the business that way.

So at the appropriate time when you're ready, um, if, you know, EBITDA needs to be 30% of revenue, then, you know, if you're at 28, they're gonna be happy,

Bill: right? Um- But what do you advise f- folks? And this might be a person who has never done this [00:42:00] before kind of a question. Sure. And I apologize, but at what point, Jim or, or DJ, do you, does a business realize years before they need it that they need it?

I mean, is there-

Dj Hill: A straight-

Bill: You know, is there something you-

Dj Hill: Well, I'll give you my example.

Bill: Sure.

Dj Hill: I didn't know I was gonna need it. I didn't know I would ever need it And, and so to Jim's... Kind of the way Jim answered the question was you build some relationships before there's a need, before you know that you may eventually take capital.

My co-founder and I, for years and years and years didn't plan to take outside capital. And then a couple things evolved in the market in terms of our you know, time investment into the company where it made sense for us to do it. Um, but we were having those conversations before. I do, I do wanna double-click on y- your question in a different angle, though.

I thought Jim's comment around talking to investment bankers is fantastic. If [00:43:00] you wanna short-circuit this, you know, talking to people for years, and you're, you need to condense your learning and your access to a much tighter, um, timeline, you could literally find three to five respected investment bankers in your space and just give them a call and say, "Hey, I'd love to, you know, pick your brain."

Every one of them will take, take the call, and every one of them will have a high volume of insights into the market, your competitors, into what buyers want, and which investors would be interested. And so Jim's got the right short-circuit answer, which is you don't always know when you're gonna know.

And if, if you find yourself needing to move a little quicker, talking to a few investment bankers can go a long way to accelerating your learning.

Jim: Here's a, you know, two quick stories. Sure. One was me. Yeah. You go to these conferences every year where your competition are, and there are investment bankers going around just trying to meet people, handing out cards, and [00:44:00] trying to solicit business.

They wanna try to sell you. And originally, you're like, "I'm not talking to that guy." That's it. A, I'm probably never gonna sell. Yeah. And B, he just wants to make money on a transaction. Um, so you ignore him. And then year two, year three rolls around, and you're like, "Ah, maybe I should talk to some of these people."

And then suddenly you realize actually they're good people for the most part, and they're very knowledgeable. And for free, they'll take a look at your business, your financials, and some other things, and they'll give you advice on where you, where you need to go and what you need to be doing. If you truly wanna have a good business, and more importantly, you know that at some point in time, either you...

whether it's you're gonna exit and cash out or you're gonna pass it on to your family, um, it's all good stuff to have. Right? So then the second story is a current story. I'm an investor, a friends and family investor with a, a company at this point in time. Business is probably six years old, and I would [00:45:00] argue that we're probably no further along now than we were three years ago.

Now some of the, the market's changed a little bit so they had to adjust a little bit, but he's not going out and talking to investment bankers. He's not ... He wants VC money, but I don't think he's talked to any VC firms at this point in time. And I feel like the business is more of a science project at this point, and he still continues to bang us for more money.

And I keep saying, "You need to find somebody that will pay for your service. And then once you do that, life will become better." But, you know, so you get some of those folks out there that no matter what you do, um, and quite frankly the smarter the owner from an educational standpoint, the harder it is.

Dj Hill: The what? What, which part's harder?

Jim: The smarter the owner from- Right ... an educational standpoint-

Dj Hill: The harder ...

Jim: the harder it is to put them into reality, is probably the best way.

Dj Hill: Ah.

Jim: For them to open up and talk [00:46:00] to the investment banker, for them to actually find a client that's going to pay them.

Dj Hill: Okay.

Jim: Right?

Instead of- Yeah ... "I know this. I know that." Yeah. You know, "Are you an AI expert?"

Dj Hill: Right.

Jim: Well, he thinks he is, but he's not. Right? Right. Okay. Um, so yeah. It's just- Yeah ... and then as an investor you're like, you basically write it off in your head. Sure. You know, 'cause you're tired of fighting with people that don't, um, have the ability to be open-minded.

Bill: Smartest people in the room syndrome.

Dj Hill: Yeah.

Jim: It's,

Dj Hill: it's, um actually, I- Yeah. So, so can, can, can- Go ahead, please. Yes ... can I pull on that thread? So the, from an economic perspective, the single the single most important com- like the thing that we tracked was net enterprise value. Not enterprise value, the net enterprise value.

So

Jim: describe that.

Dj Hill: So net enter- enterprise value would be what is the total value of my company? And if you don't know that, you could call an investment banker and they'd tell you, or you could talk to some other business owners in your space who've sold, and they could help you figure it [00:47:00] out. Or if there's a public market comp, you sometimes can look at the public market, like what does an HVAC, public HVAC firm trade at, and then you discount off of that.

So there are lots of ways to get to value. We tracked it just to make it super easy. We just said we will trade at eight times EBITDA, trailing EBITDA. So we just said we are gonna track a quarter over quarter over quarter over quarter. And then we thought about the world in terms of every dollar we put in to the company, how is it going to create earnings in the future?

So enterprise value would be eight times the trailing earnings, but it would be less whatever we invested. So if we earned a million dollars of EBITDA and we could sell it for eight times, we would have an $8 million business. That's the, that's the gross enterprise value, or commonly referred to as just enterprise value.

Our question was always, well, what's the net enterprise value? That'd be after you, after you took out what [00:48:00] we had invested. And so if we had invested a million dollars, we would have $7 million of net enterprise value. To get to the same $8 million of gross or enterprise value, if we had to invest $7 million to get there, we only walked away with a million dollars of spread or margin- Mm-hmm

um, between. And so we, we use that as a way to understand capital investments into the business what we demanded or expected for that investment in terms of returns, and we would try and you know, we'd be making the determination if we invest a dollar in a, let's say a salesperson or business development, how much did they have to generate in terms of sales to create how much EBITDA, and was that going to make us better or worse than our target or, or frankly or relative to any other investment we could make, whether it be AI or a partnership or new technology or a new service offering or something else.[00:49:00]

And so that simple net enterprise value concept, I've found talking now to dozens of business owners and leaders, they often almost always don't think about it or don't talk about it, and I haven't met anybody else who's tracked it as kinda religiously as we did. And so to, you know, not to do too much on the personal story side, we were massively over 100, 100X in terms of our exit.

Matter of fact, from the first dollars in, we were over 1,000X. And so kinda once you see, see that type of laser focus onto net enterprise value creation, once you get your head around that, it's almost impossible not to see it. And then, you know, try and figure out for other businesses kinda where is that happening and where are they-- where is that not happening.

So much so, last comment on this, so much so that I regularly say said internally in my [00:50:00] company and now as an advisor to others, Like spending time or energy on that, whether it's a product line, a market too much headcount is destroying enterprise value. You're destroying net enterprise value.

So it's a way to just keep focusing on kinda what are the economic demands of the business, and then how do you create systems and structure and return expectations and metrics to get you where you're actually trying to go. Which is why I loved the way Jim started, which is, "Hey, all of us are gonna exit our business at some point."

And understanding that you can start to work backwards from what your expectations are there, and then backwards and forwards, and net enterprise value is the single most constant thread, um, from A to B other than, you know, your, your, your mission as a company.

Jim: And I think from a simpler way to look at, at our enterprise value sometimes is, you know, a company makes a decision to I don't know, [00:51:00] take on more office space, right?

Mm. Um, so it's an extra $100,000, but if you're multiple unit industry's eight- Bingo ... that's an $800,000 hit to your value- That's right ... unless you can take that 100 and create more value with it. Yep. That's a great

Bill: example.

Dj Hill: Right? Yeah. So- Yeah, so we'll play that at one, one level further. I have a strong belief that the only, the only job of the CEO, or only job is, of the entrepreneur is resource allocation.

That's the only job you have. And you're re- you're allocating resources, whether it's trust or relationships or capital, um you know, kind of brand integrity. You, you can take that any direction you want to but the only job of the entrepreneur is to allocate resources appropriately. And so once you understand that, then you're in the business that Jim just talked about.

Okay, is $100,000 on the office the right decision? It'll be nicer, and it'll have more prestige, and I can show my friends, or could [00:52:00] you take that same 100,000 and put it in some other part of your business and get a better return? That resource allocation decision is the job of the leader.

Jim: Yeah. And to your point, too, w- in your business you gotta decide, you know, how to, when and how and what those metrics look like when you open up a new surgery center.

Oh, for sure. For example. Yeah.

Dj Hill: Yeah. And which ones to invest in and- Right ... did we expand it, and yes, yeah, those decisions were coming fast and furious.

Jim: Um, real quick, not to get into a giant AI discussion, but with this whole private equity world and from an owner perspective and also for private equity, since we're gonna talk about the buzzword today, where does AI fit in?

Dj Hill: The... I've probably asked, in the last two months, I've probably asked six private equity, different private equity companies how they're thinking about AI, and I'll give you the answer I would be looking for, I am looking for, is, we'll call it a systematic thesis of how they plan to deploy AI [00:53:00] in their portfolio company.

Do they have a, an AI resource helping kind of marshal kind of what's working and what's not in a, a communication method around their thesis and their learnings? It's mov- the point here is it's moving way too fast, and if you have, if the venture capital partner or the private equity partner talks about their answer- From an individual lens, it is a fail, it, like they're failing.

They don't have a strategy. They won't learn fast enough. They will fall behind. If the firm talks about having a firm strategy and that the firm is aligned in terms of testing that thesis and improving they have a much higher odds of success. And so an example in our business would be revenue cycles.

So revenue cycle is extraordinarily complex of tens of thousands of [00:54:00] patients you know, on hundreds of different plans that all have different r- requirements associated with them for reimbursement for surgery. Um, that's a perfect example where AI can fit in. And so we have a strong thesis around how AI can actually help us navigate the insurance I'll call it situation complexity.

Jim: Very kind to you.

Dj Hill: Yeah. Complexity, um, while reducing, um, the costs associated with a non-core service. Revenue, revenue cycle management is incredibly important. It is not providing surgery. It's not helping our patients with surgery-

Jim: Right ...

Dj Hill: Or helping our surgeons with the surgery. And so that would be a, a needed but non-core function, needed but non-core fun- functions.

We're always looking to allocate less resources to them by being smarter, better, faster, leveraging tools, and AI would be an example fitting in. So back to your question, [00:55:00] um, it depends on the industry you're in, in, in, in terms of how it should play out. But if you're thinking about it from a fund or, um I'll call it an investor's perspective that how it will help the companies to be better will make sense.

Jim: Um, I'll let Billy finish, but I have one question, one more question for you myself. Did-- If as you're evaluating private equity, the do's and don'ts

Dj Hill: Oh, great

Jim: From an owner perspective

Dj Hill: start early, alignment trumps intent, structure matters, figure out the vintage, develop the relationship. Um, the company, if you will, is gonna be punched in the face, and then everybody has to react.

In my case, um, we worked really hard to figure out who was going to make the decision who, who had the authority and power to make the decisions. And so I had no interest, and still don't, of doing what [00:56:00] intense shuttle diplomacy. And so f- figuring out, okay, like, if it's Jim and I or Bill and I, like, who's going to make the decision in which situations matter.

Um, and, and I really like... I'm saying this as somebody who had lots of successes, a bunch of failures, but most importantly had great mentors and people who helped me along the way. Jim's comment around find people who've done it before, find investment bankers who've done it um, and, and start collecting as much advice as you can.

That's probably the best advice that kind of almost trumps everything else. If, if y- i- if you're thinking about raising money or selling, or even if you aren't today, but you think there's any shadow of that as a possibility, I would, I would, I would entertain those conversations.

Bill: Well, I think you've already started on one of the top fives- Yeah

um, because I was gonna ask for those [00:57:00] people who are in fact thinking about it or have never even thought about it- Mm-hmm ... what are the five takeaways from this little talk we had today, TJ, that maybe the highlights that they should remember?

Dj Hill: Capital is a commodity. You're looking for value add investors.

That's one. Two would be laser focus on net enterprise value, and figure out the system that it takes to generate increasing amounts of net enterprise value that will help you and your potential investor. Three vintage year, vintage year, vintage year. Figure out what the time, what the life cycle that your investor is trying to live within, um, and make sure you're matching up your time horizon and their time horizon.

Alignment trumps intent. Alignment trumps intent, so y- you, you wanna be aligned. It doesn't matter what they say, you're, you're... [00:58:00] you want that alignment. Um, resource allocation is the key. I, I, I, I, I would say my last one, I actually think is the most important, and if you start with this one, it, it probably makes everything else easier, is that when somebody gives you money Most of us think, okay, well, like, it, it's the selfish side of us, right?

Like, "Oh, I'm getting this, and I'm gonna put it in the bank, and I'm gonna buy a car or a house," or whatever you're gonna do. I actually thought about it the other way, which is somebody's extending trust to me, and that trust comes with obligations, and I've gotta figure out what those obligations are.

So w- like maybe my last comment, I'll try and synthesize it, is, um, when somebody invests, that is a proxy for their saying they trust you. And I just, I deeply believe that, um, you know, oh God, [00:59:00] being honest ha- has a long tail. And just the world has a way of sorting all that out, if you will. But, but honor the trust of somebody investing in your company, and figure out what's important to them.

And if you can help them, they'll give you a lot more grace, you know, when the bumps come along the way. So it's a little selfish, too, but, um, honor the trust of your investors.

Jim: Well, amen. I mean, I

Bill: learned a lot today.

Jim: Me too. A ton. That vintage was- A ton ... was key. Yeah. Never thought of that

Dj Hill: before.

Jim: Yeah. Yeah.

Dj Hill: This is great.

Jim: Hey. I

Dj Hill: enjoyed it.

Jim: Yeah. Thank you for coming today. Really appreciate it.

Dj Hill: Yeah. Thank you

Jim: very much. And yeah. Best of luck.

Dj Hill: Yeah. Thank you. Thank you. Look, look forward to more of these. [01:00:00]