Funding Enterprise SaaS and Achieving 9-Figure Exit Deals with Christian Mack – EP 101

Interview with Christian Mack

Funding Enterprise SaaS and Achieving 9-Figure Exit Deals with Christian Mack

Christian Mack is an enterprise software veteran and a master of securing eight and nine-figure exits for his clients.

Christian is the Managing Director at Lotus Innovations Fund, a private equity firm specializing in the lower-middle Enterprise Software and Services markets. Under his leadership, Lotus has delivered double-digit returns by leveraging small businesses that don’t have access to bank and private equity capital into highly profitable and fast-growing SaaS firms.

Before that, Christian built a company (Resolve Systems) from scratch and scaled it organically before securing a massive nine-figure exit. Now, he’s on a mission to help other business owners do the same.

In this episode, we go over the lessons he learned during his journey from an aspiring professor to Fortune 500 consultant and successful business owner.

You’ll learn how he bootstrapped his first company and then scaled it from $0 to $50 million in revenue, his unique strategies for buying small IT companies and helping them land multi-million dollar exits, the importance of building businesses that don’t rely exclusively on rockstar CEOs, and much more.

Featured on This Episode: Christian Mack

✅ What he does: Christian Mack is the Managing Partner of Lotus Innovations Fund, a private equity firm specializing in the Enterprise IT Software and Services markets. Under his leadership, Lotus has delivered double-digit returns through leveraging small IT Services companies into highly profitable and fast-growing SaaS firms. Christian has over 20+ years of enterprise software experience and 6+ years of Private Equity experience covering North America, Europe, and Asia. After founding Resolve Systems in 1999 and selling it in 2012, Christian founded a Family Office in 2012 and started Lotus in 2014. Christian is responsible for the daily operations of the Fund, including fund formation, facilitating deal flow, performing due diligence, investment decisions, evaluating strategies with the potential to create value for portfolio companies, and planning and executing exit strategies. He graduated from the University of Chicago with a B.S. in Mathematics. ​

💬 Words of wisdom: “Billable time was great, but there was only so much billable time in the day.” – Christian Mack

🔎 Where to find Christian Mack: Twitter | LinkedIn

Key Takeaways with Christian Mack

  • Why are enterprise SaaS so valuable that Fortune 500 companies rely upon them to drive profits and revenue.
  • Why government agencies love working with enterprise B2B software and how to use that to your advantage when trying to scale your business.
  • How Christian bootstrapped his first software company in his basement on a bank loan and grew it to a $50 million revenue business.
  • Success requires patience. Learn why it took Christian 13 years to secure a nine-figure exit (that made all 13 of his employees’ millionaires).
  • Christian explains how his company fills a need by investing in and scaling smaller businesses who would otherwise not be able to secure traditional lending and how this strategy is leading to big returns.
  • The partial IPO strategy Christian uses to 10X smaller companies and attract the attention of huge players, such as SAP, IBM, and Oracle.
  • Why Christian loves to hold on to companies for 5 years before going public and how that creates massive value for investors and founders.
  • Founders are not always the right fit for CEOs. Learn how Christian moves the chessboard pieces when he buys a company to help it scale sustainably.
  • Have someone take care of your wealth like it’s their own. Why a family office might be better for wealth management than huge players such as Goldman Sachs or Merryl Lynch.

Christian Mack on How a Partial IPO Can Supercharge Smaller Companies

Christian Mack Tweetables

“What we're doing from a mission perspective is important. It services a capital desert for these small businesses that don't have access to the bank capital or private equity capital they need.” - @Cmack4Lotus Click To Tweet “A lot of family offices were looking for technology investments, but the options being pitched, in my opinion, had more chances of getting their money back by going to Vegas and playing roulette.” - @Cmack4Lotus Click To Tweet

Resources

Rate & Review The Lifestyle Investor Podcast

If you enjoyed today’s episode of The Lifestyle Investor, hit the subscribe button on Apple Podcasts, Spotify, Stitcher, Castbox, Google Podcasts, iHeart Radio, or wherever you listen, so future episodes are automatically downloaded directly to your device.

You can also help by providing an honest rating & review over on Apple Podcasts. Reviews go a long way in helping us build awareness so that we can impact even more people. THANK YOU!

Connect with Justin Donald

Get the Lifestyle Investor Book!

To get access to The Lifestyle Investor: The 10 Commandments of Cashflow Investing for Passive Income and Financial Freedom visit JustinDonald.com/book

Read the Full Transcript with Christian Mack

Justin Donald: All right. What’s up, Christian? So glad to have you on the show.

 

Christian Mack: Likewise. Thank you, Justin, for the opportunity.

 

Justin Donald: Yeah. This is fine. Well, I’ve been looking forward to having you on because you have such an incredible story. You’ve done so many cool things in the space of enterprise software, and I’d love more people to learn, a, what you do and, b, to consider this type of investment for their portfolio. You know, it’s something that I have heavily invested in. It’s something I know at one point you are all in. All your eggs were in this basket and you’re still heavily allocated to enterprise SaaS. So, for people that don’t know what enterprise SaaS is, can you explain that?

 

Christian Mack: Yeah. So, enterprise software is specifically enterprise software as a service, which is enterprise SaaS is basically business-to-business software. So, this is the stuff that people really don’t see. The big ones are like IBM, Oracle, SAP, but effectively it’s technology that allows businesses to interact with one another and their communities that they serve. It’s a really important kind of the plumbing and electrical. It’s not very sexy but at the end of the day, the Fortune 500 companies rely upon this to effectively drive revenues and profitability.

 

Justin Donald: Now, there’s a whole lot of SaaS companies. When you think of software as a service, you’ve got B2C and then you’ve got B2B and then kind of your high level, though, and the enterprise. So, can you break down all the different types of software as a service and why you like enterprise the best?

 

Christian Mack: Yeah. So, business-to-business, so let’s start with business-to-consumer. So, business-to-consumer would be things like Facebook, right? You know, Google, any app that you guys use on your phone, anything that the average consumer basically uses to technology-wise consume information. Business-to-business software is effectively businesses interacting with one another and effectively in order to ensure that the revenue is in the service, their product that they’re selling is delivered. Enterprise business-to-business software is even a higher level. So, I typically define that as more Fortune 500, Fortune 1000. So, these are billion-dollar companies. Their requirements on the software side are much higher than the traditional small, medium-sized business. And so, that’s where the average check size is typically in certainly six figures, if not seven figures on an annual basis. And the reason why I like enterprise of software in business-to-business SaaS is because these are contracts. They’re 3 to 5-year-long contracts. And the technology itself really, once it actually provides value, it’s very, very sticky.

 

One of the things that people don’t quite know is that mainframe technologies have been around since the 60s. And JPMorgan is one of the largest consumers of mainframe technology today. And basically, any credit card transaction that you use on Chase goes through a mainframe, the data center either in Columbus, Ohio or in Arizona. And you may ask yourself, “Well, why is that? Why don’t they use the latest and greatest?” Well, in enterprise software, what we find is that it needs to be so scalable that technology gets layered in, right? So, mainframes serve a particular purpose really well. And so, what they do in order to make it easier for people to use is they basically layer additional technologies on top of it. And so, mainframes are here to stay. They’ll be here for a long, long time, which I really like because unlike business-to-consumer where one day Myspace is the greatest thing since sliced bread and the next day it’s Facebook, it’s a very fickle market versus enterprise software. There’s so much effort and time and money put into implementing the software that once a technology sticks out and it’s picked by Fortune 500 companies, they certainly don’t want to rip it out. It’s too costly. It’s too much of a distraction and can create havoc depending on the outages that possible error could create.

 

Justin Donald: And isn’t there like so we’ve talked about enterprise with these Fortune 500, 1000 companies, but Enterprise SaaS is also something that’s used by government agencies too, right? And it’s a huge market because once you get some of these government contracts, I mean, you’re in the money. Companies love to acquire businesses that have large government contracts, right?

 

Christian Mack: Absolutely. You know, just like Fortune 500 companies, the Department of Defense, the government, they have kind of a reference IT architecture. And the whole idea is that anything that they do to scale or they do an operation or what have you, they rely upon that reference architecture to provide the underlying IT infrastructure to do so. These contracts are, I mean, in the enterprise space, a Fortune 500 space, 3 to 5-year long contracts. In the government space, it’s much, much longer. And so, even though it takes a little bit more effort to get those contracts, once you get them, then, yes, you are set for a very long time. And a lot of different government agencies will also basically approach you if you have one contract because you’re authorized to do certain things. Like, in my background, the Department of Defense has always been kind of a customer base for us. And if you think about Department of Defense, it’s not just the Pentagon, right? You’re talking about NATO and all the other allies, right, for the United States and so forth. And so, the opportunity to get very deep inside that industry is pretty significant once you kind of check all the right boxes to fulfill a need.

 

Justin Donald: Yeah. That’s incredible. So, if you talk about like my comparison is like with a triple net lease, let’s say that you own real estate, you find a Fortune 500 company, maybe a Fortune 100 company to rent your space. And maybe they rent it for ten years and you have these automatic rate increases every year. Maybe they sign a lease for 20 years. That lease is the most valuable at the beginning because you have them locked in. A lot of them are corporately guaranteeing this. And so, you flip that to like the government side of things and they sign a really long agreement, which is maybe it’s 10 years, maybe it’s 20 years, whatever it is. You now have created massive value for your company. Like, right out of the gates, this thing is worth so much. So, a lot of people, once they have these contracts, will turn around and sell it, whereas other people that want it more as a lifestyle, I mean, you really only have to land one or two of these big contracts off in time and you are set as a lifestyle business. And once you’re in, in one government agency or one with one defense contractor, it’s a lot easier to get the other ones. You know, I’ve done a bunch of investments where our tenants are government agencies, FDIC, defense contractors, Lockheed Martin, Bell Helicopter, you name it. The list goes on and on. And these are just some of the best, most unique contracts because they’re backed by the government. You’re going to get paid.

 

Christian Mack: Yeah. I think that’s one of the reasons why it’s so important. If you’re an enterprise software company, it could be very focused, right? Don’t be all things to all people. If you’re good with regards to selling into the Department of Defense, and say financial services and stay focused on those industries, right? Because the cross-selling opportunities are huge in the government, in enterprise software. If JPMorgan buys your product more than likely Wells Fargo, Bank of America, all those guys are going to want to buy your product because they don’t want to be left out in the wind. So, it’s very true within the government space as well. It’s actually even more true because once you’ve survived the government procurement process, which is no, it’s not an easy thing to do, but once you survive that and you’re providing value and you’re locked in, then it’s so much easier to effectively pick up additional business in different departments and so forth. So, yeah, that’s a great point.

 

Justin Donald: You know, it’s interesting hearing your story, and I’d love for you to share with my audience just kind of how you got to where you are today because you built a company from scratch and you scaled this thing and had a massive exit, over a nine-figure exit, or I should say well into the nine figures. And most people never experience that in their wildest dreams, but you have over and over had massive transactions in the enterprise SaaS space. So, I’d love to hear how you got started and what kind of happened with that first company, and how you pivoted to where you are today.

 

Christian Mack: Yeah. So, my story is kind of interesting. It breaks up into different kind of acts, right? So, if I look at it like a story, the first is I went to college, come from humble beginnings, and I had to put myself through school by taking on the odd IT job. I went to University of Chicago. I was a math major on my way to get my Ph.D., realized very quickly that I did not want to become a professor but I really love technology. And so, when I graduated, I like to joke around because I could spell IT and everyone was worried about the world falling apart due to Y2K, those of you who are old enough to remember that. I was instantaneously qualified and I’m not sure if qualified would be the right word, but to be a consultant. And so, I did that for a couple of years. And so, I did massive deployments into Fortune 500 companies and I realized at that point being kind of starting to become a successful consulting operator that the next phase of my life was I really want to start my own business, right? Billable time was great, but there was only so much billable time in the day.

 

So, the next act came into play where basically I started my very first software company and I did it. I carpeted the basement of my house that I had just bought. I put up whiteboards. It was a four-bedroom, two-and-a-half-bath house. I called up all the people I knew that I believe I could train up to basically start this great software company. And I told people that, “Hey, look, I really can’t pay you very much, but I can give you room and board.” And so, we had 13 people living in a two-and-a-half-bath house in the early days And we grew it successfully. You know, before I did it, I called my parents up and I said, “Hey, I’m basically starting this up on credit card debt.” And I walked into a bank and said, “Hey, I started thinking about starting a company,” and effectively the bank, I’m pretty sure, took my pulse and basically gave me $50,000 and said, “Hey, kid, don’t spend this all in one place.” And so, off we were at the races and it was an interesting time. We went from 0 to 50 million in revenue. It was definitely not a linear line. It was a roller coaster. There’s lots of ups and downs. What I realized during that kind of being an operator is that there are a lot of different resistance points, right?

 

There’s a lot of different things you have to do from a back office and front office basis in order to have a successful business. And it’s really stratified by revenue because there are just different things when you’re going from 0 to 1 million than you would do to go from 5 to 10 or 10 to 20 or 20 to 50, and that’s really where my expertise ended. But in 2000, the journey that I thought was going to be three years into being 13 years so I did it all the hard way. So, I never took on any investor capital. I did it all organically, but ultimately we had a nine-figure exit in 2012, so 13 years. But then there was a really good exit and those 13 people became millionaires and more so they did quite well, but we worked really hard during that time. But what I realized was that the reason why we’re working so hard is because there was no playbook that we were really operating by in order to grow. We were all kind of figuring it out as we went, right? We committed and we were figuring it out. So, once I sold, I decided I’m going to start a family office. So, I started a family office called Terra Rossa, and I started a network with folks.

 

And so, that was kind of the next act in my story because I went from being an operator, having a successful business to then exiting and then starting a family office. And in doing that, I realized that a lot of family offices were looking for technology investments, but the technology investments that they were being pitched in my humble opinion, they had more chances of getting their money back, going to Vegas, and playing red on roulette than, say, investing in these deals. But at the same time, a lot of businesses, thanks to the great recession, the last small businesses in the enterprise software space were approaching me going, “Hey, Christian, I can no longer get that $50,000 check that you got when you started your business.” You know, there’s basically this capital desert for those companies that are too small for private equity and don’t fit the venture capital model. And so, it’s kind of like an aha moment at family offices looking to invest in high net worth people looking to invest in technology but didn’t necessarily have the understanding around that. But the other hand had really great small businesses that needed not only capital but also the advice on those best practices to really scale from a front office and back office spaces.

 

And so, we launched Lotus in 2014. Our first and second fund were more of a proof of concept to really kind of prove around the thesis. But the whole goal was let’s go into these small businesses. We’re a buyout fund so let’s take the majority control of these companies, and the founders. They’re more likely more technologists than anything else. And so, they really want to focus on the product anyway. So, they become more of the CTO. We bring in a group that effectively kind of takes over the back office and front office, gets these best practices up and running, and we grow these companies. We grow it to the point where more traditional private equity or even public markets are interested, but when we buy it, we buy it right. So, we’re buying at very low multiples relative to, I mean, we’re talking about buying call it three times revenue versus the public markets are very, very high in multiple. But even private equity has historically all throughout the decades has bought for basically call it 7 to 10 times revenue. So, there’s huge multiple expansion there.

 

Fund 1 did really well, you know, did 2.3 times return in three years. Fund 2, we started in 2016. That did extremely well, 42% gross IRR, 36.6 net IRR in four years. We ended up in 2020. And now we’re on to our third fund, which is really exciting. And what’s interesting about this stage of my life is that since we’ve proven out the model, we’ve been able to hire some really grade A talent to fill out the team. So, it’s not just the folks that were operators. Now, we have kind of rounded out the team with people that not only understand technology but also understand private equity and financial services, best practices, and so forth. So, we’re super excited about kind of scaling this up in a big way. Not so much that we’re going to be buying bigger companies. You know, I really believe that what we’re doing from a mission perspective is important because it services that capital desert for these small businesses that don’t have access to the bank capital or private equity capital or anything like that. So, there’s a big need there that we service, which I think serves a greater good.

 

Justin Donald: Yeah. You know, that’s incredible, Christian. You’ve had so much success over your career in this space. So, here’s one thing that I love is that everyone on your team, I think you said it was 13 people all became millionaires, which how cool is it to know that you helped create millionaires amongst those people you gave the opportunity to be partners with in some way, shape, or form? I mean, that’s incredible. You said something else that I think is really important, and I would like to elaborate a little bit because earlier you said in the enterprise SaaS space, you get multiples. The valuation of the company is based on a 2X to 4X or at least you’re buying at a 2X to 4X based on revenue, not based on EBITDA. So, this is a little bit different. You know, most businesses like if you took account of every business out there, every industry, every niche, I mean, the vast majority, 98%, maybe it’s 99% of businesses, their valuation is derived from some sort of profit margin or profit formula. EBITDA is probably the most common. In real estate, it would be net operating income.

 

You know, there’s free cash flow. There’s all kinds of different things that people use to kind of like evaluate what is a company worth. But there are a few industries, enterprise SaaS being one of them, SaaS in general being one of them, where you get a valuation based on the top line revenue. Super rare. Talk about that a little bit because that, I mean, that chooses your returns.

 

Christian Mack: Oh, yeah. No. And what’s interesting about that is, look, when we buy companies, we’re always buying companies that are breakeven or making money, right? You know, you have to buy it right. You can’t buy something because it’s like, okay, great. It’s got $7 million of revenue, but it’s losing $2 million. That’s not acceptable, right? So, you’ve got to make sure to buy a company that’s got the right fundamentals, in general. And then our target actually is once we buy it to get it to 20% EBITDA or higher from a back office. So, sustainable growth is core to our culture and super important. That being said, however, Justin, you’re absolutely right. It is a little unique. Why do enterprise software companies, SaaS companies get this multiple on revenue? And the reason for that is that unlike traditional businesses in an enterprise software market, you can literally shut everything down with maybe a skeleton crew from a support perspective and these contracts are usually like 3 to 5 years. You know, they’re a lot longer in government and that customer will continue to pay for that software package no matter what. And so, all of a sudden you’re talking about businesses that have, what, 80, 90, 90 plus percent gross margin?

 

And so, all of a sudden, that revenue can become, for the most part, EBITDA if you wanted to. And now most companies don’t choose to do that because they want to continue to innovate so that they can gain more customers, so that they can basically expand their existing customer base, and so forth. But that’s kind of unique in this industry in that you can do that. And because the stickiness is there, because the contract length is there, the opportunity to effectively if you wanted to get it down to a skeleton crew and just basically take a cash-out is the reason why you can get these multiples. Because, yeah, we’re buying companies on average three times revenue but we could literally if we wanted to basically get it down to a skeleton crew and probably 80%, 90% of it could be complete EBITDA of that revenue number. And so, we would easily get our money back over a 3 to 5-year period. But when you’re looking at private equity and public markets, you’re talking about potentially ten plus times revenue because they’re so bought into the fact that historically you could do that. And so, therefore, these things are worth that much money and that’s what the markets are willing to bear.

 

Justin Donald: Yeah. Thank you for kind of diving into that because I think it’s an important distinction where there are few others that are kind of like this. A lot of technology is going to have a multiple of revenue. Like, think e-commerce specifically, think marketplaces, even on the franchisor side of things, you’ll sometimes see multiple, generally, still a multiple of EBITDA. It’s just way higher than on the franchisee side if you’re just selling a franchise or a few franchises versus the whole franchise, right? So, you get these increased multiples. But on that revenue side, that’s a big, I mean, part of the reason why I got into investing in enterprise SaaS was because these exits could be massive. And some of the cool stuff you’re doing is you’re taking companies public. You’ve done this several times before. You’ve even done some unique strategies where you’ve taken 10% of a company public on the Toronto Stock Exchange, and then you’re going to wait a period of time, use that money wisely, and then take the rest of it public on the Nasdaq, right? Talk about that, because that is a really unique strategy that I haven’t really heard anyone else doing.

 

Christian Mack: Yeah. So, above and beyond our 8% graph, which we try to target to be a dividend, right, every quarter. And if for whatever reason, we don’t hit that threshold, just it kind of continues. One of the things that’s interesting is being able to provide investors with the ability to have liquidity. So, things happen in life. A lot of times, it’s very unfortunate situations but being able to provide liquidity is important. Well, how do you do that? Well, in order to do that, it’s really helpful to have your assets that you acquire have a market-to-market valuation. Well, how do you accomplish that? Well, basically and, Justin, you hit it, basically, after you acquire the company, after you basically implement value-add, there’s an opportunity at this point to inject even more capital into it in order to make supercharge it. Historically, what we’ve done as a fund is we would just write that check ourselves. But the public markets are willing to pay even today, a lot higher multiple than the three times revenue that we’re willing to buy it at for this particular growth around.

 

So, what we do is we basically float 10%. We basically go live in the Toronto Stock Exchange and people ask all the time like, “Well, why the Toronto Stock Exchange?” And it’s like, well, believe it or not, Toronto Stock Exchange is very attracted to companies that are enterprise software companies that are smaller. You know, we’re buying companies that are between $5 million and $10 million, ideally. And so, they really like that. You don’t necessarily get the attention of the Nasdaq and New York Stock Exchange with such a small company. However, in Toronto, you can. But once you go through that process, that 10% that you’ve floated gets injected into the company. That allows the company to get supercharged. In doing that, you also have a market-to-market valuation for that company. And the liquidity provider that we work with allows people to potentially sell your position within the fund at around about 20% discount to NAV. And so, that’s huge and we can accomplish all that by going down this path. But by doing that, now that you’re on the Toronto Stock Exchange and, oh, by the way, all of our companies are audited. We have to go through all the typical things that you would do as a public company anyway.

 

And so, there’s not much more work that has to be done in order to go public. And it’s a big pain in the butt if you’re private and you’re not audited and all that stuff but because we’re mandated through our fund to do this and it’s honestly just one of those best practices. We’re already doing that. We might as well accomplish that. But once we’ve listed on the Toronto Stock Exchange for a year and our market cap is in excess of 100 million, which, by the way historically even today, I mean, you’re talking about valuations that are call it 12 to 15 times revenue. It’s not that hard to get to $100 million market cap. Once you’re able to do that, you’re able to easily cross-list into Nasdaq because the Nasdaq and the Toronto Stock Exchange have an agreement that allow people to kind of cross-list across the board, but they have to meet certain requirements. And so, then you land into the Nasdaq world and that’s, obviously, it’s a larger market and allows a lot of great synergies there, too. So, that’s why we do this. And, oh, by the way, by doing this, we always talk about selling to private equity. We talk about going public.

 

But by and large, as you go through this process and you go public, what’s interesting is that a lot of strategics actually will pick up on this great little enterprise software company that’s out there. And when I say strategic, I mean, big companies like big enterprise software companies like SAP, IBM, Oracle. These companies pay attention to the public markets and if they see that a smaller public market is doing well, and if it’s in their kind of mandate, then they’ll pick it up for a tremendous multiple. Because they don’t care about the historical financial multiples but what they care about is we’ll buy something for 30 times revenue if we believe that we can make hundreds of millions of dollars on it within our customer base. And so, that awareness is much more visible in the public market world, which is it’s a win-win all across the board.

 

Justin Donald: Yeah. And it’s also, I think, important to note that strategics buy companies not like, yeah, they want to make money, they want to make a good investment, but often they’ll buy a company because it’s a value add to their current ecosystem, to their customers, what they can roll out. So, they can often buy a company for a crazy multiple because it never has to make money. They can just use that as like a plus one to interface with clients or whatever that looks like. And so, that’s kind of a unique strategy with the strategics. Now, something I do want to say, there are a few things. Number one, you talked about the Toronto Stock Exchange. And for those that are unfamiliar, it is way cheaper to go public on the Toronto Stock Exchange. It’s way shorter of a timeline to go public. You can do this in way fewer months, almost half the time. And then on top of it, there are less hoops to jump through. So, I know a lot of people that opted not to go public in the U.S. and go public in Canada. So, what’s interesting about yours is you’re kind of getting like you’re juicing the returns. You getting this extra money that then you can put forward. And then you already have the proof of concept that you already went public with part of the company. Therefore, it’s an easier transition on the Nasdaq or in this case, it’s the Nasdaq, right?

 

Christian Mack: Absolutely.

 

Justin Donald: So, that’s really cool. And then another thing I want to point out is you’re only buying profitable companies like EBITDA positive. Like worst case, it’s break-even but the moment you own it, you can strip out because you already have a team. I mean, these are really smart people that start these companies, but they’re not CEOs. They’re CTOs. And so, you find the right people to plug in. You get a CTO not juggling two roles of being CTO and CEO and probably COO, and you just get them focusing on that technology and building it out. So, you’re buying cash flow positive. You’ve already got a good multiple. You’re buying under market. Often you’re buying unlisted, right? And so, you’re kind of in the money day one and then the goal is how do we get the most value? Is the most value from a strategic or is the most value from going public? And I would say it probably depends. And there are pros and cons to both, right?

 

Christian Mack: Definitely. Now, for us, it’s good to have options. And at the end of the day, we never rely upon or assume that we’re going to get bought by a strategic. And so, as going to this path, we can leverage public markets, we can leverage traditional private equity but if a strategic comes along and is willing to pay multiples on multiples, then that’s a win for everybody. One thing I will say is that and, Justin, you hit on this is one of the reasons why we hold companies for five years is because we want to leverage a program called QSBS, which is qualified small business. And what that does is it allows any of our investors to come on board and assuming we buy it the right way which we target to do and we hold it for five years because these are small businesses, typically they’re way less than 50 million, typically, they’re 5 to 10 million and you hold it for five years, then when we do actually sell the equity, it’s usually tax-free, federal capital gains tax-free. So, that’s a huge value-add to the ecosystem as well. And five years, it seems like a long time but in reality, it’s something where it takes a while to implement value add. It takes a while to grow. It takes a while to go public. And so, being able to establish an assembly line of sorts of all these different companies that are in process in parallel is an exciting time. It’s a win for investors, too.

 

Justin Donald: Yeah. And I think you have to have a C Corp, right, in order for that to, you know, there’s like a few stipulations. That being one of them. So, I’m sure that’s one of the things you look at when you buy companies or how quickly you could transition something operating as an LLC or a subchapter S Corp and then you just transition it probably to a Delaware C Corp, right?

 

Christian Mack: Correct. Yep. It’s a process but it’s good to do and it’s a huge benefit for everybody, including the founders themselves, because the founders, they still have a significant chunk whether it’s 49% or 30%. I mean, we want to make sure that we have a successful exit for our investors, first and foremost, of course. But also, these founders it’s better to have a smaller piece of a much bigger pie. And doing so in a tax-efficient way makes a lot of sense.

 

Justin Donald: Yeah. And so, right now there’s some market turmoil. There’s definitely some turmoil in the tech sector, right? I’m curious how this impacts what you’re seeing. And I know this is kind of like an outlier in tech in the fact that as the market gets worse, it actually gets better for people that are in a position to acquire because you can get stuff on sale. I’d love to hear your thoughts.

 

Christian Mack: Yeah. So, our strategy has always been like my company was an automation company, has always been to focus on nine segments within enterprise software. And so, these segments do well during good times, but they do even better during downturns. And the reason for that is because they’re all efficiency oriented. And so, Fortune 500 companies have to deliver the same product or service with less people in a recession. And they rely upon enterprise software, ironically, during those times so they’ll invest in it in order to drive even more efficiency. And so, these segments do really well. That being said, it’s certainly good to be in a position where these companies that we buy are all off-market deals. They’re all pocket deals. So, we’ve always bought companies around the call it three times revenue basis. And today I would say that we’re still buying companies for three times. It’s not like that’s really dropped at all. But what I will say is that the quality and the quantity of deals has certainly increased due to the fear, uncertainty, and doubt out there.

 

You know, because we’ll run across and, Justin, you hit upon it, we’re buying profitable companies. So, you have to convince an owner that, “Hey, look, I want to partner up. I want to give up control.” That’s a big deal, especially when some of these companies before the bear market we’re trading at some crazy multiples. Now, today, everyone’s like much more open and willing to partner up together. So, it’s good to be in a kind of a buying value-add position for sure. And we’re getting a lot of good quality deals, which is great to see.

 

Justin Donald: Yeah. You said you talked a little bit about how this is really a recession-proof industry. And if you look back to the dot-com crash and the financial crash of 2008, you picked up some of the best deals that you ever had during those times. And so, while a lot of people were freaking out, most people were freaking out, you’re on a shopping spree to get the best companies that are at a great price. And I just think that’s just a brilliant way to do it. I also am very impressed with your track record because generally, you’re going to have some duds. Like, you started your company, you sold it, you invested in some one-off companies, then you started a fund. You’re like, “Hey, I’m actually pretty good at not just starting my own company, but I now know how to invest.” And so, that first fund was like ten companies, and then the second fund was about a similar size, maybe a little bit more. And now you’re in a third fund that’s probably going to be a similar size, could be even more based on the fact that you’ve raised more than you ever have based on your track record.

 

And one of the things that I was thinking about with just the market, the opportunity is you’ve had very few losses. I think you’ve had like two duds that didn’t work out. And I think in each case it was because you made the decision not to sub out the CEO and let them keep running it, even though all the other times you trusted your gut. And this was early on and those are the hard lessons you said, “All right. Now, always when we buy a company, we move the CEO to CTO, and then we bring in someone professional.” So, there haven’t been too many duds, but there have been a couple and you’ve learned from them. I’d love to hear your thoughts on that.

 

Christian Mack: Yeah. No, I mean, it’s tough, right? So, when you buy a company, especially when you buy 51%, the reason why our value is created is because we implement our value-add, right? So, if you pick the best location, you come across a building that just really needs a lot of renovation, you have to implement that renovation, right? You have to implement that value add. And so, what’s difficult in small companies is that that tends to be a cultural change. And you really need to have somebody at the top that supports that cultural shift because you are coming in and you are implementing best practices from front office and back office basis so that you can attain sustainable growth, which we define as 20% year-over-year or more in EBITDA as well as 20% year-over-year in revenue growth if not more. And so, that cultural change is important. And one of the lessons learned is that that’s tougher for some employees to swallow. And having a new leader or a leader that supports that cultural change is super important so that value-add can be implemented. And so, that’s definitely kind of a big lesson learned.

 

And the good news about this is that as we make mistakes and we’re not perfect, right, we basically learn from these things. We iterate our process because we’re constantly acquiring. We’re constantly implementing value-add. We’re constantly thinking about whether taking off processes to go public and things of that nature. And as we get bigger and bigger, it’s all about scaling those best practices from a fun perspective too.

 

Justin Donald: Yeah. That’s awesome. Well, there’s so much we could go through. I feel like I wish we had more time because I know you’re an avid wine collector and connoisseur, so we definitely didn’t do a good job of getting into that. And I know you’re moving your headquarters or part of your headquarters to Austin, which is great. I know you’re spending more time here, probably splitting time, which is so cool. I’m excited to hang with you more and drink some epic wine together.

 

Christian Mack: Definitely.

 

Justin Donald: You know, you had mentioned one thing. I’d love a quick answer on this for my audience, and then we’ll kind of wrap things up because you had mentioned your family office, Terra Rossa, and you guys are doing some cool events and cool things. I feel blessed and privileged to have been able to participate in some of the cool trips and events you guys have organized, and I just want to give props there, but can you help my audience understand what a family office is? Why someone would start a family office?

 

Christian Mack: Yeah. No, I get asked that question a lot. So, when you do come into large sums of money, I think you really have a choice. You have the choice number one is the more traditional route, which is to basically hand that wealth over to a wealth manager like a Goldman Sachs, Merrill Lynch, what have you. And there’s a lot of good people in those organizations, right? But within those organizations sometimes there’s conflict that exists, right? So, because the compensation with employees inside of those areas is effectively the point where, you know, like they get paid potentially to get into certain deals and get into certain products and so forth. And so, if you establish a family office, the opportunity there is to basically hire people to effectively come on board and be full-time staff or even part-time staff. You can outsource this, too. And the goal is to basically drive investments and things of that nature that are set up around the policies and procedures that you set up within there.

 

So, the definition that I use is when you’re at a point where the majority of your wealth is managed by full-time or part-time people that you have specifically contracted out with, then it’s a huge win. And so, that is a family office in my definition. But there is no formal definition around a family office. It’s just basically you have staff that manages things, manages your wealth, which is there’s pros and cons to it. I think it’s a pro by and large, but every situation is different.

 

Justin Donald: Well, I love it. Well, I think everyone listening probably that hasn’t established this, aspires to have their own family office one day, which is really cool. So, we appreciate you sharing this because you definitely are motivating many here to be able to kind of upgrade and move to the next level of wealth, wealth building, wealth management. So, if people want to learn more about you or more about Lotus Domaine, where can they go check you out?

 

Christian Mack: Yeah. So, if you go to our website, it’s www.LotusDomaine.com and, yeah, go to the website. Check us out. We’d love to talk to anybody who’s interested and certainly thank you again, Justin, for this great opportunity. I’d love to continue to talk about wine, setting up family offices, fund. These are all kind of passions of mine but certainly appreciate the opportunity to talk with you, man.

 

Justin Donald: Well, I think this could be fun. We could do round two with the mastermind and with the lifestyle investor community, you can share some of the hacks that you’ve learned.

 

Christian Mack: Absolutely.

 

Justin Donald: Yeah, that’s cool. I just want to give a real quick plug for anyone that’s interested in kind of upgrading their game. Apply to the world’s most exclusive mastermind for savvy investors looking to gain control of time and to upgrade and build their wealth by looking for invisible deals that have been pre-vetted and pre-negotiated with preferred terms that de-risk it and accelerate the overall capital that someone can make. Check it out at LifestyleInvestor.com/Mastermind. And I will wrap today up the way I wrap up every week which is this: What’s one step you can take today to move towards financial freedom and a life you truly desire on your terms, a life not by default, but by design? Thanks. And we’ll catch you next week.

Keep Learning

Scaling to $100 Million By Reinventing Philanthropy With Scott Harrison – EP 109

Interview with Scott Harrison  Scaling to $100 Million By Reinventing Philanthropy With Scott...

Investing in Alternatives, Capitalizing on Inflation, and Building Recession-Proof Businesses with Ben Fraser – EP 108

Interview with Ben Fraser  Investing in Alternatives, Capitalizing on Inflation, and Building Recession-Proof...

Scaling Businesses, Exit Deals, and the 2-Hour Cocktail Party with Nick Gray – EP 107

Interview with Nick Gray  Scaling Businesses, Exit Deals, and the 2-Hour Cocktail Party...