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Episode Summary
You’re 55. You’ve built something real. You can see two or three moves on the board that would double the business, and you can’t make any of them because the chips are everything you have. If the next acquisition doesn’t work, the family’s net worth gets cut in half, so you sit on it. I sat down with Mike O’Neill from Stone Arch Capital because he walks owners through this exact scenario for a living. Mike is a director at a Midwestern mid-market PE firm, and on a panel a few months back he gave the cleanest explanation of the “second bite of the apple” I’ve heard. In this conversation he walks the math with a hypothetical owner named Wendy: $30M fire hydrant business at $5M EBITDA, sells 60% at a 5x multiple, takes home $21M cash and still owns 40%. We get into the three levers PE pulls to grow the equity (grow EBITDA, grow the multiple, pay down debt), the second bite five years later that lands her at $32M total, and the part most owners miss: the partnership only works if the expectations on day one are honest about what you actually want the next five years to look like.
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## Top 10 Takeaways- PE firms have customers, and you’re not one of them. The investors writing their checks are.
- Your business trades on a multiple of EBITDA, and risk to future cash flow sets that multiple.
- Customer concentration over 30% of revenue compresses your multiple. Industry cyclicality does the same thing.
- A PE recap takes your personal guarantee off the bank debt. Most owners forget that’s part of the trade.
- PE only pulls three levers to grow equity: grow EBITDA, grow the multiple, pay down debt.
- You expand the multiple by removing risk. Management depth, real systems, diversified customers, KPIs the buyer can verify.
- Rolling 40% equity instead of taking 100% cash only works if you actually want the next five years.
- The expectations conversation has to happen before the wire hits, not after.
- Build your advisor team: M&A attorney, tax accountant, real wealth manager. Put them in the same room.
- Your fraternity buddy attorney is fine for most things. Not for selling your company.
Sound Bites
“Follow the money and find the motivation.” (@00:05:39) — Ryan Tansom
“Our future success is dependent on how we treat people.” (@00:13:35) — Mike O’Neill
“At the heart of disappointment lies expectations.” (@00:17:03) — Mike O’Neill
“There’s three levers we can pull as a private equity firm. You can grow the company, you can grow the multiple, and you can pay down debt. That’s it.” (@00:32:45) — Mike O’Neill
About This Episode
Mike O’Neill is a director at Stone Arch Capital, a Midwestern mid-market private equity firm based in Minneapolis that takes 51-80% controlling positions alongside founders and management teams. Before joining Stone Arch in 2008, Mike was an investment banker at Lazard Middle Market, where he focused on M&A across industrial products, oil and gas services, business services, food and agriculture, and technology. He grew up around his family’s chain of shoe stores, Orange Shoes, founded in Lacrosse over 100 years ago, which shaped how he thinks about preserving legacy and culture inside a PE transaction. Ryan met Mike on a panel where Mike walked through the mechanics of the “second bite of the apple” more clearly than anyone Ryan had heard, and that’s the substance of this episode.
Resources Mentioned
- Stone Arch Capital — Midwestern mid-market PE firm, $4-15M EBITDA range, 51-80% controlling positions. — stonearchcapital.com
- Mike O’Neill on LinkedIn — linkedin.com/in/mikeoneillmidwest
- Mike’s email — moneill@stonearchcapital.com
- Lazard Middle Market — Mike’s prior firm as an investment banker before joining Stone Arch
Connections
Phase + Module:
- Module 1 — Ownership Goals — The three reasons owners pursue PE all flow from clarity (or lack of clarity) on what you actually want
- Module 9 — Operator Transition — The recap is a transition mechanism, not the end of involvement
Milestones:
- Milestone 3 — Net Worth & Valuation Targets — The “$21M cash plus 40% rolled” math only works if you know the targets first
- Milestone 5 — Market Value — Where the 5-9x EBITDA range gets pressure-tested for your business
- Milestone 6 — Transaction Value — Recap structure vs. outright sale comparison lives in this milestone
Concepts referenced:
- Normalized EBITDA — The number the multiple gets applied to
- The Multiple & WACC — Why customer concentration and cyclicality move your multiple up or down
- The Four Value Levers — Mike’s three PE levers map directly to value creation mechanics
- Enterprise Value vs. Equity Value — The recap math sits inside this distinction (debt on the balance sheet changes what hits the owner’s pocket)
- Three Lenses of Value — Strategic vs. financial buyer is one of the lenses to understand before going to market