Dealmaker Q&A: HCI’s Doug McCormick on Tech24’s Rapid Roll-Up Strategy

With 19 acquisitions since 2020, the past few years have been busy for Tech24, a commercial food service equipment repair and maintenance company in HCI Equity Partners’ portfolio. Doug McCormick, Managing Partner at HCI Equity Partners and a leader on the Tech24 deal team, shares how the company is getting ahead of a tight labor market and why he thinks the business will soon double its add-on acquisition total.

Middle Market Growth: Tech24 acquired five companies in 2023 and 19 total since 2020. When sourcing these deals, what were you looking for in investment targets, and how do your latest investments fill those requirements?

Doug McCormick: When we think about a consolidation strategy like this, we often talk about not only trying to build a dramatically bigger business, but also a better business. This kind of transformational growth must happen with relatively high velocity so as we think about building better capabilities, we’re often looking for targets that improve our geographic coverage, service coverage or enhance our capabilities as an organization. When done correctly, this also drives density of coverage in a marketplace, which allows you to provide better service to your customer due to closer proximity, as well as improve cost efficiencies.

The other key point is that we’re trying to drive velocity, which means, as you mentioned, we recently completed five acquisitions, and we’ve done 19 total. That implies we’re partnering with folks who are engaged as management teams that share our values and passion, and have great businesses that don’t require a tremendous amount of hand-holding or investment to grow. This is about good businesses buying other good businesses and collectively maximizing their opportunity.

MMG: What attracted your firm to the food service equipment sector, and how do these add-ons fit into your broader investment strategy?

DM: Let me start with the HCI investment strategy, and then we’ll get into Tech24. When we think about this transformational growth, we target attractive business models in large, relatively stable, highly fragmented markets which gives us a very big sandbox to play in and drive this transformational growth through rapid M&A investments, organic growth and investments in the team.

So, what’s a good business model for us? A good business model for us is one that is essential to customers and generates good returns on tangible capital relative to the investment in the business. Those investments generate good, consistent cash flows. Now let’s discuss this big sandbox that I mentioned. This market is about a $9 billion market in the U.S., and we think it’s a tremendously stable one. If you look at previous recessions and the long-term trend of customers eating takeout or going to restaurants, it’s a very underwritable, stable, long-term growth story. Moreover, it’s an extremely fragmented market—there are thousands of smaller competitors so the number of targets which we can acquire is almost unlimited relative to our thesis.

MMG: What are some industry headwinds you’re watching, and how will you drive growth for Tech24 despite those challenges? 

DM: I think the four big macro headwinds that most investors are dealing with today are inflation, concerns around recession or economic volatility, geopolitical risk and lastly, labor availability and cost. Of those four, I’m not too worried about the first three, but I am concerned about labor availability directly impacting Tech24. And, as I mentioned before, the overall demand profile for eating out really survives almost all economic cycles, so that’s not the primary concern.

However, our strategy implies that we’re going to continue to grow rapidly, not only through M&A, but also through organic growth, which is primarily driven by growing capable technicians like the folks that actually do the work onsite. That leads us to the conclusion that talent, recruiting and retention are not nice-to-haves, but are core competencies in this business, and we have made significant investments to enhance our organizational capabilities to support these areas.

For example, we’ve invested in a comprehensive training program to maximize our talent pool for sourcing technicians. And it’s not just other technicians in the industry; we’ve invested in training tools that enable us to bring folks from outside the industry—for example, military veterans who have no previous exposure to the industry, but that we think would be good employees once trained and equipped with the relevant skills. We’re very focused on offering careers, not jobs. We offer training, career progression and a program where we can articulate a long-term career opportunity, not just an hourly wage. Lastly, I think we have to be competitive on salaries and benefits to make sure that we keep our valued employees.

MMG: How has COVID-19 changed the food service industry, and did it impact how you approached add-ons?

DM: Again, I’m going to comment on the food supply chain more broadly. HCI has a number of investments that service this market—such as AmerCareRoyal, which is a large distribution business that provides consumables for all kinds of restaurants, such as takeout, packaging, cutlery, napkins, gloves, etc. We also have a business called MSI Express, which is a co-manufacturer and co-packager of food, and our customers are large consumer packaged goods companies that are looking for our support to get their product to the supermarket. So, we bring those perspectives in addition to Tech24 when we think about what has happened in the market.

What’s interesting but not well-appreciated is the share gain that has happened because of COVID between national chains and branded restaurants versus small local mom-and-pops. I think that’s really happened for two reasons. First, the large national chains were more resourced, better capitalized and had better access to capital, so when things got really bad, they could weather the storm. Second, because of the pandemic there was a migration to a lot more takeout, delivery, Uber Eats, etc., and the national chains were better positioned to exploit that trend because they were social media savvy and had brands that people could easily identify with remotely. Another new development was the overall expansion of takeout and other non-traditional formats like ghost kitchens, which are set up to provide takeout or delivery as opposed to having the traditional dine-in model.

Another significant development, which remains relevant today, is the reorientation of the entire supply chain. Cost, quality and safety have always been top priorities, with supply chain resiliency often overlooked because prior to the pandemic, the assumption was that deliveries would always be timely, so stock shortages were not a major concern. The pandemic has taught us that stock shortages are a real business risk and can significantly impact your customer experience. Therefore, many of our most sophisticated customers are now prioritizing both redundancy of supply and supply chain resilience, along with cost, quality and safety.

MMG: With a newly announced joint investment from Vestar Capital Partners, it sounds like more acquisitions are in the cards for Tech24. What is your strategy for successfully integrating multiple add-ons into the company?

DM:  From our perspective, the transaction was a great outcome and a real validation of our strategy. This strategy has not only worked well since our inception but also demonstrates that there’s a lot more runway to continue to grow. So, you’re going to see us execute the same strategy that we’ve deployed so far with the only difference being that we are going to become more capable of effectively integrating in a way that we can continue that velocity. So, if we’ve done 19 deals since our inception, I would be disappointed if we didn’t more than double that, and 19 becomes 38. We are investing heavily in our infrastructure now to ensure that we are well-prepared to onboard acquisitions and make the most of opportunities with our future partners.

This interview has been edited and condensed for clarity.

Hilary Collins is ACG’s Associate Editor.

Middle Market Growth is produced by the Association for Corporate Growth. To learn more about the organization and how to become a member, visit www.acg.org.