Yolanda Harris, a Managing Director at Duffy Capital, had been attending 2-3 management presentations a week for the past several months to review potential acquisitions for Duffy's growing portfolio of companies. She finally had found two intriguing businesses and completed enough preliminary diligence to make a decision. She would then present one or both deals to Duffy's Investment Committee to approve a Letter of Intent for an acquisition. Duffy Capital had opened its first fund five years ago when Harris started the firm with several business school classmates who, like her, had been working at big private equity firms since they earned their MBAs. They had raised $300m and their initial acquisitions had performed well: cash-on-cash returns (MOIC) were 2.3x and their investors encouraged the Duffy team to launch a second fund. They now had $850m AUM and a portfolio of 7 companies, mostly industrial businesses in "below the radar" industries with EBITDA between $15m and $75m. Duffy Capital was focused on identifying and acquiring domestic, low-tech, stable businesses that were under-capitalized or lacked management bandwidth to drive performance. Yolanda and her team had a proven track record of partnering with businesses that fit that profile to ramp up their trajectory and achieve profit growth, new opportunities and value creation. But, as the saying goes, she knew "you have to kiss a lot of frogs" to find the right deal! Yolanda was close to forming her point of view on how to proceed but she wanted to get another perspective and it was an ideal opportunity to work with Duffy's new Associates. This assignment would also introduce the newest members of the team to Duffy's "SCQA" communication framework. SCQA took a little time to learn, but it had proven to be a highly effective tool for clearly and concisely telling a convincing story and it had become an important part of the firm's culture. Like Yolanda many years before, these Associates were recent MBAs and eager to get involved in executing deals and building businesses. When they met in the main conference room, Yolanda handed them two memos that summarized the investment opportunity for each business and got right to the point. Huckleberry Widget Corp. Huckleberry Widget Corp. (HWC) serves the $1.2B widget industry and is headquartered in Newark, NJ. The company was founded by Alonzo Huckleberry in 1940 and his grandson Amos is currently CEO. Amos has run the business for 12 years and his extended family owns 100% of the business. The management team (CFO, VP of Sales, and VP of Operations) have all worked at Huckleberry for 10+ years and Amos is very active on the board of the National Widget Trade Association. The Huckleberry's are now contemplating the sale of the business because there are currently no other family members in line to assume leadership of the company. Amos has expressed a willingness to remain as CEO for 2-3 years after the sale of the business. The widget industry has grown at an average rate of 2.3% for 2015-20 and its products are a commodity, with minimal product differentiation, innovation or new product development and competition is primarily on service and price. The top 3 competitors account for 63% of the overall North American widget market but the industry structure is primarily regional: there is one major player in Canada/US Midwest, one in the Mid-Atlantic/Southeast and another in the West/Southwest, with many smaller competitors in each region. HWC is the market leader in the Mid-Atlantic/Southeast with an estimated market share of 70%. The business has long-standing customer relationships, having sold to its biggest accounts for an average of 17 years, and large customers make up 70% of Huckleberry's sales. In the past 5 years there has been some consolidation within its customer base as these companies have merged to achieve greater economies of scale. HWC has an excellent reputation for providing consistent, high level customer service that is highly valued by multi-site companies. Huckleberry's prices tend to be 5-10% higher than its regional competitors due to the service infrastructure it has put in place (call center, mobile service platform, 24/7 delivery capability). Smaller regional competitors primarily compete on price for single-site customers for whom 24-hour service is not a critical buying factor. The Huckleberry family has not pursued acquisitions as a growth strategy, preferring to grow organically by partnering with HWC's key customers to support their expansion initiatives. Huckleberry has a manufacturing location in York, PA and 3 regional distribution centers in TN, NC and PA. The HWC plant in York, PA is in good condition, well-maintained and runs smoothly although its machinery has not been updated in the past 10 years and there is little automation. The HWC fleet is company-owned and the vehicles are in the range of 7-10 years old and the company's primary IT system is 7 years old and has been modified to provide real-time service status through a mobile platform. Leadership in Private Equity - Module #2 Management Challenge Copyright by Fred Smagorinsky, All Rights Reserved Huckleberry Widget Corp Financials ($ million) 2016 2017 2018 2019 2020 Sales $232 $238 $243 $248 $252 Cost of Goods $130 $136 $139 $144 $149 Gross Margin $102 $102 $104 $104 $103 Operating Exp $63 $63 $66 $64 $64 EBITDA $39 $39 $39 $40 $39 Peach Industries Inc. Peach Industries Inc. (PII) sells into the $4.8B gadget industry and has a single location in Omaha, NE where it designs, manufactures and distributes gadgets, primarily to commercial printers in the upper Midwest. Peach was acquired by Fetch Capital in 2017, a small lower- middle market private equity firm. Fetch has been exploring exit options after it partnered with Peach's management to increase EBITDA by 67% in just 3 years. Fetch's investment thesis was based on broadening Peach's customer base to drive sustainable, less variable sales growth and they successfully targeted new end markets in consumer electronics and in 2020 sales grew at an annual rate of 12%. Several family-owned gadget companies in the Midwest have contacted Fetch and expressed an interest in selling their businesses. Due to Fetch's intense focus on organic growth and Peach's infrastructure limitations, M&A has not been a major component of the company's operating strategy. The Peach family members who had been involved in the business all departed after the company was sold. Fetch brought in a new CEO, Jalen Henderson, who had successfully implemented sales growth strategies at middle market businesses. Fetch also replaced the incumbent CFO with Jerome Stephens, a finance executive who had worked for another one of its portfolio companies and hired a dynamic new VP of Sales, Devin Barnes. The lone hold-over from when the company was family-owned was the company's VP of Operations, Rob Prince. The market for gadgets in North American is a $4.8B industry that is growing at an overall average rate of 1.8% for 2015-20. The industry structure is highly fragmented with no single competitor controlling more than 15% of the market and no dominant national supplier. Gadgets are job-specific, custom-designed componentry and buying factors (quality, cost, design, service levels) vary by end market. PII has long-standing customer relationships and its sales are project-driven therefore the mix of customers in any given year is highly variable. Peach has an excellent reputation for meeting its customers' needs and being a reliable supply partner for complex, fast turnaround projects. Project pricing is based on a standard markup based on estimated costs. Peach's facility in Omaha is in good condition but relies primarily on manual processes and staff knowledge rather than standard operating procedures and IT systems to run its operations. The operations team is very responsive to customer needs and project deadlines but does not have a strong focus on metrics, problem-solving, and process discipline to drive performance improvement. A major initiative during Fetch's ownership was to implement "Design to Value" (DTV) project estimation, which increased gross margins by 2%; however, Peach's operations team has only been able to capture half of the margin improvements that DTV identified. Leadership in Private Equity - Module #2 Management Challenge Copyright by Fred Smagorinsky, All Rights Reserved Peach Industries Inc. Financials ($ million) 2016 2017 2018 2019 2020 Sales $180 $175 $177 $186 $208 Cost of Goods $122 $117 $119 $123 $135 Gross Margin $58 $58 $58 $63 $73 Operating Exp $43 $43 $44 $46 $48

What should Duffy capital do business with? Which is the better investment, Huckleberry or Peach Industries?