for CUSOs – Capstone Strategic and the CUSO Analyzer

John Dearing, connecting with nature thanks to Mutual of Omaha at the 2018 NACUSO Network Conference

We know that the NACUSO Network Conference is where “deals get done” so we worked with Callahan & Associates to add a feature to the CUSO Analyzer where CUSOs can connect with investors. John Dearing, Partner and Managing Director of Capstone Strategic has been a great member of NACUSO and has contributed valuable content to our trade association as well as being a speaker at the last conference. So we sat down with John to get his take on CUSOs seeking investors, building out strategies, the successes and misses he’s seen in his many years working with our industry.

Let’s start with the “elevator pitch” for Capstone Strategic.

At Capstone we help organizations grow! We focus primarily on external growth – collaborations, partnerships, joint ventures, strategic alliances, investments, and strategic mergers and acquisitions – to help clients implement their dreams. Founded in 1995, our tagline is “The Growth Engineers” because we are passionate about using our systematic and proven process with clients across many industries, including CUSOs and credit unions.

One of the age-old challenges if you are starting or expanding a CUSO, is finding credit union investors.  How can you help with this challenge?

CUSO AnalyzerBelieve it or not, the first step in finding credit union investors is not to go out and find a list of credit unions! We ask our clients take a step back and to look at the big picture. CUSOs should be able to answer two foundational questions: Why are you seeking new credit union investors? And what does the ideal investor look like? We work with clients to develop measurable investor criteria based on their strategy.

We also help CUSOs to put their best foot forward when presenting to potential investors. If you’re leading a CUSO it may be easy for you to see why your CUSO is amazing, but outsiders may not have the same perspective. Before CUSOs approach any potential investors, we spend time with our clients to develop a persuasive story and introductory materials for why a credit union should invest in their CUSO.

What are the key steps to raising capital to help a CUSO expand? 

First, define what you are looking for in an investor. Then, develop a pitch deck and introductory materials that provide an overview of your organization and the opportunity available. The presentation should clearly answer the question: “Why should a credit union invest in your CUSO?” Once you have your pitch deck, search for and approach investors. You may choose to use a tool like the CUSO Analyzer, which has a new field that shows capital available by credit union, to generate a list and I would also suggest using your criteria as a guide to finding additional credit unions.

After presenting to potential investors, typically there will be follow up questions and additional meetings if they are interested. Before signing on the dotted line, the investor will perform due diligence and probably conduct a valuation to determine if they want to move forward. If the credit union is still interested after due diligence, the last stage will be negotiations between the two parties to paper and finalize the deal.

What should a CUSO CEO be considering if they are looking for new investors?

As I mentioned earlier, the investors should meet the CUSOs criteria and help the organization further its strategic growth goals. In addition, CEOs should think about the “softer” side: Do you think you will work well with the new investors? Do you like them? Do you have a shared vision? Keep in mind you may be working closely with your new investors so the human touch matters; it can be very difficult to work alongside someone who rubs you the wrong way. 

Do you also help credit unions who are considering investing in a CUSO?  If so, how (i.e. valuation of the CUSO, Due Diligence, capital structure considerations)?

Yes, we also work with credit unions seeking CUSO investments and help with the entire process including initial strategy and criteria development, prospect research and identification, approaching owners and opening the doors with decision makers, valuation, negotiations, and papering the deal.

Can you give us an example of how Capstone Strategic has been a matchmaker in the CUSO world?  

Our very first CUSO client was PSCU, who we started working with back in 2003. We identified call center Digital Dialogue (now called Total Member Care) as an ideal prospect for PSCU and facilitated the acquisition. PSCU is now the number one credit union call center. More recently we guided PSCU on the acquisition of CU Recovery, a full-service collection agency, and The Loan Service Center, a first-party collection company. The acquisition allows PSCU execute its strategy to expand comprehensive collections offerings for credit unions. Having a long-term partnership with PSCU, it’s always exciting to see how the CUSO grows and how it continues to be a leader in the industry.

We also helped Ongoing Operations enter into the cloud segment through a strategic deal. We had served as a strategic advisor for OGO’s leadership team for some time when we began exploring new ways for the CUSO to grow. Working with OGO’s leadership team, we identified cloud as a growing market segment and set out to find the best acquisition prospect for OGO. Capstone identified and screened many companies and in the end guided OGO on the acquisition of Cloudworks.

Tell me about the 4-step process you use to help credit unions build their strategy?

It all starts with vision and having an understanding of where you want to be as an organization. Without any idea of where you are going, it’s difficult to move forward and reach your goals. We then help leaders to consider all their options for growth and weigh them in context of their current business activities. This involves thinking outside the box and considering partnerships, collaborations, strategic acquisitions, investments, and other ideas that may seem a bit “out there.” While you may or may not pursue a new growth pathway, you should evaluate them to ensure that no opportunity is left on the table and you are making the best decision for the organization. After, we work with clients to develop and execute a detailed step-by-step plan and make sure they have the right team in place to maximize their chances for success. Our process empowers leaders to approach growth opportunities proactively.

What has been your greatest success in the CUSO world?

I’m especially excited about seeing the success of CUSO clients today. For example, after the deal closed, I visited PSCU and remember being on the ground floor of their Total Member Care business and seeing everything in action. It was definitely a cool experience! All of the successes go back to getting the right two parties together and developing the right deal, which is not always an easy process. It requires hard work and diligence, but it’s worth it in the end.

I’m excited to what happens as CUSOs and credit unions take on a more proactive approach to growth. There are now more ways for credit unions and CUSOs to find partners, including the CUSO Analyzer tool. Collaboration is truly an integral part of the CUSO world so we should expect to see great things in the future!