- Thank you for joining tonight's webinar,
entrepreneurship through acquisition 201.
I'm Joe Cortese, co-president
of the Chicago Booth Alumni Club.
And I'm also a principal
and a senior consultant
with the DiMeo Schneider and
Associates here in Chicago.
With me again this
evening is Brian O'Connor.
Brian is the founder of
NextGen Growth Partners.
And also as many of you are probably aware
an adjunct assistant professor
of entrepreneurship at Booth.
So for all of you that
joined our first webinar
on entrepreneurship through acquisition
titled 101 of course recall,
we talked about the basics.
What is ETA?
We talked about the three
different models of ETA.
We talked about potential economics
and tremendous amount of
additional overview information
on the subject.
For those of you that are interested
in watching that replay,
you'll find the link
to the replay in the chat box.
So feel free to copy that
and take a look at the first version,
if you weren't able to catch it.
In tonight's ETA through 201 presentation,
we'll dive deeper into
the actual search process.
So we'll talk about how
to organize the search,
how to build a target list,
how to properly qualify
prospects, things like that.
And as we did last time,
we'll be happy to take
questions along the way.
You should see the chat option there
and the question and
answer option, excuse me.
And if you do have a
question by all means,
please go ahead and type
it into the question box
and we'll do our best to
take all the questions
as we go throughout the presentation.
So we're not gonna hold time
at the end for questions,
we'd rather keep it more conversational
and take your questions as we go.
And also for those of
you that are interested
in more information about this topic,
you can feel free to reach out to myself,
you can feel free to reach out to Brian
or NextGen Brian's firm
there'll be some contact information
available there as well.
And finally, I'll just mention,
we'll have additional iterations
of this webinar and this topic.
The next one, ETA 301 will
be probably in a month or so.
And we'll dive deeper
into how to actually value
a perspective acquisition target,
how to execute the transaction,
those types of more sort of detailed
nitty gritty information
in subsequent webinars.
So with that, let's dive in.
Brian wonderful to see you again.
Thank you so much for joining.
Really appreciate your time.
Let's get started with talking about
sort of the overview.
How do you think about
organizing the search?
What are some of the common
steps you think about
and kind of, how does this
process all really begin.
- Thanks Joe, nice to be here
and appreciate everybody
dialing in and joining.
Joe, it sounds like you
just signed us up for 301,
so we're just gonna have to figure out
who's actually gonna
do the content for 301
cause that's above my pay grade.
So we gotta figure that
out between now and then.
Listen, it's really cool to be doing this
and it's great to connect
with so many Booths alumni
that might be interested in the ETA path.
So thanks for organizing
this and putting it together.
And as Joe mentioned, let's do our best
to kind of keep this conversational.
So if any of you are former students
and had been in my class
or I have a class of Mark
and I teach at Booth,
you'll know, we like
to keep it interactive
and as best we possibly can via Zoom,
we'd love to use the chat feature.
Anybody raise their hand at any point,
if you wanna dig into something.
So Joe, that's a good question.
I think the first step, honestly,
in pursuing a path in
entrepreneurship through acquisition
is to really simply understand
if it's the right path for you, okay?
And the best way I've found to do that
is to talk to Booth alumni or
other folks in your network
that have some familiarity
with this space.
Maybe they've raised a search fund,
maybe they've affiliated
with a family office
to buy and operate a business,
or they've gone down
one of the various paths
that you can go down and
we'll talk a little bit about,
we spent a lot of time on
that in the first session.
But really mobilize your network.
And I would say there's
a tremendous amount
of resources available through
Joe and the alumni network
and through Polsky Center.
And through just this tight knit,
it seems like a very tight
knit community of practitioners
that have decided to go
out and pursue a career
in buying and leading a small business
or a series of small
and midsize businesses.
So first step honestly is to figure out
if it's right for you.
And the best way to do that
is to have conversations
with those that have come before you.
Second step I would say is
if you still have not been
convinced that proposition
is too risky or too challenging
or too far outside of your comfort zone,
which I trust all of you
are extremely capable
and could do this without
too much of an issue.
You then really need
to understand the paths
that are available to you.
And as Joe mentioned,
we're not gonna spend
too much time on that
because we did cover that
in our last session,
but really we like to think about it
in three different paths, right?
There's the traditional search fund path
that we talked about.
There's this path whereby
you can go about it
by self-funding or doing it independently
with your own savings or your own capital
to conduct a search,
and then ultimately a time of acquisition
that would be when you would
go in and raise some capital
and use your investor network
that you've established
to fund that ultimate transaction.
Or the third path that we
spent some time talking about
is this notion about a
sponsored search, right?
Affiliating yourself
with a firm or an outfit
that has capital and resources
to go put you in a position
to ultimately go chase down
and effectuate an acquisition
that you would then lead post acquisition
as your entirety of your
professional interests.
I would say the next steps from there
are really path specific, right?
So if you were to raise a
search fund at that point,
you're probably gonna wanna
start to have some conversations
with would be investors,
people that are within your network.
And there's a pretty well
established community,
both at Booth and otherwise
of investors that have made it happen,
of investing in search
funds and these types of
lower and micro middle market operator led
leveraged buyouts.
There's been many leveraged
buyouts with the operator
as the one effectuating that transaction.
So you'll wanna start
to talk to those folks.
And then if it is the search fund path
that you're going down,
you'll also wanna talk to an attorney
and they're gonna help you
understand how to navigate
the various documentation
that you're gonna need
to be putting together.
You're probably gonna wanna put together
a private placement memorandum, a PPM.
That's effectively the offering
document that you go out
to those investors that you've been having
conversations with, with the proposition
of investing into your search fund,
and then ultimately with the proposition
of investing in the
acquisition that you unearth.
And so that would be one path,
and we're gonna get into some of this
in our conversation,
but part of that PPM exercise
is really refining your story
and understanding your,
the thesis and the targets
that you're gonna go after.
And you know, where you think
there's an interesting angle
and an opportunity for you
to really find a good
business that you ultimately
lead in create value in post-investment.
And so the next steps in
the path for self-funded
or independently funded
would be a little bit,
frankly, a little bit more nebulous,
but ultimately you are
gonna wanna put together
some material to communicate
to prospective investors
down the road,
that when you are looking to
fund the ultimate acquisition,
you're going to at least
have some warm relationships
and introductions that
have been made historically
to get them excited about
the ultimate investment
that you're gonna pursue
and acquire and lead.
I'm in the sponsored path I would say,
networking with groups
like ours, you know,
private equity funds
that have made it a habit
of backing entrepreneurs
that are interested
in pursuing the acquisition and leadership
of a small and midsize business.
So that would be, you know,
really where you wanna
start to establish a
line of communication,
get to know the firm,
have them get to know you
and determine if there's
a fit and alignment
between where you see opportunity,
where you think you're going
to focus your search efforts
and business and the industry,
that that business is in
that you ultimately wanna lead,
that blends itself well to
your background and skillset
and professional interests.
- So true form, we had another
little internet glitch here,
I apologize for that.
So hopefully you weren't waiting on me,
but I missed some of that, but
we'll just continue on here.
I apologize for that.
- No, no, I saw you drop real quick there,
but I kept going and
good to have you back.
- I'm sorry.
We're two for two on my internet
dropping these meetings.
So I don't know who's against us here,
but we will prevail.
Anyway, so let's
thank you for that, that's fantastic.
I agree with everything you said there.
I think what you said about, you know,
understanding how it fits for
you and those sorts of things
are really good initial thoughts and step
to make sure that, you know,
this could be something
that would work for the
potential entrepreneur.
- And yeah.
And listen and just to
kind of double click
on that real quick, Joe.
I mean, there's no right path,
in the same way that
there's no right answer
as it relates to the industry
or the thesis that you pursue.
I think it's really a
matter of what fits for you
and your career goals
and the type of business
that you wanna buy and
how you wanna fund it.
And the, you know, the stage
at which you are in your career
and all of these factors come into play
that really help you determine
which path is right for you.
Ultimately, how you're
gonna get this thing funded.
If you're soliciting outside funding,
outside of your own savings or any capital
that you might be putting to work.
And again, I'll sort of
probably say this a few times
in this conversation,
there are no right answers.
I mean, we'll talk about some
ideas and some frameworks
that will hopefully make you or help you
make a better decision as
it relates to what paths
you should so decide to choose,
and ultimately, what thesis
you spend time trying
to unearth targets in
and the ultimate business
that you acquire and lead,
but there are no right answers, right?
There are a lot of available
paths to especially--
- Yeah, I think that's really important.
There, is no, you know,
there is unlimited sort
of ways to do this,
but I think what you
and your firm have done
in terms of sort of
institutionalizing this
into a framework, makes it
much easier to understand
and makes it, you know, much
easier to potentially execute.
And in our discussions talking
about sort of the first step
in the process in terms of
like developing the thesis,
you can't look at the entire world
and sort of digest
potential targets that way.
So how do you kind of
formulate the thesis,
what goes into that and
how do you begin to sort of
construct the funnel and
then begin to narrow it down
and think about progressing
through the process?
- Yeah, this scenario that you outlined,
we like to describe
using the analogy of like
trying to boil the ocean, right?
If you trying to boil the ocean,
you probably not gonna
be too successful, right?
So you really do, Joe have
to have to pick your spots.
And I think that's what
you're referring to
when you talk about
develop your thesis, okay?
So I think frankly,
we're all Booth trained,
and so we're not strangers
to the notion of economic research, right?
So you probably wanna start somewhere
where there is good economic opportunity.
And we can talk a little bit
about what that means to me,
but that's probably gonna
mean different things
to different people.
I like industries that are growing
as opposed to languishing.
I like industries that have a
high degree of fragmentation
such that there isn't one 800
pound gorilla that, you know,
dominates the market and has some enormous
economies of scale and
can frankly, you know,
put all the smaller fragment
of players out of business.
And frankly, when you have
fragmentation in the market,
chances are some of
those fragmented players
are gonna be in the right
size range for you to buy,
because you're not very
unlikely that you would buy,
an extremely large enterprise
in pursuing the ETA path.
I like to focus on theses
that revolve around
industries that are non-cyclical.
You know, we're living through
a pretty tough time right now
during COVID.
And so a good way to look at, you know,
what might be a durable
thesis for industry
during a time of economic
times or during, you know,
a global pandemic that
we're living through
is to evaluate how that
business has performed
during the second quarter of 2020,
once we get those
results finalized, right?
So I tend to focus on
places that are growing,
so have some economic
tailwind behind them.
Are sufficiently fragmented,
such that you're not competing
with the 800 pound gorilla
and you do have a viable set
of targets in that industry.
Like focus on industries
that aren't so tiny,
and I describe them really as niches.
Because saying an industry
is probably too generic,
that probably leads you to
boiling the ocean a little bit.
I think that it's saying that, you know,
I'm looking at
opportunities in healthcare,
I think it would be akin to
trying to boil the ocean.
I think you really need
to be more refined about
your thesis development.
But not so refined that you're
really limiting your audience
of potential targets to
two or three players,
and neither of them wanna
engage with you about
the potential sale of their business.
So it's a little bit of
a finding the sweet spot.
And I like to think about, you know,
TAM, total addressable market.
And a good TAM, I often
guide is, you know,
sort of a billion dollars
in annual revenue available
to that kind of little market niche.
That tends to be pretty
good and can obviously go up
from there and as slightly below,
but that's kind of a good rule of thumb.
But all of, I tend to
getting back to your
original question, Joe,
I tend to think that it's really research
and economic-driven and
frankly fit with entrepreneur.
Like if I'm a searcher, I'm
probably not gonna be compelled
to go out and pursue an acquisition
of a life sciences
business that requires me
to have a PhD to operate that business,
something that's highly technical.
So I like to think about
theses that play in spaces
that have relatively low
operational complexity,
such that, you know, a Booth alum,
that's a very talented business athlete
but does not have that
highly specialized degree,
in life sciences or
whatever the case might be,
is able to step in and
with a period of time
and a learning curve, get up
to speed and be able to operate
a business within that industry.
Just, those are a few thoughts.
I mean, there are a number
of other ones around
industry profitability,
durability, I mentioned,
you know, non cyclicality,
those types of things, and
the list sort of goes on.
But again, to start,
we are thesis driven by economic factors
and those factors that mesh
well with your background,
is a pretty darn good
start to form a couple.
I often encourage searchers
going down this path
to sort of pick, you
know, call it three spaces
that are maybe related maybe not,
but then would make good
spaces for you to research,
get smart on, develop your
target list and then go after
and pursue for an ultimate acquisition.
- Sounds great.
Yeah, that's great insight.
I've got a couple of questions here
and some folks may not be
aware of your background,
but John asks, you know, asked about,
did you complete a
relatively small acquisition
and how long did it
take and money invested
in those sorts of things?
So maybe a good case
study of that would be
kind of your experience thus
far briefly recap that for us.
- Yeah, yeah.
I'll be super brief about it,
cause I don't wanna put
anybody to sleep on the call.
But I, my sort of,
my formal early career training was in M&A
and private equity.
And got my MBA at Booth along the way
and in 2010
I raised a search fund
and ultimately sometimes it's
better to be lucky than good,
but I ended up finding a really
great IT services business,
a company that provided
a mission critical recurring revenue.
We talked a lot about
when we talk about industry attributes
and business attributes,
which are decidedly different things
and we'll talk a little
bit more about that.
Talk a lot about recurring revenue,
we talked a lot about, you know,
does this company provide
a mission critical
recurring revenue service?
We often favor in the
ETA model B2B over B2C.
B2B tend to be stickier
relationships that are, you know,
we as consumers Joe, tend
to be a little bit fickle
are subject to changing trends and fads
and that type of thing.
So, you know, back to the
sort of story in 2010,
raised search fund, searched
high and low for companies
ended up finding this
critical IT services company
that provided a mission
critical recurring revenue,
outsource B2B service.
So the easiest way I
describe it is, if you ever
back when people used to
travel and stay at hotels,
if you stayed at a Marriott
Property nationwide
chances are when you brought
your smartphone or your laptop,
you were logging on to and
using the wifi infrastructure
and the managed services
and managed IT services
that work in the four walls of that hotel.
And that was the
responsibility of the company
that I bought in 2011, after
nine months of searching.
So small business at time of acquisition
or right in the zone of where
these typical acquisitions
tend to be, call it you know,
a two million, one and a half, $2 million
in EBITDA to kind of five range.
You definitely see some
that are below that range,
you see some that are above that range
and it's sort of two to
five million and EBITDA,
mission critical, B2B service.
And yes, out of that search
fund that I raised in 2010
effectuated the acquisition
of that business,
in nine months later in mid 2011.
- So that's a great segue
to the next question.
Ann Kate asks, Ann Kate, excuse me, asks,
how should I approach convincing investors
who are not aware of
a search fund concept?
So how did you as someone that, you know,
have never done this, how
are you able to, you know,
introduce this concept to
folks and convince them
that they should invest with you?
- Yeah, you know, it's a good question.
You do get a lot of, you know,
looks from those folks
that aren't maybe familiar
with this type of investing like,
you're trying to tell me
that you wanna do what?
You don't have a target in mind
and you've never been a CEO,
how do you think you're
gonna operate a business?
Listen, and frankly,
some of those questions,
are legitimate.
And until we find ourselves
in the seat of, you know,
searching for a business to
ultimately acquire or operating,
it is a little bit of a
crazy concept, frankly.
But this model was born
back in the mid eighties,
out of Stanford GSP.
When the professor that's
sort of founded this model
back to promising a student
or graduate of their class
and ultimately this asset
class around search funds
and entrepreneurship through
acquisition was born.
And frankly, an investment
community has formed
around this asset class and this notion.
And it's a pretty well
publicized network of people
that understand the nuances
associated with raising capital
for a search, and then
ultimately for an acquisition
for you, Joe or whomever else
to go occupy the CEO seat
in a transition plan, very likely
of a smaller midsize enterprise.
So listen, how do you go
about convincing them?
You know, you need to convince them
that your heart is in it.
You need to convince them
that you're doing this
because you know, you're doing
it for the right reasons,
which I think are,
cause you really wanna operate
a small business, right?
It's not always easy and
certainly not always easy,
it's definitely not
always glamorous to run
two, three, $4 million EBITDA company.
But if you're, you know,
an entrepreneurial spirit
and you do wanna roll up
your sleeves and operate,
and you have sound rationale as it relates
to your motivations and how
those are gonna align well
with your background and
ultimately the thesis
that you're developing,
the right audience of investors.
There's again, a pretty
established network
that it is, you know,
at Booth and elsewhere
that have been compelled
to back these endeavors,
myself included.
So it's, you know,
and then I guess the last
thing I'll say on it is
there's a tremendous amount of, you know,
conviction and hard work and hustle
that needs to be portrayed in this thing.
And again, a commitment I
like to call some of the ideal
would be searchers that
we ended up meeting
and having discussions with,
I like to call them
the best ones that we meet
are part of the four H club
and the four Hs stand for, heart, hunger,
hustle, and humility.
And it tends to be the
case that when you marry
a Booth graduate with the four Hs
and if it's sounds thesis,
and a process oriented approach toward
what industries you're gonna focus on
and how you're gonna find targets
and what you wanna do with those
businesses, post-investment
the investment community is there
and ready to support you
financially in your effort.
- Got it.
So let's talk a little
bit about just, you know,
developing a thesis.
I mean, I'm sure it's a range,
but kind of how long does
it take from, you know,
sort of concept to figuring out,
okay, these are the industries
that I'm gonna target.
And then also along those lines,
what are some of the
tips you have to ensure
that you're not pursuing
something that ultimately
isn't gonna pan out?
How can you be sure that you're
going down the right path?
- Yeah, so how long does it take?
I mean, listen, research is an exercise
that can take two minutes
or two years, right?
So I caution really smart,
talented Booth alumni
that are on this call to
not get into a situation
of analysis paralysis.
I think that's honestly the
worst thing that you can do.
I think you need to identify,
build yourself a scorecard,
build a scorecard of
the industry attribute
and associated weightings
of importance to you
in your search that you're looking for
when developing a thesis.
Maybe it's industry growth
rate, it's fragmentation,
it's non cyclicality, it's
profitability of the average
set of players in that industry, right?
What are the important
things that matter to you?
And then, you know, use some
of the research resources
that are available to
you through, you know,
Booth subscriptions or otherwise
to get smart on those
theses pretty quickly.
But then don't sit behind in
Excel spreadsheet for too long.
Get out on the field, go to a trade show,
start talking to business owners
that operate companies in this space.
And pretty quickly, you're gonna find
that either your thesis is
validated by these conversations
that you're having out in the market,
or you're gonna maybe
wanna pivot pretty quickly.
And I just, I would say that, you know,
don't get analysis paralysis,
get out and ask your thesis early.
Talk to your investor, right?
This is one thing that I
think early career searchers
have a tendency to do.
They operate in a little
bit of a black box
and they sort of get into an echo chamber
and think they've got this great idea
and they're you know, smart.
So they're validating,
you know, and all this,
but like, listen, if
that doesn't align well
with your investors, that presumably
have really good pattern recognition
and I've seen good and bad industries,
good and bad businesses,
you know, many times over
they're you know, that's
valuable input ultimately
that's probably something
that you're gonna wanna
pivot from pretty quickly.
So I would say, you know,
keep the idea millful, execute on it
without spending too much time
getting bogged down in the analysis.
Cause you're gonna test and
refine your thesis over time
as you're out sourcing targets
and having conversations
and talking to intermediaries
and industry experts
and river guides and all these
great things that we talked
about on our last call.
And you gotta go and you gotta,
you know, real time pivot
and (mumbles) to that
thesis that you thought
was gonna yield a lot of good results.
Or frankly you might
just stay over the course
of a couple of weeks and
you scrap it all together.
Because time when you're doing this,
you'll find is your most scarce resource.
You absolutely tend to be funded
with a period of time in mind,
usually that's about two years.
Is typically how a searcher,
someone that's pursuing
an entrepreneurship
through acquisition path
would probably think about
giving themselves about
two years of runway,
which might sound like a long time.
But trust me, it flies by really quickly
and you need to turn through
a lot of industries ideas,
theses, probably, but
definitely targets to find,
the right business and
with the right owner
that actually wants to transact
and sell you their business.
- Got it.
That's also another great segue.
I've got a question from Ben,
Ben is in one of your
classes here maybe currently,
but just asking about, you know,
what are some of the things
that derail this process?
You know, it seems like
in some cases, you know,
folks can go down this path
and decided it doesn't work for them.
Can you just talk a little bit about
some of the challenges that arise.
Perhaps, so people kind of
can be aware of them upfront
and you know, kind of
what can cause people
to abandon this type of endeavor.
- Yeah, I mean, there are a few things,
I mean, I guess I'll cite two of them
and I've got a couple of anecdotes
that I can share a little bit
later on in our conversation,
but one would be related to
what we just talked about.
I often find in some search funds
that I've invested in,
or, you know, former students
that they'd go down this path
and you know, are a year into it,
and they find that their
pipeline isn't taking form
in the way that they'd like it to.
They don't have that many prospects,
so they don't have many leads
that they're ultimately working toward
an indication of interest
or a letter of intent.
And I asked the questions of them about
what did the early days of
your search effort look like?
Did it look like spending
a lot of time in Cap IQ
or IBISWorld behind an Excel spreadsheet
trying to hone your industry
thesis to be just right,
or was it being out?
And again, back, you know, four months ago
when it was okay to attend trade shows,
meet business owners.
(mumbles)
Like sort of like, you know,
flashback a little bit.
You know, it really is those
folks that had a hard time
getting out of their
comfort zone and executing
and taking a bias to action approach
and showing up to the trade show
when that maybe was uncomfortable
or they didn't feel like
they were prepared to do so
or taking the call with a business owner
before doing all of the
requisite, you know,
research and analysis on their industry.
And maybe if you stumble
and maybe you'll learn,
you'll learn a thing or
two about something you did
or somebody who might wanna
change in your next approach.
I found that the folks that
ended up sit on their hands
and not get out in
front of business owners
and have conversations
get out in the market,
building their pipeline early,
they find that later in their search,
because these opportunities tend to have
long gestation periods between
initial point of contact
and when you ultimately
transact with a business owner.
So those folks that sat
on their hands, you know,
for months in the beginning,
tend to struggle toward the
latter stages of their search.
The other thing I would mention is that
it's critically important
because there is so much
there is unfortunately some luck
in what we're talking about doing here
and at any time a deal can fall apart.
I've found that some folks
can get tunnel vision
on a particular target once
they maybe get it under LOI.
A letter of intent is basically
a nonbinding agreement
between a buyer and seller
under which the terms are
that you're gonna ultimately
purchase their business
hopefully, you know, 60 or 90 days later
as you perform diligence.
The folks that while they're doing that
and while they're getting an opportunity
under letter of intent and
advancing and diligencing
on that opportunity,
they take their eye off the ball,
as it relates to continued
pursuit of their theses,
that they've been pursuing,
and continued outreach in dialogue
with other potential
targets in their pipeline.
And listen, if it happens,
then these transactions fall apart
as you're working them in
an exclusivity period in
an LOI, they fall apart.
And those folks that haven't
been mindful of continuing
to keep their pipeline
full of opportunities,
find themselves 30, 60, 90, potentially
more days down the road flat-footed
in the event that that deal falls apart.
So the second piece is the folks that
maybe take their eye off the ball
on keeping their pipeline full.
- Got it very helpful, thank you.
You, mentioned, you know, your preference
for higher growth industries.
We did get a question about, you know,
I'm sure folks prefer
higher growth industries,
but have you seen this model be successful
in industries that aren't growing as fast
or maybe languishing, can that work?
- I think it can work.
I just, you know, I would,
there are some industries that I avoid
that I believe to be sort of languishing
or overly cyclical or troubled
for one reason or another.
And I would encourage you
all to sort of have their
do not touch list.
And that's probably
different for everyone.
You know, businesses, I'm sorry,
industries that are steady Eddy they've,
you know, kind of been
growing at GDP over the years.
Listen, I think you can find
interesting opportunities
in those industries and perhaps
they're less competitive,
therefore you're gonna be
able to structure yourself
a better deal for the
purchase of the business
that you ultimately find in that industry.
So I think that's a
fine and fair approach,
I just like to talk about
stacking the deck in your favor.
And one of those ways you can
stack the deck in your favor
is to, you know, buy a ship in
a sea that has rising tides.
You know, everybody's gonna
be lifted a little bit.
So yeah,
it would be, you know,
not crazy to think
about finding a business
and just a stable industry that you buy it
and it's attractive price
and you do things to that business.
I would encourage you not to be naive
about the assumptions that you make around
taking an industry and a business
that's been growing in
line with that GDP industry
and sort of immediately
being able to turn that into
a GDP times two or GDP times three growth,
I think that's a little
bit of a naive view on it.
But yeah, you certainly,
it's not crazy to think
that you might find a good
business in an industry
that hasn't been growing
as much as some others.
- Maybe the way to think about it is
businesses and industries
that aren't growing as fast,
just have less margin
for error, potentially.
- Yeah, I think that's well said, Joe.
- One of the other
questions that we got here
just on the international market,
do you see this model internationally?
Do you see an interest in
this type of model overseas?
- Yes, absolutely.
Mark and I have students
every time we teach that come
from international locations
and bring these concepts and these tools
back to their home countries
and have been very, very effective.
You've seen quite a bit
of it from Booth alumni
and otherwise in Latin America,
there are several Booth
alumni that have pursued it
in Mexico, in Brazil and some other
Latin American countries.
There's a developed kind
of ecosystem for this
in Western Europe.
And I would say it's starting
we've seen a little bit in Asia,
but probably not as
much as what we've seen.
Historically the concentration has been
in the US but you have
seen some in Canada,
some in (mumbles), some in Western Europe.
And I think it's continuing to grow
in awareness and popularity.
- Got it.
I want to switch gears a little bit.
And we talked about, you know,
how do you sort of get the thesis going
and get the process started?
Let's say, you've got your thesis,
you've got your industry, you know,
one or two sort of targeted.
How do you then begin to
build your target list
of prospective acquisitions?
- Yeah, if anybody has like
the silver bullet answer
for this question, like,
please call me after this
cause that's a very valuable answer.
So what I'll say, Joe is
you gotta use the tools
and resources that are available to you
and you gotta get scrappy about it.
So one of the things we
talked about in class,
I'll just give you a couple of anecdotes.
Like, you know, you find the
industry trade organization
for the particular niche
that you're chasing down
and you try to attend the trade show
or if you can't make it to the trade show
or if COVID happens and
there is no trade show,
you get to the trade show exhibitor list
and you research all thousand companies
that last year exhibited
at that trade show
because very likely,
those are probably pretty
appropriately sized businesses
for what you might be looking for.
And they're obviously exhibiting
their products or services
at the trade show,
so they're gonna be a very
likely relevant target.
So, you know, there are online
databases and subscriptions
and things that you could sign up for.
But frankly, at the end of the day,
it's a lot of hustle, it's being scrappy,
it's being resourceful,
it's developing lists.
It's, you know, often you'll find
people that pursue the ETA path
are leveraging the help from interns
because interns tend
to do a lot of research
and help the ETA practitioner, you know,
develop target lists and go
through those lists and identify
whether or not a target
is gonna be worth pursuing
sort of thing.
So at the end of the day, I
think it is a numbers game
in this path.
And so you gotta develop that list
of two, three, 400 targets that you think
might be in the size range
and in the business model type
that you're looking for.
And then you go out and you
campaign them and you try to,
in whatever way you can
get a conversation going
and develop a relationship
with the business owner.
- So that's great.
And the question always comes up
when we start to talk about thesis,
do intermediaries work?
Is that part of this process
that can be affected?
So talk a little bit about
you know, the intermediaries,
how you think about that and you know,
do you see a lot of
transactions that take place
involving intermediaries?
- Yeah, I figured that was
gonna be the next question here,
it's a natural next question.
I mean, the answer is yes.
I mean, I think that, you know,
the approach that we've
been talking about thus far
is one that is often described
as proprietary, right?
So there's this proprietary
path toward sourcing,
which is develop a thesis,
go out and campaign
form a relationship directly
with a business owner
and avoid participating
in a competitive process,
that's run by an investment
bank or a broker, right?
There's this whole other
path that is intermediated
and a banker or broker driven.
And to answer your question directly, Joe,
yes, transactions in
ETA happen all the time
with a broker involved.
I mean, I think that the trade off right,
is that you're probably
not the only person
looking at that opportunity.
So you've got the
opportunity to just sort of
get into a winner's curse scenario.
And you know often when
there's competition
that drives up price.
And so, you know, I often
encourage ETA people
that follow the ETA path to
not necessarily be inclined
to be the highest bidder
in an auction process
to win a business.
You need to appeal to a
seller for sometimes reasons
that are non-economic.
You know, you're going to be
the long lost son or daughter
of that business to
carry the torch forward
and preserve their legacy.
That's a meaningful component
of why a business owner
might be compelled to sell to you
versus someone else that might be willing
to offer them more cash at close
or more enterprise value
for their business.
So, yes, there absolutely
is a universe of bankers
and brokers and wealth
advisors and accountants
and attorneys and people that
have access to these deals.
And listen, the reality
is all bankers and brokers
are not created equally.
So there is a component
of finding that business
that is misrepresented or under marketed,
let's put it by a broker
and frankly that might
present an opportunity
to buy a business that otherwise
should have been valued at
something much higher than
where you purchase it.
So the nice thing, frankly,
about the intermediated channel
versus proprietary channel
is you know that you've
got a willing seller
on the other end of the telephone, right?
They've engaged a broker not
to sit around and do nothing,
they've engaged a broker
to try to find them
a universe of buyers that will
ultimately be the right buyer
and the right fit and the right price
and the right structure and
all those sorts of things,
you know, for their business.
So yes, it happens often
and I encourage searchers
to not be exclusive in
one path or the other.
I think a well managed
pipeline, well-managed deal flow
comes from various different sources,
both in proprietary thesis-driven
as well as intermediate.
- And so as you're forming
this perspective list
of companies to acquire,
are there characteristics
that make prospective
businesses super attractive?
And on the flip side of that, are there,
you know, a few
characteristics that make them
really unattractive so
that you can kind of get
a quick sense of, okay, this is something
I really should spend some time on,
or I need to run away,
this is a dumpster fire.
- Yeah, for sure.
I mean, some of it is gonna be easy
for me to talk about generically,
but then some of it is
very much company specific
and you need to get a
look at the financials
and the team that's incumbent
and you know, all that,
some of the nuances associated
with that particular business,
but some of the things that
are more generic, right?
Like I tend to favor businesses
that have recurring revenue streams.
So we talked a little bit
about recurring revenue
on the last call.
But you know, when you have a
relationship with a customer
that month in and month
out, unless they take action
to stop their subscription
to your service,
it's gonna predictably and reliably
produce the same amount of
revenue the following month,
the following year, unless
you, as the service provider,
screw something up.
Those are fantastic businesses
because you don't have
to wake up every morning
and think about where your
first dollar of revenue
for that particular day
is going to come from.
I, you know, I tend to
favor and encourage people
following this path to favor, you know,
mission critical, low
share of customer wallet
business services, right?
So let's take the environment
that we're in right now.
If you provide on behalf
of a fortune 1,000 company,
if you are a component of
their compliance function
and they need you and your
subject matter expertise to exist
and times get tough and
they need to think about
cutting expenses, you know,
is it the compliance service provider
that they pay a 1,000,
2,000, 3,000 dollars a month
to have this nuanced little thing
humming within their organization?
That's probably not the thing
that's gonna get up, right?
So that check that you continue to receive
is very likely to remain intact
in good times and in bad.
So I think about these mission critical
asset light recurring
revenue, B2B service models
as kind of the "darlings" of the ETA path
for good reasons.
Those are really good companies.
And then once you get a peak
under the hood of the business,
you know, you're obviously
looking at things
like historical growth,
you wanna buy a business that's
growing, not languishing.
And you know, you wanna buy a business
with enough breathing room in the P and L
so healthy, EBITDA and
free cashflow margins.
And, you know, ideally
you've gotta have a business
that generate, you know,
has a scenario whereby
it's a negative networking
capital business.
So as you grow, you
can use working capital
to fund your growth.
That's a really cool element
of businesses, right?
So there's a lot of nuances to what does
or doesn't make a business attractive.
But the last thing I'll
sort of say on this,
unless we've got questions
you wanna get deeper into it
is no business is perfect.
Okay, especially a business
that generates two,
three, $4 million of annual EBITDA, right?
These are small businesses.
None of the businesses are gonna,
be completely without, you
know, customer concentration
or completely without a deficiency
in a particular part
of their organization.
None of them are gonna have a particular,
like a perfectly linear growth path
and illustrate, you know,
perfect operating leverage
in the model,
such that every year that they grow
their EBITDA margins expand.
These are all great things that look for,
but just be mindful of
not letting perfection
get in the way of progress and momentum,
because nothing is perfect in this world,
but certainly not perfect
in this micro part
of the middle market.
- If they were perfect,
they probably wouldn't be for sale, right?
It's along these lines an
interesting question from Tucker,
as you develop your thesis,
how much do you bank
on being able to create
incremental value post acquisition?
Or said differently like,
is there a certain threshold of value add
that you think is important
before you would actually
look at transacting?
- Yeah, so pretty question.
Yeah, you need to absolutely
have a thesis around
what you wanna do with this business.
But what I'll say before I
get into that a little bit is
remember core to this model
and the success that's
existed in this model
since the mid eighties and
the successes has been a while
in this asset class and model is
you're buying fundamentally
sound businesses
in healthy markets.
So first order of business,
when you buy a business
at four or five six times
trailing 12 months EBITDA, which is
a good value for these types of companies
that we just talked about.
Illustrate characteristics
of recurring revenue
and healthy margins and
growth, and all these things.
Don't try to fix what isn't broken.
You've bought a business for a good reason
at a really good price
and there's a reason why
you've been attracted
to that business at the purchase price
that you bought it for.
Take a minute, it's so easy
for all of us as Booth alumni
to wanna get in there
and flex our MBA muscles
and start to make changes
and use all the playbooks
and the things that we learned at Booth.
But honestly, there's so much
value in taking a step back,
observing, learning the business,
getting super familiar with
the cash inflows and outflows
in the business, meeting the
spending tremendous
amount of amounts of time
with your team, your frontline people
that are out delivering the
service or making the product,
or, you know, caring for the organization
and your customers, right?
There's tremendous amounts of learning
when you go and have
customer concentrations,
that sort of thing.
So yes, absolutely, you're
gonna have a value creation plan
and, all the beautiful
thing about these businesses
is often they are under utilized
and can benefit from a really talented,
you know, Booth minted,
highly trained professional
coming in and bringing new
ideas and institutionalization
and systems and technology
and additional talent
and all these great things.
But let's not try to fix
what isn't broken early on.
There's a learning period.
- Good advice.
So zooming out for a
second back to sort of
putting the fund or
the syndicate together,
John asks how many initial
investors are optimum?
And do you find it,
is there a sort of a frequent minimum
that people are interested
in, in this type of model?
- Yeah, yeah.
So John, good question.
It's path dependent, right?
So search fund, you know, typically
for your search capital,
the initial tranche capital
that you raised,
you might raise that from,
you know, 10 or 15 investors
that take a ratable share
of your search capital
that you're raising and
then have the pro-rata right
to participate in the equity associated
with the ultimate
acquisition that you find.
In a self-funded model,
you don't raise any outside
capital in the beginning,
and then when you ultimately
find the acquisition
that requires five, $10 million in equity
to get the deal done,
you've hopefully develop the relationships
that you go to a stable of investors
that have expressed
interest in wanting to know
about the deals that you unearth
and ultimately participating
when you find them.
And so there's no right answer there.
I mean, if you were to, you know,
require a $10 million equity
check to get the deal done,
and that came from, you know, 10 people
and there's an institution in there,
there's a family office in there,
there's a few advisors
that are high net worth
or ultra high net worth that may form
your board of directors, post ex you know,
that feels kind of about right.
Or, you know, you go down
the sponsored search model
and you have a smaller
concentrated group of investors
in a private equity fund
and maybe some co-investors
and some advisors that
participate alongside it.
So there's no right answer there,
but hopefully that gives
you a little bit of a sense
for how it typically works.
- Yeah, thank you.
Interesting question from Chast.
What if you already have a target in mind?
So let's say you've got a
business that you wanna buy.
Do you think it's then
worthwhile to go back
and do the whole industry thesis work
and sort of re underwrite
your interest in this business or kind of,
how would you think about that?
- Yeah, no, I think it's a good idea to,
I'll give you my phone number
and you can give me a call.
(laughs)
Good businesses are hard to find, right?
No, I think,
listen, if you've got a target,
you're gonna wanna tell
the story about that target
to whomever you're gonna
bring into your opportunity
and ultimately partner with,
to the equity requirements.
And part of that story is
like the thesis, right?
Why do we wanna buy this business
in this particular industry
with this growth rate
at this price and this structure
and this amount of equity
and this amount of debt.
And so it's all part of a package
that is gonna help you
as the entrepreneur,
understand what getting yourself into
and your investors that
are probably gonna have
a lot of questions around industry
and specific to the company
and, you know, what's the, you know,
to the earlier question,
like, what's the growth plan?
How are we structuring this thing?
What's the valuation?
All these sorts of things
form your investment package.
And sometimes that's invade
you an investor group
in a, you know, an offering
memorandum or whatever.
But yeah, it's all, I would say important
when evaluating the attractiveness or not
of a deal that you might have in hand.
- Yep, got it.
So we've got just about
five minutes left here.
I thought maybe the
last couple of minutes,
if you wouldn't mind take
us through a recent search
that you've heard about or
seen or something in your firm
and kind of talk about maybe like,
what was the industry,
what made it attractive
and is it, an acquisition?
You know, that'd be great
too, if you could talk about
sort of a live example
that you've seen recently.
- Yeah, yeah, sure.
Let's see.
So I'll give you one
that's near and dear to me,
it's one that we did at our firm
at NextGen Growth Partners.
It started with an
entrepreneur in residence
that happened to be a Booth grad.
He had a particularly interesting thesis
that was related to his background.
So he got some formal
training as a consultant
and had some really good
early career experience
and then got some industry
operating experience
in the beverage alcohol space.
So he ran operations
for a wine distribution
and retailing outfit.
And in his free time, he also
happened to be a (indistinct),
which was this sort of
serious personally interested
in this industry as well.
He came to me and to our
firm with the thought of
putting together a thesis where by,
we would target mission
critical compliance regulatory
and importation services on behalf
of beverage alcohol producers.
So as we all know, there's this
age old sense of prohibition,
highly complicated,
highly bureaucratic three tiered
alcohol distribution system
here in the US,
God bless it because
it's creating the need
for service providers that help
producers globally navigate
require those producers to have a partner
that helps them navigate
the complexities associated
with getting your products
across borders out on the shelves
and into consumer's hands, right?
So there's this whole
complex system, right?
And then there's an industry
that serves the producers
of every Jackal.
So we developed a thesis
and it's very specific
and refined thesis.
He leveraged some of
his network connections
did a lot of primary research,
did a lot of the scrappy
things we talked about
a lot of the web searching,
a lot of the attending a trade shows
and just meeting a lot of people
and ultimately found a
really great business
that in the mid nineties
was born out of PepsiCo.
Pepsi, in the mid nineties,
was divesting non-core,
non soft drink related assets.
And the gentlemen who
headed up that division
led a small kind of carve out, a small MBO
of that division of Pepsi
that handled clients
and regulatory and importation services
for producers of beer, wine and spirits.
And so effectively, that was the owner,
the entrepreneur that we
developed a relationship with.
And frankly, this
entrepreneur that we partnered
with him and still partner
in running the business
is positioned himself as
like the long lost partner
for this business owner.
That would be the next chapter
and the succession plan,
ultimately for the principal
shareholder, as he died,
you know, a little bit
later in his career,
it might be contemplating,
you know, retirement,
or frankly was just drawn to the notion
that a relatively early career,
super hungry hustler could
come in and create all these,
you know, exciting
opportunities for the business
then, you know, the seller
was the first to admit like,
hey, listen, I neglected
some of these things
and so to have some fresh
energy and some fresh blood
into the organization to focus
on these things would be tremendous.
So not in all cases, but in this case,
it made sense for the selling shareholder
to remain involved both
economically and operationally.
So they rolled some equity,
they have a minority stake
in the go forward business.
And so there's nice alignment
in the capital structure with this person.
And they've got a really cool opportunity
to take a second bite at the Apple.
And the reason that we
ultimately turned this individual
into a seller, they
weren't inclined to sell
until we got them compelled
about the entrepreneur
that was gonna be joining the organization
and that they could
roll a portion of equity
that would ultimately based on our plan,
turned into more economic value
for them than the, you know,
sale price that we were
buying the business for
at time of acquisition.
So really cool kind of marriage between,
you know, this industry
focus whereby it's, you know,
growing mission critical large enough TAM,
the business had a lot
of the characteristics
that we talked about, recurring
revenue, super high margin,
history of profitability
and growth mission critical.
And you had this really cool
angle whereby the entrepreneur
leveraged their strengths and
some of their early career
operating experience to
create a compelling story
that was very attractive
to a business owner
and ultimately it led to the transaction
that was consummated.
- That's fantastic.
Well, it's just about
seven o'clock on the dot,
so a great job on getting us right
to the top of the hour there.
Once again, that hour went
by very, very quickly.
We got a few questions
that we didn't get to,
sorry, that we weren't
able to get to all of them.
But for those of you who had questions
that we weren't able to answer,
I would encourage you to reach out,
reach out and you can
connect with me on LinkedIn,
connect with Brian on LinkedIn
I think our contact information
is available as well.
So certainly be happy to make sure you get
to Brian and his firm to
get any additional questions
answered that you might have.
- So real quick, Joe.
Yeah, just to verify that that is true.
Yes, please reach out anytime
I'd love to hear from
folks that are interested
or didn't get a question answered
or might be compelled to pursue this path.
I'd love to hear from you,
happy to be a resource.
My contact information is available
on the Booth faculty portal
and on our firm's website, nextgengp.com.
So reach out, I'm happy to be a resource,
and you've got a lot of
resources available to you
as Booth alumni,
as you think about potentially
pursuing the ETA path.
So yeah, we'd love to
hear from any and all.
- That's fantastic.
All right, thank you again so much,
really appreciate you taking some time.
For everybody that's on the call,
remember we will be doing
a couple more of these.
So look for information on ETA 301,
where we'll dive deeper into
maybe some valuation metrics
and actual transacting and
some of the nitty gritty,
which I know all Booth
alumni will really love.
So again, Brian, thank you so much.
Great to see you again,
really appreciate everyone that
joined the meeting tonight,
and we'll look forward to the
next one here in about a month
or so.
