Will Smith (2:44)

The Acquisition Lab was founded by Walker Deibel, author of Buy Then Build, the

Walker Deibel (2:50)

book that introduced so many of you

Will Smith (2:52)

to the very idea of buying a business.

Walker Deibel (2:55)

The Lab offers a month long, intensive, almost daily Q and A sessions with

Will Smith (3:00)

advisors, live deal reviews with Walker, Deal

Walker Deibel (3:04)

team introductions and in an active community of serious searchers. Check out acquisitionlab.com link in the notes or email the Lab's co founder, Chelsea wood.

Will Smith (3:15)

Chelsea buy then build.com Jonathan Taylor welcome to Acquiring Minds.

Jonathan Taylor (3:23)

Thank you Will, longtime listener. As they say, first time caller.

Will Smith (3:27)

Well, it's a Thrill for me to have you here, Jonathan. We at Mind's Capital actually looked at your deal and we declined. A year, a year and a half

Walker Deibel (3:39)

later, revenue is up 40% or so

Will Smith (3:43)

and so you are quickly becoming our one that got away. So no, but you're a great sport to come on the pod, Jonathan. And we're going to unpack some of the issues that we saw in the business and you'll tell us how true we or not they have proved to be. We have a lot to cover. Let's dive in. First things first, Jonathan, how did you come to want to buy a business?

Jonathan Taylor (4:08)

Yeah, absolutely. So I am originally from Orlando, Florida, the youngest three kids growing up. My parents owned and operated a few small businesses as a means to just help generate some additional income. So that planted the seed of entrepreneurship. I studied finance in undergrad and always had an idea of one day owning and operating my own thing, but I didn't know exactly what that meant. So like a lot of people, I went up to Wall street, joined Morgan Stanley, did investment banking for a bit of time that then led me down a finance track doing FP&A at a few places. Also got my MBA at Columbia and then spent the past decade or so at Google and then in Doordash in a variety of operational roles. Along the way, just breadcrumbs of this ETA were planted. So one of my really good friends, Michael Curry, he was in business school at the same time as me. He launched his own search fund and so saw his story. I had a professor, Professor Gregory Fairchild, who also came in, taught a case. He was an adjunct professor from uva, taught a case about one of his students that actually went out and bought a company and then in my post MBA career had a lot of my classmates that actually went out and purchased companies. So really just saw people have that as an option of pursuing entrepreneurship and over time just thought I would be pretty well suited to actually help grow something that was well established for something starting off from zero to one.

Will Smith (5:29)

But you were. And you were at doordash most recently before you actually decided to do the hard pivot into eta, correct?

Jonathan Taylor (5:36)

Yeah, that's absolutely correct. Yeah, I was leading the product partnerships team there and that actually spurred a lot of entrepreneurial interest in me again because saw a lot of small business owners that owned multiple franchises and just saw how they were successfully able to own and operate their businesses, had opportunity to meet many of them and. And so really just kind of really respurred that why not me? I can go out and do something like they were doing. Perhaps not own multiple chains of restaurants, but there is definitely a small business out there for me that I can own and operate.

Will Smith (6:05)

And so how long would you say you'd been in tech? How many years?

Jonathan Taylor (6:09)

About 14, 15 years. Between DoorDash and Google. Yeah.

Will Smith (6:14)

Great, great. Okay, so a real tenure, especially in techland where, you know, a lot of people come and go.

Jonathan Taylor (6:23)

Yeah, yeah. Well, the initial thought was I would join Google, be there two, three years, and go off and do the startup thing and be on the COVID of Fortune at one time, but ultimately I just found.

Will Smith (6:34)

That was your plan.

Walker Deibel (6:34)

That was my plan too.

Will Smith (6:36)

What a coincidence.

Jonathan Taylor (6:36)

Well, here we are.

Will Smith (6:39)

Okay, go ahead.

Jonathan Taylor (6:40)

Yeah. And ultimately stayed there for over a decade because I was just working on some really cool, exciting projects and met some really great people and, and just constantly was able to. To do some fun stuff. But yeah, ultimately it just made the decision that for the next phase of my career, wanted to pursue more eta different types of businesses.

Will Smith (7:01)

And was there something that prompted the decision that, that you took it when you did?

Jonathan Taylor (7:07)

Yeah, yeah, I, I was approaching 40 and so like a lot of people was having the what am I doing professionally in my life? Is this the direction I want to head in? And it just felt like a very much now or never type time for me to pursue entrepreneurship. My family was pretty established. We moved back to Los Angeles where my wife is from. So we were planning routes here, had some great career experiences. We were able to save up some resources. My wife is pretty secure in her role too, doing very, very well in her career, and she was just very supportive. And so it just felt like now is the time to do it and if I didn't do it right now, it would be harder to do much later.

Will Smith (7:48)

Yeah, but you did have a decent sized family. How big is your family?

Jonathan Taylor (7:54)

I have three daughters aged nine, seven and five, and I often have them listening to this podcast in the car, so. Hello, Ruby, Ellen, Sophia. It's awesome.

Will Smith (8:06)

But, but my point is Ruby and Sophia and what's the third name?

Jonathan Taylor (8:10)

Ella.

Will Smith (8:11)

Ella, that your dad has taken quite a big risk here to do this. When you say the now or never moment, for a lot of people, that's when they're totally unattached and they, and they don't have obligations. Yeah, of course your obligations were probably going to be. Only become more acute as the years marched on, but, you know, but props to you for, for still kind of being willing to step out and do it. It sounds like you guys were pretty financially secure. You had a balance sheet from your years in tech, your wife had a great job. So you weren't, you know, you, you had resources but you were also. There were real mouths to feed here. Hello again.

Jonathan Taylor (8:52)

Definitely real mouths to feed and always things that target to buy. But, but certainly that was a consideration and I took that and that factored into my approach to how I went about my search. And so you probably may not have time to get into depth of it, but did a self funded search and I did it while working full time.

Will Smith (9:13)

Talk to us a little bit about that because that does flout the conventional wisdom that to be a successful self funded searcher you need to be giving it your full time attention.

Jonathan Taylor (9:22)

Yeah, yeah. And again this goes back to having like some really good friends and that are now mentors. So Michael's business partner Keith is a different and he just really challenged me along the way. It's like do you really have to like leave your job to do it or like let see how far you can get with your search before you do that because you would be giving up quite a lot to do that. And so just know that you're in a very, very fortunate position but you can probably accomplish a lot, particularly given that you're doing a regional search, you're intent on staying in the Los Angeles area. So there's real opportunity and my job was flexible enough where I can at night or early mornings go and have meetings with business owners and make a lot of progress on that. So that's what I did.

Will Smith (10:07)

I wonder what Keith saw in part time search that so many other people say no, no, it can't be done. Of course countless acquiring minds guests do do it part time. So it, maybe it's, maybe it's not the conventional wisdom that I'm saying it is but you do have people who are quite vocal that it needs to be for your full time attention. Yeah. Any, any thoughts on like why the disconnect there?

Jonathan Taylor (10:34)

Yeah, I, I can't really say why the disconnect. I can only say that it's really a, a personal thing for you and what matters to you. And I just knew that if I were going to be leaving a job that I really like that was paying me very well and I was doing well in and really enjoying to, to go buy and operate a business, I want there to be a very, very high bar for that. And so while it may, I think some people think that if you're working and doing this part time you're just not going to have the sense of urgency to get it done. Which, which, that. There, there. That may be true to some regards, but what I also say is that it also helps you maintain a high bar because every two weeks you're extending your one. Your Runway.

Will Smith (11:12)

Exactly. No, I feel like this theme has come up a bunch in recent conversations and interviews where there's the self funded searcher who's doing it full time with no income cash constrained that they are. Even if they're, you know, they have a healthy balance sheet, they are just dwindling their resources week by week. And that can cloud your judgment somewhat because. Because you're just, you know, you just are. Money's going out the door, not coming in. And, and that can. Yeah, that can just kind of get in the way of making prudent decisions a little bit in ter. Like, like you say in terms of standards of quality of business, how much you might spend on a Q of E report and due diligence are kind of the.

Jonathan Taylor (11:52)

Yeah, yeah. And I would say that that's absolutely true because I even felt that is part of my search because there'll be times where my wife was really my first deal check. And I'm sure she got tired of me asking, hey babe, can you see me running this type of business? It would show the numbers. She would be like, what are you doing, Jonathan? Like, no, this doesn't make any sense. Like this. You make more than the SDE right now. And just like, what, what? Like, how does that even make sense if you were to 5x this business, like, is that really the best use of your time? And so I just think that again, it just was a helpful bar for, for keeping a higher quality bar.

Will Smith (12:28)

Mm, that's. Those are. Sounds like a wise counsel by her. That's. That's great. And those ideas or those businesses that you showed her that she would like, completely dismissed, was it always because they were too small or were there types of businesses or industries too where she was like, dude, you're not gonna. That's not, that's not a fact.

Jonathan Taylor (12:49)

There are definitely types of businesses, but size was a factor. I mean, I think for a little bit of time, just given my, my experience at doordash, I kind of flirted with the idea of franchise ownership. But then it's like, do you really want to be managing like high schoolers? Like really, Is that what you wanted to be doing? Because that's like your employee base. And that wasn't like a big part of my consideration set for the business, but it actually did become. It's like who are the actual people in the business that I'm working with day to day? What does that look like? And so it was really helpful to just have her along for the ride because she would really fact check very quickly and bring it back to reality.

Will Smith (13:27)

Great. Jonathan, did you consider a buy side advisor or was that even on your radar?

Jonathan Taylor (13:33)

I did not consider a buy side advisor primarily because I didn't know about them. But as I've listened to many of your guests that have gone that route, it's definitely an attractive option. I did consider the traditional search route and did have a few different conversations again. You know, Keith challenged me to like before you just go out and do this, like you know you want to stay in LA and you know there's generally traditional kind of frowns upon not not being geographically flexible. It's like why don't you just go have some conversations? So I did actually go out and talk to 10 to 15 different people and while I found there to be some people that would be very supportive of that, ultimately I made the decision to go to self funded route because greater autonomy and flexibility and also just the type of businesses that you could look at I think where there's a more open and willingness to look at a variety of things.

Will Smith (14:25)

Say more. What do you mean other than size? Traditional search requires a certain size pretty much. Is that what you mean or did you mean something else?

Jonathan Taylor (14:32)

No, I mean like for, for my specific business and we'll probably get into it later but I don't think like traditional search would have ever really looked at it because there's concentration risk, there's definitely transition risk which is existed in all businesses. But there's some new things to mind that I think just off the bat they prob would have said no. No to versus like trying to really understand in a little bit more granular details like what. What's unique about this business and are those risks that you can actually mitigate in time. Plus I saw a lot of push towards people to like do B2B SaaS and and I just felt like I don't know, been there, done that. Yeah, exactly. It's like if I want to do B2B SaaS I'm actually like at one of the best in class like technology companies. Like why am I like why am I leaving to do that?

Will Smith (15:12)

Yeah, well and then here ChatGPT is putting the fear into SAS. So it looks like maybe you made the right decision.

Walker Deibel (15:24)

If you ask owners in the ETA and search community which insurance broker provides highest quality work Great outcomes and has a practice dedicated to searchers and acquisition entrepreneurs.

Will Smith (15:38)

One name comes up again and again.

Walker Deibel (15:41)

Oberle. Oberle Risk Strategies has worked with hundreds of searchers over nearly a decade and is in fact led by a two time successful searcher, August Felker. Which makes Oberle a specialty insurance brokerage for searchers by a former searcher. And if you've got a business under loi, Oberle will provide complimentary due diligence on that business's insurance and benefits program. An easy no risk way to get

Will Smith (16:10)

to know August and the team at Oberle to take advantage.

Walker Deibel (16:14)

Check out oberly-risk.com that's O B E R L E- risk.com link in the notes.

Will Smith (16:25)

What about the psychology of the different kind of psychological relationship to search that self funded has in traditional. Say a little bit more about that because we're going to return to it later on in our conversation when we hear how you structured your deal.

Jonathan Taylor (16:41)

Yeah, I, I, I think the, when, when you say that you mean as, as the searcher or like the investor

Will Smith (16:46)

base, as the percentage ownership and flexibility.

Jonathan Taylor (16:51)

Yeah, yeah, absolutely. So I just think that with, with self funded search you have the opportunity to have a greater ownership stake and thus like have more control over the direction you want to, to take the company in. And I think uh, where, where part of my consideration set is like I think I could probably structure this to have a little bit of the best of both worlds. And by that I meant like I felt pretty confident that I can go out and raise an investment group or find an investment group that would like specifically help me do well in the deal that I found. Whereas like if you're going down the traditional search model by and large like your investment group is locked in at the beginning and they may not be the best people for that, for that deal that you find. And so I just found that it also provided you a lot more flexibility to look at both deal types have the flexibility that you want in terms of geography. Now I think Sam Rosati really has a great framework for this. I think it's the big three little two and so I think it has the ability for you to just be more flexible and adaptable. But I will say I think the traditional search model at times people poo poo because of like the ownership stake and oh, you're just a hired CEO. And I, I think there's a ton of benefits particularly at earlier stages in your career having really experienced people invested in you and trying to help and mentor and help you grow and be successful and have dollars on the line in, in a, in a venture together. And I've seen and talked to countless people that have gone that path and the doors that is open, people that have actually like been successful in launching, acquiring, then selling the business or even people that never like actually acquired a business or people that acquired a business didn't work out like they all tend to have good outcomes as long as they were. They handled the process very well. So I think it's, I think it's just very attractive. I think I was just in a life stage where self funded was a better fit for, for what I wanted to achieve.

Will Smith (18:48)

Yeah, no, that's great Jonathan. And, and to this point, critique of, of traditional search airing just ahead of this episode, maybe two episodes ago, by the time all of these air will have been Edward McDonnell who did a traditional search. And we talk about this question of autonomy or lack thereof in traditional search which he pushes back on pretty hard. So I do think that we should look beyond the stereotypes on that, including me. We should look beyond the stereotypes about traditional search versus self funded actually. And one of the points that he makes and so I'll, I'll, I' tee it up so you can respond now that you are a successful self funded searcher is that while self funded search appears more flexible from a kind of a cap table perspective because you own certainly the majority and sometimes upwards of 80, 90, and for the lucky few, even 100%, there are smaller businesses more cash constrained. And the reality of living in a small business that is cash constrained sure doesn't feel free. So, so you may not have investors to answer to, but the marketplace is pretty inhospitable to a business that is living check to check. Whereas in traditional search you're much more cash rich. You've got in the, during the search process itself, you've got the fund which is the namesake of the model, the search fund, so you don't have to nickel and dime yourself about, you know, spending on Q of E or flying to meet an owner and then, and then you're in. The intention is that you'll buy a larger business too. So once you're in your business, it in theory has $2 million plus of EBITDA to work with. And so there will be many problems, but cash tightness is probably not one of them. And feeling tight on cash is the opposite of free. It's just a different type of prison. No, no, react to that.

Jonathan Taylor (20:44)

Yeah, no, I think those are very, very well said. And I think also traditional Search the actually will structure the financing of the deal is more conservative. The reason like people are able to achieve sort of the ownership stakes that they are in self funded search is because they're likely levering the business up more. You know, you're putting it more at risk and so you're having more cash go out to cover your debt and so you have less to do all of these other things and it all looks good on an Excel model. But I can tell you like we aren't cash strapped right now. We have a lot of, you know, cash liquidity. But there are times where the bank account jumps down because you're paying that check out to a supplier. And the visceral feel of that you will in time. Like you can't describe the emotions of that. And so like what I did to sort of navigate that is I just was a bit more flexible. Like one of the things I really wanted to do well as I went about this was sleep well at night. And so rather than try to achieve the maximum ownership stake, I actually over equitized the deal and so brought more equity. The investment group brought more equity to the deal than necessarily I needed to, to close it. And also like as part of it I was a more experienced searcher. So there are some ideas out there what the traditional salary of a searcher should be. I asked for something higher and these are all things that hey, I knew this is what I wanted. And as part of presenting to deal to investors like I included all of those things and Nolte was able to come up with a structure that helps me sleep better at night. And my deal is I think more conservatively financed in a lot of self funded deals. So the senior debt was about 65% of the total debt. The seller's note is roughly 15 and the equity amount is roughly 15. The rest are transaction fees and so many of self. You know, I did the whole thing where you're looking at the self funded search model and you're doing the 5% equity that you bring to the table structuring the the seller known way so that accounts as equity. But I'm very, very happy I did not do that because that would have required me dipping into more of our personal resources to come to the table which my wife was likely to veto. But it also like it would be much harder to sleep well at night having done that.

Will Smith (23:08)

This is fantastic. Jonathan, Let me, let me distill and that and put back to a few things. So first of all over equitizing means in a Capital structure where you put more equity. So any capital structure is made up of equity and debt. And it's when you put. And there's usually kind of an optimal ratio between those two of the equity and the debt. And over equitizing, meaning it means putting in more equity than is sort of, sort of optimal. But so that's what it means. And you know, finance types will, will try to seek the correct ratio. And sometimes that means just putting more debt onto the business just because it can support it. And it's a, it's a more efficient capital structure. So over equitizing is intentionally, knowingly having more equity in that, in that business than, than is optimal. But what it gets you, as you have said now so well, is, is to be able to sleep at night. But that's not, it's not just an emotional byproduct. It's a, it's a reality that it can, you can, the business can withstand more because there's more. There's less debt service. So there's less of a fee that you have to come out of pocket for every month. The business has to come out of pocket for every month. And probably more cash on the balance sheet too. Right?

Jonathan Taylor (24:26)

Right. Yeah, exactly. So I.

Will Smith (24:27)

Going into the transaction.

Jonathan Taylor (24:29)

Yeah, yeah. And I think like you just have. So we basically over equitized the deal by like roughly a quarter million dollars and so could have closed the deal with much less equity. But you know, one of the things that I heard you say there is like optimal. I think, you know, finance types will spend a lot of time modeling and all of that trying to create the optimal deal structure. But for these small businesses, there's such a vast information asymmetry. Things you don't know until you get inside the business, that I think it's optimal to have cash on the balance sheet that can help you deal with issues that may never come up, but in the event that they do, you're able to deal with those. And again, you're able to sleep well at night so that you can come back the next day and perform and show up for your team. And that was the approach that I, that I took particularly because as I went out to the market and started talking to investors, I got a lot of positive feedback. And in the grand scheme of things, like my, my ownership stake, like when I was, you know, when I was doing it, like everyone, I was like, hey, I'll model this to get like 85%. Because I hear all the stories come on the podcast and that's what people get. But as I took a step back, I was like, this is a really good deal. I feel comfortable with this. I like the investor group that I've put together. So I, I, I now ended up with 60% ownership stake. And I'm, and I can say that I, I've not had a bad night of sleep as a result of pursuing this path. As a result.

Will Smith (25:56)

That's great. Okay, so over equitizing sounds just like, why wouldn't anyone want to do that? Well, obviously you got to sell some of your equity. So you made the decision in over equitizing to go from 70% ownership to 60. So that's a reduction of whatever, 13, 14% of your ownership. And do you now on the inside as owner of this business feel that.

Jonathan Taylor (26:22)

No, I haven't at all thought one day about the percent ownership of the business that I own. I definitely feel a commitment to returning capital to my investors over the long haul. But I have never thought like oh man, I wish I would have not done that and raised additional equity. It was the absolute right decision.

Will Smith (26:49)

Excellent, excellent stuff. And it's just two things to say on that in this, in, in the world of finance generally, the idea that you could bring relatively little cash to a transaction, to the acquisition of an asset, whatever that asset is, real estate otherwise, and, and own, be the 60% owner. Yeah, that is just, that's an enormous number in almost all other kind of fields of finance or asset acquisition as I understand it. So it's still, it's still just an enormous amount of ownership for very, very little of your own equity into it. So I point one, point two is, I, it's, it's good to look at the, like the relative decline. So going from 70% to 60% as I said, is just really what it, whatever that is of 13, 14 ish percent step down. Not that material in the, the grand scheme of things. But at the same time you're, you're giving your investors, you're, you're taking your investors from 30% to 40%. They're seeing a 33%, the investor group is seeing as a whole a 33% bump in their equity. It's much more material for them. And that's something that Nicholas James, partner in Mind's Capital, will often say about self funded searchers, is that you can really, by offering, by going from 90 to 80% for example, this is an extreme example. But from being willing to go down from 90% ownership to 80, you're effectively doubling what your investors how, how much your investors can participate in and how much, how much ownership they have while only taking yourself down, whatever that is. 11%. And it's generally a good and good faith trade to make and it sounds like. And that you buyer won't likely feel. So, so there's kind of two dynamics here. There's. There's the one that we. The primary one which is the over equitizing to sleep better at night to put the business on more solid footing as you get into it. That's the key point. But secondarily is this idea of there's an, there's an opportunity for a good faith gesture to your investors by not being greedy about the equity that you're offering them.

Jonathan Taylor (29:02)

Yeah, and I think that's, that's absolutely true. And I was very fortunate to partner with, with one of my, my lead investor like early on in the process and he gave me great feedback on loi and I'll shout him out now. Michael Jorkas, if you're ever looking at an aerospace the, the defense deal, like he should be your first call. He's amazing. And so he gave me some amazing feedback and I just knew like after those sessions I wanted to work with him and he was kind enough to open up his Rolodex and help me with, with the fundraising process. And through that actually met some other people and they were willing to do deals that gave me better ownership stakes. But I was really committed to working with Michael and his team. And so there are multiple ways in which you can make space to get investors bigger allocations. I could have reduced the check that I wrote to the deal because I wrote a bigger check than I needed to for the sba. But again, I don't think that sends the right signal. And so I think ultimately being willing to give up some, some greater ownership to, to, to make the deal safer, I think actually gives investors more confidence in, in, in you and like actually to the point that you made about the making space for them to have a greater ownership in the business. They're more invested in it in all the things you outlined.

Will Smith (30:22)

Yeah, yeah, no, that's great. It. Yeah, to, to that it's another great point that you make that it kind of signals prudence as you as a buyer which investors will, will be happy to see. Really great. And yeah, Michael's great. Michael's how we met. Michael introduced us to you. So he is, he is great. Okay, Jonathan, so we haven't yet heard about the business. Anything to more to say about the search? You you the part time full time. What about the, the commute that it needed to be because you, you changed here.

Jonathan Taylor (30:58)

Yeah yeah. So my previously my, my, my job was work from home primarily. We have an office that's like 10 minutes from me so I would go in from time to time but primarily it was working from home but this would require me to be be on site and so the business is located around 25 miles. Fortunately it's the reverse commute as anyone knows. Like LA has some horrendous traffic but. But I'm able to, to get up to the office in about 30 minutes and then about 45 minutes coming home. So reasonably not, not too, not too far away. And that's something too that as you kind of embark upon one of these regional searches I started looking at oh I can look at businesses down in Irvine or San Diego and like I'll do that drive. Not doing that drive. Like that's which is how far Irvine in in a good day it's at least one hour but generally with terrible traffic it's going to be at least two hours every way and San Diego is even further, significantly further probably two, three one way. So that, that, that was just like I think I visited one business down there and I think this is not going to ever work well.

Will Smith (32:00)

It's so I, this is a great point because I think a lot of self funded searchers are like yeah, you know I'm, I'll. My, my radius is two hours. I think I've heard searches have I have a three hour radius.

Jonathan Taylor (32:12)

Yeah, I've heard that too on your podcast. It's quite amazing. I don't know how they do it

Will Smith (32:15)

but yeah well and so the tip here for the listener is to do that drive. Yeah before you think about it because to you know I think I have a sense of what a three hour drive is like and I'll knock that out, no big deal. But to be doing it daily or whatever, even an hour long drive daily back and forth, it's, it's a lot and maybe for some people it's not but you got to try it. I too early on when I was looking at a, looking at a deal there was a business an hour and a half away and I did the drive and in doing the drive alone woke me up and caused me to not look at that business because that just it was not going to be tenable for me. So we tend to overestimate the commutes that we're willing to tolerate.

Jonathan Taylor (32:57)

Agreed. I spent a lot of Years on, on a Google shuttle. And you know, it's a very different thing when you're on a bus that's driving you versus when you're the one making that, that track. And so it's, there's not going to be, you're not going to be able to like, knock out a bunch of email or be efficient during that time. That's, that's really going to be dead time that it compounds.

Will Smith (33:17)

I call it podcast time. But yeah, I take your point.

Jonathan Taylor (33:19)

Yes.

Will Smith (33:21)

All right, Jonathan, let's hear about the business that you found.

Jonathan Taylor (33:25)

Absolutely. So the business that I found is called AEK Technology, and we are a stocking distributor. We were established in 1993. We focus on aerospace, defense and industrial end markets. By stocking distributor, that means we have a large warehouse, we have parts on our shelves, and every day customers are coming to us looking to buy the parts that we, that we stock. And so we have roughly 22,000 SKUs and over 3,000 parts in stock today. So we are an authorized distributor for a large defense contractor called Hutchinson. They've been around since the 1900s. They bought a company in the US called Barrier Control that's been around since 1940s. They make a lot of parts for the US military and other aviation. And so we are a key distribution partner for them.

Will Smith (34:17)

Right. And you people come to the location.

Jonathan Taylor (34:22)

They don't at times. They do at times. Some people will come to, they have an urgent need, they'll come and pick up the parts directly from, from our team. But primarily we are shipping.

Will Smith (34:33)

Fundamentally, it's not. This is a warehouse that people can visit, but basically you're. It's a staging ground for you to then ship product on, correct?

Jonathan Taylor (34:41)

Yes.

Will Smith (34:41)

Great. Okay. So I heard you say Hutchinson, that is the manufacturer that you distribute for exclusively. Are there others? What does that dynamic look like? And you can tell where I'm leading you here. One of the things that we pointed out about the deal, but that I now having talked to more people in distribution businesses, it seems to be a pretty common feature in distribution businesses broadly, is concentration. You're often a distributor for a. You know, you've got supplier concentration. A lot of your, your product is for a single supplier. Talk to us about that, please.

Jonathan Taylor (35:15)

Yeah, absolutely. So we, we actually have product from a lot of suppliers, but they are, we are what's. What's known as an authorized distributor for multiple different divisions of Hutchinson. And that means they have given us the right to sell their products. There are times where people call themselves a distributor for A manufacturer. And what they're doing is they're just buying from perhaps other people and then selling that on, reselling it. But we, we actually have the right to buy directly from the, the Manu manufacturer. And that actually grants us a lot of different things. So there are times where we can work directly with the government and show them, like, hey, we actually have a letter on the company letterhead that we are an authorized distributor, so you're not going through a bunch of resellers. So there are a lot of benefits there. But to the point, yes, they are our largest supply partner today. We work with different divisions and something that I don't think I did a great job of expressing, as we talked about evaluated, the deal was the decision maker risk. And so we work with multiple different divisions, many of whom they don't really ever talk to one another. And so roughly there are about three different divisions and they represent about a third of cells today. And 10% is roughly from other people.

Will Smith (36:21)

Okay, so wait, three different divisions of Hutchinson is top line, top kind of is 90%, but it's really three divisions of each. 30 to 35%. Under that, they're about right. Yeah, yeah. Okay. Plus 10% non Hutchinson. Correct. And so you use the point there. Decision maker risk, I think, or gatekeeper risk. And so this is the more nuanced way to think about concentration risk that it's not, not just the, the, the main name company that you're selling into, but how many decision decisions really are involved. And so it sounds like if, you know, if you've got these decision, you've got these divisions within Hutchinson that you supply, that you sell for, they're your suppliers and they're not even talking to each other. And so one could sever business ties with you and the other two would carry merrily along. It's, you know, while ostensibly 90% concentration, it's really not. It's really. You just have three different customers. And so how many decisions have to be made for you to win or lose business? I think is the better way of looking at this.

Jonathan Taylor (37:28)

Yeah. And said differently, we actually have unique distribution agreements with each of the divisions and there are different people that sign off of them and all of those things. And so we've been working with all of these divisions for over 20 years each. And so oftentimes they don't even. There are times where they actually come to us to buy parts for their other divisions because they know we'll have them on the shelf. And so that's something that I didn't fully grasp as I was evaluating the deal. But certainly that's something that is, people are looking at, at opportunities. It's something to try to get a higher fidelity on. Like what is the decision maker concentration? Because it, you know, often these, these large companies, they're different divisions or different internal companies themselves that don't talk to one another.

Will Smith (38:14)

Yeah. And in aerospace and defense, for example.

Jonathan Taylor (38:17)

Yeah.

Will Smith (38:17)

And anything that sells to the government, you could, you know, to, to use an analogy here, you could talk about any business that sells to the U.S. government. Well, the U.S. government is total customer concentration 100. Right. But of course what you're probably doing is selling to all different divisions within the, the, the, the behemoth that is the U.S. government. And so it's many different decision makers, you know, depending on what the business customer set looks like. But that would be like a classic example. And in some ways, as you pointed out to me, like Aerospace and defense, where, or, or, or yeah, Aerospace and defense, which may sell to the US Government or one of the airplane manufacturers of which there are only a small handful of big ones around the world. It's also just structural to the industry itself. It's in some ways in avoidable. Say more about that. Unavoidable.

Jonathan Taylor (39:08)

Yeah, it's just like at a high level there are two large scale commercial jet manufacturers, Airbus and Boeing. And so if you're generally in the space, you're going to have some level of concentration related to those big platforms if you're on them. And so the more sophisticated way that people kind of think about this is like, what is the program that I am on? And try to get really, really high fidelity. Because a lot of times at these companies there are different decision makers that are running the different platforms. So the different type of Boeing jets, there are different people making those supply chain decisions. And so there's at, at its, at it at the very, very high level. It will be the same logo, but it's really, you gotta, gotta dig a little deeper to truly understand what is that concentration.

Will Smith (39:57)

Great. Now having said all that, it still was the case that in your business that you still had pretty high concentration, even with the nuance.

Jonathan Taylor (40:09)

Absolutely.

Will Smith (40:10)

You had three, you had three different customers who represented 30, 30 plus percent of your supply. How did you handle that? And think about that. Because that was one of the things that we flagged.

Jonathan Taylor (40:23)

Yeah, absolutely. I mean, I think I actually flagged it to you guys too. Like, hey, this is a risk of the deal and just called it out. Like this is, this is something that is a known risk that in time will need to be mitigated. And so a few different things. So as part of the process and working with the seller, he actually worked with him to meet each one of these suppliers individually and have conversations and was able to express and share my goals and what I was looking to do and verbally hear from them about their desire to continue working with the business on an ongoing basis. We also then were able to, with two of them, and we're in process now, sign new agreements that extended the partnership. And what I did not really know is just the previous seller was not investing a ton of time in the actual relationships. And a lot of this just stemmed from his dad, who founded the business, actually worked at Hutchinson. And so he just knew a lot of people there. And so there was an underinvestment in the relationship part of the business, which is like, okay, that's something I can do. And so I spent a lot more time and still do today, like trying to build relationships, understand what we could be doing together. And so we actually, with each of these different divisions, have some ongoing plans of things that we can do to grow our businesses together.

Will Smith (41:44)

And so to make sure I got it, the way you mitigated this risk was you actually met with the suppliers and signed new contracts with them.

Jonathan Taylor (41:57)

Yes. With two of them and one's in process right now. Yes. So those were. One was signed before the deal closed, one was signed like immediate, like two, three months after the deal closed. And one is, we're working through that right now. And also just structurally, what we did is tied the seller note to the supplier, remaining with the business for the first two years at least.

Walker Deibel (42:23)

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Will Smith (42:26)

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Will Smith (43:34)

let's unpack that. So seller note forgivability. A forgivable seller note tied to the retention of this revenue from this customer. Can you give us more detail?

Jonathan Taylor (43:44)

Yeah, the retention of the supplier, not the customer. So remaining a supplier for aek, at least for two years. Because then after that it's like, okay, that's really on you. And so if they were to go away, then the, any one of those divisions, the. This, the seller note would be forgivable.

Will Smith (44:05)

And was it sort of proportional like. Or was it binary, like the whole binary seller notice. Oh, really?

Jonathan Taylor (44:12)

Oh, wow.

Will Smith (44:15)

And so it wasn't tied to, it was just tied to the relationship continuing. It wasn't tied to like the amount of product flowing through from one of

Jonathan Taylor (44:23)

these agreements, I think in credit to the seller. Because along the way you just maintain that, hey, we're such a key customer and partner here that feel really, really good about this relationship and enduring and long standing. What I didn't realize at the time or no is that with two of these three divisions, we are actually a top 10 customer. And so we are a material part of their, their revenue. And so I think they want to continue on this one of them. So much so that we are in the process now of just working on, hey, what are the unique things we could be doing to help grow each other's business?

Will Smith (45:02)

Yep. Well, I said customer concentration. Misspeaking, that's just what rolls off the tongue. And yeah, we all are. We, we are always talking about that. But thank you for correcting me. And when we talk about distribution businesses in the concentration issues that you often encountered in them. Yes, it's, it's usually the supplier concentration, not the customer concentration. So thank you for that. But you make, you make this great point in, in the defense of these businesses that. Let's not forget, while there may be this supplier concentration, you are their, their go to market. I mean, you are one of their key channels. So you're bringing all of this revenue and value to them. So it's, it's probably a sturdier connection than kind of customer concentration. Supplier concentration is like you just said. I mean, they're looking at you and like, don't go anywhere. You represent millions of dollars of revenue for us.

Jonathan Taylor (46:01)

Yeah, and I think that that's exactly right. And so I think that also was the feedback that I received is part of meeting with the suppliers that, hey, you're an important partner for us. If anything, all we want to do is grow. You've done a really Great job. We think there are these other opportunities for you to do things, to modernize the business. It was encouraging to hear the things that they suggested were exactly some of the things I had planned. New website, some certifications. But that's completely true. These businesses, and it's often the case that companies that are focused on and good at making things, they may be good at selling them to a large customer. They're not often good at selling them to the long tail of customer. And that's the value we bring.

Will Smith (46:50)

Oh, what a great segue. Thank you. Because, yes, you, you. That is something for the uninitiated, you might think, about a distribution business. What value is being added exactly? Is it because aren't distribution businesses just middleman businesses? Which is, of course a pejorative? And so you've just nailed it that they are just not good at going to market. They're not good at selling at scale. How, though, do you as a distributor differentiate from other distributors? This was one of the things that we were scratching our heads about. What is the moat or the differentiator that you can build in your business against your competitors? Who would be distributors for Hutchinson?

Jonathan Taylor (47:34)

Yeah, absolutely. So I think for our product category, where we kind of specialize in, it's shock and vibration mounts. And I didn't know what these things were prior to evaluating. Well, your mic, the thing that's actually holding it, is itself a shock mount. And so they're literally all over the place. Yeah. I didn't know this, but have gone down a rabbit hole of the different industries. And so now that I know this, I can't unsee it. So I was in the gym the other day and looked under the treadmill. There are lovely mounts under them. So they're just literally everywhere. If you were to walk a manufacturing floor, the machines are generally on leveling mounts to help them maintain structures. And so there's so many different applications for these things. But one of the things that is differentiating for us is that we have engineers on staff that can help customers solve, like, technical questions. And so oftentimes, customers will come to us with, hey, is this the right part to use for. Here's my application. I believe this is the right part. But I have these additional questions. Can you guide me through that? And so we have people on staff that can help them with that. We actually will go on site to customers and do training sessions for them. And so we are not just putting parts in boxes and shipping them out. We are actually handling more technical sales in a way that Is again a value added service to customers, but also to our supplier partner.

Will Smith (49:00)

And so. And that's where you differentiate or that's where you're adding value. And that's all you, how you can also differentiate your competitors.

Jonathan Taylor (49:07)

Yeah, that's one of the parts where we're adding value and differentiating from our competitors. People have just known that for since AK has been around we can go to them and they'll, they'll be able to answer our technical questions. And if the part's not, as if the part that I want is not a stock, they can answer like what a suitable alternative is and be able to source that and supply it. And so those are, those are very, very valuable things to our customers.

Will Smith (49:29)

Great. Jonathan. Well, we're gonna still have a few more characteristics of the business to talk through, but we're getting far away from the acquisition and I wanted to make sure we don't forget to hear about the numbers to the extent that you can share of the business and purchase price and so on. You've already kind of told us high level structure, but could you give us more detail?

Jonathan Taylor (49:51)

Yeah, and I'll keep it, I'll talk in ranges. And so the business was doing mid single digit millions in revenue for the past. And one of the things I was able to get the data room and look at the tax returns all the way since 2003 and the gross margins have been over 40% since that time and the business has been remarkably steady. And so that's been through 9, 11 global financial crisis. It was chugging along, growing about 3, 4% throughout all of those time periods. In terms of earnings it was roughly mid to 20% margins. And so really, really healthy business, very, very stable. And so those are things that are really encouraging in terms of looking at. Because you touched on supplier customer concentration earlier, we really didn't have any. And so one of the things that I liked about the business there was a lot of repeat customers. So roughly year over 80% of our business is from customers that were been customers in the previous year and consistently for the past 20 years. The top five customer, the top five of the same customers were all the same. And so that was just remarkably consistent. So I wouldn't say this is recurring, contractually recurring, it's not that. But there's a lot of reoccurring business that happens on a year to year basis.

Will Smith (51:17)

And the those top five customers, that's remarkable by the way, they didn't represent too much concentration. So they were all below, below whatever 15 of revenue, they're all below.

Jonathan Taylor (51:28)

It would range from like 20 to 25 revenue.

Will Smith (51:31)

Yeah. Great. And so mid single digits of revenue, 20 margins. So I'm guessing in the sweet spot to the higher side of a self funded search. Yeah, kind of like what we like to see in self research. Great.

Jonathan Taylor (51:49)

Yeah.

Will Smith (51:49)

Okay.

Jonathan Taylor (51:53)

Something that like when I presented to my wife, she was like okay, you can leave your job to do that.

Will Smith (51:59)

On the point about the size of business now, what about, let's hear now about you know, the type of people working in the business. Yeah, this is not high schoolers, you know, working for minimum wage. The motion of a, of a distribution business and you know, imagining yourself in there, whatever the day to day looks like and running one and now doing it. What, what Would you educate people on what that looks like in a distribution business?

Jonathan Taylor (52:26)

Yeah, so we have two different sides of it. So we have the warehouse side so team members that are focused on receiving product in inspecting that product and then either putting it, getting, staging it to be shipped out or to be put onto a shelf to be part of our inventory. We then have a shipping team so they're focused on shipping products out to customers. Then we also have a quality team team that is overlooking, making sure that all the parts are conforming and that if customers have any issues we can address those. Then within the office we have the sales team. So we have team members that are focused on interacting with customers and answering their solicitations. And the business has historically just operated with an inbound sales motion. So we've never actually had people go out to the field and proactively seek more business. So that's something we'll be looking to change. But that's just how we've operated today. And then we have a finance HR function and then we have someone focused on the logistics so managing all of the shipments that are going out, coming in and handling those components. I mean one of the key things within this particular aerospace is that it's really, really, really important that you have good documentation of all of the parts and can trace them back to their OEM and all the supply chain in which the chain of custody in which they've done that. And so the business has a great history of all of the parts that we have in our inventory. And so that's also a key differentiator. We actually have those, what's called certificates of conformance oftentimes from the manufacturer where we can say hey, we can show you where we got this part from. And that here is the certificate of performance from the manufacturer. And that's something that is increasingly of high importance to customers

Will Smith (54:09)

in all of this sort of value add. You know, not just like moving, taking a box from one guy and giving them to the next guy, but the real value you're adding in between there. Is that how you're able to get the margins? You are 20% margins sound high for me for a distribution business which are notoriously low margin businesses.

Jonathan Taylor (54:31)

Yeah, that's exactly right. More niche products and more value add. And so I would say that was a range I gave you. There will but, but certainly there is. The value add that we're, that we're offering is, is what is enabled us to differentiate and earn what we earn. Also the fact that we are a lot of people aren't willing to actually hold stock. We are and so we were able to buy at levels that help us generate good, good earnings because we are willing to put parts on the shelf. And so we have history of all of our different part numbers, amounts that we've been able to sell. And so we've been able to do a good job of forecasting inventory levels and focus on that.

Will Smith (55:15)

As I understand that sort of inventory management is another way of saying working capital management and it's its own beast and specialization. Have you learned it or is that expertise in somebody else in the organization?

Jonathan Taylor (55:32)

I'm learning it and there's a lot of opportunities for improvement and certainly like when I evaluated the business and compared it to other distribution businesses, there was a lot of cash being tied up in inventory and so there's an opportunity to streamline that. And so one of the things that I did was upgrade our ERP system. We were working on something that was more Ms. DOS based and very old. A lot of the ways we were operating were paper and pencil. And so we now have a system that is able to better track and can help us in time with a lot more business intelligence that can help us improve our knowledge and be better at the forecasting and inventory purchasing by the NFQ2 can get to the point where we can actually have inventory turns data by SKU and so that can be really, really helpful to the team.

Will Smith (56:19)

Well I want to hear more in a few minutes about the levers you've pulled and how you've grown revenue like you have. But a few more details on the mechanics happened with your actual acquisition. So you. The. The seller here was not a retiring seller. And, and that is something that was one of our, you know, question marks about the business and yours too. I mean you, you know, but you, you were comfortable with it. Share with us what you can about that and how you're able to get comfortable with it because it's not just us. A lot of people that I talk to have kind of a, have kind of a, a hard rule. No non retiring sellers.

Jonathan Taylor (57:03)

Yeah, well, not retiring in the traditional sense. And he's a relatively young guy and so he's about 50 years old and, and so you know, naturally the question is hey, your, your business is kicking off a fair amount of cash. You've got it to a place where you, you're, you're working a reasonable amount of hours per week. Why do you want to leave this? And so that, that is definitely a question that I asked him in many different ways over the year that I got to know him and I think have come to appreciate this now that I've been operating the business and I think he took over the business from his dad when he was relatively young, so just out of college and he did a great job owning and operating it. I, I don't know that he ever like truly this was the thing that he wanted to do, but it was something ahead of him and he could help his dad as he made you know, transition in the business over to, to, to him. And, and so he was in a place where he was just really content with everything he, he was able to achieve. So stocked away a fair bit of money, had a nice real estate portfolio and was, was really wanting to exit because he also had a, a personal, they had a family tragedy happen. And so I think it in his own way he was going through, I was going through, hey, I'm approaching 40, what am I doing? In his own way was, was having I think that that type of moment as well. And so just realized you know, he was at a stage where he can, he can exit and go do explore and do whatever he wanted to do. Is this wasn't, this wasn't his the thing that he wanted to do. I got no pushback on, on, on you know, the ask of hey, you can't reinsure the business for, for five years. It's like I don't want to. So.

Will Smith (58:51)

Yeah, on a non compete. Yeah, well you know, it's, it's tricky Jonathan, because anybody who you know, of course, of course the risk here, the fear is is that seller is selling at a peak and they know something's coming that you don't. The information asymmetry in this world is brutal. And so any seller like that who intends to Sell, sell you a lemon is going to paint the narrative that you just said that there's some personal reason or some very good reason other than actual 65 year old retirement that they want to sell. And so coming, finding that credible, whatever they tell you is you know the art of this and you have learned subsequently much more about a situation and how true it was, but you didn't know going in.

Walker Deibel (59:38)

I wonder, is there anything to learn

Will Smith (59:40)

from your experience, any tips that, that sellers, that buyers can use to suss out when a seller is giving you a legitimate reason for not want, for wanting to sell even though the business is very profitable and they're not looking to retire versus a you know, not legitimate reason and they're selling you a lemon. Do you think there's anything to extrapolate from your experience?

Jonathan Taylor (60:03)

Yeah, yeah. I mean I would, I would ask like, hey, what are your, what, what are your, your, your plans? Like what, where, where are you gonna go? Like where, where's the where after? Because we, we had a, a six month time period in which you, you helped me transition. But it's like hey, after that, like what, what tropical destination you going to? And so we would constantly pepper him to like understand like what, what, what the plans were. And this was before for, for deal close and, and just keep asking like hey, are you sure you want to sell? Like this business is going, are you sure this is what you want to do? It's really, really hard.

Will Smith (60:33)

Right?

Jonathan Taylor (60:33)

Because getting to know someone very, very fast and you're getting to know what you hope to be the true person, but you may be meeting their representative, there's no way for you to truly know. Just do your best to be a good judge of character and ask the question in multiple different ways. And ideally like if you're able to meet the team and see what they say. Because I think had I been able to do that, I think they would have given feedback that like yeah, it's, I could understand why he's wanting to retire.

Will Smith (61:07)

Well, I guess the tip that I like there is ask in multiple different ways. Unfortunately as we know, if a seller wants to deceive you, they're going to do everything they can to deceive you and they're going to be on the lookout for this line of questioning and have crafted a deceptive answer or so you know, that that's just structural. But asking it multiple ways is, is a good tip.

Jonathan Taylor (61:34)

Yeah, and I would say that we, we had multiple different, like we had the, the, the, the seller note in place so like that he, there, there was incentive for him to see me want to do well because if the business just folded, there's just no way for me to pay that. So naturally you, you want the business to, to, to perform. I will also say that he had intermediary than a lot of businesses I deal with. So he didn't just have like a regular business mercury as a middle market investment banker and I think that brings a level of credibility is like hey, I'm gonna lend my name to this but I, you, you can't be out here burning me by not like being deceptive and fraudulent and all those things. I don't want to sign up for those type of deals because this is literally my, my business. And so I found that to, to also be helpful because he was helpful in you know, oftentimes playing referee and nursing the deal and getting it across the finish line. But you're 100% true. If people want to be deceptive and fraudulent, it's going to be really, really hard to, to stop them from doing that. You just have to listen to your, your, your, your inner gut and try to spend time and building as authentic of a relationship as you can with potential sellers.

Will Smith (62:43)

Yeah, yeah, yeah. Jonathan, your first loi wasn't great. It was terrible. Talk talk to us about why it was bad, how it was bad, how you improved it. Give us that little detail of your story.

Jonathan Taylor (63:03)

Yeah, I, I, I reread it the other day after our pre call. It was just a Frankenstein of a lot of, of templates that I saw out there and, and it, and it, it was a just me trying to be cheap in the self funded search and save some expenses. And this, this is where I knew like Michael was going to be someone. I wanted an investment group. I shared it with him and he immediately shot me back and he was like hey man, this is terrible. Just like hire someone to help you with this because this is, you have a good, good opportunity in front of you. But like you're this, this what this loi you have is complete garbage. And so I was just frankensteining templates together and it was just a mess.

Will Smith (63:43)

Wow. Sage and direct words from, from a savvy investor.

Jonathan Taylor (63:47)

Don't, don't, don't play lawyer. Ideally just hire one or work with way more experienced people that can help you, guide you through that process. But you want to really put your best foot forward and you want to show that you know what you're doing because already like as a self funded searcher going through the SBA process That brings you enough red flags for, for people that any, any sense of you really don't know what you're doing in San Mature hour, I think is definitely going to be a knock on you.

Will Smith (64:17)

Yeah, yeah, no, exactly exactly. It's, it's, it's a first impression case. Case of first impressions.

Jonathan Taylor (64:24)

Right.

Will Smith (64:25)

And and not to mention that there are legal firms, attorneys in our space focused on our space in our space are focused on our space who now offer LOI templates in their entirety for free or if you reach out to them including Barlow and Williams who does the, the monthly legal office hours with us, they'll help you out with an LOI template that they have off the shelf. So there are, yeah, there are easy resources at your disposal. So no no reason to. Frankenstein, please. Yeah. Jonathan, let's turn to the alignment of investors. We've talked about it a little bit but specifically on the point of your intentions medium and long term with this business. This was a challenge for us. Our model is more of the traditional private equity model where we need to see now almost exclusively independent sponsors show a plan to exit or have some liquidity event at 5 years our LPs are looking for their money back and so you know we, we are need to meet make, need to make sure that the sponsors we're investing in are signed up for that program and you had a longer and which I, you know that's one model. Personally as a, as a potential future searcher myself, I love the long term hold model that you espoused for your for this deal. It just didn't happen. That also kind of didn't happen to work work with our model at Mines Capital and it doesn't for a lot of investors. And so talk to us about how you found alignment or the right group of investors on this point of duration of hold.

Jonathan Taylor (66:05)

Yeah. And, and I just think found it by just having that conversation up up front and part of it is also having conversations with people in the space and and Will Thorndike has written some papers and a lot of great podcasts out there episodes and a lot of the research just says that the, the CEOs of these type of companies like owner operators like really start getting good in year five seven and so it felt like if those when I'm actually starting to compound like my capability as a leader to be trying to exit the business at that standpoint feels like there's a lot of potential compounding that I would be missing out on and then I'm exiting to potentially go do what do this whole search thing again so that, that didn't necessarily appeal. Plus the nature of this type of business is more long cycle and so it's going to take time to get the flywheel really spinning. And then when it does start spinning I think there's a lot of real, real benefits but those start occurring in the out year. So like just explaining those those things to the investors are having the conversation. I think like for those that, that were interested and on board with that concept, they wanted to participate and for those where that didn't really meet their mandate, they let me know that it didn't meet their mandate and that's okay. But, but I, I, I structured it as a, as a, so the operating business is an llc. We have a C corp on top of that and did that so that we can help preserve QSBs. It was a stock deal because there are the big supplier agreements signed with the operating business and so wanted to do that and so did it every org. And so there were all of the, all of these complications that I that I learned about and was able to navigate with good legal counsel. But that also in itself and as I was able to talk through like hey, here's how I'm structuring the deal and talk about the why I'm doing that. I think investors really appreciated that too because if we do at some later date, five years on like exit because we have pursued the qsbs, there's a lot of tax benefits that will accrue to, to the investor base.

Will Smith (68:18)

And so for those long term investor friendly, those long term friendly investors, how how do they see money come back to the, from their investment in you?

Jonathan Taylor (68:30)

Yeah. So dividends, there's going to be dividends definitely. And so actually working with my finance director that we just hired to work on, hey, now is the time to start returning a little bit of capital. But definitely they're going to see some dividends and then at a future date we could have a discussion around hey, if people still want to go on this journey and if some people want to exit, we can look to do a recap.

Will Smith (68:57)

Yeah yeah. So in a word really recap is the, is the answer. You you can have have moments where you recapitalize the entire capital structure and and then investors who want to keep going have the opportunity to do so and then those who want to exit can, can usually get bought out and, and for you know, for at a new and higher valuation hopefully than than what they bought in at. And so everybody is happy.

Jonathan Taylor (69:21)

Right.

Will Smith (69:22)

I I Ask this question a lot but it's always a pretty simple answer. Answer you just recap.

Jonathan Taylor (69:26)

Yeah, but, but structurally in, in terms of the model like you model it as though there's like an exit and I think I did Year seven but really just talked around like hey this is just indicative but like the, the intention here is for us to pay down the debt, be able to return capital with dividends and look at potential recap if that's, if that's what interests some, some of the investment group.

Will Smith (69:48)

Yeah. And, and so there is an important point here because yes, in your, in your memoranda it showed a liquidity event at year seven. I didn't recall that but okay. At year seven. And so for an, for an investor like us who needs to see some sort of liquidity event in that range, we should have been satisfied by that. But, but it's not just, but almost all decks will show something like that. And as you said it's a little bit, I don't want to say performative like because you're totally transparent about your views here, but it's a little bit like benchmark like this is where we hope to be after five or seven years or whatever it is. But my point that I'm getting to is that the orientation of the sponsor or searcher you is, is, is the story behind the story. It's, you really had a long term view here and so your kind of growth posture, it's not that you were going to be anti growth as we're about to hear. You've been growing very nicely, thank you very much. But it still was, you know, you were just had a longer term orientation and so that will trickle down into decisions you make. And it is very different than somebody who's just pushing, pushing, pushing, pushing to do what they can in five years and create in those five years an asset that can then be traded up up. So just, just a nuance there to mention. Anything to say to that?

Jonathan Taylor (71:15)

Yeah, I mean I, I think the part of that is just some of my guiding principles in life and so my, my I'm identify as a Christian and so just principles of stewardship like really mattered to me. And so yes on legally I own 60% of this business but in the way that I feel and really believe is that I actually don't. I'm just stewarding the business and so I have a responsibility to be accountable for it. And so I want to manage this through its next phase and I just think for it to become the company that it truly can be will just take some time. And certainly as I grow and develop as a leader, I just think that telling people, hey, in year five, we're getting out of this, it's like I'm just starting to get good. I know now that I really truly understand the ecosystem, we're starting to really work with some of these customers. Like some of these parts that we're stocking, the lead time on them themselves are like 40 weeks. And so it's like, it's, it's, you know, I just think this business is well suited to having a longer term orientation.

Will Smith (72:18)

Say more about your philosophy of stewardship broadly, Jonathan.

Jonathan Taylor (72:23)

I mean my, my parents were both like Sunday school teachers and so I was just raised in the church and just, I just, just truly believe that. And this may not be everyone's jam, but it's, it's mine. It's just, hey, this business belongs to a higher power. And so for the time period that I am the steward of this business, I'm very much responsible for it. And as such I'm accountable to like making sure that it maximizes its potential. And if we're able to do that, there should be a reward for all involved investors for me, for the, and definitely most importantly like the, the employees. And so as I've been the sort of this business, I try to be mindful of that and like you know, do simple things for, for the employees today. So we've improved the benefits and, and so we've done better. Have improved the bonuses, have improved the equipment that people are working on and so just trying to find ways to like reinvest and just make this something that benefits a lot of people. People.

Will Smith (73:24)

Beautiful stuff, sir. Love it. I heard you say F Reorg.

Jonathan Taylor (73:29)

Yes.

Will Smith (73:30)

Define for people what that is and tell us what you can about the process of actually doing one, which is messy.

Jonathan Taylor (73:38)

Legal disclaimer. I'm not a lawyer, so definitely seek both tax and legal advice. But in a nutshell is a way, and I only learned of this and this was actually like, like the benefit of having a seller that has like really good advisor because he actually presented this to me is that it's a way for you to do a stock purchase but then have some of the benefits of a asset sale. And so there, there, there's a lot of different things you need to sign and the actual mechanism by which you go through it, you need to convert because it was an S corp, you have to convert it to an llc which then you can sell. And so there are a lot of Steps. But essentially it's a way for you to do a stock purchase but have some of the benefits of an asset

Will Smith (74:23)

sale and the benefit that you wanted, the key benefit typically is leaving behind some liability.

Jonathan Taylor (74:29)

Liability. Yes. Yeah.

Will Smith (74:30)

Yeah, exactly. Okay. Well, for anybody who's interested in learning more about that, we've had a number of webinars on f reorgs. You mentioned Sam Rosati. I think Sam did one on every orgs probably two years ago now. I mentioned Barlow and Williams. They've done one, if not two sessions where we talk about f reorgs. So go to the webinars page on acquiring minds everybody and, and you'll. And you'll see some. And search for f hyphen reorg and you'll see some, some stuff in there.

Jonathan Taylor (75:00)

Yeah. And on that I should just really want to take a moment to say thank you to Sam because there was a change in, in, in the deal team and, and he came in at, at like the, the, the, the last hour to come in and help get the deal across the finish line. So I'm forever grateful to him for doing that and had no idea that while he was helping me do that, he himself was running his fencing. His fencing business, which seems to be doing really, really well. So knowing that now, it's like, man, I'm really, really grateful to him for helping with that. So thank you.

Will Smith (75:31)

Great. Awesome plug, Sam. I know. Well, and of course respect, as do so many in our ecosystem. Sam Rosati has been on multiple times. A lot of. A lot of. We got a lot of mutuals here. Jonathan Michael Dwarkis, of course.

Jonathan Taylor (75:45)

Yeah.

Will Smith (75:45)

And Keith Burns, your, your friend I'm only getting to know now, but I had a great conversation with him and hope we'll hopefully do more with him this year. Let's talk about the. Your take home compensation, your wise wife telling you that you. Even if you quintupled a business that you were looking at. It's sd. It's sd. He still wouldn't. I have been worth your time. And so, you know, from the perspective of the, of the money you need to take home today now for the. Your three daughters, your wife, even though she's got a good income herself, walking away from a very full tech salary for a guy who's been in tech for 15 years, we imagine that that was a great number. How did you think about it? What does it look like?

Jonathan Taylor (76:31)

Yeah, I mean I think again, this is just having open conversation with, with investor group and fortunately like no one really pushed back on it, but but certainly they can understand my life stage and where I was coming from and they saw my full commitment to the deal. So I wrote the second largest equity check into the deal I'm obviously having. This is an SBA deal, the pg and so they saw my full commitment. So no one really pushed back on that. And so I would just say to other people if that's something that salary is a consideration because there are just ideas around what that should be for a self funded searcher. You should just have that open conversation with your investor and just understand there may be some other things you need to trade on and so maybe you need to be a bit more friendly on the equity. Maybe there's some other things that you need to look at to do. Higher percentage equity interest rate on your, your perfect. Whatever you have to do. Just, just understand what your personal dynamics are and what you will, what, what, what you'll need to quote unquote, sleep well at night. I will say though, like I, I took a material step back from, from where I was at and knew that, knew that I would, I would, I would need to do so. And someone said that like literally all of my direct reports at that my former company makes substantially more money than I do right now.

Will Smith (77:59)

But they're still working for the man Jonathan.

Jonathan Taylor (78:02)

They are.

Will Smith (78:03)

Can't put a, can't put a price tag on that. You're out here building an empire. No, but, no but then of course, of course I take that point. You, yeah. Salary step down and that's important to acknowledge.

Jonathan Taylor (78:14)

Yeah, I mean these things are in some ways psychological too. Right? I mean it's real, the money's real. And like you, you're, you have different plans for your life, whatever. But, but some of that psychological is like what, this is not what I'm doing and like all the people in my team are making this right. So it is, it's something that again just have that open conversation with, with, with your, with, with the people that you're looking to bring on.

Will Smith (78:35)

Yeah, yeah, no, that's great. That, that's the tip is figure out what you need to be, what you kind of need to be paid to support the, the lifestyle you, you do. If it's, if it's overly rich investors are going to raise their eyebrow with that, that but if they're good investors and you know, and get it, they're going to take into account the fact that somebody who's 27 with no obligations has different take home income needs than somebody who has three children and lives in La a high cost of living geography and is coming from tech. So I think it's $150,000 is kind of the, kind of the baseline or default default for a self funded searcher salary a CEO that investors are expecting to see, but that is way too narrow for the broad spectrum of self funded searchers out there. So yours was above 150 and you had that conversation earlier, so.

Jonathan Taylor (79:30)

Right.

Will Smith (79:31)

Okay, Jonathan, just couple more questions. You did a sales tax analysis, which by itself sounds like the driest thing ever, but in fact, in fact was crucial, a crucial thing to have done. What's the lesson there? Tell us that little anecdote.

Jonathan Taylor (79:48)

Yeah, and just this stems from the fact that we are doing a lot of transactions every single day with customers all over the US and so apparently because of Wayfair, you know, there's different tax implications. If you're doing a number of transactions, state or over dollar amount, you can then trigger sales tax requirements in those states and need to register and pay those. So as part of my original qov, they did all the usual things, but also noted that, hey, we recommend that you actually do this and take a look and see if there's actually some sales tax liability that is out there outstanding that you may ultimately, because you're doing a stock deal, become liable for. And so that cost me an extra $8,000, but from there identified that there was a high likelihood of some existing tax liability. And so that enabled me then to go back to the sell, then put some money in escrow until we can resolve that, we then use that money to pay down those sales taxes. So ultimately that $8,000 saved me $50,000 on the back end.

Will Smith (81:00)

Right. And there's the moral of the story. This was a case where you had as a searcher, you know, you're watching every penny and you had a discretionary spend of an additional eight, eight grand right out of your pocket. And it's very tempting to just be like, oh, that sounds excessive, but you did it prudently. And, and, and, and boy, was it a good decision.

Jonathan Taylor (81:22)

I learned my lesson from the Frankenstein loi. And it's like, no, let me just spend the money to again sleep well at night. And so very, very happy I did that.

Will Smith (81:33)

Jonathan, you dropped out completely. There again, Start, start from the top where you said, I learned my lesson.

Jonathan Taylor (81:37)

Yeah, I said I learned my lesson from the Frankenstein loi. So very, very happy that I, that I spent the money because it was money very, very well spent.

Will Smith (81:48)

Great. Okay, Jonathan, let's close with just hearing how you have grown this business. I said 40%. I don't. That's directional. It may even be more. And it's been a year and a half since close.

Jonathan Taylor (82:04)

It's been roughly a year and a half since closing at top line, that's direction. Correct. Bottom line, it's roughly 30 plus percent. And so a lot of that growth has just come from strong tailwinds in the industry. But also the team just buying into the vision and being a lot more responsive to customers, handling quotes, dealing with those faster. We've done some things too to improve some of our processes. So credit card transactions were all handled by paper and pencil. So those sometimes delayed the actual shipments. We now have a digital platform where we can take those and we have a lot more structured on and we have team meetings around like hey, here's the products that are coming in and coming out. And so aligning the team more on like what's happening has had a lot, a lot of, has had a lot of positive impact. We're also now more proactively pursuing business with the government. And so before there was zero dollars last year it was over 100,000. And so we're going to continue to push on that too. And so there are just a lot of opportunities ahead of us.

Will Smith (83:01)

So Jonathan, one of the final critique that I'll share that we had of the opportunity was about how to grow a business like this in distribution. Businesses, I think broadly, at least reputationally, are harder to grow. So now that you're on the inside, how do you react to that?

Jonathan Taylor (83:24)

I think that's true and I think you guys are right to have that opinion because I was coming not from this space and I'm sure that if I did I would be able to more intelligently answer the question or make, make a comment to that, to that point. But now being on the inside there, there are just a lot of things that were unique about this business. We were operating from everything, paper and pencil. So the sales team would come in, literally everyone would print their inbox and buy paper like work quotes and then type them into their computer. And so we've upgraded our system so we're now that's all happening like electronically and going out out on a much more rapid basis. And so people are able to do more quotes today than they were able to do previously. We also have a lot more intelligence on, on those quotes because we can track like okay, did this, did this actually win? Did we price this right? Also have for, for the vast majority of the products that we're selling the most of our top 200 SKUs. Like we have a price list so that's in the system. Like those things get automated and so just trying to make process improvements and it was next to impossible to me to articulate like hey, we're going to grow sales by just like improving the sales process and tackle that. Because I thought and I put this in the deck like hey, I need to build a website, I need to do all these other things. And it's like I haven't gotten to those yet. And it's just like process improvements and market tailwinds and just understanding some of our customers and being there to support them. That's what's taking us to where we're at today.

Will Smith (84:49)

And so a lot of those things, while they will add a ton of value and move the needle, they are one off wins. And so once you get on the other side of all of that good stuff. Yeah it's, it's basically about selling more, more product through and so I guess the way you once you professionalized everything, increasing throughput and that basically means more customers to sell to and more of the supplier's product that you offer to sell.

Jonathan Taylor (85:19)

Yes, both. So it's, it's understanding, working more closely with our customers so we can figure out what needs they have, how we can better suit those needs, getting those parts in supply and being able to supply them to the customers that need them and then just repeating that flywheel and then as that flywheel repeats then add on more value added services. So there are other areas that we could be doing so more long term contracts working with customers that on a longer term basis, hey, we will handle the logistics for you. So whenever you need this part you just come to us and like we'll ship it out doing repair management. So in time we can actually endeavor to be a repair station so that we ourselves can actually repair parts. And so that's another value added service. More kidding. So a lot of times a lot of the value of a distributor is that I need actually five different parts. I can just go to you get all those five parts but if you can put them together in a specific package for me and then send them out like that is tremendously helpful because then you don't have the guys on the production line fooling around trying to find the five different things. They're all just right there and so just doing all of those things. Increasing our capabilities while increasing our working more deeply and being more ingrained with our customer base, enabling us to add to our Supplier base, then add on some of those value added services is just how we continue to grow.

Will Smith (86:32)

Awesome. Jonathan, congratulations on so much progress. It's really a great story and even though we're not in it and I'm maybe kicking myself a little bit, obviously I'm thrilled at your success.

Jonathan Taylor (86:44)

I gotta ask, you know, now that you are in in Mind's capital, this is probably what 20 months for you guys. Now that you guys have, you're in fun too I believe. If are you guys more or less receptive or do you still have sort of the same position on, on people that come to you with a longer term orientation?

Will Smith (87:01)

We're probably the same.

Jonathan Taylor (87:04)

Yeah.

Will Smith (87:04)

And especially because we've defined it even more clearly. We're just coming off a fundraise for fund two and we have this articulated thesis and strategy. We, we, if anything we probably, we probably would be less receptive.

Jonathan Taylor (87:22)

Yeah, it's interesting. I, I think just the, the opportunity to present to you guys get your feedback on, on the deal was re. Very illuminating for me because it just highlighted the, the need for investor alignment with, with, with the operator and just a real focus on that. And I just think that's something that searchers should, should really, really put a high emphasis on. And it's challenging because I know a lot of investors try to push off having meetings with searchers until there's a, there's a deal in hand which I completely understand. People are busy. But to the extent that you can start building those relationships other and truly understanding whether there's a fit that there's alignment I think is just so important.

Will Smith (88:05)

It's a great point, Jonathan. I would advocate the same. I will say that like at Mind's Capital we are are in the category of investor that says only we can only take calls if you have a deal under, under loi because of the time constraints just this, this week we've just seen a crush of deal flow which is a great place to be. But already we're you know, like everybody, we're very busy and there are only so many hours in the day and so, so unfortunately we have to pick and choose the, the calls that we have. But that doesn't mean that your advice. I disagree with your advice. If you can can somehow cultivate relationships with investors in advance even of having a deal under loi do so but just understand that a lot of investors are gonna, are gonna say sorry I, I just can't. But maybe there are other ways to cultivate relationships with investors. It's a tricky one. Because I, I see it from both sides and, and just seeing it from both sides in general it has, has been eye opening now that I am an investor and see things from the investor perspective it's, it's, it's very different than, than the searcher perspective. As I said earlier in our conversation, as a searcher I would have an orientation that's different than I have as an investor. And so the incentive, the incentives just are not necessarily always the same or always what you'd expect. And so what you have to do as searcher, as you did do Jonathan is try to find those investors whose incentives are as closely aligned to yours as possible possible.

Jonathan Taylor (89:33)

Yeah, absolutely great sir.

Will Smith (89:35)

We will put a link to your LinkedIn in the show notes. Anything else you would leave the audience with?

Jonathan Taylor (89:42)

I would just offer this word of encouragement to anyone out there thinking about starting a search in the midst of the search, in the doldrums of the search. Just lost a deal, whatever, just, just, just keep moving forward and just keep, keep making progress and for those that are, that are been thinking about it and like I was when I originally started finding ways to make excuses and so I need to build a website, I need to find a CRM, just, just sign the NDA, get going and, and just really start taking the steps tilts me achieving the thing that you, you have identified that you, you want to do because there's going to be so many ups and downs. But, but certainly I think I believe it's truly worth it and the right business is out there if you just keep turning over those stones.

Will Smith (90:33)

Great point to end on. Jonathan Taylor, thank you so much for coming on.

Jonathan Taylor (90:36)

Thank you sir.

Will Smith (90:37)

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