Acquiring Minds Podcast Episode Summary: "How to Recover from a Fraudulent Seller"

Introduction

In this compelling episode of Acquiring Minds, host Will Smith delves into the harrowing yet inspiring journey of Eli Day, a seasoned acquisition entrepreneur who faced significant challenges after purchasing a fraudulent business. Released on May 8, 2025, this episode provides invaluable insights into navigating the complexities of acquisition entrepreneurship, especially when confronted with deceitful sellers.

Guest Background: Eli Day's Path to Acquisition Entrepreneurship

Eli Day shares his origins in the entrepreneurial world, highlighting his formative experiences during his MBA program and his early exposure to acquisition entrepreneurship (ETA) through working for an entrepreneur engaged in buying businesses. Inspired by Matt Estepp’s success with a traditional search fund model, Eli and his partner Alaide decided to pursue their own search fund, leading them to acquire a dental practice management business in 2017.

The Acquisition: Expectations vs. Reality

Eli recounts the initial stages of their search fund journey, emphasizing their focus on dental support organizations (DSOs) as a strategic niche. They believed DSOs offered a promising opportunity due to the increasing number of dentists seeking exit options amidst rising student loan debts (12:03). However, their acquisition process took an unexpected turn when they discovered fraudulent activities post-purchase.

Uncovering Fraud: The Turning Point

Shortly after acquiring the business, Eli noticed inconsistencies that raised red flags. An employee's offhand comment about a Medicaid audit led Eli to uncover that the business had been defrauding Medicaid, significantly skewing the financial health of the company. What was initially perceived as a $1.5 million SDE business revealed itself to be a loss-making entity engaged in unethical practices (00:00).

Crisis Management: Emotional and Operational Challenges

Confronted with the stark reality of the fraud, Eli describes the overwhelming stress and emotional turmoil he and his partner faced. Balancing the responsibilities of new parenthood and the immense pressure of turning around a failing business led Eli to experience severe anxiety and panic attacks (20:51). The situation necessitated immediate strategic action to salvage their investment and uphold their ethical standards.

Investor Support: The Pillar of Strength

A pivotal aspect of Eli’s recovery was the unwavering support from their investors, particularly David Dodson. When Eli and his partner contemplated litigation against the fraudulent seller, an insightful investor advised them to focus on growing the business instead, emphasizing the long-term value over immediate legal recourse (24:03). This guidance was instrumental in shifting their focus from vengeance to business revitalization.

Turnaround Strategy: Cash Management, Culture Transformation, and Operational Overhaul

Eli outlines their comprehensive approach to turning the business around, focusing on three Cs: Cash, Culture, and Communication.

1. Cash Management: Daily monitoring of cash flow enabled them to make informed financial decisions, such as optimizing accounts payable and receivable cycles to enhance liquidity (46:50).

2. Culture Transformation: Recognizing the toxic culture fostered by the fraudulent practices, Eli and his partner prioritized rebuilding the organizational culture. They implemented a rigorous color-coding system to evaluate employee performance based on core values like integrity and respect. This led to the difficult decision to terminate over half of the workforce to align with their new ethical standards (52:00).

   "You cannot structure around integrity." (42:50) – Eli Day

3. Operational Overhaul: By redefining roles, establishing clear performance metrics, and fostering an environment of respectful candor, they rebuilt a cohesive and ethical team dedicated to the company's recovery and growth.

Strategic Decisions: Choosing Growth Over Litigation

Faced with the option to pursue litigation against the fraudulent seller, Eli describes how strategic financial advice from investors redirected their efforts towards business growth. By calculating the potential returns from litigation vs. focusing on EBITDA growth, they made a calculated decision to abandon legal actions and concentrate on enhancing operational performance (63:09).

Exiting the Business: A Successful Turnaround

After two challenging years marked by significant cultural and operational changes, Eli and his partner successfully turned the business around. Despite the additional strain from the COVID-19 pandemic, which forced them to pivot their service offerings, they achieved substantial EBITDA growth. This transformation culminated in selling the revitalized business in December 2023, with EBITDA reaching over $4 million (71:28).

Key Takeaways and Insights

Eli Day emphasizes several critical lessons for acquisition entrepreneurs:

1. Due Diligence Excellence: The importance of investing in high-quality due diligence cannot be overstated. Eli acknowledges that attempting to cut costs on due diligence led to missing the fraud, costing them significantly more in the long run (37:26).

2. Investor Relationships: Building relationships with empathetic and experienced investors can provide invaluable support during crises. Investors like David Dodson not only offer financial backing but also strategic guidance and emotional support (28:10).

3. Culture is Paramount: Establishing and maintaining a strong, ethical organizational culture is essential. Eli’s experience underscores that integrity should be the foundation of any acquisition, and cultural misalignment can be detrimental to long-term success (33:34).

4. Strategic Focus: Prioritizing business growth and operational excellence can often yield better returns than pursuing legal actions against fraudulent actors. This strategic focus enables entrepreneurs to recover and thrive despite significant setbacks (65:49).

5. Support Systems: The search fund community’s camaraderie and the availability of mentorship can significantly aid entrepreneurs facing challenges. Eli highlights the value of having access to experienced mentors and a supportive network (84:10).

Conclusion

Eli Day’s story is a testament to resilience, strategic thinking, and the importance of ethical leadership in acquisition entrepreneurship. Despite encountering severe fraud and operational setbacks, his ability to pivot, supported by a strong investor network and a commitment to integrity, led to a successful business turnaround and exit. This episode serves as a crucial learning resource for entrepreneurs aiming to navigate the complexities of buying and reviving businesses.

Notable Quotes with Timestamps

• "You cannot structure around integrity." – Eli Day (42:50)
• "We're going to run through brick walls for you guys." – Eli Day (75:00)
• "Pattern recognition was just completely." – Eli Day (29:57)

Resources Mentioned

• Oberle Risk Strategies: A specialty insurance brokerage for searchers, led by August Felker. Visit oberle-risk.com.
• System 6: An outsourced finance team for SMBs. Check out system6.com.
• Manager's Handbook by David Dodson: A recommended read for managing and turning around businesses.

Further Actions

For listeners eager to delve deeper into acquisition entrepreneurship, Eli Day encourages reaching out via LinkedIn or email for mentorship and advice. Additionally, subscribing to the Acquiring Minds newsletter provides access to valuable resources, episode summaries, and upcoming webinars on the nuances of buying and managing businesses.