How to Recover from a Fraudulent Seller

Summary

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.

Transcript

[Will Smith]

A few weeks ago we heard from Jed Morris, who lost his business and has since connected with dozens of other searchers with bad outcomes. A key finding from those conversations is that seller dishonesty is the number one reason for acquisitions gone wrong. Today's story is a case in point. Jason Jackson learned during transition from an offhand comment by one of the employees that the business he just bought was being audited for its Medicaid claims. As he pulled the thread, he learned that the business was defrauding Medicaid and was actually losing money. If you stripped out all the fraudulent revenue, imagine that you think you're acquiring a $1.5 million SDE business. Instead, it's an organization in the red engaging in fraud. Today's interview is the six year journey to turn it all around and there are gems aplenty. Listen for how Jason and his partner corrected a corroded culture, how they worked every non technical position to learn it, and because they were short staffed, the math that one of their investors used to persuade them to stop litigating the seller and instead focus on building.

[Jason Jackson]

And my favorite moment, why?

[Will Smith]

This same investor's reaction to the bad news of the fraud moved Jason to tears, the value of pattern recognition and finally the decision to exit the business, which after six years was showing a lot of potential. Ultimately, Jason and his partner actually generated a return for their investors who thought they'd only get 10 cents back on the dollar. As evidence of their appreciation of this performance, Jason now works alongside those investors as a partner in their fund. Here he is, Jason Jackson of Fudalufu Partners. As you have probably heard, the SBA just issued the biggest rule change in years with serious implications for searchers who intend to buy a business with an SBA loan. Attorneys Bill Barlow and James David Williams return for a timely legal office hours to unpack how your SBA deal will now need to be structured. Topics to be covered include sellers, rolling equity, standby notes, deals that depend on licensing so blue collar tradesy businesses, non U.S. investors and franchise acquisitions. That is today Thursday, May 8th at noon Eastern. Register at the link in today's show notes or on the Acquiring Minds homepage.

[Jason Jackson]

On Acquiring Minds co. Not to be.

[Will Smith]

Missed if you are contemplating an SBA.

[Jason Jackson]

Loan for your business acquisition today, noon Eastern. See you there.

[Will Smith]

Welcome to Acquiring Minds, a podcast about buying businesses. My name is Will Smith. Acquiring an existing business is an awesome opportunity for many entrepreneurs and on this podcast I talk to the people who do it. 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. One name comes up again and again. 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 Oberly, 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 to know August and the team at Oberle to take advantage. Check out oberly-risk.com that's o b e r l e-risk.com link in the notes.

[Jason Jackson]

Jason Jackson, welcome to Acquiring Minds.

[Eli Day]

Thank you. Thank you for having me.

[Jason Jackson]

Jason, this is a packed story. Yours was a traditional search. You uncovered fraud very shortly after taking ownership of the business. The whole project was turned upside down. You lived to tell the tale. Let's hear that tale. Where does this story begin, Jason? How did you get the notion you wanted to buy a business in the first place?

[Eli Day]

So while I was doing like my MBA program, I was also working full time and I was working for an entrepreneur that was buying businesses. And he would buy the business, he would put a good amount of leverage on the business and he would operate the business. And so I was overseeing sales for one of his businesses in his portfolio. And so I was familiar with entrepreneurship through acquisition through him. I just, I didn't have language for it at the time. And for me, I always wanted to be an entrepreneur. Didn't have the idea. A lot of people can relate to the same story when they find eta. Um, and so I was going to one of my accounting courses and there was a, a guy that was speaking at my accounting course named Matt Estepp, who's become a really good friend of mine. Matt estep was a 2008 HBS grad and had done a traditional search fund. Sold his business after operating it for like two and a half years. Just a really amazing success story. Matty Step. And so he was talking about the search fund model and I had never heard about the search fund model before. And so it was just very compelling. His story was very compelling as he was speaking to our class. And so that's when I just kept bugging him and he said, look, if you're this interested, come to the first ever Chicago Booth ETA conference. And I still remember going to it October 14, 2014. And I was just hooked. Called My partner and that that would become my partner, Eli Day Law, and said, this is the thing that we've been thinking about working on together. This is what it is. I explained the model to him and the rest is history.

[Jason Jackson]

So you guys had, you know, had the conversations, we'll do something together, something in business together. We'll partner. Don't know what it is, but. And then this ended up being, I found it was kind of your, was your sensation. This is the thing that we should sink our teeth into. And that. 2014 Booth Chicago Booth ETA conference, first one. How many people were there? Because that's now a big conference.

[Eli Day]

Yeah, I want to say it was like 75 people at the time. And I remember the joke was that the room was too small for the 75 people. 75 to 100, it's directionally accurate. And so they were like, oh, next year we're probably going to need a bigger room. And there was just kind of laughter and things of that nature. And I just went there like last year, so like 10 years later and it was like over a thousand people. So it's wild how it's grown.

[Jason Jackson]

That's great. Yeah, I mean, I know that that and I think Harvard's are the two, two biggest ones. I have not been to either though. I think I will be at the booth one this, I think it's November.

[Will Smith]

It'S happening this year.

[Jason Jackson]

Yeah.

[Eli Day]

Yeah, great.

[Jason Jackson]

Do you go? Will you go?

[Eli Day]

Yeah, I'll be there.

[Jason Jackson]

Okay, cool. And of course we met at MIT's ETA conference a month or so ago, I guess, back in Febr, and you were on a panel about what, you know, what to do when it all goes south and gave a great, great, you know, just a really strong presence on the panel. So hence why we're, we're talking here today. I wanted to hear the story in all its detail back to that story. So. Okay, Jason, so you call and your partner's name again?

[Eli Day]

Alaide. Yeah, Alai Day.

[Jason Jackson]

Okay. So is he easily convinced by the way of this ETA thing?

[Eli Day]

You know, you know, we had always talked about, we thought we were going to work on like a non profit organization together or, you know, something of that, of that nature. And we had, you know, went back and forth with a couple of different ideas. And so when I called him, I was like, okay, I found it. And so I explained it to him. He was convinced. After a week we had to convince his wife. And so she became convinced as well that this was the right opportunity. And so then we pursued it, raised A traditional search fund in 2015. It was actually we started in April of 2015, so 10 years now. Bought our business in 2017 in the dental practice management space. And so that's when the story began.

[Jason Jackson]

Yeah. And the you chose traditional search fund I'll assume, correct me, because at the time that was the kind of the default. So self funded was barely happening. It didn't even really have a name. If you were going to do this path, it was going to be according to this model. The traditional model that was starting to be taught and talked about so much.

[Eli Day]

Yeah, it was the traditional model. It was the traditional model for a few reasons. One is, is you know, there was some self funded stuff that was just starting at that time, I remember. But it was a traditional model for me for a couple of reasons. One is, is that I was familiar with it from, you know, Matty Step. The second though is that there was pattern recognition that I knew I could leverage from the other investors that was going to be different than me doing it on my own. And then the third is I simply didn't have the money to do a self funded search. So that was kind of out of the question for me.

[Jason Jackson]

Right, and people will understand what you mean there. But just to be super clear, with a traditional search fund, one of the big features of it is that your investors who choose to back you fund the search. Which is why we call self funded search self funded because nobody's paying you anything. But with a traditional model you have the, the re resources for basically a two year search. So you can basically have no money and go off and do this thing. And that's a big reason why a lot of people choose it among others. Okay, so you bought in 2017, so tell us a little bit about the search first before we get into the business itself.

[Eli Day]

Yeah, so we had started off like most people that do search, even self funded searches. We had started off with a thesis that we were going to look in certain industries. Our industries at the time were like water reclamation, electronics recycling I think was the second industry. But as we were doing a search it just pivoted into something different. And so I remember getting a text message or a call from Kent Weaver. He was talking about this new thing called, you know, dental, dental support organizations and was talking about how it was something new to eta. And he had seen various different models, whether it be veterinary practice management, optometry and thought dentistry was very compelling. And so that's what started the whole kind of dental support organization search. And when I say dental Support organization. It's just a fancy way of saying that it's a way for business people to partner with clinicians, dentists to basically buy and run dental practices. And so the idea is that the dentist will be the clinical leader of the dental practice and that the business person will be the business leader of the dental practices as they go and acquire them and, and hopefully get to some scale.

[Jason Jackson]

And was this dental service organization, DSO concept just one that like ETA had discovered, or was it actually a new sort of regulation that enabled this to happen? Why then, why did that grab Kent and then later your attention in that moment?

[Eli Day]

So it was, it was something that there was a good amount of private equity penetration already. And what we learned when we bought the, when we started Unified Dental was that there was actually way more private equity penetration than we had fully appreciated. But it was just something that was different because there were some attributes that were similar to search funds. Even though it was more kind of B2C, there were still some elements. Like, you know, there was the, the, the, the gray, the gray wave of all of these dentists that were going to be selling off their dental practices. They did not have traditional exit alternatives to sell it to, like the new up and coming dentists because more dentists were graduating with student loans, like higher student loan debt than they were before. Second was that more dentists were looking for flexibility. And so it just didn't allow for traditional exit alternatives. And so that's why there was an, an opportunity for search funds to provide some solutions from that standpoint.

[Jason Jackson]

Great. Well, as you said, despite the fact that it seemed like there was still good opportunity in search, we do HEAR these days, 10 years later, the dental and DSOs have been, have been a big private equity play. So I guess it was even already well underway 10 years ago. Okay, and so how did you find the business? Anything more to say about the search or should we just get into how you found the business that you did?

[Eli Day]

Yeah, let's get into the business. So we, we found the business through a broker. And you know, candidly, when we were going through our due diligence, there were some things with the seller that I was seeing that just was not adding up from an integrity standpoint. Things, Some, some background history that we had seen with some issues with, with billing, but the issues had amounted to a total of like $10,000. And so, you know, we, we kind of just explained it away as, as. Look, I mean, it's only $10,000. Like that's a de minimis amount of Money. And so we continued forward with diligence. And frankly, we had, we had done some things where we thought that we were going to structure around any potential issues that we thought might come up after we buy the business. And so we felt like we had structured the deal well. We had a good amount of the purchase price in the form of a seller note. And, you know, we effectively were paying, you know, like 40% to 50% cash at close when we, when we were going to buy the business. It was, it was, I think that was directionally accurate. It was about 50% at the time. And so we thought, look, if there was any issues that we uncover after we buy the business, like we've, we've effectively, you know, structured around what we might uncover and so made the business purchase. You know, side note, right here, I was a new father. My son was 18 months old at the time. And then we had just had our second child who was like 11 days old when we purchased the business. So this was just like a really pivotal moment from a, from a family perspective, a personal perspective in my life. And so we, we purchased this business and not having a lot of sleep and all of those kind of things. And, and so two weeks into, you know, having bought the business, we were doing these things where we were going around speaking to all the employees, doing kind of like this whole kind of like red light, green light, yellow light type of exercise, meaning, you know, what would you, what do you suggest we stop doing? What do you think we should keep doing? What do you think we should look into? And so we're having those conversations. And that's when I had learned more about our business post acquisition from a $17 an hour employee than I had learned from over $400,000 of due diligence. And that was that the seller had been committing insurance fraud, running payroll, paying.

[Will Smith]

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[Jason Jackson]

How did this person reveal this to you?

[Eli Day]

Yeah, so basically I was in the office and then I, I, you know, was asking this employee, I was like, hey, so what are you doing right now? Just, you know, let me in on, on, on your role today. And I had previously told the employees, the staff, when we had first purchased the business, that do not get overwhelmed or feel like there's more to it when I ask questions, because for my first couple of months, a lot of what I'm going to say is going to end in question marks and not periods because I'm just trying to learn the business. So I'm not questioning you, I'm just trying to learn the business. And so I did that. And so I popped into the office and I said, hey, you know, what are you doing today? She had like a huge stack of papers. She was doing things that, like, looked really important. I was like, yeah, like, what are you up to? She's like, yeah, I'm just doing this stuff for like the, the Medicaid audit that we had had. Medicaid audit, like, what are you talking about? She's like, you know, the stuff with the whole, you know, Medicaid audit, which is why, you know, we're unable to see some of the large insurances at this location. It's like, what do you mean? She's like, you didn't know? And so that's when she unveils basically all that had taken place. And, you know, that was effectively hidden from the diligence because there was not. There was a pending litigation that was taking place. There was no way to kind of find it at the time from a legal perspective. And so that's when it all hit me, like, wow, there's more that's taking place here. And so that began our investigation into really the scope of how big this issue was. And it was a big issue for a couple of different reasons. It was a big issue from a dollar standpoint because what we had uncovered was that we thought we were buying like a $7 million revenue business ended up being like four and a half million of revenue. We thought we were buying like a one and a half million dollar ebitda. Business ended up being like negative half a million in ebitda. And so that's what we had bought, basically. And so that was, that was the big issue from the dollar standpoint, right? The big issue from like a future kind of like org chart standpoint was that the clinician, the dentist that we thought was going to be the clinical leader, we could no longer have be the clinical leader. And so. Yeah, well, because he was committing fraud. It was the seller. The seller was the dentist that was supposed to be the clinical leader.

[Jason Jackson]

So the seller was going to stay with you.

[Eli Day]

The seller was supposed to stay with us to lead all of the dentists, help find other dental practices for us to acquire in the future. And so that was the, that was the big issue.

[Jason Jackson]

Wow.

[Eli Day]

We had a couple. Okay.

[Jason Jackson]

All right, let's unpack some of this. Jason, first of all, what's it feel like when you, when you just have this horrible revelation and you're already walked through a door that is a one way door. There's no undo button.

[Eli Day]

Yeah. So it's, it's actually a very interesting question because the first thing that we were trying to figure out was is there, is there a legal, is there a legal mechanism for us to kind of put the toys back in the box and to give it back? And we found out that there wasn't. Right. We quickly realized that there wasn't. The second thing that was difficult was just all of the things that I just described as being a new, you know, new parent at that time. You know, having your second child that was a newborn, that was incredibly stressful. My wife was back at home working, but also taking care of our kids in Chicago. My partner's wife was holding things down for, for his family in San Diego. And so now we were moving in, in, in to Detroit metro area. You know, we had been working like 18 hour days already. We were staying in this like 70 something dollar a night Priceline hotel that we were sharing together to save money. And so you, you hear all this information in light of all of the sacrifice that you know, you had made. And also your investors more importantly had put like invested in you. They had decided to back you, they trusted you. And so the filling was completely like overwhelming. I remember for like the first 18 months for me to go through one day with only one panic attack, it was just like, it was like a huge feat for me. I was literally having panic attacks several times a day where I couldn't breathe. I wasn't getting any sleep. And you know, you're, you're in this situation where you're a first time CEO, but then you realize within a couple of weeks that now you're a turnaround CEO. And so it was incredibly difficult to go through and until this day, you know, I give a lot of credit to a couple of different things. One, I give a lot of credit to my faith in God. And so my faith and Jesus really helped me get through the situation. The second thing I give a lot of credit to is just the investors and the board members that I had. You know, Todd Tracy was an amazing board member, search fund partners that would meet with us several times each week and was incredibly sharp, incredibly empathetic. You know, Michael Aubrey was on our board, was several board meetings ahead and would know kind of strategy, this is what we need to do and was just, I mean had such sage advice. He was always available. But the first call that I had made to tell the investors was to David Dodson and I, we had decided, my partner and I to call David first because we, we didn't think it was going to get any worse. You know, the, the other investors that we had like looked up to to David and we knew that if, you know, they were going to go to him for advice on a situation as dire that as, as we were in at that moment.

[Jason Jackson]

And so Jason, David Dodson, give the audience context. For those who don't know who he is, he's kind of a big deal in search fund land.

[Eli Day]

Yeah, David Dodson was the fir, the third person ever do a search fund. Bought his business called Smith Alarm. Geez. Back in, I think I want to say it was the 80s and had a really good exit. He did three search funds. He was on the board of Assurian. You know, he's, he's since been on the board of like, I want to say like a hundred different businesses. And so he's been in the space for, for a while. And he was one of my largest investors. In fact he was, he was tied for like the largest investor that I had. David Dotson and Susan Paulmeier.

[Jason Jackson]

Thank you.

[Eli Day]

So we had decided that we were going to call David first because we had sent this email to our investors basically giving as little detail as possible because we just didn't have a lot of detail. One, two. We wanted to be able to like share more detail on the call. And so my partner and I alaidate we had practiced what we were going to tell the investors. We were basically going to share what we had uncovered. We were going to pause, allow them to curse us out for the next 20 seconds and then we were going to go back into our pitch and say, okay, we, we're really sorry we got you into this situation, but this is what we're going to do to get us out of this situation. And so we. We had gotten our pitch down, decided to call David up. Phone rings. I remember I could physically feel, like my heart beating. Like, I was just so nervous. And so David answers the phone, and he says, hey, is this the Michigan Attorney General's office? And he starts laughing. What? Like, I looked at Alaide, the hotel, like, what? Like. And so we had rehearsed for, like, every kind of reaction, but we had not rehearsed for, you know, a supportive one. Yeah. So, like, so. So then part of me was like, look, maybe he's going to use this as, like, anesthesia before he does surgery on us. So, you know, put your guard back up. And so I was like, yeah, sorry, David, we. This is what happened. We're really sorry we got you into the situation. He said, you know what? I'm not going to let you finish, because we were partners getting into the situation. We're going to be partners getting out of this situation. And so I didn't tell David this until maybe a couple of years ago. I put the phone on mute, and I literally started crying. I started bawling, and I started crying for the reason that, you know, most of the listeners are going to realize, which is that, you know, you're in this incredibly difficult situation, and to have an investor that's supportive is amazing. But I was actually crying for an even bigger reason for me personally. And that's the reason is because, you know, a lot of folks that have my background that come from underrepresented, you know, neighborhoods, underrepresented backgrounds, being black, that don't have access to the same opportunities, which is a different story for a different podcast as other people. This was my chance to, like, pay back a lot of people that had made a difference in my life to get me to this, to the place that I was at in life. And the issue with a lot of people that come from these backgrounds that pursue entrepreneurship and even folks that maybe don't come from the same ethnic background but can relate to this, is that when you think about pursuing entrepreneurship, a lot of times you have this thing that you want to fall back on, have something to fall back on. But when you come from the background that I came from, not only did I not have anything to fall back on, I was the. The safety net for other people to fall back on. And so when David had said, look, it's okay. We're going to get out of this situation together, what I had heard was that you did not ruin the Opportunity for people to fall back on you, to be the safety net when so many people were there for you. And so that sheer weight of that, I just started bawling and crying, and Alida had to take over the phone call at that point.

[Jason Jackson]

That's so powerful, Jason.

[Eli Day]

Wow.

[Jason Jackson]

David Dodson. Little did he know one joke would be. Would. Would land with such force. I mean, that's a really beautiful story.

[Eli Day]

Yeah. And look, I would just say this. It was one thing for. For. For, you know, him to say that, but it was another thing for him. And then, you know, Todd and Michael, Aubrey and other investors that I had to make good on that promise. And so every two weeks, I was jumping on CR calls with David to talk through complex operational issues, you know, and. And just the pattern recognition was just completely. It was so helpful. And the best way that I can liken it to is, is that I was trying to teach my son how to play chess a couple of years ago. And the reason why I was trying to teach him how to play chess was because I don't know how to play chess. And so I was reading this book and it was saying that the difference between a grand chess master and like, a less experienced opponent is that a grand chess master can make a series of 10 moves within seconds of their opponent making moves. And the reason why is because a grand chess master is spending about 99% of her time on. On pattern recognition, and the less experienced person is spending 99% of their time on. On calculation. And so there was a lot of time that I was spending on calculation. And we would be mulling over complex operational issues for weeks at a time. But you called David, you called Michael, you called Todd, and it was like they were able to solve it in, like, a matter of moments because of all the pattern recognition. So that's what eventually helped us get through the next couple of years, to kind of turn things around.

[Jason Jackson]

What a fascinating comment on the value of pattern recognition, the value of experience and how a lot of it, you know, other words for that might be kind of muscle memory or, you know, they. They're just. They've seen this movie enough times. They know. They know the motion to go through. It's interesting because this may just be a Silicon Valley thing, but you often hear pattern recognition used in a negative way when it comes to investors, at least VCs, they all invest in the same. It kind of like herd mentality. They all invest in the same thing, you know, and. And this probably is more a commentary on VC where it Pays to be, you know, to, to, to think outside the box. But it, it's, it's a refreshing take on how it can be valuable. So many reps can be so incredibly valuable. Calculation versus pattern recognition. It feels like you got really fortunate with these investors, which I think, which I think you did. What do you think others can learn from in terms of, in terms of your experience with your investors that, that to choose carefully to, to share more openly. You know, you're probably most first time entrepreneurs are so scared to reveal bad news to their investors, maybe they should be less so because investors see you as a partner, see you entrepreneur as a partner. What can we take away from your, your experience with your investors and just how actual value, how much value they added in this crisis.

[Eli Day]

So the way that I can liken it is almost like a pickup basketball game if you can stay with me for a second here. So like pickup basketball is like you go to a court and if you, if there are people that are playing but you go there alone or you go there with maybe one other partner and you need five people on the team though. And so you're basically looking out for other people that are playing. And you're asking yourself a series of three questions. The first question you're asking yourself is who is playing right now that can join my team on the next game that can complement my skill sets the best? Second question you're asking is who can increase my likelihood of winning? And then the third question you're asking yourself is who do I think I'd have the most fun with over the next kind of, you know, two hours? And so it's literally the same questions. It's just the implications are bigger because you're talking about the next 10 years of your life. And so you're asking yourself, you know, who can compliment my skill sets, who's going to help me win, but who am I going to enjoy this with? And the way that I would say enjoying this with is because a lot of people talk about having smart investors and smart investors is, is, is, is it's, it's hard to come by, right? And, and that's something that we're really, really blessed with in the search fund space. But I think what's also a step above that, a step forward from that is it's one thing to have investors that can root for you as you're learning from your successes. It's another thing to have investors that can still cheer you on as you're learning from mistakes. And so smart investors with empathy is even more rare. And so I just think that, you know, looking for those investors that have empathy that can say, look, you think you messed up that time? Let me tell you about the time I did X, Y and Z. And as long as you're working hard and as long as you're teachable, like they're going to support you and they're gonna like that is, that is so rare to come by. And so that's the thing that I always encourage people to try to diligence is okay, yes, smartness and pattern recognition is so important, but what is the empathy level? Because you're going to learn a lot and you're going to learn from a lot of mistakes.

[Jason Jackson]

And you'll hear from traditional searchers that one of the value propositions of investors of the search fund investor community is all the support that they're going to provide. But then you'll hear from search fund, traditional search fund entrepreneurs. Well, they say that, but they really don't provide much value. They provide the capital and it stops there. So you know, everyone is basically just speaking from their own singular experience. So it's not, you have to look at this kind of in totality, this data set. But, and, and I don't think it takes away from your point, but I, I, I, in fact, I think it reinforces your point that, that when so many traditional searchers experience with their investors is that they didn't really provide much other than the money, be extra careful that add empathy, as you said, to the list of criteria for when choosing your, your search fund investors. Is that the right takeaway?

[Eli Day]

Well, I think that's a good takeaway. But I also think the different takeaway too from what I was giving with the pattern recognition and being on calls and stuff, is that it morphed from just being on calls. In particular, especially with David and even with Michael because he had started to take over this veterinary practice, roll up that had 20 locations and he would eventually grow that to 400 locations. Right. So it morphed from just providing, you know, call me anytime or call my phone book. Like here's what I tell people. Like back in the day, like 10 years ago, you were a great search fund investor, traditional search fund investor. If you lent two things to the entrepreneur. If you gave them your phone book and you gave them your checkbook, your phone book meaning call me anytime or call my network anytime. What has changed over the last several years is now you're a great search fund investor. If you provide a phone book, a checkbook and Playbooks and playbooks were the things that I was literally starting to get from David, I was starting to get from Michael. Todd had playbooks that he helped us with initially as well on basically like lean manufacturing and applying that to our patient wait times. And so that's the support that I think you should be trying to get from your investors. Yes, the phone book is important, the checkbook is important, but what are the playbooks?

[Jason Jackson]

That's great. And, and I'll just for a little more context on Michael, the investor you keep mentioning, Michael Aubrey is now at Shore Capital. Yeah, the very well known and well respected Shore Capital who's doing, who's, who's starting to make moves in the search space and Michael is heading that up. So I, I think it's, it's still unfolding, but people should, who are interested in traditional search should keep their eyes peeled. I had a conversation with Michael a few weeks ago. Wonderful, wonderful conversation, wonderful guy, incredible reputation. Okay, let's now before we move on with the story, let's also spend some time, Jason, on the diligence, how this happened. Okay, so we heard you say $400,000 in due diligence and this was missed. And you get, and you kind of talked about why it was missed. Do you in retrospect feel like it was, it was missable or do you feel like diligence should catch that, should have caught this understanding that it was whatever it was. You said the, the legal status was in limbo or whatever, so it wasn't in any official recording. But still it feels like, you know, your $17 an hour employee just like, just, just shared it with you readily. So, so it actually, it's not like it was hidden exactly. Although the seller, I'm sure, was trying to obfuscate it. But, but anyway, so how do you react to this, this diligence miss if it is even that?

[Eli Day]

Yeah, so it was a diligence miss and, and there's a takeaway here that I think is applicable to anyone that is buying a business that I'll give in a few moments. And it basically. First off, let me just summarize the, the takeaway, the takeaway is is that not all the time is the more expensive diligence provider the best diligence provider. But that being said, you only pay for quality once. Okay, so let me, let me share why. So we had structured our diligence that we were going to do billing and chart audits first. And billing and chart audits in this, in this world is basically just trying to make sure that the way that they make their money is compliant. Okay, so that's the first, the first thing that we were going to do. Second thing we were going to do is accounting diligence to make sure that all the money that they said they had was, was really there. And then the third thing that we're going to do is legal diligence. But the first part is where we messed up. And we could have paid money to have like a more expensive $20,000 outfit do our billing and chart audits to see if the billing was there was erroneous billing of things of that nature. It's a very kind of, it's an expertise, like you have to have expertise in that particular field with that particular billing for, for dentistry in particular. All right, so, so we had the opportunity to choose this, this outfit that was going to cost us $20,000 or this, this guy that had done billing and chart audits for the state of New York for like the last 30 something years, that was an independent contractor that was going to charge us nine grand. And I went, same thing, you know, $11,000 less. We're gonna go with this guy. And the issue was that the guy missed it. And he was allowing the seller when he would catch things, he was allowing the seller, who was the dentist, to like just explain away things. And so he's like, yeah, I think, I think you're good to go. And he gave us a detailed summary, but he said I had these issues. But then he explained it this way and what I. So that was the miss. And we had done several acquisitions afterward, and myself and my partner, we caught, ah, this is really. And so, you know, we knew from what we had experienced before. And so again, like, you only pay for quality once. And like I have, we ended up paying a multiple of that $11,000 because we were just trying to skimp on due diligence dollars. So that's where it was missed.

[Jason Jackson]

Well, and so interestingly, it sounds like his miss was that he just trusted the seller, trusted the seller's hand waving and explaining away this, these, these errors. And you'd think that a diligence provider like that would be the very thing that they would be skeptical that they wouldn't trust. I mean, they're there to precisely so that you can stress test what the seller is telling you. So if they just then turn around and believe everything the seller says, it's like, you know, that was your one job, dude. I digress. Let's talk about your gut reaction to the seller. You Quantified it. You said, well, you know, it's only about 10 grand. The diligence that you guys did, the light kind of the discrepancies that you found were about ten grand. So you explained it away that way. But still, your gut was telling you something. And one of the cliches in our world is listen to your gut on, on a seller, you know, just because while if you can pinpoint something, something unethical or, or dishonest that they've done, but it's small, you should still assume or extrapolate that from that, that that's not the only thing, that that's the one thing that you found. But if they've done it in one place, they've done it at a hundred react to that.

[Eli Day]

No, I think that that's fair. I think that that's, that's really wise. And that's why I think I'm way more sensitive to that with sellers today. Right. For. For good reason. And you know, the, the other thing too is, is just thinking that you can kind of out structure integrity. Well, like structure just like it is with, with any building, it relies on a foundation, and it happens to be in our world, the foundation is integrity, the seller's integrity. And so if that foundation is off, it doesn't matter how you structure and you build on top of that with the structure. And so that's the issue that we faced.

[Jason Jackson]

Yeah. You know, I'm reminded of a line, almost a quip that we heard one of the other panelists at our panel badge Stone said, I don't know if he coined it or he's just heard it around himself, but you can't structure around integrity. Precisely what you guys tried to do. You know, the rule of thumb should actually be if there is an integrity problem to your other word, it goes to the very structure of the organization. You can't. And so you can't. I'm using the structure in two ways. You can't structure your deal around the crumbly structure of an organization. And if the, if the structure of the organization is crumbly, if there's integrity problems. So I, I, that really, that line of badges really stayed with me. You cannot structure, you cannot deal structure around integrity. It's a deal breaker batch at a.

[Eli Day]

Thousand wise things there. But yeah, that was my line that I, I learned. And the reason why I take that line is, is because I earned it with my bald head. And so you're like, sorry, Jason, I have to take every bit of credit for my baldness that I can.

[Jason Jackson]

Yes.

[Eli Day]

Yeah. From the stress that I received from, from operating the business.

[Jason Jackson]

It's such a good line. You cannot structure around integrity. Jason Jackson said those, said those words. Thank you by the way. You're very quotable. I also love when you told your team this is a line that you listeners should use when you in your transition. A lot of what I say to you, new team person, new employee is going to be ending in question marks, not periods for the next whatever, however long it is. Six months, three months. Great line. And really. And really. And it gets to the point that you need to reinforce to your team that your nosiness, your curiosity is just an exercise in education because employees are likely to receive that defensively. It's like, oh, you know, the new boss is asking me why I'm doing it this way. You know, I can imagine being in their shoes. It's like you get defensive so you got to disarm it. Great way to do so what do.

[Will Smith]

The following Acquiring Minds guests all have in common? Doug Johns, Morley Desai, Tim Erickson, Chirag Shah, Shane Ursum. They all went through the Acquisition Lab, the accelerator in community for people serious about buying a business. But they represent just a sliver of the Lab success stories. The number of deals across the Lab's cohorts now stands at over 120 with over $300 million in aggregate transaction value. The Acquisition Lab was founded by Walker Deibel, author of Buy then Build, the book that introduced so many of you to the very idea of buying a business. The Lab offers a month long, intensive, almost daily Q and A sessions with.

[Jason Jackson]

Advisors, live deal reviews with Walker Deal.

[Will Smith]

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

[Jason Jackson]

Chelseaivethenbuild.com I wanted to ask you about Jason, this red light, yellow light, green light system. Just say more about that. That sounds like a wise kind of system to bring into a transition.

[Eli Day]

Yeah, I mean it's not something we invented. It's just something that we just framed different. But you know, basically just wanting to hear a way that you can get feedback from, from the team. Right. To learn the business. Because the whole idea behind that is that really your ability to grow your business will likely fall down to two things. Your ability to learn the business, your ability and your second, your ability to learn how to be an effective CEO. So on your ability to learn the business, like you know, asking these questions, which there are, you know, what do you think we should do? What do you think we should continue doing that is working well? What do you think we should stop doing? And what do you think we should look into more? That you, you're just unsure of whether or not it's working. Just elicits all of these comments and feedback that I just don't think you would otherwise have gotten. And so that, that was basically the main, the main intent behind that question.

[Jason Jackson]

Yeah, no, and it's pretty straightforward, but it's just a great kind of, it's a great, you know, methodology to, to, to basically try to collect that, that advice from the team. Good stuff. Okay, pick us back up. So you, so what, how do you try to turn around a business that not only is not making the million and a half of EBITDA you thought it was, it's actually in the red by a half a million dollars a year. It is a business that is losing money.

[Eli Day]

So we, we really focused on three things. You know, we focused on. We, we would call them like the three Cs. Cash, culture, communication. On the cash side, what we had to do is, is we were getting, at the end of every day, our accountant would send us how much cash we had in the bank. And it really, yes, it was about the cash, but it was also about the questions that the cash amount makes you think through. So for instance, why was it up today? What was happening on the revenue side? What did the doctors do in terms of production? How many patients did we see? You know, why was it down? Oh, it's because we pay this payable. Then you look into the AP and then you realize that you didn't need to pay for another, you know, three weeks. Okay, well, now let's start paying this. You know, if it's, if you have to pay with, with between the 30 to 60 day bucket pay on day 59. Right. Because it looks the same in their AR ledger. And so if you pay day 59, it's the same as if you pay 31. Right. And so it's all of those things that you start to uncover by just looking at the cash every single day. Second thing that we focused on was culture. And there was a couple of lessons. The reason why we focus on culture a lot. Well, first off, everyone knows about the importance of culture, I would imagine. But the reason why we focus on culture and it was so crucial at that moment was because we didn't want to waste a disaster, a crisis.

[Jason Jackson]

There's a politician never let a good crisis go to waste or something.

[Eli Day]

There you Go.

[Jason Jackson]

There's some line.

[Eli Day]

And. And so we didn't want to waste that because, like, if for us to say that ethics and integrity was one of our core values. Right, yeah, Everyone, like, okay, everyone says that, like Enron said, you know, ethics and integrity was a core value. Right. And so everyone just kind of scoffs at it. They're like, yeah, right. But when we were, like, literally losing money and there was an ability for us to bill patients, bill the insurance ahead of time for a procedure, which is what, you know, a lot of dental practices would do, they would, like, they would bill for a procedure ahead of time as if they had done it so that they can collect payment, particularly with crowns. Right. I'm getting a little technical here. And we said, we're not going to do that because that's not going by the book. They're like, what? And so when they see that you're losing money and you're saying the ethics and integrity is a core value, like, now we know you mean it. Whether or not I agree with it, I know you mean it right now. And so. So that was a big thing for us. The second thing, though, from a culture standpoint, is that we quickly learned that if you have to change a person in order to get them to fit with your culture, it means you have to change that person, meaning you have to fire that person. Right. And. And that was a big lesson that we had to start. We had to. We had to learn in our first 18 months. And so our first 18 months, we had a team of about 90 employees at the time. And in the first 18 months, we had let go and rehired over 45 new employees during that time frame. And a lot of it came down to culture. Okay. Yeah, yeah.

[Jason Jackson]

Jason, when you say you had to learn that or learn it the hard way, what did you mean that you. That you thought that people were. That were maybe a little bit ethically not 100%. You could teach to be ethically 100%, but you can't sort of.

[Eli Day]

Well, no. Well, so we also had other core values, too. Which. One of our other core values was respect. And one of the core values with respect meant that we would. We would treat each and every person, everyone's. Everyone's every voice mattered. Right. So whether or not you were the front desk person or whether or not you were the CEO, your voice mattered. And there was an opportunity for your voice to be heard in our meetings. Right. And then we also had things like, you know, we didn't have to walk on eggshells around each other. You could speak the truth without having to walk on eggshells, without being afraid. But you also were. You were respectfully candid, was a phrase that we use. Be respectfully candid. So tell the truth. Be respectful about it. Um, and so we had this manager, office manager that was really good at making money. We had this dentist that was really good at making money, but everyone was terrified of them. And. And so we would hire these new people that fit the core values. But then they were starting to leave, and it was. We had great performers. They were. They were ethical, they had integrity, but they were not respectful at all. And so we fired both that office manager and both the dentists. Right. And we went through, you know, a dip for a couple of quarters from. From a revenue and EBITDA standpoint. But it was. It was worth it because we needed to imbue the culture that we were setting for the team.

[Jason Jackson]

Well, that. I feel like that took a lot of courage because when you're trying to turn around your a bit, you're an entrepreneur, you bought this business, you're trying to turn it around. It's just this crisis to. Then you're kind of talking about J curve here. You're. You're basically turning over a lot of the team, which is extremely expensive, especially if some of the top earners are people that you're letting go. So you're basically putting in more cost, right? As you're trying to claw your way back to profitability, you're. You're absorbing even more cost by all this culture reversal. So it just took foresight and foresight in real kind of fortitude to foresight that like, no, yes, this is going to be. It means we're not going to get back to profitability as quickly, but long term, obviously this is us rebuilding the foundation.

[Eli Day]

Just. Just a humility standpoint. Well, you're exactly right. But just from a humility standpoint, just to be completely transparent that that was a fire we should have done two years before. But from that standpoint, we're like, man, they're making us money. Like, we can't do this. And so we let the team turn over new people and we would just kind of explain it away like, we're making this money, though, you know? And that's when we realized if we wanted to keep the team or get a team that we wanted from a culture perspective and a performance perspective, keep a team that we wanted from a culture and performance perspective, we were going to need to get rid of them. So it took us two years to fire these people. So that was the lesson. The two people. Yeah. Took us way too long.

[Jason Jackson]

Great. Yeah. I mean, it must have been just a completely broken culture in a place where there's this fraud going on. Maybe. I think that's pretty clear to the audience already, but maybe just give us 30 seconds on the, on the culture as it was when you found it.

[Eli Day]

Yeah, I mean, look, there were people that were just complicit in the fraud because they were just, you know, unethical. There were some people that were complicit in the fraud and yes, they were unethical because of what they did. But also he was capitalizing on the fact that they were single mothers that were, you know, were not college educated, you know, and so I'm going to pay you more per hour in order to do this job as long as you keep your mouth shut. Like, that's a very difficult situation to put people in. And so there were people that we just knew were not going to be able to stay with us, but then there were people that we said, hey, look, you know, like that was yesterday. The slate is clean. We all have done some things that we're not proud of and stuff. And so I'm. We're willing to give you this opportunity here and to do things the right way. And there were, you know, to be honest with you, there were several of them that still ended up. We, we had to unfortunately end our partnership with them. But there were several people that stayed on and they took the opportunity and just advanced in the org chart, which was great to see.

[Jason Jackson]

And so we've heard you say two years, that you, there's some bad actors that you should have let go two years earlier or disrespectful people when turning around a culture. Like, kind of, at the risk of oversimplifying, how long does it take or how long did it take in this 90 person organization to turn around a culture?

[Eli Day]

I don't think that there's a time, there's a time frame. I think that there's more of a framework, you know, but, but the, but the realization, the reality is, excuse me. Is that. That it should be your top priority. And so for us, you know, what we had done is we had created an org chart, like a really detailed org chart with every employee. And then we had a color code system where green meant that they were doing great, they were rock stars, Red meant that yellow meant that we needed to fire them within the next 90 days, red meant that we needed to fire them ASAP. Purple meant that there were vacancies in the role, and gray meant that we, you know, we still didn't know. How did we come up with a color code system? Well, let me back up, you know, a bit. So what we did is Elide and myself, we really went through each and every role in the organization except for a dentist and a hygienist. And then we learned, you know, what was necessary in order to be good at that role. What we were looking for, like, what was the goal? We created policies and procedures around each role, and we said, okay, this is how you're going to be graded based on these policies, policies and procedures based upon this performance and based upon these core values. And if you do well, then you're going to get raises, you're going to get promotions. If you don't do well, then we're going to have conversations about performance. And then ultimately that might lead to separation. So once we did that, that's how we knew how to color code each and every person in the org chart based upon that. And so from there, we just started, like, really being militant and focused about, you know, getting rid of the reds, then getting rid of the yellows next and replacing them with people that we.

[Jason Jackson]

Thought were greens and the color coding that was only for internal, for. For you and a light aid to see and use.

[Eli Day]

Yeah, yeah, yeah.

[Will Smith]

But.

[Jason Jackson]

But in fact, all the employees knew that they were, of course, going to be. Their performance was going to be judged as every in every. But it wasn't like the. What color grade they had was something that they knew. No, they just knew.

[Eli Day]

Yeah, it wasn't like, you know, we're coming and, and, you know, you know, we're like, hey, you're leaving green, or anything of that nature. But yeah, for sure. And the performance reviews. And the thing about it was in the performance reviews, but by the time we had gotten there, we had it annually just so that we could have it. You know, there was like a place marker there. But they knew where they, where they stood before then because we had had conversations, you know, they had either gotten written up or we had said, you know, hey, this is where you need to improve on your performance. We need to see this take place. And so there were times where, you know, you know, the running joke was that a lot of people fired themselves, you know, because after the second time we had told them, they were just like, yeah, we're leaving, like, we're going to find a different job.

[Jason Jackson]

Well, this system seems like it could be good Even outside of a crisis. Like, it's not necessarily only in a turnaround where you might want to, where a searcher, a new owner might want to use something like this. Do you agree? Or was there something about it that was, I mean, obviously it was particularly helpful in a case where there was going to be a lot of turnover. But do you feel like it could be applied into an already healthy organization just as the performance.

[Eli Day]

Absolutely.

[Jason Jackson]

Operating system?

[Eli Day]

Absolutely, yeah.

[Jason Jackson]

And, and how did you guys.

[Will Smith]

So you went through systematically, role by.

[Jason Jackson]

Role by role and, and, and defined what kind of the KPIs of that role the performance expectations were as well as the cultural expectations. How, but how for some of these, like, how did you have the knowledge of every single role? I mean, I guess that's just what being an owner is.

[Eli Day]

We did them like, we, we literally, we did them so like, we would map out, you know, what the front desk should say. Right. And listen to the phone calls. We would, you know, hop on calls or we would call patients up ourselves. We would try to do that. Like, I literally have a picture of a lie day who is 6, 6, 6 5, who, who was sitting in a, dental assisting, who was sitting in a dental chair assisting the dentist with like his big, like he was tucking his body in like this, like holding the patient's mouth open, like doing like the suctioning and things of that nature, painting the instruments. And so we did each role and.

[Jason Jackson]

You did each role as part of the crisis management, or is that something.

[Eli Day]

No, I, you know, well, we did each role just because we, you know, we really needed to see. And plus we didn't have the EBITDA at the time, you know, so we were like, hey, like, we need to do this and we need to really get this right. But absolutely, I think that, you know, understanding each role and what does, what does success look like in each role from a performance standpoint? You know, what are going to be the two to three key drivers here in this role that make you good. Yeah. What, what makes you kind of average. And understanding that being able to quantify that is really key. Yeah.

[Jason Jackson]

And so to, to, to use your system, the one that we are, the color coding system probably requires you as owner to have done all the roles. Obviously not the technical roles. You guys weren't dentists or dental hygienists. You did everything but those two roles.

[Eli Day]

No, I, I, I don't think that it requires you to do that in, in, in each, in fact, what I would say too is, is, you know, ideally what we eventually gravitated towards, we. We graduated toward to doing, rather, is that we started just doing that with the middle management and, like, the senior team. And so we were color coding the senior team, and it was. It was. The onus was on them to do that exercise with their team. Right. And so. And so because of that, now I don't need to know every role like the front desk and the dental assistant. Now we're just managing through our middle management and through our senior team.

[Jason Jackson]

Great. Great. And this was a system you guys came up with?

[Eli Day]

I don't know that we came up with it. I'm sure other people have done it, but in terms of the color code system, like, I don't recall hearing it from somewhere in particular, but it's not something that we've patented.

[Jason Jackson]

Okay. Okay. Well, I just mean, like, is it. Is there a book written on this or something that people can go read?

[Eli Day]

We didn't have a framework at the time. The Manager's Handbook was not written at the time. The Manager's Handbook was written afterward. I wish David hadn't written it because I work closely with David. David's one of my partners, and so I always feel like it's kind of like a shameless plug when I. When I put him in. So I wish he hadn't written it, but he did. But there's a way better framework for what we were doing that I wish we had used at that time.

[Jason Jackson]

You wish he hadn't written it? Wait, what?

[Eli Day]

Well, the reason why I wish he hadn't written it is just because, like, it sounds like I'm just, like, kind of, like, sucking up or something to him because he's my partner. But, like, he. He did write it. And it is a fantastic book that outlines a lot of frameworks that we started to use in our last couple of years. And then there was even stuff that, you know, we weren't even doing, like, 30% of the stuff that was in the book, frankly.

[Jason Jackson]

Okay. Okay.

[Eli Day]

Yeah.

[Jason Jackson]

So Manager's Handbook, written by David Dodson, is. Has even an even. Perhaps even better system than the one you described.

[Eli Day]

Absolutely.

[Jason Jackson]

You are a little hesitant to say so because it seems like you're biased because he's your partner. But, but. But we're taking you at your word that it's subjective, that it is a. That it is a better system in that book. And the Manager's Handbook is. Is now taught in a lot of the ETA courses around the business schools. So it's not just you saying it's a Good book. It's actually one that, that ETA Academia has, has adopted.

[Eli Day]

Exactly. Thank you.

[Jason Jackson]

Okay, so do you at any point explore suing the seller? What. What is that? Yeah.

[Eli Day]

So we, we did. And, and so we had started the process of litigation, and what we quickly learned was that we had to get in line because he had defrauded other entities that were just a little bit bigger than us, like the state of Michigan. Um, and so we were likely not going to get, you know, any, any, any money back or any type of recourse other than the seller note. So the seller note was a great thing that we were able to get forgiven. And I hesitate to say forgiven because it would. I, I would just say wiped away. Right. Because there was no forgiveness needed from, from us, for us. Um, but then when we were trying to go through litigation, what we quickly recognized after having conversation again with David, you know, David had said to us, like, hey, you're spending all this time, like, on litigation, and this has taken up a lot of your energy. Like, like, how much do you think, like, in a best case scenario, you'll get back out of the total purchase price from, from litigation? And so we said about $1 million, which represented like 20% of the purchase price. And he said, okay, $1 million. Okay. And when you go to sell the business, how much do you think you'll sell the business for as a multiple of EBITDA? And we said maybe 6x. So he said, okay, so if you take 1 million, you divide it by 6. That's about $166,000. So wouldn't you be better off building EBITDA by $166,000 and then just, you know, moving forward and focus on growing the business? Because at the end of the day, that's really what's going to add shareholder value, is growing the business by $166,000 of EBITDA. And we went, oh, you know, but, but still, like, part of me was like, man, let's just get back at this guy. Because, like, you know, look at, look at how he did us. Like, you know, the situation I'm in. And, and so when we came to the, to the, to the, to the realization that we were going to make a logical kind of business decision and not an emotional decision that freed us up to really focus on trying to grow the business from there.

[Jason Jackson]

But, but you're saying even with this very compelling argument, logical, rational argument, you had to, you had to control your emotions because you really just wanted to get back at this guy. Yeah.

[Eli Day]

It took us. It took us a month, probably after that to just say, okay, like, we're done and we're gonna, you know, move forward. Yeah, it's.

[Jason Jackson]

That is such a. That was such good advice. And, and, you know, you can. You can kind of abstract away. And it's like anytime you're just, you're, you're evaluating a business decision, it's like, what is the. Basically kind of the net present value of this decision or of the time I'm investing here? And you guys were doing all this effort to maybe claw back a million bucks.

[Will Smith]

All this effort. And it was.

[Jason Jackson]

And so how else could that energy and time and attention have been directed to make a million bucks? Just, you know, grow. If you think you can exit this business by edxx, grow the thing. $166,000 in. In. In EBITDA. What a. What a great insight that that can be applied all over the place. I love that. And of course, it also reinforces the point that litigation just often just isn't worth it.

[Will Smith]

Sadly.

[Jason Jackson]

Sadly for those who have been wronged, you know, happily, I guess, for the, for the fraudsters. What happened to the seller? Can you share where he ended up?

[Eli Day]

Yeah, so he literally was. When he learned that we were going to aid the state of Michigan in their investigation, he decided to flee the United States. So six months later, he was found by U.S. marshals in the Dominican Republic and was extradited back to the US to be tried. So, yeah, that was. That's wild.

[Jason Jackson]

I mean, he was a. He was a legit criminal. A. A legit fr. Fraudster.

[Eli Day]

Yeah.

[Jason Jackson]

And where is he? Did he end up being tried? Do you know?

[Eli Day]

He. He ended up getting, like, a slap on the wrist. He had like a payment plan ended up taking place. And so, yeah, you know, he was. He was incarcerated for almost a year, though, before they ended up settling. Yeah.

[Jason Jackson]

We're getting toward the end of your story here, Jason. We. But I want to. Just. Before we return to the plot and close out the story here, two things. First, in Medicaid.

[Will Smith]

Or.

[Jason Jackson]

Yeah, I guess kind of health. Regulated health industries, be it dental, be it home care, which of course we all know is very popular with searchers. Is there something to say about, like, from your. Something to draw from your experience that people just need to be super, super careful about these businesses. Maybe back to your earlier point, who you choose your diligence provider to be, you have to diligence, you know, the Medicaid or the government billing or the, you know, that stuff super carefully. Something to a message to share, people who might look at a regulated business.

[Eli Day]

No, I, I don't think there's anything additional to add just to be, you know, hyper village diligent about those, you know, the compliance factor. I mean, it's all, it's all about compliance, like with these businesses and making money profitably. Because a lot of times when it's these kind of compliance or healthcare, excuse me, healthcare, Government reimbursement businesses.

[Jason Jackson]

Yeah.

[Eli Day]

From a healthcare perspective, it's kind of like high volume, low pay. And that model has the opportunity to be really, really tainted, if you will, from a, from a business perspective to make the economics work out. And so just be very careful from that standpoint and feel free to give me a call if you want to have a deeper discussion about that particular.

[Jason Jackson]

Okay. Okay. And anything to say about the dental category is this, is there still opportunity here? We started the top by saying that Even back in 2015, it was already private equity, was already very active. What do you just give us, give us 60 seconds on the industry today and if any opportunities still exist for searchers.

[Eli Day]

Well, I mean, the industry is really tough to compete in because we thought that we were going to be competing against other dentists to buy dental practices. What we quickly learned is that we were competing against other private equity funds that we're looking to get in or other private equity backed strategics. And so like that was very difficult. And so if you're not capitalized well enough, if you're not willing to kind of pay higher multiples, I think it's a really tough space to get in. I think that the, the cost of labor has increased. We were paying, you know, $26 an hour for like a dental hygienist when we initially got in. And then it increased to like, you know, $38 an hour for a dental hygienist, you know, from after Covid took place. I think that there's a lot to be said right now about dental supplies and the tariff environment that we're in right now with this administration that we're. That the business that I'm still on the board of is really nervous about in that, in that industry because a lot of the supplies come from China. So yeah, I think it's a really, really tough business to operate as a search fund entrepreneur, candidly.

[Jason Jackson]

Okay. Okay, great. Well, that was very clear. Thank you. So pick us back up. Do you, do you successfully complete this turnaround or, you know, what does it look like a few years post acquisition?

[Eli Day]

So basically what we did to Try to turn things around is. So the first two years were us just trying to learn the business, the ins and outs of the business, and trying to upgrade our org chart. And then about 2019, we had decided, okay, after two years, we were. We've grown the practices. You know, we've grown same location growth at the practices at or ahead of what the industry average was. And so, like, now we can go and make an acquisition. So we had looked and found this acquisition where we were going to purchase, like, four. Four additional dental practices at once. And they were not doing very well. It was a turnaround situation. But we felt like, hey, we've been here before. We know how to do this. There's not any fraud here. So we know what we're kind of getting ourselves into because we're turnaround guys now. Yeah, we're turn around guys. And we knew that we could do that without raising additional equity, which would help us with our MOIC and help us with our returns. And so that's why it was really important for us. And so we were about to buy this business. We were about to pay, like, a million dollars for this turnaround. We're going to be buying, like, $3 million of revenue, but it was only doing, like, maybe like, $200,000 in EBITDA, right? And so we had our work cut out for us. And. And so I remember Susan Pohlmeyer, you know, kind of flew down to meet with us, and we were about to, you know, purchase the business. She was like, you know, you're about to pay a million dollars. I don't think it's worth a million. I think it's worth half a million dollars. And at first I was like, really? Like, why are you. Like, you're gonna tell us that now? And stuff like. And so we were like, you know what? We're gonna try to renegotiate and get it down to half a million dollars. They're never gonna accept it. If they don't, we'll just take it as a sign. They did. They accepted it. So we took it over. And so we were turning things around. We made the acquisition, we were turning things around. And when we got to, like, day 90 of our Gantt chart, that's when we had kind of said, okay, we have a playbook for same location growth. We now have a playbook for buying and integrating dental practices. But we've now gotten introduced to a situation where no one seems to have a playbook for, which is COVID 19. And so now we had to go through lockdowns and so we had to shut down all of our dental practices at that time. And, like, we had just made this acquisition, but, like, it was an incredibly stressful time that we had gone through. So we had gone through this huge dip when we learned that the business was fraudulent. Half a million of EBITDA kind of grew the business back up. Now we go through this huge dip where our practices are shut down, we have no revenue coming in, and we just have expenses. So it was incredibly stressful time. And so we were going through that situation, and then we were able to open up our practices for emergency procedures only in the state of Michigan. And so now we had to, like, pivot our business to where we were doing high volume, lower cost procedures. To lower volume, higher cost procedures. And so I give a lot of credit to Eli de Wall, my. My partner that had the vision to say, okay, this is how we can kind of make this pivot, to kind of turn it down, turn this practice around, because I didn't think we could do it. And, you know, if we just do these procedures, we hire this type of implant specialist, if we do this, then we can do it, and we can. We're gonna have to spruce up the offices, invest in, you know, updating the offices a little bit more, invest in this team member. And I was like, wait, more costs like this? Like what? Like, more costs on top of, like, we're bleeding money again. Like, we haven't been bleeding money for, like, you know, a year and a half. He's like, no, no, no, we need to do it. So we pivoted the business and we started doing that. And so we got it from receiving a lot of government reimbursements to little to 1%. Literally 1% government reimbursements. And we had increased our cash bay by 10x from what we were receiving before, and we made that pivot. And so now 2022 has rolled around. And if you can imagine, we had had one huge thing that we had went through where we had gotten beat up that was effectively our fault, right? For not catching it, something that we couldn't control. With COVID 19, we had gotten that, but, like, we were now we had the right team. We were delegating the right way. We had pivoted our business, and now we were growing the business literally from a revenue standpoint at like 40%. Okay? From a revenue perspective, like 40% each year. The money that we had paid for that acquisition, even with COVID we had made big back that money, right? And so now we're making distributions to our equity holders and stuff. It was an extremely stressful time. I had gone through a stressful time with, we had all gone through a stressful time with the, the, the, the, you know, initial acquisition with COVID now that it hit us. And so I'm like, I feel like I just need a reset, a refresh in life right now. Like, this has been incredibly stressful. Like, it's been tough on my mental health. It's been tough on me physically. I've had some health issues now. And so, like, I just need to reset. And so that's when we went back to the investors. We said, you know, we had talked about like, kind of having, you know, an equity infusion to make these acquisitions, but we think we'll just sell, you know, this is what it's going to be. They were like, guys, like, we didn't think that you were going to even stay this long. If you guys had just returned back dollar for a dollar, that would have been incredible. You guys have been making distributions over the last couple of years. Like, this is incredible. And so it was really humbling to hear that feedback from them. If you look at ebitda, you know, you've grown EBITDA by almost like you could argue, you know, from a, from a math perspective, by infinity. By infinity, right? Because it was like nothing. It was fact. You were losing money. So now you have this, you know, two and a half million dollar EBITDA business that you grew from a half a million dollars of ebitda, you know, that you're selling from negative, negative, negative ebitda, you know, and it wasn't even, it was a Runway rate of, of run rate of 2. Like, it was like, literally when we were selling, like that was what it was doing from like a trailing. It was roughly that from a trailing 12 months perspective. It was like. And a little bit over that from like, I think it was like a nine month run rate perspective, but, you know, not a one month run rate. Right. And so they're like, guys, like, if you want to sell this thing, like, you know, like, we're extremely proud of you. And so emotionally, like, that was what I needed to hear because they were with us in a very difficult situation because they had the response that they had. We were like, we're going to run through brick walls for you guys. We're going to stay faithful. We're going to, you know, see this thing through. And so the, that's when we had decided to, to have an exit in 2023.

[Jason Jackson]

And exiting a business like this, is it, is it pretty straightforward? You call a banker, they package it and there's kind of given how much PE there is in, in this space, there's just, it's, it's pretty easy to find a, a willing buyer for a reasonable multiple.

[Eli Day]

We were at this interesting place where you know, from. So we were not able to just hire like an A bank because we were like a little too small for a bank, but we were too big for like the brokers. And so we had to do a lot of it ourselves, honestly. But you know, from, from a strategic standpoint through the help of other investors, we were playing kind of investment bank ourselves. But yeah, we were able to sell it. And you know, frankly, you know, my, my partner Alaide, he stayed on with the business. I'm still on the board of the company. He stayed on with the business and operating it as CEO of the company. And it's doing much better. It's at a run rate today. So this was two years ago, less than two years ago because we sold in December of 2023. Now the business is at a run rate of a little over $4 million of EBITDA.

[Jason Jackson]

Oh, fantastic.

[Eli Day]

Yeah, so it's.

[Jason Jackson]

And Alaide is still CEO.

[Eli Day]

Elite is still CEO. He's still so faithful and still doing an excellent job. An incredible, he's an incredible human being, an incredible business person.

[Jason Jackson]

Phenomenal. We'll link to his LinkedIn in the show notes. I'm breathing a sigh of relief, Jason, on your behalf at the end of the story. And now you today you're at fudaloofu, which is David Dodson's search fund investing fund.

[Eli Day]

Yeah, it was started off as a family office with David, David Dotson's family office. And then it had turned to a search fund fund of funds, a private equity fund that David Dodson and Susan Pohlmeyer co founded in 2014. And so since 2014 they've been investing in search fund entrepreneurs. They invested in myself, one of my largest investors back in 2015 and so worked with them for 10 years and signed up for another 10 to 15 years with them.

[Jason Jackson]

And so you, your day to day today is looking at would be traditional searchers and considering who to back and not and then of course on the other side of transactions helping the searchers who are then in your portfolio.

[Eli Day]

Yeah, absolutely. Yeah, that's what I'm doing and trying to help people to learn all the lessons from my, my bald head that I have as a result of, of my time as a Search fund entrepreneur. Great.

[Jason Jackson]

Well, if such people want to reach out or prospective searchers, LinkedIn is the best. How do you like people to reach out?

[Eli Day]

Yeah, LinkedIn is perfect. LinkedIn. My email, which I think is on our website as well, would be a good way to reach out to me as well.

[Jason Jackson]

Great. Anything more to add, Jason, from this incredible story? Did we not hit something?

[Eli Day]

No, I mean, look, I just would just summarize again, like, you know, faith was an important reason as to how we were able to turn things around. I think, you know, the pattern recognition from investors in our community I think was incredible. And then just to summarize, I think having a great partner, honestly, I don't think that, you know, when you look at the Stanford case study, yes, it shows that partnerships have outperformed. But one of my concerns that I have seen is that sometimes people decide to become partners either in a self funded venture or in a traditional search fund just because they kind of hit it off over a case study that they worked on together. And for me, I don't think like this is the time to kind of play Love is Blind Search Fun Edition over the next ten and a half years of your life. Because the things that you encounter right as a partner is like really, really difficult. And so if you are a solo search fund entrepreneur and you want to have a partner, I think that you're better off doing it alone rather than manufacturing a relationship. And the way that you can kind of, you can kind of fill for either like a job description gap or a skill gap is through hiring. But the other, the way that you can kind of solve for, you know, the whole loneliness factor and, you know, needing, you know, someone to kind of walk along the journey that is, that has an interest in you and not just a vested interest in the fund. I've been seeing an uptick of search fund entrepreneurs hiring executive coaches during their search process and just having a budget for that. And so I think that's a great opportunity to do that as well. Just to have some type of camaraderie as you're going through the journey. And then the last thing I would just say is one of the things that I love about our space is the amount of camaraderie that you have. Even though a person like Keith Burns was not on my cap table, I would call him up and I don't know, I think you've had, have you had Keith?

[Jason Jackson]

I don't know. Keith or Michael Curry.

[Eli Day]

Okay, so Mike Curry.

[Jason Jackson]

Yeah, Mike Curry, yeah.

[Eli Day]

So there are partners would answer the phone for me like for years and has become one of my closest friends in the search fund space. Marcus Scott would do the same thing, would would jump on the line with me and he would help me out with Excel issues and you know, say, hey, think about the issue this way. And so it's just, you know, it's just an amazing environment that we have. And if you are humble enough to say I need help and here's where I need help, the the space is generous enough to provide it self funded, traditional or not.

[Jason Jackson]

Wonderful point to end on. Jason Jackson, thank you very much for coming on. Really appreciate the time.

[Eli Day]

Thank you so much. Will. Thank you for having me.

[Will Smith]

Hope you enjoyed that interview. Don't forget to subscribe to the Acquiring Minds newsletter. We send an email for every episode with an introduction to the interview, a link to the video version on YouTube, and soon key takeaways, numbers and more essentials from the interview. For those of you who don't have time to listen or watch it, subscribe at acquiringminds Co. You'll also find all our webinars there on the website, both those we have coming up and recordings of past webinars. At this point There are over 30 webinar recordings, a wealth of information on all the technical nitty gritty of buying a business. Acquiringminds copy.