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- [00:00]
Will Smith
We know from the Stanford study that over a third of traditional searches end without an acquisition. Today's guest was in that unhappy cohort. Initially, after two years and four deals under loi, none of which closed, traditional searcher Keegan dumb wound down his search. But then things took an interesting turn. Keegan ended up working for and ultimately acquiring one of those four deals he'd had under loi. The terms changed both with the seller and with his investors. We get into those details and then after those two years of frustrated searching and dead deals for the next five years, a number of things break in the right direction for Keegan and the journey in its entirety ends up a big success. Here he is, Keegan Dum, former CEO of Egenuity Less than one month left before M&A Launchpad's spring show M and A Launchpad is a single day event that brings together business buyers, owners and investors with panels on the entire cycle of acquisition entrepreneurship from acquiring and growing to exiting and investing. Walker Deibel, author of Buy Then Build is one of the keynotes and 30 other experts will be on hand sharing their expertise. M and A Launchpad is a single day Saturday, May 3rd in Houston. Get a $200 discount off your ticket with the code Acquiring minds. Go to malaunchpad.com and use the code acquiring minds all one word or use the link in the show notes. Also tomorrow, Friday, April 11, Heather Anderson will host her monthly SBA and lending office hours. Heather is a leading SBA loan broker, a name many of you already know, and she's going to lay out the process of getting an SBA loan to buy your business. There are so many moving pieces, as you know, to this process and Heather will show you how to fit them all together to successfully close your deal. That is tomorrow, Friday, April 11th at noon Eastern. Register at the link in today's show notes or or on the Acquiring Minds homepage. Acquiringminds co welcome to Acquiring Minds, a podcast about buying businesses. My name is Will Smith. Acquiring an existing business is an awesome.
- [02:46]
Keegan Dum
Opportunity for many entrepreneurs, and on this.
- [02:49]
Will Smith
Podcast I talk to the people who do it. You know that one of the most common levers to pull in a target acquisition is technology updating the systems of a business that may still be running off a spreadsheet or even pen and paper. But tech is complicated with tons of solutions out there, so choosing the right cloud platform, CRM, telephony, compliance and cybersecurity, not to mention implementing all that is a job in itself. Acquiring Minds guest Nick Akers knows this firsthand. As a former searcher who now owns Inzo Technologies, Nick has seen the tech challenges searchers face when acquiring businesses. His team at Inzo regularly works with searchers and their acquisitions, offering a complimentary IT audit of the target company. Nick takes a personal interest in all their searcher clients, drawing from his own experience in the search phase. Inzo dates back to 1989, so this is a company that has managed the tech for hundreds of small businesses over decades. And one last thing, no long term contracts with Enzo, a big differentiator. Check out enzotechnologies.com I N Z O or email Nick directly@nicknzotechnologies.com and don't forget to tell them you're a searcher. Keegan Dum welcome to Acquiring Minds.
- [04:17]
Keegan Dum
Great to be here, thanks for having me.
- [04:19]
Will Smith
Keegan, you were a traditional searcher who bought a software business, not SaaS exactly, more on prem software. We'll get into it. And then went on to have a great if unexpected, accelerated, we might say outcome. Let's get into it. Keegan, what was it that led you to want to buy a business in the first place?
- [04:45]
Keegan Dum
Yeah, I came from a world that knew nothing about private equity or buying businesses, was an engineer operating in operations with ExxonMobil for about seven years, took a break to go back to get my MBA and started. That's where I was exposed to the space that had always thought of doing something entrepreneurial but I'm not a startup type. So even though I went to the MBA program ready to go back to ExxonMobil while I was there sitting in a class listening to people talk about this world, just kind of fell in love with it and it was a short one year MBA program and I decided to I've got the opportunity to go back to Exxon but I'm going to spend the rest of this time instead of looking for other jobs or anything like that, just fully focused on job trying to get in the search fund space. I think from a mostly from a family perspective it would give us the flexibility to kind of run my life as opposed to being on the 30 year traditional career track with Exxon.
- [05:48]
Will Smith
One of those naive characters who thinks buying a small business gives you more flexibility rather than. Actually it does though. It does, but kind of sort of.
- [05:58]
Keegan Dum
It also gives you what's a lot more all in hindsight. Yeah, it's given us a lot of flexibility that I don't think I ever would have had at ExxonMobil.
- [06:08]
Will Smith
Well certainly if you have a good exit that's that's where the real flexibility kicks in. That does help. On the other side of that, Keegan, give me a little bit more on the class that exposed you to it because there was some interesting details in there from our pre call that I recall. What was the class called?
- [06:24]
Keegan Dum
First of all, Entrepreneurial Private Equity. Two great professors that every class there was kind of a theoretical portion of the class where you're learning about doing deals and things like that. But really the exciting part of every class was that they had speakers come for every single class. And there was, you know, one of the most successful private equity firms in the Southeast. The guy came and told his story of starting it up and some, a lot of different angles to get into the space. Came and spoke at different classes. But yeah, we had a search fund. A couple guys who had done search funds that were in the process of searching came and spoke and um, that just sounded really exciting to me.
- [07:04]
Will Smith
Search, even self funded search is a form of private equity. Very entrepreneurial private equity, lower, lower, lower middle market private equity, but it arguably is private equity and, and it took me a while for that to kind of crystallize that, that even a self funded searcher with an SBA loan buying a $500,000 SDE plumbing business is, is, is doing a version of private equity. Yeah. So of all of the flavors that you were exposed to in that class, as I've already said at the top, you ended up going the traditional search fund route. Were you exposed to the whole range? Traditional, obviously, as well as conventional private equity, independent sponsors, self funded searchers? I assume so. The whole range. Why? And then what resonated about traditional?
- [07:56]
Keegan Dum
I think, you know, not having any experience in the space of doing deals or you know, buying companies or anything like that. And that combined with the fact that, you know, I've at this point had two kids and was married with two kids. My wife has stayed home with our kids and we were going to have a third. So it was a combination of me not knowing the space and getting excited about this network aspect that comes in with the traditional, traditional search where you have investors and kind of this ecosystem of accountants and lawyers and everybody else who works together. So that was half of it. And the other half was here I am, I've. I've been digging into our savings for a year while I'm doing my mba. My wife's not working, I'm not working and, and didn't have the financial capital built up to go take a couple years to do it myself.
- [08:56]
Will Smith
One of the things that people will say, I guess as a critique of traditional search, although I'm not sure that's a fair way to put it, but for lack of a better word, is that even though those who do it once, if they have a successful outcome, probably don't go back to do it again. It's kind of a great on ramp into being a business buyer. Yeah, but not a, but maybe not one, you know, that you do again and again, hence the on ramp. And I'm, I'm jumping ahead a little bit, but we're going to spend a lot of time in our conversation today talking about traditional search and your relationship to it. So I'll pull this question forward. You had a great outcome and, and you want to get back into search and you are a perfect example of this. You will probably now do it not as you won't go back to doing a traditional search.
- [09:47]
Keegan Dum
Yeah, right. Yeah, you're right. I think for what you're saying, that's, that's a good reason. Good part of it is to me and I, I love every aspect of the traditional search fund world. I love the investors, the conferences they put on the, there's really a close knit community and every aspect of the traditional search I love and I'm, if I had to start over, I would have done it the first time again, I think for the second time around you start to get, especially if you've had an exit, I think you, you start to put a little more constraints or at least me personally, I've put more constraints on myself of, you know, the first time I was 30 and I was young and hungry and ready to move wherever the company was and wanted to jump into operations. And, and the second time around, now we're more established, we've got kids going through high school and we're not ready to take that move. And I don't think I'm just coming off of almost five and a half years of operating a company and it wears you down a little bit and I'm not ready to jump straight back into that driver seat again. So I think for all of those reasons, it's an amazing opportunity for people doing it for the first time because it teaches you everything about this world and you've got these incredible people around you to help do it. But at least for me personally, you know, those are the reasons why I'm going to do it a little differently the next time around.
- [11:10]
Will Smith
But I just heard you say you don't want to get into operations and I, I thought maybe you Would want to get into operations the second time around, but more as maybe a self funded searcher, maybe even an independent sponsor. So I misunderstood that you want to be more on the investing side, not.
- [11:23]
Keegan Dum
Actively operational, not actively a CEO of a company, I think is what I mean by that. No, I'm, I, I, I'm leaving myself open to all options and I may end up doing something like that. But as of right now, I don't think it'll be moving in and being a CEO of a company again. Yeah, I think it'll be, you know, when I think of being the CEO of a company, especially as a solo search fund person, it's lonely at the top. And I think of how nice it would have been to have a partner that was checking in with me and, and helping me out and just solving problems and thinking through, through thinking through things. And so this second time around, the idea of being that person, you know, and being that partner to somebody, I, I think, I think we'll bring relief and joy to somebody else while also kind of being more of a fit for what I'm wanting to do the next time around.
- [12:25]
Will Smith
Well, sounds like a good profile for an independent sponsor, Keegan. But the other thing I'll just call out, which you've kind of already said. But just to put a fine point on it, if you think of traditional search as solving the following problems, being green and kind of wanting an investor support network around you to help you through. You know, as a rookie doing this, you're no longer a rookie, so you no longer need that. The paying being paid to search. So if you have no real resources solves that problem. Yep, you now have resources, don't need that. And then finally giving you a network and plugging you into this world, you're already immersed in it now having, having done a traditional search so that that problem with traditional search no longer need as well. Y. I think that's actually a good way of thinking about kind of what traditional search offers. The capital, the education and support and then the, the network.
- [13:28]
Keegan Dum
So, and one thing to add that I don't think, Yeah, I don't know what the actual numbers are, but while I was doing my search I kept up with a lot of people doing the independent model.
- [13:38]
Will Smith
The self funded search model.
- [13:40]
Keegan Dum
The self funded, yeah, the self funded model. Sorry. And saw a lot of people. You get to be a year into this and you start to accrue some dead deal fees and you see this stress start to build on them, particularly if they're earlier in their Savings profile. And so you'd see a lot of them, even at, you know, the one year mark, you know, one year and a quarter, they start to get this stress of they're, they start looking at deals a little differently and looser. Yeah.
- [14:10]
Will Smith
Because they're desperate to get something done.
- [14:11]
Keegan Dum
Either looser and desperate to get something done or you're passing on a lot of stuff because you just, you're afraid to jump back in and get into diligence again. And, and so I think that's another benefit, especially when you're early on, is, you know, it's, it's kind of all or nothing. I'm going to get this thing done, you know, come hell or high water. Whereas I saw a lot of those people going through that stress and they'd give up at the year and a half mark. And I think that's really when you start to get your momentum a lot of times with these. So. Yeah. So for all of those reasons.
- [14:45]
Will Smith
Well, although the psychology also works in traditional search as well. When you get toward, you know, when you get to month 18 and don't have a deal done, that starts to play with your mind a little bit too, does it not?
- [14:57]
Keegan Dum
Yes, it does play with your mind for sure. The difference being when you've gone through a year and a half of your own capital and burning through it, and every time you're like, do I spend this $15,000 to bring this tech diligence firm in and dig deeper into this, there's a big psychological aspect when it's your own money and you keep burning through your own money and you're earlier on in your career then when you've got this fund and you're burning through the, through the fund money. Um, that's, I think that's what I mean.
- [15:34]
Will Smith
Yeah, absolutely, absolutely. And as we'll hear, you actually had the discipline to kind of stay the course and did not find a deal after your two years.
- [15:43]
Keegan Dum
Right.
- [15:43]
Will Smith
Um, we're gonna hear all about that. Okay, so you decide to do a traditional search. What are, what, what is, what happens then?
- [15:49]
Keegan Dum
So, yeah, traditional search, as I'm sure most of your listeners know, you get a chunk of money that's upfront and it's gonna cover your travel and everything else. Your travel, your diligence, your salary, everything else. So just hit the ground running. I put together a team of interns to help run a brokered process. I stayed 100% focused on the proprietary process directly reaching out to business owners and tell me where you want to go with it had four companies under LOI during the two year process and all four of them I walked away from. The fourth one was kind of forced on me, but really all four of them I decided not to do the deals and can, can talk more about those if, if need be. But yeah, every day for me was if people want to know what a day in the life was, at least from my perspective it was. I had this big engine going of direct outreach through email to, to owners and my job every day was coming in, seeing who had responded, getting on, on phone calls with owners and this was people who had not listed their business for sale. So every day I was coming in and, and telling them what I was doing and, and trying to learn if there was a, a real desire on their end to, to sell their business.
- [17:05]
Will Smith
What year was this?
- [17:07]
Keegan Dum
I started in 2016, so it was 2016 to 2018 that, that two year period.
- [17:13]
Will Smith
Okay, so good. Seven, eight years ago. Now the proprietary. Did it seem to work? Did you come in most days and actually have responses in your inbox waiting for a phone call?
- [17:27]
Keegan Dum
I was, yeah. I was on phone calls basically every day with business owners and phone calls and lunches and traveling and doing all that. Yeah, I, I, all four of my lois came from the, from the proprietary direct outreach process. We never gained a lot of traction on the broker side. I don't know if that's because I just had interns running it and didn't give a lot of the time, you know, didn't give a lot of time to it myself or I don't know what the reason but yes, I had all my success was on the proprietary side.
- [18:02]
Will Smith
Great. Well, unusual to hear that. Although most of my guests are self funded searchers and so there may be a difference there between self funded search and traditional search. Of course proprietary is expected in a traditional search. So it's, it's, it's kind of. Whereas it's, it's more, much more at your discretion and self funded. So maybe self funded searchers kind of don't do it with the commitment that a traditional searcher does. The team at Aspen HR recently published a short white paper targeted at searchers Entitled A New CEO's Guide to Human Resources. It lays out the key items you should be thinking about as you transition into CEO and owner of the business you bought. The link to download it is in the show notes. Aspen is a professional employer organization or peo run by a searcher for searchers. Search fund veteran Mark Sinatra runs the company which provides HR compliance, flawless payroll Fortune 500 caliber benefits and HR due diligence support for your acquisition, all for a fraction of the cost. Go to Aspen hr.com or contact Mark directly@markspenhr.com Keegan any from those four LOIs or broken deals? Sure. Each of those is a podcast interview unto itself. But any, anything to any takeaways from that collection of stories about four broken deals in a traditional search?
- [19:37]
Keegan Dum
Yeah, I think, you know, coming from an engineering background, I'm very much an overanalyzer, if that's a word. I over analyze a lot of things. And when you have a traditional search and you've got, in my case I think it was 12 investors. Every deal you look at, you have a group or who tell you, oh, this is amazing, this is a great deal. You know, what can we do to help? Let's, let's keep this thing moving forward. And then you have another subset of your investors who tell you what a terrible deal it is or you know, the reasons why they don't like the deal. And I think on every one of my four deals, you know, all of them were the same. And I'm the type, you know, I'm new to this. I haven't done this. These guys have done this before. I would kind of underway the positive investors and give more weights to those telling me why the deals were bad. And it would start to get into my head and I'd say, you know what, this isn't, this isn't the right deal. Let's move on, on to the next one. So I think I overdid it. And you realize every single one of these small companies has some reason why you shouldn't buy it. Yeah. Or at least they got a lot. Every one of them has hair on them. So that was the big takeaway for me, I would say.
- [20:56]
Will Smith
So you reflect back now at one or two or all four of those opportunities as actually having been viable targets for you.
- [21:04]
Keegan Dum
Yeah, yeah, absolutely. Yeah.
- [21:06]
Will Smith
All four.
- [21:07]
Keegan Dum
All four? Yep.
- [21:08]
Will Smith
Oh, wow.
- [21:09]
Keegan Dum
Two of the four sold pretty soon after I walked away from them.
- [21:13]
Will Smith
Oh.
- [21:14]
Keegan Dum
And sold for more than what I had them under loi. And then one of them, as we'll talk about, was the one that I walked away from but came back to and wound up buying. Yeah. The third one that didn't fall into those categories, maybe that was the one that might not have been the greatest. I still talk to the owner all the time because he's a good friend. He stepped away from the business and it went from like 24 million down to like 8,4 8 million of revenue after he stepped away from the business. So in hindsight, you know, maybe I dodged a bullet there, but it was still a great company, so. Yeah. Yeah.
- [21:54]
Will Smith
And Keegan, you're, you're in your dozen investors, the those who would say yes or and those who would say no to a particular deal. Was there a pattern where the nate was it always the same naysayers and always the same champions?
- [22:07]
Keegan Dum
I think it changed. Yeah. Different investors have different experience with different.
- [22:11]
Will Smith
Right.
- [22:11]
Keegan Dum
Because all four of mine were in different industries and drastically, drastically different types of companies. So there was a, a software company, a plumbing H Vac company, an outsourced development and support shop and kind of a proprietary foreclosure data company. So they're all very different. And so no, I, no trends in the same people every time just depended on, oh, I've seen this before, you know, depending on, depends on what they'd seen before.
- [22:44]
Will Smith
Yeah. Yeah, very. It would be very hard to suss out, you know, where the, where the truth lies in all these people who are smarter than you and have more experience than you. And not only in the industries, but in looking at search deals, it becomes its own analysis. You're, you're, you're, you're analyzing the companies but getting help with that. And then you have to shift all of the, the, all of that intellectual energy and analyzing the company to analyzing the investors perspectives and analyzing your investors various motivations and level of knowledge and why they're saying yes or no. Okay, Keegan, so let's get to the business that you bought or let's get to the end of your search because this is where things get unusual and interesting. You get to the end of two years, four broken deals. What happens?
- [23:32]
Keegan Dum
Yeah, so in the traditional search space, when you get to the end of your two years and you've worked your way through all the, all the funds that you raised up front, it's time to dissolve the search fund. Well, you have a couple options. You can raise more money and keep it open and keep searching or I guess you could keep it open, keep working on your own, but traditionally it's you raise more money and keep it going or you just dissolve the search and, and move on. So I decided, I decided I was going to dissolve it, but I still really wanted to do a deal. And so I started consulting. There were several investors that I had made good relationships with that needed help with things, and there were also a lot of business owners I had met through this process that needed help with things. So I just Started taking on consulting jobs with investors and companies so I could keep paying the bills. And my biggest consulting job was as a kind of a quasi president, part time president role for that first loi, which was the software company. The owner had stepped away and was tired of the operations and wanted me to help out. So I was consulting with him there, really got to know the business. And after I guess it was about six months of doing that on my own and really getting to know the company well, we started talking again and renegotiated, went under LOI again to buy that company. And that's, that's the one I ultimately bought.
- [25:06]
Will Smith
You went to work for that company as a consultant or quasi president. So obviously even though the, the deal fell apart, there was no bad blood. If anything, you guys both respected each other even after the broken deal to buy it.
- [25:18]
Keegan Dum
Yeah, yeah. No, I think the. Yes. The short answer is yes. After walking away, we still talked. I don't know if once a month is right, but we still talked all the time. More just because I think during that process going to, going to minor league baseball games together and got to know his wife and, and family and just we, we became pretty close during that initial process. So yeah, we stayed in touch and talked a lot throughout my search. And so whenever it came to an end, I was asking him, you know, is there anything I can help you.
- [25:53]
Will Smith
Out with and why had the deal.
- [25:55]
Keegan Dum
Died the first time around? It was, it was smaller than I thought. A consistent theme of what you'll see when you're doing this proprietary process is without the broker or banker or somebody to help them clean up their books and prep everything and get ready for it, you're digging in yourself and finding things out. So you know, the ebit, I was a few hundred thousand less than what I thought it was. And I just, you know, with other risks and the EBIT being a little lower, I decided it was smaller than what I wanted to commit to and I was paying more than I, what I wanted to. And this was at the beginning of the search. So I said, you know what, I'm step away and keep looking and see if there's something else out there.
- [26:42]
Will Smith
Yeah. And okay, so, so this was the first LOI of your traditional search. You like it, you like him, but it ends up being having whatever risks and we'll get into those and being a little smaller than you liked. So you say no thank you, broken deal, but you stay in touch. And then at the end of your search, which you didn't buy business for Broken deals, but no business. You start consulting and you consult for this owner of this business as the quasi president for about six months and then dis. And then you restart acquisition conversations with him.
- [27:19]
Keegan Dum
Yeah.
- [27:20]
Will Smith
Now you've been sort of on the inside of this business. Gotten to know it for six months. What. So that's quite a de. Risking that you did.
- [27:28]
Keegan Dum
Yeah, yeah.
- [27:29]
Will Smith
What? Pick us up from there.
- [27:31]
Keegan Dum
Yeah. And. And not just getting to know the business, getting to know the people. I was.
- [27:35]
Will Smith
Yeah.
- [27:35]
Keegan Dum
You know, as a small company, you get to know pretty intimately all the people that you're working with. Yeah, it was, I think, you know, you get into the business and you see why an owner who's been running it for a while gets worn down and is ready for a break. It was a great, great business. But the. So they were serving the. The business was called E Genuity and it was serving. It had software for car washes and software for automotive shops. And on the, on the car wash side of the business, I think what every car wash technology provider out there, I think, or at least every car wash operator will tell you is the connectivity of the kiosk and all the equipment and everything else that you have to be doing is pretty complex to tie it all together. And there's always something broken, always an angry customer. And it's just an industry where if, if the software is down or having issues, they've got a line of cars backed up in their car wash and they're screaming at you. And it's just a high stress. It's a fairly high stress environment. So I got a taste of that whenever I got in and got to understand, you know, why he had been worn down a little bit and ready to, to step away. And so, yeah, got to know the business and intimately. Got to see, you know, not that there were major skeletons or anything, but. But really got to know the business well and felt better prepared for what I would be stepping into. And I was still excited about the company.
- [29:08]
Will Smith
And when you signed on to consult with him, did you expect that this might be an outcome that maybe you'd circle back around and buy it after all?
- [29:17]
Keegan Dum
Yeah, I mean, that was, that was part of the hope. Yeah. Is if I can keep enough of these going and stay close enough. I think the stay close to the hoop is the basketball analogy of stay close enough to these companies and the different good deals that something would, Would come through. So, yeah, part of it was paying the bills. But he knew, and I knew all along that that was my, you know, I would Love to, still love to buy the business. And so, yeah, that was part of the goal.
- [29:45]
Will Smith
Great, Keegan. So let's hear more about E Genuity. Okay, so it's software. It's not SaaS. It's software that runs on a kiosk and I assume the kiosk you guys also provided.
- [29:59]
Keegan Dum
Yeah.
- [29:59]
Will Smith
So it was kind of a bundled hardware software solution.
- [30:03]
Keegan Dum
Yep. So on the automotive shop side, less hardware, virtually no hardware. It's if you can imagine, and most of it was on the oil change side. So if you're pulling in to get your oil changed, the tech is, has a computer pulled up in front of them. He's entering your license plate. That's pulling up all the information on your vehicle and pulling up your past history from when you came in before and what type of oil and all that. So on the automotive shop side, it's pretty basic. There's not a lot of hardware. It's just ultimately a repository for all the vehicle and customer information so that they can cycle through these, these oil changes and automotive repairs fast. On the car wash side, it was significantly more complex. I don't know if you've ever been to the express tunnel car washes. You pull up to the car wash, there's a kiosk there, you got to punch in what kind of wash you want. Or maybe there's an RFID reader or a license plate reader because you're a subscriber and you know, once you've told it what you want or once it's read your vehicle, it opens the gate, you pull forward, it's talking to the car wash equipment to say, you know, it's the premium washer, whichever wash you chose. And so yeah, our, we had the, the kiosks, the kiosks, the gates, kind of that initial upfront experience for the customer. And then it had to. Everything, the car wash equipment and everything else was separate. We just kind of tied into it and, and made sure the, the car wash knew what's, you know, what we were telling it to, to do with that car as it came through.
- [31:37]
Will Smith
I'm just trying to think through whether or not it should be surprising that the car wash tunnel equipment manufacturers didn't provide, didn't also do the kiosk. Because it is a kind of a single system, or at least from the user's perspective, it's all kind of a single experience. So. But I, I guess the answer would be, you know, building a car wash tunnel and all the moving, mechanical, moving parts. There is a very different, is a Very different, you know, skill set of employees that builds that.
- [32:12]
Keegan Dum
Taking payments, tracking subscriptions. Yeah, it's a very, very different space from what they traditionally did. Some of the players, some of the bigger players do have. They have both, but the primary players in the space are kind of standalone people who deal with taking payments and handling subscriptions and all that.
- [32:36]
Will Smith
Okay, but then the hardware you provided. You did provide the kiosk. So the kiosk with your hardware running on it, then via APIs or whatever, plugs into the. Plugs into the tunnel. Connects to the tunnel. Yep. Great. And. And your customer base was mom and pops. Was some chains. Was who?
- [32:52]
Keegan Dum
A combination, mostly mom and Pops with. With some chains in there. On the al. On the automotive side, we had more chains, but, you know, whether it's on the car wash or the automotive shop side, super fragmented markets, there's only, you know, there are chains, but the, you know, 85, 90% of the market is mom and pops. Oh, is it?
- [33:17]
Will Smith
I didn't know that.
- [33:18]
Keegan Dum
Yeah, so. So, yeah, we served some chains, but a lot of. A lot of mom and pops.
- [33:25]
Will Smith
Mm. Tell us what you found that made you like the. Tell us. Let's pro and con the business. What was strong about it that appealed to you initially through that first loi, and then again once you saw behind the curtain and then what were the weaknesses of the business?
- [33:42]
Keegan Dum
Yeah, I think what I liked, you know, as a search fund searcher, what you're looking for is recurring revenue. You're looking for growth. You're looking for. There's this very play in the box, low asset intensity. A lot of, you know, it checked all, all. All of the traditional search funds criteria boxes. But primarily what you're looking for is a recurring revenue business that's growing. Those are the two, you know, if you get those rights, then a lot else is protected. So that's what I loved. I think there was a lot of new excitement. This is 2016. Well, I guess this was 2018, 2016, when I started and first looked at the business. And there's the vertical software space was starting to get sexy and a lot of people starting to look at vertical software. So the idea of having a vertical software business was attractive.
- [34:44]
Will Smith
Even though, Keegan, this would not have been considered SaaS, as we said at the top, this is. Right.
- [34:48]
Keegan Dum
Yeah, yeah. Even though. Because you can go through and, you know, you can go through, in theory, every. You can go through a conversion to, you know, transform the business into a SaaS business. And the fact that you've got the base of customers is, is, is the most important part.
- [35:09]
Will Smith
Um, and the distinction there is that your software was on prem, meaning it ran on the kiosks and at the, at the cashier. And so there was no cloud component.
- [35:21]
Keegan Dum
And that would have been some cloud components like for the, some of the back office reporting and things like that. But in general, yes, okay, they needed, they had the servers, the local servers which you know, in some of the, in, in the spaces too where you're looking for speed. You know, if they're trying, if it's all about them getting vehicles through their car wash and cars through their, their oil change, there's some benefits to the on, on premise model as well because you're not relying on the speed of the Internet and some other things that you know, as we found out later building a SaaS product, you, you start to figure out how tough it is to, to make it run really fast. Yeah, so there were some benefits there, but no, I would have loved for it to have been a SaaS business that I bought. But that's part of, you know, that's part of the search magic is you know, while everybody else is going after the sexy stuff, you're, you're going after the still solid but not as sexy businesses.
- [36:22]
Will Smith
Sure, sure. And what didn't you like about it? What were its weaknesses?
- [36:29]
Keegan Dum
I think the, the weaknesses were a lot around operations. The kind of the chaos that there was inside the business of trying to keep up with customer complaints and everything else. And they, you know, while there were ticketing systems and things like that, it was less than optimal and so, you know, kind of it keeps the business from being able to scale and I knew there were going to be a lot of headaches to be solved on the operations side. That was primarily it. I think there was a lot I learned later as you, as you run these companies, some of the other things that you look out for the next time around, like it's a fantastic high floor business, you know, you know it's not going to drop out from under you because these, you know, this is critical, critical software for these users and it's what they use to run their business. And so low churn. Fantastic. But you also, what I also learned that means is well, the competition is not churning their customers either. So, so going out and trying to, to grow the business at, especially at a, you know, a few hundred dollars a month for is, you know, it gets challenging. So your recurring revenue is fantastic and solid. But I think those were some of the going to be Some of the other challenges is these are all small shops, it's difficult to sell. You're not going to go sell a, you know, get a $3 million recurring revenue business that you're going to close. So I think those are primarily the, the, the downsides but mostly knowing that there was a lot of operational area for clean cleaning up.
- [38:18]
Will Smith
Yeah, there's a lot there. Keegan. One thing I'll just highlight, it's, it's such a good point about the stickiness of customers, the switching costs. So if you're in a business where there are really high, really sticky revenue, sticky customers, high switching costs, that also means that your competitors have those same happy benefits for them. So stealing customers becomes very, very difficult. And so if you're, if you're in an industry that's already pretty mature, where all of your target customers already have a solution, it's very hard to grow it. So if, if you are. What was so magical about SaaS in the last 15 years is that everybody, all these industries were starting to use software kind of for the first time or it was pretty green field so you could grab market share that was greenfield market share that didn't already have a solution. But once everyone's got a solution and, and the software has a mature hold broadly in a category, it's, it's, it's, it's challenging. It's going to be bloody, it's going to be bloody to just, just try to steal customers. Other thing that you said there was about the, the operational, you know, it's a small, small messy business. We assume now that's a, that's almost a feature, not a bug. That's one of the things that at least self funded searchers, we like your, the opportunity to professionalize is where oftentimes value is added. Would you say that's maybe less the case in traditional search land where traditional searchers are often buying bigger businesses and so they expect that professionalization, the professionalization opportunity is less because they're not as messy to begin with when you buy them because they're bigger.
- [39:54]
Keegan Dum
No, I think you're still looking for it. And you know, coming from an operations background in process improvement background, I was excited about taking that on, but it's always easier to look at. So when I was in the consulting president role, you feel more than just you, you feel the impact of customers calling in and your workforce is bummed, your team's bummed because they just got screamed at and you kind of feel it versus when you're doing diligence on your deal and you're saying, oh yeah, I can just come in and do some operational improvements and make this significantly better business. So I guess that's what I mean. It was a big opportunity. I was excited to take it on because that's my background and where I knew I could bring value. But having been in there, I got to see, you know, I was going into this deal knowing how painful a lot of that was going to be.
- [40:47]
Will Smith
Yeah, yeah. Well, and then one more point on pain and spreadsheets versus reality. This is, this is kind of an essential. I want to be careful about that word means something in Covid context to its customers. This was an essential business.
- [41:06]
Keegan Dum
Yeah.
- [41:06]
Will Smith
Because as you said, their businesses ran on this software functioning. Sounds great. You know, it's going to, that to our earlier point, highly sticky, high quality revenue. Yeah. But something that regular listeners will hear me mention more and more. There is a, there is a tax to being in a business where your customers absolutely need your solution to be working. I always say the guys in North Carolina who bought the scale business, the scale servicing business, servicing scales for businesses, manufacturers and otherwise that need real, real precision in their industrial strength scales. So their businesses ran on, needed these scales to be working properly.
- [41:52]
Keegan Dum
Yeah.
- [41:52]
Will Smith
And so these searchers service those scales. Sounds great again. But it was precisely that, that they were on the other, other end of the red telephone. It was, you know, it was them who absorbed all of the anxiety and pressure when the scales weren't working. Yeah. That it ends up, it ended up taking a toll. And it was precisely that that eventually fatigued them and they wanted out. I heard you say something similar about your, your seller. Owner. Yeah. So when, when you're the, the essential component of other owners, businesses, it's very high stakes, high pressure and it, and it comes with its own cost.
- [42:30]
Keegan Dum
Yeah. Yeah. If you're, if you're operating oil change shop and you're doing a million bucks a year and you've got 65, 70 cars coming through a day and the software is screwing up. And that day Instead of doing 65 or 70 cars, you can do 25 or 30. You're, you're your managers, they're frustrated, the technicians are frustrated, everybody's upset. They're on the, on the phone with your people letting you know how upset they are. You as the owner get the call. Because in these smaller businesses the owners have your number. So you're on the phone with the owners. Same thing on the car wash side. Yeah. It takes a very personal toll. I think the Other big lesson that any listeners should look out for as they're buying business critical software is if the price is right, it's all worth it. Where it gets stressful is if it's a million dollar oil change, you know, million dollar year oil change shop and they're paying you 300amonth for your software. That is the critical piece of them running their business. And there's not a lot of wiggle room. If they were paying, you know, 2,000 bucks a month and you can grow it added more significant pace. It's worth the pain. But there's some frustration that sets in as well on well, how do I, how do after you've run it for years and you start thinking well how do I really scale this business And I'm putting up with all of this, that yeah, there's a mental toll that it takes.
- [43:58]
Will Smith
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 Oberle a specialty insurance brokerage for searchers by a former searcher. And if you've got a business under loi, Oberle will provide complimentary due diligence on that business's insurance and benefits program. An easy, no risk way to get 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. So return us to the actual search and acquisition. So after some, some months being in the business, you decide again that you want to buy it. What happens?
- [45:12]
Keegan Dum
We. So I guess if you think about the first time around, we had it under Loi the first time around. Whenever I started, once I've been in the business, I know, you know, know the ins and outs of the operations. We're more comfortable with it, with what the, you know, the actual earnings are of the company. You know, the first discussion was well at what price points is the owner still excited to sell the business and am I still excited to buy the business? And so we did reduce the price pretty significantly from that first loi. So that was the first step of, you know, I think it was are you still ready to sell this business? You know, and kind of confirming that yeah, he's still worn out, he still wants to sell the Business and then just us agreeing and I think both of us knowing each other better and being more comfortable with, with coming up with a better price for the business was, was the critical step. So.
- [46:12]
Will Smith
And why do you think he was willing to absorb such a reduction?
- [46:15]
Keegan Dum
I think because. Because I got to live the pain that he had been living. And so I think we could relate to each other and the thought, you know, there's a very real aspect of deals on the table. It's in front of me. Let's do it. Versus do I want to go back out, start that whole diligence process with somebody who doesn't know me and doesn't know my business is going to ask me all kinds of questions about all the stuff that Keegan now knows about and that we've. That he's still comfortable with.
- [46:49]
Will Smith
Yeah.
- [46:49]
Keegan Dum
Do I want to start that process all over again? I think that was, that was part of it.
- [46:55]
Will Smith
He's seen you in the business, he's seen you lead the business or help lead the business. So he's, in some, in some sense he's diligence to you. He's de. Risked you. If he cares about the future of his business and his employees, he's. He's going to be, of course, diligencing his buyer, which is what he was doing on his side of the table this whole time.
- [47:14]
Keegan Dum
Yeah. And ultimately he kept a. There's probably a time to talk about structure, but he kept seller note, he kept seller equity. And so that is important when you're, you know, when you're keeping a stake in the future success of the business, not only with the people that you've hired and that, and this was a company in very small town Indiana, I think it was about 900 population outside of Fort Wayne. And so he knows everybody, he knows the community, everybody knows him, knows the business. So yeah, it was a combination of continuing to be an investment for him and making sure that that investment safe, but also also the people side as well.
- [47:54]
Will Smith
Yeah. So let's do turn our attention to the structure. I didn't ask you for businesses around the business, around each annuity. So give it. If you could give us whatever numbers you can share first and then let's talk structure.
- [48:04]
Keegan Dum
Yeah, it was roughly 6 million revenue whenever I bought the business. About half of that was recurring software revenue and the other half was, like we said, there was a pretty big equipment, components. We, yeah. Bought the business. So I think it was about a 40, 40% reduction. I'm trying to remember how much of a reduction we, we did whenever I bought the business the second time around, but we reduced it and pretty big reduction. Yeah, pretty big reduction in the, the price of the business. As, as far as structure goes, it was. He rolled about. About 20% of the purchase price was a seller Note. I think 15 to 20% of the price was him rolling equity into the business. And then we didn't go get any traditional debts. So that was the rest. Raised equity from, from the investors to buy the business.
- [49:13]
Will Smith
And before we get to that very important part of the story, Keegan, how profitable was this business? Six million revenue. What were earnings on that six million?
- [49:21]
Keegan Dum
Rough. Roughly million of ebitda.
- [49:22]
Will Smith
Roughly million. Yep. Okay. Okay. So you're buying a million dollar, roughly million dollar EBIT business. 20% note from him. 15 to 20% roll from him. So you got to come up with 40. Excuse me, was 60%. Yeah, yeah, 60 to 65%. You are outside of your traditional search fund.
- [49:46]
Keegan Dum
Yeah.
- [49:46]
Will Smith
So you have, you don't have any of those resources left. How are you going to buy this business? Where are you going to come up with that equity?
- [49:52]
Keegan Dum
Yeah, so I went out, I went back to all my original investors first. I wanted, I still wanted to honor the first right of refusal with the original group who had backed me during the original search. So went back out to that group and then got a kind of a tally of who was in, who was out. And some of them connected me with some others, and I had known some others to reach out to fill the rest of it.
- [50:18]
Will Smith
And so to be clear, in a traditional search fund, what happens is you recruit investors to invest in your traditional search fund. They write you collectively a check of, I don't know what it is now, four to five hundred thousand dollars.
- [50:31]
Keegan Dum
Yeah.
- [50:32]
Will Smith
That's to live on and support your search and deal costs for the next two years.
- [50:36]
Keegan Dum
If you.
- [50:37]
Will Smith
And one of the things that they're getting is the right of first refusal. So any deal that you come across to buy, any business that you buy, you take to them first. And each of them can say, yes, I want to then invest in your deal. So that first half million that they give you is not capital that goes into the deal. They then write you another check to actually invest in the deal proper. That's right. And you go to your traditional search investors before you go to any other investors saying, do you want to end on this deal? Some will say, hopefully all say yes, but often some will say no. That's what you call the gap. And then you got to go around and find Other investors from outside your original circle of search fund investors to fill the gap. If you get to the end of your search, as you did, without having bought a business, I guess the all agreements have effectively legally expired.
- [51:29]
Keegan Dum
Yep.
- [51:30]
Will Smith
But what you were doing was in good faith on the other side. You know, you'd gone through your traditional search and now you were basically a consultant, but you were buying a business or trying to buy a business that you had found as part of your traditional search. So in good faith, you, you did that. You went back to your traditional, your circle of investors and said, hey guys, turns out I'm buying this. I know the search fund ended six, eight months ago, but I'm buying, I'm trying to buy this business again. Do you want in?
- [51:56]
Keegan Dum
Yep.
- [51:56]
Will Smith
Okay. Okay.
- [51:57]
Keegan Dum
Yeah. The only difference being, so traditionally the search capital that they put in gets stepped up by 50%. So if they put 400, that's actually worth 600,000 of equity in whatever company you buy. Right. And part of the reason for that step up is they're taking a risk on a lot of searches that I think the numbers are somewhere around 40, 40% of them won't find a deal. And so when the funds shut down, all that goes away. Essentially they've said, you know, great job, Keegan, we're glad you gave everything you had to try to buy a business. Sorry it didn't work out. And so the, the caveat there was that six, eight months later, whenever it was that I was coming back to, to try to fund this deal that they call it an overhang was gone. And so, you know, now, because it was a, so I made a couple of pitches. One was I've just spent seven or eight months consulting, paying my own bills, searching. I've also renegotiated a significantly better price. Because I've been in this business, I've de. Risked it. The overhang would almost crush a small. You know, when you're doing a million dollar EBITDA deal, you know, part of the reason you look for bigger deals is so that 50 step up and everything else doesn't become too large of a factor in the, in the equity. And so I, I said, look, this is a much smaller deal. I know we shut down the fund, so you know, that overhang part is gone. So that was one of the caveats. The other was because of those reasons that I said, of everything I put into this, I want the chance to be able to go if I can. I know the traditional search fund is, you know, 35 IRR. If I can get a 40 IRR, I want to be able to earn an extra 5%. So whereas the very traditional models, 25%. I wanted to, you know, I felt like my experience there was worth that extra five only if. And only if I can get above, you know, get to a 40 IRR. And so, you know, there were some investors that said, you know, that's not the traditional model. Keegan, we're out. And some were frustrated. Hey, we just backed you for this part of the search and now you're changing the terms. And, you know, I felt a little differently because of what I had put into it, but understood where they were coming from. So, you know, what I don't want is listeners to think out, out there, to think, oh, let me go do traditional search and then try to negotiate terms. No, no, no, no. The whole traditional model is very standard. There's very agreed upon terms. I just felt like my situation was different enough to where I was, was asking for something a little different.
- [54:48]
Will Smith
Fantastic. Keegan, There was a lot there. Let me try to distill some of it or repeat some of it. So first thing, the overhang is the, the initial check that they write for your. Your 2 years of searching and your deal costs.
- [55:03]
Keegan Dum
Yeah.
- [55:03]
Will Smith
That money goes with a, with a 1.5 step up into equity in whatever you buy.
- [55:09]
Keegan Dum
Right.
- [55:09]
Will Smith
So that your first round of investors, even if they choose not to double up and invest in, in your deal again, they will have. Each of those investors will have a piece of the deal because they got it just by funding your search to begin with. That's called the overhang. Yeah, but then to actually buy the business, you need to raise more millions of dollars. And you go back to the investors and say, who wants to put into this deal? They write stroke you another check, but each of them individually. Okay, so what you. So when you went back to them and you re. And so you had a better deal on this business, you had basically a 40% discount from what it had been before you negotiated two changes to the traditional search terms, which were no overhang. So they didn't. So those who did not now choose to invest as you acquired this business would have no equity in the business. Correct.
- [55:57]
Keegan Dum
Right. So essentially, legally, the overhang was gone already whenever we dissolved the search funds. Yeah, but yes. So that basically that's not coming back. That's gone. I, you know that we shut down the fund eight months ago. The overhang is gone. Right, but yes, that was the first part. And important for your listeners to understand is the Importance of that overhang is if you're doing a small deal, and let's say on the very small end of deals, if you're raising 2 million of equity, and now the way the search fund is structured is you got to pay your investors back that 2 million, you got to pay them back usually an 8% preferred return on that. And then you don't see anything, you know, from a profitability standpoint and your part of your equity worth anything until you're above that. If you're doing 2 million of equity and now you're adding 600,000 of equity onto it, you've got a very small deal and that's a meaningful percentage of, you know, what you're actually paying for the business. And so that's where that overhang gets really expensive and tough. And, and I think where incentives like you as a searcher have to say, look, this, you know, I want our incentives to be aligned here on this small deal if, you know, I want to be able to have the opportunity for a good outcome as well.
- [57:13]
Will Smith
Yeah, yeah. So with the overhang, if it had been included, the, the, the investors would have had so much equity in this small deal that it almost just doesn't become worth your while because your equity piece is small on an already small deal.
- [57:26]
Keegan Dum
Yeah, yeah, yeah, yeah.
- [57:29]
Will Smith
Great. And then the other thing that you, the other sort of exception to the search terms that you renegotiate. Renegotiated was traditionally in the traditional search fund terms, the searcher can earn up to 25% of, of the carry of the entire proceeds of the project. Those are distributed or allocated in tranches. 8 and a third. 8 and a third. 8 & a third. To get your 25%. That final 8 and a third is performance based on hitting a 35% IRR, right?
- [57:58]
Keegan Dum
Yep, yep.
- [57:59]
Will Smith
And you said, actually, I, I'd like to get 30% carry, but only if I hit even. Even perform better. Yeah, than that. 35%. So 40% IRR.
- [58:12]
Keegan Dum
Yeah. So essentially I was saying, if it's a 35% IRR that we get, I'm still getting my standard 25%, but I want additional upside because, yeah, you know, I've spent this last time doing all this. I, you know, what I would love to have is an additional upside only if I can do good things with this business.
- [58:33]
Will Smith
And Keen, you know, we're kind of saying, would be traditional searchers out there don't think that you can or even should do this. This was exceptional for all the reasons that you've you've talked about.
- [58:45]
Keegan Dum
Yep.
- [58:46]
Will Smith
So in. But it's not as if, I mean hitting a 40% IRR is really is difficult. So that was a very high bar that you were going to have to hit. It's already hard to hit a 35, 45, 40% IRR was really only in an exceptional outcome. Would you, would you pass that hurdle?
- [59:07]
Keegan Dum
Yeah. Yep.
- [59:08]
Will Smith
Which you actually did. Yeah, as it turned out.
- [59:10]
Keegan Dum
Yeah.
- [59:11]
Will Smith
But it's not like you were, it's not like you were driving such a hard bargain with your traditional search investors. 40% IRR is, is a, is high.
- [59:19]
Keegan Dum
Right, Right. And that's why the ones.
- [59:22]
Will Smith
Right.
- [59:22]
Keegan Dum
Yeah, it's. It's very high. And so the, and that's part of the reason why some investors were so comfortable.
- [59:27]
Will Smith
I guess the next couple of years are a whirlwind.
- [59:30]
Keegan Dum
Yep.
- [59:30]
Will Smith
So. So let's, let's hear what happens after you get this deal done. You're now in the business as CEO, partial owner.
- [59:38]
Keegan Dum
Yeah.
- [59:39]
Will Smith
What happens?
- [59:39]
Keegan Dum
Yep, we invested a lot in people, so we dropped the EBITDA significantly, down to a few hundred thousand of ebitda because I was kind of looking for the long term, wanted to build the right team, start getting operations cleaned up. And the team did a great job. We got systems in place, got back in control. A lot of the problems that had run away from us operationally, we grew about 20% on the. Of the. The recurring revenue grew about 20% that first year. We. And then about a year in, maybe a little over a year in, I wanted to one of our competitors on the car wash side, they were the big player in the car wash technology space. They also had a small oil change software company that they had bought a few years ago. And it was kind of languishing sitting on the side. So a little over a year in, I reached out to that CEO and we started talking and I said, you know, I'd really love to buy this automotive shop company off of you and add it and give ourselves a little more scale. And so we went under loi to buy that company. And then throughout the process they got to know me and got more comfortable with me and then kind of flipped the terms on us. And they said, well, Keegan, you know, we actually still like this automotive space. We just. It's the reason it's been sitting off to the side is we don't have anybody to run it and build it. What if we buy you and you can hand over the car wash product and we'll keep running that and we. We'd have you just really focus on building out the automotive shop side of the business? And I initially said, no, doesn't make any sense. I've dropped the ebitda, you know, for all these. We're year in for all these reasons. It doesn't make sense. But they ultimately made a really good offer to, to buy us. And so a year and a half in, we sold the business. So it was December of 2020, we sold the business. And they were excellent partners. It was everything I hoped, which was I still felt like a. Like an entrepreneur because I had my own automotive shop business within this larger business. I got to make that a little bigger because I got to add their, their products in. They wanted us to go build a SaaS product for the automotive space, and now we had a bigger company to fund that build out. So a lot of exciting things there got. And so I wound up staying on for another three and a half years or so with the new buyers. But let me pause you there.
- [62:15]
Will Smith
Yeah, yeah, let me pause you there, Keegan. That was great. So I love it. I feel like there's a. Isn't there a. A scene in a movie that's like that, that's like person A thinks they're trying to buy person B, and then person B is like, actually, I'm gonna buy you. Yeah, I feel like that that's a trope for movies. Anyway, worked out well for you. The. But when they initially say to you, actually, let's buy you, and you said, you know, I've driven down ebitda, what you're saying there is. You were deep in the J curve. You'd invested a lot of the, the earnings of the business into operational improvements, people improvements. So it wasn't very profitable on paper at this point. So not looking good. If you're, if, if somebody's trying to buy you from an EBITDA perspective, an earnings perspective, because your earnings are thin, do they tie their acquisition price to your earnings at that time or they, or do they pay more of a strategic premium?
- [63:09]
Keegan Dum
You know, I, I told them that. I said, I know you're, you know, most, most businesses are going to, if they're doing an acquisition, it's going to be an EBITDA multiple. EBITDA is nowhere where it needs to be. My goal with this business is to grow it, ultimately build out a SaaS product and sell it on a, you know, at some point down the road, there'll be an ARR, you know, multiple on your revenue as opposed to on the ebitda. And So I told them generally where I was trying to get to with selling it three or four or five years down the road. And they kind of met me along that, along that way. And so for me it was, you know, it was, and the investors asked me because this was, you know, a year and a half in. And so investors would rather keep a good business, keep growing it and, and you know, be a multiple and invested capital exit instead of an irr exits meaning they'd much rather hold onto it for five or six years and you know, grow that, that moic. Um, and what I told him is there's a lot of risks still for us to get where we need to be. Building a SaaS product is extremely difficult. Who knows what can happen with the market. It was kind of the burden of hand argument that I said to the investors. And so, well, sure, maybe we could have grown it for another four or five years and had had a better outcome, but it made a lot of sense at that time to do it. Yeah.
- [64:45]
Will Smith
Yeah. Well, I think in so many acquisition opportunities, the potential seller, you in this case has to ask themselves, right. I have all these plans of where we're going with this business. So by selling the business, I'm kind of foregoing those plans and, and taking chips off the table now. And so it's like how realistic do I think those plans are? How much risk is in those, is in those plans? If they're very high risk and their long term plans, you know, it's, you're, you're, you're betting a lot by saying no to the acquisition. And in your case that's kind of, it feels like that's where you were because you were only briefly. I mean you're only a year. When these acquisition conversations started, you selling only a year into the business, I guess it took another six months to close. So total you were 18 months in the business.
- [65:34]
Keegan Dum
Yeah.
- [65:35]
Will Smith
But when you're contemplating this decision, it's only been a year. You have all these grand, this grand vision for where you're going. But like you said, it's a multi year project to get there. Who knows what happens in the macroeconomic environment, in the, in the industry environment. So it, it seemed like let's, let's collect our winnings, take chips off the table and, and go for it. Makes sense to me. Yeah. Just to say more about an MOIC outcome versus an IRR outcome.
- [66:06]
Keegan Dum
Yeah, I think it. So if you think about it this way, you know, they paid close to three times what we had paid for it. The year before. So you know, you pay off seller note and some other things. And I think it was like a 2.7x MOIC for the investors. Right? They got 2.7 times whatever they put into the business. A lot of investors would say well that's great. Not taking anything away Keegan, that's great. But if we, what if we hold onto it for five or six years and it can be a six times MOIC or seven times moic. It's really hard to find a new business. If you've got a good one, just hang on longer and try to increase that moic. That's what I mean by that.
- [66:49]
Will Smith
So as big as the IRR was IRR over a short amount of time means that they then just have to figure out where they're going to redeploy this capital. So it's an interesting, you know there's, there's no better first world problem to have than to be, than to be somebody who has capital and needs to deploy it. And so but it really is a problem that, that investors confront which is they have all this money, they need to put it to work. And oftentimes and, and this is by the way where, where investors and searchers or investors and, and entrepreneurs can diverge in their, in their alignment investors if they have their entrepreneur operator operating a business that's growing and doing well, if that entrepreneur chooses to sell, they make a great return on their capital. But then they just have to turn around and figure out where they're going to redeploy it next find that next searcher and opportunity in business which is hard as we all know. So they rather just keep their money where it is growing. In a business with known quantities, known operator, known business growing nicely. But so often the searcher doesn't have, isn't yet wealthy, hasn't had a liquidity event and this is a life changing moment for them, a sale. And so they're more eager to sell sooner to have, you know, notch a win and, and have a like, like I said, a life changing outcome. So there can be an interesting tension there that a business that's going well actually the two parties, the entrepreneur and the investors want to exit at different times for, for very different, different motivations. Yeah, cool.
- [68:24]
Keegan Dum
That's right. And yeah, so the, you know, the reality for the searcher as well, I know it's only a year and a half in but that translates to I think a 78 or 79% IRR. And so yes that means I hit my hurdles and it's an exit event that is, you know, what you're hoping for whenever you get into it as a searcher. So yeah, there are diverging, sometimes diverging thoughts on, on what to do the.
- [68:52]
Will Smith
Business just to round out Keegan, your how, how this was a great outcome for you, not only because you sold for three times what it, what you had acquired the business for 18 months earlier, but then you also had some additional benefits, financial benefits going forward. Can you tell us what those were or roughly?
- [69:14]
Keegan Dum
Yeah, I mean generally, yes. So yeah, once you exit the business, it was a cash, it was a cash exit. You know, the investor said, we don't know these guys, we don't know the investors. I'm sure they're great people that are buying the business, but we'd rather just have an all cash exit, meaning no rolled equity, nothing like that. So, but for me as the operator personally, you know, what's great is the new guys want you to stay on and so they, you know, give you some equity and the new company that you're joining and, and they, you know, in my case there's a three year package that they said, hey, you know, stay on for three years and keep helping us grow this business and it's worth your time. So I think those, those benefits and then the, you know, as fate would have it, they, the company that bought us sold to a public company about nine months after buying us. So, you know, know that original equity gets cashed out and now you've got some equity or some stocks with, with the new company that comes in. And so, yeah, just that whole, you hear the second bite of the Apple story a lot that, you know, it's true in this case. So staying on for the other three and a half years was worth about as much as it was to, you know, to get through the original exit. And so yeah, and you'll hear a lot of people sometimes it's three months and they're done. You know, you sell the business three months and you're ready to go on to your next thing. In my case, I was so early, it was a year and a half in that and I love the people I was working with and everything else that it made, you know, a lot of sense to just stay on and, and, and keep going.
- [70:49]
Will Smith
Fantastic. So, so you had the, you had the proceeds from the cash sale of the, your search fund acquired business. Yep. And then the buyers offer you to offer a very generous package for you to stay on, very generous salary plus equity, new equity or not rolled equity. But Equity in the, in the new enterprise. So net new equity for you and then that is all. Then they're acquired and so that equity in fact does becomes worth quite a bit. And so that whole second chapter there you under the new ownership was worth just as much as your search fund proceeds were. So great outcome on your search fund times two, the second. So really, really good stuff there for you, Keegan. Congratulations. I don't think I've said that so far.
- [71:37]
Keegan Dum
Oh, thank you.
- [71:38]
Will Smith
That's great. Fantastic. And, and so then you're no longer in that business. So round out the story for us.
- [71:47]
Keegan Dum
Yeah, I guess rounding out the story. So whenever we, towards the end of the, of the period when, when, when my wife and I had talked about, we knew the end was going to be coming, we'd been wanting to do something, take a break, a full break and, and go somewhere abroad. So we've got three kids that are 14, 11 and seven now and we just wanted a whole different family experience. So we packed up and moved to Spain. So we're on the southern coast of Spain in Malaga and we're spending a year here. The kids are in school. The visa doesn't allow me to work so I am doing nothing while I'm here. Especially you know, the first six or seven months was literally nothing other than trying to work on my Spanish and, and really enjoy it here. And now as we're getting, we're getting closer to the end of the year, starting to do the research and think about what's next and it'll be something certain, you know. You know I've. We talked about in the pre call but something search related and trying to talk to as many people as I can and learn about all the different, you know, what does that mean search related? What are all the different options out there? So I'm kind of in the ideation and research phase of still not working, still taking it easy, but starting to do a lot of research on what happens when we come back.
- [73:12]
Will Smith
When you come back stateside.
- [73:14]
Keegan Dum
Y.
- [73:14]
Will Smith
Well, really what a, what a great way to spend a year. Not just because you're on the beach doing literally nothing I think were your exact words.
- [73:23]
Keegan Dum
Yep, yep.
- [73:24]
Will Smith
But also giving your, giving your kids the experience of, of a year abroad. Invaluable. Just so, so special.
- [73:31]
Keegan Dum
Yeah. And especially I think, I'm sure a lot of listeners can relate but you know, in our case my wife has stayed home with the kids and I've always been working really hard and so there's this, this whole daytime where she's doing things. I'm working. We don't get to see each other. The morning we're rushing to get the kids out. The evenings kids are home and we're getting them ready for bed and doing everything else. And then we have like an hour a day to talk to each other. And so, you know, there's also that aspect of I'm finally not doing that crazy work cycle. So we have, you know, we can go sit and have coffee every day for a couple hours. And so that's been, that's been amazing as well. And so anybody who gets a chance to. I've had a lot of funny looks whenever I tell people I'm taking a complete break and not doing anything. And. But there's been. No but it's great.
- [74:26]
Will Smith
It's great for the reservations.
- [74:28]
Keegan Dum
The plant's been amazing for the family.
- [74:30]
Will Smith
Yeah. Yeah. Fantastic. Keegan, anything else to any themes we didn't hit any learnings that I didn't ask about that you want to share with the audience or did we get it all?
- [74:41]
Keegan Dum
No, I, I think we mostly hit on it all. I think the main, the main point. And, and I love my favorite. I'm sad that the one sad thing about being over here in Spain is, is every year since I raised my search fund, I get to go back to Emory where I did my MBA and I talk to the same class and tell the story. And it's one of the highlights of my year. It's so much fun. So I didn't get to do that this year while we're here. But, you know, one of the things I always try to hit because I always ask, well, what are your top 10 takeaways? And. But one of the big things is, yeah, people say it a lot, but you don't realize how important it is to really build deep relationships in this process. And that's what, you know, like I said with Dan, the, the, the guy who ultimately sold me the business, you know, that's what led to, led to all of this. So as you're doing this, and I guess another very fast anecdote is, and you've talked about it with proprietary. There's a lot of time wasted on looking at proprietary deals because people may not be really selling their businesses.
- [75:52]
Will Smith
Right.
- [75:53]
Keegan Dum
With Dan, I don't know why, but with most businesses, if I reached out and they weren't willing to share financials or something else, I just moved on. With Dan, I think we had like six phone calls probably where I had no idea what size the business was. Or if it was anywhere related to, you know, the. The type of business that I would want to buy. But I just kept talking to him because we really hit it off.
- [76:16]
Will Smith
Because you liked him. What was it, what was it that kept you going back?
- [76:20]
Keegan Dum
I liked him. I liked what the business was doing. I liked our dynamic on our phone calls. Normally I would have cut it off, you know, immediately of, well, okay, if you're not willing to share anything, I'm gonna move on and keep looking at deals where it's a reality. But for some reason, for some reason, we kept talking. And so, yeah, I think. Yeah. Just want to reiterate how important it is to build that relationship.
- [76:44]
Will Smith
I see, I see. So. So kind of. Because. Because the relationship you built with them is, of course, what led two years later to your buying his business. Just the value of. Of that. Okay.
- [76:56]
Keegan Dum
Yeah. Yeah. And I still. We still talk while I'm, you know, even while we're living over here, I still check in with them and. Still good friends.
- [77:05]
Will Smith
Great. And by the way, Keegan, did you move to his 900 population town outside Fort Wayne, Indiana? You're. You're from your Georgia's home base, Atlanta.
- [77:13]
Keegan Dum
I was doing my search for Atlanta.
- [77:15]
Will Smith
Yeah.
- [77:16]
Keegan Dum
The original thesis was we won't be able to build a big enough business, you know, in this small town. We would have kind of a base in Fort Wayne, but all new hiring would start in Atlanta because there's a lot more access to tech talent in Atlanta. So we were on track for doing that. And then Covid hit, and once Covid hit, we went all virtual and just never went back. So it turned into 100% virtual business and started hiring, which is wherever the talent was all over the country. So, no, never moved that we were ready the first time. It was under Loi. My wife and I were there. We were already starting to look at neighborhoods and all that that you go through with the search, and we were ready to move the second time around. I think there's, you know, it just didn't happen.
- [78:08]
Will Smith
Fantastic, Keegan. We will link to your LinkedIn in the show Notes. Is there some other way people should reach out to you?
- [78:15]
Keegan Dum
If not, then that's probably the best. Yeah, reach out on LinkedIn. Great.
- [78:20]
Will Smith
Keegan. Dumb. Congratulations on, as I said at the top, quite an unusual but fantastic outcome. Really, really neat story of traditional search. Thanks for sharing it with us.
- [78:32]
Keegan Dum
Absolutely. Thanks for having me.
- [78:34]
Will Smith
Hope you enjoyed that interview. Don't forget to subscribe to the Acquiring Minds newsletter. We send an email for every episode 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 webinar 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 Co.