A (3:55)

So Stanford GSB Graduate School of Business. I guess that's really considered maybe where search funds, traditional search funds came from. I don't want to overstate it, but am I right about that? I know that it's certainly where a lot of the academic research and search funds has come out of.

B (4:13)

Yeah, I think there's maybe a little dispute on. The professor who's sort of considered the godfather of search was originally at Harvard and then he moved to Stanford at some point. I think for, you know, he wanted to be in California. I think, yes, technically, you know, the academic teachings first started happening there. Did he come up with the idea there at Harvard? I don't know. But yeah, Stanford is definitely thought of as sort of the hub of what I think is known as kind of the traditional search fund model. And there's more models out there than just one. But at Stanford, search funds are well known, very popular. There's a whole administrative support function around it. It's called our center for Entrepreneurial Studies. That certainly backs VC platforms as well and spends a lot of time in that ecosystem, but provides a lot of great resources to searchers as well. I'd actually never heard of a search before I got to Stanford, but you learn of it pretty quickly when you get to campus. Some people hear the name and don't dive into it. But if you want to learn more about it, it's a fantastic place to be. And I was really lucky to have the opportunity to even go to Stanford and then to sort of have chosen the place that ended up showing me this career path is something I feel really fortunate to have gone down.

A (5:35)

I hear over and over again. In my own case is the same. I'd never even heard of a search fund before, whatever, not very long ago. But even somebody like you who was in finance in New York and then in private equity in California, never having heard of a search fund, it just goes to show how still nascent of a concept it is. And only when you're really kind of exposed to it square in your face or somebody explicitly tells you about it, you don't necessarily pick it up by osmosis. Even if you've been in the financial industry.

B (6:04)

Yeah, I think it changes a little bit where you are scale wise in the financial industry. I was working at a large fund, so the businesses we were looking at just weren't in the same ecosystem. If you're at a more entrepreneurial, middle market private equity fund, you might run into searchers in the ecosystem, so you might get some more familiarity with it. But yeah, I mean, at Stanford or on Twitter, it feels like everybody in the world knows what a search fund is, but it's certainly a very small part of a very big market.

A (6:34)

So you're at Stanford, you're exposed to the concept and what it immediately resonates with you because Stanford is also of course, where a lot of traditional tech startup activity and that entrepreneurial path that's also a hub of that. So what specifically about Searchfront tell us how you arrived at wanting this specifically?

B (6:53)

I came into school not knowing, not having a defined path. I really, really enjoyed my time, you know, in my career before and thought there was a good chance I'd continue doing that after school. But I also had this inkling that operating was, was pretty interesting to me. I, at towards the end of my time before school, spent kind of two to three months working at a portfolio company of ours in Denver. I was kind of there kind of in a consulting role every other week for, for a few months. We had just bought the business, so I was helping stand up institutional financial reporting for the first time. You know, what does a quarterly or deck look like? What does a monthly KPI report look like? What do we have to send to the bank? Because it's the first time they had a loan, obviously we used a loan because we were private equity. And also we were working on an M and a function for that business, so helping the internal team start thinking about sourcing. And anyway, so I was spending time there really standing up processes and systems and working with sort of the mid level accounting and operations staff and I just like really enjoyed that. It was working with a bunch of different people, getting to know them on a personal front, learning about their families to try and build some rapport and just kind of came into school recognizing like, oh, that was a fun experience. I really enjoyed it, not knowing what I would do with that. And then when I discovered search funds, a lot of what had been interesting to me in those couple months obviously resonated and was in parallel with what people talk about when they talk about what does it mean to run and try to grow a small business. So that experience, when I learned about search, made me think, oh, maybe this is a really good fit for me. And I spent much of my two years at GSB exploring search further.

A (8:37)

And had you, prior to Stanford, thought that you might do something entrepreneurial in your career?

B (8:44)

Honestly, no. You hear a lot of people, I think, talk about, oh, you know, I was the kid who ran the lemonade stand and stuff like that. I mean, I, I'd always, I played competitive sports growing up and I had to organize a lot of my schedule and it was a, I played competitive golf and you know that that is an individual sport. So I was certainly comfortable with the individual nature of, of things entre all entrepreneurially. But I didn't come in with this grand plan, you know, to start a business or lean into entrepreneurship. I just came in knowing that I still wanted to take time to explore and think about what I wanted to do for my career. And business school is a great opportunity to do that. I spent some time looking at entrepreneurial startup stuff, didn't think it was for me. Spent some time looking at different scale investing, different scale private equity. So it's a great chance to look at a bunch of different things. You, you got to pick a path eventually. I'd say sometime in the first year because at some point depth is where you really get value out of business school, not just spreading yourself across 50 different disciplines. And so for me, in that first year, it became clear that search was really appealing to me and so I sort of went down that rabbit hole.

A (9:59)

Great. And so did you then do a traditional search fund? What did you, what, like, be more specific about the path you took?

B (10:07)

You know, I think in the first year it was, there's a great opportunity just to have a lot of initial conversations, talk to investors, talk to people running a business, talk to people searching. I then sort of, you know, as that year moved forward, realized, oh, this is really compelling to me and so sought out an internship at a search acquired business. So I, and I also wanted to try out living in a different geography for the summer, knowing that that's a big part of search, depending on which way you do it. So I worked for probably 50 person historically on premise, moving towards the cloud niche vertical software business. Acquired in a traditional search fund in Charlotte, N.C. had a great summer. Shout out to Eric Christiansen, who was a fantastic CEO and a fantastic person to just shadow for eight weeks.

A (10:59)

And was Eric a Stanford grad?

B (11:01)

No, he had, he actually went to Kellogg and I found him. You know, one of his investors is Pacific Lake, which is one of the funds backing search entrepreneurs all over the country and the world. And they are, you know, have lots of good resources available to people pursuing or contemplating search funds. And they, including an internship matching program. You know, I wasn't getting paid much, I think Stanford, but, you know, was able to support a little bit of my salary as well. But they just were really playing matchmaker, like, hey, Chris, this is some of the stuff you're interested in. You should talk to these three CEOs and see if they need your help for the summer. So that's how I got connected to him. And yeah, then, you know, I think I spent, you know, part of the fall of my second year looking a little bit at job stuff. It still wasn't 100% clear to me that I was going to do a search and then by spring of my second year, right before graduation, decided to sort of make a full decision that I'm going to go search.

A (12:02)

And so what were the parameters of your search? Did you do a traditional search fund where you raised some money from investors that are part of the search fund community at Stanford and go out and look for a sizable business or. Tell us about that?

B (12:15)

Yeah, yeah, yeah. No, so I didn't. I took sort of a, a winding path through search and a winding path ultimately to the business that I bought. And it's kind of got a bunch of flavors of a bunch of these different paths. And I think the interesting thing there, which I'll talk about is like search is not as cut and dry as I think sometimes it gets made out to be. I mean, certainly there are some decisions you can make out of the gate that do make it very cut and dry. But there are a lot of different flavors and there's pros and cons to all of them. But anyways, my path was a lot of my classmates were raising traditional funds and I think to me it just felt like I don't know if I wasn't ready yet to make that level of two year commitment plus pick 10 to 15 investors. And it also just, I recognized that I was going to have a tighter geographic band. By the way, you can have a focused geographic band and still do a traditional search fund. Just there's certain investors that favor that and certain that don't. But I also felt like I wanted something more personal. I think a lot of people want a bunch of investors so they can maintain a lot of independence and I wanted two or three really close knit supporters and like the idea of more of hey, let's do this together. Not sort of, I've got a bunch of different people and can therefore kind of carve my own path because you can't listen to 15 people but you can listen to two or three. So I kind of just deferred raising and what I ultimately did was I found two or three individual investors who spent a lot of time around the Stanford community who actually are mainly traditional search fund investors. But I said to them, hey, let's just spend a few months researching industries together. I want to lean on you guys for pattern recognition for connections. I think at the end of the year I'm going to raise actually more of a permanent equity multi acquisition. Let's put together a fund, I'll run the first business, then I'll step out and hire replacement and go try to buy business too. These permanent equity vehicles are becoming more and more popular and one of my classmates was raising Ron and candidly I really admired what he was doing and thought maybe I should do that. I just need a few more months to figure out how to do it. So yeah, I basically kicked off in August, September after a couple months of enjoying time after graduation working with two individuals and we were on a weekly, bi weekly cadence and I was exploring industries. I was starting to source a little bit and the plan was let's sort of raise money in the right format at the end of the year. And then I got to the end of the year. So after three or four months of industry research and sourcing and sort of realized the big grand multi acquisition strategy for me was cart before the horse. It's really hard to find a business. It's really hard to Find a business that works for me and where I want to be. So let's not worry about the next 10 years. Let's just find the first really good business. There's pros to thinking that long term. It just wasn't, I think, for me. And then during those couple months, I did get more comfortable with a smaller business acquisition, an SBA funded acquisition, and candidly got a little more comfortable with. I had a little bit of savings leftover. Not enough to buy a business, but enough to keep my lights on for a year to 18 months of searching. And said, I don't know if I'm going to end up buying a million dollar SBA business or a $3 million EBITDA traditional search fund business, but I'd like the opportunity to look at both types of deals. And so I'm just going to defer raising capital, drain my savings as we go and put together the right capital structure at the time of the acquisition. And the two guys I was working with were great. They were like, absolutely, we'd love to continue mentoring and advising you and keep running your search and we'll be here. And they're going to evaluate the deals. I wanted to do just like any investor would. It just wasn't structured. And I was fortunate that I had enough money basically to not have to raise money.

A (16:28)

And that was the key difference because for people who don't have their own Runway or whatever, they need to decide at the outset if they're going to do a traditional search fund because their search is being funded out of the search fund.

B (16:39)

Yeah, yeah. I mean, so that is a big benefit of the traditional search fund, which is, yeah, you know, if you need money, then, you know, you're being, you're.

A (16:48)

Earning a six figure salary while you're.

B (16:49)

Looking for a company to buy ballpark, you know, 400. Some people are raising a little bit more nowadays, but ballpark, $400,000. And that's going to pay you $125,000 plus or minus salary pay, travel costs pay, software, diligence, database, legal fees, all kinds of stuff. It takes money to buy a business and I didn't have that much money certainly, but I thought, hey, I can pay myself a salary. And you're not cutting in half with taxes. It's a lot less money. And if we start running up a bunch of diligence bills from dead deals, I'll have to deal with that when we get to it. But for now, let's just defer. That's great. And the flexibility that provided Me to look at smaller businesses was great and we can get into that. But I would also say there's some merits to raising a traditional fund. You're leveling up a little bit. You've raised $400,000 from usually a handful of pretty sophisticated investors. They have expectations on you in terms of monthly reporting systems. They want to see the number of people you're reaching out to. So I was very self motivated. But there's more accountability I think when you're in a traditional search fund. And I tell people, don't sleep on that positive aspect of a traditional search fund, which is you have to be more focused because there's a narrower band of businesses you can look at and focus is good in a search.

A (18:19)

Yeah, yeah, that's a really important point. And that sort of rigor continues of a traditional search fund continues post acquisition once you find the company that you've searched for and acquired it. And I'm going to quickly get over my head here, so you'll have to correct me, but the way the traditional search fund is structured is such that if you don't meet certain growth targets correct, even post like post acquisition, you find the company, buy the company and then you have to meet certain growth targets for your equity to vest, for your equity to vest for you to get like the piece of the business, whatever it is. And there's like a standard tiered structure to this. Can you give me 60 seconds on that for people who don't know anything about this?

B (18:59)

Yeah, that's partially true. So basically when you buy a business in a traditional search fund, you get 8% equity vests at the point at acquisition there's another, it's eight and a third, there's another eight and a third percent that vest to you over four or five years. You know, you have a board of directors in place so you could be terminated. That happens super, super rarely. But if you're like a horrible manager, at some point you might get terminated. But then there's a final performance tranche that is another 8 and a third percent. So the whole pool is 25%. If you're two searchers, it's 30. But that, that final tranche vests linearly between 20 and a 35% IRR. So if you run your business for four or five years, sell it and it generates an 18 IRR. Perhaps the board might make some special grants along the way, but on its face, you would only be entitled to 16 and 2/3% equity because there's a whole nother tranche that would not have vested. So there are performance tranches, but it's the final third. There's two thirds that do vest to you just with time.

A (20:10)

Just with time, right?

B (20:11)

Yeah.

A (20:12)

But the point is there's a very like you never. You're always answering to your investors basically for the duration of the entire search fund.

B (20:20)

Yeah. And there's pros and cons and I think there's some people that want to do a self funded search because they truly want to run their own business and they want to raise money from nobody. Or maybe they raise money from their friends who they don't feel like they have to answer to. And certainly in an SBA structure, you can't have a board of directors. You can't be fireable because you're the warm body signing the personal guarantee. So they need that body to always be in place. And yes, if you do a traditional search fund, you have a board of directors with sophisticated, effectively they're small market private equity investors on that board. But I also think that a lot, I think the traditional search fund or the self funded search is evolving where people are choosing to raise money from some of the more sophisticated investors we see on Twitter who while they don't have board rights. The guys who backed me sit on a lot of traditional search fund boards. They don't have board rights over me, but I work with them as if they're a board. There's monthly reports that go to them right now. We talk every other week. And I want their advice, I want their oversight, I want to feel like I work for them because they've advised dozens and dozens of young, unproven people like myself on how to scale and run a business. So I do want their advice.

A (21:43)

And so what about the self funded search attracted you? If the rigor or having to answer to investors and provide the monthly reporting and so on does not turn you off. What about the self funded turned you on?

B (21:55)

Yeah, for me it was basically the flexibility to look at a smaller business. So every searcher, and I think this is important for searchers to keep in mind ultimate money creation is part of while people are doing this, it can be super lucrative to buy, run, grow and ultimately sell or perhaps cash flow for an even longer period of time. A small business. And so, you know, in the traditional search fund ecosystem, you know, if your ownership portion is 25% of the business, that just means you kind of, you've got a portion of a pie. And so often those people are looking for larger businesses, sort of $2 million of EBITDA and up. There's also a lot of benefits to a bigger business. There's more scale when you buy it. There's more processes and systems in place. For me, I knew that basically I wasn't going to leave the West Coast. And with a serious girlfriend, it became who's fantastic has been really supportive of me, shout out to Blair through this process. But we were getting more and more serious and it just became clearer and clearer to me. I wanted to support her job that she just got in San Francisco that I didn't really want to move. So I have a smaller number of businesses I can look at and therefore that's an even smaller number that are going to be above 2 million of EBITDA, if that's the threshold you want to pick. And therefore, for me to be able to look at enough businesses, I needed to look at a smaller business. But if your share of the pie on a smaller business is 25% from a financial outcome, it may not feel lucrative enough to you. And so that is one of the reasons why traditional search funds look for bigger businesses, because the searchers want to create money. Also investors want to write bigger checks. But for me, the appeal was, hey, I want to be able to look at smaller businesses because I need to, because I have a smaller geographic region. And staying self funded meant financially those businesses could still be attractive because I could own a bigger portion of a smaller pie.

A (24:00)

Great. That's a great explanation. Okay, well, so tell us a little bit about your search, Chris, or. Yeah, the process and finding system six.

B (24:13)

I would say my search had a lot of similar lookings to what traditional search funds do, but it maybe wasn't held to the exact same level of rigor. It really just wasn't as scaled. And I think I was trying to be lower volume, higher touch and a little more focus on relationships, which I think some, some traditional searchers do. Some are super high volume, send 20,000 emails. But I was running a pretty bifurcated search. I was trying to spend 20 to 30% of my time getting in front of brokers of small businesses focused on Northern California, up to Sacramento, up to Tahoe, down into Southern California. That was where I drew my circle for brokers and then spending a larger portion of my time on proprietary outreach, which really just means learning a little bit about an industry. Make sure you like that industry, then either yourself or with interns. I started out on my own, eventually was using interns, build a list of companies in that industry. I was kind of cutting it off, sort of Like Denver and West and then writing usually 80% of the emails form 20% is custom to that individual CEO that you're reaching out to. But sending out emails, they go into drip campaigns with follow ups and trying to get on the phone with business owners who he or she may be interested in selling their business and taking it from there.

A (25:52)

I hear from a lot of people that they're the business owners these days are getting a lot of these emails because search is becoming more and more popular. I sometimes wonder if that's overstated, but did you hear from any of the people that you were outreaching to cold like, hey, you know, no, I'm not interested. I'm getting five of these emails a week sort of thing?

B (26:12)

Yeah, absolutely. I mean, I think there's probably very few instances of someone emailing an owner and that owner having, you know, that having been the first email that owner ever got about buying their business, like, absolutely, you know, the business I bought, he had gotten emails from other people. He'd actually talked to other searchers who were traditionally funded and therefore, you know, he was too small for them. But it is really hard to find someone like who's never gotten an email from somebody else. And that's why you want to have to do the 20% personalization to try and find something that they can relate to. And also you just gotta get lucky. Like the, the, my perspective on this is you have to put in the work. You, you know, you have to do a lot of work to put yourself in the position to get lucky. But like I kind of got lucky and we'll get into it.

A (27:07)

So tell us what happened.

B (27:08)

Every searcher will, you know, will say ultimately they got a little lucky. Yeah, so I actually, I reached out to my own Jeremy Allen, fantastic guy. He ran System 6. He started in 2008. I reached out to him originally in September or October or pretty early in my search and we hit it off. I sent him an email, he replied. We had two conversations I think in the fall of 2020. But ultimately I came to the decision at that point I was still thinking about looking for, hey, I've got to do 2 million plus of EBITDA because I'm going to go the traditional way one way or another. And I wasn't yet really open to the SBA structure. So we sort of left it as like, you've got a great business. It's not the right fit for me and the investors I'm working with, but let's stay in touch. I actually was trying to get him to start selling into the search fund world. I was like, you provide outsourced accounting and outsourced finance back office services. I actually remember I sent him an email in January like hey, here's search funder. You should go do business development on that. And then he actually went. He was quiet on me for a couple of months. And then turns out he had had an unfortunate tragedy in the family and that had re evaluated how he was thinking about next few years for him himself in the business. And then he had a couple of strategic regional accounting firms reach out to him and actually send him offers. And he reached back out to me saying like, hey, I know you're in the M and A world. I know we weren't quite a fit. Like could you help me think about these a little bit about these offers? What do you think? And by that point I was open to a smaller business. So I gave them my thoughts. But I also said I'd actually love to have a conversation about whether myself and the investors I'm working with could acquire System six.

A (28:57)

You pulled the Dick Cheney, Chris?

B (28:59)

Yeah.

A (29:01)

I think the best person to be vice president is me.

B (29:04)

Yeah, I try to be open and honest. This is what I think. But also I'd love for you not to sell and sell to me instead. Yeah, a lot of searches. Timing. I had just lost out on another deal and I was kind of bummed about it. So I leaned in to this one and was maybe a little more aggressive than I should have been on price and stuff but I don't think that matters in the long run. But the point was, yeah, I just come out of one deal that I had lost in final bid to a private equity firm and so I was really eager to run at something else and timing just kind of works out sometimes.

A (29:35)

Yeah. So can you tell us about size of system 6 and probability and anything you can share about the numbers would be great.

B (29:46)

Yeah. So we're a team of 20. We are fully remote business and have been that way for several years. And most of the industry is that at the end of the day we manage QuickBooks or Xero, Bill.com, payroll. We use a bunch of software tools to be a tech enabled back office for small and medium sized businesses on their finance side. So we serve about 150 clients. We're effectively $3 million of run rate revenue and we run 35 to 40% EBITDA margins. We don't have real estate costs. Our largest cost by vast majority is people. So it can be a pretty Profitable model, like, you know, like most professional services can be, especially when you take out the real estate component.

A (30:36)

So let's, let's get into bookkeeping a little bit because you can see my eyes getting bigger. So that's a great. That sounds like a great business. And it's recurring revenue. I mean, you're really sticky. I assume it's really sticky revenue. So what do you. Was bookkeeping you had reached out to. Sorry, what was the owner, the seller?

B (30:55)

Jeremy. Jeremy.

A (30:56)

You'd reached out to Jeremy as part of your outreach. So I assume you had identified bookkeeping as an industry you were interested in. You reached out to a lot of bookkeepers up and down from San Francisco to Seattle sort of thing.

B (31:06)

Yeah, yeah, yeah.

A (31:07)

What had you decided you liked about bookkeeping? Was it what I just said, Basically? Tell me about your thinking there.

B (31:12)

You know, I put it in a little bit. And this is me putting my now business owner, you know, marketing hat on. I'd put it in a broader category of outsourced financial services. Outsourced finance team, outsourced finance back office. Honestly, I got to come up with a catchier term if someone listening can come up with one. Some people talk about cloud accounting services, et cetera. But look, yeah, you're right. Bookkeeping is our core service. But for two thirds of our clients, we're also running their payroll, paying bills, invoicing. We're trying to take on as much of their finance back office as we can. But to answer your question, yeah, I mean, the first thing, it's a lot of the same stuff you talk about in traditional search fund or just good private equity investing. Like, we're a critical service. Everybody has to maintain accounts, books and records, run their payroll, pay their bills. It's a pain point for our most small business owners. You know, most of our clients are kind of 10, 20, 30, 40 employees. And a lot of the work sometimes falls on the business owner. And that's not what they started a business for. It's not what they're good at. So they're looking for somebody to take it off their plate. It's a large industry. There's, you know, however you cut it, millions and millions of potential clients. And I, you know, keep. I kept coming back to that in diligence as a place to hang my hat, which is there's, it's just a huge market. I also really liked the working capital, sort of just revenue model of the industry. So a lot of businesses in the industry charge their clients monthly on, you know, monthly retainer. We actually run on a weekly model. So we're charging our clients every week, you know, hundreds of dollars for weekly services. That's pulling money in ahead of payroll. So just from a cash flow dynamic, that's really powerful. It is recurring, it's not contract recurring revenue. Our clients are under contracts, it's at will so they can churn. But it is a really attractive form of revenue. It's not inconsistent. Other types of revenue. From a churn perspective, we're not soft, we're not software, we're not 110% churn. We do have clients that go out of business and we do have clients that ultimately get too big and go in house. Or in our case, we lost a client a couple months ago who wanted to move to NetSuite and run an enterprise back office. And we don't support NetSuite. So there was churn there. And so what that means for me is good client selection on the way in. Don't pick businesses that look like they might go out of business. And you know, also try not to ever have more than a couple percent in any customer because you know, the bigger they get, eventually they may churn. You know, we've got some customers that are 4, 5, 6% of revenue and have been on this for a long time and don't think they'll churn. But some do ultimately go in house. So there is some churn. It's kind of 10 to 20% usually in the industry and we're trying to do a little bit better than that. But 10 to 20% per, per year annual.

A (34:12)

Yeah.

B (34:12)

So you know that's, that's not nothing. Right. Like if you weren't growing top line, that would be a negative dynamic for sure. But you know, we're able to grow well and well in excess of that top line and, and you know, it's just, it's part of the industry we're in.

A (34:28)

And when you say, when you keep saying we're not software, you're saying that in B2B software churn is a lot less than that. Yeah, because I've worked in some SaaS companies, but they were more B2C and churn was a lot higher than that.

B (34:40)

I think it depends. Are you beat a small business or are you beat an enterprise? But you certainly see searchers acquiring niche vertical software businesses that are a couple million dollars of ARR, that have low single digit to negative churn. Negative churn being the gold standard where you're able to upsell customers throughout the year and throughout several Years. That is part of the reason you've seen a ton of search funds looking for niche vertical software over the last few years is like, that's a really powerful revenue dynamic. And of course you're also. Software is a lot easier to scale, but it comes with very different acquisition multiples. And also it's harder to run a software business for me as a non software engineer. So that was one of the reasons I wasn't spending a ton of time in that space. But yeah, I mean software like there's a reason it's eating the world or whatever Benioff said, or Mark Andreessen, I can't remember which one it was.

A (35:42)

It's Andreessen and that's what he said. Well, Chris. Okay, well, okay. That's actually good. I didn't, I didn't realize that B2B software was. The churn was so low. Yeah, but why is everybody so interested in home services? Because your churn crushes like a plumbing business's churn. So why should I look at a plumbing business rather than a bookkeeping business?

B (36:02)

Yeah, I think, I think some of that is. And look, you know, actually the company that I had almost acquired, or not almost acquired, but was trying to get under LOI right before System 6 was a property service business, it was a little bit, it was kind of part commercial, part home. But so I spent some time in that industry. I think one is from a competitive dynamic. There's a ton of opportunities. If you come in as a young person who wants to modernize a business that oftentimes is fully on pen and paper, you know, go read stuff on Twitter. But you know, if you deploy service titan into your business, like you can add a bunch of value really quickly, you start paying attention to SEO. There's just like I think a lot of low hanging fruit oftentimes in those businesses. And there's a ton of, you know, M and A opportunities. If you buy one and you build a nice little reputation, you can do a lot of tuck in which if you can finance that out of cash flow is incredibly accretive. So I think there's both organic and inorganic ways to win in home service. And while it's not recurring contract revenue, it's reoccurring in that people's pipes break, people's electricity needs to get rewired. Right. The gold standard is five year no out for the customer contract. And then the flip side of that is completely discretionary clothing. Certain types of clothing perhaps you would say isn't discretionary but like plumbing and home services is somewhere in the mix, which is it's not reoccurring every year, but you know, every five years a homeowner is probably going to have a plumbing expenditure and if you spread that out across enough homes, you can still get really good revenue metrics.

A (37:47)

And the other things that you said about acquisition and opportunities to monetize, I guess with bookkeeping or financial back office, let me say there isn't the low hanging fruit to modernize because people are probably already all doing it virtually and Everybody's already on QuickBooks or I mean it's already essentially modernized. So there isn't that low hanging fruit there. But what about the acquisition play?

B (38:11)

Yeah, I mean, I'd say you'd even be surprised. There's not necessarily, I think as much of an opportunity to modernize some of our operations because yeah, we're all, you know, we're already using QuickBooks and using a bunch of software tools. But like we are a $3 million business without a CRM, writing all of our proposals on Microsoft Word and then uploading them onto DocuSign. So like those are things I'm taking on the first couple of months and that, that will just, it's not going to add, you know, dollars to the top line immediately, but it's going to create efficiency and free up more of my time. There's definitely an M and A opportunity as as well. There's, you know, if you go on QuickBooks, there's tens of thousands of bookkeepers listed and so there's certainly, I think a customer acquisition strategy where you've got and a lot of bookkeepers in the economy are nearing retirement and so there's an opportunity to form a relationship. Maybe you just acquire their customer list, maybe they come on for a couple of years and then retire. I think from a firm acquisition perspective, there's a lot fewer than there are individual bookkeepers. But there's M and A in both of those in those ecosystems. And it's definitely something I'm going to spend time on down the road.

A (39:24)

Chris so what about the future of bookkeeping trends in the industry? The obvious one would be AI. I'm sure I already know that people talk about it a lot in bookkeeping, but like many things, AI may be the threat or the opportunity of that particular technology may be oversold. What are your thoughts on it? What are your thoughts on it?

B (39:44)

Yeah, I think absolutely it is something that is being worked on now and is going to continue to evolve and get better. I think there's a couple of questions. One, what is the AI really look like? And then two, is it a threat or is it an opportunity for someone like us to add some leverage? The first thing I would say is there are several firms that came out in the last four or five years that were like we're going to be AI for bookkeeping. Quickly they ended up sort of pivoting towards leveraging good API integration and I think some automation, but also leveraging offshore resources to exist on top of the API work that they were doing and Pilot and Bench and Botkeeper, which are three of the big VC backed businesses today. If you're on their websites or you talk to them and as part of diligence, I talked to some investors in those businesses. They're like, yeah, it's tech enabled, it's not full AI yet because it's just more complicated than I think people thought it was. And there's a business called Scale Factor. Look it up. It's a good story that went down in flames because they were telling everybody they were AI and then all the investors realized this isn't AI, it's offshore resources plus some tech and they shut down. It's a good Forbes article worth reading.

A (41:04)

I don't think they're the only VC funded company claiming AI that was actually humans behind the scenes.

B (41:10)

But I don't mean to just wipe off the question because it's something I definitely focused on during diligence and something I still think about and it's definitely a risk. But what I keep coming back to is yes, the very basic reconciliation work or transaction coding where you're basically taking credit card transactions and putting them to the right account in your QuickBooks file that's already getting somewhat automated, that will continue to get further automated, but at the end of the day the client ultimately do they want to deal with a robot? Do they want to deal with somebody in an offshore capacity or do they want to deal with a trusted advisor us based. That's where we're hanging our hat. And you know, we're trying to be higher service, higher value, not chasing the cheapest clients. I think cheapest clients who want very low touch service, perhaps like AI does evolve over time, but we're looking for that small business owner that really wants someone to take care of their accounting, but also kind of be their outsourced cfo, maybe they don't call them that, but their outsourced financial monitoring controller person. And they are always going to want a resource that's a human that they can talk to and trust and so over time, maybe we end up using those companies that are providing offshore services to accountants like us. Maybe we look at that over time to add more leverage to our frontline service delivery team. But I think that at the end of the day there still has to be a person for the judgment call stuff and also just to be the advisor to the client. And so I don't think that will ever get automated away.

A (42:51)

When you were looking at bookkeeping or when you were looking at this specific acquisition, what value did you envision adding? Do you have a long to do list of what you want to get in here and fix or is it pretty? Yeah, I mean, what did you imagine for the first year? What is Chris going to do as the new CEO? And by the way, how is the transition going three months in?

B (43:11)

I think that was one of the things I didn't actually, I think really realize it when I first signed up the deal under loi. But the more I got into it, the more I saw that this actually was a decent fit for me. Look, I'm not an accountant. I don't have a cpa. But I spent five years working in finance and I don't necessarily know how to do a reconciliation. Now I'm learning, but I knew what that was and I've spent time looking at P&Ls and balance sheets and doing financial analysis. It's like all I did plus glorified PowerPoint work for five years. And so while I couldn't necessarily perform the frontline work that we're doing, I can certainly talk to clients about it, I can certainly sell it and explain to them why it's important for them to understand what's going on in their finances. So as opposed to that plumbing business I was looking at or the commercial property service business where I had very little relevant experience, there was some here for me, which I think is a nice benefit in the search ecosystem. And then I think another thing that I thought was a good fit and stuff I'm working on now is there's a huge community of small business owners and acquirers that I know through search, through lower middle market private equity that are looking for outsourced bookkeeping and accounting and back office function, are acquiring businesses where their finances are a mess and they need somebody to clean it up. So I think there's actually a pretty good opportunity for me to add some value out of the gate. And we've already brought in a few clients that I met through Search Fund World, whether it be advisors, I, you know, I've got Some referrals from, from banking partners I use during my search to people I've met on Twitter. So it's, it's nice to be able to sell a little bit out of the gate. I'm in a sales role about half my time. So, you know, I'm the salesperson and it's been nice to be able to drive some volume myself. Other stuff, you know, in the first six months I knew coming in that there wasn't a CRM, that their, you know, sales proposals were still being written in word and the previous owner had talked about just kind of not wanting to take on the project but knowing it was something they needed to do. So I'm driving those projects forward, doing a lot of it myself. That's part of the buy a small business you are in sometimes more of an execution role than a little bit larger business where you're maybe more of a full, full time CEO. We've got some other stuff that is just I think work that's good to do when you know you're trying to continue to grow. Maybe it doesn't have to be done exactly. If you were just kind of happy running a small business and cash flowing really well, which is what the previous owner was. But you know, we're putting a little bit more around quality control. We're putting in a more sort of fun, consistent training process, just a kind of continuing education. And it's also, I think from a cultural perspective, great. Our employment agreements, our legal agreements hadn't been updated in five years. So I drove that forward. So it's kind of the first few months for me have been the very obvious sort of just get ready for the next stage of System 6 tasks to be done and then a lot of Q, you know, of next year of 2022 for me will be building out the sales function. So like a lot of businesses in accounting ecosystem, we've always been referrals and sort of word of mouth and you know, I want to both hire a salesperson so I can free up more of my time but also pick a couple of verticals that we want to build further specialization in and go sell proactively into those ecosystems. It's not Facebook and Instagram ads, it's investing dollars and building relationships and advertising in the right places and trying to become an expert in a couple of verticals because I think in the effort of trying to be a high value add, higher touch provider when we have real expertise, deep expertise and a couple of places and can really add value to our clients because we know how the best businesses in that industry are run from a financial perspective, then we're able to command better prices and I think resonate more with the prospects. So that'll be a lot of next year. Is the sales function, it sounds like.

A (47:18)

Was the previous owner not doing a lot of proactive selling? Is that what I just heard you say? That there is more passive and just growing the business passively?

B (47:26)

Yeah. And I will say, I mean, I've been on sales calls with him during diligence and he's helped me out a little bit since then. And like, man, he could sell anything. And that's probably one of the biggest insecurities I had coming in. Was I going to be able to sell like him? And also what was I going to be able to lead? I think he could get people to follow him anywhere. He's just like a really talented, gregarious person with a big personality. Yeah, he wasn't out there prospecting, but was responding to people when they would come in the door. Think he was an entrepreneur. He started a couple businesses before this was plugged into the EO organization where he lives in Michigan. So there's some people coming in that way as well. So using the right networks. But yeah, he had proactively and this is something to look for in a business. He had proactively pulled himself out of the business over the last several years because he was really happy with the level of cash flow, was producing and was trying to spend more time with his family. And that's a good sign because I'm not trying to work 25, 30 hours a week. I want to work a lot more than that. That means there's opportunity. Not that he was just making the conscious decision, I want to spend my time elsewhere right now.

A (48:40)

Yeah, that sounds like a wonderful opportunity for somebody like you because you know that the business is solid, that, um, if you take a couple of weeks off for vacation, it's not going to totally fall apart. Like the key man, risk is low. Uh, it's just a sweet spot. It's like he's putting enough in that it wasn't like a complete absentee situation, but not so much that you know that if you double your. Double his output, that you can really, really move the needle in the first year.

B (49:03)

Yeah. And I think that, like, you know, you actually have to, to his credit, you know, put some good processes and systems in place to set it up that way. I definitely, you know, and that was something I was nervous about during diligence was, you know, Every owner tells you, oh, the business runs itself. You know, I don't really do all that much. I'm not that critical to it. You know, I was worried about him as a key man. Relationship with clients. Yeah. You know, are the clients here because of him? Are they here because of the work we provide? And fortunately, that's all turned out not to really, you know, to be an issue. But, you know, I definitely want to give credit that the systems and processes, you know, they put in place over the last couple of years have allowed me. I'm in the weeds on sales. I'm in the weeds on some of this other stuff, but I'm not dealing with client problems. I'm not doing accounting work. So definitely a lot of good work was done over the last few years to get it to where it is now.

A (49:56)

Sounds like a great acquisition, Chris.

B (49:58)

Yeah, I mean, honestly, like I said, there's a lot of luck involved. There's industry pros and cons, but as I think about, hey, can we go from 150 clients to 500 in the next few years? Like, that'd be a great outcome. I feel. I feel pretty good about that. You know, what's it look like beyond that? I have ambitions for it to grow for the next 10 or 15 years. Like, that's a bigger question. But I feel good about the spot we're in and, yeah, really fortunate to have to have found it.

A (50:25)

Just a couple more questions before I let you go, Chris. Are you. How difficult is it to acquire bookkeepers? Is there a shortage? Like, there is everything else? And can you train people yourself who don't know anything about it? Is there like. Or like, what is a qualified bookkeeper? What sort of training do they need?

B (50:44)

We basically have two types of employees we're looking for. One's easier to find than the other, so we have what we call client leads. They're effectively our account managers. And that's the person who is the relationship with the client who runs all of the bookkeeping and accounting and payroll and is going to be the CFO if they want it. Those people were having a harder time finding someone who basically just has. Yeah, usually five to ten years of accounting experience. We prefer people who've served across multiple clients. So not just somebody who's done accounting inside of a business, but rather someone who's like, all the big four accounting firms, they have cloud accounting practices like ours. So we're looking for someone who's gotten experience serving multiple clients basically over the Internet, and those people are harder to find. You know, the frontline bookkeeper. Yeah, we're just looking for somebody who's really detail oriented. We've got some interesting questions in our indeed posting that you have to email us about. That show that show us that you're detail oriented and you read the whole post. That role we absolutely can train and we often, you know, we've hired some people over time who came from whether it's a property manager role or you know, some sort of just like data entry, attention to detail, joyful personality. You know, that is a role we're hiring for right now. But it is less of a bottleneck than the client facing person. Right. That person represents system six to the client. So that person we have to have a higher bar for culturally. They have to be ready to go out of the gate because they're going to get clients out of the gate. So you know, people are business, there are products like we're tech enabled, we've got processes, but we're only as good as the people we're putting in front of clients. So there has to be a high bar there and that, that makes it hard to hire even in a business where we can hire remotely, which is obviously a great aspect. But still that's, that's our bottleneck. Like if I turned on, I put in place fuel and the sales side and then turned it on. There's only so much we could take on before, you know, needing to stop sales like which we've done a little bit over the past because we just don't have more capacity.

A (53:00)

Last question for you, Chris. Yeah, any, any advice for somebody start doing a search. We touched a little bit on your decision of like size of search and how to think about search. Maybe there or something else.

B (53:12)

Yeah, I mean that, that is the biggest piece of advice I give to people and it's, you know, depending on what ecosystem you're coming from, which business school or maybe you found search online, what blog did you read? I think there can be a sentiment of there's one best way to do it. I think there are a lot of different search paths. There's some we haven't talked about. There's going to work for an accelerator where they've got a lot of the systems already set up and ready for you to go. There's private equity firms who are putting young, talented, entrepreneurial people into C level positions of small businesses and that looks a lot like search without some of the financial upside. There's buy a very small business, start small, go the Nakashka route and do A roll up over time. So there's a ton of different paths. They all have pros and cons. And I think the first thing you can do is just learn about all the paths, evaluate, understand the pros and cons and really sit with yourself and understand what are you solving for. Is it potential for largest financial outcome? Is it median outcome? Is it geographic preference? Is it industry preference? Is it certainty to close? There's a ton of different criteria that you need to pay attention to. And then the other thing I think is as much as you can do it a little bit before you make your decision. The only reason that I got comfortable with ultimately doing an SBA deal and taking on the risk that comes with that is because I was searching for a few months, hadn't locked myself into a structure, saw a few small deals, and at first I was like, I can't do those. And then when I really sat down and thought about it and got to know some more people who had done an SBA deal, because nobody just talks about that in the ecosystem I came from, I just got more comfortable with it. And I only was exposed to it because I had been lucky enough to be able to search for a little bit without locking myself into a structure. So whether you're at a job or wherever, just search a little bit, see what's out there and you'll start to understand. Maybe you like the smaller businesses, maybe you want to buy bigger and that's going to force you a different way. So understand the options and then try to dip your toes in the water to sort of reinforce what's the right path you think for yourself. Because I really don't think one is absolutely better than the other.

A (55:26)

Well, it's so telling. Just because you kind of, I mean, your story is such a great example. I mean, you were on one path and then you reevaluated and found yourself on a completely, not a completely other path, but an evolution of your path. Appears to have worked out quite well so far.

B (55:39)

Yeah, yeah, so far. I mean, I think the most important thing in the first few months of buying a business is make sure you don't have half the company quit or half the clients leave, or in my case, make sure you can make your debt payments as any self funded searcher can relate to. But yeah, I think I feel good about the growth in front of us. And now it all comes down to execution, which is why we get into this game. Can you learn how to lead and grow? And it's on you, which is, it's on you and your team, but ultimately it comes back to you, which is really motivating.

A (56:12)

Chris, if people have questions for you, want to talk to you directly, how's the best way to reach you?

B (56:16)

Yeah, absolutely. You can reach out to my work email. It's chrisystem6.com that's words, no numbers in there. And, you know, I think that the fortunate thing, I feel, is happy to talk to people thinking about searching, happy to talk to business owners if they want to outsource their financial operations. Shameless plug there. Yeah. So reach out. And I'm happy to make time when I can.

A (56:43)

Great. Really appreciate you making time for me today, Chris.

B (56:46)

Awesome. Will, good to talk with you.

A (56:48)

You, too.

B (56:48)

Thank you.