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- [00:00]
Will Smith
When you buy a business, the suddenness of going from searcher to owner CEO, with all its attendant responsibilities is thrilling, but also isolating. The emotion of loneliness is an unhappy characteristic that we hear over and over from acquiring minds guests. But you also lose some of the practical value many business buyers took for granted in their previous W2 lives. Being on a team of people that you make decisions with, where multiple perspectives are available, where your team can absorb your absence if you take two weeks off for vacation with your family, well, today's guest shares a business buying model that seems to solve for this abhi, Ravi Shankar and his three partners are building a Holdco. We go into a lot of detail on its structure, but in brief, it's this the four have pooled their resources to buy four different businesses sequentially. Each partner will search for and buy the business for which he will be the principal operator and have extra equity. But via the Holdco layer, each partner is also a significant owner in the other three businesses. The way that shakes out is that Abhi will own 40% of the business he's CEO of and 20% of each of the three other businesses. In terms of revenue, they aim for each of the businesses to surpass $10 million a year and for the portfolio in aggregate to reach $50 million a year. There's also a CEO understudy feature of their model where each partner is familiar enough with one of the other businesses that he could run it for a while. This feature is key, highlighting that ABI's Holdco is not just about equity numbers in a spreadsheet. It's about sharing the burden of CEO responsibilities, backstopping each other, counseling each other, providing flexibility to each other as owners. And it was stress tested earlier this year when ABHI took a three week trip to India. It passed the test and then some. It's a fascinating and clever model. See if you agree. And we also hear all about Abhi's acquisition. A pool company in the Bay Area, it was doing $3 million a year when he bought it last July July 2023. A year and a half and a series of bolt ons later, he's almost tripled that number. That $10 million a year goal is all but certain and he will have achieved it far faster than expected. If ABHI and his partner's Holdco model intrigues you, make sure you also listen to my episode with Mark Zojibwami of Calgary, who together with two partners is building a Holdco with a similar model. Link in the show notes to that episode.
- [02:46]
Chelsea Wood
Okay.
- [02:47]
Will Smith
Please enjoy this conversation with ABHI Ravi Shankar, co owner of Trust One Partners.
- [02:55]
Chelsea Wood
Announcements Webinars are back so much in buying a business comes down to the price you pay. But figuring out what that number should be is delicate. You need to weigh risk comps, seller expectations, debt burden. Well, this Wednesday, the Acquisition labs Chelsea Wood will host a webinar for a look at how to come up with an offer that makes sense for your deal.
- [03:21]
Will Smith
It's called Is it a fair multiple?
- [03:24]
Chelsea Wood
The art of making your offer. And it is this Wednesday, January 22nd at noon Eastern. Link to register is in the show notes and on the Acquiring Minds homepage. Acquiringminds Co. Then next week, everything legal you need to start your search. Attorneys Bill Barlow and James David Williams return for a legal office hours to cover how to set up your search from a legal perspective, including preparing your LOI template to submit offers. And they'll actually be handing out an LOI template for you to use in your deals. That's next Thursday, January 30th at noon Eastern. Register at the link in the show notes 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 opportunity for many entrepreneurs and on this podcast I talk to the people who do it. If you ask owners in the ETA and search community which insurance broker provides highest quality work, great outcomes and has a practice dedicated to searchers and acquisition entrepreneurs, one name comes up again and again. Oberle. Oberle Risk Strategies has worked with hundreds of searchers over nearly a decade and is in fact led by a two time successful searcher, August Felker, which makes 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.
- [05:37]
Abhi Ravi Shankar
Abhi Ravi Shankar welcome to Acquiring Minds.
- [05:40]
Raj
Thanks Will. Happy to be here.
- [05:43]
Chelsea Wood
Abhi.
- [05:43]
Abhi Ravi Shankar
You and three friends are building a Holdco. You're doing it to give yourselves more flexibility in your lives. You're doing it to build wealth and you're doing it for the long term. This is a buy, build, hold strategy and you're doing it with a partnership model that deserves our study. So let's get right into it. Abhi, start us off with some background on you, please.
- [06:09]
Raj
Excellent. Nice to see you, Will. So I live in the San Francisco Bay area. I've been here for 14 years or so. My background has been mainly in consulting and in operations. Spent after undergrad in India, which is where I grew up. I spent four years in the Middle east running operations and oil and gas rigs offshore onshore. Came here to the US for business school and after business school went into consulting with BCG and almost spent a decade there doing a wide variety of stuff, but very atypical of normal strategy or management consultants, which is, you know, two, three month project. Most of my engagements were six to 18 month kind of engagement. So really working hand in hand and that was what I loved about it. At the same time there was probably like two or three times during my consulting time where I left to go do something either on my own or join a smaller company and build something. Various reasons, something or the other kept me back. And finally it was 2022 when I made the move and 2021 actually and made the move to go join a startup which one of my friends had built and scaled for 10 years. It was a startup that does robotics for warehouses. It was great. Spent two years there running operations and customer success kind of brought a lot of things together for me. My love of like working in a smaller entrepreneurial culture, building a company, growing fast, building teams. It was just ideal for various reasons. I ended up leaving the startup a year and a half ago and I then kind of went back to what I had been following as this ETA movement and culture and people who've done that. I've been following this space for three or four years, very lightly, very superficially, but I took a couple of months off after my startup gig and I said, hey, you know, what am I going to do? Really? The thinking was, you know, how do I bring a lot of things that give me joy, which is, you know, building teams, building companies. I'm more of a generalist rather than a specialist, so I like playing different things. I can relate to a blue collar employee and a C suite executive being able to manage all of that. I think that was then I realized, hey, you know what? I've never had a time in my life where I was gainfully unemployed. Now's the time that I can actually not go sign up for another W2, but go do something on my own. Ended up floating this idea with a bunch of friends and a couple of them were like, wow, this is awesome. We, we've thought about the same. Why don't we do it together? So my plan quickly pivoted from me.
- [09:34]
Abhi Ravi Shankar
Abhi, what was the plan as you explained to them or what was the vision as you explained to them? Let's buy an H VAC business together.
- [09:41]
Raj
Basically yeah, yeah, yeah, not pretty much. Yeah, you know, that's how they interpreted it. Because I do remember one of my now partners telling me the first time I heard you, I was like, what's wrong with this guy? Went to business school, was a partner at a consulting firm and now wants to just buy a local, I don't know, plumbing business or whatever. That just sounded bizarre. But my, my thesis and plan there was very simple. It's like hey look, you know, at this point in time I wanted to focus time more for myself, I wanted to spend time with family, I wanted to have the flexibility and build something of my own for the long run. So trade off the year one year, two cash flows for what you build as net worth and what you build as equity for the longer haul. But do it in a more predictable space rather than the startup space which is being in Silicon Valley. That's what most people would gravitate towards around me. And I said hey, why don't, I'm thinking of just buying a couple of small businesses, maybe one, maybe two. And quickly when these guys said why don't we do it together? The plan evolved to wait a minute, you know, instead of me building, buying a 5,6 million revenue company and growing it to 10 million and holding it forever, maybe we can build a holding company of 50 million in revenue and we all can kind of learn from each other, work with each other, share learnings across our businesses, build some redundancies across businesses and amplify the ambition that we have. And that's what we got to and that's how we got started in May of last year.
- [11:37]
Abhi Ravi Shankar
Great. Well thank you for that abhi. And we are going to dissect some of the decisions that you made there. But before we proceed with the story abhi, I want to ask some follow ups first of all. So to be clear, it sounds like you had an entrepreneurial itch for a long time. You had been lightly following eta, you had been sort of feeling that you wanted to do something on your own for years and years. So you are somebody who wasn't entrepreneurial for the first half of your career but maybe were it was inevitable that eventually you do something. Yeah, just trying to get your the personality type here.
- [12:09]
Raj
Yeah, yeah. I mean I felt that I wasn't that big a risk taker growing up. That was not what was even okay and foreseeable in middle class India. Like hey you. You know, my family is mainly people who sort of everybody, my uncles, aunts, cousins are all people who just went and studied, got a job, did well in life for themselves. And somebody saying hey, I'm going to just go bet all my money on starting a business kind of sounded weird, at least where I grew up. And that was. But what I realized, either be it in the oil company, oil services company I was in, or in consulting, I had much more joy working in smaller settings where I could move things at a breakneck pace, I could break things, I could just wear those cars on my sleeves. That gave me so much joy that I realized, hey, you know what, maybe that's what I should do if. And that is probably the proverbial itch.
- [13:19]
Abhi Ravi Shankar
Great. That was great color in your personality and background, Abby. Thank you for that. And then let's also name drop here a little bit or the prestige on your resume. So you were at bcg, you were a partner at bcg, correct?
- [13:35]
Raj
Correct. Yes.
- [13:36]
Abhi Ravi Shankar
Okay, so not only a partner at a, at a consulting firm, but one of the largest, most important, most prestigious, biggest sort of blue chip consulting firms that there is. So you were, you were not only leaving that behind in terms of, certainly in terms of income, you were probably making a great salary and, and had even better the promised income in the years ahead. But there's a lot of status that comes with that. Then you work in startup land in Silicon Valley. You, I know your story from the pre call and you were working in robotics and it was a, it was a kind of rocket ship high growth startup. So in, in startup land there was kind of the prestige of working in, in for a high growth startup in robotics. Sexy, sexy area. So what, what about. You haven't talked at all about the status that you were leaving behind. You've kind of hinted at it where you had, where your friends were like what are you talking about? But speak to that directly, please.
- [14:38]
Raj
Yeah, you know, that was a big mindset shift, Will. And I felt it happening probably some midway during my startup tenure over there. I know in a lot of ways we're all sort of pre wired to that of what society values and marks as high status. And admittedly so I probably was the same. I think what really shifted things for me was the fact that when I left consulting to go join the startup, it immediately changed the perception in my head that okay, I've already left consulting, so that's already in the rear view mirror. Now on my own, I'm on my own journey. And if my journey gives me joy, gives me fulfillment, that's the highest status I can aspire to. And in my head, that made me, wow, that's the highest status that I can ever be. So it's already gone. It's not like I've burned the boats. I can always go back to consulting if I want to. And. But in this time now, it's on my own terms and my own journey. And I think that was one big shift. Probably a year into startup world, where I started getting comfortable with the leader I am, with what I'm doing. And I felt like I've achieved what I wanted to in my own head. And I think after I left the startup and in that two months of soul searching, sabbatical, however you want to put it, I think I really got to look, if I achieve a few things in my life, which is, hey, my daughter is five years old, I get to spend more time with her now at this age, I get to spend more time on myself and the flexibility that I want to do and the things I want to pursue, that's the happiest life I can build for myself. And that, to me, superseded a lot of status. All that said, it is still extremely difficult when you talk to people and you're telling them this story and, you know, people who are not used to the SMB world and the ETA world and you cannot talk about it and, you know, it comes up. You know, I was in a mixer at a BCG alumni event a couple of weeks ago, and people are like, what you're buying and running pool businesses? We'll come back to that later. But, you know, that was how they thought about it too. But I felt pretty happy where I was coming from, where it is. And they're smart people, they kind of get it. They're like, hey, okay, now I, you know, they ask a few questions and they get the vision and then they get it. But I think once you make that mental shift yourself, it becomes way easier.
- [17:44]
Chelsea Wood
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- [18:48]
Abhi Ravi Shankar
And another point on your, on your pivot here into doing this that you just hit on that I wanted to make sure that we did was the flexibility, the life flexibility. So you, that startup experience that was between BCG and doing this, you worked very hard, crazy startup hours and took a bit of a toll. Right? And so you were coming in the wake of that, that was something you were trying to solve for. Say more.
- [19:14]
Raj
Yeah, absolutely. You know, consulting is generally a pretty busy kind of a job. It's, it is a, you know, 60 plus hour kind of a per week kind of a job. But I think being a startup executive of a fast growing company, not just the expectation but just the drive that you yourself have to build something to conquer challenges is so high that it takes a tremendous amount of time energy that goes into it. I ended up traveling a lot more than what I had sort of bargained for. I thought, hey, consulting to coming and working for a company, I would travel lesser. It's probably the case in the beginning. And then it started kind of going up much to the case of like, you know, I was traveling three or four times a month and you know, being up late, you know, it's a global company so I'm at calls at all times during the night and day. And that took a toll on my personal life and being able to do what I want, give the time that my family needs and what I want to spend time with my family. And that was the realization I came to is like, look, I love high growth, but if this are the sacrifice, these are the sacrifices that are required for, you know, to be in a high growth environment. Maybe this is not the right life stage for me. Maybe, you know, when my daughter is a teenager and she's like, dad, just leave me alone. I want to be with my friends. Maybe that's the time I can kind of say, okay, you know, let's go get another rocket ship at that point of time. But at this time I want to be present and available and, and that's the decision I had to make.
- [21:05]
Abhi Ravi Shankar
Great. And Then one other thing that really caught my attention in our pre call was the quality of the work that drew you to entrepreneurship through acquisition. Wanting to work in tangible services, I guess. I guess services, by their definition, by definition is not tangible, but kind of in. In the. In the. In the real world with real world outcome as opposed to knowledge work. Say more about that one, please, because that is not one I've heard articulated very often.
- [21:34]
Raj
Yeah, it's. It's probably a little bit of reflection of myself and my experience. All the industries that I've worked on are more, you know, atoms than bits and bytes. So, you know, energy, power, transportation, manufacturing, these are the kind of industries I've spent more time in. I've spent way more time in, like, factories and refineries and warehouses than I have in a, you know, data center or whatnot. Right. So to me, I wanted to build on that. Like, hey, I have an edge here. I can connect to people who can work there. I can understand, I can speak that. That language. At the same time, I can sit next to a CEO and kind of talk strategy. So if I want to be able to build both of these, I wanted to kind of build a company which is more catered towards, hey, you know, here's a very tangible product or service. You know, when you're in consulting as a partner, more so you're sort of an entrepreneur. You still have a P and L, you're building your team, you have to go get your clients. But what you're really selling is knowledge work. You're selling impact of a transformation that you would do. You're selling the impact of a strategy that you would kind of come up with and help somebody else execute. And I'd done that for a while, and I felt like the thing that gave me more joy, though, was waking up to this warehouse 45 minutes outside of LA. This giant warehouse with it used to be so loud, and now there are a thousand robots just moving everything, and it's so silent, and they're just moving things around. And I'm like, you know what? We built something here. And as a team, as a company, and that gave me so much more joy than trying and trying to go sell a transformation. And that's when I realized, you know what? This is what I want to do. This is what I'm probably, I'm decently good at and I want to do. So why not try to do that?
- [23:54]
Abhi Ravi Shankar
Fantastic.
- [23:55]
Raj
Kavi.
- [23:55]
Abhi Ravi Shankar
And I haven't heard you yet mention any sales experience. And given that you convinced three skeptical friends not only that this was a great path for you, but that maybe, you know, I assume you influenced them into all doing this together. I know that wasn't your initial goal, I don't think to, to do a four way holdco, but obviously they not only were convinced that it was a good path for you, but for them to participate as well. Was it just, was it just the brilliance of the vision or do you have any sales experience?
- [24:27]
Raj
I mean as a partner you're essentially a salesperson that's probably like 80% of your hat is actually sales and then you're kind of doing, you're doing it in very consultative manner. So I feel like the last five years of BCG was, you know, I was doing sales but I was just doing it in a very consultative partnership oriented model rather than here's a widget, let me sell you this widget. And I think that was probably where I, you know, cut my teeth. And even in the startup line like you know, I was doing ops and customer success. So a large part of it was like hey you, you know, customers already chosen to go with us, now they need to expand. And I was the one working with, you know, our clients in expanding our footprint within, within them. So that was again probably a 50% of a sales role in itself. And I enjoy sales like, but I am probably not a very good seller widget kind of guy but I can talk to people and if, you know, very partnership oriented manner, kind of get a sale out there. So. But when it comes to purely the Holdco part, we can get into a bit of it. But two out of the three other partners of mine, we went to business school like you know, 14, 13 years ago and we met then and we used to, at least one of them used to joke around that you know, he would just wants to just buy a series of gas stations and run them. And that was his idea. So in a way we were all pre wired to it where we had talked about it half jokingly or whatever that was already talked about in some setting. So all we needed was a catalyst for some of us, one of us not to be at a W2 and kind of say, hey you know what, I'm making the jump. And I ended up being the catalyst, that's all.
- [26:30]
Abhi Ravi Shankar
Okay, great. Well now let's return to the story perfect segue. Let's hear more details around what the vision became.
- [26:38]
Raj
Yeah, so the vision as it was sketched out in a Starbucks napkin quite literally was okay, you know, here's four of us, we are Going to build a holding company to buy and grow small businesses. Our secret would be operating, not investing. We are okay as investors, but we are probably better than the average operator. And we will not pursue this like a private equity fund or so where we are really looking to kind of go all in and exit in three to five years. But we will look at it as a longer term holding company. And why? Because we valued cash flow. We valued the ability for all of us to leave our W2s, come in, afford a Bay Area lifestyle with kids and support that we would want to build enduring companies that have good cash flow. That said, we never kind of like made it like, hey, we are all going to retire as 65 year olds with these 40 year old companies. No, that was never the case. It was more like, look, we are not in the five year mode, we are not in the 50 year hold mode, somewhere in between. But we can be flexible depending on each company and the market and the industry and what happens. We did also have another principle of like, let's not take investor money up front. Let's try to structure it in a way wherein we are doing what we can with our capital. And all of us have spent 15 plus years in corporate and we had some savings and we were willing to allocate some part of that and also reinvest some of the cash flow from the businesses that we would buy into these businesses for future acquisitions. So. And there was a reason why we were not too keen on investor capital. I can get into that. But that was sort of the founding principles of this holding company as to how we operationalize it. We said, you know, it's kind of difficult for all four of us, different stages in life to just quit our jobs on day one and just kind of jump into this. So anyway, I was out of a job and I was looking to go do something. So we said, hey, you know what, let's buy a company for abhi. We go run it and over time, over the next two to three years, two to four years, each one of them leaves their W2 and then kind of comes in either to either the companies that I've acquired have grown so much that we need a couple operators or we buy a separate business for them. So if you fast forward that to five years, we've got all four of us in it full time, all four of us at least running or operating a business. Because remember that was the secret sauce that we kind of thought we, we could bring is we have better than average operators and we can share Resources, we can kind of have a lot of things I could help with. We could build some small, hey, you know, this is the same marketing engine that we can kind of use for two of the two or four of these businesses. And that was how we thought we are going to operationalize it. We weren't completely against investor capital, but we were like, let's go as far as we can with debt and some creative ways of financing it. And at some point of time if you really have to bring in external capital, that's fine, we can kind of do that. And to kick this all off, let's go find a company for ABHI to run.
- [30:50]
Abhi Ravi Shankar
You didn't want investors just for the obvious. Retain as much flexibility and control as possible reason. I mean you're, and you already are a foursome. So you've kind of got a built in panel of people that you're going to have a group, group decision making anyway.
- [31:06]
Raj
Correct?
- [31:07]
Abhi Ravi Shankar
Yeah. Yeah. Okay, that's great. Abhi and, and, and so just to be clear, so it's a very sequential model here. ABHI goes first because ABHI was the catalyst. ABHI is already in between jobs. So you're, you're going to go find a business first and be the operator and then, and then sequentially the, your, your three partners will follow suit over the course of, call it five years. But just trying to understand the money piece. So you guys have savings, you can buy the businesses with your own capital. But I heard you mention not needing to take much out of them, reinvesting a lot of the, the cash flows of the businesses back into them. What was, what, what was the plan to actually be able to live off of them and, and replace the salaries that you were all leaving. When do you get to do that? Do you as operator, presumably you're gonna, you're gonna earn a salary from the business that you are kind of quote unquote your business. But is it going to be, is it going to be a salary commensurate with the job you left behind? What does all that look like?
- [32:12]
Raj
Yeah, yeah, yeah. You know, one of the, one of the good parts about doing this with people who I knew were friends and people I worked with and trusted is, you know, we've had, we've gone to battles in different settings together. Like one of them worked with me. So we knew each other deep enough to have some deep conversations early on, which may be difficult if you just found a partner at a networking event and you start to build a company. Because the, one of the conversations I Remember, having was, let's have a very, very real conversation about what's the minimum amount of money you want to make, where you kind of keep your lifestyle as it is, but you are not just earning a bunch of other money that just goes. And you would invest somewhere like this is, you know, let's say, let's call it in Bay Area. You want to 250k, would that be good for your lifestyle and for your family and what you have going on? Do you need 250? You need 200, 300? And it could be different for each one of us. We literally wrote that on a whiteboard and after discussing with our spouses and whatnot and put that money out there and said, hey, you know what? This is the minimum amount we can make, we need to make. And if we can make more than that, all of that goes reinvested back into the business. Because what we are building is we are building a company that is way more valuable 10 years from now than what it is today. And that's the real worth of what we are trying to build. And we are willing to make the sacrifice of like, okay, I've got a big salary. I'm just using, you know, half of it. The other half is going into index funds and whatnot. Instead of doing that, here's this smaller salary that I'm drawing, and the rest of it, I'm building equity in this company that's going to be very valuable. We did say as and when people come in full time, we are going to, you know, have them salaries. Salaries, of course, will no way be commensurate to what any one of us is making and will be making. But that's the deep, honest conversation we were. We were willing and able to have within two, three months of us all getting together to start this. And I think that set a very strong foundation to where we are now.
- [34:33]
Abhi Ravi Shankar
But this number that you all wrote on the whiteboard. So did you come to the same. You all had to agree on the one number.
- [34:40]
Raj
Let's say it was 304 different numbers for each one of us, right? And that was totally fine. We said, hey, we'll figure that out if we need to make. But they were all pretty close. They were all not too far off because, you know, all of us are married, have one or two kids, all kids around the same age, and we all live within 15, 20 minutes of each other. So it's kind of like, you know, there's not a lot of change in what that is going to be. And none of us drive Lamborghinis or whatever. So we are normal people where it was pretty in a tight band, so to speak.
- [35:24]
Abhi Ravi Shankar
And so the idea was so. So everybody had their number within 250 to 350,000 and beyond. And so that was kind of. You were pre agreeing to what each person's salary would be when they and everything else beyond that would go back into the business rather than it going into their pockets to be invested in their side real estate or an index fund or what have you. You're all agreeing that excess capital out of this project goes back into the project?
- [35:54]
Raj
Yes.
- [35:56]
Abhi Ravi Shankar
Okay. And sorry, when does everybody get that number they wrote on the board? When they. Because, because the, because you. Abby's salary now is not going to be that number. It's. You're going to be paid market rate for salary. So what's the, how do you, what's the delta between the salary you earn as operator and that final number?
- [36:16]
Raj
Great question. And I, you know, we all have different places where we are, we all at different places where some of our spouses work, some of them don't work, you know, and we want to balance that as well. For me, and we said, hey, look, let's be flexible in how we kind of like get to this point. We are not going to build a big company if we all don't come in full time. This is not a hobby. We can't do this with, you know, Ajasabi doing it and the other sort of like sitting on the wings. And we're not going to build that 50 million revenue company that we kind of dream dreamt about. So when one of us is ready, willing to come in, let's have that conversation. We may need to make adjustments on distributions on, on equity. Let's have that conversation. Let's make it fair. We believed enough in our shared values that we felt comfortable that we can have that conversation. For me personally, I wanted to get to that number within two years of when I started. I'm like, look, you know, here's my number. And if I need to get to that number, I want to start getting towards it. And the way you get towards it is one, you need to run the business well. It has to grow well. And either you're growing it organically or inorganically, it doesn't matter, but that's what you need to do. And I was prepared to do it. And I felt, I was confident of saying, hey, you know what, I get started on this in a couple of years. We would have built a company which can afford that. For me now the best case would have been it can afford it for one more person. So they all so can come in and we can kind of like start building it together. But maybe not. And if that's the case, let's buy another company for them.
- [38:01]
Abhi Ravi Shankar
Okay. Okay. So the brunt. The, the majority of those numbers that each of you put on the wall that you needed to make are going to come indeed are going to come as operator salaries for the businesses that you, that you, each of you, you're kind of little thiefs.
- [38:16]
Raj
Yep, yep, yep.
- [38:18]
Abhi Ravi Shankar
Okay, great. And I also heard you mention the number 50 million. I know it was kind of a throwaway, but is that in fact the number that you guys would like to get collectively get to. I mean obviously there's no, no, let's not put arbitrary ceilings anywhere. Why not? 100 million.
- [38:31]
Raj
Yeah.
- [38:32]
Abhi Ravi Shankar
But is that kind of like this vision will have been successful if you get to 50 million cumulatively, I think.
- [38:37]
Raj
We'Ve, you know, I think the first time we said it was definitely a throwaway number, but we've now said it a few times enough where we do aspire to it and we say hey, you know what? That is a mark where we would feel we've built something substantive.
- [38:52]
Abhi Ravi Shankar
Okay, fascinating. Abhi. The other thing that I want to draw out of you is how doing this with partners, your kind of pinch hitter model. So if you're the principal in the business, in the first business you acquire, but then go out, go to India for a wedding for three weeks, one of your three partners is kind of the understudy of you as CEO of that business and can make sure the wheels don't fall off while you're gone. Maybe I just said everything there is to say, but please say more.
- [39:27]
Raj
You did say it very well. Let's put it as precisely. We call it the primary and secondary partner model. So we said, hey, every business we buy there's going to be a primary operator and a secondary operator. It's just better risk management and it's better for always a CEO to have somebody who understands the business well enough to give you another perspective and not. It's very difficult for me as the operator of my of business number one to kind of keep everybody in the loop for everything that we are kind of doing. But one more person far easier. So we kind of started this model very early on and it has worked tremendously well for us. And I think that's one of the, you know, in our pre call we can we kind of talking about it. The. The pros and cons of like, hey, you know, obviously in a partnership model, you give up some upside to what else could have been yours. But really, I feel the. On the flip side, what I've gained from it is this ability to have the flexibility that I would want. And that was the core why of why I was doing it. And I was never going to forget that part. And once we designed this model, so we now have a guy who's a secondary partner, kind of is involved with most major decisions. All the employees know him, unlike. Employees don't need to know that, hey, here's this group of four people who are owning us. They just see me every day, and they see Raj on a very recurring basis and know him very well. And he runs some work streams as well with the company. But when I'm gone, which I was this year for my brother's wedding in India, for three weeks, you know, Raj would just go into the shop every couple of days, check in on our team, and, you know, make any decisions that need to. And, you know, he was completely. And I barely, barely had to kind of run the model, which, you know, talking to other searchers and search CEOs, it's such a big mental burden of like, hey, you know, I'm going to travel to, you know, somewhere else. And for three weeks, it's. It's a huge hassle. And I think we've built this system which works well. And now he's had 18 months of shadow CEO role where he's much more prepared to be a better CEO in the business we're going to buy for him. So that's the advantage as well.
- [42:08]
Abhi Ravi Shankar
Yeah. And by the way, did Raj, you said he had to make some decisions. Did he have to make any big decisions? Did he have to put out any fires? Was he really tested or was he just FaceTime kind of putting. Having FaceTime there with the employees?
- [42:23]
Raj
Thankfully, there weren't any big issues during those three weeks, but there were quite a few small decisions that he had to make. Uh, and just the FaceTime matters a lot. In fact, even more than the decisions. If it was a big decision, he would have called me and we would have talked through it and he would have. You know, I'm very confident he would have done the right thing. But I think the biggest value is the team feeling the. The owner is not just sitting in Hawaii and, you know, going and doing nothing. Like, the owner is still present, one of the owners is still present. They care about the business, they care about the problems and just having that creates a big mental shift in how they work. And it was a pretty busy season for us, you know, so given it's a pool service business, it's. It was summer, so it's kind of busy. And they were able to work through a lot of that and ask Raj for some small decisions. But one of the good things, it also gave. And I, yeah, I didn't share this. The last time we spoke was at the end of those three weeks. Raj came up to me and said, hey, abhi, I've noticed these three sort of meta problems that the company is kind of thinking, you know, I feel that we are dropping the ball in this process more often than not. Things that I probably knew, but I hadn't really kind of surfaced and articulated in the way he would have. And that immediately gave a rallying cry when I came back saying, okay, you're actually spot on now that you say it. It fits everything that I've been observing. Let's go solve that problem. And we solved it in like the next four weeks. So that's the cool part about it.
- [44:10]
Chelsea Wood
What do the following Acquiring Minds guests all have in common? Doug Johns, Morley Desai, Tim Erickson, Chirag Shah, Shane Ursum. They all went through the Acquisition Lab, the accelerator in community for people serious about buying a business. But they represent just a sliver of the Lab's success stories. The number of deals across the Lab's cohorts now stands at over 120, with over $300 million in aggregate transaction value. The Acquisition Lab was founded by Walker Deibel, author of Buy Then Build, the book that introduced so many of you to the very idea of buying a business. The Lab offers a month long, intensive, almost daily Q and A sessions with advisors, live deal reviews with Walker, deal team introductions, and an active community of serious searchers. Check out acquisitionlab.com, link in the notes or email the Lab's co founder, Chelsea wood.
- [45:12]
Abhi Ravi Shankar
Chelsea, @buythenbuild.com I want to dissect the numbers a little bit of how the equities all split in just a second. But, but before we get to that, the. The. As this sequence unfolds, Abby goes first, then number two, three and four. Did you have any guardrails or teeth in the agreement? What if, what if one of you just doesn't get around to it or, or some other career opportunity comes along? They're offered some amazing role that they just can't say no to and therefore can't participate. As in terms of Buy Searching for buying and operating a small business. Like what, what were your, you know, there's this length of time for this all to come to fruition and there's any, you know, any sort of variable could, could not go the way you expect. How did you account for that?
- [46:08]
Raj
Yeah. Without getting into a lot of legalese and specifics, the short answer is, yes, we did talk about it. You know, we talked about quite a few sort of morbid scenarios too. Right. You know, what happens if one of us is gone and you know, what happens if one of us needs to move to another country? All sorts of scenarios. And look, to be honest, does the operating agreement cover every one of those things? No. Did we have the belief that we can create a fair outcome for most of them when that would happen? Yes. Did we consider the big scenarios and write them in? Yes. We also did consider, hey, at the same time we wrote the number for each of us on that whiteboard. We also wrote what is, what's the drop dead date by, by when you will be full time. And that's all on a whiteboard. And we kind of like, have been. We go back to it every six months or so and kind of talk about it and say, hey, are we on track to doing this? How do you, how do we feel about it and whatnot? And so far, everything is running as we intended it to and what people signed up for.
- [47:35]
Abhi Ravi Shankar
Great. Abhi. Okay, now, now let's get to the numbers. We haven't even gotten to the business that you bought, which is where we'll spend the second half of our conversation. But, but just before we get there, let's, let's just get to now this, the, the equity structure of this and how the, the principle of each business that he was in charge of acquiring, he owns more of. Because. And just to, to contextualize that, just remember, audience, the business that we're going to hear about ABHI buying and doing well with, why did he need the other three guys since they're all working W2, he could have just gone out and done this himself, but he's basically, now, he got. You got money to help you buy that, but you've also got, you know, a fourth of it rather than 100% of it. You shared one answer, which is that this, this understudy model where Raj can come in while you're in India is amazing. And not only not only to kind of keep things, you know, keep the wheels on while you're gone, but actually bring fresh eyes to the business and point out Areas of, of improvement and actually be adding value. Very, very powerful. It and it really gets to the core of why you're doing this, which is the flexibility that you want in your life. Very powerful in its own right. But now tie, but tie in the, the numbers and how the equities actually.
- [48:55]
Raj
Don'T provided I'll share some rough numbers. Right. I think roughly we are equal partners at the holding company level. So you have a holding company for simplicity, let's just call it 25. 25. 2525. So you've got four partners. We didn't want it to be known as like hey, if you buy operating company one, it's like Abhi's business. Not really. It's sort of like hey, it's the holding company's business. ABHI is operating it for now maybe we buy a second business and I'm a better operator for the second one. So I go there and Raj comes in here. Any of that could happen. But that was the primary model and we said at an operating company level we think about the holding company putting up 100% of the capital. So let's say they're buying an operating company for $10 million. Each one of us is responsible for kind of like funding that as part of the Holco. But at each operating company level, depending upon a bunch of different things, depending upon how we are financing it, how big of an operational role would be needed for someone to kind of like run this, what's the intensity, what's required and what is their personal life requirements, etc. We would allocate a sweat equity pool which we grant to the operator who's kind of coming in to run it on a day to day basis. And that sweat equity pool just dilutes the whole co. So to use a very simple example, we kind of built one for our operating company. One which was like there's a 20% equity pool. Let's say that 20% goes to me because I'm the first operator and then the remaining 80% is owned by the holdco. So 1/4 of each one of that is owned by each one. So now my three partners own 20. 20, 20. I own 20 through the HoldCo and 20 through the sweat equity pool. So I own 40 just to use round numbers. I think that's how we got to this plan. And we've kind of done that twice now in two different settings. And the model is largely the same. There might be some adjustments we are making due to various things. You know, who's pging alone because we don't need to all four of us pg we are kind of saving our dry powder for what we were going to end up building. So there are some, lots of considerations that minor adjustments, but those adjustments are like sitting down and talking for a few hours. You can kind of work out those things. But the main Holdco at the operating agreement level these principles are enshrined. So whenever we go do a new one, it's just minor adjustments based off of this model.
- [51:50]
Abhi Ravi Shankar
And why do this model, what effect has it had on you, Avi, as the first acquisition being your acquisition that you own 40% and at the Holdco level there's some dilution. Is that just kind of ti just incentivizes you further, presumably?
- [52:09]
Raj
Correct, exactly right. And you know, we wanted to build one where hey, you know, the first time I was building it, I'm building it as an investor, as a whole co investor I'm wearing that cap and kind of saying hey, you know, does this work for me? But at the same time I'm, I'm looking at the operator's hat and is it, hey, is this lucrative enough for me if I'm going to grow this, you know, is this going to work? And I think we try to delicately manage that balance and it's kind of worked out because now let's say you buy your and we have bought our second operating company using the same similar example. I own 20% of that. I'm not spending a lot of time on it. I'm spending a lot more time on this. If I had bought operating company one as a solo searcher and I own maybe 80 and some investors own 20 or so. I can get that by just all my partners buying companies of their own. And when you get to that model, I kind of come whole to owning 80% of a single company. But now I'm diversified now I have increased the odds of success of three or four businesses. I have maintained flexibility and I'm not on this journey alone. So I get, I bank a few more wins along the way. It may not look rosy and appetizing in year one, but in year four it is going to, you know, balance out.
- [53:39]
Abhi Ravi Shankar
Let me just repeat that because that was a, just a really profound distillation of the whole model. So let's, and let's assume nobody has investors. So your model with no investors versus a self funded searcher who's in, who's in the fortunate position of not needing investors either and they own 100%. So the, you know, the, the typical SBA self funded searcher owns 100% of their business. Sounds great, is great. Or, but in your or versus your model, the obby model where you own 40% of one business plus 20% of another, plus 20% of another, plus twenty percent of another. So in total we get to 100% but it's diversified across for businesses you're a little more concentrated in the business that you're operating yourself and, and, and, and so the numbers individually coming out of the dividends or the, the EBITDA that you're participating in and each of those businesses may be smaller but in aggregate in, in certainly in the long term after you all have, have reinvested enough that you're taking, starting to really enjoy dividends you feel will be better, it's obviously better diversified. So as an investment it's stronger at least in theory. And, and you, and you've bought yourself the benefit of, you know, you're doing this as a team so you're, it's not, you're not just a, a lone wolf out there figuring everything out on your own and likely to maybe make that bad decisions where if you had a partner or partners, they could have steered you in a better direction.
- [55:13]
Raj
Yep, that's the vision.
- [55:15]
Abhi Ravi Shankar
That's great. It's great. It's this pretty, it's pretty, pretty convincing here, Avi. The only trick is for people listening, they got to go find three people they really, really trust and have known for 15 years, since business school to do it with. Okay, I think we've covered the model. If not we'll, we'll return to it where, where we've left gaps. Let's turn now for the remainder to the business. The first business you bought, Abhi's business, what were your criteria, please?
- [55:42]
Raj
Criteria was it's gotta be local because I didn't want to get on a plane or drive three hours every day. It had to be ideally in a blue collar ish or a blue slash white collar ish industry. We wanted the first one. We just wanted to bank a win. We didn't want a hairy deal. We didn't want to bite off more than what we could chew. So we wanted a business which was call it the usual search criteria of like 700, 750k SD to a couple million in EBITDA SD. Right. Like that was sort of the range we were kind of looking at. Ideally we would have wanted something that had a recurring component as usual, but a reoccurring would have been great. So those were the usual ones. But Indexed very heavily on the local part. So industry agnostic, but local, right? Doesn't matter what it is. And if it's painting, that's fine. If it's commercial cleaning, that's fine. If it's whatever, that was good. And that was the criteria. And literally one day I just started going on Biz Buy Sell, putting together. I didn't do the fancy, hey, let's put a CRM together, let's do proprietary outreach. None of that. It was as good as like, hey, open up a spreadsheet, put some deals on there, kind of create your own CRM, so to speak. Just look at Biz Buy Sell and a few other listing sites, just talk to brokers and probably in a span of six weeks, looked at 30, 40 different opportunities, tried to dial down on 10 to 12 sectors. My way of approaching it is like, hey, go very, very deep on one sector for a couple of days and see and get to if it's a no. It's very hard to get to whether it's the perfect company and the perfect industry in two days. But it's fairly easy to say no.
- [58:00]
Abhi Ravi Shankar
And it's, it's one of these where speed to know. You're trying to get to know.
- [58:04]
Raj
Exactly, exactly. And, and that's what we just, abhi.
- [58:06]
Abhi Ravi Shankar
As a former consultant, give me, give me a, give us a quick five bullet points on how you teach yourself an industry in two days. Just what did you do? You YouTube university sort of thing, a bunch of that.
- [58:20]
Raj
I like as a consultant, I just like talking to people who've done it. So I would just cold email people, cold LinkedIn people who are in that space, Twitter somebody who's getting on and try to just get on a call. It's the single best way.
- [58:35]
Abhi Ravi Shankar
And you would say, I'm looking at buying a business in this industry. Will you give me 15 minutes?
- [58:39]
Raj
Yep, yep. And you know, I, I, I, I even looked at franchises and I would call up other franchisees in that space and just say I'm looking into it very early in the space because they will probably try to check, hey, is this person legit? Thankfully, with a decent LinkedIn profile. And they would look me up and go, okay, I can talk to this person. And he's just not a scammer. So that's predominantly one, number two. And the best way I feel is like to build a model, like, I would just build a rough model of that industry. Try to kind of like, because when you're doing that, you start thinking about what drives behavior, what drives you know, revenue, what drives cost? And you start really asking yourself the question of what's the true value driver in this industry and in this sector. And the third is like literally mapping that again.
- [59:37]
Abhi Ravi Shankar
And by building, Abby, by building a model, you mean a model of a single company in the industry, I assume?
- [59:43]
Raj
Yeah, yeah. Off. Off a target.
- [59:44]
Abhi Ravi Shankar
Like a single P and L sort of, yeah.
- [59:46]
Raj
If I've already gotten the SIM off a company. And that's why I'm looking at that sector. And that's how I, by the way, got into sectors. It's not like I was like, ah, okay, let me go look at in home senior care services. That's the thing. I was, no, it. I just happened to find an in home senior care business biz by sell listing. Reached out to the broker, got the sim, talked to the seller, and now I want to dig more into this industry. So then I would pro forma build out a model on that. I would call a few people who've been in that space. And thirdly, just run it against a bunch of checklists of, am I the right operator for this? Does this amplify my strengths? Does it shine a glaring light on my weaknesses? And is this something that I can do? And many of them, you know, FedEx routes are a great example. Right. It's such a liquid market. I was like, oh, and I spoke to people who built good 1 1/2, 2 million EBITDA businesses just doing that and probably spend less than 10 hours a week running it. And I was like, wow, that is so cool. How do you do that? And I, you know, talked to a bunch of them. But then I realized it doesn't check one thing in my box, which is you're going to get calls on the weekends, you're going to get calls on weird times of the day. I was like, if I wanted to do that, I would have probably, you know, I would have liked to get a call about a robot going bust in a warehouse in South Korea rather than, you know, doing this. I didn't want, you know, that didn't pass my sniff test of what I wanted to do. So, you know, that's when you kind of like look into it and you go like, okay, you know, this is good, but it doesn't match these. So those were the three primary things I did, which was calls a model and then my checklist of whether I'm the right operator.
- [61:49]
Abhi Ravi Shankar
Funny about the FedEx routes, you do see them all over biz by sell. And there's a searcher I know who bought FedEx routes and then also exit them. Exited them. I've been twisting his arm to come on. Haven't quite convinced him. But it's surprising. I've been unable to get anybody on here who's done FedEx routes. I think they're scared of FedEx itself. But it is such a common. You see it all over business route packages. Yeah, great. Okay. And so what did you find? What, what was the one that you went with? Please tell, tell us about it.
- [62:21]
Raj
And talking of listings that are all over bizbuysel, the other thing that you also see is pool routes. A lot of them. And I didn't, you know, that was my first introduction to a pool route. But eventually the sim that really got me hooked was company which was 15 minutes from where I live, Swimming pool service company which was much bigger than all the pool rats that you see on biz by sell, which are roughly listed at like 40,000 to $100,000 of enterprise value where you're just buying a customer list. That's it. Whereas this was a company where it's close to about 3 million revenue, had 17 employees, had been in business for 40 years, had many long tenured employees and the owner was wanting to retire and sell. And I remember sending this in the WhatsApp group of my partners saying, hey, this kind of looks good. Good. Does any of you know anything about it? And Raj is the only guy who had a swimming pool amongst the four of us. And he's like, oh yeah, I, I, I think I know. And then, you know, went to Raj's house and got the one hour introduction to swimming pool equipment and what it kind of means. And we started thinking about how and.
- [63:47]
Abhi Ravi Shankar
Did he have a pool guy or did he serve as well?
- [63:49]
Raj
He did have a pool guy. Yeah. Yeah. Now he doesn't.
- [63:51]
Abhi Ravi Shankar
Everybody who has a pool has a pool guy. Pretty much.
- [63:57]
Raj
Yes, yes. I mean in, especially in areas like the Bay area where you know, people have money and or are a busy job, you know, you get a pool guy and that makes it easier and it's just less headache and you can kind of enjoy the pool. It's not a very high expense. And I think that's the business we found. Within six weeks we had closed on the deal and abhi.
- [64:30]
Abhi Ravi Shankar
So it was a pool route business, just a big established 40 year old, long tenured employee. One.
- [64:37]
Raj
Yeah.
- [64:37]
Abhi Ravi Shankar
So it was that business, it just.
- [64:39]
Raj
Was a standout 14 routes combined. And along with that they had two or three specialist repair technicians who are sort of pseudo Plumbers, slash electricians who can kind of, you know, they're not probably as skilled as that, but very close to it, but they're some of the hardest people to kind of like get and retain and do that. And then you've got a bunch of regular pool guys as part of the team. They even had a service manager. They had a retail location. So it was a very dialed in operation of how it was supposed to be, and it had done it for a long enough time that they had ironed out a lot of these kinks. So it was an amalgamation of these.
- [65:26]
Abhi Ravi Shankar
And what did the retail. What is the retail serve? Who's the customer there?
- [65:30]
Raj
Other pool companies or usually DIY customers who want to, you know, take care of their own pool and just want some supplies. And is that.
- [65:40]
Abhi Ravi Shankar
Does that actually generate any revenue? Are there enough DIY pool people who go and get their own chemicals?
- [65:46]
Raj
The short answer is no. And we just shut down the retail store this month. I was made to believe that it is an excellent source of lead gen, but absolutely is not.
- [66:00]
Abhi Ravi Shankar
Yeah, I mean, you're interacting with the very people who have disqualified themselves by virtue of the fact that they're diy.
- [66:09]
Raj
Right.
- [66:09]
Abhi Ravi Shankar
Great. So that's a sizable business. So did you say. I don't think you said what the SDE was. So 3 million in revenue.
- [66:16]
Raj
What was it roughly about 20%? A little over 20%. So in the 600 to 700 kind of range, where it was great.
- [66:29]
Abhi Ravi Shankar
And can you, can you share with us the terms of the deal?
- [66:33]
Raj
Yeah. So the reason why we ended up. I kind of gave the ending first, which was we closed it in six weeks. And the reason was this business had been. Had been put up for sale a couple of times and didn't go through because of things beyond any. Some, you know, personal situations emerged and the potential buyers had backed off and had been on the market for six months. The seller was really itching to sell it and retire and spend time with his grandkids. And we were in the. In the final round of it, we were trying to compete with another party who was kind of going with an SBA route. And the seller was really unhappy with that. He was like, man, that's going to be another quote, unquote colonoscopy of having to go through with the SBA bank. Having already done that twice, he was very reluctant to. So the broker, who initially was very reticent about me being a legitimate buyer, he's like, why are you some guy who's been a consultant trying to Buy a pool company. This doesn't sound real. He, after I built some trust with him, he kind of came up with this option of like, look, you know, because we wanted to go the SBA route, that was a default route. And he was like, look, if you go to the SBA riot, you're just gonna shoot out between these two. He'll pick one of you two. But if you really, really want this business like you're telling me, then there's another way I can convince him to take a much larger seller note than what it is. And you guys just go, you know, Instead of putting 10% up, maybe you put a quarter or a third up and would that work? And I was like, you get the seller to agree to 3/4 and yeah, you got a deal. We can kind of figure out how we get 25% of that capital or so.
- [68:44]
Abhi Ravi Shankar
So we ended up, and here's another, another example, Abby, of doing a four way hold co was beneficial because that additional 15 points you needed to come up with was split four ways. So you actually each only needed to come up with whatever 3, 3 and 3.75 or whatever.
- [69:04]
Raj
Exactly.
- [69:05]
Abhi Ravi Shankar
Yeah, go ahead.
- [69:06]
Raj
Exactly. So that was how we kind of structured it. It was roughly in that range, a pretty large seller note. We ended up putting our capital upfront. We did discuss it of like, hey, maybe we are losing some dry powder. But at the end of the day it's about getting into the game first rather than sitting on the sidelines trying to like just look, look for that perfect deal, which is never going to come. There was a lot of hair on this deal in different ways. But that was like in my third point on the checklist of am I a good operator? I was like, hey, you know what, I can overcome some of this hair, so I'm okay with it. So we ended up putting a little more dry powder and ended up buying this company typically in this space and generally things trade at the 3 to 4x. We, we kind of went slightly on the higher side of that range so that we can get the deal done. And that's how we ended up closing it with no sba, just pure seller note amortized over a long time and self capital.
- [70:25]
Abhi Ravi Shankar
So higher end of 3 to 4x, so toward 4x on a 6 to 700 EBITDA business. So somewhere in the 22 to 25 range, 2 1/2 million purchase price range. And the, didn't you also tell me that the, the interest rate on the seller note was, was great?
- [70:46]
Raj
Yeah, yeah, yeah, we were able to get that down to, you know, 5, 6% range. That's how we've kind of like talked about it. I mean, a lot. In a lot of ways, my communication to sellers is, look, in this case, the seller had a reason why he was willing to go up because he didn't want to go through the same thing again. And something else breaks four months down the lane. And now he's sitting with this business he's been trying to sell for a year. So I could see that. But at the same time, I knew he was going to retire. And, you know, there are a lot of good beneficial tax reasons. Consult your CPA for that. But there are reasons why that's actually good for him in terms of assured income. And all he wanted to know was like, hey, are we real people? Are we bankable people? And he's been in this area. He's, you know, born and brought up in Palo Alto for, and has lived here this whole age. You know, we, we talked to him about our families and he was able to kind of see that we are legitimate people and he was willing to bank on us. And he's been, you know, just a, just a small 15 second digression. He's been an amazing, you know, guy. Even now, 18 months in, he sends us, you know, gifts now and then he writes, he writes sweet cards now and then and kind of tells us how happy he is. And every time I call him for something, he's like, have you already taken over the world? Is how he picks it, picks up his phone. He's such a sweet guy. So it's been great.
- [72:30]
Abhi Ravi Shankar
That's amazing. It's amazing. Well, that's, that's great to have such a great relationship with him. And, and I'll, and I'll say that the fact, yeah. You had to make this decision to use some of your dry powder that you were waiting to use for future deals, but really to go from 10% down that you were expecting in going the SBA route to 25% down and having him to, to then, to then get the remaining 75% fully seller financed, it's a pretty low price to pay, I'd say. That's a, that's a lot of seller financing. A lot of seller financing.
- [73:08]
Raj
Yeah. Yeah. And I think, you know, having now talked to many, many searchers who've done sba, and we have our second portfolio company which is on SBA loan. There are days when I do have my, oh, I wish it was an SBA deal because it's like hey, you know, it's, it's because you don't get them amortized for 10 years. You know, you might get a, if you're lucky, seven. Seven years, eight years, eight years. I think this one's like roughly like seven years. And yes, you are paying and just that shorter amortization kind of much, much, much higher impact on your cash flow. So we were kind of okay with that because we did the math and we felt like look, you know, even if we are losing two, three years in additional amortization, we get a lower interest rate, which is beneficial. Right. But the interest rate when you model it out is a much smaller needle mover than length of the note itself.
- [74:14]
Abhi Ravi Shankar
Good to know.
- [74:14]
Raj
I didn't realize that two more years is worth more than 3 or 4 interest. 3 or 4 points on an interest rate. So I think we always push for like I'm happy to write a seller note for 7% if I can get 10 years. I'm very happy with that. So I think that's the kind of model and typically in the pool industry because the industry is so liquid in terms of selling routes and whatnot, it's very fragmented, very liquid. There are some rules of how the industry's evolved. They're not used to seller notes. So this one I actually give kudos to the broker who worked with us because he was able to kind of say hey look, if you really want this, this is how you kind of structure it. And, and I think we've kind of had success with a couple other subsequent add on acquisitions as well by really articulating the value of how this is useful for the seller, you know, in a lot of different ways, especially when they're retiring and they want fixed income for the next few years and they are able to get that at a pretty high confidence rate. So it's worked out for us. You know, would I do it anywhere else? No, I would still do what I did now. But there are days when I'm like I wish I had a 10 year amortization.
- [75:46]
Abhi Ravi Shankar
Yeah, really, really good to know that when you model alone that the amortization longer amortization can be, can be worth whatever a few points of interest rate. I wouldn't have guessed that. But in great. Also to to be reminded that there is an argument for high seller notes to owners that the it. It spreads out their income and gives them assured income for a number of years which to a retiring owner can be, can be attractive. It's a little counterintuitive because you'd think well, don't they just. Wouldn't you just rather have all the money at once? But there's a psychological, there's a psychological aspect to this of getting, of knowing that the check is coming in the mail every two weeks or every month.
- [76:32]
Raj
Yep.
- [76:33]
Abhi Ravi Shankar
For seven years.
- [76:34]
Raj
Yep.
- [76:34]
Abhi Ravi Shankar
That is, that is, even if it's, that's more appealing than getting it all right now. You know, these, these are entrepreneurs, these are people who, who, who understand deferred gratification. Unlike the, I think the, the normie would just want all upfront. But these business owners maybe are more sophisticated and there's tax benefits too. Yep, exactly. Which is huge. Which is huge. So good reminder on that. Well, we're, we're running out of time here abhi. But tell, tell me quickly the progress you've made on these subsequent acquisitions and bolt ons and, and where your thief sits in terms of overall size. And then I just want to hear, and then I want to hear the same about the hold. The entire holdco. And then I want to hear about how it's going as an operator. So what have you, what other pool businesses have you bought since and what does that portfolio look like now?
- [77:29]
Raj
Yeah, so we've done four more add ons since then in the last 18 months. Varying sizes all the way from an enterprise value of like 100,000 to over a million dollars and added and assimilated and integrated all four of them. The last, the latest acquisition was just a month ago, November 24th. And we're now at a run rate where we've sort of almost tripled the company of where we, where we started from. So let's call it roughly 8 to 9 million revenue range is where we are. And we've grown from 17 employees to 51 employees. Really expanded our geographical area and definitely gone through the big J curve of the first year in terms of ebitda. We're still maintaining that in the teens and you know it, it is the J curve was, I mean I knew what to expect but when you're in the middle of it it is pretty strong. I think we are now emerging out of it and I can see in the last couple of months we are making strides and kind of coming out of that which is great. So the next year is going to be more of like just getting a lot of systems and processes that have is a combination of five different companies to be really one company now have a leadership team. I have three directors, one for sales, one for residential, one for commercial. I have a couple of quality managers and really built out what was essentially just one service manager and me in the beginning to a team of five of us who sit on the leadership team on a weekly basis and kind of like talk about the company and metrics and whatnot. So I'm very, very excited about what we've kind of got. This to be my goal and sort of the holding company goal is we want to get each one of our businesses to about 10 million in revenue in the first three to four years. And why 10 million in revenue? And that's again, sort of a throwaway number, but there's some science behind it. Roughly the kind of businesses we tend to buy have, you know, 15, 20% EBITDA in there. So now at 10 million revenue, you're kind of talking million and a half to 2mil in EBITDA with some loan servicing and whatnot taken out. That still leaves some substantial chunk of money for each one of us to hit our numbers that we talked about and some to be able to reinvest. And that's why in the pool service space, I knew I was buying small, smaller than what I would have wanted. But it was very clear I could quickly consolidate into a bigger company. And maybe in 12 months from now, I'm already hitting that 10 million mark of where we want it to be. So that's the sort of structure of where we've got Operating Company one, Operating Company two was in Bobby.
- [81:03]
Abhi Ravi Shankar
Let me, let me. Before we get to that, let me stop you there. Of course I want to hear that, but how long did it take you. You bought the first business in May of 23.
- [81:12]
Raj
Did you say July of 23? And now we are in December of 24. So a little less than 18 months.
- [81:19]
Abhi Ravi Shankar
A little less than a year and a half. You took your. And that really was the platform business because it was the biggest of the bunch. Even though it was smaller than you wanted, it was the biggest of, of, of your five acid pool acquisitions, right? You've gotten from 3 million to 8 or 9 million and 10 million is within spitting distance. So that's, that's your, your goal of 10 million in, in you said three to five years. Seems all but assured and so great for business, number one. But of course also really bodes well for this whole Holdco project that the very first experiment is going so well. Just, just a little bit of a, of a digression into the pool business. I don't consider the Bay Area a big pool town. Big pool area. Certainly San Francisco proper is not maybe in the East Bay There, where it's hotter, there are a lot of people with pools. Is it a pool region? And the reason I'm getting at this is because I just wonder how attractive pool services service businesses might be in geographies that don't have pools everywhere. Like in Arizona or Florida.
- [82:28]
Raj
Yeah. In the pool services space, there's like the tier one markets, which is essentially the Sun Belt. So sort of Florida and Sunbelt and then Arizona, NV and SoCal kind of come in the Tier 1. They have 12 months of pool season. Phenomenal sun. You can use always. Tier two is what? And then tier three is sort of, you know, Boston. Right. You know, you can only have like a 3, 4 month pool season. Tier 2 is Midway Northern California. And the San Francisco Bay area is sort of at the top of that Tier two where you kind of get a pool season which is seven, eight months in a year, maybe even eight months. And in particular parts like the East Bay, you said you can get 10 months over there. It's kind of hot and you can get some this. We operate predominantly currently in the South Bay in the Peninsula, so the Silicon Valley proper. So that's our core area where we operate in, you know, I think 21 of the top hundred richest zip codes in the country are over there. And so many of these are large houses, estates with pools. So there are a lot of pools. People do have quite a few of them. But as we probably in the future expand into the East Bay, I think the TAM is much bigger. But in terms of propensity to spend and people who care more about quality, that's probably like our core area where we are right now. So it's a pretty big, you know, there's 120,000 pools in the two counties that we operate in and we service about 1500 of them.
- [84:22]
Abhi Ravi Shankar
Oh, that's amazing. And just two in the two counties where you already are, you are at 1% penetration.
- [84:31]
Raj
Yep.
- [84:32]
Abhi Ravi Shankar
Oh man. You could just feast there growing organically and inorganically for another many years. That's phenomenal. Great. And then integration. So you started by saying after we Talked about the FedEx routes, that pool routes is another thing you see all over biz by sell. And many of those businesses are tiny because. And they're essentially client lists which as a platform business, as a first business, are terrible options. But as add ons can be amazing options, it would seem. What have you found?
- [85:09]
Raj
Absolutely. I mean, I'm still not a fan of buying a pool route and just a customer list. I have tried it, have been marginally successful. I feel the bigger solve is to buy an established pool service company where the sucks, you know, where you get employees as well. Because part of the problem is getting customers, but part of the real problem is getting good employees who know the business, who are okay doing the hard work of being a pool guy. It's not easy, it's monotonous. It is physically taxing. You have to do it in all elements and you have to do the same thing again and again. So it's a tough one. To get good quality employees is a big thing. So I've focused my add on filters on are we getting customers in an area that we really like? Are we getting good employees along with it? Have the customers stayed for a long enough time that they've built some trust and equity with the pool guy or the company? Do the customers pay well? And finally, is there some pricing arbitrage where I can kind of like wow the customers with something different? Hey, maybe I can. You know, we traditionally offer these services which you wouldn't get as part of your smaller company that you had. And now you're delighting the customer saying, oh, this company can take care of all my needs rather than me having to call somebody else. I want a new heater. My old company did not have a qualified heater, electrician and a repair technician. But now you do. Now I don't have to pick up the phone and call. You will just fix it for me. That's kind of cool. That means now I have pricing power because I can then kind of really build that. So I look at these five filters of how when we do add ons and it wasn't that I knew these right off the bat. I've kind of refined it over time, having done multiple of them, seeing what mistakes we made. Integration is always a pain. It's a muscle that you can keep building but you will never perfect. There's always challenges that come along with it. There's mistakes we make, but we've gotten better and better at it more. So you become pretty thick skinned about what to expect and all kind of challenges and curveballs that get thrown at you. You kind of get at it. But I do spend probably a lot of my time personally of what I spend on integration and you know, process and team building than anything else.
- [88:11]
Abhi Ravi Shankar
And since we're on the topic of that, the integration, the team building, the processes, how are you finding that part of your life? This is your now day to day, this is the operations of being a small business owner. How does it compare to high growth startup or being a consultant.
- [88:28]
Raj
Very different. But I love it is I get a lot of joy seeing what I'm building. It's sort of similar the of you know, at the core of it, at the end of it all as a leader, what you're doing is you're just building teams and trying to get out of the way so that they can achieve great things and you might do it in different settings with different caliber of people. And I like that it feels different enough but similar enough where I can bring to bear what I have done in the past and, and it shows results and you can kind of see it right off the bat. And if you make mistakes, your team will drag you over the coal and make fun of you for it. And that's cool by me. So you know, has happened.
- [89:22]
Abhi Ravi Shankar
That's your, that's your thick skin talking.
- [89:24]
Raj
That's right, that's right. But you know, that's the, that's the fun part of you know, building it because then you're truly building it with that long term model and mental model and that gives you the courage to do it. Like if I was a searcher and I had raised capital and I am watching my growth rate and my EBITDA like a hawk every month, I would have made very different decisions in many ways to what I have done now. And maybe one of these, a couple of these acquisitions would not have happened. But I'm focused on like, hey, how do we get good enough large consolidated base where now that I have a leadership team, I can now build the right models for this leadership team to run this business and I can kind of like get out of the way of doing it. And you know, it doesn't have to be that. I'll just keep buying pool companies. It doesn't have to be that. You know, now, now that we've gotten to that spitting distance of 10 mil, maybe we just focus on organic and that's cheaper and we are good at it. And in the last one year we grew organically more than three out of the four acquisitions. Four add on acquisitions we did. Like I built, we had built a company organically which was bigger in size than any three or four of them. And if that engine kind of holds over time, then it really kind of compounds. And that's what I'm excited about.
- [91:03]
Abhi Ravi Shankar
And to be clear, abhi, what you said is if you had been like a self funded searcher, SBA style, took it and took investor money, you wouldn't have made the decisions you did because you feel because of your long term horizon here. You just have the room and the space to take your time. Is that where you were? Is that what you meant?
- [91:19]
Raj
Yeah, I know I've, I've seen people on Twitter kind of talk about like, hey, I, you know, I wanna, I'm trying to grow out and I'm trying to hire another operations manager or so, but I can't make that investment.
- [91:30]
Abhi Ravi Shankar
Right.
- [91:31]
Raj
And why can't they make that investment? Because a. I mean I don't know the numbers, but it could be a reason where just the numbers just don't pencil itself. But it also could mean that hey, they're at this where they have to make certain distributions to investors and they have to, they cannot afford to hire another 100k ops manager, 80k, 100k ops manager in place for them to get out of the way so that they can focus on growing the business and marketing. We had a similar problem come sort of January, February of this year. We had done two add on acquisitions by then and suddenly I felt it was becoming too much for my service manager at that point of time to run it. And I went to my partners and said, hey, we just need to hire another ops manager. And we kind of, you know, they're like, oh, how much did it cost? Yeah, I don't know, 8,000 K. And I'm like, what already? Like, we just bought the business. And I'm like, yeah, but that's what we need. And they were like, you know, in, in two minutes they were like, yeah, okay, done. You're closer to it. You know what is needed. Just get it done right. And that means our J curve was steeper for a few months, but we came out way stronger because of that. The guy has been a great hire and gets a lot of positive reviews. It's made even the first manager I had even more effective because of that. And now we just bought another company. So now we don't, you know, we already have that infrastructure kind of set up. So you're investing ahead of growth and you can afford to make that investments when you have a longer term picture in mind. And you know, you have a very understanding set of partners.
- [93:24]
Abhi Ravi Shankar
Fantastic. Abhi. Okay, close. And then. So close us out now please with, with the acquisitions. Other acquisitions done at the Holdco level.
- [93:32]
Raj
Yeah. So we did one more acquisition at the Holdco level where one of my partners ended up moving to Seattle. So he started looking for businesses in Seattle. He found one pretty immediately that he liked and kind of penciled in with all of our Criteria and we ended up buying an existing franchise that had, you know, a franchisee had kind of built it over 10 years. It does kitchen cabinet shelving solutions. So pull out drawers. Lazy Susan's design and and installation. Excellent quality product, good franchise and very good team. What the seller had built over 10 years had dialed it in immensely. Well compared to sort of the pool space where everything is very paper was very paper oriented and I had to take the whole journey of digitization and whatnot. This one was all dialed in. You just didn't need anything. You just need to focus on sales and marketing, get more leads in and, and run the business and not tank it. I think that was the appeal of it. So he's now running it part time while still working in his company and he expects to probably in the next 12 months will be most likely joining full time as well to further grow that business. So that's the second one we've done.
- [95:11]
Abhi Ravi Shankar
And how big a business is that? Abhi.
- [95:14]
Raj
Ballpark, 4 to 5 million in revenue.
- [95:18]
Abhi Ravi Shankar
Okay, so to achieve your $10 million per business goal, he's got a little more than double that business.
- [95:27]
Raj
Yeah, yeah. And there we the our thesis was that franchisor has branched off into closets and closet design and installation is a 8x9x more TAM than kitchens and kitchen shelving solutions. So our goal was like. And we've talked to quite a few franchisees who've been doing that. And our goal is when Rajith kind of comes in full time, he focuses on that build out. So it's more geography. Expansion and adding a new business line is the real source of growth there. Rather than inorganic.
- [96:11]
Abhi Ravi Shankar
Rather than inorganic.
- [96:13]
Raj
Yeah, rather than inorganic. Because you know, it's a very low franchise concept.
- [96:17]
Abhi Ravi Shankar
We think of inorganic as particularly appealing where you can do the programmatic acquisition. There's no integration or I shouldn't say. Of course there's always some integration, but there's a lot less integration which is the pain point you've been experiencing in non franchise land. Why does that not appeal to you to to roll up some Shelf Genies in and around western Washington?
- [96:39]
Raj
Two reasons. One, we happen to be the number one franchisee in the Shelf Genie system. So we already have almost every conceivable territory in and around Seattle, Tacoma region. So there's not left much left around there. It has to be a plane hop away. So we either start Shelf Genie in Portland or actually the San Francisco Bay area does not, which you know, maybe could change soon or really do it in a different place or Buy inorganically an existing franchise out in a different place. Possible. That's not our primary target right now because we feel like, you know, just expanding a new business line is. Is much larger creation of value. And all four of us, we are just not particularly enthusiastic about managing a remote business. You know, sitting in Seattle and managing a business in Salt Lake City, for example, each, you know, it gives us all a little bit of heartburn of whether we'll be able to do that successfully. Maybe that could change. But right now, that's the plan.
- [98:00]
Abhi Ravi Shankar
And was there. Were there any more or is it Shelf Genie in Seattle?
- [98:04]
Raj
Yeah, that's the. That's the one. Those are the two that we have now. There's an active hunt on for number three, for Raj, who's involved with pools etc as well. And we are looking to find something for him next year in the Bay Area. So we are actively scouting and looking for something.
- [98:28]
Abhi Ravi Shankar
Abhi, does the Holdco have a name?
- [98:31]
Raj
Yes.
- [98:32]
Abhi Ravi Shankar
Is it a portmanteau of the four of your.
- [98:36]
Raj
When this episode airs, we will have a new name. So we will be called Trust One Partners. Truss, as in T R U S S like the building trusses that kind of holds up a building. So we were formerly known as Route 1 capital, but we are changing our name and we will be Trust One Partners by the time this airs.
- [99:01]
Abhi Ravi Shankar
And is that because Route 1, now that you're in Seattle, no longer holds?
- [99:07]
Raj
That's a good story. I should use that from now on. It's actually not. We ended up getting into some trademark issues. One of our guiding strengths has been speed. I'm always about, let's just make progress over just being perfect. There are some people who are much better at being perfect and being diligent. We never looked into, oh, does anybody have this trademark? And in this space, we were like a bunch of guys who were like, all right, let's go buy a business. Here's a sim. Let's write together this thing on Starbucks napkin. And let's just get started. We found the name Route 1. We just proposed it, we liked it, we went with it, and we've been asked to change. And after much consideration, we are like, hey, we are too early in the game. If you're going to build something big, it's okay. We can change it. We don't have a lot of capital invested in it, so we can. So we're going to be rebranding as Trust One Partners.
- [100:09]
Abhi Ravi Shankar
Well, and the good thing about a Holdco is, I mean, of course, of course, a Holdco, as it gets more mature and more visibility, the name does matter, but it's not a consumer facing brand so you have a lot of room to change it and not a lot of investment in the brand itself. But, but I will say I like Trust one. It has, it has more originality too than, than Route 1, I think. What didn't I ask you, Abhi, anything you want to say that we didn't get a chance to talk about?
- [100:36]
Raj
No, I think, you know, the big piece. As I reflect back on this journey of now, 18 months into it, I think what I take a lot of pride in is you gotta, it's very easy to judge it in different ways. Right. You know, you can judge it as like, hey, you know, I mean, are you having fun? Are you making enough money, are you getting enough time with your family that you wanted, whatever. And I think having those measuring yardsticks up front is very, very important. I was very clear what matters to me. I wanted to build a career around my life and not the other way around. We are all used to building lives around our careers and I wanted to, I was like, okay, I'm at a point where I want to switch that and I want to really build a career around my life and if that requires me to do things differently, so be it. But here's how I'm going to measure it, right? And for me now when I measure against that, you know, I hit two and a half out of the three things that I want and I have line of sight to get from 2.5 to 3.
- [101:56]
Abhi Ravi Shankar
And what are your KPIs like hours with hours with your daughter sort of thing?
- [102:01]
Raj
Yeah. Without, without getting too precise. I think it's time with my family, time for myself to pursue my, you know, hobbies and my health and whatnot. And third is make some amount of money that I want to be able to make and have line of sight too. And I think I've hit the first two and the third one, I was never going to start off getting that amount of money in the first 12 months, but now I think I have a pretty strong line of sight to get there. So that's how I, you know, this holiday season when I reflect, I feel pretty good. I'm like, hey, you know what? I'm hitting those three of my, my personal whys. And sometimes as searchers, as entrepreneurs, as, as CEOs, you kind of get lost in the, I'm measuring it based on the EBITDA of my company, the growth rate of my company. But you Forget why you're doing this in the first place. And I think that's, that's a key lesson for a lot of people.
- [103:06]
Abhi Ravi Shankar
Well, that's a great reminder, Avi. I'm, I'm as guilty of that as anybody. One of the first questions I'm always trying to get at with my guests is, you know, what EBITDA is and what aggregate revenue is. So I take the point. Great walk through your Holdco structure and your first and I guess, second acquisitions here. Really an interesting group model here. And I have to believe, I mean, it makes so much sense. I have to believe as I publish stories like this, there will be more of it. You actually had reached out to me, Abby, because in reaction to Mark Zojibwami, who up in Calgary is doing a similar model, the. The three of them sequentially partners, sequentially buying businesses into a Holdco. And you said to me how funny they're. They're doing. They. They kind of arrived at a very, very similar model to the one that we kind of originated here on a Starbucks napkin. So there, there's something to it. It. It, you know, two. Two is not quite a trend, but we're getting there. And again, it's. It seems like you get all of the same financial benefit, plus you get flexibility, less mental burden, more eyes on each other's businesses. Not do it. Not going it alone. Which is one of the classic complaints and, and weaknesses of being an entrepreneur is the loneliness. So you've, you've solved for all of that. So it's pretty, pretty neat. Pretty neat stuff. Abhi. If people want to reach out, do you have a way that you like them to do that? You're on LinkedIn. Email. What do you prefer?
- [104:43]
Raj
Yeah, LinkedIn or X? Probably LinkedIn. You can find me. Abhi Ravi Shankar on X. Abhilash is my full first name. A B H I L A S H. And those are two good places.
- [104:59]
Abhi Ravi Shankar
Fantastic. ABHI Ravi Shankar car. Thank you very much for coming on.
- [105:03]
Raj
Thank you, Will. It's a pleasure.