← Acquiring Minds
Acquiring Minds
The Argument for Self-Funded Search
01:06:10
Jordan Carter & Robert Graham argue for self-funded search over traditional search funds or the "buy small" approach.
Loading summary
Transcript149 lines
- [00:11]
A
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. Today's conversation is with two self funded searchers, Jordan Carter and Robert Graham. Jordan and Robert independently acquired and now operate their companies and later partner together to form Search Investment Group. Search Investment Group or sig, works with self funded searchers as both advisor and investor. We spend a lot of time comparing and contrasting the different types of search, specifically self funded search with investors versus traditional search funds versus kind of the biz buy sell searcher looking to buy a smaller business without working with investors at all. Now they are proponents of the self funded search, so you're going to hear that perspective, but for me it was a very educational discussion that if nothing else should make clear to you that if you've decided you want to buy a business, you need to carefully choose the style of search you want to conduct. Buying a business is a life decision and the type of search you undertake sets you on a particular path for the duration of your ownership of the company you acquire. I don't expect this to be my last conversation with Jordan and Robert or others about the pros and cons of the different styles of search. And another good Acquiring Minds episode to listen to related to this was the recent November 1st interview with Chris Williams who acquired a company earlier this year and he explains in the interview how his search path evolved from more of a traditional search to a self funded SBA style search.
- [01:46]
B
All right, here are Jordan Carter and.
- [01:48]
A
Robert Graham of Search Investment Group.
- [01:51]
B
Jordan Carter and Robert Graham, thank you two for joining me today on Acquiring Minds.
- [01:55]
C
Thank you Will. Excited to be here.
- [01:57]
B
The two of you are both successful self funded searchers. You each independently sought, identified and acquired businesses that you're now respectively the operators of. And more recently, the two of you have partnered with a third person to form Search Investment Group, which is a firm informed by your own experience of self funded search and a gap that you saw. I'm going to let you all define really what search investment group sig, what its worldview is, what this gap is and how you're addressing it. But let's put a pin in that and return to that a little bit later in the interview. What I really want to spend our time talking about and what I really want the audience to get from in this conversation is an understanding of the three primary paths of search and acquiring a business. As an acquisition entrepreneur, there are many kind of nuances to this, but we agreed off air of three very loose buckets. And I'll say what they are and then I'm going to ask you guys to really define them with more detail. Get everybody on the same page as we proceed with this conversation. So those three paths would be a traditional search fund, a self funded search, a traditional search fund searcher, a self funded searcher, and let's say a small self funded searcher. Let's call that person the biz buy, sell searcher. Okay, so those three buckets, Robert or Jordan, why don't you start with the traditional search fund searcher and define that for us, please?
- [03:36]
C
Sure, I'll take the first one. So traditional search is kind of a methodology that mostly is taught at some of the top MBA schools. And that's where it really was started, I think. And what it is is basically young professional or newly minted MBA will go and raise 3 to $500,000 from a group of investors. And that money is used to pay for their search, right? For approximately two years of looking to find a business to cover due diligence costs, their living costs and paying them a salary. And then they end up, once they're ready to acquire a business, if they end up finding one that they do want to acquire, they then raise a separate round of capital to actually do that acquisition. And the initial investors who gave them money for their search phase then get preferential terms for the raise phase. Those terms are already kind of decided when they take the initial 3 to 500,000 for their search phase. The terms that they're usually getting. It's almost for every deal is this, there's a special model called eight and a third. Eight and a third, Eight and a third. So usually they get eight and a third ownership in the business the day it closes. Eight and a third if certain benchmarks are hit, and then eight and a third the day that the business sells. There's a similar model for that. There's slight changes on that, but that's pretty much how it works for every traditional searcher businesses they're typically looking for, it's going to be probably at the very bottom end, 2 million of EBITDA up to 6, 7, 8 million of EBITDA. So they're pretty large businesses for the most part. And they have to be really for that model to work because the searcher is taking a smaller percent ownership. Great.
- [05:40]
B
And do you find you touched on this, but let's clarify. Do you find that people who do traditional search funds are really like freshly minted MBA grads. I mean is this something that somebody mid career who their education is in the distant rear view mirror works for them or is this really for the 29 year old fresh out of wherever?
- [06:02]
C
I mean that is the majority of people doing traditional searches. It is usually for mid-30s, late 20s, fresh MBA, but there are mid career people who do it. You know, one common factor I would say is generally, well, almost always it's someone who doesn't have enough personal capital to fund their own search.
- [06:25]
D
Right.
- [06:26]
C
So it's somebody who needs enough money, Right. To bridge them for two years of searching for a business. And if they have their own personal capital or in a situation where they could pay for that themselves, they probably wouldn't go that route because the terms are punitive on the actual acquisition. So generally speaking it's people earlier in their career.
- [06:52]
B
I want to ask what's punitive about the terms but let's get into that in the pros and cons section. But just one other point on this. The money that a big part of the traditional search structure is that your search is funded. So you're earning a salary while you're out there doing a search. If I wanted to self fund or couldn't found myself self funding, how do those. Does that 4 to $500,000 that is allocated to the search itself, how does that break down? Is that like all salary or is that half of that is my salary? Half is to just deal costs. How does that typically break down? Or is it just. Is there a typical.
- [07:32]
C
I don't think there is a typical. I mean the salary is usually probably in the 100 to 150, maybe 180 range.
- [07:40]
D
Right.
- [07:40]
C
And then the rest is going to be extra, you know, deal costs and things, you know, or search related costs in there. So you probably got enough for, you know, two or three broken deals.
- [07:53]
E
Okay. Actually, yeah, I would say it's even. It's actually more like 100, you know, on that low end they want you really hungry to buy a company and the rest of it is essentially will. It's a commitment of capital to fund those diligence costs. I mean, so it's a great deal from the standpoint of, you know, somebody's going to be there for you if you need to spin up your accounting or legal, you don't have to kind of worry and go, oh, that's going to come out of my pocket if this deal goes sideways. So you really just. Yeah, it's an interview process, it's a recruiting process, but once you get, you're going to get a salary, it's going to be probably below market of what you typically would get coming out of an MBA program or for mid career. But that's not really what you're going for anyway. You're going for once you get that company having an opportunity to earn, to earn up to a certain amount of equity as Robert was talking about. And I think what we saw also from the Stanford actually puts out a search fund study every year and they actually noted themselves that the average total equity retained by that searcher in a traditional search is more like 22%. Once everything's all said and done, if you take, you know, you take some averages of statistics and that's because that.
- [09:09]
B
Last the eight and a third, eight and a third, eight and a third, that last eight and a third is contingent on performance. And so some people perform better and some people don't perform all the way to get the full 25% or the eight and a third less tranche. Cool. Now let's let Jordan talk to me about self funded search is simply the difference that I'm funding my own search. What else define it for me.
- [09:34]
E
Well, you certainly do need to put some capital aside. I think we talked about the two different types of self funded searchers. We think there's a pretty big bright line there between somebody who's just kind of passively cruises bizbuysell.com and we'll take a look at some companies every now and then. Maybe they still have a full time job but they moonlight. They really want to kind of look at potentially playing with that idea of being an owner. A lot of people on Biz Buy Sell are also looking for something passive where it may not be an owner's transition. Maybe it's a FedEx route or you know, landscaping route to use that seller discretionary earnings to hire somebody else in your spot or who else that would take over for the day to day operations. But that's kind of a different part of this market rather than what we consider essentially a full time self funded searcher. Somebody who's really just jumping right off the cliff and saying I'm going to dedicate at least a year. But typically you want to have enough capital set aside in your savings to go, you know, for a full 24 months if you need to. And your only job is to wake up every day and to source deals and look at them, review them and diligence them. And at the end of the day you can do a lot of work yourself. You don't have to be spending your diligence money unless you kind of hit certain metrics that you do. It would be great to have a coach, somebody who can guide you down that path because typically this is the first time you've ever done it. Some people come into it with private equity backgrounds but we actually believe sometimes that can be a detriment because you try to bring in all those, all those key learnings from middle market private equity where everybody is super sophisticated, all knows the whole deal of how to do a transaction. And this kind of micro cap market is just uncharted territory in many ways. But I think the big difference is full time versus kind of part time and then believing you can raise capital for your for yourself and insertion still maintain majority control. Not 22% but you will be well over 51% owner. And the other one where it's kind of like I'm going to use my savings on the side and buy something small. Looking at it passively and on this.
- [11:53]
B
Self funded, on the self funded searcher Jordan and not the biz buy sell buyer, but the, the one looking who's doing this full time. The enterprise value that they might be looking at and the size of business that they're looking at acquiring, how does that compare to the traditional searcher? Typically yeah.
- [12:12]
E
The enterprise value would typically probably be between 3 to 8 million in total purchase value. You can get north of that. We've seen it. You can get up to like 10, little over $10 million. But that's kind of where it starts to chart out, we think the minimum of looking at something with about $750,000 of cash flow. So after you're paying your salary. So that can work out to you know, if you're going to take $150,000 salary as the operator and majority owner, that could be 900,000 in seller discretionary earnings. So we're talking triple the size of what you would probably mark as a traditional biz buy sell type of purchase. Something under a million dollars. But it's kind of right in that middle gap.
- [12:57]
B
And why are so they're generally going to be smaller than traditional search targets. And why is that? If I'm devoting, as you said, if I'm stepping off the cliff and I'm devoting full time to this new career path of going out and finding a business and becoming the leader of that business, why wouldn't I shoot as big as I can?
- [13:20]
E
Yeah. So a big piece of the capital structure of these types of deals is you're typically an SBA 7 loan which gives the self funded searcher an opportunity to fill a lot of that, a lot of that capital structure need. You can essentially finance up to 90% of the purchase price of the business using, you know, you're putting your personal guarantee on the line. So again it's a, it's a little different from a risk quotient than what you would look at otherwise or especially if you're getting paid paid to search, but you can essentially then put in oftentimes 1% of the purchase price yourself and raise the other 9% in this kind of scenario and do it on terms that are most favorable to you given the size and the capital structure. Robert, did you want to add any more to that?
- [14:10]
C
The only other thing I'd say is once you get above 1012 million of purchase price, the SBA program is no longer really as attractive, right? In terms of a capital structure having that 7A is not as attractive. So usually the traditional searchers, you know, they're, they're going the route of using conventional debt or you know, some mix of unitranche, SBIC and mesdet, something like that. But you can do the exact same thing with a self funded deal, right? As long as you have the funds to provide for your search for two years, you can buy really about as big of a business as you want. Now I don't think you're going to be very competitive once you get above a certain amount because one individual versus a private equity fund or a strategic, you're not going to be competitive in the bidding process. But we ourselves have worked with independent sponsors who are really searchers who have bought businesses with over 8 million of EBITDA. So there's really no need to go the traditional search route unless you just don't have the $400,000 of capital needed to bridge you two years.
- [15:22]
B
I didn't properly introduce the two of you, so this is a perfect segue to step higher in the interview and do that you both were self funded searchers. Robert, give me a minute or two on your background then Jordan, I'll ask you to do the same and tie it in Robert, to your search and why you went self funded rather than traditional.
- [15:41]
C
Yeah, absolutely. My background was engineering. I worked for a big diversified manufacturing company called Eaton Corporation, worked in a variety of different roles in plant management and product line management, went back to school, got an MBA at Harvard Business School and then worked in private equity for a little while. While there saw some of my friends do self funded searches that ended up great, ended up having great outcomes and I got pretty jealous, honestly working for somebody else and decided I should do this myself. So I actually brought on a business partner and we started looking for home health, home care and hospice companies to acquire. Spent about a year in my search and ended up acquiring three home health, home care hospice companies in Dallas, Fort Worth that we've been running since we acquired those businesses in 2019 and then since then have done a couple of acquisitions and also partnered up with Jordan on Search Investment Group where we focus on helping searchers achieve good outcomes and end up with acquiring the majority of their joint business. So that's what I spend my time on when I'm not running the healthcare businesses.
- [16:56]
B
And Jordan, what about you?
- [16:58]
E
Yeah, so I started my career coming out of undergrad in investment banking MA in New York and then moved over into private equity, kind of a traditional path pre business school and went to do my grad business school at Wharton Business School before that actually I learned about the search fund path and I immediately thought it was interesting at that time only knew about traditional search but quickly learned about the different other pathways there and launched my search coming out of school and ended up closing on a company last year in 2020 that does professional services and software for local government entities. So cities and counties. Totally. So Robert and I can both speak about how relevant the private equity background can be in this area. But the reason we started Search Investment Group was because still the market is generally there's not as much advertising out there that you can do deals like I did and what Robert did. We're basically trying to help other searchers utilize, take advantage of this methodology that we both did ourselves. So we believe it's good enough for us and we just want to help those other people out there take advantage of it.
- [18:16]
B
You were both self funded searchers and you know, when did you meet? Did you meet prior to each other's searches or after TSG event?
- [18:25]
C
Actually didn't we Jordan?
- [18:26]
E
What was that, Robert?
- [18:28]
C
I think we met at a Texas Search Group event.
- [18:31]
E
Yeah. So there's a networking entire search community. It's inclusive, it's everybody traditional searchers, cell phone and searchers, passive biz by sell and the full community investors legal account getting together. And Robert and I met there and yeah, we just. Robert actually. So I did part of my, you know, my raise for my deal myself for the equity side and Robert came in and worked with me to help close out that equity raise. And I have to say just seeing both sides of it that really was one of the foundational deals to later create what became Search Investment Group. So again, it's kind of born in the proof of that we actually helped another searcher together. So Robert and I both helped another searcher close a deal in Austin that had over $2 million of EBITDA. And you know, he's self funded and he wasn't putting in very much himself personally, but just raised a lot of it from the equity investors that we were able to help him bring to the table.
- [19:35]
B
So you guys are really, really about, as you said, helping self funded searchers, increasing the awareness of this path versus really the traditional search path. And I'm interested that you both found yourselves on self funded paths without the influence of the other. So you probably, you came together around this common affinity, I guess did both of you like when did you. You were both at the, you know, MBA programs where probably the traditional search fund was probably most talked about. I'm guessing, don't know, but I'm guessing. And you, I guess you came to the same conclusion that you, there was something about traditional search that you didn't like. It didn't like. And yet you definitely like the idea of search generally. And so with some digging, you undercover the self funded path and took that path and just because that's what you preferred it. So what kind of talk to me about that? You're being exposed to the traditional search path or model and rejecting it. So here's your chance to be opinionated.
- [20:44]
E
Robert.
- [20:47]
C
He never has to ask me to be opinionated. It just, it oozes out of me. So actually at Harvard Business School, the more popular model, surprisingly is the self funded model. Yeah, not by a large margin, but it is more popular. And that stems from kind of the professors who are the lead search fund professors at hbs, that's kind of their methodology.
- [21:14]
D
Right.
- [21:15]
C
So now at Stanford it's the opposite.
- [21:18]
D
Right.
- [21:18]
C
It's the traditional funded search model is the priority.
- [21:23]
D
Right.
- [21:24]
C
It's more commonly pursued. So it's just two different schools of thought right? Now. That being said, obviously I looked at the traditional model, I looked at the self funded model and for me the traditional model, you really, there's no possible way unless you do some kind of a recap. And if you get really lucky, for you to own, you know, the company and for you to be, well I shouldn't say own the company for you to be majority owner of the company. So that's something that's important to a lot of people.
- [21:54]
D
Right?
- [21:55]
C
If you want to own your own business and really control your own business. Technically, traditional searching is more like being a CEO with, you know, with equity upside.
- [22:05]
D
Right.
- [22:06]
C
You know, and a lot of CEOs get equity compensation anyway. So it's kind of like being the CEO of a small business with equity options, right? You're not in control of the business for the most part, right. The investors really are, at the end of the day, in control. Traditional search CEOs can be fired. It does happen. In addition to that, the terms you get are really locked in. What really kind of boggled my mind is for example, if you went out and found, let's say you just did a great job of sourcing a deal and you went out and found a 10 million EBITDA company in the healthcare space with all recurring revenue, just a fantastic deal and you got it for three times, right? So three times 10 million of EBITDA.
- [22:50]
D
What a deal, right?
- [22:51]
C
Just hypothetical. Imagine great deal. Okay, well, are you going to get any better terms for yourself as the traditional searcher for bringing this fantastic deal to your investors? No, they don't care. Sorry. You're getting eight and a third. Eight and a third. Eight and a third. Doesn't matter how hard you work on your search, how good of a business you find. So that to me, right there, I mean, I was like, what if I find a great deal, right? And in addition to that, I mean, you know, I wanted to control my own destiny, you know. And the truth of the matter is you can pursue businesses the exact same size and do the same thing with a self funded model as long as you have the personal capital to do it. And I think one thing that's really interesting, I've never personally seen this. I'm sure someone has done it, but I have never seen a traditional funded searcher sell their company and then do another traditional funded search. Never seen it happen. And the reason is because they have the capital that they don't have to take money on those terms, right? So why would they do it?
- [23:52]
D
Right?
- [23:52]
C
They do a self funded search after they've done their traditional funded search because they have the capital to float themselves. Now you do see self funded searchers sell their companies and then do another self funded search all the time, right? So that's a model that I've seen repeated many times. So that to me was another sign, right? If people only do this once, there's probably a reason for it. But yeah, I think that's how I would explain it.
- [24:20]
B
What about the argument that in a traditional search you're Going to have, you know, a lot more investors at your disposal to look to for counsel and guidance and support. And these investors are investors that have typically seen a lot of search deals. You know, they're, they're, it's a niche they've chosen to spend time and resources in and that can feel like you have a lot of support at your back more than a self funded search. If this is your first time doing.
- [24:48]
C
This, I can just comment on, you know, my own anecdotal evidence because I've had, you know, coming from the MBA program I did come from, I had quite a few classmates who did go the traditional route. And you know, for the most part I think that there's a lot of talk about support provided by investors. But at the end of the day, you know, the truth of the matter is, you know, most of them haven't been in that specific instance in that particular industry. And I just think that the amount of value they are able to bring sometimes can be a little bit over oversold.
- [25:21]
D
Right.
- [25:22]
C
And the fact of the matter is other searchers for the most part are willing to help each other. So you can get a lot of help from the search community. Now I will say, you know, that is probably the best argument for going the traditional search route versus the self funded route. And you know, it's a, it's a very common argument made and that's why we started Search Investment Group and not trying to plug, but that is the gap right on the self funded side, where's the M and A and deal and where's the experience? Where do you find that in the self funded space and the place you find that is with a group like Search Investment Group where we do provide that level of support. A level of support more than you would get if you were just a lone wolf independent searcher.
- [26:09]
B
So on that point, if either of you guys want to take this. Jordan, though you had mentioned people with private equity experience overestimate the value of that experience as they embark on their career in search. Because the lower middle market down in these little messy businesses is completely different than the businesses that private equity typically deals with. What is the expertise that's valuable at this end of the market that SIG provides?
- [26:43]
E
Yeah, well, I would say generally that people shouldn't go into search at all if they're trying to build a private equity background or maybe use it to go into some again back into a finance field. We don't want to have searchers. We want to get them as quickly as possible into the operations seat. And I think they do want that as well. That's a huge point. The fact that self funded search, using a model like ours, where you're raising equity and you're, let's say, retaining 70% of the company, you have complete operational, strategic and financial control over your destiny. We're not talking about traditional search CEOs getting fired for cause, we're talking about them getting fired because the traditional search funds have, you know, have another company they want to combine with. And guess what? Musical chairs is up. And so, you know, really that's what it's about is being able to create a pathway for you to be an entrepreneur and do it in a way that, that is rewarding you for that. So the faster we can get you in an operational seat, the better. And I think people who either ran a division or ran a small company before, although that's relatively rare as a background that we see a lot of times, military veterans bring really good management experience. They've had to deal with all sorts of tricky decisions and still have to make a decision quickly. And they can't have all perfect information. That's a good background, somebody who's had to work through those kinds of issues. You do not need to be a finance expert nor at any point really. You need to know how to do sales, need to know how to hire people and be able to pursue projects essentially like initiatives within a company and make decisions that's, that's just a great operator. So if that answers the question, well, that's what we're really looking for. And you, you shouldn't be trying to build an expertise in the deal space. You want to be a deal person, go work for a finance company, don't buy a business. You're going to be this, the really the only person driving the strategy at the top and creating, creating initiatives and executing on them.
- [28:53]
C
Well, I wanted to add something really quickly to that to further answer the question. So buying Fortune 500 companies as a, you know, as an investment banker or a large cap PE analyst or associate or VP is totally different than buying a small company using the SBA or even conventional financing. So I mean, number one, the intermediaries you're dealing with are different. These are not investment bankers from Goldman Sachs, Right. These are M and A brokers. Very similar to like, almost like a real estate agent for a business.
- [29:24]
D
Right.
- [29:26]
C
The level of expertise of everyone involved, including the broker, the seller, the other third party advisors, it's just totally different.
- [29:34]
D
Right.
- [29:35]
C
In addition to that, the SBA is very different than Conventional debt. And then the conventional lenders are different than you'd find the very large lenders for typical M and A deals. Even the legal paperwork and the due diligence you're going to do is completely different than you do for a Fortune 500 acquisition. So the problem that people with a PE or investment banking background fall into is they come into this approaching it like they would doing due diligence for a major acquisition. When in fact, I mean, you're not going to have all the answers that you're going to have with a large company acquisition. You're going to have to get really comfortable with the gray space. You're going to have to get really comfortable working directly with a seller who is very likely very unsophisticated. So, you know, you can actually set yourself up for failure. I think coming at this with, you know, an expectation this is going to be like large cap, PE or M and A. So I think the only thing that prepares you to provide advice like we do or to be successful at this is experience specifically doing this.
- [30:49]
D
Right?
- [30:50]
C
Once you've closed 3, 4, 5 SBA deals, you have a pretty good idea of what a small acquisition utilizing the 7A program, what that's going to look like and what that requires. And that's kind of what we bring to the table, right? We have just in the last year been involved in over 10 self funded search deals.
- [31:11]
D
Right.
- [31:11]
C
So that repetition is specifically doing this is the value we bring.
- [31:21]
B
We touched on the kind of typical Persona of a traditional searcher, the mba. There's kind of an age band. It's typical. Is it the same parameters for self funded search or not?
- [31:35]
E
I think you can certainly be in the same parameters. I think Robert was talking about that, you know, it can come from the same pools, but you know, in many ways there's a lot of operator types that are going to be very successful that don't come from MBA programs or at all. If not much less, you know, let's say a top tier prestigious MBA program. You know, there's, there's very little, if I would say the only barrier to entry really is your dedication to do this. This is self funded search is the, is the closest thing you're going to get to in terms of taking a bet on yourself other than starting your own company. So a lot of what people stop themselves of and they convince themselves potentially that a traditional search is just safer, it's more conservative. Maybe they think it's going to be a higher chance of success because there's all These people behind you supporting you. At the end of the day, you are left alone. Most of the time in traditional search you have to fight as a solo or you have a partner searcher and get out there. But really it's, I think that there's an opportunity here for this being one of the best pathways for people who are confident in themselves, they know they can do this, they want to get a shot and they're willing to take that bet in it. So I don't know if that helps answer the question Will, but I think, you know, podcasts like yours is and really getting the message out there is doing the job for it. People now just going to gravitate and I actually think they're different human beings. I think the type of person who wants to be a traditional search CEO and you know, wants to get some good operations experience but a lot of safety there and have not have the majority control is a completely different human being than somebody who says I want to put it all on my back and let's go do this and I want to own and operate. That's the biggest difference. Your own majority own and operate.
- [33:29]
B
I think one of the big differentiators as well, and maybe this just comes under what you just explained, Jordan, is that with a traditional search you basically have a mandate to eventually exit that business and please correct me if I'm misspeaking, whereas you don't with self interest search. I mean to your point about owning 51% or more of the business, you create your destiny so you're not as beholden to your investors and that gives you more freedom. But just baked into the whole traditional search fund model is an exit.
- [34:01]
E
Well, no, you are right. You're actually working for the investors in a traditional search model. And just put it bluntly, that's what you are, you are, you are at the behest of them, they own the business. I know you're an owner and I don't know how they structure that from the standpoint of the actual security itself. But having it be kind of phantom equity or payouts as according to a waterfall in an eventual liquidation scenario, these are all decisions that are not up to you as a traditional search CEO and you can say your piece but they, they know what they're doing. They have, you know, 30 other companies, they, they know what they're going to do and they're going to do it whether you kind of are on board or not. You know, self funded search. It's, it's your company, you want to hold it for 40 years, go for it. You want to sell it in three years, that's up to you. It's, it's just you are entrusted to make those kind of decisions.
- [34:56]
B
We've done a lot of comparing self funded search and traditional search and it's a very interesting debate, for lack of a better word. And there's a search funder, you guys are on a panel where this debate has gone into in some more depth. So I'll put that in the show notes. But now let's compare the self funded search flavor that you're talking about, Jordan and Robert, to the kind of the biz buy sell buyer that we talked about at the top. But we haven't given much time to say I have $200,000 at my disposal in some way, maybe I've saved it up or friends and family or something. Many people like that are probably looking at biz buy sell thinking they're going to put that $200,000 down as 10 or 20% deposit and get an SBA loan run, let's say $1 million business. Is that what they should do, Jordan? Or, or is there. How do you see that person squaring with the type of self funded search that you guys were and that you guys are working with?
- [35:58]
E
Well, I think there's just based off that blind profile, that person should be a self funded searcher, the type of person who would work with search investment group and use that in a more capital efficient way to generate a better return and ultimately give yourself a better chance. So another thing we didn't really talk about with regard to this end of the market is we say lack of sophistication. What does that mean? Oftentimes the broker and the seller, they are not aware necessarily that they don't have the cash flow, that they may be saying they have the cash flow, you know, for that business. So there's going to be some surprises. Oftentimes they're not positive surprises in terms of what that actual financial profile of the company is. And regardless of that, let's say it is exactly what you thought you were going to buy. If you're buying something with $300,000 in seller discretionary earnings, how are you going to get the cash flow to hire somebody? And maybe two people maybe need to hire a salesperson. Maybe you need to reinvest some cash flow into assets to help grow the business or some capital expenditures. How do you do that? You're basically. And then you also have a loan on top of that. So you have to pay the debt and somehow generate an equity return for yourself. Let's say you're the sole equity owner, 100%. You can make a lot more and do a lot more by growing your business successfully getting something with a million dollars in seller discretionary earnings where you are able to then, I mean, at the end of the day, let's say you bought a million dollar business for four times. It's $4 million. Just pay off the SBA debt over 10 years and you now own a $4 million asset. Okay. To me, that's a lot better than owning something that's worth $900,000 after 10 years. And you put in the same effort, potentially you've had more headwinds, you've had a tougher time recruiting people. You can't invest in the projects. You know you want to invest in it. Just to me, it's, it's, it's a completely obvious choice. If you're going to take a bet on yourself to actually go all in and no one's going to believe more than in you, than you, then go for it.
- [38:05]
B
And Jordan, spell out for me how that $200,000 gets me a $4 million company.
- [38:12]
E
So, yeah, so if you take, let's go, $5 million purchase price and you have a 90% leverage on the company, that could be 80% as SBA, and you have a 10% seller note, and you really only need 10% equity to actually complete that acquisition. So that's $500,000 of equity needed to buy a $5 million purchase price business. You and the searcher really just need to put in $50,000 of that and raise the other 450,000. And you can essentially structure that in a way by working with us and our network to be able to retain majority control of the common equity. So day one, you, I mean, again, you just pay off the SBA debt over 10 years and you have $5 million business.
- [39:00]
B
So I can put down 10% of the 10%. So that's $50,000 on the $500,000 in equity for the $5 million business. And so if I come to the table of $200,000, maybe that remaining $150,000 that I have in excess of the 50 I need for the equity that's going toward the search because it's going to be hard to find this business and I'm going to be having to go at this full time and there's going to be failed deals and there's going to be diligence costs and accounting and tech costs. And building out some sort of to do outreach to companies. Right. Like it's not trivial to go find that $5 million company. That's what the search, that's where the art of the search comes. And it takes time and it takes money.
- [39:46]
E
Yeah, it's exactly right. We think that you should have sufficient capital set aside above and beyond essentially a cash burn rate for you to live. Let's say it's your rent, food, just overhead, things like that. You should have capital set aside for a couple of deals that go sideways. I'm sure Robert, you have some good stories from your search of that may or may not have been the first company you looked at and pursued. And for me it was my third. So I had some heartbreak. I mean it happened, everybody has that and it's, we're trying to minimize that and make those decisions much higher quality and therefore reduce the risk of people searches. You know, we know that's tough. Having been self funded searchers ourselves, we know what that can look like. And so again, that's why we formed the group. But absolutely, you should have sufficient capital set aside to devote to the search. You don't really need it so much. From the infrastructure side, you can do this with a laptop and a telephone. You don't really need too much now if you want to work out of an extra bedroom or what have you, you can do it and you don't really need to spend too much money. It more comes down to making those decisions on when you decide to green lights and diligence expenses, whether that's quality of earnings or initial legal paperwork for the purchase agreement, things like that.
- [41:06]
B
And can you generalize as to what those costs are?
- [41:09]
E
Yeah. Robert, why don't you. Do you want to share kind of the thoughts on, you know, maybe a per deal or what we expect for, you know, an 18 to 24 month successful search? Kind of average costs?
- [41:21]
C
Yeah, I mean it depends, but I would generally expect at least one or two broken deals and we can consistently get searchers through due diligence for less than 50,000, which we think is great, especially considering the quality of the diligence materials. So if you can have, if you're working with us and you're using those third parties, you're probably going to need an extra, you know, you're probably not going to have 100% of your deal costs. You're not going to incur 100% of them if your deal breaks, probably 50% of them. So factor in I'd say two broken deals at 25k each, right. So if you have an extra 50,000, you know, plus, you know, your living expenses for two years, plus a little cushion, I think that's sufficient.
- [42:10]
B
Go ahead.
- [42:12]
C
I wanted to run through a question you asked a few minutes ago about somebody off of Biz by sell buying a 300k EBIT to business, right? So let's say you bought a 3. Just kind of numbers I just wanted to throw out there. Let's say you buy a 300k EBITDA business, right? You pay a million dollars for it, 3.3 times. That's not unreasonable, that size of business, right. You're putting, you know, 200K down, right. And taking an $800,000 SBA loan for the rest. And you put your $200,000 of your own money co 100% of the business. Okay, so now what's your actual cash flow though? Because it's not to you every year because it's not $300,000, right? Because you've got interest payments, got debt amortization, which is probably going to be a 10 year amortization if you're using SBA 7A and then you've got taxes, right? So if you've got an llc, which probably is going to be your structure, that's the most likely one. You're going to be paying personal income tax rates on your distributions. Well, technically not on your distributions, but on your income every year.
- [43:10]
D
Right?
- [43:10]
C
It's just like personal income tax when you have an LLC flow through. So, okay, so take your 300k, you're going to take 40,000 out for interest to 75% interest on your $800,000 loan. You're going to take $80,000 out for amortization, which, you know, just goes back to repaying the loan every year. You're going to take, you know, call it $50,000 for taxes and you're left with, you know, 130 grand. And I mean, I can tell you, well, you can go find a job and make 130 grand. A lot less risk with taking on a heck of a lot less risk than you can personally guaranteeing a business with a 7 loan and buying a business with 300k of EBITDA. So you know, small businesses like that often are owner dependent. When the owner leaves their relationships go their, you know, tribal knowledge goes to, you know, you have almost no cushion if something goes wrong, right? That's 130k for your living expenses and no other cushion. So if something goes wrong, you're in big trouble fast. In addition to that, doing a small deal like that takes almost just as much work as it would take to do a deal that was 2 million of EBITDA. You go through the exact same steps for a deal that small versus a deal with 2 million of EBITDA. And the final thing that I think is the most important is Whether you're borrowing 800k from the SBA or 5 million from the SBA, you're taking a personal guarantee for it. So you're on the hook. You're taking all that risk. Why would you do all that, take all that risk, potentially put yourself and your family in a position to go bankrupt for $130,000 a year? I personally would not do that. I would go get a job.
- [44:55]
B
What about this sort of feeling of self confidence? Maybe I feel like I could step into this million dollar business and make it happen. A $5 million business. I just don't know if I'm up to the task.
- [45:08]
C
I would actually tell you that you might be surprised. And it depends on what type of business it is and you know, how the owner is set it up. $5 million business, it's more likely that there's some management in place, Right. That does some of what the owner is doing in the 300k EBITDA business.
- [45:27]
D
Right.
- [45:27]
C
Where the whole business is probably run by the owner.
- [45:30]
D
Right.
- [45:30]
C
And if that person leaves, you have to do you have to be skilled in A through Z rather than skilled in A through D. Right. Because it's more of an actual owner rather than manager position in a larger business. So I think that that's a little bit misleading.
- [45:52]
B
So in fact, the larger business is the less risky business because it's probably higher quality, with more management in place. More, more room for error.
- [46:01]
C
Well, there's definitely more room for error, most likely depending on, you know, what margins look like. But a $5 million business, all other things being equal.
- [46:09]
D
Right.
- [46:09]
C
A $5 million business is going to have more cash flow cushion.
- [46:13]
D
Right.
- [46:14]
C
In some kind of a, you know, a negative correction to revenue or operations. Yeah, so yeah, absolutely. And then, you know, like I said, you know, taking the owner out of a 300k, you have to. Business is likely going to be different, all other things equal than taking an owner out of a, you know, 2 million EBITDA business.
- [46:34]
E
Yeah, I would, I would add to that, Will, you know, we do hear that a lot. And a lot of people look at a million dollar purchase price and just go, wow, that's a big investment. And you know, I want to be sure I Prove myself on that one, then maybe I'll do a bigger, you know, self funded search type deal later.
- [46:49]
B
Yeah, that's a common stair.
- [46:51]
E
Step it. Common thought. I'll tell you that buying a business between anywhere between 3 to 8 million dollars purchase price still feels absolutely tiny. These companies are really small and I think very quickly after even just 60 to 90 days of being a new owner of that business, if anything you'd be like, wow, I wish I could have more staff and build out more, faster and more resources to bear. So I couldn't imagine like being in a, you know, in a business even smaller than that. You're just, you're really backing yourself into a corner. And so I, it is interesting though because I do think this is one of the most. You do have to be very confident in yourself to be able to even pursue self funded search. Again. It's a huge self bet but you know, I think for those reasons mentioned that you're decreasing your risk. But also you'll find once you step into that company, let's say it's a $5 million purchase price, it's not more than you can chew, you'll be just fine. And I think if anything we want to encourage people to kind of, if you're going to do it, go for the full bore path. That really is a win, win, win for you.
- [48:02]
B
Do you vet the folks that you work with, the searchers that you work with at Search Investment Group? Some people are overconfident in themselves and they probably shouldn't be buying that $5 million business. So you get people at both ends of the spectrum. So what's the vetting look like?
- [48:19]
E
Yeah, so we do screen and work with a select number of self funded search entrepreneurs. I will share that. We have essentially two separate models through which we can work with people. One is what we call a full service or full time support where you can just be kicking off your search. We just took on two searchers actually recently that are just getting started. We can help them set up the search recruit and define how they put interns to work and helping them out, targeting and calibration of whether that's geographic or industry verticals, you know, things that we've learned, things that we can help guide them on. We're trying to shorten that time of how long that search is going to take. Our goal is for your search to take seven months if we can, if we can do it right. We don't want to have you search for two years just to just to, you know, have that notch in the belt, that's not, that's not worth it. You need to get going. But yeah, we do multiple rounds of recruiting kind of interviews and we just kind of see whether there's a good fit and match and ultimately a dedication to the size range. If you're going to Also look at 300, $400,000 SDE deals, we can't work with you as a full time searcher. It just is because we are fully betting on you and our compensation is aligned with the searcher. And yet nothing happens unless you successfully close and become the new owner of your company. We have to have you dedicated to the same size deals that we pursue. The other model is post loi. So if you are a self funded searcher and you feel like you're good to go on your search process, you're getting some good targets. Under loi, you can reach out to us. Let's say, hey Sig, we have $1.2 million EBITDA deal. I would love some support in this closing stages, right? Doing the right diligence, reviewing it and then ultimately an equity raise and making sure my debt's in place, making sure I didn't miss anything and get it across the finish line.
- [50:22]
B
And how are the fee structures or equity, the equity compensation, how does that work for both of your two ways in which you work with searchers?
- [50:32]
E
Yeah, so our compensation is structured again in alignment with the self funded searchers. So you know, we're targeting for the self funded searcher to keep way more than they would ever be able to keep by just going with a single source of equity. You think about it from that standpoint, there's a lot of self funded searchers on searchfunder.com who look once they get a deal into LOI or reach out to investors, I started out doing it that way. It's pretty tough. You'll have 10, 15 + calls and ultimately maybe net one investor that actually is coming on board with the terms that you're going to market with. So a big thing that we do is we actually work with that self funded searcher to really evaluate from an investor perspective what is going to be acceptable to the investor network, the group and essentially get that equity completely raised and we work alongside with a small portion of that from the self funded searcher. Robert, do you want to add something else to that?
- [51:30]
C
I think that pretty well summarized it. Going to the general community is probably not going to be successful. So you know, we've, we've spent a lot of time curating a Group of investors who love self funded search deals and are, you know, willing to, you know, invest in searchers on terms that allow the searcher to keep the vast majority of the business. So that's, I think a big value.
- [51:58]
B
We bring you guys. Somebody mentioned. Yeah, go ahead, Jordan.
- [52:03]
E
I was going to say, you know, that's a big point there too in that we've seen self funded searchers go out kind of solo. And while you're trying to close your deal, you got way more than that to worry about. Your equity raise should actually be one of the procedural elements of your deal. Not so much like the crown jewel of it. It should be, again, you're sourcing the capital to get the deal done. We've guided our searchers several times where they have blinked, you know, in many cases and said, well maybe I should just give way more equity to the investor groups. And we say stay the course, hold, you know, and we make sure that the searcher, again, we're working for the searcher and we consider that a big way where, where we earn our keep and ultimately make sure they're, they successfully get a win. Because this is a binary game. You can search and I know a searcher who searched for, you know, four plus years and is still searching and not close the deal. It's a zero. You still haven't closed something. So that's what we're all going for.
- [53:03]
B
Yeah, and that was what I was going to ask about is you always hear with traditional search funds that people can search for years and have nothing come of it. Is there any more likelihood of finding a deal with the self funded model versus traditional or is that really. The models don't really matter. It all just comes down to the hustle of the searcher and luck.
- [53:29]
E
I think the size range is a critical piece of this. The fact that if we're Talking about between 7 or $50,000 in cash flow or EBITDA up to, I'd say 2.5 million is being down the fairway. As Robert said, we can do a lot of creative things to help get much larger deals done and they're much more favorable than pretty much any other structure in the marketplace. But that's kind of down the fairway. You start to get kind of north of even $2 million and you're encroaching in traditional search space. So kind of between that million and 2 million is left for dead. And sometimes a lot of people are hunting for those biz buy, sell small, really ultra tiny deals. It's more competitive than probably people think and there's a lot of people who are looking for just little passive investments and they'll buy it in all cash between kind of seven fifty to two million. A little over two million. It's a little more professionalized. You need to raise capital for it. Typically the equity need could be a million dollars or 1.5 million dollars for that deal. But you're just not, it's not rich enough for the independent sponsors and the small private equity firms and the traditional searchers to dip down into that space.
- [54:46]
B
You will find that size of business on BizBuySell. It's not the majority of businesses on Biz Buy Sell but you can find million dollars claiming to be million dollar EBITDA businesses on Biz by Sell. Do you recommend your searchers spend any time on the site at all or is it basically got to be. It's really all proprietary outreach and brokered outreach.
- [55:09]
C
I would not recommend that our searchers spend much time on Biz by Sell. Now that being said, we don't have any kind of, you know, you've got to do 90% proprietary. And that's another thing with the traditional search model. Most of the traditional search investors want their searchers to spend all their time on proprietary deal making. You know, kind of interesting observation in this self funded realm. You know, the majority of deals get done actually through brokers and there's a few reasons for that. But you know, the way that you interact with brokers and the types of brokers that you work with is a very important part of your strategy. So you know we, we have our own, you know, set of real strategies around sourcing bills. Buy Sell is not part of the, is not part of the template.
- [56:01]
B
But yeah, and just to. We're up on time so we're going to wrap up here but just to close out Sig's offering. So the pre like the all the traps of a deal in this area of the market as people with private equity experience or without private equity experience might encounter. You can help them with that because you've, you've seen a lot of SBA deals done a lot of SBA deals pre loi and the sourcing you had mentioned that you helped me get set up as a searcher. What else are you helping me do during my search? Pre loi. Flesh that out for me.
- [56:45]
C
Well, setting up your sourcing engine is probably the first thing that we do. So.
- [56:49]
D
Right.
- [56:49]
C
Getting deal flow going for you and quality deal flow. So making sure your inbox is filled every day with A lot of good deals for you to look at.
- [57:00]
D
Right.
- [57:01]
C
This is a volume game to a degree.
- [57:03]
D
Right.
- [57:04]
C
So how you build your sourcing engine is pretty important. And then we provide a lot of help with the screening portion of it.
- [57:12]
D
Right.
- [57:12]
C
So we know exactly what's going to be required for a deal to be financeable by the SBA and also what investors are going to be interested in. So pretty early on, I think one of the most important things actually skill sets in searching is learning how to kill a deal and how to kill a deal fast. Because where searchers really get in trouble is they go down the road with a deal that's really not a deal that can close for a few months and then they find that out at that point they've wasted six months in a bunch of capital. And so we're pretty good at this point at pretty quickly killing deals that can't happen.
- [57:51]
D
Right.
- [57:53]
C
So we're spending several hours a week with every searcher that we bring on board going through every deal that they're looking. Well, not every deal, but the deals that they think are the most promising with them to say whether it deserves additional attention, time and money. And so that's huge for me.
- [58:12]
D
Right.
- [58:12]
C
I think the efficiency that we bring to a search is going to increase the chances of success significantly. You know, in addition to that, you know, going further out pre loi, we're actually helping searchers put together the loi.
- [58:29]
D
Right.
- [58:30]
C
Think about, you know, the important questions when they have those first conversations with the broker and the seller, you know, and. And also put together an offer that is going to make sense and going to be again, you know, the business itself and the offer that you make have to be kosher with the SBA and with investors. And, you know, we help with that whole process. And then the final thing I'd say pre loi that we help with. A lot of brokers want some kind of proof of your ability financially to buy a business.
- [59:02]
D
Right.
- [59:03]
C
And so that's something we can bring to the table.
- [59:05]
D
Right.
- [59:05]
C
And offer, excuse me, a commitment letter that says you have financial backing and a little credibility. Because when they look on most searchers websites or research, any good broker is going to research who the potential buyer is at least somewhat. And if they go on your website and they only see that before this you were a consultant versus you're working with Search Investment Group, who's done over 10 SBA deals in the last so many months, there's a certainty of close there.
- [59:35]
D
Right.
- [59:36]
C
And definitely it adds a level of comfort and trust to the searcher. So those are all things I think we bring pre loi. Did I miss anything?
- [59:49]
E
Well, yeah, I was going to say also modeling supporters get way too detailed into wanting to focus on modeling. And at the end of the day, essentially your deal valuation process we can help calibrate. You know, there's great forums. Searchfunder.com is an outstanding forum through which people can learn about search and look at deals and talk to each other about, hey, I'm looking at this deal, here's high level, what it looks like and someone else can respond and say, oh, it looks really great. Oh, look into this. The end of the day though, the actual on target calibration and adjustment which happens when you show, right when you keep showing us your deal flow, we go, what do you think about that? And then they, they decide whether they want to go forward or not. Key insights that then they go, okay, you know what, I got this. I'm going to actually change the way I'm looking at this entire vertical or kill it all together. Can save somebody months and months and months. And you don't have that time when your cell phone is searching. It's your money you're burning. So the last thing you want to do is try to recreate the wheel while you're trying to do something which is going to change your life. You know, we don't see any other support out there. Nobody else is doing this. Traditional search is not really doing it other than I think accelerators do a good job. I think those are probably a good example. But again, the terms come with a different price tag on them and that support.
- [61:19]
B
One of the things always in traditional search is that you have to be open to, or I think almost always have to be open to moving to a particular geography where you might find that deal or at least that's smiled upon and you're pushed toward that. Is it the same in the types of self funded searchers that you guys work with? Do I have to be open to moving anywhere in the country that I might find this deal anywhere in the country?
- [61:47]
C
But generally speaking, you know, we're usually not, you know, the chances of success in the search fund world are limited, period.
- [61:56]
D
Right.
- [61:56]
C
If you look at the Stanford study, right. And the Stanford study is just based on traditional searchers, right. Who are all looking nationally for the most part, all usually have pretty good backgrounds because they've been able to raise, you know, half a million dollars to search, you know, and have time, a full time, two years to do it, right? And plenty of resources at their disposal. And one out of three doesn't find a deal.
- [62:21]
D
Right.
- [62:22]
C
And of the two thirds that do find deals, about 50% of those, so another third out of the total end up buying a company and it not really providing adequate returns or it completely going bust. So you know your chances of success in the traditional world, you know, according to the study, which is the best data we have is about 33%.
- [62:44]
D
Right.
- [62:44]
C
About a third. So if you limit yourself to, you know, I want to live in Houston, I'm only going to search in Houston, that just hurts your chances that much more. So we will partner with searchers who are not doing a full national search. But generally speaking it needs to be a pretty large regional area.
- [63:04]
D
Right.
- [63:04]
C
So, and there's got to be a lot of GDP in that area.
- [63:07]
D
Right.
- [63:08]
C
So we're not, we probably wouldn't partner with someone who is only going to search in Idaho, you know, but if they were going to search, you know, the entire west coast, in the Midwest, yeah, we'd probably be open to that. Otherwise, I think you just hurt yourself a lot, you know, just your probability of success.
- [63:24]
E
Yeah, yeah. At the end of the day, you have to be focused on one goal here. This is hard enough as it is. We don't have data on self funded search, but I would imagine it's, it's potentially in similar realms there. And the thing is everybody's doing this thinking that they're gonna get, they're gonna win. And so if a third don't even find a company, I mean that's a huge portion of this group that every single person, nobody does this to just play around, you know, when you're, when you're full time searching. So having we found some of the most, the most advantageous attributes to bring to self funded search, what we, you know, really screen for is humility and ability to learn fast and adapt and integrate, integrate outside learning. Don't do it the hard way. That's kind of our big thing is if we had access to search investment group, you know, Robert's one year search could have been six months and my two year search could have been nine months. It's like that's what we're trying to do here. And it takes on hands on calibration, but it also takes from the searcher that attitude and that kind of openness and willingness to get outside of a comfort zone to make sure you get this win. It's a huge binary win. You have to be focused purely on that.
- [64:35]
B
We firmly believe that well, this has been great. Is there anything that either of you want to add or should we leave.
- [64:42]
E
It on that I was going to say too. If you want to learn more, go to our website search investgroup.com y actually that's one of our key pages. We actually have a searcher we helped last year. We did a YouTube video interview in person and you can kind of look at some of the model materials that we have available and reach out to us. But it's a good. We're always doing events. We're trying to foster more knowledge of the search community and particularly self funded search. Obviously it's very close to our hearts because we pursued it as a path and we are really believing in expanding the pie. We want there to be more self funded searchers who believe this is possible to get out there and go for it. It's kind of like just encouraging entrepreneurship generally in this country. Right. The more entrepreneurs we have, the more great companies we'll have in 2040 and 2050.
- [65:31]
C
Great.
- [65:33]
E
Thank you all for having us. Appreciate it.
- [65:34]
B
Yes, thank you, Jordan. Thank you, Robert. This was an education. Very interesting what you guys have, what you're doing with Search Investment Group. And there will be links in the show notes for everybody for not only the website but many of the things we've touched on and be interesting to see where things are in a year and who you funded in that time. So we'll have to reconnect then. Thank you gentlemen.
- [65:57]
C
Sam.