Invest Like the Best with Patrick O'Shaughnessy Episode: Royce Yudkoff & Rick Ruback - Entrepreneurship Through Acquisition (EP.423) Release Date: May 13, 2025

In this engaging episode of Invest Like the Best, host Patrick O'Shaughnessy delves deep into the world of Entrepreneurship Through Acquisition (ETA) with esteemed guests Royce Yudkoff and Rick Ruback, both Harvard Business School professors renowned for their expertise in guiding students to search, acquire, and manage small businesses post-graduation. Nearly a decade after their first conversation, Royce and Rick share their evolved insights on ETA, reflecting on the dynamic shifts within the search fund ecosystem and the enduring principles that continue to drive success in this domain.

1. Evolution of the Search Fund Ecosystem

Bifurcation in Acquisition Strategies

• Rick Ruback highlights a significant bifurcation in the small firm acquisition space:

  • Funded Searchers are increasingly targeting larger deals, averaging around $20 million in total enterprise value, often competing with private equity and strategic buyers.
  • Unfunded or Self-Funded Searchers are focusing on smaller businesses with lower EBITDA multiples (around 3-4x), enabling the acquisition of multiple smaller firms to diversify and mitigate risk.

  “The small firm acquisition space is really bifurcated with the funded searchers really moving upmarket into much larger deals… and self-funded searchers are buying smaller businesses at lower multiples.” [06:14]

Impact of SBA Loan Programs

• Royce Yudkoff emphasizes the role of the Small Business Administration (SBA) loan program, which allows entrepreneurs to acquire established businesses with up to 90% leverage, fostering high-return opportunities even with modest initial capital investments.

  “Every American citizen has the right to borrow up to $5 million in this government-backed loan program, which allows them to buy an established, proven, profitable business.” [07:43]

2. Risk and Return Dynamics

High IRRs Compared to Private Equity

• Royce Yudkoff presents compelling return statistics:

  • Funded Searches have delivered internal rates of return (IRRs) in the low 30s, significantly outperforming traditional private equity returns in the low to mid-teens.
  • Self-Funded Searches exhibit exceptional math, with leveraged returns on assets often reaching 25% before growth.

  “Returns to investors are in the low 30s of IRRs… in self-funded search, you're generating a 25% return on assets before any growth.” [14:29]

Risk Assessment

• Rick Ruback identifies two primary risks for searchers:

  1. Failure to Find a Suitable Deal: Over 50% failure rate among funded searchers, attributed to intense competition and higher acquisition multiples.
  2. Acquiring a Poor Performer: Less common due to rigorous due diligence and investor gatekeeping, though unforeseen market shifts can impact profitability.

  “The failure to find risk is a real one… But buying bad businesses doesn’t happen as often as you might think.” [11:26]

3. Criteria for Acquisition Targets

Key Characteristics of Desirable Businesses

• Recurring Revenue: High-quality, predictable revenues that ensure stability and facilitate financial leveraging.

  “We really want high-quality revenue… it gives you great stability.” [20:44]

• Low Customer and Vendor Concentration: Avoid businesses overly reliant on a few customers or vendors to mitigate dependency risks.

  “You really want to try to avoid concentration with customers or vendors.” [20:44]

• Avoiding Economic Cyclicality: Target industries with steady demand unaffected by economic downturns to ensure consistent performance.

  “Avoid economic cyclicality… it pairs poorly with the financial leverage you’ll need.” [20:44]

• Manageability: The ability of the searcher to effectively manage and operate the business, often aligning with their personal skills and interests.

  “You have to have a business that you can use your talents or develop talents to run.” [22:10]

Supplementary Criteria and Insights

• Rick Ruback adds the importance of geographic considerations and the physical presence required to manage the business effectively.

  “The idea that you can buy a business in Mississippi and run it from your ski lodge in Colorado just seems incredible to me.” [23:38]

• Royce Yudkoff underscores the necessity for students to develop judgment in assessing which criteria are deal-breakers versus negotiable factors.

  “They have to develop judgment about how good is good enough.” [25:42]

4. Search Process and Strategies

Practical Steps for Successful Searching

• Rick Ruback emphasizes commitment and proactive engagement:

  • Engage with brokers.
  • Utilize databases.
  • Conduct direct outreach.
  • Participate in local business events and networking opportunities.

  “Just commit to it. The goal for this week is to have an owner's meeting. Just have a telephone conversation with an owner.” [62:05]

• Royce Yudkoff adds that while there are 3,000 small business brokers and 300,000 small business sales annually in the U.S., the challenge lies in filtering and identifying the right opportunities.

  “It's not that hard to get in the flow of this. Harder to filter and find a good business at the right price with a committed owner.” [64:36]

Geographical and Industry Focus

• Many searchers opt for a geographic search, immersing themselves in local business communities to source opportunities.
• Others may pursue a national search, leveraging broader networks and specialized brokers.

5. Trends in Business Sales and Supply Side Factors

Demographics Driving Sales

• Royce Yudkoff points to the baby boomer generation as the primary source of businesses for sale, with many owners seeking retirement due to:

  • Lack of internal successors.
  • Desire for better work-life balance post-retirement.
  • Increased capital availability leading to higher willingness to sell.

  “They are reaching an age where, as Rick and I like to say, they now have more money than time and they're behaving accordingly.” [32:39]

Market Dynamics Post-COVID

• Rick Ruback discusses how the COVID-19 pandemic has created uncertainty among sellers, with some delaying sales while others face financial pressures to sell sooner.

  “There are lots of sellers who are now reaching the end of their patience and health and are going to become more interested in selling.” [34:25]

6. Teaching and Influencing the Next Generation

Practical and Engaging Curriculum

• Royce Yudkoff emphasizes the practical nature of their classes, focusing on real-world applications over theoretical concepts.

  “We teach a lot of theory, but we teach it in the context of practice.” [54:18]

• Rick Ruback highlights the use of case studies and interactive discussions to foster pattern recognition and decision-making skills among students.

  “After two years of a case-based education, you've seen hundreds and hundreds of situations and life is going to give you those situations.” [72:35]

Student Engagement and Long-Term Relationships

• Both professors maintain ongoing relationships with alumni, offering guidance on specific business challenges and strategic decisions.

  “We get a lot of phone calls with practical business questions… they call me when they have this sense that they might be wrong.” [77:32]

Successful Case Studies

• Nashton Partners: Chronicles the journey of HBS students acquiring and scaling a municipal extermination company, illustrating the ETA process's potential.

  “It explains the journey we're going to take them on, which is a great place in my heart.” [81:00]

• Capital Digital and Brian Bonk and the Palfreys: Highlight real-world challenges in business acquisition and management, providing valuable learning experiences for students.

  “It’s like, I bought a rabbit slaughterhouse and a biotech company… it just is this.” [85:14]

7. Challenges and Future Outlook

Low Participation Despite High Potential

• Rick Ruback observes a significant gap between the number of students benefiting from ETA training and those actually pursuing it:

  “Why more people don't do it. We have 920 students graduate every year… we get like somewhere around 20, 25.” [85:38]

Perceptions and Personal Fit

• Royce Yudkoff and Rick Ruback discuss how personal values and preferences influence career choices, with ETA attracting those seeking independence and entrepreneurial fulfillment over traditional corporate roles.

  “They have values that are sensible and different… they want to build the life you want to live, earn a great living, and have independence.” [86:07]

Sustainability of the Opportunity

• The duo anticipates a surge in business sales due to pent-up seller motivation post-COVID, followed by a return to equilibrium as the market adjusts.

  “We'll never know if these predictions are true… there'll be some surge over the next three or four years of pent-up selling.” [34:25]

8. Concluding Insights

Value in ETA Education and Practice

• Rick Ruback and Royce Yudkoff underscore the transformative impact of their ETA programs on students' careers and the broader business landscape.

  “We hear that every day, but we see it quite often and we see students coming back over and over again saying, your class was pivotal in my life.” [54:18]

Encouraging Participation and Mindset Shifts

• The professors advocate for more individuals to consider ETA as a viable and rewarding career path, emphasizing the tangible benefits of owning and managing a small business.

  “It's such a better career path than working for somebody else.” [85:47]

Final Thoughts from Patrick O'Shaughnessy

• Patrick commends the enduring relevance of Royce and Rick's insights, encouraging listeners to explore their teachings and consider ETA as a potent avenue for investment and personal growth.

  “I encourage people to read your book, to listen to your podcast, to submerge themselves in the ideas that you've accumulated over 15 years together.” [89:00]

Key Takeaways:

• Entrepreneurship Through Acquisition remains a robust and evolving pathway for aspiring entrepreneurs, offering high returns and tangible business management experience.
• The landscape has diversified into funded and self-funded searchers, each with distinct strategies and risk profiles.
• Education and mentorship play critical roles in preparing individuals for success in ETA, emphasizing practical skills, case-based learning, and ongoing support.
• The market dynamics, influenced by demographics and global events like COVID-19, present both challenges and opportunities for ETA searchers and investors alike.

For those interested in exploring the nuanced world of Entrepreneurship Through Acquisition further, this episode provides invaluable insights from two of the leading educators and practitioners in the field.