35+ Acquisitions, $1.3B Exit and Backing 80+ Searchers | Mark Sinatra of ETA Equity

A search fund survived the crash and sold for $1.3bn

Mark Sinatra bought a human resources outsourcing company just before the financial crisis and spent three years fighting fires. Sales discipline and a talent formula of exceptional people in the right roles saved it, and Staff One HR grew double digits for five straight years before selling to Oasis. Sinatra rode the Oasis sale to Paychex at $1.3bn, and ETA Equity now backs about 80 searchers and 35 companies on the questions he learned the hard way.

Takeaways

• The bet comes down to jockey, horse, barn. Sinatra starts with the searcher, then weighs the company and its industry. An average business in a growing, fragmented market that can be professionalized into an above-average one is a powerful formula.
• Reference checks should never be outsourced. ETA Equity calls the last two managers of every searcher it backs, plus others who have worked with them. A resume does not show how someone behaves when the plan goes wrong.
• Talent formula took three to four years. Sinatra did not feel like a CEO until he had exceptional people in the right roles with the resources and vision to excel. Leaders hired from large companies rarely adapted to a nimble searcher-led business.
• Owners price businesses off a hot market. Sinatra says searchers must weigh the realistic cost of buying into an industry and whether owners have inflated valuation expectations. Buying businesses is more competitive than it has ever been.
• The opportunistic generalist searcher is fading. Search is a competitive credit market now, so searchers have to break through the noise. Better-prepared candidates, including self-funded searchers who convert to a traditional search, tend to be more successful.
• Stress became visible to the whole company. Sinatra brought 30 to 60 days of unopened personal mail into the office and a manager asked if he was okay. He began time blocking his week for exercise and rest.
• Deals break on people, not markets. In a health care business, attrition after close cost customers and the company struggled to recover. In another, a top salesperson left soon after close and that revenue was never replaced.

From Staff One HR to the Paychex sale

1. Sinatra launched the search in January 2007 with a business school classmate and closed on Staff One HR, a PEO, over a larger manufacturer also under letter of intent.
2. He bought just before the financial crisis. Clients failed or demanded fee cuts, and a workers' comp accident two or three months after close produced a $250,000 claim.
3. Three years in, the board questioned whether to continue. A proposal won at 30% above the closest competitor, plus rising pipeline and net promoter scores, restored conviction.