How Two First-Time CEOs Bought a $5M EBITDA Business | Greg Geronemus Interview

Two first-time CEOs buy smarTours and net nearly 5x

Greg Geronemus and David Rosner bought smarTours, a group tour operator for older Americans, as first-time CEOs through a search fund. Their search was constrained to the Tri-State area, so they sourced through in-person networking rather than an industry thesis. A low entry multiple and a large seller note gave them room to learn the business, survive external shocks, and grow through direct mail and B2B2C distribution, producing just under a 5x net return and just under a 50% IRR four years later.

Takeaways

• They raised search capital from six investors. Geronemus and Rosner met at Harvard Business School in 2010 and could not self-fund, so they raised search capital from six backers for up to two years. The search took about eighteen months.
• The deal came through old-fashioned networking. They sent about a thousand emails a week and met accountants, lawyers, insurance brokers and wealth managers. A Long Island broker breakfast and BDO's Todd Kinney led to accountant Bob Cohen, whose client was for sale.
• smarTours was asset-light with loyal older travelers. The 1995-vintage group tour operator had customers who booked twelve to fifteen months ahead and took ten to twenty-five repeat trips. It had negative working capital, no CapEx, six employees, and a seller embedded in everything.
• They bought at about five times EBITDA. The $29m deal closed on 10/11/2013 with a 50% seller note of $14.5m at 4%, $5m senior bank debt and $10m equity. The low multiple and cheap seller note bought them time.
• They learned first, then found distribution growth. Neither had operating experience, so they acted as flies on the wall while the seller stayed under a year. Digital marketing tests failed. In year three, direct mail and B2B2C through universities, churches, synagogues, retirement communities and chambers accelerated growth.
• Ebola and later shocks tested the thesis. Ebola-driven cancellations in South Africa, about 25% of revenue and 30% of EBITDA, were the first crisis. The events did not change their view on leverage but changed how they saw top-line growth. They delevered aggressively.
• Price and structure are set at entry. Geronemus says those are the only things you cannot change later. The exit returned just under 5x net and just under 50% IRR, with debt down from $19.5m to a few million and EBITDA up about 50%.

The smarTours sale process

1. A financial buyer approached in late 2016, prompting Geronemus and Rosner to consider a sale.
2. They hired Fidus Partners, led by John Ross, to run the process.
3. Seventy-eight firms signed NDAs, 34 submitted indications of interest, and 12 management meetings followed.