Buyers and Builders
00:13:32 · Felix Jander
[00:13:32] S1: So actually, I mean, if you want to have a frank response, it was kind of, I think the best time of my life. Yeah, I was never again. So it's, you know, it's very you building every day something. It's very creative as well. When you're iterating, you're sparring with smart people. So you don't have the burden of leadership, Of developing people, which sometimes also is tough and needs a lot of effort. You're just surrounded by like minded smart people. You can iterate every day and you move very fast. So I I found that back in the days, I found it super cool. Yeah. So like the first six to twelve months, I tell everyone were were the best, so to say. Yeah. Also the times afterwards were were super cool. Yeah. But like this fast moving pace, really intrigued. Yeah. And look, by nature, I'm actually... I I wouldn't say I'm such a brave person. Actually, I'm pretty cautious, and I wouldn't say hesitant, but but cautious, I think, is better to say because I could have also started something similar just right after BCG. Right? But I did not feel ready. I first wanted to get some more entrepreneurial experience and so on. I wouldn't even say that I was like the classical startup founder that did this bootstrapping. Don't know, of €100 a day. Had some savings. I knew I was fine, know. Still obviously it was also a tough period. Mean when we tried to save every cent we could we could run longer for looking for businesses and markets. And I remember very well when Alex and I, I mean we slept together in Ibis hotels for €60 a night. We were very cost conscious. And yeah, but it was cool. Yeah, I liked it. Though the sleep was not the best, yeah.
00:15:14 · Mikk
[00:15:14] S0: You mentioned the VC background. What's interesting the other day, a week ago, I had a podcast with a gentleman, Eric. He built a startup, but during COVID, they had to let go 80 people and eventually close down the business. And then he started reading about Constellation Software and eventually he found an investor and partner. And now they bought over 10 businesses and building this diversified holding company in Malaysia. So it's interesting to see in the future, the guys from the VC world, how many of them might want to or willing to try the, let's call it more stable route of buying a business with a positive cash flow.
00:15:54 · Felix Jander
[00:15:54] S1: Yeah, I see that trend totally. Yeah, like in Berlin, have, let's name some funds you have Creandum, have Cherry Ventures, have Project A, General Catalyst and the likes who all move into that space and also have done some investments in roll ups already. I feel I mean they have the difficulty of telling their LPs. I mean for their LPs they're still in the asset class of venture capital right which is in mindset of I produce one outlier and nine write offs. But the outlier has to return more than 10x and putting that return expectation on roll up I think is unhealthy because in the end you're going to try to reach that expectation even if it's not 10x. But a roll up hardly is an eight, nine, 10x case. So if you want to have that possibility of achieving it, then you need to take more risks in the beginning, which means you do something with software, you have a burn rate, you hire upfront a lot of people whom you are then hoping to generate some margin value creation or some growth value creation or so. But you know it's a significant risk that they're taking there and I think they're making it a bet so to say. And I think that's what they're doing is they're taking the beauty out of this roll up concept, which is the stability, is buying stable cash flows, which also is leveraged by the way, that you can leverage quite well. And they put on a lot more equity and a lot more risk and I don't think that's healthy for the concept. So what we try to do with Arsipa is that we try to stay out of those markets. So we try to stay out of those markets that are prone to be VC financed. It also tends to be the larger ones. So real estate brokers or tax advisors in Germany, very hot topics. Where VCs move into very large markets, super many targets, can enter at low multiples, but then we say, okay, look, maybe that's not our market. We rather focus on something more niche y where we don't have that risk because it kills your entry multiples when you have too much money in the market.
00:18:00 · Mikk
[00:18:00] S0: I want to spend a bit of more time on the very early days of now you getting the meetings, because it's like 100% proprietary deal flow. You didn't do it through a broker or investment banker. How were the first meetings and conversations with owner operators and maybe most importantly, valuation part of you going there, I want to buy your business, and then they will give you those extremely high valuation expectations. How did you survive this period and found the good ones?
00:18:30 · Felix Jander
[00:18:30] S1: So I would say general answer to this topic is it depends a lot how mature your market is in terms of M and A. What we had back in the days with occupational health is a very immature M and A market. So they had hardly seen any offers of any competitor nor any M and A broker. There is some other markets in Germany for instance dentists. Every dentist has received at least five to 10 letters if the dentist is in a certain size and so they know what EBITDA is, they know the multiples, have an understanding of net debt and so on and so forth. So our market was very uneducated. So when you do this organic outreach what we first did is kind of educate them a bit like look this is evaluation this is how we would do it we wouldn't pay everything up front we want to delay some components of the purchase price so there was a lot of education part to it and there was also a lot of you don't need let's not call it waiting but patience. So because you hardly hit anyone that is exactly at that point where they tell you okay I want to sell my company within the next four months. That is the key advantage of M and A brokers. There you know the deal is actionable. When you do organic outreach you have to go their pace and you have to be there at the point where they think of selling the company but often you reach them at a point where they didn't think about it yet or are not super keen on selling within a short time frame. And so you need to be patient as well and wait for them that it's the right time. So what we often did is we did a meeting, did a first meeting, we explained our concept, our vision, how valuations work sometimes we also dropped some numbers but we didn't do that with many targets and then we told them look we would be really interested in taking this further if you're ready then let us know then we do evaluation we sign NDA we look at your financials and then within five days we can tell you where we are like ballpark numbers. And some of them reached out to us two months later and told me yes, have a look at this, some of them right away and some of them like two years later.
00:20:41 · Mikk, Felix Jander
[00:20:41] S0: And let's talk about the first acquisition, because after this one, nothing will be the same when it comes to confidence and actual belief that we can do that. So tell me about the first acquisition. [00:20:53] S1: So it was actually too small, our first acquisition. Know everyone told us you need a nucleus that is sizable enough that has like 1,000,000 EBITDA or more. So and then our first acquisition was like 350,000 EBITDA so actually way too small. Yeah but we were so keen on the market that we figured okay let's do it anyway. Know when a transaction is actionable then you also either you do it or someone else does it in the end. So we decided to do the first and it was a pretty cool doctor's practice in Hildesheim, that's in Lower Saxony in Germany close to Hannover. And it was small. It was like three, four doctors only plus like seven, eight other employees. So that's totaled it to 11 maybe, which is shockingly small for a small deal. But we had a very good relationship to the seller, to the founder of the company. And together with him and also his successor was quite a good deal. [00:21:54] S0: What was the story from the first acquisition to five acquisition and from which one you started using DEBT? Because I guess in the first two, three, four acquisitions, it's not very clear yet. And you can maybe share more about the DEBT side of doing this.