Buyers and Builders
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.
00:22:09 · Felix Jander
[00:22:09] S1: I mean, first acquisition is the hardest. That's also why we decided to do it, even though it was a small company. Because then you have a story to tell, right? So it's not only PowerPoint slides that you're going to share with your next seller, but you can tell them, look, talk to this guy. He has always sold to us. He can give you a proof point that we trustworthy guys. We we pay the purchase price, which is also often a fear when people see you first that you can't pay. Yeah. That's that's that's reality that many people apparently don't say they have the money but then they don't. Yeah and so the second and the third acquisition was easier and then after the third acquisition you're already a group of companies and then you can actually visualize your vision of like ah yeah we're going to have some central HR function and some central recruiting and then they're going to help you with recruiting doctors which is a big issue for everyone in the market. The story got tangible and that helped us a lot. To your question, so the first deals we did all equity which I would also in hindsight do exactly the same way. And then we did a debt financing together with a debt fund because so there's two reasons. So first of all, it's speed. So when you do the first deals on equity, then obviously faster than if you negotiate with a bank every single time. And secondly debt funds funds debt or specialty debt is absolutely preferable in my point of view. Yes you might pay like an additional seven eight bips of interest but you can make it a 100% bullet and that's super super helpful when it comes to cash flow because you don't have amortization of the loan over the years. So you can use the cash flow for one or two more acquisitions and that in the end gives you way more IRR than these. Let's total it to 10% interest. And so speed plus debt fund debt is the two reasons and debt funds only start up from a certain size. So you need 2,000,000 to $3,000,000 EBITDA to have such a debt package and that's basically the reason that's also how we did it. So we did I think four to five acquisitions then we did the debt funds financing on the holding and we also did a recap. We got some additional debt for the deals that we already made. The sixth and seventh deal was kind of 100% debt financed, so to say. And that played out pretty well for us.