Buyers and Builders
00:18:12 · Greg Geronemus
[00:18:12] S1: Yeah. So back in 2010, Rick Ruback and Royce Yudkoff, I think a bit of an unlikely pair or duo, very different. Rick's very, very... You know, an academic, real sort of a Boston's... Bostonians Bostonians, Red Sox fan, you know, fond of making sort of some, you know, wisecracks here and there. Royce, a private equity giant, extremely polished, not from an academic background. They linked up. You know, I'm honestly not sure of of how they connected in the in the first place, but they developed a shared interest. And in the overall concept of, you know, getting talented MBA types into smaller enterprises. You know, much of the emphasis at a place like HBS where they use the case method and cover different business scenarios in every every class and and and use the Socratic method to facilitate, you know, dialogue amongst students. Much of the emphasis is around Fortune 500, Fortune 100, Fortune 50 companies. And they took an interest in sort of evaluating smaller firms and looking at how perhaps you know, MBA... Top MBA types can go into smaller smaller companies. So they launched a course, actual title called the financial management of small firms, which was not explicitly search fund focused. Although there was, you know, a a decent... Some some emphasis on the search fund or ETA model in their course. And and that was launched around the 2010 time frame. My my business partner was lucky enough to take that course, and that helped spark his interest and then, thus, my interest interest in the broader area of ETA. But we wanted to go a level deeper. And in the fall of two thousand eleven in our second year, we approached Rick and Royce about the idea of doing an... A small independent study, not a formal course, but a sort of a two on two where they would mentor us, and and we would get course credit to go deeper on the search fund model in anticipation of likely doing a search ourselves. That sort of initial planning for an independent study became... It it had... It sort of took on a life of its own where other other students said, I I wanna join that or I wanna join that. And what started as a two person independent project quickly morphed into a 40... You know, in in a matter of weeks or months, morphed into a 40 person course that they...
00:21:17 · Greg Geronemus
That Rick and Royce created, really sort of building the plane as they were flying it, and did a fantastic job in that first year of putting together cases and bringing in speakers and really created the best course that I took at HBS and very much to their credit. And then in the years that followed, it's become one of the staples second year curriculum where there are multiple sections, extremely high demand. You'll have students rank it as their their highest priority second year course in this lottery system that HBS has. And I feel lucky and privileged to have played a small part in that. I'm sure the class would have evolved and emerged eventually, but I think think David and I helped accelerate and put some momentum behind it. But I don't think you can underestimate the importance of that class and the efforts that Rick and Royce made. The class has inspired hundreds of HBS students to go down the path of ETA. A few years after launching the class, they also put out their book, The HBR Guide to Buying a Small Business. That has inspired probably thousands of people to go down or who... Countless people to go down the ETA path. And then I think it also created momentum for other schools to follow. I think I think Booth was next and then Kellogg and Wharton. And and now, as I mentioned earlier, there are roughly 20 different MBA programs around the The US and many others around the world that have really robust ETA curriculum. And certainly, I think it's important to acknowledge that Stanford was the first, but I I I think something, the sort of the switch flipped when Rick and Royce launched their course, and, I think that created some really robust momentum.
00:23:34 · Mikk
[00:23:34] S0: Now on... Now going a step further, the knowledge is there. The experience... Experiences are there, the track records are there. You are one of those special individuals who who did it you... Who did it successfully. I played quite a lot of tennis in my life. I... I'm I'm not very good at it. I used to be a professional volleyball player, but I just started enjoying playing tennis. So there is a book Mental Game of Tennis. So I'm just thinking further here as we were talking about mental toughness and the mindset. Should there be a book or or a small add on on top of this course, which covers all the theory about mental game of ETA or mental game of buying a business. And let's say there is one or there is going to be one. What would you... If you you had to share a few things what you've learned based on your experience, on doing this with David, what would you say to to people listening? Because the the the the education is there, the podcasts are there, the course is there. You can go and talk to those people who have done it. But what would you say when it comes to the mindset part?
00:24:42 · Greg Geronemus
[00:24:42] S1: To me, it really boils down to this idea of seeing success as the only option. You know, failure is not is not on... Is not in the cards. It's on... It's not on the table. We are going to be successful regardless. You can worry, you can entertain or let in some some doubt, but I really believe that sort... That the special entrepreneurs, whether it be startups zero to one or ETA, just view success as the only viable option. Failure is is not is not gonna happen. I'm a big you brought up sports. I'm a big Knicks fan and still on a high after last night's victory. The greatest comeback in NBA finals history against the San Antonio Spurs. Still work to do. The Knicks haven't won yet, but they're they're in a decent position. Their Knicks star Jalen Brunson was interviewed at the end of the game last night, and he was asked by a few of the interviewers, you know, you're down 29 points. You know, did you think you could come back? Did you believe that you could come back? And and he said something, you know, very similar. He said, I I entertain the prospect of... You know, that we that we might not win this game, but I never lost the belief that we would make... Find a way. And and so I... You know, there's there's so much more to be said on on mental toughness, but, you know, sometimes I hear searchers talk about, well, you know, if I come up empty handed, it's okay, or, I'll make this run at this particular target and perhaps it pan out. That's a near red flag for me. But then there's sort of a special subset that speak in the same way of failure is not an option, I will be successful. And I just think that belief and that determination is more powerful than anything else.
00:27:16 · Mikk
[00:27:16] S0: There are different ways on going down to this route. There's this education, you know how to do it, you are... You actually know you're going to succeed regardless, as you just said. So we have traditional search and we have self funded search. Someone listening, can you maybe explain both going back to basics and share some data with us? And we go more into details about the economic deal size, owner structure, ownership structure, risks and all that.
00:27:49 · Greg Geronemus
[00:27:49] S1: Sure. Yeah. So as I said, back in 2010, there was... When I was... Started learning about this ecosystem, there was really one show in town that was traditional search. When people refer to a search fund, often they're referring to traditional search. The category has broadened, and now the the umbrella of entrepreneurship through acquisition has many subcategories. The two main ones, although I think the the picture is shifting, but the two main ones over the last ten years or so have been traditional search and self funded search. I'll start with traditional search. Traditional search, you... It can be a solo entrepreneur or sometimes it's partnered like I was lucky enough to have to have David. Occasionally, you'll see a trio. But the basic concept is that you you raise seed capital, we call it search capital, which buys you the... Which buys the entrepreneurs two years worth of runway, typically, sometimes two and a half years, to go out and hunt for a business to buy. Most of that capital goes to keeping, you know, to some modest salary for the searchers or entrepreneurs, and then some miscellaneous operating expenses, legal, tax, tech tools for sourcing, and usually a provision for dead deal costs in the event that you get far along on a deal and it doesn't end up going through. The investors in that case, they take the risk that you don't find a deal. The benefit that they that they get is they get a right of first refusal on any deal that you find, and they get a... Some preferential economics on that acquisition. So they get what's called a step up. Any dollar that they put in, they get a dollar fifty's worth of credit into preferred equity in that in the transaction. Typically, traditional searchers will will go after larger deals. I think half or so are larger than 12,000,000 of enterprise value. Seeing traditional search deals get bigger and bigger. So I think that's... We saw that stat recently, but I think that you'll see deals increase in size. One of the big benefits of traditional search is not only the opportunity to go after a bigger asset, but also the ability to have those investors that back you from the outset, support you during the search, and a subset of them, two, three of those investors will join your board and really coach and mentor you all the way, all the way through, hopefully, towards a a successful exit.