Buyers and Builders
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.
00:30:47 · Greg Geronemus
That is traditional search. And when people talk about the great returns in search, they're usually referencing the Stanford study. The Stanford study exclusively consists of traditional search. Self funded search has emerged in a meaningful way in the last ten, twelve years or so, and that's sort of the practice of hunting for a deal without upfront search capital. So the self funded part refers to the search phase. So it could be you, Mikk. You could say, you know what? Done with podcasts. I'm gonna I'm gonna look for a business to buy, and I'm gonna go without salary. I'm gonna hunt for a company. And, you know, at the time of the acquisition, typically, you're raising some equity from third parties. Some people are in a position to put to... If they have significant savings, to write the entire equity check themselves. And from a debt perspective, self funded search has not exclusively, but largely become synonymous with SBA loans where searchers have to put up a personal guarantee. There's some benefits to the SBA. It's a great SBA loan program. It's a great program. There obviously... There's some downsides as well with the personal guarantee. And for the most part, in contrast to traditional search deals where the deals can be a bit larger, Self funded search is largely associated with smaller deals. Often, you know, three in the sort of three to eight million dollars of enterprise value, but off... But also many times quite a bit smaller than three. You'll see, you know, a lot of these deals are $600,000 of EBITDA or seller's discretionary earnings, and searchers are buying them for $2,100,000. So we're talking about, you know, all all search deals, even traditional search in the world of investments and private equity. It's it's all small potatoes, but self funded search is quite a bit smaller. So there's a lot of debate as to what the the best model is and what somebody should pursue. You know, I have... I certainly... I'll admit I have some biases. I think when it comes down to it, it's really a matter of personal preference and people should do exhaustive research and understand their personal circumstances to really figure out what's best for them. There's no question that self funded search is, it's a great option for many. It's also not possible for most people.
00:33:40 · Greg Geronemus
The idea of working without any income, incurring deal expenses for one, two years. That's just... That's a nice idea for many, but it's not... It's often not on the table. But for those who have savings, it can... And they have an interest in a particular... Maybe they wanna go for something really small, maybe more a lifestyle business where they have... One of the benefits or features is that you can own a greater percentage of the company, sometimes up to 60 to 80% of the company. Whereas in traditional search, you're often owning more in the 25 to 30% range. There's also a perception of... I think this is maybe more perception than reality. The opportunity for greater autonomy in self funded search. You don't have a board. It doesn't feel like you have anybody to answer to. Self funded search has often become a vehicle for people who have a hard geographic constraint. So, you know, if somebody is... They're living in Milwaukee, Wisconsin, their family's rooted there, they wanna go find a business to buy, and they can't move. They're not gonna move, but they wanna be an ETA entrepreneur. They're not raising a traditional search. Traditional search investors, Footbridge, others will not back a Milwaukee focused traditional search. The odds of acquiring a business, especially one of sufficient scale, are just too low to be backable. But could somebody find a very small business that they could SBA finance and raise a little bit of outside equity? Sure. So that can be a good reason to go self funded. Where I think you have in this sort of self funded versus traditional search debate, where I think you have people get it sort of incorrect or wrong is there's a belief that in self funded search by virtue of the larger ownership percentage that there's greater economic upside. And I think that that is simply a fallacy. That's just not correct. People conflate ownership percentage with dollars that you can earn, And there's just so much more nuance to that. It is... Yes. It's a larger percentage of the pie, but it's a much smaller pie. So that's that's one. Two, there are significant and really difficult implications of being in a really small business. You have less cash flow to reinvest. It's much harder to attract and retain talent. It's much harder for an operator to extricate themselves from the day to day of a business.