Buyers and Builders
00:08:00 · Mark Sinatra
[00:08:00] S1: Sure, sure. So on the fundraise, you know, I remember, I was really fortunate, during my fundraise to have met the, you know, the the grandfather, right, of, of search, Irv Grousbeck. And I remember asking him, well, you know, for each stage of the search, how would you rate the complexity and how hard it is? He said, well, the fundraise is about, he said an eight out of 10. Running the business is more of like a, you know, five or six out of 10. The actual search was really a three out of 10, and just in terms of like how, like just, and so, you know, search part, you know, is obviously the the hardest there. The raise would... Was probably the the easiest part. But for me at that time, you know, you really had to have at least at least a half of your your fund from your network. Problem is, you know, I was... Think I just turned 30 at that time. Didn't have a, a wide network of folks that, you know, would just write me a check for for my search. But we were we were super resourceful and scrappy. You know, just reached out to obviously to to anyone and everyone, former colleagues, classmates, professors. And I will say, thankfully, like the the Wharton network was was extremely helpful and supportive in, you know, really getting us to to launch, you know, officially launch our search in January of o seven. So the search itself, going to the other part of your question, how I found the acquisition, you know, we employed a strategy of of really going, like, deep and wide as it related to brokers and investment bankers. You know, that's still a a strategy that's used to some degree nowadays. But but we also employed, more of a proprietary thesis driven approach. We started to develop a real strong interest in, you know, on what I'll call just like outsourced business services. And if you kind of like look into that and zoom in, you know, HR services was a segment of particular interest for a lot of reasons. You know, large growing market, large addressable market, recurring revenue, fragmentation. Also at the time, you know, we thought like that industry was gonna continue to to grow at mid to high single single digits at least, every year. And then lastly, which is really the x factor.
00:10:42 · Mark Sinatra
Because I know, you know, Mikk, you you you talk to a lot of, you know, investors and the x factor with the search is that you have to envision yourself really, you know, running that type of business. And there has to be some, you know, alignment of of either interests or passion or skill sets with that type of business. And I remember there's a point in time, there's an inflection point of the process where we had two deals under LOI. And one was, you know, this this, you know, outsourced HR company, PEO company, which is the one we ultimately closed on. The other one was a manufacturing firm. It was a larger deal, had some really interesting... It had grown quite a bit. There's there's a little bit of of a hair on it that we had to to diligence. But at the end of the day, you know, kinda ask ourselves, well, you know, what type of business could we actually see ourselves running and like, you know, enjoying and being, you know, impactful at? And the answer is really more the former, you know, we said, listen, we had this thesis driven approach on, you know, outsourced business services. Let's, you know, there's a reason for that. Let's go in that direction. We thought it kind of lended itself well to, you know, we viewed ourselves as generalists, right? You know, we didn't have an experience in the industry, but we thought, well, we have a good team in place. We can learn the ropes in the industry and the business, you know, initially, and then, you know, do do a good job being being really hands on running it. So that is the important distinction, you know, and what I, you know, really advise searchers nowadays is, you know, where does that relay line, right? Where, you know, the company is, is, is a good company. The industry is, is an exciting industry that that has attractive investment dynamics. But in terms of you seeing yourself in the CEO seat, where does that all align from a passion, a skill set, and an interest perspective? And and if you can figure that out, then you found your answer in terms of, like, where, you know, what's your ideal company to to run.
00:13:16 · Mikk
[00:13:16] S0: I wanna ask here, what about the underwriting risk when it comes to this acquisition? You twenty years ago and you today. How much you I know it could be like a very loaded answer, loaded question, but how do you view maybe deals and people differently compared to who were back then and all the lessons you've learned. Because it's a like Staff One, it looks like a very attractive search deal on paper, recurring revenue, succession driven seller, sticky service, fragmented market. It's... It could be a great acquisition today as well.
00:13:52 · Mark Sinatra
[00:13:52] S1: Yeah, that's a really good question because the environment... I mean, you know, it's different nowadays, right? But a lot of the core tenants of what investors look for and search operators look for in acquisitions have stayed the same, right? I mean, it's still kind of tried and true predictable revenue streams, recurring or highly, highly reoccurring. Potential to to scale, like you said, you know, large growing, industries, certain level of fragmentation. But at the same time, there's a there's a lot that has changed since that time. You know, number one, we obviously have significant AI opportunities and potential for disruption. And so, so that is certainly a lens that that, you know, searchers and investors really look through when when you're, you know, they're evaluating opportunities today is AI more of an opportunity or or disruptive threat to to the mode of that business? Number two would be the proliferation of private equity, particularly like in the in the lower middle market. And so what that has done is it's been a double edged sword. Right? On one hand, private equity has been a fantastic partner on on the exit side for searcher operated businesses. But at the same time, private equity has has also, you know, been an increasingly, you know, more kind of serious, you know, kind of competitive, you know, competitor, for for a lot of, search acquired companies on the buy side. Whether that's, you know, as a platform or or what's maybe more common as, an add on to a a PE backed platform. And so now you have to look as a searcher, industries that could be attractive, you know, twenty years ago, right, like the PEO industry as an example, that didn't have really barely any private equity at that time. Now, there's a lot of private equity in that industry, right? There's a lot of private equity in HVAC. There's a lot of private equity in MSPs. So, and you know, the list kind of goes on and on a bit. So, you know, you got to be really mindful of, okay, if you're searching in an industry, what's what, you know, is there kind of the realistic cost to buy into that industry? And are you gonna be, you know, spinning your wheels, talking to owners at, you know, that have this really inflated valuation expectations based on the market.
00:16:39 · Mark Sinatra
And so, and then number three, is, and this kind of relates more directly to your question, my experience with my search operated company, One, the the amount of technological tools that exist nowadays to foster workforce collaboration and to make that seamless, efficient, effective across the world, across countries, across states and regions, is is quite quite impressive. Right? There's just so many options out there. And when I think back to to to my experience, you know, at at, you know, Staff One, you know, we just didn't have those level of collaborative tools like like the one we're on now. Right? You know, Zoom, Teams, Slack, etcetera, etcetera. And so I asked myself, well, you know, if you had a business, and, you know, in my case, you know, I ended up moving that that company down down to Dallas after a couple years, you know, whatever, I just kept the headquarters there. And I probably, you know, would've if, you know, we had all of these collaborative, tools and the technology that we had today. Right? So in other words, like, you know, thinking at a business and, you know, the remote workforce, and there's certainly been a reversion, closer reversion back to to to, you know, working in the office. But still, you know, a lot of small medium sized companies are still hybrid or remote and they're using that as an advantage to grow. They're using that as an advantage to to hire because they're not constricted or constrained by geographical, borders. And so that's a really interesting dynamic today that didn't exist twenty years ago.
00:18:34 · Mikk
[00:18:34] S0: So you bought the business very close into the great financial crisis. Could you explain the first maybe a year, you as a first time buyer operating the business? Maybe you can share like how much depth you were using and how was the day to day when it comes to you operating the business? And how was the reality now? Because again, it was your first very first acquisition.