I continue exploring search funds and with this episode I talk with a searcher who is in the middle of the process and thus is experiencing it’s ups and downs live. My guest, Jules Brenner, runs a self-funded search called Manufacturing Succession and as the name implies is focused on acquiring a manufacturing company. Jules has an interesting background with engineering and start-ups and talks about how that background guides his search. In addition to life as a searcher, we talk about preparing for a self-funded search, owner outreach, and searching as an engineer.
If you’re an investor interested in manufacturing companies or just want to connect and learn more about Jules, go to manufacturingsuccession.com/contact.
Live Oak Bank – Live Oak Bank is a seasoned SBA lender focused on search funds, independent sponsors, private equity firms, and individuals looking to acquire small companies. Live Oak has closed billions of dollars in SBA financing and is actively looking to help more small company investors across the country. If you are in the process of acquiring a company or thinking about starting a search, contact Live Oak directly to start a conversation at liveoakbank.com/contactus.
Hood & Strong, LLP – Hood & Strong is a CPA firm with a long history of working with search funds and private equity firms on diligence, assurance, tax services, and more. Hood & Strong is highly skilled in working with search funds, providing quality of earnings and due diligence services during the search, along with assurance and tax services post-acquisition. They offer a unique way to approach acquisition diligence and manage costs effectively. To learn more about how Hood & Strong can help your search, acquisition, and beyond, please email one of their partners Jerry Zhou at [email protected].
Traction Capital Partners – Traction acquires companies in the Pacific Northwest with between $1-5m in EBITDA and has acquired two companies to date. Visit their website or contact one of the partners, Justin Turner, directly to learn more.
I’ve talked with searchers who have completed their search and they acquired a company and that was all well and good but I also wanted to hear from searchers who were in the middle of that search and their emotions and the ups and downs were still very raw and they lived them every day. And so I’m glad you were able to join. Do you want to start by sharing a little bit about your background, career, how you got into starting a search fund?
Thanks Alex for having me always happy to get my thoughts on searches and then help the search fund community. I’ll give you a background about myself first. So I’m originally from New York City, born and raised in Bay Ridge, Brooklyn, if anyone knows it. I was at NYU, I was a mechanical, aerospace and business major. I spent a lot of time in different engineering projects, different machine shop endeavors, I’ve done everything from underwater vehicles, cars, aerospace stuff, medical stuff, electric vehicles, and my LinkedIn will probably do a better job of showing you some of these projects.
But really when I first went through all these companies and had all these experiences, I spent a lot of time trying to learn from founders, taking jobs that maybe normally wouldn’t be so effective for a longterm career and more instead of how can I learn from someone else at a different stage of their business and then how can I use that to impact my future? So I went in and focused on learning through most of my career through internships and some professional roles and so on. And I kept coming to startups at different stages, anywhere from a… just that of a C fund anywhere to getting to B.
And the thing I kept noticing is the founder always had to, A, keep the customers happy, B, keep the investors happy but, C, try to still figure out their product-market fit and keep consistently adjusting to that. So my thinking for this was I wanted to be in a situation now where I didn’t have to do that. I could instead, focus on how do I innovate, how do I keep customers and investors happy and so on? And how do I improve something that already exists and build it into something bigger?
So I was just thinking about how to do this and I was doing some research and I stumbled upon this entrepreneurship through acquisition model. And I immediately got pretty intrigued I actually had a friend back in Brooklyn where I grew up, his father bought a business out from the previous owner, I think it was like a seller finance type thing, but I always kind of kept in the back of my mind as that was interesting, you don’t have to start from nothing. And did more research, I did some of the typical stuff that I’m sure searchers mostly do, I read the Harvard Business Review book, I read Buy Then Build, did my research on Searchfunder.com, found out about that. And ultimately just decided I want to take the plunge and get into this. And I want to look at this more from the perspective of how can I start one business, improve that, and build a portfolio, and then eventually have some sort of exit.
And the other thing I really thought about when getting into this, is kind of a theme that I’ve still been kind of going on in my whole career thus far, and that’s trying to focus more on the learning. So I go into this thinking that if I come out of this not making a ton of money, and then just come out with a ton of really good experience, I think that was a successful search and a successful endeavor here. And hopefully, I can leverage that into the future to actually have a skill where at any point, if I’m living at in any state, any part of the country, doing whatever I want to do, at any point, I can leverage all this experience that I learned now and find a business that exists and build that and grow that from anywhere. So I really think search funds are exciting for that reason, you have the skill that you can take onto the future and always use.
What steps did you take then to actually set up the search fund? How much time did you take before launching to think about your strategy from the potential research you did. Why’d you choose self-funded? What was your thought process going into launching the search fund?
Yeah, starting out, I kind of did sort of a realistic assessment, that’s first of all, that the thing that you want to be clear of, and I’ve had a bunch of searchers reach out to me and asked for my thoughts on this. And what I say is when you’re doing a search, some people are treating it as if they’re almost building a startup and they’re having to just kind of figure out what’s that awesome idea that I should pursue and so on and build from there. And because of that, they spend way too much time on that ideation. So I fell into that trap when I started doing that as well. So I kind of had my startup hat on for too long, if you will.
So kicking this off, I was like, what’s a good industry, what’s exciting now, where can I find the most opportunity to buy a lot of businesses and so on. I put more thought into it, I really said, “Well, at the end of the day, whatever, I find, I’m going to need to convince someone to fund me. And that’s going to be based primarily off whether, A, it’s a good deal, B, whether they actually believe that I can pull it off and a lot of that’s going to come from my past experience.” So when I kicked off, I thought about, “Well, let me do an assessment on the things I’ve done. And let me see what I can actually realistically explain to someone that I can handle.” So as I did that, I thought machine shops and manufacturing. And that was something that I know really well, and I know I can handle. And I know I can come in and take some of the experience from sales and business development that I’ve done in the past and apply that and really grow in these operations.
So kicking it off, as I thought about that, I said, “Okay, well, let’s call this manufacturing succession partners, let’s focus on manufacturing more broadly, but let’s try to at least focus in on a few different issues so we’re not just running around all over the place and searching for something we don’t know.” So starting there, I gave it kind of this general title. And there said, “Well, based on my experience and what I’ve seen from past operations I visited or heard of, what industries provide me with the highest likelihood that I’ll be able to find a business within our likelihood, basically what has the maximum amount of supply of businesses out there and then also what industry has some path towards an exit?” So I didn’t want to come in to strategy where I’m just buying something and running it indefinitely for 20, 30 years like some search funders might want to do, I instead, wants to come together and build a portfolio.
So I thought about that, and I also thought about what are we going to be sort of interesting drivers to how do I select these businesses basically? So I thought about that and I said, “Well, we need something that has some replaces parts. We need something where they’re niche enough to have a moat where if you joined from day one, all the customers, aren’t just going to leave because there’s someone with less experience coming in, there’s a reason they’re buying from these types of companies.” So I just started listing out these parameters and I kind of got myself thinking, well, the real thing that I’ve been interested for a while, and obviously biased due to my college degree was aerospace.
So I wanted to spend a good amount of time in that industry. And I didn’t know the types of players in there and so on. And then I also wanted to focus on equipment manufacturing businesses, because they had that bit of, A, predictability so they tended to have longer order time. So you might get a machine a year later so you have to sign some contracts, so there was predictability. And there’s also this need for replacement parts in both aerospace and equipment. So you knew that there was a reason a customer had to keep buying from you and especially if you made the machine. I mean, even if the owner changed, it’s at least easier to keep buying from the same person every time.
So going to that, I just started sort of laying the foundation together of what this would look like from a sort of a qualitative search, what that ideal candidate would look like. And from there, I just kind of said, “Well, this is enough to get started.” Because a lot of searches are coming in, building these models and saying, “Oh, this industry is exciting for this, that, and so on.”
And that’s all good but as you’re going through the search and starting to limit your parameters and what you’re willing to do, whether that be the deal size, whether that’d be the deal location, whether that be, you find an owner that sort of your timing to buy, sort of happens to match with their timing to sell. You’re really going to run into such a small pool of companies that doing all that is going to slow you down. So you’re a bit better off thinking about this in a serendipitous manner. I come in with a few restrictions, but I don’t want to get too picky when I don’t even know what the market looks like right now.
So falling into all that, I put that all together and said, “Okay, so I have enough to go off of here. Let me start thinking about where I’m going to go location-wise.” Well, I’m based in California, I’m from New York City so any of those locations are definitely exciting, but I also didn’t want to concentrate on other hubs that have aerospace, which is now what I’m more biased towards. And for that reason, I added in Texas, Arizona, Colorado, Florida. And I said, those are going to be my initial strike regions and the other thing I did, which searchers don’t necessarily need to do was I wanted to at least try to be near some major city then, 30 or 40 miles. So I made that as a potential nice to have, but really I’m open to deals all across the country.
So having all that in mind I still knew that I call it like it is, I’m an engineer with some sales experience, I’m not a deal guy. So I had made sure that either when I’m thinking about, whether we’re going to go funded or self-funded, I had to think about what was going to happen. So when you think about funded, you, A, have investors that are essentially saying that they will invest in your deal if a deal does come up. So you do have that investor pool sort of ready from day one, but you also do get really strong advisors and that’s really, really important. I always joke and say, “You’re only kind of smart enough to know what you don’t know.”
Yeah, I knew that there was a lot that I needed to fill in and to have people that would help me through so when I looked at this, I said that if I go self-funded, which, fortunately, I was in some position to do so, that at least I’ll be able to have flexibility with the deal sizes and so on. And then from there, I decided that the smart thing to do would at least be to put together some people that understood what they were doing and could help guide me through this. So forming that, I started to think about what those people would look like and decided that I need someone with some level of financial or investment banking experience someone with some auditor or accounting experience, and then also someone with some legal experience.
And I put together an initial team just reaching out on LinkedIn and having conversations with the people I’m really happy about that have been really helpful in guiding this all through. I guess the last thing to touch on would be we went self-funded so we wanted to make sure that we were at least in a position where we can try to take advantage of an SBA note. So when I was determining sort of the deal size that we’d be going after, I said, well an SBA note, we’ll go to five, say we can stack some equity on there, some more loans we’ll probably be looking somewhere like a seven, eight, or nine purchase price and max, and that tends to fall within a one to three million EBITDA range. So I set that as my initial target. And that’s what we’ve been looking for.
And you alluded to it a little bit, but can you elaborate more on some of the ways you spend your time preparing for research that maybe you would’ve done a little bit differently with hindsight?
Yeah, that’s a really good question, so I have the engineering mindset just because of my college education and for that reason that I’m biased towards certain ways of thinking, some are good, some are definitely bad. Overthinking is probably the thing that I’ve done too much in the early stages of the search. I think, as I highlighted, you want to kick it off, don’t be so rigid on exactly the type of deal just decide on a domain that you realistically think that you’d be happy in and that you think can summon, that you actually be… actually have success there. But really, you don’t need to read everything out there in the world. But I’ve had search funders reach out and say, “Oh, how am I going to get this funded? How am I going to do this, how am I going to do that?”
Well, the challenge is you don’t always know. A lot of it’s going to come down to you finding a really good deal. And in my experience, there’s a lot of people out there ready to fund good deals. And in fact, you’d be doing them a service by coming to them with something really interesting and on good terms. So I think you have to make sure you’re not worrying about those things and instead, just read just a few things, focus on a few high-level resources, the Harvard Business Review book that was great, Buy then Build was great. I think going on searchfunder.com also really helps because you get this feeling of a community and you’re actually exposed to how helpful people are on there. So it’s pretty surprising, it’s one of the few things I’ve seen where you can come in and post something and immediately 10 people offer their opinion and there’s lots of investors and lenders and so on.
And it’s really, the more you see it as this kind of somewhat structured thing, the more helpful it is, there’s a process through it, starting out about your initial kind of thesis is the one thing that you kind of do you and you think about, and once you get through that, everything kind of moves. There’s only a fixed amount of companies that operate in your certain parameters. Once you called them all and talked to them all, well, if there’s no one interested, then you have to try something else. It’s important for you to understand that, there’s only so much you can do in certain domains.
And then once you kind of understand that thinking, I think it’s really important to understand sort of who are the stakeholders in this whole thing that you’re doing. So you have the business brokers, you have people who are going to be bringing deal flow to you, you have the lenders. So the lenders is financial arms, I put investors and so on who you’re going to talk to after you find these deals and you want to also at least have some conversations with the professional services side, the accounts and the lawyers, they’re going to be very important to helping you guide this.
And once you break that down, I think it’s really important to understand, well, what do you need to do first? In my case, I spent the initial part of the search after putting together the advisors, focusing on the professional services. And I think I spent about two, three weeks on it. So not that much time, but I really wanted to make sure that I had a good pipeline of people that I trusted and could help this through once we did find an interesting opportunity. So I think that’s really important, I still, looking back at it, would do that. I probably wouldn’t do it so kind of structured all in one kind of two, three-way shot. I’d probably spread that out of it more, but I definitely would try to at least start those conversations a bit earlier because that’s something you just might want to get out of the way.
The other thing that’s really important is you want to get your name and your search funds name known to brokers as soon as you possibly can. And I actually always recommend calling them rather than sending an email or applying through the website, just give them a call, and introduce yourself, let them know who you are, let them know what you look for and just be friendly with them because it’s really important to have people like that thinking of you as at least in their top 10 companies that they think of once a deal comes to them. So really establishing yourself on general brokers, Sunbelts, Transworlds of the world but also going to some of those more boutique ones, Generational Equity, UVB, putting yourself on that, and so it was really helpful. And just understanding that once you kind of laid out the initial structural groundwork, then you can kind of kick off the search from there.
Yeah, and earlier in our call, you talked about the various phases of your search. Would you be able to elaborate and go into detail on each phase and how you’ve seen the search process go?
I guess, if we’re timelining it here, there was that initial find the idea on then orchestrate it and then go for advisers and then go for the professional services and then to go for the brokers, it’s in that and that order looking back at it, I probably would do it the same aside from the accountant side, the accounting and the lawyer side, I’d spread that out through the whole phase but have that be roughly the same. At that point, you definitely, once you’ve just told brokers what you’re looking for, and so on, you want to start thinking about how you’re going to source deals on your own.
So that this one, there’s a few ways of doing it, but the way I did it was I downloaded a list of NAICS codes. So just designated codes based on the types of companies and types of industries, for people who don’t know easily find that, it’s spelled N-A-I-C-S. Once you identify NAICS codes that you’re interested in, for me, I was interested in manufacturing so I just went down that list, looked at anything that I thought would be intriguing. I found that also important to not be so picky. So for example, if it has screw manufacturing and I wasn’t interested in screws that might not be a basis to eliminate them because they might be making screws for something that I am interested in, such as aerospace.
So I think being a little bit open-minded on that, putting together that initial list, then what you can do is get a membership to a Dun & Bradstreet. I found that really helpful and you can actually import the whole list of those NAICS codes in there. For me, what I did, and you don’t have to do this. So I downloaded a full list of everything in a country first that had that fit. But then I also went in and I used, I just Googled online zip code from generator. And I put in as zip code say, for example, Los Angeles center of town. And then I just told them, give me every zip code, 30 miles away. And they would give you a list. You then take that list. You can actually just import it as a CSV and straight into that Dun & Bradstreet, and it’ll give you all the companies, and then you can download that list. And you basically have your initial goals.
So once you have all that and all these pieces are starting to move together, it’s really important that you establish a CRM system or some way of tracking everything. And looking back on it, I spent way too much time thinking an Excel sheet would be a good solution for this, but it got out of hand so quickly. So I made sure to go and find a good CRM. I come from a sales background, so doing this, wasn’t too out of the ordinary for me. But I started initially on Zendesk which is what I was just used to based on my prior professional experiences. But I actually found something called Salesmates, salesmates.io. I highly recommend it, it’s much cheaper and it offers all the services and you can actually make multiple pipelines.
So I have business brokers, bankers, private equities, mezzanine, deal hunts, and so on, all broken down on there. And I just thought about a good organizational system for all of this. I made deals, as they call it in Salesmate, for all of it. Imported the brokers, any of the private equity funds I talked to, I just put them all in there and make sure I have a log of my conversations and just keep things organized them. When I would say I got that NAICS list, I just went through it and did sort of a qualitative check if you will, just look at the business’s webpage said, “Okay, I’m interested. This looks okay.” Highlighted all of them out.
Once I got to the point of businesses that I’m actually interested in, I would just double-check that none of them were owned by any larger conglomerates. This is really frequent than aerospace, there’s a lot of M&As to start with. So I ended up eliminating a bunch of them and came with a list of businesses I was interested in, I think if I’m remembering my numbers correctly, once I went within 30 or 40 miles outside of cities that I was looking at, came down to something like 2000 or so businesses to start with, and then that list got narrowed down to like 400 after all the qualitative reviews and all that, then about to probably about low 300 after I removed the ones that were already owned by someone else.
And then what I would do to save time, and maybe if someone has an intern, they can look at doing this, but I just went on Upwork, found people on there that’ll work for a lower hourly rate in another country and just told them, “Hey, I need you to find out who the owner is.” Frequently, these Dun & Bradstreet services we’ll have that on there. So you can just put it in there and find out who the owner is and figure out all the certain parameters. I looked a lot on the years when they were founded. So I kind of made an assumption that if something was founded a while ago, so basically within a realistic timeline of one owner owning it, say something like 50 years back, the owner might be in his 70s.
So I’d have that in there, sort of that list down, have them find the owners, have them find the owners, emails and contact information, put that into my CRM, made sure I understood, did this owner just take over? Maybe it’s the son, maybe it’s this, maybe it’s that and really try to understand before I made the calls, and just went on and started cold calling companies and seeing who’s interested in selling. And if they’re not just being polite about it and saying, “I’m here, if you are, great, contact me in the future, if not, no problem.” So that’s about where things were. And we have the business that are presenting were sending us listings now, and then we also have the proprietary search going as well.
Once you have the list of owners and you’re at the stage where you need to start making calls, how do you tell your story to that owner who’s never talked to you before and how do you get them to, at least trust that you’re interested in their business and you’re not scamming them or something like that. How do you get that trust with an owner and then tell your story?
I think that the first thing that you got to understand it, and this took me a bunch of calls and meetings to really understand this and I kind of thought about it, but I didn’t really get it, was that a lot of these owners are wary, they’re not sure who you are. First of all, you’re most likely a kid to them, if you’re like 30 and they’re in 70, you’re probably a kid in their eyes, maybe the age of their children. So they’re going to have that sort of thinking when they see you anyway. So you have to be aware that they might be looking down on you, not in necessarily a bad way, but you’re really trying to convince them that, A, you’re legitimate, because what if you’re a competitor calling just to understand their financial situation and so on. And that sounds crazy, but I have had owners that legitimately thought I was with competitors and I show them everything else. You want to make sure you’re thinking about this when you’re making these calls.
So I guess if you’re going to call in, you’re going to 99% of the time get a secretary, try to see if the owner’s information is online, but try to call don’t email. A lot of people email first, I definitely would recommend calling. Some of these guys are so old. They don’t even know how to use email. You call in and you just asked to speak to the owner, tell them you’re a firm or whatever, looking to talk to the owner. And assuming they let you through to the owner, you talked to them and you want to have some pitch ready, you don’t want to just say, “Oh,” just start stuttering and kind of having a weird conversation, you want to make sure you have some sort of pitch ready and you just want to ask them, have you ever thought about a transition or a sale?
They don’t have, at least in my experience, this immediate pop and most likely they’re not going be someone that you’re going to be able to work with today. And maybe in the future, something happens maybe, again, more motivated for some reason, but really from what I’ve found, unless they’re immediately from, “Yeah, you know what, I was actually about to list it.” Or some answer like that, that shows that it’s similar to like an off-market deal that’s usually a really good sign. So when you’re calling in, you want to try to draw those answers. And you also want to try to find any similarities that you have with the owner beforehand.So if you have a similar educational background or you grew up in a similar region or whatever the case is, you want to try to almost sneak that in into the first part of your pitch, just so they understand this is a person who’s calling them that at the end of the day potentially reminds them of a younger version of themselves. And that’s really, at least from the conversations I’ve had with people who invest in search funders and so on, that’s one of the big edges we have. We’re not coming off as this huge private equity fund or instead of coming off of someone who’s very relatable and they can trust is actually going to run the business properly.
So that’s what you want to keep aware of, the real things you can offer some of these, especially if you’re a self-funded searcher, you’re not going to be able to move as quickly as an all-cash buyer and so on. So you really want to make sure that there’s some really strong trust-building between you two and a lot of that comes to trying to bond them on things that you’ve already done before. So I’d make sure I try to sneak that in very quickly to the conversation.
And the thing that’s also important as well is and also, but you don’t want to be too aggressive on these calls. You want to sort of build trust as you go. So you’re having the initial call. You can’t assume that the seller is just sitting around doing nothing all day, and they’re ready to talk to you for 15 minutes about your experience and if they’re selling. You have to treat that first call is just like a, “Hey, I’m interesting for these reasons that remind you of yourself, whatever it is, can we find a time to talk later next week?” And if they sounded interesting and they find time, talk to you next week, most likely you’ll be able to talk a bit further and understand their motivations.
And in those calls, I try to not spend most of it and having a sort of business conversation, it’s more of just tell me about yourself, why did you get into this? And I found that a lot of sellers, no one ever asked them these questions. Very rarely do people actually care anything about them that are behind the scenes and so on.
So just try to understand their motivations as best you can. And once you do do that, after that conversation, then you might want to take it to an NDA and just tell them, say, “Hey, I can give you a high-level idea of what I can do here to understand that I’m at the mercy of my funding sources. And at the end of the day, I’m just going to tell you what I can do for you and what I can offer you. I can’t offer you an instant close. I can’t offer you some of these benefits that a private equity firm might be able to do paying very high multiples or a competitor might just pay more just to get rid of a good part of the competition.”
So just be upfront about them, let them know what we can do and can’t do, and just tell them, get me some high-level financials, and we can talk further. And you get an NDA in place it shows that there’s somewhat serious. I’ve usually seen most of them not serious ones fall apart right there. And then they just won’t execute an NDA. But if they’re starting to send financials and they’re actively having selling conversations, I think that’s a pretty good sign to kind of pursue further.
A lot of searchers involved in direct outreach, they involve email pretty substantially. So why do you start with the phone call and not email direct or email on that first contact?
Yeah, well, I tried that, and the thing that I got, like feedback-wise, especially once sellers were more honest with me is that it, especially if it’s a decent size business and they have a decent online presence, they get a lot of brokers and private equity funds calling them every day and then kind of taking their attention. You can push that route and it potentially might lead to success, but really you’re fighting kind of through the same door, probably is brokers and all that. I mean, secretaries usually not connect you with their owners, it’s usually because they think you’re a broker or something like that. So you want to try to find a more creative way of getting to that owner and that’s why I just go for the call.
And there’s also been a lot of times where I’ve sent emails and never heard back, but then once I’ve actually had a conversation with them on the phone later, they respond to that same email chain. So they did get it or maybe it went to their junk or whatever, but it’s just been more effective for me. And you can have a quick conversation and you also get that benefit of gauging tone. I’ve noticed that a lot of sellers there just want to know what their businesses worth. And then when the next guy comes along and say, “Oh, someone offered me this much last year, why are you offering me so little?” Or whatever the case is. So I’ve just found that in my experience to the better draw the more serious sellers and get directly to the source instead of taking this long route so I get them to answer.
In terms of gaining that trust with owners, what are some things that, as a searcher, you should avoid doing that make you look bad, or what are some bad practices that you want to avoid? And then maybe what are some like additional things you can do that make owners trust you more or perhaps to make their lives just a little bit easier.
I guess, to answer that question, I think it’s very important to be upfront about what you can offer, just get your numbers and your idea upfront. Then for the first thing I like to do is I like to just explain to them how did I even get to this? What is a search funder, and so on.
It’s really good to be able to reference some of the top business schools that endorse this model and in some of your initial pitch, because it is just it gets them to say, “Okay, this isn’t just some crazy 20, 30 something-year-old, just calling me out of the blue trying to buy my operation, thinking that’s going to be fine.” They want to know that there’s some adult supervision.
And the other thing they want to know is that there’s some financial backing behind you. So you want to, at least, especially if you’re self-funded, have some conversations throughout your initial stages, just to make sure there are people out there who would vouch for you if you’d found a good deal. And that could be as simple as they’ll write you a letter of financial support saying, “Hey, if you do go through this deal, we can back to you and so whatever.”
And the sellers just want to know, they want to know that if they’re going to invest numerous months with you talking through these details and potentially paying legal fees and accounting fees and so on, that you’re not going to be in a situation where you just can’t close. So you want to be super upfront about how you’re doing this, how you’re getting the funding. It’s very helpful if you have bankers that you’re already talking to, that you can reference and say, “Hey, bank XYZ and I have a decent relationship. They’re ready to look at this whenever this is ready to go.”
And just being upfront, because they’re not stupid, they know you’re a young person and you most likely don’t have millions of dollars lying around. And if you’re telling them that you’re not a private equity fund, well then how else are you funding this? So they just want to know that the basic things that basically a business broker would want to draw out from you, you want to address those objections even before the seller asks you about them. So if you know, for example, a business broker is going to want financial proof and all this, it’s something you should just try to draw out. Because if you think about a seller goes through a business broker, there’s that person there, that’s kind of guiding them that they trust that that helps make sense of things and address their objections potentially even before they have objections.
And because you’re just calling a seller out of the blue and maybe they haven’t even paid for a business broker yet, you have to almost a business broker. So you have to address these objections yourself and then also do a little bit of handholding as well in terms of, “Listen, this isn’t really… you’re not really against it’s me versus you kind of situation,” which frequently they kind of feel when you meet them, but it’s more of me and you figuring out how we can make this happen assuming that there’s no lies in any of the information you’ve told me.
And as long as you’re upfront about things and you’re sharing things, I can make sure that I can build the strongest financial case to investors. And therefore it gets you the highest payoff for your business, for what it’s worth. So as long as you’re doing things like that and speaking honestly like that, I think you’re in a good spot to build trust over time.
Even getting to the LOI stage is difficult, but closing an LOI, it can just fall apart at any time. So if you get into an LOI with one business, how do you think about potentially hedging your bets, if you will, and getting into an LOI with a second business. And do you think about balancing multiple or do you try to stay focused on just one business at a time?
I think I can get pretty focused just my personality, but the thing there to know and it’s like even if you do in this case, get really focused on business. I mean, there isn’t this whole point where you’re just fully working on that, you’re waiting for the seller to send you things, they’re still running a business, so it’s not just going to be this instantaneous thing unless they have some emergency, there’s going to be a bunch of kind of dead time if you will, in between. And I think it’s really important to not just stop your search whenever you find something interesting. It’s always better to come from a position of power and you frequently won’t feel that you’re coming from a position of power if you don’t have a lot of options, if you have a lot of options, you’re not so worried if one of them fall off.
So I think it’s really important to just keep your conversations going, making sure you still have things going on before you close that deal. And who knows, that could fall apart right at the signing table on the last day for whatever reason. And you would have been basically spending months doing nothing. So you think of it a lot, like a job offer, and until you do fully sign the job offer that you like, you’re most likely going to still attend the interviews. So just really keep that in mind and I always kind of think about this kind of searching as you’re effectively trying to, in some way interview for the job of CEO of that company. And if you think of it that way you’re not going to just focus on one, you’re going to make sure you have other options lined up.
So I always recommend, I always do this too, just keep looking, keeps the search flow going. And worst case you just end up with more options that you can either bolt on to that existing acquisition in the future, or just buy a second business.
So coming from an engineering background that said, it gives you a unique perspective on searching. So how do you think about search differently from folks without the engineering background and then other perspective searchers who have engineering backgrounds who come to you for advice, what sorts of things do you tell them?
Yeah, that’s a good question. So I’ve had a few searchers reach out and they’ve noticed that I have an engineering background and I think a lot of these traditional search fund institutional investors, if you will, they won’t fund these manufacturing acquisitions, at least for the hunt phase. So it’s really important to understand that, if you’re going to be doing it and you’re really set on utilizing your engineering to go buy something in manufacturing, you just want to be aware of that, thinking of the financial perspective. So I would make sure that’s kind of squared away first. So making sure, you’re basically ready to fund any manufacturing searches on your own.
If you’re an engineer, just trying to get something else I think it’s really important to say, “Okay, well, I’m not going to overthink too much.” That’s very hard to say, the more engineering degrees you have masters, Ph.D. and so on, I found this to be harder and harder. But really you just got trust that a lot of these details will fall in place or you’ll get to that path and you do have some similarities that you do with like a startup. You will probably pivot, today you might focus on aerospace tomorrow you might be interested in dental implant centers. In a lot of ways, they’re both doing some type of manufacturing but just different domains, you want to think about that.
So as you’re going through, don’t sit there and sweat all the details, have a sort of a general strategy focusing more on convincing investors, what your thinking is. So if you’re kind of like I explained with the aerospace components and the equipment, and so on, you want to think about, so I’m looking for a business that just has these characteristics and if the industry changes, then that’s fine but I want to make sure that I, at least try to hit some of these, and so on.
Don’t overthink who’s going to fund this after what industry analysis should I be doing? Don’t do any of that, just come up with something you actually wouldn’t be miserable being a part of every day and then come up with something that you can also realistically convince someone else of and then from there, just go after just those NAICS codes, use that NAICS codes as kind of something that your engineering brain will understand really, really well in the sense that there’s only a fixed amount of options to pick from. It’s like if you’re designing a part for an airplane, there’s only so many suppliers that will supply you this shaft or whatever the case is.
So you just do your kind of analysis on that and go based on that but just you have to know that, you eventually will run out of options and that will force you to make a new choice. So you don’t need to be too worried about that. Focus more on using your engineering to reorganize the structure of the search but then after that, you’re really putting out a sales hat. And then once you do find a business, you’re more putting on that operations hat. So just be really aware of this, don’t really overthink things and then just try to only focus on the initial steps as I kind of outlined in that initial process and then just kind of let the rest fall in place.
Back to telling the story to the owner. How do you use your engineering background as a strength? I imagine also a lot of the owners are probably engineers themselves and it created this component that became multiple components and a business around it. So how do you use your engineering as a strength but also demonstrate enough business awareness to be a fit owner for that business?
In manufacturing, you kind of have a few people. So you have someone who was more on the machinist side and then just got really good at producing a certain type of component and just kept doing it. And you have that person that was just an engineer by background and never practiced too much engineering and more was on the management side and the business side of things and then you had that one that actually was a practicing engineer. I’ve seen more of the first two in my search and when I think about that, I say, “Well, machinists, what is their nature usually?” Usually, they’re very calm and they think twice before doing things and it’s kind of like they measure twice and cut once and they really apply that to a lot of the things I do so they’re super careful.
So I try to make sure that I’m helping them not be so cautious around me. And then if it’s on the engineering side, I kind of come with this assumption that they’re going to be at least bit more organized. And you want to convince the seller that you have really similar values. For me, one big thing is I’m a kind of a neat freak with things so as part of my engineering background as well, I think super organized and done properly, placed properly furniture wise, clean stuff and so on. So I really relate well to those sellers that I come in and they have a really nice shop, and it’s well organized, well thought through and I kind of compliment them on that and there’s this kind of praise that you compliment the business owner by complimenting their business. So I really have more genuine confidence in that case because that is something I truly value myself.
The other thing I found, so I really like cars and I’ve worked on a few car projects, built cars from scratch before. So I try to if I notice that they’re a mechanical engineer like myself, I’m going to bet that they have some interest in cars. Usually, I’ll come up to their office, they’ll have something hanging somewhere. I will spend good amount of time talking on those things and just observing it and talking specs and just… that works really well, just using things like that to your strength. You got to think about what a person with that sort of education would really value and be interested in and try to see if you can find the relations on those terms.
What skills are engineers, perhaps missing frequently that are really important during a search to build?
I think like in my case, I’m pretty different than some engineers because I’ve at least done some sales. And it was really hard for me at first when I was doing some of my initial sales and I was really forcing myself out of my own personality. And then that’s something that I found a lot of engineers just they don’t want to do cold calls, they don’t want to do any of that. I think you need to come into this expecting that you’re most likely going to need to do probably at least 500 to 1000 cold calls. In my case, just for us to find one business that relatively seemed interesting that was 300 cold calls. So you just got to be ready for that.
And there’s really nothing you can do aside from just get reps in. And engineers tend to not have those good cold call skills. So what I’d recommend if you’re doing that is to try to start out with businesses you don’t care so much about, you’re going to sound terrible most likely but try to at least create a script for yourself and memorize it so, at least you’re not really focusing your mental energy on the call on, how am I sounding? And you’re just making sure that you’re just focusing on what the script is. So yeah, you have a script memorized and you’re not kind of starting from scratch on these calls. So at least try to do that.
Meeting in person is another big thing if you have poor kind of social skills in person, that’s really important. The thing that these owners want is they just want confidence in that this person is going to be able to close this. If you coming off to them as someone who’s not confident, who’s giving them any sign that either, A, you won’t be able to close this or even worse buy their business and you might not be able to even speak to their staff and you have no leadership skills in that sense, I think that’s going to really alarm them, maybe you’ll make a deal but I think you really need to kind of flush out those skills so that you kind of fail along the way.
What characteristics do you look for in manufacturing companies?
We’re really interested in understanding what the end market is. You can be making a screw but there’s screws that go into mining equipment, and then there’s screws that go into oil equipment, and there’s screws that go into defense equipment and they all a type of screw. So the thing that you should first do and I focused, in my case, I do have people that are advisors and then sort of ideal team to come help review the quantitative perspective is to make sure I really flushed out the qualitative first.
So what I look for first to say, “Okay, well, they’re producing this product, let’s first, A, make sure that they don’t have any significant customer concentration.” So as a first-time owner of one of these businesses, you’re going to be in a very risky position, essentially because you’re loading a business potentially with some debt. And you want to make sure that you don’t have this situation where if you come in from day one and you just piss off one customer and that customer is 30% of revenues then you won’t be able to pay your loans. And most likely as you go through there’s like checks and balances in their systems and that bankers, most likely, wouldn’t even fund a deal like that, knowing your experience.
So I want to really make sure that I understand, A, where their product sits in the supply chain, and B, that they don’t have that much customer concentration. Once I understood those two and I’m kind of happy with that, knowing that their product is sitting on a platform that’s going to be going on for many more years and then that they don’t have any significant concentration issues. Then I’ll start to look into say, “Okay, well, why do customers keep reordering this part in general? And then why do customers keep reordering from them?” They can go anywhere.
So when I look at why do they order this part in general, I want to try to understand is there some reusability to this. Maybe these parts are a onetime use, maybe say it’s like a medical device that gets implemented one side and then it’s done and then they have to keep buying more. Is it something that can be refurbished to refinished and there our customers sometimes opt to do that instead of buying something new from them? So just understanding that end of it. And then also trying to understand the part of why did they go to them. What is their sort of secret sauce?
And frequently, these owners will say, “I don’t know or we have really good on-time delivery or good relationships or whatever.” But you want to be really clear on this. I’ve had some examples where people have bought businesses and they found out that the top customers are buying from them because part of the money is paying for some presents or something to the customers, and so on. And that might not be something you might be able to sustain going forward.
So you just want to be really aware of that and why they’re buying from them. And you want the reasons to be something like there’s a consolidation in the amount of people who can supply these parts, they so happen to meet the cut. So they’re one of the few that I’ve allowed or they’re operating on some really expensive equipment that either, A, has long lead time or is so expensive that most people wouldn’t even buy or bother buying it to start something like this from scratch.
And just really just understanding those kinds of macro trends and making sure that the whole thing makes sense and you have a full grasp on why this is a good operation from the qualitative. I mean, you can shift over and try to really dig into the quantitative and make sure that all is good.
What class would you teach in college if you teach about anything you wanted?
At NYU Stern, they had this class called real estate entrepreneurship. It was actually a really interesting, it ind of mimicked a lot of the principles that you do in like a private equity fund or anything like that. It was taught by a professor who’s an active developer. It was pretty interesting, we got to learn from him but the project there that I really thought was really cool was that, professor would have the students make groups and they would have a semester-long project where they had to identify a real estate asset that they wanted to invest in and then perform certain improvements and then increase the rents and so on.
And I had to kind of go through this whole process, creating financial statements, performance and so on. And at the end of the year, you would present it to him and he would offer his thoughts on it. And I just thought that was really interesting because that’s in a lot of ways, similar to some of the stuff, search funders aren’t right. They find deals and they figured out what they’re going to do and they present it to investors and then they’re going to give their thoughts based on their experience and so on. So I think definitely, the takeaways from a class like that, I think sending students out into an environment where they get to go in and find things that actually exist and figuring out how they can add value to them and bundle it in a way that’s kind of understandable by investors in different finance committees and then present that and I think something like that would be a very interesting class to end up having in our universities.
Nice, yeah, that’d be a lot of fun. What’s a belief you used to hold fairly strongly that you’ve since changed your mind on?
When it comes to search funds, I think the big thing was a lot of things that I thought were going to be smooth weren’t. I think you find that out a lot, there’s some parts of the startup world where I felt that way and I spent half the time in startups running around like a chicken with your head cut off and it’s just a bit crazy there. So I thought there would be a lot more structure here but it’s still, there’s some of the stuff that still goes the way you normally wanted to.
So I think coming in to search funds, you just want to have an open mind. I also thought at some point that sellers would be really honest about things that potentially hiding and some of their financials would be cleaner and didn’t find it that way. And also I think understanding what businesses of different sizes look like has been really interesting.
What have been some of your observations on different manufacturing companies at various sizes?
Yeah, I think, the ones that have, let’s say a few locations they actually manufacture in, each of those locations, especially when you have that revenue fix that sounded like the 10, they’re maybe not as clean, maybe a smaller shops, maybe in the cheaper locations. I’ve noticed a lot of them like the floors are really dirty and just it’s not very clean operating. But some of the other ones where maybe to have one manufacturing facility and everything’s in house and the CEO works there, all the head staff is there and so on, they tend to be a bit cleaner and a bit more organized.
And as you know, I have more bias towards those. So I always found it really interesting and I think he can tell a lot about just kind of the attitude and the pride employees give to the organization by how they keep their workspaces clean and how they just keep the general environment. So it has just been really interesting to see when you get to tour manufacturing, the operations of all different shapes and sizes.
What’s the best business you’ve come across?
So I guess not search fund-related, there was a business that I learned about, I don’t remember how many years ago, but they’re actually called Big Ass Fans, they literally make big ass fans. Their logo is a donkey, which is pretty funny because it’s a fantastic play on it. And it was really interesting because the founder, he landed about the concept before they were called high volume, low-speed fans. And I don’t know if it’s this concept that just kind of never took off and the founder found out about this and went with a similar design to it and then ended up growing this huge company out of it and making over a few hundred million dollars on a sale just a few years back.
So I was always appreciative of, it has like the Apple, Tesla-esque feeling except to apply to really big fans. And it’s just really interesting to see that and all these thoughts. I think it’s a cool way of taking something that was just like simple, boring fan invented by machinists and then adding all this flare to it and making it into a big company that are nexus.
Thank you very much for sharing your time. It’s good to hear from a searcher who’s in the middle of all that roller coaster of a process. So thank you for sharing your time with us today, it was awesome.
I appreciate you having me and always happy to help.