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Luis Reyes – Fire Protection Thesis in Spain

My guest on this episode is Luis Reyes, managing partner at Iberian Ventures in Spain.

Episode Description

My guest on this episode is Luis Reyes, managing partner at Iberian Ventures in Spain. Luis worked in strategy consulting before acquiring small companies in Spain in a similar vein as the search fund model through Iberian. We kick off by talking about the buyout market in Spain and what makes it particularly attractive. For example, all private companies in Spain have to file their financials with the government. As a result, the full financial picture of any company in Spain can be found and sorted.

We also spend a great deal of time talking about one of their core investment theses, the fire protection market, and why it’s an ideal market for consolidation.

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Clips From This Episode



Live Oak Bank — Live Oak Bank is a seasoned SMB lender providing SBA and conventional financing for search funds, independent sponsors, private equity firms, and individuals looking to acquire lower middle-market 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 Lisa Forrest or Heather Endresen directly to start a conversation or go to

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]

Oberle Risk Strategies– Oberle is the leading specialty insurance brokerage catering to search funds and the broader ETA community, providing complimentary due diligence assessments of the target company’s commercial insurance and employee benefits programs. Over the past decade, August Felker and his team have engaged with hundreds of searchers to provide due diligence and ultimately place the most competitive insurance program at closing. Given August’s experience as a searcher himself, he and his team understand all that goes into buying a business and pride themselves on making the insurance portion of closing seamless and hassle-free.

If you are under LOI, please reach out to August to learn more about how Oberle can help with insurance due diligence at Or reach out to August directly at [email protected].

Oakbourne Advisors– Oakbourne is an independent retirement plan consulting firm that helps small companies design and implement great retirement plans for their teams.  Whether you already have a 401(k) in place or are looking to start one for your team, please reach out to learn more about how Oakbourne can set your people up for success in retirement at

(3:42) – What is Spain like as a buyout market?

(9:05) – What are the regulations around requiring private companies to make their financials public?

(12:17) – Did you have any previous ties to Spain before deciding to plant roots there?

(13:52) – Was your previous career experience in finance and consulting helpful in working with business owners?

(15:12) – Can you give us a walkthrough of the companies you’ve purchased so far and how you structure acquisition?

(18:32) – What does the fire protection industry look like country-wide and how does it compare to how you’ve approached it?

(25:00) – What are financing options for acquisitions?

(26:33) – Can you walk us through an example of a transaction and integration?

(32:18) – What are your options for exiting?

(34:38) – What are the options or paths you’re thinking about in the long-term?

(36:07) – Do you see other Searchers in Spain stepping outside the traditional model?

(38:09) – What other industries do you find interesting and is there any limit to your team’s capabilities to manage over multiple industries?

(42:13) – Are you raising money to build internal software?

(45:25) – What’s a strongly held belief you’ve changed your mind on?

Alex Bridgeman: I think an interesting place to start would actually be talking about Spain as a buyout market. There obviously seems to be a nice concentration of searchers in Spain and of the- of the non-US countries, it seems to be one of the most developed in terms of search and its understanding of search and the investor group. Kind of give us a walkthrough of Spain as a buyout market. I’d be really curious to start there.

Luis Reyes: Yeah, no, definitely. So I think Spain, it’s in general, as all Europe, it’s having a set of factors that make it a market ripe for entrepreneurship through acquisition. Like the country is getting old really fast, so you have a large population of 65 plus people that founded the businesses that actually took Spain from a developing country, I would say, before the 70s and the transition to democracy, to where it is right now, which is a high income country. And all of those businesses which are from medium to high value added are like let’s say scaled by 70, 65, 80 year old folks. The kids of these people lived through a phase of a lot of work to create these businesses, and what we’re finding is that most of them do not want to operate these businesses. They want to work in consulting, in tech. They don’t want to live also in the small towns. Spain has also like in hyperdrive a trend that is going on in other countries which is like moving to the cities. Spain has four or five large cities compared with other countries in Europe, which typically is one city. Like UK, you have London as a big city pretty much, and here, we have like four or five big cities. So the kind of, let’s say, the moment in which the society is right now makes it a great market to acquire great businesses. And in terms of the numbers, Spain is a country mostly based on SMEs. So you have around kind of 2000 companies of more than 10 million EBITDA. Then you have like what we could consider the core middle market of kind of 2000 in 5 to 10 million in EBITDA. Then you have 14,000 companies with 1 to 5 million of EBITDA. You have below that, you have like almost a million companies with less than 1 million EBITDA. If you clean all the single folks having their own kind of job as a business and very, very small concern, you have kind of 100 to 200,000 companies with between 500k and 1 million euros in EBITDA. And again, a lot of these companies are led by this 65-year-old cohort. So, when you see the sheer numbers of companies below 10 million, it’s an amazing place to fish in the sense that there’s a lot of opportunities. Now, in terms of how easy it is to acquire companies, the last little bit harder than in other countries in Europe and in the US. So, you need to set up somehow a complex structure of SPVs, or special purpose vehicles. You cannot kind of raise debt in the target to acquire the company. So, it is complex, but there is a lot of- a full ecosystem of lawyers and fiscal and regulatory kind of advisors that already have this figured out. So you can just fit very nicely into an existing ecosystem of advisers to figure that complexity out. In terms of the society, I would say, and this is more debatable, and this is just a theory of what we see and what investors tell us, is that the Spanish entrepreneurs are way more open about selling to people outside of the region or outside of even the country. I’m American Mexican, I’m buying companies in the countryside of Catalonia, and I never face any kind of cultural resistance on the opposite. Like folks are very excited to see people from outside coming and buying companies. And in that kind of sociological aspect of it, Spain is a great country to live. So you have a lot of folks that come after studying for their MBAs in Europe, in the rest of Europe, in the US being very glad to come and go to live in a country of- in a town of maybe thousand hundred inhabitants. So you have a lot- so just to summarize, a large pool of companies of high quality being led by people without a succession, second, a very open society to acquisitions from people outside of their areas, third, a large number of highly educated professionals that are interested in the opportunity, and then a regulatory and financial services industry that already has a lot of professionals with, let’s say, the structures for acquisitions really, really nailed down.

Alex Bridgeman: And one thing that you mentioned that blew my mind is that Spain private companies have public financials. You can go and search through- Is it for a certain threshold or like above a certain income level or revenue level like your financials have to be public? Where does that fall?

Luis Reyes: Yeah, so now, that’s a very helpful aspect for us. Basically, all companies are required to publish their financials on a public register. And this is private companies. So you need to publish all the details of your P&L and your balance sheet. Now, there are some companies that decide not to do it, especially in really like secretive sectors with bad economics. So for example, if you look at the food delivery companies, they do not publish them. And what they do is you face a fine, initially a small fine, like a few thousand euros from the regulator. But at some point, you do need to release them. But what they’re doing, like these companies in hyper growth phase, they prefer to delay it until, at some point, they’re going to be forced to do it. But no, it’s every company. So it’s curious that, for example, the financials of McKinsey or Bain, I was working in that segment before in the US, there’s a lot of competitive research that the companies do to kind of figure out how much the other- the revenues of the other. And here you are just going into the registry and you put like McKinsey LCC, let’s say, and then you see all the financials, the employees and EBITDA. So it’s amazing, you have all the information available.

Alex Bridgeman: Yeah, that’s incredible. I can imagine the private company Bloomberg terminal for that would be amazing if that worked in the US. I imagine that makes searching and looking at different companies and industries pretty straightforward then in terms from a financial and business model perspective.

Luis Reyes: No, that is correct. So we do have- we created our own software precisely because of the abundance of information. We just created software in which we employ like all the companies in our target industries and in our range of EBITDA, we just have them all; we have like 10-15,000 companies in our database. And we do all sorts of analysis on the industry. We identify the companies with the most attractive economics. So it’s very easy to do this sort of analysis. And an interesting thing is that these represent a competitive advantage obviously with other searches. And we see- that’s what we see in Spain, like also a lot of competition for kind of the same targets because it’s very easy to put all that information into a database. I’m going to look for companies with like the 40% EBITDA, and most, I can guarantee you that the company is between 3 million or above in EBITDA, all of them would have received at some point a letter from somebody wanting to acquire it. That’s kind of also what pushed us to a segment of companies with EBITDA below 1 million. Here, we find that none of these companies almost, like I would say like 99% of the companies we reached out to have ever been approached by anybody on proposing an acquisition.

Alex Bridgeman: And so you said you were from Mexico originally and worked in Chicago in consulting. Did you have any previous ties to Spain?

Luis Reyes: No, that’s actually pretty funny. So I worked for McKinsey in Brazil, then in the US. I kind of took advantage of the mobility. And I moved with my wife and my kids throughout the US. We lived in Houston, in San Francisco, in Chicago, in Boston. And the US is such a large market that most of us, unless you want to, I mean, you don’t work for projects outside of the US. So, I honestly had been in Spain in holidays and kind of the odd one week for a particular project, but I had zero contact with Spain. And then one day, I had Hunter call me from Bain, which is a competitor of McKinsey. And they said, we’re building our team, and we’re looking for somebody that has this and that experience that speaks Spanish. And then they proposed to us to move. By that time, I already had two daughters. And when I saw the difference in salary, it’s like 1/3 of the salary total comp, like Spain compared to the US. But I can always go back and say like the experience of being here- and we came just like pure adventure, let’s say let’s go and let’s live a little bit in Europe. And that was it. No previous ties. I didn’t know anybody in the country basically.

Alex Bridgeman: Did you find that the consulting work and that experience and that job title, was it helpful in any way in talking to business owners at all?

Luis Reyes: I feel not in my- in the targets that we have right now, most of the folks that are leading the businesses that we acquire are the founders. They come from a, let’s say, less educated background. They’re obviously great at what they do, but most of them do not have formal education. And all of this consulting, finance kind of roles for them is not a plus. Sometimes it is a minus. I think what does help is that in consulting and professional services, you get exposed to a pretty wide range of personalities. And it gets easier, obviously, to in general interact with folks. But none of the, let’s say, presentation skills that you have coming out of consulting are helpful here. Like if you start speaking about EBITDAs, multiples, when you approach in general these types of founders, it doesn’t help the conversation. So it helps us with the investors but not necessarily talking to the company owners.

Alex Bridgeman: Gotcha. Yeah, that makes sense. Can you give us a walkthrough of the companies that you’ve purchased so far, business models, rough customer base, and then kind of the way you’ve structured those acquisitions to date so far?

Luis Reyes: For sure, for sure. So we started, given the richness of the data that we had out there, we just hired a team of analysts. And we started by just sorting all the- just looking for attractive companies. It doesn’t matter which industry. We said let’s buy. We started with a holding idea; we’re going to buy like 15, 20 great businesses with EBITDA above 25 to 40%, just great businesses that have some sort of structure around. And the first company that we found that met the criteria was a company selling equipment for poultry farms. So you have ventilators and sensors, computers. It’s fairly modern, like the poultry farms nowadays, and so there’s a lot of technology there. We found a distributor of this equipment with number one distribution position in Catalonia for one particular segment of the market. They sell around 4 million a year, 4 million euros with EBITDA of 0.6, 0.7, most of it converted to cash. I mean, except taxes, the company is like services, so no capex required, no other investments really, except taxes, mostly cash flow. That company, we acquired it for the standard here is four to five times EBITDA. And again, structure is 50% equity, 50% debt. We did use also like vendor loans and earnouts and all that sort of stuff. So the initial payment was fairly acceptable and low when you compare with bigger acquisitions. And the second, which is in the fire protection industry, kind of much smaller, 1.5 million in revenue, very, very recurrent revenue. We say like 90% of it is maintenance with the same customers year on year. So the type of customers is a very fragmented base of retail customers that buy services for and maintenance order for a fire extinguisher, their signals, in case of fire, they have all the right signals, sprinklers, and all these sorts of very simple equipment. By law, you have to maintain it every year. So there’s a large base of retail customers and also very large like hospitals, schools, those are a little bit more competitive, but every year you gain some, you lose some. Fairly stable, 1.5 million for the last 10 years with 40, 45% EBITDA, again most of it converted to cash and a structure with very, I want to say professional, but a very solid structure, except the founder, which is kind of hands-on on everything, but for all the roles, sales, procurement, operations, there’s people on it. And the structure was fairly similar around 5x EBITDA, 50% equity, 50% debt, vendor loan, earnout and all this sort of stuff. So that’s kind of the structure.

Alex Bridgeman: Yeah, I would love to dive into fire protection as an industry and market for consolidation and your broad thesis there. I think a good start would be kind of looking through the business you have, the business model that is at 1.5. And then how does that compare to the industry broadly? Or since you have all that public financial information, does that type of model carry over to the rest of the industry? And what does the business model countrywide look like and how does it fit with a consolidation thesis?

Luis Reyes: Yeah, for sure. So I would say that, again, like we fell on this industry by chance, because we were looking for an attractive target, this company was really attractive in its financials. But once we started giving a second look, and we just look at all the companies in the sector, we realized like the opportunity- the opportunity is basically this, like the fire protection industry, it’s inside or a sub sector of the wider security industry. And you have actual security, regular security guards, cameras, you have fire protection, and you have a difference of protection. So the large players in the market, like 50, 100 million euros in revenue, focus on the whole spectrum of security for large companies. So let’s say I have a hospital; I need security cameras, I need guards, I need fire protection and protection, even cyber protection. So I go to one of these large players. And I don’t want to be dealing with 10, 20 contractors, so I just go with one of the large players, and I just get all my security sorted. So that market is humongous. You can imagine, it is like five, seven beasts. Inside that market, the fire protection market is divided in active, which is all the distinguishers and whatnot, and then you have passive, which is all the like backdoors, materials to protect the buildings. In that market, the active fire protection is the most interesting in terms of consolidation. Why? The business, like the operations of the of the business require that you have a large footprint of people in close to the customer. Because what you do basically is like you visit the building, you do an inspection, you find- like you see if the hoses, sprinklers, and the fire extinguisher needs any maintenance, and you fix like small problems. Like you need a hose that needs to be retained, the distinguisher is in the wrong place, so you fix it. So it means that you need to be very close to your customer footprint. So when you look at the country, you have hundreds and hundreds, literally, of companies in every city. Because for example, we serve the southern part of Barcelona. And even if we want to expand, expanding means even in Barcelona, if we sell in the north, probably we just need to open a different office and hire people that live nearby. So you need to be visiting a lot of customers every day. So that, like the nature of the operations drive a lot of the structure of the market with a lot of companies. So the big players, what they do is either they go to like only the bigger cities and they establish their own footprint. But mostly they subcontract the services to some of smaller, like in our case, our company. Now, you can live pretty well by serving the large players in your area, but that’s like the large players obviously want some of that margin. So the margins that we have, it’s because we don’t depend on serving only the large customers. We have a large retail customer base. Now, in terms of acquisition, serial acquisition, it is, as you can see, a REIT market because there’s a lot of fragmentation, but also there are not super obvious opportunities to streamline operations. Yes, you do the typical services center, you can do a procurement, HR, etc., etc., but the core of the operations, what drives 90% of the cost, which is people doing work at the customer site, you cannot optimize that. So it is very attractive. And for a player like us that we want to be a 50, 20 million player over the next two or three years only here in Catalonia, it’s very achievable. But we feel very open and very comfortable talking openly about it because it is known in marketing, which you can say with a large amount of capital, you can just go and start consolidating at a national level because, again, like the economies of scale are not such that you can start buying unprofitable players and get them to 40% EBITDA.

Alex Bridgeman: So you have to focus on profitable companies first before getting the expertise to turn around less profitable ones?

Luis Reyes: Exactly. So, that’s what we’re doing. Like we’re finding- like here in Catalonia, again, there’s like 200, 250 companies, so we’re doing- we’re focusing on the two or three that have similar economics to the company that we have, so we can continue operating with kind of that leverage of cash flow generation before going and venturing in companies that are unprofitable. And you can say, like the typical leverage – okay, we buy an unprofitable company, and we raise prices. But that’s not the way it works. This market is very sensitive, as you can imagine, given the nature of the services and the competitive dynamics. If you’re unprofitable, yes, you can get out of them. But it’s not that you can call the customers and say, your next review is going to be like 30, 40% more expensive, because in that moment, they just go into Google or open like their yellow pages, and they are going to have like 30 other companies around that are going to be very happy to keep maintaining the same margins that they had before. So, it is a little bit complicated to get out of an unprofitable situation in this industry.

Alex Bridgeman: What are financing options for acquisitions like this? If you can find enough companies with similar economics that you feel like you can deploy a good amount of capital to, what are your debt options for part of the strategy?

Luis Reyes: Yeah, that’s another reason why, now that you mention financing, why we started with very profitable companies, because raising debt for this acquisition was like fairly easy. So we went to the largest bank in Spain, and we managed to get a typical traditional LBO debt with the corporate guarantee, like kind of the equity of the company as a guarantee of the acquisition, obviously with 2% plus Euribor interest. Now, that was before we had like the Euribor, it was at the time Euribor was minus 0.6%. So in fact, we were paying 1.5% annual interest rate for these kinds of acquisitions. Now, we got lucky. Like we were the first, the bank told us we were the first acquisition of that size ever financed. The other alternatives are direct lenders. Direct lenders, there are way more in the country. They have a little bit more lax credit rating standards. But the interest rate at that time, it was like 6% for the same acquisition. So now that the interest rates have been up, I think you can go all the way to 8% to 10%. There are a lot of players in the direct lending market, enough for I think people still to be able to get financing for the next year or two probably.

Alex Bridgeman: So if you’re going to buy a company- I’d like to walk through like a transaction example in terms of how you would structure something like this. And then what’s the- what, if any, are some of these integration plans? You mentioned a few services that could be centralized, but it’d be curious for structure and then integration afterwards. What would that look like?

Luis Reyes: Yeah, so again, in Spain and in some other countries in Europe, you have this interesting law in which you cannot raise debt in the target for an acquisition. That’s considered- it’s not legal, basically. So what you have to do is create another company, which is the SPV, where you get the capital, the investment from the equity investors. So we have a group of 10 equity investors. They get the money into that company, and the bank also gets debt into that company. The company then acquires the shares of the operating business. So in reality, the debt never reaches the target company. So even after the acquisition, you have a company that is fairly clean in terms of its balance sheet. And then there’s another kind of hurdle which is to pay that debt, you need to pay dividends from the operating company to the SPV. And that is tax in Spain. So you pay, I believe it is 5% of 25% of the dividend so you have another 1.25% of interest, which in effect is interest because you take that money out, like put it in the SPV as a dividend. You pay 1.25%, and then you’re able to pay the debt there. And then the paper seems very standard SBA. You have your shareholder agreement. You have your LBO contract with the buyer. Everything is fairly standard. But that’s kind of the particularities of the structure in Spain, that you do need to have an SPV to do an acquisition. If it’s an equity talk acquisition, if it’s an asset, you can do kind of a more traditional structure. So right now, we have not done any integration per se. So what we’re doing is going to the transition phase from owner led to a more, let’s say, professionalized structure. And this is one of the main learnings that we have and one of the main pains, which is obviously you kind of know that if you’re going to acquire a company with 15 employees, there’s not a lot of slack in that system, probably. But the level of, let’s say, resistance and difficulty in doing changes, it’s more than we face at a traditional corporate, which more people you can assume are not fully occupied a full day. So when you introduce, there’s always cultural resistance. But there’s more slack in the system, let’s say, as a whole to take on new initiatives and new projects here. The first thing that we do is get the finances in order. So typically, these companies do not have any sort of view of their P&L, their balance sheet, other than by the end of the year. So literally like that. Like they have a small accountancy shop that does the taxes for them every quarter. They do not have like a view of their P&L on a quarterly basis. But we cannot leave like that, like number one. So we install a modern ERP, cloud ERP to get the financials real time. And obviously, we do the P&L and the balance sheet. And we do that in a centralized team that we have in Madrid. So independently of where the company is, we do that from a centralized location. And, importantly, cash flow. And also, these businesses, the owners treat the company as their own, basically, purse, and they have their own wealth in the company. So there’s no concept of cash flow projection or cash flow management. But we cannot operate like that. So the first one, we need to have like all the cash flow projections, the cash needs, for the whole year planned out. And if we need some line from the bank, we typically now prepare that before going into the company. So that’s kind of finances, the very first thing that we do. The second is all the, let’s say, HR kind of ancillary roles that people do, like sometimes purchasing for some of the companies, like the fire protection, there’s not a lot of purchasing going on. So we try to get kind of the standard tasks that we can take, like, say standardized and take ourselves, take them out of the hands of people, so they can do like their core job better. And third, we try to immediately start thinking of how to provide system support for the more like operations functions. Like these companies do have some sort of software, but it’s typically very outdated. So we try to get a modern ERP, a modern route management software. And this is like the first 12 months, this is our priority to get kind of the operations, give some more leverage to the folks on the operations. But again, this is kind of sounds like the playbook on paper. Now, when you talk about training folks that have been working like 30 years in one way, and when for you the Excel that they have may seem inefficient, introducing a software, the technology is the least of your concerns in that situation.

Alex Bridgeman: Yeah, absolutely. That’s definitely a big piece of the buying any business is working with existing founders or team there. What are options for exiting? Are there larger companies that do this work that you could sell to, strategics, or sounds like there’s a couple private equitfirms as well that could be potential outcomes as well? Do you think about that? Or is this more of a- Do you view this more as a longer term play where exits may be much, much secondary to holding for as long as possible?

Luis Reyes: Yeah, so given that when we started, we had this idea of kind of permanent equity structure, we always thought of acquiring businesses that we would be happy to maintain. In one of the episodes of your podcast, somebody talked about how the hard work in the business, you do it the first let’s say three to five years, and sometimes you really don’t get the rewards of that investment until, let’s say, a few years have happened. So the problem with selling, obviously, is that you might put all the hard work into standardizing processes, putting in like some of the growth engines, and the next buyer is the one to actually capitalize on that. So for us, we want to work and put like the hours and the effort in businesses that we believe we will be happy to maintain long term. And we always do things on a day by day with that in mind. Now, obviously, we had investors that might decide that they actually want to get some returns out of their investment. You do the capital raise based on scenarios of selling at some point. So we are very mindful when we do an acquisition that there have been acquisitions in the space. So we always look at the industry. There have been deals in Spain in the industry, and they have been good returns for the investors in those deals. So what we want is to get the companies to a place in size, in quality of their financials, but they are target for some of the private equities shops in the country. And we do have the, let’s say, the baseline scenario of five to seven years to get them to that place. We have identified the players that could buy the companies at that point. But hopefully, when we’re there, everybody can get behind the idea of keeping the companies for longer.

Alex Bridgeman: Absolutely. And to this point, you’ve acquired companies deal by deal and raised to a specific company at this point. What are options or paths you’re thinking of in terms of something more long term akin to a holding company, which they’ve become very popular for great reasons, but what do you view as the options that lie ahead?

Luis Reyes: Yeah, we haven’t really- we have discussed internally with the team. But we need to, at some point, get these thoughts with- and our investors will probably listen to this, and we want to acknowledge that those conversations need to happen with the investor first, but there’s like many that we have discussed. Like, at some point, turning, just changing the structure in which we return money, returning some of the original money to the investors in what we have done that then give some return of at least the 8% hurdle that we had set in the beginning, although now that might not mean much with inflation. But once we have returned some money to the investors, you might have some earned a right to propose something different for a longer term. And obviously, there’s always the option of giving their return to the investors ourselves and just staying with the companies, operating them, and continue growing the companies by doing an MBO solo of operation or sales. But honestly, at this point, it is just mere speculation and anything concrete that we do need to discuss with investors at some point.

Alex Bridgeman: Yeah, absolutely. Do you see other searchers in your network in Spain thinking of similar thoughts? I’d be curious how developed the Spain search market is for kind of stepping outside the traditional model. What does that look like in your view?

Luis Reyes: Yeah, look, I think that, honestly, we were a little, if you want, crazy to get out of this standard search fund model. The search fund model in Spain is fairly developed. There is support for some pretty large acquisitions. Some of the folks that we know have the support of their investor to go even for a 30 million EV acquisition. So when you’re starting to think of an ETA, and you see the option of having support to acquire 30 million business in which you can have 30% carry or equity, so as a searcher, that model is much more attractive, to be quite honest, than what we’re doing, which is structuring a traditional 2/20 fund that is looking to buy fairly small companies and to deploy the same 30 million over way more work, which is not only the operations but the acquisition. We decided to do that because we believe that like number one, there’s no competition, like no competition in our market. And we believe we do have passion in this space. And were betting for a second or third fund where the economics are actually there, where you can raise 100, 200 million and do something pretty nice at a larger scale. But to be quite honest, when you think of the next five years, there’s not a lot of incentives to get out of the traditional structure. And that’s why most folks don’t do it. And again, investors, what we have seen, are not super enthusiastic about alternative structures so far.

Alex Bridgeman: So far, you’ve mentioned the two companies that you’re invested in now. I would, one, be curious what other industries you find interesting, but also, is there some limit just in terms of like your team’s capability or intellectual capability to manage over half a dozen or a dozen industries? I imagine at some point, you’re just- you can’t keep your circle of competence within- you can’t keep your work within your circle of competence. It’s going to get really hard to manage like the dynamics of a dozen or so industries. Where do you feel like that line is for you and your team?

Luis Reyes: Yes, in terms of industries and also going to one of the questions that you sent via email, which is what is the best business that you have ever seen. So my experience comes from the first five, seven years of my career in software. I founded a startup in Mexico. We had a successful exit, software traditional SaaS company. Then I went and worked at Google. So kind of the best business that I have seen, this is cliche, but it’s Google. It has to be Google. It’s a business that just prints money. So that’s the best business that I have seen. And I love software. I love technology. Actually, for every company that we acquired, we developed software for that industry. So right now, we are about to release a software that we created to analyze the information by the companies including some statistics and finding targets. We’re about to release that software. We raised a bit of capital for that. Now we’re doing a software platform for poultry companies, for the sales department of poultry companies. And we’re not fans of just doing random technology projects. We did do a search of all the solutions globally in the market, and none of them, we believe, satisfied what our market needs. So we’re just creating a tool and doing that. So to your question, software is the best industry. And in Spain, there’s a very interesting market for software companies, also for acquisitions. The only problem is that is very, very competitive. And here in Spain, you have, obviously, the traditional private equity groups, but also you have some of the Constellation Softwares of the world. Actually, Constellation has an office here, and they do fairly small acquisitions. Why? Because again, like it’s just too good to be true. The enterprise software companies, there have been some ridiculously high exits of pretty nice businesses, and we believe we don’t have a competitive advantage, at least in access to capital or in fighting for these deals. So we’re not going into software. But to your question, software for us will be something at some point we will love to get into. But right now, it’s not something feasible. But the closer that it gets, to be quite honest, in terms of financials, it is the good companies in the fire protection industry. Like out of those 200, obviously, most of them did not have the financials of the company that we have. But when you find a good company there, the finances are pretty, pretty close. So yeah, that’s in terms of industry. And then in terms of the capacity of our team, we are three partners. We believe that one or two different industries by partner is at most what, at this stage of our evolution, what we can handle. Why? Because more than the intellectual capacity, as you mentioned, which is also a limit of how much information you can kind of credibly absorb and how credible can you go and talk to targets, it is more than we are in the weights of the operations. And that is when you cannot be handling three, four, or five different industries if you’re actually in the operations, especially in the first acquisition and turn around and integration, just time is not- there’s not enough hours in the day to be assembling again. It’s not only working with the companies but actually also assembling and recruiting for those industries. So I believe one or two is the max that at this point we’re able to handle, each one of us.

Alex Bridgeman: And did you say you’re raising money to develop that software to look at financials of private companies? Is that what you mentioned?

Luis Reyes: Yes, we did a small- the story goes like this: Like we developed this software just internally for our use. And one of our investors saw it and said like, wow, this is really interesting. I might use it for the other stuff that I’m doing. And so, he put us in touch with his team, and they loved the platform. They said like, guys, we want to kind of accelerate the development, and they proposed to invest a bit of money. So we just took it out to a different company, and we hired a few developers. And now we have developed the 2.0 version of it and are about to release it, put it out there in the market.

Alex Bridgeman: Yeah. When is it coming out?

Luis Reyes: By October or November, we’re going to have a version. If you want to try it out, I can give you access. That’d be cool to get your feedback,

Alex Bridgeman: Yeah, absolutely I do. That sounds amazing. I love data companies. So anything in regards to financial data or small private company data sounds amazing. It’s like the best of both worlds.

Luis Reyes: Going here on a tangent, I feel that the US is very developed in terms of marketplaces for acquisition. Like, that’s something that you- like BizBuySell, Empire Flippers, all that sort of stuff that I don’t think it’s kind of where folks like us fish, but it’s very developed. Here in Spain, you don’t have that sort of development. But one thing that all these companies lack, it’s the quality of data. Like when you go there, it’s very deficient. It is obviously because the targets do not publish most of their financials. But I feel that in countries such as Spain that we’re very fortunate of having kind of all these troves of open data. When you go into a marketplace, you should be able to have- let’s say, we have our own algorithm with 40, 50 different kind of- we look at the typical metrics, and then we do some correlations and say we’re looking for a company with this asset intensity and this kind of financials. And then we do a scoring. And that’s pretty, I think, pretty much what everybody does when they look at targets. But we apply that formula to all the companies that we see, and then we rank them, and then we just have the analysts going through that. And that’s pretty effective to kind of optimize the way that you look at things. And it will pretty cool to go to an Empire Flippers and just use your own algorithm, let’s say this is my- like, kind of my scoring. And let me go through your list according to my criteria. So, that’s kind of what we’re trying to recreate here. And some of our investors say like that’s kind of your secret sauce. And we believe that it’s really not. Like we just have our own criteria. But putting that software in the hands of all kinds of search funders and even private equity funds would be pretty cool for them to use the same information but with their own criteria. And we’re going to be looking at the same companies but in a different way. And that’s pretty much like way more useful than in the traditional marketplace, which just a random sampling of lease of companies. That’s kind of- we just started to think about where do we take that business?

Alex Bridgeman: Yeah, that’s pretty amazing. You already mentioned one of the closing questions, the best business with your answer being Google. So I’ll go with the other one. What’s a strongly held belief you’ve changed your mind on?

Luis Reyes: Yeah, I feel like if I can cheat a bit here and use two. So the first is that quote, like very famous from Warren Buffett, when a management with a reputation for brilliance tackles a business with a reputation for bad economics, it is the reputation of the business that remains intact because- it goes like that. I believe that you always think that you’re super smart, especially when you’re in consulting in the business of just giving advice without dealing with the consequences. We believe, look, there’s some, I don’t want to say terrible industries, but industries that in general have bad economics. But you find one or two players in those industries that are doing- like when you see the numbers, it’s like there’s like one or two companies that are doing the right thing. So if we just go into that industry, which most people have not figured out how to make money inn, and we kind of, let’s say, copy that playbook. But you realize that there are some- a lot of industries that, I mean, there’s just, there’s no- that’s a fluke. Like that one or two companies that get the good financials, it’s a fluke, or they have something that cannot be repeated. So we have gone through those industries that are known, I don’t want to name names to kind of not get, let’s say, controversial, but we have seen industries that you see a lot of companies struggling with profitability, with very cyclical behavior of their economics. And we’ve identified two or three targets. Once you get and know the targets and know why they’re having the good results and you look at the industry and say like, this is just- at some point we’re going to revert to the mean. So now we don’t try to believe that we’re that smart. And we just try to look for industries where there are a lot of success cases. Like, for example, the fire protection, I feel confident in just talking openly about it because if more people want to come into the industry, there’s enough targets that like it doesn’t depend on finding the two or three companies that are good. So basically, we don’t believe that we’re brilliant anymore, and we try to go to the industries that actually foster good economics. And the second is that small is easier. Again, like you can- there’s obviously- if there’s like very few employees, you know you don’t have a lot of resources to do it, but the challenge of really transforming and integrating small companies, it’s way more work, I would say. Like it grows exponentially as the size of the company decreases. So, in my previous life, I worked for some pretty big integrations like HP with CSC. And obviously, there’s hundreds of people working there. But just the timelines and the level of support that you get, it’s like, I want to say it is easier but the level of stress that I had in those kinds of integrations is way, way lower than in trying to transform a 50 people, 4 million revenue company. So we still believe that this market is where we feel passionate about and there’s a lot of opportunities. But the level of challenge to work with these companies is just so big that now we see why there’s a lot of- like, nobody’s looking at kind of these companies right now.

Alex Bridgeman: Yeah, no kidding. Absolutely. Thank you so much for coming on the podcast and chatting a little bit. It’s been really interesting hearing about fire protection as an industry. We haven’t had kind of a podcast reviewing thesis in too much depth. So that was really- that was great. Thanks for sharing. It was great to have you on. I’m looking forward to chatting again soon.

Luis Reyes: Yeah, no, thanks for having me. Hopefully we can catch up in a few or years or so. And let’s see if we were able to consolidate this beautiful industry.

Alex Bridgeman: Yeah, absolutely. I hope it works out.

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