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Rick Ruback & Royce Yudkoff – Think Big, Buy Small – Ep.231

Rick and Royce are Harvard professors for entrepreneurship through acquisition and co-authors of the most popular and well-known piece of content in search, the HBR book How to Buy a Small Business.

Episode Description

Ep.231: Alex (@aebridgeman) is joined by Rick Ruback and Royce Yudkoff.

My guests today are Rick Ruback and Royce Yudkoff, both Harvard professors for entrepreneurship through acquisition and co-authors of the most popular and well-known piece of content in search, the HBR book How to Buy a Small Business which I would consider the bible of the search fund world. It’s one of the first resources I recommend for folks wanting to learn about search, besides this podcast of course. On top of the book, Rick and Royce have now launched their own podcast titled Think Big Buy Small that is a great primer for search funds, especially self-funded models, and I highly recommend giving it a listen.

Rick, Royce, and I talk about their careers as professors, case studies on small business they often reference, common threads through case studies and advice for new CEOs, ways search has changed, and the mission of their new podcast.

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Learn more about Alex and Think Like an Owner at

Clips From This Episode

Favorite Cases to Teach

Becoming a More Effective Teacher

Hood & Strong LLP – One of the nation’s premier full-service public accounting firms, Hood & Strong LLP provides buy- and sell-side quality of earnings, due diligence, assurance and tax services to search funds, private equity firms, and business owners and investors. The H&S Advisory team helps expedite a smooth, cost-effective transaction process that maximizes value and minimizes tax impacts for both buyers and sellers. To learn more about how Hood & Strong can support your M&A objectives, please contact Transaction Advisory Group Partner 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].

Interested in sponsoring?

(00:00:00) – Intro

(00:02:18) – What made you decide to write the book?

(00:07:17) – How have you become a more effective teacher?

(00:12:29) – What cases or scenarios have been most challenging for CEOs to work through?

(00:19:03) – What are some reasons searchers buy cyclical businesses?

(00:25:06) – What recurring concepts are you trying to teach or questions CEOs ask?

(00:28:32) – What are your favorite cases to teach?

(00:33:16) – What’s changing or evolving in the Search space?

(00:40:56) – What are the missions and goals of the Podcast?

(00:46:11) – What would you add if you wrote a new book edition?


Alex Bridgeman: Rick and Royce, thank you for being on the podcast. It’s great to see and meet you both. I’ve read your book and followed your work for a long time and it’s fun to actually get to chat with you both on a podcast. This is going to be a ton of fun. Just as a personal curiosity around the book, anyone I know who is in the search fund world has either read the book or read it several times and sent it to friends. What made you decide to write that book in the first place and put it out there as a kind of template for a couple generations here of searchers now?

Royce Yudkoff: Rick and I saw after a few years of teaching how searching really wasn’t limited to HBS MBAs or MBAs but was something that was really doable by a wide range of people, people who perhaps never went to business school but are 10 years into their business career and doing fine but not happy and don’t know quite how to express their entrepreneurial desire, and we thought a book is a way to reach beyond campus and touch these people and influence them. Rick, what would you add or change about that?

Rick Ruback: Yeah, we teach two courses at the Harvard Business School on small business. The first one is a case course that takes you through different ways to buy a business, different types of searches, different types of enterprises, different types of situations that small businesses find themselves in, both buying, running, and exiting. So that course is, as I said, a case course. We then had demand for what we at Harvard called a field course, an opportunity for students to just come in and explore the field in a kind of less structured way. And it was a funny thing, Alex. We had six or seven students come to us – you might remember this, Royce – in December just before classes ended, but before we started this lovely task of grading 300 exams. And they said, hey, would you guys be willing to do an independent study? And we said, well, yeah, but what is it going to be on? And they said, well, we want to talk about how you actually go out and buy a business. And we said, great, well, if there’s six of you, we should do this in some organized way. So, let’s just say we’ll meet regularly, and the six of us will work together on this. We won’t do six meetings, individual meetings, we’ll do one meeting together. So that’s how we left it. And after the students returned, that six became 17. And the registrar wisely said, well, if you have 17 independent studies, that’s kind of odd. It seems like you should just offer this as a class. And we did. And next thing you know, we had 35 students in the class. That’s our second course on Entrepreneurship through Acquisition is the title of the course, but that course goes through the details of how you actually buy a business from the very beginning, how you think about your search, how you design your search, how you fund your search, all the way through closing. And that course got a lot of traction, and so what we discovered was the material that we were teaching in that course through our outside guests and ourselves was just not generally available. And academics are all about influence, and so we had this idea, we knew something about buying a small business that there was demand to know and people were eager to learn, and so we thought what a great contribution, so we wrote the book. I would just say that sentence seems so much easier than the process actually was, then we wrote the book. Not so much. I mean, it was, I don’t know, a two year process or something worse.

Alex Bridgeman: Yeah, we were talking about how the podcast, the recent podcast you’ve started, has been in some ways more challenging than you expected, but a two year process to write a book still sounds an order of magnitude more challenging.

Rick Ruback: And it’s a small book, but the challenge of the book was how do we get the ideas across without it being super dull and be a little bit engaging, teach a little bit of economics, and at the same time teach a little bit about the mechanics of how you actually buy a small business.

Royce Yudkoff: I think one of our themes in the book was to be super practical, and that we succeeded at. I mean, you read it, Alex. It really is all about how to do this and I think it succeeds.

Rick Ruback: Right, but there are places, Royce, where we’re sneaking in our views of the world, like barriers to entry and the like, and by our enduringly profitable business concept and a few other things where we’re giving our view of the economics, the importance of margin, and things like that.

Alex Bridgeman: One thing I’m curious about with professors and teaching, there seems to be a lot of crossover between the skills of a professor and that of a CEO and entrepreneur in terms of being able to get a room together and convey ideas and solicit feedback and explain through concepts. Have you noticed that there are certain tactics or things that you do as a professor that have made your teaching more effective over time?

Rick Ruback: Well, I’m thinking of what a perfect group to ask this question to because as you know, Alex, Royce had a real job before he became a professor, and I never have had a real job. I’ve been a lifelong professor. So, it’s kind of a great question to ask us because we come at this problem through kind of two different directions.

Royce Yudkoff: I was going to say, Rick, that I had been a businessperson and always aspired to be a professor. And you had been a professor and always aspired to be a businessperson.

Rick Ruback: That’s probably true. That’s probably true.

Royce Yudkoff: Alex, I can speak for the Harvard Business School better than for other schools, but traditionally the school has always had a faculty that’s deeply engaged in business, and so there’s a lot of- and the whole idea is that the faculty sort of brings back real life important experiences from practice and teach it in the classroom and so that’s sort of a major crossover. Rick and I started teaching this area, and as we became interested in it, we became investors in search and board members of search companies, and so that was enormously synergistic with our teaching because we bring back real problems and real lessons from the search world. And with those cases, we often bring back the CEOs as guests in class. So to us, there’s a tight, tight, tight connection between what really happens in search and our teaching. So that’s one way to answer the question. Rick, what would you say?

Rick Ruback: Well, I was just going to extend what you said a little bit, which is one of my favorite things now is that our new cases are almost always our students who have gone out and done something interesting and keep us in touch along the way, sometimes commercially, but mostly not, and are willing to cooperate with us to write a case and describe their experiences. So, we’re in this wonderful flywheel of a moment where our academic research, our cases, our teaching almost is self-generating. I mean, we’ve got to do a lot of work, but the ideas are coming from people we know, and they know us because they took our class. So, it’s sort of fun.

Alex Bridgeman: Are there any recent examples in the last year or two, some way that a CEO is running their company that you thought, oh, that’s interesting, I’m going to apply that to my teaching? Is there any recent example that comes to mind perhaps?

Rick Ruback: I mean, there’s so much that we learn from our guests and our cases where all the time, one of the things that’s great about teaching by the case method is you end up having to talk to people who are in interesting situations. And about half of those interesting situations or so turn out to be cases, interesting potential cases, and then maybe half again work out. And in each one I think we learn something. I will just tell you, last year one of the cases that we developed was a multimedia case, and it was a little bit off the beaten path for us. It was set in Park City, Utah. It was a small coffee shop, subscale, not the kind of thing that you’d search for. But what these entrepreneurs did was think about the problem of employment in a very different way than we have normally thought about it. And they employed people with Down syndrome into coffee shops and other intellectual disabilities. And that allowed us to get this lens into the employment of people with disabilities. And the question is, the question that I think we both found really intriguing is, particularly in this environment where hiring and retaining workers is so challenging, is there a segment of the workforce that is not being engaged that could be? So, for me, that was a great journey and really intellectually interesting.

Royce Yudkoff: I think I agree with that, and it also sort of drives home to students that one of the things you get when you buy your own company and are CEO is the ability to make decisions that matter. You don’t have to ask permission of a whole chain of command. If you want to try something, even something that’s substantially different from what other competitors are doing, you can do that. And I think this example really drives that home to our students about what you get when you’re an entrepreneur.

Rick Ruback: And it’s such a feel-good example. I mean, it’s an example of two young women, two young entrepreneurs going ahead and really changing the lives of so many people and influencing their community and opening up opportunities for people who just wouldn’t have any. So, it was a delight.

Alex Bridgeman: What types of cases in the last couple years of teaching do you feel like have been most challenging and why? Like what types of scenarios do you find are most challenging for CEOs to work through?

Rick Ruback: I could start if you want, Royce. Our students always wonder about what they call feel-good cases and happy-ending cases – is it the case that if you buy a small company, nothing can ever go wrong and you just get wealthy and everything goes great? And so, I don’t know, about 10 years ago, we added something that I call Stephen King Week. And Stephen King Week are small businesses that did things, unfortunate things happened or people made unfortunate decisions. And some of those were set in the Great Recession. More recently, some of those are set in the COVID era and in 2020, trying to adjust to the changing winds of COVID, both regulatory and obviously health risks and manage a business at the same time. So that’s really fascinating. It is really challenging to get protagonists to come and say, I’m here to share how I goofed up. Not a lot of people want to talk about how they goofed up. But it’s great. We have, I don’t know, four, five, six CEOs who routinely come or are on tape or have been videoed having those discussions and share those circumstances with the students. It’s not easy. I really admire people who are willing to do that.

Royce Yudkoff: One of the things that I love most about Stephen King Week is nothing can avoid some calamity that comes out of the blue and hurts your business, what Rick and I sometimes refer to as walking down the street and the piano falls on your head. But there are certain attributes you can look for in businesses that cause the businesses to be much more robust. And one of the things that Rick and I try to teach is there’s three or four or five characteristics that you can identify that make for – Rick, and I think these were your words originally – an enduringly profitable small business, and we’ve come to use that as the goal. And so, when you look through either successes or something like Stephen King week, it’s a way of teasing out why those are so important. Like for example, the characteristic that Rick and I put in front of all the others when you’re looking at a small business is both something that leads to high returns, but it’s also safety of principle. Rick, do you want to talk about that? We’ve been together so long, we can…

Rick Ruback: Yeah, I think you’re referring to recurring customers.

Royce Yudkoff: Yes, sir.

Rick Ruback: I was able to guess that. Yeah, the idea that if you can buy a business where 60, 70, 80% of your customers are recurring and what we mean by recurring is not necessarily just repeating. What we really want is something with high switching costs where the customer would have a very, very hard time changing suppliers. That’s what we really want. So we want some reason why the customer is going to stick with you if you goof up, hopefully you never will, but you might, or if you need to raise price, or if there’s a blip in quality, those kinds of things. If there’s no switching costs, if it’s just a coffee shop, and you might go to the same coffee shop for five years, but the day you get a lukewarm cappuccino, you’re going to walk to the Starbucks down the street or go to Pete’s or wherever you’re going to go, whatever the alternative is, there’s another coffee shop around the block. You don’t have great loyalty to your coffee shop. It’s easy to walk down the block. You want something that makes it hard to change.

Royce Yudkoff: So, characteristics like that make the difference between surviving rough seas and sinking, and we try to teach our students that through both negative examples and positive examples, and that comes through the book and the podcast as well.

Rick Ruback: In Stephen King week, what we often find is when you look at the collection as a whole, there are circumstances where people put themselves in harm’s way. They bought highly cyclical businesses, and they put a lot of operating leverage and financial leverage on them and had a very limited capital structure so that they didn’t have equity sources to go back to in the case of a blip.

Royce Yudkoff: Customer concentration sometimes was an issue, too.

Rick Ruback: Yeah, customer concentration, particularly customer concentration without, project businesses with customer concentration and high leverage and high cyclicality. What could go wrong? I mean, if everything goes right, it might be fabulous. But when you hit a bump in the road, you stub your toe, there’s COVID, there’s a great recession, there’s who knows what’s next, those businesses can go sideways and south very quickly.

Royce Yudkoff: And those things are identifiable in advance. To a disciplined searcher screening businesses, things like recurring revenue, low cyclicality, low customer concentration really protect you if you buy a business like that. You don’t have to try and predict what’s coming. You’re safer.

Alex Bridgeman: Have you met Stephen King? I thought he was up in Maine. You should have him come down and speak.

Rick Ruback: I’ve never met Stephen King. He and I are both Red Sox fans. He, I think, has much better seats when he goes to the games than I do. But I’ve never met Stephen King. Royce, have you met Stephen King?

Royce Yudkoff: I’ve never met him, but I like to imagine he would be honored that a week of Harvard Business School teaching is named after him.

Alex Bridgeman: Yeah, what an honor that would be for him, I’m sure, really highlight of his career, I think.

Royce Yudkoff: Yeah, Stephen King, if you happen to be listening, call Rick Ruback at the Harvard Business School.

Rick Ruback: Call either one of us at the Harvard Business School and we would be happy to meet with you and have you as a guest on our podcast. It would be so much fun.

Alex Bridgeman: Yeah, lots of fun. Are there any- From searchers who’ve bought the cyclical business that maybe is less predictable, what are some reasons that that happens? Is that a lack of discipline or maybe something was just harder to identify as cyclical versus something that’s not? What are some driving factors behind that?

Royce Yudkoff: I think it varies. I mean, we certainly have searchers we know who have bought cyclical businesses and they’ve caught the cycle right and it turned out well for them. And they would say that they’re good at calling the future. They’re good at calling the bottom. And Rick and I have sort of said to them that really it’s more like farming under the volcano, that it seems right now and the timing just better be great. And these searchers, they’ve done a couple of executions like that that worked and one that was disastrous and sort of what you’d expect. It’s a chancy business. So I think some people think they can predict economic cycles, which is really hard to do. I think some people fall in love with other characteristics of the business, like price for example, a cheap price, and don’t fully reflect on how risky it is to buy a business, put debt on it, and have it be a profoundly cyclical business. And they’re just mis-weighing the pluses and minuses. So those are a couple of thoughts of people who do this. Rick, I don’t know if you’d add anything to that.

Rick Ruback: Well, I would just say sometimes you don’t really know.

Royce Yudkoff: That’s true. That’s a really good point.

Rick Ruback: Sometimes you don’t really know. Sometimes, if you go back to the, I don’t know when the right time is, 1950s, 1960s, I don’t know if it was the Beatles or Elvis or Perry Como, but it was something like that, there was this sense that there were well-defined cycles in the economy and people looked at the automobile industry, and so as the automobile industry went, so went the steel industry, so went… There was this idea that you could look at the industrial sector and watch a recession ripple through the economy so that there were these well-defined cycles. Cyclicality is much more confusing now because the industrial base is much broader. A lot of it’s software, a lot of it’s AI, a lot of it’s different technologies, different medical care, all that stuff. And so, I think it’s harder to tell in cycles, and you certainly find instances where businesses go into cyclical downturns when if you looked at the last cycle, for example, you might find a business that is a provider in some way to the petroleum industry. That industry certainly has highs and lows. But if you’re a supplier, it may be that it looks like you didn’t have a cyclical downturn when prices went down last time. So you might be fairly convinced that you have found the niche that will allow you to get rich without incurring these risks and the price is right and so you go for it. And then in the fullness of time, what you learn is that there had been production problems, and the reason why you didn’t get a dip in revenue wasn’t because there wasn’t a dip in demand, it was just you were filling old orders. But once the channel gets unstuffed, it could turn out to be a very highly cyclical business. So sometimes, the data are hard to tell, and as you know with small business, the data often is pretty limited. And with that limited data and it’s such a niche-y space, you can’t always tell. It’s not like you can look at 10 years of commodity data or 20 years of commodity data for a small business and make some sense. That kind of analysis just is almost never doable.

Royce Yudkoff: Well, just reflecting on Rick’s point that it’s hard to tell, Rick, you and I worked with one former searcher who bought a warranty business that provided kind of insurance on repairing used cars, and when you looked at prior recessions, they sailed through them without any difficulty and you could easily convince yourself and the truth was that people traded down in cars in recessions, and so car sales might go down in aggregate but used car sales went up, and so their business was fine. And then a searcher bought this right before the Great Recession, and it turned out that used car warranties were generally wrapped into the car loans when the used car was purchased, and in the Great Recession, it wasn’t just a Main Street recession, but of course, there was a tremendous retraction of available debt including low credit rated automotive debt and that was just retracted, and suddenly people couldn’t get loans that covered these automotive warranties, and they were now caught up in a recession where they hadn’t been before because it hadn’t been a credit recession. That’s a good example of it would be really hard to predict that because the prior recession- that’s Rick’s point, that sometimes you can look at the past and you get caught because the future is just a little different.

Rick Ruback: Right, because the underlying financial structure changed in a very subtle way. And if you weren’t living it, you wouldn’t have known it.

Royce Yudkoff: So, it helps to have a business where customers can’t easily leave you and all of these characteristics that we say comprise a durably profitable business because you want to be as protected as you can be.

Alex Bridgeman: In each of the cases and classes that you teach, are there recurring concepts that you’re trying to get students to understand or any recurring questions that in each case a CEO should be asking or start trying to understand? What’s the through thread?

Rick Ruback: Well, I think in our course, the thread is really the insight that all my colleagues always laugh at me about. They say, Rick, you’ve been studying small business for 15 years. What have you learned? I always tell them that what I’ve learned is that small businesses are small. What I mean by that is that all the scale economies that we take for granted in most normal sized businesses, the businesses that most people think about when they think about business, businesses that make tens of millions of dollars or hundreds of millions of dollars in profits, those businesses have a deep management bench, they have specialization within management, they generally have low customer concentration, all the things that come with size. They can negotiate bank loans, they can maybe even issue debt or equity in the public markets. Whereas when you come to a small firm, it’s all so different because they’re small. The sources of capital are very limited because they’re small. Diversification of customers tends to be much less because they’re small. So silly as that is, one of the reoccurring themes is that corporate finance is just hotter for a small firm than it is for a big firm.

Royce Yudkoff: I agree with that as a sort of repeating learning experience. I’d add, Rick and I bring in the case protagonist in almost every class, and there are a number of reasons we do this, it sort of further elucidates the case and lets people ask questions. But one of the main reasons we do it is we want our students, future searchers to look at entrepreneurs through acquisition and sort of try to ask and answer, could I be that person and do I want to be that person? And I think one of the things, and Rick, I’d be interested in your comment on this, I think one of the things that students see again and again is these often successful entrepreneurs, very successful entrepreneurs through acquisition, they aren’t superhuman. I mean, they aren’t Elon Musk and Richard Branson and that’s the minimum bar you have to cross to do this. They’re actually regular people just like them. They’re energetic and well-organized and they can communicate well and have positive qualities, but it’s an accessible set of qualities. And I think that’s a central theme because we really believe that. Rick, what do you think?

Rick Ruback: I agree with that entirely. I think another way of saying what Royce just said is that we believe this space doesn’t get enough attention. People don’t quite understand how cool a career it is to become a CEO of a small business.

Alex Bridgeman: I like the through line of businesses are small, corporate finance is hard, that these CEOs are human, they’re just like us, they’re not these super humans that we can’t relate to or envision ourselves becoming. Are there any favorite cases you enjoy teaching because of some concept that they bring out and convey to students?

Rick Ruback: Well, cases are a bit like kids; they’re all our favorites. They’re all our favorites. And I really do mean that because by the time you get to teach a case, you know it pretty well and you’re usually pretty invested in the ideas and concepts. And if you take Royce and I, I think all of our cases for the last 15 years are cases that we’ve, at least most, all but one or two, are cases we wrote. So, when we teach them, they’re really- it’s not like we’re teaching some concept out of a chapter. This is really part of our lives. So, these case protagonists, they’re not- maybe they’re like cousins, I don’t know, but they’re like family members you don’t see all the time, but certainly, when they call, you pick up the phone because you want to know what’s going on in their lives and in their world. I don’t know, that wasn’t a good answer. I don’t know if I have a favorite. Do you have a favorite, Royce?

Royce Yudkoff: I can’t say I really have a favorite. I think that one of the cases you and I wrote that has tremendous impact on students is a case called Nurse Care, and it’s one of our former students who went out and bought a home nursing company down in the southeast, but what was so special about it is he was one of the early self-funded searchers, and he had very little money of his own like many early career entrepreneurs. And so, he took out a small business administration loan, which we can talk about later in the podcast if you like, Alex, and he had the seller take back a note for part of the purchase price, and that allowed him to buy this business for a very small component of equity, which was good because he didn’t have any equity to speak of. And he went around to investors to raise that money. But because the business was bought at such an attractive low multiple and because of the high financial leverage he was able to get through the small business administration loan, which doesn’t put pressure on you to repay, you have to repay but it gives you a lot of time, the return on equity was very, very high. And he could sell off a small percentage of the equity to investors to get the remaining cash he needed and keep most of the equity in the company for almost no money of his own. And it really shows a path to becoming your own boss, controlling your own smaller firm, getting all of these entrepreneurial economic upsides, how you could do that without any money to speak of. And it’s an electrifying case, Rick, right? We always get a big response to it because it shows how practical this is.

Rick Ruback: Right. And it’s really only one of a few cases that follow that same route where people start with nothing, no capital as a self-funded searcher and are able to fashion a transaction which gives them substantial controlling interest in a business. And sometimes, they do super well in those businesses. I’m thinking our Burger King guys, I’m thinking about Heritage Holdings. There are just a number of instances where people have become among the most financially successful students. And they do that by believing in themselves and buying 25 Burger King franchises for zero dollars down in the summer between their first and second year of business school. It’s really impressive stuff that our students do.

Alex Bridgeman: How have you noticed search change over the last many years? It’s become massively more popular. The 2024 Stanford study was released maybe two hours ago. I’m not sure if you’ve gotten to flip through it at all. I just had time to read the executive summary. But the number of search funds being raised has not slowed down by any stretch. And I assume the self-funded proxy would probably be very similar. So, becoming much more popular, but is there anything specific you’ve noticed that’s changing or evolving in search funds from your own vantage point?

Rick Ruback: Sure, I think there are evolving differences between funded and unfunded searchers that didn’t exist before. It used to be that funded searchers, people who went out, got investor capital to fund the search phase of their journey, those funded searchers bought businesses that were pretty similar to unfunded searchers, people who did it on their own capital and did it in a very scrappy way. And what I mean by that is they were buying businesses in the million to two million dollars of EBITDA and paying about the same multiples. That’s if you go back like 10 years or so. You think that’s fair, Royce? And now, because of this growing, I guess I should call them institutional investors or institutions, they’re not universities, they’re funds that have been raised to support funded searchers, Pacific Lake Partners and a whole slew of them. And what you find in those is they favor bigger transactions. And so, what we’re seeing now is unfunded searchers generally buying businesses still in the $1 million to $2 million of EBITDA range and paying three to five times depending on the quality of the business. We’re finding funded searchers though looking for much, much bigger acquisition targets, looking in the $5 million EBITDA range, looking at total enterprise value. So, if you think about the funded searcher paying on average four times a million, so four million, unfunded searcher paying four times one million or $4 million in total enterprise value with maybe well less than a million dollars of equity. Royce, what did you tell me recently? That the average equity check for a funded search is now?

Royce Yudkoff: It’s now $8 million and the average enterprise value is like $17 million. So four times basically, four more times the size of self-funded searchers in size.

Rick Ruback: Yeah. So very, very different.

Royce Yudkoff: I think that’s the most, what Rick described is the most important change we’ve seen. I’d add to that, another change we’ve seen is when we were in our early years of teaching, raising debt was reasonably hard for searchers because these smaller loans that they were seeking to take out naturally come from local and regional banks which lend in a geographic region, and so they’d get a deal under letter of intent and then have to run around like a maniac in whatever that region of the country was to line up the debt part of their purchase price by going around to the local or regional banks. And it really wasn’t a great way to buy companies. Over the last decade or more, we’ve seen a number of lenders really get educated about search, and in some cases have specialty departments that focus on funding search funds or self-funded searchers. And so, you can establish a relationship with them at the start of your search, and they’ll follow you to any part of the country you happen to buy a business in. And that’s been a great facilitator for searchers.

Rick Ruback: And I guess, extending that though, is that debt, while debt is more readily available, it’s much more expensive. So the difference, typically a typical search fund entity would be able to put three times EBITDA as debt and do it either through an SBA or commercial loan. SBA, they might be able to go a little higher than that. Now, just because of the interest coverage, it is often the case that people want to limit their debt, at least senior debt, to two times. So debt, the amount of debt financing has gone down, not because of availability, just because of expense. And the expense is just due to higher interest rates. So those interest rates, they’re part of the landscape now, and we have to adjust. But the net of all that is that there’s less leverage particularly in the big deals. That means there’s more equity. That means it’s a much more challenging environment for the searcher to make it personally rewarding.

Royce Yudkoff: One comment I’d love to come back to is something you said, Alex, at the start of this question which is, yes, it’s true there’s been a big growth in both search funds and self-funded searchers. Rick and I have witnessed that every year over the last 15 years we’ve been teaching. But it is still a tiny number of buyers relative to the businesses that come up for sale. I saw a statistic, you and I haven’t had a chance to talk about it, Rick, because I just came across it last week, but in the first half of this year, over 80,000 small firms came up for sale. If the last half of the year is the same as the first half, that’s 160,000 small businesses. Now, some of them are too small, some of them are terrible businesses, but I don’t know how many searchers are currently in the market but it numbers in the hundreds at most, the low hundreds at most. So, there’s a huge imbalance between a gigantic base of our business economy and the number of searchers.

Alex Bridgeman: And your new podcast is Think Big, Buy Small, which I think ties into this really well. Is there some view on self-funded search that comes through in that podcast title? Or what’s behind the title for you both?

Rick Ruback: It was actually the subtitle of the book, so obviously you read the book, but that didn’t stick with you, that’s okay. It’s hard to compete with the HBR logo. But that’s how we think about it. We think about it as you can expand your opportunities, that is the thinking big part, by buying a smaller business. That’s going to give you the opportunity to build the world you want to live in, and if you do it well or even average, you will, we think, end up with at least the same financial consequences as you would if you took a job, a more typical post-MBA job, and in a great many instances, a substantially better financial outcome. At the same time, you have flexibility, executive control, you get to work with people you want to work with because you get to hire them. You get to work in the business you want to work in because you picked it. You get to work on things you think are important because it’s your business, it’s your money. Of course, that’s important. So there are so many advantages to being an entrepreneur and being CEO of a small business, that we think about the title as emblematic of that. Think big, think about big opportunities, and the big opportunity is to build the world you want to live in by buying a small business.

Alex Bridgeman: I like that. What are some of the missions and goals of the podcast? It seems like a nice…

Rick Ruback: I’m going to let Royce go with that one because on some of these long days, I was wondering that, but no, just kidding.

Royce Yudkoff: Well, I think Rick really, when we were starting our brainstorming of this podcast, kind of codified our direction, which is there are a lot of people who get excellent training in entrepreneurship through acquisition, not just at HBS, but at a variety of other business schools. But the equal truth is there’s a much larger population of people who are terrific prospective small firm entrepreneurs. In my mind, the archetypal candidate for this is someone who’s in their early 30s, mid 30s, they work in someone else’s company, they manage some people, they have some P&L responsibility or partial P&L responsibility for a revenue budget or a cost budget or both, but they’re just not happy with their career and they’d like to be an entrepreneur, but starting a business from scratch is scary and maybe they don’t have a big idea that would lead to that. And so, they don’t quite know how to gain that professional and financial independence. And that’s the target of our audience. It’s interesting and useful for MBAs too, but it’s really for people who would be great entrepreneurs but haven’t been introduced to this material. And that’s who we want to reach out to, and that’s what HBS wants us to do too, to take these ideas and push them far beyond campus.

Rick Ruback: Yeah, our very first podcast episode, which is live now, features Geoff Duckworth. And Geoff, it turns out, was a high school friend of my son and happened to mention to my son in the kind of reunion get together sort of thing, what are you doing now? And he said, oh, I bought this book by these two guys at Harvard and decided that I would do it, so I bought my own small business. And that’s our first episode. And it’s a really intriguing episode about how Geoff does, I think, really special things for himself and his family by buying a small business. And we end the season with one of our students who grew up in foster homes and struggled as a child, made his way through some state colleges, and then found his way to HBS, had a good job, a good investment banking job, or private equity, I guess private equity, Royce? Yeah, private equity. And then decided he really wanted to bet on himself, so he bought a small HVAC business that he was able to grow organically in a very special way and do some add-on acquisition. And we talked to him, and his family was on a long vacation in Europe and they’re doing pretty well and life is really good and he’s not thinking about where he’s going to get his next meal anymore. And it’s wonderful to see those stories, that people believe in themselves, people take their energy, and instead of working for somebody else, they work for themselves.

Royce Yudkoff: Alex, I think there are two parts to what we’re doing in this podcast. One part is really walking people through how you get this done. Because there are a set of steps you really want to know, and it’s hard work, and some days are discouraging. Neither Rick nor I would paint this as an easy path. We’d just say with confidence, it’s a doable path. So one part of the podcast is that sort of teacherly piece of this. I think the other piece of the podcast is making people aware that this opportunity exists, that this enormous opportunity is hiding in plain sight here in the United States. And I say that because Rick and I frequently get the reaction from people, including people who are students at HBS, that they just were never aware that this was a possibility and that once you present it to them, the light bulb goes on at a minimum that they should spend some time investigating it because, as mentioned earlier in your interview, there are hundreds of thousands of small businesses in the United States owned by founders who have a rendezvous with retirement and they’re going to need to sell these businesses and someone’s going to need to buy those businesses. The other piece is that the financing is available. There are plenty of individual and some institutional investors who want to put money in small firms, the debt is available, and the small business administration program is a magnificent way to become a small business owner. I think it would be fair to say that through that program, every American has the right to borrow up to $5 million from the federal government to buy a small business. What a country this is that that opportunity exists.

Alex Bridgeman: If you wrote a new edition of the book today, would you add any additional chapters or concepts to it?

Rick Ruback: We have that conversation a lot and chose to do the podcast instead, but just kicking the can down the road a little bit on a revision of the book. Certainly, we would talk about the changing structure of funders and investors. That’s really significant. We would probably talk a little bit more about the decision to self-fund and the challenges that go with that. Yeah, I don’t know. It’s hard to look back. One of the things that has happened since we wrote the book is, of course, COVID, and COVID has resulted in so many changes in the small business environment. First, there was so much government intervention into the world of small business with special purpose lending, PPP loans, ERC loans or grants or whatever they are, lots of government intervention. And the book doesn’t cover any of that. I don’t know if that’s transitory or not. The ERC stuff is still going on. Presumably that will get resolved sometime soon. And I don’t know if the government will continue beyond the SBA to provide special financing for smaller businesses. Not sure about that.

Royce Yudkoff: Well, one long-lived follow on from COVID, Rick, that you and I have talked about is the growth of businesses that are operated virtually. Before COVID, searchers broke into two categories. They were either willing to buy a business almost anywhere and move there, or they had a geographical focus and would only buy a business in the geography in which they wanted to live. Since COVID, it’s become very possible for searchers to buy a business which is run virtually, they can live anywhere, presumably where they are now, and run those businesses. Although, Rick, you’ve pointed out quite fairly, I think, that large businesses can operate that way. There’s still an open question about whether small businesses can really operate that way. But for now, we’re seeing a lot of those enter the search world.

Rick Ruback: That’s correct. I think that’s exactly right.

Well, we’re coming to the end of our time, but Rick and Royce, thank you so much for coming on the podcast. It’s been really, really fun to get to chat with you and exciting to see your own podcast coming out. I’m pretty excited to keep listening to it, so thank you for putting it together, and thank you for the book too. That was an inspiration to read when I was in college. So that was a fun kind of kick-starting of that idea that, oh, you can go buy a small company. It’s not something that is so foreign that you can never achieve. So I really appreciate that.

Rick Ruback: Alex, thank you so much for having us and best of luck on your journey. Keep us posted as you search. It’ll be fun to hear about.

Royce Yudkoff: It was a delight. Thanks, Alex.

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