March 21, 2025 • 60 mins
A new generation of buyers trained in Entrepreneurship Through Acquisition (ETA) is looking for businesses like yours. Unlike private equity firms focused on roll-ups, ETA buyers are often searching for a single business to own and operate—making them a legitimate option for certain sellers.
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Episode Transcript
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(00:01):
Rick Bruback, Roy Stewart-Kaff, what can I build to sell radio?
It's a pleasure to be here.
Thanks for having us, John.
It's a delight.
I'm a little intimidated guys, a couple of Harvard profs.
This is going to freak me out a little bit.
Tell me about acquisition.
For those of you who are listening, you will have to check out the YouTube channel andtake a look.
(00:27):
in any event, I'm really excited.
You are two of the world's most experienced and recognized experts in this field ofacquisition entrepreneurship.
So I'd love to dig in.
because I think a lot of our listeners have notionally heard about acquisition throughacquisition.
They've maybe been approached by a searcher and they're curious about it.
(00:48):
So I'm really looking forward to Digne and maybe we could start with maybe a basicdefinition for folks who don't know what entrepreneurship through acquisition is.
Can we just maybe start off there?
Royce, maybe kick us off.
Sure.
Well, everyone has kind of heard of acquisition through startup, right?
That's the famous bigger cousin to entrepreneurship through acquisition.
(01:09):
So entrepreneurship through acquisition appeals to people who want to be entrepreneurs,people like so many of your listeners, but who don't want to take the risk of starting
from scratch.
Or maybe they don't have the big idea that is usually behind some startup, but they'regood, practical, scrappy managers.
And what they want to do is go out and buy a profitable smaller business, usually from aretiring founder, negotiate some kind of short-term transition agreement where that
(01:38):
founder eases the transition, and then that buyer takes over the company as CEO afterhaving organized the transaction.
They usually have somewhere between seven and 15 years of
prior management experience in other people's companies, although not usually in theparticular industry they buy in.
(01:59):
They've lined up some debt financing from banks that commonly lend to the purchases ofsmaller companies.
And they've commonly raised some equity from a group of recurring investors who invest inthese so-called acquisition, search acquisitions or acquisitions, entrepreneurship through
acquisitions.
(02:20):
And so this happens again and again and again and again.
to sort of help people who've built a successful business and want to retire, retire andhave someone succeed them in running it and organizing the sale and then creating the
entrepreneurial dream for this next generation.
You teed me up for the question that I wanted to ask first, which was, how do they get themoney?
(02:41):
As I understand it, are students coming out of an MBA program.
They probably get student debt.
They may not have had a lot of success leading into it.
Where do they get the money?
You mentioned there are banks and there are people that sort of support economically theseefforts.
Rick, maybe do you want to walk me through, in basic layman's terms, how are they gettingthe money to buy a business?
(03:06):
Sure.
At the time they go to buy the business, it's not really hard.
There's local commercial banks that lend.
There are SBA loans designed for these kinds of activities.
And for equity investors, there's a lot of people interested in providing private capital.
(03:31):
at attractive rates of return for these kinds of investments.
You know, it's an easy investment to make because it's so transparent to the investor.
They're not buying pieces of paper.
They're buying to them.
They're actually seeing the business they're buying.
They're buying a manufacturing business.
They're buying a service business.
(03:52):
But they can see, yeah, I get it.
They mow lawns.
I understand what that business is.
I understand what people pay.
I understand
where the employees come from.
It's easy to understand business.
What Royce and I find fascinating and I think true more generally than just our experienceis we've been doing this for little over 15 years, teaching it, doing a little investing
(04:22):
on the side, being in contact and being in the flow of this ecosystem for...
pretty much all of that time and we've never heard of an instance where somebody purchaseda company, wanted to purchase a company that was a good company at a fair price that they
could not finance.
(04:42):
Okay, let's walk through it and imagine it's a $10 million company.
That's the value that the owner wants.
Let's just walk through the capital structure.
How much is debt?
Sure.
oftentimes people who want to sell think that the value is determined by how much moneythey want.
Because they sit down and they say, I want to buy this boat and this condominium, and Iwant to be able to spend this much money on travel every year, and I want to buy my new
(05:12):
wife a new gift or my new husband a new gift.
husband a new car, my new wife a new ring, whatever it is.
And the problem is that's of course not what determines the value.
What determines the value is some multiple of the ongoing cash flow of the firm.
So think about that as being somewhere around four times the value, the cash flows of thefirm.
(05:40):
Maybe five if it's a bit larger, if it's a larger small firm, a bit less if it's a, youknow.
a larger small firm, so your example, $10 million, that firm would have to have prettyhigh revenue quality, so lots of recurring customers, something Royce and I call enduring
profitability, together with about $2 million of cash flow, or $2.5 million of cash flow.
(06:05):
Okay, so let's walk through this.
So let's imagine you've got a company with $10 million of revenue that are putting $2.5million of EBITDA to the bottom line.
The revenue is high quality.
It's in a protected industry.
It's a decent business.
Okay, so walk me through, if I'm an acquisition entrepreneur, I'm a graduate of yourprogram, where am I getting 10 million bucks?
(06:28):
Mm-hmm.
So, Royce, do you want to do this?
You want me to it?
Yeah.
So whether it's in the US or Canada, conventional commercial bank is going to beinterested in lending to that business and the commercial bank will probably lend about 50
% of the purchase price, maybe a little bit more.
(06:49):
Or another way of thinking about it is the bank will look at that two to two and a halfmillion dollars and want to lend two, two and a half times the cash flow.
So either way,
about $5 million of that $10 million will come from a commercial bank loan that will berepaid over about seven years.
And is that acquisition entrepreneur personally guaranteeing that loan?
(07:11):
Generally not.
For very small, small businesses, they will want a personal guarantee because there's sucha key man element to the business, but for a business of that size, it's likely there will
be no personal guarantee.
We'll talk about SBA loans for your American listeners later, but think of there asprobably no personal guarantee.
(07:33):
Usually in these transactions, not always, but the majority of the time, the seller willtake a small seller note.
And so that might be in a transaction like this, a million dollars out of the $10 millionpurchase price.
Two.
two, two and a half, something like that.
define a seller note for those who aren't familiar with that terminology.
(07:55):
Sure.
So the part of getting these smaller firms sold is that the seller will step in and deferpart of the purchase proceeds they get.
So if the total price is 10 million, to choose Rick's example, they might get seven and ahalf or eight million at closing in cash, but two, two and a half million, they might get
(08:17):
over the next four years in a seller note.
They'd get interest on that seller note, probably better than they'd get if they depositedthe cash in a bank.
but they'd wait.
And then the remainder would be equity.
So in our example, there's 5 million from the bank.
There's say 2 million from the seller.
That leaves 3.
3 million would be equity that would come from the buyer's investors because usually thebuyer is an early career professional.
(08:43):
They're not going to have $3 million.
And what they've done long before they've met this seller is they've gone to a group ofinvestors, described their journey.
many times the investors are actually supporting that searcher in this journey that ispaying them a salary, paying them the expenses.
There are different variations of this.
(09:04):
Sometimes the seller will pay for that part on their own, but when the buyer will pay forthat on their own, thank you Rick, the buyer will pay that from there on their own, but
these are a serious group of investors who again and again and again invest intransactions like this.
And as soon as the seller, the buyer engages the seller seriously in this, that
person will be briefing their investors and the investors will put up that $3 million andhave their own arrangement with the entrepreneur or buyer as to how much profit that
(09:35):
person gets for success in managing this, but they will put up the $3 million.
So $3 million from the investors, say two from the seller, five from the bank.
Got it.
And a couple of questions.
The equity holders, are they guaranteeing the debt that the bank provides?
Okay.
(09:57):
Okay, so they're limited liability to their investment.
Yeah, they're deep in the capital structure.
So the senior debt gets paid.
The seller debt, which is subordinated to the senior debt, will get paid before the equityholders get paid generally.
So they're subordinated in that sense.
(10:18):
They're, if you will, a cushion, a safety net.
a floor, but there's no personal guarantee.
if, for example, things go very badly at the firm, the debt holders can't reach to theequity holders for additional capital.
That's helpful.
so with regards to how the acquisition entrepreneur makes money, I'm seeing how, there's a$5 million bank loan, the seller finances in our, just as example, $2 million.
(10:49):
So $3 million of equity goes in.
How does the acquisition entrepreneur carve out some equity for them?
So what happens is the acquisition entrepreneur structures the deal with their outsideequity investors so that they keep a portion of the firm.
(11:10):
And Royce alluded to funded searchers where they have some support in their search.
They're getting a salary, they're getting health insurance, they're getting other supportfrom the entity.
They're the...
there the equity ownership is fixed.
It's called carry, so the money gets paid back to investors first, and then after themoney's paid off, there's some split between investors and the entrepreneurs.
(11:38):
In the standard funded search arrangement, the entrepreneurs may get up to 30%, morelikely 20%, depending on performance.
in a situation where the entrepreneurs are paying themselves to search, so they'reunfunded, there's no outside investors paying them to fund the search.
(12:01):
They're not getting a salary while they're searching.
those, oftentimes it's, we call it unfunded, but oftentimes it's spouse funded, right?
Or partner funded.
And in those instances, the entrepreneurs own substantially more than the 20 or 30%.
They might own 60, 70 % of the firm.
(12:23):
The way they do it is investors have a sense of what kind of rate of return they wouldlike to receive.
And the entrepreneur builds a model and solves for the amount of equity they have to giveup for the investors to get the required rate of return.
So that's super helpful.
(12:44):
So when a funded search, the searcher, the acquisition entrepreneur is getting paid by thefunds.
So they're taking less risk to that extent and therefore they get less equity.
And the non-funded, they're doing it on their own.
They're self-funding the whole thing.
That makes sense.
And out of interest, how long does it take a searcher to find a business to buy?
Oh, it can take forever, some never find.
(13:07):
It can take three months.
It can take three years.
The average is a little over a year and a half.
So the fun, you know, your question suggests that how long does it take?
to find the business.
Finding the business is often not the hard part.
(13:27):
It's closing the business, know, actually structuring the transaction, getting through allthe bits and pieces.
The schedules, most sellers aren't really prepared to sell.
It's a lot of work.
So it's not uncommon for people to sign a letter of intent.
So we have the skeleton of the deal sketched out and then it will take some
(13:53):
between three and nine months actually to close the transaction.
yeah, three to nine months.
Three is the quickest.
And that's assuming there's absolutely no delays.
(14:15):
So three months, so just think about it.
There's two, three, four weeks of business due diligence that goes before you hireprofessionals and before you get the information that you can apply for a bank loan with.
The bank wants to know who owns the vehicles, how are the vehicles financed, how's thisdone, how's that done, who works for the company, what is their education?
(14:40):
You don't know that from a confidential information memorandum.
know that until you've done a couple weeks or three weeks of business due diligence.
Then you start collecting proposals from banks.
That may take another week or two or three and then you get a proposal from a bank andthen you say great I'd like to do that and then the bank has a process which takes six
(15:04):
weeks.
And then at the same time you're continually asking the seller for information and youknow
What percentage of your revenue is from this customer and can I see those invoices andwhere did you get your supplies and how long have those relationships been going on?
(15:25):
And most sellers are busy managing their business.
They often don't think about the business the same way the buyer does.
So they've never really asked those questions.
And it sounds like, and I just want to make sure I'm clear, that the acquisitionentrepreneur would have the seller sign a letter of intent prior to having the financing
(15:53):
lined up.
OK.
need the letter of intent.
So what happens is, as you know, sellers are sensibly secretive people.
They want to keep information about their business private, and they particularly want tokeep information about the sales process private.
(16:14):
And so they're not going to reveal the information that...
the buyer needs to apply for the bank loan until they're under this higher level ofconfidentiality and exclusivity.
And similarly, the buyer doesn't want to bother banks until they know they have theskeletons of a deal.
(16:38):
makes sense and the letter of intent is, I'm assuming it would be similar to a privateequity acquisition or a strategic acquisition.
It would have a no shop clause where the seller agrees not to continue to negotiate withother third parties.
They get.
in fact the only binding part of the agreement.
Yeah, that's Rick's exactly right.
(17:00):
And a good way to think about what each party is giving here is the seller is taking thecompany off the market usually for 90 days.
Mm-hmm.
they'll probably extend that, but they'll have seen a lot of evidence that the transactionis moving along by the time they get to that point, but they're taking it off the market
for 90 days.
And the buyer, of course, is doing a lot of work on due diligence and organizing financingand spending money on accountants and later lawyers.
(17:26):
And so that's what each party is contributing once that letter is signed.
And the letter, course, has, as Rick referred to, and I love this description, theskeleton of a deal, right?
At a high level, it describes how much we pay, seller note, et cetera, et cetera.
make sense.
I want to switch gears and talk about the the psychographics, the demographics of anacquisition entrepreneur.
(17:47):
You've been teaching this I think for 16 years and seen a lot of people walk through theoffices and the classrooms.
How would you describe the typical student in your program?
Well, there's no one size that fits all.
One of the things that intrigued Royce and I early on was what kind of backgroundsactually work really well.
(18:11):
And what we've concluded is we can't tell because we see people who are formerconsultants, who are former private equity people, who have military backgrounds.
There doesn't seem to be a particular background that leads to success.
(18:37):
Similarly, there doesn't seem to be a demographic that leads to success.
It's not the case that only men do this.
We're increasingly seeing women do this.
is a, for women who...
want to both have a career and a family, this is a nice way to have control over how theydo that.
(18:59):
Nobody's telling them when to travel, when to work, that kind of thing.
Yeah, hop in.
prior point.
Rick and I have always thought, well, we didn't always think this, actually.
We went through a few years where we were mystified as to how this could be.
How can we not put our fingers on the forehead of someone and detect whether there'll be asuccess at entrepreneurship through acquisition?
(19:21):
Because we are Harvard professors after all.
And I think Rick originally pointed this out with this.
students are doing, what our former students are doing, these acquisition entrepreneurs,is they're selecting businesses which are good fits for their skills.
And that's a big reason why you see so many skills working.
It's because the people who
(19:43):
are really good at selling, lean into businesses where that's really important and thestudents who really have great engineering backgrounds and the students who manage
platoons in the army kind of go to a business where you're managing all different kinds ofworkers that have a feel of the platoon and so there's a bit of an adaptation by them to
what they do well.
(20:05):
I must admit it, a bit of a bias.
And so you can correct me and I'd love for you to do that.
I listened to one of the episodes of your podcast, the most recent one with Betsy, who isan acquisition entrepreneur.
People should check out your podcast as well.
We'll link up to the, in the show notes, but she was what I would describe as out ofcentral casting.
mean, she was a Vanderbilt grad, right?
(20:28):
So this is like a prestigious, very, very hard to get into university.
She had an amazing experience there and then she went into finance She ticked that box andthen she goes to not some community college or some state school but she goes to Harvard
that you know the the the highest level possible program to get the credentialing and itall left me with the view that Education sure I'll call it as absolutely but at the end I
(20:59):
felt
teach them something.
We all have to cling to our illusions.
We all cling to our illusions.
All right education, but at the end I kind of took a step back and say how is she gonnado?
When the reality of running a company Smashes her in the face.
There is no playbook.
(21:20):
This is gonna be the first time in her life I'm speaking for Betsy I've never met thewoman but my assumption be this is gonna be the first time in her life Where she is way
outside of her depth.
She's gonna be dealing with things that
Most startup entrepreneurs learn by doing, right?
If you start a business, you figure it out by the time you hit 500 grand, a milliondollars, you figured out the hard way by skinning your knees how to run a business.
(21:45):
This person I was hearing, she sounded so polished, so dynamic, so incredible.
And I worried that she's never had to do the hard stuff that doesn't have a playbook.
Am I getting it wrong?
Yeah, yeah, go for it.
Yeah, yeah, yeah.
I think that most of your listeners who started their own companies and built them up andare now getting in the middle distance thinking about retirement and sale, what they did
(22:12):
is so much harder than what is being asked of an entrepreneurship through acquisition,acquirer.
You know, they had to rub two sticks together to make fire.
They had to find the first customers before they could point to existing customers whowere happy.
They had to come up with a business plan where the revenue they got was greater than thecost they spent.
They had to find employees and figure out which employees worked and which didn't.
(22:36):
They had to do all that.
And now, 20 years later, they have a business, to choose your example from earlier, with10 million of revenues.
They have customers who are happy there and are reference points for new customers.
They have employees who know what to do.
They have profits they make each year and they understand what affects profits up anddown.
And so this is far more understandable to a new person who is a trained manager, who's hadhalf a dozen or 10 or 15 years of experience, far more understandable than what they had
(23:08):
to go through in starting a business.
And not only that, but as part of these deals, these owners,
will spend three to 12 months, an average probably of four to six, transitioning, know,being there for phone calls and explaining the history.
So it is a much more noble task to a smart, energetic person than it would seem at first,as evidenced by the success rates of doing this.
(23:32):
Rick, would you add anything to that or would you modify it?
much to that.
So first of all, while it's true that Betsy has this kind of shiny background, let me makea shameless plug for some of our other episodes.
So our first season ends with a Q &A session, but the episode before that is one of ourgraduates, Gerald Pierce, who...
(23:59):
was a foster child, dumpster dove for food, got to state schools by scholarship, got toHarvard by scholarship, and when we were interviewing him, he had just sold his HVAC
business and his family was in a luxury resort off the coast of Spain.
(24:20):
And so it isn't just for the people who walk in with a silver spoon or walk in with agreat education.
I think what happens is that there's a scrappiness to the people who are successful atthis.
Another woman who was in our first season, Jackie Copcho, who ran a pool service in LongIsland, and she described the stress to get...
(25:00):
120 seasonal employees trained and in vans and servicing so that everybody's pool is shinyand clean on Memorial Day.
Because if it's not shiny and clean on Memorial Day, it doesn't make a difference whatelse you do.
And it turns out her family business, her family was in the restaurant business, right?
(25:21):
Is my memory right?
in the Bronx.
They ran a pizzeria in the Bronx.
And so while she had a great education and is a very smart and capable person, herbackground, what she grew up with around the dinner table was not, you know, let's talk
about Ulysses today.
(25:44):
You know, that's not the environment.
I'm not saying that was Betsy's environment, but that's not the environment of most of ourentrepreneurs to acquisitions.
They grew up in families that were business people and the family business was importantto the family.
(26:05):
And what they're doing is bringing that same energy and grit and drive and determination.
together with some knowledge about how to run a business.
What most founders are, we think, what we find is most founders are absolutely outstandingexperts in their fields.
(26:30):
So if it's an engineering firm, the founder is an outstanding engineer.
If it's a concierge medicine practice, the
founder is an outstanding physician if it's an HVAC business it's The person who startedthe business was an outstanding technician and then went on his or her own and and
(26:59):
And those skills are really important to get a business off the ground.
But most businesses will reach the point at which you actually have to know somethingabout management to take it to the next level.
And our students, some of them have those technical backgrounds, but some of them don't.
And many of them don't.
But what they do have is the knowledge of business basics to get those businesses to thenext level.
(27:29):
I just think it's remarkable that nobody would think that an engineer doesn't bring valueto the business, right?
Of course the engineer brings value to the engineering business, right?
But the manager also brings value to the engineering business.
And at a certain size, the business can employ engineers.
(27:53):
But the manager is the person who's deploying those assets.
At some point, the founder's skill set just becomes, I don't mean to minimize it, butbecomes an fungible asset in the business.
And that's when you know it's ready to sell.
Rick, when do think that happens?
At what size?
I don't think it's size dependent.
(28:14):
think it depends.
There's a moment in which somebody starts a business and in the beginning the business isfundamentally a job.
And at some point the business stops being a job and starts being a business.
(28:36):
You sort of know this when, I think you know this, when the founder no longer gets to dothe skill that they love doing that brought them into the business.
So the person who wants to make artisanal bread now finds himself running a bakery with100 people and he's spending all his time on HR and finance and managing the real estate
(29:03):
and...
employee benefits and customer delivery schedules and hasn't baked a loaf of bread in ayear?
Now he's being a businessman, not a baker.
And the question is, was he a better baker than a businessman?
I don't know.
Depends on the person, right?
But why do we think, you you gotta learn how to bake.
(29:26):
You gotta also learn how to be a business person.
But a lot of these great entrepreneurial businesses, they're successful because of adelicate alchemy.
In part, it's the soul of the company.
It's the instinctive leadership of the founder who knows how to deal with the customer ina certain way, who knows why a word on a website is bad or good.
(29:49):
And that's very hard to teach a manager.
What do you...
teach or train?
of all, would you agree with that sentiment?
mean, you won't.
I think if the business is so tied to the knowledge of the owner, then it's not a businessyet.
Then it really is a job, no matter its size.
(30:11):
I guess we could look at a company like Dell.
Under Kevin Rollins, Dell struggled.
Dell was an incredible success story up until the time that Dell tried to move away fromthe business.
It's a multi, obviously multi-billion dollar business.
He's come back in the company and it's become an incredible success story again.
He's an instinctive leader that's brought Dell back from a manager who kind of knew thebasics of how to run a company.
(30:36):
He knew more than that.
I'm not giving him credit, but he didn't have the instinct.
I would argue there are, know, Steve Jobs would be another example.
There are lots of, you know, very celebrated examples of this where the entrepreneur hasto come back into the business, even at a very big size, because they're the only ones who
understand the soul of the company.
And I'm wondering.
(30:56):
Well, I would say two things about that, John.
First of all, the stories you just related are true stories, but I think for every one ofthose stories, we could look at many more stories of the business that outgrew the
founding entrepreneur where he or she just didn't know how to manage the business and gotlost.
And frankly, the most common story is the entrepreneur builds a great business.
(31:22):
They're now more of a manager than they were
you know, the creator of the services.
And also, as they've gotten older, their priorities change.
You know, suddenly they find they have more money than time and they want to act that way.
They don't want to work 70 hours a week.
They want to work 35 hours a week.
And so maybe they're not paying as much attention to the business as would be great forthe business.
(31:44):
It's great for them as the owner of the business.
And so there are forces in life which start to create the opportunity for someone who's
young and hungry and trained and doesn't have much money but wants to have success, reallybe a suitable successor for people like this.
So I think the truth is there are founders who are impossible to replace, there arefounders who ought to be replaced, and then most of them go in the category of they're
(32:12):
great, but they can be replaced, particularly with their help.
So yeah, the zero to one, know, the Peter Thiel, there's most, think entrepreneurs, thinkmany of our listeners would fall into that.
They're great in the startup, right?
They're great for the first couple of million in revenue, first 10 employees, and thenfeel a little out of their depth when we're starting to get into 30, 40, 50, 100
(32:33):
employees.
And so I think they would concur.
just pushing the envelope to say in some companies.
they're working 70 hours a week and maybe they don't want to work 70 hours a week, I thinkit's not so much they don't want to work the 70 hours a week.
It's they don't want to work the 70 hours a week doing the stuff they have to do then.
Right?
Because they're no longer baking bread.
(32:54):
They're no longer doing the engineering drawings.
They are managing HR.
They are dealing with grumpy customers, difficult employees.
They're not, they're not...
You know, they're not sharpening their pencils or mixing the wheat and gluten and whateveryou do to make bread.
You're hungry, aren't you, Rick?
You definitely want some good fresh breakfast.
(33:16):
not.
I, you know, it's remarkable how things like we say baking bread and it's like I shouldknow that, right?
I feel like I'm at a George Bush moment, if you know what I mean.
Like, milk?
What's a gallon of milk?
Is it $50?
Is it $2?
I don't actually, you know, I mean, I've thrown ingredients in a bread maker and pressedthe button, but that's really it.
(33:44):
So yeah.
portion of the conversation, which is I was trying to put my finger on like what, youknow, how would you describe psychographically, know, demographically?
And so what I've heard, you know, I think it'd be fair to say if you took a survey ofHarvard Business School graduates, you'd have a portion that would go into consulting, a
portion would go into investment banking, all of whom would have very, very, thanks toyou, all incredible skills that they, you know, education about business.
(34:14):
It sounds like your graduates from your program combined those same business chops,expertise, with a degree of scrappiness and willingness to get their hands dirty and
sleeves rolled up that perhaps the grads that go into investment banking or go intoconsulting may not have.
It's the scrappiness plus the education that makes the ideal acquisition entrepreneur.
(34:38):
Is that fair?
And the drive.
There's a lot of drive.
And you know, I'm a big fan of saying success is a delicate mix between confidence andhumility.
And what I think is true about the people who are successful in this place is that theyreally do have an interesting balance there.
(35:00):
They have confidence in themselves, but they're willing to walk into the entrepreneur andsay, I've done all the studying I can to learn about your business.
I've worked really hard to understand it, but I need to learn from you.
I'm not going to come in and say, let me tell you how to run your business.
They don't do that.
(35:21):
But they absorb like a sponge.
So what's the pitch for an acquisition entrepreneur?
Because if we go back to our hypothetical $10 million business doing $2.5 million ofVBEDEL, let's imagine it's an HVAC company, 50 employees.
(35:41):
There are a lot of people that want to buy that business today.
There are private equity groups rolling up HVAC businesses.
There are probably strategic regional players that want to add another HVAC company in anew city.
and then along comes your grad, how do they compete against a potential private equitybuyer willing to pay a premium, a strategic acquirer again willing to pay a premium?
(36:07):
Well, yeah, it's, it's, yeah.
Well, I'd say two things.
Actually yesterday, Rick and I had in class a HVAC company founder who sold his businessto a searcher, but we'll talk about that in a moment.
I want to, I want to follow up on Rick's comment because he's right.
You know, there are businesses where there is a lot of private equity interest.
(36:29):
So in HVAC,
your perfect example, John, there are lots of private equity buyers.
You can line them up.
You can get a bidding contest going and sell them.
But for most smaller businesses, you know, there aren't a lot of private equity buyers forat least two reasons.
Even though these are very high quality companies that any sensible person would want toown.
(36:50):
The first is they're small.
And the economics of a private equity firm don't favor buying smaller businesses because
they live off a management fee and a share of the profits they make for their investors.
And if they can do larger investments, it is much more lucrative for the firm than if theydo lots of smaller investments, which are very labor intensive.
(37:11):
So small sort of turns off a lot of private equity firms.
And the second is that the owner, founder, CEO is often selling
as a step towards retirement.
And now that private equity firm not only has to do the work of buying a small firm,deploying a small part of their capital, but they have to do the extra work and take the
risk of bringing in a successor, making sure that person works, doing all the work ofhiring them and vetting them and supervising them.
(37:37):
And that is not an attractive combination for most private equity firms.
And it's really hard to do and not always successful.
Exactly.
so what many of your listeners are going to find is those buyers aren't that keen.
The kind of buyer who's keen is someone who is capable of pulling together a transaction,the equity, the debt, and structuring it, and then wants to run it as CEO.
(38:03):
And in addition, what they want to do is they actually, they want to be the founder.
They want to run that business for five or seven or nine years, and some founders
actually place value on that separate from just getting a sale done.
That's the first most important reason.
But they just say, I don't want my company just subsumed into some larger holding company.
I don't want the employees laid off by some heartless P firm.
(38:26):
want someone who sees this as a business to curate for seven or nine years.
Rick, would you add something to that?
would add, yeah, just a few things, Royce.
One is that your example is one that tilts against the searcher because HVAC is, ofcourse, a business that has attracted lots of private equity interest.
(38:47):
And most of the buyers of HVAC companies eliminate the management and just roll theclients into the larger company.
And and your example of two and a half million dollars of profitability It's at theborderline where it's a standalone entity for a small private equity firm make that a 1
(39:11):
million dollar or seven hundred and fifty thousand dollar EBITDA business Private equityisn't gonna touch that ever because it's just way too small not may get rolled into
another portfolio company
But then you need to think about that many small businesses are in these niches that youmight never even have heard of except you're looking for the small business.
(39:40):
it's remarkable you find these little manufacturers of custom batteries of this, of that,services that you didn't even know existed.
People have, you know...
very successful careers in running.
And so these businesses aren't subject to roll up because they're kind of idiosyncratic.
(40:07):
They're not easy to roll up.
They're too small.
for a private equity firm to buy and you need to replace the manager because if you'remaking $750,000 in owner's compensation, if that's your EBITDA and the owner's taking
$500,000 or $600,000 a year and doing whatever with it, which is fabulous, they probablydon't want to spend $200,000 for number two.
(40:37):
that's know of equal to their quality and so some owners say well gee why should I sell mybusiness for four times I'm going to just keep owning it and I'll hire somebody and then
it turns out that they might say they're gonna hire somebody who has the same skill setthey do but they don't they hire that they take the general manager that they have who
(41:03):
was good at getting things out the door or managing the shop floor and they give thatperson a new title and maybe a 25 % bump in salary and they say, okay, now you're running
the firm, execute your strategy.
Well, that person doesn't generally think about strategy.
That's not what they've been doing their whole career.
(41:24):
That's not what they've been trained to do.
So they just execute on the owner strategy and that works until the world changes.
And guess what?
The world changes all the
so that strategy just doesn't work for a small company because you really need somebodywho has that skill set who can actually run the business.
(41:47):
So yeah, two and a half million dollar HVAC, we can have a long conversation about it.
you know, $750,000 specialty manufacturer, short conversation.
Now we've really peaked, I think, a lot of the ears of our listeners because for a lot ofour listeners, they are in those unique industries where there isn't some roll up going
(42:09):
on.
And they may be a little south of the numbers we were talking earlier, six, seven,$800,000 of profitability.
They're like, if I could just get to 2 million of EBITDA, I'd attract the big strategic,but I can't get there or I don't want to.
And so this is a really interesting potential for them.
in particular if they don't want to see their employees gone, they want someone to comeon.
(42:39):
I wonder, do you get the chance to vet the candidates for your program?
Are you involved in admissions at all or do just get what you get from the admissionsoffice?
Well, we get what we get, but our admissions are pretty good and
Harvard Business School, there's about 925 students in each class.
(43:01):
We have room for 200 in our two sessions that we offer, two classes that we offer.
It's pretty competitive to get in, so the people who want to get in are the people who arereally interested in that career path.
They don't come just because we're pretty faces, you know, we think.
(43:22):
And so,
There's a bit of self-selection.
We tend to get more married students.
We tend to get more military students.
We tend to get more people of color, people for whom this career path seems particularlyattractive going in unconditionally before they really see it.
(43:44):
We don't screen out anybody, but there are a lot of people for whom this just doesn't fit.
Like who?
Well, I like to say the most difficult thing a CEO does every day is write down theirto-do list.
because it's the definition of the to-do list that determines the success of the business.
(44:10):
And a lot of people really like to have the to-do list given to them.
And for a lot of careers, very high level careers, you get a to-do list.
If you're a partner in a private equity firm, you're effectively getting a to-do list.
Find a firm that we can buy and then execute and make profits at that, right?
(44:30):
There's a to-do list.
I mean, it's maybe a high level to-do
list but it's such a do list.
not presented that way, but that's exactly what it is, right?
Yeah.
mean it's not right and and and if you're working for investment banking or consultingthey're gonna tell you go work you know if you're a consultant they're gonna tell you go
visit this big company and they have this problem that they've hired us and do a power youknow you have a month and put together a PowerPoint slide that they're gonna sell really
(44:57):
great ideas.
That's your to-do list that you have a deliverable it's well defined and for a great manypeople on earth.
I would say most people on earth, having that well-defined to-do list, the objective, Iknow exactly what I need to get done in the relatively short form, relatively short term,
(45:21):
and there's somebody smart telling me what that is, that makes people happy.
Interesting.
they don't fit this, right?
You have to have, this is this confidence and humility thing.
You can be really confident in your ability to execute a to-do list, right?
But it's...
It's interesting because it does get back to our earlier conversation around, you know,the difference between a startup entrepreneur and an acquisition entrepreneur, because the
(45:49):
startup entrepreneur is the ultimate to-do list person, right?
Like they're literally starting from a sheet of paper.
They've got no to-do list, right?
It sounds like the folks that you're educating are somewhere in the middle.
They don't want to sit in the, you know, 64th floor of the Bank of America tower and justdoing out the PowerPoint presentation.
And at the same time,
(46:10):
If they were truly total blank slate thinkers, they would probably start something ratherthan buy something.
So there's somewhere in the middle.
maybe.
I don't know that, this is my personal bias, I don't think being a blank piece of paper isa higher calling or even more creativity or more drive.
(46:38):
I just think...
I just think it's a different skill set to create something out of nothing than to takesomething and make it spectacular.
That's a different skill set.
You know, it's pretty typical for our students when they take over a company.
(46:58):
You know, things don't really move a lot in the first year, but if you look five yearsout, most of those businesses are double or triple the size they were when they bought
them.
And it's not because of luck.
It's because they go visit their customers and they visit their customers and listen withan open mind.
(47:18):
They look at their marketing materials and they don't say, this is the way we've alwaysdone it, so we should keep on doing it.
They're saying, gee, maybe we should go to Google words and get higher in the searchengine and maybe that's how we should market or maybe we should market at trade shows or
maybe we should do belly to belly sales.
But they're open-minded to a bunch of alternatives.
(47:43):
And I think that's special and different than founders.
When does it not work?
You've been a tremendous advocates, both of you for this working.
And I think in large measure it does.
You've got a tremendous case studies and all your podcasts of real success stories.
I'm sure there are some examples where it breaks.
(48:04):
Can you share some examples or commonalities where it doesn't work?
I mean, you said this is gonna air relatively soon, I mean, I can't tell you the number ofcommunications I received in the last week from firms I know well and former students who
(48:24):
have international trading partners with Mexico or Canada who suddenly find themselves inlike, what do I do now?
And that's kind of like, wait till tomorrow, it could be different.
So look, bad luck happens, the world changes in various ways, and so there are theseexternal forces sometimes that happen that you can't see.
(48:50):
And that certainly happens to people.
Some people buy businesses that are broken and they think they can fix them.
You know, they're gonna buy a business.
They're trying to buy a business in a cyclical industry at the bottom and be ready for thebe ready for the rocket ship recovery.
(49:16):
But if they get that bottom wrong and it goes down, down, down another few years, theyfind themselves quite sad or miserable.
Sometimes people make due diligence mistakes.
They just don't understand the businesses they're buying.
They think they understand them.
but they don't really.
And then you have problems.
(49:36):
Sometimes, Royce and I encourage our students to buy dull businesses with lots ofrecurring revenue that are enduringly profitable.
They're generally not sexy.
They're not growth oriented.
They're, let's grow a little bit.
(49:57):
Let's never lose a customer.
Let's pay off our debt.
Let's do things well and improve and get marginal efficiencies and do it better and growby being just better at executing what we have.
I- I-
I agree with everything Rick just said, and I would just add that one of the pieces ofadvice we give our students again and again is after you buy a business like the kind Rick
(50:24):
described, you know, in that first year, you will have plenty of decisions to make.
Every day you'll be making decisions, but try not to make decisions which are big and hardto reverse in the first year.
Big meaning a lot of money is associated with it.
Hard to reverse meaning if you discover that it
you decided wrong, it's tough to pull out cheaply, try to avoid that because if you'vebought the kind of business Rick is describing, you have some time to wait before you make
(50:53):
those decisions.
The business will be fine and you will be so much more knowledgeable a manager about thatbusiness at the end of six to 12 months than you are in that first month.
And that is a safety belt when you get into any established, successful, high qualitybusiness.
Just that.
not all surgical acquisitions are like that.
(51:14):
Some people really look for high growth.
They say, I'm not gonna buy businesses that are Forex multiple that's dull.
I'm gonna buy a business that has lots of growth potential.
to develop new software to succeed, where I have to develop new markets to succeed.
And those businesses are like any startup business.
(51:37):
You're basically bolting a startup onto an existing business, but in that instance thething you're bolting on is pretty big because you have to get this growth to succeed.
And in that instance, it's just like a startup.
They don't all succeed a lot fail because the markets don't appear, there's a competitive
(51:58):
So all those things happen, but if you're in a business that's been enduringly profitablefor 15 years You really have to do something wrong to goof it up like really not just
wrong like you make a judgment arrow like like really stupid
You know, you know, as you're describing this business, kind of the Hippocratic oath cameto mind.
(52:21):
The idea was like, do no wrong.
I kind of get that.
The other train of thought that happened for me was if I were an employee in one of thesebusinesses that has been there for 17 years or whatever, and this young hotshot 20 years,
my junior Harvard educated new owner shows up.
(52:41):
I'd be kind of look at them and saying, okay, like,
What are you going to decide to do anything?
Or are you just going to sit there and smile at me and say, do no wrong?
so I wonder, what coaching do you give these entrepreneurs, these acquisitionentrepreneurs, to do ingratiate themselves with the employees who are in these companies
that are doing the work?
Is that something you talk about or educate them on?
(53:04):
How to ingratiate themselves with the employees of the company?
You know, we have a class guest who talks about how in his white manufacturing businessout in the oil fields, he talks about how he discovered his biggest value add was
unplunging the company toilets.
(53:26):
Because if people couldn't use the toilet, they actually couldn't do their job.
And so as soon as the toilet got plugged, he dropped what he was doing and went andplunged the toilet and cleaned out the bathroom stall.
I don't think he's, I mean that may be a more graphic and colorful story than most, but Ithink fundamentally that's it.
(53:49):
If the floor needs to be swept, you sweep it.
don't, particularly our guys with military backgrounds, our men and women with militarybackgrounds, but it's true throughout our, I've never met anybody who's an
entrepreneurship.
who's buying a business and wants to run it as a CEO who doesn't expect to work reallyhard and get really dirty.
(54:12):
Not just intellectually dirty, but like really dirty.
The floor needs to be swept and there's no end, you you're not gonna take the technicianoff some money-making activity to sweep the floor, you're sweeping the floor.
Yeah, guess our ex-military students would refer to this as leading from the front, right?
They're not asking you to do anything that they're not showing you they do.
(54:34):
Or another civilian word for it would just be humility.
And that goes a long way, right?
Because...
I think if you're not willing to do that stuff, don't.
I mean, look, the nature of small business, especially in the size range that I describedearlier, is that these businesses are under-resourced.
There is no HR person.
(54:54):
There is no, maybe no full-time accountant.
There is no this or there's no that, right?
There's no janitor.
There's no building maintenance person.
And so, you know, you're gonna spend your weekend...
fixing that door that doesn't work.
And people just do that.
(55:16):
a great place for us to end.
I am so grateful for you spending the time educating me on this important sector of oureconomy.
think you're obviously very passionate about this and I think your students are very luckyto have you both as professors.
So thank you for giving me a few minutes of your time.
I think I'm enormously grateful for it.
(55:37):
That's really kind of you to say we enjoyed our time here.
was great.
Thank you for hosting us, John.
We appreciate it.
Your book, by the way, is one that I have read personally and found it really helpful ineducating myself.
It's the Harvard Business Review Guide to Buying a Small Business.
I think I would recommend everyone who's even remotely interested in this to pick up acopy.
(55:58):
It's a great book.
Is there anywhere else that people could learn more about you, follow you?
What else can people do?
the school has encouraged us, starting a couple of years ago, to have a podcast similar tothe book, teaching people...
how a small firm gets bought and it's called Think Big, Buy Small.
You can get it wherever you get your podcasts.
(56:20):
But the school really is interested in us reaching beyond campus to the many entrepreneursand would-be entrepreneurs who are interested in the subject but don't know how.
So that's what our Think Big, Buy Small podcast product is seeking to do.
And that's really been fun because we've gone beyond the normal HBS searchers.
We certainly have had some HBS searchers like Betsy as you described earlier and Gerald asI described earlier.
(56:46):
But many of our searchers, many of the people who appear are not people who you wouldimagine or who have graduated from the Harvard Business School.
And we have a lot of...
What should I say?
A lot of Main Street businesses and a lot of businesses that you just wouldn't haveimagined.
(57:12):
It is a great way, I think our podcast is a great way to learn a little bit about businessin a way that you don't from even reading the Wall Street Journal.
So it's a lot of fun.
We're having a lot of fun doing it.
The podcast is called Think Big by Small.
I've listened to it.
think it's a great introduction to your work.
So I encourage everybody to download it and follow.
(57:32):
If people want to reach out to you on social media, do you accept social media?
Or is the podcast the best place for folks to go?
This is an email address associated with a podcast and so the easiest way to reach us isthrough that podcast email, which is
rickandroiss at hbs.edu.
Awesome.
And we'll put that email address along with links to the book and the podcast in the shownotes at builttosell.com.
(58:00):
Professor Rubak, Professor Utkow, thank you for doing this.
Thank so much.
Be well.
Rick Bruback, Roy Stewart-Kaff, what can I build to sell radio?
It's a pleasure to be here.
Thanks for having us, John.
It's a delight.
I'm a little intimidated guys, a couple of Harvard profs.
This is going to freak me out a little bit.
Tell me about acquisition.
For those of you who are listening, you will have to check out the YouTube channel andtake a look.
(00:27):
in any event, I'm really excited.
You are two of the world's most experienced and recognized experts in this field ofacquisition entrepreneurship.
So I'd love to dig in.
because I think a lot of our listeners have notionally heard about acquisition throughacquisition.
They've maybe been approached by a searcher and they're curious about it.
(00:48):
So I'm really looking forward to Digne and maybe we could start with maybe a basicdefinition for folks who don't know what entrepreneurship through acquisition is.
Can we just maybe start off there?
Royce, maybe kick us off.
Sure.
Well, everyone has kind of heard of acquisition through startup, right?
That's the famous bigger cousin to entrepreneurship through acquisition.
(01:09):
So entrepreneurship through acquisition appeals to people who want to be entrepreneurs,people like so many of your listeners, but who don't want to take the risk of starting
from scratch.
Or maybe they don't have the big idea that is usually behind some startup, but they'regood, practical, scrappy managers.
And what they want to do is go out and buy a profitable smaller business, usually from aretiring founder, negotiate some kind of short-term transition agreement where that
(01:38):
founder eases the transition, and then that buyer takes over the company as CEO afterhaving organized the transaction.
They usually have somewhere between seven and 15 years of
prior management experience in other people's companies, although not usually in theparticular industry they buy in.
(01:59):
They've lined up some debt financing from banks that commonly lend to the purchases ofsmaller companies.
And they've commonly raised some equity from a group of recurring investors who invest inthese so-called acquisition, search acquisitions or acquisitions, entrepreneurship through
acquisitions.
(02:20):
And so this happens again and again and again and again.
to sort of help people who've built a successful business and want to retire, retire andhave someone succeed them in running it and organizing the sale and then creating the
entrepreneurial dream for this next generation.
You teed me up for the question that I wanted to ask first, which was, how do they get themoney?
(02:41):
As I understand it, are students coming out of an MBA program.
They probably get student debt.
They may not have had a lot of success leading into it.
Where do they get the money?
You mentioned there are banks and there are people that sort of support economically theseefforts.
Rick, maybe do you want to walk me through, in basic layman's terms, how are they gettingthe money to buy a business?
(03:06):
Sure.
At the time they go to buy the business, it's not really hard.
There's local commercial banks that lend.
There are SBA loans designed for these kinds of activities.
And for equity investors, there's a lot of people interested in providing private capital.
(03:31):
at attractive rates of return for these kinds of investments.
You know, it's an easy investment to make because it's so transparent to the investor.
They're not buying pieces of paper.
They're buying to them.
They're actually seeing the business they're buying.
They're buying a manufacturing business.
They're buying a service business.
(03:52):
But they can see, yeah, I get it.
They mow lawns.
I understand what that business is.
I understand what people pay.
I understand
where the employees come from.
It's easy to understand business.
What Royce and I find fascinating and I think true more generally than just our experienceis we've been doing this for little over 15 years, teaching it, doing a little investing
(04:22):
on the side, being in contact and being in the flow of this ecosystem for...
pretty much all of that time and we've never heard of an instance where somebody purchaseda company, wanted to purchase a company that was a good company at a fair price that they
could not finance.
(04:42):
Okay, let's walk through it and imagine it's a $10 million company.
That's the value that the owner wants.
Let's just walk through the capital structure.
How much is debt?
Sure.
oftentimes people who want to sell think that the value is determined by how much moneythey want.
Because they sit down and they say, I want to buy this boat and this condominium, and Iwant to be able to spend this much money on travel every year, and I want to buy my new
(05:12):
wife a new gift or my new husband a new gift.
husband a new car, my new wife a new ring, whatever it is.
And the problem is that's of course not what determines the value.
What determines the value is some multiple of the ongoing cash flow of the firm.
So think about that as being somewhere around four times the value, the cash flows of thefirm.
(05:40):
Maybe five if it's a bit larger, if it's a larger small firm, a bit less if it's a, youknow.
a larger small firm, so your example, $10 million, that firm would have to have prettyhigh revenue quality, so lots of recurring customers, something Royce and I call enduring
profitability, together with about $2 million of cash flow, or $2.5 million of cash flow.
(06:05):
Okay, so let's walk through this.
So let's imagine you've got a company with $10 million of revenue that are putting $2.5million of EBITDA to the bottom line.
The revenue is high quality.
It's in a protected industry.
It's a decent business.
Okay, so walk me through, if I'm an acquisition entrepreneur, I'm a graduate of yourprogram, where am I getting 10 million bucks?
(06:28):
Mm-hmm.
So, Royce, do you want to do this?
You want me to it?
Yeah.
So whether it's in the US or Canada, conventional commercial bank is going to beinterested in lending to that business and the commercial bank will probably lend about 50
% of the purchase price, maybe a little bit more.
(06:49):
Or another way of thinking about it is the bank will look at that two to two and a halfmillion dollars and want to lend two, two and a half times the cash flow.
So either way,
about $5 million of that $10 million will come from a commercial bank loan that will berepaid over about seven years.
And is that acquisition entrepreneur personally guaranteeing that loan?
(07:11):
Generally not.
For very small, small businesses, they will want a personal guarantee because there's sucha key man element to the business, but for a business of that size, it's likely there will
be no personal guarantee.
We'll talk about SBA loans for your American listeners later, but think of there asprobably no personal guarantee.
(07:33):
Usually in these transactions, not always, but the majority of the time, the seller willtake a small seller note.
And so that might be in a transaction like this, a million dollars out of the $10 millionpurchase price.
Two.
two, two and a half, something like that.
define a seller note for those who aren't familiar with that terminology.
(07:55):
Sure.
So the part of getting these smaller firms sold is that the seller will step in and deferpart of the purchase proceeds they get.
So if the total price is 10 million, to choose Rick's example, they might get seven and ahalf or eight million at closing in cash, but two, two and a half million, they might get
(08:17):
over the next four years in a seller note.
They'd get interest on that seller note, probably better than they'd get if they depositedthe cash in a bank.
but they'd wait.
And then the remainder would be equity.
So in our example, there's 5 million from the bank.
There's say 2 million from the seller.
That leaves 3.
3 million would be equity that would come from the buyer's investors because usually thebuyer is an early career professional.
(08:43):
They're not going to have $3 million.
And what they've done long before they've met this seller is they've gone to a group ofinvestors, described their journey.
many times the investors are actually supporting that searcher in this journey that ispaying them a salary, paying them the expenses.
There are different variations of this.
(09:04):
Sometimes the seller will pay for that part on their own, but when the buyer will pay forthat on their own, thank you Rick, the buyer will pay that from there on their own, but
these are a serious group of investors who again and again and again invest intransactions like this.
And as soon as the seller, the buyer engages the seller seriously in this, that
person will be briefing their investors and the investors will put up that $3 million andhave their own arrangement with the entrepreneur or buyer as to how much profit that
(09:35):
person gets for success in managing this, but they will put up the $3 million.
So $3 million from the investors, say two from the seller, five from the bank.
Got it.
And a couple of questions.
The equity holders, are they guaranteeing the debt that the bank provides?
Okay.
(09:57):
Okay, so they're limited liability to their investment.
Yeah, they're deep in the capital structure.
So the senior debt gets paid.
The seller debt, which is subordinated to the senior debt, will get paid before the equityholders get paid generally.
So they're subordinated in that sense.
(10:18):
They're, if you will, a cushion, a safety net.
a floor, but there's no personal guarantee.
if, for example, things go very badly at the firm, the debt holders can't reach to theequity holders for additional capital.
That's helpful.
so with regards to how the acquisition entrepreneur makes money, I'm seeing how, there's a$5 million bank loan, the seller finances in our, just as example, $2 million.
(10:49):
So $3 million of equity goes in.
How does the acquisition entrepreneur carve out some equity for them?
So what happens is the acquisition entrepreneur structures the deal with their outsideequity investors so that they keep a portion of the firm.
(11:10):
And Royce alluded to funded searchers where they have some support in their search.
They're getting a salary, they're getting health insurance, they're getting other supportfrom the entity.
They're the...
there the equity ownership is fixed.
It's called carry, so the money gets paid back to investors first, and then after themoney's paid off, there's some split between investors and the entrepreneurs.
(11:38):
In the standard funded search arrangement, the entrepreneurs may get up to 30%, morelikely 20%, depending on performance.
in a situation where the entrepreneurs are paying themselves to search, so they'reunfunded, there's no outside investors paying them to fund the search.
(12:01):
They're not getting a salary while they're searching.
those, oftentimes it's, we call it unfunded, but oftentimes it's spouse funded, right?
Or partner funded.
And in those instances, the entrepreneurs own substantially more than the 20 or 30%.
They might own 60, 70 % of the firm.
(12:23):
The way they do it is investors have a sense of what kind of rate of return they wouldlike to receive.
And the entrepreneur builds a model and solves for the amount of equity they have to giveup for the investors to get the required rate of return.
So that's super helpful.
(12:44):
So when a funded search, the searcher, the acquisition entrepreneur is getting paid by thefunds.
So they're taking less risk to that extent and therefore they get less equity.
And the non-funded, they're doing it on their own.
They're self-funding the whole thing.
That makes sense.
And out of interest, how long does it take a searcher to find a business to buy?
Oh, it can take forever, some never find.
(13:07):
It can take three months.
It can take three years.
The average is a little over a year and a half.
So the fun, you know, your question suggests that how long does it take?
to find the business.
Finding the business is often not the hard part.
(13:27):
It's closing the business, know, actually structuring the transaction, getting through allthe bits and pieces.
The schedules, most sellers aren't really prepared to sell.
It's a lot of work.
So it's not uncommon for people to sign a letter of intent.
So we have the skeleton of the deal sketched out and then it will take some
(13:53):
between three and nine months actually to close the transaction.
yeah, three to nine months.
Three is the quickest.
And that's assuming there's absolutely no delays.
(14:15):
So three months, so just think about it.
There's two, three, four weeks of business due diligence that goes before you hireprofessionals and before you get the information that you can apply for a bank loan with.
The bank wants to know who owns the vehicles, how are the vehicles financed, how's thisdone, how's that done, who works for the company, what is their education?
(14:40):
You don't know that from a confidential information memorandum.
know that until you've done a couple weeks or three weeks of business due diligence.
Then you start collecting proposals from banks.
That may take another week or two or three and then you get a proposal from a bank andthen you say great I'd like to do that and then the bank has a process which takes six
(15:04):
weeks.
And then at the same time you're continually asking the seller for information and youknow
What percentage of your revenue is from this customer and can I see those invoices andwhere did you get your supplies and how long have those relationships been going on?
(15:25):
And most sellers are busy managing their business.
They often don't think about the business the same way the buyer does.
So they've never really asked those questions.
And it sounds like, and I just want to make sure I'm clear, that the acquisitionentrepreneur would have the seller sign a letter of intent prior to having the financing
(15:53):
lined up.
OK.
need the letter of intent.
So what happens is, as you know, sellers are sensibly secretive people.
They want to keep information about their business private, and they particularly want tokeep information about the sales process private.
(16:14):
And so they're not going to reveal the information that...
the buyer needs to apply for the bank loan until they're under this higher level ofconfidentiality and exclusivity.
And similarly, the buyer doesn't want to bother banks until they know they have theskeletons of a deal.
(16:38):
makes sense and the letter of intent is, I'm assuming it would be similar to a privateequity acquisition or a strategic acquisition.
It would have a no shop clause where the seller agrees not to continue to negotiate withother third parties.
They get.
in fact the only binding part of the agreement.
Yeah, that's Rick's exactly right.
(17:00):
And a good way to think about what each party is giving here is the seller is taking thecompany off the market usually for 90 days.
Mm-hmm.
they'll probably extend that, but they'll have seen a lot of evidence that the transactionis moving along by the time they get to that point, but they're taking it off the market
for 90 days.
And the buyer, of course, is doing a lot of work on due diligence and organizing financingand spending money on accountants and later lawyers.
(17:26):
And so that's what each party is contributing once that letter is signed.
And the letter, course, has, as Rick referred to, and I love this description, theskeleton of a deal, right?
At a high level, it describes how much we pay, seller note, et cetera, et cetera.
make sense.
I want to switch gears and talk about the the psychographics, the demographics of anacquisition entrepreneur.
(17:47):
You've been teaching this I think for 16 years and seen a lot of people walk through theoffices and the classrooms.
How would you describe the typical student in your program?
Well, there's no one size that fits all.
One of the things that intrigued Royce and I early on was what kind of backgroundsactually work really well.
(18:11):
And what we've concluded is we can't tell because we see people who are formerconsultants, who are former private equity people, who have military backgrounds.
There doesn't seem to be a particular background that leads to success.
(18:37):
Similarly, there doesn't seem to be a demographic that leads to success.
It's not the case that only men do this.
We're increasingly seeing women do this.
is a, for women who...
want to both have a career and a family, this is a nice way to have control over how theydo that.
(18:59):
Nobody's telling them when to travel, when to work, that kind of thing.
Yeah, hop in.
prior point.
Rick and I have always thought, well, we didn't always think this, actually.
We went through a few years where we were mystified as to how this could be.
How can we not put our fingers on the forehead of someone and detect whether there'll be asuccess at entrepreneurship through acquisition?
(19:21):
Because we are Harvard professors after all.
And I think Rick originally pointed this out with this.
students are doing, what our former students are doing, these acquisition entrepreneurs,is they're selecting businesses which are good fits for their skills.
And that's a big reason why you see so many skills working.
It's because the people who
(19:43):
are really good at selling, lean into businesses where that's really important and thestudents who really have great engineering backgrounds and the students who manage
platoons in the army kind of go to a business where you're managing all different kinds ofworkers that have a feel of the platoon and so there's a bit of an adaptation by them to
what they do well.
(20:05):
I must admit it, a bit of a bias.
And so you can correct me and I'd love for you to do that.
I listened to one of the episodes of your podcast, the most recent one with Betsy, who isan acquisition entrepreneur.
People should check out your podcast as well.
We'll link up to the, in the show notes, but she was what I would describe as out ofcentral casting.
mean, she was a Vanderbilt grad, right?
(20:28):
So this is like a prestigious, very, very hard to get into university.
She had an amazing experience there and then she went into finance She ticked that box andthen she goes to not some community college or some state school but she goes to Harvard
that you know the the the highest level possible program to get the credentialing and itall left me with the view that Education sure I'll call it as absolutely but at the end I
(20:59):
felt
teach them something.
We all have to cling to our illusions.
We all cling to our illusions.
All right education, but at the end I kind of took a step back and say how is she gonnado?
When the reality of running a company Smashes her in the face.
There is no playbook.
(21:20):
This is gonna be the first time in her life I'm speaking for Betsy I've never met thewoman but my assumption be this is gonna be the first time in her life Where she is way
outside of her depth.
She's gonna be dealing with things that
Most startup entrepreneurs learn by doing, right?
If you start a business, you figure it out by the time you hit 500 grand, a milliondollars, you figured out the hard way by skinning your knees how to run a business.
(21:45):
This person I was hearing, she sounded so polished, so dynamic, so incredible.
And I worried that she's never had to do the hard stuff that doesn't have a playbook.
Am I getting it wrong?
Yeah, yeah, go for it.
Yeah, yeah, yeah.
I think that most of your listeners who started their own companies and built them up andare now getting in the middle distance thinking about retirement and sale, what they did
(22:12):
is so much harder than what is being asked of an entrepreneurship through acquisition,acquirer.
You know, they had to rub two sticks together to make fire.
They had to find the first customers before they could point to existing customers whowere happy.
They had to come up with a business plan where the revenue they got was greater than thecost they spent.
They had to find employees and figure out which employees worked and which didn't.
(22:36):
They had to do all that.
And now, 20 years later, they have a business, to choose your example from earlier, with10 million of revenues.
They have customers who are happy there and are reference points for new customers.
They have employees who know what to do.
They have profits they make each year and they understand what affects profits up anddown.
And so this is far more understandable to a new person who is a trained manager, who's hadhalf a dozen or 10 or 15 years of experience, far more understandable than what they had
(23:08):
to go through in starting a business.
And not only that, but as part of these deals, these owners,
will spend three to 12 months, an average probably of four to six, transitioning, know,being there for phone calls and explaining the history.
So it is a much more noble task to a smart, energetic person than it would seem at first,as evidenced by the success rates of doing this.
(23:32):
Rick, would you add anything to that or would you modify it?
much to that.
So first of all, while it's true that Betsy has this kind of shiny background, let me makea shameless plug for some of our other episodes.
So our first season ends with a Q &A session, but the episode before that is one of ourgraduates, Gerald Pierce, who...
(23:59):
was a foster child, dumpster dove for food, got to state schools by scholarship, got toHarvard by scholarship, and when we were interviewing him, he had just sold his HVAC
business and his family was in a luxury resort off the coast of Spain.
(24:20):
And so it isn't just for the people who walk in with a silver spoon or walk in with agreat education.
I think what happens is that there's a scrappiness to the people who are successful atthis.
Another woman who was in our first season, Jackie Copcho, who ran a pool service in LongIsland, and she described the stress to get...
(25:00):
120 seasonal employees trained and in vans and servicing so that everybody's pool is shinyand clean on Memorial Day.
Because if it's not shiny and clean on Memorial Day, it doesn't make a difference whatelse you do.
And it turns out her family business, her family was in the restaurant business, right?
(25:21):
Is my memory right?
in the Bronx.
They ran a pizzeria in the Bronx.
And so while she had a great education and is a very smart and capable person, herbackground, what she grew up with around the dinner table was not, you know, let's talk
about Ulysses today.
(25:44):
You know, that's not the environment.
I'm not saying that was Betsy's environment, but that's not the environment of most of ourentrepreneurs to acquisitions.
They grew up in families that were business people and the family business was importantto the family.
(26:05):
And what they're doing is bringing that same energy and grit and drive and determination.
together with some knowledge about how to run a business.
What most founders are, we think, what we find is most founders are absolutely outstandingexperts in their fields.
(26:30):
So if it's an engineering firm, the founder is an outstanding engineer.
If it's a concierge medicine practice, the
founder is an outstanding physician if it's an HVAC business it's The person who startedthe business was an outstanding technician and then went on his or her own and and
(26:59):
And those skills are really important to get a business off the ground.
But most businesses will reach the point at which you actually have to know somethingabout management to take it to the next level.
And our students, some of them have those technical backgrounds, but some of them don't.
And many of them don't.
But what they do have is the knowledge of business basics to get those businesses to thenext level.
(27:29):
I just think it's remarkable that nobody would think that an engineer doesn't bring valueto the business, right?
Of course the engineer brings value to the engineering business, right?
But the manager also brings value to the engineering business.
And at a certain size, the business can employ engineers.
(27:53):
But the manager is the person who's deploying those assets.
At some point, the founder's skill set just becomes, I don't mean to minimize it, butbecomes an fungible asset in the business.
And that's when you know it's ready to sell.
Rick, when do think that happens?
At what size?
I don't think it's size dependent.
(28:14):
think it depends.
There's a moment in which somebody starts a business and in the beginning the business isfundamentally a job.
And at some point the business stops being a job and starts being a business.
(28:36):
You sort of know this when, I think you know this, when the founder no longer gets to dothe skill that they love doing that brought them into the business.
So the person who wants to make artisanal bread now finds himself running a bakery with100 people and he's spending all his time on HR and finance and managing the real estate
(29:03):
and...
employee benefits and customer delivery schedules and hasn't baked a loaf of bread in ayear?
Now he's being a businessman, not a baker.
And the question is, was he a better baker than a businessman?
I don't know.
Depends on the person, right?
But why do we think, you you gotta learn how to bake.
(29:26):
You gotta also learn how to be a business person.
But a lot of these great entrepreneurial businesses, they're successful because of adelicate alchemy.
In part, it's the soul of the company.
It's the instinctive leadership of the founder who knows how to deal with the customer ina certain way, who knows why a word on a website is bad or good.
(29:49):
And that's very hard to teach a manager.
What do you...
teach or train?
of all, would you agree with that sentiment?
mean, you won't.
I think if the business is so tied to the knowledge of the owner, then it's not a businessyet.
Then it really is a job, no matter its size.
(30:11):
I guess we could look at a company like Dell.
Under Kevin Rollins, Dell struggled.
Dell was an incredible success story up until the time that Dell tried to move away fromthe business.
It's a multi, obviously multi-billion dollar business.
He's come back in the company and it's become an incredible success story again.
He's an instinctive leader that's brought Dell back from a manager who kind of knew thebasics of how to run a company.
(30:36):
He knew more than that.
I'm not giving him credit, but he didn't have the instinct.
I would argue there are, know, Steve Jobs would be another example.
There are lots of, you know, very celebrated examples of this where the entrepreneur hasto come back into the business, even at a very big size, because they're the only ones who
understand the soul of the company.
And I'm wondering.
(30:56):
Well, I would say two things about that, John.
First of all, the stories you just related are true stories, but I think for every one ofthose stories, we could look at many more stories of the business that outgrew the
founding entrepreneur where he or she just didn't know how to manage the business and gotlost.
And frankly, the most common story is the entrepreneur builds a great business.
(31:22):
They're now more of a manager than they were
you know, the creator of the services.
And also, as they've gotten older, their priorities change.
You know, suddenly they find they have more money than time and they want to act that way.
They don't want to work 70 hours a week.
They want to work 35 hours a week.
And so maybe they're not paying as much attention to the business as would be great forthe business.
(31:44):
It's great for them as the owner of the business.
And so there are forces in life which start to create the opportunity for someone who's
young and hungry and trained and doesn't have much money but wants to have success, reallybe a suitable successor for people like this.
So I think the truth is there are founders who are impossible to replace, there arefounders who ought to be replaced, and then most of them go in the category of they're
(32:12):
great, but they can be replaced, particularly with their help.
So yeah, the zero to one, know, the Peter Thiel, there's most, think entrepreneurs, thinkmany of our listeners would fall into that.
They're great in the startup, right?
They're great for the first couple of million in revenue, first 10 employees, and thenfeel a little out of their depth when we're starting to get into 30, 40, 50, 100
(32:33):
employees.
And so I think they would concur.
just pushing the envelope to say in some companies.
they're working 70 hours a week and maybe they don't want to work 70 hours a week, I thinkit's not so much they don't want to work the 70 hours a week.
It's they don't want to work the 70 hours a week doing the stuff they have to do then.
Right?
Because they're no longer baking bread.
(32:54):
They're no longer doing the engineering drawings.
They are managing HR.
They are dealing with grumpy customers, difficult employees.
They're not, they're not...
You know, they're not sharpening their pencils or mixing the wheat and gluten and whateveryou do to make bread.
You're hungry, aren't you, Rick?
You definitely want some good fresh breakfast.
(33:16):
not.
I, you know, it's remarkable how things like we say baking bread and it's like I shouldknow that, right?
I feel like I'm at a George Bush moment, if you know what I mean.
Like, milk?
What's a gallon of milk?
Is it $50?
Is it $2?
I don't actually, you know, I mean, I've thrown ingredients in a bread maker and pressedthe button, but that's really it.
(33:44):
So yeah.
portion of the conversation, which is I was trying to put my finger on like what, youknow, how would you describe psychographically, know, demographically?
And so what I've heard, you know, I think it'd be fair to say if you took a survey ofHarvard Business School graduates, you'd have a portion that would go into consulting, a
portion would go into investment banking, all of whom would have very, very, thanks toyou, all incredible skills that they, you know, education about business.
(34:14):
It sounds like your graduates from your program combined those same business chops,expertise, with a degree of scrappiness and willingness to get their hands dirty and
sleeves rolled up that perhaps the grads that go into investment banking or go intoconsulting may not have.
It's the scrappiness plus the education that makes the ideal acquisition entrepreneur.
(34:38):
Is that fair?
And the drive.
There's a lot of drive.
And you know, I'm a big fan of saying success is a delicate mix between confidence andhumility.
And what I think is true about the people who are successful in this place is that theyreally do have an interesting balance there.
(35:00):
They have confidence in themselves, but they're willing to walk into the entrepreneur andsay, I've done all the studying I can to learn about your business.
I've worked really hard to understand it, but I need to learn from you.
I'm not going to come in and say, let me tell you how to run your business.
They don't do that.
(35:21):
But they absorb like a sponge.
So what's the pitch for an acquisition entrepreneur?
Because if we go back to our hypothetical $10 million business doing $2.5 million ofVBEDEL, let's imagine it's an HVAC company, 50 employees.
(35:41):
There are a lot of people that want to buy that business today.
There are private equity groups rolling up HVAC businesses.
There are probably strategic regional players that want to add another HVAC company in anew city.
and then along comes your grad, how do they compete against a potential private equitybuyer willing to pay a premium, a strategic acquirer again willing to pay a premium?
(36:07):
Well, yeah, it's, it's, yeah.
Well, I'd say two things.
Actually yesterday, Rick and I had in class a HVAC company founder who sold his businessto a searcher, but we'll talk about that in a moment.
I want to, I want to follow up on Rick's comment because he's right.
You know, there are businesses where there is a lot of private equity interest.
(36:29):
So in HVAC,
your perfect example, John, there are lots of private equity buyers.
You can line them up.
You can get a bidding contest going and sell them.
But for most smaller businesses, you know, there aren't a lot of private equity buyers forat least two reasons.
Even though these are very high quality companies that any sensible person would want toown.
(36:50):
The first is they're small.
And the economics of a private equity firm don't favor buying smaller businesses because
they live off a management fee and a share of the profits they make for their investors.
And if they can do larger investments, it is much more lucrative for the firm than if theydo lots of smaller investments, which are very labor intensive.
(37:11):
So small sort of turns off a lot of private equity firms.
And the second is that the owner, founder, CEO is often selling
as a step towards retirement.
And now that private equity firm not only has to do the work of buying a small firm,deploying a small part of their capital, but they have to do the extra work and take the
risk of bringing in a successor, making sure that person works, doing all the work ofhiring them and vetting them and supervising them.
(37:37):
And that is not an attractive combination for most private equity firms.
And it's really hard to do and not always successful.
Exactly.
so what many of your listeners are going to find is those buyers aren't that keen.
The kind of buyer who's keen is someone who is capable of pulling together a transaction,the equity, the debt, and structuring it, and then wants to run it as CEO.
(38:03):
And in addition, what they want to do is they actually, they want to be the founder.
They want to run that business for five or seven or nine years, and some founders
actually place value on that separate from just getting a sale done.
That's the first most important reason.
But they just say, I don't want my company just subsumed into some larger holding company.
I don't want the employees laid off by some heartless P firm.
(38:26):
want someone who sees this as a business to curate for seven or nine years.
Rick, would you add something to that?
would add, yeah, just a few things, Royce.
One is that your example is one that tilts against the searcher because HVAC is, ofcourse, a business that has attracted lots of private equity interest.
(38:47):
And most of the buyers of HVAC companies eliminate the management and just roll theclients into the larger company.
And and your example of two and a half million dollars of profitability It's at theborderline where it's a standalone entity for a small private equity firm make that a 1
(39:11):
million dollar or seven hundred and fifty thousand dollar EBITDA business Private equityisn't gonna touch that ever because it's just way too small not may get rolled into
another portfolio company
But then you need to think about that many small businesses are in these niches that youmight never even have heard of except you're looking for the small business.
(39:40):
it's remarkable you find these little manufacturers of custom batteries of this, of that,services that you didn't even know existed.
People have, you know...
very successful careers in running.
And so these businesses aren't subject to roll up because they're kind of idiosyncratic.
(40:07):
They're not easy to roll up.
They're too small.
for a private equity firm to buy and you need to replace the manager because if you'remaking $750,000 in owner's compensation, if that's your EBITDA and the owner's taking
$500,000 or $600,000 a year and doing whatever with it, which is fabulous, they probablydon't want to spend $200,000 for number two.
(40:37):
that's know of equal to their quality and so some owners say well gee why should I sell mybusiness for four times I'm going to just keep owning it and I'll hire somebody and then
it turns out that they might say they're gonna hire somebody who has the same skill setthey do but they don't they hire that they take the general manager that they have who
(41:03):
was good at getting things out the door or managing the shop floor and they give thatperson a new title and maybe a 25 % bump in salary and they say, okay, now you're running
the firm, execute your strategy.
Well, that person doesn't generally think about strategy.
That's not what they've been doing their whole career.
(41:24):
That's not what they've been trained to do.
So they just execute on the owner strategy and that works until the world changes.
And guess what?
The world changes all the
so that strategy just doesn't work for a small company because you really need somebodywho has that skill set who can actually run the business.
(41:47):
So yeah, two and a half million dollar HVAC, we can have a long conversation about it.
you know, $750,000 specialty manufacturer, short conversation.
Now we've really peaked, I think, a lot of the ears of our listeners because for a lot ofour listeners, they are in those unique industries where there isn't some roll up going
(42:09):
on.
And they may be a little south of the numbers we were talking earlier, six, seven,$800,000 of profitability.
They're like, if I could just get to 2 million of EBITDA, I'd attract the big strategic,but I can't get there or I don't want to.
And so this is a really interesting potential for them.
in particular if they don't want to see their employees gone, they want someone to comeon.
(42:39):
I wonder, do you get the chance to vet the candidates for your program?
Are you involved in admissions at all or do just get what you get from the admissionsoffice?
Well, we get what we get, but our admissions are pretty good and
Harvard Business School, there's about 925 students in each class.
(43:01):
We have room for 200 in our two sessions that we offer, two classes that we offer.
It's pretty competitive to get in, so the people who want to get in are the people who arereally interested in that career path.
They don't come just because we're pretty faces, you know, we think.
(43:22):
And so,
There's a bit of self-selection.
We tend to get more married students.
We tend to get more military students.
We tend to get more people of color, people for whom this career path seems particularlyattractive going in unconditionally before they really see it.
(43:44):
We don't screen out anybody, but there are a lot of people for whom this just doesn't fit.
Like who?
Well, I like to say the most difficult thing a CEO does every day is write down theirto-do list.
because it's the definition of the to-do list that determines the success of the business.
(44:10):
And a lot of people really like to have the to-do list given to them.
And for a lot of careers, very high level careers, you get a to-do list.
If you're a partner in a private equity firm, you're effectively getting a to-do list.
Find a firm that we can buy and then execute and make profits at that, right?
(44:30):
There's a to-do list.
I mean, it's maybe a high level to-do
list but it's such a do list.
not presented that way, but that's exactly what it is, right?
Yeah.
mean it's not right and and and if you're working for investment banking or consultingthey're gonna tell you go work you know if you're a consultant they're gonna tell you go
visit this big company and they have this problem that they've hired us and do a power youknow you have a month and put together a PowerPoint slide that they're gonna sell really
(44:57):
great ideas.
That's your to-do list that you have a deliverable it's well defined and for a great manypeople on earth.
I would say most people on earth, having that well-defined to-do list, the objective, Iknow exactly what I need to get done in the relatively short form, relatively short term,
(45:21):
and there's somebody smart telling me what that is, that makes people happy.
Interesting.
they don't fit this, right?
You have to have, this is this confidence and humility thing.
You can be really confident in your ability to execute a to-do list, right?
But it's...
It's interesting because it does get back to our earlier conversation around, you know,the difference between a startup entrepreneur and an acquisition entrepreneur, because the
(45:49):
startup entrepreneur is the ultimate to-do list person, right?
Like they're literally starting from a sheet of paper.
They've got no to-do list, right?
It sounds like the folks that you're educating are somewhere in the middle.
They don't want to sit in the, you know, 64th floor of the Bank of America tower and justdoing out the PowerPoint presentation.
And at the same time,
(46:10):
If they were truly total blank slate thinkers, they would probably start something ratherthan buy something.
So there's somewhere in the middle.
maybe.
I don't know that, this is my personal bias, I don't think being a blank piece of paper isa higher calling or even more creativity or more drive.
(46:38):
I just think...
I just think it's a different skill set to create something out of nothing than to takesomething and make it spectacular.
That's a different skill set.
You know, it's pretty typical for our students when they take over a company.
(46:58):
You know, things don't really move a lot in the first year, but if you look five yearsout, most of those businesses are double or triple the size they were when they bought
them.
And it's not because of luck.
It's because they go visit their customers and they visit their customers and listen withan open mind.
(47:18):
They look at their marketing materials and they don't say, this is the way we've alwaysdone it, so we should keep on doing it.
They're saying, gee, maybe we should go to Google words and get higher in the searchengine and maybe that's how we should market or maybe we should market at trade shows or
maybe we should do belly to belly sales.
But they're open-minded to a bunch of alternatives.
(47:43):
And I think that's special and different than founders.
When does it not work?
You've been a tremendous advocates, both of you for this working.
And I think in large measure it does.
You've got a tremendous case studies and all your podcasts of real success stories.
I'm sure there are some examples where it breaks.
(48:04):
Can you share some examples or commonalities where it doesn't work?
I mean, you said this is gonna air relatively soon, I mean, I can't tell you the number ofcommunications I received in the last week from firms I know well and former students who
(48:24):
have international trading partners with Mexico or Canada who suddenly find themselves inlike, what do I do now?
And that's kind of like, wait till tomorrow, it could be different.
So look, bad luck happens, the world changes in various ways, and so there are theseexternal forces sometimes that happen that you can't see.
(48:50):
And that certainly happens to people.
Some people buy businesses that are broken and they think they can fix them.
You know, they're gonna buy a business.
They're trying to buy a business in a cyclical industry at the bottom and be ready for thebe ready for the rocket ship recovery.
(49:16):
But if they get that bottom wrong and it goes down, down, down another few years, theyfind themselves quite sad or miserable.
Sometimes people make due diligence mistakes.
They just don't understand the businesses they're buying.
They think they understand them.
but they don't really.
And then you have problems.
(49:36):
Sometimes, Royce and I encourage our students to buy dull businesses with lots ofrecurring revenue that are enduringly profitable.
They're generally not sexy.
They're not growth oriented.
They're, let's grow a little bit.
(49:57):
Let's never lose a customer.
Let's pay off our debt.
Let's do things well and improve and get marginal efficiencies and do it better and growby being just better at executing what we have.
I- I-
I agree with everything Rick just said, and I would just add that one of the pieces ofadvice we give our students again and again is after you buy a business like the kind Rick
(50:24):
described, you know, in that first year, you will have plenty of decisions to make.
Every day you'll be making decisions, but try not to make decisions which are big and hardto reverse in the first year.
Big meaning a lot of money is associated with it.
Hard to reverse meaning if you discover that it
you decided wrong, it's tough to pull out cheaply, try to avoid that because if you'vebought the kind of business Rick is describing, you have some time to wait before you make
(50:53):
those decisions.
The business will be fine and you will be so much more knowledgeable a manager about thatbusiness at the end of six to 12 months than you are in that first month.
And that is a safety belt when you get into any established, successful, high qualitybusiness.
Just that.
not all surgical acquisitions are like that.
(51:14):
Some people really look for high growth.
They say, I'm not gonna buy businesses that are Forex multiple that's dull.
I'm gonna buy a business that has lots of growth potential.
to develop new software to succeed, where I have to develop new markets to succeed.
And those businesses are like any startup business.
(51:37):
You're basically bolting a startup onto an existing business, but in that instance thething you're bolting on is pretty big because you have to get this growth to succeed.
And in that instance, it's just like a startup.
They don't all succeed a lot fail because the markets don't appear, there's a competitive
(51:58):
So all those things happen, but if you're in a business that's been enduringly profitablefor 15 years You really have to do something wrong to goof it up like really not just
wrong like you make a judgment arrow like like really stupid
You know, you know, as you're describing this business, kind of the Hippocratic oath cameto mind.
(52:21):
The idea was like, do no wrong.
I kind of get that.
The other train of thought that happened for me was if I were an employee in one of thesebusinesses that has been there for 17 years or whatever, and this young hotshot 20 years,
my junior Harvard educated new owner shows up.
(52:41):
I'd be kind of look at them and saying, okay, like,
What are you going to decide to do anything?
Or are you just going to sit there and smile at me and say, do no wrong?
so I wonder, what coaching do you give these entrepreneurs, these acquisitionentrepreneurs, to do ingratiate themselves with the employees who are in these companies
that are doing the work?
Is that something you talk about or educate them on?
(53:04):
How to ingratiate themselves with the employees of the company?
You know, we have a class guest who talks about how in his white manufacturing businessout in the oil fields, he talks about how he discovered his biggest value add was
unplunging the company toilets.
(53:26):
Because if people couldn't use the toilet, they actually couldn't do their job.
And so as soon as the toilet got plugged, he dropped what he was doing and went andplunged the toilet and cleaned out the bathroom stall.
I don't think he's, I mean that may be a more graphic and colorful story than most, but Ithink fundamentally that's it.
(53:49):
If the floor needs to be swept, you sweep it.
don't, particularly our guys with military backgrounds, our men and women with militarybackgrounds, but it's true throughout our, I've never met anybody who's an
entrepreneurship.
who's buying a business and wants to run it as a CEO who doesn't expect to work reallyhard and get really dirty.
(54:12):
Not just intellectually dirty, but like really dirty.
The floor needs to be swept and there's no end, you you're not gonna take the technicianoff some money-making activity to sweep the floor, you're sweeping the floor.
Yeah, guess our ex-military students would refer to this as leading from the front, right?
They're not asking you to do anything that they're not showing you they do.
(54:34):
Or another civilian word for it would just be humility.
And that goes a long way, right?
Because...
I think if you're not willing to do that stuff, don't.
I mean, look, the nature of small business, especially in the size range that I describedearlier, is that these businesses are under-resourced.
There is no HR person.
(54:54):
There is no, maybe no full-time accountant.
There is no this or there's no that, right?
There's no janitor.
There's no building maintenance person.
And so, you know, you're gonna spend your weekend...
fixing that door that doesn't work.
And people just do that.
(55:16):
a great place for us to end.
I am so grateful for you spending the time educating me on this important sector of oureconomy.
think you're obviously very passionate about this and I think your students are very luckyto have you both as professors.
So thank you for giving me a few minutes of your time.
I think I'm enormously grateful for it.
(55:37):
That's really kind of you to say we enjoyed our time here.
was great.
Thank you for hosting us, John.
We appreciate it.
Your book, by the way, is one that I have read personally and found it really helpful ineducating myself.
It's the Harvard Business Review Guide to Buying a Small Business.
I think I would recommend everyone who's even remotely interested in this to pick up acopy.
(55:58):
It's a great book.
Is there anywhere else that people could learn more about you, follow you?
What else can people do?
the school has encouraged us, starting a couple of years ago, to have a podcast similar tothe book, teaching people...
how a small firm gets bought and it's called Think Big, Buy Small.
You can get it wherever you get your podcasts.
(56:20):
But the school really is interested in us reaching beyond campus to the many entrepreneursand would-be entrepreneurs who are interested in the subject but don't know how.
So that's what our Think Big, Buy Small podcast product is seeking to do.
And that's really been fun because we've gone beyond the normal HBS searchers.
We certainly have had some HBS searchers like Betsy as you described earlier and Gerald asI described earlier.
(56:46):
But many of our searchers, many of the people who appear are not people who you wouldimagine or who have graduated from the Harvard Business School.
And we have a lot of...
What should I say?
A lot of Main Street businesses and a lot of businesses that you just wouldn't haveimagined.
(57:12):
It is a great way, I think our podcast is a great way to learn a little bit about businessin a way that you don't from even reading the Wall Street Journal.
So it's a lot of fun.
We're having a lot of fun doing it.
The podcast is called Think Big by Small.
I've listened to it.
think it's a great introduction to your work.
So I encourage everybody to download it and follow.
(57:32):
If people want to reach out to you on social media, do you accept social media?
Or is the podcast the best place for folks to go?
This is an email address associated with a podcast and so the easiest way to reach us isthrough that podcast email, which is
rickandroiss at hbs.edu.
Awesome.
And we'll put that email address along with links to the book and the podcast in the shownotes at builttosell.com.
(58:00):
Professor Rubak, Professor Utkow, thank you for doing this.
Thank so much.
Be well.
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