Building Your Search Team
July 28, 2021 | Issue #32
Big Deal Small Business: Building Your Search Team
July 28, 2021 | Issue #32
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I think most active searchers have discovered the broader “search community” to be incredibly generous & supportive. My pace of learning has been many multiples faster than what it would have been without the community.
So I think it’s worth highlighting what your search team can look like as it’s made up of a few buckets of people.
I’m now a year into search and have been fortunate to develop each of the following teams — it makes me 1000x more prepared to close a deal than I was a year ago.
Deal Team
There are ~5-6 core members of your deal team. I have heard varying views on how to best put these folks into place. I took the most expensive approach, which was to go through a live deal that died on the 1-yard line, so I actually hired & paid most of these folks.
In practice, the cheaper approach is to be proactive and cultivate these relationships as you’re getting a deal closer to LOI.
For example, I interviewed four different CPA firms right after I signed my LOI, which was a stressful time to do it.
In hindsight, I should have gotten the references from friends and had those intro calls in advance. That way, I could have just pressed play on the Quality of Earnings the day after we signed the LOI.
In any case, here are the core deal team members:
Financial Diligence CPA: Quality of Earnings, Working Capital Analysis, etc.
Deal Lawyer: Purchase Agreement, Shareholder Agreements, Consulting Agreement for Seller, etc.
Lender: It probably makes sense to chat with a couple in order to learn what geographies, deal sizes, and industries they cover. You can check out my post on Navigating the SBA 7(a) Maze for more.
Insurance: Confirm that the business today has sufficient & well-priced insurance. If they don’t have enough, you need to model in higher premium costs going forward. If their policy is too expansive, you may have some day one cost savings.
Tax CPA: Purchase price accounting, general questions around pass-thru taxation/corp taxation, etc.
Industry Expert: This can be hard to pre-plan for if you’re doing an industry-agnostic search, but a sector-specific expert that you can trust is invaluable. They help you avoid gaping blind spots and show you what questions you should be asking the Sellers.
Investor Group
If you’re planning to raise money from investors for the equity, ideally you build an investor group through dialogue and not through deal pitches.
My preference is to avoid the dynamic of deal pitches. I want to include investors in my diligence process so they understand that by the time I show them a deal, I really believe in it. It allows me to be fully transparent with the risks & merits.
In my first deal that got close to the finish line, I sent prospective investors a short deck that laid out the opportunity and the business, but it also outlined the key open questions. I asked them to indicate if they’d be interested assuming I could figure out those questions.
Then a couple months later, I sent them an update memo outlining my diligence and how I answered those questions. Only at that time did I ask them to truly commit to the deal.
As a professional investor myself, we understand that management teams can lose our money at times — that’s just the risk of any deal. The unforgivable element is if they hide a headwind/risk from us that they knew about in advance.
Lastly, not every investor is the right fit for your deal. When you accept their money, they are on your cap table for 3 to 10 to potentially 50 years. The best way I know how to solve for this is with radical candor around your intentions with the business.
I tried to be super clear to my prospective investors that the path forward was unknown at deal close. My plan was to put my head down and learn the business for 2 years. After that, I’d pull my head up and we’ll collectively assess 3 paths:
Reinvest cash flow into this business for organic growth
Use cash flow to buy similar businesses for inorganic growth
Do our best to grind out cash to pay back debt quickly and sell the business
I didn’t want to be prescriptive upfront on if we would own the business for 5 years or 50 years. I didn’t want to be prescriptive upfront on if this was a roll-up strategy or a single deal play.
Investors signed up to that game plan — pulling the hard conversations up to pre-close strikes me as the best way to have a fruitful long-term partnership with your investors.
Peer Group
I think it’s imperative that you find a few friends within the search world who also love to shoot the shit on SMB deals.
I could only tell my girlfriend so many times about how cool some random $700K SDE business was — she’s very supportive of my search efforts, but she doesn’t want to discuss the gory details.
As a result, finding a sounding board of other searchers is crucial to 1) managing your sanity during search and 2) making sure you’re not walking off a cliff / drinking your own Kool-Aid.
In particular, I’ve been very lucky to find peers with a range of approaches:
The most traditional / holding company style of search funds vs searchers stringing together multiple $100-$200K SDE deals on their own dime
Folks planning to bring in a GM from day one vs others who don’t believe that’s possible
Folks planning to use 90% leverage vs others targeting <30% or no leverage
Local vs national searches
Operators by background vs Investors by background (like me) vs Former Searchers (i.e. currently operating or already-exited)
All of the above ensures that you’re constantly testing your own search thesis.
The coolest part of being in a peer group is celebrating others’ success. The wins in search are far and few in-between — getting to celebrate a friend’s success is like a breath of fresh air that can give you the drive to push forward in your own search.
Conclusion
The search process can feel very lonely, but it requires a real village to get to the finish line. Cultivating that village early in your process will go a long way to making your search both successful & enjoyable.
This is also why I’ve been writing this newsletter — it allows me to give some of learnings back to the community, but it also helps me connect with a wider, more diverse set of search community members than I even knew existed.
And of course, I’m always happy to be a part of your peer group! Just hit reply to this email or find me on Twitter.
Thanks,
Guesswork Investing
P.S. I’d always appreciate introductions to potential acquisition targets or brokers (primarily targeting $750K-$1.5M+ of SDE or EBITDA, ideally located in the Northeast, West Coast, or Colorado).