Big Deal Small Business: Non-Scalable Search Methods
September 16, 2021 | Issue #42
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Earlier this week, my guest writer Spencer Butcher laid out what it takes to develop a nationwide software proprietary deal pipeline.
I’ve had a number of conversations with traditional and self-funded searchers about setting up an email campaign engine to start developing that proprietary deal flow.
The more I’ve grappled with it, the more I think that model just doesn’t feel like a great fit for me. Clearly the email campaigns work for a lot of folks and generate real off-market opportunities (as evidenced by Spencer’s experience closing 7 deals in 6.5 years). But it’s not my jam.
For me, as I’ve progressed my search, my geographic focus has gotten tighter and tighter. It started nationwide, then tightened to major tech cities, and is now solely Seattle and the Bay Area.
Going more & more local is restricting in some ways, but it also opens doors to non-scalable proprietary deal flow generation that feels more organic to me than the email campaigns.
Today’s post explores those two interconnected subjects:
Why did I get even more local in my search?
What’s my game plan for proprietary deal sourcing?
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Why did I get even more local in my search?
Okay back to me (this whole newsletter is so egocentric it’s kind of gross, thanks for putting up with it).
I’ve been thinking a lot about how to win deals. In its simplest form, winning deals means paying the highest price, with some value allocated to being a preferred buyer by the Seller.
This means if the top bid is $X, you may be able to win paying $X - 5% because the Seller wants you to own her business. But that % discount is going to be small in a competitive process.
As a result, you need to get damn close to the top bid on a cash basis. To do that, you need to be more comfortable with the risks as any other buyer.
With that premise, consider the fact that most SMBs are hyper-local businesses. Home services businesses, the golden child of self-funded searches, are inherently limited by a service radius around a very specific location.
In these businesses, you’re making a bet on the business, but you’re also making a HUGE bet on the local economy & population.
It’s obviously easier to make that bet if you know the local market well.
Don’t get me wrong, I’m not saying you can’t do a deal in a new market — I’m saying that if you’re trying to win the auction, you will see less risk in a market you know well, which will allow you to pay a higher price than a newcomer.
That’s a big reason why I’m getting more local in my search. Seattle and the Bay Area are region in which I grew up. It’s where I have all my close and extended family.
The more I reflected, while I have lots of friends in the tri-state area around NYC, I don’t have close to the same personal network or local knowledge relative to what I have in those two West Coast markets.
Buying a business in Seattle or the Bay Area just feels “easy” to me relative to anywhere else.
Separately, but importantly, my significant other and I both see ourselves being happier in one of those markets over the long term than anywhere else.
If I’m trying to buy a business that I could conceivably own for 20-30 years, I don’t want to foreclose that option by buying in a market that isn’t a good personal fit.
Getting more local creates deal flow restrictions obviously. On the other hand, there’s an argument that I should just pick one market rather than spreading myself thin across two big markets.
As a result, I may end up adjusting after a few more months, but that’s part of what makes search fun — it’s a constant, evolving learning process. I’m just sharing where my head is at with all of you at a point in time; hopefully it’s helpful as you reflect on how you approach your search.
What’s my game plan for proprietary deal sourcing?
As I transition out of my day job into full-time search, I have a lot more hours in the day to generate deal flow. The obvious allocation of that time should be to proprietary deal flow as I already have the broker channel up & running.
A ton of searchers have been very generous in sharing their thoughts & experience with me in setting up a proprietary deal flow engine.
The spectrum of proprietary search methods range from mass email campaigns to very targeted, customized outreach.
As my geographic aperture has tightened, it affords me the ability to skew my proprietary search to the extreme “non-scalable” end of that spectrum.
In practice, this starts with re-connecting with my personal communities given I have been living on the East Coast for nearly a decade.
I’m only just starting, and it’s already been a breath of fresh air to see where folks are at in their life. Once I’ve done some basic community building, I’ll start working through advisor (CPA/lawyer) networks, many of whom are the parents of kids I went to high school with.
The point of all this is to create opportunities for serendipity. The more I put my vision out there in these small communities, the better odds that someone thinks of me when they hear a friend is selling a business.
This is not a systematic way to generate deals, but I’m not building a long-term, optimized deal pipeline — I’m trying to find one deal.
As a practical example, I played golf with a friend last week, who invited a couple coworkers. I told the coworkers about my plans to buy a small business — turns out his close friend’s dad is looking to sell his business soon.
Another example — I reached out to a great education-related business that I attended myself 15+ years ago. The owner told me he hears from search funds roughly once a month, but had largely ignored all outreach until he saw my email. In my case, he was excited to hear from a former student and was all ears on a potential transaction. We’re speaking again next week.
Those are connections that work in a local context, but are very hard to develop in a nationwide search approach.
Relationship Building
Relationship building is the amazing convergence of going local & doing non-scalable proprietary deal generation.
Being able to tell Sellers where I went to high school, where my parents work, which neighborhood I grew up in — it all makes a difference.
Probably goes without saying, but proprietary deal generation is a SLOW process.
But it blows the door open on relationship building and creating transactions that really fit what Sellers want.
Removing the broker barrier & auction dynamic allows me to have a frank & open conversation with the Seller about their real goals.
I don’t anticipate paying less then fair market price in a proprietary process, but I think solving for more than financial goals significantly increases my odds of closing a deal.
Conclusion
This applies to all my writing but feels especially relevant today — my posts are just a chronicle of my search journey and my self-reflections & learnings. Over time, my posts will contradict prior posts as I keep learning.
Please don’t take anything written here as gospel or even experienced advice — it’s me sharing how I think, and hopefully that helps you form your own views on search.
With that big caveat, I feel really good about my plans going forward in search:
Focusing on two markets that are well-known to me
Doing non-scalable things to generate proprietary deal flow
I always welcome your thoughts on my posts, particularly disagreement & feedback. 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, located in Seattle or the Bay Area).