Big Deal Small Business: Search Update (9/2021)
September 21, 2021 | Issue #43
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Today’s post is a monthly ride-along update on my self-funded search. If you’re new to Big Deal Small Business, feel free to check out these posts for more context on my search:
My search approach: Why I picked self-funded vs traditional and quasi-partnered vs solo or fully-partnered
As I ramp down my day job and ramp up my search, it’s hard not to feel unproductive relative to the intense pace of private equity. I haven’t fully left my day job yet as we agreed on a slow transition period, but I’m quickly losing the top-down pressure to get work done.
On the one hand, it’s been liberating to structure my own days and viscerally feel the flexibility.
On the other hand, it’s hard not to feel like I’m making no progress at times.
As a result, this month’s search update is a bit more forward-looking than backward-looking as I need a new set of goals to work towards.
But first, here’s a quick recap of the past month.
Deal Activity
It’s been slower as we exited the end of summer and into September, with only 8 new deals added since the last search update.
This has been a function of two issues:
My day job is taking more time than expected as the transition period actually increases work for a while until I’m fully out
I’ve started to narrow the filter in terms of geography
It feels like SMB buying is a volume game in that you just need a constant deal funnel to eventually find the right deal. However, you don’t win a medal for just churning through deals — ideally you’d look at as few deals as possible before closing your deal.
I’ve now looked at 97 deals since starting my search, which can be interpreted as failing miserably at closing deals. Or it just means that it’s a long game, I’m maintaining the pace, and eventually it will click.
The real interpretation is likely a combo of those two.
The good news is that with my narrowed geographic focus is starting to yield some results. I’ve already generated 2 proprietary deals through friends of friends type connections.
With one owner in particular, we’re starting with a blank sheet of paper around what a deal could look like. It’s a new way of thinking & dealmaking for me. Not sure if it’ll go anywhere, but it’s a breath of fresh air.
Looking Forward
I was prompted by two sources to set some real goals going forward.
The first was this Twitter thread by Michael Girdley that laid out a method for setting quarterly goals in service of a 10-year vision.
The second was chatting with Graham Thompson about EOS/Traction and the concept of setting Quarterly Rocks.
Both Girdley’s post and the EOS/Traction system are basically saying the same thing:
Start with a long-term outcome
Work backwards to medium-term outcome
Work backwards to short-term outcome
Solve for the short-term goals required to get to the short-term outcome
While I won’t share my long-term or medium-term outcomes as that’s much more personal, my short-term (1-year) outcome obviously revolves around closing an SMB deal.
In order to achieve that, I’ve set the following quarterly goals or Rocks for the next 12 months:
Process ~65 deals each quarter = ~5-6 per week
Generate 2 personal network meetings related to SMB/M&A per week in my target markets of Seattle & Bay Area
Submit at least 1 LOI per quarter
I solved for those goals backwards based on the following assumptions:
25% close rate on accepted LOIs (assuming a reasonably high level of pre-LOI DD). I’m 0/1 so far, hopefully 25% is correct.
50% acceptance rate on submitted LOIs (assuming you have reasonable line of sight into the auction process, know what you need to pay, etc.). I’m 1/2 so far, so potentially reasonable?
4% LOI offer rate. I’m 2/97 so far, so maybe a tad high, though my filter has gotten sharper so each deal I look at going forward has a higher probability of going forward.
Based on that, the math is simple: 200 deals x 4% x 50% x 25% = 1 closed deal
So if I need to go through 200 deals to generate 1 closed deal, I need to hit 65 deals per quarter to find a “winning” deal within 3 quarters. That leaves me with one quarter to actually close a deal.
Look — this is just scratch math, with massive assumptions. There’s no certainty at all that this will work or not work.
But I needed some tangible goals to work against and a way to measure progress beyond simple “closed a deal” and “have not closed a deal”.
I just have to balance that with maintaining quality. I don’t want to work towards achieving the goals; the goals are there to guide me towards achieving an outcome.
Conclusion
The search grind continues! While momentum feels low in this exact moment as I’m busy with my transition period out of my job, I’m optimistic that my plan makes sense and will result in a closed deal within 12 months.
If I can make a request — if you know M&A professionals, brokers, LMM PE firms, or SMB owners in Seattle or the Bay Area, I’d love intros. You now know my goal of meeting at last 2 folks through personal connections each week, so would appreciate any & all help in that regard.
As always, send me 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).
Were you an associate or VP in PE?
As far as getting frustrated that you're not working as hard as when you were grinding in PE, remember that you probably always envied the execs that made huge paychecks and did relatively nothing, so welcome to that transition. But it will probably be shortlived until you step in as manager.
Can I ask what EBITDA range you're looking for?
As a self-funded searcher myself (completed an acquisition in 2020) I'd be happy to chat. I think the market has changed so much in the past 12 months. It seems like great deals have really dried up. Not only have multiples risen, but the quality of the deals has just gone down. Also it seems like almost every deal we look at had a baseline level of earnings pre-2019, and a stepped up level of earnings in 2020/2021 and the multiple is always based on 2020/2021.
All I can say is do not compromise on the quality of the deal. I know that sooner or later you'll want to move your goal posts to get a deal done, but you'll be paying for that for years to come. Instead treat all of the time searching as a learning and growing experience. The people you meet, the industries you learn about, may open up opportunities down the road that are slightly off-course from a traditional SMB buyout, and that's OK to pursue as well.
When you say "5-6 deals/week" is that for example signing the NDA and doing preliminary due diligence? Or is your definition something else?