Host: Today's episode is a treat. In an education we hear from Adam Borse, who bought a blue collar business as a self funded searcher four and a half years ago and has grown profits over 150% to around 2.4 million. To be clear, he took an already nicely sized business with 900,000 in EBITDA and has almost tripled annual earnings. So we hear that story and learn his key unlock that generated so much growth. And then more recently, Adam has become a search investor with a preference for traditional search funds. So this is a guy who as a searcher prefers the self funded model, but as an investor prefers the traditional search fund model. We get into why and it gets mathy toward the back half of the episode. So no shame in re listening. Adam's perspective here is so valuable, especially for those of you who anticipate needing to find investors to help you buy a business. As you know, raising money from investors is a sales process and the first step of any sale is to inhabit the perspective of the party you're selling to understand their choices and incentives. I hope today's interview with Adam will help you do just that for search investors. Please enjoy my conversation with Adam Borse, owner of Delta Installation Group and a search fund investor Quick Announcement Next Thursday is the third webinar in our series with Sam Rossotti, this one on raising equity to buy a business. We're going to walk through how to raise money from investors for your self funded SBA acquisition. There are norms to working with investors, a process information they'll expect and packaged in the way they expect it. And the more you demonstrate you know what you're doing, the more likely they are to invest in you. And of course questions like how much money do you raise? How do you decide what percentage of the business that money is worth? Lots to cover here. It's going to be an education and you'll leave with templates for an investor NDA Investor Teaser and Term Sheet. The webinar is next Thursday, February 22, 1pm Eastern. The registration link is in the show notes. Look right at the top where it says register for the webinar. And if you can't make it next Thursday for the live webinar, you can register anyway to get emailed a link later to the recording. If you don't know Sam Rosati by now he has seen the back and forth between searchers and investors on many deals, including his own, including those he's invested in himself. He also maintains a list of SMB investors. This list has emerged as a really valuable resource for the ETA community. So come learn from Sam how to raise money from investors to Buy A business Thursday, February 22, 1pm Eastern Registration Link at the top of the Notes. Welcome to Acquiring Minds, a podcast about buying businesses. My name is Will Smith. Acquiring an existing business is an awesome opportunity for many entrepreneurs, and on this podcast I talk to the people who do it. What do the following Acquiring Minds guests all have in common? Doug Johns, Morley Desai, Tim Erickson, Chirag Shah, Shane Ursum they all went through the Acquisition Lab, the accelerator in community for people serious about buying a business, but they represent just a sliver of the Lab's success stories. The number of deals across the Lab's cohorts now stands at over 120 with over $300 million in aggregate transaction value. The Acquisition Lab was founded by Walker Deibel, author of Buy Then Build, the book that introduced so many of you to the very idea of buying a business. The Lab offers a month long, intensive, almost daily Q and A sessions with advisors, live deal reviews with Walker, Deal team introductions, and an active community of serious searchers. Check out acquisitionlab.com, link in the notes or email the Lab's co founder, Chelsea wood. Chelsea@buythenbuild.com Adam Borse welcome to Acquiring Minds.

[4:34] Guest: Thanks man, Good to be here.

Host: I'm excited for our conversation. Adam, you own a sizable business that you acquired via a self funded search and that story alone is impressive. Inspirational it's fair to say, but you also have experience as an investor in search deals, mostly traditional search funds. So you bring the perspective of a successful self funded searcher, but a traditional search fund investor. So lots to tease out there. If you'd start us off please, with some background on you Adam

Guest: sure again Will, thanks for having me. So I from Maryland went to the Naval Academy, spent my early days as a submarine officer, did a couple deployments in the early 2000 period, transitioned in 08 to a publicly traded energy company based in Bethesda. Kind of tangential to the energy industry. We were selling enriched uranium nuclear fuel to commercial nuclear power plants. Great landing place for me out of the military, but knew I kind of wanted to be in a little bit of a maybe smaller business, faster growth opportunity. So I networked with some people in Annapolis, ended up working for a fundless sponsor in the Annapolis Anne Arundel county area. He had previously worked at a middle market fund doing turnarounds of small businesses and assembled a team to originally acquire one business. We ultimately acquired about seven or eight had A small investment fund. And I kind of cut my teeth in, you know, sourcing deals, structuring deals, doing diligence, interfacing with lenders, and then ultimately working in three of the portfolio companies as an operating partner. He hired me right out of Kellogg. I was doing an executive MBA program, which is on the tail end of that energy company. He hired me about three months prior to graduation because that's when we bought our first business. The business had a pretty sizable outcome 18 months later was kind of catapulted into the investment fund that we ran. And then I did that until 2018. My father has owned and operated a small business in the digital marketing space since the late 70s and always felt very entrepreneurial. I don't think we were the wealthiest people, but we did fine. We had great vacations and tons of family time together. You know, always home for dinner, you know, some late nights for my dad commuting into dc. But it was just a great way to grow up as a kid. And I kind of, as I built my professional repertoire and got older, I was like, how do I become an owner operator? The guy I worked for in Annapolis was Tom Ripley. And Tom built a team around him to, to basically acquire these distressed businesses. And as I mentioned before, that's where I kind of learned how to operate, how to look at deals, how to read balance sheets. And then I was like, look, I like this, but I'd like to buy a profitable business. I'd like to be a CEO and I'd like to be my own boss. And that kind of catapulted me into a search, ironically, kind of a fun place to start. I learned about search from Anacapa, one of the oldest, most reputable traditional search funds out there. And Mike Mare was a great mentor of mine as I was transitioning out of Tom's team. Had some really meaningful discussions with him and Jeff, Jeff Stevens. And I was like, wow, this is a great model. And I asked them, I said, what if I search for a business but I don't take any investor capital? And said, well, that's a self funded search. I was like, there you go. So that was actually the first time. It was probably 2017, early 18 when I heard the term, and then by the end of 18, I had resigned from my firm. Launched my search in January of 19. I ultimately sourced a deal through an existing intermediate relationship that I had that I built while I was working for Tom, because I spent my first three years sourcing deals, doing diligence, evaluating businesses. And I spent the last two and a half years running companies. So I had a pretty expansive network of intermediaries which ultimately gets me to the acceleration of my search. Searched in January, got the business under, under LOI in April and I closed in June. That's a. Having been exposed to a lot of self funded searches in the last five years. That's a pretty quick timeline. But I feel like I had the right capabilities to search and I was good with. I was good with transactions. Like I was good at putting together paperwork for banks. I could build financial statements. I knew how to articulate things about a business to get people more comfortable with them. I ultimately landed with a 7A loan.

[9:42] Host: Adam, can I pause? I want to, I want to tease out some of this stuff, but I also want to. Before we get too far away from your background, I want to ask some follow ups. First of all, your dad, digital marketing going back to the 70s. What is digital marketing in the context of the 70s and 80s mean? Just curious.

Guest: So it doesn't mean anything? That's what it is today. It was an advertising agency with print billboards, newspapers, and over the last 20 years it's transformed into a digital marketing firm. So ad agency old. They're basically Madison Avenue in D.C. in the 70s.

Host: Is it, is it a firm that's still around? Because I know some of the ad agencies in D.C. would. I've heard of it.

Guest: Well, it's in Annapolis. It used to be called Boris Dixon. My dad's business partner is Jay Dixon, but because my dad is retiring this year, actually they rebranded it several years ago to Ads Intelligence. They're based in Annapolis. Primary focus is residential real estate.

Host: I feel like I've worked with them in another life, which I can talk to you about offline. That's so funny.

Guest: Interesting. The world continues to get smaller.

Host: Yeah. Okay. And when you say that you worked for a fundless sponsor, of course that term has evolved to. You usually hear independent sponsor these days, but it's their same thing. First of all, why do you think that you got hired if you had no experience? Obviously you're coming out of Kellogg, so that might be the answer. And the Naval Academy.

Guest: Well, yeah, really came down to the principal assembling a team of people who had all the same values as him, who were high integrity, hard working people who he could give a guardrail left and right and just say go and execute. And there was three Naval Academy people on the team, an FP and a auditor accountant type that he hired. And the four of us worked with him to Go off and execute. He actually said to me, it doesn't matter to me that you've never done a deal. I know how to do deals. But I know that if I give you a task, you'll execute it 120%. And there's also tons of OJT on the job training that you ultimately stumbled into. It was a really interesting team. I'm actually the only person on the team that's not still there.

[12:00] Host: Oh yeah.

Guest: So it says a lot about him and that team and they've done a lot of really impressive things over the last 10 years.

Host: And for somebody who has worked for an independent sponsor at, in an independent sponsor, just give us a little bit of a picture of, of what that means, what that looks like. That's a term that comes up a lot. But I, but I also think unless you're heavy into the independent sponsor space, there's a bit of a mystique and not fully people this audience might not fully understand what it is. So give us a picture.

Guest: I think it, it manifests itself in a couple of different ways. I think predominantly you see independent sponsors who have transaction backgrounds, they have acquired businesses, likely with other larger teams, and then they decide that they're going to go do it on their own. They then do research and figure out an industry where they feel like there's opportunity to potentially buy a business, a platform and then do a buy and build. So the independent sponsors that I'd previously been involved with and invested in would pick a specific sector, they'd buy a platform business and they would raise capital to go out and acquire those businesses, assemble a team, they sit on the board, they kind of operate as like chairman, executive chairman of those businesses and they try to grow them through acquisition as well as organically. We were doing it a little bit differently because we were acquiring distressed businesses. So it was not a specific sector thesis, it was a distress thesis. So it was opportunistically looking for lower middle market businesses that had good businesses with good customers and a good product or service to sell. But something had happened in the business that caused them to fall from grace. Whether that was like a Covid event, although this was before that, they very frequently had some sort of personal issues going on, whether it was fraud or embezzlement, they were very frequently in foreclosure with their senior lenders. The lenders put the businesses into workout groups and then they try to sell assets at a discount to get them off their books. And that's what we did.

Host: And so sourcing These turnaround opportunities, there are some pretty clear places where you would go fishing. You talk to lender, you develop a network among lenders. And lenders have assets they're trying to get off their books.

Guest: Correct. And the most recent deals, the three that I did before I left, one was sourced through an investment bank that just happens to sell lower middle market distressed businesses. One of them was sourced through a commercial bank at M and T local relationship. And then the other one was sourced through a network of my former employers who a lawyer who was involved in helping this business deal with some of their real estate issues said, hey, this business is going to transact, you guys should come and take a look at it. If I connected that to search. Search is all about finding profitable companies. The intermediate network is pretty vast, inclusive of business brokers, lower middle market investment bankers. But you do kind of take the no stone unturned approach. You're talking to lawyers, you're talking to private wealth people, you're talking to commercial lenders. There's opportunities kind of everywhere. And whether you source a profitable business or distressed business, it's not that different.

[15:32] Host: And sourcing aside, give us more of what the difference actually is between independent sponsorship and search. Because a lot of what you said, and also leaving aside that your thesis or your approach was going after distressed businesses, searchers don't do that. We look for healthy businesses. But everything else you said about what independent sponsors do sounded like searchers. So remind the audience what the real difference is here. Size of business, size of target business is a big one. What else?

Guest: Yeah, I think the thing that jumps to the head of the list is all searchers run the businesses that they buy. The model is predicated upon it being a searcher operator model. Self funded searchers take on SBA loans, they personally guarantee them, they run the companies. The reason why their economics are so good is because they have a lot of risk and they're candidly the person doing all the work. Similar to that. Traditional searchers also run the businesses every single time. Their economics are very different because they don't have the same personal risk profile as self funded searchers. They don't take on bank loans, they don't take on personal guarantees, they very, very infrequently put their own money into deals, but they again are also running the companies. Independent sponsors do not necessarily become the day to day president. I will tell you coming out of the fundless sponsor, independent sponsor, distressed world is that you end up taking a little bit more of a hard lean in on the Running of the business if you are the person, because they require a lot of hands on leadership. So an independent sponsor that raises capital to buy a platform to buy business two business three, they may not be the person writing the checks, they're sitting at the board. If you buy a distressed business as an independent sponsor, somebody at that sponsor group is writing checks, looking at all the cash coming in and out every day, hiring and firing, doing all the blocking and tackling. I would say that my perception is that the, the independent sponsors, that buyer that buy profitable businesses are doing a lot of blocking and tackling but not nearly as much as you do when you're buying a distressed business. Yeah, because I mean, I think makes sense.

Host: Yeah. I mean it sounds like the whole opportunity is to basically write the ship. Correct. But somebody's got to do that writing, writing of the ship. And it's not going to be somebody who's already at the business, otherwise the ship wouldn't be sinking. So it's going to be you guys. And so you had this great experience. You learn a lot from Tom Ripley was the sponsor's name, the founder.

[18:09] Guest: Yeah, Tom. Tom was my employer, my mentor and pretty much learned almost everything I know about running and evaluating businesses from him. And that five and a half years.

Host: Most business buyers acquire their target company using an asset purchase, which means that you've got a brand new legal entity that needs to be ready on day one to properly employ your new team. Payroll, HR documents, tax accounts, workers comp, benefit plans like medical and 401k. You need to make sure all of that is transferred or set up on day one. Aspen HR understands this challenge and the delicate timing that searchers have to juggle. Led by a successful former searcher, Mark Sinatra, Aspen HR can assist searchers to ensure a seamless transition for the employees. If you are structuring an asset purchase, contact Aspen HR for a free consultation. They'll walk you through their proprietary checklist for asset purchases that assesses your readiness for HR, payroll and benefits. Check out aspenhr.com or contact Mark directly@markspenhr.com well, it does sound like amazing experience to go off and do your own search because as you just said, you learned, I mean not only how to buy a business, how to source businesses, how to look at deals, but then you were also looking at really challenged business. You got all kinds of operational experience. You learned how to operate not only a business but a business that needed to be, you know, was, that was in crisis. So you know, really thrown into the deep end to to fix businesses. So once you got your hands on a healthy business, it must have just seemed easy peasy. Yeah, but, but here's a question. Why did you, so you, you, you. Why did you not, when you set out on your own, choose to be an independent sponsor? Why did you want to be a searcher?

Guest: I'm not sure, you know, God, that was seven years ago. I'm not sure I fully appreciated every single different structure. But if I were to use my knowledge today and then kind of walk it back to 2017, 2018, I still feel like self funded has the most autonomy and gives you the most control. Now, did I know that when I did it? I mean, I kind of knew that, but. And let me give you one specific detail. You can be a fundless sponsor and buy distressed businesses and have a permanent capital vehicle, no investment fund, no investors. And you can do whatever you want, whenever you want to, whatever business you want. That's very unique. Most, most fundless sponsors are buying profitable businesses and they need investors. Once you take on investor, you have a boss. It may not feel like you're an employee, but you have a boss. Traditional search funds have investors, a lot of smart people putting very specific guardrails around that traditional search fund to make sure that he or she does the right thing. Yes, it's super independent, yes, it's super entrepreneurial, but you have a boss. Self funded, you don't have a boss. I don't care what governance you put in place. And again, some self funded structures have boards, most don't. It is the most flexible structure where you can do whatever you want, whenever you want to, whatever business you want. And that was very appealing to me. And again, I don't think I had as much knowledge as I have today about all the different structures, but the independence and autonomy about an unfunded search was the most attractive thing to me about that model.

[21:53] Host: And so when you were turned on to search as a concept at the tail end of your time at the fundless independent sponsor, and you mentioned some names, Ana Kappa and Mike Moray. Was that the name?

Guest: Mike Morray? Yeah, he's a 20 year senior to me, Naval Academy submarine officer. Met Jeff at Stanford Business School. And he's had just such a great impact on my professional life, advised me on all the different things I could be doing. And then he's like, hey, this is, this is what I do. You should, you should come and talk

Host: to us about it.

Guest: So it was a really, it was a fortuitous conversation because I think that going off and buying my own business was going to happen anyway. I didn't really know that people were calling it a search until they told me.

Host: Yeah, and, but, but in fact you, you, you, you hear them out, you're really excited. But then you say, but by the way, how do I do this without raising money?

Guest: And back to the control independence thing.

Host: Back. And that was what is, that was what prompted your question to them was like, well, I'd still have a boss if I go with this traditional search fund model thing. How do I do this without a boss? That was kind of.

Guest: Yeah. And I would say even having that specific conversation with Mike, I'm not even sure I knew that the economics would actually be much better potentially as far as an ownership doing a self funded. Like, I didn't know that I was going to use an SBA loan when I was in that office. I didn't know that it was 25% ownership versus 80% or 100%. I just knew that if you invest, it felt similar to my previous role where I didn't have an investor but I had a managing partner kind of telling me what to do. It just, it felt like I wanted to, I wanted to be farther away from that. And all the while, candidly like I was interviewing at middle market private equity funds, to be an operating partner to help run businesses for them, one in particular in the area. And I got very far with them. And maybe buying Delta was the shortest distance between two points to employ myself as a CEO and that just happened to happen first. So again, like is it skill or is it luck? Well, you know, Tom uses that Thomas Jefferson quote like, the harder I work, the luckier I get. Like, I think there was a reason why I bought the business, reason why I did it quicker than employing myself at another fund. The net result is independence. And that's what I've always valued as a searcher. Great.

[24:21] Host: But just so we understand on this point that self funded equals the most independence of all and that you don't have a boss. You did mention in your kind of your brief glossing over the economics that like self funded searcher, you might have 80% of the business. Well, if you take no investors, you have 100% of the business. If you take investors as doing a self funded search, you might be left with 80% of the business. Just to, to be absolutely clear with the audience, why do those investors not represent bosses?

Guest: Because they don't have the same, they don't have this, they don't have the same rights as investors In a traditional search fund. Do.

Host: Can you elaborate?

Guest: So traditional, yes. Traditional search fund investors have very specific things that they can do. The most important thing that they can do is they can fire the traditional search fund CEO. There's no structure that I've seen where an investor invests in a self funded deal and can fire that searcher. And the reason why they can't fire that searcher is because they have a personal guarantee for a government backed loan. Period, end of story. So that's not the only difference. That's the most legal difference in my opinion. Other maybe less tangible, more intangible things is the whole model for traditional search is predicated upon having a lot of smart people, more experienced than the searcher, help them find, acquire, operate and exit a very profitable business. I think the outcome is the same in a self funded search. But that person who did a self funded search chooses that track, that route. They may need an investor because they have a $500,000 equity gap or it's a bigger business and they have a $2 million equity gap. But again, in my experience, most of those self funded searches who need outside investors only want the money, they don't want support. And I think that's a very, very, very specific distinction.

Host: Well, we're gonna, we're gonna spend, we're gonna return to this because this is really getting, I think, to the essence of your kind of understanding both sides of the table that I touched on

Guest: at the outset here.

Host: But for now, let's return to the plot. So you were about to tell us you're, you are well positioned to kind of, you are already integrated into deal flow. So you found Delta pretty quickly. Take us back to how the deal starts coming together and tell, and tell us about the business.

Guest: Yeah, a couple things fell into my favor. One was I had, I had an existing relationship with the intermediary. That's the first point. The second point is when I re engaged that group, that business Delta was under loi with a different buyer. So I actually spent the winner of 19 looking for other businesses besides Delta. I actually worked for a different independent sponsor for two months trying to help him acquire a sizable manufacturing business in Virginia. In April, this intermediary came back to me and said, hey Adam, the deal, the buyer with Delta fell apart. It was candidly a nightmare. They, you know, had no experience in running businesses. They didn't want to do a purchase and sale agreement. It just seemed a little odd to us and the sellers basically, you know, once the exclusivity of the loi ran out, they said, let's go find a new person. I was his first call. Within one week, I met with the sellers and had the business under LOI for directionally the same purchase price. So they, you know, they had what we call as buyers, they had, they had fatigue because they had spent three months dealing with somebody and it was not only time, but it was also frustrating time. Let's just say, I don't know for a fact, let's just say they got directly the same price. They got a, a local buyer. Not only local living, but local like grew up in the county, served in the military. By the way, the sellers of Delta were military veterans. And I had direct experience in small businesses. They're like, seems like a good fit. Let's meet them, met them. Businesses under LOI in two days. So basically from the time the broker reached back out to me, it was less than a week that I had it under LOI. Then the 60 day process of diligence getting the Live Oak bank loan started, which is, you know, in April, that, that put me at a close the middle of June. It was, I mean, I hate to say it was fairly painless, but I had very, very high integrity sellers. As I mentioned, two of them were veterans. The, the three most senior people running the company, not the owners, but the senior management were also military veterans. And then there was just things that were luck. First piece of luck was the landlord happened to have a personal relationship with the landlord. That was coincidence. The business was in my backyard, 12 miles from my house. That was luck. The CFO who owned part of the business came in years after the existing owners bought the business because they wanted to sell the business when everyone was at retirement age, which is basically then mid-60s for them. He was a super high integrity person. The books were super clean. There weren't a lot of add backs. If you want to get real tactical, well, it was a C corp. So these guys basically took all their money out via W2 because they didn't want to pay corporate tax. There weren't any add backs, you know, a couple here and there. It was really easy to understand that this was a, it was in like the low 900,000 EBITDA business. Wow. I don't recall how I met Live Oak, but they became the primary lender. I don't even think I shot the deal just knowing met them and like, what do you guys do? He's like, well, we have, we're the largest SBA lender in the country. I was like, well, I want An SBA loan. And they're like, okay, we're good. And then they, you know, they do their, they do their process and do their underwriting. And dealing with banks is always frustrating. I had again, another piece of luck. I had, like, one of the most skilled closing agents at a commercial bank I've ever seen. And I literally, however fast you could close on a loan, I did it. And it was because of that person. That woman closed on the 19th of June, 2019, and then spent the next six months just kind of like sitting in, listening, meeting the team. I had the three sellers in the office a couple days a week to kind of help me navigate. But honestly, once we got to 90 days, I asked them not to come in anymore because I kind of wanted people to see me as a CEO. I took a lot of.

[31:27] Host: Adam, Adam, before we get too much in the transition, let me stop you and tell us what the business is. We haven't even.

Guest: Oh, yeah, right. So the business is one of the oldest commercial furniture installation companies. So said differently, we put together office furniture, and the term that the industry uses, we put together primarily systems furniture. Systems or cubes. Yes, systems furniture or just cubes. So think about a. A cube in an office that has three walls that are vertical, that are made out of metal, and they've got, you know, typically fabric on both sides. And then there's. And then there's a work surface, your actual desk part. And then there's. A lot of times there's a metal pedestal that sits underneath that has drawers. And sometimes there's an overhead metal thing that gets bolted on the wall. And then you, they open up, flip doors, you put stuff in there, and then there's a chair.

Host: And why is this something where, you know, classic search, where it's like, wow, there's a whole business around that and it sounds like a sizable one. Why are assembling. Why, why is there a whole business just to assemble those cubicles? Which it sounds like whoever, like whoever else is in that value chain either. Maybe the client. Like, why do you need specialized workers or a third party firm, your firm, to do the assembling of these cubicles, which is, you know, I assume it's, you know, easier than putting together IKEA furniture.

Guest: Yeah. I mean, the best way to answer it is to just, just run through the supply chain. So the supply chain is the. I'll start on the left. The person that makes the furniture. Most commercial furniture that goes into federal government, big government contractors, Big, big commercial banks that spend a lot of money on their facilities to have nice offices for the employees. Buy furniture that's made in the usa. Most furniture that's made in the USA is made in Michigan. The three primary manufacturers I know you've heard of, at least one of them are Haworth, Knoll and Herman Miller. Herman Miller recently merged with Knoll, so it's now called Miller Null. So there's two primarily large commercial furniture brands. They work with licensed dealerships who represent those furniture brands to basically space plan commercial offices for their customers. So let's use the federal government. The federal government works with the dealership. They want to buy Herman Miller product.

[34:06] Host: They want.

Guest: They give them a blueprint. They space out how many desks, how many chairs, how many common areas, how many conference rooms that dealership has. It's all college educated people. It's a lot of master's degrees, it's architects. It's a white collar workforce. We are the contractor to that dealership to put the stuff together. So the reason why we exist is because the people who buy the furniture and then sell the furniture to the end user typically don't want to have the workforce that we have, which is actually the workforce that I really like, which is more blue collar. We're a labor company. We receive unassembled product into our warehouse. We then send it out with our people on our trucks to be assembled. We're not electricians, but we're also at somewhat of a skilled labor. Yes, it's not like putting an IKEA desk together, but it is a lot more complicated than you think. And it takes years, decades, honestly, to be as good as a Delta or another competitor of ours to do what we do. So that's proverbially like the moat. That's the competitive advantage is like we know how to put together all the primary furniture brands. We also have the warehouse to support the product coming in. And we have, we have the labor force to be able to support the large project. Large projects, I mean, multi, seven figure, multi month, sometimes multi year.

Host: And so there really is specialized knowledge or an experience in assembling these systems, these, these rows of cubicles, essentially.

Guest: Okay, yeah, 100%.

Host: And speaking of moat, I assume a lot of, you know, for you the kind of linchpin of the business is the relationships with these dealerships. So, you know, your, your business kind of rises and falls based on that. So do you consider those, emote, those relationships? And, and how, you know, how, how tightly do you need to hold on to them? How many competitors does a Delta have?

[36:11] Guest: Yeah, I mean, it has, there's less than 10. But in the markets that we compete in, it's really us and three others. And absolutely those dealership relationships are essential. But the reality is when our business in the 80s and other competitors started, like our business started at NSA and the people who own this business, the people I bought the business from, were enlisted Air Force linguists at nsa. And as NSA started to have these massive overhauls of furniture, they figured out very quickly like, well, like we could, we could take this furniture apart, we could get new furniture. And how do they exactly like build a relationship with the dealership at the time, I don't know. But it naturally there was a demand for the service. They were already cleared active duty military, and they started to install furniture at night. Then they basically bought this business from the founder a couple years later and they owned it for 30 years. So back to your question. Yes, the dealerships are the key. They have very competitive RFQs with the federal government. And it's kind of like a, you know, like anything else. Lowest price, technically acceptable, but someone has to put the furniture together and there's only so many of us out there to do it. And you can't just snap your fingers, get 100,000 square foot warehouse, get a 50 person installation team who knows what they're doing and execute it on a certain timetable. So it's basically 30 plus years of successful execution. Having the labor force, having the warehouse, and having those key dealership relationships which Delta has.

Host: Fascinating. And just going back to the fact that the business had transacted before, but it was so long ago, 30 years ago. This is not a case where you can say to yourself, oh, the business transacted before in recent years, therefore we know it can survive another transaction. Because this was ancient history. Different time, different place, different business at that point, and smaller.

Guest: Basically. Basically what happened was the business was started in the mid-80s, but the guy who started it had a furniture dealership. He's like, if I have a dealership, I have, have an installation company. Well, once the, you know, you got to 1988, the year before the 89 recession, his dealership business didn't survive. So he sold the installation business to the people I bought the business from. So yes, there was technically one transaction, but it was 30 years ago. So then the question is like, well, like, how did I know that you could buy a business and there would be no transaction risk? The answer is, you never know. Like there are no riskless transactions. But the thing that got me most comfortable was I Went and met with the biggest dealership customer, veteran sellers. I trusted them. I didn't fully appreciate how much of a moat and how sticky this business really was when I bought it, but I since have learned that, that it is. And it's not perfect, it's not great all the time, but for most of the time there's a high demand for this service. Even through Covid, we've seen meaningful demand. And again, that's probably the last piece of luck is like I didn't realize how the resilience to macroeconomic conditions only manifested itself in the fact that the business has been around so long and literally the year I bought it, if you looked at the trailing five year financials, they had not skipped a beat. Now, those five years didn't encapsulate a Covid or an 0809 financial crisis, but they navigated all those crises pretty well. We navigated the COVID crisis pretty well. And it's a testament to that competitive advantage that a business like this has.

[39:59] Host: Well, you may have just answered this question, which is the obvious thing that you, when you're evaluating this business you poke at, which is that it sounds very, very projecty. So you're, there's actually no recurring nature, nothing recurring about this business. So, so is the, is the way that you got over that in your own mind what you just said? That you just looked at the historical performance and it was consistent and strong.

Guest: Yeah. And, and like you think, you know, when you talk to searchers, you hear, you hear recurring revenue, you hear contract revenue, and then you hear things like repeat revenue. While I was in the latter bucket of repeat revenue, and candidly, Live oak, it was challenging because they're basically not only buying a business with no recurrent lending into a business with no recurring revenue, they also were lending into a business that had high customer concentration. So the way that I got comfortable with it and got them comfortable with it was to do what you just said. It's like, hey, I know it doesn't like technically like contract. I know technically there's higher than desirable concentration, but look at the financials. This business has not skipped a beat with all those negatives. And it wasn't that easy. But it was pretty simple to explain to them that this was a key customer relationship. It had been around for 30 years. I didn't intend on changing anything. And as long as I didn't, you know, aggressively change prices or change a bunch of people in the workforce, like there theoretically shouldn't be any problem. And, and there wasn't yeah, well the,

Host: the, the other thing that would jump out at me at a business like this is that it's very much tied to the types of projects that you get are either net new hiring, so a business is opening some businesses opening a new branch or needs new bodies or correct or just replacing old systems. So I assume there's, you know, there's refreshing an office or there's the latest and greatest in office furniture. So every 20 years or 15 years there's new office furniture. But, but both of those are very much tied to the local economy. And so as kind of employment, I assume this is basically tracks with the employment of the local economy and you might say, well, so does every service business. So that's, that's neither a strength or a weakness.

[42:22] Guest: That's just everybody.

Host: Yeah, but here too, you know, probably a lot of your, your projects are with the government. So if you're thinking about, you know, the government just basically since 911 has expanded tremendously, the DC area has just surged over the last 20 odd years. But there are kind of projections or there's chatter that that's going to risk, that that's going to pull back. So anyway, did you think about any of that macro stuff?

Guest: No.

Host: Really?

Guest: No, I didn't. Honestly. I mean I'm not going to like sugarcoat that I didn't. I just didn't think about, I looked at the financials and I got comfortable with the brand and you know, the largest customer. And even without a Covid, you know, you, you kind of think like how long can a business like this continue to run? The biggest risk mitigator for this business is not only are the customers, a large part of the customers, government, government contractors, they're also in cleared facilities. So I don't care what happens during COVID or a financial crisis, people are going into that top secret office. Yeah, we go in and we put new furniture in and take old furniture out or go into new buildings, put new furniture in there. That it's a blessing and a curse. It's a curse because although our customer is not the government, our customers, the dealership, the end users, the government, the government, the general contractors, they're challenging to deal with payment. Payment terms can linger, projects get delayed. It makes managing an efficient labor force very difficult. But the good news is they're always putting butts in seats, they're always replacing furniture. Without getting into details, you can surmise what you want. A lot of our government end users are in the intelligence community. So it is a constant flow of facility work. Has the facility, the macro facility real estate market post Covid changed some of our other commercial relationships negatively? Absolutely. Some of the banks we deal with are not in person. So like some of their large projects got put on hold or got canceled. One of our newer customers is Amazon. So if you think about who are the three largest employers in the D.C. metro area, it's Amazon, the federal government and Northrop Grumman. Those are three of my largest customers. So this business is not predicated upon like the 20 person law firm. Our business is predicated upon large government, large Fortune 100 businesses who spend hundreds of millions of dollars a year on facility. We candidly get the crumbs at the end as the installer, but those crumbs are worth a lot of money.

[45:03] Host: And so having just now poked all these holes in this business, it is as you said as we talked about here, 30 years old, so that now I'm, I'm switching sides here. That, that's, that says a whole lot about a business that's just, we love history and it's doing $900,000 in SDE. So it's also, you know, right at that kind of, it's a great size for a self funded searcher, I guess. Was there anything else that you liked about it that we haven't already touched on?

Guest: I would say for a, for a services business, like a blue collar services business, it had I would say not excellent but fairly sizable EBITDA margins. The gross profit margins I think you see it like even like my father's company are much higher. But we drop a lot to EBITDA after gross profit. The biggest expense after gross profit is basically facility. So I mean the business was. Make sure I'm talking correctly. So we were doing 900, 185, it was running at just over 10%. So double digit EBITDA margin, which for this type of business is pretty decent. I basically assumed, and this is one of the very most exciting thing about the business after just what we just talked about, getting comfortable with the risks was how does this business grow? And the conversations I had with the three sellers always boil down to one thing. There's more business out there to do, but we can't find people to execute it. We can't grow the labor force. We can get more facility space. We can't grow the labor force. And I said to them, what are you doing now? And I said, well our CFO who is this 65 year old white male, he's basically interviewing people and figuring out who can come in and join the team. And I'm like, what does our workforce look like? Oh, our average employees, like late 20s, African American, Latino. And I'm like, okay, okay. So if there's revenue out there and I, and I could hire more people, can I generate, could I grow the business? And they said, absolutely, but I don't think you're gonna be able to do that. You know, it's just a really hard labor market. I'm like, cool, okay. So we transact. And then I think when I bought the business, unless I need to give the numbers of people, but I know what the number was. And within 12 months, we had almost doubled the workforce. And that was the key to unlocking literally revenue that was out there. But we were saying no to jobs because we, quote, couldn't hire people. We put a young late 20s female, we made her the HR manager, we opened up an indeed account and she went to work. We then pulled a 20 plus year installer who just happened to be ex army. We made him the administrative supervisor. Between the two of them, they'd screen candidates fee indeed, he would personally interview every single person and he would personally train every single person. And within 12 months, we had doubled the workforce. We didn't double revenue, but we doubled profitability because I obviously got for every dollar above break even, gross profit is net income, EBITDA margin. So we basically created all this operating leverage because we took directionally the same facility with twice as many people. And that's how I doubled the business, candidly, two and a half times the business. Because we were able to figure out how to hire which the previous owners were part of. It was fear. They're at the end of their career. I don't want to take on more people, more risk, more liability insurance, more worker comp. It really wasn't that hard. It was just asking how we're doing it now and how do we do it differently. And once we figured out how to do it, trust me. Well, it's completely imperfect. Like we have a ridiculously high turnover in that lower 20% of our business. But we figured out how a way to get people in, put the right people in front of them to screen them, bring them in, train them and grow the labor force.

[49:25] Host: And Adam, just forgive me if I'm being culturally dense here, but the mismatch between the on his way to retiring CFO and the labor force that he was hiring or not, as the case may be, was it that the prospective employees didn't like him or that he didn't like the prospective employees.

Guest: Yes.

Host: Okay. Okay.

Guest: It was just talking past each other. Yeah. It's just one of those things. It's like you have this person who candidly doesn't really want to grow the business because they see it as risk, they want out. And you see a person coming in, you're like, why am I talking to this person? First of all, the person I'm talking to is never, never installed a piece of furniture. So we put people in front of the prospective employees who had been there, done that, walked and talked like them and could sell them into why this is a skilled labor. We, we augmented our benefit structure. We started giving signing bonuses, we increased the amount that the employer was paying for health insurance. And we increase. And then, and then this is, I would say this happened less organic. It really happened because of COVID we started to increase the rates at which we'd pay employees. So we were always well above minimum wage. And again, if you could find the right people who could show up to work and be trained and could last 90 days, they could be furniture installers.

Host: And did you see this opportunity? I mean, you knew that there was strong demand, so you knew you didn't have to solve that side of the equation. It was the labor side. But this particular kind of how you were going to solve what they thought was an inability to hire more people. Did, did you. How much did you thought that through? Or is only once you got inside the business did you see what, you know how to kind of start solving it?

[51:14] Guest: I didn't tactically know how we were going to solve the problem. I just listened to the problem, which was, well, you can't grow the business any bigger because we can't hire more people. And I said, so if I hire more people, can I grow the business? And they said yes. And I was basically like, I'm good. I don't need to talk to you again about it. And I, and I, and I never did great.

Host: Okay.

Guest: And the reality is the underlying theme of self funded deals is this business did not need to grow to be a great investment for me to be a great opportunity. The growing part was a nice to have. Now it's turned out to be a really nice to have. But that's the beauty of a deal where you don't have investors who have a fund, you don't have like a boss, like run the business with the leverage profile from the sba. Don't grow it. You have plenty of room with your debt service, or grow it and be better off. I was at the time, I'm 39 years old, I'm aggressive coming out of an independent sponsor group who was buying, I was hungry. That was the other part that we didn't really touch. I was hungry to take a good business. I didn't really change anything except give the team a perspective about how to be bigger. And guess what? When you started putting money, more money in people's pockets because we were bigger, everybody got on board.

Host: The point that you just made about how like growth is gravy in specifically in self funded deals is such a, is such a, a valuable one because including me. We're all just so focused on growth. I am guilty of that as well. But the, this model is so compelling. The self funded SBA model with the, you know, 80 to 90% leverage.

Guest: Yeah.

Host: It, the economics are so compelling, the model is so compelling that you really don't need to actually grow something very much, maybe along with GDP to have a great outcome. And the, and the outcome is essentially paying yourself really well for the duration of the SBA loan and then having once you paid off your SBA loan, the full enterprise value of that business be your now kind of all belong to you.

Guest: Exactly. And, and, and the, the, the wealth creation over that year 0 to 10 can get accelerated if you grow the business. Which is why I think you perfectly put it well, it's gravy in 10 years seems like a long time. But the reality is, is like I'm now on the right side of my loan. And even when we had, we've had really lean years where candidly we generated EBITDA but no free cash because all the EBITDA went to pay down the loan. I still had great income as an owner, wrote 12 principal checks to pay down the loan and increase the equity in the business. And like you have those lean years as well, but over like a 10 year period, I think that that's it continues to be one of the most powerful dynamics of the SBA self funded structures.

[54:11] Host: I can't wait till we talk about traditional search funds. Adam, we're still a few minutes away. Yeah, two follow up questions to stuff you just said. Adam, when you say the right side of your loan, what does that mean? Just the back half of the back half of the five year. The second half.

Guest: Second five years, six through ten. And if you think about a 30 year mortgage, and I don't remember what year it happens, but in a 10 year amortized SBA loan, the first couple years you're actually paying disproportional Amount of interest, just like a mortgage, I'm on the right side where every month my principal payment goes up, my interest payment goes down. Said differently, I'm paying down the loan faster and I'm increasing my equity faster. I'm, I'm in that part of the loan, which again is a good place to be.

Host: Yeah, exactly. Great. Thank you. And when you solve this problem of hiring and you doubled the workforce and that took you that you more than doubled the ebitda, you kind of quickly powered through like how, how the economics of that flowed through. Walk me through that again slowly please.

Guest: Right, so for every, just use a million dollars. If you have a million dollar business that has 50% gross profit margin. So a million drops 500,000 to gross profit 500,000 of cost of goods sold. And let's make the math easy and say that it's a 10% EBITDA business. So the business is going to have $400,000 of operating expenses overhead less the 500 of gross profit. GP drops 100,000. Okay. That track, Yep. Okay, so now that I'm making money at $100,000, the next million that I drop in the same month generates the same gross profit, another $500,000. But the $400,000 of overhead has already been quote absorbed. So how much of that 500,000 gross profit drops to EBITDA? All of it said differently, gross profit equals EBITDA. So once you're above break even and all your overhead gets absorbed, every incremental dollar of revenue you generate, the gross profit margin drops and it's the exact same EBITDA margin. So said differently, I didn't need to double the business revenue. I only needed to pull a couple more levers on the labor force, capture that low hanging revenue fruit. And that's what allowed the business to go from basically call it about a million to about, you know, close to two and a half million. That extra million and a half of EBITDA was because I was so far to the right of my overhead absorption perfect.

[57:02] Host: But in why was the business like what is your overhead look like such that you don't that your overhead doesn't need to scale with your labor force. Because what we're always told about service businesses is that basically everything it isn't scalable. Because what you're basically what you just articulated is called scale. And what we're always told is that these things don't scale. So as your labor grows, as your revenue grows, so too will not only your cost of goods sold, but your overhead as well.

Guest: Yeah. And like, to be very. Not. Not to oversimplify it for my business, I'll say it like this. If my labor force grows by 100%, my facility does not need to grow at 100% to support that new business. It only has to grow at 15% or 20%. Again, that's maybe bucket seven of luck. I didn't know that, but I figured it out really quickly that I could add. I only added. I added like, 10, 12% more facility with twice as many people to generate that million and a half dollars.

Host: Got it. And when you keep saying facility, Adam, you mean like the warehouse where you store, as an intermediate step, all of this furniture pre installation. Okay.

Guest: Yes, yes. And it's. It's a. It's a massive facility that has racks and we stack furniture. And then that's like, kind of. The other thing that I learned in working with Tom is, you know, you buy these distressed businesses. When you go to buy a good business, you're like, okay, like, somebody has been doing at least 70 to 80% correct for the entire time this business has been run. But I was like, what if we make the warehouse more efficient? We can generate more revenue without changing our overhead. That was the other lever that kind of got pulled in parallel with the labor force. The reason why we're able to only add 10 to 15% of our space is because we became more efficient with the existing space. Said differently. More ebitda. Everything is always about ebitda. Free cash, but. You know what I mean?

Host: But I feel like you're saying something profound there, but to my ear, sounds obvious. It's all about profit, of course. But I feel like maybe you're saying something subtle that I'm not.

Guest: Yeah. What I'm trying to say is, like, people who run businesses are always trying to do things that they think are adding value. And the reality is, unless you specifically do something that affects gross profit margin or affects ebitda, it doesn't really matter. So the person who comes out of a world who's controlling everything and is, like, hiring and firing and, like, dealing with a lot of problems, I had to take. So, as I forgot, I was trying to mention this earlier when I was talking about the transition. I was trying to take the advice of one of my Kellogg professors who actually passed away. He wrote a book. Keith Moynihan wrote a book called Do Nothing, and it was like the CEOs guide to when you go into a new business. It wasn't specifically if you acquired a business, but one of the pieces of advice I give to minted CEOs, traditional and self funded is it's really hard to do nothing because you want to do a lot. But by doing nothing it allows you to listen, learn and let the employees empower themselves to come effect change themselves. So let me answer your question. The only things that I did and I still do today, if they don't affect our gross profit or operating margin or even a margin, I don't get involved with it because it doesn't matter.

[1:00:24] Host: Let's return to that. Just a minute. But on the do nothing philosophy, you and you'd said this in our pre call, but give us a little bit more on the transition and how it played. So you really came in and you were, you were pretty dogmatic about tying your own hands and just listening. How did that, what did that look like? How did that unfold?

Guest: Yeah, it was mostly, you know, you're in the office every day. I, I went out to job sites with the seller. The one seller was very involved in specific projects with specific customers, but he was, he was one of the guys who had been installing furniture at nsa. So he was like a, you know, boot coll, boots on the ground, roll up his sleeves, owner. And even to the day he sold the business, he was still out driving trucks. So I went out to job sites with him, met the crew and just listened to people. And I don't think a single change happened until we got into closer to like five, six months. And I don't necessarily remember what that change was, but I was in the office, left the door open, let the project managers, the project coordinators, the director of operations come into my office and give me information. And then I would walk the warehouse, I would walk the office and I'd walk the job sites and I would talk to people and I would ask them questions and I would listen and I would receive information. And again, like a business that has very, very, very consistent profitability, the reality is you shouldn't have to do much. You basically just don't want to change anything. You don't want the customers to feel like things have changed. You don't want the quality of service to change. You don't want the pricing to change. Once you get a little smarter about the customers, the industry, the operating profile, you can start to push people in different directions. My first push was growth. And I said to the guys and the girls, how do we make the business bigger? And you said, well, we got to hire more people. And I said, well, how do we hire More people. And so I go, I don't know. So then we kind of collaborated and figure out this HR manager structure and d this administrative supervisor. And although the revenue was out there, we had to lean into some of those new customers and let them know that we were open for business because we had basically been telling them for years that we weren't big enough to help them. One of the largest furniture dealerships in Maryland we were not doing business with. And I thought that was crazy. So I went in there with the director of operations where I promoted to president. He and I went with one of my lead project managers, sat in their office, told them who we were and they're like. And this is literally what they said. This is a family owned business. They've been around for 50 years. We haven't done business with them since the 90s, 20 years. I said, why aren't we doing business with you? And they're like, we didn't know Delta wanted to do business with us. And I said, so should we do business together? And they said, sure. And then literally 18 months later, we're doing $2 million of revenue with them. So this isn't like rocket science. All I had to do was let them know that we were like me new owner, had a mentality of growth. We were spending a lot of time and effort to grow the labor force. We had a facility that was going to incrementally grow, but not as, as I mentioned, doesn't need to grow as big. We want to do business with you guys. Here's our track record. Here are the customers. And they knew us, they just, we just didn't do it. It was literally that easy. Amazon, that relationship started the year I bought the business. And we've done a good job of fostering that, but that would probably be bucket eight of luck. It was just luck and timing that they were building out Crystal city, building out HQ2, and we got a bite at that apple.

[1:04:11] Host: Fantastic, Adam. And so let's just, I just really, really want to highlight here the numbers that you've shared with us. It was a $900,000 SDE business and you grew that EBITDA to two and a half to two and a half million. Now that's, and just to be clear, everybody, the audience, everybody in the audience should know this, but let's be crystal clear here, that 900,000 was SDE. The 2.5 million is EBITDA. So you're, you know, paying down your loan out of that money so that doesn't all drop into Your pocket. But, but still two and a half million, even after a loan payment, a lot of that is going to, to

Guest: you and to the employees. We have a, we have a very robust, you know, bonus program and a lot of, a lot of, I would say above market average as a percent of total goes into the employees pockets

Host: through a profit sharing plan.

Guest: Correct, correct. And, and that's what, you know, not to use Navy cliches, but I think that the other, the other thing that I did that I didn't think was that difficult, but I didn't know any other way to do it, was we set a budget for the year based on gross profit and then we tied the profit sharing to the gross profit. So everybody knew how much the company made and then everybody got a piece of it based on what their target was. It allowed people to have visibility. One, set a goal, two, talk about the goal on a regular basis and if you achieve it. And three, the better the company does, the better you do individually proverbially gets people rowing in the same direction at the same speed.

Host: And this is, this is kind of out of a Navy military playbook.

Guest: Well, I mean, it's out of, it's out of Tom's playbook, but the reference to the rowing is a Navy one, but it creates alignment. You know, like I basically took everybody's bonuses and profit sharing is probably the wrong word, but we took everyone's bonuses prior to me buying the business. And I said, if the business gets bigger, you're going to get a bigger bonus. And then we figured out what the pillars were to grow the business. And as a business has gotten bigger, everybody's bonus has gotten bigger. And directionally the business is twice as big and everyone's gotten twice as much money. That's a good thing.

[1:06:28] Host: How much. Adam, are you. I mean, you just referenced Tom. Um, we're gonna, we're gonna start pivoting into kind of your, your new life as an investor or your new life at the time, how you kind of chose to do that. And I think a good way to get there is to ask you how much of this success and what you're doing in this business do you think was because you had the experience with Tom? In other words, for somebody listening to this, who's a, who's a self funded searcher, an aspiring searcher, you know, do you think that, that anybody would have come in and kind of seen these opportunities and taken the same action as you, or were you really leaning on this valuable experience you'd accrued under Tom working for an independent sponsor.

Guest: We, we touched on this in the pre call and it's probably the, maybe the most important thing to, to, to, to emphasize I don't think the keeping the business going at the same level, profitability, I think anybody could do that. I don't think that's necessarily the hard part. I think the hard part for the inexperienced person who doesn't have the capability to run a small business is when we had to cut during COVID and we had to manage cash and we had to figure out how to kind of build the arc before the rain. Proverbially you just don't snap your fingers and know how to do that. I had that experience. I was very comfortable being uncomfortable when business basically stopped. And that's the part I think that gets overlooked and oversimplified with self funding because everybody wants to tell everybody that it's rainbows and kittens. And the reality is it can be, I mean it can be rotator cuff surgery from high fiving your wife but it can also be calling pgs and bank receives. And look, you know this, the foreclosure rates on SBA loans are very, very low. They're single digit percentages. But I think that, and we just touched on this before we started recording. I think the detail that gets overlooked is you could lose a key customer with the SBA leverage profile and basically run a break even business for the next 10 plus years of your life. It doesn't go into forbearance, it doesn't go into bankruptcy, but it's not a life changing event. The other analogous thing I'll talk about is, and again I think choosing structures and this is a good transition to traditional. I think choosing structures comes down to your risk profile, your capabilities, what you actually know how to do and economics. And I don't think you get to economics unless you get past the first two. Anybody can say I have a risk profile to take on a PG because you could say it on this call. It doesn't really mean anything. What I think means a lot is Bucket two. And what I think made me a good self funded searcher when things went tough is because I spent five and a half years working for a person and working in businesses that constantly needed things change, that constantly needed to make better in candidly very precarious financial situations. That experience is kind of what shaped me as running a profitable business operator. And I'm not saying that you only have to have a distress background to be a successful self funded searcher. But like just Saying I want to take on the risk. I don't buy that reason to being a self funded searcher. I think you actually have to know what you're doing, especially when things go south.

[1:10:18] Host: Well, and how do you think about. So a lot of people listening to this are going to be self funded searchers, aspiring self funded searchers, as I said, without having been small business owners, business owners at all yet maybe they're probably are sitting in a W2 and many of my guests also fit that profile and now are on the other side of their transaction and owning and operating a business. And yes, there are the horror stories and I always try to find those surface those but the majority of my guests seem to be doing okay, if not great. And really I'm not trying to oversell this at all, but I do feel like there is a bit of a divergence between what I see and, and what I'm hearing you say, which is that you really need a lot of experience. You really should have a lot of experience and a lot of capability as a, as an owner operator before you become a self funded searcher.

Guest: Yeah, I don't think you need to have worked in five businesses and done five business loans and you know, invested your own money into a, into a small business before. But I just going back to when I made the decision to do it, if I didn't actually know what I would do and it would feel a little bit like desperation, like you're hoping you can do it. I didn't hope I knew I could do it because I had previously done it for a person, for a firm. So I guess this is not intended to dissuade people, but I just think that a lot of the stories of people buying businesses and living in purgatory for the rest of your life, I just don't think that there's a lot of people volunteering to talk about it. Also the connection between being an investor and self funded and being a traditional. I've said this before and I'll say it now as the owner of the self funded deal, this structure is amazing. As an investor I think it will be very good. But I don't think there's enough data out there to convince me that a structure without timelines for exits, initiatives pushing people to grow, I'm not convinced and 20% of the allocation being for investors, I'm not convinced that as an investor the self funded structure will outperform traditional which is why I've basically consistently put more money, my own money into traditional search funds where the investors own 75%. We have governance, we can change CEOs and we put very specific tactical KPIs in place for growth. That's why that model continues to in my opinion, outperform self funded. I'm hoping I'm wrong because I would love to continue to put personal capital into both models. But I have recently host Delta, put much more personal capital into traditional search funds.

[1:13:19] Host: What you just said about traditional search funds from the investor perspective, that you have governance, that you have more control, that you can switch out the CEO and that it's very growth oriented, there's kind of basically pressure on the operator, on the searcher to grow. Let's leave aside that growth mandate and just talk about the governance. One thing that you'll hear traditional search fund supporters, advocates say is that, no, but actually, you know, the traditional search fund searchers, the CEOs, the people who buy the businesses become CEOs, they're, they're, it's so rare that they're actually ever fired. So yes, that's there, but it's like it really kind of doesn't happen maybe at the margins and, or you'll hear, sure, the investors, the traditional search fund investors, technically, formally have governance, have a lot of control. But really, you know, the, the operator, the CEO, the searcher is really calling the shots and they have a lot more autonomy than maybe it looks like on paper. So which is it?

Guest: I would say it's probably something in between maybe. Think about like this. When things are going well, a board of a traditional search fund is going to have to do very little. They're going to want to get updated financials, they're going to want to pat the CEO on the back for pulling all these growth levers and building these new customers. They're going to get excited about talking about an exit and everyone's high fiving each other. The reality is nobody wants to talk about the 20 plus percent of traditional search funds that actually don't get the original investment back partially or at all like that full or partial loss bucket in the Stanford study. So look at 10 searchers, seven acquire, three don't. And I'm rounding up because it's technically closer to like 65, right? Three don't acquire. Of the seven that acquire, two of them, they don't make any money. Only five of the original 10 people make money. So do you think that the two people who don't make money, those are the scenarios where having governance really makes a difference because the investors have a super majority to Basically vote in anybody out anything and make any decision they want and when things go bad, they dig in. And the reason why, again the reason why the, the, the investors benefit from that is in a self funded scenario where you can't change the person out and nobody else is helping to write the ship, you just, you're going to have more, you're going to have more zeros or more, more opportunities for self funded deals to not make any money. They're not in bankruptcy because you know it's only like 2% of SBA loans are defaulting. But do you think I'm getting my $25,000 or $100,000 self fund investment back? Probably not. So I just think that it does get overlooked. Although it is the minority of the time. I agree on a traditional deal not going well, having that control and having the ability to help right the ship and candidly putting an exit timeline from the very beginning, that's probably the last thing that helps drive that four or five extra turn. Whereas a self funded investor is likely not going to have an investment exit timeline in order for them to get that higher 4 or 5 extra turn, they're likely going to have to hold on to the investment longer. Because I don't believe, and I hope I'm wrong, I don't believe that your audience buys a deal like I did from someone who owned the business for 30 years and they're going to resell the business in five years and get everybody a 5X. I just don't, I don't buy that. So how do I get to my 5x? You just hold the business longer. Like I'm good with that, I'm good with that long term hold, but I'm not convinced in the same investment period a self funded investor is going to make more money than a traditional investor. I just, I, I find it very unlikely.

[1:17:19] Host: And let's, I hope we're not spinning the heads of the audience here, but let's jump back now into your psychology as a self funded searcher presiding over Delta. What you just said about how, you know, good returns come with liquidity, events with exits. First of all, did you have any investors in yourself in a deal? We haven't covered that.

Guest: Key question, My father owns 10% of the business.

Host: Okay. And that's friends and family money. So he's going to be less, I mean he's not going to, he's going to, I assume, kind of lets you do what you want.

Guest: Yeah. Purely passive. No, no, no legal rights whatsoever.

Host: Okay.

Guest: Hear that?

[1:18:00] Host: Debt.

Guest: Yeah. He's okay with it.

Host: Okay. But for you, you know, it's still, I mean so we can think about it from the point of view of investors but also from the operator. It's like your best return is also realized with a liquidity, liquidity event. So even if it's hard for self funded searchers to kind of grow quickly and exit after five or six years, kind of have that playbook that is, that is the expectation in traditional search funds it still would be the path to the highest kind of ir, the highest IRR possible. So why does basically why does Adam hold indefinitely and not sell or are you holding it? Definitely I didn't even, I presumed one.

Guest: One of the things that mitigates around needing an exit at year five is growing the business, which in my scenario has just conveniently happened. So if you grow the business, you can make more money faster then you can, you can do the math on what the business is worth today versus what it would be if you hold it for another X amount of years. And because I personally have a long term hold strategy, there's no scenario where selling the business makes sense. That's one person's opinion. But again the nice thing about the self funded structure is I have full decision making authority to do that. Now at some point in the future, when I'm older, will I want to be as involved day to day and think about all the different levers that I need to pull to make sure the business operates successfully. That's why you sell the business. It's partly because of money. It's partly because you just don't want to have the time and the mental capacity to think about the business. Because at some point you're always going to have risk. But at some point I won't have a loan, my house won't be collateralized as part of that loan. So the risk goes down. Then it just becomes time and mental bandwidth. But I'm 44 years old so I don't see that happening anytime soon. So what I tell self funded searchers to my bucket three of economics, you can make more money. If the average traditional search funder is exiting with somewhere between let's say five and seven million dollars. If you buy a million dollar EBITDA business in a self funded structure and grow it moderately and you hold it for 10 years without an exit, you can make more money.

Host: Why do you think that self funded? The terms for investors which now you being on the other side of the table, being a traditional search fund investor have articulated like they're they're just not that, that interesting. Why has the market allowed for that to occur? That that self. We self funded searchers can, can command such terms if investors. Basically you're telling me as a, as a search investor you don't like those terms?

Guest: Well, I don't think we're telling them we don't like the terms. I'm just saying that they're not as advantageous as they are in a traditional search fund. The reason why we self funded investors continue to do it is because even though the aggregate common equity ownership is still typically 20%, it's because the equity check going into the deal is disproportionately lower because of the 10 year amortization SBA loan. You can still show me 35% IRR. So self funded investors are like, I don't need governance. You get me 35%, I'm good. Right. So let me say that again like a little slower. The leverage profile in traditional search funds is a lot less than an SBA self funded deal and it's a lot less because the term is half as long. It's five years. So nice round numbers. You buy a business for 10 million bucks. If it's 50% equity, it's a $5 million equity check and it's $5 million of debt. I then have to return the 5 million plus more to get to that 3, 4, 5x return. That exact structure. Now that's probably slightly larger for a self funded deal, but let's just say that self funded deal is 5 million in enterprise value. My equity check is not 2.5 million, it's 500,000. And I get a $4.5 million loan that's amortized twice as long because yes, you're only getting 20% of the common because the equity check is so much lower. You can get to the same return profile. I just don't think I can get to the same return profile in the same time period as a traditional search fund.

[1:22:19] Host: Great.

Guest: I know that's like a lot of details in math, but like that's how I think about it.

Host: That's great. Adam. When thinking about going to the investor side of the table now and thinking about traditional versus self funded, one of the things that you mentioned to me in the pre call, which is, I think such an important point to highlight here is that you know, even if I, if I wanted to invest in traditional search fund, traditional search funds over self funded because I'm convinced that they're better, which is basically your argument, I can't Just put, if I have 50 or 100 or $200,000, the minimums that are required to be an individual investor in, in a private equity fund that's investing in traditional search fund deals is much, much higher. Right? Can you elaborate on that?

Guest: Yeah, I mean whether you have a $25 million fund or $150 million fund, unless your friends and family are the GPS, you're very unlikely to come in at less than a million dollars. That basically pushes 99.9% of us out of being able to invest in that asset class. So the reason why self funded search as an investment asset class has become so popular is you can invest single deals, typically as low as $25,000. The few funds that are out there like the one that I'm in, you could come in at 2550, 100 grand, 250, it really doesn't matter. But, but these larger institutional funds, and again like these larger deals in the traditional search world, there's more dollars to be invested. It's just not advantageous or efficient for the GPS to have a bunch of $25,000 investors. So that's what has also become so popular in the search investing world is you have access as a self funded search investor, is the return going to be as good? I don't think so. But you can still get a great return and really believe in the person in the business, that person buys.

[1:24:11] Host: Right. And when you say you can still get a really good return, let's just be super clear where what you and I have spent a lot of time talking about is the point of view of an investor investing in either traditional or self funded. But let's actually look at the universe of possible ways to deploy capital. And when you compare self funded search investing to many, many, many other ways that you might deploy your capital or might invest your capital, $25,000, $250,000. It's very, very strong.

Guest: Correct? It's extremely strong. I mean I always look at the take fixed income out because that's not a, it's not an Apple to Apple comparison. If you look at public equity market over the last 10 years is basically, it's basically going to double. You know, you should be able to closely two times your money every 10 years. Now I know the last couple of years are not represented that per se, but like that, that, that's, that's the directional math. So why do large institutional investors put their money into private equity? Well, the top quartile of private equity funds, net returns are somewhere in the two and a half to 2.6. So they're crushing it compared to the public equity markets, which is why it's a large part of institutional investors. Portfolio allocation search is in that same bucket of higher than the public equity market, but it's even higher than that.

Host: Why?

Guest: Well, it's in the lower part of the market. It's more inefficient. They get better purchase prices. There's a growth mentality. You have all these smart people helping it. It's a lot of human to human deal making, hands on leadership, like you name it. But we in traditional search could potentially, per the Stanford study, almost double, nearly double what the middle and bulge bracket private equity do. Where does self funded search fund? It's somewhere higher than the two and a half and something lower than traditional search. My mind. And that's unbelievably powerful for a person who wants to invest $100,000 because they can't invest a million dollars in traditional. That's the, that's the sound bite, Adam.

Host: We got to start wrapping up the. We didn't, we got so sidetracked. We didn't kind of make clear your story. So you grew Delta to. We've talked about that. And it's basically two and a half million EBITDA. You fully own it or you own 90% data. It's the remaining 10% then. But you're now became active in traditional search funds. So. So what was the transition there? Give us the kind of the last couple of years of your life.

Guest: Yeah.

Host: What, what your day looks like today.

Guest: Once I got into the year two of operating and then in 2020 we had a very good year at Delta. You know, we kind of fell off a cliff with COVID But because of some of the profitability, I then wanted to invest some of that money back into a space that I really like and know which is lower middle market and search was the necessary target. So back to Anacapa. Mike introduced me to Greg Geronimus at Footbridge and I was like, look, I want to be a meaningful investor. I know you guys are both from hbs. You both, both have done searches. It sounds like a great model to put money into. What does it look like? They're like, actually we don't have an open fund, we're not fundraising. I'm like damn. So Greg introduced me to Riviera, Alex Wang and Chris Jenkins and I became what I would consider a meaningful lp. And knowing that yes, Alex had done a self funded search, but they were primarily traditional search fund investors knowing very well what the model was that I chose not to do it but really liking the economics behind it, I decided to invest in traditional search via Riviera. And that's what I've done for the last couple years and still very, very, very excited about it.

[1:28:03] Host: I'd like to distill kind of what we've been kicking around here and let me take a stab at it and then you can refine it. I mean I, I think it's not, it's not too subtle. Traditional search fund investors being from the investor side of the table. Traditional search funds offer basically a better return opportunity because there is better governance and because there's a growth mandate. And in that, in, in, in the kind of a shorter time frame you're more likely to see a better irr or better, maybe better moik and an

Guest: exit and an exit mandate.

Host: Growth and, and exit mandate. Thank you.

Guest: Because remember the, the traditional search fund CEOs will not make a lot of money unless they sell the business. That's just how, that's just how it's set up. So that's the other thing that kind of drives the timeline, the growth and the exit.

Host: So, so they're, they're very incentivized actually to sell as well because that's 100%

Guest: in the fact they're just making salary

Host: basically in the interim.

Guest: And remember all of these traditional search fund structures have preferred returns built in. Said differently when the investors put their $5 million in, you're then paying. Now it picks, it accrues, you're then accruing a interest rate on top of that $5 million. So the faster the CEO can get the business to paying that back and exiting, the more money the searcher makes. Again, tons of alignment in that growth model, tons of alignment in getting that high returns profile. That's why it works great.

Host: And then, but from the self funded searcher side who's going to be a lot of the people listening to this, the economics and the profile for you, the searcher probably are a little bit more or a lot more advantageous advantageous as a searcher. But it is not to be understated that you are your, you should really take seriously the, your own experience. And if you buy a great business that's healthy, that never has a problem, you, you can do it. It's really when you, you, you encounter turbulence that your experience or lack thereof is called upon or is tested and that shouldn't be you, you shouldn't kind of overlook that.

[1:30:22] Guest: Well the other, the other detail is yes, the failure rate of SBA loans self funded deals is low, but what's the failure rate of self funded searches buying a business? Is it higher or lower than 30% in a traditional search?

Host: Right.

Guest: I would argue that it's higher. Is that quantified anywhere? I haven't seen it, but I would argue that it's higher. A person without 10 people helping them without hundreds of years of experience and by the way, trying to find a smaller business with less sophisticated intermediaries, probably brokered approach, 100%. I would venture to say that that's higher. Now as an investor, I take on none of that risk because I don't write a check until there's a deal. The other part, just to dovetail the preferred return comment. There are preferred returns in self funded deals, but because it's only 20% ownership, the self funded searcher is less incented to drive that because they already own 80% of the business. Now what counterbalances that argument is they're not going to take 80% of the profit of the company until they pay the investors back. So you do get alignment there.

Host: I think this is the joke with podcasts is that people are listening to us at 2x, but this might be one where people listen to it at 0.5x to make sure they got everything.

Guest: There's a lot of details. I think the math is it can be complicating, but it does help understand the different models and the structures and how one person thinks about the investor economics.

Host: Yeah, no, it's incredibly valuable, Adam. This is, this has been a great unpacking. Don Gorley said that Don Gorley was on the, was on the podcast about six months ago, but love all the

Guest: veterans you have on.

Host: Yeah, yeah, a lot of them. And, and Don of course bought Boston Tree Preservation and said you got to get with Adam. So I'm really glad he connected us and, and I, we finally got the chance to have you on. This has been really great. So thank you very much. Anything that we didn't get a chance to say that you really thought was important for the audience?

Guest: No, I mean I think it's. I have found that evaluating both models, people typically very quickly fall into one bucket. And I always think about the risk, the capabilities and the economics. And you can usually use those three guiding principles to figure out if you're a traditional or self funded. But again, I think that people typically fall into one bucket pretty quickly. And I continue to talk to people on both sides of the aisle to better assist them with all the good things that can happen and the bad things that can happen to be a resource and selfishly to be an investor.

Host: Both sides of the aisle. So are we partisans here? Is that what the traditional versus self funded looks like at this point?

[1:33:07] Guest: I mean, the good news is the outcome is the same. Back a smart person to buy one business.

Host: And Adam, if people want to reach out to you, what do you prefer? What method of communication?

Guest: I'll give you the email address and I don't have my phone number on LinkedIn, but I have two email addresses on LinkedIn and I'll give you my cell phone. People want to reach out and text me. I mean, I feel like I'm talking to a lot of people in the industry already, but 100% use the podcast as an opportunity to have searchers connect with me.

Host: Great. All right, you're probably, you'll probably get a lot of inbound from that. Adam Borse, thank you very much, sir. This has been just a fantastic education and congratulations on Delta. What, what a remarkable story there.

Guest: Thanks for having me. Have a great, great start to 2024. Well,