[00:00:00 - 00:05:01]

Will Smith: The acquisition of today's guest was sitting on the market for over a year, which may frustrate some of you searchers in DFW when you hear what a gem it turned out to be. David Graf himself had to get comfortable with it due to the 96 year old seller's non negotiables that there be zero seller note and no escrow. Also, the listing sim was a single page black and white word document so other buyers could be excused for dismissing this one. But David did not dismiss it and he has been rewarded for looking closer. Listen for how he structured the deal, specifically the reps and warranties insurance that mitigated his risk in lieu of an escrow and his wholesaling of the business's real estate.

This latter maneuver, akin to a sale leaseback, enabled David to acquire a business with $750,000 of adjusted EBITDA with for $2 million. Even that's 2.7x and if that weren't good enough, David has grown EBITDA 58%.

In his 19 months of ownership.

That low multiple that he paid means lower debt payments and when you add in substantial earnings growth, you have a business acquisition that is already throwing off a lot of cash. Finally, listen for David's insight on growth in small businesses and how it's underpriced.

Here he is David Graf, owner of Danhard and it is Graf, not Graf.

As I pronounce it in the interview.

Apologies to David Webinars Attorneys Bill Barlow and James David Williams return for an office hours webinar focused on negotiating working capital. Bill and James David will cover techniques to get over common deadlocks on working capital, which is such an important feature of your acquisition but one easily misunderstood by your seller. Bill and James David will explore common frameworks for unique working capital situations like long term projects or subscription based revenue,.

And they'll explain how to do all.

This while staying in compliance with SBA guidelines. The webinar is negotiating Working Capital it is tomorrow, Tuesday, May 26th noon Eastern.

Link to register for the webinar is right at the top of this episode's show notes or on the Acquiring Minds.

Homepage acquiringminds Co. Then Thursday, SBA loan broker Heather Anderson will host a webinar on the new $10 million limit for SBA loans.

You may have seen that eligible borrowers may now combine SBA 7A and 504 loans for up to $10 million in SBA backed financing, which doubles the previous cumulative limit. Heather will lead a webinar on these newly expanded lending limits and what the changes mean for you, if anything, that is this Thursday, May 28th noon Eastern. Link to register is right at the top of this episode's show notes or.

On the Acquiring Minds homepage. AcquiringMinds co.

Welcome to Acquiring Minds, a podcast about buying businesses.

My name is Will Smith.

Acquiring an existing business is is an.

Awesome opportunity for many entrepreneurs and on.

This podcast I talk to the people

Who do it looking to secure an SBA loan to buy a business? Meet Pioneer Capital Advisory your Go to Partner for sophisticated buyers who want deals closed quickly and on the best possible terms. The Pioneer team has closed more than 100 SBA loans, averaging timelines well below industry standards. Founder and owner Matthias Smith and COO Valerie Stash bring over two decades of SBA lending experience. Matthias and Valerie have built a team that meticulously works your deal from underwriting to close.

You'll have a full bench working on your behalf, sales associates who streamline onboarding M and a financial analysts who craft investor grade lender decks and an operations team that manages every step of the closing process with institutional level rigor. Pioneer is not a single person, but your true deal team. Visit pioneercap.com or click the link in the notes.

David Graf welcome to Acquiring Minds.

[00:05:01 - 00:05:03]

David Graf: Thanks Will.

Really excited to be here.

[00:05:04 - 00:05:20]

Will Smith: David, you bought a business a year.

And a half ago or so and.

Well it's going absolutely great.

You've learned a lot over this journey.

So let's get into it.

How about some background on you, please to start.

[00:05:20 - 00:07:10]

David Graf: David yeah, happy to. And you know, throughout the conversation feel free to double click. I'll try to, you know, keep keep the high points flowing for you.

I know we got a lot to cover but basically, you know, I'm, I'm born and raised in the Dallas Fort Worth suburbs which is where I live now, with my wife and my four daughters including twins that born on September 11th. So they're seven, seven, eight months old. Something like that. I gained an appreciation for working and earning at a young age, I would say. When I was 12 my mom had a small home based business making custom rubber stamps and I was one of a handful of part time employees working the vulcanizer machines, the scroll saws in our hot Texas garage and I saved up enough over my first summer to buy a brand new Polaris 4 Wheeler.

So this, this love of working sprouted into a desire for ownership at a young age as well. And like so many of your guests and listeners, I tried, I've tried my hand at a Number of proverbial lemonade stands through the years. Fast forwarding a few more years, I took a liking to math and science. I became a two time state champion in high school science competitions and then later graduated from Texas A and M with a degree in chemical engineering. During my college internships though, I realized I was less interested in engineering career and became more interested in pursuing the business side of business.

So I ended up taking a full time offer after college with Accenture Consulting. And then after Accenture I founded a small hydroponic farm. Bit of a pilot project. Sold that business after a couple of years and went back into a W2 position with the software company Qualtrics for seven or eight years. Was during my time at Qualtrics that I ultimately began my search.

[00:07:11 - 00:07:16]

Will Smith: Great. And so what was it that made you want to search? Why then? Why search?

[00:07:16 - 00:08:40]

David Graf: Yeah, so I actually first heard about search in the context of traditional search in maybe 2020 or so and I thought man, that is the coolest thing I've ever heard of.

You get to go, you get a small living, you know, salary while you're looking for a business, then you get to pick the business, do the deal, run the business. And the economics were attractive, but I a great career at that time at Qualtrics on a strong trajectory and I basically couldn't justify the opportunity cost of going back to get an MBA to pursue that traditional search path. So I basically balled up that dream and threw it in the trash can and moved on with my life. And it wasn't until March of 2023 actually at a, a lunch with a couple's lunch with my wife, another couple that I learned about the idea of self funded search from the, the husband that we were eating, eating lunch with. So I was immediately interested, you know, after conceiving of a half a dozen startup ideas through my, my young life and actually birthing one in earnest and discovering the concept of self funded search finally it was a total moment of clarity where the odds of success in a startup might be 10 to 90.

The odds of success in search to me appeared to be flipped to 99,010. So it was just immediately gravitating.

[00:08:40 - 00:08:55]

Will Smith: And how did the, what you heard from this friend of yours that day contrast so starkly with the traditional search? You were only familiar with traditional search, then you hear about this other model. What is it about the other model that that seizes you?

[00:08:55 - 00:09:17]

David Graf: It really was sort of just like the, in my mind doing a search of what I had read thus far meant you had to go get an mba. And I couldn't justify that with a young family and the income I was already earning and all of that. So when I found out, oh, there are other ways to do this without going back to get an mba, that was the unlock in my head.

[00:09:17 - 00:09:20]

Will Smith: Carry on. So how do you get serious about it?

[00:09:20 - 00:11:27]

David Graf: Yeah, so I mean I think that night I first thing I did, of course like everybody went on biz by sell just to be like what is on the market? You know, how does this look? What are the multiples and return profiles and whatnot. But I did that and then went and bought the books Buy then build the HBR Guide to buying a small business. Started reading posts some search funder, started listening to podcasts like yours, started meeting people in the search community, just totally immersing myself in the resources.

A couple months later, this would be like May of 2023. I, I sat my wife down armed with the search investment group SIG self funded search survey data set. And basically I didn't use these words but to discuss the bear case base case, bull case of how this might go. And I'm happy to say that I've got a great partner and she saw the rationale behind it and she, she got on board with the plan. And I think this was one of also the first key lessons that I took away from my entire search process that are, you know, that are applicable to other searchers is it became pretty clear to me that where I was in my career relatively early in my career, but with a good trajectory and especially being in Texas, Texas is amazing for doing a self funded SBA backed search.

Our risk, our bear case was pretty minimal. Most of our assets were either in home equity which would be protected in a bankruptcy event, or in retirement accounts which would be protected in a bankruptcy event. Whatever exposed cash we had, most of that would go into funding the deal or some post exit liquidity anyway. So it was that bear case, at least at this stage in my life, this specific stage in my life was really pretty, you know, you could stomach it. And that I told my wife and she agreed, like in 10 years that might not be the case.

In 10 years we might have a ton of exposed assets and it might be just the risk profile might be totally different. So any of your listeners that are considering this that are in a similar stage in their career and their earnings trajectory, I think that needs to be considered.

[00:11:28 - 00:12:08]

Will Smith: Well, it is something that comes up from time to time, this point that the personal guarantee has no nuance to it. It's going to come after you for everything. But if you are 25 with no assets versus 45 with a mortgage and a family and mouths to feed, it's a very different, it's a very different bear case.

As, as you put it, the personal guarantee doesn't care if you have nothing to your name or if you have a million dollars to your name. It'll come after, it'll come after both. The, say more about the, the report that you referred to. The, the SIG's self funded search report which we reported on when it came out.

[00:12:08 - 00:13:09]

David Graf: Yeah, yeah, I, I found it to be so informative.

You know, historically there had been some recurring survey data sets collected for traditional search that showed pretty attractive return profiles for the searchers and for the investors. But to my knowledge no such data set had been compiled specifically targeted at the self funded search cohort or community. And so this, that really instead of extrapolating mentally and sort of guessing, you know, does this, does this data set from traditional search extrapolate to self funded search? I didn't have to guess. The timing was perfect where that data set from SIG had just been released around that time, I believe.

And so it just really helped give me the confidence to understand what the return profile could look like and the bear based bull case and get behind it and also frankly, you know, convince my wife as well. I think it convinced both of us that there's a, there's an attractive opportunity here.

[00:13:10 - 00:15:00]

Will Smith: I'll just add a few more things to that. So that really was a pretty exciting report to have come out because as you said, historically there'd been all this data from the traditional search fund side, namely the Stanford search study, which people will have heard of and really CLE data and lots of it and nothing on the self funded side which is way messier and amorphous and people come and go from their searches and it's not this sort of trek like a traditional search is and limited to people at certain business schools, etc. So Sig took a stab at, at building something and it was the closest, I mean it was, it was the most data any of us had ever seen on self funded search.

They have not done a updated version, nor do I think they will. So I would encourage people to go look at it or to listen to the episode that we did when we interviewed SIG about it, where we go, went over some of the key takeaways from it. We try to distill down the most exciting findings. But it is also now old data and Self funded search results have probably declined in aggregate since then as rates went up and businesses got harder, got more challenging and, and the competition among self funded searchers. There are just more of us around running around trying to buy businesses.

So one assumes that multiples have drifted up a little bit due to the increased competition. Although we could have an argument about that. I could argue that both ways. So anyway, encourage people to go dig it up and listen to and either listen to the episode or look at the report itself. Keep in mind though that it's two or three years old and that difference in when the data was collected matters in this world.

[00:15:00 - 00:15:01]

David Graf: So.

[00:15:01 - 00:15:23]

Will Smith: But it paints a very compelling picture for self funded search. There are lots of in the aggregate high probability of single digit millions outcomes for you, the entrepreneur. So it paints a pretty convincing path to $5 million of net worth.

[00:15:24 - 00:15:58]

David Graf: Agreed.

Yeah, I mentioned that the probabilities of success were kind of flipped between startup and acquisition. You know that neglects that there is a longer right tail with the startup where if you're like I'm 50 million or bust, you go do an act startup and keep doing that until something clicks hopefully. But for me, and I think for most people having single digit millions as a potential outcome is so attractive and the probability is just exponentially higher that it just, it makes more sense for most people's goal profile, if you want to call it that.

[00:15:58 - 00:16:07]

Will Smith: Yep. And I would even argue that it's a higher likelihood to north of a, north of $10 million in net worth than doing a venture backed startup.

Sure.

[00:16:07 - 00:16:07]

David Graf: Yeah.

[00:16:08 - 00:16:34]

Will Smith: You're not going to become a billionaire and you could become a billionaire creating the next Facebook. Yeah. Or a centimillionaire.

But I think even the getting into eight figures of net worth is more likely in this path than, than the other.

Okay. Before we continue to hear about the search itself, David, you said in passing Texas is an amazing state for self funded search. Why?

[00:16:34 - 00:18:16]

David Graf: Oh yeah, I'm glad you're, you're calling that out. I don't know of.

There may be other states that have this. I don't know that for a fact but Texas is rare among the states in that in a bankruptcy event your primary, the home equity in your primary residence is bankruptcy protected. Now there's some, there's some rules you should look into. Like if you moved recently then like there's rollover equity plus a $200,000 increase and then you have to get to 1200 days before of your equity is protected. So look into those if that matters to you.

But point Being it's a great state to do SBA backed search fund with because of that protection where between your home equity in your retirement accounts, most people that are in kind of a corporate track, that's where the vast majority of their net worth lives. So and then you have $100,000 of personal assets in a bankruptcy as well. So it's like cars for example. Realistically for the majority of people, after you've already put your money in for the equity injection, probably 90% on mortgager assets are going to be bankruptcy protected. If you're doing that in Texas and you, you know, and you have that primary residence qualification, I have heard some SBA lenders will ask you to waive your rights to that home equity protection, especially if the home equity is more than 25% of the home's value.

So you, you know, you've got to be prepared to have an answer there if you're going to say yeah, I'll do that or not and then move on to different banks. I don't, I don't know how negotiable that is. That is possible. My home equity at the time of my loan application was like 23% so I didn't get asked,.

[00:18:18 - 00:19:38]

Will Smith: You know. Enzo Technologies as one of the leading IT managed service providers serving the search community. Led by Nick Akers, an acquiring minds guest who bought the 35 year old business. The team at Enzo regularly works with searchers and their acquisitions. And one feature of acquired businesses that Enzo is seeing over and over is the need to implement cybersecurity promptly during the transition.

So many acquired small businesses either have glaring vulnerabilities, lack security best practices or both. That step one to de risk the deal you just closed should be addressing these issues. INSO is your full service IT MSP for post close stability. They assess your target, surface the biggest risks in plain English and give you a day one through 30 plan to cut exposure, prevent downtime and even find cost takeouts like bloated telecom bills. Check out enzotechnologies.com I N Z O or email Nick directly at nick@enzotechnologies.com.

So you convince your wife and how do you proceed with the search itself?

[00:19:39 - 00:20:47]

David Graf: Yeah, if I can. I'll also mention one other decision that came shortly after the you know my wife getting on board was whether or not to follow this kind of common advice to quit your job while searching. I ended up maintaining full time employment until after closing on my business. And not every job is going to be equally suited for this.

But if you can get yourself into a role that allows you to work while searching. It just dramatically reduces your financial stress and your risk of rushing into a bad deal. I also only looked at brokered deals because there was a higher certainty of close in my view versus proprietary deals and therefore a lower risk of broken deal fees. So again, increasing the financial certainty. And also brokered search just worked better with the limited amount of time I had each week when I'm dividing my time between a full time job and, and searching.

So that was a decision that I really wrestled with for a month or so, but ultimately decided, you know, I have a job that is probably perfect for searching while working.

[00:20:49 - 00:20:58]

Will Smith: Yeah, it's a tricky one. Could argue both ways. Part time versus full time search. You know, burning the boats has a tendency to create action.

[00:20:59 - 00:20:59]

David Graf: Sure.

[00:20:59 - 00:21:58]

Will Smith: On the other hand, burning the boats can also cloud your decision making. If you've been a year without any income and you're looking at a deal that if you still had your W2, you would reject because it's got quality problems. But then maybe if you've gone full time and you haven't had any income, you're just desperate to get something, you know, so you can lower your standards and so on. So we could go back and forth on this.

The key point of a part time search is that it, meaning you are, you've retained your W2, your job while you search is that you kind of have infinite Runway, so valuable and keeps your quality standards high. The other thing I don't think you've said, David, is that you were geographically limited in your search to dfw. And that means that your deal flow, if you're, if you're just looking in one market, as big as DFW is, your deal flow is going to be very manageable. There's just not that many good businesses for sale in a single metropolitan area. Even a big one.

[00:21:59 - 00:21:59]

David Graf: Sure.

[00:21:59 - 00:22:05]

Will Smith: So you know, if you'd quit your job to go after to do your search, you might have found yourself twiddling your thumbs a lot of time.

[00:22:05 - 00:22:37]

David Graf: Yeah, absolutely. The size of your buy box also matters with the brokered search versus proprietary search decision. I think my buy box was wide enough where it also supported the idea of doing a brokerage search while continuing to work full time.

My buy box was ultimately 800,000 to 2 million in EBITDA, Dallas Fort Worth based or remotely operated. And given my background and my entire careers in B2B, I was only looking at B2B products or services companies.

[00:22:38 - 00:22:48]

Will Smith: Okay. Ah, and you did the lab too The Acquisition Lab. I'm shamelessly plugging one of my longtime sponsors here, which is actually how we met.

Chelsea introduced us.

[00:22:48 - 00:24:01]

David Graf: That's right, yeah. You know, it also really became obvious to me that I wanted some level of buy side assistance. You know, I don't have any type of investment banking or PE background. And so I strongly investigated and met with people from three different options.

I considered search accelerators where, you know, they kind of back you and there's a. They help you raise the funding and evaluate the deals and all that stuff. There's several of those out there and I think it's a great option for a lot of people. I really considered it. I also strongly considered buy side brokers.

There was a couple that I had ultimately gotten to kind of like term sheets with. But after considering all the options, I landed on joining the Acquisition Lab. It just felt like the right balance of cost and support. It's a decision I'm really happy with. I still go there regularly for, you know, either to ask questions of my own or in some cases to give back to the community, which is kind of a phase I'm entering into now.

So it's, it was a great decision. I have a friend mine who I just connected and he's joining the July 2026 cohort, in fact. Oh, great.

[00:24:01 - 00:24:10]

Will Smith: Well, David, on the, your analysis of doing it using a buy side advisor and then deciding against it, can you share that analysis with us?

[00:24:10 - 00:24:50]

David Graf: I, I, it's been a couple of years.

I don't have the details, but the takeaway is. I don't have the exact precise numbers, but the takeaway was, you know, there's a success fee and it's not insignificant, especially when compared to the cost of joining the Acquisition Lab, which is much, much more, which is a much lower. It's a different, it's a different, you know, upfront cost for the exhibition lab versus the success fee. The success fee is much larger, but the upfront cost is guaranteed to occur to me. It was still an obvious choice to go with the Acquisition Lab in part for another reason, which was I might want to do this again.

And so I did want to learn how to do it. I just wanted some help getting there. And it was the perfect prescription for that goal.

[00:24:51 - 00:25:03]

Will Smith: Okay, shall we turn our attention to the business you found? Was there anything you submitted?

A couple of. Lois, Anything to share about those deals that didn't happen, or should we jump into Danhart?

[00:25:03 - 00:28:00]

David Graf: Sure, I can, I can share some stuff briefly there and I think relevant to all three of the offers I submitted. There is another learning that came to me early in my search, which was that I realized pretty quickly that growth isn't, is underpriced in search deals. And so I only offered on growthy deals during my search.

And what I mean by that, and I'm not here to say this is the multiple or this is whatever, like we can argue about that, but just for simple simplicity's sake, build yourself an IRR model. One of two identical companies, let's say they're both a million in EBITDA or one is trending at, you know, 3% like GDP type growth at a 4x multiple and one is trending at 15% growth and maybe it's commanding a 5x multiple. If you just run the math on that, on the returns, assuming that they continue trending, that or you can cut both of those in Half so it's 1.5 versus 7.5, doesn't matter. The 5x more expensive deal is a much better investment. The unlevered returns, the levered returns are both superior.

And so what I basically came down to is this realization that yes, growth has a premium on the multiple, but it should be higher, it shouldn't be five, it should be six or seven or something depending on the growth rate. And so I really honed in on trying to find a deal that had some, some growth trends. And that's all three of the offers I made had that. So I submitted my first LOI in August of 2023 as a 1.7 million EBITDA remotely operated firm, but happened to be remotely operated from DFW as a coincidence. And it is in a really attractive property management niche and it was growing 40% TTM.

I came in second place out of 14 bidders, very competitive process and, and frankly the only reason I was told, the only reason I didn't get the deal is because they wanted some rollover equity which at the time was incompatible with the SBA financing. So it was a real heartbreaker, but got back to it, submitted offer number two in October of 2023. It was a $1.9 million EBITDA remotely operated temporary staffing firm in the hospitality industry. It was growing about 20% TTM. In that case, the seller expectations were in my opinion, unrealistic.

And the broker subtly shared that this was the reason it had been on the market for over a year. So got back to it, took off maybe four months, kind of during the winter for some personal reasons and, and then later when I started searching again, found Dan hard in April of 2024 and I was under loi with Danhard a few weeks later.

[00:28:01 - 00:29:28]

Will Smith: Well, just to underline your point about growth being underpriced in, in small businesses in the lower, lower middle market. What a great insight. I don't think anybody, I don't think I've heard it before, but, and I even think that, I mean of course everybody wants their business to grow, but we also, I think and especially in self funded land, have this long term orientation which is something that I generally celebrate, that actually growth seems a little bit less important than it might in some of the other models and certainly in like a venture style business where it's all about growth, where you know, we are looking at past performance and inconsistent durable profitability as the key metric as opposed to how much it's growing.

So really, and maybe that's why growth is underpriced because it's this end of the market values, it's, it values growth as a, as a concept just a little bit less than everybody else in business. But your discovery of, of the mathematics of if you play, play it out, you know what 10 year over year looks like versus 2% year over year and how, you know, an additional turn of EBITDA paying an additional turn of ebitda for that 8% delta in growth is a screaming deal is just a great insight. So thank you for sharing.

[00:29:29 - 00:29:30]

David Graf: Yeah, absolutely.

[00:29:30 - 00:29:34]

Will Smith: Okay.

Danhard, what is Danhard?

[00:29:34 - 00:29:53]

David Graf: Yeah, Danhard is a light manufacturing company located in Dallas founded in 1963. So we design, assemble and sell H Vac systems for specialty vehicles, including ambulances, fire trucks and armored cars with a long tail of some other vehicle types.

[00:29:53 - 00:30:08]

Will Smith: So is that, that's manufacturing kind of project based or you are regularly producing the same sort of widget on a kind of consistent basis?

[00:30:08 - 00:31:14]

David Graf: Yeah, good question.

It's, I would say it's a strongly reoccurring customer base. In fact, coming from software, you know, I was familiar with metrics like net revenue retention, which I think you should run on any business, frankly. It's a great metric. But when I ran I looked at the 2022-2023 and the 2023-2024 cohorts of customers and the net revenue retention, even though there's no contracts with 107% meaning your average customer, they spend a hundred dollars in year one, they spend $107 in year two. Super long lifespans.

You know, I never, I don't know what the LTV is top of my head, but it's large. And so that was just a huge green flag that on Danhard that I suspect probably other buyers hadn't picked up on. Customer concentration was also attractive. I think at the time of purchase, number one customer was 12% of revenue. Top five or sub 50% in the 40s, probably.

So there were a lot of good things, but it certainly was not a squeaky clean deal as we'll get to. Which I think is part of the reason why the deal, the purchase price ultimately ended up being so attractive.

[00:31:15 - 00:32:21]

Will Smith: Yeah, this net revenue retention is a common metric in SaaS land and probably in any recurring, truly recurring business model context. And it actually, I, I will often say about quality of revenue that in my, my definition of it is the likelihood that a customer who gives you a dollar this year is going to give you that same dollar next year, which is a wordy way of. Basically that's what net revenue retention is.

That captures it. So that's what I'll start using going forward. It's funny because it is so common in SAS land, but we don't hear it here. I think that maybe we have to stretch the definition a little bit because I think it's technically only in, you know, it's only supposed to be applied to recurring revenue businesses. Although I don't know why it couldn't be reoccurring.

Yeah, but, but say.

But, but because it's such a good.

Concept and you were so wise to overlay it on your business.

Say again.

Define net revenue retention, what it is and how people in SaaS land use it, and then how you applied it to Danhardt one more time for us.

[00:32:21 - 00:33:28]

David Graf: Yeah, I think the application is exactly the same as in, as in SAS land. So yeah, I just to kind of walk you through the steps I took. The entire sales report for 2022 broken out by customers. Is that when we're already in diligence? Of course.

And then, so let's. I looked at each customer and what they spent and then I looked at in 2023, what did those same customers spend? So you would ignore any customers you gained that were new. For 2023, you're just looking at the 2022 cohort. And of that cohort you can see, okay, some customers stopped spending entirely.

We lost them. Some customers doubled their spend, and most were in between. And on net, a customer that spent $100 in 22 spent $107. 23. And I did the same analysis for 23 to 24, or maybe it was 21, 22, 22, 23, something like that.

But Point being, it was a very strong number, actually a number that resembles a lot of pretty good software companies. 107% is a great number for a lot of kind of, you know, middle software companies. So that's how you do it.

[00:33:28 - 00:33:34]

Will Smith: And, and that took into account, David, even customers that, that didn't come back at all and dropped to zero.

[00:33:34 - 00:33:37]

David Graf: That's the net revenue retention.

Yeah, right.

[00:33:37 - 00:33:41]

Will Smith: I guess so, because then you got the other customers who double revenue and it offsets.

[00:33:41 - 00:33:42]

David Graf: Yep.

[00:33:42 - 00:33:54]

Will Smith: So overall it's 107. So.

So, you know, across the, all the cohorts, not only are you retaining the revenue generated by your customers, it's actually growing $7.

[00:33:54 - 00:34:03]

David Graf: That's. Yeah, that's what the analysis showed for the two years that I analyzed before closing. I haven't rerun the analysis, but I have been actually thinking about doing that here soon probably.

[00:34:04 - 00:34:23]

Will Smith: And, and just to underline what you.

That that's such a good number. So in SAS land, that's one of the key number like a SA that makes a SaaS business really promising is that your customers are spending more with you over year by year. So, so 100. 107 is great. Or 107%.

What is, how do you, how do we even say it? 107%.

[00:34:23 - 00:34:24]

David Graf: 107.

[00:34:24 - 00:34:34]

Will Smith: Yep. 177%.

But that's kind of ideal and exceptional. What might you have gotten comfortable with? Would you have gone down to. I mean, I feel like in a.

[00:34:34 - 00:35:17]

David Graf: Business like this, being 90 plus feels pretty good personally.

But just, just the math is very simple. The, the further you go below a hundred, anything below 100, that means you are, you have a boat, it's got a hole in it. And so you are, you're bailing water out of the boat to stay on, to stay where you're at. Right. So when you cross above a hundred now, your base is growing.

Not, not that it's effortless, like there's. The company is doing this because of the services and quality it provides. It's growing, but it's growing, quote unquote, on its own. And then new customers you bring in are completely additional to that. And so it just compounds much faster.

[00:35:18 - 00:35:28]

Will Smith: Excellent. So everybody, if you're looking at a reoccurring revenue business or any non, well, frankly, any business, really apply this, apply this analysis to it.

[00:35:29 - 00:35:42]

David Graf: Yeah. I would say the exception would be like you sell something where customers buy it every five or 10 years, it's not going to be very useful. But if you have something where customers generally are making multiple purchases every year, It's a pretty useful metric.

[00:35:43 - 00:36:08]

Will Smith: Yeah. A good call out something where it's truly project based or one off based or B2C where there just isn't a reoccurring motion of your customers. It's going to be useless and it's going to look low and it's going to to scare you off. But your business model is not that. But anything where you're telling yourself this isn't recurring but it's reoccurring.

Reoccurring and recurring. Do the analysis. Thank you. Okay.

Size of Danhart.

[00:36:08 - 00:36:08]

David Graf: Yeah.

[00:36:08 - 00:36:10]

Will Smith: Numbers, employees, age.

[00:36:11 - 00:37:22]

David Graf: Sure. Founded in 1963. You know, it wasn't immediately apparent to me that this would be the company I bought.

I have to say it was much smaller than the previous two offers I had made. Danhard at the time of my offer was about 700,000 in EBITDA and then at closing had TTM was about 750 in EBITDA. So it grew a little bit with that growth rate kind of kicking in, you know, noise in the data maybe, who knows. But it had those growthy trends I was looking for with the previous 19 months which was like the full year and the partial year. The previous 19 months had shown a 30% revenue CAGR.

But this, this was to be fair, in large part due to a bankruptcy of a PE backed competitor. So I had to kind of like suss out how much was that versus not that. And ultimately the purchase price we landed on justified going down market to this 700k EBITDA business which was below my, my buy box technically. But the purchase price justified it and so I can get into, you know, the, some of those specifics now if you'd like, if that'd be helpful.

[00:37:22 - 00:37:53]

Will Smith: I would but one pre question.

Why was your, your buy box so aggressive? Frankly David, a lot of people will say will be, you know, 750 to a million, a little bit above a million, but they'll let themselves go to 600 and it'll be fine or even lower. And you, as we've said, you know, you had geographic focus. So you, you know, which usually means you gotta loosen other standards if you're, if you're married to one particular criteria. In your case geography.

So yeah, why?

[00:37:53 - 00:39:23]

David Graf: Yeah, well, you know, other people will let themselves go blow their buy box. I think that's poor sport if you're willing to go to 600, just call your buy box 600 in the first place. But so maybe that's just a discipline thing or a precision thing that I lean towards. But for me it was just when in that conversation with my wife, the one kind of, the one thing she asked is like, I don't want to have like an appreciable decline in lifestyle.

You know, during these first, you know, during. I had essentially told my wife I was going to figure out how to make it work where we wouldn't have an appreciable decline in lifestyle. Especially during the first few years where I had engaged, expected to be not getting much more than a salary. Now, you know, we were savers. So it's not like we were living off of everything that we made when I was working at Qualtrics, but through a series of promotions, high performance grants, exits that converted those to cash vesting schedules and so forth.

You know, I was clearing over $300,000 at Qualtrics, so there was a bar there. And then I wanted to have some, some cushion. Not to just, just barely graze the bar, but exceed the bar with some cushion. And so ultimately with where interest rates were at and where I expected the purchase multiples to be, I defined my buy box as a minimum of 800 in EBITDA. When you have a lower purchase price you can break that rule because you wind up clearing the same floor.

[00:39:23 - 00:39:30]

Will Smith: Okay, now please do take us into the hair on the deal and the, in the purchase price. Yeah, the multiple.

[00:39:30 - 00:39:49]

David Graf: So you know, I've shared a lot of the things that attracted me to Danhard, but, but Dan Hard was on the market for over a year. I'm not exactly sure how long, but it could have been well over a year. So there had been lots of other people that looked at it and passed.

It was a 96 year old seller and maybe.

[00:39:49 - 00:39:50]

Will Smith: I wonder if that's a record.

[00:39:50 - 00:40:49]

David Graf: I haven't heard it yet, but I'm not saying there's gotta be someone out there who maybe in large part due to his age had some non customary demands. Must buy the real estate. No seller note, no escrow.

This is also I would argue not well represented. The sim was literally a three quarter page black font on white paper word document, you know, to kind of cut to the offer I ultimately offered. After some floating with the broker to push to push on it to see where the market was at. I ultimately offered 5.3 million in total which was penciled as 2.3 for the business and 3.0 for the real estate. I got a representations and warranties insurance contract to solve the no escrow problem.

A lot of people don't know that you can get these on smaller deals now. But it's a great product. I like them a lot.

[00:40:49 - 00:40:50]

Will Smith: Say more about what that is.

[00:40:50 - 00:41:55]

David Graf: Yeah, so you know, every deal has the seller will sign representations and warranties, basically saying like, I promise these things are true and whatnot.

And if they, there's any breaches to those RWIs, as they're called, they can be held liable financially post closing. For those up to a certain whatever the termination date is of those warranties, most people will hold back a portion of the purchase price in an escrow account for say 18 months, which is kind of like the bank, the piggy bank for any RWI breaches. You can understand why a seller would not like that. And so regardless of your deal, I think it's a tremendous value add for your offer as a buyer to say no escrow. I'm going to place an RWI insurance policy that acts in lieu of this escrow.

So if there is a breach, you actually go to the insurance company and file a claim and the insurance company pays out, pays you for the breach as opposed to going to the escrow account where some of the seller's money has been held up in presumably a poor interest rate environment, you know, poor interest rate account.

[00:41:57 - 00:42:02]

Will Smith: And, and why are you such a fan of that structure as opposed to escrow? Because it's more palatable to the.

[00:42:02 - 00:42:39]

David Graf: I think it makes your offer more attractive compared to most buyers that aren't including that in their offer. You know, I always like to make the window sticker as high as possible.

So the top line price may have been actually higher than 5.3, where I would include like the value of the RWI and so forth. Right. The value of, not that I had a seller note on this deal, but the value of interest on the seller note, the value of seller's compensation during transition period, just to make that window sticker pop. That was kind of my strategy. So you can kind of add it back in.

Whether or not that works and that every seller appreciates that or not, or if they just skipped the line that has cash at closing. I don't know. Probably depends on the seller.

[00:42:40 - 00:42:49]

Will Smith: Okay. All right.

And so how on the seller note piece, the no seller note piece, you're. I assume you were going to go after this with an SBA loan.

[00:42:49 - 00:44:22]

David Graf: Yep. So context that's relevant before I get to that is as I mentioned, I penciled the business as 2.3 and the real estate as 3.0. I ended up actually, you know, I kind of asked myself the question, do I at this stage of my life do I want to be a business investor or a real estate investor and the returns on the business are much higher and more attractive.

And that's where I wanted to be. I didn't actually want the real estate and that's why it had been on the market. And I think in part, as well as you had business buyers that just wanted the business, you had real estate buyers that just wanted the real estate. No one could pull it together. And so this 5.3 offer was, even though it was a fair market offer, you can't say it wasn't.

It was on the market for a year and a half and it was the best offer they got. It was below what I think people would say is market for the pieces. And then I, I identified that. I well considered it for a little bit. I quickly decided I just want to be a business owner for now, this stage of my life.

I'm not, I don't want to own the real estate. So I wholesaled the real estate to a commercial real estate investor for 3.3 million, which reduced my purchase price on the business to 2.0 million. And wholesale is kind of like a sale leaseback, except it happens before closing. So you never actually take ownership the property and then purchase multiple being so low. The bank, to answer your question, was comfortable without a seller note.

So I, I was able to, you know, I think this is a good lesson as well, is like the best deals have some hair on them. If you can find a deal where you can turn those lemons into lemonade like this, it can really be advantageous, as is the case in my deal. The.

[00:44:22 - 00:45:01]

Will Smith: Just to repeat that for everybody. So the business plus real estate was 5.3 and the seller was insisting on the real estate being part of the package.

So 5.3. But you found, you decided you didn't want the real estate and you found a real estate investor who would pay a commercial real estate investor who would pay you 3.3 million for the real estate, knocking that off effectively of your purchase price. So 5.3 down 3.3 equals 2.0. So you paid $2 million effectively for the business. And going back to what the adjusted EBITDA was and that it was adjusted ebitda.

[00:45:02 - 00:45:09]

David Graf: Adjusted E. Yes, correct. There was a, I can't remember, 160k market salary adjustment in there or something like that. Yeah.

[00:45:09 - 00:45:11]

Will Smith: Of 750.

[00:45:11 - 00:45:12]

David Graf: 750 at closing.

[00:45:12 - 00:46:43]

Will Smith: Yep, seven 750 at closing. So just shy, so shy of a 3X on, on a business whose numbers at least are what every self. Self funded Searcher covets. Well done.

Running payroll, paying your bills, closing your books and producing financials.

These are critical tasks every business owner must do or oversee, but spending time on them distracts you from the leadership in growth work you want to do. So let system 6 do it for you. Owned and led by a former Searcher, Chris Williams, System 6 is a leading outsourced finance team for hundreds of SMBs, including over 50 searcher acquired businesses. Chris, Tim and the System 6 team understand firsthand the challenges, the opportunities of jumping into a business as its new owner. So whether you own your business already or have one under LOI, talk to System 6 about how they can give you time back and improve your financial operations.

Mention acquiring minds and they'll provide a free review of your books and financial ops, a $500 value. Check out system6.com, link in the show notes or email helloystem6.com.

Now tell us more about what this wholesale concept is.

[00:46:43 - 00:47:09]

David Graf: People are probably more familiar with a sale leaseback where you own a property and then you sell it to a commercial real estate investor and they lease it back to you. It's the same idea except I never owned the property property there was a three way closing table where the seller sold the real estate to the real estate investor, he sold the business to me, the business investor and simultaneously the real estate investor wrote a lease to me. So there's a little triangle that gets connected there where everyone's happy at the end.

[00:47:10 - 00:47:33]

Will Smith: One of the things about sale leaseback, as appealing as they can be on paper is that the, the leases can be a little more onerous than I guess market than market of whatever market you're in.

I'm a little bit out of my depth here, but this is as I understand it was your lease with this new investor that you brought in. From what you could tell, pretty typical.

[00:47:34 - 00:48:23]

David Graf: It seemed like it. I did have, I did compare to I worked with invest this investor and I also went to a real estate brokerage just to kind of like like get a second quote. Even though I wasn't, I was one step removed from the ultimate investors that they were able to like provide some guidance on what market looks like.

And of course I asked my, my lawyers and you know we negotiate a little bit of red lines on the lease. So yeah it ended up being somewhere I was very happy with, maybe even you know, slightly advant more advantageous than some triple net leases because there was one carve out where the real estate investor likes to to own the roof so to Say so like anything wrong with the roof is their responsibility and then everything else is triple net. So that was kind of a nice added bonus that maybe wouldn't be present in all triple net leases.

[00:48:25 - 00:48:32]

Will Smith: And how did it occur to you to go find a commercial real estate investor to buy this? And how did you find this individual?

[00:48:32 - 00:48:41]

David Graf: This one was in my personal network. But I don't, you know, I don't want to discourage people because you can certainly approach commercial real estate brokerages and they will. Will help you connect the dots.

[00:48:44 - 00:48:44]

Will Smith: Interesting.

[00:48:45 - 00:48:45]

David Graf: Yeah.

[00:48:45 - 00:48:48]

Will Smith: I'm wondering why we haven't heard this technique either before.

[00:48:49 - 00:48:53]

David Graf: I just kind of make these up as I go and then I find out that other people do them later.

[00:48:55 - 00:49:07]

Will Smith: Well, I haven't heard this. I mean the sale leaseback is a common one but this is as you said, it's kind of effectively that. Simpler probably. I mean simpler and, and I'd say cleaner too.

[00:49:07 - 00:49:07]

David Graf: Too.

[00:49:08 - 00:49:16]

Will Smith: Yep. Great. And what of the seller's age? I mean this was a 96 year old guy who showed up the closing table.

[00:49:17 - 00:49:38]

David Graf: Yes.

And you know, obviously given his age as you might, you might wouldn't be surprised to hear that he wasn't day to day involved in the business anymore. But that is, is more recent of a change than you would think. He'd only been out of the business day to day like 18 months.

[00:49:40 - 00:49:41]

Will Smith: Good for him.

[00:49:41 - 00:50:42]

David Graf: Yep.

And sadly he, he passed away just a couple weeks ago. Oh. So he, he made it to 98 which is I think a tremendous, a tremendous, you know, lifespan that we can all covet. But yes, he had been out of the business for about 18 months. So he kind of had.

His wife was kind of office admin bookkeeper. And how old was she? Oh, I don't. Younger and much more mentally acute. She was actually I only spoke to the seller a couple of times before closing.

I mainly spoke to her and she stayed on for about three months post closing just to help transition as well. And then there was sort of some lieutenants in like sales, supply sales plus supply chain combined like sales and purchasing. There was one over the assembly production area and then there was an engineer that you could definitely argue were some of those individuals were key employees. And maybe that's some of the hair as well.

[00:50:43 - 00:50:54]

Will Smith: Well, most businesses, small businesses have key employees.

Was there so which is a weakness but almost inevitable. Was there something hairier than just a typical having a few key people?

[00:50:54 - 00:51:45]

David Graf: Yeah, I would say no. But I will also add that due to the seller's lack of involvement day to day in the business, I think maybe there was. He was kind of forced to allow prospective buyers to be a little bit more visible before closing.

And so I got the opportunity to meet those individuals before closing. And actually we went all the way through negotiating comp packages before closing, which just gave me a ton of confidence that these people weren't going to step away and leave the day I bought the business. They certainly could. There's nothing legally barring them from doing that. But they went through the motions.

We agreed on comp. And so I had a lot more confidence than I would maybe have normally had. In a deal where you don't get to meet those people till after closing, that's pretty remarkable.

[00:51:45 - 00:52:23]

Will Smith: David. Everyone, all buyers want to meet the team or at least the executives, management before the deal closes.

And we're just told that we shouldn't expect that. That's just very likely not going to happen. Happens, but very likely not going to. And for understandable reasons that the seller's worried that they'll trot you around as the buyer deal falls apart and then everybody at the business knows is being sold and mayhem may ensue. So you were able to get this done because the seller just acquiesced understanding kind of that it needed to happen or did.

Was there some. Is this something we can learn from the way that you were able to achieve this?

[00:52:24 - 00:52:50]

David Graf: I, I unfortunately don't know if there is something to learn there. I think given the seller's age, everyone knew he's trying to find a successor. When I, when my wife and I together went and toured the business for the first time, it was during business hours.

So I think that was just kind of. I think people knew this had to happen. People were probably more concerned that it wouldn't happen, to be honest.

[00:52:50 - 00:53:04]

Will Smith: Yeah. Yeah.

Great. Okay, David. So anything more to say about the getting the business across the finish line or can we turn to your 18 months of ownership?

[00:53:04 - 00:53:39]

David Graf: Yeah, I think a couple more things that could be useful is one, you know, having a networking capital peg negotiated early I think is a great thing, especially making sure the seller is educated on why that's important. Danhart's very networking capital intensive.

We negotiated of that 2.0 million dollar purchase price. We had a 2.0 dollar net million dollar networking capital peg. It's just networking capital basically. And the.

[00:53:39 - 00:53:43]

Will Smith: What, what, how does that work?

What, what do you, what are the implications of that?

[00:53:43 - 00:56:32]

David Graf: Well, that's just what it. At the time, the way they ran the business, that was what normalized networking capital looked like. It was incredibly inventory intensive. At the time I bought the company it was like 220 days inventory outstanding.

We've improved that dramatically since then. But we just looked at, okay, normal. You have to remember this is in the context of a five point at the time, a $5.3 million combined offer and there's a line that says networking capital peg $2 million. Right.

That was just what it looked like based on their, their trends of ar, AP and inventory values. It was like, okay, it takes this much cash to run this business and if you showed up without that, you were going to probably go broke in the first few months. It was a very intensive business. Thankfully we negotiated that up front. With all that said, we also in the purchase agreement had a 60 day networking capital true up, which is I think incredibly important.

Meaning we would have an estimated net working capital delivery number at closing. So maybe it's we were shooting for two and the seller's books say we delivered 2.05 202,050,000. So at closing the purchase price would have to go up 50k based on that estimate. And then 60 days post closing I would have to deliver my analysis to say this is what the true networking capital delivered is and there's an opportunity to contest that by the seller and so forth. The seller just days before closing says hey, here's the books I'm delivering to you, $250,000 extra networking capital.

So you're going to have to adjust your at closing purchase price up by $250,000. As you know, with an SBA loan and whatnot, that is not an easy feat. So I was coming back from my brother's wedding in Seattle, landed, saw that text and I from the moment I left the airport, the moment I got home, I was talking to fort lawyers, bankers, investors, you know, investors, everything, four different people. My wife was probably stressed just listening to me. Ultimately we got a, a plan together where the seller agreed to say in writing that the estimated networking capital at closing was exactly 2 million which allowed us to punt and go calculate the number on the during the 60 day true up phase, which the bank had said we'll, we'll do a loan modification to get your line of cap, line of credit increase so you can fund this for that 60 day true up payment it later down the road.

Word to the wise, I did a really detailed audit of AR, AP and inventory during those first 60 days and my math came out to about $110,000, not $250,000 that was owed. The seller did not Contest this. And that was what I paid. So my net purchase price ended up being 2.1 million with 2.1 million of net working capital delivered.

[00:56:33 - 00:56:48]

Will Smith: So David, to be clear, when you say, say $2.1 million of networking capital, we're not talking about cash in the business.

There's a lot of inventory in this business, manufacturing business, so I assume a lot of it's there. Spell it out for us, please.

[00:56:48 - 00:57:33]

David Graf: Yeah, that's exactly right. So networking capital, as I'm defining it here, just to, to clarify, is AR inventory minus AP. AR and AP were call, you know, know, roughly equal.

So the majority of that 2, $2 million or $2.1 million is, was inventory. And that is in fact what the inventory was said to be on the books after my audit. So my. After my audit we had a finalized agreed upon. Hey, this is the inventory that I actually delivered to you, David, value of $2.1 million.

And yes, some of that was obsolete and whatnot, and we've cleared that off the book since then. But that is what was delivered at closing.

[00:57:34 - 00:57:51]

Will Smith: And why was it such a crisis that he was claiming to deliver more networking capital to you at close than originally estimated? And you couldn't just tack that onto purchase price so that it effectively zeros out.

[00:57:52 - 00:58:02]

David Graf: It was just.

So there's the timeline. It was so soon before closing that we found this out that I think it would have required a loan modification. It just wouldn't have happened in the time you need it to.

[00:58:02 - 00:58:03]

Will Smith: I see, okay.

[00:58:04 - 00:58:12]

David Graf: Or.

Or you would have to fund it 100% with an equity injection, which would be, you know, it's like going from a 10% to a 20% equity injection. It's a big difference.

[00:58:13 - 00:58:18]

Will Smith: Yeah. Speaking of, can you share the capital stack with us?

[00:58:18 - 01:00:48]

David Graf: Yeah, absolutely.

So good opportunity there to, I think, share another lesson or takeaway that I, I think is very valuable. I, through my earlier offers, the bigger deals, I had, as you would expect, been meeting with several investors who would, you know, each or all of them could have been anchor investors in any particular deal. And when I found Danhard, it was so much smaller. I could have kind of stretched a little bit maybe and just taking it down on my known, no investors needed. But there was a particular investor who happened to be local.

And I just really appreciated the guidance and his generosity with his time and expertise. And so when I had danhart under LoI, I approached him and I basically said, look, I could fund this without any outside capital, but I would love to have you on board in an Active advisory role. So he ended up placing the majority of the equity injection just to make the check size kind of worth his while, frankly. And in return for that, he got some kind of quote unquote search fund standard participating preferred equity with a pick and that, so forth. And then you know, the way I view it, like any silent investor can get that.

And so in addition to that, he got a common equity sweetener, a few points of common equity on top of his participating preferred equity, which is meant to be commensurate with his active rocket role. And he has been terrific. He's involved on the other deals we're considering now. He's got connections that are helpful. You know, he's more of.

I don't know if he calls himself this or not, but he's. You can kind of think of him as an independent sponsor kind of kind of classification. He's done his own GP deals and so forth. So I. The takeaway there is even if you can afford a deal without any equity investors, having at least one good investor to provide advice and, and accountability I think is very likely to make you a better operator.

If you don't have that in your current deal, you know, you might consider joining groups. I'm a big fan of groups and network support. EO I've heard is really good. I'm considering that as well. I haven't done it personally.

There's another group that I am a member of that's manufacturing specific but they have like different industry vertical groups called Scale Path and the guy who runs that company has been just a tremendous value add to my business. The other members of that manufacturing peer group have been a tremendous value add to my business. So find something, whether it's an investor or if you're too late for that, join some kind of group to get that support. Don't go it alone.

[01:00:48 - 01:01:03]

Will Smith: So Scale Path is.

Is Rand's. Rand's thing. Right. His peer group thing. Great.

It's Rand Larsson, a big presence in the ETA community, has done meetups across the country and Scale Pass, Scale Path is the name of the.

[01:01:03 - 01:01:12]

David Graf: You might know him from his entrepreneur trading cards. I actually have just in the last week received my entrepreneur trading card from Rand. It's sitting to my, to my right.

[01:01:12 - 01:01:19]

Will Smith: Right here.

He makes baseball cards out of acquisition entrepreneurs and players in small business land.

[01:01:19 - 01:01:26]

David Graf: Right. Yep. It's a very cool, very cool little marketing or whatever, you know, side piece of his business. Yeah, yeah.

[01:01:26 - 01:01:34]

Will Smith: It, it really is clever.

The ultimate ownership that you have is what.

[01:01:35 - 01:03:16]

David Graf: Yeah, on a. I think the most probably relevant metric is on an as converted basis, you know, after the. The exit or liquidity event that participating preferred equity converts into common equity on an as converted basis, my ownership is 88% of the business. And again in the search fund space, as opposed to maybe the independent sponsor space, where terms are fairly standardized. In the search fund space, the better a deal you negotiate, the less equity you need to grant to an investor for them to meet their return hurdles.

So because the purchase price was low and the returns were attractive for my investor to meet a very healthy, attractive return hurdle for his investment, it only took, call it 12% of the equity, regardless. And one other thing I think a lot of searchers get confused is you could technically have less than 50% equity and still have all the same controls I have. That's all operating agreement. So I've talked to several searchers where they're like, I have to have 51%. And I'm like, why?

Like, well, I want control. And I'm like, well, would you rather. What if you had 40% of a huge pie and you still had control? That's all operating agreement language for the most part. It can be done if you have the right investors.

And so, point being, you know, if you are only saying, I don't want investors because of control, that is, I think in an invalid reason to consider larger deals because the control can be there due to the operating agreement, regardless of your equity stake.

[01:03:17 - 01:03:35]

Will Smith: Yeah, a few things to say. You said a lot there. It was great on the owning 40%, owning less than, less than half and retaining control. That does assume that nobody else owns more than half.

Anybody who owns more than half is going to expect control.

[01:03:36 - 01:03:57]

David Graf: Sure. Yeah, that'd be a fair point. And that's, that's kind of an edge case. Right.

Like the scenario that would lead to you owning 40% would be you had to raise a lot of equity for a bigger deal, maybe a higher multiple. You still have an SBA personal guarantee. So there is a reasonable expectation that you have to have control. But it's a really edge case. It's probably unlikely.

[01:03:58 - 01:04:44]

Will Smith: Exactly. It is an edge case. I think in most cases people do expect that control correlates to percentage or at least the 50% is the magic threshold. I'm reminded of Mark Zuckerberg, actually, and how he, as, as the lore goes, he negotiated for himself very well in his, his terms of his equity. Right.

So while he doesn't own 51% of Facebook, obviously he, he negotiated for himself a lot of control of Facebook which was. Point being it was abnormal. That wasn't quite the norm. But to your other point and more broadly, the better, the sweeter the deal you have. The better the deal you have, the more leverage you have vis a vis everybody else on cap table.

[01:04:44 - 01:04:54]

David Graf: Yeah, I wouldn't call it leverage. It's not you're trying to win one over, it's just that you don't have the returns become attractive at, at a lower equity percentage for your investors.

[01:04:56 - 01:05:19]

Will Smith: I think, I think that that's true and I think it's a little bit semantic. But you're right, leverage does suggest that it's sort of an antagonistic negotiation and it's not necessarily. But the better deal in hand you have have the, the better economics you, you will likely see for yourself as the buyer of the business.

[01:05:19 - 01:05:20]

David Graf: Correct.

[01:05:20 - 01:05:27]

Will Smith: The return hurdles that your investor wanted to see were roughly. What do you know? Did he tell you?

[01:05:27 - 01:06:09]

David Graf: Yeah, I, we, we modeled it together, backed into kind of targets together and whatnot.

So it was very collaborative. I'll speak broadly just because one data point is kind of useless. It was in line but broadly in talking to all the investors I worked with during my search, I, it felt like at that time search investors were targeting like base case returns of I mean I. 30% I had heard would even be hard to get. Like 35 felt more normal.

I've heard rumors that it's gone up since then which seems crazy but that's what I've heard. Don't know if that's true through call it 35 is what kind of the market I was feeling.

[01:06:09 - 01:09:06]

Will Smith: That's the, that is the number that I think 30 to 35 and even in kind of independent sponsor land where they're larger, safer businesses but still lower middle market and a lot of risk is perceived to be there. They're more fragile business of course the smaller the business the more fragile. So as you go up and up and up market the return profile could be less or hurdles can be less.

35% is pretty standard. 30 to 35% and it's an important, it's an important thing to think about because we do partly probably the way I talk about it, but we do tend to think of this, of these models and how much you can retain and so on and the investors and you know what sorts of models, what sorts of kind of models they might invest in or models of search they might invest in. But ultimately what they're all any investor is solving solving for is that ultimate IRR or MOIC number the multiple Uninvested capital number. And so kind of no matter the deal, no matter the structure or model, your investor just wants to see that they can get, see, you know, we're generalizing here. Can get a 30 to 35% return.

Realistically, if your deal does what it's supposed to do in a base case, does what it's supposed to do and how you get to that number. Number might vary a lot from model to model, but ultimately that's going to be, you know, what they scroll down in your deck and look at is what is that base case number going to be? It's usually the IRR number. Okay. And I would just say one other thing about negotiating terms for yourself in independent sponsor land.

I, I'd say the terms are pretty well defined at this point. Although there's a lot of, there's a lot of levers that you can, can move in an independent sponsor deal. There's some standards, but there's also wiggle room. I'd say traditional search is the most rigid. There's a little bit of wiggle room there too, but it's, it's the most well defined.

And then self funded search, SBA style deals like yours is where there, there's, there's a, a wide range. I mean you could be a self funded search deal who has 800% of the business or 88% as in your case, or 51% and all kinds of stuff in between. So that's why it's more interesting here in SBA land. But anyway, David, just, and then finally on this segment to underline what a.

Great deal this was.

What, what a, how you were able to get a great multiple on this business was just a great deal for you and your Investor. You've retained 88% which is effectively, sure, sounds like all of it. And yet still your investor has the possibility here of getting 35% returns in a base case. And it sounds like they brought all the equity.

[01:09:06 - 01:09:10]

David Graf: Is that what I heard you say most?

Most of the equity? Most, yeah.

[01:09:10 - 01:09:11]

Will Smith: So you came out of pocket how much?

[01:09:11 - 01:09:12]

David Graf: 60 grand.

[01:09:14 - 01:09:37]

Will Smith: So that's, that's pretty incredible.

No. And that is all possible. Again, we've said it now multiple times, but just to underline the point that the, because you were able to buy this business for a low multiple, there is a ton of subtle or value you listener might not perceive in getting a business for a good price. It's got all this great ripple effect. If you can buy a business for.

[01:09:37 - 01:10:00]

David Graf: A low multiple, absolutely. I mean that's everything it should be common sense, but I think sometimes we lose sight of that in the modeling and this and that and the hand waving. But if you buy a cash flowing asset for a lower price, it is inherently a better return. Like if you just step back and think about that. It's, it's so obvious.

It helps everything else. It helps your debt service ratio. It helps everything. Right, Right.

[01:10:01 - 01:10:10]

Will Smith: Okay, David, got you for a few more minutes.

And we haven't even gotten into operations, so let's turn our attention to that. How has it gone? Gone?

[01:10:10 - 01:10:55]

David Graf: Yeah. In summary, it's gone incredibly well.

You know, I think about this as a lot of things I think about probabilistically, but we've winded up on the right side of the distribution here, thankfully. Maybe the far right side. I don't know. In 19 months of ownership ending March 31 this year, we've grown, adjusted EBITDA 58%. We just closed March at 1.2 million.

We've reduced our cash conversion cycle from like 220 days to 150 days. So we've released tax free cash off the books by being more smart with purchasing and getting inventory values down. And we've got some trajectory to continue that for another year or two as well. It's just, it's just been really, really strong.

[01:10:57 - 01:11:24]

Will Smith: David, what you just said there about inventory, better inventory management meant the business was sitting on all this inventory. And if you can tighten up how the business uses its inventory, then you can effectively sell through or kind of liquidate or turn into cash that excess inventory. And that is a one. And that drops to the, that's kind of a one time cash realization out of the business.

[01:11:24 - 01:11:59]

David Graf: Correct.

And it's not income. Right. I mean maybe if you're on a cash basis it would be, but even then I'm not sure it would be. I'm not a tax advocate expert, but it's not income, so it's not taxed. It's, it's, it's just tax free cash flow basically because you're, you're getting it off the shelves and into your pocket.

So very powerful. And that was, that was an identified opportunity. We had it baked into our model. Some improvements in days inventory outstanding. That was part of the, part of the reason again that I had 88% is because we had some very defensible assumptions on improving that and we've exceeded those expectations.

[01:12:01 - 01:12:15]

Will Smith: And you were a guy who came from SaaS. Land inventory and working capital is notoriously tricky period. But certainly for first timers, how Are you figuring all of this out? This, this inventory windfall, for example?

[01:12:15 - 01:12:51]

David Graf: Just kind of one step at a time through my.

This is where the networks, the acquisition lab and other networks that you join become really helpful because you would be modeling something. You'd hit a roadblock. Oh, I don't understand this. And you'd go do online research or talk to somebody. Actually, my investor and I, we met because I was introduced through a mutual friend because I had a networking capital question on a prior deal.

That's how we met. And yes, it's just, just you run into a problem, you go research it, you figure it out and then you. That just kind of happens over and over again. You slowly gain more understanding of how it all works.

[01:12:51 - 01:12:57]

Will Smith: The employees and some of the key employees.

Has that ended up being. Okay.

[01:12:57 - 01:14:02]

David Graf: Tremendous. It's in fact one of the keys to the success we've had. I think we have had zero, not almost zero, not, you know, hypothetically zero.

Zero. Regretted employee attrition since I bought the company. The team is more stable, more engaged, and better compensated than they've ever been before. So our, I would say our average employee pay is, is each employee, every employee has received pay increases of total cash compensation and probably on the order of 15 to 20% per employee. Headcount's down a little bit.

Where we did lose some people that was not regretted attrition and we just didn't backfill them. We kept the best and improved productivity and we are, you know, we're, we're more lean than we were and more efficient. So we've grown revenue, we've grown gross margin and we've made smart decisions with operating expenses. We've kind of of attacked the balance sheet top, middle and bottom. It's been a, it's been quite a success.

Excuse me. Attacked the income statement, top, middle and bottom. And we've made those improvements on the balance sheet with cash conversion cycle, you know, improving ar, improving inventory and those types of things. It's been really all around just attack.

[01:14:06 - 01:14:09]

Will Smith: There was a key leader that you waited too long to replace.

[01:14:09 - 01:15:39]

David Graf: That's right, there was. And I think that's a key lesson as well. Our. The production manager that was here when I bought the business.

We. And I think it's understandable, right, I would understand if another searcher did the same thing I did. You're new. You don't want to shake anything too big, too hard, too fast, and you want to make sure you, you're seeing everything the way you think you're seeing just Wasn't a fit unfortunately. And for performance reasons we did have to ultimately make a change there.

I wait. The lesson I learned is I waited too long to do that and I won't make that mistake again. I've got a kind of simple three questions, three strikes evaluation that started, you know, event. Eventually I realized, oh, this is exactly what Dave Klein the management coach teaches. And it's like ask yourself three questions.

You know, would you, if they came to you and said they were leaving, would you stop them from leaving? Did you do everything you can to stop them? If the answer is no, that's strike one. If they, if you were hiring this and they applied, knowing what you know now, would you hire them again? If the answer is no, that's strike two.

And if you were to go higher for this role, is it a, you know, better? Better than not? Pretty good odds that you would hire someone who is better? If the answer is yes, that's strike three. And so it's just a, to me a heuristic I think through when I'm making those decisions to get over the pain of having to make a switch.

[01:15:40 - 01:16:10]

Will Smith: Yeah, interesting. You started working with peo. Here comes another shameless plug. But this is not actually to mention one of my sponsors. I really do want to hear about that decision and kind of the value that it's provided.

Aspen is the PEO that you worked with. But just broadly educate us on your decision to use a peo. Why do it and, and what does it look like?

[01:16:10 - 01:17:37]

David Graf: Yeah, Aspen has been terrific. We did a RF on rfp, but we did a competitive bid process for peos and we selected Aspen.

You know, I think a lot of people, maybe, maybe it's fair to say most people that consider joining a PEO are primarily focused on how much am I going to save on health insurance. That was actually nearly none of my analysis. We don't have that many people on the company health insurance. That was, we had a Blue Cross policy when I bought the company and we didn't have that many people using it. They were on spouses plans, they were on Medicare, whatever.

Right. And so that was not a big part of the factor. What was a factor was I wanted the fractional HR support. When things got sticky and tricky I wanted to be able to talk to somebody who is an expert. I wanted better integration of all of our deductions and benefits.

I wanted better benefits, the ability to roll on to a 401k seamlessly and for, for free for no additional cost, time tracking, better time tracking, better pto accruals and vacation tracking. Not on a spreadsheet anymore, just all of those things. And yes you can do that with another provider that's a paycheck, a payroll only provider. But we were already on that and I didn't like wasn't that much the per month cost to be on a payroll only tech solution versus going to a PEO wasn't that big a leap and it has been well worth it in my opinion. They've been a tremendous partner for us.

[01:17:39 - 01:18:38]

Will Smith: And to your point that peos one of the reasons that they are sought is to save on health insurance which I think is kind of the legacy PEO value prop which was will we the PEO will aggregate all of these our client businesses and to get. To get group purchasing power basically and negotiate better rates from let's say a health. Health insurance provider. But it has a. The PEO model and value prop has evolved to what we just heard from you where they're essentially an outsourced HR function.

They're doing payroll as well. They're doing benefits management 401k time or out of office tracking. So there I guess there's some sort of portal solution that they offer offer you where you. Where you're managing your. Your people from a centralized location.

So it's, it's. Yeah it's. It's really all of the above. Yeah.

[01:18:38 - 01:19:40]

David Graf: Anytime I Absolutely right.

All that's all the above is true. Anytime I have a question, I reach out to our contact at Aspen and we get very, very prompt responses. Anytime there's something sticky like oh, an employee is requesting. I'm just making this up but hypothetically an employee is requesting a medical exception or there's a workers comp concern, you know, maybe someone is got injured. Not that that's happened, but it could happen, right?

Or there's a. We did a layoff or termination. I'm always consulting them on any type of people decisions that are significant like that they can consult on how to protect Dan hard how to be fair to the employees. You know, all of those things. It's like if I didn't have that I would have to make my best guess.

I'd have to go online and research employment law. They do all the tax withholdings and everything for us including state, you know, unemployment tax services. We don't even have an active account with the state anymore. It's fantastic. It's just easy.

[01:19:41 - 01:19:56]

Will Smith: And David, when you look shopped around for a PEO do they all essentially offer a similar basket of services and it comes down to kind of price and feel and service or are the offer. Do the offerings vary a lot from peo to peo?

[01:19:57 - 01:20:42]

David Graf: My impression was that there are certainly like higher end, more fulfilled, more high priced, higher featured ones and vice versa. But my impression is that most of the stuff I was looking for is going to be covered by most peos. Ultimately it came down to like reputation and trust.

For me, there was another peo I won't name. I actually went to high school with the sales manager, so I had a personal connection there. And so I was working with one of his sales reps on the deal and I ultimately just couldn't get behind what I was reading online about this peo, unfortunately. And whereas all my interactions with Aspen and the things I was reading were positive and I think I made the right call. Great.

[01:20:43 - 01:20:44]

Will Smith: And how is it priced?

[01:20:44 - 01:20:47]

David Graf: Classically, it's a PEPM per employee per month.

[01:20:47 - 01:20:55]

Will Smith: All right, David, we're wrapping up, but tell us quickly about your success with eos. And then I got one final question for you.

[01:20:55 - 01:23:23]

David Graf: Sure.

Yeah, man. Eos, entrepreneurial operating system. I genuinely cannot imagine living without it. I can't imagine that we would have had the success we've had without it. It's a shared language, a shared cadence that all of my, especially my leadership team now understands and runs on.

For those who are unfamiliar, you got to run your business on something, otherwise you're just winging it. And there's lots of systems out there. EOS immediately clicked with me as the system that's simple, that employees can understand. It just makes sense from a psychology perspective. And I pre acquisition well before I even knew about Danhart, I started, started just absolutely reading everything I could about it.

I recommend to everybody, if you're unfamiliar, start with the book. Get a grip. Don't start with the book. Traction. I have Traction.

It's a reference manual. I've never read it cover to cover. I have read Get a Grip or in this case listened to it on audio probably six times. Because the other thing you need to consider when you roll onto eos is do you want to self implement or hire a professional implementer? If you have the money, I would hire the implementer.

I think it's well, very valuable. You're going to really get a lot of, a lot of adoption doing that. Ultimately we weighed that decision. I interviewed several local implementers and we ended up bringing one in to for a free, what they call the 90 minute meeting and they speak to the team and explain EOs. And I really thought that A key part of this was going to be, I'm the new guy.

My, it'll be more. This implementer will have more authority than I will. And so I wanted to have that unbiased third party to say, no, this is a real thing. David's not making this up. And thankfully I was already a couple months into owning the business and the team came to me and was like, we're in.

We think it's awesome. We think it's what this company needs, but we don't think we need at our current size to pay the relatively high rates of a professional implementation. And that was all I needed to hear because my fear was they wouldn't listen if I was self implementing or I was too new and didn't have the authority. But they basically gave me the green light. You self implement, you lead us, we will follow.

And it's just been so successful and we run on. We use 90io for the software to track it. And I think it's a terrific tool that helps us all stay in line. We're constantly adding issues to the issues list and headlines and everything else.

[01:23:24 - 01:23:29]

Will Smith: Great endorsement of eos.

Got to get a webinar going of EOS here one of these days.

[01:23:29 - 01:23:41]

David Graf: Yeah, I've had a lot of unpaid endorsements in this just because I'm a kind of a natural evangelist. If I like something, I tell everybody about it. You know, my brother's the same way. He sold 10 of these flashlights to me and nine other people.

[01:23:42 - 01:23:44]

Will Smith: That's a great quality, though.

[01:23:44 - 01:23:44]

David Graf: Yeah.

[01:23:45 - 01:23:51]

Will Smith: All right, David, you said ebitda is up 58%, that's since acquisition.

[01:23:51 - 01:23:52]

David Graf: That's right. Right.

[01:23:52 - 01:23:55]

Will Smith: So, so over, I think you said 19 months.

[01:23:55 - 01:23:55]

David Graf: Yeah.

[01:23:56 - 01:24:08]

Will Smith: Close us out with the vision here. Are you going to go acquire more? Are you doing this for the duration?

Are you going to. What. How are you thinking about it? Yeah.

[01:24:08 - 01:26:13]

David Graf: Boy, I wish I had a really clean answer for you, Will.

It's something I'm, I think about a lot. I'm actually pretty introspective about. The good news is I thought about it a lot before and I knew that that search fund, a search fund would give me lots of options. And so I, I still find that to be true.

I could run this and grow it organically for the long haul. I am engaged by the work, I'm engaged by the team. We've got awesome trajectory and, you know, from a, an income perspective, I'm doing well, better than I've ever done before. Right. That is a very satisfying life.

I do get. I'm Very cognizant with four young kids and to not over commit myself. It's easy for me to do. I could easily step into more hours. It's, that's my personality as many of your guests share.

So I'm just consciously trying to balance and any, just any big decisions I make, like do we want to go pursue an acquisition of some kind? I'm always asking myself like what are the economic. How does my 5 year or 10 year economic outlook change? And also how does my, my home life change? And that's just the stage of life I'm in.

Might not be that way forever.

I'd say. One area that we are interested in pursuing from an acquisition standpoint would be some kind of maybe two. First, a vertical integration play. Like having some kind of vertical integration of our supply chain, especially key components would be very interesting. Second would be we need to grow the tam.

It's a great niche, terrific net revenue retention. But there is a ceiling on the total addressable market here. If we stay in the vehicles that we primarily focus on, we gotta expand into other types of vehicles to continue to see these growth rates for the long term. And so an acquisition could potentially address that as well where we just buy our way into other vehicle types. And so now that we've kind of got the foundation set set of the first 18 months, I feel very good about what we've done and stabilized the business and we're ready for growth.

And I would be more open at this stage to considering some of those moves.

[01:26:13 - 01:26:21]

Will Smith: David, are you selling into, does the, does Danhardt just sell into the DFW or north, north central Texas?

[01:26:21 - 01:26:29]

David Graf: Mostly United States, mostly Conus, continental United States, but some Canada, some Mexico, some Europe. So it is a global, global operation.

[01:26:30 - 01:26:37]

Will Smith: So this is not one of these where there's a Danhardt in every market sort of thing.

Like they primarily have local apples to.

[01:26:37 - 01:27:02]

David Graf: Apples head to head, American manufacturer, American quality, you know, kind of the, the quality standard. We really have one Apples to Apples competitor that I'm aware of. There are some, certainly other names that we compete with. Their key components tend to be Chinese sourced.

So it's not apples to apples on quality or price. But yeah, that's one, one big one currently that we're kind of head to head with.

[01:27:03 - 01:27:21]

Will Smith: And you mentioned the, that you're enjoying the work. I didn't ask you about much about the business at all or the industry. The manufacturing H VAC units for specialized vehicles, ambulances and, and what were the other fire trucks.

[01:27:21 - 01:27:55]

David Graf: And our primary market is Ambulances, I guess you could say emergency vehicles is kind of our focus. In fact, we've got some awesome T shirts that we've done a series with an ambulance, a fire truck and an armored car that the tagline on the bottom is Climate Solutions for America's Heroes. But those are the three big ones and there's kind of a long tail. We even do some aviation, you know, little general aviation planes, which is near and dear to my heart as someone who's currently pursuing their private pilot's license. Yeah, it's, it's kind of a long tail of little things after that.

[01:27:56 - 01:28:07]

Will Smith: And your. How have you found learning the motion of the business? To what degree have you learned about the products that you guys are building?

[01:28:07 - 01:28:57]

David Graf: Yeah, good question. Enough to where as I'm now starting to dabble directly in sales and marketing, my team has I think been quite complimentary or maybe surprising.

They were a little surprised on our last on site with the customer that like you kind of got it down. It's like you got, you know, you know, the products, you know, the positioning, you know, I, I don't have the details. You asked me a, a super detailed technical question. I'm gonna, I'm gonna hand that off to either my, my lead sales guy or my engineer. That's not where I add value to the business quite frankly.

So I just haven't gotten in those weeds intentionally. But I know it well enough to, to have a, a good conversation with the customer and I know also well enough to know when to hand it off to someone who knows more.

[01:28:59 - 01:29:07]

Will Smith: And you had said to me that.

You actually haven't really leaned into sales as a growth lever, which is interesting given that that was your background.

[01:29:07 - 01:30:29]

David Graf: Personally I have not because I, there was a trend there already.

The trend was continuing and I had high faith and trust in the person who was running that effort. I had a lot of other. The analogy I used with my, my team over and over again was that we were rebuilding the foundation of the business underneath the building, metaphorically speaking. And that's where I focused my effort is on HR compensation, purchasing policies, benefits, you know, all these things, right? Accounting, complete accounting overhaul.

I and you know, had to go back and review everything from the moment of acquisition through about February of the first year. All of those things shored up the business where now we're not going to be cracking under increased growth. And so we're already growing at a pretty good clip. But as of March this year I started personally getting involved in some AI enabled sales outbound sequence generation and things like that where I'm optimistic that we will see an accelerated growth or at the very least maybe we'll avoid a deceleration in growth that would have otherwise come our way at some point in the future. I don't want to be the key person responsible for any sales relationship and currently I'm not where I can put a little finger on the scale to help win a deal or win a customer over, that's where I step in.

[01:30:29 - 01:30:43]

Will Smith: Sure.

But you understand B2B sales very well and you could behind the scenes you could be implementing a lot of process and best practices there that I assume Danhard didn't have when you got there.

[01:30:43 - 01:31:02]

David Graf: Correct. That is my focus for Q2 currently. Right now one of my rocks is all around how does Dan Hard for the first time ever have a professional, professional systematic outbound sales process and to be determined on how successful that will be, but I'm pretty optimistic.

[01:31:05 - 01:31:26]

Will Smith: Great. David. Well, just to conclude with a number here. So you said you've gotten EBITDA to 1.2 million because of your low multiple. Your debt service is not so high.

So that 1.2 million translates to probably pretty good free cash coming out of the business fair there.

[01:31:27 - 01:31:40]

David Graf: Very good. And then again, in addition to that free cash, we've turned excess inventory into cash as well. So the first year and a half has been incredibly strong from a cash flow perspective.

[01:31:41 - 01:31:43]

Will Smith: Bought a new house as I understand we did.

[01:31:43 - 01:31:46]

David Graf: We had a major upgrade with a large down payment.

[01:31:48 - 01:32:11]

Will Smith: Well, all well deserved. You are. We're really careful and strategic about all this. David.

We can hear it in your how you relate the story. So well deserved but boy is it going well. It's just like all the, all the things are that we want to see happen are happening and that's not to take away from your own ability, but it's nice when it just works like it's supposed to and better even.

[01:32:13 - 01:32:39]

David Graf: It certainly exceeded my base case. So I wouldn't even say like it's supposed to.

It's been on the upper end of what I thought would be possible and I hope that I can just continue to steward it, to continue that trajectory. Our seven year target is 15 million in sales, which should be December 31, 2032. We need about a 13% revenue CAGR to do that and we're ahead of pace currently. So let's, let's see if we can do it.

[01:32:39 - 01:32:43]

Will Smith: All right.

David Graf, owner of Dan Hard, thanks for joining us on Acquiring Minds.

[01:32:43 - 01:32:44]

David Graf: Thank you. It was a pleasure.

[01:32:45 - 01:33:29]

Will Smith: Hope you enjoyed that interview.

Don't forget to subscribe to the Acquiring Minds newsletter.

We send an email for every episode.

With an introduction, introduction to the interview, a link to the video version on.

YouTube, and soon key takeaways, numbers, and more essentials from the interview. For those of you who don't have.

Time to listen or watch it, subscribe at acquiringminds.co.

You'll also find all our webinars there.

On the website, both those we have coming up and recordings of past webinars.

At this point, There are over 30 webinar recordings, a wealth of information on all the technical nitty gritty of buying a business.

Acquiring Minds Co.