Host: Today's guest thought he would buy a single business for the long term. Sure, there might be bolt ons and strategic M and A opportunities along the way, but he wasn't envisioning acquisition being the core motion of the project. Well, when he found a business he wanted to buy and went into the market looking to raise equity, one investor gave him a pivotal piece of advice. Make this acquisition a platform and do a roll up. Elliot took the advice. Four and a half years later, he's acquired seven businesses and is at $16 million in revenue. As if to make the point, you'll hear how Elliot was going to give the Day one speech at his latest acquisition. Literally right after our interview. Now, in addition to getting a peek inside the life and strategy of someone pursuing a roll up, a few particular themes to listen for. First, adding value. A good rollup should be more than an assemblage, a collection of disparate businesses that happen to be in the same industry. No, what you want is for the whole to be greater than the sum of the parts. And you do that by integrating your acquisitions, stitching them together into a cohesive single entity. Which leads to theme 2 change management. Integrating the businesses rather than just leaving them as islands unto themselves means you're going to change each business you buy. Elliot has learned a lot about the art of doing so, and we spend time here and finally payday. At the end of the interview, Elliot does the napkin math for how much money the entrepreneur behind a roll up stands to make. I so appreciated his transparency here, understanding exactly what all that revenue and EBITDA could actually mean for Elliot's own net worth when he exits. Okay, here is Elliot Edge pulling back the curtain on his rollup for us to learn from. Enjoy Announcements Smith List the job board for operators and leaders of small businesses that we launched recently has more amazing opportunities. Posted an operator to run a small industrial distribution company with 10 employees. An operator to run the operations and own the P and l of a 30 person sign manufacturing business, a GM to run a 30 person glass fabrication business and an operationally focused CFO for an H vac and plumbing platform doing 50 million in annual revenue. And the right CFO candidate here could evolve into CEO. So if instead of buying a business right now, you want the opportunity to run one, check out these opportunities and others@smithlist.com link in the notes okay, on to today's episode. Welcome to Acquiring Minds, a podcast about buying businesses. My name is Will Smith. Acquiring an existing business is an awesome opportunity for many entrepreneurs and on this podcast I talk to the people who do it. A PEO run by a Searcher for Searchers if you're running a company with less than 100 employees in providing health insurance, you could secure better benefit plans at a 15 to 30% discount through through a professional employer organization or PEO. Aspen HR, run by search fund veteran Mark Sinatra, understands the needs of search operators and could be a great solution for you to receive HR compliance and diligence support. A powerful HR tech platform and Fortune 500 caliber benefits, all for a fraction of the cost. Check out aspenhr.com or contact Mark directly@markspenhr.com Elliot Edge welcome to Acquiring Minds.

[4:12] Guest: Thanks for having me. Will Excited to be on Elliot, you

Host: bought a managed service provider, an MSP in San Antonio in December 2019. Fateful timing. Now, I didn't know this, but San Antonio was really where Covid hit the shores of the US first, meaning your Covid in San Antonio started earlier than for the rest of us, which I peg at kind of March 2020. So needless to say, things moved fast during your transition and they don't appear to have slowed down. Matter of fact, you just told me that we have a hard stop at at 1 o' clock Eastern so that you can give the day one speech for your latest acquisition, which is closing today. What a perfect the perfect little detail to have for your Acquiring Minds interview. Elliot, let's be efficient here, therefore start us off with some background on you, please.

Guest: Yeah, absolutely. So, born and raised in Oklahoma, studied petroleum engineering in undergrad, got my start in the oil business, worked in a variety of engineering disciplines with a couple publicly traded EMP companies, but always knew that I wanted to do something entrepreneurial. Always planned to go back and get an mba, but with the wonderful encouragement of my wife, reached applied to Harvard Business School, was fortunate enough to get in before going to hbs, was very well versed in the ETA model and knew this is what I was going to do after graduation. So graduated.

Host: So you, you, you went to hbs, to Harvard Business School, already aware of ETA and indeed knowing that that's what you were there to study and network around and get cracking on. Yeah, say a little bit more about that if you would.

[6:05] Guest: Yeah, absolutely. So again, working in oil and gas. Knew I wanted to do something entrepreneurial. Had a good, good friend of mine who attended a few years before me and we had talked maybe about someday doing something entrepreneurial together and I get a text from him one day who said, hey, there's this crazy thing where 30 year olds who don't necessarily have any capital or business experience are buying companies. You should look into it. And so he really introduced me to the, to the ETA search fund model. I was on Rick and Royce's pre release before the HBR guide was published. So I came in knowing, you know, as close to blinders as you can probably have going to business school, that, that a self funded search was, was what lay on the back end for me.

Host: That's great. So Rick and Royce, of course for people who don't know, as you just implied, they're the authors of the famous HBR guide to buying a small Business. And so I guess they were promoting the book's imminent release and you could sign up for an early copy or to be on the notification list or whatever, which you did. So one of the very first copies off the press you had in your hands and then took their class obviously.

Guest: Yep, took all the classes while there.

Host: Y do they. Do they teach multiple classes or just the one?

Guest: So there's two classes during your second year, your EC year there's what they call financial management of smaller firms which is your, your typical case study, case method style HBS class and, and then they teach a course called ETA that is more of a field type hands on. You go through building out a PM for prospective investors. You go about pitching actual business owners on the model. So it's a little more hands on specific just to ETA and search funds of course.

Host: Well Elliot, you know we, we talk about on acquiring minds quite a lot about for those people who don't have either a financial background or an MBA or both or neither, what advantage those who do have and because it can be quite intimidating to hear the HBS crowd or the, the former investment bankers on here and I have to say I'm not sure I had the color that you just gave me on what you learn at HBS to go buy a business including like, like you just said, doing the ppm, like doing the deck that you present to investors and getting some practice there. That's valuable. That's really quite valuable because putting together a deck is, is no joke for somebody who's never done it and then going out and cold pitching investors and presenting to them over zoom. So that alone seems, you know, worth the cost of admission.

Guest: It's certainly valuable and, and I learned a lot and grew a lot during that experience. But don't kid yourself. You do not need a finance background, you do not need an mba. And in fact I think in a lot of regards some of the most successful searchers I know are people who came from military, came from industry, came with no kind of traditional ETA search entrepreneur background.

[9:20] Host: Perfect. Thank you for saying that, Elliot. I would have forgotten to. And it's such an important point.

Guest: Yeah.

Host: Okay, so you're at HBS and then you immediately, day one after graduation, buy a business, right?

Guest: Pretty. Pretty much.

Host: Not.

Guest: Not exactly. So my, my, my lovely wife who's been incredibly supportive through my whole journey, I would not have gone to HBS were it not for her. I would not have bought the, the company that I bought were it not for her. She had quit her job to move to Boston for me to be able to pursue the MBA there. And upon graduation she took a job. She's also an engineer, oil and gas. And she took a job back in industry with the KKR Portfolio company out of Dallas. So we moved to Dallas after graduation and that's where, that's where I ran my search from. I was fortunate to be pretty fast in my, in my first acquisition, so started searching in July, found the company in September, was under LOI in October and closed in December.

Host: Wow, that is super fast. And by the way, given that I assume it was a geographic search, you'll correct me, that is even more impressive because obviously if you're only searching in one geography, the pickings are slimmer. But if you moved back to Texas or moved to Texas for your wife's job, I assume that means you weren't going to uproot again and it was geographically constrained.

Guest: No, the plan was to go wherever the business was because I was not running. You're correct that I ran a geographic search. It was not industry specific, but as you can imagine, searching from Dallas, Texas. I ran a search in five states, so Texas, Oklahoma, Missouri, Arkansas, Colorado. A lot of the reasoning being I felt there was just too much white space with no industry focus. There needed to be some way to create guardrails to build networks with prospective sellers to tell a meaningful pitch and story that could resonate with a seller. Texas is a big place, so I, I did not get, get very far. And, and, and we did relocate to San Antonio, albeit there was an extended period where, where I commuted back and forth between Dallas and San Antonio.

Host: Give us a little bit of the, of the parameters of what you were looking for. You've already said it was self funded. What else?

Guest: So I was looking for a lot of the same what I'll call sanitary metric criteria that a lot of self funded searchers look for because quite frankly, they lend itself to the self funded model being able to put a decent amount of leverage in a business that's kind of hard to break for a first time operator. So a good deal of recurring revenues, durable cash flows, industry tailwinds, strong margins. And like a lot of guests, I was looking for a business that was doing at least a million of ebitda and I found all of those in my first acquisition except for size. So I ended up buying sub million for sure.

[12:22] Host: Is there anything to learn from the fact that you were able to accomplish finding a target so quickly or was it just, was it just happy accident?

Guest: Yeah, I certainly think luck and timing being the right place, the right time played the biggest factor. I found a gentleman who was wanting to get a transaction done before the end of the year, was concerned about potential changes to cap gains tax rates with a change in political leadership, but also a seller who had a disdain for your typical private equity MBA ETA type of acquirer and, and so wanted somebody local, somebody out of Texas, somebody who, who he could see selling, you know, his business that has had had his name on the doors for over 30 years to the two things that I do think played in my favor. So I tell every prospective searcher, recognize that you're the buyer of last resort in a competitive market. You have no capital, you have no industry experience, you have no transaction experience. So you have to, you have to compete on other criteria to, to win in a game that stacks up in your favor. So again I found a seller who's looking for somebody local and somebody who could do a fast transaction. And I was able to lean very heavily into that. The second thing is Jim Sharp, who, who a lot of listeners should be familiar with, a wonderful resource to the community, a mentor to searchers and an investor in the space. I had a call with him 30 days into my search and like my engineering background would lend me to, I had this beautiful spreadsheet with all of these metrics. How many brokers I had put into my funnel, how many qualified leads with prospective sellers I'd put in. He asked me one question, how many offers have you made? And it was a, a rude awakening, but the one that I needed, you're not going to buy a business without making offers. And so I then shifted my approach. I was very early to getting comfortable making offers, getting comfortable testing valuation, which allowed me to be a lot more efficient in processing deals out of the funnel, either that weren't the right fit for me or that I was not the right fit as a buyer for

Host: this is fascinating. Elliot, I probably have run across that, that philosophical approach of Jim Sharps before, but there is a, there's a, there's a good philosophical debate there. Jim's perspective obviously is that kind of shots on goal and the more the better. The counter argument would be that when you do find a business that you, it seems like you really could transact on and it's going to be important that the transaction be as smooth as possible, that you get along with the seller as much as possible and so on. Having an an spending time on the LOI and thinking through the transaction so that you don't have to retrade later or disappoint or frustrate your seller is, is valuable in a different way. So taking, taking your time with an LOI does have value. It's not just about being overly cautious. As a first time business buyer, how do you respond to that?

[15:50] Guest: Yeah, I don't want it to sound like I was not thoughtful with the LOI and did not spend time making sure that I had a, a properly structured deal and that I wasn't going to need to potentially retrade or be surprised during diligence. But for instance, a lot of listeners are, are likely familiar with industries that have become very hot that they might like to buy a business in. And if you are willing to pay four or five times but the expectation from the seller is eight to 10 times, you're never going to buy that business and you're wasting your time. And so if you can identify what expectations are and either close the gap or you know, self select or select out of, out of a process, you're saving yourself time. That being said, if you're running a very niche, narrow industry search, if you are bringing something unique and specific to the table, that, that would be a different situation and certainly a different sort of search approach than, than what I was in and what I was taking.

Host: So in terms of volume of Lois, it's and versus a carefully crafted loi, it's not either or, it's kind of both and high volume, but also making them considered well crafted, thoughtful offers as well. So trying to kind of do it all.

Guest: Yes.

Host: And get volume of high quality.

Guest: Yeah, exactly. And really just getting comfortable making an offer and talking valuation. I know that that, that can be very uncomfortable for a first time business acquirer and I've spoken with searchers that are 612 months into their search and they haven't actually formally made an offer yet. And you'll never buy a business without making an offer.

Host: Well, this would be the opportune time to plug a webinar that I did with Sam Rosati a couple months ago. The anatomy of an loi, where we go through an actual LOI template to get people to understand what the contents of one is and really just get people comfortable with it. The idea being that it is this big mental hurdle that many searchers need to overcome. And it can, like you said, it can really be, I guess, like to Jim Sharp's point, it can really be something that impedes a search. Just that psychological friction there, getting comfortable sending out offers. An SBA loan broker, as opposed to a direct lender, doesn't work for a particular bank. Instead, the broker pairs you with the right SBA lender for your deal based on industry terms, risk thresholds, then helps you navigate the process better than many lenders themselves do. Matthias Smith of Pioneer Capital Advisory is just such a broker. Matthias worked at two of the country's top 10 SBA lenders. So he's been on the inside of the SBA process and knows well the pitfalls and hurdles and how to avoid them. He struck out on his own to laser focus on the ETA and search space. Our niche is his niche. You'll see Mathias at all the ETA conferences. He's closed over 30 search deals since starting Pioneer in May of 2022, including some acquiring minds guests. To learn more and get in touch, go to PioneerCapitalAdvisory.com or click the link in the notes. Now, Elliot, one thing you said about your seller, and by the way, I loved how you said you're as searchers, business buyers were the, the, the buyer of last resort from the seller's perspective, just unattractive. Back of the line. So we need to do what we can to make ourselves attractive. And you kind of rattled off, you know, he didn't want a PE type, he wanted somebody local. Um, but he, he didn't want a PE type. He didn't want an mba. You know, yes, you were local, but you, you were definitely, you know, you're a Harvard mba, so you're, you're, you know, you are the, the picture of somebody that a grizzled SMB owner is going to say, I don't want, you know, that whippersnapper buying my business. So you weren't, you know, you weren't the perfect picture of his, of his imagined successor.

[20:11] Guest: Yeah. What I would say to that. Look, I leaned everything into my positioning of who I was as a buyer and my digital Persona during my search to align with the type of search I was trying to run. I stripped hbs off my LinkedIn. That's not what I led with in any of my pitches. And I steered clear of using our favorite five letter or six letter phrase EBITDA in any and every communication. I said look, I'm an entrepreneur out of Texas looking for a business that I want to buy and grow. I'm going to move to your community, I'm going to step into your shoes in the business full time. If that resonates, let's talk.

Host: And. And it did. So he was receptive to that. And had he been courted by private equity and other types of buyers that he didn't like?

[21:05] Guest: Absolutely.

Host: Was it competitive?

Guest: Absolutely. As, as I'm sure we'll, we'll get into the IT managed services space is, is very active, very active with lower middle market private equity and I was nowhere near the first or, or, or highest offer in his process.

Host: And where did you find the business business?

Guest: Through a broker. Through a broker. I was actually looking at another business that the broker had. It was a tire recycling plant. So it was like two business, two, two businesses together in one. And he said hey, I know this is smaller than you said you, you wanted, but I've got this great IT services business you should take a look at and let me know if it's interesting or not.

Host: Okay. We're about to return to size, but before we do, tell us about the this business, this MSP.

Guest: Yeah. So MSP out of San Antonio, Texas, been around since 1990 serving clients there in south Central Texas. For folks that aren't overly familiar with what an MSP is, it's outsourced IT predominantly small to medium sized businesses, a little bit in the mid market enterprise space, a little bit in the local government entity municipality space. But it is largely being an outsourced help desk, an outsourced IT consultant and strategy and outsourced IT procurement department for clients.

Host: And there are many shades to this business, as many as there are permutations of technology that an organization would have. So and, and of course you have msps that specialize in X versus I mean niche upon sub niche. But just to understand, I mean so much of technology, technology's gotten a lot simpler. As we all know. You know an msp in the 80s and 90s was a very needed technical thing because far fewer people were technical and, and, and stuff wasn't in the cloud and it was just technology was just in general a lot less self serve. Today a small business can turn on Google Cloud or Google whatever. Google work. What is the thing?

Guest: Google Workspace.

Host: Thank you. I'm a, I'm a customer, I don't even know what it's called. Google Workspace. And you know, have kind of a light, you know, system for all of their necessary communications and so on. So anyway, just give us a picture, examples of what it looks like, the tech involved to manage an organization today.

Guest: Yeah, absolutely. And I'll first start by saying technology is a lot more accessible than it's ever been. But I don't know that that means that it's simpler. Our demands of technology, the demands that every business makes of technology are increasingly on the upward to the right trajectory. It's got to be secure, it's gotta be seamless, it's gotta be easy to access. And so a lot of our clients, we do a lot more in the Microsoft ecosystem, although we do support a number of organizations that are, that are Google Workspace shops. But we will manage and administer their cloud environment, make sure that we understand their business processes and that we're able to bring the right technology for their need, get it configured in a way that works for them, put proper security protocols in place or assist them with navigating insurance renewals. Any specific security or regulatory compliance requirements that they have will be desktop support for their users. So if I know it's 2024, there's still a lot of people who need to print things out and printers break and don't function all the time. There's an ever, never ending change of new features released from Microsoft and Google into their cloud products. Case in point, we've spent a lot of time with clients this year, late last year, but has accelerated this year on leveraging AI in their business. Whether their data storage is in Box, Dropbox, SharePoint, Google, Google Drive, you name it, all of these solutions now have AI capabilities. Those AI capabilities need to be managed properly to protect data, data governance, data controls. And so we help businesses navigate, find the right solution, configure it correctly, and then support their end users when they need help.

[25:53] Host: One of the appeals of MSPs is the kind of forever demand as technology marches along, as you put it, it's, it's more and more accessible. But it's also our demands of the tech or our needs of the technology are growing maybe even faster than its own capability. So, so the, the demand is kind of, you can imagine it being just permanent. The other appeal of this is because of the complexity of technology and because every organization is unique, I imagine you're very entwined in the organization once you become its technology service provider because it's so layered in knowing all of the kind of all of the variables about the particular implementation of technology within a particular organization is not something that they're gonna, they're that one of your clients is going to be particularly comfortable just swapping you out and swapping in a one of your competitors so you become quite embedded into, into your client organizations. Is that, is that accurate? Yeah, absolutely.

[27:11] Guest: So one of the reasons why I found this industry attractive for my search, aside from loving technology and loving to help people, is highly recurring revenues, highly durable cash flows. So we're about 80% of our revenues are contractually monthly recurring and our average customer relationship is more than a decade. Wow.

Host: And is that profile common in MSP land or is the quality of your revenue at the business you bought particularly high?

Guest: As you mentioned earlier, MSP means 12 different things to 10 different people. If you're talking about your traditional IT managed service provider that has a decently high degree of operational maturity, then yes, that quality is pretty consistent and so makes it super attractive. It can also make organic growth hard though, because as you mentioned, you become entrenched, you become ingrained and it can be hard to switch from one provider to another.

Host: Just one more on the tech. Is the landscape of technology offerings that small business, small and medium businesses choose from today? Does it basically bifurcate into Google Workspace in whatever Microsoft's offering is called? Or are there yet other ones? Or is it basically those are the two. You know, Google and Microsoft are kind of duking it out for small and medium business. Email, calendar, et cetera, et cetera, et cetera. Yeah, two, two primary ecosystem, two dominant ecosystems.

Guest: Yeah, I think that'd be a good way to characterize it. They're the two dominant players. Even within those two players, how much you fully embed in their cloud ecosystem versus multi home? You know, we have some businesses that have, they might do email in, in Google because that's what their team really likes. It works well with their marketing program, but they need some of the enterprise applications. Within Microsoft, there are still a significant portion of businesses, even small businesses, that require a physical on premise footprint. Now whether that's servers sitting in a closet in their office or in some third party data center, there's still a good portion of the business community that still has some sort of on premise infrastructure. So you've got to integrate that with the cloud environment. But yeah, at a high level those are the two big players duking it out. For the small business community.

Host: Great, Elliot, thank you for that. Now back to the deal. Okay, so how many people, what is the business called?

Guest: Yes.

Host: Yeah.

Guest: So the business we acquired, Palmer Technology Solutions, we have, as we've grown, we've rebranded. So we are now Velonics Technologies and Palmer Technology Solutions. Eight people.

[30:12] Host: Eight.

Guest: A team of eight. We were doing just under 2 million of revenue and about 700k of true EBITDA.

Host: Okay, so that's 700k number. Let's return to that now. Smaller than you were looking for, which was the kind of standard 1 million EBITDA if you could get it, but you went for it anyway.

Guest: Why? Going into hbs, my wife being very well plugged into the search community, knowing I was going to do a search on the back end and HBS did a lot of programming around partners and what the experience of being a partner of a searcher is like, went in very eyes wide open to what a search process looked like. So she asked me over a glass of wine while I was working on this acquisition, what do you like about the business? And I rattled off all the criteria and she said, what don't you like? And I said, size, it's too small. She said, okay, you know the statistics. You could spend the next 18 months searching and having not acquired a million dollar EBITDA business, or you could grow this business well north of a million EBITDA over that time period. If you think it's a good deal, I think you should do it.

Host: Man should be interviewing your wife here. Elliot, what are you, what are you good for? Well, you know, and the other thing about that advice is not only that you get into the game sooner rather than spending another 12 or 18 months looking for a million dollar business, you could just grow yourself to that point. But also you, your entry point is lower. Your, the, the business, the, the what you're paying for a business of a smaller size is lower. So in 18 months you either you can find yourself at a business with a million dollars of EBITDA that you bought when it was 6 or 700 and so you've captured all that value or you've searched the whole time, dwindled your own balance sheet, spent down your own balance sheet by not having any income and paid more for the business and kind of be at the same place, but you know you won't, you know you paid much more for the business. Therefore, you know you're, you know, when you go to sell the business or whatever, whatever you do, your basis is going to be higher. And therefore you're going to make less money. So, so there's kind of multiple reasons to do it the way she recommended. Now obvious counterpoint to that is you're taking on more risk. You're. There's the risk that you won't be able to grow it to a million or at least not in the time frame that you're hoping. Million USD.

Guest: Yep, yep. And, and you know, I know you recently had had Robert Graham on and he talks a lot about the value of buying bigger and, and you are making a trade off what your day to day looks like in an eight person, you know, 700k EBITDA business is very different. And yes, you spend a lot of time working in the business, making sure that you make payroll and vendor invoices get processed as opposed to just working on the business.

[33:07] Host: Great. Eliot. Well, I want to hear what life was like when you get into the business. But before we do that, is there anything more to say about the actual transaction of Palmer?

Guest: Yeah, I think this would be a good time to introduce Thales because I did partner with them right out of the gate with the first acquisition. So I know you've had at least one other operator, Luis Aguilara, the commercial laundry facility. He's another Talas partnered searcher. I got connected with the Talas team during my first semester at hbs. At that point in time, they weren't investing in the ecosystem, maybe the same way with the same structure that they are today through talas. But I went and actually spent my summer internship in business school working for the family office, supporting some of their industrial services and energy services businesses. And I loved the team. I knew I wanted to do a search and moving to New York was just not a good fit for my wife. And I so stayed in contact with them. And while I was under loi, I reached out to the principal to get a gut check on. You know, I was so early in my search, I was 90 days in and I'm under LOI in a business. Is this a good deal like, or am I just seeing the first opportunity to get in the game? Coincidentally, as a lender, they had been in msps, I think more than more than a dozen times. So they were very well versed in the space and they pitched me on, hey, if you want a check in a cheerleader, give us an allocation. We, we'd be happy to be involved. If you want a little more support, if you want some more mentorship from a group who has sat in your chair and done what you're trying to do many times over. We'd love to be involved but we'd want all of the outside equity raise and thought long and hard about it. Had to go have some, some tough conversations with some wonderfully supportive folks that had committed to funding the acquisition as part of my equity raise to tell them hey, unfortunately I'm going to cut you out of the opportunity because I'm going to go this, this direction with Talas.

Host: Great. Well there's, there's a bunch here I'd like to follow up on. Before we do that, Talis is what how would you define the group?

Guest: Yeah. So they're part of a family office of an individual that has been a serial entrepreneur, a gentleman by the name of John Fitzgibbons and Talis is, is a part of his family office and a group of fantastic investors and operators who have probably the best track record that exists. Most people would not believe their track record if they saw it because they, they are that good at what they do. That likes to be very hands on, very operator supportive and focused in mostly serial acquisition. But it doesn't have to be a roll up strategy but direct buy and build investing.

[36:28] Host: And so that might mean that like in your case searchers, ETA lower middle market but it might it also mean are they a traditional search fund investor, are they independent, do they get involved in independent sponsor deals?

Guest: So because they're a family office they don't have a necessarily narrow mandate. Right. They're not going and raising money from LPs with a PPM of saying this is what we do and this is all we do. They don't typically do a lot of traditional search fund investing and they do a fair bit of direct buy and build themselves. So they will source businesses, buy them, inject their own operator from across, across the variety of businesses in their ecosystem and then they'll also work with supporting searchers and operators at the time of acquisition like they have with me.

Host: Great. Elliot. And then they so they made you this offer. They said a check in a cheerleader and so you know, more of a passive, I don't love that word but a less involved role, more just capital or a quite involved role where they would be support, they would share their playbooks, they would be at the other end of a phone call, etc. But we want to be your sole equity check, your sole investor. What was which is the. You chose option B. What was the, your calculus there? Why did you like that offer? Because and, and give us some context here about how one might broadly Think about having a single vest investor versus multiple.

Guest: Yeah, absolutely. So I think in a lot of scenarios, having one single investor can, can be a challenge. You've got to have a very high degree of trust that the two of you are going to be aligned and that when you're not, when misalignments come up, that you can, can easily work through them. I built up that trust, you know, working for them over the summer and, and maintaining a relationship during my second year of business school with them. So I had a very high degree of trust. A lot of the calculus for me was I plan to spend the rest of my life buying and building enterprises through an ETA type structure. And so for me, the most valuable commodity I have is my time. And do I think that they can help me get there faster in terms of growing and developing my capabilities as an operator? Because as much as I love hbs and you can learn a lot of things, there's very little you learn about actually running a business in business school. And so did I think that they could help get me there faster? And the thing that I think they bring more than anything is do I think they could take my chance of failure on my first one down to as close to zero as one can get. And that, that's really a big benefit that they bring. They're patient, they've got a lot of operational expertise, they're willing to bring in resources when and where you need them. I thought, okay, if the biggest commodity I'm trading is my time, I need to put a win on the board on the first one. And if I can get there faster in terms of becoming a good operator, then it's absolutely worth the partnership.

[39:51] Host: Great, great analysis. And you know, one, one phrase I might throw out to the audience in terms of thinking about a single investor versus multiple is leaning on the customer concentration that we talk so much about having. If a business you're considering buying has but a single customer, or excuse me, a customer that represents too much of the revenue may be a single customer, but maybe one who just has an outsized portion of the revenue, you can apply that concentration concept in all directions coming out of the business. Supplier concentration, vendor concentration, and investor concentration. And the point is, when things are too concentrated, the risk of that relationship goes up or the kind of, the kind of, the vulnerability in that link in the chain kind of goes up. And so you just need to be aware of that. And it sounds like you traded some additional risk there for, you were compensated for, for that risk with all of the, the value that they were going to bring and the things that you just described, so very interesting. Anything to add to that? Do I have that right?

Guest: Yeah, the only thing I'd maybe add, if you go out and syndicate and you run a competitive process, there is way more capital chasing searchers and operators than there are searchers and deals to be had. And so you can negotiate down more attractive terms for the searcher if you're going that route. So if you're only ever going to buy one business and you, you know, you want to run it that one single business for 30, 40, 50 years. And I hate the term lifestyle business because that implies that, that you're not willing to grow it, you're not willing to run it professionally. But, but if you're, if, if that sort of structure is more where you want to go, you should desperately hang on to every sliver of, of equity percentage and, and preferred return that you can. So you know, kind of depends on what, what are you trying to get out of your career by going down this path? And you know, what, what's, what's the right trade off?

[42:04] Host: And the point there is because if you're thinking about buying only a single business for, for the duration of your career, that every point of equity that you negotiate with your investors will follow you. I mean that will be the structure from here on out. Whereas in Elliot, your case, you were, you know, this is a chapter of your career, there will be many others. So a point here or there isn't going to dictate the cap table of your life.

Guest: Yeah, exactly. I think that, I think that's a great way to put it.

Host: And Elliot, the other thing I want to make sure we highlight is in your conversation, I believe with Talis or maybe the principal at Talas, that gut check conversation. Am I, you know, is this, I've only been out my search for a couple months. I find this business looks good, little small, but otherwise looks great. There was another piece of advice in there.

Guest: Yeah, absolutely.

Host: Do a roll up. Do you know where I'm going? Okay.

Guest: Yeah, yeah. So like I said, they had been in multiple MSP platforms as a lender on the credit side and they knew the industry well, they knew the wonderful aspects of it, they knew some of the challenges of it and the feedback was this is a great business, it's entirely too small. You need to get to more scale and you need to get to more scale fast and the best way to do that is going to be through a roll up.

Host: So you were thinking about this as maybe the only business you buy or you were open to doing inorganic further acquisitions at some point. But it wasn't this like gunning hard to acquire, acquire, acquire. Correct. And then they shifted your thinking, is that right?

Guest: Yes. Yep.

Host: Okay. And why, what, what, what was the, what was their kind of the reason behind this forceful piece of advice they were giving you?

Guest: So there's a lot of benefits to scale for your customers. As I mentioned earlier, technology is more accessible, but it's increasingly more complex. So then the depth and breadth of technical expertise you need to have on the team to be well positioned to be able to grow with your clients is becoming quite large as well as trying to get some purchasing power with your vendors. And so they knew that scale to be able to deliver the value you want to be able to deliver to clients is important. And organic growth can be hard because all the things that make us sticky with our clients also make our competitors sticky with our clients or internal IT departments that we might be either partnering with or displacing sticky with the clients as well. And so we needed to get to scale. We all recognized that. And then the question became how? And if we think organic growth is going to be slow. The other option is inorganic growth. And if you've got really highly durable cash flows and it's a very, very fragmented industry, it's estimated that there's somewhere in the ballpark of 40 to 50,000 MSPs in North America alone, that inorganic growth could be a very, very attractive way to get there.

[45:34] Host: And just to be clear on the idea, in case somebody in the audience is looking at an MSP and isn't convinced or hasn't considered doing an aggressive roll up, but they just want to buy the one business. The, the vulnerability of not being very at scale is that it will be hard to keep up with tech to basically have your bench, your, your employees, the knowledge base of your team to be both broad and deep enough to keep up. Sort of. Because technology is so fast moving.

Guest: Yeah, absolutely.

Host: That's it. That's it.

Guest: Basically, that's it. It's a lot of the reasons why we pitch the value proposition of an MSP to businesses. There's no way they, that most organizations, I would include up to 2, 300 employees, can economically staff all of the needs of technology that they have. You need a networking expert, you need, need a security expert, you need somebody who knows cloud, compute, cloud and cyber security, AI. You know, the list can go on and on and on. You need all of that expertise to be able to keep up and serve your customers well. And it's hard to get all that expertise with a small team. And then if you have a small team, any one player leaving could create disruption to the business. Right. So you need some redundancy.

Host: There goes your cyber security guy or whatever.

Guest: Yeah, absolutely, absolutely. So you need a deep and broad bench of talent.

Host: Okay, so you raise from. You raise just from Talas. And can you give us the terms of the acquisition?

Guest: Yeah. So it was 2.7 million, 2.65 million in enterprise value. We put about 450,000 of equity into the deal and the remainder was made up with banknote and seller note.

Host: SBA.

Guest: Yes, did go SBA.

Host: And of the 450 equity that was all Taliesin and some from you?

Guest: Yeah, yeah, it was about 85. Dallas 15. 85% Dallas, 15% me.

Host: All right, now I would like, if there's nothing else on the transaction, I would like to hear about what month one looks like Covid hits. You're in San Antonio and going back to the working in versus on the business. You bought a smallish business, meaning you're more likely to have to work in it. Start wherever you want.

[48:13] Guest: Absolutely. So I had this beautifully laid out and admittedly probably pretty naive 100 day transition plan. First time running a P and L, first time managing people, first time working in the IT industry. Although I did have a lot of technology experience from my time as an engineer and spent a lot of time learning how to go through post M and a transition. So there's a lot of blocking and tackling that has to happen day one after close, particularly if you're in the business. I like to say all of my friends in private equity clink glasses at closing dinner and move on to the next deal. And for those of us that go down this ETA world, that's when the work actually starts. So trying to learn the industry. We were living in Dallas at the time. I'd gotten an apartment in San Antonio. I'd leave at 2:30 in the morning on Monday so I could be at the office before 7 and I'd get home around 11pm or midnight Friday night and just trying to soak up and learn everything I could about our customers, about our vendors, about the industry. So we acquired the week of Christmas was when we took possession of the business in December and very surely shortly thereafter, Covid happened. So as you mentioned, Lackland Air Force Base was where a lot of people were being brought back to quarantine from China. It was essentially ground zero for Covid. So we started hearing rumblings in late January about this potentially black swan disease event, that we all knew how it played out. I went to my team in early February and had us run a simulation on if you can't come to the office tomorrow, can we still function as an organization? And I think the team thought I was crazy. First I'm this, I'm this new guy in the company, new guy in the industry, and now I'm having them run this, this crazy deal. And the former owner had been adamant, no remote work. Everybody has to be in the office, butts and seats, five days a week, no exceptions. And about two weeks later, San Antonio Bexar county shut down.

Host: And by the way, Elliot, did you feel confident in, in making the team do this? Make making this weird request or order as the case may be? Being a new guy, never managed people before out of left field. Seems paranoid.

[51:17] Guest: I don't think I had the same degree of confidence that I have in, in my gut decisions today. But it was pretty clear to me there was almost no risk to us doing this. There was potentially existential risk to us not being able to operate if something prevented us from being able to come into the office. So it seemed like a no brainer to me of something we needed to do.

Host: And the fact that you did it two weeks before San Antonio shuts down, you do the test. Did you find that in fact you could operate remotely and it was fine, or did you find holes in being able to operate remotely that you scrambled to plug over the next eight business days and were able to plug? And so then when you went remote, it was okay.

Guest: We found that we could operate, I think more seamlessly than anybody expected, remotely. That being said, we found a few gotchas along the way. We had to change a few things in our phone tree, phone system routing. We had to figure out how my controller and I, the business that I acquired while being an IT business ran entirely on paper, every invoice, every check. So we had to figure out, okay, how are we going to get checks to vendors, how are we going to get payroll process for employees? And so we worked through a few gotchas. But I think we were all pleasantly surprised how well we could function, having never done it before.

Host: Well, it was probably recognizing that Covid was an awful event. The fact that you do this, mandate that this, you mandate this test and then two weeks later everything shuts down, that probably instilled in the team confidence in you that, oh wow, this, this new leader of ours is saw around the corner He's a visionary. Was it kind of a management, an early management win for you?

Guest: I mean, I'd hope so. I, I, I don't, I don't know if it was, but you're not going to take credit?

Host: You're not going to take credit.

Guest: I'm not going to take credit.

Host: Tell us a little bit more about just for somebody who's never managed before, this is a common pattern for searchers, although not one I usually double click on. But anything else to say about your, your experience managing people for the first time?

Guest: Yeah, what I would say is that what I found pretty quickly and probably still not as quickly as I should have, is that if you treat people fairly, you try to bring some sort of human component and that doesn't mean, you know, forgetting the data, not setting goals, but you try to be a reasonable person, treat people fairly and trust your gut, you'll get it right more often than you won't, and that there are very few mistakes that are going to be either not fixable or detrimental to the business. I know Jeff Bezos is talked a lot about one way doors versus two way doors. Most decisions you make as a, as a manager and an operator are two way doors.

[54:42] Host: Well, let me, but let me push on that Elliot, because, because what I'm hearing you say is, you know, just treat people well and you know, be wary of making decisions that can't be undone. That's the one way door versus two way door thing. What was the other thing? Kind of maybe feel some confidence in your gut. And yet there is such thing as good managers and bad managers so it can't be all that straightforward. So maybe say more for the skeptic.

Guest: Yeah, so what I didn't know then that I use now, and I'm actually stealing a phrase from my director of operations who joined us via our second acquisition, is good management means you're leading people and you're managing processes. And if you're not doing either of those or you're only doing one of those, you can't be a good manager. And leading people means working with them, at least to me, working with them to set them up to be the most successful they can be in their current role. And it's not just, you know, rah rah high fives and happy hours or talking about where somebody wants to be in three years, five years. It's sitting down with them understanding what is getting in the way of them being able to do their job well. It's taking ownership of. Have we adequately defined a Process. Have we adequately documented a process? Have we adequately trained you on how to do this successfully? And if you haven't done any of those things, you need to look inward for accountability before you start. Start looking at members on your team.

Host: Thank you. Okay, Elliot. Well, we. You've done a number of acquisitions since. Actually, why don't you. Why don't you give us the end of the story? How many acquisitions have you done, including the one that you just did this morning a couple hours ago, or whatever it was, how many have you done?

Guest: So today will be number seven.

Host: Number seven. Wow. Y. Number seven over. So that is. We're in 2024, 29, 2020. So four years. Yeah, four years and change. So two ish a year or a little less than two a year. The. We did.

[57:07] Guest: We did five acquisitions in the first 26 months, then went two years with. With no acquisitions, working on operations, working on building out the team. And. And then now we've done two acquisitions so far this year.

Host: Okay, great. Well, that is a perfect segue. Let's hear about that pace and then slow down. And if it. If there's something there to unpack. But maybe be. So obviously we're not going to go through all the next six of these. Is there any particular acquisition that you want to give a little bit of a story to from numbers 2 through 6? 2 through 7?

Guest: Yeah, I think the first bolt on acquisition was really meaningful. So because of COVID you know, expected to probably do a second acquisition in the first six months, maybe that was hopeful. Because of COVID a lot of the time was spent adapting to the ever changing. Changing whips off uncertainty, whether it was from regulations or, you know, new new laws and rulings, and so did not do an acquisition in 2020, but closed on the first bolt on in 2021 in February. And this was in Southern California, in LA. And a lot of people thought I was crazy. This was at a time when the prevailing news story was people leaving California, businesses leaving California to come to Texas. And here I was in Texas going to California, and because of COVID did not have the ability to go on site to do diligence in the traditional sense that a lot of people think of and do during a small business acquisition. So ended up closing on the business essentially entirely remotely. And my answer is.

Host: Do tell. Yeah. Yeah. So to all the detractors, how did you rationalize those three things that all seem like weaknesses to this deal?

Guest: Yeah. How. I think a lot about businesses today, particularly when you're looking at a Roll up strategy is what again, coming back to what I'll call the sanitation metrics. You know, customer concentration make up of the revenues between product and consulting and recurring services. You know, once you kind of check, okay, those are fit those, check the box. Whether it's a good fit or not all comes down to culture. And can these two teams mesh together? And in all of my conversations with the owner and operator, with a few members on his team, you know, we spoke the same language, we had a lot of similar goals. These two organizations fit very well together.

[1:00:05] Host: Just culturally, there was kind of a just go. Similar philosophy, a similar vibe.

Guest: Similar philosophy, similar vibe. And I, you know, in the industry that we're in, a lot of our work can be delivered remotely. You know, I don't know that I would feel as comfortable in every industry, the first bolt on being that kind of step out, but in IT services, and we had just gone through a year of learning how to function remotely, so I get very comfortable with those things. Yes, California is becoming a more and more challenging place to operate as a business owner every single year. But there is no decrease in demand for people wanting to live in Southern California. It's a wonderful place. It is a beautiful place. And I believe that that trend's going to continue to carry forward. So long as there's an ocean and there are mountains and there's a beautiful sunny beach there.

Host: Yeah, that's kind of how I feel about California. Yeah. And so was was this business, by the way, what was the name of this business, your bolt on Simplicit Technologies? Simplicit was Simplicit remote, I guess. Of course, every business in February 2021, every business was remote. So they'd gone remote. Had they been historically remote?

Guest: They'd been historically a little bit hybrid in. They had a physical office. As anybody who has driven in LA knows, you don't measure things in miles between point A and point B. You measure it in hours of traffic. And so because of that, a lot of their team necessarily didn't see each other day in, day out. Yet you had your team that was down in the city, you know, Santa Monica, West Hollywood, downtown la. You had your team that's up in the Valley, and they might see each other once a year, even if they're all physically going into the office together. In addition, we had a couple members of the team, including the CTO who is our CTO today, who worked full time from Israel. So he'd lived in the us, had worked in the US for the business for a number of years, but had been working remotely from Israel since I think 2014. So they were a little more accustomed to culturally that dispersed nature of operations

Host: and some bullet points on the simplicit acquisition, roughly what did it look, what did it look like in terms of revenue? I mean in headcount?

Guest: Yeah. So we picked up about 13, 14 team members on headcount and it was very similar to the Palmer acquisition, slightly larger. So I think it was a little over 3 million of revenue still sub, sub 1 million of EBITDA. And, and we paid just under five times for it.

[1:03:04] Host: And so at this point you're now the entire organization is in the north of 5 million in revenue.

Guest: Yep.

Host: And how did integration go? So if you're in to, to put a fine point on this, the roll up strategy, of course mean integration is often the biggest sticking point of a roll up strategy. How do you take all of these disparate businesses and make them cohesive? And it can, it's a huge challenge often. So this was your first attempt at that and you, you know, this is something you're going to have to get right if you're going to really want to scale your roll up. So how'd it go?

Guest: It went very slowly. So a lot of what searchers are taught when you buy a business, you know, spend six months, don't change anything. And that, that was a lot of the approach to the acquisition and the integration. It was very slow. We're going to bring systems together, but we don't want to disrupt the team's ability to deliver services to the client. I don't want to upset the apple cart with the new team by instilling a bunch of process change. So if I could sum it up in one word, it went slow. And you know, as I think we may unpack here, we've taken come 180 and have a very different approach to integration today.

Host: Okay. And yes, we definitely are going to get to that. But you do eventually integrate if slowly, if conservatively, you learn a thing or two. Okay, let's. Now here you did four more acquisitions over. You said, I think you said 26 months. You did five and 26 months and then you slowed down for a while. So can I guess here that it's because you, you bit off a lot and you needed time to digest. Is that why there was the kind of slowing down, that you slowed the pace down? What can you tell us about your trajectory here?

Guest: Yeah, I bit off a lot, needed to digest. I was wearing too many HATS had not really built out the management team. And while I was continuing to look for additional acquisitions, it was hard to do in any kind of meaningful way because the operations of the business required so much of my time. It wasn't just the operations, it was the finance and accounting. And through that process of the acquisitions, you know, had outgrown the sba, so needed to go refinance, so had to run a process to find a. Find a new lender. That new lender brought, you know, different requirements in terms of compliance, certifications, and just additional process. And I hadn't built out the team to be able to absorb all this additional, additional work. And we were. Because we were going slow in our integration, we'd stacked up a lot of integration work that needed to be done. So merging systems, trying to get teams operating as one unit. And so there just wasn't enough bandwidth and capacity. I brought last year a CFO on board, one of my good friends who had left his job to start doing a bit of a search. I convinced him to come join me as our cfo, and that was a huge unlock. And so it's no coincidence to me that he's joined us and now within call it seven, eight months, we've found two great acquisitions and closed on them.

[1:06:58] Host: And when you had done acquisition number five and then stopped for a while, was it like, was there something about that acquisition or that time period where you were like, I can't. This is going to break if I keep doing this sort of thing, or did it kind of you just by default, you just kind of slowed down or was. Or the wheels about to come off sort of thing? Like, what was that like?

Guest: Yeah, I don't know that I'd say the wheels were about to come off, but, you know, there's. There's 168 hours in the week you can't make any more, no matter how hard you tried, you might try. And so acquisitions three, four and five came really quick. Acquisition three was a really small bolt on out of Austin, Texas in December of 21. And then 4 and 5 were simultaneously closed the same week in February of 22. And so there was just a lot to digest and work on there, given those three acquisitions were within 60 days of one another.

Host: And Elliot, I'm not sure we. We returned directly to buying big versus buying small. Your Palmer was small, then simplicit was larger. But anyway, how did the fact that you bought small play out? I mean, you've also just finished telling us that these acquisitions five businesses you didn't have the management layer there too to, to keep doing them. So maybe that's the answer. But just how do you reflect back on the size of business that you bought in Palmer?

Guest: Yeah, I think the, the story we've heard time and time again on, on this podcast and in this industry is when you buy small, you're going to have to spend a lot more time working in the business. And that just, you know, is capacity. It's important, it's critically important. I think sometimes we, while the goal is to work on the business and create as much leverage out of your efforts as you can, we shouldn't lose sight of the fact that like being a good operator is, is, is critically important and there's a lot of just day to day blocking and tackling needed to do so. And you know, because of that I was trying to do both work heavily full time in the business and then work full time on the business doing M and A and lining up integrations. And I think had I invested earlier in building out some, some capacity in the leadership team, I know a lot of people may say five acquisitions in 26 months. That's really fast. I think I could have gone a lot faster. And, and yeah in that first 26 months and then potentially avoided, not avoided, but potentially shortened the ingesting time between the grouping of acquisitions there in, you know, early 22 to now.

[1:10:00] Host: So now let's return to that directly, the ingesting and the change management and how you were conservative initially and you've gone 180 degrees. Rip the. Now you're 180 degrees, rip the band aid off. Guy, talk to us about that evolution and what you would advocate.

Guest: Absolutely. So now our fundamental approach is, is we want to be fully integrated in 60 to 90 days. We'd like to be even faster but we've got a few limitations with some of our vendor processes on, on getting systems merged that, that we have to navigate around. And we really want to go beyond just merging systems. We want to merge processes, we want to learn from each acquisition and potentially pull through and change processes across the company. And we want to get where we are talking in one language, operating as one Volonix team so that we can bring what is our North Star enterprise capabilities and services. But with that local touch and feel and support one another internally as a team. I have come to the belief that with change management, going slow doesn't make the change any easier for people to digest. People don't like change and going fast doesn't necessarily mean being careless. I think that, and I am going to 100% be rephrasing. One of our professors from HBS, Francis Fry, who has a book that's called Move Fast and Fix Things, which is trying to reorient the business world away from the famous Zuckerberg quote, move fast and break things. That there's this then presumption that if you're moving fast, you're being careless. There's a way to move fast and get through the change and get through the change with the team fast with a big degree of care. You've got to build trust and you've got to know what needs to be changed. On acquisitions one and two, I could not have moved fast because I didn't know what needs to be changed, what needed to be changed. I hadn't fully refined the playbook in what post integration should look like.

[1:12:22] Host: The.

Guest: And it's not just me, it's also my leadership, my leadership team as well. Our cto, our Director of Business Operations, our cfo, we all know the things that need to be changed. And so we can move fast and get that change behind us. Because prolonging it doesn't make it any easier for people.

Host: If somebody's hearing this and, and saying, yeah, but, but you just come in, you're a new owner, and all the employees are going to revolt. If you, you know, just dump all of this on their, on their virtual desks, all this new process and so on, you'd say to them, no, they won't. Or what would you say to them? How would you, how would you assuage somebody's just concern that it's just not going to be received?

Guest: Well, yes, if I come into a new team and I say, Volonix is now the owner, this is now the way you need to do things, and you need to do it this way, by Friday, they will revolt. And they should revolt. Right? So you've got to first pitch them on the vision. Why is change necessary? What's going to be the benefit for them, for the clients? You've got to set expectations and say, this is what we're going to do, and then follow through on it and build that trust. And once you've done those things, then you can move a lot more quickly, but you can't move fast without doing those things, because, yes, you will break the business. You will create a revolt. And so you also need to make sure that you are learning along the way. On every acquisition, if we don't identify something that that team is doing well, that we need to pull across the rest of the business. I have not done my job right, so it's not here's the Valonics way and you now need to do it this way. It is. We need to standardize for these reasons. Your team has been great and built up these phenomenal client relationships and we need to preserve that legacy. We can't disrupt that, but we need to standardize. Let's understand everything you guys are doing from a process standpoint and best answers when and best answers aren't always biggest answers. And what I have found oftentimes through that process, A, people feel seen and heard, B, you learn something that you can pull across and make the entire business better. And C, you almost always generate some quick wins that build up some rapport with the team. Oh, we really needed an expert in, you know, intune. But to be able to leverage an intune expert across the broader business, we had to be speaking the same language. They had to have access to our documentation systems, et cetera. And because we're merging systems and because we're changing a few processes, we're able to benefit and our clients are able to benefit as a result.

[1:15:40] Host: So let me try to distill that start the kind of keys to a successful to successful change management that is done quite rapidly after an acquisition. Start with the why. Start with why. Thank you, Simon Sinek, or whatever his name is. Why are you doing this and how will it be beneficial to your new employees, the larger organization, the clients of the organization? So give them the why and then build trust by making commitments and delivering on them.

Guest: Absolutely.

Host: And, and then kind of always be learning. So look to the acquired target for best practices that they might already do in their organization that you're not currently doing in the mothership or across your existing businesses and look to roll those out or implement them or bring some value from the newly acquired business out into the other businesses which will, as you said. Well, first of all, it's just if it's, if it's good process, it's good process, so you should do it anyway. But it also has the added benefit of your newly acquired employees. Feeling heard, feeling seen.

Guest: Yep, yep. I like to say I tell every team before, close, after close and you just keep repeating the same message and following through with it with your actions till they believe you. We have no sacred cows. It's going to be best answers. When we did our second acquisition, our professional services automation system, we merged into their tenant because their tenant was more mature, more built out. We did our Fourth acquisition, they had specific documentation processes that were superior to what we were doing. So we merged our documentation system into theirs. Even though they were a six person team and we were four or five times, five or six times that on our side they had a better way of doing it. And so that's what we were going to adopt across the board.

Host: Well, so then it sounds like Elliot, that when you make a, an acquisition that the change doesn't go one way, you're going to change the organization that you've just acquired, but that there could be changes that are then imported into the existing businesses. So if you're already one of the acquired businesses, you don't just experience change when Active Elliott acquires you there could. You're gonna maybe experience change every time Elliott acquires another business.

[1:18:16] Guest: Yeah, it's, it's, it's a dynamic, it's a dynamic environment. We are big fans of Lean. We're big fans of Kaizen continuous improvement. In fact, one of our annual goals that we Track on our KPIs for management is how many Kaizen events, how many continuous improvement changes are we making and running across our business? It may sound like a continuous change environment and in some ways it is. And I believe in it. As rapidly changing as our field is, that's what you got to do to survive and thrive and serve your customers.

Host: Well. Great. And before we leave this topic, I'm just watching the time and I boy, do I not want to keep you past your hard stop. There are new employees waiting. The change management approach and how you've, what you've learned and what your approach is today and how it's evolved is I just want people who haven't yet bought their first business. I'm just, I'm just careful that they not necessarily copy paste what they're hearing you say because this is change management in the context of a roll up. So how do you think your approach today or does it at all apply to somebody who hasn't yet bought their first business?

Guest: If you have the experience in the industry to know what change is needed, then I think you should move fast. I don't think that there is a ton of benefit and delay. I think there are almost no first time acquirers of a business that are going to have that experience. And a great case in point, I spoke to a searcher, I do a little bit of investing in other searches now. So I talked to a lot of searchers in the community. Spoke to a searcher this probably about a year ago. It was a blue collar business run entirely on paper. He was like, okay, first thing I need to do, I need to change how we process payroll. We're going to move this all to direct deployment deposit. And he realized after three, four, five months that coming into the office on Friday to pick up the paycheck was the only time the team was together, was the only time his managers hadn't had had an opportunity to interact with the frontline team. And so I actually ended up rolling it back and going back to paper checks. So things that you may say, oh, well, this is obvious. I know if you haven't worked in the industry, if you don't understand how the business functions at a really deep level, I would question whether you really know

[1:21:07] Host: which, as you said, is going to be most people, that they are going to be outsiders to the industry into which they acquire. And so therefore, for most people listening, they're probably best served being more conservative in their changes.

Guest: Absolutely.

Host: For their first acquisition.

Guest: Absolutely. But once you've identified the change and you know, go ahead and move fast because all you're doing is wasting time and delay.

Host: So. So the distinction there is change management. You, you want to be careful of making changes when you just don't understand why things are the way they are. The ripple effects, the method to the madness, you know, that perfectly applied that cliche here because it's like things might not seem to make sense to you, new owner. It's like, why do they do it this way? And then, you know, you're there for another few months and you realize, oh, sure, glad I didn't change that. Or stupid me for changing that, because it was done this way for there was a reason for that. So that stuff you want to not, you just aren't smart enough yet to know to be changing tweaking 100%. The but, but, but the other reason to go slow that you'll hear is to give your employees time to adapt and to get used to things. And that's what you're pressing on. That is not a very good reason.

Guest: I think the reason for giving the employees time is to build trust. And I don't think building trust and time are synonymous, nor should they be. I think that there's this assumption that, oh, if they just see me coming in first in, last out, sitting in the chair, working with them, over time, I'll build trust. And yes, it does organically happen. But I also think you can be deliberate about what you do to try to build trust. And that's the reason for going slow is it's it's not time, it's trust.

Host: Good, great distinction. Yeah, because I think we probably think that those are, they are correlated time and trust. But you shouldn't think that there's a, that you just need to wait to build trust. You can more proactively be building trust to accelerate how quickly people trust you. All right, Elliot, I want to start wrapping us up. And on the topic of structure and really the numbers, the money involved here, we hear about roll ups. The numbers can sound really big and impressive, but it can be very opaque. What does a roll up actually really mean for the searcher, for the principal, for the sponsor, for the entrepreneur? So two things I want to basically hit here. Try to try to unpack that via two inroads. First is you mentioned earlier that you refinanced out of your SBA loan after one of the acquisitions positions. So, so let's get into the weeds there. What did that look like, please?

[1:24:09] Guest: Yeah, so I think a lot of people are familiar with the, with the borrowing limits within the sba, which I'll put an interesting caveat and plug out there. A lot of people think about it as you can, you can borrow 5 million of, of SBA debt and that.

Host: Right.

Guest: That's actually not the limiting factor. It is that the SBA will guarantee 75% of 5 million. So it's really that SBA guarantee number. And there are some banks, not a lot, but there are some banks out there that you can actually get to take down the amount of SBA guarantee they take from the bank and potentially upsize your SBA borrowing limit. So it's a, it's a, it's a unique, interesting thing that I don't think enough searchers are aware of or maybe even asking their lenders for that. They should be. But we had maxed out on the SBA borrowing capacity. We had some additional acquisitions we wanted to do. Acquisition number three, we just did with on, on balance sheet cash and we had acquisitions four and five and we needed some additional senior debt. And the bank we were working with said, no, we're, we're tapped out. So we ran a process to go find a lender who, who would lend into this space. We reached out to, it's about 40 lenders, some traditional bank kind of conventional bank debt, but a lot of what they call SBIC credit funds and folks in the middle market and lower middle market private equity space would be a lot more familiar with these types of non bank lenders. It's where a lot of the financing packages for lower Middle market private equity come from are these non bank credit funds. You know, they'll look, I think a lot of people will, will throw out the term mezzanine debt. They may not necessarily be MES debt lenders, they may be senior cash flow based lenders, but they're willing to, to lend and oftentimes are looking to lend into serial acquisition platforms where they can have an opportunity to continue to put capital to work over time.

Host: Excellent. So, and, and so was it an SBIC credit fund that you went with?

Guest: Yes.

Host: Okay, and so can you give us the structure of what that looks like? You refinanced out of the SBA loan, so you paid back the sba, your, your SBA lender, you paid them back and then took out a larger loan with this new lender. And so kind of give us some bullet points there of that new structure.

Guest: Yeah, so one thing that we wanted to do is as you can imagine, refinancing can be a pretty inefficient thing to do in terms of your time. It takes a lot of time. Run a process. We did a bunch of management meetings. People flew down, met with us in our office. You've got to pick the right partner. Ideally you want them to be there for, for the long term because you're also going to incur a fair, fair number of financing fees around refinancing. And so we were also looking for a partner that would put what is called the delayed draw term loan. So we weren't just looking to borrow what we needed for those two acquisitions and for refinancing or sba, but we wanted to make sure we had a structure for ideally the next three to five acquisitions. And so we found that with this lender. So in total we had 18 million worth of borrowing capacity. We drew about half of that down. Five year note interest only and a

[1:27:59] Host: bullet at the end so that you negotiate with them $18 million with, worth of debt with, with a five year

Guest: term, no amortization of principal, just interest. So we're paying interest the whole way along. It's, it's more expensive debt in terms of a higher interest rate than, than what an SBA would be. But I was able to, to wipe my personal guarantee off the table, which makes everyone, every, every operator typically happy to do.

Host: And

Guest: we, we knew we had Runway for the next three to five acquisitions with this structure. The other thing that I'll note, a lot of lenders, a lot of these credit funds in the market would also like an opportunity to have some exposure and participate on the equity side. So we, we did allow a very small minority co invest. So this is an equity check that would have otherwise come from Thales that we just carved off and let them co invest alongside that structure.

Host: So, and to be clear there, you know, when we think about banks, banks are pretty much just in the business of lending. They're much more focused on just protecting downside. They care often not at all about upside. They just want to know they're going to get their interest payments and get their money paid back. That's how banks kind of think. These SBIC credit funds are a little, a bit of a hybrid. So they're lenders and they make money from interest payments and loans, but they also can allow themselves to, to enjoy, to look for upside as well in the form of equity injection.

Guest: Yeah, I think similar to banks, they, banks care about principal protection. Right. They don't. They want their money back with a, with a, with a small return. But if, if you dig in, a lot of banks have specific charters and things they're trying to accomplish, whether it's lending into a specific region or community, etc. You'll find that same experience in these SBIC credit funds. Some only want to be on the debt side and they'll only land hyper conservatively on the debt because they're most focused on principal protection. Some are going to lean in a little more, want a little more equity exposure. And it all comes down to what have they pitched to their LPs. You know, some have pitched a lower return but a lot less risk taken. And some have pitched, we're going to be a little more aggressive and you're going to get compensated for that.

[1:30:35] Host: That was great, Elliot. And so just to, sorry to round it out so you refinance out of your SBA loan, that loan goes away. Elliot no longer has a personal guarantee hanging over his head. You have $18 million now to go out and do more acquisitions. You immediately tap about 9 of that for acquisitions 3 and 4. And so then you have another 9 to continue using to acquire.

Guest: Yep.

Host: Great. Okay, Elliot, you have a call. I want to do one last question. The, this was my second question related to understanding roll ups and what it can mean for the, the entrepreneur, the principal. You can you kind of net this out for us, this whole project, this whole adventure. You're going to acquire up to X number of businesses, get to Y revenue, Z, ebitda. You've got TALAS in there as an equity holder now you've got the, the, the SBIC has a Little sliver of equity as well. You presumably have a majority or a big slug of the equity. At the end of the day in your fantasies, how much money do you think that Elliot could walk away from this with when it's all said and done?

Guest: Yeah, so I think, I think a good framework is, I'll walk through a hypothetical scenario and these numbers are going to be very industry dependent. But if, if we buy 10 million of EBITDA and we pay five times for it, there's been 50 million of capital invested into the business. And if you get three turns of senior debt, one turn of seller debt and one turn of equity from outside investors, you have $30 million of senior debt, 10 million of seller debt and 10 million of outside equity. Now if that business is valued at 10 times and again the multiple changes are going to be very industry dependent, as are the capitalization. You now have $100 million enterprise value company, less your 30 million of bank debt, less your 10 million of seller debt. You are left with $60 million to flow to the equity investors. So you return your preferred equity. And different equity has different structures. Some require preferred return, some it's just liquidation really. All depends on what the right fit for that business and that strategy is. Then there's $50 million left to float to the common. Today I own, I think it's about 40, 45, 46% of the common. And so if there's 50 million left to flow to the common, you can see a world where, you know, there can be a generational wealth creation opportunity here. Talking north of $20 million.

[1:33:40] Host: That was fantastic, Elliot. Thank you very much. That was very generous for you to share that with us. That was an education. People can write that down as I have and study it or re listen to it. Very, very kind of pulling the veil back. I really appreciate that.

Guest: Yeah, I would like to dig into just a couple things there, if you'll indulge me.

Host: Oh, of course, yeah.

Guest: So one that assumes no organic growth, no pay down or amortization of your existing debt. So the numbers can get even more interesting than that. But even more importantly, it is fun to look at that in an Excel spreadsheet. And the reason why a lot of people pursue rollups is the Excel looks very interesting and exciting, but damn you Excel. But you know, I think you have to think if, if you're going about a roll up, why, like why is the value creation mechanism there and, and be pretty disciplined in your industry about why, why you're creating more value, why somebody would compensate you for the more value? Because I see a number of, of folks talking about doing rollups in industries where all they're doing is just jamming together revenues and earnings and they're not necessarily creating any more intrinsic value. And, and they think okay, this is, this is going to be great because the multiple arbitrage is, is fun and excel. And so I would caution everybody, you know, get to your first principles. How are you creating more value for your customers? How are you creating more value for a potential owner who would want to buy that thus now larger business and be willing to pay you a higher multiple than they would the smaller business?

Host: And why isn't the answer Elliot, isn't a good enough answer that that more EBITDA is worth more money?

Guest: There's again an underlying assumption there that bigger businesses and more EBITDA are more durable cash flows because they're more operationally mature. And in a lot of cases that could be true. But that is an assumption that that needs to be proven out in the way you go about doing a roll up and building a company. I don't think that same sort of multiple arbitrage would play out. If I was buying greenhouse and nurseries and they were spread all throughout the US and there was no value to the customer base of my scale. There was no value from a purchasing power or from a logistics and that the cash flows weren't any less risky that there were just more of them that an investor or, or somebody would be logically willing to pay a higher multiple for them?

[1:36:47] Host: Yeah, it's interesting. It's almost like a quality of revenue thing. For every dollar that the organization the business generates in sales, is that $A more valuable dollar? So in your greenhouse example, a consumer say there's somebody's rolled up 100 nurseries. Is it, is the consumer that's going to the nursery in Little Rock and buying a plant getting any more additional value for those dollars? No. Although you could argue that they have might have buying power from their, their plant supplier. So maybe they're getting better pricing and

Guest: maybe they're a little more resilient to like regional weather trends because you know, they're more dispersed. I, I know very little about the nursery and greenhouse business. So if anybody out there looking at doing a roll up and they're like no, he's wrong, this is a great industry, I may be completely wrong. My, my point being that you need to be making the cash flows less risky in, in my opinion.

Host: And so let's, let's apply it to your business, Elliot. And so how are. How is every dollar that is coming into your larger organization now from your customer higher quality than it was as going into one of the disparate units when they were still all independent businesses? And then that'll be our last question.

Guest: Yeah, I think that today Volonix is so much better positioned to service our customers. We should be able to service our customers longer with lower churn because we do have so much more depth and breadth in our team because we have so much more resiliency in the systems and processes. We've made a lot of investments into systems and processes to try to identify where any of these risks in the business are and take them out. And so that's why they should be worth more.

Host: Elliot, good luck at your speech here in 12 minutes. Thank you very much for keeping our call and not rescheduling on me and being so transparent. This was a really a strong interview. Thank you, sir. If people have questions, how should they reach out?

[1:39:00] Guest: Yeah, you can find me on LinkedIn. Absolutely. That'd be a great place to reach out. And I know a lot of the listeners here are business owners themselves or prospective future business owners. If you need help with your technology and systems. That's exactly what we do.

Host: Well earned. Plug, Elliot. All right, thank you very much, Elliot. And let us. Or let me know how this speech goes.

Guest: Will do.