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Will Smith: When many entrepreneurs in our world think of exiting, they think of private equity. PE is firmly established as the most. Active buyer of private businesses. Now there are also strategic buyers you might even sell to another searcher, but for all intents and purposes, PE is the default. But there's another category of buyer, another capital base that we should be considering, according to today's guest, James Bohannon.

And that is family offices. Now, you probably have a vague notion of what a family office is, but I brought on James to really explain this world to us and how buyers and owners of small businesses should think much more about family offices as partners when it comes time to exit or maybe just recapitalize a thriving business or even provide equity when you buy a business in the first place. This episode is a primer on family offices, and hopefully it opens your eyes, as it did mine, to the potential partnership between our world and theirs. Here is James Bohannon, Senior Vice President at Belzberg and Co.

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. 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 and 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 how 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.

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James Bohannon welcome to Acquiring Minds. Thank you. Good to be here. James, you are a Senior Vice President. At Belzberg & Co. A family office.

And today you are going to talk about exactly that. Family offices and their relevance to entrepreneurs. Buying or selling small businesses. Now, probably everyone listening will know what. A family office is, but I bet they won't really know much.

Even having been in this world for a few years myself. To me, family offices still seem opaque, insular, inaccessible. I just know that they control a lot of Capital that moves throughout the lower middle market. And so what we'll do today is. Have you pull back the curtain and.

Give us a primer on family offices. And how they work. What I'd like to do as a very first step, James, is start with the, the, the, the big point. The key takeaway. Why should listeners, why should entrepreneurs in small businesses in the lower middle market care about family offices?

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James Bohannon: It's a great question. I think know ultimately family office capital is, is really just the capital of individual investors and that ultimately is the lifeblood of private markets across so many different ways. So if you think about, you know, someone creates a business, sells it and then what do they do? They've obviously unlocked a lot of capital. They have experience in entrepreneurialism, they have experience in private markets and then they have to go invest that business usually in alternatives which ends up in private equity funds which then gets funneled back into private businesses.

And so in, in many different ways the actual capital that is brought into early state or you know, small SMBs throughout the US and throughout the world is ultimately individuals family office capital. So it's a huge participant in the alternative space obviously which we'll get into and then also search and independent sponsor world, either acquiring those businesses later or investing in independent sponsors. I think family offices in today's world, and we'll get into the trends a little more, are really interested and excited about investing more directly. So outside of blind pools and directly with operators and searchers and independent sponsors, family office capital is long term, right? So it doesn't, doesn't exist in a fund structure.

It doesn't need to be returned necessarily in three to seven years it can be held longer, it can be more flexible, doesn't have mandates. So it makes it sort of the ideal capital pool for privately family held businesses. And when you're talking about searchers and talking about independent sponsors, you're really talking about family held businesses. So it's my belief that family office capital can be the best capital for family held businesses. And so there's all these different ways that those two, those two entities are matched.

Sometimes it's through funds and it sort of filters this way and sometimes it's just more directly either investing directly into a business or with an independent sponsor. I think for searchers and for operators and entrepreneurs that own anything from a lawn care business to a pet care business, like having access or knowledge of this capital base is hugely important because maybe you'll partner with them one day, maybe they'll fund your search, maybe you'll sell their business to a family office. Maybe they'll be a minority investor. There's all sorts of ways. But they're a huge participant in the, the private market sort of capital markets world both on the, on the debt and the equity.

And so I think educating sort of the searcher community around it is, is a good thing. And James, quick follow up to that. That all sounds well and good, but why is it then that private equity is what we always think about as you know, who, who small business owners will partner with, some sell to. Private equity seems to have the brand totally to dominate the brand in terms of who the next kind of tier up of capital is or, or putting capital into these businesses. Far less so family offices.

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Will Smith: Why? Especially since it sounds like family offices could be a better fit. 100%. So I think there's a few dynamics there. One, private equity as we know it, they invented the model, right?

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James Bohannon: They really invented the model of investing for a set period of time, of adding value, of using a little bit of debt, of doing acquisitions and then obviously selling a business. And so I think they traditionally were the ones that were the most active in this space. The second reason is PE is very on offense, meaning they are, they, they are always outreaching and going out to people looking for deals and doing a lot of origination and sourcing. You know, they're sending out cold emails to business owners. They have to do that because they have capital that they've raised that they need to get out the door.

They need to deploy it. It's a little different in the family office world. As we can get into is there's a lot of bandwidth constraint and then there's a lot of things that family office investors are focusing on. They don't have the resources to have five people reaching out to business owners, right? So the majority of the market is covered very well by the private equity playbook.

And the private equity playbook has done an incredible job, right? I mean, it's. The model is what created this whole sort of opportunity set because it works well. They add a lot of value, obviously, and there's a ton of, you know, meaningful realizations created by that model. And then I guess the last thing I would say is the whole kind of family office industry that we know of today really spawned out of private equity, right?

It's all kind of private equity individuals that are now working at family offices. So the types of activities that family offices and private equity are doing can actually be quite similar in some cases, it's just a different Type of capital that makes sense. That's great. That's great. Well, you said a lot of things there that we're gonna return to later and over the course of the conversation, let's get a quick background on you.

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Will Smith: James, who, who are we talking to and what, how does somebody end up working in family, a family office? It's a great, great question. I'll preface with I, I don't have the typical sort of, you know, historical track is into getting into a, into a family office role, although it can be very non traditional and how people end up in these seats. For me, I started in public equity research and, and, and at a firm called Merlin securities, which then sold to Wells Fargo. I had an entrepreneurial bug pretty early on, so I started a shoe business called Del Toro Shoes, which made velvet slippers with embroidery on it, believe it or not, and do a pretty large business for me at that point in our 20s.

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James Bohannon: And I, and I sold it to an individual who's a wealthy guy that had a large perfume business. What I now know is a family office. I didn't hear that term in 20, whatever, 16 when we heard it or when we sold it. But now if you look at it like that was a small, you know, two or $300 million family office in Miami. So that was my first experience interacting with this base.

I then spent a handful of years in sort of advisory, working on sort of structure and capital raising and all these different things across different alternative asset management businesses, across inland marine leasing and rail car leasing and things like that. And then I went in house at a family investment firm, family office out of Boston. I worked for the Christensen family, Dr. Clay Christiansen, who wrote the Innovator's Dilemma. And then so that was my first sort of like pure family office role. And then I worked, I came here about three years ago to join a longtime friend and mentor of mine to, to work at Belzberg and Co, which I can get into.

So that, that's sort of a quick background on me. So some entrepreneurial stuff, some sort of straight finance stuff, fits and stops along the way and you know, happy to be here. Great. Awesome. Thank you, James.

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Will Smith: Let's start. So what we're going to do, audience, is go through kind of the, the real basics of family office. I mean, I'm about to ask James for literally what it means with the definition of family office. And we're going to build on that foundation and get more and more nuanced as we go. And James, we're going to end the conversation With James giving us really a kind of current trends and, and really the subtleties of how family offices work.

So just to lay the groundwork there, as I said, basics. First, define family office for us, James. Yeah, it's, it's, it's a loose definition, but essentially it is just somebody's money. It's a, it's, it's a rich person or a rich family. Right.

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James Bohannon: It's a pocket of capital. Usually what we associate kind of over the hundred million dollar mark right now would be a very small family office. But it's a dedicated pool of capital that really exists to sort of invest and compound and to diversify and belongs to the person or entity that is actually investing. That's very different from an endowment, a pension, a fund of funds, a PE fund, basically everything else. Right.

Because the money doesn't actually belong to them. They're raising it from someone else. So the key difference in a family office is the money belongs to the actual entity that's investing. It's principal capital. It does not have LPs, does not have LPs.

So what does that actually mean? Means it's not in a fund construct. It doesn't have to be raised, it doesn't have to be returned, it doesn't have, it'll have mandates, but those mandates are set in house. Right. So that means it can be very flexible, it can be very opportunistic.

It can look at everything. It could do tiny checks, it could do huge checks. It's sort of, you know, like totally creative and flexible across the board. Great. You had said that the family office industry, if you will kind of respond by private equity, I think I heard you say.

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Will Smith: My impression is that there are more family offices now than ever. Probably because there's more wealthy people now than ever, but maybe also because the, the structure of a family office is, is, is, has just matured a lot. So anyway, give us a snapshot of the, of the history of family offices and how they developed. Yeah, it's, it's, it's a pretty cool history if you actually think about it. I mean you could go back to even like the Rothschilds and like sort of European banking partnerships that a lot of that was sort of family principal capital mixed with some quote, merchant banking.

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James Bohannon: You'll hear the term merchant banking if you learn about a lot of the history for, for the US the, the kind of first two well known ones were kind of the House of Morgan, which obviously spawned into many different banks and financial firms, the JP Morgan, et cetera, and then Rockefeller Right. So Rockefeller, John D. Rockefeller, sort of created what we know as the first family office. And that was his. His capital he invested in that now has become a multifamily office, which is Rockefeller and Company actually sitting right over there. And that's a major trend that we can talk about a ton.

And that's basically single family offices opening up and going into the multifamily office world to basically share in costs and bring in outside investors other than the core family. So, yeah, I mean, groups like, obviously, Morgan and Rockefeller and Bessemer, those were kind of the original few that were there going forward today, like, because of the massive amount of wealth that has been created even since the year 2000. I was just looking at some of the stats. Like, I think there's 3,000 family offices in the US, 8,000 globally. And that number was, I think, like a thousand in the year 2000, which is wild.

And the amount of assets, obviously, that those individual. Those. Those entities control has, like, quintupled at least. And that's just, you know, the richer. Sort of getting richer.

Right. So that's kind of the overall landscape of how they've come. I think they've. When they started, a lot of times it was really just like, okay, there's a family business, and let's say 90% of our wealth is in this family business. And then maybe the CFO is going to start investing in stocks and bonds on the side here.

And then all of a sudden, it was like, well, we now have a lot of extra cash going on. The CFO can't be just investing in stocks and bonds. Know, now we need a team to do that, to invest in stocks and bonds, or maybe they would outsource it to someone else. But as that pocket of capital got bigger and bigger, they're like, all right, we need a full dedicated team doing that. And then in the 60s or 70s, about the attraction of family office capital into what we know now today as alternatives really picked up.

And if you think about some of the most famous private equity funds we know now, they were seeded by, you know, wealthy families, Right? That's what we would consider a family office today. So think of Blackstone, KKR, et cetera. Like, some of the. The first LPs in those funds were.

Were wealthy families. So call it, you know, 60s and 70s, they started investing in alternatives. Then alternatives became a major focus for family offices all the way from then until sort of today. And when I say alternatives, I, of course, mean, you know, real estate, private equity funds, hedge funds, venture Capital funds, et cetera. What do the following Acquiring Minds guests.

[00:17:34 - 00:18:46]

Will Smith: All have in common? Doug Johns, Morley Desai, Tim Erickson, Chirag Shah, Shane Ursum. They all went through the Acquisition Lab, the accelerator in community for people serious. About buying a business. But they represent just a sliver of.

The Lab success stories. The number of deals across the Lab's cohorts now stands at over 120, with over $300 million in aggregate transaction value. The Acquisition Lab was founded by Walker Deibel, author of Buy Then Build, the. Book that introduced so many of you to the very idea of buying a business. The Lab offers a month long, intensive, almost daily Q and A sessions with.

Advisors, live deal reviews with Walker, Deal. Team introductions and an active community of serious searchers. Check out acquisitionlab.com link in the notes or email the Lab's co founder, Chelsea Wood. Chelsea, then build.com why do they have this affinity for alternatives, especially given their long horizon? That to me strikes me as more of an argument for, for public.

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James Bohannon: Well, I think they just want, they, they obviously they want the, the, the highest possible return they can for their capital. They have enough, where they can properly risk enough capital for the right return. So alternatives are sort of well suited. They also don't need the money. So they can take the illiquidity of a seven year, ten year lockup.

If you're an individual with 200 grand, like I might need that money, right? I need to sort of. The argument is it's less of a, less suited to someone unless they have a lot of money. That's why until recently you had to be of a certain level of wealth to even invest into an alternative fund because you're locking up money for a long time. In the case of a very wealthy family, they obviously will never need all their money, right?

They're investing for multiple generations. They're thinking on a, on a two, three decade timeline. And so they're happy to lock up that money to get a higher return than they would in public equities. Great. And then you have, I guess, I guess taking that a step further, what sort of happened in the last 15 or 20 years is, or maybe even the last 10 is after decades of investing in alternatives and investing in funds, a lot of family offices are sitting around, they're saying, well wait a minute, half our team is ex private equity people.

We know what we're doing, we know how to find deals. We have capital with the most preferred capital. Like maybe we should just invest directly into a business or invest directly with an operator. Or a sponsor instead of going into a blind pool. So the direct investing practice of the family office world has really percolated and become a big area of a focus in the last sort of two decades.

They don't want to just be put in, you know, seven to 10 year funds whether when it takes, you know, they want to be more control, they want to be closer to the, to the asset themselves. They want to dictate terms more, they want to be part of the underwriting. So that's sort of the last evolution in, in terms of the investment. And then I guess, you know, other trends in, in family office world. I think one is the single fam to multifam.

Like that's one you see, you know, across the board a lot of brand name single family offices, especially of those sort of famous gilded age names. They'll open up their doors to other families. So then they really become MFOs multif family offices. They become RAs, they become financial institutions. So they're not, they sort of, they have removed the hat of being like we are singularly focused on investing principal capital.

They now become fee collecting sort of multifam ra. So the very structure, the very, the set of incentives changes. It does, absolutely. I mean in all honesty it does. I think there's some that can still have the look and the feel of a single fam, single family office and then others that have really just become sort of pure, you know, RAs and every client's treated the same and, and, and etc.

And then I guess the, the last trend we're seeing which sort of falls in that a little bit is you know, family offices are getting more, more active sort of on the gp, meaning they're, they're co GP deals, they are raising outside capital, they're building funds in house. Like if you think about like what msd, MSD is a perfect example which is Michael Dell's family office that started as just Michael Dell's family office and then they open it up to MSD Partners and that's like sort of great example. And you're seeing, you're seeing that all over the industry now is a big name out of Chicago that's obviously doing that. And the, and the idea is there. That they have, they just are, have historically shown good returns for the principals capital.

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Will Smith: So they built this expertise and they think that they can just. The more capital the better, the more aum the better so that they can grow more capital 100%. And I think there's, there's sort of a two, you know one, a lot of times it's the team, the team's like, look, we're, we're deploying $100 million a year. We're doing great returns. Maybe we don't, we're not getting paid as much as like the full kind of 2 and 20 that a private equity firm is.

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James Bohannon: So then they go to their principal and the principal is like, well, if you want to invest more money, like, go get it. And like, you can use our balance sheet, you can use our brand, you can use our team. And you know, you can, you can obviously now invest 3 or $400 million a year. So it's because you're kind of doing all the work already, right. If you're underwriting great deals and investing it.

So it's just this natural like, desire for, to, to increase aum, to increase deal size, to increase obviously the carried interest perhaps. And so they'll, the team will be, continue to be compensated in, however they were being compensated before for the deployment of the principals capital. And then all incremental outside capital is kind of a 2 and 20. Yeah, that's normal. I mean, sometimes, you know, it's all case, case by case.

And then in some cases the principle is like, look, I want to build a real institution too. Like, I want to go build the next, you know, I want to use, I want to use our reputation in this area over here and I want to build a real powerhouse and I want to go call some of my other, you know, buddies and pull them together for deals or want to go buy this asset or all that and they just get much more commercial. And that's where they sort of cross the line a little bit from independent single family office to either multifamily or to merchant bank or to, you know, syndicating deals or to doing gps. Like, they become much more of a, like enterprising, like active participant in the, the private equity world versus just a standalone LP or you know, balance sheet investor. Yeah, you had used the expression before that PE plays offense.

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Will Smith: And it sounds like there is this trend in family offices to play, start playing offense or maybe bigger, more mature family offices want to, like you said, build institution, become build institutions, become more commercial. I assume for the purposes of this conversation, we're not talking about that flavor of family office. We're talking about the more traditional, probably smaller family office where they're investing off the balance sheet of the principal. Yeah, yeah, absolutely. And I think, I mean, so much of the, the family office seat is kind of playing defense, right?

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James Bohannon: Because let's say you have a famous sort of, you know, a well known sort of person or entrepreneur or business owner, like they are going to get. Everyone in the world is going to be hitting them up for something, right? There's going to be cocktail party investments coming in. There's going to be the guy's neighbor starting his crypto fun. He's going to ask, you know, everyone's going to like call him up.

So like defense is a huge part of it. You also like, as a family office entity, you're on all these different lists, right? Just by the nature of your business. So every hedge fund, private equity fund, real estate fund and VC fund is going to be sending you cold emails. So I mean if you open up your email in this seat, any, any allocator seat too, if you worked at a pension or whatever too, you get it too.

But there's just a huge amount of inbound. So half the job is like just swatting away, you know, it's like, no, no, no, no, no. Because you have to protect sort of your focus, your bandwidth and your core mandate. So again, it's a lot of defense, right? But sometimes it's important to like look, you know, stop and look around and say, okay, what do we actually want?

Like what do we, what do we care about? What is the ideal setup? What are the industries we want to play in? What. Let's think about how to go proactively, go get those.

And some families do a great job of doing that and have amazing sort of direct investment teams doing that and they're able to source and they can go to conferences and they can find operators and build relationships and build platforms and all that. Some have a more difficult time doing that and are kind of stuck playing deep fence.

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Will Smith: And overall the orientation with respect to capital growth is. I thought I would have guessed that it's more conservative because it's like we've made, the family has made all this money. We're already extremely wealthy. You know, priority number one is don't lose it as, as opposed to grow it as well as we can. Obviously anybody sitting on money wants to grow it, but I would just think that versus private equity, they would just be more conservative financially.

Um, but I'm actually not getting that from you or what would you say. It all, it all sort of depends, right? I mean it depends on the risk appetite of the, of the principals, of the families. None of them are the same. And that's what you hear this expression.

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James Bohannon: Once you've met one family office, you've met one family office. Like they're so different because they were created for the specific needs of an individual or a family. They are inherently custom built entities. So that means definitionally none of them should be the same at all. So some people are going to want to like, you know, swing for the fences and really compound capital.

Some people like I want to be in treasuries and whatever. I think for the most part when you have a certain quantum of capital it only makes sense to have a small portion of that be in higher risk stuff. Right? I mean that's why there's a small allocation to venture or higher, higher risk stuff. So in, in any case there's going to be like a certain amount of money that wants kind of, you know, alternatives.

If you have all your money in t bills or even you know, whatever mutual funds and ETFs, you know, that's obviously if that helps you sleep at night as a family or as a principal, like that's great. But I think for the most part there, there is a desire to have an allocation to alts and specifically to privates, either PE funds or directly into businesses. And the real question that we can get into is sort of relates to the search community is how they're going to get access to those privates. Right. There's several ways to do that.

They can go through funds, they can go through independent sponsors, they can buy businesses directly, they can take minority stakes of businesses, they can club invest with other family offices, they can do all sorts of stuff. And it all depends on what are they set up to do. What's like, what's their, what's their, you know, sort of sweet spot. What's their circle of competence? What are they like?

Like best suited to execute on in a good way. You had mentioned your own exit to a family office which you now understood, which you now understand was a family office. I, I think you called it a small 200 million or 300 million family office which of course for the lay person who's going to make them cry that that's considered small. Give us a sense of the strata of family offices. I think you also said that they, a true family office kind of starts at 100 million and goes up.

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Will Smith: Can you, can you break down the tiers? Yeah, for sure. I mean on the small end the reason you'll get a lot of people that will be like, oh, it's my family office. And what they're kind of just saying is like I've got, I'm a rich person and I Invest personally, like they're not really, really a family office. And I guess definitionally it helps to understand like the, the nuance difference.

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James Bohannon: I think if you just take for example, let's just take a hundred million dollar pocket of capital, like a standard RIA wealth management fee on the high end obviously is going to be 1% of that, right? So that's gonna be $1 million a year. If you're really a family office, that's your, that's your annual, that's your annual sort of operating budget for an office, a cio, an analyst, an assistant. So you can see very quickly that on that level it doesn't make sense to have a bunch of employees. Maybe you have one person, right, you're paying and then you obviously have a bunch of expenses as well as you get to 200, 300, 400 and up, then it starts to make more sense.

And I think a lot of the reasons for starting a family office is that you just, you don't like the current offering that's out there. You don't like what they're offering you at maybe Goldman or JP and you've looked at some of the other independent multifams and reas and you don't love it. And you're like, look, I really want to do, I want things just so, right, I've made my money like now I want to like, I want to focus on this. And a lot of people just like the idea of having a team, you know, and a, and a, and a job and a company, it's their own little curated like cool special forces team to do whatever they want to do. And so yeah, yeah, that's where kind of the, you know, 200, 300, 400 million dollar family offices come.

Those are obviously like, they have to be pretty lean, right, because they don't want to eat into principle if they get too pricey. And then if you think about the cost of talent, you know, to get really strong investors, like we all know what the sort of Wall street comp salary is going to be. You know, it gets, it gets pretty pricey to have really good talent. If you're looking for, for hedge fund investors, private equity investors, especially if you're thinking direct investors, you have to be willing to, you know, pay for, for the right talent. So, so that can be tricky.

And then as they get sort of larger and larger, then they start to look a little bit more like endowment style investors, right, where they have a whole funds team, they have a real estate team, they have a venture and private Equity team, they have a liquids team and then they have a, all the other stuff. This is all investment focused. I guess One quick thing to touch on is a huge part of what family offices are doing is managing lifestyle, managing taxes, estate planning, accounting, legal, like the whole lives of the family members. And that can be, you know, if you're bezos and you have 150, you know, planes and 12 hangar, that can be a major massive undergoing or it can be just, you know, underwriting mortgages for the, for the, for whoever's kids or buying homes and tax estate plan, all, all that. Right.

So there's a lot of like, that kind of like family lifestyle management part that does creep in to the role of the family office. Now a lot of firms have separated that and I think the investment professionals are, are specifically like I probably don't want to do some of that stuff. Like sometimes they have to, if it's a small one, it's like, look, you're the cio, like you got to do some of that stuff just comes with the job. But most of the investment professionals are sort of not wanting to do that. And then I guess as you sort of get up in size, you know, then there, there can be sort of an appetite to do full like buyout for example, where you're really deploying a lot of capital.

I mean, I know a lot of family offices that write $300 million checks. Right. So if you're writing $300 million checks, you're probably buying businesses outright. And so you're almost becoming like a Holdco. And, and there's obviously a lot of famous sort of names from sort of the history of capitalism that, that have done this.

You need a big team to do that. You need 200, you know, you need whatever 175 to 300 people. And if you look at some of the top, you know, net worth people in the world, like they're going to have very large family offices. And you have to think about it this way, just take the top 100 wealthiest people in the world. Every one of them has a version of a family office, every single one.

Like they are investing somehow their homes are being taken care of. They have a, you know, lifestyle management sort of person. So they're all going to like look and feel a little different and they're all going to do some stuff kind of similar. So I think that's a good sort of strata and breakdown, the different types. Great, thank you for that and understanding that this will depend a ton.

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Will Smith: But is there, is there some Way to tie like check size to size of assets under management. I mean there must be, Bezos is not going to be investing in searchers. How do you think about that? Well, there's, there's, there's again some nuance there. So I think, because bandwidth constraint is a huge, you know, issue, right.

[00:34:50 - 00:36:57]

James Bohannon: I think to use your team's focus on a deal that's going to be a tiny amount of the amount of sort of annual deployed capital bogey that you need to hit. It can be, you know, a bad use of resources. Right. So if you, a lot of families will say like we, we can't invest a check that's less than 10, right, 10 million bucks. Because we need to get this money out the door.

We have to like we're, our target is to invest 50 to 100 a year. We want to do it across whatever 5 to 10 deals. So we just can't do anything less than a certain amount. But there's a huge amount of families as well that would love to do, you know, one to seven million dollar checks. Some will do $500,000 checks.

And that's where it sort of gets into this variety of check sizes. I think obviously very you can in most cases say, okay, if there's a $10 billion family office, their directs program is going to be usually writing whatever 50, $100 million checks plus. But there may be a sleeve of that family office that's like, we actually want to do more independent sponsor deals and smaller checks. So there's a team at that firm that's running sort of their small cap private markets team. They're doing independent sponsor deals, maybe they're doing some directs and maybe those are much smaller checks.

So that's why I don't think you can totally discount even the large family offices for writing small checks because a lot of them want to start early and a lot of them want to build platforms, right? So just like private equity, they want to get in early. They want to back an independent sponsor deal for sort of anchor acquisition 1 and then fund all the equity for the next sort of five deals. And they want to build a relationship over 5, 10 years with a great independent sponsor or operator or investor and they want to, you know, they want to back them on deal one. So it's so relationship driven that if, if the feel and fit is right and someone's like, Look, I need 500 or $1 million now, but over the next five years, like I hope we're deploying 30, 40, $50 million, like that's definitely not off the table for, for a family office, no matter what the size.

[00:36:59 - 00:37:35]

Will Smith: James, this point about maybe there's a cleaner correlation between size of family office assets under management in amount of capital per year deployed. Is, is that, is that ratio pretty well defined across family offices? Yeah, somewhat. I think it all sort of depends too on the liquidity, right? Like some you can have a, can have a $5 billion family office that, that, you know, 4.98 billion of it is locked up in the, you know, the New York jets, right?

[00:37:35 - 00:39:24]

James Bohannon: And so they're like, well, we only are, you know, deploying this amount, right, Like a year because most of it's locked up. And so liquidity is, is a big thing too, right? Other people just sold sports team were a huge asset and they're like, all right, we have a massive liquidity event. We need to get that money out. So I think the, the magic number is really like deployment, annual deployment pace and what, what they're trying to put out.

Because the AUM can be, it's not irrelevant of course, but there's just so much like depending on what the liquidity sort of nature is, it can be. And there's all sorts of things that come up, right? There's divorces, there's the ME offices that split, there's major sale of assets, there's, you know, huge sort of tax bills that come due that can affect liquidity and a huge role. The CIO is figuring out what the liquidity schedule needs to be in, the cash management needs to be. And then the other obviously big one is if you're know they have a huge sort of capital commitment schedule that they've made and all these different projects that they're doing, like the capital that they've committed is going to come due in later years, right?

So managing their, their liquidity and cash management is huge. And I guess as the, as the person asking them from capital, the most important thing to know is like, how much are you planning to deploy this year in this strategy, right? Because it could be Bloomberg and you know, maybe he's. Maybe they're only Planning to do $10 million of hedge funds in 2025, right? And that has to do with all the moving parts and etc.

So you can't look at the whole AUM number to glean that 10. You have to really understand the organization and have a, a strong enough relationship with the perfect person that runs the hedge fund group there to know that that $10 million number is there. Great. Great. Well, we're going to get into relationships and how to make them.

[00:39:25 - 00:40:01]

Will Smith: Let's first hear some about. More about the inside the inner workings of a family office. The. I've heard you say capacity constrained or you said bandwidth constrained. That seems to be kind of a key feature, especially of the, the family offices at the lower level.

What is the award chart look like in these? Build one out for us. Yeah, totally. So I think role number one is always the cio. So I think that's going to be like the head honcho.

[00:40:01 - 00:42:00]

James Bohannon: I mean, sometimes they call it a CEO, but usually it's cio, which is chief investment officer. And that's the person making the decisions, the investments and the allocation and all that. And that's kind of like the, the de facto head of any family office is who is the cio. Okay. There's lots of family offices that just have a CIO and then they have.

Maybe they'll outsource the bookkeepers and accountants and they'll outsource the FPA and they'll outsource the bill pay. And it's just, just the cio and he talks to the principal. Principal again is the person who owns the money. Sometimes the principal's in the office with the cio. But either way, if there is a family officer, it's going to be some sort of cio.

Sometimes the CIO is the principal too. But any, in all cases, there's a CIO going down from there. There's going to be obviously like people under them on the investment side maybe covering different strategies. So there'll be analysts or, or, or people covering, you know, privates or publics or venture capital or real estate. You'll have sort of different teams and then they'll sort of be a combined, you know, investment committee.

And there it'll look very similar to any sort of investment management business. Right. CIO at the top, sort of people under them. I think also on the side is going to be, you know, like a chief legal officer. Right.

Or chief administrative officer or you know, like head, head counsel, you know, tax and planning people, administrative people that's handling stuff with the family. Those aren't core investment professionals, but they're alongside those still report to the cio. Great. And so the decision making flows from, I mean, if it's just the cio, the CIO and the principal are kind of make the key decisions. And if the CIO has staff under him or her, then they'll bubble up to the cio.

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

Will Smith: But the kind of the, the key decision maker other than the principal is going to be this, the CIO 100%. So I mean ultimately the decision maker is the principal. It all just depends because it's their money, right? But it kind of depends how the principal has engaged with the CIO in the office and sort of what the system is like. In many cases the principal is like, just send me a report like once a quarter and whatever you think is good.

[00:42:29 - 00:45:00]

James Bohannon: And the CIO has almost full discretion. In some cases the principal wants to talk about every deal and be very involved and sort of a two person, you know, process. Right. So again, it can be totally all over the board. It just depends on the feel.

It is very common usually for there to be somewhere in between, right. Where the, the CIO has been brought in to lead the sourcing, underwrite and investment decisions. They will, with their team, have an investment committee meeting. They'll speak about it. They'll obviously do research, they'll do references, they'll do their due diligence.

They'll spend whatever three or four months on a work on, work on a deal or a fund. This aligns well with their deployment schedule that they discussed. Then they bring it to ic. They internally approve it in ic. So the four principles and the CIO all love it.

The analysts love it. Everyone, everyone internally is aligned. Then they bring it to their principal, they say, just want to sign off. This went through our ic, we want your blessing. Principal signs off and a deal is made.

What's amazing about family office capital is that can happen in a weekend, right? Or that can happen, you know, that can happen instantly. It's usually most cases much quicker than it's going to be at the endowment, pension level. There's just no bureaucracy, right? It's the decision makers are actually in the room versus having to go through review boards and yada, yada, yada.

And that's where like the complexities and bureaucracies of, of, of funds and pensions and endowments and all that, you know, that sort of gets in the way. What can be a very quick moving advantage for family offices. So that's why I think you, when you talk to independent sponsors and searchers and operators, they love people that can move quickly, right? They'll be like, I love the blank family. They're smart, they're thoughtful, they give me a quick decision.

Like that's always a thing because as you know, when you're putting together the deal and the equity and, and the debt and the loi, like you just need a yes or no very quickly. You don't want to be dragged along you want crisp, good feedback and that's obviously sort of one of the advantages here. Looking for an SBA loan to buy a business? Then meet Pioneer Capital Advisory, your team for getting an SBA 7A loan quickly and at great terms. The team at Pioneer has closed 81 SBA loans in just the last two and a half years, with an average close time well under the industry standard.

[00:45:01 - 00:46:30]

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I have also heard the generalization of family offices, James, that to a much earlier point you made, that they're not under a ticking clock, unlike private equity to deploy, they don't have to put the capital to work and therefore the, the kind of sense of urgency and, and again, playing offense to overstretch, that turn of phrase isn't there. And so they can be a little bit lower, less non committal or, or less eager. Maybe a higher bar to say yes. It's an, it's easier to say no from a family for a family office than a private equity fund who always has the bias to deploy 100%. Yeah, I, I couldn't say it better than you just did.

[00:46:30 - 00:47:00]

James Bohannon: That's the other side of the coin. Right. Of which I sort of asked. That's why like the whole family office discussion, you're sort of speaking out of both sides of your mouth because that's sort of the other end of the spectrum. And the disadvantage is, unlike a private equity fund like you don't have to deploy.

Right? You're not, you're not, you're not being charged, you're not charging anyone management fees, really. You have your deployment schedule. So you can just sort of wait for your fat pitch and so, you know, they can definitely drag people along as well. Great.

[00:47:01 - 00:47:50]

Will Smith: And just James, just the people who work within family offices, you've given us kind of the job titles and positions. These folks are people presumably from the world of finance. And so they might be in banking, they might be in private equity, they might be in Family offices or any number of other kind of categories in the world of finance. What sorts of people are drawn to family offices? What's its reputation?

Yeah, among professionals in the world of finance to, to. Why work at a family office versus one of these other categories? Yeah, I think there's a huge amount of demand to work at family offices because I think one of the big ones is like, family offices don't have to raise capital. So I think a lot of people will will it. Like in smaller PE funds.

[00:47:50 - 00:53:02]

James Bohannon: They'll be sitting at a, at a fund and they're kind of waiting for the fund to do its next raise and they're kind of twiddling their thumbs waiting for that. And, and people are like, I don't want to live and die on a fundraising schedule all the time. Because if you're subscale, even if you're a billion dollar private equity fund, like, you're still, like, living and dying on capital raising. And for, I think for a lot of PE individuals, it's like, look, there's no more capital raising. Capital is just there.

That is pretty enticing. And then you say, there's also a huge amount of flexibility. You know, we can invest in anything, we can be opportunistic. So it's like, whoa, that sounds pretty good too. You know, you can, we can do, you know, big deals, we can do small deals, we can invest across industries.

There's not a lot of, like, bureaucracy. It's a much looser IC process. There's not a lot of, like, there's not, it's not as cutthroat amongst the team. Like, everyone's not just jockeying for, like, credit. It's kind of like you're all in the boat together.

Sounds a lot more fun and enticing, doesn't it? Thank you. And being like an ultra competitive, you know, cutthroat private equity fund, etc. Especially one that's, you know, sort of not paying someone as much as they think they deserve. So then they hear about these old family office roles.

Sounds so nice. Sounds cushy. You get to hang with some billionaire, you know, and you're at the box, at the sports teams, and you're just throwing out $25 million checks here. Like, it sounds really great and, and it can be, but there's also like a lot of negativities too. Right?

It's all, like, fun and good and you're like, doing that and it's flexible and you have to wear jeans and you're like, coming to the office only three days a week, and you still like, work hard and you're doing high octane private equity stuff, but it's just a more relaxed and underground environment. You're not speaking at conferences, you're not even going to conferences anymore. You probably won't even wear a tie, like, for a long time. So it like sounds, it sounds great. And then like, you know, one day like the son in law comes in and he's like, never had a job before and his new job is to like, be in charge of half the asset pool.

A family member wants to start a goat farm, and all of a sudden like, all this work and mandate you've done and there's, there's, there's a huge divorce with the family members and then you're like, you know, there's a dispute over planes and you're like, wait a minute, my entire like, world kind of got blown up. Right. It can be a little more volatile. So that's a, a little bit of a perverse example. But I think those sort of touch on some crucial things.

Like because it doesn't have the kind of tight aligned incentives of a private equity firm, a structure that has worked for many, many decades, it can have some downsides. Incentives are another thing. If you're like, what, whatever, 30 years old and you're working for, you know, a family that has hundreds and hundreds of millions of dollars and maybe you're, you know, you're working for a CIO that's sort of in a cushy seat, like, that can be difficult as well, because you have, you know, incentives that are a little misaligned. Right. The family has already made their money.

They're trying to have fun and, and, and maintain, and they're, they're very focused on philanthropy. If you're like, look, I want to build and grow and I want to change the world and I want to do big things and do all that, like, that can be a little bit of a misalignment too. I think if you're sitting at Blackstone, even when it's 20, $30 billion in size, obviously it's way, way bigger than that now, but even at that size where you're above scale, they're still all like, we are on a boat and we are razor focused and growing. Everyone is aggressive, everyone's incentive. Maybe incentives aren't purely aligned, but like, they're all kind of like, we're trying to get rich.

Even the rich are trying to get rich. And I think it, there can be some misalignment there. Sometimes in, in family offices, other things that happen is, you know, a small family office will, will pop up. Let's say it's a couple hundred million dollars a year. And let's say for the first four or five years, you know, the principal is very committed to directs and independent sponsor deals and directs and search funds and, and you're having a great fun time.

You're sort of doing all these deals. Then all of a sudden the principal, you know, gets a little older and the principal's like, yeah, like I'm not really loving doing these directs anymore. Like, let's just start moving the portfolio over to, you know, ETFs and maybe we'll do a direct. So all of a sudden you're the, the young CIO or, or senior vice president or principal or whatever and you're like, you know, I was brought in to really like take my private equity career the next, next level. I was doing directs and, and now I'm doing like one a year and like the check size is coming down so like my carried interest is coming down.

Like that can change as well. So as professionals consider a family office to work for, one of the things they're really trying to tease out from the outside is sort of the orientation of the principal, the orientation of the, of the whole family office and kind of if it's going to be aggressive or not and the types of investments that's going to do and for how long and maybe also how much drama there's going to be in the family. Yeah, harder to predict. Totally. These are, these are the things that people contemplating working in family offices look at.

[00:53:03 - 00:54:14]

Will Smith: Aside from the obvious stuff like size of, size of capital base and, and things. Culture. Yeah, culture is, is, is so huge. You know, and getting a feel for really getting to know the, the principal family and what their long term goals are, getting to know the other team members and all that. Yeah, yeah, I heard you say it's all a bit underground when you were referring to going to conferences or not as the case may be for people who work in family offices.

So this, this notion that I had that they're, that they feel kind of shadowy. Yeah. Is that, I mean you're in the world. So of course it's all feels completely like the lights are on to you. But is there that sensor.

Is that misplaced on my, on my part. And, and you also, as I think about how you, you know, there's so much of, it is kind of playing defense and, and walling off the, the infinite inbound that the principal is getting all the time with people with their hands out. There probably is an orientation to just kind of like stay a little bit in the shadows so that you're, so that you. It's a way of managing inbound 100. I think like, look, there's an element of desired privacy here.

[00:54:14 - 00:58:09]

James Bohannon: Like some people don't want people to know what, what this family sort of has and, and you can be in the spotlight. It's a, it's a, it's not without controversy. Right. And I think if you're obviously Bezos or something and your net worth is listed because of a stock price everywhere, you know, that's like, that's so like out in the open, etc. I think the other side of that coin is I think these families want a private company that manages their most personal affairs.

And I think what is a crucial nuance here with a family office is it's, it is a very intimate entity. You are dealing with a family's wants, desires, life's work, investments, how much money they have, what they care about, what they don't care about, distrust amongst the families, legal matters, you know, so by nature it's a very intimate and sort of trusted organization for like the pure family office. Now some are so big that they're more like institutions, right. And like the main person will just be an LP almost and there's none of that stuff. But for most of like the midsize family offices, it's a very intimate thing.

So I think that, you know, there's a level of sensitivity that is, that is required and I think spawning from that, like they want to be private. A lot of them don't have websites. Some do because they want to be more out in the market to attract deals. But I think, you know, for the most part a lot don't even want websites. I don't really want LinkedIn profiles.

And they don't want, you know, they don't want to be out there at the market sort of speaking at conferences. This has changed a little bit. And this goes back to the trend of these private, shadowy family offices are now becoming brand new broader market participants. They're leading deals, they're raising capital, they're searching, you know, they're getting more on offense, they're being more aggressive. And so I think that's again, that's changing.

You'll see more and more, you know, family offices that have websites that list their portfolio companies on them. Like that used to never be the case. Now, you know, they're so they're they're getting to be more important participants in the private markets world. A lot of them are competing directly with, with private, private equity funds as well. But I think you're, you're definitely spot on to say there's an element of privacy, an element of, of confidentiality, of discretion.

I think if you know, you don't necessarily want the world to know whatever Forbes says complete. What you find is what Forbes says is kind of like, like, like 50% accurate most of the times. Like, like you don't really want the world to necessarily maybe know what your family has because it's honestly nobody's business. The ultimate, like, if you think about me personally like as an individual, like I wouldn't want people knowing what stuff I owned and you know, how much money I had and how much my kids were going to get my wife and all that. So there's an element of, of, of privacy there.

And so that sort of become, comes out of the entity. And then I think going forward, I think it's tactical because I think a family office will say like, look, I want to be, I only want to do a deal or meet someone that one is either creative enough to figure out a way into my door or two that was introduced by someone I know and someone I trust. And this is a very important element of family office world. There's an element of trust and relationships that is so crucial. So I think that's another reason for that.

They sort of will stay quiet and they'll stay shadowy because they'll say I want to, like I want to be introduced the right deal. I don't want to be on a bunch of lists because I don't want to get the thousand emails and I want to be. How should people listening think about raising capital from family offices? How should they approach it? What sort of profile of deal should they have?

[00:58:09 - 00:58:53]

Will Smith: Are we talking about searchers with an. SBA deal talking to family offices or. No, not really. We're talking about people more independent sponsor. I've heard you say independent sponsor a few times, taking down 3 and 4 and 5 million dollar EBITDA businesses.

Are we talking about maybe the best fit for family offices and searchers or when searchers go to sell and they've grown their business and maybe family offices or buyers. Let's get granular now. Yeah, there's a lot, a lot in there to unpack and you might have to revisit different parts of the question if I forget to answer it. Yeah. First of all, the best way to sort of get into the world is to develop a relationship with a single family office first.

[00:58:53 - 01:04:14]

James Bohannon: Right? Because it's all about like building trust with sort of one and have a champion. And again, when I say family office, it could be a high net worth individual as well. Like the, we'll, we'll leave the line sort of blurry. Someone with $50 million versus $150 million family office or 300, not that different how they're going to sort of to like communicate and work.

And so as all sorts, sort of searchers and independent sponsors know, like one introduction leads to another. Right? So it's like build a line of trust and communication with one individual and they are going to make introductions because everyone likes to discuss good deals with people they know and they trust. Families love to invest together and alongside each other. They rely, we rely heavily on the family office network.

When we're doing a deal we want to vet the other investors in deal. So it's so, it's so reliant on a sort of a trust and network element. So I think the only way you can't break into it, you have to build it. You have to build your network in the family office world one at a time and it's, you know, one strong contact to another and then you just sort of go from there and you obviously like show up prepared and be honest and be straightforward and show people interesting deals. I think there is a huge amount of desire, I mentioned before that family offices used to just be sort of passive LPs and they are still passive LPs but I think there's now a huge amount, a huge desire to be co investors as well.

So they're, they'll, they'll say our direct program is to invest in a fund and then we'll do 50% in co invest. That has now morphed into okay. We'll also do independent sponsored deals. So an independent sponsor, you know, spawns out of a small private equity shop. Let's say they have a great thesis on logistics.

They've done four or five logistics deals. They, they aren't getting paid as well as they should at that PE shop and they don't have any to carry because of a succession issue. They leave and they spin out. They're going to come to the family office community and they're going to say, hey, I had this deal in hand. I have an loi.

I know what I'm doing. I spent seven years at whatever fund. I'm going to take my, I have $600,000 in savings and I'm going to put 500 grand in this deal. So there's good alignment and I need whatever equity check to get started. And, and this can either be done sort of via search or it can be like loi in hand, right?

So it's sort of like post, post loi fund, equity economics, etc. Like that's, that setup is very desirable for the family office world. And if you come to me with that deal, I, and, and I'm, I'm highly impressed by the story, the setup, the alignment you were introduced to me with, you know, through a trusted source. Like I have a desire to introduce you to my friends, right? Because I'm like, guys, like, look, I found this guy that's really sharp.

We're going to do the deal, but we're thinking about. Or maybe we're not going to do the deal, but I know the logistics are right up your alley. I'm going to send it to three or four other guys in my network, people in my network in the family office world and they're going to be like thrilled, right? Because I'm not. No one's blasting stuff all over.

It's just when you find someone interesting. So it's an element of trust and I guess on the, on the nuance and size of the deal, it can be dependent. I mean some people want to do, you know, one to $4 million EBITDA businesses and they want to be the only equity check. Some on pure search, like if it's a, you know, $400,000 SDE business, like that may be slightly on the small end, but that doesn't rule out all family offices. There's plenty of small ones that are like, look, we'll, we'll be the one equity check.

If they really believe in the searcher or the operator or the investor, they know that that guy is going to have a long track. All right, we'll get you into business now. We'll own a chunk of equity of this business. Let's go build this together. And then you have a, then you have a partner, right?

So maybe, maybe it is a small business. They took take a big chunk of equity. They have the balance sheet. They may be the only capital you ever need, right? And you have this sort of long term partner.

The other benefit is you now have a team of people that all come from private equity world and can open a lot of doors, right? So they have access to the most influential people in the world. Because the family office world, you do get that access because you're ultimately working for these Principles and then you also get the expertise of private equity principles because they're sitting in the family office seats now. So you can, you know, collaborate and ask advice. You can get them on your advisory board, etc.

Etc. So they can come in early, they can be great value add partners and they can be ideally all the capital you ever need.

What else am I missing in your question? You did a great job of remembering all of my sub questions there, James. Let me follow up with this point about family offices talking to each other. So my sense from tech land, for example, when raising from venture capital is entrepreneurs with their idea are out there raising funds, vc and it's a lot of no's until you get a big yes. And then dominoes fall and a lot of people pile in.

[01:04:14 - 01:04:50]

Will Smith: That's an oversimplification, but I presented that to you as kind of an analogous dynamic to what you described in our pre call and you said yes, but it's actually, it's a little different in family offices because there's like a collegiality among the family offices. Maybe underline that it's not about dominoes falling so much as you guys really rely on each other. Absolutely. You know, spot on. I think given, given the industry sort of is semi underground and there's just, there's not a lot of like transparency.

[01:04:52 - 01:07:55]

James Bohannon: I think so much is, is, is reliant on, on a trusted network. And so if you see a deal from someone you want to say, okay, well how do you know this person? Have you worked with this person before who's in the deal? And then if they're like, well, you know, we've done three or four things with this person. You know, Bob, Gary and Tina are all in the deal as well.

They know him as well because they did a deal with him previously. You all of a sudden like have a good amount of trust. Right? Because again we're not dealing with brand name institutions. It's not like investing in Blackstone and kkr.

It's just like a guy in a truck, right, who's like just here and has like an loi. I mean just like a lot of your, a lot, you know, a lot of your amazing guests, like they're people that have discovered an amazing business. So how do you vet that? You vet it sort of through, through sort of trust and, and, and conversations like that. I think to your point, there's, there is not a lot of, there's more collaboration than there is competition.

Now sometimes a deal is really good. You're like, and let's say there's only $20 million left and you're, you're trying to deploy a hundred a year. Like sometimes you want to be careful, like you want to be a good collaborator and share. There can be capacity constraints sometimes that you want to sort of take all of it. But generally it's a very collaborative meaning because you also, you feel better if your partners are investing with you because you know and trust them.

You've done deals together as well and you can compare notes, you can compare sort of the diligence process. You can sort of think creatively together when you're doing the diligence, you know, so families love to invest alongside other families because they're coming at it with a similar, you know, a similar thought process and how they're yes, long term compounding trust, good alignment, you know, flexible. And what will often happen is families will kind of naturally club up. So there'll be three or four, like if you go to Chicago for example, there's a lot of huge well known family offices there. There's like three or four that will love to do deals together because they've known each other for a hundred years, right?

Like the kids have known each other and they've done deals together and they invest similarly and they have similar philosophies and the teams all know each other, they go to the same commerce. So they're going to invest in sort of deals together. So it becomes a very naturally like communicative, like you know, like community, which is great. It makes it a lot of fun. So that's why there's a lot of like comparing of notes amongst family office people.

And again a lot of it is just because it's like you have to like there's no published list of all the information. You have to rely on trust. That's kind of because it is underground. Well, there's also that there's almost a need to do it because of this constraint because there aren't, there aren't, they're not fee generating organizations. And so as you have now said a couple of times there, there's always this capacity problem.

[01:07:55 - 01:08:29]

Will Smith: And so part of the way to get some scale is for to kind of share the work, family office to family office. And so if you, if you are working alongside people you trust, maybe they've done, you know, some of that diligence work that you just don't have the bandwidth to do and you trust them and so you can kind of scale your decision making that way. There's, there's one other Point to that is in many cases there's no banker involved. Right. So if you're talking about like a, a big auction process in the private markets, a bank is going to go out to 150 different private equity firms.

[01:08:30 - 01:09:21]

James Bohannon: Right. And the bank is well known and the bank is putting their stamp on something. And when I say bank, it could be broker, small M and a advisor, whatever. Right. Like they're creating sort of auction, they are putting it on the market so the market will naturally sort of communicate.

Like most of these family office type deals, they're off market. Right. So there's no, like everyone's kind of like in the dark. You don't know who else is in the room with you. Like, you're kind of like walking around in the dark trying to figure it out.

And I think the banks, you know, the, like, we can talk about this a little bit. Like the banks don't like, they are, they are better fit to serve the private equity industry because private equity firms will buy, sell, do an add on. They're sort of repeat buyers, whereas family offices, like you said, can maybe buy every two years. They're probably not, you know, selling every two or three years, et cetera. Yeah.

[01:09:22 - 01:10:58]

Will Smith: Let's talk, James, more about how this audience should think about partnering with or, or trying to use family office capital. I heard you say that they're, you know, a $400,000 SDE deal is probably on the small side, but if there is a sense that the entrepreneur is going to grow this for many years and this, that small size is just that first deal, but there's a lot of more deployment of capital to come subsequently that that could be a fit that's going to be, you know, that's a very specific case. So I have the sense from our conversation that the, the, the maybe best fit for family offices and searchers is for searchers to think about them as better exit partners than maybe even private equity. Absolutely. So it's all as we talked about at the top, it's always the default.

If I think, okay, I want to, you know, I bought this business for $3 million. Now I've grown the enterprise value to 5 or maybe $7 million. Now it's time to shop it around to private equity. Um, shopping it around to family offices is not, is not, you know, in our vocabulary, but should be according to you. And that feels like maybe the best fit of all.

So for maybe for people listening, it's not, it's not working with family offices at the beginning of their journey. So Much as at, at, at the end or at a midpoint. If they want to keep growing the business, they've already grown to 5, $7 million of enterprise value. Please say more about that. That fit in contrast it with pe.

[01:10:58 - 01:15:16]

James Bohannon: Absolutely. So if you get to the point where your business is doing, you know, 3, 4, 5, 7, 10, whatever, SDE, SL or EIDA like, then you've got a serious business that you could, that you could sell to private equity. But let's just say you don't necessarily want to just sell out the business and now like be, you know, like a minority holder. You, you, you could actually go and get family office capital and, and recap your business as an alternative to private equity. You can also just look at the private equity buyer universe as a good alternative to pure private equity buyers.

So if you think about family held businesses and family office capital, like there's a good natural alignment there because family office, sorry, private equity investors, they're going to have to sell that business in three to seven years. So if you're the operator and you own the business now, you know that that person coming in needs to get out in five years. So on day one, they're coming in not with a long term approach, but with a, like, okay, we need to sell this thing in five years. And I think there's a lot of the search community that wants to take a very long term, forever view, like 10, 20 years. If I have a great business, I never want to sell it.

And so I think like, that's where the private equity solution maybe can fall short a little bit. You've got someone that's going to come in, they're going to buy the majority of the business, they're going to tell you how to run it, they're going to have to put some debt on it, they are going to be in control. So you're no longer in control. You had like, you brought it to this point, but now all of a sudden you're in the back seat and they're going to change everything and then kind of strip and flip it. Now that's a very pessimistic description of private equity.

They're obviously phenomenal and we're investors in pe, et cetera. But you know, that's just one kind of side to look at it. Whereas I think if you build a great business that sort of you own, you can go to family office capital or you know, family offices and say, look, buy it, buy a stake in my business, have a longer duration, be more flexible as the family Office. Like we'll be there when you need us. Like we're professionals.

So like we're we, we can be as helpful as we as we want. If you want to introductions or need a new CEO or need whatever. Like we can do all the stuff that private equity can do semi right. But like we're a phone call away. We're not going to come in and tell you how to do your business.

And some of that is minority versus majority. And there's both flavors in the private equity world. Some families are only going to do majority deals they want to, but a lot of them will just buy a business with a great management team, leave them alone and hold the business for 20 or 30 years. So I guess what I would encourage of your audience is when they're, when they get to that level and, and they start getting calls inbounds like hey, you know, this is Michael and I'm from name your bush and your color capital in whatever, you know, tertiary city, you know, they should start thinking, okay, like private equity is, is like I'm on the radar of private equity now. And, and instead of just getting the inbounds as the business owner, you can start to think, well like what, what do I ideally want?

What's the best sort of capital partner for me? And think about like family office capital as a solution for the next 10, 20 years of your business. You're finding the right partner. Because what I love about the like the family to family thing is so cool is you know, you like a family office is someone that built a business, right, and made it and then a searcher is someone that has bought and built a business right? It's like very relatable.

And because the money is not tied up in a fund, like it doesn't sort of require this come in, put a bunch of debt on it, change the business strip and flip it, sell it, exit in seven years. Like that's going to disrupt the business. You can, you can, you can like there's just a better like fit a lot of times for capital. And what will the expectations of the family office be for such an investment? If they're, you know, what, what are they going to be?

[01:15:16 - 01:15:58]

Will Smith: What are their, is the pro forma going to look like? How are they going to expect to get value from this business? Are they going to expect a liquidity event just like private equity just later, 20 or 30 years later? Or is it basically just collecting dividends. Off the business indefinitely?

What, what are their financial expectations? The long termism sounds great, but there's still got to be some expectation. So some people will actually, some, some entities will invest exactly like private equity on, on that same time frame. And that can often be driven by the team as well. They're like, we need liquidity events on a regular basis so we can comp our team so we can attract the right talent.

[01:15:58 - 01:17:20]

James Bohannon: Sometimes just the principle is like, I want my money back every three, four years, right. Or whatever, three to seven years. Like I don't want to hold this thing for 20 years. That's on one side. On the other side, a lot of people like to own businesses forever, right?

There's like, find a great business, it throws off cash. Because a lot of times as a family office, they're like, we don't have anywhere to put this money. Like there's so much money and they need to put it somewhere. Right? So they like if you, if you deliver money back, obviously taxes are paid and then they have to figure out where to deploy that capital.

So there's, it runs the full gamut of, of where they want to, of like timeline and duration. I think most of the time what we see is the phrase like we can be flexible on duration and we are long term oriented. So I think that's going to be, you know, eight years to 15 years is good, right? I think if it's a minority position, maybe there's a little bit of like some structuring stuff. If it's obviously a full buyout, then they're in control of the business, right?

They can sell it whenever they want. And for such a fortunate searcher who has grown their business to $3 million of EBITDA, they're in there on, as you put it, they're on the radar of private equity now, but they should entertain family office or explore that as an, as an alternative.

[01:17:22 - 01:17:47]

Will Smith: How do they approach without having contacts in family office? You've already said that it is difficult that you, you know, it's that that's its own filter. Like if you can't figure that out, maybe your family office principals aren't going to be interested in you. So maybe. I'm sure there's no pat answer here, but are there conferences, are there, are there professionals who claim to have inroads to family offices that you can hire?

[01:17:48 - 01:18:49]

James Bohannon: Yeah, I mean, I think, Look, I think McGuire woods is a great conference for independent sponsors and I think that's the one that's almost the one like real like connector of just like total cold call strangers and then like the shadowy world of, of, of, of like family Office capital, like that's a, a place where those merge pretty nicely. More and more families go down there to see that event. Event, it's in Dallas. They've done an outstanding job and they've really built an ecosystem around the independent sponsor sort of world. So that's obviously one, I think building, you know, building one great relationship with a, a wealthy individual is going to lead to another one.

And I think you can say to people like look, I'm trying to obviously meet some other high net worths or family offices. If you could make an introduction, people will tell you if they can or they can't. And people love to tell their friends when they're, when they're impressed. So you kind of just have to start with one and build from there. Fantastic.

[01:18:49 - 01:19:00]

Will Smith: James, anything that we didn't touch on that you wanted this audience to hear about? Family offices? I think we've really, you know, covered a lot. I think.

[01:19:03 - 01:19:10]

James Bohannon: Yeah, I think we've covered a lot of the trends. I think we're kind of good. Will. Well, fantastic. This has been an awesome primer.

[01:19:11 - 01:19:45]

Will Smith: It no longer feels quite as shrouded in mystery as it, as it did at the top of the call. And just to underline the takeaway here that we started and ended with, there is this whole capital base in family offices that could be better aligned for Searcher acquired Searcher owned businesses when they look to the next chapter, be it selling or be it recapitalization or be it partnering for further growth, long term growth. Growth that's really not on the radar from what I can tell. So thank you for helping us put it on the radar. James Bohannon.

[01:19:45 - 01:19:58]

James Bohannon: Thank you. 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 to the interview, a link to the video version on YouTube.

[01:19:59 - 01:20:30]

Will Smith: And soon key takeaways, numbers and more. Essential 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.

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