Host: You've heard a hundred times how valuable a bias toward action is. Well, today's guest, Johannes Haack is a great example. Only six weeks into their search, Johannes and his partner got under loi on the business they'd end up buying. We spend a lot of time on what their process looked like and yes, luck was a part of it, it always is. But you increase the surface area of luck by taking more action and moving quickly. They also relaxed certain search criteria. Sure, we all recognize and nod our heads that the perfect business doesn't exist, but are you really prepared to buy, for example, a project based business? Johannes was and did and this open mindedness was a big part of getting across the finish line. Also listen for Johannes thoughts on how hard to negotiate multiples, the underappreciated advantages of buying in a growing industry, and just his eagerness to get into business. This last point was made to me recently by Brandon Adams in his update episode There's Value to Just Getting in the Game. How many of my guests have you heard say, my only complaint is that I wish I'd started sooner. Tons of tactics and strategy both in this episode with Johannes Hochst, owner of DFW Turf Solutions. 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. Listeners of Acquiring Minds know that for almost any business you acquire, its success comes down to the people and how you develop and manage them as their new leader. Thing is, in addition to management, there is also a lot of process and bureaucratic work when it comes to your new employees. Payroll, compliance, HR technology, hiring to name but a few. These processes are crucial to get right, but at the same time distract from where you want to be putting your energy in leadership. So Aspen HR is an HR firm and PEO that takes this work off your plate and handles it with the care it demands. Aspen is owned and run by Mark Sinatra, himself a successful former searcher, so Aspen's own leadership understands the HR challenges that searchers have post acquisition. The firm is offering Acquiring Minds listeners a complimentary pre acquisition HR and PEO review for your target business. Check out aspenhr.com or contact Mark directly@markspenhr.com Johannes Haack welcome to Acquiring Minds.

Guest: Thank you very much. Excited to be here Johannes.

[3:02] Host: We got a lot of ground to cover today. In addition to having bought a business, DFW Turf Solutions, that has grown dramatically in the two years since you acquired it, you also Think deeply and write about our world of buying small businesses. So in addition to your story, there will be lots of themes for us to dive into today. Start us off, Johannes, with some background on you, please.

Guest: Yeah, happy to. So I have a pretty traditional background, but in a somewhat uncommon path. Um, so grew up in Germany, made my way to the US via track scholarship. I was on the track team for the University of Texas, made my way into finance, started my career in banking and eventually got into private equity. So that's where, you know, the background becomes more common to a lot of searchers. The one nuance that's probably interesting for this discussion is that the niche that I was focused on was non control deals. So that would cover anything from distressed debt all the way to buying, you know, 49% of a business. And so we worked a lot with, you know, family founder owned businesses, kind of be the first institutional capital that they saw. So a lot of times it would be a transaction where, you know, someone had built up a company, they started to look at buying competitors and needed some capital for that, or maybe they wanted to buy out a competitor or maybe they just got to a size where they needed some more institutional help to eventually become, you know, a corporation to sell really large. And so the interesting experience that I got was I would find myself regularly sitting across the table from folks that had started a plumbing company five or 10 years ago, or that started a junk removal business in college. And now we're eight years later. And after you send the second or third tens of millions of dollar wire across the table, you start to wonder if you're sitting on the wrong side of the table. And so this was kind of a year and a half in or so of my associate stand for those that are familiar with kind of the private equity world. About two years after you start, you typically either go to business school or you kind of settle in for the long haul, depending on what fund you're at. And so across the associate class had a lot of conversations about what we were going to do and I kind of thought about what if instead of going the MBA route, I just take those two years, try and see if I can buy one of those businesses that I want to go all in on, work really hard for three to five years and hopefully hit it big enough to where I don't have to work for someone else ever again. So that was kind of where the thought of what I would later learn is search was planted. And luckily had a fellow associate at that fund that thought very similarly. And so after doing a lot of research on the search space, how likely we were to find a company to buy who tended to be successful in search and whatnot, we decided to do a self funded search. And so then when our two years were up at our associate stint, we quit our jobs and started a self funded search. So that was summer of 2021 and then kind of took two months off, started really Labor Day 2021 and then October I think 18th we signed the LOI for, for the business that we're currently running.

[6:38] Host: Wow. Six whole weeks into searching. We're going to get to that here, Johannes. But you know, it's funny to hear that pattern of a private equity associate or somebody in their private equity career, young and earlier in their career and seeing the family owned businesses, the founders who come in and, and have, have built these often blue collar businesses and wondering if you're on the wrong side of the table. That is something now that I've probably heard three or four other guests say. And it starts to feel like everybody in private equity kind of has this, has this epiphany and then goes off to buy a business. Of course there's, there's a lot of bias here because I'm just getting the people who actually did that and it sounds like it was, it wasn't everybody in your firm who was running off to buy a business. What do you think separates you guys and the opportunity you saw from other people who decided to go back and get their MBA or stay the course in private equity or whatever, just a little bit more entrepreneurial or what?

Guest: I don't actually think so. I think, oddly enough, I think most people that know me would describe me as fairly risk averse. So this is by far the riskiest thing we've ever done. I think it really depends on kind of what's the why and what you want to do long term. And that's, that's one of the things that I talk to other searchers about that are kind of early on or thinking about searching. So for me it's always been this, this idea of there's, there's a lot of things, you know, I come from a track and field background. There's, you know, nobody pays for track and field. It's always, you know, you have to find sponsors, you have to raise money, whatever you want to do. And so I've always kind of had this, this thought of like, I have a number in mind that I want to hit and then there's a lot of things I want to do. That won't make money. So I need to kind of get to my nest egg first and then I can kind of spend more time on things that I'm passionate about in that way. And so I think for a lot of people that have or take more enjoyment in just the prestige and kind of more in depth intellectual work of private equity and just frankly the stability, it is a very attractive pathway in the long run. But I think for people that have maybe want to get to the other side quicker, I mean it was really for us it was the swing for the fences, right? I kind of said it's now or never. Especially we'll probably talk about the experience of writing a personal guarantee and the possibility of bankruptcy. And it was one of those things where I was like, the further up you go the chain, the bigger the golden handcuffs become. And so, you know, I didn't want the two years of travel and vacation that most MBAs are for people that are in finance and want to go back into finance. And so I just thought it's the right time to hopefully shortcut 15 years of working and get to the same outcome obviously in a positive outcome.

[9:38] Host: So you think that the potential here is equivalent to somebody who, a private equity person who is successful in their career and does it for 15 years. Because my impression of somebody who's in private equity for 15 long grueling years, that they'll be, they'll be earning a lot of money at the end of those 15 years. And so you think the opportunity in search is the financial potential is similar there between 15 years in private equity and or five years in a search business. I know we're generalizing extremely widely, but indulge me.

Guest: It's more so that the, the right tail is fatter in search, right? Like you can truly hit it big. The odds that as a, you know, 27, 30, like 32 year old guy working in private equity, wherever you're at on the ladder, like there is pretty much no way you're going to get like a 5, 10, 20 million dollar payday right now. I'm not saying that's a typical outcome in search, but it's at least one that's possible. Right? And so I think nowadays obviously private equity has become pretty saturated. So the typical timeline is you're going to do 10 years at your fund that you're kind of working up the ladder and you know, you're making good money by all traditional standards, obviously, but you're not making retire at 35 money. And so then you establish yourself for 10 years. Then you have to do your own deals for 10 years, at which point you're probably, you know, you're making 2 million a year, whatever you're making with carry and everything. And then after those 10 years, now you get to run your own fund. And now you make, you know, kind of the stupid money that people know about private equity. So if you're starting at 25 into private equity, we're talking about 45 until you get into your peak earnings years, right?

Host: Yeah.

Guest: And so my thing is, of course over a lifetime you'll probably make more money in private equity. But what I'm saying is I don't need to make 50 million bucks. What I'm saying is I can get to the number I want to get to faster in search if it works out again, if it works out then going through the regular private equity ladder.

Host: Well, you have now referred to your quote number twice. Can you tell us what it is?

Guest: It moves a lot, kind of between, between 10 and 20, but that's, that's kind of the ballpark.

[12:03] Host: All right, we're going to, we're going to use 15 as Johannes number here. Fair enough. I appreciate, I appreciate you sharing that with us. That's great. So as if it's not already clear, you are not a kind of permanent equity, permanent capital hold forever, build a Holdco searcher acquisition entrepreneur. You are somebody who is trying to buy, grow and exit a business. So it's, it's really, I, I just emphasize that because every searcher should know very clearly what, what they want because it will dictate a lot of how you, how you search, what kind of search you do. You know, so many decisions follow from that. So now that we have that clear, let's continue with your story.

Guest: Yeah, happy to. So, yeah, I think the, you know, the search process we ran obviously did a lot of legwork early on. Talked to, you know, 20, 30 searchers before we even started our search. The way that we approached it was the second the clock starts ticking, which for us was, you know, Labor Day 21, I want to start talking to brokers. Day one, I want to start looking at deals day one. And so we did all the kind of legwork, the setting up a website, setting up a CRM, like, you know, pulling lists of brokers, pulling lists of companies. All that was still kind of in, you know, kind of mid-2021. And I think the biggest thing that we did differently was probably two or three things. One was the first conversation that I had with one of My former professors, who's very involved in the small business world was I came in with the probably standard criteria that everyone has, right? Recurring revenue around for a long time, profitable, no concentration, all that kind of stuff. And that was my first conversation. He was like, yeah, good luck finding that unicorn. You're not going to find that. And so we got that slap in the face before we looked at the first listing or anything, which I think was very helpful because that's something I see a lot in people. They spent the first year looking for their perfect deal and then a year in they start to widen the criteria. And that's pretty draining when you just kind of lose out, lose out a little look and nothing that you see matches and it's just a really frustrating process. So that was the first realization and then the second realization was in talking to the people that had bought or hadn't bought, which frankly people that haven't bought are kind of a little harder to find. But at least the difference between people that had bought quickly and people that were searching for a long time, the biggest difference was just that there was a certain attitude at people that bought quickly to just get in the saddle. Like not everything is going to be perfect at the end of the day you have to just pick your horse and get on it and figure it out. And so with those two things in mind, we had a relatively broad spectrum of companies we looked at. So our target was Texas. We probably had five, six industries. Home services was a big one, but healthcare, consumer products, light manufacturing. And we really looked at just moving quickly. So in that time period of the kind of six to 12 weeks that we really searched because we continued searching after we signed the first LOI, we probably wrote 40, 50 IOIs, we probably wrote 15 LOIs and we actually signed three LOIs. So our numbers probably don't look much different than any other search. It just was compressed in a much shorter timeframe.

[15:54] Host: August Felker is a two time successful searcher. First with a traditional search fund. The second time around he did a self funded search. Today August runs Oberle Risk Strategies, an insurance firm with a dedicated practice group for searchers and acquisition entrepreneurs like you. If you've got a business under loi, Oberle will provide complimentary due diligence on that business's insurance and benefits program. A great no risk way to get to know August and team. They love helping searchers. They've worked with hundreds. Oberle is a specialty insurance brokerage for searchers. By a former searcher. Check out oberle-risk.com O B E R L E risk.com link in the show notes Johannes, the slap in the face that you got from the professor. Good luck finding the unicorn that that checks all the boxes. So what were some of the criteria that you were that you relaxed that you were willing to relax or, or was it not like that? It was just like you would just lowered your standards a little bit and you looked at more listings than you otherwise would have or were there particular criteria that you relaxed? This is a leading question because you've written an article entitled something to the effect of recurring revenue is overrated.

Guest: Yep. No, that was exactly the first one to go. I think there were some that were less flexible. I think we were more focused on location, somewhat more focused on industry. But yeah, recurring revenue was the first one to go. And I think what's interesting there is if you think about the universe of companies, a, the universe of truly recurring revenue businesses is fairly small and especially in smaller businesses there is almost always some level of on the positive side reoccurring but just a lot of project based. Right. And so we were trying to figure out, and this is kind of coming from the private equity background of where can we find value that other people can't by just doing better diligence by you know learning more about a certain industry. And obviously you know the company that we ended up buying is a, is a very interesting example of that in terms of finding an industry that has such tailwinds and a company that's so well positioned within that industry that even though you know everyone say it's a, it's a project based revenue business, I feel a lot safer about the certainty of revenue there than even in a know reoccurring or recurring revenue business.

[18:33] Host: Well one of the things I'm, I'm jumping ahead a little bit but you just touched on it so let's dive in. One of the things that you said in our pre call that you think is, isn't doesn't get enough attention from searchers and kind of the criteria is buying a business in an industry with strong tailwinds. Now that might sound to listeners like well no, that is, that's well known, that's obvious. Of course you want a growth industry but really it's low on the list and a lot of people buy businesses in rather sleep sleepy industries and it's you know it's a, it's a balance, it's threading the needle a little bit because we also. I don't think you're going to advocate Buying. You know, this isn't, this isn't tech where you're buying into some explosively growthy industry. But strong tailwinds have been a big part of your story. So. And I feel like maybe you didn't realize it at the time, but in retrospect you'd say that criteria should be much higher on people's list, while, for example, recurring revenue should maybe be lower. Is that a fair encapsulation of how you feel in 2023?

Guest: Yeah, completely agree. I think you know where this all starts with to begin, right, Is is looking in Texas and specifically focused on Austin and Dallas, where you have such a demographic tailwind from people moving here. And I think it can't be understated how true it is that a rising tide lifts all boats when it comes to small businesses. Now that still means you can mess things up. Obviously, that's not the question. But you know, we've seen in my early career, one of the absolute death nails of companies that were in financial distress was if the restructuring office said, oh, we just need a little more revenue, we need a little more revenue means that there's no way that's going to get saved. Because most of the time what that means is that the market is, the overall industry is declining, everyone's fighting tooth and nails to stay alive and it's almost impossible to get out of that situation. Whereas on the flip side, if you have a market that's growing 10, 20% and we'll go into turf here in a second and how we kind of put together where we think that should end up, you have room for error and yeah, maybe your conversion rates go down a little bit here or there and whatnot. But if you just have an industry that's growing 20% plus, there's just room for error because your competitor can also grow 20% and you can grow 20% and nobody has taken any share, right? So instead of battling it out for every single customer, you're in a scenario where you can't even serve all the customers, which is a fundamentally better problem to have than the overall pie of customers shrinking or just kind of being flat. And so, you know, I think for us when we first started looking at this business, it was, we knew the Texas market especially. We're located in North Dallas. I've seen single family homes go up left and right to where I know our install base overall is growing 10 something plus percent a year. Obviously the big, big driver here is adoption of turf. It's a relatively new product. When you look at the west coast where the kind of residential artificial turf trend started, you're at way, way higher penetration rates. We're talking 20x30x the amount of homes half turf there than they do here in very similar climates. And so you put those two together and then the third part of the trend that we saw was just millennials are finally buying home and we like to spend our Saturdays at a brewery instead of mowing our lawn. And so you combine the three together and you have real, real tailwinds and real, real reasons for the overall industry to grow dramatically. And obviously it had been. The financials were a true hockey stick. And so we had real reason to believe that was going to continue. And again, with an industry that's growing that quickly, you just get room for error because for every customer you lose, there's three more that you can do better on the next time.

[22:44] Host: Yeah, well, we're going to revisit this, but I. Before we get too far away from the kind of your philosophical approach to your search, let me ask a couple follow up questions there. You said a few minutes ago that you really just appreciated the speed to get in the seat and you really listened closely to the searchers you talked to that bought quickly elaborate on why that was so important to you. Because what you so often hear is that a search can take a year or two. And oh, by the way, there's nothing wrong with that. You seem to, you seemed to feel that, no, there is something wrong with that. I don't want to spend that time, that amount of time just searching.

Guest: Yeah, I mean, I think it's a little bit about knowing yourself right there. I think there's certain characters that are fine with kind of sitting in that discomfort and are very optimistic people and they're a year and a half in and they have the optimism and say, oh, I think the best ones are going to come around in month, you know, 21. I know that for me that wasn't the case. I know for me is like for every, you know, every month that ticked by and every month that your bank, bank account starts ticking lower, I would get that. That, that would have like a psychological toll on me and that would bother me. And so I thought that my best decision making and our best decision making was going to be in the first six months for sure, when you, you know, still have all the optimism and you're still early on and you know, you can be more, it's easier to be more critical. So I thought that having a high volume of deal flow and A high volume of deals that you look at early on is very crucial. I kind of compare it a little bit to if you have a night out on the bar. It's very similar where you probably make your best decision in the first hour of the night, not in the last hour of the night. I think that's one side, and then I think the other part too is it is really hard on these very small businesses with very limited data to like, be a better investor in terms of the business you, you buy. There's just so many external factors that Even if you're 100% on your underwrite in with the data that you have, most likely, if you, if we looked at a hundred small businesses that searchers bought, the outcome would probably not be. Or what determines the outcome is probably not something that people looked at during underwriting. It's that, you know, all of a sudden there's a new law in your, in your town and you just didn't know about, and that's why the business went bankrupt. I mean, you've, you've had big wins and big failures, or not failures, but where things went wrong. And I think most of the time it's not something that people had on the radar. And as much as I'm like, hey, when we buy the business, I want to be able to give you the postmortem of what went wrong. If it does go wrong. The reality is just in small businesses, you're not going to have all the information. And so I thought the importance of getting in the seat early and not getting to the point where you've had a failed deal or two, now you really want, you don't want to be the guy who didn't buy. So now you're at month 22, and now you all of a sudden, instead of just compromising on one criteria, you're compromising on three. And then that's how you get to really hot water. So I just think psychologically search is draining, especially you see people around you buying and whatnot. And a lot of it has to do with luck and timing and whatnot. But that's the part of why I think getting a high volume of deal flow early, getting a lot of looks, submitting a lot of IOIs and just being ready to go. That's the other thing. Just willingness to pull the trigger helps a lot psychologically and I think ends up in a better decision because you still have time and you're not too worried about, oh, I'm not going to buy something.

[26:38] Host: Well, it's Interesting hearing your approach here, Johannes, because I guess at its core this was a risk mitigation strategy. You didn't want to find yourself in month 22 making bad decisions, so you were trying to eliminate that risk. At the same time, it feels like somebody who's has a much higher appetite for risk than he's, he's giving himself credit for. Because, because you're just, you just really want to clearly want it to go, go, go. And that doesn't sound like somebody who is risk averse. As you, as you kind of self described.

[27:11] Guest: The.

Host: One of the other things on this, on kind of how you thought about Small Business Acquisition that you mentioned to me in our pre call was about the price that you pay in the multiples. You said a couple things that entry multiples don't matter as much as everybody thinks. There's a pretty tight band, so. And then there's another point you made that I'll ask second, so please, the multiples range and how you think about that. Elaborate on that for the audience, please.

Guest: Yeah, well, happy to. I think I started my career in valuations and I've done the game of building models with 100 and something tabs and thinking that as long as you have enough inputs and enough dials to push up and down, eventually you'll get the exact right answer. And obviously that's, that's not really the case. And so when we approached this, my, my thinking was, okay, what's really like the realistic range that you can bid here and the range that we came up with. And you know, obviously that kind of moves a little bit with where rates are. But effectively I was like on the low end, if you give someone three times, a lot of sellers are just, they'll just like run it for another three years and I can make the same amount of money. And so I thought bidding significantly below three times just isn't probably particularly interesting to sellers.

Host: I E not going to happen.

Guest: So.

Host: So don't expect that you're going to get a deal for that.

Guest: Exactly, exactly. And then, and then on the high end, you know, you have to get, if you're doing self funded, you have to get it through an SBA loan, so you have to get it through an appraisal. The people that do the appraisals, they pull the regular market comms. Like you're probably not going to get away with paying over five times. They're just not going to appraise it and you're going to have to put more equity in and that's you know, ruins kind of the investor returns. And then realistically, if you look at, you know, what the debt service covenants are that most banks have and everything, you're really looking at about four and a half times, right? And so I was thinking this was going in, I was like, well, realistically you can pay between three and four and a half times. And so we just came up with, okay, if it's a deal that's just barely good enough to where I would do it, and I can see myself running it for several years. But there's not, you know, maybe the industry isn't growing particularly quickly. The company needs a lot of internal work. There's no general manager, so you're going to spend all the time running the business. But it's an overall sizable, decent business. So like we, for example, we had like a 1 million EBITDA landscaping company in Dallas that we looked at, but it was, you know, very antiquated, very, you know, no reason to believe that that was going to grow quickly. That's a three times bid. And then on the flip side, I was thinking, okay, if I have something that I really, really like, you know, maybe already has a general manager or some level of management in place where we can spend most of our time on growing the business, Better industry, you know, all the other criteria, a better match, maybe a little bit larger, then you're kind of pushing towards the four and a half. And so when we were going through companies and evaluating them, evaluating them, it was literally like, get the, get the materials, talk to the broker. 30 minutes the same day, they would get an IOI for me. And it was literally just kind of like barely doing it. Three, kind of, okay, three and a half. I like it. Four. I really want to do this. Four and a half, right? And then boom, like, we were usually some of the first to get them in ioi. It was like on a, you know, on a normal template template, it looked legit. We had a call with them and so that's how we were able to move really quickly.

[30:52] Host: So IOIs are less used and less well understood compared to otherwise, which are. Every deal has an ally. Not all deals have IOIs. Explain what an indication of interest is and you know, what, where it falls in the sequence and what happens if you, if you send an ioi, you know, paint a picture here.

Guest: So an indication of interest in, you know, the small business buying process is effectively just where you tell the seller the number that you would, that you would bid for and then there's a bunch more text on the page. But in reality it's just like, hey, I'm willing to pay 4 million. Is this even something we should talk about? That's really what it is. And usually what we would do is have a little bit of a range. So maybe the range would be from like 3.75 to 4 times EBITDA. And so, you know, maybe it's saying, hey, we'll do 3.75 million to 4 million in that range. And, you know, you put the EBITDA there with it. And so very quickly you either get to the point where the broker or the seller says, okay, this makes, you know, this is in the realm. Let's talk about it. And at that point you go into more details around, you know, how the deal is going to be funded, things like working capital and other parts of the deal structure. But it's a good way of very quickly saying, is this worth pursuing or not? Because we're even talking about the same kind of price level.

Host: So really, the technique here is that you are bolstering your own, the perception that the seller has of you as a real buyer. Because it's not, it's, as I said, it's not actually that common to use IOIs. So. So typically, you know, this kind of in the, the way the, the buyer indicates interest is just kind of asking for more information. And, and there's back and forth with the broker and maybe a call with the seller, but there's no formal, like, indication of interest. I'm now being circular here. So. So an ioi, an indication of interest is like you are raising your hand and kind of formally saying, here we. We think we like this business. Here's what we think we'd pay. And that just kind of makes you seem more serious, really, is. That's kind of like, yeah, that's. What benefit does it serve to you to do this? It makes, I'm gathering that it makes you seem more serious to the seller.

[33:12] Guest: Yeah. So I think as a searcher, anything you can do to look more professional and more serious is obviously a benefit. And we can talk through that part. What it helps us most of all is a lot of times you don't know what the expectations are of the seller. Sometimes they list the price, sometimes they want more, sometimes they want less. You also don't really know necessarily where that deal is in what process it's in. And so once you've made a formal offer like that, you can then follow up the next day and say, you know, what do they think about the Offer, where are they at? And then you'll relatively quickly get answers from brokers around in the ballpark. Too low. Oh, we have three other offers. You know, you start moving to the next stage of like seriously talking about putting together a deal versus if you, you know, you don't want to have three calls with the broker and ask for more information. And ask for more information. Because all that broker is going to read from that is they're difficult to deal with. This might be a cumbersome process. They don't seem very committed. Right. Because you'll see sometimes when competitors buy each other in small businesses, that deal is drawn up on a napkin. The broker says, hey, I have a deal come up and it's like, give me the revenue number and we'll go. Right. And so I'm not saying that's what you typically compete with. I think most of your competition is probably other searchers. But I think, you know, we, I think we got at one deal out of everything we looked at where the broker just wouldn't give us the materials. And I think a lot of that was, hey, you know, the initial message we sent to them was just, you know, this is who we are, this is why we're interested in the space. We'd love to take a look at the materials. They would send us the materials. We'd go through materials and say, hey, can we have a quick 30 minute call, talk about it? And we'd have our initial kind of gauging questions of is this even a deal that we want to do? Right. And then after that deal it was okay, I'll send you an offer later today. And then it was effectively, in reality it's just a number, but it was a well written out email. This is why we're excited about the deal. This is why we're the right people for the deal. And then you have an actual PDF document that's attached that says indication of interest and here's the number. And so I think it to be

Host: very clear here, Johannes, when you say offer in the context, you just use it. You mean ioi. You do not mean loi. Yeah, yeah, we're still talking ioi. Okay, just clear. Because sometimes people use the word offer and loi interchangeably. You're using with Iowa. Okay, okay. So, so you, you, you see the listing, you ask for materials, you maybe have a 30 minute call with the broker just to kind of like get some high level feedback, apply some high level filters. If it passes those filters, you send an email to the broker and the body of the email with a PDF attachment. The PDF attachment is a kind of A1 pager, which is the formal IOI. And you also kind of bullet point what those are in the body of the email. And that can all happen in 24 to 48 hours, correct?

[36:18] Guest: Yeah. And I think the overall point here is, right, what I wanted to start with is let me look at businesses that I can buy at a price that I would buy them at, and then let me figure out if I like them, if I really like them. Right. Like, you don't want to waste time and just like submit iois and whatnot on companies you never buy. But anything that's in the realm, let's make sure we're at a, at a price point where it makes sense for us to have a conversation. Because the worst way to waste time as a searcher is you start getting into the weeds of a business. You really, really, really like it. You get to like week eight. And then they're like, oh, yeah, we want 15 times. I mean, I'd never sell for learn. It's like, well, great, now you're an industry expert in like some random industry. But that's not very helpful to what you're trying to accomplish.

Host: Yeah, yeah. And so these businesses that you're. These listings that you're seeing are not just on biz by sell, obviously, because most businesses on biz by sell do already have a price listed. So where, where are your other. Where are your sources of deal flow?

Guest: Yes, so we started with the, you know, regular brokered brokerage sites. I think, you know, in the last two years, there's been a lot of deal aggregators that have made that easier. At the point we were searching, there's still probably 20, 30 websites that we were checking. But what I would say is I don't care what the price is on this buy sell. I'll tell you what I'm willing to offer and you tell me if we should have a conversation or not. And so we'd go through and say, sometimes we'd bid over, sometimes we'd bid under. It's that the price that you want for the business has nothing to do with what I'm willing to pay for the business. And so we just go through, say, is this business itself interesting? Here's what I will pay for it. Should we have a conversation or not? And then plenty of times they say, no, we shouldn't have a conversation. Okay, good. Good to know. Move on to the next one.

Host: Gotcha, Gotcha. Oh, wow. Okay, so, so the listed price is something that you kind of really didn't, didn't factor in too much at all. I assume if the listed price was so egregious that would be just, you could filter out that listing without even spending any time on it.

Guest: Yeah, well, but you got to remember there's, there's good brokers and there's bad brokers out there. And one of the worst qualities and bad brokers is that they just won't tell a seller that they're delusional. So the seller comes in and says, I want 20 million for this business and it's worth 5. And then he lists it for 20 million. It sits on biz by sell for 90 days and nobody has inquired about it or the people that have inquired about it do some diligence, try to figure out a way they can make the 20 work and then just walk away from it. And so then if you come in and you're the first person to say, hey, I'll buy it, it's going to be for five, but if you want to have a conversation at five, let me know. And then probably in the first go around they're going to tell you, yeah, no, it's worth way more. And then six months later you probably get a call and say, hey, are you guys still interested in this? Yeah, that's why I'm not saying ignore the listing price entirely. But in general it's like your valuation is what matters. Right? You're the one who's paying the money. So it should definitely start with this is what I'm willing to pay. Is that something that you guys are interested in?

[39:15] Host: The other follow up question I had was another thing that you said in our pre call was that going back to multiples and what you pay for a business, we've established that, you know, there's kind of a tight band of basically three to four and a half that you're going to pay within. And you also, in terms of moving quickly and getting in the seat early, you also have this, this view that paying a little bit more now, a higher multiple is like paying less later and you just wanted to get going sooner. What did you mean by that? Elaborate on that comment.

Guest: Yeah, so the idea is if you think about larger businesses, pretty much all of the outcome that you're going to have at the end is the multiple that you're going to get. You're going to grow EBITDA by a little bit. But if in that time maybe you bought it 12 times, you sell it for 20 times whether you grew at 10 or 20% doesn't matter. It's all about the multiple. And so that's why people are very, very focused about buying cheap on the front end. There's also plenty of research that, looking at the equity asset class, that will tell you the number one predictor of returns and outcomes is buying cheap. Now where this is a little bit different for really small businesses is that the multiples are so low that one year's worth of cash flow is a meaningful portion of the overall enterprise value. Right. So if I buy it four times today and I get the cash flow from a full year, I'm effectively sitting at three times of that value one year later.

Host: Right.

Guest: It's ignoring taxes. But let's just like, for simplicity, think about it that way. And so what I was thinking about is, you know, a business that I buy today, like, I think a lot of people get hung up on, you know, like a quarter turn of, you know, or like $200,000 that you fight back and forth on on a business that does a million of ebitda. And you know, the reality is like in the, in the two months that you just argued about this, the business generated $200,000. Right. And so the idea is that if I let a business go for, you know, when we're close early on, I have to find something better at a, at a significantly lower price later on. Right. And so if you think about, if you're, you know, two months into search and you can buy something for let's say four and a quarter times, or you're two years into search and you can buy something for three times, you as a searcher would still have made more money buying that same business for four and a quarter times two years ago. Now that's a little bit different for investors because obviously the cash flows get distributed very unevenly in self funded deals. So you don't want to just go haywire with, with your multiples. But what I'm saying is like when in doubt, I think it's a reasonable strategy to pay a quarter turn more to get a business that you really like early on because of the dynamic that these businesses generate. Real, real cash flow.

[42:20] Host: Yeah, well, it's a fascinating and I think very strong point. And it also, you know, part of your analysis there I think is also useful for people to think about is we think about these multiples three x three and a half, four and you're like, oh well, three and a half is so much more than three. Well, if you map what those Turns what the number before the X represents to number of months. They all, they'll all of a sudden seem a lot smaller. So half a turn or 0.5x, that's six months. Like six months goes by like that. So, so it's like, so just when you, if you're negotiating tooth and nail with it with a seller between three and three and a half X, he wants three and a half. You, you only want to give three. You know, realize that it's just, you're basically just offering another six months of working in the business if you just give him his, his three and a half versus your three. So I think, you know, yeah, mapping multiples to months can be, can be helpful to realize that we're oftentimes kind of bickering over tiny, tiny blocks of time. Really tiny blocks of time.

Guest: That's a, that's a great way to put it, Johannes.

Host: Okay, so this is fantastic. I know we're, we're spending a lot of time just on the search itself. We got a long way to go here. But this is, this is great stuff. So you're. Okay, we have an. We have established your IOI technique. And you also then sent out a flurry of Lois. So talk about how you guys were just like sending out lots of iois. And Lois, it was just like an expression I heard from, from a guest the other day. Violence of action. The violence of action.

Guest: Yep. No, that's, that's very true. So I, I think, you know, we talked about for most IOIs, it was probably a two to three day turnaround from finding the listing to, to giving them an ioi. Then a lot of times you'd have about a week or so of them figuring out if it's worth to look at or not worth to look at. And assuming they said, hey, this is in the ballpark, let's move forward. We usually have one big call with the buyer, probably, you know, an hour or two or something like that where we kind of checked off all the, you know, we've already had the first half an hour call with the broker. Now it was kind of a little bit more in depth and at that point we would convert the, the IOI where we kind of had the number to an loi. And what was important there is, well, let's say we have a little bit more concentration that we like or there's, you know, some things that we don't like as much. So maybe we would structure it with a bigger seller note or maybe we would bid at the lower end of the range that we had put in the IOI or something like that. And so. But again, being easy to work with, giving people real numbers quickly. So, you know, from the seller side, they would have to spend one hour with us, and then they would get an loi. And so in the LOI, at this point, the LOI just lines out all the deal terms. I think people that listen to your podcast are obviously familiar with that. And the big points for us were obviously the price, the structure, including the seller node. And then we already did working capital. That's one thing that I think kind of depends on the deal if you want that this early or not. But what we do there is relatively quickly give the seller something to respond to. And then a lot of times they would ask for a little bit more money, or they would ask for a little bit smaller seller note. And the way we resolved that was usually I would give people two options. I would say, hey, I'll give you a smaller seller Note, but it's 100% forgivable, or I'll give you the bigger seller node, and maybe it has a ladder of forgivableness, or maybe half is forgivable, half isn't. And so what you do that way is you kind of make them put their money where their mouth is, and you just have two options that you really like. So maybe you do a million seller node, but not all of it is forgivable. Or you do half a million, and all of it's forgivable. Right. And so that way, instead of arguing about, hey, but this is what it's worth, this is what it's not worth, that's never helpful. You give them two options to pick and say, if you want to do this, you know, let's. Let's pick one of the options. And so we. We did pretty well with that, that kind of approach. And, you know, probably converted well. We. We signed three, three or four. Lois. It's been a minute now, but at one point we had two. We had two signed at the same time. The nice part of being partnered search is we. We probably would have just done both if. If both would have gone through. I don't recommend just blindly signing Lois and then walking back on deals. I don't think that's good form. But I do think that just because you have something under LOI doesn't mean that you stop searching, because we all know there's a decent failure rate there. And then we also had, even after that, with IOIs that we had submitted earlier, that would have gone to the LOI stage. So I think overall it was just an approach of being easy to work with, being very actionable and like not getting into the. Well, you know, I got my MBA and the working capital needs to be the just like let's, let's figure out a deal that I would want to do, that you would want to do and let's keep moving forward. Keep moving forward.

[47:34] Host: Yeah. So it was, it was not being overly kind of onerous in trying to kind of perfect every little aspect of the deals. That was part of it. And then the other part of it was the quantity, the kind of flurry of iois and Lois that you guys were sending, that was, that was kind of the two pronged, you think, strategic advantage that led you to basically getting something your LOI out signed in in six weeks.

[48:03] Guest: Yeah. And I mean, look, I'm not going to say there wasn't also, you know, luck involved. Like I'm the last person to say, you know, it's, you can do this robotically, but I have seen people buy on similar timelines using similar approach. I think that the part that we do have to add to your analysis is like probably bidding a tad bit higher. Like I think we probably were on average a quarter turn or so higher. And so that just gives you, if you're fast, pretty high and easy to work with. That's a lot of reasons for a broker to talk to you and you can move through things fairly quickly.

Host: And what were some of your criteria in terms of size of business, by the way?

Guest: So we said the absolute minimum would be 750k of EBITDA, really looking for a million plus. And that is one point that we got really lucky on. But that I think is way more important than I even thought. I think there is a fundamental difference. If you have a business where you are the main manager, so where you are the general manager, you are running the day to day operations versus what you have, one level of management. So I think a big reason why we've been able to grow this business as fast as it has is because we had a really good general manager in place. And so we spend 80 plus percent of our time working on the business and not in the business. And it's also a fundamentally different role that you're playing. And I think especially for people that come from banking, consulting, private equity, like corporate Fortune 500, where you're used to kind of very intellectual or generally intellectually stimulating work and difficult intellectual problems rather than just like you have an upset customer and you just have to deal with it. I think that's something that we're very grateful for, that I get to figure out how to get in the depth of SEO and marketing channels and run all that and figure out what the best software system is. And it's just kind of like almost project based consulting work on making the business better rather than every day. There's always someone who's upset and some fire to be put out. And those are just very different roles. And you got to remember that if you're searching, you're going to do this. Even if you're going to sell your business for three or five years and being eyes wide open of what your day to day actually looks like I think is pretty important, especially when you go through the search and it gets very appealing to look at the 500k of EBITDA and the 400k of EBITDA. And I think it's very dangerous to buy small because if you were really small, you probably have very few employees and that means inherently you have concentration risk. If you have four employees, you have 25% employee concentration. And you're one irrational decision away from having to figure out something that or you have no transition with an employee and it all falls on you and all of a sudden you're spinning your wheel.

[51:13] Host: Let me ask you though about the GM and its correlation to size of business, because I feel like that correlation I used to kind of tightly couple and now in my own mind I've kind of decoupled it because sometimes a business might have a lower SDE 3, 4, 500 precisely because the existing seller has invested in putting in a GM. So it's a 4 or $500,000 SDE business, but it has, you know, a middle layer of management, otherwise it would be, you know, closer to six or seven and so, and vice versa. So if it's a 750 or $800,000 SDE business, it might only be so rich because, you know, the sellers, the seller's doing all the operations, him or herself, and they haven't invested in the gm. So I do feel like you have to take those, you have to take those two characteristics of the business separately.

Guest: Yeah, 100%. I just think it's fairly rare for businesses of that size to have the GM if they do. Fantastic. Yeah, I think 100%. It's not a pure size metric, but it tends to correlate pretty heavily. I think there is like, if you think about, there is a real, real sweet spot in kind of the American ecosystem. Of running your own business having like five or so employees making 7, 800 grand a year and you've got it figured out and it takes you 40 hours if you can get to that point. Not a lot of people let go of that. Right. And then you're also, you get the validation of you're the head guy, you're important, you have standing and that kind of thing. So I personally have never seen a business that has a GM that does 400k of true EBITDA. Not saying they're not out there, but yes, if, if you find one of those totally applies to the GM category. I just haven't seen a lot of them.

Host: Okay, okay, fair enough. And then Johannes, you know, you pretty much said everything I think that there is to say about buying a business with a GM and how that completely changes what you and your partner have been able to work on day to day. But it's so important, let's dwell on it for a second. So one follow up question would be one of the kind of arguments for buying a business that doesn't have a gm and so you come in as the operator for a year or two is kind of what the vision would be and then you hire a GM and the value there is that you really, really learn the business and that, that, that have, will have that investment on your part will have some long term value to how you can then strategically run the business when you hire that GM and step up and start working on the business rather than in it. You guys haven't, you guys aren't, haven't been operators at all. Do you, do you see any validity to that argument or are you like, no, you don't really need to operate the business. Try if you can get it. Just buying a business with a GM 100%.

[54:21] Guest: If you can find one with a GM, find one with a GM. Because the answer is like, yeah, I mean the real answer is like you'll come into the business and you'll learn everything about the business, but pretty quickly, right? Good operators execute the very similar thing day after day after day after day. And so I think by the time we were six months in, I could have told you how you run a turf business and we could have run a turf business. Doesn't say, mean I want that role. Right? And like I can tell you from we, we opened a new location in Austin earlier in the spring where we effectively played that role and that location is doing just fine. But it's not what I want to do and it's not what I what I think the best use of our time is. And so I think when you first come in, even if you have a gm, you're still going to go through the same processes, right? Like you're going to go through what is everyone doing? How exactly are we doing every piece of the business? You're still going to learn all the same processes. The only difference is then instead of you learning it and then having to execute it day to day to day to day, and then having to figure out in your downtime or in the evenings how to improve processes and make it bigger, you get to spend the majority of your day on that. So I think when you buy a business and you sign a personal guarantee and you know it's make or break on this, you have plenty of incentive to figure out how to run that business successfully, even if you're not answering every customer call and you're not dealing with every heat case and you know those aspects of it.

Host: And returning now to the question of criteria for a business to buy and how, as we talked about your professor, slap in the face, so you relaxed some of your criteria like recurring revenue. And then now looking back, you kind of think that having nice industry tailwinds is a criteria that searchers should really prioritize. Is this one also a criterion that searcher. You think searchers should really prioritize? Look for a business with a GM in it, or maybe it's at least ask yourself like, you know, really envision yourself in the business and ask yourself what you want to be doing day to day. Don't kind of not address that question directly. And if you decide that you really don't want to be an operator, then yes, one of your criteria needs to be buy a business with a GM in place. Did I just answer the question?

Guest: Yep. No. I think it's very similar. I think the tough part is it's a little bit of a luxury at the end of the day. I think if you look at the landscape of businesses that fit the criteria that Church is looking for, I bet that maybe 20% of them have a GM, maybe less. And so I think it's, if you can get it, highly recommend doing that. I don't think you should start a search and say, I'm only going to do that because there's a decent chance you're going to pass on good businesses where you're just going to have to get your hands dirty. Initially we had a small business roundtable with 10 other guys that bought around the same time. And I think we were the only ones who had a true GM like that in place. One of them was kind of down the road further on, four or five years in, so he was in a similar spot. But I think for most people or most searches that buy, you're probably replacing the owner and you're going to have to get in the trenches for a year or two. What I'm just saying is be cognizant of what that actually looks like. And if you can, I would probably pay up for a business that has a GM that's going to stay in, is long term incentivized, because I think that depends on what role you like. If you want to be an operator, then obviously be the operator. But I think for most people, the typical background that searchers have would enjoy the working on the business than in the business a lot more.

[58:09] Host: Yeah, yeah. But you guys, to be clear, you guys would have, you were prepared to and would have been willing to be the operators for your buy business where you were going to be the operator for year two. Okay.

Guest: Yes.

Host: Okay. All right, let's, let's get into the business that you bought, Johannes, because there's, there's fun aspects to that whole story. So how do you find DFW Turf Solutions? What was the source of this particular

Guest: listing listed on Biz by Sell? So right down Main Street, I think the reason we ended up getting it was because it was growing so quickly that it was very tricky to make that deal work with an SBA loan and we kind of had to get creative on that side. But so DFW Turf Solutions is an artificial turf install business. Our bread and butter is backyards in suburbia. So, you know, we're based in Dallas, obviously, so you have a lot of people that can grow grass in their backyards. There's shade or they just don't want to pay attention to it. And so, you know, you just moved out to the suburbs, you bought, you know, spend a pretty penny and five or six hundred grand to finally get the house. And now the dogs are muddy and the, the kids are scratched up and you're like, hey, I, I want this to be a usable space. And that's, that's where we come into play. And so we do lawn turf, pet turf, we do putting greens, and that's about, you know, the majority of what we do. And then we do some light commercial jobs. So, you know, apartment complexes, restaurants, dog parks, things like that. We don't really do the big sports fields. That's a very different industry. But that's yeah, that's the core of the business.

Host: You had said that it had been, it was a growthy business. It had grown a lot in the years prior to your acquiring it, which made financing difficult. So elaborate on that whole aspect of this.

[1:00:05] Guest: Yeah, so, so you know, we're, we're talking about late 2021. They wanted to sell off of year end 2021 numbers. The business had grown, I think LTM we're sitting at like 60% growth or something like that. For year end it was going to be close to 70. And so if you think about most banks finance based on last year or last three years and a certain debt service coverage ratio there. And so the standard or at that point typical kind of like 80, 10, 10 AD, SBA loan, 10 cell and O10 equity was going to be really tricky. And so we ended up finding a bank that was willing to start underwriting based on a Q of E, like an LTM Q of E and then say, hey, let's wait for the, let's close with the 2021 tax return. And so that way we were able to offer them a real price on the current size of the business. Because obviously it looked very, very different in 2021 than it did in 2020 because it was growing so quickly. And so one was structuring something that made the numbers work and then the other part was obviously one understanding and assessing ourselves if this was just a fad and a one time, obviously we're still coming out of COVID and everyone is talking about COVID pops. And then once we got comfortable with believing that it is a long term trend, convincing the banks that it was as well. So there was a lot of, I think the financing piece was the most difficult piece of the deal because the diligence itself, both financing financial operationally, everything else came back kind of squeaky clean, as good as you can. Didn't have the typical sellers are running a ton of personal expenses through the business. None of that was happening. So the other sides of the deal were pretty easy. But the financing piece was tough and then had to kind of nurse it. Ended up taking five months to close because we had to nurse it to the finish line.

Host: And so how do you value a business that is growing 60% year over year? What was your kind of multiple going back to that or your valuation? How did you calculate that?

Guest: Yeah, so it was same thing as before. Right. Going back to the three to four and a half. We liked the business a lot, had the gm, it had the industry tailwind. So it was towards the upper end of that range. And quite frankly, it's one of those where I wouldn't have been surprised if they didn't end up selling it because it was growing so quickly. And you could easily make the case that if we wait another year and we get the same multiple, then we'll sell for way more. So we stuck to the same process we walked through earlier. In their case, the sellers were selling because they wanted to use the money for real estate development. They had gotten in real estate development already. I think that's a big piece. When you have a business that's growing very quickly, there's not a lot of incentive to sell that at any given time, especially if you're talking about 30% plus growth. I think the reason for selling becomes all the way more important because the seller knows way more about the business than you do. And if it turns out to be a fad, they have a lot of reason to sell whenever they think it's peaking. So we, you know, we actually looked more into that, looked at what projects they had developed, asked them about how much money they had made there, and it turned out that they actually were likely to make more money on the real estate deals than this business. So that's when we, you know, took it as a good enough reason to sell the business. Everything else is like, oh, it's, you know, it's a lot of work. It's like you have a GM that's running the business. It's growing quickly. Like, why would you sell this? Yeah.

[1:04:00] Host: But you got comfortable that they really wanted the capital.

Guest: Exactly. They had specific deals lined up. They were starting a 50 unit townhouse development and this was going to be the equity. So it's going to go out of, you know, out of the bank account, like in the bank account and right back out of the bank account. So yeah, yeah, there was a reason there. And then for a fast growing business,

Host: the multiple of SDE or ebitda, the EBITDA number that you use is just last year's. Or is it like a blended from the last 36 months?

Guest: It wouldn't have worked as anything blended. Like, I think the, the, what we had to get comfortable with was that the size that the business was at this current point in time. So essentially last 12 months was going to be the size that the business is going to be going forward or, or bigger. Right. And so a lot of it for us was, you know, do we believe these tailwinds? Do we believe this is a fad? Or do we believe this is, this is long term sustainable, right? And so, you know, if you look at, like, part of how we got comfortable with that was, you know, we've done a lot of deals in home services. We know what reviews typically look like. And the reviews across the whole industry are insane. Like, if you're a 4.7 rated turf company, you are terrible. You are absolutely terrible. And so you have, you can see that, you know, consumers love the product because it's not like the turf industry is just so much better at customer service and everything else. It means that even a mediocre performance must satisfy most customers. Otherwise you'd have, you know, way more bad reviews. So that was one where we're like, okay, the product is really hitting with the customers that you have. The second piece is we looked at, you know, where did this, where did this trend come from? And the reality is that it had their turf companies in Texas only started about like 2010, 12ish, were like the first ones. So for most people, the pitch is still, like, people don't even know about the product. Like, almost everyone we talk to is like, hey, I just want a solution to my dogs being dirty all the time. Like, does this work? And so when we looked at where did it come from? Like, it was a lot of the distributors, like residential artificial turf only started about 20 years ago on the West Coast. And then it's usually the distributors started first and then you get the installers coming after. And so you had two of the bigger distributors come to Dallas in like 2010, and then one in 2015. And then you see kind of with a lag after that, that the adoption really picks up. Right? And so you have the, you have the reviews to prove to you that the customers love the product. And obviously we talked to other customers as well. Second piece was the share of the business that came from referrals was really high. Which tells you that once people get the product, they talk to their friends. And you have a real mode of getting the word out without having to pay for every lead and those kind of things. So people love the product, people get the word out. And then you look to the west coast and where that trend has already played out. And I think when we bought, my best guess was that one in a hundred homes in Dallas had turf. And if you go to Southern California, Arizona, it's one in five or more. And so you're sitting there saying, okay, and at the end of the day,

[1:07:19] Host: you can see the future. Basically, you can see the future markets.

Guest: And so that's really what we said at the end of the day, look, that was the analysis and we obviously we did more than that. But when it comes to buying small business, at the end of the day, you're taking a bet. And my bet was that North Texas is going to keep growing and I think turf is the turf adoption trend is going to keep growing and that's what we're going to hang our hat on.

Host: Yeah. So you were, as we joked in the pre call, you were long turf in long Texas. Exactly, Johannes. So you referred to size. How big was the business at the end of 2021?

Guest: So when we bid on it, it was doing just over 5 of revenue

Host: and skipping to the end. What is it going to, what do you project it'll do by the end of 2023?

Guest: So we're, we're more than three times the size. I'm not going to say an exact number, but probably, you know, close to, close to three and a half of three and a half times of what we were when we bought it.

Host: Okay, so conservatively you've tripled the business and you will have tripled the business in two years. Pretty spectacular. And how many employees was it when you acquired it?

Guest: So I think we had seven or eight. It's grown a lot. So I'm kind of drawing a blank. We're sitting at 22 today, so it's been a lot of change.

Host: Yeah, fantastic, Johannes. Okay, well it sounds great now, but as I recall the first two weeks of ownership were terrifying. What are the trends? Tell us a little bit about the transition.

Guest: Yeah, so I think, you know, one of the, one of the things that we did in terms of just swinging for the fences was structure a deal that was probably a little bit too tight on the, on the liquidity front. I didn't want to raise a single extra dollar that I didn't need to and give up equity because in our mind this was really swing for the fence, go big or go home. And I think that's a little bit of part if we can talk about the personal guarantee and those kinds of things. But really the way we approached it was like I want to have a chance of hitting the number and walking away. And so one of the things was we started with almost no cash in the bank account because legal ended up being a little bit more expensive and a couple other things. And so we really needed cash to come in the door pretty quickly. And so we took the business over. Handoff went well, all those things went well. But then we had snow and Ice for the first two weeks, which means we couldn't install at all, which also meant that no cash was coming in the door. And obviously the clock on the first debt payment starts ticking. And that is definitely a memory that's burned into my mind. And that was not very pleasant, having to think about potentially having to draw on the revolver for your first debt payment. Luckily, the weather let up. You know, late February, early early March were really good. So we never, never got into that trouble. But that was certainly one where, you know, you lost a night or two of sleep on no doubt.

[1:10:27] Host: And was there anything. I guess the answer was simply weather. There was nothing that you guys did to juice sales. Like, there were no leads. And then the sun came out and there were leads again.

Guest: No, no. So the problem is that there were plenty of leads, but we can't install. So we had the jobs on the board to get installed, but as long as we don't install, customers don't pay until the job's installed. And so it was literally like we were just waiting for the weather to be good enough to install. Gotcha.

Host: Okay. So you did have the comfort of having a pretty deep pipeline.

Guest: We had. I wouldn't say deep. I mean, it was probably, you know, you know, two, three, four weeks or something like that. But it was more, you know, it was fine. Like, it's not. It's not one of those where, like, oh, we have visibility for, you know, half a year or like, nine months or something like that, as you. As you do with, you know, a pool bill or something like that. But we had enough to kind of like get off the ground and running. And then the big thing was obviously, like, spring is like when, you know, most people go outside and think about what they're going to do with the yard. So we were. That's another big thing that we focused on was when you have a seasonal business closing at the right time because you don't want to do is close and then go into slow season. That can be pretty brutal. But it was just so everything was lined up, and then it was just, you know, it doesn't freeze a lot in Texas. And so it happened to be the first two weeks that we owned the business.

Host: And then March came back, but then I think you said April was bad again. So it wasn't just one slow patch. It got. It went up and then went down. I mean, it was a kind of rollercoaster there.

[1:12:02] Guest: Yeah. So it was, you know, it was like a scare to start with. Then March went really well. Like, you know, record month in March, all time, even though, you know, traditionally that's, that's one of the slower install months because the weather just isn't that good yet. And then the next big scare was kind of Memorial Day when the phones just kind of dried up. And, you know, we had obviously been watching rates starting to take up, gas prices are ticking up, and at the end of the day, you know, if the difference is between putting food on the table and putting turf in your backyard, you're probably going to buy groceries. And so we were kind of, you know, the thesis of like, this trend is going to continue was getting a real, real challenge there. And it turned out that weekend was just because it was a holiday weekend and people have better things to do than call the turf company on a holiday weekend. But that's the thing. When you're in the first year of operations and the prior owners didn't have a lot of data, you just don't know, right. You're flying blind until you kind of lap one year around. And now you've, you know, that's one of the big things you should do is like day one, start tracking. Because then the sooner you start tracking, the sooner you lap one, the sooner you lap one year. And then, you know, it all gets put in perspective.

Host: Baseline.

Guest: Exactly.

Host: You can establish a baseline. Yeah. This was something that I recall, I wanted to make sure you mentioned. Thank you. From our pre call, where particularly kind of people coming from corporate environments, there's a lot of historical data, typically in an, in an institution, to refer back to and to compare whatever numbers you're seeing right now to. But in our world, when you buy business, you know, the previous owner probably doesn't. Wasn't tracking that data or took it with them or whatever. It's just, it's way, way more opaque. And so the sooner you can start tracking the data, the better to establish your own baseline for next year and the next year and the next year. So you want to build your data set. I thought that was a really interesting insight you had.

Guest: Yeah, no, absolutely. I mean, it's. It's literally like you're. You're flying blind initially. Like the. I think the first day is kind of surreal. When you own a business and there's work going on, you don't really know anything yet because you don't have any passwords, you don't have any. You don't know if we're having a good day or bad day. Right. You're not involved in any of the processes. And there's a little bit of a surreal moment where you sit there and you're like, I'm depending on these eight people doing their job or we're going bankrupt. Right. There's a surreal moment there. And obviously you transition quickly and you learn everything and that kind of thing. But I think that having data as soon as possible is very crucial to calm yourself down, get perspective, and just have longer term trends rather than just being like, fantastic week. Was a terrible week. It was a fantastic week. It was a terrible week.

Host: This is probably a good opportunity to talk about the personal guarantee where, because you're experiencing these moments of terror when you're having these terrible weeks and you don't have any data to know whether or not you know what's going on. Really, I think you just kind of wanted to speak to that. What did you want to say about the personal guarantee? We all know that it's the most unhappy aspect of these, of the way these deals are structured.

[1:15:16] Guest: Yeah. I mean, I think you have to look at it in the broader context of the SBA 7A loan, which I think is the greatest vehicle of wealth generation in the U.S. hands down. I think most people that listen to your podcast probably saw that article in the Wall Street Journal or wherever it was, where they looked at all the millionaires in the US and how they made their money. And it's like 70% of them are business owners. So it's like if you. That's what you want to do and if that's what your aspirations are, to probably own a business in some way, form or fashion at some point. And then coming from Germany, there's no comparable instrument like the 7A loan, where you're effectively getting incredibly cheap leverage and you get to own a big percentage of a reasonably large company. Like, it is the definition of making money with other people's money. And then obviously the drawdown is the personal guarantee. But I think one way that people don't think through as much is so, for example, if you live in Texas and you think about. Because obviously I wanted to know what the downside is, you know, what the upside is. I was like, okay, if this goes south, what are we actually looking at? Well, your house is safe, your retirement accounts are safe, there's like a certain amount of personal property that's safe. And you kind of go down the list and pretty quickly you're like, okay, so you're telling me if this goes south, it's going to be a shitty year in terms of having to go through bankruptcy court, having to go through the settlement, your credit score being ruined. And I'm not 100% sure if you're allowed to work in the securities industry anymore. I think you're not allowed to do that. So you can't go back to like finance, I think. I'm not 100% sure. But other than that, it's like, you're really not losing that much. In a sense where I'm like, from what I had going into this, which was effectively I took the money I had and I was like, it's either going to go for living while we're searching or going into the deal, or it's in retirement accounts or in the comment I have, I was like, the downside doesn't seem that bad. It's not what you want to do, right? But if I'm like, if the answer is I have, on the upside, I get a chance to be done at 35 and very well at 35. On the downside, I start over at 32, I still have my car, my house, the retirement accounts, whatnot. And yeah, it sucks. And you have that scarlet letter to a certain degree on your chest. But, you know, so what I work,

Host: you're not gonna lose every last penny.

Guest: Yeah, so What? I work five years more from 50 to 55. Like, what's the alternative? The alternative is I retire at 50. And like, the downside is I retire at 55, but I have a chance to be done at 35. I was like that, that deal sounds pretty good to me now. That's, that's for Texas. I don't know all the state laws individually. I think there's some that don't protect the home as much. And, you know, people should look at that individually. But now it's still scary, right? It doesn't, it doesn't take away from the fact of, like, it's not a pleasant experience and not one you ever want to experience. But I think it's important to go through all that before you get into search and really think about, okay, this is my upside, this is my downside. Am I, am I okay with the worst case scenario? What's my reason I'm doing this? Because whenever you get through the diff to the difficult parts of like, am I willing to pay up a little bit right now to get this done?

[1:18:47] Host: Or

Guest: am I willing to move on from an employee that doesn't work and threaten us, but maybe is contributing really to the business? I think in those situations, unless you have that foundation and you really done the soul searching before going in that's when you waver and maybe you don't close the deal and you're like, ah, I don't know if this is really for me. So I think it's very important to do that ahead of time. So then when you get into the situation, you're ready to pull the trigger and make the decisions that need to be made.

Host: That's sage advice. Kind of knowing what your tolerances are before you get into the heat of a moment where you're much likely to be less rational, more emotional, more rash, kind of set your own kind of borders of your own behavior and know what your tolerances are before you go into it. It, it's great. And just to, just to reemphasize what you said about Texas, I don't know either. I'm not an expert on this, but I, I have heard Texas mentioned multiple times as a place where your home is kind of protected in, in a personal guarantee situation. So it, Texas may well be really an outlier and not many other states do that. Do your homework, people. Neither Johannes or. I know, but don't. But, but my sense is that Texas is the exception, not the rule on that kind of generous approach to the personal guarantee.

Guest: Okay, just, just move to Texas when you start searching

Host: and definitely get some turf. All right, I got four or five more questions for you. These are. Okay, some are about your, your story and your deal and then some are just kind of broader. The. Let's return now just to the growth here. Okay. So you are looking at, as I said, conservatively tripling this business after two years. And this, we already talked about how kind of why Texas is high growth. You can see the future of turf adoption in looking at the markets in California and Arizona where turf arrived a decade earlier or more. But, but this, but I don't think that you were projecting this incredible amount of growth, were you? And, and, and, and is there anything, is there any genius in, in you and your partner's management of this that has contributed to the tripling of the business? Give us, tell people more about how you've done this.

[1:21:14] Guest: Yeah, so I, I think, you know, obviously our, our thesis was that there's consistent growth. I don't think you can underwrite, especially with the amount of data we had, which was very limited. Right. Nobody tracks turf installs in Dallas or something. So you're, you're talking about, you're coming up with your own data the best you can, but you don't really have good data. So I think we were confident that we would have solid double digit growth probably, you know, on the high end, you know, 10 to 20%, like was like a conservative estimate that we thought was supported just purely based on the factors that were long established and kind of inevitable in terms of, you know, the people moving to Texas, the millennial home buyer and a certain level of adoption curve. Now I think we certainly didn't underwrite that level of growth and I think there's definitely a good part of right place, right time, but I think there's also a part of a. Not as many people were willing to take that risk of buying a project based business with a ton of leverage and just saying, I'm putting my money where my mouth is and I think it can be really big, but at least I think it's going to be big. I think the other part too is that we were willing really quickly to jump on the growth and not just settle for growing 10 or 20% a year where we were saying, we have the opportunity to go this big and so let's buy. We got no. We were a month into the business and we drove to Arkansas to buy another truck because you couldn't find another truck in Texas. Then we got a vehicle equipment line and bought, I think we bought six or seven trucks the first year that were nowhere in the capex budget and just got a vehicle equipment line and we were just like, we see the growth is there, let's get it, let's actually capture it. And that's not just. We could have easily printed a 10% up year and said, hey, great, transition worked, employees are happy and we had a good first year. But we really were like, let's chase every last percentage of growth that we can. I mean, obviously an important reason was that we had the time to, if you're running the business, you're not driving to Arkansas and buying a truck, right? Like you can't do some of those things. So that was important. I think another really important part was we picked our investors very carefully to be able to help us in different aspects of the business. And I think that's one of the best decisions we've made was have people with different expertise on our cap table that would be able to help us with the different areas in the business that we thought were important. So we had a guy who has a ton of experience in SEO and those kind of aspects and obviously we looked at the channels that the business had. And so that was one of the first things we looked at which, which I think in general the first thing you should do when you buy a business is do whatever you can to have as many sales as possible. Just give yourself buffer everything else you can figure out later, but get revenue in the door. And so we figured out that there was a lot of our service areas that in certain channels we were just invisible at. And so we fixed that really early on. And then we had other investors that had Texas connections that could introduce us to, you know, home builders or pool builders or whatnot. And so I think there was a lot of help in that regard as well in terms of, hey, we think here's an opportunity. Can you guys help us with this, this and this? And so I think having structuring your capital structure, your cap structure with the right people is very important in terms of optimizing your outcome. But yeah, look, I mean, I think it's not that we're outgrowing the industry by a ton. I think it's just the market's hot and the we caught lightning in a bottle. I'm the last person to sit here and say that we did this all by ourselves. But I think the best takeaway from the story is that if you get the opportunity and if the market is hot, go for it and don't just print a nice year and be willing to take the risks and put capital behind it to capture the growth.

[1:25:38] Host: One of the things that you'd mentioned to me, a fee that you weren't expecting had to do with sales and commissions. Give people the warning that you learned the hard way.

Guest: Yeah. So this is more a margin question. So the general manager that we had was also selling a meaningful amount of the jobs we were doing. And so we look at our business very much on a margin basis where we want to hold margins consistent and just install more and more and more turf. And so one of the costs that we just didn't think through as much going in was the mix between sales that was done by the general manager, which were house deals and didn't have nearly as much commission attached to it than a regular salesperson, where that was their whole job. And so as we've grown the business by a ton, the GM is still selling a good amount, but obviously his share of sales is smaller than it was. And so there's essentially the additional jobs are a little bit lower margin because you have to pay sales reps on it. And so I think that the bigger takeaway there is be mindful when you have an owner, a general manager that is involved in the sales function and know that you're going to have to pay somebody somehow for that and factor that into the ste and whatnot. And it's not just, hey, I need to think about a salary for replacing the gm, but you're probably going to have to replace the salary for a GM or yourself and then the commissions for a sales rep.

[1:27:12] Host: Right. And those commissions could be significant because they're often tied to a percentage of the sales. So if all of your sales now have this kind of new tax, that's gonna, that's gonna seriously, you're gonna seriously see that on a few points of margin, right?

Guest: Yep, yep. And we, we corrected it. It was, it was. Luckily there was enough meat on the bone in our industry where you can kind of make it back in other ways. But yeah, important to know.

Host: Great. Two more questions for you, Hannes, both related to kind of having comrades. The first is you did a partner based search. We've referred to your partner, but I want to hear you give thoughts about having done a partner based search. And the second is about the peer group that you put together. So first on the, on the partner, what would you tell people about doing a partner based search? How has it served you?

Guest: For me personally, best choice I've ever made. I think. You know, it, it's important that obviously it aligns in terms of what you guys are looking for in, you know, both in the search and the outcome and all of those. But I think a search in itself is lonely to operating is lonely and is a really, really long time. Right. Like three to five years is not. Oh, you know, you can do anything for a couple months, but three to five years is a really long time period and for some people, even longer. And so for me personally, and I think that depends a little bit on how different people are wired, it's been very helpful to have someone else in the exact same seat going through the exact same ups and downs. And when you have to make important decisions or tough decisions, you can just kind of talk about it and have the backup there. And then I think the other piece too of it is you buy a lot of flexibility with having a partner. So I think if you're running your own business, and especially if you're the GM and the main guy, if you go on a vacation, nothing gets done. Or if you have a wedding and there's an extra day that you would want to leave town, that's the day that no revenue comes in the door. And so having that second person to kind of pick up the slack I think is an important improvement in quality of life. And I talked to one of my old bosses when we were going through the decision of should we do partner or not. And he had walked me through some examples in his life where people had done it either way. And he, he told me the, you know, if you want to go fast, go alone. If you want to go far, partner up. And so I kind of used that as the guideline for why to partner up. Now, the caveat that I would make is it's not just any partner. Right. Obviously it needs to work on a personal level and at least to work on what you guys are going for. But I think if the only drawback is, well, I'm going to have to split the equity, I think it's worth it.

[1:30:22] Host: Okay, but that, but that last point is, is definitely there's a big cost to it, a financial cost. So, so just people need to be very clear about in their own mind. Yeah. Roughly, to get the same outcome, everything needs to be double versus doing, doing your own search. So there is a serious, you know, financial cost of this, not to at all undermine all of the, the value that can be there. And, and if with the right partner, I think it's almost always going to be worth that cost, but the cost is significant. Okay, last question for you. You'd mentioned it earlier. This peer group that you put together, I know, I know it's not super active now or, or the roundtable, but it sounds like you were all kind of in a similar stage of small business ownership. Just talk to me about what you put together, how that went, because peer groups are something that I just keep hearing talked about as invaluable. So what was your experience with it?

Guest: Yeah, so where it came from was kind of the idea that, you know, one of the aspects that I did appreciate from the product equity life is like you typically have like a Monday morning meeting where you go through, you know, where is each company, what are we working on, on in those aspects. And in a best case scenario, this is a situation where one, you have to hold yourself accountable to other people, but also you get input that you might not have thought about. You just get more brains to think about your problem. And so I wanted to have it as kind of a sounding board and I just thought it would be helpful to have. There's so many problems or issues that you face as an operator that everyone else faces too. And I think you don't have to reinvent the wheel on everything. Just like talk to someone who just went through that and take their results effectively. And so, yeah, we had probably eight to 10 people that bought around the same time, some a little further, some a little newer. And the format was just once a month, one hour for lunch. Everyone just go through how things are going, what they're working on, and what the group can help with. And I think especially in the initial month, it was really helpful. And whenever there was bigger economic changes. And so one of the most helpful questions I remember was when we were kind of getting towards fall of 2022, it was like, hey, how much cash are you guys all holding? How are we all thinking about the economy? And it's one of those, where could you all be wrong? Yeah, of course. But it's just like, there's a little bit of safety in numbers, right? If everyone's saying, I'm not that worried about next year, like, my business looks pretty decent, it's like, yeah, it's less and less likely that everyone's wrong. Right. Whereas, like, you by yourself, you could just get a hunch or, you know, it's like you have your individual experience and you make your decisions based on that. And so we've had a lot of helpful advice in terms of, hey, what are you guys doing for bonuses? How are you guys structuring recruiting? And so for a lot of things, you could just use, you know, kind of the learnings that other people had already had. And so I thought that that was, that was super helpful. And then I think also just the fact of, like, it's still to the point of where, like, you know, you're like, hey, I have a question around. Like, is someone using direct mail marketing? You know, you just throw it out there and you probably get two, three people, like, yeah, tried it. Work, didn't work. And you can kind of learn from other people's learnings and just like, kind of accelerate your process. So I think that's. That, that's very helpful. And you know, I think especially in the first year, there's, there's a couple things we got all got pretty busy. And I haven't really had a chance to put it exactly together this year. But especially in the first year, it was, it was super helpful.

[1:34:20] Host: And, and to be clear, you all were all very close in phase. So some more recently bought, some less recently, but most everybody was within a year of their journey of small business ownership. And where did you find these folks?

Guest: Across Twitter Search introductions. Yeah, yeah, yeah. This was like my personal network that I had built through the search phase and kind of just being in the, in the ecosystem. And then I emailed all them. It's like, hey, would you guys be interested in this? And you know, then people signed up and we kind of put it together that way.

Host: Cool. And it was in person for lunch, all online. Oh, it was because we have people

Guest: all over the country. I mean the odds are that like you're not going to know people in your neighborhood. Like there's a couple people in Dallas, but we had anywhere from Seattle, east coast, like all across the country, Colorado. Like it's more important to find people that are at the same stage than in the same location.

Host: Well, yeah, I was going to say when you said lunch I thought you meant we're meeting in person. So I thought this meant you found 10 to 12 recently closed searchers all in DFW. Although I mean DFW is, does seem to be one of the most active markets for search. So maybe I wouldn't have been surprised. Johannes, this has been quite a conversation really. So much, so much value here. Is there anything I didn't ask anything that you want to make sure listeners hear?

Guest: I think the only thing I would point out we're, we're starting to sit on the, the other side of the table again where we' invested in a couple other searchers now. It's something that I really enjoy and that I'm really passionate about helping people kind of along that phase both in terms of, you know, looking at deals, structuring deals and then, and then investing at the end of the day. So if people have, you know, are in their self funded stage, want advice on, on a deal or have a deal on the table that they're looking for investors for, please reach out to me. Always happy to help if our background is something that's helpful there and then other than that we're expanding. If you come across an artificial turf business that's listed for sale, we'll definitely take a look at should not slip our cracks because we're obviously looking. But in case it does, we had one recently that a friend of me sent so that would be great. But other than that, yeah, I would say it's a very interesting time in search. I think this is going to be the decade of operators. If you're the person who's willing to get their hands dirty, there's more and more economics that are going to go your way. The capital is there. If you're worried about raising money to close your deal, that's going to be one of the least of your worries. It's all about finding the deal and then being willing to be the operator. So if you have that in your genes, it's a great opportunity right now. Now.

[1:37:20] Host: Great. I will put your LinkedIn in the notes. Johannes, unless there's another way you prefer people get in touch.

Guest: LinkedIn's good, Twitter is good. And then if you're interested in how I think about search, I do write a blog called Buy Small, Sell High. I don't get to it as much as I like to, but every now and then if I have thoughts, I write some stuff there. And there's the first, first post is the self funded search toolbox which is every all the tools that we used in our search. So if you're just getting started, that might be a helpful resource.

Host: Yeah, there's a number of essays in there that you've done, probably what, eight to 10, including the one about recurring revenue is overrated. You had another recent one that really explains kind of point by point about how step ups work in structuring a deal. So a lot of, a lot of great content in there. It's a sub stack and I'll make sure to link to that as well. Johannes Haack, what a conversation. Thanks very much for coming on and congratulations to you on DFW Turf Solutions. So really eager to see that, see how that growth goes in the next couple of years. We'll have you back.

Guest: Awesome. Thank you very much for having me. Sam.