Host: Today's guest returned home to do a search on the assumption that there would be a cohort of baby boomers looking to retire. Sound familiar? That's the trend that Jonathan Bornagol heard about during his time here in the US. It's the trend we still hear constantly. But when he started searching at home in the Dominican Republic, he found that retiring baby boomers wasn't really a thing on the island. He he was going to have to adjust his approach by, among other things, leaning heavily on that discipline that every searcher with challenge Deal flow eventually turns to networking. It worked and Jonathan bought a small document storage business partly owned by the father of a friend. And today we learn how he transformed that little business into the leading document storage provider in the entire Caribbean region. We cover lots of ground. Here are a few key themes Thinking about the multiple you pay to buy the business in terms of the exit multiple, as opposed to being anchored to the 3-4x that we talk about so often. Putting the entrepreneur in Entrepreneurship through acquisition Jonathan bet the company to take it to the next level. And on that point, the value creation model here was more growth equity than leveraged buyout. The latter, lbo, is how most searchers create value, buy business with big loan, pay loan down with profits of business and improve and grow business along the way. In the growth equity model, by contrast, there's no debt and it's all about reinvesting to grow, grow, grow Real Estate There are pros and cons to having real estate included in your acquisition. You've heard how you can get more favorable SBA loan terms when real estate is involved. You've heard how Carlos Santelli used the real estate owned by his target business to execute a sale, leaseback and generate the capital to buy the business. But others will say that you're not in the real estate business, so real estate shouldn't be an asset of the business that you buy. Jonathan is in that camp even though his business model is leasing space. We discuss and of course buying in a non US Market How Jonathan found capital, how he found deal flow in the Dr. Please enjoy this ride through building a regional powerhouse from a small platform business with Jonathan Bornagol, President of Bunker. And if you have a question as you listen to his interview, we're excited to introduce a cool new feature here at Acquiring Minds live Q&As with our guests so that you can come meet them virtually and ask your questions directly in a zoom call. Jonathan's live Q a is Wednesday, March 19th. Register for that at the link in today's Show Notes or in the YouTube notes. If you're watching on YouTube or at acquiring Minds co come to Jonathan's Live Q a on Wednesday, March 19. Register at the link in the Notes. Announcements this Thursday, Heather Anderson will host an SBA and Lending Office hours. Heather's a prolific SBA loan broker, a name many of you recognize, and she's going to lay out the process of getting an SBA loan step by step. There are many moving pieces, many stakeholders in an SBA acquisition, and Heather will show you how to fit them all together to successfully close your deal. That's this Thursday, March 6th at noon Eastern. Register at the link in today's Show Notes or on the Acquiring Minds homepage. Acquiringminds Co Also M and A Launchpad is Back for its spring show M and A Launchpad is a one day event that brings together searchers and independent sponsors, seasoned business buyers, owners and private equity investors to go deep on buying businesses, finding financing and closing acquisitions, meeting investors and lenders, learning value creation from those who have done it. These are just a sampling of the workshops and panels that are packed into a very full day and that day is May 3rd. The show is in Houston. The organizers are running a promotion just for us. $200 off with the code acquiring minds. Go to malaunchpad.com and use the code acquiring minds. All one word or use the link in the Show Notes. And finally, in case you missed it, my partners in Mind's Capital and I have launched a new podcast, Meeting of the Minds. It's a weekly show focused on independent sponsors. Now as you know, the independent sponsor format of buying businesses is quite different than that of search larger businesses, much more outside capital, strict expectation of an exit by investors. But for some searchers, it's where their business buying careers might take them. Last week's interview was with Azar Quaider, who bought an 850 unit hair salon chain during COVID and turned it around to spectacular success. So as you can tell, not exactly a self funded search story, but tons to learn from nonetheless. The podcast is called Meeting of the Minds. It's on YouTube, Spotify, Apple, every Wednesday. Please join us. 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. The team at Aspen HR recently published a short white paper targeted at searchers Entitled A New CEO's Guide to Human Resources. It lays out the key items you should be thinking about as you transition into CEO and owner of the business you bought. The link to download it is in the show notes. Aspen is a professional employer organization or peo, run by a searcher for searchers. Search fund veteran Mark Sinatra runs the company, which provides HR compliance, flawless payroll, Fortune 500 caliber benefits and HR due diligence support for your acquisition, all for a fraction of the cost. Go to aspenhr.com or contact Mark directly@markspenhr.com Jonathan Bornagol welcome to Acquiring Minds.

[7:10] Guest: Hey Will, pleasure to be here. I'm an avid listener of your podcast and honored that you got interested in my story for me to come on.

Host: Well, it's a great one. Jonathan. You were the first search fund in the Dominican Republic. That journey started over 10 years ago. Today you've owned and grown multiple businesses and see yourself as an investor more than anything. We're going to hear the story and learnings from a decade of fascinating work. Start us off please, Jonathan, by explaining how you decided to do a search fund in the Dr. Back in 2013.

Guest: Sure. So I never knew about the search fund model until I went to business school. And that's ultimately when I connected my past and my training, which was investment banking, understanding, you know, how to run an M and a deal with what valuation is and everything. And quite frankly, being from the Dominican Republic and growing up, I always wanted to find myself way back to my country. Had no idea of how to do it. I had almost been in the US for about 10 years and when I heard of the search fund model it I quickly connected the idea of it's not that I should be looking for a job, it's I should be creating my own job. And so that's, that's how I clicked. Every everything clicked after that and I understood that I had to go out and you know, create my own destiny, if you will.

Host: And Jonathan, remind me, your 10 years in the States that that went back to high school, right? Because. Because I you've got essentially no accent. So how is it give us a little bit more there on your piece of your backstory.

Guest: Moved around between Dr. And the states during my early childhood, so I learned I actually got alphabetized in English before I did Spanish. So English is quasi my first language. So that's why you probably don't don't hear much of an accent and how I became fluent in it. Ten years was actually the the time between me going to undergrad. Then I did four years of investment banking and then I did two, two years of mba. So when you all add all that up, it would have been 10 years.

[9:25] Host: Great. And banking in New York?

Guest: Yes. I worked at Citi. I did Citi M and A. I covered financial institutions for latam.

Host: Okay. And so you had a pull to go home. Maybe you always assumed you'd go back to the doctor. You didn't know how, but you were going to have to create your own job or create your own destiny to make it happen. Why entrepreneurship through acquisition as opposed to starting a business in the doctor?

Guest: I don't know. Listen, I went to undergrad for Babson College, and that's obviously a really big entrepreneurship school. And the idea of starting and going from zero to one, it never really connected with me. I always saw myself as somebody being, you know, very finance driven, understanding, you know, looking and analyzing a financial statement, a business. And so I was more than an analyst, than a builder, I would say. So it never really never crossed my mind besides a couple of, you know, trying to do entrepreneurship and startup idea exercises, which in 2012, 13, when I was in business school, obviously everybody had to go through that motion just to make sure they got it out of their system. But for me, the idea of buying and the whole, you know, branded way of calling it entrepreneurship through acquisition, it kind of, you know, made me feel like I had found my, my mold because it was. I was entrepreneurially trained at Babson and then I was acquisition trained at banking. So it really just, it was a, let's say a search or market fit if you want it.

Host: Well, I'm glad to hear that because it is, I think of the label while, while it does do the things you do that you just described that kind of perfect Venn diagram for, for people who buy businesses, but the entrepreneurial element to it, it's a mouthful. So I've never loved, I've never loved. I, I've always kind of wished there were a different way to put it than entrepreneurship through acquisition then. And then, of course, the, the ETA abbreviation is an unfortunate one because most people see that and they're like, estimated time of arrival, what the symbol of. Of waiting.

Guest: I've actually run into a harder time explaining what a search fund is. A lot of people think it's executive search and that you're a headhunter. Yeah. So I love the idea of ETA

Host: search fund. I have to say, though, interesting point that, yeah, it sounds like recruiting, but it is punchier. Search fund has a certain ring to it. Anyway, okay, so. So this seems like the path. How does your search or your thesis take Further shape.

[12:10] Guest: So like I said, I learned about the, the business model second year of my MBA and I went headfirst. Luckily, I was able to take Rick and Royce's, I know you've mentioned him before, course. So I was able to dive completely into how it works. What's the model have good, you know, mentors, advisors during the process. At that point, I guess the first thing you have to decide is, you know, are you going to do a self funded or you're going to do a funded search? For me, it was clearly the idea was to do a funded search. And so at that point I had two choices. Do I try to bring established search fund investors, AKA the search fund mafia, to new markets that would be Dominican Republic, or do I look for local investors and try to do the inverse of how do I sell them on this innovative, you know, investment model that they've probably never heard of? I went for the latter. You know, I thought investing in a small country that maybe, you know, traditional search fund investors didn't have the experience might have been a little bit uphill. They might have, you know, asked a lot of questions that were just going to be complicated answers and not, and not be, you know, a quick fundraising process. And the other thing, ultimately I wanted angel, like search fund investors. I wanted people that knew the, you know, the lay of the land that I was going into, having not ever really operated in a professional manner in the country. I wanted to have a great, you know, a plus investor list that could help me, you know, navigate the peaks and troughs that it is in acquiring, in operating and obviously in growing a business. So I went down that route. Luckily for me, it was one of those things where they, they loved the idea right away. Right off the bat. One of the things I learned was and really resonated with them. They were the type of businessmen that would field a lot of investment opportunities. So a lot of people would pitch them businesses to buy. And the one thing that they lacked was, was probably somebody to actually take care of the businesses after they were invested in. So the idea of saying, look, I'm looking for a business to buy and to run was like, was perfect for them. They said, finally we have somebody that can operate something that gets purchased and invested in. And it was pretty easy, I'd say. Also, I think the funded search model with the Stanford Primer that had just recently come out was a very simple way of also documenting everything and saying, okay, this is the, the cookie cutter model. Let's just go and, and do this without Having to adapt it too much.

[15:07] Host: And so that, that the benefit there of the cookie cutter model is that the terms are prescribed. They're well documented. 25%. Eight, eight and a third. Eight and a third. Eight and a Third. Listeners who don't know the model can go chat GPT it but we've covered it here many times. But point is you didn't have to get into the weeds about what the term should be. It's just like hey guys, there's this very mature model that I'd like to bring here and I'd like. And here we hear what the terms look like. I'd like you to invest. Interesting point, interesting point about that. How how the missing piece of so many investment opportunities they saw it's the operator. Um, which is perhaps not surprising finding, you know, it's always, it's always thus that these good businesses can be great but without a strong operator at the top, they can not be so great after being acquired. Well, I guess Jonathan, one question would be so, so one thing we'll return to over the course of this conversation which I've done with with many guests who are based outside the US where search is less well established is try to, you know, extract from your experience what people buying in non US markets can learn from your experience. So this group of investors is I guess was it, was it, is it very particular to your situation? You just happen to know these people already and requested a meeting and kind of pitch them in the meeting and bada bing, bada boom. Or is there anything that people in other markets who are trying to bring search to their markets can learn from how you, how you found access to, found the capital capital providers and then also convince them of the, the model in the, in the pitch.

Guest: They were existing relationships. I wouldn't say they were deep relationships, you know, but had been developed probably during my early years of being a professional. A couple of them actually were the type of people that when they heard I left the bank and heard I was going to go do an mba, said keep in touch. We love to know what you do after you finish business school. So that was a great transition into how to bring, you know, the model to them and ask for their investment. To be honest, it was, I was lucky really to find such great investors and that I think my hit rate was like five out of six or something like that. So you build a pipeline thinking you're going to have to pitch 100 times. But I was lucky enough to, to find interest in the few that I pitched first first, which obviously were the highest quality ones and the ones that I wanted to close on. So I'd say it was, it was a little bit of, of existing relationships. A couple of them actually brought in other investors as well. Kind of doing like a club deal. Hey, I'm investing in Jonathan's search fund. How about you? You come in as well and you know, it's funny how those things happen. I think 20% of my fund actually was just a forwarded email with a reply that said, count me in for my 20%.

[18:08] Host: Oh, wow. Wow, love to see that. And other than them recruiting people that you didn't even know was there also, did they all know each other essentially? Like, was this a domino effect thing where you tip one domino in, the rest fall? Like, like. So often it is in capital raises.

Guest: A lot of capital raising is about having an anchor. And so as soon as I had an anchor, you get momentum. And when you have momentum, then you know, it's pretty much sailing, smooth sailing from there.

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Guest: Sure. So this is one of the difficult things I think searching in a small market because you get, you know, the whole search fund thesis is around retiring baby boomers because it's a very, I think it's a very US constructed investment thesis. And so obviously you've got millions of baby boomers that are retiring every day in any market with a bunch of, you know, businesses. And so you kind of try to adapt and pivot your equity story to what you feel, what you think. Because obviously you have to make the thesis your own. And so given that we don't have really baby boomers here in Dominican Republic, the thesis started off as being, you know, we're going to look for family businesses that are probably in a generational point where they might be considering exits. And I think I told you this in the pre call that was a huge, I'd say investment. There was an investment thesis that didn't really hold, hold water or translate as easily as one might think. Because family businesses are extremely different than a solo owned and operated business who might not have succession or is just looking to either close or, or sell it to some, you know, young, young guy or gal who is looking to buy the business from them. So that was, that was complicated. Other than that I think.

[21:34] Host: Wait Jonathan, why, what was, sorry, what, what is different there? So these, so the family businesses in general do like in the doctor for example, the son or daughter will want to take over the business more commonly than in the US Is that what you're saying?

Guest: Or, or absolutely. I think a lot of times in family business context the future generations are kind of trained and expected to be part of the family business in some way, shape or form, even if it's not on a day to day basis. So let's say it's almost like a plant that spreads deep roots which then is difficult because you have to unroot everything in order to make a deal happen. So that probably means convincing, you know, maybe you're the family business now in second generation there are four brothers and sisters. Well you have to convince four people. It's not the same as convincing one sole owner of a business who can make, you know, a decision on a whim and actually engage with you and take something to closing right away. So taking it into then operating terms, the sales cycle is a lot longer too. Yeah, you have to, you have to sell upwards and downwards across the capital structure to actually get a deal done.

Host: So. So in the world of small businesses, in the market of small businesses, many more as a percentage have a succession plan where it goes to the next generation. In your market than in the US you'd say there is succession. Succession is much more a thing.

Guest: And I think, I think there's, it's not just small market dynamic. I think that's also a little bit cultural. You know, in the US a lot of times after you go off to college, families kind of get dispersed. You know, everybody, you know, maybe you're east coast growing up and now you live in the west coast. So it's really, you don't spend so much time with the family and within the family business. Once you become a professional in small markets, especially Latin American markets where you probably, you know, I live three blocks from my mother's house, you're constantly, you know, in the business and, and a lot of life revolves around the family business. So I, you know, you grow up going to the office, you, you know, your first job is likely at that family business. And so it's a lot easier and a lot more common to get, you know, tucked into the family business than probably in the US Market where everybody, you know, follows their, their own way. I'd say.

[24:10] Host: Yeah, yeah. How fascinating. Great. Okay. And so when you realize that that kind of, that kind of conventional look at the market was inaccurate in, in the Dr. How did you pivot your approach?

Guest: So I'd say the funny thing is the two, three businesses that I bought, I actually bought them all from, from foreigners or from businesses that were not, let's say, operated with family relationships. One of them was a multiple partner business where only one of them operated. So I'd say I stopped, I stopped trying to convince myself that I was going to land a big family business and just started looking at other situations that might look a little bit more opportunistic. So partnerships that, you know, Maybe it's a 50. One of them was a 50, 50 joint venture where they wanted to split up. Another one was a foreigner who was actually Florida based, who owned a business in Dominican Republic. And he was about 75 years old. So he was somewhat of a retiring baby boomer, but with a business in the doctor. And then lastly, another situation that I found was, you know, five, six owners of a business, everybody trying to get some cash out of the business, but only one of them operating. It was a little bit of convincing the operator, hey, maybe you should change your partner base because we're just going to reinvest and reinvest and, and you're going to have a lot more leeway and a lot more ability, let's say, to build the business that you've always wanted to build with us as partners rather than the ones you have. So you could call it special situations, but I'd say it's different shareholder dynamics is what I learned to have to look for.

Host: And how did you look for that at that point? What does deal flow generation look like when you're not leaning on the baby boomer thing?

Guest: So it's a small Market. Let's stop there for a second. I think the search fund model, they typically tell you call on 200 businesses everywhere and anywhere. A lot of times you're supposed to be calling and not really even knowing what the business does except for what it says on the website. That's not how you can go through a search in a, in a small market. Your reputation as a tire kicker can kick, can come in pretty quickly if you start doing that. So you have to be very targeted, you know, very curious into how you research opportunities and get a little bit more backdrop into what is actually happening at the shareholder base. You have to get creative. So one of the things I tried initially was obviously the advisor network. So you know, lawyers, you know, boutique bankers were trying to get transactions done. Consultants, I didn't really find a lot in, in those situations. I found a lot of businesses that have been quasi for sale for some time. I like to call it a little bit of window shopping. Sometimes they put a price tag on it and see if somebody bites, but they're not really actively selling the business. And so those situations, I'd say I navigated a little bit through that. But to be honest, proprietary deal flow ended up being the key to the game.

[27:32] Host: It's funny based on networking. You're not blasting out cold emails or are you?

Guest: No, it was pure networking. Um, I, I like to joke. So when I started searching I was about 28 years old. My dad was a cardiologist and my dad had a lot of friend friends who were his patients. So they were older people. And a couple of times I remember on a Friday night my father would say hey, you want to come with me to Mr. Such and Such birthday? And I was like jackpot. Because I was going to 75 year old's birthday and you know, I was 28. I was asking everybody what they were doing, you know, what they planned to do with their business. It was a perfect situation. But it's small market, it's almost, you know, you have to think about. Dr. Economy is the seventh largest economy in Latin America. It's equivalent to probably the last five states in the US So you really have to understand that you are looking in a very shallow market and constraining yourself heavily to geography.

Host: I, I think it was Rhode island that you compared it to on the pre call. This is essentially like looking in Rhode island and not being able to look anywhere else. It is an island after all. Literally. Not Rhode island which is not an island. The doctor is a literal, literal island. Okay, all right. So well, what did you find after this? After this? Create creative and networking. Creativity and networking, sure.

Guest: So I ended up buying two businesses that were three months apart. One was, the first one was a document storage business called Bunker. I had, I had never learned about the document storage business. I was tapped into the regional like broker models that existed at that time. I don't know if they still exist but I got a, you know, I found a deal in Panama where they were selling the largest document storage business. And as soon as I went through the, the, the business model I fell in love with it. What I did realize though, it was a very high multiple business. So these were the types of things that don't trade for 4x which kind of is one of the pitfalls. I think that in studying the search fund model too much they ingrain in your head that you're supposed to buy at 4x and if the market isn't there for 4x you might just spend your whole time making offers that get rejected. So when I, when I learned about this document storage business I quickly one of the, and I just want to make a parenthesis, I realized I'm supposed to be looking for, you know, maybe 10x businesses and try to be buying them at 5 to 7x which is a little bit outside the search fund model. So I ended up buying that business. It was really small at that time, so it was a nation market in the Dominican Republic. It hadn't really even been developed even close to what it had been developed in Panama. The second business which actually was one and a half businesses was a billboard business in Dominican Republic. I actually bought two. And then, you know, while I was buying those two billboard businesses, I met with two other billboard businesses and we agreed to, to merge them. And my contribution to the four way merger was this two businesses that I bought. So they're both very. So if you look at comps on document storage as well as billboard businesses, they're usually double digit EBITDA businesses. And so I was focused on doing a good deal where I could grow rather than just get fit fixated on. I can't pay more than four times and just have that resonate over and over in my head.

[31:19] Host: Let's unpack that a little bit. Jonathan. Okay, so yeah, so forex, first of all, why are multiples higher in this market? I'd think, I would think they'd be lower because demand for these businesses is lower. Or maybe not. Maybe I'm wrong. Yes, supply is way, way, way less. But if supply just all depends on what Supply and demand is. So maybe demand outstrips supply and drives driving multiples up. Point is, I would expect in a less, less evolved, less developed market multiples would be lower. But I'm, I'm clearly wrong. Why, why do you think Forex was just not going to happen?

Guest: I've thought about that a lot and I think ultimately it's tricky. I think because of the shallow supply and probably there isn't a cultural M and a market. So people don't really think and understand that they can sell a small business in Dominican Republic. And so a lot of times they aren't actively for sale. So I think it has to do a lot with price discovery. Maybe you can get something at Forex, but at first brush, especially in proprietary deal flow, when you approach somebody and you offer them something like that, it might be a turn off for them because they're not actively selling the business because they didn't know that there was a market to sell their business. So I'd say them for lack of liquidity in the market actually pushes expectations higher, not necessarily clearing prices. But it can take time to really, you know, take the seller and, and coach them to where they actually can sell the business. For Forex. If you're looking to do a quick deal then that might be, you know, a tough sell and you might just go on and look for other things.

[33:02] Host: I think you nailed it, Jonathan, because one of the things that we see here in the US is is that sellers often overestimate the market value of their business. They think it's a lot worth a lot more than, than the 3 or 4X that it probably is would trade for and, and so in a market. But they eventually learn their broker coaches them or they, you know, they go to market and they start to see the offers that are coming, coming in and eventually their expectations have to come down to earth. Well, in a, in a far less liquid market like what you just described, maybe those expectations just never come down to market because there isn't that, there isn't that market telling them, you know, forcing them to ex to reality. A discovery, a price discovery thing like you said.

Guest: Yeah, and I think also it's one of those things where in a small market a lot of people think that all businesses trade for the same multiple. You know, you're supposed to get 6x or 7x for your business and it kind of just goes, you know, mouth to mouth and it becomes one of these things where everybody, that's, that's the number they have in their head. You know, because my friend sold his business and he told me that was, that was the number. And so like I said, I, I, when I realized that, I said, all right, we got to look for very, you know, cash flow generating businesses, which usually is the driver of why something will trade higher. So EITA is a proxy for cash flow, really what it is. But not every business has the same EBITDA free cash flow conversion. And so that's what really drives a multiple. You know, how much of your EBITDA goes to free cash flow and then what level of, and also how capex intensive is it? So the average business will have average, you know, conversion metrics on it. But if you can find a very high cash flow generating business with small or modular capex, those are usually the very high multiple businesses. So I said, all right, if everybody has seven in their head, let's look for ten 10x businesses instead of trying to convince a five, you know, four to five times EBITDA business that they weren't supposed to be worth that. So I said, let me get arbitrage instead of coaching them down, which is really the billboard businesses and the document storage business are really those types of business that I just described.

Host: Great. So, so just to be clear, you, you, everybody, no matter the type of business they own, is fixated on 6 or 7x or something. So instead of trying to talk them down, you look for the opportunities where that was actually an underestimate of what their business is probably worth. It's, it's more like a 10x business. So you were still getting a low entry multiple for that sliver of an industry, for that, for that particular, of the market for that particular industry. So it wasn't that you still believe in getting a low entry multiple. It was just, it was just shifted. It's all relative.

Guest: I learned about a deal in Panama which made me learn the business model. And I turned around in Dr. And said, well, I couldn't buy the Panamanian one. What do we have here in Dominican Republic? Do we have a player that can operate in this space? And so I, I, I, you know, found two or three of the players, did a little bit of, you might want to call it social due diligence. Who are they? Who are the partners? How do I get to them on a, you know, credible warm lead basis? And so I met them, I, how

[36:30] Host: did you get to them? How did you get them them on a credible warm lead basis?

Guest: So I remember the one that I ended up buying, Bunker. I literally googled the company name and I found a article in the newspaper on the day they launched in 2005. And in the picture where they launched was one of my friends father. And so I called, I sent him the picture, I said hey, can your father make, make me an intro? And he told me two things. He said, one, my father's a partner in the business and two, they're never going to sell it to you. And I said, and I said I didn't ask you that part, those two questions. Can you get me the intro? And so he effectively told his father, hey, I've got a friend. He's got this weird search fund model. He wants to meet the partner that operates the business. And met with him. He told me, you got to be quick on the trigger as a searcher. You got to be really forthcoming. I've asked for this meeting because I want to analyze potentially buy your business. And the answer right away was no. And so I went through two, three meetings of getting no's. Eventually what ended up happening in that business, I like to say that the operator realize the trade. Can I get, you know, very high net worth individuals to be my, my new partners that will really help me fuel the growth of this business. And it also comes with this young entrepreneur who is going to be with me side by side because what we ended up buying was 80% of the business. The, the partner that operated the business ended up rolling over coincidentally with my father's friend, which I told him then, you know, tell your dad that he's staying in deal because I like them.

Host: So you wanted to keep the operator. You were not going to become the operator.

Guest: I so the initial idea was we're going to keep them. You know, I think every searcher goes through a, a very scary moment when it's one they're going to hand over the keys. You know, you don't know how you're going to really operate the deal or the business after you close. And so a lot of times you'll see transitions, earnouts in existing owners, rollovers of their parts. So the idea wasn't necessarily we're going to keep them on forever, but I did, let's say putting it in terms of a document storage business. I needed to have somebody who knew where all the boxes were. So it was an idea of having them roll over and transition lightly. One of the things that also happened during my, you know, search, let's say search agreement as you said, we did modify it a little bit when I took it to the investors and one of my investors said listen, I Don't like the idea that just because you bought the business, you run the business. We feel like there are handcuffs there as investors and we're not being good fiduciaries in making you operate a business that you might not be the best one.

[39:41] Host: But Jonathan, I thought that was the very thing that, listen, I think just. Am I not clear?

Guest: But yeah, but I think you also, you're, you also have to think as a fiduciary of your investor capital and it made total sense. What if I buy a business that is better suited for somebody that we can hire to operate? The flip side was I said well you can't make me operate it either in case we find something that's too small and we end up pulling the trigger. Anyway. Anyways, so we, when I acquired this, this document storage business, we kind of found ourselves on, you know, this is a little bit of a relatively smaller business that we had gone out to buy. And so I knew that the company couldn't, you know, couldn't pay me what, what, you know, what I was expecting in terms of salary. So I was half halfway in the, in the door. And that's why I had to look for another way to get income which ended up being buying the next business which was pipeline that I had built during the, the whole search phase. So I immediately ended up being kind of, you know, the business development chairman like role in the business. But it was great to have somebody that knew how to operate it with the interest of continuing to operate it, you know.

Host: Jonathan, what it, what if, if you do a search fund with search fund economics where your equity will amount to, let's call it 25% maybe there was fluctuation there and you're not going to be the operator that starts to look and smell a lot just like independent sponsorship because those are kind of the, the terms of, of independent and also with the kind of a mandate to buy, grow and then ultimately exit. What was the understanding there? First on, on exiting was this, was, was that going to be the mandate that, that you exit the businesses or was this a long term hold or either or.

Guest: I'd say, I'd say it was clear that we were going to search for an exit. I think any search funder, especially a, you know, funded search has to exit. You have to, it's just, it's impossible.

Host: Why do you say that?

[42:00] Guest: For two things. One, in order for you to actually get your liquidity, it's not the same of you know, if you're a self funded search where you might end up after you pay off your SBA loan or whatever where you still, you know, you own the cash flow of the business and you can do what you please with it. Let's say as a, as a searcher, you ultimately are a minority owner in a business. So unless you find a way to get to get yourself liquidity, you might find yourself in a continual reinvestment situation which isn't bad. You end up being, you know, equity value for yourself. But I think everybody really understands the idea of liquidity. The second thing is the last tranche in the search fund compensation model. The funded search is you know, performance based and it's, and it's upon liquidity. So it's basically an IRR hurdle. And the IRR hurdles in the original at least when I did it in 2013 started at 20% IRRs and so and went all the way up to 35% IRR. One thing that I reflect on a lot is that is close to impossible to sustain in a you know, 7 to 10 year hold period. So earning 20% IRR for a 7 to 10 year period, it's literally talking about 4 and 5 Xing. A business where on your 6th or 7th year if I, if I recall correctly, you basically have to grow in value the value of the business that you purchase purchased.

Host: Yeah.

Guest: So unless you're on this growth rocket ship, it's unsustainable for your IRR hurdle and you should be looking for exits around 4 year, 4 year 5. Which I will say is not something that I did but it's something I guess one of these lessons that I have today which goes for fund, you know for also for private equity and unfunded sponsors. You know, never try to hold your, your investment past year seven. It's just it destroys your, your IRR and what the way it should be looked at is let's look more at MOIC on multiple investment capital rather than IRR at that point if you're looking to hold for that long.

Host: Well we're getting into fascinating territory. That's more that is definitely something the investor class and PE class will will be familiar with less so searchers maybe we may return to it. I want to understand why never to hold for over seven years. But but we got to put a pin in that particular. Sure Investing philosophical investing point. The when I said that this starts to look and feel like an independent sponsor deal you you made a face like you don't. You didn't agree. Why is doing a search fund with performance based with hurdles. You know the Max you're going to get is about 25% you as the sponsor searcher and you're not operating the business. Why, why is that not basically the outline of an independent sponsor deal?

[45:15] Guest: I'd say two things. One, I wasn't, let's say I wasn't the general manager of the company per se, running the internal operations. But all the growth fell on my back. And this is the entrepreneurship part of the ETA which is the growth of this business depends 100% on me. This is a business that I had been, that existed for 10, 12 years. And so they had maxed out their, probably their sales effort. And so it's just really understanding what role you play in the business. Where do I add the most value? And you know, I quickly realized and I sat in the general manager positions in the billboard business for maybe a year, two years. At one point during our about eight year hold period, I came back as interim general manager to get a couple things done when we lost one of our general managers. But ultimately I think it's two things. Where does the buck stop? Is it on the general manager or is it on me? And then I was clear, it was on me. I was the one that got capital. I was the one that you know, promised that we were going to create returns. And I felt that I was the one that probably had the, the new juice, let's say to take these companies to the next level. So it's, it's I think an unfunded sponsors more, you know, trying to create arbitrage in transactions, you know, grabbing real assets and doing maybe a sale lease back, trying to create you know, asset back liability facilities and trying to piecemeal out a deal. But at the end of the day the strategy here was grow, grow, grow. And so you know there's I, I think that's the most important thing in operating a business and feeling like the owner. It's do I feel like the boss? The buck stops with me. And for me both businesses the answer was always yes.

Host: This fascinating distinction Jonathan between because I was looking at it through the prism strictly of kind of the outlines, the structure of this arrangement. But what you just articulated, if I, if I may is basically you feel like a search fund even as not the day to day operator but you felt like it felt more entrepreneurial. It was basically about growing this business. Whereas maybe an independent sponsor as you see them, I'm sure many independent sponsors would push back hard on this but as you see them, it's more of a financial engineering play. How to Figure out better capital allocation and often inorganic assemblage of a larger business. But you were going to do that too, were you not? You were going to acquire other document storage businesses. That was a big part of the thesis.

[48:02] Guest: It was. But going to the point, I'll put it this way. If you have maybe an unfunded sponsor, maybe it's okay for one of your deals to die, you know, one of your portfolio companies. You know, it's just one of those things where maybe you'll do 10 deals and, you know, part of the business model is let's, let's. It's okay to lose money on one of the deals. There was no way I was going to lose money on this. You know, I was all in. I was signing PAs on debt, so RPGs. Sorry, on. On debt. Even as a small owner of the business, because I was, I was all in. Failing was not an option. So. And I spoke to my general managers three and four times a day. So I wasn't, maybe I wasn't sitting the place where they were signing the checks because I had somebody else signing the checks, but I was making sure that the cash register was ringing all day long.

Host: Okay.

Guest: And I knew that was my role.

Host: Yeah. Yeah, great. And just for the audience, when, when Jonathan says unfunded sponsor, that's the, the earlier term for independent sponsor. So same, same thing there. You know that one of the most common levers to pull in a target acquisition is technology updating the systems of a business that may still be running off a spreadsheet or even pen and paper. But tech is complicated with tons of solutions out there. So choosing the right cloud platform, CRM, telephony, compliance and cybersecurity, not to mention implementing all that, is a job in itself. Acquiring Minds Guest Nick Akers knows this firsthand. As a former searcher who now owns Inso Technologies, Nick has seen the tech challenges searchers face when acquiring businesses. His team at Inzo regularly works with searchers and their acquisitions, offering a complimentary IT audit of the target company. Nick takes a personal interest in all their searcher clients. Drawing from his own experience in the search phase, Enzo dates back to 1989. So this is a company that has managed the tech for hundreds of small businesses over decades. And one last thing, no long term contracts with Enzo, a big differentiator. Check out enzotechnologies.com I N Z O or email Nick directly@nickzotechnologies.com and don't forget to tell him you're a searcher. You said that this business and we're going to focus our attention here on the document storage business. If we have time, we'll get to billboards. What did you say it was a 12, 13 year old business. When you. Okay, and, and that you thought that they had maxed out their own ability to grow it. How did you grow, grow it or how, how did you envision growing it? How, how did you actually grow it?

Guest: Sure. So the idea of, of storing your documents somewhere else was a very novel idea in a market like Dominican Republic. It's something super common in the US It's a huge industry, especially anywhere where real estate is expensive. But it was very unknown here in Dominican Republic. And so when I found the business, I remember having looked at the second player as well and I remember looking at the, you know, the book of business they had who were their clients. And I quickly realized one of the two companies had like the triple A rated clients and the other one kind of had everybody else. And so I ended up buying the one with the AAA rating. But what I realized were two things. One, they had a very good client base which kind of meant they had a little bit of what you call product market fit. Know they were servicing a need in the market. The second thing I learned was they were capacity constrained. So this is, this is a real estate business. You need space and racks, you know, you need floor space and racks to put up a box and store it for somebody. And I realized that they were pretty much at capacity, no plans really to expand. And so the company was kind of and the business owners were taking, you know, cash off the table each year. So there was no real plan to, to expand their capacity.

[52:17] Host: Why. So why do you think they hadn't wanted to.

Guest: I think, I think ultimately the next step was a big capex step.

Host: Yeah.

Guest: And I think they, they were just complacent with, you know, rather than look around the table and say and see how we're all going to put, put our pro rata up, let's just milk the cow a little bit. We came in the complete opposite mindset. Our idea was there's product market fit here, this or what we need to, I like to say we need to refine product market fit and we need to kind of change a little bit what's happening. So in terms of infrastructure, it was a very old, very odd warehouse where they were storing. It wasn't built for document storage. So it was low ceiling. It wasn't, you know, uniform, let's say aisles where you can pretty much max out capacity. And so what we realized very quickly was we're going to have to build out. And what we designed was the infrastructure for a business that was probably worth 5 or 6 or 7x the business because we said, maybe we can move this business once more and never again because logistically it would just be a nightmare to do. And so we set out and we really, you know, said this is one of these, you know, go big or go home moments for this business where you have to accept that the business model isn't a niche little service provider. This is real estate and infrastructure. And so that's, that's how we went about thinking of the business and the actual, the course that we took. I don't know if I went on a tangent. I kind of forgot.

Host: This is awesome. No, you didn't, you didn't. No, that was. You nailed it. Jonathan.

[54:02] Guest: Another important thing in refining product market fit, one of the things I realized is the biggest players in the industry were not clients. They were actually unvended, which a lot of those players are financial services companies. So maybe health insurance banks, regular insurance companies. And one of the questions that I asked quickly was why? And the answer was, well, the physical infrastructure where you're storing isn't very different than what we're doing in house. We also have this small little warehouse that's kind of inefficient. And when you're really a bpo, a business process outsource operator scale is king because you basically pool everybody's size and operate it yourself as a way to be able to give back efficiency to everybody. So when we started building out this, you know, 12 meter which is, I guess 40 foot high warehouse and probably about 50,000 square foot facility. As soon as we started building, I started taking these potentially large clients to go see it. And I will take them first. I would take them to where we were. I like to do a little bit of before and after and then I would take them to the construction site and you know, maybe we still don't have walls, but we had the columns in the roof. And I would just sell them the idea of can you imagine this full of boxes? And everybody started to realize, you know, you know, two questions they would ask, when is this ready? And what's it going to cost me? And so one of the beautiful things about the BPO space was I was basically going to give them 40% savings and they were going to end up storing in prime, you know, storage conditions which ended up being the, the, you know, easy sell or the, or the way for them to pitch, you know, this just works for us.

Host: Yeah, there was a lot there, Jonathan, that was awesome. Let me respond to a few things. First of all, the previous ownership kind of milking the company. That is a common pattern. Dr. Us wherever that that the who the current owners, often the founders, just taking the business to the next step would require a lot of energy, a lot more risk. And if they're maybe at the. Toward the end of their careers or maybe they've expended all of that, all of that energy in. In risk in just getting the business off the ground for whatever reason, they just don't want to take it to the next step. But that doesn't mean that the business itself, that there isn't a next step to take. And so it takes new blood, I. E. You, business buyer to come in and do that. So that's a very common pattern.

Guest: One good question to. To let's say in diligence is ask the owner, if they had unlimited capital, what would they invest in for the business? Like, how do you double it? You can ask those questions. And I think ultimately that's how my current, you know, partner, because he did roll over his equity, how I kind of got him to make the sales pitch to his partners of, you guys need to sell because, you know, you're holding me back. And. And it was because I asked him that, you know, unlimited capital, what would you build? And he said, you know, we build this huge warehouse where we would have, you know, we would comply with all the, you know, fire safety and everything. And we basically said, all right, let's put, you know, pen to paper and let's. Let's figure out how to do that.

[57:34] Host: I loved how you put. How did you put it that I was.

Guest: It.

Host: Was it that in business process outsourcing, basically what you're doing is all these companies will be doing whatever the process is themselves. And what you do is you pool all of that. And because you're doing it at scale, you can offer the same thing they're doing internally more cheaply to them and probably much more value. Exactly what you did. All these. These unvended. Never heard that word. Love it. These unvended businesses were doing their own little, you know, crappy document storage in house. And you could do it better and for cheap if you pooled doing everybody's. I've never. It's such a good articulation of much of business, really. I've never. I've never heard that. And then. And then you've just Revealed what a salesman you are. A little show, a little show and dance. A little before and after. So you must like that.

Guest: I love selling this. One of the things I didn't know about myself going into the search process, but I then realized that when you're an investment banker, you're always selling. You're either selling the buy side or the sell side, but you're constantly pitching. That's what it's, that's what an IB analyst does all day long. And so never heard that.

Host: Interesting.

Guest: I never really knew that I was a salesman until I had to sell because my life depended on it. But yeah, I, and that's one of the reasons why I didn't push to then become the general manager. I said, no, I need to be selling all day long. I can't be, you know, running day to day operations. This is a pure growth, you know, kind of a growth equity play. And so the growth needs to come from me selling all the time.

Host: Jonathan. So let's turn to your life depending on it. So when you, you really bet the company here, I mean, it was all about building this giant new facility. How did you decide how, I mean, I guess basically how did you decide how big a facility to make? And the way you do that is you correlated to how big you thought the actual market was. Maybe it was just a kind of a rigorous financial analysis that isn't that interesting for a podcast. But can you say something about me like, why didn't you build the facility twice as big as you did or half the size that you did? Or because you said yourself you only had one shot at this, you weren't going to move after this.

Guest: So, so this is, this is funny. I'm going to go back to the business that I did not buy in Panama. I remember they had three sites and they were scattered around Panama City. And so when I learned of, when I, when I went to buy Bunker, I said in diligence, I said, we'll just rent more warehouses. You know, you can do that. And it's part of the business model multi site. You know, you say it and you believe it, but I remember the first two weeks we had owned the business. We, you know, we ran out of space and, you know, I had to scramble to find where we were going to store the next box because you can't stop your clients in the document storage business, your existing clients, they grow and they expect you to take the boxes and they expect you to store them. So the idea of we're out of space is unacceptable. And I remember, luckily one of my investors, you know, they had real estate and they, they had a warehouse that was maybe a couple of miles away from my. The warehouse that we had. And I quickly called them up. I knew it was an. It was a warehouse that, that, you know, was. Wasn't being used. And I said, hey, can I do a short term rent on this warehouse? And they said, yeah. And I swear to God for the next three to four months. It was a logistical nightmare. The idea that maybe Will has one box stored in site A and his other box stored in site B. And he asked for both of them. And I have to somehow centralize, you know, that is a logistical nightmare unless you are a logistical operator, maybe like a FedEx where you're taking everything centralized and then distributing. You do not want to live that. And so at that point, the thesis of we will own multiple sites, it just crumbled and crumbled quickly. And so at that point we started looking for the idea of we need to build, and we need to build somewhere we can grow. Just one of these coincidences. In life as a searcher, you're always out there, you're always pitching your, you know, find a business to buy, find a customer, the business that you have. And so I, I developed a relationship with somebody that's about my age who fell in love with the idea of Jonathan searching. He had bought his own business. And I remember his family owning a piece of real estate that was in the, the main highway here in Santo Domingo. And I called him and I said, hey, Marcos, what are you guys going to do with this 300 square foot of plot of land? Because I could really, you know, I'm looking for something like that. And he said, let me call you back. And all of a sudden he called me back and he said, listen, I talked to my family. We actually own the 300,000 square feet behind that doesn't access the highway. And he didn't even know it, that they owned it. And he's. And I said, that's interesting. Let's get together. We ended up. Why am I saying this? We ended up sitting down and saying, all right, we have 300 square feet of land. What do we build? We sat down with an architect that had a lot of experience in industrial real estate. And we did a build to suit. We said, you know, what does this building have to look like? And I swear to God, it started off with, to comply with the National Fire Protection association, we need 170,000 gallons of water in a cistern to be able to run in rec sprinklers. And so if the building is built already, it's impossible to put the cistern because it goes under the warehouse. And so luckily this was a greenfield opportunity where we will build this to spec. Why are they so important in my story? They literally built the entire warehouse. So they became our real estate partners. They put up the warehouse, they, the entire building and they gave me a 20 year lease without me having to give them a deposit. So again, you know, they were kind of this, another investor that I had or this partner that I, that I picked up along the way that is invaluable I to this day. And I will say, and I know he will hear it, he will laugh. I have still not given him a deposit after eight years. That's, that's how much trust base this was. And it was a warehouse where going into it we were losing money because it was too big for us. You know, we built something that, that we needed to fill up.

[1:04:22] Host: So you never bought the building. In fact you were, you, you just. They built a spec. You were going to be the tenant. They built it for their tenant basically.

Guest: And my investors at one point, some of them had never gone to the old warehouse. You know, they just trusted along the process. And when the new warehouse was ready, I remember I did the before and after and they said one, this is, you know, you have an amazing eye and you, you know, your risk appetite is a lot larger than we thought. And then the second thing, a couple of them said, if you would have taken me to the old warehouse during due diligence, there's no way we would have let you buy that business.

Host: And so the, the answer to the question of how big to build was basically determined by the available parcel that you, that you found through Marcus's family.

Guest: Yeah, it was. And it was big enough. I mean we're talking about a. We still have land. So we've already built the second warehouse. That's basically just a continuation of the first. We've about 6x the company in terms of boxes stored and we still have land to probably, you know, 2 or 3x where we are today. So it was very big piece of land for us to really be ambitious.

Host: Really exciting. Good for you, Jonathan. It's really, really cool story. You, you relationships and kind of working the phones. I feel like this keeps coming up. It is a stereotype of smaller markets. I don't even mean countries, but smaller cities, smaller towns that it's all about, you know, relationships and networking and business gets Done that way, kind of old school, if you will. Am I, is that accurate or am I reading into it?

[1:06:14] Guest: 100 accurate. So I mentioned my father was a cardiologist, right? He passed away a couple years ago at a young age. But like I say, he's my, he's still, to this date, is my best salesman. People trusted him with their heart, their life. And so when I came up to them, you know, maybe he would do a couple introductions like, hey, meet my kid. He's got this, you know, either he's a dog, he was a doctor, he didn't really understand what I was doing, but he would say he would, you know, open doors for me, get me meetings all the time. Until this day, about six years after he passed, he's still my best businessman. People trusted him and by association, now they trust me. And then when I say trust, you know, document storage, it is a storage business, but you're storing people's information, so there is a lot of hesitancy to outsource that. And so I am not only the sum of my relationships, but also everybody around me's relationships. So you need to really cherish that and protect it because in small markets, reputation is everything.

Host: Great, Jonathan, now you just characterize this as a growth equity opportunity. I want to hear a couple things. First of all, for, for people probably understand what that means, but contrast that. What did you mean by that and how is that different than a typical search opportunity?

Guest: I'm going to compare it more to, let's say LBO or buyout. In private equity. You're usually buying in those situations, stable cash flow businesses where you're doing a little bit of financial engineering, how much debt, how much equity you, you take on. And, and maybe they're mature businesses that don't grow at very high, you know, high rates. I'd like to describe growth equity as those situations where you're going to experience high growth, but you're probably going to have to put more capital to work and where it's not just let's buy the business and, and internally generate cash flow to operate, but rather we're going to have to probably deploy more, more and more funds to keep feeding it until we feel that we've reached some sort of steady growth business. So I'd say that's the distinction and how we saw the opportunity. You know, we bought something small, but we're going to, we're going to grow it a lot bigger. You know, I'll, I'll take it to maybe ETA comparison a lot of times when you're a funded search, you know, you love to say, I'm looking for a business that's about 2 million in EBITDA. Well, but what if that business is just growing, you know, 7 or 8% a year? How does that compare to a $500,000 EBITDA business that's growing 20% a year?

Host: Yeah.

Guest: Ultimately you can create the same amount of absolute return in both scenarios. You just have to understand they're a little bit different playbooks.

[1:09:06] Host: Y. Yeah, no, it's, it's for non people without finance backgrounds. They won't know this stuff. And, but it is so important and it is a way to think about an opportunity. And so your first example of growth equity versus the LBO model in search land, that is what dominates by far is the LBO model leverage. LBO model leveraged buyout. You're using a lot of debt in the case of an SBA deal, maybe 90% debt, which in private equity land is unheard of, but, but a whole lot of debt. And the reason debt that you then pay down, of course, with the, the proceeds of the business. Everyone listening will understand that because that is the search model. But the reason that you can, you know, lenders only lend when, against an opportunity, when it's generating enough cash flow to support that debt service. And in a growth equity context, there isn't that because you may be just reinvesting, there may not be profits to show you're reinvesting everything into the growth of the business. And so debt as an instrument to fund the acquisition and growth of the business is all but unavailable. And it's actually people, if this, people of course be saying this sounds like venture capital and it's not unlike venture capital, but it's not. Venture capital is at a whole different scale and it's generally new technology. And so you can have other businesses that are kind of not. So where the chances are not 1 in 20 that it actually works out, the chances are better but that basically all the money going into the business is cash, not debt.

Guest: That's correct. It's just in the, in between, between venture and pe, it's just the corporate life cycle ones, you know, be born, the other ones grow. These are teenagers, if you want to put it that way, instead of adults. They, they still need, you know, they, they, they still make you put up cash to send them to college. So it's, it's that type of the, the corporate life cycle.

Host: So venture capital is investing in infants or fetuses and growth equity is investing in teenagers, in LBO private equity. Traditional search is investing in adult businesses. I've never heard it put that mature

Guest: industries, mature cash flow. The one thing I would say, just as a piece of advice, if I can offer to potential searchers that are surely listening to this podcast, will, if you are a good salesman, do not be scared to do a smaller deal. There's one of these things in growing businesses that I feel that, you know, sales will cure. They won't cure everything, but they'll cure a lot. So high growth will cure. Overpaying in a deal. High growth will cure, you know, dysfunctional partnerships. It'll. It'll cure a lot of things.

[1:12:01] Host: Yeah.

Guest: And so sometimes, you know, when you're sizing your deal up, you might say, this is too small. But, you know, having reflected on this, don't be scared of a small deal. If you're a strong salesperson, you'll grow into it and you'll grow into it

Host: quicker than you think, says the salesman. Speaking of size of business numbers, we didn't get any. Can we have some about the size of the business that when you bought it and, and terms that you bought it at?

Guest: I can't. I don't think I can get into specific numbers, but like I said, one of the. We found very. It was a small deal. It was definitely on the, on the. Maybe we. This is, this is a lot smaller than we thought we were going to find. Amount so below a million dollars of EBITDA business.

Host: Okay.

Guest: And like I said, we've been able to grow it at multiples on an absolute basis. So now, now it's, you know, it's a, it looks literally physically and internally, it looks like a totally different business to the point where I could, you know, easily say we're about 85% of the Dominican market and probably the largest operator in the Caribbean region, which kind of makes us, you know, the, the entry point into, into any international player. Looking at the region. By the way, we. I still operate the document storage business. I don't know.

Host: But in case anybody's listening that wants to enter the Caribbean market, you know how to reach. Jonathan. Okay, so less than a million in Ebitda. And, and. But the multiple was. Can you. The multiple was this. 6, 7ish.

Guest: Yeah, yeah, that was the arbitrage we were looking for.

Host: A couple other things on this, Jonathan. The so. So growth equity was, was how you saw this opportunity. One of the things that is the opportunity for more traditional searchers, conventional searching is when it's a mature business LBO model is making, doing what the business does, but better. In other words, you know, pulling the levers is the cliche. Getting in there and improving processes, et cetera. So was that at all part of your thesis? Was there, was there that kind of conventional stuff to be done? And if so, like maybe. Is there anything to say there or was that a small part of this story?

Guest: No, no, absolutely. I like to describe. It was a four pronged transformation, what we did in the business. So the first one, and we already talked about it, which was physical real estate and the infrastructure we were offering, that one was relatively clear and straight cut. The second one was the company didn't have a middle management system. It was literally kind of one of these businesses where the partner that operated the business, it was him. And then it was. Know I, I listen to a lot of your episodes. Imagine like these H vac businesses where then it's just, you know, field technicians.

[1:15:03] Host: Yeah.

Guest: So there, there wasn't real management team. And I was lucky enough to the first month I said all right, I need a project manager if we're going to grow. I need somebody after I, you know, land a sale. I need somebody to onboard the client and bring the boxes in. I was lucky enough. I told my brother in law, here's the relationships, you know, know you were an industrial engineer. Can I meet a couple of your, your classmates that you think could, that you would recommend. And I met Helen and I'll shout out to Helen because she's still with me and Helen, you know, signed up to the business the next day and it started one of these situations where Helen came on board. Caroline, who is our finance manager actually came from the family office of one of the investors. They were nice enough to, you know, give it, to give us one of their finance managers as a growth opportunity for her. We plugged into their ERP system and she was already fully trained on, on the system. So it was, you know, it was literally plug in and we're operating on a new erp which implementation for those things are, are, you know, a torture. So that was one of a huge win. And then ultimately I ended up finding another operations manager whose name is Millie. Three women, three managers. They were the core of the middle management team from going there on out for the last eight years. Everybody was young. One of the things that happens a lot in markets like Dominican Republic, a lot of really good young talent, a lot of times they don't get opportunity. And so I, I'd like to think that one of the things that we were clear upon from the get go was if we do not build a middle management team, we cannot grow exponentially. I like to say when you're an owner operator, sometimes you make all the decisions and there are only so many decisions you can make in a year. But if you build out a middle management team and you empower them, then the amount of decisions that get made during a year are exponential and that just compounds year over year. It's just like an irr. And ultimately that's one of the things we did. I told them, listen, you've been hired, you make decisions and you are accountable for them at the year end and we'll just take a look at it. And so we, we did that and it was, it was a home run. Yeah, literally all eight of them stayed on with us. So we have zero attrition and amazing. They've grown, they've grown themselves a lot, both financially and personally and professionally. So that's one of the non monetary, I think benefits of being a business owner. You see the people around you grow as well and I love that. So that was two. Number three in our transformation was product offering. You know, we, I remember when we closed on the deal, or at least prior to closing, already had signed the spa. One of the conditions precedent was to get, I think it was the top 10 clients had to sign an assignability clause and change in control of their contract. And I remember having to do that round with Nacho, which is the partner who rolled over and who still is my partner and the general manager of the business. And I remember going to the meetings with him and putting out my hand and saying, nice to meet you, my name's Jonathan. And then he would say, nice to meet you, you, my name's Ignacio. And I would look at him and say, you're selling me this book of business. Are you telling me the clients don't know you? And he was like, well, this client signed the contract eight years ago. You know, they send more boxes, they pay their invoices, they're low maintenance. You know, I hadn't met the counterpart and, or maybe they changed them a couple years ago and you know, we don't have to really put that much effort into them. And at that moment it clicked and I realized something and I said, let me look at how the growth rate per client per vintage was looking like in terms of the year of the box that I was storing. And I realized we were doing a lot of what, you know, later age storage is. So just, I'm going to go A little bit technical, but Iron Mountain, which is the largest document storage company in the world, says that the median box has been stored within 16 years. So yeah, it's. And we'll hopefully we'll get into recurring revenue later. Yes, but that just means that, you know, there are documents that are right off the printer fresh and there are documents that have been stored a long, long, long time that nobody's touching. You might want to call it cold storage almost if, if you want to talk about in a digital fashion now that they're calling, you know, when the data center puts it away instead of keeping it in the cloud. And so I realized we had a lot of cold storage and I said, this is a risk. If we don't have strong client relationships, something can happen. So we need to get into the just in time model. I want the paper off the printer business. And so we designed how we were going to build the business in order to strengthen the relationships and add more services and add more value to our proposition to make our client relationships that much stronger. So that was number three. The fourth one was digital transformation. So similar to clients that are unvended, we had a Excel, which was the treasure map of where everything was stored, combined with this inefficient storage method where every box had a forever place. So our barcodes would know, say this box will be stored in warehouse number one, row number four, you know, module five, position six. But obviously once that box went out, because maybe the client asked for it just to, you know, work with the documents. That was a position that had to be reserved for them. And so when I went in, I told Nacho, we need to, you know, we need to buy enterprise grade warehouse management system for this industry. Said, you're crazy. That costs so much money. We're going to, we've actually been trying to build our own software. And I said, all right, open mind Nacho. We went to the International association, which is mostly us driven their conference. And I remember the first thing we did, we went straight to the booth. There were two vendors that the whole industry uses and we went to two vendors and I basically said, hey, this is our situation. Pitch us. By the end of the conference, when we landed back in Santo Domingo, Nacho was all over me saying, when are we going to buy the software? When are we going to buy the software? And that's what we did. You know, we implemented, you know, the top class warehouse management system, which basically is what everybody, the biggest big players use where, you know, where a box is at every moment at any moment in your chain of custody responsibilities. And it really transformed us because it was luckily we, we bought it just when we were going to move which is one of the challenges because or the opportunity was we will be able to scan every box and make sure we onboard not by data migration but by actual physical audit 100%. And it was the best way to start the business kind of to restart the business into this new digital reality. So we kind of became digital native all over again. So those were I guess the, the four, the four things of, of you know, growth. The other one and I know you're a little bit interested in talking about was through acquisition. I guess this was kind of how we prepared the company to be able to acquire. And after we had these four things in line it was a lot easier to actually think about strategic M and A because we were just running with different systems, different teams, different everything. Where acquiring a customer was not only just a huge upgrade for any of their clients, but it was easy to digest for us as well.

[1:23:18] Host: Well Jonathan, we're actually not going to have time to hear about the inorganic growth because there's so many other topics I want to get to and we're bumping up on time already. One thing I want to hear about a little bit is just how going back to the giant facility that you built but as a tenant just because in search self funded search generally there's. There can be real estate involved and the business owns the real estate. The searcher will buy it as a package and they're off. And there always seems to be this debate of like well should you own real estate as a package or should it be carved out because it's in some sense real estate is its own business, frankly a single asset business. I heard you mentioned sale leasebacks earlier. I aired a recent episode with an independent sponsor who had an incredible sale leaseback deal going to be doing a sale webinar on sale leasebacks. So anyway it's just cracked open my. On what I thought I understood how to think about owning real estate versus not I would take it in your business where you yourself have said that you're basically a real estate business that you, that you of all people would want to own it but your tenants. So how should people think about that?

[1:24:35] Guest: So I bought the first warehouse. So we, we had to buy it in the deal.

Host: Okay.

Guest: And I'd say it was maybe it was about 20% of the value of the, of the, of the transaction. Yeah, I, it was one of those things I immediately regretted because I realized I had to shed, I had to shed the old warehouse and move on to something new. And it took me a while to move. You know, the trend to sell the, the, the, the real estate, the, the warehouse that we, we had purchased. And it was a very big distraction and it was, it was even a distraction in conversation with my investors. It became one of those things where it took me so just so you know, it took me maybe it took me about five years to sell. Yeah, well, you had to, you had

Host: to build the other one first. So that was going to take a while.

Guest: Yeah, no, that, that, that was, that was good. That was one of the reasons we're, we ended up, why we ended up buying it. It's because we had to have it until we were going to move. Yeah, but it wasn't prime real estate. And so it kind of became one of those things where at the end of the year, you know, you have your shareholder meeting and did we, did we sell the real estate? No, we had, you know, a couple of offers. Nothing fell through. From an, from a returns perspective, sitting on the real estate and then selling it for less than we purchased it for five years later. Complete value destroyer. Unless you're sitting on prime real estate or very strategic real estate for what you're going to do next, I'd say try to not try to carve it out and have somebody else on it. Now the difficult part is how much of the transaction is the real estate worth and how is the seller looking at in terms of their liquidity, liquidity event, you know, are they interested in keeping some rent generating asset? Are they, is it going to be a liability for them? You know, can you find alternative uses like sale, leaseback or you know, maybe, maybe you just buy it to resell it or something. So I don't think I have a straight cut answer to you. Except, you know, if it's not really strategic for you to be there and you might end up moving your business, then absolutely don't buy it. And if it becomes a, you know, a, A, an issue in terms of negotiation with the seller, try to find ways around it, I'd say. And then also ultimately understand what are you buying? Are you buying an operating business or are you buying real estate that has an operating business within it?

[1:27:15] Host: So, and so, and you're strong on the fact that people should just basically their first reflex should be not to buy it. And that's because it's a distraction. It's fundamentally a different calculus and how you optimize the capital that goes to real estate you basically bought, it's basically like I said, a mini business. And so now you've bought too many businesses. Get rid of the mini business, that is the real estate.

Guest: It's a distraction return, it's a return diluter as well. So I don't know many real estate businesses that might be growing at a 20, 25, you know, percent IRR for, for that long a time unless you're in this like really hot real estate market. So when you're looking at it as well, it's probably, it's probably dilutive to your, your incentive to return returns, I guess to, to your investor base.

Host: Great, thank you.

Guest: It's a different asset class in and of itself.

Host: Actually. One thing we touched on before we leave this Jonathan, is going back to the fact that this was growth equity and you bought, you, you did not take debt to grow this business. We had talked about that. There are unique challenges to that that many searchers might not anticipate or be used to. What were those?

Guest: So I didn't take on debt at acquisition. I'd say that I did take on operational debt, if you want to call it that. So rent a big rented warehouse might not look like debt, but ultimately, I guess if you, if you start doing, you know, capital lease versus operating lease accounting, you can understand, well, is this a burden on the company? And the 20 year lease where you pay rent the first of every month is a financial burden just like any other debt. So we did get that benefit of, of a debt that didn't look like a, you know, traditional debt. But you know, when, when I bought the business, I thought I was going to be able to finance a little bit of it, maybe 50% of the transaction. And pretty much up to the month before closing, I had lined up financing with a specialty finance company that does business in the Caribbean and they gave me term sheets I was literally ready to sign, except we got hung up on one clause which was how many days late is a default? And the standard language at least here in Dominican Republic was usually five days, maybe a little bit more. And it's permissive. And they were adamant. One day late and you know, you're going to have your shares as guarantee and we can execute. And I remember at that moment I got cold feet with the debt and I said, these guys, they're not giving me the good vibes. They're sounding kind of sharky. There are worse deals to do than a full equity lower return transaction, which could be, you know, we did a great deal for some crazy reason we might have missed payment on one day and then we're, all of a sudden we're in this legal disaster where if a shark wants to foreclose on you. And I remember I had to pull the plug on the debt. It was a weird situation, a very uncomfortable one. I had to go back to my investor. I said, hey guys, I need double the amount for the acquisition. Thankfully, the support that I got with them was. And because this was relatively small for, for big, high net worth individuals, the answer was no problem. We're here for you. And we were able to close the M and A. The benefits of being all equity, you get to sleep at night a lot easier. I mean, you get to, you get to use your free cash flow, the cash flow that you're generating to reinvest it. It gives you a lot more, more. It's a different mentality. I think a lot of times if you're levering 90% of your deal, a lot of times you're trying to play, I don't say games, but you're trying to juggle cash flow to meet debt obligations. And a lot of times you don't focus on how do I grow? This while if you're very heavily equity funded, which I do think businesses that are going to go through, you know, high growth situations might need to be, you, you're, you're able to be a lot more creative and a lot more, you can explore a lot of things when you have cash that isn't earmarked to go either to debt, a dividend or, you know, earnouts, whatever you want to call it. So I do think that even though you always, in hindsight could look at your, your historical performance and be like, oh, what was my, what was my cash flow? I should have levered all of that and it would have juiced all my returns. Well, in hindsight, you know, everything's 2020 and you only get to play the, the, the cards you got dealt. But you know, that's, that's my perspective on, on leverage, especially in growth situations.

[1:32:25] Host: But, but also you had said to me that, that to get really outsized returns, leverage usually has to play a role.

Guest: Yeah. So when we talked originally, I told you there are four ways of creating returns. Buy cheap, grow, lever, and get multiple expansion on your exit. And it's tough to create high returns in an unlevered scenario. Just so for people that like accounting and financial accounting, there's something called the dupont model. I don't know if you know it will, but it's basically, it's basically a shorthand word way of, of calculating your return on equity. And literally the amount of leverage you have on a balance sheet is a multiplier of those returns. So your return on assets, and this is book leverage accounting, but your return on assets multiplied by your book leverage equals your return on equity. So you can imagine if your return on assets is, you know, equal to return on equity, you, you don't have this leverage component which is a multiplier, literally a multiplier of returns. So if you're missing one of these four legs to the stool, it's, it starts creating difficult situations to, to return these sometimes, you know, very outsized returns that the search fund model tries to, to predicate on. I think a lot of times, mm,

[1:33:54] Host: happily in your case, you haven't sold the business, but you, you grew enough that it overcame the fact that there's no leverage in it.

Guest: Yes, yes. And I did exit one of the businesses. I told you, I already exited the billboard business. And so the other thing that I did learn was multiple expansion is tough in small markets. Usually, you know, the, the, the ETA thesis is by the time I'm done growing this business and that I'm done owning, you know, my hold period, I will find smaller mid market PE to come in aggressively and take this off my hands.

Host: Yes.

Guest: And that usually that usually means I bought at 4 and I sold at 10. That multiple expansion is just as equally a multiplier than, than financial leverage is when you're operating the business. So what, what I found is also in small markets, the depth isn't there and a lot of times you're, you're waiting for the international strategic to want to come on your market. And what I've learned is those strategic are very disciplined in terms of multiple, the multiples they pay. So if you're one of these, you know, global businesses, a lot of times you have these M and A departments that their job is literally to have the pulse on every single country in the region. And they have conversations once or twice a year with you. They'll ask you, you know, how the business is going, where you guys are at, are you thinking of selling? And ultimately what they do is they try to give everybody offers, but they're low offers because they play the, the numbers game. You know, we throw out 30 offers and maybe one of them bites and that's the time we enter that country with the market leader at a cheap price. So multiple expansion is really tough in small markets. The second reason why it's small. If you get into niche businesses like the ones that I got into, you might actually be the market. So who's going to acquire you if you're the big one in the room? And ultimately if you grow the business into something that's too big, it's almost undigestible for anybody other than a strategic. So a lot of times you might think maybe I can sell to another searcher, maybe I can sell it to a high net worth individual. But if the business gets so big, nobody has in their portfolio allocation a sleeve of capital that's so big to go something that is non core. Assuming that you are the big player in the market, you're non core to everybody. And so the only way you can motivate somebody might actually be let me reduce price. And so that, that you know, kind of shoots your operating, I'm sorry, your multiple expansion in the foot as well.

[1:36:47] Host: So with all of that in mind, how, what would you tell people in non big mature markets where there's always a larger PE buyer up the chain? What would you tell them? How would you tell them to think about multiple entry, exit, multiple or exiting at all?

Guest: Even so, I think let's go to Genesis and let's go to the search fund model where so much of, you know, a third of your compensation is driven by the returns that you, you give on an IRR basis. So I would say literally irr, so let's call them legally defined as irr. I think the first thing you need to do is talk to your investors, really understand who is putting this idea of liquidity, the liquidity pressure on the table. Is it you, the searcher, because of the things that we already spoke about, because it's the way of you to get liquidity? Or is it the investors that actually want their capital back? Because you know, they, they're thinking more institutionally like funds who recycle capital and give back capital after about a 10 year period. The answer is, you know, as investors we're okay with owning a business as long as it starts generating cash flow maybe and comes into a dividend play. If they're okay with that, maybe put some consideration into that in your, in your search contract. What, what would the, what will the business look like if we hold this for 20, 30 years? Because if not all of a sudden you're going to find yourself in a situation kind of what happens in startups that, you know, where everybody's options are underwater, you know what's going to, what, what is this going to mean all of A sudden, if you're never going to be able to hit your IRR hurdle and you're still the owner, operator of this business, it's not good for anybody. You're not incentivized to keep putting, you know, as much as you might, might, you might need a refresh comp package and maybe you end up having to look for other, other avenues of creating wealth for yourself that maybe you do get your, your, let's say some sort of very big variable compensation tied to it. The other thing is, I'd say break away from the idea of the irr. Think about multiple unvested capital. So multiple uninvested capital is literally how many X you did on the, on your capital. As simple as that. So let's take this to maybe stock market terms. I bought a share at a hundred, I sold it for 500, I did 5x on my multiple and invested capital.

[1:39:30] Host: It's a fancy, it's a fancy acronym for basically how the layperson thinks about investments. I doubled my money. Great, you got a 2x more.

Guest: Exactly. The difference between that and IRR is time. So how long did it take you to make that 5x? Did you do it in a year? Because if you did it in a year, then your IRR is 500. Did you do it in 10? Because if you did it in 10, maybe your IRR is closer to 16, 17. So I think what ends up happening in, though the two biggest differences is probably on the investor side. So when you're a high net worth or maybe you're a family office or an institutional investor, you probably are looking for situations that are more managing portfolio, generational wealth and situations like that where 10x in 10 years is phenomenal. A lot of times also these, these types of investors, they might not want their money back. They might have already gone through liquidity events where their problem is to deploy capital, to not have them sit, you know, in T bills while they're able to deploy large amounts of capital. So they actually might like the reinvestment rate that you're generating. And so that being said, Maybe at year six or seven, they're happy with a 15% return that year. But if you sign, you know, with blood on day one, that it's a 25% hurdle rate on an IRR calculation. You find yourself in this weird no man's land where you know, you're pressuring yourself because you, you know, your, your vesting went underwater, but they're still happy. And with the return that on a yearly basis, their asset is generating. So I, I think when you look at the MOIC or multiple uninvested capital post year five, it's a lot more honest on what the relationship should be looking like. Like can you find a vesting scenario where the searcher operator gets some sort of liquidity, keeps operating the business and is still motivated without feeling that their IRR hurdle just you know, landed and squashed them because the incentive were designed really for a four to six year hold period.

Host: Great. I gotta let you go Jonathan. We've gone over but, but close us out by telling us about what you're doing now. We, we. You still own bunker. There's a whole story of the billboard business which obviously we didn't get time for. You got, you're doing other stuff as well, which you and I talked about on the pre call. But, but fundamentally I, I think it's. Is it fair to say that you've pivoted to kind of private equity?

[1:42:15] Guest: What.

Host: How would you describe.

Guest: I'm in process, in process of morphing into some sort of private equity investment investor. Although I like to say that the entrepreneurial part of ETA I will always hold dearly. I look at opportunities based on what I can bring to the table and not just how I can financially construct or deconstruct an opportunity. So I think reflections after being in business, you know, eight, nine years, I do not like operating. I am not a day to day person. I do not like repetitive functions which a lot of times is in running a business that's what you need. You know, you got your sales teams that you have to, you know, keep tabs on. You've got, you know, operating and if you're in a factory environment then obviously every day you're pumping out the same product. You said it. I'm a salesman and I love selling anything and everything that I believe in. And so I truly love every time I learn a new business model I am, I like to become an expert in new industries and morph into. I can put on a document storage hat today, you can take me to the room next and I can put on a billboard hat on and truly become an expert in each one of these new industries that I learned. So what I've understood is the place where I add most value besides deal making because it is my training is to be, you know, a helpful partner of another operator. And so, and that really just means helping them do business development, acquire, partner, sell. And so knowing that my job now is to really morph into a portfolio approach and be able to buy more businesses. But I truly think that the ETA in me will never come out. I will get elbows deep into the businesses we operate. It's not hands off. Let me know how it goes.

Host: And so are you raising a fund?

Guest: I am finishing structuring a fund that I will be fundraising soon and I hope my lawyers don't tell me that I was not allowed to say that.

Host: And it'll be focused on the Caribbean, Justin?

Guest: No. So the idea of being geographically constrained is probably not good if you're trying to look for larger businesses, which I am now, and if you're trying to create a portfolio approach. I think one of the ways to shake the idea of a small market, a Rhode island sized market, is export businesses. So I think by now I've built the relationships I feel comfortable in looking at business models and new businesses in more countries that are just not my native one. So we're probably going to look for a regional approach, although very doctor focused.

[1:45:09] Host: Great, Jonathan. And for the audience of people who are in eta, what's the profile of somebody you might be able to help? A searcher, somebody who's not in the US who, where do you think you could add value if somebody who's the best type of person to reach out to that you could add value for?

Guest: Well, I think I'm in having spoken to a lot of searchers because I have, I think during the search and right after acquisition is probably the moment where at least I felt that I've added a lot of value. So I have a friend, a good friend who searched right after me here in Dr. And, and I remember I, I would tell him six months in advance what he was going to go through literally while searching and after he searched and one of the things, and this might sound a little bit unhuman, I told him the day he acquired, I congratulated him and I said, get ready. You're gonna, you know, you're gonna fire everybody. You're gonna cycle through human capital now because you're gonna build a different organization. And it was this whole middle management philosophy. You might have found somebody that just didn't align with your mission. And I remember he called me the day he ended up having to let go. The last person he called me and he said, I can't believe you were right, I should have let those people go sooner. And I really didn't believe you when you told me that I was going to go full cycle on, on human resources. And that was the case. So I think a lot of searchers we have common experiences and getting good advice during the part you're searching, which is lonely and right after acquisition, which is, you know, scary. Reach out to as much searchers as you can.

Host: Yeah, well, Jonathan, on that last point, you, you probably made a few people uncomfortable who were want to be able to say on day one in their announcement speech, nobody's losing their jobs. You know, we're going to get, we're going to get to continue on. They don't envision themselves turning over their, their staffs altogether. And I, I, I actually just had an interview last week where that happened to somebody. But I think also in this world it's considered a, not a failure because this person, it was appropriate that they do it and it's. And with the new team now he's, you know, cooking with what is it? Cooking with gas. But so it was the right thing to do. But, but still it's terribly painful and I think most people would consider it not a failure. But they don't want to think that that is the business they bought where the entire team needs to be replaced.

Guest: I'll tell you this, transparency and honesty go a long way. And so if you don't lie that, that idea and nobody's going to lose their job, it might be a lie. You might better say, you know, we are looking to build and grow exponentially and we want, and we, part of what we did in due diligence was study you as a team and we bought the business because of you. Now if they don't align with you, a lot of times they'll raise their hand and you need to know that quicker, sooner rather than later. And I actually had a situation. The first person I had to let go, you know what they said after I let them go, they said thank you. Yeah, I don't think, I don't think I would have been successful in this mission that you are on. And we gave each other a hug and you know, then they become promoters of the business because they, they still feel that they spent part of their

[1:48:49] Host: career there's fantastic interview, Jonathan. Thank you so much. I'll link your LinkedIn. Is that the best way for people reaching. I'll put that in the show.

Guest: I'm a salesman. Well, you know, I'm heavy on LinkedIn. Right.

Host: How we first connected. Good stuff. Jonathan Bornagol, thank you so much for your time and congratulations on all your success.

Guest: Thank you. And thank you for the time and opportunity.

Host: I hope you enjoyed that interview with Jonathan Bornagol. If you want more, Jonathan, if you have a question for him. Come to the live Q and A that we're doing with him by Zoom on Wednesday, March 19th. Jonathan will come just to answer your questions, direct questions from you, the listeners of his Acquiring Minds interview. Register for that at the link in today's show notes or in the YouTube notes. If you're watching on YouTube or at acquiringminds.co. come to Jonathan's live Q and a on Wednesday, March 19. Register for that at the link in today's show notes, in the YouTube notes or at acquiringminds.co. see you there.