Host: The financial services industries are enormous. Multiple trillion dollar markets exist under the financial services umbrella, including one we talk about today, asset based lending. Interesting that there are so few stories of acquisition entrepreneurs buying businesses in this sprawling rich sector of the economy. Well, today's guest did Jonathan tupper bought a 30 year old asset based lender that does about a million and a half in revenue every year. With eight employees, it operates in the factoring niche. I say niche, but the factoring industry is itself a multi, multi billion dollar market. So you're going to learn about asset based lending and factoring and how they've got the same appealing features for business buyers that other more talked about industries do. Fragmentation, tailwinds, owners looking to retire Jonathan Seller was 89 years old. Now an obvious question here is does a searcher need expertise to buy a business in one of these categories? Because Jonathan sure had business buyer fit. With decades in fixed income under his belt, he understood in his bones the principles behind debt, risk, collateral. But you'll hear him say that there's definitely a learning curve. He might not be new to private credit broadly, but he's new to the factoring industry. He's leaning heavily on the team he inherited and he does believe that an outsider to the world of credit could do this. My impression, hey, if you've got the self confidence to go buy a trades business having never turned a wrench yourself, you can tackle this market too. See what you think. Here's Jonathan Tupper, owner of JSI Announcements. Chelsea Wood has run Acquisition Lab for five years and in that time has witnessed the searches of hundreds of aspiring buyers and had calls with thousands of them. So Chelsea knows what separates those who succeed in closing a deal from those who don't. And next Thursday, December 12, she's hosting a webinar with Acquiring Minds to share her observations with us. In this one hour session, Chelsea will dive into the key mistakes she sees searchers make and how to avoid them to ensure a successful close and ownership period. This is part two of Chelsea's presentation last month on the same topic. There was so much to say. We split it into a two parter and it's not just a presentation, it's a live office hour session with time for Q and A. So bring your questions and take a big step forward in your own acquisition journey. Come learn from Chelsea's expertise and avoid the missteps that trip up many first time buyers. Next Thursday, December 12, noon Eastern Register in today's show notes or on the Acquiring Minds homepage, acquiringminds co. Welcome to Acquiring Minds, a podcast about buying businesses. My name is Will Smith. Acquiring an existing business is an awesome opportunity for many entrepreneurs and on this podcast I talk to the people who do it. Running payroll, paying your bills, closing your books and producing financials. These are critical tasks every business owner must do or oversee. But spending time on them distracts you from the leadership in growth work you want to do. So let system 6 do it for you. Owned and led by a former Searcher, Chris Williams, System 6 is a leading outsourced finance team for hundreds of SMBs, including over 50 searcher acquired businesses. Chris, Tim and the System 6 team understand firsthand the challenges, the opportunities of jumping into a business as its new owner. So whether you own your business already or have one under LOI, talk to System 6 about how they can give you time back and improve your financial operations. Mention Acquiring Minds and they'll provide a free review of your books and Financial Ops, a $500 value. Check out system6.com, link in the show notes or email helloystem6.com Jonathan Tupper welcome to Acquiring Minds.

[4:47] Guest: Thanks for having me. It's a pleasure to be on your show.

Host: Jonathan. You bought a business that is first of its kind for an Acquiring Minds guest. Asset based lending and factoring. We'll get into exactly what that means, but suffice it to say, it's a lending business. We're going to hear why you liked it, what your vision is all about, the industry, but please start us off with some background on you Jonathan.

Guest: Yeah, well thanks for having me, really appreciate it and I'm an admirer of the show. I've been listening to it for several podcasts now. And look, you do a great job and I've learned a lot from your prior guests but my background is I come from an entrepreneurial family. Both my parents and my brother, they own their own business so it was bound to wear off on me at some point. But we'll start with my parents because I remember at a young age, frankly hanging out at my parents office. Most of my youth we would get dropped off at their office after school and my brother and I would have to try and entertain ourselves. And as a quick aside, my parents had an insurance brokerage just outside of Toronto, so I'm Canadian originally, but that was our first foray into into owning a business. We would just pick up things from our parents as they would have to deal with clients, you know, as they're trying to generate new business, as they'd have to deal with employee Issues or whatnot. And, you know, my parents would be in one room, but you could always hear the conversations. Right. And my brother and I would try to do our homework or, you know, try not to pick on each other while, you know, we were waiting to go home.

[6:23] Host: And they were partners, obviously, then your parents, they were partners in this business. And, and how, how, how successful or not was this agency, this brokerage?

Guest: Yeah, I would say it was relatively successful. We were kind of like a, you know, mid to upper middle class family. I thought we did really well. We certainly weren't wanting for anything. My dad started it when he was 30 and he retired when he was closer to 75. And so no, he had a, he had a great run.

Host: Fantastic. Okay, so that made small business to little Jonathan, seem like a normal life. Little did you know how abnormal it was.

Guest: That's right.

Host: Go ahead.

Guest: And, well, obviously it wore off. I mean, my brother, as an example, he went to college. And after he went to college, he went and worked for my parents for a couple of years. And after that he did basically an internship for another brokerage and then he started his own. So within four to five years after graduating from college, my brother started his own insurance brokerage as well. And so, you know, every conversation that you have with your family in some way is related to, oh, what's going on with the business. Right. And so my brother was much more on the acquisition binge, which is dot, dot, dot, you know, a precursor to our conversation here today. But my brother was much more on the acquisition binge. So it was always, oh, how'd you find that company? Why did you buy that one? Right. And so these were always conversations that we would have within our family over the last, you know, 40 years or so.

Host: And how did your career progress?

Guest: Yeah, So I would say mine was a little bit different, obviously from my, from my parents and from my brother. But, you know, for me, it started in college. Like many others, I, you know, frankly, I didn't know what I wanted to take going into college. But when I was in middle school, we learned that one of our relatives was actually a founding father of Canada. They called him a father of confederation. So he's a founding father of the country of Canada. In the late 1800s, he was actually one of the first Canadian prime ministers, the sixth Canadian prime minister. And so learning this as a kid, I'm like, that's what I'm going to do. I'm going to go into politics. And so off to Ottawa I went, which is our nation's Capital. And so I went to a school where know they had a great political science degree. And I ended up working on Parliament Hill for a member of Parliament, which would be like a congressman here in the United States, but he was also a junior cabinet minister and so his portfolio was foreign affairs and international trade. Long story short, you don't make that much money as a, you know, a mid to late 20 year old, you know, working on Parliament Hill. There's more money in the, in the private sector. So I decided to make a shift and that was my first foray into the investment management world. How you manage money, how you're managing capital for clients. And so I started off in the lonely, you know, client service representative, fielding calls from financial advisors and from individual investors. And then several years later I found my way actually into the small world, actually a very big world. But not as sexy as a world as the stock smart stock market. But I found myself into fixed income. And more specifically that's like government bonds, investment grade, corporate bonds, high yield. And so now you're really getting into lending. And so lending of course happens across a variety of sectors in the markets. Right. It's not just individuals, right, as they're looking to borrow for their car or for their house or for companies, right, who are looking for maybe acquisition capital or working capital, but also for governments as well. And so that was my first foray into fixed income. And so eventually I ended up becoming a product manager for fixed income at this company. And it was amazing learning experience. And so that is where I would spend, you know, the next significant portion of my career was actually in, in lending, fixed income and particularly in credit like investment grade and high yield.

[10:23] Host: And so how many years do do you tally for your thinking and being in the industry of bonds and fixed income and fundamentally lending?

Guest: Yeah, that was close to 20 years of my career. So I'm almost 50 now. So I started when I was perhaps in my mid-20s effectively. So it was a significant portion of my career. And so when I wrapped up my period of time at McKenzie, I had married a Southern Californian and after five winters she didn't want to be in Toronto anymore. She's like, we're moving home. And so we moved to Southern California. And when in Southern California I finished my, my mba, but I hit the mother lode and I landed at a company called pimco or Pacific Investment Management Company and they're based in, in Newport beach in, in California. And So I spent 10 years of my career there. And as I said, I Hit the mother load. And it's a phenomenal company. Um, but it's also at that period of time too where, you know, really I ended up getting my graduate degree, if you will, in, in fixed income, in credit and in lending. But also too, it's where I had a pivotal moment where I moved away from being a product manager or a fixed income strategist and spending more of my time actually working with their clients and doing business development and with sales. And it was also a really, really formative period in my life, but also because there was so much that was going on. This was around the, the global financial crisis. So I interned at PIMCO in 2009 where the country was in the throes of the GFC, the housing market was in turmoil, the equity markets were in turmoil. There was just a lot that was going on and I learned so much. I loved my time there that I ended up getting hired there in 2010. And so the biggest thing that I took away from my time at Pimco there and of course all this is leading up to a precursor that I'm doing now. But you want to be a liquidity provider. In periods of stress, you need to be a liquidity provider. You need to be able to provide capital when people need it most, whether it's people or a company. But in periods of stress, people are always looking for some form of liquidity. And ultimately like when you think about what we do today, that's essentially what we do. We provide a form of liquidity for small and medium sized businesses. And while our company is mostly focused in Texas, but we provide a very, very critical role in that.

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Guest: Well, the short answer is I hit a crossroads in my career. So after Pimco I had stayed in the investment management industry for, for a few years. And in 2022, I actually ended up going over to a financial technology company, a fintech company. It was actually in the late stage of its development, so it was certainly, you know, fast growing. And we ended up IPOing via SPAC in 2023. And so as with most SPACs, you know, the stock price didn't hold up very well afterwards.

Host: Say more, Tell us, tell us if you would just how dramatic this is, please.

Guest: Well, it was very dramatic, right? I mean, we had a company that just prior to going into the IPO was valued at around $3.5 billion, which for us was a big number. And you know, if you were to look up that firm's ticker right now on CNBC, you'll see that it's probably less than $50 million. Right? So literally 99.5% of that firm's valuation since. And we IPO'd last summer in 2023. So 99.5% of that firm' valuation has been wiped off the map. Right.

[15:24] Host: Wow.

Guest: And so you can see the writing on the wall certainly last year. And so in November of last year, I ended up leaving the company. And then my crossroads ultimately, to answer your question here is, well, what do I do next? And so, you know, I started to go down the road of doing what I had didn't previously. Let's get back into private credit, let's get back into these alternative investment structures. And as I was having these interviews, I'm thinking, I'm not interested in this. I'm like, I just can't do this anymore. And so I was having these conversations actually with some people outside of, outside of my work, Right. Outside of, well, within my network. So my brother, right, at that point in time, frankly, he was looking to acquire another insurance brokerage. I had another former colleague of mine who frankly had left Pimco and he actually started his own company to make acquisitions of other companies. So he had a plan to acquire, you know, two to three companies and his plan was to hold them for the long term. So along this point in time, I'm having these conversations with, with these colleagues, with my brother actually, frankly, even with former family office clients that I used to work with. And as you, or maybe some of your listeners know, like family offices are, you know, they are extremely active in small to medium sized businesses. And just having some conversations with some people that I had worked with previously. And so it just got the wheels moving. I wasn't quite ready to make the jump in terms of buying my own company at that point in time. But it just got the wheels moving and so I just happened to start looking on websites like Deal Stream and Biz Buy, Biz Buy Sell, you know, for, just for companies that were putting themselves up for sale. And you know, I was looking all over the map. And so initially it was, oh, it's cold storage, pretty interesting, you know, warehousing. And then of course that leads you into things like transportation. But then of course I was also really looking for things where I could marry my background in investment strategy. So think credit, product management, product strategy and then also business development, raising capital. And so.

Host: Jonathan, let me, let me stop you there. So what your, you were not exposed to the world as we know it, eta entrepreneurship through acquisition, quote, unquote. You were, you just learned about buying businesses or you were, you were. I mean, as somebody from a financial background, you probably, it was probably not a foreign concept, but the idea that you would entrepreneurially buy businesses, you were mostly exposed to this via your brother, via this other friend, colleague of yours. And it, it seemed appealing. You have subsequently read the books, listened to the pods, I guess. Yes, but, but this was mostly from your network that you're really exposed to the idea and where. That's what planted the seed. Fair.

[18:20] Guest: Yeah, that's fair. That's totally fair.

Host: And, and can you give us a picture of. You said you're approaching 50 now. How, and this was, I guess this was just last year, so this is a recent acquisition, so you're approaching 50 then too. Can you give us a picture of kind of your balance sheet, what you had to work with, what the parameters of your search were?

Guest: Oh, parameters of the search. Yeah, I, you know, frankly, they were, they were really, really broad. I wasn't necessarily looking for something in my backyard, let's say in Southern California. I was open to looking at businesses within, you know, a major, I'll call it like a major center. Right. As long as there was some form of, you know, really, the only, the really, the only kind of criteria had, is the cities had to have some kind of population growth, which seems silly to say in, in hindsight given you're in the financing, you know, industry. But look, we needed to have, I wanted to have some kind of population growth. I wanted a company that, you know, perhaps had headline revenues of at least 1 1/2 million dollars and that could have gone up to, you know, anywhere from 4 to 5 million dollars. Wanted, you know, companies that would have had like a Net income, net earnings of roughly around half a million dollars. And so that was, that was really kind of like the very vague, you know, you know, kind of moments that I was looking for in a particular company.

Host: And did you expect to use an SBA loan to acquire?

Guest: Well, initially I had considered that, but of course when you get into companies like asset based lending, they're not covered by the sba. So that, that, that changed my tack pretty quickly. So then it was more about, okay, how much more, more of my own personal capital am I going to have to be able to put in? And then also, who else can I raise some capital from? And so at that point in time, I'd actually considered again, given my background, working with some small private credit companies, because right now, not just right now, but for the last few years, one of the largest areas for raising capital within the, the alternative, the private alternatives industry was actually in private debt, private credit. And this little area called specialty finance. And specialty finance would include things like, you know, think auto loans, you know, credit cards, receivables, like account receivables. And so people would buy pools of these types of structures, mainly because they give you a very attractive yield relative to what you'd be able to buy in the treasury market or even in the investment grade credit market or, you know, other more traditional forms of, of a fixed income. And so I had initially thought about approaching a private credit firm to join me as a, as a partner. And unfortunately it fell through. It actually fell through, you know, perhaps around, you know, six to eight weeks before we were about to close on a deal. So we kind of had to scramble to raise some additional capital and so was able to do that with, with another partner. But that was the general parameter for, for falling into this asset based lending and this factoring, this factoring company.

[21:41] Host: So you, when you say partnering with a private credit firm because you weren't going to be able to finance an acquisition of an asset based lending company with the sba. Yeah, you were going to get, you were going to take a loan from a private credit firm, which ultimately didn't happen. But that was kind of the plan.

Guest: Yeah, it was more of like an ownership structure actually. They would have been a 50% owner. So it wouldn't, it wouldn't have been so much an own. They would have had 50% equity, I would have had 50% equity. But also more importantly, what they would have been able to do is they would have been able to fund future purchases of receivables for the company and then they would have been able to pool those within their own investment vehicle, which is actually, it basically would have been a source of origination for them and then that way they could, they could source new deals for their investors and more importantly they would be able to, you know, get the yield right or the distribution that they're trying to target for their investors too.

Host: So tell us about the search. How did you find the business that you did? Did you go through any others before you bought this one?

Guest: There was one that I had come across that was up in Chicago and it was actually more of a traditional asset based lending equipment finance company that was up in Chicago, I believe. And I just came into the process just very, very late. I came across it through, it may have been like deal stream. And when I had reached out to the broker, it was just too far done. They had already gone into the LOI and they were about to close. So what I did though is I ended up reaching out to another broker and I came across the company that I currently purchased. It's actually it was an 89 year old woman who had a factoring company here in Houston. And you know, previously she had founded the company with her, with her son. Her son passed away a little over two years ago and so there was no succession plan in place. And so she's 89, she doesn't have the energy to run the company as much as she used to and she just needs to move on. Right. But ultimately I found it through, through a brokerage and it hit a lot of the boxes right that you know, that I had at least set out in terms of the type of company that I would be interested in.

[24:01] Host: Jonathan, before we leave, learn, get more into the industry and kind of really understanding what you liked about this particular business, asset based lending and factoring. Explain please exactly what that is.

Guest: Yeah, well, coincidentally, asset based lending and factoring have, have actually been around for hundreds, if not probably all close to a thousand years. And as asset based lending implies we are lending to a particular client and in return we are receiving some kind of asset that can be used as collateral. But for a typical investor or most individuals, they're probably familiar with it if they've taken out a mortgage or if they have a car loan, a mortgage. When you buy a house and you're borrowing finances, let's say from a bank or it could be from other, some other non bank lender, typically they're using the, the house or the property as a form of collateral that's backing up the amount that they just lent to you. Same thing for a car loan. If you've taken out a car loan, right. Usually the car is acting as some form of collateral or an asset that is basing. Basing that is that the loan is based upon. So that if a payment isn't made or if there's a series of payments that are missed, then that property can be taken. They can, it can be possessed by the person that lent you the money, by the lender, the bank in this case. So asset based lending is something very, very similar. There can be all different types of asset based lending. It could be a type of equipment, it could be a receivable, an accounts receivable, which is effectively like a promise to pay. Right. And that's also a form of collateral that can be used to securitize a purchase or in this case a loan.

Host: And so make this more concrete for us. Give us a use case or an example or two. An actual example or two from our business.

Guest: Yes.

Host: Yeah.

Guest: So I would say we work with a lot of Truckers. Almost 80 to 85% of our clients are in trucking or logistics related industries. And so imagine if you had a trucker that was picking up a load of steel from a steel mill and it needed to deliver it to a construction site, right? So in this case, the load of steel would be the collateral. Potentially could be the collateral. But more importantly, when you, when the trucker drops off that load of steel to let's say, that construction site, he's usually getting paid by a carrier, right? Perhaps he's getting paid by a construction company, whoever happened to pay the carrier or that, or that trucker. And so he'll drop off the, the load of steel at the site. And they'll say, okay, look, you dropped off 2 tons of steel, right? Here's the rate that we're going to pay you for this steel, here's the date you dropped it off, right. And there's a whole other series of metrics that invoices in schedules, right. That the trucker would be able to provide us. But in this particular case, and let's say that that construction company says to the trucker, we're going to pay you within 45 days or 60 days or whatever the timeframe may happen to be. But that trucker needs to pay the driver, they need to pay for insurance, they need to pay for maintenance on the truck. They got to put diesel in the car, in the truck. And so he doesn't necessarily have 45 to 60 days to wait for payment from the construction company in this particular case, in this example. So what he will do with us is he essentially sells us that, that receivable, right, that load of steel that he, the, the payment, the promise to pay from the construction company, he, he will sell that to us and we will advance him, let's say, 90% of that amount of, of the, the price of the steel or the cost of that load to help him meet his cash flow needs in the short term. And then we'll charge him an interest rate until we get paid by the general contractor. And then when the general contractor pays us back, then the 10% that we didn't advance to them at the very beginning, the trucker will receive that at, at the end when we receive payment in full. So frankly, the, the receivables can be on any type of asset. It could be soccer balls that are dropped off at an Amazon warehouse. It could be a load of steel. It could be, you know, a truckload full of cars. It could be anything. In this particular case for trucking, just think of anything that you see, you know, in the supply chain, right, as you're driving, you know, down any highway. So the receipt could be varied.

[28:39] Host: And, and the use case you just gave, is that a trucking company that only needs to, only does this in a pinch, or is that what they routinely will, will come to somebody like you to do this?

Guest: Yeah, it's quite, it's quite common for, for them to come to someone like us. Again, mainly because not all trucking companies have, I would say, the financial cushion, right, to wait 40 days, 60 days or whatever the term may be. And so again, you just have these cash flow gaps that you need to fill for whatever reason. And they can happen for any variety of reason. Again, think of some of the conversations you've had with guests. Yeah, I need to make payroll. Right. And so we can be just another flexible form of working capital for, for a business owner.

Host: Great. Okay, very helpful. And what is factoring?

Guest: So factoring is, it is basically a form of asset based lending. Asset based lending. You could think of it as more of like a banking relationship. Right. I go to a bank, I need capital to, you know, fund my, you know, next phase of growth within my company. So I go to a bank, I get a revolving line of credit that I'm able to tap and it's more of a formal banking lending relationship. Right. Factoring is more of a non banking relationship. So we are a non, what's. We are a non bank factor, which means instead of lending you the money Technically what we're doing is we are buying the receivable from you and then we sell it back to you at the end of the contract. But the terms of the payment are very much like a lending relationship. So there's a lot of similarities, there's a lot of overlap between factoring and asset based lending. But to simplify, one is basically with a bank or a formal banking type structure and the other is a non bank type structure.

[30:40] Host: And so the example you gave with the trucker, that was an example of factoring.

Guest: That's an example of factoring. Yes. It could also be an example of an asset based loan too, just depending on the channel that you go to. Right. And so what you'll find is companies are always looking for flexibility. Right. So you may have, let's say a trucking company who has a lot of debt on their balance sheet and maybe they can't go and take an additional line of credit from a bank. Right. Because maybe it will trip some covenants. Right. Maybe there are some other restrictions that are imposed upon the company that it can't borrow anymore. Right. Maybe it's really going to amplify their debt equity ratio or what have you. Right. And so sometimes what they'll do is they will use a non bank entity like a factor in order to help get the essentially, as I said earlier, a flexible working capital facility that works for them.

Host: Great. This is really educational, Jonathan. And so you mentioned a hundred clients, that the business you bought has a hundred clients. So is that to say that there's a lot of reoccurring business here that you're working with a pool of. Same pool of folks or give or take, but a lot of the same folks over and over?

Guest: Yeah, that's one thing that actually attracted me to the business to begin with is the our company does have great customer experience. Usually in factoring, most clients aren't with you for 10 to 15 years, if not longer. And we have, our company's been around for a little over 30 years and so we have a huge number. I won't give you the exact percentage. Right. But a large proportion of our client base has been with us for 10 years plus and in factoring that's pretty rare. Usually they're with you for a year to two years, a couple years at the most, and they're moving on to the next factor. So the fact that we've been able to retain clients as well as we have really says something to the process and the people we have here.

Host: Jonathan, how do you gauge the quality of, of a factoring business and, or the fact that you have these cl, These long term clients, what do you attribute that success to? And, and the reason I ask is because it would seem like to, from what little I know about this industry, that you're providing a commodity capital. So you know, you would just be competing based on interest rates and you know, favorability, you know, how, how favor the terms, term based on terms that you're offering to your customers. How else do you differentiate or do you differentiate on anything other than that?

[33:15] Guest: Yeah, well, price is always important, right? It doesn't matter if you're a consumer or if you're a business, right? You're always looking for, you're always looking for a deal, you're always looking for price. And certainly for a cost structure that makes sense for you personally or for your business, right? So let's be honest, price always matters. So we do have to be able to compete on price, but of course where we can also compete upon is expertise, right? And the connectivity that we may be able to provide you. So let's say as an example, we had a client that ran into some tax issues, you know, several years ago. So just being able to connect them with, you know, the appropriate tax advisor to help them sort out their tax issues, that's one thing. Perhaps since we were touched on trucking for the last couple of years, trucking has actually gone through somewhat of a recession, certainly as they've been recovering, if you will, from the disruptions within the slight supply chain. So truckers have had a variety of headwinds that they've been able to, that they've been confronted with. And of course, but even more recently is inflation. So if you think of inflation in insurance, fuel costs, employment costs, right? It costs a lot. Just, you know, find drivers, right? It's difficult to find drivers. So being able to connect people with, let's say a job board, right? A load board where I'm able to pick up, you know, a load of steel, you know, within the area that I'm able to work, where am I able to, you know, find someone that can maybe help me with, you know, insurance premiums or something of that nature, right. So that connectivity is also exceptionally important. And so yes, being able to compete on price, you have to be able to do. But it also goes far beyond that as well because as I said, think of all the difficulties that any other business owner is going to face with. And so in some ways you're also a trusted advisor, if I can use that term. Right. And being able to steer your clients in directions that can help them grow their business.

Host: 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 Inzo 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. Inzo 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 inzotechnologies.com I N Z O or email Nick directly@nicknzotechnologies.com and don't forget to tell them you're a searcher. Foreign let's return to the story and to why you liked this particular business. So this is for one thing, this is a big industry. So while people listening, I wasn't super familiar with it, how it works. It's actually a giant fragmented industry, correct?

[37:01] Guest: Yes. And frankly that's one reason why I was really attracted to the industry. And again, it's an industry. It's those types of characteristics and features are something that I'm familiar with, I'm comfortable with. So take two steps back. I came from the investment management world, right. Where just even in, in the United States that is a multi, multi trillion dollar industry. So even things like when we talked earlier about high yield bonds, that's a trillion dollar market. You talk about private credit, that's a trillion dollar market, more than a trillion dollar market. And so factoring as well is a massive industry on a similar scale. It is very fragmented. You have companies that are really small like mine. We have eight employees as I mentioned. Right. And you have other. And we factor $30 million in purchases a year. You have others that are doing billions in a quarter and they have thousands of employees, certainly hundreds and hundreds of employees. Right. And also too, as I mentioned earlier, just like many other industries, right. You, you do have like this shift in demographics, right. Where you do have owners that are looking at what the next step is for them. How am I going to retire? How am I going to transition my business? Am I going to transition to a family member or am I going to transition that to someone else? Am I going to sell to a private equity firm? What are my options? Right, right. And so for me personally, I see that there's a lot of opportunity when you have these large fragmented industries where you have the ability to consolidate. And so frankly, for me that's, you know, kind of what drew me initially to this is because one, I can kind of draw upon my experience in my prior life in the investment management world. But then also too, I don't want this to be just, this is not just a lifestyle business for me. I, I do want to grow it. I do feel like there are a lot of areas for opportunity just for some of reasons that I, that I just expressed. And then as I said when you talked earlier about like, what do you compete on? Not all factors can provide the liquidity that a client needs at that particular period of time. Not all banks, right. Can necessarily provide, you know, the type of liquidity that perhaps a consumer or a company needs that at that point in time. And so, yeah, there are lots of very legitimate reasons for us to, to grow and, you know, be competitive.

[39:32] Host: So this pattern of the, your seller, 89 year old seller, wanting to transition out there are. You see a lot of that. I mean, at 89 years old, she's not a boomer. She's.

Guest: Yeah, no, but you get the idea, right, of the demographic shift. Right. And look, that's not unique to factoring. Right. You see that across the landscape and every industry. But so while the industry is certainly becoming much more competitive and while you are seeing, you know, more, I'll say, institutionalized players like private equity and private credit firms and banks, that banks have been in this space for a long time because it's very, very complementary to their business.

Host: Yeah.

Guest: But as I said for banks, let's say as an example, they're also under much more regulatory scrutiny than they were, you know, 10, 15 years ago. And so they've had to pull back, you know, in terms of what businesses they really want to participate in. And so because of those regulatory requirements. Right. Yes. There are some opportunities for, for factoring. Right. To participate where banks used to be, but perhaps aren't as active as what they used to.

Host: Gotcha. So it is something where you, you, you and banks are sometimes competing for, competing to deliver your services.

Guest: Yeah, absolutely. Now for us because we're a small company, you know, they may go and make, they may look at, you know, contracts where you're Factoring, let's say $5 million and above in the course of a year. $5 million for us would be, you know, a large client. And so, you know, if we're able to find clients in around two and a half, three million. Right. And on down, you know, that would be a great client for us. But perhaps for a larger banking institution, frankly, it's, it's not worth their time.

Host: Yeah, yeah. Okay. Well, so let's now return to the business. Tell us if you would, bullet points on the business. You've shared that the 89 year old seller, 8 employees. What more can you tell us to give us a picture here?

Guest: Yeah, it's also been really, really regional. So even though we're based just north of Houston in a town called Humble, Tex, the vast majority of our clients are basically in the Houston area, Austin and San Antonio. And so the company has really only lived in that area. And so as I said earlier, for me it's not a lifestyle business, but for the prior owner it was more of a lifestyle business. And so for me, frankly, you know, part of the characteristics of that is that's one of the other areas where we can see growth is moving beyond South Texas to all of Texas and then eventually beyond. Right. And into other markets that are similar to the ones that we are, that we're currently participating in, in the industries that we have areas of expertise in. But yeah, I would say that so small. 30 million a year, one and a half million revenue, only 100 clients. We need to build that up, obviously. But the other thing that I think is also really, really attractive about this business is our investor base. And so I mentioned a little bit earlier all of these financial service related industries, they're mostly really, really geared around how much capital are you able to raise. Whether you do that through a lending structure or if you go find an equity partner, ultimately it's your ability to raise capital. And so our founder, she was able to raise, you know, a few million dollars from effectively family and friends. But what made it really attractive is the interest rate at which she was borrowing at it's six and a half percent. And I don't care what, where you go, you can't borrow at six and a half percent. Most companies are not able to borrow at six and a half. Microsoft could. Right. But most small to medium sized businesses are not. And so even if I go and raise additional capital afterwards and of course that's going to be at a higher rate than six and a half percent. My, this really helps me from a, a competitive standpoint because my average cost of capital is going to be, it's going to be meaningful. It's, it's, it's going to be very competitive. Right. It's going to give me a head start, isn't it?

[43:38] Host: So, so that, that six and a half percent, you bring in capital that you're kind of redeploying into, into your basically lending to your clients. But that six and a half percent number, won't that change as you grow? You'll need to raise more capital and you'll have to raise it at market rates.

Guest: Yes.

Host: Also, doesn't that six and a half percent the term of that particular loan or, or series of, of of loans into the business come do you know, expire and, and then your existing lenders that she had this great, this great rate with will renegotiate. Renegotiate you up to market rate as well.

Guest: Yeah. So the, the prior owner, in terms of her investor notes, she had them structured where there really wasn't a maturity date. Uh, so technically they could mature at any point in time based on the investor's discretion, but they automatically renew annually. So for many of our investors, frankly, we've had, you know, for, since the beginning, we've had for close to 30 years. So, so we've been really, really fortunate in that, in that sense. And you're absolutely right, Will, like, we are not going to be able to maintain that six and a half percent, you know, forever and ever and ever and ever. We'd love to. Right. But as we grow, we will require some additional capital. We'll have to raise some additional capital. And then of course, yes, that's going to cause our, our, our weighted average cost of capital to, to drift up here over time. But initially out of the gate when you're first starting a business, that's a great competitive advantage to have.

[45:12] Host: $3 million was initially raised by her a long time ago kind of from her network. And it's just kind of been parked there and you all have been paying interest on it and it stays there and you, this is what you're using to, to cycle through your clients and

Guest: that's right, that's right.

Host: Back to the question of so your, your vision for this, it's been a regional play, so expanding to larger Texas and beyond.

Guest: Yes.

Host: And then of course that, that would mean the amount of, of capital that you're lending, it seems Like a financial services business is pretty scalable because there's not a lot of overhead. I mean, you're not, you're not out there turning wrenches. But disabuse me, maybe there's a lot of due diligence. Maybe there's a lot. So what does the overhead structure look? How scalable is this business?

Guest: Yeah, well, technology is a great thing, right? And certainly in financial services markets, right? Maybe we're not Silicon Valley, right? But you are certainly seeing huge advancements in the use of technology in financial services. And look, that's not new, right? We've been seeing that for, you know, for 20 plus years, if not, if not more. But what that technology absolutely allows you to do is it kind of, if you will, allows a little bit more of a plateau in terms of, you know, hiring. So perhaps 20 years ago is very much a very manual process today. You know, a lot more things can be automated. So just even if you think of all the invoices and the schedules, since we were using the example of a truckers earlier, right, so if you think of all the invoices and the schedules that a trucker would have, you know, a lot of that now they can just take pictures on their phones. That gets uploaded into our system and it gets effectively, you know, tracked into our factoring software, you know, almost immediately. And so now with the advent of AI, right, you're seeing a lot more, you know, kind of like machine learning, right, Just in terms of differentiating the different types of, you know, documents that you're getting from your customers because they can be quite varied and you know, different companies while the, the documentation may have the same term like a bill of lading, right. You know, they may look very different, right, from one company to the next. And so, you know, the machine learning and, you know, the AI automation that you're certainly seeing within, within financial services has been massive. And you know, frankly, that's an area where we, we need to invest more. As we mentioned earlier, right? We had, our, our prior owners were, were a little bit older in age, right? And they were a little bit more hesitant to invest in that type of technology because it's a big spend, it can, it adds up very quickly as, as all your listeners know. But that is an area where we are looking at, you know, deploying a little bit more capital to make the, the company even more automated, right? Make us a little bit more efficient and you know, set us up for the next phase of growth. And then I would say the other thing too, just in Terms of like overhead, obviously it's, it's employees. And so most people, I don't know anybody even growing up, right. Who said I want to go into fixed income or I want to, you know, when I grow up I want to go into lending or I want to go into factoring. Right. These are usually industries that you either fall into or you learn about, you know, much later in age. Right. You don't, you're not a 10 year old kid thinking you're going to be a banker.

[48:43] Host: Sure, sure.

Guest: Right. And so, you know, for us frankly, finding, you know, good quality people, right. That's, it's a challenge for every industry. But you know, certainly something that, you know, we're, we're dealing with as well.

Host: And so for your team of eight, how many people are. I guess the analogy, the analogy to a blue collar business would be like the technicians, the people who I guess are making the decision, the under, I guess they're underwriting, doing the underwriting. Is that the proper vocabulary? They're underwriting the loans. That's really where your special sauce is going to be. The risk analysis, the whether or not to make the loan and what the interest rate should be and the reserve and so on should be. So of your staff, how many are quote technicians or bankers or underwriters?

Guest: Yeah, so there's, there's two on our staff that, that spend most of their time on, on underwriting. We, and if you will, kind of like portfolio management. Right. So just being able to make sure that, you know, we don't have too much concentration in one particular client or too much concentration in one particular debtor. Right. So those are certainly something that as I said, two people spend most of their day on, others are on account management. And what that means is collections. And so look, our success and the amount of yield or income that we're able to generate right. From the capital that we deploy is largely dependent on how well we're able to collect from, from our clients and, and their debtors. So the faster that we're able to do that, obviously the more profitable we are. Right. And the better return that we're able to get to, you know, ultimately to our investors. Right. So those are, those are really, really critical. And then we have two others that are a little bit more what I'll call like administrative. Right. So they help with client onboarding.

Host: Right.

Guest: When we have new clients, you know, sometimes not everything goes perfectly well when you're handing in, let's say if a trucker, again to use the analogy, if a Trucker is handing in their paperwork, right. Sometimes they're taking a picture of the invoice, right. And you know, their fingers in the way. Right. So yeah, you know, so we have, we have people that, we have two people that, that work on, if you will, a little bit more on the administrative side and the client service side

[51:00] Host: in a business like this, Jonathan, I mean, varies, I'm sure, from business to business, depending on how well you're doing your job. But how often does, does do the ugly situations come up where you gotta get aggressive and go chase down your money and do whatever things you do?

Guest: It's not a question of if, it's a question of when. So with any lending industry, and this goes all the way back to, you know, my days when I was on the, you know, the fixed income desert, you know, other firms, look, countries go bankrupt, right? You've seen that with Argentina, many, many times. Companies go bankrupt, right. Even ones that you never think will go bankrupt. So again, since we were talking about, you know, the financial crisis, Lehman was not on many people's bingo cards for bankrupting, right. For going under. Right? So now you translate that even over into small and medium sized businesses, right? Of course, yes, it happens. So you're absolutely right. Like the underwriting and the credit work that you do on an underlying company, like you're determining who you're ultimately going to effectively lend your money to, right. And buy their receivables from. It's, it's, it's where you spend a really, really huge amount of, an inordinate amount of your time. But things do happen. It's not if, as I said, it's when. And so when they do happen, then what's your game plan? What's your exit plan? How are you able to collect? Right. Or at least minimize, you know, the damage that could be done to your, to your revenues. Right? And so there's a lot of things that you can do. And so some of it is just monitoring. It could be everything from we mentioned earlier, right. We had a client that had, you know, some tax issues, right? So, you know, there are technologies that allow you to monitor, you know, a particular company's tax returns with the irs, are they making payments, are they making payroll, you know, payments? Things along those lines, right? Payroll tax payments, you know, things along those lines. You can monitor things like that. You can get viewing rights, right. Just even on a client's bank account, right. Or other financial statements, right? So things like that, they can go a long, long way and hopefully before you actually get to a problem. Hopefully there are some yellow flags or red flags that pop up over the course of your, your underwriting and your monitoring process. Right. That hopefully you can get in front of it. But admittedly it's, it's not completely avoidable.

Host: Yep, yep.

Guest: And that's something frankly that we've had to, you know, strengthen up on a little bit as well. So we have invested a little bit more in that since, since buying the company. And you know, frankly, we've, we've done a really, really good job on, you know, on collections. Right now I would say our days outstanding are typically around 34 or 35 days. So we've done like a really good job there. But even if you have great metrics like that, you know, things pop up.

Host: Yeah. So you had mentioned that you are, couldn't get an SBA loan to buy a business like this. So take us back to the transaction now. The terms. How did you, how much did you buy the business for? What does that look like?

[54:10] Guest: Yeah, so we did it as a stock sale. Just from the 40,000 foot level. We did it, we structured it as a stock sale. The main reason is because there's not a lot of tangible assets within the, within the company. And then also too, I really wanted to be able to lock in our investor and our client base. And at least according to my legal representation, a stock sale would have been the optimal way to do that. And so even though we may not have benefited as much from a cost basis, at least you'd be able to retain your clients and the investors, which I know we'll probably touch on this a little bit more later. But those to me were like paramount because as I said earlier, if you can retain that average cost of capital as much as you possibly can, that's a big competitive advantage. And even though we have a hundred clients who we'd like to grow it, those clients are, many of them are long time clients to our company. And so we wanted to be able to retain them as well as opposed to having to renegotiate with them if we had done it through more of an asset sale. So we did it as an asset sale for, for those reasons.

Host: A stock sale.

Guest: Yeah, stock sale. Excuse me, as opposed to an asset sale.

Host: Yes.

Guest: Thanks for correcting me on that. And then we'll touch on like metrics here a little bit. Right. So just like if you are, you know, if you're looking at purchasing a company. Right, there's all these different types of metrics. Right. And so of course, yes, we look at multiples on ebitda, we look at price earnings, and we'll touch on those too. But there's also another one that I'll introduce to you into the audience and that's called net funds employed. And so what that ultimately means is we touched earlier on how the prior owner had raised $3 million. Right? And so that's the capital that's ultimately getting used for the purchase of receivables in our business. But you're not necessarily using the full $3 million. Right. You need to hold some for reserves for working capital or for other purposes. Right. And so for us, typically in the industry, like a rule of thumb, right, it's not for every single company, but a general rule of thumb is you look at 85% net funds employed. So our investors have about $3 million that they invested in our company. If you have, you know, net funds employed of around 85%, that means what we're really using to purchase receivables is closer to $2.5 million. So 85% of 3 million. So roughly, you know, two and a half million dollars. Right. And so now if you take that $2.5 million and you take the price of whatever you paid for the company and you divide it by that two and a half million dollars in net funds employed, you're going to come up with some percentage. Right? And so that premium to net funds employed is a metric that they use in asset based lending and factoring companies when you're looking at making acquisitions. And generally speaking, again, just to kind of give your audience like a general rule of thumb, like if you have a range between 20 to 40%, like that's, that's, that's a general range. You know, now that you've had more private equity step in, right now you're starting to see some pricing coming in close to 40%, the upper end of that, that range and a little bit higher, some now are coming in closer to 50%. But generally speaking, that's the range that you're seeing. So I was able to purchase job for about 30% of that, that premium to NFE or the price to net funds employed. So I feel like I got a good price at least based off of that metric. And then when you look at price earnings, right, we look at that as well. So if you look at it from a pre tax standpoint, generally the multiple you're getting in around there is 6 times to 10x is again kind of like a general range. So I was able to purchase job for around six times price to earnings. And then like the multiple on EBITDA for us, I was able to get it at a 2x 2.1x multiple on EBITDA. And so yeah, those are some metrics that we used to kind of to price the business. And so you just triangulate effectively between those metrics and you came up with a price. And so that's why we paid $750,000 for the company.

[58:34] Host: Well, of course the latter of those calculations or metrics to use is how we generally think about things here in small business acquisition land. Yeah, multiple and a two point, whatever you said 2.1 low twos. That's a, that's an extremely good multiple for you as buyer.

Guest: Yeah.

Host: I mean even unlevered, I mean unlevered, you make your money back in two years and own the company outright.

Guest: Why?

Host: But, but it doesn't sound like, at least according to your nfp, your, your net funds employed metric sounds like you were kind of right down the, the fairway.

Guest: Yeah.

Host: There. So it doesn't seem like in this world that you got a screaming deal, you got kind of a fair deal,

Guest: I got a fair deal.

Host: And yet in the way it translates to and to, to our world of multiples, it's a screaming deal. So square that circle for me. Why, why shouldn't we all be going out and buying these for 2x?

Guest: Well, I don't know how to run it.

Host: I mean this is, this is, this is, it doesn't seem like some, any anybody listening could just go buy one of these. There's that. Go ahead.

Guest: Yeah, and I think that's a, this is also something like when you look at financial services companies, right, and investment management companies and lending companies, like while the metrics, like metrics like multiples on ebitda, they apply. It's not the sole basis off of which you, you value a company. So as we said earlier, like one metric that you will place a little bit more emphasis on or you will place a meaningful amount of emphasis on is that premium to nfe, Right. And so as I said, like now that you've seen more entrants come into the market, right? So let's say private equity firms, right, who are really looking to scale, as I said, they're, they're paying more in the upper end of that range, right. Between 40% and some are, you know, even, you know, gravitating a little bit higher than that. Right. So you could say that they are paying more. Right. So then that would be like saying, you know, Your multiple is more like 5x, right. Or 6x or I don't know how to make the direct, you know, comparison. Right. But it will be something similar to that. Right. And so you wouldn't necessarily say that's a screaming deal. Right. So, but you pay. But you see, private equity companies sometimes do that because one, they have capital to deploy and frankly, they haven't been able to make distributions. Right. To clients. Right. And so over the last several years, Right. And so they have, they had a great fundraising campaign, you know, three, four years ago. And then obviously we had, you know, a little bit softer economic performance in the last, you know, year and a half, two years. Right. And so you really saw a deal flow begin to come off. Right. And so if you have capital deploy and your investors are expecting a particular required return and you're not, you're not making it, well, guess what you're going to do? You're going to pay up. Right. And so you see that tend to get reflected a little bit more in the nfp. And of course ultimately you get reflected in that multiple on EBITDA in some way, shape or form. But yeah, you'll, you'll, again, generally, you'll tend to see those multiples be a little bit lower for financial service oriented companies generally.

[1:01:42] Host: Hmm. Because I'm, I'm just sitting here wondering, you know, kind of first principles, trying to look at this as first principles. Here you have a business that generates earnings and you were able to buy it for what, you know, two years worth of earnings. So whatever, you know, metrics or KPIs the industry uses to assess a company, if you just look at it from a value investing perspective on how much cash it generates and how much you can buy that cash flow for, it seems like you'd be wanting to buy these all day long.

Guest: Well, yeah, but there's trade offs to everything though, remember? And so as I said, like we know that we're going to have a big technology spend on our, on our, on our hands coming up. Right. So if we had, you know, that's one reason why look, obviously the owner had a particular price in mind when she first listed it and we were able to reduce that price over, over a series of negotiations. Right. But you know, that's part of it, right? Is we knew that there wasn't a ton. There was some working capital in the company. I don't want to say there was none, but there was some. But there was also some other things that we needed to capitalize. I'd say you Know, like technology, we needed to do that where, as I said, we needed to be a little bit more efficient, we need to automate some more things. But you know, that comes with a cost. And so given some of those things, you know, we were able to get the price down a little bit more. So.

[1:03:10] Host: Okay. Okay.

Guest: And then also too, just even, you know, frankly, just even clients. Right. You know, there's always some uncertainty when there's a change of ownership as to how many clients you're ultimately really going to retain and particularly when you are in a competitive environment. And again, that's not just unique to factoring. Right. Or asset based lending. Right. That's across all industries. Right. And so, you know, those are some other reasons. Right. Of course, the, the prior owner is not going to be able to guarantee that, you know, you're going to have, we have a hundred clients today.

Host: Right.

Guest: When you buy the business in, you know, X number of weeks that you're going to have a hundred clients then. And so as I said, just because you had some other uncertainties around clients pricing and you know, technology spend, working capital spend, we were able to get the price down a little bit more.

Host: Well, Jonathan, those are the, all those factors that you just gave are, are true in all these small businesses, which is why we pay 3 and for them, so we don't, we still, even with all of those things being true, it's going to require new investment. There's going to be some loss of revenue in the transition, still going to pay 3 or 4x. And yet in your case, you were, you were significantly under that. So well done. But of course, I guess one thing to call out here is you didn't have the advantage of an SBA loan. So that, that means it was going to maybe be a little bit more, I mean, that was going to change the calculus. So, so talk to us about how you did buy it, because this is going to vary from how most of my American guests buy their businesses.

Guest: Yeah. So about 70% of it was self funded. So at full disclosure, when I initially went into this, I thought maybe at most I would put up 50%. Right. Initially we had explored a partnership with, with, with another entity. Unfortunately, it fell through, you know, a few weeks, you know, a few weeks before close.

Host: This was the private credit firm.

Guest: Yeah, that's right. And admittedly it was more like a discussion and you know, things that you learn. Right. Of course, is you want to have as much down in writing as you possibly can, particularly with partners. Right. And you know, frankly, we didn't have a lot. It was more handshake deals, so to speak. Right. And so needless to say, it fell apart.

Host: Right.

Guest: And so then there's a little bit more of a mad scramble as you're kind of rushing towards close like who else can you bring in? And so we explored a variety of different entities. Again given my business development background on the investment management side, we had explored some partnerships with other family offices, but just given the timing, unfortunately.

Host: Yeah.

Guest: And plus this was in the summer. Right. So now you're starting to confront vacation schedules and you know, things of this sort. And so long story short, I ended up actually working with my brother in law. And so my, my brother in law lives up in the Bay Area. He has a long distinguished career in, in, in gaming and in social media, so to speak. And so he, he actually approached me and said, you know, he'd like to consider being a partner. And so he, I got, I got lucky. He ended up being a great partner. And so that's where I was able to get the other 30% of the, the capital from.

[1:06:37] Host: And when you look out at again going, returning to your vision of this is not a lifestyle business for you, you're trying to grow something substantial here is that through inorganic acquisition. You've talked about the fragmentation of this industry or organic or little column A, little column B.

Guest: It's going to be both. It'll be column A and column B. Look, one of the things that we do really need to. Since you were, we were talking about price a little bit earlier, right. We ever since the, one of the co founders passed away, that co founder coincidentally was also the primary driver of growth and business development and sales. And so it's another reason for why we were able to kind of grind the price down a little bit more. So is just simply because they hadn't had like a real active business development pipeline. So that's a headwind that we have to, that we do have to confront. Right. Is sales and growth. And so we will have to invest pretty highly. We are looking to invest heavily in that. Right. And so whether that's just expanding your network of centers of influence.

Host: Right.

Guest: But also too, that also means that we're also exploring inorganic growth metrics as well. So of course, yes, if there are other factoring companies that are for sale, of course we would like to take a look at it. And then the other area too, potentially for growth is we touched earlier in our conversation about asset based lending, which is more of like a formal banking relationship, if you will, versus Factoring, which is more of a non banking relationship. And the lines between those two markets have been intertwining and blurred over the last, over the last several, several years. Right. And so they are conforming in many, many ways. And so, you know, another area for growth is pursuing opportunities in asset based lending as well. But that would be both, as we, as we said, organic and inorganic.

Host: Okay. And inorganic acquisitions. What you would need a capital or debt partner to go do those?

Guest: We could do both. We could certainly do both. So currently, right now we are, we are exploring a partnership on the debt side with a, with a Florida based family office entity in order to raise some additional capital that we could use in a variety of ways. And of course the primary way of doing that would be to, to purchase more receivables, but also for additional working capital. And then I would say we are also having conversations with some other entities potentially exploring equity partnerships into, into our company as well. So we are exploring, we are exploring both. And as, as you well know. Right. Trying to find the right balance between debt and equity within your, within your company is always delicate. But that's certainly something that we are, we're mindful of. But you know, certainly to, to at least get us here through the, the first phase of growth, if you will. We are, we're looking more at a, at a debt structure or revolver structure. Okay.

[1:09:51] Host: And this business being in Houston earlier you mentioned your Southern Californian wife and, and being in L. As I understand it, you, that you live there still in Southern California. So are you doing this remotely? Are you back and forth? What does that look like?

Guest: So right now I'm going back and forth. It's an easy flight from Orange County, John Wayne Airport into, into Houston. So I'm, I'm basically been making that trip every single week, sometimes from three to five days a week, depending on the week. But also the reason why I'm doing that is look, I want to also be able to instill my own culture into the, into the company and into the business. And you know, I think it's difficult especially initially to do that when you are working remotely. So certainly for the next few months I anticipate that occurring. And then eventually what you're going to see is you're going to see that cadence drop off and you know, it's not going to be three to five days a week anymore. It's going to be two to three and then maybe one and then every couple of weeks. And I don't think while it may be mostly remote I don't think it will be just 100% remote. I, I still believe in, you know, kind of coming to the office and, you know, interacting with your staff and your clients and. But I certainly need to get the FaceTime in here at the very beginning of the, of the process.

Host: And in terms of growing the business and inorganic growth in particular, you see growing from this base and then kind of expanding geographically like this as as opposed to just buying an attractive factoring company wherever in the U.S. yeah.

Guest: The way that I've been thinking about this, at least initially, is like, if you think of the Houston market. The Houston market, right. You got a port, it's a big railway hub, big manufacturing complex here. Obviously oil and gas industry is really, really important. And then that's also part of the other reason why you have a large trucking and logistics client base that we have as well. Right. And then as I mentioned a little bit earlier, you also see it's still an area of, you know, population growth. So if you think of other markets that have maybe not identical but similar characteristics. Okay, so now you're kind of like, think of all, like all the, all the cities. Right. All the states that basically had, you know, shutdowns with the dock workers recently. Right. So that takes you into Florida and Georgia. Right. Places like that, you know, perhaps other places like Colorado and Kansas City. Right. Like those are some other areas that kind of maybe not perfectly, but are at least somewhat aligned to kind of the market characteristics that we have here in Houston.

[1:12:38] Host: So you could buy a buy of your next acquisition. Could be one in one of those remote markets. Yeah. And you could see economies of scale.

Guest: Exactly.

Host: Because it's a, effectively a, it's a. Could be done virtually. I mean, you're not, you're not. This is not a physical business.

Guest: Yeah, that's right. And look, this is. There are several factor, many factoring companies and asset based lenders that do have a remote model and it works very, very well. So there are certainly templates that we can copy from in order to implement that type of a model.

Host: I think you were going to say something else. I interrupted.

Guest: Oh, no, you're. Okay.

Host: Okay. Okay. Well, Jonathan, I guess my last question for you would be around whether or not somebody from who doesn't have the years of experience and fixed income in lending could buy a business like this. It, it sure feels like there's a, a real specialization to it. Now a lot of my guests will buy businesses that they don't know anything. They don't know how to turn a wrench, let alone, you know, have four years of plumbing experience or, you know, trades education, and they'll still make it work and they'll add value to the business, kind of at the business level, and they'll enable their technicians, the ones who have the, the field, the ones who have the actual service delivery responsibilities. But I get the sense here that the person who's, who's, who's captaining the ship, you probably needs to, needs to have some experience. Correct me if I'm wrong. What, what would you say to the person listening to this, who's intrigued by this industry, by this opportunity, but has never worked in fixed income?

Guest: Yeah, I would say, well, the first thing is my experience isn't perfectly aligned with factoring. So yes, I did a lot in credit, I did a lot in fixed income, but I've never ran a factoring company before. And so while there are a lot of similarities, there are certainly some very meaningful nuances. Right. And so even though I am here every single day, the team that I have was also critically important. And so one of the things, like a prerequisite that I also had. We didn't touch on this unfortunately a little bit earlier in terms of, you know, things you were looking for within a company, but is the management team.

[1:15:02] Host: Yeah.

Guest: And so I made that like abundantly clear both to the owner and just even as we were going through our due diligence process and we're getting to the point where you're starting to interview staff like I was really, really keen on, okay, how much can I, how much of this business can I put in your hands to run on a day to day basis? And we have three people who are rock stars, like in my opinion. So even though we have, yes, we have eight employees, they're wonderful. But there are three who carry the load. Right. Who are absolutely managing the day by day to day managing the client relationships. Yes, I'm involved. Right. But many of these people on the management team have been here for 15 and 18 years. They've been here for a long time. And so it was really, really important for me to retain them.

Host: Right.

Guest: And so, look, I'd love to say it's all me, but it's not. The reality of it is, is that I rely on those three and that management team heavily. And so, you know, if I was to give any advice, it's, you know, make sure you have a great management team and it's not great advice. Right. I mean, you hear every person on your, on your show talk about that in some way, shape or form. And our management team is, is, has been wonderful because as I said, they, they've seen more market cycles specifically in factoring than I ever have right. So far in my career. And as of right now, like, I'm learning just as much from them as they are from me in terms of, in terms of running this business. So,

Host: so is that to say if somebody were to, to find a business with a really strong management team and it with decades in the business that they could learn the factoring business even without a credit debt, fixed income background?

Guest: Yeah, no, absolutely, I think so. Because.

Host: Okay.

Guest: At the end of the day, you know this, I think most people try to overcomplicate their business. And at the end of the day, what do we do? We, we lend, right. To small and medium sized businesses, right. That have a short gap or a shortfall and they're working capital needs. Right. Again, whether it's payroll, whether it's, you know, buying a new truck, whatever the case may be. Right. We help with that working capital solution. But on the other side of the business, a lot of our costs are ultimately really fixed. Like we can tell you for the next, you know, 12 months how, how much we're going to spend on this factoring software implementation, how much we got to spend on, you know, kind of this consulting service. Right. Or this collection service or you know, this credit monitoring service. Right. So a lot of the costs are relatively fixed. And so the, the, the, the real critical aspect of it is can you raise capital?

[1:18:01] Host: Yeah.

Guest: And that's what ultimately fuels growth. Like if you think of, to make again the analogy, right. Like if you think of any major investment management firm, whether it's a blackrock or a Blackstone. Right. Or the Pimco of the pimcos of the world. Right. How do they grow? Yes. A meaningful portion of that is, is what's the return that they gave to their investors. But even more meaningfully is how much capital are you able to raise. And in this, in this space you need to be able to raise capital. And so I feel like that's one area that I can bring that perhaps maybe the prior ownership team, not, I would say they didn't dedicate as much time to it as they probably did. They were very good when they raised it. Right. And clearly the capital stayed with them for decades, which is amazing.

Host: Yeah.

Guest: But then it's the consistent process of, okay, I raised $3 million, now I got to get another three. Now I got, now I have to get another 5 million. Now I got to get 10 million. Right. And then spending that time on raising that capital in addition to whatever inorganic growth you're planning. That's. That's really critical.

Host: Yeah. Yeah. And your opportunity.

Guest: Yes.

Host: Jonathan, if people want to reach out to you, ask questions about your business or, or this type of business, how do you like them to do that?

Guest: Well, I think there's two ways that are really easy. Of course you can look me up in LinkedIn, so both my personal and business emails are on my LinkedIn profile. And then, of course, if you just want to email me directly at Jonathan T. @jsifactoring.com, you're more than welcome to reach out that way, too.

Host: JSI Factoring. We never really got the name job or JSI factoring.

Guest: Yes, Job Services Inc. Or JSI. I should have said it about 20 times. Clearly. I gotta take. I gotta take some PR classes. That's okay, great.

Host: Thank you for the, for the education and for the explanation, Jonathan. This is a new industry for me. I'm sure there will be listeners who already know this stuff, but many others who were naive as I was and so a great education and a really interesting business. As I said, after almost 300 episodes, not one who's bought a business like this. So you were. It's. It's pretty novel to a lot of us. Thanks for sharing.

Guest: Oh, my pleasure. Thank you very much and really appreciate the opportunity speaking to you, Sam.