Host: Most search fund investors are going to want to see you pursue a growth strategy with an eye toward exiting within five to 10 years. So when you sign up for investor capital, there really is a growth mandate there. Well, today's guest did something different that seems like a very desirable alternative to the conventional model. Juan aguilar bought a $3 million EBITDA business in Guatemala with traditional search fund economics. He spent the next five or so years growing the business and doubling those earnings. You're going to hear how he did that. Listen for his strategy to raise prices, which paid off handsomely. But after about six years, when it came time for the next chapter, instead of selling the business, Juan recapitalized it with a new loan and issued a big one time dividend. This dividend went to paying back his investors plus a nice return and and liquidity for himself. A big personal payday. But it also meant Juan and his investors still owned the business. So while the conventional way to a liquidity event is exiting selling the business, Juan generated his own liquidity event and retained ownership alongside his investors. Today that business has grown even more and Juan intends to own it for the long haul. Indeed, it's become a platform business within a holdco he's building in his native Guatemala. Let this be a reminder that if you've grown the business and it reliably generates enough cash, you may have options other than just selling it. Listen for how Juan did it. Here he is, Juan Aguilar of Paltus Capital Announcements. Don't forget this week's webinars. On Thursday, July 11, three top players in SBA lending to the Search and ETA ecosystem will report on the state of the market as of summer 2024. What are current terms they're seeing? Which industries are strong, which are struggling? How is competition among searchers? How are their searcher clients who've already closed now performing as operators? That's Thursday, July 11, noon Eastern. The next day, Friday, July 12, Max Lummis and his team at forensic accounting firm LCS are hosting an office hours devoted to answering your questions on all things due diligence. LCS does the quality of earnings for dozens of search acquisitions every year. So come get your due diligence questions answered by one of the most active diligence teams in the search ecosystem. That's Friday, July 12, noon Eastern. And next week, two more fantastic webinars scheduled Thursday, July 18, three top search investors will discuss what they're seeing in the market. They'll provide perspectives on self funded, independent sponsor and traditional search deals. That'll be Nicholas James of Mines Capital, my partner, Tony Capper of Workbench Capital, and Adam Borse, whom you'll recognize from his Acquiring Minds interview back in February. Three super sharp investors around the table talking about the state of investing in search. So if you're looking to raise money for your acquisition from investors or are considering investing in this asset class yourself, this will be a super valuable hour. Thursday, July 18, noon Eastern and next Friday, July 19, attorneys James David Williams and Bill Barlow, whose entire practice is devoted to small business acquisition, return for a legal office hours. They'll walk us through the biggest fights they see when it comes to negotiating the purchase agreement. And we'll then allow ample time to answer all legal questions related to buying a business, not just those related to purchase agreements. So come get any legal question you have about your deal or your search. Answered by James, David and bill Friday, July 19, noon Eastern okay, that was a lot of events and dates I just threw at you, but you can find all those topics, dates and registration links nicely neatly laid out on the Acquiring Minds homepage. Acquiringminds Co. So go to acquiringminds Co to see what these events were. Again, check the dates and of course to register for them. Or as always, links and dates and topics are also in the show notes of this episode. Speaking of which, on to today's episode. Welcome to Acquiring Minds, a podcast about buying businesses. My name is Will Smith. Acquiring an existing business is an awesome opportunity for many entrepreneurs and on this podcast I talk to the people who do it. August Felker is a two time successful searcher, first with a traditional search fund. The second time around he did a self funded search. Today August runs Oberle Risk Strategies, an insurance firm with a dedicated practice group for searchers and acquisition entrepreneurs like you. If you've got a business under loi, Oberle will provide complimentary due diligence on that business's insurance and benefits program. A great no risk way to get to know August and team. They love helping searchers. They've worked with hundreds. Oberly is a specialty insurance brokerage for searchers by a former searcher. Check out oberly-risk.com O B E R L E- risk.com link in the show notes. Juan Aguilar welcome to Acquiring Minds.

[6:25] Guest: Thanks for having me Will.

Host: Juan, you were a searcher and are now an independent sponsor for lack, maybe lack of a better term, pursuing four to five platform businesses with a long term hold orientation. So there's a lot to your story, a lot of evolution. We want to Hear about both of those things. So start us off please, Juan, with some background on you.

Guest: Sure. Well, I, I'm from Guatemala actually, so Central America. And I was born and raised here, currently living here, went to school in, in, in, in the States. So I, I went to school in Virginia. I'm an engineer. Um, after, after studying engineering, I went, I went straight into management consulting. I worked in Mexico for BCG for about four years. I, I did a stint in private equity in Mexico as well, then went to business school and right out of business school started a search fund. And so, so, so that's how I got kind of introduced to the search world.

Host: And why, why a search fund? Why not continue on the corporate path?

Guest: Yeah, so I, I was looking to, to, to do something that allowed me to go back home. So I was, I was interested in, in, in going back to Guatemala. I was going to get married. And so, you know, thinking about entrepreneurship in, you know, in Central America, corporate opportunities are, are limited and, and not so attractive. I was also thinking about continuing in private equity and, and also had, you know, limited opportunities in Central America for that. So, you know, I started learning about the, the search fund model in business school and saw something interesting there and, you know, found a combination of, you know, the, the investing part that I loved with the operating part that I felt I, you know, I wanted to develop a bit more. And I said, you know, maybe this makes sense and we can give it a shot.

Host: And Juan, do you, were you somebody who was destined to become an entrepreneur or more of an investor?

Guest: Yeah, I, I do think I have my roots in entrepreneurship. You know, I come from a family of entrepreneurs. My dad's an entrepreneur and I, I wanted to run my own ship. I think that that's the, that that's the way I thought of it. And, and, and if, if the search fund route, I mean, if I were, have not done a search fund, I do think I would have started something on my own. Maybe not right out of business school, but probably a couple of years out after, after, I don't know, probably doing private equity after business school or something like that. Yeah.

[9:17] Host: Okay. All right, but this allowed you to pull that plan forward a little bit and return to Guatemala. All right, so, and this was what year that you, this was starting?

Guest: 2016. I, I started my search in 2016.

Host: And did you move back to Guatemala first or did you actually get some of the search going before that?

Guest: I, I, so I, I started kind of structuring and raising the fund early 2016, while I was while I was still in business school, moved back to Guatemala that summer and started searching, you know, July, August, right, right after getting married. So.

Host: Okay, now tell us about the, the raise. This will be interesting to people, even those who are not in Guatemala because you raised from people who were new to this concept and so you had to explain and sell the concept to them, which you did. So tell us about how you went about this.

Guest: Yeah, so I, I, I like to say I have a, I, I did a traditional, non traditional search fund. You know, it's kind of funny. I, I did raise funds but the majority, and the vast majority of my investors were first time search fund investors. And although I do, I do have a couple of, and literally two I guess you know, old school kind of search fund investors, non, non institutional high net worth individuals and, and from the U.S. but those were kind of, I guess my anchor investors that you know, gave me the stamp to go back to Guatemala and raise funds from. Primarily you know, I, I like to call them friends. You know, they're definitely my, my friends now and, and people that I knew prior to going to business school that they, and they knew me through you know, relationships in Guatemala, family and whatnot, high net worth individuals and you know, business people. Right. That's, that's the type of investor I have and, and I was looking for intentionally and I was, I was I guess thoughtful of this because of suggestions I received and conversations I had with search searchers prior to me in Latin America that they you know, unfortunately gave me the heads up and said, you know, be, be very thoughtful of the people you select not only because they will be extremely useful in the search. You know, searching in, in small regions is very network based. Right. So, so in, in Guatemala it was very important to have, you know, investors that, that had connections with the business community here. And I think that applies, you know, everywhere. But, but, but, but I guess maybe even more so in smaller markets and also people that you trust and admire. You know, that's I guess just the Warren Buffett way of thinking about things. And I really went about that seriously and I, I, I guess I handpicked a group of people I felt really comfortable developing a relationship with and it was a, it was a limited number of investors. So we had ended up I think doing it was 10 units and I think a couple had half a unit. So we, we a very limited number of investors and only two actually three non, non Guatemalan investors. So that's, that's how I structured the search. Right, right.

[12:56] Host: Great. And so to be clear, these, these are people who, the non American, the Guatemalan investors are are people from the, the business community in Guatemala themselves successful in the Guatemala context. And, and I think let's just make sure we're clear on the advice that you heard from other folks who've done searches in Latin America. You want local investors partly because they'll help you with your deal flow and maybe more so I mean we, we hope that from investors in general, although you should really be clear about that with investors because probably, probably a lot of investors are not going to expect that they'll be providing deal flow to you. But in some cases, yes, but here it sounds like that was a, that was really something that was going to be important because of the nature of the way the markets operate in smaller markets.

Guest: Yeah, I, I, I, I, I think I'd add something else that, that is, you know, in, in, in I guess other less transactional regions or you know, countries where capital markets are less developed and M A activity is, is very limited. You you, you know, these, these conversations about buying a business are are, are extremely rare for business owners. Right? So it's, it's, it's very different to the US where, you know, it's, it's, you know, it's common conversations, you know, it's dinner table conversations, bar conversations about, you know, I sold my business, he sold his business. That's very rare in, in Latin America and especially in, in smaller markets. And so, you know, the, the, you know, soft introductions are important. You know, getting, getting introduced to a business owner through somebody that he knows is, is going to make a huge difference as, as opposed to a cold email. And not only that, like once you're starting to have serious conversations around, you know, acquiring the business, the business owner wants to understand like, you know, who are you and who's behind you. Right? And and so having these local investors that could give us that, you know, backing of, of being people that had done business for many years in, in, in, in Guatemala that people knew and respected was extremely important. And, and to add to that, you know, also we were able to get attractive bank debt to finance our our acquisition. And it was very important for, for my conversations with banks to, to know who was behind who was backing the investment and the search and, and that allowed them to, you know, to, to have more trust in in what we were trying to do. It was new for banks as well. This was if not the first probably one of the first top three definitely searches in Central America. So banks were unfamiliar, unfamiliar with the model. And we, we were able to kind of explain to them what was, what was going to happen and how it was going to be attracted to them. And I think they, they had a, they. It was a good deal for them as well. So it, it still is a good deal for them.

[16:14] Host: And a large part of getting them to open their minds to it and, and entertain it and ultimately do lend you the necessary capital was because of the credibility of the investors that you had behind you.

Guest: Yeah, yeah, it's, it's, it's a small market as I said. You know, the, the business community is small and so relationships matter and, and my investors had, you know, decades of relationships with, have def. Decades of relationships with the old school banks in Guatemala. And so that was extremely helpful. They they, they, they, they introduced me to, you know, high level executives at banks. And, and once once that got going, you know, trust was there to start the conversation.

Host: So you know, Juan, I'm, I'm zooming out on the way you put this all together. I just see kind of a domino effect. So you, or, or really that you use the credibility of one group to, to then get yeses from the next group. So it was the, the, the two US Invest search fund investors were the anchors to then legitimize you to the investors in Guatemala. Once you had that you had gotten them on your cap table, then it was using their credibility to get you the door with the banks. And once you had them and the banks you were probably then doors were opening to you with these, with these owners. So it's very like you were parlaying one group's credibility into the, into an entree into the next group. And maybe you know, I'm just kind of as you tell us, I'm kind of realizing this, maybe this is how it always works. But it definitely seems like a very linear and logical progression there in your, in your. How you did this.

Guest: Yeah, yeah, it definitely was. I also had a, a, my ex boss from Mexico who's also an, an investor and that was, that was also you know, the sequence of events. There was probably, you know, the U.S. investors then my, the, the, the partner from BCG in Mexico and then the local investors. You know, so it was definitely credibility building because as I said, you know, the, the, the, the local investors were all first time search fund investors. They, they had, they had never heard of the model. So it, it was going to require some you know, they trusted me. They, they knew, they knew me. But they were also you know, saying you know, can can somebody else tell us if this makes sense or not?

[18:41] Host: Yeah, sure. Well, good on you for having a good outcome. So make making the, you know, the, the ecosystem more open to the, the search fund entrepreneurs who you know, come in your, follow your footsteps. A PEO run by a searcher for searchers. If you're running a company with less than 100 employees in providing health insurance, you could secure better benefit plans at a 15 to 30% discount through a professional employer organization or PEO. Aspen HR run by search fund veteran Mark Sinatra understands the needs of search operators and could be a great solution for you to receive HR compliance and diligence support. A powerful HR tech platform and Fortune 500 caliber benefits, all for a fraction of the cost. Check out aspenhr.com or contact Mark directly@markspenhr.com Juan and just give us a minute because this will be really relevant to people outside as you said, kind of more developed M and A markets. What do owners in Guatemala think they're going to do with their businesses if, if it's not selling them? Is it just always an error? There's all basically they stay in the family and, and, or what?

Guest: Yeah, that's, that's, that's a great question. And so as I said, you know, it's really, it's really deep I guess in the culture of, of business owners here that you know, businesses are fam, are family businesses. Right. And they're like, you know, part of the, the family inherited. So, so yeah, I think you know, small business owners just, just you know, know that the, you know, the, the nest, the next necessary owner of their business has to be somebody from the family. So you typically see it go to like extended family. Right. So, so if they don't have a direct heir in, in their like a, you know, son or daughter that takes over the business. I've seen you know, cousins take over the business. So any other, you know, you know, relatives kind of kick in and, and, and take over the business because it has to stay in the family. That's just the mentality. And but then again you, you do see a bunch of businesses just wind down. Right? So so small businesses kind of tend to disappear after that first generation owner as, as he, as he retires, gets older, the energy is not there and, and even if the cousin takes over, it's not the same thing. Right. So there was definitely an opportunity and, and that kind of ties into to the business. I, I, I ended up buying which did have kind of an inherent inheritance problem and another, you know, set of problems between, between the, the owners. But that was definitely one of them. You know, the, the, the, the transition, the inheritance who was going to take over the business in the next 10 years. And that's where the opportunity popped up for, for us.

[22:06] Host: And in these markets though, would you say that the pattern of like the kids or even cousins, the next generation doesn't want to take it over is less common in the States, you hear, you know, the, the, the, the guy who started the plumbing business, his son doesn't want to be in the business. He wants to go make his own business career or whatever. Yeah, I'm generalizing. So in, in Guatemala, same thing or in general, most of the kids do. Somebody in the family does in fact want to take over the business.

Guest: Yeah, my experience will is that, yeah, it's definitely. I think it's a cultural, cultural issue. You know, the, the, the, the, the children, the kids of the business owner, I guess, you know, are brought up thinking this is, this is what I'm going to be doing as a professional. Right. I, I will follow in the footsteps of my father or mother with, with this business. And definitely in, in the U.S. you see, you, you see that a lot less and I think it's getting even more, you know, or less common for people to think about, you know, inheriting a family business. But in. I'd say I, I'd comfortably generalize there that I think it's still a Latin American thing. I've, I see it in Mexico and everything that it's just, it's just much more normal I guess traditional for people to think about taking over the family business as, as their kind of one and only option. Right. And, and the smaller the business, I think that the more that, that that you, you see that and it's a combination of opportunities are less, I mean available I guess and that, that naturally becomes an attractive opportunity especially economically for, for, for. But also people live longer with their families in, in, in Latin America. Right. So you see in the usa, you know, typically you, you, you know you get graduate from high school and then you're not coming back to your, to your parents house, right? That's not the case in Latin America. You know, most people stay and study in their hometown and they live with their parents until they get married and, and sometimes even after they get married. So, so it's just, you know, the family, you know, ties are stronger and naturally that, that, that makes more sense for the opportunity to, to be, to inherit the business and continue with the family business.

[24:38] Host: Yeah, well, the picture you're painting, Juan, is, is of a very difficult market to find a business in. It's a much smaller market. And then even as a percentage of the available opportunities or the available businesses that you might want to buy there, it's a smaller percentage of those that are not going to pass on to the, to, to the, the kids or somebody in the family. So on that with that, tell us about what your search then looked like. How did you find this business?

Guest: Yeah, and I think it definitely makes it more difficult but on the flip side you're dealing with a lot less demand also. So, so supply limited, but demand is also limited. So we had very few, you know, there's, there's not a lot of people buying businesses here. You know, there's no formal private equity. You know, it's, it's just uncommon on both sides to sell but also to buy. So, so that you know, you know there's limited opportunities but the, the few that there are, you're going to be probably the only one there and, and creating this inception to the business owner about selling their business. So my search was you know, was also non traditional in the sense that it was a pretty short search. So I started searching in August and we closed the deal April 2017. So this was August 16th. So it was you know, eight month search or so. And the business I acquired, I met the owners early November, right, November of 2016. And I, I, I, I, I definitely say I was extremely lucky Will. So I, I found a, you know, very early on I found a business that in, in a specific niche that I was looking to, to that I started out out with a thesis of acquiring in which was construction materials. There was, there was a thesis that, that we believed, you know, low income housing in Central America was, was booming and was continue, was going to continue to boom. You know, the demographics here and the housing deficit was were you know, macroeconomic factors that were going to play in favor of specifically low income housing going forward. So we were, we were targeting something there, right. And you know, we weren't thinking about, you know, buying a cement company, but we, we were considering anything roofing, flooring, windows, doors and stuff like that. So I started mapping out the players in that industry or in that niche and came across a door business that was not for sale at all but that had an interesting profile that one of my investors knew the owners well and had interacted with them previously and he put me in touch and turns out that you know, they, they were two, two, two, you know, two business owners two, two partners that had started the business 25 years ago. And I think they were at a point where they, they were tired, they, you know, over 60 years old, interested in, in, in thinking about transitioning out of the business. One had more of an operational role in the business. The other was just basically the capital partner. I think they're, I think their relationship was being, you know, had, had degraded a bit and, and they were kind of a bit tired of each other for, for reasons I, I wasn't aware of. And, and they, they were very interested when I mentioned the idea of, of, of buying their business. Very curious. And, and we just started exploring the possibility. Fortunately, as well, they were, they had started working with a financial advisor, so somebody that had started to help them put their, you know, the business in order, not necessarily to sell, but yes, to just have that, you know, just to get, you know, the books in order at least. And that was also extremely helpful for the, the negotiations. So let me stop because then.

[29:11] Host: Because things were cleaned up for you to understand quickly.

Guest: Yeah, yeah, yeah, I understand. Like three or four years before we started these conversations, the business was, you know, not ready to, to be sold. Like the books were not in order. So, so that was important as well. Yeah.

Host: And so Juan, now we were talking earlier about generalities about searching for a business to buy in this market. So take some of those principles and apply it to this case. Did these guys not have heir apparents? Did they? I guess you had the credibility of your, so your investor was provided this deal. So perfect example of investor giving you deal flow. So I guess really just the error question. They didn't have errors. And even if they didn't, you know, how did they respond to some young random guy wanting to buy the business? It's still, you still had to, you still had to explain the search fund concept to them. So how did all that go?

[30:12] Guest: Yeah, I, you know, so they did not have air. I mean, they, they, they, they, they both had, they, they both had kids, but none of them were in, you know, another, none of the, the children were potential heirs. One of them had had their, their, their, their, their kids participate in the business for several years and that didn't go well. And I think that was one of the factors that generated some sort of conflict between them, between the, the two business owners. So that, that was off the table for them. Right? They, they, they, they did not have the option of having someone from their families take over the business, at least from the direct family, their direct families. They, they, the, the, they Weren't that like, I, I, I feel like they were on the flip side. They weren't like at the point where they had to retire, like they had some energy in them. I think they still do. One of them is still, you know, running a separate business that he owns, but they definitely, you know, were tired of, of each other. So this was more a situation where the reason to sell was solving the conflict that was, that had generated from being business partners in a, in a clean way and trying to conserve the friendship that, that they originally had because you know, they had considered, you know, one of the, one of them would buy the other one out and that was, that wasn't going well. So, so this was kind of a clean way to say let's save our relationship and let's, let's, you know, you know, take separate paths and make sure we're, we're friendly going forward. But also the inheritance problem also played into the reasons to sell. Right? And, yeah, and, and so the business, my, my investors going to, the other factor that was important were, were extremely important in these introductions. You know, I was, you know, a 26 year old guy, you know, had lived, had spent the past 10 years of my life, almost 10 years living outside of Guatemala doing other stuff. And so they were like, you know, who are you and what does this mean for us? But they definitely knew. Several of my local investors had heard about the businesses that they owned, had heard about the reputation and I think the logic was, you know, if those guys trust him, maybe I can trust him. So it was a bunch of trust building at that, at the start, right? So a bunch of, you know, coffee conversations, just them getting to know me, trying to understand, you know, what I was trying to do. Understanding the search fund model more so than the model. They, I think they understood the concept of like, I'm going to take care of your business and I'm going to be all in making sure that whatever you did transcends and is successful going forward. And so that was, I think, something that made a lot of sense to them. Yes, I was young. Yes. They probably said, you know, you're, you're, you're going to have a bunch of things that, that you're going to learn along the way and it's not going to be perfect, but I can trust you. And that got things going for sure.

[33:37] Host: 26 years old, man, that's, that's 27, I guess.

Guest: Just turning 27.

Host: Okay, okay, well now tell us more about this, this business. It fit into your thesis. So it was in residential home materials. Tell us more please.

Guest: Yeah, so it was not, I guess again non traditional or not textbook search fund at least what they were teaching back, back, back then because you know it was, I remember business school, it was just like you know, search for A B2B services, you know, recurring revenue business and high margins and still teaching it that way.

Host: Juan.

Guest: I think, yeah, I think it's still, that's still the box that you should check. I'm, I'm, you know, I've become a bit more flexible in terms of things and I think you, when you're searching in it, when you're geographically restrained, you definitely have to kind of draw outside the lines a bit and search outside the box because there are other interesting opportunities. So this was manufacturing light manufacturing. So we, we manufactured you know, residential doors low income primarily. And, and this is, you know, this is not artisanal, this is high volume. So we're, we're doing a bunch of doors right a day. And this is a, so it's a very, I guess unsophisticated light manufacturing process. There is, you know, it's not services and, but it is B2B primarily. So we're not direct to consumer. We primarily sell to distributors and, and, and retailers and constructors as well. Export, it's high export and that was important for us because the one model market is limited and small and so we, we wanted a business that could export and attend you know, the rest of the world basically and you know, definitely not recurring revenue but a bunch of reoccurring revenue and, and very sticky customers. This was a business that had probably when we bought it was probably you know, 70 to 75% market share in Central America. Right. So we were by far the largest and still are and yeah, top, I think we're top three or five door manufacturers in Latin America. So you know, in the high volume door manufacturers. So, so it's, it's a, it's a, it was a significant business in terms of size within that niche and, and had a very important market share. And that was the, that was you know, part of the things that I've, that made me feel comfortable with the business knowing that I wasn't you know, acquiring a services high margin business. That, that was, so that was the trade off I knew I was getting into.

[36:32] Host: But your thesis had been that you liked low income residential construction in Guatemala or did you see that being a trend across all of the whole region?

Guest: The whole, the whole region. So it was Central America. So we saw that trend we analyzed that trend and you know we're thinking about that play in Central America, not just Guatemala.

Host: Okay, gotcha.

Guest: Yeah.

Host: And give us a sense of the size of this business being one of the market leaders. What does that look like in, in Central America to be a market leading door manufacturer?

Guest: Yeah. So that was a, that was a business that when we acquired it was doing about $20 million in revenue and we were doing, you know, I think indoors we were producing when we acquired it was probably 35 to 40, 40, 000 doors a month. Right. That, that was, that was the, the relative size and, and, and EBITDA was doing about a little bit under $3 million in EBITDA. Another kind of interest, interesting metric is that you know there the headcount was larger than what I was expecting to acquire. Right. So, so I think we were like 250, a bit more than that in terms of headcount when we acquired the business. And obviously that was a lot of people in the factory manufacturing doors. That was primarily the operators in the factory, but it was a lot of people. Right.

Host: And so what does that tell us? That the business was inefficient or that's just the nature of a business in, in Guatemala where maybe it's, it's more, it's more labor than mechanized or what, what is that, what story did that tell you?

Guest: I guess I mentioned it because I never expected to like being like, you know, from one day did to the next become in charge of like 250, 300 people and then, and then families to think about the number of families you impact through this model. So it was frightening for me and intimidating I guess initially then I saw it like a very cool opportunity to impact and to have an impact on a bunch of lives, a bunch of families. And I think what you mentioned is also an interesting point that it speaks to the. One of the advantages we have as a door manufacturer in Central America is that cost of labor here is very attractive for these types of manufacturing facilities. So we've been evaluating certain processes to automize the door production and stuff like that and things that know other US door manufacturers do a lot more often. It just doesn't make sense for us because you know the cost of manufacturing here is, is, is, is very attractive and so we can hire more people to do labor intense processes and be more efficient than with robots. And I think it's a, it's a win, win also for the people that, that, that, that participate in the business because they're you know, we're we're generating jobs for a bunch of people that are are in need for them. So yeah, that's, that's also a great point as well.

[40:14] Host: Juan, tell us a little bit about the, how you structure a deal like this. So you've called your fund a non traditional traditional search fund. So the traditional part of that did was your cap table like a tradition structured like a traditional search fund. What can you share there

Guest: in, in terms of the terms for, for investors is that.

Host: Yeah, the terms for the investors and then for the deal itself.

Guest: Yeah, so for investors. Yeah, traditional terms. I, I mean you know, here here there are some variations I guess, but nothing nothing. It was pretty much from you know, the Stanford search fund primer. So so traditional terms, the step up and everything else that the investors had that as well. In terms of the deal. We as I said we were able to, we, we. I think that was, that was important in the way we structured it so we were able to get banked that. I was not expecting that to happen to be honest. I, I thought, you know, local banks were not going to be interested in a deal like that or would not understand the model I guess. And they, we, we were able to convince them and to get very attractive bank debt. So we structured the deal. It ended up being, you know, I, I think 30% of, of of the the total value paid was, was equity and we did about I guess 50% of the, the bank debt and then the rest was a mix of a seller note and an earnout. So we, we had in total, I guess 70% leverage on, on that initial transaction.

Host: Great. Now tell us about now again this is going back to 2017, so this is some years ago now and you ran the business for six or seven years before stepping out of it, which we're going to hear about. But tell us I guess start with what did you do with these the business in these six or seven years? Give us the big picture of your progress there.

[42:20] Guest: Yeah, so the big picture of, of the progress. So so we, so I started running the business and my first surprise was I guess a culture. The, the my read on the culture was a bit off through due diligence I guess. So once I started running the business I did realize that the, the business was run like it was a one man show. And in terms of the business owner, the one that was running that was actually in, in the operations, he was a, he was a big micromanager. So the problem with that is that you have talented individuals in, you know, at the executive level that you know, have a bunch of I guess retained talent or encapsulated talent because they were on, they were not allowed to express their ideas. It was, you know, the, the business owner was, he, he would, he, he would, he would make all decisions right. And, and he would question everything that everybody did and make sure he was involved in everything and made the final decision. So and I was, you know, I don't know if I was, you know, by inception designed differently or I, I, I wouldn't say like intentionally I was trying to not do it that way, but I, I, that just didn't fit in with my leadership style. So I, you know, I, I, I'd say I'd made the mistake of trying to fit, fit in trying to fit my leadership style into that culture. And I quickly found out that that wasn't going to work. Right. So the first couple of, I guess the first year was a year of understanding that I was not going to be able to work well with their, the key management, the, the, the, the for the high level management team. And so I started changing the top line and, and hiring new people that I guess I found more connections with.

Host: So, and one, this was because the existing managers basically needed you to tell them what to do. They didn't express a lot of autonomy because they'd never really been given the, the room to do that before.

Guest: Exactly. I was, I was trying to inculcate, you know, extreme ownership and accountability and we started working with eos. That, that was immediate. That was two years in I guess to running the business. But especially when we started with eos, I found that, you know, those people that came from the old school management team were not going to be able to, to, to run on EOs just because of the lack of responsibility they wanted to take, the lack of accountability and the, the having someone question everything they did that was just not going to fit in with the culture we were trying to build. So building the team, getting the right people on the bus was extremely important in the, in the first couple of years and that took time. It's, you know, it's not easy. And, and, and that was a challenge. I'd say two to three years in will I, I really started to get comfortable and I, I felt like, um, now I have a grip of this. So some people I remember when I was searching would tell me ah, you know, don't worry, it's going to take like six months to get a hang of the business in the industry, so don't stress about it. My experience was like, yeah, that's, you know, I don't know if it's my industry, my business, but it was way more than six months, right? It, it, it took more time and, and, and sometimes it takes more time and, and, and you have to be patient, I guess.

[46:08] Host: And in retrospect, can you, can you pinpoint what it was that made understanding this business more difficult? Is it, is it the actual manufacturing process, let's say, or is it the market dynamics? I mean, is it kind of, yeah, in the weeds stuff or is it how the market functions? Kind of bigger picture, macro stuff?

Guest: Yeah, I think, I think I, I, you know, I, I definitely it's a combination of all, of all the things you mentioned. So one is that, you know, manufacturing adds a level of complexity that, that you have to deal with, even if it's light manufacturing. And this is, you know, we're not, you know, manufacturing rockets, but, but we're, we're piecing together things. And that implies, you know, certain procurement issues that you have to understand. You know, quality of materials, just quality of production, just taking care of, of, of of the operators and, and the manufacturing process injuries and stuff like that. So there's a bunch of factors that you have to kind of get, come to grips with and understand that would, I think you don't have to deal with. If, if you're dealing with the services business. Then again, you have to kind of. There's a bunch of SKUs. And the business that we acquired was doing a bunch of stuff outside of the core, right? So we were also manufacturing back then, kitchens and closets. And, and we were also doing, and we had a small like, services business that was installing the doors. So we also offered the, the, the, the installation, which is a whole nother business and it represents a bunch of challenges. So trying to come, trying to, trying to understand, like, what are we really good at? Like what is that one thing that we do the, that we can be the best in, in the world at when, when you have so many variables is, is, is difficult. Right? And, and, and so that, as I said, took some time and I traveled a lot. You know, I went to, to, to trade shows, I went to visit our suppliers, I went to visit other factories to, to try to understand, you know, where, where, where should we be focused on? And, and that took some time. Right, okay. And so, so back to like getting the right people on the bus. That was, that was, that was, that was key. Right? And so it's like I, I find this concept really important, which is like Finding your, your whole. I, I call it like. So I initially I was like, very like how oriented is the way I'd see it. I'd say it. It's like, how do I do this? How do I, how do I, how do I solve this? And you know, a business coach kind of introduced me in to this concept of saying, you know, stop thinking about that. Like, start thinking about like, who, right. So who can help you solve this? And who knows the answer to these questions? And, and, and so I, I started working off of this like find your who and became, I think, more efficient at least at identifying people that could help me solve problems and, and assigning them tasks specifically and being very clear with what we were trying to do. And I think that kind of helped the flywheel start or get going in our business. Right. And, and so once, once I felt I had a, a better grip of what was going on and I felt I had the right people on the bus, I started, you know, thinking bigger and thinking about, you know, what, what things had to change and what we had to get rid of first to focus on our core. And that was the first step. So we made a bunch of changes. So we, we stopped manufacturing kitchens and closets and everything and we said we're going to focus on high volume doors. And, and, and that was it. That was a tough decision to make because it was, it was uncommon. It was, it was not what people were used to, to do less instead of doing more. And, and you know, revenue were sacrificing revenue and it was just like, you know, a bunch of people were staring at me saying, like, what are you doing? Right. And, but I was confident that, you know, we wanted to focus on our core and in the long term that was going to make us more efficient and raise our margins primarily and give us a better, more ability to serve the customer.

[50:49] Host: And you did this in what year?

Guest: So that was 20, that was early 2019 probably.

Host: So, so only two years in.

[51:01] Guest: Two years in. Yeah.

Host: Okay.

Guest: All right. And, and so first was like doing less in order to do more. And then we made some also, I guess more aggressive decisions and started, I guess two things. So one, one was a, a built out a team to explore new markets was what we called it. So we, we knew we had a high market share in Central America and we, we got curious and, and started to explore other geographies where we could export our doors to. So we started to think about the Caribbean and opportunities we could find in the Caribbean, Colombia and Mexico and, and, and started Capturing some, some clients there and started doing some sales first in the Caribbean that become, that became pretty attractive. And then we went into Colombia and started doing well there and I was, I, I was lucky to. To. So we, we were about to, we were about to invest in a new manufacturing plant in Colombia. Actually this was late 2019. And covet hit and made us kind of stop the process. I was about to sign the lease to. To for the facility where we were gonna, where we were gonna set up the plant there. And, and the, the best thing that could happen to me was was covet and, and for us to stop that decision and that investment. Because the Colombian market struggled the years after Covid, during COVID and after Coven, and there was a huge devaluation of the currency and that was. That would have, I think, not been a great investment. So that was interesting. And a separate issue we did was to. Was a project where we evaluated a, a significant price raise and actually executed that. So we, we raised prices seriously. And I think that was, that was a, a very difficult and impactful decision. So it was one of one of these, you know, kind of moonshots and, and high, high risk, high return decisions that you make as a CEO. And, and, and yeah, we, we, we started, you know, running numbers on that that was late 2020 and, and essentially raised prices over 25 in one, one, one step. I guess this wasn't a sequential like 2% towards 25. This was one day to another a 25 price hike in, in our products. And, and there's a, there's a whole story behind that, that and how we thought about that. But that was probably one of the best decisions that we made as a team. And that changed the profile of not just the business, but I think the, the entire industry. I think, you know, doors were undervalued and the willingness to pay for doors was much higher for customers. And so that, I think that not only benefited us, it benefited our, you know, the entire industry, our competition. And we know of other players in the rest of Latin America that followed our lead in terms of raising prices. So it was an interesting kind of change in dynamics that, that we let there.

[54:42] Host: Well, you say there's a story there and we won't have time for the entire story, but can you condense it? Because Certainly raising prices 25, 30%, all of that falls to the bottom line. I'm sure a lot of searchers and operators listening would like to be able to do the same. So what are the bullet points of how you got comfortable with such a big strategic bet.

Guest: Yeah. So the bullet points were I, I, you know, this was not my genius to just one day wake up and say we have to raise prices 25 because I, I feel like that's a good idea. I, I, I, I'm, I am a big believer in, you know, not reinventing the wheel and just like, you know, learning about concepts that have worked and understanding them and trying to tag along or essentially copy them. And so we, I, I, I tend to follow big players in, in the industries that we participate in in other markets in read their annual reports and read what they're doing and just be in the know. And so one of the bigger players in the door market, I, I, I was following and I, I read about a price hike that they were putting forward and so I started just kind of researching what they were thinking, trying to reach out and, and you know, understand the details and go as much in the weeds of, of, of what they were thinking and, and, and what was going on there. So I, I even was able to get you know, some materials that they had worked with consultants with regards to the logic behind why prices were undervalued, why doors were undervalued and why the willingness to pay for customers was higher. And there were, there were studies that, that were being made about you know, compare like other construction material products and how margins in those construction material products were way different than the door market. And also this concept of like the door will if one fun fact is I guess a, a door, the, the, the whole cost of doors in a traditional U.S. home, right? So if, if, if, if you, if you do the unit economics of the traditional, I think it's a three bedroom, two bathroom home in the U.S. doors represent less than 1% of the total cost of constructing that house. Right. So, so what that means is that if you know, the sensitivity to the price of the, of doors is, is very low because with regards to the total cost of the door, you know, it's really relevant a difference in the price of the door being, you know, 5 or 10%. Right. So, so you can raise prices indoors 25% and that's not going to impact the door, the cost of the home at all basically. Right. So there were a bunch of studies being run with regards to why there was an opportunity to change basically the pro, the pricing profile of doors. And I read about them, I learned about them and then we started studying if it applied to the, the Central American market as well. And I think did and I was definitely like not this Wasn't one of those things where, you know, there was no risk and that I was like 100 comfortable moving forward, but I had a high, I think I had high conviction that this was going to be successful. We ran a bunch of numbers and they made sense. And, and then we just, you know, went ahead with a very important and, and sophisticated communication strategy which was key and where we, our main objective was to not lose trust with our customers. So you know, this is a hard message to transmit, like we're raising prices significantly. But we went through a whole set of, you know, communication strategies where we were explaining to them why this was happening, why this was beneficial for all and why this could be an opportunity for us to grow as an industry. And I think that was a big reason why, why this was successful as well. So, so I, that's, I guess a high level summary of the, of the story.

[59:18] Host: And, and what was the argument to your customer as to why it would be good for them?

Guest: So essentially we, we went ahead and explained we were not, this is not direct to consumer, so we're working with retailers, distributors around the region. So we were saying, you know, this is not like us taking margin from you. This is, you have to translate this to the market. Right. So, so we had a whole strategy of how they should be able to transmit this to, to translate these price increases to the market. But then again you, you also have to argue the, the, the incremental margin that we get is going to be invested in these initiatives that are going to benefit you as my customer. Right. So we, we, we were talking about, you know, a better, you know, software investments that we're going to allow them to have a better communication with us. Right. So we had three specific projects that we were going to be investing in that were going to require like additional capex. And what we were saying is if we generate whatever we generate from this price increase that's incremental to us, we will reinvest it in being a better service to you customer. Right. And we track that and we're able to show it, you know, to them as the years went by. So the, so the trust continued to be there. Right.

[1:00:41] Host: And just finally one, I mean everything you're saying makes sense, but it still doesn't address the very obvious concern that adore. If all of a sudden your doors are 25 or 30 more expensive than the competition, then the end customer is just gonna buy the competition.

Guest: Yeah, obviously. Yeah, the.

Host: So, so how do you, how do you deal with that unfortunate dynamic?

Guest: Yeah, definitely. So so you have to. Yeah, that's, that's the, that's the fear, right? And that's, that's where you know, you really get nervous is with any type. Like and I've experienced this with price hikes of you know, 1% right? And, and, and your sales team is going to say like I'm not raising prices 0.5% because I'm going to lose, you know, to my competition. You. Again, if, if in our case, and this may be specific to our industry, but I think it applies to, to several other industries is if, if, if you're only, if, if your only lever and, and differentiator is price in a market, then you have other problems, right? So if, if you can only protect your, your share through price and being the lowest cost producer and the lowest price on the market, that's, I think that's not a, a long term strategy that holds, right? So you, you, you, you have to strive for, for having other differentiators that allow you to, to win over customers in the long term. Right? So we were comfortable letting go a whole bunch of customers and we, we had modeled out, you know, a bunch of lost sales that, that we were okay with because we felt that these were customers or clients that were only interested in price. And if that was, if that was their, if they were not willing to value the quality the service, you know, and, and the, the volume that we could, that we could supply to them as differentiators and the prime, the most important of those three was service for us. So and attention to the customer, then that was not a customer. That was not our target market. That's the way we thought about it, right? So we knew that we would have some sales that would be lost to our competition. We also knew and we experienced this that we would, we would be creating competition through this strategy. Right? So and, and that happened. So two or three years after this price hike, we had new door manufacturers in Central America that were, that were selling doors at, you know, 10, 15% below our, our, our price. Right? And, and we, you know that you know, you, you go through the fear of like is this going to be relevant? Is this going to make us lose share? But if you stick to your guns and make sure that your differentiators are strong and, and you lay and then you're focused on, in our case, it's service quality and volume that makes us different to the rest of the market. And nobody else can do those three as well as we can in, in the market in the long term, I think you survive. And I think those low cost competitors are just, you know, stints in the road that, that you know, make, make it difficult for you a couple of months or maybe a year, but then they fade out. And, and, and you're able to play the long term here. So that's, that's where, and we're in this for the long term. So that's, that's, that's the way we think about it. Right.

[1:04:22] Host: Well, and then you have the other happy possibility that sounds like it's come to pass where if you're the bold one that raises prices and then eventually the market follows suit because you've created room for everybody to raise prices, then you don't even look like you're high priced compared to the competition because everyone just catches up with you. And so then, then you continue to have all your differentiators, but you're not even positioned as particularly premium cost because everyone has also raised their prices. So I guess you really hope that that happens. Fantastic. And so at the end of six or seven years, what did the business look like after your, after your tenure? What you're still an owner but your direct tenure as the, as the CEO?

Guest: Yeah.

Host: So

Guest: the business had grown and we, we, we were able to, we, we essentially doubled the business. We, we doubled EBITDA and doubled revenue and, and we, I mean the EBITDA doubled before revenue doubled. So, so we, we, we increased, we did through this price hike. The, the, the margin profile of the business changed significantly. And so this was 2021 and, and, and end of 2021, we, we, we were doing over $6 million in EBITDA and, and about 30 in revenue. So, so yeah, so it was, it, it was, it was, it was primarily due as I said, I think it was, it was the, the, the, the change in prices was important to, to the, the, the, the growth of the business. Right,

[1:06:16] Host: great. So a $6 million EBITA business, the. Now in, in the Guatemalan market,

Guest: how

Host: many such businesses are there? There are probably. Well there's obviously a lot fewer than there than there are in, in big countries like the U.S. but I guess what I'm trying to say is going from 3 to 6 million because the population of, of companies is smaller, that puts you in a, at a different level and the levels are, are far less populated as you go up the chain.

Guest: Yeah. So we would consider ourselves a mid medium sized business in, in Central America. It's so yeah, and, and medium to, to large I guess. And it's, it's hard to, it's hard to say. You know, also businesses here don't, you know, the, are very private in terms of the numbers. So it's hard to, it's hard to say how many of what size and but we definitely fall in the category of medium, medium to large business in, in Central America. Right. And there are you know, a bunch of small businesses in, in Central America, you know, a bunch of mom and pop shops, but limited number of businesses I guess above the 3 million dollar EBITDA hurdle.

Host: Right. And so there you are at 6. And of course to really get a sense of how large this business is in a Guatemalan context, you'd have to kind of do the currency conversion. So $6 million in EBITDA is a lot more money in Guatemala than it is in the States. So it's relatively a much, much more kind of cash generative company than it would be here. And even here, $6 million EBITDA does, you know, there's, there's, that's a, that's a fantastic business.

Guest: Yeah, yeah. And the cash profile of this business which is important for us is very attractive. So it's, we don't require a lot of capex to increase our manufacturing capacity. Again, this is a very, you know, non like automized process. It's very labor intensive. So, and, and so and, and the, the machinery we need or you know, is not complex machinery. We're working with wood. We're, you know, we're working with unsophisticated materials. So, so the capex is very low relative to other manufacturing companies and that allows us to grow the business with a high cash flow generation characteristics that, that are attractive for us in the business.

Host: Okay, so what do you, what take us kind of to the end of this chapter of the story of your, of your tenure as CEO in the business. What year is it and what decision do you make?

[1:09:12] Guest: So when it was five, six years in the, the business was fortunately doing well. I, I felt like we had stabilized and, and we had the flywheel going and the management team was up and running and taking care of things. Also. I felt like, you know, it was a different, it was a different business. It was a lot, a much larger business. We were growing in new markets. There was untapped potential to keep growing the business. And I, I started to get a hunch of wanting to, to go back to the investment side of things. And you know, as, as we talked about earlier, Will, I was always also a very, I guess financy guy interested in investing. I love the Operating part of all of this and, and, and still do. We can talk about that a bit more of that, which is interesting. But I, at that point in time I was, I was thinking about like investing, right, and saying like, I think there are more opportunities like this one and we should capture them. Right. I had a friend, one of my best friends, you know, from childhood, who was, who was also starting a search back then. And what we did is we essentially partnered with the same set of investors back to him and in his search and he was searching in Guatemala as well. And so I was following his search and helping him out and, and saying I, I think we saw a bunch of opportunities that were very attractive, but maybe not search fund like deals because there were minority deals or they were, you know, not, we're not checking all the boxes in terms of the search fund deal. But I, I, I spend a lot of time helping him. You know, long story short, I, again, given the trust and friendship I had with my investors, I had open conversations with them about, you know, saying, can we transition? Is there a way I could transition out of, out of this role as an operator and keep on doing, you know, investments with you guys backing me and make sure we, this, this, this door business is taken care of. And, and they were very open to those conversations. So I started exploring, you know, what, how this could make sense. And so we ended up doing a couple of things. First, it was important for me to clear the, clean the table with my investors and even, even, even better if we could generate some sort of return and, and so make sure we were playing with, you know, house money going forward. So as I said, the business was doing well. We had generated a lot of cash and paid down debt. And so we were able to do a sort of a dividend recap, a special dividend through recapping the business with debt. And that allowed us to distribute, you know, back money to investors, generate a return. I was able to vest my carry. And the other thing we did and I worked a lot on was find a great manager to take over the, the CEO role and to, to transition me out. And I think that that also was, was important because I also felt like, you know, maybe this next stage, you know, is there. I was sure there was somebody out there that could do it better than me, right? So I, I, I was, I was interested in finding someone that, that was a great operator and that would take care of the business going forward. I was going to support him and I was going to continue participating as a board member. But he would be running the show. And I was, I was, I was fortunate to find the, the current CEO of the door business who, and, and he, and hire him and, and he's now running the show there. And we're still business owners, we're still running, we're still the owners of the company and I participate as chairman of the board, but he is fully in charge. I'm no longer in the day to day to day operations of the business and the business has continued to do incredibly well. So, so very happy with that transition and how those things kind of played out. Right.

[1:13:33] Host: Anything to say about finding your who in this case? Finding the CEO.

Guest: Oh yeah, there's, you know, we could do a full, a full hour of that and yeah, there's a bunch to say there. Generally in hiring, the way I think about it is, you know, again, people I, I can really trust. But for this role, it's by far the, the, I now have some experience hiring CEOs because I think we'll get to that. But we're now doing more investments and, and assigning CEOs to run the businesses. But I think finding a CEO is, is, is, is difficult and different than hiring a someone from the management team. So someone for a specific role. The CEO has that particularity that it's, you know, it's, it's somebody that's, you know, has to be good at everything and you know, not specific on something. So it's, it's, it's, it's complicated. But I, I, I was looking for somebody first of all, first of all that had this kind of entrepreneurial rigor. So, you know, you, you want somebody that, that or we wanted somebody that was just scrappy, a doer, you know, owner mentality, but at the same time analytical and rigorous. Right. Um, so finding that combination is, is tough. I wanted somebody that I could, you know, trust from the get go and that was very candid and open from the get go and had demonstrated that in the past. And I was looking for somebody that was coachable as well. I think that those were three traits that were very important to me and that had demonstrated an ability to, to, you know, a growth mindset, somebody that was willing to learn. And, and I'm more of a, I prefer to hire people that are, you know, that, that may not have the title, that may not have previously had the title of a CEO or a general manager, but are that, that are right there and have all that hunger and drive to get to that position and you know, you know, go through that kind of phase where they're, they're, they're gonna learn a lot and make a lot of mistakes, but that they're going to be hungry and driven as opposed to somebody that has proven out his, you know, all his skills as a CEO and has, you know, you know, that, that title for 10 to 15 years, but doesn't have that drive anymore. Right. So the, the CEO that, that we hired for the door business was exactly that. He was, he was just ready to become a CEO. He was extraordinary at what he was doing in, in a large corporate where he was previously and was, was very interested in this model of small to medium business, full ownership, participating in the equity as well. And, and somebody that I knew, I had known previously as well. So he was, he was trustable and, and we had a great relationship and, and, and yeah, so I, I was, I was, it's, it's, it's, it was an easy transition for me actually. And, and I'm really happy to have him on, on, on the team.

[1:16:57] Host: Fantastic. And Juan, tell us more about the dividend recap. So I'll just take a stab at big picture. You had built, paid down a lot of the, the debt that existed. You were generating a lot more cash at this point so you could get more debt back onto the business. The business could support a bigger debt payment because it was generating so much more cash. And then with that loan, pay yourselves back. So pay your investors back plus a return, plus pay yourself, have a big liquidity event for yourself. The business then carries forward with a new loan in it. But it, you know, everyone, the lenders and you all are very comfortable that it can support that loan. You've now been in the business for six years and gotten it to $6 million in EBITDA and retain all of your equity. Right. Is that, is that essentially it? Anything more to say about that? I mean, that, that must have felt good. You basically had an exit without exiting the business.

[1:18:04] Guest: Yeah, yeah.

Host: You had a liquidity event without exiting the business. I should say.

Guest: Exactly. Yes. Yeah, that, that, that's pretty much it. Will. So, so you're, you're, you're re. Levering the business. So in our case, we re. Levered the business to the levels that, even below the levels that we had levered it at acquisition. Right. So, so it, it was not, it was not something that, it wasn't taking leverage to a new extreme. It was just relevering up to where banks had originally lent us. Right. And, and that's because again, the cash generation and was, and the growth had allowed us to, to pay down debt significantly. Right? And with that, you know, influx of money, you, you, you declare a special dividend that you pay out to, to, to investors. And we also, given that I was transitioning out of the CEO role, we're, you know, we had to kind of restructure the, our shareholders agreement because, or make amends to it because, you know, investors were now going to participate in a, in a different thing that from what they had originally signed up to. Another interesting fact here is that was once you do this like you're now really playing the long term, right? So now you can really think about okay there, you know, you, you've, you've cleared the hurdles. You vested you, you, there's no like irr to be thinking about, right? So, so as, as, as you know, as a searcher and as the original investors, you're now saying, okay, cool, you know, we've cleared the hurdles, we've made the money we want to make here and now we really want to play the long, long game. And so we're now thinking about, you know, more moic just kind of permanent capital compounding the cash we generate from this business and, and trying to make this as big as we can for over the long term. Right.

Host: And Juan, if, I mean if you can a business that's doing well, you can dividend, recap it and pay the investors back plus the return they were looking for and then continue to retain equity and think about it for the long term. Why don't you see this as a more common liquidity event in the search fund space? The default is sell the business outright. Yeah, that's, I mean this sounds so much more attractive. You had a payday and by the way, you still own the company forever.

Guest: Yeah, yeah, that's a, that. I mean, that's a great question. I guess you're probably so first you, I mean you have to have the financial conditions to, to be able to do this, right? So, so that I, I guess that's the, the first question is you're not, I mean not all businesses are, are in the financial capacity to go through an event like this. Right? And I, I do see an argument from investors if, if this wasn't a significant special dividend where like, you know, you're, you're generating a significant return and you're just returning capital. I do see the investor saying, let's not use this money to, to pay us back our capital. I mean, let's look for other investment opportunities. Right? One conversation we, we did have the conversation with investors of like should we just sell the business now? Right. So maybe let's, let's explore this. And we did have some conversations with the bankers and started exploring the idea. But quickly we, we found, you know, that a couple of things, one, as I said, the financial conditions were there, interest rates were very attractive. So this was 2021. So you, you get, you know, I think we all recall what interest rates were back then. It was, it was, you know, just in time to do this. Right. In terms of good timing. Wow, good debt. Right. And also there weren't clear avenues to deploy that capital for the business at that point in time. Right. So why don't other people do this? Even if they can check all these boxes of like being in the, in the financial capacity to declare, to relever and declare a dividend like that. I can think about, you know, maybe because there's other uses of capital allocation so great investment opportunities. You know, in our case it could have been another manufacturing plant. It could have been, you know, buying a bunch of robots to automize the production process and everything. But none of that really made sense for us or acquiring another business within the door manufacturing industry. Nothing made sense for us at that point. And at the same time we saw a great potential in the business to continue generating cash over the long term. So we said, you know, and that has happened. We, we did this back in 2021, end of 2022 and we're now, we, we, we've we've basically reduced our debt back to the levels where we were prior to that dividend recap in just a couple of years. Right. Because the cast, the business has continued to grow and the cash generation is, has that same profile. So I think will, I think we, you know, as a searcher, ideally you want to find a business and, and we're, you know, when we talk to searchers we're constantly drilling them on find businesses that have other liquidity avenues that are not necessarily selling the business. So focus a lot on the cash generation of your business. Understand the cash profile, understand the needs for capex because you always want to have some sort of flexibility to do something like this in case, you know, the market is not there for selling or in case you want to play the long term game and have these conversations with your investors. So and so I think one, you know, people don't buy these types of businesses, right. So you, you have high growth businesses but that are not necessarily generating a bunch of cash. Right. And two, I Do think people don't stop and think about other opportunities of capital allocation once they have a bunch of cash, right. They, they just think about like now I have to invest this here or there, now I have to acquire this other business because I want to grow, grow, grow, grow. But I, you know, I would invite everybody to stay and, and just like stop and think. And for example, if you haven't read the the Outsiders by Wilfon Thorndike, I think that's a great, great book that every searcher should read. And just like think about the other avenues of capital allocation, right? And whether what other options are out there for you to use the cash that you've generated. And this being one of them I think is a, is a great way and use of cash.

[1:25:10] Host: Well it sounds like frankly just a stellar outcome Juan. I mean to say what I said before you had everyone have their payday, investors got paid back plus return and you still own the business and then it's continued to grow. So you've able to, you could do the same thing again. I mean it's really serving as, as you know, an ATM machine that spits out more and more money. What you said about as you, as you now invest in searchers yourself, drilling them on making on, on evaluating businesses with an eye toward being able to have optionality in the future, did you just, by that did you just mean you know, basically profitable businesses that don't, that aren't super growth dependent, that they have attractive fundamentals that if they don't grow, grow, grow they can be very attractive cash generation machines? Is that what you meant?

Guest: Yeah, yeah. So I, I asked them to think a lot about like the, just, just, just really understand the cash flow yield. Right so free cash flow yield of the business know year after year. I, we don't like put a necessarily like a hurdle or, or make them think about a specific number but just like you want, you want that to be high. You, you want to understand how it works. You want to understand the working capital like profile and needs of the business. Right? You want to understand capex those are all like variables towards free cash flow. So but I guess our experience now as investors because you know that's another conversation but we, we, yeah we're also investing in, in search funds in the US and in Latin America. Our, our impression is that you know there's a tendency to think a lot about growth and, and that's, that's good. I mean we, we, we all, we, everybody wants the business to grow and everything but sometimes sacrificing the, at least the understanding the free, the cash flow profiles of the business. Right. And you know, we've all heard the, the, you know, the saying that cash is king and we're, we're more interested in this free cash flow yield than, than growth. I'd say that outright. Outright. Like we don't really care that much about growth in businesses. We're really interested in the free cash flow yield because of this experience that we've had. Right. So not sure if that answered your question though. I'm.

[1:27:41] Host: That was a great one. It did well and it also, it may come back around again with my kind of closing questions here. We haven't left a lot of time for it. But let's hear now about how what you're doing, you've, you've pivoted into, let's call it an independent sponsor. That, that may not be, that may be kind of shoehorning that label onto you. What did you do when you stepped out of the door business?

Guest: So I, I partnered with my, my, the friend I mentioned previously that was also doing a search fund. He searched without acquiring. But we created this pipeline of dealers in, in Central America that is extremely attractive. And since we've been patient because that pipeline has been maturing over five years now, some of the deals that he started, like some of the conversations he started five years back with business owners are now maturing into possible acquisitions.

Host: So one, so you're telling the audience it takes five years from that first conversation to actually for an owner to be willing to transact.

Guest: So yeah, like in, in these, at least in Central America we have like our experience has been that yeah, you have to be much more patient and maybe that two year time window that, that you have as, as a searcher is tight because you might get lucky like I did. But if not like more, more common scenario is that business owners just take a lot of time to come to terms with the idea of selling their business because of this, you know, the whole family legacy and you know how important it is for the family and inheritance.

Host: Yeah.

Guest: As, as we mentioned earlier. But so I, I would say like more than an, like an independent sponsor figure. We're trying to. Because we're still working with our original investors which is great and we, we love that we've acquired another business in the same sector like construction materials and, and we, we also own 100 of that business. We've assigned an extraordinary CEO to run that business as well. So very, very similar model to the door business. It's light Manufacturing as well. We, we currently have another business under LOI in the same space, same characteristics. So we're trying to close that third acquisition soon. And our idea is to, is to you know, own these businesses under a Holdco model. We, we like to call it more a platform model because we're thinking about being specific to an industry for now and then venturing out to try to platform number two in another industry. But we're trying to leverage our expertise in this light manufacturing, construction materials sector as much as we can and also ride kind of the tailwinds that that this industry has because we, we do see Central America continuing to boom in the, in this segment. And, and so we're trying to ride that wave through a vehicle that, that allows us to own these businesses for the long term. Right. Backed by original investors. That's, that's, that's the, that's the whole plan. Separately as I mentioned, we've also with my same business partner, we, we've raised a fund with primarily local Central American investors that the original ones and others that have found the search fund model interesting and we're investing in search funds globally, primarily in the US but, but, but globally and backing searchers in, in a very, this is a small fund so we're not like large institutional investors, but we, we want to back, you know, you know, a set of five to ten searchers every year and, and be as helpful as we can to them. It's our way to give back to the ecosystem. We received, you know, a bunch of help and all of these ideas that I've mentioned will were backed by searchers who had done this previous to me and, and done it well. And so I'm very grateful to the search fund community and grateful to folks like you that, that put out all this material to, to make us, to make the adventure more like, I guess more palatable for, for us as searchers. And I'm just trying to give back. Right. So that's the way we think about investing in search funds as well.

[1:32:15] Host: And you said investing in searchers in the US but also globally, given you're being situated in Central America. Do does a more a global searcher or non US Searcher should they feel more like they should reach out to you? I mean, I guess maybe is that a differentiator do you think, compared to other search investors?

Guest: Yeah, so we're, we're, I think we, I mean we're happy to, to, to talk to searchers anywhere to be honest. We, we, we, we do have a mandate to so the majority of our fund is is going to be invested in the US Right that's just because of appetite from from our investors and LPs and the way we structured it. But but we do have a bunch of conversations with non us searchers and we have a bunch of experience to share with them. So and even if we're not investing and we, we have conversations with searchers all the time to, to help them out and and and just just be helpful in, in terms of how they're thinking about structuring their fund or or of the deal. So happy to talk to anybody that that is thinking about a search fund.

[1:33:28] Host: Great. Okay well I want to go back to the Holdco or the the platform investment firm you're closing the third or your work you've got the third acquisition under LOI and so are you then looking those three will become the platform or the door company is the platform. And these are bolt ons. And and this is all just kind of sounds like it's in what year one ish. You exited in year 20 or you did the dividend recap in 2022. So I guess we're two years later. Are you going to continue at the I guess what are some of the goals in terms of acquisitions or revenue numbers and size I guess year five call it?

Guest: Yeah. So we're looking to acquire on. So the, the these are not bolt ons to the, to any of the operating business. So the idea is is to to structure in that's what we're currently doing structuring a new CO that will own. So it would be like an the new CO would acquire each of the operating business but that would just be kind of a share swap from investors and from the this, this new coal hold Coal whatever we call it we would acquire. We're targeting three owning five to seven businesses in total. Right. Within this this, this, this segment the construction materials niche. Right. But again we're very scrappy. Will I I even I struggle to say like five to seven. Obviously we have to put some numbers on the document that we share with investors to give them a sense of what we're thinking. But I always say you know it could be could it could we keep it with three and and just do three or do five or do ten. Yeah I mean we, we, we want to be flexible but the idea is to use the cash flows that that are generated from these operating companies to acquire more companies. Right. And get that, get to that flywheel where you know we're using the cash that the Business businesses generate to grow inorganically within the same niche and compound, you know, and, and you know, hold these for the long term. Right? And, and so when you say hold

Host: for the long term, therefore the returns to investors are happening on a, on a, on a regular basis as dividends as opposed to some big liquidity event because long term means that liquidity event is too far away. So you're going to be using, using the cash to not only make new acquisitions but also pay dividends in the meantime.

[1:36:14] Guest: Yeah, we're, we're, we're going to, you know, we're going to use the cash. The, we're going to make the best capital allocation decision we can at each point in time. Right. So if there is nothing interesting to, to, to, to invest in at that point, we will, we will, we will dividend out, right? And, or we will buy back shares or we will do something that gives liquidity to investors. But if we find other attractive opportunities, acquisitions specifically, we will, we will acquire other companies and, and, and, and keep growing the, the hold go. So that, that's the way we think about it. And we're, we're, our investors are clear that you know, this is a different model. Like this is not the search fund model, right. This is a, a long term hold vehicle. And so we're no longer thinking about IRRs, we're thinking about money on invested capital and trying to grow this as much as we can. And, and, and as I said, compound the, the returns.

Host: Juan, for, for the listener who might not understand this shift in mentality from IRR to moic. Moic. What does that mean? What say, say more about that. Say more about that, please. That's an important concept. And, and one that maybe not a lot of people or not everybody listening are going to really understand, even if they understand the definitions of those two things.

Guest: Yeah. So typically, you know, I guess the majority of investments, financial products and everything are thought of through IRR and just returns over a period of time. So it's not just how, how, how much money you make on an investment, it's how and how much time you make that money. Right? And so you're trying to clear these, these return hurdles that have a time variable that's important and that as, as you, as you, you know, take more time to generate returns that you're IRR is going to lo. Be, be fall. Right. But here we're playing, as I said, this, this, this game of, of compounding.

Host: Right?

Guest: So, so, and this comes from, you know, the, you know, the Berkshire model You know, Warren Buffett and, and, and this philosophy of, of the magic, the magic of compounding. So once you're in these investment vehicles that are, that are long term permanent capital vehicles, right. You're no longer thinking about time as, as a, as a variable to optimize for. Right. So the IRR hurdle starts to, I guess I wouldn't say it, it no longer matters because you're obviously trying to maximize returns in any sense, right. But yeah, what you're really striving for is money on invested capital. And as opposed to like thinking about, you know, doubling your money or three times your money, you're now thinking about like we're gonna 100x your money. Right? So, so we're, we're really thinking about, you know, in 20 years, in 30 years, this is going to be 100x right. And the IRR and that is going to be extremely attractive, but we're not really thinking about that. We're thinking about compounding this your money for the very long term. And, and so I, I guess the search fund model is designed to, to also think about time. And, and most search funds are structured through irr. At least that's what I still understand how, how things work with IRR hurdles. We've, we've been, you know, we've, we've argued that, that a good model for search fund investing should be MOIC hurdles and IRR hurdles. So you're, you should be trying to clear a MOIC hurdle and an IRR hurdle is if you're doing a traditional search fund. But once you migrate into this kind of, especially for, for example, in our door company, when we, we've cleared IRR hurdles, we've returned capital to investors and generated the return that they were expecting. As I said, we're, we're playing with house money now. And so what we're trying to do is really just, you know, make that money as big as possible over a time horizon that, that, that we're not sure how, how many years that might be, but we're just really thinking about compounding that, that capital.

[1:40:46] Host: Well, I, I still, I struggle with this one, I have to, I have to admit, because the, I'll call it moic, the money on invested capital or multiple on invested capital. You know, if you, if you 10x my money in 10 years or 10x my money in 20 years, those are both long term, but those are both very different outcomes.

Guest: Yeah.

Host: So it's still ultimately always comes down to time of investment. This is what I don't, I don't understand how returns can ever be decoupled from time frame.

Guest: Yep.

Host: Is it, is it just that like when you start thinking in, in 15 and 20 and 25 years, it's just too hard to predict so you're just kind of, you allow yourself to be a little vaguer. Is that what it is? Because, and just to go back to the Berkshire, the Berkshire Warren Buffett example, you'll often hear about like what is, what is Warren Buffett's performance? Well, it's basically low 20s IRR year after over whatever it's been 60 years. So, so you know, when, when people are really studying Warren Buffett, they still kind of tie it back to what his internal rate of return has been over this amount of time.

Guest: Yeah, yeah, I think that's a great question. Also the way I think we, we, you have to think about it is, so why does it matter, right? So one, one reason why as an investor this should matter is like so how are you, how are you paying promote on, on the investment to, to the manager, to the GP or to, to, to the search or whatever, right? So, so that's, that's, that's one reason why it matters, right? Because it's, you know, as, as you said, it's not the same to double your money in, in two years or in six years, right? So one thing we, that so to, to be clear, it's like we're not ignoring the irr. So for example in the way we think about structuring promote for this long term hold vehicle is you're gonna get paid as, as the, as the founder of this model for doubling the money for doubling each time you double MOIC for investors, you're gonna get paid, we're gonna get paid, but we have to clear a, a preferred hurdle, right? Which is irr. So we're, when we look back, when we double the, the, the, the net asset value of the investments, we look back and we have to make sure we cleared an 8% hurdle, right? So if, if you're, if, if you doubled over 40 years, you're not going to have cleared the, the 8% hurdle. So we're also, I guess we're not ignoring the, the, the irr. We, we're definitely making sure it clears a hurdle, but we're not using IRR as a primary benchmark because then you're incentivized to generate as much liquidity in the short term as possible to maximize your rr, right? So, so decision making is another reason why it matters, right? And that's why you know, traditional private equity, you're going to, you know, you're seeing all these, you know, flips and, and businesses being sold in three to four years. Right. Because obviously that maximizes irr. Another interesting reason why it matters is it uses debt. Right. So, so debt becomes an interesting thing to think about once you structure these long term hold vehicles because you know, debt is very attractive in private equity deals that, because that really bumps returns. Right. So it's going to, it's going to really help, help you juice up your IRR. Especially if you're doing this for three or four years once you're going for really long term. Right, 20, 30 years. Yeah, yeah. It's going to help you bump returns, but not in the same way. Right. And so you, you, you, you think twice about using debt, especially if interest rates are high because it doesn't have that same effect as, as if you were playing the three to four year game. Right. So it's just different. Right. And, and so I guess to answer specifically your question, the way you have to think about it is we're not ignoring IRR in these, in these games or in this model. We're just making sure it's not our primary driver. Right. Our primary driver is multiplying your money. My C. Okay, right.

[1:45:13] Host: Well, thank you for that. Thank you for that one. It was great. Well, I want to close this out here with basically just kind of have you reflect on the difference in what you're doing now versus being an operator. You said earlier in our interview that you, you really loved operations and, but you have, you're now obviously mostly a capital allocator. You're an investor. So it's a very different profile of day to day life and in trajectory of career. So maybe compare and contrast and, and in a way that might be relevant and helpful for the audience.

Guest: Yeah, and I, I, it turns out that the grass is always greener on the other side, I guess because I, I was, I was, I was, I was running the business and I was, I, I guess 20, 21, I was like, I'm ready to, I'm ready to go back to the investing side and you use my investor hat and you know, start running analysis and, and doing deals and stuff. Then you know, I was, after a couple years of doing that, you know, I started saying, ah, I want to be in the trenches again, I want to start running, I want to, I want to be in the operations again. And I did spend some time in, in the day to day operations. I was a temporary CEO. I guess of the, of the second business we acquired. And I, I really enjoyed that. I, I don't know if that's a, if that's even possible, but I, I see myself like going forward, switching hats constantly and, and if I, if I can buy myself that flexibility of, of being able to participate in both temporarily, I guess, and, and, you know, not, not losing the ability to, to spend some time in the tree, in the trenches with the operators, with the management team, doing eos and all that. I love that. But I also feel very comfortable and enjoy participating in deal making and deal structuring and negotiating acquisitions. And so maybe I'm just somebody that's very dynamic and gets bored of doing the same thing for long periods. So I want to be. And I think another interesting thing is that this model that we're building out, hold go, I guess, allows for that. And that's something that I, that I find very attractive as a professional development opportunity, I guess.

Host: Well, it's probably a good thing, Juan. I mean, at least a good thing given that you've built something for yourself where you have the flexibility. If you, if you didn't have the flexibility, then you'd always be chafing and wanting to get back to the other thing. But given that you have this, this freedom to go back and forth, it's the, it's again, to use Warren Buffett, I think it, you know, he, he says his quote is, I'm a better investor because I was a businessman and I was a better businessman because I was an investor or whatever. I mean, the, these are highly complimentary, needless to say. And yet most people probably just prefer one or the other operations and being in the business versus being capital allocator. So if you are a personality that can enjoy and does enjoy both and actually gets an itch to do both, you'll be able to travel back and forth and bring the learnings from one into the other and vice versa. So that seems like a, a really happy characteristic of yours.

[1:48:46] Guest: Yep, definitely. For sure. I really believe in that quote by, by Warren Buffett, for sure.

Host: Yeah. What haven't we talked about, Juan? Did we get to everything?

Guest: What haven't we talked about? Yeah, I, no, I, I think, I think we covered a bunch of ground and I, I, I, yeah, nothing big comes to mind. So

Host: if people want to reach out. Juan, what's your preferred method?

Guest: I think LinkedIn is, is, is, is probably the, the preferred method method for me. I check that often so people can find me through LinkedIn and, and yeah, through we, we can like, if, if you're a searcher, we have a website that, that, that has a good communication tool and, and you can reach out there. And happy to get in touch.

Host: So what's the URL?

Guest: It's paltuscapital.com.

Host: so Paltus P A L T U S. Yes.

Guest: Capital.com.

Host: great. Juana Elar, thanks for so much time. Thanks for walking us through your journey. Really a fascinating one. And seems like you're, what are you now, 34? 33.

Guest: 34, yeah, 34. All right.

Host: Well, lots to come in your career, so it'll be fun to watch. Thanks, Juan.

Guest: Thank you, Will. This was great. Really appreciate it. Sam.