Host: You've probably heard of Stanford's Search Fund study. This is a report on key data from traditional search funds in North America going back to 1984. Lots of the data about search you'll see referenced is sourced from this study. There's only one issue. The Stanford study covers traditional search funds only. It does not cover the market of self funded search. So there's precious little data out there on trends and characteristics across self funded searches. The very type of search that most Acquiring Minds guests did and that you are probably doing too well. Live Oak bank is trying to remedy this. They've just completed a survey of self funded searchers that they made loans to. And in this interview I talked to Live Oak's Lisa Forrest about some of the findings from this first of its kind dataset. I think you'll find these interesting. Enjoy this mini episode with Lisa Forrest of Live Oak Bank. 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. Lisa Forrest, thank you for joining me today on Acquiring Minds.

Guest: Thank you for having me. Will always appreciate it.

Host: Lisa, you are a familiar name and face in the world of acquisition entrepreneurship. You work on the search team at Live Oak bank providing SBA loans to entrepreneurs who buy businesses. Your team does many, many search deals every year and has really made a name for itself as one of the leading lenders in the space. You've come on today to share with us some of the findings of a survey that your team at Live Oak recently conducted. I have this is a bit of a sneak peek. You're going to be releasing this data to the public here shortly, but thank you for kind of sharing this with our audience in an early fashion. People are going to love this data. It's super interesting. Please give us an intro. Tell us about what this survey was. Lisa.

Guest: Well again, Lisa Forrest, Co Director, along with my partner Heather Anderson, we lead our search fund sponsor team over at Live Oak Banks. Thanks for having us. Appreciate that. So in the world of search fund, everyone's familiar with the Stanford study from the standpoint of the traditionally funded searchers, Endurance Search partners surveyed some of their traditional searchers last year. I think they released it earlier this year. And on the self funded search side of things, which is really more of a sort of a newer animal, a newer hybrid on the search theme, I think we on the self funded side of the ecosystem have grappled with how do we survey the self funded searchers we've got certainly those known lenders in the marketplace. We're all really good friends and respect one another. So do lenders get together and survey? Do we work with the investors in the marketplace Marketplace to put the survey together? Do we work with the business schools? So we've been grappling with this. Well, Heather and I just said, well, what if we just take a shot at trying this? Let's just start. And we decided to just survey some of the CEOs in our portfolio. All self funded searchers. Going the self funded search fund model. Using the self funded search fund model, we decided just to survey our own portfolio as a starting point. And we were kind of really surprised, pleasantly surprised, intrigued by the responses. We got 49 responses back. Next year we're going to try to kind of boost up the robustness of it. But we thought it was an interesting starting point and we hope the ecosystem thinks that the information is directional.

[4:05] Host: And Lisa, you're the CEOs that you surveyed. So this is this. How far back were you guys doing search deals? Self funded search deals.

Guest: So we started with our first self funded search deal back in 2017.

Host: Okay, okay.

Guest: So this, but largely this is going to be, you know, as we sort of gain momentum. We had kind of critical mass really in sort of 2019, 2020 and certainly 2018. But these are going to be respondents that have been in our portfolio and the bulk of them were in 2019 and 2020.

Host: Okay, great. All right.

Guest: Which is interesting. So we have a little bit of pre. Covid. During COVID CEOs that we were booking loans for. So we were trying to isolate that. And I don't know, we're bankers. We're not, you know, professional statisticians or like question askers. So we just try to take people we know really and just tried to ask some, we thought, you know, interesting questions.

Host: Yeah, yeah. Well that explains why on one of those questions or a couple of the questions, the commentary on, on labor challenges and supply chain challenges, I mean that has all of the, the, the scent of, of COVID times just to, just to piggyback on what you just said kind of about the data or lack thereof for self funded. Just for anybody who attended the debate that Acquiring Minds hosted between Greg Jeronimus about traditional sear. Traditional search funds. Robert Graham representing the self funded search model. You know, one of the things that came up in that debate was how traditional search funds have this data set in the form of the Stanford study, with a well known Stanford study. And there wasn't one on the self funded side. So it was kind of this, this acute, glaring absence of data that we, that we, that the, that the industry has for the self funded side, which is frustrating on many levels. So it's awesome that you guys and Live Oak bank seems like a great entity to step in and try to fill that void. Without further ado, let's get into some of these findings. Lisa. So there are, how many questions were there in total? 20. 27.

[6:25] Guest: 27 questions.

Host: Okay, so we're not going to go,

Guest: I was just going to say mostly on the acquisition part of the process, but then we did throw in a few. You're in your CEO seat. Are you thinking of recapping? Are you thinking of strategic acquisitions? How did the supply chain hit you? Any labor constraint issues once you transitioned and you were in your CEO seat? So there were a smattering of questions in that regard. The bulk of the questions focused on the acquisition process itself.

Host: The search. Yeah, exactly. So obviously we're not going to go through all 27. We're just going to go through a handful of them and the ones that really jumped out at me that I think are most interesting and you and I on our pre call kind of agreed that we, some of these findings, we both, some of the same things jumped out at both of us. So let's start with one of the questions about where folks found their deal. So you asked how did you find your deal? 3. The three answers. The three possible answers were proprietary, brokered or their professional network. What, what were the findings, Lisa?

Guest: Yeah, so we came up with about 70% of the respondents said that they got their deals through the broker network, which I think would resonate. That would be a confirmatory answer. I think the viewpoint is that most self funded searchers get their deals for the broker network, which it sounds like they do, at least for our CEOs. Then what the interesting part was is that 10% came through proprietary search and then 12% actually came through the searcher's own professional networks.

Host: Right.

Guest: So that was just interesting. I would have thought it would sort of been like 70, 30, but there's this other sort of piece in there that. And we left the question other and then it was filled in with professional networks. So we thought that that was really, really interesting. So keeping in contact with your, you know, alum, your, you know, work network and interestingly enough there were even like, you know, your neighborhood. There were, there were quite a handful of searchers that got deals just through people they know in the neighborhood.

Host: Wow. Yeah. I don't think.

Guest: Interesting.

Host: I hope I don't misspeak here, but I don't think a single one of my guests has gotten a deal from their, from their professional network. So that was, that kind of really surprises me. The. And I have to say, Lisa, I was actually also surprised about the preponderance of broker deals at almost 80% because. 70. 77. 70. 70. Yeah, 77, 78. Because I mean, I know that, I mean most of my guests do get them brokered, but there's just still such a, such an emphasis on proprietary search, such an interest in it, such an insistence on continuing to do it. And yet, you know, it just for all of the effort that it requires, it just seems to yield such thin benefits. But that didn't really surprise you. It's like, why do it? Like, I mean, if only 10% or 12% of people, self funded searchers are finding their deals that way, why do it?

[9:45] Guest: Well, and again, if you're kind of comparing, contrast the traditional model to the self funded model, you know, self funded obviously is paying for it for themselves. For themselves. So their timeline, their window, window economically works a little bit differently. So yeah, you know, if it's easier going the brokered route, you know, go ahead and do that because it seems to have been very successful.

Host: Yeah, cool. Okay. Another one that jumped out at me. You asked, let's see, do, do you think your acquisition price valuation was fair? So this is, you know, these are self funded CEOs who are looking back at their deal and being asked, hey, what you paid, in retrospect, do you feel like it was fair? This number 98% said yes. So basically one person, it was just one no response, that they were like, no, my acquisition valuation price was fair. How do you interpret such a screaming result?

Guest: Yeah, this is interesting. And again, the idea of it being brokered, I think the idea is that you sort of get taken advantage of if you're going down the brokered route. But you know, most of them are getting their deals through the brokers and at the end of the day they thought that their value was fair. Part of that though is one of the other questions was after, did you have to materially, materially renegotiate your deal after signed loi. And I think what the the answer was like at least 50% said that they had to renegotiate the deal. So at the end of the day to still kind of get it in that, that fair valuation, there was a little bit of kind of haggling or whatever the negotiation points were afterwards. But I thought that was an astounding number two, that people really did feel the valuation was fair and part of that. And again, this is all our assumptions as to how it worked out fair. But with the self funded model, especially going sba, our, our constraints are a little bit different. They're debt service coverage driven versus the traditional model that can pay afford to pay multiples for different reasons because you're bringing in a lot more equity versus SBA where they're, they're more highly leveraged. So your affordability works a little bit differently. So your, your multiples valuation range is a lot different than the traditional world. So maybe that, maybe that should have not have been a surprise that 97% felt their valuation was fairly priced.

[12:15] Host: Yeah, yeah, no, it's a, it's a good point. The SBA loan just basically, yeah, it sets constraints on what the multiple can really b. Which works in searchers favor because they can just say the bank is the bad guy and I can only buy your business if we can get to a multiple in this range. I also just saw that number as just a testament to how compelling acquisition entrepreneurship is. It's like people are pretty psyched with the deal that they made. And part of what really draws us all to this space is how relatively affordable some of these great but small businesses are. And it's just, it's, it's kind of why a lot of people are here in the first place. And this just kind of confirmed that. Cool. Let's move to how long it took people. So this one was kind of another, I thought pretty positive result. How long did you search before you found the deal that you closed on? So basically, you know, how long were people search across these 49 searchers? And, and let me get to that slide. Where is it?

Guest: Yeah, it was 30%. Yeah, yeah. 30% from the start of their search found and closed their deal within six months. That was surprising. I thought that that six month mark would have been less, but. So 30% found their deal in less than six months, 60% found their deal, started searching and found their deal and closed on it within a year. So 60% started and closed within a year. And I thought that that was to your point. Well, I thought that was pleasantly surprising in a good way for sure.

Host: You know, and I think this is especially, especially the 30% were less than six months. That's just, you know, we all are just told that we need to expect a longer, a longer search than that and to be responsible, we probably should. But it's nice to hear that fully 30% find something in less than six months. But I also wonder if part of the reason that we're surprised is because we've kind of been anchored to this two year number because we always hear that from the traditional search fund world and kind of fail to remind ourselves that that's very specific to traditional search funds, not necessarily to self funded search. And so this two year number we really shouldn't kind of be anchoring to and according to this data we should really be more anchoring to one year because it's kind of like that on the bell curve. It's kind of like one year kind of seems to sit at the top of the bell curve.

Guest: Yeah. Now the other 40% that took longer than a year, I know that they would still caution folks that, you know, you might have to put some time in.

[15:07] Host: Yeah.

Guest: And we probably would ask a more nuanced question on our next survey next year we didn't differentiate between okay, it was longer than a year, but we didn't differentiate well with is that another three months. So we'll get better about asking some questions next time.

Host: But you are right to point out so 6 of the respondents, so 12% of people did search for over two years. So not to say that it was short searches for everybody at all. 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 of. Oberle is a specialty insurance brokerage for searchers by a former searcher. Check out oberle-risk.com ob e r l e-risk.com link in the show notes. How about this, the question about how competitive the deal process was. So the question was did you have a competitive deal process where multiple buyers were vying for the LOI? 65% said no, which I took to be another happy result. So 65% of your of these 49 successful searchers were not competing with other searchers or PE firms or whomever for their deals. Any interpretation on that one?

Guest: No, I thought that that was really interesting. You know, now obviously we're in an inflection Point. And that's the other thing it'll be interesting to see when we survey again using some of these same questions. Now we're at an inflection point in what's happening in sort of the economy in the world today. Does that answer change? Are there less good deals out there? Is there more competition for each deal? That's a good one. Now going forward, I don't know. But that did surprise me. I just sort of intuitively felt that it was much more competitive than that. So I don't know if that. And there's one of the questions we asked about what was the critical critical success factors in sourcing and closing your deal that I thought was interesting. And will you reminding me was like really, actually probably a really obvious question. But the seller relationship was so important. 30% of respondents said the seller relationship is the, was the most important thing for them sourcing that deal and then closing it. So maybe this is kind of akin to that, that the sellers really liked these buyers so much that it, it wasn't, you know, they weren't in competition with other buyers. I don't know if you can make.

[18:12] Host: That's a great point. Yeah, yeah, it's an, it's an interesting connection. And so let's segue into that question. What and that was what do you think the critical success factors were in sourcing and closing your deal? As you said, Lisa? And so I'll just read the six answers here. It was perseverance, seller relationship, getting help from others, willingness to compromise, efficient use of time. And then other. It's going to be hard for the audience to remember all of those. But the takeaway here is that the two critical success factors, the winners from among those answers were perseverance. And I guess this was select all that apply. Was that how this answer was offered to folks? So 73% of searchers said perseverance was a critical success success factor. Not surprising. We all know how hard it is. And then 60% said the seller relationship. And so that's all. Yeah, as you said, that's also not surprising because my guests over and over and over just talk about how that the rapport building, the trust building with their seller is just, was so key to making it all come together and not just from the seller's perspective, also from their own perspective and their own, you know, getting comfortable with actually moving forward with the transaction. So part time versus versus full time searching. So did you conduct a full time search? Yes was 67%. No was 33%. So I guess I'M a little surprised that the no was as high as that. I just had a searcher on who's whose interview hasn't yet aired. But he talks about how the difference when he went from part time searching to full time searching was just night and day where you know, his and this kind of is stating the obvious but you know, his learning, the acceleration of his learning was just so incredible that anyway he just wished he had been full time searching all the time and now is just a hard proponent of full time search. So I guess I'm surprised that fully 33% of people were successful part time searching. What do you see anecdotally among your clients, Lisa, on that question?

Guest: Just over the years I would say the full time search is just definitely the more successful approach. The interesting thing here is if we could have just gotten so complicated with our questions that the follow on to this is if you didn't conduct a full time search, how long did it take you? I think that's the thing where people are thinking, yeah, you can conduct a part time search but it's going to take you way longer. I think that is maybe the assumption everyone makes. I don't know. That's a part when we saw this answer like oh, we should have asked well how long did it take? Because that's why you ask that question.

Host: Totally.

[21:01] Guest: And that was the part we sort of missed in asking the question in the best way possible anyway.

Host: Yeah, like those six people who took longer than two years, like maybe it correlates perfectly to like they're all part time searchers sort of thing.

Guest: Maybe so, but I think that there are more full time searchers now than there ever were. Because this idea of self funded search, just observationally for me, being a lender in the ecosystem over the years, being a full time self funded searcher is much more accepted and supported than it's ever been. Because before like a few years back that was kind of a weird concept. Now it's, you know, being a full time search. I think you just think that it's going to put you in a more successful position faster if you can at all take on a full time search.

Host: Well, and it also just feeds on itself because it just makes the world of search that much more competitive. So if you know you're the other searchers are out there all full time searching and you're part time searching, you're at a competitive disadvantage and so that impels you to then full time search. So it just kind of forces us all in that direction. Okay. A couple more, Lisa, then, then I'm going to let you go here. But did you go up mark up or down market to compare to your original expectations? This was split essentially evenly, 50, 50. So half of searchers went down market compared to what they originally expected. Half went up market. How do you interpret that one, Lisa?

Guest: You know, I thought that that was really interesting also because I think, and you and I talked about this, I think the common idea or common wisdom out there is that searchers will start with a higher number in mind. They get into a lot of competition with strategics or private equity and those deals get gobbled up so they have to come down market. So that part of it didn't surprise me was the other answer. Oh, I actually bought a bigger business than I set out to do. So that, to me that was the interesting statistic there. And then you and I talked about it a little bit because one of our questions we also asked was did you have investors on your deal? And 44% of our self funded searchers had investors. So I'm just making an assumption here that the ability to go up market is now in combination with, now there are SBA self funded investors out there. So you can go up market when you can bring in more money. I just observationally see that that's definitely a trend that's happened. More investors in the market are allowing bigger deals. I don't know if that's the connection here or not, but that's what came to mind for me.

Host: And expand on that a little bit, Lisa. Just, just separate from the findings themselves. But what you've seen in your own time in search and this availability of capital now to self funded searchers. So what when you started it was like, you know, if they took investment at all, it was friends and family and now there are actual firms or funds set up specifically for searchers sort of thing. Talk to me about what you've seen

[24:04] Guest: that basically you encapsulated that really, really well. Our self funded searchers, while they were coming from Harvard and MIT and going through the Stanford programs and things like that, coming in with that real professional resume that we see with their self funded searchers back in 2017, 2018, there was more friends and family then as this concept of self funded really took hold and using, you know, SBA as a vehicle for that and coming up with economic models that work for the investors and institutional and just very professional investors coming in, figuring out how SBA can work for the searcher and the investor, that definitely has taken hold in the last couple of years. And then now there's lenders ourselves. Byline also has an SBA Senior Plus Live Oak or Plus Junior Debt. Now there's loan products out there that will allow a larger loan to be financed, a larger structure to be financed also. And so the lenders have honed the ability to make that happen, too. So both the debt and the equity side has gotten just more, I guess, professional on that idea of larger deals.

Host: Well, it's all. It all strikes me as positive for searchers. Just more. More ways to get stuff done. Cool. Let's do one more here. Lisa, how long did it take you to discuss valuation with the seller? And the answers to that were in terms of the number of calls. So one call, two calls, three calls, four calls, two calls was the clear outlier there, 47%. So almost half of people said it took them two calls to discuss valuation with the seller. And so what that means is like meeting the seller via phone, via Zoom. When did they broach the topic first? Is that. Is that what that means? And most people waited to the second go. So. So the first call would be kind of a getting to know you, and the second call would be getting into, you know, brass tacks, I guess.

Guest: Right? Yeah.

Host: Okay. Okay.

Guest: So within the first two calls, what was the answer to that? I'm not actually pulling up my slide here, but between the first two calls, that would have been the first.

Host: Yeah, yeah. So within the first two calls is. Fully 70% of people did it within the first two calls, but 27% did it in the first call. So they wasted no time.

Guest: Yeah, exactly. So we would call that efficient. Yeah, totally.

Host: And then. And then you got 14% who. Who were four or more calls. So they were. They were really, I guess, cultivating a relationship with a seller before they started talking hard numbers.

[27:03] Guest: And again, were those the proprietary deals that would have been. You know, there's. Once you see the data, then you're like, oh, then you have more questions. Well, why was that, that? Are these the broker deals? And are, you know, so just questions beget questions, you know?

Host: Totally. Well, it's A great version 1 of this information sorely needed in the marketplace. As I said, I think Live Oak is super well positioned to do it. So I'm really glad you guys, you and Heather just took the initiative. It's super, super cool. Where can people download this data, Lisa?

Guest: You know, we are going to be emailing it out to our entire network. I'm assuming we'll probably put it on Linked and then we'll definitely live on our search fund landing page on our web pages. So also, if you wanted to email me, for those of folks that are sort of new to finding my stuff or Heather's and my stuff, if someone wanted to email me, I can make sure that they get it. That's Lisa Forest, F O R R E s t@liveoak bank.

Host: And is it available now or is there kind of an official release date or what?

Guest: Two more weeks. We're going to maybe put a little of fancy, fancy stuff on the slides and then we're just going to get that out. But we're going to share all the raw data with you. We're in the process of making it look pretty cool.

Host: Great. Well, thank you again, Lisa, for coming on, giving Acquiring Minds listeners a sneak peek. Very interesting. I encourage everybody to go and get the actual, the full data product here. There was a lot more that we didn't cover. So thanks for your time. Lisa, thanks for coming on and I'm sure you'll be back on here before too long.

Guest: All right, thanks, Will. Thanks so much. And hello, all the listeners.