Host: Today's episode is a rebroadcast of a live recording done last week. You've probably heard me promoting it. Over the last few episodes, Acquiring Minds staged a debate about the merits of self funded search versus traditional search funds, with two passionate advocates for each model, Robert Graham and Greg Jeronimus. And when I say passionate, you'll hear sparks fly at points. But sparks aside, a lot of ground was covered in what was a really substantive debate. Also, a reminder, the choice between traditional and self funded is situational. If you've listened to even just a few Acquiring Minds episodes, you know that each searcher comes to this adventure with their own very particular aspirations. Financial resources, networks, etc. So while Greg and Robert are both convincing guys, you have to apply what each of them say to your unique goals, your unique situation. And with that said, enjoy the debate. 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. Welcome everyone, to a live recording of Acquiring Minds. I'm the founder and host of Acquiring Minds, Will Smith, and I'm really excited and honored actually to be hosting this event, which, as you all know, is a debate about the merits of traditional search fund versus the self funded model. These two different approaches to search. It's a perennial debate, really, in the world of search, and it's a very important decision that every acquisition entrepreneur considers before embarking on their search. And it's important because as we'll see today, the model you choose touches so many aspects of not just the search itself, not just the search process, but really your entire journey as an acquisition entrepreneur. So my goal as host today is that everybody come away smarter and better equipped to make this important decision between traditional and self funded in their own search. Our debaters are Greg Geronimus and Robert Graham. Thank you gentlemen for doing this. Greg is representing traditional search funds. He and a partner acquired, grew and exited a business with a traditional search fund, and he is now an investor himself in traditional search funds. Robert is representing the self funded side and he also has been both acquisition entrepreneur and investor of his preferred model, self funded. To learn more about both of these guys, of course you can find them on LinkedIn and I will provide links to their profiles in the show notes when this airs on the podcast. But you can also find quick bios of both of them on the registration page that you use to sign up for this event. Okay, let's get into it. I want to start with definitions. So I presume that our audience today has knowledge of both models already. So let's keep this, this bit brief, but I do want to just set the stage. So Greg, if you'd kick it off, would you give us a definition of the traditional of traditional search funds and kind of bullet point it for us, particularly the key differentiators of the model. And then Robert, I'll ask you to do the same for self funded. Greg, go ahead.

[3:33] Guest 2: Sure.

Guest 3: And thanks again Will for having us excited for the discussion soon. When we talk about traditional search, we're talking about the proven search model, the known quantity, the model that's referenced in the Stanford study that everybody likes to talk about. Most anyone involved in search has some reference to the Stanford study on their website, even those involved in self funded search. And just to get into the details, traditional search is a, is a partnership between searchers and investors where searchers receive upfront money, also known as search search capital, from which they draw a decent salary and cover operating expenses for two years while they search for a business to acquire and then they raise another round of capital to fund the deal, most typically from that same group of investors. And I'd say the key tenants and key advantages of traditional search, and we'll get into more later, are the support and credibility coming from that investor group to help you find and close typically a much larger deal than what you would find in traditional in self funded search and support from that investor group to help you be as successful as possible and de risk the operating phase to help you grow the business as much as possible and realize the greatest gains for everybody involved. And just quickly before we get into some of the details and back and forth, I think all forms of ETA are awesome and I have the utmost respect for self funded searchers and applaud their success, including Robert's. I just, I think it's important for everybody to have all the information so excited for this discussion.

Host: Thanks for that, Greg. Robert, would you give us a definition of the self funded side?

Guest 2: First of all, thank you for the applause Greg, greatly appreciate that it's a self loaded searcher. But so I'm going to just kind of a caveat here. I'm going to answer Will's questions today from the perspective of the broader self funded search space. And the self funded search space is pretty diverse, right? You've got folks pursuing many different types of strategies within the space. But I'm going to do my best to try to answer the questions from the broadest perspective on the space as possible. My firm, SIG specifically, what we do is we provide advice and support for self funded searchers. So there are some statistics that I'm going to cite today. We don't have a Stanford study for self funded search. To Greg's point, there are going to be some statistics I'm going to cite today that are SIG specific statistics because those are really the best statistics that I have available. But in general, just to define the self funded search space, you know, it is an entrepreneur who wants to go acquire a business and what they do is they make the decision early on to fund their own search, right? So they're going to cover whatever due diligence and search costs that they're going to incur during the search phase of finding a business, you know, and kind of really manage that process for the most part themselves. Once they find a business to acquire though, oftentimes they bring in outside investors, you know, and I'll talk about some of the misconceptions about self funded search. Oftentimes self funded searchers put together very professionalized boards. Oftentimes self funded searchers acquire pretty large businesses. SIG had a 9 million EBITDA business that a self funded searcher acquired last year. Oftentimes self funded searchers don't use the SBA program, although it is available to them and it's an incredibly attractive form of debt. Not all of them use it and not all of them take personal guarantees. You know, not all of them buy small plumbing companies. A lot of them buy very large, fast growing companies. A self funded searcher has maximum flexibility. They can buy really as large of a business as a traditional searcher. And you know, as some of the examples I've talked about, you'll see that they do it all the time. So, you know, what it comes down to is by not taking funds up front to pay for search costs and due diligence costs, searchers don't have to agree to all the strings attached that comes with that funding. Right? So many self funded searchers end up with a vast portion of ownership and control in the company they acquire, which is quite different from the traditional search side. And there are pros and cons to both models. Don't get me wrong, the often quoted conventional wisdom is that all models of entrepreneurship through acquisition are good choices that need to be weighed equally. It sounds very objective and fair, but the point I'm going to be making today is that that conventional wisdom, it just simply doesn't stand up to critical analysis. And I think that for the vast majority of entrepreneurs. Self funded search provides the highest probability path to superior economic outcomes and also true business ownership. And you know, I say all that not with disrespect, it's just looking at the numbers and the facts. So thanks. Well, appreciate it.

[8:56] Host: Okay, well let's, let's get right into the biggest consideration of all is going to be the economics. So as you just touched on Robert, it is commonly understood in the traditional that in a traditional search fund the search is going to be going after a bigger deal. So while the overall ownership doesn't exceed 25% and Greg, I'm going to ask you to actually define how this ownership structure works, but it won't exceed 25%. As a traditional searcher, it is generally understood to be a smaller piece but of a larger pie, a larger deal. And self funded deals are smaller conventionally. So while the searcher might own 80% of the business and it's on the self funded size, it's a smaller business. So it's a classic bigger slice of smaller pie or smaller slice of bigger pie.

[9:46] Guest 2: Now Robert, hold on, hold on, Robert,

Guest 3: hold on for a second. Hold on for a second, Robert, let's do it. I think I want to clarify something that Robert mentioned and I'd encourage everybody to listen to the podcast acquiring minds from November 2021 where Robert's business partner at SIG, Jordan Carter said that the range for self funded search deals is between 3 and 8 million dollars of enterprise value. So you know, there aren't stats for, for self funded search that are readily available. But I agree, you know, listening to professionals that live and breathe in the self funded space is, is quite important. So if you think about the, the range being typically from 3 to 8 million dollars of enterprise value and you compare that to traditional search where 46% of traditional deals are larger than $12 million of enterprise value, we are talking there is a substantial difference in the size of the pie and I think to cherry pick examples where there have been larger self funded deals is I just think is disingenuous and doesn't. I think this conversation should serve the interests of people who are trying to make an important decision for their careers and I think we should be as, as objective as possible in terms of presenting the facts. And I think the range that Jordan, your business partner, gave was very helpful for me in understanding the landscape.

Host: Greg, tell us the, the, I said the 25%. For those in the audience who don't know, explain just very briefly how the economic terms of traditional work.

Guest 2: Sure.

Guest 3: So it's broken up into a third, a third, a third of the 25%. So you, the searcher will get eight and a third of the, of the common equity at close for finding the deal, eight and a third vesting over time, typically four years for staying with the business and then eight and a third subject to achieving certain performance hurdles in, you know, in the exit or the ultimate realization of the business. But I do think it's important in addition to looking at the size of the pie compared with the percentages, I think you also have to look at the probability of success. And what you have on the traditional side is a lot of data around significant wealth creation for traditional searchers. If you look at the Stanford study, there are 133 data points collected. 29 of those had searchers making over $8 million, 42 over $4 million and 69 over $2 million. And that doesn't account for what searchers are able to make with their rollover. Typically if it's a private equity acquired deal or just the general second bite at the apple. By contrast, we have no stats on self funded search and I have plenty of reasons to be skeptical just in the absence of data, as anybody should be without, without having seen anything about the, you know, the probability or the actual success metrics of, of self funded searchers.

[13:10] Guest 2: Robert.

Host: Yeah, so you, you have, you, I've, you just cited a very compelling example of a self funded search and I've heard you cite other ones. But are I, are those outliers? What is, what is the typical story? And we're all kind of flying blind here because we don't have a data set. But address Greg's points.

Guest 2: Yeah, I think the Stanford actually maybe the best data set actually to talk about this.

Guest 3: So do you agree with what Jordan said in November?

Guest 2: Greg, I didn't interrupt you, I'm just,

Guest 3: I just want to, I just want to make sure everybody has full information. Did you?

Guest 2: Yeah, we'll, we'll get full information. Yeah, I'm prepared to discuss it. Okay, so you know this whole idea that first of all that you can only buy a small business with that, you know, with the traditional, with the self funded model, that's just a false comparison. You know that 9 million EBITDA deal, that's not the, that's not a unicorn. Okay. So I personally have seen three self funded deals, over 4 million of EBITDA close in the last three months. Okay so they are out there and they're happening. I'll say this, SIG searchers on Average and that's, this is an SIG stat. To Greg's point, there are not a ton of deal stats on self funded deals because there's not a study. But on average they're ending up with 73% common equity ownership in on average 2.6 million EBITDA businesses. Okay, traditional searchers, and I'm pointing at the study that Greg's pointing at the same one, end up with 10% or less ownership at closing, a median of 1.8 million of EBITDA. Okay, so the whole idea that these are giant businesses just, you know, are large businesses or larger than self funded search, it's just not the facts. And you can look to the study yourself to see that. So it really, you know, you'd have to think if you're only ending up with 10% or less of a 1.8 million EBITDA business at closing and that's the median. You know, how does that compare to self funded search? You'd have to, to make it equivalent, you would have to buy a tiny, tiny self funded search company. And I see self funded searchers buy much larger companies all the time. I'll just say that depending on what size of deal you get, the economics here are so important because with a self funded search you can get much better economics. If you get a good deal with the traditional side, you are going to be getting 10% or less at closing, no matter how good of a deal you close. Everyone loves to cite the Stanford studies, 33% IRR. Keep in mind those are the returns to investors, not the searchers. Even the study itself admits, and I'm quoting here, a small number of highly successful search funds disproportionately increase the aggregate returns. Okay, so you have to ask why is there such a huge disparity in terms, why is the traditional searcher on, you know, on media ending up with 10% or less ownership of a 1.8 million EBITDA business, but a self funded searcher can buy a 2,3,4 million E of the business and end up with 80% ownership. How is there such a disparity?

[16:36] Guest 3: Can we, can. There are just some gross mischaracterizations and I just, I don't think that's fair to the audience. I, I think there are a number of people here that are actually trying to make decisions for themselves and their futures. When you say 10%, we're talking about at close, that's not, I know, but, but, but it, but you're, I think you're being a little, a little I

Guest 2: was mischaracterizing it, but you just said.

Guest 3: I think you're being a little too casual with, with how you're, with how you're describing it. It's not. People don't.

Guest 2: That's what I said. Right.

Guest 3: Okay. Okay. Robert, I think we need to, we need to give people all the facts so that they can make an impact.

Guest 2: Finished talking? Can you not interrupt me?

Guest 3: Well, I just think, I don't, I really don't think it's constructive for, for you to.

Host: Okay, Robert, finish your point and then Greg, and then. Your turn, Greg. Finish, finish your point, Robert.

Guest 2: Okay. I think there's a reason for the disparity in terms which is, I mean, it's huge, right? And if you look at the traditional side, all the deals are funded by the small, this small group of investors that tend to be the same investors in every single deal. They're in constant communication with each other. You know, they all demand the exact same terms. And if you're a traditional searcher and you want funding from any one of the investors, you have to agree to the terms that are set by all the investors. So you've got a small group of investors setting terms for everyone. It limits competition and it creates a situation where searchers can't get market efficient or market fair terms. And that's why terms are the way they are. And there's such a, you know, I believe that's the reason there's such a disparity. So what I would say is traditional search capital, it's more expensive, it's a more expensive form of capital than just about any form of capital that we normally think about. It's more expensive than private equity capital. It's more expensive than venture capital. It's more expensive than credit card debt or expensive than a payday loan when you consider how much upside a searcher gives away by taking traditional search capital for their certified.

[18:36] Host: Greg.

Guest 2: Yeah. Here's a statistic. To get the additional eight and a third equity that Greg talked about related to performance, a searcher has to return 25 to 35% IRR in their deal. Okay? That's a hurdle rate over four times higher than what LPs would expect from a private equity firm. Okay. It's not even comparable to other forms of capital. Okay? So what I would say is having a set of terms imposed by a small group of investors on searchers isn't good for anyone but those investors. And I don't know how anyone can make an argument with a straight face the other way.

Guest 3: There Are. There are hundreds of traditional search investors. So I think that that also is a mischaracterization. Okay, I think the.

Host: Wait, let, let Greg answer.

Guest 3: There are dozens of data points which, which you didn't acknowledge. There are dozens of data points of searchers making exceptional, you know, exceptional outcomes for them, themselves and their families. And I think that reflects a, know a well functioning market where both searchers and investors are doing well. I think, I think everybody wants business to be a win win and I think search is a perfect example of a true win win. And we really, we. You can talk about percentages like common numbers, but nobody, but nobody, nobody. I've never been able to, to deposit a percentage of common equity in the bank. I don't think that anybody would be successful in doing that. People talk, it's about the results, not only the size of the deal, the probability of success, yes, the percentage ownership as well. But there's a lot more to consider than just simply the percentage of common equity. You talk about the size in traditional search deals. There are more and more deals getting done that are software deals with zero EBITDA or even negative cash flow that drags down or skews the data. In the Stanford study. I would just point to the fact that 40, 46% of search deals are greater than $12 million of enterprise value. I think that's much more representative of the reality. There are a lot of search deals that are quite large and again as Jordan Roberts partner said, the typical self funded search deal is in the 3 to 8 million dollars of enterprise value range which is just a different, different ballpark altogether.

[21:10] Host: Greg, could, could you address. I myself am curious about the eight and a third. Eight and a third. Eight and a third. This, these, that these terms are so fixed and so, so I could be a searcher who has a phenomenal track record. I mean just a really, really good candidate as a searcher. And the deal that I find might just be a screaming opportunity versus maybe a less capable searcher or a less attractive deal. And yet the terms are still sort of etched in stone and market force is traditional. Sort of the traditional negotiation that goes on between investors and the person they're investing in doesn't really take place because it's fixed. This price of this capital is kind of fixed. I am curious about that. Could you address it? How is it fixed and stayed fixed for so long?

Guest 3: Yeah, you know, it's a, that's a great question and it's, I think it's an interesting thought experiment to. But the reality is that I think it's been, it's stayed as it is for so long because of, you know, all of the success that traditional searchers have had over the years. Traditional searchers have done extraordinarily well and had life changing economic events for themselves and their families and traditional search has become increasingly popular. If, if the model was broken, if this was fundamentally unfair, you would not see the increase in prop. In popularity of traditional search. There are some markets that just continue to stay as, as they are. Talking about private equity. Private equity is a great example.

Guest 2: You're going to make the argument that asset class can be unpopular because there's an unfair distribution of profits. You're seriously going to make that argument?

Guest 3: Greg, I didn't understand your comment.

Guest 2: You just said it wouldn't be a popular model if there was an unfair distribution of profits. If it was an unfair model. You're really going to make that argument?

Guest 3: Yeah, I'll make that argument.

Guest 2: You're really going to say that market inefficient asset class because of that, it's just inherently going to be unpopular.

Guest 3: I don't really understand the point you're making. My point is why would traditional search increase in popularity so dramatically if it was fundamentally unfair? The model works. The model works. Searchers have done extraordinarily well. Investors have done well. That's a win win. I think we like win wins and that's why the model has persisted. If, okay, got like, if people don't like the terms or the, you know, relative inflexibility, then if they can somehow afford to go self funded, then that's, you know, that's certainly their prerogative.

Host: Guys, let's move on to the next topic because we're only on the first question and we're 25 minutes in. So this, this ownership difference of, let's call it 25% capped the traditional search, you're only going to have ever have 25% and so you're never going to be a majority owner and therefore the investors will have a lot of influence on the traditional search fund side so they can fire you. Hardly ever happens as I understand it, but possible. Meanwhile in self funded, the searcher is going to own a majority of the shares and therefore doesn't really have to answer to investors and a board in the same way. On Jim Sharp's blog he talks about this as kind of do you want to be rich, do you want to be king? Another framing is do you want to be CEO or do you want to be owner? CEO versus owner. So in traditional search fund, you're maybe a CEO with equity upside, a lot of equity upside versus self funded. You're the owner of the enterprise. Greg, would you agree with the CEO versus owner framing why or why not?

[24:56] Guest 3: I would encourage anybody to take a poll on traditional searchers and ask them if they, if they didn't, if they felt like they were an owner, the key owner of the business, I think overwhelmingly they would say, as I had in my experience and the vast majority of traditional searchers that I talked to, have a significant amount of entrepreneurial autonomy, control and true sense of ownership. I think there's, you know, I think there's this misconception that, you know, board involvement, governance, you know, accountability is all bad. Well, I think the most common conversation that we have with as, you know, as board members, with the, with the searchers that we work with is how can we help you more? How can we support you to grow this business even more? What else can we be doing to help? What other resources can we provide? And frankly, I think it's a great experience to have to learn how to interact with a professional board. I think that serves you extremely well for your, you know, from a professional development perspective and for your future pursuit. So I think there's a massive misunderstanding and I think by contrast the absence of a real board and yes, some self funded deals have boards, but I think we can all agree that that's a, a small percentage have real well functioning boards. I think that represents not only risk to investors, but risk to searchers. These are first time owner operators for the most part without that sort of, you know, consistent coaching and, you know, and support that I think is critical.

Host: Robert, you want to address this question of the board involvement, governance and I'll

Guest 2: give that point to Greg. You know, there is a large, you know, proportion, I don't know what it is exactly of self funded searchers who do not have, you know, the level of board, you know, oversight and structure that traditional searchers do. I think that, you know, one important thing on the, on the self funded side is self funded searchers get to decide what board structure, what amount of control, what amount of governance, what amount of mentoring is right for them. It's not decided by someone else, it's decided by them. They're the entrepreneur, they're the business owner. They don't have to work with board members that they don't get along with. They can choose the right set of board members who have maybe direct industry experience. That's what my board looks like. I'VE got board members who have theoretically worked in the industry, you know, and you know, I've chosen those people to be on my board, you know, and a lot of self funded searchers do that. I think a lot of self funded searchers receive mentoring from their investors. A lot of them do have professionalized boards. So we can't just, you know, make these sweeping generalizations about self funded surge. You know, I think an important point here will, I want to address directly your question of CEO versus owner. So, you know, if you look at traditional search versus self funded search, on the traditional, excuse me, on the self funded side, generally speaking, you cannot be fired. Okay? There are exceptions to that. But you know, and this whole idea that traditional funded searchers are never fired or it happens very rarely, I just disagree with that and I don't have statistics for that. They're conveniently not in the Stanford study. But I can just give you my anecdotal experience and I'll tell you that several of my section mates from Harvard Business School went the traditional funded route and have been fired and lost their companies.

[28:42] Guest 3: So it's exceeding, it's exceedingly rare. I wish it were in the study too, but it's exceedingly rare. I just want to make that clear.

Guest 2: I don't know what the number is. Yeah, so anyway, you know, point being, if you're, if you are a self funded searcher, generally speaking, you're going to have majority control of the board. You're going to have a controlling share of the votes. You do not, you're not forced to report out in a certain way, you know, and I'll tell you, you know, if you're going to argue that, you know, traditional searchers are less, you know, are, are not as much employees as, as they are owners, I completely disagree with that and I, I understand, you know, how Bright felt, you know, and how his friends feel about being owners. But you know, how we feel. And the backs are two different things, right? Traditional searchers sign employment agreements. They're expected to perform their jobs within certain parameters. In exchange for a salary, they can be terminated. Their performance is evaluated by folks who are in control, right? The controlling investors, by any definition, the Department of Labor, the irs, academia and anyone else objectively reviewing the amount of control that the controlling shareholders have over the activities of the searcher, they would be defined as an employee. So that's, that's all there is to it.

[30:05] Guest 3: I don't know that there, that's all there is to it. Any traditional searcher that you, that I've talked to that you would, that you would talk to has significant ownership and I haven't talked to one that doesn't feel very much like an owner. And I think that's that is what counts and is the experience that you have, not the technical IRS definition.

Host: Well, and let's talk a little bit about some particulars on the flexibility and optionality of the two models. So related to what we're already talking about, but being more specific, in traditional search funds, two specific expectations that are pretty firm and traditional. The first one is you're expected to exit. So like traditional private equity, your investors are expecting you to acquire, grow, exit, maximize, rrr, return the capital. With self funded, there isn't quite the same expectation, or maybe dramatically there isn't the same expectation. So if you want to, for example, acquire a business to hold indefinitely, you almost have to go self funded, as I understand it. Greg, I'm going to have you weigh in here first. But one more classic requirement of traditional search funds is this question of location. You're expected to move wherever opportunity presents itself. So if you find a deal in rural Alabama, your investors are going to expect that you will move to rural Alabama. No offense to rural Alabama. So Greg, to you, do I have that right? And how would you address that? Because that does feel quite a bit more restrictive.

Guest 3: Roll Tide, Alabama's a great. So I think those are.

Guest 2: There are a couple of misconceptions in

Guest 3: there, but I will concede this point. Overall, you are by and large expected to exit. But there are several search deals that traditional search deals that are held for incredibly long periods of time, and there are a number of traditional search investors, including us at Footbridge, that we're happy to hold a business indefinitely. There is a general expectation around geographic flexibility, although the trend in traditional search is to be much more inviting of more narrow geographic searches within reason. So plenty of searches are sort of regional in nature, the Northeast, Southeast, Midwest, west coast, that that will fly in traditional search. But taking a step back, I do think flexibility and optionality are the best reasons to go self funded if you can somehow afford to go self funded. I think that's an important factor to acknowledge here. Young or mid career professionals, people out of business school, or even if you work for a handful of years. We're talking about a very small subset of people who can put aside the money to not only fund themselves, but fund the operating cost and potential due diligence expenses required to pursue the self funded model. So you know, if somebody can pursue it, I Do think the flexibility is that is the best reason to go down that path. But I would describe the flexibility slightly differently. Flexibility to go for a very small business where you know, if you go for a very small business or if that's potentially of interest to you, having the ability to flex up on the economics can potentially make that work. Or if you have a very targeted geographic search. So if you wanted to buy something around Milwaukee, for example, that's probably not going to work in a traditional context, but you can certainly do that self funded. And I would also say if you're interested in eta, but you're also contemplating maybe I'll do a startup. If I have a startup idea and you want that optionality or flexibility then then I do think that the self funded model is right for you. So I definitely think it's by definition more flexible.

[34:20] Host: Robert, he conceded your point. Do you need to add anything there much to say?

Guest 2: Well, no, I do agree with those points. I think there are certain to give Greg some, you know, some concession here. There are situations where traditional searchers have rolled equity and you know, there are situations I think where that has happened. I think it's pretty rare. But you know, on the flexibility piece, I mean that is a pretty big reason people go self funded search, you know, the ability to acquire in a certain geography you really can acquire in just about any industry. You know, I'll add you can even acquire a minority ownership. You know, in a larger business you really can't really do that with the traditional search. You can acquire franchises that have restrictions on ownership, you know, and you can use some alternative forms of debt and equity that can't be used with the traditional side which I think is actually one of the bigger points here. It's not being able to buy a small business. It's, you know, what you can do in terms of your structure and the types of companies you can buy. It's just a maximum amount of flexibility which is a huge help I think considering that even the Stanford study searchers 1 out of 3 don't find businesses to acquire. So flexibility and being opportunistic are very important to success. I think in the search space.

Host: Greg, you touched on the fact that it costs money to do a deal to search and then the due diligence cost, the broken deal cost, which Robert, you refer to a lot of. So let's get into the question of risk here. So first of all there's the upfront risk of if you're really serious about search, you're probably doing it full Time. So there's the opportunity cost of not earning income anymore in a job, and then there's the additional outlay of cost related to your search, travel, due diligence, attorneys, et cetera, et cetera, et cetera. You might have 1, 2, 3 broken deals that you spend literally tens of thousands of dollars on and have nothing to show for it. So it's real and that's its own cost. And that's before you get across, find a deal and make that acquisition. When and if you do do that, of course, self funded, if you're using an SBA loan, which many, many self funded searchers are, you have the infamous personal guarantee, which means if you don't pay back that loan, the bank can really, really come after you. Lenders themselves will not mince words here. So let's just get into that. Robert, why don't you go first, since self funded looks a little weaker, frankly, on this question of risk.

[37:02] Guest 2: Oh yeah, I love the question. Actually, I'm going to cite some percentages. I'm sorry, Greg, I know you don't like percentages, but. All right, so starting off, if you think about risk, relative risk between the two models, let's say. Well, to your point, a lot of searchers are using the SBA. Okay, so let's say you buy a company for four times and you use 90% leverage, right? You're going the SBA route. That'd be a typical self funded deal, right? 90% leverage through the SBA. And when I say leverage, I mean LTV loan to value. Right? 90% LTV on a forex deal. Okay, so you know what the median purchase multiple in the Stanford study is? It's six times. And how much debt is an average traditional searcher putting on their company? Well, you know, probably 50 to 60%, sometimes a little more, but it's in that range. Okay, so if you actually model that out, the debt service coverage of those two deals is the same. Okay. And that's not even factoring in the fact that conventional debt is going to have much more aggressive principal amortization, for the most part, financial covenants, you can be fired. There's so many other considerations on top of that. So what I'm going to tell you, what I would tell you is the median self funded deal from a debt perspective, from a debt service coverage perspective isn't any riskier than the median traditional funded deal. And there's a whole bunch of risks outside of debt service coverage that are even being considered here. So I guess that'd be my first response there. The other piece is how often are personal guarantees actually exercised? Very, very rarely. It's extremely easy to shelter your personal assets with basic estate planning. So there's a whole bunch of reasons why I think and also a lot of self funded searchers don't even take pgs, you know, it is the majority that do, I will give you that. But yeah, I, I don't think that there's a clear risk advantage actually for traditional cern.

[39:14] Guest 3: Greg? Yeah, I, I, I also think that the concern about the personal guarantee I would agree with Robert is overblown. I understand the sensitivity of it, but I think it's less of a concern. But I, I think you know, there are two components to probability success and first, as you noted, Will is closing the deal and we have data from the Stanford study that about two thirds of traditional searchers will close a deal and we have no data as it relates to self funded search about the probability of success. We could only speculate about the probability of success in closing a deal. With self funded search. I have concerns about having less credibility with sellers, less support from investors and the impact that that very well may have on the probability of closing a deal. But I also think you have to look when you think about risk, you have to think about what are the fallback options if a searcher comes up empty handed. If you're a traditional searcher, you were funded for two years, you're given a salary, working closely with investors, building a relationship with them and many investors will go out of their way. This happens all the time to help traditional searchers who came up empty handed, who worked hard but came up empty handed find really interesting career paths after. So not only have you taken in some capital, some money and not depleting your savings if you had those savings somehow, but you're also supported from your investors in terms of figuring out what's next. And then it's also, you know, what's the probability of success post close and thinking about the debt and debt service. Those are fair points but that's just one piece of the picture. I think typically traditional deals are larger with more cash flow to reinvest, to grow the business, to stabilize the business, with bigger teams, with more resources, human capital resources to grow and sustain the business with more support from more formal, engaged boards. And you know, not surprisingly you see a very high probability of success not only in terms of closing the deals with traditional search, but in terms of the outcomes that they deliver post close. And I think, you know, we again we can only speculate about the success of self funded search deals. And again, I have, you know, reasons for concern about, you know, smaller businesses with smaller teams with, without, you know, formal, typically without formal, you know, board dynamics. And then there's also the question of, you know, I don't, I don't, I honestly don't know the answer. But you know, what happens in a self funded search deal when there needs to be more sort of equity capital put in is that, you know, in traditional search there are, you know, dozens of examples of investors stepping up and supporting companies to help them, you know, get through a rough spot. And I'm just, you know, it's not, not obvious to me that there's the same practice of self funded search investors rallying to support those companies.

[42:33] Host: Robert, could you address Greg and let me just segment it into. Talk to me about how the self funded model increases probability of closing and then talk to me about how the self funded its strengths post close and how the self funded model facilitates success. Once I'm, once I'm an owner of the business, the owner of the business, the questions will.

Guest 2: So we don't have statistics that show that going the self funded route increases the probability of success. I'll tell you that the only statistics I can cite are SIG statistics and our percentages of close are much higher than the Stanford study. The point of the Stanford study I think that I'd point to is one out of three searchers who launch a traditional search don't end up finding a company and just quit searching. But I do want to talk about the support of investors that's pointed to on the traditional side. You know, on the self funded side there you can find investors who are very supportive. There's an entire ecosystem of investors who invested in many self funded search deals, many of whom were self funded searchers beforehand. But the whole idea on the traditional side that you get superior mentorship, I just kind of disagree with that. The first piece would be again, one out of three searchers don't even find deals when they have that mentorship. 28% of traditional solo searchers that close deals end up destroying capital with a loss and 56% of traditional solo searchers end up returning less than two times capital. So the numbers, even with all that mentorship and support aren't that great. And Greg cited a quote from my business partner earlier in the talk and I want to cite a quote from him. Not a direct quote, but he did a think like an owner podcast, you know, just a couple of months ago. And in The Think like an Owner podcast. He actually said traditional search investors often have groups of 50 plus searchers that they've invested in and oftentimes don't even have enough time to return phone calls or emails. And that was part of his rationale for starting Footbridge, which, you know, I will congratulate him on Footbridge. I think that he's pursuing a model that's potentially filling a real spot of issue on the traditional search side. But the whole idea of all this mentorship and support I just don't think is right. One other statistic I'd like to cite, often traditional investors don't even come through for their searchers at the most important time, which is when those searchers need capital to close their deals. So Endurance Search just did a study. It found that 50% over 50% actually of traditional search searchers don't have equity gaps in their cap tables when it comes time when they need to close their deal. So I think that the question of how much additional success does taking the traditional search money in terms up front, how much does it get you? You know, I'm not, I'm not sold by the Stanford statistics or the other studies I've read.

[45:55] Guest 3: Yeah, I just think, I think it's easy to find data points to support your argument when there are no data points on the other side. I think that's, I think just everybody should be aware that that's what's happening here. And I think 2/3 probability of success and of closing a deal in an entrepreneurial pursuit is pretty darn good. And I think that should be celebrated as opposed to the opposite. And I think 28% of those that acquire businesses returning less than cost, that means that 72% generated a profit. I also think in an entrepreneurial pursuit that should be celebrated as opposed to the opposite. And on the Endurance stats, that's interesting, but I think that's perhaps a little bit misunderstood. An equity gap can be created even when every single investor participates in the deal. All you need is maybe a larger deal where investors aren't able to pony up all the capital and then you just, they go to outside sources. That's easy. It doesn't mean that the deals don't get done. It also doesn't mean that investors aren't stepping up. And yes, I did say that. I do believe that there are a lot of search investors that are spread too thin, but there are hundreds of traditional search investors and there are more than enough to go around. And ultimately all you need as a traditional searcher Is a few investors in your corner eventually on your board to provide you with more than ample support.

Host: I want to leave the audience on this question with the takeaway that for self funded, yes, you can assemble your own board and your own investors, but you're really on your own to do that. So if you're somebody who's in a position where they know they have access to an ecosystem where there are a lot of would be investors or really smart people who could serve on the board, great. But if not, Robert, I just don't want to undersell that it could be difficult to assemble a really good board on the traditional side. Maybe a lot of those traditional investors are stretched thin or aren't really going to. Even if you get them on your board, maybe they're not going to be that active. But there is an ecosystem there prepackaged for you to go out and shake hands and meet people and hopefully sell yourself and pick from. So you're going to be really on your own to assemble your own board on the self funded side. Fair.

[48:35] Guest 2: Robert, I would agree, yes, I think that you are on your own in some ways but it also gives you a ton of flexibility. You can pick the right investors. It's not necessarily who you know the majority of the capital picks. It might be somebody for example, like we talked about, well with direct industry experience who maybe has run a, you know, the very same type of business and been successful. So I, yeah, I do concede some of what you said. Yes. Yeah.

Guest 3: Just, just to clarify though, traditional searchers select their boards as well. So that's not, it's not imposed upon them or mandated by any, any third party guys.

Host: We're starting to bump up on time so we got to be efficient here to get in A few more questions is talk about your models with respect to the target industry. So we've, we've danced around that a little bit. But if I'm looking at, I have the impression, correct me if I'm wrong, Greg, that the traditional search might be better suited to really a high growth opportunity. Like you just said yourself that There are some SaaS deals now where they aren't even profitable. Acquisition, the acquisition the target isn't even yet profitable and that could be a fit for traditional search. That's going to be, that's going to be much harder on the self funded side because there's no EBITDA to work with. But maybe I'm wrong. So if I care about a particular industry and I just because it's my own background or it's just what I'm interested in. How do you see each of your models playing there? Robert, go first please.

Guest 2: I guess your question is do you have a particular work experience, background, Will, is that what you were getting at?

Host: No. How does self funded in your case, is it only good for particular industries or would you say it's good? It doesn't really. It's industry agnostic as a model it's completely industry agnostic.

Guest 2: Well to answer your question directly, right, you can, if as a self put insert, you could go find a deal and then go to the traditional search investors and raise on those terms if you wanted to. Right. Or you could go to you know, traditional LPs, you could go to high net worth individuals, you can use conventional debt, SBA debt unit tranche debt, mez debt. You can do whatever you want. You can buy a company in the industry. And I do wanted to, I wanted to point out, talk to one point there, the idea that, you know, all or a large portion of traditional searchers are buying these fast growing software companies that make them multimillionaires. Well, you know, only less than one out of five traditional searchers actually buys a software company. Okay. That's the first thing. And then the second thing is if you take out the outliers within traditional search, the returns are not the same. So. And even the study talks about that. Right. You've got these super high performing unicorns that have driven returns way up. But that's just, that's not the median traditional searcher. Yeah.

[51:30] Host: Greg, is traditional search industry agnostic or does it, does it smile more on certain industries than others?

Guest 3: It's industry agnostic, looking for good businesses to buy. Well, it does allow for growthier businesses also for more boring, much less sexy businesses. And I think Robert's mentioned this idea of a couple deals skewing returns. Yes. If you look at aggregate returns, there are a couple of deals that have skewed the overall return profile. But you can't ignore the dozens and dozens and dozens of data points on equity earned by traditional searchers. This is actual money taken to the bank under this known model. Proven quantity that has delivered a lot of success and not just monetary success, but also, you know, autonomy, professional development. I'm a, I'm a better, I have better on so many levels, personally and professionally because of the experience that I had as a traditional searcher and I think many would would echo that point.

Host: Greg, who would you say, say traditional search is not for? And Robert, I'm going to ask you the same Question. So, so there, there's. Despite the fact that you're defending your model, there's got to be some avatar out there that you're like, this is just not a good traditional search would not be a good fit for that person or group of people who is traditional search not a fit for?

Guest 3: I would say somebody who I mentioned earlier has a very, very narrow geographic focus. I would say that would be, you know, that would be one person who would probably not be a great fit for traditional search. Somebody who's not sold on doing entrepreneurship through acquisition might want to test the waters, but may still be open to doing a startup so they have the flexibility to pivot. And some people like the idea of starting really small, sort of a, you know, their first acquisition, pretty tiny, you know, and get that experience, get their feet wet. You know, I think that's probably also more sort of appropriate for or less appropriate for traditional search and more appropriate

[54:06] Guest 2: for self funded search.

Host: Greg, I have a perception, so either agree or disabuse me of it, that the traditional search is kind of very much tied to MBA programs, kind of a university circuit. And so if I'm mid career or if I didn't get an MBA or I got my MBA 20 years ago and I just am not in the either academic ecosystem or PEIB ecosystem or I'm not a veteran veterans, another common one for traditional search. I'm just kind of a mid career person who's learned about ETA halfway through my career and I'm interested in pursuing it. I have the feeling that traditional search is not a great fit for that person because they're not. Feels like there's an ecosystem there that you got to already be part of.

Guest 3: Correct.

Host: What do you say to that perception?

Guest 3: I think there's truth to that. But this traditional search ecosystem is evolving and I think has become more and more democratized and it's more accessible than it ever has been by far. So I think it is much more open than it used to be. I think there's still, there's still progress to be made on that front, but I think that's an evolving picture as we speak.

Host: Okay, Robert, who is self funded not a good fit for.

Guest 2: There are some kind of strange examples I think, or maybe not strange isn't the right word, but examples that aren't as common maybe would be the right word. But I think the biggest group, to be pretty frank about it, the biggest group is folks who don't have a way to fund two years of searching. If you can put in the sacrifice of maybe limiting your personal expenses for two years and getting ready to eat some broken due diligence costs, which if you do due diligence the right way, that can be a pretty small number if you're wise about it. But if you have that ability, I think that self funded search is going to be the way to go. And if you don't, I think folks don't have much of a choice, unfortunately. I think one thing that does happen, exceedingly rare, is that a traditional funded searcher does a surge, you know, has a successful exit and then does another traditional surge. I have never seen that happen. And I think the reason for that is because if folks don't have to take that money and accept those terms, you know, they're not going to do it. They're not going to do that if they have any other choice. But you know, if you, if you look at the self funded side, folks do self funded searches, have a successful exit and then do another self funded search all the time. I mean that's extremely common, right? So I think that just kind of points to the biggest market I think for traditional search is that unfortunately

[57:19] Host: a

Guest 3: lot of people opt in with enthusiasm and have a lot of success. So I don't think it's, I don't think it's unfortunate. And there are just to be clear, to set the record straight, there are more and more and more second time traditional searchers that go in again with enthusiasm and certainly with eyes wide open.

Host: Guys, we are bumping up on time. We're at 58, so I'm going to have to call it here. But Robert and Greg, you both provided a great amount of your perspective and both argued strenuously as I expected and I was really pleased to see. It's such an important question, I think, and I think the audience is a lot better for having wash. Um, you guys duke it out. So thank you very much both of you for coming on. Thank you, Will. And thank you.

Guest 3: Thanks Will.

Host: Thanks and audience, audience members, thank you. Thank you guys for giving us your attention today. This watch for this episode airing on the Acquiring Minds podcast in your podcast app. Subscribe to Acquiring Minds. If you haven't done that, you'll also see clips of it distributed around Twitter and LinkedIn and the entire interview will make its way to YouTube, YouTube as well in the next week or two. Greg, Robert, thank you guys again. And this concludes the session.

Guest 2: Thank you.