This episode is a primer on working with investors to help fund your business acquisition, from one of the experts in the space.
After getting his start in GovTech SaaS, Steve Ressler founded and sold his first company, GovLoop. After two more successful exits, Steve turned his attention to investing. He invested in a search fund of funds, which exposed him to search investing, and he found he really enjoyed the space.
“I think owning a business and helping create jobs for families is a great way to make a living and a great way to have an impact.”
In this episode, Steve offers a primer on recruiting and working with investors for self-funded searchers. These are acquisition entrepreneurs who typically use an SBA loan to buy a business, as opposed to a so-called traditional search fund.
Steve explains those and the other 2 types of search — search fund accelerators and independent sponsors — as well as what kind of investors are right for searchers who want to buy small local businesses.
He also explains how to make your deal — and yourself — an attractive prospect to investors.
Preparation before seeking out investors is critical. The best thing a searcher can do is learn everything they can about the industry they’re interested in before approaching investors.
Armed with that deep understanding of the market and the business, you can then begin networking with investors and determine who is the best fit for the business you plan to buy.
Tune in as Steve walks through raising capital, navigating SBA loans, setting expectations with investors, and ultimately landing your investor partners.
✳️ Episode highlights with timestamps
Acquisition Entrepreneur: Steve Ressler
He learned a lot about private equity during GovDelivery’s sale to famed Vista Equity Partners, a PE firm that has been highly successful investing in SaaS.
That experience put him on the investor path and he’s been investing in search since 2016. He’s done deals with acquisition prices ranging from $3 million to $50 million.
💡 Key quote: “As an acquisition entrepreneur, [it is about] how quickly you can learn items and be creative and network and solve problems. And that's what a lot of being a CEO is.”
Acquisition Tips From the Episode
Top takeaways from this conversation
💳 You’ll probably need at least a handful of investors to fund your SBA loan.
When you use an SBA loan to fund an acquisition, usually the SBA will cover around 80% of the loan amount. The remaining 20% is often split between the buyer and the seller (via a seller note). As the buyer, if you’re not able to bring your 10% to the table in cash, you can bring in investors to cover some or all of it.
But you’ll likely need to bring in a group of investors rather than just a single individual. This is due to an SBA rule that requires holders of equity above a certain threshold to personally guarantee the loan -- which your investors will not want to do for many reasons, including that they aren’t typically closely involved with the running of the business.
So if for example, you get an SBA loan for a $3 million business, you’d probably seek five to 12 investors to cover the $300,000 you’ll be responsible for bringing to the table.
🤔 Show investors how fast you learn.
You’ve done your research, narrowed in on your chosen industry, and identified the business you want to buy. Steve recommends considering the following questions before calling investors:
- Have I learned everything I can about this industry? Steve notes that a key differentiator he looks out for when making investments is the level of research a searcher has done. Before courting investors, Steve suggests combing the internet, listening to podcasts, and even shadowing industry professionals to bring yourself up to speed on the industry in short order.
- What are my core business goals? Investors can add value far beyond their money. It’s important to think through your goals to understand if you need an investor who can provide industry expertise, help refer you customers, or help you scale the business.
- What kind of investor is right for me? Not all investors are created equal and, in many cases, a larger private equity investor may not be the type your business needs. After thinking through your goals, you can decide if you’d benefit from a local investor or if an established firm makes more sense.
🤝 Get investors to yes with professionalism and fair deal terms.
There are two major mistakes Steve sees self-funded searchers make when dealing with potential investors:
- The deal isn’t packaged professionally
Too often, Steve has seen searchers who didn’t take the time to put together a thoughtful investor packet. He recommends compiling a concise PowerPoint with high-quality research that can easily be shared with investors. He’s even created a template that searchers can use to better organize their plans and increase their chances for success. (You can contact him at sressler at gmail for a copy.)
- The deal terms aren’t realistic
Another common mistake that searchers make is coming to the table with unrealistic terms. Terms should feel fair to both the searcher and the investor. While there are industry-standard terms in a traditional search fund model, there is more wiggle room in self-funded search. So searchers have some discretion in the terms they offer to investors.
But! Be realistic and fair. The terms that your friends and family accepted because they support you are probably not going to work with professional investors, who will assess you and your deal based much more on the cold reality of IRR and risk management.
Inflection points from the show
[3:27] From GovTech to search investing: Steve’s dad worked in government, while his mom’s side of the family is all entrepreneurs. He talks about how he got started in GovTech, exited three companies, and became an investor.
[6:15] Four flavors of search: Steve defines the four types of search:
- Traditional search funds that typically involve MBA graduates raising money to identify a large business acquisition ($10M-$50M) while being compensated during the search
- Search fund accelerators, where a single investor (ie: NextGen Partners, Broadtree Partners, etc.) puts the searcher through a program reminiscent of Silicon Valley’s Y Combinator
- Self-funded search (the subject of this interview with Steve), where searchers interested in smaller acquisitions (around $1M-$7M) use SBA loans to cover the majority of the sale
- Independent or fundless sponsors which fund very large deals ($20M-$50M) where the searcher acts as the acquisition leader and then probably chairman of the board or advisor to the company’s existing CEO
[11:04] Choosing the right investor: Steve explains the difference between larger private equity investors and smaller local ones, giving scenarios for when to work with each type.
[13:15] SBA loan math: Steve and Will break down exactly how much capital a searcher will need once they take out an SBA loan. Typically the SBA loan will cover 80% of the transaction and the seller is required to finance another 10% with a seller note, leaving the searcher to come up with the remaining 10% of the transaction.
[15:09] Covering the 10%: With SBA loans, it’s common to work with multiple investors to raise the buyer’s 10%. Steve advises searchers target anywhere from five to 12 investors as they raise this capital.
[15:34] Making sure your investors qualify: An important step in the acquisition process is making sure your investors meet the SEC requirements of accredited investors, namely the income and/or net worth minimums.
[17:52] Don’t forget about K-1s: As partial owners of your company, investors require an annual K-1 tax form to report their earnings from the acquired company, even if the company doesn’t actually pay them a dividend.
[20:33] Preferred return breakdown: In a self-funded search, investors can expect to make anywhere from 8%-15% -- the so-called preferred return -- on their investment annually on top of whatever percentage of the company they own.
[23:35] Investor expectations: When negotiating with investors, Steve notes that searchers need to understand the structure of the business — whether it’s an LLC or C corp — and how that will affect dividend payouts. Searchers should also consider the type of business and how they plan to grow value either through equity or cash distribution. And lastly, it’s important to agree on the level of information that investors will get access to as the business progresses.
[29:29] Buying in a new industry: As an acquisition entrepreneur, you are likely not an expert in your chosen industry. Investors expect that. However, Steve highlights the importance of researching and learning everything you possibly can about the industry before seeking investors. He advises searchers scour the internet, listen to podcasts, and even shadow industry professionals to accelerate their learning.
[33:29] Securing smart money: When talking with investors, always consider the value they can add beyond their capital. The value professional investors can bring is with pattern recognition and avoiding common pitfalls for the business. A topical example: how to deal with the labor shortages currently afflicting the trades.
[36:10] Google your investor: Searchfunder.com is a great place to start. (Steve has done a number of deals through the platform.) He also tells searchers to expand their network and talk to others looking to acquire businesses as they may have leads on potential investors.
[36:54] Search trap: Self-funded searchers will often start with traditional search fund investors but these firms usually aren’t a fit for smaller deal sizes. Steve says you’re much better off finding individual investors or looking at search fund incubators to kickstart your acquisition.
[41:30] Common self-funded search mistakes: When reaching out to your investor, it’s critical to provide your information in a professional package and with reasonable terms. Steve has seen many self-funded searchers sabotage their own efforts by coming to the table with unrealistic deal terms.
[45:42] Embrace the search journey: Steve congratulates searchers on their journey and shares how accessible business acquisition is when working with investor partners.
Links & Mentions
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