Host: 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. Today's episode is a little different. It's pure education. Today, Steve Ressler is my guest. Steve is an investor in searchers, that is entrepreneurs who buy companies. And I use the opportunity to ask Steve how to understand working with an investor if I'm somebody who wants to buy a business. Steve is really well positioned to teach this stuff and I think you'll agree he does so extremely clearly. If you're already knowledgeable about raising money and structuring a deal, this episode is probably a bit basic for you, but many of us looking for a company to buy are doing so for the first time. So I thought it would be great to get a primer on working with investors to do that. I know I learned a lot and I asked the dumb questions so you don't have to. Here he is laying it all out for me, Steve Ressler. Steve Ressler, thank you for joining me today on Acquiring Minds.

Guest: Thanks for having me.

Host: You are a very visible person in the world of acquisition entrepreneurship. You're active on Twitter, you speak at conferences. You're an active investor in people buying companies. You've got a monthly newsletter ETA musings that I'm a regular reader of. People should go out and subscribe to that. You also come from actually a background of your own entrepreneurship, so you're a serial entrepreneur on top of that. So you've seen the world of entrepreneurship from many different angles, but now you're primarily investing in searchers. I'm going to let you give your own proper bio here in a minute, but before we do that, I just want to tell everyone what we're going to do today, which is a little different than the usual interview, telling the story, telling the guest story. Instead, we're going to do kind of a one on one on working self funded searchers working with investors. So as opposed to the search fund model, which is somebody coming out of an MBA program and they have access to a network and resources and they're typically raised more money to buy a larger company. Who we're talking about today is the person who comes home from work every day, gets on biz Buy Sell, sees that local plumbing company or medical billing solution provider and says to themselves, man, I want to go buy that company. I know I can run it, I know I can grow it, crush it. But I feel like I probably would need to get an investor involved to make this acquisition happen. But they don't know really beyond that, how that works, how an investor fix it fits in, where to even find an investor. You invest in people like that. So we are going to answer those questions for this, this type of person. So that's the context. But before we dive in, why don't you just give us three minutes on you and what led you into this world of acquisition entrepreneurship.

[3:07] Guest: Awesome. Well, thanks for having me. Excited to join today and excited to connect with the audience. As you mentioned, my background comes from entrepreneurship and it's really my dad's side is all government employees and my mom's side is all entrepreneurs. So that's kind of where I ended up in government entrepreneurship. I went to Penn for grad school under a government scholarship and ended up working in government for five years in technology. I eventually left and started a company called govloop.com and govloop was basically a mini LinkedIn for government employees where people connected, learned online training and we grew that business, bootstrapped it and we sold it to a software company called GovDelivery, which is if you've ever gotten an email or text message from government, probably the White House or CDC or your local agency, it's probably from them. I was an executive there. I was the chief marketing officer as we grew from 7 to 40 million ARR and sold it to Vista Private Equity, which is a large private equity investor in software. And that's where I learned a lot about kind of private equity and how to improve existing businesses, which in a lot of ways search is the smallest of all leverage buyouts. So that's kind of where I learned a little bit about it. I eventually left and became a CEO of a small public safety software company. My friend had found it and we grew that business and sold it to Motorola Solutions about a year ago. So kind of day jobs and kind of classic software entrepreneurship and private equity. And then I've just always loved investing. Probably like many listeners grew up fan of Vanguard and a Boglehead, Buffett and Munger and value investing and then being in technology, I did a little angel investing in Washington D.C. where I'm based, as well as government technology companies where I have a network and a friend of a friend had done search. And to me it really clicked the idea of buying existing business. I honestly didn't know it was a thing. And so learning that kind of combining that private equity, buying existing businesses and making them better, then having that more entrepreneurial spirit corporate or putting in first time CEOs and driving businesses was really attracted to me. And so that's when I got the bug. And I've been investing in search for I guess the last five years now.

Host: And how did you decide to be an investor in search rather than to go out and buy a company yourself?

Guest: Yeah, so for me, partly I was operating at the time, so I had a day job and was full on speed for that. And then I started out by being an investor in a couple search funds that exist where they take outside capital, invest in more traditional search. And then as I got more in the weeds and working with searchers, I realized there's all these different types of search. Traditional self funded, small businesses, large, which we'll talk about today. And just really enjoyed working with searchers and investing alongside their great businesses.

[6:00] Host: Cool. Well that's a perfect segue. So let's start with some definitions. So you just said how you learned that there were these flavors of search. Why don't you give us the categories as you see them?

Guest: Yeah, so there's a couple main categories. So when you look up search funds off the Internet, you often kind of start with Stanford and traditional search funds. So the concept of search funds came out of Stanford 30 plus years ago. And the idea was at the time that there's a couple top MBA students a year would work with professors and their friends and they would pay the the searcher to go find an existing business and buy it. And so kind of what you call traditional search. Now the concept of often a recent MBA is raising capital to pay them a salary while they work full time to buy a business. And then those investors invest in the business is called traditional search. And so that is done. Now there's 20 plus schools that teach at MBA programs. It's popular not just the US but in Spain and Brazil and other countries. Those are generally buying decently sized businesses, 10 to $50 million in enterprise value. There's a spin off of those of traditional search called traditional search accelerators. So instead of having kind of 14 individual investors investing in your search, one group is basically putting you through kind of a Y Combinator accelerator program helping you search. And so those are called Search fund accelerator is probably the most well known one. There's one Next gen Growth, similar concept, similar model, paid to search, except you kind of work with one group for that capital. That's what I'd call search fund accelerators.

Host: And Steve, there's the two that you mentioned are kind of the primary ones. Search fund accelerator and then next gen

Guest: partners yeah, next, yeah, next gen, next gen partners, a couple of next gens. You gotta make sure you Google the right one. But yeah, those are the two main ones. There's another one, Broadtree and. And now they're popping up. I recently met one in the Nordics that's doing this called True North Scandinavia. So that's also been cool, seeing the international flavor.

Host: Great.

Guest: And then next I would say it's called self funded search. And I would say self funded search, I gotta say is there's two flavors of it. I'd say there's what I call self funded search. Searchers buying generally small businesses, probably 3 to 7 million of enterprise value, value of the business. And they're usually using SBA loans to cover a majority of that. SBA loan can be, the cap is $5 million. So often they're using that for the whole thing or most of the item. And they're either on SBA. You have to have, I think it's 10% down currently and the searcher is either putting the 10% down themselves, maybe pulling out all their money from their home refi or 401 and doing that, or going to friends and family to raise. That could be $200,000 to $500,000. Or they're bringing in investors like myself that do this semi professionally and they're raising say 500k to $2 million. And so that's what I call a self funded search using SBA loans. And then the other category I would qualify as a separate sector of self funded search is the very large deals. And those are often called independent sponsors or fundless sponsors. And that is more like deals that are 20 to 50 million dollars of enterprise value. Often someone that used to work at a private equity shop or maybe was a CEO of a company in a similar space. And often those are roll ups. So I've invested in ones that are in auto collision or veterinarians or H VACs and they're doing very large deal. And the economic structure is different, but also the concept is different in the fact that usually those companies already have a CEO in place. And the new person, the independent sponsor is really kind of the chairman of the board and the fundraiser and the person in charge of doing all that M and a transaction. So I'll pause there.

[10:15] Host: That's great. That was great, Steve. And so in the independent sponsor model, the difference between that and traditional private equity is simply that the independent sponsors acting sort of as a loan private equity shop.

Guest: Yep. And often independent sponsors will build up a track record and raise a private equity fund. So it's kind of sometimes a bridge for folks that, you know, want to eventually raise a private equity fund but need a track record. So. But very, very similar in concept.

Host: Well, as I said that was a great breakdown of the kind of the big three and what we're going to talk today about is the self funded type individual. And so you had said that the enterprise value could be 3 to 7 million. I see smaller deals like if we take it back to the biz, buy, sell, you'll see 800,000 1.5 million. Are those deals too small for an investor like you to be interested in?

Guest: Yeah, so I'd say there's a couple different types of investors I'd say self funded searchers look at and basically the larger the deal, the kind of more professional the business, the more likely investors are going to be interested. I said the smaller deals are often done with folks that are very close to the searcher. And that's partly the smaller the business you go, the more fragile the business. Right. So often those if it's a million dollar enterprise value business 10% down, you need 100k and you don't have that in your 401k or your home or you don't want to pull it out. Usually the closest way to start are either friends and family, but a lot of folks don't have those networks and if not that, sometimes they go to kind of former boss's colleague. So you'll see that a lot of hey, this person, maybe they were in consulting and they had their partner at the firm, et cetera or as well as kind of local investors as well. So I think there's kind of the smaller the deal, the more likely you're going to get local investors and friends and family. Which makes sense. Right. If you're buying a million dollar H Vac business in Greenville, South Carolina it is actually kind of interesting to your classic local investor who might do real estate and different items and they could potentially even help you in a way more than a national investor who can help you once you kind of get to scale, but might not be the person in Greenville to refer you three business leads from someone they go to church with, that kind of thing.

[12:37] Host: Sure. And just for Steve himself, your bottom the floor of where a deal would probably make sense for you, probably there are exceptions is about 3 million in enterprise value.

Guest: Yeah, I've invested in companies kind of 3 to $50 million enterprise value. So I've done probably half of what I do is traditional search and those are a larger kind of 10 to $50 million backing to searcher deal. And then done a number of in the self funded world using SBA loans. And most of them have been. And that five to seven, I've gone as low as three. And then I've done a few of these larger independent sponsor deals.

Host: So just to be clear, so as we break down, like, if I'm looking at, let's say I'm looking at buying a $3 million business with an SBA loan. So let's say 80% of that is going to come from the SBA. Typically I know that they'll do as much as 90, but typically it's maybe 80% SBA and then 10% of that, I think it's an SBA requirement. Is, is that the seller finance it? Is that correct?

Guest: Yeah, that usually there's a seller financing piece around 10% and then the remaining

Host: 10% is the cash that I, the entrepreneur, bring to the table. And I either bring that from my own bank account if I'm so fortunate or that I raise that money from an investor. So it's this cash piece that I either have all myself or I go out and I get an investor or friends and family, any mix thereof.

Guest: Correct. Yep.

Host: Okay, great. So how does that. Let's, let's just for easy math, let's take a $3 million business and let's say 80% of it is from the SBA. What we just did, 80% SBA, 10% seller financing and 10% cash. This 10% cash is $300,000. Right. So it's 10% of 3 million. Tell me how, what is an investor, the investor's role in that $300,000. Like, let's get into that tranche and how it works.

Guest: Yeah. So a couple of things that are important to know is, so on getting that SBA loan, anyone that owns over 20% of the economic interest, which is economic interest, is both like ownership, but also if there's a preferred return. So often these structures have a preferred return, which is kind of a automatic interest. Folks get on the deal in addition to the equity. And so to get to your 300,000, you're usually not doing it with one person, you're getting it with a group of folks. Because no investor wants to put a personal guarantee on a business they're not involved with closely. So that's kind of a key part. So think of it less as, hey, I'm going to raise one 300k check. You're probably raising from 5 to 12 different folks on to get to your $300,000. A couple other details that I think is important as you bring in outside investors. If a person has not done alternative investments, they will need to. And they'll need to qualify under the classic qualified investor rules, which are. They're written by the sec, but they're items like you have to make over a certain threshold and income per year or have assets over a certain threshold, which is basically the SEC saying for private investments, we have a higher bar of the caliber of folks who basically have the ability to lose the money.

[16:11] Host: Do you know what those thresholds are? Offhand? They change, didn't they?

Guest: Yeah, I think they changed, but I think it's 200,000 individually, 300,000 as a couple on the income. And I think I forget the terms of average the last three years. Then on assets, it's 1 million. That's probably. And then there's a separate. And that's usually enough. There's a separate thing called a qualified purchase. That's a higher asset threshold. That's for. That's usually done for different types of deals. So. Yeah, so generally, like, think about your, your, your successful doctors and dentists will qualify. The folks probably in your neighborhood that are investing in real estate deals would probably qualify. But I think it's important you want that type of folks where this is not the first time they've ever done an alternative investment. The second reason you want someone who's a little bit sophisticated is it's somewhat intrusive. So the sba, actually, if you're an investor in a deal that's SBA related, will ask information from all those investors, like two months of their bank of statements, and they'll ask questions about the transfers around it, which, if you've never done this before, you're like, why do I have to do this? What's going on? And it can really delay the close of your business if you have to wrangle 10 folks that have never done this before and you haven't prepped them successfully. This is also partly why it's helpful to use a bank that's done a lot of SBA loans kind of in the search community before, because they'll be familiar with these logistics and will prep you and your investors ahead of time. If it's just a local bank that's never done an SBA deal with investors, sometimes I've seen hiccups. And then the last piece around it is you will owe the investor K1. So if you're not familiar with a K1 if the company is an LLC, which is a way to structure a company, there's C cores, S cores, LLCs. A very common way, you as an investor in the company, you own a share of that company. And so if that company is making profits, which they should be doing, you owe automatically liability on that profit, your percentage, even if you don't pay, even if they don't pay out a dividend. So you have to get a K1 every year and file that with the government. And often K1s are sent after an April 15 deadline. So you have to file a tax extension. So I wrote a blog post we can probably show in the notes around this. But I say all of that, why I think it's important that you prep the investors that will join you in the search. So if it is family, friends, others, just them knowing what they're getting into and how it will affect some things that will come their way.

[18:59] Host: And in terms of the. So 10 people, let's keep using our $3,000,000,000 and $300,000 example. So 10 people to get me to $300,000 is $30,000 a person, 10 K1s a year, that's a lot of herding cats. $30,000 is a lot of money, but it's not that, you know, it's kind of, it's not that much money. And so for that seems like a lot of work for a lot of little checks. But that would be typical.

Guest: Yep, yep. You could do maybe, you know, something five by 60 or five by 60 or that. But yeah, generally most of the cap tables I'm on self funded maybe are raising a little more money. Maybe they're raising a million to 2 million bucks, but they're doing 10 to 14 investors. So yeah, they are doing kind of a group of investors they're putting together versus kind of. And once again it goes because if you just do one, they would then have kind of that SBA personal guarantee on themselves, which they wouldn't want to do.

Host: Right. And so basically the threshold for that as you said, is 20%. So no outside investor is ever going to want to own 20% or more of the business.

Guest: Yep, exactly. And the nuance, it's 20. But it's actually not just ownership, it's economic interest. So if there's a preferred return on top of it, the kind of rule of thumb is often it's actually 13% of the ownership.

Host: And give us a little bit more on preferred return, give us with some numbers behind it. An example maybe.

Guest: Yeah, so a preferred return you know, we'll see in self funded search, kind of 8 to 15%. And so that's saying, hey, you know, the investors will first get back 8%. 8. In this example, let's make it 10, 10% back of the money every year. So you're $30,000 a year, you're getting a 10% interest kind of coupon on that money every year. And there's some timing on when that's paid back. It kind of depends on the style of the company, when, but that coupon, so you get the interest and then on top of that you're getting your, say whatever percentage of the company you own. So you're getting kind of both. And so when I say 20% economic interest, the SBA looks at it as, hey, that 10% preferred interest rate has economic interest in addition to the common interest. Common ownership makes sense.

[21:29] Host: So in terms of the investor's incentive and how they're getting money out of their investment out of the business, you just explained part of it. So I might get an 8% or 10% coupon on my investment that is basically an expense to the business and then I could participate in the profits of the annual profits of the business if the CEO chooses to pay those profits out at a pro rata dividend.

Guest: Correct? Yep.

Host: And other than that, it's simply when there's an exit, when the business is resold or re exited.

Guest: Yep. So I think of it exactly those three ways. So there's the preferred return. That's kind of as we talked about before, there's two, there's kind of the annual profits where Obviously the first SBA is a 10 year loan. So at the beginning you're just kind of paying off the SBA debt and the seller's debt so there's less profit. But say the business has really grown and you pay those off quickly, more and more, you'll get the profit just from the company. And three is either the selling of the company or the recapitalizing of the company. So recapitalizing would be, hey, if you bought a business and it was doing 500k a year in profit and you have an SBA loan and then you grow it and say Maybe it's doing $5 million in profit, it goes great in 10 years, you can actually get a new loan based on that $5 million of profit you do every year. And so when you get that new loan, sometimes that's when you recapitalize the company,

Host: setting the expectations of the investors. How does that work? Is it usually the searcher, the self funded searcher's responsibility to it is their responsibility to basically say look, I'm asking for this $30,000 check from you and I expect to distribute out the dividends every year or don't expect a dividend because I'm reinvesting everything I can. I guess this is all part of the negotiation, but dive into that a little bit.

Guest: Yeah, I think this is an important part on the searcher to clarify with investors just what is the goal of the business and how are you expecting to run the business and how does that mean on how the investor is going to get their money back? So there's a couple of different variations on it. I'd say one is structure. So I talked about LLCs before which are primarily how this is done and it's kind of passing through the income. But there's also C cores is a different way to structure a company and some folks are structured as a C corp with the hope if they hold the business for five years and sell it, they'll qualify for this qualified small business stock provision where you don't pay capital gains tax on that gain. And so for those businesses, they're going to the investor and say hey, we're not going to distribute out any money until the end of the five years. And so the structure of the company matters on how they're going to get your money out. Second, the type of business you're trying to do. So there's difference between growth businesses and, and folks where you're businesses where you're just really trying to grow the cash. So some business I've involved and they say hey, why we're buying this business with a million in profit, we really think we can take this business from going 10% a year to 30% a year and we're going to reinvest those profits the first few years and then with the idea of increasing the equity value of the company primarily as the goal versus through cash distribution. So that's an important thing both for the searchers and investors to rely on. What type of business is this and how are we trying to run it? And then last is also tied to that like what are the expectations from the searcher and the investor on access to information in terms of just kind of quarterly, are there going to be board meetings or advisory board meetings? What's the level of detail expectations? Quarterly, annually. And trying to understand as a searcher you don't want an investor who's expecting super high quality private equity level financials every quarter. What do you think, hey, I just raised some from friends and family. I'll call you when I feel like it. And vice versa. I think searchers being clear about what level of detail they're going to provide and where they'd like guidance is important.

[25:56] Host: We've touched on friends and family a number of times now, typically, I think at least certainly in the venture world, and it sounds like maybe in the search world as well, friends and family is kind of like your first line of raising money. It's people who love you and trust you, you hope, and maybe their expectations are a little low. The investment is a little less professional. Stop me if I'm mischaracterizing any of this, but do you have any thoughts on. Is that basically when you would go friends and family or are there kind of more strategic ways of think Do I try to raise from friends and family versus a professional investor?

Guest: Yeah, so I think of it in a couple of different ways. So one is starting to think of like what you're trying to solve for. So some folks are, it's just money. Hey, I need the money. Any way I can get it, I'll take it. You know, Summit, you know, they feel comfortable with the money, but they really want industry expertise. You're buying a business in H vac or waterproof purification or some sector that you don't know that well, that's part of searches. We're buying these businesses that often we're not that familiar with. And you're trying to round out with expertise. Sometimes you're looking for folks that can bring you business. Right. So I mean, what better to, you know, if you're running a property management business than getting some investors that own a bunch of real estate and apartment complexes. Like they're not guaranteed they're going to give you they business, but they know the folks that will. And then last is, hey, professional investors, where, hey, I want to bring a higher rigor or caliber of the type of business that I want to run because I want to run a large business, I want to run it at a level of a private equity business. So I think you look through those goals and then you adjust accordingly. And then I think I also would say the business and the background will also tie it in. So what I mean with that, professional investors are generally looking for the items in the classic search books, the Harvard book, the buy then build book, et cetera, low customer concentration, high recurring revenue, all those tailwinds in the industries. But you may find a business you really like. You know, you might be, you Found a great travel business in your area that doesn't fit those and it's a great business for you, but it's not a great fit for professional investors. But you might have great friends and family, involved folks from the industry. So I think also understanding quickly what type of business this is and what's the investor appetite for this type of business.

[28:42] Host: So it's very case by case. Clearly every business, every acquisition entrepreneur is different, as are investors and their goals. You had touched on what you optimize for and one of the kind of obvious things would be industry experience. And many investors in this space recognize that the acquisition entrepreneur isn't going to have ever run or have any experience in H Vac or in property management. Better if they do. But there's an understanding that in many cases they just won't have. So how do you as an investor think about that? I don't know anything about H Vac, but I bring you an H Vac deal, H Vac Co. I want to buy. How do you get comfortable with that? Just kind of walk us through the thinking there.

Guest: Yeah, I think as entrepreneur, acquisition entrepreneur, a lot of what you're doing is how quickly you can learn items and be creative in networking and solve problems. And that's what a lot of being a CEO is. So I think the best CEOs for these types of businesses may not know anything about it could be a military veteran has never done anything H Vac, but when you talk to them, they've clearly done the research. Right? Just like a job interview, right? Have they read everything ever written about H Vac that you can Google, you know, and listen to podcasts like this one and other ones where they interview H Vac operators. Have they connected and talked to 10 folks that own businesses in the space? Have they? The best ones I've talked to and said, hey, yeah, I actually went out and shadowed for two days a fellow person. So I think it's really just building the credibility that you've done the work to learn the space. And I think what's beautiful these days is between Twitter, LinkedIn, podcasts, cold emails and just straight up hustle, you should be able to quickly learn a space. The best folks I have seen, like, you know, I could have a learn about it, submit an LOI on a space they didn't know winning on Monday and by Friday you think they've spent two years in the space just because they went 24 hours a day learning, talking to anyone they could in this space. So that's what I look for is have they built their network and knowledge

[31:00] Host: quickly, the shadowing people who are actually operating in the business. So if I'm somebody considering buying an H Vac company and I know nothing about H Vac and so I go out and find an H Vac operator to shadow, how much does that really happen? Sounds ideal, sounds great. Is it common as a would be acquisition entrepreneur, should I consider that something that should be top of my list to actually do or is that kind of like nice in theory, but doesn't really happen that often.

Guest: I've seen some of the best folks do it, so I think, I don't see. It's not common, but I think it stood out to me. And you'd be surprised how many smart people are willing to do that. Right? So it's kind of the classic item, you know, when you're a college student, you know, your college services say, hey, you should email alumni and ask them for coffee and this and that to learn no one does it. It's kind of the same, you know, and the classic, you know, if you email ten H Vac operators, you're not going to get ten yeses. They're busy, right? So you probably get nine no's, but you'll get one yes. And I would do it. I would do it in a space where I was serious. And you've done all the work. So once again, don't waste anyone's time. Don't ask for shadowing if you haven't listened, if you haven't googled the Internet and read everything there is on H Vac and listen to podcasts with H Vac operators. But once you've done that, I think shadowing is a great opportunity.

Host: You just gave an example of searchers that you've seen as self funded searchers who on Monday they knew nothing and by Friday it seemed like they'd been in the industry for 30 years. If I am somebody who sees myself that way and I can really bone up on an industry quickly and just absorb knowledge and I'm not scared about going out and finding somebody to shadow and so on. And these businesses, often the services businesses at least are fundamentally pretty simple businesses, how important is finding kind of smart money in terms of investment? So in the tech world, in the venture world, it's like it's not just about getting a check, it's about getting a check from somebody who can really add a lot of value alongside their money. But I suspect maybe in the world of services that's a little less important because these industries are much more mature, they're less jigsaw puzzles than some tech startup where the stakes are a lot higher and the chance of failure is a lot higher. Talk to me about kind of smart money versus dumb money. Not dumb money, but smart money versus any money. And in the world of search, yeah

[33:29] Guest: I'm a fundamentally, I'm a big believer on, you know, you're the average of the five people you spend the most time with. And so I think generally in life having people that are great around your table is worth it. You know, I think, I think it's, you'll. It'll have a better business but also be more enjoyable to work with, meaningful relationships, et cetera. So I would always try to optimize for great high integrity, high quality individuals. And that could be actually professional investors that could be friends and family. But I would always spend time trying to get the best people on my team. That becomes the number one piece around it. I'd say the professional investors, the thing you get that is useful is pattern recognition. So I think the professional investors, the beauty of them is they've seen stuff like the issues with labor shortages across the trades is kind of a classic thing you're seeing in these small businesses and the trades now. And so you start having some pattern recognition of how that's being solved of partnerships with community colleges, the pros and cons of training them junior on your team, etc. So I think that's what you get out of professional is kind of pattern recognition, some more national exposure. So hey, you should connect with these folks in different sectors or across the geography that can help you. So I think that's what kind of the professional investors will help you and also kind of like how to speak towards your financials, the reporting kind of how to run a high quality top business. I think we're local and professional, local and friends and families folks. I would look for folks that can really help drive revenue to your business. And so like once again if there's folks if you're in a space where potentially like real estate with the property management or hey if you're buying an H Vac business and you're buying get some investors that have done real successful and other related part of the, maybe the construction marketplace or plumbing or roofing feels like an interesting addition to your mix.

Host: And in terms of finding investors recognizing that part of being, as you said, part of being an entrepreneur and a CEO is just solving your own problems. So I know there's no pat answer to finding your own investors but Given that you are out there as a visible investor and you're obviously looking for deals, you're talking to a total noob. Where do you recommend they even start outside of their own locality? Let's take friends and family and their own business network out of it online. Where would you start?

[36:10] Guest: Yeah, so a couple good places to start would be I find they're kind of general note but Search Funders is a great hub and that's, you know, I'm quite active on Search Funder. They have an investor list on their website. I've gotten a number of deals for them. That's the easy place to start to start and connect with. So that's where I highly recommend folks to start, I think talking to other searchers. So once again once you start engaging and Search Funder or Twitter or if you're in an acquisition, entrepreneurship, mastermind, group or Buy, then build, you'll talk to other searchers that have closed a deal and they will reference their other investors. So that's a good place to start I would say for self funded. One general mistake most make or not most make but some do is the traditional search investors generally don't invest in self funded search partly because they're writing larger checks and as mentioned the personal guarantee issue. And so going after the traditional search fund investors at Pacific Lake or Anacapa that are well known in the Stanford traditional search model, those generally aren't a fit. So that just one note and then what I would say kind of last is now there's kind of new burgeoning other groups spawning off. So a friend of mine, Sam Rosati at Pursuing Capital has kind of a self funded search incubator. There's a group DL Capital, Adam Leave and Eli that help work with self funded searchers. There's another group SIG Search Investment Group that works with self funded searchers and kind of a lightweight model where they help support. So I'd say there's kind of those smaller ish groups and then there's just individual search investors like myself and I'm always easy to reach out to. I'm just srestlermail if anyone wants to connect.

Host: You mentioned Search Funder as one of the first resources searchfunder.com, for people who don't know probably much of the audience already does. However, one thing I'd say about Search Funder Steve, tell me what you think. It's a bit of a misnomer now I think because Search Funder sounds like it's kind of for traditional search funds and there is a bit of an orientation to the community, to the site still kind of a legacy orientation toward kind of MBA programs and colleges and where people went to school. But in fact a lot of self funded searchers are using it as a resource as well. And there are a lot of investors on there who would be target investors for self funded investors. So self funded searchers. So don't let the name Search Funder turn you off and make you think that it's just for traditional searchers.

Guest: Yeah, exactly. Yeah, that's a very good point. I'd say. I think it's over 50% are self funded search, maybe even more. And just my own, we did a webinar there called Tips for Self Funded Searchers that's in their archive that was one of their most popular webinars and just kind of a classic example of like how many self funded searchers there are on Search Funder.

[39:13] Host: And so you said I can go in there into Search Funder. You sign up, it's a membership and there's list of investors. And so I presumably I can search by industry experience, for example. So back to our H Vac example. I can search by investors who know something or have invested in H Vac.

Guest: Yes. I don't know all the details of the filtering ability of the website, but yes, you can search for investor. They have a good search, both keyword search filters as well as other ones. And then I think if you go back like anything, go back through the archives, you'll see folks saying hey, just close my deal thanks to this bank or thanks for these investors for being involved. So it's also one that the more you're involved and you're active, you kind of start getting quick to the community who are the key players and very helpful community where people help each other out. So often people reach out for me to deal. Maybe it's not a good fit for me, but I say, hey, these three other folks are a good fit to call them and then talk to those three and two might be a fit, one might not, but the one that's not gives you three more names. So it's a very kind of reference community, which is, which I really like.

Host: I will say I'm relatively new to Search Funder, probably six weeks. And it is a phenomenal resource. So highly recommended. The way that community and that site has aggregated all the people in this world from all the different pockets all over the world, in fact is really impressive. And you can be asking about the most obscure, seemingly obscure type of business and somebody there will have experience doing deals or know somebody who did and put you in touch. It's really powerful. Really at least as a noob to the, to the platform it seems like that's the culture. Very cool. So now that I so I'm a self funded searcher, I've found some investors and I'm reaching out. How can I increase my chances of them being interested? Let me reframe that because I mean you could go on about, you know, be professional, have done your research, show that you know something. All kind of all the obvious stuff. So let me turn the question around. What are some of the more common mistakes that you see self funded searchers when they're coming to you Steve, or reaching out to you with a deal?

Guest: Yep. So I think one one is just packaging it professionally. So you know I have a kind of two page investment memo template I created that I share with folks just one format of just like how do you put this information in the right way? You know I think the larger the deal but just generally it's good to put a sim together. It's kind of an overview of the PowerPoint of the deal, the market etc. And just the more the high quality the research and thoughtfulness around it. So just treating it with a, with a rigor and a presentation you can tell you don't have to be a McKinsey consultant, you know and have that level of quality but you should clearly have thought about the business in that way. And then I think the last is I think trying to come together with terms that feel fair to the searcher and investors. So it is a little bit of a dance of like what's the exact terms. Traditional search kind of has set terms of how it works self funded it varies a little bit more. I'd say that's another mistake that sometimes self funded searchers do is is finding fair terms that feel like a fit for both sides. So obviously if the terms feel it'd be like equivalent of a too high valuation in VC that's going to turn

[42:46] Host: some investors away and you see that with some frequency that searchers have unrealistic expectations of the terms with respect to the investors.

Guest: Yeah And I think that that is also where like you know, I think deciding between do you want friends and family? And you can probably get the best terms from your friends and family generally. Right. Because they're kind of unsophisticated and they will want to support you and more professional is going to be, you know they're doing it As a. Not your friend or your family. Right. They're doing it as an investment. And so I think trying to understand what kind of capital you want and then setting the terms too. So sometimes I've seen businesses where they said, well, I actually already have half the money committed on these terms. I don't want to change them. I said, well, that's fair, but that's because it's your friends and family and that's fine. Maybe you want to go down the route and do 100% that way, but finding what's kind of fair in the middle will require some change.

Host: You said you have a two page template that people can use to put together a teaser on the deal that they're bringing to you.

Guest: Yeah, happy to share that. If anyone wants to reach out, it's just a two page template. People ask me a bunch and they wanted to see examples and through NDAs, I'm not going to share other people's deals. So I ended up creating my own template of what I think are the key things folks should put together when presenting.

Host: So a typical flow to reach out to you might look like I have a deal that I like. Maybe I reach out and I introduce myself to you and I say, here are a couple of bullet points. Are you interested in learning more, Steve? You respond, you say, yeah, and then I send over this two pager, for example, and then we're talking.

Guest: Yep, yep, exactly. And then some people even do it now, like they might hear me on podcasts like this and just email me at wrestler Gmail and say, hey, I'd love to copy the template. So I flipped in the template and they come back a month later and they have it filled out with the deal.

Host: Just to get a sense of the how often you invest. Kind of the ratio of actual, actual investments that you make to searchers that are interested in having you invest. Coming from Silicon Valley, there's a very high ratio of people, founders who want funding to those who actually get it. What does it look like in search? How many deals do you actually do as a ratio of the deals that you consider?

[45:10] Guest: That's a good question. I haven't run the exact math. Probably higher than venture, I feel Venture, it's like they see 100 deals to do one. You know, I'm probably in the kind of 1 to 1 to 5, 1 to 10 range on what I see. And honestly kind of it ebbs and flows during kind of the period of the year and what else I got going on, et cetera.

Host: Is there anything I Haven't asked you Steven, any obvious stuff that we need self funded searchers to understand about this process and about working with an investor.

Guest: No, I mean I think it's well a, a first just congrats on the search. It's a great community. Yeah, I mean I think we didn't talk a high level, just how cool opportunity is. So I just do one of the first things that I ever heard. You could buy an existing business. Probably most acquisition, that's a thing. I put 20% down on my house. You could put 20% down and own a cash flowing asset that you can keep, grow and create. It's just, it's, it's an awesome opportunity and I think it's a great fit for a lot of different folks. It could be you run a P and L at a large company. It could be, hey, you're a GM of a lawn care company but you want to own one. It could be you're working at Facebook and want to do something smaller. So I think it's, it's a really cool opportunity to drive a meaningful impact. I think owning, managing a business and helping create jobs for families is a great, a great way to make a living and great way to have impact. And then I'd say last, it's a journey. Right. So the search is a journey. It could be tough to find that great business but once you do it, you're just starting the journey and so I'd encourage you to surround yourself with the best people you can so that have aligned shared values and vision on that. So that would be the same in a startup. You know, you're on a journey trying to get have impact. You want folks aligned. You don't want to be battling it out with your investors or unclear people not aligned of what you want to do. And so I'd say the same in search. So find the best quality folks aligned with your vision and then together you can have impact. And if I can help in any way, I think what makes the community special is just everyone gives back. So as I mentioned a couple times in the interview, if anyone wants to reach out, happy to, to help. And if I can help, I'll help myself. If I can, I'll try to help connect you to other smart people like we're doing on this podcast with Will

Host: today you captured exactly my own excitement about acquiring a company. And I also felt like I was late to have this realization. Although when I talk to people like you and others, it just, it's clearly not something that people recognize as possible. Still, what is it about? I wonder why this is something that people aren't more aware of. Has something changed in the last five or 10 years? Because the traditional search fund, as you pointed out earlier, is 30 years old, almost 40 years old. I wonder why it is that acquisition entrepreneurship is just kind of grown so slowly and people are. It's only kind of like a trickle of awareness.

[48:21] Guest: Yeah, that is a good question. And obviously sites like BizBuysell. I don't know how old BizBuysell is up, but it's not new. Right. It's a 25 year old site and so it's always been there. I think partly there's nothing wrong with being a W2 wage earner. I worked in government and have a lot of friends. It is a big risk putting a personal guarantee on your back on SB Low. It does feel risky when you're not used to it. I think that prevents a lot of folks then. I also think it just hasn't been marketed that well. That's part of the beauty of podcast, the Internet. I feel like more folks are talking about it and so folks just didn't even know that was a thing. And so even the traditional search just started out at a few business schools and for a while it was kind of just Stanford and Kellogg and Harvard has now trickled down a little bit more. So you'll see Duke and UNC and Darden and Rice and SMU and Berkeley and seeing more colleges grow and teach the course. And I think the more you get exposure to it, there's probably some exponential effect. Once you meet one person that had done it, then they'll tell someone else or someone who now took the class and MBA program wasn't right for them, but five years later may go back and do a self funded search. So it all compounds on itself.

Host: We've now mentioned Biz Buy Sell a number of times. You hear a lot of hate, for lack of a better word on Biz Buy Sell. I actually though talked many of my guests found their acquisition on Biz Buy Sell. So what are your thoughts? Why does it get such a bad reputation when in fact plenty of deals are done on that platform? What do you think?

Guest: Yeah, I mean it's probably just the classic it's been around a while, so it doesn't have the most beautiful design and user friendliness and there's a lot there. Right. So it can be kind of overwhelming. So I think that it's kind of the. Maybe it's the Walmart of the space which you know, Walmart gets crap, but it's great. Provides great products at a great price and a lot of people shop there, you know. And Walmart of acquisition entrepreneurship.

Host: Bizbysell.com yeah, exactly.

Guest: And if you're a Nordstrom person, maybe it doesn't feel quite refined enough for you, but I think it's a good sign. And now there's like a lot of spinoffs too. There's the axials and the micro acquirers and the gen equities and others. Now there's a number of sites too, so I think it's nice to have both. BizBuySell is a great home, but there's a lot of other ones as well.

[51:02] Host: This is great, Steve. Thank you for introducing us all to how the structure of self funded investing or getting an investor if I'm a self funded searcher works. You've given us your email address. ETA musings. How do I get there?

Guest: Yeah, so it's bit ly. Bit ly. Etamusings is a good way to find it. And also if you follow me on twitter, just twitter.com steveressler it's also kind of the first link in my bio.

Host: Recommended both of those. I follow him in both places. Also watch his Search Funder webinars. So sign up for Search Funder and they maintain an archive of all the webinars they've run. And you've done the self funded one, but I think you or your partner have done one or two others. You've been up on stage there more than once, haven't you?

Guest: Yeah. So as I mentioned, I invest with a good friend Alex Mears in D.C. who's got a large cap private equity at Bain and Carlyle, but also military veteran and so he actually has taught modeling at a number of large P funds. So we've taught a couple modeling courses on search funding. Intro to financial modeling or self funded search. It's a little different for traditional search, so we did another one Intro to Modeling for traditional search. We also did a session for veteran searchers if there's any military veterans audience. And we also have a separate nonprofit called Search and acquire search and acquire.org we have a number of resources targeted to military veterans so we love kind of giving back to all those communities.

Host: Great. Steve, this was awesome. Thank you very much for coming on and sharing your ideas expertise.

Guest: Awesome. Sounds good. Thanks for having me. Well.