Searchfunder Interviews Recent CEO Zach Perry

SEARCHFUNDER INTERVIEW OF ZACHARY PERRY 

We spoke with Zack Perry whose Claremont Square Capital acquired Record Reproduction Services in May.

How did you get on the search fund path?

The way I found the search fund path is a little different than most of my peers because I didn’t go through an MBA program. I was blissfully unaware of search funds; I went through the first 10 years of my career working for Deutsche Bank. Six years ago, I concluded that I wanted to be an entrepreneur. Turns out that it would have been really good for me to have heard about search funds back then. I knew I wanted to be an entrepreneur but I didn’t have a specific business in mind.

I moved down to Texas from New York City. I started a craft brewing company with a partner of mine. We started and ran that company for 3 years. At the end of 3 years, I had learned a lot about starting a business. I determined that business was not the right fit for me, but he wanted to keep running the business. So, I sold most of my stake to him. Suddenly, 3 years after leaving Wall Street, I was looking at what I wanted to do next. I had some concrete ideas. First, I didn’t want to go back to banking. Second, I didn’t want to start a company from scratch again. Third, I really liked running a small company. I went out with that message to anyone in my network who would listen to me. Lo and behold, I had enough meetings, discussions and conversations with people until a friend of mine in Austin said, “It sounds like you should start a search fund.” The idea was planted. Within about 3 to 6 months, I had done the research and decided to go raise a search fund.  

You’ve been a member of Searchfunder for quite some.

I remember getting connected to Searchfunder pretty early on, when it was a new platform, just being rolled out. Someone told me about it and it sounded like a good idea to be a part of it.

For the craft brewing company, it sounds like you liked being an entrepreneur. Was the business and/or partnership issues a concern for you?

It was probably both. When you start a company, your business partner is a very important part of that experience. I also didn’t have a strong desire to be in that particular line of business, but he did. So, it naturally made sense for me to move on. For me, I viewed it as a chance to do something entrepreneurial, not my life’s passion or my life’s work. When you are starting a company from scratch, I think that passion is far more important.

It looks like your search took about the normal amount of time. How did you find your deal?

I didn’t feel like it was normal. I started searching in June###-###-#### It took me almost 35 months to close a deal. I don’t think that’s the length of time searchers think it’s going to take. I had numerous points along the way when I tried to exit being a searcher and was unsuccessful. The first time, I signed an LOI about 12 months into my search. It took me a better part of 5 months to run that deal to its conclusion. Unfortunately, the sellers walked away at the 11th hour in December 2016.

In 2017, I had another LOI that I walked away from due to deterioration in the business during diligence. I was 2 years into my search in the middle of###-###-#### At that point, I told my wife that I would search until the end of###-###-#### I made that point to my investors as well. I started sending monthly updates, saying: “I am committed to searching through the end of this year. At the end of this year, I will be working on either closing a deal or closing my fund.” That was my intention. I found the deal. Well, the deal really found me in October. We signed an LOI in November of###-###-#### The way I found my deal—which is exactly the right question to ask people — is a pretty cool story.

When I had that first deal that ultimately concluded without a purchase, my prospective largest investor in that deal was from outside of my original search fund group. He and I developed a relationship. We stayed in touch; I made sure he received my updates. In that October 2017 timeframe, he got in touch with me, explaining that there was a deal that he really liked. He had put an LOI on it in an earlier version of the deal. The company had come off the market and then back to market. They only had approached the people who had been involved previously. He still really liked the deal, the company and the industry but he realized the company needed a CEO. He said, “If you are interested in it, I think you should pursue it. I’d love the opportunity to invest even though I am not in your group.”

Wow! Looking back to the first LOI that ended unsuccessfully after 5 months, how did you find that investor and build that kind of relationship?

When I was trying to raise capital for that deal, my original group was supportive but I still needed a fair bit of outside capital. And, I started reaching out to people in the search fund world that I knew, mostly other searchers who I had become friends with. I had multiple people just sending me the investors that they knew. One searcher sent me an email, “This fund reached out to me and said they’re looking to be more active in search funds.” Pretty quickly I set up a call and met him. We walked through the deal and he was quickly interested. Since that point, he is somebody I’ve stayed close to. Obviously, we got very close to doing a deal where he would have been the largest investor and on my board. So, we got to know each other through that deal process. I made sure I kept in touch with him throughout the rest of my search. Ultimately, if you trace it back to Contact Zero, it was a cold email.

What were your conversations like with your investors as you were heading into the “do or die” point at the end of 2017? What were the investor reactions?

People were really excited that I found a deal. I had a very supportive investor group. People understood that I had had, to use a poker analogy, a “bad beat” with the first deal. I had been disciplined throughout my search. I steered toward not throwing LOIs at every deal that came around. If I was putting an LOI together, chances are I believed in the deal. I think people were looking for – maybe it’s overstating it – I think people were excited to support me and were just hoping they would get that opportunity. I did get that feeling from a lot of people. I was just fortunate to have the deal come together close to the wire. I would have committed 30 months to a search at that point. People understood that it was time to decide one way or the other. I didn’t want to get to a point where both sides felt deal fatigue. I didn’t want my investors to start feeling maybe I had been searching for too long and it was time to move on. I think they were very supportive and I had been clear about the deadline. If I had not found the deal, I would have closed the fund. Ultimately when I closed my deal, granted it was another 5 months past December, I had less than $5,000 in the bank anyway.

We talked to a few searchers who have been down to that number as well.

I recall logging in and there was $2,800 in there. I tried to keep some money in there in case of costs to wind down the fund.

You mentioned your spouse. That’s a long process for your family as well. Do you feel like you prepared your family for the process?

First and foremost, my wife is incredibly level-headed and supportive. Because I wasn’t coming out of an MBA program, I was mid-career - we were in a different place financially. She is an attorney and has a very good career of her own. She has what I call “real skills”. She can find a job pretty easily. We were in a life position where managing the roller coaster was a little bit easier. We weren’t forced to make certain decisions based on time and the realities of income, which was great. If you don’t have that base, then I don’t know if it matters how patient or prepared you are. Combined with her being incredibly patient and understanding that this was what I really wanted to do, she was understanding of the search process.

However, you can talk about it all you want, but you don’t truly understand the highs and lows of a search until you do it. You just don’t understand what it’s like to go into the office every day and potentially come home with a deal – or not. Or, you sign an LOI that you get really excited about. You start researching a city and doing diligence on a company. And then, it falls away for what can be very idiosyncratic, unpredictable reasons. Yes, we did some preparation work and she understood. But, until you go through the highs and lows, it’s very hard to truly understand.

What reinforced that patience though was that – as we started working through the diligence on the deal that we closed. Everybody will tell you – and it is true – “every deal dies a couple of times.” When it happened on this deal, both of us were incredibly disappointed. Every time it seemed like this deal wouldn’t happen, both of us were really, really disappointed. When you are disappointed because it feels like the deal is not going to happen, that’s how you know you should keep going.

Good words of wisdom there. Tell me about some of the hitches you had in this deal or one of the earlier LOIs.

In the first deal, I was dealing with multiple sellers, which was a significant challenge. I think that proved to be the true undoing of the deal. I could identify the tripwire. We ultimately had a company that had a number of contracts which required consent. The right way to go about seeking consent became a very, very difficult topic to get past. In the end, it became an easy excuse for a seller group that was divided on whether they wanted to move forward to walk away from the deal. Multiple sellers are a hard to predict.

This deal, I only had one seller and he’s been great. From a personality perspective, that carried us through all the different deal challenges. It seems cliché but having a strong relationship with the person you are trying to buy a company from will make the difference. You are going to have issues come up either way. If there is a strong enough relationship, you have a chance get through it.

As far as the issues that came up in this deal, I think these have been highlighted before but are worth highlighting again. Even though I reiterated some of these issues, they still came up at the end of the process: the seller note. Walking somebody through a seller note and their lack of security but the fact you will pay them back, despite having a bank in line in front of them is hard. Continue to stress to the seller how those things work. That’s a micro issue, where the macro issue is that a lot of us are dealing with sellers who are not particularly experienced in the deal world. That’s fine. Not everyone needs to be sophisticated. It is easy to have a conversation and discuss an issue early in the process or even post-LOI, and then move on. In your mind, you have covered it, it’s done and you can put that to the side. What you didn’t realize is the seller heard it, it went in one ear and kind of out the other. Nothing was actually resolved. You might have flagged it for them so that it is not a totally foreign concept. Especially when you have a seller who has not been through this process before, bring it up once and crossing it off the list is not enough.

Maybe they hear it, but they can’t appreciate it?

They hear it but if they don’t fully understand it, they’re thinking in their mind, “We’ll have lawyers and they’ll help me figure it out.” It’s much better to have the realization that just because you brought something up once doesn’t mean it has been covered. Continually bring it up again and talk about it again. What you don’t want is your seller’s lawyer explaining everything to the seller for the first time. You would much rather be the one framing most issues.

That way, the lawyer is reaffirming what you have already told them?

Yes. And, the lawyers typically present issues through the lens of what can go wrong. And, when you apply a nuclear scenario to anything, it is a really hard uphill battle at that point.

It’s amazing that business actually ever gets done, right? (chuckles)

Right. It’s not about what the clause says and how it works. It’s about how does this protect me in case someone does something I don’t want them to do. That’s the reality of a contract. No matter what the contract says, people will still do things. So, that’s why they need to trust you. If they don’t trust that you will uphold your end of the contract, then you just end up in litigation anyway.

What was your first day as a searcher like?

I started in June and I had prepared interns to start with me. I had 2 interns on Day 1, which was also my Day 1. I had no idea. Despite reading, preparing and thinking about what we needed to do, it was a totally new job for me. I remember the interns are looking at me to know what they should be doing. I’m looking back at them thinking, “I don’t know, but I want you to be busy.” without being able to give them good direction on how they should be busy. (chuckling) So, you start sending people down research paths. The first day was a blur. The first 3 months were a blur.

I remember that for the first 3 to 6 months not knowing whether what I was doing in terms of how I was spending my time and was I being effective. We would create lists of companies. We would have a very high yield rate on responses. I would have a whole day or two of calls with business owners. At the end of the day, you talk to your investors about a couple of them. Nothing really happened, but you learned something. So, I would say that for the first 3 to 6 months were more about learning how to search effectively. The only thing that comforted me during that phase was that I got to know a lot of other searchers who basically told me that would happen to me. I felt better knowing that others who had gone before me, basically had the same experience and had ultimately gotten their feet underneath them. But it was a lot.

Despite my best intentions, I don’t think I was fully prepared to get going from Day 1 but picked up quickly from there.

How was your Day 1 as an operator?

My first day as an operator was May 9th, just shy of a month ago. There was a moment when I woke up that day where I was very, very happy. I felt relieved to be done with the search and incredibly excited about the next phase of operating. I remember that feeling very, very well. But, reality quickly set in. The seller and I were sitting in his office (which is now my office). In the middle of the morning, one of our senior managers came upstairs with an employee issue. He explained the issue to the seller and myself. The seller looked at me and said, “Well, you are the boss now. What do you think we should do?” Ultimately, I had to make a personnel decision as my first decision here. It was very grounding and became very real, very quickly. That was the highlight from Day 1. I don’t really remember the rest of the day. (chuckles). I know we were here late and we had a lot going on. We’ve been busy on so many different fronts. Those are the 2 things I remember about the first day.

Is the seller still staying on or already phased out?

The seller is still active with the company and has transitioned into our sales department. He is helping us to close on our top prospects. His time is spent helping to facilitate the rest of our 3-person sales team by coordinating their time and effort. He also gets involved when we have larger clients who are close to decision making.

How long do you think he will stay on?

I should add that the seller retained some ownership of the company and will be on the Board. His day-to-day is somewhat open. As long as it working for both sides, I am optimistic that it will continue for the rest of this year. We will both be honest with each other to make sure it stills works.

What do you know now that you wish you had known when you started your search?

First, I decided to hire people full-time very late in my search. It was the best thing I did. And, I wish I had done it so much sooner. The ability to rely on interns is far from perfect. It is hard to expect a lot from someone who has a full-time job already, which is going to school. During the summer, I would have a good experience with interns. During the school year, it was so unpredictable and difficult. Once I hired full time people, our productivity skyrocketed. I would highly encourage searchers to budget additional monies or reduce your salary somewhat to find some younger folks to join. Having come from a banking background, I think you need somebody at the analyst and associate levels. Essentially, one person just out of school and another person 2 or 3 years out of school who, for whatever reason, are looking for an opportunity. And, those people are out there. That is #1 and how I got the most leverage particularly as a solo searcher.

Second, don’t be afraid to put offers together on businesses. I spent the first year so worried I would put an offer on the wrong business that I was too careful. Ultimately, you need to be aggressive. In this market, you are competing with everybody. You are competing with other searchers, certainly private equity and family offices. You can’t say no to everything. You must be disciplined, but it is good experience to do some research on an industry, be purposeful about the company you are looking at and put an offer together. 9 times out of 10 they won’t take you up on it. So, it’s just good experience. An offer is the beginning of the process not the end of it. Perhaps others don’t have that issue but I was hesitant to put an offer together unless it was the perfect deal, and those deals don’t exist so you might as well move forward.

What have been the pleasant or not so pleasant surprises in your first month?

I have been very fortunate to have a seller that embraced and effectively announced Day 1 that this transition was happening, he was stepping down and I am the new CEO. It was not unclear to people what was changing. I was lucky to inherit a great group of people who are hungry for change. While the business had grown and there were more people, things hadn’t changed necessarily.

The unpleasant surprise has been that when you acquire a company from an owner/ founder/ operator, every individual employee has their own experience with the company. It means that personnel decisions, including compensation, have been made on an inconsistent and idiosyncratic way. You can’t make sense of what everybody gets paid. Somebody who has been here for 2 years gets paid this much and someone new gets paid higher, but why? Almost all my time in the last month has been devoted to getting to know my employees better and building rapport with them.

 What I wish I had known a month ago was that I was inheriting a situation and whether people liked it or not, I was going to have to figure it out. That’s a really hard thing to do. I don’t think I fully appreciated it. I knew and wasn’t surprised that with 70 people you can’t move things overnight and that you must communicate things much more clearly. You can’t command, “This is how we do things now.” However, I didn’t appreciate the reality of inheriting a ship in motion with lots of different people rowing at different speeds. Your challenge is a pretty big one. If you want to start turning the boat, there are a lot of individual rowers that you need to start talking to. You can’t snap fingers and make changes.

For the most part, I have been fortunate to not have had a lot of unpleasant surprises. If there were a major unpleasant surprise, you would probably hear it in my voice. The surprises I’ve dealt with have been fairly minor. I have a lot of good people on the team and as advisors to me, whether at the Board level or consultants. I think other searcher/operators have dealt with far worse. I’m also incredibly early on in this process at the moment.

Looking ahead at the next 3 to 6 months, what do you see ahead?

We inherited a company that did not have a financial reporting function at all. We are creating an entire financial reporting system out of thin air right now. We’re on the verge of closing our first pro forma month. We had only 22 days in May that belonged to NewCo. So, three months from now, we’ll have a well-established and credible financial reporting system.

At the same time, this is a very much technology enabled business and our technology is old. We are actively meeting with vendors to evaluate different options to improve and upgrade our technology. We handle medical records. So, we deal with very sensitive data. We are very focused on the security of the data and reliability of our technology. My hope is that 3 to 6 months from now we will be on firmer footing with regards to those issues.

As I indicated to our employees on Day 1, we need to get the foundation strong. That means that the next 6 months will be internally focused: ensuring we have the right teams, the right tools and the right transparency around our business. You can’t have accountability until there is transparency.

Once we’ve made progress on those, we will shift our focus to our sales team. We already held our first ever weekly sales meeting since I joined. That will continue. We’ve actually had a few wins in the first few weeks here. Once we have that foundation, I see us transitioning to more focus on growing our sales team. Those are the 3 big headline initiatives that I will be working on between now and a year from now.

Did you set aside money knowing you would need to invest in the company before it grows?

Yes. You don’t know the full extent of anything until you get in the seat. We knew the technology systems were antiquated. They are probably 7 years old at this point. I had two consultants provide estimates to modernizing the systems. I raised capital specifically to coincide with those estimates.

Any other advice you’d like to provide to searchers?

The main lesson learned on searching is that it invariably takes longer than you think. I spoke with a searcher who searched even longer than I did. He is an incredibly talented, sophisticated and competent person. When you decide to do a search, you must embrace what happens if and when you do not find a company. We know that statistics indicate that we might not find a company. I don’t think anyone believes it will be us. It’s becoming more of a reality. You need to have longer time horizon or be upfront about what Plan B looks like.

It's so weird to leave behind searching because it’s this odd combination of private equity, sales and unemployment that is very hard to explain to anybody until you have gone through it. It’s such a strange experience to go through.

The hard part about searching is that it like having a baby. Either you have one or you don’t.

That’s it. There are no shades of gray. It is such a binary outcome. It’s a harsh world: “Did you find a deal or did you not?” A lot of people have not found a deal and gone onto doing good things. But, it is harsh reality at the end of a search.

Thanks for your time.

Thank you.

Summary of Insights

Here are our a few of the key takeaways from our discussion with Zack Perry

• • It pays to cultivate relationships because you never know where your deal may come from.
• • The perfect company does not exist. So, temper any hesitancy between acquiring an imperfect company with the risk of missing out on a good one. Learn through going through the LOI process.
• • Inexperienced sellers may hear what you are talking about, but not fully appreciate it. So, consider reiterating points even if you think they’ve been covered.
• • Consider hiring a full-time analyst and associate for your search.
• • You are inheriting a ship in motion with people rowing at different speeds. So, it takes a lot of communication to turn to the ship.
• • Be prepared to embrace the possibility of not acquiring a company.
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