BIG FISH, SMALL POND

I wrote recently about the searcher's competitive position relative to private equity and the tough lesson I took early on in my journey. The #TLDR was... a friend correctly pointed out that we had positioned ourselves as a terrible private equity fund. No money, no track record, little operating experience. Why did we think that was a good strategy? Not sure, but it wasn't.

We decided we needed to try harder to be a big fish in a small pond. We pivoted down-market and focused hard on local businesses that had to be exactly where they were, and could never be relocated to a different market. We wanted businesses that no PE firm would want, and would be tough for an out-of-town entrepreneurial buyer to take on. 

We hypothesized that at <$500K SDE, there would be far fewer potential business buyers. Moreover, we'd have much more control over our own destiny because we could self-finance with debt and would have a firm grasp of exactly what we'd be buying. After all, at that size, there's just not that much to see. That shift would remove the time consuming, and risky process of raising equity from the equation. And, we would compare more favorably to the other buyers who were also aggressively pursuing historically profitable businesses with recurring revenue, market tailwinds, minimal seller dependence, minimal customer concentration, and a long list of other characteristics that make a good target.

Good news... it worked. And we were right, sort of.

Not long after we closed on The Wright Gardner, I asked the seller who the other potential buyers were and why he picked us. This was eye-opening.

There were 3 other very qualified buyers pursuing the deal, any of whom he could have selected. One was a homemaker with a business background looking to return to the workforce. The second was a recently retired, yet still fairly young, couple looking to come to town and establish themselves as small business owners. The third had a similar background to us. The catch was, he already owned a competitor and wanted to tuck it in. Overall, we stacked up reasonably well, but it was no slam dunk.

In further discussions with the seller after close, he told us that he picked us because he thought we stood the best chance of being successful with the business and building the legacy he wanted. He trusted our credentials, our story, and our aura. Our terms and pricing were not the best of the bunch, nor were our financial qualifications, but in his mind they were sufficient to proceed. He could have pushed hard for more money, and may have ended up selecting one of the others if he had.

That said, it's not unreasonable to think he could have been more moved by the stories of the other buyers, and gone in a different direction. For whatever reason, he felt we best matched what he was looking for. This, ultimately, was an example of the luck we had deliberately designed out of our process. If he'd been drawing straws, we'd had a 1 in 4 chance. If this had been a 1M+ EBITDA deal, it may have been more like 1 in 40.

The point of presenting this story is this.... Think very carefully about how the deal criteria you use, and by implication, the deals you pursue, will narrow the buyer universe and push the odds in your favor. You really don't know who else the seller is considering, what unique selling points they will have, and how those factors might tug on the seller's motivations. 

For any business you'd actually want, regardless of its size, you are potentially competing with an extremely broad and diverse set of potential buyers on criteria that are not well defined. After all, business buying isn't MBA admissions. That process has a high degree of consistency in the applicant field, a small and fairly  well defined set of evaluation parameters, many winners, and the chance to take risks and "fix it" in next year's batch. None of this is true in this messy world of entrepreneurial acquisition. Sellers only ever get one shot at this, and the choice to defer is always there. They won't evaluate buyers like you would. They're not picking ex-McKinsey vs. ex-BCG vs. ex-Bain. The choice just isn't that obvious. :-)

The entrepreneurial buyer needs to take advantage of what few advantages s/he actually has. His/her lack of rigid constraints, resourcefulness, and the ability to improvise and pivot all bode well for the entrepreneurial buyer. If you can't figure out how you're using these advantages in any given deal, there's a real chance you'll be blindsided by a competitor you never imagined was out there.

Hope this is helpful perspective. Happy Searching.

Nick

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Connect to me here on Searchfunder to get notified about future posts. Check out our self-funded search partner site at cubinvestments.com/searchers/ which contains a lot more about our strategy and approach to search in the SMB marketplace. Email me at [redacted] and I'll send you my searcher resource compendium, and I'd be happy to chat with you about your self-funded search. I always appreciate hearing from people doing unique and thoughtful work in ETA. You can also follow me on Twitter @NickHaschka where I’m starting to post more regularly.



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