“I’ve invested $300,000 over 4 deals in the last 18 months, and I don’t know what’s going on.”
I had a conversation about this problem with an investor the other day.
This investor writes checks into small business acquisitions.
Medium check sizes, usually $50k - $100k.
Anytime they invest in a deal, they go through this experience:
- Build a relationship with the sponsor, make sure that they are a competent, high-integrity person
- Investigate the acquisition target, make sure it fits their criteria
- Create an agreement with the sponsor
- Sign docs, wire money
- Gets 1 or 2 quality post-acquisition updates, then communications fall off...
With most of these deals, investors aren’t getting as much information as they’d like from searchers as they operate the business.
There’s a big communication gap.
And it’s not the sponsor’s fault, it’s just very common for the early days of an acquisition to be drinking from a firehose, preoccupied with running the company they bought.
And this is just one problem, “lack of visibility”, for an investor who wants to know about the business they just wired $100k for.
This lack of visibility is just one symptom behind a whole tangled mess of problems.
For example, what if an investor wants to invest in multiple deals?
How can they reasonably deploy capital without knowing whether their bet is paying off in real time?
If they don’t know how their first 4 investments are doing, how are they supposed to have confidence in the next 4? Are they left guessing?
Or maybe it’s a smaller investor who cuts 1-2 checks per year and this isn’t their full time thing, how can they run a sophisticated investment process without being an experienced investor?
Or when their sponsor approaches them seeking advice or questions, how do they know what advice to give without the full picture and context of the company’s finances?
Or how do they know they can trust that the businesses' bookkeeping is accurate?
Or in the worst case, how do they know that the sponsor is being honest with them or not?
At this moment, there are not great answers to these questions.
But this is what we’re trying to build at Mainshares.
Our goal on the investor side is to make managing multiple investments easier, give more insight into financial performance, and help standardize governance.
SMB Investors are not currently equipped to handle the next 10 years of investments into this space.
We’re here to help them (AND their operators!).
The point is, most people want to buy a business without having any idea how they are actually wired. Being an entrepreneur is quite a bit more than just owning a business. A true entrepreneur will seek to find problems, bend over backwards to create a solution, and turn that solution into a monetized method to better the business while providing the utmost value to the customers.
The whole ETA, (entrepreneurship through acquisition) in theory sounds nice but in reality, it's kind of a joke. Most people in the population are simply not designed or equipped to honestly run a business. I know that's a harsh statement but it's a true reality. Most people are not entrepreneurs they are wantrepreneurs, meaning they love the idea. The thought of them being in business is far greater than their ability to do so.
Now don't get me wrong, I'm not saying that being an entrepreneur is better than being an operator. I'm simply stating that there is a vast difference between the two and most people enter into business relationships without having any idea how they are wired and whether or not they're cut out to do this.
Obviously, you can learn some things as you go, but if you don't have the desire, temperament, correct risk makeup, and fortitude to continually get back up off the canvas when life body slams you, then it may not be your thing. I'm not saying that a young smart person with a degree can't go far, but I am saying that I think people put far too much emphasis on an MBA with a good school name and think that there won't be any problems with these acquisitions.
I'm in a fortunate position where I get to talk to the person prior to getting a loan, while they're getting a loan, and many times post-closing when all hell is breaking loose because they just found out everything the seller neglected to tell them. Not to mention the comments from the lenders on deals where the buyer is having real issues.
Search funds and investors can do whatever they like, that's what's great about the USA. But I do see a lot of very young people with not much more than a degree next to their name trying to buy $7 and $8 million businesses because they think that's their ticket. And while they may have an MBA, I can tell you one thing they don't have at 22 or 25 years of age and that is wisdom. Wisdom comes from time and making lots of mistakes and having the ability to continually overcome them and move your business forward among other things.
Again, I'm not picking on any one person or demographic, but I think a lot of human nature is overlooked because of dollar signs. One thing that I find very common among very young searchers with little experience is their inability to understand, or you could say willful neglect of wanting to understand, that a lot of these deals don't go as planned. For whatever reason they simply cannot see the negative side of things they only see the upside of owning businesses and doing roll ups and LBO's and everything else that somebody told them about.
Again, this is not everybody but i have seen this way too often and it can be very problematic for an individual investor or a search fund that is backing somebody. Personally, in my opinion, having a searcher do a multi-million deal when they are not coming in with any skin in the game whatsoever is a horrific idea. I know it happens and again, everybody's entitled to do whatever they want, but's it a bad idea.
Sorry this response was so long I just thought it should be said. I guess the short answer could have been, be careful on the horse you back. Hope this helps somewhat. Feel free to reach out to me at any time if I can provide clarity on any subject for you thanks.