SEARCHFUNDER INTERVIEW OF MICHAEL BALLARD
We spoke with Michael
Ballard about his experience in trying to raise capital for a search fund.
Searchfunder member
Through business school, the Dean of our campus came to me
and a bunch of buddies, who were studying away – as grad students do and he
said , “There’s a guy named who is coming to speak about
Entrepreneurship through Acquisition.”
Searchfunder memberSearchfunder memberHe informed us that it was very interesting;
that as an MBA graduate you go out and buy a business and become the CEO.Searchfunder memberSearchfunder memberSearchfunder memberSearchfunder memberSearchfunder memberI had already done a quasi-version of EtA
before, where I, with partners went out and bought a home healthcare company.Searchfunder memberWe grew and ended up selling our shares for
100% IRR in about year and a half.Searchfunder memberI had
been involved in the entrepreneurial start-up mode before and that is a grind.
I believed that EtA was a great way to mitigate some of the risks and still have
some upside potential while surrounding myself with a bunch of really smart,
motivated people.Searchfunder memberTo me, it just made
perfect sense.Searchfunder memberAlso, realized that I had
made a lot more money in relative and in absolute terms through an acquisition
and exit than I ever did in a start-up.
Start-ups only cost me a lot of money, not just in sweat equity. I
thought that the search fund route is a lot better route for me.
Searchfunder member
Probably about 6 to 8 months from the time I took the class.
I put together the PPM and talked to 26 searchers and another###-###-#### investors.Searchfunder memberI found that the more I reached out, the more
and better information I received, and my questions got much better and as a
result I gleaned much more insight into the EtA model.Searchfunder memberPeople would ask me if I had formally
launched.Searchfunder memberI guess I was launched because
I was out hustling investors. I never really did the whole roadshow thing. At
that time, I didn’t know that you did a roadshow to raise capital.
Did you consider the self-funded route?
For personal reasons, the self-funded route was not a real
option for me.Searchfunder memberI was going the
traditional route or the accelerator route.
One of the mistakes, I made was cross-pollinating, which I mentioned in
my list. The accelerators want to know
that you are committed to the accelerator route. I took more of a shot gun
approach. I am just going to go for this – if it’s the traditional route, cool.
If it’s an accelerator, that’s great too.” I knew the pro’s and cons to each, I
just knew I wanted to do it. That lack of clarity was also one of the things
that didn’t help me out.
Do you feel like it was any different than a job interview where you’re interviewing for 3 similar companies and they all want you to be their first love?
Searchfunder memberSearchfunder memberSearchfunder memberSearchfunder memberSearchfunder memberSearchfunder memberSearchfunder memberSearchfunder memberIf you’re talking to traditional investors,
then firmly say, “I want to go traditional” and vice versa. In my mind, a
candidate needed to demonstrate that they’re absolutely committed to EtA no
matter what route it is. Whereas, the investors wanted commitment to a direct
route.
I’m not a super-traditional guy that started like most in this space seem to be. I grew up in a family business, which is one of the reasons I wanted to do it. I can relate to family business owners and felt that was an advantage because I could empathize with them and talk their language.
Would you consider the self-funded route in the future?
We have plenty of folks who spend 3 to 5 years of corporate or finance employment experience and then try.
Right. That is a great way to go as it helps you better
understand the systems and processes in place to increase efficiencies in your
future business.
So, it’s never like the door is closed, just that you’re on another path for now.
Searchfunder member
You mentioned that investors seemed tapped outSearchfunder member
In your list, you mention that it’s a close and tight knit community.Searchfunder memberCould you say more about that?
That’s just a good reminder to act professionally and always
keep your integrity intact.Searchfunder memberIt’s like
the broader entrepreneurial community. They all talk and know each other.Searchfunder memberSo, you never want to do or say anything that
would detract from that. You never want
to tell one traditional investor one thing and then something else to another.
You also mention branding yourself, being honest and authentic.
Searchfunder memberSearchfunder memberWhere I grew up (and my personal value
system) was always “Be humble.”Searchfunder memberDon’t
over-exaggerate.Searchfunder memberAlways talk yourself
down, essentially. Searchfunder memberI found that that approach
doesn’t serve me well in this context.
Searchfunder member
Searchfunder memberSearchfunder memberWe had
100% IRR.Searchfunder memberI grew up in a family
business.”Searchfunder memberIt’s having confidence and
branding yourself in a way that says “I can be the entrepreneur you are looking
for.Searchfunder memberI will add some spice to your
portfolio because I will knock it out of the park due to XYZ.”Searchfunder memberIt’s branding yourself in a way that speaks
to potential investors.Searchfunder memberMy branding
evolved to being much more confident, and that just comes with time and
experience. I realized that I have done cool
things that were very applicable to EtA.
Did you talk to 26 searchers before talking to investors?
Searchfunder member Searchfunder memberSearchfunder memberThey successfully acquired and exited and are now getting into investing. I spoke with one searcher who was still in an operating role but invests in a handful of searchers.Searchfunder memberIt was fun to see that transition happening.Searchfunder member
I talked with searchers in all phases. I spoke with some searchers who had closed down their funds without acquiring. They didn’t have much good to say. I recall one in particular who mentioned the professional risk of the search fund route. Once he didn’t secure a company, he had trouble finding a job. Search funds aren’t well known and it’s harder to translate the experience to the skills that were needed for a position. Others said that the metrics aren’t as profitable as entrepreneurs think because of the hurdle rates and the carried interest instead of equity, etc. It was an eye opener but was I undeterred. It did help me go in with both eyes open.
You hear the pitches and think, “Wow, I could own 25% of a $50M business. That’s awesome!” But that is not exactly right in many cases, you have hurdle rates. I heard a lot of good and bad. But these conversations helped me to communicate better with investors. Understanding the financials of the model is very important to making a clear decision.
Your next point is “Be ready for a lot of rejection."
Yes. I talked to just about every investor in this space. The
more I went on the more I started to realize the chances of getting anybody
else to jump onboard are very slim.Searchfunder memberRejection
not only happens in raising your fund, but also in seeking to acquire a
company. If you don’t like rejection, you must learn to like it or learn to at
least deal with it.Searchfunder memberOtherwise, you might
want to rethink the search fund route.Searchfunder memberYou
will be rejected a lot. So, if you are looking for an easy ride, this isn’t it.Searchfunder member
This goes to my next point for “Be prepared for the unexpected.” Those deals can blow up in the 11th hour. You’re going to have deals within days of closing that go downhill. One searcher said that his blew up on the eve of close because a seller revisited his forecast and decided he wanted 20% more for the business. Disappointments can and will happen.
My impression has been that investors seemed more open to opportunistic deals, but you have here 80% proprietary.Searchfunder member
While some investors may say they are open to looking at
opportunistic deals, I very rarely heard a traditional investor say that they
wanted an opportunistic search. Proprietary is the preferred route and there
are a lot of reasons for that. First, most opportunistic deals are not very
good in that they don’t meet the level of business sophistication that is
required. Second, it’s hard to get a good company being sold by a broker-dealer.
Lastly, if it is a good company with a broker-dealer, then a lot of eyes are
looking at it, including private equity firms. In fact, private equity firms
are coming down to the lower middle market to target the smaller firms because
M&A activity is up and the competition to buy these lower middle market
firms is competitive. One fund said that they haven’t done an opportunistic
deal in years.
Self-funded searchers seem to do a lot of both and retain a lot of flexibility. In talking with self-funded searchers, several said they would have done more opportunistic deals, just to keep the deal flow numbers up. It is a numbers game. Proprietary can be a grind by emailing, cold calling, sending out letters and generally trying to get responses and meet with potential sellers, etc. Plus, there is the benefit of having an already motivated seller.
Searchfunder member
Exactly. Some just
try to sell a couple of businesses a year to make their money and that is it.
Searchfunder memberSearchfunder member
That’s a very popular quote known as the “Man in the Arena”
quote. I believed that if I were going to do it, I would put it all on the
line.Searchfunder memberIt was brutal doing the PPM,
talking to 26 searchers, talking with investors.Searchfunder memberSearchfunder memberSearchfunder memberSearchfunder memberrethink this whole EtA route and how I am
going to do this in the future.Searchfunder member
I talked to others about it and they loved the model, but don’t want the grind of searching. Where’s the battle? Where’s the victory? Searching is an essential prerequisite for acquiring a company. They’re never going to swing that pendulum between good and bad, joy and pain to know the joy of succeeding. That’s how I feel. I worked my tail off ultimately to not get into a traditional fund or accelerator. I am okay with it because I gave it my best shot. I’m not going to sit in my rocking chair, when I am 80 years old, thinking I wish I tried to do the search fund. I won’t have that regret because I gave my all.
Searchfunder memberSearchfunder memberSearchfunder memberSearchfunder memberI’ve talked to so many musicians who wished they’d taken the time after college to tour around the country in a beat up van.Searchfunder member
Exactly. EtA is a great way to do something that makes a
difference. It might not be the business per se, but its managing, leading,
raising capital, strategy, growth and all the things that go into being a CEO. Tons
of fun!
Searchfunder member
Searchfunder memberSearchfunder memberSo, I’d like to stay connected to the search
community. Learning about the EtA model has also given me some ideas, so we
will see what happens. Right now, I am working at a GE portfolio company during
the day and work on my own stuff at night. I feel I am wired to blaze my own
path. I will keep going forward and it’s
a matter of when and what it looks like.
What from your experience will you take into this next phase?
The intellectual challenge of it all has been a lot of fun
for me. The level of sophistication that these investors are at – when you
realize who they are, where they are, what they’ve done and how they think
about business – they are very detailed and cognizant of every risk that could
turn things upside down. Those types of things that I have gleaned from the
Stanford primer, case notes from INSEAD and speaking with searchers and
investors has all been helpful in taking my business sophistication to the next
level.
You included a spreadsheet at the end of your notes?
Some of the texts I read treat equity and carried interest the same, they are not. They aren’t very clear on the mechanics. So, I’m not sure if my numbers are correct. It was just me taking a stab at the content that was out there and extrapolate out that data. In this example, all debt is paid down, the searcher could have $30M exit and reap $1M. For the numbers to really work for the entrepreneur to make a sizeable amount of money, two things have to happen: First, you have to buy a bigger company, say north of $12m and you have to grow it very rapidly, so you can have EBITDA growth, cashflow generation, debt paydown and EBITDA multiple expansion. you must get into the middle market for the metrics to work out for the entrepreneur toward building any sort of wealth.
Searchfunder member
I love this space.
So, if there’s anything I can do to help out you or a potential
searcher, please let me know. Thank you.
303 views
10 comments
Sign in to see all replies.
Create an account.