GETTING INTO THE ARENA

SEARCHFUNDER INTERVIEW OF MICHAEL BALLARD


We spoke with Michael Ballard about his experience in trying to raise capital for a search fund.


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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.”  [redacted][redacted]He informed us that it was very interesting; that as an MBA graduate you go out and buy a business and become the CEO.[redacted][redacted][redacted][redacted][redacted]I had already done a quasi-version of EtA before, where I, with partners went out and bought a home healthcare company.[redacted]We grew and ended up selling our shares for 100% IRR in about year and a half.[redacted]I 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.[redacted]To me, it just made perfect sense.[redacted]Also, 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.



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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 15-20 investors.[redacted]I 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.[redacted]People would ask me if I had formally launched.[redacted]I 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.[redacted]I 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?


[redacted][redacted][redacted][redacted][redacted][redacted][redacted][redacted]If 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?

 The interesting way that Professor Guido presented the EtA class is that you don’t have to go out and do it right here, right now.[redacted][redacted][redacted]So, if you have an opportunity to do an MBO or MBI.[redacted]Or, maybe, you think at night you’ll start to reach out to broker dealers and try to find a company, then that’s great. [redacted]I’ve noticed that the banks are getting happy to lend up to 90% acquisition plus working capital. There are a lot of routes to EtA and everyone can be different. [redacted]I am always still thinking about how I can get into this to eventually make it happen.  I will certainly keep an open mind.



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.


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You mentioned that investors seemed tapped out[redacted]

 I reached out to every investor that could be found online. Many would graciously reply and state that they were fully allocated.[redacted]At least, that’s what they told me: “We’ve allocated all of our capital that designated for search funds.[redacted]And, we’re waiting for some of it to come back.”[redacted]For example, one group said that they’re invested in 35 some odd active searchers and another 7 to whom they committed.[redacted]So, even though they really liked me, they were full. I received that message a half dozen times. I also think that this has become a very popular route and was indicative of what my lawyer said, “Three years ago, if you said you were doing a search fund, you were funded.[redacted]It doesn’t matter who you are, you were getting funded.[redacted]Now, it’s very competitive. There’s a lot of students coming out of Stanford and Harvard as well as Columbia, INSEAD now that are looking at this space very seriously.[redacted]They are all looking for traditional investors.”  Now, the investors must be very strategic and choose the best that they think are going to have the highest returns.



In your list, you mention that it’s a close and tight knit community.[redacted]Could you say more about that?


That’s just a good reminder to act professionally and always keep your integrity intact.[redacted]It’s like the broader entrepreneurial community. They all talk and know each other.[redacted]So, 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.


[redacted][redacted]Where I grew up (and my personal value system) was always “Be humble.”[redacted]Don’t over-exaggerate.[redacted]Always talk yourself down, essentially. [redacted]I found that that approach doesn’t serve me well in this context.  [redacted]  [redacted][redacted]We had 100% IRR.[redacted]I grew up in a family business.”[redacted]It’s having confidence and branding yourself in a way that says “I can be the entrepreneur you are looking for.[redacted]I will add some spice to your portfolio because I will knock it out of the park due to XYZ.”[redacted]It’s branding yourself in a way that speaks to potential investors.[redacted]My 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?

[redacted]  [redacted][redacted]They 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.[redacted]It was fun to see that transition happening.[redacted]

 

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.[redacted]Rejection 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.[redacted]Otherwise, you might want to rethink the search fund route.[redacted]You will be rejected a lot. So, if you are looking for an easy ride, this isn’t it.[redacted]

 

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.[redacted]


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. 


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Exactly. Some just try to sell a couple of businesses a year to make their money and that is it.



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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.[redacted]It was brutal doing the PPM, talking to 26 searchers, talking with investors.[redacted][redacted][redacted][redacted]rethink this whole EtA route and how I am going to do this in the future.[redacted]

 

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.



[redacted][redacted][redacted][redacted]I’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.[redacted]


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!



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[redacted][redacted]So, 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.



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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.


 



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