After 2 years of a part time search and a 7-month diligence process, I finally closed on my first acquisition in December. I always found it helpful to hear the reflections of other successful searchers, so I am sharing some of my biggest learnings in the process:
- Part-time searches can work, but they are not for everyone - at the beginning of my search, most of the advice I received was against a part-time search. I didn't take the advice and I conducted the entirety of my search while working as an independent consultant almost full time. While it did work for me, what made it possible was my background (McKinsey) and tremendous luck in finding a great client who kept engaging me. Additionally, I had to entirely give up any proprietary search and most activities outside of work (especially during diligence). However, I would totally do this again, as it gave me 1) the patience to wait for the absolute best deal I could have dreamed of 2) even for a good deal on paper, the ability to walking away in front of red flags, regardless of the sunk costs.
- Evaluate your vendors wisely and structure your contracts well - signing up for substantial debt with a personal guarantee was terrifying for me. What got me through the hurdle was a rigorous process and support from quality vendors, which come at a cost. Even then, almost all my vendors tried to overcharge me by a very substantial amount. What saved me were contracts well structured, keeping a close eye on them, and staying very firm in renegotiations. Strive for fixed fee agreements and even for hourly contracts, always include a clause with levels of spend that require your written approval for the vendor to continue the work.
- The reason why a searcher can be competitive on a brokered deal is because it has hair all over it - to get a deal done, you must accept risks that you can understand / diligence better than other buyers. Personally, the only risks I stayed away from was customer concentration and young sellers without good reason to sell, but I tried not to exclude any other yellow flags.
- At current interest rates, the###-###-#### deals are incredibly rare, but you can still strike a great deal with ~20-25% equity. Maybe because I underwriting most deals conservatively to ensure a safety cushion and a scalable structure, but I have not evaluated a single deal where a###-###-#### deal would work without taking incredible risks (i.e., 1.25 DSCR on just the last 1-2 years and much lower values historically). However, the equity markets are still very generous for searchers and you can still keep a substantial portion of the company with much more equity###-###-#### % or even more depending on the multiple). Generally, my rule of thumb was any deal where equity was <1.5x EBITDA were doable. I am thankful to many lenders who educated me on how to underwrite an opportunity. Spend time building those relationship and knowledge, so you can build a model to quickly evaluate if an opportunity is worth pursuing.
- If a company is the right company, overpaying is better than losing the opportunity - I was able to get under LOI on my deal by writing an aggressive offer that matched expectations. I was lucky enough that the company earnings were better than expected and I turned out not to be overpaying by that much in the end. Sometimes writing a very aggressive offer to get under LOI and figure things out afterwards might be the right strategy.
- Watch out for problematic language in bank loan documents. I had a great relationship with my selected banker. In order to close, I agreed to have loan documents delivered only the morning of close. I thought that they would be SBA documents without the ability to negotiate. Next thing I knew was that the bank also had their own loan documents with very aggressive language (e.g., confession of judgment among other things). There was a risk the deal will slip and even not happen if some of that language couldn't be negotiated out. I was able to have some of the more problematic language removed, but I would strongly advise to have a tempalte of loan documents reviewed at least 2 weeks before close.
These were only a few of the countless learnings over the last 2 years. Pursuing this path has been an incredible experience, in large part thank to the great community of searchers, operators, and lenders who allow people to learn all the nuances required to be successful. A big thanks to everyone who helped me out in this process (including the searchers I called the morning I got my bank papers panicking and talked me into some sense). I hope I can be equally as helpful to others - hit me up on LinkedIn if you want to connect.
Learnings from a 2-year successful part-time search

by a searcher from The University of Chicago - Booth School of Business
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