In this episode of the M&A Launchpad Podcast, hosts Feras Moussa and Casey Minshew welcome Sean Smith, Managing Partner at Search Fund Ventures and co-founder of SMB Investor Network. Sean brings a transparent, investor-first lens to the world of small business acquisitions, breaking down what dealmakers need to know to structure successful transactions.
The conversation covers everything from capital stack nuances and risk mitigation to understanding investor preferences and step-up dynamics in self-funded search and independent sponsor models. Sean also shares his entrepreneurial journey and mission to democratize private equity for accredited investors.
In this podcast episode, we discuss:
· How to structure any deal with the right capital stack
· The investor mindset: what matters most in deal evaluation
· Why the traditional search model might not be as successful as it seems
· Comparing self-funded search vs. independent sponsor deals
· How to evaluate deals using MOIC (Multiple on Invested Capital)
· Why high debt levels change investor risk profiles
· The role of quality of earnings in securing investor capital
· How to approach investors with teaser decks and checklists
· Real-world lessons from Sean’s portfolio and due diligence
· Why transitioning small businesses is a national responsibility
Connect with Sean Smith:
Email: sean@searchfundventures.co Website: https://searchfundventures.co SMB Investor Network: https://smbinvestornetwork.com
Additional Resources:
· O’Connell Advisory Group – Financial diligence and Quality of Earnings experts for business buyers. Website: https://www.oconnelladvisorygroup.com
· Attend the M&A Launchpad Conference – May 3, 2025 in Houston Premier event for entrepreneurs and investors in the lower-middle market. Tickets and info: https://www.malaunchpad.com
Additional Resources:
Sponsored by O’Connell Advisory Group – Work with a trusted Quality of Earnings and Financial Diligence partner who focuses solely on business acquisitions.
Visit: https://www.oconnelladvisorygroup.com
Attend the M&A Launchpad Conference – May 3rd in Houston.
Premier event for entrepreneurs, investors, and dealmakers in the lower-middle market.
Get your ticket at https://www.malaunchpad.com and use code LAUNCH for $200 off.
M&A Launchpad Hosts Contact – info@equitylaunchpad.com
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Transcript
00:00 hey are you thinking about buying or
00:02 selling a business join us May 3rd for
00:05 the M&A Launchpad Conference this is the
00:07 premier conference for entrepreneurs
00:09 investors navigating mergers and
00:11 acquisitions in the lower middle market
00:13 you’re going to connect with top
00:14 dealmakers gain insight strategies to
00:17 take your business search and your
00:19 business acquisitions to the next level
00:20 so get your tickets now at
00:24 malaunchpad.com and use the code launch
00:26 for $200 off your ticket we’re looking
00:28 forward to seeing you on today’s episode
00:30 we interviewed Sean Smith from Search
00:32 Fund Ventures where we talked a lot
00:34 about really as a search fund right how
00:36 do you look at a deal and more
00:38 importantly how do you structure a deal
00:39 right because we’re big believers that
00:41 any deal can be bought if you put the
00:43 right structure in place to make all
00:45 parties happy and what we love about
00:47 this business is that you can get really
00:48 creative on it and so we kind of dived
00:49 into a lot of those topics and as a pure
00:52 investor right how does Shawn analyze
00:55 these deals how does he consider the
00:56 deals how does he weigh the jockey vers
00:59 versus the horse and all the other
00:60 aspects around it casey what were some
01:01 of your takeaways yeah just just right
01:03 off your piggyback right off you i think
01:05 that anybody that is putting together a
01:07 deal right now that does not understand
01:09 what the investor wants you need to stop
01:12 listen to this podcast go back to it
01:13 because Sean breaks it down he is an
01:15 active investor 15 to 20 deals a year
01:18 and they are doing the the the solo
01:21 acquisition entrepreneur that’s raising
01:22 you know maybe 10 or 20% of his deal or
01:25 even the independent sponsor but he also
01:27 talks about like how does he measure the
01:29 investment is it a two-up step step up
01:31 basis well it doesn’t work with a lot of
01:33 leverage I mean these are new things I’d
01:35 not heard and so it was a pretty
01:36 impressive very impressive conversation
01:38 yeah so not too technical but very
01:40 valuable so go ahead and listen to this
01:46 Welcome to the M&A Launchpad podcast
01:48 with your hosts Casey and Ferris with
01:49 Equity Launchpad on this podcast you
01:51 will gain insights on acquiring
01:52 investing in and selling profitable
01:54 businesses in the lower to middle market
01:56 whether you’re a business owner investor
01:57 or aspiring entrepreneur at Equity
01:59 Launchpad we will provide you with the
02:00 knowledge guidance and capital to
02:02 navigate the world of mergers and
02:04 acquisitions all right guys just take
02:06 one second here real quick when you’re
02:08 buying a business ensuring the financial
02:09 health of the company is critical and
02:11 that’s where a quality of earnings
02:12 partner comes in quality of earnings
02:14 gives you confidence in the financials
02:15 of the company that you’re purchasing it
02:17 aims to protect your investment and
02:19 ensure that you’re stepping into a
02:20 profitable business on day one patrick
02:22 of Okonnell Advisory Group is your
02:24 dynamic quality of earnings partner he’s
02:26 here to help you buy the right business
02:27 on your timeline patrick’s entire
02:29 practice is focused on business
02:30 acquisitions your niche is his niche and
02:33 over the past decade Patrick’s helped
02:35 more than 200 buyers like yourself
02:36 successfully purchase and operate
02:38 enduring profitable businesses in fact
02:41 Patrick’s helped some listeners of this
02:42 show so if you’re buying looking for
02:44 help with the quality of earnings
02:46 financial due diligence network capital
02:48 and more head to
02:49 okonelladvisor.com or just click the
02:51 link in the show notes hey Sean welcome
02:53 to the show hey guys thanks so much for
02:56 having me yeah we finally got you here
02:58 man we’ve uh we’ve been staying in
02:59 contact and now we’re here yeah ever
03:01 since the Chicago conference that was
03:03 great so glad we can make it happen
03:05 awesome so for for the listeners that
03:07 don’t know Sean Sean you want to maybe
03:08 share a little bit about yourself and
03:09 what you do yeah absolutely um so Sean
03:12 Smith I’m the managing partner at
03:14 SearchFund Ventures and also a
03:15 co-founder of
03:17 SMBinetwork.com and you know the two
03:20 sides of the business search fund
03:21 Ventures is a fund with committed
03:23 capital we invest into you know
03:25 independent sponsors and self-funded
03:27 searchers really in the kind of you know
03:29 micro cap PE one to three million EBITDA
03:32 range um and we take those you know
03:35 investment uh that we make through the
03:38 fund and bring them to SMB investor
03:39 network as a co-investment opportunity
03:41 so we’ve got about 1,200 co-investors on
03:43 on SMB investor network and always
03:45 looking for for great deals to support
03:48 awesome and so so you know you’re a fund
03:50 that funds independent sponsors and
03:53 self-funded searchers how did you get
03:54 into that space you know let’s kind of
03:56 talk about the preface and just kind of
03:57 where it all started yeah so you know to
04:01 to go way back my entire family on my
04:04 mom’s side uh virtually all you know all
04:07 the folks I can count are are
04:09 entrepreneurs um and they range from you
04:12 know one’s a pretty successful venture
04:14 fund manager and founding partner um all
04:16 the way through an events planning
04:17 business so there’s lots of diversity in
04:19 there and then on my dad’s side a
04:21 handful of his close friends are
04:23 actually serial acquirers of businesses
04:25 so I’ve kind of seen you know just have
04:27 a family history in both the zero to one
04:30 side of things and also the acquisition
04:31 entrepreneur space i personally latched
04:34 more onto the acquisition entrepreneur
04:36 angle um it’s it’s just an investment
04:39 profile that fits a lot more with what I
04:41 understand and so kind of growing
04:44 through I’d say my professional journey
04:46 after college I uh was an investment
04:49 banker in leverage finance at a bank
04:50 called CIBC and I kind of built those
04:52 transactional finance skill sets moved
04:55 into direct investing all the while kind
04:58 of with the goal of saying hey I want to
04:60 get into a place where I can start
05:01 buying businesses and supporting that so
05:04 call it 18 months or so ago I started
05:07 partnering with searchers as essentially
05:08 a deal team member helping them source
05:10 deals helping them evaluate deals
05:12 bringing those transactional finance
05:13 skill sets to this micro cap PE world
05:16 and all the searchers that I worked with
05:18 said “Hey do you know anyone who can
05:19 provide equity for these deals?” And
05:21 that’s when I really started building
05:22 the network of you know investors and
05:24 and folks that were investing in
05:27 self-funded search and independent
05:28 sponsor deals met my business partner
05:30 through that that process Nick Bryant he
05:32 became the anchor investor in our fund
05:35 and we held our initial close in August
05:37 2024 and and really have been pursuing
05:39 that thesis of you know backing sponsors
05:41 and searchers got it congratulations
05:44 that’s that sounds like uh you know you
05:46 had a vision and uh you you you created
05:49 it man you made it happen so and maybe
05:52 let me ask you this because a lot of
05:53 people you know as they get into the
05:55 space they’ll first find out about
05:57 searching right but then a self-funded
05:59 searcher and independent sponsor those
06:01 are actually more nuance right much more
06:03 niche so to speak and so what attracted
06:05 you more to those over just following
06:08 that more traditional search model yeah
06:10 it’s a great question that is a good
06:12 question bringing it out today asking
06:14 all the good ones unbelievable question
06:16 um so for me I really like looking at
06:20 the deal right and I always wanted to
06:22 look at a specific company a specific
06:25 entrepreneur the terms that surround
06:28 that acquisition the terms you know for
06:30 the investor i want to have a holistic
06:32 picture of what we’re investing into
06:34 before we deploy a dollar of capital
06:36 right the traditional world has you know
06:40 averaged incredible returns historically
06:42 right right i mean Stanford puts out
06:43 their 35% irr figure pretty much every
06:46 year for the past decade the the
06:49 challenge there is you know you you
06:51 provide some capital to someone who’s
06:53 searching you provide a modest amount
06:55 and the you know the the rumblings are
06:58 that the actual success rate of that
06:60 search you know people finding a
07:01 business and actually closing on it is
07:04 going down um I think at the most recent
07:06 HBS conference Jim Southern of Pacific
07:08 Lake flashed a slide that showed
07:10 somewhere closer to 52% of um you know
07:15 traditional searchers succeeding in
07:17 acquisition versus 33% in some of the
07:20 historic Stanford studies so just that
07:23 lack of visibility into what you’re
07:25 going to be investing in if you invest
07:27 in a traditional search and if there’s
07:29 actually going to be a close was
07:31 something that just didn’t hurdle for me
07:33 for my personal investing approach and I
07:35 think also for the LPs that have
07:36 invested in our fund and and and the
07:38 folks that invest alongside us in the
07:39 investor network that said it’s a great
07:41 it’s obviously a great approach and a
07:43 lot of people have done really well
07:44 there so it’s it’s just a matter of
07:46 preference does it sound like it’s more
07:48 about it’s kind of like the blind fund
07:50 model versus the deal specific model
07:52 right you want to know what you’re
07:52 investing into versus hey the hope that
07:55 Casey’s going to go off and look for a
07:57 chrome plating company but then he shows
07:58 up you know a week later and says you
07:60 know what I want to buy Popeye’s
08:01 franchise and that’s what we’re doing
08:02 right that’s spot on all right and if
08:05 you hang around me long enough it may
08:06 actually sound just like that ferris was
08:09 was a dig on his part you know he’s like
08:11 he’s like Casey comes in he’s like “We
08:13 got this deal.” No I’m just But being a
08:15 deal guy you know that’s kind of one of
08:17 the things that makes it exciting to be
08:18 in the sponsor world is to chase those
08:21 deals and I love the the angle you get
08:23 to sit on because you get to say “Hey
08:26 we’ve got committed capital and I get to
08:28 look at those deals but you don’t have
08:30 to get into the weeds you know and
08:31 that’s the that is the the magic of the
08:34 investor and that that mentality right?”
08:37 Now I’m a big Robert Kiosaki fan and if
08:39 you remember his cash flow quadrant
08:40 right you know and you look at the be in
08:43 the eye right so you get to sit in the
08:45 eye position which is where everybody
08:46 wants to be they want to be the investor
08:48 no one really wants to be in the
08:49 business running the business doing the
08:51 business but we got to do that to get to
08:52 that next phase right so it’s a really
08:54 good symbiotic relationship on the
08:56 investment side and then on the business
08:58 side and uh no it’s it’s pretty powerful
09:01 my my big question for you Sean is you
09:04 know when you started looking at SMB in
09:08 your in your group the small business
09:09 side a lot of those guys are more into
09:11 that ETA world less about independent
09:14 sponsor world so tell me kind of how you
09:17 in your differentiation right of how you
09:18 look at the both markets so a lot of
09:20 people don’t know all these terms they
09:22 they’re like “Hold on I just learned
09:24 about what a solo search fund was and a
09:26 searcher why don’t you kind of give us
09:28 some education on how you see the ETA
09:30 world and how you see the independent
09:32 sponsor yeah another great question um
09:35 you guys are on fire so the there’s two
09:38 it’s really important I think you know
09:40 from sitting in someone’s seat where you
09:42 are trying to invest in both sides and
09:44 both deal structures to be able to
09:46 compare those things on an applesto
09:48 apples basis right and one of the
09:50 reasons that’s so tough to do is because
09:53 the capital structures the investor
09:56 terms and this the kind of in overall
09:58 incentive models are pretty different as
10:01 you start to peel back the layers so
10:03 I’ll try to explain this in really brief
10:06 briefly but you know on the self-unded
10:09 search generally the searcher is going
10:11 to become the CEO after they buy the
10:13 business they’re going to be using an
10:16 SBA loan in some form to finance a large
10:19 portion of the acquisition that SBA loan
10:22 is going to come with a personal
10:23 guarantee that the searcher is going to
10:25 take on and then they’re going to raise
10:27 a modest amount of capital that’s
10:28 usually you know 10 maybe 20% max of the
10:33 total sources for the acquisition right
10:36 so that’s kind of the capital structure
10:38 that comes into play and I would say
10:40 most of the people that listen to our I
10:42 would say most of the people that we’ve
10:44 seen in our demographics of listeners
10:46 that’s going to be their model right
10:47 they’re going to raise the 10 to 20%
10:49 they’re going to get the SBA loan and
10:50 they’re going to make a business or
10:52 they’re going to make an acquisition
10:53 they want to be they’re going to run
10:54 that business for the next 10 years yeah
10:57 and that’s it’s a great model and I
10:59 think incentives she surely based on the
11:01 fact that there’s a personal guarantee
11:03 and that the person’s in the weeds
11:05 running the business incentives are
11:06 really well aligned on that front right
11:08 okay on the independent sponsor side
11:11 generally there’s a little bit less debt
11:13 being used maybe it’s around 50 to 60%
11:16 max in a lot of cases right and they’re
11:19 raising more equity probably more like
11:21 30 to 40% potentially um or there’s a
11:24 gap in there for with kind of seller
11:26 financing whether it’s a note or equity
11:29 but the big difference between the two
11:31 structures is the independent sponsor is
11:33 going to take a carried interest meaning
11:36 equity people who invest in the equity
11:37 are going to own virtually 100% of the
11:39 business and get diluted upon exit based
11:42 on performance and that dilution is
11:44 usually between 20 to 30% so it’s it’s
11:47 actually very attractive when you
11:48 compare that to the self for an investor
11:51 when you compare that to the self-funded
11:52 search model where there’s this this
11:54 quote unquote step up dynamic that’s
11:56 become kind of market And what that step
11:59 up means is you know the basis that
12:02 investors like like us put in if we put
12:05 in 10% of total sources of capital used
12:08 to buy the business and you step us up
12:10 two times will own 20% of the business
12:14 but where that becomes a little
12:15 challenging if we’re comparing
12:17 self-funded search and independent
12:18 sponsor on an applesto apples basis is
12:21 if the searcher is using 80 90% debt to
12:25 finance the acquisition and investors
12:27 only own 20% of the business there’s a
12:30 really disproportionate kind of
12:32 ownership versus um financial risk that
12:36 we’re taking on even with the personal
12:38 guarantee in place that business is
12:40 still the first line of defense against
12:41 that SBA loan and that if that SBA loan
12:44 is you know 80% of the capital structure
12:46 and probably between four to you know
12:48 four times EBIT or something like that
12:50 it’s just a disproportionate level of
12:52 risk so we really look at that capital
12:53 structure weigh out the incentives that
12:56 are are probably better on the search
12:58 side than on the independent sponsor
12:59 side but the capital structures are
13:01 usually safer and the the uh carry
13:04 structures are a little more investor
13:05 favorable on the independent sponsor
13:06 side and we we take that all into
13:08 consideration when we look at these
13:10 deals yeah it’s funny that you see that
13:12 that way i almost feel like Casey and I
13:14 really look at it the opposite way in
13:15 some some regards right because like as
13:17 an independent SP like the to me the
13:19 search model is very rigid it is what it
13:21 is right now you’re right from the risk
13:24 profile of hey essentially the investors
13:26 taking on the bulk of the the financial
13:28 money in right but the independent
13:31 sponsor side as an independent sponsor
13:33 which is really what Casey and I
13:34 probably classify ourselves as right we
13:36 can get really creative too right and so
13:39 absolutely we like the independent
13:40 sponsor model because of the fact that
13:42 we can actually structure things that
13:44 are much more economical for us and at
13:47 the same time protect the investors and
13:48 so it ends up being a win-win and so you
13:50 know but I think Sean’s point is is that
13:53 the traditional independent sponsor
13:55 model right this is what it is then the
13:57 thing we like about it is it’s kind of
13:58 like the wild west in our sense you know
14:00 like if I can go get an owner to owner
14:02 finance the deal to me we don’t have to
14:04 put any cash in it i can get in there
14:05 and go to work and then I come to you
14:07 Sean and I’m like “Hey we’re going to
14:08 contribute this cash flowing asset into
14:10 our next rollup act you know and that’s
14:13 our contribution.” You’re like “Shit
14:15 let’s do a deal.” You know it’s like it
14:17 doesn’t get so rigid but on that ETA
14:18 because you have that SBA note it has to
14:21 be structured a certain way because
14:22 Shawn can’t come in and be a guarantor
14:25 so he can’t own 19% or more that’s right
14:28 but you do get it through your step up
14:30 in basis and that’s how you overcome the
14:32 personal guarantee so let’s let’s break
14:35 this down even further because this is
14:37 this is huge because Sean you’re giving
14:38 them behind the curtain because I think
14:40 a lot of people out there don’t know how
14:42 they’re going to go to their investor
14:43 and they’re gonna look I’m going to give
14:44 you 5% equity for 100 grand right but
14:47 for a traditional investment into that
14:49 SBN that that that deal that SBA loan
14:52 deal give us those terms that you guys
14:54 like to see like break it down for us so
14:57 that person go “Oh that I never thought
14:59 about it that way.”
15:01 Yeah
15:02 um so kind of going back to just looking
15:06 holistically at the capital structure it
15:08 we don’t approach these deals by saying
15:11 we need to see a 2x step up or we need
15:13 to see you know something between one
15:15 and a half to two times i think a lot of
15:17 searchers might hear that from the
15:19 market
15:21 what we look at is how much debt you
15:24 know total debt are you putting on the
15:26 business between your SBA loan your
15:29 seller note where does that shake out
15:32 and then we we look at what does that
15:33 imply from a step up standpoint and the
15:36 easiest math to do assuming you know no
15:39 dilution nothing is if a business has is
15:42 fin you know an acquisition’s financed
15:43 by 50% debt that implies a 2x step up if
15:48 you just pay down that 50% debt you get
15:50 a 2x mo right so so we start to look at
15:53 that and if you build a chart of this
15:55 sort of thing you’ll see that once the
15:58 debt gets higher it doesn’t go up
15:59 linearly it goes up exponentially so if
16:02 you look at a deal that has 90 that’s
16:04 financed by 90% debt like some of these
16:06 self-funded search deals because the SBA
16:08 will allow that right yeah you can even
16:10 get up to 95 if you structure it right
16:12 right it’s there i I was looking at a a
16:15 capital structure the other day that had
16:17 had 2% equity injection i forget how
16:19 they got there they they pulled all
16:21 these levers to get to you know so but
16:24 the point is when you get to those
16:25 numbers you’re talking about implied
16:27 step-ups in the range of like 20 times
16:29 right that’s hypothetically what the the
16:33 kind of risk profile if you will should
16:36 be for someone who’s levering up a
16:38 business that much so when we see a deal
16:40 that has 90% debt and we’re getting a 2x
16:44 step up there’s a big gap between what
16:46 we hypothetically should be receiving
16:49 and what we’re actually receiving and
16:51 that’s what makes us concerned so we’re
16:53 fine with a you know one and a half two
16:54 times step up as long as there’s only
16:57 you know 50 to 60% debt on the business
17:01 okay then there’s
17:02 not where does it go at 90 if you look
17:04 at the deal I’ve got it i told you 98 is
17:08 uh 20 times you’re but you’re doing a
17:10 deal so most of your guys are going to
17:12 come to you with a 10% down like No
17:14 that’s a good segue maybe to segue that
17:16 you know just kind of what is a recent
17:18 deal you’ve done right kind of how’d you
17:19 structure it what was the debt and what
17:21 was kind of the step up yeah we recently
17:24 did one it’s a sewer inspection deal
17:27 um let’s see i’m gonna have to rack my
17:31 brain getting you know we look at 20 to
17:33 30 deals a month so it’s hard for me to
17:35 remember the exact numbers but I believe
17:37 it was somewhere in the range of 60%
17:43 um you know senior debt um and then
17:49 there was some rolled equity in there
17:50 that’s right there was rolled equity and
17:52 a bit of forgivable seller note that got
17:55 I think equity investors contributed a
17:58 total of around like 17 or 18% after
18:03 that that rolled equity slug that took
18:05 up you know a decent amount
18:08 and investors were basically given a two
18:10 and two and a quarter time step up on
18:12 that or so so we still weren’t um you
18:16 know we weren’t majority owners of the
18:17 business afterwards it was a little less
18:19 than two and a quarter to get there so
18:21 the searcher was able between the
18:22 searcher and the the owner who rolled
18:25 equity they still had kind of their
18:26 majority piece
18:29 um but we got a healthy step up that you
18:32 know if you do that that math it’s not
18:34 too far off from what that that debt you
18:36 know that leverage risk creates right so
18:39 I think that’s a really good example of
18:41 kind of marrying the capital structure
18:43 with the actual ownership that equity
18:45 investors come out with so I want to dig
18:48 back in on that one just because I I
18:50 understand it but I’m sure it can be
18:51 somewhat confusing but in in in the the
18:53 terms of the model of the SBA from an
18:55 investment standpoint I’m at 50% payown
18:59 on that note in year five which if the
19:03 company doesn’t grow at all and it stays
19:05 the same right we now have that much
19:08 more equity or we have that equity that
19:11 you didn’t have as an investor that came
19:12 in at maybe a 9010 right 10% equity 90%
19:16 now the debt’s paid off so you guys know
19:18 if it’s sold at that you would at least
19:20 be able to take your your money capital
19:22 back plus return right is that kind of
19:24 how you’re visualizing and then as that
19:26 debt keeps getting paid down even if
19:29 they don’t grow the business that you’re
19:30 protecting your step up basis is is that
19:34 kind of how you look at it when you’re
19:35 really digging in on those things i
19:38 think I may I I don’t think I fully
19:39 understood the question sorry yeah so
19:42 when you’re looking at like what you
19:43 were talking about the leverage piece
19:44 right yeah we know that if they hold the
19:47 business for five years right they’re
19:48 going to be paying down at least 50% of
19:51 that SBA right and if the business never
19:54 really if it never grows if it never
19:56 goes to the next multiple that it could
19:58 get or the the entrepreneur didn’t get
19:59 it and grow 30% like their performer did
20:02 right you’re able to at least see in
20:04 that that there’s now that if we just
20:06 trade it at what he bought it for you at
20:08 least know that that equity is there and
20:11 to get y’all’s investment back plus your
20:13 step up or at least somewhere in that
20:15 range that’s exactly right so and then
20:18 if you think about it from that
20:19 perspective you can back into what MOIC
20:22 you’re implying as long as the business
20:24 the big assumption right as long as the
20:26 business pays down the debt you can back
20:28 into the MOA i mean that step up is just
20:30 your it’s your MO at a certain point
20:32 right if if nothing else happens other
20:34 than paying down the debt that helps me
20:37 that that actually helps me because I
20:38 haven’t ever really seen it through that
20:39 lens but now I kind of see it because
20:41 I’m more the guy asking for your money
20:43 than the guy that’s uh placing my money
20:45 right so it’s good to see it from that
20:46 investor lens because that’s true you’ve
20:48 got to secure the fact that first am I
20:51 going to get my money back and
20:53 everybody’s
20:55 performs phenomenal i mean I can show
20:58 you the last 10 performers I’ve done
20:59 they’re phenomenal right and then I can
21:02 show you the last two the execution of
21:04 it it’s just not the same it’s lumpy so
21:06 I can from an investor standpoint the
21:08 one thing you can do is say if the
21:10 business just can pay its note right
21:13 right and and just trade for what we
21:16 bought it for i’m in a position to at
21:19 least get my money cover my bet and make
21:21 some return or myic and that I And for
21:25 those who don’t know MOIC or MOC
21:27 multiple uninvested capital
21:30 yep that’s exactly right so are you
21:32 doing the same math with an independent
21:34 sponsor or is it different math exactly
21:37 so then we you can translate that’s how
21:39 we compare these deals apples to apples
21:41 you can translate that to an independent
21:43 sponsor deal by basically taking you
21:46 know what is the equity slug what is the
21:48 investor’s
21:49 participation and you can you can you
21:52 can calculate you know I won’t walk
21:53 through all the steps to do it but you
21:55 can effectively calculate an implied
21:57 stepup based on you know what your
22:01 uh you know what what the multiple of
22:04 the the percentage of sources of capital
22:06 of is is equity based on what percentage
22:09 is debt right you so you can calculate
22:11 that step up and usually I’d say in the
22:15 sponsor deals because it’s you know 60%
22:18 50 to 60% sources of capital is debt
22:20 that carry is usually between 20 to 30%
22:24 you know that dilution also impacts it
22:26 right
22:27 um you’re usually looking at you know
22:31 kind of a one and a half times maybe
22:33 just north of two that’s kind of the
22:35 range for independent sponsor deals so
22:37 it’s funny how that all shakes out right
22:38 but the point is the independent
22:40 sponsored capital structure nine times
22:42 out of 10 is safer kind of and there’s
22:46 more cushion on it than these highly
22:48 levered you know self-funded search
22:50 deals got it and so so so maybe shifting
22:53 gears a little bit right if a person has
22:55 a deal how should they approach you
22:57 right like what you know what is the
23:00 most successful approaches right is it
23:02 just hey let’s have a call let me share
23:04 this with you or is it they come up with
23:05 a pitch deck you know do they go in and
23:07 model out the MIC for you i mean what is
23:10 from the you clearly you said you do
23:11 about 20 30 reviews of these a month
23:14 right which are the ones that actually
23:16 work out and why yeah so you know we’re
23:20 we’re probably a little different
23:21 there’s there’s a spectrum of investors
23:23 in the space right there’s folks that
23:25 are investing in a deal or two per year
23:29 there’s um you know folks like us that
23:33 are are doing aiming to do between 10 to
23:35 15 deals a year right so a lot more
23:38 volume um I’d say for you know the the
23:41 less frequent investors they’re probably
23:43 spending a lot more time with every
23:45 single deal they get or that would be my
23:48 my my guess and what I’ve kind of heard
23:50 from talking to folks they’re getting
23:52 more into each sim you know and and
23:55 really drilling in each time we’re much
23:58 more systematic about it right so we
23:60 sort of have call it three different
24:02 phases that we go through the first is
24:04 kind of a teaser checklist so when you
24:07 ask about what’s the best way to
24:08 approach we always like to just see send
24:10 us a teaser if you have a blinded teaser
24:12 it’s a one pager that’s got you know
24:14 good kind of critical information about
24:16 a deal that’s super helpful we can get
24:18 through that in probably 10 to 15
24:20 minutes and give you some feedback the
24:23 second step if we pass you know if it
24:25 passes our first checklist
24:28 um we’ll you know we’ll sign the NDA
24:30 we’ll look through the SIM and we have a
24:32 a longer form checklist and each you
24:35 know segment of that checklist has sort
24:37 of red flags that we’ll look to dequal
24:39 disqualify
24:41 uh at any given point right so it’s all
24:43 very systematic and it’s all meant to to
24:46 um allow us to process as much deal flow
24:48 as we can and give a fair look to every
24:51 deal
24:53 okay awesome and then um and then I
24:56 guess you know how much is it purely the
24:57 deal versus betting on the operator yeah
25:00 and that that’s a really good one and we
25:02 think about that all the time good
25:03 questions yeah so we think
25:06 um what’s kind of emerged in our minds
25:09 is there’s there are you know bets that
25:12 lean more towards the horse if you will
25:14 meaning the company and bets that lean
25:16 more towards the jockey in every time
25:18 we’re kind of seeing that our our thesis
25:21 leans a little bit one way or the other
25:23 and I can give you some examples um but
25:25 what I will say just from a fundamental
25:27 standpoint you know classic val we’re
25:30 we’re value investors right we apply a
25:31 lot of value investing principles to our
25:33 approach like classic value investment
25:37 theory says you should bet on the horse
25:39 and that’s what a lot of the big it
25:41 makes a lot of sense in a big publicly
25:42 traded company where there’s inertia and
25:45 you know sure the management team can
25:47 make an impact but they’re not going to
25:48 be able to just wholesale move an
25:51 aircraft carrier overnight right in this
25:55 you know small in the smaller uh
25:57 entrepreneurial investing world the the
26:00 jockey the the leader of the business is
26:03 so much more critical and they certainly
26:05 can move that business in a pretty swift
26:09 amount of time right and they can also
26:11 break things really quickly um so I
26:15 share that to say we put you need to you
26:18 need to as an investor put a lot more
26:19 emphasis on the operators in this space
26:22 than you might if you’re purely betting
26:23 publicly traded
26:24 companies to give you a couple examples
26:27 of kind of the the jockey strategies
26:29 versus kind of horse
26:31 strategies whenever we see you know
26:34 these kind of bigger rollup
26:36 opportunities that are betting on kind
26:38 of um you know trends and and kind of
26:42 whether there’s there’s you know great
26:44 tailwinds and and a great fragmented
26:46 market a lot of times those tend to lean
26:48 more towards the the kind of betting on
26:51 the entrepreneur and really believing
26:53 that they can execute a strong rollup
26:55 right because sure we underwrite the
26:57 first business the platform but at the
26:60 end of the day the upside and and even
27:02 in some cases kind of that base case
27:04 return hinges on execution of some good
27:06 or inorganic growth so I think that’s a
27:09 great example of where we focus a lot on
27:12 the
27:12 buyer the the other side of the coin
27:15 would be you know we see a business it’s
27:18 it’s incredibly healthy it looks very
27:20 easy to run there’s maybe there’s
27:23 potential to do inorganic growth but the
27:25 thesis hinges more around you know
27:27 holding it there’s attractive investor
27:29 terms to our conversation just a second
27:31 ago and we can generate a nice return as
27:34 long as debt gets paid down and maybe
27:35 you grow it at 5% a year right that that
27:39 we can you know get a lot more
27:40 comfortable with a variety of folks as
27:42 long as they have strong business acumen
27:44 demonstrated leadership skills they
27:46 don’t need to be an expert in that
27:47 specific industry so no great feedback
27:51 and great great stuff here and I I’m
27:53 going to kind of bring it to to just in
27:55 a story mine talking back and forth with
27:57 kind of how Ferris and I thought about
27:58 our first project right so when you know
28:01 I did a solo acquisition in 19 uh in the
28:04 I I bought a cubby up in Oklahoma all by
28:07 myself did the whole thing put the money
28:09 together put my own money in and you
28:12 know obviously right in time for COVID
28:14 the oil collapse all those great things
28:17 but hey my business is still running you
28:19 know we we ended up being you know 50%
28:21 of it into trucking you know we don’t
28:23 give up we don’t quit right very tough
28:25 tough economics when I approached Ferris
28:27 and Ben in 21 and said “Hey you know I
28:30 let’s take what I did here and then
28:32 let’s create you know a platform right
28:35 to go out and usually have people run
28:38 off our off our independent sponsor our
28:40 syndication.” So then that’s where the
28:42 launchpad came from which is like hey
28:44 once we put the systems the processes
28:46 and the baseline um this the parent
28:49 company disrupt has such a good office
28:51 admin structure HR benefits all this
28:54 stuff that we can support with now we
28:56 got to do it so then the first step is
28:58 I’m not one to go do it without doing it
28:60 myself and so I went out and searched
29:02 found a hard industrial chrome plating
29:04 facility um $20 million acquisition 160
29:08 employees you know close to 4 million
29:10 Ebbit so we’ve had all of these things
29:12 that we did but we didn’t realize is the
29:15 capital structure so you know we were
29:17 able to syndicate our own capital from
29:19 our equity um good good check from Ben
29:21 and Ferris and his and their
29:23 relationships uh we took a senior uh on
29:26 the equipment we took an AR line of
29:28 credit loan to f do that seller put in
29:30 you know carried 30% and then he got a
29:32 nice kind of earnout that’s attached to
29:34 it so we put a really unique structure
29:36 together in we got in for about 20%
29:38 equity into that deal but when it was
29:42 valued all of these great things long
29:45 story short to say we did not understand
29:47 or think about the fact like the holding
29:50 company like the strategy that needs to
29:52 be there to think about now how do we go
29:54 get the private credit capital and all
29:56 these things and so we’re we’re now in a
29:59 situation where we’ve been in there two
30:01 years we’re we’re going to recapitalize
30:03 this next year and now our education has
30:05 gotten a lot further of like hey there’s
30:07 great potential here for our deal number
30:09 two three and four so we didn’t really
30:12 start out with the mindset of we’re
30:13 independent sponsors we were like hey
30:14 let’s go buy a business and now we’re
30:16 starting to understand the structure of
30:18 it to go oh my god so we’re kind of that
30:20 hybrid right we can raise our own
30:22 capital we we want to get partners so
30:24 it’s this whole like evolution that’s
30:26 occurred for us and I and I think Sean
30:29 and my point to make is for the
30:30 listeners is like all of this stuff
30:33 you’re getting your education to so you
30:34 can understand what each of the boxes
30:36 are because ultimately I have to come
30:38 back to Sean at some point and I’ve got
30:40 to say Sean you know we we’re we’re
30:42 bootstrapping get it done make stuff
30:44 happen people but it sure would have
30:46 been great to kind of have the end in
30:47 mind so the structure is a little bit
30:50 different i mean not that we can’t clean
30:51 it up and make it look different but
30:53 they’re understanding what the
30:54 investor’s mentality is and then kind of
30:57 working backwards from that really helps
30:59 that person you know get to the next
31:01 deal next deal
31:03 and it’s so critical you know to folks
31:07 like you guys who are you know spreading
31:09 this education coaching people on how to
31:12 do this providing that support
31:14 because it’s an esoteric asset class
31:17 anyone getting into it is not going to
31:18 have all the you’re not going to learn
31:21 in school how to put together these
31:23 capital structures you just got to not
31:24 at all either get the experience or or
31:27 have some mentors like you guys that
31:29 have that experience right so no these
31:31 deals are all about the structure i mean
31:32 you can make any deal work if you can
31:34 structure it effectively so yeah again
31:35 I’ll tell you the that’s the fun part at
31:37 least for me and Casey like it’s fun to
31:38 you know to put the deal together right
31:40 and structure a win where you kind of
31:42 address all the sellers concerns you
31:43 address all your investors concerns and
31:45 you also carve it up to where it makes
31:46 sense for you and you know you’re trying
31:48 to keep everybody happy you we’re people
31:50 pleasers at the end of the day so but
31:51 for people like you Sean that come on
31:53 podcast like this and give us your
31:54 playbook right let the listeners know
31:56 hey like I want to make investments on
31:59 good businesses right so this is how you
32:01 need to come to me these are the these
32:02 are the structures that I need to see
32:04 instead of you educating them because
32:06 I’m sure you do a lot of education on
32:08 the phone with the with a lot of people
32:10 right they’re like “Hey Sean just write
32:11 me a check.” You know you’re like “Right
32:13 let me let me tell you how it works.”
32:16 Yeah it’s good to make it a little more
32:18 public and hopefully you know spread the
32:20 word absolutely it’s great man so thanks
32:22 for all you’re doing for the SMB
32:24 business and you know look I think it’s
32:26 our responsibility and you’ll hear me
32:27 saying this on every one of our podcast
32:29 i think it is our responsibility to
32:31 guide people through the transition that
32:33 we’re having in America there is not
32:35 enough people that are looking to
32:37 transition business from baby boomers
32:39 and so we have a huge middle we have our
32:41 middle class gap of bluecollar workers
32:43 and all these people that if we don’t if
32:46 we all don’t take the risk and go out
32:47 there and be this on this new frontier
32:50 right you’re going to have a gap in this
32:52 country and I think that you see it like
32:54 the new administration or not but you
32:56 see what they’re trying to say which is
32:58 hey we’ve got to make it fair for us to
33:00 bring manufacturing back because this
33:03 country needs jobs we need this middle
33:05 market you know I’m sitting there
33:07 talking to my son at college right and
33:09 he’s sitting there going like you know
33:11 trying to figure it all out the truth is
33:12 go become an electrician get your master
33:15 electrician’s license and you can make
33:17 just as much money in this world because
33:20 I can’t I love talking to electricians
33:21 that own companies i’m trying to buy
33:23 that business
33:26 so that’s our responsibility and I feel
33:27 like you and I both share that that we
33:29 are here to help transition America and
33:30 we all play a role in doing that through
33:34 small businesses and transitioning them
33:36 to the next generation yeah it’s
33:38 absolutely right i mean our our mission
33:41 you know is kind of three-fold say
33:43 supporting local businesses and you know
33:46 sustaining small local medium-sized
33:48 businesses is is you know one of those
33:51 pillars um enabling entrepreneurs who
33:55 want to take a calculated risk to kind
33:58 of go forth and do this approach right
34:00 that’s another key piece and part of
34:02 that’s just driven by trends related to
34:05 the the growth in cost of living versus
34:07 the you know probably less favorable
34:09 growth in wages and things like that so
34:11 this is a real opportunity to your point
34:14 to kind of step up from where you might
34:16 be if you pursued a W2 role for for a
34:19 long time and then the third is
34:21 democratizing the ability to invest and
34:23 and to support small businesses and
34:26 acquisition entrepreneurs right so those
34:27 are the three pillars love them man
34:29 they’re three and and we we are
34:31 completely in alignment with what you’re
34:32 doing 100% nice awesome all right so
34:35 this is our turn where we get to flip
34:37 the conversation and start asking Sean
34:39 some questions this is called our rocket
34:40 room all right so Sean first question
34:43 what do you like to do in your free time
34:46 so either uh I I play guitar i’m a jazz
34:50 guitarist uh not as good as I once was
34:52 but I love I love uh jamming with with
34:55 folks that and improvising with folks
34:57 that that play guitar uh play music
34:59 that’s one and then uh I’m I’m also a
35:02 fan of golf so I I like getting out on
35:03 the course and then spending time with I
35:06 mean I’m an intermittent guitar player i
35:07 I have you know but I I get better if I
35:09 just play every day i just I I fell off
35:12 the wheel about seven months ago so I
35:14 just went and bought a Breedlove um you
35:16 know nice i I knew if I bought a new
35:19 guitar I would probably start playing it
35:21 more yeah so I I have the Breedlove
35:23 Parlor it’s like a smaller uh smaller
35:25 version
35:27 very cool very cool all right next
35:29 question most memorable moment in your
35:30 business journey
35:34 um I’d say probably you know holding the
35:38 the first close of Search Fund Ventures
35:41 it was it was a big moment um really
35:43 exciting for for Nick and myself you
35:45 know we we worked really hard to get
35:48 there and you know it it’s the classic
35:50 thing of that success looks like it’s
35:53 overnight you know you sign all the
35:54 docks and the funds closed and you can
35:56 deploy capital but it
35:58 was you know many many months and and as
36:01 I kind of said at the beginning of this
36:02 call like years in the making of kind of
36:05 going along that journey so that that
36:06 was a big one awesome exciting and then
36:09 last question what is your favorite tool
36:10 or resource
36:13 yeah so um I I’ll talk about a software
36:16 tool that we use it’s called Clay it’s a
36:19 really unique piece of software that can
36:22 basically be used for any data
36:25 enrichment um you know prospecting
36:28 anything you’re doing where you need to
36:29 get lots of data and
36:33 um um you know whether it’s enriching
36:36 contacts or information about companies
36:38 it’s an incredible piece of software you
36:40 can use it for deal sourcing you can use
36:41 it for sales I would encourage folks to
36:44 to look into Clay Clay heard of that so
36:46 I’ll take a look yeah we’re jumping on
36:47 that one that is awesome and then I’ll
36:49 tell you Sean so real quick here so um
36:51 thanks for being on the show tell us a
36:53 little bit as we close out you guys do
36:55 you’re involved in some things and I
36:57 think people need to know about these
36:58 other opportunities otherwise investing
37:00 so why don’t you just close us out and
37:02 basically tell us about some of those
37:03 things that you’re involved in outside
37:05 of just investing
37:07 yeah so um you know we have SMB investor
37:11 network which is sort of a a parallel to
37:14 our fund right and SMB investor network
37:16 is really a a platform for folks to
37:20 co-invest alongside search fund ventures
37:22 right so we will will post deals to our
37:25 the members you got to be an accredited
37:27 investor um but the members of that
37:29 network can invest as as low as 10k into
37:33 deals alongside search fund ventures so
37:35 again in that spirit of democratizing
37:37 the ability to support local businesses
37:39 we’re really trying to bring in you know
37:42 um more folks that want to kind of
37:44 invest on a one by one basis and who
37:47 might not you know want to put all their
37:49 eggs in one basket and go personally
37:51 guarantee an SBA loan to buy one right
37:54 awesome fantastic and then you know for
37:56 the listeners how can people get a hold
37:57 of you yeah you can reach me at uh sean
38:01 searchfund
38:02 ventures.co um or you can go to
38:05 smbinvestornetwork.com or search
38:07 funfunventures.co and there’s there’s
38:09 lots of uh ways to submit your
38:11 information to us awesome all right Sean
38:14 thank you very much thanks Sean thanks
38:16 so much guys thank you for listening to
38:18 the M&A Launchpad podcast if you’ve
38:20 enjoyed today’s podcast and would like
38:22 to support us please leave us a rating
38:23 and a review after you listen if you’re
38:25 looking for guidance on your next
38:26 business acquisition or sale capital to
38:29 support your next business transaction
38:31 or to invest in a private equity
38:32 opportunity visit equityaunchpad.com to
38:35 learn more and to connect with our team
38:37 if you know of an individual who would
38:38 be a great guest for the show head over
38:40 to
38:43 equityaunchpad.com/nominate where you’ll
38:44 have the chance to refer yourself or
38:46 someone else to be a guest on our show
38:47 i’m Casey Mchu and I look forward to
38:49 talking with you next week
