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𝗧𝗵𝗲 𝘂𝗻𝗹𝗶𝗸𝗲𝗹𝘆 𝗰𝗵𝗼𝗶𝗰𝗲 My favorite searchers are the ones who, each time they had to make a career decision, pushed against the obvious, easy one in order to find a worthy alternative. Sometimes that looks like joining a hedge fund instead of staying at McKinsey. Sometimes that looks like launching a startup after doing Teach For America. Sometimes that looks like not following up rocket-engine school with an engineering job. At some point, these searchers faced a fork in the road with two paths. One that offered certain disappointment, and the other that offered a chance. Either is fine for others, because it's not their career. But given the chance to choose a career that made no rational sense to others, but which had a non-zero chance of leading to a special level of success, they took it. These searchers almost always have the grit necessary to make it through the grueling search fund process.

𝗨𝗻𝗱𝗲𝗿𝘀𝘁𝗮𝗻𝗱𝗶𝗻𝗴 𝘁𝗵𝗲 𝟱𝟬% 𝘀𝘁𝗲𝗽-𝘂𝗽 Search funds have been a reliable way to acquire and run small to medium-sized businesses for about forty years. And the standard 50% step-up has become a part of that process. Here's how it works. Investors fund the first part of the process. The searcher gets a salary and expenses, as well as the resources to meet with hundreds of potential sellers. This lasts for about two years. During this time, the searcher invests significant time, effort, and emotional energy, but there's no guarantee they'll actually find a business to acquire. Once the search is successful and a deal has been inked, the investors are asked to put in more money to finance the actual deal. The 50% step up means that if the investors are now contributing $10,000,000 to the deal, the $500,000 that was put in at the beginning of the search is treated as $750,000 of real equity. The deal and the cap table are now structured as if the investors put in $10,750,000 overall. This mechanism rewards investors for the unique risk of the search phase. This makes sense, because the search took time and effort, but if no deal had been done, that money and time would have been wasted. A flat step-up reward is both clear and fair. It helps to structure deals with the right incentives for all parties, while not putting the searchers at the risk of dramatic dilution. And most of all, it helps the searchers and their team do a better job of looking for a great deal, without feeling the pressure of having to do just 𝘢𝘯𝘺 deal. The purpose of the step-up is to create a financial commitment from the searcher as well as the investor, ensuring that both are motivated to work hard on the search. And the purpose of the step-up is to create the conditions for searchers to walk away from a marginal deal, knowing that they have done all they could to create something of value. That's why it's persisted for over four decades.

𝗗𝗲𝘀𝗶𝗴𝗻𝗶𝗻𝗴 𝗮 𝘀𝗺𝗮𝗿𝘁 𝗰𝗮𝗽𝗶𝘁𝗮𝗹 𝘀𝘁𝗿𝘂𝗰𝘁𝘂𝗿𝗲 A lot of what a first-time searcher CEO does for a few years is manage the relationship between the debt providers and the equity holders, particularly in the early years of the deal when the operator is still learning how to run the business. That's why it's important to nail the capital structure when you first buy your business. You're going to spend a lot of time thinking about the structure you put in place on Day 0! It's important to keep two groups in mind as you consider the structure. Your goal is to create a useful balance that protects everyone and starts you down the path to value creation and flexibility. First, the entrepreneur. There will be surprises. Maybe an opportunity will appear. Perhaps you were misled by the seller. The entrepreneur needs to be able to survive the deal, learn what needs to be learned, and be there when things don't go as planned. Protecting the entrepreneur means having enough upside upside in the deal to make it worthwhile, while at the same time giving you protection and flexibility as you learn the ropes. Next, the investors. The reason to take on debt (which you pay off first) is because it might help this group of people get a better return. Protecting the investors means keeping risk and reward in sync. (If the entrepreneur is learning a new industry, it's worth considering whether an overly leveraged capital structure might overwhelm them in the learning period. Debt is attractive, but it's not risk-free.) A few questions to consider as you figure out the right structure: - How much debt are you comfortable taking on? - How quickly will you be able to de-leverage, or should you start with less and de-leverage over time? - What do your investors expect? What kind of returns and in what time frame? - What happens if you discover that you've been misled about the state of the business, or if the seller's expectations aren't aligned with your goals? - Is this the best structure for your team as you grow it? - How much capital will you have access to when it's time to grow? What happens if you discover a great opportunity? Are you flexible enough to take advantage of it?

“𝗧𝗵𝗲𝗿𝗲’𝘀 𝗻𝗼 𝗽𝗿𝗼𝗴𝗿𝗲𝘀𝘀” This is the most common complaint you will hear from people who are searching for a business to buy and run. It is an expression of frustration and anxiety, and in some cases, shame. The challenge of a search, particularly a solo search, is that the journey can be long, and the rewards are sometimes slow to materialize. For me, the way to reframe it is to say, "if you're doing a good job, you will be able to measure growth." Growth doesn't mean that you're going to be able to find a business today or this month or this quarter (that would be a miracle). Instead, if you do 24 monthly sprints, each with 2-3 A/B tests and a retrospective, then you should be able to measure your progress by the speed of your sprints and the quality of the tests you run. It means that if you measure the quality of the feedback you receive during your search process, you can track your progress. You may not be able to count the number of yes's you get from a business owner or a seller, but you can track the number of meaningful conversations you have each week. Growth means that you're able to look back over the last month and say, "this month, I refined my value proposition by running 5 targeted A/B tests." It doesn't matter if you are actively raising money, are in the middle of a due-diligence process, or have just started your search. The simple truth is that you can measure progress by the quality of the tests you run and the speed at which you learn. Time spent on reactive work and firefighting isn't counted as growth. If you can figure out how to write a weekly plan that doesn't get derailed by incoming issues and emails, you're going to be able to grow faster. Most of all, growth comes from adopting a growth mindset. When you say, "there's no progress," what you might mean is, "I'm not perfect, I'm not good at this, I didn't find a business I could buy, I didn't raise any money, I'm not ready to buy a business, I'm not good at networking, this is scary…" And that's okay. Growth means that you're learning the skills needed to move forward, that you are developing an understanding of how to improve your process and that you're getting better at each iteration. The thing about growth is that it comes from setbacks. And setbacks aren't a problem as long as you're disciplined about documenting the insights that came from them. The key is to keep your parameters in check while using each step of the journey as evidence that you are growing in a measurable and objective way

𝗔 𝗳𝗲𝘄 𝗺𝗼𝗿𝗲 𝘁𝗵𝗼𝘂𝗴𝗵𝘁𝘀 𝗮𝗯𝗼𝘂𝘁 𝗱𝘂𝗲 𝗱𝗶𝗹𝗶𝗴𝗲𝗻𝗰𝗲 One common failure in due diligence is the failure to reconstruct the org chart and to understand the allocation of time to the various roles. If you don't understand how much time the seller spends doing work, what kind of work it is, and at what price it could be replaced, you're leaving a huge amount of insight on the table. A business that is so dependent on the seller that it can't operate without them is a serious red flag. That sort of owner-centrism is a deal breaker, because the efficiencies that were possible because of the seller's involvement are gone forever once the seller leaves. One of the best ways to see this is to map out the org chart, and then reallocate the time the seller is spending to market rate roles. What you're likely to find is that the seller is performing tasks that are crucial to the business, like client management and operational oversight. When you factor in the cost of replacing those roles, you realize that the business needs two or three other people to do the work the seller was doing. That changes everything about the price you're willing to pay, the headcount you'll need, and whether the deal makes financial sense at all. The other thing to consider is the way in which the customers are linked to the seller. This can only be done by doing some customer interviews. Go and interview 10 or 15 customers. Find out if the seller has been the linchpin in the relationship. Ask them how they would feel if the seller was no longer around. Ask them what they know about the seller and their involvement. Find out how much revenue is tied to the seller. Ask about succession plans, and how much of the revenue is based on the seller's personal involvement. And of course, there's the facility and the assets. How much work have they invested in this business? When was the last time the building was inspected? What is the condition of the assets? How much capital will it take to bring them up to current standards? You can add these to your list of questions, or you can rework these questions into ones that get you actionable answers. Every question in the due diligence process should have an answer that is useful to you and the other people (your advisors) who are doing this diligence. If you can't find an answer that helps you, don't bother asking the question in the first place.

𝗔 𝗰𝗼𝗺𝗺𝗼𝗻 𝗳𝗮𝗶𝗹𝘂𝗿𝗲 𝗺𝗼𝗱𝗲 𝗳𝗼𝗿 𝘁𝗲𝗰𝗵𝗻𝗶𝗰𝗶𝗮𝗻𝘀-𝗶𝗻-𝘁𝗿𝘂𝗰𝗸𝘀 𝗯𝘂𝘀𝗶𝗻𝗲𝘀𝘀𝗲𝘀 When evaluating a service business, it’s worth it to interview 10 or 20 customers to find out what percentage of the revenue is based on personal relationships with the owner. As part of good due diligence, you're going to do these interviews anyway, but make sure this specific question makes it to your call script. You'd be surprised how many $1-2M EBITDA businesses are built solely on the personal dynamism of the owner.

𝗧𝗵𝗲𝗿𝗲'𝘀 𝗮𝗹𝘄𝗮𝘆𝘀 𝗶𝗻𝗳𝗼𝗿𝗺𝗮𝘁𝗶𝗼𝗻 𝗮𝘀𝘆𝗺𝗺𝗲𝘁𝗿𝘆. In any encounter, the other side knows something you don't. But when it comes to buying a company, we're not talking about a little information. The people who are looking to sell you a company know everything there is to know about that company. They hired every employee. They sold every customer. They made every product. In comparison to them, you know very little indeed. That's fine, of course. But it's something to keep in mind.

𝗛𝗼𝘄 𝗪𝗮𝘀𝗵𝗶𝗻𝗴𝘁𝗼𝗻 𝗰𝗮𝗻 𝗵𝗲𝗹𝗽 (𝗼𝗿 𝗵𝘂𝗿𝘁) The Trump administration has brought major policy shifts, and whether we approve or disapprove, it's a fact that some companies will win and others will lose as a result. When I sit with a new search fund entrepreneur, I sometimes wonder if they've taken the time to consider how public policy and its reactions might impact the industries they choose to look in. With a search fund, it's tempting to believe that the power to make change is entirely within your grasp, but that's rarely true. From taxes to regulation, from international trade to local zoning, the government matters, and the changes it makes (or threatens to make) can have a huge impact on the organizations we seek to buy and transform.

𝗪𝗵𝗮𝘁 𝘁𝗼 𝗱𝗼 𝘄𝗵𝗲𝗻 𝘁𝗵𝗲 𝘀𝗲𝗹𝗹𝗲𝗿'𝘀 𝗮𝗱𝘃𝗶𝘀𝗼𝗿 𝘁𝗲𝗹𝗹𝘀 𝘆𝗼𝘂 𝘁𝗵𝗮𝘁 𝘁𝗵𝗲 𝘃𝗮𝗹𝘂𝗮𝘁𝗶𝗼𝗻 𝗶𝘀 𝘁𝗼𝗼 𝗹𝗼𝘄 "The owner said that it's worth more than 8 times EBITDA." Successful search fund entrepreneurs have a few useful approaches: 𝟭. 𝗗𝗼𝗻'𝘁 𝗺𝗮𝗸𝗲 𝗶𝘁 𝗮𝗯𝗼𝘂𝘁 𝘁𝗵𝗲 𝗮𝘀𝘀𝗲𝗿𝘁𝗶𝗼𝗻, 𝗶𝘁'𝘀 𝗻𝗼𝘁 𝗽𝗲𝗿𝘀𝗼𝗻𝗮𝗹. It's not about you or your feelings, it's about getting the right numbers on the table. Your job is to depersonalize the number and show the seller that you're committed to getting this right and finding a fair valuation that works for everyone. 𝟮. 𝗗𝗼𝗻'𝘁 𝗳𝗶𝗴𝗵𝘁 𝘁𝗵𝗲 𝗮𝘀𝘀𝗲𝗿𝘁𝗶𝗼𝗻 𝗱𝗶𝗿𝗲𝗰𝘁𝗹𝘆. The seller's emotional connection to the business they built, the pride they have in it, and the fact that they don't fully understand all the financial and cultural implications of their decision make this a particularly difficult conversation. Your job is to acknowledge the worth of their work, while pointing out that you're focused on what the market will bear and what the numbers show. (Also, it might be worth sharing the requirements of your investors with the seller, but tread carefully here!) 𝟯. 𝗚𝗲𝘁 𝗼𝗯𝗷𝗲𝗰𝘁𝗶𝘃𝗲 𝘃𝗮𝗹𝗶𝗱𝗮𝘁𝗶𝗼𝗻. This is hard. If the seller's advisor is pushing a high valuation, you could try to bring in a neutral third party that both sides will respect. This person can be difficult to find, so I've only seen this happen once or twice, and you'll need to preempt defensiveness from both sides. 𝟰. 𝗕𝗿𝗶𝗻𝗴 𝗶𝗻 𝗵𝗮𝗿𝗱 𝗻𝘂𝗺𝗯𝗲𝗿𝘀. If you can, do your homework. If the business is an HVAC company, then look for the multiples of successful transactions of HVAC businesses. Show the seller that a dozen mid-sized HVAC acquisitions closed in the last year, in the same geographic region and with the same type of services offered. And show the range of multiples paid for those companies. This is a great way to depersonalize the transaction. 𝟱. 𝗛𝗮𝘃𝗲 𝘁𝗵𝗲 𝗰𝗼𝘂𝗿𝗮𝗴𝗲 𝘁𝗼 𝘀𝗮𝘆, "𝘄𝗲 𝗰𝗮𝗻'𝘁 𝗱𝗼 𝘁𝗵𝗮𝘁." If your LBO model shows that you can't do more than 5.5 times EBITDA, it's probably best to say, "I'm sorry, we can't do that," because if you did, the deal wouldn't work. 𝟲. 𝗥𝗲𝗳𝗿𝗮𝗺𝗲 𝘁𝗵𝗲 𝗰𝗼𝗻𝘃𝗲𝗿𝘀𝗮𝘁𝗶𝗼𝗻 𝘁𝗼 𝗯𝗲 𝗮𝗯𝗼𝘂𝘁 𝘁𝗼𝘁𝗮𝗹 𝗲𝗰𝗼𝗻𝗼𝗺𝗶𝗰 𝘃𝗮𝗹𝘂𝗲. The seller may have an emotional attachment to the business that can't be fully captured by an EBITDA multiple. The way you address this is to look at all the elements of the deal, including a seller note and earn-outs and equity rollover and other elements that might help them get to their goal.

𝗧𝗵𝗲 𝘀𝗲𝗮𝗿𝗰𝗵 𝗳𝘂𝗻𝗱 𝗽𝗮𝗿𝗮𝗱𝗼𝘅 𝘄𝗲 𝗻𝗲𝗲𝗱 𝘁𝗼 𝘁𝗮𝗹𝗸 𝗮𝗯𝗼𝘂𝘁 Here's what's happening: - Searcher compensation is higher than it used to be. Fair enough, it's two years of focused, challenging work. - More and more searchers are looking for a small business with roll-up potential for their acquisition. It makes sense, as it's easier to find and still a chance for them to earn outsized returns. As a result, the first acquisition for many is not the classic $10-to-$25 million Enterprise Value (EV) business, but a $5-to-$10 million one. But here's where the math starts to break. When the search fund is (say) 50% more money upfront, that money isn't simply dormant until the deal is done. It impacts the return (aka hurdle) rate of the acquisition, as that search capital gets folded into the capital stack at close. Suddenly, you need to hit much higher return hurdles to make the economics work for investors. The downstream effect: fewer deals can clear that bar. Searchers spend months evaluating opportunities that looked perfect until the return analysis killed them. Deal flow slows. Closings stall. And here's the kicker... Some searches are effectively overfunded before the first LOI goes out. So quality companies get priced out, not because they aren't valuable, but because the structure has become too heavy. I'm not proposing any solutions or changes here, as this is a complicated problem that can't be solved by a social media post. But I do think we need to raise awareness of something that many traditional searchers are feeling right now but isn't getting much coverage by the ecosystem.

As of right now, you have about 15 business days to work meaningfully on a transaction you'd like to close before year-end.

𝗧𝗵𝗿𝗲𝗲 𝗾𝘂𝗲𝘀𝘁𝗶𝗼𝗻𝘀 𝘁𝗼 𝗮𝘀𝗸 𝗯𝗲𝗳𝗼𝗿𝗲 𝗯𝘂𝘆𝗶𝗻𝗴 𝗮 𝗰𝗼𝗺𝗽𝗮𝗻𝘆 Search fund entrepreneurs often make a mistake when they go looking at companies: they focus on the numbers and on the strategy but not so much on the culture. There are good reasons to focus on the income statement and the competitive landscape but leaving out the people part is a costly mistake. The people part is what you sign up to buy, and it’s what can change the trajectory of the company and of your life. Here are three questions to ask before you buy a company, and a quick note on how to treat the answers: 𝟭. “𝗪𝗮𝗹𝗸 𝗺𝗲 𝘁𝗵𝗿𝗼𝘂𝗴𝗵 𝗮 𝘀𝗽𝗲𝗰𝗶𝗳𝗶𝗰 𝗿𝗲𝘀𝗼𝘂𝗿𝗰𝗲 𝗮𝗹𝗹𝗼𝗰𝗮𝘁𝗶𝗼𝗻 𝗱𝗲𝗰𝗶𝘀𝗶𝗼𝗻 𝗶𝗻 𝘁𝗵𝗲 𝗽𝗮𝘀𝘁 𝟭𝟴 𝗺𝗼𝗻𝘁𝗵𝘀 𝘄𝗵𝗲𝗿𝗲 𝗰𝗼𝗿𝗲 𝘃𝗮𝗹𝘂𝗲𝘀 𝗱𝗶𝗿𝗲𝗰𝘁𝗹𝘆 𝗮𝗹𝘁𝗲𝗿𝗲𝗱 𝘁𝗵𝗲 𝗰𝗵𝗼𝘀𝗲𝗻 𝗰𝗼𝘂𝗿𝘀𝗲. 𝗗𝗲𝘁𝗮𝗶𝗹 𝘁𝗵𝗲 𝗳𝗶𝗻𝗮𝗻𝗰𝗶𝗮𝗹 𝘁𝗿𝗮𝗱𝗲-𝗼𝗳𝗳𝘀 𝗰𝗼𝗻𝘀𝗶𝗱𝗲𝗿𝗲𝗱, 𝗵𝗼𝘄 𝘃𝗮𝗹𝘂𝗲𝘀 𝗶𝗻𝗳𝗹𝘂𝗲𝗻𝗰𝗲𝗱 𝘁𝗵𝗲 𝗳𝗶𝗻𝗮𝗹 𝗯𝘂𝗱𝗴𝗲𝘁 𝗮𝗹𝗹𝗼𝗰𝗮𝘁𝗶𝗼𝗻 𝘃𝗲𝗿𝘀𝘂𝘀 𝗮𝗹𝘁𝗲𝗿𝗻𝗮𝘁𝗶𝘃𝗲𝘀, 𝗮𝗻𝗱 𝘁𝗵𝗲 𝗾𝘂𝗮𝗻𝘁𝗶𝗳𝗶𝗮𝗯𝗹𝗲 𝗶𝗺𝗽𝗮𝗰𝘁 𝗼𝗻 𝗘𝗕𝗜𝗧𝗗𝗔.” This is a hard question. It requires specificity and candor. You should get back a story that’s more specific than, “we focus on quality.” A company that only talks about values in a vague or hypothetical way is unlikely to have values that can stand up to commercial pressure (see #3). 𝟮. “𝗦𝗵𝗼𝘄 𝗺𝗲 𝗵𝗼𝘄 𝘃𝗮𝗹𝘂𝗲𝘀 𝗺𝗲𝘁𝗿𝗶𝗰𝘀 𝗮𝗿𝗲 𝗲𝗺𝗯𝗲𝗱𝗱𝗲𝗱 𝗶𝗻 𝗰𝗼𝗺𝗽𝗲𝗻𝘀𝗮𝘁𝗶𝗼𝗻: 𝘀𝗵𝗮𝗿𝗲 𝗮𝗻𝗼𝗻𝘆𝗺𝗶𝘇𝗲𝗱 𝗲𝘅𝗮𝗺𝗽𝗹𝗲𝘀 𝘄𝗵𝗲𝗿𝗲 𝘃𝗮𝗹𝘂𝗲𝘀 𝗰𝗼𝗺𝗽𝗹𝗶𝗮𝗻𝗰𝗲 𝗱𝗶𝗿𝗲𝗰𝘁𝗹𝘆 𝗮𝗳𝗳𝗲𝗰𝘁𝗲𝗱 𝗽𝗿𝗼𝗺𝗼𝘁𝗶𝗼𝗻 𝗼𝗿 𝘁𝗲𝗿𝗺𝗶𝗻𝗮𝘁𝗶𝗼𝗻 𝗼𝘂𝘁𝗰𝗼𝗺𝗲𝘀.” This question gets at the reality of operationalization. Are values something that are merely discussed or are they actually used to manage and lead people? 𝟯. “𝗗𝗲𝘀𝗰𝗿𝗶𝗯𝗲 𝗮 𝗿𝗲𝗰𝗲𝗻𝘁 𝗰𝘂𝘀𝘁𝗼𝗺𝗲𝗿 𝗿𝗲𝘁𝗲𝗻𝘁𝗶𝗼𝗻 𝘀𝗰𝗲𝗻𝗮𝗿𝗶𝗼 𝘄𝗵𝗲𝗿𝗲 𝘂𝗽𝗵𝗼𝗹𝗱𝗶𝗻𝗴 𝘃𝗮𝗹𝘂𝗲𝘀 𝗰𝗮𝘂𝘀𝗲𝗱 𝘀𝗵𝗼𝗿𝘁-𝘁𝗲𝗿𝗺 𝗿𝗲𝘃𝗲𝗻𝘂𝗲 𝗹𝗼𝘀𝘀 (𝗲.𝗴., 𝗳𝗶𝗿𝗶𝗻𝗴 𝗮 𝗰𝗹𝗶𝗲𝗻𝘁 𝗼𝗿 𝗱𝗲𝗹𝗮𝘆𝗶𝗻𝗴 𝗱𝗲𝗹𝗶𝘃𝗲𝗿𝘆); 𝗾𝘂𝗮𝗻𝘁𝗶𝗳𝘆 𝘁𝗵𝗲 𝗳𝗶𝗻𝗮𝗻𝗰𝗶𝗮𝗹 𝗶𝗺𝗽𝗮𝗰𝘁, 𝗲𝘅𝗽𝗹𝗮𝗶𝗻 𝗵𝗼𝘄 𝗹𝗲𝗮𝗱𝗲𝗿𝘀𝗵𝗶𝗽 𝗷𝘂𝘀𝘁𝗶𝗳𝗶𝗲𝗱 𝘁𝗵𝗶𝘀 𝗱𝗲𝗰𝗶𝘀𝗶𝗼𝗻, 𝗮𝗻𝗱 𝗲𝘅𝗽𝗹𝗮𝗶𝗻 𝗵𝗼𝘄 𝘁𝗵𝗲 𝗱𝗲𝗰𝗶𝘀𝗶𝗼𝗻 𝘂𝗹𝘁𝗶𝗺𝗮𝘁𝗲𝗹𝘆 𝗽𝗿𝗲𝘀𝗲𝗿𝘃𝗲𝗱 𝗹𝗼𝗻𝗴-𝘁𝗲𝗿𝗺 𝘃𝗮𝗹𝘂𝗲” This is a tough one for many companies, but it’s critical. It’s worth noting that the best answer is going to be a situation that wasn’t perfect for the company, but it turned out for the best in the long run. 𝗛𝗼𝘄 𝘁𝗼 𝘂𝘀𝗲 𝘁𝗵𝗲𝘀𝗲 𝗮𝗻𝘀𝘄𝗲𝗿𝘀? These answers are not soft, they are hard. And in certain circumstances (for example, where you’re acquiring a service business or where the seller is staying on as part of the deal), the answers to these questions are as important as the numbers on the income statement.

𝗛𝗼𝘄 𝗻𝗲𝘄 𝗖𝗘𝗢𝘀 𝘀𝗵𝗼𝘂𝗹𝗱 𝗯𝗲𝗴𝗶𝗻 Congratulations, you've just bought a business and are stepping in as the new CEO. Odds are, you have an elaborate value creation plan that you've been working on for the last 90 days. But that's not how to begin. During the diligence phase, when you interviewed the team, you uncovered a bunch of employee pet peeves. And if they're bringing them up to 𝘺𝘰𝘶 (someone they've only just met!), they're probably already thinking about leaving. The good news is that many of these things are simple, low-cost, and easy to fix. They matter a lot more than you can possibly imagine, but they went unaddressed because the people who worked here before were simply too busy, disinterested, or afraid to make the quick fix. End the three-person signature process that was a hassle and waste of time. Fix the flickering light in the hall. Publish the cash flow weekly thing that they thought couldn't be done. Move the copier. And, most of all, 𝘴𝘩𝘰𝘸 𝘶𝘱. Don't be too busy to sit down and compare notes with your direct reports. Bring all the outstanding requests to zero. Tell the truth, even if it's difficult to do so. If you're not going to do something they ask for, then close the loop with the person who made the request. If you can't fix something in the first month, do your best and then live with it. And if you can fix it, simply fix it, don't make a big production out of it or ask for extra money from the seller. These quick fixes aren't just about convenience. They signal that you listen, act decisively, and care about the daily experience of your team. Earning trust is the best strategy, and it provides for a quick return on investment.

𝗙𝗶𝘃𝗲 𝗾𝘂𝗲𝘀𝘁𝗶𝗼𝗻𝘀 𝘁𝗵𝗮𝘁 𝘀𝗵𝗼𝘂𝗹𝗱 𝗰𝗼𝗺𝗲 𝘂𝗽 𝗶𝗻 𝗺𝗼𝗿𝗲 𝗳𝗶𝗿𝘀𝘁 𝗰𝗮𝗹𝗹𝘀 𝘄𝗶𝘁𝗵 𝗮 𝗽𝗼𝘁𝗲𝗻𝘁𝗶𝗮𝗹 𝘀𝗲𝗹𝗹𝗲𝗿 👇 "What specific growth opportunities did you explore but not pursue, and what operational, market, or personal barriers made them impossible to follow through on?" "How does your emotional connection to the future of this business affect your readiness to sell?" "Have you engaged advisors and committed time and money to a potential sale?" (A best friend who is an estate attorney doesn't count.) "How aligned is your spouse or family with this decision, and what are the opportunity costs of not selling?" "If we were to close a deal today and you got precisely the price you were hoping for, what non-financial conditions would still prevent you from selling?"

𝗪𝗵𝗶𝗰𝗵 𝘀𝗲𝗮𝗿𝗰𝗵𝗲𝗿 𝗮𝗿𝗲 𝘆𝗼𝘂? There are two types of searchers looking to buy a business, and they send very different sorts of customized cold emails: - One type looks at the website, pulls up their template, edits the section on their background to reference something mentioned somewhere on the seller's website, and hits send. - The other type reads the site, the press releases, the bios and finds a tie between what the seller wants and what they've got. Then they pull up their template and edit the intro section with 2-3 highly personalized sentences about the seller's wants and needs. Both can work. There's no best practice here. What shocks me is that neither type of searcher knows the other exists.

𝗔𝘃𝗼𝗶𝗱𝗶𝗻𝗴 𝗲𝘅𝗽𝗲𝗻𝘀𝗶𝘃𝗲 𝗴𝗿𝗼𝘄𝘁𝗵 There are three common ways to add value after acquiring a business: - Growth: Making the company more valuable by simply selling more. Bigger is better. - Cost reduction: Cutting the costs of running the company in order to increase its profit. - Multiple expansion: Changing the nature of the business to make it worth more per dollar of profit or revenue. Growth is one way (and certainly the most fun way!) to add value, but it’s also the easiest way to lose value. You might be tempted to use the word "expensive" as a euphemism for growth that costs a lot. But there’s a key distinction to be made: 𝗘𝘅𝗽𝗲𝗻𝘀𝗶𝘃𝗲 𝗴𝗿𝗼𝘄𝘁𝗵 𝗶𝘀 𝗴𝗿𝗼𝘄𝘁𝗵 𝘁𝗵𝗮𝘁 𝗰𝗼𝘀𝘁𝘀 𝗺𝗼𝗿𝗲 𝘁𝗵𝗮𝗻 𝗶𝘁 𝘆𝗶𝗲𝗹𝗱𝘀 𝗶𝗻 𝘁𝗵𝗲 𝗹𝗼𝗻𝗴 𝗿𝘂𝗻. While growth can add value, expensive growth is a surefire way to destroy it. Consider a search fund buying a small SaaS company that has a high customer acquisition cost (CAC). When the new owner pushes for growth, they have to spend a lot of money to acquire new customers and drive revenue growth. While growth is good, if that growth is expensive enough, it's actually destroying the company. So, when does growth become "too expensive"? A high CAC isn't inherently problematic. The key metric is the LTV/CAC ratio. Lifetime value (LTV) is the anticipated profit from each new customer, and CAC is what it cost you to get that customer. A good business earns multiples of what it costs to acquire a typical customer. The danger is not simply that it's costing you money to get customers, it's that it's costing you more money than they will ever generate. If you need to keep replacing a customer that cost you $10,000 to find with a new customer, over and over again, you're losing money each time. You're basically making a precarious bet on future customer retention. Don't mistake activity for progress. Expensive growth destroys value.

𝗛𝗼𝘄 𝘁𝗼 𝘀𝘁𝗿𝘂𝗰𝘁𝘂𝗿𝗲 𝗮𝗻 𝗲𝗮𝗿𝗻-𝗼𝘂𝘁 𝗳𝗼𝗿 𝗮 𝘀𝗲𝗮𝗿𝗰𝗵 𝗳𝘂𝗻𝗱 Search funds are about creating value, not simply acquiring an asset. When both buyer and seller are aligned in that mission, earn-outs are a great way to bridge valuation gaps and establish trust and cooperation. They work best when the seller has a significant minority interest in the future of the company. At the same time, earn-outs are the biggest source of legal disputes between search fund entrepreneurs and sellers. The problem often lies in the metric that’s chosen to measure success (or failure). The metric must be measurable, and it must be something you can influence. The two common approaches to earn-outs: - The first common approach is based on revenue. Revenue is easy to measure and simple to understand. If the company reaches a certain revenue target, the seller gets her earn-out. This approach is easy to measure and simple to understand, and it’s almost impossible for the seller to dispute. The challenge with a revenue-only approach is that it doesn’t account for quality. It’s hard to know whether the entrepreneur has made the company more efficient or simply sold more stuff in a way that loses money. - The alternative is based on EBITDA, and the problem here is that it’s not as clear as it sounds. The seller will argue that certain expenses should be added back, and that the entrepreneur is simply trying to cheat. In practice, this creates a lawsuit that’s often just as good as a deferred payment, which defeats the purpose of the earn-out in the first place. The best option? Well, opinions will vary, but I like either: - A Gross Profit-based earnout: Take your revenue thresholds, then apply a reasonable flow-through margin to it. - Or, if you have to, a revenue-based earnout, 𝘣𝘶𝘵 with significant oversight from the search fund CEO and board on how Gross Margins are trending (i.e., making sure they're going up, not down).

𝗪𝗵𝘆 𝗯𝗲𝗶𝗻𝗴 𝗮 𝗱𝗶𝘀𝗿𝘂𝗽𝘁𝗼𝗿 𝗯𝗮𝗰𝗸𝗳𝗶𝗿𝗲𝘀 When we're doing diligence on a business we're buying, it's tempting to share our strategic thinking with the seller. After all, they're selling the company to us, and it seems at first like the clearer we are about what we can do with it, the more likely it is we can complete the deal. This often backfires. Here's the thing: Selling a business is emotional and risky and it's a lot of work. Sellers have people they care about and are often moving on to something else, so it's on their mind a lot. If you go to the seller of a background screening business that's seen slowing revenue growth and tell her that with a modest investment in time and tools, you can triple the income of the company in the next few years, that sounds great, right? No. Because that's what she's been dealing with for years and she's decided to head to Costa Rica instead. If she thought for even a minute that this was possible, she wouldn't be selling it to you. You're not saying something she doesn't know, you're reminding her of part of the reason she wanted to sell. You think you're being persuasive, but you're showing her that you don't understand what you're buying, or even worse, you're making her reconsider the whole thing. So instead: - Frame your strategic insights in the seller's stated motivations. - Throughout diligence, keep asking: "What's going through your head as we discuss this?" - Position yourself as a steward of their legacy, not a disruptor. You're much more likely to close your deal that way.

When you think about it, there's nothing really magical about a search fund. Search funds take advantage of one simple, observable fact: There are a bunch of companies, each with unique circumstances, but each with similar challenges: - They need a new boss. - They want to get sold. - The old boss wants to make a lot of money. There are thousands of these opportunities. Some of them are in manufacturing, some in service, some in B2B, some in B2C. Some of them are in areas with a lot of competition and some aren't. Some of them have a lot of public comps and some don't. The magic isn't in the model: it's in the execution. Anyone can see that these opportunities exist. The hard part is being the person who can actually execute the transition well. Most people can't or won't buy a business, manage the handoff, and grow it profitably. That's where the returns come from.