Partial Acquisitions, Search Funds and Add it Back For Greater Profits On Exit
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Raleigh Williams is the CEO of Deal Maven and is an experienced entrepreneur who sold his last company for over $26 million. He began his career as a mergers and acquisitions lawyer in Manhattan and Dallas and quickly realized he didn't enjoy the corporate environment. He decided to take his knowledge and start his own company, Deal Maven, to help people like himself with acquisition deals. Raleigh's experience has taught him to respect entrepreneurs who put their own skin in the game and make large profits from the deals they understand very well.
The guest had the opportunity to purchase an interest in a family entertainment center - a trampoline park and escape rooms business - in 2016. Over the next five years, he was able to grow the business from a $2 million to a $10 million annual revenue with acquisitions and expanding locations. Right before the Covid pandemic, he decided to put the business up for sale and the process took nine transactions between sellers, owning real estate and a variety of businesses. Through the process, he learned a lot.
Raleigh Williams recently founded Deal Maven, a service that connects buyers and sellers of different types of assets in order to facilitate more entrepreneurial deals for those involved. This is in response to the difficulty of full acquisitions and the personal guarantee and high risk that comes with them. Ron then delves into the idea of partial acquisitions, asking Raleigh to explain what it is and how Deal Maven facilitates it. Partial acquisitions involve reducing the risk and exposure of the acquisition by dividing it into smaller parts, and Deal Maven provides the platform and resources to help buyers and sellers manage those transactions.
Raleigh Williams had a conversation with a billionaire mentor who shared an important principle for doing deals - that if you get it right, you get rich, and if you get it wrong, you don't go broke. This means that the deals you take on should have an upside that could lead to great wealth and a downside where you won't go broke. Williams has found that the assets that sellers want to offer on 100% seller financing are usually not great investments and should be avoided. He does caution that there are exceptions, and the goal should be to find those and capitalize on them, listen here:
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E98: Search Fund Expert Jan Simon On Entrepreneurial Acquisitions Journey - How2Exit
Jan Simon is the managing partner of Vonzeo Capital Partners and the author of the book Search Funds and Entrepreneur Acquisitions. He is currently based in Barcelona, Spain. Jan has 12-13 years of experience working in investment banking and has taught around investing at IC in Barcelona. He was encouraged by his colleague Rob Johnson to look into search funds, which Jan eventually did. He had previously done his PhD on how hedge funds come to decision making and performance, persistence and investing. Jan is now using this knowledge to help people buy, sell and do search funds.
Rob Johnson introduced the speaker to the concept of performance persisting, or what could also be called skill. This concept is usually only found within venture capital and the top quartile in terms of performance. It has an incredibly high performance rate of between 30 and 35%. The speaker was drawn to the idea of backing young entrepreneurs, helping them to acquire and grow a company. This connected to his background in Special Forces, investing, and teaching. He started investing his own money and then wanted to start a fund, leading him to reach out to Johnson and another friend, Peter Kelly.
Ron Skelton asked if the venture capital funds that help searchers are school dependent, and Jan answered that they are not. They are looking for the best talent, regardless of where they come from. People who have studied at a certain school may have easier access to their peers, but it is not necessary to have studied at a school to be a successful entrepreneur.
Jan Simon, a search fund investor, discussed the traditional structure of a search fund. A searcher, or an entrepreneur who wants to own and run a business, seeks out investors such as Simon to finance their search. Typically, a search fund has between 12-16 investors, each of whom contribute 30,000 units to raise 450,000. This money is used to search for a business with the desired characteristics over a two-year period.
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This week’s “DEEPER” Dive:
Add it back! How Addbacks Can Add Value to Your Business Flip!
Joe Valley, an M&A advisor, discusses the value of Addbacks along with other tools that will help you sell a business that you’ve built to exit.
We interviewed Joe Valley in episode 17 - Watch it here
•Joe Valley, an M&A advisor and accomplished author, discussed the importance of Addbacks for business owners who are looking to flip their businesses.
• Addbacks are owner benefits or one-time expenses that do not carry forward to the new owner. Not having a proper addback schedule can result in losing 10s of thousands of dollars in the sale process.
• Ecommerce addbacks include website redesigns while brick & mortar may include car leases, family cell phone coverages and additional rent on P&L’s which could be personal residences of sellers.
• Joe Valley gave an example where lack of adding back $600K resulted nearly 6 million dollars being left on table due to lower multiple range caused by higher expenses without considering addbacks as part off bottom line calculation .
• Adding back nonessential but seller related expenses can increase multiples significantly resulting more money from sales price than expected initially with same net income value before adding those extra numbers .
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