ryan doyle and heather anderson thank you both for joining me today on acquiring minds thanks for having us ryan you are a searcher you're actively out there in the trenches looking for a business to buy heather you're director of the search lending practice at live oak bank so you are working week in week out to help searchers get loans usually sba loans to buy businesses what we're going to talk about today is time killers in search and how to avoid them so time is so precious in search particularly for full-time searchers like you ryan because full-time searchers are often not earning income as they search not to mention spending money on deals which is expensive so you've got your life burn rate plus deal costs and it adds up very quickly so anything that we can do to become more efficient as searchers is extremely valuable and one of the biggest areas to become more efficient is learning when to pursue the deal you're working on or to discard it and move on to the next understanding the time killers that we're going to cover today will help you do just that ryan you are the original author of this list of time killers um but start us off with a quick bio on you elaborate a little bit on on what i've already said and then tell us about the genesis of of this list of time killers sure sure and thanks again will for having me on um so i'm a little bit of a finance journeyman i spent about 15 years on wall street a variety of different roles started in pe moved over to a boutique investment bank and then from there i spent some time at a rating agency while i went to business school on saturdays and then after graduation is where i really shifted to a more traditional investment banking track i'd say the one common thread it's definitely not a linear path here but uh i basically focused almost entirely on financial institutions and so that's kind of where it created a lot of opportunity for me uh through through all these different firms it gained uh you know a lot of interesting roles and responsibilities to that process okay and what led you to to search um so i i've always kind of been uh i guess interested in entrepreneurship uh i'm you know from a family of small business owners uh have fond memories of spending time in my my dad's office and warehouse going to conferences and i've flirted with the idea of doing something more entrepreneurial you know when in business school you know try to kick around a few different ideas with some classmates but nothing really took off and just always felt the need for for more capital really get something going on my own um and then you know after i graduated i basically financed my my business school degree and you know i had this this really specific industry expertise that i really wanted to leverage and so i really just went to work from there and uh focused on that entirely for for you know seven seven years or so um and so it's kind of cliche but um essentially i was flying back back to new york i was traveling still for through covid um and i had uh that you know the buy then build book everyone talks about um had this bad habit of really just kind of a banker move i could imagine um but you just i just bought lots of books on kindle that i never read and then this one somehow made his way into my library and i just had read it and i was like wow this is it's interesting because i've spent my entire career working with banks uh spent a lot of time on credit lending obviously knew the sba but i didn't know that you could finance an acquisition with an sba loan and you know the capital is required to do that is was kind of within my reach so there's this kind of light bulb moment and so uh you know did a little bit of networking with folks uh that had done it um from my business class i vaguely remembered a few people talking about it at the time it wasn't that big back then um and then yeah then after that year's kind of uh bonus cycle i decided to come pursue this full-time 100 so none of the folks that you learned that you met in your career post business school ever talked about this this was this wasn't in the air in any of the financial firms that you worked in no it was uh no and there weren't any classes when i was in school about it i do remember people talking about it at lunch one time like vaguely um but then there's one person that i knew well actually that i got along with really well that was doing it and i just didn't know what it was called um and he was basically rolling up landscapers out in california for uh since graduation so i touched base with him and um you know got a little bit of a lay the land heather i want to get you in here uh as well um i i think 99 of the people listening to this will already know uh you and live oak but do but indulge me anyway and just give me a quick uh tell the people who you are please for for that one percent who doesn't know absolutely this is heather anderson i'm co-director of sponsor finance for uh search fund lending for live oak bank uh we have a vertical in the bank that specializes in providing both sba loans and conventional loans for self-funded searchers and traditionally funded searchers to buy a small business uh to become the ceo of great and and live oak bank is just a huge name in the space they've they're really kind of top of the list for for many um for many searchers and they put out a lot of content and in fact heather and ryan worked um ryan originated this list and we're going to hear about that in just a second from you ryan um and then heather and live oak worked with ryan to actually publish this um as a formal piece of content and we'll of course link in the show notes um and all that ryan so i want to hear about your search but but just um i don't want to bury the lead here so tell me about the the origination of this uh where did you come up with this list of time killers and then and then take us into your search yeah sure so um actually i was working on a deal that just had died and this was a little bit part of my my morning process uh where i'll go through really just mostly my email box and just kind of fill out a database that i keep of deals that i've looked at and one of the data fields is you know why i killed it and um and i just started noticing these patterns where i was just like this is kind of crazy how much garbage is out there um and uh and so i kind of put it out there and twitter just to see you know if other folks were thinking the same or um you know come across the same and then also just curious if there's others that you know i hadn't been um identifying as you know key time killers that uh people can contribute so this list is is actually 15 items long we're not going to get to all 15 today but we're going to get about halfway through the list but what so what you found in your in your spreadsheet of deals that were that were dying or that you were moving beyond um do they just some of the same same reasons jumped out again and again and is the is the list ranked like is number one the most common time killer on down um maybe probably um i yeah i think i kind of i wrote it more to flow i think there's some things that dovetail um so but i would definitely say just i mean looking at the list we're going to talk about valuation first that would probably be number one yeah sorry great okay um and just before we get in into the meat of this list just tell us a little bit about your search when did you start how long have you been doing it um size industry any geographic constraints all the the uh top top line points about it yeah sure um i would characterize myself as really a non-traditional self-funded searcher i'm more geographic focused so coastal southeast dallas houston markets and then i like to say mountain west but that's really been passive actually i haven't really been actively searching uh in there but it's essentially places that um my wife and i would like to live um and uh in terms of industry um you know it's it's a little bit of the cliche uh you know positive characteristics that you'd expect within with you know searchers to look for so evergreen stable growth stable margins low capex requirements um you know recurring revenue repeat business sticky diversified customer bases um fragmented markets but ultimately i'm looking for like carp types of investments so for opportunities so growth at a reasonable price and then that really has led me to probably some of the more popular uh search sectors um services businesses um within residential residential services um light manufacturing um some commercial services and then um have have looked at a few kind of niche uh industrial types of services and how long have you been at it uh about a year a little over a year now okay and how would you say it's going how how you feeling let me take your pulse here uh it's it's i'm not lie it's uh it's as advertised it's it's it's it's searches is is tough it's it's it's not easy it's you know definitely finding a needle in a haystack a numbers game a bit of a grind but with lots of ups and downs it's just really you know it was one thing i think i anticipated going in obviously working on deals i had you know understanding that's a lot of it's very challenging to deal across the finish line even in corporate world um but i think it's even harder in this this part of the market so um you know it's and it's difficult not to get emotionally invested in a deal that you're excited about um but other than that i mean i'm really trying to enjoy the process it's really um been great in meeting new people learning new business models especially someone that's been so focused hyper focused on one industry for so long it's it's just um just refreshing to to dig into other types of models um and um you know and i've gotten close on a few things that's that's given me hope um a couple things currently in in you know in the hopper so um you know cautiously optimistic but yeah it's always one of those things the searchers are always thinking about you know how do i fill the top of the funnel so that's something that it's always top of mind for me never can really relax you say it's as advertised um you know that it being difficult is anything more or less difficult than you expected or is it pretty much the lonely slog uh that you thought it would be yeah uh i'd say one thing that i guess is a little bit more difficult than i anticipated would was really just getting a deal to you know to get under loi really this negotiation process has been especially for proprietary outreach deals um where uh there's just a huge amount of um i think there's a lot of education you know to the seller you know there's not a lot of sophistication not surprisingly but um you know you just find yourself spending a lot of time explaining really basic concepts and then it's and you're also trying to sell yourself for them to think of you as a steward for their business and you know that's that's something that um i kind of anticipated but not didn't fully appreciate until until now yeah and but you're still feeling the proprietary is worth your time because i i just i feel like i've talked to so many self-funded who uh try it and then ultimately are like you know it was just the response rate was so low um you know if i had just invested all the time i was doing in proprietary into you know uh in my broker relationships and and filling my filling my funnel through brokered uh brokered deals but just kind of enhancing my brokered outreach um i might have been more successful but how are you thinking about this in this moment of time uh yeah at this point i i'd say in terms of deals that excite me or interest me it's probably two-thirds one-third proprietary source versus broker um and i'd say i think you have to kind of do both because the proprietary outreach is just such a slow burn that there's going to be times where you know you send out 25 letters or 25 whatever your process is for for reach out um or outreach um there's just gonna be downtime where you might as well be looking at deals and then there are there are occasional deals that come from brokers that are interesting you just you know have to move quick and it's going to be competitive yep okay uh thank you for all that ryan it's it's really it's so many all essentially all of my guests are people who have already completed their search so it's it's great to have somebody on who's in the thick of it let's get into this list so again these are time killers in search and if we can figure out we as searchers can figure out how to um to to really reduce the time that we spend on on a bad deal um we'll be ahead of the game number one you have is as you said ryan is is valuation so what do you mean by that how is it how can evaluation be a time killer so i mean i think everyone goes into this search reading reading the books and and what you read on twitter and there's kind of this bogey of two to four times you know sde or even ebitda and the reality is that most of these deals that go to market um are rarely priced at that um and you know just a highly inefficient market um pricing's all over the place and we're also in a really unique time with covid uh and so earnings are very lumpy and so where you have a business that might be listed off of a headline ebitda number that you know four times it might be up a hundred percent year-over-year you know pre-cove it and it's really an eight or nine times business if you try to think about if you look past or through the cycle or what it looks like on a normalized basis so um and i just it was also that's another thing that i found pretty surprising is you could have that conversation with a broker and they'll just be very emphatic about the valuation being you know completely uh you know competitive and and then there's a market for it but then you'll see it sit for six months and i think that's also i think a lot of these challenges in these um you know time killers is is sort of related to this inefficiency of the broker model um there's some some some obviously proprietary challenges you'll face but um yeah brokers are generally happy and by the way not all brokers are created equal so um you know some great brokers on twitter that i've met a couple that i've interacted with through this process but they're content kind of keeping a diversified portfolio of listings you know and letting it sit and you know it's basically fishing expedition so as a searcher it's uh you got to have a little bit of discipline and then you might want to be tempted to reach out which i actually don't think it's a bad idea to reach out and kind of you know submit some level of interest and hang around the hoop because i do think opportunities come from that but you know really don't spend your time spinning and doing sort of analysis on it in the meantime and and so essentially just right off a business whose valuation is is outside of that that two to four or is that that's where you save time and or um make sure you look at the you know when you're looking at the revenues if there was a if there was a covet effect a positive covet effect quickly look for that so that you can kind of normalize revenue uh and then see see what the valuation is in normal times and make sure again that that uh that it's worth your time and it's at a fair valuation is that is that the opportunity to save time here yeah i'd say that's fair yeah i i typically won't even reach out to a broker if it's you know five or six times sde because i know it's only gonna get worse once you start getting into it but um yeah i think what you said makes a lot of sense heather do you see uh evaluation being a time waster for any of your searcher clients definitely um i totally agree with ryan that sometimes you just need to let a deal sit they may be on a fishing expedition so will often as bankers see that same deal you know nine twelve months after the first time we saw it so that tells us something too it was on the market for a long time maybe the second time we see it the valuation has come down but ultimately yeah it's a two to four uh x market and anything priced above that that's a small company is probably going to be a waste of your time and i think the normalization of ebitda is also really important point we're going to size debt to normalized ebitda and so we're not really going to tell you what you should pay for it but given there's if there's a big delta between normalized ebitda that we size debt to and what you're paying for the company that's all paid for with equity and then you need to plug that into your return on equity or invested capital model and decide if that's worth it to you and i think that's usually a maybe a fast way to get to a no yeah yeah i mean one of the things about valuation if you're if you're planning to do kind of a standard structure of 10 down or 15 down and then 10 or 15 seller note and the rest in sba loan i mean there there isn't there's an anchoring effect that the loan for you got for the loan to pencil that means that you just no matter what what the seller is saying you just can't go higher than that in that range is that do i have that right heather well you can but you're going to be paying for it all with equity and that is gonna that that's gonna impact your model quite a bit and that may be the easiest way for you to figure out that you really don't want to do that do you ever find that searchers are able to use that point as as a a push back on the on the on the evaluation negotiation like look that you know live oak does these loans week in and week out and their range is this and you know the standard the standard structure is 10 10 80 and you know you're asking me to do something that would cause me to put in a lot more equity than is standard uh therefore you know you're kind of you're overvaluing your business based on this this big data set that live oak sees all you know and is working with that works definitely i mean there a lot of times you can use the bank as the bad guy that certainly works in a lot of different situations um i think even more importantly it's the bank decided that normalized ebitda is x even though broker is trying to push non-normalized dividend a much higher number um i think you know you can maybe sometimes use the bank's reasoning as to why we think that uh as part of your discussion or your negotiation great okay stupid margins ryan was was deal killer number two what are stupid margins what do you mean by that uh yeah i mean it's it's it's crazy to see i mean it's actually a very high percentage of deals uh that are listed um that will have you know 50 plus percent margins um and so they'll advertise it you know as a million dollar ebitda business and um i mean usually you'll see kind of in the summary blurb that there might be only two million in revenue and um you know i've spent some time uh out of curiosity looking into some of these businesses and really what it usually what it means is the it shouldn't be surprising but um you know the owners is either wearing a lot of different hats uh you know running driving a lot of the business there's very little infrastructure in place so there's no operating expenses um so it just introduces a lot of key man risk um again you see this in contract you know contracting businesses or professional services businesses sometimes um and so uh yeah and this i think it also applies to kind of just trends in general financial trends in the financials in general where you should kind of have a good sense of what the industry should be doing um uh you know either from their deals you've looked at or publicly traded comps hopefully where you know they're not going to do you know landscaping business is not going to have a much better margin than brightview right um if not there's something if so there's something uh there's something there um and then yeah i mean for example here i i had a broker that convinced me to meet with uh it was a lighting business um i drove five hours uh to meet with this guy for a million dollar ebitda business realized quickly there was 2 million of revenue it was husband and wife working out of home he was really a good sales guy he had already kind of built this business up and sold it in the past and now this was more of a hobby project and it was you know just quickly you know it's a buying a job a sales job which you're not going to do better than the the seller you know that's already doing it so uh you know you have to really think through the value that you're buying or the value that you're paying for these businesses is a lot to do with the infrastructure around the people and the assets and the brand and um these stupid margin businesses uh they're generally kind of uh you know one or two men operations uh you know sometimes out of their home and is so and that scares you off as opposed to okay well there's this seller doesn't understand that in fact you know the way i'm going to approach this business is i'm going to need to replace them and so therefore you know my the sde is going to immediately uh the day the day i take ownership of the day i put in a general manager is going to immediately compress um and i should we should really be talking valuation based on that future you know that future sde is that not are those not conversations you even you even go down the path with because you your experience tells you that they just won't see it that way um it where's the opportunity to save time because by itself even though even though i'm not going to take their margin that stupidly high margin at face value it's still it still tells me something and not in something maybe not not not necessarily a deal breaker i don't necessarily interpret that as a deal breaker so what it would elaborate on that for me yeah i mean look i think if it's if it's you know it might be unique to the individual searcher if it's something that they maybe have you know operating history in um and that's one thing but again as a first-time searcher not you know looking at sectors that are relatively new to me um you know it would scare me because you're really facing more than just a potential revenue headwind of losing that that key employee that's that's driving probably a lot of the top line but then you it's really hard to get a handle of of what the expenses are or really the the capex you need to put into this business to scale it so um yeah it would be it'd be really tricky especially again if it's i mean also like if you think about just the simple math of taking a business from 50 even a margin to what is like a normal industry you know even a margin uh you know i don't think any valuation um that's a huge it's a huge gap to bridge yep heather any thoughts on that one yeah i mean i think i sum that up as the way the banker will see that is you are buying a job you and as ryan said you will probably not be able to do as good a job as the seller so there's that right there that even if you were trying to replace them your ebitda might go down a bit right there because you're not as good a seller owns the relationships that's always really risky um and if even if you were to replace the seller with an employee is the employee going to be able to do as good a job i mean that's a big risk too so you it really just buy a job is just not a good um financing scenario for a bank and so stupid margins really say it really is a sign it's a really uh good sign that you're probably buying a job yeah i mean what we're saying here is basically the stupid margins is kind of a proxy for this the business being too reliant on the seller essentially um how and so heather what's what's the ideal i mean i assume the ideal is like a management layer and you know the the seller is absentee i mean and it actually is a really high functioning business and the seller's never there like that's the ideal ideal but um we don't we probably don't see that very often what what is that what is the happy happy medium between that ideal and this in this you know kind of worst case stupid margin case um that that kind of is um is functional and you see more commonly well just normalized margins and an org chart that shows that the seller's not wearing all the hats that he's got some key people in place that will continue on with the business after after transition that's really what we're looking for in general great okay or you could be a tech business with uh recurring revenue and it's you know just by yeah just by virtue business model it's a actually high margin business but those aren't the ones i'm looking at right right uh and the valuations on those probably won't be very friendly to an sba loan size ryan is is time killer number three yeah this one's an interesting one because when i when i network with a lot of different searchers i feel i feel like we've had this conversation i've had a conversation with all of them we're at some point tempted to go down market you see a listing and there are a lot more of them at the the smaller size call like the 150k vivid uh or sde and you you know you're like okay well that's that's enough to live on uh and you know you have a lot of confidence your ability to grow the business um but end of day it's it's it actually will and you know maybe there's less capital you have to put into the business up front um and so you kind of view it as lower risk but reality is the smaller the business especially that size is you're introducing a lot more risk i mean we're already kind of in a really you know it small business is inherently risky and then when you go down market to that size these are pretty fragile businesses and then on top of that if you're going to try to grow it um again you're going to end up putting in more capital down the road so i'd rather you know do a deal that requires 500k you know to a million of equity and you know be able to fund the growth with cash flow versus putting 50k in and then you know every time you're trying to make a high or buy a truck or you know increase marking spend it's not coming out of your your your pocket um so i think the other thought here too is you know there's really a sweet spot here for economics researchers where your cost to capital is kind of lowest at the largest size deal you can fund so i mean that both from like an sba standpoint because you can get you know the maximum amount of leverage assuming that you know you're doing it um on a business that can cover it they cover the cash flow conservatively but um you know you get the max amount of leverage from the sba but then also if you're going to equity investors um you know they're gonna they're gonna be more interested in larger deals just again because of going back to the risk point i made earlier so um it's uh it's tempting i think uh for a lot of folks um and i also like the the idea too of you know it's easier when you have an asset right that you can go find out their assets and bolt on but um i would anticipate putting in a lot more cattle after after you've made that purchase and what so what range of ebitda is the sweet spot and and i assume whatever you're going to say is where you're looking uh yeah i mean look i think i think uh you know a lot of the self-funded searchers will will kind of push it towards about a million and eva it's like a good bogey i i'm kind of you know 750 to one one and a quarter i can go as low as 500k i think and get comfortable depending on the business but um yeah and nothing sub of 500k i won't even i don't want to look at it anymore heather you're not in your head oh yes totally agree with this one um our minimum enterprise value to lend on is a million and even then i don't really feel great about it um and i think what ryan said is really interesting way of looking at it it the cost of capital does go down the further up market you go and uh the beauty of having this great search fund investor network is that you don't need to buy too small of a company you have access to capital both in terms of debt and equity and so you know it is within reach for most searchers if they find a good deal to go a little bit up market and we we really dislike small deals they are fragile companies and it is very tough to put leverage on them heather there are i have three follow-up questions to what you just said first so when you said you you guys won't land on it on a on a deal that where the enterprise value is less than a million so just backing out on that assuming a 3x as an average so that's basically 350 sde um if if we're if we're thinking about things in terms of of how much money how much cash it generates so 350 400 is kind of the is kind of the floor of businesses okay um when you say the cost you both have said the cost of capital goes down as the purchase price goes up um can you spell that out for me well i guess uh if you think about it from just the equity perspective right if you were to go out to investors and you were you know say the deal needed 50k of equity and you were going to go out and raise capital around that i don't even think anyone would touch it but maybe maybe you are taking capital the terms are not going to be as favorable as you know some of the stuff that you're seeing out of uh you know these self-funded searcher investment groups where you know it there it's protractive economics it can be so where you know you're taking money in you know you might be taking in ten dollars of cash they're really giving up you know three dollars of of ownership um and you're not going to get that in these smaller deals i mean you you may not even get that you know 500k you uh keep it or 750 you know that's kind of where it starts i agree as a debt provider it's risk reward and an equity provider is going to be the same thing so if we're going to see small deals as higher risk we want to get paid more if if we're going to lend or provide equity into those spaces so it is definitely more expensive uh capital uh the smaller you go yeah yeah so so in fact you're actually being punished in a word as the searcher if you bring a smaller deal because the source of your capital be it debt or be it equity uh perceives that as a riskier a riskier investment that's right heather you said lastly you've said um you know you can find that capital um you know if i'm just somebody who's kind of new to search listening to this conversation and i don't have connections i don't know anybody i've just kind of found this on the this concept of search on the internet and i keep hearing people talk about how you know all these investors this investor community how easy it is if you have a good deal to get an investor where do i start well that's a good question so first you need to sort of get to know the investor network so just classic networking you need to get to know some other searchers maybe attend a conference look around online there are several resources online that actually list the names of some of the investors but just like raising debt you've got to go meet them you've got to impress them with yourself first of all and your thesis what you're looking for and and try to find the investors whose uh appetite uh for for risk uh you know matches your thesis so that you can sort of cultivate a group of at least a few investors that you know if you find a deal that meets their criteria that they would probably be interested but it's classic networking really is the best way yeah yeah it's great okay this this um size of acquisition time killer leads in naturally to the the fourth one bolt-on versus platform what did you mean by that ryan yeah so um yeah it overlaps with size um also even even the margin point i think you know that could potentially be a good bolt-on um but yeah you'll see a lot of deals i mean that's the broker's job they're gonna market it as a platform the best they can they're gonna they're gonna take whatever the seller provides them and put together a sim that shows that they do have a management team in place they do have systems and processes but reality is is you you don't it won't take long when digging in uh in preliminary due diligence to find that um you know this business is really um at best of bolt-on and that's where that's what i'll eventually trade as and um you know i i just i guess for example i met with a you know landscaping business um and yeah the seller told me straight up uh all right i mean they operate out of a parking lot um not don't really have an office um you know no systems no process no crew leads he he leads the whole team and he'd worked at a landscaper two years ago um saw the opportunity grew this you know went on his own grew it to a decent sized business but for me it doesn't it's not a good fit right because i need i i can't immediately be focused on building everything from scratch i need some semblance of a team in place um or you know some type of systems and process to work from uh otherwise i think you'll get kind of caught into that you know working in the business versus on the business from day one um and it can be tempting because it's again once you have that asset maybe you can make it into a platform but i think it'd be hard enough to find a good platform um at attractive value uh to build from so i'd avoid anything that smells like a bolt-on anything to add there heather yeah i would say this one's interesting because i think most lenders wouldn't be able to detect this as well as the actual searcher so this is one where we might not be really your safety net it's really dependent on you doing your diligence and asking those questions and kind of having this in mind when you do that because uh to a banker it's a little little harder to detect this and a lot of bankers won't ask these types of questions to figure this out great industries with pe private equity interest this is going to be an interesting one this was this was your number five time killer ryan take me through it yeah um so look i i'll preface it by saying i i'm curious i mean i'm interested in private equity business or businesses that private equity is interested in right there's proof of concept there there's a comfort around you know terminal value there's potential opportunity for multiple arbitrage i i like those types of businesses um going back to my pe roll up days but uh it's the challenge there is that you're you if you're going to or you're going into a competitive process with a private equity buyer and by the way that also includes private equity spot you know backed platforms which are also trickier to find you know trickier to be aware of um it's it's going to be tough so they have greater access to resources um they will get under loi quickly they've no problem with with with getting under loi it's a lot of sellers like you know the high the limited like the low amount of execution risk involved with those types of deals um but so i guess my advice on this and i hate giving advice as a searcher that hasn't actually executed a deal yet but my thought is is uh if you're going to do it just be kind of quick and nimble about it so you you'll see a deal uh you know be quick to um you know quickly uh underwrite it and and and try to submit an loi so you can be competitive um but don't spend time again you know creating analysis around it if you know there's a potential that there's you know in market pe interest um because i've had that where you know i for example had a broker that i've had a really good relationship and this happened two or three times where i asked things like i want to see deals in this sector you know i will be quick i you know i have you know all of the capital that been lined up that's shouldn't be an issue and sit in my loi you know go dark for a few days and then they're under contract with somebody else you know the brokers are you know again over generalization but many brokers will be happy to feed a pe sponsored or pe backed platform um because that that's that'll that's better they'll feed them on a recurring basis and it's also kind of lower execution risk so be mindful that also your bid will be potentially shocked to those guys as well so um look i think there's there's opportunity in that space the pre pe you know sectors that uh you know just under their radar or maybe they're just below the scale that gets them interested and that's actually kind of where i spent a lot of my time but you know i i wouldn't get too excited about a deal um where it might be pretty competitive and but ryan why what you just said there at the tail end was going to be my question why is that not a great strategy so if pe let's say arbitrarily or kind of roughly they stop looking at a million dollars ebitda below so why isn't it an awesome opportunity to buy the six 800 ebitda business in an industry where there's a lot of private equity interest um with the expectation that you know you have you have these ready buyers once you you grow the business a little bit that seems like a great playbook i agree i mean i like that uh thesis i guess um i would also say though you have to be cognizant where there's you know strategics again that are pe back that will go down a little bit below that um i mean there there's competition regardless but yeah i think um okay that size anything above a million is really where i think it starts to get more competitive millionaire and um and i'd say too also though searchers uh we do i think have a little bit of an advantage depending on what the seller's true goal is in the sale process um you know the sellers that i like the most are the ones that care about their employees they care about their brand they care about legacy and you know a lot of them have seen pe come through town maybe they've required a competitor you know you have a shorter investment horizon you know where you can go in and convince them that you're or her that you're you're buying it to own an operator over the long term take care of their employees take care of their customers preserve their brand be a steward for for the business they've built uh i do think that goes a long way with the right slurs um but sometimes you know sellers are looking for you know they're burnt out they just want to you know just think about after tax proceeds you know yeah yeah and you know you hear people say that you know kind of appealing to the sellers kind of like their emotional attachment to the business and and interested in seeing it live on after them um but that that that is i just just want to echo what you said i mean that's a very real thing and and you know you hear it even more in traditional search where traditional searchers are looking for larger businesses and so they're having to compete almost certainly with re you know bigger capital bigger deeper pockets private equity and so on so the only thing that they can really say is like i'll i'll be you know a responsible steward of your business i'm a human meet me and so on it's really the only differentiator one of the only differentiators they have um or competitive advantages maybe i should i should call it uh heather what are your thoughts on this private equity um concept very interesting in the last few years uh how much uh smaller a company private equity can is interested in these days um i think the multiples are certainly attracting them um and uh there are certain industries where uh they'll sort of heat things up and they will um it would be very tough for a searcher to win a deal against them if they find something that they like so definitely not something to to waste your time on and and definitely to be careful about the brokers who might just be using your offer to shop around it it definitely happens fortunately there are so many niche industries out there that i don't think pe would ever really be that interested in uh they're too different and um they don't really fit on a platform so i think um you know you tend to find searchers looking in those spaces where they know they will they will not have that kind of competition let's move on to number six where where um we probably got we got time for probably just a few more so number six was market ryan what did you mean by market yeah so i i've kind of fallen into this trap where i'll look and look at a business take a deep deeper dive on it with the hope that i will get so enamored with the business that i will overlook uh the market that it's in and magically convince my wife and i to to completely relocate our lives into uh you know a a place that doesn't necessarily fit our preference so um you know i think uh and i got a joke i think there's really a and then separate from that there's there's a lot of market considerations as it relates to the deal in terms of opportunity as well as valuation so um you know i i will spend less time again on these on these markets um you know i for example i looked at a a cut and so manufacturer that made a product that i actually really like and it was a good size um it was a little expensive but it was in a market that was probably expensive for us to live in uh especially when it factored in the price of the business and our you know economics after cons you know considering my wife would have to leave her job most likely uh and so you know it it you have to kind of balance all these when you think about where you're actually going to be and i think when you you know traditional search model right you know a lot of investors will make sure that you're yeah completely geographically agnostic i think that that's easier said than done and i think uh if you really kind of boil it down people are you know they're obviously they're gonna there's gonna be a natural preference to certain areas in certain states certain cities and um you know i wouldn't i wouldn't ignore that heather do you have any thoughts on on marketing yeah i i mean i i agree with ryan most people just are going to have their preferences and that's why uh there if you if you do find a deal in a place where maybe a lot of people don't want to live you might actually get a pretty good valuation so there's the other side of that if you really are truly willing to do it um there's going to be a limited number of buyers and therefore probably a better price but you know but i still don't see that many deals transacted in places like that either yeah ryan at the start you said where you were looking and it was a pretty wide swath but um is that narrowed by you just want to live in a metropolitan market so really it's actually a handful of five to ten seconds uh well i'm actually kind of looking in i'd probably classify as like tier two tier three metro markets because i again i i'm actually getting the most traction too so again on the proprietary outreach like you know there's there's some markets that are you know call it 150 000 populations definitely small cities that um you know the sellers haven't been pestered by searchers or pe and you know they're actually open to taking your call and if you have a actual you know inroad for being there um you know we're now in the southeast so it's a little bit easier to have a conversation i think it goes a long way um whereas you know if you're reaching out to businesses in miami it's it's going to be pretty tough it's it's just just inherently more competitive but i'm not saying it's impossible i'm just getting a lot more traction in you know a market like sarasota sure you you have a couple of examples listed here um getting outbid in charlotte charleston yes uh the remote the remote beach town what are any stories behind these examples yeah so yeah i told you about the manufacturers in washington uh couldn't get comfortable with living there after doing a decent amount of work on it um then yeah when i was looking you know spending a lot of time in charleston charlotte um driving all over uh it was it was kind of crazy for a while i hope i think things are kind of hopefully settling down a little bit but late last year i mean businesses in those markets were on fire so i mean they were listing for you know businesses and for example i looked at a business that almost was almost identical in sarasota that traded four times and then four weeks later a business listed in charleston almost identical in terms of characteristics for been traded for seven times so it's yeah it's a huge disparity ryan you say that you you will look at other deals you'll look at deals in other markets just to to continue to educate yourself what do you do there yeah so if uh if i see a listing in another market that i know that i i i wouldn't necessarily pursue i might look at it just to get a sense for uh you know like i was telling you before about kpis what are what are reasonable margins what are they doing best practices um you know if there are any good diligence questions that come out of that but again i won't i won't do actual work or spend too much time on it um beyond that and then yeah i guess the other downside to what we're missing going back to the other point in terms of evaluation is that there is there's a there's more there's another reason besides the fact that it's a great place to live and it's also there's a lot more growth opportunities um you know in some larger markets uh and so you know there's one business that i really liked uh everything about it other than the fact that it was in a rope beach town where i think it would just be really challenging to grow that business there's limited amount of competition which was good um but at the same time if i was looking to grow you know i like fragmented markets looking for opportunities to grow acquisition down the road or even attracting talent uh it can get really challenging i think in some of those places yeah yeah heather how how much do you when you're doing a loan do you look at the growth like how do you think about the growth potential for a business the searcher's looking at that's a great question because a lot of folks don't realize that as a lender that's one of the lesser important criteria for us so a lender always looks at sort of the worst case scenario of historical cash flow so we're going to adjust it and then we're going to think worst case if we lost a customer or we hit a down cycle or whatever it might be could this loan still be repaid and and almost all of our decision is really centered around that that uh thought process now um we then we'll look at the growth more from a risk perspective are you going to try to grow too fast are you going to have to spend too much money to grow is is the type of growth you want to engage in going to introduce risk because we're all about protecting that sort of historical nest egg that we have rather than the growth and the whole simple answer the reason why is uh lender does not have upside all we have is downside we're going to either get paid back with at a particular interest rate that's already been set and determined uh or we're going to lose money so we're all about not losing money and uh and and so growth is great we we're certainly excited to see it happen and and we understand that that's what searchers are are here to do but when we underwrite we really only think of the growth in terms of what might go wrong and how it might hurt what we do have and and we want to make sure that that doesn't happen great such a valuable point got time for two more here ryan did you have something you wanted to add uh i actually did want to add something on that so i there are some lenders though that will stay away from certain markets um you know it goes back to kind of the point where you know maybe they were burned there in the past so um for example i had a lender that didn't want to touch a deal in south florida um they just you know and i think that might become more and more common as we kind of get later later cycle or you know if we're in a recession now who knows but um you know i think a lot of banks might pull away from states that uh are regions that you know what we saw kind of during the great financial crisis was sand states got crushed um and i think a lot of banks will may shy away from those types of deals um you know if there's an over concentration or they start pulling back credit i will i will add to that just that banks bankers have scars and they might be a geographic they could be all kinds of different scars but when when something uh looks similar to a bad deal that we've had or experienced it it really is a quick turn off and and you'll see that a lot um if banks have had bad experience and and to ryan's point if we if the recession sort of causes more stress on credit um in banks then you're those are all going to be new scars and uh whatever the lessons learned from those are are going to you know tighten up credit in those ways and so that that is sort of how the cycle works heather do you have any searcher scars that you can be public about or give us an example of oh gosh uh you know sure um there are certain industries we've learned i won't go into specifics but i'll say that we've learned in certain industries that there's the ethics are not very good um what you know what a seller thinks is perfectly fine and the way they've represented things we found later was effectively misrepresentation but they but they had no problem with it and we sort of saw that similar pattern in other businesses of the same industry and sort of formed an idea around that so sometimes we we develop opinions that way another one that i i can think of is an example where a searcher relied on um a gap uh you know they converted cash uh accounting to gaap on their own and uh based their that was the reba daw that they were buying and they didn't do it correctly they did not get equality of earnings and so i think you know that's another scar is it you know any anything that's got to be heavily adjusted should absolutely have a quality of earnings a third party um you know look at that a deep dive on the forensic accounting so i think those are two just ethics in certain industries and make sure you get a q e if there's if everything's not completely straightforward in your numbers i so want to know what this crooked industry is there's more than one but i'm just uh give you one example but there there are more than one and that is something to to really be careful about and that that's something that would you be if a searcher took you a particular deal that you would you'd be able to say to them privately this is an industry i would yes definitely crooked industries that's going to be the subject of an upcoming fight red flags uh ryan is is your next time killer sure um so look i think a lot of the opportunity that that exists in smb space is is kind of offset by a lot of uh risk right so it's really the wild west and um i it doesn't cease to surprise me uh some of the things that i've been seeing um and you know i i'm i think a little bit more reverse but if there's one or two red flags depending on what they are i will usually kind of go pencils down pretty quickly so um you know red flags are pretty obvious but you know uh unreported income that's something i see a lot in the twitter sphere uh some brokers have mentioned it they'll try to you know they'll try to price a deal on it it's crazy um uh aggressive add-backs it's more object that's a more common one although i don't think that would in itself be a deal killer but um something you definitely skeptical of uh lawsuits that's that's something i've noticed kind of just i'll do some google research on on you know senior management or the partnership and then you'll you'll be surprised that you know they might have had a falling out where a previous partner sued the existing partner that you're buying from and i don't know usually you know maybe there's there's ways to kind of immunize yourself from that risk down the road but to me i think you know when you take multiple red flags on usually there's a much larger you know there's potential issues unknown to you down the road um and i had this kind of there's a simple concept i was just networking with another searcher who just recently recapped his business so he kind of basically was treading water for the last five years and he attributed almost entirely to the fact that he bought his business from uh excuse my french and and he didn't he didn't really even know it um until you know they closed the deal and then day one he lost like a couple key employees and then the rest of the employees basically demanded huge raises because they they were you know very disgruntled and they knew you know they had some leverage and he was he went from being excited to to grow this business to just completely putting out fires um and that was leading into you know once you think he got everything stabilized and coveted hit so um i mean it's it's uh it's something that you you always want to be mindful of and it's there's enough out there in the public domain nowadays where you can you could definitely find uh just from a google search you don't even need to be doing background checks to find bad reviews or employees complaining on uh you know employment websites uh so things like that uh usually for me well i might go pencils down pretty quickly depending on the flag and and so and and so the ti the way to save time here is as you said just to kind of put your pencil down and stop working on the deal rather than maybe the temptation of a searcher might be especially as a searcher gets desperate uh you know it's been months they're looking for a deal to rationalize how they can overcome the bad reviews on whatever on google or they can correct the toxic relationship that the seller has with his employees it's like no just just skip it think bad reviews well it depends on who's choosing those arbitrarily yeah as examples yeah right i mean i i don't think they're all created equal um but if again if if somebody's trying to sell a business on unreported income uh you just have to think about all the ripple effects that that that that person probably had on that business so what is the culture really like you know are people or you know are they potentially stealing from customers and then there's obviously all those liabilities associated with that down the road that you could potentially you know obviously you could try to immunize yourself that from like a legal perspective then there's just operational risk right of of losing employees losing customers um you know again like going back to i think appointment earlier it's like you're buying a large part the brand employees um you know the ability to grow this business and again if you're uh you know turn around situations um based off of poor ethics uh are really i think really difficult to execute on heather what do you think totally agree i mean it's a non-starter for us if someone you know shows us that the seller's not reporting something or doing something you know wrong on purpose for some you know quote unquote tax advantage um you know the gray area with that is is the ad backs where uh you know they're running personal expenses through the business and they're selling the business saying hey these are personal they weren't really business even we accept some of those but i even have a hard time with that to be quite honest because um where's the line you know and uh uh it it's and there's many of those that we'll just kind of throw out um but i think anytime you're looking at uh buying a business from someone who's putting out there right up front that they're they're not doing things properly that's a red flag you need to really dig deeper the add backs one is so gray though because i mean you know any accountant will will talk about how small business ownership one of the great advantages of small business ownership is that you can run your personal life through the business so i mean in some ways some of that behavior is practically encouraged by your your your account your accountant heather i think you said that some things were some within within this um this the pool of ad potential add backs and um there are some ad backs that are deal breakers that if they're if they're trying to add if they're expensing something that they shouldn't can you give me an example of one that's just like crosses the line i've seen many that cross the line very very far um they'll run a hobby you know i had one uh who was into car racing and his mechanic and everything to do with that hobby was in all kinds of parts of the the pr profit and loss statement it was uh it was crazy um i've seen people run food like including their groceries yeah for their entire family you know it gets out of control um and uh and and we don't that's just a that's just it's not only do i not want to add back the number but i really want to think twice about whether i want to lend to anybody in that business at all great very clear okay uh let's do one more ryan um and and just again this is a list of 15 and uh your you can download that list of 15 um with the link in the show notes um but let's do we're on number eight here so so wrap us up with number eight ryan yeah so uh needs to pencil uh effectively needs to support leverage so uh again what i'm trying to do here is is essentially a micro lvl right so these businesses should be right now please uh lbo uh leverage buyout micro leverage spot go ahead micro live version buyout yeah so effectively there's a there's a component of financial engineering here that that you know that improves returns right responsibly so you think about buying a business at four times you know zero growth um you know that kind of translates to a 25 ir but once you start introducing debt you can really uh improve the returns of the business and growth and all that good stuff but the business should be able to support that debt uh i like to think of it through the cycle right so i kind of underwrite it to a downside case of what a recession would be um and you know whether or not that could support uh you know the debt service uh and um you know and then expected capital expenditures and my salary right um because you do hear i've heard from a few searchers that have had kind of the nightmare scenario of buying a business and and business goes away and then all of a sudden you're contributing capital the business you're not taking salary more and and so i guess you should always i always think about deals in terms of the max amount of debt i could take them so um and a rule of thumb that i think about in terms of evaluation for that is is um it's about four and a half times really this is the maximum if you want to max max out sba debt um you really you're gonna be pushing it if you're paying over four and a half times and then to heather's point earlier above that you it's fine you can do deals above that um you're just going to contribute more equity which means that you'll probably you'd have to have a stronger case for growth um and especially if you're raising that equity then again you better have a pretty good story behind why you think that you can grow that business um but i don't know i think uh um yeah and then i guess beyond just evaluation right um a lot of banks will look at really you know the business characteristics some things are not financiable so against all those kind of attractive characteristics which we described earlier but you know evergreen businesses stable cash flow recurring revenue all those types of things are attractive to lenders and guess what they're attracted to me as well and so usually if it's a business that i know that i'm gonna really struggle to get debt put onto it uh and be worried about being able to service that debt down the road then i will either negotiate on the valuation or walk away so getting getting kind of lender endorsement of the industry before you spend too much time looking at a deal in that industry yeah i was just thinking of an example today um i have a deal that we spent a lot of time on there's a lot of noise in the numbers definitely there's a good company in there but but very hard to figure out normalized ebitda long story short we declined it um and another bank has approved it and that searcher's coming back to me and he might walk away from the deal you know just because of our input on declining it so i think i think the the story there is as a searcher that the bank is another set of eyes yeah um and to the extent that we dug in deep and asked a lot of questions um you know that that helps i think um whether it's a yes or no so maybe even the no helps you think if the bank doesn't want to do it maybe maybe there there's a point there maybe i shouldn't do it absolutely yeah we're not always right we don't know as i've learned more and more about search um and come to appreciate particularly with like a live oak or banks that really no search and are really active in a lot of search deals um and and you used the phrase earlier heather that you the the safety net that you act as sort of a safety net or a second pair of eyes that uh and in fact i did um an interview just a couple weeks ago it hasn't aired yet with somebody who worked with your partner lisa forrest on a deal um and really was um singing her praises about how she really kind of helped helps kind of coach him through the deal get through the deal like what to what to look at um i i don't know if that's common uh in in other industries and other applications of debt but it certainly seems like it's uh it's valuable that searchers have as a resource the the lenders in the space that they do let's call it there um why don't we why don't we just ryan please tell folks your your twitter handle um i i and i'll just endorse you i've uh seen you around on twitter didn't know it was you um so this is you have an anonymous handle but um now people are gonna know who you are you're a great follow obviously this one piece of content um got heather's attention got my attention um but it's not the only great piece of content you put out there so i encourage people to follow you at smb quest a great creative uh name uh clearly i did i did not put much thought into put to making that name and uh yeah i've uh but yeah feel free to give me a follow um dms are open for searchers that want to compare notes um self-funded investors open having conversations um and then any any brokers that have deals that you know within the criteria that i've outlined happy to happy to connect it is a quest i think search so maybe maybe maybe it's a pretty apt uh app name for twitter handle and heather how can how can people get in touch with you or or connect with what live oak is doing uh and find this piece of content is it going to be just right on live oaks website to tell me where people should go yes so so come to our website uh live oak bank search fund lending you'll find our landing page we've got all of our resources there uh recordings of podcasts all kinds of great stuff but uh look for the time killers slide and you can download it it's a it's a two-page pdf and it's got a little bit of detail on each of these these 15 time killers but i think it's just a great piece of content for searchers to think about as uh they're deciding how to spend their valuable time and and as i said there will be a link in the show notes but go to the live oak page directly anyway because there's a lot of other great content there that people can find and heather what's your twitter handle it's and heather but anderson's hard to spell so but uh you should be able to find me pretty easily great ryan heather this was a fascinating conversation thank you both very much for coming on thanks for having