Nicholas James welcome to acquiring minds thank you very much Nicholas you've got a great story for a lot of reasons but among them how you've evolved from a Searcher to an independent sponsor now the independent sponsor model is not one I've really addressed directly on the Pod it does come up in passing from time to time so you are the perfect person to explain to us Searchers us acquisition entrepreneurs what exactly the independent sponsor model is all about how it's different who should consider it and you're doing this in the HVAC the HVAC industry which we hear a lot about in our world of buying businesses so we'll also have the opportunity to spend some time on getting the basics of the HVAC industry but let's start as we always do Nicholas with some background on you please yeah fantastic thank you again well and it's exciting to be here today uh the first thing you'll notice is that I have an accent from a Norway originally so I grew up in a small picturesque town called the stabanger in Norway I went to college there and then did a master's degree in London started my career at Bane where I was mostly in their private due diligence group after Bane I uh had a quick step working I met your Capital before I uh did my MBA at HBS and then after MBA after my MBA I moved to Texas where I've been for 10 years now just got back from my HBS reunion here a couple of days ago and uh in Texas I first worked in the oil and gas industry for a few years this was set when fracking was booming and oil price was 110 um and then as soon as I got my green card I have been very inspired by a lot of my HBS Brands who had done search funds and acquired businesses by then so I left my job and uh you know started a career self-employed and since then I've been in this search fund slash independent sponsor space so now for seven or eight years been involved in a number of things and uh excited to be here to talk more about it great now let me ask one one something on the side here Nicholas when I would imagine a reunion at HBS could be of all of the kind of high school or college reunions you could have that would be an anxiety-inducing uh reunion if you're not you know the prime minister or president of a country yet you feel like you're under achieving uh what's the vibe like in an HBS reunion that's a great question and this is actually a topic of conversation when you go to these reunions there are certainly a lot of people who've done very impressive things by the time you get to the 10-year War uh but I also think by the time you get to the 10-year Mark everyone has experienced life in different ways and uh that can be on the personal side or on the professional side but everyone has had ups and downs um so you know the story at HBS goes that the an impact one of my professors the parking words from him was do not go to your five year five year reunion because at the five-year reunion everyone is just five years out people haven't quite started to have families yet or had any health issues everyone is really into their careers and supercharged and doing well so it's uh it's pretty intense but by the time you get to 10 years and apparently it gets even softer as we get older you know it's more about you know how many kids do you have uh where do you live these days and you know what what are you experiencing and less all about kind of who is doing who's earning the most money um so yeah I would say it was a really a football atmosphere all with them long and and the school does a fantastic job of putting on a great show with good speakers and I had a fantastic experience that's great that's great well it's nice to hear that even even in in the the August world of HBS that you know everybody gets a little bit softer as uh with age um I like that's reassuring for me okay well you have touched search in a number of ways um I I know your story but let's give a little bit more to the audience you initially set out to do a traditional search fund actually um what tell us that story sure so I was still employed in the oil industry um and this was best in 2014 2015. a few of my friends as I said from HBS have graduated and gone on to do search funds and acquire businesses so they would give me tourists of their facilities which was very inspiring and you know look at them and say what do they have that I can't do my answer was I can probably have a crack at this as well you know out of HBS there are two models that you can pursue they're also kind of a professor sponsored uh books similar to traditional search fun that you could go but I hadn't been in that class so that was nothing Avenue for me and then it was the traditional search fund and I started networking with people who had gone that route um I spent a couple of months traveling a country I would still avoid I think when I met a lot of the investors in the search fund space so I raised a fund uh 400 000 or maybe it was 450 000 and as you know the fund is meant to give you a salary I've called it 90 000 a year and then also a budget for two years and in exchange you lock in for two years per day on your bill flow and their first dips at any deal you may pursue um so I raised the fund and uh then I actually made the decision to not cash those checks so I called back to all the investors and I said love meeting you uh we look forward to having you as a mentor would love to have you as a Capital Partner if and when I find a deal but at this stage I don't need to lock myself in for a 90 000 salary um and there are a number of reasons for that but but that was the calculus I made and why uh well first of all my wife was working I was also a couple of years out of HBS so I didn't really I wasn't desperate for ninety thousand dollars um and I realized that I would give up some economics down the line potentially by going the traditional search phone or model um it's a very specified you know formula for what kind of Economics you get but they actually own your deal flow and uh you're enough to really uh as independent as I maybe was hoping to be also and this was important I was uh talking to a company about a position that was quite interesting just at that decision point that they were maybe looking to hire me for and that made me realize that it would be nice to be flexible I just quit my job by now and who knows what's going to come up in the next two months or two years but it's nice to be autonomous and be able to to uh to be flexible so so those were kind of the the reasons behind why uh the Morton did anything I think I understood early on that the major problem back in private Equity is is not Capital it's a deal flow so I trusted that if I do find a good Target and get it under Roi then I will be able to find a capital for it and I think I along with many others have found this to be true well um that's something that my audience has heard a lot on here if you have a deal the capital is there for you it's not as intimidating as raising Capital can be to a first timer this was what actually this past Monday's episode was all about with Kevin biebelhausen um if you actually have a good deal you put one foot in front of the other you do some Outreach and it's actually not that difficult to connect to connect with people who would be more than happy to to help you with your deal um so that's a great that's a great um point for you to emphasize um and just out of curiosity Nicholas how did how did your traditional search fund investors react when you called him back and said actually I I'm going to send you back your check or I'm going to tear up the check I I um yeah I mean what was what was the reaction there I think most of them didn't react you know they are busy and didn't reply to that email um react you know for the most popular react in positively and one one reacted with some disappointment but the also reaffirmed that yes you know please let us know about your deal flow and we'll take a look which kind of reaffirmed my my belief that the uh it's all about the deals that you bring to the table so okay and and so in this decision Nicholas you it sounds like there were um you weren't actually sure what you were gonna do you had this this very nice W-2 offer which you did I don't think you ended up taking um you had the traditional search fund money then you were contemplating I guess going self-funded um so so how did all of that shake out and where are you living at the moment sure so the self-funded the model or that terminology I haven't yet been established so this was 2015 so I've never heard the term self-funded surge but that is what I ended up doing I ended up pursuing a search uh sponsoring the search itself myself and then not taking a salary and uh so I was living in Houston Texas at the time and uh I started the you know just like any other Searchers building the infrastructure and reaching out to intermediaries in particular I would say my search also one thing that distinguished me was that I had been in the oil and gas base I'd also spent quite a bit of time in oil and gas while I was at Bain I'm foreign from an oil and gas town in Norway and my thesis going into this was actually a little bit more specialized I saw that uh in 2014 there have been a huge crash in the oil Market um only had gone from 105 dollars down to 26 dollars and it was because of the activity happening in Texas so fracking had taken off there was a lot more production happening in the U.S and the US wanted to becoming energy independent and I saw that this activity in the U.S it's going to sustain and it's going to be at the expense of more expensive production areas around the world such as Venezuela or Canada or Brazil so I my thesis was that this is a great time the oil industry is down but I activity long term in the U.S and in Texas will be strong so that was kind of my thesis going into it then so initially I spent probably half of my time focused on finding oil and gas deals and um uh I would love to talk more about you know the benefits of specialization uh but that was the initial thesis that I was trying to Garner support for when I was raising money and yeah I do want to repeat that it was not deliberate that I didn't catch those checks that it was my intention to the traditional search fund but you know I was part of meeting 15 20 investors you're also learning about the model and one question that I would ask each and every one of them was you're in the space already you're very experienced with this you see the info every day how can you help me generate deals and the answer was always well that's your job and that's why we're investing in a search fund which is fair enough but I also realized that's the bottleneck for all of us so if they're not going to help me with anything but a modest sum of money I would say then uh let me have a crack at it on my own and maybe I can negotiate something interesting down the line that is more bespoke so to speak okay so you are looking spending half your time in your search looking at oil and gas around a particular thesis given your experience in that industry and I guess half the time kind of as a generalist looking looking at anything and everything take it take us up to the deal that you found yeah sure so in the initial uh time period there I I you know you look at everything that comes across your desk right so I found a couple of deal some oil and gas I actually got them under a wire close to Loi uh but the the industry was just really suffering and it was really hard to actually find Capital look for those fields once I found them so I ended up eventually moving away from oil and gas entirely just because it took longer for the market to recover and I believed in the deals but the capital was just not there people were scared um so I Diversified as we got through 2016 and um Alexander and why first with one software company in Florida that didn't close I walked away from it after a couple of months and then I eventually got under and why with another company late in 2016 which was in the edtech space it was a SAS business uh where the customers were school districts Nationwide ended up closing a few months later and uh uh I took the reins as CEO and uh yeah it was it's really quite similar to what you hear today is the kind of prototype self-funded search model um Theo so um and just to spoiler for the audience this is actually not the business that we're going to spend most of our conversation on today this is actually an another deal that you've closed and have experience in but we should um give this story a little bit of attention so let's spend a few minutes on it as well Nicholas so you said it's kind of prototypical can you can you fill that out at all can you give us some bullet points numbers yeah so what's an edtech business recurring revenue from from school districts and private schools um and the the ibados advertises around 1.2 million and had maybe a dozen employees most of them are engineers and it have been around for I think six or seven years I can't quite remember um I closed the deal with the SBA loan and also with the uh just investors from the search space coincidentally none of the investors were the ones I had up front to 18 months earlier but uh but they were you know in that search space all of them and uh uh most of them had specific knowledge with software deals and just curious why none of the investors from the from your traditional search fundraise came in because traditional search fund investors love SAS well everybody loves SAS but particularly traditional search fund investors yeah I was going to say I can't remember but actually I do remember it was my terms so of course by now I had a good deal um and I wanted I did an SBA loan which enables you to raise less Equity right and uh so I wanted a higher portion and a majority control for myself and uh that was something that the the funds and the search space were less comfortable with and the individual Centinela family office style investor for more flexible to to take a look at so that was the reason okay well Nicholas yeah this sounds like I mean maybe to say it sounds like the dream is a little bit strong but SAS I mean they're hard hard to find a hotter industry except maybe HVAC yeah uh SAS everyone wants a SAS deal one doing a million dollars in ebitda or over a little bit over a million dollars ebitda at least advertised as such um in edtech I don't actually know if that's considered uh a good or bad but it's basically it's B2B I mean you're selling to to um private schools and in educational in school systems um and you did you were able I mean it wasn't at such an egregious multiple that you were able to to finance it with an SBA loan so these are all this sounds like a unicorn um I happen to know that it it wasn't as good as it seems so let's continue what what yeah what goes wrong I was very excited that nothing beats the acceleration of uh closing of the year and meeting the employees on day one and uh and uh yeah it was fun and uh you know just going through the process it's it's tough when you're in a deal by the time you get to closing you're kind of so numb that if you're almost at the verge of being indifferent of whatever it happens or not because it's just been so tough to deal with the creditors and investors and seller and insurance and everything going on but but of course once you get it across the Finish Line it's it's a major milestone in this particular case however I would say uh we learned pretty quickly that the uh you know the business wasn't gonna have the growth trajectory that we were hoping for and uh the the core reasons you know I could write a book about this but the revenue really wasn't as sticky as expected uh and that was both because of company issues that you would always expect there are always some skeletons in the closet and also because of the contracts uh that that were there so um and then also we uh we or hitting some issues macro issues in the industry that were just starting to emerge I I was cognizant of them prior to the deal uh they were part of you know the pitch book to the investors there's nothing we didn't know but they became a lot more pressing a lot sooner and more dramatically than we expected so it was just uh there were headlines in the industry that that just happened quite quickly after it closed in fact on the day I closed uh Google announced that they were entering the space and uh that's just not great when they come in with a free product so so that was one of the issues as well um so we experienced the significant customers for right out of the day that cash flow got pretty tight very quickly um so yeah it was a little bit of a troubled investment from the start I think that's the kind of situation where you learn the most and uh yeah it became a learning experience from that point onward immediately I mean day one news Google's entering your space that's sounds pretty terrifying uh and it continues to be challenging why don't you just kind of accelerate us through the whole experience um how does it how does it end how long do you spend on it sure I think you know many people encounter bad deals this is why private Equity Funds have portfolios because they know it every now and then I do listen kind of work out I quickly understood that this is a recovery Mission and the one thing that I'm happy about looking back from it is that it happened quickly at the time of course that feels terrible because you're just closed and within a month or two of close in your kind of spiraling down spiraling downwards but the the benefit of that is that you're eventually able to move on faster it's better that way than being stuck for 10 years right so anyway it was a recovery Mission and that of course sucks but we had them all and that then becomes the priority and um it sucks because your incentives start to misalign with the investors they've invested Equity they want to see 3x return on that the bank they want others to get their money back so uh you know and then you also have to deal with fiduciary obligations student of predators and shareholders so it's really a tough Balancing Act there and just to give you an example on what how that kind of materializes you know you go six or 12 months into this the bank wants to play it safe billion don't you know hire more sales people just continue to produce cash to to service the death the investors who are seeing that there's not going to be a good return unless we do something dramatic they will encourage you to take the route of doing a Hail Mary invest a lot see if it works out and if it doesn't then too bad but at least we gave it a real saw and for them and a good investor will have a portfolio of deals so of course they want to maximize what they can get out of every any given deal but the the creditors are not a concern of theirs so everyone is acting rationally but the in in a probable situation that also means that the incentive starts to misalign and that became a real Challenge and something I learned a lot from dealing with mm-hmm uh Nicholas when I hear you talk about the investor motivations here and you know they have a portfolio so they just really want there's less risk for them in doing a Hail Mary there's so much risk for you with as an SBA borrower in a personal guarantee I can understand you know an adventure in a VC in a venture environment where the same thing Venture capitalists have portfolios and only you know it's it's it's one unicorn that pays back the other 19 bad deals um and so kind of Silicon Valley style VC is all about Hail Mary's um but in in those cases the entrepreneur can really resist that as well because they don't think it's the right thing but the entrepreneur doesn't have a personal guarantee so so their downside is limited your downside the SBA borrower's downside is is no joke um and there there are real ramifications to that so um can you can you respond to that at all yeah and I agree with you I think the search traditional search fund model has really moved more in that direction of BC uh and let me explain what I mean by that I think if you go back 15 20 years you know you hear about how they would support uh you know construction companies or tow truck companies was a big success obviously right and uh they were happy to invest in businesses uh where they could get that 3x return and it was fun for them to access that but then the tech room happened the Whole Decade of the 2010s that's where the valuations were rising and I think more and more the the investors started viewing it as a portfolio and they wanted to pursue 10x opportunity deals realizing that not all of them will happen and I think that a little bit conflicts with the interest of the search father as a search founder will have a good outcome and a good track record if they can close the deal and eventually it does 3x and apple set them up for the next stage of their career but however if they do a tech deal for instance they tend to be you know have a have a broader range of outcomes it's more risky for them and when you're a Searcher you only do one detail so that that and you're committing a lot of time um to that deal book before you're close to them and of course running it for five years so I I think that's also another reason why why do I like to be self-funded is that I wasn't going to be pushed so hard towards Tech deals even though I ended up doing one in this case but yeah more specifically to uh to your question there you know we did our due diligence on this deal remember I spent the early part of my career during due diligences for private Equity I'm looking back on it I don't you know regret uh the decisions that were made we were working with the information we had at the time I had really smart people advising me I had really smart people putting their money into this and it was actually an easy deal to raise money for so that tells me the thesis was uh strong and credible and um it's just a matter of fact that you don't always know what the outcome is going to be down the line and this is true for every fund out there so I learned that the hard way and this being the first deal out of the gate that's uh that's obviously not what you dream for but but you certainly learn a lot and I would say for subsequent deals I hear from investors now that you know it's almost safer to invest with me now because I know what it is to go through a trouble deal as opposed to someone who is 28 years old is a little oblivious of how tough it is to go through it is even if they understand what this looks like on a spreadsheet they don't know emotionally the draining will have on you and of course when you've been through it you have a much higher version to ever encounter another game so so that's kind of the story that I like about to invest yourself I've had by now both sides of the coin experiences and I think they'll really strengthens your perspectives and and so in you believe that of yourself as well because it you know I guess the conventional interpretation would be oh somebody has a quote-unquote failure I use that I I put that term in quotes but this didn't go the way you wanted um you know that that would be bruising to Your Ego to your confidence I assume you probably had both you probably yes it was bruising to your ego and confidence but at the same time it also like you just said it gave you some armor it gave you some experience to kind of on the on the other side of the Ledger grow your confidence and feel much more equipped to go out and do this again yes the key as we said earlier Harris to be able to make it happen I was able to Source the deal finance a deal close the deal and then I operated it um even the operation space I'm proud of what we did as a team I think we managed this company well we implemented some new things that the uh could have been good growth opportunities I basically did the Hail Marys that was wanted from the investors on a shoestrian budget so I'm proud of walking dead I'm going back by Matthew make decisions with with the information you have happen at the time you have to make them and the outcome will fluctuate from saturation to situation but if you put yourself in situations where there can be upside or downside then eventually you're going to get a situation that is good again going back to why it's so important with performing also in investing in general as far as capital racing goes yes when you've had when your most recent deal as you know as a sponsor or a search founder wasn't a great narrative it makes it a little bit more of a not till battle but it's I think more emotional than anything first of all I believe that most investors invest first and foremost in the deal over time maybe they will just trust you so much that they they will invest in you as a person and everything you vouch for they'll go for but but they always look at the deal so that's going to be a large percentage of their calculus on whether they want to do or not so if you have a deal they're all evaluate it on its own premises but then as I got to Future deals then I shared you know my most recent deal it went a little sideways and here's what I learned from it I think that first of all it made me very trustworthy because I disclosed it and the deck instantly connected them to me secondly it gives you credibility because you've been through it and you know what you're talking about you know why this deal you're not working on will contrast that um and as I said I think that builds a bond and also some trust that uh if anything I've had really good reception from investors when I disclose both the ups and downs so that I've been through as a Searcher I have a bunch of a bunch of things here I want to get to before we get too far away from it in the conversation I want to Circle back to what you were just saying about how search funds um search fund investor motivations started being influenced by the returns being seen in Tech um and how kind of their their approach to each individual deal changed a little bit I just want to highlight how use that opportunity to highlight how important it is that if you raise money from investors for your self-funded dealer or otherwise you re but particularly for self-funded you really understand the motivations of your investors right um because they they have different motivations they have different time Horizons for their Capital some will you know kind of have a more kind of private Equity model where they will want to see a liquidity event within X number of years Others May kind of have a permanent Equity model and be fine just you know collecting dividends from from you and the business you buy indefinitely so um and that's a very very different approach by investors in in so you need to figure out what you want and then you need to make sure you understand what the investors want and that they align cost updo talked about this on the panel at SM bash um and yeah I mean he laid this out he wrote this down for himself he had it very clear in his mind so he could communicate that transparently and clearly to the investors and only select and only work with investors who were similarly aligned so that's very important um okay uh the other thing just before we move off of this story Nicholas that I wanted I I wanted you to just speak to is SAS so you know you bought in in the hottest of hot Industries everyone loves SAS for the reasons that we know there you know there's no marginal cost to to a sale recurring Revenue uh everything you know software's eating the world etc etc um what and yet it was a very challenged experience for you what what did you learn about the truth about SAS maybe that isn't obvious to the rest of us who think it's just you know the best possible type of business you can buy there are a lot of people who know a lot more about software than me so this is just my opinion of course but the um I think sass uh first of all I think the valuations these days are very very high and can only be justified if you accomplish their strong growth um that growth is not guaranteed in any deal and in my experience you know I I learned that the stickiness uh or recurring revenues not a sticky issue maybe expect or calculate or anticipate so uh so I learned that the hard way and why is that well it's because technology changes much faster than uh than any other industry right I mean that that's all premise of technology and uh I think you never quite know where the industry is going to be in 10 years from today uh Google just had a red alert earlier this year because of chat TPT it can really compromise their search business meta or Facebook they lost 80 of their market cap in 2022 they've recovered some since but this just shows you that even the biggest and most powerful companies are vulnerable to technology technology development that happen outside of their control and so when you're a small SAS player you know you're always at the mercy of some competitor coming in and of course if you're really successful you're going to attract competition as well I understand software can be success you know very successful and it is sticky for many but uh not always then I think that's that's something to understand and if it's 98 percent uh you know recurring Revenue today and unstick you today uh that doesn't mean it'll be 98 for years from today um so I think because there's a lot of upside you know there's a risk reward profile out there right and yes there's a lot of upside groups of software companies that are easy to scale because they're not they don't have bong next like many other Industries do but for me that also means the risk is higher overall and if you're again a portfolio investor like a search Bob and you do or search on investor I should say right you do 20 of these deals it's going to work out in your favor but if you're a Searcher and you only do one deal uh I'm not saying I'm never gonna do a software deal again but you know there is something very comforting about uh in in my case now I'm working in the Home Services industry I know for sure people would need bump me in 10 years from today so I know the man will be there I don't know exactly what it'll be but it will be within a small band and I don't actually know for sure that Facebook's advertising Revenue will be there in 10 years from today right then and so you can then downplay that to any other software company so that's just a perspective that I've developed over time that's well put thank you um you you had said that this this hard experience with with the SAS acquisition you did emerge from it uh wiser smarter stronger um and and frankly proud of what you'd accomplished um but but but let me ask you know you you talked much earlier about how you had um friends uh friends from HBS who did search funds and you fell in love with a model the idea of buying your own business then going through it and having your first experience be be quite difficult did were you at all disillusioned with the whole concept the whole idea that you would buy a business and put all your eggs in one basket or were you like you know I I did the best I could but I still love this concept I still want to go out and do it again because you did yeah I did uh yeah I think it's a little bit yes or no and I would say um I was uh I I didn't lose my kind of confidence in the model and private Equity overall and and the upside potential that you can have in it uh but I had become more familiar with the risks and uh by now I had children so you know I had to ask myself am I ready to take on similar risks in the future is this or do I want a more stable life right I mean when you're in a trouble business situation it comes to you night and day um and in my case you know I'd wake up really early in the morning just because I was so stressed this never happens in my life but it did happen at this period of my life so you know it becomes a personal question whether or not it's still a fit for me but overall for the model I would say I I still very much believe them that nothing had this way the death I I knew that it was situational not structural um so I I guess I was happy that I gave another try but uh and I guess this will probably be your follow-up questions I'll just go straight into it it wasn't only by choice that I continued to do the same thing right what I also learned as I started talking to Executives uh you know recruiters record you know started applying for jobs perhaps in this little internal phase where I had transitioned out of the SAS business and I hadn't really made my mind yet about whether I was going to start a fully fledged search for a new business to buy I think I just learned that they couldn't appreciate what I'd been through I had sourced companies and talked to business owners Nationwide in every imaginable industry learned so many things like negotiated with them I had financed the deal out close to the Allied then work with creditors and attorneys of investors and you've managed the workforce you've developed new products like I mean you do so much and it's on a day-to-day basis so exciting everything you get to be involved in uh but uh you know a recruiter couldn't really appreciate that then my experience was that if I just stayed those extra two or three years and Consulting that would have actually been more valuable from the recruiter's perspective because my resume would be more Fleet they didn't even know it was a bad deal or good deal you know I didn't even go there I was just saying this is what I've spent my career on doing it and so I I found that my career would really if I went that route of going for a W-2 job again it was really like going two or three years back in time as far as which decisions I could access so that was only modestly exciting um and uh a little haphazardly you know when you're a Searcher you continue to get the you know emails about the inflow and so I at least looked at whatever came through and uh um just kind of got going again with that it wasn't necessarily as deliberate as as it just happened that way and nothing else more attractive would come up so I started to make it engaging in deals and and then it kind of snowballed from there great well let's get into the snowball first what year are we in at this point May 2018. late 2018 your flirting with with um interviewing looking at W-2s but you still got deal flow coming in and and those are enticing so what happens between that period and finding your first your first acquisition yeah sure so I connected um my life started working she had also been in Consulting forever and she started working uh at Linux International which is a large manufacturing company that manufacturers HVAC equipment she was quite Senior reporting directly to a CEO and that gave me a front row seat to an industry that the I hadn't considered specifically before but that looked compelling and um and over then a few weeks of partaking my job I connected to a broker with a business owner in the Dallas area and we just really hit it off he was five years older than me um and uh I thought he had kind of a good platform that would my help could be be taken to the next level so so that was really the Genesis of how I got it to age that and then oh so how did it go from there so he had a business it was called k s Heating and Air based in Garland Texas uh he was what 17 18 million dollars of Revenue and maybe 10 profit margin uh but it was a majority new construction and I realized that oh I knew that the Masters don't like sexual businesses right so I was like okay how do I raise money for this I have December I have a deal here but I don't know how to raise capital for it so I tried I could only get very honorous terms I was pretty honest with the seller like these are the terms I can post that deal and do a recap and we can partner together but I'm not sure it's in the best interest of the company how about I said and by now we're in 2019 how about you know I help you out for a couple of days a week through the summer season this year uh and see if we can get that epidemics to be a little bit more palatable for our investors and then we we do a recap and start like a more horrible partnership uh uh you know within the next 12 months so essentially became a consultant to this uh a business that I really liked gave me a very nice offer I essentially became like a minority Equity partner at this time um of the business and uh within a few months we acquired another uh company that was fully focused on in in our business we have two businesses actually we do new construction we're the Builder is our customer and then we do service where a homeowner is our customer so we acquired a business that did only service and that really helped change the revenue mix but more importantly it became a fantastic case study because we were able to through our purchasing power on the new construction site where we did a lot more scale we were able to really enhance their ebitda margins and then on their side they were you know their bread and butter was doing uh retail or doing service to homeowners they were really all their permissions are trained of getting reviews and maximizing each ticket so when they came over to you know the platform company they were able to double the service department within six months just by being much better at closing rates and average tickets so it was a great marriage and so that fall I went back out to investors I still had to deal with the CL we adopted a little bit of course uh because we had grown by now and I said look with what we've accomplished um we have a good platform and we have a great add-on we want to do more of that do you want to be our investor and uh yep don't forget let me let me stop you there Nicholas because I got a bunch of follow-up questions so just going back to um your initial goal with this person so so I understand that it evolved in the way that you just told us but you initially approached him with the idea that you would buy his business outright or that he would always stay involved what was the initial the initial pitch because it I know it changed he was looking for a change to the status quo I think he was uh feeling pretty lonely in his best method become a lifestyle business and he was ready to kind of do something else and or get someone else into the team that could help take it to the next level um so I think as the initially I think he had engaged a broker to sell it and do something else but as he got to know me and we really had good chemistry I think it uh a bit more and more excited about the prospects of continuing to work on it and grow it so that evolved a little bit so and this I guess maybe this is where you're going but maybe this is the key in where my mindset went from being a search lender where I'm going to run this business to being more of an independent sponsor where your mindset is uh I'm gonna see y'all because that will now be his role so I would more you know I would support him in that right and so that's where that transition happens and Nicholas I mean but you so I understand what he wanted um and meeting you you guys got along it seemed like you could do something interesting together that would keep him you know would scratch the itch that whatever he was kind of dissatisfied with in his business but what about you did because a self-funded Searcher typically and sees themselves as becoming the lone CEO and the the seller leaving after a transition so did you also have to adjust what you were looking for I thought it was a great fit in that I had a skill set with strategy and uh kind of that industry perspective uh from Linux also I could see where this business can go and he knew the day-to-day stuff I even to this day I'm quite mediocre on the technical items within HVAC um so I like the idea of relying on someone else to help me manage the operations and uh so I don't know that I was looking for something else I mean really at the core of it as a search hero as a sponsor what you're looking for is a great Target to buy and in my mind how it's governed and managed has to be customized for each situation and when you're a Searcher you're looking specifically for situations where the CEO is transitioning out which actually reduces the number of opportunities you can look at if you take a broader view you can also look at other you know more like recap situations um and uh partnership opportunities and so by taking a broader view we could create a win-win which is of course a model that we have emulated many times since with a lot of add-ons since then great and um I want to well first why did you like the business now well you just answered that like that you saw a potential of what what could be kind of corrected um but looking at it from the perspective of kind of the traditional parameters the fact that it was heavy construction um is is yes some Searchers will say well that that's the opportunity is to take it is to is to increase the quality of Revenue to make it more maintenance but most people will just walk they'll just say no I'd just rather not do that deal period um so how did you reconcile that in your own mind absolutely Yeah by now I've been pretty well versed in selling why construction isn't so bad to investors and whatever but but my view was that the construction in Dallas is going to be a decent industry to be in uh we you know there are some macro trends that you really can believe in one of them is population growth at the time there were six million people in Dallas move forward by 2045 they're apparently going to be 9 million people in Dallas Fort Worth um and that may not be a straight lie but I knew that migration traps like that tend to come through and uh if that's the case for Dallas construction will overall be a great spot to be in uh I can't tell you what you know 2024 is going to look like but I can tell you what the 2020s are going to look like overall it's a decade so if you take a long-term perspective and you have a fine balance sheet there's opportunities there's going to be activity so that was kind of my Mac review and then on the micro level with this particular business I saw an opportunity because they already had built down it's actually a back offers I mean it was a pretty sizeable business 17 18 million of Revenue so they had a lot of like the aor and AP team right in place to to to scale it which is not what you see on the server side too much of uh they're much smaller typically and then um they of course are doing two and a half thousand homes per year where they can put their sticker on it and they've been doing that for decades so can you harvest those customers uh who are homeowners moving in and your system is the one they're enjoying and down the road they become homeowner clients that's a lead generation source so your cost per lead can be lower um another thing is construction it's cyclical but it's not seasonal HVAC is very seasonal you know the summer season is great for us the winter season is really slow for us so when we're stopped mid AC in the winter so it's very seasonal business but by having construction which is kind of even throughout the year it helps with cash flow in the winter and then the fourth argument that I'd like to bring up is all it's also a fantastic training ground for our technicians so especially some of those that are near um they can go and do warranty calls or work with Builders who work on long-term relationships and it's a safe space where they can really hone their technical skills before they go to homeowners where it's not only technical skills needed but you also really need to have that customer service of interpersonal skill set to add on to it so I actually saw a lot of benefits with having construction and service together I still do I still believe this this is this correct but you have to be in the right geographies I wouldn't do it and certain other geographies in the US but but being in Texas I'm sure if you're in Florida um you know there are some really good markets to do it and um but but you've got to be selected on that mm-hmm thanks Nicholas that's great now you um mentioned recap so this is going to be a uh very basic question to anyone coming from a finance background or private Equity but they're going to be other people in the audience who don't really they kind of vaguely understand what that means when you say you you met this gentleman you guys hit it off you worked with him for a while kind of on a Consulting basis you saw that there was an opportunity to come in as a as a formal partner and so you did a recap what exactly is a recap so a recapitalization is really another word for selling to be honest but uh it's uh it's more technical in that you're talking about recapitalizing your balance sheet your balance sheet has a certain you know structure today with death and equity and so by recapping you are recapitalizing what that balance sheet looks like so that's the technical approach to it uh and it's just a word that is used a lot uh there are two types of recap it's a majority recap and a minority recap and uh if you're above 50 it's a majority recap and if you're below it's a minority recap and this is a big you know distinction line with some funds will only do majority recap because they want control and everything they do that's what's also the case for me and then there are some investors who only do minority Recaps so they're like investing Parts growth they're backing a management team um so you'll see a lot of that and kind of when you look when they pass the BC stage and they're looking for growth Equity that's technically a minority recap they're taking there are more more Equity to to grow a business um and then I would say there are in the growth Equity model Lebanese inject it into the company to be used by the company for growth and the private Equity world that money is injected in to be taken out as dividends for whoever was the selling selling shareholder um so yeah that's a recap great and and so in your case what the recapitalization was meant to do was um it was give you Equity so you bought into the business so you on the other side of the recap you are now a part owner of this business the your seller now partner has sold you some Equity so presumably he pulls some he has a partial liquidity event he put some cash in his pocket and through all of this there's also investors who who's whose cash and Equity is is what's being infused into to for to allow him to take money out of out of the business to infuse the business with some growth Capital um and to end yeah and and then they also I guess the investors of course also take some of the equity so on the other side of this it's you know every business is different so this could you know this gets very particular and complex quickly but you've got Equity he's got Equity if reduced the investors have equity and there's more cash in the balance sheet to go out there and grow is that kind of yeah suggest yes great summary and I would just emphasize every deal is different so in some cases all the caches take them out because the sound but that's the proceeds in other cases all the cash is left in the business to grow the company and in those cases the seller has particularly or he has sold a portion of the company around in order to infuse cash that will help him to grow which is what you see at BC right they sell a portion in order to fund continued operations so they can Affinity to grow and the private Equity world I would say is less about that and more about taking out previous authors so before we move on to your your subsequent Acquisitions of which there are a handful uh this this first acquisition where you where this business brought all of this all these best practices around running a home services business right so at what was it asking for reviews and and kind of all of the things that you're supposed to do to um to to uh I guess position the Home Services business well on the internet among consumers increase leads this business had those those best practices um and and so and that was one of the big values of this of this acquisition is first acquisition but uh I'm struck that it that you were able to import those Norms into the platform your original business so quickly and effectively because all we hear about here from my guests is how difficult doing any sort of change any sort of cultural change is in in a business so so you were but in your case you were able to take these practices and import them into your platform business relatively relatively quickly and have them have that be the new normal across the the entire the entire combined entity yes I would say so and uh there are a lot of HVAC Roll-Ups out there so I'm not going to say that we're the best or the worst or where we rank in that order and everyone probably does it in different ways but the overall one of the reasons why HVAC is soft and why the multiples have been high continue to be high is because this integration Playbook has been I think largely perfected and I think there are a number of reasons for that a major one would be software if you go back 15 20 years most companies will do pen and paper when you call they would put it on a whiteboard and that will be their scheduling right uh in fact I came across one of those targets there last year that was still doing it that way but most companies today your software for this and uh in fact most companies use a fairly small uh two or three different software programs and you can easily then transition them on you then have all of your customers in one database so so the integration kind of the system and processes uh it's easy and also because of software processes have been very standardized or maybe company did things very differently before today everyone uses the same software so the steps they follow are are more or less the same so I think because of that the risk has come down and then on the back end with size and scale you know people are able to get more when you roll up you're able to get more out of the marketing more of the insurance and more out of the procurement so this is how you can enhance the margins which we often talk about not only adjusted even though what we call we talk about synergize adjusted it with the solilar multiples are crazy high when we do add-ons for ebitda they're pretty ridiculous still when you talk about adjusted ebitda but if you look at synergized adjusted if without I know it's a lot to to compound there but but it starts to look more rational when you do add-on Acquisitions and especially when you know that the the risk of losing that Revenue stream is uh relatively well managed great so returning to the story so you're you're now a partner in the first platform business you've done an acquisition uh and I think I think you had you had stopped by saying you could demonstrate to the market into the potential investors that there was a successful integration that you'd done what you learned and then you could with some Capital kind of do it again and again and again is is that where things were going to please pick back up the story yeah so you know why is a check very popular for private Equity players today it's it's an extremely fragmented Market there are thousands tens of thousands of HVAC contractors Nationwide most of them are very small uh some of them are very big but most of them are or many of them are I'm a decent size and good add-ons targets that give you a new footprint and all that stuff right so so it's a large fragmented Market with a lot of targets and you know what the deal guys like to do they like to do deals so here you have a vertical a lot of deal opportunities um another reason I think private Equity has gone after it is because it's uh relatively well compared to softer right it's relatively unsophisticated um it's uh it's a lot of people who founded their business because they've been a technician and this is the way they've done it but they've never tasted kind of the private Equity corporate skill set with strategy and apply that and in a systematic way that you're now seeing uh at a high level things are being done I've been in the industry for a few years now this has changed you pretty rapidly I'm Amazed by what I see some companies do today on the big scale but uh you know when you meet smaller targets they don't have the resource or capacity or experience to to apply that sophistication so going back to why multiples are high is because you can add that sophistication and lift a lot more value out of the targets when you're acquired them you already have that Playbook running great and and so returning to your story you are you've now done two Acquisitions how does what what do you and your partner then kind of decide the future should look like and how do you then proceed to start doing more and more and more okay yeah sure yeah sure let me tell you more about the story how it evolves so we close the in the summer of 2020 it's almost been three years now it took a little longer to close because of Culvert I think the investor said let's wait and see what happens here and what happened was that everyone was at home and wanted home services so it turned out to be okay uh so we Post in the summer uh the first thing we discussed was do we divertic obstruction do we grow it or do we keep it stable just because renew strategically this may harm our our own valuation prospects down the road and then we made the decision to kind of keep its steady state to focus on maximizing profitability in that department but continue to get the benefits that we are getting today and then since then all our Focus has been on growing the service side and by service I mean when you pick up the phone and you need service right so as a homeowner so that will be your maintenance that you should do twice a year or the service that you need whenever something goes wrong or The Replacements you're going to need every 10 to 12 years um so and that's frankly where the margins are the highest and the growth potential uh is the most kind of uh predictable and and also most exciting so our folks has been on growing that like it is for every other HF roll up we've also added Plumbing along the way because we have a huge intrinsic database we have a call center we have a software so adding Home Services to the same platform makes sense typically we'll see the trifecta of HVAC bubbling and electrical will be the third one and then once you do that people they are in different directions if they decide to add anything but uh so we've added plumbing and uh we focused almost an organic growth we have built out the marketing team here and then we have done six add-on Acquisitions today um sensory close three years ago so there's been a nice combination of organic growth and inorganic growth and of course with the inorganic targets I'll tell you some of them were not frankly not profitable because you know it's uh it's someone who's managing a business and paying themselves whatever uh net income they have they're smaller targets but we can come in and we have purchasing power that is a lot better than them which dramatically either and perks are margin or uh improves their competitiveness and pricing um and then we can insource a lot of the administrative tasks that this one person typically does something so accounting HR sales call center Insurance uh marketing so so by doing that we're then able to get that entrepreneur if he continues to stay with us the founder he can now be fully focused on his field team and customer experience and so then you kind of get this margin Improvement on the back end Revenue Improvement by having uh Mark they are in house marketing take care of it and then experience Improvement I guess that will probably for both our team and our customers by having the the now general manager founder before they focused on those aspects of the business so so yeah that's the model again we're not the only one pursuing it but if it is working and it's been really exciting uh to to see the growth in the story we've had so far it's been a lot of fun and so Nicholas to be absolutely clear when you for these bolt-ons they the seller founder owner manager person typically stays on uh it's been a mix um some have stayed on for a period and then transition now um as someone's still with us um you know some are fantastic matches others have you know the culture alignment hasn't been 100 but so so you know every situation is different um but we have systems in place to take them out if that's what they want but if The Upfront uh conversation is that hey a lot of them come to me and say I'm just tired I've been doing this for 20 or something I'll I'm just 50 today but I'm tired of dealing with texts that are leaving because it's a labor solid it's out there right now or the supply chain issues that happen in 2010 well it's just a lot to deal with or I feel very lonely you know that there's a theme of topics that continue to come up right and so I can then say we're we have the administrative back office to help you take care of that so that you can then focus on what you enjoy the most which is managing the team and taking care of the customer would you like to be part of that Journey so it becomes part of the pitch if that's the direction they want to do and when you refer to all of this back office the the payroll the accounting the marketing all of this insourcing that you know they can do give put in your hands and then you'll do for them and do bet and and do better than they were doing likely so do you have so there's a Mothership I mean there's a there's a central a centralized entity that does all of that and as a follow-up question are you subsuming all of these bolt-ons under a single brand uh yes we do have a headquarters where most of that the operations happen and then satellite offices around North Texas in our case uh um or for for those satellite offices that we require um remind me of the second product or questionnaire so if you have this If you're sort of a centralized Services model what about the brand does is there a single brand that everything becomes subsumed under yeah this is kind of ongoing decision uh discussion it's also part of the premise you know and some of the cases with the business owner I would be very deliberate and saying we're going to preserve your brand and build um what you've built already in other cases I'm probably softer on that language because I am thinking that down the line we will incorporate the brand so it changes a little bit from case to case for us specifically generally I would say the industry is moving more and more towards having Mega Brands but it's interesting because there was a roll-up kind of period that happened 20 years ago and a big roll-up kind of hit Infamous at the stage did that and it backfired so they would take all this family around local businesses and just they want to change the brands and it actually didn't work out particularly well for this probably like the company so for many years in our industry the common knowledge has been don't do that because you don't want to lose the connection with the with the with the customer but I think it's reversing back because there are operational challenges with having a lot of different brands especially if it's the same Geographic market and you don't get the benefit of having one Big Brand as you're going to push all the time so so probably see more of that go forward than that we have and that includes ourselves with future Adam Acquisitions we'll probably do more uh yeah both on would be or tuck in more than adult ah I didn't realize you were making a distinction there that's good to know okay um and going back to your first acquisition where you found this this seller owner and you guys effectively partnered in in growing his business are the two of you working in tandem to do this roll up now or have you kind of stepped above and are the one at the top doing most of this um kind of higher level acquisition in integration activity yeah we've had a fantastic partnership and we still have a lot of fun uh but uh he was in charge of day-to-day operations and that's been the case uh throughout in the initial period first year in particular I was very Hands-On we didn't yet have really a marketing department so I would do a lot of that working with the agencies directly I uh we also didn't have a CFO yet so I kind of took the range on that a little bit for a while but by now we have built out the team and so my folks over the last couple of years has shifted towards being uh more M A and strategy and more you know stereotypical independent sponsor um so and and uh so today I still run our m a uh but that's kind of the main day-to-day activity that I do with the company the operations per se are are taking care of by the team and so when we do an add-on acquisition I'm the front figure until Rich miles but we've actually transitioned to a point where I'm not there the day we announced it to their employees because we don't want to send too many people there and scare them off and that they're not going to actually work with me on a day-to-day basis um I always make sure they don't say about it later of course but on that day one we make sure to send our head off service and the CEO who they will be seeing and dealing with um and then yeah I'm more in the background I guess more so the private Equity sponsor which is what I understood Nicholas I I think I I missed a little bit where you evolved from your relationship with the the first seller that you worked with um you were kind of a self-funded Searcher but then you meet him and you see this opportunity to work with him effectively partner with him and kind of really grow and transform his business so then you've already shifted a little bit away from what we think of as a Searcher acquisition entrepreneur and but there's been continued to be this shift all the way to now an independent sponsor um can you can you fill in the The Gap there when did you has it just been this kind of very gradual process or was there a moment where it crystallized in your mind like okay I'm gonna step up out of Hands-On operations and I'm gonna be kind of a sponsor despite the pendant sponsor a sponsor of a real kind of private Equity play here sure yeah it's been more gradual and I would say even when I was in the edtech company you know I I actually looked at deals that were adjacent and synergistic with that deal and so that was that's not very common for a search spot to do but one of my board members said that a good way to overcome a not so good investment uh is to do a good investment even within the same kind of deal so if we could have bought the company like an adult acquisition that could have given us kind of a Lifeline out of it right so uh so that was so I would actively have conversations even back when I was still the CEO of that business and of course when I was running that business Mass it became a question well how are we going to manage this business which is in a different state so I I guess I familiarize myself with the concept of uh you know having conversations approaching sellers were with not the intent that I necessarily would be the CEO but we I would be the new owner but not necessarily the new CEO and frankly I think the conversation is almost easier when you say uh well let me flip it around if if your helmet on being a CEO and you're 29 years old and you're straight out of business school you know you don't have experience in that industry or specific skill sets that you can point to when I can go and meet a seller and I say look we're going to hire an impact here as a Rolodex I may have already prepared before a meeting of people that will sit on the board for this deal and they're going to hire someone who's been in the industry for 10 20 30 years who's going to help us run it um and that really speaks to them because they're getting a whole team and Orchestra of people who are very familiar with this industry and business and so it gives you more credibility enough less to to not have the Hebrews of saying I am the one who's gonna be the best to run this business now it's nice to be able to say I have run businesses before and I can be a backstop and support the CEO and if you know he's hit by the bus so I can step in and take care of the business and government that's always good to see say about the having a broader approach to that I think is well received by CEOs in general after your question about Canada gradual uh approach I think also the independent sponsor world started to Blossom in this last years of the last decade and Maguire Woods is a law firm to do a fantastic job I think in fact they coined the term independent sponsor they claim previous to that it was called a public sponsor but nobody wanted to be fabulous or never took off but everyone wants to be independent so then it really took off and and they have an annual conference in Dallas in October uh it's an excellent conference they do an amazing job great for networking it's exclusively to investors and independent sponsors and when I went to that the first time in 2018 I think there was you know 120 people and you kind of got to know everyone over two days and this past October I think it was 1500 people there so the space itself is blown up which means intermediaries are more familiar with it so they will start to prep their target companies with this is the kind of buyer you're dealing with here investors are more confident about looking at deals that there's going to be an intermediate area that has like a deal by deal economic structure so that has also helped the educated me and kind of I've grown up in the industry as it's grown up and matured itself so to speak but people are always bought companies I would say uh I have one investor and he says this is kind of what I did 25 years ago I bought I found a company and bought it you know people have always done that just like people have always flipped houses so whether it has a new terminology around it it's still the same thing all you're looking for is a great asset to buy you have a seller and you buy it and then you just need to solve for how to manage and grow it and that's a constant uh effort by the way well that was a very concise uh answer to my next question which was let's let's Define independent sponsor explicitly it's a lot of syllables and it kind of has a fancy label but it's really doesn't need to be let me take a stab at the definition somebody who goes out and finds an acquisition business to buy um probably has investors that they're talking to but they don't actually have committed Capital yet they find a Target and the and then they bring that acquisition opportunity to their investors um and then this is all negotiated deal by deal so it's not I I'm sure there's some kind of Market standards here but it's not super well defined that's all negotiated and the independent sponsor puts the deal together they earn money close they get some of the equity of the business they and then of course the the capital that they raised those those folks are the LPS the limited partners who who are now also part owners in this business and then in terms of governance in terms of operations that's a little murkier maybe the independent sponsor actually comes in as the operator usually not right usually either the existing seller continues operating or like you said the independent sponsor is bringing a Rolodex and puts into place a new manager or management um I think I covered everything as I understand it did that all sound right uh it did sound right and I'm looking for gaps to fill in but but I think it's a good summary um it's it's private Equity but in a deal by deal basis and also the uh so you call yourself a general partner just like a private Equity Fund well then your economics are modeled based on private Equity so you don't actually get equity which is something you get as a search at least a self-funded Searcher you get Equity literally in the business which is what I have with my first deal and in this situations you can invest and be an LP alongside your other LPS uh but your reward is going to be carried carried interest is the private equity and so it's a Nuance difference and has some different tax implications but the effectively the same thing if you get a piece of The Upside you know we can contrast it to search funds we can dig into that if you want but the but the general thing for for an independent sponsor how you're compensated right it's um there are three main components and I've heard about other components you can have if you're very good at it and can add up to it but then you get a closing fee it's just going to be typically one to two percent of the Enterprise Value uh in most cases that's wrong into the DLS Capital um and then you get a management fee which In Search terms would be very similar to you're not taking a salary but instead of it being a double if you do salary you're going to get the 1099 payouts um so Nuance difference there because you're not texting it up front right and that will typically have like a floor and ceiling and then be a percentage of ebitda call it five or six percent of people with the floor and ceiling and then lastly you get carried interest where 20 is the standard private Equity uh and and there tends to be kind of a ladder where if you do really well you can get it up to 30 or more um so those are the three main components that the most standard approach based on the market terms that I've heard a couple follow-ups there so the second um bucket of uh compensation the management fee is that based on you doing based on what based on being a board member or just being there as an advisor or what if you you actually I mean might you actually have a a formal role within the business like what is that compensating you for precisely no that's a great question uh it's it's uh it's actually not very well defined it's for governing a company and making sure that you know you're staying on top of management you're providing reporting uh you're putting together board I mean I guess you would call it like a chairman video or board fee but the management fee is is the money that you get for overseeing this investment and it's Loosely defined what that entails independent sponsors will rates from very Hands-On which I've been with this deal to very hands off and have many many details um and so that's a case by case but management video is the recurring Revenue that you get for overseeing a company that is in your portfolio and so an independent sponsor this is typically there where they will fund all their operating expenses and also fund future deals uh but as well as live off of that mm-hmm and on the third piece of compensation the carry which is where you know the the real interesting numbers would come from that also presupposes to your point this is private Equity so that there is going to be some sale of these business of the business that you've acquired so that that's actually an important difference with search because in at least in self-funded search many self-funded Searchers might want to hold on to the business indefinitely and the independent sponsor model you will be expected to sell sell the businesses at some point to to to realize your carry correct that's uh yeah unless you've communicated otherwise up from that would be the expectation there are some independent sponsors out there who very deliberately take a different models from that and they raise capital from sources who are happy to support that but the default expectation would be you know it's a five to seven year home um but uh you know I know people who who buy deals and uh you know their goal is to get through cash flow or they get dividends on the carried and kicks in after the investors have gotten their money back plus typically an eight percent return on that money and then after that happens that's when there is a divide call it 80 20 or 70 30 based on what you're curious and so if you're us an independence officer get to that point where your investors are fully repaid and you have not only your management fee but now you get a 20 30 40 whatever percent uh of annual the dividends I mean that's that's a sweet spot that's a as an independent sponsor too because then you have more to funnel into your next deals it yes you don't have a liquidity event but you have a recurring revenue and that is nice for the stability of your operations I still want to kind of dwell on the difference here between self-funded Searchers people listening to this primarily um one of the things in our world that is considered so challenging is is being an operator uh particularly with the transition particularly as you're learning the business that you've bought I mean there's so much risk there there's so much you don't know no matter how how thorough your your diligence was so a lot of people like to operate they want to be an operator that's that's certainly going to be a lot of the people listening to this it's not something they're trying to escape others are they they want to buy a business they they love the idea of buying a business and then and they are fully willing to operate it but the end goal is not to be the operator the end goal is to learn the business operate it and then put in an operator so they can step up uh or out of the business and do whatever they want buy another business or who knows what um and and for those folks who like really don't want to be operators it's kind of like the necessary step to their grander plan I'm looking at you or the kind of the independent sponsor model and it feels like it it it is the way to do search without ever having to be an operator I know you did you did get your hands dirty for a couple of years but that was particular to your case and I'm getting the impression that in general that doesn't have to happen and indeed it may not happen like you may be the exception not the rule so so is the independent sponsor model the answer to being able to buy a business without actually and being able to skip the operations yes um and I you know I frequently talk to friends in fact just at my reunion every other day I have a friend who bought a business a year ago it's going well he's hired a president he's still a CEO but you know he sees the future I don't know two years or 10 years I don't know the time frame it has in mind but where that President will essentially take a take over all his responsibilities as a CEO as well and then he has in this case the business that uh he he owns he did a bit more in the self-funded search Direction actually right but so he that's what I'm saying like even in a self-funded world you know a girl can easily be that they uh that they want to step out eventually and they're sitting on a good asset at the end of the day that's what everyone is looking for a good asset and some people when they're sitting on one they like to hold on to the yeah yeah well I guess I'm just trying to understand or make it clear for the audience like is is should they consider instead of being a self-funded Searcher if they don't really like the idea of being an operator yes they're willing to do it but they'd rather not should they consider being an independent sponsor period so they're just kind of the deal person and and really just the one kind of moving the pieces around um yeah because that's really what a lot of people will want yeah I think so I think a lot of people will want that I think also there are people out there who want another job uh their mid-career and they're becoming a Searcher because they don't particularly like the career in or the job they have so they're looking for a new job and they essentially buy that new job for themselves uh in those cases they genuinely enjoy the operations and maybe their ambition was never too to do a lot of deals or become like a Serial deal maker uh they're happy to run a business plan for decades right so so I think this really depends on the person and on the deal but that's really the beauty of independent sponsor every deal is customized which is where I think self or search funds are very prescribed and how they're approached and done and so the pitch to intermediaries them to owners is going to be uh fairly standardized but I don't and in many cases that will be the right answer but not in every case yeah and and just what you just said about like a Serial deal maker and just thinking so so kind of uh making it clear for people what type of Personality what the distinction there is between an independent sponsor and a Searcher I've kind of been hammering that a Searcher um kind of more likely should like operations is it fair to say that that somebody who likes the art of the deal even searching negotiation Etc Finance um that that that that that you like you're gonna need to be that type of person to Be an Effective independent sponsor is that a fairer generalization I think a skill set that you often see independent sponsors have is business develop they're good that's pitching and that's sales because you have to sell yourself to intermediary to sell yourself or your concept to to business owners and then to investors and then to a new team that you're onboarded so business development is a big skill set in addition to those that you mentioned there but then you have personality types you are you know I'm just gonna call them more like engineer mindset or they like to solve kind of practical problems or solve uh or sell them to customers or solve business problems so to speak for for a customer and get gratification for that and I think we all get gratification from both but they really bear towards that then but Thrive as a CEO and love being in that position where they are the one running things um an independent sponsor is is not the number one guy ever if that makes sense uh yeah you're behind the scenes you are yes so you're not the front face of anything uh yes the CEO is working with you or reporting to you uh but he is still the person in charge and you rely that's more even more of him than the other way around if you want to look more broadly at the difference between search fund and independent sponsors you know uh and I'm gonna say uh traditional search sponsor maybe in particular uh you know as an independent sponsor you control your own deal flow nobody has paid you up front to own that deal flow so so that's that's an important thing number two uh you have autonomy of your life meaning you haven't signed up for a full-time search job but also you're not your fiduciary duty is not to be a day-to-day operator after you're close you're responsible for everything that happens and the results but um you know I'm European when I went to college nobody took count of where I was the whole year there's an exam at the end of the year and I'm accountable for my grade and that final exam there is no follow-up for anything throughout you can go through the auditorium and set the big seminars throughout but that's the model there so you're responsible with on a day-to-day basis you have a lot of autonomy when my wife went to college uh here on the US you know uh it's homework assignments every week and kind of tests on a monthly basis and there's a lot of follow-up throughout which is what we have in high school frankly um so there you don't have a lot of autonomy um but you're still responsible in the same way so I enjoyed a more autonomous word I like the responsibility but I also uh you know like having a flexibility Rama and then I would also say great analogy as a searcher um you've signed up for or especially traditional right but we didn't even ask a self-fund researcher you're pitched to the investors I'm going to be the CEO I'm going to run this company so you've signed up for it and that's what you're doing until you exit unless the board and I've never heard this happen but finds that you are an inferior solution to whatever they can find instead right so so you've signed up for that and hence uh your career is on the line too and you're occupied with that until you're out of it um and that can be a multi-year situation so your flexibility of your career is also diminished versus if you're an independent sponsor you're responsible for governing a company and that can also be a multi-year responsibility but it may not take up your day-to-day in the same way which gives you capacity to do other things and also you can actually sell that responsibility someone right you you have a GP position in something it's uh it's a role in responsibility that can be traded I don't hear this happening but theoretically you could versus uh the self-funded circle you're a little bit more locked in there um right and uh you know just to double down on that you know the expectations are different too right you're if you're managing the operations that is the expectation from the from the board and from the investors uh versus if you're overseeing the deal you're gonna try to find investors or like okay this looks like a good deal we also kind of want to help you oversee it we have some expertise in this industry and they kind of take a little bit more of an ownership mentality versus hey you're our W2 employee they'll implement this it's more like okay these are our ideas and they'll funnel them through me so to speak so the expectations are different there um the capacity that I said to have autonomy most independent sponsors will funnel that into doing more deals uh in my case uh about 18 months ago I was really close to closing a sex Melody with the electrical contractor I'm still better at the loss but the Strategic came in just and you know we were too recently closely so so it wasn't what it was but uh I had capacity to find a deal and go check the deal and then dunch a deal I have raised a capital for the deal and uh it was fairly synergistic with my existing deal in Asia because it's also a contractor they were servicing different type of customers but it was an easy sell both to the owner and to investors that look I have a portfolio company that is you know it's labor intensive it's blue collar uh supply chain issues right so so I had the story down and I had capacity to take on another deal that particular that particular one didn't close but maybe one will in the future um and uh that that's that's the beauty and you know most independent sponsors that's what they do they go and do multiple deals can I actually jump in with a question make sure you remember where you are Nicholas because I want to return to where you are but before we get off the multiple deals so so you are are the multiple deals presumed in the case of an independent sponsor to be some sort of roll-up where they're all synergistic like what you're doing or could you have an Eclectic portfolio as an as an independent sponsor it becomes there are some big guys out there by now and you meet them at this conference and they'll have 50 deals um these are the biggest guys and imagine that you have 50 deals where you get a management fee from each and every one of them and and this is the beauty really because if you're a a private Equity Fund in your race uh 500 million dollar fund great you're gonna get the one and a half percent management fee every year which is a lot of cash flowing you get it right up there for gay uh many of them built a team around it but when you have raised a fund your obligations are to manage that fund and it's a 10 12-year event right so you it's a job right you've they're doting yourself into a job when you raise the fund if you however do 50 deals each and every one of those is gonna be clicking out um management fees which is how you've now hired a big team and you're able to do more and more deal is a snowballing effect but uh you know technically speaking at least you're not locked into it because it's all deal by deal so if you wanted to you could you could step out or uh you still have that autonomy you're not the expected to spend 50 hours a week managing a fund your obligation to those who are given your capital is still just to manage each deal on a deal by deal basis and you have them done that for each deal um so I actually think down the line if you can build this kind of scale it's even better in private Equity right because you have that flexibility and you don't have to be anxious about racing your next fog which is entirely contingent of the returns of your previous funds um it's always a deal by deal basis if you find a good deal you're gonna get it close even if you had three bad ones out of the last 10 uh it's always going to be contented on that deal so I I wouldn't be surprised if uh well I'm not surprised to see that the independent sponsor spaces is growing as it is and I wouldn't be surprised if you see larger larger deals being done this way thank you can you return to the point where you were yes we were talking about the differences between search funds and independent sponsors as I mentioned before an independence sponsor is going to have an inclination to try to find an experienced manager CEO of the company that's how they pitch it to investors that's how they pitch it to the owner and that becomes part of the whole governance Arrangement that they put in place um I wouldn't say one thing that that forces is an independence boxer has to look for bigger deals typically because there has to be cash flow in order to pay to bring someone in versus a self-funded Searcher they'll you know pay themselves I have a friend who's paying himself the 120 000 a year he's on a great Pathway to build net worth but uh it's not a huge drain on the company so it's the metaphor to have a smaller company and and buy a smaller company and uh with the with an independent sponsor if you're going to hire a management team you need cash flow for that and if you want to get the management fee five to six percent of ebitda you want it to be a little higher right so uh so that's a neurons too for sure um and anyway so the inclination Divine experience managers that will be a big difference and then uh another point I would say in my opinion you come across more professional to sellers if you're a guy who's says these are my investors this is who I'm gonna put on the board these are the ideas that would have around um uh you know what the new CEO should look like and this is what I'm going to spend my time on to you know help the business grow we're going to do add-on Acquisitions and really be focused strategically not operationally and taking it to the next level I think that's a stronger pitch if I was a business owner I think that's a stronger pitch than if someone comes to me and it's delaying across their LinkedIn I'm looking for one single company to buy and that's all I am doing all I'm gonna do and you may be the lucky winner of my search um I I think that's you know passionate and as a business owner you obviously want to find a buyer who is passionate about taking over your business that's going to take good care of it but uh you know it's not necessarily confidence inducing in the same way as someone who has more for infrastructure way to put it together yeah that's a great that's a great Point Nicholas because searchers you know we we we're told that our our pitch the way we in fact the way we differentiate from a private Equity buyer is you know I'm going to bring my whole self to this business I'm going to you know take care of your legacy um and it's going to be me and while that um has a certain emotional resonance yeah it may not be it may not be what what a seller wants to hear or not necessarily what they want it just may not be what they want and it's just circling quickly back to to put a pin on your point about flexibility Nicholas you uh could do despite the fact that that your Acquisitions I believe are all in north Texas you could be do fulfill your role as independent sponsor from anywhere that is correct and the independent sponsors search for deals Nationwide and they have to travel regularly to to oversee their deals of course when they do that but you're not locked in to move to that one location where the company is based it's of course in advance it's not necessary and no private Equity Funds are ever in the same cities right so yeah similar mindset yeah okay in the search World the other kind of trendy concept is is a holds Co so buying a business then stepping out and having multiple so having a portfolio of businesses and it and I I think the appeal of that is because well it's bigger um it sounds like Warren Buffett uh it's diversification which really is the the original reason for a holds Co a conglomerate is is to diversify to have a portfolio that's Diversified um I'm not sure that's why people think that you know the people on Twitter talk about having a hold code I'm not sure a pure diverse diversification strategy is really what's driving them I think it just seems cool which is fine it does seem cool but it it's starting to feel like you know I guess I guess the question is now contrast uh the the lucky few who do become hold Co owners who have four or five small businesses that they own outright or you know some large piece of versus an independent sponsor who's in five or ten deals because that starts to feel almost even very similar even more similar than an independent sponsor and a cell phone at Searcher I agree I agree and it goes back to what we just discussed where I have some self-funded search friends who have a goal of transitioning a finding someone to take their day-to-day job right and so it's really the same concept I I agree with you it's it's like it's not a black and white it's really a spectrum of things that yeah a deal is one thing up front but also over time it can evolve and then you uh yeah I agree with you that that's a very similar approach and so just different terminology and and that's quite consequential you know because if you call it something else you're gonna miss out on the literature and conferences that exist about whatever you're missing out on right Nicholas is there anything that you thought we would talk about uh that that I have failed to ask you about no I think it's a very rewarding pathway and it's accelerating to to continue to kind of encounter business situations I think Independence sponsor the model uh it keeps you kind of on the offense in the sense that you're always going to be able to encounter new situations as opposed to being stuck in one deal but even if it's going well and growing 15 a year it's it's a that's what they're doing you're in and year out I think this is very Dynamic on the year of the Year basis and I like that about it um I foresee myself continuing to do more of the same um I've been since for the last 18 months I've been pretty hence pets down what they're doing add-on Acquisitions and making sure we optimize the Returns on this one acquisition that I'm in now uh but uh but I do look forward to to do more of the same in the future and I'm meeting good partners on the way to accomplish that both and help services and Beyond well it's it's uh it's pretty intriguing Nicholas uh it's going to be new to a lot of my audience it's new to me even though there's as as we've been kind of touching on this whole time there's actually a lot of overlap but there's this whole conference devoted to Independent sponsorship that that I wasn't aware of until recently that's been grow that's grown 10 times in the last few years a lot of my audience will not have heard of that that's again that's McGuire the McGuire Woods conference in Dallas yes great so so this is um this is going to be I'm really glad that we did a real deep dive here because um as I said I've glanced off of of Independence sponsor the term many times in the Pod but never addressed it head on and and it's really kind of eye-opening and I'm sure I'm sure people listening will feel the same so thank you sir for so much time and so much transparency about what you're doing congratulations so far uh on what you built already and um yeah let's let's check in in a year and see where things stand thank you so very much oil Nicholas how could people how can people reach you what's your preferred way uh please add me on the link then that's always exciting to be connected there um and then my email address is nicholas.james.gmail.com I use one for business purposes as well with the people from this podcast can reach out to me personally great well expect some inbound thanks Nicholas thank you as well I hope you enjoyed that interview make sure you subscribe to the acquiring minds Channel below we are now publishing twice a week so tons of new interviews and stories to come stories that will help you along your own path to acquiring a business