What’s a TRADITIONAL SEARCH FUND?

Aspiring entrepreneurs raise ‘search’ capital from investors of $350K-$600K to pay for their salary and expenses up to 2 years to find and acquire a small business

Once a they find one to acquire… 🧵 The entrepreneurs go to the ‘search’ capital investors who have a ‘first right of refusal’ to fund the equity investment

Then investors are not required to fund, but they have a guaranteed option!

Not truly committed capital but close

Terms are set

3 super valuable legal (and deal structuring) threads I wish I had read before I bought my first small business: 🧵👇 1. Most small business owners who elect S corp status don't *really* understand what they're doing (most rely on their accountant's recommendation). Here's why they are very popular with small business owners (hint: $$$):

https://twitter.com/KHendersonCo/status/1640001583541780480

I recently started the Cash Flow SMB Investor List

275+ accredited small business investors want to invest in cash flowing small businesses

➡️ 5 deals sent out in last few weeks (1 of them was a debt deal!)

Here's how it works: 👇👇 Entrepreneurs / deal Sponsors love it:

-less manual direct outreach
-protect your deal: it's sent anonymously so you don't burn your ask
-save time: vet investors before connecting and wasting time on an intro call
-only need to fund your deal once

How do you diligence 'people' and 'culture' when assessing a business acquisition?

Extremely important, hardly ever talked about: 🧵 The trick is to start with the easy stuff first

I like to use the People Analyzer tool from the EOS toolbox

You'll find out quickly who the C and D players are who are going to be a challenge and consume most of your time

Cash flow is king as a business buyer

3 steps to get from SDE (Seller's Discretionary Earnings) to cash flow using a live business for sale on BizBuySell: 👇🧵 3 steps to truth:

1. SDE ➡️ Broker EBITDA (what the broker thinks EBITDA is)
2. Broker EBITDA ➡️ Buyer EBITDA (what you as a buyer thinks EBITDA is)
3. Buyer EBITDA ➡️ Free Cash Flow (BUYER REALITY)

Maintenance CapEx 101 and how to discover the true cash flow of an asset heavy business 👇 🧵 Maintenance CapEx = Maintenance Capital Expenditures

Investment in fixed assets on the balance sheet in order to sustain current operations

A$3M EBITDA company might need $2M of annual investment in the balance sheet to maintain revenue...so cash flow is only $1M!!

Mezzanine / sub debt is going crazy right now as senior lenders tighten up

Mez debt make money by sitting between the:
😨 fear of senior debt holders and the
🤑 greed of equity holders

A quick intro to Mez debt 🧵👇 Mez debt (also called sub or subordinate debt) is used frequently when buying companies >$4M of EBITDA

Characteristics:
🔸hybrid debt / equity instrument
🔸pays higher return than senior, less than equity
🔸extremely limited amortization required
🔸may require warrants (equity)

The 2023 Self-funded Search Study surprised me in a few ways 👇

What surprised you? Overall, I am impressed with the survey

I knew there would be shortcomings to the data & collection, but this gives us a new lens to look at the self-funded deals

Great final product @JordanPCarter @Robert_E_Graham and @search_invest

searchinvestgroup.com/study

"How do I reduce my taxes when I sell?"

is the #1 question from entrepreneurs & SMB owners when they find out

I sold my business 😁 and had a big tax bill 😭

15 ways to lower taxes at exit 🧵 👇 Frist, avoid these scams:

❌ whole life insurance (convince me I'm wrong -> I'll write an apology thread)
❌ anything you don't understand or think is sketchy
❌ doing an investment to avoid taxes

Second, I am not a tax professional nor is this advice

The 27 best 🧵 threads of 2022 for small business & entrepreneurship

The amount of free value in one spot is mind blowing 🤯 👇 First, threads are not in any particular order

Second...the competition.

-> the tweet with the highest [like to view] ratio will be crowned best thread of #SMBtwit for 2022

So smash the like button on the ones you think should win (multiple votes allowed!)

How much does a sole founder of a $300M private equity fund make assuming you 3x the investor's money?

$65,000,000 ... 🤯 👇 1. Management Fees: $15M

$6M of mgmt fees per year for 10 years (2% of fund annually)

Single founder, so you'd probably be able to pay yourself $1M-$2M

$1.5M / yr for 10 yrs = $15M

Rest of mgmt fees go to pay for your team compensation, office, some deal expenses, etc

How much do M&A advisors (business brokers, investment bankers) get paid to sell a business?

🔸5-10% for $2M to $5M
🔸4-6% for $5M to $10M
🔸2-4% for $20M to $50M
🔸1-2% for $100M to $150M

(imo they're underpaid!)

This hot tea 🫖 came from a report that was just released 👇 2 ways M&A advisors make 💸:

1. Engagement/work fee: one-time or monthly, usually netted against success fee (81% of advisors charge one)

2. Success fee: % of the sale price paid when the business is sold

Success fees are where most of the money is made

The People Analyzer is an incredible tool for small business management and micro PE peeps

The quick and dirty guide on how to use it
👇 People Analyzer is a list of all your employees rating them against your values

You should use it for:
-assessing new hires
-benchmarking existing employees
-annual assessments
-monthly or quarterly management meetings

You're missing out on the latest small business buying opportunity in 2023

100% Seller Financing: no money down and no bank loan

And as interest rates rise, I think it will be even more effective

🧵 ⬇️ Here's how to do it and why I think it's a legit strategy 1. Interest rates for small business loans have risen from 5.25% to ~10%

Purchase prices are coming down

Sellers expectations are not being met

But you've got something other buyers are fearful of doing

This is your opportunity

Want to buy a business within 25 miles of your house? (called a geographically constrained search)...17 things:

1. be open to a lots of diff business types

2. setup auto deal notifications on biz listing sites for geo

3. meet live every single local biz broker and banker
⬇️ 4. call & email surrounding area bankers and brokers (between 25 and 250 miles of your city) every few months

5. contact all local accountants, lawyers (transaction & estate is gold), consultants, commercial bankers, wealth mgr

6. entrepreneur/SMB events (meetup, facebook)

Searcher problem: Personal guarantee

Investor Problem: Many desire cash pay structures, avoid equity, willing to go lower in return for higher certainty cash

Solution: 'cash pay preferred equity'

I want your thoughts / critiques! I may try to do this on an upcoming deal ⏬ Issues with self-funded SBA deals:

-rarely pay out cash on schedule (first 3 yrs it's either tight or reinvesting in growth)
-risky for equity...sit behind SBA debt, a variable rate
-Many investors avoid equity. Increase pool of investors with certainty + cash pay (ex: my dad)

How did I buy a multi-million $ business at age 27?

It started at age 10...👶

My entrepreneur coming-of-age story 🧵 At age 10, I read @theRealKiyosaki's Rich Dad Poor Dad

That was a defining moment now that I look back, I didn't know it at the time ↪️

I wanted to make money, not be reliant on others, and be my own boss

So I did what any curious kid would do...experiment

EBITDA is a lie

I'll show you what I use instead when I'm buying a business 1) EBITDA doesn't incorporate:

1. capex (money spent on long life equipment that goes on the balance sheet)

2. changes in working capital (especially investments into AR & inventory)

How to create a PASSIVE deal flow funnel for equity investments in self-funded search deals?

In 2022, I analyzed over 100 of these and made investments in 4

In this 🧵 I'll show you the 5 ways I get deals 1. Searchfunder Passive

Searchfunder is an ETA online forum

searchfunder.com -> register as an 'investor'

Make sure your title and biography clearly outlines:
1) you're an active investor
2) check size range
3) your unique value add

My wife bet me I couldn't get to 1,000 followers on Twitter in a month

She was wrong.

I did it in 2 weeks! (from 55 followers)

I had a winning playbook and it worked: First, to my first 1,000 followers

Thanks for engaging with me

#SMBTwit is the community I focus on (think #RETwit but with only smart people)

I buy businesses…and want to connect with other investors and entrepreneurs

Let's give away some secrets...

How to tell if a business is linked / correlated to a commodity?

I just saw this $3.5M EBITDA #smallbusiness for sale: Recycled Resin and Plastic Supplier

PLASTICS = polyethylene

Ok, let's see what's up here 🧵 All questions start with me opening up Google

Google search "polyethylene price"

This 2nd link looks promising...a chart.

I like charts.