My best work (on Twitter) may be behind me...

...at least if I look at the dates I posted my most popular Tweets.

Join me on a trip down memory lane... On the changing nature of a CEO’s role…

https://twitter.com/tsludwig/status/1234580166963167232?s=20&t=JqoncOPYzAfO3_9B8Y5cTA

SMB friends, I need a bit of help...

If you are an owner, investor, broker, banker, etc. that is involved with SMBs, I'd like to request a few minutes of your time.

1/x Background: For some time now, I've been frustrated by the lack of engaging, relevant, and timely information about what's going on with SMBs at any given point in time and rather than continuing to complain, I'm going to try to do something (small) to start addressing that.

2/x

Required for launching a new fund:

☑️ The right partner (@JustinEBurris)

☑️ Funding - Millions of $ from leading business families

☑️ Compelling strategy - Search fund-like model w/ no PG, full $ support, long-term holds

🔲 8-10 top operators who want to buy & grow a SMB Today, after a year of intense effort, we're launching Majority Search, a new investment firm created to become the preferred buyer of $1-2 million EBITDA service and light manufacturing companies in the US.

What does it cost to fund a search for a business to buy?

To support full-time sourcing efforts for 24-30 months, a typical single funded searcher will budget about $500,000 to sustain their efforts. (2 searchers might require $750k) Where does this money go?

- Salary: $100-150k/year
- Insurance taxes: $20-30k/year
- Office: $15k/year
- Tech/Research: $30k/year
- Travel: $30k/year
- Diligence: $20k/year

Raising capital for the first time (or 2nd, or 3rd, etc.) can be intimidating.

After some experience as both a GP and an LP, here is a rough guide for what I think investors look for in deal sponsors... 1) Strategy: If you're pitching crypto to an investor w/ no interest in that space, you're not going to succeed, even if you are awesome.

The investor must be interested in your product.

🚨Call for Operators🚨

For much of 2021 I've been developing a new idea for entrepreneurship through acquisition (EtA) with a partner. We're not quite ready to pull back the curtains, but we're really close.

1/6 In anticipation of our launch, we'd like to start identifying the highest caliber mid-career operators we can so that we can connect with them to share more about our opportunity later this year. That's where I could use your help.

2/6

Because I'm weird, I woke up thinking about working capital.

During negotiations to buy a business, the topic of working capital frequently becomes a sticking point in crafting a successful deal. @MatthewGHinson wrote a very good piece about this a while ago (link at end of 🧵) But, management of working capital doesn't just end with a signed purchase agreement.

A smart operator understands their balance sheet and the levers they can pull to optimize their cash conversion cycle. Here's a quick summary...

I was watching a scene in Ted Lasso last night and it had to do with saying goodbye to a colleague (no spoilers in this thread).

It reminded me of how important those transitionary moments are and how impactful they can be.

A few thoughts... Saying a proper goodbye is the right thing to do. It also has the benefit of (1) making a person feel good; (2) leaving an open and positive bridge to a potential future interaction (ever needed a favor from someone from your past? - it happens more often than you'd think).

One idea that I've been thinking about for a while is 'search funds for other asset classes'.

I don't have this figured out, but it seems that there could be opportunities for syndicates to back young, smart people outside of SMB For example - Real Estate

Back an up-and-coming RE professional with a clear strategy:

- cover overhead for 2 years + GP commit + LP commit for 1st 1-3 deals
- Investors also provide LP intros
- In return, syndicate gets part of GP economics for guaranteed period of time

1/ One of the ways SMB operators increase their equity value and reduce risk is by professionalizing operations. Most sub-$1mm (or even <$2mm) EBITDA SMBs lack core elements of a scalable, less risky company. Here are some examples... 2/ Middle management is usually non-existent. This creates a lot of key-woman/owner risk and limits growth because people aren't developed properly and the firm lacks expertise and specialization in key functional areas.

A thread:

SMB Twitter seems to really like home services businesses (e.g., landscaping, plumbing, HVAC, etc). These can be great companies, especially when paired with strong operators, and they exist in large numbers and in every market, which is also attractive as a buyer. A few potential downsides to consider if you're looking at these types of companies:

- they usually involve some cap ex (vans, etc.)
- skilled labor shortages exist in most geographies
- the stickiness/brands in local markets also can make expansion to new areas challenging

One of my main goals in business ownership is to build an anti-fragile portfolio of companies with my partners.

Having a permanent investment time horizon means that I need to make sure the businesses are around for the long-term to accomplish my objectives. The best way I know how to do that is to make the companies as bulletproof as possible.

Here are some key ways I believe I can de-risk my outcome:

- Buy good companies in growing industries (tailwind effect)

Purchase accounting is a narrow subject area, but can have large implications in buying a business.

Here's a short overview of one area that can be very important: goodwill. Goodwill is created in an asset purchase when the buyer pays more for the assets than their book value. The difference is put on the balance sheet as goodwill and typically amortized over 15 years. For service companies or less capital intensive firms where book value < purchase price, this can create substantial tax savings as non-cash amortization expense is charged off each year

One of the inherent dichotomies in entrepreneurship is that of "rich versus royal".

Most entrepreneurs want to be both: receive a majority of their firm's profits and have control.

In practice, however, this seldom works out.

A short 🧵 Capital is often required to start or grow a company and when that money takes the form of equity, it is dilutive to the existing owners/managers, thereby reducing control.

Thus, an entrepreneur often needs to decide between getting bigger (taking $) or maintaining control.

This was the year I became active on Twitter. Rather than summarize my experience this year, which has been amazing, I want to highlight what brought me here in the first place, the brilliant content put out by others. Here are some great tweets from 2020... Learning to delegate is essential for good leadership. @david_perell had a great post in April

https://twitter.com/david_perell/status/1245536487476617218?s=20

In reflecting on my own entrepreneurial journey, I realized that I'm drawn to partnerships. I've had 7 of them (compared to 2 solo efforts). I've had success with each approach, but given a choice would usually choose to have a partner.

Here are some thoughts on partnerships: What has led to a good partnership (for me):
- extremely high trust and transparency
- clear expectations about role, effort, etc.
- having hard conversations upfront about authority, economics, equity, dissolution, disputes
- working together in some capacity prior to partnering

People like to say that an investment should be so easy that you can model it on a napkin, but is a financial model an important tool in deal analysis? I have found there to be benefits to creating and using a financial model in my acquisition work. Models help to deepen my understanding of the business - the levers that drive costs, revenue, and cash flow;

They can show how sensitive to shocks the business may be;

They help me understand how much debt is appropriate and how much leverage to use to manage my risk.

I spent about 6 years working in real estate before becoming an investor/owner of small companies. I've been asked which I liked more and, for me, the answer is small company ownership, but not because it is more lucrative or a better path to wealth.

Let's compare the two...

/1 Liquidity:
- both asset classes are illiquid, but the edge goes to RE
- I don't have data to support this, but I believe there are many more real estate transactions done every year than there are biz buyouts and the process in RE is more standardized and streamlined/easier

I think brokers serve a purpose, but I don't think people should neglect proprietary sourcing just bc brokers have expertise and pre-existing and ongoing deal flow. In my experience, a mix of direct and brokered sourcing yields optimal results.

A few other thoughts...

/1

https://twitter.com/NickHaschka/status/1309866744912080898

- Brokers do qualify sellers, which is really valuable since a lot of time can be wasted talking to sellers who think they want to sell or just want to get a free valuation.
- Good brokers maximize the sale price of a company through good marketing and making an auction.

/2

I’m attracted to the Japanese idea of wabi-sabi, which I understand to mean ‘beauty in imperfection’. The bowl image below illustrates the physical form of this concept.

/1 Rather than replacing the broken bits with a seamless fix or discarding the bowl entirely, the repairs are highlighted and make a dramatic and stunning impression.

Businesses can be viewed the same way. Sometimes it is the imperfections that make them special and “authentic”.

I'm a pretty eclectic reader and was browsing through my most recent reads. Thought I'd share the past 10 books that I've read/am reading w/ brief notes.

I'm always searching for great reads, so please pass along any suggestions.

Recent reads 👇 - Surprise, Kill, Vanish (reading): story of the US's secret CIA paramilitary assassination programs. Disturbing, but interesting.
- Raised Healthy, Wealthy & Wise: @MikeBoyd interview guest. Books deals with raising kids in wealthy families, but many ideas apply to all parents