How to Buy a $13m Business with No PG, No Investors | Carlo Santelli Interview

Carlos Santelli, welcome to Acquiring Minds. Thanks for having me. I'm excited to be here and excited to share my story.

Well, it's quite a story, Carlo. You've acquired a big business at remarkable terms. This is going to inspire listeners; this is going to challenge them on their own approaches to buying businesses. So this is really a deal to be studied, and I want to do exactly that now. Start us off with some background, please, on you, Carlo.

Yeah, again, thanks for having me this morning. Uh, name's Carlo Santelli, originally from the New York/New Jersey area. Uh, I relocated down to Florida about uh, 3 years ago, so I reside in Florida. Um, grew up in New York/New Jersey, then moved over to Clifton, New Jersey. My father's from Italy; my mother's from North Dakota. Uh, went to a very large high school in Clifton, New Jersey. Uh, took three years off between high school and college. Uh, worked for a nonprofit for two years, uh, and then the last year, actually, lived in Alaska. I was living in Alaska in a van, 20 years old, um, essentially homeless in some sense. Uh, and during that time period, working for the nonprofit, working in Alaska, uh, did a lot of door-to-door sales and door-to-door uh, fundraising. Uh, and I think that kind of forms my life experience, forms uh, kind of my uh, you know, investment thesis in some sense, just getting a lot of "nos" from strangers just walking around door-to-door. Uh, came back, realized I want to go to the best school in the area. I was back in New York, so I wanted to go to Columbia University. Uh, so I was out of community college. I applied to Columbia once, got rejected; applied again, got rejected again. I wasn't taking no for an answer. I applied again for a third time to Columbia University, uh, finally got accepted, uh, and attended there. So I graduated college in three years.

Carlo, Carlo, this is—there's a lot—this is so already a lot of fun. I mean, I feel like we could do a podcast episode on your early adulthood here. The—okay, so you took three years off between high school and college. That—did you know at the top of that phase that it was going to be three years, or did one become two, become three, sort of thing? Just curious.

Something like that. One became two, became three. It was affiliated with the church I grew up in, so I was encouraged by my parents to take that time off between high school and college, do something for the greater good. Um, and so it was really kind of missionary sort of stuff, but not—you're not a Mormon, I assume, by your last name, not to say that Italians can't be Mormons, but um, so it was—but it was something like that sort of mission.

Yes. I think half like character development, the other half like making the world a better place, so it was a kind of combination of those two goals.

Okay, okay. And um, living in a van in Alaska—give me 30 seconds.

Yeah, I'd basically been to every state except for Alaska at that point. I was 20 years old, went up there with friends, and we were just living on the edge, you know, living in Kodiak, we were living in Anchorage, traveling around in the van. I kind of—I think the dream of many young people, to travel and just be out there in the wilderness, and uh, and it was a great experience, formative experience, but very cold, very cold experience.

What isn't that around the time—no, it probably a good five or 10 years later when that movie about the guy who drove into the Alaska hinterlands and died came out? What was that movie?

I never saw it, actually.

Into the Wild.

And actually, very interesting experience. When I decided I was going to move to Alaska, I was living in New York City at the time, and I'd watched the movie for the first time, Into the Wild. I was walking to, believe it or not, Columbia University, where I ended up going, and I met the actress, the mother from that movie, and I took this as a sign I should go to Alaska because I was thinking about it, and then I should go apply to Columbia University. So it's kind of a full circle experience there.

But that's right, that movie, Into The Wild, kind of inspired that move.

Oh, wow. Okay. Um, great. And then, all right, so you come back and you're older now, so you—you're going to start college, uh, you know, basically at the—your classmates as a freshman are going to be like—you're going to be senior-ish, and they're all going to be three years younger than you, like—um, and but you start in community college. Is that just—but you wanted to go to Columbia, so there's a big—that's a big jump from community college that anybody can go to to Columbia, one of the most exclusive, selective schools in the country, as you learned painfully. Um, the—why did you just not wait around? Why—why were you going to community college at all if you had your heart set on this very exclusive Ivy League?

I applied to both, and hey, you got drama big sometimes in—in search—in college, in many ways in life. So I applied to both. I got accepted to the community college, which I don't think they rejected many people, and I got rejected by Columbia. So I said, why don't I get some, you know, credits done, some classes done, and eventually try and jump over to Columbia?

And why did it have to be Columbia? You said you needed it to be local. I guess you needed—it was the—it was the best school locally. That was it.

Basically, I—I was gone for three years from family and friends. I actually concurrently was uh, running for the Board of Education in my town, um, so I had kind of political aspirations locally, um, so I said I had to be close, and I said, what's the best school locally? It's Columbia.

Do you still have political aspirations?

No, very opposite.

Okay. Why?

Uh, you can have influence in this world without being directly in politics. I think politics is a very dirty game these days, and uh, I consider myself very anti-political these days, but we won't get into that.

Okay. Uh, and then you apply three times to Columbia. What do you think the third time—what did you do differently the third time where they finally relented and let you in, or was it that they just were—they threw their hands up, were like, "Fine, come on"?

I think that was it. They're like, "If this guy really wants to come here that badly"—I told them I only applied to one school; it was Columbia and had no safety school. I said, "You are my safety school. If you reject me, I'll just keep coming back," and uh, I don't know, persistence leads to success sometimes, and in that case, it did.

Well, of course, that—that you—you tell this angle of your history because that is a life philosophy of yours, which we're—we're going to hear you've been rewarded for having nicely, um, but do you really think that that Columbia, the—the decision-makers at the admissions department of Columbia were—were reacting to your persistence, that that really was the—the ultimately which got you in?

Yes, because they interviewed me on the second time, and I got some inclination—they're like, "It's interesting you applied twice; most people don't do that. What if we reject you?" And we kind of talk through that, you know, oh, that concept of persistence and—and—and all that.

Really cool. Really cool. Okay, so you get to Columbia. Columbia—you're what, 20, 21 as a freshman at that point?

Probably 22 because a year at the community college.

Um, I want to be an entrepreneur eventually, um, but everyone was doing this thing called investment banking, so I—I went down that route, uh, got an internship and eventually a full-time offer at Bank of America Merrill Lynch in their healthcare investment banking group. Uh, did that after graduation for a year. Um, I was not a good analyst; was not a good analyst. I ended up switching to another bank, Cantor Fitzgerald, for a year, doing similar work. Uh, in totality, did about 10 years across various buy-side, so investment banking uh, roles or sell-side roles, or some buy-side shops. I worked at Stonehenge Capital, and then most recently I was a vice president of funds—12 billion, you know, fund, mostly credit fund; they did some buyout work as well. Uh, so that's from college up until March of this year. Uh, I left my—let me—let me stop you there, Carlo. So say more about being a bad analyst. Why—why were you bad, and what—what does that mean? What can the audience glean from the fact that you were bad at investment banking?

I think I was a bad analyst. I didn't think I was bad at the game of investment banking. I think if I was still in that world, I think I would do fine. Uh, an analyst, especially at a large bulge bracket bank, you're there to take orders; you're not uh, paid to think outside the box. I thought outside the box; I kind of challenged the status quo uh, on many fronts. Um, I was thinking, "Hey, how can it be the first investment banking analyst to go source and close my own deal?" You know, we're working on multi-billion dollar transactions; it just—it just wasn't the right environment for that. So um, I don't think I'm great at crunching numbers and building complex financial models, despite the Columbia background and all that. Um, so anyway, that was my experience there.

Straight out of college, what did you study at Columbia?

Economics.

Okay, so would you say you're a—you are comfortable with numbers? It's not that you're not a numbers guy, or would you say—

No, I'm not a numbers guy. And the reason I'm harping on this is because so many people um, who listen who don't come from finance backgrounds are really intimidated by the population of the large, overrepresented population of former finance people in ETA, and they—so I'm always looking for uh, a way that people who don't have that background to get comfort that this—that they can still do this. So that's the pretext for the question.

I will say I feel very strong at math, mental math, and just naturally, you know, good at math. I will also say in the finance side, it's pretty simplistic math; we're not talking Calc 3 or anything like that; it's addition, subtraction, multiplication, and division. So if you could do those four, and you can use an Excel file to help you with those four, you know all the math you need to be successful in this space.

It is true, isn't it? It's mathy, but it's—it's, you know, arithmetic plus at its worst.

Um, really, right. Uh, um, okay, so so you were already showing signs of kind of being into deal-making, entrepreneurial deal-making from your earliest days in—in finance.

I would say so, at least the desire to do that, but I think more importantly was—I always thought outside the box; I was not—I was not good for the bulge bracket or Corporate America, uh, which I still think is the case.

Okay. Um, and then when did you discover entrepreneurship through acquisition, or whatever your—you call what you're doing?

December 15—I looked at the email before this uh, this interview here. I came from bulge bracket investment banking where businesses were trading for multiples of revenue—20 times EBITDA, 30 times EBITDA—big-time transactions. I came across this French back pain device business doing three times EBITDA; they were selling for 9 million bucks. The business was listed online, which for me was crazy that someone would list something like this online at the time, um, and uh, it just blew me away, the multiple that you could buy this business for. So I don't think I slept much that night. I did my LBO several times over. I'm like, "Wow, if I could buy this business and come up with this money, this would be—this would be pretty lucrative." So that was kind of the aha moment for me.

Your aha moment was—you found—you happened to see a business for sale online, a small business, and were blown away by what it was selling for, essentially the multiple. And so you didn't know before that that kind of small business transactions were a thing, sort of thing?

I would say small business transactions were a thing. I was shocked at the multiple, really. I've heard some of your guests in the past use the term "the magic is in the multiple." That was—that was my aha moment—on the magic is in the multiple at the lower end of the market, and the economics I could probably get at this time. I was thinking as a buyer could be pretty lucrative if I could come up with the capital to take a deal like that down. So—and this was such an aha moment—you—oh, I guess you looked up before—before our conversation now when that happened.

December 2015.

Um, you don't have that committed to memory, but it was something that now—9 years later—really—you're coming up on your 9th anniversary of that moment, I guess here, Carlo, and you still remember it well.

Yeah, and it was—evolution—getting into the search space and ETA space, and I was working at a fund called Stonehenge Capital at the time, uh, and we participated in many search deals or search-style deals. We participated in many independent sponsor deals. So I've played in the lower middle market now for—I call it nine years, uh, and now I'm just on the other side as a buyer rather than a capital provider to that space.

Well, you know, one thing that's interesting, Carlo, and I mean, given how quickly you've moved this year, you know, as one of these making-up-for-lost-time things, but I do want to press you a little bit on the fact that you saw yourself as, you know, square—what is it—square peg, round hole type of person in—in a corporate environment, wasn't kind of—didn't fit, didn't feel at home there, felt entrepreneurial, like you wanted to do things outside the box, your own way, going back 10 years, more maybe, and then—and then you have this—you have this discovery of small business transactions, the magic being in the multiples, going back to 2015. So you did stick around in corporate land for a while, even after your epiphany and even after knowing that you didn't love uh, having your hands tied, not being kind of captain of your own ship. Why do you think you stuck around for so long?

Great question. I don't know. Should have pulled the plug a lot longer ago, but uh, um, you know, there—there—there's plenty of benefit to being a capital provider in the space. You're paid well; the benefits—um, you're also just striking the check, and you're not doing a ton of work post-closing. So—um, yeah, none of those are great answers, but those are at least the justification I gave myself.

Okay. Um, and you were—to be clear, you were having visibil—furthermore and more visibility into this world because I get where you ended up—you were—do you guys were doing independent sponsor deals, searchy-searchy deals. So you—you were also learning, I guess, correct?

We were a lender, non-SBA lender, um, and and I interacted with many independent sponsors or search fund guys at the lower end of the market, and uh, you saw the deals getting done, and I—I was around long enough to see people buy, grow, and exit their businesses, and the case studies were incredibly compelling, as I'm sure you know.

So then why did you finally decide to step out?

I think uh, just—it came to a head in uh, earlier this year. I—I'd spent uh, about two and a half years at this—this new fund, post-Pro—post uh, Stonehenge Capital, uh, and just seemed like the time to move on. So I left March 3rd of this year, uh, and now we're sitting—it's December 2nd. I've closed on four acquisitions this year so far, so in uh, you know, what's that—eight months, um, and we're off to the races, and excited for 2025. Gonna hopefully uh, increase that amount a fair amount, but again, March of this year was the time I kind of pulled the plug on Corporate America and—and dove in headfirst.

Okay, Carlo. Well, so four deals already this year. We're gonna spend our time and focus on two of those, which are really kind of a single transaction because there's kind of sister companies. Um, why don't you give us the—the headline uh, about that deal, and then we'll get into the story, please. So what—what are the companies? How big are they? Get start with there.

Yeah, so Trium Industries and Stillwater Fasteners. They're manufacturers of custom metal components. Custom metal components—you could think screws, fasteners. Uh, they—they manufacture—approximately 200 million per year, uh, approximately 13 million in sales, uh, approximately $3.5 million of annual uh, EBITDA profitability, EBITDA, uh, 65 employees between the two facilities. They operate out of two separate facilities in Connecticut and Massachusetts, with about 150,000 square feet of space, um, and I acquired both those businesses October 29th of 2024, so just over a month ago.

13 million in sales, three and a half in EBITDA. So that is a much larger business than somebody who—I self-identifies as a searcher would go after. If—if you had to label yourself, I assume it would be independent sponsor.

I tell—I don't love that term. I—I'd say I operate at the crossroads of entrepreneurship and—and private equity. Um, sure, you can bucket me into independent sponsor. I don't necessarily operate these businesses, but I think I am fairly more involved than other independent sponsors are that I know have been with their portfolio companies. Um, so yeah, you can bucket me as independent sponsor, sure.

Okay, that bucket. Well, when you go out looking for businesses to buy, what is your approach? What are your parameters? Give us—give us a picture of what you're out there doing before we actually get to the transaction itself.

Yeah, so the entity I operate as called Cortina Capital Partners. I call myself an investment vehicle, and I think I'm slightly different than independent sponsors or traditional private equity in a couple ways. Most importantly is—number one is uh, proprietary deals. I only do proprietary deals; I've only ever done personally proprietary deals, uh, and have no interest in doing bank or broker deals. So if there's a bank on it, there's a broker on it—not interesting to me. In fact, if there's a SIM or a data room or any materials prepared, I don't touch it; it's an instant death kill for me. And the reason is because, as we talked about earlier, the magic is in the multiple. We could talk about this transaction, multiple paid there, but uh, you won't—I don't think you will find a a below-market deal that is brokered or represented by a bank. And if you can buy a business like I did here for a pretty low multiple, the economics you get as a buyer are so much better and advantageous that I think it is worth putting in that extra effort to go find those proprietary deals. And for the audience, they'll know the term proprietary, but just in case we don't—it means basically going and finding the deal yourself; it is not, as you said already, found by a broker; it's not listed anywhere; it's just—so it's—you have to go find these deals, which is really difficult and kind of part of the art, and then—and but once you're negotiating with the seller, it's just you and that seller, um, all the way through. Now, and we're going to spend much more time on that. So that—that's one way. What about size, Carlo? Um, you know, a lot of the audience listening—I mean, there are people who—who buy as small as 150,000 of EBITDA. Um, you bought a three and a half million of EBITDA, so that's—what—about 20 times larger. Um, how do you think about financial parameters, size parameters?

To me, there's no upside—there's no—maximum. There's independent sponsors doing large deals, and there's guys finding proprietary large deals. It's a couple elements—that the—the relationship between me and the seller is much more direct. Um, that's important—building that relationship with the seller. I'd also say in this specific transaction we're discussing here, Trium Industries, that business was not prepared to be sold. Half of my job was actually as a banker, preparing materials, preparing financials, and uh, in very much extracting the information I needed from the owners to prepare a package to go to raise capital. Um, you know, in this instance, you know, for example, I sent the owner a list of a due diligence request list—I need tax returns, financials, your employees, your customers. I emailed him once; he didn't respond; emailed again; no response. I call him up, "Hey, man, I'm super busy here. If you want this information"—he goes, "Come get it." And so that's exactly what I did. I flew up to Connecticut. I—that—down—

Multiple days with the owner extracting the information from his computer. Hey, can I jump on your computer and go on your QuickBooks? Go right ahead, you know. So this is a much more partnership approach, much more handholding the seller to get the information I need. The full total opposite, uh, you know, approach here, right? As you're working with a banker, broker, all that information is in a nice clean offering memorandum or similar; it's a beautiful data room with all the information you need. So this is a much more, uh, handholding approach, uh, the way I have done it and did it on this deal, but the rewards are are clear if you're able to pull that off, uh, with the economics being better on those transactions. Okay, Carlo.

Okay, okay, okay, okay. Got a lot of follow-ups there. Was a lot there. First of all, he said you already had the business under LOI when you asked for all those materials, and he said, sorry, too busy. Just to be clear, uh, it was either under LOI or close to being on the precipice of being under LOI. Yeah, so we we had already discussed and talked at a fair length at this point. Okay. And so just to get in his head, even being even looking at the exit of his business for millions of dollars, it wasn't his priority to get you those materials. I mean, I think that that's just an education point for for listeners that sellers, you'd think that selling their business would be priority number one if they if they're open to the selling process, but even then, no, the day-to-day, typically the day-to-day is typically more; there are fires to put out that are more important even than moving the process along, selling their business.

Absolutely. I think they there's a fire to put out right that minute with their real dollar impact to that they think they can sell their business later; it's not a top priority. Uh, it was my job to constantly remind him of that: Hey, at the end of this our relationship and transaction, I'm going to put x amount of dollars, millions, tens of millions of dollars in your pocket, um, so I should be your top priority, and in fact, I'll come up to you in your office and I'll sit with you and I'll help you do these things. Okay. Now, so so let's let's hear about that, Carlos. So you you you go up to Connecticut, you walk into a manufacturing facility, 65 people, big warehouse or facility I guess you said 150,000 square feet between the two businesses, and you're just this one guy. You go into the the owner's office, which is probably some I assume kind of some dusty, you know, fluorescent light lit room in the in the back of the facility. Maybe not; maybe it's corporate, uh, and he and you say, I'm here; I'm here to EXT, you know, look at your QuickBooks basically, and and he sits you down at his computer, and and you go to town; you go to work on on getting out what you need from his QuickBooks.

In some sense, yes. I think it's a little bit more salesy, like, Hey, we're, you know, I chart out a very clear timeline to closing; it's going to take us 60 days, 90 days; here's the steps we need, and here's the information I need. So it became clear to him; it was clear to me the steps I need to take, but to him, first time selling a business, he was unclear how long it's going to take and the steps, and if this is going to involve this and that. So I was pretty clear with him on that. The other thing I said is, hey, if you have any shadow of a doubt if I can close this, go call Mark, go call Michael, go call Don, the guys I bought their businesses in the past and put millions of dollars in their pocket quite recently, and they'll say Carlo is the real deal; he can come up with the money and close this transaction. Because there was definitely that degree, some degree of like doubt during this: Hey, where's the money coming from? How do I know I'm not just wasting my time here with this transaction? Exactly, especially since you're a lone individual, Carlo. Do do you not at some point, I mean, maybe you've just answered it that you have these testimonials you can point him to these these references, but do you not at some point feel the need to project that you're bigger and more corporate, if you will, like poor poor choice of words, but just just more of a a team than basically kind of a lone wolf out there? Were you tempted to bring along two interns or something just so you look like more substantial than just Carlos Anelli doing this thing?

It's a it's a great question; there's a lot to discuss on the topic, but for me it's striking a balance between blue collar; I'm a blue collar guy; I lived in Alaska; I was going door to door raising money; I, you know, I came, you know, you walk in there with like a T-shirt and jeans with a little bit of dirt on them; you don't want to project yourself as being private equity type guy, but the balance side of it is yes, I was constantly talking about my track record; I worked on multi-billion dollar transactions, which is true in my career; I bought other businesses; I've done this many times; it's constantly instilling like, you know, confidence in them that you can do this from the finance side, but at the same time you're not some private equity guy who's just looking at the numbers and stuck on their computer all day. Um, definitely the art of the deal, um, going through this process, but um, I think it's important, especially when you're working on a proprietary deal; there's no advisor, broker helping them and pushing them along along the way; that's your job in many ways.

Yeah, and well, and so let's turn to that, which I think is the biggest detail of all to explore here. One of the reasons that even I at this point generally feel like proprietary is not a good use of time. Now, for an enormous, relatively big deal like this, it it starts to make a lot more sense, but for people buying smaller, SD businesses, half a million to a million, million and a half, if they can find it, it just from so many guests who've tried proprietary, spent a lot of resources on it, and it's basically been a dead end, and they've often just found their deal from BizBuySell after spending a lot of resources on proprietary. I I end up feeling like I'm I'm not much of an advocate of the technique, but there's a more but aside from just kind of that kind of um, quantitative assessment of how it's how successful or not it's been, it also comes down to this philosoph to this to this alignment of incentives or this perception of misalignment of incentives, which is if you are having to educate, if you even if you're outreach, you get somebody on the hook on the phone; they they're talking to you, and you're negotiating with them, even if you get that far, which is hard enough with proprietary, um, they are going to doubt everything you say when you say this is how the business is is how I'm valuing the business; you know, this is what multiples are; this is what this is worth; this is why; here's a weakness in your business, and so I need to I need to I need some concession on on the valuation because of this weakness or that weakness or customer concentration or what have you; everything that you utter to them they are going to see as biased because fundamentally this is zero-sum; every dollar out of their pocket is into yours and vice versa, so it just it it always feels like it would it's really hard to find a seller who can get over that and not and not need to rely on a third an objective third party like a broker or banker to sell their business. Um, so maybe you've already answered it which with it which is all about the trust and rapport building, but but answer all that please.

I think to some sellers the dollar amount is not necessarily the most important; it's speed, certainty to close, like effort on their parts. If you can sell them on the fact you can make this a quick transaction, uh, I will focus on what's important in your business, the consequential stuff, and not have you sign up for a two-year sales-side process with endless amounts of questions, um, that's a there's a ton of value to that, and that's was exactly the case in this situation and scenario. I also think I'm able to think more creatively and uh have a much wider bench of like capital providers, and I think maybe the average searcher so is able to fit this deal into to the the bucket that ended up fitting it into, for example, non-SBA deal; this was not SBA appropriate; it was too large for that, um, and then also again just the leaning on my track record; I can close these transactions quickly; I've done it many times; I can get that money in your pocket as we promised in a speedy and efficient manner, and I think to the seller that's all they wanted, and and that's what made them happy. Ultimately, they are happy; I I fulfilled what we discussed and the DI struck with them, and uh I think they were happy with the transaction.

Okay. And so just two quick follow-ups there. First of all, one thing that will differentiate you from many listeners is that what you just said, which is that you do you have experience doing deals of this size and you know where to get the capital, so that that is certainly an edge that you have, um, or or in a difference with many of the listeners, because of course one of the reasons we're talking to you here, Carlo, is what what can the the sort of more average searcher learn from your story here, um, so that is an advantage you have that other searchers will not is what it is, um, but secondly, you you said something about avoiding the two-year what did you say the two-year sell-side process, something a tale of an earnout sort of, so say more about that. A traditional private equity shop talking to an owner here would have lots of process, lots of time, lots of strings attached; say more about what you're kind of you're competing against and why and how you differentiated yourself was can be so appealing.

Well, I think two things: one, if this owner is signing up a broker to go sell the business, this is a long process, multi-mon, usually multi-year process realistically, uh, and an owner in especially in this scenario was not willing to sign up for that type of process, but number two, to your earlier point was about, you know, maybe the word is consequentiality; I focus on the consequential things of this business when I was working at a large fund and you're paying 14 times EBITDA for a business, yeah, that model better be exactly correct, and the, you know, all the detailed information from your customer and supplier and trends and gross margins per skew, you you need all that information because you're paying such a high multiple. In this instance, where I'm not paying a high multiple, uh, I would say my job was to really focus on the consequential stuff, which is really customer concentration, employee uh situation, owner involvement in the business; I didn't need, you know, where the what college did the, you know, the bottom guy go to when he was younger; it doesn't matter; it really doesn't matter when you're paying the multiples I'm paying on these businesses. So I think that made the job much easier for my side and also the seller side; it wasn't endless requests for diligence, endless questions that they may get when selling to a larger private equity fund, and you spell that out for them that if you were to go with somebody other than me, the process is going to be what what was the expression I heard the other day? It's going to be a cavity search for sure and take forever. I didn't really spell that out necessarily; I think they already knew that, but on top of it, I think most private equity funds, certainly the ones I used to work for, would not have gone to Connecticut and sat down for 3 days on the guy's computer extracting the information, you know what I'm saying? Uh, I don't think they're willing to do that.

Um, so that's fine; good. I will, and I I'll take these deals down myself, and so and and why do you think a private equity shop wouldn't be willing to do that? I mean, this is still, you know, three and a half million of EBITDA, uh, it's not that big a sacrifice to fly and meet the guy and and on his own turf and extract the the materials from his computer, like what? Yeah, it's interesting edge. Yeah, I think some to be clear, I think some there's a lot of private equity funds out there now; some of them are willing to do that, and some are a little more willing to roll up their sleeves. I think the general consensus is that companies trade for what they are worth, so if someone's selling their business three and a half of EBITDA for x amount of dollars, uh, that must be what it's worth; there's no way you can get a below-market deal out there. Um, also again, I think just time and bandwidth, you know, like, uh, you know, private equity fund deal team, they want the they want the materials ready; they don't want to put together a SIM; rather pay up and and uh uh for a deal and pay a higher multiple and have a clean deal with a SIM all prepared and all the information prepared for them. Okay, great. Well, and and by the way, the other thing about well well let's hear a little bit about your what you said essentially that the multiple being so low allows you to do less thorough due diligence; you maybe you don't want to put it so bluntly because it sounds it sounds negative to say, oh, I I didn't diligence this as hard as I I needed to, but frankly, that's what this that's what we're talking about when you buy a business; it's such a compelling multiple; there's a lot more room for error, right? And and and by the way, you're not not diligencing it just for the sake of not diligencing it; it gives you that other edge that you have, which is speed, and that's very appealing; that's that's kind of how you how you get your deals, so it serves a purpose, but do I have that right?

You do. Uh, would now be an appropriate time to talk about the actual transaction because I think that can go into the multiple discussion; you you tell me. Sure, sure. Well, um, not not quite yet. The other thing, well, maybe because because actually, Carlo, the other thing to say here is that when talking about due diligence, uh, is that you don't have a PG, so the way you structured this deal, you also have less personally at risk than many searchers buying much much smaller businesses, so sure, let's get let's how is this deal structured? Yeah, so my uh in the letter of intent with the seller, which I signed April 15th, so about 6 weeks after I leave my job, I would purchase the business and the real estate for $16 million. There's a $2 million seller note, so I had to deliver them $14 million cash at close. I took the real estate, and I did what's called a sale-leaseback; I in fact bought the real estate, but simultaneously sold the real estate again, 150,000 square feet of of space, uh, and the sale-leaseback buyer purchased that for $10.75 million. So $16 million, $2 million seller note, only needed $14 million at closing; of that 14 million, 10.75 came from a sale-leaseback buyer who was purchasing the real estate, so I needed to come up with $3.25 million. So $3.5 million EBITDA the business; I had to deliver separate from the real estate, 3.25 million, so less than one time EBITDA for this business. On top of that, the business came with an uh remarkably uh excess amount of excess inventory; we didn't know at the time of the LOI how much inventory there was; by the end, it became clear to myself, the seller, the amount of excess inventory was approximately we'll call it somewhere in the $1.5 to $2 million range of fair market value, so that's machinery and equipment and then inventory; they're making screws and bolts and and fasteners, so we're talking screws and fasteners and raw material, so stainless steel wire. Um, I got what's called an asset-based loan from an asset-based lender, um, backed by the inventory, um, and they provided all 3.25 million. So in effect, I bought this $3.5 million EBITDA business, uh, for $3.25 million cash at close, 100%; that was financed by debt; no equity needed; I own 100% of the business today, uh, and that's how the deal was structured; it's amazing.

Okay, we're going to we're going to I'm going to walk you through it a little bit slower, but to be clear on the asset-based lender providing the 3.25 um of cash at the remainder that you needed to come up with, did they provide more than that or did you just basically need them for that sum? They provide me a facility, so ABL, a revolver, which is like a credit card, so my capacity on that, my credit card limit if you if you will, uh, was yeah, triple that I would say, and and that's because an asset-based lender will give you a facility that's maybe half the amount of what of your inventory that inventory whose fair market value was in the 20s. Correct, so around numbers if they think the the inventories were $20 million, they're like, all right, we'll give you half of that; we'll give you a facility uh like capacity of 10 million, and you can draw $10 million on that at closing, and if you want to use that to buy the business, you want to use the rest of it to put money in your pocket; that's that's your decision, uh, but that is in round numbers, so they're not looking at the cash flow of the business, which is SBA lenders look at cash flow; most SBA funds look at cash flow lending; these guys are an asset-based lender; if you don't repay us, we're taking the assets and we're selling those assets to get our money back. The facility was, again, round numbers, 10 million bucks; 3.25 goes into the transaction, so you're left with 6.75 of this facility, so that's also nice working capital for you, although maybe you don't need the working capital because the business is big enough and has what what did that 6.75 remaining on the facility mean anything to you? Have any value to you? Uh, just optionality; yeah, if you want to buy more inventory or invest in the CAPEX or anything for working capital; we don't need it; we funded enough cash to the balance sheet at closing, and it's uh, you know, it's throwing off 300K of cash uh a month at this point, so uh that's just nice to have in some sense, that capacity. Okay, great. You let me let me just quickly review to make sure I have it: $16 million is the purchase price in for the business and real estate, really two businesses and I guess two pieces of real estate, right?

Correct, collectively 150,000 square feet. You do a sale-leaseback, which means that you sell the real estate, so you're the owner, the business owners of real estate; you sell it and and immediately lease it back, so you continue to use it; I I assume that lease is a long-term lease, so there's no threat of losing access to the buildings, um, and so that provides you immediately with 10.75 million that you can use toward the 16 million, so now you have to come up with 5.25 million uh to buy this business; 2 million is in the form of a seller note, so now we're down to 3.25 you need to come up with, and we just covered where that came from; you got a $10 million; the the business had six uh 13 million in sales, three and a half in EBITDA, but it also had um inventory and raw materials and equipment to the tune fair market value tune of $20 million, let's call it conservatively for round numbers, and you could get a loan on that of an additional $10 million from an asset-based lender, and of that 10, you took 3.25 and put it to to fill out the remaining $16 million; that's amazing. And so you walk you walk away the 100% owner of this business that does three and a half million of EBITDA, and you haven't put in a dollar yourself, and you don't have a personal guarantee.

That's correct; that's correct. Um, and even more so, right; there's only call it $4 million of debt on the business today, right? So $3.5 million EBITDA the business; I bought it for really $5.25 million; so I paid one.

And a half times EBITDA for that business again, definitely below market, uh, in terms of—oh wait, wait, that that's a really interesting point. Sorry to interrupt, Carlo, but yeah, because what what you just did there was you—let's let's pretend the real estate is just separate and apart, right? So you're talking about—so moving the real estate out of the transaction, you paid 5.25 million, which was what you needed to come up with after you sold the real estate for a business doing three and a half million of EBITDA. So you paid $5.25 million for three and a half million of EBITDA, so that's where you get your one and a half X multiple, which is amazing because—correct?

Yeah, obviously one and a half—one and a half times is not a number we ever hear, even for very low EBITDA businesses. This is a very high EBITDA business for search funds, correct? Interrupted you. What were you gonna say?

Yeah, so paid 5.25 million for a $3.5 million EBITDA business—one and a half times EBITDA. How's this possible? To me, things like proprietary deals and the power of the sale leaseback uh, definitely helps bid down that purchase price. Um, but yeah, that was a deal we closed a month ago with Trium Industries. Now let's spend some time on the sale leaseback concept. There's got to be a catch there, Carlo. I mean, is there? So obviously you secured a lease where there's no—as I said, there there's not going to be any threat of losing access to that building—but some owner along the line in this business—we haven't heard the history of this business—it's a very old business—somewhere along the lines they thought it was strategic to own the real estate, and you're letting the real estate go. Is there not some risk there or some downside to that, or is it just $11 million bucks of free money that you can get access to?

Yeah, it sounds so simplistic when you just summarize it the way we summarize it, but there's definitely some complications. First of all, the transaction becomes much more complicated. We need to do environmental uh, work—phase one, phase two—uh, there's additional—there was a petroleum release; there was underground storage tanks that need to be released. This is all due diligence dollars I needed to put up, and I'm not backed by anybody; it's my own money. Um, and if the deal falls apart, you're on the hook for that money. Um, it also made it complicated. At some point, the seller did see the actual sale price of the real estate, and it—to me it's very clear—I am signing myself up for a 20-year triple net lease. The—I'm—the only way I'm getting away with selling this real estate for close to $11 million is signing up for that lease that may or may not—you know, he may or may not not want to sign up for. It's a triple net lease, so I'm in charge for paying the insurance, the maintenance, the taxes on the building. Um, and and yeah, it just complicated the transaction uh, to to a number of extents. Last thing is, as you pointed out, I don't own the real estate now. I have a landlord that I have to answer to, and that obviously complicates operations and things of that nature.

Okay, so there's a little bit—but your calculation is that it's okay, and sale leaseback is obviously a thing, so there's—this isn't—this isn't a fringy move; this is something that people do. Give us a little more context on sale leaseback for people—for the uninitiated. We now have a definition of it and how it can be used, but is it common? Is it—you—you know, in PE land, tell us more.

I think once you understand it, it's almost like the second level of—first to me, lower middle market, the magic's in the multiple; the second aha moment I had was like sale leasebacks—when you realize the power of that—and again, I think this deal is a great case study of that. You can—it's—it's a very powerful move. Now, I used to never want real estate in my transactions; now I probably won't do another deal without real estate in it where I can do a sale leaseback. Um, just again, you could bid down the purchase price significantly and and get a great deal on a transaction. There's real estate—there's sale leaseback brokers; there's a ton of institutional sale leaseback buyers out there. Um, it's definitely a multi-billion dollar market. Um, there's many buyers that—that's all they do; they only do sale leasebacks. To be clear, you need to own the business to own through the real estate, most likely, right? I can't have another business that I don't own sign up for a 20-year triple net lease where I increase the rents to some degree or sign up for, you know, that—that type of arrangement. Um, it makes it complicated; it's much more complicated than just buying a business, which is already complicated in and of itself. Um, but yeah, there's a whole world of people doing this—independent sponsors, and I'm sure other searchers are also pulling these transactions off—and the—and with the sale leaseback firm, you—you negotiate uh, a lease, and—and like, what do your rents look like? Do you negotiate—I guess you negotiate—how long is the—is the lease? I guess would be the big question.

Twenty-year lease; it's triple net, so again, there's the base rents plus I have to pay insurance, taxes, and maintenance. Um, I would say I did not have to—some people what they do is they increase the rent that they will be paying versus is like the old landlord. I did not have to increase the rents almost at all—very, very minimally—um, in order to get uh, this sale leaseback buyer to purchase the real estate. And that—that rent is locked in for those 20 years, correct? And—and—and so you didn't have to increase the rent much, but typically in sale leaseback scenarios, the sale leaseback buyer of the real estate does see—want to see—typically a big uptick in rent. What—what can—can searchers listening learn from—is what I'm trying to get at here. Uh, businesses trade off of EBITDA; real estate trades off cap rate. So if you—every dollar of EBITDA you move over to rents—so your EBITDA goes down by a dollar, uh, the operating income of that real estate goes up by a dollar—but if that real estate trades off of a five cap, that's like a 20 times EBITDA though. So if you take a business—buying—you buy a business trading at five times EBITDA, and you transfer that dollar over to the real estate at a five cap, which is like 20 times EBITDA, you just made yourself 15 times EBITDA on that dollar. I don't know if that's too complicated for the—for the listener, but that's the math.

Okay, that might be too—so it's advantageous, in other words, it's advantageous to spend more in rent.

Yes. Yes. So some people will try and jack up the rent as much as possible to the absolute limits, if—but only if they're the real estate owner—only if they're still the owner—but not once they're not the owner.

Well, no—like someone like me, I'm like, hey, buyer of this real estate, I will pay you $2 million in rent. I'm paying $900,000 a rent, but I'll pay $2 million a rent—$2 million a rent at a 5% cap rate is—million—5%—20—that's $40 million. If they went for that, they would have gave me $40 million, and guess what? I'd give $14 million to the seller, and I would have put the other $24 million in my pocket. And so the calc—the calculation there is um, obviously that whatever the the EBITDA will come down now because you have these additional real estate expenses—not only in rent but the triple—the triple net—but the business can support it easily, right? Which I think is the math that is very important. Can this business actually support that rent? Is there plenty of margin of air and cushion uh, to service that rent to sale leaseback buyers? I think this is almost more of a credit play; they use the vehicle of real estate, but they're underwriting is—this business healthy? Will they be able to keep paying the rent payments over the next 20 years? If they don't, fine—we seize the real—we have the real estate, and we could sell the real estate, but they don't want to put in a new tenant; that's not their game. So that's kind of the way they're looking at the world.

Gotcha. Okay. And so for searchers looking for—looking at smaller businesses—we often—SBA style deals—we often celebrate real estate because it allows you—if the real estate is—is more than half the value of the transaction—just 51% or higher—then you can amortize your SBA loan over 25 years, so it becomes—seemingly is really appealing—in that case, you're getting a 25-year—it's almost like you're mortgaging the cost of the business um, and it's accompanying real estate—but maybe a technique that—a different technique that people should look at is taking that re—real estate and doing a sale leaseback and having to bring a lot less to the table to buy the business—or—or enabling them to buy a bigger business, as in your case.

Absolutely. I think there's pros and cons to both approaches—owning the real estate and financing it over 25–30 years on the SBA world—sale leaseback. Uh, I think it really comes down to the arbitrage you can get between—hey, I'm buying this real estate for $5 million; I'm going to sell it for $11 million—that's a $6 million arbitrage. If you can get plenty of arbitrage between what you're buying and selling that real estate for, that can be very advantageous to you as a buyer. And—how would a searcher detect that there's an arbitrage opportunity? What are they looking for? I know you—you gave us—you told us once—tell us again maybe in—in different terms. Uh, how do you know if there's an arbitrage there?

Uh, you know, I work with a sale leaseback broker who I sent the deal to, and they gave me some quick numbers. They said, hey, we think we could sell this for X amount of dollars, and they exceeded that; they did a great job. Um, so that's—it's just knowing what you can buy the real estate for and and finding out what you can sell it for.

Yeah, I see. So the arbitrage is between—with the sale—owner of the business—their own real estate at—and what some sale leaseback buyer does, correct, Carlo?

One other thing I want to highlight that I—I gather from you somewhat in this conversation—also from our pre-call—and just having gotten to know you a little bit—is—is you're—it seems like—I mean, you're on here as an expert right now, but you're also um, comfortable not knowing everything about a deal or an industry and just figuring that out as you go. Um, so many people suffer from imposter syndrome, you know, if they—if they encounter a body of knowledge in a deal they're looking at that they don't know—it might just scare them off, or might just—they might just convince themselves they don't belong or shouldn't be doing this. You don't seem to have that particular self-doubt or—or something. Do you know what I mean?

Yeah, I think that's very true. I think maybe that's the nature of this uh, game, which is you're constantly going to be in positions where you don't know what's going on or you're—you're a little confused, and uh—uh, that's definitely the case for me, you know, during this process. I—I talk about sale leaseback; it was my first sale leaseback, and there's definitely instances where I wasn't crystal clear what was happening. I think having a good set of advisers around you and helping you through that process is critical. The other part is just being comfortable with the unknown, and uh, you know, um, admitting when you don't know what's going on, and uh—and I think that's just part of the game here. So uh—but you do have to project competence, and of course, you're not saying you're incompetent, but you have to project—you know, to all the stakeholders in a deal—you have to project that you—that you know you're going to make this happen—that you are the expert in the room.

Yes. So it's a fine balance; it's definitely a fine balance. Um, and maybe it's just like ignorance of what you don't know and just like, oh uh, you know, uh—you know, I have a lot of friends getting into the space now who come from very fancy backgrounds, and I think they hesitate because they feel like there's that 1% that they don't know, and they know much more than me, and they're much more sophisticated than me—yet somehow you're still able to do this. So I think that's the message to anybody out there—that you may not know 100% of this game, and I don't think anyone really knows 100% of this game—and they figure it out as they go, and—and you just lean forward, and hopefully it all works out.

Yeah, yeah. And—and I think—I think that's kind of a skill in and of itself, and so if you don't have that—you're the type of person that feels like you—you just got to be super smart about everything all the time—that—that could actually handicap you here, I think so. But again, if we're talking about—again, deals—low multiple deals—there's so much margin for error in there uh, and you structure these deals right, um, they should work themselves out, you know, um, that's my belief at least. And so what will your day-to-day look like now? You're the 100% owner of this business, Carlo. Uh, you don't know much about manufacturing; I assume you're not going to be an operator in this business—obviously that—that's been pretty clear from the start—you're an independent sponsor—if we have to put a label on you, it would be that—what will your involvement be?

I'm very operationally involved in the first—two to—two to three months. I live in Florida; this business is up in Connecticut, so I'm not there day-to-day, but there's a lot of transitional items in the first two or three months that I am intimately involved with. Ultimately, the owners—two of the owners—signed up to work for another five years. I'm hiring a couple of their individuals to supplement what they're doing. I mentioned there's a ton of excess inventory, so are hiring someone to first help organize that inventory and then ultimately sell it uh, at as high as possible price. Um, but my goal is after three months to be once or twice a week—hour-long check-ins—and then move on and do other transactions. In that sense, I am kind of like an independent sponsor, which—that's more their model. I won't be operating this business on a day-to-day; I'm not the CEO, uh, but people there know I'm the new owner. I've introduced myself to everybody. Um, so that's going to be the dynamic. And—and what about the employees hearing about—about a new owner who lives in Florida? What—what do you need to be—as careful in your day one speech and how you present as a searcher would who's going to be—everybody's kind of—is going to be super visible in the business—or no?

I think so. Yeah, I think there's a—there's a fine balance there between—yes, I'm the new owner, uh, you know, I also—uh, want to—for me, it's more about steadying the ship in some sense. Um, we're not changing our hiring and firing policies; we're not decreasing people's pay, but we're not—so increasing people's pay initially until we get a good sense of what's going on here. I did give the feeling that there will be positive changes going on, which there definitely will be positive changes. Um, but I also say back to my investment thesis and philosophy is not to supercharge organic growth. I'm actually not super interested in supercharging organic growth; I'm more interested in inorganic growth, which is buying other businesses. If I can buy a business for three and a half—three million—three and a half million of EBITDA at one and a half times, and I can buy four of those, now I got 14 million of EBITDA. I paid one and a half times for those businesses that probably trades for close to 10 times EBITDA. The amount of value—equity value—I've created there is so much more than if I spent my whole time operating this business and grew revenue and EBITDA by 10% growth per year. So that's the math. I think of my time is better spent—go finding the next business—if I can buy businesses at this—this, you know, value now. But—but to get that sort of multiple expansion, you need to be buying like businesses that you can make the argument are—if you buy four businesses and—and then sell them as a package—that they are all somehow the same business or very, very similar businesses.

Correct. Correct. Yeah, same industry. It's—it's definitely going to be a roll-up in that space.

Correct. And so that is—is that what you're doing? Is that the project now? 100%?

Yeah, I'm doing that. Uh, I've mentioned—closed four deals this year in other industries as well; we're doing rollups in those spaces as well. Uh, but again, rather than spending 60 hours a week operating this business day-to-day, I empower the guys there; I hire some to run it day-to-day; I'm going to spend my 60 hours a week—going to go find other businesses and buy those businesses to do a rollup and uh, ultimately sell—an exit.

Okay. Couple important things there. You're doing a rollup to ultimately sell—an exit. Is this something you communicated to the seller—to the owner?

Um, yeah, because that is very—that is very conventional private equity.

Yeah, I think uh, it was communicated that it's open uh, the plans here. Um, I—I should also say—I—I plan to do a rollup whether I exit in five years or 10 or 20 years. I don't think that's—that's said either. Um, there's a lot of solutions to provide yourself liquidity without actually selling the business; there's dividend recaps; there's a whole other world we could talk about. Um, but my first objective is buying other businesses and integrating them—whether I fully exit and sell or hold on to it, I would say that's not clear at this moment. The other point on this is that you—in your deal structure—you said there was no outside equity, which means you took no investors, so—so you—that's why you own 100% as opposed to 90% or 20%, and that also means that you don't have to give a return; you're not on the hook for a return to anybody. So obviously when you have investors, they need to know what your plan is to get them their money back and a nice return on top of that. So that's why often in search deals and—and certainly in independent sponsor deals—the whole pro forma looks at a typically organic and often also inorganic strategy to get to a certain growth number after five to eight—and then, you know, five years, seven years—and then sell—sell in that timeframe. You—you have the luxury—you have 100% optionality because you have 100% of the equity. So—so I'm—I'm actually interested that you do consider selling—you just said that maybe you don't—maybe you do—but that—that you even need to think that hard about selling and just not hold on to this forever since you have no investors to answer to. How do you think about that—longterm versus five years, eight years?

Yeah, massively advantageous obviously to not have outside investors. How do you get—how do you get away with not having outside investors? Either you put up the capital yourself or you find low multiple deals. How do you find low multiple deals? Proprietary deals; sale leaseback uh, has been my strategy and will continue to be my strategy, but I agree there's no one—I—that holding me accountable. Of course, I have a lender—asset-based lender—I have a landlord, but in terms of like equity—outside equity investors—there's no time horizon; there's no dividends; there's no returns. If I want to—you know, if the business has a million of cash on the balance sheet and I want to do a special dividend, you can do it, right, uh, as long as my lender is okay with it. Uh, so I agree there's a lot of ad—is very advantageous to not have outside equity investors. On top of it, in the independent sponsor world, the economics you would get is obviously vastly different, right? You get 20% carry; you get a small management fee; you're basically, in some sense, working for your equity investors in many ways. Uh, in this case, that's not—that's not the case.

Really important point there. I think we both now said it, but I'll just repeat it for a third time: when you raise money from investors, particularly with the independent sponsor model, which is kind of a classic—

2 and 20 model that you're 20% your work, you independent sponsor of buying the business, and your big pop is going to be the 20% carry you get above and beyond certain, often certain, performance thresholds. Um, so you effectively own 20% of the business, uh, and 80% is in your investors, and you really are working to get them their return. And in your case, you own 100% and don't have that; it's it's quite something, Carlo.

Um, say more about optionality. We we're not going to spend a whole ton of time on that, but you mentioned dividend recap. I think you just mentioned a special dividend of a million bucks is a hypothetical. What are uh ways of of getting value to you personally, to your personal balance sheet without selling a business? Just give us a quick primer or a quick list of options there.

In this specific case, I'll mention the excess inventory again. We use round numbers; there's, you know, probably $20 million of excess inventory here. We don't have to buy a new raw material or make a single extra screw here if we really organize what we have today, which is a task for years, two years maybe. We don't have to buy new raw material. Um, the world's not that perfect and elegant, but that's a nice thing. So everything I sell down or hire a sales guy to sell through the tens of millions of dollars of excess inventory, it goes to the ownership; I am the ownership, right? So that's nice.

Been more on like a high level, you know, like a general uh ways you can yeah. Basically, the dividend recap is another way of doing it. I have no debt on the business today; it's doing three and a half million of EBITDA. Just an example, I can put three turns of leverage, 10 million bucks, and do a one-time special dividend to the ownership. Again, if you own 100%, you get all that, and now there's $10 million of debt on the business, and you pay that down over time. There, you don't give up any equity, and you still have a liquidity event, right? Most people sell the business; they want a liquidity event; they want some cash. And the dividend recap is a nice kind of solution to that. It's a little tougher in today's market; you know, two years ago, three years ago was much more popular, um, but I'm sure it'll come back. And again, that's a great solution. So if you're looking for some cash, some liquidity, but you don't want to sell the business, dividend recap is really that solution.

And and say more about that, Carlo, just because to my mind it's very kind of real estate uh that's kind of how the real estate world operates. You buy a building, and then you build some equity into it, and then you recap it and um pull out some some money and put put it in your pocket, but still hold a building, and just you can do that for over and over and over again over years and hold real estate for years, and that's that's kind of that's done a lot less in this world of buying businesses, and I wonder why uh it's done less, but it's done; plenty of people do it, and uh again, great liquidity solution for you um if that's what you're what you're aiming for. So I mean you you could, to use your hypothetical, put $10 million, take a $10 million loan into the business that it can support easily, paying down, put that $10 million in your pocket, pay down that loan, and do it again in 10 years, and do it again, do it again, and be pulling out $10 million, never giving up any equity, never selling the business. Absolutely. And there's independent sponsors doing that, you know, multiple times; I know them; they're doing it, and it's a great tool. There's just business owners doing it, you know, they own the business, and they take dividend Recaps, and uh it's uh it's a yeah, can be advantageous.

And and what would a detractor say? There's got to be some reason why people, even private equity people, indeed especially private equity people, look to just sell a business outright as opposed to dividend recapping. What's the reason not to do it? And and by the way, you also mentioned that it's was popular a couple years ago and now it's less so; like what is this what is the trend there that you're alluding to?

Well, you know, a business like this you could probably sell, you could sell for more than three times EBITDA, you know. So you recap it; you're not getting nearly the value that you would get if you just sold it outright. Correct. That's one. And then from the lenders' perspective, they're like, well, listen, all my dollars isn't going to growth or to a new owner like to buy the business; it's actually going into the pocket of the existing owner, which then I guess incentives might be unaligned. Some private equity groups have done this in the past; they knew their company was about to go bankrupt, or there were some issues; they took a huge dividend recap; they took the money, and then the company failed. So there's been some bad case studies, but again, it's still happening; there's plenty of dividend Recaps happening in our in our world. I'd also say because interest rates are higher than they were three years ago, you can't borrow as much debt as you were able to three years ago because of the principal, the interest payments on the debt. Yeah, um, but anyway, div Recaps are still happening, and I don't think they're going away anytime soon.

Uh, and Carlos, say is there any more to say about how you think about growth? You've said that you're not leaning heavily, hard on this business to grow um organically, so just to kind of continue doing what it's doing, and then you will be out there growing it inorganically with more acquisitions, um, but so often we do think about growth. Why or maybe the question would be then why not have your cake and eat it too? Why not yes, you be the deal guy to bring all this potential multiple expansion to this enterprise, um, but in the meantime also be leaning on the business that you just bought to to see some organic growth? And and because certainly, you know, it's interesting in our conversation so far and in my pre-call with you, I haven't heard you mention any of the levers that that are so often pulled, and you know, the well, I guess selling the inventory would be a huge one, or that's a pretty big lever, or or excuse me, sitting on the inventory and not having to buy more raw materials for the next couple years, whatever it is, but in terms of operational levers, I haven't heard you mention that at all, and that's usually the topic of conversation here. How do you, why are you not so focused on that because you could have it all, in organic and inorganic? To be clear, there is plenty of organic ways to grow this business, for sure.

Absolutely. Okay, uh, anybody with half a brain walks in there is like, yeah, you know, there's so many ways to grow this business. My point is I don't want to spend my time, my limited 60 hours per week, uh, making those changes. I can identify them and then allocate the responsibility of making those changes to either existing staff, um, non-owners who knew about these changes but the existing ownership did not want to make those changes. And I'm also bringing in a couple high-energy individuals, new hires, to basically uh take ownership of those projects and do it. So I want organic growth; I also know, taking a step back, my time is better used going to go find another $3 million EBITDA business that I can loan 100% of than spending my time organically growing the business and fixing up the business.

One last thing before we leave, your deal terms thing, which is which is so powerful, in the concept of the sale leaseback. Maybe you don't know the answer to this, but um are small, is there sale leaseback? Is there is there kind of a floor on that market, or could even in kind of a smallish SBA deal where the real estate might only be worth a million bucks, is this a tool that SBA buyers can can take advantage of to your knowledge, or or maybe there's some like maybe SBA, you know, prohibits sale leaseback or something like that? Do do you happen to know?

Structurally, no; there's I don't think there's anything stopping them, um, but is it worth it? Probably not when you're talking about smaller deals, um, you know, in the facts, basically doubled the price of the real estate, bought it for five and sold it for 1 million bucks somewhere in that range. If it's a smaller deal, the real estate's worth 500,000; you sell for a million; you made $500,000, but there's a broker fee, there's due diligence cost, there's environmental study costs, so it's probably not worth it, the smaller you go. Okay, but remember, on an SBA deal, the equity that a that a searcher might need to buy the business is could only be 100, 200, $300,000. So if they can get a $500,000 arbitrage in a small piece of real estate, even with all those fees, it might still be the source of equity that they need, right? Correct. Am I under am I underestimating the amount of fees that could be involved in there, the broker fee, the etc.?

Yeah, I think so. Just some context, I think my deal was a little more complex for a number of reasons, but total deal fees between legal and underwriting, deposit, an environmental study, an appraisal on the inventory, appraisal on the machinery and equipment, about $450,000. I didn't put that up front, but I was technically on the hook for that if that deal fell apart. So you need a lot of confidence you can get this deal done, done, or if that deal fell apart, I'd be on the hook for basically half a million dollars in deal fees.

Well, and that's I'm thank you for that segue; that was something I wanted to get to. And again, this is all in the spirit of kind of learning what we can from you, Carlo, but also recognizing where your experience or what have you differs from the average searcher. To do this requires taking a lot of personal, huge amount of personal risk in fees. So maybe you just said it, but maybe say more cuz cuz cuz you you'd lost, you've this deal worked out, but you've worked on other deals where you were in the hole for a lot of deal fee uh costs, and then those deals didn't come to fruition, and so you're you never got that money back. So say more, please.

Yeah, I think that's the game you play, you know. If if the deal falls apart and you owe lawyers and accountants money, you should pay them that money, or you pay them money up front; it's going to suck, yeah, if the deal falls apart, but if you do nine deals and they all fall apart and the 10th deal works, it's going to work out, and uh it's worth it; it's well worth it. So hopefully your odds are better than that. One thing I'll add is a couple things: one, my you know, my uh service providers, they had confidence in me that I could get this done, so I paid a lot of them upfront, at the ends. If they don't have confidence in you, they may ask for more upfront, and there'll be more money out of your pocket. The second thing is, and maybe this is a a tip that anyone can use, anyone listening, is that in my letter of intents, I put a clause saying that if this deal dies, any any non-legal expense, so not the legal fees, they that uh diligence item they need a purchase from me, so quality of earns report, appraise on the equipment, appraise on the inventory, environmental study, phase one, phase two, all these things came out to around $200,000. The owner, I'm like, I have no use for this quality of earns report, but you do if you want to sell this business, so you are required in our letter of intents; it's they signed it that they will buy those items off me. So I think that's a great little trick people could put in there; maybe not every seller will agree to it, but that will limit your downside risk uh in the event of a broken deal.

Yeah, I mean that's amazing, but I think the central point is how the heck do you get the seller to agree to that? If you really want, I tell the seller, if you really want to sell this business, you're going to need these items, and if you want to start from scratch, go ahead, or it's already done; the QVE is already done, yeah, uh, and you could just buy it off me; you will have a use for this QOV as a seller if this deal falls apart; me as a buyer, if I'm gone, I have no use for this QOV. Yeah, so that's how I verbally explained it to them. And also just a point in the deal fees, it's not only do you have the risk tolerance or or can you, you know, deal with the psychological and financial damage of losing all that that money, but if you just don't have the money, so you had say you basically you're working off a nice little nest egg of savings you've built for yourself over the years, uh I mean yes and no. I mean, I have equity in other stuff, yeah, there's value there, but like cash dollars, I was down, you know, I was I was running thin; I was I had less than a thousand bucks cash in my pocket, the in my bank account the day, you know, the day this deal closed. So obviously in a very different place now, but yeah, I was running thin uh on deal costs. I had other stuff, buildings and stuff, I could have sold, um, but yeah, you're you're taking a risk, and it maybe in some sense a little crazy going going that levered uh personally, but uh that's what I knew I needed to do to get it done.

The other or maybe one of a handful of things that that that differentiate differentiates you, Carlo, is the well, two things you said: first, that you had vendors who trusted that you could get this done, so they fronted you their services; that and that comes from a track record of having worked with them at your in your W2 time, is that right?

Uh, no, since since leaving them, on again, I close two other transactions this year, um, and I wouldn't say they fronted me, but yeah, they I paid a small deposit upfront, and the balance of what I owe them was paid at closing. Okay, but again, I think if they don't believe this deal is going to close, I think they're going to question, should I keep working on this deal for this buyer? If I don't think this deal is going to close, I think they had full faith the whole time the deal was going to close. And how did they have that faith? Because it was it just faith in Carlo, because you're you were getting such a phenomenal deal; it's kind of like it seems almost too good to be true. So so yeah, uh yeah, yeah, in some sense that was, but the other time we're moving full steam ahead, and everyone was engaged, and I think everyone believed that throughout this process this deal was was happening, um, so they had that belief as well.

Another thing, Carlo, that you touched on earlier was that you're almost acting as a banker when you do proprietary uh outreach and and and go and kind of get the financials and package everything up; that does lean on your experience as as an investment banker, right? So so there is some specialized knowledge there. I mean, I to to what degree are you leaning on skills that maybe not everybody has?

I would say specialized. I think putting together a SIM is relatively easy, um, you talk about the different facets of the deal: the employees, the products, the customers, the vendors, the history, um, but that's correct; half of my job I view as an investment banker; I'm there's no materials, there's no SIM, there's no data room; I'm putting those together so I can go to my capital providers and raise money because you need some of these things, but I'd also make the comments, you know, when you're paying 1.5 times EBITDA for business, there's such a margin for error in there that I always focus on the consequential stuff. I didn't badger the owner with with certain things that I knew were not consequential because even if EBITDA was off by 75%, that means I'm paying six six times EBITDA for the business, which is still for business's size is pretty on market, I would say. So I focused on the consequential stuff. When I knew I was pestering the owner too much, I went and found it myself; I flew up to Connecticut; I did that many times to go get it myself, and uh, you know, I really just looked at myself and put myself in the position as like a partner to the seller; we're going to get this deal closed; we're doing this together; I'm going to get you $14 million cash at closing, and we're going to make this happen.

And uh, let me let me guide you through that process. When you felt that there was friction or that maybe he was getting frustrated, you either took work off his plate by doing it yourself and and just constantly reminded him of what the kind of the pot at the end of this rainbow, this particular pot at the end of this particular rainbow for him was that $14 million?

Absolutely. Yeah, to all that. One thing I'll add on top of that is just like speed, for me. I love responding to emails rapidly, sending out LOIs rapidly. If you if the ball is always in the court of the seller, he asked me a question; I respond in 10 seconds via email; he can't blame anybody but himself, right? If the deal process is going too slow, hey, this is going too slow; well, let's look back at the last 20 emails I sent; I responded to you within two minutes each time; we're waiting on you, not me, right? So um, especially in the beginning process, I send out an LOI rapidly; after the first call, I get to LOI pretty rapidly, moving that deal process along rapidly, especially in the beginning, I think is important because at many many deals the owner gets fatigued at some point; you're asking too many questions; this is taking too long. So if you can get the ball rolling as quickly as possible, I think that helps with that owner fatigue and minimizes the risk they're going to walk away because they're tired, and they're over, and they don't want to do the deal anymore.

Well, I can personally vouch for your responsiveness, Carlo. I I know I've said it to you via email uh in our correspondences, but it's amazing how lightning fast you are uh with responses. What else, Carlo? I think I think we we've hit everything that I wanted to hit, but uh more you want to say? I mean, this is so yeah, please.

Yeah, this was uh, you know, I'd say I guess to the listeners, this is a very exciting space. I get I have friends in crypto; I have friends in AI; friends kind of all over the place. I I would say this is the single best space, which is ETA lower middle market private equity, uh, for to make in, you know, risk-adjusted intergenerational wealth. You find a business, lower middle market, you buy, you operate it; you can make a ton of money doing it; it's a very exciting time to be in the space. There's capital providers coming in from all angles trying to provide more capital to the space, which is only going to get better for the buyer, someone who finds the business and operates that business. It's a little scary; it can be, um, but this is a very exciting space to be in, and it's an exciting time to be in this space, uh, so if you're thinking about making the jump, go for it. I push the proprietary deal route; I think this is a great case study and what types of deals can happen and are happening, um, but it's not for everybody, you know, and finding a deal via broker uh route is is not a bad option either, um, so yeah, I'm lucky and excited to be in this space, and uh I'm looking forward to doing this for for many more years to come.

As well, Carlo, when you say it's an exciting time to be in this space, we often talk about ETA and search and it being taught of the business business schools and the growth and podcasts like this that exist now and didn't before, but what you're doing is bigger businesses, and you're doing a slightly different model or a dramatically different model, actually, for independent sponsorship, um, and I have to believe what kind of what you're doing, um, you know, you came at this not for because you went to business school and learned took an ETA class, but you come at it from kind of a private equity perspective. I'm just wondering is is this new? Is this a new layer of private

Equity: the kind of deals of this size that are maybe too small for the lower Middle Market for private equity, too small for the big private equity names. What's different now? I guess yeah, I'd say first of all, like search funds in the ETA space is nothing new in private equity. It's all private equity buying existing profitable businesses using a mix of debt and equity. So there's nothing new about search funds or ETAs; this has been around for a long time. But the natural evolution of private equity has been that more, you know, you start with the big deals, capital's coming to the market chasing these returns, and now people are naturally going lower and lower in the market looking for yield, looking for lower multiple transactions. So this was almost inevitable that people would go to the lower Middle Market if you really know the history of private equity.

Um, but there's a lot of different flavors out there. I think it's true. I feel like I've done something slightly different, a slightly different flavor, but in the end, it's all leverage buyout private equity space. Uh, and just to be clear, I'm also looking at small deals. I look at deals 600k of EBITDA and less, a million of EBITDA. Yeah, all low multiple; I'm not paying more than two times EBITDA for any of these things. But um, I am, yeah, there's there's several deals I'm working on, and I'm ramping up for a big 2025. Uh, I'm trying to do 10 deals next year, well, so that's my goal um, in this space. But to be clear, these aren't all large transactions; these are all, I call it, you know, 500,000 of EBITDA to 10 of EBITDA. That's a very wide range. Carlo, often we talk on this podcast about, you know, 500 to 1.25, a much narrower band, uh, and and you know, it's different markets too. I mean, once you get into 10 million of EBITDA, you're you're, I mean, you've got all kinds of buyers for business like that.

Correct. Yeah, and again, if you could leverage proprietary deal routes and the sale lease back, I think uh, you can get a good deal on it. You know, for me, I want to always buy something below what I think I could sell that thing for because I know the value I'm creating is really in that multiple arbitrage. If I'm buying it for two times EBITDA and I can sell for six times EBITDA, and there's ways to make that happen, then that's really where you make most your money, uh, in my opinion. Well, Carlo, I think this episode is kind of an "art of the deal" uh, type episode because a lot of this, a lot of your insights in your in your strategy here, I feel like is um, is not about the quantitative stuff, um, it's about the, I ultimately always comes down to numbers, but it's about um, your kind of creativity. Maybe more qualitative, and to that point, can you share, um, I should have asked this at the time, can you share what your opener is? What this, these emails that you send, the proprietary outreach that you do? Give us a taste of what actually gets a response from owners who are probably getting hit up by a lot of private equity and searchers. I mean, we, that's another, you know, I said this at the top, that's one of the reasons I don't like proprietary because they're getting bombarded, as it is, owners are getting bombarded as it is. So how do you break through that initial, initial outreach?

Yeah, I, there's a couple prong approaches. Number one, yes, I do cold emails. I have a group overseas sending tens of thousands of emails, um, and it's pretty bland with their message: "Hey, we're looking for three million in revenue; you want to sell?" And I also say, "I'm not a private equity group; I'm a um, uh, I'm an entrepreneur; I own businesses; I want to buy more; would love to talk shop with you." So that's one approach. The other approach, which I found very fruitful, has been the existing businesses you're in. I know many of your guests mentioned this all the time. Once you're in the industry, it's easier to buy the next one. I say, "Hey, listen, I'm an existing owner in this space; I'd love to talk shop with you; I'm relatively new," uh, and I have found a lot of our service providers in our these spaces, the people selling me stuff, vendors selling me stuff, I incentivize them to go find other businesses that are looking to sell because they know all the other owners; they know if they're looking to retire or open to selling, and I incentivize them. So uh, that's been my strategy, and via those two routes, I feel like I have an un, very robust pipeline of proprietary deals uh, at the moment, and hopefully that continues, um, but it's hard. End of the day, it's hard, you know, uh, this isn't a clean, squeaky clean deal that's coming through to you; you have to work these relationships, uh, convince them to sell, and it's it's definitely hard work, but hopefully worth it, as you can see. And and and with this business with Trim and Stillwater, these businesses, they, it was just cold outreach because you weren't already in the industry. So it must have just been a cold email that you kind of got a bit of a toehold and started having a conversation.

Yeah. 72 hours after I quit my job, I cold emailed them that same week. I was up there in Connecticut, and within a month was under LOI. So this happened pretty rapidly after leaving my my W2 job. Yeah, it was a cold email; it was cold, cold email. And then on the incentivizing owners, once you're once you've acquired their business, incentivizing owners to introduce you to other owners that might want to sell, AKA a finder's fee. So if they introduce you to somebody, you buy that business, they get a percentage of the sale price. Correct, other owners in the industry or other suppliers. So someone selling us the wire, the wire, for example, they they're also selling wire to all my other competitors. Uh, during this interview, I had three people call me, and I bet you they all had deals for me because I, they only call me if they have a deal. So you incentivize enough people, they'll be calling you and bringing you deals, uh, plus with that warm relationship, by the way, right? It's a warm introduction. Fascinating stuff, Carlo. Uh, lots to learn from here. Really exciting deal and exciting path. I love your last point that that this is this is an exciting time to be here, um, even with friends in tech and all of the the headline grabbers like whatever AI and crypto, um, you feel really excited about this space, uh, and and how it is kind of a moment in time for private equity that's been coming down, coming down, coming down, and finally gotten down to the point where you can kind of be a lone private equity guy, even though you don't talk, talk about yourself as that and go out and do really, really fun deals, uh, with tons of value in them. How can people reach out, Carlo?

Well, uh, um, I, you can put my email in the the description of the episode, LinkedIn; I'm relatively active on LinkedIn, um, yeah, and look forward to uh, engaging, continuing to engage with the community here. Super, thank you so much for doing this, Carlos Anelli. Congratulations on uh, you know, making a move out of corporate and doing so with with a lot of with a lot of results in less than a year. Really exciting. So look forward to following you for going forward, Car. Thank you. Well, thanks for doing this, and uh, yeah, thank you very much. 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.