Transcription
[Music]
Hello and welcome to this edition of the Entrepreneurship Direct Position podcast, brought to you by the Polsky Center for Entrepreneurship at the University of Chicago Booth School of Business. I'm Brian O'Connor, adjunct professor of entrepreneurship at Chicago Booth, and joining me today, I have the pleasure of speaking with Austin Hall, my good friend and director of Brick Street Partners.
Thank you for joining us, Austin.
Thanks for having me, Brian.
Great! Maybe if you wouldn't mind starting us off with a little bit of your background and how you found your way into the model that you're pursuing right now, which is a self-funded search. We'd love to hear about what sort of pushed you in this direction.
Sure thing. The genesis of this all for me, Brian, was I grew up in a family-owned company in Indianapolis. I grew up a Hoosier my whole life, went to school at Indiana, and I grew up in a business that my grandfather founded in the 1970s. My dad worked there throughout his career, so these are two guys that I just think the world of. They're mentors and some of my best friends. I just grew up around entrepreneurs and operators and kind of had that in my blood in a way.
When I was a high school-age kid, college-age kid, I knew that I wanted to operate a company; I just didn't really know how to get there. So, I spent a couple of years working at Goldman Sachs in New York in the finance world, doing investment banking work, advising on M&A transactions, mostly with industrial-oriented companies, manufacturing, and distribution businesses.
Then I joined Madison Dearborn here in Chicago, doing private equity investing, probably half my time with industrial businesses and half my time with other industries. I think that as I worked on these deals over the course of my four years and got a lot of reps, I looked across the table at the guys who were running these companies, and I really wanted to be on the other side of the table. That's the way I grew up.
So, I started to learn about the search fund model in 2013 and decided this was what I really wanted to pursue. I enrolled at Harvard Business School in 2014 with the express purpose of moving back to Chicago to buy a small company.
Broadly speaking, what's really interesting about this for me is I lived it for 18 years with my dad and my grandfather and sort of know what small business is all about. I think, or at least I know something about it, and I really like it.
Yeah, the notion of sitting across the table from operators and wanting to be in that seat is a recurring theme in our discussions with people that follow this path.
Yeah, right. What is it about your background, maybe at Goldman or Madison, what are the skills and some of the things that you worked on that you have found to be most relevant and applicable to what you're doing right now at Brick Street?
Sure thing. I think that learning how a deal gets done from soup to nuts—worrying about the sourcing side of things, the due diligence side, financing, structuring, documentation—all of those things are really important to the search process, at least they have been in my experience so far.
Having seen that for four years has been really critical to what will hopefully be some success in the search process. I think seeing a lot of deals early in my career helps me understand, in some ways, what makes a good business, what makes a bad business, how do you evaluate good management teams, and how do you evaluate industries.
So, I think just getting a lot of reps early on in an investment banking and private equity context informs how I think about due diligence and structuring those topics today.
Yeah, well, those are good environments to get those reps for sure. Coming out of HBS, you probably had quite a few options as it relates to how you might go about structuring and pursuing the ultimate goal of running, acquiring, and running a small business.
What maybe give us a little bit of background on your decision and the path that you chose, and if it's, you know, why it was the right choice for you at that time and if it has proven out to be the right choice for you as you conduct your search.
I remember sitting down the street at Madison Dearborn when I first learned about search funds. I was talking to a friend of mine who was enrolled at HBS, and he started talking to me about this concept of young MBAs buying small businesses. I thought it was kind of crazy; I'd never heard of it before. But I thought more and more about it, and I thought, man, this is really something that is of interest to me.
So, I started to explore it. I talked to a lot of traditionally funded searchers during my second year at Madison Dearborn when I was applying to business school. I wrote about it in my application essays that I wanted to come back to Chicago and buy a small business.
I think that I went in with a pretty clear direction that I wanted to pursue the search fund path. The model that I was going to pursue from a funding perspective wasn't clear to me, but I went in with my blinders on and was really focused on doing this alone.
You're six months into your search. How's it going? What challenges have you encountered that you didn't envision? And looking back on your decision to pursue this path six months ago, do you think you made the right decision?
Yeah, I think to answer your last question, I've never been as professionally engaged and interested as I am now. Part of it is I'm working for myself, so I feel like there's a lot of pressure or responsibility on my back, but I like it. I like it, and I'm excited about going to work every day and getting up in the morning and doing what we're doing.
Six months in, I think that my goal has been every day to do something better—incremental small changes add up to a lot of big changes. So, I think that what's been a little challenging about my search is that I'm geographically focused, which I think we'll talk about in a bit here.
But I'm focused on businesses that are sort of 90 miles or less from Chicago, and in that sense, I only have a small pool, in some sense, relative to most searchers of businesses to evaluate. So, I think that's one challenge of what my approach has been.
But in general, I think that I've been pleasantly surprised by the response we've gotten from business owners on our specific approach and my specific story. I think we're doing the right things, and as long as we keep sticking to what we're doing, I think we'll have success.
So, you touched on this briefly, Austin, when you started talking about your geographic focus. How is what you're doing in a self-funded environment different? What are the key elements that might be different from some of your peers and counterparts that might have pursued a more traditional search fund route toward acquiring and running a small business?
Right, well, I'll start by saying that there are different approaches for different people, and my approach works for me, but it very well might not work for other people.
I think, stepping back, the reason I decided to go down the self-funded path—I went into HBS thinking that I would raise a traditional search fund for sure. Then I think at HBS, there is somewhat of a bias towards self-funded searches. You just see that in the number of self-funded searchers that are coming out of that program.
So, I think in part I was influenced by the people who I was surrounded by. Because I'm focused locally, my burn rate is very low. I don't spend a whole lot of money, and in that sense, I didn't need to go out and raise, call it half a million dollars for a search process.
You know, I spend something like $1,200 or $1,500 a month between travel, office, and other technology and other things. So, I think that what's a little bit different about my model versus a traditional search fund—it's not my model; it's the self-funded model—but I tend to look at smaller businesses, and maybe traditional search funds might look at businesses that do $750,000 of EBITDA up to $2 million.
But that's really the size range that I spend most of my time in. I think I look at different business models, and maybe a traditional search fund might. The business that I buy doesn't necessarily have to have contractual recurring revenue; it doesn't have to be growing at 5, 10, or 15 percent a year.
I'm more comfortable with businesses that are sort of more old economy, manufacturing, industrial in some cases. So, I think that from a size perspective and from an industry-focused perspective, maybe what I'm doing could be different from a traditionally funded search.
Sure, that's great. Now, let's drill down into that a little bit. What are some of the nice-to-haves versus the need-to-haves as you think about your mandate, your sourcing strategy in Brick Street?
Sure. I tell people that we qualify the owner of a business as much as we qualify the business itself. So, first things first, we want to make sure the person is selling the business for the right reason and that they're actually interested in the transaction, which is kind of difficult to assess early on.
I would say from a business perspective, I like to see stability in revenue, and ideally, I like to see revenue growth, but stability is perfect. I'm perfectly comfortable with that. Declining on the top line makes it a little bit more difficult for me.
I think, in particular from a capital-raising perspective, I often look at gross margins of a business as much as I do at EBITDA margins. So, if a business is underperforming on profitability and there are good reasons for that, and there's sort of a path towards improved profitability, I can get comfortable with a business like that.
Where my impression has been that traditional search funds like to see pretty robust margins in a business. I think that part of why my model or my focus might be a little bit different is that the universe of businesses that I have access to is just so much smaller than a national search, so I have to be, I think, a bit more flexible from a criteria perspective.
Yeah, have you found that is sort of putting you in a position to be maybe more competitive or more open to finding opportunities that maybe aren't as highly competitive or sought-after as those that sort of fall right in the middle of the search fund or traditional low middle market private equity fairway?
Mm-hmm, I think so. I've tended to stay away from some of the industries that traditional search funds like to spend time in. I haven't looked at a single software business, and in part because I'm not sure that I'll be able to be competitive when it comes to price in those situations, and there's a lot of folks looking at businesses like that.
So, I've tried to find—it's difficult—but find industries that are a little bit off the beaten path, maybe not as targeted by independent sponsors, private equity, or search funds. I think, truth be told, in my first six months, I haven't come across search funds in competitive processes because most of the stuff I'm looking at falls outside of traditionally what search funds might target.
It sounds like a little bit smaller from an EBITDA standpoint. A good example would be we spend a lot of time working at manufacturing-oriented businesses. That's where my experience has been, both from our family company and from my experience at Goldman and Madison Dearborn.
So, I get a lot more comfortable with a traditional manufacturing business that maybe has some capital intensity to it versus other folks.
Yeah, great. Being six months in, it's difficult to measure success and progress. What are the critical metrics that you think about when you wake up every morning, go into the office, manage the team that you have? And I'd like to talk a little bit about the team and how you're working with folks to leverage your time.
Yeah, I spend a bunch of time thinking about the CRM that we were going to use. I explored Zoho, I explored Salesforce IQ, which is what I use today, and ultimately just found that Salesforce IQ is a really useful tool from a funnel management perspective. It helped keep us organized, so we do use that.
We use another tool for email called Yesware that's been really effective. These are not expensive items; we spend $25 a month on each. So, from a technology perspective, that's really all we use, but both have been very helpful.
Yeah, can you tell us a little bit more about your team?
Well, what I said before is still true: these guys have been absolutely invaluable to my success so far. I have three interns today; I've had five over the course of my six months, mostly from a local university here. One individual is a student, and the other two are graduates of that university, all sort of finance-focused individuals.
They have been involved in a variety of different capacities—reviewing SIMs, teasers, and being that first level review of brokered and banked deals in terms of lead generation and industry research. They've been extremely helpful; they probably spend 60 to 70 percent of their time on that front.
And I think probably most importantly, being a sounding board for me—I'm doing this on a solo basis; I don't have a partner. So, being able to not have to think about these topics in a vacuum and bounce ideas off these guys has been extremely effective.
You know, I think what I've done has been a little bit unique, and I learned this from some of my peers, but I do a lot to try to keep these guys engaged. They want to get into investment banking, so we do HBS case studies, we do mock interviews, resume reviews, and we do lunch and learns with people in finance around the city.
So, I've tried to introduce a professional career development aspect to what we do, and I think that that's been a really helpful way to retain and keep folks interested.
Sure, you've touched on interns, you've touched on the way that you think about your tools and resources that you're using, and managing the budget around those. The fact that you're conducting a relatively confined geographic search probably helps cut down on travel budget and any other things that you're doing.
I mean, obviously, all searchers need to be mindful and cognizant of their spend. That’s a scarce resource in conducting a search, and it might be particularly true in your case given the fact that you're pursuing it self-funded.
Are there other things that you're thinking about as it relates to managing your budget and keeping the cost level down during your search?
Yeah, I think it doesn't take a whole lot of capital to search for a business to buy. I mean, you've got to keep the lights on at home, and you've got to keep the lights on at work. Our run rate spend is very low; we spend about $750 on an office downtown in the loop, and that's the biggest piece of our budget.
We have other things here and there, but in general, we don't spend a whole lot of money. I think that, you know, in the context of a geographic search, that can work. Obviously, if you're flying around the country looking at businesses, it's more difficult to fund a self-funded search, especially coming out of business school.
So, I think from a budget management perspective, you know, that's something we track often every month, and I think we've tried to keep the expenses reasonable.
Yeah, makes sense. So many activities that you're focused on on a day-to-day basis—sourcing, advancing opportunities in the pipeline. My guess is that you're spending time corresponding with prospective investors in the ultimate acquisition that you source.
How do you think about time allocation on a day-to-day, week-to-week, month-to-month basis?
Mm-hmm, for me, that's right. I know you have help from your interns, but for you on a day-to-day basis, how do you think about allocation of time?
Yeah, one of my big goals for 2017 was to spend almost the same amount of time on all of those activities, regardless of where I am in the search process. Obviously, things are going to ebb and flow, but on the whole, my thought has been I really need to keep this sourcing engine up and running, even if I'm doing due diligence on a business, even if I'm under LOI.
Because I think from the searchers that I've spoken with, if you get too focused on one specific deal and your sourcing engine goes away, that can be really problematic for search.
In terms of percentage of time that I spend, I probably spend 60 to 70 percent of my time on sourcing, whether that be through proprietary outreach or brokered or bank deals. Truly, I do a lot of networking and connecting with people in the Chicago community who are in the flow of information from a deal perspective, which is, I think, a little bit unique to my search because I'm trying to get to know lawyers, accountants, and intermediaries that are local.
I probably spend the other 30 to 40 percent of my time moving the ball forward on transactions and sort of helping my interns do the work that they're doing, both of which require a fair amount of my time.
One thing I think that's important to be mindful of is I have three interns today. I've heard of folks who have zero interns; I've compared to folks who have 12 interns, which I think would be challenging to do, but I think some people have pulled it off. The more people you bring on to help you, the more time it requires you to invest in those folks.
Sure, yeah. Now, one of the activities you didn't touch on there is my guess is that you're trying to foster relationships with folks that could provide equity financing for the acquisition, right? Once you ultimately source it and structure it, how do you think about those relationships?
How do you think about maybe the part of the capital structure that might be on the debt side? How do you think about financing your deal when it comes time to ultimately execute?
I'll start on the debt side. A lot of self-funded searchers have utilized the SBA 7(a) loan program for acquisition financing for small businesses up to $5 million, and I've thought a lot about using that program. Of course, it comes with a big kicker, which is a personal guarantee on your personal assets, which people have to get comfortable with if you're going to go down that path.
So, I've thought a lot about the SBA program, and I've tried to cultivate relationships with lenders, mostly in the Chicago area, local banks who provide small acquisition financing.
On the equity side, there's kind of two groups. I have a group of four advisers who have been extremely helpful. I talk with each of them once a month, kind of like a traditional search fund has investors that they engage with on a regular basis. I have four folks who I do that with, and my hope is that they will be part of the investor group as well.
Then outside of that, I have a number of different individuals who I sort of just keep updated on a regular basis around what I'm doing. I send them my investor updates from time to time, I'll send them deals and industries that they have familiarity with, and just bounce ideas off them to keep them engaged and interested and curious about what I'm doing.
So, you know, time will tell how many people are part of that equity group depending on the size of the business and their appetite and interest for that business in particular.
But yeah, I try to spend a lot of time keeping people informed on what I'm up to.
Yeah, six months, 12 months, 18 months, 24 months—you have a little bit of flexibility, I suppose, given the fact that you're self-funded. How do you think about your goals and the milestones and associated timing for you in conducting your search?
If you ask my wife that question, she would probably have a different answer. I know we've kind of said 24 months is the right timeframe for us. Obviously, we'd like to get something done sooner rather than later, but I think 24 months is appropriate.
It could take a little longer given the geographic constraint that I put on myself. I would say that one of my big goals for Q2 is to have a business under LOI by June, and you know, if I haven't accomplished that, I'll have to think long and hard, eight months in, about what I've done right and what I've done wrong.
I would expect that in 24 months, if we continue to tweak things and improve our process, I think that in 24 months, we'll know whether or not we've been successful.
Yeah, that's great. What sort of parting words of wisdom would you have for maybe a recent MBA graduate, somebody that's starting to explore this path, or maybe somebody that's in industry that really wants to own and run a small business? What words of wisdom would you have?
You know, being into the search six months, I might be willing to share.
I have very little in the way of wisdom, just opinion. No, but my opinion is that the approach I took was I tried to tailor my search to what I wanted to accomplish in life, both professionally and personally.
For instance, we wanted to be in Chicago; that was really important to us to be back in the Midwest. So, I tailored a search around that constraint specifically. I liked companies that make or ship a product that needed at the end of the day, so I've spent a lot of time with manufacturing and distribution businesses for that reason.
So, I guess my advice would be there's plenty of different models. You have the traditional search fund model, you have the self-funded model, you have folks like NextGen and the SFA doing really innovative new things with search funds.
I think there's different models for different people. Be thoughtful about whether the model you're pursuing is consistent with your professional and personal life. That would be not advice, but an opinion.
Just one follow-up question, Austin, on that. You mentioned playing to your strengths when sourcing. I'm curious to hear how much your story around, you know, as you describe them, sort of old-world accounting-type businesses and your level of interest—your clear passion for them—how does that resonate with a seller of a business?
If you found that playing to those strengths and those interests has been critical in engaging with a seller about the prospective partnership with Austin Hall and Brick Street?
Well, I mean, I talk a lot about when I meet with business owners my history and growing up in a family company. Really, because I have a genuine interest in this path, because I grew up and was influenced by two great men who ran a company quite successfully.
So, I do talk a lot about that, and you know, I often get the question, "Well, you're a 29-year-old guy who's never run anything in his life besides his fraternity. What makes you think that you can pull this off?"
The truth is that I spent 18 years growing up in mills, working on delivery trucks, and driving forklifts. I mean, not when I was a little kid, but certainly when I was growing up, that was part of my upbringing.
So, I grew up in small business; I grew up in family business. I'm pretty darn sure this is what I want to do for my career. So, telling business owners that story versus trying to explain why I'm a 29-year-old guy who's capable of running a company—that's kind of a harder pitch.
So, I don't know if I'm playing to my strengths in that sense, but I just try to give people a sense that my interest is genuine. I view this as a long-term career path and running and owning companies, whether it be one or several.
So, I do like talking about that topic.
Yet, often time is your most scarce resource.
So, thank you so much for joining us and sharing your insights, Austin Hall, Brick Street Partners.
Thank you for joining us for this edition of the Entrepreneurship Direct Position podcast, brought to you by the Polsky Center at Chicago Booth.
[Music]