Ep 498 Inside the Mind of an Acquirer: Understanding the Buyer Who Pays 100% at Close
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Hi there, and welcome back to another edition of Built to Sell Radio, the podcast designed to help you punch above your weight in a negotiation to sell your business. I'm the executive producer, Colin Morgan, and this week we're featuring another episode of our Inside the Mind of an Acquire series, where we explore how different types of buyers think. And today's guest is Dan Mitels, a private equity investor who's acquired more than 100 companies through his firm, Salt Creek.

Now, unlike traditional private equity firms that rely on blind pools of capital and expect sellers to stick around, Dan typically pays 100% of the purchase price at close and lets the owner walk. He also shares how Salt Creek differs from ETA buyers, the kind of

the kind trained by Professor Rick Ruback and Royce Yudkoff at Harvard Business School, who are often searching for their first acquisition. If you found value in our conversation with Adam Coffey, Jordan Dubin, Professor Ruback, and Yudkoff, you'll love this one. We'll include links to all three of those episodes in the show notes over at BuiltToSell.com. And without further ado, here is Dan Mitels. Enjoy. Dan Mitels

Dan Micellas, welcome to Built to Sell Radio. Thank you so much for having me, John. Excited to be here. Yeah, it's cool. I'm really curious to learn more about the way you acquire businesses because I think it's a bit of a different model than the classic kind of ETA model.

buyer. And we'll talk about that. And I want to get into sort of how you're unique as a firm. Maybe start off. I'll tell you what I know about private equity groups. And then you can tell me, yeah, what parts of that are similar to Salt Creek and then maybe what parts make you unique. So we've had a lot of private equity acquirers on the show. And the typical model is they're buying businesses

holding them for a period of say five, seven, nine years, whatever, and then hoping to sell them on at a greater valuation. They've got investors who have sort of put money into a group or fund so that the game is for them to try to get a return for those investors by buying as low as they can and selling as high as they can. Where have I got Salt Creek right and how are you guys different?

Yeah, the basics of that is largely runs true. We are in the business of buying other businesses and running them and ideally increasing and improving their value. So yeah, we typically buy a company, it might be for $10 million.

and we'll typically hold that for five to seven year target. In many cases, it's much longer than that. In some cases, we're holding businesses for 15 plus years, and then we'll ultimately look to sell that business or monetize the investment. Could be seven years in, could be 15 years in to provide a return for ourselves and our investors. And who are your investors? Yeah. Our investors are, the biggest investors really are ourselves.

We all kind of started off as middle class guys, but we've been doing this for a long time. And we've bought, including add-ons, 100 companies now. We've bought 100 companies. We've exited 20 of them. But yeah, the biggest investors are ourselves. And then we've got kind of friends and family. Our friends and family really are ultra high net worth investors.

investors or family offices to dumb that down, people that are worth 20 to $250 million. Okay. So if you have a pie, the Salt Creek pie,

you know, money pot. And it sounds like the majority of that pot are the founders who've kicked in their own personal cash. What proportion would be outside money, meaning friends and family and other sort of groups? Proportionally sized pot. It depends on the deal, but on average, let's say it's 75% or two thirds outside capital.

And the vast majority of that is committed people that are that are said, hey, we want to invest with us 500K or a million per year with us. And we're able to draw that down. And so meanwhile, and meanwhile, also, you know, for any particular deal, you know, we have the capital on hand sitting in the bank. So, you know, we close a deal and then we'll syndicate some equity, you know, we'll syndicate equity as needed through the process.

Okay, so what does that mean, syndicate the equity? So you'll close the deal, so you'll buy a company. Let's just use, for the rest of our conversation today, let's use a hypothetical business generating $10 million of revenue and $1 million of EBITDA. I know that's probably on the low end of what you look at, but let's just say that's sort of the kind of company we're talking about. If you were to buy that business, you mentioned syndicating part of it. Maybe explain what you mean by that. Hey, it's John. Look, if you're building to sell...

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It's available exclusively through a Value Builder advisor. So talk to your advisor. If you don't have one yet, you can go to valuebuilder.com slash score. Let us know what industry you're in and we will connect you with an advisor who specializes in companies like yours. Just go to valuebuilder.com slash score.

Well, for a deal of that size, we would probably just buy it ourselves. Our average company might be more like three or four of EBITDA, but we'll buy companies with one to ten of EBITDA. But hypothetically, if we were to syndicate it, say that deal required a million and a half of EBITDA and we got bank debt for the rest, me and my partners might put in half of the money and then...

five or 10 other investors put in the rest. So it's kind of a deal by deal structure. Like it's not, you know, you're not investing in your fund, so to speak, or investors, friends and family aren't investing in your fund. They're investing or choosing to or not to invest on a deal by deal basis. Correct. Correct. Although most of our investors invest across everything we do. They'll invest in

They want to invest in everything we do for the future. Okay. But to be clear, you give them the option and they say, yeah, I'm in or no, I'm not, et cetera. And then, so you make your money as partners, the people that have kicked in capital when you go to sell, obviously that's one. Do you also get a management fee to kind of manage the fund? We get a small management fee and then, and then, yeah, when we exit, we make money and then often we'll start doing distributions, um,

and take out capital three or four or six years in. Got it. So if you buy that $10 million business with $1 million EBITDA and you grow it to $3 million of EBITDA and they don't have an immediate need for the profits, you may collect to draw a dividend and then obviously that would get distributed amongst the shareholders, including yourselves, but also your limited partners as well. Correct.

Okay. That's super helpful. And so in what way would that, in your experience, be similar or different than a traditional private equity group that our listeners probably have heard lots from in the last few months? What would make your firm different or similar to a traditional private equity? Yeah. Well, so we don't operate with a fund. We have committed capital. So that gives us a lot of flexibility. A lot of funds have a 10-year life.

where they're looking to investor capital in the first three years, four years, and then run the businesses and then exit. So the average hold time of a typical fund private equity, I think it probably averages more like four years. And they're often realizing their winners early because they're really focusing on raising that next fund. In our case,

We have no fund. We're just looking at, we're entrepreneurs that happen to own a lot of businesses. And so we're making the decisions based on what to do with a particular company with a strong bias and preference to keep the company for the long term. All things equal, we'd rather own the company for 10 or 15 years, even 20 years.

Whereas a fund needs to get that money back to their investors and keep going. So we're similar in that we both buy companies. We're different in that we have a bias towards holding companies for the very long term. Another big differentiator for us is that it relates to the long hold time and kind of what we do and what we're good at.

is that for most of our deals, 80% of our deals, our sellers sell the business and hand us the keys. We buy the business, give them a

a cashier's check or slide a big briefcase of cash to them and they're able to walk away from the business within say a month or two. Most private equity firms meet an entrepreneur or seller and want to figure out a way to keep that seller engaged in running that business. Often their minimum is two or three years. They're really thinking, hey, let's work with this entrepreneur for five or six years until their exit. And often there's a lot of hooks with an employment agreement. In contrast,

Our sellers are almost always just selling the business, giving us the keys and helping us with an orderly short-term transition and, you know, allows the seller to sell and retire. Now you got every one of my listeners leaning in. Now they're like, okay, this guy, my tells guy, sounds like my kind of guy because they all hate earnouts. They all hate the idea of, I mean, not all, I'm embellishing, but most sellers,

don't want to roll equity or if they do, they want to roll a small slice of equity because look, if they wanted to have a boss, they would have had a boss 30 years ago. Most of them are founder types. They're strong-willed. They're independent-minded. They don't want to answer to some board and be some minority investor for the next 10 years. So,

You just got everybody's attention with the idea that you're going to hand over the keys. Now, what I assume though, the quid pro quo of that is that you're buying at a discount. If you're wanting these guys and gals to just hand over the keys, they're getting kind of bargain basement price for the business, no? No.

Well, we're certainly paying a market price for businesses. We have to. Most of our businesses, the seller is picking us over some other buyer. So we can never buy for less. In our mind, we want to pay a fair price, pay ideally 1% or 2% more than the next buyer. But

But our valuations are what they are. We're typically buying companies for, say, three to six times EBITDA. And if a seller is in a growth market and really executing, and there is a path to tripling that business over a period of time, they may well be better off selling 70% of the business and keeping 30% and tripling that business.

Most of our sellers have kind of reached a mature level of their business. It's growing. It's flatter. It's growing 5% or 10% a year. Most of our sellers are of retirement age. They're 60s, 70s, even 80s. We're doing a deal right now with a gentleman who's 90s. So most of our sellers are looking to retire and step away. They don't want to spend another three or four years taking the business to the next level.

Excellent. So we're at a mature stage. And again, I think a lot of our listeners would find themselves in that spot, right? They've got a great business carved out a little niche and a little quiet part of the kind of economy. But they're starting to feel like getting to the next tranche of growth feels really tough. I got to put a lot of capital at risk. And, you know, I'm at an age where that doesn't necessarily work.

necessarily appeal to me. So that makes a ton of sense. And at the same time, I'd imagine you're competing with a lot of these ETA buyers. So we had the two Harvard guys, as you know, on the show who are really pioneering this entrepreneurship through acquisition model where kids are going through getting their MBA and focusing on ETA. Right.

And as they graduate, they are trying to buy a business, oftentimes very similar to what you described, the kind of mature business, been around a while for a relatively modest multiple, right?

You know, wants to preserve their legacy. It's not the next Tesla, the next Google. It's, you know, it's a it's a it's a good little niche business. How do you compete with an ETA buyer? First of all, do you compete with the ETA community? And if so, how do you kind of compete? Yeah, we we we consider ourselves broadly in the genre of ETA. We, you know, we certainly distinguish ourselves.

pretty distinctly from the traditional, you know, search fund community. You know, in my mind, after doing this for 25 years, you know, I was buying my first company, working to buy my first company going back 25 years ago, and I was kind of a search funder then. You know, I didn't have the gray hair and the bald head.

The Search Fund community, there's tremendous talent and resources there, but it largely does start as an academic exercise. The overwhelming genesis of that comes out of the very distinct business schools. And so we're similar in that most often when we buy a business, we'll install a new manager.

We're partnered with a manager, but our manager, for example, is already 52 years old. Our manager has already been a CEO for seven, if not 10 years. Okay. So help me understand that. You've got a manager almost like a bench, like a baseball team would have a bench? At any given time, we've got 30 managers that have partnered with our firm. They're spending two years with us, up to two years with us, looking to find a business to buy. Okay.

And there might be a 53-year-old person who had their top MBA 25 years ago, and they went into corporate America and did very well. And then they went to run a small division, and they grew that division. And they're already worth $7 million, $8 million. And they're going to move to some business, and they're going to write the first check, a $500K check on average today.

to buy that business, say, for $10 million or $15 million. So, you know, it's very similar to the search model, except the search model, there's a, you know, there's a, on average, there's a 29-year-old who's got student loans and has never really run a business and, you know, probably is less focused on, might not be as focused on, you know,

sustaining the legacy of that business, and doesn't necessarily have the proven leadership experience that these businesses need. And, you know, there's, so that's how we distinguish ourselves. We're talking about, you know, an older version of that search fund model. And again, there's so many, you know, good talented folks in that community, but that's how we distinguish ourselves.

Let me understand. So if I'm one of those executives, I'm 53 and I'm like, I've always wanted to own my own business. I, you know, it is a 50 year, 30 year career at Ford Motor Company. And, and, and now I want to own my own business.

They would you mentioned that you partner with them. What does that look like? So do you pay them or they pay you like just just brass tacks? What does that mean to be one of those sort of what do you call them? Operating partners or executive partners? Executive partners. So just walk me through what that looks like. Yeah. Yeah. Yeah. So, yeah, they don't need a salary because they're at a point in their career where where they've got.

you know, plenty of capital to sustain their lifestyles. So at a high level, they join our firm and we sort of share the journey together where we take on, say, 80% of the cost and risk and travel and legal and due diligence fees. And we work together to help them review

dozens of opportunities, typically within their area of prior expertise. So if someone's got a background in manufacturing, we'll look at 200 manufacturing deals with them and find out those situations that are a good fit for their background where they've got, you know, where they can build a strong relationship with that seller.

why would they join you and not just do it independently? Again, if I'm a 53 year old former Ford executive, I've got 8 million bucks in the bank. Presumably, why do I need you guys? Why don't I just go straight to do my own search, find my own database of manufacturers and do it on my own? Um, well, they shouldn't, they could, but, but we bring them deal flow, you know, when they, yeah. I mean, we, we know every broker in the markets, um,

and you know, got relationships with sellers that are, you know, maybe we looked at their deal a couple of years ago, but when they joined our firm, they instantly have hundreds of opportunities to look at. We've done diligence, we bought now a hundred companies. So, you know, there's common areas to look at. We've got attorneys and diligence providers that have done it all before. And, you know, we've made the mistakes before, we've rectified those mistakes.

It's a lot better for your sellers, you know, or the seller, because, you know, a first-time buyer is trying to learn how to buy a business, is trying to coordinate all these advisors. By the way, they don't have access to the lenders. The lenders don't want to back a first-time buyer because there's, you know, there's more risk and,

And so it really is a win-win. With an executive partnering with us, frankly, we can pay a little bit more than that executive on their own, make it a smoother process. We can de-risk the whole situation.

We add more value to the executive end of that company. So it's kind of a win-win-win. Seller gets 5% more, executive gets the same thing they get otherwise, de-risks their process. So it's sort of a win-win-win for everybody.

Okay. So break it down for me. So let's say we've got Jane Doe, who is a former Ford executive and she wants to buy a business. Okay. She's an executive partner on your team. And we find a deal that she's going to pay five times earnings for a million dollar company, like a company with a million dollars of EBITDA. So she's got to come up with 5 million bucks. Okay.

How much of that does she, like just walk me through the cap table. How much is debt? How much is equity? How much is her equity versus your equity? Just give me at a high level. What does that look like? Can we do 2 million of EBITDA and 10 million? Sure, let's do it. 2 million EBITDA, $10 million sale price. 2 million of purchase price. So, you know, we might get 5 million of real debt, you know, senior debt for that business.

that we got to pay off over six years, let's say, with a balloon payment. So it's very manageable debt payment. There's going to be likely a little bit of seller debt. We like to mostly pay cash. Seller debt would be maybe 10%? Yeah, maybe 10%, 15%, could be 5%, could be 20%. Okay.

And there might be sort of like a mezzanine equity piece in there. Maybe not, but let's say the equity, let's say we're the only equity partner and it's $4 million of equity. That executive today on average is putting in like $500,000. So Jane, who was an experienced manager, been at Ford Motor Company and maybe a small supplier to Ford, so she's also been running a small. So she'll move to that business. She'll fly across. We get a lot of empty nesters.

that they want a new 10 year venture in some new town and they're business geeks, you know? So they'll, and by the way, Jane probably used to W2 like 700 grand a year, but she didn't take a big pay cut to run a business with 2 million dollars. There's no budget for, for, you know, so she's going to make 275, 300, you know, that's always a point, but let's say $300,000, but she's going to invest 500 K and take a big pay cut. Um, maybe get, um,

total equity of another 700K. So she's got a million two of equity. But she moves to that business and it's a very professional manager. The seller probably could never, if the seller wouldn't hire that woman, he'd have to give her, you know, 800K or, you know, some real sweet equity package. So, you know, it's...

But that's why she'll put in 500K of real hard equity, get a little bit more equity, and then we'll just put in the last three and a half million. And again, that's sitting in the bank. We'll cut that check. We will syndicate it, but that's what we're just doing over and we're doing six of those a year. So that's the exact situation.

That's amazing. So that's just to be clear on a couple of questions. I want to make sure I got it. So the three and a half million that you're kicking in, you and your partners may write that check personally or and or you may go to a few of your family offices and partners and say, hey, do you want a piece of this? And they are buying a piece of the three point five million.

Realistically, on that deal, there's going to be 20 investors at, you know, whatever it is, 150K each. And my partners and I are going to be in for a million. She's in for 500K, we're in for a million. And then there's a bunch of little people. Got it. Got it. And those other people...

Do they have any influence over Jane, the person operating the business? They have no influence. No, they're kind of passive investors on the one hand, but on the other hand, they're very sophisticated, experienced, very high net worth. And they can occasionally add some real value to that business, whether it's a referral, a customer relationship. So it's a very beneficial value added investor base.

Got it. Okay. So Jane kicks in 500 grand on a $10 million purchase price, but instead of owning 5%, she's probably got more like 10 or 12% because she's taking a bit of risk and she's putting some salary at risk over a period of time. So equity is 4 million. So she's putting in 500K and she also gets another 700K. So she probably owns at least 20% of this thing.

Right, because her is on the actual equity put in, not on the total deal price because the debt isn't – right. Jane's math is we're buying the business for $10 million, but there's $4 million of equity. Yeah. But with her hard work, her blood, sweat, and tears over the next seven years, she gets to grow this thing, pay down all that debt, pay back the seller. Right.

And say she's able to sell it for $20 million. That's not an outrageous. She doubles it. She's had a strong track record of doing that in her past. She'll believe in her heart of hearts. Oh, I can double this thing. You know, double something over seven years. That's not terribly ambitious. That's not crazy. And she might own 22% of it. And so 22% of the 20 million exit, once you pay down that debt, that's four and a half million dollars.

And then meanwhile, she's making a living wage. And meanwhile, she's doing what she's passionate about, which is leading teams and serving customers and serving industry. I just want to make sure I totally understand this. Again, you're talking to a guy who took sociology at university, so not super swift on the old money stuff. So let's do this again. So 500 grand, she's kicking in.

And the total equity that's going into this deal is...

is 4 million, right? Because we got 500 grand, sorry, 5 million of debt from a bank, a million of debt from the seller. So that's 6 million. And then we've got 4 million of equity. So she's putting in 500 grand. So she's a little more than 10% of the equity. But what you're saying is that you as a partnership group would incentivize her with some additional equity. The

So it sweetens it for her. Is that right? That's right. And that's the same thing the search funders do and the same thing that normal private equity does. So yeah, it's all industry standard stuff. Yeah. And so she might, in that deal we just described, she might end up with 20% of the equity. Got it. And then obviously if it all goes well, she's got a great success at the

on the back end. Okay. I think I get it now. You know, we've had some execs that have really built these things. You know, we had a company last year that we bought for $8 million and it took us 12 years ish. And we sold it for 80 million. And so, you know, 20 million of 80 million is, you know, it was a $16 million exit, you know, that, that, so that math, you know, scales up nicely. Yeah.

Yeah, no, for sure. I get it for sure. Yeah, that makes sense. The debt in this case, the $5 million of debt, who guarantees that? More often than not, there's no guarantee. That's professional debt. Meaning the business itself is the guarantor. Sometimes we'll do, you know, sometimes our execs will sign personal guarantees for debt or for leases.

It changes the dynamic. You know, I mean, sometimes our executives will own more than 50 percent of our businesses. So but that's an exception in our typical situation where we're buying for 10 and there's five million. It's pure risk capital. That's our most common situation.

And what would a bank charge for that $5 million? What would their interest rate, I guess, as a premium on prime? Yeah, premium on prime. I mean, usually doing SOFR, but premium on prime would be 2%, so 9% money today, 9.5% money today. Our listeners are just getting absolutely bombarded with...

people calling up. Oftentimes it's some kid in New York who said, Hey, we want to buy your business. I represent this private equity group or that. And it's cutting the wheat from the shaft and trying to figure out who the legitimate players are and who the shysters are is really hard. It's a very, very challenging thing for our listeners to do. I think it's gotten worse and worse with the proliferation of all these online courses and

Right. How to buy businesses for less than their worth or for no money down. There's all this stuff. So you play in a kind of tranche of the market, which is a little higher than kind of SBA loans, right? SBA loans, I think they're limited to $5 million of total transaction value. So if you wanted to buy smaller businesses for a million or two, oftentimes an SBA loan

is probably the way to go. You're playing in the 10 and 20 and 30, $40 million businesses. So that's beyond the scope of an SBA loan. I mean, to be clear, our average purchase price today, we'll buy business for as little as $5 million. We'll buy business for $5 million to $40, $45, $50 million. That's our range. Really what we focus on, I mean, we're open for business. We'll buy companies that make sense. But-

80% of what we do, four out of five, what we do, and what really distinguishes us in the marketplace is hands-on owner-operators. So a business owner, like you said, they've got some, more often than not, they've got some niche business that they're turning the crank on. They've kind of won that niche. Maybe it's a geographic niche. Maybe it's a national brand. Maybe they created some association and, you know,

They've got leadership through that association. They've got this winning business and they're hands-on. Maybe not 70 hours a week anymore, but they're in the trenches. And often it's two brothers or three partners or husband and wife team. And

They don't want a partnership. They want to sell their business and retire or do something else. They want to give us the keys and we slide a briefcase full of cash across the table to them, metaphorically, of course. But yeah, they want a big wire.

And so that's really our niche. And so it tends to be a lot of, you know, a lot of it's hard for, you know, I'll say it this way. It's hard for a real private equity group that's trying to manage $250 million out of New York or San Francisco. It's hard for them to sell, send their, you know, super sharp, you know, suit wearing MBAs to fly into some little town to meet the management and fly back to their, you

50th floor in Manhattan, who the management's leaving, you know, people that know everything are walking out the door. So, so, so that person in Manhattan can't really buy that business. We can buy that business because Jane is going to move down the street to that small town and,

We bought a hundred of these, we've got support, whether it's CFO support, SEO support, and we can put in the new systems. That old company was run with 2 million cash in the bank and maybe only just tax returns or at least maybe just compiled financials because it doesn't matter that they were taxed. So we're uniquely set up to kind of buy these more complicated systems

you know, more typically more complicated, you know, a lot, a lot of manufacturing, a lot of industrial services, a lot of nichey businesses, you know, a lot of, a lot of really smart businesses that someone, yeah. I want to talk about, it's super helpful to kind of understand the model and, and, and you, and your focus. That's amazing. I want to spend a little bit of time understanding you, Dan, because I, I know you've started a company and you've operated a business and,

And you've now shifted gears to where you are a partner in an investment business. What's the difference in, you know, our listeners are operators, right? So I think they would be curious to know how life is different for you now.

now that you're an investor as opposed to like a, like a pure operator of a single business, like help them understand how that's, how that's different. Yeah. Yeah. I mean, at Salt Creek, I consider us a bunch of entrepreneurs that are buying smart businesses and keeping them going. And so I consider myself an entrepreneur and that's,

half of my life and day job. The other half is being an investor. So, you know, private, and so we, I do have a, you know, the lens of an investor when I look at businesses.

that has a lot of overlap with professional private equity. You know, I look at the, you know, I look at the fabric of small business, for example, in America and, you know, have a framework that I've developed over 25 years. You know, I started, you know, my training to get into this business by being a business broker going back 25 years ago, you know,

and while i was doing that i was always looking at to buy businesses i was looking to sell a couple as a broker and to try and buy one um and i saw you know i and i was with a big firm so i i just you know both with my salt creek work and just fundamentally i used to look meet with so many business owners let me see your financials and let's talk about your business you know

And I've developed kind of just in my own head, and a lot of investors have, you know, I can walk through the warehouses of any town or the retail. I can eyeball, oh, I know that company's making money. Wow, that company's making money. What would help you understand if something's making money? Like what would you see? If they're busy and, you know, they've got some niche, you know,

You know, unfortunately, the corollary to that is also true. I can see a lot of businesses and go, ouch, ooh, someone's in there with a six-year lease and dead inventory. And, you know, that's a divorce waiting to happen, you know. So, you know, I'm trying to be a little bit colorful, I guess. But, yeah, so we, you know, what we found with a lot of the businesses we buy is,

And, you know, this will apply to a good percentage, 10% of your listeners, 15%, some meaningful percentage of your listeners. There's some industry fundamentals, and often they've built something that's just sitting outside of it or next to it, which is good and bad. They've got some winning formula that works. You know, sometimes the bad is that because they're a little different, the big players in the industry don't want to buy them. They're a little too small and different.

But often, you know, often what we find is really good businesses. There's one or two or three things. Often it is two or three different unique things that together give those businesses leverage that are making them nicely profitable. But you really got to understand what those things are and why they're important to keep those businesses successful. So as an investor, we're as an investor in small businesses, we're

You know, I'm good at, we're good at kind of figuring out what are those points of differentiation and leverage? Why are they sustainable? Because you can't compete against Google and search and, you know, or, you know, you got to be, you got to figure out why we're winning and why we're going to continue to win. You know, Warren Buffett famously said he wants to buy, you know, the number one or number two business in some really big niche, you know.

We like to buy the number one and number two businesses in some very small niche. So you're trying to figure out what is their secret sauce and how transferable is that? What's the one or two things? The industry and the company dynamics and what the seller does and what they know and can we replace hopefully 80% to 90% of what that seller does, which is really important. With the sellers, of course, they want their business to succeed.

These companies need leadership. The industry needs leadership. Yeah, and that's the meaningful work that we do is we enable these companies to transition. I mean, you've highlighted on your podcast, I've seen a couple of them, where business owners sell the private equity in some angle, and two or three years later, the thing's falling apart and everyone's miserable. And

So you got to do this carefully and smartly. Yeah. So some of the classic challenges of selling to private equity are the kind of professionalization process, right? So there's the playbook of, okay, how are we going to make this more professional? So it sounds good on the surface. What it really means to a founder is that we're going to

override and change all the decisions you've made over the last decade because they were unprofessional. Effectively, in order to make a difference, you have to change what the owner is doing. And it can feel like surgery without the anesthetic. It's like, wait a minute, these are all the little idiosyncrasies and the way we run the company. Some clearly are good, but what you're trying to discover is like, what are the things that are the secret sauce so that we don't mess those up in trying to improve the operations? Don't ruin...

throw out the baby with the bathwater, to use the old expression. And that's fundamental to our approach to buying is like the physician is first do no harm. First. The hippocampus. Yeah. First 12, 18, 24 months. Let's not make major changes, you know, just by the nature of our, by Jane coming in. That can be very destructive to our organization.

I was looking on your website in preparation for our call, and there's sort of three types of people at Salt Creek. And I think we've touched on a couple, but there's one that I'd love to learn more about. There's a group of investment professionals, of which you are one, I believe. So these would be people that are investing in companies, I'm assuming.

Then there's a group of executive partners, and we've talked about them. These are the people that are your bench of former executives who can come in, write a check, and run the company. And then there's a group called operating partners. What's the difference between an operating partner and an executive partner? Yeah, our executive partners signed up.

So there's a lot of overlap, but our executive partners have fundamentally signed up to lead one acquisition and to move to a business and to be the new CEO of that business, to be the new boots on the ground. And our operating partners are typically specialists with a lot of expertise, often across some dimension, and they've signed up to get involved with

You know, as little as three to four companies over a five year period, as many as 10 or 12 companies. So I'll call out, for example, one of our executive partners is, you know, just a very experienced crackerjack, best in class expert on SEO and web marketing and can help us evaluate the strengths and weaknesses of the company in those areas and then can also help to

improve, optimize those areas post-clothing. And this individual built and sold multiple companies in that area. And he doesn't want to be the CEO anymore. He's done that. He's semi-retired. As we speak, he's scuba diving. But he's a business geek and he wants to write a check and he'll be an owner. And they get a very small board fees to honor his time.

but he keeps out on building businesses and we have, you know, that's just one example of that individual. And he's pretty broadly, he might invest in and contribute to two new companies a year. And then, and then some are more focused. Some of our operating parties are worth, you know, confidentially, you know, 20 to $50 million. They want to write a million dollar check in a deal and get involved with installing the new ERP that the salary has been putting off for seven years. And so yeah,

So the operating partners are, so the executive partner wants to go run a business, be the boots on the ground in town, get it. And then the, the operating partner has a deeply deep subject matter expertise in something could be supply chain, could be SEO, whatever. And they are potentially, uh,

investing in multiple businesses that need their service. And in addition to the capital, they will also bring their expertise presumably to bear and helpfully move the needle on their equity. Got it. And, and, and for that, are they getting in at a better valuation or better terms than Jane or what, like how does, what are, what are their terms? Yeah. Um,

No, I mean, Jane gets the best deal, the best big package, because Jane's going to be working 50, 60, 70 hours a week. And the operating partner is going to contribute, you know, one to 10 hours a week, depending on. But an operating partner on average might, you know, might cut a 400K check and get another 100 to 150, 200K of stock.

And, you know, Jane is trying to play for, you know, 3 to 10x or, you know, even 3 to 20x. Same with the operating partner. You know, we're trying to put the best team around to enable this business to succeed and thrive. But in both cases, they get a little more equity than just the cash that you would get if you were like a silent investor and you just kind of wrote a check because they're being paid effectively for their business.

whether it's on operating a business or their deep subject matter expertise. I get it. Okay. So you've got really interesting operating partners, executive partners, and then investment professionals, which are the core founding team of people that are making these deals happen. Awesome.

That is really, really fascinating and a, and a unique model. I mean, I'm, I'm not, and I like, I'm not into this world terribly well. So is, is your model fairly unique in the marketplace or is this a fairly common? Yeah, we're, we're fairly unique. We're mostly competing against small shops where it's, you know, one investment professional with one operating partner, you know, that that's doing their, you know, there's still one deal every four years. And then we're,

you know, unfortunately we're also competing against that kid in Manhattan who hasn't done a deal yet. Um, it's hard for sellers and brokers to know the difference. Both of us have websites that say we buy companies, you know, ours of course lists 50 companies we've bought. There's, you know, there's got, you know, two logos and they're both their buddies companies. So they haven't really bought them. It's, you know, it's easy for anybody who sees them to suss that out. but okay. So let's, let's do a little role play. Let's imagine, um,

you're advising a business owner, okay? Business owner has a company generating revenue of $10 million, EBITDA of a million. And they're getting calls from people, quote, who want to buy their business, right?

What coaching would you give that founder in terms of what questions they might ask in the first conversation to suss out the professionalism of the buyer? Like, can you think of like a couple of novel questions that you could arm our listeners with that would help suss out the real legitimate buyer? Yeah, great question. Yeah, I would ask, you know, how many companies they've bought and what are the most similar to buyers?

to my company, I'm the owner. What have you bought? And then, you know, who's going to run this business and for how long? What do you think is the key success factors for keeping it going? And who's your investor base? Are you writing the check or who's writing the check here? And how long, where will the money come from? And how long will this take?

All great questions that would help you ascertain the seriousness of the buyer. I know people are going to want to learn more about Salt Creek and how they can kind of find you. What's the best way for folks to learn about Salt Creek? Yeah, on the website is a lot of our contact information and you're welcome to reach out to folks there. I'm on LinkedIn and I do check my messages there at least a couple times a week.

So we encourage people to reach out to me directly on LinkedIn. Great. And we'll put your contact information, Dan, your LinkedIn profile, along with the links to Salt Creek in the show notes at BuiltToSell.com. Dan, thanks for doing this. Oh, thank you so much, John. I really appreciate it. It's been a good time. Thank you so much.

And there you have it for today's episode between John and Dan. If you enjoyed today's podcast, be sure to hit that subscribe button wherever you're listening to today's show. And as a reminder, you can watch this full video interview over at our YouTube channel at Built to Sell. For show notes, including links to everything referenced in today's podcast with Dan, you can visit his episode page, which again, you'll be able to find over at BuiltToSell.com.

If you know of someone who'd be a great fit to be a guest right here on the podcast, you can nominate them. You can head over to builttosell.com slash nominate or email me at Colin at Built to Sell, where there you're going to have a chance to nominate yourself or someone else to be a guest right here on the show with John. Special thanks to Dennis Labategla for handling today's audio engineering. And thank you to our community of certified value builders who help us bring our message to you. Our advisors are experts in helping you build the value of your company. To get in touch with an advisor or learn how to become one yourself, head over to valuebuilder.com.

I'm Colin Morgan, and I look forward to talking again next week.