Tyler Flinchum

@HockJohannes @jamesonhaslam 100% agree

@TylerFlinchum @jamesonhaslam No. Just had a self funded deal get done with an sba loan where the equity is 30% of the source and uses. So with a 2x step up, investors own 60% of the company. My point is that <50% searched ownership on an sba deal isn’t enough upside to compensate for the BK risk.

In light of another WSJ search fund article dropping, here's a hot take. I don't think a 5x EBITDA deal with 25% equity is worth it for the searcher. It doesn't sound like much, but the difference between 10% and 25% equity almost cuts your economics IN HALF, while your bankruptcy risk barely goes down (more on that below). In my opinion, self-funded search has always been one thing: you take a ton of risk (lever up with PG) and if you survive, you are set for life on a single deal in about 5 years. That's what the math works out at 4x EBITDA and 80-90% ownership. It doesn't work out at 5x EBITDA and <50% ownership. The latter is a bad economic trade for the searcher. You'll hear every investor tell you to overequitize. Yes, that does derisk the deal, but the real winners are the investors here. What good does a deal do you that still has a ton of risk but you don't have homerun upside on the other side. The potential to make $1-2mm over 5-7 years with a ton of risk is not a good trade for the average searcher. Most of you can just keep a $200-400k job with no bankruptcy risk. For the deals I have seen gone bad, having 75% debt instead of 90% would not have saved them. In small businesses when things go bad, it's often binary. So all that extra equity you raised barely reduces risk and but gives a ton of the upside to investors. 6 months of fixed cost is plenty of cash in the bank. If it takes more than that, the business likely wasn't going to make it anyway. And yes, someone will bring up a scenario where a business was saved by having 7 months. Doesn't matter, when you are going down this path you are playing the average odds. If bankruptcy is an impossible risk for you, then don't get SBA debt. You're better off getting paid carry at that point. TLDR I don't think signing the PG is worth it if you don't have the chance to be done if your deal works out.

@CTW_SMB I think it skews self-funded on here because traditional search funds are still pretty much only available to T15ish MBA recent grads and that group isn’t huge on here. The adversarial nature of Self-funded vs traditional is odd.

If you are thinking about buying an SMB I think you are SILLY to not at least CONSIDER a “traditional” search fund Way too much SBA or bust (“self funded) chatter here on twitter. I did a SBA deal, and my biz is typically more successful serving SBA sized deals vs “traditional”, so I probably should advocate against it But here’s more about it + why you should CONSIDER Also, I specifically say CONSIDER because newsflash y’all there is no right decision here. This is an entrepreneurial journey. YOU are going to look for a small business to buy. Many different paths, all with pros and cons. YOU need to learn the nuances figure out your situations and decide what is best for you. If you can’t make that call on your own you certainly wont be able to buy and run a roller coaster SMB What is traditional search? Traditional search means you raise $ upfront from investors to keep your lights on for usually 18-30 months while you look for a business to buy. Targeting $2M EBITDA and above. Can own up to 25% of common equity. There is a much more narrow box of type of business your investors will allow you to buy, and they have the ability to fire you during the journey (RARELY happens). More context of course but this is basics. So first, everyone usually jumps on the 25% ownership. Why would I own 25% when I can do SBA and own 85%+. Answer: SIZE OF PIE & QUALITY OF PIE. SIZE OF PIE: Many traditional searchers buy businesses with $3, $5 of EBITDA. I know some that have bought $8M+ (rare). 25% of $4M of EBITDA can be better than 85% of $1M of EBITDA. QUALITY OF PIE: Often overlooked. Everyone focused on equity amounts. Typically, a bigger business is more stable. Less risky. It’s proven more points of success if it’s gotten to $2M of EBITDA+. Less founder risk. So you’re probably buying a better business. A a few other pros: 1. You have more cash flow after debt to go reinvest aggressively in new hires, M&A, etc. 2. You are out of the weeds more - more of a chance to be strategic. That is probably where you are at your best. Not running payroll. 3. Closer to multiple arbitrage. PE really starts to pay more at $10m+ EBITDA. So if you buy at $5M EBITDA, you can get to 10 a whole heck of a lot faster 4. Forced oversight. Investors definitely have more control over you. What you buy, how you operate. News flash - THIS IS A GOOD THING. I chose to have investors who have more control over me than normal SBA deal. This is because I was 30 when I bought Sys6 and never run a biz before. I WANTED more oversight. More guardrails to prevent me from doing something dumb. There are obviously cons: 1. WAY harder to find these larger deals. 2. Yeah, you do own less. And you only get your final 8.33% of ownership if you hit a 35% iRR. That is hard. So in many ways it’s harder to make mid single millions of equity off your biz. 3. You do have less control (I do NOT think it means you feel like you have a W-2. Far from it) List goes on But point is - consider it Some people out there in traditional search have bought and built some unbelievable businesses. Way better than most of us on here including myself So give it some time before you start your search

@rossiadam I think having a lot of people locked into 3% mortgages will be a boon to renovations. Can’t lose the mortgage, so make the house how they want it. Trex is an awesome product too , we’ve used it a lot.

Trex is a publicly traded manufacturer of composite deck boards, headquartered right up the road in Winchester VA. They are expanding mfg capacity to keep up with demand, knowing that home improvement will probably slow over the coming years due to interest rates and post-pandemic remodeling slowdown. Business decisions are lumpy and messy. There is never a “right time” to expand a business. There is always something in the macro environment to be worried about. I don’t own $TREX but it’s on my watch list.

@homeservguy Electrical is steady-state. Plumbing and HVAC always break and therefore provide work. Electrician is by the worst trade if you only have one.

@FetaFund No data to back it up, but my hunch is tight geography (which a lot of SFS have) leads to better relationships with the sellers due to frequent meetings. This makes the seller like them more and ends in sale.

Traditional searchers have access to many sourcing resources. Yet I often see self-funded searchers source great proprietary deals. I have NO idea how. If you're a self-funded searcher, not paying for (e.g., Grata), and doing a proprietary search, how do you stay competitive?

@ChandlerReedSMB Sounds like ServiceTitan

The perfect SMB: - Asset light - Low CapEx - Competitive moat - Recurring revenue Am I wrong? What would you change? What would you add?

@homeservguy $140/hr is cheap

@parkerdlittle Would be interesting to see what percentage of Harvard/stanford grads become entrepreneurs and how they do.

This is the goal. Tim Draper on Draper university he built: “It’s harder than Harvard or Stanford to get in. We’ve had 3500 students started 900 companies and 5 are unicorns. Harvard and Stanford say 85% of their graduates get jobs when they get out and our average graduate creates 7 jobs.” Harvard/Stanford: 4+ years Draper U: 5 weeks

@OneManLBO Carhartt is the Patagonia of the trades

To be clear, I will treat my future HVAC workforce to a complete uniform overhaul. The Patagonia fleece vest, a reliable and proven choice in corporate settings, should be enthusiastically received

@the_sytch Abundance mindset is a better lens for everything. Scarcity mindset means making every decision out of fear, which isn’t a good way to end up fulfilled on your death bed.

What's a better way to think about money: A. Money is hard to come by, so I must protect it at all costs, or B. Money is abundant, and I can always afford what I need.

@BarbellFi The problem is that there aren’t currently better signaling mechanisms for 22 year olds outside of being able to code. Anything more ambiguous requires some signal employers can rely on and this has been good college degrees.

54% of U.S. adults have a college degree Student loan debt in the U.S. reached a record high of $1.7 TRILLION in 2023 I’ve hired many people in my career Not once did it matter to me where they studied or if they even graduated Is a college degree still worth it today? 🤔

@SMB_Attorney That seems like a sweet spot for acquisition then. Big enough to not be miserable but small enough to not compete with LMM PE

@TylerFlinchum You’d be surprised. Investors are desperate to deploy capital in these deals.

Which business buyer is more likely to succeed? Buyer A: - Investment Approach: Buys the first available opportunity, contributing $50k from personal funds, without investors, owning 100% of a business with $350k earnings. - Legal and Financial Oversight: Utilizes a neutral closing attorney and a “standard” 7-page purchase agreement lacking indemnity or protections. Foregoes hiring a quality of earnings provider, choosing to conduct financial due diligence independently. Selects a broker-recommended lender from ABC random bank that gives the broker a kick-back. - Support Network: Proceeds without assembling a board of advisors, industry advisors, or joining a peer group. Buyer B: - Investment Strategy: Chooses opportunities that align with a rigorous set of criteria reflecting their skills, preferences, and experience. Invests $50k of personal funds, supported by a group of investors, retaining 80% ownership of a business generating $1.5 million in earnings. - Legal and Financial Due Diligence: Engages an experienced M&A attorney familiar with small business and SBA guidelines, drafting a purchase agreement with comprehensive protections. Employs a seasoned quality of earnings provider adept at handling Main Street sellers. Partners with a top-tier SBA lender and a BDO experienced in evaluating small business deals. - Advisory Network: Leverages equity investors to establish a board of advisors, secures industry advisors, and participates in a peer group. Both of these buyers are active in the market today. When considering the merits of buying a business, it's important to recognize the spectrum of factors influencing success. Which buyer do you want to be?

@SMB_Attorney Who are the buyers usually? Seems like a tough sell to investors without pedigree/experience

@TylerFlinchum Pari passu loans at many lenders cover that gap up to about $8 or $9 million. Investors plug the remainder. We see these deals all the time.

@SMB_Attorney I am so glad I cut my teeth with actual trades guys before I pursue this. It’s honestly amazing that run of the mill MBAs ever buy trades businesses

Real footage of Stephen (“Stevie”) Archibald Montague Beauregard III, a recent Ivy League MBA, taking his first site visit to Stanley’s Asphalt Corp. meeting with Larry, a 65-year old key employee. Let’s take a look and see how it’s going…

@MatznerJon The comfort crisis is getting worse. It will reduce competition for the ambitious but ultimately hurt society.

Dude is channeling his Nietzsche vibes, and I’m here for it. Said another way by the OG himself: “ … if you refuse to let your own suffering lie upon you for an hour and if you constantly try to prevent and forestall all possible stress way ahead of time; if you experience suffering and displeasure as evil, hateful, worthy of annihilation, and as a defect of existence, then it is clear that besides your religion of pity you also harbor another religion in your heart that is perhaps the mother of the religion of pity: the religion of comfortableness. How little you know of human happiness, you comfortable and benevolent people, for happiness and unhappiness are sisters and even twins that either grow up together or, as in your case, remain small together.”

@alexforbes__ A good remedy for this would be good land grant colleges (Virginia Tech, Texas A&M, etc.) offering skilled trades as a major. Go to college, have fun, get a degree and also become a licensed plumber.

In 10 years you’ll be able to make $100-200k/yr in the trades or manufacturing. Skilled jobs have never been in higher demand but have the lowest supply of new people entering these industries. Here is my prediction over the next decade. 🧵

@Blind__Luck Depends on your skill set. A lot of builders build houses, move in, sell 2 years later tax free. This is by any definition an investment.

your home isn't an investment vehicle.

@irentdumpsters In my experience roofing has the worst labor pool of any trade hands down

If I’m ever going to start another service business. It will DEFINITELY be Roofing. Roofers are the investment bankers of service businesses . All the ones I talk to are high-level operators, pulling in huge money . Sales/Marketing/Service Dominate this industry .