Ian is the Head of Venture Partners at Golden Section. After a friend told him how he was buying and growing businesses, Ian was hooked.
Ian tells his story as well as shares some great insight on what he looks for with a deal and what he looks for when growing a business.
Find Ian on LinkedIn at https://www.linkedin.com/in/ianjhreynolds/
Read Ian’s insights learn about his mentorship at https://thesiscapital.com/
READ THE EPISODE:
Welcome. On this episode, we have a special guest, Ian Reynolds, head of venture partners at Golden Section. Ian has done quite a few transactions on the VC and the P side, and has been involved in billion dollar transactions, and has also acquired and sold multiple companies in seven and eight figures. Hi, Ian.
Hey, how’s it going? Thanks for having me.
It’s good. Yeah, I’m excited to get into it. Because we’ve been chatting for some time now through for mastermind. And I was always curious about like your stores and businesses what you buy. Because I noticed that your approach is actually very similar to, to kind of Hi, how I look at businesses, except you just target businesses with quite a bit bigger. Yeah, I’d love to hear how you got into that festival. What? What was your first introduction to buying businesses?
Sure. So let’s say 2016 or so, I had a friend that we played college soccer together, he was couple years ahead of me, and we just playing catch up, you know, hey, what are you doing? What are you up to, etc. And he described for me post MBA, that he was in a incubator that helped him seek and acquire businesses in the United States. And he said, you know, you should, you should look at this, this is something that I’m able to do. And I thought, you know, this guy’s got two more years of experience than I have. And he’s, he’s buying a business, and what does that mean, right? And explained, well, I want to buy the business, and I’m going to run it as the CEO. And I am going to, you know, grow it and then sell it and, you know, walk away with $10 million and retire and, and you know, if he can grow it at a certain rate, etc, and says, Okay, well, that’s interesting. How are you? How are you going to do that? And so he sent over some resources. And that sort of opened a can of worms in terms of my perspective. And I had to spend 689 months reading about how to do that. And what all the while I was working actually in transactional finance.
So that’s five years ago. And before that, what was your background? What were you doing?
So before that, let’s see early, it was an early start to my career. I was in startups, not my own other other people’s startups, learned a lot of what not to do, and how not to run things. And so when did the BA an accelerator program finished about a year and then moved from Dallas was in Dallas, Texas, moved to from Dallas, Texas, to Houston, and worked in energy transaction advisory, and some large energy software projects in a very, very boutique consultancy in Houston, and like so many firms in Houston, in the energy space, right. So we served upstream, midstream, downstream Office services, just a wonderful company. And so I had the opportunity to do both these really large enterprise deployments on the software side, for some private equity backed firms or would go in private equity firms or put in a bunch of money. And they let’s say, Pata refinery, and they need to install like enterprise trading risk management software or something like that, and then scale it up. And so we would go in and do that sort of stuff. And then after one or two of those projects, moved over to the transaction side, where companies were buying and selling each other, or in some cases, they borrowed too much money, and they needed to restructure, meaning, you know, the banks were saying, like, hey, you know, we got to, we got to make hold on this debt. And we need somebody to help us go help the banks, kind of sort out that problem, if you
will. So that’s where you worked on some billion dollar deals as well, right?
That’s right. Yeah. So we had the opportunity to do some very, very large transactions, where we were either representing the bank or we were representing the company, or we were representing a potential investor. And they were either looking to acquire assets or sell assets or make a loan to these against these assets. Or, as I said earlier, restructuring. So restructuring was probably one of the most fun set of tasks that I had were these companies that they had several 100 employees, and then it was we had to whittle it down to like two or three, and then try to operate the assets with that, and get the get the bank’s money back and then turn around and sell the asset, or sell the company and sort of rebuild it post getting rid of all this debt because the debt would get converted to equity. And a quick side story on that there was once a company that I helped restructure, and it was it was like a legacy company been around for like 100 years, you know, well respected will recognize all employees have been there for, in some cases, generations. And this guy just like, tanked this company as CEO. And so he’d go in, he was pretty bad actor and get rid of him and just had to like, move all these files out of this multi story office building in downtown, like shipped them off to like have a porn site so we can go through them. So, you know, he had some we had some fun places, but I saw, I saw parts of Kansas that I never wanted to go back to. And so that it sparked my interest from my buddy said, Hey, I’m buying a company.
So was it? Was it like an oil and gas? Yeah,
yeah, well, well, so the friend of mine that’s acquired that acquired a company. And he’s still running his firm, and he’s doing quite well. And he’s done many bolt on acquisitions was in the wine and spirits space, which is something that he was super passionate about. And so they’re doing super well. I mean, he’s, he’s recently bolted on a couple more things into his platform, and they continue to grow.
Alright, very cool. So then you learn more about acquisitions? And is that then you with that company and move to work for more for venture Venture Partners for Golden sections?
Yeah, so what what happened was, I was in this really boutique sort of consultancy, doing these transactions, and we’re coming to the end of a very large transaction cycle. Energy is very cyclical. And I’d spent probably, in addition to this time period of doing this work, maybe nine months reading about transactions, how we were doing them, especially in the size of the kind of like entry level transactions, if you will, and really kind of got a sense for how people are doing things. So I stood up an LLC, you know, got sort of insurance and formal documents to protect myself, etc. And started just kind of networking aggressively around town, and with business brokers, etc. and other folks who were doing this type of activity to get a flavor for what folks were doing, and sort of what transactions were available, talk to a large number of business owners. And ultimately had, I had a buddy who was interested, I was introduced to through mutual contact. And, you know, we said, hey, let’s let’s do a deal. And so did that deal, and moved my family from Houston, to Salt Lake City. So we close that transaction in September 2017. And move my family up to Salt Lake City, we were up there for three and a half, four years, and we grew that company, from just a handful of employees to quite a large number. In a short period of time, improved profitability, we the probably the most important thing is we talked to a bunch of research firms, like Gartner in the United States, as a big research firm we talked to, we conducted a market research study, actually, through my university to get some information on how we should position ourselves how should we should position pricing, how we should position, the firm overall. And through the combination of this research, we hit on a couple ideas in terms of how to, to be think Michael Porter type differentiation. And we made some pretty big adjustments in the business model really quick, took probably about a year to make those adjustments, maybe a little bit longer. And then we started growing pretty rapidly and adjusted our prices, etc. And so then December of 2020, I had the opportunity to exit that business. And so now I still advise the business and sort of aboard capacity. And I moved back to Houston with my family. And so now I am the head of Venture Partners, and I’m happy to talk about that. And I am also the chief strategy officer at a data analytics firm. And on top of that, I do investing through thesis. So where would you like to start?
That’s a cool, so that first deal. You’ve spent about nine months kind of learning about deals and interacting with different people trying to find opportunities. So tell me more about the deal. What what was like the structure? How did you finance it? How big was it like seven figures? Six figures?
Yeah, so yeah, so seven figures. We’re definitely in that range. Right. So typically, when you’re looking in a, what’s called a search fund style, which is which is sort of what this deal was. Your those transactions are typically in the realm of let’s call them 10 to 12 million revenue type businesses, and they’re earning anywhere from one to 2 million. Typically, the search funds are looking at EBITDA. I personally prefer to look at free cash flow right what is the what is the cash that comes out of the business after maintenance, capex etc. And what is the return? Which that’s growing, and also that operational cash flow is really investable, you know, so that basically we give this 10 million revenue, and then, you know, about $8 million with the costs, sort of in there, the typical transaction size.
So let’s have a bit of like, one 2 million. Yeah, yeah.
And then in terms of transaction structure, like very, very, the transaction structure in lower middle market is pretty uniform. For most of these deals with some variants occurring between each of these components of the capital structure, so you have, like a third of it is going to come from financing from investors, right, and they’ll typically get a press. And then you have a third of it is going to come from market debt, where a bank is either going to say, Hey, this is a blue sky loan, or, and we’ll give it to you for maybe five to six years, five, five to seven years, depending on if you’re using SBA. And then or SBA sometimes goes up to 10. And then other first lien lenders may look at it depending on assets and other things and say, that will also give you a first lien loan, maybe some Misner, and that’s another third of the capital structure. And then the last third is typically seller financing where you have the seller basically providing a newt, that is, think of it as, as sits near the bank that but typically banked it. And it typically almost always has priority over seller financing.
Yeah, very cool. So for $1 million, a bit, or 2 million, what would be the typical price was a bit difficult, like multiple.
Yeah, so I’d say I’d say, historical multiples, for these kind of lower middle market funds have been around, it’s called four to five of EBITDA. But I would say that’s crept up, especially as people have moved towards software, they’ve paid much higher multiples in the realm of like, six, I saw one that was as high as like, seven and a half recently, which I don’t think I would have paid. But, you know, that’s, that’s what some people are paying. So I’d say multiples have crept up, especially for software type businesses, or asset light businesses into that six plus range.
Okay, and that and that first deal was it was it software, that business was heavy on software.
So we were a service business. And we eventually stood up our own SAS platform. And then also transition to much more of a a model where we had what’s called like service contracts within the service. So it had elements of a kind of recurring revenue business. But insofar as we had so typical b2b SaaS business, that is got like a sort of ideal contract structure, is going to have contracts that are what’s called to two to three years in length. And so we took that idea and applied it to our service business. And then there are other service contracts that do this in the software maintenance space. And then we structured sort of software maintenance contracts around some of the services we sold. And that resulted in really sticky revenue, right? Because they were contracted with us for two, three years. So like, you know,
and so how much how much of your own capital did you actually have to put in that first transaction?
Too much? Yeah. Yeah. So I put, I will say, I put probably a third of my net worth into the transaction, which, in retrospect, I’m not sure I would have done again, it worked out fine. But, you know, thinking thinking about an effort factors is what risk is a lot. And, but I say, typically, actually, in the lower middle market search structures, you don’t, you don’t necessarily need to use your own capital, I like it was almost unnecessary that I used any of my own money. Because if you find a transaction, and sponsor it all the way through, maybe you do pay for the legal fees, and the accounting fees, etc. It’s, it’s not, it’s not even necessary that you necessarily even commit a certain amount of your own capital, maybe there’s a little bit down payment for the debt that the banks want to see. But you can walk away with, in some cases up to, you know, 60% of the transaction without if you’re in that kind of like sub 10 million range without using too much of your money.
And what else financing did you use? Did you get an SBA loan for this deal?
So in our case, it was you know, like very similar structure to search, right. So first lien type stuff and seller financing, right? So no, no SBA.
And how long is like what what time period is with seller financing usually spread around?
So typically, seller financing is shorter than bank debt. So again, a bank that you’re looking like 67 years on this Something like first lien seller financing. And you’re typically looking like, let’s call it like around four years, four and a half years. And depending on the transaction structure, and if you have different hurdle rates, etc, you can stretch that.
And you can pay it all for the business profits general. Yeah,
that’s right. That’s right. Okay. And typically, that’s in the US, if you’re going to do it, you know, depending on your depending on your transaction structure. If you have the seller routine, any sort of equity in the stay like a partner in the business, you know, it’s going to be like pre tax, right? If you structure it as like a formal loot, it’ll be it can it can be post tax, to certain degree. But in most cases, I think for especially for the smaller transactions, people are rolling your equity. So you have a pre tax component to that. So keep in mind that, you know, like, taxes are real costs to the business. Of course, they weren’t but you know, is.
And did you have any investors in the deal? That
did? Yes, yeah. Yeah. So I had, I had a number of folks that I talked to you in what’s called the traditional search space. But ironically, they weren’t necessarily fit for this deal. And I was like, you know, this is there’s great opportunity here, like, why would you not invest? And there’s only you know, like, there’s 50 million things wrong with this thing. And so none of these people opted to invest with me. So I did it, I did it without them. And there’s there’s pluses and minuses. I’d say the people in the search space are pretty well defined. And there’s new entrants all the time. And they’re very sophisticated and very smart folks. I keep up with a number of them, really just great people. But this deal because of its characteristics was not a fit for the sort of like set of criteria they typically invest
in. So was it like one of those that’s, that’s slightly on the riskier side, like has this impression, but it’s a little bit riskier? That’s yeah, exactly. Yeah, that’s just, I usually like as well, yeah. Yeah.
So like, but the opportunity for me was clear. And I understood the dynamics of the business and how it can be improved. I confirmed those things with some of the confirmed and improved my opinion on those things with some of that research I did. But it was very much like too much in the periphery of what these guys would traditionally invest in, right. Which is funny, because like, I haven’t seen any deals similar to what I did yet. And I would I would do another one in a heartbeat. But
I will say, so you mentioned the term search fund, what what does this actually mean?
So search fund is a set of individuals who set out to acquire a lower middle market business, it started many of these in, there’s a group at Stanford that went to a professor and said, Hey, we want to buy an existing business, rather than start around. How do we do that. And so that’s when the search fund was born. So there’s the Stanford search fund study, I recommend you just go to the Stanford stanford edu website, pull that down, you can read about it. And it’s got all the data, basically, they’ve done a retrospective study, going back to 80. Something and, you know, kind of tracking these people who’ve done traditional search. Now, in contrast to the percent equity that I’ve talked about, in terms of what these people can walk away with, a traditional search is where a searcher is going to raise money from investors first, to say, Hey, I’m going to pay myself a little bit of a salary, I’m going to go run around town and try to find an opportunity for me to invest in. And if you, you, let me you know, you go sell units to 15 or 20, investors, maybe you raise a total of $500,000. For one person, you spend half of that on searching for an opportunity. The other half is maybe salary and other sort of things. Maybe you have some reserve left for dead deal fees. And the idea is you give those investors or promote on their equity, they also get the right of first refusal on the transaction that you generate. So they could say they can say no. But their equity then converts at a premium into the transaction. And as a result, they also command much more of the equity. So typically, a searcher or a traditional searcher is only walking away with something like you know, 10% of the company, day one, and then up to 30 plus percent of the company, after certain internal rates of return are hit for the investors. So So traditional search, you sacrifice economics, for a bit of safety. And whereas I’d say The persons who do like what I do, you can walk away with as much as 50 plus percent of the company they want. Right? That’s very common.
Yeah, that’s that make sense? So that’s, uh yeah. And then did you do something similar? Did you raise some capital from from investors first? And like pay yourself a salary when you were looking for a deal? Or were you? Did you skip that? You didn’t know?
Fair question. So I was in, I had that formal structure set up, I had a PPM I, I flew East Coast flew to the kind of Midwest was in the process of visiting some people in the Mountain West. And at the same time, I had found this transaction. And people, again, this, the traditional investors was like, hey, look, I found this deal. Will this be interesting? And, you know, some people are like, no, no, no, not a fit. So I had, I had, like, half of my units committed, at least verbally. And so I said, Well, okay, I don’t necessarily need to give up my economics for veal that a lot of people don’t necessarily want to do. So I’ll just do the transaction myself. And so in the process of raising that, I also completed this transaction and then said, Hey, thank you very much for your support in the process of raising my fund, the traditional search fund, but ultimately, I decided to go a different route. And I’m glad I did, because did you have to refund the investors so well, so So I just had I had, I was only at the stage where I had verbal commits for half of my units. So I hadn’t officially visited typically, the way it works is you raise all your units, or like 90%, stimuli, all of them. And then you kind of like pull the capital down at one point once you get the commits. And so I was, again, parallel processing. So I had, I had the transaction I was doing on one side at the same time I was reading and I was asking people like, Hey, would you do this deal? Would you do this deal? Would you do this deal? I got a bunch of news. And we’re like, well, this deals like, super gonna happen. And long story short, I did the transaction without the investors and shot them a polite email, I got only one person who’s like super mad at me. Everyone else. Congratulations. And I’ve stayed in touch with pretty much anybody else. So but you know, that’s not true. I stayed in touch. And that person was mad at me.
Yeah. And so usually, you said you would get 10%. And beginning so because you put more of your equity, you probably got, like more than 30%. Yeah. That’s right. That’s right. You, but But you probably didn’t have like an opportunity to increase it, because you didn’t have investors, right? Or did you still have?
No, I still had, I still had industry, I still had investors, we still have debt, we still have, we still had seller, finance traditional, the traditional structure, the difference being that, because I didn’t do a traditional search fund. I didn’t sacrifice the economics to those investors. Right. So the idea of a traditional search fund is like you limit your downside, because you’re paying yourself a salary for these investors, and, and so they say, Okay, well, because of that, we’re, we know, we’ll comp you a certain amount, but we take a greater percentage of the economics effectively, if you look at the traditional model versus the self funded model, I was effectively a self funded person, the traditional model says that the the core equity economics, etc, of the capital structure, work out this way, where the base of the debt and the equity that go in from the bank, and the investors basically flows to the investors and the seller financing in theory goes to the searchers, right, so let solar financing be a third of the capital structures
such as meaning the, like you,
personally, me, and that’s how it would typically happen a traditional, whereas with the self funded, that is people like me, who go and do the deal without having equity in advance. They get the economic benefit of the debt and the solid financing, right, in addition to whatever equity they put in, right. So that’s, that’s why they can own 70 plus percent of their transaction. In, in contrast to, you know, self funded or funded searcher.
So, yeah, makes sense. So yeah, basically, then the idea is if you are new to the space, and you have quite a bit of experience, you understand deals, but you don’t have the capital then that’s probably the best option. You go and read the search fund, you talk to a bunch of investors. i It can be really time consuming and you have to grow your brand, develop relationships, but then you Get all the capital you need to go and, and find the deal and acquire it. While if you already have some well established name, reputation capital, then you probably don’t need to do that. So you can just keep that and and then also save time on talking to a lot of investors and sort of go straight to finding some deals, finding some financing sources. Yeah,
very much. So yeah. All right. Pretty good.
Yeah. So then let’s get to the good stuff. After you acquire that first business. What did you do sort of in the first year or so what what did you accomplish in terms of growing profits? And what are some changes that you plan to make and made right away?
Sure. So we had to transition a number of people out of the business to professionalize it.
So how many people did it have, like in the beginning, was
so like, 30, or maybe 40? Yeah, full time, like local, full, full, full time, and we had some people who were remote, etc. And the challenge we had was that the resources we had were somewhat limited. And we had to improve the quality of the staff pretty pretty aggressively. And so we had to transition sales resources. There were we had to wait to set up accounting processes, right? There are no sort of formal accounting processes. Like the the seller, for example, was making accounts receivable calls himself type things, right? And so set up accounting processes, get the books cleaned up, but she had to fire the company CPA and go get a new CPA and clean things up, which was a chunk of work, believe me. And I mean, we knew the books were clean, there was no issues with books. But we had to wait to do that work.
That’s perfect. Because that’s that’s like tied to your background. Yeah, like finance and accounting. And, yeah, exactly. So that’s probably,
it was pretty straightforward. And it was a simple business. So it didn’t require a lot of work. And then it was, you know, okay, we got to evaluate what we’re doing on sales, right, we’d hired some junior employees, who have since gone to do wonderful things, but we’re not appropriate for our, like what we needed to do with the business. And so we had evaluate hiring new sales resources, we had to train up some internal project managers. And so actually, we as opposed to, that was the one case where the project management as opposed to hiring senior people, we chose to hire junior people and train them up, because we had that competency sort of in spades internally. And then. So in sort of addition to those things, we were conducting this research with Gartner and universities, etc, to see how we should position ourselves. And we, we started talking to competition, etc, in the market. And that led us to certain conclusions about marketing and sales and what we should do in that arena, which I can’t 100% of old just otherwise we give a more competitive position. But that was super helpful. And there was no there was also like any other examples, there was no marketing at all in the business. It was all word of mouth and outbound sales. That was it. Right? There’s no marketing. So we did stand up an entire marketing function within the business. And that in the digital age is competitive, right. But we we did that. Eventually, that marketing team got up to like eight people. That’s pretty much
all day to be like, Wow, let’s show suctions.
Yeah, yeah, all all the to be. And so it was that kind of like those series of things, and then keep improving the team. As we went along. We had we stood up some other offices, hired a bunch of people. And, like superberry charter, but we have no HR department. All right, formally, so we had to stand up an HR department, hire HR resources, you know, first we started like a pair of like, people who were recruiting then we train them to do other things. And then, and so it was, it was a we had, we had, I’d say a fair amount of turnover through that period, and then it sort of stabilized. But we sort of knew that that’s what was gonna be required to get things done and, and those series of changes, right accounting, marketing, sales, etc, are all kind of each individually added to the bottom line. And so those things kind of stacked and we’re just kind of like, build that reinvesting machine
in the business. And so was it like a full time job for you at that time? Like, were you the CEO?
It was like 6am to like 6pm Minimum And for a few years, yeah, for a few years, I mean, I was full time on that did nothing else. And it because it took a lot to what’s called transform that business and but but it I’d say it normalized pretty progressively in 2020 2020 actually wasn’t a bad year for us. It was, it was a bad year generally. But it was it was not a, it wasn’t like, terrible, right, we didn’t have our time, we actually still grew through 2020. And in actually business got a little easier to manage, because we’ve completed many things that we try to complete in the year before. So it wasn’t quite such a crazy timeframe.