I Acquired 5 Companies in Australia and Learned THIS
Summary
In this conversation, Jon Stoddard interviews Pete Seligman, an acquisition entrepreneur from Australia, who shares his journey through five acquisitions, including the challenges and lessons learned along the way. Pete discusses his background in engineering and investment banking, the motivations behind his first acquisition, and the importance of finding the right business. He elaborates on the acquisition process, financing options in Australia, and the transition of ownership. Throughout the discussion, Pete emphasizes the significance of understanding business operations and the value of learning from failures in entrepreneurship. In this conversation, Jon Stoddard shares his journey through entrepreneurship, focusing on the thrill of sales, the challenges of business acquisitions, and the importance of operational excellence. He discusses the need for autonomy and accountability in sales, the lessons learned from navigating the unknown in entrepreneurship, and the strategies for overcoming growth barriers. Jon also reflects on his experiences with various business acquisitions, emphasizing the significance of understanding the operational aspects of different industries. He concludes by discussing his transition to a search fund model, where he aims to leverage his experience to support emerging entrepreneurs in their acquisition journeys.
Takeaways
Pete Seligman transitioned from engineering and investment banking to acquisition entrepreneurship.
He sought autonomy and accountability in his career, leading to his first acquisition.
The first business acquired was SRO Technology, focused on measurement instruments for mining.
Direct customer relationships were a key criterion in selecting the business to acquire.
The acquisition was financed through a 50/50 equity and debt structure.
Initial challenges included navigating the existing company culture and operational practices.
Valuation and structuring of the deal were approached with a focus on simplicity and practicality.
Lessons learned included the importance of understanding every aspect of the business post-acquisition.
The entrepreneurial journey is filled with uncertainties that require adaptability and resilience.
Pete emphasizes the need for a long-term perspective in business acquisitions. Autonomy and accountability are crucial in sales.
Excitement in small business comes from small wins.
Navigating entrepreneurship often means creating your own path.
Growth often requires letting go of certain responsibilities.
Breaking through revenue ceilings involves organizational restructuring.
Many entrepreneurs fear the challenges of scaling their businesses.
Successful acquisitions require understanding the operational landscape.
Operational excellence can unlock potential in diverse industries.
The search fund model allows for hands-on involvement with entrepreneurs.
Backing the right individual is key to successful investments.
Watch the Interview:
Transcript
Jon Stoddard (00:00.086)
Welcome to the top &A entrepreneurs. Today my guest is Pete Seligman from Australia. Pete's been five acquisitions. He's actually run the companies for a little while, three of those, and he's made two accents. So welcome to the show, Pete. Thank you very much for having me, John. It's good to be here. It's fantastic what you're helping everyone understand the real life journey of being an acquisition entrepreneur. So thanks very much for having me on the show.
Yeah, I love doing this and I love hearing the stories because everybody's a little bit different what they're called or a venture was what they encountered and you know how I transformed them. So let's get into this and talk about your first acquisition. I did a little research. You did your first acquisition. It was in June 2013. What were you doing before then? And what was that call to adventure? Yeah, yeah, fantastic. Well, I'll do the first.
Up to that point, guess you could say my career was probably about 15 years old at that point. So I qualified as a civil engineer. I did a finance degree. I spent about five years working as an engineer doing civil and construction design, then moved into construction management, project management, delivery. And so as an engineer kind of honed my problem solving skills in project management, started to understand how to
manage teams and get things done. And then in kind of the mid 2000s, around 2005, I moved across to Macquarie Bank and moved into investment banking here in Sydney and also in London. And that's where I learned a lot about &A, about investment, about kind of financial modelling and investment decisions. And then in 2009, moved back home and joined Stockland Property Group, which is a big property group here in Australia.
And that's where really I got more of my general management experience over the five years after that. I guess that 15 year package is kind of a range of kind of engineering, technical, people leadership, general management, investment banking, a range of things. And then in 2012, I just kind of got to the point where if I reflect on it now, that the two things that were missing for me was autonomy, but also accountability.
Jon Stoddard (02:26.862)
I could clearly see what the rest of my career looked like. I could map it out. If I stay doing what I'm doing now, the next 10 or 15 years is gonna look like this. And that wasn't ambiguous enough for me. I wanted a bit more uncertainty that I had to navigate. And so, the autonomy piece was definitely in a big business. You have less hands on the levers. You're further away from the direct control.
But the accountability thing was as much wanting the accountability of being able to make those decisions, but also strangely, I kind of wanted it to hurt a bit when things went wrong. I felt like in really large organizations, either when I made a mistake or when other people made a mistake, it didn't really hurt very much. know, like things would just roll on. There's so much momentum in those flywheels of big organizations that things can go wrong and you don't really notice.
And so I might sound strange, but I kind of wanted to have better feedback loops on my failures. And so that's also what small business definitely gives you. So late 2012 and into 2013, me and a good friend of mine decided that, why don't we have a go and see if we can find a small business to buy and I'll drop in and run it. And so we did. Yeah. Let me ask you about that calling of wanting to
feel the results or the pain. I think it's a human nature and a lot of people, it's like Eugene, he goes like, well, I'm very curious. I put an input here. I just want to see what the output is. Yeah, yeah, absolutely. I mean, the analogy that I use quite often, not only because I like sailing, but I feel like sailing is a good analogy for it. If you're sailing on a really big yacht, there's certain jobs that each person needs to play. And those jobs are all very important, but
they're a very small part of a bigger picture. And if you either do your job slightly wrong or if you move around on the boat, you can't really feel the impact of that movement or that failure. Whereas if you're on a 16 foot skiff and there's three of you and you get your job wrong, something will happen. Or if you move from one side of the boat to the other, it'll tilt. Like you'll feel the impact of your movement a lot more.
Jon Stoddard (04:54.734)
And I think that what that does is it trains you to actually understand the differences of some of those things and some of those decisions. And I think the same resonates for business. Yeah, so this is a little bit of a tangent. I just recently watched the America's Cup on Netflix, the history of when Australia first won it after hundred three years and the change. Yeah, I'm told. Yeah, the keel change in that and keep it that heading and how America actually was trying to change the rules to get the Australia's
entry disqualified. Yeah, yeah, yeah, that was very controversial at the time, but a defining moment for the Australian psyche back in that back in that time. And the skipper just said, I did it once. I'm retired. Yeah, yeah. It took so much of my life and my energy. I'm done. Yeah. Yeah. Yeah. It would have been a very tiring process, I imagine. And Dennis Connor keeps kept coming back and back and back.
Anyway, so what was the first business that you bought and tell me what the process of in Australia, how's that a little bit different than United States? So, so yeah, the first business we bought with some SRO technology. It's a business that we still own today. So me and Anne who are kind invested with, we're still basically 50 50 on that. There's a couple of minority shareholders as well. And yeah, we it. SRO technology?
So it's a business that designs and installs and commissions and then calibrates measurement instruments for the mine sites. So measuring the flow of materials around the site, tons per hour on a conveyor belt, know, flow through pipes, density in ponds, that kind of thing. So all the instrumentation, so the nerve endings effectively of the brains of the mine site.
So we've got longevity, not a trending business. Yeah, that's like a especially in Australia where it's only by 2 % of the whole continent. Yeah, I mean, so I mean, the thing for us in terms of fundamentals when we were looking for something to buy. First of all, we wanted to be able to fund it ourselves because we didn't want to play with other people's money just yet. And so it had a certain size restriction.
Jon Stoddard (07:16.846)
We wanted to have something that was kind of in a, people always talk about being in a boring industry, but being relatively boring, but having something that was a little bit special about it. So for example, it's generally in the field of electrical kind of services, but because it's instrumentation, it's a little bit unique in that field.
There are plenty of competitors, but it's unique in that overall field. And that does things like improves margins, increases chargeout rates, those kinds of things. But also what we wanted was we wanted that the business that we ended up buying to be issuing invoices directly to the end customer, directly to the big blue chip customer. We didn't want to be five layers down in the contracting kind of scale. And so that was another thing that we were after is we wanted to see
on the books of the company that we bought, the good names of customers, the BHPs, Rio Tintos, all those names in there. Why was that important too? Because we felt like if we had a direct connection with the end user, effectively the ultimate customer, that was our ability to make sure that the decisions that they made at that point, we at least had some kind of influence or input into. If you're five layers down in the contracting stack,
Obviously you've got a direct customer, which is the next person up in the stack. but if bigger decisions are being made further up that chain, you do end up being much more of the tail than the head. if that makes sense. So it just felt like a nicer place to be. Well, your criteria was to have some kind of result. And if you were five chains down, you couldn't really change the product because you have to go through five layers to improve your product. Yeah.
Yeah, that's right. That's right. So all of those things that ticked all of those boxes. I mean, at the time, very small business. So, you know, when we bought it, it had five people in it, two of whom were the husband, wife founder, right? So very, very small business, but one that we could easily get our hands around both financially and also operationally. So, you know, from day one, I dropped in to start running it and turning it around.
Jon Stoddard (09:43.277)
And today, you know, we're approaching 100 people. We've got offices in, I'm losing count, but probably six different locations around Australia. We've now expanded our services to a range of other things beyond just kind of the belt scale measurement systems that we did before. So yeah, it's going well. And again, we didn't buy to sell, we bought to grow, you know, like anything.
If someone comes along with a great offer, who knows, but it's very unlikely that, you know, we can see a lot of ongoing value in this business and we can see a great future in it. And so we're, we're really committed to continuing to grow up with the team that we've got. Well, tell me about the cap stack that you came in. You and your partner put in 50, 50 down now United States. Yeah. We have the SBA loan. You can put 10 % on and get 90 % loan. What is, what's that? Australia. Yeah.
Yeah, we don't have the benefit of that great structure that you've got over there. So we just have to, I mean, at the time, we just had to go to a normal bank. mean, in Australia, also the banking market is getting better, but it's relatively constrained. are four big names and then a couple of challenger banks that are coming through the ranks now. But we don't have a lot of options when it comes to kind of your traditional banking finance.
And if you go to non-bank, particularly at that kind of size, the rates and the kind of equity carry that those non-banks want is quite punitive for a business of that size. So you either end up fully equity funding it or you go to a pretty traditional bank. we, I think at that point,
You'd have to get into a lot of details around the exact structure that we used at that point, but we were basically 50 % levered at that point. you brought in 50 % cash, equity down, 50 % debt. Yeah. And did the owners stay on the business or they accept? Yeah. So the owner was ready to go. mean, the first time we met the owner was actually on Christmas Eve, 2012. We went down for a meeting.
Jon Stoddard (12:00.509)
And both of us having come from, well, having still been in relatively kind of high-rise office type jobs probably turned up, I can't remember what we were wearing, but we probably turned up in shirt and tie and trousers, right? And the owner turned up in his cycling gear because he was already having a good time spending.
you know, Tom doing triathlons and all that sort of stuff. Well, in his 60s, but a pretty fit guy. But he was he was cruising and very much ready to retire. So he was happy to stay on his dad on for maybe, I mean, interestingly, that's a whole nother story. He was very excited about the freedom he was going to get. And so the month after we bought the business, he went on three months holiday, which was was good and bad in
different reasons, right? So we're kind of left with the business to run without much understanding of how it ran, but that was a good baptism of fire. So yeah, he, by the time we probably got to six months in, I can't remember exact details, but by the time we got to six months in, he was probably not really doing much by that point. So was relatively quick. Was it a good business when you looked at it and how did you find it? And that's two parts to that question. So how did you find it?
Was it a good business financially? it make good money on top end? You said how many things did it have? Yeah, yeah. So I'll answer the first one. So how did we find it? We found it just through normal broker channels. So a lot of the searches that I'm working with in the search run world at the moment do a lot of proprietary search and so they'll run their own pipelines. At the time, we really just used brokers.
So we probably had a list of five or six brokers and a few online sites at the time. We estimate that we would have looked at 200 businesses over about a four month period. We probably looked in detail at 50 with 10 to 20 and put in offers on five and bought one. So that kind of pipeline ratio. Interestingly, one of the other five offers we ended up buying two years later.
Jon Stoddard (14:20.749)
So that was kind of our pipeline down. It was all through brokers though. And when I think about those numbers, previously I thought, wow, we looked at 200 businesses. now when I hear the stories of the searches that I'm working with and the thousands that they managed to churn through on a monthly basis, it's a very different process. Very picky, very picky. Yeah.
So, and answer to your second question. Yeah, good business. mean, the way I would describe it is the way that I would describe a lot of businesses I see at the moment that are coming through the search pipeline as well. Like these are good businesses that are well run by founders that know how to run them. So, that doesn't mean that necessarily I can jump in and run it that well straight away. You know, like,
Quite often, again, it doesn't matter whether you use the analogy of an old vintage car or an old vintage sailing boat, right? If you watch the person that's been driving that vehicle for the last 15 years drive it from the outside, it'll look great. If they jump off and then hand you the keys and you jump in, all hell can break loose, you know?
You suddenly don't realize that, that's how I've got to push the clutch. I didn't realize that it was a bit sticky on the right hand turns. like, you know, that's like, yeah, that's like somebody said, Hey, can I drive your 76 truck and then go, yeah, but it's on the fourth gear. And then it pulls to the right a little bit. Yeah. Yeah, exactly. Exactly. And so, and so typically like, I would assume that for most businesses like that, particularly that are founder or owner led at the time when you buy them.
you've got to assume that in the first six to 18 months, there'll be a whole bunch of turbulence while you redesign the vehicle for you. It's been designed for them. And so you do need to go through some fixing. So when we bought it, the earnings margin was in excess of 20%. The bottom line was 20 %? Bottom line.
Jon Stoddard (16:31.137)
Bottom line was 20 %? for a mining industry. Yeah, okay. Yeah, yeah. Yeah, I mean, it was doing well. But then when you look at it, it was probably run on the smell of an oily rag, right? Like it was, it was it was run by an owner that knew exactly the minimum amount that needed to be done to be able to turn that revenue into profit, right? So, so of course, those earnings margins are going to go down in the period after we buy it, because we're like, okay, we can't do it on gut feel, we need a few more things.
put in to help us understand what those metrics really mean. And so all of those things add up. And you don't know what's in his head too. mean, he's not telling. I have a perfect example. I have a student that sent me a SIM and there's three owners. They each own 33%. They're all leaving. said, that's brain drain, man. You're not going to know what to do because three of them are leaving at the same time.
Yeah, and you just need to be ready for that. And that doesn't necessarily, that's not necessarily prohibitive, but you need to factor that into your pricing and your structuring of the deal to make sure that you've got some buffer in there to take account of that turbulence that you'll hit on the way out. So, I I think it was a good business. It clearly had some good recurring revenue in there that kept on coming through.
in the period during which we were learning how to run it. And, you know, like in that first probably 24 months, I kind of put myself into every single part of the business. Like I would go out onto site, I would go to customers and sell things, I'd write quotes, I'd be in the workshop building things, like loading things onto trucks. So I had to learn every single part of that business.
and that was really useful and even useful for me today. So today I'm Would you recommend that to your search fund students and say, don't think about working above the business or being an absentee owner. I want you in the business for six months to a year. I think so, yeah. I think that it's very rare, particularly for the size of business that typically searches are gonna look at and the kind of...
Jon Stoddard (18:51.393)
business that you will buy for the kind of multiples that we want to pay, they will need you to do that. If you want to buy a business where from day one you can sit in the boardroom and pull strings, you'll be paying a higher multiple and it'll be a bigger business. And that's fine, but it'll just be a different vehicle at that point. It'll have management, it'll have a CEO, have executive team, have a reporting structures.
And then you can just sit in the boardroom and pull strings. That's fine. But it'll be a much higher multiple in a much bigger business. Yeah. Let me ask you about, sometimes I see individuals that spend time in investment banking and doing numbers or big numbers, they overcomplicate the valuation of it. When you saw the valuation of the broker and you run three different methods to value the business and it goes, no, that's not, know, it's somehow you make it.
in the middle. What was that process like? That process was very funny and I do it very differently now. mean, so- Did you overpay? Do you think you overpaid? No, we didn't actually. We did all right, I think. I think we did all right. And we did very well on the debt funding at that point, which is better than what most people were doing a couple of years after that because the debt markets kind of changed a bit in the three years after. They're coming back now.
So I think we did okay in terms of pricing, but I do think that when I either think or look back at the kind of analysis that we did, I don't know if in the US you know Macquarie, but it's a very well known investment bank here and does a whole bunch of very, very interesting and complex deals and has done many over the last few decades. And that was my background.
And my business partner had come from PwC PricewaterhouseCoopers, which again is a big global name, right? So, and he'd been spending his last 15 years doing a whole bunch of &A deals globally, some of which we worked together on coincidentally, know, billion dollar transactions, that kind of stuff. We brought that sledgehammer.
Jon Stoddard (21:02.261)
to. So it was like a nuclear bomb to a small yeah yeah yeah yeah it was it was it was very funny and so but but it was useful i mean we really did get under the bonnet of that thing and so what i learned through that process is it's definitely important to know how to ask good questions and do good analysis but you you want to make sure that that is fit for purpose to the volume and
quality of the data that actually exists in the business. Like so often these small businesses, like they've got a certain amount of data and that data has a certain level of quality, but it's probably not the kind of quantity and quality that stands up to real deep analysis, right? Like it's not worth that much analysis. But you can't, I mean, you can't do analysis unless you have something else to compare it to. Yeah, yeah, it's hard, it's hard.
So in terms of the valuation and the structuring, it was relatively simple. We paid a certain amount upfront. There was an earn out over an 18 month period, think, three, six monthly tests on earnings against which we would then make subsequent payments. So I think that structure was relatively simple and kind of still relatively normal for what we're seeing today in similar transactions.
So yeah, we didn't end up over complicating at that point. I often say to people, I really kind of enjoy the structuring piece. I think it's an interesting puzzle to try and solve. Like how do you bridge that gap between buyer and seller through a transactional structure that actually manages risk on both sides? I think that's an interesting challenge. The challenge for me personally is not to kind of over complicate it just because I'm excited about it. Because often...
you overcomplicate it to the detriment of the seller. Yeah. What's your style there? Some people go, Hey, you did a great business and you built it over a few years. Love it. We think it's worth this. And then there's some people come in and goes like, there's a scratch on there. There's a dent over there. we think, know, we're, we're, I would, my, my general approach would be to go in relatively early with an indication of value that I know
Jon Stoddard (23:23.277)
has some buffer in it for all the things that you're gonna find along the way. And I'm- Is this a Warren Buffett margin of safety offer? Yeah, yeah. It's an offer that says, I'm happy to trade at this price and I know that there'll be gives and takes through this process. And I know that, you know, like-
It will not only be gives and takes in terms of what you find in due diligence, it'll also be gives and takes in terms of what you as the buyer need to give away to the seller during negotiation. So it'll be things like, you get through the negotiation and then suddenly they'll turn around and say, and by the way, I assumed that I was going to keep my vehicle that's currently sitting in the company books. So I'll have that right. Like that's a $50,000 vehicle, but I'm going to keep that.
And so suddenly like there's another 50 grand that's just gone out the window on the, on. So when you're doing, when you're thinking about the valuation, you need to assume that through the process, you're to be giving away probably a couple of hundred grand or more to the seller just through negotiation and findings. But what you've also got to assume is that through that process, things like working capital will probably end up paying you back. Like
that they probably haven't been really managing their working capital very tightly, for example. And they probably don't really understand their working capital as well as what you hopefully will be able to post completion. And so that'll pay you back for some of those downs. You'll get some ups on the other side as well. And so I definitely think that people spend a lot of time and whenever I see an offer that says we'll pay you, you know,
8.93 million, which is equal to a, you know, 4.75 times multiple. I'm like, just call it nine and it's a four time, like. But what's the difference? Yeah, it's like, there's not too much accuracy. like two months revenue different. There's no difference. Yeah. So I'm much more about, it's about this much. And as long as we can end up paying about that much, then the rest will come out in the wash and there'll be some ups and downs. Because ultimately,
Jon Stoddard (25:41.727)
If you're planning on holding this thing for, you know, five, eight, 10 years is usually what you need to do. It'll look so different by the time it gets to that point. But yes, I'm not saying that you don't want to buy well. You definitely do want to buy well. But you don't need to sharpen your pencil right to the nth degree because that's where you risk losing the deal. back to your acquisition thesis. Was it buy and hold or buy?
and hold till we get till 5X or somebody makes us a stupid offer? It was pretty much buy and hold really. We knew we wanted to buy a couple or a few. We didn't have a certain amount of money we wanted to spend or we didn't have a target exit date or anything like that. It was like, let's build a
a small portfolio of businesses that we can own and operate over the longer term and grow them. My promise to my wife and I think the same for my business partner, here's my, we had an amount that we're allowed to lose and an amount of time we're allowed to waste before we had to give up and go back to our day job. But no, there was no particular target around that. Let's find a good business, let's buy it and let's grow it and make it better.
Yeah, did you have expectations that the that was going to pay both of your salaries or was he still working at PWC? Yeah, yeah. So if if we had happened to find a business that was big enough to cater for both of us, we potentially both would have. But this one just wasn't big enough. So he stayed on. I dropped into the business. And then when we bought our second, we bought three businesses in 2015. So that was that was not by design. but.
When we went through that process, he then left his role and then we could continue to I'm gonna get to that, what's that, not by design, but was there any holy shit moments where something came up that intentionally or unintentionally didn't hide that you've discovered that wasn't true about the business or meet your expectations? Not in that business in particular.
Jon Stoddard (28:03.361)
There was in 2016, I think it was, there was a bit of a crunch across a multiple of our businesses. That was a bit of a holy shit moment. But no, mean, the only thing that just jumped into my mind, which is more anecdotal rather than a big issue, but at the time, as I said, there was five people in the business, six actually, six people in the business. Anyway, there were three technicians that were the guys.
four if you include the owner, but three technicians that would go out and calibrate these instruments, one of whom was an apprentice. and the literally it felt like almost like the day after we bought it. He came into me and he goes, yeah. And by the way, that apprentice he's got to go. And I was like, what? Like I bought this business assuming that we had this amount of capacity. And now it's like day two.
And you've decided, surely you would have known this like maybe, I don't know, a week ago or maybe even a month ago that you've decided that this guy's got to go. So I don't know, he just had to pick it up. actually, I won't go into the depths of that story, but effectively it was one of those cases where regardless of the size of the business politics exists, right? And, you know, any business is made up of humans. And so there are arguments and all sorts of things that go on. And so one of the little issues I had to solve was that
33 % of my technician workforce was on the outer with the remaining 66 % of the workforce. So, but that was fine. We navigated our way through that relatively well and it's fine. But no, no massive skeletons in the closet. All so let me ask you about what you're feeling there. People tell me drudgery work, W2 work, because there's no results, right? Now you're in it.
Are you feeling I really feel this? I tingling. I'm pinching myself. This is what I was meant to do. I want to do. Yeah, like it's funny. I remember. I think the answer is yes. Like I remember that that first couple of months I so so again he hadn't spent a lot of money on this business in the last couple of years, right? So that so the warehouse and the office above the warehouse were pretty run down.
Jon Stoddard (30:28.653)
In the first six months, we did a renovation of the whole thing and kind of upgraded the office and upgraded all the furniture and all that sort of stuff. But for the first few months, whilst he was still there, before he went on his three month holiday, he was sitting at a big old oak, I don't know, desk, like you'd see in the old movies, right? That he must have bought and he really liked it, he put it in the corner of the office.
And I was sitting about two meters in that direction in the corner at a plywood student desk having just bought the business. So it was a, it was a very big difference. like a couple of months before I was, I was working on the 35th floor or something in a, an office building in the middle of Sydney, you know, with a personal assistant and a team of, you know, 50 people and all that kind of stuff, wearing a suit and tie. And now I'm sitting.
you know, out in the suburbs at an industrial warehouse at a student desk, like made of plywood, trying to fill out quotes to sell instrumentation to mine sites, but strangely loving it. So, but I think, I think the reason why I did love is right back to that comment I made at the beginning around that, that autonomy and that accountability. actually felt like when I would write that quote to that customer,
Right? I want to sell you this instrument for $15,000. And I am going to sell it to you. I'm going to win. Right? I'm going to issue you this quote and then I'm going to follow you up and I'm going to like keep talking to you until you issue me a purchase order. And then the next week when the purchase order comes in for $15,000, like, I don't know, probably chemically the dopamine hit or whatever it is. for beer. Yeah. Yeah. Yeah. Absolutely. Like,
And so one thing that I talk to searches or potential searches about a lot is that need to really embrace that level of detail. Like you got to get excited about a purchase order for $10,000. And if you've come from McKinsey or GE or like one of those big organizations and you've decided, right, I'm to be a searcher and I'm going to kind of run my own business. $10,000 doesn't excite you when you're, you know, helping
Jon Stoddard (32:51.307)
large global organisations solve $2 billion supply chain issues. it needs to excite you when you're running a small business and that's going to be, you know, it's a repetition of $10,000 purchase orders that's actually going to make you successful. So yeah, I feel like in that first year, six to 12 months, it reinforced my enjoyment of that process.
Beautiful. Was there anybody that you followed at the time? So these are my inspiration. This is where I want to go. Could have been anybody. Yeah. So interestingly at the time, I mean, I know that ETA like entrepreneurship through acquisition and search and everything was was a big thing in the U.S. by that point. I mean, we're talking 2013. It was it was definitely well known at that point. Even in Europe, there was some.
In Australia, there were people doing things like this, but no one really knew each other. And I would say that the term ETA and search for I have no idea. there was no one really that had done what we were doing before. mean, a lot of our friends and our circles and our networks were all investment banking, large.
kind of consulting organizations, you know. And they said, you're to go buy an SMB? You're crazy. What are you doing? Yeah, no, totally. Exactly. For the first few years. You could be working 100 hours a week for us. Come on. So, so yeah, it was there wasn't any like, even when I think back on it now, I'm actually I don't even know why I did it. Like it's kind of surprising, surprising that we got to the point where I actually decided to have a crack at it because I
There was no kind of, even though the roadmap existed, we hadn't found it yet. And so we were just running off our own bat, having a crack. Yeah. So where did it get to the point where, you 2015, you said you acquired, that's only three businesses. That's only a couple of years later. Yeah. You grew this business or what was it growing?
Jon Stoddard (34:57.503)
Yeah, so we grew, yeah, I mean, did grow, SRO grew well in those first few years. And we already knew that we wanted to buy a couple more. We had irons in the fire with a few different things. And then for those three, one of them was one of the five that we originally offered on. So the storyline there is we offered them the price
in 2013 and they said, no, it's not enough because we need to retire so the number we need is X and you're only offering us Y. And we said, well, that's fine. If you want X, we'll pay it to you, but your business needs to look like this, know, needs to have these characteristics in order for us to pay that much. And so they said, fantastic. Well, we'll go away and we'll make our business look like that and then we'll sell it to you for the price we want. we said, okay, fine. That's good. And so we caught up with them every six months.
And it got two years down the track and they couldn't work out how to make their business look like it needed to look. so let me ask you a little just a small detail. How did you contact it? Was it you'd call them up, see how they're doing, or did you have a beer or lunch or what? so a bit of all of that. So they would reach out to us, know, that when they were, was a Canberra based business, when they were in Sydney, they'd come and visit and we're in Canberra, we'd go and visit like, yeah, just, you know, catch up.
when it's suited and they just give us updates along the way. And I think there's some fundamental things that you need to change about the way in which you run a business to break through any glass ceiling at any level. whether you're hitting the two to five million revenue mark or the 15 to 20 million or the 50 to 80 million or every now and then there's this glass ceiling that you hit and quite often
founders, particularly in the sub 10 million revenue mark, they'll hit a glass ceiling somewhere in that range and they won't know why. And it's because it'll be something completely unrelated to revenue or productivity. It'll be something typically to do with their team that they need to work out how to create more leverage in their structure in order to break through to that next size.
Jon Stoddard (37:12.693)
And particularly for people that have founded their own business, that's very difficult because it means there will be something that they currently do that they need to let go of. There'll be something that they're responsible for that someone else needs to be responsible for. So they suddenly need to be comfortable that that other person's best might not be their best and that's okay. And so they hit those limits. And so I think that's what happened with this business. The owners and the family that was running that business.
just couldn't break through that redesign of their org structure to unlock more leverage. And so they just constantly would hit the same kind of limits around volume in the business. sounds like in reality they didn't want to. Yeah, I think it's one of those things where you can talk about, I've got another sailing analogy I use quite often about ocean racing, where there's a lot of people that own boats and love sailing around the harbor.
and they constantly talk about how they'd love to do an ocean race. But then if you actually take them on an ocean race, they realize that actually it might sound good. That's not really good at all. It's downright scary. Yeah, and so often those sailors will sail around the harbor and they'll sail out to the heads and get close to the ocean and maybe hit a few waves and then they'll come back in again, right? And they'll do that for a long time. And then even if they invite an ocean racer onto their boat,
to help them sail out. Once they start heading out, they'll get scared and they'll grab the wheel and they'll say, no, let's turn around. And then the person will say to them, but I thought you said you want to do ocean racing. This is ocean racing, know, five meter waves, big winds, lots of like all that sort of stuff. Like that is, so that is ocean racing. It looks great from a helicopter, but when you're actually on the boat, it's pretty rough. And so I think that happens a lot. So anyway, that happened to this business.
they, that has kept on hitting the same revenue mark. Yeah. We dropped in and helped them. Did he, when you have these conversations with them every six months, were you actually helping them making suggestions to how to grow their business? Yep. And they just, they were just, they just weren't implementing. were tapped out. Yeah. Yeah. Yeah. How about was this business, was this business the same size? The first one that, a tiny bit bigger.
Jon Stoddard (39:32.813)
I have a bigger one. Call it it similar. This is slightly bigger. Yeah. Yeah. And when they first came to and surrendered and said, OK, we're ready. Yeah. Yeah. Yeah. So so what happened then was that they said, look, we can't make it worth what.
what we want it to be worth, right? And because they wanted to retire, they wanted to buy a particular house, they wanted a certain amount of money so they could live in their retirement, right? Then what we did, and this goes to the structuring point, right? So we thought, okay, well, you want that exit at that price. Your business isn't worth that now. So you don't want to crystallise right now. But we don't want to just help you make it worth that much for a fee, because that's a bit boring for us.
So effectively what we did in the end was we injected cash into their business to buy 50 % of it. And then we took out a call option over the remaining 50 % that would then be worth more than what they were wanting to sell the whole thing for. So what we said to them was, we'll buy half your business now, but we'll do it.
by not putting cash in your pocket, by putting cash into the business, right? And then we'll have a call option to buy the other half from you. But when we exercise that call, the check we ride will be bigger than what you currently want for the whole thing. Because I have a hundred percent confidence that we're gonna grow this business because we not. We'll back ourselves that we'll make it worth twice what you think it's currently you're trying to get for it now.
It sounds like a Elon Musk comp plan with Tesla. they said, they said, they said, that sounds, that sounds great. But what if you fail? Like what if you don't manage to grow it and we want to kick you out again, because now you own 50 % of our business and actually it's not worth more than what it was. And we said, okay, well, if we don't increase revenue by 50 % within, I think it was.
Jon Stoddard (41:46.733)
I think it was two years. think we had to increase revenue by 50 % within two years. And if we didn't do that, then our call option expired. And so they agreed to that. We increased revenue by 50 % in 11 months. But they still own, you still own 50 % in two years if your call option expired. Well, no, no, no. They had a call option over us. OK. So I put in call option. they had to. Yeah. So if.
No, it's yes. So if we didn't increase revenue by 50 % within two years, they could buy our shares back. Yeah. And the same price. And you accomplished it. Well, we increased revenue by 50 % in 11 months. fantastic. And then we exercised the option in two years. And they wrote a check, what, how much bigger than it would have been if they just bought the business right out the first time they're trying to sell it. A lot higher, huh?
Yeah, we paid them more than, well, yeah, we paid them a check that was bigger than the check they were originally wanting. And it was more than twice the amount that we would have paid them if we'd just tried to buy the business in the beginning. And where did that come from? They got the dollar value that they were always saying that they wanted. That actual amount they had in their head.
Where did you get that money? it cash flow from the first balance sheet of the company or what? Excessive the option. No, to exercise the option. was kind of a bit. It was coincidental. One of the other businesses that we bought was with a group of co-investors and they they really like the look of this business. So together we bought out the other business. Yeah. And you're
At this time, does your partner PWC is like there's enough cash flow to support him to yet or what? yeah, totally. Yes. He was out. He was out in 2014 or 2015. Yeah. Yeah. So you have this first one, the SRC and this other one, is it complementary industry and still a mining or what was it? No, no. So each of the ones that we've done haven't necessarily been
Jon Stoddard (44:04.503)
kind of complimentary, it's not like a roll up or a bolt on type strategy. There are similarities in terms of the situation that the business is in and the size and scale of the business and the age issue of the business and similarities in the situation of the vendor, the seller of the business. I guess you could also, if you draw a line through most of the businesses except for one, they're all
industrial product, IoT, kind of a bit of hardware, a bit of software, that they all have that kind of attribute. And they all have a level of kind of on-site service technician team type activity as well. So yeah, there are some similar attributes, but they're more characteristic than specific. Yeah, it's unrelated industries. You just bring in operational excellence to
each one of those. Yeah. Yeah. I mean, I think, I think, you know, if you look at the, the, the simplest and frankly, most common playbook for buying and then kind of growing any of the businesses, any business at this size and age and scale, it'll be a, the business, fix the back office, increase sales. So, I mean, that's, that's pretty much it. Like if you, if
If you buy generally a good business that's run by a good founder, the thing that's holding it back will be more internal than external. And so if you can unlock that leverage within the organisational structure, the leverage within the systems and processes. So I always talk about the triad of people system process. And those three things are usually undercooked in a lot of these businesses and that's why they're capped out. So if you can fix those three things,
So the machine is ready. And then you say, okay, now we've got a machine that can run four times faster than it's currently running. Now what we need to do is now just go and do the best that we can possibly do for our customers to increase the volume that we're putting through that machine. And that usually, you know, if you buy well enough, like we were saying before, not perfectly, but well enough and hold a business for five years that is that kind of business and that kind of size.
Jon Stoddard (46:30.477)
you only really need to double revenue in a five year period as long as you're doing it productively and you'll make great money. All the IRRs will be off the charts for any normal measure if you do that. And so you don't need to 10X the revenue or do anything amazing like that. If you buy a good enough business and make it better on the inside and then kind of grow by
15, 10 to 20 % per annum at the top line over a five year period, you're storming. Yeah. What are your opinion on businesses? You know, the software, it's leverage, right? You can bring on a thousand people or 10,000 people. It's just a couple more servers versus an IT business where you got to bring on people for each $200,000 per employee revenue. Yeah. So I think both, both have their pros and cons.
I think for me personally, I'm much more familiar with the latter. Like I'm much more familiar with people-based businesses and I'm much more familiar with kind of physical engineering businesses rather than kind of high leverage SaaS opportunities. But I think that one of the things about that it comes down to a little bit around the buying opportunity.
So if you already have a business that is doing well enough and it has that kind of SaaS growth opportunity, the pricing is already, the pricing of already going to be taken. And so I do think, and there are some businesses that I'm already currently involved with that have a SaaS layer opportunity on top of the kind of traditional business that we've already got. And so that's definitely something that
that we'll be working on over the next few years is for sure is looking for SaaS opportunities, but it's all founded on a relatively traditional base. I think that there are some, and if I think about the searches that I'm working with at the moment, there are some searches that are finding pure SaaS play businesses that are 15 years old, that are kind of what I would refer to as mature startups that have hit.
Jon Stoddard (48:53.485)
one of those glass ceilings that we've been talking about and potentially might be a good acquisition. And so some of those are coming on the radar, but they're just less likely that they more stay in kind of a startup to VC to kind of growth capital kind of realm rather than the acquisition space. what I'm finding. Tell me about those, that's the second business. said there was a couple more businesses that you acquired in 2000. Yeah. And I can't believe it. Like almost 40.
50 minutes have gone by already. So what were those businesses? And then I want to get into, what are you doing now? Cause it sounds like you're a private equity funds funding searchers or what? So, yeah. So, so, so in relation to the first two, so we also bought a, a business called Duncan technologies, which is makes on street parking meters. So
So the actual machines that you pay when you park on the street. But again, it's a device with a software layer. So it's got a full software package that the local government uses to monitor all of those payments, payment gateway, predictive parking volumes, all that sort of stuff. So we bought that in 2015. We still own that today. We sold down a majority stake to a private equity firm a few years ago.
but I still sit on the board and we still have shares. big was that when you bought it? So that was a lot bigger. that was, I mean, not heaps bigger, but it was a fair amount bigger. So that would have had, I'll talk in terms of people, so that would have had 70 or 80 people when we bought it. We're now about 100 people, 90 something people. Nice.
So yeah, yeah, I mean, that was definitely a bigger acquisition. And at the time we had a co-investor get involved with us to help us get across the line from a funding point of view. So what's happening there is, are you reaching out to these investors or is gravity happening and you're attracted and these, hey, Pete's doing great deals. It's, you know, let's find out what he's doing. Yeah. Yeah. So by that point in the process, I think,
Jon Stoddard (51:11.511)
because we were speaking to our existing networks in investment banking and accounting and legal and finance, and they were kind of hearing what we're up to. There was some more deal flow that was coming in at that point as a result of that. And also, you know, there were a few people that were saying, look, if you come across another deal and it looks like a good one and you need some extra capital, then let us know and we might be interested to co-invest. So it wasn't that we went and raised capital.
It was more that we were finding things and we found this one. We thought, this one looks good. It's probably bigger than we can afford. Let's have a chat to one of those people that said they'd be interested in getting involved and see if they want to co-invest alongside us in this one. that kind of a good to have a network, a PWC and investment bank. Yeah, yeah, yeah. And so and so that that worked quite well. And and you know that that that particular investor did well.
they invested in 2015 and they exited in 2018 making quite a large multiple when we, because effectively they sold their shares out to private equity. And we stayed on board. So, so yeah, it worked well. And then, and then the other business that we bought was probably a little too opportunistic. We bought a business that was a wholesale in wholesale travel. So it's, it's sold.
Italian travel holidays to Australian travelers. And we had a connection in our network that had a lot of experience in the travel industry and to come across this deal. And so we thought, okay, well, let's have a go and see if we can help, you know, buy and build that. But man, that was hard work. To me is like immediately outside your domain of expertise. Totally.
And that's the lesson, right? So the lesson is you do need to stick to your knitting. is a certain amount. There's a certain amount of variety you can, like when we were talking before, know, are these businesses similar? A lot of the other ones have similar characteristics, like they're built from the same mold. This one, complete outlier. And we thought, that's all right. The other partner is bringing the expertise. We just need to bring that operational capability, right? And work out how to run the business.
Jon Stoddard (53:34.837)
The real problem with that business was actually just the macro headwind was massive. Hotel beds, Airbnb, like all these other things were completely online undercutting the fundamental value that it had in the relationships with the venues in Italy, which is where it had built its business. So luckily we managed to exit that and keep our shirt. So we exited that a couple of years later after trying.
whole bunch of different strategies to make it work. But that was, you know, there's some good learnings in that one for sure. Yeah, it's a funny story. And that was like, I got married and took my wife to Italy. you know, I read the Rick Steves books and says, don't wear jeans, it's too Americanized. So I bought these stupid cargo brown pants and we get to roll. Everybody's wearing jeans. Yeah, yeah. Yeah, yeah. Perfect. Perfect. Well, pants and jeans. That's it. It's like,
Will I stand out now or what? That's funny. Yeah. So tell me what are you doing now? Cause I don't have a lot of time here. You've got to, you work with servers. What do do? Yeah. Yeah. So, so effectively, I mean, I mean, long story short, it got to 2020. So each, each time I dropped in to run one of these businesses, the objective was to make myself redundant. So I would drop in, do some growth.
and either promote someone from within or recruit someone from external to then make myself redundant. And so having done that a few times, get to 2019, 2020, just ignore COVID because it actually didn't influence these decisions. But it was just coincidental at the same time. But I was at a point where it's like, okay, so what next? Do we just like roll the dice again? So go and find another business, it, drop in as the CEO and do the same thing again.
And at the time, you know, I've got, I've got two boys, they're now 10 and 12. So at the time they were whatever, six and eight or something like that. And I was looking forward over the next kind of five to 10 years and thinking, I want to have a bit more flexibility in then what you can have if you're the hands-on CEO of a small business. And so I was looking for something in between. I didn't want to manage other people's money. I mean, that's another pathway is to go and raise a fund.
Jon Stoddard (55:56.095)
And so they look at, we've got this track record. Now we want to go and raise a whole bunch of capital and go and use that to leverage more money into similar types of investments. And coincidentally, my business partner, he's done that just recently. So he's raised a fund in the last 12 months and has made a couple of acquisitions, which is fantastic. And so he's leveraging that experience to now go and do that managing other people's money.
And I wasn't keen to get into that kind of management space. So was looking for how I could leverage the experience that we've had together. And then by pure coincidence came across the search fund model because I was doing some work at NC out in Singapore. And it just really resonated. Obviously the search journey resonated with me because I was like, that's so similar to what I've done. And I didn't even know it existed. How, how great is that? There's this whole community and
And then also the thing that really worked for me was I looked at what is expected of the investor in that model and not only what's expected but what's available for the investor to do in that model, which is be much more hands-on than what you can be in a normal private investment or private equity type of model. There's a desire from the searcher to have the investors involved and I'm quite a hands-on person.
If you speak to any of the CEOs that I work with, hopefully I'm not so hands-on that it gets annoying, but occasionally I probably am. But that really resonated with me as the opportunity to work closely with these searches and actually kind of really get close and coach them through the process. it the search type fund where you're giving them a check every year for a couple of years, or is it no cell phone?
Yeah, yeah, yeah. A bit of both. There are some self-funded searches that I work with as well, where I catch up with them once a month and help them think about the way in which they're progressing their search and then potentially when they acquire, I might invest. But yeah, I'm also invested in the search phase of a number of searches as well. So yeah, I'm doing that. I still sit on the board of SRO, of Duncan Technologies. I made an investment in ticklish parking business last year.
Jon Stoddard (58:14.701)
So I'm on the board of a range of businesses that I had already previously invested in and then backing these searches to make acquisitions as well. We don't have a lot of time, but I'm just curious about what are your expectations as a search funder? So these searchers, I need you to find this type of business and then we're going to sell it in five years or seven years? So the model
sort of expects an average of five to 10 year hold and about an eight year average in terms of the exit. Me personally, I don't really mind on the exit pathway, but there's usually 10 to 15 investors involved of which I'm only one, right? So I'm just a co-investor alongside another 10 to 15 that are all sitting in there backing the searcher. In terms of what they should look to buy,
I guess kind of, you think about the conversation we've just had around the fit for me with particular businesses, that's the most important thing for me. mean, so the test is, do I think this individual, this searcher has the capability, the grit, frankly, the problem solving mentality and the coachability to traverse this journey, right? This whole weird search journey. If yes, then the task for me is to find
the most suitable, help them find the most suitable business for them. Rather than for me to say, really like engineering services or I really like property management. The best thing is for me to say, okay, well, I really like you because I think you're a capable person that's going to run a great business and you're humble enough to be coached. How do we find a business that great fit for you? It's like you're backing the jockey and then you've got to find the horse.
If we're looking for a horse, it's not a horse that I'm going to ride, it's one they're to ride. So that's got to be a good fit. It's just another way to drop a GM when that company, it's just when you do it, you're getting the job first. Yeah. Yeah. Back in the GM first and then trying to find a company to fit rather than the other way around. Right. Right. Well, Pete, I have ran out of time. I'm on five more minutes and...
Jon Stoddard (01:00:27.703)
Thank you so much for doing this. This is great. You're awful. No worries. Yeah. I really enjoyed it. How do people get in touch with you? Yeah. Well, I'm on LinkedIn. that's, I'm active enough on there that a message on there will get through to me. I've also got a website that people can use to have a look at some of the stuff that I've done. but yeah, probably LinkedIn is the easiest way. So, you you can drop it in the notes or, you know, people can.
can look me up and they'll find me pretty quickly on LinkedIn. Beautiful. Thank you so much, Pete. Cool. Thank you. It was great to chat. really enjoyed it. was a fun conversation. Yeah, that's good. I love these stories. I love them. if I could just tell, like write a book on this, man. Maybe one day. Yeah. Thank you. Thanks, John. I hope this video has inspired you. If you need help buying your first million dollar business,
make sure to visit me at dealflowsystem.net. If you like this video, make sure you subscribe down below, comment on it, share it, tell everyone about it. And thanks for watching.
