Mastering M&A with Tip of the Spear Military Tactics from an Insider

Summary

In this conversation, Jon Stoddard and Sam discuss the concept of 'Deliberate Discomfort' as introduced in Jason van Camp's book, emphasizing the importance of stepping out of comfort zones for personal and professional growth. They explore the significance of mentorship and coaching in achieving success, sharing insights from their own experiences. The discussion transitions into the realm of Mergers and Acquisitions, where Jon shares his journey in the industry, focusing on the entrepreneurial approach of acquiring existing businesses rather than starting from scratch. They highlight the value of investing in entrepreneurs and the unique opportunities presented by Baby Boomer-owned businesses looking for succession planning. In this conversation, Jon Stoddard discusses various aspects of mergers and acquisitions (M&A), focusing on understanding seller motivations, innovative leadership strategies like the Entrepreneur in Residence program, and the importance of structuring deals effectively. He shares insights on finding and acquiring businesses, the significance of due diligence, and the role of Letters of Intent (LOIs) in the acquisition process. Stoddard emphasizes the need for detailed financial controls and the importance of building relationships in the M&A space.

Takeaways

Deliberate discomfort is essential for growth.
Having multiple coaches can provide diverse perspectives.
Investing in entrepreneurs is as important as the business idea.
Mergers and acquisitions can be a better path than startups.
Baby Boomer businesses often lack succession plans.
Sales processes can be simple yet effective.
Coaching should yield a significant return on investment.
Discipline in business leads to freedom and success.
Asking the right questions is crucial for mentorship.
Recognizing when a coaching relationship is no longer beneficial. Understanding seller motivations is crucial for successful acquisitions.
An Entrepreneur in Residence program can foster innovative leadership.
Finding the right business to acquire requires strategic outreach.
Structuring deals effectively is key to successful M&A transactions.
Due diligence is essential to ensure accurate financial representations.
Letters of Intent (LOIs) should be detailed to avoid misunderstandings.
Building relationships with brokers and professionals can enhance deal flow.
The pandemic has impacted many businesses, affecting their sale potential.
Financial controls are necessary to manage risks in acquisitions.
Constantly seeking deal flow and partnerships is vital for growth.

 Watch the interview here:

Jon Stoddard (00:03.086)
Hey, welcome to the top &A podcast, opportunity podcast. got Sam, Sam's a new friend of mine introduced me to a book just recently from written by a ranger and and I were in the right in the same circles right now. Sam, welcome. Thanks, John. Appreciate it. Yeah. So I want go back to this book that you recommended. It's by the rain. That was a great book, by the way. Yeah. Deliberate discomfort by Jason van Camp. Yeah. It's not as it

It's not as good as leading at the tip of the spear, the leader of the book that I wrote in 2018, but no, Jason's a good friend of mine. He's a retired, you know, special forces green beret, went to West Point, and he is, I think, just an awesome dude. And he totally has changed my life for the better. So he wrote a book called Delivered Discomfort.

He does a 60 day deliberate discomfort challenge that you can Google and find him on, but he is just awesome people. And this book that you're referencing that I turned you on to was one that when I got it, I couldn't put it down. A lot of it is about the conflict, obviously over in the Middle East and his interaction with it. But more importantly, it's written by the heroes who went through these discomfort, these

tremendously uncomfortable moments and it's riveting the stories that they share and they write it themselves. So each chapter after the book and opening and closing chapters by Jason are written by these heroes in the military who've gone through these tremendously uncomfortable moments. Yeah, it's a first time writer. I will tell you, I was in the process of like.

You know, I, there's one area of my life I was trying to get better at and you know, that's consulting. That's our business. And there was a, I was just trying to decide whether to hire a mentor or not. And then I wrote the book, which said, you always put yourself in deliberate discomfort areas and you know, putting out that money for this mentor program was kind of discomforting, but I read the book and I like, you got to do it to grow. So I did it. I agree.

Jon Stoddard (02:26.367)
Success or reason. Yeah, I agree. You know, I, my career has spanned and we'll talk about it wherever it is you want to go in the conversation. But, you know, I I've had the ebbs and the flows of a career path. It hasn't been quite the just a ladder. It's been more of a rope that seems to have gone up and down. But I can tell you that the successful times, you know, I look around and I had really great mentors. I also had really great coaches and

And now I have three coaches that work with me. Each one of them has me focused on a different clarity path. I'm a firm believer that, you know, if you think about a golfer like a Tiger Woods, he probably has 12 coaches that work with him. Everything from the intricacies of his swing to his pots, to his clothing, to his diet, nutrition, exercise, so on and so forth. I mean, he's got a coach for just about everything.

Yeah. So you've got three coaches or what are the three coaching areas that they work on? I feel like it's just totally off the subject that I'm &A and work on that, but I'm very in because actually it's not because everything you want to get better at, if you're not improving in 30 days, you need a coach. Yeah. So, so I have, I'll tell you what, with comfort, I'll tell you two of them. The first coach is for sales.

He's the same sales mentor that I've had for the last six years. It's a gentleman named Anthony in a Reno. He's based out of Columbus, Ohio. I plug him, promote him and him and I connected because if you think back to selling and if you've ever sold, you know the grind that it is. It was very popular about six, seven years ago to only do referral selling.

And you and I both know, and this is how it is that you and I came into contact with one another. At some point, you're going to run out of your own network, your own referral network, and you're going to have to go outside of that. Maybe there's a deliberate discomfort moment in that. Maybe there's not. But it is one of those things where sooner or later you're going to run out of your own referral or your own circle of trust. You run out fast. And so with Anthony and I aligned really quick,

Jon Stoddard (04:43.275)
Not only is he a great Italian guy like me, but he also from a sales methodology, he's very cerebral. He's very, I want to say direct. And he believes in what it is that he presents with conviction. And that's kind of how it is that I am. And we can talk about that in an &A space. So that's one of the coaches. The other coach is, I would put him in IACT.

I ask him to act more like my chief of staff, someone who is familiar with business, someone who has been there, done that, and someone that I can ask for advice and guidance and counsel on, and he can either share firsthand perspective on this is what I've done, Sam, and this is what, if I had to do it over again, I would do the same or different or.

He also, because of his network, has the wherewithal to say, I never had what it is that you're facing, but I know someone who has, and here's how they went about coming up with and driving towards action plan and solution. And you can either follow them and do that, or it turned out to be a disaster, and you shouldn't do this. So he's got those types of analogies. So those are a couple of them. I'm a firm believer, though, that

You know, if you have somebody who works with you, you can achieve a higher altitude. At that higher altitude, you'll take in a totally different perspective. And you've got to be able to take in that perspective with clarity so that way you can act. And that's what I leverage these coaches for. And I have mentors who obviously, you I come from big consulting. I come from Deloitte. I come from Aon's Change Management Group.

I'm still great friends with the senior partners who are now retired. One of whom I call monthly just to see or have him share with me that, you know, he's 900 steps from the beach in Jacksonville, Florida. And so it's a short commute to paradise for him. But it is one of those things where I'm really fortunate to have that type of a network to call on to get some perspective and bounce on.

Jon Stoddard (07:09.153)
multiplies your abilities. I got a question for you. My friend, one of my buddies from college, used to say, you you can be in swimming and take, you know, like in your middle school, you have your middle school coach for swimming, and then you go to high school, you have your high school coach in the college, they all go up. How do you, and it's really easy to see the demarcation lines because you graduate college or you get, you recruited a college or

you have the abilities to go to the Olympics. I mean, how do you decide like, I'm not getting anything more out of that coach. I need to move up a little bit. I'm saying I'm not doing it with my coaches. I'm just curious how you do it. So I'll start off by telling you, I'll tell you two things, it reminds me of two things. The first one is that it's almost the equivalent of a mastermind group.

If you've ever participated in a mastermind group where you're the only one who's going and providing or sharing, it's gonna at some point probably leave you hollow or empty. In other words, mastermind groups that work best when it's a give and take or provide and receive model. Because I've been in those types of mastermind groups where it's a, I'm given all the time.

And while this is really great and everybody else is kind of catching up, it's not benefiting me one bit. And so I kind of look at an executive coach as, or a coach or a mentor as, know, there's gotta be, and especially the ones that formerly that you pay for, right? There's gotta be a five X return equation. You know, if you're gonna pay a coach $5,000 a month, you'd need to get $25,000 at a minimum.

return on the investment. That's the accounting side of me that comes out. I'm an accountant by training, but you've got to get that type of a multiple in return. And if you're not getting that, you need to maybe introvert, look at yourself in as much, are you asking the right questions or providing the right scenario for them to assist? And sometimes it comes down to, are you asking for help, especially in those informal relationships, right?

Jon Stoddard (09:30.795)
You know, a lot of us, know, we want to be prideful. We want to have egos. You got to check that at the door in those types of moments when you're meeting with, people who can help you if you want to receive maximum help. Yeah. The other thing that I will share with you besides that type of a five X mastermind, you got to give as well as take or provide to receive is, and I was recently reacquainted with it and it's the theory of constraints.

This theory, which is by a gentleman who taught at MIT, his name is Eli Goldratt. He wrote the book called The Goal, if you're familiar with that. And I worked at General Motors in the late 80s. We had a bunch of senior leadership who was going to Harvard's MBA program, and they were going to MIT for advanced doctorate degrees and whatnot. But the theory of constraints that Eli came up with has rule number one.

If it's not working for you, stop doing it. And I look at these mentors that, know, if in a coaching providing perspective, if it's not working for you, stop doing it. know, gone are the days when we have the luxury of these ample time allotments. I mean, I don't even play golf anymore.

which is something I was on a scratch tour when I lived in Texas. Really? But it's one of those things. Yeah. But it's one of those things where I don't even play anymore because I'm convinced of two things. One, golf can be an old person sport so I can play it when I retire, if I retire. And secondly, the tremendous time suck that it is, I can't dedicate six hours to a round to go and play golf a couple of times a week, no matter how much I love it. Yeah.

But the theory of constraints is the second thing that I'll share with you, John. And that is that if something's not working for you, stop doing it. Because time is too precious. It's the only commodity that we have that we can't get more of. Yeah, well, that's, and negotiate for it. You can't do anything. It's just, I, we've tried. I was, I had a coach who was out of, Toronto and Zurich and he was awesome.

Jon Stoddard (11:50.463)
And he was the inventor of the 5 a.m. club. And so and I still get up at 5 a.m. and still work out and do all of those types of things. I don't necessarily always do it. So I probably violate his 5 a.m. club rules from that perspective. But I got to a certain point where it was just like, you know, what it is that he's referencing outside of that discipline or what to do with it with at that 5 a.m. mark. It's just not resonating with me anymore.

Yeah, it wasn't working. so theory of constraint rule number one, if it's not working, stop doing it. So you're not going to pick up Jaco's 4am wake up time. You know, no, but there's a lot of good things to get from a Jaco relationship in addition to fancy coffee, so get after it. And to get his tea and all the other energy and mulk protein shakes. You know, there's a lot of good things that come out of a Jaco world.

One of which is that discipline equals freedom. The more disciplined you can become in structuring your day and the activities that you put yourself through with consistency, they've got to drive in the right direction, obviously, but they can lead to some really successful moments. It's really like the Darren Hardy, the compound effect. What are you talking about? Just do the little things every day. You'll you'll grind away at it. Yeah, as long as there are the things that are leading towards that that moment, right? There's some things that you will

perceive that you're spinning your wheels at some certain point, you need to check up on yourself, look back on the moment and say, we're still spinning our wheels here. Is this going anywhere directionally or are we just flinging mud everywhere, right? Yeah, but you don't know if it's 20 year version and you're at year 10 and you've only made, you know, minute progress and the bulk of it progress comes at the later times like

I say this, like, if you look at Warren Buffett's wealth in his 50s to 60, he was still a millionaire. It was after 60, he became the billionaire and multi-billionaire. No, I agree. I think he's got some real long-term. had some, don't believe the hype though. He also has some short-term goals and in the event he's not achieving them, he makes those modifications or pivots as well. he'll make some trades.

Jon Stoddard (14:17.421)
I think that the public persona of what it is that he wants to present is one of, know, slow and steady wins the race. Well, not if you're getting lapped. OK. And not if you got bills to pay. I think it's of those types of moments. So, hey, that's a great opening. Let's talk about tip of the spear. Yeah. Mergers and acquisition business. And you've been doing this for almost 10 years. What exactly? What's the focus? What do you what's the criterion? What's the

purpose behind it? what is, tell me about it. Yeah, I'll give you the background about how we got there too. So, I let a tech start up from 2010 to 2012. Prior to that, I had my own consultancy and I come from big consulting, Deloitte, Aon's Change Management Group. And so I had a client who was in San Diego. He asked me to get together with him. He had a tech idea that he wanted to run past me.

And I said, sure, I'll help any way I can, which is my nature. We got together, I heard him out and I said, you know, I really like it. You know, how can I help? You would you like me to act as a mentor or an advisory board member or sit on the board of directors? And he said, I'm really glad you like it because I want you to help me run it. And I said, well, keep talking because, I like the thought of it. He talked, John, I listened, he talked some more and he talked really well because the next thing you know,

I was leaving this consulting firm that I'd been running and led for six years. I was single shingle in it for the first year. And then I grew it to 20 folks. We were doing projects, both domestically as well as internationally in a sales business development capacity. But I ended up off ramping from it, jumping headfirst into a tech startup in 2010. We raised $8 million straight out of the chute. It gave us some great deep pocket funding to do some nice development.

I would argue that we raised 6 million too much. were. Yeah, that happened with us at TurboSquid. We raised $5 million like, man, this is, it's 4 million too much, We have two, it was a marketplace and we only had one side. That was the inventory. Yep. We were wasteful, I would say, with some of the money and lots of it to boot.

Jon Stoddard (16:40.609)
But like I said, it looked great. It provided customers with exactly what it is that they were looking for. Anyway, long story short, I implemented the same sales biz dev blueprints that we've been helping organizations around the world architect and implement. We grew one of those true hockey stick graphs that are of legend. We had some private equity firms that became interested in us as we grew revenue at about the 18 month mark. Some got really interested at the 22 mark. One of them purchased us.

and I off ramped at 24. I looked around and I said, you know, that was kind of a wild ride. What do I want to do next? As a matter of fact, one of my old senior partners from the consulting firm that I had called me up and he asked, are we going to put the band back together? And I said, you know, I think so. I said, but I want to do it different this time. You know, I want to have not only a consulting firm side, but I want to have this venture side of the firm. And so here we are.

Nine and half years later, we'll celebrate our 10 year anniversary in February. And we still to this day have two sides of the firm. We have a consulting side of the firm that Deloitte would call it business transformation consulting. I would call it change consulting. It's a heavy focus on sales business development, but we go upstream and downstream from that department to get involved with marketing on one end and operations and fulfillment and customer service on the other.

So that's our consulting business that works with the Fortune 500 through the SMB markets. On the other side of the firm, we do three things at the venture side of the house. One is we still do some early stage seed funding for entrepreneurs that are post revenue and post revenue at a million dollars plus. We look at how it is that we can partner with them to help accelerate their growth. With, with, let me ask you on this one.

If they're having over a million dollars in revenue, is it tech related? know, we've looked, know, tech obviously is one of one of our favorite areas from that perspective, but we've also done some biotech pharma. We've done a retail play as well. And so any anything that really I think it goes back to the, you know, somebody asked me in another conversation, what do you like?

Jon Stoddard (18:58.207)
investing in? Is it the company, the idea, or the entrepreneur? And I think it really, when I look at company or entrepreneur, I think that's one of the same, because the entrepreneurs essentially dictate the culture of the company. And that's really what you're buying or investing in. But, but it's also one of those things where, you know, the the actual entrepreneur is crucial to it, the business idea, you know, you can get the business idea.

But I've seen entrepreneurs who've had maybe not necessarily first to market, they've been second to market. But because the entrepreneurs were awesome, it was like that's where we're to put our money and that's where we're going to put our sweat equity or smart money so we can work with them. Yeah. Seed money. I'm just curious, you're almost like a VC there, right? Yeah. You take a big percentage of the company and look for

acquisition or IPO at some later date. Correct. Yep. We'll, look to either grow the firm towards some type of either a and A itself or an IPO or something of that nature. That's one aspect of the venture side of the venture funding. The other two real quick, like John are, I mentioned earlier, we were wasteful with the money that we raised. So we do a business funding type of a service where we'll either help capital raise or

do customer funding type initiatives. The capital raises obviously because of FINRA certifications and whatnot. We have to be owners of the organization, board members, et cetera. So that way we draw that fiduciary line of responsibility. Yeah, on the cap table somehow, right? Yeah. But in addition to that then, what we're really here to talk about is the &A space. That's the third leg within the venture stool, if you will. We're late bloomers in the mark.

I would say in as much. So I'm an adjunct faculty member at UNLV. I've taught at the higher ed level since 2008. And I had the fortunate situation to go to a conference at Harvard a couple of years ago. And I met the two gentlemen who wrote the Entrepreneurship Through Acquisition Bible, if you will. my God. That is the most popular book. Everybody recommends that. Read that one first. That's your first book. Great.

Jon Stoddard (21:21.269)
So I did and I loved it and I thought to myself, this is such a better way to be an entrepreneur, acquisition versus startup. You're going out and you're acquiring a business that already has its processes, procedures and people in place. And all you're trying to do is identify what are the levers that you can flip up and drive this thing forward faster.

And so we're late bloomers to that market. We're late entrance into it, but we're making good progress therein. We look at tremendously unsexy industries. We look at manufacturing firms. We look at construction firms. And specifically we look at in the market size anywhere from our sweet spot is about 1 million to 10 million in EBITDA or annual revenue. We'll look at either one.

but we love Baby Boomer owned organizations where the Baby Boomers looking to exit and they don't have a clear succession plan. They don't have a heredity line, know, son, daughter, sibling, nephew, they don't have that type of who they want to turn the company over to, yet they're really proud of the legacy that they've been able to build and they want the organization to continue on.

Those are the types of organizations that we love. What would you have in place to say, hey, the guy wants to leave real soon or the guy wants to leave in a year? Do you have the resources in place to find people to replace them? Yeah, so we do two things. In the past, we have looked to see if the CEO, the owner of the company wants to depart, do they have a second in command who could potentially

step up into that leadership role. know, typically a baby boomer owner who's in their late 60s, 70s, who's had an organization for 20 plus years, they have a second in command who's essentially running the operation. They may not do the sales biz dev, but that's what we're really good at, right? And so it's a nice cleaner transition. And we'll typically give that type of a second in command, an elevation to a president type title.

Jon Stoddard (23:44.791)
give them an equity stake in the organization so that way they've got skin in the game. And we recognize that we value their participation with the organization. We buy organizations based on past performance. We pay on future potential though. And so there's a differentiation between those two. Yeah, that's a good topic right there. Let me go back to that. Do you ask the second in command to...

put skin in the game or you just give them equity? We can. mean, typically the way that it works is that we'll give them equity because we respect what it is that they've done and we want to recognize their contribution to the organization moving forward as well. Right. And what is your plan for that? I I was going to say, I was going to say, I'll give you the second model because I think it's going where it is that you're going, but.

This is what I've looked at a lot of manufacturing plants and you can go to some of the broker sites that specialize is in the local regional businesses. And you go, yeah, it's a lovely business and you've been running it for 20 years and you're, you know, all your employees have been there for 14, 15 years, but how do we grow it? Is it, can we grow it organically or do we just put it in a portfolio and set it over the side and do the same thing over again? I think it depends what your

what your path is and what it is that you wanna do. I think if you look at some of these tremendously unsexy industries where they've been enduringly profitable, I mean, right now we're looking at a construction firm that is, I would put them in the middle of nowhere. It's in a non-sexy geographic footprint, but it is one of those things where they do about $2 million in annual sales.

and their EBITDA figure is almost two thirds of a million dollars. So it's healthy from a ratio perspective. so the business, when we look at it, we like what it does and we like the returns that it provides. And we also like the people that are there.

Jon Stoddard (26:02.029)
not only from a internal people, the employees of the organization, but the people that the organization serves from a customer base perspective. So I hope that answers your question. we look at this. I have another friend who bought a business that makes toilets, where you a toilet anywhere and it's totally unsexy. There's nothing sexy about taking shit. Yeah.

But it's really profitable, good salt of the earth people, but there's no 50 % growth per year. It's, you you just have to look for some other business if you want your whole portfolio to reach $10 million. Right? Yeah. That the business that I mentioned, it's never going to fire work off. It's never going to have a 200 % growth year over year. I don't care how many levers it is that we identify in our due diligence.

as the potential that we can flip up and drive this thing forward. It's not going to be that type of a firm. That's just, that's not the type of company that they are. And you can look at their past history too. You can look at five years worth of financial. I think the common mistake that most acquisition entrepreneurs make is that they're the smartest guys in the room, or at least in this instance, and that they can run the organization better than the entrepreneur who's been owning and running the business for the previous

three plus decades. The reality of the situation is that there's probably, yeah, maybe they're not great tech guys and maybe they don't do a lot of the marketing and they probably don't play social media nice. I mean, we have a construction firm where the owner was the sales business development individual or department. He was it. And when we asked him, you know, who does that and where is your CRM?

He pulled out his flip phone and he said, right here, if somebody needs something, they call me. And so we looked at that from the perspective of, okay, great. So can we buy the number from you? So that way we have it. And he says, no, he says, you can buy the flip phone. Cause my daughter tells me I need to upgrade to one of them iPhones anyway, but you can't have the number. Cause I've had this number for 30 plus years. And that is a great ass because.

Jon Stoddard (28:27.157)
If he calls those people, they recognize his number and they'll pick up the phone. And more importantly, we recognize that he gets the calls. So the sales methodology, the sales process wasn't he's making phone calls to drum up business. The sales process was his phone rings. He flips it open and answers it. And so what we, the deal we structured with him was, you know, you know, we asked, would you like to stay on in some type of a capacity? You know, we love.

We love maintaining those figureheads as long as they can maintain some type of a, know, we're now a hundred percent in charge type of a Marcus Lamonis from the profit moment, right? But it is one of those things where he wasn't interested in staying on. mean, I can't blame the guy either. He wanted to go down to Arizona and golf, right? He wanted to be in your back of the woods down there. Does he still get phone calls like to his phone? So the deal we structured with him was that, well, can we structure this type of deal?

when the phone rings, will you answer it? And then if it's a sales call or what we would determine an inbound sales call, will you feel that? And then you don't have to sell it, just turn it over to us. And so that's kind of the arrangement that we've made with him. What's that? As a sales guy and a process guy, Deloitte guy, you feel uncomfortable not being in that process where...

No, I'm totally comfortable with it because it's one of those things where it's like, you know, we've probably we've probably allowed him to pay for his a lifetime of country club membership dues. He'll run out of years before he runs out of the money we paid him to provide him with country club dues. So it's worked out financially for him. At some point, everybody wants to argue about, is it all about money? And it's not about money always. He's just a guy who wanted to keep his phone number.

And he likes getting those types of calls. And it makes him feel like he's still engaged with the organization, if that makes sense. Yeah, no, I get it. I'm part of the group called Roland Frazier's Epic Course. you've just got to find what really motivates why they want to sell. And then there's a lot of little unique intricacies of what they may want.

Jon Stoddard (30:52.161)
that you have to uncover to make sure they're comfortable and earn their trust. Right. Yeah. No, you're exactly right. I was going to tell you the second program when it comes to how is it that we're, if we don't have a good promote from within strategy available to us, like there's no second in command, there's no general manager that we can elevate. What do we do then?

And so in the past, we have a relationship with an executive recruiter who will go out and find a CEO or a president in our instance, someone who can be the owner operator of the facility or the business. And we like that model. Where I think we're going though, I like even better. And we're about to launch an entrepreneur in residence program. We look at this entrepreneur in residence program as somebody who already is familiar with acquisition entrepreneurship.

They wanna run a business, they just haven't found one. We'll work with them, we'll help them find it. They put their money in, we'll put our money in, or we'll buy the organization. They'll get an equity stake, we'll get an equity stake obviously, and then we'll run the business together. And that's really what an entrepreneurship or an entrepreneur in residence program from my perspective consists of. And we look at this path, this EIR, we call it for short the acronym.

as how it is that we're going to grow the firm through this &A practice. You know, I look at these, I went to University of Chicago booths, entrepreneurship through acquisition conference earlier this year in March, and there are so many smart people out there that are looking for businesses to run. And I look at it from the perspective of they have brilliant backgrounds, right? How is it that we can put ourselves or join forces with them?

which is a different type of a slant. And maybe there's a leadership moment in here. You know, I used to have the mentality of I wanted to go fast and I wanted to go alone. Now I want to go big and I want to bring others with me. I want to bring the group. And I look at this as a way that we're going to grow the &A practice specifically. We're going to bring in other owner operators into the fold through this entrepreneurship and residence. We're going to structure it just like Deloitte structures their partnership program where each partner is responsible for their own vertical.

Jon Stoddard (33:15.447)
but then they're also going to be able to network and brainstorm masterminds, like we talked about earlier with each other on a monthly basis. And then at the end of the year, there'll be a partner pool where they'll be able to get a revenue share from their peers as well. So they'll have some reason to want to share. This is the VC model in Silicon Valley, the entrepreneurs and residents, you know, they make an exit and then they sit in Kleiner Perkins for a while until...

they find a new company that needs adult supervision. Correct. Yeah. Yeah. I, and I love it. you know, it's, it's a matter of, know, and I've had those, I've had entrepreneurs who've come to me who've said, you know, I want to run a company and it's like, great. Do you want to run a company in what geographic area and what type of companies specifically? Because, you know, sometimes like this one that I was mentioning earlier, it's, it's extremely unsexy.

The revenue is good. The EBITDA is fantastic for the revenue from a ratio perspective. It's in a tremendously unsexy geographic location. mean, like next to, if nowhere is here, it's right next to it. Not to ask somebody that's been around doing something for a long time to go to live in a town, you know, with two population, 2000 and two stoplights. Yeah.

Yeah, this one I think has less than a thousand people. And so, how do you get a guy to leave Phoenix, Chicago, LA to go over there? Probably not gonna happen, but that's okay. It's the right opportunity for the right person. And sometimes it's finding that right person. But more times than not, what we're structuring this entrepreneur and residence program, the entrepreneur is gonna have a say in geographically the footprint of where it is that they wanna go.

And I've talked with enough entrepreneurs now and I've talked with enough guys who like NextGen is a group and incubator out of Chicago led by a bunch of University of Chicago booth, MBA guys. And they have this type of an entrepreneur in residence program. We've talked about the ups and the downs, the highs and the lows of it. And I think it's a winner. And so we're gonna launch it. My mentality is, let's fire it out there and let's see what happens because.

Jon Stoddard (35:39.949)
You know, in one way or the other, this is kind of our innovation moment and how it is that we're going to continue to grow and adapt and overcome. Yeah, it's a, it's interesting. was having a conversation with a guy in my mastermind. They purchased like an average, like 16 businesses a year. And I go, well, wait a minute. How do you, half of those businesses, the CEO wants to leave, leave. Like, how are you replacing those people? Cause that's another skill in itself. And he goes, well, the

My partner, you know, 10 years ago built an HR company, a recruiting company and then sold it. So he's got some really good special skills in that area. Yeah. Yeah. Probably he might have a deep bench worth of, you know, short list contacts or candidates that he can outreach in front of a friend. Yeah. Yeah. Interesting. I know exactly what you're talking about because that's, that's a great model and that's he's fortunate to have that type of a bench. So. Yeah.

So when you go to these companies, how are you finding these companies that want to sell? Everybody goes, the first thing they do is they go, let's go to the broker sites like website closers or Murphy's or something like that. Are you doing direct mail pieces, emailing LinkedIn or all of that? We've done everything. We started out initially as let's just test the waters and let's see what's happening on bizbuysell.com. I think that the information that's there is probably

you know, how do I say it nicely? It's, it's got organizations that are for sale. Yeah. broker represented. Half of it's true. Yes. And, and so we, I, we look there exclusively for probably the first eight months. And, and then it was one of those things where we were talking with other guys who were in the space and they were like, you know, the sooner you can swim upstream from that type of broker.

listing agency relationship, the better off you're gonna be. And so we've chosen to do that. And we've swum upstream, we've identified organizations and geographic friendly locations that we wanna outreach and connect with. We've also outreach and connect with a professional team, like attorneys, forensic accountants, some brokers, bankers.

Jon Stoddard (38:08.365)
Yeah, these are, you know, attorneys are difficult to ask them to give you referrals on. You know, I have to develop a relationship like, you know, I thinking about it, like you write a book and you mentioned them in a book, say, hey, I have to do this. And there's our quid pro quo kind of. It can be. mean, every, know, I guess it's one of those things where, you know, so we're we're a couple of years into this &A practice. I've got some good relationships with some brokers.

but it's not the same as like a realtor. A realtor, you can kind get on their good side and they'll give you the pocket listing before this goes on the market and I plug it into the MLS, I want to let you know about it and you know that they're letting us select few. Real estate brokers don't need to go to an auction unless it's a seller's market. Brokers kind of, some of them will tell you that they.

hey, I wanna let you know this before it goes live. But you and I both know that they're gonna let it go live anyway. And it's not necessarily erased a letter of intent as much as it is they're just looking to be strategic about it. Our best plan is to outreach, connect with entrepreneurs who own their own facility, their own business, see if we can strike up a conversation with them regarding what their business is like.

And then sooner or later, turns into a, you know, we can help you in a couple of different ways. One, we've got a consulting firm side, don't forget that does business transformation. So if you want to grow your business, we can work with you in that capacity. they want to sell, right? If they say, well, I'm just not interested in that, right? Maybe down the future, you could come in and do that. Yeah. Correct. Yeah. On the other side, on the venture side of the house, you know, Hey, look, what if

What if we could, I don't know what your exit plan looks like or succession plan is, but you know, if you'd be interested, we work with a number of valuation experts who could tell you how much your business is worth today. Do you call it a business valuation expert or do you just say, you know, you're a manufacturing company in Cleveland and the multiple is 3.5 to 3.9? Yeah. You can do that back of the cocktail math.

Jon Stoddard (40:32.077)
with them, if a cocktail napkin math with them, if that's most of the guys pretty much understand that that's the average or the range. But it could be one of those things where maybe they're in a geographic, you know, hot location, you know, at the end of last year, we started looking at property, excuse me, down or I should say facilities, businesses down in South Florida and the whole Florida peninsula was just on fire. I mean, it still is still just going gangbusters.

But it's one of those things where it's like, yeah, yeah, the multiples, the three to five multiples don't necessarily apply. So we can do the back of the cocktail napkin math with them. But it is one of those things where from a comfort perspective, if they feel more comfortable having a business valuation expert get involved, we'll do that too. Yeah. And do you, how do you come in with, you know, your structure of the financing? Is it your money and then some seller financing or?

What is that? What's your sweet spot there? Yeah, we've we've looked at we've looked at every deal and I am I'm a person that believes that if there's a deal to be had in there, we're going to we're going to flip over all of the stones. We're not going to leave any unturned to attempt to identify structure. And so we've we'll look at it from the depending on the cost of it. You know, we'll break off a portion of the balance sheet and acquire the company.

At a higher level though, and depending on the circumstances, we've done the financing in and of ourselves, right? It's always nice to have some seller financing. Most sellers, they feel uncomfortable with second position and our response is great. I don't want to be a bank. Great, then be first position, okay? Do the whole thing, 100 % owner financing.

You know, we've also had some organizations who've outreach to us and have said, you know, look, we're just, we're just need to get rid of it and take it over. And that's been a rarity. It's not in this seller's market today. Had a couple of those where they just said, I had a conversation with a, a guy that owns a number of e-commerce businesses. And he just, said, look, this is out of the blue. A guy calls me and said, just take it over. Right. And we built it up to a 2 million to $3 million business. was still under.

Jon Stoddard (42:58.413)
seven figures at the time, but she said, my God, this has got potential. Okay, I'll take it. 100%. Yeah, it's one of those situations where, you know, what's scarier, the business who is selling and what's the reasoning behind the selling or the business where they want to give it to you? Why do they want to give it to you? Why do they want to get out of it? You know, it causes some different due diligence strategies to be deployed.

But in the end, if it's something that we like, we'll see if we can absorb it within the portfolio. How many you say you find, let's say you find a deal and it looks good, the numbers on pieces of paper, you take it to the rest of your committee or your partners and they're going to give it up or down and they're going to try to rip holes in it and ask you questions and.

Yeah, our process is pretty simple and pretty straightforward. You know, if the organization is broker represented, we'll interview the broker. We'll ask them for all of the information that we need. And sometimes that's a cleaner route, right? But then again, it's one of those things where it can get complicated because of the broker relationship. And don't forget brokers are seller brokers. Unless you're hiring a buy side broker, the broker really works for the seller and they have their vested best interest in it. And they want it done.

because they're already moved on. Once they- Transaction business. So that's our job is to get the sale to the next one. Yep. For non-broker representative businesses, know, attempting sometimes to get financials. You know, we looked at a construction firm that they didn't have any financials available because the gentleman who owned it, you know, he doesn't do that until the end of the year. And it's like, well, and this was at, and I remember it was in March. It was like, well, it's first quarter.

and the end of first quarter of the following year. So why wouldn't they have their last year financials available? Cause I'm going to ask for how's first quarter going. And they were like, there's no way they don't even have that. That's not odd. I I looked at long time ago when I first started my &A kind of journey, I saw a janitorial business doing about like a million a year. And so I went to their place and they wrote the stuff on a napkin.

Jon Stoddard (45:18.125)
their financials before I got there and I go, you kidding me, right? Yeah. I'm like, I'm just like, am I supposed to trust you on this or? Yeah. You know, if you've ever seen Marcus Lamonis in that profit show where he asked for the financials and he's reviewing them, sometimes the financials are really nice. They're, they're in a bounded or a binder. They've got real professional, this is the balance sheet. This is a profit and loss, so on and so forth.

sometimes they look like the other side of my desk here, which looks like a packet of paper exploded. So you never know what it is that you're going to get, but sometimes that's the beauty of a small business. You know, from an accounting and a former accountant perspective, it makes me kind of uncomfortable because, you know, how are you possibly going to manage buying metrics and numbers, which is what we do. I mean, that's what we're really great at is taking a look at

at the numbers and if the numbers are garbage, then you're probably not going to make your best management or leadership calls. Yeah. So just curious, if you found a business that had great numbers, let's say you said on the face of it, it has great numbers, but they're not in a clean slate, quick books or fresh books or anything else. And you said, well, we like it, but we need to get to your bank statements. We need all of that information. Yeah.

And we'll also, you talked earlier about structuring the deal, we'll have some type of an earn out based on the comfort level that we have. You know, we, and obviously the more discomfort, the more reserve we hold for the owner who departs receiving equity over multiple years, a stair step type of a fashion. You know, we've structured deals like that because

You know, it just, it just is one of those things where, you know, we want to believe everybody, but we know that believing everybody probably leaves us the only one with faith and belief. And, you know, not that I think someone would purposely want to take advantage of us. You don't want to be that guy where if you walk in a card game and it's like a, can't cite the Patsy, you are the Patsy. Right. Exactly. You know, I, so I think that we've put, we've put those types of financial controls into the deal structure.

Jon Stoddard (47:37.941)
So that way we can, you know, and we've actually put it into the letter of intent too. So that way we can do the proper analysis and whatnot. At the beginning of this year, the end of the first quarter, we had four letters of intent out simultaneously. And two of them were accepted. One we never heard back from. And the other one was a broker who wanted to counter offer, which was a difficult story still.

The two that did go to letter of intent. And this is where the craziness of the business, our goal is to buy a company every quarter. That's our goal. And in order to do that, you've got to have X number of companies or balls that get dropped into the top of the sales funnel or the prospecting &A funnel, right? And that's how we look at it. And that's how we run it.

We had two that went to letter of intent, one of which blew up about two weeks into the due diligence on letter of intent. And we informed the owner that we're not going to go to purchase agreement. The other one lasted about eight weeks out of 12 under due diligence and letter of intent. And they both kind of had similar reasons for why it is that we didn't go to purchase agreement. And primarily it surrounded

not necessarily having accuracy in the numbers, but just an overly optimistic number presented. These were organizations that, like a lot of them last year in 2020, the pandemic caused them to really have a difficult year. Lending institutions really don't want to lend money on organizations that are not showing some sort of growth or progress, right? And especially if there's a dip, they're probably out.

The thing that drove us not to go to purchase agreement in both of them was that I won't say it was a misrepresentation, but overly optimistic sales pipeline or book of business for the future and the backlog therein. I'm a former sales leader. I've had a couple hundred folks report to me in a sales capacity. I know what sales pipelines look like and I know what overly optimistic sales pipelines are.

Jon Stoddard (49:58.829)
something that benefits being an &A or having your background as a sales background helps you in &A, unless you say, because I know that how many needs to be in the top of the funnel and they moving through the funnel to be able to make that shot and make the basket. You've got to have that. If you don't have that, you're not getting better at any of those skills. Right. Yeah. Yeah. No, you're exactly right. I think it's one of those things where

The background, you know, from an accountancy perspective helps me out tremendously. I don't have the personality of an accountant. So there's probably, there was a rub when I was an accountant from that discomfort moment back to that. But it is one of those things where it helps me out. But I'm also a student of the game too. last year. You got to love it. Everything. Yeah. Last year we were, I was bent. was hell bent. I'll say on.

finding a digital ad agency. And we have a 501c3 nonprofit at the firm called the Javelin Institute that provides executive education. And we were doing a big project with Kellogg at Northwestern and their leadership program. And I was telling one of the gentlemen who's a former Silicon Valley guy who's now an adjunct faculty at Kellogg about, gosh, I'm looking for a digital ad agency. And he says, Northwestern has the best marketing department in the world.

and we've got a digital strategy course that's online, it's a MOOC, why don't you take it? I'll introduce you to the professor." And I was like, that'd be great. And so I did. And going through this program, John, I was able to really firm up the due diligence process that I was putting these digital ad agencies through. And it gave me a greater insight than I would have ever imagined. And it's benefited us, I want to say, tenfold.

for what the investment was. Did you buy that digital ad agency or did you just say, no, we acquired the skills to be able to. So we had three of them that were finalists. One of the difficult ones that didn't go to letter of intent where the broker got involved was one of the three finalists. The other one we really liked a lot, but couldn't come to terms with to go to letter of intent. The third one,

Jon Stoddard (52:21.517)
I want to say it was more of a merger. it was a, it was more of a entrepreneur startup than it was an entrepreneur acquisition type of an opportunity. And I just don't want to do a startup. I don't want to talk to me about them. Not from ground zero anyway. If it's, if it's a million revenue plus, that's traction. That's fine.

There's something to work with there. So what do you think of MicroAcquire? Because he's just listing, charging companies like 300 bucks. And there are a bunch of companies out there, tech companies that are, a lot of them are doing over a million dollars. And it's like, I want to sell, I want out. It's for So Andrew runs a great platform there at MicroAcquire. And I think a lot of him and I think a lot of that platform.

The thing that I like about it is that there's not a lot of broker affiliation or representation there. Yeah, you're right. For the bigger deals, they're broker represented. But I will say this much also that, for the most part, I don't know that it necessarily fits our model. Traditionally, I love tech startups. It's the sexy aspect of the venture business, right?

If the primary &A is through unsexy manufacturing and construction firms, the tech businesses that we look at are very sexy. The thing I don't like about it though is that it breaks our rule about these should be baby boomer led organizations and they should have a second in command who can potentially step up into the leadership seat. Most of the time, are, we talked with a young guy who in the- years old, man, they're all young.

In the owner interview, he was on a beach in Tulum, Mexico, and the only thing between him and another Corona was us. I remember looking at my analyst on the call on the zoom session, and I was like, this is not going to go well. Yeah, what are we doing wrong here? He's on a beach and we're trying to acquire him and would I be paying for that Corona? Or I think it's one of those things though, where, you know,

Jon Stoddard (54:39.637)
So there's some, I would much rather acquire a tech firm. And this is where that early stage startup, million dollar post revenue, where that fits more into that type of model because those entrepreneurs are looking for, they're looking for some capital, but more importantly, they, we've had some who've outreach to us and asked us if they could bring us on as consultants to help them through.

some of the either process procedure operational moments that they're experiencing as they go from 1 million on the road to 10 million. So they brought us on as consultants. Some have asked us if they can compensate us not only in cash, but in equity or 100 % equity. We shy away from the 100 % equity deals because that's can take 100 % equity in a bunch of startups. Right.

I've got, I've got enough stock certificates already that are birdcage liner. don't need more or zero. Yeah. I sell too. I got a question. I don't have a lot of time left because I have you for an hour, but I want to ask you about LOIs. I don't know if you were on lat patch bakers. He's a mutual friend of ours, his discussion on LOIs and how important they are. and I love it, man. Cause you're really.

I'm also student to Alan Weiss, a million dollar consultant. It's like a conceptual agreement. Have that conceptual agreement in place first, like every point you agree on, on the phone, whether you're face to face or on a Zoom call, and then then you send it off to your attorney. You don't send a boilerplate out to like to lock it up like a private equity firm said, hey, here's a, we'll accept you on these terms, terms, Like what's your position on LOIs?

So we want an LOI that is going to be fairly represented of the purchase agreement. So we want the details in there regarding what it is that we want the deal structure to look like. I think that's the gist of how we structure our LOIs. My partner is also an attorney, full disclosure. So we kind of got home cooking or home field advantage on that one anyway. Yeah, there you go.

Jon Stoddard (56:55.531)
But it is one of those things where, you know, we want, we want that LOI and the seriousness of it. We want it to be an easy transition from that to the purchase agreement. Yeah. Gotcha. mean, I, I, there's another guy in my mastermind, Vinnie Fisher, and he, he just does like how serious the LOI is to make sure, because if you leave it open for interpretation, it's open for renegotiation. So.

Make sure everything's like point by point point point in there. Yeah. Yeah. I think the more detailed you can make it, the better off you'll be. I think the areas where you don't have the details, your desired end state is probably something that would be important to share. I've done LOIs and I've had some sellers come back and say that they wanted to have this type of terminology put within it.

And it's like, okay, great. If that's what you'd like to have, then let's put that in. It doesn't. A lot of times it's just a verbiage type of a moment where, know, depending upon where it is that they're at within the country or the industry, they want to have something specific in there. And as long as it doesn't materially alter the contract or what it is that we could potentially put into the purchase agreement, you know, and don't forget.

you know, as the buyer, you get to conduct due diligence and you get to drive that due diligence bus wherever it is that you want to go. If you don't like the way that it's coming out, then you don't have to go to purchase agreement and don't do it. You know, it doesn't mean that just because you have a detailed out LOI doesn't mean that everything that's detailed out on it is going to play itself out under due diligence. All of your findings are going to fall in alignment with what it is that you structure within the LOI.

for the transition from LOI over to purchase agreement. Your purchase agreement can be dramatically different and it should be if you even go that far. Well, I am running out of time and I wanna say a couple of things first. Look, if my audience loves this contact, please subscribe to this deal. So Sam, where do you wanna go with this? mean, how can my audience, whoever sees this help you? mean, are you doing looking for deal flow? Are you looking for partners?

Jon Stoddard (59:17.313)
Yeah, constantly looking for deal flow as well as partners. You can find us at tipofthespearventures.com. If you visit our site here, we're putting up a special offer for acquisition entrepreneurs. It's a, what we would call an assessment or a workbook on how it is that you can go about achieving business transformation, a free download. So we'll have that up by the end of this week or by the time this podcast launches. Yeah, I'll put it up next week. The podcast will go live next week. So great.

Sam, thank you so much for the time. I really appreciate that. And I hope to see you Thursday again. Sounds great. Thank you, Cheers,