Early Years as Searcher/CEO
How do searcher/CEO’s feel 2 years after closing their acquisition? You may be surprised to learn from over 2 dozen searchers surveyed that 2/3 of them reported feeling significantly worried about their business 2.1 years from acquisition. They explained the many ways they got out of the slump.
Additionally, 60% of the CEO’s, who themselves averaged 4 years since they began ownership, felt that their businesses were significantly different from when they first engaged with it in ways that they had not predicted. During the search and closing process, searchers seldom can see much beyond the business model they are purchasing.
The “magic” of EtA is just this transformation that the searcher brings to the business as time progresses. In fact, 86% find themselves feeling like an entrepreneur much more than a “professional manager”.
Doubts and concerns
It is not unusual to second guess yourself after a few years. One searcher/CEO reflected, “In year 2, I asked myself, where am I going to find my breakthrough in this business and why I did this in the first place. Joining EO-Entrepreneurs’ Organization and participating in an “EO Forum” was transformational for me. I also reached out to my mentors from the search and my previous jobs to talk through these feelings. Knowing what I know now about the opportunities after 4 years, I’m still scratching the surface and have a long way still to go.”
Another searcher/CEO reflected, “I frequently wondered whether I was the right person for the job – the company is sales-oriented and I’m not a sales person and feel I’m the wrong person for the job. However, I landed a new client as the results of new marketing efforts and that put the wind back in my sails. In the worst slump, when I had decided to call it quits, I talked to other searchers who had been at the brink of quitting before. And, ultimately, realized that although I wasn’t the best person for the job from a skills point of view, I was the only person who had the subject matter expertise and business context to get the job done!”
Another searcher/CEO looked back over their 4 years, “I certainly had very low times when I felt that it was possible that our company would fail; like being in a burning building. My partner went through some difficult times also. I have been extremely excited or extremely terrified and sometimes both. I was motivated by a very high level of conviction that the market opportunity we were pursuing will be large, achievable, and psychically rewarding. Now my priorities and what I spend my time on are completely different than they were in those early years.”
On the other hand, after 2 years, Andy Rougeot at RG Maintenance reports, “Geographic expansion has kept me engaged and going forward. The challenges of growing a formerly single geography operations to multi site locations has added additional complexity and reward to the business, keeping me positively engaged.”
In my own case, signing personally for the debt kept me very focused during the early years on maximizing cash flow. As one self-funded searcher says coming up on their 2nd year, “With a highly leveraged purchase, the pay down of debt is my main concern and motivation to move forward. The concern for the debt has decreased since the close but our second seller note is now payable and this is keeping me engaged. I’m getting into a good operating mode and now trying to grow the business.”
Sarah Moore at King Sales Group, goes beyond just loan repayment as she reflected on her first two years, “Besides massive amounts of bank debt my 3 most common thoughts were ‘I’m sick of babysitting’, ”I never want to hear from that customer again’, and ‘Am I getting stupid?’. Because of the ‘daily grind’, I don’t have time to ruminate. This is good because my real problem is my thinking about what’s happening, not what’s actually happening.”
One searcher, 3 years beyond closing, looked back, “Between the 18th and 24th month I made a significant philosophical pivot: from ‘making the business the best it can be’ to ‘building the best business on top of the existing business’. While sounding simple, it launched us into a new market and a much more significant growth path. Take advantage of these reflections early on, you don’t get too many. They recharge your energy reserve and help you rethink the 5-year growth plan for the business.” Scott Holley, CEO at Eddyline Kayaks, remembers this experience, “As I approached two years, I felt bored and disinterested, but the business was doing well. My managers called me on the carpet! They held a meeting and said ‘do you really want to be here?’ Thankfully, some new business opportunities came around that got me re-engaged.”
Ben Murray of New Forest looks back, “I would say that I did experience a slump – two years in was the low point. The business was surviving, the urgent problems were getting under control and we were meeting obligations but with little excess capital to fund growth. I was getting over the high of thinking that the search was the hard part and trying to come to terms with doing nothing but operating the same business that I bought for many more years to come. The big change was realizing that I could take a little bit more risk by expanding the business into new areas that would grow the business and make it more interesting to operate by providing opportunities to increase the size of the team and pick people that I wanted to work with. I was also able to reduce the amount of time I was spending in the weeds of the business daily and use that time to look for additional opportunities which I found stimulating – I have since acquired another business and am really enjoying the opportunity to have a second try at taking over with the benefit of the first experience.”
A partnered search felt they were not making progress after their 2nd year and observed, “We asked ourselves: what are our long term goals? How do we grow faster? What should our roles be as CEOs? What elements of day-to-day management can or should be delegated? What are we uniquely qualified to do, vs what can we hire someone else to do? We decided to spend money in order to build out our management team, increasing the scope of the day-to-day” management activities and responsibilities delegated to others rather than performed by ourselves. This was a difficult decision, as it meant all of our hard work to grow the top line over the first two years would be re-invested in payroll rather than manifested as improved EBITDA. But it was necessary, as it allowed us to redeploy our own time to focus on the ‘important but non-urgent’ items of growth that will better serve us over the medium and long term.”
Sunny Kanneganti in a partnered search bought Mobile Sweep and felt “After drinking from the firehouse, I entered a period of good, steady work. Picking low hanging fruit and making plenty of operational improvements based on our education. About 18 months in the “fruit” had been picked, and it became a mix of relief for a respite and panic for not being sure where to go next! Talking with other searchers and local businesses owners helped me in psychologically re-grounding and generating ideas of where to go next. The day-to-day details of the business can pull you into just working it at 100%. Now that procedures have steadied the ship with high confidence, there’s a lot of bandwidth for tinkering and improvement.” Similarly, another searcher at 7 years as CEO, said “In year 3 I was feeling frustrated that there was no path to quickly grow as much as I wanted. So, I almost bought a few Curves gyms in the third year. It was a horrible idea and luckily I came to my senses at the last minute, but it was out of my sense of wanting a new challenge. I quickly refocused on the core reason I went into search in the first place — to create an organization that provided better jobs and got on with focusing on the business.”
18 months after acquiring Stanley Ruth, John Holsapple, at Craft Equity, commented “I don’t think I have felt a slump yet. I have certainly been through my share of ups and downs, but I am working to find someone to replace my working ‘in’ the business role. I think the only way to implement the change on the scale I want is to work ‘on’ the business. More recently we have started planning better which has helped us be less in ‘fire fighting’ role. I think it is OK to forgive yourself for being reactive in your business for the first year or so.” Juan de Dios Aguilar, CEO at at Globales in Guatemala, coming up on 3 years said, “I have not experienced a slump. I still feel like I am learning and still have things that are not under control. For example, I discovered a Due Diligence surprise just 3 months ago! I feel like I am very much in an upward, challenging phase and energized by the challenges that I face every day and the huge growth prospects the company has in front of it.”
Lars Gehre, at Greenvault, shared his experience, “Yes, I did experience a ‘reality check’ after 3 years. I had ambitious growth targets but the reality turned out to be much more challenging. Instead of projected double digit growth, I was battling client loss and pricing compression. I re-branded and re-positioned the company to focus on more stable and growing market segments. However, the increase in newly gained business was not enough to offset the client churn in the context of a broader industry shift and client consolidation. I set myself a hard target of 365 days to laser focus on our growth initiatives and achieve a set growth goal which would decide whether to continue or exit. In the end, we sold the business.”
Feeling like an entrepreneur or a professional manager
Mark Anderegg from Little Sprouts feels he has gone through various roles, “I always felt like an entrepreneur. If anything, I felt more like a ‘professional manager’ after selling out to a private equity. Since exiting the second time, though, I feel very much like an entrepreneur again. I now simply describe myself as an entrepreneur. It’s very liberating!” Andy Rougeot, a US Army veteran, at RG Maintenance is very clear, “My business is small enough I am still very hands on, so never felt like a professional manager.”
One searcher/CEO candidly said, “I was always more of an entrepreneur and not a very good professional manager!” Sarah More at King Sales claims to be both, “I find myself wearing different hats on different days and sometimes both hats on the same day.” Scott Holley at Eddyline Kayaks remarked, “I get to spend most of my time “laying track” for further expansion and not putting out day-to-day fires.” Another searcher/CEO says, “I felt like an entrepreneur from the very beginning of searching and have always felt like and acted like one. It was just nice to lift the veil of professionalism away from that and just be myself.” On the other hand, another said, “I feel in my early days I needed to be 90% an entrepreneur, figuring out how to do things. Today, I spend more time focused on talent and supporting my team. I still need to be an entrepreneur to grow the business but to “run” the business, I needed to learn how to be a professional entrepreneur!”
Another CEO feels that as time has passed, his viewpoint has changed, “I feel like I am going from an entrepreneur to a ‘professional manager’ with each passing month. Larger chunks of my time are spent on topics such as: capital raises and allocation, leadership recruitment, investor/board/bank presentations, HR policy and my own learning and development.” On the other hand, this searcher says, “By focusing relentlessly on delegating the delegatable day-to-day tasks, constantly asking ourselves ‘should we be doing this task, or is there someone else in our organization capable of doing this task 80% effectively’, we’ve been able to elevate from ‘day-to-day manager’ to being an entrepreneur and looking for opportunities”.
Juan de Dios Aguilar CEO at at Globales in Guatemala reflects, “I feel I am kind of evolving into an entrepreneur mind set. We have this challenge of opening a new huge new market in Colombia which is very much a start-up project and I am very excited and motivated by it.” Jason Pananos at Nashton Partners summarized, “I went from being an individual contributor when my business was small, to a manager as I got better at delegating, to a leader as my business got much bigger. At each stage, I might have felt out of my comfort zone and had to adjust my skills. I think the opportunity to create value and be innovative only got better as the company grew.”
Ben Murray at New Forest reflected, “I feel very much like an entrepreneur. It is the biggest change in me since I started on this path. I had management skills and business skills from my previous career, and felt I had answers, but I did not have the mindset of an entrepreneur. Looking back, I feel now that my view of business was too much as a machine to be tweaked and managed. With entrepreneurial eyes I now focus much more on the opportunities and things that I can do to use the capabilities that the business gives me, rather than on what the business is doing today.”
Mike Katz at Molded Dimensions, searched mid-career with his wife Linda, and pointed out, “When you sign the personal guarantee, have no money, take a 70% pay cut, and don’t have enough money to buy new underwear for 3 years, it kinda forces you to be entrepreneur from day one! After selling the company 6 months ago, I am shocked by how much of my share-of-mind for the last 18 years has been on the company. I think you just get used to having it in the back of your mind 24/7 and it is not until you find it is not there that you realize it has just become part of your being. I don’t know many professional ‘managers’ who are not running and owning their own business who feel that way.”
How different is the business as time passes on?
One of the significant “value creation” aspects of EtA is the result of taking a previously sustainable business model, professionalizing it and bringing the entrepreneurial lens of the searcher/CEO to bear on enterprise. Too often, investor and searchers tend to overly focus on the business “at hand”, without recognizing that over 5-10 years, the business will change dramatically with new markets, products, staffing and reinvestment. With an historical looking analysis it is often difficult to “trust the model” and become overly worried about problems surfaced during due diligence and forgetting that the most successful searchers are “entrepreneurial problem solvers”, not problem avoiders!
Private Equity firms have shown that extracting a business from the owners, getting them out of the way, professionalizing and investing in the business creates great returns. The “magic of EtA”, is the entrepreneurial element that the Searcher CEO brings to the table. Having been through the gauntlet of the search process, raising the funds, closing the deal, solving the problems as they arise and finally transforming the business model, yields higher returns for the investors and the searchers themselves.
The VC community has learned this lesson well and seldom puts any credence in a forecast that extends more than a few years. Pivoting a start-up multiple times is very common place. While Searcher/CEOs don’t have the resources for significant investment in a radical departure, it is not unusual to see evolutionary change over time as the CEO pursues opportunities with the resources at hand. Hold time for a business has an impact. In my own case, over 21 years, the commodity aluminum extrusion components business was transformed to a niche provider of products resulting in an order of magnitude change in revenue, employment at EBITDA.
Mike and Linda Katz, at Molded Dimensions, had a similar outcome after running their EtA business for 19 years, as Mike reflects “When you can change your time horizon to work on those things that will be impactful 3 to 7 years in the future, whether you plan to own the business then or not, is is when the real fun and value happens. Our business is basically the same with the same basic manufacturing processes, but it more than tripled in size and almost quadrupled in profits. This happens when you stop “working in” your business and start “working on” your business. It took us about 6-7 years to change our focus away from the nuts and bolts of the job.”
This CEO reflected that after 48 months in the business, “The operation is significantly different and is physically changed. The equipment has all been upgraded and 80% of my customer base has changed. My team and company culture has changed significantly. We have many more years to go and am looking forward to leading us through additional changes and profitable growth.” Another, after 3-1/2 years observed, “I think the direction and nature of the change has been very consistent with my vision from the outset, although I did not anticipate how hard it would be to accomplish. It is superficially very similar but has fundamentally changed in ways that are not obvious. I anticipate additional opportunities will present themselves, especially as we become less focused on debt repayment.”
For some, a simple change in business model fundamentally changes the company, as Andy Rougeot, at RG Maintenance found, “We have transitioned to a multi-site footprint and the business is now significantly different from when I purchased it two years ago.” Alex de Pfyffer at Heritage Holdings has long term view, “When Ross and I settled on the EtA path, we knew that it was a 10 year decision and we now have completed a number of acquisitions that have raised our revenues from just under $60M to $90M in the first 3 years.” Another CEO, 3 years from closing, observed “The business is significantly different with only 20% of the staff remaining. All the processes and procedures are different. The culture continues to evolve.”
Ben Murray at New Forest, after 4 years looked back, “The business is very different – we have opened additional locations, have only 3 remaining original employees and we have about 25% of revenue in added new service lines. I could not have predicted the way the business has changed since many of the best things that have happened are opportunities that only arose because we did something that then led to something else. None of it was part of a master-plan!” Similarly, CEO Juan de Dios Aguilar found, “As of 2-1/2 years now it is only marginally different, but I see how in the next year or two it will be significantly changed. The short term avenues for growth I had not seen at closing.” Sunny Kanneganti at Mobile Sweep, 2 years from closing shared a similar observation about their future, “I imagine that in the next 2 yrs we may see a large departure from our base operations materialize.” Another, after 3-3-1/2 years, optimistically said, “We are working on some ‘transformational’ opportunities which, if successful, will significantly change the business direction.”
Some, like Sarah Moore at King Sales changed her view of the business, “When I bought this business I thought I was in the poultry industry. It took me a year to realize I was actually in the specialty packaging industry. This perspective changed my game plan quite a bit.” Scott Holley at Eddy Kayaks found it difficult to assess, “When I look at the road-map I put out in the investment memo, our core growth exceeded expectations but our growth outside of the core has lagged. After 2-1/2 years, I would split the difference between marginally and significantly changed. Our planned move to a 30,000sf new manufacturing site twice our size is certainly significant.” Another CEO radically entered a new market with and additional sales force investment, “I would say we are markedly different than where we were 3 years ago. After about two years I saw an opportunity in an adjacent market which significantly broadened our service offering and have established a new office to attract a higher level of professional employees. I could not have seen this change in trajectory.”
On the other hand, a smaller number of searcher/CEO’s including Mark Anderegg at Little Sprouts reported, “The business is materially different in terms of scale, but not necessarily in terms of what the business does. So from that standpoint, yes, I think I very much predicted what the business would evolve to be. Not with perfect clarity, of course, but I am not surprised by what the business looks like 7 years after closing.” Another said, “Yes, we could have seen where it is now. While the business’ operations, culture, team, and product have been greatly improved and professionalized, the fundamental nature of the products and services we offer to our customers are the same.”
Early exit and refinancing
Some fortunate CEO’s find themselves in the enviable position of considering an exit in their early years, initiated on their own perceptions or from market forces around them. Instead of a slump, they experienced the “high” of reaching one of their objectives by selling their business. (See Blog post on Exit)
Mark Anderegg, at Little Sprouts, found, “I chose to sell the company 2.5 years in for both personal reasons based on reducing my risk tolerance and desire for liquidity and also considerations of shifting market dynamics and high multiples in the industry. The sale process was different, exciting and stressful, as was the new Private Equity board and associated economics that also provided motivation to continue pressing forward as CEO again.”
An international Searcher/CEO summarized, “The operating phase of EtA is the trickiest; you don’t get the doing-the-deal adrenaline rush and you have numbers to hit in an environment that is very different than the corporate world. This part of the path can be very tiring and exhausting. Our early exit after 2 years was based on a feeling that EBITDA growth trajectory of business was not easily sustainable and market headwinds slowed growth while end-customers became more cost conscious. We had put a very credible Managing Director in place and would have gotten in their way and had a sense that acquisition opportunities would be better executed by a professional Private Equity firm rather than us. Finally, this was the first deal for us and we wanted to de-risk our lives financially, as well as secure solid first return for investors; in retrospect, our timing was perfect!”
One searcher/CEO hit the 3 year mark and became very discouraged, “Learning the business has taken much longer than expected, I was still getting it up and running. An early bolt-on acquisition has been very challenging to integrate. I considered exiting as it became clear that my economics were going to be difficult to hit and my my base compensation was stretching my personal finances significantly. After a frank and open discussion with my investors, we adjusted both of my concerns. My vision for what this business can become keeps growing, the more I learn about opportunities in the industry.”
Exit is not the only option to relieve some of the early self imposed pressure from investors to provide a reasonable return for their financial support. Ari Medoff at Nurse Care of North Carolina felt that “2 years of strong performance plus improved credit markets made the time right to refinance the seller and investor notes to lower the cost of capital and own 100% of the business. Since the SBA will not allow for a refinance of the investor debt if they remain owners it was an easy conversation with all as it was a good, fair deal because I wanted to be generous with those investors who had believed in me.”
Lessons learned about the early years
Mark Anderegg from Little Sprouts highlighted, “If liquidity and risk tolerance are an early the source of concern, I recommend very open conversation with your board. When things are going well, everyone has an incentive to ensure the searcher does not hit ‘eject’ prematurely.” Jennifer Braus, CEO at Systems Design West, said, “Focus on having the life you want to have, and find/mold a company to allow for that life. I have had two children in the 4 years of owning the company, and had the flexibility for some ‘downtime’ for both maternity leaves.”
One searcher reflected on their early exit and said, “A lot of searchers go down this path for the freedom it brings, but after a just a few years don’t feel free. Understand for yourself why this is and if you can change it and if not, consider an exit.” Sarah Moore, CEO of King Sales, has a different take on this, “Remember that freedom isn’t free. You have to do what’s hard and uncomfortable at times if you want the rest of your life to be less hard and more comfortable!”
Juan de Dios Aguilar CEO at at Globales suggested, “Look for low risk projects/investments that have an entrepreneurial feeling to keep you out of the slump. Justify a low risk/high return project to the board that will have a small win. Also, hire young people that have entrepreneurial drive, they will keep you upbeat and busy.” Another Searcher advised, “Knowing when to listen and when to ignore the ‘voice in your head’ is probably one of the most powerful lessons I’ve gathered during the past 4 years. A lot of what is going on in the business is in your head! Pay attention to the stories you are making up vs. what is going on right in front of your eyes!”
One searcher also said, “The more time you spend in business and industry the more opportunities you will discover-just give it time. 90% of success is showing up!” Andy Rougeot, at RG Maintenance, found, “Searcher/CEO’s need to have a source of meaning outside of work. This can be family, their church, or another community organization, or hopefully all of the above. But keeping perspective on your successes so far, and how fortunate searchers are in so many aspects of their lives, is very important.” One searcher looked back after 6 years and reflected, “Being a Searcher/CEO will be hard. It is not always fun. Not every day is a good day. Be careful of believing the old adage – if you love what you do it’s not work.”
With or without a partner, being a searcher/CEO can feel isolating, as one said, “As with all matters in search – it pays to have a group of searcher peers. It’s amazing how helpful it is to know that I’m not the only one feeling the way I do or in need of hearing from someone with similar experience.” Ben Murray at New Forest reflected, “Do not be surprised or feel alone when you go through the inevitable slump and moments of doubt – that is the time to reach out to mentors and fellow search operators – they are always happy to hear from you and know what you are going through.”
Finally, Lars Gehre said “My recommendation would be for a searcher/CEO to do regular self-check ins. Asking yourself; can you achieve little successes? Set yourself realistic goals? Are you on the right path and making progress. Can you become excited again about the opportunity and excite everyone working for you?”
These observations from searchers, show the wide variety of experiences both facing and dealing with an early-on slump in their business. Each search business and CEO is different and their own views and reality changes over time. Like most things related to EtA, there is no “right way”, but learning from each other can be very helpful.
Feel free to share some of your own best practices or experiences in dealing with these issues in the blog comments. I encourage comments and dialog, allowing all in the community to learn from both my views and the views of others – a virtuous learning cycle. Jump right in! I frequently update individual blog posts, add to the Reference section and Search tips, so visit www.jimsteinsharpe.com website regularly.