Royce Yudkoff:

Welcome to Think Big, Buy Small, a podcast from Harvard Business School about entrepreneurship through acquisition. We’re your hosts, Royce Yudkoff…

Rick Ruback:

…and Rick Ruback.

Royce Yudkoff:

Rick, today we're speaking with Alexander Wallace, who is a self-funded searcher doing a geographically-focused search. There are at least a couple of things in this conversation that are going to be really interesting. One is that Alex does, I think, a very good job communicating how he thought about leaving a very good career for searching to buy his own business, both the rewards he saw in doing that and how he thought about the risks associated with making that move away from a conventional job in someone else's company. So, it's something you and I know listeners are going to want to tune into. And the other part of the conversation that's really interesting is exploring with him how he executes his geographic search.

Rick Ruback:

Royce, the thing that I think we should add is that the geographic search is actually a whole country, but it's a small country. It's New Zealand, which is about 5 million people, so it’s a narrow geographic search, but it’s the whole country.

Royce Yudkoff:

Yeah, technically a national search, but made small by the size of the country. Let's hear from Alex.

Rick Ruback:

Alex, if you could, let's start by having you describe your journey. Where did you grow up? Was there entrepreneurship in your family? Tell us about your career, your education. What brought you to this point where you've decided to look for a business?

Alex Wallace:

Yeah, happy to talk about my background. So, I think maybe I'll bucket it into maybe three different phases of growth. So firstly, is growing up in New Zealand, and then secondly moving to the US in my early professional career, and then the last five years or so when I was sort of more of like a mid-career professional. So, I grew up in rural New Zealand. My parents had, and still have, a 2,000 acre sheep and beef farm. So we had about 3,000 sheep and 500 cows, so kind of what you might expect when you think about New Zealand, I guess. So, rural upbringing, a lot of time outside doing chores on the farm, that sort of thing. It was a really good upbringing, but in some ways it was kind of a sheltered upbringing. You really kind of only knew what was around you, which was the New Zealand farming community. That said, I think what really stays with me from my upbringing is my parents were really dedicated and really passionate about the farm. It was kind of a 365 day a year-type job, morning till night, real kind of gritty work. And just their real passion and hard work for that and building something for themselves was something that really stuck with me. So moving from there, when I was 20, I moved to the US. I received an athletic scholarship to run cross country. And when I got this offer, I jumped it. I'd never been to the US before, and I thought it was a pretty amazing opportunity to expand my horizons.

Rick Ruback:

All the benefits of chasing those sheep around the fields, huh?

Alex Wallace:

Exactly. I'd done a lot of running, so I was rearing to go and had a lot of good preparation. But yes, I went to Providence College, in Rhode Island, and yeah, I remember moving to the US. I think I packed up the one suitcase and headed on the plane and my parents, as I said, were pretty busy so they sort of sent me on my own. And I remember getting there, arriving around sort of midnight into Rhode Island and not really knowing what was going on, but my coach picked me up and I was kind of on my way. So three years at Providence College. I got a degree in accounting. From there I moved up to Boston and I got a job and worked at PricewaterhouseCoopers for three years. From there I went to Cornell University for business school and I was pretty keen to get a real finance education and move into banking or consulting. After Cornell, I moved back to Boston, worked at L.E.K. Consulting for one year before moving to Liberty Mutual. And I'd say up until this point, I really started to build the groundwork for a business career and started to learn the ins and outs of business, but was still a pretty junior professional. So, yeah, the last five years I've been at Liberty Mutual. I've been on the in-house private equity team, investing in private equity assets on behalf of Liberty Mutual. And it was a really great five years. I think I was lucky in that in our role, we had a really sort of unparalleled bird's eye view of the private equity world. We got to see really every type of manager, every type of private equity strategy you could imagine. And it really opened my eyes to kind of the world of possible having this much breadth in my role. So in the last year, year and a half, I got really comfortable, work was going well, and I'd long harbored this desire to do something entrepreneurial, probably just stemming back from seeing my parents on the farm. And through work, we started evaluating private equity managers that were focused on what we call the lower middle market or sort of small businesses. And essentially through that, I came across search. That was about a year ago now, and here I am today.

Rick Ruback:

That's great. How many years approximately are you from your graduate work?

Alex Wallace:

I graduated from Cornell in 2018, so six years now.

Rick Ruback:

Yeah, six years. Okay. So that's a big change. How do you decide to make a change? I'm not good at making changes. I've been married for almost 48 years and I've been at the Harvard Business School for 37 years and Royce and I have been partners for nearly 15 years. So, I'm impressed with people who make changes.

Alex Wallace:

Yeah, I've jumped around a little bit in my career, in my life. I think for me, when I first started thinking about this, it was kind of, “What do I want from my career?” And, you know, you spend so much of your life working, so I wanted to do something that I could be truly passionate about. And again, I'd seen kind of a blueprint of what that was from looking at my parents. So, I came across search at Liberty, and I quickly determined this was something I was pretty keen to do. It made a ton of sense and I felt I had the skill set to do it. And from there it was just kind of building conviction in myself and in the idea and confidence to take that leap of faith. You know, I looked at “What do I want for my career?” And I could look at what I could do if I stayed in the corporate world and in many cases it's a relatively linear progression and that's if things go really well, you know, you move up in your role and you go from there, but you're ultimately still going to be part of a really big organization, you know, a small cog in a large machine, and often a pretty complex machine that's not super nimble.

So, I thought about what got me fired up and that was working for myself, working for a small business. You know, I was one of those kids who really liked going to all the different classes at business school. I loved learning about the different aspects of business, you know, pricing, sales, procurement, the whole lot, just the idea of being able to move something and improve something. And then finally, I thought about like, “Okay, like I have to really take a leap of faith here, leaving my job, leaving a good job, leaving the US.” But look, I've kind of done that before. I'd sort of taken that bet on myself back when I moved to the US in the first place. So, you know, I was comfortable making that sort of trade off, you know, valuing the risk and rewards and thought it was a good trade off. And worst case, I'll get my job back, you know, or a similar job back if it doesn't work out. So, yeah, that was a bit of how I thought about it.

Royce Yudkoff:

Alex, let's talk a little bit about things you might worry about in leaving a good job to go off and search on your own. I mean, you worked for a very established insurance company in their investment arm. Your career was going well. You were doing interesting things. You had the pleasurable experience that all employees have that, you know, at the end of each month, the company has poured money into your bank account, and you're deciding to switch that off to go on your own. You've talked a little bit about what attracted you about the “on your own” part, but were there any things that made you reluctant to leave your job?

Rick Ruback:

Yeah, did you have sleepless nights? Did you have a sleepless night staring up the ceiling saying, “Why am I doing this?”

Royce Yudkoff:

Did you worry that if things didn't work out, things would have taken a turn for the worse?

Alex Wallace:

No sleepless nights, I don't think. I spent quite a lot of time building conviction in this idea. And I think the big thing for me was sort of going back, “What do I want from my career?” I didn't want to be stuck with the kind of “what if”. That being, look, if I don't do this, I'll always be thinking, “What would it be like if I'd taken a bet on myself and given this a go?” And I felt that I was in a pretty great spot to do this. I'm 34 years old. I feel like I've got a pretty good skill set to go into search and go into ETA. And I'm at a point where I don't have too many commitments just yet and I felt like every year I waited, it would just get a lot harder. So now felt like a great time to do it. I think some considerations people might say, you know, is leaving your peers behind or not having the resources of a big company, that sort of thing, not having the regular paycheck. All those were things that I was able to get comfortable with pretty quickly. You know, I think the positives really outweigh the negatives, for me, in terms of being my own boss, doing things that really matter to me. And in terms of not getting that paycheck, like I said, I think the worst-case scenario is I'm without a salary for two years, but I'll really be richer for the experience. It's a bet I was willing to make.

Rick Ruback:

Royce, I love the way Alex characterized this. I love that he was more concerned about the risk of not taking a bet on himself. That's a wonderful way of thinking about it. It's so easy to worry about losing what you have and not thinking about losing what you're not.

Royce Yudkoff:

What you want.

Rick Ruback:

What you want, right. So it's, “Ah, this is okay, and I don't want to lose okay.” You know, and so I'm going to get stuck in okay and never get to great. You thought the risk of not getting a great outcome, was higher than the risk of losing okay.

Alex Wallace:

I think that’s a pretty fair characterization. You spend so much of your life working and I'm someone who really likes to be passionate about what I do. You know, running is a big part of my life and that was something I was really, really passionate about and you really dedicate yourself to that sport, and I found the same in work. If I'm going to spend most of my day working, I want it to be something that I could get up every day and really find meaning in, and I felt this was the best way to do it. I didn't want to not give it a shot.

Royce Yudkoff:

Well, you decided to make this big change from being employed in someone else's company to pursuing becoming your own boss. But within that, you made a few interesting, specific choices. One of those choices was to self-fund your search. As you know, because you built conviction by researching entrepreneurship through acquisition, there are many people who go to a group of recurring investors in search, they raise a search fund, it pays them a salary, they have a preset deal with their investors if they find a company, or they fund themselves and have a lot more flexibility of how to raise the equity, and on what terms, when they buy the company. You chose self-funding. Can you talk to Rick and I a little bit about why you chose that path?

Alex Wallace:

Yeah, and as you said, Royce, I would say most people do traditional. And when I first started thinking about search, I thought I would do that as well. It sort of was a more tried-and-true path. It's easier to kind of follow the steps and I think even the first fundraise itself helps you build conviction in yourself that you can do this. People are willing to give me some money to get started, they must think I can pull it off. So, I started off going down that track but as I built more conviction in myself and my ability to pull this off, I started to gravitate towards self-funded. I think traditional search works really well for people coming out of business school. And often they've taken on debt to go to business school. It's really important for them to have that sort of salary, that money coming in the door to help support them. But I'm fortunate that I've had six years post-business school, I was able to build up savings on my own to fund this, and I think for me, I was in a position where I didn't need to lock in terms or be beholden to a group of investors in the same way that a traditional searcher might be. And I think that's particularly important. We can talk a little bit more about New Zealand but one thing about New Zealand is the deals probably skew a little bit smaller than many in the US. And the more search money you take, the more you're driven to buy a bigger business. So that allows me to be a little bit more flexible as well. So, when I thought about where I am in my career and so where I'm going to search, and just the conviction I'd built in myself, that I didn't need to raise the money today to have the confidence to do this. I felt that self-funded was a better path for me.

Rick Ruback:

Yeah, that makes a lot of sense to me, Royce. I actually think most people like you, Alex, who've had some success in their careers will self-fund this search when they decide to go launch a search. It certainly happens that people mid-career, I guess, I don't know if I could call you mid-career. You're six, seven years post-graduate school, so you're still early-career, but you're not just a fresh MBA. I do think that most people in that situation would self-fund. There are certainly examples of people who do raise funds in that circumstance. As you say, it's people who generally want to buy that business, which is tens of millions of dollars in total enterprise value, which probably isn't the New Zealand market.

Alex Wallace:

Yeah, and then, candidly, the other consideration was if I had to go raise money, that would take me another two months, you know, potentially. So, I can just start searching. I've been in New Zealand two weeks. I've started already, so it was a nice little positive from self-funding as well.

Royce Yudkoff:

Well, that actually brings me to another question that Rick and I have, which is you chose to do a tight geographic search, in your case, New Zealand, which, Rick, I looked this up after meeting Alex.

Rick Ruback:

How big is New Zealand?

Royce Yudkoff:

It's the size of the Phoenix, Arizona metropolitan area. So, it's like five million people, right Alex? Something like that.

Alex Wallace:

Yep, yep, just around five.

Royce Yudkoff:

Yeah, five million people.

Rick Ruback:

So, it's bigger than Vermont.

Royce Yudkoff:

It's bigger than Vermont, but it is...as we know, some searchers do broad national searches or big regional searches and some want to focus on a tight area. So, it wouldn't be crazy for a searcher to say, “I'm going to buy a business in Phoenix, Arizona and only search there.” And Alex, you've sort of made that kind of decision with New Zealand. So, I guess my question is, the path not taken is you could have said, “I’m going to search in the whole United States.” Clearly you're not reluctant to move, you know, from Boston, Massachusetts to somewhere else because you've just done that. How come you chose to do a specific, tight geographic search?

Alex Wallace:

Yeah, and I like the comparison to Phoenix because I think Phoenix would be a great place to search. That said, I think for me there were two big considerations here. One, where do I want to live? And then number two, does that location have a good opportunity in terms of businesses that fit within my criteria? And New Zealand fit both those boxes for me. I've been back in New Zealand two weeks now and I'm loving it. I would say, in terms of just geographic searches, from my experience or just my observations from talking to lots of searches, I felt that if you do a geographic search that just kind of positions you a little bit better, particularly in a competitive market. Probably more applicable to the US, but you're going to be competing with all sorts of different business buyers from other searches to small-scale private equity to a whole host of other things. And I think if you can limit your search to a geographic area, you can just become much more approachable to business owners. You know, they want someone that they can spend time with, that can come meet them quickly, and that has some sort of affiliation with that area. I just felt that would be a better approach to convincing sellers to sell their business to me. That said, in terms of New Zealand, as you said, it's the size of Phoenix or the size of a sort of medium sized US state, but I think importantly the demographics of the market are really good. It's not an overly competed market. To the best of my knowledge, I'm the only current searcher in New Zealand. And there's pretty good tailwinds. New Zealand generally grows population and GDP slightly above where the US does, and our population's aging in line, if not more than, the US population's aging as well. So, there's a lot of opportunities for business transitions. And then finally, I felt, look, I had a good story to tell here. I'm from New Zealand, I came back, I've got a good skill set to add to a business and to the community, and I felt it was a recipe for success.

Rick Ruback:

So Royce, one of the things I think is really interesting about this search is that while it's in a narrow geography, in terms of addressable humans, it is in fact the whole country.

Royce Yudkoff:

That's a big plus for Alex. You know, you and I have seen other searchers go into parts of the US where there just aren't a lot of other searchers, and we've seen that they generally get very good results because there's less competition, and that's always a good thing.

Rick Ruback:

Right, there's this sense that we have seen that many searchers are often what they used to call bi-coastal. They want to be on the East Coast or the West Coast and certainly not in between. Everybody has their favorite joke for when they look down on the airplane on the flight to Los Angeles or San Francisco and they say, “I wonder what's underneath us.”

Royce Yudkoff:

Businesses for sale, that's what's underneath them.

Rick Ruback:

It's surprising how few people want to search in middle America. And what we've seen, I think, is that when people search in places where there hasn't been other searchers, they get just amazing deal flow and very little competition.

Royce Yudkoff:

You and I have been in touch with Alex after recording this episode and he seems to be experiencing that in New Zealand with quite a bit of flow for the early stage his search is at. So, it seems to be bearing out in yet another country.

Rick Ruback:

So that's a lesson, I think, to our listeners that when you're deciding where to search, maybe you should search in a place where other people are not searching.

Royce Yudkoff:

A goodly number of searchers do these self-funded, geographic searches and when you do a geographically-focused search, your approach needs to be a little bit different from the typically larger scale national funded search, different in a way that brings you benefits. Like, for example, it's obvious that when you concentrate on a small market area, you're reducing the number of targets you have. And a way to offset that is by going a little more down market. You know, the economy is like a pyramid with more and more companies at each smaller level of size and so you can reestablish that larger pool of potential sellers by looking at some smaller companies with six, seven, $800,000 of EBITDA, of pre-tax profit. And that's okay because you're probably self-funding your search and that means when you raise money from investors, you're going to own a really big piece of that company. So, starting smaller is OK because you'll own more than you would if you did a funded search. And that's one difference in a geographic search that you play into because it brings you strengths. Rick, I don't know if you have others on your mind.

Rick Ruback:

There are others. It's that you get a very different kind of deal flow. It's more intimate. If you're doing a geographic search in a relatively small area, you probably never ought to have lunch alone. You should spend every day networking with somebody in the business community because if your geographic scope is relatively tight, it's really important to get that reference, to get that suggestion of somebody who might be retiring a great business that is ready for transition.

Royce Yudkoff:

You know, that's a really good point, Rick. And it contrasts with a national searcher who's going to be very cautious about getting on an airplane until he's had a few interactions with a potential seller around price, because that searcher just doesn't want to waste the time or money and then find out that the seller he or she's dealing with is just in an entirely different place on say valuation. But in a small community, you can drive across town and have lunch with a prospective seller, and there's no big cost if that seller is not in a place you want to be, but when they are, you've gotten a real edge over people who haven't put themselves in front of that seller. So, just the ability to have that human contact earlier in the process is a big part of a successful geographic searcher edge.

Rick Ruback:

The other thing about geographic searches that I think is so interesting is the number of subtle geographic searches. So, you and I note that when we talk to our former students and other searchers, we often hear that they end up buying a business very close to where they wanted to live, even though they weren't doing a geographic search. And I've often wondered how that happened and I've come to the view that when they hear about a business that's in a place they want to live, they just like the business. And they want to like the business. Where if they find a great business in a place they don't want to live, they immediately find things wrong with the business and don't have any interest in the business. So, it is intriguing that even the national searches turn out to really be geographic searches because of this biased assimilation. Your view of the same facts changes if it's in a place you want to live.

Royce Yudkoff:

You're absolutely right, Rick. We see that again and again.

Rick Ruback:

And one of the things we have learned is that if you end up buying a business that happens to be near your hometown or your family, that turns out to be a huge plus. Because when you have children, you have some built-in daycare network, you have other things that families do that can be really helpful. And especially if the business involves a bit of traveling, it's just an enormous help. Plus, people want to help you find a business in the community of which you're a member. It is a big factor.

Royce Yudkoff:

I agree with that, Rick. And I think that if you come from the big cities on the coasts, which are these fluid environments where people are often working for companies where they could be located anywhere, localism isn't that important or relevant to them. But if you go to smaller communities and deal with business people who have spent their lives in that community, it's often a little puzzling to them that a national searcher approaches and is willing to move anywhere in the country when they buy a business. That's just not a natural thought to people who are very rooted in a smaller city. And when you come to them and say, “I came from this city” or “I want to live in this city and buy one good business”, it resonates a little more with an entrepreneur. It's not a make-or-break deal, but it's another edge you can give yourself.

Rick Ruback:

Right, the line that says, “I grew up here and I want to come back home.” It's a big line.

Royce Yudkoff:

It really resonates, yeah, agreed.

Rick Ruback:

Let's go back to the conversation with Alex.

Rick Ruback:

Alex, you're probably at your peak of optimism right now. You know, you've been through the decision to search or not search, decided to search. You've been through the decision of where to search. You're at peace with that. You're back home. I bet your parents are really happy you're searching in New Zealand. Tell us about your ideal business. What is the business you dream about buying?

Alex Wallace:

I guess in terms of my search strategy, I would characterize as pretty down the fairway search type business. So, I'm looking for two to six million dollar EBITDA business, you know, that's been growing profitably with some sort of recurring nature to the revenue. And yeah, as I said, that's pretty down the fairway search and I think that's for a reason, right? As a new CEO, if you buy the business, you want to buy a business that's a low-risk business, right? In a business that doesn't need too much capital expenditure and one that you are well positioned to add value to on Day One. So, I think the services business model, particularly non-discretionary services, is a really great business model. They lend themselves to having some sort of defensive or recurring type revenue and they're more likely to be low capital need, which is important when you can be on a budget, which I think would be the case for a lot of searches. I think that's important for me as well, particularly in a market where I don't have too much competition, there's no need to recreate the wheel. I think that just creates unnecessary complexity. So, I just spent a lot of time looking at what had worked for other searches or other people who had bought businesses of this size and shaped my criteria around that.

Rick Ruback:

What kind of non-discretionary service businesses do you have in mind in New Zealand?

Alex Wallace:

Yeah, so the area I'm starting with is veterinary services. The reason I'm starting there is one, it's a business model that's done really well in the US and Europe and in fact there's been some success buying veterinary businesses by private equity firms in New Zealand and Australia as well. Number two is I think I am well positioned to run a vet practice and to speak to owners. Again, I grew up on a farm. My brother is a veterinarian. And it's just a great business model, right? Whether it's agricultural vets or retail, if you have a problem with your animal, you kind of have to bring it in. And there's a lot of recurring services that come with veterinary services as well. So that's an area I'm very keen on, starting my search. But that said, you don't want to get too attached to any given sector because, particularly if the market's shallow, you don't want to fall in love with something just to find that the opportunities aren't there. I think the opportunity is there in veterinary services, but I'm prepared to pivot if that doesn't eventuate.

Rick Ruback:

And in the US a lot of the veterinary services acquisitions have been what we call roll-ups. They've desired to buy multiple practices, you know, one multi-vet practice at a time, usually two or three vets. Is that right, Royce?

Royce Yudkoff:

Yes, for sure.

Rick Ruback:

And then they purchased several of them. How many do they buy usually?

Royce Yudkoff:

Well, I know large ones have several hundred vet practices.

Rick Ruback:

Those are really private equity ones, right?

Royce Yudkoff:

Yeah, those are private equity. Searchers will do, you know, five, eight, ten, something like that.

Rick Ruback:

Right. And that's happened in the US in veterinary services, dental services, medical services, now, you know, human medical services, not just for animals, as well as so many other industries, car washes, you name it. So, do you imagine a roll-up strategy as well, or are you content to buy one and grow it and run it?

Alex Wallace:

Yeah, I really like the idea of a roll-up strategy. I think it's a strategy that can really create value, in terms of putting businesses together and getting both cost and revenue synergies. With that said, I'm certainly cautious about it. In comparison to private equity, where they can rapidly buy a lot, that approach to roll-up, you need quite a bit of upfront cost on Day One, in terms of building out an organization that would sit on top of the underlying vet practices. So I think, given where I am, that's not necessarily a luxury I can afford. So, my approach to this would be to find a sort of sizable practice to start with, one that's already got pretty good processes in place and is well positioned to have add-ons added to it, but from there certainly add a few more to get to a reasonable scale.

Rick Ruback:

Yeah, so that would be acquire a platform company and then make some tuck-in acquisitions along the way…not necessarily a full-on blazing speed roll-up strategy, but more platform than tuck-ins.

Alex Wallace:

Yeah, I think it's more just making sure I'm not biting off more than I can chew approach.

Rick Ruback:

Yeah, makes sense to me.

Royce Yudkoff:

And Alex, when you find that first company to buy, maybe it's a vet practice, maybe you've gone on to another sector, how do you imagine raising money to fund the purchase of this company? I mean, you're funding yourself in the acquisition search period but once you want to buy that company, Rick and I are thinking you'd need more money beyond your resources. How do you think about raising that?

Alex Wallace:

That's correct. So, for today, it's just me funding myself. But in terms of fundraising, I spend time maintaining a network, and that was one of the things that I did even as I started my search, was just going out and meeting with potential investors, selling my story and saying, “Look, this is what I'm trying to do. This is my experience. In the event of a transaction, you know, would you be interested in participating?” So, I sort of make a concerted effort to maintain a pretty broad outreach effort and maintain relationships with investors. And I think given my role at Liberty Mutual, I was well positioned, A, to build that network, and then to know how to engage with investors. So that's something that you don't want to spend too much time on until you start the transaction, but it is something that you should manage, so I do that. And then in terms of actually raising money, that comes in line once you sign the LOI, once you really dig into diligence, there's going to be a number of different work streams you're going to have to put on, in terms of diligencing the business, in terms of raising debt capital, as well as equity capital to purchase the business. So, I maintain relationships both with debt providers and equity providers. And again, just have processes in place such that I can rapidly provide them with the information that they need to make that decision, if that's something they'd like to participate in if a deal eventuates.

Rick Ruback:

Alex, if you were in the United States and a US citizen, you would surely be looking for a small business administration loan. One of the great joys of a self-funded searcher is that they can take advantage of this ten year, no covenant loan that's guaranteed by the government. Is there something like that in New Zealand?

Alex Wallace:

To the best of my knowledge there is not something exactly like that. That said, New Zealand is quite a business-friendly environment and, you know, I'm not too worried about being able to get bank debt or private credit debt as a portion of my capital raise. But there isn't a specific loan program like the SBA loan in New Zealand.

Royce Yudkoff:

Alex, just a few weeks ago you were working in the investment department at Liberty Mutual Insurance. Now you've just settled in New Zealand to start searching for a company you are seeking to buy. Can you tell Rick and I just a little bit about how you're going about sourcing these companies? Are you working the phones and cold calling owners of veterinarian practices? Are you writing emails or letters? What's your approach to finding that business to buy?

Alex Wallace:

Yeah, similar to my strategy, I would say it's relatively down the fairway search, maybe with a little bit of a New Zealand twist to it. I have a two-pronged approach, one being direct outreach and then the other is building my network. So, on the one hand, I spend time researching and looking for companies. I've built a template for quickly evaluating an industry and deciding, “Does it have the dynamics that make it attractive for me and does it have a large enough universe of potential companies to buy to be worthwhile?” From there, there's various sources. New Zealand actually has a great register of companies that's publicly available. You can go find all the registered companies. I've got that data set pulled down and I filter it to find companies, in this case, veterinary companies. And then I work on cleaning up that data to get good data to understand, “Is this company of a size range that's appropriate to me and have I got the appropriate contact details?” And then from there you contact the business owner in any way you can, whether it's via email, via sending physical mail, just phoning them up, even just dropping by their office. And then the other side of it is network. So, I spend a lot of time connecting with business brokers, with bankers, with anyone who has a pretty good reach and good touch points into the small-to-medium business world, and saying, “Hey, this is my story, this is why I'd be a good buyer of a business. If you have any business owners in mind, send them my way.” And you can get deal flow that way as well.

Rick Ruback:

Alex, people who have been first-time searchers in other countries report to us that they often have a challenge, that they have to explain the whole concept, the whole structure of what they're doing. And sometimes, particularly with older owners of businesses, they're somewhat skeptical: “You've never run a business before, you don't have any money, you don't have any committed capital. Why am I even talking to you?” Have you run across that yet or is it still too early?

Alex Wallace:

It's mostly a little bit early, but I was really lucky in that I'm, again, to the best of my knowledge, I'm the second searcher in New Zealand. A guy by the name of Luke Taylor was the first searcher and he searched over the 2022-23 period and actually purchased a company at the end of last year. So I talked to him a lot about how he did this and his approach, and there is a little bit of an education process there, but the great thing that he found, that I'm finding as well is, these business owners are not getting inundated with emails of people looking to buy their business, in the same way that a US business owner might. And so they're much more curious just to hear you out. So, the response rates have been much higher than what a typical US response rate is. And yes, it is about explaining. I try and just explain, “Look, I have this capital base behind me. I've got the good experience.” And just more talk about why I'd be a good owner. And go from there and certainly do my best to answer any questions they have to help them get comfortable.

Rick Ruback:

I think it's a really good point that you make, that if you search in a place where other people are not searching, the opportunity set is just huge. Because you have, as you say, in New Zealand, much like in the United States, a collection of people who are reaching their late 60s, mid-70s, who eventually are going to have to sell their business, or their heirs will sell their business. And they need to find somebody like you who can both run the business and provide the capital to buy the business. And it's great that they haven't been inundated because they're not jaded, right? They look at you and your phone call may be the best thing that's happened to them all month.

Alex Wallace:

Yeah, in that sense, I'm fortunate in that way.

Rick Ruback:

Yeah, go where nobody else has gone, right? Sort of like the Star Trek episodes.

Royce Yudkoff:

Alex, this has been great, to hear your story. Rick and I like to end our interviews by asking if you have any questions for us. And if you do, we're happy to answer them. And if you don't, well, you can get back to searching and sourcing new companies.

Rick Ruback:

And you have a whole day ahead of you.

Alex Wallace:

Yeah, still bright and early, which is great. Well, yeah, I really appreciate the time to come and chat with you guys. I had one question. I haven't had a chance to attend one of your classes, but I have friends who were students and spoke highly of your ETA class. Over the years, have you made any notable changes to your curriculum? And if so, what were they, or why did you make those changes?

Rick Ruback:

Oh wow, such an interesting question. I bet we're both going to have different answers to that question. You want to go first, Royce?

Royce Yudkoff:

Yeah, I'll go first. Thank you for that, Rick.

Rick Ruback:

Thank you for that, Alex. I'm going to learn a lot right now.

Royce Yudkoff:

You know, searching has evolved a lot over the almost 15 years you and I, Rick, have been teaching this. And I'd say if you go back 15 years, at least two conditions were different. You know, one is that there were no commercial banks that would finance a searcher acquiring a small company nationally. And so the result of that was when you got a company under a letter of intent, you had to race around like a crazy person right in that region, to small banks that lent right in that city or several counties and line up your debt financing. And since then, banks have entered this business where you can call them up and they will sort of follow you nationally and finance you anywhere. So, debt financing has become a lot easier for people who buy a business for the first time.

Rick Ruback:

Yes, they're much more open. They're more open to the idea that somebody can buy an existing, enduringly profitable business and be a success of it. And early on, banks were very concerned about that. Now they're fully supportive.

Royce Yudkoff:

Exactly. And on the equity side, when we started, funded search, basically offered searchers the opportunity to get a relatively modest salary and have standing by equity financing for their acquisition. But the terms were not as attractive as if you went out on your own ticket and searched and then found a company and offered it around to all kinds of investors, you ended up owning more of the company. And so I think –

Rick Ruback:

A self-funded search.

Royce Yudkoff:

A self-funded search. And so, Rick, I think when you and I started teaching, one of the things we were doing was pointing people to self-funded search, which wasn't much of a thing then. And over time, it's become a thing. And as a consequence of that, funded search has actually improved its terms, so the two forms of search have now become more competitive with each other for searchers. So, I would say the whole story of how you finance this has evolved over time and our teaching has of course followed the market.

Rick Ruback:

I would just build on that, and that is that what we've seen in the last few years is that the size of businesses that self-funded searchers buy are much, much smaller than the size of businesses that the funded searchers buy. And part of that is the funded search investors, some of them, at least, have become very institutionalized. They're raising their own funds. They need or want to put sizable amounts of capital to work. And if you buy a business that has a million dollars a year in pre-tax profit for four times, so you're buying a $4 million dollar business, and you're probably going to get 75% debt financing on that, that means you need a million dollars of equity. And if you're going to raise that from several people, the net is that an investor would be investing hundreds of thousands of dollars, maybe just a few hundred thousand dollars. And if you have a $200 million fund to deploy, you can't do it at $200,000 chunks. You really, really need people to buy bigger companies and have bigger check sizes. And so what I think has really been interesting, particularly in the last four or five years, is that the market continues to bifurcate in the sense that the kinds of businesses that self-funded searchers buy are just fundamentally different than the kinds of businesses that the funded searchers buy. Fifteen years ago, they were very similar. You know, our very first class is about the bug company, was it VDCI?

Royce Yudkoff:

Yeah. Vector Disease Control.

Rick Ruback:

Vector Disease Control. That was a $6 million acquisition and a funded search. Now, I don't think I've seen a funded search at $6 million…

Royce Yudkoff:

That's right.

Rick Ruback:

…in a long, long time. So, I think the big difference is there. The other thing is, for our student standpoint, this has become an aspirational career choice for a great many students. It used to be just a small pocket of students. When we started this, we would have, I don't know, half dozen to a dozen students a year going searching, and I think now we probably have two to three times that every year and maybe more this year. So, it's really gained traction as a career path, not only at the Harvard Business School and of course at Stanford, where there's also a significant search program and education and courses, but also throughout the country, right?

Royce Yudkoff:

Yeah. Yeah.

Rick Ruback:

So those are big changes.

Alex Wallace:

Excellent. Well, I appreciate that and, as you said, a lot of change. So, thanks.

Rick Ruback:

Well, when you come to the States next, you should visit a class!

Alex Wallace:

I would be happy to. I lived just down the road from HBS for many years.

Rick Ruback:

Yeah, well now it would be a longer walk.

Royce Yudkoff:

Yeah.

Rick Ruback:

And a swim too!

Royce Yudkoff:

Well, Alex, thank you so much for taking the time to visit with Rick and I, and we wish you luck. And it shouldn't surprise you if, as you go forward, we just check in and see how the search is going.

Rick Ruback:

Yeah, it's such a great time. It's at this height of optimism, when the world presents so many opportunities. I hope you enjoy it because it's just such a fun time in your life.

Alex Wallace:

Thanks so much for the time.

Rick Ruback:

Royce, one of the things that Alex talks about is potentially doing a roll-up of veterinary practices. What do you think of roll-ups, Royce?

Royce Yudkoff:

You know, there are all qualities of roll-ups, from roll-ups where there are lots of ways to win, meaning you have an opportunity to put companies together and cross-sell or cut out duplicative costs, or you have redundant parts to your management team, and so you can free up a lot profit by combining those together. But I know that you're not focused on those. You're really focused on the many roll-ups where all someone is doing is putting together three or four small companies and doing nothing but creating a larger cash flow across the same set of businesses, with no organic improvement in the cash flow. And I think it's a good question. Like, why does someone think that they can sell that collection of businesses for more than they paid? Here's the case I'd make – and I'm keen to hear your comments on this. I think when you put a group of small businesses together, you average out some of the idiosyncratic fluctuations. If you go from buying one restaurant, where you're exposed to the manager being really terrible or a competing restaurant opening across the street, and instead you own ten of them, that your cash flows will level out and be more predictable because there'll be a good thing happening somewhere to offset the bad thing, and people will pay more for that level cash flow. And then second, of course, as you get bigger, there are more lenders and more buyers who want to buy your company or lend to your company and that will often create more demand. That's my case. What do you think?

Rick Ruback:

I'm not really convinced. You know, we have talked about before that we've looked at businesses that have $2 million of pre-tax profit and they really have five businesses, each earning $400,000 of pre-tax profit, and they're in disparate businesses. And you and I have said we shouldn't treat that as a $2 million dollar EBITDA company. We should treat that as five $400,000 companies because we have five sets of management challenges, and five sets of accounting concerns, and five sets of humans that are working and are not easy substitutes. There's no economies of scale. There's no gains. Would you agree with that?

Royce Yudkoff:

I do agree with that.

Rick Ruback:

And now we have in these roll-ups, that don't involve any synergistic combinations – there's no cost savings, there's no revenue savings, there's no marketing savings, there's very little front office savings, there's no IT magic that's happening. It's sort of like those five businesses, each at $400,000 each, I mean, they're separate. They're not combined in a meaningful way. So, I don't know. I'm not convinced.

Royce Yudkoff:

Well, for sure, Rick. This conversation is making the point that there's a whole hierarchy of roll-ups, from really high-quality roll-ups, which you and I have seen, where there is a lot of cash flow creation through savings and cross-selling, to the kind of roll-ups that you were just talking about. But I'm going ask you this question, which is we do see lot of roll-ups which are only about aggregating similar businesses together and creating a larger bought cash flow. And yet a lot of the time we also see those, after that work has been done, getting sold for a much higher multiple of cash flow than was paid. How do you explain that recurring phenomenon?

Rick Ruback:

It is a troubling thing. As you know, I have said many times that it really bugs me that the strategy doesn't make any sense to me and yet other people are getting really wealthy and I'm saying, “Oh, aren’t you silly?” And there they are going, “Kachink, kachink, kachink, kachink.” And they're very gracious about their success. I appreciate that. And when I ask them, “What'd do?”, they just said, “Oh, we bought some businesses.” And maybe it's that I'm just too old school because, you know, the classic roll-up was SCI, Service Corporation International, the funeral home company, that realized massive economies of scales because they realized that most funeral homes are empty and idle most of the time - I guess that's a good thing, particularly at my age, I think that's a good thing – but so that you can combine things like fleets of hearses and embalming and those kinds of things, you can get great economies of scale. And then they found out there was great marketing economies of scale in things like caskets and stuff like that. And the history of people doing roll-ups and making a ton of money and really improving the operations and economic viability of their entities is well established. What is more recent is this idea that I can buy them and not combine them and still get a big boost of multiples. My thought on that is that they must be selling it to somebody who imagines that it is really hard to actually do the transactions and that they have the ability to get the synergies. So, for example, if I'm a large national dental practice, I might buy a ten-office or twenty-office practice for more than the multiple of an individual practice just because it's the cheapest way for me to get those acquisitions. I don't have to do the work of acquiring ten or twenty firms, with all the uncertainty. So, I’m rewarding them for their work. And I know I'm going to get some benefit for the synergies. And then the question goes, “Who gets the synergies? Is it the buyer or the seller?” As you know, oftentimes it's split. In the public markets, it usually almost all goes to the seller.

Royce Yudkoff:

I think where we can agree on this is that it's a better roll-up opportunity if you can release cost savings or cross-selling benefits than if you're relying entirely on getting out at a higher multiple because if it all works, you'll make more money in the first case than in the second. But if it doesn't work, if you buy companies and they go backwards, if the sellers really were better managers than the people you install, then you'd really like to have some other sources of value creation to offset those headwinds. So not all roll-up opportunities are alike, and you should look the better ones.

Rick Ruback:

Well, you like to say that it's always good to have multiple ways to win and a roll-up provides that opportunity if, in fact, you do have multiple ways to win and that multiple ways to win are getting those scaled economies from something. So Royce, it'll be interesting to see in New Zealand if it's simply a combination of offices or if, in fact, there are some economies of scale that can be realized…better technology, better billing, better marketing, better communication. I could even imagine that there would be some labor force substitution, if one vet was sick then the other vet could come fill in. So, there might be great economies of scale here. We just don't know.

Royce Yudkoff:

Yeah, I agree with you, Rick. We don't know, but it seems like the type of business where there could be a bunch of opportunities. So, worth pursuing, worth pursuing.

Rick Ruback: 

Royce, it was great to hear from Alex. What was interesting about Alex's conversation is that it is rare that we get to talk to somebody at their height of optimism about their search. He's just started the search, he's a few weeks in. The world is, or at least the country of New Zealand, is unfolding before him with opportunity. It will be wonderful to follow his journey.

Royce Yudkoff:

You’re absolutely right, Rick. In our next episode, you and I are going to be interviewing Nick Wheeler, who has recently bought a small but very promising company, which tests laboratory equipment to make sure it's properly calibrated. It's one of these little niche businesses where getting it right is so important and the cost to the customer is tiny. We're going to see how Nick responds to the takeover process and what problems show up and opportunities show up and how he's feeling about the business he so recently bought.

Rick Ruback:

And Royce, our last episode of the season is going to be us answering the questions that we hear from our listeners. So listeners, please send your questions. Our email is rickandroyce at hbs dot edu.

Royce Yudkoff:

You’ve been listening to Think Big, Buy Small. We’re your hosts, Royce Yudkoff…

Rick Ruback:

…and Rick Ruback.

Royce Yudkoff:

Katie Zandbergen produced today’s episode. 

Rick Ruback:

Our audio engineers are Mari Shear and Craig McDonald. If you have any questions, comments, thoughts, feel free to just e-mail us – rickandroyce at hbs.edu.

Royce Yudkoff:

We’ll be back next week with another episode of Think Big, Buy Small.