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. Today Royce and I are going to be speaking with Geoff Duckworth about his experience buying, running, and then successfully selling his own company.

Royce Yudkoff:

He has a story that’s very useful to hear. Like most people who search for an existing business to buy, Geoff had never bought or run a business before. He did have about a decade of general business experience when he decided that his job working in someone else’s company didn’t fit with the life he wanted to live. So, he reached out to brokers of smaller businesses in the region where he lived, he found a business that he could afford, and bought it.

Rick Ruback:

He bought a business you and I think of as a high-quality company, meaning there are good reasons that it will have enduring profitability. We will spend some time talking with Geoff about why he liked this business because he did a good job in selecting the company to buy.

Royce Yudkoff:

He also did a good job paying for the business. He took out a Small Business Administration, or SBA loan, for about 90% of his purchase price and paid for the last 10% by selling a condo that he and his wife had previously lived in and then rented out for a while. These SBA loans are regularly used by many searchers to turn themselves into business owners. The amount of money he had to come up with was affordable and reasonable.

Rick Ruback:

We will also discuss with Geoff how he learned to manage the business with some transition help from the seller, why he decided to eventually sell it, and how he thinks about his career going forward. I think listeners will find a few steps in his journey particularly interesting: why he decided to stop working for others and buy his own business, how he sourced businesses that were for sale, and so on. 

Royce Yudkoff:

Also, what qualities he saw in this company and how he financed it.

Rick Ruback:

Well Royce, let’s meet Geoff…

Rick Ruback:

Geoff, welcome to Think Big, Buy Small. Delighted to have you here today.

Geoff Duckworth:

Thank you. I'm really happy to be here.

Rick Ruback:

Tell us a little bit about your journey. How did you get to this moment of your life?

Geoff Duckworth:

I studied mechanical engineering as an undergrad. I spent a couple years doing aerospace, robotic mechanism design. Didn't find it to be totally my jam. Ended up going to business school. Didn't have the thing that I totally understood I wanted to do out of business school so I did consulting for seven or so years. In the business school journey, I thought, on the way in, “I'll go to business school and this will be great. I'll figure out what the business I want to start is”, because I had always wanted to be a business owner or an entrepreneur or found a business or whatever, and never really had that kind of moment where there was a flash of genius of the thing that I wanted to do. So then I figured I'd bide my time in consulting. At a certain point, sort of became tired of spending fifty weeks a year on the road and more nights in hotel rooms than my own bed. Then, serendipitously fell onto the notion of ETA through your book. And here we are.

Rick Ruback:

That's great. And importantly, you didn't go to the Harvard Business School?

Geoff Duckworth:

I did not. I went to USC.

Royce Yudkoff:

And Geoff, along the way, you married, you had kids? Tell us about your family.

Geoff Duckworth:

My wife and I have known each other for quite a long time, and so she's been with me through the whole, the whole journey. My first son was born in 2012, just a week before the end of business school. So, I was finishing up my last class in statistics and was supposed to be gearing up for a final project and I got the phone call. The instructor happened to be a couple months behind my wife, also pregnant. I had a kind of a sympathetic ear but I went to talk to her. I said, "Look, I just got this text message. I got to leave class a little early and I'm not going to do your final project."

Royce Yudkoff:

I love that.

Geoff Duckworth:

I've got an A right now, so just go ahead and give me a C or whatever you got to give me.

Royce Yudkoff:

Average it in, I'll take my medicine.

Geoff Duckworth:

Yup, I've got bigger fish to fry right now.

Rick Ruback:

That's great.

Royce Yudkoff:

I love this. So, you graduate from USC Business School, you're not sure what you want to do next, so you choose consulting, kind of keeping your options open.

Geoff Duckworth:

Exactly.

Royce Yudkoff:

You had a steady, general vision of, “I want to be an entrepreneur.” And I guess, like many people, you think about that as startup entrepreneurship, but it doesn't feel quite right to you.

Geoff Duckworth:

I think conventionally that's what you think of, right? But I think maybe it's a bit the curse of the engineer, too. I feel like an engineer is sort of a professional skeptic. We just sort of think about all the reasons why this is never going to work. That's enough to make me want to not pursue these different ideas that I might've had. That's what I love about this notion of ETA, is that you get to look at a business with the benefit of history and say, "I don't know if I would've thought that was a good idea, but it certainly seems like the P&L shows it to be a pretty good idea." I was really happy to discover this notion.

Royce Yudkoff:

Perfect. And we discovered that the inflection point was actually reading our book, which was a happy surprise for Rick and me.

Geoff Duckworth:

The origin story is a bit fuzzy for me at this point, but I believe there was a podcast where it was sort of mentioned and then looking about to see like, "Well, how do I find a little more information about this?" Found this book from Harvard Business Review, and I feel like those guys have some credibility, maybe they know what they're talking about. And I read the book and it was mercifully a relatively short read and concise, seemed like it laid it out pretty straightforward. And so I pretty much used that as the playbook. And in the back of my head, as I was reading it, I was thinking, "Ruback, that name is familiar." And I went to school with a guy, turns out, and I was like, "What are the chances that this guy Rick Ruback is related to Sam?" And it turns out they're pretty good.

Rick Ruback:

Yeah, yeah, Sam is my oldest son, and Sam tells the story that you were at a reunion event or something – we ski at Mad River Glen – and you had met him there and said, "What are you doing now?" And that discussion ensued, and you said you had discovered this book by these guys from Harvard, and Sam said, "Who wrote it?" You said, "Oh, somebody named Ruback!"

Royce Yudkoff:

So Geoff, tell us about your search. You had a job and you sort of cottoned on to this idea of buying your own smaller firm as a way to make a living and a career.

Geoff Duckworth:

Yup.

Royce Yudkoff:

What did you do next?

Geoff Duckworth:

I was consulting before COVID, so consulting was definitely all the travel and all the on-site work and all that. So, I was doing that and kind of looking for a way to get off the road. I'd say the search started slow, kind of feeling it out to sort of see, is there something here? After I found a few interesting opportunities, even if they weren't something I really pursued, it gave me enough confidence to say like, "Oh, it looks like there are some interesting things out there." And so I proceeded to break most of the search rules that you guys laid out in the book where I ended up doing most of the search nights and weekends, on the side of a full consulting schedule. I didn't really generate any proprietary deal flow other than, you know, some, to put it fairly, probably half-hearted attempts at networking. And the deal I ended up finding, you know, I found it on BizBuySell.

Royce Yudkoff:

You were going to websites, some of the big websites, that offer businesses for sale and maybe calling a few brokers who are brokers in businesses?

Geoff Duckworth:

Yeah, so I had a very geographically-focused search because we had just relocated our family from Los Angeles to Eastern Massachusetts. So, I'd mentioned that my oldest son was born right at the very end of business school, and then two years later we had another son. At this point, a reasonably sized but young family, and the move from California to Massachusetts was harder on the family than I had kind of expected it would be. Definitely weren't about to move again for a business opportunity. I was looking very much in the Eastern Massachusetts area. That helped in a certain degree, right, because there's only a handful of major brokers in the region, just tried to get myself on all the mailing lists I could get on, but fundamentally, they were all marketed deals.

Royce Yudkoff:

And you were self-funding your search, meaning you didn't raise a fund from some investors to pay you while you were searching and cover your expenses. You were doing it by keeping your job and searching nights and weekends, which you're right, Rick, this is something we just -

Rick Ruback:

We tell him, it just doesn't work, but here we go, here we go, here we go. He's a very happy person who, like with my own children, they just ignore what I say and seem to end up just fine.

Geoff Duckworth:

I feel like I've made a career out of successfully doing the things that people say won't work.

Royce Yudkoff:

Well, it did work in your case, which is wonderful. You know, it's something we don't see working that often. So, it's actually nice to see that the opposite is true.

Royce Yudkoff:

Rick, it’s great that Geoff was able to search for and buy this company while he was still working at his job and earning a salary but we need to say that that’s very unusual. Searching for a company to buy and acquiring it is almost always a full-time job.

Rick Ruback:

We get asked this question a lot by people who are thinking of searching: “Can I stay at my job and search on nights and weekends, and over holidays?” And it would be so attractive if that worked. But Geoff is one of the few people you and I have seen, after studying this market for nearly 15 years, who’s pulled this off.

Royce Yudkoff:

It’s true. Most searchers search full time. They spend their time talking to lots of brokers and owners, reviewing companies for sale that they might be interested in, and that’s before they sign a letter of intent, or LOI, to buy a company and start diving into the operating and financial details of the business.

Rick Ruback:

It’s not just that, Royce. These conversations take place during business hours. Even if you could put in all of this time, you aren’t going to be reaching owners and brokers during nights and weekends. These are some of the main reasons searchers describe searching as a full-time job. Which of course brings up the question of how these searchers support themselves while they search? There are several answers to that: they live frugally off savings, they have a partner who is working while they search, or they line up some investors who regularly back searchers in their search and then in the business they buy – that’s a funded search. We will talk about each of those choices in later episodes.

Royce Yudkoff:

I think the main thing to take away right now is that while most aspects of Geoff’s experience are pretty standard steps in entrepreneurship through acquisition, listeners should know that buying while still working is really non-standard.

Rick Ruback:

Right. Geoff got lucky. Let’s get back to our conversation with Geoff…

Rick Ruback:

I do think though that having such a well-defined search criteria almost makes this easier because if your search region is Eastern Massachusetts, it seems to me that your deal flow is not going to be overwhelming. It's going to come in in trickles. And so as long as you can get that deal flow to look at every time, it's not awful to do it part-time. What's really awful is to try to do a national search part-time or a big regional search. If you were all of New England or east of the Mississippi River or something like that, I think that would be really hard to do part-time because there's just so much deal flow coming at you. But if it's like, "Ah, I'm going to put a pin where I live and I'm going to draw a fifty mile radius”, or a radius built around travel time and highways, you're not going to see that much deal flow, I don't think.

Geoff Duckworth:

I was definitely not overwhelmed with deal flow because I wasn't creating any deal flow. With such a geographically-focused search, if I were to just blanket every registered business in Eastern Massachusetts, that probably wouldn't even be that hard.

Rick Ruback:

People who do that kind of tight geographic search do exactly what you say. They find business listings and they try to collect information on each line of that listing. It's a little easier with artificial intelligence and all that other stuff, you know, web scraping, but it's still a time-consuming task. And then they do the networking. They never have lunch or breakfast alone. They're always trying to find somebody who might know somebody who might know somebody. That's a great strategy, but it's very time-intensive and you didn't have that kind of time.

Geoff Duckworth:

I didn't have that kind of time. And you guys laid it out pretty well in the book to say, "Well, look, if you're going to generate deal flow, you're going to send out a thousand e-mails and you're going to get a couple of responses." And then, of those few responses, people are going to say, "Sure, I'll sell my business for the right price." And it's inevitably not going to be the right price. I understand that that's one approach. It didn't sound like a terribly appealing approach to me.

Rick Ruback:

I'm a big fan of using the broker network because the hardest thing is to find a committed seller. I think you find a committed seller first and then you decide if the business is appropriate.

Royce Yudkoff:

That's what the broker does for you, right? The broker is boiling the ocean to find a committed seller, so you have a richer population of those.

Geoff Duckworth:

And hopefully you don't have to have the conversation to say that this thing that you missed birthdays and weddings for for 30 years is only worth three and a half times earnings.

Royce Yudkoff:

The broker will have sort of splashed the cold water on the seller's face before you show up.

Rick Ruback:

Right. A good broker is a good psychologist, a decent accountant, I mean, it's their job to make sure that the people selling actually want to sell.

Royce Yudkoff:

Well, I think that's right, Rick. And so, Geoff, you scoped your geography. You were searching for any kind of business that appealed to you. You didn't have an industry-specific focus because I'm gathering you didn't want to further narrow your pool of targets.

Geoff Duckworth:

Yeah, it felt that to narrow the industry too much would maybe be detrimental. And some people think it's a dirty word but I’m kind of a generalist. You know, we would joke about in the consulting world, if you've done three months of work in an industry in consulting, you're experienced in the industry. And if you've done six months, I mean, now you're a subject matter expert. If you manage a business for three to six months, you probably understand 70% of what's going on. The other 30% might take twenty years to learn but at least you can get your arms around the basics pretty quickly. My consulting experience was super varied, many, many different industries, and so I felt confident to say I could probably step into an industry I didn't know well.

Royce Yudkoff:

Because you had practiced as a learner of businesses.

Geoff Duckworth:

Yeah, exactly.

Royce Yudkoff:

So Geoff, how did you pay for the business that you ultimately bought? We'll come and talk about the business itself in a moment, but we understand clearly how you funded yourself and your family while you searched. You kept your job and you managed to search at the same time. But how did you pay for the business?

Geoff Duckworth:

We had had a condo that we'd owned for a number of years that we used to live in when we were younger. You know, at the time we moved out of that place, we couldn't afford to sell it because it was sort of underwater, so we were forced to rent it and hold onto it. And in hindsight, we were lucky to do so because it had come up quite a bit in value. And so we were able to sell it and then take the proceeds from the sale of that condo and use that to put as the down payment of the business. You know, I did the SBA route.

Royce Yudkoff:

An SBA loan, SBA guaranteed loan.

Geoff Duckworth:

Yup. You guys described, "Oh, they'll lend sometimes up to 90% of the deal value." My experience was, and this was '19, I don't know if things are different today, but my experience was that they were very willing to go straight to 90%.

Royce Yudkoff:

That's outstanding. So 90% from the SBA, 10% from money from cashing out your rental condo.

Rick Ruback:

Can I ask, were you haunted by the personal guarantee? Did you go to bed at night and say, "Oh, the personal guarantee."

Royce Yudkoff:

Right, Rick, because the SBA loan is terrific in many ways...

Rick Ruback:

It's the best thing. It's no covenant. It's 10 years.

Royce Yudkoff:

10 years to repay, yeah.

Rick Ruback:

All you have to do, Royce, right, is if you make your payment -

Royce Yudkoff:

They don't want to know anything else about what's going on.

Rick Ruback:

They don't nag you about anything.

Geoff Duckworth:

They can't say boo if you make the payment.

Rick Ruback:

Yeah.

Royce Yudkoff:

Exactly.

Rick Ruback:

And that is not the way a commercial banker is.

Royce Yudkoff:

That's right. But you have a personal guarantee,

Geoff Duckworth:

And that's the big downside. It definitely gave me pause. We were at the point in our lives and our career where, you know, I wasn't straight out of business school. We had some equity that we had accumulated in our primary home. I had some pause there. I voiced that concern a little bit with the loan officer or agent, basically the woman who was kind of bird dogging the deal and trying to get things done, who was fantastic. But I was like, "Gosh, I'm a little nervous about this personal guarantee situation." I think her role is somewhat a selling role, but she was like, "Look, the bank doesn't want to own your business."

Rick Ruback:

It doesn't.

Geoff Duckworth:

So, she's like, "If you miss payments and you're in default on the loan, no one wants to go take your house. The bank wants to figure out how to make it work so you can pay back the loan." And I think that reality of what default would actually look like kind of helped me understand.

Royce Yudkoff:

I think that advice you got was good advice, you know, because while it requires sober thought when you sign a personal guarantee because something bad could happen, the reason the banks want that is that if things start to go poorly in the business, maybe your equity is not worth anything but the bank's loan is still worth something, what they don't want is for you, the entrepreneur, to just hand them the keys and walk away. That's the moment they waive the personal guarantee and say, "Geoff, you've got hundreds of thousands of reasons to clean this mess up for us." If you do that, they're usually pretty happy.

Geoff Duckworth:

I had some pause about it. I was able to get my head around it. Definitely there were some sober conversations with my wife, for sure, because it wasn't my equity. It was our equity in the house and the money we were going to spend. Ultimately, she had to become comfortable with it as well. When I talked to other people who are considering it, particularly young MBA graduates, I'm like, "Well, your net worth is probably minus $500,000 right now.” The personal guarantee is kind of a theoretical thing. It doesn't really mean a whole lot.

Royce Yudkoff:

True enough.

Rick Ruback:

True enough. Let's talk about the business that you acquired. So, the business you ended up buying was a business-to-business business, right?

Geoff Duckworth:

Primarily.

Rick Ruback:

Would you have purchased a business-to-consumer business? Because you were geographically constrained so would you have done a lawn care company? Would you have done a restaurant?

Geoff Duckworth:

I would not have done a restaurant. I've seen restaurant operations and it's not something that I was interested in. You know, I don't think like lawn care explicitly would've been something I would've been interested in, but I don't think I was averse to a B2C company, in general. Thinking back at the deals that I closely evaluated, I don't think there were any. The one thing I like about a B2B company is that you're really not asking someone to open their wallet. It's company money. And that mentality is a lot different. Whereas, if you're like a lawn care company and you're like, "Oh, it's not fifty bucks to cut the grass anymore, it's fifty-five bucks to cut the grass." And people are like, "Well, that's five bucks out of my pocket." Where if it's just the budget people don't care as much and I think they're less price-sensitive as a result.

Royce Yudkoff:

Well, Rick, should we learn a little bit about the business specifically?

Rick Ruback:

Yeah, Geoff, tell us about your business because it's a great one.

Geoff Duckworth:

There's a thing called a hydraulic breaking hammer, which is like a jackhammer you see a guy using in the street, but it's like eight feet tall and 10,000 pounds, and it attaches to the end of a normal excavator. Instead of a digging bucket, you put this thing on. And basically its purpose is to break rocks, big rocks into small rocks. They're relatively expensive and they break all the time and they're fairly expensive to fix. So, it's a really nice recurring revenue-type business. Now, what we did was repaired them in our facility, rebuilt them, and then sold them a little bit. And then, primarily, we sold parts for them all over the country. So, we would sell parts to other repair shops, similar to ours, that were doing work for their customers. Then we sold parts to people who were also fixing their own equipment, typically fleet operators.

Royce Yudkoff:

We should think about you as primarily a specialized distributor and bolted onto that you had a service and repair shop attached?

Geoff Duckworth:

Yeah, it was maybe a third of the revenue, was service and repair. Repair parts was maybe a third of the business. And then the last third would've been the actual drill bit, so to speak. They wear down and so they get replaced fairly frequently.

Royce Yudkoff:

While this business wasn't a recurring revenue business, like some sort of subscription business where the customer signs up and until they decide to get rid of you, if they ever do, they're paying that regular subscription. The revenue is really predictably reoccurring because as long as people are breaking rocks apart, these things are going to break and wear out, and there’s kind of an actuarial recurrence to it.

Geoff Duckworth:

Yeah, it was not contractually obligated revenue but it was every month recurring.

Rick Ruback:

Interestingly, in these kinds of businesses, sometimes you can transform it into being a recurring business. You can do a service contract, "We'll do your annual maintenance, and if it breaks, we'll fix it. Just call us when it breaks and we'll bill you for that."

Royce Yudkoff:

The HVAC industry has transformed itself into that sort of thing.

Geoff Duckworth:

Yeah, that notion occurred to me on the way in. I thought, "Oh yeah, this would be a great way to maybe achieve that." I think what I found was that our customers weren't really interested in that kind of a model. It's much more like a hand-to-hand transaction of, “When it's broken, I need it fixed. If it's not broken, I've got other things to spend money on.”

Royce Yudkoff:

This business has a nice quality to it, which is that this part is a small part of a construction company's budget or a mining company's budget or a road construction.

Geoff Duckworth:

Yeah, the way I would think about it is to sell a new one, for example, we might charge $50,000 or $80,000 for this piece of equipment, and to rebuild it might be a third of that cost, but the machine that it goes on that operates this thing, this excavator, is probably a half million dollar excavator. So, we're not talking about small dollars in our transactions but in the broader scheme of things, like I said, it's a half million dollar excavator that it goes on, and those companies are burning thousands of gallons of diesel fuel a week running these pieces of equipment. So, we're pretty far down their list of cost priorities.

Royce Yudkoff:

And this equipment has to work because they have a whole crew out there and if this stops working and they don't have the part, it's a big problem.

Geoff Duckworth:

In the day-to-day operations of the business, that exactly was a lot of times the stress that we would experience, where someone said, "Ah, it's broken and I need it to be fixed yesterday." And we tell them, "We need a week and a half to get the parts because it's a special order." And they're like, "Well, what am I going to do with ten guys standing around, nothing to do?" And to a certain degree, your lack of planning is not my emergency, but we try to do what we can.

Royce Yudkoff:

That's what you don't say to the customer.

Geoff Duckworth:

Yeah.

Royce Yudkoff:

But it all goes to the issue that price is really not that important to your customers. Availability is, having the right part is, service is, so there's some room to charge a good price in a business like that.

Geoff Duckworth:

Yeah, I think we were able to charge a fair price for the work that we did. I think also it's a niche enough piece of equipment that while there are other people who know how to do the service well and know how to supply the parts correctly, there are plenty of people who thought they could do it because fundamentally it's a hydraulically-driven thing. And so there are a lot of hydraulic shops, for example, that are accustomed to repairing other hydraulic components and thought, “Yeah, we could take that on”, and just got in over their heads.

Rick Ruback:

This is the principle, Royce, the interesting principle is it's important to be important to running of the operation, but it's also important to be unimportant in terms of the total dollar outlays. If you were perhaps the vendor of the $500,000 machine, somebody would say, "Oh, if we could get that down 20% to $400,000, that's a hundred thousand dollars we will save." That's really important. Whereas, for you, you’re important, it has to be there, it has to work, it has to be right, it has to get fixed when it's broken, but you're well down the list of lines that people are going to look at to cut costs. And nobody's ever going to say, "Hey, I need this drill bit and I need it today. And my best vendor can get it to me by the end of the week." And somebody's going to say, "Well, I think you should spend the week shopping for a lower price." That just doesn't happen, but it will happen for the excavator.

Geoff Duckworth:

Yeah, and many of our guys, they're not going to buy one excavator for half a million bucks. They're going to buy twenty. If they can shave a couple percent off, it really makes a difference, right?

Rick Ruback:

Right. Not so much for the part you were selling.

Geoff Duckworth:

Not for stuff that I was selling, and inevitably, either through just oversight or lack of planning or whatever, the thing that they need so badly they don't have a spare of, and nothing ever breaks on a Monday morning. It always breaks on a Friday afternoon. You're just going to work Saturday morning to finish up this job. Now it's an emergency and now if you've got it, I need it.

Rick Ruback:

Royce, do you like this business or not? I love this business.

Royce Yudkoff:

I like this business too and I think what I like about it is what you were talking about before, Rick, that the product and the service is really important to customers. It's time sensitive, it has to be right, and it's a tiny part of their budget. And that causes customers to stick with you if you can get the job done, not shop for competitors. And price is just secondary or tertiary to them, so you can get a fair margin.

Rick Ruback:

Right, and you can create a barrier to entry by simply doing your job well.

Royce Yudkoff:

By being reliable.

Rick Ruback:

Being reliable, good service.

Royce Yudkoff:

Geoff, just because Rick and I are business school professors, we tend to think a lot about, well, money. So maybe you can give us some guidance. Roughly, how much pre-tax profit was the business making each year and roughly what kind of multiple of its pre-tax profit did you pay? Whatever you feel comfortable sharing with us.

Geoff Duckworth:

Let's say that it was under a million dollars of EBITDA and I think it was somewhere in the neighborhood of three times to buy it.

Rick Ruback:

Listeners, that’s a term you will hear often from us and our guests, and that you will also hear a lot if you search for a company. It stands for Earnings Before Interest, Taxes, Depreciation and Amortization, E-B-I-T-D-A. We’ll get more into that in later episodes but just think of EBITDA as pre-tax profits.

Royce Yudkoff:

That's a very economical price for a smaller small firm, kind of at the lower end of the range we point people to, of three to five times EBITDA or pre-tax profit.

Geoff Duckworth:

Yeah, and it was a little bit hairy. There was some stuff we had to get comfortable with. Probably the biggest thing was the seller was doing accrual accounting, primarily, except he was expensing inventory and he didn't have a clear tracking of his inventory. That was a tough hump to get through in diligence to understand, A, how much inventory is there actually? What's the value of that inventory? And then how does that, if you recast things looking backwards, what actually is the earnings in a P&L perspective?

Rick Ruback:

We have seen that where people will run their business thinking about their own personal cash flow.

Geoff Duckworth:

Exactly.

Rick Ruback:

And they'll say, "Oh, I have a little extra money. I don't want to realize a higher income tax bill this year. So, what I'll do is spend some money on the business." And they'll expense it but that's not gap accounting, right? It's hard to figure out what the earnings are. In a reasonable world, you would take that incremental contribution to inventory and add it to earnings, but you actually have to know what that is. And oftentimes it's very clear when you do it but two years later you can't really remember why you did it.

Geoff Duckworth:

Right, and the guy that I bought the business from, he was very much a self-made guy. I think he told me at one point he had a fourth grade education. I mean, he's a remarkable character. The business I bought from him was actually the fourth business that he had started and sold. He was very much a seat-of-his-pants kind of finance guy in the sense that he's like, "Well, I've got money and I could either have that money sit in the bank or I could have it as inventory on the shelf that I could potentially sell to somebody." But inventory management is hard.

Rick Ruback:

It is absolutely hard. It's the kind of thing that mathematicians and operations research specialists spend their careers trying to optimize. But, of course, that's not how he did it.

Geoff Duckworth:

No, he just expensed it because that was easy.

Rick Ruback:

Yeah, he just did what felt right.

Geoff Duckworth:

And I don't blame him for it. I mean, he was trying to run the business, not be an inventory control specialist.

Rick Ruback:

Yeah, yeah.

Royce Yudkoff:

So, this part of the purchase you're highlighting was hard. You had to make some estimates on what's the inventory worth? What are the real profits derived from buying this inventory and reselling it? You had to solve that problem, which it sounds like you did because you bought the business.

Geoff Duckworth:

We were able to solve it to a certain level of satisfaction. We never got to say like, "Oh, this is signed, sealed, delivered", like, clearly, exactly what things were. But we got to the point where we said, "Okay, as near as counts, this is going to be close enough."

Rick Ruback:

Did you have the skills to go back and back cast their financials?

Geoff Duckworth:

No.

Rick Ruback:

It's a smaller transaction, so you also didn't have the budget to pay an accounting firm to really dig in. So, what did you do? Did you learn enough accounting?

Geoff Duckworth:

Yeah, I learned a little bit as I went. I have a terrific friend from business school who is a CPA and, in the diligence process, he did a lightweight proof of cash for me as the first step, just to understand what's actually even really there. We understood the cash flow side of it. And then we had to unpack from cash flow P&L.

Rick Ruback:

Because if you did a proof of cash, you would've immediately seen that he's expensing inventory. I hadn't really thought about that but it's an interesting insight that you get from all the other insights from using a proof of cash.

Royce Yudkoff:

Right, because at the end of the day, you see the dollars coming into the checking account and you see the dollars coming out of the checking account. And if there's, say, a million dollars of difference, that's kind of the pre-tax profit. I mean, you can work your way towards it.

Geoff Duckworth:

Yeah, you can sort of get there, right?

Royce Yudkoff:

Sort of, approximately, which is what the proof of cash is. I think the important thing to remember is, as you said, Geoff, you don't need to get this exactly right because the way you're constructing this transaction, I know you just gave us guidance on the numbers, but if we use those, if the business did a million dollars of pre-tax profit and you're paying around three times for it, or $3 million, that is a business that's generating a 33% return on that purchase price, which is really good. And you can afford some room for error in these calculations because that's an amazing -

Geoff Duckworth:

You're not on the razor's edge.

Royce Yudkoff:

You're not on the razor's edge.

Geoff Duckworth:

We talked earlier about margin solves problems, right?

Royce Yudkoff:

Margin solves problems.

Geoff Duckworth:

And you can take that same notion to the deal as well, right? If you consider the deal having margin at three times, you can accept a certain amount of hair on a deal.

Royce Yudkoff:

Exactly. There's room for error.

Royce Yudkoff:

Doing a proof of cash is a really valuable due diligence step, best done shortly after you and the seller sign a letter of intent and you are starting your close examination of the business. It’s not complicated to do and you are trying to confirm something really important before you do lots of other work. Let’s say the seller has told you that in each of the last three years the business had sales of $5M and pre-tax profit, or EBITDA, of $1.0 million. You want to check that is true. How do you do that, Rick?

Rick Ruback:

Royce, you take three years of bank statements and check that in each year there are $5 million of deposits, that would be the revenue, and that $4 million of checks are written for expenses, leaving a million dollars left over. This won’t tie out perfectly. There will be timing differences between billing customers and when the business actually collects the cash from those sales and other differences – but it should be close.

Royce Yudkoff:

Yeah, and that’s okay in your initial proof of cash. You aren’t trying to tie out these numbers this early. Later, if your business due diligence gives you a green light, you’ll bring in an accountant to examine the books and, as part of that, they will do a highly accurate proof of cash, which your bank will also want to see. But for now, it’s enough that you see that the cash revenue, expenditures, and what’s left over are roughly similar to what the seller was telling you. On the other hand, if your proof of cash keeps showing only $500,000 left over each year instead of $1 million, you need to either get a good explanation from the seller or walk away.

Rick Ruback:

The other thing about a proof of cash that’s really important, I think, is that you learn how the business makes money. You learn where the revenues come from, you learn what they spend money on, and it’s a way of getting to know the business in a more intimate way than you had prior to signing your letter of intent and getting into the confidential information.

Royce Yudkoff:

Completely agree. Now back to our conversation with Geoff…

Rick Ruback:

I love the business. I understand you sold it. Why did you sell it?

Geoff Duckworth:

We talked earlier about a geographically constrained search and with any search, you're never going to get everything you want. The geographic portion of my search is the biggest compromise that I made. So this was a little bit farther than my ideal commute. In the beginning it was all right. During COVID, it was actually pretty great because -

Rick Ruback:

Nobody was driving anywhere.

Geoff Duckworth:

Nobody was driving. But after COVID it became almost twice as bad because nobody takes transit anymore. Particularly in the Boston area, many roads were still less traveled but, in fact, my commute route was one of the roads that was most heavily impacted post-COVID. So, it was becoming a two-hour trip home and it was just -

Rick Ruback:

Crazy making.

Geoff Duckworth:

I just couldn't do it. I feel like it took us a while to get out of COVID. It felt like finally we had some momentum. The business was really on the trajectory that I thought it was going to be on when I bought the business before COVID, we're doing great, and that the smart decision would've been to hold the business and continue to operate it, but I just...personally, my family needs just didn't allow it any longer.

Royce Yudkoff:

And you had run it for about how long, at the point where you were saying, “I just can't commute like this anymore”?

Geoff Duckworth:

It was about four and a half years from close to close.

Royce Yudkoff:

Putting the commute aside for just a moment, was it a satisfying experience, running your own business?

Geoff Duckworth:

Yeah, absolutely. When I closed the sale at the end of last year, I thought to myself, “I'm not necessarily going to rush back into that”, but now, four months later, I'm thinking, “Maybe I will rush back into that”. I don't know. But I think all in all, it was great. It's a very, very different role than being a worker or an employee, but I think in a good way, and I liked it quite a lot.

Royce Yudkoff:

Can you take a moment and just tell us what some of the main differences are between having a job, a good job, in someone else's company, and being the CEO?

Geoff Duckworth:

There's pros and cons, obviously, to anything. I think the challenging parts of it were there's no one that you can punt to when there's a problem or you're not sure how to move forward. It was up to me, right? For example, inventory management. I got paralyzed by inventory management for a while trying to figure out the right answer. I just didn't know where to turn to move forward with that strategic project. But it falls to me, but I think also that the stress is different. I don't think it's less stress or more stress, but it's just a very different stress. I think about it in the consulting world, for example, we're stressed because there's a tight deadline. Or we're stressed because the client is being difficult, or we're stressed because the boss has unreasonable expectations of us or whatever. And I would think of that as sort of an active stress. I would maybe finish up a day and feel like I needed to decompress. Whereas being the boss, sitting in the chair, I didn't feel those stresses as intensely. But what I did feel was this background stress of a “what if?” Like, “What if my key man decides on Monday he's not going to come to work on Tuesday?” “What if our biggest customer stops calling?”

Royce Yudkoff:

It doesn't shut off.

Rick Ruback:

Right, that two-hour commute is just like the perfect time for that freeform anxiety. You're just there and you're stuck in traffic and you're, “Oh darn. What if this happens? What if that happens? What if the aliens land on my shop?”

Geoff Duckworth:

Well, that's why I have a really big tinfoil hat.

Rick Ruback:

Yeah, but knowing that you need to manage it, doesn't make it go away.

Geoff Duckworth:

Certainly like, okay, if you're feeling certain stresses, maybe you try to take mitigations for those things, but there are certain things you can't control for. Like I couldn’t really control for what my customers are going to do and I can't really control for what's going on in the lives of my employees, you know? Somebody could leave the company, not because they've got any problem with the company at all, but just because their personal situation has changed.

Rick Ruback:

Yeah, a parent gets sick and they decide to leave the state. That's nothing about you. And similarly, a customer could lose their big contract and now they don't need you anymore.

Geoff Duckworth:

Exactly.

Rick Ruback:

Or they shift from road construction to some other kind of construction.

Geoff Duckworth:

It could be three steps down the chain of causation and suddenly...no way you can mitigate three steps down the chain.

Rick Ruback:

And sometimes it's hard to even know it. Sometimes the piano can fall on your head and you didn't even know there was a piano above your head.

Royce Yudkoff:

And that's an essential difference from being a boss and being an employee, which is no matter what you did or didn't do, the responsibility ends up being yours. It doesn't go to somebody else.

Geoff Duckworth:

Yeah, and I felt that intensely, right? Like I felt an obligation to the people who worked for me and to my customers. And during COVID, for example, my number one priority was to make sure that we didn't miss a payroll, you know, because I'm the guy sitting in the chair. When things go well, hopefully I get the bigger paycheck. But the other side of that bargain is that when things don't go well, I don't get a big paycheck, but I've got obligations and these people that are working for me, they're making blue-collar money…

Royce Yudkoff:

They depend on you.

Geoff Duckworth:

…they depend on it.

Rick Ruback:

I'll just say though that I think there are very few opportunities in life in which you can make money and not have risk. I think the difference is, in the CEO role you can look ahead and see where those risks are. And maybe you don't have great visibility on all of them, the ones that might be three steps down the road, but you understand who the customers are, you understand why they buy from you, you understand why the customers are getting jobs by their customers. And I think in other businesses you have the exact same risks. They're just opaque. You can't see them. And you ask your boss and say, "Hey, boss, it seems like nobody's buying buggy whips anymore." And the boss tells you, "No, it's perfectly fine. Horses are coming back. It's all going to work out. Just chill and do your job." And then the next day or the next week, you might discover that the aliens truly have landed and automobiles were invented.

Royce Yudkoff:

Well, I think that's right. I think that there's the illusion that there's no risk in big companies and some risks go away, the company is unlikely to disappear, but that's not the same as your job disappearing, so there is that.

Geoff Duckworth:

Well, I think to that point too, I wasn't trying to withhold any information from anybody but I was trying to compartmentalize things to a certain degree. My warehouse guys and my shop guys, they didn't really need to know what the big picture of the business was, per se, right? But our revenue was up considerably from years prior. Our profit was up considerably from years prior. Yet, the guys in the shop felt like they didn't have as much work, and so they were nervous. They asked me, "Is the business doing okay? Because we're nervous, it feels like we're not busy in the shop." By the numbers, they actually were busier in the shop. It just turns out that some of the changes that we'd made to the way we work, some of the skills that they had developed by being a little bit more empowered to create new ways of working, and also the quality changes that we've made over time, they were getting work done more quickly. And so they felt less busy, yet objectively, they were putting more work through.

Rick Ruback:

That's fabulous. What a great story. We're almost out of time but, Geoff, we always ask our guests if they have any questions for us. Since it started with our book, I feel like I'm really nervous asking this question.

Geoff Duckworth:

Because I've got you both here and you wrote the book, I'm in this position now where I made a little bit of money on the business. I made enough money to buy myself a little bit of a sabbatical and a little bit more financial security, let's say, but certainly not enough where I don't have to work any longer. You know, Rick, you and I had spoken a little bit about what do I do next? You feel like I should buy another business.

Rick Ruback:

I do.

Geoff Duckworth:

I'm kind of at a crossroads here. I think I could be happy running another business, but I'm also wondering if there's other ways to put this experience that I've developed to work.

Royce Yudkoff:

Well, Geoff, before we answer your question, I want to just ask you a question, which is, it sounds through its absence, like one option is not going back and working for someone else as an employee?

Rick Ruback:

I don't think that is actually off the table, based on other things you and I have talked about. Is it?

Geoff Duckworth:

Yeah, the day after I sold the business, a lot of that background stress lifted off. And I thought to myself, “I could probably be happy just being a worker for a little while.” Now, it's got to be the right role, and I feel like having been a boss, I feel like I could probably be a better employee than I was as an employee. There is an element too of, I have a different relationship with employment now than I have ever had in my life where like you can -

Rick Ruback:

You can quit.

Royce Yudkoff:

You can't tell me to do that.

Geoff Duckworth:

Right, you know, like at a certain point, I don't really want to do that. They're like, "Well, you have to." I'm like, "Well, I don't." I may not push that button ever but knowing that the button existed might give me enough freedom of the ego to be like, "Yeah, I can take lumps differently."

Rick Ruback:

Yeah, there's a phrase for that, but I guess we can't say that on the podcast.

Geoff Duckworth:

Yeah. If the deal that I had done had another zero or another comma in the thing, you know, I would be perfectly happy to just enjoy my time skiing and being in the mountains. But there's certain financial realities that come to play, so I need to make some money still.

Rick Ruback:

Yeah, Royce, I'm interested in what you think about this. My answer is when you do something well and it succeeds, why not do it again?

Royce Yudkoff:

Rick, that's my answer too. I'm a big believer in “if something works for you, do it again”.

Rick Ruback:

Nothing succeeds like success, Geoff. And you were really successful at it. Why not do it again? And we've seen people who do what you've done and do it over and over and over again. And typically, I think, Royce, tell me if you disagree, but typically people will upsize. So, you took on no outside investors. Maybe you have a little bit more confidence now and you would take on a bigger acquisition and bring in more outside equity, perhaps keeping control, perhaps not. Perhaps a business that has more growth potential, maybe not. As a result, what we found is that people tend to make more money on each successive deal. And eventually they find one that they either want to stay in a long time because it really fits them, fits their family, fits their lifestyle, or just keep on trading and then eventually have enough money after a few of these, maybe four, who knows, that you get to retire at 50 or 60.

Geoff Duckworth:

Yeah, I mean, that certainly has appeal.

Rick Ruback:

We've talked to lots of people over the last 15 years who have sold their businesses and what we never find is people who are then happy working for other people. I mean, maybe in one instance we're aware of it, but it is pretty rare.

Royce Yudkoff:

That's right. You're as close as they come where you are speculating that you could be happy, but only if you had that button that you could push.

Geoff Duckworth:

Sure.

Rick Ruback:

As soon as you have that button, you don't really have a job.

Geoff Duckworth:

Yeah, yeah, yeah. It's all good stuff to think about and I'm working both angles. You know, I'm seeing if there is that job that just seems like a great fit for what I'm interested in. And then, I'm also, currently, I'm searching again. So, if any podcast listeners are interested in selling a business…

Rick Ruback:

Again, in Eastern New England.

Geoff Duckworth:

Yeah, in Eastern Massachusetts.

Rick Ruback:

Eastern Massachusetts.

Geoff Duckworth:

Maybe parts of Southern New Hampshire and Southern Maine.

Royce Yudkoff:

Just call Geoff Duckworth.

Geoff Duckworth:

Yeah, give me a call. Another question that I had for you guys, now that I'm thinking about it, is the biggest challenge that I felt in both sides of the transaction, the biggest thing I couldn't control, was lease transfers, and that the leaseholder basically can own the deal.

Royce Yudkoff:

Yes. So just for our listeners, most businesses rent the space they operate in. The landlord has the right to consent to the transfer of the lease to the buyer, and they can just say “no”. And usually this is left late in the deal.

Geoff Duckworth:

Exactly, because we couldn't bring in the landlord too soon because you got to keep things close.

Royce Yudkoff:

The seller was nervous that if the deal didn't make, he didn't want it to start getting out. This happens all the time. You know, Rick, I'd be interested in your reaction. I think this is always an anxious point for buyers and sellers and always takes a little longer than they expect to get the landlord to consent. But I've never seen a situation where a deal actually fell apart because the landlord said no. Almost always they just want to keep renting their building, maybe they extract a fee.

Geoff Duckworth:

Yeah, on the sale transaction, it felt like maybe there was a little bit of rent-taking behavior going on.

Royce Yudkoff:

Yeah, and that happens but I've never seen it actually be a deal breaker. Rick, what do you think about that?

Rick Ruback:

So, I actually distinguish between two kinds of real estate situations. One, where the real estate is really integral to the business, that you just can't imagine moving. One of my favorite examples is I had the opportunity with a young searcher to tour a candy manufacturer in Massachusetts, and they made kosher Christmas candy. So, it's a distinctive business. And they were selling the real estate separately from the business but the real estate was so integral to the business because throughout the building they had these pipes in which hot, sticky stuff -

Geoff Duckworth:

Right, there's no way you're moving that business.

Rick Ruback:

There's no way. You can't move it. You can't move it across the street. Without the building, you can't run the business. So there, the idea that you're buying the business and the real estate separately, you're going to have a lease arrangement, I think that's really problematical because it's a key asset in which you don't own. And I distinguish that from a business which is just in a suite, in an office park.

Geoff Duckworth:

Right, you fold up the laptops.

Rick Ruback:

Fold up the laptops. Move your internet, move your server, it's going to take a weekend. It's no big deal. And I think then it's perfectly fine. And I think those aren't the landlords who'll try to hold you up. I think it's the former. And I think you can recognize that when you start looking at your business. You know, I don't know how many of our listeners are owners of small businesses, but this is an idea that if you're thinking about selling your business, one of the things you should do is get your real estate in order. Get that lease to be assignable for three years.

Geoff Duckworth:

Well, a three-year assignable lease isn't even going to cut it, right? If it's an SBA, a ten-year note, it's got to be a ten-year lease. My experience was that the lenders want to see a lease with options extending to the term of the loan.

Royce Yudkoff:

If the property is essential to the business.

Geoff Duckworth:

Well, I think the default mode is lease to the term of the loan. It could be options. And if you want to try to wave that, you need to demonstrate that moving wouldn't be disruptive and it's not integral.

Royce Yudkoff:

Interesting.

Rick Ruback:

That’s interesting. Well, that makes sense.

Geoff Duckworth:

But it’s to the point, my experience with it was enough that it makes me feel like, as I search for another business, if there's a lease that needs to be assigned, it's almost a red flag for me, unless I feel like we can fold up laptops and move in a weekend.

Rick Ruback:

One of the things that always surprises Royce and I is that so many businesses own the real estate that their businesses operate. And we always think, “Well, why do you want to own the real estate assets?” Own the operating assets, own the business, put your energy and capital into growing your operating business, not your real estate. But maybe it's this other thing, this sort of unknown.

Geoff Duckworth:

Well, I think particularly small business owners think differently than corporate businesses. In many markets, in many times, you can own the real estate for the same price as the lease. And yeah, there's certain P&L efficiencies to a lease over owning it. But in the long run, you know, if it is the business you've built, you plan to own it for 30 years, you'd probably benefit by having the real estate.

Rick Ruback:

It's just a risk mitigation thing.

Royce Yudkoff:

Geoff, thank you so much. It's been a pleasure getting to know you a little better and hearing about your journey.

Rick Ruback:

It's really great.

Geoff Duckworth:

I appreciate all the guidance that you guys have given me through the process, mostly by way of the book, but as well as just speaking with Rick over time as well, so I'm happy to, happy to be here.

Rick Ruback:

Well, we're excited to watch your journey as it continues to unfold. There's a lot of new and exciting chapters yet ahead.

Royce Yudkoff:

I really like Geoff Duckworth’s story. It’s a classic example of a self-funded search that transforms someone from working in someone else’s company to working for themselves. The thing I like best about it is that the economics of this very straightforward acquisition are so good for the searcher. And, most importantly, the economics are so good because the multiples of EBITDA at which good smaller firms sell are attractive. In Geoff’s case, three times EBITDA. Rick, do you want to share that saying that you have about buying smaller firms?

Rick Ruback:

Yeah, absolutely. The magic is in the multiple.

Royce Yudkoff:

And why is that?

Rick Ruback:

Well, a little math makes what Geoff did very clear. He bought a business that makes $1 million a year for $3 million. That means every year he makes a 33% return on his investment – $1 million over $3 million. Said differently, he makes a third of the amount he spent on the business each year. Think about, just as an analogy, if you were buying a house, if somehow your house purchase price equaled only three times your rent. That’s a really good deal. But like most searchers, Geoff borrowed money to buy the business, so the returns to Geoff are even better. Geoff borrowed $2.7 million in an SBA loan. That loan cost about 10% a year in interest, or roughly $270,000 in interest in his first year of ownership. That left about $730,000 each year in pre-tax profit for Geoff. So, he put in $200,000 and each year he gets $730,000 of cash.

Royce Yudkoff:

I think this summarizes why people become interested in entrepreneurship through acquisition: it’s an opportunity for meaningful wealth creation, being your own boss, and for making decisions that matter. And to do this you don’t need to be a millionaire or someone who’s owned a business before.

Rick Ruback:

Or a finance guru.

Royce Yudkoff:

Or a finance guru. Hard work is involved and there are surely risks, but these risks are a lot less than starting a business from scratch.

Rick Ruback:

We’ll be back in the next few episodes meeting other searchers and also diving into the “how to”s of some important parts of searching. We look forward to reconnecting with you then.

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:

Craig McDonald is our audio engineer.

Royce Yudkoff:

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