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:

We're going to have a conversation with Michael Orzetti. Michael was an officer and leader in the Marine Corps. After a number of years, he left and worked for a short period of time at a public securities investment firm, got a business degree, and then thought through his choices as between working in some other large company or institution, starting a company from scratch, or buying an existing, profitable business, ETA. He chose the last of those and set off on a search in which he funded his search activities, found a company, and then raised money from investors to buy that company. It's an interesting business he bought, and we're going to talk to Michael about the decisions he made and what happened on this journey.

Rick Ruback:

Yeah, it's such a cool business and he's done such an amazing job with it, Royce. Let's hear from Michael.

Royce Yudkoff:

Michael, welcome aboard. Rick and I are so happy to have you joining us so we can explore your search journey. And maybe a good place to start is just to tell us about the part of your journey before you decided to search, a little bit about your family, your career, you know, as you wended your way toward the decision to search.

Michael Orzetti:

Sure. Thanks, Royce. And thanks to both of you guys. It's awesome to be here with you. Obviously, I've looked up to you guys for many years, so a pleasure to join you in conversation. So, a little bit about me, I'm from New Jersey originally. I went to the Naval Academy for college, and afterwards I commissioned to the Marine Corps. In the Marines, I was what you'd call a signals intelligence officer, so think kind of focused on enemy communications on the battlefield. And look, I deployed when my oldest son was two months old and I came back when he was nine months old. And so my wife Megan and I wanted to think about things from a family-friendly perspective. Fast forward to today, we just had our fifth child recently.

I had all these great leadership experiences, but I couldn't have told you a whole lot more beyond what P&L stood for, right? I've always been pretty good at knowing what I'm not good at, which is a lot of things. And what I did not know a lot of the times was about finance. And so I wound up finding my way, and someone took a bet on me at Bridgewater Associates, which is a hedge fund based in Connecticut, where I was able to dive into the deep end and start learning a bit of the nuts and bolts of finance. And then proceeded on to Harvard Business School, where I met the two of you.

At Harvard, I took sort of a tactical pause and I said, “All right, this is one of the few chances I have in life to really look at and pivot the course and direction of my career. Let me think long and hard about what I'd like to do.” And so while I was there, I uncovered a bit of an entrepreneurial itch, and not, mind you, anything tied to entrepreneurship through acquisition. I was truly interested in brand new ventures being started up. Obviously, Boston's got a pretty lively ecosystem. We worked with a lot of folks around IT and I learned a lot about zero to one entrepreneurship, but ultimately decided for a few reasons I wasn't in the stage of life. I didn't have the right business idea to try a zero-to-one type form of entrepreneurship. But in parallel, I had been exposed to this idea of entrepreneurship through acquisitions, this whole idea that there are a bunch of baby boomer businesses out there with no obvious succession plan.

And so, long story short, my wife and I had a long conversation about this. We had two kids at this time, when I started down this path, and we said, “Hey, look, let's give this sort of two years. Let's see if we can find one great company to acquire”, with the goal of us picking up as a family and relocating there and me stepping in both as the sponsor of the deal and the CEO on the deal. And I should remind you that this was not my own money I was planning to do this with. My goal was always to find a business and then to go raise capital from other investors to buy it because I just did not have that money at that time and wanted to find a new way to entrepreneurship.

Rick Ruback:

Yeah, nobody really has the money to buy a business. They just have the money to search.

Royce Yudkoff:

Mike, I'd love to pause before we move forward, at this point where you kind of pivoted and decided to search for an existing business to buy. Of course, an obvious alternative would've been to join some big organization, like Bridgewater, which you had worked for before, or some big company. What made you decide to pursue entrepreneurship versus that choice?

Michael Orzetti:

That's a great question. Look, I think I would break that question into two ways. One was sort of me-centric and one was me and my wife-centric, if you will. From a professional standpoint, I've always valued the ability to have ownership. And I don't necessarily mean financial ownership, though that's always good if you could drive that, but real ownership in what I was doing.

And in the Marine Corps, the things that I loved best about my time there, though I valued the mission and what we were doing, I always most valued working in a smaller team, where you know if you're working hard and hitting long balls, your teammates recognize that. And conversely, if you're not working your hardest, there's an accountability that comes from that. And the trust and a relationship that you can build with your team was always appealing to me.

I was a little bit concerned that that would get lost in a bigger organization, right? And when I think about ownership, in particular, I really valued always the ability to know that what I was doing had an impact. And so I think that was part one that made me say, “Ah, here's an opportunity and a path where you actually can be the one making decisions of profound strategic consequence in your small section of the universe.” The second thing was something my wife and I discussed, which was, “Hey, one, obviously this would be something that could be personally and financially lucrative over time.” But secondly, I'm now a father of five kids. I valued the ability to be an active part of my children's lives. While I didn't know exactly how my journey would end up, I wanted to maximize my ability to really drive professionally great outcomes for myself, but to do it in a way that minimized any sacrifice I had to make on the home front, knowing that those trade-offs are always going to exist. But I knew that if I was driving the ship forward, I didn't have to worry about validating somebody else's expectations.

Royce Yudkoff:

Mike, you decided to self-fund your search and raise money when you found an acquisition to present to investors, as opposed to the other popular way of executing search, which is to go to a set of the regular search fund investors, raise a fund that'll pay you a salary and cover your search expenses, and then make the investment in the company. Why did you choose to self-fund your search instead of getting a salary and signing up with a search fund?

Michael Orzetti:

I think it's a relevant question, especially for some folks out there who may be considering this path. This was not a situation where we had a massive cushion. Look, I'd saved prudently over a couple of years -

Rick Ruback:

In the Marine Corps.

Michael Orzetti:

In the Marine Corps, and then for a little bit afterwards at Bridgewater. But we were very deliberate and measured about this decision because my view is that there are a lot of paths to success and that path to success may look different person-to-person. So, my wife and I really thought of a lot of different options. And as we sat down and thought about the trade-offs between different paths, one thing we drew away was that if you are able to not accept capital up front, and in fact go find a great compelling value proposition of a deal for investors, you really have a very different set of options available to you at the time you go to raise capital. But that requires you giving some trade-off up front. And in our case that meant, “Hey, we're going to primarily focus on living far more frugally than we would otherwise”, if you had a normal salary, because we thought it was a sacrifice that was worth making over time, in terms of maximizing what we might be able to drive for ourselves as a family, candidly, if and when we came across a deal and went to go raise capital for it. So, as we thought about things, we really just put out a budget for ourselves and said, “Okay, how do we bring our cost of living down as low as possible?” We were living in Cambridge -

Rick Ruback:

Not known for a low cost of living.

Michael Orzetti:

Correct. No, no, we were not staying in Cambridge or Boston to continue our search. And look, we actually had a discussion about this together where my wife and I agreed, look, we would have gone anywhere in the continental US. So the deal we said was, “This business may wind up being in the middle of nowhere. Why don't you pick where we live for the next two years?” Because that we can control. And I happily ceded that decision to my wife. So, we moved down to Northern Virginia, where my wife is originally from, sort of near family. And we lived in a house that was way too small for us. I guess it was okay with two kids. And then we had a third while we were down there. And there's a picture of me with two small children in my arms sitting absolutely exhausted on the couch. And this was just after I had signed an LOI with Eastern Communications, when little did I know the sprint was actually about to begin. And for those out there thinking about this, oftentimes we get entrapped in so many things we think that we need, and really on Maslow's Hierarchy of Needs, there's so much that we can live without, but those are some of the times we look back with the most fond memories. And we basically budgeted for cost of living plus some broken deal fees, in the event that I had followed a company, purchased a QV, and found out that the company was not something worthy of the next couple of years of my life or other people's money. So that's how we thought about it, and ultimately we're pretty happy we did that decision.

Rick Ruback:

That's a great way of thinking about it. Short-term sacrifices for long-term gains.

Michael Orzetti:

And look, my wife is an absolute saint of a woman. So that's something else I'm grateful for on all this. That's part of the equation here, no doubt.

Royce Yudkoff:

And Mike, just before we leave the part of your journey which involves searching, how did you think about the risk of spending a year, two years searching and not being able to find a company and then giving up, or running out of resources and then giving up? Because I think a lot of people listening might say, “I have a good job and if I give that up and this doesn't work, what happens to me?” And how did you think about what happens to the Orzetti family?

Michael Orzetti:

Yeah, that's a great question. I'm naturally a little bit more risk-seeking and so my wife raised many of these questions. I was graduating from Harvard Business School where, for one reason or another, a lot of career opportunities are available to you at that time. And so the question became, “Hey, this is a pretty big opportunity cost to go swing the bat at something that may not manifest itself at all two years from now.” So that was absolutely a discussion we had. And the view we both came to was that firstly, no matter if I was graduating from business school or in any other position, if you hop off of the tracks for two years, it is more likely than not, even if you can't see it today, that you at a minimum can hop back on the tracks where you got off. So, what did that mean in my context? Well, I figured that I could at least have as compelling of a career opportunity as the day I was graduating from business school. And in somebody else's context, they may not be graduating from business school, perhaps they’re mid-career, but you've had a full life of professional experiences up to that point that don’t go away simply because you take an entrepreneurial role of the dice. Now we further ration that, “Okay, well these two years after business school are a pretty critical first step out of the gate from a career perspective. How do you think about that?” And my thought was, “Well, at a minimum I can return to where I was before but maybe I will develop some very interesting skills and experiences over a two-year search that, if I'm unsuccessful in finding a business, somebody out there will value and maybe I can even progress in a way that was unforeseeable at the time. That's how we thought about it.

Rick Ruback:

That sounds exactly right. There's not a word of what you said that I disagreed with. But what was it like when you came home? Did you search out of your house or did you get an office somewhere?

Michael Orzetti:

So, we were very disciplined about a budget. And mind you, I started my search in June of 2018 and then I did not close a deal until August of 2020. So, this was all in the pre-Zoom-being-popular era, pre-remote era. So, there was no way with two little kids running around the house and then a third little kid in the house that it was going to be feasible for me to search inside the house. But I really didn't want to spend a whole lot of money on external office space. We were in Northern Virginia, and I must have called every landlord in probably a good 15 to 20 mile radius who had commercial space available, saying, "I am very disciplined on budget right now. This is just a stage of my life. I will sit in your IT closet if that's all you have for me, but I need a space outside of my house to work in. I will work in a windowless, cable-filled, room if it means that I can operate on a tighter budget here." And one gentleman was really nice, and he gave me an actually windowed, nice office for about a hundred bucks a month, something like that. And so I wound up searching outside of my house, but 15 minutes away. And I think particularly having young children, it was good just to be outside of the house because when you're searching for a business to acquire, it's good to have a segmentation between work and home, where this work thing is a constant sort of presence in your mind. Because your outcome is totally binary, unlike anything any of us will do in most other parts of our lives. It's a zero or a one at the end of two years, or at least that's the way you feel in the trenches.

Rick Ruback:

So how did it feel when you came home at night and Megan said, "Mike, how did it go today?" And you say, "I didn't buy a business.”

Michael Orzetti:

So, for those of you out there who are contemplating this entrepreneurial path where you're truly operating by yourself, one thing that was absolutely critical to me is I was very well networked with other people who are in this process right now. I had a friend named Josh and a friend named Daniel, all of whom were in their own versions of this journey and three or four times a day we'd be on the phone with each other saying, "You can't believe what this seller said to me. You wouldn't believe this response." Or, "Hey, this guy responded. How do I play this?” And that wound up being a tremendously valuable resource because in isolation, the highs can be really high and the lows can be pretty low. And that's just part and parcel of it. So, I had some other folks that were in the trenches with me that I could share it with. And then when I came home, I really didn't give the high level update of, "I didn't buy a business today." It was more just a, "Hey, listen to this really funny story." Or, "Man, this thing really frustrated me." But really that was kind of the extent of it.

Rick Ruback:

Royce, one other thing about Michael's journey that I have to comment on is how frugally he lived during his search.

Royce Yudkoff:

That is a requirement of self-funded searches. Sometimes you have a working spouse or other people in your family who will help you along financially while you search. Michael had a wife who was a full-time mom and several children, and so -

Rick Ruback:

A gaggle of children. A gaggle!

Royce Yudkoff:

A gaggle of children, and they really sat down and put a budget together and a time period they'd invest in searching to see if they could buy a business. And he really found every possible way to treat a penny like it was a manhole cover, right? That he didn't toss that money around easily.

Rick Ruback:

No, it was really remarkable and remarkable that even with a basketball team full of kids, he found space to do his search and to do it really well.

Royce Yudkoff:

You know, related to this frugality of the self-funded search, another thing I noticed in Michael's description is that he reached out to other acquaintances who are also searching and kind of created a group that was something between an advisory group and just a support group. Because searching alone is a very solitary activity, particularly when you don't have investors who can be regular sources of interaction. And he found a way to just make it a better experience and probably a more productive one.

Rick Ruback:

Yeah, the decision to do ETA wasn't haphazard. It was really thoughtful.

Royce Yudkoff:

Yes, this was a planned and thoughtful activity. It wasn't just rolling the dice and seeing what happened. Even the investment of his time was carefully thought out, you know, that he and his wife decided on a period of time to search. If it worked, that was great. If it didn't, they'd take another path. So, everything about what he did was really carefully planned.

Rick Ruback:

Yeah. Such a family decision as well. It wasn't him pursuing his dream at the expense of his family. It was very much, “Let's do this together for our family.”

Royce Yudkoff:

That's right.

Rick Ruback:

Royce, let’s get back to the conversation.

Rick Ruback:

How did you find Eastern Communications?

Michael Orzetti:

Over the course of two years, I had a few industry theses that I was focused on, the types of businesses that I thought would be most compelling for me to step in and run. And I targeted those pretty heavily. And I did those with the help of a few different cohorts of interns who I brought onto my team along the way. Now, I had barely any money to pay any interns. So, these were all unpaid internships. And the way I thought about this was I put out an opportunity, a posting saying a little bit about what I was doing and that these were some private equity internship opportunities. And my view was always that even though I couldn't pay my interns monetarily, I really, on a personal level, wanted them to derive more from their summer or winter with me than I got from them. And so how do you do that without paying someone money? What I did was we'd have about seven or eight interns in a cohort for about two to three months, where we would every week have a few learning sessions. “Hey, today we're doing intro to modeling. Today we're doing a mini investment committee”, where someone might present a business that they came across that week. And I went through many iterations of how to run this internship but at peak, when I was running at my best, this is how we worked with our interns. I used a lot of open-source tools and web scraping data to identify target businesses in industries that I thought were of interest.

We had a lot of raw data that needed cleaning, right? And oftentimes, just because you scraped something or maybe from a trade show page got some potential leads, it doesn't mean that they're quality leads. And what I had my interns do was, after a couple weeks of training, I got them to understand what types of business characteristics were broadly appealing, just from a two or three minute survey of someone's website and some high level industry knowledge, to decide, “Hey, is this something you want to commit more time to or not?” And so ultimately we developed was sort of a smaller set of very qualified leads. And so we wound up having an outreach campaign to those types of businesses. And over time, the deal I had with each of my interns was, because it can be monotonous sometimes, cleaning data, even if it's towards a higher aim, I said, "If one of you identifies an opportunity that winds up being a first-round conversation, I'll bring you onto that conversation with me. And after your first, second, or third week, after you've had four or five conversations, and I feel sufficiently comfortable that you can represent me and what we're trying to do here, I'll let you start taking these conversations on yourselves." And then over time, the idea was if we had one deal that ultimately got to the finish line, you could have, part and parcel of your resume, and real-life experience sitting shotgun next to me on the initial sourcing all the way through the closing of a potentially pretty meaningful deal. And for a lot of folks who were undergraduates looking to really bolster their resumes with an eye towards finance, that was a deeply appealing prospect. I mean, we had literally Ivy League interns working for us. And I took very seriously my obligation to train all these people. So, I guess when you asked how did we go about finding the business, look, I had teammates helping me, but under a really direct and systematic way of thinking about outreach.

Royce Yudkoff:

And Mike, just following up on Rick's question, so the way you were finding businesses generally was identifying companies that might fit your criteria and then just doing a direct email or call to the owner. You weren't going through brokers, you were just going direct to these folks.

Michael Orzetti:

Yes, the direct sourcing is how we found Eastern Communications, ultimately. There were three types of businesses that I was really interested in. I was very interested in specialty distribution businesses, which is ultimately what Eastern Communications was. I looked closely at QSR, or quick service restaurant-type businesses. And then we always looked at business services businesses, oftentimes with more of an industrial bend to them, right? Those were the three types of industries, that I got to learn a lot about the economics of it and became quite interested in. And then lastly, there was sort of a catch-all bucket, which was anything opportunistically that was in a niche that I did not know existed, I'd bite and learn a little bit about it. And so I primarily emphasized direct outreach, but I absolutely spoke to business brokers as well. And to those listening who are contemplating this, even if you think ultimately you wound up with a heavily direct sourcing-driven machine, I really recommend as you're taking your first couple steps out of the gate, getting really connected with the broker network for two reasons. One, you may in fact over a two-year search find a great opportunity and acquire it. I know multiple people have bought businesses that were serviced to them by intermediaries. But the second, and I think more critical, universal thing, is it helps you to get your story down, to be able to explain, because let's be candid, an entrepreneur trying to buy a business with effectively no funding behind them at the time is quite a different head scratch and proposition than, say, a private equity firm or an associate at some sort of financial institution who knocks on the door and says, "Hey, we'd like to buy you for X." So, speaking to business brokers allowed me to help articulate in a clear and succinct way what was an absolutely valid proposition.

Royce Yudkoff:

Rick, I think this would be a good moment to ask Michael to describe Eastern Communications, the company that really was the result of all this sourcing and filtering that you did with your interns. Can you tell us what the company does and roughly how big it was and anything else you think the audience would like to hear?

Michael Orzetti:

Sure. So Eastern Communications sells, services, and maintains critical communications infrastructure and networks. So, if you think about the telecom networks that we typically have cell phone calls on, sometimes that'll patch out. Well, there's a group of users out there who that is nowhere near good enough, from a reliability standpoint. If you think about a police officer, oftentimes their radio is more critical than their weapon. If you are a utilities worker and you have to go out in the middle of a storm to restore service, those might be the exact conditions in which the telecom network is wiped out, but you still need to be able to move and coordinate and communicate. If you are conducting a train and you've got five hundred people on your train and you somehow miss a switch, you can't not have communications. So, for all those situations where "I can't hear you" doesn't cut it, we provide communication solutions for that. And for many of our customers, they need these services provided on the networks that they own privately for themselves. So that's what we do.

Royce Yudkoff:

Great. And can you give us some sense of how big the company was, anything that you're comfortable sharing about that, when you came upon it?

Michael Orzetti:

Sure. The business was founded back in 1976 and the business fit many of the characteristics that I was looking for. You think about a great strong underlying business model, a really strong culture, and an owner committed to finding the right answer for their legacy down the road and partnering with me over time as we thought about running the business in perpetuity. And Royce, look, it was a business on the larger size, at least from what I've heard from others, in terms of transactions.

Royce Yudkoff:

Which wasn't something you were specifically focused on, right? This just happened to be a larger possible acquisition.

Michael Orzetti:

A hundred percent. Candidly, part of the reason why I was always interested in bringing a deal to investors, rather than signing up to a group of investors and being told what deals I could do, was the fact that I wanted the opportunity to, if I saw a larger than normal size, close on that deal and pursue it and transact. And from what I understand, this is certainly a larger deal that was done and not where I had typically been focused on.

Royce Yudkoff:

So, here's one of the things that both Rick and I would really like to know. You've called on this company, you've found out that they're interested in selling. You've persuaded them that they should let you in the door. At some point in this conversation, Rick and I are imagining that the owner sort of says to you…

Rick Ruback:

"Well, Michael, do you have the money?"

Royce Yudkoff:

Yeah, that's exactly what I was wondering.

Rick Ruback:

Michael, it's nice that you have all these children, but do you have the money?

Michael Orzetti:

That's exactly right. And it was a much larger sum than I had been planning on raising, in terms of capital. But look, I had a belief and had been instructed and was about to put to the test this thesis that people say there's lots of dry powder out in the world, i.e. there's money that people have earned over time and they're looking for places to deploy that capital, and sometimes in the tens of millions of dollars or more type of capital. I had a very strong belief in the fact that, “Okay, dry powder exists in the world for deals that are good. I believe this is a good deal.” And it was absolutely the truth. Lo and behold, we did transact almost nine months later. But I think it's a really instrumental point because, Royce, I was not a guy who had anywhere near the money to do a much smaller transaction, let alone one of this size. And I think sometimes there's a bit of an intimidation factor when you're thinking about taking an entrepreneurial leap to do this. I had always in my mind said, “Okay, if I do a smaller deal, these are the types of people that I might go raise capital from.” And if I universalize my experience, it could be anything from a wealthier dentist or doctor in your community, who may not have access to a private equity fund but might have some money that he's looking to invest in one place or another. I had a series of people that I had planned on calling upon and presenting an investment opportunity to when I found a certain size of business. And when I realized that this was going to take a much larger equity check to get a transaction done, I went to the people that I trusted and said, "Hey, can you make introductions to types of people who can not only understand what I'm about but also someone who can write a much larger check?" And so those introductions were made, and ultimately I wound up meeting a bunch of family offices and got quickly injected into that world, where I presented an investment opportunity and was able to raise capital that way.

Rick Ruback:

Wow.

Royce Yudkoff:

That's really great.

Rick Ruback:

Just a comment, if I could. So, I don't think the issue is the amount of dry powder out in the world. I think it's almost definitional that any good business can be funded, any good acquisition can be funded. If the economics makes sense, the funding will be there. And I think your business proves it, but dozens of others prove it as well. I've never heard, in our 15 years of teaching and investing and talking with people about this, I've never heard of an instance where a good acquisition isn't funded.

Michael Orzetti:

I'll give you guys a bit of credit for that, though, right? Because I think if you define a good acquisition, and there are lots of definitions of what is a good acquisition, but you stick to the core tenets of candidly the types of things that you guys have hit the hammer on for a long time. So, stable, steady, recurring revenue, or at least repeating in some capacity-type revenue. Or, as I talk to other people now and explain it, a business that is strong enough to withstand you as a first-time sponsored CEO messing up badly, because it is going to happen. You will step in it at some point. But if your business model's resilient enough to handle that, then that is by definition a good business that you can sort of get in the passenger seat, look around over time, grab the wheel, and then if you maybe swerve out of a lane, the business model is good enough to withstand that over time.

Rick Ruback:

That is so well said, because it is this concept of resilience, which you mentioned, and recurring revenue that go hand-in-hand.

Michael Orzetti:

At the same time, you guys have talked a lot about the buyer reality expectation curve, where you come out starting your entrepreneurial endeavor and it's like, “Hey, I'm going to buy the perfect recurring revenue business with the stickiest customers in the world and immovable contracts.”

Rick Ruback:

For three times. For three times.

Michael Orzetti:

Yeah, right, it's just like, “Hey, that's pretty unlikely.” And over time, and this is something I've come to value, is as you come to learn individual industry niches, there are dynamics in my industry that are very different than other industries I knew about. Now, I knew the business model but I didn't know my industry in particular until I really dug in and learned about it. And so as you find certain things that are not readily understood about your business or your industry, and this was certainly the case in my business, I said, “Oh, hey, these types of things that at first glance don't appear to be perfectly reoccurring revenue”, if we reframe the question and look at it another way, we are able to actually unlock value and say, “Actually, this is an incredibly stable and solid business from which we can plant ourselves over time and grow.” And so I think that's where some of the opportunities that I see other people coming up with over time are not your necessarily middle-of-the-fairway, “Hey, this is a perfectly reoccurring revenue business bought at an effective entry point”, but in fact it's something that is uniquely tailored to you. It could be a pretty unique opportunity. And I think plenty of those exist out there.

Rick Ruback:

I would think the best way of telling that is how high the customer switching costs are. You might go to the same restaurant every week, but you could also go to the restaurant a block away, and it's not a very big cost to change that. You just have to look at a new menu. In the case that you described, though, it sounds like because of the essential reliability requirement of the network, that is both something that if it's working, you'd never want to change, and if for some delusional reason you decided to change it, you would have a very hard time actually moving all that knowledge to a new vendor.

Michael Orzetti:

A hundred percent. And I think, to make this relevant to Eastern, in particular, look, many of our customers are our dealers, effectively, folks who work with the OEMs we work with, who are embedded in their local communities providing middle-of-the-night service. So, it doesn't matter if you're in the city of New York or the middle of Kansas. If your system goes down in the middle of the night and you're the local emergency response team, somebody must be there to help you get that back up. And so whether we're doing this work ourselves or we're helping provide technical guidance and support to our local partners who are doing that there, they are the people who answer the call in the middle of the night to go. And by the way, do it in two hours no matter where you are in the country. That's the thing that as long as either we or our partners are doing their job, yeah, why would you change that? But I think it's more than just what we talked about, Rick. I think another great example, and something that we stressed really hard, was non-cyclicality of the business. The idea that you could be independent of the business cycle, and in our case, that was absolutely a key part of our thesis. You may remember I started my search in June of '18 and then I closed it in August of 2020. And I'm happy to describe some of the inside baseball as we got there, but -

Rick Ruback:

I heard there was something called COVID that happened around that time.

Michael Orzetti:

And how, and how. We got under LOI in October of 2019, nobody knows anything about COVID. Raised my key equity check, raised all of the debt, and I ran a forty lender process. The final lenders that we wound up going with were based out on the West Coast, and they had to do a final diligence visit to the business they were funding. And again, this is symptomatic of larger deals, typically. You need to fund with an in-person visit. And we were sitting at a diner in New York just before we headed over to Eastern and we're all sort of musing about what this COVID thing was and if this would be anything severe. Earlier that week, my lenders had said, "Hey, we've got a trip we've got to make to New York and Boston. Do you want us to come to New York the first half of the week or the second half of the week?" We said, "Let's just knock it out." We visited Eastern that day. My lenders did not finish their trip to Boston that week because that was the week that the world shut down because of COVID. So, if you want to talk about being blessed and fortunate, catching the last train leaving the station, this was their last in-person diligence visit for many, many months. And then COVID hits in earnest and holding a capital stack together of this size is a very different and new set of challenges and learning experiences for me at that moment. But one of the theses that I had been underwriting the whole time was non-cyclicality of my business. You're definitely not funding them to not be able to communicate with each other in times of crisis, right? Like this is the most recession proof of the most recession proof. And in the early months of COVID and through COVID, we actually grew. And so you may notice that I closed several months after the onset of COVID. There were a few dynamics at play there, but one of the benefits of this was it actually helped validate the thesis I was underwriting the whole time, that “Hey, not a global meltdown can affect this business, so Michael Orzetti certainly can't do a whole lot of harm.”

Royce Yudkoff:

Michael, in the few minutes we have left, I know Rick and I would love to just ask this. So, you've been running this business now for about four years, at a high level. How's it gone? How's the business been doing?

Michael Orzetti:

It's going really well. Thanks, Royce. We spent probably the first 18 months after acquisition validating that we bought what we thought we bought. So thought we had bought a great business with great underlying customers, great service mindset, and just a great culture. And that was absolutely the case. But the type of business we stepped into at the time hadn't necessarily professionalized from a 21st century business standpoint in a lot of ways. So, we're doing all the absolute right things to run the business, but many things still needed to be built out. So for the first couple of months, even though I was nominally the CEO, a lot of what I was doing was CFO-esque work, right? And I mean that from establishing a strong gap compliant monthly close, all the way to having regular interactions reporting with our banks in a consistent way. I did not feel comfortable recruiting people into the business and deploying the capital that we amassed over time running the business until we had a more firm grasp on the business, beyond faith in the model. And we had a lot of trust in our founder, who continues to be a great partner to me today. And we said, “Okay, this guy has been running the business for almost forty years off of gut intuition.” And I think a lot of finance people often forget that intuition, particularly decades of intuition, count for a hell of a lot. We said what we're going to do is come up alongside and professionalize alongside, without ever disregarding or tossing by the wayside this intuition.

It took eighteen months to get to the point where we said, “Okay, both outside external metrics and internal intuition are wedded together and telling the exact same story.” It was at that point that we really felt comfortable going and hiring a lot more different types of people into our business, folks who weren't just in our industry, but who had expertise from outside our industry and could bring best business practices in. And so that meant that we would be pursuing M&A, a lot of organic growth opportunity, and long story short, we've more than tripled the business from a top line and a bottom line perspective over the course of the last three and a half years.

Rick Ruback:

Wow. Wow. That's great. That's fabulous.

Royce Yudkoff:

That's an outstanding story.

Rick Ruback:

Congratulations.

Michael Orzetti:

Well, I had good teachers, guys.

Rick Ruback:

So Royce, one of the things Michael accomplished that I'm so impressed with is just the phenomenal growth of his business.

Royce Yudkoff:

He worked really hard and he also had a leg that involved acquiring another business that was similar to his.

Rick Ruback:

Right. So, if you're in a business where you have sticky customers, sometimes the only way to get bigger is by acquisition. Because if the customers are sticky for you, they're sticky for your competitors too, so you can't pry away the customers. Oftentimes, it's easier to just pry away the business. And it's really easy to buy a related business because you know everything you need to know about the business.

Royce Yudkoff:

And sometimes you can find that there's similar costs between your business and their business that you don't need two of, so you can really bring some special savings to bear by combining the two.

Rick Ruback:

Yeah, we call that operating leverage, right? You get this zoom in value just because you don't need two CEOs, you only have one. So that can often be a big gain in profitability just from combining the two businesses. And sometimes if the product line is a little bit different, you can cross-sell.

Royce Yudkoff:

Yeah, that cross-selling is a really attractive part of acquisitions. It means that when you buy a company that has an additional set of products that you don't sell, you can take those products to your existing customers and broaden out the array of products that those customers are buying.

Rick Ruback:

And the other thing that I find really interesting about this is that when people are in related businesses, they often know each other. And oftentimes the seller will reach out to the young ETA acquirer and say, "Hey, I know you bought this business. Would you like to buy another?" And boy, that is great.

Royce Yudkoff:

Yeah, and there's a practical reason why they do it, in addition to the fact that they already know each other. It's that the seller knows that because you understand their business, because you're in it, that when you make an offer and they accept it, and you go through the long due diligence and contracting process that follows that, that you're not going to be surprised and suddenly want to renegotiate that price. Because you really understand the basis on which you made your offer and that's a special quality you have as an industry buyer that someone from outside the industry doesn't have.

Rick Ruback:

That's right. It isn't a roll up. I call it tuck-in acquisitions. And tuck-in acquisitions are always winners.

Royce Yudkoff:

And now let’s go back to our conversation.

Rick Ruback:

So now I want to ask the question, what is it that we didn't teach you that we should have?

Michael Orzetti:

Look, I'd say there's something that you just can't learn in a classroom context that just needs to be lived experience, right? And I'll tell you, some of the most valuable lessons that I learned were actually not in your class but in the Marine Corps, where as a young leader, I made just some young leader mistakes, where oftentimes when you come in and take charge, you feel sort of compelled almost to show that you are in charge. And look, you ultimately can get what you need done in those circumstances, being the external leader, sort of holding the big stick. But what I found over time in the Marines, and that I applied into this business context, was that even if you retained ultimate decision making authority, much better to approach it in a way where we have very vibrant discourse behind closed doors as a leadership team, but then not needing to be the person who owns the decision externally and let the power come through in other ways. Ultimately that drove a lot more of our success, where I was able to get buy-in. I took sort of a new approach and wedded it to the best of the old approach. And I give that from everything, to changing our business hours from 10:00 to 6:00, to 9:00 to 5:00, all the way to, “Hey, we need to overhaul our ERP system.” And everything in between is often done much better in a consensus-driven way. But I think in being willing to actively lay down your authority and have a real discussion about things, and then pick up your authority if you truly need to at that point and wear it, I think that's something that you could only learn through experience.

Rick Ruback:

Fair enough. I agree with everything you've said. Any questions for us, Michael?

Michael Orzetti:

Yeah, Rick, I'd be really curious to know, it seems I was a little bit in the early adoption wave of search. Not that it hadn't been around for decades before, but I had a few people that I could look to and say, “Okay, this is doable.” It seems like the space has really exploded in popularity since then, simply for me, going to business schools and speaking with people and talking to searchers who are starting their own journey. Do you think that's the case, and why?

Rick Ruback:

Is it true there's more interest? Absolutely. I think what's driving it is twofold. Part of it is generational. People want more control over their lives. People want to be able to work hard for themselves. People want to have a sense of participation in their own destiny. And so I think all of that is driving people to want to be in business for themselves and to work for themselves and to create value for their families and to create an environment that they can be proud of. And I think there's a lot of drive that says corporate America is great and it's fabulous at doing what it does but for a great many people, like you, it's not a good fit because they want more control, they want more determination. So, I think that's in part driving it. I think in addition to increased interest, though, there’s increased demand. Remember, buying a small business is special because you're providing both capital and management simultaneously. And that's really hard to do. So even if we have lots and lots of searchers that can provide capital and management, it turns out there are a lot of people in my age group, baby boomers, who need to sell their businesses and retire at some stage. For business owners who want to sell their businesses, they really need somebody to come in that can provide enough money to buy them out and enough skill to take over their roles, roles that they might've been doing for 25 years or 30 years, and they're so good at they don't even know how good they are at it. And that's hard. So, I think while you have an increase in supply of searchers, people wanting to buy small businesses, you also have this massive increase in demand to be bought. So, I think it's all working out okay, more than okay.

You know, one of the stories that we really keep our ear open for is whether there are circumstances where searchers find businesses they want to buy and find that they're competing with other people similarly situated. “Am I somebody who's graduated from school X and I'm competing with somebody who's graduated from school Y, who looks a lot like me, and we're both trying to buy the same business?” And while that happens, it is pretty unusual. I think I've only heard it like two or three times.

Michael Orzetti:

I'll tell you, I had that happen to me twice.

Rick Ruback:

Well, there you go. Now I have five times.

Michael Orzetti:

Both in broker deals that wound up being acquired by people in and around the ecosystem. But I didn't know I was competing against them. I saw them buy it afterwards and I said, “Hey, okay.” Ultimately, it was a price delta and these people saw something in the business that they acquired that I did not, and that they may have paid a perfectly fine price or they didn't. I don't know, actually. The one thing I would say that everybody listening ought to realize is, look, if Rick and Royce and Michael reach out to these same HVAC services provider, the lives of these business owners are so chaotic and hectic that, I mean, I get, the CEO of my company, I get probably 20 different advertising e-mails a day. This is not something I solicit, it just happens. My e-mail address gets web scraped somewhere. I ignore like 99.7% of them. So, if Rick and Royce and Michael all email the same small business owner, your e-mail coming in may just not be opened and the idiosyncrasies of that person's day may determine whether or not your message gets opened or not. And his mood that day may determine whether or not he says, "Ah, I'll bite." Right? And I've spoken to other friends who have bought businesses. Like literally nobody's story is exactly the same, right? And so when you say, “How do you go back and recreate success this way?”, if I were to go back to square one and do it again, almost certainly my path to acquiring a business would not look an exact replica of how I did it today. The major muscle movements would. But the details on how that ball sinks into the hole? Very different. And those are people going in with the exact same sort of activities for all the reasons I said. So, I would not be deterred if I was going out and trying to acquire a business for the first time today, for that reason. You've just got to take many shots on goal and for some reason or another, the breeze might blow left and your ball goes in one day.

Rick Ruback:

Don't you think that's true in so much of life, though? Like who you had for a second grade teacher, who your kids have for a teacher, who you marry? I mean, you either have to deeply believe in faith and deity or be okay with a little bit of randomness in the world and understand that sometimes that randomness is going to work for you and sometimes it's not.

Michael Orzetti:

I'm with you a hundred percent.

Royce Yudkoff:

I think we're about out of time, sadly. It's a pleasure teaming up with you on this. So, thank you. Thank you for the time you've invested in this.

Michael Orzetti:

No, no – thank you.

Royce Yudkoff:

It's great.

Rick Ruback:

One of the things I found really intriguing about Michael's journey is the business he bought. It's an interesting business. One, I never would've thought about, this specialized two-way communications. And I would imagine that the leader of a business like this is some, you know, ham radio operator or somebody who has spent their entire life tinkering with two-way radios and building one as a child from their Christmas gifts and that sort of thing. But that's not Michael, right?

Royce Yudkoff:

No, it's not. And it's a great point. I'm sure a lot of our listeners are wondering how is it that so many searchers can be successful when they've never been a CEO before and never been in the business they're buying, which is exactly Michael Orzetti's situation. But the truth is most searchers overwhelmingly are successful taking over the companies they buy. And you and I have seen some reasons for that, some patterns in what they do.

Rick Ruback:

I think the biggest thing is the stickiness of his customers. When you're buying these two-way radios, the requirement is they work when you need them.

Royce Yudkoff:

And that makes a customer very reluctant to switch to another vendor if they're receiving good, reliable service from an existing vendor, because that service is important.

Rick Ruback:

Yeah, exactly. In Michael's business, they have some ownership of the installation, some pride in doing it right. Then, like everything in life, it needs to be maintained, and they do that. And there's an element of trust, right? That, “Oh, these guys have done it. They've done it well, I can trust them. It'll work when I need it.”

Royce Yudkoff:

And the final ingredient you and I see, and really sticky customer recurring revenue businesses, is that the cost of the product or service is small as a part of the customer's overall P&L and the customers are fleets of trucks, like a utility might operate or a school district might operate. So, the cost of maintaining that two-way radio system just is a tiny, tiny, tiny thing weighed against the need for reliable service.

Rick Ruback:

Right, but when you're worried if one of those trucks has been abducted by aliens, being able to reach out to them is worth every penny and more.

Royce Yudkoff:

Exactly.

Rick Ruback:

I mean, maybe being a Marine, he got some appreciation of the importance of reliable communications? He certainly had no expertise that I'm aware of before he bought the business. He learned the business and the sticky customers allowed him the space to learn the business.

Royce Yudkoff:

The importance of sticky customers is obviously that it leads to a better business because you show up every January 2nd and you have a base of revenue you know is coming back. The less obvious benefit is it's very forgiving to a newbie CEO learning the ropes of the business. So that selection is one of the things that makes these transitions go well.

Rick Ruback:

Right. Compare it to a coffee shop, if you will. If a new owner takes over the coffee shop and you get a lukewarm, watery cup of coffee and a three-day-old croissant, you're not coming back. And it's pretty easy to just go to the one down the next block. But if you have a company that's installed your two-way system and has been maintaining it for years, you're going to think twice before you walk away from that relationship.

Royce Yudkoff:

That's right. So, if one of the attributes that makes this work well is sticky customers and recurring revenue, I think there are also a couple of other things that we see again and again that make these ownership changes work. One of them is surely that in almost every purchase, a transition agreement is reached with the seller. And for some period of months after the purchase, that seller is sticking around, sharing the sort of unwritten history and policies of the business as a handover. And that's just something you design into the purchase of these.

Rick Ruback:

Strategic shifts are really hard but certainly for that first month or so where you're just not making any changes, you're just trying to get some transference of the DNA of the firm.

Royce Yudkoff:

The third element that makes these transitions work well for someone who's never worked in the business or been a CEO is really part of the due diligence. Due diligence for these searchers isn't just about reading contracts and checking numbers. It's getting to know the CEO and watching them and asking yourself the question, “Can I do that person's job? Is that something that I can learn to do and do well? Or are their skills so different from mine and so elusive that I can't do it?” And making a selection in part on that basis is what raises the odds of success so much for these searchers.

Rick Ruback:

Yeah. But I'll disagree a little bit there, Royce, because you don't have to do the seller's job. So, for example, if the seller is an engineer and you are not an engineer, you can hire an engineer, providing there’s something else you can do in the business which is going to add value. Now, if you don't understand math and you're confused by lines and numbers, maybe you don't want to run a business that has a key engineering component, I don't know. I think as long as you have the ability to understand the work of the engineers, it's fine. Maybe your forte is going to be in project management, and the engineering role is just going to become a plug-and-play kind of function in your business as you organize it. So, I don't think you have to do what the seller did, but you have to be able to manage the business and understand the business well enough to manage it.

Royce Yudkoff:

We agree, and that's something you should be figuring out during your diligence period on the company.

Rick Ruback:

You can't buy a business that you just don't understand. And often the way they do that is they ask some simple questions: “What do we do that makes customers want to buy from us?” That's one question. The next question is, “How does the cash flow cycle work?” So oftentimes when you both understand the product and then understand the cash flow cycle, you have a pretty good understanding of the business. Those are the two big things. The next thing is, of course, you have to understand a little bit about the production. Is it a business that requires ongoing capital expenditures? Is it a business that is just yellow pads and pencils and cellphones? You need to understand the difference between that business and a business that involves trucks and specialized machinery and the like.

Royce, that was a great conversation with Michael. Next week we have Heather Endresen with us. She runs a business that helps people get SBA loans and, as you know, for many small business acquisitions, particularly those that are self-funded, the SBA 7a loan program is a magical way of obtaining debt financing. So, Heather will be with us to share the magic and walk us through that important step in the acquisition process.

Royce Yudkoff:

I like it. I look forward to our conversation with Heather!

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. If you have any questions, comments, thoughts, feel free to just e-mail us – rickandroyce, all one word, at hbs.edu.

Royce Yudkoff:

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