Tom Allsworth – Final Transcript
Think Big, Buy Small – Season Three, Episode Three
You Don't Need an MBA to Pursue ETA

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: Today, Rick and I are meeting Tom Allsworth, who has a fascinating background to any listener who's thinking about entrepreneurship through acquisition as a career path. Tom went to the Merchant Marine Academy, then joined the Marines, then spent several years in engineering jobs at large shipbuilding companies, when he reached the conclusion that what he really wanted to do was be an entrepreneur and be his own boss. Without an MBA, without a background in financing, he carved his own way to buying a company that Rick and I find very fascinating. We're going to share with you Tom's journey and you'll learn a lot about the different skills that can help you become an entrepreneur through acquisition. Tom, welcome.

Tom Allsworth: Thanks.

Rick Ruback: Tom, it's great to have you, particularly because your businesses are something dear to my heart. Why don't you begin by telling us a little bit about your business and about yourself?

Tom Allsworth: I'll start with the business. I acquired Pacific Opportunities in November of 2022. It's a business that's focused essentially on community service. We help adults who experience intellectual or developmental disabilities find and maintain employment. So, if you've ever gone to like a grocery store and seen a bagger with Down Syndrome, we help get the person that job and then we help coach them while they're in that job, to try to maintain long-term employment in that role. You know, and that's just one small step. We have people who you would never know that they have some kind of a barrier in their life, and we help them do larger roles at corporations and everything in between. That was the first company and then, in May of 2024, I closed on the second company, which is my biggest competitor in the Portland metro area. But they expanded my service offering. Now we also have community living supports, so we help adults build community, make friends, do basic tasks in their life – like we might help with cooking or housekeeping or things like that.

Rick Ruback: Fascinating businesses that really fill a need in society. I suspect our listeners don't know what I guess in the community is often called a “cliff”, that people with intellectual disabilities get support through high school and that extends usually to about what, Tom? Twenty-one?

Tom Allsworth: Exactly. Twenty years old is typically when we see people transition out of their special education programs and into the regular workforce. I believe it can extend out to twenty-one.

Rick Ruback: As I understand it, high schools provide all kinds of support up until that moment and then, when they reach that cliff, there's no longer any governmental services. So, absent businesses like yours, oftentimes there's no next step.

Tom Allsworth: Right, and it's amazing how much fulfillment people get out of work. A lot of our clients, with not having that next step, it's like what are they going to go do? They're going to isolate. They're not going to live a very healthy life. And just by having work, we've noticed it has an excise return for the community.

Rick Ruback: Yeah, we wrote a case called “The Lucky Ones” on a coffee shop in Salt Lake City that focuses on employment of people with intellectual disabilities. And one of the strong lessons in that case echoes what you've just said, which is employment is such a fulfilling thing. Doing something valuable, it seems to be an essential human need. So, your background – you were a Marine?

Tom Allsworth: I was in the Marine Corps, correct. Yeah, I did four years on active duty as a Marine officer.

Royce Yudkoff: And where'd you come from originally, Tom?

Tom Allsworth: I grew up in Phoenix, Arizona. Went to high school in Scottsdale, Arizona. 9/11 happened when I was in high school. You know, I knew that I wanted to go into the military but there was another component of that too, is my parents weren't going to pay for my college and I didn't see a lot of good options. I got into the Merchant Marine Academy. I went there. I did my degree in engineering. When I was in college, I knew I wanted to go in the Marine Corps, so I did officer candidate school. And when I graduated, I commissioned as a Second Lieutenant. I went in the Marines. I went through the basic school, combat engineer, got to my unit, did a deployment in Afghanistan, in Helmand Province. And I think Afghanistan kind of opened my eyes to like “this isn't what I want to spend the next ten, fifteen years doing”, which was sad because I think, up to that point, all I wanted to do was be in the military. So, I kind of like lost what my purpose was and I got out of the military.

Royce Yudkoff: I will say, that's actually pretty common. You know, you go into any kind of job and think it's sort of satisfying in one way and, as you do the job, maybe that's reaffirmed but often it isn't. And then people switch. It's not a mistake. It's a journey of discovery. So, I really want to hear what happened next.

Tom Allsworth: For me personally, it was a tough choice, and it was a decision that was influenced by a lot of factors. I'm glad I got out, but it led to this sort of like, “What am I going to do?” And so I went back into the maritime industry and I worked through a recruiting agency and there was a job in South Korea that was hiring for marine surveyors, building new ships at Samsung. I'm very lucky that I got that opportunity. I worked in Geoje, South Korea at Samsung Heavy industries, building LNG tankers and drill rigs. I kind of accelerated myself in the company. A guy that I had worked with in South Korea poached me from Samsung back to San Diego, and I got to manage a large-scale project at General Dynamics in NASSCO Shipyard. That was pretty neat but I didn't really like the company. I wanted to make decisions that were impactful. I had that in the military, you could make decisions, but then in my civilian career, I felt like I was just not living up to the potential that I could, so then what do I do? I thought, "Do I get an MBA?" I had some pretty good talks with people in my life on like, you know, "Why do you want to get an MBA?" And it really boiled down to: I wanted to pursue entrepreneurship, I wanted to be a big fish in a little pond, and I wanted to really see how far I could go, I wanted to be unbridled. It's like, "Hey, you don't need an MBA to do that, buddy. You can learn more about business if you go buy a business and run a business." I visited Kellogg. They had this Veterans in Business Day – I think that's what it's called – and I got to talk to some students. And something I had read about prior to this was the search fund model. And so it just, my brain kept like, “I don't want to do an MBA yet. That might be down the road, but just not the right time for me right now.” And so I took a higher paying job in Japan. I saved money. And that's where I met two out of the three partners at Search Investment Group. They had launched when I was in Japan and I was like gearing up to do a full-time search.

Royce Yudkoff: Yeah, and I should say at this point, for our listeners, Search Investment Group is a professional investment firm in searchers, like yourself, but just so they know what SIG is.

Tom Allsworth: Yeah. So, I'm in Japan. COVID's happened. I'm like alone in a foreign country. I was like, "All right, well, I've got some broken deal costs saved up. I'm going to go for a full-time self-funded search.” And I had prepared a private placement memorandum, a PPM, just in case, I started it, like, if things go bad, I will be able to fall back and try to raise a search fund, and do that. But I want to go self-funded first Before I moved back from Japan, I had a couple of options where I thought we were getting pretty close to an LOI. Right after I got back to San Diego, I got a business under LOI and I was running with it. The business was in Seattle and they built enclosures for electrical equipment. I was like, "How am I going to raise money for this?" And I reached back out to the Search Investment Group team, which at that time was Robert, Aaron, and Jordan. And I was talking with Robert and I was like, "You know, if this doesn't go through, what do I have to do to work with you guys?" And so we did an interview and then I signed up to work with Search Investment Group. But I think I'm getting ahead of myself in the story.

Rick Ruback: So, can we unpack some bits and pieces of that? So, you're searching, and are you single, married, children, no children? What's your life status at this moment?

Tom Allsworth: I was divorced. I've got nothing bad to say. We met when I was a second lieutenant and we got married young, and I think our lives were just starting to spread apart. And obviously, moving to South Korea, and then going back to San Diego, and then going to Japan…and she just wanted to stay in Washington, DC and live her life in a different way than I wanted to live mine. And I'm talking about quitting work, going to buy a business, we'd have to commit to living anywhere in the United States. You know, I was the rolling stone collecting no moss and she was not having it.

Rick Ruback: And so your search was not geographically focused. If you ended up in Toledo, you would've been okay?

Tom Allsworth: I'd say Toledo, yes. Manhattan, no.

Royce Yudkoff: Wow.

Rick Ruback: Wow. I would just say that that seems very rational to me but my partner here would…

Royce Yudkoff: …who's from Manhattan.

Rick Ruback: ...who's from Manhattan and loves chestnuts, and traffic, and the theater, and the restaurants...

Royce Yudkoff: But I get the point – you have preferences, but it's basically a national search. There was one thing in this narrative that I just heard that I don't think has come up before in our podcast, but you intended to do a self-funded search but you wrote a private placement memorandum for a funded search, just in case. And the thought was you'd see if the self-funded search would work and if the tank ran out of gas before you bought something, you could go to the funded search investor community and raise money, and carry on that way. I think that's very interesting because I think many people who contemplate searching don't quite realize that you have an option that goes beyond just deciding funded or self-funded. You can self-fund and the investment community will usually regard you as an even better person to back because you come to them with real search experience.

Tom Allsworth: That's correct.

Rick Ruback: You ended up in a mission-driven business, you know, a business which has a strong social contribution to it, but did you buy it because you said to yourself, "This is a place where I can really make a difference in people's lives?"

Tom Allsworth: Well, I'd say that's the icing on the cake. The search was more motivated on opportunity and stability. I wanted to make sure I identified a company that I could go into, and I gravitated towards companies that had a strong impact on their community. I had kind of dedicated my life to community service. When I worked in Korea, I was working for health/life safety on ships. In the Marines, I thought I was standing up for people that really needed help. I gravitate towards that but that would not have been a criteria that made me say, "Okay, I have to move on this." It was first financial and then it was community.

Rick Ruback: That's really interesting. So, if it had been a light manufacturing business instead, you would've been fine with it?

Tom Allsworth: Yeah, I would've been fine.

Rick Ruback: You might've still had this community service itch but you might have done it outside of your search life.

Tom Allsworth: That's right. You know, there's a component of that that's subjective, like, can I see myself actually running this business?

Rick Ruback: Yeah, great question. A really important question to ask.

Tom Allsworth: Having the social component was important to me. However, I didn't realize how important it was until I took over Pacific Opportunities. And then I realized too, a lot of the companies that I had been looking at had some kind of social impact. And, believe it or not, I think HVAC has a bit of a social impact. And same with plumbing, right? I think they get overlooked as being very impactful but being an engineer, I think of these things as some of the glue that holds society together.

Rick Ruback: Absolutely. I'm a diehard capitalist, so this idea that virtually any business in which your customers are eager to buy your products and you can produce them at a profit, creates social value.

Tom Allsworth: Right. You're creating jobs, you're creating opportunity, and that feeds families, that helps people develop.

Royce Yudkoff: So, Tom, you're back in San Diego. Do you now search full time?

Tom Allsworth: I had full-time search, so I got an office space in downtown San Diego at like one of those co-working spaces. Just like a regular job, I would wake up in the morning, get coffee, and then I'd go to work, and I'd do my eight, nine, ten hour days. There's a gym, so at lunch I was going for a swim and working out. That's the biggest difference, is nobody could tell me not to do that.

Royce Yudkoff: Yeah, welcome to entrepreneurship. And tell us a little bit about your search process. Were you mainly working through brokers?

Tom Allsworth: Brokered search – I used things like x5 deals, call lists, I scoured Southern California brokerages. I was doing a little bit of proprietary searching too, very opportunistic. And then the industry was just broad. It really was anything that piqued my interest.

Royce Yudkoff: And then you came upon Pacific Opportunities through this process, right? They came in as another confidential information memorandum, another CIM?

Tom Allsworth: That gets a little more complicated. So, I had been searching for a year. I had seen a CIM for Pacific Opportunities. I signed the NDA. It was like a Friday afternoon, and I saw that LOIs were due that day. I had a conversation with the broker's wife, and she's like, "We already have offers in-hand that are over five times." So, I'm like, "Okay, well I guess this isn't going to be a fit for me." And a few weeks later I had a call from Robert and he's like, "Hey, we got a deal under LOI. The searcher backed out. Do you want it?" And I was like, "Uh, yeah."

Royce Yudkoff: So, what happens next? Did Robert flip the card and say, "So, this business is Pacific Opportunities, that this other searcher had”?

Tom Allsworth: Exactly. “Hey, this is Pacific Opportunities.” I mean, I could remember seeing the CIM and I remember reading it. I was just like, "How cool would this be?"

Rick Ruback: What did that vaporized searcher do differently? Did they pay more than you had offered?

Tom Allsworth: It was 5.24X.

Rick Ruback: So, not that much more than you would've paid.

Tom Allsworth: And I was under like coaching too, to not go over five, and like you could go over five if everything is just perfect but when I would talk to a broker it was like, "So, do you think this is trading in the four or five, six times range?" And like when I hear, "We already have multiple offers over five times", in my mind that's like, "Okay, this probably isn't going to work. And if LOIs are due today, this is going to be more than I can bite off right now." So, I just missed it.

Rick Ruback: But if the broker had said, "Tom, you're a fine, upstanding human being. Five and a half gets you the deal." Would you have done it?

Tom Allsworth: Oh, I would've done it. Absolutely.

Rick Ruback: OK. And then when you learned that it was available at five and a quarter, did you feel like, "Wow, I missed it, but I got really lucky that it's bounced back"?

Tom Allsworth: I felt like the luckiest guy in the world. For one, it's this business that I remembered. I mean, I'm looking at lots of teasers and then I'm looking at lots of CIMs, and I'm signing lots of NDAs. So, to have one that you remember and you're like, "That'd be so cool", to land on my lap, signed LOI, I thought I was the luckiest person on the planet. And then, you know, the trading multiple, that kind of stung a little bit, where I was like, "Okay, well if I knew that I could be going over this all the time, there may have been some other businesses that I should have gone a little bit higher on too."

Royce Yudkoff: Well, very few deals go right or wrong because you've overpaid by a quarter of a turn of EBITDA. Now, that's a slippery slope, right? That can lead you off a cliff but I think it's really true that if you would've been very comfortable at five, you know, n the end, there are other things to study in the business besides the five and a quarter. We teach our students that, you know, there's a set of criteria that you want to look for. Price is one that we've already talked about, but they kind of interrelate with each other, right? Because if the business is off-the-charts great, like it has a hundred percent recurring revenue, customers never leave, then you can go out of the zone on price a little bit, just to pick two of, you know, five or six important criteria. So, there's an interaction among all of these. It's not quite as simple as four to five, 90% recurring revenue or better. There are trade-offs.

Rick Ruback: Absolutely.

Tom Allsworth: This had a lot of exciting criteria with it because our long-term clients – now this was something that I didn't really understand until I was under due diligence – but in the CIM, you could see it was fairly flat. It had a slight growth and it was stable during COVID. And then you have an owner living on the coast and she was running the business essentially through her cell phone. I'm thinking, you know, "Here's this really stable business that has a component of recurring revenue through our long-term clients, and this owner is just not as engaged in the business as she could be." And so, I thought all the things were great.

Royce Yudkoff: So, Tom, you were evaluating the qualities of the business and these qualities you mentioned are very attractive. Did you ever find out why the other searcher decided to walk away from it?

Rick Ruback: Yeah, that was what was on my mind because if somebody says, "No, no, no" and you're inclined to say “yes, yes, yes”, the thing that would haunt me is…

Royce Yudkoff: …why did they say no?

Rick Ruback: “What does that other person know that I don't?”

Tom Allsworth: That played in my head a little bit but at the same time, I feel like when you're a searcher, you're opportunistic. And this business is in Portland and I like the western US, because it has more open spaces and nature.

Rick Ruback: That's really fascinating. So, if I had learned that the other searcher had two deals under LOI and decided to go with another one, I think I would've been pretty sanguine about that.

Royce Yudkoff: Yeah, you and I can conjure up a bunch of reasons why two searchers would look at the same business and decide differently. It could be, “I'm not comfortable managing a business like this. My skills lie elsewhere.” It's not just a sort of black and white issue. Different searchers will look at the same business differently.

Rick Ruback: I fully agree with that, yes – for lots of reasons.

Royce Yudkoff: For lots of reasons. ----------

Rick Ruback: Royce, I couldn't help but reflect on your comment that there's not a lot of difference between buying a business for five times and buying a business for five and a quarter times. Do you remember you said that?

Royce Yudkoff: I do remember. Yeah, I do.

Rick Ruback: And did you cringe when you said that?

Royce Yudkoff: I did because you and I both think, you know, that the price you pay really matters in a business and what's so wonderful about small firms is you can buy good businesses at low multiples, so…

Rick Ruback: …because the magic is in the multiples.

Royce Yudkoff: The magic is in the multiple. I think the thing to keep in mind is that small differences shouldn't stop you, right? That what's key here is that you make an assessment of, “Is this a great business or is it a good business or is it a not-so-good business?”, and that the price should be aligned with those qualities. Whether you're off by a quarter turn of a multiple is much less important than you get that pairing right. What's your reaction? We've never actually talked about this.

Rick Ruback: We've never actually talked about this. This is kind of fun. It's interesting. I would think about it slightly differently. I agree with all that but I also think it's worth mentioning that the multiple is not something chiseled in stone that was carried off a mountain by Moses, right? The multiple really changes depending on what basis you're looking at. “Well, do I include my earn outs? If I had seller debt, do I include that at market value or not?” Often the seller interest rate is low, the covenants are low or non-existent. And it is so tempting to say, “Well, is it a multiple of the last twelve months? Is it a multiple of the last calendar year?” They have some signed contracts, so can I look to next year and calculate the multiple on next year? How many times have we seen a searcher pitch us as an investment and we look at it we say, “Well, the multiple's six and a half times” and they say, “No, no, no. We're growing at 15% and when you look at the growth, we've grown into four times in a little over a year”, right? The whole concept of there being a multiple that we would all agree on…

Royce Yudkoff: Yeah, it's a less pure calculation than it seems at first.

Rick Ruback: Right, it's a lot less pure. And then given whatever the basis happens to be – if we agree we're going to calculate on a particular basis – do I think a quarter turn will change the outcome? No, I don't. I also think there's so many other things to look at, both in the searcher's life and in the searcher's business. So, we know Tom had been searching for a while by the time this deal came back to him through an investor. And so would you rather pay five and not get a deal or pay five and a quarter and get a deal, right? That's number one, because you're learning about the market. Maybe what he learned is that his three-to-five benchmark wasn't quite right.

Royce Yudkoff: Right, right.

Rick Ruback: And two, of course, the quality of the business really depends. You know, the multiple I think about is one divided by R minus G, right? The discount rate minus the growth rate. And, you know, a fast-growing business is going to have a higher multiple. A riskier business is going to have a higher cost of capital and a lower multiple.

Royce Yudkoff: Yeah.

Rick Ruback: And then there's just the scale size. If businesses are really small, they sort of have to have a small multiple just to cover the fixed costs. So, an identical business that's doing a million and a half might sell for four and a half or five times to a $500,000 EBITDA business that might sell for three…

Royce Yudkoff: Mm-hmm, that's right.

Rick Ruback: …just because there's fixed costs to running the business, the CEO salary, for example. So, I think it isn't a precise number.

Royce Yudkoff: You know, if I were doing a five-year projection and a model of performance and investment return and I was nervous about paying five and a quarter times because I thought that was a little above market, the way I would get my arms around is I would say, “Self, what do I guess that market really is for this business? I don't think it's five and a quarter. I think it's 4.75.” And I would model at the end of my five-year holding period, selling it at 4.75 times, even though I had bought it at 5.25 times, and ask myself, “Can I earn a fair return on my effort and for my investors getting in at a slightly higher multiple and getting out at a multiple that I really would love to pay but can't?” And if I can, that tells me that it's okay paying that incrementally higher multiple up front because I've sort of assumed that into my whole endeavor. What do you think?

Rick Ruback: I think it's hard to get a transaction to meet that criteria, just because if you're going to imagine like a five-year hold, it's hard to make enough money to cover a multiple compression. But I don't know. You know, it is just so common when you look at the modeling to see that no matter what the entry multiple is, people assume the exit multiple will be the same. Sometimes they think about multiple expansion. That's clearly wrong. I've never really had pause with setting the exit equal to the entry, but I get this example. I mean, one of the things that this would make me do is maybe finance it more conservatively.

Royce Yudkoff: Yeah, that's right.

Rick Ruback: But then, of course, my equity – now we're really getting into the weeds here – but then the equity IRR is going to go down for two reasons, the multiple compression and less leverage, and my investors might not like me as much.

Royce Yudkoff: By the way, just to your point on financing, you know, your banker will also have a view on value, right? Because they see scores and scores and scores of small businesses that they lend to, and they'll have a policy like, you know, “We like to lend to half the value of a business.” And just because you've put a certain price on it doesn't mean they'll necessarily agree. So, you'll get some input from them, not in the small details, but if you're way off the market, they're going to speak up.

Rick Ruback: Yeah, I've always thought about that as a little bit like a home appraisal.

Royce Yudkoff: It is a little like a home appraisal, yeah.

Rick Ruback: Royce, let's back to the conversation. ----------

Royce Yudkoff: So, Tom, this business, they serve long-term clients. It's very economically non-cyclical. It's in the part of the country you love. The price is reasonable. So, lots to like here.

Rick Ruback: Is it private pay?

Royce Yudkoff: Well, this is exactly my question. I was going to come out and say “customer concentration”. I mean, who pays? Are there lots of different payers? Or a small number of different payers?

Tom Allsworth: We are totally funded through government dollars, so it's not customer concentration because each customer is a unique customer but their benefits are administered in two ways. So, we have two distinct pots of money, and I'm just going to focus on Pacific Opportunities, at this point. So, they receive money through vocational rehabilitation, which if you worked at a lumber mill here in Oregon and then you got your hand cut off in the saw, and now you can't work at the lumber mill anymore, you could go to vocational rehabilitation and find a role that would help cater to your new disability. We work with the intellectually and developmentally disabled who also have access to the same vocational rehabilitation. And so one pot of money is through Department of Education and they have this voc rehab funding. And that's how clients enter our pipeline. Then the clients, because of their disability, they have Medicaid. Medicaid then funds the long-term job coaching. Our long-term job coaching in Medicaid is funded for every hour they work, not for every hour that we provide person-to-person care. So, categories one through five, five being the highest need, one being the lowest need. Essentially, the most able clients pay for the least able clients, for the most part.

Rick Ruback: And do you get to select who your clients are or do you take all comers?

Tom Allsworth: Great question. What I have learned is cherry-picking is very frowned upon at the voc rehab offices, where all of our referrals really come from for employment. And then they finish after ninety days of sustained employment, they transfer from VR to what we call long-term supports, LTS. And that's when they go from VR funding to Medicaid funding, and they go from being a cost to where we can make money on the service.

Rick Ruback: So, do all these workers in Portland get minimum wage?

Tom Allsworth: Minimum wage is a requirement. What we're obligated to provide is competitive, integrated employment, “competitive” meaning it's open to the public and it's a wage that's competitive in the work landscape. We get some jobs in the over $20 and $30 an hour, but more so it's like $15 to $20 an hour jobs. So, reimbursement in VR is totally based on the number of hours we work directly with a client and that's about $45 bucks an hour.

Rick Ruback: Oh, the number of hours you work with the client, not the number of hours the client works.

Tom Allsworth: And then at ninety days, if they have Medicaid, it flips and then it's like if they're working twenty hours, we get paid between $19 and $57 for every hour that they work.

Rick Ruback: I see. So, the way the program works, it might be that you have a client who's making $15 an hour and you're making $17 an hour. So, the all-in cost of the employment is like $32 an hour?

Tom Allsworth: Exactly. It's odd, because when you think of it like that like the all-in cost of this one worker is fairly high, especially when they're earning minimum wage. But, you know, you've got to think about that impact that it's having. One, it's reducing the amount of social security benefits they get. And two, it's giving this person a positive impact in their life. Most likely it's positive. Sometimes we do see work isn't having a positive effect, and then we try to coach them and have them stay and work, but if that's not going to be a good outcome, we want them to not work and maybe go to a different program, or a different path that's going to be helpful to them.

Rick Ruback: Do you feel like you have a stroke-of-pen risk in the sense that there's a risk that the government could change their policy and that would have a very unfortunate and dramatic effect on revenue? Or do you think that's unlikely?

Tom Allsworth: Well, they say the pen is more powerful than the sword. In this case, you know, one stroke of a pen to change a policy could put us out of business. But I think this is a bipartisan issue. I think both parties agree, because you're getting people to take less benefit through work, so you're reducing cost. And if you are on the other side of the fence, I think this is something that you can champion because it's providing a service to someone who has this bonafide need to integrate into society. I think it spans both parties and I don't think it would be very popular to cut. You know, we're not talking huge dollars here. We're talking about a program that has a huge impact.

Rick Ruback: And how many clients do you roughly have?

Tom Allsworth: The first company, we have about 200. The second company we have about 350.

Rick Ruback: So, you're surveying about 550 or so clients?

Tom Allsworth: Correct.

Royce Yudkoff: Tom, I'd be interested, as you reflect on your experience, what is it like being an entrepreneur? How do you reflect on this?

Tom Allsworth: Royce, that's an excellent question. Thank you for asking it. I have never been more fulfilled in my life. I don't know how to say this without sounding cheesy. It's like you kind of find something that clicks, and this very much clicks with me, because you have to be analytical, you have to be very person-centered, problem-solving. Every day is different. The biggest challenge, I think, is the roller coaster of emotions and then the grinding down you get from your employees. Those can be challenging things. But the greatest honor I've ever had in my life is serving in the Marine Corps. But this is right up there with that because I can actually see the impact I have on people. And the other thing is like I'm unbridled. This business, how do I want to grow it? I don't have anyone telling me, "No, stop. Don't do that. You can't do that. Not authorized." I get to do it. I can be as clever as I want to be. Sadly, I'm not clever enough to triple or quadruple the company yet, but maybe someday I'll get there, you know?

Royce Yudkoff: I love hearing that, and it's something Rick and I hear from a lot of entrepreneurs, this sense that every one of your skills is being tested, that you get to make your own decisions, you get to see the impact on others, and also the sort of big oscillations in sort of emotions when you're at the top of a small company.

Rick Ruback: That's right. I read between the lines that you find the most challenging part to be managing the humans, the HR, the people who work for you. So, tell us about them. How many of them are there?

Tom Allsworth: So, now I've got roughly a hundred employees. Most are full-time. I've got a handful of part-timers. I wish HR was the silver bullet that just solved all the problems, but even HR has problems and they don't always have the right answer. I think the problems are different at each company. So, the first company, I've got that one kind of dialed in. But then the company that I just acquired in May, one of the departments has been persistently challenging. And I like dealing with the challenges because they're new and they're different. What I don't like dealing with is the entitlement that I'm getting from some of the staff members, and like the former owner did not hold people accountable. By that I mean showing up on time, working forty hours a week, doing your reports, basic things. And those are very challenging things to get done at the second company.

Rick Ruback: Are the employees generally college-educated? Are they social workers? Tell us about them.

Tom Allsworth: At Pacific Opportunities, probably 50%, 60% have a college education. And at the second company, they had a deliberate campaign to hire college graduates.

Rick Ruback: Are they trained in this field, working with people with intellectual disabilities?

Tom Allsworth: Some are. Especially at the second company, some have a psychology degree and some have a degree in social work. And some have master's degrees, at the other company.

Rick Ruback: So, it must be the case that these people have pretty high EQs to do their job, they get fulfillment out of their job. I think they'd be pretty easy to manage, but I guess not.

Tom Allsworth: I think that Pacific Opportunities has been very easy to manage lately. And when I say “lately”, probably the last twelve months have been good months. And then the other company, I'd say one of the departments is very well run and managed very well. The other department, I think they have a cultural issue there, where they were taught by their manager, who's no longer with us, that you can get your own way. You just have to be the loudest person in the room screaming. So, I don't think education has to do with it.

Rick Ruback: It is fascinating to me. I wonder how much of it is also that if we talk to you in a year, you will say, "Well, that second company I acquired is really terrific and easy to manage now," because some of it is that over time you build the company to reflect your values, your work styles, the things you care about. And the people who work for you say, "I really like working for Tom," or, "I don't really like working for Tom." The latter group probably moves on when they get the opportunity so, over time, you end up with a workforce that's very much the kind that you want to manage.

Tom Allsworth: I would agree with what you just said, and the staff members that stay are staff members that click with our culture. And part of my job as a CEO is to set that culture. The staff members that I promote are staff members that I think are promoting those values. And so I hope you're right that at the second company, in the next twelve months, we really get that click.

Rick Ruback: Yeah, these things work themselves out over time. Tom, we like to end our interviews by asking if our guests have any questions for us.

Tom Allsworth: I would love to hear how you two got together and like what made you start doing this at HBS, for buying a small business.

Royce Yudkoff: We've never been asked that question before.

Rick Ruback: We've never been asked that question, but we know the answer, although it was fifteen years ago. Do you want me to just take a pass at that, Royce, and you can correct?

Royce Yudkoff: Yeah, you go ahead.

Rick Ruback: Royce and I got to know each other when I was teaching a course at HBS called Private Equity Finance, and Royce was working at the very successful private equity firm he was leading and had founded, Abry. His firm had done something really interesting and unusual. It had gone out to raise money, was substantially oversubscribed, and said, "We're not going to take all the money that people wanted to give us. We're going to stick to what we think our opportunities are and we're going to take a lower amount of money.", which was pretty unusual because, at that time, most private equity firms were really getting to be less about the 20% carry and more about the 2% fee, so they wanted to be bigger. So, I and a colleague wrote a case, and I got a chance to meet Royce. We talked, we had lunch a couple of times, and I think we got along pretty well. And then I was on leave thinking about what I would do next in my HBS career, and Royce reached out and said that he was ready to step aside from his day-to-day activities at Abry as the Managing Partner and was interested in spending more time at HBS, and could we do something together? And I thought that would be just fantastic, but that we should do something new. We thought something where we could use some of the learning from our independent, earlier previous professional careers and bring them to a new space. So, we looked around – venture capital had been done, and this and that had been done, but what seemed to be missing was small business. And so, we started a course on small business. When we started, I think it's fair to say that neither one of us knew anything about search. Is that right, Royce?

Royce Yudkoff: That's exactly right.

Rick Ruback: And so we started writing cases, talking to people, and we heard about search and, over time, our course has stayed true to the question about “How do you run a small business well?” But increasingly we featured cases with our former students who were searchers, and so there's a search piece to our courses. And then the book evolved by our students saying, "Well, could we do an independent study teaching us how to actually do this?" And then we have our spring course called Entrepreneurship Through Acquisition. We have a fall course, which is that small business case course. The spring course now has a hundred or so people in it. That's the origin story that I recall. What do you think, Royce? What did I miss?

Royce Yudkoff: Well, one of two things is true. Either that's an exact, accurate history or we've been talking to each other as partners for so long, it's just kind of, you know, the myth has sort of been shared. But Tom, in answer to your question, that sounded right to me, for sure.

Rick Ruback: It's been a lot of fun because Royce and I have very different work styles. One of the things I learned very early on, when you say to Royce, "We should draft this case." And then, you know, in the inbox at six or five in the morning when I get up, there's a draft of the case, because that's just Royce. And I'm a brooder, so he'll be, "Did you get the draft?" "Yes, I did." "What'd you think of it?" "I thought it was great." "Okay. Can we just start publishing it and teaching it?" "No, I think we need to edit it." "When are you going to get that done?" And that has been the story of fifteen years.

Tom Allsworth: That's a great partnership.

Rick Ruback: It is great because I tend to procrastinate a lot more than Royce does, and so he brings that.

Royce Yudkoff: You bring a lot of thoughtfulness to our process, Rick.

Rick Ruback: And so it all works out.

Royce Yudkoff: Works out, yeah.

Rick Ruback: I think we're a great combination and, as I said, I've enjoyed every minute of it.

Royce Yudkoff: Me too.

Tom Allsworth: Can I give one piece of fan mail for your book?

Rick Ruback: Yeah, go ahead.

Royce Yudkoff: Twist our arms, Tom. Go ahead.

Tom Allsworth: You have a case in there and you talk about it a little bit, but I actually bought the case study and it's the case study for Castronix, and it was a partnered search and they bought a company in Kimball, Nebraska. Maybe this is just me, but I think that when you look at that case, look at how committed those two were at making it work and how hard it was to do that, I think if that's not your level of commitment, you really need to take a step back and think, "Is this the right fit for me?" And that's what I really loved about your book, is like when you really read your book and look at what you put into those pages, if you do a little extra digging, you can see that that's the kind of information that's there. You're not just feeding it, but you have to look, you have to find it in the pages, but it's there. It was a great book and thank you for putting it out. It really helped me.

Royce Yudkoff: Well, Tom, thank you for spending the time with Rick and me here. This is really the next phase in our journey, where people like you are showing this path to people all over the country, and in other countries, about this choice that people have to work in someone else's company or to carve out and buy an existing firm for themselves, and run it. And different people respond differently to that, but they ought to make the choice.

Rick Ruback: And what's so cool is Tom didn't have a background in finance.

Royce Yudkoff: Right.

Rick Ruback: Tom didn't have an MBA and has been terrifically successful.

Royce Yudkoff: That's because there are a lot of different skills that are called on in buying and running a business. And you just have to have some of them, because no one has all of them.

Rick Ruback: Yeah, that's exactly right. Thank you so much, Tom.

Royce Yudkoff: Tom, thank you.

Tom Allsworth: Thank you, gentlemen. ----------

Royce Yudkoff: Rick, one of the things I think both of us find so inspiring about Tom's story is his background because it shows that there is no narrow set of education or skills that you have to have to do ETA. What do you think about this?

Rick Ruback: Well, it is so interesting because so many people tell us, “Well, I can't do ETA even though I'd really like to because I don't have a background in deal making. I didn't study negotiations in college. I didn't work in private equity. I haven't even worked in financial services. I didn't take an accounting course.” And I don't know if Tom took an accounting course or not, but his background was he went to the Merchant Marine Academy and the Marine Corps.

Royce Yudkoff: That's right. And I think this should really speak to a lot of people who are working in other people's companies and asking themselves, “Could I ever be an entrepreneur?” Because what Tom's example tells us is that there are a lot of different skills that are required to be a CEO of a smaller firm, and you do not need to have all of them. You just need to have enough of them that you can run the business. And that's helped by picking the business that you buy to be one where enough of your skills are applicable that you can run it.

Rick Ruback: Right. Now, Tom got some help on the deal making side, I think, from his investor group. And that's terrific and typical, but I don't think he even needed that. I think he probably would have figured out most of that as he went along.

Royce Yudkoff: I agree because the truth is, you know, as you get closer on a deal, you'll have a lawyer, and if you've picked right, they've done a lot of deals; and you'll have an accountant examine the company's books, and if you've picked right, you've picked a firm that has assisted in a lot of examinations of small companies; and you'll have a lender who'll be asking intelligent questions; and you'll probably have friends and relationships you can ask for advice and you can make this work.

Rick Ruback: Right. Lenders these days often have templates and they ask you to fill in the templates before they'll consider the loan. And so some of the modeling that we teach our students, they learn on the job as they're applying for a loan. So, I think if you know enough to say, “I want to buy this business. It's a good business. It has the features that I want – recurring revenue, enduring profitability”, the kinds of things we talk about in our book. And you characterize it and say, “Yeah, it works.” And then you go through the process and you know, “Okay, I want to have some equity and some debt and I know I'm going to start with debt first and reach out to some people who might be able to help me with the equity.” I think as you reach out to the debt, you're going to learn a lot about the modeling and figuring out if the deal works.

Royce Yudkoff: Exactly. You know, this reminds me of why you and I, when we teach, bring so many searchers into our class as guests, because part of what we're trying to do is get the students to say, “Could I be that person and do what they did? Do I want to be that person?” And that's a little bit of what listeners should be doing with Tom. It's very inspiring to see Tom transition from being a Marine to buying his own business in a field which he hadn't previously worked in and doing fine.

Rick Ruback: Yeah, that's interesting too. His clients are people with intellectual disabilities. And yet, as far as I can tell, he doesn't have any personal connection. I imagined that there would be some deep personal connection or that this would have been a mission driven search, but it was not.

Royce Yudkoff: Right, he finds it deeply satisfying to do something that helps other people, but it wasn't at the root of his search.

Rick Ruback: It's so interesting because every year we have this debate with our students. In a couple of our cases, we talk about whether you really need to love your business. And, you know, our students are split on that but one of the things this podcast really demonstrates is that when you find a business that fits, you learn to love it. And, and in this case, I think it's really easy to love. That is to say, it's easy to see that you're making a substantial difference in your clients' lives, in their families' lives, in a very, very visible way.

Royce Yudkoff: Rick, I think you'll agree, that was an interesting conversation we had with Tom Allsworth. In particular, it's always fascinating to hear the journey of someone who doesn't come out of a conventional MBA background, but finds their way to ETA, identifies some high-opportunity companies, and is able to buy them and run them successfully. So, I think it's not only an inspiring story, but it's instructive. In next week's episode, we have a very different type of guest. It's Bruce Marks, who is a long-time SBA lender and very experienced lender to small companies. He's going to be speaking with us about the role of SBA financing. What are its attributes? When is it best used? How should people think about whether they ought to obtain an SBA loan and how to best do that? So, I think it's going to be a very practical conversation for many people who are considering search.

Rick Ruback: I'm looking forward to it.

Royce Yudkoff: Rick, we end each season with a very special episode where we ask our listeners to e-mail us and offer questions they have after listening to our episodes or after their experiences in search. We pull out the questions and you and I discuss them.

Rick Ruback: You know how much fun that can be.

Royce Yudkoff: It's a favorite of ours and a favorite of a lot of our listeners. So, listeners, shoot us an e-mail at rickandroyce at hbs dot edu and we'll put them in the bunch we go through and answer them in our final episode of Season Three. We're looking forward to it. 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 dot edu.

Royce Yudkoff: We'll be back next week with another episode of Think Big, Buy Small.