Tim Ludwig
@tsludwig
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Owner of and investor in exceptional small businesses. Tweet about PE, small business (SMB), search funds, management.
San Diego, CA
Joined March 2009
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A few guiding principles for a new CEO’s 1st year at an acquired company:
1. Do no harm. You (or the investors) bought a good business. Don’t mess it up.
2. Look for low-hanging fruit, especially things that will make a positive impact on team morale. Can be as simple as...
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A CEO's role changes as a company grows. Directionally, like this:
* Startup: driver, fixer
* Emerging: team builder, coach, process architect
* Scaling: allocator, leadership developer, culture protector
* Established: strategist, chief communicator, accountability creator
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In a NYT article today about the 0.1% of highest earners in the US (>$1.6mm/yr), three conclusions were drawn:
1) Rich people own equity
2) They own equity in boring businesses
3) Those SMBs often have a moat that allows them to avoid competing solely on price
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I spent about 6 years working in real estate before becoming an investor/owner of small companies. I've been asked which I liked more and, for me, the answer is small company ownership, but not because it is more lucrative or a better path to wealth.
Let's compare the two...
/1
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I just learned about Spielberg's deal with Universal Parks:
"[for consulting], he receives 2% of all park ticket revenue and a portion of park concession receipts...in perpetuity...up to $30-50M/yr; [he can also trigger an] exit deal and collect a lump sum pmt of up to $535M"
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Operating most SMBs isn't glamorous. 97% of the time, it's about being consistent and fighting inertia by making small improvements to a never-ending list of issues.
Those that do this well survive; the rest die or stagnate. The very best earn the chance to become larger firms.
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1/ One of the ways SMB operators increase their equity value and reduce risk is by professionalizing operations. Most sub-$1mm (or even <$2mm) EBITDA SMBs lack core elements of a scalable, less risky company. Here are some examples...
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When buying a business, you want actual cash flows to tie to the reported financials of the company. If the actual flows of cash differ materially from the reported numbers, you'll want to dig in.
One exercise to evaluate this uses a tool called a 'cash proof template'
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Buying a business, especially a good one, is hard. But not impossible. And not without risks.
Reducing those risks takes a good process, emotional control, discipline, savvy advisors, and relentless hard work. Though just about anyone can do it.
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I was curious to estimate how many SMB PE/CEO-types are active on Twitter, so I started to make a list. Thought others would like to see (and maybe add to) it. So, here goes:
1
@BrentBeshore
2
@LongvueMatt
3
@rudman_ben
4
@mgirdley
5
@awilkinson
6
@MatthewGHinson
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Most people who buy a business, and nearly all who buy more than 1 company, will need to raise capital.
There is a lot of advice available about how to effectively raise funds, how to set terms, etc., but the best capital raisers that I know do a few things really well:
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Hey, parents!
One skill I recommend you teach your high school and college age children who are preparing to enter the workforce: cold outbound outreach.
My daughter is a freshman in college and beginning to think about summer internships. Most of her classmates are waiting…
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My first PE investment resulted in a total loss. I'd invested almost 10% of my available capital. The education was costly, but has made me a lot of money in future deals by not repeating the same mistakes. What I learned:
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I spent a day in Dallas and, I have to say, I came back very bullish on the area.
Great healthcare
Great airports
Good cost of living
Business friendly
No income tax
Large base of entrepreneurial, savvy investors
Global connections
Friendly people
Great vibe and very dynamic
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Required for launching a new fund:
☑️ The right partner (
@JustinEBurris
)
☑️ Funding - Millions of $ from leading business families
☑️ Compelling strategy - Search fund-like model w/ no PG, full $ support, long-term holds
🔲 8-10 top operators who want to buy & grow a SMB
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Just finished Zell and Schwartzman’s books, both of whom built multi-B fortunes as investment managers. My takeaways:
1. Both have relentless work ethic
2. They obsess about risk and how to mitigate it
3. Great timing, vision,and outsized ambition with the courage to act on it
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As a buyer, you are unlikely to operate the business you buy as efficiently as the seller and will also likely identify areas that need improvement before you can safely pursue more robust growth.
This underappreciated aspect of acquiring smaller companies (<$3M EBITDA-ish) is a…
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Dangerous combo as an "investor":
- Smart
- Not very active / poor deal flow
- Investing outside circle of competence
- Early investment win
Breeds overconfidence and is really speculation (bad process, good outcome on the win)...likely leads to losing a lot of $ in future deals
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I thought I'd share this teaser I found on a popular business listing site a few weeks ago. The company is off-market (multiple offers before I got to it), but here's what caught my eye:
- Tier 3 city in mtn west w/ good demographic trends
- 30+ year history
1/
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🚨Call for Operators🚨
For much of 2021 I've been developing a new idea for entrepreneurship through acquisition (EtA) with a partner. We're not quite ready to pull back the curtains, but we're really close.
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This was the year I became active on Twitter. Rather than summarize my experience this year, which has been amazing, I want to highlight what brought me here in the first place, the brilliant content put out by others. Here are some great tweets from 2020...
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Similar to 2008-2010, the next couple of years could be a great time to buy a business. Many owners are fatigued and may be looking for an exit. Credit markets remain healthy and capital is abundant. Trailing financials will show which co's are resilient. Multiples *may* fall.
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This is really geeky, but I think this is among the most valuable content that
@BrentBeshore
and the
@adventur_es
team has produced and it should have more widespread attention.
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Following Charlie Munger's advice to always invert, here are 10 things not to do as a CEO:
- Run out of money
- Fail to learn / grow
- Lose your team / break the culture
- Not understand capital allocation
- Believe you are the sole reason for your company's success
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What’s an action you can take in 2021 to break thru a self-limiting belief & unlock more of your potential?
Me: Think bigger. I rationalize my decision to operate on a small scale instead of acknowledging that most of my reasons are really my own fears & some imposter syndrome.
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Years ago, I was excited by the idea of forming a holding co. I dug in pretty deep, but ended up pursuing deals on a stand-alone basis. I’ve had a few independent conversations lately with folks mentioning similar ideas, which made me revisit my plan. tldr: It's still good
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Data on activity required to complete one SMB acquisition (2014 Stanford GSB Search Fund Primer):
• Initial outreach: 3,404
• Response: 256
• Positive follow-up: 124
• In-person mgmt meetings: 25
• Pricing conversation and IOI: 16
• LOIs sent: 4
• LOIs signed: 2
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The best company culture I was ever part of was when I worked as a fishmonger during high school and then through college during vacations.
The fish market cut no corners - the best fish flown in daily, careful training of staff in product, hard skills (cutting, cleaning),...
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…fixing an annoying broken light above someone’s desk
3. Learn the business. Spend time with employees, customers, vendors, the seller, your board, etc
4. Develop a 1st cut of KPIs and a system to update them regularly
5. Understand how cash moves through the business and how...
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…to understand your financials
6. Identify gaps and weaknesses (people, tech, processes, etc.) and develop a plan to address them with your team.
Obviously, there are many other tasks that a CEO needs to focus on, but I like this list as a starting point. Feedback is welcomed.
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Just got told by a broker that I had to submit an offer before I could see company financials. To that point, I’d been shown 4 months of summary info from mid-2019. We then established I won’t be moving forward as another buyer had already followed the process and made an offer🤦🏼♂️
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In reflecting on my own entrepreneurial journey, I realized that I'm drawn to partnerships. I've had 7 of them (compared to 2 solo efforts). I've had success with each approach, but given a choice would usually choose to have a partner.
Here are some thoughts on partnerships:
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Many SMBs are run extremely efficiently by their owners.
Most owners also under-invest in growth.
Because new owners aren’t as efficient & want growth, it is very common for profits to drop initially, sometimes for 1-2 yrs.
Especially if you use debt to buy, plan accordingly.
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This email is awesome. From this, you can see what made Barbara Corcoran successful in an ultra-competitive field. Tremendous sales ability, confidence, smarts, and storytelling.
Saw this on Facebook.
It’s too good not to share here.
Barbara Corcoran being denied from Shark Tank Season 1.
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So, for most people, if wealth creation is the goal, RE is a better asset class in which to invest time, effort, and capital.
For me, however, I just really like business and seeing teams come together & thrive and having the constant challenge of staying competitive.
/end
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I began my public Twitter journey a bit less than 11 months ago. Today I give thanks for the many amazing, brilliant, and kind people this service has introduced me to this year. Good health & close human relationships are life’s greatest blessings. May you have both in abundance
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SMBs trade at lower multiples than larger ones because they are FRAGILE. Common issues include:
- customer / vendor concentration
- "key man" risk / little redundancy in roles
- harder to access capital markets
- less $ to invest in R&D, key hires, systems
- poor / bad data
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I'm helping to create an online community for the small business/search community.
To ensure quality, members will be required to apply and be approved, but the site will be free.
Before launching, we are forming a waitlist (see next tweet for link).
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A thread:
SMB Twitter seems to really like home services businesses (e.g., landscaping, plumbing, HVAC, etc). These can be great companies, especially when paired with strong operators, and they exist in large numbers and in every market, which is also attractive as a buyer.
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In a tweet today,
@Post_Market
said “strong communication lowers the cost of capital”.
I’m fascinated by the idea and think it is absolutely true for public companies. I’m wondering if this concept extends to private markets, too? I think it does, but curious if others do, too?
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1/ I’ve known this was true in the abstract for a while, but over the past few months, I’ve had a number of conversations with business owners who are tired of running their companies, want to stay involved, but also take chips off the table.
The common ask: help me hire a CEO!
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2 areas of an SMB's 'operating system' that I've been thinking about recently:
1) How to incorporate 'no code' solutions like Zapier, Notion, Airtable, etc into a company's workflows
2) How to assess what tasks can be moved offshore
Few SMBs I know are doing even 1 of these
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For those who are interested, latest Berkshire Hathaway letter is out:
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I read that only 15% of first-time managers receive any training.
What are the best resources you know for helping someone new to managing people get up to speed and build competency? Could be books, videos, courses, articles, specific coaches...whatever you think works!
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If you haven't read them, the Nomad Investment Partnership letters provide an education in investing, rational thinking, & amazing GP-LP alignment & communication. 218 pages of wisdom - among the very best publicly-available investment letter compilations out there.
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Fast forward six months. Sellers reach out w/ update. They never sold, fired the brokers, and still see me as preferred buyer, if and when I choose to re-engage.
Key lessons: There is no substitute for integrity. Maintaining discipline is really hard sometimes.
/fin
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@theSamParr
I’m not quite 50, but maintaining flexibility through yoga or regular stretching would be high on my list. I feel like most of the injuries I have had since about age 35 can be traced back to lack of mobility/flexibility.
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One lesson that runs counter to my thinking that I am still working to internalize:
Entry multiple matters less than buying a good business in a growing market if the intent is to own long-term.
Of course, the challenge is figuring out if a biz is really good before you buy. /1
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The first 100 days of an acquisition are so important. You're creating a lot of 1st impressions as the new owner/CEO and everything you do is under a microscope.
If not done thoughtfully, it can take years (forever) to dig out.
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We've been pretty quiet about what we've been doing at Majority Search since our launch.
But make no mistake - we've been busy!
And now we need help.
We're hiring an Associate to join our investment team to assist w/ deal sourcing, fund operations, and fundraising/IR.
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Hi, I'm a business buyer. You might know me from my hits "Show me the EBITDA adjustments", "You need to leave me some working capital", and my banger, "I prefer an asset deal"
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I’m going to borrow
@sweatystartup
’s thread idea, but try to crowdsource it and change it from RE to PE.
Here’s a starter list of terms (you add the definitions and other terms you’ve heard/used):
- ebitda
- multiple expansion
- unitranche
- turns
- sponsor
Comment and GO!
A THREAD that will allow you to fit right in around real estate Twitter.
With terms, definitions and the basics of the lingo you need to know:
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In searching for a business to buy, effort does not equal progress.
Progress is binary - you've bought a business or you haven't.
Tracking effort, however, in terms of emails sent, meetings, held, IOIs issued, etc is also critical bc the journey is long and success is a
#s
game
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A few “brands” that I consider to be of such high quality that I expect any purchase or time spent will be of value:
- bios by W. Isaacson
- books published by Knopf
- tv/films produced by Ron Howard/Brian Glazer
- outdoor gear by Patagonia
What/who are “can’t miss” for you?
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One bonus idea: the reporter estimated that >10% of people that own market research firms are in the 0.1% of top-earning Americans. Interesting!
Here's the article:
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Some of the biggest mistakes I see new searchers making:
Don’t set measurable, week activity targets - the best way to find a great company is to work hard and stay accountable to yourself. If I had to pick one metric it would be owner calls per week.
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Exploring Mexican wine country this weekend. This is 1.5 hours from San Diego.
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Related, corporate jobs have as much embedded career risk as entrepreneurship, and maybe more.
Boss doesn’t like you, company merges, you’re not good at politics, etc. Any, and more, can be career killers.
Founders answer to the markets/their customers
Which risk is greater?
Talking about investment firms, big law, consulting, etc the other day and a friend made the point that they’re designed to make you believe there’s no way to succeed outside that framework. If you take a step back and you see there are unlimited paths to success and happiness
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Business buyers: what are the best ways to create proprietary, differentiated deal flow?
Less common (& hard to build) ideas:
1) unique referral sources (best friend is a banker, etc.)
2) content marketing (
@BrentBeshore
)
3) reputation that leads to inbound deals (Buffett)
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The Great Mental Models series by
@ShaneAParrish
is outstanding and a great addition to any investor’s library. Book 2 just arrived yesterday...looking forward to diving in this week!
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sent back a very detailed, thoughtful, and transparent response with his views on pricing in the market, details on prior pricing mistakes, and a rebuttal to one of my concerns. Best SMB broker response I've gotten. Left me feeling 👍 and w/ a desire to transact w/ him in future
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I'm very excited to share this job opportunity.
We're looking to hire an ambitious, hard-working CEO for a small, high-growth medical billing company outside of LA. Great job, company, and board.
Pls help by sharing with anyone in your network!
PDF:
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Today is launch day for my podcast, Transitions!
I'm honored to have
@moseskagan
as my first guest and there's no one that I can think of whose story I'd be more excited to share than his.
Moses is incredibly thoughtful and well-spoken. Combining that with his humility,…
YOU'RE DOING WHAT?!...
That's the reaction I've gotten from some people after telling them that I'm planning to launch a podcast. And now I'm telling you.
I've always been drawn to learn about people's journeys in life. And, as I've gotten older, I've really come to appreciate…
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A brief thread on acquisition term debt:
I'm not an expert at this and many others might have more experience or just be a better negotiator than I am, but here are my high-level thoughts on securing a business loan.
1/
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My feed on this platform is largely centered around business and investing. As a result, one of the main themes I see is related to getting rich. Having money is nice and most people's lives would be objectively better with a higher net worth or income, so no judgment.…
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If you're in the business of acquiring companies (just 1 or a lot), I encourage you to follow RE sponsors here on Twitter.
Not only are they smart, but they also transact much more often than business buyers so they develop experience faster and share more regularly.
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I wanted to share the initial version of our CEO Resource Library.
Our aim was to collect and organize foundational resources relevant to the operation of a small business.
Most are books, but we also have podcasts, newsletter, and articles.
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My Twitter all-stars for 2020:
@brentbeshore
- Most impactful retweeter. Brent kindly shared some of my very 1st posts and encouraged people to follow me. Can’t overstate how much that moved the needle. And, he’s as nice and generous off Twitter as he is on it.
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YOU'RE DOING WHAT?!...
That's the reaction I've gotten from some people after telling them that I'm planning to launch a podcast. And now I'm telling you.
I've always been drawn to learn about people's journeys in life. And, as I've gotten older, I've really come to appreciate…
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I'm seeing early signs that the lower-wage labor crunch is abating. Higher quality applicants, fewer no-shows...
Someone else shared that a larger company they know had 500 open positions a month ago & filled them all by last week.
This is all in CA.
Reports from other areas?
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Are you interested in what people in the SMB community are experiencing in their businesses and the economy right now?
I interviewed over 40 people, collected and summarized their best takes, and wrote-up the results along with an analysis of the key themes.
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*Update*
Thanks for all of the responses. Here's a summary of the recommendations so far...
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Rewatched Good Will Hunting tonight. What a great film and, as always, Robin Williams was just so superb.
I’m also amazed that Damon and Affleck were able to write the script while in their early 20s, and especially Williams’ part. I’m 50 and couldn’t write something so…
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The Ford truck team is killing it with these designs. They know their buyer so well! F-150 Lightening is also going to be a home run, I think. And I’m not a truck person.
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PE still mostly operates in a shroud of secrecy. One area that is opaque is how they evaluate deals and make decisions. Here’s a short thread on one part of the process and the key questions that are often asked by these firms to help in deciding whether to allocate capital.
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My language for describing emotions is pretty limited most of the time and I believe that when I’m more clear, it helps me to process and can help others with whom I may be communicating.
Came across this helpful wheel diagram that is a great aid in sorting through my feelings.
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I like this idea, so I’m going to steal it ;)
Substitute SMB/micro-PE for FinTwit in the call to action below and introduce yourself with a reply to this post.
h/t
@valueterminal
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Years ago, Inc. magazine used to have a lot more content centered on smaller 'boring' companies. In recent years, there is a lot more coverage on tech and 'start ups'.
Who's doing great writing on traditional industries and SMBs? Newsletters, freelancers, blogs, magazines, etc?
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As one does 🙂, I spent my Saturday morning looking at SBA data to understand the distribution of SMBs around the US.
Seeing that data, I wanted to compare the overall SMB landscape w/ where traditional search funds have bought companies using 2020 data from Stanford. So I did.
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Many PE firms create 100-day plans to jumpstart value creation and align new owners and management.
Not every buyer needs to be as rigorous as a PE firm in making a plan, but it is a good exercise.
Here's an older report that covers many relevant topics:
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Traditional SMBs that figure out how to leverage no code solutions to drive quality and efficiency in their operations are going to have a distinct advantage over those that don’t...at least until everyone catches on 😀
I’ve been digging in with
@airtable
/ no-code consultants over the past few weeks. Most work with SMBs. It was eye-opening.
My takeaway:
I spend a lot of time talking to startups about the power of these tools...I think I’m completely missing the plot.
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Two close friends wrote this article about the changing nature of the CEO job as a company grows.
It contains too many important ideas to try to summarize, but I highly, highly recommend taking the time to read the piece in its entirety.
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In my family, my dad began writing me a letter every Christmas starting when I was 5. I still get them. They are a priceless collection of remembrances from my life. These gifts from parents that pay it forward and demonstrate love, in whatever form, are among life’s best gifts.
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If you own or run a business and you are an optimist, the end of a day creates a sense of excitement about what tomorrow will bring.
Will I book the order? Sign a new client? Have a breakthrough with an employee?
Even in sucky, stressful times like now, there is always hope.
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I was thinking about the # of books someone reads during their adult life. Assume they read from age 20-80 and 25-50 books/yr.
That’s a range of 1,500-3,000.
There are ~300k Eng. lang books published/yr, not incl. self published, and about 130MM books in print.
Choose wisely!
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But you can also do your own version, either before you spend money on a QoE, or instead of a formal 3rd party review if you are really controlling transaction costs and feel comfortable with the work.
This article shows other cash tests:
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One of my main goals in business ownership is to build an anti-fragile portfolio of companies with my partners.
Having a permanent investment time horizon means that I need to make sure the businesses are around for the long-term to accomplish my objectives.
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🚨 For the past two years I've been pretty quiet about things going on with Majority Search, the investment firm I co-founded with
@justineburris
. It would be a mistake to think that the lack of updates indicates a lack of activity.
Today I wanted to share some big news and…
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As an investor, cash flow is my love language.
(Got some good news from a company today)
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Assuming you have the 💵:
It is easy to buy a company.
It is hard to buy a great company.
It is exceptionally, burdensomely hard to buy a great company at a fair price.
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I'm going to be in Portland, OR tomorrow night...looking for three people to join me for dinner (my treat) somewhere near downtown or the convention center.
If interested, send me a DM and I'll respond if there's still an open spot.
1st time doing this...let's see how it goes!
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Sometimes I like to entertain myself by reading blind teasers from brokers and then trying to find the company online. I’m 2 for 2 today.
Most common mistake: copy/pasting text from company website.
Practically, this helps me decide whether I want to sign the NDA and get CIM.
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1st time I raised capital, it took over 3 months and it was brutal (eternal thanks to those folks)
2nd time, it took about 3 weeks and required moderate effort, but I knew I’d be successful
3rd time, it took 3 hours. Trust, track record, & confidence made all the difference
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If you follow SMBTwit, you might think everyone knows about the opportunity to buy a business. But as this eloquent thread demonstrates, it is still early days and there are thousands and thousands of good companies that need a buyer. 2022 is a great time to start!
1/ The greatest wealth transfer in the world's history has begun.
An estimated $70 trillion.
It's not crypto, the stock market, or real estate.
We're still in inning one, but word is spreading FAST!
I'll show you how you can get your piece of the pie below.
A THREAD ⬇️
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The "L" in LBO. What amount of leverage is appropriate to use in an acquisition? Everyone has their own take on this. Here's mine:
- The more predictable and stable a company's cash flow = more confidence in using more leverage, unless...
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Hot off the presses...Bain's annual PE report.
One highlight: Average EBITDA multiple paid for US buyout transactions in 2020 - 11.4x (oh, and about 80% were financed with more than 7x EBITDA in debt). Shows either optimism or need to put $$$ to work.
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I’d love to see a Google for podcasts. The service would vacuum up and transcribe podcasts and make all of the content searchable. Like what
@patrick_oshag
has done with Colossus, but for all podcasts. Organize the world’s (podcast) information.
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What does it cost to fund a search for a business to buy?
To support full-time sourcing efforts for 24-30 months, a typical single funded searcher will budget about $500,000 to sustain their efforts. (2 searchers might require $750k)
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Ran across this today:
Be curious, not judgmental - Walt Whitman
and it reminded me of this:
I never allow myself to hold an opinion on anything that I don't know the other side's argument better than they do - Charlie Munger
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