We closed our first deal as an independent sponsor a few weeks ago. It’s a nice service business with good margins in a niche corner of the market. We’re in at a fair price with reasonable incentives for everyone involved. If we execute, we’ll do well. You might think that I’d write a thread espousing all the tips and tricks that we used to execute this acquisition. That’s not this thread. We’ve been at this for 3.5 years and just closed our first deal. Here are all the things I wish I’d known as a non-PE guy co-founding an IS firm. I have a small audience on X, but hopefully this is valuable to a handful of folks. If not, writing this was a good exercise for me to reflect through. Sorry in advance. No sunshine and rainbows here.

Sounds like a guy already living paycheck to paycheck

I didn't have kids until my mid-30s. Cannot imagine junior IB with young kids.

“Hear me out, we base it on the amount of real cash the business generates in a given year. I saw this video on YT from a guy named Damodarionian or something like that. He literally uses an NPV calc, bro. Insane.”

Imagine being shackled by a $20mm liquidity event. Wild.

(13/13) I should say thank you to two guys, and they might be a little surprised by this. @paulswaney3 for being a bit of a sounding board from time to time and for just pumping value into the transaction world of X. @PadraicMcC for offering assistance to me (a completely anonymous stranger) while we were knee-deep on a deal last summer. I won’t say exactly how he offered to help, because I don’t want the world blowing up his DMs. But he was exceptionally kind. Both guys deserve your follow.

(4/13) Your network isn’t strong enough. Let me assure you that you don’t have enough of the right relationships. You will be appalled at how much of your current network won’t give you the time of day once they realize that you’re no longer working for [BIG FANCY FIRM]. I was stunned. The reasons are numerous. You’re suddenly perceived as risky versus the established names. Intermediaries are (rightly) skeptical of your ability to fund an acquisition. Family offices look for a track record under your current flag, but you haven’t completed a deal yet. To be successful in this endeavor, you need strong relationships that will send you deal flow and a huge rolodex of capital sources. I couldn’t believe how many equity providers, folks that I knew well, were “bandwidth constrained” and “fully allocated” when I brought them deals. Your list of 50 equity providers is really a list of 10. And of those, 8 will auto-decline for size, fit, price, etc. Plan accordingly.

W. Bryan Hubbard is an absolute master of pacing his speaking.

(5/13) You’re probably too emotional for this. Everything you look at must be Schrodinger’s deal – you must hold extreme optimism in your ability to close while maintaining a sober realization that any deal probably won’t close. When you haven’t had paycheck in two years, things start to become personal. You become terrified of upsetting the seller. The intermediary holds way too much leverage against you. You’re always negotiating from a place of weakness. You end up bidding too high. You look the other way when EBITDA grinds down during diligence. You don’t force the seller to be reasonably commercial in the LOI. “So, I just won’t have the hottest deal in the market,” you might say. You also won’t have any investors. It takes a cold SOB to be years into the process and remain completely willing to walk away from the most attractive deal in your pipeline. But that’s what it takes.

(3/13) BLUF - If you aren’t from a PE background, I would not recommend going the IS route. This a brutal path. We’ve been at this for 3.5 years and just got a deal done. That means no income for 3.5 years while you’re funding the initiative. That means everything is out of pocket. Travel expenses are table stakes for this business, and they add up. Meanwhile you watch your personal liquidity trickle out every month. How long can you fund your current lifestyle with no income? How much of a lifestyle cut can you realistically implement to extend your runway? How tight are you willing to get? Do you have a spouse? Kids? Can you look them in the eyes when your 3rddeal blows up and tell them that this will all be worth it? This thread is a sober take on the independent sponsor route. This is just not the right journey for most people. I’m living up to my X handle. But you’re committed. Okay.

(10/13) You might suck at storytelling Debt guys are relatively formulaic. Their world is clearly defined by a 3D underwriting and returns box. Not so with equity guys. Equity guys want to underwrite the narrative, the people, the economy, the themes, the competitive landscape, etc. You can’t just send them a deck and hope for a check. A fundraising independent sponsor must be first and foremost a storyteller. I’ll be honest, we struggled here. Storytelling is much more than the bullets on a slide and the talking points during a pitch. Storytelling involves your projection model, your structure, your leverage, and your valuation. A new independent sponsor doesn’t have a track record to point to. You can’t just say, “trust me, bro” to a family office. The story must be crisp and clear. The equity guys need to be able to understand the company and the structure in about 30 seconds. Anything more and you’re too arcane for an emerging independent sponsor. If you get this wrong, you’re going to burn up your equity rolodex while you refine your pitch. You might finally get the message right, but you’ve run out of relationships. Bummer.

(6/13) You’re probably too friendly. Similar to the above, it’s fine to be pleasant and commercial. It’s good to have folks across the table who want to work with you. But let me assure you, the Seller is not your f*cking friend. His broker is not your f*cking pal. Money talks. EVERYTHING else is secondary. When the bids start flying, it doesn’t matter that you were also rooting for Notre Dame in the CFP Champ Game. It doesn’t matter that the Seller laughed at your stories at dinner. This is about dollars and cents. Sometimes the venn diagram of what Seller is willing to accept and what you can fundraise against doesn’t have any overlap. Punch out and move on. Don’t get emotional…see above. Oh, and your lead equity investor? The guy that was super excited to work with you? Once you sign him up to complete his diligence, you’re now in a zero-sum game with him. You think he’s not going to turn the wrenches on you? Think again. Most equity investors will not or cannot underwrite process improvements or value-add. Not for a first-time sponsor. They’re trying to make money on the buy. Your economics are fair game.

(11/13) You don’t have the chops to get cute You can lose years chasing the wrong deals. Literally…years. Once again, you don’t have a track record. Don’t bring an asset intensive deal to the market. The debt guys will love it, and the equity guys will hate it. Don’t bring a turnaround deal to the market. Turnarounds require the equity guys to take on execution risk, and you can’t clear their hurdles as a new sponsor. Unless you have 20 years doing turnarounds, don’t bring one to the market. Don’t bring the next best thing to the market. You aren’t going to raise IS dollars from VC shops. If it hasn’t been EBITDA positive for a while, don’t touch it. Don’t bring something full of sketchy EBITDA adjustments. Don’t bring anything without a management team in place or identified. Nuts and bolts. Ham and eggs. Vanilla. That’s how your first deal should feel.

(12/13) There’s plenty more I could add here. And there are plenty of former IS guys on X that could pile on. We made mistakes that cost us time and money. At times we didn’t know what we didn’t know, and that cost us time and money, too. If you’re committed to going this route, you need to have a realistic view of your likelihood of success. While the IS world seems to be booming right now, most enterprising independent sponsors fail. Stay out of debt, get your lifestyle under control, and do what you can to extend your runway. Plan for at least 2 years of burn before you find something. We were longer than that.

As the independent sponsor ecosystem continues to mature, I’m noticing an increasing number of institutional capital providers are choosing to dip their toes in through a preferred structure. This can be good, but in any case, I would strongly advise any aspiring IS to get familiar with the typical mechanics of preferred equity. At a minimum, you need to understand: - Priority in the capital stack - PIK vs cash pay interest - Redemption Preference (and its implications for more junior equity) - Participating vs non-participating - Put rights - Detachable warrants Preferred equity does some interesting things to incentive alignment. While it can add a bit of leverage to the return profile of common equity, too much preferred equity with a big redemption pref will make common equity behave like a derivative. That’s not necessarily something you want. Here’s a simple litmus test: on a pro forma basis, mark your common to market on the day after closing. If the common marks at $0, you aren’t going to close. Some Institutional firms are targeting this IS space by proposing these structures. Keep your eyes open. Additionally, preferred equity sometimes comes with springing governance rights. When times get tough, the preferred investor can step in and control the business. As the sponsor, can you get control back as you right the ship? (Spoiler: probably not) I would suggest you get familiar with these mechanics now so you don’t get caught flat-footed during a live transaction. Preferred equity has mechanics with second-order implications that aren’t obvious.

(8/13) You might accidentally grab the tiger by the tail So, you closed a deal. Finally. Congrats. Now you’re making a good living and moving toward hitting a homerun at exit. You sure? Let’s take an example. You close on a business with $5mm in EBITDA for a $25mm purchase price. You might get a deal fee! Maybe 2%! That’s $500k! But your investors are going to make you roll every red cent of that fee into the deal as your “contribution”. As far as your family is concerned, your deal fee is zero. But you’ll get paid a monitoring fee to help grow the business! Yep. You will. Probably $250k annually on a $5mm EBITDA business. Have a partner? Split it. Then you have to fund your sourcing expenses for your next deal. Because you’re still building your IS firm, right? You’re not just a searcher, right? What’s your take home when it’s all said and done? Does that stop your liquidity bleed, or are you half pregnant and in really deep sh!t now?

“I played 0 games of golf” 🤣

Yeah, his man of the people social presence only works if his junior bankers aren't dying.

Bonus points for peach or pastel yellow fill?

(7/13) You might be a patsy and there’s not much you can do about it. I figure we never had a shot on about half of the investment banking processes that we’ve participated in so far. We were a check bid and nothing more. The banker used us as a highly motivated buyer to keep a funded GP or a strategic buyer honest. This was especially true for narrow processes. We got silver on processes several times. We’d get a call from the broker just after submitting an LOI: “Oh gee, this other fund revised their bid up at the last minute and can close in 30 days. We really appreciate you guys flying out and taking the time on this.” You just dropped $5k in travel and a whole lot of hours on initial diligence and bid prep. There is no consolation prize. Second place is an unacceptable outcome for an independent sponsor. You don’t have the time or the money for silver. If you’re going to lose, lose at the IOI. But you’re an easy mark. The brokers will let it slip to the other (less risky) buyers that the favored bidder is an IS firm that Seller really likes. So, they wallet whip you and promise to close next Tuesday. There’s nothing you can do about it after the fact. Enjoy the process.

(2/13) First, a lot of senior PE guys will read this thread and nod their heads. They’ve seen this movie. But I’m not from a PE background – I’ve mostly been a debt guy. I’ve worked on many transactions, but never in a buy-side seat. Being a debt guy has its benefits: it’s easy to raise debt when you’re from that world and I have a few years of experience in workout, which will almost certainly (unfortunately) come in handy. But the pure buy-side transaction world is different. My partner is an ops guy – he’s lethal in a management meeting and will drive execution post-close, but he doesn’t come from the buy-side world either.

I’m confused and not used to this transparency. Are you sure you aren’t launching a mastermind or selling a course on investing in the S&P500?

And KiTT is up 27.5% AH since this was posted

This guy puts out great content and his email newsletter is solid too. Must follow.

(9/13) You’re not going to be able to magically get consulting clients You’ll often hear pioneering independent sponsors address the personal liquidity/income problem by saying that they will simply pick up a consulting client or two while they’re hunting for their first deal. That will stymie the cash burn and lengthen the runway. Nice idea. Have you ever prospected, engaged with, pitched, onboarded, and executed in a consulting capacity before? Be wary of handwaving your problems away. If you haven’t been a consultant historically, you need to find those clients BEFORE you quit your 9-5. You’ll find that they are elusive after the fact. Why? Plenty of reasons. But, primarily, noise. Are you an independent sponsor or a consultant? Or both? How does your LinkedIn read? Companies will be hesitant to engage someone to consult if they really don’t want to be a consultant. No one is interested in your side gig. It’s not impossible, but it’s HARD and it distracts from the primary mission.

I feel this

Associate discovers the rat trap. Get to a small shop or get entrepreneurial.

Complete fail. Timed out trying to analyze the file.

This is correct. We had an elongated path in part because we started too large. If you’ve worked on bigger transactions in the past, it won’t translate under an IS flag. I’ll note, though, that we encountered funded GPs basically everywhere.

When I was an analyst, I had an MD come in to the office about 3 hours after his second son was born. He thought it was a flex. He was really just showing how insecure he was. Even the junior guys were shaking their heads.

Sure, Jan.

The future of SMB sellside is 2 years of consulting and then a process. Very few SMB brokers can do both.

Kids will teach you how valuable your time is. I have two very young kids and I find myself thinking constantly about time and wishing I had more of it. More of it with them but also more of it for work stuff — wishing for a 30hr day. My kids are an absolute blessing and enrich my life. But it’s so obvious now that I used to waste tons of time pre-kids. It’s a paradox though, you don’t realize it until you and your wife are in man coverage with a toddler and a newborn. Then it’s obvious. Sunday night reflections. Good luck this week to all.

$1mm EBITDA seller is more likely to hire inexperienced counsel and have poor or no advisors. That can get VERY expensive.

Pics or it didn’t happen

Going to try it with a heavy and poorly formatted federal pdf tomorrow. One that absolutely broke ChatGPT.

Damn good thread. Ferrari 250 GTO

Fundamentally, you either have a unique skillset (unlikely in that setting) or you bring in clients. That's what makes you hard to replace. Everything else is fluff to fill out an annual review. A lot of folks conflate the things that make you valuable to your manager with the things that make you valuable to your firm. Once you hit 2-3 years of experience, the overlap drops. True in banking as well. Skeletor knows.

We might be seeing a top. I think we'll see a runup in busted deals here. Tariffs plus struggling fundraisers will blow up a lot of deals under LOI at high valuations.

I minored in MechE. Partial differential equations and advanced thermodynamics make just about everything else seem straightforward. Engineers run a gauntlet to get their degrees.

The leverage read tells you value because you have certain D/Cap requirements? Many firms operate at a rough 50-50 benchmark, just curious if yours does as well.

We have a platform and are working on our second now. There is no scenario where any course I could create would be more accretive to me than more acquisition work. And on paper my economics should be worse than having the SBA as a partner. The math don’t math.

Would highly recommend that anyone in PE/IS take an hour and give this a listen. @BigJohn043 and @paulswaney3 have a valuable discussion. piped.video/watch?v=m376sUrs…

Experience and battle scars are a huge edge.

There are a lot of IS groups now. It's difficult to separate the wheat from the chaff. The industry has changed dramatically since we kicked off a few years ago. But I can assure you that when the cards are on the table, capital remains precious.

I don’t think you can suggest that longterm mean returns of SPY will amount to anything greater than 8%—and that’s probably optimistic. The next decade will see a further press into direct investment until forward P/E’s of public equities come down to earth.

Not sure how you square "great brand" and "40 years" with that EBITDA profile. I'm sure they have a nice reputation, but it's not accretive to multiple at that size. Size and new construction put my multiple in the 4's. Hard pass in the 7's.

If .1x changes your deal outlook, you have false resolution in your analysis.

This is almost certainly public multiple expansion. Would be very interested to see a replot of this with stock vs cash acquisition volume highlighted in someway.

50 swings of a 35lb kettlebell would absolutely trash 95% of people. 50 swings a day for 3 months would change a lot of people.

This is like measuring the quality of a manufacturing business by its revenue.

Completely correct. Getting an MBA to learn a hard skill is a huge waste.

Strong agree.

I invite borderline strangers to my house to use my pool to attempt to amortize the cost over more uses

“Akchuallee, if I could just double click on thaahht for a minute. Can you ahhhd some color to TTM marjahns?”

Just flew back from Denver last night. 4/10 town now. Shame.

The only people that care about that stuff are other transaction bros.

I'm a big fan of MFN mechanisms on all US drugs. Don't care what you charge here, but you can't charge less anywhere else.

2022 saw huge damage with so many boutique IB's moving downmarket without adjusting to downmarket valuation expectations. Then the music stopped and no one transacted. So you have all of these sellers who were told their businesses were worth X.X times but no comps to justify.

Very welcome. We’re old world guys. Industrials, manufacturing, infrastructure services, and distribution. We focused there because we’ve worked with those types of businesses before. Regarding size, if I were to do it over again, I’d look to acquire two businesses with around $3mm in EBITDA each by the end of my third year. The absolutely correct answer to the size question is “whatever you can fundraise for quickly”. Time will kill your deal.

94 underwater earnouts

12% per month sounds great

Can we all just calm down with the "BREAKING:" stuff? You're just linking local news websites.

It would be catastrophically selfish to have wealth and never work again. Especially if you at a highly productive age. If you don’t have the skills to deploy the wealth yourself then you should be working hard for some cause that betters the world.

Serious main character syndrome coming from mom and dad. Skip the trip and prioritize your kid.

It's called ARR and it's classy.

In the market for $20-$30mm of private debt. We’ve received 4 term sheets from some fairly prominent groups. The term sheets are almost xerox copies of one another. Remarkable. The major delta is how much coinvest they want.

Interesting thread. No mention of @ORIGINBJJ and @originpete, which is a bit odd.

Small business brokers often don't understand it either. They can't coach their client.

Friendly reminder that fundraising for a deal is really really hard. It’s harder still if it’s your first. If you’re trying to do deals of a size where you need institutional capital (say $20mm+ EV), the world is completely different from the SBA + F&F playbook.

What

Cut your rev growth forecast. Dependent variables.

World class shopping list from my wife today. Love that woman.

This app is outrageously valuable if you don’t get caught in wall to wall political screeching.

Kroger does $150b of revenue and saw operating profit contract last year. Walmart does more than $600b of revenue. You’d thinking corporations that were “price gouging” would generate better margins.

This hits so hard.

I have so many questions about the pirate flag in the bio.

Depends on the business. Probably a bad move. Just have a truck and drive that to work.

And you must not pay more than 4x

Agree that the notion that this whole thing was “sneaky” is nonsense. Probably on the first page of the term sheet.

I do feel like a lot of really capable people think this a is a sexy path. It’s REALLY isn’t.

They aren't hiding it

S&P is trading at ~22x 2025E earnings, which bake in something like 14% growth YoY. With poor market breadth, SPY is badly exposed.

“The best way to avoid interventionism is to ration access to data…” - Taleb A lot of PE firms know this.

He’s either incredibly disingenuous or has a appalling lack of grasp of microeconomics.

If they've run it into the ground, always buy back your business from PE. "Is this the second bite at the apple I was promised?" If PE wants to make you take a fat earnout, make them sign a ROFR. Joking... sort of...

One of the big changes in the past few years is the jump in value expectations from small business owners. Historically untouched by PE, combo of broad rollup strategies and searcher growth has caused huge growth in valuations.

A Calendly link signals to the recipient, “my time is more valuable than yours.” The fact that folks in sales do it is nuts.

🤦‍♂️🤦‍♂️🤦‍♂️

50/50 banked vs proprietary is remarkable.

How long before the searcher influx starts to shift to greenfield/de novo startups? More and more talented people (and some not so talented) are competing over a static pie.

Accuracy versus precision. Precision provides comfort when accuracy is unavailable.

I’m sure there was a reasonably cogent argument for why it was a great deal for you. Reasonable until you asked a question

Sector discussion. @PadraicMcC linked the full deck in the comments.

Appears to be default rate per vintage per year

All true. We see very little appetite in the equity capital markets for execution risk.

Hard to overstate the value of this app and the SMB community within it.

Not trying to be flippant here, but private investing is basically kissing frogs 365 days a year.

Partner was copied 100%

You'd think the guy with 76 suits would be in the laundry business.