Why We Buy Small Businesses With 100% Equity and Zero Debt

So, guys, this is a conversation I've been excited about. A lot of you know Mike Botkin already from Twitter, but to map out where the conversation is going, Mike and his partner Peter have a very interesting approach. It's somewhat different than the way a lot of us think about financing transactions. That's where we're going to go. Mike, why don't you give us a little background. Peter unfortunately couldn't make it this weekend, but share where you started.

I had no idea what search was. The term I learned was that I was a self-funded searcher. I bought a commercial landscaping business 18 months ago. It was doing under a million dollars of revenue, not SDE, not EBITDA, under a million dollars of revenue. It was very purposeful to buy super small, which I was a huge advocate of. Looking back, I don't know that I would be an advocate anymore. I needed to learn. It was a terrible decision. We got extremely lucky.

Previously, I was the COO of a real estate private equity firm with almost a billion dollars under management. Even at that position, I had no idea what I was walking into. I didn't know what happens with payroll. I didn't know what happens when a guy who makes 12 bucks asks you for a raise to 15 or 20 bucks an hour with no reason other than "why work hard if I don't get it."

To prove my thesis, I needed to learn how to run a business. I felt that by buying a smaller business and being the operator, I would have an opportunity to one, prove I knew what I was doing; two, get reps running a small business; and three, have better conversations with potential sellers in the future because I could relate to them in a way other buyers couldn't.

In the last 18 months, we've bought five, soon to be six commercial landscaping businesses, and there will be a seventh in the next 60 days. The first one I bought was under a million dollars of revenue. After the seventh, we'll be a top 50 landscaping company in the country.

Our friend John Wilson would tell you, if you're going to buy a business, go big. Early on, I was a huge advocate of buying small. Anything could have gone wrong and tanked it. A customer leaving, employees leaving. I didn't know what I was doing. I bought that business with a $175,000 investment check. Sam Rosati turned that investment down. His IRR would've been pretty good. It could have gone south. Buying a bigger business is definitely better. I got lucky is the real answer.

After the first one, we doubled the business in very few months and went out and raised committed capital. We structured it as committed capital versus a fund because these businesses are extremely hard on their own, and when you have a fund you are dictated by timelines, not by outputs and results. I wanted something dictated by results. I raised a $20 million committed capital vehicle within the first six months. There's no timeline on it. There's no mandate other than be a good steward of capital, find good deals, and make sure it's going well.

Our original investor rolled. He owned a company that's now IPO'd, and it's kind of funny money to him. Then one institutional investor took the entire $20 million cap. Oddly enough, we're almost out of the 20 million bucks, so we will be going out very shortly.

The reason we went all equity versus SBA, and this is the douchiest comment in the world, but simply because we can. I got lucky enough to have the opportunity to buy a small business, I had success with it, and I was able to make a compelling case to investors. Someone made a bet on me. If I wasn't lucky enough to get that opportunity, I would definitely be using the SBA. I'd be using it a lot differently than I think the general population uses it for. We have zero debt. Zero debt on the platforms. We use zero debt in acquisition. It is a zero-debt holding. It is all equity.

When you take institutional capital, the goal is not to return money as fast as you can. It is actually a burden when you return money. It goes against every line of thinking for them, because we are a small check for them. Even at 20 million bucks, it's out of a $2 billion-plus platform. If we return capital, it's going to cost them more money to find a new deal, deploy it, and see it through. So our mandate is to prove out the thesis and keep going. Returning capital for an IRR looks great, but the goal is not to have a good IRR by returning capital quickly.

Debt obviously amplifies returns. There's no timeline other than create massive optionality. We want multiple arbitrage opportunities where if we sold, we'd capture a huge return, or optionality where we can put debt on the business and run it forever. We're at the point now where we're starting to have discussions with Live Oak's conventional department and other institutional banks about putting debt on, but it would still be a reasonable amount, and we'll never use debt for an acquisition. It would essentially be a recap, a little post-close operational debt. We don't distribute anything. We've only been doing this for 18 months and we've never distributed a dollar. I haven't even taken a distribution yet. There's no need, there's no burden, there's no desire. Compounding works because you let it work.

We think we have a higher ROI on capital being used in the business than putting it in my pocket or our investors' pocket. Because we're using all cash at closing, we're able to get good terms on deals we otherwise wouldn't. The number one thing a seller is concerned about with a buyer is probability of close. They don't really care what you're going to do with the business. That's secondary. Can you close? Our very first conversation with sellers is, we're going to close if this is a good fit. That allows us to spend so much more time during diligence getting to know the seller and the business, not necessarily checking a box for the SBA. It releases a ton of energy. We tell sellers we're going to close if it's a good fit, and that allows us to spend much more time diligencing the person and the business than worrying about bank obligations.

Is this an approach your committed capital partner takes across all their portfolio companies? It's a $2 billion fund, so you can imagine what they own. Very name brand things you'd recognize. They use debt on a lot of them.

Do you believe debt makes a manager more prudent? I don't know, because we don't have debt, so I can't answer intelligently. Another reason we don't use debt, outside of not having to, is it gives us a massive advantage pre-close in closing a business and post-close. We want money to leave the business when we see fit. We don't want money going to pay Live Oak. As much as I love Live Oak, they are not your partner, they are your lender. That check is due, and they're going to say, give me my money. If the business drops day one, that's an issue. Post-close, every single one of our deals, stuff has gone materially wrong from what we thought, and I'd say we're pretty good at this. We closed a deal in December and I didn't sleep the month of January because things were going wrong left and right. To have stuff go wrong and also have to have cash leave the business simply because the SBA loan has to be paid, that's not a partner, that's a lender. In this game for us, we want partners, not lenders.

A couple of brief examples. We got approached a couple months ago by an SBA lender, not Live Oak, with a deal where an Ivy League guy, very smart, owned a business for a year and it was going south. They wanted us to buy the note. He fit every single box that a lot of the background everyone in this room has. He just couldn't operate a business. He didn't know how to handle people asking for raises, customers dropping, customers questioning him. He had no idea how to run a landscaping business. He subsequently filed bankruptcy.

On the reverse, the guy we're hopefully buying on Monday, Ivy League guy, family office, PE background, fits every checklist of a guy you'd want to invest in. He used SBA debt. His lender did not provide proper working capital, and he doubled his business in the last 18 months. He struggled because the cash wasn't coming in quickly enough to capture the growth. He had to personally buy trucks and trailers and mowers because the SBA is a senior note, and Chase Bank wanted to be senior. They're your lender, not your partner. So there are two examples of, I think the SBA is great, but there is a negative side that's not publicly discussed.

A lot of times we make the mistake of thinking of an SBA note as being a long-term piece of the capital structure. The SBA program was originally set up to help people who otherwise wouldn't be able to buy a business get in the game. If you need to buy a truck, it's time to get a commercial loan. I think people don't understand the realities of the SBA, and that probably led him to sell his business to us quicker than he otherwise would have.

If we weren't lucky enough to get the capital we did, I would be begging Lisa to approve a loan for me. Here's what I would say about the SBA. If I were doing the SBA today, knowing what I know now, I would not do 90% leverage. I think that's irresponsible for your first acquisition. I would do 60% or 55% or 70%, because of all the things that can go bad. You don't know what you're doing for your first acquisition. You don't know the business as much as you read BizBuySell. You don't know the people. You're putting 90% leverage and personally guaranteeing things you know nothing about. At least when you buy a house and you're super levered, it's a house, you've lived in a house. But you know nothing about running a business. On a personal level, I think it's irresponsible. Part of my thesis on the very first one was, if I can't convince someone of my idea, that I'm a good jockey to bet on and this is a good idea, then I shouldn't be doing it.

When Sam said, "Hey Mike, this just doesn't fit for me," it was a hard thing to cope with because I have the utmost respect for Sam. It was a very introspective look. Because I'm hardheaded, I went to the next guy.

The SBA is popular because it's the easiest and cheapest way to buy a business and live the American dream. You're putting 10% or less in. All you have to do, relatively speaking, is check a couple of boxes and convince someone to sell their business. Not having a seller invested with interest moving forward when it's your first acquisition at 90% leverage is asinine to me.

We've actually changed our approach. The first three we did, I wanted the seller to get out. I didn't click with them; I was buying from an older profile, guys hunting and fishing on the weekend. I told the first business I bought, on the third day, you can leave now. He said, well, we have this transition. I said, don't worry, I'll figure it out. We cut grass, we got this. We've now changed that. We require, on platform or material acquisitions, the seller to stay and roll a minimum of 15%, maximum 25%. The institutional knowledge, people skills, soft skills, hard skills, it's their brand. You want a jockey who's working for his own brand. So we now require those guys to stay involved in the business.

Do you require them to stay operationally? Depends. If it's a platform acquisition like the one we're doing in Georgia, he's staying involved. If we did a rollup underneath him, depending on the skill set, we'd either tell them to leave or join the team.

On working capital, the first business I bought, I knew nothing. I didn't even ask about working capital. I didn't model it. The second one I did, I was so much smarter. I followed Twitter, I had my checklist. I asked the seller, hey, what about working capital? He said, sounds like a you problem. We closed on a zero working capital number. Since then, we've gotten better. We're buying much bigger businesses and we're able to articulate the need for working capital simply as, you're going to take all the AR, you're going to take the AP, who's making payroll on Friday? Not me. The business is.

On the very first business, my investor put in $175K. I called him on Tuesday, I bought on Monday, and said, hey man, there's no money in the bank. He said, kind of a you problem. So what does that mean? Well, payroll's due Friday, and I don't have the cash to float this amount of payroll. I had to take a private loan from him for working capital. We didn't even discuss it. I used the broker form. I was the dumbest buyer you could ever imagine.

How am I splitting my time now? It's a massive struggle. The first three acquisitions, I was the operator, so I made every decision. Luckily our investor really lets me run how I see fit. Since then, as we've gotten bigger, this sixth acquisition is the first time we're buying outside of Florida. As of December, I went from operating the businesses to having a CEO in place in Florida. It's a massive struggle going from operating a business where everything is your call to managing someone else's decisions.

Our new CEO and I had to have very long heart-to-heart talks about my role. A business deserves one CEO, not two. I'm very analytical. I want things this way and this is why. The new CEO is very people-oriented, sales-oriented, gathers the room together and gives a huge speech. He and the COO didn't click. Well, that's because the COO was my COO and his skillset was built around me, not him. I've had to understand that it's okay that someone has a different idea than I do. Something I was told was, you don't always have to be right. Don't fight to prove yourself right. Fight to have a good output. That's really helped. People ask me, oh, how's a holdco? Go buy a lemonade stand first before you start talking about a holdco. We classified ourselves as a holdco prior, but we really weren't. We were a rollup, because I was the operator. We are now what I would say is a true two-or-more holding company, and it's completely different than a rollup.

Reporting cadence? I see guys on Twitter who say, Tuesday at 9 o'clock I talk to my guys. I'm not built that way. I'll go pick up Chick-fil-A for lunch and just call him. Hey man, what's going on? He'll call me at 10 PM to vent. We're buddies, friends to a degree, but you'd fire your friend if you needed to. There's no set true cadence. We're learning and building that.

Q: Are you fundraising for the long term, or do you have to return capital?

We don't have a mandate to return capital. We have a mandate to buy good businesses at good multiples and create multiple arbitrage. We'll capture the return at a point that makes sense for everyone. If you're raising capital that is more of a fund or a true investor putting in $200K wanting their money back, that would change my perspective.

Q: Post-close, what are you doing with integration? Synergies on equipment, routes, ops?

It's evolved. We do inject capital post-close. No matter what business you're buying, employees will find a way to ask for more money, whether we're the face of the business or it's the same guy being the face. We didn't model this before; we model employee raises now. We inject capital to cover that. We consider it a deal cost. We upgrade the fleets, make sure insurance plans are better. I hold onto decisions like what PEO we use, what accounting software, what ERP, things that materially impact the broader business. We'll upgrade everything, make sure we have new uniforms. Things that cost money but help morale. We bought brand new 2023 trucks at our last acquisition. A worker came up to me and said, thanks for the truck. I said, no problem. He said, no, really, this is the first time I've ever driven a truck that's not beat to hell, personally or professionally.

Q: Branding strategy?

The first five acquisitions, we changed the brand and made it all one brand, more of a rollup strategy. The sixth, because it's in a different state, we're leaving that brand. The seventh, we'll leave it in that brand. We'll have three different platform brands. Our end goal is optionality. We want a business we could trade or sell for a good multiple, or have the optionality to be big enough to recap with decent leverage and continue running it. We don't want to keep flipping brands because we don't know when the optionality will materialize.

Q: Can your investing partner fire you, or veto an acquisition?

Great question. When you take on that large of a capital provider, you essentially work for them, to a degree. I built in protections where I essentially can't be fired unless something materially goes wrong, like fraud or stealing money. I built protections around it being my thesis. This is my idea, my deals, I'm the one on the ground. You trust me or you don't. That wasn't a first-date conversation; this was a relationship that had to be built first. I was lucky enough that they agreed to my terms. On greenlighting a deal, I'm on the board with other board members. I hold majority vote. If they said no to a deal, I'd question that, and if they had to say no, they'd question me. We have a lot of conversations before we even get to the board yes/no. I talk to Peter, who works for my capital provider, more than my wife.

Q: Long-term hold and no distributions, is there a mechanism for liquidity, KPIs, bonuses?

We never thought about it until sellers started asking. They'd ask, when do I get my money back if you're never going to sell? I stole this after a conversation with Brent Beshore. We get our business valued by a third party once a year and offer existing shareholders, myself included, the opportunity to sell shares. We cap how much a seller can sell at that moment. The flip side is someone has to be willing to buy those shares, and we don't want to take on new capital today, so it has to be among existing shareholders or the business buys those shares. We provide liquidity events once a year. For my own compensation, we take management fees to cover expenses. There's no set formula. It's like, here's what I think it costs to run this, that's what we take.

Q: How do you describe your model to someone who finds this aspirational?

When I pitched Sam our first deal, I didn't talk about rolling up landscaping businesses. I talked about buying one business. I would never tell someone to think about what I did as the path. Buy a business, learn the business, then figure out your next step. I understand that's not sexy advice, but you'll know if you're a real operator. This is so hard, it's unbelievable. Sam and I had a personal conversation yesterday about the struggles of where to allocate your personal time. I have a wife and two kids, family, three sellers constantly coming to me with issues, capital to deploy, investors. You have 24 hours in a day, and you have to have hobbies. This is extremely hard. So buy a business, run it, see if you like it. It's okay not to like it and bail. That's my real answer.

My second answer: money is out there. Money is a commodity. We're about to go raise $50 million more of committed capital, and that's because we've had an idea, executed it, been good stewards of capital, been honest when we messed up, and celebratory when we did well. There's money out there that wants to be put to work. Do good work, buy good businesses, treat people fairly, have a good plan, and be honest when you mess up. Good things will happen.

Thank you all so much.