Thanks for having me, you do a great job with these.
Thank you, I appreciate that. It means a lot coming from you. And I couldn't think of a better person to have to discuss the topic dujour today, which is reflections on how and why search funds don't necessarily always go as planned. I mean, you're a former searcher and CEO yourself, obviously, you've enjoyed great success, but you had some bumps along the way, as we all do. And you're also a very experienced investor. So from a second hand perspective, you've seen all kinds of outcomes. So we'll dig into all that today. I guess where I want to start, Jim is this idea that that the search fund community, I think, does a wonderful job, celebrating all of the success stories of which there are many.
But I guess, in my experience, and I suppose in my opinion, the community at large doesn't seem to shine enough light on the journeys that don't go as planned. And I often say that if one were to attend a randomly selected group of search fund conferences, they would be forgiven for thinking that every search fund is a smashing success. But, of course, we know that that's not true, the data is actually pretty clear. In that 1/3 of all search funds closed down without an acquisition. And among those who do acquire a company, roughly 1/3 of them generate a net loss. So clearly, not every search fund is a smashing success. To start with, why do you think this dichotomy exists? Why does it feel like they're all a smashing success yet, in reality, they're clearly not.
It has a lot to do with hope, and desire to beat the odds. Searchers are aware of the glass half full, glass half empty, two thirds do find a business, and two thirds of those that have a positive outcome. And if you multiply those two together, you get 44% to have a successful or reasonable outcome. And they're they're focused on that, you know, they've grown up in the startup community where one in 10 startups aren't in existence five years later. So they recognize that, you know, there's a 4X multiple probability that they'll do better than if they were in a startup. And, you know, many MBAs stay with their their company upon graduation, I think the numbers in 20, 25% range. So there's no, they're looking at the odds and saying, This is a fairly proven model. And I think I can beat it.
Do you think it has something to do with the fact that it's easier to find searchers and CEOs were willing to talk about positive experiences than it is to find searchers and CEOs who are willing to talk about less positive experiences?
No, in reality, when I talk to searchers, who have had a negative experience, whether it's failed to find or fail to thrive, they're willing to talk about it. But they don't kind of put themselves up on searchfunder.com, or put themselves up as you know, I failed at this and I want to share my experiences with people. I tell searchers in their request to for help around how they should make this decision to search, go talk to 25 searchers. And if you can't find the ones that have at least a couple who have had negative outcomes, you probably shouldn't be searching, because it's hard to search. It's hard to find those individuals to help you kind of get a framework as to what the positive and negative outcomes could be. So it's a good start to go try to find them. They don't publish themselves. It is hard to find them. But by and large, when I bring them into panels and interview them with students who are interested in search. They're willing to talk about it, and they're not afraid to share.
Now, you mentioned the concepts of failed to find and failed to thrive and going back, you know, 10 plus years, I remember you using that framework when I was a student of yours. I guess, can you share that framework with us, I suppose failed to find sounds self explanatory enough, but if that warrants more color, I'd love to hear it. And maybe you can spend a bit more time telling us what you mean by fail to thrive.
Yeah, the failure to thrive is kind of complex, because there's a variety of different issues that come through when a searcher CEO decides that this isn't going to work out for them. So the sales failed to find is on the on the search side. This operating side is where the fail to thrive works out. The biggest characteristic of the fail to thrive is run out of cash. There's not enough sufficient cash flow would pay down the debt. And you either have to sell to somebody at a loss, or actually shut the business down in Chapter 11, or come out with a reorganization in Chapter 11. So that's a pretty dramatic failure. The second, though, is a little more difficult, which is, when there's pretty significant headwinds, you're tapping a struggle making payroll from year to year to year. And you're not kind of circling the drain in terms of missing some of your covenants. But you're in trouble.
You're not thriving, the business is not kind of meeting its objectives. It's it's barely kind of growing, and you're frustrated about it. Which leads to the third biggest fail to thrive element is the searcher gets burned out. Now you're banging your head against the wall, things aren't going the way you want. It wasn't what you expected. Your peers seem to be doing much better than you are. And you want to step away, and you discover that there's some pretty strong handcuffs here on how you can step away, can you step away? Have other people done this? How do you get out of the situation that you're in when you feel obligated to so many multiple parties that are in your realm of business, investors that banks, employees, vendors, customers, with a lot of pressure on you to not make any other changes other than keep going forward? So that failed to thrive is more relation of a variety of different impacts.
And we're going to use this framework to to guide our conversation today. We'll start with some failed defined questions. And we'll move on to fail to thrive questions. Before we get there, though, within each of these buckets. Are there any common themes or regrets that you hear from searchers once they look back on their journeys in retrospect? So for example, if I was a failed to find searcher, two years after I closed down my phone, and I'm on to greener pastures professionally, are there things that I look back on and regret? Like do you see any common recurring themes in either of those buckets?
Yeah, when I prepared for this site, I looked at my list of failed to find searchers and my fail to thrive searchers and came up with a couple of different conclusions. And the failed to find category, kind of looking for a great business is a mistake. Searchers don't buy great businesses, they buy good businesses, because they can't afford to buy a great business. It's just running too well. And that's what they're focused on and thinking that that's what the kind of business they have to buy. So looking back, they say, I should have looked at some of those businesses that were just good. Or they spent too much time looking for a big business. Now, they were enamored by the fact that maybe if I can find a $2 million EBITDA business or a one to $3 million EBITDA business, it'll be easier to run, there'll be some staff, I won't have to do as much work.
But those are very expensive. And certainly that's a great lesson for any searcher to be thinking about. What kind of businesses to look for? Or are they're seeing a business that looks good, it's a reasonable size. But it has a lot of risks. And they do a lot of navel gazing around, what could go wrong and what the problems could be. And most businesses, their searchers buy, have some element of problems. And most searchers ended up being good problem solvers, because they couldn't solve those problems when they come up. But when they look back, searchers tell me, you know, I was just too risk averse. I was seeing too many problems. I was skilled in identifying what they were, I walked away. And a final one might be partnerships that we're working well.
This is harder to tease out because there's a corollary, there's another partner on the other side of the phone. So searchers who have this issue, share with me privately, you know, and my partner and I we're not getting along, we're not seeing eye to eye. And I worked with on my pick, pick time and in many cases, this just wasn't working out well and was hard to address. So we couldn't come to an agreement on on things on the field, the thrive side. One of the looking back says I should have had more money at closing. I should have raised some additional capital either from my investors or from the seller or from the banks, to ensure that I had a good cash cushion. A 10 to 15% kind of overage to account for any unusual surprises that might happen in those first two years.
A second might be, the seller hung around a little too long, and I listened to them, which is a common mistake early on, you want the seller to be there and the seller says they want to be there. But there may inhibit kind of your, your plans to change, bring change to the business or take it in a different different direction. And the final one is no, some of the employees in the business I should have gotten rid of sooner, I should have made changes. I was thinking about changing the people more than I was in changing them out. And when I look back, that made it very difficult for me to thrive. So those would be the buckets I kind of put the overall themes of what was happening with that.
So I mean, so much of that resonates with me. And in my experience keeping the seller on for too long did that, you know not changing people soon enough, definitely did that, too risk averse definitely did that. And so lots of lots of follow ups we can get into here and we will but before we do that a lot of younger folks, when they are contemplating taking this journey to begin with, look at well, what's the worst that could happen? Maybe I don't buy a business. And I spent two years searching with, you know, nothing to show for it. So I'm curious, for searchers in the failed to find category but also, frankly, in the failed to thrive category. What have you observed about what these people tend to do next, from a professional standpoint, and what might prospective searchers be able to learn from these observations?
They have gained something in those two years or three years that they've been searching, which is experienced in doing deals and negotiating, talking to banks, understanding the industries that they dive deeply into. So some end up as CEOs for owners, I would say that every searcher gets a proposal from an owner to instead of buying their business to be a general manager enjoying them with a salary. So searchers ended up in that category. Maybe not exactly what they expected, but working well for them. Many of them go off and work in positions with startups, it turns out was a little surprise to me when I went through the statistics that I pulled together. But many end up in kind of C round startups where they're not at the very early stages. They're at kind of the stage of bringing in some outsiders who are young, youthful, have some energy.
And some experience in hiring, negotiating, looking at product market fit trying to figure out how to pivot and have worked out well there. Of course, others end up with private equity firms, just as a natural kind of tendency to move toward the skill set of looking for businesses raising capital looking at deals and transactions. Finally, some end up with at family offices who want to take advantage of searchers skill set and experience and looking at deals. On the failed to thrive side, many stay in the same industry. So they're in a business, a software as a service, they want to use those skills and step back into that. Others work within the search community. So may work for an investor or may work for another search or CEOs looking for someone who knows kind of what they're going through.
Someone who's maybe moving toward making acquisitions and wants to do a bolt on or an acquisition and put someone in place a lot of examples of a variety of those outcomes. So it turns out that, whether it's failed to thrive or fail to find they land on their feet, and they're problem solvers, and they took a risk. And the reaction of the individuals for their joining is, if you've had this experience, it's worthwhile. And how would you react to kind of what it's going to be like joining us? And the searcher says, I'm curious that it was there, I tried it and I'm much better for it. And I've got the skills that will be beneficial to you when you hire me. And I know myself a lot better than I did when I started, which I think is really important for anyone going through the early stages of their careers, being able to recognize what they're good at and what they're not so good at and learn. Learn that and benefit their potential versus time goes on.
One thing that I think is worth mentioning on the failed to find side, I know those who pursue search or contemplate doing so tend to like to quantify things. So I actually tried to quantify the risk return spectrum in a very crude way. But let's say that you no one spends two years looking for a business to buy and doesn't consummate an acquisition by the end of that two years. In the context of a 40 year working life, which I think is pretty average, let's say you work from 20 to 60 years old. So that's 40 years, two years is 5% of your working life. So your downside you can quantify as 5%.
The upside, however, is hundreds of percentage points, maybe 1000s, of percentage points of increase in freedom, opportunity, independence, autonomy, learning, etcetera. So the way that I thought about it is your downside is quantifiable at about 5% of your working life. And your upside is measured in hundreds to 1000s of percentage points. So there's a massive asymmetry between risk and return, especially the earlier one is in their career when they have fewer kind of real life handcuffs, mortgage payments, spouses, kids, etc. what's your what's your reaction to that?
I'm reminded that AJ Wasserstein, who teaches search at Yale University, who wrote a piece about compound experience. So even though it's in those early years, you're compounding your experience, every month, every year that goes by. So no matter what the outcome is, that really kind of accumulates in those, those early stages of your career. So I think you're very right about that.
So, let's talk about failed to find for the next few questions, and then we'll jump into fail to thrive. Some search funds reach the conclusion of their 24 months search or just exhaust their search budget, whichever comes first. And then they contemplate raising a small amount of additional capital, often from their existing investors to support a search for an additional X months, let's say six months, but it could really be any number can sound very tempting, especially when you feel like you're close to something. In your experience, when might this be a good idea? And when might this be a bad idea?
Well, I think it's a good idea that if you're in your 23rd month or your 20 year plus, and you're under LOI. LOIs on average take five months to come to completion. So you have a fairly easy statistical runway there, they might last eight months. But if everything is looking good, and the probability that the seller will close with you, is high, based on kind of your observation and kind of monthly or weekly assessment of how am I going to close. I think it does make sense if you're out of out of money, and you're the bills are coming in from your QV provider or the experts that you're bringing in to look at diligence and you need the cash, it's worth asking investors for an additional three months of investment. In my experience is generally happens positively, that investors are willing to do that.
You'd also want to have something still in your pipeline in the event that the deal falls apart. Almost one out of three deals comes to successful conclusion, but two thirds fall apart, once under LOI. You want to make sure that that pipeline is you're spending some time on so you can compare what you have in hand versus Plan B, which might be a fallback. A bad idea is if you're in that 20th month, you're not under LOI, your pipeline is somewhat dry. You've been kind of maybe LOI fell apart two months ago and you've had to restart your search, it's probably not worth going for another year and having your investors kind of sign on for that. More importantly at home things might be challenging if you're married and your spouse is expecting kind of this to be a two year process which has been what you raise the Fund for.
I think it behooves you to look hard in the mirror with your spouse around, is this the right time? There's lots of history, I'm a failed to find searcher who after six months or six years actually after graduation, wants to search and shut it down after eight months. And it was hard to look in the mirror and make that that decision. But I rebounded and there's a half a dozen searchers who failed to find, cut their search down in a variety of timeframes, whether it was eight months in my case or longer in other cases, but then searched later in their career doesn't mean that, failed to find does not mean that you failed to find forever. It means that you've learned some great skills. If you want to try this again, later on in your career, you can be successful at it. The best idea is to kind of every three months assess with yourself, is this working for me?
Am I seeing businesses that I could actually be operating and be excited about? Or am I developing some concerns about all the businesses that I'm looking at, none of them are looking like something I want to do. And my peers and my previous work experience would say, I'd be happier on a different path is to shut your search down early, so that the people around you, yourself, your investors, all are kind of not agonizing with you, because you feel you made a two year commitment to them. And so the best in my opinion is not every week, and not every month, because search is very hard. And but at least every quarter, you self reflect around, am I on the right path for me. And I struggle, this concern and fear that I'm waiting and make a hard decision to move on.
I know one searcher did this in their recently under six months, and just was so proud of themselves to come for coming to a decision that was so hard to make, and felt good about going to their investors and saying, this is just not working for me. And I don't need you to tell me that I'm making a bad choice, I need for you to understand that for me, this doesn't make sense for me now.
Now, in your experience, I mean, look, searchers will always say that they do their best to maintain objectivity when evaluating targets to purchase. Of course, they will always do their best to maintain a quality threshold that is at an appropriate level. But anecdotally, it's been my experience that like the quality of the business that one gets excited about in month 22 of the search is often less than the quality of the business that one gets excited about in month 12 of the search, which is to say the quality bar keeps going down, the further and further. And the deeper and deeper they get into their search. What has been your experience with that? How does the quality of the target change the deeper and deeper one gets into their search?
I think the criteria may change. As I related earlier in the discussion today, Steve that looking at only great businesses, yes. You know, early on, you may be looking at some great businesses, but they may not be able to close. And consequently, if that's your measure of quality, is it a great business or is it a good business, and it's not such a great business and quality changes? Or the size changes? Or the perfect kind of recurring revenue is not there? I think that early on, it does make sense to make a pitch for the best businesses that you think you can close. So I would agree with you there, you could observe that maybe the businesses are last desperation or fall into a mistaken purchase.
But in general, I think that I don't see searchers in their 24th to 36 months, buying businesses that are mistakes. I would say I see those businesses that are bought beyond 24 months are not necessarily bad businesses, they were worth waiting for. Remember, the searcher has spent 24 months kind of evaluating how to get this across the finish line and what's a good business and what's not a good business? That by the time they're at that that stage, they should be pretty clued into what's going to work in the long run and what's not. Anecdotally there might be a couple that fit in your category.
Jim, within the failed to find buckets specifically, are there any commonalities that you've observed with these searchers and what might current or prospective searchers learn from these commonalities?
So I have a bar that I set pretty high with searchers that says if you are unable to make three to four written offers every month, you need to be really thinking hard about whether this is going to work for you. I find a searcher who's six months in has made two offers because they just haven't found thew right business, my red flag start to wave pretty strongly here. Written offers give you practice at negotiating at putting together a deal, figuring out what the elements are, having the narratives with brokers, if they're engaged in the process or the seller directly. Perhaps even talking to some banks and lenders about the deal. And three or four is a big number. And yes, it could be a fear of being told no, or it could be a fear of, it's just not the best business yet, that practice in the early stages of your search, I think are so critical that that's a great measure of the searcher may fail to find because they're just not able to make those offers.
The second one is to get under LOI, get under LOI, quickl. I maintain that 60% of what searchers learn about search, they learn well, under LOI. And consequently, if you defer that or delay on that, or you can't get to a signed LOI, you're missing out on some, some great experience that you can bring to the table. If the LOI falls apart, which many do that, that you want to be making sure that your goal is on getting to a signed LOI. So that you can open up your view to investors and what they think and lenders and how they feel, what a QV might entail and what you might want to watch out for there. So that knowledge opening, I think is pretty open. And if I find a searcher that's kind of done all the right things in making offers, but in their 18th month and haven't had a signed LOI, I'm worried.
Because when they find the perfect business for them to buy, they may make some mistakes, because they just haven't had the experience of what it's like to be under LOI and counterparties, who recognize that this may not be a qualified buyer, yet. Another could be they're just too picky. They're just looking for that perfect window of recurring revenue and low customer concentration and seller kind of walking away and good resources in place and systems. Another one would be their failure to use interns. I would say that kind of managing your intern process helps all searchers in the search process become more efficient. And if I hear man, I just don't like her I've had a hard time with them or they haven't worked out. Is usually a sign for me that there could be a problem. And the final one is, is when I ask who are you talking to?
Are you in the search community kind of listening to searchers who have been down a path a year ahead of you? A searcher who is now a CEO, but is willing to talk with you about their experiences and processes during the same timeframe that you're in now, as you're launching or beginning your search. And I think from learning from those other experiences and from others, and knowing when to ask for help is a real strong characteristic that if it's missing in the early stages of your search process could yield a failed to find outcome.
Yeah, I love that. I mean, I've taken so much of the guidance that I give searchers today, Jim, as a result of what I learned from you. And at the risk of being repetitive relative to what you just said, the importance of Reps. And this question of in your first handful of months, like what are you optimizing for? And I think for me, the best answer is you're optimizing for learning and practice. And that's one of the reasons why I encourage searchers to utilize the broker network pretty heavily in the beginning of their search. Because one of the benefits of the broker network is it's quick, you could call a broker this morning and get a SIM this afternoon. And even if it's not necessarily the business that you want to by getting practice and repetition, as you said, going under loi is incredibly valuable.
And actually remember my own experience, like one very practical way that this manifested is, you know, eventually you kind of get a bit more comfortable with having introductory conversations with business owners, but I would say that the types of questions that you have to answer once you're under LOI are very different from the types of questions that you might have gotten comfortable answering. So for example, I remember when I put my first offer in front of somebody, and I thought I, you know, gotten pretty comfortable with these types of conversations. The business owner looked at the offer, he said debt, you're gonna put debt on my business. I've been running this for 30 years, I've never had a penny of debt. And I didn't know how to respond to that because I just kind of wasn't prepared for it.
Because it wasn't first offer, I'd never had to respond to something like that. I think it was either the first or second offer might have been with the same owner. I don't exactly recall. But he looked at the LOI, and he saw the working capital adjustment. He's like, What is this? Why do I have to do this? How are you going to treat my deferred revenue? And of course, now, I know the answer to that. But at the time, I had no idea what the answer was. So just to like practical examples of like, the types of questions and problems and opportunities that you run into, once you're under LOI, tend to be pretty different from those questions and problems that you face before you're under LOI.
The great example is bankers. And when you have it, when you're under LOI, you're in a different category. You have a signed LOI, you're asking for a term sheet. And you learn some great things. I remember going to a banker and showing them my presentation. And none of the balance sheet and income statement and the cash flow don't seem to match up, they're off by 10 or $20,000. I'm not going to loan you any money if you can't figure out how to get this straight. Because like a shock. And never again, did I go to a banker with a presentation that didn't have those numbers actually tying out.
So we're still in the failed to fund bucket. And in my experience, there are a couple of recurring concerns that prospective searchers have with respect to the failed to find risk. One is competition, and the other one is price. So let's start with competition. First. Some perspective, searchers think that their failed to find risk is elevated given how many search funds have been raised over the past few years. And actually, this is probably one of the questions that I am asked most frequently. Is this question of whether or not there are too many search funds in the market right now. What would your opinion be on that question?
I ask the same kinds of questions to searchers all the time, on a monthly basis, what are you seeing out there and are your offers being bid up by other searchers? Half the time they speculate because they just don't know. I mean, the ability to get good, clear responses to that kind of answer from a seller or broker are difficult. But in essence, I'm not seeing very many searchers in competitive bidding situations with with other searchers have to remember that there's hundreds or perhaps even 1000s of sellers coming into the market every day, as they change their mind about their willingness to sell, and begin to have those discussions. So it's easy to think about, well, everyone who's been asked that said, no one is not going to change their mind, that's just not the case.
Sellers just ignore these outreaches until they're ready to make a change, something happens in their personal life, or in the business or age wise, or whatever their personal circumstances are. So there's lots of new sellers coming into the market, or boomers or late stage business owners that are available. I'm not seeing the searchers running into each other on a regular basis, I got to remember that some of the searches end up being failed to find and disappear. So there might be newer ones coming into the market. But they're not all sitting there kind of waiting for things to happen. They go through their normal cycle also.
I would agree with that. I mean, I do see searchers running into each other every now and then. But I would classify it as the exception, not the norm. And I guess one of the things that I understood intellectually, before my search is how many small private companies there are in North America. But once you actually start searching, like you feel it in your bone marrow, like the staggering number of businesses that there are, that you and I have never heard of operating in industries that you and I have never heard of and didn't even know existed. And there are hundreds of 1000s Maybe millions of small private companies in the United States. And there are what 100, 200, 300, Search funds. I mean, you just look at it that way. I mean, I often say you could double the number of search funds, and I still think it's a drop in the bucket relative to the size of the addressable market.
When I hear it, I say, Ah, I think you need to do some more work on this. I don't believe it that there's two things that churches tell me that I say I push back on, you know, the season of the year seems to be the problem. I don't like my data concludes that that's not the case. It's just a searcher that needs to continue to push. And the second is, there's a lot of searchers out there. This is hard. Well, it's hard for a lot of different reasons, but it's not necessarily because there's a lot of other searchers.
Yep. How about price Jim? I Mmm. Another common reason for failed to find revolves around valuations. Some think that there are two schools of thought on this, I suppose. Some think that the days of trying to acquire small businesses for three to five times EBITDA are gone, perhaps due to the competitive dynamic that we just discussed, but others completely disagree. And they say that that opportunity is very much still there. What's your view on this, can one still find a good search business at three to five times EBITDA?
That's the issue, though maybe the size. The size may be lower, the private equity firms are digging into smaller size businesses and consequently bidding some of those up. And, you know, realistically, searchers are never going to be the highest bidders. And if you are, I'd be where, because searchers can't afford to overpay for their first business, maybe on their second or third business when they have a stability in their in the business that they own. But for their first business, they can't afford to overpay and consequently, you don't want to be in a bidding war. And yes, I do hear searchers tell me regularly, the seller wanted more, you know, why am I still looking for three to four times multiple, when they're asking for six or seven.
And I say you represent the market, they don't represent the market. Now if they want three to five, if they want five to seven times multiple, and they're beginning the negotiation, that means they might settle for five, or they might settle for four. I think it has more to do with unwillingness to negotiate and think about negotiating strategy, rather than to say that there's no one out there that will accept that.
Warren Buffett has this famous quote, he says price is my due diligence. And I've always thought that that's a bit of an oversimplification. I mean, sometimes there's a reason why a company trades at three times, which is to say, it's got a lot of problems with it. So on one hand, one can say, hey, I buy a business or three times, that provides me with a cushion to fix a lot of the problems that I see in the business. On the other hand, like I said, there's a reason why some companies trade for three times and maybe they don't lend themselves particularly well to a first time CEO. So I guess the question for you is, I don't know, how does one avoid getting blinded by a good purchase price, which is to say like, they become willing to accept risks that perhaps they shouldn't be willing to accept?
You know, the question is, can they manage and solve the risk. So there's some searchers that I'm familiar with who bought a business that had 80% Customer concentration, the multiple was 2X. So it was a great price for a business that had high risk. And the seller knew, after many years in the business, they weren't going to get paid that much for the business because of the high level of customer concentration. The Searchers, this was a partnered search, got their pencils out and began to lay out exactly what they would do over a four year five year period to reduce the customer concentration than to reduce that element of risk. They found investors who were willing to support it, they found bankers that are willing to support it, they kept the seller on for a while.
Which is unusual, and managed when they exited the business five years later, that only 30% or so have that in virginal customer concentration there and solve the problem. So I think there is a somewhat of a goldmine around how much how many issues are you willing to take on and using your negotiation to drop that multiple down. And can realistically tell the seller you're not going to get that high number because of customer concentration or project orientation or businesses that aren't as attractive with repeat revenue, revenue instead of recurring revenue.
Let's move on to the fail to thrive bucket so failed to find naturally tends to describe those in the search stage of the journey. Failed to thrive tends to describe those in the operation stage of their journey. I guess similar question. Within this failed to thrive bucket, what are some commonalities that you've observed with searchers who fit this description?
Market conditions, I mean, you know, COVID, for example, can't do much about COVID. It was a fail to thrive, they didn't survive through it. Maybe they didn't qualify for government money or maybe it was just too deep of a ditch to pull themselves out, couldn't pivot. Lots of reasons. So along those lines, some other subtle ones or investors is not not all that common, doesn't happen that regularly, but does happen from time to time. The investors lose confidence in the CEO. And the CEO, I've got a couple of different CEOs come to me and say, I feel like I'm treated like an employee now of the investors, I feel like I have a boss. And that's not what I signed up for. And they're not treating me like I thought they would be treating me.
In fact, one investor has said, yep, you're in a difficult time, it doesn't look like this is gonna have a big payoff. I want to get off the board and move on. Because I don't think this is gonna be worth my time to put into it. So there are some issues that are very difficult for searchers to deal with, especially CEOs are in the business, running it every day, and discover that there are investors are losing faith in them. Another one would be the sellers hanging around too long has been a problem or sellers going into competition, or starting a business that's not competitive and taking employees from the operation that are very difficult to recover from. And are more about the seller than it is about kind of the searcher who's operating and running the business.
And then there are others who are just burned out, this is hard work. It's hard for anyone who takes on this task. And you know, there's there's folks at home or dealing with the difficult business that the CEO is operating under, and makes it emotionally difficult to continue on. When things aren't going as expected. Gee, honey, you're still you're spending a lot of time at the office. And now it's three years into the business. And it's very difficult for us to kind of have a normal life. And how long is this going to go on? It's not what I expected. So the pressures begin to build and anxiety comes to the forefront, which many of us do get burned out.
So I mean, don't I know it? I guess that brings to mind a follow up question, which is, you listed a couple professional or commercial reasons why one might fall into the failed to thrive bucket, then you also mentioned some personal reasons, is one more common than the other in your experience?
I'd say that, you know, if I had to put a number on it 60% of the fail to thrive are related to the business or the markets or the customers etcetera. But 40% are related to both mental and physical health. If you haven't, searchers, who are running their businesses and operating under challenging conditions don't work out as much or aren't eating as healthy as they should or drinking too much or trying to solve their problems by working too many hours and not paying attention and having balance in their their lives. And that takes a toll on their mental acuity and on their bodies. And consequently, unusual circumstances show up with. I've just painted my back and I can have a hard time getting standing up.
And when was the last time we went to the gym? Well, I haven't been going very often and things begin to deteriorate. So I tell searchers it's really important to be listened to your spouse's listening to your balance, as you have pointed out, this could be a very short time in your overall career. If it's not working out at home, it's not worth kind of continuing on. Or seek some therapies. Take some professionals to help you through what's going through your mind about are you succeeding as it's not turning out the way you want? What are people thinking about? How are your outsiders kind of dealing with things? What tools can you develop to help you through some of these difficult darker moments?
Jim, you have a very unique perspective in that you've been a searcher, you've been a CEO, you've been an investor, you've been an educator, you've basically done everything that one can do in this community. And if I were to read your biography, if I were to read the headlines, it would be easy for me to view you as somebody who just steps up to the plate and hits home run after home run. But I suspect that's not the case, because I don't think that's the case for anybody. So even though you had a great outcome, and even though you're a thought leader and a mentor in this community for so many years, as you reflect back on your own time as a CEO, and as a searcher, in what ways did you failed to thrive?
Well, I don't want to skip over the fail to find, I tried for eight months and failed to find and came back as a rebound four years later. So that was a, I would say, I had a partner didn't work out as well as I expected, my expectations and their expectations were different. It took us getting all the way to a signed LOI, and was three weeks away from closing to come to a head. So that was a great lesson for me that I needed to really understand myself. And whether or not I wanted to work with a partner was, was one of those elements that was important to learn. On the fail to thrive area, I was just a lousy delegator. I was a detailed person who loves the details. And very, very slowly delegated more and more as the business grew to others in the business that was very hard for me to do. It was a long learning lesson that just took took forever.
I waited too long when I wasn't thriving, I wasn't thriving, because the business was growing faster than I had prepared it to grow. And I was spending more and more time with the business and getting out of balance. My wife worked in the business with me, so she understood some of those pressures. But we both came to an agreement that, you know, this is the way the business is running. Now, as quick as it is and as profitable as it is. But with the growth that it has, is we need to sell this. However, we should have made that decision two years earlier, and had a better and successful outcome that instead, we waited, and the .com bubble burst. And our offer was withdrawn. And we had to start all over again in the process, where I learned how to delegate more and bring in a CEO that was very important for the business.
And bring in a CFO to relieve some of the work that Debbie was under. And those failures along the way were were good lessons for me around the challenges of operating and learning how to deal with that. It took me a while to ask for help. So I joined an organization, Young Presidents Organization that was very useful for me from both a personal standpoint and a professional standpoint, to see what others were doing. I joined an organization of small manufacturers. And that was just eye opening as I learned what other people were doing in their businesses that I could copy shamelessly, thank them very much and move on, and use some of what I've learned from just learning to ask for help, and learning to ask other people. How did you handle this problem with hiring people? How did you handle this problem with legal issues in the state of Massachusetts that were so important to me?
Yeah, there's nothing more comforting than bringing a problem to a group of fellow business owners and seeing half of the heads around the table nodding and saying something to the effect of yeah, I remember when I dealt with that. Here's what I did.
The realization that you're not alone. Does that happen to other people? Yeah. Did this happen to you? Tell me about it. How did you deal with it was so enlightening?
Totally. Now, in your experience, are there business or transaction characteristics that tend to be most predictive of good outcomes? So like, if you were to run a regression analysis on all of the business and industry and transaction characteristics and try to correlate them with good outcomes? Does anything come to mind? It's so multivariable, right? I mean, there's hundreds of things to consider are there like one or two or three that you think are particularly important?
Not going to be surprised at the first one, Steve, the opportunity for margin and price improvements in a business. The customers have a willingness to pay, is the product that you're providing your customers a big part of their overall thought structure or a small part? Hopefully, it's a small part, which means they have a higher willingness to pay, which means your margins can improve. And you can extract more value because of pricing. Very seldom do I see that characteristic on a, this is the kind of business you want to find. And recurring revenue is there, of course, and low customer concentration, but that's a hidden one, in my opinion. Another one might be the ability to see or find or to exploit small niches.
I would much rather go after five customers that represent a million dollars each in business, then go after one that represents $5 million. Now that one may be a big win, and you may celebrate and be excited about. But I think there's much more advantageous to have five medium to small sized companies in very small niches, because the willingness to pay is there, to improve price or their ability to kind of not run into competition, because they're such a small segment is another characteristic of those businesses. The third would be systems, I tell every CEO that they should be spending 25 to 40% of their time on systems, they lead the company, they understand the whole network of customers, vendors, employees, capabilities, strengths, weaknesses, and systems can be so impactful.
Especially these days, with the advent of SaaS products and models of AI that can be used in your business, that you as a CEO, really have to embrace that process, and can really benefit your business if it's been neglected over the years. So if they don't have an ERP system, or they don't have a good CRM for capturing sales activities, putting those into place, and making them work in a business is another hidden opportunity that shouldn't be delegated and be dramatic, for a CEO to go after. The magic of search, finally, is recognizing that the CEO who buys a business in a search process 10 years later has a business that doesn't look like it looked like on day one. And that's the magic. That's what searchers bring entrepreneurial to a business, they take advantage of opportunities. And it's easy to get caught into a trap of looking at this business and saying, I'm going to clean it up. And then five years of look, the same magical results happen when 10 years have gone by. And that business is absolutely not the same business as it was when you bought it.
On the system side, I mean, these businesses are notorious for being under invested in particularly from a systems process. So when a searcher looks at a company and says, Hey, their sales team has no CRM, the accounting system is a mess, there is no ERP things are done on a whiteboard. Do we view that as a negative thing because there are no systems to speak of and the infrastructure of the business is lacking? Or do we view that as a wonderful value creation opportunity? Or do we view it somewhere in between?
I'm way on the side of wonderful value creation. I do find some CEOs who say my eyes glaze over when we talk about systems or IT. I'm just not good at that. I said, well, maybe your CFO should be doing that. Or maybe your operations people should be doing that. But you want to be leading the charge that somebody needs to be doing it because there's so much value to be created.
Jim, as we conclude our discussion today, is there any specific advice that you'd give to somebody who might be contemplating an entrepreneurial career but is scared of falling into either the failed to find or failed to thrive buckets? Certainly, fear of failure was something that, in a way motivated me and in another way, terrified me throughout every part of my journey. So I think fears is a very real thing. You know, what advice would you give to somebody who's who's fearful of falling into either of these buckets? And how should they think about the risk return equation that entrepreneurship through acquisition presents?
It's a pretty simple model, I think it's a mirror, you know, have a good mirror at the ability and willingness to ask for help by looking in the mirror and saying, how good am I on that? Because you're going to need help in this process, you're going to need practice and repetition. Again, how good are you at this? Are you going to burn out after three offers and say, this is just boring, I'm doing the same kinds of stuff, I'm not learning that much, I didn't want to learn that much anyway. So we have I do have the confidence to sell yourself. I wasn't naturally an outgoing salesy kind of person, I had to learn it. And if I looked in the mirror, when I graduated with my MBA, I would probably have to say, I was not good at selling myself. But as a searcher, you've got to sell yourself to the seller, you got to sell yourself to the bankers, to your investors, to your employees, to your potential customers to vendors.
And that's a real strong characteristic that you want to kind of have had some ability and confidence that you can do that. And do it successfully, or at least learn it to the point where might not be the way you are at home, but it might be the way you are at the office. The next one is competence. How competent do you feel in kind of taking on HR issues, people issues just pervade these businesses that searchers buy all the time, and they're difficult. Somebody has to be terminated. Somebody has to be hired. hires don't work out the way you want them to, and what's your level of competence and kind of practice in your past to be able to take those those on, I think is important when you look in the mirror. And it could be that you're not ready. And as you pointed out, this is a long journey in your career.
And I predict that there'll be three or four times more searchers who search mid career than do it upon your MBA, because they've recognized that on the competence and competence kind of grid. They're not where they need to be comfortable taking this step. And falling into the failed to find or fail to thrive trap that we've been talking about. I'm convinced that ETA can change your life, and change your career. And you should do it when you're ready. And if it doesn't work out in the first time, you can do it later in your life. So it doesn't necessarily mean that you're a failure, or you're not going to be successful in your dream of autonomy and independence of running your own business. It can still happen. I see it all the time, search on.
Amen. What a great place to conclude. Jim, as always, thank you very much for your time today. There's there's a reason why you're the first to time guest on the show because you just have so much wisdom and so much experience and so much to share and give to our community. So we thank you for your time today.
Steve, one of the things I learned as a as a teacher later in my career, that is not necessarily about the answers, which I was happy to provide you during the questions that you raised. But it's more about what questions to ask and you've done a masterful job at learning with practice, which are those good questions to ask to draw out from your your guests, the kinds of things that you feel are important. So pat yourself on the back for being a good question asker.