In The Trenches: Conversation with Jim Edmunds, Badge Stone, and Kent Weaver

4:22PM Feb 25, 2025

Speakers:

Steve Divitkos

Kent Weaver

Badge Stone

Jim Edmunds

Keywords:

Search fund ecosystem

acquisition rate

private equity

software valuations

searcher fatigue

email deliverability

industry theses

seller expectations

cost of capital

broker competition

uniformity issue

mentorship

investment returns

entrepreneurial edge

sales process.

search investor

election uncertainty

bespoke succession

supply demand

entrepreneurial culture

financial crisis

market timing

emotional preparedness

cap table

personal fulfillment

independent thinking

best practices

reputational feedback

community impact

optimism.

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Hello everybody, and welcome to another episode of In The Trenches. I am your host, as always. Steve Divitkos, so today we have a very special episode featuring three of the most experienced and respected investors within the search fund ecosystem. And the reason why we've assembled such a group is to discuss a topic that is understandably of interest to the entire ETA community. And that subject is why the acquisition rate among search funds has fallen over the past 10 years, and whether the rate of acquisition is likely to fall further in the years to come.

Indeed, across all known search fund, since the inception of the model in the 1980s about 63% of funds have gone on to acquire a company. However, since 2014 the acquisition rate has decreased, hovering around 57% over the past 10 years, Today's episode will revolve around the testing of several hypotheses. For example, is the falling acquisition rate attributable to a greater number of search funds in the market. Is it attributable to email deliverability challenges that have become particularly pronounced over the past few years?

Is it attributable to searcher fatigue within the seller and intermediary communities? Or is it attributable to something else entirely. To generate the hypotheses that we test in today's episode, I surveyed over 1000 current and prospective searchers and CEOs and asked them which ideas they'd like to hear us unpack. Today's episode focuses on those hypotheses that were mentioned most frequently. So joining me today are the following three people, Jim Edmonds, a partner at Search Fund Partners, a firm that has been investing in ETA for over 20 years, himself, also a former searcher and CEO.

Badge Stone, co founder of WSC, one of the world's leading search investors. Himself, a two time former searcher and CEO. And Kent Weaver, somebody who has invested in over 150 search funds and 80 operating businesses after also serving as a searcher and CEO himself. Before we dive into today's episode, allow me to remind you that I am an active investor in search funds and the companies that they acquire through my firm, Mineola Search Partners. So if you're planning to raise a search fund, or if you're looking to invest in the asset class yourself, I'd love to speak with you.

But now on to today's episode with Jim Edmonds badge stone and Kent Weaver. Ken Weaver, Badge Stone, Jim Edmonds, thank you so much for joining us today. It is a genuine pleasure to be joined by you guys, and honestly, I count myself lucky to to get the opportunity to learn from three people like you. So thank you very much for joining me today. It really is my genuine pleasure, and I hope that today we'll have an insightful discussion that might challenge some conventional wisdom within the search community.

And folks listening will be aware of the structure of this conversation, how we're planning to test different hypotheses, but before we get to that, I actually want to start with a bit of a lightning round, for lack of a better way to put it. And just get some quick reactions from each of you. And Kent, maybe we'll start with you, Badge, we'll go to you second, and Jim we'll conclude with you. So the question is, when you review the 2026 and the 2028 Stanford study, which are the next two years, do you expect the acquisition rate among search funds to be higher than, lower than, or roughly equal to, the 57% that has prevailed over each of the past 10 years? So Kent, maybe we'll start with you.

Steve, I think the numbers are going down. I can remember back when I searched, which is back in the dinosaur ages, I felt like the success. Rates on finding deals was probably 70 to 75% I think we've all seen it trickle down into the high 50s, low 60s. But the data, I'm seeing the motions, the leading indicators. I think we're going to be somewhere in the 40s or low 50s for the next two years.

Badge, how about yourself?

I think it's going to stay about the same. And the reason I do is because, as you point out, I think a lot of people, if you look at the data, a lot of people think the closing rates coming down. But as you referenced, the data from Stanford and others, will say that since 2014 it's been relatively flat in this kind of 55 to 60% range across economic cycles. I think it's going to stay there. I think interestingly and importantly, what's happened to the returns over that same period of time?

And the returns, if you strip out the top five, have actually gone up from a 20% IRR to a 33% IRR. So for me, I actually think the close rates will stay about the same, but I think the returns are going to go down, so I think they're going to tighten based on a number of things that I'm sure we'll talk about today.

Interesting. Jim, how about you?

I think just looking at my own sample size and projecting out in 2022 all the of the 20 searches that we launched, half of found deals and half did not. And I think that trend will hold for 23 and 24 vintages. So I think you'll see a tick down in the success rate overall in the next study.

Okay, by the way, I think that's important to point out, because I searched during '08. And so every vintage is going to have a different success rate, but when you look at it in the aggregate, is what I'm talking about. So in the aggregate versus the annual vintages, I think is important distinction to draw Interesting.

Okay, so we have some diversity of opinion here. We have Kent and Jim leaning a bit more towards acquisition rates declining. Badge leaning a little bit more towards them, staying roughly flat. So let's get into some hypotheses around both why it has fallen over the past 10 years, as well as why it may fall to the extent that you think it will over the next handful of years. So each thesis has a little title. This first one I'll call encroachment.

And this thesis posits that private equity firms and other sources of quote, unquote, institutional capital are coming further down market than they have historically. So maybe we'll go in reverse order. Jim, we'll start with you. Badge you'll go in the middle again. And Kent will conclude with you. What is your reaction to the encroachment thesis of private equity firms and other buyers coming further and further and further down market?

Steve, I think it exists, b ut I don't think by any means does it fully explained the phenomenon. You know, private equitystrategics have always been competition for searchers. I think the deals that we found that have been in the $5 million and above range have usually come through personal connections, as opposed to beating out private equity. But I do hear anecdotally that you hear anecdotally that searchers are beat, feel like they're getting beaten out or participating processes with five or six potential buyers. And so I think particularly on the brokerage side, private equity coming down is a factor, I think, for searchers, for who develop really strong, independent industry theses and are having private conversations with owners. I don't think they're affected at all.

So, just like an open question to the group, a follow up with that. I remember when I raised my search fund in 2012 I was scared of this very same thing, and this kind of dialog was happening at that time as well. And I guess at 100,000 foot level, it is still as uneconomical today for a $500 million private equity fund to buy a ten million company. That was true 15 years ago. That's true today. So I guess, like an open question to the group is, to the extent that private equity firms are coming further down market, what has changed? If it is indeed still uneconomical to do these small little deals?

I think it's their platforms that are buying them as add on acquisitions, is how I see it.

I also think financing has been tougher to come by the last couple of years from them, so it's a lot easier to digest off their balance sheet. And so that's why, actually, search funds have still been selling a lot over the past couple of years because they're able to buy our companies. And I maintain they want to buy our companies more than they want to buy the companies that we buy, because we build the people, process and technology and make the companies they want to buy. It's not efficient for them to buy the businesses. Yes, if you have a platform. You can do the add on. But I agree with what Jim said, land you said it as well Steve, like I searched in '08, private equity was coming down market then too, it's hard to buy a business. It's always hard to buy a business, and you're going to be competing with people always.

Yeah. And just to close the loop, I tend to agree with Jim and Badge, I don't see a noticeable difference on private equity coming downstream. It was always there. It does seem like there's more consolidations. These consolidators that are backed by private equity, so they're pretty aggressive about tuck in acquisitions. I feel like I see a tick more of that. And I do feel like there's more self funded searchers than I remember 10 or 20 years ago, so that that's more noticeable. But of all the things we'll talk about, I think on this thread, this is probably not the most impactful thing on on those success rates we were talking about earlier.

So, this is an interesting one, because, like I said, when I raised my fund in 2012 I was fearful of this. And this struck me as one of those things where people have been talking about it for a decade and a half, but I've never seen any data to either support it or refute it. So in all of my wisdom and laziness, I asked ChatGPT, is this true and do you have any data to suggest whether it is true or not true? And it seemed to suggest that for companies with enterprise values of between 10 and 50 million.

About a decade ago, the average entry multiple was in the mid fives from an EBITDA perspective, and now the entry multiple has ticked up by one or two turns of EBITDA, so about six or seven times relative to five times historically, any just reactions to that? I mean, ChatGPT does make mistakes, as we know, but it is at least a piece of data where I haven't seen any before, any reactions to that.

To me, that is maybe a mix issue with software companies driving valuations sort of to the moon we would never have paid on ARR 10 years ago, and now we're doing it pretty routinely. And so I think there might be some noise in that. I think the classic, you know, sort of blue collar good cash flow business is probably still the same valuation.

Yeah, I think Jim has a point. I think it depends on the pockets, and it probably always did. I think if you want to buy into vertically focused software right now compared to maybe eight to 10 years ago, it feels like it's more pricey on average, I could probably pick out some other like niches, sub sectors, and, you know, I think it'd be the same story line. But, you know, then I look at some of the the home health care sectors and niches, I don't think they're any more expensive than they were 5, 10, years ago. And I could probably say the same thing for a lot of the industrial service B2B niches that I look at or get pitched on.

So Kent, I know you're a reasonably active Software investor, so I'm going to ask you a follow up question, if it's okay. I have been skeptical over the past handful of years about the new complexion of a software deal in our ecosystem. So I'm reminded of the fact that search funds have been successful historically because we buy at mid single digits of EBITDA, we put prudent leverage. We buy businesses that don't have to grow at meteoric levels every year to hit our return. And yet the complexion of the quote, unquote, typical software deal now is we're not paying mid single digits of EBITDA.

We're paying mid single digits of revenue. We're often going in with no debt. We're often going in with, you know, let's call it 500k of EBITDA or less. So in many so an optimist would say, well, software is a much larger share of the economy today than it was 10 years ago. And these are structurally more attractive business models, therefore they ought to reasonably be more expensive. A pessimist might look at that and say, maybe we're starting to violate the basic pillars of what has made search funds successful historically. Where do you fall on that spectrum?

Yeah, I would say I think there's something to a lot of these vertically focused software companies we've bought as a community like have very distinctively attractive industry and company characteristics. I can make, I can make a pretty good case that they're on a relative basis. They shine, but I think what you might be hitting at is I also think our community has got, like a very wide ranging view of how to buy growth and how much to pay for some of these premium characteristics, low churn, high gross margins, positive NRR, etcetera, etcetera.

That's where I probably punctuate the differences how we buy growth. I think it's been pretty wide ranging. We all appreciate organic growth. I think there's been cases I think we as a community, overpaid for it, and I think you got very differing points of views about that. And then I think, you know, a lot of positive wins in the software space have evolved. And I think with that, you had a lot of people chasing these kind of deals and a willingness to pay more. And maybe we're kind of reconciling that now.

Anby the way, I think this is a great thread, because if you think about what happened over the last 24 months, software started to be a big part of the acquisition search. Over 50 people were searching there. And I think that's going to hit a year, because people weren't successful when we had all these big recorrections, as Kent point out, the thing I think a lot about is exactly what he's hitting on, which is, I had a searcher one time say, Look, you know, no disrespect, but I heard you guys were value investors. And I was like, well, first of all, thank you. Like, what does that mean?

Because I haven't seen a value investor that doesn't like growth. We all want to grow, and we want to do things. We want to have appropriate and we will pay a fair value for a company like and so the most expensive business I ever bought was a three times EBITDA multiple because it went to zero. And so I think that's what I was hitting on earlier. I think the ecosystem has wrapped around and knows what growth looks like and quality looks like, so the multiples in our ecosystem are trending up because we're buying higher quality businesses, and you have people that are focused on that.

Jim, any reaction?

Yeah, I do think there are a lot, because there was so much success in acquisitions in software in 2020 to 22 and a lot of those companies have done quite well. Naturally, a lot of people have come in with software focused searches, and they're having harder time because there's a some dislocations in that market, there's, you know, diverging opinions on valuation. It's just a lot harder to get a software deal done. We from 20 to 22 maybe a quarter of our deals were software. And in the past 12 months, we've done one software deal out of 12. And so I do think that will be a short term drag on the overall success rates of searchers. But I also think it'll rebound, because these software company owners eventually will need to sell or recognize that they've taken the company as far as they can and value what searchers can offer in terms of a bespoke exit solution.

I'll throw in one comment to kind of build on Jim and Badge's remarks, it's kind of fascinating to me. I think if you looked at you look at the index, let's say we use the Stanford study as an index, and if you had the four or five investors that maybe have outperforming returns, I think you'd see a higher proportion of software, maybe consolidations than the Stanford index. And then I think if you had the bottom five or seven returns, I think you'd see a higher proportion of software and consolidations. So I guess the punch line, I think some of it's, you know, the eye of the beholder, like, how we're learning as investors, and I'm just not used to it as much variance in returns as maybe what it looked like 10 or 15 years ago.

So, maybe just a higher risk, higher return proposition relative to the quote, unquote, down the fairway, B2B services deal that resonates.

It's fascinating. Like, Pro Service is a deal, we all know one of the best search fund outcomes in the last 15 years, that was growing at like 40 something percent a year, revenue growth, I think it was bought for seven or eight times EBITDA. And people wondered if seven or eight times EBITDA was too fully priced. But when you were buying that kind of growth with that kind of low penetration in a large TAM that looked like a hell of a buy. And then on the flip side, you know, I think I just recently saw a deal, that software deal that got bought for six times ARR, that was growing at about 20%, that seems pretty fully priced. Those are really two different, very different kinds of financial profiles, and I think we see a lot more of that than what I remember.

And you know, it's interesting. We talk a lot here at WSC about ARR asymmetric risk reward. And so that's what Ken, I think you're hitting on, is, you know, for me, search has always been about. Now, what is the upside disproportionate for the searcher compared to the downside, and that's what I struggle with. Some of the software deals that we see don't line up with rule of 40. They don't even come close, and they're still paying these kind of nosebleed multiples.

Okay. Hypothesis number two, I've titled capacity, and this will be a particularly interesting one for us to discuss as investors, and I'll try to stay out of the way, because I've only been investing for three years myself. So the capacity hypothesis is as follows, unlike 15 years ago, investors now have portfolios containing too many searchers, and as a result, searchers are no longer getting the one on one mentorship that made previous cohorts of searchers successful, so I'll just invite Badge, maybe we'll start with you, because we haven't started with you, and then Jim or Kent, you can fill in as appropriate.

Yeah, I think this, to me, goes back to the difference in the resources that are around searchers today than was back when I searched in oh eight. You know, back then, you had kind of 10 people that were around you, and they were mentors and they were helping you. And now you have a lot more built around to that searchers can pull from. So, for instance, when we started WSC in 2016 it was just my partner, Macon and I, we had 25 to 30 searchers. Today, we have a team of six people. We have all these people in processing technologies. We have 25 to 30 searchers. And meanwhile, I'm talking to a hedge fund guy that's managing three and a half billion dollars, that has six investment professionals.

So it's like, okay, like, I feel like the community has invested heavily in resources to surround people. So I don't, it comes across as me being defensive, you know, for the model. But the reality is you have more and more people that have come out. They have done the full cycle. They're like me, they're like you, Steve, they're like Kent. They're they have bought, operated, sold businesses and come back in. So the pipeline of support continues to build as well. So not only do you have resources from people that this is their day job, 24/7 that they're fully focused, you have this additional pipeline of people that care about this community, that give that mentorship.

Okay, so that sounds like you do not view this as being explanatory of the declining acquisition rates. Kent or Jim Do either of you disagree with that, or maybe have anything that you want to add to Badge's Point?

I completely agree with badge I reject this thesis out of hand. There's so much more resources available for searchers than there were 10 or 15 years ago. And if you want, and again, some of that is not senior decision makers. But if you want access to senior decision makers, you can get it pretty easily. There's so much competition among investors to be desirable partners for searchers that you know, people are adding resources and doing whatever it takes to help searchers.

And by the way, Steve the rate hasn't declined over the past 10 years. It's held pretty steady at 57% between 55 and 60. So if this was your thesis, it hasn't happened.

Yeah, so I'm pretty aligned with both Badge and Jim, and this might be segueing into some of the things we'll talk about, but I you know one thing I have observed. But I think some of the the best practices that I've seen over the years on search, I think they've been diluted. I'm not sure I see as many searchers and even the ecosystem support them, like adhere to things that I think lend themselves to best chance of closing you might be theme development. It might be like what you're quantifying in terms of activity, like number of quality calls, number of in persons.

I mean, there's not just one way to do this, but it just seems like the emotions are a bit fragmented, not totally consistent, not as much in person time as I remember. I mean, I remember back when you searched, you know, you could take 15, 20, visits to get deep into a pipeline, or deep into an LOI with a seller like that would seem kind of unheard of to a lot of people right now. I also think there's just a lot more people that are super well intended and really talented, that are leaning in to help but. But less of them have ever done a search or ever sourced a deal before, right? And it's just different. I mean, the best way to really learn it is to have done it, I think. And it's just hard, hard to appreciate all the nuance.

The other thing Ken, I'd be interested to hear what you and Jim think about this. The other thing I think a lot about is the thing I love about traditional search is, the more smart people around the table, the better the outcome, the collaborative, while messy, gets you to where you want to go. The balance and the tension is, is you want to provide those best practices. You want to make sure that people have the resources so they're not recreating the wheel every time, however you want to be suggestive and not prescriptive.

If you get too prescriptive, then what happens is, everyone's doing the same thing, and the message is diluted. And I think that's what you're saying. It just doesn't resonate with sellers. And so that's what I get most concerned about in the future, is that people latch on to these, you know, practices and don't make them their own and authentically fill it to connect. So that's the balance we have to strike.

I really like that Badge. I'd add too, you know, Steve, you talked about 57% I would just, I would just like, point out that's just, that's just an average, an index. You know, for every 100 searchers, maybe 14 or 15 of them are going to have a five time NYC or better. Like, those numbers should be higher. I would just say, like, there's a couple different roads to success. And, you know, for the people that are just doing old school theme development focused, you know, a lot of the things we feel like are best practices like, like harvesting the value of their of their investors as much as they can. I think their numbers are way higher. But when you start getting to third party dependent, or broker dependent, and your emotions kind of inconsistent every week, like, etcetera, I think your numbers go way down.

So this is a really interesting segue to hypothesis number three, which I've titled dilution of talent. And hopefully people don't shoot the messenger here, because remember that these theses were developed through polling 1000 current and prospective searchers and CEOs, and this is something that they wanted to hear us discuss. So let's unpack this, and Jim, maybe we'll start with you.

Yeah, I think it's hard to say that there's been a delusion of talent, per se. I do think there's an increasing number of people for whom search is not the right fit, and I think that's a byproduct of the ease with which you're able to raise a search and sort of the popularity of it. It took real work 15 years ago to raise this church. It was by no means a foregone conclusion, even for the most promising people coming out of MBA. I was with two searchers to finish to Stanford in 2002 last week, it took them nine months to raise a search.

And the qualities of salesmanship and perseverance that was required to raise a search back then, just you don't need those as much today, because really promising candidates, or people who appear to be really promising candidates are able to raise the search before their ppm is even published. And I think that maybe invites people into the community who aren't fully ready for just exactly how hard it is to do this really unglamorous, difficult job of finding a small business to buy. And so I think in terms of, like, intellectual ability, all those attributes, people are probably just as good as they ever were.

But I do feel like there's some people who are able to do this because it sounds interesting, maybe haven't done as much homework, and they're going to struggle, and they're going to maybe look for shortcuts, like relying too heavily on broker deals that don't lead to success.

So underneath this umbrella of dilution of talent is also something that maybe we can loosely refer to as like dilution of commitment, which is to say that today, there are a greater number of searchers who are searching nights and weekends off the side of their desk, etc, and perhaps their inability to close has left a somewhat sour taste in the mouths of sellers and intermediaries vis a vis like the capability of the average searcher to close. So maybe Kent and Badge any reaction to either the dilution of talent or the dilution of commitment hypothesis here?

Yeah, I can hit that like I thought Jim made a number of great comments. I'm not sure I could sit here and with a diagnostic say the talents less the same. It's not obvious to me. I do have an opinion, and it's meant in general, because it's certain to offend people that this does not apply to. But where I would punctuate is lack of hunger, not quite the entrepreneurial edge. And I think, like Jim was hitting on if I look at the root of that, I mean, way back when, like people would drive two or three hours to come out to Sacramento from the airport to pitch me and my wife would say, like he's definitely not worth it. Why would you sit in all that kind of traffic, and they do it anyway. So, I mean, it would take six months, nine months, to fundraise.

Now it's just so much easier. I mean, investors are spending way more time recruiting than I remember. They're stocking the campuses. There's a lot of brown bag lunches that make searching look really easy, like it's all just still down to like a four page deck. Like, I get it, I'm not knocking it, but I think it made selection bias, like, who opts into this? It feels a little different. This feels a little bit more like an entrepreneurial type of job, like, like a consulting job, and it was, it just didn't feel that way before. So I think lack of, I'm going to go with, your lack of commitment, lack of edge in general, certainly does not apply to everybody. But I think we're all seeing that.

Yeah. Look, I think I agree with everything Jim and Kent said, and I think if I look at, okay, I get 200 PPMs, you know, a year, meaning that those are people that have gone through, put together something, and they're going to go to market to raise a search. Stanford says less than 100 is doing it. There's 100,000 MBAs annually. So I just don't know how there could be a dilution of talent. We're still such a small portion of the talent pool. I do think there's a lot more variation in the talent. I believe very much in thedemocratization and proliferation of this.

It should be spread. But I do think there's that. The interesting thing we haven't talked about is, when we talk about dilution of talent, is there dilution of investor talent? And maybe it's pattern recognition. Maybe it's the other thing. But if I could throw a hypothesis in the mix with this. Over the last 12 months, I've seen a lot of searchers come back and say, well, there are different investors saying I should stay around the hoop on this deal, and this is an immediate no like, what are you doing wasting any time on the deal?

And they're getting it from the people that have done this from decades, but there's new talent coming in that you want to be the nice partner you want to or maybe you're not paying attention. But to me, that's a real disservice to the searcher and to what's out there. No is very powerful, and an immediate no is even more powerful because they're just looking to build on your pattern recognition. Now they're going to take and make a decision on their own, but I do think that's a challenge. I think we've seen that come out in the last six months, but the previous 12 months, I was seeing a lot more of that.

I mean this problem going to get worse in the future like this strikes me as at least potentially an inescapable byproduct of just more money coming into the ecosystem, which makes it easier to fundraise, faster to fundraise. You know, Jim, to your point, I remember coming into your office in 2012 after taking a six hour flight from Boston. Doesn't happen anymore, and as more and more money flows into the space, is this problem likely to get worse and worse, that people are fundraising without a PPM and as a result, or at least partially as a result, might not have like a nuanced appreciation for just how profoundly difficult this journey can be?

I'm confident that money will flow back out of the space. In fact, we've seen it so and the reason why is they realize how hard it is to do what we do, and you've got to be really bought into that. So they will fly back out as much as they fly in. And it's just something that's always been dealt with is that, I think we'll continue to see.

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Badge, what a great comment, and Steve to hit your comment at the same time. I think what we just talked about, it's already been happening like, like, the frenzy, the ascension, the popularity of this hit. I don't know if it's peaked out, but I think it's it's either peaked or been on its way. And I think what happens next is we, we see the reactions when searchers find out the past a lot harder than they thought. You know, maybe because of less than ideal practices, the hit rates are lower. I think investors that were new to this that, you know, thought just indexing the community was a way to make a great IRR, I think are going to learn the hard way that it's not and it's a lot more work than it looks like. So a lot more work to add value. And I think you'll start to see people and money flow back out. I think we're on a way to a correction.

And by the way, to add to that, the beauty of this, and Jim hit on this earlier, the reputational feedback loop of this community is so strong. Like the amount of diligence that searchers do now on investors is to other searchers is really, really powerful, and that is the governor and the checking mechanism on who's adding value in our community.

Which is exactly the way it should be, right. Searchers should be deeply thoughtful about who they partner with, but so should investors.

And I mean, we've seen that who was on a cap table 15 years ago is different, including some institutional investors, than it is today. And I will say, though, that in terms of the top talent we're working with, some people who are smart or smarter than we ever have. It's just more of a description of the population that there's maybe a long tail of people who maybe aren't as strong as they were.

Okay, hypothesis number four, I've titled competition and I don't know about you guys, but this might be one of my most mentioned FAQs. I get asked this all the time. So the competition hypothesis is as follows, there are just too many search funds on the market today relative to the number of actionable target companies, and the competition is bidding at prices for assets, and makes any single search fund less likely to acquire so I'll just open that up for comment and reaction from any of you.

I have a first reaction. So I can remember when you could search, and literally never trip across another searcher in your whole search. Then probably buy a company 70 or 75% of the time, and of that, get it funded 70 to 75% of the time. That's definitely not today. I mean, I think I think searchers are competing with each other, with self funded searchers pretty regularly. But all that said, I still think demand outstrips supply. You can win every bit as big as you ever could. So I still think like room for optimism on that part, there's still a ton. There's a wealth transition that is a mega wave right now for searchers to capitalize on.

Yeah, so agree, 100% think about these numbers. So what 8500 private equity deals done in 2024, 25 search fund deals, 0.3% like, Okay, what about how many companies are between five and 50 million in the US? 250,000? Like, depending on what you're looking at, it's less than 0.6, 0.8% like demand is so much like the boomers that we're just lucky that these businesses, over the next 20 years need leadership and need a transition. So I just think that there is plenty of supply here.

Where we're seeing the collisions is on brokered stuff, where you've got you'll have brokers target search funds, in which case you'll get like five searchers all after the same deal. And then industries, usually, which are industries where other people have gotten a deal done, and searchers are coming in later to see if they also get a deal done. You're seeing collisions on those. You're not seeing them on the searcher who finds an interesting niche that they're working, that they've come up with on their own, and they're working independently. And I think that suggests to me that, you know, that's that's probably the best way to go about it is to not work, or where other people are.

I'd even say, even on that point. Jim, like, like, I'll sit back with a lot of FOMO. You'll see some of these. Some of today's searchers are so good. They've been historians of what's worked over time 100% they've done it all the right way. They're digging into theme development. They're ripping through this process with velocity. They're meeting people in person, they're hounding people on the phone, and the things they're looking at are as good as anything I've ever seen. I mean, all kinds of reason for optimism. But again, like not all paths are the same right now.

That's always been my opinion. Badge, you mentioned, there are hundreds of 1000s of businesses that are within our size target in the US alone, and just mathematically, whether there's 50 search funds or 150 search funds in the market at any given time is, you know, less than a rounding error. Now there's always been a part of me that's tried to square that with this reality that each of you have already articulated, which is, well, I'm seeing a lot of searchers running into a bunch of other searchers. So maybe that's not true, but Jim, to your point, that tends to almost always be a a broker transaction, or B, almost like the caricature of a search fund investment thesis, which is like a med spa, an HVAC roll up, or some sort of other home services roll up, like the thesis that I'm sure we're all tired of reading about. That's been my experience.

Also, Steve and I hope this doesn't hurt your feelings, but it feels like Canada is also too crowded of just the number of unfunded searchers out there who are calling on in on a finite list of companies, it just sounds like it's pretty brutally competitive there, whereas 50 years ago, Canada felt like Greenfield.

Steve, I think you hit on something big. I think, you know, if I were talking to my younger self, the searcher, and doing it now, just stay independent minded. It's because when you start, when everyone starts calling on the same brokers, or you follow the herd mentality and you're chasing retread ideas, that's what's happening too much right now. Okay, so plumbing, one big. I want to look at plumbing right now. Yeah, medical esthetics, one pretty big. I don't think I'd look at that right now. Except, you know, I could go on and on.

Interesting. So instead of competition, it feels like we've almost accidentally settled on another hypothesis, which I'll call uniformity. Too many people looking for the same stuff.

Yep, I think there's an issue there.

Ken, you would recall, like after Pro Service clearly went big. A lot of people looked at PO, I think this phenomenon has been around forever.

I mean, the hard questions, what's the next Iron Mountain in 1985? Or what's the next Pro Service of 2004? But it doesn't mean go to a PEO or record information management company again, you know, what's the next party rental in 1990 like, that's where the edge and the hunt could be. And for investors too, it's really hard to be a value added investor and look forward and not kind of go back to things that have worked the last three or five years. But that's kind of the best way to mediocrity I think.

By the way, there's a nuance here that kind of popped in my mind that I wanted to surface. One is, you know, I actually believe this is a sales process, and you have to do multiple channels, which it sounds like we're bagging on brokers. But not all brokers are created equal, right? And my thesis, starting five years ago was more and more sellers are going to have advisors, because they're going to have this technology that they can reach them, just like any other buyer can. And by the way, their spouse, since the great financial crisis, has been saying, I thought you were going to sell this business now you need to show or people are actually dying, you're in the process.

So you have to have. You can't take that channel out of your search. In my opinion, I agree. Let me give one one anecdote. So we had a searcher. He came to us and he said, I've seen this deal. I was like, I've seen this deal three times and and I was like, don't waste your time. He's like, I have an edge. I have a connection with the seller that no one else is going to get, and I might have to pay a little bit more for it, but it's not a retread. It was actually a very unique business. The reason it came out to so many searchers was because they had to sign the profile of the seller wanted a search.

Once they learned about it, he was like, this is exactly what I want. I want this in my this community, this. Type of person, and that searcher, against my advice, stuck to the deal, ultimately bought it, and actually did really well on the exit as well. So I do think there's some nuance we have to be careful with, but in general, I think what we just discussed holds, in my opinion,

I don't think searchers should ignore broker by any means. I think a broker who runs a really great process in Elicits 10 Bids, The Searchers not going to win. The broker who maybe has a seller with some unique needs where the searcher has an edge that can be great and that can be and then, you know, you've got a motivated seller, and then it's just a question of picking your spots. I also think having an eye on the broker channel can help with idea generation and open your perspective, to some potentially new theme generation that you can go out and pursuing your own.

I love it. Badge, I had a lot of edge to it. I think so much of this is bespoke. I mean, like, it's not enough to say, you know, outbound emails don't work anymore, even though I don't think they work anymore. It's more complicated than that. So I think the best formulas like being entrepreneurial hunting, I think it's a combination of river guides, conferences, some outbound email, doing cold calls, having industry specific brokers where you have a right to win that could be absolute gold. But then also being mindful, like the broker network, when I searched like no one knew what it was, so you were battling inertia.

Then maybe seven or eight years ago, it was kind of novel to the brokers to be a search funder. Now it's a four letter word, because unfortunately, too many people have soiled, not the good searchers, but enough people ghosted the the conversations with sellers. They didn't show up, they they didn't do enough homework. And there's a little bit of a black cloud. So like knowing how to maneuver through all that. That's part of the journey here.

Well, and I think on that point now, a person with a computer says they're a search fund, yeah, and that can damage the traditional model and what has done. I actually, interestingly closed on a deal, and the seller said, Well, I had four search funds, but I like this guy, and he was the only one that had money. And so they are learning that, oh, wait, there's a difference. There's the people that have money and the people that don't, and I think that's really important as well.

And by the way, on definition of broker, what I like to say is, if the broker, we don't talk enough about situational dynamics. Jim, can't not. We've talked about this. Steve, we have like the fit, the best searchers buy from the best sellers with the best businesses, and the broker that allows you access almost immediately to the seller, the advisor broker. That's the broker I want. If they're putting you behind a box and behind a process that's not something you want to participate in.

Well said. And there's a even a bit of a contrarian view here, like all the things we're talking about, I think there is a flight to quality right now, and the good brokers get it. If you're the searcher that does what you say, works fast, talks crisply, did your homework. You will get short a short circuit. You'll get a shortcut right to the seller. You'll even be on their A list for the next year. So like, there's a good part of all this too.

So, if this hypothesis is less about competition and more about uniformity, I have a very tactical follow up question. Maybe there's a uniformity issue, because in a very black and white way, it is hard to come up with industry theses. Most searchers come from generalist backgrounds, banking, private equity, consulting, and as a result, they don't have, like, the quote, unquote, luxury of being able to say, I worked in industry X, Y, Z for five years, I know where all the bodies are buried, therefore I'm going to acquire an industry X, Y, Z. So what do they default to?

We default to things that have worked in the past, and maybe that's perpetuating this uniformity issue. So maybe the question is like, how have you guys seen good examples of industry ideation? Where do these kooky little niches that nobody's ever heard of. Where do these tend to come from? What is like good ideation look like versus less good ideation?

Well, here's a couple ideas. And again, it's all about being scrappy and have an entrepreneurial edge and a hunter mentality. I mean, you could go look at the Indianapolis Convention Center and look at all the events they orchestrated or scheduled in the last 24 months. Every one of those is a niche industry that might be interesting. Can't promise it, but I'd look. You could go drive. I grew up in Southern California. You could go drive around City of Industry of Pacoima, it'd be the same as as the South San Francisco right by the airport. Drive around those blocks for half a Saturday.

Start writing down the names of the things you see. And people have websites now you can go to the Inc, fastest growing companies for the last four years, and just start plucking, plucking away industries you see there. Another thing which always fascinated me, you can email 40 people in your inner network, people that are in private equity, maybe they're a divisional CEO at General Electric or something, or in consulting. Three sentences are left like, here's what I'm trying to do. Hey. Nice to say, Hi again. Haven't talked to you in a couple years. Here's what I'm looking for. Do you see anything that looks like that rhymes like that in the century position you're in? And because they know you, you'll probably get back some pretty fertile ideas like that could be interesting. But you got to go for it, right? That's that's not herd mentality there.

It's funny Kent, because I think that process that you described worked just as well 20 years ago as it did today, no matter what you know with email and all the change in tactics of that kind of industry, idea, open mind, asking questions, listening, being curious, that's timeless.

And like dirt under the fingernails, right? Like Kent I remember I used to do exactly I'm glad to hear this validated by somebody else, because I thought I was the only lunatic that did this. But I used to drive to those non descript strip malls on the side of the highway, and I would go into the elevator bank and take pictures of the company directory that's always posted in front of the elevator bank, and I drive back to the office and start Googling around. So maybe not the most efficient way to go about it. But I guess for me, the takeaway is like, there is simply no replacement for dirt under the fingernails, unglamorous work and just hustle. I mean, hustle is maybe the best way I can think of to avoid this, like uniformity issue.

Intense curiosity. Hunter mentality, driving on the freeway and taking phone pictures of all these goofy trucks you see, and then going back and seeing what do they do?

Like, like, yeah. I love Yeah. I do like the I did, and still do the more efficient way. Not only getting into the biggest industrial parks there's in the book of lists or whatever, but you can do it in Google Maps and just drive around electronically. That's the hunt. Is what's fun, right? That's what's the big part of it.

Okay, moving on to hypothesis number five, seller valuation expectations, and this hypothesis states, the days of reliably acquiring small businesses at three to five times are largely behind us, and as a result, sellers are only willing to transact evaluations that would be unpalatable for most search funds. So we can go in any order, any reactions to that hypothesis?

I wish I was alive during the days of three to five entry multiples. That hasn't been our experience overall. It's usually been, you know, sort of five to seven. But I think for me, it feels like seller expectations ticked up pretty strongly in software, but everywhere else it's, you know, within a half a turn or a turn of where they've been historically.

Yeah, I think it depends on the space. I mean, it's hard to cast an over generalization. I mean, if you know, I do hear some searchers who I think the world of telling me things have things have gotten more expensive, pretty much across the board. So maybe there's some truth to that. But it does seem like it varies from sub sector niche to sub sector niche. But I'd also say like, like price is what you pay, values what you get. I mean, sometimes seven times EBITDA could be the deal of a century. Just what industry and company, team are you getting for that?

I agree with that. Kent and I think also valuations have shifted up on our exits. I mean, we've been selling companies at prices that never would have dreamed of, if they're quality businesses with quality leadership.

Yeah, I don't think we ever bought it three to five times. I just don't know that the quality was there. And so, like I said, the most expensive business I ever bought was three times zero. But I do think if you look at the Pepperdine study, you know, for 50 years, things were trading at this size five times, five times, five times. It's moved to six times and but I think one of the things important to talk about, too is like, and this goes back to what I was saying earlier. We're focused on close rates of searches. Are they acquiring? But what about the returns of the investment?

Which is the most important part, because the worst case for a searcher is you get in a bad company for 10 years and don't create any equity value. That's the worst case. So if you look at what we've done over the past decade, if you exclude the top five, the IRR is going something like 20% to 30. It's going up. And so we're buying better businesses, so we're paying for those businesses, and that is value. And so I think that's what people need to focus on, instead of trying to get the close rate to 100% on searchers buying all these businesses. Oh, thank you. The best deal I ever did was the one I didn't buy, is what we need to really focus on.

So to me, that's where we like to focus and get our searchers to focus. And I think about that too from my seat of like, okay, well, all right. Well, I used to hear it was a 70% close rate. Now it's a 55 to 60% close rate. Well, what about my risk? Well, let's be real, if you close your search and then you combine it with who created positive value, economic dollars versus those that didn't. 50% of searchers don't make any money, right? Well, okay, is that good or bad? Like, to me, starting a business and having a 5% success rate. Wait, I can do 10 times like I'll 10 times more likely to be successful. And look, we have a lot of confirmation bias. We're very confident in ourselves to go buy businesses, and that's what entrepreneurship is about. You have to believe and you have to go get it.

I would agree a 50% success rate for any entrepreneurial endeavor sounds like a no brainer in terms of taking the plunge and trying.

I think this conversation matters to people who are contemplating pursuing search and so if you're going to jump into the pool, whether you have a two thirds for success rate, it's more enticing than if you have 50% but I do think perception of the search fund, skill set and what you learned during the search has increased. I think 20 years ago, it used to be considered pretty unusual or weird to do this, but I think people who are contemplating search should know that you're going to develop really great skills, and if you do well in search, even if you don't buy a good company, even if you don't buy a company, you're going to have nice options afterwards.

Yeah. Okay. Hypothesis number six relates to cost of capital expectations. So this thesis says searchers have to pay a certain price to hit a 35% IRR, whereas other types of buyers in the lower middle market can pay higher multiples because their IRR targets are closer to 20 to 25%. As a result, searchers are at some sort of structural disadvantage due to the return expectations of their investors. So Kent, maybe we'll start with you, and then Badge and Jim can add based on the contents of your answer.

Yeah, well, I can be a little bit provocative here. I've always thought that holding things a little longer and looking at what the MOICs were, was at least a part of the scorecard that we all should pay more attention to, like, in a way, like, you know, search can become a really efficient way to get to, like, a three or four moic, and then we sell too fast. We did it that 35% hurdle. So I just want to make that note like, you know, at the end of five years, that's a four and a half time MOIC. So I would take some comfort if I were a searcher and this was an issue, knowing it's every bit the win and probably better for your personal wealth creation, if you go a little longer than three or four years.

If you're willing to really be a business builder and go for it, by your fifth, sixth, seventh year, you might be at a 68 time MOIC, even if the IRR is dropped. And I think your investors would be super excited. Probably get a tattoo of you on their left arm and build a statue in the backyard. So like, like, let's just look at this a little bit more openly. So I'm not sure. I I get it, but I'm not sure I like, buy this as too much of a concern. I think there's a way to talk through that, and then I don't see I'm every bit as excited about the prospects, of the of the opportunities that I'm investing in now, as I ever was just, there's a lot more variance.

So Kent, if I am a skeptical searcher listening to that, I agree with that, by the way, but if I'm to play the role of a skeptic, they would say, perhaps they would say in response. But my carry is based on IRR targets, not MOIC targets, so I am structurally incented to sell faster than I otherwise would. A high MOIC see is great, but I might lose 10 points of carry assuming a duo search, if my IRR is not high enough. So how would. You respond to that skeptical searcher?

I think you can have a lot of trust. I mean, sometimes it's in the LLC agreements. Sometimes it's just forming a deep trust with your investors, your larger investors, like, let's just leave some optionality open, like, I get what the scorecard is and how I earn equity, but should we love building this and will we recognize that carrying a 35% IRR past the fourth or fifth year? Can we all acknowledge that's pretty hard to do? Like, can we just have some trust and have that conversation, and maybe we'll lower the IRR hurdles after the fifth year and convert into Mike multiples.

Like, can we just be open and to whatever the best path is for this business build? I think they'd have a very partnership like answer, and that people are out to support them. And just point of fact, like, you know any of the investors in this community, whether you're family, office, institution, individual, if you just go back to what the top the returns, everybody's most proud of the top 10 or 20% anyone's portfolio, you know they tended to run a little longer, and they found a way to solve for this.

And Steve, by the way, we did this in your deal, that Jim and I were on the board, right? This didn't exist. And what's always hilarious to me is people say, Well, I want to go to a moec, and I'm like, well, a pound of feathers and a pound of nails is still a pound. So what you're really asking for is a declining IRR hurdle, right? And that's I mean to Kent's point. Like, do we want to make a 1.35 MOIC, 35% in the first year? Or would we rather make 20% over 15 years?

I think we're pretty aligned that everyone would would pick the option B. So it goes to the word that Kent said, and it goes to the reputational feedback loop with this community. It's about trust. It's about, I mean, one of my mentors told me long ago, he said, I can make this legal document 1000 pages thick, but if you don't trust who you're working with, it doesn't matter.

Yeah, and I guess that, Badge to your point, that was my first hand experience as a CEO. Our whole period was seven years, and I remember approaching you and Jim, both on the board for seven years about this very issue, and it was a pretty quick conversation, and it was all underpinned by this idea of trust and respect. And for me, it's yet another reason for searchers to be deeply thoughtful about the people that they choose to partner with, because I felt comfortable coming to you guys and having that conversation.

You created an environment where I wasn't scared or intimidated to have that discussion, and I felt that even if I didn't get the outcome that I was looking for, it wouldn't reflect poorly upon me. So at the risk of pumping your tires a little bit too much Badge and Jim, I would just say that you guys, as board members, created a great, safe environment for me to just at least have that conversation with you. And again, my first hand experience suggests that it was a pretty quick and reasonable one, and we made the changes that we needed to make.

Steve, did you go into search to get an entrepreneurial win and to make a nice chunk of change or to maximize your carry?

Yeah, certainly the former, yeah, yeah, yeah. Okay. Let's move on to the second last hypothesis that we got from our community of searchers and CEOs. This one I've titled searcher fatigue. So this one says that there is some quote, unquote, searcher fatigue within the seller and intermediary communities, communities, I should say, and sellers and brokers are being overwhelmed with emails from search funds whose individual value propositions all sound remarkably similar to each other. So you can just see the proverbial seller rolling her eyes because she's gotten the 20th email talking about protecting her legacy this week. To what extent do we think searcher fatigue in the seller and intermediary communities is explanatory of the declining acquisition rate?

I think there's something very real here, and it's unfortunate. It's I think it's overcomeable, but I think there's probably been too many unthoughtful email blasts that are all about volume. You know, probably not the best showing when you're building relationships and building trust with sellers and brokers, certainly not from the searchers we all love working with. But probably as this community or this path got more popular, there's been some not so great actors, even bad actors, lot of ghosting on phone calls. And so, I mean, there's a little bit of a headwind because of that, in my opinion,

We routinely hear from winning searchers, they'll recount the seller, telling them, I get like five emails like this a week, but there was something about yours that made me hit click Yes. And I think that's probably a strongly differentiated biography that comes across as very authentic and sincere, that they're not just some suit. And I think it comes from having a knowledge of the industry and some connection to the industry that resonates as authentic. And I think for searchers who are just, you know, cut and pasting, that that's not going to work as well as someone who really knows why they want to buy a business and why they're the right person for that business.

Yeah, well said, I think of all of the points that we've discussed, this is probably the one that actually does have more merit to it. And everything Jim said is right on. I mean, you know, I think a lot about Dennis Lally and his sister Jenna buying a business and they had their two Golden Retrievers on their website, and one was an associate with typing on the, you know, keyboard, and you talk to the seller, and they, they ultimately bought. And he said, Look, I like golden retrievers, and I thought their humor was like me.

And, you know, Dennis had a background that resonated and actually made sense with my company. And so it's, how do you stand out like that? How do you do things that don't scale, as Brian Chesky says, and and how do you do things that I was told when I was searching one time, they were like, You know what your job is? One of the investors I said, to buy a business? And they're like, No, your job is to be the son or daughter this person never had, and that's what your job is.

It feels like we're getting back to this problem of uniformity that we talked about competition, which is too many searchers sound like too many other searchers. So while that makes good intuitive sense to me, I guess the risk of going too personalized is certainly there's a trade off vis a vis time second. There's this reality that you know in your first phone call or your first email, you're unlikely to dazzle a seller with your industry knowledge specific to his or her industry. So how do you guys think about those two relative trade offs? A, personalization is more time consuming. B, I could do 20 hours of research on industry, X, Y, Z, but the seller's probably forgotten more about the industry than I'll ever know, and I'm unlikely to dazzle her with my industry experience, especially in those first couple of calls. How do you guys kind of square that circle?

The thing I think about in that question is, is the choice quantity or quality? And the answer is both, and you can do both like, okay, so conversion rates have fallen. Okay, so on your funnel, conversion rates have fallen some, let's say from mid 30s. By the way, not in all campaigns, but mid 30s to mid teens. Okay, well, cold outreach is like a half a percent or less. I mean, we are selling money after all. Right, so I don't think you should throw the baby out with the bathwater, right? You should still do those things, because they're a part of your process, but you have to also do the other as well. And you leverage interns, and you leverage technology, and you leverage things that you can to find that one needle in the haystack.

Yeah, I love that Badge. I think part of the currency and trade is knowing how to move with velocity on a search that might have 730 days in it, or something like that. Like it's a balance of quantity and quality. It's like playing it's like playing a card game. You don't go all in up front when you don't know what your hand is. So you're spraying a bit. I don't think you're looking at 20 industries, but you might be looking at two or three in parallel. You might leave 20% of your time for third party intermediaries. It's not like, don't cut off brokers, wealth managers and accountants all right up front, like, that's a fairly wide net, but the way you're outbounding, it's probably a mix of trade shows, river guides.

It's not just cold emails, and it's how you mix it together. It's how you build themes and maybe use an intern or two, or, you know, leverage your investors. How do you get to good themes early? How do you get smart about them early? It's just, it's moving through this with velocity, with the right amount of personalization. But then when your conviction builds, I think the weight starts to get way more about personalization and less about quantity. But you gotta work your way there, because most of us don't know the perfect industry when we start.

Yeah, moving on. On to the last hypothesis. And again, you know, many hypotheses were mentioned, but the eight that we will have covered today were the ones that were mentioned with overwhelming frequency. So this final one is about email, and we touched on a little bit when evaluating the prior hypothesis. And this one says that email deliverability is a massive challenge, and these challenges have become particularly acute over the past two years, and as a result, that is hurting the acquisition rate of search funds. Any reactions to the email deliverability hypothesis?

Well, it's indisputable that email success rates have dropped, and some searchers have been able to pivot and change their tactics to more diversified approach, a lot more conferences, in person, phone calls, etcetera. And to the extent that there's folks who are still really reliant on on email, they're going to be less likely to find something.

Yeah, I think there's something real if people are still zoning in on what's wrong with email deliverability, they probably haven't adapted enough, because the array of things they're using should be a lot broader than email. But on that email one like, I think there used to be open rates of 70 or 80% even two or three years ago. Now, I don't even know if you can measure open rates, or you get, yeah, you'll get your domain shut down, or, yeah, the game has changed, and this is just not as, the ROI on these is a lot less than other avenues

The thing that I've always loved and this is our home, right? This community is our home. And I love how our community adapts, and how smart people are to move with the change. They're always trying to figure out what's the next step when things happen, and so we'll get through that. And I agree with Jim, it's undeniable that these things have happened. We talked about it, don't be too prescriptive, because this evolution of sales needs to happen to be able to hit people. But again, don't abandon that channel. Like you need to have that channel. But you know what?

I don't hear a whole lot of people doing cold calls, because you know what that feels like that hurts. I mean, I even now it's been a couple of years. I have to admit, actually probably more than that. COVID is a real time teller that and kids. But I used to just go knock on the door and sit in the just personally, like I wanted to feel what my searchers were feeling. So I would walk into a thing and sit in a waiting room and wait for 45 minutes and ask the lady like, Hey, can I go back and see your boss? She's back there. Like, and so you need to feel that and understand it, but you've got to feather all these methods in together and have a really appropriate sales outreach.

So much admiration for the searchers that do that. It's scary. It's hard. I just love you, sharing that, so much admiration for them, but that's what you got to do.

And even if email is no longer what it once was, I would agree with badge that, like, the takeaway is not to no longer email. The takeaway is that, like a new set of core competencies is required, setting up domains, setting up sub domains, warming up domains like just a whole bunch of skills and tools that didn't exist 10 years ago are now prerequisites just to make sure that email remains a channel.

So by the way, sorry, just one last thing Jim said this earlier, but I bet all of us could point to two or three times this month we've heard exactly what Jim said, which is your email was just different than everyone else, and it just popped, so it's clearly still working.

Yeah, I would agree with that.

We're optimistic, right? Like it? This is a head one, but there's still great companies out there, and we're working with some really talented people are out there looking for them.

Jim, I want to conclude with that thread of optimism. So I'm going to ask each of you a two part question. One part of it I have not prepped you for, so apologies in advance. So the two part question is, A, is there any hypothesis that we didn't explore today that we should have? And B, whether there is or there isn't. The question is, are you as excited to be a search investor today, as you were five to 10 years ago? So Jim, I'm going to put you on the spot and start with you, and then we'll go Badge and conclude with Kent.

I do feel like one thing we didn't cover is I do feel like uncertainty and anxiety around the election in the United States. I don't have any like data or concrete proof, but I think that might have suppressed some sellers, and my justification for that is for whatever reason, we have an unusually large number of stuff under letter this quarter, which makes me think that there's like a rebound. And so to the extent that there's were some temporarily down fluctuations over the last year or two, the election might have been.

Then, in terms of my optimism, I'm as optimistic as ever. I think we've touched on this. There's a lot of really great small businesses that need bespoke succession solutions that searchers can offer. And there's a number, there's a huge overhang of private equity that wants to buy the businesses that we build. And so I think the returns will be there, maybe not to the absolute levels that they've been historically, but still relative to other investment areas. I think this is a really attractive space.

Badge, I'll go to you same two part question, any thesis that we didn't explore that we should have. And Are you as excited to invest in search today as you were five to 10 years ago?

Yeah, I think the thesis I would think about as a searcher is, is my vintage going to be good or not? And so because of all these things we're talking about. And I searched in '08, the great financial crisis. And naturally you would think that would be a tough time to acquire. And it was just like any but the highest failure to acquire rate was '06, and so it makes sense, because the day that Lehman collapsed, if you're 19 to 24, months into your search, when you're your most efficient and effective, that's when it's going to be challenging.

And the takeaway is, you can't time the market. You can only do what's in your life, and you can do it. But my advice to you would be, hey, hope for nine months. Expect 19 months, but prepare for 30 if you really want to do this. And by the way, prepare financially, but importantly emotionally for that. So it's more of an advice than another call out. I think we covered some of that earlier. My thoughts there, as far as it, you know, am I more excited? I am. I'm more excited, and I think the supply demand economics exists today.

I'm a simple person, so I thought about supply and demand when I was thinking about investing like this, and it was the things we've covered today is the entrepreneur is the investor community is the supply of companies, and the supply and the quality of that is still there, and we can meet it. I do get concerned about the culture. And it's funny, in school, you kind of dismiss all of these culture things and say, Oh, it's just bogus. And then you realize, the older you get, when you run businesses and you work with people, that culture is really all that matters.

And I love the work that's been done around the culture of our community, but I worry about 10 years from now, do the roundel rose turn into sharp elbows? Because there's certainly some sharp elbows even happening now and have been in the past, but like, let's keep them round. Let's do what's right the searcher, let's hold that 35% I mean, 35% like, back to your earlier point about, oh, they're underwriting at 20% well, what's the definition of lower middle market? Because the micro cap market, you got to underwrite a higher return, because they're small businesses and have more risk.

So as long as we have the culture and people that have lived through this, and we will uphold that culture because of the reputational feedback loop. And that's why everyone on this phone is here doing this, right, is that we care deeply about this and about the people that this is their journey, because it's a payback model. We all lived it. We all benefited from it, and we want to have that impact. And that to me, I believe, fundamentally, people are good, and so I'm always going to be an optimist. One of my great mentors, Hugh McCall.

I was sitting down, and we were talking about when the banks collapsed and everything a couple of years ago, and I said, Look, I'm an eternal optimist. And he said, Look, he goes, Well, you can be a pessimist and be right, but that doesn't mean you're going to make progress in the world. So you've got to optimistically look at things you're driving forward in you have to be realistic too though.

And investing is a fundamentally optimistic act, because you're fundamentally taking a bet that tomorrow is going to be better than today, Kent, we'll conclude with you.

Yeah, I'll wrap those into one answer. I think for me, it's a hell yes exclamation point. I mean, the rewards of this path are huge. I can't imagine doing anything else, and I think all of us feel that way. It's personal fulfillment, growth, learning, life balance, control over your life. The friendships you build are deep and amazing, and you can create a lot of wealth. I mean, every check box is clicked, so to me, it's worth the pain. It's worth making the pivots. I guess, if I were to do it again, or if I were to do it right now, or what I would offer up is just keep thinking independently, like, just really, like, it's got to be like a burning drive.

Think independently. Be radically rational. Just try to follow best practices. Because I think for those who do, the numbers are very, very different than you know, rest of index. I check yourself just make sure the edge is there. You have to really, really want this, and then build your ecosystems carefully. The people around you, it really, really matters. They're forms of nourishment and enhancers. It's never going to replace you at the center of it, but it can make a big difference.

Yeah, really well said, you know, and I hope that today's conversation can serve as a sort of microcosm or example of what makes this community special. We've got three of the most experienced and respected investors taking their time to join me to discuss a lot of questions that are top of mind for a lot of people. I'm asked a ton, and I'm sure you guys are asked a ton. How should I think about constructing a cap table? You know, investors versus operators, growth, investors versus value investors, large funds versus individuals. I think all of those are important to think through. But at the risk of oversimplifying, I usually default to the following, find the best human beings that you can and ultimately, that is probably the best thing that you can do to construct a cap table.

And I mentioned that because we've got three pretty darn good human beings on this call, Badge and Jim are on my board for five and seven years respectively, and they are exactly the type of board member and investor that everyone should be striving for. And Kent through secondhand experience, I've heard the very same with you, but having first hand experience with Badge and Jim, this is exactly the type of person that you want on your cap table for all of the reasons that we've discussed today and many that we didn't discuss today. So that's a very long winded way of thanking you, Kent, Badge and Jim for joining us. I am so lucky to be able to learn from people like you, and hopefully our listeners feel something similar.

Thanks so much, Steve and wha an honor Badge and Jim, t be on a panel with you guys. Just love it.

Yeah, thanks, Steve, same, and by the way, it's four great human beings. You're in that as well. So thank you.

Appreciate it.