HALSTATT LEGACY PARTNERS
Entrepreneur-focused investment group within Halstatt, LLC, a Naples, Florida-based family office
Will provide sole-sponsorship for 2 new entrepreneurs each year
We have learned that after we make a presentation or speak to someone for the first time, Nick, Ayo, John, Jordan and Katie are often inundated with requests to speak. We would prefer that you and we both know you’re serious about searching before utilizing their valuable time. Please do us a favor and hold off on contacting them until we have made an introduction.
We take our partnership commitment seriously. We teach our partners how to search, provide them with the technology tools and methods required to increase the efficiency of their search. We are very involved with their search, and will do whatever is required to help our partners be successful. When it’s time to buy the company, we provide 100% of equity required to close, and lend our balance sheet to secure debt financing on very favorable terms. We also build a corporate board and team of advisors to assist the entrepreneur in learning and managing the business for the long-term.
Focused on acquiring business owned by older entrepreneurs who lack an heir or other succession plan
Generating profits between $1,000,000 & $4,000,000
We’re looking for the “just don’t screw it up” scenario for our entrepreneur partners
Ideally pay between 3.0x-4.0x profits
Business has historically been profitable, but probably isn’t growing
We pay a price that allows our entrepreneur and us to earn a good return just by not breaking the company (of course we think they’ll do better than that!)
If possible, we like to distribute excess cash back to shareholders (including the entrepreneur)
Our entrepreneur earns 25% stake in the company
10% vests on close of the deal
15% vests in equal monthly tranches over 4 years
The entrepreneur has a “catch-up” provision
After we have received our investment capital back from distributions, the entrepreneur receives 100% of cash distributions until she has yielded the equivalent of 25% of the total distributions
After that, we distribute cash on a pro rata basis (25% to entrepreneur)
Strategic focus is on maximizing returns to the entrepreneur
Focus is to get through the search AS FAST AS POSSIBLE
Can search from wherever you like
Single source of capital - you can’t get closer to the 1 decision-maker
You only raise capital once
We even have senior debt on SBA-like terms arranged for you
You have a partner to help you close the deal - we’ll do whatever you need
Open to non-traditional search industries
Really like regional searches
We’re patient capital. If the company is doing well, we’d be happy to own it with you forever
This is designed to yield better results to the entrepreneur; although, admittedly, we don’t yet have empirical evidence to support that we do
Only commit to 2-3 entrepreneurs per year
Long evaluation process (>9 mos.)
Sometimes people perceive a risk in a single source of capital. The feeling is that an entrepreneur could get all the way to a “signed” deal, only to have their one capital source say “no.” We work so closely with our entrepreneurs, I’m not sure how this could be the case. There aren’t any surprise deals between us and our entrepreneurs, and they know up front, and during the process, which deals we wouldn’t be interested in.
Some people equate having a single-source of capital to getting “hired” by the investor. For many search entrepreneurs one of the primary motivations for searching is the feeling of efficacy they believe will come from “working for themselves.” Our view is that the better analogy for our partnerships is a marriage, not a hiring. We would argue that it’s our partner’s search and their business to run. They operate with autonomy and have discretion over their day-to-day destiny. We help when and where asked. We’re confident that our partners will confirm this.
We’re not very interested in multiples >4x, fast-growing or technology/software focused business. If you want to buy something from those areas, we’re not a good fit.
We don’t have a 5-year perspective on this, so if you want to flip after 5, we’re not a good fit.
SELF-FUNDED SEARCH/SBA Guaranteed Acquisition Loan
The model taught at HBS by Royce Yudkoff and Rick Ruback
Entrepreneur assumes the risk of the search by not raising capital to cover cost to find the company
Use Small Business Administration-guaranteed loan to finance up to 80% of the purchase price
SBA loan is capped at $5 million, and will guarantee 75% of the loan
3,5, 7 or 10-year terms
No prepayment penalty, but no non-SBA payments or distributions for 24 months
Raise any remaining capital in the form of redeemable preferred equity, usually with a high preferred coupon rate (>15%), and targeting 25-30% IRR
If the entrepreneur can pay off the debt, she can own 80% or more of the company
Example Case: Home Nursing of North Carolina (Ruback & Yudkoff, 2013)
The entrepreneur is in total control of the process, of the company and of the equity
If you’re looking for autonomy, this is it
You take all the upfront risk, chose the industry, craft the deal, raise the financing and set the course for the future of the business.
The SBA requires a personal guarantee from the entrepreneur. If you default, you’re on the hook.
The entrepreneur needs cash to support the search (living expenses, travel, broken deal costs, marketing, etc.), so you can burn through your savings.
It can be difficult to secure a letter of intent if you can’t prove you have capital to do a deal.
Sellers can be suspicious - they may ask for proof that you have the money to close a deal. That can be tough in this model.
SEARCH FUND ACCELERATOR
Incubator of search entrepreneurs - like Y-Combinator for search
Economics: up to 25% equity, earned over three tranches; no preferred return to investors and lower transaction costs.
Single source of capital
Close relationship to the funding decision-makers
Mentorship & education from search experts and investor-advisers
Peer relationships with other searchers
Search resources provided (analysts, interns, CRM, websites, offices)
Focus is to get up the search learning curve as fast as possible and see more opportunities over a given search period
Typically buy high growth potential businesses with $1m-2.5m of EBITDA
CEOs and the fund’s investors will take out money over time through leveraged recaps rather than having to wait for an exit.
SFA is an institutional investor, so it must return capital to investors at some point; however, the fund life is 15 years with the possibility to hold an investment indefinitely and continue doing recaps.
Because the entrepreneur’s payout is based in part on IRR hurdle, there has to be a liquidity event to maximize the payout. If you want to keep owning and running the business, you would have to find a way to buy out the investor, who holds a majority of the business.
You must relocate to Boston or New Orleans for the search (this isn’t a disadvantage to many, but it is to entrepreneurs hoping to search from a different location).
SEARCH FUND INVESTOR COMMUNITY
Example investors (in no particular order)
Pacific Lake Capital (Boston)
Anacapa Partners (San Francisco)
Search Fund Partners (San Francisco)
Peterson Ventures (Salt Lake City)
Relay Investments (Boston/Montreal)
Cambria Group (Dallas)
Housatonic Partners (Boston, San Francisco)
Graue Mill (Chicago)
Argo Management Partners (Chicago)
Operand Group (Chicago)
Ohana Capital (San Diego)
RHV Capital (Bloomfield Hills, MI)
M-Squared O (Los Angeles)
WSB & Company (Charlotte, NC)
Rich Augustyn, NIP Investments (Boston)
Trilogy Search Partners (Seattle)
Dixon Midland Company (Chicago)
Prairie Capital (Chicago)
Numerous individuals: just ask the community or look on searchfunder.com
20%-30% carried interest to entrepreneur(s)
Depends on number of searchers on team, and experience of searcher(s)
Carried interest vests in three tranches
1/3 on deal close
1/3 over time (4-5 years)
1/3 based on achievement of investor IRR hurdles (net of entrepreneur payments)
150% “step-up” to participants in the search round
If they choose not to exercise their option to invest their pro-rata share of the deal equity, their search capital will be credited toward equity in the acquired business at 150% of it’s original value (e.g. if the search investment was $50K, they will have $75K in the deal).
The model was started at Stanford 30 years ago, and has yielded ~34% IRR over that time. They’re definitely doing something right.
The investors have seen it all and know what works and what doesn't
Small, highly-networked community of investors (many of whom were former searchers) and entrepreneurs.
Fundraising can be relatively fast. When the market is moving well - as it is now - an entrepreneur can be funded in 1-2 months.
Bigger investors (Pacific Lake, Anacapa, Search Fund Partners) are starting to take bigger shares of funds, which can accelerate the fundraising process.
The illusion of diversity. Often entrepreneurs perceive safety in having many LPs in their fund; however, anecdotal evidence suggests that because of the high connectedness between big investors, they typically work in concert.
Focused on acquiring growth businesses, often for high multiples (>6x). This introduces execution risk for the inexperienced entrepreneur, and they are required to achieve stellar growth to maximize their economic benefit.
Overcrowding means less time for each searcher. While the industry seems to have acknowledged that trend and taken steps to ameliorate its impact, searchers still complain that many LPs won’t return calls.
On average about 40-60% of LPs will not participate in the deal. This can happen for various reasons beyond simply not liking a deal: they’re already invested in something similar, they’re illiquid at the moment, etc. Many entrepreneurs find themselves raising funds again when it’s time to close the deal.
OTHER CAPITAL SOURCES:
Gemini Investors - have twice engaged in an “Entrepreneur-in-Residence” model with search entrepreneurs
NextGen Growth Partners - “incubator” fund of search funds based in Chicago. Single source of capital and started by a former searcher/current UofC EtA Professor
Broadtree Partners - hybrid accelerator/search fund model. Launch cohorts of entrepreneurs each year. Members of the cohort have economic interest in other cohort members companies. Capital is supplied by LPs who have search-like option to participate in acquisitions.
eQuire - “crowd sourced” funding platform to pair qualified investors with self-funded entrepreneurs seeking equity to close deals.