Six Real Stories of Small Business Failure with Andrew Hoffman | Halloween

Hello, everyone. Welcome to a special edition of the Search Fund Coalition. Tales from the Search Crypt, I will be your crypt keeper for today's session. Andrew Hoffman, founder of the Search Fund Coalition. We're going to talk about nightmares on Main Street. I'm going to be joined by Jed Morris, the king of the Sim Reaper. We're going to talk deep and hard about deals that actually went wrong and why you need to be prepared and ready for anything. Before we get started, I just want to give a quick shout out and thank you to some of our partners for today. First Internet Bank, Jared Johnson. Jared wants you to know, don't over-leverage your deal. Otherwise, you'll end up in the grave. Make sure that you have the right mix of debt and equity in your deal and be able to find and be able to operate your business. Mark Sinatra from Aspen HR wants you to know that you don't want energy

vampires on your team. Make sure you have the right team in place. Do an HR and PEO audit. We'll make sure that everything gets done right the first time. Kane Cross and Chris Williamson wants you to know that your money is your lifeblood. Do not get sucked out like a vampire. Somebody that I forgot. Oh, that's embarrassing. Jed Morris, come up on stage. Sunset Co's partners. We're going to do this. Get ready. We're going to- For God, that's horrible. I know. I'm sorry. For whoever you are. Hold on. I'm going to find you. No, Jed, start going. Oh, so bad. This is so embarrassing. I was on a roll too. That was really good. Well, I don't want to interrupt you. You're on a roll. I was just throwing there. I want you to know that failure is not not finding a deal. Failure is finding the wrong deal. Failure is finding a deal that you personally guarantee because you feel the expectations

of trying to be a quote successful searcher. And there's a lot of people out there who are going to help guide you in the right direction. But I can tell you that there is nobody out there who cares more about you not ending up in bankruptcy than me because I know exactly what that feels like. Thanks, Jed. And our last but not least overly risk strategies. Have insurance. Make sure that you've got your garlic and your steak if you need it to make sure that everything works out well in your deal. Okay, okay, okay. Let's do this, people. So the way that we're going to structure today's session, we've got a few tales from the crypt. Jed is going to walk us through some stories. The names are changed to protect the innocent and the guilty. The stories in the industries are also pivoted so that we can talk openly. All of these stories are real stories that Jed has sourced through his collection and the book that he's been working on. So we know that they are legit in that way. We are then going to talk through each of them for a few

minutes and just to make sure that everybody has a chance to get insights and ask questions. You'll see on the right hand side, there's a little blue chat button. If you click out on that, you can see the chat and also there's a Q&A tab. You can drop things in the general chat if you'd like, but if you try to put all the questions in Q&A so that myself and the search for a coalition team can keep tabs and make sure that everybody's questions and thoughts can answer. Without further ado, we are going to go through six mini episodes of tales from the search. Like Andrew mentioned, the reason why we've changed the names and the locations on these is because, and also the reason you don't hear these stories very often is because nine out of 10 times, they end in settlements and lawsuits, which include nondisclosure agreements and non-disclosure agreements. It is a requirement in the vast majority of cases that you can't give out the exact names. Then on the few cases where

you can, it's simply not fun for people to blast online that they've had some massive failure. That's why the names are changed and the industries are changed, to help protect people who have already signed settlements and agreements in place. That's why we appreciate what you're doing here, Jed, is that we need to shed more light on the heels and things that can and go wrong. Not because we want you to be scared, but we want you to be prepared for anything. And it's very easy to be prepared for growth. It's very difficult to really be discerning, especially when you are in the thick of it. So our first mini episode is the nuclear apocalypse. Market condition changes, Jed Morris take us away. The first story is someone I can actually say the name. His name is Joe O'Dell. Joe is my partner at Sunset Coast. Joe got his MBA at UC Berkeley at the Haas School of Business. Wonderful guy. Realized that he wanted to do a traditional search fund. He raised a traditional

search along with his partner. They found their first business, a healthcare business, a home healthcare pharmacy-style business. There was a $20 million acquisition. This is a great example of an acquisition where everything was done right. They had plenty of capital. They did Q of E. They did operations. They had dedicated investors who understood the space. They had the right pedigree. Everything you want from a traditional search. The one thing that really did stick out as a big red flag was the fact that they had a single line of revenue that made up about 65% of all the revenue. And that's not uncommon in healthcare. It's also not uncommon in aerospace or other types of businesses where there is inherent customer concentration. And so they knew that going into this. They knew that that was one of the risks. However, based on market analysis, they knew that the risk of this going south was relatively low. It was one of the known knowns. So that's what they were stepping into. Their lenders got comfortable. They got comfortable. The investors got comfortable.

They executed the deal. Nine months after executing, that number one line of business disappeared. The manufacturer of that particular reimbursable pharmacy type of medication decided to try to expand their market by being less competitive on price and more on market share, dropped their price. And overnight, about 65% of their EBITDA vanished into thin air. And so they were immediately in breach of covenant. They were overlevered. And thankfully, they did not go into bankruptcy immediately. Joe is a hell of an operator. His partner had to step aside because they simply, the business didn't have the cash to maintain both of them on payroll. And then he led the business for another two years, ultimately built out a separate line of business, a brand new line doing 8 million revenue, just wasn't enough to replace what they lost. And so he struggled another two and a half years trying to keep this thing above water. Even got to the point to where he was able to restructure and get potentially another $2 million of equity injection from their investors to keep moving forward. Ultimately,

though, at the last minute, Joe informed that his investors that he did not think it was a wise use of their cash. And so they decided not to invest. And then by that weekend, the business was closed. And that was it. Oh, Jed, that was a really, really short version of a story. We have a couple of extra minutes if you want to go a little bit deeper. I mean, so I guess like for me with this story, and the line concentration, so this was like more of like a channel partner concentration versus the customer concentration. Is that the key difference here? That's right. Yeah, it's a channel part of concentration. And the key thing with this one is that, you know, there's always going to be risk in your deal. And a significant portion of that risk is known. And, you know, you can do all the diligence in the world, but there's always going to be an element of risk that you have to accept. And understanding that most of the time, you know, those black swan events are not going to happen. But every once in a while, they will. And this is not a space where you can diligence away all the

bad things that could ever happen to you. And so this is a great example of, you know, when this one disappeared, you can't look back and say, oh, well, I should have known that based on the concentration, because this was inherent in the space. And ultimately, when the business did fail, the investors came back and they're like, we've never seen anything like this in this space, the way the way it actually went down. And so it's a real nod to Joe and his partner, their ability to push through their ability to be very clear with their board about their current situation. And also to be able to move the business forward for an additional two years after losing that revenue, Joe maintains very good relationships with investors, even after the failure based on the work he did while he was running the business. So when we talk about Black Swan events, right, like also something to consider now obviously is all the changes in macro policy. So when we're looking at historicals, you need to also make sure and look at what the headwinds are for any deals that you're looking at going forward, which I think is super important to remember and consider when

we look at the nuclear apocalypse or Black Swan events that we that we that we touched upon. You're right. Some things you can't plan for interest rates go up, tariffs happen. These are real things. I don't know. Tom, Samco, don't put your questions in private chat me. I don't I'm not going to do that. Sorry, bud. Okay, you can probably do that. Does the owner have an idea how they could have structured any differently from the seller or something? So yeah, seeing the concentration was known always be with one of the constant replies you get that question, which is something I echo to everybody is don't overall ever your deal. 1.5 on your DSCR feels comfortable. But in reality, that's pretty high leverage. We've all gotten way more comfortable with leverage than we should have because of the way the SBA allows us to take out so much. And I would remind everyone that, you know,

if you're in a place where you're doing a one and a half DSCR on your leverage and revenue drops 30% you're in danger of cousins. And so you're in danger of default. That's that's a lot of leverage. I really, really push people to really think about, you know, instead of obsessing about every individual point of equity that you could save about whether or not you want 80% of the business or 65% of business. The truth is that if you own a small business, as long as you own 51% of it, your God, your Caesar, your dictator, you own that thing, you can do whatever you want. And I would much rather have 51% ownership of a business that is successful five years from now than 90% ownership in one that's going to fail in 12 months. So don't overlever the deal. Take on it more investor capital than you think is necessary. Water down your return. In reality, if it's your first acquisition, your only job is to simply not fail. That's it. Yeah, surviving the first 12 to 24 months is the hardest part of anything that any of us's acquisition entrepreneurs will do. Just getting to that starting line is not enough.

Thanks, Jen. Now we're going to move on to story number two. This one is bad Frankenstein. Bad Frankenstein. Chris Myers and the DIY guy. Yeah. Chris Myers, he's a very interesting story because I've had a lot of these conversations and nine out of 10 of them kind of reflect Chris Myers. Chris Myers, you know, he is somebody who I call him the DIY buyer. So he didn't have this NDA background. He didn't have any of this kind of stuff. He was actually a blue trade collar worker specifically in plumbing. He had bet he kind of grown up in plumbing. He knew it very, very well. And he kind of, you know, he'd been online just like the rest of us and he saw all the big movement about, Hey, go buy a business. It's everywhere. It's unavoidable. And so he saw the writing on the wall and thought I'd much rather run and own a plumbing business than start, you know, just be an employee for the rest of my life, which is fair. But he approached it from the wrong direction to his credit. He did start off by engaging with a legal

team, but the legal team he engaged with was very much, you know, they, they agreed that they would only bill him at close. And so the problem he ran into after about six months was that they racked up a bunch of legal fees, but then the legal team was constantly pushing him to close, constantly pushing him to find something he could close on. And that's one of the things I try to, you know, get across to searchers, which is you need to know the incentives of the people around you. If your diligence team is only getting paid if you close the deal, then they have every incentive in the world to tell you to close the deal. I want a diligence team that's going to tell me all the problems and encourage me not close the deal. So that's the first red flag. But beyond that, Chris decided to move forward. Ultimately, he did find a small business, about two and a half million dollars, top line revenue. It was run by a father and son. The father was in his late 60s. The son was in his 30s and they were hoping that they could sell this business and be able to go do something else. Some, some other sort of, you know, real estate investments that they were working on. And

so Chris met with them, decided they agreed on a 100% seller financing deal where Chris would come in and basically take over the business on day one, make payments over the next, you know, five years with a balloon payment on that 61st month. That's kind of how they, they structured that. So Chris steps in, starts running the business, everything seems fine. But then around month number three, they starts having some tension with the previous seller because he notices that the seller isn't really being cooperative anymore is kind of being distant in the office. And what had happened was that they had a misunderstanding about who owned accounts receivable. The seller was under the prospect, under the assumption that all accounts receivable were his and any customer he had already spoken with before Chris took over the business was his, regardless of when those accounts closed, regardless of who was paying for the cost of goods for those business, for those deals, he was sticking around to get to collect his checks. Chris absolutely was against that. You can imagine

when you're doing trade work, you know, he's already putting out all the costs when it comes to piping and materials and, you know, onsite work, and he's waiting for these reimbursables to come in to fund the business. And then he ends up having this dispute with the seller who believes that those reimbursables are his. Ultimately, after the first four months, they had about $600,000 in reimbursables that are just sitting in a bank account and that they're already going over. And so the seller has one of his attorneys, you know, send a letter to Chris saying, Hey, these are ours, turn them over within a couple of days, or we're going to file litigation. And so Chris immediately realizing the problem moves all that money out of the business account to a separate business account that he set up immediately. He's like, we're not doing this. We're being very careful. He knew that if all that disappeared, the business would collapse. And so he did that to keep the business alive, continued making payments that he was required to make to the seller. But immediately following that he and the seller were unable to speak to each other, even with mediation. They moved quickly into litigation.

And right now actually, they're hoping to wrap up litigation by hopefully January or February. That's his hope. In the meantime, he's still been making payments on that business because he doesn't want to fall into default while he's in the middle of litigation. But when the seller left when the seller basically pulled out completely, he took most of the relationships with him, all the work dried up. And through his credit, Chris basically bootstrapped his own business on the side to keep this thing running. And so he bootstrapped his own plumbing company to not only fund the business that he acquired, that he's now in litigation for, to also fund a litigation for that business, and then also to be able to take care of himself and his family. And so his big takeaway was he realized that he could really do this himself. He realized I can always take care of myself going forward, but he also sees the incredible amount of risk that he took on by not having proper legal guidance and then just not doing what he needed to do to be very clear about how this was going to work post-close.

Was this deal, they had the licenses to be able to operate? It requires a plumbing license. Yeah, that's a really good point though. Let's say I see a lot of people who are interested in trades, but the vast majority of trade work requires a license. And you need to be very clear, A, do you have that license? And if you don't, how long is it going to take you to get it? And in the interim, who's the license holder? That's a very important conversation that you need to figure out before you ever sign the purchase agreement. And if you're going to buy, especially with the SBA loan, you need to get that license because ultimately what you are doing is buying an owner operated firm. And you don't want to be relying on somebody else's license to be able to operate your business because you're still responsible for the debt. You are, even if it's 100% seller finance. Now, I always think of 100% seller finance deal as a bad deal anyway. Like why would anyone be willing to give away their business for nothing down? So I would be incredibly cautious on anybody that's either A, telling

you to go after 100% seller finance deal or B, going after one on your own, even if no one is telling you that. We are not telling you that here on the tails from the crypt. That's just super interesting to be able to do that. I actually also saw a social post earlier this week about more people not just doing startups in trades if they have the ability from a licensing standpoint. Yeah, really, if you're in the trades, what you're doing is you're buying time when you buy a company, the time and the customers to get started. And that's great. And we all talk about, you know, the leverage of being able to jump ahead and do something like that. But the thing you're missing is that, yeah, you're buying revenue and you're buying customers, but you're also buying culture. And something that I personally seriously misunderstood when I bought my first business was I thought that I discounted culture. I discounted that. I was like, well, as long as the finances are good, then I'll figure out the culture part later. And the truth is with a business, everything's culture. It's a collection of

people who come together to do something that creates 20 times the value that any one of them could do on their own. This is not real estate. If it collapses, there's no property backing this up. There's no asset behind it. It all disappears. And so culture is everything. If you lose a key employee, if you have an injection of negative culture in your business, then you're going to see revenue drive very, very quickly. And it's going to be very hard to get that back. And the last thing I'll say is that a small business is the direct reflection of its owner. And so a owner has incredible influence over the business. They do have a hiring, the firing, they set the pace, the payroll, everything. And so when you buy, you need to understand that, yes, you can mold it to fit what you want, but it takes time. Unless you're planning on firing everybody within the first couple of weeks and starting from scratch, you're going to need at least 12 to 24 months to turn that ship. It's not going to happen overnight. And in the meantime, you have a lot of culture debt that you have to work with. And so you need to think long and hard about the culture

of the business you're buying and whether that's something that aligns with your values. And you know, it's frankly, something you can, you can take over. Great, great points, Jed. And a great transition to story from tale number three, the devil zombie, the devil zombie. Yeah, that's what Sarah would say. So story number three is Sarah Masters. She's a, she's a wonderful person, but she did her MBA and decided to become a self-funded searcher. And she was hyper intentional about finding something that had plenty of revenue that was recurring. And she put a lot of value on the integrity of the seller. And I applaud her for that. Ultimately, she found a B2B services business. They were doing direct sales. And she loved the owner. She loved the business. It had been operating for a long time. And the one big catch for her was that she had two dedicated salespeople, each of which brought in about 50% of revenue for

the business, usually on like an annual cycle. And so she got a chance to, you know, before close, she got really comfortable with the seller, really liked them. And then she did get a chance to meet both of the salespeople before the close. And she got comfortable with both of those people as well. And she felt very good about this deal, doing about four and a half million top line revenue. So she closed the deal. And then about six weeks after closing, she gets into business and realizes that of those two salespeople, one of them, who we'll call Jim, not his real name, was in her words, quote, the devil. He was the most toxic person she had ever met in her entire life. He was the epitome of everything you think of from a horrible human being. Incredibly racist, incredibly chauvinistic, treated everyone in the office like absolute garbage, but very charismatic. And so his charisma came through very well in sales. His charisma came through very well in their initial conversation. But she found out very quickly that on the other side, everyone in

the company hated this guy. And he hated all of them. And in fact, the seller was a wonderful person, but was very non-confrontational, to the point where the seller had largely withdrawn from the business, because he just didn't want to have to deal with this particular salesperson who was bringing in half a revenue and just basically let this salesperson run wild all over this business. And so initially, what Sarah thought was a good thing about the seller being removed from the business operations overall, ended up being a very bad thing because that meant that this other salesperson was just running rampant. She tried to work with him because, again, he's bringing in half the revenue. But after about four months, she could not handle him and fired him on the spot. Immediately, this salesperson sets up a competing shop, steals about half the revenue in clients because he owns the relationships. And so they had to deal with that very quickly. Luckily for her, the other salesperson was wonderful. The environment within the business improved overnight, as you can imagine. And

they were able to move forward for another 18 months. But ultimately, they weren't able to add any additional customers. Revenue started declining. And then when the revenue dipped below about one and a half million top line, the other salesperson, she tried hiring a few other salespeople. Nothing really worked out. It just really turned out that getting new customers in the space was actually a lot harder than she thought. And corporate clients are very sticky. In this case, that worked against her. And then ultimately, the other salesman left a year and a half later because she had to do what was best for her and her family too. And that was kind of the death nail in this business. A couple of things there. So just guys remember that a key man risk doesn't necessarily just mean the seller. It can mean key employees. And that's very important. I'm not really sure I know that we also like obviously also talk about trying to get a sense of your sellers integrity. But you know, we're going to do some digging on like questions that you can

maybe potentially get to the bottom of something like this. But this is a really difficult one, right? Like you're not going to ask a key other employees, like, what do you think of the other employees, right? Like then they'll be like, is this person selling discord on their own or like pitting people against each other? So that's really difficult. This one's really tough. It's like, you know, you do your best. You assess the seller and she had a good representation of thinking the seller was, you know, an upstanding person, which ultimately was true. It's just that the seller was just so non confrontational. And then ultimately you could argue, you know, a little bit of a maybe not lack of integrity, but not not calling out the obvious problem never hinted that this person was as toxic as they were. And so obviously that's a problem. And then a lot of times you don't get an opportunity to meet the employees of the business. And you do push to try to meet the key employees, obviously, but usually maybe one or two times. And so you have to make a decision based on very limited information. And if you're trying to assess the culture of business, you know,

it takes a lot, you know, from an EQ perspective. One of the things I try to do though is I try to figure out, like, what's the general reputation of the business around town? What I found is that a lot of small businesses, especially if they're regionally constrained, they all kind of, and they're in the same community, they all kind of know each other. And so, you know, if there's a way that you can look around town, you know, talk to suppliers, talk to vendors, you know, as a customer, perhaps not as a buyer and try to get a feel for like, you know, what kind of companies, what kind of teams people like, then that might be one way to kind of, you know, try to hedge your risk. But this is a great example of you just don't know what you're stepping into until you do. Yeah. And I mean, like, again, like this was like an internal culture issue with this employee and the toxicity that this person was bringing, which is like one of those things where it's like, no matter what you do as a buyer, you will never know as much as the seller does. So there's only so much we can do from a structural standpoint. You know, I guess that there was

this, you know, I'm curious, you know, you know, things to like mitigate that could have been like the way that employee contract or compensation was put or having a non-compete on those key employees or those salespeople, you know, if it was a-- Well, to be clear, you can't have a non-compete for an employee. So, you know, you're always at that risk. And I asked the lady's question in the chat, you know, this is a situation where, you know, she told me like, you know, she tried working with a salesperson. She didn't want to fire this person. She was, you know, as a brand new buyer, you can imagine you're terrified that you're going to lose half your revenue. That doesn't always happen when you lay off somebody, but in this case, it absolutely did. And so, you know, she tried pushing this off as long as she could. And after four months, it was just an untenable situation. This was somebody that she just simply could not work with. And it turned out that the only reason that the owner was able to work with this person is because the owners had walked away. Just wasn't doing it. Yeah. I mean, I guess like that's like a whole, not involved in the business, absentee owner

situation. But this is just like one of those things, right, where how do you able to mitigate something like this? And for me, something where you have only two salespeople. And now one of the things here with this type of sales, be to be corporate sales, very enterprise, very sticky, very, very long sales cycle. So getting in and being in a position where you potentially lose these customers and then having to try to recover them quickly is going to be incredibly difficult. So it's like understanding the customer base and how long the cycle. Another example would be something like a government contract or like something in the educational services space, where all of the funding is like a based on a calendar year. And so like get something off cycle or even like media and sponsorships where like 80% or more sponsor dollars are set aside for 2026 and Q4 of 2025. So getting dollars or figuring out how to fill those revenue gaps, you know, off cycle and thinking about that strategically is like a really important thing. So you don't end up in devil zombie employee category.

Well, you have to remember some of the things that make your revenue attractive or the business attractive can absolutely work against you. Like I buy companies and government contracting where our proposal timeline is 18 to 24 months, they're the stickiest contracts you could possibly have. But that also means that if you need to go and raise revenue this year quickly, it's it's nearly impossible. And so, you know, just like Sarah's situation, you know, it's great having really sticky customers when you have them. But if you don't have them, it's really hard prying them away from somebody else. Yes, yes, I mean, those relationships are incredibly difficult, especially like when you think, oh, I have this employee that has these relationships, I'm not relying on the seller, but it still means that you as the new buyer need to figure out ways to develop relationships with the customers as quickly as possible. So our next hail from the crypt is the big shop of horrors and Brittany powers. So what happened to Brittany? Yeah, I feel really bad for Brittany powers.

She did a lot of things really well. She actually bought a manufacturing company here in North America. And the thing with hers is that they were doing auto components. And they were making components that a lot of times mostly went to cars. And they were very well diversified going to a lot of different manufacturers here in the States, not just American manufacturers, but like, you know, foreign ones that also have factories here. And so it was very well diversified within auto. And then they had a few other things where they made one or two components that went towards aerospace and a few machining shops. And so it was poised for success. And she bought just before COVID really exploded, like she bought, I want to say 2020. And so, you know, her first, you know, thing was like she was really concerned that obviously they were going to lose business. And initially they did. So the PPP was able to keep them, you know, the PPP COVID loans that was able to keep them afloat there initially. But what happened, if you remember correctly, that, you know, because they stopped making autos and it was hard to get new cars during the pandemic, used car sales surged, right?

It was very hard to get a brand new car during that time. And so the cost and the pricing power on her components went way up. In fact, they could not produce them fast enough, because they were one of the few providers who created them here in the States. And so they didn't have to worry about logistics or supply chains, they're making them right here. And so, you know, demand far outsteaded supply. And so by 2023, they decided to expand and they put up a new manufacturing facility in Northern Mexico. They have one here in the States, they have one in Northern Mexico. The good news about the one in Northern Mexico is they were able to triple their overall capacity. But it was also, you know, about 60% cheaper than the one here in the United States. And so it was just the best of both worlds. They were able to leverage it at almost like dirt cheap interest rates, you know, I think it was like just over 1.5% during that time. And so it was the, it was exactly the kind of move that all of us would dream of having, you know, tons of demand. We're able to finance it with almost free money. We're able to cut costs at the same time by, you know, incorporating

in Mexico and everything seemed to be going really well. But then this business actually collapsed in the fall of 2024. And it collapsed because of two primary reasons. One, because when they, when she decided to expand to the facility in Mexico, she took on an equity partner, somebody who was able to help finance that. And then at the same time come in as a minority owner. And one of the issues that she ran into was that this equity partner had a step up in their contract where they were able to be their exclusive equity partner. And so at the time that seemed like a really good thing because she was thinking, Hey, I really like these people. I think that we're going to keep expanding. Things are going to go well. But what happened was by the end of 2024, all of that oversupply disappeared. They started moving right back off that COVID bubble more towards what normal production would look like. And then as they were coming in towards the end of 2024, a lot of tariff concerns started coming up. And what had happened was right at that point, they needed an injection of capital to be able to keep moving forward. Now their overall costs were starting to exceed,

you know, their supply. They were now starting to have to recompete with a lot of their foreign competitors. And it became very, very difficult. And at this point, they needed a little bit more cash to be able to not only offset what they did, their expansion into Mexico, but also to be able to expand further out in Northern America. Their equity partner declined that because unlike Sarah, they weren't trying to grow. They were trying to protect their investment that was already there. And so they felt like, you know, with the upcoming concerns in the election cycle about perhaps having tariffs in 2025, which they didn't know if that was going to happen. But as we can see now, it absolutely did. They felt like it was too much of a risk. And so they refused to increase working capital. They refused to invest even more into it. And then by January of 2025, the business became insolvent. They ended up selling it for parts. And so it's a classic example of just hyper growth. You think things are going well, you think they're always going to go that way. And you get opportunities to expand in ways that in normal times, you wouldn't, and you simply

expand too fast. And you outgrow your own skis. And then you take on one or two partners that have a little more influence than you'd hope they would. And all of a sudden, you're not the only decision maker at the table. And it gets away from you. I've got a couple of things here to talk about. So, you know, when we talk about kind of like looking at a business, and a lot of times we all look at businesses that show some sort of extreme hockey stick in like the most recent year. So whether that be like 2024 or like trailing 12 months 2025 for a business, and then a seller is putting that business on the market based on that. Firstly, like making sure to look back on the historicals and take a look at the revenues and the growth and like how things are operating before. And like, if the pandemic or something or some sort of like major events is going to be like a headwind or a tailwind. And so like, for example, you know, a business that is centered around like data centers in the United States, like now like the AI and like all those infrastructure

needs is like really good, something that has like manufacturing that has a lot of imported components, you know, even if it's like made in the US, but the important the components are, unless you're able to pass those costs along to your customers, you need if you are like there's going to be margin compression. So really thinking about kind of like the capital needs of the business or how that capital cost and CAPEX could potentially change is like super important. I also think about kind of like what you were saying about this equity partner and this exclusive and exclusive equity partner. So there was a really like or choice in the way that that was actually like that was like really thought about having giving it someone exclusivity, you're really them beholden to like how they feel towards like your ability to grow or keep the business solvent in this particular instance. We've heard like other stories of searchers that have had investors in the space where the business has not gone well and investors have declined to step in and to add additional

capital or the individual doesn't have the liquidity to be able to inject their own personal capital into a business. And so a lot of times again, when we talk about that like equity staff or that deal stack and like Jed made mention of this earlier is not over leveraging your deal, not putting yourself in a position where you have no liquidity yourself and putting all of your money and all of your work directly into the business at close, you want to be able to have some sort of additional buffer. And so again, that goes back to the idea of working strategically with amazing investors that have your back that have a track record of being able to go in and help and to be able to be there and be part of your team is like so paramount and so so so important because you don't want to be in a position where you are going into a deal that then like 12 18 months from now, some other headwind comes that you just can't foresee these like macroeconomic trends, right?

Like looking and saying, oh, normalization post COVID. Well, that's just like COVID now. But like it could be like a reason like for like why did the business do so well, you know, like during, you know, we've kind of passed that like initial three year period of like the original like COVID bump. But kind of looking forward at like what are those potential headwinds? And you know, are you buying into something that had its massive upstick already? And then your J curve is going to come in from an operating expense standpoint or your revenue is going to go back. And so that's why a lot of times we talk about really thinking about a business acquisition either with like a three year average or some sort of contingent seller note to mitigate some of that risk to make sure that the seller is aligned with you, you know, or in other scenarios where it's non SBA would be either an earn out or some sort of equity role and protections in different ways coming on the way that you decide to structure your deal.

It's really tough because it's, you know, and this is this is true for this story, but you know, it's true for all of them, you know, it's very easy for us to sit back and Monday morning quarterback this stuff and just look back like, well, obviously there was a COVID bump or, you know, obviously taking on this other investor with a bad idea, or, you know, obviously we should have done, you know, Q of the obviously we should have done, you know, the XYZ like all these things that, you know, you can look at it and say, well, I would never do that. There's the problem. And we're very, very good at pointing the finger and saying, well, I can see why this searcher messed up. I'm definitely not doing that. And I would caution you because these are not these are these are good searchers. They're people who are, you know, very well qualified. And what you find is that when you actually get into the business, when you're actually, you know, when you're actually in the seat, it's very easy to get caught up and you do the best you can, you do the best you can with the information you have. And I don't know that if it's 2023, and I'm sitting in a business that has twice as much demand as I have supply and interest rates are near zero, that I wouldn't have been thinking the same thing that Sarah did. This is a once

in a lifetime opportunity to really grow aggressively, to expand my, you know, my total addressable market to bring in a lot of customers to, you know, grow past COVID. And, you know, you can look at that and say, oh, well, that was just COVID. But I see this over and over and over where, you know, too many times we point back and we say, oh, well, I can see why they messed up. That would never happen to me. But the one big consistent thing I always see over and over and over is that the problems we run into as searchers that lead to these failure stories, they're repetitive. A lot of times they're the same thing over and over and over. And I caution you to think that if you think it can't happen to you, I guarantee you that's exactly what's most likely to happen. Like make sure that you're not, you know, like not having that cognitive bias, not thinking that, you know, well, obviously I would never have that kind of problem, because I know better. These are not, these are not stupid individuals. Yeah. Thanks, Jed. Hey, Dana looks like Caleb, but it doesn't understand how technology works. So you could just take his Q&A questions

and drop them in there for him. Thanks for that. So I mean, again, going back to this idea of like these, these like Black Swan macro trends, like type of events, trust and verify, protect your downside, do what you can to make sure that you're not putting yourself in that overlapped position. Yeah. The next one, self cannibalism, eating yourself to spite, eating your nose to spite your face. Miguel, tell us about Miguel. Yeah, Miguel Tello. I really like Miguel. He's a really great guy. He, and he is he's actually a really great lead into what I was just talking about, you know, this whole idea of Monday morning quarterback. So Miguel actually was a Harvard Business School grad. He just decided to do self funded search. If you know about HBS, they really pushed the self funded search model. He really liked that idea. And one of the biggest things for him was that he thought I want to be able to, I want to do my search. I want to bring dedicated investors.

He knew what he was doing. He had great QV, great legal. And one of the real thing that got him was deal fatigue. And so I see this a lot. I see this a lot with searchers who, you know, it's you're, you just started searching, you're super excited. You post on LinkedIn, hey, I'm so excited to announce that, you know, you know, top of the mountain capital, we're live. We're looking for that one great business that we're going to shepherd into the next generation of blah, blah, blah, whatever you decided to put on your website. And that's great. I'm really happy for you. It's super exciting. But we're really excited around month three. We're super excited around month six, you know, we're starting to build out our deal flow, you know, sourcing is coming in. We've had conversations with sellers. We've already passed on a few things we've seen one or two we like. And we know in the back of our mind, like generally speaking, you know, most successful cell phone researchers, they're going to be somewhere between that 18, 24 month timeframe to find something and actually get it locked up. And that sounds all well and good. But then, you know, around month 12, you tend to find that one deal that you're really excited about. And you go into diligence, everything's working out really well. But then for some reason, it falls apart.

Maybe the seller gets cold feet. Maybe the, you know, the, the financing doesn't quite line up. Maybe you can't raise the right capital that you need. Or maybe there's like one risk in there that you're like, Hey, this one is, it's too risky for me. It's a pass. And so you pass. And that's fine. That's probably the right idea, the right decision to make. But the problem you're into is that in the problem that Miguel ran into is that he got to month 19, and he starts having these thoughts where he's like, deal fatigue starts setting in, you know, I've been under LOI four times now, none of them worked out. Everybody knows that I'm a self-funded searcher. Everybody knows that I've been telling everyone I'm going to do this. I've been telling everybody I'm going to find the right deal. All my classmates have great jobs. They're asking me like, when I'm going to close, you know, everyone expects this. And so, and now I'm starting to have like remorse, because I look back at that deal from 12, you know, that I found at 12 months. And I think, well, maybe that one big red flag, you know, maybe that was manageable. You know, I know that there's no such thing as a perfect deal. Maybe that was, you know, maybe that was the one. And I started thinking

about the one that got away. And that's when it starts getting real dangerous. And that's when it got dangerous for Miguel. He found a deal right at month 19. And, you know, overall it looked pretty good. He told me, he's like, yeah, I went into it. And I remember thinking, you know, it's not great, but it checks off most of my boxes. So let's do it. And then he's like, I wasn't super excited about it. It was fine. So I just figured I'd submit an LOI and see what happened. And shock, the LOI was accepted. So now I'm in diligence. And he's like, okay, cool. So he moves in, starts going through his checklist and brings in his QoE provider. And the one line that really stuck out to me was like, he mentioned that he's waiting for QoE to come back. And he said, Jed, I remember thinking, I hope QoE comes back and says this is a bet. This isn't a good deal. I hope it comes back with a red flag or something. I don't know why I just had this feeling. And you remember thinking like, I really hope the QoE rules this company out completely. And then a week and a half later, QoE came back and was like, yeah, it's fine. Revenue checked out, margins checked

out, cash flow checked out. Everything was good. I mean, it wasn't perfect, you know, but you know, on a 10 point scale, it was probably an eight and a half. QoE was fine. Nothing worth retraiting, that's for sure. And so he looked at it and he's like, all right, well, you know, what I'm feeling is probably just, you know, the fact that, you know, I'm a first time buyer and there's always going to be that, you know, hesitation and all that kind of stuff. And, you know, this one checks all the boxes. I put together my deal box. This one checks the boxes. I'm there. And let's move forward. And he did. So he moved forward. 12 months later, he found out that there was actual seller fraud in the business. And so without going into too much detail, because it's hard to really separate the facts from the fiction on this one. This was a business where they were providing a service, a B2B service, and they were using premium parts. And they were billing for premium parts, but the seller was actually fulfilling the orders with very cheap parts and saying they were premium and then billing for premium. And then when Miguel found out, he reached out to the

over supplier of those premium parts was like, Hey, did you know this? And they're like, yeah, kind of, we just don't care because we're still getting sales and found out that everyone kind of looked the other way because everyone was making money. And so he was put in a position where it's like, do I move forward with this fraudulent business? Or do I actually fulfill, you know, with the premium parts that I'm contracted to fulfill with? And if I do, my margins disappear. And so he decided I'm going to fulfill the premium parts because that's what I've contracted to do is margins disappeared. And he immediately sued the seller. And that litigation is still going on today. And so that's a great example of, you know, sometimes your gut knows, sometimes your gut knows when you don't know. And it's a really great example of just deal fatigue. Like when you've been doing this for month after month after month and you feel all the pressure and you put together this buy box and all of a sudden the boxes are checked. This is why it's so important to have people around you who have been there

before, find somebody, you know, hopefully more than one, somebodies who have closed deals in the past, someone who has no vested interest in your deal whatsoever. And at the same time has vested interest in seeing you be successful. And, you know, from the very beginning, treat them like your personal board of advisors, like help, like, and listen to them for the love of God, listen to them. You know, if you pitch them a deal, I'm like, Hey, what do you think? And trust that they have your best, your best interests at heart. And so to help you not make a dumb decision later on. And again, his biggest thing was like, I knew I had this feeling I'm just I hope the Q of E was going to come back bad and it didn't. And I moved forward anyway. And he kicks himself to the state for it. And he learned a lot. And he's actually planning to move forward as an independent sponsor. So he's not out of the space, but he's still going through the litigation now and it's been 16 months since then. So these things don't wrap up quickly sometimes. So, you know, have that board of advisors, that personal team that can help set you straight. You are

muted, sir, who wants to listen to me talk anyway. And now I somehow change the format. Oh, we're back. Okay. So, uh, uh, you know, we really care. Like, I think Jed and I are both up here on stage to be like, we want you to buy a good business. We want you to be successful. But, uh, you ultimately have to be the one to make that decision. Like, we're only as good as like advisors in your deal team is only as good as like the advice that you accept from us. And there's definitely that level of hubris here, where there was this feeling that's like, I got to do this. And the worst case scenario is not having to go to your friends and family and be like, I did not succeed in my goal of buying a business and becoming a small business owner entrepreneur. It's ending up in this graveyard with us here today. That's the biggest thing that we want you to know. And like leveraging experts and being surrounded by people that care, as Jed mentioned, is like so incredibly important

to be able to do and to think about. Um, thanks, Jed. So our last, uh, uh, tale from the crypt before we start answering some of the questions in the Q&A section for a few minutes is silence of the lambs. So Buffalo bill. So what happened to Jill? Yeah, Jill Stevenson. He had the problem that so many of us think about in the very beginning, you know, that non compete clause. And so for her things were going pretty well. She had found a, a company in South Florida that was a distributor and, uh, you know, met the seller, didn't particularly like this person, but at the same time, the business was solid. And so move forward. And she was very, very clear from the beginning. She had excellent legal representation, got the Q of E done, knew that there was no, like really felt comfortable. There was no fraud or anything like that. Love the business. And it, you know, just to be clear, there was no fraud. And so that's great. But the problem that, that Jill ran into and I'm kind

of abbreviated this just a little bit is that, uh, the seller tried to push back pre, you know, pre purchase agreement on the non compete clause, tried to get it mitigated from five years down to two. And Jill was like, I don't think that's a good move. And to her credit, her legal counsel was like, yeah, that's, that's a red flag really pushed for five years. And so she's like, okay, so she pushed for five years, ultimately the seller relented. But Jill will tell you today that, uh, the fact that the seller even wanted to have that negotiation proved that they, they planned to compete. And sure enough, uh, the seller was already had already set up a competing business on the other side of town before they even signed the first agreement. They already set it up and they had already started working with, uh, to get everything transferred over within weeks of signing the purchase agreement, they had already stolen over half the customers and were already actively soliciting the employees of the business. In fact, the leading GM of the business came back to, uh, Jill and was like, Hey, the seller is doing all this stuff. And by the way, they've asked me to come join them and take over. You know, like, I don't want to do that because

I never, I never liked these guys to begin with, but just so you know, this is going down, this is happening. And what's truly diabolical about it is that not only was it premeditated, but the seller, when they created the business, they basically kept, you know, 90% of the name the same, they just added S to the end of it. And then the logo is almost the same. You know, just changed it to look just a tiny bit. And then with the, you know, the top like 50, 60% of seller of customers, they just emailed the customers like, Hey, we got an updated, you know, wiring instructions and everything, blah, blah, blah, didn't even tell them that they were a different business and just kind of move forward. And so most of the customers didn't realize what was happening. So within weeks, Jill realizes what's going on. Jill engages with her legal team, which again, fantastic. And they issue, you know, cease and desist letters, they move for litigation. And ultimately they got to a settlement. And here's the thing that a lot of us don't realize. I've been through lawsuits when it came to my business classic. A lot of people out here have been through litigation. And

if you've never been through this, you, you have this misunderstanding that the legal system is there to protect you. And it is, but it doesn't protect you in the way you think it does. It's not a world where, Hey, we signed this contract. Oh, you broke the contract. I'm going to take you to court. I'm going to take, I'm going to win. I'm going to have this big judgment. 70% of civil suits never go collected. Even if you win, they'd never go collected. There is a very real chance that you're going to pay a lot of money, a hundred thousand dollars for like 12 months of actual litigation, just to get the point to where you can get that moral win and get nothing out of it. There's nothing there at the end for you. And that's where you have to start making some grown up decisions. Am I really going to spend the money to go after this person when I'm probably not going to win? And even if I do win, is there anything to collect or is it just a hollow victory? And so ultimately Jill decided not to pursue litigation after about six months. Quite frankly, the business was insolvent at that point. They had lost all their customers. And even

though they knew that the seller was objectively in violation of the entire purchase agreement, she didn't have the finances to really go after them and even keep the business afloat. So she decided not to continue litigation. However, very specifically, she did not sign a settlement with them and instead referred them to the local district attorney. And so fingers crossed, this is still ongoing, but we're very hopeful that the district attorney is going to bring up criminal charges against this person because they absolutely deserve it. Now, even if that happens, you know, that's a wonderful moral victory, but Jill is still out. Like she still had an SBA personally guaranteed loan. She's, you know, bankrupt. She's still dealing with all the aftermath, not just on the financial side, but on the personal side. And so, you know, I can't emphasize this enough. Like when things go south, there are very few remedies for you. Like things go south quickly. You know, the legal system is not going to be there to reward you with this multi-million dollar settlement that

you think you deserve because where does that money come from? It comes from the other party. And one of the very first things I know from experience and from these conversations that will happen is if someone tries to screw you, they're going to take the money that they then screwed you with and go spend it somewhere else. And there's not going to be anything to recoup. And so the question becomes, how much can I aggressively pursue this person? Is it even worth my time? And if not, you know, maybe there's no moral victory for me, but maybe there's something I can refer to a district attorney. Lawsuits. The lawyers win. So guys, so we don't really want to end up in that position, right? So there's not a lot you can do. I will say that I know a story that was similar to this and that there was, you know, a searcher that in a home services industry that was able to recoup and recover from a situation like this. But that still doesn't mean you want to be in that situation. That even if the seller comes and steals or sets up a competing

business in town, the last thing on earth that you want is that, but you should be thinking about that from a seller integrity standpoint or like looking at that seller, that person, exactly who they are and how they're going to potentially look to do this to you. Now, there was a question in the Q&A section about like how often do these graveyard acquisitions happen somewhere, 3%, 3 to 5% of the time, but you don't want to be one of the three out of 100 that this happens to. The whole goal here is to be able to help you feel like you better understand like what are the things to be thinking about and thinking at a macro level of like what are these things and learning from other people's mistakes and then also not putting yourself in the position where you feel the pressure that you like have to do something. So that's like a really important thing and that's a good question. Thank you, Catherine. To that point, Andy, you know, people always ask me, Hey, what are the mitigation strategies? And so there's two, two responses I'll have for you. One is that everybody who's on the

call today, you're gonna, you're gonna get an email that's got a one pager from sunset coast, which is the top five mitigation strategies to make sure you don't end up in the graveyard. So keep your eyes open for that. But I'll go ahead and give you number one, which is do not do a deal with someone you don't trust. Period. Period. There are 29 million small businesses, small businesses in America. You can, you can find one who's owned and operated by somebody who has a monochrome of integrity. That's it. If you can't trust the seller, you need to sprint away from that deal. At this point, I've interviewed over 35 people who have had a business failure within the last five years and well over 60% of them is a direct result of something, some sort of conflict that happened with the seller. Half that time it was outright fraud. And so the way someone does something is how they do everything. Do not do deals with people who are untrustworthy because fundamentally that's just who they are. They will screw you. And so, and there are very few mitigations you can do after the fact. So just be very aware of that. And then the last thing I want

to bring up because I know we're running out of time is of the 35 people I've interviewed, four of those people verbally expressed feelings of suicide. And I know this is something we don't like to talk about, but this is Halloween and this is the graveyard. And I just want to be very, very realistic about what life looks like. And it is very, very difficult when you're facing a very dark tunnel of financial insolvency, your business, your family, a lot of these people have young kids and you don't know how it's going to end. All you know is that you're screwed. And when that happens, you start having all these kinds of thoughts. And I know that if four people verbally said it to me, then I have to assume that eight of them, eight more people had the same thought, they just didn't say it. And I want to be really clear because when this happened to me, one of the things I used to say was like, I lost everything. And the truth is that I didn't, I lost money. You didn't lose everything. I still have my family. I still have my friends. They still have me. There are some things

that you can't replace. This is America. You can always make more money. There's plenty of money to be made. And there's no such thing as bankruptcy debt. There's no such thing as debtors' prison. You'll be okay, but you can never recover from one of those decisions that you make that is irreversible. So I just want to leave you with that. And one of the big things I want you to understand that this does happen to people so that unfortunately, if it ends up being you, I want you to remember that there is absolutely light at the end of the tunnel. This is not the end of the world. Eight out of 10 people that had this happen to, they're right back in the acquisition space. Like I'm an independent sponsor today. So it is not the end of the world, but it sure feels like it when you're going through it. I think that we're going to now close out with a, it's okay. And this is a good place to rise from the dead. So you can recover, right? Like mental health, so important. Yeah.

Thank you for sharing that. Thank you for sharing these stories with us here today. This is incredible. Thanks for having me, Andy. I really enjoyed it. I hope that everyone in the audience did. Next year we're going to be dressed up like for real. I mean, this was pretty good. I mean, this was pretty good. I really enjoyed it. So much exciting stuff coming up. Search for Coalition will be sure to share lots of new things that we have coming beyond the lookout. A couple of networking happy hours in New York. We got one next week, a week after that in Miami, and then we're working on one in Chicago. So beyond the lookout for that, some education, lots of exciting things for the rest of the year. And we wouldn't be able to do this without all of you. So thank you so much for coming. We're going to stop for the presentation now, but we're going to do what we always do, which is leave the space open for about 30 minutes for networking. If anybody wants to stay and talk to Jed myself and your other fellow searchers, we're all about creating community and supporting each other. So again, thank you, Jed. Thank you everyone for coming.