Episode 11 - Rafael Dufour, Relais du Dirigeant

If we stay by the book all the time and we try to find the perfect search fund industry, the perfect search fund company, we will end up buying nothing. This has to be very clear. We will find companies that have some pros and cons and at the end it's a question of you being convinced that you're the right person for that. And if you are, then you will be able to convince the investors, even though it doesn't check all the boxes.

So the big question is, how are entrepreneurs who aren't scaling tech startups or building lifestyle businesses from scratch doing how do acquisition entrepreneurs find businesses, buy them, and then create generational wealth while taking on less risk? Welcome to Search Funded the Entrepreneurship through Acquisition podcast. Today we're joined by Rafael Dufour, who is a search fund entrepreneur in France. He launched his search fund last year and he's currently searching for a business in France. His background is in steel and textiles and he has management experience across a lot of different industries. So I'm really excited to learn what the experience has been raising a search fund in France and searching for a business out there. So maybe you could start out just by telling us a bit more about your background and how it led you to become interested in search fund entrepreneurship.

Well, thank you for the invitation. About my background, I'm an industrial engineer. I started my career at Arsenal Metal in steel industry, so heavy industry for about three years. Then I did my MBA at ESA and that's when I decided to enter the world of SME. So after my MBA I took a general manager position of steel tube manufacturing SME for about 20 million euro of sales and 100 people for about 3 years. And then I moved to another SME then in non woven textile. So it's a very niche textile manufacturing industry for about six years. This one was a bit larger, it was 60 million euros of sales, it's now 90, it was 150 people, it's now 220. So yeah, I've been working in SMEs for about eight years and then for personal reasons my wife and I wanted to move to France. And that's when I had the choice either to work again for another SME, so the general manager, or do it for myself. And it was thanks to another French searcher who now acquired a couple of months ago. His name is Benjamin Givlet, he's a friend of mine from usa. I knew a little bit about searchfriend, but to be honest, not so much. And he's the one who told me, well why would you work for another guy in another SME with every all the risks related to this story and why wouldn't you do that for yourself? So I had the SME experience, had checked a couple of docs of typical search fund profile, maybe a little bit older than the usual, and that's how I decided to start the search fund.

Sure, I mean sounds like an excellent background for a search fund entrepreneur. A lot more practical hands on experience than a lot of them typically have. So I'm sure it was relatively easy. Transition. What was the process like once you decided that you're going to raise the fund? How did you start reaching out to investors? What was your pitch? How did that go?

Well, first Benjamin offered me to work for him. I was studying the cfa. I finished my CFA during that year, the full program. So I was used to work three hours a day after work, to study three hours a day after work. So I decided to work for Benjamin. I wanted to know, you know, in the whole process, I think one of the first question I asked myself is okay, the fundraising. I haven't done it before, but because of my training I should be able to do it. Even the first one and the second one, the operating phase was the one that I was feeling the more confident about and the selling well, same as the acquisition, we should be okay with it. However, the searching is really where I felt there was the most amount of risk due to my experience and I had no clue what was searching about. And I honestly, I don't think many of us has any experience in searching. So it's really probably one of the most risky phase of the whole operation, at least for me. So I wanted to start doing that for Benjamin and I asked him, don't tell me to do due diligence, just give me the crowd, give me letters, give me everything that is you do on an everyday basis or you give to your interns. I want to see whether I can handle that for two years. Because in fact what you do is this plus the ups and downs, the emotional ups and downs of falling in love and breaking up with SMEs during two years. So you need to be able to handle that. So once I have done this for about a couple of months during the week I decided to raise my search capital. This was pretty fast. This lasted I guess two months from beginning to end. I started in September, I was closed in November. So that was a bit the process, it was quite smooth. I think the fact that I work in SMEs was quite helpful. And then you find two type of investors. The one that are worried about your ability to run the SME. So this was my strong point and my weak point was really my ability to run the search. And for that, usually investors usually prefer XP guy or consulting guy. The only thing is, in terms of risk, they put one ticket in the search phase. So maybe they risk to lose this ticket, but they put 10 times the amount when they enter the operating phase. So if I were them, I would be more worried about finding a good future CEO than a good searcher. Sure.

Did you have to overcome any objections to people who had questions about your ability to search?

Not really. To be honest, I had one that told me straightforward that he only invested in XP and McKinsey guy. I told him good enough. But in France also, France is a very peculiar market and I think really what I'm going to say is very biased because of the French market. So I think it's very different in the us but in France and now I have confirmed that to have some credibility when you face an owner of a typical search fund industry. I'm not talking about software or some more fancy industries, but the old traditional brick and mortar industry. First, I guess you need to be older than 30 years old. It's a bit cliche, but hey, that's the way it is because in my opinion it's hard for you if you're younger than 30, to be credible in France. Second aspect, you need to have either experience in managing people or in selling, because usually that's one of the questions I've been asked. And third, you should not come from finance or consulting. In France. There has been some recent scandals with McKinsey involving with the government. So they all knew about consulting thanks to this. And finance has a very bad image when it comes to SME owners. So the idea was really to try to remove any capital finance fund image from my marketing tools, to sell myself really as an individual trying to take over and to take back a business. But this again is very specific, I believe, to the French market. When in some other markets they accept younger people. More straightforward talks and talking about valuation very quickly, talking about funds. In fact, it's an advantage to be backed by funds here. It is an advantage for sure at one point, but at the beginning it's more inconvenient to talk about it than anything else. So you need to be careful.

That's really interesting because typically you'll see surges trying to brand themselves as XYZ Capital, some very private equity sounding names. So it's funny that they actually try to avoid that and go the other way in France.

Yeah, you usually see that even in the name. Everyone call themselves whatever Capital. It's good for the fundraising, but it's completely counterproductive in France. I'm very cautious about that. At least in France. I believe it's counterproductive to put any capital close to your holding name. In fact, it's even counterproductive to even say you have a holding. And then it becomes quite productive when it comes to giving them the confidence that you're able to finance the operation. But then it's a different level. The more difficult part of it is really attract the owner. And for this you need to be asked to introduce yourself as an individual. Not even talking about search fun. In search fun, you have the name fun, so they don't like it. You need to stay away from everything related to money, which is a bit hypocritical because at the end of the day, money is a big part of the operation. But hey, you adapt to the culture. Sure, sure.

Definitely.

Were most of your investors French or European? Or did you have.

I have only one French now. Most of my investors were European. Yes. Americans are not fond of France. They still have the image that France is a communist country. At least to them it will come. Relay has some footprint in France. I came at the bad timing because they were a little bit too much exposed to the French search fund market. And in fact, when I raised my fund, France was market that had got some momentum, but was going into a tough phase because twas so end of 2021 people went through Covid and there were a lot of old searchers, people searching for more than 20 months. So a lot of people were expecting France to show off whether it could go further or whether that was going to be a slow market. And luckily, in. In the past five months, about six searcher have closed in France. So it's proven to be a very dynamic search fund. Sure.

Sounds like things are definitely picking up there.

How's the search process been for you? Have there been any big surprises or.

Challenges that were unforeseen for you?

Large surprises? No, because I was prepared because I did my internship for French Searcher. So that really helped a lot in the pace in which I started and started the outreach process. So on that regard, no. Now, if you ask me whether I do the same job or if I'm the same person now that what I was eight months ago, the answer is definitely not. I mean, the process has improved a lot. You learn by doing you learn and sometimes some very little changes and can make huge differences. So such stupid stuff. I don't know. You write emails. Well, the subject of your email, you're going to try 10, one or two per month and you do habit testing and suddenly one pops up and you have plus 20% opening rate. How come this is it? Just a little word. So this is the secret sauce. You try to improve months, after months and on the other hand also. So that's for all the tools and everything that you obviously optimize after months. And on the personal side also, once you do that for a couple of months already, you improve your pitch, you improve your own criteria. You're also self confidence, both with regards to owners, but also with regards to investors. Meaning. Because at the end of the day that's also one of the big learnings of it. But if we stay by the book all the time and we try to find the perfect search fund industry, this perfect search fund company, we will end up buying nothing. I mean, this has to be very clear. We will find companies that have some pros and cons. And at the end it's a question of you being convinced that you're the right person for that. And if you are, then you will be able to convince the investors even though it doesn't check all the boxes. And that's probably one of my biggest learning because if you look at recent acquisition in France, I always say if you want, we can sit and I can destroy all the deals that have been done in France one by one. They are all not at all search friend. Obviously they are very good deals and the searchers that have acquired are brilliant and I know them and I know that they're going to do great work. But if you take the book and you try to analyze each individual company with this type of mindset, yeah, you can destroy all those deals. So the searcher needs to be extremely optimistic, extremely convinced that this is the one for him and he's the right person to do that, to go against all those investors that will try to poke holes on your investment memo.

Totally. Has your industry or type of company thesis changed at all since you started the Surgeon? Is there a particular type of company or industry that you're focused on?

Not really in that sense. Because I always knew that I was more an industry guy. So I would look in either light manufacturing or service to industry. I still do that. And I also knew that France is a small market. So if you really want to be too much industry focused and really picking something you have experience on or something like that. It won't last long until you actually contacted all the companies in this sector. It will last what, two weeks? So we are not the American market. We cannot really be completely or too, let's say too industry focus. We need to prioritize, but we need to open up the pyramid because otherwise there's not enough company. Sure.

Has the current economic climate affected things at all in France and world?

Yes, for sure, especially debt financing. But now it's a question of whether you want to see the glass half full of half empty. So it will create opportunities for sure. I'm sure that some owners are sick of going through one crisis after the other. So I believe in terms of on the owner side, we will have more companies for sale. But also it will be more risky because you need to figure out whether they really have potential or whether they try to sell before it's too late. On the competition side also, there's a little bit of a cleanup going on right now in France. So in France, on the buyer side, there are, let's say four type of buyers. You have obviously funds, private equity funds, it's about 16%, if my memory is correct, you have about 80% of strategic buyers. And these are really the competition and against them it's really hard to compete, at least not on price. For sure. It has to be another criteria. And then we still had a lot of competition on the low end from, let's call them ETA entrepreneurs. They are not searchers, they are not search fund, they are self funded because also they use the French Social Security system to support their financials during the search. And basically what they do is that they search for SME and then they take care of the financing afterward. So it's more or less similar to the self funded search fund model, but with way more diversity in models, management package type of companies than traditional self funded search fund. And these guys are actually right now going out of the market because they are not financed. So they have leverage now is going down. So it's hard to finance a deal if you cannot bring 40 to 50% equity. So I've been talking with the Chamber of Commerce and they were saying there has always been a lot of buyer for one company in the ratio of, if I remember correctly, what was it, six to one, something like that. And now this ratio has come down and it's not because there are less companies or less private equity funds. It's because they have less ETA entrepreneurs because they are not financed. And also I guess when these Guys, look at the overall market. If they have a job before going and quitting their job to start this venture, I guess they will be more entitled to keep their job and at least for a couple of years until things looks better.

Sure, I mean sounds like an opportunity. If you can get funded and have a traditional search, then now you're going.

To pay more interest for your debt for sure. I mean this has doubled. This is it.

Yeah, that's definitely there. And based on what you said, it seems like it's a pretty active search fund or ETA environment there in France with many different types of people looking to acquire businesses. Have you found that it's difficult in any way to explain the model to business owners? How strong is the family business culture there or is it common there for owners to sell their businesses?

It is not common. Most of them will sell their business for the first time and the last time. There's really an aging population of business owner in France. They were at believe the status. They were 10% above 65, 10 years ago. They are 25% today. So you if it's really an issue, so that creates an opportunity when it comes to the market, then it's a bit different to other markets. French private equity market is let's say fairly organized. So from 0 to 1 million EBITDA you have these ETA entrepreneur that I was talking about. From 1 to 2 you probably have this gray zone. We are hunting in a traditional search fund above 2. It's starting to be very, very uncommon that you have proprietary deal above to most of the businesses that do 2 million plus EBITDA will probably go through a broker, a bank to sell their business. The window of opportunity in France is more in between one and two for us at least.

And you chose to do a solo search rather than a partnered search. Is there a reason for that or.

The reason was very natural, is that I didn't have any partners since I started this not post mba. So I was already disconnected a little bit with my MBA friends. Everyone has his career, so this was fairly natural now for the French market. I really do not regret this decision because of what I just told you since I believe again these are only one opinion. These are stats I believe really the window of opportunity is between one and two. So being a duo in France is a bit trying to hunt really and to compete with private equity funds and strategic buyers. So it's a tougher job in my opinion. Now the other thing also that I have here is we have a very friendly French search fund community. I believe because we are still small enough to understand that we're not competing with each other and we have more to learn about each other than really to consider ourselves as competitors. So we have a couple of search and friends that with whom I can discuss over the phone about my deals before I even discuss with investors without being afraid that they will take my deal or try to go behind my back. This will never happen. So it's really, you can get a little bit of taste of what a duo is without being too alone by doing that. And I'm happy I have a couple of search firm friends with whom I can exchange like that.

That's great to hear the community so.

Collaborative there as it really seems to be most places. Do you have any thoughts on where you might add the most value to the business operationally or plans for that? And also what are your thoughts on an ultimate exit?

Is it similar in France to the.

US or what sort of financial or.

Strategic exits might be possible there in.

General or for some specific deals I'm working on because again, this depends on the deals. Some will go through buildup, some will go through organic growth. You really have a clear exit path, some you really try to think about one. But the truth is you're going to figure it out when you have the company. So it's really on a case by case basis.

Sure. So you're basically being flexible?

Yeah, yeah, yeah. I'm not the guy if you're asking me would I have a clear growth strategy like some people trying to look for build ups or something like that? No. And again, I think it, you cannot be too restrictive in a small market like France. You need to be open and adapt to whatever business is for sale and you can be a good fit for sure.

Definitely. And how much does the culture of the company or the relationship with the founder you meet play in it for.

Me, and this is probably one of the learnings I had is at the beginning you're, you're thinking yourself about yourself as a rational person trying to analyze everything through Excel sheets and through rational criteria. But hey, you're going to spend what, five, seven years working like hell in a company. You're going to bring your wife and kids if you have some in the middle of nowhere. Everyone is going to have to make sacrifices. So you better make sure you like what you do. And I had one investor also that told me that do you project yourself in there? Do you like, you're going to like what you will be doing there. And this is a very, very subjective criteria. When I started the search fund, I was looking only at, let's say, objective criteria. And with time, I started to trust a little bit more my guts, both in the sense that, okay, am I the right person for this company? Do I feel I'm going to do the job? And it's really also about feeling that you're going to like what you're doing, because I believe you're really good when you like what you're doing. So that's one. And yeah, also having this confidence about gut feelings. And this is also very subjective. So you visit a company and when you put your feet in the workshop, you get a feeling about the company, about nothing. This is completely subjective. It's hard to justify against an investor saying, why would. You don't like it, you don't feel it. Maybe it was just a rainy day and this really killed the mood. But hey, you have experience. And I believe this was this shark tank investor who was saying, if your guts are telling you something, it's your experience talking. And at the beginning you don't have this confidence with your investors saying, I don't feel this company is the right fit and give me objective reason why. And if you don't have some, well, you don't feel well. And now I really trust my guts a little bit more because at the end you're going to spend so much time trying to seduce one company owner and if he doesn't want to sell and you don't really know it at the beginning, and then you're going to figure this out over time with some hints, the way he acts, if he shows up at meeting on time, if he sends you a document when he was supposed to, if he answered the phone. So those are very subjective things. And at one point you're going to have to figure out, I'm not going to invest more time with this guy or I'm going to challenge him to make sure that he's really willing to sell. And this is your guts you need to trust a little bit, pouring your experience and your guts into that. And this is also something you gain over time during the search phase. And you can try to prepare yourself as much as you can before that, but you need to go through that to really get this feeling.

It sounds like one of those things where you really just have to learn through experience to gain the confidence in that feeling and the ability to judge the situation. I guess that brings me to my next question, which would be around more of the personal journey of the search.

I was wondering how the process has.

Been for you emotionally and how you've dealt with it.

You know, it's a long journey. It's. It's not an easy one. It's. I think we should not underestimate really how emotionally tough this experience is. I have so much respect for my friends that just acquired because when you look at what they have gone through, some have even gone through Covid and then really, really hard negotiation, ups and down. During this negotiation, one day they thought it was going to fail, the owner changed his mind and so on, and then they catch back, then they lost investors. So it's hard. It is a really hard road. But hey, there's no free lunch. So this is the cost we have to pay. We learn a lot. Intellectually it's fantastic. But yes, I guess really one thing is to figure out whether you can do the job and the other thing is whether you can handle the emotional ups and downs of this adventure because it's really emotionally quite intense. I was thinking, just to give an example, early on a friend of mine who started the search fund and got drowned into a negotiation and burned all his cash and now he's doing very fine in startups. But he told me, never stop searching, even if you have a great deal at hand, and so on. And we all say that and everyone now knows this, it's good to know it, but to do it, it's super hard. Because as soon as a deal starts to feel okay and it looks good and the owner is looking good, and the prices more or less are looking good, you're falling in love and you are completely emotional and you can have your interns bringing you new companies and they all look like shit and you say, ah, no, it's not good enough. And then you change your mindset. You go in the mindset I was talking about earlier, when you can destroy companies easily and there's only one that is looking good is the one you have at hand and everyone, you're going to destroy them one by one. And this is a bias you have to fight against every day because this company can really, this deal can stop at any time. So emotionally you really have to handle that. And then when it's going down, then suddenly you feel depressed. So suddenly you question yourself, am I going to do it? Am I going to go until the end? And if you add the personal component of telling your wife, one day you're going to go to Breast, the other day you're going to go to Paris, the other day you're going to go to Toulouse and the other day to Lyon, she's going crazy. So you need to maintain also some calmness and some and at least project this into your household while internally it's bloody roller coaster. So I guess this is the only thing really we can prepare for, but at least we can understand what we're getting into.

Have you found any practices that help you with that internal roller coaster? Like people you talk to or daily routines that help you through the daily struggle?

I guess really I have a couple of investors, a few of them that are really good friends of mine and if you ask me whether we should blend the two in some cases, in this case, for example, it's really good to have friends that are investors. And the other thing is also having the support of this few searchers that are in the same boat as you at the moment. This helps and you need to be able to talk to those people quite often. And I think this was really, really helpful. It still is, by the way.

Wonderful.

I really enjoyed this, Rafael. I wish you the best of luck.

Just one last question. Do you have any deals that you're.

Currently looking at that are especially promising?

I've got three at the moment that are promising. One we are into really tough negotiations so it can break at any time and the others were entering due diligence and they are completely different one from the other. So we'll see. But again, I'm trying to carry on with outreach and try to contact more companies and fill in the pipeline. I have started the years with two interns just to help me do so and make sure that I give them. This is a bit my safeguard. If I had only one, I was afraid I would drag him into my hot deals and we won't do outreach anymore. So I took two to make sure that we have to do this part of the job and make sure we fill the pipeline with new deals. Sure, so you find your ways to try to fight against your own bias. But we are emotional people and we need to manage that.

This episode of Search Funded is brought to you by smbpodcastnetwork.com the network is a collection of podcasts and shows from around the Internet which focus on bringing you interviews with amazing guests who share actionable advice, ideas and information for small and medium sized business owners and entrepreneurs. Visit www.smbpodcastnetwork.com to find more great shows and easily subscribe to be notified of new episodes. It's a great way to discover quality content. If you've discovered us today via the network, then I hope you're enjoying the show and will consider subscribing directly so you never miss any of our great episodes.