Episode 8 - Pete Seligman, Australian search investor

A whole bunch of businesses will die that will then have to just be refounded again in some other shape by someone else that's starting from scratch rather than taking this legacy of great businesses we've got and finding new owners to take them forward.

So the big question is this. How are entrepreneurs who aren't scaling tech startups or building lifestyle businesses from scratch doing it? 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. I'm joined today by Pete Seligman, who is a search fund investor based out of Australia. I'm really excited to talk to Pete and have him on the podcast because Australia is a relatively new market for search funds, but it's one that fits a lot of the characteristics of what I think make for an excellent search fund market. It's a decent sized wealthy country with a lot of business owners nearing retirement age, much like the us There are a lot of great businesses out there to acquire and then you have the great investor base of people who are used to investing in small companies as well as the support for transactions that you would expect from a highly developed country with plenty of investment bankers, high quality law firms, and multinational accounting firms that are used to dealing with transactions of this size. So really makes a great place for a search fund ecosystem to develop, even if things are still relatively nascent there. And that's why I'm really excited to have Pete on the podcast and to learn more about his journey. He previously was an acquisition entrepreneur himself in Australia and now he invests in search funds there. So I think a great place for us to start would be just for you to tell us a little bit more about your own entrepreneurial journey and how that informed your views on search and ultimately led you to start investing in search funds in Australia.

Yeah, fantastic. Well, thanks very much for having me, Nick. It's great to be on and I really appreciate your efforts to try and help educate more people around search, both in the States and also elsewhere in the world because it's a growing asset class, I guess, and it's a growing career path. It's been around for a long time, but it's actually really starting to get off the ground in a range of new markets as well, including Australia. So I guess I'll try and distill what is now coming up to 25 years worth of experience into a very short summary. So I'm an engineer by background. I also did a finance degree. I spent some years as an Engineer, a civil engineer, that is, I dig holes, I don't write code. And then after that, about five years in and doing some project management and some construction and some construction delivery. Macquarie bank, which is an Australian investment bank, was spending a lot of time and effort and money investing in infrastructure. And that was my opportunity to jump across into the investment banking world and leverage my finance degree. So I did that for a few years both in Sydney and in London, various other places around the world, which was great experience in terms of just the whole finance sector, investment banking, decision making, investments, due diligence, risk, all those kinds of things were really useful learning for me, particularly what I'm doing now. And then I came back home to Sydney and joined Stockland Property Group, which is a large listed property company here. And that's where I really gained my general management experience. So leading larger teams, navigating the, I guess the bureaucracy and the politics and the dynamic of a large organization. But in 2012, I kind of got to the point where I could clearly see what the rest of my career path could look like. And strangely that was less incentivizing than not being able to see it, if that makes sense. I was keen on doing something that had a bit more volatility, a bit more uncertainty. I also for myself needed a bit more accountability and autonomy in what I was doing. And at the time, I guess without knowing anything around ETA or entrepreneurship through acquisition or search funds or anything, me and a good friend of mine decided that we should head out and buy a business of our own. So that's what we did. We searched for about six months. I used to say we looked at 200 companies and I thought that was a big number. But now looking at how searchers typically run their operations, that's a small number. And bought a business in June 2013, a very small business. So I'll jump over the next effectively 10 years, which has been me as a, what you'd now probably describe, a self funded searcher. We ended up buying five businesses. I dropped into three of them as CEO, made myself redundant each time, either recruiting or promoting internally. And then come to 2020, got to a point where I either was going to drop in as CEO again or find another path. And that was when I was first introduced to search and the importance and the role of the search fund investor, which is effectively a hands on private investor, which is exactly what I was looking for. So it fitted. And so I spent the last couple of years investing in search here in Australia and doing what I can to try and build the market.

Amazing. And so given that you are a pretty hands on investor, what sort of support do you give to the searchers there in Australia? Or do you just invest in Australia or are you investing in other locations as well?

Yeah. So at the moment, so second question first. At the moment I'm focusing my investment on Australia and New Zealand. There's. I feel like there's a lot of opportunity here. It's, it's in a market where I can add value directly both because I'm experienced in this market and also I'm closer to the searches so I can make myself available. In terms of the kind of support, it really varies. You know, I do think that fundamental to the model of search is the fact that the investors are active. Now that doesn't mean that all investors need to be active and doesn't need to mean they need to all be active in the same way, but it does mean there's an opportunity for the investor to engage and an opportunity that the searcher should take up to get that guidance from the investors. So during the search phase to bring it to life, I probably catch up with each of the searches I'm invested with. I'll catch up with them once a month for an hour or half an hour depending. Just for really an update, you know, how you going? What have you found? Have you got any questions? It could be anything from. I'm feeling really down because I haven't found anything yet and I don't know if I'm right for this journey. Like could be kind of almost kind of psychological. Could be kind of a coaching kind of session in that regard. You know, it'll be okay. You're only three months in, there's still a long journey to go. Or it could be quite technical. You know, I've got a letter of intent I'm going to put in. I don't know whether to structure it in this way or that way. You know, what's the impact of having an earn out with these kind of metrics? So there's a range of things really and the thing that I enjoy about it most is seeing each of those searches go through that journey, which is quite a journey. You know, you go through various stages at various points in time. There's lots of things you need to learn and lots of experiences that you have. And so I really enjoy seeing them do that. I like being able to help where I can. And it's also a nice challenge for me because, you know, over the last 10 years I've done it Myself, you know, been in the hot seat, searched for the businesses, negotiated with the vendors, been through the transactions, dropped in to operate like I've done those things in the hot seat. The challenge for me now as an investor is what can I do to help someone else achieve the same thing, which is one step removed, which is something new for me to learn as well.

Yeah, I mean, it must be pretty rewarding to be able to help other people to do what you've done in the past and help them see them succeed as well. What would you say are the unique opportunities or challenges of the Australian market versus other places such as the US or UK, where search may be a bit more mature?

Yeah, well, if you take purely the maturity metric and say, you know, how does the maturity of a market have an impact on the challenge of search? I think Jake Nicholson, who's based in Singapore SME Ventures, who I've done some work with, he did a great presentation at our Australian forum last year in September where he was trying to articulate the nature of the Australian market, but also the maturity of the Australian market. And he broke it down into three parts, which is essentially, you need entrepreneurs to head out and try and search for businesses. You need businesses for them to buy. So you need a good market of small to medium sized businesses that are ready for sale and you need investors that are there to provide the capital. And so it's a bit like spinning plates. At any point in time, any one of those three things might be increasing or decreasing or stable. And I think in more mature markets, probably the biggest thing that stands out on all three of those both like the entrepreneur, the businesses for sale and the investors in mature markets, the knowledge of search is just greater. So, for example, there are probably more entrepreneurs because they know about that opportunity as a career path. When business owners are approached by those entrepreneurs and it's more likely they'll know what a search fund is and what a searcher is, and so their confidence in engaging with those people is probably higher. And thirdly, investors, there are just more people that understand the search model and therefore are willing to provide capital to it. So, you know, two years ago or three years ago in the Australian market, the knowledge base was very, very small. And so raising capital was harder. It was mostly raised offshore. The discussions with vendors was harder because they were like, well, you're just some individual. How are you going to have capacity to buy? And how can I trust that you're going to complete and all these things? Right. So I think as we've matured those things have now as I sit here Today, we've got 10 or 20 searches in the market. We've got a good fundamental base of search fund investors who understand the model are actively investing and supporting those searches. And more and more, at least the advisors that advising business owners are starting to hear more about search. So when a business owner goes to their advisors and say, look, this guy just called me, he says he's a searcher or something and wants to buy my business, what does all that mean? It's more likely the advisor go, oh yeah, I've heard about a little bit about that. That is actually something that's for real, it is worth having a conversation. So yeah, I mean, fundamentally my view on the Australian market and the New Zealand market is that whilst the populations are relatively a lot smaller than other markets like North America, Europe, the number of businesses is still plenty. You know, the best estimates we've got of businesses with earnings between 1 and 4 million is that it's somewhere between 80 and 120,000 businesses, probably between 60 and 80% of those are owned by people of retirement age. And more than half of those won't have succession plans. So, you know, you run the numbers and there's tens of thousands of businesses that have the right characteristics. So I think we've got a long way to go before we start to saturate the market.

Totally. Yeah. I mean, I think it definitely seems to have the characteristics of being relatively aging population, but wealthy country and strong culture of entrepreneurship. So it seems like it should be a place with a lot of opportunity, at least for now. How does succession typically work in Australian businesses and how have you, when you were searching for a business or how have you advised your searchers to present themselves to these sellers or to get past that unfamiliarity that may be there in terms of selling to a search fund entrepreneur?

Yeah, absolutely. Well, I mean, I think the question around how does succession work? I think the answer to that is it doesn't work. I think, I think there's. And this is not just an Australian problem, I think it's a global problem. I think that a lot of small and medium business owners don't think about succession early enough and when they do, they're not thinking about it in the right way. I think unfortunately, more often than not people suddenly think about selling their business on a dime and then we'll think, okay, I'm ready to sell, let's get this done in six months and we'll then take to market whatever business they happen to have. And I think that that's a real issue for a whole bunch of reasons. So it's like if you owned a house and you suddenly woke up one morning and said, okay, I want to sell it, but, you know, you hadn't cleaned the gardens and you hadn't fixed that hole in the wall and you hadn't redone the roof where there was a tree fell through or whatever. You know, like if you're going to sell your house, you spend some time and effort preparing it for sale so you can get a good price. Turn that into a business lens and the task is even larger. The time it takes to properly prepare a business for sale is quite a long time. And I think people under and so they take their business to market. Their own internal view of value is quite high because they've loved that child per se for a long time. But an independent person coming in and having a look will find all sorts of holes in that value. And so in terms of first approaching potential seller, the first kind of thing to understand, it's not a problem to solve, it's more an issue to understand is how prepared are they? Have they spent the last two years with a good advisor helping them prepare to sell so they properly understand value, they properly have got their business in the right kind of shape and therefore when you start discussing with them your view of value, it's going to be much more well grounded and rational conversation. Or are they relatively new to market, haven't really been well advised and they're in a situation where they just want to sell, but they want to get an excellent price because then that conversation is going to take much, much longer. And it doesn't mean that the conversation isn't worth having, but you just need to be ready for that to take longer because you're going to have to take them through that whole curve from what they think their business is worth to what it actually probably is worth, and then them deciding whether or not they still want to sell it. So that takes time. So in terms of coaching searches through that process, the primary bit of feedback is patience. Like you just really do need to be patient. These things take time. There are deals that will happen in Australia in the next month or so and first phone call on those deals would have been 12 months ago, easily, if not more so that's just how long it takes because there's so many iterations to go through and there's a journey that you need to take that vendor on. They're not a financial investor that is buying and selling their investments in businesses every week of the year. And so for them to offload one of their investments is a relatively easy process. Trying to extract a business from someone that's probably owned and operated it for 10, 15 years, 20 years, that takes time. So patience is probably the most important thing that searchers need to have when engaging in those conversations.

Sure, it makes a lot of sense. Do they have the culture of brokers in Australia and how much does that factor into the search? I mean, I would guess that that may help with some of that process in terms of helping the seller get an idea of what the market rate for their business might be.

Yeah, absolutely. I mean, there are a number of brokers in the Australian market and the range goes from, you know, a one man band, like an individual who's running business broker service, all the way up to the big four accounting firms, like the big global accounting firms, that will also potentially represent the sale of businesses that are usually bigger, but surprisingly they will even represent relatively small businesses for the size of their organization. So there's a spectrum, and obviously there's also a spectrum in capability and experience of those people that are advising and representing these sellers. So it really depends who you get. Frankly. If you go through a broker, the broker themselves can be more trouble than value that they create because they feed the vendor kind of inaccurate expectations around what this transaction might look like. But equally on the other end of the spectrum, you can have fantastic brokers that have done a lot of legwork and a lot of groundwork to really prepare the vendor and their expectations for what this process is going to look like. And it's not just value. Like a lot of the time, you know, obviously value is one thing and it's important to make sure that you get to an agreement on a reasonable value. But then there's also the risk equation. So what is the risk that the vendor is going to have to take on through this process? And that might be the risk of settlement at completion. It might be the risk of deferred settlement for a payment that's going to be due in 12 months after completion. It might be the risk that gets baked into some kind of earnout calculation. It could be all sorts of things. And the risk that's then documented in the sale agreement is something that a lot of vendors really aren't used to because it's probably the only time they'll ever do a business sale in their entire life. And it can be quite a complex document if you're not used to it. So having a great Advisor through that process is very, very useful. And there are some that do a great job at it. There are others that don't do a great job at all. But I guess that's like any industry, right? You have a spectrum of capability. Capability and understanding where that representation is at early on can also help the searcher and the searchers kind of support network get an understanding of how to run that process in the most effective way.

Sure, yeah. Speaking of third party advisors, are there many lawyers in Australia that are familiar with this process or that can be helpful in that way for the seller or the buyer?

Yeah, absolutely. I mean, I think that in terms of legal and accounting, we're really well served in this market. Obviously we have all of the same brand names globally that exist in any major market and so there are always those options. But even effectively the second and third tier on the legal and the accounting side are all very capable in that regard and also appropriately priced. So it's not as if to get the necessary capability into the transaction, you need to be paying an amount that's excessive for the scale of the transaction. You can actually do it reasonably. That's another concern you could have. So yeah, I definitely think there are people out there that very well versed and very well experienced in transactions of this size and type. I think that sometimes what happens, again it's on the vendor side is that if you own a small business in a regional area that's out of the city and you've been running that small business for 20 years, and when you first started it was the local real estate lawyer or the local tax accountant that was helping you set things up and you've stuck with them for the last 20 years and now you're looking to sell your business and you go to those two people to help you through the process. You know, those people have been fantastic supporters of you and your business over a long period of time and you trust them inherently. Right. That doesn't necessarily mean that they've got the skills to navigate a business sale transaction. And so something also that it's useful for the searchers to do is to kind of have those conversations, you know, in an appropriately polite way, but have the conversation around. Have your advisors been for a process like this before? Are they familiar with these kinds of transactions and these documents and the processes that surround them? Because quite often, and if I'm just thinking about the transactions that I've been involved with, more often than not, the seller as part of this process will have to engage a new lawyer and Probably a new accountant specifically to help them through that process because their current lawyer and accountant just don't have that in their skill set.

That's really interesting. I think that probably true a lot of places, but yeah, it just shows how much trust plays a role in these transactions and sometimes it can.

Yeah, trusting is really important. And I think the searcher investing time upfront to do whatever they can to instill that trust in the seller, I think is really useful. That said, there's a limit to how much the seller is going to be able to trust you because you are sitting on the other side of a table. Right. So I also quite often see this kind of journey happen through that kind of acquisition process is that the searcher will be out there looking for businesses to buy. They'll find one that they really like the look of. They'll go and meet the vendor. And the vendor is wonderful and knows heaps about their business and they've got an excellent business and they're in a position that they want to sell. And the vendor really loves the searcher. And they're like, oh, wow, this guy or girl is great. How experienced they are. Look at all the great ideas they've got. They could make such a great go of the business that I've built to this point. They'll be able to do all the things that I couldn't do. And isn't that excellent? My legacy will live on. And they get all excited, right? And then the seller and the searcher develop a really good relationship over a series of months, as the searcher is learning more and more about the business, because the searcher is enjoying it, because they're learning more about a business that they can start to see themselves running. The seller is really loving it because they feel like they get a chance to transfer all of this great knowledge and experience that they've had to someone that can carry it forward. And then, unfortunately, what happens is you have to negotiate a sale, right? And in that negotiation process, it's just a fact of life that you will sit on the other side of certain issues, right? The seller will want X and the searcher will want Y. Why? And you'll have to negotiate that outcome. And so that process, I was going to say by necessity, not necessarily by necessity, unfortunately, will result in argument and argument, hopefully in a rational and positive and good way to come to agreement, like an argument for the benefit of agreement. But equally, it's very easy for some of those arguments to not be so productive. And so it is one of those things where quite often I find myself coaching searches. Just, like, they'll. They'll say, oh, you know, I felt like I had such a great relationship with this vendor, and now we're going through this process and I haven't been returning my calls or something's going. I'm like, it's okay. You can't expect this entire relationship journey to be rosy, because there is part of this that just has to get serious. You know, they're trying to sell their business for the highest possible value at the lowest possible risk. You're trying to buy their business at the lowest possible value for the lowest possible risk. Right. There's a gap. And, you know, as some people joke, sometimes good negotiation results in neither party being perfectly happy. Right. So I think that accepting the fact that there will be ups and downs in that relationship will actually make your ability to keep that relationship strong better because you. You'll go, okay, that's okay. And you can even have the conversation directly with the vendor. Look, this is something we will argue about because you want this and I want that. That's okay. We now need to have a debate about how we can find some ground on which we can both stand. And that will probably leave both of us slightly disappointed. But at least it gives us the opportunity to step forward to this ultimate objective, which I think is important for both parties to keep in mind. Like, ultimately, what are we trying to achieve? We're trying to achieve a transaction in which I buy your business for a value that you're happy with, you get a chance to sell it to someone that you're happy with, and you get to retire and crystallize the capital of this great business that you've built. There'll be niggles along the way, but that's just a fact of life, unfortunately.

Sure. Yeah. One of the most important parts of the acquisition to get right. Wondering if there were any examples you have of where things went south because someone didn't approach the negotiation the right way or. Or I guess in other ways, examples of success stories and examples of ways that building the relationship ended up creating a great win win situation for both sides.

Yeah. So I always want to try and be as transparent as I can in these calls, but just given that some of these things are still live, I'll be generic in my description, but I promise it's a real life situation. So it goes back to, again, one of those kind of fundamental negotiation facts. Right. So there's a difference between what my intention is and what my position is. Right. So what am I trying to achieve. And in order to try and achieve that, what position am I taking with you? So what often happens is that, particularly on the sell side, so the seller will have something in their mind that they're trying to achieve. They don't quite know how to articulate that to the buyer. And so they'll think of something that the buyer is already talking about to help them achieve the thing that's in their mind. So I'll bring that to life a bit. Right, so just say the seller is wanting to sell the business at a particular time, right? To line up with an acquisition that they want to make or because there's a particular date that works for them. But that hasn't been the topic of conversation. The buyer's been pushing to buy and complete on a particular date, but the seller wants to defer that a bit. Sometimes what the seller will do will just. Because they don't know how to just say, look, how about we think about changing the date? Because I've got these requirements and you've got these requirements. You know, would that work for you? You know, let's get this out in the open. They might start just debating another completely irrelevant point, because in debating that point, they're deferring the execution of the agreement and effectively deferring the sale. Right? They don't want to kill the sale, but they want to defer it. So they're starting to argue on this other point. And then what happens is the buyer starts looking into this point that's suddenly the subject of debate and trying to work out what's going on. Like, this seems like such an obvious point for us to agree on. Why is the seller debating me on this? Right. And so you end up down this rabbit hole, but you've actually completely mispicked it because what you're trying to do is actually understand what's sitting behind the position that they've taken. So what happens through the course? And like I said, you know, you have this great relationship between buyer and seller, and then you get into the negotiation, and sometimes that can sour because you're trying to kind of agree on things that are somewhere in the middle during that negotiation. What can also happen at that point is lawyers necessarily have to get involved in order to draft the agreements and do all those kinds of things. Sometimes the lawyers then put themselves in between buyer and seller, and then you end up with a very formulaic communication approach, which is necessary for the lawyers. Like, I'm not saying they shouldn't do that, but that can cause a Breakdown in the relationship between buyer and seller. And so in this example, where there was this red herring thrown up by the seller in order to change a completely different unrelated clause, all the buyer needed to do was go for a coffee with the seller and say, look, I just want to see where you're at on this deal. I don't want to ask you any specific questions, but how are you feeling? Are you still engaged? Are you still willing to sell? You know, is there anything that's on your mind? And in that process, face to face, over a cup of coffee, the seller actually kind of just says, oh, you know what? I'm just really keen for us to transact on this date. And then suddenly the buyer's like, okay, I'll get it. I understand. Like, you've been fussing around with all these clauses that seem completely irrelevant, but actually there's this other thing sitting behind, so. So I think it's a very nuanced process, like any negotiation is. And you need to balance the need for rigor and discipline, which the lawyers will bring, and that softer side, which is how to manage that relationship with the seller that will always be in flux. So you'll have good days and bad days, and that's okay, but you need to manage the relationship side and the structural side at the same time.

Great. Yeah, it's a great story, and I think it illustrates the point. So, based on what you're saying, it seems that emotional intelligence, relationship building, patience, negotiation skills, those are all things that make good searchers. I was wondering what else you look for in the searches you invest in, whether it's particular professional backgrounds or any other traits that they may have.

Yeah. So I actually think those traits that you just articulated, there are important characteristics to help navigate an acquisition, but they don't all need to rest in the searcher. Right. One of the great things about the search model is that it's founded on the basis that the investors will be there as a group of coaches to help surround the searcher and fill the gaps that they might have. Right. So I definitely don't want anyone who's thinking about doing a search to feel as though if they haven't negotiated a sale and purchase agreement before, they're not going to be a good enough searcher. Right. All they need to do then is they just need to surround themselves with investors who have done it before and then be open to the coaching through that process. And that goes to any of the skill sets that might be required through the entire search journey and well into operation. So the things that I personally look for in a searcher, there's kind of some threshold criteria which is like, you need these things in order to even get a ticket to the game, right? And that's like, obviously you need to have a certain level of skills in relation to communication in calculation, you need to know how to add up. Like, you know, you need to have a certain minimum level of capability when it comes to that regard. It doesn't necessarily mean you need an mba. A lot of searches have an mba. I don't think that's completely necessary. But you need to have a certain intellect. And I think what that does though also is it leads to my second point, which is I do think you need to have a problem solving mindset. So there are always going to be issues and you need to have that mindset where you're actually intrigued by the process of solving problems rather than frustrated by the process of solving problems. So I think you need to have problem solving mindset. I think you need to demonstrate and have demonstrated a certain level of grit, like a level of determination. Because right from the start and all the way to the end, it's not an easy journey. So I talk about quite often that if the search journey is climbing a mountain, you need to be in it for the climb, not for the view from the top. You actually need to enjoy. When you're 20% up the mountain and your boots are wet and it's raining and it's cold and the strap on your backpack breaks, you don't need to completely enjoy it, but you need to embrace that. You need to say, okay, this is part of this journey. Okay, how am I going to fix this? How am I going to solve that problem? How do I get to that next phase of this journey? I think that's really, really important. It's interesting. A lot of adventurers or extreme sportsmen talk about there's three types of fun. So there's type one fun, which is just fun, right? So that might be like powder skiing or catching a great wave or standing on top of the mountain. This is stuff that in the moment it's fun and you know it's fun while you're standing there. Then there's top two fun, which is the fun that in the moment you don't enjoy, but when you reflect back on it, you actually go, that was awesome. So that could be things like the climb of the mountain, or it might be when you go to the gym and you push out those few extra sets and it's hard in the moment, but you look back and you say, that was actually really, really good. So that type two fun, I think, is something that's really important for searchers to kind of relish. They want to know that there's going to be hard work and that's okay and I'm going to push through it. And hopefully there's no Type 3 fun, because Type 3 fun isn't fun at all. Right. So Type 3 fun is like getting caught in avalanche, getting dumped by a massive wave, you know, all those things. You don't want type three fun. But yeah, this type two fun is something that I think is really relevant for search, which is why I look for grit. It's not going to be easy. I also think that you need a certain level of pragmatism. A lot of people that think about search as a career path potentially have come from relatively large organizations. Like they might have come from a big management consultancy or a big accounting firm or a big corporate. And they're thinking, okay, I'm going to take all these skills that I've built and I'm going to take them to a small business. I'm going to be the CEO. And that's great. Like that absolutely can work. But the thing that you need to understand is that when you move into those smaller businesses, you won't be pulling the same type of levers that you would in a really, really big business. Right. So one way of articulating that is that the strategy challenge in a small business is actually quite simple. It won't be very challenging intellectually. So if you've come from a big management consulting kind of role and you've been solving big global supply chain issues for multibillion dollar companies, and then you buy a business that turns over $10 million and you're trying to work out what the next growth strategy is, it's not going to be hard. It'll be open up a new office in the next town. It'll be employ five new people. Like, strategically not hard, but execution is really hard. And if you can embrace the execution challenge, then you'll really enjoy it because the execution piece of a small business is actually where the grit is required. So I think you need a certain pragmatism is, I think is really important because you need to be willing to go get down into the detail and just do those pragmatic things. And then probably the final thing is just the coachability. As I've kind of said a few times in this call, one of the fundamentals of the search model Is you've got a searcher who by definition is relatively inexperienced in the role that they'll be taking on. And they're surrounded by a group of investors who are not only going to put in capital, but have the appetite to contribute some of their time and expertise to help the searcher grow. If you put a searcher in that role who isn't really open to coaching, then you're going to miss out on all of the opportunity. And actually it may or may not be a success, but it's kind of not leveraging one of the most fundamental parts of the model. So I always look for people that kind of demonstrate that they've got that learning mindset and they're interested in being coached. And a little bit, I guess from my perspective, I want to work with someone that's keen to be coached because I'm keen to work alongside someone and actually collaborate with them as they grow. So I think, yes, there's a threshold criteria that you need to kind of have a brain of a certain capability. I think you need to have a problem solving mindset. I think you need to have a certain pragmatism to you because the things that need to be done, quite practical. I think you need some grit because there are going to be hard times and I think you need to be coachable.

Sure, yeah. That's all really helpful. And I think those are definitely good traits to look for in entrepreneurs of any type, especially acquisition entrepreneurs. One thing you said there that was wondering if you could expand on or give an example of is that people coming from management consulting or a large corporation may be used to doing strategy at a high level and maybe like more of an, I guess I could say intellectual pursuit, but then they may struggle when it comes to execution in a smaller business. I was wondering if you could maybe go a bit deeper into that and explain what the challenges of owning small business would be that people who don't have that background may find surprising or more challenging than what they're used to.

Yeah, sure. So I'll try and think of a quick example. If you're working for a large organization that has the bigger the organization, the more people in the organization, the more revenue streams it has, the more locations it operates in, more markets it serves effectively, the more diverse the levers you have to pull. And so therefore the combination of levers you pull strategically can have all sorts of permutations and combinations. Right. And so with that, your strategic decision making becomes more complex because the problem itself is more complex. Now, obviously the challenge with strategy is to make it as simple as possible. But in order to distill that simplicity, you need to analyze quite a lot of complexity. Now if every single one of those metrics is smaller. So Instead of having five markets, you serve, you serve one. Instead of having 505,000, 50,000 people in the business, you've got five or 20, right? Instead of having an org chart that you might consider redesigning for all sorts of things like matrix and regional or functional or whatever, your org chart is actually only 15 people. And so there's only a certain number of ways you can cut that. Right? There's just less levers to pull with less numbers on any of those metrics. So sometimes, and even I had this conversation with some searchers just last week and they brought this business to me and they said, oh, you know what, this looks like a great business on the surface of it, but the more we've learned about it, it just seems really, really simple. And I'm like, yep, that's, it's probably, it probably is really, really simple on the face of it. Right? So for example, just say you buy an electrical services business in a relatively medium sized town in state XYZ, right? And you've got 25 people, it's five administrators and 20 electrical technicians and it's turning over a reasonable amount, has got reasonable margin. You're trying to think, okay, how can we grow? There aren't really many strategic levers you're going to pull. You might say, okay, well we do have a lot of service revenue. Can we start selling some product into that mix when we deliver the service we're currently servicing Town A, could we open up a new branch in town B, which is one hour down the road and so therefore replicate what we've got here. So 20 technicians and go and put 20 technicians in the adjacent town. Or you might say, we're doing electrical services. Can we also do air conditioning services or fire services or change our vertical mix? So those are relatively simple strategic decisions to make. You don't have to go to school for 15 years to learn how to come up with those strategies. So what I mean is if you bring a big strategic mind to a business of that size, they'll either get bored by the simplicity of the strategic options or they'll overcook the strategy for the capability and capacity of the team of 25 people that you have sitting in town a running electrical services business, right? So that's the strategy side. On the execution side, the strategy might be simple. Okay, what we're going to do is we like what we do. We think that town A looks relatively similar to town b. We've got 20 electricians. All we want to do is we want to go and build a branch in town B. Execution of that actually then becomes really difficult. Who's going to do it? Like, who's going to. Are you going to go and recruit in Town B? Are you going to poach from the electrician that's already operating in Town B? Are you going to move one of your people from town A to town B? Okay, well, let's just say that you want to move someone from town A to town b. You've got 20 electricians and three of them are supervisors, so probably a supervisor. So you speak to the supervisors. None of them really want to go. You're like, oh, okay, well how are we going to get this new branch operating? I can continue down this path for a long time. But you need to now work out how are you going to build a team of even five electricians in town B to start the genesis of your new branch? Where are those people going to come from? So you might actually find that there's a guy who's not yet a supervisor in your team of 20, but he's almost ready for promotion. But there's no space because you already got three. You're like, okay, well maybe we can get that guy, move him to town B, promote him to a supervisor, send two of the other technicians over to town B and they can start our new branch. You have a chat to that guy. He's really excited about, yeah, yeah, I'll move to the new branch. That sounds awesome. It's great for my career. I've spoken to these two other guys, they want to come with me, whatever, right? Then you go and do that. And one of the existing three supervisors said, why didn't you provide me any opportunity like that 10 years ago when I was a technician? You know, like, well, you never asked for an opportunity like that. And actually last week I asked you if you wanted to move to town B and you said no. And now you've got this thing where you've got one of your three money producing supervisors in town A is now looking a bit sketchy and he might leave and go to a competitor, like, so you can see what I mean, right? Like the execution, like it's obvious. 20 technicians in town A, build another 20 in town B. Strategically easy execution, actually really hard. And a lot of it is people, a lot of it is trying to navigate the various career Paths and aspirations and family situations of people in small teams, but then working out how to manage the dynamic between those people as you try to push down this path where you're trying to create these new strategic opportunities. And so for me, I find the ambiguity of that problem really interesting. There is no answer to that. There's only a whole series of iterative steps that you can take to try and navigate your way down this path. A bit like climbing a mountain, right? There's not a set of stairs from the bottom of the mountain to the top. There may be a pathway, although may not. But each step along the way, you kind of looking up and trying to work out, okay, now do I turn left or right? Oh, that rock fell over this tree, now is over the path. That's the stuff that you really need to want to love that type 2 fun we were talking about in order to really engage in this process. And so from a searcher's point of view, you need to look ahead, knowing that you'll have all these challenges. That can be really frustrating. Like you would have thought that you stand in front of your 20 employees in town A, and say, we're going to grow this business. It's opportunity for everyone. We're going to open up a new branch in town B, who wants to be part of it? And they all walk out and say, happy doing what I'm doing. You're like, but it's so obvious, right? But then how do you change tact to try and start motivating people to get on that journey and get on that growth? So that's why I think it's important for searchers to have an open mind around what the reality of the journey looks like. It might sound nice to climb Everest, but what does it actually look like when you're 27% of the way up the hill and your right boot is full of snow? It might sound nice to sail around the world, but what does it look like when you're stuck in the middle of the Southern Ocean and your mast is cracked and you need to rebuild part of your engine because of stock work? So any opportunity, a potential searcher has to spend time talking to current searchers and business owners and operators to talk about what does it really look like? Day to day, I think is really useful. And so that's why, as an investor, it's hard. But I try to understand those characteristics in the searcher when I'm meeting them for the first time. Like, are they going to have the grit when the going really gets tough? And when those things that look obvious on paper are really hard to get done in real life.

Definitely. Yeah, yeah. No, I think that and small businesses, the human touch and management is such a big part of your life. And I think that's a great example you gave. I guess we're running a bit short on time. So just one last question. What motivates you as a search fund investor? What's your ultimate goal and what part of the process keeps you going?

So there's quite a few different parts to it. As I said just then, I really like the ambiguity of the challenge. I as an playing the investor role, I really like the personal challenge for me to try and do what I can to help the other person achieve the outcome. I can't grab the wheel. If we were sitting on a sailing boat, I'm sitting on the back watching this person hold the wheel. I'm not holding it and I can't lean forward and grab it even if I know what to do. So the challenge I enjoy for me is how can I say the right things and ask the right questions to try and get that person to then learn how to make those decisions at the right time in the right way? So I really like that. I really like seeing people grow through their journey. And even in the businesses that I've owned and operated, I've loved watching people in our teams make their way through their careers and evolve and progress and learn. So I think I enjoy watching other people do that. And I also think, just fundamentally, from a macro point of view, everyone knows it, so it's kind of. It's not new information, but there's a massive issue globally and definitely in Australia with all of these excellent small businesses that almost regardless of what we do, most of which will die in the next five to 10 years because they don't have a succession plan, they don't have a good way to get an exit. And so a whole bunch of businesses will die that will then have to just be refounded again in some other shape by someone else that's starting from scratch, rather than taking this legacy of great businesses we've got and finding new owners to take them forward. And so I think in some small way, the search model is a great way of addressing that. And so it's great every single time that happens. I feel like it's at least some small contribution to that kind of transition of ownership and legacy and economy.

Definitely. Well, thank you so much for joining, Peter. It's an excellent conversation. I learned a lot and I'm really happy to have you on.

Yeah, no worries. It was great to chat to you, and I wish you all the best with your own endeavors, but also with the rest of the podcast, because you'll find that there's a lot of really interesting perspectives in this space. And I think that I always encourage every searcher to make sure that even when they're building their cap table, get a real diversity of views, because that's one of the really rich things about this particular community, is there are lots of people with different opinions, and all of those opinions can come together to produce results. So definitely reach out. People will be happy to chat, and I think you'll learn a lot along the way.