Walker Deibel, is an entrepreneur, investor, and advisor. He also the author of a book that is critical to master a framework to become an acquisition entrepreneur: Buy Then Build.
With Walker, we covered the key steps to get into the mindset and process of acquiring businesses, to then scale them up further.
How did you get started as an acquisition entrepreneur?
Walker Deibel: I had a realization first that led up to it. I was getting my MBA at Washington University in Saint Louis, and with a few classmates, we started a business. We were finalists in the business plan competition; we were raising capital.
We were talking with a very large retailer who wanted to take our product nationwide. And it looked with all certainty that this was going to work out. This was back in 2004. The month that I graduated, like four days before I graduated, the whole thing fell apart.
In a series of events that took about four hours! And so it went from I knew exactly what I was building and what I was doing to probably the only graduating MBA from our school who was actually unemployed.
And that’s when it dawned on me I knew I was an entrepreneur, but I also knew I was an entrepreneur without a company. Without a vehicle.
It’s not like I had something just to start up the next thing or whatever. So, the notion of being an entrepreneur without a company was something that took hold at that time. I knew that you could buy an existing company.
Inside acquisition entrepreneurship
I didn’t know how to do it. And what happened was I went out, as a fresh MBA and I did something back then that MBAs didn’t do. Which was go out and try to buy an existing company, and I was immediately met with a very fragmented industry.
A very opaque industry, one where getting a quality deal flow was time-consuming. And the quality profile of the brokers that I was talking to, and they would call themselves brokers, intermediaries, advisors, investment banks.
Whatever it was, but the quality regardless of the title was enormous. And the quality of the listings and the insights of the brokers themselves were huge. I ultimately failed my first attempt at buying a company, and I went corporate, and it wasn’t until little over a year later that I ended up being successful buying a business, to begin with.
Gennaro Cuofano: many people think that when you start a company, it’s something that is going to grow very quickly but in many cases when you’re starting from scratch actually you have to give it at least five to ten years to actually build a sustainable business over time.
How did the name “acquisition entrepreneur” came up?
Walker Deibel: The name just came to me. It took me about four, and a half years to write Buy Then Build, and the name came to me for probably three of the four years.
For probably three years that I was writing the name of the book was “Platform Entrepreneurship.” I knew deep inside me, it wouldn’t be the ending title, because of course as entrepreneurs think of platforms we think of tech-stacks or something like Facebook or something that we can build on top of.
I knew it wouldn’t exactly work, however, in private equity they buy and then they focus on growth through acquisition or tuck-ins.
Thus, I saw that there was an intersection between entrepreneurship and private equity. At the most approachable level, at a micro level.
And it wasn’t until I ran into Verne Harnish’s statistics in “Scaling Up”. That 4% of companies in the United States ever exceed a million dollars in revenue. And that to me is an extraordinarily small number. I think that everyone was kind of surprised about that statistic.
I started to look at what actually drives value in companies, those that are growing for 20% for four years or more. It started to come together that there is this very approachable model that no one was talking about.
That if you’re going to go out and put 20% down on your first home and you took the average price in America. And you compare that to a 10% down loan for a business it’s very similar numbers that the average down payment for the house in the United States and buying one of the largest 4% of companies in the United States is actually the same amount of money.
The number one critic I get is that I promote high leverage, but the point is only that if your objection is, “Oh, it must be nice to buy companies. I’m sure you’ve got to be loaded rich to do something like that.”
You actually don’t. If that’s your objection the capital is more ready than starting a company, and it’s far from needing to have generational wealth in your family or anything like that.
What are the critical elements for a good acquisition strategy?
Walker Deibel: I think that there’s a very successful multi-decade broker out there who basically was saying that 10% of potential buyers of businesses don’t end up pulling the trigger on closing something.
And I sort of think of why that is and some of it had to do with my own sort of reality as I started to look for companies. And it also came through working with other partners as we were looking to acquire companies.
And then I do work as a business broker now for online businesses, and it’s been just working with my clients and buyers of businesses and seeing how they all come together that I’ve sort of came to my realization.
Lack of urgency
The number one reason in my view, why that never ends up working out is because they don’t work with a sense of urgency. They believe that everyone who is selling, they know something destructive to the business and they’re trying to unload it really quickly.
Which connects to the next point.
Nine times out of ten (businesses on sale are not getting unloaded). Usually, someone who has built something of value they eventually want to sell it. And so a lot of times you get the first question from a first-time buyer, and that’s “Well, why are they selling?” And it’s this sort of accusatory question.
The truth is that if you’re an entrepreneur and you start a business, and you start this thing from scratch. It’s hard, its hard work and then the second year if you’re one of the lucky ones, your business grows, whatever, 200% over the year before.
The next year it grows another 200% the following year it grows 100%. The year after that it grows 50%, the year after that it grows like 20%, and you’re like “I don’t even know what to do with this anymore.”
Right? It sort of “I’ve done with it all that I can.” And I’ve run my course and not only that, but I’m an entrepreneur.
So, I need to kind of move on and do my next thing, and it’s a great opportunity for an acquisition entrepreneur to come in. Presumably, use a bit of leverage to get an outstanding ROI on it.
Jump in, take over, and create the business that they want intending to take that business to the next level — all the while getting the ROI of the equity build up as well. So, number one is that they put way too much weight on the reason for selling.
They’re trying to figure out the negatives right away. And that’s just a responsible approach, I get it, right. But when you are applying for a job, for example, you’re not going in looking at the negatives you’re going in saying,
“Okay, this is what I want to do with my time and my life, right.” And there is a time to focus on the negatives, and it’s critical that acquisition entrepreneurs do that, and that the due diligence period.
You need to understand the due diligence model; you need to understand why it’s working. You need to figure out if this is the right fit for you, but be patient. The negatives will turn up because there is an appropriate time, and that’s immediately following the letter of intent.
And that would be the time to really, drill in and get into the weeds and highlight all of the negatives. So, I’m not saying to skip over it. I’m just saying do it at the right time. There is a time and place for everything.
In other words, assuming everything, you’ve shown me is true. I intend to buy your business with these terms and x-many dollars. And then they say, “Okay, I agree I like you, you’re a good fit, that price works for me. These terms work for me, let’s do this.”
Once you have that letter of intent in place and it is your intent to buy the company that’s the time where you take the gloves off and get into it and start looking for everything that’s been presented to be accurate. Is everything true? Where are the rabbit holes that are showing me where this whole thing can trip up?
Create a sense of urgency
Avoid working with no time constraints. And if you aren’t trying to be C.E.O. of a company in six months, guess what? It’s not going to happen. It takes work, it takes commitment, and it takes hustle.
And if you work without those sort of sense of urgency than the time will keep on rolling. And it’s widespread for a search to end up taking a year and a half or more.
And as we know, time kills all deals. So, if you are unemployed for a year and a half you end up moving on yourself, right.
Pitch the seller
There is this belief that the seller is trying to sell me something and I’m like a potential investor I’ve seen it over and over again (see above “accusatory mindset”).
Where they will sit down and say, “Okay, pitch me your slide deck or whatever.” And they almost confuse it like it’s like they’re a venture capital or an angel investor and there’s some startup coming in or pitching it.
It’s the other way around. When buyers go in, they need to sell the sellers on them as the right choice. They need to sell them on, “Listen, I’m the right C.E.O. for this company. I’m the one that is passionate about this, that can take it to the next level.”
Or, I might not be die-hard passionate, passionate about it yet but it’s got a lot of the elements that I’ve given a lot of thought to and this business is of high interest to me, right.
So it’s one of these where they want to be pitched instead of going in selling themselves.
What mistakes should you avoid when acquiring a business?
I think that one of the things that I try to do with Buy Then Build I’ve bought seven companies, and that doesn’t just happen. It takes a lot of time; you kiss a lot of frogs as they say.
And I think that I just learned a lot by going through the process and also interviewing and talking with others that have done something similar. And I try to come up with a framework that I use and what are the mistakes and what would the process look like if we were to build a process around a search.
When you’re a buyer, and you walk into an advisor’s office the first thing they want to know is, “What industry are you looking for?”, “How much money do you have?”
What I’ve realized is it’s completely backward, as those are the least important things. People who are solidly in the middle market will get a letter of intent based on being able to pull the financing together and turn around and raise capital once they have the deal in hand.
As a seller, it’s an uncomfortable place to be in, and it’s not ideal. But it happens all the time, if you have a business that’s generating, pick a significant number whatever 20 million in EBITDA; and you are able to get a letter of intent to purchase that business with 20 million in EBITDA people are going to start lining up especially if you’ve got the management team in place, and you’re able to retain them. People are going to line up to invest in that.
The private middle market has been the fastest growing wealth builder for decades. This is a huge opportunity for private investment, so don’t let size limit you quite as much you might be inclined to right off the bat.
The first thing, okay, so I’ll go in and talk to MBA classes or executive MBA classes, and it’s usually up until recently this was something that was totally elective. The acquisition through entrepreneurship classes that have popped up over the last five, seven years have been fantastic.
And it’s starting to catch on, but it’s still very limited, but I’ll go in and say like, “Okay, you guys are all here optionally this was your choice. What questions do you have? Let me try to figure out what it is you came here tonight to learn?”
You always get this one person standard deviation out that says like, “I’m just trying to figure out if I have what it takes to be an entrepreneur, right?” The first guy that ever asked me that question was an M.D. he was a medical student and was a resident at that time and was wanting to get into entrepreneurship because he was attracted to the model but hadn’t spent enough time to see if he sort of had what it takes. So, for me, there is kind like if get into the psychology behind what makes a successful entrepreneur ultimately it will start at two things.
Go after a great opportunity
It sounds superficial, but you can say it like this, it’s a smart individual going after a great opportunity. So, the thing is though what makes an intelligent individual and what makes a great opportunity?
Well, let’s talk about the opportunity in a minute, but it makes a smart individual when you push on the building blocks and what we know today, sure it might be something like I.Q, but more and more it’s turning into there’s evidence around just having a growth mindset. In other words, when a challenge pops-up.
A growth mindset is critical
Do I look at that and say, “I’m the one to solve that problem, I got it, right.” Or do I start freaking out in the face of adversity and think about how I got a C in my biology class back in high school, and I might not have what it takes?
And Herald Dweck wrote extensively about that, so merely having that entrepreneurial mindset is the first piece.
A lot of people will go in and talk to their advisor right away, and they’ll leave the first meeting saying, “Yeah, I can afford a company that’s, whatever a million dollars in revenue and it’s in the manufacturing industry.”
They won’t know for eight months that they actually aren’t even in the right mindset and that they can’t mentally pull the trigger because they can’t get comfortable, right. So, that’s the most fundamental thing. I’ve got more, but I want to stop and take a breath and make sure you want to keep going.
Why is not a good idea to start looking for businesses to buy online?
It’s statistically against you to start from there. When you go to the marketplaces online looking for a business to buy, a couple of things are happening here. Number one, public marketplaces, in my opinion, they all kind of become an element of the lowest common denominator.
Second, you need to take the time to understand what it is that you are looking for.
I encourage all acquisition entrepreneurs to get upstream. You’ve got to get your deal flow. That doesn’t mean that if it’s on there that it is junk, or it has been passed over. But like a lot of brokers will put it out there on the first day, that’s fine, but it becomes tough to be able to see what’s good and what’s junk when you limit yourself only to these public marketplaces.
When you get upstream, and you prepare, and the growth opportunity and you come out with your target statement, and you have one-on-one meetings with the brokers, the advisors, the high bankers in your geographic space or in the industry you inevitably decide to look for.
What happens is something different. The human element comes together, and I’ve bought companies because brokers that I have relationships with call and say, “Walker, listen I know the company that you’re running right now, and I know geographically where it is, and we just got his new listing it’s packaged up, and it’s going to be launching in 48 hours I’m going to go ahead and let you take a look at it early if you’re interested.”
I’ve been introduced to companies on Thursday and been under a letter of intent to buy it on Monday on two occasions. Both times I am ultimately buying it.
It just goes to show you neither of those made it to any marketplace. It just has the relationships, and especially once you close on your first deal. Things change for you; things change because they know you’re not a tire kicker.
What do you suggest to people that are getting started in acquiring other businesses?
We talked about attitude (this is the number one thing). The next thing is aptitude, so rather than go out and look for the company. I want you to look internally first.
Understand your strengths but also your weaknesses
You need to spend some time and understand your attitude, your skill set what you’re good at, your strengths and weaknesses.
In other words, when you buy a company, it’s going to be the company plus you. You’re the new leader; you’re the CEO, what do you bring to the table? Having a clear understanding of that and not just, “Oh, I work in pharmaceutical sales, so I know a lot of doctors that buy this type of doctor, so I need to go buy a medical practice that serves these kinds of doctors.” It’s too superficial.
You can be trained to run anything, in terms of the process and the business. You need to understand like, “Okay, I have strong interpersonal skills, I’m process-oriented, I’m goal oriented.”
Visualize the outcome and take action
The next is action; I like to think about what do you want, I want you to visualize what you want your life to look like. And the reason why is because entrepreneurs work hard. We operate a lot of hours, right?
Of course, there is this whole Four-hour-work-week model. If that’s what you want you can buy that! It’s out there, okay that’s readily available. Or, do I want to build something that has some real meaning. Do I want to introduce some disruptive technology to a significant customer base, that’s out there too.
Both completely different models that make your day to day life look very separate. Do I want to go to a physical location and run a manufacturing plant? Do I want to work in the services industry with a bunch of professionals and sell services? It’s very different lifestyles.
You got to know that about yourself and what you’re looking for.
Find your sweet spot
The third thing, perhaps the most important, is the growth opportunity that matches your skill set, okay. In Buy Then Build, I talk about a Matrix that looks at four value drivers.
The four ways that an acquisition can drive value for you.
- Number one is that eternally profitable method. The guys at Harvard wrote a book called, The HBR Guide to Buying a Small Business, they coined that term eternally profitably and as far as I know. And what they’re really looking for is sort of like, if I really want to reduce risk.
- Number two is high growth companies. Things like companies that are taking off and growing to the moon and just needing working capital you need to jump in and manage the growth.
- The third being a turnaround where you buy a company that has assets, has a lot of potentials, but it’s being underutilized. Maybe fallen on hard times and needs someone with a particular skill-set to jump in and fix it.
- And the last one I call is the platform company, and that’s where again you’re using your skill set to jump into the right opportunity for you to maximize the growth of that company. So, little more risk obviously than an eternally profitable company, but it replaces the risk because I think more often than not, the risk is actually in the entrepreneur rather than the company.
And so when an acquisition entrepreneur kind of jumps in to grow something, being able to have that growth mindset. Tackle the growth opportunity, use your skill set to grow the company is the thing that can potentially bring the most value.
Is there an example of the perfect acquisition you’ve made?
It’s kind of funny because it’s almost like you can’t say that until you exit. And in other words, the whole story has to be told. The book has to be closed on that particular deal before you can say, “Oh, this went completely according to plan.”
And one did, I’ll talk to you very quickly here. I bought a book printing company, and I did this during a time when the recession was starting, bookstores were going out of business.
Apple released the iPad, the month that I bought this company. Newspapers were going out of business; bookstores were going out of business, it was a very interesting time. You might think I was crazy.
What I saw was the following, digital book printing was growing at the rate of 30% or was it 38%? Year over year for four years in a row. And we didn’t know it then but what we saw was Amazon moving into their first space. In retrospect, we see it now, Amazon moves into a space, and it starts to suffer.
Back then it seemed like print was dead, but it was Amazon back then. Digital book printing provided a lot of benefits to publishers. Things like Just in Time and Mentor Management.
Being able to pull books out of print and print them on low run parties. Let me say digital book printing is inherently low run qualities of published books on exalted Xerox machines. That’s what the product is.
So, it also lent itself very well to warehousing and fulfillment, so a short run of printed books. Warehousing of those books and then fulfillment to individual places. So, I bought a book printing company that had about 130 to 150 different publishers nationwide.
I used the cash flow of the business so I knocked down a few walls and built a digital book printing facility inside the company. About 12 months after I bought it. I went to the market and I started of course by selling it to the existing customer base. And within 24 months it was making almost a quarter of our revenue.
At a time when printing companies were going out of business. 18 months after I put the digital book’s facility in there we were one of the largest 2% of printing companies in the U.S. and Canada.
That’s textbook, the thing is though, is that it hits the ceiling. And what I wanted to do was growth through acquisition because in entrepreneurship we’re faced with this all the time. It’s okay I’m going to go, pull together a million dollars or whatever.
And I’m going to build some infrastructure. What I don’t know is can I get paying customers to commit to that infrastructure that I built. Or is it just not going to work out. That is the risk of a startup.
When I looked at it, I had a lot to lose, because I had a company that was generating millions of dollars in revenue and by reinvesting the cash flow into this very speculative thing.
I was not only putting other people’s money at risk. It was my money now. And it was like the company; I could take the company down by making a speculative investment like that didn’t work out.
So, I knew that I could acquire the infrastructure, cheaper than building it, and I could also value it based on earnings, which meant that it was more affordable.
So, it’s more affordable, and it’s proven. It’s a wonderful opportunity, I went out and looked at 27 companies, and this last one was perfect. The company was not for sale. I had recruited a buyer’s advisor, and we were going to these companies that I was finding.
This company was perfect. We had whatever 50,000 square feet they had ten in a couple of places et cetera they had the most significant digital infrastructure exactly where I want to go. We talked about four months; the guy says, “Listen, I love your vision we’ve got to do it. I want to change one thing. I want to buy you.”
I was 35 years old in the printing industry, that’s fine, and it just so happened that the whole acquisition entrepreneurship model does use leverage and all of that leverage shored up liked the month prior.
And so it was one of these things where I had my first exit all by practicing acquisition Entrepreneurship. So, it’s possible that it’s the best way in certain situations not only to start as an entrepreneur but also to grow and eventually exit as well because all of those activities lead to the outcomes that we ultimately want.
When does it make sense actually to use leverage to acquire a company?
What it’s interesting, I think that it’s the number one criticism I get. When people say, “Oh yeah, you pushed leverage.” That’s not true if you read what I’m saying in there.
I even point out that private equity is learned two or three times, not to put minimal equity into deals. The private equity market has pretty much figured out that placing between 40 and 60% equity injection into a company will then both increase the ROI, but also building a level of security to the acquisition. So, money is readily available to the point that if your objection is “I can’t get money.”
I’m going to stop you right there. Money’s not an issue; it’s there. And if the risk truly is in the entrepreneur and you are the entrepreneur for that opportunity than when you go out and put 10% equity injection in down payment we are going to call it into a business acquisition, and you need 90% leverage.
And it works out because you build up that 90% leverage over time. You sort of sidestep any external market conditions that could come at the wrong time and you build up that equity. You grow the company, and you execute perfectly.
You are an absolute genius; it is the number one ROI of any investment I have ever seen anywhere. But by doing it, you are taking on a lot of risks. And so what I say is if you have no capital and you’ve got nothing to lose, and you’re the right fit for the CEO of that business, go ahead and do it.
So, many people are as a broker I can tell you that probably 90% of the deals I’m closing right now are for the last year have been people that are putting 10% down because they like it. The money is accessible if you do that I would advise eating ramen noodles like any entrepreneur.
Build that equity up right away, right. Look at the private equity industry and understand that these people have like a hundred trillion dollars right now or something in liquid capital to invest in acquisitions. And they are only taking 60% leverage. They probably know what they’re doing.
Suggested reading: Buy Then Build
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- Pretotyping: How To Find The Right Idea To Avoid Business Failure With Alberto Savoia [Lecture]
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