Business acquisition is a unique challenge, especially if you’re an owner-operator who’s being pitted against larger private equity entities. Navy SEAL officer Ian Hossfeld knows where his competitive advantages lie and tries to stay within that lane in his ongoing search for a company to acquire. Ian is the founder of The Foss Mountain Company, which was created in 2020 for that specific purpose. He spends time with Bob Roark on the show to share what his company is looking for in a business, as well as some insights on what business owners should be looking at if they’re planning to sell. If you’re a business owner who’s contemplating an exit, listen in to know if Ian is a good fit for you. If not, then he would gladly help you find a buyer who is!
In this episode, we have a special treat. We have Ian Hossfeld. He is the Managing Partner and Founder of The Foss Mountain Company. He's a SEAL Officer with the US Naval Reserves. Ian, thank you for joining us.
Bob, thank you for having me. It's a pleasure to join you.
Ian and I ran across each other. He is working on purchasing a company. I thought we would take and dig in with his thoughts on the type of company he's looking for and some of the criteria. Ian, in a thumbnail sketch, give us a quick snapshot of what got you from the Navy to where you are now.
I was a Navy SEAL Officer on active duty for eight years before transitioning from active duty to the Reserves, returning to school to get my MBA and pursuing this path. A couple of steps along the way that led me to this. What led me to transition from active duty was in 2016, my wife was pregnant with our first born. I was staring at my fourth deployment in five years and didn't see that changing while I was on active duty. I wanted to be around more for fatherhood and chose to leave active duty but still be able to serve while serving in the Reserves. You do when you don't know what you want to do and that's go back to school. I went and got my MBA.
I wanted to do something with entrepreneurship. What led me to that was on my last tour on active duty, I was deployed to Iraq and was in charge of a 75-man militia in the Upper Euphrates River Valley helping lead the charge to clear ISIS out of the area. In my capacity there, I was in charge of manning, training, equipping and operationally employing this force. In many ways, I had wide left and right lateral limits. I got to be in charge of this force and in some parallels, it’s like being in charge of a company. I loved that autonomy and ability to make meaningful decisions and have to think on my feet. Having to problem solve, to work with individuals both inside and outside the organization.
[bctt tweet="There is such a thing as a wonderful business to own, but not a wond erful business to buy." via="no"]
It was a meaningful experience that I knew leaving from that, I wanted to replicate that and didn't want to be a cog in a larger machine. I knew entrepreneurship was the right path for me. While I was at business school, I met up with some professors, investors and mentors that worked with folks such as myself and help advise them and mentor them in going out and purchasing a company after graduation. I worked with them my last year I was in business school on a couple academic projects. I got to know them both personally and professionally as they did me.
We decided to partner up together after graduating. As it stands now, I am backed by 21 investors ranging from folks that were in my shoes several years ago, to some successful investors, to folks investing on behalf of family offices and private equity funds. It’s a good mix of people and I selected them based on their experiences across industries, across geographies and across roles that they held within companies. I feel fortunate to have them on board my team, backing me as an entrepreneur and providing guidance throughout the whole process.
We were talking about the one big thing and it is to take care of the people that you had. As you took over that business enterprise in the Euphrates Valley, it’s probably the wrong word but you had a product to deliver. When you came into that organization and you started trying to work toward taking care of the people in your organization, what was your discovery like and how did you start to prioritize how you were taking care of those folks?
There are a couple of things in that particular situation that were unique but then there were some commonalities. A big part of that is that regardless of who you are and what you're doing, you have a professional life and you have a personal life. It's impossible for you to take off the personal life while you are at work. I found with these folks that are making sure that I was aware of issues they were having with their families. If there was something at home that was the matter, then they couldn't focus on what they were doing at work. We were better off to, in those cases, give them time away from training to take care of the issues they were having with their family, so that they could come back to us and be 100% committed to what we were doing. Treating them with that decency and respect, and realizing that we were there for six months and they were going to be there for the rest of their lives, and that our pace and their pace might be a little different. Seeing that humanity and empathy with them will build loyalty and trust. That was something that I learned and focused on while I was there.
I think about that empathy component. We hear a lot about that in the business and I don't think that's necessarily associated too well with military. In the empathy side, the impact from when you arrived versus some duration of time, when did you start to notice that this approach was starting to have enough positive effect on your organization?
It does take a bit of time because anytime you come into an organization and you're the new guy, there's a period of building trust and demonstrating competence. That was the same in there. Within a couple of months of demonstrating that I was a person of my word and that there was follow-through in what I said and not hollow words, that's where we started to see that. Maybe some of the common soldiers were a little less aware of it but their leaders who we are working with day-in and day-out had to hear the everyday gripes of their men. We were there helping them solve it. That's where the real trust and relationship started to build was at that level as we demonstrated that we had their back and that we would help them accomplish their goals and empower them to look like as leaders. Let them show that strength to their men and earn their trust even more.
You have this wealth of experience, discipline and academic work that you've done. It's a compliment that the academics and mentors at your last place of education had confidence in you to back you so now you're on the trail. You're looking for an acquisition. For the readers, what is your acquisition target resemble? What are the characteristics?
There are a couple different characteristics that I'm looking at. One quick and down dirty easy to sort by is looking at the financial side of things. I'm looking for a business between $1.5 million to $5 million of cashflow EBITDA. I can go a bit lower than that if it’s in a fast-growing industry or in a hyper fragmented industry where it's conceivable without having an aggressive timeline that you'd be able to put together a couple businesses within a couple of years. Elaborating a little more on the upper end, I set the limit around $5 million, not because my investors don't have the funds or that I don't feel I have the competence or expertise to run an organization of that size. I just realize where my competitive advantages lie.
As you start getting larger and start going against bigger competitors, strategic buyers and going against larger private equity shops. I'm coming in as an owner operator. I won't be bringing any companies or portfolio companies in tow. I don't have the synergies or cost savings that such buyers would be bringing in. In a competitive pricing market, I realized that gets a little harder for me. If there's alignment with the seller, both for wanting to sell to someone like me, an entrepreneur or someone who's going to move their family to the area to run the business and who like my leadership style, my vision for their company. If that all resonates with someone, then by all means, I I'd love to take a look at the larger business.
[caption id="attachment_5791" align="aligncenter" width="600"] Business Acquisition: If you’re coming in as an owner-operator going against larger private equity shops, you need to recognize where your competitive advantages lie.[/caption]
I'm also a realist. I'm not going to tilt windmills for the sake of getting reps. That's on the financial side. Looking at the business characteristics side, my investment interests lie in businesses with highly recurring revenues or repeat revenues. The reason why I like those types of businesses is because you have that good visibility year-in and year-out of what the picture is going to look like. I also realized that with some industries, they may have one line of work or a revenue stream that's more project-based or one-off type revenue. Those can be highly lucrative but I'd say in those situations, I'm looking for the business that tilt heavier towards that, either recurring or a repeat repair or maintenance service, whatever you want to call it type of revenue. That's one of the characteristics.
Another big characteristic is looking for not asset intensive businesses. It’s not highly reliant on real estate, not having a heavy equipment or heavy manufacturing. It’s not the best match. Folks in vans and trucks and some inventory is not a problem. Some light manufacturing whether that's CNC machines or something along that line are not an issue. Those are businesses that I like as you start getting up there. In asset intensity, it becomes less and less of as a good fit for me as a buyer. I don't need an industry with super high growth. I found industries that have great business characteristics, as far as strong recurring revenues and sticky customer basis. I find those attractive. It comes down to what you have for your growth strategy for the business.
If it’s a business that's growing like crazy, then I'm looking to tap into the organic growth of that business. If it's a business that's strong and steady but chugging along, then maybe the strategy is to utilize this first acquisition to form a nice strong base. From there, looking for some other competitors or smaller scale businesses that I can selectively look at that have good alignment as far as customers they're serving, how they treat their employees and that culture of the organization. If there's good alignment there, then the growth strategy is by going out and acquiring some more of those types of businesses.
Do you find in this environment that there's a shortage of opportunities to look at companies? I've got to believe that there's a fair quantity that you can look at. I don't know if there's a fair quantity that qualify.
You can be as busy as you're willing to put the effort in. Lots of businesses are available for sale through brokers and bankers. I've also had success talking to business owners directly. I started searching here in August. I wasn't in the market during the early days of COVID. I heard that was a bit of a slowdown but I feel that it's picked right back up and especially now, I had a surge of people I was talking to that said, “Come circle back around the first of the year and let's start talking.” It’s very busy times now.
For the readers, they're going like, “I've got a company. How do I attract your gaze?” For some of the businesses that didn't make the cut to do further due diligence and maybe why that was.
I have a couple of philosophies that I think about when I'm buying a business. One is that I don't expect me as the owner and operator coming in without 30 years of experience you had as the seller. I don't believe that early on in my life as the CEO I'm going to be able to operate the business as effectively as you did with all your experience. With that in mind, if there's a seller that's involved with the business’ daily operations in the standpoint that they're still providing some service to clients, they're still the most pivotal player in the sales or the most pivotal player in the maintaining relationships with a client, it can give me a bit of pause because I'll be taking over the seat from them. I don't have that experience that they have and that years of goodwill with that client. If it is those types of situations, there's more risk for me as a buyer coming in.
[bctt tweet="Value means much more than revenue. " via="no"]
Another situation that has caused issues in deals to die on my end is maybe you have a fantastic business model. It's in a nice industry, great margins and good cashflow. Everything from a financial picture looks great, but then we started talking some more and I find out that 50%-plus of your business is from this one client. In those situations, the way a mentor of mine phrased it was, those are wonderful businesses to own, not wonderful businesses to buy. You built a special relationship with a client that you've worked with them and they've grown and scaled over the years and you've scaled with them but they still remain a large portion of your revenue. As a buyer, that gives me a bit of a pause and makes it harder to pay you a great value for the business because there's a lot more risk for me as the buyer because as I don't have that relationship. If something was to happen, all of a sudden, your business doesn't look the same as it does before with gaping hole in the income statement.
When you're talking to these various business owners, do you think that they're surprised in many cases when you bring up client concentration? You're the CEO, the chief salesman and the marketing. You're everybody. Do you think they're surprised when they hear that?
One part that I have found especially true with the relationship with clients and customers is folks will be proud of the relationships they've formed with people, and that does mean something. I don't want to say that it doesn't have value, but it's hard to take that good faith to the bank when there's concentration risks that isn't settled by a legal contract. It’s a good thing to have with the business but a lot of times that trust relationships are not enough to bridge the gap with a lender to get financing for a deal. It’s a lot of risk for a buyer.
The owner may have a perception and he says, “Look at all my financials.” From the buyer's perspective, you go, “I'd have to discount this risk so much that you're not going to like the deal. You might like the eventual money if it all comes to pass but you're not going to the deal structure.”
I'm a big proponent of keeping things simple. If you're only able to get the deal to work through a complex structure that both sides barely comprehend, it's not a good start. I'd rather keep it stupid simple, and a simple mixture of cash at close and either a seller's note or an earn-out for part of it, not layer upon layer of complexity where at the end of the day, there's a high likelihood that we'll have differing opinions about certain terms being met. That's not a good relationship starter and not a good point to begin with.
I think about the timing of you starting to look for businesses and so on. COVID has just come through. It’s rippled through various companies. When you're looking at some of these companies, presumably they're going to be on some trajectory pre-COVID and they're on some other trajectory during COVID. When you have that discussion with the business owner, there are some businesses that have accelerated camping, but how do they do that?
[caption id="attachment_5792" align="aligncenter" width="600"] Business Acquisition: If you’re only able to get the deal to work through a complex structure that both sides barely comprehend, then that’s not a good start.[/caption]
It’s case by case. It also depends on how it's impacted them. For example, I’m based in San Diego here in California. The governor here shut everything down from March 2020 through April 2020. If you took a hit for that time period and then sales and everything bounced back, that's a lot easier gap to bridge it and discussion to be had. If there is material difference from 2021 to previous years, whether you're the beneficiary and you're in the camping and RV industry or you're someone who's getting destroyed, you're doing the commercial kitchen supply or maintenance and your restaurant side of the business has gotten crushed. Those are two much tougher valuation conversations to have. They would be trying to find some either average earnings over a couple of years or that's where it would be more appropriate to look at adding in and earn-out or heavier seller financing.
It’s something where you as a seller get to capture more value and get the fairer, more normalized value instead of these extraordinary times that we're living in. Because it's variable and we don't know what's in store for us, I personally have tried to stay away from industries that have had that effect on the business because that is a tough conversation to have. Unless you have, as a buyer, a strong opinion or experience in that industry or much higher risk appetite, it's hard to get around.
As you're out there with the business owner community and looking at the deals, things that stick out in your mind as far as the owner knowledge gap. They'll go, “I come in every day. I work my butt off. I'm the sales guy. I run company and I don't have a chief operating officer. My CPA does my financials and I don't have audited or reviewed financials.” What's the biggest gap or series of gaps do you think the owners have with respect to selling?
One thing I've heard about it from some sellers is hearing some story of what someone else received. What someone paid versus what your value is, there could be discrepancies there. Maybe your friend got the deal of the century or maybe your friend's business was that much more valuable because instead of they had their revenue was through a contract, whereas yours is at will. There is some more legal standing to their future revenues or their margins were that much better than yours or they had some intellectual property that you don't have. Understanding what people paid versus what the value is, and I don't think there's anything wrong with, as a seller, you have some number in your mind and regardless of what the comparable pricing is for your industry, if you want to stick to that, that's fine and just waiting that buyer who's willing to pay that.
If you are serious about selling and you're ready to retire and transition from your current role, having an understanding of what the market is in regards to multiples and an understanding of what is it that enables these companies to achieve tell us that price range, whether revenue size or some of the factors I mentioned around building that competitive moat or their margins, growth or trajectory. All of those things can play a factor in why someone may get the upper price range versus the lower price range for the industry.
My sense is there's a big disconnect between revenue and value. There's a disconnect on what the value drivers are for an industry. When you're looking at deals, you’ve got deals from the business owner and from brokers, various people in the marketplace. What's your observation when you get shown a deal from a broker versus being shown a deal from an individual business owner?
On the broker side, you come across a whole spectrum of folks. Some folks that have a lot of experience to those that have very little or even if they have been involved in the industry for a long time, a wide disparity as far as CIMs marketing material, what they put together and the thoroughness of it. On average, if you're on the more professional side, the CIM will probably answer a lot of those high-level questions before we even have a conversation with the broker.
What is CIM?
It’s the Confidential Information Memorandum. If you are talking with a broker or a banker worth their salt, they have hit some of the main questions that you're going to be asking. If revenues bumped way up or way down, for some reason, an explanation of why that happened. If there are margin improvements, what caused that, what is the customer concentration? If there is something that looks like customer concentration, maybe they're breaking it out some more to say, “While the end client is this big company, you're dealing with different divisions within the company or you have five different contracts with the company.”
There still is some risk but it's been de-risked because of these steps. You'll have that available in a more professional process. When you're talking to owners, it can be a spectrum, it can be people that are serial entrepreneurs and have sold businesses before and have worked with an exit planner or have worked with a consultant or advisor in the past or got an evaluation of their business done. They have seen, at some past point, what their strengths and weaknesses were for the business. I've been working at building upon the strength and eliminating the weaknesses. When you're having that conversation with you, they're able to lay out quickly the good, the bad, the ugly and what they've done to improve the business.
[bctt tweet="Time kills deals. " via="no"]
You have other people that it’s their first time coming into a transaction. They don't even know what the terms are, what the process is and what the outcome is like. In those types of situations, I to try to help them as much as possible. Regardless of whether I'm the right buyer, I'd like to point them in the right direction as far as, “This is my quick observations for you of what I like about your business. Here are some risks or concerns I might have. Here's how, if you were to improve upon this, you would drive a better valuation for your company.” It is across the board. In general, the rule of thumb is that brokered or intermediary processes, the more professional solve some problems because they've been working with this advisor for a year but it is not always the case.
I think about your journey and you've got a deep bench of mentors that have been around the track. You've been around the track. You know what a crappy day looks like. This don't look like that. What message might you say to the business owner that's reading that would check all the boxes? What should they do, reading this blog, if they think they've got the company that will fit your parameters?
Reach out to me at Ian@FossMtn.co. If someone is serious about wanting to sell their business, I would love to talk to you, but talking to you as an individual and wanting to see your success, I would day to first talk to a CPA or an exit planner or some a fiduciary to come up with a plan for you and make sure this is the right time. This is going to be a transformative event for you and wanting to make sure that you understand the tax implications so that pay that paycheck you have in your mind is going to match what you receive after Uncle Sam takes his. On a personal level, if this has been your day-in and day-out, your baby for years, do you have what's next figured out for you?
You leave this, you take your breather or whatever is right for you but then you transition into your next calling or have something to line up to fill your days. That's something I've talked to some people that gets overlooked and that they don't have that in mind, “This isn't going to take my day-in and day-out.” The other thing I’ve been told from a variety of folks is when you're going into this transaction, retain M&A lawyer. Don't use your buddy who is a PI, a lawyer or your real estate guy. Use an M&A lawyer and this helps smooth the transaction and make sure that you're receiving the best legal advice possible.
I've talked to folks that have headed this advice and those that have not. The common outcome is, “I was glad or I wish that I had retained an M&A lawyer.” From a buyer's perspective, we know we're working with someone who knows what's the market rate for terms and structures and can explain them to you to make sure that you fully understand. At the 11th hour, you finally figure it out and the deal blows up. Even assuming that nothing is wrong, if someone isn't experienced with purchase agreements and due diligence issues, at the least, it's going to be a slower process. Time kills deals. That's no good for both parties.
There’s the deal fatigue and the emotional roller coaster. I would add on to the right advisors, if you can find an M&A attorney that's done a transaction in your industry, and if you find a broker or somebody else, make sure that they've done a transaction in your industry and those kinds of things, so they at least have plowed that field before. I saw a picture of you and your family on your website. That’s a great looking family you've got there. It's been a few years since mine were that size. I appreciate the path that you're going down and the contribution that you've made from your years of service. For the readers, if you either are a business owner that are looking to create a relationship with a young gentleman like Ian here or if you know of someone, please urge them to reach out to him. He's available. He's also on LinkedIn as well. Ian, do you have any parting words you'd like to say to folks?
[caption id="attachment_5793" align="aligncenter" width="600"] Business Acquisition: There is a range of factors that go into why someone gets the upper price range or the lower price range for an industry.[/caption]
I'd love to get in contact with you if you are a business are looking to sell. Even if I'm not the right buyer for you for a variety of reasons, I have a network of folks that I think very highly of, both individuals and institutions that I'd be happy to point you in the right direction. I'm all about building relationships and helping people out. I’d love to work with you and complete a deal and continue building upon your success but at the least, I'd like to help you find that right buyer for you.
Ian, I appreciate you taking time. Thank you.
Bob, thank you for having me.
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