The podcast features a deep dive into the world of small business acquisitions, highlighting the significant opportunity presented by the ongoing transfer of ownership from retiring Baby Boomers.

What is acquisition entrepreneurship? It is the practice of searching for and buying established, profitable small businesses - usually from a retiring owner. Fruition Capital invests in these businesses.

I invited Jason Ehrlich, Managing Partner of Fruition Capital on ATLalts to discuss why he believes investing in the acquisition of small businesses can allow investors to take advantage of what he believes are four key factors:

1. Generational transfer of US small businesses owned by Baby Boomers is underway. Greater then 3 million profitable businesses owned by 65+ year-old owners will change hands in the next 5-10 years
2. Attractive acquisition prices of 3x-5x avg. acquisition multiples (of EBITDA) for target businesses.
3. Probability of failure is low as only 2.1% of SBA 7a Business Acquisition Loans defaulted in 2023
4. The Chance of attractive performance is high as 75% of sesarch entrepreneur investors achieved an IRR of 20% according to one study.

Jason Ehrlich, Managing Partner of Fruition Capital, discusses how his firm focuses on investing in B2B companies with stable earnings and a repeat customer base, which he refers to as "enduring profitability." The conversation emphasizes the attractive valuations available in this space, often at 3x-5x multiples of EBITDA, and the low failure rates associated with these businesses, particularly in the context of SBA 7a loans. Ehrlich also elaborates on the unique structure of Fruition Capital, which differentiates itself by partnering closely with entrepreneurs while providing significant capital and operational support. As the episode unfolds, listeners gain insights into the strategies and criteria that make Fruition Capital a leader in this niche market, ultimately aiming to preserve and grow local businesses in communities across the U.S.

The impending retirement of Baby Boomer small business owners creates a unique landscape for investment, one that Fruition Capital is keen to navigate. Jason Ehrlich, managing partner of Fruition Capital, discusses the firm’s distinctive approach to acquiring established B2B companies that showcase not only a history of profitability but also a strong customer base. The podcast sheds light on the economic opportunities that arise from the generational shift in business ownership, particularly in light of the favorable valuations available—typically three to five times EBITDA for these enterprises. With a low default rate of approximately 2.1% on SBA 7(a) loans, the primary financing method for such acquisitions, investors are presented with a compelling case for entering this market.

Ehrlich elaborates on Fruition Capital's stringent investment criteria, underscoring the firm’s commitment to stability and enduring profitability. By intentionally avoiding tech-heavy or cyclically volatile industries, Fruition ensures that its investments are grounded in businesses that have demonstrated resilience over time. The conversation also touches on the structural elements of deals, such as seller notes and equity rollovers, which serve to align the interests of the sellers and the new owners, thus facilitating a seamless transition of leadership while preserving the legacy of these local businesses. This model not only safeguards the interests of investors but also places the entrepreneurs in a position to succeed as they take the reins of these established firms.

Furthermore, the episode highlights the broader societal impact of Fruition Capital's investment strategy. By empowering a new generation of entrepreneurs to take over small businesses, Fruition aims to keep jobs within local communities and foster economic stability. This commitment to community revitalization aligns perfectly with the firm’s investment philosophy, showcasing that financial returns and social responsibility can go hand in hand. As listeners delve into this discussion, they gain a deeper understanding of how strategic investments can not only yield strong financial outcomes but also contribute to the health and vibrancy of local economies.

Takeaways:

• The transfer of small business ownership from Baby Boomers is creating unique investment opportunities.
• Fruition Capital focuses exclusively on B2B companies with established customer bases for stability.
• Investors can benefit from attractive valuations, often at 3x-5x EBITDA multiples.
• The default rate for SBA loans used in acquisitions is impressively low at 2.1%.
• Jason Ehrlich emphasizes the importance of investing in enduringly profitable businesses with longevity.
• The podcast highlights the need for experienced entrepreneurs to guide successful acquisitions.

Companies mentioned in this episode:

• Fruition Capital
• Gramercy Park Wealth Advisors, LLC
• GPWA, LLC, Member FINRA/SIPC

I want to welcome everybody to another edition of ATL alts. This is your host, Andre Sendate. I am joined today by the managing partner of Fruition Capital, Jason Ehrlich.

Jason, I know we've been working to get this podcast on the calendar for a few weeks. I appreciate your patience, but excited to be here finally today. So welcome to ATL Alts.

Thanks so much, Andres. I'm happy to be here.

I I'd love to hear about your background. We're going to talk today in this podcast, folks, about about private equity, but a little bit different focus in private equity.

So many sponsors are focused in, you know, the middle market or the upper middle market or lower middle market.

Jason is really intrigued by your platform as I've gotten to know more about your background and Fruition Capital, the focus on small businesses and businesses that might be right around us, if we will, as listeners in our backyard businesses focused on serving other businesses. So we're going to break all that down today, folks, with Jason.

But before we get into Fruition Capital and private equity in that small business part of our economy, would you tell us a little bit about your backstory?

Yeah, absolutely. And I have probably something of an uncommon route into this space, but I've had two parallel journeys going for at least a decade.

And before that I came up in kind of a corporate background.

I had some different sales and operations roles, went back and got my MBA and spent a number of years in management consulting, in strategy roles, and then rolled out into some corporate strategy roles about 10 years ago while that was still going on.

I really developed this interest in alternative assets entirely selfishly, just to diversify my own portfolio of, you know, publicly traded equities and such. And so I started doing some research, started making some investments as an LP just for myself.

And the asset class that I found and liked most was workforce housing. And specifically around the Southeast. And so for several years I made investments there for myself. But I've always had this entrepreneurial itch.

And after a while a light bulb kind of went off that said, hey, what are these sponsors doing that you couldn't do? And you know, a little bit of soul searching. And the answer was nothing. I could do this as well.

So I started my own firm inside Hustle Mode, to start acquiring and operating apartment complexes around the Southeast. And I still do that to this day. You know, that's been going on for 8ish years.

In the intervening time, I kept spreading out my own chips as an LP into different asset classes and, you know, starting off in, in commercial real estate, got into self storage, got into some industrial, got into some private debt funds and then utility scale solar development, just, you know, exploring different things that are out there. And eventually of course you come to operating businesses as an asset class, so made some investments there.

And then as I always sort of let my LP dollars guide me into where there might be more of a meaningful opportunity. Maybe three years ago I got introduced to this concept of ETA or entrepreneurship through acquisition.

Basically the practice of going out there and intentionally searching for high quality established small businesses to buy and operate.

I got introduced to that concept and in digging into the thesis, just blew my mind a little bit about the opportunity that we're looking at in terms of the intergenerational transfer of wealth about to take place with retiring baby boomers.

And you know, we'll go into all that in a few minutes, I'm sure, but I just saw an enormous unserved niche in the space because the ETA space is bifurcated. And yeah, over here you've got what are called traditional search funds.

They've been around for 15 or so years, fairly mature space, but over here it's self funded search. And that was three years ago and still largely is now the Wild west.

And so I saw an opportunity to sort of marry my experience as a private investment sponsor, coming from the commercial real estate world with my business background, from all of my years in corporate and consulting and all of that, and create a firm and a fund and now a couple of funds to go in and try to be a little bit more of a sophisticated player in that self funded search space, which is where we're now operating.

That's great. Yeah, definitely a lot of things that we want to break in and break down here today.

You know, the whole focus for me, like you, in terms of that alternative education emphasis, sounds like you've developed, have really immersed yourself as an investor. LP first, now a gp, first in real estate, now as a, as a platform, acquiring small businesses.

You put out some terminology or put out some, some, some, some things that I want to spend a minute on before we jump in. You, you called it acquisition entrepreneurship. In, in your collateral materials, you also said eta, entrepreneurship through acquisition.

Can you, you said self funded search, fundless sponsor. There's a lot of terminology.

You know, Our, our listeners are a mix of investors across wealth advisory, wealth management, registered investment advisors, family offices, folks that are very sophisticated in their own right, but are also looking for education, hopefully through this platform, this podcast, ATL alts, and through those interviews that I'm doing and with experts like yourself. So would you just mind giving us a little bit of background on this entrepreneurship through acquisition, the fundless sponsor space.

When people think private equity, they may think Blackstone, they may think Apollo, they may think Carlyle Group and kkr and certainly those are big, well known, you know, enterprise platforms, global in nature, with hundreds of billions of dollars under management.

But let's, let's go back and wind the clock back a little bit to these terms and help educate us at like a 101 level around the things that we're going to talk about today with respect to acquiring these businesses and why there's a real opportunity to build wealth.

Sure.

So fundamentally, private equity, as you describe it, tends to focus on larger businesses and even what you'd call lower middle market private equity firms. They probably don't come down further than 4, maybe 5 million in EBITDA type businesses.

But there is an enormous segment of what you might call micro cap companies in our vernacular. These are small businesses, you know, 1 to 3, 1 to $4 million in EBITDA. You don't really have private equity down here.

What you do have though is an enormous segment of businesses. Over 55% of them are owned by baby boomers. Right. And those folks are rapidly aging into retirement.

The Exit Planning Institute just did a study recently and they said 73% of small business owners plan to sell within the next decade.

Yeah, yeah, I'm even looking, yeah, sorry to cut you off, but I'm even looking at working on that credential, the Exit Planning Institute and several others because there's such a need for these business owners to get good support and advice from, from good lawyers, good bankers, good advisors. Right. Who help them maximize the value of the company at Exit. But so, so maybe you could take, take it a step further.

Talk about ETA acquisition, entrepreneurship. What is that? How did that come about?

And, and how is that part of the private equity industry so different beyond just the size you said, 1 to 3, 1 to 4 million dollar EBITDA on an annual basis. But how, how are those terms and how is this space so unique and different from the lower middle market and even the middle market and above.

Yeah, that's right.

So I kind of, I took a little aside there to talk about the scale of this, but the punchline is those larger private equity players aren't playing down here.

Yeah, but there are, I mean, thousands of high quality businesses where, you know, in that one to three, one to four space you've got processes, people Systems. These are going concerns, you know, in many cases they have multi decade track records. Our specific thesis focuses on B2B companies.

Okay.

We're talking about, you know, companies that have had the same businesses as their clients for years and years and years. So not talking about a business that's overly dependent on the seller to where, you know, when they retire, the business is just kind of unwind.

These are going, concerned businesses that can be a very attractive asset to someone now because we're subscale and those big players aren't involved, who goes out and find those, buys those businesses. Right. There's an increasing need for that as more and more baby boomers retire. And so there's really two types of folks that go and do that.

In the smaller end of this range you have the, the searchers, right. And those, those are going through traditional search funds which I can describe or they're going through self funded search.

But in both of those scenarios we have someone who is, you know, they probably look a little bit like me in that their mid early career, 15, maybe 20 years professional experience, oftentimes an MBA and they're saying, you know, no thank you, corporate ladder. But I also don't have the appetite for a startup. I want to be my own boss. I want to run a company, be a CEO, owner, operator.

I'm going to go find, search for intentionally, not just pick one up off the street, but I'm going to spend up to two years looking for a business that I think is a high quality enterprise with lots of growth potential, whatever. I'm going to go find and buy that business and I'm going to be the CEO day to day. Like this is my new job, my new future.

So, so I think what you just described, to paraphrase this, this idea and this set of activities of entrepreneurship through acquisition is somebody that has put together, if you will, a strategy to go and look for a very specific type of business that fits a criteria. Right. We're going to hear about yours here in a minute. What's your criteria?

What kind of business characteristics, you know, what are the things that you're looking for? But they go and become the owner and CEO of a business by acquiring a business from a seller.

Maybe it's a husband and wife team who have built a nice company, generating a couple million dollars of, of EBITDA annually and they're ready to sell. Is that the idea?

That's exactly it, yeah. Okay, and just to round out that conversation before we move on, that's the, the searcher Sort of part of this.

Yeah, direct, directly above them, the segment that runs from three to a little bit north of that. I mean some of them will go up like 10 million EBITDA, but we're talking about 3 to 6.

Maybe you have independent sponsors or fundless sponsors is the term you use. Those folks tend to be a little bit more experienced a little further down the line in their careers than the searcher.

Almost always they will have been operators themselves at some point and had an exit. And what they're doing now is they're acquiring a portfolio of these businesses where they're not necessarily going to be the CEO day to day.

They will oftentimes sort of like place a resident general manager type person to run that enterprise. But they're still highly involved, chairman of the board kind of thing.

And they're just chosen to do that. Sorry to interrupt, but they just chosen to do that maybe without a actual fund.

Correct.

Thus the term fund, the sponsor. So they're, they're pulling together capital, I'm simplifying, but they're, they're pulling together capital to acquire businesses.

And they may be doing that in a very specific vertical, maybe where they have domain expertise, maybe they have a network, maybe they've got industry experience, maybe they came out of that industry and now are more on the, the acquisition side and they maybe are looking to do a series of these types of acquisitions. Is that a fair characterization?

Perfect characterization. Okay, so that was two demographics.

The, the searcher and the independent sponsor, fundless sponsor, those are the two sort of parties that operate in this segment that we're playing in.

Now the other part, you call it self funded search, I think is what I heard you say, define that for us.

Yep.

So the difference in searchers, a traditional search fund operates a little bit like a VC in that they're going to go out there and snatch up a whole cohort of recently graduated MBAs. They're going to say, hey, Mr. Harvard MBA, Mrs. Stanford MBA, we're going to pay you a salary for two years.

Your only job is to go out there and be searching for a business when you find one to acquire. We're going to provide your debt, we're going to provide your equity.

You are going to become our paid CEO to run this thing with 25, 30% equity kicker depending on the performance of the business. Now that's a very low risk proposition for that individual. But that individual also doesn't become an owner operator, they become a paid CEO.

Right.

Self funded search is the other side of that Coin where that same individual says, you know, no thank you, search fund. I've saved up enough capital, I have enough confidence in myself, I'm going to foot my own bills during the search, hence self funded search.

I'm going to pay for my broken deal cost, my deal cost. When the day comes and I find the business, I'm going to source the debt maker, Most commonly an SBA 7A loan.

I will be personally guaranteeing that loan. So I'm really tied to the mast of this business and then I'm responsible for raising equity to get the transaction closed.

So sometimes people think they hear self funded search and they think it's only that person funding the whole thing. Well, it refers to the search.

Most of the time these, these equity raises are a million and a half to say, $3 million depending on the transaction size and terms. So these entrepreneurs are usually going out and searching for folks, you know, friends and family.

And there's a small sort of fragmented ecosystem around this, hence the Wild west description earlier. But that's where we're coming in and we're saying, all right, we're an anchor investor. We're going to write checks for roughly half their cap table.

So we're their biggest check.

We're taking a seat on their board, we're staying involved in their business not as like an activist investor, but certainly as an active investor where we're providing advice, guidance and resources. And that's really where we're coming in and adding value in this overall searcher ecosystem.

Yeah, yeah, for sure.

Well, and you know, the reason that I thought this conversation would be relevant to folks who listen to ATL is because, you know, we're trying to provide education across the alternative investment ecosystem. Obviously private equity and private capital is a big part of that. Right. And, and, and so as an investor, you have different options. Clearly.

Now you can, if you're accredited or qualified investor, you know, you can invest in, directly into private equity funds. You can invest in kind of the proxy of some private equity funds now that are out there through various, you know, registered offerings.

But, but what you're describing, you know, you're giving investors and you know, we can only sort of talk so much about the specifics of the offering. But what you're giving investors is the opportunity to say, I don't, you don't have to go be a search fund.

You don't have to go be, you know, somebody that sets up capital raises and goes out and looks for the business. You can actually come along with fruition capital as A potential lp.

And that's what I want to spend kind of today on is talking about like what are the differentiations between that Wild west player. You're doing it your way, you're looking for a certain type of business.

But I just wanted to level set, you know, for, for folks that aren't familiar with some of the terminology and how a self funded search platform, you know, comes together. So I appreciate that background. Anything else before we jump into, you know, your process and kind of how you find deals and how you structure deals.

Because I know that our listeners will find that very interesting as well.

Yeah, I'm happy to go there. Next, I'll just to sort of play on the, the topic that you just brought up. Right. We sort of have a twofold value proposition.

We've got our searcher entrepreneur facing value prop and our investor value prop. And like you were talking about this space, I think it has tremendous potential.

Obviously we're, you know, we're very invested in it, but it is very difficult to access.

It is subscale like we talked about and it's very opaque and there's a ton of time and effort and relationships that go into finding these entrepreneurs getting ahead of the deal, getting on the cap table, doing all the diligence. So it is a difficult space to operate in.

And the value that we bring to our LPs is, hey, you know, we do all that for you and you can get into an asset class that, you know, very few are truly in this small business asset class. Even, you know, folks that may have private equity in their portfolio, it's larger businesses.

Right.

So we're sort of, you know, I think the term democratizing access is so overblown anymore with, you know, crowdfunding and all that.

But we truly are trying to bring access to an asset class through a diversified, you know, fund vehicle, you know, that folks may not be able to get into absent an offering like ours.

Yeah, I mean it's, it's interesting to, to think about the, you know, the investment case, if you will. As I'm reading through your material and I'm learning more about, you know, the merits, if you will, of looking at small businesses.

You know, there's definitely, I think, more and more interest on behalf of investors to build wealth outside just the stock market. Right. And so you are a good example of having deployed capital into real estate.

You know, you largely talked about the multi family area, but perhaps you do other things. But real estate is just one area. Right. And it might be where a lot of Alternative investors start, but there's other alternative asset classes.

Would you, you talked about, you know, the size of these businesses, the 1 to 3 million of EBITDA. They're first generation owners, maybe they're baby boomers, so they're aging.

What are some of the criteria and maybe more specifically, what are some of the reasons why you're so excited about small businesses and why fruition capital is focused on that segment of the US economy?

Yeah, there's a couple primary ones. First and foremost, the, the sort of risk return profile I think is tremendous.

So you can acquire, or you know, an entrepreneur can acquire these businesses at three to five times earnings. So extremely attractive valuation multiple coming in. And as we talked about, there's attractive debt through the sba and that's relative.

Sorry, I'm gonna cut you off, but I just, you know. Education, education, education.

So when we say three to five times the typical multiple on a business, right in that middle market to upper middle market.

And, and certainly when you get even bigger, the multiple that the owner is going to get to sell their business because it may be larger, that multiple is going to be what, six times, eight times depending on a software business, could be 10 to 12 times.

Yeah, that's right. You're paying far less. If you're in a tech space, it's going to be far higher than teens.

When you start to get into the, that lower middle market PE space, that's where you can start to see multiple in the 7, 8, 9, 10 range. Ultimately that's where a lot of our entrepreneurs look to grow to, for an exit. But when you start to get larger. Yeah, high teens, twenties.

So one of the cases as an investment, right, whether you're active in your case buying these businesses or you're more passive where you're an lp, say in fruition capital, right, is the gp or, or Jason is going out and, and he's buying these businesses, but he's, he's buying them for a lot less than what potentially they will one day be worth if he's buying correctly. Is that right?

That's, that's exactly right.

But what I'll say is that's almost the icing on the top of our thesis because I'll, I'll still kind of going through the basics of why I like the space.

So you like it one for price.

I like it one for value. And then directly behind that, I like it for stability.

And that's the main reason that ETA is popular, because startups fail at an enormously high rate. Right. If you're investing in a VC fund. You're assuming that 80 or 90% of your businesses are going to be zeros for sure.

And it's a long timeframe until those eventual exits. You know, you hope carry the whole fund.

Right, sure.

This pro, this profile with ETA is established, company customers already there, product market, fit, revenue assets. So we're going in there, you know, we're not trying to hit home runs like a venture or you know, technology kind of.

We're trying to hit doubles with every single one of these.

And if these businesses which have been chugging along, continue just chugging along with relative stability based on the instrument that we use to invest and we'll get into that later. Yeah, we'll have a very nice outcome. It doesn't have to grow and explode for us to do really well. Which, which I love.

Sure.

If it does. Right. We're talking about buying on an incredibly attractive multiple.

Many of these entrepreneurs have an M and a thesis where they're either explicitly trying to roll up in a small industry or they're going to acquire a platform and just you know, do bolt ons and tuck ins to, to grow that that way. Or it's an organic play where you know, we acquired a wiring manufacturer that was running at 48% capacity.

Like okay, we could double this business without ever another dollar of capex. Yeah. In every case, you know, their, their ambition is to grow it and to have a multiple expansion at exit.

All of those things are very real possibilities but none of it needs to happen for us to have a nice exit.

So, so, you know, highly attractive price, acquisition prices, three to five time multiples. So, so that, that is a very attractive area.

You're going to talk later in the, in the interview conversation about the structure which further is, is attractive. You would argue, I would presume to your LPs, but there's some other data that I wanted to include that you include in your materials.

You alluded to this earlier, just the number of boomers that own businesses that expect to transition those businesses over the next decade and the number that you included in the materials.

And this is all public, public data in terms of the research is there's greater than 3 million profitable businesses with owners that are over 65 that are intending to transfer their business in the next decade. Is that right?

Yeah, that's right.

Okay, so you have a big pool of potential businesses that are going to be looking to, hey, we've worked our whole life or worked for decades to build this company. It's worth, you know, three to five times the $2 million of EBITDA. Right. So I'm going to make six to $8 million is what they're thinking.

But I need to go through an exit, I need to go through a sale, et cetera. And this is kind of a once in a lifetime transaction, right, for these folks.

That's right.

Okay. And then you talk about some other things that jumped out, which is only 2.1% of SBA 7 business loans failed in or defaulted is the right term.

Yeah. So I. My second point about why we like this space so much is stability. Right.

And I'm trying, I'm trying to hit a bunch of doubles and I'm not to strike out at all. So, you know, that's a stat that says how often do strikeouts happen in this space? Right?

Yeah.

2.2.1% of the time these businesses are going under and they're defaulting on their loans. So to me, you know, through every lens that I look at and all the data I look at, that is an incredibly low failure rate.

Right.

And then what we're trying to do with our specific thesis is if the reason to like acquisition entrepreneurship in general is stability, how can we further focus on those areas that are going to be highly stable?

Yeah.

So you mentioned at the outset part of our thesis, which is we only look at B2B companies. Right. So if it's selling to consumer, that's not even in our universe. It's already a very narrow niche.

But beyond that, I want companies that are in old economy type industries are not subject to disruption through technology, at least not easily. Right. They've got a base of customers which are businesses that have been buying from their business year after year after year after year.

So we don't have any huge customer concentration. There's no, just like one big client.

But it's a whole bunch of these businesses that they just keep, whether they're actually on contractually reoccurring revenue or not, they're recurring or reoccurring revenue year after year after year. We want, you know, a decade of track record at least, and we want to see stability in those earnings.

So not something that's been, you know, up and down, up and down with cyclicality. We explicitly rule that out, you know, happily or unhappily, we've had some major economic turmoil in the last decade.

Yeah.

Covid thing. So we can go and we can see, hey, which of these businesses are actually durable, are enduringly Profitable. Yep. Those are the businesses we focus at.

So that 2.1 statistic, that's for all acquisition entrepreneurship, you can use a 7A loan to go buy a restaurant, a laundromat. You know, we are focused on a, what I believe to be a much more stable subsegment of that subset. And so we're trying to very much beat that 2.1% failure rate, if you will.

Yeah. So when, when you think about the, you know, the.

As you're gathering, as you're gathering up thoughts to, to this question, you know, there's 3 million businesses out there that, you know, you have, let's call it a somewhat motivated seller. Right. Everything's for sale at a price, you know, is the old saying.

But you, you are looking for a specific type of business and you gave some of those criteria. Probably have answered this before in, in other interviews or other podcasts, but I'd love for you to articulate it to us here on ATL Alt.

How as your going out and searching for these businesses, building these relationships, how have you refined that origination and sourcing process so that you can spend your time, dollars, capital, resources focused in finding those B2B businesses with experienced owners, great customer bases that are, that are going to meet the criteria, that subset of criteria. How have you refined that over time?

Yeah, well, I'll talk to a little bit. Two things around that, how we established it and then how we've refined it.

So my and our team, I should say it's not just me over here, but our team's thesis and approach is sort of different from industry standard here in that we don't search for businesses at all. Okay.

I search, I search for entrepreneurs. We have an entrepreneur first model. And so we'll go out there. Last year I had over 300 conversations with. They call themselves searchers.

You know, these, these would be entrepreneurs. And so we will vet a huge number of these folks early on in their process, the vast majority of them, before they ever have a deal on the table.

And we'll talk about their experience and, you know, the type of business that they're after and their integrity, their, their character and their capability. And we set aside maybe it's 20% of the population that we say we think you'd be a really good qualified operator.

And your search criteria for what you're looking for in a business is well aligned with our investment parameters that I just outlined. And we hold those folks really close and we form an ongoing relationship.

Those guys are out there beating the bushes Every day they're working with the business brokers and the banks and the intermediaries, and they're doing proprietary outreach. So each one of those guys will look at several hundred businesses. And so we're achieving leverage through those entrepreneurs.

And they only come back to us when they actually have a strong prospect that, you know, they want to pursue. And they're saying, hey, we believe this meets your criteria. You like me as the jockey.

You've already told me, here's the horse I'm thinking about riding. Do you want to do a full diligence process on this and potentially invest with me? So that's. That's how we sort of efficiently pursue.

And, you know, through them, we're vetting thousands of deals. We will vet hundreds of deals. Right. But they will vet many, many more than that.

So. Yeah, so let me make sure I understand that. So you've set Fruition up so you can.

You can build and continue to build, I would presume, every year, more and more relationships with highly qualified searchers.

Each of those individual searchers, if you will, if you're working with them or engaging with them, have a criteria that aligns well with your criteria at Fruition Capital. They're out there, like you said, maintaining and have lots of lines in the water to identify businesses.

Apart from that effort, you're also having some direct outreach yourself to some of these entrepreneurs and business owners or.

No, not at all. Not at all. We're an entrepreneur, and now also in the fundless sponsor relationship business.

Okay.

Occasionally we'll get some inbound for interesting deals. Sure.

And then what we do is we just go straight to our Rolodex of entrepreneurs we like, and we'll just, you know, essentially forward the listing to them and say, hey, if, you know, this looks interesting, if you pursue this, we would be an anchor investor with you. Have a look. But we're. We are not searching for businesses.

Got it. So I don't want to put words in your mouth, but you've set up a business in Fruition. If. If I'm incorrect, please, please address it.

But you've set up a business that's gotten that.

That provides leverage and scale, not in the debt sense, but in the sense of you've got this growing network of entrepreneurs who are looking for acquisitions. Why do they come to you? Why do they come to fruition? If there's.

If it's the Wild west and there's a hundred groups out there that are doing what Fruition's doing, I don't know how Many there are. But what, what is it that gets them to contact you and say, hey, I've got a business that I, I want to go try to acquire.

Yeah. So that's the other half of that value prop that I alluded to earlier. Right. So a couple of reasons.

Number one, there are almost no firms doing what we're doing there.

In the last several years, three others have sprung up that are pursuing different theses through a different approach, but they're generally operating in space. Nobody's, nobody's really doing what we're doing.

So number one, we write a big check, we're an anchor investor, and we will immediately fill up roughly half their cap table. Our typical check into these businesses now is about a million bucks.

Okay.

And so just the dollars are attractive. I can also turn around and say, hey, we've built a substantial network of co investors to where we say, hey, Fruition's coming in as the anchor.

Do you guys want to look at this deal too? A lot of folks will pile in with us and so, you know, we have the ability to substantially de stress their capital raise. They love that.

That's just, you know, the obvious dollars and cents. But beyond that, we're very much a value adding investor. Right.

So my team includes several guys, you know, outside of my own experience, which I think, you know, is fairly considerable. I've got a couple of guys who have themselves been very successful operators who have had very lucrative exits.

I got another who ran a search that failed, ran another one that succeeded and is still operating in this space. We've got an EOS implementer. You know, there's, there's some meat here where we can add value in the transaction.

But then afterwards, because you know, we do a full diligence process on this business with, you know, eight other pairs of eyes, we're sharing all that feedback with the entrepreneur, things to look at, structuring advice. You know, some of these guys are earlier on in their process.

We've got a trusted network of vendors, whether it's the Q of E providers, the attorneys, the banks, you know, we can definitely add value to them in the transaction and do.

But then as I mentioned, we're taking a board seat, we're staying involved, we can make relationship, you know, introductions for them, provide advice and guidance and there's all sorts of things that we can do to add value down the line, not the least of which is for those with M and A aspirations. They want a capital partner that they know they can go back to and get another big check. If they've got another accretive target.

So for all those reasons, we've only ever had one business of all the ones we've looked at where we wanted to get on the cap table and couldn't otherwise we have very much so far been able to sort of pick our shots.

Well, that's impressive.

I'd love to kind of get a sense for the types of businesses, you know, when, when, when people talk about finance and alternatives, it sometimes gets way esoteric and people listening may have a hard time of understanding what kinds of businesses is he talking about? When you say a profitable, durable experience Team business to business. One to $3 million of, of EBITDA a year.

Can you give some examples, whether they're in your portfolio or not, of the kinds of businesses that our everyday investor out there running a wealth management firm or running a family office would, would just say, oh, we have one of those in our backyard, you know, or oh, I'm familiar with that industry. I'm, you know, I've heard about it.

I'm just curious what you could share and just help educate us around where these businesses are kind of in everyday, you know, America's economy.

Sure. So our thesis as I described is very much focused on a business's dynamic. I didn't talk about industries and I didn't talk about geographies.

We very intentionally diversify across both of those sort of axes, if you will. So manufacturing businesses, B2B services businesses, distribution businesses, all those fall into the umbrella.

Okay, so to, to make that a little bit more concrete, we've done a couple of heavy commercial towing businesses. Not that would come to your car, but if you see a semi truck broken down or fleet vehicle. Yeah, they're the big rotators that come get those things.

They have natural geographic monopolies around them and they sort of have, you know, these exclusive little bubbles that they operate in very well. Sort of competitively protected type business.

Yeah, some nice moats, it sounds like.

We love it. We love a natural geographic moat. And these businesses absolutely have that.

We have a manufacturer of specialty coated wires and cables that go in all sorts of outdoor machines from jet skis to tractors to lawnmowers, you name it.

We have a service that goes into restaurants and like quick serve McDonald's, they all have ventilation hoods over their grills that have to be cleaned X number of times per year by a regulated cleaner to reduce fire risk. So we have a service that is a cooking hood cleaning business.

We have a 3 PL which is a third party logistics, shipping coordinator that helps businesses with their freight logistics. And it's a very asset light business. They don't own the trucks and the ships and the planes, but they're facilitating all this.

Sure.

We've got a sheet metal fabrication shop that is serving municipalities and businesses.

Also a specialty parts machining shop where they're creating components that go in other large sensitive machines like medical imaging machines and things like that. So yeah, there's okay, there's more in the portfolio, but hopefully that starts to.

Make, yeah, no, that does that, that does make it concrete.

I mean, you know, I, I want to talk about the actual, you know, some logistics to take a word, you know, you talked about distribution logistics there for a second. So it got me the actual nuts and bolts of the transactions themselves. Okay, so you find an entrepreneur who's got a great business.

It's a killer business. It's got all the criteria. Can you talk about how fruition capital and that entrepreneur structure and set up the deal?

That's different from, because you know, when you think about these entrepreneurs, maybe I'm just less educated on this subject, but I'm thinking this is somebody that's ready to sell the business. Okay, maybe they hire a business broker, maybe they have a lawyer helping them, but they're ready to sell the business.

Don't they just want to check and, and just turn the keys over to somebody like, you know, after due diligence and the deal closes? I, I, I'd love to understand how you go about structuring these deals so that ultimately, I mean, your investors are winning. Right.

That's the goal here, to grow your firm. But, but there has to be a lot that goes into the structure of the deal beyond just finding a great business.

Yeah, that's right. So there's really two elements of the structure. There's the transaction structure of buying the business itself and check the seller gets.

Then there's the structure between the acquiring entrepreneur and their investors. So I'll kind of talk about both of those. So yes, at the end of the day the seller is going to get a nice big check at exit.

But it's almost never the whole thing.

There's usually a component of either seller carry, like a note that they're going to take with them or rolled equity that they will roll forward into that business. So almost, you know, I think I can say every scenario. I don't know that we've done one that didn't have that.

They have some component of skin in the game that remains after the close and you really want that in place because you can put in offsets and escrows and things to where, hey, you know, you represented that this was the case in this business. But hey, this inventory over here is actually, you know, it's aged, it's obsolete, whatever, and it was represented as current.

We're going to take that right out of your payment, out of your note. You know what I mean? So there's, there's some component of that.

So they have. So sorry to interrupt you, but, but so they have skin in the game.

The seller of the business or the asset has skin in the game through a seller note or some type of carry equity that create is. Is there's value to be unlocked based on hitting certain milestones.

Yeah, we. Right.

We want to incent them as much as possible, mostly to make sure that the transition goes smoothly because that's the biggest risk is this right. As you're changing jockeys on the horse. We want to make sure that goes smoothly. Yeah, the. This. So they get a big check at exit.

Where does that check come from? Well, it's debt and it's equity, right?

Yeah.

So we mentioned the debt source is very commonly an SBA7 loan for larger transactions. In particular, when you start to get into the independent sponsor world now they're using more private debt or they're using what's called an sbic.

Small business investment company. Right. Yep. But you know, that leverage will range from, let's say 50% to maybe 80%. You've got to have an equity component in there.

Right.

That's, you know, where does that come from?

It can come from the entrepreneur, their friends and family, this fragmented group of guys that just like this space and will write 25 to 100k checks into three or four of these deals a year. And, or it comes from us where we're able to come in and you know, be a much more larger, more straightforward solution for them.

Yeah, yeah, that makes sense.

That's the, the acquisition, transition part of the structure.

Sure.

A really, really meaningful sort of differentiator in our area is the structure that we use with the entrepreneur.

Okay.

So we're using an instrument that's called Participating Preferred. And so there's really three components to that. When we come into a deal, we'll write them $1,000,000 check.

So long as our principal is outstanding, we're earning a preferred return on those dollars, and that's typically in the 10 to 15% range. And you know, if it's accruing and not getting paid, then it's compounding every year.

But after the first year, you know, we year one, put all the cash back in the business, build your operating reserves, you know, invest. After that, we'd like to see cash distribution. So there's the preferred return component, then we have a liquidation preference.

And so the entrepreneur, you know, they're paying themselves a salary as a CEO, of course, but otherwise they can't take anything out of the business. They get no upside at all until our full principal has been returned and any accrued unpaid pref has been paid to us.

At that point in time, the prep essentially goes away. We've gotten our money back, our risk is off the table. Now we convert into common equity shares or common shares.

That happens at what's referred to as a step up basis. And so for lean illustrative math, let's say it's an 80, 20 deal. 80% debt, 20 equity.

And the step up is two times, which is commonly one and a half to two times the equity investors who brought 20% of the enterprise value to the transaction would wind up owning 40% of the common equity in the business. So on the day that we get our money back, we now own 40% of the company.

We participate pro rata in any ongoing distribution and then eventually when the business is sold, investors will get 40% of the upside from that and the entrepreneur gets 60.

So in, in terms of putting myself in the shoes of the, of the seller who has built this business, it's clearly attractive. You know, they've been approached by an entrepreneur and you're at the table, you're having these discussions with the seller.

They've decided, okay, it's time to sell the business. I'm willing to entertain a structure where I have to, I stay involved, maybe I take back a note, you know, there's definitely strings attached.

Help us understand why does the seller of the business, why would they want or consider this type of transaction with, you know, this structure versus potentially a lower price with less, I don't say strings attached, but you know, with, with less terms like what's, what's the motivation that's allowed you to get these CEOs and sellers to, to enter, enter a transaction with those terms.

Yeah, well, the, the transaction terms for the acquisition themselves where we're going to talk about a seller carrier role that's in the 10 range. It's actually a fairly market term. Yeah, in this, in this segment. Right. So we're not talking about doing anything. That's crazy.

In general, sellers want to maximize their economic outcome. From the sale.

Yeah.

Of course, they want as much cash up front as they can get, but if they can take an overall higher price and it means that they're going to receive a portion of that over the next several years, they're willing to make that bet in most cases because they've built this business. It's their legacy. They believe it's going to continue to do well. You know, they're.

They're not selling to a big PE firm where it's going to become some nameless, faceless thing. They're selling to an entrepreneur who has met them, who has come and sat maybe at their table and broke bread with them. It's very much a.

I'm transitioning my legacy to this person. I'm keeping my small business in my community. And so they believe in the person that they're selling the business to in every one of these scenarios.

And so if they can get a higher price and have a little bit of it deferred, that's a deal that we've seen them take every time.

Yeah. And what's the dynamic with the entrepreneur, you and the seller?

Is it usually the entrepreneur that's kind of spearheading a lot of these conversations and negotiating on your behalf, or are you guys doing that alongside the entrepreneur with the seller? Explain that deal dynamic. As you start to put something together.

The entrepreneur is very much the face of it to the broker and the seller.

Now, on the larger businesses, brokers often want to get a comfort that, hey, you really can bring the $3 million of equity that you're going to need. And in those scenarios, we're happy to get introduced to the broker or directly to the seller to say, hey, here we are.

We're an anchor investor, and we can bring the rest of these. And we've done a whole bunch of these. You know, this seller or this buyer, I should say, is going to close.

And so we will poke our head out from behind the curtain, so to speak, to give them some sort of surety of close for the transaction. Otherwise, we're standing behind the entrepreneur.

We're giving them advice and counsel on negotiation and structuring and all that, but all that's invisible to the seller.

Yeah, that's interesting. You know, one of the things about alternatives that a lot of, you know, I just put my. I had to put my. My. My wealth advisor hat on right.

From Gramercy park and say, you know, the other side of the coin, right? So when we talk about alternatives, we're talking about typically things that are Less liquid.

We're talking about investments where you know, your general partner or your fund manager, your fund sponsor, right. Has more discretion. Right. Through typically something like a private placement memorandum. You can't press a button and sell tomorrow. Right.

You can't press a button and get all your capital back like you can with a liquid investment like in an ETF or mutual fund. I think most people get that.

But talk a little bit about more broadly, the platform you've built around things like reporting you gave and illustrated, you know, the things you do from an ongoing standpoint to create value reporting, implementing eos, you know, a board seat.

But what does the risk management, what does the transparency, what does the reporting experience feel like, look like, tastes like as a limited partner in one of these or even your fund, you know, when you talk about, you know, what's the time frame, you know, because I think a lot of investors may find the space very interesting. I mean, clearly economics, right, buying businesses at three to five times that you can hopefully sell at six to ten times makes a lot of sense.

But what is that other part of the experience, the other side of the coin going to feel like, look like, tastes like?

Sure. I do think that liquidity, if you want to think of that as a downside, that's the primary trade off in this space, right.

Is we're getting into these businesses. Our fund is a seven year fund and you should assume as an investor that your capital is going to be tied up for that period. Right.

So you're going to trade liquidity for, you know, what we believe is a significantly higher return than you'd get in the market. Right.

Yeah.

What, what does the now, by the way, the, the reality of when cash comes back in may not at all be a seven year hold.

Sure.

For some of these folks. And talk about that, what does the experience look like during that time?

So first, as the anchor investor, we're redlining the operating agreement with our entrepreneurs in 100% of cases.

So we've got a big set of provisions that provide for not just negative control rights and other things, but also, you know, information access, our seat on the board.

So in every one of these cases, at a bare minimum, we're getting a set of quarterly reports that include financial and operational reports with management commentary. We're also on the board, keeping our finger on the pulse and being engaged in these discussions about challenges, opportunities, financials, etc.

We turn around and we repackage that stuff for our LPs and we send out a quarterly update. It's summary financials, it's summary commentary, but we're also a full transparency shop.

So if someone, you know, says, hey, I actually, I want to dive into this commercial towing companies financials, like, is everything good there? We're more than happy to make, you know, any level of detail available.

We have it all back to the company level and we make that available to our LPs.

Yeah. So

a couple more questions before we wrap up.

You know, I'd love to understand, and I think you're just in a really great position to sort of help articulate the, you know, the notion of, you know, sometimes the best deals are ones you don't do.

This space strikes me as one where through repeated experience, through looking at lots and lots of entrepreneurs out there hunting for businesses, you know, looking to acquire, you start to identify what I call the pattern recognition. Right. You start to develop experience in knowing what are some of the red flags to avoid.

So, Jason, I'd love for you to talk about, as you think about, you know, one of the slides in your crate, in your collateral, talks about maintaining that conservatism and the approach. It's about the upside, but it's also about, you know, how you underwrite.

Can you explain what maintaining that conservatism really means and how your experience now with fund one, you're now in fund two, you bring a team to the table, a lot of, A lot of support around you.

But, but what does that look like at fruition in terms of that more conservative, you know, approach in terms of the investments, the risk management, et cetera?

Yeah, there's really two. There's really two questions built in there. Right. So number one in pattern recognition and risk mitigation is right.

We've developed and we continue to all the time add to and refine a matrix of things that's our red flag matrix. Right.

Okay.

And those are business level factors.

They are industry and secular trend level things and very much their entrepreneur level things as well that we're going through and we are vetting up against. And absolutely, sometimes the best deals are the ones you don't do.

We actually just within the last couple of weeks had to walk away from a deal that we'd been pursuing for months because the entrepreneur, while everything else is checking the boxes, the entrepreneur was doing some things that were raising some flags with us. And so we had to walk away from that. So we're very rigorous in that regard. The second piece of it is the conservatism and underwriting.

And that comes from my background in Commercial real estate.

Right.

I've always been a very conservative underwriter. So every one of these entrepreneurs has a pro forma what they plan to do with the business tied to their business plan.

We will take their model and we pull it all the way apart and basically build our own around it to say, okay, we're not going to allow a growth assumption, a keg or a growth rate on revenue of more than 5% per year, absolute max. Some of them get lower than that just depending on the business. The exit multiple we've talked about, maybe you're buying at a 4.

We really think we could exit at an 8. We're not going to give them more than like one turn on that multiple in our underwriting operating margins.

They might think there's huge efficiencies to be had in the business. Great. But we're going to assume that operating margins are flat. Right.

So if we can hold those three sort of primary levers variable in the model to our level and we can achieve roughly a 35% IRR at the deal level with those assumptions, then that's a deal that we'll go and do.

And if they wind up growing it, having bolt on expanding their margins, having a great multiple expansion and exit to a different, you know, classify, all those things are sort of icing on the cake.

Yeah.

And most of those things are very, very real possibilities in these businesses. But we are not basing our, our underwriting and our outcome on that potential.

Yeah. So two final topics I want to talk about, you know, your all's approach at Fruition Capital, Jason versus the traditional search fund.

And some of the things that in a traditional search fund, you know, you're going to get diversified exposure. Right. To, to a variety of industries. I would presume you guys also are looking to get diversification through your, through your platform, correct?

That's right.

Yeah. Got it. But here's a distinction. Exposure to failed search risk.

So in a search fund, traditional search fund, the LP has exposure to failed search risk. What does that mean?

Yeah, so there's two sort of primary differentiators between our approach and traditional search fund. And it's not to say that one is right or wrong. They're different.

They're just different. Yeah.

So in traditional search, kind of like inventure, the stat is 60% of searches fail.

And so I mentioned the traditional search fund is paying that entrepreneur for two years of salary, you know, on the order of a couple hundred thousand dollars to go out there and look 60% of the time they come up Empty. And so all that money is just zero.

It's a lost deal pursuit cost, effectively.

Yeah, well, so that's the next piece. There are deal pursuit costs. There's oftentimes two broken deals for everyone that succeeds. So you have. You have failed search costs.

Then you also have broken deal costs and successful deal costs that go into that. Right, got it. Then past that, a certain percentage of businesses they acquire will just do fine and a certain percentage will do great.

And the hope and intent is that those businesses that do great will carry the whole fund. Now, search funds are taking a much larger economic stake in these businesses as a result of putting their capital at risk at the very beginning.

Right. So they have, you know, the ability for these home runs to carry all of the zeros.

Sure, sure. So a little bit more of a growth tilt. Whereas it sounds like you guys are looking at more stable businesses.

Like you said at the beginning of our conversation, these are businesses that have customers, maybe not recurring, but reoccurring customers. Is that fair?

Yeah. I mean, sometimes traditional search funds are after those sorts of businesses as well.

Yeah.

But they are, again, they are sort of taking a risk that maybe they never even get one economically.

Yeah.

Our capital goes in right at the time of closing. So our failed search risk is zero. And our deal transaction failed deal risk is zero.

The primary trade off there is one they have a larger economic stake in them to control. That's a big one. Right. That I always want our LPs to, like, fully understand and be transparent about. Traditional search funds control the business.

If they don't like the entrepreneur, he's just the CEO, you just hire him. Yeah, exactly. Now, our model is not that we're in true partnership with folks. Yeah, we are, you know, on their boards. We're involved in their stuff.

Obviously, we've got lots of protections and rights in the, the operating agreement, but the entrepreneur controls that deal.

Right.

And so that's, you know, a.

I think that leads to a bias in quality because the type of person who wants to be the true owner operator is very different from the person who wants to just be a CEO. But also, you know, at the end of the day, our risk profile is far lower in that we don't have all those zeros.

But also, we are not in control operationally of these deals.

So it's just a different, like you said, once an employee. Yeah, once an employee who's at the mercy, if you will, of the. Of the search fund.

The other one is more of a partnership model that you guys employ not to say that you employ them, but it's a partnership model that you use to create incentives, alignment and hopefully repeat deal flow over time.

The last thing I want to talk about is, you know, this, this idea of investing in local communities and investing in, you know, if you will, your backyard. I think a lot of people on the surface would say I love that idea. Right. I like shopping local, I like, you know, supporting local businesses.

I want to live in a, in a market, in, in a city where it's thriving and there's jobs and all of this type of thing is very cyclical. Right.

I'm going to read your impact slide and just love for you to finish by maybe just giving some final thoughts on why you set up fruition capital. Maybe this will stimulate a final takeaway for, for our audience. So our impact fruition capital.

We are empowering the next generation of entrepreneurs to reinvigorate small businesses in local communities as their aging owners retire in order to preserve and expand high quality jobs that provide career opportunities, fulfillment and financial stability for their employees. So I'd love for you to, you know, unpack that, share with us, you know, here at ATL alts what, what's kind of behind that? The motivations.

There's a lot there.

High quality jobs, reinvigorating small businesses, empowering entrepreneurs, preserving and providing career opportunities, you know, fulfillment and financial stability. I mean, there's a lot that's a quite ambitious kind of impact approach.

Can you talk about how you're seeing that realized and, and why you set it up that way?

Yeah, well, I mean, number one, we saw an enormous economic opportunity here. Right. But we always like to look a little bit past that. There's lots of different ways to make money.

Everything that I describe on that slide I think is fairly self evident in terms of its overall social and economic benefit in local communities. And so what we're talking about with these retiring owners is, you know, they might employ 8 to up to 30 sometimes employees, right?

Yeah.

We want, and we want these employees to stay there in their communities. We don't want these businesses to go under because they don't have a transition plan.

We don't want them to go off and, you know, become part of some corporate entity. We're talking about transfer of legacy. Sure.

One family that has been running this for decades to someone again, like I talked about, with a face and a background. Most of the time these entrepreneurs aren't from that community.

They're relocating there, they're bringing their families, you know, they're going to come and be integrated in that community and keep that business and grow that business right there in the place that it's been and so ever.

But they could be, and if that, if they have that, if they, if they meet that criteria, it sounds like they could do an outreach to you and say, hey, there's a great business in my backyard.

Right. It does happen. Yeah.

You know, you got to meet the criteria, you got to be the right partner, blah, blah, blah.

But, you know, yes, they could also be somebody that comes in and establishes themselves in the community. But what I think you're talking about as well is you want those employees to continue to have jobs.

You want that comm, you want that organization continue to reinvest back in its community. Right?

That's exactly right. And I think, you know, people talk about generically small business being the backbone of the American economy.

I don't have the exact stats off the top of my head at this moment in time. I should have grabbed them right before we hopped on here. But it's, it's absolutely qualitatively true. Quantitatively true. Right.

And so in my view, this is us doing our part to sort of help keep small businesses locally owned, locally operated, and facilitate what is this once in a generation transfer between baby boomers, which own most of these things, and the next generation of entrepreneurs is going to come in there and run them for the long term.

Yeah. Wow. Fascinating. Always love to, you know, help people get in touch with our guests, you know.

So, Jason, how do, how do folks go about learning more about Fruition Capital? How would they best get in touch with you?

Sure. Yeah. I mean, Our website is fruitioncap.com all of our materials are out there, so that's always an easy place to go and look more.

Yeah, you can also reach me directly, Jasonruitioncap.com and I'm always happy to hop on the phone and get introduced to anybody that might be interested a, in, you know, investing with us, of course. But also folks are considering this route, you know, they may want to go and buy a business for themselves.

We love talking to folks on, on both sides of the equation.

Yeah, that's great.

Well, Jason Ehrlich, managing partner of Fruition Capital, I really want to thank you for enlightening us, educating us, in some cases listeners, being empowered. Right. To, to go out there as entrepreneurs and say, hey, I think there's a great business. I need a partner in order to execute a transaction.

So this was super, really hope that we can get an update from you sometime in 25.

I know that you're in the middle of a, of a capital raise, and certainly I think people will be intrigued to, to learn more and reach out, and I encourage them to do that. But with that, we'll leave it here for today. Thank you, Jason Ehrlich, managing partner at Fruition Capital, for joining us today on ATL alts.

Thanks, Andres. I appreciate it.

All the best.