Acquisition Versus Working For Someone Else
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Welcome to Think Big, Buy Small, a podcast from Harvard Business School about entrepreneurship through acquisition. We're your hosts, Royce Yudkoff and Rick Rubeck. On today's episode of Think Big, Buy Small, we feature two former students of ours who are contemplating the decision of whether to look for a small business to buy and run or to pursue a more traditional post-MBA career path.

The decision of whether to pursue an entrepreneurship through acquisition path is at the core of our podcast. It's a tough decision to eschew the more well-traveled career paths to instead take a chance on yourself.

and on your ability to find an enduringly profitable small business and at a good price. Still, through our years of teaching and researching entrepreneurship through acquisition at Harvard Business School, we've seen many former students and others discover this path to be an intriguing and rewarding alternative to a more traditional job or to starting a new company from scratch.

Irie Santos and Alan Newman both served in the U.S. Army, both graduated from the Harvard Business School, and both are married. Though there are parallels to be made between their personal and professional paths, the

As our listeners will learn, these similarities in their backgrounds make their differences all the more interesting and nuanced. That's right, Rick. Listeners should also keep in mind that these conversations were recorded in April 2024, just a few weeks before our two guests were scheduled to graduate from Harvard Business School. So, without further ado, let's begin by meeting our guests, starting with Ari Santos.

All right, get us started. Tell us about the journey that brought you to this moment in your life. What did your parents do? Where did you grow up? That kind of stuff. So I'm originally from Miami, Florida. I would say we were kind of squarely middle class. My dad works for the city of Miami. My

Mom worked for an architecture firm. I grew up kind of the middle of three brothers. Baseball was huge. My older brother went to the Naval Academy. And then when I turned 18, I'm like, I have no idea what I want to do. So I ended up joining the Army. I went to West Point.

Once I graduated, I commissioned as an infantry officer. Did five years in the Army. And I figured it was time for me to move on. It was really a matter of family considerations. I just got married. I spent five years in the Army. A lot of that was away in Poland, in Kuwait. Wanted to settle down, start a family. Army's kind of tough on families, moving every two, three years. You don't really have a lot of agency over where you go and what you do. Came to Harvard Business School wanting to do something entrepreneurial, but I was really looking at tech startups.

startups, mostly because I had no idea what search was. My first experience in search was your class, financial management of smaller firms, and kind of opened my eyes to a different side of entrepreneurship. Last summer, I interned at a tech startup called Astroforge. It's an asteroid mining company out of California.

You weren't flying in an airplane to find... I was not in space mining asteroids. I was in California doing PowerPoint, Excel, typical business stuff. It was a cool experience, but I remember being in the middle of it like, I don't know if this is really for me. I kind of missed that opportunity.

leadership management component of the Army. That's what generally interests me in search. And I graduate next month and not exactly sure what I'll be doing. I do have some options on the table and search is one of them. And now let's have Alan Newman introduce himself.

I grew up in Minnesota, a suburb of the Twin Cities. Dad was a consultant and mom was a homemaker, raising me, my brother and my sister. I went to West Point. Choosing to go to West Point, I think the number one reason was character development. And I was choosing between three branches: Navy ROTC, Air Force Academy, and West Point. I think there's great character development in all three. But I was advised to go to the Army because it's all about the people.

So eventually I flew helicopters, but it's still much more about the people. And that was from day one that's emphasized again and again. And I didn't really know at that time how much that would resonate with me and how much I still look forward to that in the future, that the people are the number one piece of what I will prioritize on what paths I take. And so I chose aviation because I thought there was a good perspective

personal interest plus personality mix in that branch. And at that point you sign an eight year contract for flight school. And then decision to leave is control over life because they're going to move you every two to three years.

You have a little bit of options, but you don't really. Also, my wife was a classic underemployed spouse. So by having more stability and getting out, we can now have her pursue her paths as well. Any kids, Alan? Do you guys have a family yet? No kids, also because they never felt stable enough. Lots of people do, and they do...

Very impressive in moving that family around, but we just didn't feel like it was the time. Let's now turn to the search decision by looking at the alternatives that both Ari and Alan are considering. First, we'll hear from Ari. I think it's still in the tech startup space. I like working in smaller teams. I like where my work has some sort of impact.

I imagine if I went somewhere corporate or something like investment banking, consulting, like my work kind of gets drowned out. I wouldn't feel like I have a sense of agency. And that's kind of the reason I got out of the military in the first place. So I would see myself getting back to early stage tech, call it seed, series A, something like that.

Now we'll hear Alan's thoughts on what his alternatives to search might be. I think a very good fit is PE Operations. I think it connects well with veterans. And the hesitation there, though, is that they're probably going to send you to where they need you. I want to choose where I want to live because I have to.

because I haven't chosen for the last eight years. So either that or general management. I was looking at leadership development programs. See that as a very similar to the Army. Rotate around all the functions, get to learn everything, and then hopefully go be a general manager. I think that fits well for me too. But also similarly, that organization would move me potentially without my full choice.

At first, these alternatives seem so different. A vague, highly uncertain tech startup versus operations in an established business, perhaps owned by a private equity firm. However, when you do more than scratch the surface and look at why they are considering these career paths, some interesting commonalities emerge. Let's hear more on this topic from Alan.

So a big part of this is wanting to have control over where you and your wife live. Huge, absolutely. Control, yep. And it's not just control over where you live.

Well, right. Live in lifestyle. And a big part of this to me is I think I'm very good at choosing what to spend time on. Although I'm sure customers start choosing how you're going to spend your time. I think that also fits very well with entrepreneurship. Am I going to spend Monday morning doing something not work, but then I'm going to work the weekend? I'm very happy to do that. I'm very happy to spend time as needed where I think it's best. So control over time as well. Yeah.

Well, generally, when you own your own business, it's not so much that you work less hard than in working for someone else's company. You probably work more hard on average, but—

But as CEO, you get to pick a lot of the times when you do and don't work, right? No one's going to say no when you leave at 3 o'clock to make a commitment with your wife. And if you want to work from 9 p.m. to midnight that evening, that's fine too. You get to choose when more than someone else's company does. Right. And that's a tradeoff I'm very happy to make.

Even on the long hours, they're fulfilling because they're hours that you're picking what you do and you've decided it's important. The long hours doing something that somebody else thinks important that you don't really think important is painful. Yeah.

For sure, that's one of the big differences between being a CEO entrepreneur and working in a large organization, right? In a large organization, someone's telling you do A, then B, then C, or hit the sales target. And when you're a CEO, your first job is assembling your own to-do list for the day. That's something you always say, right? Right. I always say that the most challenging part of being a CEO is you have to assemble your own to-do list. You wake up

in the morning and say, this is what I think is important for me to do. And if you work for somebody else, they give you that to-do list. I bet the Army didn't ask you. So what you thought you should do, right? They probably told you what to do. Fix that airplane. Well, impressively, they give you actually a lot of autonomy. They give you left and right limits. And I didn't realize how much autonomy I had until I went to investment banking this last summer. And I realized how little autonomy is possible in a role. I love it.

What you're saying is in a financial professional service role, you had less autonomy than you had in the U.S. Army. Absolutely. It's counterintuitive, and it surprised me very much. But in the Army, I got my task. Go out and do it. Figure it out. How much, you know, am I going to go talk to people? Am I going to...

create a little plan and then talk to people. There are some opposite scenarios where also you're told to sit in an auditorium for eight hours a day for five days straight. Generally as a leader in the army, once you're a lieutenant and beyond, you figure it out and you reap the rewards or punishment of, uh,

spending that time well. Yeah, I can see why there'd be a lot more autonomy than, say, in a large professional service organization where each task is being very specifically described and inspected, and you don't have a lot of autonomy compared to that. Right. The mission command theory of the Army, they push everything down as far as you can because that person on the ground, the lowest level leader, knows the most and can probably accomplish it the best. And I enjoy that part.

Like Alan, Ari is also focused on a career that gives him some control over what he works on, when he works, and where. On the same topic, here are Ari's thoughts.

I would love generally to be the boss. I think in the army you have agency like within your left and right limits. And as soon as you get out of there, someone's going to hammer you back in. That plays a huge role for me. And it was the reason I was interested in entrepreneurship from the very beginning. And if I'm not kind of the quote unquote boss right away, I'd still love to be in a small team working directly with the boss, with the leadership. That sounds exciting to me.

Just a contributing member of a large organization is not something I was really ever interested in doing, kind of leaving the army and coming here. So I was always kind of tilted towards something entrepreneurial. I think a joiner in an early tech company, it would have to be, it would almost certainly have to be a joiner because I have zero coding, like zero technical experience at all.

But yeah, that does play a large role for me. I'm really intrigued by this tech setup thing because it just doesn't seem to fit you very well. You're not a techie guy.

Are you? No, I'm not. And there are no blue collar workers in a tech startup. It's a total 180 to go from like asteroid mining to HVAC or whatever. I do get that. It's more the environment of like it's exciting. You're working towards something bigger. It's a small team. Your work has impact. It's more it's more that. And then, OK, what's like what's the avenue to achieve that?

This is the way I was thinking about it. And to your point, I was working at a tech startup and about a month in, I'm just like, I'm just staring at a computer screen all day.

So I didn't – I can't say I loved it. Right, because it might be a small company where things are happening. But if your role is a sort of very narrowly scoped analytic role, you're not really making decisions. Correct. Well, it's not just decisions. Ari's really a doer. He wants to come home with dirty fingernails, right? And it's hard to do that in a tech startup. Yeah. Yeah.

Exactly. But that weird itch you need to scratch as you get out of the army and you miss kind of being with the guys and getting your hands dirty, I don't think that really exists outside of search. If I knocked on the nearest kind of auto mechanic shop, they'd probably be like, get out of here. You have a Harvard degree? Like, what do you want? Get out of here. Yeah, I don't think there's an avenue for me to scratch that itch besides search.

And early stage kind of gets after it, but kind of doesn't because I did it and I was doing financial modeling. I was doing sales and I was doing kind of investor relations slide decks. Feels very similar to a job that you would have in a very large company, frankly. Yes. With pizza and you get to wear a T-shirt, I suppose. Those are pluses for sure. That's coming to large companies too.

For both Alan and Ari, it's about control over the what, where, and when of work. They have different approaches to thinking about potential solutions, but they are focused on the same underlying problem. Do you think this desire for control and autonomy is a response to their time in the army? Is it generational? Or is it just who they are as humans? It's probably a bit of all three. I'll add one more.

People rationally gravitate to jobs that they have the skills to excel in. These two guys are natural leaders, and those leadership skills were nurtured in the army. Both seem to intuitively know that their future is leading people, and those are the careers they'll pursue if they don't search.

I'm not interested in being a point guard in the NBA. I know I'm too slow, too old, too clumsy, and basically have none of the skills to excel there. However, I do have a creative mind, and that serves me well as a professor. We all need to find our place, and I think these guys are on the journey to find theirs. And what seems clear is that both could find a small business to run as CEO that would fulfill this desire for autonomy. In fact,

I'd bet that it would be much easier to find a company to buy than to find a traditional post-MBA job that would pay them a competitive wage and give them the control and leadership opportunities that they're looking for. I agree, Royce. Now let's hear from Alan about his ideal business to own and run as a CEO. Yeah, there's the values of the business, like financial values, recurring revenue, and all that. But I think of it more as in...

Who am I going to work with on the day-to-day? Who am I solving problems with together? Am I getting phone calls late at night or more of what are the problems with those phone calls? I don't really have a great answer for that. I feel like it's kind of like you know it when you see it, like I'm not really interested potentially in construction.

But I've been looking at a bakery, and that excites me for the aspects of producing a physical object with a team and almost the light manufacturing aspects of it, too, and operational efficiencies, along with some artistic part of the product that's being produced. Do you imagine getting dirty at work? Yes. So I used to think, like, I'm ready for the...

office job after the army, but I had that experience. I would like to be outside or going across to different locations or job sites, things like that. So yes, I want to get my hands dirty in that regard, right? I think I'm very flexible in general. I care much more about who are the people I'm with, suppliers, customers, and employees, and

And how are we solving problems together? You want to be connected to whatever the product is. Right. I want to be very connected. I want to feel like I can contribute. Yeah, I'm not going to be that expert in the room, but I want to help solve the problem for our customers. So I guess like a lot of entrepreneurs through acquisition that we meet, you're kind of –

broadly agnostic about the type of business it is. It's really about managing a team of people, getting the product out, making sure things work well, kind of the management itself more than the product. Is that? Right, which maybe is too generic and maybe I have some more thinking to do, but I think that's also when you're looking at these organizations, you're

I can look at each one objectively. And I think it opens up a broad set of choices for you, right? Because you're looking for an enduringly profitable quality business in a place you want to live and you've chosen not to bound yourself by a specific product or service. Yeah. I think you can only pick one dimension on which to restrict yourself. So if you're going to restrict yourself in geography, I think you have to be pretty open with respect to industry.

If you're going to restrict yourself on industry, I think you have to be pretty open with respect to geography. One or the other. You need to make sure there's a big enough opportunity set to be successful. And so you don't want to slice that too narrowly.

Ari has a different ideal business to own and run as CEO. But like Alan, acquiring a company that provides more blue-collar products or services is a key attribute he's on the lookout for. And here's how Ari tells it. Yeah, I just like the technicians in a truck style businesses because that's what I was used to in the Army. So in the Army, I was leading teams of 40, a rifle platoon and then a distribution platoon and...

Yeah, I'm just kind of, I'm comfortable with the blue collar environment, kind of logistics heavy. I'm more comfortable leading a team like that than an accounting team. I don't think I'd even know where to start, like leading a CPAs or something like that. So if I were to search, I would definitely lead in the, you know, blue collar services broadly. And then not to mention, they have a lot of the good characteristics of

Contractual revenue, kind of their essential services, non-cyclical, things like that, the things that you look for in a stable, enduringly profitable business. The number one thing feels like it's something you've done before, like it feels like running a platoon again. A hundred percent. I would feel comfortable. I can be myself and, you know, mess around with

with the guys and they'll poke jabs at me and I'm totally comfortable in an environment like that. I mean, that's like a great thing because there are many more of those. And the pricing, as you said, is usually much better because lots of people don't feel comfortable supervising blue collar workers. Right. I feel uncomfortable wearing a suit and tie.

Both Ari and Alan seem well-suited to looking for a business to own and run, and both are inclined to look for blue-collar businesses where the multiples are typically favorable and there are numerous available targets, many of which are enduringly profitable businesses.

It seems that searching is such an obvious choice. Given all of this, it's reasonable to ask the question, what, if anything, is stopping them? Location, location, location, and family considerations. Both Alan and Ari have strong geographic preferences that have a huge impact on their decision-making. For Alan, his wife's career path is in the forefront of his mind in terms of thinking about where to search. Let's hear more.

So it sounds like one of the things you'll be dealing with is if you buy a business, where is that going to be located? And how does that also fit with your wife's interest in a career? Right. What is her path?

So she actually works here at HBS right now, and then she just got into Harvard Graduate School of Education. So she'll be doing that program for the next two years and onwards and upwards from there. Interesting. So does that mean that you will need to be based out of Boston for the next couple of years? Yes. I'll be looking in the Boston area.

And here's Ari sharing his thoughts on where he'd like to search. We'd love to hear a little bit about the pros and cons you see in buying a small business because you're right in the process of being thoughtful about it now. And I think all our listeners would like to know what the considerations are for you. So let's start with some buckets of concern that Rick and I hear all the time, like,

family life. How are considerations about your family dovetailing with the idea of search versus the idea of getting a job in someone else's company? I have a one-year-old son. He's toddling. He's starting to stand on his own. He is 13 months. And that obviously plays a huge role. There's a huge deciding factor in what I end up doing, where we end up going. Ideally, we want to stay

Close to family. It's kind of weird being isolated, just me, my wife, and my son with all my family either back in Texas or Florida. So, yeah, that definitely plays a role in what I do afterwards. Your hope is to end up in either Miami or... I hope so.

Yes. I guess. Where's your wife from in Texas? El Paso, way West Texas. Geographic uncertainty plays a big role. Yeah. Truthfully, I think that's the major one. So you move to conduct a search or perhaps stay in Boston. And then two years later, you find a business. You don't know where it's going to be and you move there. And there's uncertainty about where you're going and what you're doing. It kind of subsides.

strikes a similar vein to the army, you know, that you have a little bit more agency, I would say, but that uncertainty is kind of the reason I got out of the military. Well, you have a little more agency because when you look at that information document on the company you might buy, you're alone in your office and you can decide, am I moving or am I not? And no one's going to second guess that decision. In the army, I'm guessing you can't do that. You cannot do that.

You can't decide which crises fit your geographical tastes. You can't say, you know, I really feel like being in the sun, so could we have a crisis, say, in the Middle East? Or I feel like the cold, so I could go to Afghanistan and ski. You don't get those choices. Yes, that is true. There's a second consideration I feel like they feed into each other, which is like the immediate financial crisis.

And I feel like if I did raise a search fund, would I be able to say no? I kind of feel like I have an obligation to the investors that provided the search capital to be like, you know, this is good business. I know it's in the middle of nowhere and my family's not going to like it, but okay, I'm going to do it.

But yeah, the second consideration would be kind of that short-term financial because Harvard Business School has cleaned me out. I don't think I'm the only person in that regard. I think most...

NBA candidates at this point probably have a negative net worth or something like that. I think that Ari is onto something here. If he raises money from investors to fund a search and his family's expenses while searching, investors might have a strong view about the nature of his search, particularly a tight geographic restriction like in Ari's case, Miami or El Paso. Let's hear some more about how Ari is considering where and how to search.

I would love to self-fund my search and raise money when I have a deal because I feel like I have more flexibility in where the business is located and what the business is. But yeah, the problem is I cannot self-fund my own search.

And I feel like when I do talk to a lot of people that said they went self-funded, it was really spouse-funded or parent-funded. And I think for me, I don't have that luxury. If I did self-funded, it would have to be a true self-funded. So then you'd fund the search. Correct. I think I would have to go that route unless I just find something within the next couple months. But then that feels like, what do they call it, like where you're acquiring your job or your, you know.

Buying a job. Buying a job. Instead of a business. Buying a business. Because of the rush timeline. This is something that I feel like I have to be thoughtful about. So this is where these two issues collide about family life and the type of search you're doing, which is it sounds like if you search, you really need to get a group of investors to fund you, but you'd really like to marry that with buying a business in Florida or Texas and

And you're not so sure that investors would sort of agree to sign up to back you in a

if the plan was you're just confining yourself to those two states. Yeah, that's the nail on the head. And then how much... I think it's deeper. I think the search funders, the people who fund these days are largely wanting bigger acquisitions. And if you want to buy a blue collar company, most blue collar companies, I would guess, are sub $2 million in EBITDA. Yes. So you're not going to be buying a business that's

$15 million of total enterprise value or $20 million of total enterprise value. You're going to be buying one that's $5 or $6 million of total enterprise value. And so the funders are generally more interested in bigger businesses, not all.

But some funders are certainly interested in bigger businesses. So that's a concern to pay attention to. That's also an important consideration. So what's happening then in your mind is you say, if I fund, I might end up being pushed to a place or a business that I don't really want. And if I don't fund my search...

I don't have any money. I've considered, do I work part-time? Do I get a remote job? Do I consult online to fund my search? But yeah, because a lot of people say we're just living off of savings for the next year or my wife has an okay job and that's not my case. It's between a rock and a hard place. But then it comes to the decision of self-funded where you have

I would have the agency, but I don't have the money or funded where, okay, now I have the money to take care of my family and that's important, but I might be pushed in a direction that I kind of don't want to go. And then is that how, you know, isn't that like a job after, you know, as you think about it? So yeah, these are kind of what's rattling around my head. Such an intriguing conflict. I get it. I mean, I get it. And, and you might be able to find funders who are both comfortable with a blue collar business and,

and a geographical constraint. And I've thought about, okay, I can kind of increase a geographical scope to like the Southwest United States. And that encompasses kind of Texas, New Mexico, Arizona, Oklahoma. Okay. Maybe someone, maybe an investor would be more comfortable with that. Would an investor be more comfortable with a smaller acquisition, like essentially a

a holding company or like this, I would need to aggregate a lot of these smaller businesses because I don't think you're going to find the size of the average

HVAC, commercial landscaping, maintenance, things like that. I don't think it's the size of an average search fund investor would like. They exist. I'm sure they exist. Well, you know, it used to be that the investors who backed searches would invest and were eager to invest in businesses with one and $2 million of EBITDA.

And probably five to seven years ago, Rick and I started to see that group of investors change and in large part get oriented to bigger deals as Rick said. But I wonder if in that fairly large population of investors, there are still people who would love to buy a $2 million lawn care business or HVAC business that's priced right at

four times EBITDA. I imagine there's a population there that could get really excited about that. I think there is, but I think it's not the people who have raised big funds. Right. You'd have to search through the population to find them. You'd have to search to find the search. You'd have to search to do the search. I was just going to say, what you're putting front and center is this money question of, could you raise the money for a search that's sort of

defined around buying a sort of smaller blue collar business in a couple of significant regions of the country, would you get the investor's support? I think that's a real question because some people will think about search and not be sure and they'll go get a traditional job for a few years thinking they'll go back to it later.

But I don't think this issue will go away. In other words, I think you'll face the same – if you took a traditional job, you'd face the same issue in three years. It's not going to go away. So it either gets solved or it doesn't get solved. But deferring it doesn't help.

When it comes to funding the search, Alan is in a different situation. If he searches, it will be spouse-funded, in his words. Spouse-funded, yes. So I'm very lucky there. You know, we're very much going through our budget. How have we been spending money? What's the next few years going to look like? Yes, it's a concern. We talk about it almost every day, but it's a part.

Hi, it's Royce. Did you know that companies who've raised Series A, B, and C funding all have the same rate of failure? That tells us that scaling a company is no easy feat. And if you're interested in taking a deeper dive into that side of the business, we recommend listening to the podcast, The Science of Scaling, hosted by Mark Roberge, Harvard Business School lecturer, co-founder of Stage 2 Capital, and founding CRO of HubSpot.

The Science of Scaling is all about how to scale your revenue and sales. Each week, Mark talks with the folks who've scaled the most successful sales teams in tech, like the head of sales at OpenAI, VP of sales at Figma, and the CROs at Asana and Atlassian. So don't miss out. Listen to The Science of Scaling on Apple Podcasts, Spotify, or wherever you get your podcasts.

So, Alan, one of the implications of that is, as you know, there's sort of two ways of funding yourself when you search. Some people self-fund or spouse fund, as you're doing. They have the resources to carry themselves until they get to the point of buying the company, which time they look for some investors. And the other is going to some of the regular investors in search and raising a search fund, and that fund will pay them while they search and fund the acquisition.

you've decided to self-fund partly because you can, but are there other reasons you've made that choice? Yes, and I think both are very good options for specific individuals. So other reasons are I'm going to be very geographically constrained, which I understand could limit the traditional search fund investors, as well as

I'm still chewing on this growth thesis versus a sustainable business and how I'm going to operate it. So if I'm optimizing for choosing which problems I want to solve when, I'm going to go for growth when I see it, not because a –

Because I'm trying to hit equity targets or targets to try and earn more equity in the business. I want to go for what I think makes most sense at the right time versus I think there's a little more pressure for

significant growth from traditional search funds. So just I want to test that I've heard you right. It's kind of one of the things you get when you self-fund is usually end up controlling the company you buy. And even though you have outside investors,

You ultimately answer to yourself, and that might be expressed in setting the growth rate of the company, not based on investor expectations, but what's right for the business. It might be other things, but you're looking for that extra control you get. Right. And there will still be investors in the self-funded, and they're going to want to see the growth. But I think if I can curate the investor list...

I have a lot of kind of ideas I'm thinking about that I'd also like to go a little smaller in the investment because I see this as a 20, 30 year journey, not a... I see a lot of people who seem to buy one, operate for seven years, and then they never want to do it again. And that's a little concerning on why don't they want to do it again. So I'd like to go maybe a little slower, a little smaller, and...

then go for a much longer time period of trying to run small businesses. So it's my thesis. I think it's a great approach. I think it's a fabulous approach. The smaller the business, the lower the multiple, the better the pricing of buying the business. The more opportunity to get to know the business,

The other thing is you need less capital so you can really, as you say, curate your investors. And the interesting thing about the investment base for a business like that is investors will self-select. Investors will look at the business, will look at how you describe the business, will look at you and say, do I like this or not?

And the ones that say yes will want to be in your capital structure. Whereas if you fund the search, they have a style of what business you might buy. And there's that nudging towards that style. And then when you buy it, they continually want to nudge you to that style because that's what they signed up for in a self-funded search process.

you're going to get investors that really like the style of that business because they see it at the time they buy it. That uncertainty is gone that exists with funded searches. And I think the step further then is that's my leadership style, which will theoretically lead to more success versus me trying to

work on someone else's style and maybe not succeed in that regard as much. I agree with what both of you have been saying. I'd just add I think there's a real consistency in a focused geographic search and opening yourself up to smaller size businesses because of course when you say I'm going to search for example only in New England it's

you're naturally reducing the number of businesses that could be your targets. But then by opening yourself up to go a little smaller, the pyramid of North American businesses gets wider and wider as you get smaller. And so in a way, you're restoring a number of targets that you eliminated by going geographically tight. So it's a very consistent strategy here where you reduce some of the targets geographically, but you expand them through considering smaller size businesses. So

It's a good way of thinking about it. So fit, I think we've already talked about. You think you're going to just fit better as a CEO than as a part of a bigger organization. I think so. It really reminds me of back at West Point, people talking about the platoon leader job and company commander job. And I haven't got much of that. I've been looking all the roles coming out of what you could do with an MBA. And I think this is the best fit for my talents at this point.

Alan can pursue a Boston-area focus by spouse funding his search and potentially getting much better economics as a result, whereas Ari needs investor funding to support his search and his family. Do you think Ari can find investors? Royce, absolutely. But my guess is he'll have a smaller group with different investors than many of the larger funds.

But there are surely investors interested in enduringly profitable blue-collar businesses that can be acquired at relatively low multiples. He'll give up economics relative to an unfunded search. But so what? He'll likely do at least as well financially as in a traditional career. And this entrepreneurship acquisition path just seems to fit him better.

I agree, Rick. I think you'll find value investors out there who get excited about investing in an established business that's been around for 30 or 40 years and is profitable, and now it's being taken over by an energetic person who's been well-trained in management and has skills managing crews of people. I think that seems like a no-brainer as an opportunity. I think some people might have pause about narrowing the geographic area and

but you're not narrowing it to a small place. When you look at smaller, small companies like we're talking about, there are a lot at the base of the economic pyramid. So I'm with you, Rick. I think Ari will have to search a little harder to find those investors within the realm of search investors, but they're there.

I'd like to cover one last topic in our conversations with Ari and Alan. Risk. Many people think searching is risky, and Royce and I always find that befuddling. After all, you can always just get a job if the search fails. But here we are, talking to these two veterans whose prior careers in the U.S. Army exposed them to serious physical risk. How do they feel about risk? We'll start by asking Ari for his thoughts on this topic.

This leads me to a question that's on my mind and I think on Rick's, which is about risk. You know, most commonly when Rick and I talk to people who are thinking about searching versus thinking about

a traditional job in a large company, they kind of have the view, gee, it's riskier buying your own small business. It's safer being in a large company, something I don't think Rick and I actually agree with, but that's the common choice. This doesn't sound like that because the choice to you is buying your own small firm, a landscaping business, whatever, or joining an early stage business

tech company, which seems fraught with risk to me. How are you thinking about risk? I am comfortable with risk as long as I'm able to kind of do the internal calculus of will this company succeed? Will I be okay? There's a certain level of risk I'm probably not comfortable with, but I'm probably less risk averse than the average person. That's not a huge factor for me.

How does your wife think about the risk side? Does she think the search thing is just crazy or does she think it's really intriguing? She thinks it's intriguing and I am really blessed that she does support me and I think she'd support me in basically anything I did. She's kind of happy even now, even though we don't have a lot. Hey, we're living in Boston. We have a roof overhead. So, yeah.

Yeah, I'm lucky in that regard. When she hears of our friends taking $175,000 base salary jobs, it definitely raises an eyebrow for her. Like, hey, why didn't you apply to those jobs? But I think she gets the bigger picture of why I want to do something like this.

Can I ask kind of an off-the-path question? You'd be surprised if I didn't, right? So in the Army, they have like real bullets, right? Yeah. Yeah. I mean, it's a dangerous job. Yeah. I find it really intriguing to me that some veterans think about this as risky, but they didn't think about the Army as risky. I have never thought about it that way, but yeah, 100%.

It also depends on what you did in the Army or in the military in general. There's a spectrum of risk within the military as well. So I would say it depends on what that person did prior. But to those people who are taking huge risks with their lives in the military to not be willing to take financial risks, I've never thought about in those terms, but that makes sense.

It makes sense. It's goofy that they're willing to take personal risk. Yeah. Physical risk, but then financial risk they get really scared about. Yeah. I think that's odd. You don't think that's odd? It's 100% odd. Alan has similar thoughts about risk. Do you worry about risk of failure as a searcher? Do you worry about risk in the business?

How do you think about risk? I mean, I think it's an odd question because you guys have faced real risk. Well, that's what I think about a lot because we have different definitions of risk, right? Every helicopter flight is inherently dangerous. But now I'm thinking of taking on a million-dollar loan. Plus, that will be paid over 10 years. How to transition risk thinking in that regard is quite a difference. So, yeah, I think about risk.

I think there's a failure to thrive thesis as well that you're not going to go bankrupt, but you're going to be working in this small, not growing, not really succeeding organization. Basically paying off someone else for the next 10 years of your life would be the downside of risk.

Meaning paying off the lender, for example. Right, the lender who has paid that cash to the seller. And essentially, I'm going to be working for that seller or lender for the next 10 years. Oh, the other piece I want to mention is there's a lot of great mentors, a lot of great community in HBS that gives me the confidence that I'm going to pick up the phone before I get in this situation. And if I do get in this situation, to figure out a way out and that –

brainstorm, talking to a lot of people that I have the confidence that will be able to figure it out. Yeah, I think what you describe is sort of an unhappy circumstance. You know, you buy a business, you think it's going to be great, you lose a customer or something bad happens, there's some innovation, you just slog along repaying the debt and what

That doesn't seem like you. It seems like if you find yourself in that situation, you'd find a way to fix it. Having participated in this community for nearly a decade and a half, one of the things I note is that every CEO faces challenges and every company faces unanticipated hurdles. What's special is that many people, people like you, look at those hurdles as challenges

things that need to be fixed. What do I do to solve this problem? And I just solved this problem. It's not, oh,

You know, this is really terrible. I'm stuck now. You're just not going to ever be stuck. You're going to fix it, whatever it takes. Alan, how about the solitude of the CEO role? I think he's going to like the solitude of the CEO. Well, I don't know. That's why I'm asking, you know, because it's in some ways in a large organization, you have a large peer group.

you know, who can sort of share experiences, commiserate advice. Surely you have an informal peer group when you're your own CEO, but it is, you know, as they say, it's lonely at the top. How do you reflect on that? The answer for me is I have a very good and close relationship with my wife, and that's what I'll rely on, channeling more into that for the harder times. It sounds great.

Towards the end of each episode, we'd like to ask our guests if they have any questions for us. We briefly touched on this earlier, but Ari asked us an interesting question about his search thesis, and that's what we'd like to share. Here's Ari. I have one more question because this is something I hear a lot. What is your opinion on having a super well-defined thesis?

I think your thesis is I want to be in Miami or El Paso and blue collar. Okay. I don't think you need any more definition than that. Yeah, that's good to know. I agree.

I think you got to be open-minded. With those constraints, you got to be open-minded. Because often with small companies, you see a business you didn't even know existed or it wasn't on the top of your agenda, a pool maintenance company or a specialist repairer of pool heaters. This journey leads you to places where –

Look at what that amazing entrepreneur created over 30 years. I didn't know that business existed. You want to be open to that. Yeah. There are so many businesses like that. There's septic businesses. There's water businesses. You know, there are just – there's trash pickup businesses, roof repair businesses, right? It just goes on and on. Right. Yeah.

And you need to be open to all of those because they're exchangeable with each other really for your purposes. And the trick to searching in that space is you want to keep a keen eye towards recurring revenue and not repeating customers. So you want to find one of those businesses that you're both unimportant to their cost structure and that customers either repeat or recur.

And speaking of recurring revenue and other important factors to consider when searching for a small business to acquire, Alan had a great question for us as well. Let's listen. You need to practice to do, right? There's one graduate, he owns like an internal fan company.

in Texas, I think, and he has one employee. And his thesis is you've got to get your hands dirty. You've got to know the job before you can kind of lead the job. So do you really need two years in recurring revenue? Do you really need the recurring revenue? Or is it worth it taking a higher risk to start

a CEO position earlier. This is quite a long... No, I get the question. And the question more generally is, do I take something which is well away from perfect? Yes. I guess how far away from perfect to start being that...

To just get going. Get in the seat. I think everybody makes the tradeoffs differently. I think that one of the keys to being a successful searcher is recognizing that no business you can buy is going to be perfect, especially if the price you pay is included in the bundle of things you're considering and how much can you compromise on.

and still buy a really good business. And I think that's something you pick up through experience searching where you look at scores and scores of firms so that you can recognize a company and say, "I know it's not perfect, but it's like in the upper quartile of the 50 businesses I've seen," is how you sort of get comfortable with that decision. I think in the example you just gave us, which was, "Should I just go really small like this person did?"

I think small can be a nice trade-off because you can fix small, right? You can fix small by doing good work and getting new clients and you can build the business bigger.

I think what you described there to me sounds too small, right? Because you have a lot of experience and skills and you want to leverage that with the appropriate size of business. So you're being rewarded for the work you're doing. Yeah, but it's interesting you should say that because I had occasion over the weekend for somebody to describe a business that they said is a perfect business, didn't have long-term contracts, but had recurring revenues, but it was –

We didn't have financials, but I would guess it was like $150,000 of EBITDA and like three employees. No. That's a job. That's not a business. That's a job. It's not a business. Okay. So let's try this. Here's another way of asking the question of how far from perfect can you be.

Imagine the perfect business being a million and a half dollars of EBITDA, 75% recurring revenue, no customer concentration in a business I can easily understand that doesn't compete with Home Depot, Walmart.

You know, somewhat defensible, good service. I know the customers but no customer concentration. Say 25, 30 customers are reasonably distributed. Is that fair? Sign me up so far. I would say 15 to 20 percent EBITDA margins and maybe 50 percent gross profit margins. OK? All right. I'll ask the questions you guys can answer.

And we're going to buy that at 5x, did I say? You didn't say, but that sounds like- Let's say we're going to buy that at 5x. It's a reasonable small company price for a business like that. Okay, we're going to buy that at 5x. Okay, now- Five times EBITDA, five times pre-tax profit. Yeah. And we'll finance it with the SBA and loan and all that stuff. So suppose we go and add, we move $1.5 million to $750,000, but leave everything else unchanged. Would you buy it?

Yeah, I'm very eager to. So I have no problem with that. No problem. What would you pay? Could bring the multiple down because of the size. So four. You'd pay four. Royce? Yeah, I would buy it small here. Sounds like it's very fixable through hard work and growth. And I'd probably cap out at a four multiple on that, somewhere between three and four for a sub-million dollar business. Okay, next question. 50% customer concentration.

We're back to the million and a half. Everything as otherwise I said is true except this 50% customer concentration on revenue. So it's probably more than 50% customer concentration on profits. Where are you at? I wouldn't – And I saw you pressing the eject button. Well, this is like one of those afternoon game shows. So you're out. Yeah, that's also like having a job where you work for that customer except that customer has no hesitation about firing you if –

if they can get something better. Okay. Now we're back to the same company, $1.5 million, only instead of 75% recurring revenue, you have 50% repeating revenue. So no long-term contracts, no visible commitments, but the same customers come back

You know, customers tend to come back each year and it's about 50% of your revenue is associated with customers you've done business with. So it could be a project business where you're doing different projects for the same people. So what do you think? Are you in on that?

Yeah, and so for better or worse, I don't have a problem with that, which makes me question if I should be kind of doing search at this time because do I have a good understanding of the risk? Because I'm in all day on that. You're in all day on that. Royce? I like it. I think it calls for some more questions to be asked. Like I feel better about that kind of repeating revenue business thing.

If what brings the customer to your door is required, like you're fixing their heating equipment when it breaks, and so you're kind of counting on a steady flow in your catchment area of that equipment breaking, and then they come to your door or a competitor. I feel less good if it's a discretionary project that customers could cancel. If there's an element of cyclicality in it, for example, which you sometimes see in reoccurrence. So I like it too. I'm with you, Alan, but I think...

I think that there's some nuances to be explored. It was a trick question. Do you know why it was a trick question? Tell me why. Because I had the margins up. The margins, I didn't change the margins. So you still had your 20% EBITDA margin on the repeating business. Which suggests that these are not discretionary purchases, that when someone isn't getting any heat, you're their first call and you're going to get the business at any pricing. Nice trick. What I actually liked about this, Alan, is that

This is what you gain when you start to search. In other words, you see a whole bunch of case examples like this and almost like the optometrist. You're saying better or worse, better or worse. And by the time you get to the 50th business or the 70th business, you can really see where this lodges in the companies that are for sale, what they really look like, and you become better at these choices. I had one more A-B test since we're back to the optometrist analogy. Yep.

How about I keep the same business, $1.5 million of EBITDA. I've taken away the customer concentration. But here's the thing. The margins, the EBITDA margins are 5% instead of 20%. So I have to do a lot more revenue to get to the same EBITDA. I'm not a fan because more—

Yes, much more increased revenue for bottom line, but also to me it tells me I'm not that valuable and people have a lot of power over me, whether it's suppliers or customers or both, and I don't want to dig out of that. So earlier you said that you weren't sure you knew enough to search. Yeah. You just passed the test because I – because Royce likes to say if there's one measure –

It's margin. If you have a 5% margin business, the first question you should ask yourself is, why does this owner not raise price by 5%? Because that 5% price increase would double his 5% profit margin. And there can only be one answer to that in most cases. He is afraid that his customers will dump him if he does that. And that is a bad business if customers can substitute you out over such a small price increase.

I agree with Rick. You did a nice job. I did a really nice job. I wouldn't worry about a thing. Royce, these conversations with Ari and Alan were so interesting. I loved the clear thinking about the choices and how the entrepreneurship through acquisition path dovetailed so nicely with who they are as people, their career aspirations, and their hopes for their family's futures. I love it. And like you, I think there's a lot to learn from their thoughtful considerations and clear thinking.

The question always, I think, is how searching will work for you and your family and how to tailor the journey to meet your personal needs. One last thing, Rick. Do you think that Ari and Alan will search? I think so, but let's do this. Let's come back.

to each of them at the end of this first season of the podcast and check in with them to see what they're doing and how they're thinking about things. I look forward to that. Thanks to our guests, Ari Santos and Alan Newman for joining us on Think Big, Buy Small. We really enjoyed our conversations with them and learning more about how they're thinking about the decision of whether to become searchers or not.

And thanks to all of you, our listeners, for tuning in. In our next episode, we'll be speaking with a successful searcher, Jackie Kopcho, who is now CEO of Tortorella Swimming Pools in New York. She has walked the entrepreneurship through acquisition path and has great insights to share with us.

You've been listening to Think Big, Buy Small. We're your hosts, Royce Yudkoff and Rick Rubeck. Katie Zanbergen produced today's episode. Craig McDonald is our audio engineer. If you have any questions, comments, thoughts, feel free to just email us, rickandroys, all one word, at hbs.edu. We'll be back next week with another episode of Think Big, Buy Small.