The Self-Funded Journey From Searcher To Seller
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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. Today, Royce and I are going to be speaking with Jeff Duckworth about his experience buying, running, and then successfully selling his own company.

He has a story that's very useful to hear. Like most people who search for an existing business to buy, Jeff had never bought or run a business before. He did have about a decade of general business experience when he decided that his job working in someone else's company didn't fit with the life he wanted to live. So he reached out to brokers of smaller businesses in the region where he lived

He found a business that he could afford and bought it. He bought a business you and I think of as a high-quality company, meaning there are good reasons that it will have enduring profitability. We will spend some time talking with Jeff about why he liked this business because he did a good job in selecting the company to buy. He also did a good job paying for the business. He took out a small business administration or SBA loan for about 90% of his purchase price

and paid for the last 10% by selling a condo that he and his wife had previously lived in and then rented out for a while. These SBA loans are regularly used by many searchers to turn themselves into business owners. The amount of money he had to come up with was affordable and

reasonable. We will also discuss with Jeff how he learned to manage the business with some transition help from the seller, why he decided to eventually sell it, and how he thinks about his career going forward. I think listeners will find a few steps in his journey particularly interesting. Why he decided to stop working for others and buy his own business, how he sourced businesses that were for sale, and so on. Also, what qualities he saw in this company and how he financed it. Well, Royce, let's meet Jeff.

Jeff, welcome to Think Big, Buy Small. Delighted to have you here today. Thank you. I'm really happy to be here. Tell us a little bit about your journey. How did you get to this moment of your life? I studied mechanical engineering as an undergrad. I spent a couple of years doing aerospace robotic mechanism design. Didn't find it to be totally my jam. Ended up going to business school. Didn't have the thing that I totally understood I wanted to do out of business school, so I did consulting for seven or so years. In

In the business school journey, I thought on the way in, I'll go to business school and this would be great. I'll figure out what the business I want to start is because I think I'd always wanted to be a business owner or an entrepreneur or found a business or whatever. I never really had that kind of moment where there was a flash of genius of the thing that I wanted to do. So then I figured I'd bide my time in consulting. At a certain point, sort of became tired of spending 50 weeks a year on the road and more nights in hotel rooms than my own bed. Then serendipitously, I

Fell onto the notion of ETA through your book. And here we are. That's great. And importantly, you didn't go to the Harvard Business School. I did not. I went to USC. And Jeff, along the way, you married, you had kids. Tell us about your family. My wife and I have known each other for quite a long time. And so she's been with me through the whole journey. My first son was born in 2012, just a week before the end of business school. So I was finishing up

my last class in statistics and was supposed to be gearing up for a final project. And I got the phone call. The instructor happened to be a couple months behind my wife, also pregnant. I had a kind of a sympathetic ear, but I went to talk to her. I said, look, I just got this text message. I got to leave class a little early and I'm not going to do your final project.

I love that. I've got an A right now, so just go ahead and give me a C or whatever you got to give me. Average it in. I'll take my medicine. Yeah. I've got bigger fish to fry right now. That's great. I love this. So you graduate from USC business school. You're not sure what you want to do next, so you choose consulting, kind of keeping your options open. Exactly. You had a steady general vision of, I want to be an entrepreneur. And I guess like many people, you think about that as startup entrepreneurship, but it

doesn't feel quite right to you. I think conventionally that's what you think of, right? But I think maybe it's a bit the curse of the engineer too. I feel like an engineer is sort of a professional skeptic. We just sort of think about all the reasons why this is never going to work. That's enough to make me want to not pursue these different ideas that I might have had. That's what I love about this notion of ETA is that you get to look at a business with the benefit of history and say, I don't

I don't know if I would have thought that was a good idea, but it certainly seems like the P&L shows it to be a pretty good idea. I was really happy to discover this notion. Perfect. And we discovered the inflection point was actually reading our book, which was a happy surprise for Rick and me. The origin story is a bit fuzzy for me at this point, but I believe there was a podcast where it was sort of mentioned. And then I was looking about to see like, well, how do I find a little more information about this? Found this book from Harvard Business Review, and I feel like those guys have some credibility.

Maybe they know what they're talking about. And I read the book and it was mercifully relatively short read and concise. Seemed like it laid it out pretty straightforward. And so I pretty much used that as the playbook. And in the back of my head, as I was reading it, I was thinking, Ruback, that name is familiar. And I went to school with a guy, turns out, and I was like, what are the chances that this guy, Rick Ruback, is related to Sam? And it turns out they're pretty good. Yeah, yeah. Sam is my oldest son. And Sam tells the story that you were at a reunion event or something. We ski at Mad River Glint.

And you had met him there and said, what are you doing now? And that discussion ensued. And you said you had discovered this book by these guys from Harvard. And Sam said, who wrote it? And you said, oh, somebody named Ruback.

So, Jeff, tell us about your search. You had a job and you sort of cottoned on to this idea of buying your own smaller firm as a way to make a living and a career. Yep. What did you do next? I was consulting before COVID. So consulting was definitely all the travel and all the onsite work and all that. So I was doing that and kind of looking for a way to get off the road.

I'd say the search started slow, kind of feeling it out, sort of see, is there something here? After I found a few interesting opportunities, even if they weren't something I really pursued, it gave me enough confidence to say, oh, it looks like there are kind of some interesting things out there. And so I proceeded to break most of the search rules that you guys laid out in the book, where I ended up doing most of the search nights and weekends online.

on the side, a full consulting schedule. I didn't really generate any proprietary deal flow other than, you know, some, put it fairly, probably half-hearted attempts at networking. And the deal I ended up finding, you know, I found it on Biz by Sell. So you were going to websites, some of the big websites that offer businesses for sale and maybe calling a few brokers who were brokering businesses. Yeah, so I had a very geographically focused search because we had just relocated our family from New York

Los Angeles to Eastern Massachusetts. So I'd mentioned that my oldest son was born right at the very end of business school. And then two years later, we had another son. At this point, a reasonably sized but young family and the move from California to Massachusetts was harder on the family than I had kind of expected it would be. Definitely weren't about to move again for a business opportunity. I was looking very much in the Eastern Massachusetts area. That helped in a certain degree, right? Because there's

Yeah.

and searching nights and weekends, which you're right, Rick, this is something we just... We tell them it just doesn't work. But here we go. Here we go. Here we go. Here's a very happy person who, like with my own children, they just ignore what I say and seem to end up just fine. I feel like I've made a career out of successfully doing the things that people say won't work. Well, it did work in your case, which is wonderful. You know, it's something we don't see working that often. So it's actually nice to see that the opposite is true.

Rick, it's great that Jeff was able to search for and buy this company while he was still working at his job and earning a salary. But we need to say that that's very unusual. Searching for a company to buy and acquiring it is almost always a full-time job. We get asked this question a lot by people who are thinking of searching. Can I stay at my job and search on nights and weekends and over holidays?

And it would be so attractive if that worked. But Jeff is one of the few people you and I have seen after studying this market for nearly 15 years who've pulled this off. It's true. Most searchers search full time. They spend their time talking to lots of brokers and owners, reviewing companies for sale that they might be interested in. And that's before they sign a letter of intent or LOI to buy a company.

and start diving into the operating and financial details of the business. It's not just that, Royce. These conversations take place during business hours. Even if you could put in all of this time, you aren't going to be reaching owners and brokers during nights and weekends. These are some of the main reasons searchers describe searching as a full-time job, which, of course, brings up the question of how these searchers support themselves while they search.

There are several answers to that. They live frugally off savings. They have a partner who is working while they search. Or they line up some investors who regularly back searches in their search and then in the business they buy.

That's a funded search. We will talk about each of those choices in later episodes. I think the main thing to take away right now is that while most aspects of Jeff's experience are pretty standard steps in entrepreneurship through acquisition, listeners should know that buying while still working is really nonstandard. Right. Jeff got lucky. Let's get back to our conversation with Jeff.

I do think, though, that having such a well-defined search criteria almost makes this easier because if your search region is eastern Massachusetts, it seems to me that your deal flow is not going to be overwhelming. It's going to come in in trickles. And so as long as you can get that deal flow to look at every time, it's not awful to do it part-time. What's really awful is to try to do a national search process.

or a big regional search, if you were all of New England or east of the Mississippi River or something like that, I think that would be really hard to do part-time because there's just so much deal flow coming at you. But if it's like, I'm going to put a pin where I live and I'm going to draw a 50-mile radius or a radius built around travel time and highways,

You're not going to see that much deal flow, I don't think. I was definitely not overwhelmed with deal flow because I wasn't creating any deal flow. With such a geographically focused search, if I were to just blanket every registered business in eastern Massachusetts, like that probably wouldn't even be that hard. People who do that kind of tight geographic search do exactly what you say. They find business listings and they try to collect information on each line of that listing. Yeah.

That's a little easier with artificial intelligence and all that other stuff, you know, web scraping. But it's still a time-consuming task. And then they do the networking. You know, they never have lunch or breakfast alone. Right. So they're always trying to find somebody who might know somebody who might know somebody. That's a great strategy, but it's very time-intensive and you didn't have that kind of time.

I didn't have that kind of time. And you guys laid it out pretty well in the book to say, well, look, if you're going to generate deal flow, you're going to send out, you know, a thousand emails and you're going to get a couple of responses. And then of those few responses, people are going to say, sure, I'll sell my business for the right price. And that's inevitably not going to be the right price. I understand that that's one approach. It didn't sound like a terribly appealing approach to me. I'm a big fan of using the broker network because...

because the hardest thing is to find a committed seller. I think you find a committed seller first, and then you decide if the business is appropriate. That's what the broker does for you, right? The broker is boiling the ocean to find a committed seller, so you have a richer population of those. And hopefully you don't have to have the conversation to say that this thing that you missed birthdays and weddings for for 30 years is only worth three and a half times earnings. Right.

the broker will have sort of splashed the cold water on the seller's face before you show up. Right. A good broker is a good psychologist, a decent accountant. I mean, it's their job to make sure that the people selling actually want to sell. Well, I think that's right, Rick. So, Jeff, you scoped your geography. You were searching for any kind of business that appealed to you. You didn't have an industry-specific focus because...

I'm gathering you didn't want to further narrow your pool of targets. Yeah, I felt that to narrow the industry too much would maybe be detrimental. And some people think it's a dirty word, but I'm kind of a generalist. You know, we would joke about in the consulting world, if you've done three months of work in an industry and consulting, you're experienced in the industry. And if you've done six months, I mean, now you're a subject matter expert. If you manage a business for three to six months,

you probably understand 70% of what's going on. The other 30% might take 20 years to learn, but at least you can get your arms around the basics

pretty quickly. My consulting experience was super varied, many, many different industries. And so I felt confident to say I could probably step into an industry I didn't know well. Because you had practice as a learner businesses. Yeah, exactly. So Jeff, how did you pay for the business that you ultimately bought? We'll come and talk about the business itself in a moment, but we understand clearly how you funded yourself and your family while you searched. You kept your job and you managed to sort of search at the same time, but how did you pay for the business?

We had had a condo that we'd owned for a number of years that we used to live in when we were younger. You know, at the time we moved out of that place, we couldn't afford to sell it because it was sort of underwater. So we were forced to rent it and hold on to it. And in hindsight, we were lucky to do so because it had come up quite a bit in value. And so we were able to sell it.

and then take the proceeds from the sale of that condo and use that to put as the down payment of the business. You know, I did the SBA route. - An SBA loan, SBA guaranteed loan. - Yep. You guys describe, oh, they'll lend sometimes up to 90% of the deal value.

My experience was, and this was 19, I don't know if things are different today, but my experience was that they were very willing to go straight to 90%. That's outstanding. So 90% from the SBA, 10% from money from cashing out your rental conduct. Can I ask, were you haunted by the personal guarantee? Did you go to bed at night and say, the personal guarantee?

Right, right, because the SBA loan is terrific in many ways. It's the best thing. It's no covenant. It's 10 years. 10 years to repay. And all you have to do, Royce, right, is just if you make your payment. They don't want to know anything else about what's going on. They don't nag you about anything. They can't say boo if you make the payment. Yeah. Exactly. And that is not the way a commercial banker is. That's right. But you have a personal guarantee. And that's the big downside. Definitely gave me pause. We were –

at the point in our lives and our career where I wasn't straight out of business school. We had some equity that we'd accumulated in our primary home. I had some pause there. I voiced that concern a little bit with the loan officer or agent, basically the woman who was kind of like bird-dogging the deal and trying to get things done, who was fantastic. But I was like, "Gosh, I'm a little nervous about this personal guarantee situation."

I think her role is somewhat a selling role, but she was like, look, the bank doesn't want to own your business. Doesn't. So she's like, if you miss payments and you're in default on the loan, no one wants to go take your house. Bank wants to figure out how to make it work so you can pay back the loan. And I think that reality of what default would actually look like kind of helped me understand. I think that advice you got was good advice, you know, because...

While it requires sober thought when you sign a personal guarantee because something bad could happen, the reason the banks want that is that if things start to go poorly in the business, maybe your equity is not worth anything, but the bank's loan is still worth something. What they don't want is for you, the entrepreneur, just to hand them the keys and walk away. That's the moment they waive the personal guarantee and say, Jeff –

You know, you've got hundreds of thousands of reasons to clean this mess up for us. You do that, they're usually pretty happy. I had some pause about it. I was able to get my head around it. Definitely, there was some sober conversations with my wife, for sure, because it wasn't my equity. It was our equity in the house and the money we were going to spend. Ultimately, she had to become comfortable as well.

When I talk to other people who are considering it, particularly like young MBA graduates, I'm like, well, your net worth is probably like minus $500,000 right now. The personal guarantee is kind of a theoretical thing. It doesn't really mean a whole lot. True enough. True enough. Let's talk about the business that you acquired. So the business you ended up buying was a business-to-business business, right? Primarily. Would you have purchased –

business to consumer business because you were geographically constrained. So would you have done a lawn care company? Would you have done a restaurant? I would not have done a restaurant. I've seen restaurant operations and it's not something that I was interested in. You know, I don't think like lawn care explicitly would have been something I would have been interested in, but I don't think I was averse to a B2C company in general. Thinking back at the deals that I closely evaluated, I

I don't think there were any. The one thing I like about a B2B company is that you're really not asking someone to open their wallet. It's company money. And that mentality is a lot different. Whereas if you're like a lawn care company and you're like, oh, it's not 50 bucks to cut the grass anymore. It's 55 bucks to cut the grass.

And people are like, well, that's five bucks out of my pocket. Where if it's just the budget, people don't care as much. And I think they're less price sensitive as a result. Well, Rick, should we learn a little bit about the business specifically? Yeah, Jeff, tell us about your business. It's a great one. There's a thing called a hydraulic breaking hammer, which is like a jackhammer you see a guy using in the street, but it's like eight feet tall and 10,000 pounds. And it attaches to the end of like a normal excavator instead of like a digging bucket you put this thing on. And basically its purpose is to break rocks.

big rocks into small rocks. They're relatively expensive and they break all the time and they're fairly expensive to fix. So it's a really nice recurring revenue type business. Now, what we did was repaired them in our facility, rebuild them, and then sold them a little bit. And then primarily we sold parts for them all over the country.

So we would sell parts to other repair shops similar to ours that were doing work for their customers. Then we sold parts to people who were also, you know, fixing their own equipment, typically fleet operators. We should think about you as primarily a specialized distributor and bolted onto that. You had a service and repair shop attached. Yeah, maybe a third of the revenue was service and repair.

Repair parts was maybe a third of the business. And then the last third would have been the actual like drill bit, so to speak. They wear down and so they get replaced fairly frequently. While this business wasn't a recurring revenue business like some sort of subscription business where the customer signs up and until they decide to get rid of you, if they ever do, they're paying that regular subscription. The revenue is really predictable.

probably reoccurring because as long as people are breaking rocks apart, these things are going to break and wear out. And it's kind of an actuarial reoccurrence to it. Yeah, there was not contractually obligated revenue, but it was every month recurring. Yeah. Interestingly, in these kinds of businesses, sometimes you can transform it into being a reoccurring business. You know, you can do a service contract. We'll do your annual maintenance. And if it breaks, we'll fix it. Just call us when it breaks and we'll bill you for that.

that. Right. The HVAC industry has transformed itself into that sort of thing. Yeah. That notion occurred to me on the way in. I thought, oh yeah, this would be a great way to maybe achieve that. I think what I found was that our customers weren't really interested in that kind of a model. It's much more like a hand-to-hand transaction of like, when it's broken, I need it fixed. If it's not broken, I've got other things to spend money on. This business has a nice quality to it, which is that

This part is a small part of a construction company's budget or a mining company's budget or a road construction. The way I would think about it is to sell a new one, for example, we might charge $50,000 or $80,000 for this piece of equipment and to rebuild it might be a third of that cost. But

the machine that it goes on that operates this thing, this excavator is probably a half million dollar excavator. So we're not talking about small dollars in our transactions, but in the broader scheme of things, you know, like I said, it's a half million dollar excavator that goes on.

And those companies are burning thousands of gallons of diesel fuel a week running these pieces of equipment. So we're pretty far down their list of cost priorities. And this equipment has to work because they have a whole crew out there. And if this stops working and they don't have the part, it's a big problem. In the day-to-day operations of the business, that exactly was a lot of times the stress that we would experience where someone said, ah, it's broken and I need it to be fixed yesterday. And we tell them, well, the

We need a week and a half to get the parts because it's a special order. And they're like, well, what am I going to do with 10 guys standing around, nothing to do? And to a certain degree, it's the – your lack of planning is not my emergency, but we try to do what we can. That's what you don't say to the customer. Yeah. So – but it all goes to the issue that price is really not that important to your customers. Availability is –

having the right part is, service is. So there's some room to charge a good price in a business like this. Yeah, I think we were able to charge a fair price for the work that we did. I think also it's a niche enough piece of equipment that while there are other people who know how to do the service well and know how to supply the parts correctly, there are plenty of people who thought they could do it, you know, because fundamentally it's a hydraulically driven thing.

And so there are a lot of hydraulic shops, for example, that are accustomed to repairing other hydraulic components and thought, yeah, we could take that on, you know, just got in over their heads. This is the principle, Royce. The interesting principle is it's important to be important to running of the operation, but it's also important to be unimportant in terms of the total dollar outlays. If you were perhaps the vendor of the $500,000 machine, right?

Somebody would say, oh, if we could get that down 20% to $400,000, that's $100,000 we will save. That's really important. Whereas for you, you're important. It has to be there. It has to work. It has to be right. It has to get fixed when it's broken. But you're well down the list of lines that people are going to look at to cut costs.

And nobody's ever going to say, hey, I need this drill bit and I need it today. And my best vendor can get it to me by the end of the week. And somebody is going to say, well,

Well, you know, I think you should spend the week shopping for a lower price. That just doesn't happen. But it will happen for the excavator. Yeah. And, you know, many of our guys, they're not going to buy one excavator for half a million bucks. They're going to buy 20 if they can shave a couple percent off. It really makes a difference, right? Right. Not so much for the parts you were selling. Not for stuff that I was selling. And inevitably, either through just oversight or lack of planning or whatever, the thing that they need so badly, they don't have a spare of.

And nothing ever breaks on a Monday morning. You know, it always breaks on a Friday afternoon. You're just going to work Saturday morning to finish up this job. Now it's an emergency. And now if you've got it, I need it.

Royce, do you like this business or not? I love this business. I like this business too. And I think what I like about it is what you were talking about before, Rick, that the product and the service is really important to customers. It's time sensitive. It has to be right. And it's a tiny part of their budget. And that causes customers to stick with you if you can get the job done, not shop for competitors.

And price is just secondary or tertiary to them. So you can get a fair margin. And you can create a barrier to entry by simply doing your job well. By being reliable. Being reliable. Good service. Jeff, just because Rick and I are business school professors, we tend to think a lot about, well, money. So maybe you can give us some guidance, kind of roughly how much pre-tax profit was the business making each year and roughly what kind of multiple of its pre-tax profit did you pay? What –

whatever you feel comfortable sharing with us. Let's say that it was under a million dollars of EBITDA and I think it was somewhere in the neighborhood of three times to buy it. Listeners, that's a term you will hear often from us and our guests and that you also hear a lot if you search for a company. It stands for Earnings Before Interest, Taxes, Depreciation, and Amateurization, EBITDA. We'll get more into that in later episodes, but just think of EBITDA as pre-tax profits.

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That's a very economical price for a smaller, small firm, kind of at the lower end of the range we point people to of sort of three to five times EBITDA or pre-tax profit. Yeah, and it was a little bit hairy. There was some stuff we had to get comfortable with. Probably the biggest thing was the seller was doing accrual accounting primarily except he was expensing inventory and he didn't have a clear tracking of his inventory.

That was a tough hump to get through in diligence to understand, A, how much inventory is there actually? What's the value of that inventory? And then how does that, if you were to recast things looking backwards, what actually is the earnings in a P&L perspective? We have seen that where people will run their business online.

thinking about their own personal cash flow. And they'll say, oh, I have a little extra money. I don't want to realize the higher income tax bill this year. So what I'll do is spend some money on the business. They'll expense it.

But that's not gap accounting, right? It's hard to figure out what the earnings are. In a reasonable world, you would take that incremental contribution to inventory and add up the earnings, but you actually have to know what that is. And oftentimes, it's very clear when you do it

But two years later, you can't really remember why you did it. Right. And the guy that I bought the business from, he was very much a self-made guy. I think he told me at one point he had a fourth grade education. I mean, he's a remarkable character. The business I bought from him was actually the fourth business that he had started and sold. He was very much a seat of his pants kind of finance guy in the sense that he's like, well, I've got money and I'm going to do it.

I could either have that money sit in the bank or I could have it as inventory on the shelf that I could potentially sell to somebody. But inventory management is hard. It is absolutely hard.

It's the kind of thing that mathematicians and operations research specialists spend their careers trying to optimize. But, of course, that's not how he did it. No, he just expensed it because that was easy. Yeah, he just did what felt right. And I don't blame him for it. I mean, he was trying to run the business, not be an inventory control specialist. Yeah, yeah.

So this part of the purchase you're highlighting was hard. You had to make some estimates on what's the inventory worth? What are the real profits derived from buying this inventory and reselling it? You had to solve that problem, which it sounds like you did because you bought the business. We were able to solve it to, you know, a certain level of satisfaction, right? We never got to say like, oh, this is signed, sealed, delivered, like clearly exactly what things were. But we got to the point where we said –

okay, as near as counts, this is going to be close enough. Did you have the skills to go back and backcast their financials? No. It's a smaller transaction. So you also didn't have the budget to pay an accounting firm to really dig in hot.

So what did you do? Did you learn enough accounting? Yeah, I learned a little bit as I went. A terrific friend from business school who is a CPA and in the diligence process, he kind of did a lightweight proof of cash for me as kind of the first step just to understand what's actually even really there. We understood the cash flow side of it and then we kind of had to unpack

From cash flow P&L. Because if you did a proof of cash, you would have immediately seen that he's expensing inventory. Yeah. I hadn't really thought about that. But it's an interesting insight that you get from all the other insights from using a proof of cash.

Right, because at the end of the day, you see the dollars coming into the checking account and you see the dollars coming out of the checking account. And if there's, say, a million dollars of difference, that's kind of the pre-tax profit. I mean, you can work your way towards it. Yeah, you can sort of get there, right? Sort of approximately.

Yeah. Which is what the proof of cash is. I think the important thing to remember is, as you said, Jeff, you don't need to get this exactly right because the way you're constructing this transaction, I know you just gave us guidance on the numbers, but if we use those, if the business did a million dollars of pre-tax profit and you're paying around three times for it or $3 million, that is a business that's generating a 33% return on that purchase price. Yeah.

Which is really good. And you can have forward some room for error in these calculations because that's an amazing... You're not on the razor's edge. You're not on the razor's edge. We talked earlier about margin solves problems, right? Margin solves problems. And you can take that same notion to the deal as well, right? If you consider like the deal having margin at three times, you can accept a certain amount of hair on a deal. Exactly. There's room for error.

Doing a proof of cash is a really valuable due diligence step, best done shortly after you and the seller sign a letter of intent and you are starting your close examination of the business. It's not complicated to do, and you are trying to confirm something really important before you do lots of other work.

Let's say the seller has told you that in each of the last three years, the business had sales of $5 million and pre-tax profit or EBITDA of $1 million. You want to check that that is true. How do you do that, Rick? Royce, you take three years of bank statements and check that in each year there are $5 million of deposits. That would be the revenue.

and that $4 million of checks are written for expenses, leaving $1 million left over. This won't tie out perfectly. There will be timing differences between billing customers and when the business actually collects the cash from those sales, and other differences. But it should be close. Yeah, and that's okay in your initial proof of cash. You aren't trying to tie out these numbers this early.

Later, if your business due diligence gives you a green light, you'll bring in an accountant to examine the books, and as part of that, they will do a highly accurate proof of cash, which your bank will also want to see. But for now, it's enough that you see that the cash revenue, expenditures, and what's left over are roughly similar to what the seller was telling you.

On the other hand, if your proof of cash keeps showing only $500,000 left over each year instead of a million dollars, you need to either get a good explanation from the seller or walk away. The other thing about a proof of cash that's really important, I think, is that you learn how the business makes money. You learn where the revenues come from. You learn what they spend money on. And it's a way of getting to know the business in a more intimate way than you had before.

Prior to signing your letter of intent and getting into the confidential information. Completely agree. Now back to our conversation with Jeff.

I love the business. I understand you sold it. Why did you sell it? We talked earlier about a geographically constrained search. And, you know, with any search, you're never going to get everything you want. The geographic portion of my search is the biggest compromise that I made. So this was a little bit farther than my ideal commute. In the beginning, it was all right. During COVID, it was actually pretty great because nobody was driving anyway. Yeah.

But after COVID, it became almost twice as bad because nobody takes transit anymore. And so particularly in the Boston area, you know, many roads were still like less traveled. But in fact, my commute route was one of the roads that was most heavily impacted post COVID. So it was becoming a two hour trip home. And it was just crazy. I just couldn't do it. I feel like, you know, it took us a while to get out of COVID. It

It felt like finally we had some momentum. The business was really kind of on the trajectory that I sort of thought it was going to be on when I bought the business before COVID. We're doing great. And the smart decision would have been to hold the business and continue to operate it. But I just personally, my family needs just didn't allow it any longer.

And you had run it for about how long at the point where you were saying, I just can't commute like this anymore? It was about four and a half years from close to close. Putting the commute aside for just a moment, was it a satisfying experience running your own business? Absolutely. When I closed the sale at the end of last year, I thought to myself, I'm not necessarily going to rush back into that. But now, four months later, I'm thinking maybe I will rush back into that. I don't know. But I think all in all, it was great. It's a

a very, very different role than being a worker or an employee, but I think in a good way. And I liked it quite a lot. Can you take a moment and just tell us what some of the main differences are between, you know, having a job, a good job in someone else's company and being the CEO?

There's pros and cons, obviously, to anything. I think the challenging parts of it were there's no one that you can punt to when there's a problem or you're not sure how to move forward. It was up to me, right? For example, inventory management. I got paralyzed by inventory management for a while trying to figure out the right answer. I just...

didn't know where to turn to move forward with that strategic project, but it falls to me. But I think also like the stress is different. I don't think it's less stress or more stress, but it's just a very different stress. I think about it in the consulting world, for example, you're stressed because there's a tight deadline and we're stressed because the client is being difficult or we're stressed because the boss has, you know, unreasonable expectations of us or whatever. And that's like,

I would think of that as sort of an active stress and I would maybe finish up a day and feel like I needed to decompress. Whereas being the boss sitting in the chair, I didn't feel those stresses as intensely. But what I did feel was kind of like this background stress of a what if, like what if my key man...

decides on Monday he's not going to come to work on Tuesday? What if our biggest customer stops calling? It doesn't shut off. Right, that two-hour commute is just like the perfect time for that free-form anxiety. You're just there and you're stuck in traffic and you're, oh, darn.

Darn. Yeah. What if this happens? What if that happens? What if the aliens land on my shop? Well, that's why I have a really big tinfoil hat. Yeah. But it doesn't – knowing that you need to manage it doesn't make it go away.

Certainly, like, okay, if you're feeling certain stresses, maybe you try to take mitigations for those things. But there are certain things you can't control for. Like, I couldn't really control for what my customers are going to do, and I can't really control for what's going on in the lives of my employees, you know. And somebody could leave the company not because they've got any problem with the company at all, but just because their personal situation has changed. Yeah, a parent gets sick and they decide to leave the state. Yeah.

That's nothing about you. And similarly, a customer could lose their big contract and now they don't need you anymore or they shift from road construction to some other kind of construction. It could be three steps down the chain of causation. And suddenly, no way you can mitigate three steps down the chain.

And sometimes it's hard to even know it. And that is that sometimes the piano can fall on your head and you didn't even know there was a piano above your head. And that's an essential difference from being a boss and being an employee, which is no matter what you did or didn't do, the responsibility ends up being yours. It doesn't go to somebody else. And I felt that intensely, right? Like I felt an obligation to the people who worked for me.

and to my customers. And during COVID, for example, my number one priority was to make sure that we didn't miss a payroll, you know, because I'm the guy sitting in the chair when things go well, hopefully I get the bigger paycheck, but

The other side of that bargain is that when things don't go well, I don't get a big paycheck, but I've got obligations. And these people that are working for me, they're making blue-collar money. They depend on you. They depend on it. I just say, though, that I think there are very few opportunities in life in which you can make money and not have risk. I think the difference is in the CEO role, you can look ahead and see where those risks are. Yeah.

And maybe you don't have great visibility on all of them, the ones that might be three steps down the road. But you understand who the customers are. You understand why they buy from you. You understand why the customers are getting jobs by their customers.

And I think in other businesses, you have the exact same risks. They're just opaque. You can't see them. And you ask your boss and say, hey, boss, it seems like nobody's buying buggy whips anymore in the boss's house. No, it's perfectly fine. Horses are coming back. It's all going to work out. Just chill and do your job and then...

You know, the next day or the next week you might discover that the aliens truly have landed and automobiles were invented. Well, I think that's right. I think that there's the illusion that there's no risk in big companies and some risks go away. The company is unlikely to disappear, but that's not the same as your job disappearing. Well, I mean, I think to that point, too, I wasn't trying to withhold any information from anybody, but I was trying to compartmentalize things to a certain degree.

My warehouse guys and my shop guys, they didn't really need to know what the big picture of the business was per se, right? But our revenue was up considerably from years prior. Our profit was up considerably from years prior. Yet the guys in the shop...

felt like they didn't have as much work. And so they were nervous. They asked me like, is the business doing okay? Like, cause we're nervous. It feels like we're not busy in the shop. By the numbers, they actually were busier in the shop. Just turns out that some of the changes that we'd made to the way we work,

Some of the skills that they had developed by being a little bit more empowered to create new ways of working and also the quality changes that we'd made over time. They were getting work done more quickly, so they felt less busy, yet objectively they were putting more work through.

That's fabulous. What a great story. We're almost out of time, but Jeff, we always ask our guests if they have any questions for us. Since it started with our book, I feel like I'm really nervous asking this question. Because I've got you both here and you wrote the book, I'm in this position now where I made a little bit of money on the business. I made enough money to buy myself a little bit of a sabbatical and a little bit more financial security, let's say, but certainly not enough where I don't have to work any longer.

You know, Rick, you and I had spoken a little bit about what do I do next. You feel like I should buy another business. I do. I'm kind of at a crossroads here. I think I could be happy running another business, but I'm also wondering if there's other ways to kind of put this experience that I've developed to work. But Jeff, before we answer your question, I want to just ask you a question, which is it sounds interesting.

Through its absence, like one option is not going back and working for someone else as an employee. I don't think that is actually off the table based on other things you and I have talked about, is it? Yeah, I think the day after I sold the business, a lot of that background stress lifted off. And I thought to myself, I could probably be happy just being a worker for a little while.

Now it's got to be the right role. And I feel like having been a boss, I feel like I could probably be a better employee than I was as an employee. There is an element too of I have a different relationship with employment now than I have ever had in my life where like,

You can quit. You can't tell me to do that. Right. You know, like at a certain point, like I don't really want to do that. And they're like, well, you have to. I'm like, well, I don't. I may not push that button ever, but knowing that the button existed might give me sort of enough freedom of the ego to be like, yeah, I can take lumps differently. Yeah. There's a phrase for that, but I guess we can't say that on the podcast. Yeah. Uh-uh.

If the deal that I had done had another zero or another comma in the thing, you know, I would be perfectly happy to just enjoy my time skiing and being in the mountains. But there's, you know, certain financial realities that come to play. So I need to make some money still, you know. Yeah. Royce, I'm interested in what you think about this. My answer is when you do something well and it succeeds, why not do it again? Yeah.

Rick, that's my answer too. I'm a big believer in if something works for you, do it again. Nothing succeeds like success, Jeff. And you were really successful at it.

Why not do it again? And we've seen people who do what you've done and do it over and over and over again. And typically, I think, Royce, tell me if you disagree, but typically people will upsize. So you took on no outside investors. Maybe you have a little bit more confidence now and you would take on a bigger acquisition and bring in more.

more outside equity, perhaps keeping control, perhaps not. Perhaps a business that has more growth potential, maybe not. As a result, what we found is that people tend to make more money on each successive deal. And eventually they find one that they either want to stay in a long time because it really fits them, fits their family, fits their lifestyle,

Or just keep on trading and then eventually have enough money after a few of these, maybe four, who knows, that you get to retire at 50 or 60. Yeah.

I mean, that certainly has appeal. We've talked to lots of people over the last 15 years who have sold their businesses. And what we never find is people who are then happy working for other people. I mean, maybe in one instance we're aware of it, but it is pretty rare. That's right. You're as close as they come where you are speculating that you could be happy, but only if you had that button that you could push. Sure. And as soon as you have that button, you don't really have a job. Yeah.

Yeah. It's all good stuff to think about. And I'm working both angles, you know, I'm sort of seeing if there is that job that just seems like a great fit for what I'm interested in. And then I'm also currently I'm searching again. So if any podcast listeners are interested in selling a business. Again, in Eastern New England. Yeah. In Eastern Massachusetts. Maybe parts of Southern New Hampshire and Southern Maine. Just call Jeff Duckworth. Yeah. Give me a call. Other question I had for you guys now that I'm thinking about it is the

The biggest challenge that I felt in both sides of the transaction, the biggest thing I couldn't control was lease transfers. And the leaseholder basically can own the deal. Yeah. So just for our listeners, most businesses rent the space they operate in. The landlord has the right to consent to the transfer of the lease to the buyer and they can just say no.

And usually this is left late in the deal. Exactly. Because we couldn't bring in the landlord too soon because, you know, you got to keep things close. The seller was nervous that if the deal didn't make, he didn't want it to start getting out. This happens all the time. You know, Rick, I'd be interested in your reaction. I think this is –

always an anxious point for buyers and sellers, and always takes a little longer than they expect to get the landlord to consent. But I've never seen a situation where a deal actually fell apart because the landlord said no. Almost always, they just want to keep renting their building. Maybe they extract a fee. Yeah. On the sale transaction, it felt like maybe there was a

a little bit of rent-taking behavior going on. Yeah, and that happens, but I've never seen it actually be a deal-breaker, Rick. What do you think about that? So I actually distinguish between two kinds of real estate situations. One, where the real estate is really integral to the business, that you just can't imagine moving. One of my favorite examples is I had the opportunity with a

young searcher to tour a candy manufacturer in Massachusetts. And they made kosher Christmas candy. So it's kind of a distinctive business. And they were selling the real estate separately from the business. But the real estate was so integral to the business because throughout the building, they had these pipes in which hot steaks

sticky stuff. Right. There's no way you're moving that. There's no way. You can't move it. You can't move it across the street. It's just without the building, you can't run the business. So there, the idea that you're buying the business and the real estate separately, you're going to have a lease arrangement. I think that's really problematical because it's a key asset in which you don't own. And I distinguish that from a business, which is just

in a suite in an office park. You fold up the laptops. Fold up the laptops, move your internet, move your server. It's going to take a weekend. It's no big deal. Right. And I think then it's perfectly fine. And I think those aren't the landlords who tried to hold you up. I think it's the former. Yeah. And I think you can recognize that when you start looking at your business and

You know, I don't know how many of our listeners are owners of small businesses, but this is an idea that if you're thinking about selling your business, one of the things you should do is get your real estate in order. Get that lease to be assignable for three years.

Well, three-year assignable lease isn't even going to cut it, right? If it's an SBA 10-year note, it's got to be a 10-year lease. My experience was that the lenders want to see a lease with options extending to the term of the loan. If the property is essential to the business. Well, I think the default mode is lease to the term of the loan. It could be options. And if you want to try to waive that, you need to demonstrate that moving wouldn't be disruptive and it's not integral.

- Interesting. - That's interesting. Well, that makes sense. - But it's to the point, like my experience with it was enough that it makes me feel like as I search for another business, if there's a lease that needs to be assigned,

It's almost a red flag for me. Unless I feel like it's we can fold up laptops and move in a weekend. One of the things that always surprises Royce and I is that so many businesses own the real estate that their businesses operate. And we always think, well, why do you want to own the real estate assets? Own the operating assets, own the business, put your energy and capital into growing your operating business, not your real estate. But maybe it's this other thing, this sort of unknown thing.

Well, I think particularly small business owners think differently than corporate businesses. Many markets and many times you can own the real estate for sort of the same price as the lease. And yeah, there's certain P&L efficiencies to a lease over owning it. But in the long run, you know, if it is the business you've built and you plan to own it for 30 years, like probably benefit by having the real estate. It's just a risk mitigation thing.

Jeff, thank you so much. It's been a pleasure getting to know you a little better and hearing about your journey. It's really great. I appreciate all the guidance that you guys have given me through the process, mostly by way of the book, but as well as just speaking with Rick over time as well. So I'm happy to be here. Well, we're excited to watch your journey as it continues to unfold. A lot of new and exciting chapters yet ahead.

I really like Jeff Duckworth's story. It's a classic example of a self-funded search that transforms someone from working in someone else's company to working for themselves. The thing I like best about it is that the economics of this very straightforward acquisition are so good for the searcher. And most importantly, the economics are so good because the multiples of EBITDA at which good smaller firms sell are attractive. In Jeff's case,

Three times EBITDA. Rick, do you want to share that saying you have about buying smaller firms? Absolutely. The magic is in the multiple. And why is that? Well, a little math makes what Jeff did very clear. He bought a business that makes a million dollars a year for $3 million. That means every year he makes a 33% return on his investment.

$1 million over $3 million. Said differently, he makes a third of the amount he spent on the business each year. Think about, just as an analogy, if you were buying a house, if somehow your house purchase price equaled only three times your rent.

That's a really good deal. But like most searchers, Jeff borrowed money to buy the business. So the returns to Jeff are even better. Jeff borrowed $2.7 million in an SBA loan. That loan cost about 10% a year in interest or roughly $270,000 in interest in his first year of ownership.

That left about $730,000 each year in pre-tax profit for Jeff. So he put in $200,000 and each year he gets $730,000 of cash.

I think this summarizes why people become interested in entrepreneurship through acquisition. It's an opportunity for meaningful wealth creation, being your own boss, and for making decisions that matter. And to do this, you don't need to be a millionaire or someone who's owned a business before. Or a finance guru. Or a finance guru. Hard work is involved, and there are surely risks, but these risks are a lot less than starting a business from scratch.

We'll be back in the next few episodes meeting other searchers and also diving into the how-tos of some important parts of searching. We look forward to reconnecting with you then. You've been listening to Think Big, Buy Small. We're your hosts, Royce Yudkoff and Rick Rubeck. Katie Zandbergen produced today's episode. Craig McDonald is our audio engineer. We'll be back next week with another episode of Think Big, Buy Small.