Rick Ruback
speaker
94 appearances
1 recordings
1 series
first heard May 2025
last heard May 2025
Rick Ruback’s voice in public audio — every appearance, attributed to the second.
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My guests today are Rick Ruback and Royce Yudkoff. Rick and Royce are Harvard Business School professors who teach their students how to search for, acquire, and run small businesses directly after graduation. It's nuts, but it's been almost a decade since our first conversation.
And unlike many past interviews that become outdated due to technology or market changes, the core principles they shared about entrepreneurship through acquisition remain remarkably relevant today.
They explore fascinating developments in the search fund ecosystem, including the bifurcation between funded searchers targeting larger companies and self-funded entrepreneurs finding success with smaller businesses.
Rick and Royce share their accumulated wisdom on what makes a company worth buying, why the magic is in the multiples, and how their students consistently achieve impressive returns through patient, value-oriented business acquisition. Please enjoy my second great conversation with Rick Ruback and Royce Yudkoff.
Royce, what would you add to that? Well, first of all, I agree that that's the major change.
And I'd just like to spend a moment adding to what you said and then offer one additional change, which is that in the United States, we have this amazing opportunity that's created by the SBA loan program where every American citizen has the right to borrow up to $5 million in this government-backed loan program.
which allows them to buy an established, proven, profitable business with up to sort of 80% or 90% leverage. And that in turn enables these acquisition entrepreneurs to line up the equity they need, give it a very attractive return, and own 70% or 80% of the business, even though they don't have any capital but for their sweat equity and talent.
And to Rick's point, that's proving to be an attraction to many very talented people. The other less important change that I'd add, but still notable, is when Rick and I started teaching 15 years ago and through 10 years ago, our entrepreneurship through acquisition program, everyone who went into it wanted to be an entrepreneur and run their own company.
I think more recently, we've seen a minority stream, but a meaningful minority of people who kind of look at this opportunity as independent sponsors. They go into it. They don't want to run a company, but they want to buy a series of small companies and put managers in. And Rick, I'd say that's a change. It's not as important as the one you mentioned, but it's certainly notable.
Yeah. From investors, I'll break it into two groups. In the funded search, Stanford has done a good job of tracking returns on funded search through an annual report they do since forever. And it's shown that the returns to investors are in the low 30s of IRRs. So if you compare that to big private equity, the average returns are sort of in the low to mid teens.
So it's a huge premium you get from being in this market. We think those numbers are slowly trending down a bit, but they're still way above the closest asset class, which is private equity. In self-funded search, where you have these students raising money to buy $1 million-ish EBITDA companies, $1.5 million, and buy them at four times, and finance them at 80%, the math is just extraordinary.
If you buy something for four times, you're generating a 25% return on assets before any growth. You lever that at 80% with, say, debt that costs eight or 10%, and the return is astronomical. you pay your investors a portion of the common equity that gets them to a targeted return of 35%. That's the market clearing price in self-funded search.
And the searcher is able to keep 60% or 70% of the common stock for themselves. So deals are smaller, but the rewards are high. So that's the kind of math The one other point I'd make is on risk, particularly on the self-funded side.
You're buying at multiples that are so low that generally, even when things don't go right, the cash flow yield pays down the debt very quickly and mitigates a lot of the downside. So it's a pretty good trade. You can see why people get interested.
It is hard to get a zero.
It is flowing. Yeah, your surmise is exactly right, Patrick, and Rick's comment is exactly right. What we see today, it's funny, we started this podcast by saying maybe there hasn't been much change, but indeed there hasn't, like all your other interviews, Patrick. So Rick is right, it's flowing. When we look at the market today,
There are more investors who want to get behind talented, well-prepared searchers than there are well-prepared searchers. So the choke point is this number of searchers, even though that's grown quite a bit. But there has just been a huge flow of capital.
not on our list is growth. Not because we're against growth. We welcome growth, but you don't need growth in this market because good companies sell at attractive prices. And Rick came up with this expression that we've both embraced, which is the magic is in the multiples in this market. So if I were to knock off the list that Rick and I iterate, the first one is recurring revenue.
We really want high quality revenue. And there are all types of different recurring revenue from the contracted revenue that's impossible to pull out to sort of actuarially repeating, but very high quality predictable revenue so that when you show up in your office every January 2nd, 80 or 90% of the revenues from last year, you know, are going to repeat this year. It gives you great stability.
It pairs nicely with financial leverage. And it allows you to be on the offense in marketing, meaning that all of your marketing time is basically spent growing, not replacing. So that'd be one. Low customer and vendor concentration.
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