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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Appearances
That doesn't occur so much in big private equity where you're dealing with big companies, but it occurs a lot with small companies where they have one big legacy client. And so you really want to try to avoid concentration with customers or vendors would be number two. Third, avoid economic cyclicality. Again, it pairs poorly with the financial leverage you'll need to buy this
To Rick's point, often we have people express astonishment to us that the newly minted MBA who has maybe five or six years of middle managed experience can go into a business they've never operated in. And the percentages are very high for successful operation of that business. And how can that be?
And the reason it can be is partly they're talented, energetic people, but it's the point Rick has just made, which is they're selecting for businesses that they feel they can fit with and learn how to run. They're not randomly picking businesses on this dimension. They're choosing very carefully because they're aware of that risk too.
Right. And when we call them, they say, it's just like running a platoon.
I thought it was so interesting. So what Rick's referring to is we assemble a library of recent small company purchases from a network of cooperative brokers. And the students filter through those and then come up with a company they really like. And then they break into groups of six or seven of our students who have done the same thing.
And they collectively come up with which is the best company to buy. And so you have 14 or 15 groups now in our class. And what, about 100 companies, about 100 sims that they've paged through and looked through. And the result is they come up with about 12 different companies. There's no consensus on this. They're different.
I think on this point, we arm our students with this list that we've just gone through. It's a filtering criteria. But the truth is, you're never going to find a company that has all of those boxes checked, particularly if attractive price is on the list too, which it surely is. You're just not going to find that have all of those qualities.
And so the piece that we really try to tune our students into is that they have to develop judgment about how good is good enough. And they do that by, as Rick and I like to say, bathing in deal flow. And eventually you start to see what different qualities of companies are. And you see that next company, you say, okay, it has five of my seven criteria, but it's in the upper quartile.
So I ought to keep working on this because this is a good one. That's the other piece that's really hard to teach, but you can teach people to keep their eyes open to judgment.
The way most searchers like to structure their cap table is they like to have 10 or 12 different investors. Some investors push really hard to get a big chunk of the cap table of these funds for the reasons you asked about. But for the most part, searchers want a diversified base of investors for a variety of reasons. They want a variety of advisors and voices.
They want to diversify who owns their business. And so that naturally invites a dispersion among investors. So I'm with Rick. I don't see the Harvard, Stanford searchers as dominated by two or three or four big institutional investors.
So Rick and I, since we launched our podcast a couple of years ago, which is really directed beyond the business school campuses, it's got us more tuned into what's going on away from the MBA ecosystem.
And that's a world which, unlike the business schools, is overwhelmingly self-funded, using SBA loans, tuning into smaller businesses that Rick was describing, this kind of $750,000 million EBITDA businesses. That world today dwarfs what we talk about in the MBA world.
It's actually got its own population of individual recurring investors writing quite small checks for the reasons of the math we discussed earlier. It's got many times the number of participants
all of whom are able to get this favorable government-backed financing, line up investors, buy these attractive businesses at low multiples, and often don't have MBAs, but have a lot of useful professional experience or just outside this top MBA schools. And it is a big opportunity. big place out there. Rick, would you add anything to that?
I think your description is exactly right, Patrick, which is the seller who is the center of the bullseye for searchers is someone who is an expert in this product or service and started their business and spent 25 years building it. And now they're 65 years old and have run the business for 20 years and several things have changed. One is the business has gotten larger and it really, at the top,
no longer needs an expert artisan, but it really needs a trained manager. And this person isn't that in most cases. If it's a blue collar business, maybe it was an HVAC guy who got fired, bought a truck, built up a business. It makes a million and a half dollars a year, but it really needs a manager at this point because it employs 60 people and has lots of customers.
Second, the business is at a size where he really doesn't have an understudy CEO in that business. It's not like a larger company, which has a thick bench of talented middle managers. And so he needs someone or she needs someone who can not only organize the capital for the transaction, but can then step in and run it because he has no internal successor. Because if he or she did,
They could retire and just keep owning the business. Some businesses are suited to that, but most businesses aren't. And the third thing is they've reached an age where, as Rick and I like to say, they now have more money than time and they're behaving accordingly. They don't want to work Fridays anymore to launch a new territory, but a searcher who's not wealthy and energetic and hungry, they do.
And levered. And levered. And levered. And so this is the catalyst moment. This is why these sellers sell to searchers. And this is why the searchers see opportunity there. But Rick, I don't know if we have a view that somehow we're at a peak of supply.
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