![Royce Yudkoff & Rick Ruback - Entrepreneurship Through Acquisition - [Invest Like the Best, EP.423]](https://s3.castbox.fm/59/20/0c/072a906e782a468b7150f3a80b905be645_scaled_v1_400.jpg "Royce Yudkoff & Rick Ruback - Entrepreneurship Through Acquisition - [Invest Like the Best, EP.423]")
Royce Yudkoff & Rick Ruback - Entrepreneurship Through Acquisition - [Invest Like the Best, EP.423]
1Digest
This podcast explores the dynamic world of small business acquisitions, focusing on the strategies employed by both funded and self-funded entrepreneurs. The discussion highlights a significant bifurcation in the market, with funded searchers targeting larger companies and self-funded entrepreneurs focusing on smaller, more manageable businesses. Key criteria for selecting acquisition targets are emphasized, including recurring revenue, low customer/vendor concentration, and avoidance of economic cyclicality. The podcast also analyzes the risks and returns associated with these acquisitions, comparing them to private equity and venture capital. The accessibility of capital, the role of SBA loans, and the increasing involvement of institutional investors are discussed. The conversation delves into the types of businesses suitable for acquisition, the role of technology in driving growth, and the common avenues for margin expansion. Finally, the podcast reflects on the success of a specific entrepreneurship through acquisition (ETA) class and its impact on students' careers, as well as the future of higher education and the evolving role of practical, case-based learning.
Outlines
Entrepreneurship Through Acquisition: A Market Overview
The podcast introduces the concept of entrepreneurship through acquisition (ETA), highlighting the current market trends and the division between funded and self-funded search strategies targeting different sized businesses.
Funded vs. Self-Funded Search Strategies
A detailed comparison of funded and self-funded search fund strategies, including their respective risks, returns, and access to capital. The role of SBA loans and independent sponsors is also discussed.
Risk, Return, and Investment Strategies in Small Business Acquisition
A comprehensive analysis of the risks and returns associated with small business acquisitions, comparing them to private equity and venture capital. The unique characteristics and potential rewards of this investment strategy are highlighted.
Identifying Promising Acquisition Targets
The podcast outlines key criteria for identifying promising acquisition targets, emphasizing recurring revenue, low customer/vendor concentration, and avoidance of economic cyclicality. Managerial fit and geographic considerations are also discussed.
Capital Allocation and the Investor Landscape in ETA
This section explores capital accessibility for searchers, investor concentration, and the expansion of the search fund ecosystem. The increasing involvement of institutional investors and the shift towards a venture capital-like portfolio approach in funded searches are discussed.
Technology, Business Types, and Value Creation in Acquisitions
The podcast examines suitable business types for acquisition, focusing on recurring revenue and stable markets. The role of technology in improving efficiency and growth, along with common reasons for margin expansion and top-line growth, are explored.
The Success and Evolution of an HBS Acquisition Class
The professors reflect on the success of their entrepreneurship through acquisition class, highlighting its practical approach, case studies, and strong student-teacher relationships. The keys to its popularity and ongoing impact are discussed.
Reflections on Private Equity and the Future of Higher Education
Royce discusses his transition from private equity, reflecting on his motivations and the future of higher education, emphasizing the value of practical, case-based learning.
Keywords
Search Fund
A type of investment fund where a team searches for and acquires a small to medium-sized business. Often involves self-funding or limited external capital. High potential returns but also high failure rates.
Entrepreneurship Through Acquisition (ETA)
A strategy where entrepreneurs acquire existing businesses rather than starting from scratch. Leverages existing infrastructure and customer base for faster growth.
SBA Loan
Small Business Administration loan program in the US, providing government-backed financing for small business acquisitions. Enables entrepreneurs with limited capital to acquire businesses.
Recurring Revenue
Revenue generated from ongoing subscriptions, contracts, or other predictable sources. Highly valued in small business acquisitions for its stability and predictability.
Due Diligence
The process of investigating a business before acquisition. Crucial for identifying potential risks and ensuring the accuracy of financial information.
Multiple
A valuation metric used in acquisitions, representing the price paid relative to earnings or revenue. A key factor in determining the attractiveness of an acquisition target.
Self-Funded Search
A search fund strategy where the entrepreneur finances the search and acquisition without significant external funding. Often involves personal savings, family loans, or spouse funding.
Funded Search
A search fund strategy where the entrepreneur receives external funding to finance the search and acquisition. Typically involves larger acquisition targets and higher risk.
Acquisition Target Selection Criteria
Key factors considered when choosing a business for acquisition, including recurring revenue, low customer/vendor concentration, and avoidance of economic cyclicality.
Margin Expansion
Increasing the profit margin of a business through cost reduction or price increases. A key driver of value creation in acquisitions.
Q&A
What are the key criteria for selecting a successful acquisition target in the small business space?
Key criteria include recurring revenue, low customer and vendor concentration, avoidance of economic cyclicality, and a business the acquirer can manage. The ability to identify and capitalize on opportunities for growth and margin expansion is also crucial.
What are the major risks and potential returns associated with small business acquisitions, and how do they compare to other investment strategies?
Major risks include failure to find a suitable business and acquiring a fundamentally bad business. Returns in funded searches can reach the low 30s in IRR, significantly higher than private equity averages. Self-funded searches offer even higher potential returns due to lower multiples and high leverage.
How has the search fund ecosystem evolved over the past decade, and what are the current trends?
The market has bifurcated, with funded searchers targeting larger companies and self-funded entrepreneurs focusing on smaller businesses. The role of SBA loans has increased, and more institutional investors are participating, leading to a more venture capital-like portfolio approach in funded searches.
What advice would you give to someone who wants to conduct a search to buy a business without formal training in this area?
Commit to the process, network extensively with brokers and business owners, and focus on building relationships. Don't over-theorize; start by having conversations with business owners and immerse yourself in the deal flow. Learn from experience and develop your judgment.
Show Notes
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 business directly after graduation. It has been almost a decade since our first conversation, and unlike many past interviews that have 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 conversation with Rick Ruback and Royce Yudkoff.
For the full show notes, transcript, and links to mentioned content, check out the episode page here.
-----
This episode is brought to you by Ramp. Ramp’s mission is to help companies manage their spend in a way that reduces expenses and frees up time for teams to work on more valuable projects. Go to Ramp.com/invest to sign up for free and get a $250 welcome bonus.
–
This episode is brought to you by AlphaSense. AlphaSense has completely transformed the research process with cutting-edge AI technology and a vast collection of top-tier, reliable business content. Invest Like the Best listeners can get a free trial now at Alpha-Sense.com/Invest and experience firsthand how AlphaSense and Tegus help you make smarter decisions faster.
–
This episode is brought to you by Ridgeline. Ridgeline has built a complete, real-time, modern operating system for investment managers. It handles trading, portfolio management, compliance, customer reporting, and much more through an all-in-one real-time cloud platform. Head to ridgelineapps.com to learn more about the platform.
-----
Editing and post-production work for this episode was provided by The Podcast Consultant (https://thepodcastconsultant.com).
Show Notes:
(00:00:00 ) Welcome to Invest Like the Best
(00:05:23 ) Changes in the Small Firm Acquisition Space
(00:06:52 ) The Impact of SBA Loans on Acquisition Entrepreneurship
(00:08:55 ) The Evolution of Entrepreneurship Through Acquisition
(00:10:09 ) Risk and Return in the Search Fund Model
(00:13:38 ) The Role of Investors in Funded and Unfunded Searches
(00:19:33 ) Criteria for a Good Acquisition Target
(00:28:36 ) The Growing Popularity of Self-Funded Searches
(00:43:21 ) Challenges and Red Flags in Small Firm Acquisitions
(00:49:47 ) Exploring Margin Expansion and Growth
(00:51:02 ) The Impact of Practical Teaching in Business Education
(00:52:12 ) Keys to a Successful Business Class
(00:53:30 ) The Role of Theory in Practical Business Education
(00:55:29 ) Challenges and Rewards of Teaching Business
(00:57:46 ) Capital Allocation in Small Businesses
(01:00:50 ) Advice for Aspiring Business Searchers
(01:03:45 ) Value Creation and Business Lifecycle
(01:08:20 ) Deciding to Leave Private Equity
(01:11:20 ) The Future of Higher Education in Business
(01:16:06 ) Ongoing Relationships with Former Students
(01:18:45 ) Favorite Business Cases to Teach
(01:24:46 ) Encouraging More People to Pursue Business Ownership
![Krishna Rao - Anthropic's CFO on Compute, Scaling to $30B ARR, and the Returns to Frontier Intelligence - [Invest Like the Best, EP.471]](https://megaphone.imgix.net/podcasts/fdfca472-4e43-11f1-bf1a-cf5adcc9aeb5/image/b1ed0c54d8c57aae09fe68adc7d1fb32.jpg?ixlib=rails-4.3.1&max-w=3000&max-h=3000&fit=crop&auto=format,compress "Krishna Rao - Anthropic's CFO on Compute, Scaling to $30B ARR, and the Returns to Frontier Intelligence - [Invest Like the Best, EP.471]")
![Brian Chesky - AI Founder Mode - [Invest Like the Best, EP.470]](https://s3.castbox.fm/7c/06/b3/41f1531be8c320417bb85935bb4ea122f7_scaled_v1_400.jpg "Brian Chesky - AI Founder Mode - [Invest Like the Best, EP.470]")
![Paul Tudor Jones - Lessons From 50 Years in Markets - [Invest Like the Best, EP.469]](https://s3.castbox.fm/cf/cf/a2/b2065eb2d7a5f123f5c56abc6b88e732b3_scaled_v1_400.jpg "Paul Tudor Jones - Lessons From 50 Years in Markets - [Invest Like the Best, EP.469]")
![Dylan Patel - The Infinite Demand for Tokens, Claude Mythos, and Supply Constraints - [Invest Like the Best, EP.468]](https://s3.castbox.fm/17/81/d4/6584562b983a3b674d3366482762b516c1_scaled_v1_400.jpg "Dylan Patel - The Infinite Demand for Tokens, Claude Mythos, and Supply Constraints - [Invest Like the Best, EP.468]")
![Alex Karnal - The Trillion-Dollar Health Revolution - [Invest Like the Best, EP.467]](https://s3.castbox.fm/09/6b/6f/ec06afdfde0a984b329882fdf9d4142ff4_scaled_v1_400.jpg "Alex Karnal - The Trillion-Dollar Health Revolution - [Invest Like the Best, EP.467]")
![Scott Nolan - SpaceX, Founders Fund, and Rebuilding American Uranium Enrichment - [Invest Like the Best, EP.467]](https://s3.castbox.fm/f4/a8/5d/f9e9538f4354d16e4273853bb8b5447d2d_scaled_v1_400.jpg "Scott Nolan - SpaceX, Founders Fund, and Rebuilding American Uranium Enrichment - [Invest Like the Best, EP.467]")
![Alan Waxman - Private Credit and the Modern Financial System - [Invest Like the Best, EP.466]](https://s3.castbox.fm/3a/70/2e/345f2f280e701e77e4b8ac5f43322eff22_scaled_v1_400.jpg "Alan Waxman - Private Credit and the Modern Financial System - [Invest Like the Best, EP.466]")
![Sergey Levine - Building LLMs for the Physical World - [Invest Like the Best, EP.465]](https://s3.castbox.fm/4e/46/40/13cb80ad1cd8fdf801f8fe82691d4ffc57_scaled_v1_400.jpg "Sergey Levine - Building LLMs for the Physical World - [Invest Like the Best, EP.465]")
![Mitchell Green - Lessons from Cold Calling 10,000 Companies - [Invest Like the Best, EP.464]](https://s3.castbox.fm/85/1f/fb/56cbc1668d83b4ce1d4c4b9ba8a0ac8339_scaled_v1_400.jpg "Mitchell Green - Lessons from Cold Calling 10,000 Companies - [Invest Like the Best, EP.464]")
![William Hockey - Building the Operating System for the Dollar and Silicon Valley Heresy - [Invest Like the Best, EP.463]](https://s3.castbox.fm/92/1c/fe/f1b495885d3db9d67667a48c3f0ce9990a_scaled_v1_400.jpg "William Hockey - Building the Operating System for the Dollar and Silicon Valley Heresy - [Invest Like the Best, EP.463]")
![Shyam Sankar - Celebrating Heretics - [Invest Like the Best, EP.462]](https://s3.castbox.fm/43/32/b7/3cae799a858850f41f5f4ad63d27aba47f_scaled_v1_400.jpg "Shyam Sankar - Celebrating Heretics - [Invest Like the Best, EP.462]")
![John Arnold - China, Energy Markets and Fixing America's Systems - [Invest Like the Best, EP.461]](https://s3.castbox.fm/79/ae/32/5110e55c7ffa32168a651dc2026ae8f1fc_scaled_v1_400.jpg "John Arnold - China, Energy Markets and Fixing America's Systems - [Invest Like the Best, EP.461]")
![Dan Sundheim - The Art of Public and Private Market Investing - [Invest Like the Best, EP.460]](https://s3.castbox.fm/ef/92/69/36608335f061460d081468e2e01636cdec_scaled_v1_400.jpg "Dan Sundheim - The Art of Public and Private Market Investing - [Invest Like the Best, EP.460]")
![Josh Kushner - Concentration and Conviction - [Invest Like the Best, EP.459]](https://s3.castbox.fm/12/08/09/9e32408b8ed7b613f4b46d007a09a3dfe8_scaled_v1_400.jpg "Josh Kushner - Concentration and Conviction - [Invest Like the Best, EP.459]")
![Alex Behring and Daniel Schwartz - Inside 3G Capital - [Invest Like the Best, EP.458]](https://s3.castbox.fm/8c/df/2e/bc0946b58a5f6fdc05723f17d25703a471_scaled_v1_400.jpg "Alex Behring and Daniel Schwartz - Inside 3G Capital - [Invest Like the Best, EP.458]")
![Ben Horowitz - Backing America’s Future - [Invest Like the Best, EP.457]](https://s3.castbox.fm/a5/d0/83/b66e5db579a5850f5d119a6183a0f7aab5_scaled_v1_400.jpg "Ben Horowitz - Backing America’s Future - [Invest Like the Best, EP.457]")
![Gokul Rajaram - Lessons from Investing in 700 Companies - [Invest Like the Best, EP.456]](https://s3.castbox.fm/b6/f0/38/ac87924a008aeedf1bd0e60d467669baa9_scaled_v1_400.jpg "Gokul Rajaram - Lessons from Investing in 700 Companies - [Invest Like the Best, EP.456]")
![Patrick O’Shaughnessy - Creating on Principle - [Invest Like the Best, EP.455]](https://s3.castbox.fm/66/f9/3f/6bb1ad0397f945e5a790c7f317b780fa5e_scaled_v1_400.jpg "Patrick O’Shaughnessy - Creating on Principle - [Invest Like the Best, EP.455]")
![Tom Digan & Greg Stewart - Building the World’s Best Fitness App - [Invest Like the Best, EP.454]](https://s3.castbox.fm/c9/2e/43/ee93a620cb54d6dc62686e64173f8a719e_scaled_v1_400.jpg "Tom Digan & Greg Stewart - Building the World’s Best Fitness App - [Invest Like the Best, EP.454]")
![Reed Hastings - Building Netflix - [Invest Like the Best, EP.453]](https://s3.castbox.fm/7c/99/35/b58df9507e47f6e253bafa1440234887cc_scaled_v1_400.jpg "Reed Hastings - Building Netflix - [Invest Like the Best, EP.453]")
Table of contents
United States
