Deal Sourcing for Searchers {Webinar}

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TRANSCRIPT:

Karen Spencer (00:06:31):

Well, thank you for being here, gentlemen. Let me just quickly go through the agenda for today, introductions, and what's going to happen. So welcome to our Searchfunder session, Deal Sourcing for Searchers. I'm very excited about it having Gabe Galvez and Alex Karlsen here to talk about their tips and tricks that they have learned the hard way and are willing to share with us, and how they've worked with searchers and operators in the past. Gabe is a licensed investment banker. He's built and exited three previous companies, so I think he knows a lot about deal sourcing. Alex is Vice President at CAPTARGET and has had a career in business development and operations. So very excited to have both of them here. I believe Alex has been a long-time member of Searchfunder and always so excited to be able to have members of our community share their expertise in the Searchfunder sessions.
So they are going to present for just about five or 10 minutes or so. I'll ask some questions, and then we're going to open it up to you to ask questions. We have a wonderful audience, and you are free to raise your hand or unmute and ask directly to Alex and Gabe, or else you you can put it in the chat as well, and then Mark and will tag team reading your questions that are in the chat. So lots of options to ask your questions. This is really your time. I'm just here to help keep things moving along. So with that introduction, I just need to know who to pass the screen sharing duties over to. Thank you.

Gabe Galvez (00:06:31):

Send it to me, Karen.

Karen Spencer (00:08:42):

I'm going to make you... There you go.

Gabe Galvez (00:08:55):

Okay, I'll do one of these. Okay, great. All right, guys. Well, let's get started here. Just to add to Karen's notes on my background, so I am one of the co-founders of CAPTARGET. I was a licensed investment banker. I was the CFO of a large multifamily office partner in a growth equity firm and the founder of a handful of companies, most of which have been in this space. So, as she said, I've seen it all. I've bought them, I've sold them, I've been bought, I've helped them grow, and I'd like to think that I've come away with a lot of lessons, specifically on what to do wrong or what has been done wrong, which hopefully, we can help you all avoid. So what we're going to talk about today are really just some mistakes we see that are very common in sourcing.
In our work with CAPTARGET, we've worked with probably more than a thousand companies to date over the last decade or so, the large majority being in some sort of sourcing capacity. So when folks come to us, we often see either systems that are totally broken or systems that have not yet been developed yet. So just as a real strong footnote, this is based on real-world data, a tremendous amount of feedback from customers, big and small. Also, [bisdeck 00:10:17] is probably way too long for this application, so if anybody wants to get into this later, we can either stick around or Alex will be available, because I may not get through this. It looks very plain, but there's a lot of information here.
So let's just jump in. Big problems. Number one problem, this is probably preaching to the choir, no formal sourcing process, right? I talk a little bit about the odds here, and this is real data. Professional scaled, committed firms. Last year, we're looking at about 400 deals to one. Now, granted, they don't have the flexibility that you have. They have often restrictive mandates, et cetera, but even anecdotally, you have to look at a lot of deals to see a single one. So when I talk to folks on the sponsor side who are very confident about the power of their network, let's say, or the relationships from their previous role at some adjacent firm, I think that's a great starting point, but there's real data that supports it's not enough, so I don't like to-

Speaker 4 (00:11:28):

I don't think anyone can see the presentation. I'm not sure if you're sharing your content.

Karen Spencer (00:11:33):

Yeah, I think the screen share is not quite working right, for some reason.

Gabe Galvez (00:11:37):

All right. Give me one sec. Let's just hop back in and try this one more time.

Karen Spencer (00:11:45):

Yeah.

Gabe Galvez (00:11:52):

It looks like it's running on my side. You know what, it's seeing my five screens. You guys seeing that in non-presentation mode currently?

Karen Spencer (00:12:03):

Yep.

Gabe Galvez (00:12:05):

Okay. Yeah, you missed a headshot of me and some logos. Don't worry about it.

Karen Spencer (00:12:09):

Okay.

Gabe Galvez (00:12:09):

So let me minimize all of us here. So anyway, not to dehumanize the process of origination, because there is a heavily relational element to it, but the reality is that the top-of-the-funnel folks in the sponsor game and the search game need to look at this as a numbers game, because all the committed funds are, and those numbers are pretty significant. So as you think about building processes, they need to be scalable formal processes. This can't just be a game of, "I know a lot of folks in town." It's a great start, but it's not enough. There'll be solutions to these, by the way. I'm not just here to beat everybody up. So I'm going to tear through these fairly quickly.
Well, let's move this away. I see a lot of folks overvaluing their origin story. So this idea of, "Hey, I'm a recent MBA grad," or, "I was a for-hire CEO. I just want to buy a good company, and I don't have the restrictions or the pomp and circumstance or the formality of a committed fund," was a very popular marketing tagline for the last few years as the Search fund world really started to mature. The downside with that now is it really reads as disingenuous. If we're all marketing to the same 250,000 companies that are worth acquiring in North America and we're telling them this same story that, "Hey, I'm a regular guy. I'm a regular gal. I'm not one of them, the private equity overlords of the world." Eventually, that story becomes distilled into having really no value.
So it used to work, but it's an old strategy. So if you're leading with that strategy, particularly from a content marketing perspective, in email, in long-form content development, I would highly recommend you do something to augment that. I don't ever want to make extreme statements like, "Sellers only care about price and term or likelihood of close," but certainly, those things are going to be on the top of the list. So I really recommend stepping away from this now somewhat tired story about, "I'm just an average guy with an average life who wants to give you some money," because it just doesn't really work anymore. Again, a lot of data behind this as well. We've told this story hundreds of times, and we've seen the diminishing returns over the last year or two.
Of course, underestimating the reach of committed funds. I think Alex probably talks to more folks on the sponsor side than I do, but I hear a lot of people confidently, maybe overconfidently saying, "Look, I'm playing in a pool where private equity doesn't play, so I don't need to worry about what they're up to." When I stopped being a professional buyer of companies in 2007, something like that, there were about 5,000 committed funds playing in the "middle market." We defined it a little differently then. And we all had a $2 million EBITDA floor, right? Everybody did. Fast forward now, whatever, 13 years later, we're seeing that there's about 12,000 committed buyers and some thousands of buyers in an alternative structure, search being one, and we're seeing that this EBITDA floor is gone. I mean, we have clients now, big clients with multiple funds of varying vintages that will buy companies with $500,000 worth of EBITDA. Occasionally, EBITDA-negative companies, as long as certain attributes exist that are specific to their mandate.
But the point is, this argument of, "The big guys won't buy you anyway," or, "The formal committed funds won't look at you anyway," is really becoming a fallacy. And when we lead with that, from an origination storytelling line, it just kind of makes us look out of touch because it's no longer accurate. So try to avoid that at all costs.
Lastly, lack of a sourcing budget. And again, this is not to beat up anybody. I've tried to buy companies when I had like $700 in the bank. Wasn't successful, but I don't knock anybody for trying it. But the reality is scaled professionalized sourcing effort that is competitive in the context of these other 10,000-plus professional buyers has some cost. It doesn't need to be huge cost, but it does have some cost. Obviously, we're all familiar with the various models. CAPTARGET is a fee-for-service provider, as we call it, which means we don't participate in any backend costs, and it's usually a few thousand bucks a month to have us run our processes, or commonly, whether it's with a buy-side firm or some network affiliate paying somebody on the back end.
But the reality is, if you want to close more than one fluke of a one-off deal, there's going to need to be a budget in your company, the company of buyer, to do this type of work, and a lot of times, folks either don't allocate that budget, don't source that budget, or simply don't value the function of origination to a high enough degree where the proper resources are available. So don't cut off your nose to spite your face. So simple improvements to these fairly obvious problems.
Just some notes on best practices. I mean, we've worked with the likes of just about everybody, from [five B-plus 00:18:11] buyers down to sponsors, and the really productive groups do have some shared DNA. The bullet points are self-explanatory, but I'll read through them. They always have multiple sourcing strategies. They're using cap target. They're on axial. They have three buy-side firms retained, et cetera. That may be more robust than some of us doing this on an individual basis can stomach, but we need more than one arrow in the quiver.
Secondly, having dedicated labor to the effort is huge. It doesn't mean you have to have a big sourcing team or whatever, but if there's two partners in a room, somebody really needs to have ownership of the strategy and the execution. If you're a one-person shop, it means carving out time and really wearing that hat. It can't be an afterthought, right? It's fairly easy to run a company that you bought. That's mature, right? I mean, that's why private equity return rates have the level of consistency that they've had forever. But it's pretty hard to find a company to buy. So we really need to make sure that the effort is focused on a formal origination effort, either upfront or in perpetuity, depending on your own strategy.
Automate scale outreach is huge, right? I mean, having the ability to move beyond physical mailers, like Link was talking about, although that's a means to a certain end, which is totally fine and get into condition-based automation, real scaled outreach that doesn't involve labor units, right? Whether it's really smart email marketing or smart retargeting through paid advertising platforms, through the development of a content marketing channel that starts paying dividends. These are all things that can be done for, really, truly inexpensive cost, thousands of dollars to set up, and the upside is pretty significant.
And lastly, just as kind of a roll-up of all three, treating sourcing as a mission critical initiative. Again, this cannot be treated as an afterthought, even if you have a small team and you are tight on resources. If you don't have a great sourcing strategy, you're never going to have a great portfolio, right? I mean, one happens to feed the other.
Shameless plug time, and I'll be really quick on this. How do we know this? What do we do? Some of you may have heard Alex mention this when we were all just chatting, but we're basically an on-demand origination team that does most of its sourcing through really sophisticated email marketing and digital marketing.
We can source both on and off market deal flow. We maintain probably the largest broker and intermediary data set in the market today, so with a click of a button, we can talk to all of those people on your behalf without it being dependent on them participating in a platform, right? Whether it's Axial or it's buy-sell, whatever. We don't take any fees. It keeps us free of conflict from working with all the firms we work with simultaneously, because unlike a buy-side firm, we don't have five clients. We have dozens, tens of dozens, hundreds, depending on the time of year and where we are in the cycle.
We represent ourselves as you, so there's no third-party perception. We're not this cloak and dagger by-side firm or a matchmaker who's kind of looking for a good deal and finding a good client. We are your origination team. When folks respond to your messaging, you own those leads, you own those relationships. So we're never having this conversation about, "Well, Alpine pays 5%, so we should probably show them everything first," and, "Okay, well, those guys, they only pay a layman," so dot, dot, dot. So we make sure that if a prospect responds to your value proposition and your star story, you own them, regardless of your certainty of close. Again, fairly inexpensive, $1,500 in pricing. Our whole deal here is really for search folks to make sure that at close, you get to keep all that money, and it doesn't have to dissipate to all these channel partners who helped you originate, which we can come back to this later. I'll throw it up that Karen can share. We don't need to read a matrix right now.
But again, just kind of key takeaways really quickly here. We want you to keep as much money at close. This can be accomplished while actually improving your outreach and your hit rate. The best in the business do this type of stuff, along with other strategies. And just the simple reminder that improvement just takes action. Groups like Searchfunder and some of these other great resources I've seen some of you engaging with are awesome. And we just got to start doing this stuff habitually, just like running any business, and we will see some measurable improvements to all the work that you're putting into this.
As a non-written takeaway here, I just implore everybody to avoid these common mistakes. They're way more common than you think, and often, we don't think we're falling victim to them, but take a good introspective look and see if you happen to be making some of these same mistakes that the industry at large often does, and know that whether it's with a group like us or some of these other great resources out there, there is a pretty well-defined blueprint right now as to scaling your origination effort, saving a bunch of money, and then moving on to those more critical next steps of owning, managing, and growing that portfolio. So I'll stop the screen share here. I just wanted to hammer this out as quickly as possible. And we can Q&A, Karen, and you can back the screen if you would like.

Karen Spencer (00:24:28):

Oh, wonderful. Thank you so much. I appreciate your tips. I have a bunch of questions to ask you. I know that you've worked with searchers and then also folks who successfully search and were operating a company. Do you see any distinctions in the type of search that you're doing, between being a searcher and an operator, or is it about the same?

Gabe Galvez (00:25:00):

You know, right now, they're fairly similar. I mean, I can't put on my mystic fortune teller hat with COVID, but I mean, we've seen, with some modest interruptions to our business when we had a physical shutdown in our city, that the business is, in effect, booming, and because of that, everybody is kind of clawing towards this same focal point. So years ago, the answer would've been, they're pretty different stories and there's pretty different targets. But now, I mean, there's only so many companies to buy, although again, I would argue there's a couple hundred thousand, but there are more people buying than ever, so we're kind of just all ending up in the same point here.
And just to further that, before you ask your next question, Karen, we all know this, but I think a lot of people view the search folks as working way downmarket, but I think a lot of folks in the space are figuring out, of course, that it's easier, if not just as difficult, to close deals upmarket as long as they're proprietary, they're not being auctioned, you're not competing against some big group. Because of that, we're seeing a lot of people in both those applications now aiming for as high as they have the appetite or the physical ability to transact, simply because it's going to be challenging anyway. So let's just go for broke.

Karen Spencer (00:26:28):

Yeah, that makes sense. You get a little bit more efficiency there if you're just going for your max level, whatever that maximum might be. And one question I have is we often get searchers or folks who are exploring the idea of search who have full-time jobs. Would you consider cap target as a potential solution for folks who can't quite quit their job to do the deal sourcing function?

Gabe Galvez (00:26:59):

I would say yes, but I would put an asterisk next to that. We like to say we bring the horse to water, right? We can fill the top of the funnel up, but there are times where we can also kind of break the back of the client, particularly one who has either a full-time job or maybe they're just a private equity professional who's very busy managing the rest of their portfolio, because when you start scaling this effort, depending on your mandate, that's a big depending on, but nonetheless, you can get a lot of inflow of potential leads and desire for conversation.
So what I don't like to see happen is somebody who doesn't have a huge amount of time but has a real desire to outsource everything, which is great, good start. We can help. But then, you end up with this clog in the pipe, right? And so ultimately, you have to then disconnect from all these outsource vendors, you have to work through that pipeline, and the unfortunate reality becomes, many of those leads are very timely, right? Circumstance, economic cycle, day of the week. Business owners are finicky wacky people, right?
So if I respond to Karen and say, "Karen, what a cool story. Gosh, I have been thinking about this. I love this. Let's talk," and if you can't get back to me for three weeks, now I've had three weeks to think about who else will buy this, because Karen's obviously just not real. And now, not only am I less, maybe have less incentive to talk to you, but now I'm also talking to three other people, and I'm talking to a broker, and he's telling me some things, maybe they're true, maybe they're not, and this cascade effect happens that really can be negative. So regardless of your job status, I just always remind people again that this is a really mission critical function early on, and whether you're answering those emails at 2:00 AM, or after dinner in your den or whatever, it's to need to be done, and you are going to need to have the capacity to do that with some scale. Otherwise, there's just this diminishing return with your lead flow.

Karen Spencer (00:29:15):

Thank you. And I have another question, because you mentioned the story, and in one of CAPTARGET's posts on a Searchfunder, and it's an excellent one, and I'll see if I can't bump that one up, you talk about being authentic, needing to be authentic, and even your first slide says, "I ran for office. It was one of those things where it just sort of landed on my plate unexpectedly, and I remember spending a lot of time trying to figure out my story, what I was going to tell the voter." When you have the search fund model, as you said, where the initial story is no longer effective, how do you get to the authentic piece with your clients?

Gabe Galvez (00:30:04):

This is a really good question, and to my point from earlier, I think we can do better than just, "Hey, I just exited. I was the CMO of this company, and I want to take the help," right? I mean, that's fine, and it can be a part of an authentic story, but we all have way more story to give than that, right? And it can be told in many different ways, but I think ultimately, what we're trying to do is really garner a personal connection, right? An authentic personal connection. And I think the best way to do that early on with a potential seller, particularly for off-market deals is to do a bunch of research about their company. That can be done either before you do outreach, which can be challenging. It can be done with really smart technology, where we're just mail merging in, highlights, et cetera, and then mixing them in with our personal story.
But regardless on the how, when somebody reaches out to me, I want them to know that I have this background that's applicable, that we just moved into this space, that you have some information that pertains to the space or at least speak my language. So it just takes a little bit of work to elevate your game and marrying that to something beyond a sig line bio and really get into, "This is the type of person I am. I love doing this. I've done this a bunch of times, and man, what a ride. If you're not for sale, I don't care. I just want to know every smart CEO in my zip code, because that's my job," or whatever. That's my story, right? I sit here and I just want to know all the players in our market. So I can't write anybody's story, but I think we need to marry those two, real intelligence on the prospect side and something more than just kind of my bio on the introduction side.

Karen Spencer (00:32:02):

Thank you. I want to see if we have any questions in the chat. So hopefully, Mark is monitoring that.

Mark Yuan (00:32:15):

There has not been any questions in the chat. Oh, someone just chimed in. So Jerry Lou wants to know if there's any specific industries that you're all in for right now.

Gabe Galvez (00:32:28):

I mean, we trail broader private equity, right? We have a pretty diverse customer base and we're just hired guns. So whenever you ask me what I like, it's just what everybody likes, right? I think the MSP wave is over. Thank God, everybody. If you're a searcher trying to buy an MSP, stop with that already, please. I think a lot of the folks that have been in that arena are now going into the property services side of business, whether it's hard or green, HVAC is, of course, blowing up, and some of those related industries. I'm involved in a landscape services play right now, for example.
But regardless of what's popular in the space, I think we got to buy what we know, right? If you're a electronic RC motor components manufacturer by trade, you probably shouldn't buy an HVAC company. I think there can be value in following some of these trends, but I also think it can be a little bit dangerous, so I encourage folks to just stay with what they're passionate about, what they have some contextual information about, and try to carve out your own niche there because there's room, particularly in some of these weird applications that we don't read about.

Karen Spencer (00:33:49):

And we've heard similar remarks, actually, from the lenders that we talked to, so Heather and Lisa from Live Oak Bank and Bruce Marks from the Bank of the Lake as well, is really understanding what your skillset is and how that matches with the industry that you're going for.

Gabe Galvez (00:34:12):

Yeah, that's huge. I mean, when you talk to somebody like Bruce, who I've known for too long, from when he was two banks ago, three banks ago, their underwriting is there's a big chunk of underwriting that basically says, "Does this guy, does this gal know what the hell they're talking about?" Right? It's a soft component of their underwriting, to some extent, because it's devoid of what is this balance sheet and what's leveraged, but you do get to a point with even their very professional underwriting where somebody just sits down and says, "Did they actually know what this is going to take?" And the unfortunate reality at times is, a lot of us skip that step and we say, "We're business people. Business is business. Let's go buy a business." That's okay, but it's not the whole picture.

Karen Spencer (00:35:04):

I saw another question pop up in the chat, and I will read that one. It is from [Suman 00:35:12], and hopefully, I said the name properly. "Do you work with traditional search funds? And what's the engagement model?"

Gabe Galvez (00:35:21):

So we do. We work with, honestly, anybody who's buying a company anywhere, whether it's a search fund, whether it's a committed PE fund. We do a lot of work with corporate development arms of really, really large corporations. But the engagement model is the same. Again, it's what we consider a fee for service model. So you pay us a monthly fee, we scope the service, typically asking, "Do you want to look on market deals through the brokers? Do you want to do direct outreach to off-market deals? Do we want to blend the two? What's the mandate? What's the geography? Build the lists. We have a great team of analysts here in San Diego and in Houston. Everybody's a CFA or an MBA. It's an internal pretty delta force small team, and from there, you pay us until you don't want to pay us."
Typically, we want to run long term engagements because, of course, building a pipeline takes a little bit of time, but we're talking about many months, not many years. And when you close a deal, that's that. Either tell us to find the next one and keep paying us, usually 1,500 on the low side, maybe $5,000 on the high side per month, or tell us, "Thank you," maybe send us a bottle of wine or something, and then stop paying us and go run your business. It's a pretty basic model. And I actually pulled up chat, and just to Suman's question, we've got experience across the board. We don't call ourselves an expert in any one, but because we go where the market goes, I mean, certainly, we touch healthcare every day.

Karen Spencer (00:36:59):

And just for the sake of clarity for people who are going to hear the playback after the livestream, the question was, "What's your experience of the healthcare services and healthcare technology sectors?"
So you've mentioned setting the geographical location. We did some research a while back that essentially showed that most of our searchers were finding businesses within a quick flight or a car ride of where they were living. Is that your experience as well?

Gabe Galvez (00:37:46):

Yes. Traditionally, that's been the case, but again, as we see the opportunity pipeline maybe become truncated in comparison to potential buyers, that's starting to get thrown out the window. It used to be like, "I want to buy something in San Diego, where I am," and that turned into Southern California, and that turns into, "I'll drive to Vegas. It's an hour flight," and then that turns into west of the Rockies. So I think now, people are having to search a little farther and a little deeper for those deals.
But that said, if you can do something at home, particularly in a search capacity, I think it benefits you greatly because just knowing your home market, knowing some of the same people, the banking infrastructure. I mean, just the local players can be really valuable, but depending on where your home market is, I mean, if it's in whatever, Duluth or something, good luck. There's just not that many companies there that are going to be realistic targets for you. So conditional on where you are now, but knowing that the industry as a whole is casting a wider net because they need to currently.

Karen Spencer (00:39:02):

Thank you. And then, Mark, have you queued up a question?

Mark Yuan (00:39:11):

Sorry, I was on mute. Chin wants to know, "How long do you normally take to find a right acquisition target for your clients, probably in sort of like this size range?"

Gabe Galvez (00:39:28):

There's really no right answer. I mean, we've worked with some search folks. Alex, you and I were talking about one the other day. It took us three months for them to buy their first platform. Awesome. And of course, this becomes a case study for us because it's great marketing for us. But the reality is, there are a lot of X factors when we talk about close times and close rates, right? Your financing structure, the seller's level of commitment to selling, your ability to manage diligence while you're working that second or that primary job, as Karen mentioned as a hypothetical. All of these things are going to impact close rates.
I'd like to work backwards from the folks that do this every day at high volume, and really, the best in the business, just from a diligence standpoint, when buying in a single vertical and are very focused, can close in maybe 45 days, right? There's groups that say 30, 45, 60 are more common. Working backwards from there, I mean, you could be looking at anywhere from 60 to 90 days prior, if you're really cooking with gas.
But there are long-haul plays that are worth staying in where it may take a year of searching to find that perfect company, again, big X factors being your ability, access to capital, and the mandate, right? I mean, if you're looking for a registered GSA, minority-owned reverse logistics company in Atlanta, well, there's three of them, right? And they're all owned by private equity groups, so it's going to take you a while. If you're looking for just a healthy cash-flowing local business that has some good upside that is in business services, you might be able to find that in 60 days. So a big non-answer, Chin. I'm sorry there's really not a more direct answer, but it's going to depend heavily on who you are and what you're up to.

Karen Spencer (00:41:33):

And I should ask for our international folks. Do you cover outside the US, or do you have any recommendations for searchers to maybe searching outside the US?

Gabe Galvez (00:41:46):

So the strategies don't vary that much when we leave the US or North America in general. There's some different compliance perspectives in Canada, which is neither here nor there. But the big challenge when it comes to international work for us, as well as the people doing international work is just quality data, right? We know how to get a prospect's attention, we know what that process looks like, but if you want to do something and maybe a company that is more on the developing side of the spectrum, the ability to run a FactSet screen, a CapIQ screen, or whatever, to just start with asking the question, "Who are the players?" becomes very, very difficult. So heavily dependent. If you're in Nicaragua, that's going to be challenging. If you're in Spain, not too challenging. So really, just comes back to data availability.

Karen Spencer (00:42:45):

And then how far into the deal process do you go? Do you assist on the NDA, the IOI, or the LOI?

Gabe Galvez (00:42:56):

Typically no. And we don't do that because there's some value add drop off. But really, because we do this at scale for a lot of groups simultaneously, we need to be totally devoid of conflict. So the second I'm negotiating Karen's IOI with her and not Mark's, the question really becomes, "Who's helping who, and why?" So we take you to the point where a prospect raises their hand and says, "I would talk to you, and I meet this criteria," through some level of self-identification, and that's the horse being brought to water. From there, again, just to avoid conflict, we really have to say, "All right, Karen, here's your lead. Good luck. If you need more, we'll keep running the process. But beyond that, if you need that support, certainly, there's great options, whether it's working with savvy attorneys in this space, or maybe an intermediary on a fixed fee basis just to manage diligence, et cetera, but that's sort of above our pay grade."

Karen Spencer (00:44:07):

Do you ever have a situation where the horse likes to basically take sips from different troughs at the same time?

Gabe Galvez (00:44:19):

It's not as common as you would think, and again, we kind of view it as being above our pay grade. So if Karen's looking for light bulb manufacturers in New Jersey and Mark's looking for light bulb manufacturers in New Jersey and you sign up at the same time, although we're going to build two independent prospect lists and develop that market independently, they're likely going to be very similar, and as such, they're likely going to see some messaging from these two groups that happen to be powered by our back office.
But that's where I fall back to this idea that your storytelling, which we can support, but comes from you and your experience and your expertise becomes mission critical, because the value prop of your firm or of your expertise is very likely not going to be recreated by your competitor, Mark. And we want to let the prospect make the decision, ultimately, without any influence from us directly as to which one they pick.
So could they pick two? Absolutely, but real world experience shows us there's so many ways to skin the cap, pardon the saying, but that it doesn't happen as often as you would think. But again, when it does, it's up to you to either pay more, have a better story, be better on the phone, be better in person, have a higher probability of close that you can prove, all of which we don't really influence.

Karen Spencer (00:45:50):

Thank you. And Mark, is there another question on the queue?

Mark Yuan (00:45:54):

Yes. Blake wants to know, "Can you talk a little bit more about why MSP is over, and does that apply to IT or also like business outsourcing?"

Gabe Galvez (00:46:08):

I would say, Mark, that that's more towards the IT side of the spectrum, that classic like, all the folks that we were [break-six 00:46:16] folks 15 years ago became managed service providers who now have half a million dollars worth of EBITDA and they think they're worth 9X or whatever, and they think they're worth 9X because there's hundreds of PE firms clamoring for market shares that space consolidates. I don't have consolidation numbers on hand, but I remember looking last year, and something like five years ago, something like 80 some odd percent of the space was independently owned, and that number has dropped by multiple double digits since then. So there's been a massive consolidation effort in the space.
That's not to say it's over. I mean, I'm kind of cavalier and work amongst friends. So if you can buy a MSP, awesome. Go for it. You're probably going to overpay, or it's probably kind of a shitty MSP right now because all the great guys in the space have passed on it. So when I say it's over, all I mean is pricing is probably inappropriate for what you're buying now. Consolidation has been occurring for years at a very high rate, and there are some great, great firms, some of which we work with, in the space that are just, they're already at the point, having tens, if not hundreds of millions of dollars of committed capital, where they can't spend the money to buy more EBITDA margin, simply because it's just not there right now.

Mark Yuan (00:47:46):

Okay. Well, that's-

Gabe Galvez (00:47:47):

Good time to start an MSP. Start one, get a million dollars in EBITDA in three years, and then sell it, and you can probably sell it for 7, 8 million dollars.

Mark Yuan (00:47:58):

Nice.

Karen Spencer (00:48:01):

So John has a question. "How much of your focus is on contacting business owners directly versus contacting intermediary, such as wealth managers, et cetera, and what do you feel works best?"

Gabe Galvez (00:48:17):

We touched on this a little bit before everybody showed up, just Alex and Link, one of the participants, and I were chatting. So there's benefits to both. I would say the technical majority of the work we do is proprietary outreach, right? Off-market deals, folks reaching out to the [Gabes 00:48:37] of the world who have some businesses and just asking them if they're for sale. But proprietary deals, they tend to have a few great things going for them. Number one, they trade at a discount, right? Because they're not on market.

Karen Spencer (00:48:56):

[inaudible 00:48:56].

Gabe Galvez (00:49:00):

Oh, I can hear you, Karen. Can you hear me?

Karen Spencer (00:49:06):

I can hear you, yeah. It just broke up. I think it was the internet connection issue or something like that. Try that one more time, because I think it was a great answer and I just want to hear it.

Gabe Galvez (00:49:16):

No problem. So proprietary outreach, off-market deals, there's some great stuff going on there, right? They trade at a discount because they're not on market. So you can get a decent deal, and there's some good data that supports that discount is a low double-digit discount. So depending on the size of the company you're buying, there's some real value there. The downside is close rates, probability of close is also almost commensurately down to the discount you trade at because these are not sellers who have any binding commitment to sell. They haven't hired an intermediary, they haven't gone through an audit process, they maybe haven't prepared their company structure to even truly be transferable. He hires whatever. So all of those issues lead to a higher non-close rate.
The intermediary-represented deals have the exact opposite mechanics, right? They close way more often, and you pay measurably more. Modest double-digit increase in value because they're being auctioned or because those challenges that weren't addressed on the proprietary scenario have been addressed in this on-market scenario. They hired that COO, that business owner Bill didn't want to hire. They went through that audit process. So you have reviewed financials, so you can present to Bruce, the bank, and whatever. So there are benefits to both, and ultimately, we're in the business of selling the service to people, so I say run them both if you can afford it. Some of that is self-serving, obviously, big disclaimer, but truly, a blended approach is going to be better, right? We want to play on both those dynamics if we can.

Karen Spencer (00:51:03):

That makes total sense to me. Mark, is there another question in the queue?

Mark Yuan (00:51:08):

Yes. So Scott wants to know, "Has the value of being local to a target company been diminished during the pandemic since meeting in person is so difficult anyways?"

Gabe Galvez (00:51:24):

I don't think so. Long-term, it might. I mean, we've been working remotely for this entire time since March 3rd, and we figured it out, and a lot of us have figured it out. As a business owner, a few times over, I mean, I have a little portfolio of my own, I don't meet with anybody anymore, right? And I don't really care if you're local or not. That's just speaking from my experience.
But long-term, I think this will create some habitual behavior, right? I think hopefully, long-term, beyond employers being more supportive of remote work, and this might be too big of a dream, but as an aside, maybe we pick up some mask culture, like when you're sick in five years and you go to the grocery store, you wear a mask. Side note, that might be nice. Asia seems to have figured that out.
But beyond that, I think we're probably going to build some habit around, "I don't need to be in the room with Mark anymore," and we get over that. So that may present some opportunity. I don't think it's quite happened yet, but if some of this stuff sticks and if this general lockdown environment has to continue for some period of time, I think the longer that happens, the more okay we'll get with getting a solicitation from a guy on the East Coast who wants to buy my company on the West Coast, because our interaction will be the same either way.

Mark Yuan (00:52:53):

Awesome. Karen?

Karen Spencer (00:52:57):

So a question from Suman, and it just left my screen. Where is it? Okay, here it is. "Any advice on working with a brand agency to get set up for positioning yourself with website, emails, letters, talk track, et cetera, et cetera," says Suman. He wants to, or she wants to be effective and just not another guy with a laptop.

Gabe Galvez (00:53:27):

Super great question, and it's music to my ears. This is something we really harp on internally. And those of you who interact with Alex, he'll be one of the first to say something similar where when a searcher comes to us and they don't truly have a mature differentiated footprint online, they don't have a great LinkedIn profile, they don't have a professionalized website, they don't have professionalized ancillary services. You just don't look real, and there's so many not real folks in the space that it really discounts whatever you're doing. I don't think you necessarily need to go hire a big agency, but I think you need to have your ducks in a row, a thoughtful logo, a name that doesn't sound made up. Half of us have these wacky made-up names these days, right? And it's okay, but every time I hear one of these, I go to Wolf of Wall Street, Stratton Oakmont. They carved their name in the Plymouth Rock, whatever Leonardo DiCaprio said, "This is a bullshit name," right?
So let's be authentic in our marketing and let's represent ourselves professionally, formally in the context of our business the best we can, and that often does mean we're going to pay somebody for branding, we're going to pay somebody to build a website. But in this age of great access to variable use experts on the internet, us included, that shouldn't cost a bunch. You know, you build a website for 2,500 bucks. You can spend a couple grand on really good branding and good templates, but don't skip it, because when you do, and we have a lot of experience with folks that have, because I mean, we'll take your money if you want to give it to us, but your results are going to be measurably less than those who have a strong brand, because the fear is this is a scam.

Karen Spencer (00:55:27):

So I need to take a short pause on questions. Will you be able to stay for a handful more, Gabe?

Gabe Galvez (00:55:36):

Yeah. Yeah, yeah. Sure.

Karen Spencer (00:55:37):

After the hour? Okay, great. We're getting close to the end of our hour together, and I want to make sure that everyone knows about our upcoming event on Searchfunder. So let me share my screen here. Great. So we are going to have a meetup on the US Election Day. It's a BIPOC meetup, and it was merely coincidental on the election. It was the first day I can be available to make it happen, so I'm excited, so please spread the word. I-

Mark Yuan (00:56:16):

Karen, if you're sharing your screen, I don't think anybody can see it.

Karen Spencer (00:56:20):

Oh, that's interesting because it said was shared. Okay. Hold on a second.

Mark Yuan (00:56:24):

It might be a internet issue because your voice is breaking up a little bit, too. Maybe just like a Wi-Fi connection issue.

Karen Spencer (00:56:32):

Okay. Is it showing now?

Mark Yuan (00:56:37):

No, it just says, "Karen Spencer has started screen sharing," but there's no actual.

Karen Spencer (00:56:41):

Oh, interesting. Okay. I will stop the screen share since it's not being helpful.

Mark Yuan (00:56:45):

Yeah, I think you could just talk about it. It should be fine.

Karen Spencer (00:56:47):

Great. Okay. I'm turning right so I can make sure I get the dates right. So we have the BIPOC meetup on November 3rd. Please help spread the word. We really want to encourage more women and more people of color to be in this space. I think it's a great avenue for building wealth and in doing the entrepreneurial thing, so please help spread the word on that. We'll have a Searchfunder operations sessions on customer communications during crisis. That should be exciting. I know Pat has a lot of fun war stories, so I'm sure we're going to be getting into it, and you'll be able to learn from Pat's many years in the PR space. And then we will have basics of business evaluation on November 12th. All of these events will be live streamed on Searchfunder. So that is my plug for the upcoming Searchfunder events, and hopefully, Mark, you've got another question queued up.

Mark Yuan (00:57:56):

Yeah. Okay, so back to the questions. Let's see here. Derek wants to know, "In the US and Canada, what are your top three sources of data to generate a long list of targets in a proprietary search? How do you bring those efficiencies that you might have that a searcher might not into determining who's actually a committed seller and who's just kind of kicking, like trying to get a valuation or something?"

Gabe Galvez (00:58:28):

So this is the ultimate question, and there's not necessarily a right or wrong answer. We obviously have a perspective on it, which I'll share, but there's totally no perfect source for middle market business intel, particularly in the level that we're playing at here. But down market in the lower-middle market, we like to just blend a few tools by category, meaning I like to use an enterprise tool, a big expensive set of tools that most folks can't afford. We like using FactSet for that, right? It's the billion dollar gorilla. It's now bigger than CapIQ by way of revenue and market share, right? Not super attainable for a one-man shop, but we have multiple licenses and we have some purchasing power there.
But when we talk about rounding out this equation with lower-middle market businesses, sometimes we have to just go to the basics, go to custom Hoovers screens, go to building bots to scrape data on a ad hoc basis based on the mandate, and then manually find those people's email addresses or phone numbers. We do a tremendous amount of what I call ditch-digging, just figuring out, "How do we get ahold of Karen? How's that happen?" And you got a bunch of butts in seats, and you grind it out. So unfortunately, there's not really a perfect solution, but from a mixed standpoint, original data scraped, purchase lower-middle market data, Hoovers, biz intel, et cetera, big data package enterprise data on top of that, if you can afford it. That, at least, gets you some shape to the output, and even then, it'll still need to be curated by hand.

Karen Spencer (01:00:19):

We have several questions in the chat along the theme of, how can you tell whether the seller is truly committed to selling or is just tire-kicking, essentially?

Mark Yuan (01:00:41):

Yeah, like what are some indicators to how far?

Gabe Galvez (01:00:45):

Yeah, so there are some indicators. Like in our skill set, we can't do something you can't where we can come to you and say, "Mark, this guy, for sure, will sell if you give him whatever," right?

Mark Yuan (01:00:55):

Right.

Karen Spencer (01:00:55):

Agree.

Gabe Galvez (01:00:58):

Because as an aside, I've lived through with one of my business partners the conversation of, "If we get an LOI with these terms and this value, we will sell." News flash, we didn't sell the business, right? So we're all wacky. But you can look for some behavioral things. Number one, when folks respond with long-form, thoughtful Q&A, especially early on in the conversation, they tend to be more likely to be real, right? The response is, "Oh, this is interesting. I've been getting some of these emails. What makes you different? What's your timeframe? Do you have any capital? I'd love to put a face to the name," doing some diligence on their part. It shows intention.
The biggest red flag I see is when they simply ask for value, right? Those are the tire-kickers, the one-line response. "So Karen, what are you paying me for my business?" It's like, "Bro, I don't know anything about your business. I'm not going to pay you anything." And then they don't want to talk because they don't want to give you information because they don't know how much you're going to pay. It's just not real.
So engagement, like almost any type of selling initiative, is going to be your biggest influencer on the reality of the opportunity. Do they respond? Are they quick? Are they thoughtful in how they're interacting with you? Even one step further, are they respectful and professional? A lot of business owners, again, are kind of kings and queens of their own universe, and that can create some interesting behavior, as we've all probably seen or know firsthand, whatever. And those people, even if their intention is good, have a much lower chance of closing anyway. So just put those human feelers out there, and that'll get you like halfway there as a step one. It's kind of just basic human behavior.

Karen Spencer (01:03:00):

Thank you. We have a question from Jules, and I don't know these acronyms, so I'm just going to spell them out. "Do all of these data sources have similar data, i.e. S-I-C, SIC, and NAIC, N-A-I-C-S? Will that cover 80% of all the businesses?" is the question.

Gabe Galvez (01:03:24):

So many systems use SIC or NAICS codes. Not all of them do. Those are functions of government classifications, particularly, I believe, originating primarily from the Bureau of Labor and Statistics once upon a time, right? Unfortunately, the way SIC and NAICS codes are assigned is one of two things, either the government assigns it based on like, I don't know, a guy in a basement in a cubicle who looks at your website, or the business owner can sell a sign through a number of processes. Still imperfect process. So imperfect that until two days ago, from a NAICS code standpoint, cap target was classified for the last decade as a telecommunications, I think, cell tower maintenance company. I don't know. It took me that long to get ahold of somebody at the Bureau of Labor and Statistics, which now, I have time to do, as we all sit on the couch to change that NAICS code, right?
So even when they exist, they're imperfect. When you start spending money on data, I mean, with big enterprise tools, like we talked about, you get into keyword-driven inquiries. They tend to be much more accurate. It's not more accurate, more granular, which, I guess, you could argue is the same thing.
So for example, an SIC code may only have three sub codes, right? Telecom, cellular, repair and maintenance. But a keyword code could tell us something very nuanced about the company, and unfortunately, keyword-driven searching, if you're buying data or buying access, is more expensive, and the only other real great way to use keyword-driven search now is either have some familiarity with AI, machine learning, or have the ability to use more retail bots to your advantage to at least scrape that data and then manipulate that data once it's in SQL or a big CSV file. But we get kind of down a rabbit hole of now, you need to know Python, and that's a whole other animal. So long answer to the short question, NAICS codes, SIC, great place to start. Keywords are even better, but it comes at a premium, and the only workaround from that premium is some computer science background.

Karen Spencer (01:06:04):

Thank you. I think that completes the questions that we have in the chat. I want to thank you, Gabriel and Alex, for participating and for doing this. It's exciting to have you as members of our community and to share your wonderful knowledge. If you haven't already, please put your contact information in the chats. People can grab it. And I want to thank our audience for attending and asking such great questions. I've learned a ton about deal sourcing and where things stand, and I may be starting on the side, Mark, if you want to join me in MSP business, too.

Gabe Galvez (01:06:52):

That's what I like to hear. Thank you all so much. Alex will drop his contact info in there as well. I just put mine in chat. Visit us at captarget.com. We can help you with whatever you need.

Alex Karlsen (01:07:02):

Thanks, guys.

Mark Yuan (01:07:03):

All right. Thanks, guys.

Karen Spencer (01:07:05):

Have a good day.

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