Funless Sponsor

The trials and tribulations of sourcing, structuring, fundraising, and closing deals in the middle market.

[Funless Sponsor @FunlessSponsor]

We closed our first deal as an independent sponsor a few weeks ago. It’s a nice service business with good margins in a niche corner of the market. We’re in at a fair price with reasonable incentives for everyone involved. If we execute, we’ll do well. You might think that I’d write a thread espousing all the tips and tricks that we used to execute this acquisition.

That’s not this thread.

We’ve been at this for 3.5 years and just closed our first deal. Here are all the things I wish I’d known as a non-PE guy co-founding an IS firm. I have a small audience on X, but hopefully this is valuable to a handful of folks. If not, writing this was a good exercise for me to reflect through.

Sorry in advance. No sunshine and rainbows here.

[Funless Sponsor @FunlessSponsor]

Microsoft updates aren’t exactly inspiring tonight.

[Funless Sponsor @FunlessSponsor]

Pathetic from the economist here

[The Economist @TheEconomist]

And his should not be the only head to roll https://t.co/YlbEBr2LjE

[The Economist @TheEconomist]

And his should not be the only head to roll https://t.co/YlbEBr2LjE

[Funless Sponsor @FunlessSponsor]

If you haven't tinkered with Grok Bot yet, spend $50 to tinker with Grok Bot.

[litquidity @litcapital]

“Scott Galloway? The guy who shits in his Tesla on purpose?”

[Funless Sponsor @FunlessSponsor]

This exchange, good Lord.

[Marc Andreessen 🇺🇸 @pmarca]

😳

[Funless Sponsor @FunlessSponsor]

There is a subset of the PE world that earns a reputational stench for much of the industry. Given PE's entry into the IS world, we've encountered a few of the bad actors, and their behavior is inexcusable.

HOWEVER

Even from my IS viewpoint, founders/sellers themselves often behave quite poorly leading up to a transaction and after the transaction is completed. We see and hear about founders clutching their pearls after cashing an eight-figure check because their new PE partners won't allow them to run the business out of their back pocket anymore. The nerve of some investors...

When it comes to perception in the PE world, the founder is automatically the victim, regardless of the behavior leading up to whatever outcome is being framed. But when you're investing on behalf of other people, basic protections are required.

And PE often gets this reputation for slash-and-burn tactics. Squeeze every last ounce of blood from the stone before flipping the asset. And this happens in larger, upper-middle-market or MF deals at times.

But in the LMM? You must be joking. All of these businesses are under-resourced. The founders are wearing way too many hats. They all require heavy investment in personnel and infrastructure to handle the next leg up in performance. No firms are making a platform acquisition, then walking in to fire the office admin who knows where the bodies are buried. Doesn't happen.

It's a nebulous industry that often appears to be a zero-sum game. That's why it's easy to hate on the business. The industry could do better, but the reputation is out of line.

[John Caple @BigJohn043]

PE is just easy to dump on and make the bogey man. All sorts of public companies and family businesses also cut costs and at times make bad product or pricing decisions.

This isn't helped by some of the anon accounts on here that work in PE but dump on the industry....

[Mike Schumann @ The Daily Hoosier @daily_hoosier]

Classy stuff from Nick Saban:

Curt Cignetti: "I learned a lot from my dad but never coached for him."

Saban: "Well I coached for your dad, and you learned a lot from him through me."

#iufb

[Funless Sponsor @FunlessSponsor]

Most founders have had at least a few brokers whispering in their ears over the past 5 years. The brokers overpromise.

Our standing policy for an off-market deal is to ask the Seller straight-up what they want for the business early on. If we're at 4.5x and they're at 7.5x, we're out before we've burned up too much time. Great. No hard feelings.

It's awkward to do this. You may find out that the deal you were excited about has no path forward.

If there's a path to bridge valuation expectations, even better. You gain more momentum.

The second biggest impediment is the cast of characters around the Seller. Spouses, wealth managers, attorneys, CPAs, etc. They can absolutely blow a deal to pieces out of nowhere.

We regularly beg Sellers to hire more sophisticated counsel.

[Funless Sponsor @FunlessSponsor]

@paulswaney3 Thanks, Snipping Tool, for making this 280p.

Tech tanking.

[Funless Sponsor @FunlessSponsor]

@paulswaney3

[Funless Sponsor @FunlessSponsor]

@paulswaney3 @elonmusk @ADoricko has us squared away now.

[Funless Sponsor @FunlessSponsor]

@paulswaney3 @elonmusk I think so. Wasn't it a huge bust?

[Funless Sponsor @FunlessSponsor]

@paulswaney3 @elonmusk Agree. Basic necessities will only be blocked by corruption or catastrophe going forward.

[Funless Sponsor @FunlessSponsor]

@OneManLBO What’s your geographic reach?

[Funless Sponsor @FunlessSponsor]

@IanjhReynolds Deming’s quote is apt.

[Jocko Willink @jockowillink]

TRAILER!
Way of the Warrior Kid.
From @Skydance on @AppleTV starring @prattprattpratt as Uncle Jake

[Funless Sponsor @FunlessSponsor]

Fun story. I used to do a little bit of work with a pool chemical distribution business. A portion of the business was repacking bulk pool shock into smaller pack sizes. Nasty, nasty stuff.

One day, the owner/CEO gets a letter from the county saying that two trash trucks burned in the lot one night. They dug through the remnants and found pool shock bags still smoldering. Provided pictures.

Yep, that was us.

Employees were already trained to dispose of pool chem containers in special dumpsters. But it was just too convenient.

Got out of it for $150k and a long apology. The owner was lucky. You cannot fully underwrite small businesses.

[Ben Bortner @Slackwatercap]

It’s 9am on a Tuesday, ten weeks after closing on a small pool maintenance and repair company.

You’re standing at the edge of a large commercial customer’s pool looking at green and black algae growing up the walls. The property manager is explaining, for the third time, that the algae was not there when the old owner ran the company.

Your phone rings. It’s Brad, the plumber three units down in your warehouse complex.

“Hey, your garbage just exploded. And there’s a weird smell out here.”

The shop is two minutes away. You tell the property manager you’ll call her back and you’re in the truck before she can answer.

You turn onto the street behind your shop and there’s a haze hanging over the warehouse strip. It’s drifting toward the houses behind it.

At the stop sign you google “can chlorine gas kill you.”

Yes.

You google “how much chlorine gas is fatal.”

You don’t love the answer.

You pull in and stand in the parking lot with your thumb over 911. If you call, they evacuate the neighborhood and your company name is on the 6 o’clock news. If you don’t call and somebody’s grandma ends up on a ventilator, it’s worse.

You call the old owner. Twenty years in the business. He’ll know.

“Huh. I don’t know. You should really get that CPO certification. Good luck.”

Click.

The cloud is starting to thin out. You pull up the security cameras and scroll back to when the guys loaded out. There’s Mitch getting his truck ready for the day, cleaning out his skimmer baskets. He dumps the wet leaves into an empty chlorine bucket, screws the lid on tight, tosses it in the dumpster, and drives off to his first stop.

You fast forward.

The bucket launches out of the dumpster like a mortar round. A cloud rolls up and over the fence.

You watch it three times.

Mitch doesn’t have his CPO either. Neither of you knew that a little leftover chlorine powder, wet leaves, and a tight lid make the thing they banned after World War I.

You think about the SBA loan. Your signature on the personal guarantee. The guy on YouTube who said pool routes are “the most passive business in America.”

You google “liability for chlorine gas release in a residential neighborhood.”

Then “does an LLC protect you from chemical weapons.”

Then you clear your search history.

The property manager texts: “Any update on the algae?”

Mitch texts: “hey boss can I leave early tomorrow”

It’s 9:20. Passive income.

[James Hartman @jrhartman131]

Who did I miss