My Guest
My guest today is Jim Sharpe, somebody who I’ve been fortunate enough to call a mentor and friend for over 10 years now. This is Jim’s second appearance on In The Trenches (you can access the first episode here)
In this week’s episode, we build upon the first-hand accounts presented in episode 1 of this series, and ask Jim to reflect on his two decades of search fund investing experience. More specifically, Jim discusses the trends, commonalities, and themes that he has observed among a) searchers who failed to consummate an acquisition; & b) searchers who did consummate an acquisition, but failed to “thrive” thereafter (either commercially or personally).
Jim has been at the Harvard Business School since 2009, holding positions as a Senior Lecturer in the MBA and Executive Education programs, an Entrepreneur in Residence, and now serves as a Visiting Executive. In 1987, Jim purchased Extrusion Technology, an aluminum extrusion fabricator that he ran as CEO for over 20 years. In 2008, Jim sold the company to a private equity firm, having grown the company from $4MM to $32MM in revenue throughout his ownership tenure. Jim is now an active investor in small and medium sized businesses, holding ownership positions in more than 50 entrepreneurial companies.
Jim graduated from Harvard Business School in 1976.
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When Search Funds Don’t Go As Planned (Part 2): With Jim Sharpe – In The Trenches
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Questions Asked
Introduction
- Why is it that every search fund sounds like a smashing success, yet in reality we know that is clearly not the case?
- You have a framework that categorizes searchers as “failed to find” or “failed to thrive”. Can you share that framework with us?
- Within each of these buckets, are there common themes or regrets that you hear from searchers once they look back on their journeys in retrospect?
- For searchers in either category: What have you observed about what they tend to do next (professionally)? What might prospective searchers learn from those observations?
“Failed to Find”
- Some search funds reach the conclusion of their 24-month search and contemplate raising some amount of additional capital to support a search for an additional X months: When might this be a good idea, and when might this be a bad idea?
- In your experience, does the quality of target company tend to deteriorate the deeper one gets into their search process? Why or why not?
- What are some commonalities that you’ve observed within the “failed to find” searchers? What might current searchers learn from these commonalities?
- One of the most FAQs that I receive from prospective searchers is whether there are too many search funds in the market right now. What is your opinion on this?
- Are the days of trying to acquire a good business at 3-5x EBITDA gone? Why or why not?
- How does one avoid getting “blinded” by a good purchase price? How do we be careful to avoid thoughtlessly accepting risks that we otherwise shouldn’t be willing to accept in the name of a low purchase multiple?
“Failed to Thrive”
- What are some commonalities that you’ve observed within the “failed to thrive” searchers?
- Do these searchers tend to fall into this bucket for reasons largely personal in nature, or for reasons largely commercial in nature?
- As you reflect back on your own time as a CEO, in what ways did you “fail to thrive”?
- What are the top 3 business or transaction characteristics that tend to be most predictive of good outcomes for searchers and their investors?
Conclusion
- What advice would you give to somebody who is contemplating an entrepreneurial career, but is scared of falling into either of the “failed to find” or “failed to thrive” buckets?
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Thanks to our Sponsors
This episode is brought to you by Symphony, a company that partners with software businesses across the entire software development life cycle, including technical due diligence, team augmentation, outsourced development, technical consulting, and more. Symphony not only performs technical due diligence engagements for search funds, Private Equity firms, and strategic acquirers, but they also partner with those buyers on an ongoing basis on all things product (outsourced development, team augmentation, new product prototyping, UI refreshes, QA professionalization, and so on). Symphony is offering a full 15% off of any of their services for readers & listeners of In the Trenches. Just go to the Contact form on their website and tell them that you’re a listener of the podcast.
This episode is brought to you by Oberle Risk Strategies, the leading insurance brokerage and insurance diligence provider for the search fund community. The company is led by August Felker (himself a 2-time successful searcher), and has been trusted by search investors, lenders, searchers and CEOs for over a decade now. Their due diligence offering (which is 100% free of charge) will assess the pros and cons of your target company’s insurance program, including any potential coverage gaps, the pro-forma insurance pricing, and the program structure changes needed for closing. At or shortly after closing, they then execute on all of those findings on your behalf. Oberle has serviced over 900 customers across a decade of operation, including countless searchers and CEOs within the ETA community.