Acquisitions Anonymous - #1 for business buying, selling and operating - Why Most Private Equity Pitch Decks Miss the Point

Episode Date: July 17, 2026

In this episode the hosts break down exactly how they evaluate private investment opportunities as limited partners, revealing what makes them say yes—or pass—on search funds, business acquisitions, and real estate deals.Welcome to Acquisitions Anonymous – the #1 podcast for small business M&A. Every week, we break down businesses for sale and talk about buying, operating, and growing them.Looking to build a professional website in minutes? Try Wix: https://wix.pxf.io/c/6898629/3115214/25616?trafcat=templateHubSpot is the backbone for how businesses scale without chaos. Try them out here: https://go.try-hubspot.com/OeG9VrSubscribe for more episodes: https://www.youtube.com/@AcquisitionsAnonymousPodcast?sub_confirmation=1Subscribe to our Newsletter: https://www.acquanon.com/newsletter💰 Sponsored by:Viso Business Capital — Get the right SBA loan tailored to your acquisition needs with Heather Endresen’s firm. Sign up for a free live Q&A on SBA loans at https://www.visocap.net and click “Zoom Sign Up” in the top-right corner.FRANZY - Thinking about buying a franchise instead of an independent business? FRANZY is a free platform built for acquisition-minded entrepreneurs who want to explore franchise ownership without broker bias. FRANZY matches you with franchise opportunities based on your capital, goals, and lifestyle—and includes free coaching from experienced franchise operators. If you're exploring ETA but want a structured, system-driven alternative, check out https://franzy.com/ This week, the hosts step away from reviewing a business listing to answer a question they receive constantly: How do experienced investors evaluate private acquisition opportunities? Whether it's a search fund, an independent acquisition, or a real estate investment, the hosts explain exactly what they look for before writing a check.Key Highlights:- Where experienced investors actually find off-market acquisition opportunities.- How LPs evaluate sponsors, business quality, and buyer-business fit before investing.- Understanding preferred equity, waterfalls, carry, management fees, and capital structures.- Why sponsor incentives and personal financial commitment matter more than flashy IRR projections.- Bill and Mills share the private investment hurdle rates they personally require before writing a check.Subscribe to  weekly our Newsletter and get curated deals in your inboxAdvertise with us by clicking hereDo you love Acquanon and want to see our smiling faces? Subscribe to our Youtube channel.Do you enjoy our content? Rate our show!Follow us on Twitter @acquanon Learnings about small business acquisitions and operations.For inquiries or suggestions, email us at [e-mail]

Hello, everyone, and welcome to another episode of Acquisitions Anonymous. I am one of your host, Bill D'Alessandro, and this will be a fun episode because it's a little different for us. So Mills and I did a candid conversation on how we think about investing in private deals. So if someone approaches us and says, hey, I'm doing a search fund, or, hey, I've got this deal under LOI or hand-buying this piece of real estate of this building, how do we evaluate that from an LP's perspective? We talk a lot in the podcast about how to evaluate deals from the GP perspective, from the sponsor perspective, hey, there's a business I want to buy and run.

But we get approached a lot. I'm sure there are people that listen to the pot that get approached a lot or are thinking about raising equity from limited partners. So we talked a little bit on this episode about how we would think about evaluating deals from the limited partners perspective. So a little bit different today on Acquisitions Anonymous, but it's a different side of our small business acquisitions industry that we hope is interesting to people.

So without further ado, please enjoy this episode of Acquisitions Anonymous. Hello, another episode of Acquisitions Anonymous. We don't have 100% beers anymore. And thumbs downing on just the plus inventory. Hi, Heather here. When I'm not breaking down deals with these guys, I'm helping people get the right SBA loans for their business acquisitions. Because when you're buying a business,

the best financing isn't one size fits all. There's the best rate, fastest to close, the specific loan structure that you need, or a little of all of those things. That's why my company, Vizzo Business Capital, works with over 30 different lenders to find you the best funding in less time and with less friction so you can focus on the deal. Sign up for a free live Q&A session on SBA loans at VisoCAP.net.

Then click Zoom sign up in the top right corner. That's V-I-S-O-C-A-P.net and click Zoom sign up. Hey, Mel, so are you, man. I'm excited. It's just us today and we are going off book. We are trying out a different format for acquisitions. is anonymous today. And this is a conversation between Mills and I about how we look at deals as investors. We talk a lot on this pod, almost 500 episodes of how we would look at a deal as

though we were buying it ourselves. But Mills and I also, you know, have invested in other people's deals and our approach frequently to be an LP and, you know, an investor. And that's a little bit of a different diligence angle. So what we want to talk about today is sort of how we approach those opportunities. And like this is coming from the place that like we've had a couple people recently that we're not going to help who said I saw this deal. I first heard about this deal on the podcast. I'm letting you guys know. I've signed the NDA. I'm getting the SIM and I think I want some investors. And we're already familiar with the deal. And we're like, man, that's that's kind of like the natural progression of this, whether it happens or not, whether the deal is good. But we're so

used to talking about buying the business as the owner operator, now thinking about it as an investor has a slightly different layer and lens to it. Yeah. And we love that, by the way. I mean, this has happened non-zero number of times where we'll do a deal on the podcast. The episode comes out and we either get somebody who emails and it goes, I'm already looking at this. Damn it, why did you want it in your favorite? Or hey, I heard about it on the pod. And, you know, I would, it's my first time. I would love some experience capital. Would you guys ever invest? And we, I mean, how cool, like this is one of the awesome parts about the internet. And this has happened to us a couple times recently. So we thought we would do an educational pod, you know, not just for

everybody who is thinking about taking on investors in their deal or thinking about investing in deals as an LP, kind of how to think about it. So Bill, I get this question all the time, whenever like deal talk comes up and people are like, how do I get invited? How did you hear about that? Like how do I hear about those opportunities? Because it's usually all said and done, you know, once like you have anything to talk about. So how do, how do these opportunities come up for somebody other than just, you know, having 500 episodes on a podcast? So people assume that, oh, you guys must have the podcast. You must get a ton of flow for the podcast. And, you know, we do get some, but it's not as much as you would think. We would like more. So send it our way. But a couple ways,

you know, places where I get deal flow. There are like the aggregator sites. You know, you guys, if you're regular listening to the pod, you may know Travis Jamison from Capital Pad, where he, you know, they feature search deals fairly regularly. So you can go on CapitalPat or other places like that. One place, groups of kind of high net worth people. So like Long Angle is a great community you can join, YPO, you can join, EO. If you are around other people who are investing in deals, very often those groups will actually aggregate deals and bring them to their membership. And you'll have the opportunity to invest.

And sometimes it comes with kind of pre-packaged diligence, which is nice. So that's one place that I've seen some flow. How about you, else? Yeah, the other thing I would add is like, there's kind of regional or local angel investing networks that I've dabbled in for a while, but they're usually so early stage that it's like we're building some like pre-revenue thing and we need to raise capital that is different than what we typically look at on the

podcast and is different than what I am used to underwriting. And so I'm like, I have no idea if this is going to be the next like viral app. I don't have any basis for that. So I found those to be not very effective for me. I think there's a big part of this is just like the more active you are and the more the flywheel churns. Like if you're an investor in a partnership that is buying something, you know at least

who your other partners are. And you start to see patterns of names, right? In your operating agreement or in your partnership agreement, you're like, oh, I didn't know that that guy did stuff like this. And then you see him at like, you know, a kid's. soccer game or something. It's like, hey, man, like, we're in this deal together. This happened to me the other day at an event. And it was like, all of a sudden, we're talking about other stuff I'm invested in, other stuff they're invested in. And it just creates this flywheel when

opportunities come up that people know that you're effectively raising your hand versus just the deal's done. People are like, shoot, how did I, how did I find out? How do I find out about that next time? Yeah. And it's worth saying, like, as you talk to people, if somebody's talking about a deal that they did. It is not, maybe you've got to eat a little bit of your pride, but to go up somebody and say, hey, like, I would love to invest in some deals like that. I'm actively looking. And that's a phrase that I kind of use, hey, I'm actively looking to do more deals like this. Would you ever, you know, include me if you see other opportunities? And, you know, very often, you know, there's room in the deal. Like, people are passing the hat. It's really a matter of staying

top of mind, you know, so if somebody's investing, oh, Mills would probably like that too. And Lou Mee. I think you also have got to be prepared to like not embarrass yourself, so to speak. Most times these investments when somebody is soliciting, like you need to be an accredited investor. And also you need to be prepared to at least just ask the question of what is the minimum investment. In my experience, it's usually between $100 and $250,000 minimum investment on these deal by deal. Now, if you're going to like capital pad and an aggregator, they're lowering the bar because they have a lot better kind of. coverage, right? And those might be 10 to $25,000 minimum investments. But for most of the stuff I've done, it's in the kind of 100 to 200, 250 range because they just don't want like investor relations with, you know, 100 people. Yeah. I've seen kind of 50 to 100, you know, on the low end. And honestly, like if they're taking $10,000 checks, it probably, you know, the deal, they don't have enough interest. It's kind of a negative signal. And also, I mean, investing $10,000, like, you're going to get a K1. You're going to deal with this for five to 10 years. Even if you triple it,

it's just not really worth it, in my opinion. So I'm always trying to balance, you know, can I invest enough here that it's going to make a difference, but also I'm trying to stay diversified, you know, as well. I'm not trying to put a huge chunks in my net worth into single deals. Yeah. But one last thing I'll say about where do opportunities come up is like capital follows a path of where it's taken well care of. So like, I'm going to reinvest with folks who did, did well in previous investments. The outcome maybe aside, but like, were they thoughtful? Did they give me a K-1 in time? You know, are they like quick to give me regular updates? Like, did they at least acknowledge when things went the way we thought or differently? And similarly,

the sponsor is going to do the same thing. If you're a pain in the ad, ass LP, like, you're not going to get phone calls this regularly. You know, if you want to nickel and dime them over every little thing or just be a thorn in their side, you know, it kind of works both ways. I've found, though, that asking really thoughtful questions as an LP really helps the sponsor and helps the GP, not like death by 1,000 cuts questions, but just asking thoughtful questions, um, some of my friends who are GPs, like, roast me about like always having like the longest list of questions, you know, or the most strenuous questions in a deal. And I may be the smaller of all the LPs, but I at least am just going to keep doing that because that's the way my

brain works. So how do you balance that, though, Mills? Because like, you know, if somebody's raising $5 million and I'm going to put in $100,000, you know, like, you're not investing enough of the round to, like, be the pain in the ass guy and drive the diligence. Like, you're, you're investing a single digit percentage of the round, like, to some degree, you just kind of send the check-in. right? Yeah, I think I think you definitely have to balance it. I think usually the questions, what I've found is that if I'm asking the right questions, it's helping the GP round out their understanding of the deal too. Like, you're not like doing, you know, spreadsheet checks for them and like, hey, you miss this thing. But just trying to understand like the cash flows in and out,

the sources and uses, like making sure that the assumptions are correct. And like asking thoughtful questions. The investor, the sponsor, knows more about the deal than anyone. And they're excited, like I had this deal recently where they had interest only debt for three years on a development. I was like, dude, interest only for three years, that's amazing. Like, nice work. And they're like, hell yeah, we were really proud of that. But, you know, nobody else is giving us a thumbs up for it. They're like, whatever, you did your job. But the difference between three years, interest only in 18 months is material to the cash flip, you know, in the pro forma. So I think, I think there's like a little bit of an art to it. So let's actually move into diligence. So the deal's in front of you. You think

you want to invest. How do you think about it as an LP versus a GP, right? So a GP, a sponsor, you know, to not use fancy terms. This is somebody who has a deal and wants your money. They want to buy the business, the piece of real estate, whatever it is, and they're trying to raise money. And they're putting an offering in front of you and saying, hey, invest 100 grand, invest 200 grand, whatever. This is the business we're buying or this is the real estate we're buying. The way we kind of sketched out pre-show is sort of three categories of diligence. First business, then structure of the deal, and then sponsor the person bringing the deal. So we're kind of kind of work through three categories of diligence. The first one being business. So how do you decide whether this is a business

you want to invest in? I mean, Mills, how do you narrow it down? I think that like we talk about it and we've talked about it for all these episodes of like, is the business attractive, is the price attractive, or the terms right, like all those things. As an LP, it's a little bit different because I don't necessarily need to like be the one

who can get in there and wrestle the business into submission. It's more like, do I add anything to this, you know, to this operating entity as a very kind of in the background type of partner? I still want it to be in the path of progress. I still want it to be, you know,

compelling from a risk return process. profile, like all those kind of things. But it's more like as a, as somebody who's in the backseat or the very, very backseat, you know, do I add value here? Does it, does it help me in any way? So your focus first on can you provide value beyond capital? Do you do deal where it deals where you're just the capital? Yeah, I have. We have. And I think that like geography matters for me. I would much rather invest in stuff that's in my backyard that maybe doesn't have, doesn't check every single box like 10 out of 10, but it's here and I know it and I can see it and touch it and like I can go visit the business or, you know, go visit the piece of real estate

or like drive by and see how it's doing. So geography is important to me, but there's plenty of people that doesn't, it's not on their radar at all. They'll invest in something in Arkansas, you know, if it's the right deal and they'll never see it. I mean, I think we all like to touch and feel anything, you know, in our backyard. I mean, for me, one of the first questions I ask, obviously everybody has their own preferences about what industries they feel like have tailwinds, etc. But one of the first questions I ask is, why did this sponsor see this deal? You know, what, did they just pluck it off a biz buy sell?

Like that's a negative signal to me, you know, unless and we'll get to kind of buy our business fit later, unless they're like a particularly great fit to run it. But, you know, I really like to see a deal that was off market, you know, that they had a special look at for some reason that didn't get shop. that's proprietary opportunity, that's generally a positive signal to me. So kind of the first thing I'm going is, is there a biz by sell logo in the top corner of this, this offering memo? Like, I don't love that. Yeah. I would get behind. I've never done one, but I would totally get behind a management buyout for the same reason. If you have a management team that's maybe undercapitalized, has been in the

business a long time, wants to help the owner exit. Like, I would love investing in something like that because you de-risk several factors already. That's right. So how about, you know, obviously I want stuff that's structurally stable. I'm not a venture investor, Mills, I mean, you mentioned the top. I'm not either. I'm not trying to, and if you're going to do venture investing, that's not what this podcast is about. That's not why you're listening. You know, if you're going to spray and pay venture investments, there are other podcasts probably that will teach you to do this.

You know, the lens that Mills and I are coming at it from is kind of more of your classic search or real estate. I want mid-teens to high, you know, 20s, IRAs, right? And we'll talk about your own rates later. We're not looking to shoot the moon here. So I'm not trying to predict the future. I'm more looking for a business that is not going to zero. We'll get to structure in a minute. I don't want a structure that increases the chances of going to zero either.

But one of the first questions I'm asking is, is this business likely to be around in five years, right? Is it dependent? And this is, I see a lot of e-commerce deals because of my background. you know, is this a fad? Is this heavily dependent on a e-commerce platform like Amazon where the winds can shift? Is it heavily dependent on an advertising platform that, you know, where the algorithm can change? Yeah. I'm kind of my first screen is I want anti-fragility in this business because it's kind of structurally.

This is a private deal, right? This is illiquid capital. Like your capital is going to go in. And if the winds of change kind of come blowing through, if it's a public equity, you just sell. on out. But there's no selling. So you're going to ride kind of the next five years of macro, whatever it is. And so I want to make sure that it's not like massively exposed to huge macro uncertainty. Yeah. No, I think that's a I think that's a good point. And that's like, that's why we've tended to invest more in real estate. One, because it's roofing related and because

it's so asset backed. Like our, our podcast has a cash flow backed component. Real estate is an asset-backed component. The venture stuff is, you know, just like excitement. Vives. Rives backed. Yeah, exactly vibes. So then like, let's say you, you know, you've heard about the opportunity. You're excited about it. It checks your boxes in terms of like what the business is. Then the next set of questions is like structure, right? Who is who is doing what? What are the shared economics? What are the unique economics between the two parties. Like the devil's in the details on this. And your first time around, you will not know any of the questions to ask. It's a totally different set of questions and vocabulary than just buying a business for yourself. And structure is the type,

let's say it's a great business. Structure can make it, even if it's a great business, a bad deal to invest in. Yeah. So let's kind of talk through the components of structure. First, let's talk about the deal structure, which is what structure is the sponsor getting in acquiring the business. And then the second level structure is what structure are you, the LP, experiencing your capital in as equity in the deal? So the first question I want to know is kind of capital structure on the acquisition. What is the price? Are they paying a reasonable price and how much leverage are they planning to use and how much equity? And that gets back to my earlier point about fragility. If this thing is very under-equitized, a whole lot of leverage,

and they're paying a super high price, that's just more risk, versus something that is, you know, they got a big margin of safety on the price and it's over-equitized. You know, that might bring the returns down a little bit,

but that's not the end of the world because what I don't want is a zero. And I think that's a lot of times, it's, you've got to thread the needle as a sponsor too, if you're going out to LPs. There's this compulsion to show the biggest IRA number. Like this is going to, like,

we're going to return, this is going to be a great deal. And you can definitely juice the IRR by ramping up the debt, right? But balancing that margin of safety, if you show two conservative people aren't going to get excited. But threading the needle of the right structure that delivers good enough for turns to get people excited without getting greedy. So that's kind of the first thing I'm looking for. I just basically, we were talking about hurdle rates earlier. Like I throw IRR completely out the window because I know IRR isn't actually real.

When you look at a pro forma and you've run enough businesses and you've seen enough pro forma's. But when you look at somebody's pro forma, IRA is based on functionally like NOI or net income if it's an operating business. You and I both know, we don't actually distribute NOI. You don't distribute net income, right? There's all the money that has to stay in the business and timing of cash flows in and out and reinvestment, all those kind of things. So IRR ends up being based on like the highest possible number of cash generated in the business, assuming 100, percent of it gets distributed, which is never the case. So when I'm looking at the pro forma on a deal, I'm going, okay, RR aside, how much free cash flow do we anticipate this business to make over the

next five to seven years? And then discount from there, how much is actually going to have to stay in because we're not distributing 100% of it. Also important, too, is taxes. And the models never account for taxes because you really can't because everybody has a different tax situation. but taxes are really real. It got you that happens a lot is people will structure as an LLC. And then they've got to make cash distributions because they're going to allocate out income to everybody. And that's going to create taxes, a tax burden for you. And you better hope you're getting a distribution in order to pay those taxes.

I have definitely seen sponsors go in and not realize that they need to distribute 40% of net income every year. Otherwise, their investors are coming out of pocket for taxes. And that, so expect to get that tax distribution. Like, that's a question I always ask. Like, are you guys doing tax distributions at what rate? You typically have to assume like the highest marginal rate, you know, for everybody, which can be ironic because if you're not paying taxes to the highest marginal rate, you can actually keep some of the money.

The tax distribution. But the taxes, and that's a drag, right? You're going to run that kind of nice IRA, right, on cash distributions. But a lot of that is lost to taxes. So be aware that is a pre-tax model when you see it. One of the biggest risk in entrepreneurship through acquisition is buying a business with fragile systems. Unclear demand are a single owner who holds all the knowledge. Franchising approaches that problem differently.

You are buying into an established brand with documented systems, unit level data, and repeatable operating playbooks. The hard part is knowing which franchises are actually worth evaluating. That's why Alex Moresniak, former CEO of Two-U laundry, built Franzy. Franzy is a free platform that helps acquisition-minded entrepreneurs, franchise ownership without broker bias. You answer a few questions and Franzy shows you franchise opportunities that align with your capital, lifestyle, and long-term goals. You also get free coaching from people who have actually built and scaled franchise businesses. If you are exploring E-T-N want to understand whether franchising fits your acquisition strategy, visit franzi.com.

That's F-R-A-N-Z-Y.com. And thanks to them for sponsoring today's episode. The structure on these deals can get so insanely complicated, so fast. So there's kind of a sliding scale in my mind from like simplicity to complexity. The simplest is everybody has a common share class and everybody is just getting paid, you know, Perry Pesuit, which I hate that term, but everybody's just getting paid pro rata, right? If there's $100 of equity required and Bill, you put in 50 and I put in 50, okay, great, we're like, it's pro rata or you put in 60. You put in 40 cents. Yeah, exactly. So that's the simplest structure. Everybody has a common share class. What most of the time, though, happens in these deals is there is a preferred equity component,

where there's a preff being paid, a preferred kind of coupon being clipped, not just everybody's at common. So that pref rate ends up being like one of the headline things that you'll see in a pitch deck for something like this of, okay, you're getting guaranteed, whether it's paid or accrued, you're getting guaranteed to get a eight, nine, 10, 11 percent preff. You know, right off the rip. That becomes kind of the floor of if this business doesn't go to zero and it is creating some cash flow, even if we don't pay it out, you know, at month, you know, 12 or 24 or whatever, before the sponsor, before the GP is getting any money, I'm guaranteed to get at least this hurdle rate. There has to be kind of a balance between pref, fees to the GP and other things,

but that is going to be one of the headline numbers you're going to see is what's the preff? So I think that, so yes, it's funny because you as more real estate investor probably put a little bit more stock in the Prath than I do because a real estate, a building has cash flows. Yep. You know, a business cannot have cash flows. So when you're buying a business, if there is a PrEP, it's frequently accrued. And even if it's paid out, the sponsor typically has the right to pause the payouts and begin accruing the payouts to keep the business alive. obviously you're not going to bankrupt the business on distributing cash, you know, out to your LPs. So at the first sign of hiccup, your pref is not really the pref.

So whether or not there is a pref, I don't, this is something I put more stock in earlier in my investing career and now I put less stock in as I've been in some deals where the pref became not very relevant. And it kind of pretty quickly comes back to is there terminal value or not here. Yeah. So real estate may be more weight on that. I am much more focused on the total return profile. Yeah. So then that comes down to like first thing is maybe prep. And then the second kind of correlated thing is what is the co-invest. What's the split between GPs and LPs of the cash that is distributed? It's like a waterfall, right? Is what most people would talk about it as. So the typical kind of like traditional private equity minds. model is 2% management fee that the GP is going to charge and a 20% two and 20 is like the

model, a 20% co-invest that goes to the GP. So I put the deal together. We're not a 20% carry. Yes, carry. Yeah. So I put the deal together. I get a 2% management fee and then I'm going to get 20% carry, you know, on on this investment and then 80% goes to the LPs. There's all kinds of layers and like hurdles and things. flip if certain IRAs are met like it gets way way complicated quickly i tend to err on the side of simplicity and i like deals that are that are more simple um over one that is maybe more complicated and slightly better you know rate of return um but you'll see right as you move up and down the risk spectrum these splits start to change from 80 20 maybe to 70 30 right what's your experience been

with that bill i mean this is much more common in real estate you know where you kind of you have these cash flows in kind of search deals, you'll typically have a little bit more of a sweat equity component where the, because they're going to operate it. You know, somebody putting in a real estate deal, yeah, they're operating a piece of real estate, but it's not the same. Where, you know, you will typically get, you're going to, you can be giving the searcher some sort of free equity, sweat equity that's really vests in over time. The, and I almost, within reason, don't have a lot of sensitivity around that because typically if it works, you want the searcher to get rich. And it almost gets a little bit more binary.

It's not going to make or break, like in a middling outcome, you know, oh, I made 12%, I made 15%. You know, the search took home a little more. You know, that doesn't matter as much to me. What I don't want is the searcher getting really rich on management fees or closing fees or refinancing. fees or, you know, I've seen these deals, all these fees kind of loaded in, you know, just for kind of not creating EBITDA value, right? Like you, like I want the sponsor, the person who puts together the deal or operates the deal as CEO to get rich by creating enterprise value in the business. Not just for showing up every day. Not just for showing up every day, not just for, you know, refinancing or yes, you know, managing your capital or whatever. So

the closer the alignment is to we create equity value, which you participate in, I'd rather them participate more in the equity value, even in a rationing way, as they create more of it, rather than I get paid this rip every year. I get paid this chunk at closing, blah, blah, blah, blah, blah, blah, blah. Yeah. You know, because and also I think those are generally tells of deal people. And I like to invest with operator create value people. And they are generally just come out of the gate much more aligned on I'm going to create a bunch of value and if that happens I'm going to keep some of it okay yeah you know and that's fine with me what do you think about the like the role of debt and personal guarantees in the kind of small business acquisition space because

typically the bank's going to say any investor who owns more than 20% right is going to have to personally guarantee the debt as well and it may be joint and severable um but what's what's your experience been with that the the searcher sponsor is taking all the personal guarantee yeah i mean it's all of the lps kind of stick below that 20% for that exact i mean i'm not personally guaranteeing all of the debt on a business that i'm not right i mean it's just a total non-starter for everybody um what i the question is like is the sponsor going to have a pg on the debt obviously the sponsor doesn't want that um but i love that you know as an investor because because that that guy or girl's butt is on the line.

And they're going to work really hard. And I honestly think you kind of need that in a small business because it's going to get really hard. It's way more motivating than just I don't want to let Bill and my investors down. The bank's coming after me, you know, come hell or out water. That's right. And I mean, I do think that is, that is a risk that at times can feel unfair as the sponsor where you're personally guaranteeing all of the debt, but you don't have all of the equity upside. And so I acknowledge that tension for sure.

But the reality of the matter is that's pretty much the only way to get debt at the lower end of the market. Like if you're an SBA zone, if this is a less than $10 million deal, you know, you're not getting institutional debt. It's got to be personally guaranteed because it is an SBA loan. And so what you try to do in the structure is to compensate the sponsor for that, but with that sweat equity piece that they're getting free equity in an upside scenario. It's kind of the nature of the beast. Yeah. I think the other thing that we haven't talked about that much is like how much equity is the sponsor putting in, right? How much of how much of the, you know, are they eating their own cooking, so to speak?

So I care a lot less about what percent of the deal the sponsor is putting in and much more about what percent of their net worth are they putting in the deal, right? And I, you know, if they're PG, like PG, your net worth is on the line too. But if you're worth $100 million and you're putting in $100K and PGing a million dollar loan, you can walk away. You can walk away and you don't care. But if this PG will bankrupt you or, and that's one thing, but I would really like if you're actually putting cash into the deal that is material to your net worth, it just creates a skin in the game, which you need because they are operating the business day to day. you are not. And if they evaporate, everybody's capital is in deep trouble because nobody else is standing behind them. I have an old friend in Columbia who he was, he's, he's just kind of boiled it down to.

Like any, anytime somebody pitches him on an investment, they bring like an amazing binder and a pitch deck and all this stuff. And he's like, stop. Bring me a one page document explaining it. I want to see how simply you can dumb it down. I want that. And I want you to tell me how much money you're putting in the deal. Like those are his two. criteria, right? Because it really does. Like, how simply can you communicate the thesis and then how much are you putting in? And relative to net worth is a really helpful nuance because somebody could be putting $100,000 in and they have, you know, $150,000 of liquidity. That matters a lot. That matters a lot. Yeah. Yes, absolutely. So then that brings me kind of the third point of diligence,

which, you know, I kind of bang on on the podcast a lot, which is buyer business fit. And that to me is really important. And this is what's just so tough about being a first-time searcher or first-time sponsor is you don't have a lot of experience. It's hard to point at a lot of successful deals you've had in the past. But what you can point at, and I think people don't often do this enough, is point at your career and go, I have worked in metal manufacturing for 20 years. And I have had a very successful career. And you would hire me to run a metal manufacturing company. and I am talking about buying a metal manufacturing company. Yeah.

Right. That your resume, your career being relevant is really important. Versus I have no e-commerce experience at all. And I'm a career kind of corporate accountant and I'm coming in to buy this e-commerce business. I have no marketing experience. I have no experience leading teams, nothing. Invest in my search deal on the e-commerce business is a lot scarier.

Yeah. I think I think that like experience fit is. huge and like geography and proximity also they don't mean everything but like if somebody's like I'm uprooting my family we're going to move cross country and they're negotiating the deal it's like okay when are you moving you know and and it's hard for you to just pop over and meet the seller like there's all those dynamics of friction that start to get layered in whereas an LP I'm kind of thinking like for the same reasons that I don't buy like just random stuff in Texas you know it's going to be difficult for this person to move from

Colorado to the Carolinas and evaluate a deal or whatever, you know. Yep. Yep. So I think buyer business fit, either experience, it's great if you've done it a few times on successful deals because do it. It's one thing to buy and operate a business. It's another thing to raise outside capital, put a deal together, buy, operate, and report to your LPs, right, while you're running the business, manage maybe board dynamics or reporting dynamics, et cetera. It's another slight layer of added complexity. So I love somebody who's done a deal before with outside investors and return capital and that's successful. But I would at very least like to see that you, you deserve to be running this business, right? I would hire you to be CEO of this business

independent of the fact that you found the business and put the deal together. Yeah. So trying to keep this a little bit tight and bringing it back, Mills, you know, one question everybody kind of always wants to know is what hurdle rate do I have? Like if I'm going to invest in private deals, what return should I expect? And nobody ever really talks about this, so I like talk about it. And I'll go next. But how do you think about, you know, what return you require to invest in a deal or deals broadly as a category? And how'd you come up with that number? I think it changes like every day and every deal. And like if I'm coming off of a bad update from a private market deal, I'm like, man, my hurdle rate just went up, you know. I think like it,

ultimately you've got to be compensated for the risk, right? You have illiquidity risk. You have, you know, small business risk. You have minority shareholder risk. Like all those things kind of layer on. And you should be compensated for the fact that you can't push a button on your Schwab account and, you know, convert your equity to cash in, you know, T plus three. So I would say that it's got to be for me like high teens in order to make it make sense. otherwise there's just a gap there where I would say I'd rather be liquid, you know, and not take this big. And specifically, you're mostly talking about real estate. Yeah, yeah, mostly on the real estate side.

And then if it's an operating business, I would say it's riskier, you know, because it's not asset back and the hurdle rate needs to move up from there. Yeah. And, you know, for me, I think people investing in private deals really underweight what their hurdle rate should be at the beginning. I would say my hurdle rate has gone up. the more that I've done it. Because that illiquidity is really real. Because it's not just, oh, I can't get my money back because, you know, oh, crap, I want to invest something else or I want to buy a boat or

whatever. It's more that your capital is in the ground and it's not agile and you can't get out of the way of the oncoming hurricane. Yeah. Right. Anymore. Like you are committed and you're going to ride out that storm however long it takes and it could take a decade. You know, everybody goes in with best intentions, but it can be very liquid for a very long time. So it's one thing to invest in something that compounds at 3% a year. And you go, crap, that wasn't great. What if you're locked in for 10 years? And that's typically how it works, right?

When it's not going great, the timeline stretches. And so you're compounding at a lower rate for even longer. So that illiquidity premium needs to be pretty high for me. So I, you know, sub 25%, it's just tough for me to get excited. And now you'll probably be thinking, you know, as a searcher, well, geez, it's hard to deliver plus 25% to equity. Like, yeah, it is. You know, there's a lot of deals. And you've got to pay the right price in order to have enough room to create enough value.

The capital structure has got to be right. You've got to have a plan to grow the business. It's pretty hard to deliver 25% plus IRA kind of just on financial engineering, you know, unless you're just stealing it from the seller. or you got a whole bunch of really, really, really friendly debt or something, it's hard to get above 25% without a real credible growth plan. And that's why I'm kind of back to underwriting, does this person deserve to run this business? Yeah.

Can they really scale it. Do they have some secret, you know, superpower to unlock growth in this business and add value for everybody? That's right. And we just think about like the S&P returns 8%, you know, on average over time. So like 12% to go from like, I can buy the best largest, most profitable well-run businesses in the world, right, at 8%. To go to the smallest amateurly run, no offense, you know, thin balance sheet, idiosyncratic risk, et cetera, businesses.

Like going from 8 to 16% is not getting me excited to move that far on the risk continuum. Yeah. So I'm kind of a mid-20s guy and I got to feel pretty good about that. Yeah. Yeah. I got to see upside above that. And I think like all this comes back to we're talking about this, you know, as people who invest in deals.

And I think it's helpful to people who listen to the podcast who are like, how do I invest in deals? But it should also be helpful to people who listen to the podcast who are like, I'm trying to figure out how to raise capital for a deal. Right. Like here's a peek behind the curtain of what questions is your investor base going to be asking so you can kind of preempt them. Yep.

I, yep, absolutely. So I hope this is helpful to people. Send us deals. Hey, we're going to take our own advice. Mills and I invest in private deals. Send them to us. We're easy to find on the internet. Send us deals.

We love to look at them, give you feedback. Huge kudos to the listeners who actually go out and buy some of the business that we profile on the pod and reach out to us. Love that. I've helped people just for free that I didn't invest with because I want people to win. So reach out to us. if you, you know, if, yeah, well, I hope it's helpful. Well, I mean, I think there's also like this nuance to this bill where like people ask us all the time, hey, can I pick your brain on this thing?

And it's like, well, there's not enough hours in the day for me to spend an hour consulting with you on a call about things. But if that's a very different question than what I think the more nuanced approach would be, which is, hey, I've got this deal put together. I'm trying to source X amount of dollars of capital. Do you have an interest in it? I'm going to immediately open that document and look at it and evaluate it over a, you know, less than five minute period. And if you're on the right track, I'm probably going to want to have a phone call because now all of a sudden, like, we're both selling each other on different things versus just can I have an hour phone call to ask you kind of very rogue questions that I can figure out

otherwise. Totally. And also, at least have listened to this episode before the call. This is what I'm going to send people. This is why I wanted to record the episode. Yeah. Yeah. All right. Well, I hope that was helpful. If you've got feedback, You can tweet us or access or post us, whatever it's called these days, on X. Or if you want more content like this, hop on our email newsletter. It's ACQU-Anon.com. We have 500 episodes, not just like this. Usually we review deals, but 500 episodes about small business acquisitions.

Go on the website, get on our newsletter. We'll email them to you if you don't like audio. And we hope to see you on the next episode of Acquisitions Anonymous.