Peer Effect
Best way to scale? Your peers have the answers.
This is the podcast for scaleup founders looking for insightful, actionable wisdom from some of the best operators around. Each week we’ll explore one secret that other founders and experts are using right now and how to implement it.
It’s practical wisdom to build the company AND life you want. Hosted by renowned founder coach and advisor James Johnson.
You’ve survived to £1m, now let’s scale to £10m+.
Peer Effect
Navigating M&A to Unlock New Markets, with Matt Bodnar
Ever thought that Mergers and Acquisitions (M&A) are just for the big names with endless cash?
In this episode, ex-Goldman Sachs sailor and ‘Forbes 30 under 30’, Matt Bodnar explores how founders can leverage acquisition strategies without needing a massive war chest.
Together we explore how you can use M&A to scale your business, by understanding these key insights:
1. Creative structuring and resourcefulness can open doors to acquisition opportunities earlier in your business journey than you might think.
2. Whether through hiring, partnering, or advisory roles, bringing in knowledgeable individuals can help you navigate M&A effectively.
3. Think Outside the Box! Small acquisitions can be a strategic growth strategy and offer valuable assets, talent, or customer bases while requiring minimal upfront investment.
For more weekly insights on acquisitions and growth strategies, connect with Matt Bodnar on LinkedIn and check out his podcast, The Science of Success.
More from James:
Connect with James on LinkedIn or at peer-effect.com
Ever wondered if acquisitions could transform your business, but felt you lacked the budget or expertise? You're not alone. If it's your first time listening, welcome to Peer Effect, the podcast that helps you scale to 10 million plus, thanks to your peers sharing the one thing that has changed the game for them. I'm James Johnson. I'm a founder coach who has worked with hundreds of founders globally. I offer practical support to founders looking to scale from 1 million to 10 million. Joining me today is ex-Golden Sacks ailer, matt Bodnar, sharing how you can creatively leverage M&A without needing a massive war chest, whether you're exploring growth strategies or deep in the process. This episode is packed with actionable insights to change the way you think about acquisitions.
Speaker 2:It's going to vary a lot depending on the maturity of the market that you're in and how fragmented it is and how many targets there may or may not. Be. Like if you're a you know, de novo startup, that's like, you know, forging new territory in terms of like building your tam and like educating consumers or and or customers about even what you do. It's going to be pretty hard to find some add-ons, right. Like if you're in a more mature segment or just, you know it doesn't even have to be that mature, but I guess, a segment that just has more kind of ecosystem of companies, then add-ons become a much more attractive possible growth strategy. Right?
Speaker 2:I think if you're only focusing on organic growth, you're missing out on a lot of opportunity to potentially scale, and potentially scale really quickly.
Speaker 2:Right, because if you look at the big boys and what they do to create enterprise value, in most cases a lot of their growth is driven via acquisition.
Speaker 2:Right, and part of that's because organic scaling gets harder the bigger you get. But if done correctly, m&a can leapfrog you know your growth trajectory and really put you in a position to scale much more rapidly or access new markets, access talent, whatever it might be, and so I don't think it's an either, or I think it's just a question of having that arrow in the quiver, having that tool in the tool belt, to know, hey, if a deal comes to your desk, how do you think about executing and evaluating it and seeing whether it's worth pursuing? And then what I've seen again and again and I think this is applicable in sort of some businesses that I've invested in or acquired, and also I've seen other founders do it as, like, you do one deal and then you know maybe you do another one. And then you start to think about, hey, these have been great sort of opportunistic deals that have come across our plate. How do we really thoughtfully, programmatically, approach this? To say, hey, what if I keep doing these right?
Speaker 1:how do we what if we define?
Speaker 2:a criteria. What if we got, went out and started seeking companies like this, because the, again, it varies tremendously by end market that you're kind of serving, um, some end markets there's tons of acquisition targets and some there's very few um, but you know, I mean it's, it's the way I look at is like if there are targets available, the same time energy resources, etc. That you would put into the acquisition of a customer Right, and obviously I'll make up some numbers, but what your LTV of your customer is, et cetera, like we'll just doesn't really matter for the sake of the example, but you put in X amount of dollars to retain a single customer Right. The same sales effort could go into acquisition because all it is is lead generation, meetings, pipeline negotiation, closing. It's an enterprise sale, effectively right with a similar sales cycle, except that one closing adds 100 or 1,000 customers instead of one right.
Speaker 2:And so again, it's not exactly analogous, but it's a leverage of effort sort of strategy that I think can be really valuable if pursued correctly what's interesting.
Speaker 1:So I bought a business in my previous life and someone said to me I was doing a bit of research we're doing. And someone said to me, if you're going to buy one company, buy, buy more. And the logic was like it's, it's a skill, and you start learning it and, like you're probably the first, one's probably not going to go all that well, but you just need to commit to the idea that this is a core part of your strategy and then get better at it.
Speaker 2:I totally agree, for better or worse. That's definitely a skill set that I've spent a lot of time and energy cultivating and I think it's a really useful one. Right and again, it doesn't replace organic growth. I mean, right and again, it doesn't replace organic growth. I mean it can to some extent, but I don't view them as competing. I view them as complementary and if you want to really accelerate your growth trajectory, they can multiplicatively stack together right. So if you acquire, you know, an additive service or a customer base that maybe there's an opportunity to cross sell either that product into your customers or your product, those customers. There's some overlap there. There's opportunity to expand LTV and it's not just adding a million dollars of revenue, it's adding a million dollars of revenue and cross-sold and added 20% revenue lift in our existing book of business and another 10 or 15% on the new business that we acquired. And there's tons of different I really don't like the word but synergies around buying businesses that can be very value creating in a lot of ways.
Speaker 1:But it probably could also be a little bit distracting, kind of like fundraising for a founder, in terms of it does slightly potentially out of your business and you do need people around you who can potentially run it.
Speaker 2:Yeah, I mean it's not dissimilar from customer acquisition, right. It's like some companies are founder-led sales, some companies have a full sales force and the founder product focused. It's going to vary widely. And so I'd say similar for M&A right, and you can have M&A that's largely founder driven. You can outsource or delegate it to a corporate development team or an M&A team, right. I mean, if you think about large enterprises, maybe the CEOs sometimes more or less involved in acquisitions, but I mean bigger enterprise. You know companies, fortune 500s, that kind of thing. I mean they have teams of in-house people that are doing corp dev and M&A and finding acquisition targets and buying businesses for them on a recurrent basis, right?
Speaker 2:no-transcript. I mean, that's what private equity firms do, right, so they'll go buy a platform company or a new business acquisition. Then their team will sort of seed the M&A function within that business. So they, hey, we're going to go buy an HVAC business and its strategy is just to buy smaller HVAC businesses, right? And so the big PE parent will start leading that process and eventually they'll hire like one deal guy into the organization and then they'll hire like a junior person and then, you know, five years down the road they have like a five-person deal team that's doing all of that. It says sourcing, closing, structuring, financing, all of those in-house acquisitions, and the PE firm is sitting back at the board level, just sort of you know, maybe providing some additional capital or whatever, but not running their M&A strategy day to day, whereas in the early days they might be running the bulk of it.
Speaker 1:So I think it can vary. Before we jump into the sort of the hows on this, what's your path to this point?
Speaker 2:Yeah, so short version of the path is I'm from Nashville, tennessee in the States, grew up in Nashville, I worked at Goldman Sachs in New York for a number of years. Out of college I came back to Nashville in 2011. So, pushing forward 14 years ago 14, 15 years ago and I came back to do a couple of things, but one of them I sort of stumbled into the purchase of a really small IT business. Like I mentioned briefly earlier, it was doing about a million dollars of revenue. It was, at the time, sold point of sale terminals. So you may remember we used to go into a restaurant or coffee shop and now everything's an iPad. But back then they were the giant, you know big computer terminals where you would like hard key everything. So business, um, what I mean, since still around, but kind of that that end market has largely died or transformed. Um, but that was the original business and they had a bunch of issues with their cashflow. So they were selling these average installation is about $50,000. And so they would sell a restaurant this big $50,000 hardware package. They would go pay their suppliers 25, 30 grand and then they would do an absolutely terrible job collecting any of their receivables and it was sort of classic I've ever read E-Myth by Michael Gerber kind of founder, technician or technician, owner, manager, different roles. Technical business founded by a technician who had very few real business skills in terms of things like AR collection, back office, accounting those sorts of things and so classic paper profits but huge amounts of receivables uncollected, unable to really have enough operating capital to kind of keep the business going. And so I came in sort of structured a deal that said, hey, I'll help you guys out and in exchange for some ownership of the business, help turn the business Turnaround is probably somewhat of an overstatement, but kind of clean the business up, get it on good footing. I spent the first six months basically just pounding on people's doors and getting thrown out of buildings to, you know, threatening to shut people's systems down and stuff to collect accounts receivable. But I learned a very important lesson about the difference between cash and AR and to pay very close attention to AR to ensure that it's being collected really diligently.
Speaker 2:Fast forward, we did a few other acquisitions in that business eventually got into the managed service provider space. We bought a small data center at one point and we eventually completely divested the point of sale business because we felt rightfully so that the business was eventually going to effectively wither with things like Square point of sale and Toast wasn't even around then, but brands like that kind of entering the marketplace. And then we also bought a small software business that sort of served a similar end market. A lot of the end market we were serving was in the restaurant space at the time, and so we bought a small software platform and then around 2016, 2017, I effectively fired myself as CEO of the business and said, hey, I want to focus full time on really being an investor, building a portfolio of operating companies, brought in a seasoned technology executive to run the company, and then in 2020, we took on some growth capital would effectively be a Series A to continue scaling the software business, and our managed service provider business has kind of been just sort of plugging away in the background, technically a subsidiary of that business that provides a lot of additional growth funding basically for our SaaS company, and we've been growing it since then.
Speaker 2:We were contemplating an exit, sort of before. Saas multiples took a massive haircut in the last two or three years, but now we're back in growth mode, grind mode, whatever you'd call it. So that's the first business I was really involved in and then, when I phased out of operations, eventually I set up effectively a holding company called Eidolon Capital, which is an investment entity that buys small businesses, basically really targeting more old economy type companies, typically industrial distribution, business, services, those kinds of businesses and I'll give you a sense of what's in our portfolio, but really focusing around basically just super old school value investing, right. So I read too much Berkshire Hathaway, Warren Buffett shareholder letters and stuff like that and basically landed on a thesis of hey, let's buy good businesses that we can buy at good entry multiples, that we can hold for a long time horizon that hopefully aren't generally going to be massively disrupted by things like crypto and AI and all of these other hard to predict technological factors that are shaping the market today, and so our current portfolio.
Speaker 2:We have a business that manufactures portable sinks, handwashing stations, that sort of stuff. We have a business that distributes pallet racking, industrial shelving, material handling, etc. Right. So sort of boring businesses, old school, very industrial focused. We have a staffing business that staffs primarily industrial warehouse, skilled trades, forklift drivers, those sorts of positions.
Speaker 2:Recently sold a durable medical equipment business that we had and sort of actively looking for $2 to $5 million EBITDA manufacturing and services businesses that fit that similar criteria and in a lot of cases, our thesis is really entered, sort of the right price and structure, but also a lot of these businesses.
Speaker 2:There's a tremendous opportunity to professionalize them from a system standpoint, from a processes standpoint, from a sales and marketing standpoint. I mean, I can give you lots of case studies and stories about some of the crazy antiquated stuff we've found, but when you're buying a business that's 51 years old and operates on pen and paper and it's the 2020s, it's amazing sort of the efficiency that you can create in the improvements you can make without having to be a predictive genius of like, hey, this new AI trend is going to change the world. It's like cool, but we just want to sell some shelves, and I think we can make ourselves more efficient by doing X, y and Z right. So that's kind of our strategy. That was a long-winded answer. I don't know if it encompassed everything, but that's how I think about it.
Speaker 1:Well, I think it's fair to say that you've got some experience in this, which was certainly one of the takeaways from that. I mean, it's kind of ex-Goldmans pounding the streets, actually getting your hands dirty and then getting into some sort of real businesses to see how they operate and scale them Probably gives you quite a unique perspective. I'd have thought.
Speaker 2:And one of the weird things is there's this burgeoning ecosystem of whether searchers or ETA, entrepreneurship through acquisition, that whole world independent sponsors another term you'll hear thrown out there. A lot has really blown up in the last five years, certainly maybe the last 10 years, where a decade ago nobody had ever heard of those things and five years ago people were starting to say I think I've heard of that. Then now it's like you know, at HBS, like you know a ton of the grads like want to go and do this type of stuff. But when I started out, like none of this vocab existed. A lot of these structures and sort of the marketplace was very, it was very Wild West. So I had to almost unlearn a lot of the things you learn in sort of big finance and really get way more in the weeds, both from a deal structure standpoint, from a negotiation standpoint, from a strategy standpoint and even from an operating standpoint. You know what I mean, Even stuff as little as as operationally, like at Goldman.
Speaker 2:You know if you tell someone to do something, it's just done right, like I mean that's, it's all.
Speaker 2:It's like you say, hey, do this thing, great. And similarly, someone tells you to do something, you do it right, that's it, like it's not a thing you have to think about. When you're managing a small business with like 25 employees, you learn very quickly that just because you say, hey, go, do this thing, you might have to follow up, you might have to check in, you need to build a system. You'd have a process and a KPI and this is how we do it. And all of these things in the real world aren't necessarily the same as they are when you're at some big, bold bracket institution and from a financing and deal structure standpoint, same thing. The way big deals get done is a lot different than the way smaller deals get done and I think, advantageously, you can really unlock a lot of value with the right deal structure and approach to doing small deals too. But I don't know if that's where you're going, but just high level made me think about it.
Speaker 1:It was so I've started working, became my career for a multinational in Asia, and the whole thing was like getting really deeply involved with businesses and having a good strategy but then executing it, because what my old boss called not building paper tigers. It's like creating a PowerPoint, but until you've learned that actually if a plan's too complicated, it won't work. Until you've learned that Debbie in accounts is going to torpedo your plan because it messes up with her internal power structure. And I think a lot of founders, when they're kind of in that sort of scaling stage, they probably haven't really thought about acquisition. It's kind of, oh, maybe that's a sort of a series c, series d thing, but I think it'd be quite interesting just to explore, like I've talked before, like the timings when you think about it, but like how you might go about practically doing it. So you've got a founder, you've never done it before. You're thinking, oh, this sounds interesting. I get the whole idea of like doing both organic growth and acquisition. What would you recommend?
Speaker 2:Yeah, I think it's a really good question and it's going to vary tremendously by what end markets you're serving, in sort of how active the space is, how many participants and players there are, and it's not necessarily a one-size-fits-all. I think there's certain industries where it's a no-brainer not necessarily certain software sectors or sort of startup verticals, but lots of service industries where it's a tremendously value-creating strategy because there's enough ecosystem of target companies to make it make sense, to make it worthwhile, right? I mean, if you think about and home services broadly has become a very fertile ground for roll-up acquisitions over the last five to seven, maybe 10 years and every major vertical of home service there's 40,000 plumbing companies in the United States. There's 40,000 electricians in the United States. Technology sector there's not a ton of players. It's harder to have a programmatic approach to going out and hoovering up smaller deal. That said, I think there's a lot of ecosystems where there are many potential targets and a lot of times having a really creative approach can help you unlock some potential economics or pursue opportunities that maybe if you just looked at and said, hey, I don't have the cash to buy this thing, you know, I'm not going to do it. Well, there's tons of ways to do deals even if you don't have the cash right. I mean, whether it's stock, whether it's with earnouts, rev shares, structures, joint ventures, acqui, hires all kinds of different ways to bolt on pieces of a business. And to me it's like seeing in 2D versus 3D. It's like you can grow just organic and that's fine If you understand how to grow using M&A. It just unlocks additional opportunities, right. You meet somebody and you think about, hey, how would that fit into our business and would it make sense? And if it did, how would we think about structuring it?
Speaker 2:I think a lot of folks myself included, candidly for many years of my life think, hey, one day when I have this massive war chest of cash, I can go out and do deal. But it was all just sort of these organic one-on-one conversations. I didn't set out to say I was going to do that, I just sort of stumbled into it. Stumbled into it, we bought multiple different companies without putting any capital up front because we just didn't have it. And we sort of had the opportunity and we're like, well, how could we make this work? And I ended up buying things on earnouts and rev shares and stuff like that.
Speaker 2:But I still, after having done all that stuff for years, was like one day when I grow up, I want to be in private equity and go buy businesses when I have $100 million fund or whatever. And what I realized is like, well, you don't have to wait and there's actually tons of structures and strategies you can use. And if you have an existing business, you're leagues ahead versus. I mean, it's still possible to do it. If you want to buy even just a new standalone platform acquisition, if you have an existing company, there's a tremendous amount of leverage. You can pull strategies you can use to buy businesses without needing to have a big war chest.
Speaker 2:You can do deals that are still super accretive, even if they're all stock deals, and effectively infinitely scale those as long as like, if we think about it, most PE stuff really operates around EBITDA multiples. Just from an example of roll-up economics but for software, if you're thinking about revenue multiples right and rule of 40 and all that stuff, like if you're trading at, I'll just make up a number four times ARR right and you go out and buy a million dollar ARR business for two times right or one time or whatever two times right or one time or whatever, and we're even. This is including if you bake an earn out and a seller note and some other structure into the deal, which you probably want to do from a risk mitigation standpoint, and you know whatever else. But let's just say you buy a million dollar revenue business for two times ARR, right, you're trading at four. As soon as that million dollars moves onto your P&L, it's now worth $4 million. So you just created $2 million of enterprise value, which is the stroke of a pen, even though you gave up and it actually math this out in a spreadsheet you'll see. But like you gave up, whatever the percentage of your company is, like you're, if you give up 10% of your company you're remaining.
Speaker 2:90% is worth more now because of that $2 million bump in value than your 100% was worth before. Obviously the math varies depending meaningfully on ownership and entry multiples and exit multiples and all that stuff, but the framework applies either way. Is if you're buying companies that are in a creative multiple, even if you're doing the do's all stock, which I think is the most punitive way you could do it to yourself, right, no debt, no external whatever, no structure. It still makes really good economic sense. And then you layer some structure and suddenly buy that thing for two X ARR and put you know half, you know maybe half a turn of ARR is seller financing and there's an earn out and all this stuff and then you're only diluting yourself.
Speaker 2:5%, right, or whatever the numbers are, so that's a high. You know, into the weeds a little bit, but I really think it can be a powerful growth strategy. And if you don't understand some of the nuances of how to apply it, you might just rule it out and say one day we'll think about that. But you could be missing opportunities to add capacity, add team access, additional markets, cross sell or upsell your product into their customer base or have an add on product that you could cross sell into your customer base, like all kinds of different avenues of access. That if you just rule it out, you might again say one day we'll do that. But if you, if you have that lens, that perspective, that set of tools, it just gives you more flexibility to hit your end goal. And to me it's not. Should I do organic or M&A? It's really both and. And if you have the lens open, you're going to see more opportunities to hit your ultimate end game target, whether that's revenue, enterprise value, exit impact, whatever it might be.
Speaker 1:So I think what's a really nice term from that is this idea that you don't need a war chest, but that probably so you could. You can do it almost any time if you're smart, if you're not an ex-Goldman Sachs sort of highly financially savvy sort of founder. It does still feel like some of these terms are coming out like feels like simple to you, maybe more confusing for other people. How would you go about doing that? Because then you feel M&A oh, that involves investment bankers, that's expensive. Like, oh, I may not need the money to buy the business, but where do I buy the expertise? Or how do I learn about this stuff? Sorry, how complicated and how would you go about doing that side of things?
Speaker 2:Yeah, I mean, I think it's like anything as a founder of a business, right, You're not an expert in every area of the company, and it's a question of bringing in the right expertise and resources. You know you want to be the dumbest person in the room, ideally, right, and you want to surround yourself with people who are better at everything. You know, whether it's product, whether it's sales, whether it's, you know, ops, scaling systems, whatever it might be, you know you don't want to be the bottleneck on any of those things. I think the same thing applies to M&A, right. I mean, certainly, if you have a skill set and expertise, you can have a company just, we touched on this earlier, but it's like, it's like selling, it's like adding new customers a company that's founder led sales and the founder his tip of spear on all biz dev and customer acquisition, and you can have a company where the founder doesn't speak to customers at all and it's all run through a sales team.
Speaker 2:Same idea there, right, you can bring in and scale up the right M&A resources over time bankers, which are, you know, sort of paid retainer expertise, whether that's in housing, whether that's bringing in advisors and giving them, you know, either stock or cash or whatever compensation, like there's lots of different ways to structure it. It's just a question of approaching it creatively, Like I think it's a question of resourcefulness and not a question of resources, and I think doing deals is the same thing, but to me it's. It's just like anything in any company that scaling it's about surrounding yourself with people who know what they're doing and are smarter than you, Right, and that applies to engineering, it applies to product, it applies to sales, it applies to you know M&A right across the board.
Speaker 1:So you don't have a war chest, but you do have to have the person, whether that's yourself, yourself, or whether that is someone that you're brought in, potentially on a fractional basis, would you say. It's a rule two is one day's war chest too. You do need someone who knows what they're doing in and around you or your business.
Speaker 2:I think that's helpful, but they don't necessarily have to be an employee of the business. Right, they could be an advisor, they could be. I mean you can. A lot of these skill sets are, at least in my opinion, learnable, you know, I mean I've been in the world for a while, but to me it's a very learnable, applicable skill set. And with the right you know, people by your side, I think you can solve lots of challenges using M&A as a framework and as a toolkit.
Speaker 1:We mentioned before that say this is something that you tend to advise on, advise, share your knowledge on. So if people did have more questions, is there a way that they best way to follow you to learn some of this stuff?
Speaker 2:Yeah, I have a free newsletter called the Deal Mastery Insider where I'll share case studies of deals, look at acquisitions, talk about structure and financing and even things like raising money and sourcing and finding acquisition targets. Like all of the above lot, I write about it, do podcasts about it, talk about it. But yeah, I try to consolidate most of my thinking into my newsletter and it's sort of a weekly dose of M&A insights and strategies and approaches.
Speaker 1:But I think what I'm really taking from this is actually you can do a lot earlier than you think. It needs less money than you think. It's really just creativity.
Speaker 2:Absolutely. It varies to some extent by sort of the marketplace of competitors or complementary businesses that are in your ecosystem, but there's tons of opportunity in lots of different verticals for acquisitions of these little tiny businesses. A lot of times those can be done the most advantageously, right. So I'll give you one or two case studies of that. So we bought in our IT business we bought a data center the data center co-location business that the guy was thinking about closing it down. It was doing like it wasn't, it was tiny, it was doing like $400,000 a year of revenue, right. I mean he's like, hey, I'm gonna shut this division down. Do you guys wanna buy it? And we were like we're interested but we don't have a war chest sitting around to dedicate towards this purchase. So we'd have to figure something out.
Speaker 2:We ended up negotiating basically a purchase at 10% of revenue for three years, right. So he made 40 grand a year, made 120 grand on an asset that he was otherwise going to close down. He had a different business that he was focused on and we bought it. And day one our profit margins were higher than 10% of revenue or whatever. So it was net cash flow positive to us. We actually moved our offices into that building and saved a bunch of money on rent over time, and so it was like a nice little win-win.
Speaker 2:But there's tons of these, especially any sort of technical field, where you see a technical founder starts a business, plateaus out at a couple hundred thousand dollars of revenue, whether it's plumbing, engineering, it, marketing, agencies. There's tons of these different spaces where somebody who's really good at the craft will start a business, do the thing to a certain threshold and then they don't have any real systems capabilities, ability to scale beyond just what their personal capacity is. Right. They get bottlenecked out and tapped out. A lot of times they get burned out and want to just do something else, but they don't want to either abandon the project, they don't want to look like a failure, they don't want to let down their customers.
Speaker 2:If they have any employees, they don't want to necessarily abandon them. And so those are great opportunities to say hey, instead of doing that. Right, it depends a little bit whether the founder wants to keep going or whether they want to leave. But if they want to leave, you can say, hey, we'll take this thing off your hands, we'll pay you some kind of you know percentage of something over time and you can, instead of just closing this, you can monetize it and generate some returns off of it over time and you'll make some money. You'll have a soft landing and you'll have a home for your customers, your code base, your employees, whatever it is that you wanted to kind of offload versus just throwing away.
Speaker 1:I hope you found today's discussion helpful and showing how M&A can be a practical growth strategy, even for smaller businesses. Matt shared great tips on structuring creative deals and building the right support team, proving you don't need a big budget to get started. Stay open to acquisition opportunities. They could unlock major growth. For more insights, check out Matt's newsletter, the Deal Mastery Insider and his podcast, the Science of Success, and don't forget to join us every Wednesday on Peer Effect for more stories from founders and experts who've made it happen.
