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In this insightful conversation, Drake Hill and Max Kleeman from Funded Ventures discuss their journey from Washington University MBA graduates to aspiring small business owners. They share how they’re taking a different approach from traditional private equity, focusing on businesses that are too small for institutional buyers but perfect for hands-on operators.
Below is the full transcript from the episode.
John Bartlett
Drake and Max, thanks so much for joining me today. Where are you guys located?
Max Kleeman
I’m based in St. Louis. Yeah.
Drake Hill
We’re both out of St. Louis.
John Bartlett
Oh, wow. Are you from there originally?
Max Kleeman
I’m from St. Louis. I grew up there. Drake is from Effingham, a small town outside of St. Louis, about an hour and a half, in Southern Illinois.
John Bartlett
Cool. Tell me a little bit about your background, about how you guys came together, what it is that the firm is doing, and what you guys are doing individually, and what you guys are looking for. Give me a little bit of your background. Max, you want to go first?
Max Kleeman
Sure. Drake and I are both partners and entrepreneurs in the residence at Funded Ventures. It’s a small investment firm that was founded by Brian Wolfe. Brian’s a former partner at a law firm, and teaches classes on buying and building small businesses now at Washington University in St. Louis, and also the University of North Carolina.
Drake and I were both one of Brian’s students. We completed our MBAs at Washington University about a year ago, and since then have partnered up with Brian together, each running our own adjacent searches, but looking for a lot of the same stuff, to partner with Brian that we would then operate in partnership together for hopefully a really long time.
Background prior to that. Prior to business school, I worked for a small family-owned business in St. Louis, and that’s where I just started to begin to understand how important they are, not only to our local communities, but our broader economy. That’s ultimately why I wanted to go out and partner with Brian to search, to buy a small business owner in partnership with him that we can grow and operate together. That’s me and what I’m up to. Drake has a similar story, but I’ll let him tell it.
Drake Hill
Just to be clear, I think-
John Bartlett
Head off, Drake. You got it, man.
Drake Hill
I think we agree that I convinced Max to take this elective class called Entrepreneurship Through Acquisition, which was the class that our partner Brian taught. We really loved it. We would both leave class and start texting each other right away, like, “This is so awesome. This makes so much sense, the ability to be a business owner without the risk of starting up, with an established customer base and team, with a brand.” It was super appealing.
Brian was also all about it, so we just continued that conversation with him. By the time we graduated, it grew into this idea of, “Let’s partner together, let’s make it happen.” He’s a very successful attorney and investor, so he’s committed his expertise and capital and ongoing strategic support to help us each individually find a business.
As for my story, grew up in a pretty small town. Almost everyone I knew worked in a small business of some sort. I knew I wanted to be in business in some fashion, so I did an undergrad in finance, and then went to went straight to law school at WashU. I don’t regret going to law school, but I knew there was something missing about that path, some lack of growth, lack of real world, real value building. I tacked on an MBA to try to pivot back to the pure business side of things, and I’m really glad I did because it allowed me to find this path that really resonates with me in a way that a big corporate career just doesn’t.
John Bartlett
That’s great. When we talk to sellers and help them understand what their business is worth and who potential buyers for the business might be, we talk about potential buyers falling into three groups. We talk about private equity firms that are doing roll up consolidations in specific industry sectors. We talk about strategic buyers, which might be competitors of theirs today. It’s someone that’s in the business. It’s a company that’s looking to acquire other companies to grow, and there might be a strategic fit or a geographical expansion that makes sense for the particular seller to be appealing to that type of buyer.
The third group that we talk about are owner operators. It sounds like you guys would fit into that third group, where you would come in, you would be boots on the ground, you’re going to replace the current owner-founder in terms of their day-to-day responsibilities, in terms of manage the team, in terms of running the business, and you’re going to work with them through a transition period, and then they’re going to retire or move on to the next chapter of their life, whatever it might be, and then you’re you’re going to replace them from a day-to-day responsibility standpoint.
Am I thinking about where you guys are coming from properly, and you would be in that third group of buyers that we would talk to sellers about? Is that right?
Drake Hill
That’s exactly the way that we think about it, too, in those three buckets. I feel really strongly about this. I think this is a really important point that speaks to our differentiating factor and really why we exist. We’ve been searching for several months now, and so we have a good sense of who’s out there in the market, what kind of acquisitions they’re doing, and what types of industries.
No secret that big private equity and these big strategics can pay more. They’re able to justify higher valuations because they have a much bigger platform. There are financial advantages to being big. By and large, that’s the private equity model.
We stand out from that in two ways. Private equity needs your company to be a certain size financially. It’s industry-dependent, but usually close to a million in EBITDA. The other is the team size needs to be of a certain size, a certain structure, a certain caliber. Many buyers like them plan to run their businesses from afar. Big firms are not set up to put boots on the ground. Your team needs to be in a position to take things over. It can’t be too dependent on the seller.
That’s where we’re different. Although we operate under this Funded Ventures brand, we are individuals first. We’re going to be boots on the ground. We plan to relocate to wherever the business is, spend a 110% of our time in it, and dedicate our lives to it. That can be a game changer for companies that are a little less mature when it comes to team size and financial size.
John Bartlett
You talked about private equity firms being interested in businesses that are doing at least $1 million of EBITDA or free cash flow. If they’re doing $1 million, and let’s say the net margins are in the 20% range, that means from a revenue standpoint, they need to be doing at least $5 million.
I think what we see in the market is the same. A business needs to be at least $5 million of revenue, at least $1 million of profit for it to be large enough to even make sense from a private equity firm standpoint. Businesses that are smaller than that, it’s not that they’re not good businesses. They are good businesses. They’re just not large enough for a private equity firm to be able to devote the resources to complete the transaction to integrate them into some larger holding company.
These smaller businesses that might be under $5 million of revenue, you guys would be good alternatives to speak to those buyers and perhaps consider buying one of their businesses. The size of the company is going to make a difference in terms of what might be appealing to you. You touched on some other things in terms of, the size of the company is going to dictate the number of employees that they have, that’s going to dictate what the management team looks like and what the infrastructure looks like.
Smaller companies that don’t have as well-formed management teams that are going to be less appealing perhaps to private equity firms, you guys would be willing to take on some of those smaller businesses that need to build out a marketing department, or a sales department, or an ops department, or a finance department, or an HR department. You’re going to be able to buy those smaller companies and help them scale up over time that are, again, going to be too small for private equity firms. Am I saying that right?
Max Kleeman
100%.
Drake Hill
Exactly.
John Bartlett
Are there certain types of industries that are particularly appealing to you, or are there certain parts of the country that are appealing or perhaps no-gos for you?
Max Kleeman
I’ll start first, Drake. As far as industry, I think Drake and I would be pretty similar. As far as geography, we might differ just a little bit. We like a lot of trades businesses for the same reasons that a lot of other people do.
With far as a characteristics’ perspective, we’re looking for a small business that has predictable revenue streams, preferably recurring or actually recurring in a fragmented growing market that aren’t too terribly CapEx heavy. A lot of trades businesses that fit that criteria are HVAC, pest control, pool services, just to name a few. Drake and I like, and have been searching for a lot of those types of businesses.
As far as geography, Drake and I both are a little bit different, just given where our families are located. We both are based in the greater St. Louis area today, and our partner Brian is based in Chicago. We initially were looking in just those two geographic markets.
Over time, as you can expect, there’s only so many acquisition targets that fit what we’re looking for in those two markets. I’ve expanded personally from the Midwest all the way out to the West Coast. I’m looking on the left half of the country. I’ll let Drake give his spin on that answer, but that’s how I’m thinking about industry characteristics in geography.
Drake Hill
I think about it in two ways. What sorts of things limit downside risk in a deal, and what sorts of things can enable growth? As far as limiting downside and preventing something catastrophic from happening to the business, we just want to see strong revenue, whether it’s fully contractually recurring or just a long history of customers returning consistently. Also, customer concentration, hopefully no more than 5% or 10% of revenue from one client, for obvious reasons if we would happen to lose one of them post close.
To make sure that we’re buying into an industry that’s growable, it’s about the assets and the capital expenditure that’s required. Low CapEx just allows for more free flowing growth. We don’t want to be limited by having to inject a bunch more capital to grow, whether that’s heavy equipment or inventory. That’s just our general rules. All of this is fungible and situational, but those are our general guidelines, and it’s led us to mostly service businesses, home services, IT MSPs, home health, stuff like that.
John Bartlett
Tell me how you’re thinking about these businesses from both a valuation standpoint and from a transaction structure standpoint.
Max Kleeman
I’ll start on valuation standpoint. We think about it, what’s pretty much middle of the fairway in the market. I think a lot very similar to how you think about it, John, a multiple of sellers’ discretionary earnings, or adjusted EBITDA, which is their EBITDA plus any expenses in the business that is directly related to that owner. A multiple of that, and just their general market price multiples, somewhere between 3-5 times that number for sub $1 million assets is how we think about valuation.
The other thing I wanted to mention that we also think about on your last question, if I may, is the amount of work that the owner does in the field. For folks like Drake and I, we are not licensed contractors. We’re not going to be able to do that type of work in the field if the owner is doing it. We just take that into consideration on whether or not the acquisition target is a fit for us if a large portion of the revenue is tied to the owner doing work out in the field.
As far as just getting back to valuation, generally think about it very similarly to how you do a multiple of SDE or adjusted EBITDA.
John Bartlett
What about transaction structures? I know in a lot of deals, there could be a cash component. There could be a seller note component. There could be an earn-out component. There can be a rollover equity component. Are you open to all four of those options, or are there certain options that would not be appealing from a deal structure standpoint for you guys?
Max Kleeman
Drake, you want to handle that one?
Drake Hill
Yeah. I would just say, it’s all about cash flow for us at the moment. It can be a small amount of cash flow, but the deal needs to just have a little bit left cash after the debt gets layered on. We’re a lean, mean, little partnership that needs to put food on the table for our families. Valuation is typically driven by that. Deal structure is typically driven by that.
Like I said earlier, if it happens to be a seller that the business is really dependent on, we’re happy to partner with them. Whether that’s rolled equity, seller financing, consultancy agreements, whatever makes sense, we’re happy to go in, get our hands dirty, partner with them for some period of time, and one-on-one learn everything we need to get it transitioned over.
John Bartlett
What’s a normal process in terms of, when you’re originally introduced to a deal or an opportunity is brought to you, do you set up a call with the seller? Do you go visit the seller at their facility? How do you build the relationship with the seller, and how does the seller get comfortable with you guys as being the right potential buyer, partner, steward of his business, so to speak?
Max Kleeman
It’s a good question. I think about this a lot, is the first beginning call, whether phone or Zoom, or in-person meeting, sets the stage for the entire, not only transaction process, but hopefully, a really solid successful transition thereafter.
The way I think Drake and I both think about it, but I’ll just speak for myself, is it depends on whether or not a broker or intermediary is involved. Let’s say that there is, of course, we would execute an NDA to receive confidential information from them, whether that involves just basic 3-year history of financials, profit and loss statement, maybe a list of their equipment and inventory that they have on hand, a little bit of information about the background of the business, its origin story, and the team involved, and then just a general overview on the services that they’re doing, and their end client that they’re performing those services for.
We take a look at all of that information. If it checks at least size and geography for what we’re looking for that we mentioned earlier, we would set up a first distant initial call, an intro call, that we would ask you or another intermediary to help us organize. From there, we can pretty quickly determine, this given on the first intro call, financials, all that stuff, if it’s something that’s going to be at least a good fit for us.
We go directly to start getting some folks involved, whether that’s a lender. We’ll set up an in-person meeting. Happy to come do a lunch or or or a dinner or something like that in person, and then we’ll just get all the information ready to present the seller an offer.
John Bartlett
You have the various conversations. You get all the information that you guys need. You perhaps have a meeting with the seller. You present an offer. The offer’s accepted at this point. From that point until the transaction closes, what are the steps that are involved from getting it from offer accepted to close, and how much time does that take?
Max Kleeman
I’ll start with the time. Generally, about 60-90 days from a signed letter of intent to that purchase agreement being signed. Within that time frame period, the first 2 weeks is just getting other information that we may need, not only for just the lender, but also for us to just start doing a little bit more of a deeper diligence where we’ll just look to just better understand the business and get more information than we had access to before that.
We would get a lender involved, and then also get an accountant involved to perform what’s called a quality of earnings report. That’s just a report to help us better understand what that actual free cash flow number is from an unbiased perspective, and also help us better understand the working capital needs and all that kind of stuff. We’d first get those things in place, get the bank involved, bank process is about 60-90 days, and then sign the purchase agreement, and we’re off to the races.
John Bartlett
They’re buying the business, or you’re buying the business. What assets as part of the business are you buying? Are you buying trucks, equipment, inventory? What all are you buying, and what are you not buying?
Max Kleeman
It’s a good question. I feel like it’s a hard question to answer because every seller is different. Every business is different. Drake, I’d love to get your perspective too, but generally, we’re buying equipment, we’re buying the trucks, we’re buying the goodwill of the company, its name. We’re buying, if they have any, maintenance agreements or anything like that in place, we’ll take over that, and then also the inventory, and AR and AP, accounts receivable and accounts payable.
From there, it depends if there’s a business, but we’d also look at employment agreements and stuff like that as well. Generally, we think about it. Unless there’s a reason to do a stock sale, we would prefer an asset sale.
John Bartlett
If they own the real estate that they’re running the business out of, if they own that in a separate entity, are you buying the real estate also, or are you just buying the operating company, and you’re going to lease the real estate back from them if you choose to run the business out of that location? How is that handled?
Max Kleeman
I’d prefer not to purchase the real estate, only the business, and do a leaseback at just whatever terms is-
John Bartlett
Standard market, right?
Max Kleeman
Yeah. It just makes most sense for all of us involved. Drake, I don’t know if you have a different view. I don’t think you do.
Drake Hill
Yeah.
Max Kleeman
That’s how I think about it.
John Bartlett
From the time the offer is accepted until you close can take 60-90 days. At what point through that 60-90 day period does the owner announce something to the employees, and at what point, if at all, do you guys meet with the employees prior to closing?
Max Kleeman
It’s a good question. It’s a hard one to answer. Pretty close to the signing of the purchase agreement, we would want to meet the employees. Probably not sooner than that, just on the off-chance something goes awry. You can attest to this. Not every deal under LOI always closes. Of course, we would love to meet the employees before a purchase agreement is signed, but very close to when that purchase agreement would sign just to… I just think it makes most sense for everyone involved.
John Bartlett
Let’s say the business is doing $4 million a year of revenue, and they’ve got 12 employees, 14 employees, whatever the number is. These employees have been there for a period of time, and they’ve got a compensation structure in place, and they’ve got benefits in place, and they got roles and responsibility. Do you see the compensation, the benefit package, and the roles and responsibility? Is that going to change a lot after you buy it, or everything’s going to stay basically the same post closing?
Max Kleeman
Drake, you can answer this, too. The first thing that we were told, and when we took this class maybe 2 years ago, was do no harm. Do no harm for the first 18-24 months. We would not envision changing really anything in that first year. It’s really all about just making sure that it’s a successful and smooth transition, and just making sure from our perspective that we fully understand and take over those previous roles and responsibilities that the previous seller was doing, and then look to not only make this work better for the employees, but also just look to try and improve upon just systems and processes in general from thereafter.
To answer your question, with comp and all of that kind of stuff, would that change? Not at all. If anything, we would want to make it better.
John Bartlett
The seller. The deal has closed. Money’s been wired. The day after is here. What are the seller’s responsibilities day 1 post close? How long do you envision the seller continuing to be involved in the business in some form or capacity?
Max Kleeman
I can try and answer this question too, Drake. It’d be great for you, too. I think 90 days is a good peg for that transition period where the seller is with us full-time. On that first day, it’s really just getting to know if we didn’t have the chance to meet everyone in person and all that good stuff beforehand. It’s just having that introduction meeting and conversation with everyone.
I envision that first 30 days spending time with each employee, spending the day with them, doing ride-alongs, going out to whatever they’re doing on a day-to-day basis, and really just trying to better understand what they do, and how we can ultimately make it better. Also, that first 60 days is really just also beginning to better understand the roles and responsibilities of the seller, what they were doing and how they’re just transitioning all of that kind of tool set and knowledge that they had to us, and also, just any relationships with suppliers and customers and that kind of stuff, too, over the following 90 days. I guess that’s how I just start to think about 30, 60, 90 days.
John Bartlett
Got it. It goes into phases, I guess.
Max Kleeman
Yeah. That’s how I think about it. Drake, I don’t know if you think about it differently.
Drake Hill
I just think it’s extremely situational. Sometimes it’s necessary for a long transition period. Sometimes it’s not. It depends how dependent the business is on the seller. Some deals, it makes sense to be a clean break.
John Bartlett
It’s going to vary. I guess part of it depends on what the seller’s objectives are as well. Do they have a place in Florida, and they’re looking to get down there as fast as they can, or are they not quite sure what the next chapter is going to look like, and they’re looking for a soft landing where they can take a little bit of time to figure that out? It’s about finding common ground that meets everyone’s objectives.
When you’ve looked at these businesses, obviously, you’re you’re buying these businesses because of the legacy, and because of the cash flow, and because of the consistency that’s there, but you’re also buying them because you think there’s an opportunity to grow the business. What are some key areas that you would be looking to improve the business, drive more efficiency into the business, drop more growth into the business?
When you’ve looked at businesses that you think are good fits, and you think about, for the first year, these are the three or four things. Once the deal is closed and once the deal is stabilized, and everyone feels good about the day after, when you start thinking about, how do you improve these businesses, how do you professionalize these businesses, how do you begin to take them to the next level, what are some of the areas of, I hate to use the term, low-hanging fruit, but areas that you see immediate opportunity?
Max Kleeman
Drake, do you want to add on this one, or you want me to?
Drake Hill
We hear a lot about how sellers near retirement age are pretty happy and complacent. Sometimes we see the financials, and they’re growing less fast than they used to be. They say, “That’s because this is a lifestyle business for me. I’m just chilling. I’m near retirement, and I don’t have the energy that I used to have.”
We think that’s a huge advantage for us coming in, is just looking at things with a different perspective, bringing a fresh energy. Mostly, we think about it in terms of marketing and advertising. How can we go out and bring that fresh new energy to put more business in the door, really.
As far as the operations go and driving efficiency on the operations side, that’s going to come with time. That’s not something that we can come in and immediately do on day 1. As we go along with it, and we figure out the business, improvements there will come.
John Bartlett
What are your long-term plans with this initial business? Are you buying it to grow it over a 3-5 year period, and then you’re going to sell the business? Is this what you plan on doing for the next 30 years of your career, and this is your retirement plan? What’s the big picture here in terms of what your plans are with each of these respective acquisitions?
Max Kleeman
It’s a great question. I think for me is, this is what I want to do with my life and my career. I want to be a small business owner operator for as long as I possibly can. It is, as you know, John, really, really hard to buy one small business. Our goal is to buy one small business that we can hopefully own and operate for a really long time. We do not have a hold period or an exit period that we are targeting, like a lot of strategic, or not necessarily strategic, but private equity firms will have in their funds.
That’s part of the reason why Drake and I wanted to partner with Brian, is the flexibility on that. To answer your question, I don’t know what growth looks like, whether it’s just via sales and marketing, and growing top line revenue, or whether it is a couple acquisitions along the way. But this is what I want to do with my life, is to be a small business owner, to buy and build a small business for hopefully a really, really long time.
John Bartlett
Talk a little bit about the search from ETA world, how that has evolved and changed over the last 5-10 years?
Max Kleeman
Drake, do you want to handle that one?
Drake Hill
Yeah. I think it was 20 or 30 years ago whenever folks from top business schools started doing a traditional search fund model where they would go out and raise money and do the whole thing. Only in the past 5 or 10 years did the self-funded model with some SBA debt become more mainstream, and all of a sudden, a lot of those guys are flooding into the market.
We’re somewhere in the middle. We have one single investor that’s very closely aligned with us, versus a traditional model, where they would have lots of different investors on their cap table, and versus a strict-self funded model where it’s a mid-career professional guy who’s putting all the money in himself.
John Bartlett
I’m a huge supporter of all you guys that have chosen to go the entrepreneurial route as opposed to guys that typically go to business school and they come out. They go to work for a private equity firm or go to work for a hedge fund or an investment bank or a consultant. I applaud your sense of courage and your sense of adventuresome and your willingness to roll up your shirt sleeves and control your own destiny, so to speak.
I often make the comment that I think the world would be a better place if we had a lot more business owners and a lot fewer W-2 employees that are out there working for big organizations. This would be a better world out there.
I wish you the best. Anything we can do to assist you with deal flow, to help you find any deals, we’re fully supportive of the journey that you guys are on and hope we can find a good business that makes sense for the both of you. We’ll be sure to put contact information in the footnotes here that if anyone out there wants to reach out to you guys directly, they can do that.
Anything in closing that you would want our audience to know about potentially selling the business to a couple of young guys like you?
Max Kleeman
Drake?
Drake Hill
I would just say, if you’re selling a business, make sure you’ve thought your priorities through. Everyone wants a big check. What else is important to you? Is it your employees, your customers, your community? Even if it’s something small, like the name of the business, you want the name of the business to stay the same, if that’s important to you, those conversations. Find a buyer that gets you and will honor that.
John Bartlett
Cool.
Max Kleeman
I would a 100% agree with that.
John Bartlett
That’s awesome, guys. Thank you again for your time, and let’s go find you something. Let’s go find you a home, and you guys can be off on the next chapter of your life also. Thanks so much for doing this, and we’ll be in touch.
Max Kleeman
Awesome. Thanks, John.
Drake Hill
Thanks, John.
John Bartlett
Thanks, guys. Have a good day.
Max Kleeman
You too.
John Bartlett
Goodbye.
