- Fund: Silver Field Capital
- Search type: Classic search fund
- Partnered/solo: Solo
- Stage: Search
- Location: Chicago, IL
- Alma mater: Chicago Booth (MBA), Michigan (BA)
Shamus Hines is two years into his search at Chicago-based, classic search fund Silver Field Capital. Shamus is searching solo, aims to leverage his experience in SaaS and financial services, and has had several companies under LOI.
Highlights of this interview include:
- The importance to an investor syndicate of institutional search fund investors
- The advantages of a proprietary search
- Downsides of fragmentation within mature industries
- Shamus’ experience trying to buy a Registered Investment Adviser business
- Signs that a seller isn’t really a seller
- Red flags that commonly emerge during diligence
Editor: What’s your personal background?
Shamus: My father was a business broker while I was growing up and I became fascinated by middle market companies listening to him talk about his work.
When I left college I worked in investing at UBS and then in sales and operations management at Morningstar. I helped sell Morningstar’s SaaS products and enjoyed that environment and appreciated the commercial strength of their products.
I got both my CFA and my MBA while working in Chicago.
How’d you learn of search funds?
I first learned of search funds at Chicago Booth. I was taking the course Entrepreneurial Finance and Private Equity when I was blown away by the Stanford case about Jaime Turner and Kirk Reidinger’s purchase and operation of a vocational school.
I then took Steve Morissette’s M&A Strategy course (also at Booth) and was inspired by the case of Justin Norman – a b-school grad who had worked in investments, noticed that all of his clients had made money through business ownership, and then bought a business mostly using debt capital.
After doing more research I decided that I wanted to do a search fund, but I was concerned about my background – I hadn’t worked in banking or consulting, hadn’t gone to HBS or Stanford, and didn’t know any big money investors.
To burnish my resume, I worked on an independent research project under Prof. Morissette that was published in the Journal of Private Equity. This project presented the opportunity to get in front of a lot of experienced search fund investors and to learn more about search funds. I talked to a lot of familiar names within the Booth community – O’Connor, Agnew, Augustine, Furlow – as well as institutions like Anacapa that habitually back searchers. Later, I called these same guys and told them that I’d like to raise a fund and asked for meetings.
Why’d you decide to search solo?
I considered searching with a partner and tried to make it work a few times, but found partnership a tricky problem to solve. My biggest challenge to partnership formation was that I knew I wanted to lead a company myself and had a hard time balancing this desire with what I understood to be the benefits of partnership. I was open to the prospect of working with someone else, but didn’t want to “force it.”
What were your goals for your investor syndicate?
My priority was to land a couple of institutional search fund investors – when you’re on the fundraising trail everyone asks whether you have a couple of these guys on board, and they’re able to write big checks if necessary once you’re ready with a deal.
Second, I wanted to include investors who were opportunistic – willing to go into non-traditional industry verticals or growth profiles.
Above all I wanted smart investors – I spoke to many searchers and asked which investors they found to be particularly discerning, and tried hard to find folks interested in backing me specifically rather than the model in general.
Finally, I was sure to include Chicago investors since I’m a Chicago guy.
What operational role do you see yourself assuming once you acquire?
I’ll focus personally on the elements of business management that I consider to be most important and to which I think I can add the most value. These elements are sales, marketing, pricing, cash management, and accounting.
I hope to delegate operations management to steady pairs of hands.
How have you used intermediaries?
Almost all of the search fund deals that I’ve seen close have been brokered, but I’ve run a mainly proprietary search which I admit is more difficult. It’s hard to find a business using proprietary methods:
- Business owners are bombarded with contact every day from brokers, PE funds, and other searchers
- Once you do reach an owner, the fact that you’re the one initiating the discussion of sale makes it less likely that the owner is a real seller
- The decision to hire a broker remains the single best indicator of an owner’s willingness to sell!
- A good broker/banker can be extremely useful in managing the emotions and expectations of a buyer during the negotiation process
I’ve remained stubborn in the face of these advantages of intermediaries because I believe that it’s possible to get a better deal done through proprietary methods. If a business is so good, why does its owner need to hire a banker to sell it?
What’s been your search strategy?
I’m looking for a business that’s both situated within a growing industry and has tailwinds within its niche.
Significant industry fragmentation can be helpful, but fragmentation can be a double-edged sword: The more fragmented an industry, the more likely it is that the services provided by companies in that industry are commoditized.
Take the insurance brokerage industry, for example – There are a ton of insurance brokers out there all doing more or less the same thing. What’s going to differentiate you? How are you going to grow profitably? If an industry’s old and still fragmented, it’s probably fragmented for good reason and you need to ask yourself what will be your competitive advantage as you chase growth.
You list on your fund’s website the following target industries: Database/Information Management, Financial Services, For-Profit Education Services, Health Care Services, Niche Manufacturing, Outsourced Business Services. Could you describe your search experience within a few of these verticals?
I initially looked at Registered Investment Advisers (RIAs) (Ed: RIAs are independent wealth management offices compensated based on their clients’ assets under management (AUM) % fee rather than on brokerage commission). The RIA industry is highly fragmented and contains a big chunk of advisors with enough AUM to generate the EBITDA I wanted. I’m a CFA with extensive work experience in finance and felt comfortable becoming a financial professional.
I eventually decided that RIAs just aren’t great targets for a searcher. The owners themselves are often times highly critical to the business, as it’s difficult for a searcher to retain clients once the seller departs.
I also found RIAs to be very expensive to buy based on EBITDA multiple. I nearly closed on five different RIAs but settled on none of them.
Within the financial services vertical I also considered non-financial services providers e.g. certain types of database aggregators. I got a few of these under LOI and nearly closed on two of them.
Outsourced Business Services
My experience in SaaS sales at Morningstar showed me the value of businesses that maintain and sell access to web-based databases. These sorts of companies can sustain highly profitable, recurring revenue streams with real competitive advantages.
Sounds like you’ve had a lot of deals nearly close – what’s prevented them from crossing the finish line?
Lack of seller motivation
The most common challenge has been owners’ unwillingness to sell when it came time to consummate a deal – sometimes an owner who claims he’s ready to sell isn’t a real seller at all.
I’ve found it important to develop a professional sense for who’s a real seller and who’s not. The tell-tale signs of someone’s being not a real seller are:
- Being slow to respond to data requests during diligence
- Constantly trying to push off negotiations
- Trying to re-negotiate an agreed-upon price
- Making you deal with people other than themselves (underlings, intermediaries)
Another sign that a seller isn’t really a seller is when he makes statements like “I’m willing to sell, but only at $X price.” Typically this price is high and the seller’s attitude is that there are so many prospective buyers out there that some day one white knight will come along and pay them their price. I guess this is possible, but what it means for the searcher is that it’s time to cut bait and move on.
Finally, owners with a history of busted deals with other prospective buyers are no more likely to sell their business to you than they were to the buyers who came before you. Unless the owner’s circumstances have changed since these failed deals (e.g. health issues have arisen), it’s best to steer clear of these types.
Issues discovered during diligence
The other major challenge I’ve faced in getting deals closed is the discovery that the business’ performance isn’t what it seemed to be at first blush.
One common problem is that EBITDA doesn’t survive diligence, usually because costs are higher than initially described. For example, some owners under-hire and operate their companies on a shoe-string budget that could never support the sort of growth-oriented practices I’d like to implement as an operator.
Other problems are that the company’s sales pipeline is weaker than I (and sometimes the owner) thought, or that more capex is needed than the owner has anticipated.
These issues are, of course, the reason we do careful diligence. The trick is identifying them quickly so that you can move on to better opportunities.
Thanks for your time, Shamus!