Matt Estep – Bosworth Capital Partners – Midwest Supplies

Basic info:

  • Fund: Bosworth Capital Partners
  • Search type: Classic search fund
  • Partnered/solo: Partnered (independent partners)
  • Stage: Exited
  • Location: Chicago, IL
  • Alma mater: Harvard (MBA), Purdue (BS)


Matt Estep describes his acquisition and operation of Midwest Supplies – a seller of home brew beer products. Highlights include:

  • How to use business school to extend a search “runway”
  • How certain behaviors can waste searchers’ time
  • What stood out about Midwest Supplies when Matt first visited the company
  • Why it’s a good idea to primarily use brokers during a search
  • Life after search as a PE investor


Editor: What’s your personal background and how did you become interested in ETA?

Before business school I worked as an engineer in the utilities sector and drove race cars professionally. My wife worked in private equity and one night a few years after I had graduated from college we went out to dinner with a colleague of hers who had gone to Stanford GSB and done a search fund. I spent all evening asking him about his experience and decided that night that I wanted to run a search myself.

I applied to business school with the intent to raise a fund and run a search immediately after graduation.

How’d you use your business school experience to support your search fund goals?

I didn’t, really. I spent my first year getting an internship in banking, then decided a week into my internship that that field was not for me. I didn’t raise my fund until my second year, which in hindsight wasn’t the best use of my business school experience.

What business school did give me was credibility and confidence – both were invaluable during my search and stint as an operator.     I also did look at a few businesses (I think I signed 5 NDAs while in school), but nothing came of these inquiries.

How would you have done things differently given what you know now?

If I could do business school over again I would have begun searching the day I got to school. I would have set up a website, signed NDAs with brokers, and started looking at businesses as soon as possible.

Searchers fail to acquire a business because they run out of time and/or money. Using my time in business school to search would have increased my “runway” – the amount of time I had to build and exploit a pipeline of business opportunities – and therefore improved my chances of success.

I would also have made better used of my business school classmates. I was concerned during business school that I lacked the financial acumen to run an effective search and close a deal, but many of my classmates possessed these skills and would have been glad to help me.

Could you talk more about the importance of not wasting time?

I think a lot of searchers neglect to some basic practices and that this behavior costs them a ton of time.

For example, if you see a teaser/CIM you like you should be on the phone with the broker immediately asking how much he expects the company to sell for. The broker’s going to hem and haw about how they need to wait to let the market tell them what the company’s worth, but you’ve got to push past those objections and get a number – if the broker is doing his job right he’ll have a very good idea of what the seller expects to receive because the first conversation the broker had with his client was “How much can I get for my business?”

So ask the question immediately: “Is this business going to trade at 4x or at 7x?”

I recently spoke to a searcher who had been in discussion with a promising company for two weeks and who still hadn’t asked for the seller’s price expectations. I asked why the searcher didn’t yet have price information and he explained “Well, I want to get all of my questions in before pressing on price.”

That searcher may have wasted two weeks because expectations might be outrageous. There is no excuse for wasting that kind of time – you need to learn price expectations quickly, and not doing so is a sure-fire way to collect a string of busted opportunities and to run out of runway.

How did you go about raising your fund?

I raised $375,000 during the second semester of my second year of business school. I met with 60 prospective investors, received commitments from 35 of them, and ultimately took money from 17 limited partners. I sold 15 units for $25,000 each, with two of the units split among multiple LPs.

Did you have any goals for the composition of your investor syndicate?

My initial goal was to fill my LP roster with three types of investors:

  1. 1/3 Character witnesses – people who could attest to my ability and attitude
  2. 1/3 Experienced operators – people who could help during the operating phase
  3. 1/3 Transaction experts – people who could help me close a deal

In hindsight, none of these attributes matter – I think a searcher should take money from the people with whom he/she most wants to work.

How did you think about searching solo vs. with a partner?

I wanted to search with a partner all along but wasn’t able to find one before I raised my fund. My eventual partner and I were introduced after each of us had independently started to run our searches, and we maintained a degree of independence from one another even after we began looking at deals together.

In a partner I hoped to find someone with financial acumen and deal experience. My eventual partner had been a banker for 5 years, and I think his experience was helpful during our search and acquisition processes. My partner’s impact on me was important to my professional development.

I believe that the search fund experience can be more fulfilling if done with a partner than if done solo. Some of the crazy nonsense that you’ll experience just can’t be shared with people who haven’t seen it – it’s nice to have someone going through these experiences with you and it’s good to be sounding boards for each other as you try to make sense of it all.

I often hear prospective searchers complain about having to “split the economics” of a deal with their partner, and my response to these complaints is that if your sole focus is money you shouldn’t be doing a search fund. The risk adjusted returns of a search fund aren’t high enough for searchers.

What do you think about self-funded searches?

I think a self-funded search can be a good path, but I’m not sure that the potential for higher financial payoffs should motivate searchers to use this method – while self-funded searchers usually come away with a higher ownership percentage than they would have if they had run a funded search, the companies they acquire tend to be smaller and the nature of the operating challenge tends to be different.

Say you buy a $1mm EBITDA business using an SBA loan. An important difference between your situation and the situation you would have been in had you bought a $3mm EBITDA company via a classic search is that you have very few resources to help you manage the business. Hiring a new sales person, a marketing person, whatever – anything that gives you personal operating leverage – cuts deep into EBITDA. It’s very difficult, meanwhile, to grow a business from $1mm to $3mm without making these sorts of hires. In fact, it’s hard to grow a business from $1mm to $3mm, period – harder, I think, than growing a business from $3mm to $5mm. When you buy one of these very small businesses, you’re just buying a job and you must then work yourself out of that job and into a position in which you can think strategically.

If you do manage to grow your $1mm EBITDA business into a $5mm business and you do own 80-90% of the equity, then of course your economics are going to better than they would have been had you bought a bigger business using a classic search fund.

All considered, both self-funded and classic can be good paths but it’s important to understand the type of operating challenge you’re choosing under each method.

How did you find Midwest Supplies and what did you like about it?

Midwest Supplies came to us through an intermediary. By the time we acquired we had issued 12 LOIs and signed 6 of them. One of those six was Midwest.

The business interested me because it had grown 35% per year through the recession. By the time we saw Midwest Supplies I had personally visited about 75 companies, and my visit to Midwest was the first time I left a site visit thinking “I could run this place better than it’s being run today.”

The company’s managers were succeeding despite themselves. I walked around the warehouse floor asking employees questions like “How many orders do we receive? How many shipments do we make?” And everyone answered that they didn’t know. The way the owners had measured their performance was simple: If there was more money in their bank account at the end of the month than there had been at the beginning then they declared the month a commercial success.

  • Aside, this behavior is indicative of the sort of lack of sophistication that you’ll encounter during your search – sellers often have strong awareness of their cash position but no means of monitoring their business from an economic perspective.

We had conviction about Midwest despite its being a consumer business. Most searchers avoid consumer businesses because consumer tastes can be so fickle – searchers want their success as operators to depend on their ability to execute and want to minimize the unmanageable risk that customer interest shifts away from their products or services for no fault of their own.

A trend in consumer tastes towards home brewed beer are what powered Midwest’s performance through the recession and, fortunately for us, this trend continued throughout our ownership of the company.

Sounds like you used brokers heavily during your search – do you recommend that other searchers do the same?

I do recommend the use of brokers because I think their use increases the odds that you’ll acquire a good business.

If you talk to search fund investors you’ll probably find that the majority recommend that their searchers run proprietary searches. While strictly proprietary searches make sense for investors, I think searchers should keep in mind that:

  1. Most search fund deals that get done are brokered, and
  2. It’s really hard to find a proprietary deal

It’s understandable why an investor would recommend a proprietary search – they’re making many investments in different searchers and they’re hoping that one or two of these searchers hits the ball out of the park. They believe that home runs are more likely to be found using proprietary methods (which is probably true!) and so it makes sense for them to encourage all of their searchers not to rely on brokers.

Searchers, meanwhile, really need to acquire a good business to run even if that business isn’t a home run opportunity. I think you’re much more likely to acquire a good business using a broker simply because sellers who hire brokers want to sell. It can take a very long time to convince a hesitant seller to sell, so seller motivation is important and the hiring of a broker is the strongest indicator that a seller is in fact motivated. Again – you cannot waste time talking to sellers who aren’t actually interested in selling.

What did you think your focus would be as an operator once you bought Midwest?

I assumed I would be doing a little bit of everything. When you acquire a small business you become CEO, CFO, head of HR, etc. – you must be prepared to do it all.

I think it’s important that you’re excited about or at least comfortable with the nature of the product or service you’ll be selling once you acquire. I was comfortable selling home brewing supplies. A search fund peer of mine, however, is excited to be taking control of the brain trauma rehabilitation business that he just acquired. I think it’s great that he’s ready to work in that field, but I don’t think I’d be happy there even if the company were great.

Do you think now is a good time to run a search?

I would have no qualms about starting a search right now, and I think any time is a good time to run a search provided you’re personally ready to do it.

Sure, there’s lots of money flying around right now in the search fund world, but there are also lots of good businesses for sale! When the economy goes bad valuations drop, but owners of good businesses tend to hold on and ride those times out because they know they’re not going to get a good price for their company until the market comes back around.

Whenever I hear someone complain that it’s “so hard to search right now,” I respond that it’s always hard to search. I’m not a believer in trying to time markets – it’s difficult to do that over the course of a career.

What have you been working on since you exited Midwest?

I now invest in lower middle market companies as a private equity investor rather than as a search fund entrepreneur. My challenge is now a bit different in that I can afford to spend longer periods of time searching for businesses to buy since I don’t have the same time and money constraints I had when searching for Midwest.

Thanks, Matt!


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