How to Succeed in the ETA World: Insights from Sam Razati

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Here is what my team and I learned from this interview: (These are notes from team members, writers, sometimes AI, and even listeners who submitted what i learned loosely edited and shared here) - If it seems a bit unrefined, you're reading our notes, so. yeah. -Ron

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Article:

How to Succeed in the ETA World: Insights from Sam Razati

Note: The following article is based on a podcast interview with Sam Razati, founder of Pursuant Capital. The article is written in the voice and writing style of the podcast host.

Introduction

In the world of entrepreneurship through acquisition (ETA), success is not guaranteed. It requires a unique set of skills, a deep understanding of the industry, and the ability to navigate the challenges that come with buying and operating businesses. Sam Razati, founder of Pursuant Capital, is a powerhouse in the ETA world. With his extensive experience in buying and selling businesses, he offers valuable insights and guidance to aspiring entrepreneurs.

In this article, we will delve into the key themes discussed in the podcast interview with Sam Razati. We will explore his journey into the ETA space, his approach to operating multiple entities, his involvement in the search fund community, and his insights on identifying great operators. By analyzing these themes, we can gain a deeper understanding of the ETA world and the strategies for success.

Journey into the ETA Space

Sam Razati's journey into the ETA space began with a realization during his time as a lawyer. He discovered that his true passion lay in the business side of deals, rather than the legal aspects. This realization led him to explore the world of search funds and small business acquisitions. Through trial and error, he gained valuable experience by buying and selling businesses, eventually leading him to found Pursuant Capital.

"I stumbled on a podcast… learned about search funds… and realized this might actually work. The only thing I know how to do is help people buy and sell companies." - Sam Razati

Operating Multiple Entities

Managing multiple entities can be a daunting task, but Sam Razati has developed a unique approach to ensure the smooth operation of his holdco. He focuses on being a "master of special projects," stepping in to handle accounting, finance, M&A, and other high-level tasks that are not necessary for the day-to-day operations of the businesses. By doing so, he allows the businesses to thrive without being reliant on his constant involvement.

"I built my entire holding company around the idea that in order for the day-to-day operations of any of these businesses to stay steady and grow, I can't be needed in the day-to-day." - Sam Razati

Involvement in the Search Fund Community

Sam Razati is actively involved in the search fund community, offering guidance and support to aspiring entrepreneurs. He hosts boot camps where he shares his knowledge and brings in industry experts to provide insights on various aspects of the ETA process. Through these boot camps, he aims to help individuals become owner-operators through acquisition and provide them with the tools and resources they need to succeed.

"The whole reason I do this is to help people get in the seat and get investment in small company purchases." - Sam Razati

Identifying Great Operators

Identifying great operators is a crucial aspect of the ETA process. While there is no magic formula, Sam Razati has observed certain traits that are consistent among successful operators. However, he acknowledges that the backgrounds of these operators can vary greatly. The key is to assess the risk factors associated with the business and evaluate the operator's ability to navigate those risks.

"The skills you may or may not have in managing people are far more important to searchers than any book has written about because they all write about the search phase and not the operating phase." - Sam Razati

Implications and Future Outlook

The ETA world presents both opportunities and challenges. It requires individuals to be adaptable, resilient, and willing to put in the hard work. Sam Razati's insights shed light on the importance of finding the right balance between involvement and delegation, as well as the need for ongoing support and guidance within the ETA community.

As the ETA space continues to evolve, it is crucial for aspiring entrepreneurs to stay informed and connected. The availability of resources such as boot camps and peer groups can provide valuable support and help individuals navigate the complexities of the ETA journey.

Conclusion

Sam Razati's journey in the ETA world offers valuable insights for aspiring entrepreneurs. His approach to operating multiple entities, involvement in the search fund community, and insights on identifying great operators provide a roadmap for success. By understanding the challenges and opportunities in the ETA space, individuals can navigate the path to becoming successful owner-operators through acquisition.

The ETA world is not for the faint of heart, but with the right mindset, skills, and support, individuals can thrive in this dynamic and rewarding industry. Aspiring entrepreneurs should embrace the opportunity to learn from experienced professionals like Sam Razati and leverage the resources available to them to achieve their goals in the ETA space.

Deeper Key Concepts - Notes from Staff and AI.: 

Concept 1: Buying And Selling Small Companies

Sam Rosati begins by recounting his realization that he had a unique skill set in helping people buy and sell companies. He explains that his expertise lies in assisting individuals in navigating the complex process of acquiring or selling businesses. This realization led him to recruit his younger brother, who had a background in operations, to join him on this venture.

The origin story of their foray into the world of small and medium-sized businesses (SMBs) stemmed from their own search to buy a business. They ended up purchasing two companies, which they then ran on a divide-and-conquer basis. Eventually, they successfully sold both businesses, which marked a turning point in Sam's career.

When asked about the profitability of the sale, Sam acknowledges that they did make a profit. However, he emphasizes that the perception of making a fortune and never having to work again is far from the truth. Sam highlights the importance of recognizing the effort and time it takes to achieve success in the business world. He mentions that he has three kids and that financial stability requires ongoing work and dedication.

The conversation takes a detour as Ron mentions his previous involvement in real estate and his intention to write a book combining his experiences in real estate and business acquisitions. He humorously reveals that the title of the book is "Get Rich, Quick My Ass," emphasizing the misconception that these ventures yield instant wealth. Sam emphasizes the importance of patience, learning, and perseverance in achieving success in business.

Returning to the topic of business acquisitions, Sam delves into his current hold co (holding company) and its investment thesis. He explains that his hold co consists of nearly two dozen entities, comprising both small businesses and real estate properties. The holdings are geographically diverse, although there is a concentration in Florida, where Sam is based.

Sam mentions that there is no specific rhyme or reason to the industries in which his holdings operate. However, he notes that most of them are old-school, blue-collar, service-based businesses. He dismisses the notion of intentional cross-selling or upselling synergies among his holdings, stating that such benefits are often exaggerated. Sam admits that many people initially have grand visions of cross-selling opportunities but quickly realize the challenges and complexities involved.

Concept 2: Delegate Day-To-Day Operations To Others

One of the key takeaways from the podcast is the importance of delegating day-to-day operations to others. Sam Rosati, shares his own experiences and explains how he built his entire holding company around the idea that he shouldn't be needed in the day-to-day operations of his businesses. He believes that in order for the businesses to thrive and grow, he needs to focus on being the master of special projects rather than getting involved in the day-to-day tasks.

Rosati's approach to delegating day-to-day operations is rooted in his personal preferences and strengths. He acknowledges that he struggled with operations in his early ventures and realized that he didn't enjoy managing people and the day-to-day tasks that come with it. Instead, he found that he excelled in problem-solving and taking on special projects that required his expertise. By delegating the day-to-day operations to others, he can focus on what he does best and add value to the businesses in a different capacity.

The podcast also highlights the challenges and complexities of managing people. Rosati admits that managing teams and staff in small businesses was one of the more painful parts of operating. He recognizes the importance of the people aspect in the deal business, but he personally prefers to focus on the art of the deal and human psychology in the M&A perspective. By delegating the management of teams and staff to others, he can avoid the stress and challenges associated with it.

The podcast episode emphasizes the need for entrepreneurs and business owners to recognize their strengths and weaknesses. Rosati's realization that he didn't enjoy and excel in day-to-day operations led him to build his holding company in a way that allows him to focus on his strengths. By delegating the day-to-day operations to others, he can ensure that the businesses continue to run smoothly and grow without his direct involvement.

Concept 3: Importance Of Emotional Intelligence

One of the key points discussed in the podcast is the importance of emotional intelligence (EQ) in the business world. Ron emphasizes that EQ is greater than IQ, stating that emotional intelligence is more important to him than someone's actual intelligence quotient. He believes that one's ability to handle stressful situations and behave well around others is crucial for success.

Both parties acknowledge that they are not the best people to manage day-to-day employee behavior or deal with personal issues. Instead, they prefers to focus on solving problems and leading from the top. This self-awareness is an important aspect of emotional intelligence, as it allows individuals to recognize their strengths and weaknesses and make decisions accordingly.

The podcast also touches on the challenges of managing people, particularly in the transition from being a searcher to becoming a CEO and owner. Rosati suggests that the skills required for managing people are often overlooked in the literature on entrepreneurship, which tends to focus more on the search phase of acquiring a business. He believes that the ability to effectively manage people is crucial for success as an operator.

Rosati explains that he has tried various methods of identifying and hiring great operators. He has partnered with sellers who continue to operate the business, and he has also passed on opportunities to others who he believes are better suited to run the business. He does not prescribe a specific method for finding the right operator, but acknowledges that it is a crucial decision that can greatly impact the success of the business.

Concept 4: Finding The Right Business Operator

Finding the right business operator is a crucial aspect of running a successful business. The host and guest share their experiences and insights on this topic. They talk about their own experiences of operating a business themselves and also buying a business where they replaced the retiring operator with someone unfamiliar with the business.

The Guest admits that the more they engage in this process, the more they lose conviction in their ability to identify the right operator and predict their success. They highlight that while there are certain traits consistent among great operators, these individuals can come from vastly different backgrounds. This realization leads Sam to conclude that they don't have a playbook yet for finding the right operator and that it is an area they need to improve upon.

Ron shares an anecdote about a friend who bought into a tow truck company and put an operator in charge, only to discover that the operator who he made partner was horrible. This experience prompts Ron to include operator selection questions often in his interviews of over 160 people to learn how to choose the right operator.  What he found is that no Hold Co. CEO has ever told him they had a proven system or process to ensure you have a great operator and that you will need to go through a few sometimes to get a great one. 

Both conclude that there is no magic formula for finding the right operator. It involves picking the best person available, giving them a chance, and being willing to replace them if they are not working out. 

Moving on, the podcast episode delves into Sam's interaction with search funders. Sam explains that they help search funders because it brings them potential operators. They share their own experience of going through the full life cycle of searching for, acquiring, operating, and selling a business. They then decided to buy businesses where they have a partner running it. However, they also started receiving requests from people interested in learning about the process. Realizing that helping people individually would be time-consuming, they decided to find a way to scale their assistance.

Sam Rosati describes how they started conducting boot camps where they share their knowledge and experiences with others interested in the search fund process. Initially, they invited experts and vendors they worked with to give presentations. The boot camps were well-received, and they have since formalized the process. The boot camps now take place at a business club and span three days.

Concept 5: Bootcamp Process: Understanding Criteria, Finding Deals, Due Diligence, Learning From Searcher CEOs

 The boot camp is divided into three days, each addressing different aspects of the process.

On day one, participants are encouraged to understand their own criteria for selecting an operator. This involves being clear about what they are looking for in terms of skills, experience, and qualifications. By having a clear understanding of their criteria, participants are better equipped to find the right operator for their business.

Day two of the boot camp is dedicated to finding deals and conducting due diligence. Sam mentions that there are search tips, tricks, and tactics shared during this day to help participants in their search for the right operator. Additionally, the bootcamp brings in deal team experts who provide insights on how to effectively search for and evaluate potential operators.

Day three is described as the "fun day" of the bootcamp. It features searcher CEOs who have successfully gone through the bootcamp and are now owners of businesses. These CEOs share their backgrounds, how they found and acquired their businesses, and how they currently run them. This day provides participants with valuable insights and real-life experiences from individuals who have gone through the process and achieved success.

The importance of understanding the challenges and uncertainties involved in the process is emphasized.  Sam acknowledges that not every acquisition leads to success and that some entrepreneurs may find themselves overwhelmed by the required work and resources. However, Sam also highlights that there is a high probability of long-term growth and success with proper planning, strategic decision-making, and the ability to ride out the initial challenges.

Concept 6: Industry Agnostic, Focus On Risk

One of the key themes discussed in the podcast episode is the concept of being "industry agnostic" when it comes to investing and acquiring businesses. Sam explains that many searchers, who are typically self-funded, tend to be geographically focused and entrenched in a specific community. This means that they may not have the luxury of being selective when it comes to the industry or size of the businesses they are considering.

Sam emphasizes the importance of not being too narrow in criteria, as this can limit the potential deal flow and make it difficult to find a suitable business to acquire. Instead, the focus should be on assessing the risk of the business and the likelihood of its revenues and profits deteriorating. This more qualitative analysis involves determining whether the business is "enduringly profitable," a phrase borrowed from the HBR guide or the Chenmark folks.

Being industry agnostic does not mean disregarding the importance of recurring revenue. While recurring revenue is desirable, it is not always practical or feasible for every business. Instead, the focus should be on identifying unique aspects of the business that make it more likely to be successful over the long run. This could include factors such as being the only game in town or having something unique about the business that sets it apart from competitors.

Another important consideration when assessing risk is the level of reliance on the owner. Sam advises searchers to understand the role of the owner in the business and determine if they are responsible for a significant portion of the customers. This is crucial because when a new owner takes over a business, they need to ensure that they can survive and continue to thrive in the long term. If the business is heavily reliant on the owner, it may pose a higher risk and require more careful evaluation.

Concept 7: Acquisition Entrepreneurship Is Mentally Taxing

The podcast episode also delves into the concept of acquisition entrepreneurship and its mental toll on individuals. Sam acknowledges that embarking on an acquisition venture is a mentally taxing and stressful endeavor. While mental health and well-being are increasingly being discussed and prioritized, the guest believes that the challenges and difficulties faced by entrepreneurs in the acquisition process are not discussed enough.

Sam emphasizes the need for ongoing support and guidance for entrepreneurs in the acquisition process. They mention the idea of an ETA support group, where individuals who have gone through the acquisition process can provide a space for others to share their experiences and find support. This highlights the importance of having a community and network of like-minded individuals who can offer advice, understanding, and empathy.

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