E154: Jeffrey Oboy of Paratus Capital Shares his Search for the Right Business Acquisition

[00:00:00] And today's sponsor is Reconcile. Reconcile invoices your clients, pays your bills and delivers clear and accurate financial reports every month, automatically. Ready to streamline your financials and prepare your business for the next big step? Visit reconcile.com today. Hello and welcome to the How2Exit podcast, where we introduce you to a world of small to medium business acquisitions and mergers. We interview business owners, industry leaders, authors, mentors and other influencers with the sole intent to share with you what it looks like to buy or sell a business. Let's get rolling.

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[00:01:21] Ronald Skelton: Hello and welcome to the How2Exit podcast. Today I'm here with Jeffrey Oboy and he is with Paratus. Did I get that right Paratus Capital. We always start off with the origin story. So I guess that's a good place to start with you. Kind of give us your background. Sounds like you did some stuff internationally and then you came here. So give us your background tell us how you kind of got into the mergers and acquisitions space and then we're going to jump into what you're looking for and how you're going about doing the search. We'll just dig right in.

[00:01:45] Jeffery Oboy: Being my pleasure, Ron. And thank you very much for inviting me on. I think just briefly, I'm on a quest at the moment to find my next business to run and operate as its CEO, but prior to the founding Paratus Capital ultimately was an equity partner with a company out of Germany. I, where in fact started with them in their headquarter in Frankfurt.

[00:00:43] Found myself running their business for the Middle East out of Dubai and then more recently breaking the business into the U. S. market, basing myself in New York, where you will find me today. Variety of things that we did, great firm, but in short, that's the long and short of the first third of my career that's brought me to where I am today.

[00:02:22] Ronald Skelton: There's somewhere I haven't been. I guess I've never been out of the continental United States unless you count, Acapulco, and some spots in Mexico. So yeah, so I've been down there a few times. Prior military, but what I did in the military was something totally different. 

Can't say where I was and where I wasn't when I, when I did with that. But,anyway, let's talk about what you're looking for. So you're, you've created, Paratus Capital. You guys are on a search right now for a US based company or an international? 

[00:02:53] Jeffery Oboy: That's correct. Yeah US based. Correct. 

[00:02:54] Ronald Skelton: Okay. Any particular vertical or? 

[00:002:56] Jeffery Oboy: Absolutely. So in our case, we're looking for, let's say the right situation where not only I think I can have a, not only fulfilling but a high impact as the company's next CEO, but where ultimately the owner has a clear succession and peril. In terms of vertical, there are a couple areas that we look especially at.

[00:03:16] Those include business service related companies, certainly technology software, but in the end we are agnostic. We're looking more importantly at certain characteristics of an industry, notably around nicheness and growth. And where ultimately, we feel there's a good field of greenness for which it can, can go forward.

[00:03:34] Ronald Skelton: So are you geographically bound? You're looking for like New York or you're looking for anywhere in the United States? Have skills, will travel or what's the game plan as far as location? 

[00:03:43] Jeffery Oboy: So short answer, agnostic. I myself am not actually from the New York area originally. So I'm from the Midwest.

So I've certainly been looking a lot of interesting companies there in Indiana, Illinois, Ohio, Pennsylvania, but as well on the West Coast. In fact, my wife grew up in Southern California, and so naturally there have been some intriguing opportunities we've seen there, but they cross all 50 states and no bounds from that standpoint.

[00:04:10] Ronald Skelton: Yeah. I would avoid the Southern California for at least a couple more days. They're having a, what do they call them? Hurriquakes? They got a hurricane and an earthquake on the same day or yesterday I think it was. And I think that's the first time in a hundred years that a hurricane actually land, made landfall in California. So if you know anything about California, our water is really cold, which discourages storms from coming up on the coast because they die off when they get here. That one came up just the right angle to stay in the warm water and get us. 

So, you talking about managed services and stuff like that. Is there a particular size you're looking for? Like, they need to be 1 million in EBITDA or does there, what's your kind of size range you're looking for?

[00:04:49] Jeffery Oboy: Yeah. So in our particular case, so a little more background in Paratus. So there are a group of limited partners that have provided the capital for this endeavor to occur. And relatedly, there's a size of investment that ultimately we're collectively looking for that is not only just related to the amount of capital they wish to deploy, but also just the size of business that I know to be right for where I'm at in my own career.

[00:05:11] So how this translates, ultimately we're looking in the so called lower middle market. This can be a business that has anywhere from five to 10 to even 30 million in revenue, but very importantly also is generating profits. We are not venture capital investors, looking for profitability down the road. We're looking at it today. And so that's where we swim. 

[00:05:32] Ronald Skelton: So, profitability now, and then depending on the industry, I guess that profit margin and the EBITDA is going to range. Depending on, you end up in, manufacturing or remanufacturing of parts, the industry average. I think in some of those industries where you're doing like rebuilding turbos or something where the, the profit margin can be all the way down in the six percents.And lower. And then you look at things like, managed service providers and, I always try to go after the ones that have decent profit margins, but things like, home services and stuff like that can be high. 

[00:06:02] Software as a service can be high. I guess it all depends on which, where you end up.

[00:06:07] Jeffery Oboy: No, absolutely. I mean, generally speaking, again, we're looking for the more one off businesses. So not those that you find in every city or multiple in every city. There are other investors have investment theses for those. We're looking for more one off businesses that you can grow organically, as the founder entrepreneur has likely done up until now.

[00:06:26] Ronald Skelton: So you're looking for something that's, they've built a unique moat around their company somehow. They're unique in some shape or manner. People come to them for their expertise. 

[00:06:35] Jeffery Oboy: Unique as in there are at least not thousands of these types of companies. Very seldom do you run into a company anymore that has that.

And if you did, we would likely unlikely be able to ones to match that, price expectation. But generally, those that are fewer in nature, you don't come across them every other day. 

[00:06:54] Ronald Skelton: So how long have you been at the search now? 

[00:06:56] Jeffery Oboy: So I've been at it for 21 months. 

[00:06:58] Ronald Skelton: 21 months. The industry average for funded searchers is between 24 and 36 months.

So you're, you're right on track. So how, I'm going to ask some questions you can answer or not answer. So in 21 months, how many businesses do you think you've actually, looked over and then how many of them you have, have you got to the point where you're doing a full valuation? 

[00:07:17] Jeffery Oboy: In terms of valuation, that's an easier question to probably answer 15, 20 legitimate where we 'bout felt that we could be a viable solution for that respective entrepreneur.

In terms of number of companies we've scanned over, it's endless, truthfully. There's a lot out there that you have to sort through, to find the ones that you're passionate about and that you really believe. You have a proposition for beyond just a liquidity event. 

[00:07:45] Ronald Skelton: Cool. The reason I was asking that is, is because that's normal, right? I know full time search funders who say, I go through and look at, a hundred businesses a week. I fill out 30 NDAs a week. And, I take a deeper dive into, 15 of them or 10 of 'em. And, usually, one will come out and we can move forward and take a deeper, even have conversations with brokers and owners.

So, it's a numbers game. What's your primary sourcing mechanism right now? Are you self sourcing? Are you going through brokers or all of the above or? 

[00:08:16] Jeffery Oboy: All of the above is where you'll find me today. I started my journey believing that I would follow strictly the so called proprietary self sourced manner, in the end that didn't yield what I was looking for. 

And so started broadening the network. And the key of this as well is finding quote unquote qualified seller. Someone that is prepared to exit for the right reasons, quote unquote. And so brokers, M& A advisors, investment bankers are certainly a source to that end. The key is just being sure that they are in fact representing a seller that's right for us. 

[00:08:49] Ronald Skelton: I think the self search, self sourced, where you're finding off market deals, I think it's extremely difficult if you don't have a very well defined thesis because of exactly who you're looking for, mainly because you're reaching out to too many targets, and each one of these industries and each one of these owner base, they have their own language. They have their own phrases, they have their own, kind of connections, their own associations.

[00:09:14] So, I see people all the time, like, Hey, they're doing a self search, they're looking for off market business is like, cool, what exactly you're looking for? And when they don't know, I said, that's going to be really hard to find. If you're going to do a really broad scope of looking things and you're still trying to figure out exactly what it is you're looking for, probably got to open up your gateway and start talking to some listed ones and stuff like that too. 

[00:09:36] Mainly because you just, you can see a lot more on the surface level. They're put together. You can go through more of them faster.

[00:09:42] Jeffery Oboy: No, absolutely. And that's, truthfully, one of the challenges is that, there are only so many good businesses for sale at any given time. So even when you have the quote unquote best industry thesis, you could be complete with it within a week, two weeks, three weeks. Is a timing element to this.

That's been part of the evolution of this search as well as refining that thesis to be able to look at those opportunities that maybe are newer. Sector industry wise in which they ultimately operate but we're able to actually wrap our arms around it, realistically, quickly. 

[00:10:15] Ronald Skelton: How are you going to know when you got the right one? What's the, like you got a checkoff list or you got a, you're waiting for a gutting deal? What is it? There's a combination of both? 

[00:10:25] Jeffery Oboy: I think, as a background, I studied mathematics in college. So I'm a numbers guy. But at the same time, there's a story behind the numbers. And that's where the gut is going to come in. You'll know it when you see it, type of deal. But the numbers are the numbers. 

[00:10:38] Ronald Skelton: All right. And then, what's the, I mean, that's another reason why I think, better off with very well vetted, on market deals when you're really wanting to key in on the numbers because, you're gonna pass up on so many off market deals because the numbers don't look right or they don't know how to present their numbers. One of the first shows I had probably in the first dozen shows are brought a guy on and I'm still pretty new at this point and I said to him well they don't have good books.

I just move. I'll move on. I'm looking for the next one. I'm looking for the next one. He says why? I said, well, like they don't have good books. How do I know it's a good business? He said, how do you expect somebody who has a business that's doing less than $5 million a year to have perfect books. Especially if they're off market and nobody's ever told them that they need to fix those. 

[00:11:22] He says, they don't have to have great books to have a great business. All they have to do is stay out of trouble with the IRS and they're not going to pay their bills. So if you think about the normal mom and pop business is doing even 1 million, 2 million, 3 million or $5 million., A lot of times their accounting mechanism is, can I pay my payroll at the end of every Friday? And can the tax man leave me alone? Can I give the person preparing my taxes enough information that the tax man's okay with what I've got? 

[00:11:48] And, I would say that's more often than not on these off market deals. So kind of personally, I had to develop a deeper skin into, okay, I asked for the books and they sent me to Excel spreadsheets that have like multiple tabs on them and, okay, that's what you got. And let's see, what's intriguing inside of that. You can pay relatively, affordably to have that stuff turned around and put back into what, books.

[00:12:13] Jeffery Oboy: Absolutely. No, and I mean, in the end, there are a lot of weaves in this journey, but there's certain items that you need to, and can zero in on to at least prequalify. This, and obviously there's a diligence period down the road to be sure everything is, as you assumed, when building out the valuation.

[00:12:32] Ronald Skelton: Are there any things that are just kind of big red flags for you as a searcher? Like, okay, I don't want companies that do X, Y, or Z. 

[00:12:37] Jeffery Oboy: I think at the moment and truthfully for the past year and a half is the businesses that were, really impacted during COVID and at the same time had a great, unusual recovery in the past year.

That has been the biggest, let's say point of difference on, what is the future look like for this business. And relatedly, what should that command as a price? And so I never say never. I still look at these businesses because truthfully there have been some that I really love, but in the end, either just do the owner's education or just the advice they're receiving. It becomes very difficult to do those types of transactions. 

[00:13:15] Ronald Skelton: Right. And then you have to worry about if they're really impacted by COVID and get really good after the recovery, we're in, still in a state of uncertainty economic wise, right? And, personally, if I'm looking for something, I can take a hit like during COVID, but I'm looking for things that like, okay, you did okay there, you're not hurting. You're not an event center, a movie theater or something where, okay, if we have another lockdown or something, it's going to hurt. Not that I think another one's coming, but, how well did they adapt? That's another thing. 

[00:13:44] Did they make attempts to shift? Is it the team on board with like, how fast can we do something differently if this is going to hurt us again? And, if they made no attempts the last time I know retail stores that, they didn't try to go online or anything. They just basically shut down and went months without any guests or visitors. Like you didn't even try to set up a shop. A lot of these guys had custom products and they didn't try to set up anything at all. Put your stuff on Amazon, Shopify. You didn't like, you didn't put on your battle gear and go to war for the, for that time period. It's like, no, we knew it was initially going to lift. 

[00:14:15] So I don't want to play in that realm. So I stay away from that. That said, I stay away from a lot of the stuff right this second. I'm kind of in a different zone. But how do you, what's the initial process for you? Are you like on daily, you got people helping? You got analysts? Or do you just daily crawl through all the listings and like, what's a day in the life of a search funder look like?

[00:14:33] Jeffery Oboy: Certainly. I mean, so to your question of Alice. So I founded Paratus, ultimately expected to do everything aside from lean on my investors, not only for capital, but guidance, ultimately on my own. In the end, there have been various students that have expressed interest to getting exposure experience. And so they've been instruemental especially during the summer vacation period and helping me sort through endless numbers of companies are out there. Looking for the ones that intrigue us and possibly are at that moment to consider this type of proposition. 

[00:15:10] But in the end, the proprietary, looking for what's right for us, I really leave to myself, having been at this for 21 months, I have an eye for what's right. And layering on a variety of criteria that I know will be important, should the deal be able to get done with us. 

[00:15:26] Ronald Skelton: Did they have you on any type of timeline? Where like, okay, we need this done in 36 months. Or do you, are you pressed up, and are you pressed against the clock? Or are you just continuing to work and find solutions?

[00:14:16] Jeffery Oboy: So ultimately, just in terms of the search fund, and you mentioned earlier, the average time it takes. So the traditional search fund would ultimately practices raised the fund to search for 24 months. So, as mentioned, been at this for 21 months near the finish line. Fortunately, budget has been able to be used in a way that I've got at least until the, yeah, beginning of next summer, to close the right transaction. So, definitely red alert mode. But ultimately, have that time period to leverage into your question. 

[00:16:07] The investors, they put their bets on there to see what you can do with the time you have. In the end, if a deal doesn't getcompleted in that period of time, it doesn't get completed. And that's part of the rules of engagement, between ourselves and the investors. 

[00:16:23] Ronald Skelton: So they fund you for a search, and then when the money runs out, you're done. 

[00:16:26] Jeffery Oboy: Exactly. 

[00:16:27] Ronald Skelton: Okay. Well, at least that, there's an added benefit that if you're smart with your money like it sounds like you were, then the money can last a little longer, and you can, go about it. And then if you burn through it too fast, I guess you could end up short. 

[00:16:39] Jeffery Oboy: Absolutely. Absolutely. But there are searchers who complete their search in four or five months from the beginning. And then there are others that go three years. At least so.

[00:16:50] Ronald Skelton: I've talked to. I'll be honest, I've talked to quite a few searchers. Some on the show and some off, and the ones that tell me they got it done in three, four, or five months, most of the time when you really dig into it, they knew the owner of the other business beforehand.

They set up the search with the intent to hopefully get that business, and they landed it. Not all the time, but I'd say out of the four people that's ever told me they got it done in six months, two of them for sure and one of them wouldn't admit it, but you could tell he was hitting at it. It was like his uncle's business kind of thing. He wasn't gonna sell it when I got into it. I was like, yeah, but i'm pretty sure you had that in mind from the thing. So I think it just takes longer. 

[00:17:25] Number one, you're different in this. Most search funders are coming straight out of college. They have never run anything. They'll have a lot of leadership. So it's a bigger sell to the business owner that's selling to you, that you're the right guy to take over their legacy and their business. You've got a one up on them that you're backed by a bigger company and you've been in the industry for a while, right? But, I think that's what takes a lot of search from funders a longer time is like, Hey, I've never run a business before, but I want to buy yours and try to shake the guy's hand. 

[00:17:54] Jeffery Oboy: Absolutely. I mean, timing comes down to all of this. Back to just my background, which is on the operator side, running, growing a company, it's not on the investing side. The LPs investors that backed me and told me from day one. Your challenge won't be phase two, it's phase one of actually completing a deal. Because there's a lot that goes into doing this if you want to do it correctly. And so to that end, the first year of my search, truth be told, was an enormous learning curve, of how do you value business? 

[00:18:26] How can you make that more attractive to the entrepreneur? And so going to that learning curve, which I was extremely grateful for the support from investors, who've done this previously, many of them. To be able to figure that out and also what makes for a good search fund acquisition. 98 percent of companies in my judgment are not a good fit for a search fund. So, what do those look like? The only trick of it has been this year, 2023, kicked off with a situation in our banking system that left, that hard to come by. 

[00:19:01] Not only did I know this, so did owners and their respective advisors. And so deal flow came to a screeching halt no matter what you tried. So kind of disappointing that you go through the learning curve, ready to rock and roll. And that's that year too. But that's the timing. And so you never know, how things will play out. But, that's what we've encountered. 

[00:19:18] Ronald Skelton: Most of the time these, the search fund is the search fund is funded throughout the search and then they have first right of refusal as investing into the, like the actual acquisition. Are they going to fund a hundred percent of the acquisition or you have like, bank loans and debt and other stuff lined up to? Are you doing combination? 

Like, you say, okay, I'm ready to go. What's the process to get it approved and funded and purchased? 

[00:19:43] Jeffery Oboy: Absolutely. So I think in terms of the deal to be done, I'm laser focused on a deal that's right. Ultimately, not for myself, but for my investors back to that learning curve, have zeroed in on, what they have learned. Having been doing this for decades, to be right and to be fair.

That's for everyone involved. So a deal that all of them ultimately participate in is my priority. Respecting, there will be some that maybe it's no longer timely or the like. There are obviously equity partners lined up on the sidelines, should that present itself. If not, get filled just by the existing base, but in the end, the actual deal structure will involve that from a bank.

[00:20:20] This is a key lever to actually be able to actually offer the owner, the entrepreneur, stronger value proposition. Their cost of capital is cheaper than an investor. Obviously, there's strings attached to that. So you can't overextend or shouldn't. But ultimately, debt is without question a component of a deal to just be able to offer the most interesting, attractive proposition to the owner.

[00:20:47] Ronald Skelton: You think that banking crisis is starting to clean up now? Or you think we're still kind of, I haven't checked in the last, probably four to six months even. But in the last two or three months, are they starting to lend again? Is money starting to move from the banks? Are they still very cautious?

[00:21:01] Jeffery Oboy: So, two parts to that answer. Deals that are worth talking to the bank with have only restarted here in the past four weeks, I would say. And those dialogues are starting, anecdotally. I've heard things are improving. But they're without question not where they were this time last year. For equivalent deals, in terms of the amount of debt the bank is willing to cover.

[00:21:22] Ronald Skelton: I can get that too with the, ever rising interest rates and everything like, if you go back two years, money was pretty much free. Which not a good thing necessarily overall for the economy. It's eventually going to, circle back around. But, now we're looking at, in my lifetime, it's still not high interest.

A lot of people are like, Oh, this is the highest interest we've had in years. I remember my mom and dad paying double digits for real estate. 10, 12, 13%. And, houses are cheaper back then too. But everything's relevant.

What's plan B? I mean, like, things take time to close. You're getting to that stage right now where you might find something to be in mid process with it. And the funding goes out, right? It could, that timeline, I don't know when that, okay, here's the red line in the sand. You're eventually going to come across that. Are you, like, starting to plan for that already or? 

[00:22:07] Jeffery Oboy: Short answer, no. Plan B is not an imminent consideration. It absolutely will become a consideration, but I'm confident in what something else could look like if that's ultimately where this ends. Just what I've done, and just also the feedback I've gotten along the way.

This in itself was a, has been an enormously educational process for myself, and I know I come out stronger in the end. So, I'm the least concerned what plan B looks like, as much as have a family and are keen to know what that looks like. But in the end, my wife notably is extremely supportive and understanding, far more than I think I could have.

So it's a struggle. It's a grind to go through that. So I have all the respect for her on that.

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[00:24:02] Ronald Skelton: I can't imagine because, I was in real estate investing before I got into this space. And, my wife made the, call it a mistake or not. In her eyes, it was definitely a mistake. She said, Hey, negotiate a really great deal on our first purchase of a house.

It's like, okay. And then, so I found a bank owned property we both liked, and I battled them. I went to battle with this bank owned property for nearly six months going back and forth. Now we got a hell of a deal, but my wife was regularly going, I don't know how you do this. I wish we just like buy one off the market.

Like, no, you wanted a great deal. So like, and we won't have a mortgage because when I get done with these people, we'll be able to pay cash for this house. And they're, we don't have a mortgage at all. She's like, all right, well, if you can get it underneath, because we had, what we started with was a decent down payment. And we both found a property that we could fix up because I was in the real estate space. 

[00:24:50] They had five acres, had an unfinished wing on the house, which is, just decent sized house, 2, 650 square feet. But we just kept negotiating with them. And we won that on the other end, but she's like, I could get it to where, my wife was waiting to move into the business.

Like she was going to work in there. I don't think she'd like the process you and I have to go through, right? Like two years of, I've looked at a hundred businesses. I've told 15 of them, I want to see their books. And then, we start entering some level of early due diligence, maybe not cutting checks to due diligence companies yet, but we're starting to spend some time and energy on these and like, yeah, it's not going to work. I don't think she has the patience for it. 

[00:25:29] Jeffery Oboy: And emotional tolerance is another item, which I'm also, subject to at times. We're all human, right? It's something, for lack of a better word. 

[00:25:37] Ronald Skelton: Oh, there's definitely WTF moments in all these deals. Like, this is the one, I think this is great.

And then you dig it through and like, ah, WTF. And I'm not going to say it on the show because there might be little ears. We do mark them all as adult. But, you get this one, like, what the heck? Like, I can't move forward on this. And you explained to the owner, I can't move forward. And like, most of the time, they want to understand. Like you misstated this or you said you, a lot of times it's just, they've got three people working six jobs and there's not enough money to like break that up and really employ the people that it takes to employ, right? 

[00:26:07] He's the sales guy. He's the CEO. He's the lead mechanic on all this stuff and all of which I don't want to be. I want to be the CEO. Or like, one of the things I see in a lot of these smaller ones is, okay, what does your wife do? I always, my favorite question is what do your wife do? Well, she does this on, she'll explain what the wife does. I don't know what she do for the business. You own this business for 30 years. Where does your wife come into play? Oh, she comes in and does the books and stuff like that. Okay. So that's why I didn't see on the org chart, somebody doing accounting, right? 

[00:26:36] The wife's a accountant in another job. So can I talk to her for a minute? Like, yeah, she's right here. So he talked to her. He's like, Oh yeah, I put 30 hours a week on that after working my 40 hour job. Okay. Cause that's another employee. You start checking that stuff off. Okay. That's another employee. Cause I don't think your wife's going to do my books for free. 

[00:26:52] Jeffery Oboy: Absolutely. The ad backs or withdrawals, however you want to frame them are a real thing. Absolutely.

[00:27:00] Ronald Skelton: What is, what's the craziest thing you've seen on somebody? Like you've seen a lot of these by now. Like you can't add that back. You can't put that on there.

[00:27:06] Jeffery Oboy: There are a couple. I think, putting aside ad backs quite frankly, I don't get overly caught up on those. In the end we are, in the lower middle market. No matter how hard you try, there will be things that you miss. You have to stomach those. That's also why the valuations are reflective of this.

That is, unless you have the hot shot accountancy firm, presenting gap compliant books that nobody has, for the reasons you said earlier. I think aside from the add backs, what's most captivating, I would say is, when owners are comparing their businesses to other businesses that caught the headlines. Notably around the valuations that they supposedly fetched, which obviously the terms of few deals are ever disclosed to you and me and the broader public.

There are some really intriguing comparisons they tried to attempt to make, to justify whatever valuation they think they deserve or would like to deserve or earn. That's where things get a little wild, I would say. And then in a more substantial way, 

[00:28:07] Ronald Skelton: I see it in all the time. I'm looking at newsletters, podcasts, support services, and which is pre and post. And then looking at things like profitable, websites, blogs, content, software, review sites, all that type of stuff. 

And then I have people go, well, this company over here got, 20 to 20 X revenue. I was like, yeah, but they're a SaaS. We have software. Our software is proprietary. Yeah. But you're a content site and your proprietary software has to go away day one. Cause I don't want to maintain your proprietary software. I'm going to move it over to something like WordPress or something, I don't need it. It's a cost center for me. It's going to cost me something. It's not something that gives a value to the company. 

[00:28:44] And they, they see, well, so and so sold for, two, three years ago. These SaaS companies are selling 20 X, 30 X crazy numbers. Now they're back more reasonable, but just because they have software inside or they, our customer has been around for six months.

That makes us a, recurring revenue model. You don't have the contracts. Yeah. They just happen to pay every month, but if you're month to month and you don't have any like long term contracts in place, is it truly MRR?

[00:29:10] Jeffery Oboy: Absolutely. No. And I mean, in the end, all these considerations are key, when you compare these companies on their current profitability.

One software business has maybe got a 20 percent EBITDA margin and another's got 40 and they're growing at the same rate. Who would you pay more for? That's, I can also relate to with this, struggle of, just what is this business worth? Because going into this, I hadn't that type of education, that background. I didn't come from private equity or investment banking. And so understanding, okay, what are actually the drivers of the valuation? 

[00:29:48] Number one, what actually should the return be to those who take on this investment? And then furthermore, what has been built? What should I expect the revenue to do next on the subsequent years? And relatedly, and how should profits evolve from there. What they all finally mean to valuation.

These are things I've concluded next to few owners themselves have gone through. And I completely relate to that. And that's, I think that's the unfortunate part of all of this, is that there is an enormous amount of noise. And owners that are, could still walk away with a substantial, liquidity event are waiting on it. Just due to poor information or no information at all or the wrong information from the wrong people.

[00:30:30] Ronald Skelton: And it happens with, if you look at kind of what's going on and how things are evaluated.

I had a conversation, I guess it's been a month or two now. Businesses listed by a broker. They reached out to me cause they heard I was looking for something in that realm. Started looking through it and I was like, you're way overvalued. Like the brokers sayin' 1.5 million. And I'm thinking like, looking at the numbers, nothing's there to support more than 800k. 

[00:30:55] And, they're like, well, no, I've had two brokers tell me that. I was like, cool. How long have you had it on the market? A year and a half. Okay. How many people have come to look at it? Dozens.

How many people have stroked you a check for 1. 5? A business is worth what the market's willing to pay. Now that said, you got to give market exposure to it. So I can get like the right buyer hasn't came along yet. My favorite thing to say to a lot of these business owners, when we sat down on the first call or whatever, and they start telling me what they want for the business, and I always just say, well, cool, let's see how we can get you there.

[00:31:27] And then the how we get there, you there is awesome. Okay. You're going to have to increase your revenue. You're going to have to go out and like. All those month to month, people out there, let's see if you can't put them underneath a 12 month contract. All right. So we have some stability in the cash flow, and they don't want to do the work.

[00:31:44] Jeffery Oboy: Absolutely, and you hit it on the head. Truth be told, offering a very, reasonable, fair valuation. And, in the end, there are other groups with different tools and parameters that might be able to pay more. And if they're available, all the more power to that individual or family, if that's the path they wish to go down.

But, in the end, we can pay what we can pay. And we don't have a, alignment there that happens, quite regularly, and that's okay. But I like exactly what you said. How can we steer that individual? Because in the end, I don't submit a valuation offer to anyone I don't like. I need to see that there is a common set of values, morals, where they see this business going, who they are as individuals.

And so when you come to that moment, which may be disappointing, it's natural then for me to want to help and say, okay. These are things that you would want to focus in on if that's where you ultimately want to go. Aside from obviously having the slam dunk acquisition take place with somebody far larger.

[00:32:46] Ronald Skelton: I've had a few cases in my life where I was like, in the consulting world. And I did not want to, somebody came, Hey, I want you to come look at this and see if you'll do this for us. And you get there, I'll give you an example. One of them was writing documents all day, for compliance to enter their business into another country. So in order to get their e commerce business into that country, they had to meet certain compliance on the security side and other stuff. 

[00:33:09] I understand the world inside and out. I had written the documents before. I know what needed to be written, but I did not want to do it again. So I jokingly said, well, it'll be $250 an hour, right? And I just thought, no way in the world they're going to pay somebody that much kind of money. Nine grand a week to, write documents. And they said, okay, well can you start Monday? And I did it. I wrote their document for them and,made 60, 70, $80, 000 writing a document over a few months. 

[00:33:33] And, when I was done, they basically said, thanks for the document and walked me right out the door. Cause they didn't want to put any more hours into me because they were, they realized how expensive that was.

And I said, I told you beforehand, I didn't want to do it. I did a good job. I mean, it passed. I kind of cheated. I just, it was a European kind of, I forgot what it's called. It's named the same as something here, but it's like, it's for two different purposes. It's like safe harbor. 

For there, it's like credit card safety and private privacy information thing. For here it's for child material, it's two different things, but, basically it was a security compliance document. And what I did is it called the office that approved it and talked to him for a few minutes. And I said, Hey, we're doing a software company. Kind of gave him the outline.

What I was looking for and he says, yeah, we do those all the time. I said, cool. Could you send me the last three that got approved? Are they public domain? They said, yeah. So they sent me three that got approved and I just followed the outline that they created inside of those. I knew I would have all the information they were looking for. That said, I'll learn my lesson inside of this. I don't tell anybody, yeah, I'd buy it for this and like give them way under value. 

[00:34:41] I don't buy anything I don't want to buy because, you don't want that case where if they say yes, I still don't want it. There's just certain things you just don't want to run, right?

But, that said, there are certain businesses you want to be around and certain businesses you don't. I mean, is there anything that you've come across in your search that's like, look, I'm not even going to look down that realm anymore? 

[00:34:48] Jeffery Oboy: I mean, certainly you hit one. And not only is it, just not for my particular tastes, I know for many of my investors as well.

So, there, there are those components. Companies that are in theammunition, let's say space. That's not exactly aligned with my tastes, and a variety of others that, your imagination can lead you to. I mean, in the end, I am looking for a business that has an impact as purpose.

And where I can bring value. That's, I don't broad slate characteristics, but these are the initial questions I asked of myself and of the business to see whether or not it's worth submitting that offer and going down. And if it isn't, I tried to do my best to be helpful to that owner. If I get introduced to that business, it certainly wouldn't come from a cold outreach.

But ultimately to be helpful because in the end, it still could be a good person, obviously, and a good business to those who it serves. But it just may not be for us. 

[00:35:43] Ronald Skelton: I take the calls. I mean, I took that call with him, knowing what he was going to call on me for. And like even sent him to somebody, I think that might be willing to do the deal cause they have similar stuff. Like just not for me. 

Let's circle back around to what, you keep saying that meet your skill set, your expertise. What do you see that you would really thrive in what type of business? What do you bring to the table for these business owners? 

[00:36:08] Jeffery Oboy: Yeah. What I think it's come to where I get most excited. Generally, first and foremost, whatever they provide as a product or service, it's providing an enormous value to their clients, first and foremost. But where I get particularly excited is where their marketing and sales is not up to say, best practice. As established earlier, I don't come from the marketing and sales field whatsoever. Again, the numbers guy studying mathematics. 

[00:36:34] However, just in the course of my prior career step, found myself selling and finding intrigue and how that happened and the art of this. And actually how the can be incredibly valuable without question. And so when I look at companies that are obviously producing revenue, because I have a great product or service and have found a way.

Product market fit and to be profitable, but maybe just haven't realized on their full potential that excites me, not only in terms of just the business's ability to grow further, but just to expand the impact. And to see the people at the same time grow with that, with that new infusion of direction.

[00:37:13] Ronald Skelton: There's a lot of those out there. A lot of people say I don't look at anything below a certain EBITDA like, I think we were talking on another show, the Harbor Business Review says, don't buy anything with less than $750, 000 worth of EBITDA, but I think there's a sweet spot inside of there that could be lower than that.

And that's what you're talking about is companies who, they've got enough customers out there. They have product market fit. They've got a good product. It provides great value to the customer. 

[00:37:35] Customers love it. They don't know anything about sales and marketing. They grew it organically. They hit a comfort zone where they're making more money than they've ever made. And they just kind of plateaued out. And I think a lot of us overlook some of those mid range, I would say 300, 400 thousand EBITDA businesses that are just, smoldering fires. Nobody's ever poured gasoline on.

And, so, that's kind of the realm I'm playing in right now, is looking around at like, okay, there's a lot of websites out there that they built it and said, build good content and they will come. 

[00:38:05] No marketing, no social media, no nothing. They're just like, I built great content and people came. Okay. What would happen if you. Put a little strategy to this and told the world where it was and put the content on all the other sources and, put a little fire on that kindling. So you're looking for the same thing, right? You're looking for somebody who's built something remarkable, but just hasn't really got the message out to the world well. 

[00:38:25] Jeffery Oboy: That's the least where I'll get excited. There might be situations that they're very good in that department, and they're just, looking for whatever is next in their life, professionally, personally, for what be it. And, just don't have that management team set up to succeed them, which is often prerequisite for many other investor groups that are just, looking to deploy capital passively.

But in our case, that's what I would love, but, wonderful if they figured it out as well. 

[00:38:52] Ronald Skelton: You got anything you're really close with right now? Like, hey, you don't have to give us any details because I know the NDAs and stuff, but you've got any, like, hey, this is really looking good.

[00:39:00] Jeffery Oboy: Yes, as I mentioned, things were pretty dry. First half of this year. But in the past four weeks, notably coming from just connections made last year, opportunities have started to pop up and we see eye to eye on valuation. Which is an enormous progress, I would say. Time will tell if those, that opportunity in particular closes.

But at the same time, there's just, re hope, if you will, with just coming out of summer. The market, again, starting to lend. Let's see where we get. 

[00:39:30] Ronald Skelton: If you get into January, February, how do you think the election is going to mess with things? So, there's always a disruption during election years, like the, things get a little chaotic, banks do weird stuff, I mean, the economies.

Usually what happens is during election years, the economy is kind of artificially held up because nobody wants to try to get re elected in a bad economy. So, you think that's gonna, I don't know how they're going to do it in this one, we're in a mess. But they're going to try. 

[00:39:55] Jeffery Oboy: I don't foresee it having any material effect on what we're looking for. In the end, we're looking for a good business, good sectoral trends. Every business has its good moments and not, but, do not foresee any material effect. We've already had a material effect couple of years. So if there is, we'll navigate it. 

[00:40:14] Ronald Skelton: Well, I've asked you a lot of questions. What am I missing here? What do you think that we should cover for anybody that's in your shoes? What do you think they need to know? Somebody else that's out there, they're thinking about going down the funded search route. What do you think they should know? 

[00:40:26] Jeffery Oboy: I think, understanding what your value proposition is and notably, who really yearns for that.

As you might know, there's a lot of literature out there and, conference talk about succession and the number of business owners that are out there ready to exit. And don't have someone to run their business. Disappointingly, I would say, or shockingly, that didn't really resonate in the first half of my search.

[00:40:51] I eventually for myself found what did. And that's where I believe we're at now, with things picking up. But it's really asking those hard questions and talking to owners, not just investors, not just fellow searchers, because most people have their own personal experiences, which may or may not be reflective of what you will experience.

And so starting that exploration before you really commit to this, to understand who you're up against, the tools they have at their disposal. And you know where ultimately you fit into that. To not only be able to make your pitch, stand out but also to know what to look for. Again, for me two percent of companies actually are worthy of an outreach. 

[00:41:33] Ronald Skelton: Two percent. What makes the other 98 percent not, is there an overwhelming percentage of that 98 that is, if they fixed X and Y, they probably would be worthy of outreach?

[00:41:44] Jeffery Oboy: Two characteristics. First, it's less a business, more of a job for the individual. That's number one. The other is that the business, as much as it's a good business, it's in a very large fragmented industry. And there is always a private equity group that is consolidating. They're open for all things. In our case, the traditional search model of roll up consolidation play is not the thesis that excites neither myself nor my investors, nor, as far as I understand any other search fund investor. 

[00:42:19] So, steering clear of that because of, again, your competition, if you will,have bigger tools at the disposal. And they're less also concerned of that owners, maybe dependency in the business because in the end they're swallowing the assets and off they roll. So, being understanding this, and where you can get 'em, again, you can certainly pursue a consolidation thesis if that's your thing, but there are some substantial professionals doing that. That's at least not myself. 

[00:42:47] Ronald Skelton: Yeah, if somebody asked me the other day, they said, well, how do you pick a good roll up in a consolidation thesis?

And I was like, look to see who else is doing them. And he's like, well, I don't want to pick one everybody's going after. I said, with PE going after roll ups right now, if they're not in your space and not, if you can't find a single PE doing a roll up in a space that you are looking at, you probably had a second guess what you're about to do, right? There's enough money, enough dry powder trillions of dollars sitting out there. They've got to a deploy. 

[00:43:15] They're looking at the market now and looking at it differently than we do, because they're looking at what's safe. They got commitments to all those investors. So if they're not rolling up marketing agencies anymore, everybody kind of stopped and now they're rolling up veterinarian services, pet stuff, golf, things that survive recession.

I'd rather you compete with them head on and do your own little roll up and eventually sell it to one of them. Than to go out and try to roll up something that they're avoiding because they've got better analysts than you do.

[00:43:43] Jeffery Oboy: And a couple other tools as well. But I won't go into those. That's someone else's story to possibly disclose, but no. And I think to the same end, for owners that are in those spaces, all the reason to be positive. Despite the fact that fragmented industries are notoriously competitive. That's going to be reflected on their bottom line. In the end, there are groups hungry for that. And so that's a, an excellent exit option for them. If they're down for that. It's not for all owners. There are some caveats to that path, but for most, it is. 

[00:44:15] I think the key is, yeah, just understanding. I think that's maybe the other part of this story, from the owner's side, who you're truly suitable for. And, focusing in on from their perspective alone, what actually will be a deal that is leaving everyone a winner. The last thing you want to do is, having passed on good offers and have no offer, in the end. I've seen this, and this should be avoided. Tune out the noise. Look at what this is worth and, get a deal done. 

[00:44:46] Ronald Skelton: Do you ever tell these owners like, look, this is the offer. If you ever decide it's a great offer, call me back. 

[00:44:52] Jeffery Oboy: I don't frame it that way. What I do truthfully, again, the offers only go to those where I love their business and I like them as individuals. I walk them through how our valuation comes to be. To demystify this whole thing.

I thought this was just not going to be welcome, but in fact, whatever education they're getting from elsewhere, don't go to the depths of how this really comes to be and what makes a business investable from an investor. 

[00:45:21] But I think this is very extremely important. Not only to be able to evaluate whether or not they're getting a fair offer, but at the same time to know how to actually navigate their business forward. If selling today isn't the priority. To understand what those levers are that actually have the most meaningful impact for the liquidity event that may be a priority down the road if a succession or keeping it within the family isn't the priority. This is something I did not know. During my time, owning and my role, the former company, but, have learned and saw the power in it. Is extremely important. 

[00:45:57] Ronald Skelton: Awesome. Awesome. Well, how do people reach out to you? If they've got a business they want you to look at? Or they want to just kind of get to know what you're truly looking for, or maybe like we have a lot of acquisition entrepreneurs that are, they're on the hunt right now. Something that may not be a right fit for them might be of interest to you.

So if they've got one that, Hey, this just didn't work for me, but I think you might want to look at it. How do you want them to reach out to you? 

[00:46:19] Jeffery Oboy: Absolutely. As most on LinkedIn, of course, and Jeffrey, E R Y, Oboy, Paratus Capital. I think you'll include a link perhaps in the show notes. Also email address, Oboy@paratus-capital. com. 

That's again, O B O Y. And, yeah, on the website, I've kept it short and sweet. There are a few videos on there. We emphasize what we're on the prowl for and where we think we'll have the most significant impact. 

[00:46:45] Ronald Skelton: Awesome. Well, if somebody can only remember one or two things from the show, what would you have them remember? What's the walkaway notes you want to remember when you buy? 

[00:46:53] Jeffery Oboy: I think the individual that's not only qualified to run a good business, but it will allow them to pursue whatever's next for them. That they don't need to stick around to run the business under new ownership and where this business has places still to go. That's what I would highlight most. 

[00:47:09] Ronald Skelton: Awesome. Well, I appreciate you being here. We'll call that a show. 

[00:47:13] Jeffery Oboy: All right. Thanks, Ron.

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