Imagine this: A young entrepreneurially minded person has worked for a few years and is now getting his or her MBA. After graduation, however, that person doesn’t want to go work in a traditional firm and climb the corporate ranks. Instead, this entrepreneur wants to run a small business — and be the CEO and owner.
This concept, called entrepreneurship through acquisition or search fund, can be less risky than starting a company from scratch. Robert Septak says GT Entrepreneurs is one of four platforms he knows of that helps experienced operators find successful businesses. The Pittsburgh private investment firm just closed its third acquisition.
“We’ve been doing this for about two and a half years. and it solves one of the issues in the sense of, you have to read some books, talk to people and try to figure this out on your own,” says the vice president of operations. “Whereas, if you come here with us, day one, we have all the resources and tools. You just need to be a good operator for the business we do find.”
Smart Business Dealmakers spoke with Septak about entrepreneurship through acquisition and how GTE works.
Helping owners transition
GTE was born out of a final project by Carnegie Mellon University MBA students Brenden Van Buren and Gabriel Chick. The two are now running a commercial fencing company in Reading and a HVAC company in Cleveland, respectively, as presidents.
Brenden’s dad, Jamie Van Buren, stepped up as managing director. With his long-time management experience, he helps raise money from investors and advises the operators after they start running their company.
“We’re buying companies that are usually $500,000 to $3 million, or so, EBIDTA or cash flow, and the owner is looking to transition out,” says Septak, who manages the day-to-day operations. “Typically, it’s somebody that’s near retirement age and is ready to cash out of their business.”
GTE has four operator employees right now looking to buy companies in industries that fit their background. The idea is the operator gets 25 percent of the equity by year five. Septak says that is split into three chunks; the operator gets 8 and one-third percent on day one; 8 and one-third percent at year five; and the final 8 and one-third based on a predetermined financial metric.
The firm, which teaches its operators how to buy a business, hopes to acquire two to three businesses each year for the foreseeable future.
Septak says roughly a 100 or so MBA grads across the country each year want to do entrepreneurship through acquisition, and many do it on their own, where one person is raising money from investors and acquiring a company.
Search fund firms like GTE are usually linked closely to a business school, such as Search Fund Accelerator in Boston that’s connected to Harvard University and NextGen Growth Partners out of Chicago, which works with University of Chicago and Northwestern.
GTE was just like any other startup at first, beginning in the Project Olympus building at Carnegie Mellon.
“Now, we’re in the new David Tepper building, and we’re still working here because we typically hire 60-ish undergraduate interns throughout the year to help us do a lot of the work with these businesses,” he says. “That’s sourcing deals, industry and market research analysis, helping us model and price things. So, we’re in CMU because we pull a lot of students for that from Pitt, CMU, Duquesne, all those schools.”
In addition, GTE is a guest speaker in CMU’s entrepreneurship through acquisition class.
Setting GTE apart from other platforms is that it doesn’t have a fund.
“We don’t want to do all the red tape that has to go with having a fund,” Septak says. “We’re just operators; we’re trying to get money to invest in the deals and close the deal.”
Septak says that Jamie Van Buren helps pull high-net-worth individuals and family funds together to provide equity. Some of those investors have bought into GTE as an operating company, committing a set dollar amount or percentage to every deal, while others come in on a deal-by-deal basis.
So far, in its deals, he says approximately 50 to 60 percent has been traditional bank debt, about 30 percent is equity from investors and the difference is usually made up by a seller note.
GTE presents itself to investors as an alternate investment class that provides diversity but is less risky than VC.
“Where can you go and invest in a $1 million EBIDTA cash flow business being run by a new, younger operator?” Septak says. “That’s not something that’s out there.”
In addition, many owners have initial thoughts on price that are out of GTE’s range, which is why the firm works to create a good relationship with the owner. By focusing on legacy, GTE can close deals.
Septak says the owner of the fencing company that Brenden Van Buren is now running in Reading knew the deal probably wasn’t the most money he could get, but Septak remembers him saying, “I didn’t know if there was going to be another Brenden, somebody that’s young and wants to take over my business and move to Reading, coming through the door in the next couple of years.”
At some point, the deals will need to go through a recapitalization conversation, but GTE hasn’t gotten there yet, Septak says. GTE also covers its costs by taking a small fee with each deal transaction. The firm has consulting agreements with the companies after its operators join them, as well as an ability to earn a bonus if the operator hits a predetermined metric.