The Overlooked Asset Class

Brandon (00:28) Welcome Mr. Tarrus Richardson. He is what I consider to be the OG in the buyout game. He's somewhat of a cross between, I would say, Reginald Lewis. you're old school, he was the first African-American to do a billion dollar buyout. And a little bit of Elon Musk in there too, because he's had a number of different chapters. And through these different chapters, he's always been able to create something phenomenal. And today he's joining us.

to talk about the asset class of ETA or entrepreneurship through acquisition, why this is compelling, why it's overlooked, et cetera. But before we get into all that, Tarrus, thank you for joining us and taking the time. You're a busy guy. Welcome to the Owner Mode Summit. Thank you so much, Brandon. Great to be back with you and congratulations for all the success that you're having with your firm. Appreciate it. Appreciate it. So let's start off by, you know, kind of getting into a little bit of your story. And, you know, I think at this point, a good number of folks are probably aware of

of who you are and what you do. You know, the one thing I'll throw out there just, you know, for people to recognize and put respect to your name is that you have built the first African-American to build a billion dollar holding company by doing independent acquisitions of companies. So one after the other, raising money for each deal at a time and building that up to a holding company with revenues of a billion dollars. And that's obviously an incredible amount of work behind that. So first off, just want to set the

the table with that, but like me, you're a Chicago guy, you know, when it's all said and done, I'm a South side, Chicago guy. You're a West side, Chicago guy. Just give us a little bit of kind of how you even got into this game to begin with. Sure. Um, so, uh, I grew up in Chicago, uh, with, you know, parents that, you know, were high school educated. Um, but basically, you know, start reading self-help books and decided they wanted to.

go into business and for them they chose to do it through a little small acquisition. So when I was sort of eight-ish, nine years old, my family bought a bar on the West suburbs of Chicago. They went and tried to talk to 10 to 20 business owners, found one that wanted to sell, raise capital from 20, multiple, multiple people.

and ultimately, 120,000 dollar acquisition of a bar. And we moved into it. We did the leasehold improvement at a bar. And recently he sold in the last sort of two months, but 47 years. He owned that bar and it provided for our development and food and safety and security and paying for school.

Um, you know, we employed a thousand plus people has got a street named after him, et cetera. Um, three or four years after that, they wanted to do a daytime business. And so they started looking for, you know, various businesses to buy that were daytime businesses. So we looked at parking lots. looked at, um, you know, a floral business. looked at a pottery business and ultimately we found something called really pop and which was a 31 flavors of popcorn.

And they bought a physical plant and a retail store operation in a shopping mall for about $330,000. And then, you know, we went to work. We made the popcorn, we worked the retail, we distributed over the holidays. And for me, I learned both the concept of acquisition, but also, you know, working in a family business to create wealth, really through my parents. And so that's the journey's beginning. Let me pause there.

Love it. And I want to, I want to kind of double, you know, double down on a little bit of that because what's phenomenal about that story is, you know, one, you're throwing out the numbers. They bought this business for this amount. They bought this a business for this amount. We did this. We did that. Right. And so I wonder how much of your business success do you attribute to being exposed to that early on? And I know you and I share a passion for educating, you know, the next generation on not just the importance of ownership, but, know,

Tactical and practical experience before you jump in there and so how much of like, you know How lucky were you to be able to kind of experience? The the bumps and the bruises at you know at these earliest stages of your of your life. I think it's a real question. I mean we My family believed in self-help books. They pushed us to read them, know throughout our journey so the mindset of positivity the mindset of hard work the mindset of you You believe it and conceive it you can achieve it. All of that is fundamental

And then you add that to just sort of, you know, watching my, family work really hard and work 20 hour days to work these retail operations, to provide a service to a consumer base that, you know, gave you real-time feedback if they were happy or not. Um, you know, we lived and learned and, know, they were smaller businesses. were harder to scale, hard to create million dollar plus enterprises. But at the end of the day, they taught the same fundamentals of.

How do you treat your people? How do you treat your customers? How do you, you know, make sure you get the safety, right? All of that stuff mattered. And we had a fundamental training ground in that, so to speak, a schooling of it, you know, as, as kids and teenagers. So was very, very valuable. How did you graduate those early experiences? You saw some stuff that, you know, really stuck with you. You saw some things that said, maybe I want a little bit more scale, right? And my version of this and you learn some things, maybe you didn't.

or you want to do a little bit differently, but somehow you went from there to where you are today. What happened in the meantime? Yeah. So, um, yeah, I graduated in high school at 16. I had this goal of being a millionaire by 21. Um, and yeah, I was cutting corners on time and rushing. And in 87, when I was 17, uh, Reginald Lewis, uh, was a, you know, African-American business owner who initially bought, um,

a company called McCall Pattern Company for $27 million and sold it for $90 million. And in May of 87, it was in the magazines like Jet and Ebony, where he had made a 90 to one return on his million dollar investment and sold it for $90 million. And he personally gained $63 million. And man, when I read that, I was in the kitchen with my mom and I looked at her I was like, now this looks like a good job. And so I

started clipping articles on him and trying to learn as much as I could about him. And then not long after that, in November of 1987, he basically doubled down and then went out and bought a $980-some-million business, which was called TLC Beatrice. And it was the largest acquisition of a company by an African-American. And in that one, he had worked with Reginald Lewis from

Kate or me with Henry Kravis from KKR and there was all these other names that were associated with that deal and so by the time I got to 1988 I realized that my parents had taught me fundamental business Smaller business and they had used acquisitions But mr. Lewis had exposed me to the ability to do it at scale And so I came into 1988 thinking I'm gonna find a way to be in the buy and build business Is the motivation I've had since then?

Love that. And, you know, why should Why Should White Guys Have All the Fun is the Bible for a lot of folks who, you know, opened up this world right outside of sports and, and entertainment, right. So really make some, serious money and fun fact, I don't know about tell you this, Tarrus at Howard University, I was a Reginald F. Lewis scholar. So he was someone who, you know, ultimately through his philanthropic work, you know, after he passed away, you know, I was able to benefit, you know, from, from his, his work in school. Okay. So

Let's let's kind of analyze it from the perspective of and they were going to get into like the core with this conversations about which is evaluating investment opportunities and this is an asset class. You saw this was an opportunity to make or use leverage to make an incredible financial outcome possible for yourself or your family. Right. But there's a lot of work to get to a place where you know exactly what strategy you're going to implement to be successful. And I would make the argument without that success that that, know, Reginald Lewis had in his first.

opportunity, he would have never had the opportunity to go out and do the big billion dollar TLC Beatrice deal. So how did you refine and kind of think through what your specific angle was going to be to to get started and ultimately to lock into as your competitive advantage? Yeah, it's a good question. I think we go back, go forward. So even in the case of Mr. Lewis, we talk about McCall Pattern Company, TLC Beatrice, but he got to the business by being a lawyer for.

what we call MESBICs and SBICs, which were either minority or just sort of small business investment companies. He was the lawyer for a number of those funds in the seventies and early eighties. And so he got his reps and learning how to work with founders, learning how to structure deals by working on 20 plus transactions before he did his first. And so this apprenticeship model is essential. And so while I had the aspiration.

In 1988, 89 to do this. I ultimately ran into a guy named Calvin Pennington while in business, while at Purdue University who was coming back as alum. He was in the buyout or leverage buyout business at Prudential Capital. I talked to him. He sounded like he was doing what Mr. Lewis was doing. I was like, I want to be like you. And I called him after that homecoming weekend, maybe 13 times. And he finally understood. I really, really wanted to learn his business.

And he became a mentor. helped me determine what to do to get the steps. And so he told me I had to go to New York and work in on Wall Street. So I pursued a job and got a job at Salomon Brothers and the mergers and acquisition groups. So two years of fundamental training in analyzing businesses and working with founders and business owners. I then went a little on the side and went out of his advice and went to Ghana where I started an investment bank at 23 years old.

It was incredible learning on how to organize capital, how to build a small business, how to work with the local business owners to sort of help them either go public or to, you know, issue capital to grow their businesses in smaller markets. You have more responsibility and you get to learn more. So it valuable. I then went to business school that Harvard Business School, I got exposed to the network. I got exposed to what I would consider higher thinking.

After business school, I went to work at a large private equity firm with a couple billion dollars. They were doing turnarounds. They had worked at, you know, former employees of Drexel Burnham with Michael Milken. They had all created, you know, a hundred million dollar billion dollar net worth. And it was only five or six of them. And so I learned at the, the foot, so to speak, of some really successful people who were doing transactions.

Um, and then I got my shot. Like Michael Porter was trying to start an inner city focus fund. I raised my hand first and was first employee of something called ICV Capital Partners. Uh, Willie joined me as my partner and president and we went out and we raised $130 million to do deals. And so that journey was from 1991 to 2000. So nine years before I got to be in my own fund.

And recognizing I was 28, 29 years old. Again, I was in a hurry relative to many people, but I still had done these one to two year, three year internship or apprentice programs to help me learn the business. And I love this because this is now the intersection of where the audience is looking to understand, you know, this idea of investing in the asset class of, you know, businesses, if you will, or business acquisition.

And so when you stepped out, right, tell us a little bit about that experience. And we're to look at it from two sides. We're going look at it from the perspective of someone who's done the work, put in the time, learned the game, and then said, all right, I'm ready to go for it. And I want to hear some of the harsh realities of what that looked like even after putting in those nine years, 10 years of work, you know. But then we'll look at it from the perspective of who invested in you, right? And why did they invest in you? And then we can kind of talk about the asset class, you know, overall.

from that perspective, but tell us about your, you know, your first foray into doing it for yourself. Yeah. And so, um, doing it for myself the first time is a little bit of a misnomer, right? What I learned from Ghana was I partnered with a guy who ran Deloitte & Touche consulting. He had capital and he had relationships, but he didn't have time to do the work. So he was looking for young, hungry and aggressive people who could come help him build an investment bank. When I got to.

Joseph Littlejohn and Levy and got the call from Michael Porter and his team. They were looking for people who were young, hungry and aggressive to build a inner city and minority focused investment fund. And what I saw was professor Porter had tremendous relationships in that work and they had partnered with American Securities, which was a successful, you know, private equity firm who also had capital and experience to continue to train us.

in a way that we were going to basically own 51% and Professor Porter's group ICIC was going to own 24 and a half percent and the American security firm was going to own 24 and a half percent. And so I partnered with people who had more brand, more capital and more experience along with my partner, Willie, in the first transaction. It was important because we knew we knew a lot, but we also knew we didn't know it all. And so by trying to

make sure that somebody to my left or my right had been where we are at and where we're going. We partnered in our first, you know, sort of private equity firm that helped us to raise capital quicker. We wind up being in the market for 12 months. We raised $130 million. We got institutional capital, we got high net worth capital, and it mostly was on hard work, knocking, making calls. But to put it in perspective, we did maybe 60 investor calls.

And we got 20 people to say yes. In this day and age that would be deemed highly successful. because usually you have to go out and more more recent experience, you have to go out to a much broader list of potential investors. So step one is we got a partnership in place that helped mitigate some of the things me and Willie didn't know because we had never raised a fund. Step two is we went to an investor base that valued that partnership approach.

and probably gave us money and gave us decisions of yes, faster. And then after we got through the fundraise, then the real work began, which is how do you build a team? How do you source businesses? How do you buy? How do you build those businesses? How do you exit? And that's sort of step two. Let me pause. I'm happy to get to step two, but see if you have any questions. No, let's let's let's get right in the step two. Let us know. Because I think another thing that could be helpful.

as you go into step two is maybe, and I think a lot of people get this nomenclature confused, how you think about it. You know, some people would say searchers, independent sponsors, know, traditional, in your mind, what are the categories and what are the definitions of those categories such that, you know, we can continue the conversation with clarity. Yeah. So in 2000, the world had maybe 500 to a thousand private equity firms. Today there's maybe, you know,

3000, 4000 private equity firms and a private equity firm in this nomenclature is someone who has raised institutional capital from either pension funds, commercial institutions, sovereign wealth institutions, high net worth individuals, et cetera. But it's a committed pool of capital to make a series of acquisitions, call it five to 10 investments over a 10 year investment period of time where

They give you the money to invest for five years and then they expect you to then basically build those businesses and sell those businesses over the six to 10 year period. That's traditional private equity language. That was what most people were trying to do 20 years ago. In the last 20 years, two things have emerged at scale. So in the eighties, late eighties, know, Stanford Business School and maybe Harvard Business School.

started encouraging students to forgo going directly into a job and to, you know, organize a small amount of capital, hundreds of thousands of dollars to pay a little bit of a salary and for deal fees to go out and buy one company where that student would, or, know, recent graduate from a business school would then go and take over the day-to-day management of that company and really roll up their sleeves and help build it. That model was called.

ETA or entrepreneurship through acquisition. And it's got 30, 40 years of experience. It's got 30 plus percent returns as an asset class. And it's more formally or former is more institutionalized now. So there's many capital providers to back students or recent graduates to do ETA. The second and the third category of investors is

was called independent sponsors. Independent sponsors can be, in my definition, people who worked in industry for five to 30 years and have said, hey, I want to take my knowledge from industry and go buy a business, ideally working in spaces where they know. Or it can be someone coming out of a finance program and investment management or investment banking program who knows the details and the components of how to source and buy a business.

by being an advisor who are now trying to go and buy their first deal. Sometimes it can be singular or independent sponsor can buy one thing where they either decide to go run it like in the ETA model or decide to be the CEO and chair or just the chair and back up existing team or one that they recruit deleted, or they can do multiple acquisitions, which is what I did over the last 15 years. So private equity, pure committed capital to

you know, invest in multiple deals in a fund. The independent sponsor will maybe buy one or two companies, three companies over a five to 10 year period of time. They don't have to run it day to day. And ETA entrepreneurship through acquisition is really for an emerging, you know, sort of buyer class, maybe directly out of business school or relatively younger, who's going to go buy and try to run one asset for a five to seven year period of time.

Thank you for clarifying that because I think we need to get the nomenclature correct so people can assess these routes and pathways correctly. Okay, so you have multiple lives, right? Your earliest was really grinding with your parents as owners of a small business. Then you went into this world of really just kind of apprenticeship, as you called it, where you did your time as employees at firms that were doing this kind of work. And then you...

you know, partner with folks to launch a firm, went through the fundraising process at an institutional level. I don't know, after that, you ended up stepping out and building your own firm, right? This is where you started acquiring business, know, business by business, raising money for each individual business at that time. Let's start off with maybe what was the difference in profile between what you were doing when you had built the institutional platform with Michael Porter and Co. And when you decide to step out on your own, what, how size wise, focus wise,

What was the difference there? Sure. So from 2000 to 2010, um, you know, we basically had 130 and then we raised a $300 million, of funds. I'll call it 400 plus million dollars of capital, um, to basically buy and build businesses with generally 25 to a hundred million of revenue, uh, and existing management team. And our investment thesis was a proven management team.

you know, investing meaningful capital with us in a niche that had, you know, 10% better EBITDA margins was deemed to be a market leader in a smaller niche sector, um, with stable revenues and cashflow and minimum capex, right? But it was a generalist model where we basically believe that, uh, if we could find the market leading business and they were at 25, we could help them with capital to expand to new markets, with capital to expand.

new products and services, we could do some M&A to do add on acquisitions. And because they were in niches, we didn't have to be expert in the space. We simply needed to be experts at helping them with these tools of capital, of M&A, of how to expand market and how to put a safe balance sheet in place. we did 10 deals at ICV during my tenure.

Uh, we generated, you know, 20 plus percent returns and in general, we're a successful firm and doing what we did. Um, I would say, you know, for that vintage of what we're doing, being a generalist private equity firm worked, but as we got closer to 2010 and by the time you get to today, the number of private equity firms expanded from 500 to a thousand to

3,000 plus the number of independent sponsors and ETA people. There's not 4,000 individuals out there going out and trying to buy smaller businesses. And so the competition to go find founders who want to sell to you substantially increased. And in that increase, each of us as private equity operators has to become way more focused on what is your differentiation between the other people that are buying companies.

How do you really put in place an operating approach and a value creation approach that enables you to create greater EBITDA growth, greater value in those businesses to deliver greater returns? Because if you don't deliver 20 plus percent returns, the capital won't find you anymore because they have so many choices for where to invest. Do you feel that this is a permanent trend or you think we're in a place where

you know, maybe it's a little bit frothy and that's why so many folks are kind of coming into this space and it'll end up kind of working its way back to what feels like a right sized, you know, equilibrium. think that, um, there's enough money to be made. The model was successful and mature to where new entrants should always be approaching it because everyone's smarter. The information gap that it used to exist between how to access small businesses, how to, you know, access capital is no longer.

You know, as far of a bridge and so more people know how to use the tools. More people know how to find the opportunities. There's going to be more competition and there's waste. There's so much money that's been made that is an attractive asset class. So, I believe it continues and will continue to be a class that attracts lots of people to it. And I think the people that will succeed will become more and more niche and specialized to pursue.

their one thing, their unique sort of competitive advantage because there's too many people doing it for you to be a generalist the way we were in the 2000s. That's a great segue and kind of like the next phase of this conversation where, and maybe you can start off by kind of laying the landscape, if you will, for us, which is now we have various levels of getting into the game of buying businesses, right? There's the SBA loan route where you're looking at

an ultimate loan size of $5 million, right? You have, you know, all the way up to, you can define lower middle market or, know, I'm actually curious to hear how you break out size of company. And then let's kind of then bring that back to where you were when you first started raising money for your deal within that realm. And, know, and even if you want to provide some insights or guidance for folks, you know, either as an investor, maybe someone who's a searcher on where to focus from a size perspective, if they're looking to seriously explore the space.

So let me sort of repeat your question in this way, which is when I started ICV, I had the benefit of being an institutional capital provider because we raised this 130 and then $300 million, right? So didn't have to worry about where my money comes from. I had these brands of Michael Porter and ICIC and American Securities, along with all the professional effort of Willie and

our vast team at ICV to go out to market to find deals, right? And so we were small, but institutional. And it gave us the advantage of people not asking who are you and why are you and blah, blah, blah, a little bit more. By the time I left ICV, two things had happened. One, I left ICV in a cloud. I had gotten fired for political activity and fundraising and sort of,

basically frustrating and investor base that didn't like my political activity. Okay. And so rather than going out with a halo of goodwill and so forth, I went out in this sort of, I don't know what just happened. We're not going to touch him. And so I had gone from being institutionally great investor to now I could not access the capital and that investor base and that network to do deals. And so it's the.

you know, that expression that says be careful who you talk to going up because sometimes you may go down. Well, by the time I got to 2010, 11, 12, I was on the down floor. I was at near bankruptcy. I was at people wouldn't do business with me. So my investment strategy had to go back to that of a persona non grata. And so I started the 2010 era with

I can't get a job and I can't raise no money. How do I figure out how to reposition myself? So I started doing consulting. I got hired by Ernst & Young and some foundations to, know, how does, where is there an access to capital gap for minorities and women? How do the businesses that operate in that space do businesses with corporations and government in a way that helps them succeed? And so people paid me to sort of, you know, map

the successful companies and the successful corporations and governments that use MWBE programs. I was curious and committed to that because it's who I want to be. So I started a business called IMB, Investors in Minority Business. I thought that there was so many people who had proven cash flows and proven managerial expertise and sector expertise. And there was a mismatch between the capital and between the opportunity.

By the time I got to 2013, 14, I had looked at lots of businesses. tried to buy businesses and as Tarrus Richardson or IMB who no one knew, I was failing time and time again to complete the final step, which is to get the seller to give me the keys, to get the lenders and the financing sources to give me the money. And I was almost out of time. And so I mentioned this book called The One Thing.

which I read as well as, um, um, well, let's stay with the one thing. The one thing basically told me, you got to stop trying to pursue multiple lines of business, multiple industries at the same time, because when you're a smaller firm, you just don't have the time to get up to speed on everything. And so by the time I was at 2014, I said, okay, I'm only going to focus on utilities and government contracting. Um,

And I'm going to create real milestones of him in terms of what I have to do. Um, and so by the time I got to 2014, I had run out of money, but I had found a company that was called any IT consulting. And it was a staff augmentation business servicing the state of Pennsylvania. The founders wanted succession. They wanted to get out of the day to day work. They wanted a liquidity event and they thought that they wanted to sell a hundred percent and go home.

And I convinced them to sell only 51% and stay with me and be my partner. And they had no one else had offered them that. And so they said, yes. And the only sort of, you know, work in it was by the time we got to June closing, I had told them, and I'm running out of money. Do you think you can give me a seller loan for my portion of the investment? And so I basically bought that first transaction with no money down.

Because the seller basically, I pledged my house, which I couldn't sell at the moment as equity, but they gave me a seller note to basically fund the first transaction. And I think the lesson learned is I was all in. My wife was committed to being all in and allowing us to pledge our house. And once I did all that, I knew that I would go and live basically at the company. I slept at the owner's home. I went to customer meetings.

I in recruiting the senior team members. And I basically learned the business inside and out to a point where I could become a strategic partner to them and a strategic owner with them. And until that business was succeeding, that I didn't turn my attention to try the second, try to acquire a second business. That's really important because you basically answered the question, which is, what value did they see in you? Right? They're giving you 51% ownership. They're staying on, you know, to add some operational

you know, expertise and then they're giving you the money at the same time. And so you proved your value by getting close to them, learning the business and them trusting that you could help drive their business. Cause there's still, you know, 49% equity holders of this business. They want to see growth that they think you can help them deliver. So, the only other nuance is that sellers have a hard time taking money out the business. gave them a $10 million check because with my help,

they can borrow it three times from a bank, which enabled me to send $10 million to them on the day of closing and then retain 49%, which has probably paid them another 15 to $20 million over the next 10 years. Got it. Got it. So they, did get, you know, a nice liquidity moment at close that made them feel good about the deal. All right. Let's switch to the investor side.

You had to raise money. Your second deal, you kind of gave us, thank you for giving us a nice nuanced view of, and I think a lot of people can take a lot from your journey. But when you got to the second deal at this point, your track record, regardless of, you know, maybe the cloud that existed before from a numbers perspective was really, really strong. But you have to raise from folks that may, it may not be familiar with the space, may not really understand how to think about returns in a space, how long it will take.

how they can get the capital to invest in you, even though they believe in you. Let's orient the conversation first by just describe to us, what are the returns that someone can generally expect as a individual accredited investor who's exploring this space and how long can they expect that capital to be tied up? Sure, so an accredited investor by definition is someone that generally has an annual income of 200 to $300,000 a year or a net worth of a million dollars.

the definition of an accredited investor. And I have about 150 investors, 149 investors. And I'd say at least 50% of them invest with me by the definition of an accredited investor, which is meaning they're relatively small net worth. They have a net worth of one, $2 million. They may own a home. They have a little bit of, know, stock and equity and stock investments, et cetera, or in debt investments, et cetera.

Most of those investors also have what is a 401k rollover. And many people don't know that you can self-direct a rollover 401k to invest in things like private equity. And so I've helped people to, to, say, look, I can at least beat the 10% you're likely to get for your 401k money. If you give me a hundred thousand dollars, 25,000, 50,000, whatever it may be.

put it in a self-directed IRA and then let me manage that money for you. So step one is being willing to talk to smaller investors was crucial because I didn't have the institutional investor base 10 years ago or 15 years ago. Being willing to talk to a hundred people to get 12 people, 15 people to say yes. Understanding that in these first few deals, you can write up the nicest book and have all the right slides and they don't care. They're really investing because

Do you seem like you care? Do you seem like you believe in what you're talking about? Do I believe you're going to give us our money back? Most people don't have to read the document to make the investment. They have to look into the hearts and minds of the person that's asking. And as long as you know that, that means that you have to work harder and show that you're all in, as much as you have to try to explain why this business's investment opportunity is so valuable. so that's how I went about raising money. I had maybe.

13, 14 investors in that first deal. So I needed to invest 2.5. I raised 1.3, 1.2 from the small group of 12 to 14 people. I took a management fee, our deal fee closing for 300. So 1.5 and I got a seller loan of a million. Every deal after that, similar characteristics. You know, I raised a 1.8 million dollars for a

$15 million acquisition of a food business. next I raised 1.7 million for a, $8 million revenue PMCM utility services business. And each of those, was some version of 10 to 15 individuals giving me money. The sellers rolling over two to $3 million of capital and me either, and me somehow investing one ish million dollars in all three of those transactions. And.

The the cool fun facts is you know, and the second deal is probably at a 15 X and the third deal We've taken home 27 times our money in the first deal. We took home four. So we got better over time But as you get more success and you know You have repeat investors and some of the founders investing with me. It doesn't get easier It just means that the template becomes more understood and when it

It's hard to raise money. You don't get discouraged. You just go and talk to more people until you find the people that want to do what you're trying to accomplish. there's a lot, a lot in there. And let me, let me kind of parse out a little bit. So the first piece is you are approaching friends and family, right? Who are in many cases, you know, so a lot of people might have the perception you're going out, you're finding some random person, you're pitching them on this deal. They buy into it. They invest. Not realistic. What's more realistic is people who know you.

believe in you, seeing you put in work respectively, whatever you had been doing before. And now you're coming to them and say, Hey, I'm going out there. I'm getting the deal done. You know, what do you believe in me? Will you participate? That's one second. Let me just pause there. Like the friends like so family, not so much, right? We just didn't have a family that had checks. My friend definition were people that I work with, people I went to school with and people that I would ask anyone that I talked to, is there one or two other people you think I should talk to?

And so sometimes it was one step or two degrees away, but it was always starting from an initial base of someone I knew who may have recommended one or two other people. Got it. Trusted connections. And then the second piece is you're offering a higher level of return than what you believe they'd be able to get in the stock market. So stock market and 401k returns, cause 401k can be a blended asset pool. and generally I'm not overselling. saying, look, I think we can deliver.

you know, 15%, 20% returns, should make one and half to two and a half times your money. That's what I think private equity can do all day, every day. It's not so difficult to do. We've delivered much better returns, but I sort of never believe in over-promising. And so this is, we're investing in safe, stable, recurring cashflow businesses. And if we do well and get lucky, it could be better, but we sold them on 15, 20% returns.

Got it. And then the other person, the part that's interesting is if you're an accredited investor, as you broke the definition down, there's for a lot of folks that may be entering into this from an investor perspective for the first time, this wrestling with illiquidity, illiquid, illiquid investments, right? And the timeline associated with seeing a return on that capital after has been deployed, I guess, from a 401k perspective, it's already going to be a long-term capital. You know, you're going to be locked in so, you know, close to 60 anyway. And so for those folks,

It's not as much of a leap to think, okay, well, I might actually give my money or my returns, know, invisibility is that way before I need it anyway, for the folks that are actually writing checks or, you know, maybe liquidating liquidating a stock position. Was that a challenge for them to, know, versus the folks you were saying? It's tricky, right? Because people one day will be like, Hey, I'll invest 50, I'll invest a hundred. And then, you know, the roof collapses on their garage and they're like, Hey, I need that money back.

because it was their savings and rainy day fund sometimes. Right. And so, my, my perception is the following one is I don't want anyone to invest too much of their, you know, balance sheet. want it to be something that if they don't have it for five years, seven years, they're good. Right. So that's why I take smaller checks. And I think of it as our job to educate and train people on this asset class and how returns work. So,

I started mostly smaller with people and they've grown with me. I try to deliver return back of your initial capital within three to five years. So even if we haven't got the whole three X or five X or two X, whatever the question is, can I deploy capital? You know, grow even the pay down debt to where I can either do a dividend recap, which is the equivalent of remortgaging your home.

Or can I sell a business where I can give people their money back? Cause the more you have unsophisticated institutional investors in this asset class, the easiest way to demonstrate is to give them their money back. And we have done a great job of trying to return capital every three to five years for investors. Okay. So now, we have an audience, you know, many of these folks are accredited investors. They, are here because they want to understand how do they get exposure to this and.

cap that downside and lock in on that upside. So you had this huge track record. You had over time built, you know, an unbelievable kind of return profile, but a lot of the folks that, you know, are getting out there for the first time, they're not going to be able to point to that type of track record, right? And so if you were to put on your cold as ice, I'm in your situation. You know, my goal is to get you exposure and really make sure that your, you know, your strategy is going to deliver the highest, you know, risk adjusted returns.

What would be your playbook for folks that are looking to get into this game and explore writing checks? So, it can't be what you can't see. So if you've never done a private equity deal, don't start the first one as the control buyer. Like, I probably invested in 30 or more sort of individual deals, right? as an individual, right? Because I want to train and learn on someone else's watch. I keep using this word apprenticeship.

So your step one is to go work for a deal or two, either as a financing source or operating partner, a BD person, whatever, but get into a lower middle market deal where you can learn. Next best thing is to invest in one where you can talk to the people that are buying a company and watch and learn by way of osmosis through them.

and then in terms of who's on your team, I've always rolled deeper with people on my left and right, because I want to say, if I'm going to buy a utility services business to my left and my right, somebody should have worked in that space or know something about it. And so build a small team that helps you not go into any deal as a complete novice. Those things are table stakes. and then as it relates to raising money, the largest source of your capital should come from the.

selling founder in an initial deal and so requiring that you only do deals with people who will roll over capital as the seller roll over financing component and have a second bite at the apple helps you lower the amount of capital and then second stand disciplined and not being too large of a capital raise. I believe it was effortless for me to raise one and half to three of capital.

But if I had to go raise four or five and six, I may have had more difficulty. Like I just ran out of friends, at least in these earlier deals. And so keeping the account small enough to where 10 to 20 individuals can fund, you one and a half to three was helpful. And, and don't go out to a whole lot of people you don't know, like stay within your network from school, your network from previous work colleagues, previous professors, et cetera, et cetera. because

They're going to be making a trust investment as much as they're to be making a investment. I love that. So if I'm an investor, I need to see that you put in the work so you know what you're doing. You're not stepping into an industry that you know nothing about. You surround yourself with people who can bring an unfair advantage or insight into the equation. That's number one. Number two, you need to show me that you were able to get the seller to put up a certain amount of money, which means that they believe in you.

as a buyer and they're along for the ride. So their expertise doesn't walk out the window after you close. And then, you know, and then the third piece, I guess, is, you know, the amount of capital you're raising seems to be commensurate with the opportunity itself. You may, you know, be signaling to people that you might be doing a little bit too much, particularly if this is your first deal. That's something to kind of look out for. What are some other red flags that you would advise folks looking to potentially back acquisition entrepreneurs that you would stay away from?

you know, I think we hit it, man, it's like you, you've been in a space, you're doing something, you have some knowledge of those things are helpful. sometimes, you know, sort of. Buyers of businesses are just trying to buy anything. They'll go, buy a roofing company, I'll buy this and they're, they're, they're applying the generalist technique. It works. but if you want to get.

closer, you want to try to find people that have decided on an industry where they've seen 10, then 20, then 50, then a hundred opportunities, because that learning curve that you basically go through to start being a specialist really helps you succeed post-close. And then from the perspective of what type of information access should you, know, so imagine

And you've seen this a lot. invested yourself in many, many acquisition entrepreneurs. Give us an example of like the gold standard of what an investor would expect someone to give them in terms of information, whether it's the initial proposal, whether it's through the process of them searching and even after they invest, like what should they expect from an information perspective? it may sound crazy, but

There's nothing you're going to learn from what they're giving you in the investor portal or investor docs that's going to help you protect your money. You're going to have one decision go or don't go in terms of writing that check to that, that person or that fund. And then after that, they're going to have to prove out. And so you, you don't get scared when they say it ain't going right. Don't get happy when they say it is going right because in small businesses, it goes up and down.

Only focus on, we're going to send a dividend. Hey, we're going to send a return to your capital or Hey, we're going to sell. And that's going to be in three to seven years and all the paperwork in the interim. It's, it's kind of interesting, but mostly you're trying to ask that owner or partner that you've worked with. Is there anything I can do to help? Who can I introduce you to and think of yourself? Not as a third party, disinterested investor, but as a.

a strategic investor that's trying to help to ensure that this person has whatever they need to help them succeed. but looking at financial reports and the quarterly, you know, sort of investor letters, those are interesting, but in the lower middle market, you should be asking, how can I help? How, who can I help you meet, to help them grow the business? That's an interesting perspective. So in other words,

These are folks that are already warm connections. So their reputation brings them 80% of the way already. Then the intentionality comes in where they're saying, Hey, I'm focused on this specific industry. Here's why this makes sense for me. Then they bring you a deal structure that makes sense. They're not over raising on capital. They've gotten the seller to put in certain funds. It makes sense. But after that, your job is to actually help them out, right? Your job is to help them be successful because they've kind of checked the boxes of things that they can control, right? The controllables it sounds like. So on that note,

a lot of folks in the audience here, just in general, are really seriously thinking about, you know, exploring acquisition entrepreneurship. And so can you make maybe a case around why it would be really useful for that person who's thinking about doing it to maybe invest first as they're working potentially like a corporate job or a day job? You know, what would be the benefit beyond the financial return for someone, you know, looking to invest in acquisition entrepreneurs as a full time employee?

I think it's the best industry on the planet. Right. And why I say that is that, you can go have an amazing job in corporate America and technology and, anything that's called a job, somebody can come in one day and say, this ain't working out or we moving in a different direction. And, and, and you got 10 days or 30 days or 60 days, whatever it is. Right. That's called a job. it can be a professional job, but it's a job.

And what I've come to learn, I'm 56 years old and watching my peers is that, you know, there is ageism. There is a day where it's easier to pay someone less to do the same thing that you've been doing as you get older. so controlling your destiny by owning assets and owning businesses, in my opinion, is a way to reduce the risk of you losing your job to enable you to create a place where you can.

have other people in your family and friends come work so you can become a provider of jobs and security to others. And then if you get it right, you can make substantially more in terms of wealth creation by owning businesses that grow and create more value. So it's, can be a lifestyle business, but it's also can be a more secure way to own something.

that creates wealth and legacy in your family and your community by doing this acquisition or acquire mindset. I love that because that's where we're going to go with this as we kind of close things out is the philosophy around ownership and why that's important, particularly today. But before we go there, let's talk a little bit around downside protection. So I think a lot of folks, and it's funny because I come from a world where I've been on Wall Street, I've been a tech executive.

And what surprised me more than anything is folks are very, comfortable with the idea or a lot more comfortable with the idea of writing a check into an early stage, you know, tech company, right, or early stage startup that has very little revenue, probably no profit. But when it comes to idea of investing in, know, someone buying a business with cash flows, with the working business model, with existing customers, oftentimes,

they get a little bit less comfortable because they're just less familiar with it. Can you get us to the brass and tax of like the worst case scenarios for someone who's investing in this asset class, whether it's they have different types of protections because it is a business that has, know, help us kind of understand what the downside protection and kind of what rights maybe someone has as an investor in this space relative to other spaces. So,

I think that the most important thing to say is that most startups have an 80 plus percent failure rate. So we hear about the ones that win and we don't hear about the ones that lose. And so my perspective is, you you succeed a lot in life by quote unquote, getting the asset class decision. Right. Right. And so my biggest view is that buying

proven cash flow, stable cash flow, et cetera, is super helpful. Right. And once you get into the private equity, stable cash flow investing business, it becomes easier for you to not worry about your downside. You're focused on does the person know how to structure a deal that makes sure that they are buying recurring cash flow and then everybody wins. Right. And so my view is

Are you doing buyouts? Are you doing recurring cashflow at a large enough level to where it's a mature established business? I equate it to a home. There's some people that know how to build a home from scratch. They buy the land, they do everything. The majority of us buy an existing home and the plumbing's working, the electric's working, the roof's on top, et cetera. And there are more people that buy those existing homes that generally make their money or make

make their return of investment back and hopefully a return on it, mostly because they're buying a proven model. And so the education is learning how to buy a proven model. Like if a business has got 12 million of profit one year and 1 million the next year and three to next year, that's not a stable cashflow business. It's not set up for private equity or leverage buyouts. You want to back people that are buying leveraged buyouts.

Because that's very safe. That's my orientation. There are a whole lot of people that make money doing things 10 different ways. But if I were answering your question, how to be safe by recurring cashflow businesses with management that is turned on and active in the business and have subject matter expertise. Love that. And we're going to close out with this question. You kind of got to this a little bit, which is this idea of ownership as a philosophy, right? Versus the time for money exchange.

I guess the way to put it is leverage, you know, so that things are working for you and providing a certain level of reliability and security without you necessarily needing to be involved. Can you maybe, you know, maybe, you know, kind of expound on that concept as you've grown to understand it in your life, but also maybe speak to what about today feels differently such that there's more of an urgency around why ownership is important now than ever before. Yeah.

I think ownership has always been important, right? It's just our awareness and understanding of how to do it is hopefully growing. And the number of people that each of us know and that we can read about and see through our information networks through, know, search unit on AI, et cetera, should demystify it and make it more available, attainable, and accessible to more of us. I think.

That's what's making more people come to the industry is because it's more accessible and visible to more of us. Number one. Um, some people, you know, I was out, um, at someone's house and they had like a couple fancy cars and they are custom there. They should retain more value than others. Right. Well, I collect businesses, right? I bought 20 or more businesses and it, should generate.

you know, hundreds of millions of dollars of net worth for me and my family. And what I know is that if you buy an asset that because you can build a team, work with customers, improve the, and grow the cashflow, it can generate far more returns than the stock market, than the housing market, than, you know, a lot of things in a way that's kind of safe to you.

And so the greatest answer for me is I wanted to quote unquote, go into the acquisition business because I thought it could create an exceptional model net worth and wealth. And so it was the quickest, safest way to become rich, in a world where it didn't rely on me having extraordinary talents, but the ability to focus and to organize people in a way that helped us gather assets and build them.

I appreciate that. And the last thing I'll say before we close out is I think another form of wealth that I've seen you, you you'd be really focused on never losing sight of is giving back to others, bringing folks along with you. So again, I appreciate you taking the time. I know you have many, many businesses to run, but you shared some insights. I think folks just can't get anywhere else. And so I just want to express gratitude for that and look forward to more conversations to come with that. Everyone, virtual round of applause for.

Tarrus Richardson, thank you again. Thank you so much. Appreciate you. Thanks so much,