Justin: Justin, Peter, come on up. So Peter and I don't, speak in public for a living, so we wanna make this as informational for you guys, and, hopefully, you guys get a lot out of it. So Peter and I help run a firm called Traction Capital. We're based up in Seattle, Washington. We've been around since 2018, and we've bought 6 businesses over that time.

So, for today, we're gonna talk just a little bit about the genesis of our firm, kind of why we got started, what we do, a couple of lessons learned, and then we wanna open it up for for q and a from you guys. My background prior to traction, I worked in investment banking, worked in private equity, and then ran a small business for a couple years before starting traction. And through the investment banking side of things, had gotten to know Peter who was employee number 1. We were just looking at it today. His 5 year anniversary with us is here in 2 weeks, I think.

Peter: Yeah. I'm, I'm Peter. I, had joined up with Justin, after doing some investment banking after school. Had worked at BlackRock for a couple years. And during that time, Justin and I started to bond over some Bret B.

Shore podcast, small business investing, and it just so happened that Justin had, with 2 of our other partners at Traction, had found this business to acquire up in Washington. It was a fire equipment, distributor. And, basically, once the wires went out, I put in my 2 week notice at BlackRock and joined kind of the 1st week post acquisition. So spend the 1st 18 months or so pretty operationally involved in the fire equipment business, and here we are today.

Justin: So it it looked like there was a lot of people here that already own an existing business. For those of you that own 1 or more, how many of you are with have a goal of, just by show of hands, of buying, you know, more than 2 or 3 businesses and building more of a holding company. So you guys have probably experienced this, but the for us, the first like, to get in the game, like, it it's one thing to talk about and we had ideas of wanting to have a holding company, but you have to get your first deal done to even get in the game. And I know I felt for me, personally, we started looking at deals kinda end of 2017, and we'd be talking to bankers, talking to brokers about this idea of traction, but not able to point to any businesses that we had actually acquired at Traction. And so getting that first one done is kinda just the how you get in the game.

And it's for us, it's been the hardest one of the 6 that we've done from raising capital, from finding the deal, to owning and, to Peter's point, being very operationally involved. We've since bought 5 more and they've, from a capital raising standpoint, have progressively gotten easier. I wouldn't say that we've necessarily gotten better

Peter: with our process. It's certainly been a learning experience. So we wanted to show a little bit about kind of the first, acquisition EBITDA wise that we made and kind of where where we're at today, we've kinda stuck within the 1 to 3,000,000 in EBITDA, size. We own an eclectic group of businesses between ecommerce, the original distributor that we bought. We own, 2 construction businesses in the asphalt paving and grinding and milling space.

And then, this year, we acquired a kind of home services restoration, business which ended up being a multi location franchisee, and, actually, this last week had bought a couple more locations with that business. We have about it's about 200 or so employees, a little bit more than that. But what we kinda wanted to show here, it doesn't view as well, but the talk about having the j curve, post acquisition has been very real, for us. It's been, with the the owners that we bought from, super involved, wear a ton of hats, and definitely had to spend a good chunk of money in those first couple years, post acquisition or either replacing the previous owner and or putting resources in place to help grow. So the I know it gets talked about a lot, but it's very real and we've lived through it now 4 or 5 times of post acquisition, baking some extra cost.

It's it's very real how much an owner, can get done on a daily basis. With the deals that we've done, we have preferred, and and it's kind of worked out for us to have sellers continue to operate and be involved in the businesses. Of the 6, we've transitioned 2 of them out and then with the other 4, they're actually still CEO operating the business between rolled equity and then some different incentive structures. They've stuck around. So, it's a little bit we talk with some other groups who are pretty strict on getting owners out the door right away and it's kind of worked, kind of not for us, I would say, of letting the owners kinda stick around and run the businesses.

Justin: I think one of the things that seems obvious, but it's taken us a couple times to learn is trying to get a better understanding of how that owner is going to behave kinda post close. And as we've gone through the deals we've done where we've had the biggest issue post close is where there's a ton of hesitancy on the front end for them for them to let you in and meet any other people of the team, you know, get any real sense other than hearing from the owner about what their culture is like, what their team is like. And that's been a a good indicator for us looking backwards on which ones we've had success with and which ones we've had struggles with. One of one of the questions we get a lot with the holding company side of things is how we've structured it. This is kind of very high level, but each of our kind of operating units has a holding company that is majority owned by traction itself.

At each one of the holding companies is where our outside investors come in and where the bank debt sits. And so, we we don't cross collateralize anything. We raise equity deal by deal. And so, each one of the holding companies, we've got 5 right now, has its own banking relationship, its own kinda capital stack, its own investor group. I would say from a, like, legal structuring, we have LLCs.

We have c corps. We have an s corp. So it's a mess. Well, hop at the do you wanna take the first one? Sure.

Peter: Wanted to just quickly kind of go through some of our lessons learned. I'm gonna focus more on kind of post acquisition, and this is all prefaced with, we do not have all this figured out. I mean, couple of the examples I'll go through are ones that deals that we got done this year that we're still making mistakes on post close. But I think a a big one for us with a business that's that's struggling right now is, we acquired a mattress and home goods business, in kind of middle of 2021 during the, boom of discretionary spend, people moving around, buying homes, outfitting their, homes while working from home, and that business has taken a pretty big reduction in EBITDA, probably down 30% or 40% after the 1st 2 years. And I think one of the mistakes that we made and really wanna focus on for future deals is really understanding the end customer that you're serving and what factors play into that end customer.

For us, we didn't even think about or consider the fact that what causes someone to go and buy a mattress a lot of the times is someone moving and not necessarily like, oh, I just want to go and upgrade. I'm not sleeping as well. Often, it's people moving around. And so we underestimated this flow of buying new homes, renting new apartment, whatever it is. And that one has been a battle, basically since we bought it.

So we're just over 2 years with it, but that was a definitely a big lesson learned. I kind of touched on it earlier, and for us, maybe it's a little bit more applicable because the seller sticks around, but not underestimating just how efficient, a seller is and how much work they get done. The idea that you can go in, make a few small changes, update the tech stack, let them do their thing is just not the experience that we've had. The the the first a good exam I mean, the first business that we acquired, it was a brother and sister. The sister basically ran the back office, and we joked now we joke about it.

She was essentially an ERP system herself. She worked from 7 to 7 every single day. She did the whole gambit of

Justin: I thought she only worked 10 hours a week.

Peter: Yeah. Yeah. Yeah. So it was it was a wake up I mean, that was my first ex experience, post acquisition. So it was it was something that's carried on quite a bit, with all of our deals.

Another mistake we've made, and just recently made this year was trying to make changes too quickly post acquisition. Restoration business that we bought was on QuickBooks Online. We were trying to clean up some of the accounting, put in some new processes probably within, like, a couple months and caused quite a bit of disruption, with the employees. And so just, again, the first couple months after being humble, trying to learn as much, being kind, and not trying to force too much, is something we're still trying to

Justin: do better at. Yeah. That soft touch, especially with the teams themselves, it's The the owners are typically a little bit more sophisticated, but where we have lost sight sometimes is how our actions impact kind of the broader team at the portfolio company as well. And and we believe, you know, pretty strongly in like, we don't wanna break what's already working because what's working is why we're interested in buying the business. But even little things that disrupt the operations of the broader team can have a huge impact on morale and and that side of things as well.

I know we've got a question over here. We'll get to it in just one second. I think one of the other like, thinking back to the beginning of traction, the lessons learned side of things, you've gotta be willing and you guys are probably already doing this, but you have to be willing to turn over a tremendous amount of rocks to find that first business. And some of it's because you don't have a track record. Some of it's because you don't have all the connections that you, you know, fast forward 5 years and then have.

But talking to a lot of brokers, looking at weird deals, looking at deals that have hair on them. The first business we bought, the distribution business, I think every independent sponsor in Seattle had looked at it and passed. And they had been under LOI with a searcher who backed out. We maybe should have seen some red flags there. But we we got really comfortable with the business, and it's been an amazing business for us to be a part of.

But turning over a lot of rocks to get that first one gets you in the game. Do q and a. Yeah. I know we had a question. Yep.

Yeah. I I think if you're getting feedback from the team, like, day 1 and it's a great strategy as well that the first couple weeks after the acquisition, spending time with the employees and just saying, hey, like, what sucks? Like, what things do you know need to be changed in the business? Where we've had issues is on things that we think are wrong and need to be changed.

Peter: Yeah. I would just add. I mean, it's a it's a great question. If that comes bottom up for that thing that's broken, yeah, I think that's something that we've we've done and it's worked. It's the top down.

Hey. We think this is broken. Therefore, we'll go down this route. That has not worked out as well for us.

Justin: I think what we've seen and, Peter, correct me. But I think what we've seen is kinda waiting 6 to 12 months before we really try and turn on the growth side of things. And you say turn on the growth. It's certainly not as easy as just turning it on or else everybody would have done it. One of the things that's interesting about our restoration business is it's partly weather dependent, but ours is more tie ours is not a cat focused business.

It's more your day to day a pipe bursts, and all of a sudden, you're have flooding in your house or, you know, you have a small kitchen fire. With with that business, we have a prior CEO involved who didn't graduate high school, who is one of the best entrepreneurs, I think we've ever seen in the deals we've looked at. And he is unbelievably competitive and thinks in systems. And so we haven't told him to turn on the growth, but we bought that business in January. It was 3,000,000 in EBITDA.

We'll finish this year probably a little under 5 in EBITDA with that business. Not because we're telling him, hey. You have to grow, but because he's just an unbelievable entrepreneur. And so I think it business to business determines kinda when and how you can start to try and accelerate the growth.

Peter: I don't, I don't know if we know that answer, I would say. I'd say it's more so at least from the owners that we've worked with. A lot of that has been more innate in the entrepreneurs we've we've for the sellers that we've worked with. You know, we have a seller note in place, for most of them. We do a rolled equity anywhere from 10 to 15%, somewhere around there.

So you'd think that would, be enough on the incentive side, but at the end of the day, I mean, the restoration one is a great example. The growth pushing forward is a lot. That's just him. So yeah. I

Justin: yeah. I think each CEO is different. We have CEOs that are kind of further along in their career that are less, I would say, less driven, especially post close. And then we have some that are younger that just have an innate, like, hey. I want to be successful.

I want to continue to drive. And so we have varying incentive plans kind of across the portfolio?

Peter: I Justin has been, kind of the lead on bringing in new deals, to traction. So more involved, during due diligence, the initial responses, talking with brokers, bringing a new business, and then both of us, I would say, are pretty operationally involved. As far as the time goes, it ends up being, unfortunately, right now, like, what is on fire and then go and spend time working on that. And so we're we're still figuring that side of it out.

Justin: And it's it's evolved. I mean, our team now at the traction level is is 6 people, and so we have a lot more support. So we have an analyst that does sourcing for us, that signs the NDAs, that gets teasers, that's that writes memos. We have a kind of chief of staff slash controller that administrative issues just end up on her plate. But it's to Peter's point.

Like, a lot of it's like, okay, who sent me an email or called me with something wrong most recently? I don't know that I would change a ton on the structuring side of things because I think some of it I think I don't think there's one perfect, like, hey, this is exactly how your holding company should be structured, and you should only do these types of entities as you're buying businesses. There's an independent sponsor in Seattle that's done a ton of deals. They only do c corps. You talk to somebody else.

They only do LLCs.

Peter: I think it's some of it's determined by what and how you're buying as well. We've tried a little bit of a version of a shared services model. And given the different business models and industries that we work in, there's not a ton that's shared over. I'd say if anything, the accounting and finance side has been the easiest to pick up across all 6. Little bit on the marketing side depending on the function, but the rest, I would say we try and move as much to the company level as possible.

Justin: And if you would've asked us that 2 years ago, I would've said, yeah. We think shared services is the way to go. Yeah. And I think we've completely pivoted away from we we want as much of the functions to be down at the business unit level Yep. As possible.

So the teams there have ownership of all the pieces of it, and we can help, but that we're not responsible for managing any of it.

Peter: Sounds like we have one

Justin: more question. So we we do charge management fees to the businesses. And then, I would say, to varying business operating. But there's certainly times where I mean, Peter's been living in our mattress business for the last 8 months. I think we I think we're out of time, but Peter and I will be around.

But appreciate you guys being here and helping to to grow the small business community.

Peter: Yeah. Thank you, guys.

This transcript was generated with Transistor AI