Embracing the "boring businesses"

Let’s get one thing straight right off the bat: These are not rocketship startups.

And that's fine! CapitalPad has no interest in VC-backed hyper-growth companies with huge risk and reward profiles.

CapitalPad is more interested in the so-called “boring businesses”.

The platform is strictly focused on matching investors with stable, cash-flowing small businesses in well established, recession-resistant industries — a practice sometimes referred to as Micro Private Equity.

Think service businesses, like:

Baby boomers are retiring..

Many of the companies CapitalPad focuses on are family owned businesses spanning several generations.

What’s the acquisition potential for these SMBs? According to one estimate, more than ​$10 trillion​ worth of these kinds of small businesses will be sold​ over the next few decades.

There are many reasons why owners want to sell their business, but the biggest one is usually retirement.

Many owners have spent their life building a great company, but are now entering the next phase of life and need to find new owners. Or their children inherited the business and no longer want to run it. (This situation is extremely common!)

..and that spells opportunity for acquirers

When these owners finally sell, “acquisition entrepreneurs” often scoop in to buy them.

Most SMB acquirers have similar game plans:

However, their end goals may vary.

Each end goal has its own potential benefits and risk, but all can be very profitable when executed successfully.

Who is putting these deals together?

The SMB acquisition space has experienced a seismic change in the last few years, led by the “entrepreneurship through acquisition” (ETA) ​search fund movement​ coming out of Ivy League business schools.

Many talented individuals are finding the idea of buying and operating a “boring business” more appealing than staying inside the Wall Street grind or working in startups.

There are generally two kinds of acquisition entrepreneurs.

Self-funded searchers

These are individuals who use their own savings to identify a company to buy after conducting their own searching, sourcing and due diligence.

After finding a target company, they generally use a Small Business Administration loan (i.e. an SBA loan, which they personally guarantee) combined with investor capital to acquire the business.

Self-funded searcher deals are typically on the smaller side, from $1.5 million to $5 million in value, with the occasional exception going up to $10 million.

These searchers often take over the CEO position of the acquired SMB and receive more equity for taking on the personal guarantee of the loan.

Independent sponsors

These acquirers often have similar objectives as self-funded searchers, but are frequently much larger, a bit more sophisticated, and use more traditional debt financing instead of SBA loans.

The typical independent sponsor (also called a “fundless sponsor”) is a former private equity professional who left to do solo deals.

Independent sponsors are less likely to take over as CEOs. Instead they install management or keep the original founders. Their compensation agreement is also different, as they are not personally guaranteeing the debt.

Technically, anyone can become a sponsor, but if they are attempting to get bank debt approval and to raise investor capital, then it’s much more difficult without a track record. .

CapitalPad works with both types of deal sponsors.

Who is CapitalPad's founder?

​Travis Jamison​: A long-time friend of Alts with genuine SMB investing credentials.

Travis has built and exited numerous successful companies over the past 15 years.

Always a believer in what he calls “real businesses”, he was drawn more towards already-profitable enterprises instead of the money-losing startups of the venture capital world.

He immediately ​saw the attractiveness of the SMB M&A space​, and started actively investing his own capital through his firm ​Smash.vc​.

According to Travis, this deal offered him and his co-investors the potential of a 35% IRR with a 4X MOIC.

These are the kinds of deals Travis wants on CapitalPad, which he launched after realizing how difficult it was for most non-professional investors to gain access to this asset class.

What do CapitalPad's deals look like?

Legally, we cannot show you the deals on the platform. ​But you can sign up to see them​.

In the meantime, here are a couple of simplified hypothetical examples for the types of deals you’ll find on CapitalPad..

An income-focused single company acquisition

A self-funded searcher wants to acquire Acme Plumbing Company and take over as CEO.

The searcher might fund the $3.5 million deal with:

​Bullet 4 is where CapitalPad comes in​.

The searcher would offer investors attractive terms combined with built-in protections, such as tag-along and pre-emptive rights (discussed in greater detail below) in order to attract them.

Once the deal closes, the investors would become passive shareholders in the plumbing business, receiving quarterly profit distributions paid by the searcher.

An exit-focused rollup acquisition

In this example, an independent sponsor wants to buy several smaller landscaping companies at attractive prices (lower multiples) and then “roll them up” into one larger platform, with centralized operations, payroll and a single home office.

Her ultimate goal would be to sell the now much larger entity to buyers (most likely a private equity fund) willing to pay higher multiples.

The sponsor would look for landscaping acquisition candidates in the $1 million EBITDA range. These might sell for about $3.5 million each (a 3.5x multiple).

The deal would be funded with a mix of bank debt and investor capital. However, the sponsor would not pay regular profit distributions.

Instead, she would reinvest profits to continue to buy more landscaping companies.

If, after five years, she raised the EBIDTA of the platform to $8 million, she could possibly sell it for a multiple in the 6x-10x range. A portion of these profits would be paid out to shareholders.

In both scenarios, CapitalPad investors would receive income or a share or profits in proportion to the amount of money they invested in the deal.

How CapitalPad works

CapitalPad is essentially an online matching site for accredited investors and SMB acquisition sponsors.

Not all SMB deals pass the test.

Self-funded searchers and independent sponsors can submit deals, but Jamison claims that very few pass his “sniff tests.” In his own words, he aims for companies that are “hard to kill” more than those that “can go to the moon”.

In short, he’s looking for “boring businesses:” stable, successful, and recession-resistant.

CapitalPad’s vetting process

No sponsor can post a deal on the CapitalPad platform unless it gains approval by both Jamison and his partner ​Donza Worden​, a private equity professional with over a decade’s worth of experience.

Jamison focuses on the qualitative end of risk assessment, leveraging his operating experience to determine the viability of the SMB, its sponsor, and its likelihood of reaching a successful outcome.

Worden generally handles the financial and deal structure aspects of due diligence negotiation. Structurally, CapitalPad aims to include these protections for minority investors:

However, it’s important to understand that each deal is unique and no operating agreement is the same. In some deals CapitalPad investors will have more protections and, in others, fewer.

As a final vote of confidence, Jamison claims he puts his own skin in the game, where he has thus far invested his own money in every single deal he approves for the platform.

He does stress that CapitalPad expects each potential investor to conduct their own diligence before they commit to any deal.

Capital Pad’s user experience

Once you begin the online application process, you’ll need to verify that you’re an ​accredited investor​.

Once approved, you’ll be given access to CapitalPad’s dashboard that lists any currently available SMB deals.

If there is an available deal, you can enter the deal room where you’ll have access to the marketing and due diligence materials:

Each room also offers interactive conversation capabilities allowing you to ask questions of the deal sponsor.

If you like what you see, you can request an allocation. Keep in mind that all deals are on a first-come, first-served basis. Thus, you may not receive the full allocation you requested.

Once your request is approved, you and other interested investors will receive a ​Special Purpose Vehicle (SPV)​ subscription document to sign.

The investment minimum for each deal starts at $10,000.

Invested capital will be kept in the SPV bank account until the acquisition closes, usually within two to three weeks.

Post-closing, you’re now a shareholder, and will be entitled to any future profit distributions.

You can get involved in as many deals as you want. One benefit of using CapitalPad is that you can keep track of all of your SMB investments in a single place.

Keep in mind, however, that statements, performance updates and tax reporting documents are provided to you by the sponsor and the SPV provider, not CapitalPad. Most entities will issue a K-1 tax document.

What if a deal doesn’t go through?

According to Jamison, delays are completely normal with SMB deals, but on occasion they don’t end up going through.

Sometimes sponsors get almost to the finish line. They’ve worked with the attorneys, rounded up financing, raised from investors, and are just about to close the deal when something unexpected happens. It could be something as simple as the seller changing their mind.

When this happens, the investment is cancelled and the funds are returned to investors’ accounts.

What about fees?

Sponsors pay no fees whatsoever to promote their deals on CapitalPad. Investors don’t pay management fees, either.

CapitalPad earns its keep by taking a 20% carry from investors.

Once investors receive 100% of their initial invested capital back, CapitalPad is then entitled to 20% of any profits. If an investment isn’t profitable, investors pay nothing.

Not an investment company

Even though CapitalPad facilitates SMB investing, the company itself is not an investment vehicle or a registered investment adviser.

It can’t offer personalized advice on the merits of any particular deal, nor can it guarantee that any sponsor will fulfill the terms of a given deal.

And since it’s a new company, CapitalPad can’t cite long-term returns for deal participants.

With that said..

Given Jamison’s extensive experience investing his own money in successful SMBs, and his stance of investing in many of the platform's own deals, it might be worth your time to take a closer look.

If you qualify, you can sign up with no commitment or pressure to participate in any deal. If and when you’re ready, you can dip your toes into this uniquely profitable corner of the private equity universe.

--

That's it for today

See you next time,
Jeff

Disclosures from Alts