My domain name for www.imcoac.com finally expired. And I’ve recently been convinced of the idea of having a failure resume. So it’s high time to reflect.
imcoac — an admittedly confusing acronym-abbreviation (?) for Improving Counterparty Access — was the social impact startup I founded in spring 2019 upon moving back home to Toronto. The idea was to strengthen and support the Canadian small business sector by capitalizing on the growing Search Fund trend.
The context was…
At the World Bank, I was frequently exposed to economic research pointing to SMEs as an integral part of a healthy economy— research now increasingly ubiquitous via “Shop Local” campaigns.
Small independent businesses, per dollar of revenue, contribute much more to their communities than larger businesses. They create more employment, spending, and wealth. Put simply, it’s because they are largely insulated from the risk of capital flight. Larger businesses, in contrast, repatriate wealth to HQ’s which ultimately accrues to shareholders without necessarily any ties to the markets they serve.
I was interested in supporting the Canadian equivalent of the mittelstand in Germany: a competitive and resilient small business community.
One of the keys to achieve resiliency — also a frequent subject of World Bank research — is attracting talented human capital.
What if the most talented management professionals from the top global business schools, instead of joining banks/consulting/tech companies, instead became business owners in their home communities?
A handful seek to do just that, through search funds.
Search funds are effectively talented MBA grads backed by financing to acquire and manage mid-sized businesses from retiring owners. And the industry is growing fast.
The potential for positive social impact is compelling. But any sort of conversation around social impact of search funds so far has been overshadowed by an even more compelling narrative of the cold, hard investment returns generated by the asset class.
Identifying pain points
Imagine Ivy League MBA grads — talented operators and financiers — spending two years of their career cold-calling small business owners using phone directories. That’s the reality of finding a business to acquire as a search fund.
Meanwhile, small business owners also have a hard time finding the right successors / buyers.
“Between 2012 and 2018, the number of businesses who just planned to close outright, rather than sell, tripled, from five per cent to 15 per cent… What worries us is that they’re not finding buyers, and then their only option may be to shut down.” — Corinne Pohlmann, Canadian Federation of Independent Business
Antiquated business brokerage models (effectively commercial real estate agents) and online marketplaces (e.g. bizbuysell.com) aren’t cutting it as intermediaries.
Proposing an impact-oriented intermediary
The idea was to improve the way the two parties interact, by:
- Utilizing local chambers of commerce to seek out business owners wanting to exit/retire
- Encouraging an impact pledge (a la: B Corps) from acquiring search funds (a pledge not to terminate employees post-acquisition, publicly report operating results, etc.)
With the help of a friend, I created a confidential online marketplace for buyers and sellers. Members of partnering chambers (or their reps) could express interest in exploring a sale by filling out an imcoac form. This information would be reformatted into “teasers” which would then be shared with interested search funds.
- Signed formal agreements with 4 search funds to help them find acquisition targets. The pledge requirements weren’t concrete at this point, and the search funds were explicitly “guinea pig” clients. These agreements came easy, and we could’ve had more, but the objective was to first test the concept.
- Established partnerships with over 20 Canadian chambers of commerce. This was tougher — most chambers, however independent day-to-day, fall under the governance of the Canadian Chamber of Commerce. I reached out to over 200 of them, elicited responses from maybe 50, and convinced about 20.
- More than 35 unique business owners communicated an interest to explore a sale through an imcoac form (i.e., deal flow). This was the toughest (e.g. incomplete information, low quality businesses, etc.).
- Size mismatch. Less than half of the deal flow was appropriate to put in front of a search fund. Search fund industry as a whole has, over time, targeted smaller and smaller companies. But even now the minimum annual EBITDA desired is ~$1 million. Many businesses fell under this threshold.
- Social impact focus slipped away. Neither the business owners nor chambers themselves were particularly affected by the social impact story. (Or I suppose I didn’t do a good enough job of selling it.) And after all, we were sort of distorting the fundamentals of agency law — how could we propose to earn revenue from buyers, while simultaneously serving the sellers? It was admittedly in a grey area.
- Unviable revenue model. The most reasonable revenue model was ultimately the same as how business brokers, realtors, or investment banks work — charging a % of the transaction value upon success. There was no way a search fund was paying for anything other than a successful outcome. And these funds could have to look at a thousand opportunities before even taking the next step with one. In short, it was tough to see how we could be financial sustainable.
Not all is lost
I learned a lot through the process. I had to wear a lot of hats: strategy, research, marketing, design, legal — all while selling the product and onboarding three different types of market stakeholders. The learning has been tremendous.
One thing I didn’t do — and probably the thing I would’ve done differently — is recruit. I viewed this largely as a solo venture, but didn’t have to, and frankly just downright sucked at asking for help. I has just moved back to Canada, and without a meaningfully active informal network here, there’s a lot I didn’t have access to then that I do now writing this in 2021.
On the bright side, I’ve become unreasonably knowledgeable of the landscape of “no-code” tech tools, and feel pretty confident sizing up the moving parts that go into building a product tech stack.
I also ended up being an advisor to multiple business owners as a result of this project, and gained an intimate appreciation for what goes into setting up for an ownership transition — including the different tax considerations.
Lastly, I’ve crossed paths with people doing very interesting work. Among them:
- Luke Tatone, Mark Yuan and the team growing Searchfunder. If the search fund asset class continues growing this fast, my bet is it will be in large part due to the community-building work of these guys.
- Taylor Sekhon and the team at Social Capital Partners. They’re growing the use of Employees Stock Option Plans (ESOPs) in enabling retiring business owners to sell directly to their employees. I don’t see a more compelling way of going about an exit.
All in all, reflecting on this small journey and where it’s led me, I think this is what’s called “failing forward”. I’ll happily continue to root for — and where possible, contribute to — the Canadian small business agenda and the search fund space.
I still have a bunch of resources I accumulated while working on imcoac. If you’re curious / might find these useful for your own work, please reach out.