Royce Yudkoff & Rick Ruback - Entrepreneurship Through Acquisition - [Invest Like the Best, EP.423]
Summary
- Entrepreneurship through acquisition has bifurcated into funded searches targeting larger companies—roughly $20 million of average enterprise value, with larger deals reaching 6-8x—and self-funded buyers pursuing businesses below $1 million of EBITDA at roughly 3-4x. The latter can use up to $5 million of government-backed SBA borrowing, providing as much as 80-90% leverage; depending on the structure, the searcher may retain roughly 60-80% of the equity. Ruback’s expression, embraced by both professors, is the episode’s governing principle: “The magic is in the multiples.”
- Self-funded acquisition math remains unusually attractive because buying at 4x produces a 25% unlevered return on assets before growth. Finance 80% at an 8-10% debt cost, give investors enough common equity to target roughly a 35% return, and the searcher can still retain 60-70%. Low purchase multiples also accelerate deleveraging when performance disappoints: “It is hard to get a zero.”
- Funded and self-funded searches now carry materially different risk profiles. Failure to find has risen above 50% for funded searchers competing with private equity and strategics, versus apparently below 25% for self-funded searchers pursuing steadier, smaller companies. Ruback’s impression is that funded-search investing increasingly resembles venture portfolios, while self-funded deals resemble conservative private equity. Funded-search investors have historically earned low-30s IRRs, though Yudkoff thinks those returns are slowly trending down.
- The winning acquisition screen prioritizes predictable cash flow, not growth. Ruback and Yudkoff want 80-90% of prior-year revenue to recur, little customer or vendor concentration, limited cyclicality, capital-light operations, and a business the buyer can personally manage; attractive growth is welcome but unnecessary. They also question whether inexperienced owners can manage purely remotely. Since no affordable company checks every box, buyers develop judgment by “bathing in deal flow.”
- Capital is plentiful, but good, transferable companies and committed sellers remain scarce. There are more investors seeking talented searchers than prepared searchers, yet a high-quality business with roughly $750,000 of EBITDA can still trade near 4x because the market is fragmented and information-heavy. The opportunity also renews itself: the lower middle market is where “your best competition leaves every year” as successful funds raise more capital and move upmarket.
- Small-deal diligence must test the seller as rigorously as the financials. The subtle hazards are a “job, not a company,” multiple owners who are not equally committed to selling, and personal-expense add-backs approaching 50% of EBITDA rather than a customary 5-6%. Buyers should maintain weekly communication and bid with room for surprises, because reducing an anticipated $5 million price to $4 million after diligence often breaks the deal.
- Operating value usually appears later than buyers project—and may persist longer than they hold. Searchers commonly forecast 5-10% first-year growth but suffer an initial decline as the sale distracts the company; year three is often the breakout, after customer conversations reveal wanted services the previous owner declined to launch. Venture-scale outliers are rare, but sequences of 3x outcomes punctuated by 7-10x winners and occasional 1x returns are plausible; successful owners may nevertheless sell in years five or six because 95% of their wealth sits in one illiquid asset.
- The seller pipeline may strengthen as aging founders run out of time to await a calmer market. The archetypal owner built a specialist business over 20-25 years, lacks an internal successor, and now has “more money than time,” while a younger, leveraged buyer is hungry to expand. Ruback cautiously predicts a three-to-four-year surge of pent-up sales after COVID-era volatility repeatedly induced owners to wait another year.
Deep dive
1. ETA has split into two increasingly different markets
Ruback’s largest observed change since 2016 is a sharp bifurcation: funded searchers have moved toward roughly $20 million of average enterprise value, while self-, spouse-, or family-funded buyers increasingly pursue companies below $1 million of EBITDA.
The corresponding entry prices have separated. Smaller buyers can find businesses around 3-4x, with examples framed around roughly $600,000 of seller’s discretionary earnings, while larger funded deals can carry 6-8x multiples.
Yudkoff’s financing mechanism is decisive: an American citizen can use up to $5 million of government-backed SBA borrowing, sometimes providing 80-90% leverage for an established company while contributing talent and “sweat equity.” After bringing in outside equity, the entrepreneur may still own 70-80%.
The path has also shed its “quirky” reputation. Parents once wondered whether graduates searching from home in pajamas were suffering “a depressive episode”; today, students can find dozens of precedents across backgrounds, while a meaningful minority pursue independent-sponsor models and install managers rather than operating one company themselves.
2. Self-funded economics are extraordinary, while funded risk looks venture-like
Ruback separates searcher risk into failure to find and buying a terrible business. The former can consume two years through broken LOIs, failed diligence, seller hesitation, or deteriorating results that force a price renegotiation.
Failure to find now appears above 50% in funded search, versus its former level near one-third, because larger targets bring searchers into direct competition with strategics and private equity. For self-funded searchers pursuing “boring,” enduringly profitable companies, Ruback puts the rate below 25%.
Yudkoff cites historical funded-search investor returns in the low-30s IRR, well above the low- to mid-teens he associates with large private equity, though he believes the premium is gradually declining. Financing and investor diligence also make fundamentally bad acquisitions less common than outsiders might expect.
Self-funded arithmetic is sharper: buying at 4x generates a 25% return on assets before growth; financing 80% at an 8-10% debt cost can support an investor target near 35% while leaving the searcher 60-70% of common equity. Because cash yield rapidly pays down debt, “it is hard to get a zero.”
Ruback adds an explicit caveat to the venture comparison: it is his impression, not a firm statistical claim, that funded search increasingly operates like venture capital, with portfolio-level winners and losses. He views unfunded search as more like private equity, perhaps safer.
3. Capital is abundant; transferable small companies are scarce
Yudkoff confirms O’Shaughnessy’s capital-supply hypothesis: today there are more investors eager to back talented, prepared searchers than there are such searchers. The choke point has shifted from financing toward people and suitable companies.
Ruback attributes the persistent opportunity to illiquidity, fragmentation, and information costs. Recurring-revenue companies with sustainable profitability are unexpectedly difficult to identify and transfer, keeping the market from clearing as efficiently as public or larger private markets.
The price anomaly survives at the bottom: a strong business with roughly $750,000 of EBITDA, diversified customers, and recurring revenue may still sell at 4x. Comparable companies with $1.5 million or $2 million of EBITDA generally no longer trade there.
Funded search is increasingly dominated by specialist institutional portfolios, making a single funded deal potentially “scary” for an investor. Yet access is not monopolized: searchers often prefer 10-12 investors for varied advice and ownership diversification, while self-funded buyers may fill modest equity needs through former employers, classmates, or family friends.
4. Growth is optional when revenue quality and purchase price are right
Yudkoff deliberately excludes growth from the mandatory screen: “Not ’cause we’re against growth—we welcome growth—but you don’t need growth.” Ruback’s expression, embraced by both, is that “the magic is in the multiples,” not an assumption that revenue must compound rapidly.
The first requirement is recurring revenue across a spectrum from contracts to actuarially predictable repeat purchasing. If 80-90% of last year’s revenue is visible every January 2, leverage becomes safer and marketing can remain “on the offense”—adding customers rather than replacing churn.
The complementary screen is low customer and vendor concentration, low economic cyclicality, and excellent free-cash-flow conversion. Yudkoff directs students toward business services where EBITDA “almost exactly equals free cash flow,” limiting both reinvestment demands and capital-allocation complexity.
Fit still decides which imperfect company is buyable. “If you’re allergic to fur, don’t buy a pet shop,” Ruback says; former military officers often understand blue-collar teams because “it’s just like running a platoon.” Buyers must also consider where the business is located: Ruback doubts that a young, inexperienced owner can reliably run a company purely remotely.
After roughly 100 listings produced 12 different student favorites, the lesson was that judgment comes from deciding “how good is good enough,” not finding every box checked.
5. Aging owners create supply, but disruption has delayed the handoff
Yudkoff’s bullseye seller spent roughly 25 years turning specialist expertise into a company that may employ 60 people and generate $1.5 million a year. The enterprise now needs a trained manager more than an artisan founder, but it lacks the executive bench that would permit passive family ownership.
Age supplies the catalyst: sellers eventually have “more money than time” and no longer want to work Fridays or launch another territory. The acquisition entrepreneur is “not wealthy and energetic and hungry”—and, Ruback adds, “levered”—so the same expansion looks attractive from the buyer’s side.
Ruback thinks COVID delayed rather than eliminated transactions: unusually strong, weak, or volatile results contaminated the four-to-five-year histories buyers examine, inducing owners to wait repeatedly for stability. With tariffs, inflation, and new disruptions extending that wait, he cautiously predicts a three-to-four-year release of pent-up selling before supply returns to steady state.
6. Different industries converge on the same recurring economics
Software can qualify, but Ruback favors narrow, established products serving markets such as podiatrists or small municipalities. These businesses may need improvement or web migration, yet face less danger of the “cataclysmic shifts” surrounding fashionable apps or social media.
Roofing, HVAC, veterinary care, garage doors, and automotive repair look different operationally but similar economically: repeat or need-driven demand, diversified customers and vendors, and limited cyclicality. Every few years, searchers have another “moment of epiphany” and discover a category with the same underlying profile.
Logan Leslie’s auto-repair roll-up illustrates the management opportunity. An excellent mechanic who grows to eight or ten bays eventually spends substantial time hiring, ordering, and handling accounting; centralizing those functions lets “the fabulous mechanics be mechanics” while management is handled centrally.
Ruback is notably cautious about immediate technology upgrades. New owners often want to spend several hundred thousand dollars on a CRM before understanding the operation; his advice is, “If the old owner managed it by sticky notes, buy some sticky notes,” then decide after year one when the buyer has become a better manager.
7. Seller character and deal mechanics can matter as much as the company
Yudkoff’s first hidden flag is “a job, not a company”: revenue may depend on the owner’s personal relationships or irreplaceable expertise. Ruback’s is multiple owners, especially partners in their seventies and fifties, because months of diligence can collapse when the younger partner finally confronts what selling means.
“Committed sellers are at least as hard to find as good companies,” Ruback argues. Buyers must understand not merely the stated reason for selling but whether every decision-maker will sign when the transaction becomes real.
Personal expenses running through a small company can reasonably be added back to EBITDA; $100,000 inside a $1.5 million EBITDA business is routine. When add-backs approach 50% rather than 5-6%, however, Yudkoff worries less about documentation than character: someone willing to “color outside the lines” retains an information advantage that “could stab me in the chest.”
Ruback favors a standing Wednesday meeting, giving both parties Monday and Tuesday to finish prior commitments and Thursday and Friday to execute new ones. He also wants an initial price that can absorb missing contracts, underinsurance, unpaid bonuses, or overdue raises without cutting a seller’s mentally spent $5 million proceeds to $4 million and provoking an irrational break.
8. Value emerges after the first-year dip—and may compound longer than owners wait
The empirical pattern contradicts optimistic underwriting: buyers project 5-10% first-year growth but often post losses or land roughly 5% below their base case. Sellers transact after good years, the process distracts the company, and the new owner is still learning.
Customer conversations nevertheless expose growth the former owner declined to pursue. A younger buyer hears requests for adjacent services and says, “We can do that”; Ruback’s ideal company delights customers, delivers reliably, fixes errors immediately, and gives clients the owner’s cell number. Year three is commonly when that work becomes visible.
Asurion-scale outcomes are “extremely rare,” Yudkoff says. A more representative series is “3x, 3x, 3x, 3x, 8x,” followed by more 3x results and occasional 7x or 10x winners; Ruback adds that some 1x outcomes belong in the distribution.
Will Thorndike’s data led him to conclude that “everyone sells too early,” because successful companies can compound through years seven, eight, ten, and twelve. Yudkoff broadly agrees, but Ruback preserves the counterpoint: selling in years five or six may be rational when 95% of the entrepreneur’s wealth is concentrated in one illiquid company and total personal risk overwhelms portfolio logic.
9. A successful search starts with calls, not sector theorizing
Searching is “not pole vaulting,” Ruback insists: commit, find brokers through Google, join their lists, examine databases, and speak with owners. His first weekly assignment is simply, “Have an owner’s meeting,” because one real conversation teaches more than another abstract plan.
A geographic search is intensely personal: some searchers move to the chosen region, attend every chamber event, never eat breakfast or lunch alone, and meet local owners door to door if necessary. A national search relies more heavily on brokers or direct industry outreach.
Yudkoff supplies the scale: approximately 3,000 small-business brokers operate in the United States, and roughly 300,000 small businesses change hands annually. Entering the flow is easy; filtering for quality, price, and seller commitment is the hard part.
The participation puzzle remains. Of roughly 920 annual graduates, only 20-25 search immediately and perhaps another 20 follow within several years. Yudkoff now accepts that others rationally value corporate resources, polished colleagues, and major brands; Ruback adds that not everyone wants the CEO’s hardest task—writing the to-do list when nobody else defines it.
10. Case teaching turns theory into pattern recognition
Yudkoff describes the course as intensely practical, with protagonists attending nearly every class so students can answer two personal questions: “Do I want to be this person, and can I do what this person does?” Each case is designed either to test the career or improve the odds of succeeding in it.
Ruback’s pushback—worth keeping—is that they teach substantial theory, but “in the context of practice.” A case where owners cut price 10% shows students that unchanged costs can erase the full profit margin and, with 70% debt financing, destroy the equity through one seemingly modest decision.
One of Ruback’s favorite closing cases follows an MIT biology PhD through roughly 280 days of trying to acquire the largest rabbit slaughterhouse in the United States, combined with biotech products derived from its byproducts. Repeatedly reopened issues make the video a lived demonstration of search frustration: “I guess I just have to get back to work.”
On artificial intelligence, Ruback offers an explicitly limited view because he is “not a very techy guy.” What he trusts is case-based pattern recognition: alumni still identify working-capital problems as “just Butler Lumber,” and he doubts anyone can “Google your way” to the judgment created by hundreds of situations and sustained effort.
11. The ultimate allocation question is how to spend a career
After 25 years co-running a successful private-equity firm, Yudkoff and his partner imagined looking back at age 75 or 80. Adding another 15 years to make the total 40 no longer seemed like a sensible allocation of professional life, particularly with a talented next generation ready to lead.
The catalytic line came from his partner late one evening: “When we started this thing, we had more time than money, and now we have more money than time, and we ought to act accordingly.” Leaving work he knew he did well was disorienting, but the teaching partnership with Ruback supplied a different and ultimately satisfying second act.
Their alumni relationships continue through questions about deals, rollovers, boards, and ambiguous operating decisions. Yudkoff thinks callers often know the answer but want trusted confirmation; the partners joke that students call Ruback when they suspect they are wrong—he considers “feedback is a gift”—and Yudkoff when they suspect they are right.
Ruback’s underlying conviction is that better-run small companies improve life for customers, employees, and communities. After decades teaching corporate finance without many declarations that discounted cash flow had changed a life, he now regularly hears that this class was “pivotal”—the practical evidence that makes the work meaningful to both professors.