Acquiring small businesses with Mudit Rawat and Curtis Kline

This Fall we spoke to serial founders and serial acquirers Mudit Rawat and Curtis Kline in a broader conversation on buying vs building businesses. In this blog post, we zoom in on their experiences in small business acquisition. First, read more about their backgrounds.

Mudit Rawat

Mudit leads Planet Corp's M&A practice and also works closely on helping the acquired companies' leadership teams hit their corporate objectives. They focus on AI, 5G, block chain, and digital transformation companies.

Mudit is known in the Canadian tech industry as the founder of Urbery, Canada's first on-demand grocery and alcohol delivery platform. His second startup, Nexus Commerce, focused on enabling D2C eCommerce channels for large CPG brands like Nestlé and Unilever, was acquired in 2019 by a US-based supply-chain consulting firm (Tompkins International).

Curtis Kline

Curtis is a 3x business acquirer. His first acquisition was for family's manufacturing company. They bought two machine shops that were key suppliers to them because they needed their capacity and offered to buy them out. He then sold his family business for $11M. He also bought a bike company in 2016 using BizBuySell. In 2019, he sold it as an asset agreement.

How did you first get into buying businesses?

Mudit

After building Urbery and exiting Nexus Commerce, Mudit was angel investing and thinking about getting into VC. He connected with a friend at the start of the pandemic who was more fascinated by the Berkshire Hathaway model.

“I was intrigued by the idea because I was seeing the exit side of investing. We had both spent so much time building companies and I didn’t want to be an operator anymore. So we got together and started Planet Corp. In the last year we’ve acquired 3 companies, and we’ll hopefully acquire 4 more in the next 12 months."

Curtis

“I joined my family's oil field equipment manufacturing company in the mid 2000s. At some point along the way as we were riding the inevitable wave of that industry, we decided that we needed to collapse our supply chain a little bit, and that we really needed more capacity.

We went down many paths but found that the only practical way to do that at the time was to buy out our suppliers. We bought out two machine shops that were not our largest suppliers but definitely toward the top of the list. We spent about $2.5m to buy those two companies and used a bank loan.”

Did you keep buying or go back to building?

Curtis‍

“After going on to sell that [oil field equipment manufacturing] company to a PE-backed public company, and some frustrating experiences trying to buy from retiring founders, I bought a bicycle brand in 2016. It was a $300K a year business that the founder had started nine years prior.

I relocated it to Tulsa. That was my first experience with an overseas supply chain because the bicycles were manufactured in Taiwan. And also my first experience with e-commerce. I had to sort of crash course in digital marketing, advertising, and all of the joyous fun of moving into a Shopify store from something from the dark ages. I sold that business in 2019 using bizbuysell.com 

After that, I still have this entrepreneurial bug I haven't been back into. But I have spent hours and hours browsing the listings on the Shopify marketplace and the, uh, micro acquire listings. So one of these days I'll come across something that piques my interest. That's where I'm at today.

What kinds of companies do you buy?

Mudit

“On the Professional Services side, we like to acquire companies that are laser focused on a certain tech stack, so be it Salesforce VMware, Microsoft like something that you're doing. So specifically as a professional service provider, it could be as simple as implementing Slack in a big enterprise. Those are the kind of companies we acquire - traditional companies but making good money with good cash flow, which is an important part of our business.

The more exciting side is IP and AI. We’re trying to find interesting AI companies that are probably early stage, and are either just about to hit product market fit or may have a great technical team, but don't know how to get their product to market. We’re acquiring them and getting them to the next level. That’s our focus right now.”

What is the diligence process for pre-traction companies?

Mudit

“It starts with all the standard items like:

• Legal
• do you have a clean cap table?
• Do you have investors that will come and screw you after?

And all that fun stuff! It's not that complicated because you have a standard template for those kinds of things. 

It does get tricky on the financial side because a lot of times the companies we’re looking at are not really making money yet. They could probably be pre-revenue. So we’d be trying to really vet at least on the pipeline side:

• how much of this is actually real?
• Can you pick up the phone and call 10 of your ‘customers’ who are doing POCs, but not paying any money? Can they give good references for you?”

What financing options exist for people who want to acquire as individuals?

Curtis

“When my family business bought our suppliers we used an SBA loan to fund the $2.5m. Just as an aside on that, we closed that deal, uh, on July 31st, 2008. Not the most confident of times financially.

I paid cash for the bike company. I hadn't looked for any outside financing and I didn't have any investment partners so it was a straightforward deal.”

Mudit

One of the transactions we've done is through our own capital. Most of the deals that we do are structured in some form of, cash on closing, plus some sort of promissory note, which is basically, debt on your balance sheet that we've paid in the future at some point. A typical split would be 50, 30, 20, 

What we're trying to do now, more on the professional services side, is work with banks. Just financial institutions who can do cash flow financing. The fancy word for this is an LBO or a  leveraged buyout.

How do you define success?

Mudit

“We're pretty young and new at this point, so there’s no magic bullet answer. I go back to the two sides of our strategy.

On the professional service side defining success is simpler because most of the companies we look to acquire have five plus years of history. There are pretty strong balance sheets, which would mean they are turning cash, 10% EBITDA, 30% plus gross margin for traditional businesses, and typically have Day 1 clients.

On the IP/AI side, the tougher one is really this early stage-series B stage AI companies that may or may not have any fractions. A lot of that is just this big idea. Those are the ones that I find quite difficult to define, but it really comes back to our conviction on the founders and are they building a strong product? Do we believe that we have the capabilities internally within a network, or if you hire a great sales team to actually take this to the next level?”

Catch up on the full conversation‍

Curtis and Mudit covered much more during our broader conversation. Watch the replay of the roundtable here.

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Learn more about Planet Corp at https://www.planetcorp.world/

Learn more about Curtis Kline here.