From Traditional Search to Unexpected Exit: Keegan Dum's Journey in Acquiring and Selling a Software Business

The Path to Traditional Search

Keegan Dum's journey into the world of business acquisition began during his MBA program. After spending seven years as an engineer at Exxon Mobile, Keegan was exposed to the concept of search funds through a class called "Entrepreneurial Private Equity." This class featured speakers from various private equity backgrounds, including successful search fund operators.

The idea of buying and operating a small business resonated with Keegan, who was looking for an entrepreneurial opportunity that aligned with his family goals. He was drawn to the traditional search fund model for several reasons:

1. Lack of experience in deal-making and business acquisitions
2. The network and ecosystem that comes with traditional search, including investors, accountants, and lawyers
3. Limited personal financial capital to fund a self-funded search

The Search Process

Keegan's search began in 2016 and lasted for two years. During this time, he focused primarily on proprietary deal sourcing, directly reaching out to business owners who had not listed their companies for sale. His daily routine involved:

• Reviewing responses from business owners
• Conducting phone calls with potential sellers
• Traveling for in-person meetings
• Analyzing potential acquisition targets

Throughout his search, Keegan had four companies under LOI (Letter of Intent), but ultimately walked away from all of them. This experience taught him valuable lessons about the importance of thorough due diligence and the challenges of finding the right fit.

The Unexpected Opportunity

After his two-year search ended without a successful acquisition, Keegan began consulting for various investors and companies he had met during the process. His largest consulting role was as a part-time president for a software company called eGeneuity, which had been his first LOI during the search.

eGeneuity provided software solutions for car washes and automotive shops. The company had two main product lines:

1. Car wash management software, including kiosk systems and integration with car wash equipment
2. Automotive shop management software for oil change and repair businesses

After six months of consulting and getting to know the business intimately, Keegan and the owner began discussing a potential acquisition again. This time, with a deeper understanding of the company's operations and potential, Keegan was able to negotiate a more favorable deal.

The Acquisition and Growth Phase

Keegan successfully acquired eGeneuity in late 2018, approximately 18 months after his initial search ended. The deal structure included:

• A 20% seller note
• 15-20% seller equity roll
• The remaining 60-65% funded through equity from investors

To raise the necessary capital, Keegan went back to his original search fund investors, honoring their right of first refusal. He also negotiated some changes to the traditional search fund terms, including:

1. Removing the "overhang" from the initial search fund investment
2. Increasing his potential carry from 25% to 30%, contingent on achieving a 40% IRR

Once the acquisition was complete, Keegan focused on improving operations and investing in the team. Key initiatives included:

• Implementing new systems and processes
• Cleaning up operational issues
• Growing the recurring revenue by 20% in the first year
• Developing plans for a SaaS product in the automotive space

The Unexpected Exit

Approximately one year after acquiring eGeneuity, Keegan reached out to a competitor in the car wash technology space to discuss potentially acquiring their automotive shop software division. However, the conversation took an unexpected turn when the competitor expressed interest in acquiring eGeneuity instead.

Initially hesitant due to the recent investments in the business and reduced EBITDA, Keegan ultimately received an attractive offer. In December 2020, just 18 months after the initial acquisition, eGeneuity was sold for nearly three times the purchase price.

The exit provided several benefits for Keegan and his investors:

1. A 2.7x return on investment for the equity investors
2. A cash exit for the original investors
3. A generous package for Keegan to stay on with the new company, including salary and equity
4. Additional upside when the acquiring company was sold to a public company nine months later

Key Takeaways and Lessons Learned

Keegan's journey from traditional search to unexpected exit offers several valuable insights for aspiring searchers and business buyers:

1. Build deep relationships: The importance of developing strong connections with business owners, even when immediate acquisition opportunities aren't apparent, cannot be overstated.

2. Be open to unexpected opportunities: While Keegan's initial search didn't result in an acquisition, it led to a consulting role that ultimately became the business he acquired and successfully exited.

3. Understand investor perspectives: Balancing the interests of investors, who may prefer longer-term holds for higher multiples, with personal goals and risk tolerance is crucial.

4. Consider the benefits of traditional search: The network, support, and funding provided by the traditional search model can be invaluable, especially for first-time buyers.

5. Be prepared to adapt: Keegan's willingness to adjust his approach after the initial search period ended allowed him to capitalize on the opportunity with eGeneuity.

6. Focus on operational improvements: Investing in people, systems, and processes can drive significant growth and create value, even in a short period.

7. Evaluate exit opportunities carefully: While an early exit may not always align with initial plans, it's essential to consider the potential benefits and risks of each opportunity.

8. Leverage industry knowledge: Keegan's experience operating eGeneuity made him valuable to the acquiring company, leading to additional financial benefits post-exit.

9. Balance work and personal life: Taking time for personal growth and family experiences, as Keegan did with his year in Spain, can provide valuable perspective and rejuvenation.

10. Stay connected to the search community: Keegan's ongoing involvement with his MBA program and willingness to share his experiences demonstrates the value of giving back and staying engaged with the search fund ecosystem.

Keegan Dum's story illustrates the potential for success in the search fund model, even when the path doesn't follow the traditional script. His experience highlights the importance of perseverance, relationship-building, and adaptability in the world of business acquisition and entrepreneurship through acquisition.

For those considering the search fund path or looking to acquire a business, Keegan's journey offers valuable lessons and inspiration. It demonstrates that with the right approach, mindset, and bit of luck, it's possible to achieve significant success in a relatively short period, while also creating opportunities for continued growth and learning.

Article created from: https://www.youtube.com/watch?v=lWMI8UhRlgM