Three Key Elements to Building a $60 Million HoldCo

This week, Sam Parr asked an interesting question over in Hampton community Slack:

"Have any of you effectively gone from a 0-1 type of entrepreneur to a proper capital allocator? And if yes, what advice would you give your past self?"

Dan Tamkin was the first to reply. He's the founder of Resurgent Capital Partners, a portfolio of five businesses that's doing well over $50 million per year profitably.

He learned the business from the ground up after spending years as a hands-on operator, VC, and CTO in other companies. In this piece, he breaks down...

• How he and his business partner got started
• Keys to the business model and where they find deals
• The three elements of a great deal
• "Oh sh*t" moments that could have ended the company
• Favorite tools, thinkers, leadership lessons, and more...

Hello! Who are you and what business did you start?

My name is Dan Tamkin, and I am the founder and Managing Partner of Resurgent Capital Partners.

Our firm is a partnership of two entrepreneurs (Bryce Winkle and myself) that buy small and medium sized businesses across industries.

While my partner has a deal background, I come from operating businesses. I built and sold a software company, was the CTO of a $2 billion company, was a VC in Los Angeles and have run 5 companies between $3-$70mm in revenues. Specifically, I have extensive experience turning around venture backed startups that were not living up to the VC potential and making them successful “normal” businesses. 

Over 6 years, we have bought 5 businesses together and are the majority equity holders in our company. Our 5 businesses sum to over $60mm in revs with 200 employees and greater than $8mm in EBITDA. The businesses include a Freight Brokerage, 20 Tanning Salons, SaaS IVR software for paratransit, SaaS software/services for enterprise SEO, and a SaaS payments company for the state and local government space.

Below is my son checking out one of our tanning beds.

What's your backstory and how did you come up with the idea?

The first business I turned around, Unified Dispatch, had gotten going in the right direction but after 4 years of running a small software company I was extremely bored. 

However, I didn’t want to risk the business by trying to cure that boredom with a “new idea.” So I hired a replacement for me and left the business to join a VC firm. I thought being in VC would make me happy. Well, it didn’t. I hated not having any operational control and betting on hope. After a couple years of VC, I went back to my business and decided I wanted to buy companies where I had control. However, I had no experience buying companies.

At first, I wanted to join a private equity firm, but I didn’t have the background for it. I tried to network my way into one but was bluntly told by many it wouldn’t happen. Then I found a fledgling turnaround firm that I joined but the partnership fizzled after 1.5 years. Finally, I reconnected with Bryce, who had just left a big private equity firm and it became a great partnership because he knew how to buy a business and I knew how to run them.

Bryce and I had both made money previously, him from PE and me from selling Unified Dispatch, so we had some runway to start an investment firm together.

The concept for Resurgent came to me out of learning to steer into who I am instead of being too influenced by what my other successful friends were doing. I liked running businesses but hated running one because I got bored quickly. I liked making things better as opposed to starting from scratch.

Take us through the process of building and launching the first version of your product.

Despite having the financial runway to start our firm, we lacked the mental runway. Both of us were used to high compensation positions and not watching our bank accounts dwindle. 

Frankly, it made us both afraid to spend hard dollars.

There were also tough dynamics that independently occurred in both our respective families at different times that made starting a firm perhaps not the best idea. 

Luckily, we caught a big break five months in. A company I had been advising was acquired by a large company. The acquired company had some technology challenges, and I was hired for a very large consulting fee to rebuild their technology and team. 

In hindsight, I could have kept that money for myself and told Bryce to beat it, but I never thought about that since my goal was to build Resurgent. I did the consulting gig while Bryce built the firm. 

I was lucky enough to be able to bring in some of my old staff that had left my previous company and was able to build a great team for the company we were consulting for. Bryce and I used the capital from the consulting gig to build new deal flow, make financing contacts and ultimately close our first deal. 

When I finished the consulting gig, the next month we closed our second deal, and we were off to the races.

Since launch, what growth channels have been most effective for you?

We have two channels where we find deals. Brokered or proprietary deals.

Brokered deals are when the company is represented by an investment bank or some kind of advisor. In those deals, we look for mismatches between the company and the bank. Is the company too big to be represented by this firm? A couple of our deals fit into that category. Is the company too small to be represented by this firm? One of them fits that.

We look for these odd fits because to find value we cannot participate in auction processes where multiple bidders are submitting LOI’s for a company. The winner in that process is paying the highest price. We look for a poorly marketed business. When we bought Manning’s Truck Brokerage, an asset-light freight brokerage, it was being marketed as a B2B transportation service instead of a Freight Brokerage. If they had marketed it as a Freight Brokerage, it would've sold for much more and we would have never had a shot at it. That’s the kind of odd fit I am looking for.

We find brokers using lists of brokerage firms and reaching out to them with our criteria quarterly over email. We try to set up calls with them and get to know them so we can stay “top of mind” for the right opportunities. That’s hard for us because we are generalists, so that’s one disadvantage to our firm strategy. It’s much easier for them to remember us as the guys that buy tanning salons or something like that, but of course the tradeoff is there are much fewer of those deals.

On the proprietary side, we have done two deals directly with business owners. One was a corporate divestiture where I bought Unified Dispatch back from the company that acquired it, and another was a company I had known the founder for 10+ years and met in the early days of ideating Resurgent. 

The truth is there are fewer and fewer truly proprietary deals nowadays. It’s gotten easier to sell a company and more buyers have emerged. Most buyers are doing some form of proprietary outreach, especially strategics that are building via acquisition. That’s where that form of outreach is most successful.

Did you ever have an “oh shit” moment where you thought it wouldn’t work?

During our initial acquisition, we encountered a financial hiccup with the company we were buying. 

Initially, Bryce and I had a mostly debt financed deal lined up whereby we would pretty much own the company. Honestly, it was a sweet deal for us. However, the company’s performance was beginning to suffer and the owner eventually came clean that the trend was definitely going to continue in that direction so we needed to get rid of the debt, restructure the price and move to an equity heavy deal.

We ended up raising most of all the equity from one other sponsor we didn’t know very well at the time. While it ended up being a good and successful partnership, at the time, we had doubts. The reason for our doubts was the Los Angeles landscape is famous for deals going well but partners still suing each other. Bryce and I try to live by a rule of not increasing our misery. 

Close to deal closing, I remember distinctly when we were at Denver Airport and there was some negative surprise and Bryce suggested we just sell off the deal and not go into it. I told him he could do whatever he wanted but I had not come all this way for just a deal fee. I was going forward regardless. My reasoning was I wanted to build a track record and the only way to do that was to get deals done. One deal is just a start but you are way more credible once you have gotten one done versus zero. 

Thankfully, Bryce stuck in there too. The deal worked out for everyone so it ends up being a happy story, but that was a moment Bryce and I could have split and without Bryce there is no Resurgent.

Can you break down the keys to this business model for us? What makes it work? And what do outsiders typically not understand about your industry?

We are in the business of buying businesses. What that means is we need to do deals (buy businesses) to be successful, and of course, we want to do good deals. We also need other people’s money to get deals done, whether that be in debt or equity, so the deals must be attractive to more than just us. 

Unlike most other firms, we do put a significant amount of our own capital to work so we make our economics from our equity, not a carry on someone’s money. I am not knocking working for a carry. We may do that in the future but for now Bryce and I own equity control of all our deals.

I boil down getting good deals done to three key elements:

The Deal + Purchase Price/Financing + Value Creation Strategy = Successful Deal

1. The Deal

The lifeblood of all investment firms is seeing opportunities or deals. If we don’t see a deal, we cannot invest in it, so we need to be covering the areas we want to see deals in. Further, we need to make sure the bankers that have deals in those areas know we exist. 

Deal flow for a new firm is often the hardest thing to establish since you have no track record of doing deals, so you need to convince investment bankers and business brokers you are real despite the evidence being to the contrary.

Further, there must be something about the deal that is attractive to you or your prospective partners. Maybe the company is in a hot space, growing nicely or has cost bloat that you can fix.

2. Purchase Price/Financing

Once you have found a deal, you need to find a purchase price and structure that is appealing. This is tough. 

Generally, the seller wants the highest price paid as quickly as possible and the buyer wants the lowest price paid as slowly as possible. You need to find a middle group that is appealing to the seller and investors who are looking for a net of fees 20% IRR and still some upside to make your carry or equity worth something. In a hot market like the last few years post COVID, that has been tough to come by.

The second part of this is how you are funding the purchase price. Mostly debt or all equity or something in between. Who is funding the debt and/or equity? What are their terms, etc? Then finally, what’s your deal as the sponsor of the deal with those providing the capital? How do you get paid?

Something most business sellers don't understand is that the availability of debt drives business valuations. When debt is available and cheap, business valuations go up, when not, they go down. Due to the rise in interest rates, valuations will likely decrease as debt has gotten less available and more expensive.

3. Value Creation Strategy

This is the wildcard of deal making. If you know an industry well or have a complementary business, you may have some strategic value to the deal that makes it so you can improve the company’s value. If you don’t have anything special here, you need to rely on something in the first two categories to make the deal attractive.

Assuming a deal checks all three key criteria, our goal is just to buy more businesses. It can sometimes be maddening to an operator to hear this because there feels nothing inherently strategic about it. However, that is how most investment firms operate. They go from deal to deal without anything inherently strategic about how all the deals sum to something bigger.

What platform/tools are absolutely crucial for your business?

For finding on-line business broker deal flow, we use deal sites like bizbuysell.com, quietlight.com, or feinternational.com (the latter two are both Hampton member owned!). 

There are many others you can look at as well as some even specialize in certain niches.

Internally, we use a CRM geared for deal teams called 4 Degrees. We keep our capital and deal lists in there. For email management, we use Mailchimp. 

For list building, we use Upwork to find contractors.

The operating companies generally make their own system choices but we try to always use Quickbooks online and Gusto for payroll and benefits. We also use bill.com for AP management.

I have also built out my twitter presence to talk about doing deals but the focus for my account then was finding capital sources. I think we are going to reorient around finding deals so the content may change.

What have been the most influential books, podcasts, or other resources?

The writings of Buffett and Munger have inspired me the most. They provide such a strong foundation for how to think. I have really enjoyed Share Parrish’s Mental Models series as well. If you are not already familiar with mental models, they are very helpful. A lot of investing is pattern recognition and mental models help you recognize patterns faster.

I am intentionally not listing a lot else because if you nail the big concepts most stuff out there is just another way of presenting those same big concepts.

Where do you see untapped opportunity in the market? What business do you wish someone else would build that would make your job easier?

I have said for years that the firm I most admire is Salt Creek Capital. They partner with mid-career experienced executives and buy businesses with them. They provide the executive fair compensation and split all the sponsor economics with them. 

A lot of similar models have popped up in the last 3-4 years. Many focused on the search fund community. As a GP or LP, I would still prefer to invest in a mid-career executive over the younger search fund crowd.

Alternatively, I would prefer someday to do deals like Brent Beshore’s Permanent Capital, who invests using all equity and no debt. The interest rates the mezzanine and SBIC community charge are similar to equity returns so I am surprised most equity investors wouldn’t just prefer to have that for themselves. I also think it gives portfolio companies more flexibility to adjust as their industry and opportunities to change. Sudden industry changes are tough for debt strapped companies to deal with.

What are some strong opinions you have about leadership, and how do you actually put those into practice in your company?

I start with the belief that everyone wants to be good at their job. I trust our hiring process to weed out those that don’t. Hence, we start from a place of trust with people and try to grow from there. I also think we owe a duty to our teams to look out at what’s best for them.

Everyone is working together temporarily is how I think about it. Hence, I try to figure out people’s career goals and help them towards them - even if it leads to them leaving. I do not think you win by shorting other people or at least that’s not how I want to live my life. I like to see the people I have worked with achieve and do well.

As far as leadership specifically, I believe in being transparent, empathetic, and owning up to my mistakes. Again, simplicity rules the day for me. I like having core principles I can refer to when I am unsure of what to do.

Where can we go to learn more?

• Resurgent Capital Partners' Website
• Dan on Twitter (the best place to reach him)