81. Erik Mikkelsen and Entrepreneurship Through Acquisition

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You're listening to the Entrepreneur Podcast from the Western Morrissette Institute for Entrepreneurship, powered by Ivey. In 2014 Erik Mikkelsen and Rob Cherun made the first successful exit for a Canadian search fund when Auxo management LP acquired Toronto-based security firm UCIT, the move cemented the two Ivey alums in the relatively young history of Canada's entrepreneurship through acquisition or eta sector, a form of entrepreneurship popularized by Harvard in the 1980s where leaders would buy and run pre existing businesses over the next decade, Mikkelsen built Stealth to become a powerhouse in the security space, growing the company from 55 to over 2000 employees, whilst achieving a 30 times increase in revenue in 2024, Stealth was acquired by GardaWorld In this insightful discussion with Ivey lecturer David Simpson. Mikkelsen talks about his journey from entrepreneur to consultant to entrepreneur through acquisition, the evolution of search fund models in eta and the field's growing importance and visibility in the Canadian market.

Dave Simpson 

We're here with Erik Mikkelsen, a proud Ivey alumni, and I'd like to say, is at the forefront of the search fund movement here in Canada. So Erik, please sort of enlighten us on your entry into business as an entrepreneur came through the formal structure of creating a search fund, and you're credited as being one of, if not the first in Canada to organize it that way. So tell us a little bit about that formation.

Erik Mikkelsen 

Yeah, no problem. Thanks for having me. So I had started, actually, my first company here at Western with a few other Ivey classmates. It was a student marketing company that sold advertising and brought revenue into local businesses. And so I'd done zero to one before, and it went pretty well for an undergrad program. And then I decided to kind of shut that down with with those classmates as good experience, made some money, etc, and go into the corporate world. But I knew I wanted to be an entrepreneur again, so the idea was, why don't go into the corporate world, get some experience, maybe save some money? So I did investment banking, real estate, private equity, and I was thinking about, Do I start a business again? Go out there on my own and go zero to one? And the search fund thing got actually presented to me by another Ivey guy, Rob Cherun, who, at the time, was at Stanford Business School, and he came across the search fund model, which is where it came from at Stanford, which is really entrepreneurship through acquisition, where you raise capital to go and buy a business from a group of investors that are basically backing you to begin with, and they'll cover kind of your operating costs, legal fees, modest salary, that kind of thing. But you're actually buying an existing business. So instead of going zero to one, you know, after you raise this fund, you could be going, you know, two to six or three to seven, or whatever it is, right, in terms of the growth, and so building versus founding, some of the same characteristics, but a little bit different from a risk profile, from kind of everything, right? And so this was actually presented to me by Rob I spent a lot of time at the Center for Entrepreneurship at Stanford University, which is where he was at the time, and he had a thesis that he was investigating with one of the professors, who was an avid search fund investor, that the model had been very successful, particularly out of Harvard and Stanford in the US, but no one had really tried this in Canada. And so we did this independent study on the Canadian Private equity market to look at where the opportunities were. And we had a thesis that had two things. Number one, there was a lot less capital chasing deals, particularly for small businesses. So the research that we did was, even if you scale by GDP or population, there was about 10 times more capital chasing deals in the US. And at the time, there was hardly anyone buying businesses under 10 million EBITDA, certainly very few people buying anything under 5 million of EBITDA, and so a few family offices, that kind of thing. But just a really, really underserved market with a lot of amazing businesses and a lack of transition planning when people are retiring. So aging population, you know, with not a lot of competition like you'd see in the US. And then the second part of the thesis was, multiples are lower in Canada, you can get in cheaper, but if you find a good business in Canada, if you expand it into the US, you can now get a US multiple on that. And so you'd see some sort of multiple arbitrage, and that's that's how we went about it.

Dave Simpson 

So is the downside, though, that perhaps the the investor class here didn't necessarily understand the model? Because, you know, for the gray hair, no hair, like ourselves, we've been buying businesses for years trying to corral investors. And you know, you're making your pitch and you're herding them all into a certain way, but this had a template and a structure. So was it hard to find Canadians that understand it, or did you use the American investors? And what is that template they put it in? Not, I'm not concerned about the upfront expenses that you're talking about. That was they fund you for a year or so while you try and find a business. But what do they get, and then what do you get in terms of the equity on an ongoing basis, and how difficult was that to translate to Canada?

Erik Mikkelsen 

Yeah, so I'll answer the first part, which is, you know, how do the economics work? And then I'll talk about Canada and the US. So the economics work, basically, they're going to give, you call it $500,000-$600,000 depending if it's one or two people, that's going to cover, you know, basic salaries, you know, some legal expenses, that kind of thing, to go and find a business to buy on their behalf, and that money steps up into whatever company you buy at a 1.5x that's kind of how the template works. So if it's 500k 750k of preferred equity goes into whatever company that you buy. What they're really buying is an option to invest in that company. So you're gonna then pitch them XYZ company. So you're raising a small amount of capital. Call it 30, $50,000 per person. You sell a bunch of these units, we call them to these investors, and that they're getting a right, a first right, to invest in whatever company you're gonna pitch to them. So they still have the opportunity to back out if it's not a good deal, right? So then you go and you talk to a bunch of bankers and lawyers, and you know, whoever you can, depending on your strategy to try to find a good company to go and buy. So the first part is raising the capital for the search. The second part is finding a good business to buy, and the third and hardest part is actually creating value at that company once you've gone and bought it. So those are the three parts to a search, and that's kind of the template that that exists in the US., and you'd get 20-30% of carried interest, which is upside, after the investors have been paid back

Dave Simpson 

with a hurdle rate. Do they get money back, plus a hurdle rate, or just once, once they're whole. You've got, you're now a partner for 20 to 30%, and that's the negotiating part.

Erik Mikkelsen 

Yeah, the at the time. And it's a little bit different now, but pretty similar. There typically be a hurdle rate of 6% or 8% that investors would get paid back first we had it so that there was a catch up on it, which means that if we get more than 8% it goes back to dollar one, and we get 20% of the upside. So that the other way to do it is that there's they just get 8% and then everything above that gets split 20:30 and that just depends on what you're able to negotiate with your investors. We had a couple people who didn't want to invest with us because they thought that wasn't because they thought that wasn't market. And so there's, you know, a group of seasoned entrepreneur search fund investors that would kind of dictate what quote, unquote market is, yeah. And (so the template is the template according to that) Exactly, exactly, exactly the golden rule, yeah. And to your point, it was a known thing, particularly out of Harvard and Stanford was kind of a secret for like, 15 or 20 years, and some really big home runs, Asurion being the most famous one, which is a very small company that became a $10 billion plus business. And those those founders are now Stanford professors, right? And so it was kind of known in there, but in Canada, no one really knew about it, and we wanted to be 50% Canadian funded, where 50% of our backers were Canadian, and we raised in a couple weeks in the US. Stanford kind of helped us and sent us out to the typical professors there. And funny, if we got a call from professors at Harvard and said, "Hey, we heard from our Stanford buddies. Come to Boston and we'll introduce you to our buddies." And we came to Canada, and we could not get, like, a couple people who knew us personally. We're like, "hey, like, whatever you're doing, sounds interesting. Like we're in because we like you guys," but other than that, it was a very foreign idea to them. Why am I going to pay some 24, 25 year old kids to go and find something to me? Why don't you bring me a deal once you have it and have a look at it, to which the response was, Well, we're not going to do that, because the people who back us now are going to have a first right of refusal on that deal. So if we're coming to you, it's going to be because none of those guys wanted to do it. It's not going to be a very good deal, is it?

Dave Simpson 

So this is what period, just to give us a time frame? (2010) Okay, so post financial or working our way through the financial crash at that point, that's right, and turning the corner, which might mean there's some business opportunities. And most savvy investors would have been looking for opportunities, but it just did not hit them, right? For most Canadians, that we should pay someone to do the essential due diligence, and you were pitching also in this fund, typically that that you would be some sort of leadership of the business that you acquire. Would that be a standard template as well?

Erik Mikkelsen 

That's right, yeah. So as opposed to traditional private equity, where you know. You're just backing the existing management team. You're typically coming into these deals and taking a very active role in management, typically the president, CEO COO, one of those. So in our case, I became the president and CRO in charge of everything external, and my business partner was the CEO in charge of everything internal.

Dave Simpson 

So closing that first deal, just to give us a little eye opener, it's not like you find a business in a week, and even if you were lucky enough to find when you liked, in that first week, there's a long window of negotiation, due diligence, that kind of stuff. So give us a little sense of how that went for you. Did you look at a lot of different industries and maybe what industries attracted you? Is it your skill set or just the margin and the structure of the industry?

Erik Mikkelsen 

Yeah, so we had a plan for finding proprietary deals. So the ones that go through the processes are typically, you're paying more for them. They're competitive, right? And if they were coming to us as the new guys, maybe they'd already been kind of picked over. They weren't like the greatest deals, necessarily. And so the idea was, find something proprietary and convince a business owner that you're the right people to sell to. You're going to get involved, you're going to put, you know, everything that you have, into buying their business, partnering with them, and grow

Dave Simpson 

somebody that needs to monetize, or should be thinking about monetizing in the next few years. You proactively went to those, (that's right) so again, then, how did you pick them? What was your interest?

Erik Mikkelsen 

So we're looking at this is kind of a template for this in the US as well. You want to pick business services, typically with recurring revenue, that have a sticky customer base, and they have, you know, some sort of upside. So for us, you know, we like boring kind of businesses that could could benefit from sort of, sort of technology innovation, right? And so that was kind of our criteria. What you want to stay away from are things that are overly technical. So if, let's say, you go and buy some, you know, engineering or manufacturing businesses, it's fairly complicated. If the, you know, guys that you bought it from all decide to quit the next day, you wouldn't know what to do. Yeah, right. So if it's more simple service based business, right? It's going to be that's going to de-risk it a bit. So those are more of the criteria that that we're looking for recurring revenue business services, and then for us also, it was important that we're in a growing industry, so we weren't looking at restructuring stuff, distressed stuff. We wanted, you know, the wind at our back, recurring revenue, all that kind of stuff.

Dave Simpson 

Did the investor pool sort of help with that process in terms of giving you tips? Or is it passive, until they come to analyze the deal you put in front of them?

Erik Mikkelsen 

More passive; they're kind of paying you. There's some, you know, advice that you give you in terms of, here's what we've seen from the best searchers out there. Here's different ways you want to go about it. But other than that, that's kind of what they're paying you to go and do and find them these deals. We got very lucky. So we had this plan of finding this prepared, proprietary deals. I called it the three D's, death, divorce and disease. So if you're sick or you're someone dies, and you have a partner that needs to be bought out, or if you're getting divorced, hey, I got to figure out this financial situation. I need liquidity to pay some bills off and restructure things. These are great reasons, actually, to sell your business. That could be a great business, right? That you otherwise wouldn't even consider selling it. And so I had this plan of meeting with divorce attorneys and estate planners and all this kind of stuff. And realistically, our thesis in terms of lower competition here really worked out for us. We had some friends from Ivey that worked in private equity, and one of them that was was really great for us, was TorQuest, a guy named Brent Belzberg. Great guy. We went and met with him and his team, and I go, Hey, we're looking at deals that are too small for you guys. And Brent had a kid at HBS, and so he knew about the model, and he had offered to invest, but we had, we had already closed. And he goes, you know, I'll have our team send out an email to everyone that we work with, all the intermediaries, all the banks, all the, you know, and just say, hey. And like our next blast that we're doing out, by the way, if you see smaller companies, send it to these guys and take meetings with these guys and give us a lot of credibility in the market. So we ended up finding a really good company, and got very lucky with a fantastic entrepreneur that we partnered with just a couple months into searching. So I didn't get to do all my divorce attorney and estate planning pizza lunches that I was planning on in Oakville and these areas outside of Toronto. I got very lucky and found the business.

Dave Simpson 

So you found an owner operator that fit the sort of monetization? Did they have a desire to maintain a stake and work with you to grow it in terms of, let's figure out all the pieces here, so you got investors and you're gonna have a carried interest, but sometimes the founder selling to you also will want to carry on a little

Erik Mikkelsen 

The typical search fund seller is like in the. 60s or 70s, looking for a succession plan. That was not this person. This guy was a guy who started the company his late 20s. He was now in his late 30s. He had young kids. He'd been working every day without liquidity, putting all of his own money into this business, and he was looking to take some chips off the table and stay at the business. So he said he was going to be gone in three years. He's still at the company now, 15 years later, and well, actually, one of the top sales guys, and the what he rolled over in the business, which was a portion, ended up being worth more than what we gave him originally, because we grew the business so much, and he became a partner, and how he's now invested in a whole bunch of other search fund deals, and become very valuable member of the search fund community, because that's how well it worked out for him. So yeah, we were expecting to meet all these guys in their 60s, 70s, 80s, and we did meet a few of them, but this guy was just young, in his 30s, and he said, I just, I don't know how I can scale this thing across North America, across I have these aspirations, but it's just me here.

Dave Simpson 

Wise, he was smart enough to know I can't take it to that place, so let's bring a team together, but smart enough to know it was a good company (Yeah). I'm gonna hang on for some piece of it (Absolutely). Okay. That's an interesting and you use the word service companies a lot, and I'm assuming part of that is if, if it's easily bankable, you know, big capital asset type companies they may not need the investor group that a service company might need. So is that sort of a traditional thing? You're looking at things that can't be, you know, the leveraged buyout people can't do as easily, because you actually do need some pure investment here. And then what debt levels Did you lay on to things like that. And do you have relationships that you cultivate constantly with bankers in addition to investors?

Erik Mikkelsen 

Yeah, you know, the lending market in Canada is, surprisingly, not as tough as you would have thought for good businesses that had a track record of financial success. So you're typically looking for companies that have been, you know, at least stable, if not growing, you know, for ten, twenty, thirty years, for the search fund model. And so those are, those are similar assets that that banks have some comfort lending to. And if you're not asking to put too much debt on it, if you're saying, Hey, I'm going to put, you know, 30% of the cap table is going to be debt. For example, we're able to get financing from from the Canadian banks, without personal guarantees and all that kind of stuff. And yeah, we were cultivating relationships with the banks from day one, along with along with our investors, and sharing deals with them and that kind of stuff.

Dave Simpson 

So investors are looking for a return. So as an entrepreneur, we're always asking people, Do you go into something, saying I'm buying this and we're going to own it forever, cash flow it, but if I have a chance to exit, I'm not, you know, being silly here, but you don't think about your exit going in, in a situation that you're just looking for a good company that you can grow and build, and then we'll deal with it if opportunity comes. Would that be characterized how you looked at?

Erik Mikkelsen 

Yeah, absolutely. One of the pitches to the seller, right? This is their baby that they've, you know, potentially had for 30 years, started from scratch, potentially, right? Is that a traditional private equity buyer? And there's, there's all sorts of different private equity but the traditional guys are typically trying to get liquidity four to six years. So let's call it five years on average. And the problem with that is you spend, you know, a year or two figuring out what the hell you bought, right? And then you spend, you know, a couple years, you know, making some improvements, growing it, you know, optimizing it, that kind of stuff, when you really figure out what you bought, and you start to make some momentum. Now you're, you're putting lipstick on it, potentially cutting things back a bit, right, to get the cash flow higher, and you're selling it when, really, that could be the most opportune time to really go for it and create real value, right? And compound that value in a very tax efficient way within that business. And so the pitch to sellers is, hey, we're not going to, you know, come in and slice this thing up in five years. We could, we want to be honest, we could sell it if we get the right price in four or five years, like we still haven't. We still have investors, but we have patient capital. It's mainly family office or individuals funding these things. It's not institutional capital, typically. And if it's a really good business, that's going well, like we can hold on this thing for seven years, ten years.

Dave Simpson 

Ultimately, you did do an exit, but that was after quite a growth so tell us a little bit about how long you held on to it and and how did your role change, as it got bigger.

Erik Mikkelsen 

So we bought the original company in 2011. We recapped it in 2014 to focus more on growth at a 3x to investors,

Dave Simpson 

when you say "recap," totally different investors at that point?

Erik Mikkelsen 

Back to our original investors. We had a couple term sheets from third parties, mainly funds that were already invested in us, and they said, Here's how we'd think about the valuation. So we set a valuation and kind of like the middle of that and said, Hey, we're just going to do an internal round, and investors can buy, sell or a hold at this level. Okay? And so if you want liquidity, here's your chance. Yeah. And so most, most investors, decided to hold or buy more a couple investors at a 3x and a couple years, sounds pretty good. And then we grew that until 2019 and we sold majority of the company to a US private equity fund. And then I stayed on for another five years with them, and sold the business again after a couple acquisitions to a strategic buyer.

Dave Simpson 

So total, gosh, that's 15 years.

Erik Mikkelsen 

Yeah, wow, almost from the search till today, yeah, it's been, it's been 15 years.

Dave Simpson 

So last thing I want to talk about is due diligence tips (sure), because looking at a business, particularly an entrepreneurial, funded business, yeah, or founded business, financial statements are not necessarily telling you the whole story. So what do you look for when you're looking at these companies? If you can give us any tips on on due diligence tactics for you?

Erik Mikkelsen 

Yeah, you want to really, these are typically smaller businesses, and you really want to spend as much time as you possibly can with the seller. So typically the CEO, owner, and if they'll let you any other really important management people, their COO, talking to people, talking to people, absolutely right? So you can come up with all the you know investment risks that you're going to put in into your investment memo. And if you're coming from private equity or something, it teaches you to think like that. But just ask, you know, the-

Dave Simpson 

"Why are you a good company?" (Yeah) "Why do your customers choose you?," talk, talk, talk,

Erik Mikkelsen 

Yeah, "what keeps you up at night?" Like, "what are you doing to mitigate those risks?" Right? And all these businesses have you know, those risks, and figuring out what are the one or two levers that are the most important, and really honing in on those things and not inundating these guys with, you know, 100 different questions, like you can do for much larger transactions. They have big management teams, they have advisors. They all the stuff these smaller businesses, just really figuring out, like, what really makes this business tick, right? And you can get most of that a lot, a lot of times straight from just talking to the people at that business.

Dave Simpson 

So that skill that you've developed give us a balance here of how much the school learning you know you've got an advanced degree, and how much is that versus the life skills you gained in your first few jobs? You know, the experiences of working with bigger companies, learning about both finance but also people management, tell us sort of where the optimal learning comes from, or is it a mix? Or what do you encourage next gens of acquisition entrepreneurs to be thinking about when they're at school, or what their first job is prior to buying something?

Erik Mikkelsen 

Yeah, there's a mix of both, for sure, but it's the people skills is really you know, when you're in in Ivey, you're like, oh, finance is the most important class. Like, listen, understanding the numbers, accounting is certainly important. But the hardest part of of of this is driving value once you're there. And that's a people that's a people game. Are you a leader people? You come, come to this business, and you're maybe 25, 26 years old, and you could be managing people in their 60s, like, that's a challenge to begin with, right? And so how are you going to command respect from these people? How you can get them take you seriously and work hard to, ultimately, you know, grow this business, you know, and get a good return for your investors. And so I definitely think that Ivey prepares you better than other options for doing that because of the case method. And you have to, like, understand, like communication skills, building empathy, looking at real world situations. But you're obviously, you know, you learn some of that, a lot more of that on the fly as you kind of get thrown into these situations, right? So you'll learn more of like the deal sourcing, acquisition stuff for banking or consulting, you know, putting together the memos and all that kind of stuff. But it's actually Ivey. I think the school here prepares you maybe even more for some of the real world people, aspects of actually operating a business, once you get into it.

Dave Simpson 

And once you're into this, I'm assuming you don't stop, because it's not about the money, it's about the process. You enjoy this lifestyle, so you're going to be continuing to look for it. And do you see our investors in Canada now a little more aware of it?

Erik Mikkelsen 

Yeah, they're much more aware of it. There's still a lot of opportunity for it, but search funds have become a much larger thing here. There's dozens per year. But also just entrepreneurship through acquisition, there's a lot of self-funded searches, people, not just coming out of business schools and younger people, people in their 50s or even 60s, buying up companies with private capital that they're getting from friends and family, sometimes partner with institutions. And then also, a lot of US private equity firms have been coming into Canada to do smaller deals.

Dave Simpson 

Those multiples they're looking at, yeah, and the dollar exchange, it's all good (exactly). So Erik, you're still smiling, so that means it's worked out for you. But a lot of effort, lot of time (yeah), probably more time than you even thought from the original acquisition, how long you'd be part of that business, but continued success and thanks for giving back some information to our students here at Ivey. So appreciate it very much.

Erik Mikkelsen 

Absolutely. Thanks for having me.

Outro 

The Entrepreneur Podcast is sponsored by QuantumShift 2008 alum and founder of Closing the Gap Healthcare Group, Dr. Connie Clerici. To ensure you never miss an episode. Subscribe to the show on your favorite podcast player or visit entrepreneurship.uwo.ca/podcast. Thank you so much for listening, until next time.