#254: John Rood: How and Why He Sold His Business and Started a Search Fund

On today’s show, we’re focusing on how a founding entrepreneur grew and sold his tutoring business to private equity. John Rood previously co-founded Next Step Test Preparation, which grew from a 2-person tutoring company to one of the largest MCAT test prep companies in the US. After building it up from scratch, he sold it to private equity in 2018. He runs us through why he chose private equity over other sales options (including an ESOP) and how that influences his buying patterns today.

After selling, John started a search fund: an investment vehicle through which an entrepreneur raises funds from investors in order to acquire a company in which they wish to take an active, day-to-day leadership role. John isn’t shy about diving into how search funds operate, what makes an attractive acquisition target, how capital structures influence a purchase, and the incredible value of long-term planning if you want to achieve your goals and ultimate lifestyle.

In this episode, you’ll learn all about search funds: what they are, how they’re structured, and how they might be beneficial and a viable option if you’re partnered with the right person who is going to be the owner/operator. If you want to learn more about search funds, go check out the Intentional Growth course at Arkona.io.

What You Will Learn In Today's Podcast Interview

How John turned his small tutoring business into a sellable business
What a search fund is and how to make it work for you
The big differences between private equity and a search funds
Why you should put meaning and purpose behind your business
How EOS© helped turned John’s business around
John’s reasoning when selecting his exit, including what eliminated an ESOP for him
The impact creating a board of advisors early on (before it was necessary)
Why you should sit down and plan out what you want your life—all elements—to look like in 30 years
What you should think about when choosing your staff to better address fit
The value of building a moat around your clients and its impact on your valuation
How John handled an out-of-the-blue offer
Why it’s crucial to understand how valuations work if you want to have a successful sale
What your network can tell you about market trends, especially in M&A
The importance of connecting with your employees and equity partners to get the full picture of what they value in your business
How to balance drawing a salary from your business versus taking distributions
Why you should look at hiring like recruiting for a sports team—you’re constantly filling your bench
What made John select an investment banker instead of a business broker
How to shed societal values that don’t serve you, and the incredible benefit of therapy on figuring things out
John’s key insights from selling his business that every business owner needs to hear

Are You Growing The Value of Your Business

Take The 2-Minute Assessment To Get Your Intentional Growth Score™ And 1-Page Vision Board.

Are your company's current initiatives intentionally designed to increase the value of the business?
Do you know what you want from your business long term and why?
Do you know what your company is worth?
Do you know the differences between Management, Family Transitions, PE Firms, ESOPs and Strategic Buyers?
Does the business have a written strategic plan on how to achieve the desired normalized EBITDA and valuation?

About the Guest:

John Rood is an education entrepreneur. He co-founded Next Step Test Preparation, which grew from a 2-person tutoring company to one of the largest MCAT test prep companies, and sold in 2018 to private equity. John now searches for small businesses to acquire in the education or senior care industries. Additionally, he is working on a platform connecting university alumni to peer mentorship groups. He lives in Chicago with his wife and two boys.

Quotes:

11:55 - “We put together a little board of advisors early on in our business, before we really needed to.” – John Rood

12:51 - “Let’s go get the right people, the right staff, and kind of go after it.” – John Rood

15:16 - “If we want to have a company that’s valuable as an enterprise, we have to get out of just doing the services.” – John Rood

18:13 - “There’s a certain subset of equity holders that care about the enterprise value of the business. And then there’s a much larger piece of your business, of your customers, of your customers, of your employees that cares about ‘Are we doing something that’s good for the world? Am I respected by my manager? Is my compensation fair?" – John Rood

20:13 - “Think about starting with a business where the cash cycles are really good.” – John Rood

20:29 - “I actually think I took too much out of the business. If I had to do it again, I would have invested more.” – John Rood

21:39 - “You really have to separate out your labor from your equity.” – John Rood

24:57 - “You have to have a bench of people that you can go hire.” – John Rood

31:32 - “If you’re going to hire an intermediary, you can’t just hire the first one. You’ve got to get intros to a couple people. See who’s doing a lot of deals, specifically in your industry.” – John Rood

36:08 - “What do I want my worklife to be for the next thirty years?” – John Rood

36:40 - “I hadn’t sat down and thought, ‘Here’s what I want to accomplish when I’m sixty. I’m doing that stuff now and I wish I would have done it back then. It really helps guide, are you making the right long term choices or not.” – John Rood

37:09 - “Do I feel fulfilled even if my business fails?” – John Rood

47:53 - “I think people underestimate the challenge involved in that because you still have to get humans to agree with you, to lend you the money, and to actually run the business.” – John Rood

53:06 - “If private equity wants to buy your business, they don’t want to go run it… whereas a search funder oftentimes will become the CEO of the business.” – John Rood