In this episode of Private Market Insights, we’re joined by Hunter Durham, founder and president of Impact Industry, for an honest discussion about a seldom-covered topic: SMB bankruptcy and, more specifically, what happens when a small business acquisition fails.
Hunter’s transparent account serves as an important counter-narrative in a space often dominated by success stories, especially for those looking to get involved in search funds. His experience presents a different view of the complexities and risks inherent in the SMB acquisition landscape.
For a comprehensive understanding of Hunter’s story, we invite you to watch the full conversation. It’s an educational and eye-opening affair that you won’t want to miss.
Hunter’s Entrepreneurial Journey and Business Acquisitions
Hunter’s career in tech with Dell, Microsoft, and Facebook offered him an insider’s perspective on high-growth e-commerce advertisers. Contemplating his next move as a young family man, Hunter planned to follow a holdco strategy with a goal of generating above-average returns to create a positive impact. This led him to create Impact Industry and marked the beginning of his Entrepreneurship Through Acquisition (ETA) and Search Fund journey.
Intrigued by the business models of Warren Buffet and venture capital firms, Hunter educated himself in the field. During the COVID-19 pandemic, he launched a Facebook ads agency, quickly achieving mid-six figures, which funded his next steps.
Hunter’s first buy was an e-commerce furniture store, later adding two more businesses in furniture delivery. His fourth was a parenting blog. All acquisitions were backed by SBA loans with personal guarantees, so SMB bankruptcy in this case spans beyond the business assets in play.
Downfall and Bankruptcy
Despite initial success, Hunter faced both internal missteps and external challenges such as market fluctuations and supply chain issues. One of his major clients also went bankrupt. Overwhelmed by the unique challenges of each business, Hunter found himself unable to juggle family and work. Rapid growth from zero to $7 million in revenue outpaced his ability to put proper systems in place. With no time to adjust, Hunter faces personal and SMB bankruptcy. The downfall of his holdco was multifaceted, each element serving as a valuable lesson for future ventures.
Five Essential Lessons on SMB Bankruptcy from Hunter’s Experience
1. Understanding Business Speed and Complexity
Hunter found that rapidly acquiring businesses, particularly in the furniture shipping sector, limited his grasp of their inner workings. While he was able to capitalize on fast-moving opportunities that appeared on his radar, that speed also came at the cost of missing key operational and cultural insights, contributing to his challenges. The takeaway is that quick expansion should never compromise your understanding of the business you’re entering.
2. Operational Efficiency as a Foundation for Impact
Hunter learned the hard way that good intentions aren’t enough. He wanted to make a broad societal impact but failed to focus on the fundamentals of running a business efficiently. He advises that operational success should come first, with societal impact following naturally.
3. The Complexities of Scaling and Debt Management
Hunter touched on the risks of taking on debt to build a holding company. While a high debt approach can maximize speed, upside, and searcher choice, it also brings complications, particularly when applied to small and medium-sized businesses with less than 2-3 million in EBITDA. The lesson is to approach scaling and debt with caution and full awareness of the risks involved.
4. Self-Assessment and Cultural Compatibility
Hunter highlighted that both operational and personal factors matter in business acquisition. He suggests asking questions ranging from your willingness to manage a team to assessing if the culture of a prospective business aligns with your own values and interests. Skipping this step can lead to personal dissatisfaction and business failure. As someone who was interested in building an impact outside of the businesses he was operating, rather than considering his businesses’ performance the measure of impact, Hunter’s company had happy employees but struggled to adjust to exogenous shocks.
5. Diverse Business Models Require Different Strategies
Hunter admitted that his expertise in one field didn’t necessarily equip him for success in another. His lesson is clear: different businesses demand different skill sets and operational strategies. Knowing your limits and acquiring businesses in areas of strong ability or competence can save you from unexpected pitfalls later on.
“If I had focused a lot more on just operating what I had and not as much focused on impact, it would have allowed me to have more impact by not focusing on it.”
Anatomy of an SMB Bankruptcy: What Buyers Should Know
By understanding the anatomy of an SMB bankruptcy, buyers and current business owners can better equip themselves for the complexities and challenges that lie ahead. Hunter’s experience serves as a practical guide through the oft-overlooked intricacies of navigating SBA loans, bank relations, and bankruptcy processes.
- Understanding SBA Loan payment processes
Hunter clarified that SBA loans differ from other loans in that the Small Business Administration doesn’t focus on where your monthly payments come from. This means that if you run multiple businesses under a holding company (HoldCo), these businesses can inter-lend to each other to cover SBA loan payments. This feature is particularly advantageous if you already run a successful business and are contemplating acquiring another. The key takeaway here is to know your margin of safety: How well can your existing ventures support a new one, especially if things go south?
- Communication and Bank Deferrals
When financial difficulties strike, communicating with your bank becomes essential. Banks are generally willing to offer deferrals, ranging from three to six months, during which you’re relieved from making any debt payments. These deferred payments are then added to the end of the loan’s amortization schedule for a minor processing fee. Hunter himself experienced this, as his e-commerce business secured a three-month deferral. During this period, Hunter pointed out that maintaining a healthy relationship with the bank is crucial for securing such benefits. The worst thing to do is to maintain silence, whether it’s with your bank, employees, or any other stakeholders.
- The “Offer and Compromise” Option
If deferrals don’t work for you, the SBA also provides another option known as an “offer and compromise.” This arrangement allows you to make an upfront lump sum payment—Hunter mentioned 30% of the total loan in his case—followed by scheduled debt payments over a specific time, typically three years. Acceptance of an offer and compromise is not guaranteed and often depends on a range of factors, including your age and financial circumstances.
- Asset Liquidation and Personal Bankruptcy
Hunter is currently going through the process of asset liquidation to satisfy the collateral obligations under his loans. During this process, he continues to work closely with the bank to sell off corporate assets such as real estate and trucks. Liquidating assets in collaboration with the bank is a formal procedure. Appraisals are required for assets, and sale prices must be approved by the bank. Hunter hasn’t yet declared personal bankruptcy as he’s still in the asset liquidation phase with the bank. It’s important to note that bankruptcy is considered a tool, albeit one at the bottom of your toolbox. Once all the assets are liquidated and used to pay down the loan as much as possible, the next step would be to file for personal bankruptcy.
- Acceleration and Liquidation Process
When loan payments become unsustainable, the bank sends a legal letter demanding the acceleration or immediate repayment of all loans. This action triggers the asset liquidation process. The bank remains involved, requiring appraisals on assets and approving sale prices. An important aspect of the “offer and compromise” option is that it also requires you to have maximized loan repayments by liquidating assets. Two conditions must be met: first, that all possible assets have been liquidated to pay back the loan; and second, that you have collaborated with the bank to maximize loan repayments. Failure to collaborate with your bank can result in non-approval of your “offer and compromise,” closing that potential escape route.
Hunter questioned the enthusiasm around Holding Companies and roll-ups, suggesting that they often benefit only a select few. He highlighted the importance of robust capital reserves, stressing that strong finances are essential for navigating market uncertainties.
As for future plans, Hunter is more inclined towards business creation than acquisition. This shift is driven by various factors, including his affinity for working with CEOs and founders, as well as certain tax benefits in Puerto Rico. He feels that starting a business allows for more cultural control and aligns better with his interests.