Patrick Flood: [00:00:00] Small acquisitions are a knife fight. They're not strategic missile launches.

For every Steve Jobs, there's probably five Tim Cooks.

I really only planned to do the initial commitment, which was 5 years. And I ended up spending 26.

The person who's been doing billing for 15 years is also the person that knows where all the bodies are hidden.

If these companies roll to zero, it's a big problem.

Hey, is there a way for my money to make money? Like, this is interesting, I'd love to be able to donate, but it seems to me like it might be an investment opportunity as well.

Andrew Kazlow: Welcome to the Diligent Observer, the first podcast exclusively focused on helping angels see what others miss. I'm your host, Andrew, and every week we explore what works, what doesn't, and why through conversations with experienced startup investors and operators.

 My guest today is Patrick Flood, a decorated US Army Special Forces veteran and founder of Owners in Honor, a nonprofit that's helping veterans transition into small business ownership via entrepreneurship, [00:01:00] through acquisition or ETA. In this episode, Patrick explains why we're seeing a resurgence in veteran entrepreneurship that's not been seen since post-World War II.

He explains how the ETA model offers a compelling opportunity with different risk return profiles than traditional startups and why veterans systematic approach to taking over and optimizing existing operations makes them uniquely suited for this path. I hope you enjoy learning from Patrick as much as I did.

Patrick, thanks for being with me today.

Patrick Flood: Thank you for having me.

Andrew Kazlow: So, Patrick, tell me what are you excited about right now? 

Patrick Flood: I'm excited about right now, we'll call it two things. One is the more long game of the fact that there's a sort of, co-joining of opportunities of a lot of small businesses that are exiting and a lot of them that are family owned or legacy businesses that are actually looking for a legacy transition.

[00:02:00] So, someone who's interested in taking over a, a family business, not necessarily someone who's interested in aggregating it into a larger conglomerate. And then the second opportunity, that's part of that is the veterans that are now really getting almost as engaged or growing in engagement as they were post World War II about entrepreneurship and understanding that a lot of their attributes are really, positioned to have them be successful within the entrepreneur through acquisition type of investment or opportunity post-transition.

The thing that's more immediate is that touch wood, we have one of our opportunities that should be closing in the next couple weeks. So, it's always exciting to, you know, I can't divulge a lot of it about that until everything closes, but, but it's always great to see an opportunity in a place that is a little bit more remote. That definitely had a difficult time finding someone to be able to buy the company without wanting to turn it into a rollup. And then at the same time, being able to provide an opportunity for a veteran to be able to go back to [00:03:00] the place that he was actually, that he joined the military from.

Which is an exciting opportunity for a lot of veterans that normally when we retire, and we transition out, we are more often than I was used to be one of the people that would coach people about this. But we talked to people about ensuring that the market provided that you engage the market to understand what your value is to the market, understand how to translate your skills into a civilian skillset, and then at the same time, be able to make sure that when you are going to the market, that you don't get anchored at a low entry point because it's really difficult at that point after you've transitioned to, to scale it up, to be able to get compensated what you really fairly earned.

And so, this is a different opportunity where that one almost always, you had to move again. You had to move to potentially a community that didn't have a veteran. Community didn't have people you knew your kids would have to leave school. They didn't have any safety net as far as family or any psychological safety net.

And [00:04:00] because of this, you can actually see in real time the fact that these communities are very excited about welcoming their veterans back. And then quite frankly, they're getting an incredible return on their investment. They, as taxpayers have spent a tremendous amount of money on leadership skills that people have been taught in the military, and now they can come back and bring it straight to Main Street and be able to really provide those leadership opportunities within communities that I think, a lot of small communities have been lacking.

Andrew Kazlow: Well, we certainly see a significant amount of veteran entrepreneurship just in general. Like at any active angel is going to see a material portion of the opportunities that hit their desk led by veterans. I was personally just looking at a deal this last month that was led by veteran team and all of those traits that you just talked about were very present and obvious in that company.

There is so much value there. So, I wanna come back to that and how you guys specifically are helping veteran entrepreneurs make this transition and get into this space. Before we do though, you just talked about something that is pretty [00:05:00] interesting. You said that, recently there's been kinda a resurgence of veteran interest in entrepreneurship that we haven't seen since post World War II.

So tell me more about what you mean by that. If you have any data points to like,

help me understand that.

Patrick Flood: So, post World War II, nearly 40% of Veterans were involved in some fashion of entrepreneurship. I think it's like the high 30%. Over time, and I think a lot of that came from the fact that it was a draft. You took people from all over the United States, you brought 'em into the military.

So There were a lot of people that entered the military service who came from small communities where everyone was a business owner. I grew up in a community that was pretty small. It's in northeast Wisconsin, and almost everybody I knew was a business owner. Because that's just how you create the community.

Post World War II, when we kind of went into more of the, say modern eighties where everything kind of became a service opportunity, is that most of the people that entered the service or into the military [00:06:00] didn't come from backgrounds where their family were entrepreneurs.

So, similar to military service of being able to have a bias to success based on familiarity of someone who's actually experienced it, is that most people that join the military, I think over 80% joined the military because they have some have, either one or two degrees away from them who's actually served in the military.

Well, entrepreneurship is really the same thing. And so if you look at what was happening in the military is that you're having fewer and fewer people that were joining in the military that came from an entrepreneurial background in any way, shape, or form. And in the meantime, we also were in combat for almost two decades.

So, you're taking a lot of folks that maybe would've spent a you know, three years, after an enlistment or potentially five years after going into an academy or ROTC or something. And like myself, I really only planned to do the initial commitment, which was 5 years. And I ended up spending 26.

And primarily I spent 26 because we were at war. but ultimately we do have a bit of a peace dividend right now.

We [00:07:00] don't have a military that have tens of thousands of people deployed in combat situations where people are really deployed or not, super engaged in making sure that they're people and the mission is being accomplished. And so because of that, you're having a lot of people who aren't really interested in going to the training centers or the national training centers two or three times a year. Aren't that interested in doing very many deployments in the Navy where they go in a couple different floats and then they're just like, what am I doing?

We're not really supporting combat operations anymore. A lot of them joined because they were considering the fact that maybe we would still be having combat operations. So, now they're getting out. Now what would've been a great way for someone with an entrepreneurial mindset to be able to be successful, which is in the military, during combat operations, because you really, everyone has to be a consummate entrepreneur because you don't have all the resources you need.

As secretary Rumsfeld once said: you go to the war with the army you have not the army you want. At the end of the day, everyone's [00:08:00] always trying to make ends meet. You're trying to work through all the different service lines to make sure that you can achieve the mission as successfully as possible.

And you're dealing with huge long supply lines and everything else that goes into it. So you have to be very innovative typically to be very successful during those periods and when we're at peace time, it's just really difficult. Even though we do really great training exercises within the military and peace time, it's really difficult to mirror that same thing, especially the fulfillment that comes, I think from some people that have entrepreneurial spirits.

And so because of that, you kind of have three constituents of people that we've been finding that are interested in entrepreneurship and a way that they're interested in entrepreneurship now. And some of it has to do with the, I would say, as much writing and different individuals that have been talking about the, gray wave, silver tsunami, the number of people that are baby boomers that are gonna be exiting their businesses.

Partially it's that, right? So it's people just being more familiar or more aware of the fact that there's an opportunity to do something different. [00:09:00] The other part of it though is that, a lot of veterans are now interested in ideally mitigating some of the risk that comes along with doing a startup and looking at something that they could potentially buy that would then be something that has provable ROI, that has past record of performance, something that they could scale to be able to increase an investment and then ideally build an asset class.

There's less of the. I don't know if the right way to say this, but there's probably, it takes a certain person to be a startup person, right? A startup founder. And I would submit that for every Steve Jobs, that there's probably five Tim Cooks. And that the Steve Jobs is definitely gonna be hitting Grand Slams. But he's also gonna be striking out probably

a hundred times to every grain slam. And then you get the Tim Cooks who are hitting doubles all the time. You know, is Apple as exciting as it was, when Steve Jobs was running [00:10:00] it? Not really. But is it a great company that's extraordinarily, sound as far as operationally and being able to scale and being able to be a, you know, really a legacy company.

Almost like as they used to say, those blue chip stocks like IBM used to be. Absolutely. But it's a different mindset. And so, you take the folks that have now gotten out of the military and they're looking at, okay, so now I'm, I'm going to get outta the military after being a combat for 10 years.

And I'm gonna explain to my spouse and my family that instead of me risking my life, potentially, I'm going to bootstrap all of my valuables to be able to do a startup. And I have to come up with a new idea. I have to do market research. I have to do all of the other things that determine is it anything even that the market wants.

And a lot of those folks, if they've been extraordinarily committed to their job, haven't really had those thoughts. Like myself, I think I would've felt I never had, you know, very few. I think of the veterans that are coming out now had very many side hustles as they used to say.

Because of the amount of commitment that we had to combat [00:11:00] operations. And so we were very focused on ensuring that the mission was successful and that the men came home alive. And so from that, now you're taking people that are maybe a little bit more mature. Maybe they're, you know, not your, you know, mid twenties.

You're looking at maybe mid thirties, sometimes early forties. Folks that are interested in potentially taking over that company because what they've missed over all these years is that sense of home. They've missed having a church to go to a grocery store, to go to a neighborhood, knowing their neighbor, all of this stuff.

And so, there's this opportunity cost that's been lost for them of being actual citizens. Because they've been, on the front line doing a lot of great service to the nation for a long time. But now I think a lot of them are like, Hey, I want to pivot back to be able to give that same amount of effort that I did to whatever Afghan or Iraqi community that I was working in for this many years.

I want to be able to return that back to my home community where I grew [00:12:00] up. There are quite a few veterans. Not every veteran comes in and is like a Boy Scout when they came in. They weren't all Eagle Scouts that were like, Hey, I'm gonna go be Otie Murphy and it's gonna be amazing.

And this is just part of my American history. A lot of folks come into the military because they're not sure what else to do. A lot of them were underengaged or underperforming, I would say, as high school students because they just didn't feel there was enough challenge to them sometimes.

And so some of 'em were a little bit. Little strayed off of maybe the main path. And this is an ability for them to a lot of times come back home to a really positive homecoming where these folks have matured a tremendous amount, since the time that typically they left the community and now, And some of it I think maybe comes from the bitterness that happened with us leaving Afghanistan and to see how much hard work we put into it. The touch points that we had with so many Afghans because we were there supporting them. I know for a fact that if I go back to the community that I grew up in, I'm never gonna [00:13:00] have that feeling. We're never gonna withdraw in a way that I feel like I'm gonna lose dignity in the process of it. Instead, if I invest in my community, I think I'm actually gonna see a tangible outcome from it. So I think there's a multitude of factors but those are all combined with I think a lot of veterans are business schools like veterans for the most part.

There's usually a pretty solid veteran constituency in most business schools, mainly because we pay our bills because of the Post-9/11 GI Bill that helps us pay our bills. So, we're great as far as a fiscal risk, we're a great fiscal risk for business schools. We also withdraw from school at a far fewer rate than your typical person.

When we commit to something, we do it, we finish it, even if it's sometimes not the best fit. And we're maybe, we, we, uh, you know, bit off more than we could chew. We're not quitters. I. So, we'll, we'll stick with it until the end. And then because of that, a lot of business schools are kind of adopting, the opportunity of the ETA opportunity or mergers and acquisitions opportunity.

A lot [00:14:00] of 'em are considering frontloading some of the entrepreneur classes. Traditionally the entrepreneur classes are usually an elective at the end of business schools, so you're getting it. Like I went to a really good business school and our electives for entrepreneurship were at the very end, and I'll be completely honest, I was smack dab in the middle of interviewing and I wanted to know this stuff about the entrepreneurship stuff, but it was fun versus, Hey, I'm gonna take this and put it in, into practice right away and now.

Because of both the ETA clubs that are developing, but also some of the ETA classes that are developing earlier on into people's business school tenure. Now you're getting a lot of students who are interested that are in business school. Well, business schools especially good ones, are a lot of times full of veterans.

And then on top of that, now you have a lot of undergraduate business students who are interested in hearing a little bit more about it because they're like, whoa, do I really even need an MBA?

Why can't I do this with a bachelor's degree? The company that potentially I'm looking to purchase, the guy [00:15:00] who ran it didn't even have a degree at all.

Great example is, my grandfather and his brother bought and then ran and established a company, bulk fuel distribution company. His brother had a college degree. My grandfather did not. My grandfather was a veteran of the Army Air Corps during World War II. My dad was a corpsman in the Navy and then a PA in the Army and ended up running and operating a clinic for 35 years.

You know, the way that we look at problems, how curious we are, how open to not necessarily being the perfect subject matter expert on everything that we approach is, it's a great attribute for people to be young business owners or new business owners.

Andrew Kazlow: Patrick, there's so much to react to there. I think what I will point to is, it almost seems to me like there's a humility, a unique humility that comes from that level of experience. Someone that's been in the service and had to sacrifice so significantly for their country to then come back and [00:16:00] decide not to start their own thing, which requires a certain level of almost like a pride and a self-confidence that's like, yeah, I'm gonna start a new thing. That because this doesn't exist. There's almost a humility in looking at an existing thing, taking over, optimizing that and taking it to the next level that I love. And I think from what you've shared seems is pretty unique to the veteran entrepreneur.

Now there certainly are those that start their own thing and that's beautiful. I love this point about some of the unique elements that make veteran entrepreneurs uniquely suited to the entrepreneurship through acquisition route.

Patrick Flood: it is just something that like. Any of us. So the smallest unit in the United States, military is two. So everyone is from day one, you're always either partnered with somebody or responsible for somebody else. One of the challenges that I think that we've seen sometimes and a lot of veterans do great at startup entrepreneurship, but startup entrepreneurship has a tendency to be very isolating and alone. If you're getting out of the service and you're going through sort of an identity shift and you're going through a [00:17:00] lot of the psychological distress and then on top of that, you're also by yourself doing it. It ends up becoming potentially critical mass and it becomes very difficult for some people because of their resiliency, because of other stuff that a lot of 'em will troop through it and do a great job.

The aspect though that you're talking about is. When we are in the military, we're never satisfied with how everything is because it's just been the way that we've been developed. We're not prideful about improving a situation or improving an operation. We just think that that's what's gonna happen and we're gonna do the best that we can while we're in that position.

And then the person who follows after us is gonna be able to do the same thing. And there's gonna be things that we don't get to. I think the more time you spend in the military, the more wise you become about that is that, you know, we typically change jobs every two to three years.

And usually it's you change one that's like your subject matter expertise. And then the other job or the opposing job that you do sort of in the middle is like a staff job, which means that you're just on [00:18:00] a team. Suddenly it's you and the other managers of the different verticals that are all trying to slug it out, trying to figure out how to make things work, making the sausage.

But then when you are in those positions where you are the person in charge, I have found that most veterans, not all, 'cause we have outliers too, of course, but most of us are conditioned to say to the person that we're taking over from, what is it that you wanted to achieve when you got here? What is it you were able to achieve? What are the things that surprised you?

What are the things that you weren't able to get to that you would like to, that are high priority? And what are your critical factors? And then from that, those are exactly the things that a good business owner would talk to a seller about. So great example is the very first opportunity we had is we were not the first offer, we were the 12th.

And our veteran, because of partially the coaching, but also really because he's a veteran, asked questions of that nature and he's the only [00:19:00] person who asked the owner what they did before they owned the company. And so it turned out that they were an FBI special agent. So that was good to know. What was your motivation to buy it to begin with?

No one had asked her that. No one had asked, what would you plan to do with it if you stayed with the company? No one had asked that. Like they'd asked all the P&L and quality earning questions that you would do if you're doing good diligence as far as financial diligence, but they didn't ask the human capital questions that to us in the military, it's just what we do. We just call it building rapport. And sometimes what's funny is that sometimes in the corporate world, that makes people real uncomfortable. We are used to saying like, meeting someone and 10 minutes later if you know that you're gonna be working with them for a long time.

Are you married? Do you have kids? Where do you live? What are your hobbies? Blah, blah, blah. Super fast to determine, hey, where are the points of commonality? Where are the things that we can then find that we can agree on? And then let's focus on those things and let's build out a team [00:20:00] based on the things that we all agree on instead of, like in the corporate world, my experience has been.

That you start asking people if they're married or if they have families or whatever, and they get real unsettled and then they're like, why are you asking this? And then, the same thing happens is that in typically the corporate world, if you're a manager, director, partner, whatever, and you have employees or direct supports that are coming to you with issues, typically it's you're focused on their performance, right?

Well, it's a weird disconnect, I think in a lot of the corporate world where it's like you focus on only the performance and not the person. In the military, you can't divorce the two things. As an example, I had a couple of soldiers that had just gotten into the army.

I was deployed to Afghanistan the first time. And their first duty when they came into the army is they had to clean up a site that was in, I'll just say it, it was, it was a, it was a murder suicide in post housing and our soldiers had to clean it up.

So that was their first job in the military. 'Cause it's part of our responsibility as the command. [00:21:00] So the very next thing that they did is pack up and then go to Afghanistan. My responsibility to them at that point was not to see if I could get 23 hours of work out of them a day for the entirety of their employment, was to make sure that their whole person became a whole person again, so that then they could start focusing on the things that they needed to focus on.

I couldn't have them distracted because it's that important. And so in small business, which I just had a great conversation today with somebody about how something that is sometimes missed, and I heard it on the Veteran Business Battle at Rice as well, is that the number of divorces that end up being precipitated because the person who purchased the company doesn't talk to their spouse about what's going on with the free cash flow profits. Is one of the main reasons that there's issues at the very beginning. And so what's interesting about the military is that we look at the whole family because at the end of the day, the soldier, service member [00:22:00] is the whole unit. And so if the family isn't taken care of, then the service member's distracted.

If the service member's distracted because he doesn't feel like his family's taken care of or her family's taken care of, then I'm not getting all of it that I need to, and he needs to be paying attention to his job. And so, in small business, that's a real thing. The person who's been doing billing for 15 years on potentially a legacy or antiquated system is also the person that knows where all the bodies are hidden, and all of the details of the company.

And if you come in great guns saying, Hey, I'm gonna revolutionize everything and digitize this, and you're not necessary anymore. You're now redundant. Now you're potentially taking this great asset that the company had to be able to help you with continuity, and you're just getting rid of them and you're looking 'em as sort of an L on a P&L.

What's interesting about the military is that you start looking at people and this maybe sounds sociopathic, but you start looking at people as like the tools [00:23:00] that they are, like what is their capability? You generally move past the superficiality of what position are they in, what rank are they?

And then you literally look at, okay, what are they contributing? So is this person, the person that does this job, but with reticence every day? Is this the person that shows up and works with alacrity even though they're miserable? you know, Is laughing in the rain? Is the person who creates good morale? Is just the person that is maybe not recognized often, but is extraordinarily credit critical within an organization and could be the critical node? And it's interesting is that if you're going through good diligence, a lot of times a really astute serial entrepreneur who's done multiple searches or whatever, small businesses, those are the questions that they ask and they do it because they've had a lot of iterations.

Going through it and seeing usually things not work out great because they didn't address those issues right away. What's interesting about veterans is that when you illuminate the fact that that could be an issue, they can [00:24:00] identify it super fast. The challenge though, to those veterans is then, what tools do they go back into themselves to be able to reach into, to be able to then mitigate the opportunity cost of, okay, they identified that there's an issue.

Do they have a vendor or a way to deal with the issue that can mitigate the issue and then be able to move on so you don't lose profitability in the meantime. That's partly the reason that we're structured the way we are, is to say. Our goal is to ideally flatten the J-curve so that after J-curve being, after you make an acquisition, typically it dips off because, there's sometimes there's elevated numbers right before an acquisition, all the other stuff to try to increase value.

And then afterwards you're like, oops, marketing dipped off, customer dipped off. People aren't that interested. The new employees or my employees that were the former owner's, employees aren't super psyched about working for me. You can start mitigating a lot of that stuff if you have someone who can help you and be able to look at it with you and [00:25:00] identify those issues earlier, and then reach into their own bag of tools or allied service providers and be able to say, Hey, here's a guy, girl who's vetted,

who I know I can apply to this issue quickly. So instead of that 18-month opportunity cost of identifying and solving a problem, now you're looking at six. So then the likelihood of you being profitable a lot faster is a lot better. And then, you know, if you're looking at the national average, I think is one out of every three acquisitions is profitable in the first three to five years, you're looking at almost three outta three. Because you're mitigating the loss of profitability issues and one of which is poor acquisition. Bad M&A, bad diligence, either wrong fit for an opportunity for someone, they're over purchasing and therefore over risking, or over exposing themselves to risk. They don't have enough experience going through the diligence process that they're missing key red flag items.

Or they end up leveraging themselves that, yeah, the bank will give 'em a loan, but it's probably not wise for them to [00:26:00] leverage themselves quite that much because now, in the first 6 months to 18 months, if there's ever anything that's a hiccup. Now they can't make payroll. So, all of that stuff goes into applying multiple iterations of other people having done it to be able to advise them to make sure that you're mitigating all that stuff.

So it's a more conservative acquisition initially, and then after that they can scale in a way that should be at least regionally up and to the right instead of having that dip. The other thing that we do a lot, special forces, which is my background in the military, is we always talk about crawl, walk, run.

And then by with and through. Those are the other things. And so what we talk about is we partner with people, we don't make them subservient to us. Our goal is to be able to get them to one, watch us do it, two do it together. Three, they could do it themselves. And so the sooner we can get the veterans to do it themselves, the sooner than that the nonprofit who is providing these advisory services, et cetera, can then disengage and move on to the next one.[00:27:00] 

'Cause all we're trying to do is mitigate the initial risk.

Andrew Kazlow: So Patrick, you've convinced me that uh, veterans are very well suited to this style of entrepreneurship, and I wanna talk more about nonprofit and your story there, but maybe before we get to that, walk me through how financing works for the entrepreneurship through acquisition process.

Let's say you have a veteran entrepreneur come to you. They've got some amount of personal capital obviously that they're willing to put up to make this happen. You've got SBA loans, potentially, you've got traditional financing, and then you have this slice somewhere for individual financiers, which would be an option available to the typical angel investor.

Walk me through how this timeline typically works where an individual investor, a small, single family office,

Patrick Flood: Yeah,

Andrew Kazlow: might fit in this process, how this works, and then we can get into more nuance around your story and how you guys equip these veterans.

Patrick Flood: I think it's helpful that [00:28:00] I did talk a little bit about the advising that goes into the sort of M&A process, and then also the post-acquisition stuff, because that's where some of this stuff gets factored in. As an example, all of the veterans go through our program before they go.

And start a search. They establish a buy box. One of the things that they need to be able to establish in the buy box, so geography, size, business industry, business, timeline to ownership, and then they also have to pre-qualify for an SBA loan. Does that mean they have to use an SBA loan?

Absolutely not. But it means that they have to be able to qualify for one. So we already vet people to make sure that their finances are in line, that they could get an SBA loan. Our goal is to try to be able to make sure that they understand the cost of capital. And the cost of capital could mean a whole host of different things.

It could mean time, it could be money, it could be interest, it could be control. It could be a lot of different things. And so for us, really. As then they find the acquisition, they already know typically that they get a letter from a bank that, hey, you could be pre-qualified up to blah, blah, blah. And then from that, yeah, you're buying it just very similar.

The bank writes you a letter to say, Hey, you've already pre-qualified. It's, you know, those letters of intent. And then it's, uh, and then from that, [00:29:00] you then can approach a seller or a broker and say, Hey, this is, you know, this bank would lend me $4 million or whatever.

The goal then is as you go through the transaction, you negotiate, and the cheapest way to be able to do it is seller financing. Sellers typically have the lowest interest rate on their debt. They don't gain any control. They do get paid first. There's some nuance to the new SBA rules where it's turned off some of the seller financing because now, um, at least the last reported, and we just did a webinar on this, is that, uh, the bank needs to be paid off first, before you actually pay off the seller's note. It used to be that you could pay a seller's note off first and then continue to pay the bank loan off.

Now, sellers are maybe a little bit more reticent because of they don't wanna be stuck in, 'cause typically SBA loans are 10 years, they don't necessarily wanna be stuck in a lien situation for 10 years. So we'll see how that turns out. But then they go through it and then they look at their own capital and they say, okay, how much of it do I need to keep as a capital reserve?

That's a good idea. How much do I need to be able to, to then, you know, am I gonna scale? Am I gonna do something different? How do I leverage [00:30:00] that or how do I de-risk you know, my opportunity? And then from that is where you can then reach out to outside capital institutions.

Could be anything from private equity investment, limited partners being able to come in, angel investors, independent sponsors, you name it. And then for us, we look at the terms that they're being set and we just make sure that the terms aren't so that they're predatory toward the veteran and that the veteran won't eventually lose control of the company based on the way the terms are set.

From that, we then have a partner, a banking partner that then goes through the entirety of the capital stack and gives a couple different courses of action recommendation and then what typically the output is for their SD, what their debt coverage is. What that looks like long term, and that all has to do with what their long term vision of the company is.

Knowing that the long-term vision of the company is probably gonna change, but at least being able to set, Hey, this is what we believe the 10 year time horizon looks like. We think that we're buying it to sell it at 10 years. [00:31:00] We think we're buying it to grow it at 10 years. We think we're buying it to build it during that 10 years.

But being able to understand that ahead of time and then from that you can leverage the different types of capital so that you could say, Hey, angel, investor. You know, we wanna make sure that you don't have a call option so soon in the process of it that we then have to have an emergency recapitalization and it causes a lot of financial stress to the company, which sometimes happens.

Andrew Kazlow: So Patrick, let's say that I'm a veteran entrepreneur. I've got an interesting deal lined up. I'm out raising some capital for this. I'm talking to different financiers. I come to you as an individual angel. I know you're active and you're interested in my area of focus for this company.

What are some of the key questions that you would ask as a potential investor in that scenario? Obviously, a lot of that would depend on the company and the story itself, but just generally, what are the categories of questions that you would be focused on that are unique to [00:32:00] this entrepreneurship through acquisition model?

Perhaps distinctive from the startup investment opportunities that angels are most often could be looking at.

Patrick Flood: So I think one of the things is how much participation do you actually want? Do you wanna be an active investor or do you want to just be able to provide financing? That's a big question. And that goes back to the cost of capital. So the cost of capital could either be money or it could be time or relationship that now you have another person that may be part of the caveat of the terms that they said is, Hey, I want to board seat, or I want to be able to be part of this.

Mitigating factor that to some of the people that have talked to us who are angel like investors. I feel like there's almost a different term that needs to be created though, for the angels in the ETA space. And depending who you're talking to, you could end up down a total different rabbit hole and be like, oh, that's what you meant. And you're like, shoot.

Like Some people, when you talk about angel investors are just like, oh, it means they're only gonna invest in startups, and you're like, not really. Angel investor by definition is just someone who's gonna provide personal capital to be able to then help somebody do whatever and they expect [00:33:00] some kind of return from it.

It's doesn't mean that it's only startups, it's just that's the way it's principally been used in the past. For us though, it's like, okay, what relationship do you want? So A lot of angels or people that have considered individual investment with us so far, one of the main factors that they were interested in doing it is because they're not gonna be doing it alone. The other thing that sometimes the angels were concerned with, the people that were individual investors were concerned with is, okay, I'm gonna give money to this veteran that say 10% of the equity of his company, I'm gonna give 10% of the equity.

Does that mean that I'm gonna be providing five hours of mentorship a week, and I'm gonna be able to help 'em grow the company, and I'm gonna be able to benefit from it because I gave 'em a little capital. I'll be able to meet him for coffee, be able to connect them to my connections, be able to make sure that things are going easier, or did I just get a 60 hour a week job that I wasn't planning on because this veteran is in the weeds with not having enough experience running this company [00:34:00] that now I am basically running this company as a shadow governor. And so the great thing about the working with the organization is that, the veteran gets a small business advisor and he gets an executive coach.

That small business advisor is connected to an allied service network. So the goal is that if there is an angel investor, that their network, which is typically would be the allied service network, would be then married with that Allied service network that happens to be within that MSA, so that then eventually, if that angel investor goes and does his own thing, now you've gotten another vetted allied service provider from someone who you can trust.

Dual value proposition to everyone.

Andrew Kazlow: So, key question is how much involvement are you as the entrepreneur expecting from me with this portion of capital that I'm considering allocating. What else would you be asking about? Let's say we're clear on that. Okay. This is gonna be a five hour a month kind of thing. We'll meet for coffee and that's it.

Great. What else would you be focused on or interested in?

Patrick Flood: And then what are the terms as far as, when do [00:35:00] you recapitalize? What is the buy option, call option? What if, because it's different. So these companies. The number of people multi fund investors that are like, oh, I rolled to zero.

If these companies roll to zero, it's a big problem. It's different than having a startup that just couldn't quite get the guns to go to market. You're taking an existing business with an existing portfolio and driving it into the dirt, and so that's a big problem.

Andrew Kazlow: I think that's so important. I mean, let, that I, that indicates that this is a separate style of investment. This is potentially, you could, you could consider this a style of angel investment an asset that could receive angel investment, but the return profile is very distinct from the typical.

Startup and so there is a piece of the portfolio that can and should be allocated to these super small high growth companies where the expectation is we want this to go to the moon because that's how it's gonna return the overall portfolio, and we're okay with rolling a lot of zeros. That's the venture mindset that I'm reading right [00:36:00] now.

A book by Ilya Strebulaev. It's all about this venture mindset. This is very different and it sits somewhere else in your overall asset allocation because the return, profile can and should be different based on what you just shared.

Patrick Flood: Yeah. If you're a venture investor and you're investing in 200 companies, you're hoping one of 'em hits and one of 'em becomes that, big deal becomes the Uber becomes whatever. If you're a private equity investor, which is probably in the middle of where we are.

Now you're a private equity investor. 'Cause we're looking at really micro ETA. So we're looking at things that are typically the size of a seven a loan, which is four, $500,000 to 5 million. That's potentially gonna increase up to 10 million, but we'll see when the SBA comes out with that. But it's usually a smaller investment.

If you're looking at the private equity plan for companies that are low middle market private equity, you're looking at. Anywhere between three and five x returns typically. So for us, you're looking at something even lower than three x to five x returns. Is it still gonna be better [00:37:00] than a mutual fund?

Yes. Is it gonna be better than real estate investment? Yes. Unless you're investing in California, is it, is it better? Is it better than is it is, it's just, it's a little bit more conservative where I think my opinion that it would appeal to family offices is as family offices are considering a more conservative approach to investment is that a family office, like some do already.

They create holding companies, right? One of the great opportunities that we're having right now is that a lot of those holding companies are divesting as they're disaggregating and they're starting to bring those individual properties to market now. Our veterans are gonna be well suited to be able to take over those companies as individual companies, not as part of a larger hold.

And that's because, family offices eventually get complex because families get big. And so, eventually it gets to a point you're like, Hey, this doesn't make any sense for us, that now we're running like a 35 company conglomerate with cousins and all the other stuff. So eventually you start saying, Hey, we need to simplify and divest a little bit and figure out how we can center this to figure out what we do best at.

But at the same time, it gives you an investment strategy to be able to [00:38:00] say, we can become limited partners essentially, and each of these investments knowing that it's gonna grow and in the meantime, you're providing a low cost to capital to veterans that then is providing a return to you. So, it's not the same.

Obviously we're a nonprofit. We love people to be able to donate to us, create donor vised funds, be able to ma maximize the capital gains opportunity. But the other part of it is that the likelihood that whatever money that you're investing in, goes directly to a veteran. And it obviously provides you a much better return than setting up a donor advised fund or just donating directly to a nonprofit.

Because you're really giving the money basically, almost directly to a veteran to then best use it. And you're also gonna get a tangible return on it. Tangible, not just meaning financial, but tangible meaning you're gonna see that the money that you invested changed this person's family, changed the business, changed all of these things.

And so sometimes those angel investors we've talked to, some of them are the folks [00:39:00] that have disaggregated companies, they're now 67 years old. They don't want to go off into the sunset. They want to fight the dying of the light. As they're doing that, they're like, I have so much that I can still give.

But I don't just, I want my money to make money. And what's interesting is that, that was some of the very first conversations we had with people as the nonprofit who we thought were potential donors and are now donors. But one of the questions was, Hey, is there a way for my money to make money? Like, this is interesting, I'd love to be able to donate, but it seems to me like it might be an investment opportunity as well.

And we were like, yeah, it is. I mean it's similar to investing in an impact fund. But yeah, it absolutely is, and so. 

Andrew Kazlow: This is one of the things that strikes at the heart of what I think angel investing is all about. And that is the personal connection, right? This is a very intimate form of investment. It is me, my family, my personal assets connecting with you, an entrepreneur that I trust and believe in, and handing [00:40:00] you a check with some value add, some expertise, some kind of additional support that you wouldn't get from your favorite bank or big source of capital.

You know, Maybe there's some extra value add that can provide like, sure. But this is very intentional, very intimate form of investing that is at the heart of what angel investing is all about. So, I love that point.

Patrick, tell me, I wanna make sure for the sake of time we're able to get to your story.

And, you know,

you've mentioned, the nonprofit and your organization. You served in the military for a couple of decades, so thank you for your service. And you've been in the consulting world, did I see you did some acting work at some point as well? 

That's pretty cool. Tell me how you got into this world and how you get to the seat that you're in now.

And then as you look towards the near future, what are some of the things that you're excited about for the nonprofit specifically

So as, as much as you can get to that in, in the few minutes we have left.

Patrick Flood: yeah, I'll start the story in a cold night in Wisconsin. [00:41:00] Um, no. Ultimately, so I went to college on an RTC scholarship, graduated from college. The Army got really small, so I ended up in the individual ready reserve instead of either the active duty or the reserves. Worked in politics for a little while, moved out to LA.

'Cause a friend of mine had moved out there, started working in entertainment. Ended up as a working actor. Then actually worked, it was my primary source of income for about three years. Unfortunately I had a younger brother who committed suicide.

And so when my younger brother committed suicide, it gave me a serious point of self-reflection where I just didn't feel like I was serving at the time. And I wanted to be able to get in a position where I could serve others more. I wasn't doing anything wrong, but I wanted, I just wanted to be able to make sure I could give more of myself to other people. And some of it was, I'm sure, guilt over the fact that my brother, who was my closest sibling had died and a lot of other things. But a lot of it was because that, I think that's the way that I always was, is that I feel really good being able to provide service to others.

And so the Army at the time, it was 2000, had an opportunity for me to come back into the Active Army for 12 [00:42:00] months. I came back in for 12 months as a communications officer. Got assigned to a special forces unit, and then nine months into me being assigned, September 11th happened, so obviously, ended up in Afghanistan.

Getting all of our stuff ready to go to Afghanistan. The day I could have gotten outta the military, decided that, hey, the big guy probably put me in where I was for a reason, and that I had some other purpose and maybe the things that had happened. Up to that point were lessons that gave me a different sense of resilience that maybe others didn't.

When confronting something that was so, unknown as going to combat for the first time. It was almost everybody's first time going to war. That I knew when I was in a special forces unit. From that I went to Iraq had a great job, had a great boss as well. That boss said that he thought that I had a good path as being a Special Forces Officer, a Green Beret.

Came back, trained for a little while, went to Special Forces Selection, made it, and then ended up going to the 7th Special Forces Group serving, as a Green Beret. Then just about 20 years, like 19 and a half years as Green Beret. My last job, however, in the Army was I was a recruiting [00:43:00] battalion commander in LA.

Which is part of the reason that I'm even doing what we're doing now is because I think it's all part of the recruiting story, is that in LA you have a lot of people that served in the military. I think per capita or maybe just gross numbers. It's like either the second or largest city of number of veterans, but almost self-identifies, because I think some of the negative stigmas that come along with it, and so for recruiting, it's sometimes very difficult for recruiting because

people don't know that the veterans are all around them. One of the things that we did is we encouraged the veterans who had come back to LA to start engaging the recruits, and we worked on making sure that their customer service experience as a recruit was good. So making sure that whatever they wanted to do in the military, if the Army wasn't a good fit for them, then we would send 'em over to the Air Force, the Navy, Coast Guard or the Marines to make sure that whatever experience they had was a positive one, so that then when they came out of the military, instead of me having 300 recruiters, I'd have 30,000. And it worked really well. We were the number one recruiting battalion for about 16 [00:44:00] months in the country, which is unusual for a large city like Los Angeles.

And so from that, I ended up going to Duke for my MBA. At Duke they focus on how can you do good and do well at the same time? One of the things that I thought of at the time was, wouldn't it be great to be able to build a nonprofit that could be self-sustaining? And most of the veteran nonprofits are really emotionally bound based on us, having people get injured during combat.

For those veteran nonprofits, it would be great to be able to have a financial engine that could eventually create an endowment. That would be something that would be consistent regardless of whether or not we're in combat, to be able to then provide to them grants to make sure that they could do the things like mental health services and everything else that are required.

'Cause in times of non-war people don't give to those organizations and for us to be able to one do that, then I put a pin in it started working. Just like everybody else, transitioned head down, worked hard for about three years. Had an opportunity to work with the Veteran Transition Organization at that organization.

I was on the [00:45:00] corporate sort of engagement, like a career fair almost. And then that same night they had an entrepreneur panel as well, and the entrepreneur panel only focused on venture opportunities. And I, at the time was working with our M&A and valuation services at the financial institution that I was working at, trying to, you know, 'cause we had just acquired them from a different firm and we're putting them to work.

And I was like, between this and my knowledge of my dad owning a business, being a veteran, my grandfather owning a business, being a veteran, there seems to be a better way to mitigate some of the risk of this. And maybe there's people that can help. And there was a gentleman there that night that was like, Hey, how can you help me?

So I called around for about three months and couldn't find anyone that could really help him dded the stage. He was, he was, he was interested, he was motivated. I think he had the skills, but no one could advise him to be able to get to the right places. There's a lot of sharpness that goes into people that are trying to search on their own.

And so I'd put a pin in it again and then ended up moving from LA to Houston. During that time, worked for a great company, because I moved to [00:46:00] Texas, there wasn't the same position, so they ended up, giving me an offer of a severance package, which is great 'cause they're super generous. Had a great mentor who was like, Hey,

I know that you want to be able to serve people and that's your end game. But if you go and buy your own thing, which is what I was going to do, then it's gonna take five years before you could really start. Or you could see if the finances make sense, that you could essentially not take an income for a year like every other startup.

And so it's funny that I started, I, I have a startup that is telling people that there's a different way of doing it, but everyone has to start somewhere. It's irony. So from that I was like, okay, yeah, I think I could afford it. I ran the numbers. And then from that I was like, okay, now all of this team that I'd already built, my search team, I was like, are you guys interested in maybe being part of a nonprofit instead?

And then we're gonna not do it for me. We're gonna do it for a hundred other veterans in the next five years. And they were like, yeah. And so from that, we started. For a year, we just built the operations of it, made sure that we had all the facets that we did. Interviewed, I don't know, 150 [00:47:00] business owners, maybe a hundred veterans, figure out what the sweet spots were.

Brought in people with tons of experience, brokers that had thousands of deals, diligence people that had done thousands of deals and talked to them about what the common obstacles were figured out. I think, how to mitigate most of them. Obviously, some of it's a work in progress.

Small acquisitions are a knife fight. They're not strategic missile launches. It's challenging and, and there's always gonna be surprises, but being a little bit flexible to it and agile is great. From that, being able to then start seeing if there was, what was the appetite within the veteran community to get going?

So about a year ago, we were fully operational and after three months, we had our first veteran that was acquired. Obviously Pegasus unicorn. It doesn't normally happen that fast, but it worked really fast. We learned a lot from it. It was a great beta test, but there were things that definitely needed to be improved upon.

At the end of that year, we had about 120 people in the program. Now we have 190, we have 11 active searchers. And like I said, we have one. That's close to closing an acquisition and four that are pretty close to [00:48:00] closing as well. We're a nationwide nonprofit. I happen to be located in Houston, so the headquarters in Houston. Wanna make sure that Texas precedes all the other states is knocking it outta the box first.

Challenging of course, because Texas is, Texas. Texas is the size of most countries. Maybe continents. I just went to a event yesterday that was at San Antonio, but it was there. All the UT systems were there. All their student veteran organizations. So we're talking to people from El Paso and Rio Grande and Tyler and like all of these other Texas colleges now was like, man, I think that we're gonna, we're gonna have to be able to be remote to allow you guys to know that there's an opportunity to some of this stuff.

But it's been great because it's been a catalyst for these veteran organizations. Like in San Antonio, there's so many different colleges there that weren't talking to each other. And so what we're saying is that, hey, we're gonna be there in six months to do an ETA event at UTSA. We're gonna invite all these other colleges.

We're doing the same thing at Rice. Rice is working with us. They're bringing in University of Houston, Texas A&M. They're all gonna be coming to Rice to be able to [00:49:00] then go to the ETA conference. As long as they go to our orientation and then the AAR that's afterwards or after action report to make sure that they're understanding the opportunity.

But they also understand there's a whole group of people that wanna see them succeed. And it's not us selling what we're doing. I just want them to know that they're perfectly capable of doing it. They just need the right components to be able to do it. And quite frankly, I want the veterans to have an asymmetric advantage over everyone else that's competing.

Because of trying to mitigate the opportunity cost of them being away for so long fighting a war that was so long.

Andrew Kazlow: Patrick, I see we're over time. Do you have just a second for me to ask a couple 

more quick questions? 

I want to, I wanna try and wrap this up, but I apologize for letting us get, get along. Um. I love it. So, okay, Patrick, you, I talked a lot about what you guys are doing. Tell me the name of the company.

Tell me what the process looks like. If I'm a veteran listening to this and I want to learn more about entrepreneurship through acquisition, or I'm an investor listening to this and I want to get more involved in helping finance some of these, how do I engage?

Patrick Flood: Yeah. So the, uh, website and also the name of the company is owners, O-W-N-E-R-S-N-I-N, honor, H-O-N-O-R. Owners and [00:50:00] honor.org. You would go to the website if you're interested in it, you would go to buy a business. You can also sell a business through us. We'll help veterans help them sell a business.

But you go to buy a business, you'll click down and it'll say, start your journey at the bottom of it, click on that. There's be an inquiry form. After that, there's an interview to make sure that this is the thing that you're actually interested in. If you're interested in doing startup instead, and you just happen to find us because we're an entrepreneur organization, then we'll refer you out.

There's a whole bunch of partners that we have that do startup. They do the same thing for us. If someone ends up at them by, thinking that they do everything, then they pivot 'em back to us, which is great too. That's been a huge thing that's happened over the last six months is all of us working together to make sure that veterans understand there's different pathways.

Um, and then. From that? Yeah. You, uh, we, main thing that we find out whether or not you're a veteran, a spouse, or a gold star family member. In other words, a member of your family is deceased in active duty. And then we just validate that, make sure that their terms of service are ones that they would be able to get an SBA loan.

Then they come in, we're integrating right now a [00:51:00] straw man, pre SBA qualification that can help flag them right away. So if they're gonna have to stay in that sort of waiting stage for a while while they clean things up, that's fine. You can be in the base camp.

There's really no time limit. It's really about them self-selecting. We're not trying to push anyone through the process. We're really just trying to lower the barriers and obstacles to make sure that they know how to do it.

Andrew Kazlow: And if I want to invest in these kinds of opportunities, how do I get involved?

Patrick Flood: Yeah, the best thing to do right now is to probably contact me directly or to go to the website and go to partner with us, and then just fill out the partnership form and say, Hey, I'd like to partner. We don't, because we don't have an SEC license. Actively seek out investors. However, we will be able to refer, especially investors typically have an investment thesis.

We can then refer our veterans to people that within the investment thesis parameters to make sure that the opportunity is there and that the veterans aware of the opportunity I.

Andrew Kazlow: Great. Patrick, final thoughts or takeaways you would leave our [00:52:00] investors with, as we wrap up?

Patrick Flood: Yeah, so we say it all the time to the veterans. You didn't serve alone, don't search alone. I would submit that very few people ran their companies alone, and most in angel investors, I wouldn't say all, but most angel investors are former entrepreneurs themselves. I think it's a great way for a former entrepreneur, someone who's maybe starting to consider their next stage of life to be able to then.

Still have activity going on and really being able to create a tangible benefit without having to have all of the risk associated with either being a majority investor or with having to take on all of the advisory role.

Andrew Kazlow: Love it. We'll, Patrick, thank you for joining us today. Thank you for your service, and I look forward to our next conversation very much.

Patrick Flood: Thank you. Appreciate it.

Andrew Kazlow: Thanks for listening to this episode of The Diligent Observer. I'm your host, Andrew, and if you're an angel investor looking for essential angel intel in five minutes every week, I think you'd enjoy my newsletter. I send my best stuff, interesting deals, and more straight to your inbox so you never miss a thing.

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