Introduction
Discover the journey of Justin Turner, co-founder and managing partner of Traction Capital, a permanent equity fund that has successfully acquired four small businesses. In this insightful Q&A, Justin shares his expertise on building a holding company, the differences between permanent equity and traditional private equity, and practical advice for entrepreneurs interested in acquiring multiple businesses.
Founder Success Story QnA
Can you share your background and what led you to start Traction Capital?
Sure. So I grew up outside of Seattle, about an hour and a half outside of Seattle. I went to a small Christian private school in the Seattle area called Northwest University for undergrad, studied finance and accounting there. Uh, and then I worked for a handful of years out of undergrad and during my senior year undergrad for a kind of boutique investment bank out here in the Northwest. I was on their mergers and acquisitions team working with businesses that were based on the West Coast. And you know, learned a lot doing that, great experience. The my boss from that time period is still a dear friend and a great mentor to me. Um, but I eventually got got pretty burnt out on the investment banking side of things. And you know, we would, we mostly did sell side advisory work, so working with business owners that were looking at having an exit, and we would kind of help manage and run that process for them. But we also had some buy side clients who retained us to look at acquisitions as part of their growth strategy. And you know, I was young at the time, and I would go home and think about like, you know, what would it, what would I do if this was my business, uh, rather than just a client’s business. And I eventually got, you know, burnt out on what I felt was their lack of ability to, you know, take the risks that that we thought were necessary to really have the growth that they were looking for. And so I, I knew that I wanted to get over to the buy side. And in my mind, that was working for a private equity group where we were going in, putting our money to work, putting investor money to work, but then we were responsible for for growing it. And that seemed seemed like a lot of fun, seemed exciting, uh, it was what I was passionate about at the time. So I took a job with a private equity group down in Austin, Texas. Uh, our focus down there was on acquiring majority positions in business that was that were headquartered in Texas that had sub 50 million in revenue at the time of our investment. Um, I was there, I was with them for about two years. First year was largely on the deal side of things, so a little bit of sourcing, a lot of analysis, a lot of due diligence, and then kind of working the deal with our partners up through the closing of that. The the second year I was there, I was largely on the operations side. I was VP of finance for a roll up that we were doing in the rotational plastic molding industry. So spent a lot of time all over Texas in our factories, in our plants working on the finance and operations side of things. Was in Texas for a couple years, wanted to get back up to the Northwest where I’m from, my sisters and my folks are still up here. So moved back up to the Seattle area in the end of 2016. Bought part of a small consumer products company with another family, helped run that for a couple years. And then I had some great connections that I had known before going to Texas that we all were kind of thinking the same way of, you know, we, it would be awesome to, you know, invest in and have a portfolio of small businesses here in the Northwest that we were coming alongside the management teams and figuring out, you know, how to grow the business for the long term. So I sold my ownership in the consumer products company and started Traction. Uh, we got our first deal done October of 2018, but we spent probably six months to a year, you know, looking at deals before we closed on our first acquisition. So October 2018 was the first acquisition.
How long did it take to find your first acquisition?
Yeah, I mean, we we had the concept, we knew what we were looking for, we knew we wanted to do, but it just took a while to find that first deal. And I think that’s probably a common story that you hear with a lot of, you know, searchers or other investors is when you’re first starting out, it it can take a little while, you know, to find that first one.
What differentiates Traction Capital from conventional private equity funds?
Sure. Um, you know, I think the biggest difference between our model, well, a couple differences between our model and traditional private equity. Traditional private equity is oftentimes raging, raising a large fund that will go out and make a lot of different investments out of that single fund. And that fund will typically have a 10-year life, and their goal is to buy companies, grow them and sell them, you know, as quickly as possible. So their typical hold period is going to be, you know, three to five years, and then they’re going to exit that and, you know, work on raising their next fund, and then go do the whole cycle over again. So there’s always an expectation of exiting the businesses that they buy. Our our model, you know, we’re buying businesses without the, you know, expectation or a defined, you know, hold period. Our goal is to own them for the next 10, 20 years. And that’s partly, you know, driven by our, you know, passion to help grow these businesses. I think, you know, you miss out on the power of compounding if you are selling after three to five years. And if you have a good business and you’re able to execute on the strategy, you really start to get the benefits of compounding the longer you can hold that investment.
Is what you’re doing considered permanent equity?
Yeah, I would say that’s a definitely a newer term, but yeah, I think I think for the most part, especially the folks on Twitter would would call that, you know, a permanent equity or, yeah, or long, very long term hold.
Is building a holding company a new concept or something that’s been around?
I think I think some people have always done it. Um, there’s certainly some large examples of people that have done it. I think for like Warren Buffett, he would be the greatest example. Yeah, yeah. Um, I think for smaller businesses, um, for folks that are using a, you know, leveraged buyout structure or buyout structure, I think it’s a newer concept. Um, so we’ll see how it proves out. I mean, I think most of the firms that are on the smaller side that are pursuing it are, you know, outside of maybe one or two, are are still very, very early on. I mean, we we started in 2018, so we’re hardly a long-term hold vehicle at this point.
What inspired you to start a permanent equity fund?
He’s certainly been super inspirational. I think very highly of him and their firm. And you know, reading the stuff that they put out, hearing him on podcasts, especially, you know, when I was coming back from Texas in 2016 and 2017, um, loved what they were trying to accomplish. I’ve gotten to spend a little bit of time with Brent, um, and yeah, a huge fan of what what they’re doing.
Why isn’t the long-term hold model more common in private equity?
Yeah, I think it’s definitely a small subset of the buyout industry that has the long-term hold perspective. I think there’s a number of reasons for it. I’m probably not an expert in all those reasons, but I think a big part of it at least on the larger fund level is driven by, you know, the need to return capital to investors, which are oftentimes, especially for the bigger funds, are oftentimes, you know, large endowments, large retirement systems that, you know, since the private equity world started, has been driven on putting money in, you know, it’s going to be locked up, you know, there’s going to be illiquidity for a period of time, but you’re going to get a in theory a higher return on those dollars for that illiquidity that you have. And you know, those, those for those investors need to get that capital back at some point. I think there’s also, I, I think on the investor side of it, the private equity side of it, they have to show those returns to justify the next larger fund that they’re raising, which drives their ability to make fee income and do deals, post a track record, and then raise a fund again. And so that’s just that, that’s the life cycle what the industry has been, uh, and I think it’s, I think it’s hard for the LP side of it to get on board with, hey, I’m, I’m going to have my money locked up in this long-term vehicle for 20 years. Like I don’t know what’s going to happen in 20 years. Yeah, yeah. So it’s definitely a newer concept. I think more and more people are going to be trying to go that route. I think partially, you know, on Twitter it’s because it’s the, you know, the sexy term, the cool term right now to try and be that person. I think largely inspired by Brent Beshore and Chen Mark and those folks.
What was your first acquisition and can you share some details?
Yeah, it’s a business called Sea Western. Uh, it’s based in Kirkland, Washington. It’s a distribution business that sells PPE products to fire departments across eight of the western states. Business has been around since the 70s. We bought the majority share of the business in 2018 from a brother and sister who are the children of the founder of that business. The primary product lines we sell are the fireproof clothing that firemen wear when they’re actually going out to fight a fire, as well as the breathing apparatuses, the SCBAs and the air packs that they’re wearing when they go out to fight fires. But we also sell all the hand tools, boots, gloves, station wear, all that side of things as well. That business when we bought it was just in Washington and Oregon primarily. They did a little bit of work in Idaho. It was about 15 million in revenue when we bought it. Uh, that business is about 24 or 25 million in sales per year now. So it’s been a nice little growth story for us, uh, largely driven by our expansion into new geographies. So we’re now in eight states versus the two that we were when we first bought it.
Who else is involved in Traction Capital and what was your operational involvement in Sea Western?
Sure. So there’s six of us at the Traction level. Uh, myself and two other partners. Oh, and the majority of the business, our VP, Peter Bell, owns part of the business alongside of us. And then we’ve got two gals that are focused on kind of financial operations for the portfolio. So Dale, Dale Payne, one of my partners, uh, pretty much exclusively focused on the operational side of things as a resource for the various companies that we’ve invested in. And then Peter does some work on the operations side, some work on the deal side with me. And then we’ve got two gals that do finance and accounting, one that’s kind of more a accountant and one that’s a controller that work with the businesses to help with month end close, bank reporting, all that fun stuff. With the first business, uh, we bought it from a brother and sister. The sister wanted to transition out pretty quickly. She largely ran the back office side of the things, purchasing, inventory management, accounting, and she wanted to transition out pretty quickly. So we hired some folks, and Dale from our team stepped in to kind of put together actual systems. The business used a lot of paper to run, uh, before we bought it. And so we’ve done a full ERP implementation there. Low hanging fruit, exactly. Yep, yep. Um, so we’ve implemented NetSuite there. Uh, we try and implement NetSuite across the portfolio. It makes kind of the reporting and analysis side of things easier at the Traction level if we have everything in the same ERP and accounting system. So we’ve, people from Traction have certainly been fairly involved in operations. I would say, you know, a little bit less so now as we’ve added to the team there and the systems are, you know, working to drive the day-to-day side of things there. But there was certainly folks from Traction very involved to help with that transition process with that transition and kind of those low hanging fruit opportunities of process improvement, putting in some tech.
What was your second acquisition and when did it happen?
Second acquisition, uh, it’s a company called Swag Off Road. It’s based down in Bend, Oregon, and we closed on that business in October of 2019. So a year later. Swag Off-Road, so it started out, um, the the guy that founded it, Troy, was was passionate about kind of the off-road side of things. He built Jeeps and Land Cruisers and originally wanted to build kind of bolt-on products for the off-road market, hence the name Swag Offroad. He pretty quickly realized it’s a very competitive market for bolt-on aftermarket, you know, automotive parts. And he transitioned to designing and selling light duty metal fabrication tools. And oftentimes these tools are used by folks that are in the off-road world, but it’s the folks that want to build their vehicle rather than use a credit card and bolt something on to their vehicle. So we design and sell light duty metal fabrication tools. Um, about 80% through our website, um, 16 or 17% through our Amazon store, and then we’ve got a couple of wholesale customers that we sell to. That business we bought, it was about three and a half million in revenue. Uh, that business is about six million in revenue for 2021, had a great 2020. Again, e-commerce, people are, you know, mostly stuck at home working on projects in their garage, and we sell tools to those people, so 2020 was a great year for us.
Can you tell us about your third and fourth acquisitions?
Um, the third business, we didn’t get any deals done in 2020. We got really close on one, um, but but due to COVID that one ended up falling apart, unfortunately. Uh, the third business we bought is an asphalt paving business. It’s based here in the Seattle area, largely serves the Seattle Tacoma market, and that business is kind of fluctuates between seven and eight million a year in revenue. And then our fourth acquisition that we completed this year as well is a business down in Portland, Oregon that is part retail, kind of bedding home goods store, part e-commerce mattress business.
What was appealing about acquiring an asphalt paving business?
Um, I the appeal for us, you know, that we we think the kind of greater, you know, Western Washington area is going to continue to experience a lot of growth. And the infrastructure part of it is a key part of being able to sustain that growth and support that growth. And so we think there’s going to be a continual need for the road maintenance, road paving side of things. It’s a business that generates pretty healthy margins. You do have capex issues to manage through, but you know, properly ran and focused on the right types of projects, you can generate pretty good cash flow from those businesses. Um, we have several contracts with um, kind of cable and fiber related businesses. So as they are going into neighborhoods, and you’ve probably all seen it where there’s a strip down one of the lanes of a road in your city that’s been repatched, we do a lot of that work. Um, kind of coming in behind the cable and fiber businesses as they’re making upgrades to their network, were contracted to come in and fix the roads behind them. But outside of that, a lot of it is is non-reoccurring. It’s it’s very relationship driven, um, on the kind of private side, and then the public side is is largely bid work.
How did you structure your capital for the first acquisition?
Sure. Um, I, you know, I think as we’ve talked about a little bit in the past, I think you really have to have the deal side of it lined up first. You certainly, you certainly should be having conversations with folks that you think will be potential investors, unless you have the ability to write the equity check yourself. Um, but having those conversations about you know, potentialities is one thing. I think having the deal, you know, either under IOI or LOI, so that you can take an investor, hey, here’s the deal, here’s how I’m thinking of structuring it, here’s what I’m willing to offer you on the equity side to help support the acquisition. Um, that that makes it real. But before that, you’re, you know, it’s all hypotheticals. Um, but I think having that deal in place, it can be very stressful, uh, signing the LOI and getting close to closing without having all your equity dollars allocated. On our first business, I think we finalized the equity raise two weeks before, you know, all the funds were supposed to be wired out to the sellers. So it can definitely be stressful. But um, we felt pretty confident that we’d be able to to pull it off. But having that live deal to be able to show them and say, hey, here’s the business, here’s the price we’re buying it for, here’s what we’ve talked to the bank about supporting on the financing side of things, here’s what we’re looking to raise on the equity side, here’s the terms we’re offering for that equity piece.
How did you cultivate investor relationships for your deals?
Yeah, the the relationship part of it is is key. Um, unless you’re able to, you know, fund it by yourself, which I think on the SBA side of things