No Sunk Costs

documenting my ETA career pivot

I recently quit my R&D career to buy and operate Merlins Pizza in Destin Florida.  I think the folks that were most surprised were probably my colleagues at Dow Chemical that saw me walking away from leading a technical collaboration with P&G that included 30-40 people and lots of obvious career upside laid out before me.  Of course, many of my friends and family were also flabbergasted to hear that after earning my PhD and a successful start to my career, I had decided to basically start over as an entrepreneur.   

In this post, I will quickly explain what I am doing and why I am doing it.  My motivation in writing this is 4-fold.  First and foremost, I owe a better explanation to everyone who was surprised or affected by the change.  Second, I hope that much of my existing network will sign up for this newsletter so we can stay in touch.  Third, my new career as an acquisition entrepreneur can benefit from laying out my thinking in writing for future partners to read. I hope there are more deals to come, and this newsletter could easily serve to nucleate future deals or collaborations.  And fourth, I want to evangelize for this career option because it is life-changing for the right person.

What the hell are you doing?

Amongst those who are familiar, my new career path is referred to as “Entrepreneurship Through Acquisition” (ETA). Within the ETA ecosystem, entrepreneurs that look like me refer to themselves as “self-funded searchers.”  I won’t give the full pitch here, but I will give a short summary, link the two holy texts (HBR Guide to Buying A Small Business and Buy Then Build), link my favorite podcast profiling others who have done similar things (Acquiring Minds), and link to the Search Fund ecosystem social network (SearchFunder). 

The short summary is that it is possible to buy a small business using SBA 7A loan financing with a 5-10% down payment.  If you search for businesses below ~1.5 million of EBITDA in industries that are not experiencing an active PE backed roll up, you can typically purchase these businesses for 2x-5x earnings.  The linked books and podcasts make recommendations on what a target business should look like in terms of business attributes and size.  If you are able to close a typical self-funded search deal in the ideal size range with a typical deal structure, you do very well financially and become majority owner and CEO at closing. 

I’m not too big into social proof, but for those of you that are, the popularity of this path as a follow on to an elite MBA has grown a lot over the last 20 years and many Harvard and Stanford MBAs do a version of this after graduating called “Launching a Search Fund.”   For more information on that path, Stanford puts out a Search Fund Study every year (webpage, pdf). Page 4 of the 2024 report illustrates the exponential growth in Search Fund launches over the last 20 years culminating in >90 funds launched in 2023.

Ok, but why??

Phew lots of reasons.  I don’t know if I will ever open up all the way on this, but I will share the highlights.  First, this change allowed me to move back home to the FL panhandle, and there was no viable path to moving home within my R&D career.  I had tried to make my R&D job remote for several years and was continually thwarted.  I have two toddlers and wanted more but didn’t feel like we could handle it without more support.  Now we live within 15 minutes of my and Maci's parents, and we are expecting our third child any day now.

Also, entrepreneurship just fits my personality.  It suited me that my last role at Dow was basically leading a Dissolution Recycling startup within Dow, but my current path is much more self-driven, bet-on-yourself, pure entrepreneurship than what was possible within a large company.

How did you even pay for this?

Well basically I was very lucky and it all just worked out.  First, Maci and I have always been frugal and had more savings than one would expect given our incomes.  Second, I have always been interested in investing.  I started buying stocks with the money I made working at Firehouse Subs when I was 15 and never really stopped.  Third, buying stocks worked pretty well because I have been lucky enough to have a great US stock market during my adult life leading up to the transaction. Fourth, I spent much of my free time on Daily Fantasy Sports before my first daughter was born and was sort of semi-professional for a few years.  All the money I earned on that went into our growing savings.  And fifth, I was able to close a transaction that required less than 10% down, took every penny we had outside of retirement accounts, and still required me to tap into my 401k. 

Alright, well how is it going?

I will probably write more about how it’s going and maybe also about why I think the common fear of restaurants amongst searchers is overblown in future posts.  For now, I will just say that it is fantastic. The seller is an ideal mentor.  The team is amazing. The product is perfect.  The brand is cherished in our market.  I have learned a ton and I’m having a blast.  Everyday I wake up and try to figure out how to make the product better for our customers, the job better for our frontline employees and the business better for my managers and my family.  It’s very rewarding and motivating.  I regularly stop and think to myself that I can’t believe how lucky I am that it all worked out.

Hmm if you say so… What’s next?

Merlins Pizza has my full professional attention in the short to medium term, and I don’t want to make long term plans. There are obvious improvements and growth levers that will keep me busy over the next few years and if it all goes as I expect, then I will never need or want to sell this business.  Other than that, I want to be opportunistic.  I expect there will be additional Merlins Pizza locations and/or additional businesses in the future, but I am content to focus on what I have right now and wait for a fat pitch. 

That being said, I am VERY INTERESTED in funding and/or mentoring other searchers.  I am not actively pursuing this now, but I expect it will become a significant focus for me sometime in the next few years. Please reach out over email (thomas@merlinspizza.com) or LinkedIn if you want advice or equity for your deal. I didn’t have a classic searcher background (MBA, PE, etc.), and I suspect I may be more open to helping folks with non-traditional backgrounds than the median search investor.

What’s up with the name of your blog?

Daniel Kahneman was famously (apocryphally?) unaffected by sunk cost bias in a way that was unsettling to collaborators. It’s just a perspective that resonates with me.

“When I work I have no sunk costs. I like changing my mind. Some people really don’t like it but for me changing my mind is a thrill. It’s an indication that I’m learning something. So I have no sunk costs in the sense that I can walk away from an idea that I’ve worked on for a year if I can see a better idea. It’s a good attitude for a researcher.” - Daniel Kahneman

That’s all I have for now.  If you want to read future updates or any other ramblings I might write down, then subscribe to the newsletter. I am not committing to any cadence, and I am not even sure that there will be another post.

Until next time.