My name is Brendan McCarthy. I'm an analyst here at Sidoti, and I'm pleased to welcome Kingsway Financial. Leading the discussions from the firm will be CEO J.T. Fitzgerald and CFO Kent Hansen. Before I hand it over, a quick reminder: the Q&A tab is located right at the bottom of the screen there. Feel free to type in any questions throughout the presentation, and we can save time for Q&A at the end. But with that said, I'm happy to pass it over to J.T.
Super. Thanks, Brendan. Thanks, everyone, for joining us today. Excited to present to you on our company, Kingsway. Kent in charge of the slides here, and we'll get started. A quick reminder on our forward-looking statements: feel free to refer to our public filings for our risk disclosures. A little background on me: I joined Kingsway in 2016, took over the role of CEO in 2018, and most of my professional career prior to coming to Kingsway was as a in and around the search fund ecosystem. We'll talk a little bit more about search funds later in the presentation, and I think that gives me a unique background to execute on our search accelerator strategy. Okay. We've got quite a few slides, so we're going to try to go through these relatively quickly so that we make sure that we have time for Q&A at the end.
Bear with me as we walk through these slides, and I'll try to just hit the highlights. First, we think Kingsway represents a compelling investment opportunity to investors. We operate as a lean holding company, and we own a diversified portfolio of attractive businesses with what we describe as dual engines for growth in a tax-advantaged permanent capital vehicle. Each one of our businesses has great organic potential for growth, and we also have a unique strategy to grow inorganically via serial acquisition by leveraging our experience in the search fund, or what we refer to as ETA, Entrepreneurship Through Acquisition, the ETA model via the Kingsway Search Accelerator platform. Our portfolio of businesses currently generates between $18.5 and $19.5 million of EBITDA, and we have roughly $625 million of net operating loss carryforwards, which means we won't be a federal taxpayer for quite some time.
We've spent considerable effort over the last several years simplifying our capital structure and delevering our balance sheet, and most importantly, our businesses are run by a group of exceedingly talented young entrepreneurs in a decentralized but supportive structure with highly aligned incentives. Our current stated goal is to continue to grow by acquiring two to three new businesses per year in the KSX platform, and we target businesses for acquisition with roughly 1.5 million-3 million of EBITDA. As I mentioned, we have an intrinsically diversified cash flow stream of 10 operating businesses organized into two distinct operating segments: extended warranty and KSX. In the extended warranty segment, we own four operating companies serving the automobile and mechanical warranty industries. These businesses have compelling attributes, including diversified contractual prepaid revenue at high margin and low capital intensity.
In fact, negative working capital dynamics, what we call investable float, and they operate in large and growing end markets. We also own six businesses in our KSX segment. These businesses operate in B2B services, in accounting and HR staffing, healthcare staffing, vertical market software, healthcare services, and IT managed services verticals. These businesses were all sourced and now managed by our Operators in Residence turned CEOs, whose profiles are in the appendix of the presentation here, which we've posted to our website. These businesses also all possess great attributes like recurring revenue, high margins, low capital intensity, and they all operate in large and growing end markets whose market growth is supported by long-term secular trends. Additionally, we have four current OIRs, Operators in Residence, that are actively seeking acquisition opportunities that meet our defined criteria.
We've leveraged the KSX platform to complete six acquisitions in the last roughly three years. Finally, one of our guiding principles is the power of decentralization and the entrepreneurial energy that that unlocks, and as such, we remain a very small group at the holding company level, and we view our responsibilities here primarily as first, capital allocation, second, strategy development and accountability for execution of those strategies. The third is accounting and tax as a public company with NOLs, and finally, risk management, employment-related risk and any litigation risk that we take an active role in managing that. Additionally, we support our entrepreneurs with an amazing advisory board that provides counsel on acquisitions, operations, and leadership. This is just a quick slide to show that over the past several years, our businesses have delivered consistent growth and adjusted EBITDA driven by a combination of both organic and inorganic growth.
Our six-year compound annual EBITDA growth has been roughly 19% based on our current run rate, which includes the earnings of our most recent acquisitions as if we'd owned them for the last 12 months. Our current operating company run rate EBITDA, like I said earlier, is between $18.5 and $19.5 million. And then this is just an update of each one of our operating segments in Q3. I think that this demonstrates that we've sort of turned the corner, and our extended warranty segment is starting to contribute again to earnings growth, and the KSX-acquired businesses are starting to accelerate and contribute meaningfully to our earnings power. And like I said earlier, we've, over the last several years, really worked hard to delever our balance sheet. We undertook a series of transactions to monetize assets and pay down debt.
And I think we've gotten ourselves to a place where we have a capital structure with $52 million or so of net debt, which gets us very comfortably inside of our 2.5-3 times leverage ratio target. So now for a deeper dive into the Kingsway Search Accelerator, a little bit of background on ETA, Entrepreneurship Through Acquisition, for those of you who aren't familiar with search funds. A search fund is essentially an entrepreneurial path undertaken by a young entrepreneur who forms an investment vehicle, raises capital, searches for, acquires, and then ultimately leads a privately held company for the medium to long term. When successful, it's resulted in a fast path to becoming an owner-operator, attractive financial returns for both investors and searchers, and ultimately growing well-run enterprises.
ETA, as an asset class, has seen significant growth in the past several years, and it's seen by young entrepreneurs as a less risky path than traditional startup entrepreneurship. It allows entrepreneurs to acquire an existing profitable business with an established customer base, operational infrastructure, and a proven business model. Also, many lower-middle market private equity buyers are hesitant to buy a business where the primary owner-operator is looking to transition out of the day-to-day operating responsibilities. And many sellers are reluctant to sell to a strategic acquirer for fear that their legacy or people will be impacted. And so ETA is a sort of uniquely shaped key to solve a succession problem for many small and mid-sized business owners who are looking to retire. And also, there's a significant demographic phenomenon underway.
We call it the Silver Tsunami, where many of the hundreds of thousands of small and mid-sized businesses in North America have founders who have reached or will be reaching retirement age over the next decade or so. So we think that there's a lot of opportunity to find great businesses in our size range and solve a succession problem for the founders. And finally, many of those businesses have unexploited opportunities as owners grow more risk-averse as they reach retirement age. Opportunities for improvement in the quality of the talent at the company, pricing discipline, technology upgrades, market and product expansion, and also potentially inorganic growth via acquisitions often exist. So addressing those opportunities and targeting untapped growth represents additional potential for value creation. And the model works. It's been around for a long time, a few decades.
Over 600 entrepreneurs or entrepreneur teams have acquired businesses using the model, and the returns to the asset class have been very strong. If you had invested across all 650 search funds ever formed that are tracked in the Stanford study, they have generated a 35% IRR to their investors and roughly four and a half times multiple invested capital. And so with over 600 data points, I think it's safe to say that the model is proven. And so we believe our Search Accelerator program provides a unique opportunity for public investors to access the search fund model. We partner with exceptional entrepreneurs, our OIRs, to identify and acquire great businesses. We then apply operational and strategic support to help them transition in and get those businesses growing with the objective of owning them for a long time and compounding capital at high rates over a long time horizon.
There's some profiles of our current OIRs. We currently have four active entrepreneurs searching for our next acquisition. As I mentioned, their bios are in the appendix, and they all possess attributes that we think are indicative of success as a leader in a small business. Each one of them, when they come on board, receives a modest-based salary while they're searching, and then when they transition into the CEO role of the acquired business, typically as the founder of that company is looking to retire, we provide them with aligned equity incentives. We provide the equity capital as part of the acquisition financing, and each one of them has the opportunity to earn up to 25% in the common equity of the business that they've acquired, provided they hit certain performance targets.
We believe the model is very scalable, and so we can continue to deploy cash to new acquisitions as our businesses generate more free cash flow to reinvest. We have a predefined set of underwriting criteria. Our goal is to seek opportunities that deliver what we would describe as enduringly high returns on tangible capital, and so we start with industry first. We're looking for businesses and industries that are large and growing, typically at greater than two times GDP, with lots of opportunity for shots on goal, so fragmented, and lots of small niches where small businesses can have an enduring competitive advantage, and we're also looking for low cyclicality, low capital intensity, or businesses that require little additional capital to grow, and we're looking for industries that have an element of criticality in the product or service that they deliver to their customers.
And then we switch and look at the business models of those companies in that industry, and we're looking for great businesses. And to us, that means a high percentage of their revenue comes from truly recurring sources at high margin with a long history of consistent profitability and low capital intensity. And historically, we've been able to acquire these businesses at very reasonable valuations, between five and seven times EBITDA. We use a prudent amount of bank debt as part of the acquisition financing, sort of typically less than 60%, more like 50/50 of the total acquisition. And often we get some component of the consideration or price paid in the form of an earnout from the seller.
Like I said, then we provide the equity capital to finance the acquisition that goes in the form of preferred, and the OIR that helped us acquire the business then transitions in to lead the business going forward. This is an overview of the businesses that I mentioned that we've acquired over the last three years. Six businesses, Ravix and C-Suite, are in the outsourced accounting and HR staffing business. Secure Nursing Service is in the healthcare staffing business. SPI is a vertical market software company. DDI provides healthcare services to long-term acute care and rehabilitation hospitals. Image Solutions is an IT managed service provider providing IT services, outsourced IT services to small and mid-sized businesses in Mid-Atlantic. As I mentioned earlier, we provide operational support to each one of our operating company CEOs. We have an internal operating system.
We call it the Kingsway Business System. No points for originality. It was borrowed heavily from the Danaher Business System. It's a package of tools and processes to help our CEOs become effective operators in their small companies with a focus on leadership, building a great team, articulating vision and strategy, and then ultimately executing on that strategy for growth. We also support our young presidents with what we would view as an all-star advisory board. These gentlemen on this page are all Kingsway shareholders, and they provide insights and guidance to our OIRs and presidents on acquisitions, leadership, strategy, and operations. Tom Joyce on the left is the recently retired CEO of Danaher. As I mentioned, we use a lot of DBS-type tools.
So to have Tom working alongside our young entrepreneurs to coach them on how to use those tools and improve the performance of the companies that they run is really amazing. In the middle is Will Thorndike. Will's a talented investor and capital allocator. Some of you may know him from his book, The Outsider. But also, Will is the original and most prolific institutional investor in search funds. He has a deep well of experience in pattern recognition to provide great insights on what good acquisitions look like and understands the challenges in operating small businesses. Finally, on the right, Tyler Gordy. We'll talk about Tyler a little bit later in the presentation. Tyler was our first OIR-turned-president when we acquired a business called PWSC. He ran it very successfully and exited in late 2022.
Being very close to the fire in our operating system, Tyler has great insights on all aspects of leadership in a small business within the Kingsway family. This is just a quick overview of KSX segment performance. As you can see, a breakdown of revenue by company on the left. Then on the right, you'll see a significant EBITDA growth over the last three years. Pro forma for the most recent acquisition of Image Solutions. A run rate EBITDA in this segment is $9.5 million-$10 million. Then here's a case study. We talked about PWSC and Tyler. Some people ask us, "Why do we have confidence that the Search Accelerator will work?" This is a case study of the model in action at Kingsway, and I would describe it as our proof of concept investment for the model.
We backed Tyler when we acquired a small warranty business. We paid $10 million for the company and financed the acquisition with $5 million of bank debt and $5 million of equity capital from Kingsway. Tyler transitioned into the CEO role with searcher incentives, like I mentioned, the opportunity to participate in the equity upside, and we supported Tyler in his transition and then supported him in the growth of the company, and because of who he is and the prospects for the business under an entrepreneur with great energy, he was able to attract an amazing team around him and infuse entrepreneurial energy in that company to professionalize it and get it growing. We owned it for about four and a half years, and the business was able to delever very quickly from internally generating cash flow and began paying dividends.
And then ultimately, we sold the company for a little over $50 million, which generated a great outcome for both Tyler and Kingsway. A 10x net return to us, which translates to a very high 60s IRR. So it was an amazing outcome, which gave us and our board the confidence to really lean into the model to grow via serial acquisition. I don't know that we'll be able to repeat those types of returns all the time, but certainly indicative of the type of outcomes you can have when you take a really talented young entrepreneur, provide them with aligned incentives to behave like an owner of a decentralized model, and then support them as they grow that business. It's, to me, just a really powerful proof of concept. Talk now about our extended warranty segment. I'll turn it over to you, Kent, to walk through that.
Yeah, thanks, JT. As JT mentioned, we did post these slides to our website last night. So if you go to the investor relations section, you can pull them down there. I do see we've got a number of questions queued up, JT. So I'm just going to go through these very, very briefly. This is just an overview. We have four extended warranty companies. Three of them are in the auto segment. One is in the mechanical segment. Important to note here, we do not go direct to consumers. So the ads you see on TV or the postcards you get in the mail, that's not us. So our warranties are packaged with the loan. So if you're a consumer, you're getting an auto loan from a credit union or from an independent dealer. They may be offering you a warranty product that gets bundled into the loan.
But we get paid upfront. We get to invest some of that money in an investment fund and earn the float on that. And that's one of the reasons why we like this model. I'm not going to go through these slides. You can pull them down and see the revenue breakdown on the left and the historical EBITDA run rate on the right. One of the reasons for the drop-off in 2022 to 2023 is because we did sell PWSC in 2022. So we didn't pro forma them out of this run rate. And then this slide just discusses some of the attributes and some of our strategies for warranty going forward. So with that, I'll turn that back over to you, JT, to wrap it up. Yeah, sure. Okay.
This slide just highlights a handful of transactions that we've undertaken over the last few years to clean up and transform the company. It's been a lot of work, but as I mentioned earlier, we've been able to clean up our balance sheet and then use internally generated cash flow to do the acquisitions that we've been doing, and then finally, just to summarize and wrap it up, we think that Kingsway represents a compelling investment opportunity to own a diversified portfolio of attractive businesses with dual engines for growth in a tax-advantaged permanent capital vehicle. We believe we're building an incredible flywheel to grow EBITDA organically and to reinvest the excess cash flows that our businesses generate from serial acquisitions through our unique proven Search Accelerator model.
Great. J.T. and Kent, really appreciate the overview.
It looks like we have a handful of questions in the Q&A bank here. We can get into Q&A from our attendees. First question here is, can you share some initial thoughts on the most recent acquisition of Image Solutions? Maybe talk about the deal flow there and how that transaction materialized and I guess how it's been performing thus far.
Yeah. So we acquired that business in late September. And so the results through September were included in the run rate EBITDA that we posted. We haven't yet filed our annual filing, so I don't want to get into anything sort of forward-looking about performance there that's not public. But Davide has transitioned in and transitioned out the owner-operator and is in the early days of developing his vision and strategy for the company. We have a typical first 100-day plan.
A lot of that is getting in, learning the business, talking to the employees, sitting in every seat, and then also talking to all of our customers, gathering what we call voice of customer to determine what's working, what's not working, what we should be doing more of, doing less of, to then formulate a strategy to grow that business. So he's very much in the early stages of transition and learn, and then we will be developing his strategy and action plans to start executing.
Great. Great. From a funding perspective, is the funding breakdown typically that 50% bank debt and the 50% preferred equity, or does that change? And then also as a follow-up, how much of the growth here is tied to access to low-cost capital?
Yeah. So each one of these acquisitions is we use bank debt.
That bank debt is only at each one of those operating subsidiaries. So there's no recourse to Kingsway, and it's collateralized by the assets and cash flow of that operating company. And so we don't use a lot of leverage. That 50% is just sort of a byproduct. Typically, we're aiming for somewhere around two and a quarter to two and three-quarter turns of leverage through traditional amortizing bank financing. And so access to capital, debt capital has never been a driver of acquisition activity in Search Fund Investing or Kingsway's Search Accelerator. Typically, that bank financing is available, and we don't rely on lots of leverage. And so we believe that it's absolutely always going to be there and therefore not a concern.
Got it.
And then do you have any thoughts on the current acquisition pipeline as far as size, views on valuation, or how that has changed in recent months?
Yeah. I would say we have four active OIRs that are pounding the pavement every day, generating opportunities, both proprietarily sourced, so through direct outreach to business owners in industries that they've identified as attractive, and then also sort of non-proprietary deal flow through brokers and intermediaries. I would say that, and you read this in the headlines as well, that I think that 2025, getting through the uncertainty around the election, some excitement around M&A picking up, and typically, first quarter of the year, we always see a bump in deal flow activity as new opportunities come to market. So I think that I would say that our deal flow pipeline remains very strong.
And again, we're targeting businesses with that sort of $1.5 million-$3 million of EBITDA. We could go a little lower. I think if you go above that, then the multiples start to get much higher because it attracts private equity buyers and maybe some larger strategics. So I think that $1.5-$3 is sort of the sweet spot. In terms of valuation, at the lower end of the lower middle market, they really haven't changed that much over the years because they're not reliant on debt capital markets to finance acquisitions. And so historically, they've always been in that sort of 4.5-7 times range. I would say over the last couple of years, we might have seen the average acquisition multiple pick up by half a turn or so.
But I think that's driven by more of focus on business quality and company growth and focused on businesses that have nice growth profiles. And that's reflected in the slightly higher multiple. Got it. I know you mentioned different industries. Do any particular industries look more attractive, more relatively attractive at this point, whether it be a result of the recent election or for other various reasons? Yeah. We're looking at long-term secular growth trends. So things that are supported by long-term trends, like aging population would be an example, or water scarcity would be a secular tailwind, right? And so I think that the vagaries of an election wouldn't really change our core thesis on certain industries too much.
I think we're very focused on the potential impact of AI, both negatively at B2B service companies and potentially positively as ways to leverage that in creating efficiencies at the businesses that we own or will own.
Got it. And then we have a couple of questions on the expense structure. I guess first at the Holdco level, do you have a sense for annualized run rate from a cost perspective? And then also at the opco level, are those expenses that you ultimately consolidate from an accounting perspective? Or maybe you could just talk about the different cost structures there.
Yeah, Kent, maybe you can take that one.
Yeah. There's some costs that we do negotiate centrally at corporate audit. It's one of them. Insurance, things like that.
As JT said, we do like to run a decentralized structure as much as possible to give the businesses the autonomy to run themselves. But there are some cost savings that we get by pooling our resources together. So we try to strike a nice balance there. We recently also started providing accounting services from corporate to some of our newer subs, which does result in substantial savings to them. Our holding company run rate, cash burn, if you will, will vary a little bit depending upon how many OIRs that we have on staff at any point in time. But I would say probably $5 million-$6 million a year could be a good estimate for that. I see that in the notes there.
Great. That's helpful. I want to ask one last question here on the warranty side of the business.
I guess how can investors ultimately think about that warranty business? Is that a core part of operations going forward? Or I guess just how can investors think about that business?
Yeah. I came to Kingsway to build the extended warranty platform. I really like the attributes of these businesses that I described. Sort of diversified contractual prepaid revenue at high margin and investable float. And they have a different growth profile, I would say. Those are much more mature markets, so they're not growing at two times GDP. And they're also a little bit cyclical tied to the consumer credit cycle, used car cycle, etc. And so historically, we've viewed those as, because of their cash flow dynamics, as sort of the cash cow that supports both the holding company and the free cash flow to reinvest via acquisition in the Search Accelerator cycle.
That makes sense. That's helpful.
We'll conclude there, JT and Kent. We really appreciate the time and the overview today.
All right. Thank you.
Great. Thanks, everybody. Enjoy the day.