member Small Cap Conference. My name is Brendan McCarthy. I'm an Analyst with Sidoti. I'm very pleased to welcome Teamshares to our conference. The ticker is TMS. Joining us from Teamshares are Michael Brown, CEO and Co-Founder, CFO Brian Gaebe, as well as Head of Capital Markets, Niall Corso. Before I hand it over, a quick reminder that the Q&A tab is located right at the bottom of the screen. Feel free to type in any questions throughout the presentation, and we'll save time for a Q&A at the end. With that said, I'll pass it over to Michael.
Good afternoon, everyone. I'm, as Brendan said, Michael Brown, co-founder and CEO. My focus today focuses, aside from general leadership duties, really on helping grow the company, which really centers around acquisitions and capital. Within that, let's go to the next slide and talk about Teamshares. We are what people call a programmatic acquirer, but as a mental model, think back to the old days of Roper 30 years ago or any of the 30 diversified industrial type of companies that grow primarily through small acquisitions from family-owned businesses, consolidate and integrate them into a diversified public company, and continue to grow them and focus on organic growth too, but actually, the model allows us to reinvest cash flow and to grow faster than the underlying organic growth rates.
The niche that we focus on is $500,000- $5 million EBITDA businesses that are very highly free cash flow generative, usually 80% conversion from EBITDA to cash flow. We strictly focus on retiring owners, and then after we acquire the business, we integrate them, hire and train a leader, and also have the employees incentivized and aligned with stock at each operating subsidiary. Our goal is permanent ownership, and we just went public in June, led by T. Rowe Price, and we're hopeful that it is the beginning of a long journey scaling the public markets. To the next slide. If you just take a step back and think about our opportunity set, it's very large. In fact, actually, one of our venture firms said it was among the largest TAMs that they'd ever seen.
The reason for that is that there's 6 million small businesses in the U.S. just as an installed base. About 75% of them are owned by either baby boomers or Gen X, so it's people who are well past retirement age or people who are just approaching retirement. It's a huge amount, 75% of the businesses. We build a lot of technology to automate steps and increase throughput in a semi-industrialized way. We get about 75,000 actively for sale businesses every year. About 15,000 are minimum size qualified, and we'll do real work on 3,000 or more of them. Today, how much EBITDA we can acquire and grow are the way we run the business, but just as an output stat, 90 companies and growing today. If we can go to the next slide.
And just on the scaling point, our vision that we've publicly stated is to be a permanent home for thousands of the highest quality companies, so we believe it's really early inning. The vision was to really try and industrialize, again, with technology and with decentralized aligned leadership the way that businesses could be acquired and transitioned in an industry-agnostic way. The repeatable process and software that pairs with it looks like this. We have an inbound funnel of 75,000 businesses. We sort of just went through some stats before. We'll pick a couple dozen of the very best of those, do rigorous work, due diligence, legal diligence, execute that all in-house, and then enclose them.
We will provide leadership if it's needed, and in this size range, $1 million-$ 5 million of EBITDA, there often is an external leader needed, and so we've gotten very good at hiring and training leaders who are local from the industry. We have an 80% success rate with that. We grant 10% of the stock of each operating company to the employees, and that helps get people aligned and financially literate in understanding how to grow the businesses.
That comes to life through the software that we built called Teamshares OS, that helps us consolidate GAAP financials, which is basically unheard of in the small business economy, and see really advanced analytics, the types of analytics that a public investor or a private equity style investor might see on a company, and that visibility provides both the ability to run the business as well, but provides real scalability, too.
Then like any of the publicly acquisitive holding companies that have come before us, the goal is to continue to reinvest the cash flows of these businesses, which even though it's intuitive, I should stop to just point out the nuance of if you compare and contrast that versus private equity or even a stock index. In private equity or a stock index, the outcome is the summation of individually isolated companies that cannot commingle cash flows. We can not only reinvest those cash flows to buy more businesses, we can actually also reallocate cash flow in select cases where additional capital would help further organic growth at similar rates of return than a new acquisition would. On the next page, please.
If you were to think about us versus the market at the competition level, if you will, or the opportunity level, there's not a broad-based sort of competitor that we have are really sort of competing against individuals, occasionally sort of very small private equity or very small roll-ups, and we win about 50% of our letters of intent. But in terms of how to think about us versus other, there have been, we think, 30+ acquisitive public companies that grow in this way, that how we're different from those is, again, we're cross-industry and we're driven by structural criteria that we think makes for good business. We'll talk about that next. The typical strategy, as most people know, is to buy the business in part because of the founding CEO or founding leaders, retain him or her, and have them run the business for decades to come.
We deliberately address the retirement end of the market and have a very now proven leadership succession model. The two of those things create a much bigger TAM, being open to most industries or many industries, and being able to provide leadership and addressing retirement creates a really, really large TAM. It also means that we are not subject to the sort of shocks that a single industry roll-up can have or sort of multiple inflation as competition crowds out a single industry. The technology we build helps us really scale both the acquisitions, and I would say even more so on the post-ownership data and oversight of the businesses. We will go to the next slide. This is just to touch on our structural criteria of what we look for.
Obviously, this is very high level, and how we apply this is very rigorous and takes months to assess within a company. Just to hit the highlights, $500,000- $5 million of EBITDA. Again, that is because we find it generally too big for most individuals, too small for most private equity and institutional buyers. So usually it means we are sort of either the preferred buyer or maybe even negotiating one-to-one. Usually $1 of EBITDA converts to $0.80 of unlevered free cash flow, so these are generally pretty asset light, working capital efficient businesses. Those are the kinds that we like. The reason we target the retirement sale, in addition to being committed to sell and selling now good terms, is that they are very unlikely to re-compete. We have only had one indirect re-compete situation in over 90 acquisitions. The businesses on average are 37 years old.
We target things that are generally 20 years or older. That helps really de-risk the ongoing success of the business. If you study cohorts of business formations, by year 15, it is very unlikely that a business would fail in a given year. We start with the premise that small business is kind of the Wild West, and the financials across the board are not particularly unreliable, and businesses across the board have a lot of key person risk. So we address that market eyes wide open and look for the businesses that have very reliable five years of tax returns, clean bank ledgers. We can do really rigorous in-house financial due diligence work and then start with already annually reliable financials and convert those to U.S. GAAP and have that on a monthly basis going forward.
We also look for businesses where the key person risk is really just retired by the time you get through the transition. People like the owner, they have not written down every process, but they are not driving revenue. So we also look for really low customer concentration risk and low technology risk. We want evergreen businesses that we very genuinely think can be in business 50+ years from now. Next slide. Just to give you a sense, this is a little stale now because it is from year-end last year, but just to give you a flavor of the types of sectors that are the output of that criteria. It is distributors, it is light manufacturing, it is independent fast food, it is auto services, it is specialty retail. Again, because we are diversified, it provides a nice mix across the cycle. We try and buy really non-cyclical businesses.
Building products is probably the most cyclical, and when we buy it, we buy it off of a mid-cycle. We are going to continue to add more industries in concentric circles. The nice thing is that because these businesses are relatively small, whatever the large cap company pure plays are doing in those industry are less relevant to our growth potential because opening a third store in a grocery chain can provide a very different organic level of growth than an outscale grocery store, for example. I think, Brian, you are probably transitioning next.
Yeah. Thanks, Michael. Our ability to leverage technology is one of the primary drivers of what enables us to scale our operations. In certain cases, we have built our own software, which includes our Buyout app, you will see in the upper left-hand corner. That sources and analyzes acquisitions, and it also streamlines our closing process. Our life cycle software that we built is the Teamshares OS, and that monitors and analyzes financial results. It also enables centralized cash management as well as administers our employee ownership program. In addition to internally developed software, we leverage best-in-class software and AI applications in order to enhance operations at the subsidiary level. Not only does this help us improve efficiency, but it is really powerful in enabling us to maintain quality as we scale, since it can provide real-time better insights into performance of businesses.
When we get our weekly or monthly reporting from these businesses, we have got a level of detail and enough confidence in the data that we could quickly diagnose any issues and monitor remediation. From the businesses that are doing really well, we can apply learnings from those out-performers into other similar businesses within our set of operating subsidiaries. Just like recycling capital enhances our ability to compound value creation, you have a similar effect with the data compounding cycle where you can accumulate and synthesize data in order to give us an informational advantage that just strengthens over time. Like Michael mentioned, the more grocery stores that we own, the deeper and richer the data set will be.
We have got a data science team and other tech personnel on staff that can help us extract value from that data and apply those learnings to improve the operations of the business. This next slide highlights how repeated execution of just four simple drivers allows us to compound value creation for our shareholders. It all starts with acquiring businesses at attractive valuations. We are able to acquire a nearly endless number of businesses at really attractive entry multiples because of the depth and dislocation in the small business market that Michael talked about, where you have got exponentially more sellers right now than you do buyers. Once we acquire those businesses, we install energized leaders to provide support and grow the businesses at a very modest target rate.
When you buy a business at 4x to 6 x EBITDA multiple, outsized growth isn't really required for us to achieve a really, really attractive return profile. Like I mentioned, we leverage tech-driven processes to help us grow earnings from those subs at a far, far faster rate than we're growing corporate overhead, and this creates margin expansion on a consolidated basis. Finally, as our earnings base grows and our credit profile improves, our cost of capital should decline, particularly the cost of debt. Reductions in interest expense free up additional capital for redeployment. We've got a centralized cash management strategy in which our operating subsidiaries upstream excess cash to the parent level, and then we redeploy it towards the highest IRR opportunities, whether that's organic or externally towards new acquisitions, and that reinvestment just fuels the cycle.
The power of compounding high IRR opportunities is how patient investors have reaped exponential returns from some of the other programmatic acquire companies that we comp ourselves to. It's how we intend to create a really unique value proposition for our investors. This slide highlights our financial forecast. Continued execution on those four drivers that I highlighted on the previous slide should provide a clear and actionable path to significant EBITDA growth over the next couple of years. Early on, we had to invest in building the team and technology to scale operations, and this created that operating leverage so we can increase those earnings from the operating subs at a significantly faster rate than corporate overhead. This enabled us to hit a very important inflection point in 2025 where earnings from those operating subs eclipsed our corporate overhead.
We are expected to grow from almost $20 million of EBITDA last year to about $60 million this year, primarily driven by acquisitions. As we disclosed on our most recent earnings call, most of these acquisitions have already been closed or are under LOI right now. We think we've got a clear path to hitting those targets. Built into that forecast is very modest assumptions related to our organic growth. If we follow a similar playbook going forward, executing on those four drivers every year should give us a path towards very, very clear and predictable growth. The level of EBITDA that we're able to generate starting in 2027 and beyond should translate to a material amount of free cash flow that can then be reinvested into growth opportunities.
Once again, it just fuels that compounding cycle and allows us to create significant earnings growth and ultimately growth for our shareholders. Just to recap and step back, we think that Teamshares offers up a really differentiated investment opportunity. The addressable market for small businesses that we can acquire is absolutely enormous. We've got millions of small businesses out there and very few natural buyers. What makes us really unique is we've built this tech-enabled platform that can extract value from that dynamic by repeatedly acquiring attractive small businesses, compounding their earnings, and then allocating that capital into the highest and best use case opportunities. Importantly, the model's already proven at scale. We own more than 90 companies today, and we've scaled earnings from our subs well beyond our corporate cost base.
Since we consider capital our raw material for growth, we believe that a recent entry into the public markets just further strengthens our ability to fuel that compounding cycle over time. I will pause there, and hopefully turn it back over to Brendan for Q&A.
Fantastic. Thank you, Michael. Thank you, Brian, for the overview and the information. We can now open the floor for Q&A here. Michael, you touched on this a little bit already, but why don't we just start off with how the Teamshares model and strategy really differs from a roll-up strategy, and maybe what are some of the advantages of the Teamshares model?
When I think of a roll-up, I think there is one specific connotation, and pretty commonly a second one, too. Generally, when I think of a roll-up and hear investors, public and private, talk about a roll-up, they are really talking about a single industry, on the basis that, hey, when you buy a company in a single industry, you get systems benefits, learning benefits, purchasing scale, all of that, right? The second is often, but not always, a roll-up is done in order to have an exit. It is an arbitrage play versus something that looked, again, going back to like a Danaher or something, or a Berkshire Hathaway. You are trying to own something forever. There are obviously characteristics that are similar to Teamshares, but against those parts, I think there are two things that are really notable.
One is that by being industry agnostic or structural, it does not mean we do not have a view in every industry. We do, right? I see there is a question there, and we can get to that in a little bit. It means that we are not subject to both the shocks of a single industry, which eventually happen, or when you get robust competition, or you just frankly run out of targets. That is a big issue. You eventually run out of targets if you stay in a single industry. We also get the learning and the data and the purchasing advantages, too, because you eventually get very significant scale in each sector and geography. We see that as a win-win.
The other thing is, the reason why I believe that public companies that grow sustainably and buy companies have much superior outcomes to companies that are private roll-ups is the incentive structure is totally different. When you're buying something, you're buying it forever, versus if you're buying something for two or three years, it's a totally different set of incentives.
Understood, and a couple questions from our attendees here. I'll combine one here. Can you share which industry verticals look more attractive at this point? I know you just mentioned the strategy is industry agnostic, but maybe talk about what industries look attractive and what the current geographic footprint looks like as well.
Yep. The geographic footprint is pretty well diversified. It's mostly in the U.S. We've done a couple internationally, one in Canada, one in Europe, one in Japan. Within the U.S., they tend to follow GDP, so they serve more in bigger states like Texas. In terms of industries, again, as I think we said on our earnings call, for commercial reasons, we don't comment on which industries we like other than just to stay consistent with we report that end market and sector mix, and we tend to expand in concentric circles. But expect more of the same really simple businesses that are high cash flow, and traditional businesses that can have durable organic growth.
Understood. Maybe you could talk about your underwriting process a little bit. I imagine that's quite important just considering your permanent ownership model. What key factors do you look for in targets, and what really backs the underwriting process?
Yeah. The criteria, the core principles that we went through on that slide that showed the highest levels, those are the principles that we then go and underwrite against. The financial diligence is before LOI, based on the tax returns and whatever we can get in terms of year-to-date internal financials and generally some ancillary data.
Some of the larger companies we see, like in the $5 million range, sometimes actually they have had an accounting firm do a quality of earnings report to take a first step at normalizing any of the financials. It is really after LOI, that is when we get into the really, we get full access to everything, including the bank records. We do a proof of cash, which if you are not familiar, that helps you tie out the bank receipts to the revenue of the company. That is a critical thing to prevent fraud.
You get full access to all the general ledger data and we do our own proof of cash. In over 90 acquisitions, I think there has only been two material diligence errors, financial due diligence errors, which we are very proud of. The legal work we do in-house, and we are really looking for making sure that our standard form, which has a lot of reps that protect us, and our seller notes also protect us, too. I think the third part of the diligence and applying the principles is to make sure we understand the business at LOI, but then you get another level of proximity to the business post-LOI, and make sure that we really understand the business, the cash flow cycle, and really are prepared to operate it and hire and train a president.
The whole process goes from meeting the owner to closing, four to six months. Three months would be fastest. But that is how I would basically describe the underwriting process.
Got it. You mentioned over 90 acquisitions. How many acquisitions have gone poorly?
Yeah
whether it required a wind down or
Yeah
what lessons were learned there?
Yeah. Let me pass it to Brian to talk about the data-driven answer. Before I do that, and we're very proud of it because it's a percentage of capital over time, it's actually quite limited. I want to actually set the context even against the numbers that he can cite. If you look at the next closest thing, either search funds or SBA loans that go bad, those are acquisitions of smaller businesses. If you look at the Stanford data, about 50% of Stanford search funds either lose money or break even, and a significant amount lose money. Then depending on where you are in the cycle, 15% up to 30% of individuals buying a single business with all of their life savings in it, result in a default.
I just wanted to set the stage of that it's a complicated industry. Let me hand it to Brian to talk about both the data that we're proud of, and then some of the learnings that we've made from our early days.
Yeah. Absolutely. If you look at impaired capital as a percentage of invested capital, the annual rate is around 2%. What's important is that number has been shrinking over time. As Michael mentioned, we made some really important adjustments to our underwriting criteria, and as a result of that, we've seen that rate continue to shrink. If you look in our financials for the first six months of this year, there hasn't been any impairment expense. I can't promise there's not going to be any impairment expense going forward because there's always going to be businesses that don't work out as expected. But we feel good about what we've seen over the past couple of years since we made those shifts in underwriting.
You mentioned a 50% LOI win rate.
How does that compare to other competitors in the industry? I guess just as a key takeaway, what really makes Teamshares the seller of choice for the retirees?
Yeah, I haven't looked up or seen any data on what others do. I know the sort of conversion rate from assigned LOI to closing. I've seen data all over the place that that success rate is 25%-50% just from business brokers. Our sort of conversion from assigned LOI to closing. Lifetime is majority sort of 80% plus. Last year, I think we've also said publicly that we signed 10 last year and closed nine. We chose to walk away from one based on diligence learnings. In terms of our sort of why sellers choose to work with us, it is because we are a safe pair of hands, both with the actual transaction itself, high probability of closing an acquisition as long as their pre-LOI presented financials hold up, and a safe pair of hands afterwards.
Now we have successfully transitioned over 90 businesses across a range of industries. There is a legacy also that we are bringing in some of the employees as shareholders, and that the business never has to be sold again, that it can be a permanent ownership, with us and with partial employee stock ownership.
That is great. Are you seeing any regulatory or litigation-driven catalysts playing a role in the acquisition pipeline or potential acquisition targets?
We see it. It is not the ones we go after. In fact, whenever we see multiple companies for sale in the same industry at the same time, it puts our radar antenna up. We really are very mindful of, not just industries, but also when we see a business in California, and I say this as a UCLA graduate who likes the sunshine in California can be a very difficult place to do business. We are very cautious around regulatory and litigation issues in California. Then you will just see it, and I do not want to name particular industries, but you will see multiple businesses for sale. Just in general, we like to buy really simple businesses that are not regulated, that are not subject to litigation. Just really simple businesses.
That makes sense. Last question here, I wanted to touch on operating leverage. I know it was on display in first half of this year, 2025. At what point might we see that EBITDA free cash flow conversion ultimately be able to fund the acquisition flywheel where it reduces the reliance on outside
Yeah
capital?
Let me talk about just the operating leverage impact and then turn to Brian and just talk about building towards the very important free cash flow, breakeven to positive cycle. One of the things that we pointed to is, that's not intuitive in our financials, is that there are really two levels of just, if you start with EBITDA before getting to cash flow, there's really sort of two levels of EBITDA for the company. One is the segment EBITDA, which is akin to kind of the four-wall EBITDA if you were in a retail chain. Then there's the corporate EBITDA. So that number is, on a run rate basis or pro forma basis, is north of 60 for the segment EBITDA and north of 20, for the corporate EBITDA. We've tried to educate people that you need to sort of look at both.
Two, the differential is the parent, sort of 90+ people plus audit fees, et cetera. What we've also tried to communicate to the Street is that as we add more EBITDA from acquisitions and organic growth, most of it should drop through. We demonstrated that in a page in our investor decks, showing that on a reported basis last year, we added something like $25 million of EBITDA and actually reduced G&A by $2 million. So that incremental EBITDA margin at the corporate level is not intuitive, and it's very high, and I think it probably exceeds a lot of incremental EBITDA margins that are out there. Really what that's doing is it's reflecting the fact that we ran a venture-backed strategy where we knew each unit was profitable.
We had a large TAM and an ambition to build a large company, and we knew that there would be a convergence point where we'd be able to have most of the things drop through. It's a very unusual strategy in acquisitions, but that was our strategy. Let me turn to Brian to talk about getting to free cash flow positive and some of the milestones there.
Yeah, absolutely. So we've previously disclosed that we expect to inflection towards positive lever free cash flow in 2027, and then we've got the potential to become increasingly self-funding for the equity portion of acquisitions thereafter. There's a lot of variables that go into our lever free cash flow equation. So we're not guiding to hitting a self-funding level of free cash flow at any given point in time. Especially as we start to hopefully see improvements in our financing costs. That's obviously a big component of being able to hit lever free cash flow positive and then getting to that full self-funding level. So I would expect us to hit the free cash flow positive point in 2027, and then gradually move towards full self-funding from there on out.
Yeah, it's a real focus for us.
Yeah.
No one's asked about cost of capital yet, but it's sort of implicit in Brian's question, which is like, look, that is a thing that as an emerging credit profile in a new public company our historical cost of capital is high, right? That's something that as our credit profile strengthens and as we are a mature public company, we would expect that to come down over time, just if you look at any market data. But it's going to take some time. I think we need to go and achieve these projections, get to the $60 million of run rate EBITDA projection this year, get to the forecast of $100 million the following year that we put out as part of our go public presentations.
Market data would suggest that companies with that type of profile would tend to have a different cost of capital than our historic. But it'll be a work in progress.
Well, Brian, we really appreciate the overview and the information. We'll conclude the conference there. I know there may have been some questions we didn't get to, but feel free to contact Teamshares directly, or you can reach out to Sidoti. Guys, thanks again for your time.
Thank you.
Thanks, everyone.
Thanks, everybody. Take care.