Justin Turner·March 29, 2022

How to Build a Holdco 4 Acquisitions So Far

Justin Turner is co-founder and managing partner of Traction Capital, a permanent equity fund based in the Pacific Northwest that has made four small business acquisitions since October 2018. His background spans boutique investment banking M&A, private equity in Texas (including a rotational plastic molding roll-up), and a consumer products co-investment before founding Traction with two partners. The four portfolio companies span fire equipment distribution (Sea Western, Kirkland WA), light-duty metal fabrication ecommerce tools (Swag Off Road, Bend OR), asphalt paving (Seattle-Tacoma), and a retail/ecommerce mattress business (Portland OR). Traction finances deals through a regional commercial bank on a non-recourse basis (no SBA, no personal guarantees), seller notes, seller equity rollovers, outside investor equity, and Traction's own capital (~30% of equity per deal). The episode functions as a playbook for building a holdco: find the first deal before raising equity, use seller rollovers to keep founders engaged, standardize systems (NetSuite) across the portfolio, and build a small internal ops team to support multiple companies rather than trying to do it solo.

Deal facts

revenue: Sea Western: ~$15m at acquisition, ~$24-25m current; Swag Off Road: ~$3.5m at acquisition, ~$6m current; asphalt paving: ~$7-8m; mattress retail/ecommerce: not stated
financing structure: Regional bank non-recourse commercial debt (up to 2-2.5x senior debt to EBITDA) + seller notes + seller equity rollover + outside investor equity + Traction capital equity (~30% of equity per deal). No SBA.
notes: Four acquisitions total: (1) Sea Western, Kirkland WA - PPE/fire equipment distribution, bought Oct 2018 from founding family siblings; (2) Swag Off Road, Bend OR - light duty metal fabrication tools, 97% ecommerce, bought Oct 2019; (3) asphalt paving company, Seattle-Tacoma area; (4) retail/ecommerce mattress business, Portland OR. Traction Capital owns ~60% fully diluted across portfolio. No cross-collateralization between deals.

Why this business

Turner wanted to own and compound value in small businesses for the long term rather than sell after 3-5 years like traditional PE. Inspired by the permanent equity model (Brent Beshore), he sought businesses in the Pacific Northwest with growth potential where he and his partners could add operational and financial systems alongside existing management teams.

What's working

Sea Western expanded from 2 states (WA, OR) to 8 western states, growing revenue from ~$15m to ~$24-25m through geographic expansion
Swag Off Road grew from ~$3.5m to ~$6m in revenue; the founder had built a passionate customer base around high-quality, made-in-America products with zero online advertising spend at acquisition
Non-recourse commercial bank financing (no personal guarantees) achieved by finding a regional bank with appetite for cash flow-based acquisition loans
Standardized ERP (NetSuite) implementation across portfolio companies eases reporting and financial oversight at the Traction level
Seller equity rollover keeps prior owners engaged at the board level as subject-matter experts who help avoid missteps
Traction's investor base consists largely of former small business owners who understand the risks and dynamics

What's hard

First deal equity raise was finalized only two weeks before closing — highly stressful without committed capital before signing LOI
Asphalt paving is largely non-recurring project work outside of cable/fiber contracts, requiring relationship management and public bid work
Scaling a holdco as an individual is very challenging; Justin explicitly says one person cannot realistically manage a portfolio of four companies without partners
COVID caused one near-deal to fall apart in 2020
Transitioning prior owners from sole decision-maker to minority partner working under new investors requires relationship-building and trust

Notable quotes

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.

I question whether or not it's realistic to go into that thinking hey i'm gonna build this holdco from day one as one person. I wouldn't have been able to do four deals and have a portfolio of four companies that i'm managing.

Each business really has to stand on its own. The bank debt is at the individual business level, it's not consolidated or cross-collateralized at all.

We always set up a holdco opco structure for the deals and then traction capital our parent llc owns a majority of the holdco in each of our investments so at close we own the majority of the business we have control of the investment.