10 acquisitions, 25%+IRR and sky-high prices

Quick note before we dive in…

Rule #1 when it comes to staying in business:

Survive. Give yourself the opportunity to figure everything out as you go.

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Btw, when it comes to raising capital, building a portfolio of traditional $1-10 million EBITDA businesses, hiring the best operators…

How many calls or meetings do you do before you give up?

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80% of sales are made on the 5th to 12th contact

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After meeting with 100s of traditional niche businesses.

• profitable, the smallest with an EBITDA of $300k, the largest with an EBITDA of $4.5M

• long history, 10+ years on the market

The winners of this game don't try to spend less to grow their business -- they prefer to be so valuable to the customer that they can raise prices or simply find a way to sell more of what they've been selling to the same customer.

That's how they seize the market share and have back-to-back-to-back very profitable years.

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That said - investing in$1-3M+ EBITDA traditional companies and want to achieve higher IRR and MOIC multiple?

Here's an "easy" trick:

Consider focusing more on the current client versus the new one, even if the latter seems more glamorous.

Three obvious reasons why:

1. retaining current customers is less expensive than getting new ones.

2. selling current customers more stuff is way less expensive and more likely to happen.

3. loyal repeat customers are more likely to repeat you to their friends (big one! I've seen this to happen too many times).

Even a small improvement in retention can mean a significant increase in profits.

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When asked from a gentleman who has advised over 1,000 business transaction and invested/acquired a few himself:

What do you think are THE MOST important characteristics of a good company?

Here's what he replied:

- Sustainability. Is the business sustainable? Will it be here in 3, 5, 10 years?

- Why is this business in business?

- How do they make money?

- How long has the business been around?

- Why would they continue to make money?

- What's happening in the industry?

- What does the seller know that the buyer, broker, or lender doesn’t know?

- What changes have happened in the business?

Buying a business is serious stuff, and his goal has always been to de-risk the transaction.

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Private equity space has become wild.

There are more than 18,000 funds — a nearly 60% increase in just the last five years.

That means tons of money. Tons of competition. Sky-high prices which means finding value buys is becoming tougher AND high acquisition multiples leave less margin of error.

Yes, there will be top top 0.1% GPs driving insane returns to their LPs although the absolute biggest winners are and will be the folks selling their companies.

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Found a very well diversified holdco portfolio.

Total investment of $400m which lead to 22 acquisitions

• Industrial machinery & manufacturing

• Healthcare and pharmaceutical

• Technology, electronics, & automation

• Renewable energy & services

• Consumer goods & food Processing

Seems to work well:

So far 25% IRR with an investment horizon of 1-3 years

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There are still many traditional business owners who don't even believe that their business should be very profitable.

Often because they think it's greedy to raise prices and then do it again. And again.

(I know a few manufacturing companies that sell products and services to farmers. For some reason they believe that farmers are having a hard time...)

They never think their net margin should be 15-20% because it has always been less than 10%…

In reality, higher profits will do a LOT of good, I mean, higher profits can be used to create new jobs and expand, create more opportunities for their top talent, which can lead to better and more valuable products/services.

As a result, doing all this while making customers' lives even better.

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How has been the week in my small holding company world?

Traditional businesses

Looking at my cold calling calendar for next week.

Calling the business owner is still one of the easiest ways to learn about a particular company and its market.

For example... I try to talk to small business owners almost every week, if not every day. I have a CRM with a list of contacts - once three, four months go by, I give them another call.

These short 15-minute conversations often provide a great overview of the market. I'll give you an example... On a call on Friday, a gentleman said there was another fire in the warehouse next door, which is an important supplier to a certain area of ​​metal shops.

This will affect metal prices in the next 6-9 months. I never would have known about it if it hadn't been for a "how are you" call.

So when I started getting this kind of market insight…

I already knew I had to keep these calls going (To be honest, I really enjoy them too.)

That was it. So the big lesson here is simple…

If you want to understand a particular business and its market, take the time to talk to the business owners. Get to know them. Understand what their day is like. What they worry about.I promise you will learn more by doing this than by reading any business book.

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When it comes to calling to build a relationship with owners, you automatically build a strong pipeline for future investments.

As Jim Rohn said, "the things that are easy to do are also easy not to do"

Additional information about the deal I’m pursuing:

The $12mm heavy equipment seller and rental company I’ve talked about – last week another buyer joined the conversation, but they said this guy is 20-25 years older than me.

They don't like it, although he is willing to pay more and with better terms (mostly cash compared to my complex structure of A and B shares and property sale leasebacks).

I might get more information in the following two weeks.

To understand your interest in what I do, get on my list here and I’ll send you more information about the deals.

Consumer loan company

November is always the busiest because of Black Friday and the general start of a shopping season. It always slows down in December.

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This week’s podcast:

Meet Jennifer Chong and Roman Khan.

Founders of Peak21, where they acquire majority and minority stakes in staple DTC brands and scale them.

Started in 2013 with $20,000 and to date have made 10 acquisitions and generate $200m per year in sales profitably.

I hope you enjoy listening.

Here are the links to Spotify, YouTube and Apple Podcast.

That’s all for today.

Thanks for reading and talk to you again next week.

Take care,

PrivatEquityGuy / Mikk Markus