20-30x P/E public holdco and $9.2mm mansion

A quick note before we dive in…

If you can raise $5-10 million for a startup, you can also raise money for a good traditional business that has been around for 75 years and has always made money.

If people are willing to invest money in something that doesn't exist yet, they should be willing to invest in a company that has been around for 75 years.

Through all the ups and downs and still always generated money.

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If you were a 25, 30, 35 year old CEO with a capital allocator’s mindset, do you think the future will be much different than the past?

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Take it from a gentleman who has studied some of the greatest capital allocators.

• Singleton

• People who run the TransDigm Group

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Suppose there are two manufacturing companies:

a) $8M in revenue and $550k in EBITDA

b) $5M in revenue $1.7M in EBITDA

There are world-class manufacturing biz operators that prefer to acquire Company A because there is much more opportunity to create value by improving things.

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Two important pages that I reread 3-4 times a year

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During tough times, I always think of my finance teacher who drank two beers before our class...

And then, getting BRUTALLY honest, sharing a lesson about why he could have run a $1B private equity fund and bought a $9.2M mansion…

But never did…

“Not having enough balls at the right time,” as he said.

So if you are thinking of taking the leap to become a GP at a private equity fund...

Or eventually start your own investment firm buying private $1M+ Ebitda businesses….

Here's a story that (I hope) will get you thinking.

That said...

1. Your time is running out… so go for something big.

As my finance professor said, he and his friend both had a six-figure finance job at a prestigious investment firm.

The next moment, his friend told him that he was going to start his own company...

My professor didn't have the guts to do that... but his friend did.

Wife and friends of this other guy: "You're crazy!! You have a good job!!! Don't leave!!"

He still did...

Today, 20+ years later, he's still in college and his friend runs a $1b aum PE firm with annual fees of ca 1.5-2 percent.

Both journeys are difficult with ups and downs.

One has a small regret (he told us!)

The other is the high of life (he told us this as well).

So…

Your time is running out.

Might as well go for something big.

That said, whether the goal is to acquire a company or to raise capital and debt to start a PE company, in most cases you won't have any more credibility 10 years from now than you do now.

It's hard and no one wants to pack you anyway. So might as well gets started today.

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When looking to acquire your next traditional $1M to $3M EBITDA business.

A great saying I came up some time ago (and something I live by):

- Do what’s hard and you’re going to achieve a high IRR and MOIC;

- Do what’s easy and your IRR and MOIC are going to be FAR from good.

So what's the hard part about building a great pipeline of these <$1m Ebitda businesses?

First, it's easy to sit in a comfortable office and wait for brokers to send you deals.

A hard thing:

1. Cold calling these business owners,

2. Build a quick rapport so they actually want to talk to you,

3. Then go and meet with founders and CEOs,

4. Build a relationship with them so that eventually, one day, maybe in 3, 6 or even 12 months, you can do business with them.

Statistically, all this means 15-30 cold calls and emails per day.

And then if you go for a road trip to meet them IRL, you can have 3, maybe 4, absolute max is 5 meetings per day.

If you do this for one quarter, you can be sure you find those potential high IRR deals.

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• Hard choices, easy life.

• Easy choices, hard life.

(Exactly the same with deals, IRRs, and MOICs because not too many folks are willing to do the work)

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A few lessons from folks who have bought many profitable $1-10M EBITDA traditional businesses and run them under an holding company structure.

Some have done so well that their holding companies are public and trade at 20-30x P/E

Here are some notes I made while reading their annual letters:

1) You really can build something very big even when acquiring a small group of niche businesses.

2) The goal is to acquire high-quality, sustainable, niche companies with continuous profit growth. Preferably led by an entrepreneur or a family.

3) When acquiring a company – local management remains or becomes shareholders in their companies – local ownership average 20-25%

4) The diversified portfolio of European companies creates a very resilient business model – becoming increasingly attractive even to global equity investors.

5) Always have a lot of relationship building going on – the goal is to have super talented entrepreneurs thinking of selling their life’s work to you.

6) Cash flow is the most important muscle which gives you freedom of movement to make a considered decision to create more value.

A truly fascinating model for wealth creation.

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How has been the week in building my own small holding company?

Consumer loan company

Launching the fundraising page next week (to give you an idea how it looks, see below).

Our target is retail investors, mainly Germany, France and Italy.

Traditional businesses

When building a pipeline of traditional $1-3M+ EBITDA companies, look for owners whose companies have made them rich.

Common sense, but still not so common...

When I first started, I talked to a lot of owners who run very asset heavy companies.

A great lesson learned - these are not great companies to acquire because the owners are often asset rich but cash poor - they will ONLY become rich if they sell their company.

And you are no different when acquiring this business.

Although there are business owners who run asset light companies, have reinvested all their profits from the last 10, even 15 years into other assets such as real estate. Same also in other companies.

IMO the latter are the ones you should try to acquire.

That said, the $12mm heavy equipment seller and rental company I’ve talked about – just finished another meeting with them – surprise, surprise, 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.

Let’s see, I will keep you posted.

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This week’s podcast:

The absolute best way to build wealth when acquiring profitable "boring" businesses:

Well... there is no right or wrong.

You can do it all yourself or choose the best and brightest operators and bet on them — this is the story of Christopher who built and sold his first company and then invested the profits in search funds.

Please enjoy this conversation with Christopher Hillier—entrepreneur, business builder and investor.

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