25-30% net profit; "cash-rich"; owning a building

They never stop amaze me.

Another very boring traditional business…

Spoke to a gentleman in 50s who runs a manufacturing company and makes millions.

Doing what?

Sandpaper.

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A spicy take from today's podcast guest who bought 6 companies and then sold his platform to larger competitor who did $275m in sales:

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The valuation expectations of 60-70 year old traditional company owners can be crazy.

In many cases, even unrealistically high.

At dinner last week, I had a conversation with the owner of a metal manufacturing company.

Revenue $20M with a 5% net margin. 20+ years in business, very stable.

He asked how much a company like that sells for… $60 million? Three times annual revenue?

Me: I'm not an expert, but not really

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Yesterday evening while gf and kids were asleep, I went through a list of traditional companies with EBITDA between $500k and $4m+

Some interesting observations:

1. Revenues for companies with those Ebitda levels range from $2m to $50m, so margins vary a lot by industry (Yes, it's obvious. But it's great to see in practice).

2. Not all owners are cash-rich. Some businesses have large asset bases, but most of the money gets reinvested just to keep things running.

3. 95% of founders are over 40 yrs old (= success takes time).

4. Some companies are extremely asset-light. They pay out nearly everything in dividends, and not much changes. Next year looks the same as the last.

5. There are so many services, products, and niches that it almost feels unreal. For example, a well-drilling company can generate 25–30% net profit per year. Like clockwork. It has been doing so since 2008.

6. Solo ownership is rather rare. There's often more than one owner, so there's a chance one of them might be open to selling their shares. (Great opportunity for someone to make an offer- maybe one partner is ready to exit?)

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Had a great discussion with a guy who just 4 months ago joined a company (head of sales) that sells trailers.

They do about $15m in sales.

Never done a campaign.

He decided to make one, sold out + 50 orders in production for this month May itself.

Lots of untapped potential to hire a great salesperson with few basic ideas.

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Some industrial businesses don’t have a CRM, a website, or even basic follow-up on quotes.

• But they own the building

• They take scrap income in cash

• And they quietly clear 7 figures

That’s what you can walk into when you buy from a retiring owner.

The upside can be real.

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Something to think about

Let's say you're building an investment company, holding company or private equity fund…

At what point do you start bringing the core business functions into the business - e.g. legal, corporate finance, financial modelling?

If there are one or two transactions a year, is it more cost effective to outsource? What about three or more investments per year…

Has anyone done the math?

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Corporate culture wise it seems the earlier the better?

When you have a group of talented team members in your office who are highly motivated and focused on delivering a shared vision, it naturally starts to “compound”

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After talking to a lot of folks who’ve raised capital to acquire businesses, one lesson stands out:

You can take 'dumb money' and keep more equity…

Or you take 'smart money' from experienced operators, searchers, marketers and simply build a firm with better returns.

Smart money might cost you a few extra points, but it’s cheap insurance on the downside and a strategic edge on the upside.

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A surprisingly common (but far from easy) operating model:

• Buy profitable boring businesses

• Run them hands-on for 90 to 180 days

• Understand every moving part

• Then install a manager

• Step back, reinvest profits

• Do it again

Many people have built large portfolios and great lives for their lovely families by repeating the exact same strategy.

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Imagine this...

You're in your early 30s, you've bought 3 businesses in the past year, your group is doing $50m+ in revenue.

Private equity comes knocking with a $130m offer to scale what you’ve already built.

You sign a 75-day exclusivity.

Then, 10 days before the closing, you decide to walk away.

Why?

Because their values didn’t align.

More specifically: you’ve got a strict no-asshole policy.

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

Traditional company

The owner of a heavy equipment rental company called – he would like to move forward with the deal. The good news is that he and the other founder who wants to leave are both willing to finance the deal.

And their broker is helping me talk to local banks.

Let’s see where we get to with all this.

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This week’s podcast:

Did you know the investors who survive for decades? They love the game. They don’t want to do anything else.

Money and performance is important but not as much as staying in the arena.

Because if you lose joy, you lose learning.

And when you lose learning, you fall behind.

That said, I’ve spent lots of time studying Neil Mehta, the founder of Greenoaks Capital.

Neil has said: "We believe a small handful of companies define each generation."

Neil Mehta has built a $15b aum fund based on a few very basic concepts.

So I decided to do a deep research on how he finds these businesses & founders.

This is my solo episode on Neil's investing playbook.

I hope you enjoy it.

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

That’s all for today.

Thanks for reading and talk to you again next week.

Take care,

PrivateEquityGuy / Mikk Markus