$31m EXIT and 10/10 asset light biz

Just a quick note before we jump in…

Find a way to build trust and goodwill before there is an ask.

A great strategy not only for fundraising, but in small business acquisition and life in general.

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That said…

Quite possibly the most practical way ever to attract like-minded people, potential partners and LPs, or just folks 10x smarter and years ahead of you in life & business…

Do cool sh*t, build great products and live an interesting life.

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Great results create the best resume although there are various ways to achieve this.

Since relationships run the world, one has to find a way to attract those right people.

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“Your chance of becoming a great investor is 1/50 of 1% or something. If not less… You have almost no chance of being a great investor.”

Said by a gentleman who manages a $115 million aum fund with annualized returns of 35% (before fees) since inception…

Oh… does all that mean you can never buy a farm ranch in Choulex, Geneve, Switzerland??

You still have a chance…

But ONLY if you bet HEAVILY on your strengths; only then you can come close to that top 0.01% investment firm when it comes to returns.…

So what if you're not the smartest deal maker?

Well, you can become world-class in attracting great deals in a very specific market or industry.

Or if not that…

You can become world-class in raising capital - show me a firm that doesn't want a person like that?!

Become so valuable in one way or another that it would be silly for people not to partner with you.

Again, how?

Find your path, focus, and bet HEAVILY on it for the next 3-5 years and see how...

• the right people will come

• the right opportunities will come

And as a result I'm sure you'll get very close to what you dream of today… if not further.

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No matter what journey you're on...

Building a portfolio of traditional sub $1mm EBITDA businesses...

Raising capital for your next 8-fig or 9-fig fund...

Try to find a way where you sell aspirin and not vitamins.

It starts with understanding what's in store for the sellers and for potential LPs.

Yes, it takes research and effort to find out what's important to them - and not too many people aren't willing to do that - so you still see them running around selling "vitamins"...

• Learn from it.

• Take that time.

• Do your research.

• Find that pain.

Because...

Selling "aspirin" makes everything much easier.

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There is a gentleman in his 30s who spent 6-12 months doing a self-funded search.

He had zero success as no one took him seriously.

He then started a small website that helped business owners sell their businesses - leads came from the Big4, brokers, accountants, etc.

Did this for many years until one day he finally found a 10/10 deal he decided to invest in.

Lesson:

There are several ways to get into the game to get the best deals to come to you. You just have to be creative.

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• If you talk to 100s of traditional business owner,

• and you focus on the right sub-$1m EBITDA companies,

• you eventually find the 10/10 biz with motivated seller,

• when this happens - ONLY pay fair price,

• don't forget seller financing,

• post-acquisition make sure you take care of your people and customers,

• as an investor/operator constantly look to learn and improve,

• while not complicating life, sales and business,

• over time...

• Both IRR and ROE tend to take care of themselves and go in the right direction.

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A business is worth ONLY what the buyer is willing to pay for it.

An important reminder when talking to traditional business owners.

Sometimes their price expectations get too wild.

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The more and more I read about private equity firms which invest in $1M to $10M EBITDA companies, the more I find the following to be true:

The opportunity lies in finding individuals who want to play in a part of the market that doesn't seem as sexy at first.

But once they get in there, the return on invested capital, if they're a founder, a CEO, and they understand what's going on, is much higher than investing in larger businesses.

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Last Sunday when gf and kiddo were asleep I spent my morning going through a list of traditional companies between $500k and $4M+ in EBITDA.

Some observations:

- Revenues on such profits range from $5M to $20M, so margins vary a LOT by industry (obvious! But nice to see in reality)

- Not all owners are cash rich as some of these businesses may have very large assets if they invest most of the money back into the business to keep the business going

- 95% of founders are older than 40 years - success takes time

- Some companies are very asset light where they pay almost everything in dividends and nothing changes, next year everything repeats

- There are just so many services-products-opportunities that it doesn't seem real - if you take a well drilling company, it can make a very stable 25-30% net profit per year, already since 2008

- Very RARE that there is a solo-owner so there could be a chance of one of the founder’s willing to sell their shares

Only one way to find out…

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How has been the week in the small private equity world?

Consumer loan company

As a picture says more than 1000 words, last three months in numbers:

Traditional companies

Met a small 20+ year old company that makes almost $650,000 in net profit per year.

• Very stable revenue

• Very stable profit

• Very asset light

• Team 10 people

One problem...

The owner works 8-11 hours a day and the key man risk would be too high.

Next…

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This week’s podcast:

James started and built a financial media holdco to the point where it was acquired for $31 million.

He did it in 5 short years…

We discuss:

- Founding HoldCo with the most financially creative person he knew – a former commodities trader

- Organic growth vs growth through mergers and acquisitions

- Looking for stable year-over-year growth opportunities. “I’m not the dude who wants to do turnarounds”

- The importance of distribution and surfing the right wave

- The best deals have always been off-market from people and companies they've worked with in the past

- How to win deals over the guys who take potential sellers to Lakers games

-Sales and marketing lessons from friends who run $100mm business

- Why he's betting heavily on social: Short and long-form content

- Why and how ego holds so many entrepreneurs back

Here is my conversation with James Camp, co-founder of DMO Holdings.

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

That’s all for today.

Thanks a lot for following the journey.

Take care,

Mikk Markus / PrivatEquityGuy