$500m to $700m worth of deals per year

Just a quick note before we jump in…

I made a post on twitter last week:

“We are looking for exceptional businesses.”

A phrase used by many fund managers, investors and business buyers.

There is a reason for this:

Exceptional business doesn’t always mean cheap and vice versa.

There can be low quality businesses that are cheap but can do well…

Still most prefer to search for really excellent businesses.

The reason being is if they find a really excellent business with true competitive advantages that can protect all sorts of return on invested capital from competition over time…

They can often make multiples of investors' money...

BECAUSE they have this great niche they dominate. And their competitive advantages prevent that return on capital (by price competition, or whatever else it may be).

Another good thing with excellent businesses is, they CAN hold them LONGER vs a cheaper (not good) business which they can build up but then they have to sell it.

So, they look for a dominant business with a competitive advantage, and that they can understand.

That can be:

• A network effect

• A cost advantage

• Some intangible brand

• Switching cost

Whatever it may be – they REALLY try to understand it by talking to customers; by talking to suppliers; by anyone they can talk to in the industry to better understand how this business really makes money?

How does it compare versus competitors?

Once they understand this, they can wrap their heads around:

1) what business is worth and translate that into a sort of IRR over a certain time period;

2) then comparing different IRRs that they’ve calculated based on their own estimates.

To sum up, their goal is to have a systematic process of developing the absolute best portfolio that they can.

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Then I got a response from a true PE specialist, Dino Sawaya from Exonas Capital

So…

If you’re into private equity, M&A and deal making.

Please read it 5 times, it's remarkable.

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The worst thing that can happen in life:

Getting old and realizing you got good at the wrong thing.

Therefore, when setting 10, 20, 30 year goals, it is very important to let your mind wander.

Whether it's building a private equity firm…

Or a holding company for profitable niche companies…

That said:

Every time you start building a business you should ask, what would XYZ do?

For example, when it comes to acquiring and growing traditional niche businesses, ask, for example - what would young Henry Kravis and George Roberts from KKR do?

So here's how I think they'd manage their time when building a holding company for traditional $2-10 million companies.

At least that's how I would do it.

Dream in Decades -> Think in Years -> Work in Weeks -> Live in Days

Dream in Decades

This is where you let your mind wander.

Find a quiet space and let ideas build up your dream about all the golden geese – and their golden eggs–that you want in your life.

Think long, and think concretely: picture everything you want to have in your life - family, health, HoldCo, etc.

*Do whatever you need to actually feel that success.

Just make sure to aim for the ambitious eggs that are way out in your future.

Some of my personal goals:

I want to build a HoldCo portfolio of 8-10 niche companies.

I want to aggressively double the revenues and profits of these portfolio businesses in the first 3-4 years

I want my podcast to be big enough in the HoldCo space that whoever I invite says Yes

Think in Years

Time to break it into smaller pieces.

You’re planning every part of a twelve-month layer cake that will churn out your golden eggs.

Here's how I think about it:

A system to go prospect and find companies to purchase.

Let’s call it a cold-calling system – building a pipeline of niche companies worth $2-10 million who want to sell the majority of their business to us.

30-60 calls per week to new companies;

1. to maintain relationships (being on top of mind when they want to sell)

2. to understand their current situation

3. to understand the overall market

At this stage, I'm doing the calls myself (I really enjoy doing this and I'm pretty sure it's something I'm not going to outsource in the year future - it's just too valuable and provides a lot of information and industy knowledge.)

Next.

A fund-raising system for bringing in investors.

Planning to spend more time building relationships with people.

• Teams & Zoom calls

• Podcasts

• Live events

• Dinners

Work in Weeks

This is where the huge dream meets with reality.

You know what you want to do in a decade, and in a year.

You know the systems you need to set in motion to make it happen.

Now, zoom in on the day-to-day for each system.

If you are in a project’s development stage, what do you have to do from week to week to get it off the ground?

If your systems are already running, what needs to happen every week to keep the project going and growing?

Live in Days

This is where your work thrives or dies.

When you live in days you’re focusing on the two or three things you can get done in one day that will help you reach what you want to accomplish in weeks.

That work will feed up to the systems that you’re building over the course of a year. That’s it.

My plan looks something like this:

In the next decade, I will have 8-10 profitable niche businesses in our portfolio.

This next year, my plan is to add 1-2 profitable niche businesses to portfolio.

To accomplish the year’s goal, I’ve set five systems:

System 1:  Improve the pipeline of profitable $2-10m niche businesses via brokers and cold-calls

System 2: Grow portfolio companies - sell 100-200% more products and services

System 3: Record a podcast episode (learnings + relationships)

System 4: Post to X (relationships and goodwill)

System 5: Go from online to offline. Meet more people IRL. Fly to London, fly to Paris, fly to Dubai and Singapour, US.

Each day of the week I’ll focus on building out one of these systems. Obviously I mix it up some days.

The secret to recognizing what you’ve accomplished over the past year without having to measure everything. You just need to measure one thing: money in the bank.

If that number has gone up in a year, then double-check that you’ve living the life you want by asking: Do I feel good?

If you answer yes to both, job well done:)

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There are a few things to look at when doing due diligence in a traditional $2-10M company.

1. How much money is coming in?

2. How much we keep after we pay for all the staff that we have to have in order to do the job

3. What do we have to pay for after that and why do we pay for it (and how to keep it really low)

4. What is the final number and how much of it actually turns into cash

You want to go into the bank statements, the last four-five years, go through all the transactions and try to rebuild the P&L.

Understand the inflows and outflows…

Takes a lot of time, but you get a great insight into the company and its numbers.

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When I first started talking to business owners that are making $2-10m in revenue

Nobody took me seriously...

Because I was solo.

However, there was this one question that really improved it all.

To get people to throw out their first number, I asked, “what is a number that, if you got it, you’d be shocked and really excited?”

This question gives the potential seller permission to be unrealistic, but you’re at least getting them in the habit of thinking about selling. And throwing out a number.

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An interesting approach when building a permanent holding company of profitable cash flow businesses.

I forgot who said this but something along those lines:

Every deal you do should be your last deal.

In the HoldCo world you die from making a mistake, not from missing out.

Total opposite of venture capital, where you invest large sums of money to find a home run or two.

You do a deal and you can be sure that this company will do so well that you won't have to do any other deals for the rest of your life.

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It comes with one catch though:

It requires extreme patience from both GPs and LPs.

But it is one sure way to build serious wealth.

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

Consumer loan company

There is a company interested in acquiring the company. We’re in DD phase.

I'll keep you posted on how it goes.

Take care,

Mikk Markus / PrivatEquituGuy

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This week’s podcast:

Spoke with a gentleman who had held various jobs before taking the big leap into entrepreneurship:

1. engineer in a service company

2. senior manager of banking

3. managing director of investment banking

In that order....

Years ago, he founded a growth equity advisory firm which does $500 to $700 million worth of deals annually. 

What made you become an entrepreneur?

"I didn't want to sleepwalk through life."

So cool!

We discuss:

• 30 of India's 50 largest companies are still family-owned

• 30% of family owned businesses are open / attracted to raising private equity funding

• Why and how should one invest in private companies in India

• A message for people who want to invest in private companies in India

• Putting all your money in Indian equities

Links to Spotify, Apple Podcast and YouTube.

Thanks a lot for following the journey.