this HoldCo does $210m in revenue

Just a quick tip before we dive in…

Build a level of trust 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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It's nothing but you and your dream of building this $100M aum PE firm.

That's all great, but people still underestimate how hard it can be… and even a long and successful career at Goldman is often not enough.

A gentleman who left GS to start a private equity firm:

“Doing it without the balance sheet of one of the world’s most prestigious investment banks...VERY hard. At Goldman you pushed a button and $20bn would show up."

Despite everything, he got things going, the first fund was $100M aum, today they run a $10B aum firm (and people say they have returned 2.5x gross multiple of capital and 33% gross internal rate of return)

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Dream bigger. Aim higher. They fly private but aren't that different from you.

Had a Zoom call to a family office in the US.

Billions and billions of AUM. Of which $200-500m is invested in PE funds. $30-50m tickets.

He even showed me one particular fund which invests in the dental or vet industry (forgot which it was). They followed a roll-up strategy and turned a $25m investment into $300m+ in a reasonably short period of time.

The first few years were slower: $5 million -> $8 million -> $11 million. And from there, whoop. $30m -> $60m -> $170m -> $350m+

$100m+ EBITDA

All through acquisition.

The IRR percentage is in the 80s.

Simply remarkable.

Now the funnier part:

When I asked if they would ever invest in Europe (family office level?)

He pretty much said there is no need for that. They have a small team and do not have enough information and knowledge about the European market.

100% understandable.

Finishing the sentence, he added that he knows some people and funds who do.

Overall a very good call.

A great investor and an even better person. Very generous, both time wise, information wise.

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Talking to a lot of retiring small business owners whose business is doing $2-$10 million in revenue.

And when asked, "What is important to you?"

Very often it is the following:

• Legacy

• Team

• Price

In that order.

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When it comes to building a pipeline of profitable <$1M EBITDA companies:

You can spend years going through all the traditional channels, including brokers and advisors.

But if you think where is the highest level of trust among these small business owners? Especially those who have been running their business for 15 or 20 years.

These are their accountants. Because their trust level is probably even higher than the founder's spouse…

The next job is to build a relationship with the accountant to find out whether or not the business owner would be interested in selling their business.

Local 1-2 person accounting firms are the way to go.

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A great question to ask small business owner when looking to acquire their business:

(This is more for you but builds a lot of trust with the seller)

“If you had another 10 or 20 years, what would you do?”

Although you will probably do 70-80% of it, it tends to develop your potential execution plan after acquisition.

And this question will give you a great insight as they have been in this business all these years.

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The world of private equity and SME acquisitions is very crowded…

Sadly, there is too much hard work and long hours, but not enough clear thinking.

Solution: Thinking time on weekends and holidays

I believe this to be one of THE biggest difference makers whether one will ever manage large sums of capital…

Invest tens of $millions in profitable private companies…

Or even achieve 30%+ IRR on smaller deals when starting out…

So, here’s the deal…

Things slow down on the weekend: less emails, little or less travel, no meetings.

All this means one thing…

More thinking time.

And that is what makes weekends very important.

From Monday to Friday, you’re often all over the place.

But when reading about the top 0.01% folks (people managing big funds; 100s of millions AUM; running a large number of profitable portfolio companies, etc.)... I've realized:

Every single one of them works hard. But the difference maker seems to be.... WHAT you do is more important than HOW… and how much you do it.

That said...

WHAT should you spend your time on... is often realized during holidays and weekends.

And not on the stressful situation after another meeting with the managers...

Too many people (maybe even 90%??): They rarely take time off, so there is already ENOUGH doing, enough action but never enough time to think.

Dare to be different.

"Having one good idea walking down the beach can save you a lifetime of hard work."

If you look at the top 1% dealmakers, private equity managers, capital allocators…

They often plan their years starting from booking the vacations:

• 2.5 weeks in January are for skiing

• Then 3 weeks in April in Morocco.

• July 10 days in Italy

• Something warm again on November 2, maybe South Africa?

• Not counting the long weekend here and there.

And ONLY when the vacations are fixed, they plan the work schedule.

Why?

1. Happy wife = happy life

2. They know the value of a clear mind

What do they do when they are away from the office?

Physical activity, walking, hiking.

Hours in a quiet room, reading, researching, gathering new ideas, taking notes, writing.

All things that many 10% IRR folks consider a TOTAL waste of time…

To sum up:

1. The goal is to work on the business, not in the business.

2. Go places where you are away from it all so you can come back and make big bets. To make big bets, you need to rest and gather new ideas.

3. Going places doesn't always mean traveling, it can also be reading a great book or listening to a podcast episode that gives you a new idea on where to make another investment

4. Start with weekends (2 hours of doing nothing is already a great start).

5. Plan your next 3-4 day trip where the mornings are quiet and unscheduled (use this as your thinking time)

Not too many folks are willing to do that...

And as a result, we have enough hard workers, but clearly not enough clear thinkers.

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Some lessons when looking to acquire a profitable traditional business:

1. It all comes down to finding a business with an owner who is willing to sell it at the right price and on the right terms

2. Finding the appropriate financing for that

How much equity?

How much debt?

How much is the seller willing to finance?

And number three, which should probably be number one:

What is your thesis to be able to do something with the business because NOT every company or an industry should be acquired or rolled up.

Apart from that, what assets you bring to the table (not necessarily money), but assets to help/grow the business.

Is it operational expertise…

Is it talent…

Is it customers…

In the end, there are many things that can and probably will break. What are you doing next?

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“When starting a private equity firm, be willing to go a year without a salary”

A general partner of a decent size fund.

It took them one year to raise their first fund.

He said if they can't raise capital within a year, they can always go back to their jobs.

First two years were extremely difficult, especially if you made big mistakes in the first three deals.

They then set around 30 things they must go through before making any investment.

• Every partner has a business plan

• Every deal gets read to investment committee for three times

• Every portfolio company is reviewed once a month.

The main thing was 'why aren’t we running our business as we tell our CEOs to run their business'.

In the end, what happened in the past doesn't matter, investors only care about the future... so you are only as good as your last fund and last investment.

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When it comes to acquiring a profitable traditional business.

Price is often the biggest obstacle as their expectations can be very high.

You'll have a lot less luck convincing an adult to change their mind than you can imagine.

You can explain what the market is, explain the industry multiples but it often takes a long time for them to soften.

So have several such ongoing conversations to close a new deal in the near future.

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In 2021 I had to decide:

1. Take a $7-8k/month salary and start working at a private equity firm to gain experience

2. Go years without a salary and start calling profitable companies with $2-10 million in revenue to build a pipeline of companies that I can present to potential investors

I chose the 2nd.... and what can I say.

In retrospect, because I didn't know what I didn't know, a lot of things went wrong…

For example, there was one investor who gave me a very strong commitment for $6 million and said I don't need to talk to other investors because he wanted to "keep the band small."

Well, he backed out at the last minute, so I couldn't close the deal.

(I didn't know I should talk to many investors at once...)

In the meantime, we have bootstrapped a profitable consumer loan company worth mid 7 fig.

And while sharing my journey here, I've met many of the top 0.01% dealmakers who have taught and shown me how to play this game of buying and building profitable businesses.

So many stories, so many lessons.

Making the uncomfortable jump to potentially go years without a salary changed everything.

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(Note: I was able to do this thanks to my savings as a salesman in early 20s. And 2 small exits while living in Melbourne, Australia. On top of that, I have been very frugal, except for travel and relationships with investors.)

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

Consumer loan company

We are still working on the deal. Lots of back and forth.

I will keep you updated on how it goes.

Traditional companies.

Today I woke up at 5:30am

Traveled all the way to Finland to meet the group of business buyers and builders.

They didn’t disappoint me. FAR from that.

• Portfolio does $210 million revenue

• $50m+ in EBITDA

• 26 companies

• Head office with less than 10 people

My two notes from the two-hour meeting:

1) Such investment companies exist

2) Play the loooong game (they have no desire to sell and they don't have to)

3) It’s comes down to a group extremely smart people

4) Industry expertise/knowledge: 

• find THE absolute smartest person in the industry,

• incentivise them properly,

• let them shine and run the business,

• support them but don't get in the way

Last but not least, they were all very easy going, generous, no secrets.

Both sides agreed that this being the first meeting, there are many more to come.

Take care,

Mikk Markus / PrivatEquityGuy

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This week’s podcast:

A dream for 1,000s of software investors: Build a portfolio of profitable B2B SaaS companies

The northstar being Constellation Software (which trades at a P/E ratio of 104 and has a market cap of $90B)

Reality: It’s hard, extremely hard!

Despite this, there are few people who actually go and try to do that…

Take Colin Keeley , co-founder of Verne, where they buy and build mission-critical B2B SaaS businesses.

“You can have a holdco plan, but do one great deal and then earn the right to do more deals.”

I hope you enjoy this short conversation (never mind the thumbnail, desiger went a bit far with teeth whitening:)

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

Thanks a lot for following the journey.