45.05% profit margin on $12.5M revenue

Just a quick note before we dive in…

I wonder how many small businesses do this?

Small business and capital allocation at its best.

Husband and wife duo. 100% owners. Almost zero debt.

They run a niche clothing company in Europe.

Depending on the year, the company itself makes a net profit of 10-15% every year. Revenues range from $10mm to $22mm depending on the year.

All the available cash has been invested in high yield bonds.

They only pay a maximum of $400-500k per year in dividends, never more, the rest is reinvested.

It seems to work very well.

I have met them a few times, they live a simple life, very smart, very patient and you would never say they have assets worth more than $60-70 million.

- - - -

The best investment opportunities are created through interaction with other people.

Period.

You have to put yourself out there. Or no deal, talent, capital will ever come to you.

Rarely does anything happen when sitting at home ‘thinking and wishing"

There are different ways of putting yourself out there:

1. posting your thoughts, ideas and journey on social media (The main benefit: people see the way you think.)

2. reaching out to people via cold call/email

3. becoming so good at something that people want reach out to you

Mixing all three… and you might end up getting very lucky.

Putting yourself out there in one way or another is the most effective way to get in front of opportunities, deals, talent and capital.

-

Social media is all about getting people's attention so you can go from online to offline.

I have traveled countless times to different European cities to meet people on the same journey as well as people who are decades ahead of me.

Will continue to do so.

As Paul Graham has said:

When you read biographies of people who've done great work, it's remarkable how much luck is involved.

They discover what to work on as a result of a chance meeting, or by reading a book they happen to pick up.

So you need to make yourself a big target for luck, and the way to do that is to be curious.

Try lots of things, meet lots of people, read lots of books, ask lots of questions.

- - - -

You want to acquire a very small business.

Think again...

One very big risk in buying a $150,000 Ebitda company

Obviously there are many, but here is one:

compensation

Let's say you do your due diligence and ask people if they're happy with their compensation or not?

You talk to all of them, individually - they are all happy.

Then the closing takes place, the first day after the acquisition. Half the team wants a raise, they say they have promised a raise for a while.

- - - -

The secret to success in the world of <$1mm Ebitda business acquisition:

It's okay to be in uncomfortable territory and not know what's going on or what the answers are.

-

The goal is to fall all in love with these types of environments or those situations.

In these situations, it helps to realize that there isn't much new information, it's just that it's new to you.

Solution:

Reach out to titans of the industry, someone who's gone from zero to $25mm, and ask how do you do it?!

- - - -

You can't fake curiosity and passion.

Be it building a portfolio of cash flow traditional businesses.

Or getting into venture capital or running a B2B enterprise software company.

You're competing against folks who live and breathe the craft, and if you're not… very difficult.

And even if you get lucky and achieve it, you will still not be where you wanted to be.

-

So the goal is to have a deep personal interest.

If you like doing what you’re doing you gotta put more effort into this as it’s not going to feel like work; it’s gonna feel like fun.

This should be YOUR personal passion and not your parents or friends.

It’s gotta be something you’re doing on your own.

And if you only run towards status and compensation but you don’t enjoy the thing…

You’re gonna burn out eventually.

- - - -

Funny thing when cold calling to >$1mm EBITDA companies…

Writing this while looking at the list I'm going to call and introduce myself next week.

The more you do it, the better you get.

You never know if the next call will be a potential seller, or investor… or opens up the door to something completely new.

Smartest thing one can do is to stay in the game. If you are in the game, luck may find you. When you quit, it's over.

- - - -

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

Consumer loan company

From October 3rd to October 10th we will issue another round of bonds

The bonds are secured by our portfolio and will be trading on the Nasdaq Baltic.

The size of Modena’s issue of secured bonds is EUR 850,000. Each bond has a nominal value of EUR 1000. It comes with a fixed annual coupon rate from 11.5% to 13% with quarterly payments.

Let me know if you’d like to learn more of what we do (I am more than happy to have a meeting where we show our back office and everything).

In May this year, we raised EUR 744,000 from 31 investors.

As you can see, ticket sizes range from EUR 1,000 to EUR 150 000.

That said, come join us, you can start from EUR 1,000

My additional comments:

To be completely transparent with you (as I’ve always been!), the biggest problem so far has been the lack of loan capital.

This is how our projected growth looks when we can raise enough debt over the years:

• 2024 portfolio: 5.5 mEUR, profit: 250 kEUR

• 2025 portfolio: 8.5 mEUR, profit: 800 kEUR

• 2026 portfolio: 13.5 mEUR, profit: 1.4 mEUR

• 2027 portfolio: 20.5 mEUR, profit: 2.4 mEUR

• 2028 portfolio: 29.5 mEUR, profit: 3.6 mEUR

• 2029 portfolio 40.5 mEUR, profit: 4.8 mEUR

• 2030 portfolio 52 mEUR, profit: 6.1 mEUR

We are working hard to achieve this.

What about the risks for the debt provider?

As of today, the net value of the portfolio is nearly 5 million Euros. The money of external investors not related to the owners is 3 million Euros.

The rest of the money is related to the owner, so the LTV (Loan to value) is about 60%, which varies slightly over time.

Our goal is to keep this LTV at the 75% limit, so that there is sufficient overlap.

If there is a worst case scenario:

In the event of liquidation, the money of investors unrelated to the owners will be repaid first. Only after that, the money goes to the owners. The guarantee agent is the law firm Widen, which in case of liquidation takes over the management of the bank account and makes payments. The owners have put money into stocks rather than buying bonds and have no bond guarantees.

We do not use external debt collection — we have developed everything ourselves in-house, and we carry out the debt procedure ourselves all the way to the court.

So…

If you are interested in financing our portfolio, we offer interest rates between 11.5% and 13%; depending on the period.

Come join us, you can start from EUR 1,000

- - - -

This week’s podcast:

Philippe Willi is building a SaaS holding company called TrekkSoft in Switzerland.

He buys SaaS businesses all day but never sells them.

Philippe's story is different:

• He started a VC-backed SaaS, but wasn't able to grow it fast enough…

• Then he pitched investors not to grow that one SaaS, but to acquire other SaaS companies instead.

• The investors said it was a VERY stupid idea, but decided to do it anyway…

Today they have a team of 170+ employees and 6 portfolio companies.

The awesome story of Trekksoft.

Important note: Philippe is a big fan of Mark Leonard, the founder of Constellation Software. They have met twice. Mark even visited Philippe and his family at their home in Switzerland.

Lots of great stories and lessons in this episode.

Enjoy!

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

Few lessons from this week’s podcast:

Lesson number 1) Willingness to pivot

Step 1: “Hey investors, we want to build a SaaS company that will grow like a rocket ship. “

Step 2: “Okay, we like the idea- here is the capital”

Step 3: Years later after not growing enough, "guys, there will be no rocket ship… Instead, let's start acquiring software companies and build a holding company like Mark Leonard did with Constellation Software.”

Investors: "Guys, this is a VERY stupid idea, but okay..."

As a results, TrekkSoft was born…

Today, it has 6 portfolio companies and 170+ employees.

The biggest lesson from this story is the willingness to pivot.

I wonder how many struggling VC-backed startups could do the same and become more successful as a result?!

Lesson number 2) Everything is negotiable.

There is a group of software founders who had a great idea. They raised capital but couldn't grow the business fast enough.

After 3-4 years, they told investors that instead of moving forward and raising additional capital, they wanted to acquire other software companies.

Investors said they were stupid but decided to invest in them anyway.

The rest was history.

That’s all for today.

Thanks a lot for following the journey.

Take care,

Mikk Markus / PrivatEquityGuy