from zero to $100 million EBIT

A quick note before we jump in…

How to summarize the definition of a great company in less than 55 words?

“If your business has a high margin, you are doing something well because your customers accept paying a high price. There is less risk of customer churn when something happens compared to a low margin business. A company with a history of good profit development also has strong numbers, which informs their future”

- Founder and CEO of Röko (ex-CEO of Lifco, an $8.6B behemoth)

Btw, he co-founded Röko short 3 years ago; Röko’s last year EBIT was $100M.

Fascinating stuff, I know.

- - - -

Over the past week, I've spent almost 5 hours listening to, writing, and then re-reading the 60-minutes interview with the founder and CEO of Röko.

As a result, here are 25 notes I made — Röko: Building a Leading Serial Acquirer

1. If you have 30 year’s experience of doing something, it’s easier, because you know exactly what to do. (My take on this: You have to start somewhere, so the next best idea is to find those people with experience.)

2. Working for others as a CEO is good for a private individual but I needed to build long term wealth for my family. Now I have control of the companies, which is advantageous.

3. At the age of 40, I was offered a big stake but I didn’t dare because I had young children and had recently bought a house. I had loans so I didn’t take the opportunity.

4. Before getting started, I had only one goal, and that was to get a GOOD team. Then we would see what would happen.

5. I find it to be a good idea to go sector agnostic and invest in good companies where management want to stay on and run the business.

6. The great BENEFIT of being sector agnostic is it increases your runway, and it also increases the quality because you have a greater choice and are NO LONGER forced to buy bad businesses.

7. It is not very good if the company lost market share over a 10-year period.

8. The beauty of the HoldCo business model is that you invest in many companies in different industries, so it doesn't matter if you make a mistake in one company. I discussed this with someone who is more experienced in the business than I am, and he makes mistakes once every 20, but it doesn't matter. I cannot think of a company where we had to close or inject cash. The mistake you can make is buying a company for 20% more and it goes down 10%, but it still contributes cash and you end up with a slightly lower return on investment.

9. There is no value in having all the knowledge if there are not enough companies to apply it to.

10. Any risks? One big risk is the RECESSION.

11. It’s enough to look at some general things; and I always have a feel for that. I did a private investment in yacht supplies which was a tremendous success and I knew nothing about yacht supplies before acquiring them.

12. It’s about finding those FANATICAL people who love their job. They stay on if they love their job.

13. It’s a challenge to find good successors when the original founder leaves; big companies are less challenging because they can afford to pay. It’s trickier for small businesses who can’t pay a proper salary.

14. The industry average is 8X EBITA, and that hasn’t changed in 20 years. It has no connection whatsoever to the stock market.

15. In order to come up with metrics such as continuous profit growth, EBITA margin, manager in place, capex under 5%, size and customer concentration - I simply read a book about this. 70% is Buffett and Philip Fisher.

16. The ONLY thing our portfolio companies have to do is to complete our monthly Excel spreadsheet, and deposit excess cash. We then decide what dividend to pay out for each company.

17. We had problems with our businesses that increased prices not quickly enough. It's also a cultural thing. Entrepreneurs love to grow their business but are not as interested in high margins as we are, because your cash flow decreases with lower margins. We still have some work to do to get them to understand that.

18. You have to be very clear that it is extremely important to KEEP the margin.

19. It’s good enough for us if organic growth is 1%

20. It’s good to have shares in HoldCos that are sector agnostic, because there is much more opportunity.

21. When we buy a company, it’s usually 3X EBITDA back debt, the rest cash.

22. If the materials are right, I don’t have any problem making a decision a day on an acquisition.

23. I can do 10 a day, so the limit would be 3,650 acquisitions:)

24. I enjoy doing that, I will be like Buffett who never stops.

25. Everything I've been involved in has outperformed the stock market. I kept one bad company, who made homes for elderly people. It was heavily regulated with the government involved. I kept it just to remind me not to do any business with the government.

More about Röko’s portfolio on the following tweet.

Very interesting, right?! How to meet like-minded HoldCo builders so you can learn the model and maybe even invest in our deals?

Step 1: Reach out to me on Twitter, or reply this email.

Step 2: Let’s take it from online to offline…

How? By you coming to our event in Stockholm.

Lots of great people there. In a short 5-7 minute presentation, I'll share our frugal yet effective deal sourcing techniques.

Take care,

Mikk aka PrivatEquityGuy

P.S. Great news: On September 11 and 12, a high-level investor will visit us—with him we go and visit 4-5 different niche manufacturing businesses & talk to the founders of these companies to potentially acquire a majority of their company.

Lastly, when it comes to the 25 notes I was sharing; it was only possible because of the guys from InPractise as they did a huge favor and sent this interview to me for free.