🔑 How I stopped following the crowd...
Welcome to The Business Academy. Here's what we have in store for you today:
- The danger of following the crowds
- Want to build a business? I discovered the original PayPal playbook
- A really crappy business selling for $10 million
🔑 How to sell your business for $1 million (or more)
I tried something a little different this week on my YouTube channel. Instead of interviewing a business owner or investor, I answered a common question I get: How do I sell my business for the most $$ possible?
Here's my answer:
Don't follow the crowd too closely
I love reading stories about business history.
Learning about bubbles, manias, and market crashes of decades and centuries past helps me gain perspective and become a slightly better investor.
Recently, I was reading about the stock market crash and subsequent bank failures of 1929.
While learning about the dozens of mistakes made by investors, banks, and the government leading up to the Great Depression, I kept coming back to one thought:
Following the crowd can be dangerous.
When thinking of 1929, you might assume that most Americans lost a considerable portion of their net worth in the stock market crash.
They didn't.
Fewer than 1% of Americans even had a brokerage account in 1929.
And fewer than 0.5% had a margin trading account.
There were just 1.3 million active brokerage accounts in the US in 1929, compared to 51.5 million today. That's a 40x increase in the number of brokerage accounts while the US population has only gone up 2.5x.
The picture of a bunch of over-leveraged day traders losing everything and causing a crash that have in our heads today didn't happen in 1929.
Instead, the crash of 1929 started as a confidence crisis.
From the book Americana, (one of my favorite reads on the history of business):
It should be noted that much of the frenzy was experienced vicariously...To the millions following the headlines, an appreciating stock market was an ongoing affirmation of economic greatness...Through this real-time gauge of economic health, the public was psychologically vested in the financial exposure of a few hundred thousand investors.
So when the market crashed, the vast majority weren't directly affected.
But they had been living their lives according to the performance of the market.
The market was doing great, so they spent lavishly and felt confident.
Before the crash of 1929, Americans were spending beyond their means on new cars and household appliances simply because a stock index that they weren't invested in continued to rise.
But when the market dipped, they started to feel the opposite. Companies contracted and everyday citizens went to pull their money out of the bank "just in case."
Before long, everyone was doing the same.
A crisis of bank runs was sparked as everyone followed the crowd.
I certainly don't blame people for rushing to pull their money out of the banks (I would have done the same, considering FDIC insurance didn't exist at the time).
I'm not saying you should never follow the crowds. In fact, you should have followed them and pulled your money out of the banks; those that didn't lost access to their life savings. But you would have been wrong to follow the crowds before the crash: People inflating their lifestyle just because their neighbors were all doing so was catastrophic right before the economic downturn.
So how do you know when to follow the crowd, and when not to?
We often base our own decisions not off logic and calculated risk/reward trade-offs, but on the suggestions of others (especially groups of others).
That's dangerous.
In 2021, it was easy to get caught up in the hype of Crypto. I was tempted to try my hand at making a quick fortune like many others on Twitter were doing.
But playing the long game with your investments requires ignoring most of the tempting distractions that pop up.
While reading about past crashes and the irrationality of investors, I come back to this question:
Am I running my own race, or simply following the crowd?
I think if you can define your own race, you don't have to worry about following the crowds.
How do I do this? I write down exactly what my thesis and investing plan is. Then when I go to make an investment I look back at my plan. If it doesn't align with the plan, I go back to the drawing board.
Humans are simple animals. And we are often (mis)led by our emotions.
If you know you will be tricked into bad behavior by emotions, you need to create tools to prevent yourself from making bad decisions.
I'd define my own race, at least in business, with this quote from our 2023 shareholder letter at Enduring Ventures:
As we need to remind ourselves in times like these, our aspiration is not to build an empire overnight, but to build a long-term compounding machine. This requires us to protect the downside and move methodically...
Long-term compounding while protecting the downside risk.
If I can do both of those things, I know I'll be successful in running my own race.
If I see the crowd rushing to the latest frenzy, I first check if this new trend will expose me and my investors to huge downside risk. If it will, then it's an automatic pass.
Don't follow the crowds. Monitor them, but keep a safe distance.
🔑 One interesting read: How money moves around the internet
"Hey, can you Confinity me that money?"
Doesn't have a great ring to it, right? Good thing Confinity changed its name to PayPal shortly after launching its mobile payment service.
I recently found the original business plan behind Confinity and PayPal, written by Peter Thiel.
It goes over how the company planned to lock users into its ecosystem, which would first be launched on Palm Pilots.
While I've read thousands of startup pitch decks and business plans, the crazy part about this one is that just about all of it came true. This makes me think of our write-up above. If you have a good plan that you write out, and stick with it for a long period of time, great things may happen.
Read the full story here (it's worth it)
🔑 One interesting deal: I found a crappy opportunity
This one is every entrepreneur's dream: Owning $1.6 million worth of porta-potties.
This portable restroom company in Oregon does $4.8 million in revenue annually and is selling for 6.5x cash flow. Let's take a closer look at this:
What I like
One of the first things I check in any business listing is how long the company has been around. This one started 29 years ago, which is a positive sign.
The listing says that the business is the clear leader in their area. Of course, I'd verify this, but I love businesses with a strong moat and established relationships with clients and vendors.
This one checks a lot of boxes for me: Established business, market leader, strong cash flow, and in a "boring" business that others won't want to compete in.
What I don't like + things to explore
The owners are retiring, so you'll need to either work in the business or find a way to pass on their knowledge.
The multiple is a bit high. Typically, I'd expect to see 3x to 5x for this size business. One potential red flag is that the business owner also owns the facility the company operates out of, but is not including it in the business sale. Usually, sellers include the real estate to increase their sale price. I'd assume the owner wants to hold onto it in order to collect rental income, which could be ok. The better outcome is to buy the land yourself and do a sale lease back on the property.
Questions to explore:
- Do they have many different customers, or are they highly concentrated around a few big contracts?
- Are the customer cyclical? For example if their main customers are construction companies then that may suffer during a downturn
- How new are their portos, if they're old and shabby you will need to pay to replace those so factor that into your price
- Does it come with it's own pump trucks, if so what is the condition of those?
- what is the true free cash flow of this product (after they pay for replacing and repairing equipment)
- the business made no money in 2020, likely because of COVID? you'll need to review financials from 2015-2020
- I see $2.2 Million in equipment, you'll need to appraise that at liquidation value
- Check what percentage of the $400k is highly likely to be colleved
Have a great week,
Sieva
Disclaimer: nothing here is investment advice. Please do your own research. The information above is just for information and learning.