🔑 I studied one of the worst business models ever
Welcome to The Business Academy with Sieva Kozinsky. Here's what we have in store for you today:
- I studied one of the worst business models
- How to buy a $2.5M+ Canadian distribution company
- Making $700k+ working 1 day a week (too good to be true?)
UPDATE: The Business Academy is opening a spot for our first outside advertiser. But not just any advertiser. We have a unique audience of 70K+ smart investors plotting their next business to buy (see results below from our recent reader survey, over 60% of readers come to learn about how to buy a business or to find a business to buy).
We are going to take on just 1 advertiser before the end of year things and get better data for 2025 — if you are interested, please respond to this email and we can provide more information.
🔑 Buying $1.9 Billion Worth of Boring Businesses
My friend John started a private equity firm and raised almost $2 billion across 3 funds. I break down how he raised the money, what kind of businesses he buys, and why investors entrusted their funds to him (including one investor who gave him $65 million after just one meeting)
What makes a good business?
Read this list and tell me if this is a business you'd invest in:
- All expenses are incurred upfront, but the revenues aren't realized for at least a year
- Every project is one-off and can't be repeated in the same way again
- You don't know what customers want until after you spend millions of dollars creating it
- The employees you hire are volatile and difficult to work with.
Sounds like a pretty bad business model, right?
I'm describing the Movie Business.
I was reading one of my favorite books, Americana, and came across this description of the early days of the movie business:
Each film was entirely different, but all were expensive. Unlike a factory, a lavish movie set might be used just once, especially if the scene called for a fire or explosion. The key employees, writers, actors, and directors were known to be volatile. Even an expensively produced film that got everything right, however, could not guarantee that audiences would actually pay to watch it. And if a movie was well received by audiences, very little of this knowledge could be directly applied to another film.
This got me thinking about the concept of Hits Businesses.
Here's how Google defines it:
A "hits business" refers to a company that heavily relies on producing a small number of highly successful products or services, often with a "hit-or-miss" element, where only a few offerings within their portfolio achieve significant popularity and drive most of the revenue
These kinds of businesses can be great.
A VC fund, for example, is one of the best business models in the world. The General Partner collects ongoing management fees, plus a generous percentage of the profits, in exchange for getting to meet with some of the best entrepreneurs in the world.
And most funds are locked up for 10 years, which means at least a decade of receiving a reliable stream of management fees.
(By the way, if you're interested in the fund management business, watch this interview I did with a legendary private equity investor).
Downside Risk.
In the VC business, the cost of a failure is negligible to the general partner and the VC firm itself.
They use other people's capital to make investments, so the cost of the failed investment is just a few hours of time spent making the investment.
But in the movie business, the cost of a failure can be hundreds of millions of dollars.
A Wikipedia article called List of Box Office Bombs shows over 100 Hollywood movies that lost more than $100 million.
Ever heard of these movies? Me neither.
The movie business is a lottery ticket if you don't have an A-list cast or an established franchise to make spin-offs of.
This is why Hollywood continues to pump out sequels, despite the protests from audiences - people still pay to go see them.
Hits businesses are great and can make you extremely wealthy, Just make sure to be realistic about the losses you will probably incur.
Personally, I like to build my wealth steadily with predictable, boring companies that have known inputs and outputs - with the occasional 'moonshot' investment.
🔑 One interesting read: How to Buy a Business
How would you find a Canadian distribution company with $2.5 million+ in EBITDA to acquire?
Luckily, I found a step-by-step guide on how a Search Fund operator began her quest for a business to buy.
You can see the breakdown of her investment thesis, plus some of the reasons she chose this path over staying in a cushy corporate job.
🔑 One interesting deal
Everyone's buying software companies.
This one does $734k in cash flow, with an owner who works just 5 hours a week. Sounds like a dream. Let's dive into this one.
What I like
This one seems to check a lot of boxes: 5x EBITDA multiple, the current owner works only 1 hour a day, been around for 12 years, and has a lean team of 5 part-time team members.
Most software business buyers would love to own this one.
Almost seems too good to be true....
And when that's the case, I'll want to take a much closer look at the business to make sure I truly understand it. And there are some negative signs here.
What I don't like
I see a couple issues right off the bat. Like last week, this listing has the same figure for both EBITDA and cash flow.
With a software business, this might actually be close to possible.
Small software businesses might not have depreciation or amortization, and this business probably doesn't have interest expense since it's so profitable. But, I doubt it has zero tax expense.
So I'd want to dig into the financials and figure out if $731k is EBITDA or net cash flow.
I usually don't like when people ask "why would the owner sell a good business?", because there are many legitimate reasons to sell a great business. But in this case, I'd have to ask that same question.
If it truly takes just an hour a day to run this business and make $734k a year, why sell? My guess is that the current owner has hit their limit on growth and doesn't know how to scale further. I'd want to dig into the model and figure out if it's possible to scale this one.
The description notes that the business provides a plugin for an Adobe app, which is another red flag for me. I personally wouldn't want to own a business that's entirely dependent on a large business I have no control over. I've seen good companies die overnight because LinkedIn, Facebook, Apple, or other large platforms decided they didn't like them anymore.
Have a great week,
Sieva
P.S. I've been publishing more shorts on YouTube with some of the most interesting moments from my interviews. Take a look and please subscribe on YouTube if you haven't already.
Disclaimer: nothing here is investment advice. Please do your own research. The information above is just for information and learning.
