Welcome to The Business Academy.

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I've sent this interview below to everyone I know. And I think you'll enjoy it too.

Justin Ishbia is the founding partner of Shore Capital. He's built an acquisition machine.

Most Private Equity firms, as they grow, look for larger and larger deals. The age-old saying is it takes just as much work to do a small deal, as it does a large deal. So it's better to focus on the bigger money-makers.

But if all the big money is going after big deals, that means those bigger deals are more expensive. So a unique arbitrage opportunity exists if you can build a system to buy a lot of smaller deals

Let's look at an example of how different companies of different sizes may be valued:

Company #1 - HVAC company with $5M revenue and $900k of EBITDA. Price = $2.7 Million (3x multiple on EBITDA)

Company #2 - HVAC company with $25M of revenue and $4.5M of EBITDA. Price = $40.5 Million (9x multiple)

The reason for Justin's strategy is pretty obvious when you consider this example.

Company 2's EBITDA is 5 times higher than Company 1. But its value is 15 times higher.

Keep in mind smaller businesses traditionally come with more challenges. They have less systems, less people in Senior Management, and have a small amount of profit so if a few challenges set in they may quickly lose money.

Justin has built a proven system around acquiring these businesses.

In just the last 3 years he's bought 600 companies. That means his group is acquiring a new business every two days. If you do the math you'll see that the average business value they buy is just $12 Million. This is MUCH smaller than most private equity is looking. All of the other PE firms of his size are looking at businesses with $50 Million or more in revenue.

Closing this many small transactions required well-developed systems. Here are some of my learnings from this interview:

Break down the whole journey - he likes to think of acquisitions like sports. So think of acquiring, growing then selling a veterinary like 9 innings of baseball. Then the diligence & acquisition of a single company is like getting to first base. There are 10 to 15 different steps that need to happen to get to each base.

Documentation - every single step is documented, and the documentation is updated regularly as they learn.

Develop an operating system - Justin has 23 standard operating procedures they implement for every business they buy. He recommends studying other companies that do this like Danaher's business systems. There are a few different operating systems I've researched like EOS (Entrepreneur Operating System), I recommend this book called Traction to learn about it.

Track everything - he has a system called Flash Dash. It's simply a dashboard that informs him and his team on the health of any business at any time. If you can't measure it, you can't manage it.

Start small - most Private Equity firms with $100 Million to deploy on a strategy are looking for a $50-60M acquisition as their "platform". He prefers the opposite. He buys a small business worth $10-20M, then spends time to make sure they understand the business, have the right systems and team, and grow from there.

Build a Board (this is my FAVORITE section) - How do you invest when you don't know the industry?

Justin has a system to build the optimal board. Again, he thinks of a sports team. He wants someone who is not only a leader in the industry, but the best at what they do in that industry. So he has a seat (for example) for marketing, procurement, CFO, supply chain, sales, etc. To find these board members they speak with owners in the industry, and look at conference speakers to find leaders in the space. Board members are compensated with options (base case worth $250k). And he targets 7 independent board members per company. These board members have run or led a business at least 3x the size of the one they are buying. They are usually in the age range of 55-75, and only want to be "partially" retired

Build the plan first - before they go into an industry, they write a white paper on their plan that can be 50 pages long. And they highlight the "Mount Rushmore". These are the best players in the industry, and the board members and executives who work there. They want to categorize what these companies are doing great and poorly.

Score your key contract - they have 15 terms they are looking for in each material contract with an owner. These are the purchase agreement, operating agreement, credit agreement, and employment agreement. I love this because it limits the variance of each negotiation.

How do his funds perform?

• They've never had lower than 3x gross cash on cash.
• Their median is 5.5x gross cash on cash.
• This means they're in the 50% on IRR net. WOW.

​Listen to the full interview here

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🔑 One good read

​Excessive debt led to the Revolutionary War - Here's a little story that is obscured in most history books:

Virginia joined the Revolutionary War against the British because of excessive debt...

George Washington and his fellow rich plantation owners had spent the previous decade selling their tobacco to commodity brokers in England. In years of weak production, these brokers extended loans to the plantation owners. Now the owners were stuck. They agreed to provide their future sales to these brokers at fixed prices and had a mountain of debt to these brokers.

But if the colonies ceded from Great Britain's control, they could wipe their debt. Needless to say, George Washington and other plantation owners were excited about this outcome...and thus the Revolutionary War began with George taking the lead.

Have a great week!

Sieva

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Disclaimer: nothing here is investment advice. Please do your own research. The information above is just for information and learning.

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