🔑 The deal that started Private Equity + an interesting deal for you
The Private Equity industry has become massive.
In 2023 Private Equity Funds swelled to $2.3 Trillion. Equal to the size of the Gross Domestic Product (GDP) of Italy. Or two companies the size of Amazon.com put together.
It feels like everywhere we look, Private Equity is buying or selling businesses.
But the idea of buying & flipping companies is a relatively new concept. It first made a splash just 39 years ago.
Here's the story:
In 1982 William Simon and his partners bought Gibson Greetings, a producer of greeting cards.
Gibson Greetings was founded in 1850 and acquired by RCA in 1980.
By 1982 it had sales of $304 million which made it the third largest greeting card company. But RCA wanted to focus on its core business, so it needed to get rid of Gibson Greetings.
William Simon purchased Gibson Greeting Cards from RCA $81 million.
Here was the structure of his deal:
- $40M Loan GE Corporation
- $13M from Barclays Credit
- sold $27M worth of distribution centers and manufacturing equipment
- $1M of equity from the Gibson Greetings partners
Just 16-months later Gibson completed a $290 Million IPO. The Simon group made $66M. That's a 66x return in less than two years.
Imagine the year is 1984 and you read about this in the news. A couple of guys invested $1M and made $66M.
It set off alarms for every finance brother and sister in the world. The hunt was on.
The goal -> get rich fast.
The strategy -> apply maximum leverage while investing minimum equity. Sell fast and move on.
This desire coincided nicely with Michael Milken popularizing a concept called Junk Bonds.
Milken's innovation was that he was able to raise massive amounts of debt that most lenders would not underwrite under normal circumstances. He did this by splitting the debt into many small pieces and crowdsourcing it out.
All of a sudden Private Equity firms were able to access ungodly sums of debt capital.
KKR (the world's largest Private Equity firm), started in 1976 with $175,000 investment.
In 1985 it had $100 Million of assets under management (AUM). By 1989 it had $1 Billion of AUM (just 4 years later). The gold rush was in full bloom.
As you can imagine it was not all roses and butterflies. There is an unlimited thirst for people to create this kind of wealth. There are a limited number of companies that can handle the debt load without collapsing. In a future post I'll share some of the downfalls that come with an incentive structure that is inherently designed around "get rich quick".
An interesting continuation of the story above.
A couple years later in 1984 Disney purchase Gibson Greetings for $300M of stock. Disney's stock price was around $64/share. Adjusting for stock splits Disney stock is up 141x since the acquisition.
The Simon Group owned 44% of Gibson (worth $132 million at the time). If they held the Disney stock (unlikely), their $1 Mililon investment would be worth $18 billion today.
🔑 interesting deal of the week
I love businesses that offer continuing education for professionals. Industries that require it include doctors, nurses, architects...etc.
To keep their degrees in good standing once a year they need to sign-up for courses to stay up with the latest knowledge in their industry.
I love these businesses because regulation only goes in one direction.
Every industry has a committee who's job it is to make sure their professionals maintain the highest degree of knowledge. That committee wants to keep their prestigious job. So they impose more rules on their industry. More rules = More money for course providers. It's a good trend to be part of as a business owner.
This business for sale is a continuation education provider for Architects.
They offer 3 main products
- online education continuation courses
- live continuation education events
- B2B distribution of courses through suppliers
One of my favorite metrics to understand the strength of a business is simply to look at their Net Margin. How much of their revenue turns into profit?
The reason I like this is because it's an indicator of how much pricing power they have. And how much competition they have in the market.
This business produces ~$3M of revenue. Their profit margin on that is a whopping 31%! That's excellent.
A few things I would diligence:
- How important is the owner's relationship in the industry? If the owner leaves, will you lose market share to your competitors?
- How do they compete now, and in the future? From what I can tell, they claim they beat competitors because they produced high-quality videos. Their competition offers static, powerpoint presentations. As the cost of quality production has gone down, I'm sure there is more competition around video.
- Where is the growth? How many more architects could you serve?
- What is the price sensitivity? When was the last time they raised prices?
I'm not sure what the expansion opportunities are, but from afar it seems like the owner has ran the business to maximize cash flow over the last 10 years. There are likely Business Development opportunities with the large suppliers, and you can increase the catalog size which should lead directly to higher revenue. I'd also test price increases (all to be confirmed during diligence).
The owner seems to be tied to his price of $6.5M but he's open to a variety of structures. This price is high for me. Given the size, and lack of growth, I'd price this business at 3x-3.5x EBIT. However, he's been on the market for a while so it seems like there's some wiggle room for a buyer. At the very least, since he's open to a variety of structures, you may be able to protect your downside, get your equity out first before paying the seller note, or earn-out here.
I think this is well-suited for a buyer who will lead the business. It's going to take a lot of work and energy to modernize this business and build the relationships to increase the size of it.
If you want to use SBA to buy this business, I'd consider investing alongside of you for 19% of the business.
If you want more details on this business, or you need a co-investor, reply to this email to tell me why you're a great fit for the business.
🔑 I'm hosting a Webinar on how to build your business to sell with Nick Huber.
I wish somebody told me this when I was starting my first business.
To build a great business, first, you need to understand what a buyer wants to see.
When you go on a new journey don't leave your house without the map.
We're going to talk about how to figure out what the right map is for YOUR business journey.
I've bought many businesses. Nick has started many businesses. Between the two of us, this is going to be a high-impact session.
If you are a future or current business owner, this session is for you.
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.