🔑 Turning garbage into billions
Welcome to The Business Academy with Sieva Kozinsky. Here's what we have in store for you today:
- Turning garbage into billions
- Using a fax machine to buy a business
- Don't buy this business
First, a word from our sponsor
At my company Enduring Ventures, we manage over 50 bank accounts across 17 businesses… That’s a lot of accounts to keep track of.
To view our cash balances and transactions, my finance team used to spend hours every week, logging into a bunch of banks. It was a pain…
Then my friend introduced me to Vesto.
Vesto made it easy to connect all of our banks into one simple dashboard. With real-time balances, transactions, and cash flow monitoring – we went from 50 account logins to one.
For any company managing multiple banks, Vesto is a no-brainer
He Rolled Up Garbage - And Made Billions
Brad Jacobs is one of the kings of Boring Businesses.
He started eight companies. Six of them are now public.
And they're all cash-flowing monsters.
Here are a few career highlights:
- United Waste Systems: Brads founded the business in 1989 by consolidating small waste collection companies, eventually taking the business public in 1992. It was sold for $2.5 billion to USA Waste Services in 1997.
- United Rentals: In 1997 he founded United Rentals, which became the largest equipment rental company in the world. It's worth nearly $50 billion today.
- XPO, Inc.: He invested in Express-1 Expedited Solutions in 2011, renaming it XPO, Inc., where he served as CEO and chairman. XPO is a leading global logistics provider and one of the best performing stocks in the Fortune 500 over the last decade. XPO spun off GXO Logistics in 2021 and RXO in 2022.
Brad gave his first two companies nearly the same name - "United" - because of the rollup strategy he was executing.
He rolled up hundreds of small, independent businesses in the same industry to create a behemoth. Here's how one article put it:
They were both highly successful roll-up plays, in which an investor acquires multiple smaller firms in the same industry, uniting them into a larger consolidated company. Since the market generally rewards scale with higher valuations, in one sense a roll-up strategy arbitrages size, with the PE firm or independent sponsor hoping to receive a higher multiple of EBITDA upon exit. There are other potential benefits to roll-ups, such as scale economies and cross selling, but multiple arbitrage is among the strongest value drivers, one Jacobs leverages at a scale few investors ever approach.
-A Simple Model
I love how Brad himself describes his investing strategy:
“The easiest way I know to create tremendous shareholder value is to buy businesses at profit multiples lower than the multiple our stock trades at, and then significantly improve those businesses.”
One of his acquisition strategies at United Rentals was genius:
Before buying up other equipment rental businesses, he purchased a software business that most of the equipment rental companies used. This gave his team access to better data than anyone else had, allowing them to spot trends and undervalued markets. And this was back in 1997 before anyone else was doing this kind of thing.
Here are a couple other important lessons from Brad:
- Buying a business is easy. Anyone can sign on the dotted line and acquire a business. The real work starts after you own the business: integrating the companies, harmonizing the cultures, merging the technology and shared services, and getting the customers and employees of the business you acquired to buy into your vision.
- M&A is nothing without a great company strategy. If you buy up every company you can, you'll suffer from confusion and chaos. Brad says every acquisition clearly benefitted their strategy of being the absolute best option for waste removal (and later equipment rental) in every market.
- Take on the big, hairy deals. Everyone else wants big, low risk deals, meaning there's a ton of competition for very few deals. But no one wants to take on the hairy deals, meaning there's low competition. But make sure you're buying a big hairy deal and not a small hairy deal (see the M&A matrix below)
🔑 A Unique Strategy for Buying Companies
If you've done cold email outreach, you know how infrequently people reply.
One aspiring business buyer had a better idea for grabbing the attention of business owners: A cold fax.
She sent faxes with a photo of herself wearing a sweater that said "I want to buy your business".
And she used this method to buy a multi-million dollar business.
One of my favorite parts of this story is the top comment on the video, which reads like the most wonderful obituary/reference. This should be a goal for anyone in business:
🔑 One interesting deal
Today I'm taking a look at a home lending company based in Texas. Let's dive in.
What I like
This is a profitable, established business that's selling at a decent margin (6.3x cash flow).
The listing explains that these loans are short-term, 12.5% real estate loans. While I like that the business has been around for 12 years now, I'll cover some of my worries about the business.
What I don't like
Short-term, hard money lending is a volatile business. The previous decade has provided ideal conditions for this type of business: Low interest rates for the most part, massive population grow in their area, and a hot real estate market.
For this business to continue doing well, those conditions would have to stay the same. And unfortunately for home buyers, interest rates are much higher now. This is a business I would expect to perform much worse over the next few years. You also need a lot of money, or access to a lot of money which is nearly impossible for a first time business buyer - I'd pass on this deal.
Have a great week,
Sieva
P.S. Last week I announced our yearly Enduring Ventures Duration Summit. We hand-pick the attendees which includes holding company owners, investors, business owners, and long-term thinkers. If you'd like to apply for a spot, learn more and apply here.
Disclaimer: nothing here is investment advice. Please do your own research. The information above is just for information and learning.
