🔑 Why I stopped reinvesting in my business
Welcome to The Business Academy. Here's what we have in store for you today:
- Why you should stop reinvesting in your business (do this first)
- How plumbers are becoming millionaires
- Making $162k/year by renting projectors
I used to be addicted to growth.
I taught myself to believe if a business grows, it solves all problems.
So if an executive of one of our companies wanted money for growth, I would give it to them.
I'd write a blank check and we'd pray for growth.
But the growth wouldn't materialize.
Here's where I went wrong:
I used to think that all profits should be reinvested.
Our company would have a profit on paper, but that profit would be spent on growth. The challenge of investing in growth is...it doesn't always work.
Now we took a profitable business and made it a break-even business.
And eventually a money-losing business.
This makes me think of when I was a kid and had $40 in my pocket while walking around the mall.
I just had to spend it.
An executive with a surplus feels like they have to spend their profit to unlock the next phase of growth for the company.
They feel they need to reinvest every dollar back into the company to keep growing.
While that's a common sentiment, I now believe it's actually the wrong one for running a company.
What changed my mind? Reading the book Profit First by Mike Michalowicz.
It's a wonderful book about how to manage cash flow and prioritize profit in your business.
In Mike's words:
Most business owners try to grow their way out of their problems, hinging salvation on the next big sale or customer or investor, but the result is simply a bigger monster.
I used to think that when an executive wanted money for "growth" I should give it to them and pray for growth.
Now I don't pray.
Here are some of our guidelines for profits and funding growth:
- Growth comes after profit. If one of our portfolio companies wants money for growth, it has to be after profits are distributed.
- We have a minimum threshold for profit in each business we own. We take chips off the table every quarter and keep them at the holding company level.
- We strive for growth, but we don't count on it. All of the businesses we buy already have great unit economics, so we don't need to grow the businesses to make money.
Growth is good, but profits are better.
A common business philosophy nowadays:
Operate at a loss for years so that you can grow as quickly as possible.
This is wrong.
In the age of venture capital, it's easy to think that we need to reinvest everything until we hit billions in revenue.
But in reality, most businesses won't be billion-dollar companies. And you might ruin a good business by forcing unnatural growth.
Take chips off the table. Pocket your profit first, then reinvest some of the excess (if you have it) into growth.
🔑 One interesting read: Private equity wants to unclog your toilet
This past weekend, I noticed an interesting article about Boring Businesses.
The Wall Street Journal finally took notice of the ordinary people becoming millionaires by starting plumbing, HVAC, and other home service businesses.
Private equity firms are scooping up these businesses and making the owners rich.
And even many of the ones who didn't sell to PE are still raking in attractive cash flow.
Here's what I posted over the weekend:
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🔑 One interesting deal:
Buy something once, rent it out 100 times.
That's the premise of this business model that cash flows $162k a year on just over $800k in revenue.
Let's take a look at this equipment rental business in Central Florida priced at $1.2 million.
They rent projectors, sound systems, tables, chairs, kiosks, and other equipment out to customers.
Orlando has to be one of the top areas of the country for this type of conference, given how many business conferences and events are hosted in the area.
What I like
I like the cash flow (20% of revenue) of this business and the business model is interesting to me. There isn't a nationally-known name in business conference equipment rental, so I see huge potential for the right person to grow this business. I also like that you'd have the option to purchase the real estate, for $525k, but I'd obviously want to run some analysis to figure out if that's a fair price.
What I don't like + things to explore
Personally, this deal would be too small for me. $162k in profit gives you little room to hire an operator. Likely, the buyer of this business would need to operate it full-time. I also don't like how asset-heavy it is: $300k of assets is a lot for $821k in revenue.
Due to these two factors, this one is an immediate no for me.
I also don't like the reason for selling, which is family reasons in the listing. That makes me think it could be a messy sale, with different family members disagreeing on the terms.
A few questions I would have:
- How do customers find out about you?
- What percent of the Orlando technology equipment rental market would you estimate the business currently has?
- Does the owner/operator take a salary, and is that deducted as an expense?
- What are the "family issues" cited in the listing? Are all the family members on board with selling?
A lot to explore on this one, but I prefer to give companies a "quick-no". And move on with my attention. There are a lot more good business buying opportunities that need your attention...
Have a great week,
Sieva
🔑 How to Go From Zero to Millions - With Codie Sanchez
This is by far the most popular podcast episode I've ever done. A few months ago, I chatted with Codie Sanchez about buying & building businesses - both boring physical businesses, and online ones. I got Codie's advice for how to buy multi-million dollar businesses, how to build an audience, and what you should focus on as a business owner. Give it a listen:
Disclaimer: nothing here is investment advice. Please do your own research. The information above is just for information and learning.
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