🔑 Why I'm leaving millions in management fees on the table
Welcome to The Business Academy. Here's what we have in store for you today:
- How I play long-term games
- He made a small fortune selling cars - and then a large fortune renting them
- A software for senior care facilities that does $1.5m per year
🔑 This pressure washing business does $2 million in revenue with 37% margins...
And they've grown to 200 new franchise territories in the last 16 months.
I think the franchising model is fascinating, so I spent an hour diving deep into the franchise model with Aaron Harper, the CEO of Rolling Suds. If you're interested in local service businesses, you're going to want to listen to this one.
Read this if you want to play long-term games
My partner and I run a holding company that owns 23 businesses
With our own capital and investors' capital, we buy companies with the intention of holding them forever.
One of the most common questions I get: Why don't you just start a PE fund?
My answer: Alignment.
Let me explain.
A classic PE fund charges "2 and 20".
This model creates a gap between my interests and the investor's interests. Here's why:
- A fund charges annual management fees of 2%, which incentivizes the GP to raise a bigger fund (bad for LPs)
- A fund receives 20% of the upside, which incentivizes the GP to take more leverage and risk (bad for LPs)
- Funds have to deploy capital regardless of the macro-environment. Most funds have 3 or 5-year deployment windows in their contract, so they may have to deploy your entire fund into a “hot” market when prices are high.
But holding companies have an indefinite deployment period. I'm not under pressure to deploy capital, so I can sit until I find a great deal.
And our investors are in alignment with our long-term outlook. They directly own a piece of the overall holding company and aren't charged management fees. We win together.
I'm not saying the holding company is the absolute best structure ever (though, it is a pretty good one).
However, what I am saying is that the HoldCo structure eliminates a lot of distractions that fund managers have to worry about:
- Growing the fund in order to get more fees
- Constantly raising money for their next fund
- Managing liquidity when investors withdraw funds (in the case of hedge funds)
My mission: I want to spend my time finding the absolute best companies to buy.
The holding company structure maximizes the amount of time and energy I'm able to dedicate to that mission.
Even if you don't own a holding company, you can learn a lesson here.
Almost everyone talks about thinking long-term, but few actually do.
Why is that?
Because they haven't set themselves up to actually think long-term.
You can't think long-term if you need to scramble to make payroll in a week.
You can't think long-term if your business partner wants to pivot the business model every quarter.
You can't think long-term if your investors are breathing down your neck about monthly performance.
So, let me ask you: What distractions in your day-to-day life are preventing you from working on your long-term mission?
Are you trying to work on a 10-year plan, but keep getting bogged down with 3-month games played by investors, customers, and partners?
My advice: Pick you long-term mission and set yourself up with a structure that limits short-term distractions.
By the way...we're actively looking to acquire great companies that we can hold and run forever.
We start looking at companies doing more than $10 million in revenue. If you have a deal for us to look at, join our Scout program (you could earn a fee if we buy the business).
Join here...or just reply to this email
🔑 One interesting read: You know his name, but you probably don't know his story
One of the most famous names in cars started a billion-dollar automobile empire...even though he didn't even see a car until he was 26 years old.
That's because he was born before the invention of the automobile.
John Hertz got his start as a car salesman, making $13,000 by the year 1907, the equivalent of $421,000 in today's dollars.
Hertz came up at the exact right time: Mass-produced automobiles were first rolling off the assembly lines just as he began his career. Timing (and hustle) is everything...this reminds me of how tech giants like Bill Gates and Steve Jobs came of age at the exact right time to dominate the new computer industry.
Check out the full story of how Hertz built an empire that we still know today:
🔑 One interesting deal: A software for senior care facilities
Niche SaaS is one category that investors are aggressively pursuing right now.
That would explain the appeal and the high multiple on this business. Keep in mind, the numbers below are in Canadian Dollars, so multiply by 0.75 to get a sense of how that converts to US Dollars. Let's take a look:
What I like
Niche B2B is a great business model. This company does $1.5 million CAD in revenue with roughly 100 customers, meaning the average facility is spending about $15k per year. The current team is based in Canada, so there may be a large untapped opportunity to focus on selling into the US.
What I don't like + things to explore
The multiple of 9x of cash flow seems high compared to the SMBs we usually look at in this newsletter, but is actually fairly reasonable for software.
The size is super small. You're basically buying yourself a job until you grow this business.
You'll need to check the retention of customers. If their revenue and customer churn is under 5% per year, then this could be a great deal.
Since it's a Canadian business, it's likely not eligible for SBA
Have a great week,
Sieva
Disclaimer: nothing here is investment advice. Please do your own research. The information above is just for information and learning.
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