🔑 Why Warren Buffett decided to lose $10M per year on a deal
Welcome to The Business Academy. Here's what we have in store for you today:
- These guys paid 110x revenue for a business
- How to sell your company (and buy it back)
- This 56-year old flooring company is looking for their dream buyer
🔑 Jamesons started a boring business that does $1.5m in revenue, hear his story (Podcast)
He left his banking & private equity career to start a boring, home deck construction business in San Diego.
And he's already grown it to $1.5 million in annual revenue in a couple of years.
In this podcast episode, I talk with Jameson Haslam about why he chose a boring business, how he sold his first $50k in projects before even having an LLC, and how he acquired customers.
What would you pay for a strong business?
5x EBITDA, Or maybe 2x revenue?
Well, I know of someone who acquired a company for 110x revenue.
And the company was losing millions of dollars at the time.
In fact, three years later, the company was losing 10x as much money.
Sounds like a pretty bad acquisition, right?
This is actually one of the best acquisitions of all-time.
I'm describing Google's $1.6 billion acquisition of YouTube back in 2006.
At the time of the deal, YouTube was generating $15 million in annual revenue and was losing money.
Three years later, YouTube's losses were estimated in the hundreds of millions.
Google's CEO Eric Schmidt even admitted that they overpaid. In 2009, Schmidt said that he estimated YouTube's true value at the time of acquisition to be $600 million or so. But he was willing to pay a $1 billion premium.
Even a few years later, the acquisition looked questionable.
CBS News said that investors were still "scratching their heads" over the deal.
Five years after the acquisition, Mark Cuban said he "still thinks it's a huge mistake."
But today, YouTube generates $30 billion in revenue with an estimated $10 billion in gross profit.
We often talk about rate of return from a deal, but we usually skip an important point of that equation: The Time Horizon.
Most of us want to make money as soon as possible. We want to double profits right away and flip the business for 3x what we paid a couple of years later.
Those can be good goals.
But the YouTube acquisition is a reminder that great deals can take a long time.
The media didn't start speaking favorably about the Google/YouTube deal until 2016, a full decade after it closed...
I believe that you can outperform other investors by thinking longer-term. While we often judge acquisitions in quarters, we should be thinking about them in decades.
I wrote about how an early investor in YouTube turned $1 million into $503 million in a year. Check it out here.
As an additional note, I'm uncomfortable losing money for years like Google did on YouTube. I prefer to buy businesses that are profitable every month after I buy them and can also grow over the long term.
Warren Buffett, who was not a technology investor took a similar strategy with the Buffalo Evening News. He spent $30M on the acquisition. And was losing $10M+ per year for a number of years while they battled with the other local news companies. Once they won the battle and became a local news monopoly, they raised their prices and this investment started generating $19 Million in profit per year...that means he was generating above a 50% cash-on-cash return in those years!
🔑 One interesting read: Selling your company to PE - and buying it back
What do you do after building a company to $45 million in lifetime revenue and selling it to private equity?
Retire, travel, and maybe do some investing?
Not in this case.
Cathryn sold her company to a private equity group in 2022, but they had trouble running it. This year, she bought it back for pennies on the dollar and is running it again. In this blog post, she gives a detailed look at how she's fixing the company's new problems and how she plans to scale up again.
If you like this story, I have a podcast coming out next week on a similar topic.
🔑 One interesting deal: Flooring business with $1.25m in cash flow
These guys have been in business since 1968 - that's 56 years!
This business is (likely) a family legacy.
There's a lot going on in this listing.
The first line of the listing description is:
Seeking an Owner/Operator only! “Cash Buyer” based in North Texas.
But the listing headline says "Reduced Price". This signals to me that they're having trouble finding the right buyer.
Finding an owner/operator that can also buy the business for all cash will be very hard. Cash buyers are few and far between.
If I were an individual, I'd look to buy this business with some cash, and likely an SBA loan.
After a while, I'd also want to hire an operator to help me run it.
This is what I'd do:
- Connect with the business owner as soon as possible. If you like the business. Offer to come out to their area and meet with them (in person is always better for rapport building). Let them know you really like their business and would be honored to own it, but make it clear what terms you can and can't adhere to.
- They'll likely decline initially. But keep in touch - every month or so, reach out and ask how the sale process is going. Don't be too pushy about forcing your terms on them.
- Eventually, if they can't find their ideal buyer, they will be ready to negotiate with you. Be ready to move quickly when the time is right,
Have a great week,
Sieva
P.S. if you're thinking about buying your first business, check out my free email course. It's 6 days of my top lessons on business buying after acquiring several multi-million dollar companies.
Disclaimer: nothing here is investment advice. Please do your own research. The information above is just for information and learning.
