🔑 You need a cash machine
Welcome to The Business Academy with Sieva Kozinsky. Here's what we have in store for you today:
- You need to build a cash machine
- Stop trying to eliminate risk
- A highway paving company for sale
My friend bought a $3.1 million business... for $0
Imagine buying a multi-million dollar business and putting $0 down at closing. Instead of paying the sellers upfront, my friend negotiated to pay them a percent of earnings over time.
It sounds impossible, but my friend did it.
In this video, I break down exactly how he found the deal, the technique he used to negotiate, and how you can possibly replicate this formula.
I love to buy cash-flowing businesses.
Why?
One simple reason: To compound cash flow for reinvestment
I want everyone reading this newsletter to build a cash-compounding engine for their life.
You may use it to pay for your bills, take some time off from your W2 income, or be like us and reinvest it to grow a bigger engine.
Buying and holding cash-flowing businesses is like playing the investing game on easy mode.
But some people make the game harder on themselves by pursuing businesses with negative cash flow.
Trust me - I was one of those people.
I raised $1.7 Million for my first startup.
Every single month, our business bank account balance went down. It was nerve-wracking watching my funds drop below $1 million, then below $500k. I was running full speed at a wall.
Then one day, I pulled the hand brake.
I decided we were no longer going to grow at all costs. We were going to focus all our attention on profitability.
And we pulled out of the nose dive. Our bank balance got down to $200k. Then it went up to $300k. And grew every year from there. It was a wonderful feeling.
I learned a valuable lesson: Startups can also be profitable.
You can focus on profitability no matter the size of your business. In fact, I encourage it.
Cash-flow investing and startup investing are not opposites. There's an overlap.
Here's how investor Paul Graham put it:
When I talk to a startup that's been operating for more than 8 or 9 months, the first thing I want to know is almost always the same. Assuming their expenses remain constant and their revenue growth is what it has been over the last several months, do they make it to profitability on the money they have left?
Or to put it more dramatically, by default do they live or die?
After the shift in strategy, our little business was default alive. And we could now fund our growth from profits.
That's why I love buying profitable companies.
When I buy a company, I write a big check to the seller. Then cash flow does the rest of the work. It flows in to our bank account, which we re-use to buy new cash-flowing companies.
This may seem obvious, but it's ignored by most people (even great investors).
If you can invest in a business that can both grow in scale and also generate cash flow, the compounding effect takes off.
"The joys of compounding are there if you keep your stake growing"
-Adam Smith
Cash-flowing businesses that we operate are my most predictable type of investment. Many things will go wrong. But I have a lot more control on the outcome here than anywhere else.
I can rely on $__ amount of cash flow per year in each business, which means I can predictably reinvest a known amount to accelerate compounding.
(Note: we buy companies that need turnaround - but we make sure their business models will be profitable with just a few tweaks).
Sound investing is all about repeatable, consistent compounding.
I think many of us can lose sight of what matters in business.
At the end of the day, businesses exist to turn a profit and return capital to shareholders.
The quicker you can do that the better - no matter the type of business.
While I applaud the entrepreneurs who take daring risks that no one else has survived, I'll stick to my "boring" strategy of buying good businesses and operating them carefully.
[our goal] is to make meaningful investments in businesses with both long-lasting favorable economic characteristics and trustworthy managers
-Warren Buffett, 2022 Berkshire Hathaway annual report
🔑 You can't eliminate risk
Why are investors allergic to risk?
By definition, risk is inherent in investing.
Yet, many investors do everything they can to minimize their risk.
This makes sense on the surface. But are you hurting your investment returns by being unreasonably scared of risk?
One of my favorite investment funds, Permanent Equity, put out this essay on why "medium risk" simply does not exist - and why investors are wasting their time chasing it.
🔑 One interesting deal
Let's build some highways.
This paving company in Texas does over $30m a year and nets nearly $2m. Let's take a look to see if this is a good investment.
What I like
I like the age and industry of this business. Texas is booming with construction, and this company likely had entrenched relationships with cities and counties.
What I don't like
Cash flow and EBITDA are the same, which is a huge red flag to me. Most likely, whoever put this listing together filled it out wrong, because I guarantee those numbers are different. It's hard to judge the listing when I can't rely on the numbers...
Also, the margins are really low. Only 5%? I'd much rather invest in a business with around 20% net margins.
I think the multiple of 5.8x earnings is too high given the margins on the business.
The margins alone would make me pass on this business. It just seems like there wouldn't be enough margin for error if I bought this business...
Have a great week,
Sieva
P.S. I've been publishing more shorts on YouTube with some of the most interesting moments from my interviews. subscribe on YouTube if you haven't already to check it out.
Disclaimer: nothing here is investment advice. Please do your own research. The information above is just for information and learning.
