🔑 Your Business Will Die
Welcome to The Business Academy. Here's what we have in store for you today:
- How will your business die?
- How to find a business to buy
- American manufacturing - is it back?
UPDATE: The Business Academy is opening a spot for our first outside advertiser. But not just any advertiser. We have a unique audience of 70K+ smart investors plotting their next business to buy (see results below from our recent reader survey, over 60% of readers come to learn about how to buy a business or to find a business to buy).
We are going to take on just 1 advertiser before the end of year things and get better data for 2025 — if you are interested, please respond to this email and we can provide more information.
🔑 He built a $200 million/year e-commerce business
Imagine being tantalizingly close to making billions not once, but over a dozen times.
That's Mike Beckham's story.
He helped his brother build a company - then talked him out of buying $1 million in Bitcoin back in 2012 (it would be worth over $6 billion today).
Mike's story is full of several other near-misses.
Until he finally hit it big with Simple Modern, does over $200 million a year in revenue now. Listen to the fascinating story below.
I guarantee you'll learn something useful about building businesses.
How will your business die?
Every business dies.
Whether it's in a few months or a few centuries, your business will have an expiration date.
I'm studying business history to help understand how and why businesses die (and how to prevent it).
For this newsletter, I pulled up some of brilliant research from Gary Hoover at American Business History Center. I just recorded a long conversation with him and will be posting it in the coming weeks on my YouTube channel, so keep an eye out for that (subscribe if you haven't already).
Why Businesses Die
I can sum it up in one word: Complacency.
Sometimes they lose to technology that disrupts the industry. Or competitors. But most importantly, they die because they lose sight of what their customers want.
Take a look at this startling trend:
A recent study by McKinsey found that the average life-span of companies listed in Standard & Poor’s 500 was 61 years in 1958. Today, it is less than 18 years. McKinsey believes that, in 2027, 75% of the companies currently quoted on the S&P 500 will have disappeared.
-IMD.org
That doesn't mean 75% of public companies go bankrupt. Some get delisted and go bust, but others are bought out or merge with other companies.
Here's an example of a company that forgot to focus on customer needs from Gary's research:
When the “talkies” came along in 1927, Vaudeville (live variety shows that traveled city to city) was wiped out. The largest chain of Vaudeville theaters, Keith-Orpheum, could not afford the transition to projectors and sound.
Keith-Orpheum failed to transition to movies and ended up selling off stakes in the business for increasingly-lower amounts throughout the late 1920s.
Radio Corporation of America (RCA) bought the chain and transformed the Vaudeville theaters into movie theaters.
They wanted the theaters, but not the core business that included the actors, producers, writers, and promoters of Vaudeville shows.
Over the next 50 years or so, RCA remained a prominent American business.
After becoming a dominant radio company in the 20s and 30s, RCA prepared to sell televisions long before they would overtake the radio market.
In April 1939, Fortune magazine ran a major story on the coming of television. Leading radio set makers including RCA, Philco, Zenith, and General Electric prepared to produce TV sets...
Due to the war, progress stopped, and sets were not produced and sold for almost ten years.
But by May 1948, only 279,000 TV sets had been produced.
RCA embraced the coming change and remained a leading company for a few decades.
In 1943, RCA was deemed too powerful by the FCC and forced to spin off its TV and radio network into two. They kept NBC (National Broadcasting Company) and spun off what is now known as ABC (American Broadcasting Company).
But eventually, RCA declined when the electronics went digital from analog. RCA didn't adapt quickly enough and competitors like Sony overtook them with digital products
In the mid-1980s, General Electric purchased RCA and begun stripping its assets, selling them off one-by-one.
We've seen this cycle play out over and over.
Yahoo emerged as the leading "portal of the internet" in the early to mid 90s. But they failed to acquire Google, which built a better technology for customers and then crushed them in search.
There are thousands more examples.
You either adapt to your customer needs or begin to die.
Here are some takeaways to ask yourself:
- What are the top threats that might kill my business over the next 5 years?
- How can I make my business more resilient?
- What emerging trend am I ignoring right now?
4. What will my customers want in 5 or 10 years?
🔑 One interesting read: How to find a service business for sale
Finding a business to buy is difficult.
You have to look at thousands of deals to find a few you want to make an offer on.
And even after all that, you still might start back at square one.
If you're feeling hopeless in your search, I found this meticulous breakdown of how one business buyer got more efficient about his business search.
🔑 One interesting deal
This one is for the manufacturing hunters out there.
The business has good cash flow and is large enough for lower middle market PE buyers to take interest as well.
Let's take a closer look.
What I like
At a high level, the net margin seem good (see Red Alert note below).
I like that they have a parts business, which oftentimes drives higher margins for the business (to be confirmed)
American-made, for American manufacturers. US Manufacturing is growing and is a primary government initiative which hopefully means this business will have a steady stream of business in the future.
Age - alive for 25+ years is a great sign of resilience.
note: In manufacturing you want to be a niche category, with high margins. Otherwise, you're competing with too many people just on price.
What I don't like
Red Alert ⛔ - cash flow and EBITDA are the same number in this listing. This tells me they may be using the EBITDA number as a synonym for cash flow. Which in a heavy equipment manufacturing business is never the case. 'D' in EBITDA is Depreciation.
If I learn looking at the financials that cash flow is 25% or more lower than the number they share here, I'd pass immediately because I'd like a bigger business. And you can't use "EBITDA" to pay your bills or your debt.
Inventory - You will need to separately validate the liquidation value for inventory. It can be as low as 5% of the cost/price
Price - The asking price is high for manufacturing (5.6x cash flow). I've seen businesses of this size trading for 3-4x.
Misc notes on manufacturing businesses to avoid:
- highly cyclical sectors
- high capital expenditures costs on replacing equipment
- heavy regulation risk (can be a plus or minus)
- highly labor intensive (expensive)
- commodities
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. Take a look and please subscribe on YouTube if you haven't already.
Disclaimer: nothing here is investment advice. Please do your own research. The information above is just for information and learning.
