Howdy, GirdleyWorld!
This week we’re looking at acquisitions as a HoldCo:
- 5 questions to ask yourself for any M&A
- The HoldCo-within-a-HoldCo structure
Plus: Gell-Mann Amnesia…
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OK, 10 seconds of me selling my stuff, then we’re back to the meat:
If you're interested in holding companies, I have a course for you! It’s called the Complete HoldCo Course: it covers everything to do with starting, growing, operating, and exiting your HoldCo, plus you get access to a community where we help each other out and I answer all your questions. It’s really great!
Now back to the free content!
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Plan first, buy second
Designing your acquisition strategy is pretty straightforward. But it’s essential to do it ahead of time for two reasons.
First, if you haven’t figured out the parameters you’re looking for, then you’re more likely to jump at a bad fit just because it’s exciting. One of the hardest but wisest things to do in business is waiting for the right deal to come along.
Second, you’ll quickly find that it’s much harder to sell a business than it is to buy one. The seller is the one doing all the work, and the buyer can just walk away. Making a bad buy is a major headache.
There’s lots of things to consider. What’s your overall thesis? What size of deals do you want to be doing? How do you want them structured, and financed?
Once you’ve got a strategy figured out, use these five questions to consider acquisitions.
5 questions to ask yourself before buying
1. Does it work for your big picture?
Let’s say your HoldCo has 4 very capex heavy businesses that are always asking for capital. Let’s assume they can deploy that capital at a high rate of return, so they’re cash hungry and you want to feed them.
In that case, you want to have some other businesses that are high cash flow and low capex, so you can reinvest into your capital-hungry businesses. Think about how you can make that flow happen, what sort of parameters you need to set, to make that fit into your bigger picture.
2. What could change?
Disruption can come into the marketplace in a variety of ways. It could be social change, governmental change, or technological change.
Think about how that potential change may impact your businesses. What is the lifetime of the businesses you already have? How vulnerable are they to disruption?
Say you’re 30 years old. And you’re buying a bunch of tech businesses that are exciting now, but will be obsolete in 15 years (or, given the rate of tech today, maybe it’s 15 months). But you’re not planning to retire for 60 more years.
Keep your vulnerabilities in mind.
3. How much is this a PITA?
Not the flatbread, unfortunately. We’re talking Pain In The Ass. How much work are you going to have to do to manage a particular business?
If you’re looking at running an investment bank or a restaurant, those take a lot of consistent hands-on time (plus they’re really hard). Compare that to something like an insurance agency. Very few things at an insurance agency are going to be down-to-the-minute emergencies.
4. Risk vs reward
Each acquisition should be considered on the risk-reward spectrum.
Take an extreme example: say you create a portfolio of all businesses that could return anywhere from +40% to -20%.
Usually you’ll do pretty well. But it’s totally possible that some years you'll be in the red.
Ask yourself: Are you ready to embrace that? Do you want to offset the risk with safer bets, but lower ceilings? Or is low-and-slow all you’re looking for?
(I have a friend whose entire business is dependent on the strength of the US housing market. He might make $5M one year, and lose $1M the next. He has to be comfortable with sitting on the far side of risk.)
5. Is this me?
This final consideration is one of the most important. What sort of life do you want to live?
One of my businesses is a chain of fireworks stores, which means I’m busy (like, really busy) around July 4 and New Years. It takes a lot less of my time the rest of the year. But, look, my holidays sucked for years. That’s the trade-off.
And beyond just working hours, consider how a potential acquisition aligns with your values and comfort zone. A marijuana grow op or a gentlemen’s club may be successful businesses, but if you’re not proud to own it then it’s a bad fit for you.
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A note on getting it done
Let’s say you’ve considered all of the above, and found a business that’s a great fit.
Now the real work begins.
M&A can be hugely time-consuming. I suggest doing one or two of them yourself, to get to know the process. But many people underestimate how much of a full-time job it is to source, approve, negotiate, close, finance, and integrate new businesses.
That’s why I recommend building an internal team. Running these processes in-house has a lot of benefits. If it’s somebody’s job, and they potentially have equity in your company, they’ll have a reason to focus and find the best deals for the best price.
Of course, beyond a certain size and complexity, it’s worth bringing in the big guns. Good brokers and advisors are worth their fees. A 10x investment bank will create a ton of value for you just like a 10x employee does.
My rule of thumb is: if it’s over $50M enterprise value, get someone to represent you as a buyer. That’s where things get really complex, with bond issuances, weird ownership structures, public markets, etc.
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PortCo’s within HoldCo’s
If your strategy involves a lot of acquisitions, especially of smaller operations, you can streamline those operations with a portfolio company (PortCo).
Let me give you an example: one of the companies I have in my HoldCo is a serial acquirer. They’re called Dura Software, and they buy up hyperniche software products.
Dura is a PortCo within my HoldCo. Their mission is to go after a class of assets that are really too small for me to want to buy at the HoldCo level. So they have the expertise, management, and network to roll up a bunch of very small pieces, and the M&A process is a well-oiled machine.
And if I see something that fits their niche, I can send it their way with minimal involvement on my part.
Just another HoldCo superpower.
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On a personal note…
I’ve been kind of down this week.
The problem? The L’s sting 10x as much as the Wins feel good. That’s just how it works, sadly.
I pushed too hard, and I got tired. That’s a recipe for me to get a sour outlook.
It reminds me of one of my favorite concepts: a thing called Gell-Mann Amnesia.
You read a newspaper article. It’s in your area of expertise or direct knowledge. You say, “That’s totally wrong! They didn’t get the facts straight! Can't trust them!”
And then, you read the next article about something new to you. And believe every word of it.
That’s Gell-Mann Amnesia.
I’ve learned the same thing happens in life. You look at your own situation, and think, “Man, this aspect of my life sucks!”
Then you look at other people (or businesses) and they seem to have it all put together. That’s your Amnesia. They’re going through crap no different than you and I are experiencing.
We’re all simultaneously (a) suffering through crap but (b) have things pretty darn good.
There’s never been a better time to be alive. And it’s getting better all the time.
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Question Time
Last week I asked you to reply with your biggest challenge right now. Thanks to everyone that responded. I'm going to give you my thoughts on a couple of them next week.
My question for you this week: I want to get to know you better! Reply to this email and tell me a little about yourself:
- Who are you?
- Where are you at in your career?
- What are you trying to accomplish by reading this newsletter?
Looking forward to reading your stories. Have a great week!
Michael
