Last week, I wrote about our acquisition of a $1.6 million small business.
The entire deal process took just 2 months.
Today’s issue is the 2nd part of a 3-part series.
I want to introduce the business we bought and explain how it fits into our investment thesis.
We’ll get it done in under 4 minutes.
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I wrote about our vision last week.
But a vision is different from a thesis:
$7 Trillion of Asset Value Set to Change Hands
We’re in the middle of the single greatest wealth transfer in US history.
Baby Boomers want to retire.
Their heirs don’t want to operate a niche (aka “boring”) small business.
They’d rather sell the business and use the proceeds for something else.
Someone will need to buy these assets—that will be us.
There’s a Gap in the Market
We’re focused on buying businesses that generate $500K-$2M of discretionary earnings per year.
Profit before servicing debt, paying taxes and issuing dividends.
These deals are too big for individual investors.
But too small for institutional private equity.
A Portfolio Will Deliver Outsized, Risk-Adjusted Returns
Small businesses—sub $10 million purchase price—are typically sold for 3-5x their annual earnings.
With no debt and no growth, that’s a ~30% yield on cost.
Which makes sense because a single small business is inherently risky.
Key man risk and customer/supplier concentration are common attributes.
But a diversified portfolio approach can reduce those risks.
No One is Focused Here
Most of our peers fall into 1 of 3 buckets:
- Early employee of a well funded technology company
- Associate of an institutional private equity or VC fund
- Manager at an investment bank or consulting firm
They’re all chasing a small piece of a big pie.
We’re creating our own pie and keeping it all for ourselves (and our investors).
Content is the Flywheel
Writing a weekly newsletter has always been first and foremost to educate.
To simplify complex financial concepts relevant to high earners.
But an ancillary benefit of writing online is that you attract other, like-minded people.
Those people often bring opportunities, capital and connections.
As this community grows, so will our access to valuable resources.
Introducing Refined Signs & Mailboxes
Now onto the meat of this week’s newsletter.
The business we purchased is called Refined Signs & Mailboxes:
The business has been around for 27 years.
Here’s why we bought it:
Signs are everywhere in commercial buildings:
On the doors, stairways, amenities, front lawn etc.
They are a “must have” item that almost no one thinks about.
Yet you literally can’t completed a building without them.
Plus, they’re often purchased alongside other critical (and expensive) building components such as mailboxes and fire extinguishers.
All are boring, but essential!
70% of our customers are commercial developers.
They’re overseeing $50 million budgets.
Our average order value is $50,000—or just 1% of that.
So even though our products are essential, they’re comparatively inexpensive.
As a result, price is not a key consideration when choosing the sign vendor.
It’s reputation, service, and quality of work.
Barriers to Entry
In order to perform contract work in California you need a license.
Obtaining the license requires passing a test.
The test isn’t difficult, but it’s still a barrier.
Plus, the labor itself is technical.
Often people with this technical knowledge aren’t entrepreneurs.
They want to work outside with their hands.
Then go home at 5pm, crack a beer and do it over again tomorrow.
Value accrues disproportionately to whoever can organize and motivate this labor pool.
Perhaps our favorite thing about this business is its low overhead.
The seller optimized for work-life balance.
He never purchased the $500,000 piece of machinery, choosing instead to outsource manufacturing to other vendors.
In time, he’s built a solid network of 20+ vetted suppliers.
And maintained a very lean team structure.
The business has just $300K of “fixed costs” on $1.5M of annual revenue.
We love asset-lite businesses that can remain profitable amidst topline volatility (which is very real in the construction industry).
Here’s how the business tracks more than $1 million of ongoing work:
Certainly the most robust magnetic whiteboard I’ve ever seen.
But there are obvious limitations to a paper-based tracking system.
These kind of antiquated processes are everywhere (and not unique to this business).
We’re very excited to introduce software to improve workflows and establish the right foundation for scale.
The seller spends $0 per year marketing his business.
In fact, he rarely even bids new jobs.
His growth has come from serving customers who have grown alongside him.
He has 30+ strong relationships that are the core of his business.
Not exactly recurring revenue, but strong repeat revenue.
There’s a big opportunity to win new business by hiring a sales team and equipping them with software and virtual assistants to optimize their productivity.
Before closing on this business, we signed a highly motivated operator.
He brings 7+ years of relevant work experience and has led teams of blue-collar employees.
I wrote about attracting these operators in a prior newsletter.
In short: he wins when the business wins.
There you have it.
The 7 things we love about this “boring” business:
- Essential products and services
- High average order values
- Technical, licensed work
- Minimal overhead
- Paper-based systems
- No outbound marketing
- Pre-signed General Manager
Thank you to everyone who replied with a congratulatory email last week.
I tried to reply to each one.
We’ll cover some hard lessons learned next Saturday.
📈 June 2023:
Here's a quick update on the latest numbers for the Wealth² Newsletter.
- Subscribers: 3,535 (+594 v. May)
- Open Rate: 55%