Unsexy Businesses or “Acorns”
Acorns get it? (Unicorns)
I’ve spent over a year looking through Bizbuysell.com (BBS), signing NDA’s and, getting a wide array of financial data on various small businesses.
My thought has been, what is to stop someone from buying up profitable cash flowing small businesses and levering them up in their segment.
Find a cash flowing profitable small business, focus on growing the balance sheet and bonding capacity, and streamline, consolidate, and optimize like your life depended on it.
Basically a personal private equity strategy meets an industry rollup meets a dude running a small business.
Or something like that.
To get one thing out of the way…BBS is mostly full crap.
I’m talking big time crap.
Discovering this made me move my price threshold to >$1M.
Yes that cutoff is pretty dubious, but it helps eliminate most of the fly by night trash heaps that many have up for sale.
I’ve learned a few things about the sustainably profitable businesses I have come across.
- Most of these businesses could use massive help in the accounting and finance department, operations modernization, and general high level strategy.
- A lot of these owners view finance as the nerd stuff. There are pretty glaring holes that come out of due diligence calls and simply looking at whatever financial statement they provided.
- Very few millennials own a sewage processing company. I have no data to back that up, but I am fairly certain that among entrepreneurs in my age group, next Facebook startup trumps steel and piping fabricator all day every day.
- A lot of these owners started a business a couple decades ago by walking into the local bank, finding a loan officer and never looking for financial sources again.
- Unsexy businesses can be major money makers. Obscure niche industries with surprising market size, obscure locations, and quirky owners. Highly fragmented industries in general. There is opportunity everywhere.
The drawbacks to the strategy of levering up/acquisitive growth at the small business level is:
- Exit strategy. Eventually you would want to sell. You would have to reach a size that put you on the radar of specific large industry players or private equity.
- Acquisitive growth/segment consolidation requires capital and a whole lot of patience and trust unless you are already wealthy. There is no way around this one. In my eyes the biggest hurdle to acquiring the above fictional steel piping fabricator would be the down payment of the first sba loan/commercial loan/debt instrument to get into the deal in the first place. Thus you need a high net worth backer and their trust (and hopefully sage advice).
- Finding an LP that is patient enough to look past the next quarter or the next 4.
- Some of the owners stories are very circuitous…now ideally that wouldn’t happen, but if it does I would think you need some staying power with your LP otherwise the plug is pulled too early.
Industries that I have hit on profitable small businesses with varying degree of market (and expansion): Steel piping, guest ranch/inn, cattle ranching and Ag, sand mining, water treatment, and logistics (trucking).
Thoughts from the crowd?