Why Start Small? Building a Private Equity Firm Generator from Nothing.
I learned something incredible recently. It is really easy to get terms to buy out a business.
Real-world examples of terms
I spammed out maybe a thousand requests to get details to buy out businesses on bizbuysell.com, and a shocking amount of them responded. I didn't go through all the financial statements sent to me, but I randomly sampled 10, and they all had straight-forward numbers with no funny business. The terms they had set out were generally quite low. I'll give some sample numbers close to the businesses (can't do any details because of NDAs):
- Asking Price: $200,000
- Revenue: $500,000
- Profit: $50,000
- Down Payment: $20,000
- Installments: $5
- Installment Price: $36,000
This is a good average of what's available. There are many which are much better.
As you can see, pretty much everything on there has an asking price below revenue with payments that leave money left over after the payment without even approving the generally abysmal margins. The best part? The piece of knowledge that sent me down this rabbit hole: most of them are owned by retiring boomers. This not only means that they have strong sell pressure, but also that they run things like an old person would — with complete and utter technological illiteracy — which means the margins will be easy to give an initial boost.
My options
With these deals on the table, I had 2 options:
- go deal with banks full time for months to secure the money, or
- take my learnings and reevaluate my approach.
Originally, I wanted to buy some businesses in logistics because I knew I could run those myself if need be. With the desire to sell so high among so many small business owners, I realized it wouldn't be nearly as difficult as predicted to get a deal done, so I'd be stupid to not cast a wider net. Surely I could do better than spending months finding financing for a couple deals.
My strategy
Here's my plan. I am building a Private Equity Firm Generator. There is a massive market of companies that make <$1 mil/year in revenue and nobody wants them. I will recruit savages, form them into teams, put teams into subsidiary companies which operate as Private Equity Firms, and have them follow one of the four funding models I've developed.
How does someone who is completely broke recruit savages? Well, it turns out that college students pursuing degrees in finance have to go through some really lame internships that have next to nothing to do with their desired career because they "can't be trusted to make an expensive mistake." The savages I recruit will all be unpaid interns with an agreement to:
- be hired or made an equity owning leader in the subsidiary company, and
- get carry on the deals they took part in
Upon successful completion of well-defined criteria (basically, they need to make the subsidiary some money). The participation trophy is an internship that gives the intern real experience in the field, and the upside is something completely nonexistent in internships — especially finance internships.
This offer will allow me to find the most bloodthirsty young people in finance by allowing me to attract highly confident people, and then pit them all against each other with offers of equity and senior positions to get the truly legendary performers of the next generation the head-start they deserve.
Another virtue of this strategy is how outrageous it is. I figure I can get some great execs as well as interns by blogging about what's going on, so let me know if there's any questions you want to ask or ideas you want to share. That will help me so that I can better hone in on ways to get my writing to be interesting to the right people.
I'll start doing updates once all my recruiting preparations are complete in a couple days. I'll also write about ideas and strategies that I'm working on if they seem like they'd be interesting.
That's it. Thanks for coming.
That's an interesting model, almost too good to be true. I would be a bit cautious with numbers reported from SMEs though, since there may be hidden difficulties inside the businesses itself - which may or may not be uncovered during due diligence. This could interfere with the expected boost via technological literacy. And I'm not really sure how private equity firms work, if you have experiences in that field it shouldn't be much of a problem.
Anyways, it's interesting and I'd love to see it work!
I've been mainly writing software for the last six years, so unforeseen difficulties is my forte. In fact, that's a big part of what excites me about this - I think that's where most of the value is. Think about it, there is only now starting to be anything near saturation in the PE market. Why would anybody, in an unsaturated market, bother with low revenue businesses with all their own sets of bullshit? Better to go after excellent companies at good prices than good companies at excellent prices, so I'll do the opposite.
A lot of people will scoff at this approach, but its what Sam Zemurray did. Everyone was throwing away bananas that were ripe because they would go bad before they got to the destination. There wasn't enough competition to force banana providers to improve their system's transit speed, so they literally threw them into the water. Sam Zemurray said, "wait, why don't I just grab all that free money those greedy morons are throwing away and hustle harder than they are willing to?"
All these boomers are trying to retire, and most people who make it to that age running their own business are, necessarily, really lucky or at least decent at business. This means - at least to me - that targeting business-owning-Boomers in the first place is targeting a group that is more likely to be above average at business operations than what you'd get from a random sample. Take into account their much more cautious nature (remember, these people's parents fought in WW2, and their grandparents went through The Great Depression). I've seen first-hand that most of the people in this demographic has left some money on the table in terms of expanding their business.
Many of these businesses are throwing off way more than enough cash flow to reinvest to make more money, but there seems to be a complacency among Boomers where, "enough to pay the bills and go out on Sundays" is the desired goal. Even making more money to afford a general manager seems off the table to Boomers. I don't get it, but I don't need to. I'm nothing near complacent, and nobody I hire will be either, so we'll strangle huge returns out of these investments. Not huge in dollar amounts relative to established PE Firms, but huge in terms of ROI.
I appreciate the kind words as well as the input. Its a really good idea for a full write-up.
So basically.
Something like that?
Oof. You sound like fun at parties. I had a sick burn coming, but I saw you have the word "Pythonist" on your profile, so now I'd just feel bad insulting you. You have a good day, buddy.
I was wondering about the hostile reply. But now, I read what I had written, and it also seems hostile.
Pardon me, I should not comment and be tired.
I tried (and failed) to convey that you had two distinct paragraphs, which I understood.
I did not quite understand how you bridge from one to the other. Granted, this is not my area of expertise; I'm more of a SaaS guy.
I apologize as well, then, for my discriminatory comment. I spent a lot of time on StackOverflow getting roasted for "not pythonic enough code" and the misrepresentation of my wording here made me assume you were a leak from the containment zone.
I'm not excited in particular by cheap companies, but what I am excited about is the reason for which they are cheap. I think about things from a ecosystem frame of mind, and so its like this: when some original life form gets old, a fungus will take its body and keep it for much longer than the original life form did and profit from the work it did building that biological structure. This is a lot like what PE firms do to companies which the founder no longer wants to run. The relatively low prices of small companies reflect that they are not competed over, and markets are a lot like ecosystems in that uneaten food hastens the evolution of something that can eat that food. Figuring that out is an unlikely outcome, but that's why I decided to go with a "generator" model. There are always many niches which can take advantage of a food source, and all I need to do is discover one.
I wouldn't say I'm looking for "cheap" labor, I'd say I'm looking for the best way possible to get labor without being a scumbag since I have no money to pay anyone with.
I don't see what's elaborate about the compensation scheme, so I'll explain the context and hopefully that makes it all make sense. My first problem was this: getting to a deal took a short total time (meaning from contacting seller to getting terms), and very little individual time (meaning total minutes spent specifically interacting with each seller). The choke-point was getting a loan. Its a good amount of individual time, but - most importantly - its a lot of total time. Banks take their sweet time, and one entity can only shop around so much for loans before their credit becomes untouchable. Credit goes back up once a loan is given, but you won't get anything from a bank when you have multiple unmet requests for debt from other financial institutions because they don't know if you were rejected by them or not, so they play it safe.
As a programmer, I'm sure you have a proper understanding for the importance of running things in parallel/concurrently (I can't comprehend the difference) when you have to do a ton of things at once and they all take a lot of time waiting. This led my to my first solution, and my next problem: why would anybody help me with this when I can't pay anyone until after revenue is made?
That's the point of the compensation scheme - I designed it to be too good to be true for the only audience whose options are so bad that its actually desirable. I'm giving them a worst-case-scenario outcome that is the expected, market-standard result of doing an internship: a note on their resume. I'm also giving them a best-case-scenario that I'm pretty sure is nonexistent: skipping through the remainder of their career path.
The bad outcome, I'd argue, results in the person getting a much better internship than other ones in terms of education because, usually, interns just do bullshit work the employees don't want to do. The good outcome has obvious merits to the interns, but is also self-serving. If they are successful against all the odds stacked against them, then hell yeah I want them to make a bunch of the money they made for the company and have incentive to make us all more.
I appreciate the continued interest after my, admittedly, vitriolic response. Your points show me some things I definitely need to explain better moving forward.
Thank you for your thoughtful response. This opened up a lot for me, not entirely as an EU resident; the finer points are a bit country-specific.
I think getting a internship doing something cool and meaningful will teach a bunch. However, what would it look like in the resume, or would they care? Having a small, no-name company as your resume doesn't seem as good as having a more prestigious company there.
Thanks again, and I have to say that I like your use of written language. And no, as a Python programmer I have only heard about parallelism ;)
Thanks for the compliments. I'm glad to have you onboard for my future posts! You've already given me multiple bullet points on my list of writing ideas, and thanks for helping me with even more.
To answer your excellent point - I think the complete and utter lack of prestige will work in my favor as a filtering mechanism. I remember, right before I dropped out of college, I got accepted to be a lab tech intern at a world famous laboratory, and another internship offer to work as a park ranger and chase down the animals with GPS trackers on them and analyze them. I accepted the park ranger internship because I wanted to do something cool rather than stand around cleaning beakers. Funny side-story about that, I didn't get to do it because they wouldn't let a dropout take an internship. Lame! I'd never do that to someone - you never know what path someone may take to their destination.
Anyways, this offer will ideally attract people who follow similar instincts, and repel people who just want some good resume padding.
I'm dying to see how the offer goes, but Indeed thought I'm a scammer (I don't know if that's funny or insulting) so now I'm waiting on the government in Delaware to send me my business license because that'll somehow prove I'm legit to them.
Also, to your statement about being an EU citizen. I looked up PE markets in various countries. Finland's isn't that big relative to all global players, but its said to be growing very rapidly. That's the case for most nations in Europe and South America as well as Korea and Japan. Unpaid interns are illegal in most or all of those places, but I was doing a thought experiment about whether successfully taking the niche of bottom-feeder in PE would work internationally, and I actually think the same principle is applicable.
Interns are a useful category in America because it basically means, "anyone willing to forego many of their worker's protections in exchange for experience." That applies to my situation, but just barely. There's this craziness about how you have to communicate with unpaid interns regarding anything that could possibly be considered as incentive that's a whole article itself. More or less, you have to be really rude to them if you want to make sure you don't open yourself up to lawsuits.
If you think about it, what I'm trying to recruit is a, "potential founding team member," not necessarily an, "intern." "Potential," meaning multiple people may be cycled through before the criteria for a hiring occurs for that role, but any of them has an equal shot. It just so happens that my roles are ideal for students looking to learn which qualifies the role as an, "internship," which I think is a much easier way to market the opportunity: "Internship with potential to be founding team member of PE Firm," rather than "Whole ton of work and learning to do PE to potentially stay as a founding team member." The latter is most likely a harder sell.
While it'd be a harder sell, earn-in agreements exist in all of the EU, so with proper wording it should be fine. In any case, I'd have money well before considering going international, so I doubt this problem will ever arise, but its fun to consider.
Interesting approach! Your unconventional strategy of recruiting interns for a Private Equity Firm generator is certainly unique.
Thank you! If I'm being transparent, I stole the core of the idea off of episode 515 of My First Million. I recommend it to people constantly.
What makes what I'm doing different comes from my problem with her path. I just was disappointed with the outcome she had. It was such a great idea! My only problem is she should've hooked it up to a nuclear reactor like I am. Its like she built the Death Star and only shot it once. I'm building it and putting a machine gun on that motherfucker!
what about online stock trading platform for <$1m companies?
Starting small enables a methodical growth trajectory for building a Private Equity firm generator, while minimizing risks.
That's a super neat idea. The main issue will be gaining the trust of customers.
Your platform should be transparent and trusted.
I loved the idea.
Wow, that's a neat idea! I really like how you're doing something different by getting interns for a Private Equity Firm maker. It's not the usual way, and that makes it stand out. Great job thinking outside the box!
Thanks for sharing your thoughts