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PaperclipPerfector  1yr ago (text post)   29302 thread views

Culture War Roundup for the week of March 11, 2024

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If there are literally 500k biz available for 1.5m, then there is a massive opportunity for a micro PE fund to consolidate 20-30 of these businesses in the same field. I put in 15m debt finance 30m. I pay off the debt in 4 years. Yes there at costs to growing larger (eg controls etc) but also savings. Let’s say those net out.

Sell in Y5 for 5x multiple (I get a better multiple because the next buyer is buying a larger biz). That’s 75m. That’s a 5x return in 5 years.

Maybe this is happening and I’m just too far upstream (not PE but service PE funds) but seems like if not happening maybe it isn’t as straightforward as you suggest.

If there are literally 500k biz available for 1.5m, then there is a massive opportunity for a micro PE fund to consolidate 20-30 of these businesses in the same field.

Is there? Typically the 500k profit includes the full-time labor of the owner. You can't just hire a manager to take care of it. Many businesses have idiosyncratic challenges.

Simple businesses or large business will command a higher multiple. Maybe. As far as I know, PE firms that do business acquisition have target IRRs of at least 20% – usually much higher. So that would imply that they are not paying large multiples either.

PE funds pay large multiples depending on the type of business. But 3x net income is cheap. Keep in mind leverage super charges equity return. If I pay 10x EBITDA for a 50m EBITDA biz but borrow 50% then even with the same multiple if I can increase EBITDA from 50m to 65m and sell within 3 years the EV is 650m of which 400m is equity. So I have a 150m profit on my 250m return.

I take your point re the labor cost.

There have been attempts and some successful consolidations, but also a lot of these small businesses are complete landmines that don't work as advertised

That is my theory. The idea there is free money is seemingly wrong

I'm sure that a certain chunk of these businesses are free money, some are okay returns on capital and some are toxic cesspools that the original owner is exiting for a good reason.

Yeah that’s fair. The problem is the cost of diligence becomes probably quite high to figure out if bucket A, B, or C

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