My Small Business Investment
Hello again, folks! Thanks for checking out The Green Swan. Today we will be delving into some detail on the small business investment opportunity that my siblings and I are pursuing. I mentioned this previously in My Investment Portfolio post, but didn’t get into many of the details since it was still early. Today, I’ll address it in more detail and also give you the opportunity to respond with comments and questions.
My family has always had a bit of an entrepreneurial spirit and history which goes way back. My great grandpa started an insurance company which has now been in the family for three, going on four generations of ownership. When I was still growing up, my Dad started up a local bank with three other colleagues which grew into a small regional bank before getting bought out not long ago. Two of my brothers had started a financial services business together five years ago which has been successful. And that is just the immediate family, there are numerous other examples in the extended family.
What I will be investing in is an established, albeit not the best managed, industrial services company (I’m intentionally being vague, sorry). The acquisition is about $1 million in total and it generates around $350 thousand in EBITDA (earnings before interest, tax, depreciation and amortization – a metric commonly used to measure profitability). Our early estimates are that we can grow this business from initially providing an estimated return in the low-teens as we see a decent amount of upside. Generally speaking, we are very excited about the opportunity and upside potential.
We have been in the process of re-organizing the existing business my two brothers own as part of this deal. There will be a holding company that each of us four own a piece of, which will own both the existing business and this new business opportunity. The existing business is also a services company, but in a different field. So while I am buying into the business in conjunction to the new opportunity, I will be an owner of the broader businesses, with the intent to do more acquisitions in the future. Below is an overview of the org structure.
Enough with the high level finances, onto the business. I mentioned earlier that the IndCo has not been properly managed. The reason is because the current owner (I’ll refer to him as Bob) has had some very serious health issues in the last few years and has put the business on auto-pilot. As we have diligenced the business further, it also doesn’t appear to he was necessarily the best business operator. Now, because of those health issues, he is basically forced to sell the business.
There are a couple specific and identified actions we plan on taking upon completing the acquisition to drive revenue growth. Bob has even indicated these actions would be a good strategy and something he knew he should have done, but his health issues have been in his way of focusing on the business.
Some of the strategies we plan on putting in have been already taken and proven effective by a business in the same industry, but in a different geographic market (FriendCo). We know this because the owner of FriendCo is friends with Bob, and as future owners we have all now been introduced to each other. We expect this to be a very beneficial and collaborative relationship going forward. If we can drive IndCo growth similar to the performance of FriendCo, we could potentially triple the business based on our current geographic market size and other factors.
The business itself is in a stable industry and market. It is a regional driven business located in a large metropolitan area. Because of the nature of the business, you need to be local to be player, which provides a bit of a barrier to entry. IndCo is not a cyclical business either, meaning we would expect business to be good and stable even in a declining economic environment.
Needless to say, we found this a very attractive acquisition opportunity. Many others did as well. Fortunately, we were able to get Bob to sign a Letter of Intent (LOI) very early after he put it up for sale, effectively blocking out competing bids (and there have been plenty).
Legal and Administrative Aspects
I’ll keep this brief because this is nobody’s favorite topic. We have thoroughly vetted this business. We have used an attorney throughout the whole process to help with the legal aspects. The attorney we have used is an acquaintance of our family so we know and trust him and he has been very helpful.
With regards to combing through the finances, we’ve mostly done that ourselves and I would like to think we are fairly qualified to do so. Among us four, we have significant experience in multiple facets of the finance industry and includes a CPA, CFA and MBA.
We have also completed significant due diligence with Bob including site tours and inspections. I feel comfortable in saying we have checked all the boxes as it relates to legal and administrative aspects of the acquisition.
One of my siblings will be in charge of running the operations of IndCo. While none of us four have prior experience in this industry, we are confident we will be able to get up to speed in order to effectively run the company.
There is an extensive industry training program that my brother will be participating in which includes hundreds of hours of pre-training and a 14-day in person training. In addition to this, the Bob will remain with the Company in a consulting role for 18 months.
My Main Concerns
My primary concern is going into business with family. A lot of folks can probably relate to this concern because there are plenty of stories and examples of this not working out in the end. I also have a couple examples that were in the forefront of my mind when making this decision. These examples include my grandpa and his brother going the last 25+ years of their lives not speaking due to the insurance business they inherited from my great grandpa, my Dad and a few of his business partners no longer on the best of terms, and another example in the extended family where the business was sold because the owners were in disagreement.
These examples are hard to ignore since they are all so close to home for me. However, my brothers and I are ultimately comfortable with this risk because, first and foremost, we view this business as a fun opportunity for us to all be involved with and work together on. A return on investment is obviously an objective, but it is not a top reason any of us are involved. And given how close all of us are, we are fairly confident that a business will not get in between us.
Another major concern of mine is being able to get my money back out. After all, I want to retire early! While the day may come where I want to cash out, there is no defined timeline and I may not ever want out. My investment in the business equates to about 1-2 years of incremental work to offset any potential loss which isn’t the end of the world. And quite possibly, I could even use the business investment as an exit strategy from the corporate world as I could conceivably move into a part time role for a salary (me and one other brother will be equity owners solely whereas the other two will be equity owners and employees).
In the end, I wouldn’t ever expect me “cashing out” would result in us selling the business. Instead, it would be a matter of my brothers buying my ownership interest from me. They are aware that I may want to do this in the future and are accepting of that, and I know from a financial standpoint that they would have the ability to do so.
So I hope this was a helpful overview of the small business investment opportunity for my siblings and I as well as an overview of the considerations we made prior to investing. The deal is actually expected to close on August 1st, but everything has been progressing as planned and everyone (buyer and seller) is motivated to close as soon as possible.
Let me know what you think of the investment. Do you consider something like this to be too risky or would it be right up your ally? Any additional considerations you think we should have made? Any other questions or comments on the process? Let me know in the comments below.
For more on my small business investment, check out The Green Condor!
Thanks for taking a look!
The Green Swan
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