Today, a mezz thread!

Also, the answer to a few questions including:

Yesterday’s Value That Company!
Also, Why am I so dumb?
Finally, Why listen to me? 🤷‍♂️

Here we go!
A few years ago, I get a call from an acquaintance (we have several mutual good friends). He’s running a fast growing consumer finance company and needs cash...

It isn’t “I need $5 Million by Friday” but it’s close...
How fast are they growing? By the time we are negotiating the deal a week or 10 day later, the ask is up to $10 Million...
We did a little time travel yesterday on Value That Company, and I put you back in my shoes 3 years ago...

(Answer shortly)...
The business is fascinating, but also extremely sensitive to assumptions, underwriting, etc...

Management is good, but also very aggressive which I’m not sure I love...

Worse, we don’t have the time to really dig into the numbers as extensively as I’d like...
Value That Company Answer:

I get comfortable enough with the numbers to estimate the company is worth at least $100 Million ...

Will I lend $10 Million (this was a big deal so I partnered with some friends) into $100 M equity value? Sure

Then the CEO asked if I’d do equity?
I politely decline, and go close the mezz deal ...

The company continues growing, and refinances me out within a year.

I get a 36.9% IRR ... a good deal all the way around.
But, oh wait, there is more! Turns out Matt is an idiot for not taking equity.

Yesterday, @IrishCapMGMT correctly identified the company on everyone’s favorite valuation game.

The company just sold for $1.65 Billion less than 3 years later...
Based on these deal metrics, the correct valuation when I was looking at it was $88-200 Million (basically where I was)... take a midpoint of $150 Million and I could have done a 10x in less than 3 years
So, do I feel bad? Maybe, but I’d make the exact same decision again. Here are a few reasons:

1) Circle of Competence/Discipline - This deal was a success for me because I stayed disciplined within what I know. I don’t like/try to avoid risks I don’t understand
2) An honest congratulations to all involved (I have at least 3 friends and a former next door neighbor in the equity) ...

Why should their success diminish mine?
3) I believe there is still risk in this business that I don’t understand. The unit economics make no sense for the borrower (I’ve told my children to NEVER finance something in the store). Will a new administration/CFPB care?

IDK, but I’m unwilling to take the risk...
4) I haven’t looked at the financials for Rent-A-Center but I actually think this is a good deal for them. It’s a way to modernize their business while staying within their competence...

(I won’t be investing, though - see #1)
Final) Thank You for following along as I take this Twitter journey. I confess that I love it!

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More from @SkolCapital

12 Jan
It is time... For reasons that will be clear tomorrow, we are going into the archives for the first 2021 edition of Value That Company!

Today: Consumer Finance

TTM: 217 M Rev; 12.7 M EBITDA
Prior year: 97 M Rev; -4.4 M EBITDA
2 yr ago: 23 M Rev; -2.9 M EBITDA

More details:
This company does VERY sub-prime “leases” for POS transactions (tires, furniture, eyeglasses, etc). If a customer doesn’t qualify for the store credit card these guys step in for “lease to own.”
Markups are in the 100% context. Last year they established $195 Million of new leases and collected over $210 Million of lease revenue.

Senior debt of $65 Million; Jr debt of $10 Million.

What’s your overall value for the business?
Read 5 tweets
5 Jan
Time for my first thread of 2021: Today, How I Measure Myself: a 2020 Report!

With some related thoughts on evaluating management and picking investment managers.

Important note: underlying everything that follows is integrity and trust. Without that, nothing matters.
1) Day to Day: Business Basics

Did I “keep the trains running on time” in 2020? Yes

Do I know how I measure my performance? Yes

How was my performance? Satisfactory

Overall grade: A- (I wasn’t aggressive enough in the markets at the bottom)
Management Thought: Passion not Emotion

Emotional investment decisions tend to be bad investment decisions, but passion keeps somebody in the game - especially when things get difficult

Equally true for investment managers and company management.

Don’t want:
Read 13 tweets
9 Dec 20
It’s time for everyone’s favorite game: “Value That Company”

This week: a services company with exactly one client: $AAPL

$6.6 M Revenue TTM (flat during COVID, 20% growth LY)
$4.5 M COGS (explained below)
$850k SG&A (depreciation ~0)
$1.25 M Net Income

A note below...
This company has 10 employees that run around the world refurbishing woodwork (mostly tables) in Apple stores. Most of the expense (labor, travel, etc) goes into COGS.

My thoughts tomorrow, but I can’t wait to see what you come up with!
Also, a final note from last week on the Pest Control deal ... Did you know that per the Department of Agriculture, Pest Control is an “essential service?”

My thoughts on the Apple supplier tomorrow!
Read 4 tweets
4 Dec 20
UPDATE: As promised, my thoughts...

1) Thank you to everyone for participating! Yes, I’m a nerd so I enjoy this, but it’s also a learning exercise for me. FinTwit is a wonderful place!

2) As I’ll explain below, my belief is this company is worth $15 M OR $30 M (LOL)
The challenge here is the zero growth unless additional capital is provided. So there are three options:

A) Sell to a strategic (another pest company). It’s well established in this industry that these companies can be had for $1.5x ARR so in this case ~$15 M
B) They could not sell, in which case I think @guessworkinvest makes a pretty compelling case below that the business is worth ~$30 M if they just sat and harvested the cash flow.
Read 7 tweets
3 Dec 20
It’s time for another edition of “Value that company!”

Today, Pest Control - NW US!

$10 M ARR (24k customers at $100/q plus a little one-time)
95+% Customers are on cc autopay.
80% GM
$1.5 M SG&A
20% attrition in customer contracts can be replaced with part of SG&A
Additional additional grown can be had for 1x first year revenue (see thread below) ...

What’s the value of the company? My thoughts tomorrow!
Read 4 tweets
1 Dec 20
Yesterday, as I was responding to a message on MLM’s I realized it was time for another mezz thread.

This morning when I was responding to a different message about placebos I realized the time is now!

This week: “Are you kidding me?”

MLM’s are big (and controversial) in Utah.

$NUS was early (I have several friends that made serious money there), but there are dozens of imitators because everyone wants to move up.
Let’s pause here to ask a question: Why Utah? Two answers

1) Mormon missionaries cover the world, and many have language abilities when they get home. MLM’s are especially big in Asia so some synergy exists.

2) Is more problematic, but I believe it’s true...
Read 18 tweets

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