1/ One of the ways SMB operators increase their equity value and reduce risk is by professionalizing operations. Most sub-$1mm (or even <$2mm) EBITDA SMBs lack core elements of a scalable, less risky company. Here are some examples...
2/ Middle management is usually non-existent. This creates a lot of key-woman/owner risk and limits growth because people aren't developed properly and the firm lacks expertise and specialization in key functional areas.
3/ Financial controls and reporting are often bare-bones. Having timely, accurate financials and coherent reporting allows for much better, data-driven decision making. It also helps to identify issues early (fraud, drops in productivity, A/R aging, etc).
4/ Operational processes are often static and undocumented. Good processes are scalable and dynamic - they change as better solutions are found and get documented into SOPs that are shared and used regularly by new and tenured staff.
5/ Planning is often done infrequently or not at all. OKRs, EOS Rocks, goals...a company can choose any method they want to select and track goals and milestones along the way, but operating without a plan cuts out a key tool to improve organizational learning and progress.
6/ Recruiting is siloed and unsystematic. Professional companies spend a lot of resources on bringing in the best people at every position. Most SMBs throw a quickly-written job ad up on Indeed or Zip and then provide a poor candidate experience and get the expected results.
7/ Making the jump from bootstrapped small biz to one a smart buyer would pay up to own is challenging, but w/ each 'jump' you'll be in a better position to make the next one. And, for leaders looking to work more 'on' their biz, these are all fun and exciting projects to tackle.
What other areas have you seen make the biggest difference in scaling up from a small to mid-sized company?
/end
• • •
Missing some Tweet in this thread? You can try to
force a refresh
SMB Twitter seems to really like home services businesses (e.g., landscaping, plumbing, HVAC, etc). These can be great companies, especially when paired with strong operators, and they exist in large numbers and in every market, which is also attractive as a buyer.
A few potential downsides to consider if you're looking at these types of companies:
- they usually involve some cap ex (vans, etc.)
- skilled labor shortages exist in most geographies
- the stickiness/brands in local markets also can make expansion to new areas challenging
I'd be eager to see more searchers focused on B2B services, which I think can be as, if not more, compelling in many cases.
Some examples:
- P&C insurance brokerages
- outsourced bookkeeping services
- managed service providers (i.e., outsourced IT)
One of my main goals in business ownership is to build an anti-fragile portfolio of companies with my partners.
Having a permanent investment time horizon means that I need to make sure the businesses are around for the long-term to accomplish my objectives.
The best way I know how to do that is to make the companies as bulletproof as possible.
Here are some key ways I believe I can de-risk my outcome:
- Buy good companies in growing industries (tailwind effect)
- Use prudent leverage at entry, and work to deleverage (while balancing with growth)
- Once deleveraged, hold or be ready to inject enough cash to sustain a prolonged downturn and to capitalize on innovative or compelling growth initiatives
Purchase accounting is a narrow subject area, but can have large implications in buying a business.
Here's a short overview of one area that can be very important: goodwill. Goodwill is created in an asset purchase when the buyer pays more for the assets than their book value.
The difference is put on the balance sheet as goodwill and typically amortized over 15 years. For service companies or less capital intensive firms where book value < purchase price, this can create substantial tax savings as non-cash amortization expense is charged off each year
For example, $1.5MM in goodwill = $100k in annual net income reduction, which, depending on the biz's tax rate, could save $40k/yr in taxes for 15 years ($600k total). This gets many buyers excited in the same way that RE investors get when talking about accelerated depreciation!
One of the inherent dichotomies in entrepreneurship is that of "rich versus royal".
Most entrepreneurs want to be both: receive a majority of their firm's profits and have control.
In practice, however, this seldom works out.
A short 🧵
Capital is often required to start or grow a company and when that money takes the form of equity, it is dilutive to the existing owners/managers, thereby reducing control.
Thus, an entrepreneur often needs to decide between getting bigger (taking $) or maintaining control.
Even the sources of capital (individuals writing small checks compared to institutional investors) can have an impact on this dynamic as 'less sophisticated' and smaller investors may require less control for any given investment amount.
This was the year I became active on Twitter. Rather than summarize my experience this year, which has been amazing, I want to highlight what brought me here in the first place, the brilliant content put out by others. Here are some great tweets from 2020...
Learning to delegate is essential for good leadership. @david_perell had a great post in April
In reflecting on my own entrepreneurial journey, I realized that I'm drawn to partnerships. I've had 7 of them (compared to 2 solo efforts). I've had success with each approach, but given a choice would usually choose to have a partner.
Here are some thoughts on partnerships:
What has led to a good partnership (for me):
- extremely high trust and transparency
- clear expectations about role, effort, etc.
- having hard conversations upfront about authority, economics, equity, dissolution, disputes
- working together in some capacity prior to partnering
Value of partners to me:
- reduces my fear & insecurities about my own abilities
- belief that 1+1=5 / do more, faster
- emotional support (during good & bad times)
- forced personal & prof development / accountability
- expanded network (raising capital, diligence, hiring)