Personal Passion vs Fundamentals
August 4, 2021 | Issue #34
Big Deal Small Business: Personal Passion vs Fundamentals
August 4, 2021 | Issue #34
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You’re being warned upfront — this is one of my more rambling post and not super well-organized.
In my private equity day job, my personal passion about an industry is not super relevant or reason to do a deal.
The reality is that most industries are fun enough to learn about at a desktop/site visit level of depth. I’ve had the opportunity to look at everything from oceangoing shipping to broadcast media to gaming to corn farming to tugboats to coal to food products to money services to……the list goes on. It’s one of the coolest parts of my job.
Further, we can generally find great management teams in most industries with 20+ years experience to drop into the business.
As a result, once we’ve found a great team, the investment analysis solely focuses on the quality of the investment opportunity itself (business, industry trends, valuation expectations, etc.).
It’s a different ball game when it comes to SMB deals. We are not only going to buy a business as an investment, we are also going to live & breath that business for the foreseeable future.
That means we should buy a business that we are personally passionate about…I think?
When you’ve worked a bad 90-hour week in your SMB and need to push for that last 10 hours to grind through, could that personal passion be the difference between pushing through and not?
How do you balance that with a business/industry with great fundamentals? Which is more important?
I’m honestly not sure.
I go back and forth on this constantly — I see companies that are good businesses by any traditional metric, but I just can’t visualize myself running that business day-to-day.
But then I see some of these travel/tourism businesses (like my original Alaska deal) that have zero recurring revenue, just a strong brand / operations platform. With those, my head starts spinning with ideas to expand the brand & drive new demand.
That kind of excitement & passion feels like the right juice I need to push a deal over the edge.
But then I look at where I see other searchers gravitate to when they going into due diligence.
This is a simple table I made for Sam Rosati’s SMB Bootcamp a few weeks ago:
When I talk to operator-type searchers, they always start talking about deals with a growth / optimism mindset. When I talk to investor-type searchers (like myself), they always talk about profitability metrics, returns expectations, etc.
So when I get very excited about how I could grow a travel business, I’m really only transitioning my thinking from the investor-type searcher to the operator-type searcher.
But based on my investment experience, deals are made or broken based on business & industry fundamentals.
So going back to the original question — how do you balance the two (fundamentals & personal passion)?
I think the real answer is that you can’t balance the two, which is why search is so difficult.
You don’t want to optimize purely for fundamentals and buy a business you don’t wake up excited to work on.
You also don’t want to get into a passion project but face daily headwinds from business & industry trends outside of your control.
It’s an unsatisfying answer to say the least, a non-answer really.
The good news is that this otherwise useless, rambling blog post does generate one usable insight.
It seems clear to me now that one of the best ways to improve your odds of closing a deal is to get genuinely excited about MORE industries.
The more businesses I can viscerally see myself operating, the more deal opportunities will seem actionable.
In order to see myself operating more types of businesses, I need to, well, see more businesses being operated.
To do so, I’m hoping to spend more quality time with my friends & folks in this community who are post-search.
Whether that’s via “ride-alongs” or just in-depth, in-person conversations, I want to visualize life post-close a bit more clearly. That’ll help me take the big swing on a deal for myself.
If you’re a current operator and would enjoy that kind of conversation/experience, I’m happy to travel to you! I can offer a outside person’s perspective on your business with my PE lens on (to the extent you want that), but I can also offer coffee & beer if that’s preferred.
Conclusion
If you made it this far, thank you for putting up with one of my more navel-gazing, self-indulgent posts.
If you’re a current searcher, let me know how you’re balancing personal passion with business fundamentals — maybe I’m over-simplifying or over-complicating it.
Maybe personal passion just isn’t that important once you’re in the weeds — the weight of investor capital and a PG on SBA debt is incentive enough to dig deep.
If you’re a current operator interested in someone really digging into your business, hit me up!
If you’re a current/prior operator who hates their business but loves its cash flow resilience, I’d love to hear your story as well.
In any case, it’s clear I’m still thinking this one through, so please reply to this email with your thoughts or find me on Twitter.
Thanks,
Guesswork Investing
P.S. I’d always appreciate introductions to potential acquisition targets or brokers (primarily targeting $750K-$1.5M+ of SDE or EBITDA, ideally located in the Northeast, West Coast, or Colorado).