Here's what my perfect deal looks like
If you really want to 5X your money - you can call this whatever you want - “get rich quick” or “market-beating uncorrelated returns” - then you’re likely doing it in private equity, where the playbook is pretty simple…
Buy low, sell high; and don’t lose too much money in the middle.
And for as long as I’ve been in banking, single easiest way to “buy low” is to go find what people call a “motivated seller.”
More specifically, an unsophisticated seller who has a quality business asset, needs money now, and has very few other interested buyers.
Why? Because in any market, the key to winning is all about managing “supply and demand.”
And if you want to make as much money as you possibly can in the dealmaking business, there’s simply no substitute for getting your hands on as much equity/control of a sellable asset for as cheaply as you possibly can.
So where do you go to find these great businesses that you can pick up below market rates?
Private Equity’s favorite killing ground is – and has always been – founder led businesses who haven’t raised outside capital before. Sorry if that’s YOU, but at least “now you know.”
Why are these the killing fields? Because as a category, most founders lack the executive skill sets required to build a business in a way that investors find valuable.
But the professional investor who is BUYING the business most certainly does.
That’s why founder-led businesses sell for less money – and lower multiples – than professionally managed deals.
Deals involving founder-owned companies tend to happen at the lower end of the market (i.e. $100 million or less) and are often at a significant discount to larger corporate- or sponsor-backed deals.
According to Pitchbook:
This, in a nutshell, is the secret to consistently hitting those 5x-10x wins in 5 years or less.
Don’t get me wrong, this is NOT easy work to go sifting through the vast mountains of garbage-filled founder-backed companies in the lower middle market…
But when you look at an institutional investor, their entire firm – from the Partners down to Interns – is built around originating deals, sifting and sorting through all the trash, and finding an asset that is more valuable in YOUR hands than it is in the sellers.
And even though there’s plenty of risk – and hard work – that comes with investing in these deals…
If you know how to structure the financing the way Bankers do, you can put you – and your investors – in a much lower risk position in the deal.
“You think your business is worth $10m? Well, no, it’s not: you have no other buyers interested except for me. Market rate is $3m. And even then— you will have to provide some seller financing and hit an earn-out target over the next 2 years.”
Why? Because unless you own a well understood, easy to underwrite asset with an existing market – for example, you own a bunch of car washes or cash-flowing Jiffy Lubes…
And unless you know exactly how to clean up your financials, build a PE-level dataroom and tell a very compelling story about how that model is expected to perform in the future…
… There is no SPOT MARKET for some <$50m company that has messy financials, an owner who cannot explain how the business operates, and a lot of work that has to be done by the buyer to get the asset to perform.
So what happens when these founders go try to sell their company?
They wind up taking a deal to market that suffers from the “wrong plug” syndrome.
And because the deal doesn’t neatly check the “perfect deal” boxes the buyer probably has, the seller is forced to talk to a small pool of sophisticated buyers who understand where the “alpha” is in the deal (and is willing to do the work to unlock it).
From the outside, you might see this as some sort of “predatory financing” scheme where you “steal” assets from people through some trickery.
But really, thats just banking.
Don’t get me wrong, there’s plenty of predatory lenders out there who do all kinds of nasty stuff… and I have no interest in structuring deals where I so one-sidedly take advantage of the other party.
That’s just not a fun way to do business.
But if you want to hit 10 baggers, you’ve got to scrape out every percentage point of return you can.
And even though your ego might tell you that you can make any deal work…
If you want to have a repeatable system, you have to find some sort of “cheat code” that lets you run the same playbook programmatically.
For me, the deals where I add the most ALPHA are ones that have a well-run business but a poorly-run stock.
In the stock market, alpha comes from… I dunno, magic?
But in the lower middle market – as in sub $100m companies – things work a little bit different.
Unlike the “Team with a Dream” propaganda you see in the startup culture…
You don’t make billions of dollars in deals investing in unproven business models (which are startups) with unproven managers.
Real money is made working with experienced executives who have a proven track record executing the business play you are financing.
We’re not picking stocks, sitting back, and doing nothing.
In private equity, great deals are MADE… not found.
But where are those deals made? Not out in the middle of nowhere Kansas.
They’re forged inside of an innovation ecosystem that supports the growth of the business across multiple stages of its lifecycle; Places like Silicon Valley, Southern California, Boston, Wall Street, and the Texas Triangle.
Once you understand what an ecosystem is, what types of deals they like to finance, and how to plug YOUR deal into them after you’ve cleaned it up and prepped it for sale…
This is how you “make money on the buy side” of the deal and set yourself up for those 5-10x returns.
Because I’ve done deals in basically ALL of the major capital markets ecosystems – and I know how all their cheat codes work – I know who all the buyers are and what I need to do to make it appealing to them.
Except these days, instead of flipping to some PE firm for a quick 5-10xer…
My plan is to simply do what that PE firm would do on the next leg of the race, take it public myself, and set myself up for a potential 25x+ over the next 10-20 years.
Want to hear what the next deal we’re building inside the West Coast Finance ecosystem?
P.S. Now that I’ve shifted this newsletter away from teaching people on how to raise capital… and towards doing my own deals and explaining how I think about putting deals together and investing my own money…
I’ve been getting an entirely different kind of feedback on the Pitch Anything Playbook newsletter.
How are you liking the new content road map? Do me a solid and let me know in the poll below.
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