“What types of companies do we buy?”
Whenever I am asked what type of businesses we buy, my standard answer is that we are industry agnostic, but there are certain industries we stay away from. Here is a list of what we look for and what we avoid when deciding to buy a business.
First off, it is a given that I need to understand the product/service being sold and how it is being sold. If I cannot explain it clearly at the dinner table, I have no business owning it.
I also need management to stay in place post-transaction and for them to be the type of people I see myself working with. We must be vision-aligned.
If any of those are not satisfied, I quickly move on. If they are, I advance to analyzing the economics of the business to see if it is attractive for us.
We run a HoldCo. We buy private businesses and use the cash flows to either reinvest for growth or acquire other businesses. To put it much simpler, we buy cash flows.
The businesses we buy must produce cash. Not net income. Not EBITDA. Cash. Most of my analysis revolves around how efficiently a business can convert income to cash, how much cash is needed to maintain the business, and how much cash I must risk growing the business.
Businesses that require heavy maintenance CAPEX are unattractive to us. Think of an airline. They may have a decent EBITDA number, but most of that money must go back into maintaining the airplanes or buying new ones.
A service business could be ideal for us: no inventory, controlled receivables, and lots of cash. Our BPO business has been our most consistent cash producer over the last decade.
The economics of different companies in the same industry can also be wildly different.
A fine dining restaurant group, which requires massive CAPEX for new openings will not work for us. A fast-casual brand with less ongoing investment could work.
A retailer far from its manufacturers holding heavy inventory probably will not work. A retailer in close proximity to its suppliers, carrying little inventory and rotating multiple times a year does work.
In the end, the final decision is more art than science. I do not have an algo I drop the data into, that tells me whether to proceed or not with the acquisition. I must weigh multiple factors when deciding. Cash flow production carries one of the heaviest weights when making that decision.