Apr 29, 2011

Principles of Freedom vs. Socialism

“Those who do not learn from history are doomed to repeat it”

-- George Santayana

In the historical documentary / lecture, "Nietzsche and the Nazis", Stephen Hicks outlines some of the values and ideals held by a very well-educated German people during the early part of the 20th century.  Hicks shows how these ideas developed and took root in the German people, which of course led to the rise of Nazism and the slaughter of over 20 Million people in concentration camps and another 30-50 Million people from World War II.

I'll list only the summary here, but strongly recommend viewing the dry, but deep discourse presented in "Nietzsche and the Nazis" to better understand the principles behind the words below.

Nazi principles:                                      Freedom Principles:

Collectivism                                              Individualism

Instinct, Passion                                        Reason

War / Zero-sum conflict                           Production/Win-win trade

Authoritarianism                                        Liberalism

Socialism                                                  Capitalism

Apr 13, 2011

The Ideal Company Acquisition

A bit of Q&A from an associate of mine.  His questions, my answers on what type of acquisition we should be targeting - my thoughts on the ideal company acquisition for where we're at at this time.

As for my ideas on an ideal acquisition, I've commented below.

This may seem a bit vague, but I've bought companies in industries I haven't been too fond of, with the justification that if I can buy a dollar's worth of value for 25 cents, it's worth the trouble.

I'm trying to get away from this philosophy.

I've had a tendency to buy, as Warren Buffet would describe, cigar butts - good for one last smoke, but not worth much long term.

This tendency to buy companies on the cheap, based simply on the estimated cash-on-cash ROI and what I believe I can resell for a short-time later, probably aren't the best set of criteria for making a business purchase.

So far, I've been lucky I suppose in holding to this type of 'anyting-goes-so-long-as-the-price-is-right" mind set, which has served well in negotiations with sellers as well as buyers and helped me remain emotionally neutral to an opportunity. Perhaps it opens up more opportunities than otherwise would be if I were ultra-selective... but I believe I've got a lot to learn in this area.

My selection process has been primarily one of elimination: I've avoided and plan to avoid any/all strictly service-type businesses - especially those that don't offer some type of barrier to entry (real estate intensive; restaurants; retail (unless e-commerce); dying industries or industries that appear to be threatened by any macro trends (publishing, hospitality, etc.); I have steered clear of any technology companies that I don't understand or that rely heavily on patents.

I prefer companies that have some type of identifiable competitive advantage/barrier to entry that can be exploited or developed. I know this is all very vague, so I'll try to answer your questions in more detail below.

Q: Agree to what our business skill sets are – to leverage
A: I believe my skill sets would center on leadership, initiative, vision, creative problem solving, critical reasoning, logistics, negotiation & sales/marketing, fiscal discipline, and a healthy appetite for taking educated risks.

Q: Market niches: you like – don’t like
A: Like:  Niches that can expand into other markets by applying a similiarly proven base formula
Don't like: too narrow of niches that tend to dead-end or don't have other outlets for growth, or that rely upon an asset that isn't scalable.

Q: Markets: domestic and/or international
A: Preference: domestic with potential to grow international, unless of course it's an e-commerce company.

Q: Markets: population demographics influence (organic growth)
A: Preference: ride the following macro-trends: baby-boomer (health care, entertainment, etc.), green tech/ resource efficiency;

Q: Travel: OK to have to travel – or prefer not traveling
A: Okay traveling for due diligence after an offering has been accepted. Intention to bring company to Arizona if and wherever feasible.

Q: Types of businesses – Manufacturers/ Services/ Software/ e commerce
A: Comfortable with all, though I've never bought/managed a software company yet and would need some help on that one. Would prefer to avoid the 3 R's: real-estate or location-based companies, retail, resturants, etc.

Q: Size: $ to invest/ $ annual revenues/ Employees
A: I should have $500K liquid in the next 6 months as I'm in the process of selling one of our companies and several pieces of real estate.  I would prefer we buy a company with Revenues over $1M, preferably $2-Million, EBITDA of $500K or more, with strong gross margins (over 25%). Employees can be 0-100 or more, I'm comfortable leading large groups, but I would hope the revenue per employee would exceed $100K.

Q: Geographic Location options
A: I prefer being able to meet face-to-face with the people I work with whenever possible. Tempe, Arizona would be the ideal place to bring a company if at all possible for me, from wherever in the U.S. Other options would simply depend upon the economics of a given company and where it would make the most sense for it to be.

Q: Infrastructure support requirements: facility/ equipment/ storage/ tools/ computers etc/ repair
A: I'm open on this one assuming the facility is in or around the Phoenix area where we can see it. Big facility or no facility at all is fine.

Q: Liability exposure and ongoing legal advise support requirements
A: I don't like liability exposure, as much as the next person I suppose, and would try to avoid companies where there's a lot of liability or potential liability (don't ask me why I was looking at the solar company). :)

Ongoing legal support is another one I would hope to avoid by sticking to companies not needing or relying too much on patents or proprietary technology.

Q: Financability – SBA or other to get the deal done or leveraged
A: SBA is fine I suppose, but I prefer equity investors over debt, unless its seller carryback debt. The only things I like to leverage or use the bank for is A/R's or FF&E and I prefer a working capital line for the A/R's, a Seller note for the FF&E.

Q: Degree of technology – simple to proprietary
A: Prefer simple. Having said that, if I felt more comfortable valuing and knowing how innovation trends might impact the value of a patent or a technology, I would be more likely to want to invest in something more complex; I rarely feel comfortable with what I think I know.

Q: Business Scalability
A: I'd prefer a business that can scale and handle additional growth.

Q: Government influence and compliances
A: As much as is possible, I generally prefer companies that are relatively free of governmental regulation, except in situations where the government is making great efforts to build-up a particular industry poised for growth (ex: solar or anything green).

Q: Expansion potential and cost thereof
A: Almost a must to have expansion potential that can be developed for fifty cents on the dollar - there has to be profitable, organic growth potential in the deal for me to be interested.

Q: Reasonable Sales cycle: 5 minutes or 5 months to purchase?
A: Pretty open here, but prefer the shorter sales cycles - 6 months or less being ideal.

Q: Customer purchase loyalty tendencies
A: Prefer some type of consumer monopoly or oligopoly based upon loyalty/brand that keeps them coming back. Prefer dealing with clients (re-occurring revenue streams) over customers (one-time buyers).

Q: Required Selling Process: Face to face/ E Marketing/ Website/ CEO level decisions?
A: Comfortable with all. Prefer the human element of phone-sales over face-to-face if possible, and if the sales process can be simplified for the benefit of the customer by an e-commerce solution, I prefer that even more.

Q: Competition?
A: Prefer a few (1-3) competitors in a given market so I can size them up, compare and offer a better solution. Industries that have too many competitors (where our company isn't in a top 3 or 4 position) make it difficult to size them up and it becomes a bidding war of who can do it for less. Niches that appear to have no competition as a result of some new, break-through product aren't my ideal either; I'd rather copy and use what works with others than blaze a new trail.

Q: Develop an original business concept or improve an existing - other company’s business model?
A: I prefer to improve rather than invent from scratch. Having said that, if I was convinced we had a blue-ocean strategy in place (a completely revolutionary business model for a new or old industry) that utilizes the strengths and minimizes the weaknesses of a given industry (or blending of 2 or more industries or sectors), I would be more inclined to develop it from the ground up.

Q: Dependency after purchase of existing personnel to maintain/ grow the company
A: I'm a bit different than most on this one. I prefer a company I can eventually insert a team chosen by myself, rather than keeping long term the existing personnel (typical of most financial or LBO buyers) or simply collapsing layers and taking over positions in a typical synergy-merger/acquisition (typical of most strategic buyers). For that reason, I prefer not to be heavily dependant upon the existing personnel of the company. (Having said that, I try to be very sensitive to the value of the company in relation to key personnel - a top salesperson for example - and if it does rely too much on too much brainpower or too few of key people; in such cases, I tend to be less inclined to want to buy). I prefer to eventually inject the company with people who hold a similar value system as myself: integrity, discipline, work, family, religious, etc., rather than being talent-dependant.

Q: Who will be the potential buyers after the purchase is made?
A: I have yet to sell a company to anyone other than a layed-off executive or another small business owner, so I'm probably not as familiar with the options that are out there with a larger company, but would like to sell eventually to a PEG or some other institutional investor perhaps... Preferably the business would be somewhat relocatable, in that it would open itself up to more views when we put it on the market. I like the idea of relocating a company from an overly taxed, overly regulated, overly paid state like California and planting it in Arizona, for example. I'd prefer we buy a company with a minimum $500K EBITDA. From my limited experience, buying right, or for the right price, has been one of the biggest factors in being able to sell for a great price (relative to the purchase) later on.

Q: The search for businesses to buy: RE-active or PRO-active?
A: PRO-active for sure. I'd prefer to hunt them down, rather than calling on listings. Occasionally, however I come across some businesses that show up on the market that I prefer to jump on if the value appears to be there for a needy seller, and it isn't in one of the industries I dislike.

Mar 18, 2011

2011 Bank Rules for Real Estate Acquisitions

In 2011, banks can still finance up to 10 properties (they count 1st and 2nds as one loan in most cases - thank goodness).  If it's for a primary residence, there's really no limit to how many mortgages you can have - so long as your normal debt to equity & income ratios, credit, income, assets, etc. still pan out.  

One can also use existing assets (notes, equipment, A/R's, home equity or even your stock portfolio) as collateral for other loans - typically at a 50% collateralization rate (that is, banks may take your $100K stock portfolio and be willing to lend you $50K, for example).

No assets to pledge?  You'll still need 2 year's worth of W2's and verifiable income (pull out the tax returns) to qualify.  And good credit is pretty much a must too in this market.  If you want good rates.

Converting a hard money loan into a conventional loan is do-able.  BUT, the standards for a refi are just as strict as they are for a new purchase.  Keep that in mind.  And, typically, you can't pull your money out of the property for at least 6 months on the refi.  Gotta wait it out for 6.  Dumb rule, I know.

The hard money guys?  Make sure they approve the property first.  They'll charge a $900 setup fee, 18% interest only, and they'll want 25% as a down payment, no prepayment penalty, but they do require a minimum of 30 days servicing.  Make sure you plan your escape before you enter.

Feb 22, 2011

The Wanna-be Entrepreneurs - Please Don't Apply

I find it amazing how many people want money for a startup venture - and how few of them have any common sense about how (un-)valuable their company really is.

A wine guy wants $5M for a company that has no assets, no income (and no competitors, which supposedly is supposed to turn me on - not so, buddy.  No competitors = no money to be made in that space.  In any case there are ALWAYS competitors - even if it's nothing more than putting up with the status quo.)

Another wants $3M for a dating website - no site built yet, so of course, no money/assets, etc. and the guy has no skills to bring to the table to actually build the site, which I might be able to invest in.  Generous guy though - he's willing to offer me 25% of his company.  Wow.  So, let me get this strait: I give you $3M for you to build a website, and your role will be....?  Oh, I see: overseeing the project.  I can do that myself for $3M, buddy.  Good luck.

I get hundreds of these types of requests each week. 

Luckily, I also find a few nuggets of gold every now and then: people with the experience and skill to have a chance at winning in a startup venture.  Or companies that have a long, steady track record who've come upon hard times who need a workout to get their company turned around without their loosing control.