July 16, 2018

It’s been nearly 7 months since we started Pursuant Capital to search for, buy and operate profitable businesses for the long term. When we started, we only imagined the things we’d see, the hidden “nichey” businesses we’d uncover, and the personalities we’d meet. Here’s an inside look on the first 7 months of deal flow.

 

A picture is worth a thousand words

 

With a lot of old-fashioned elbow grease and even more coffee, we’ve compiled an impressive database of privately-owned, profitable businesses located in West-Central Florida. Our funnel looks something like this:

 

When we set out on our search, we knew that greater Tampa Bay was full of the usual characters: construction, healthcare, tourism and an endless assortment of chain restaurants, but we’ve been really surprised to see the diversity of industries and business located right in our own backyard.  You wouldn’t imagine the number of highly specialized manufacturing, technology and services businesses doing north of $1M per year in profits.

 

So what industry are you looking for?

 

We get asked this question a lot.  At the beginning, we answered with generalities like “business services” and “light manufacturing”. But experience is the best teacher, and over time we’ve fine-tuned our answer based on the thousands of different business and industries we’ve seen so far.  Today our favorites are:

 

In the “micro-middle-market” where we search, every business is different.  So for us, it’s more about company characteristics than specific industries.  We like business that are “B2B” (its customers are other businesses), not “B2C” (its customers are individual people).  Services businesses are preferred over businesses that make or sell products, all else being equal. Contractual, recurring revenue with low customer concentration almost always outweighs what product or service the company is selling.  And the “nichier” the better. This graphic says it best:

 

 

Beauty is in the eye of the beholder

 

99% of the businesses we uncover end up not being a good fit for us.  Most of the time that’s either due to size (annual profit is either less than $500k or more than $3M) or timing (owner isn’t ready to sell).  But increasingly we are finding that owners value their own businesses at a far higher valuation than is reasonable. Recently, one owner responded to our outreach with the following note:

16x 2018 EBITDA!  Yikes! There’s no doubt that times are good.  Shoot, just look at your brokerage account statements, the stock market has been on a heck of a run.  We see so many businesses with great recent growth, strong P&Ls and clean balance sheets. But owner expectations are just as strong, and often there’s just too much of a valuation gap to get a deal done.  Fortunately, “this too shall pass” and one day we will see owners’ expectations come back down to earth. And at that point, we’ll be ready to buy these same businesses at far better valuations.

 

Paying it forward

 

Even when a business isn’t a good fit for us to buy, we’ve really enjoyed the many conversations with business owners.  On countless occasions, the business owner needs something different than what we offer. Fortunately, we have a strong network of friends and colleagues in the Tampa Bay area that have exactly what these businesses need.

 

For example, one owner really needed an ERP (enterprise resource planning) software system, so we introduced him to a consultant we’ve used in the past.  Several times we’ve received compliments on our website, so we’ve referred a lot of work to the website developer who helped us build PursuantCapital.com.  And when an owner realizes what he or she needs is growth capital, and not an exit, we’re happy to send him or her to our friends in the finance world.  The stories like this are endless, and many of you reading this will either have already received a referral or will soon. Doing so has been one unexpected pleasure of running Pursuant.

 

Salesmen with a checkbook

 

Like any salesman (remember, we sell an exit strategy for business owners without a legacy plan), we’ve “had the door slammed in our face” more times than we can count.  But those harsh rejections are worth the thousands of businesses we’ve studied and especially the 50 or so in-person meetings with business owners. And as we write this letter, we are inching much closer to our first acquisition. We’ll hopefully have exciting news to report this fall!

 

Cheers,

Joey & Sam
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