How do you start the type of businesses PE buys? (boring niche businesses)
I'm talking diabetic shoe manufacturers, forklift truck tire makers, bolts for airplane engines... the type of boring, unsexy but niche businesses PE often invests in. Two questions:
1) How does one start these types of businesses? (without generational wealth)
2) Is it ill-advised to start one of these boring companies, with the goal of an eventual sale to PE? (same way innovative start-ups dream of VC funding)
The reason I ask is I've met people who have sold their companies to PE. They're filthy rich, retired early, and some of them have even sold multiple companies. This leads me to believe it's NOT all luck, and it is possible to create companies with the objective of selling to PE
If I wanted to be the next big urinal flush handle manufacturer, how do I start?
- Structurally fragmented market (gas stations, vet practices -> geo limited) but still possible to pursue roll-up strategy
- Non-cyclical (i.e., easy to lever up)
- Pricing power
Naïve question related to medical practice roll-ups (as you mention vet). What is the net benefit for anyone other than financial sponsors and sellers of practices in these roll-ups? Underlying patients pay more and services feel less personal given it's apart of a larger organization vs. a single or handful of location business.
One thing I've heard is actually more efficient patient allocation. If you've got two different clinics, one might be getting too many patients while the other is under-utilized. If you own both, you could encourage the patients at the overly-busy one to go to the less busy one. This means that you're stepping up your revenue through more effective and timely provision of services, and also improving customer experience at the over-crowded one by reducing wait times, making them less likely to switch over.
Does this make sense? IDK. This is just what I've heard from someone whose worked on a medical roll-up deal.
I believe consolidation is contributing to killing the essence of this country. Every business you go to outside of a few cities is just copy and paste these days. Go to Europe and see how small family businesses stimulate the culture and economy. Makes me a bit sad.
Bit late but from a vet roll-up I've seen recently:
- Key point was that most vets now opt to be employed instead of running their own practice, also offering part time to (mainly female) vets -> roll-ups can make use of that
- Obviously shared overhead costs, run everything more efficiently
- HR: at least in Europe, winning / retaining talent is very difficult, the roll-up had a strong employer brand which attracted many vet students, especially with the earlier mentioned part-time option
-> connected to that, vets can very simply move locations, i.e. if you want to move, they likely had another practice happy to take you
- Quite some economies of scale regarding meds / supplies
- Digitalisation: they invested heavily in digital patient files, digital appointment booking system etc - exactly what young people want, but most "oldschool" vets did not even think of
Identify market need
Identify product that fills need
Scale
How long usually does it take for them to build the business to exit? I’m looking at one of those businesses and it shocks me the founder is gonna walk away with $200mil cash.. super unsexy business if you ask me. On the other hand he’s been doing it for 20 years so that’s longer than what it takes to be PE partner
Have seen it through family connections. I'd say about 12-15 years is the point where, if done right and scaled, founders can sell for hundreds of millions.
You need actual industry experience is the long and short of it. Build a product that addresses a pain-point or serves demand. Best way to do that is to develop domain experience in the field. (e.g. logointern was started by bankers who hated aligning logos)
lol bro I had the exact same thought as well to start these unsexy manufacturing companies
If you're starting from scratch, you need capital and industry experience (or partner with an operator who has that experience). Most of these guys came from other boring businesses and decided that they could do it better, or their family owned the business and they took it over. You won't find many of these businesses being started by finance guys alone.
Agree that you'll have a head start of you have domain expertise but I've also seen people start from scratch, without any expertise, with $100-200k of their own capital (I realize this is a big some sum for a lot of people). Most of the the times the people who started without the expertise bought an existing business, ideally in a fragmented market and made it better; did the things the business owner didn't like doing (admin, backend, seo, marketing, etc.). Took that business from okay to to excellent, acquired more, and eventually sold that platform to PE. I'm sure if you spend 6 months learning about a niche, fragmented industry, talk to some experts, you'll have a good idea on where and how to start. Most of the times you learn on the job, making mistakes anyway. No risk, no reward.
Great insights
Thank you for your response. Any particularly fragmented industries that come to mind? What you're describing seems to be a mini-roll up strategy. Unless you're funding it with debt, that means each business must be reasonably cheap in order to afford rolling up further businesses and centralizing back-end. Halal carts come to mind!
Jokes aside, I am genuinely curious. Very interested in doing something like this, but I it's tricky without any mentors. I feel like these unsexy businesses don't get nearly as much support / attention as more innovative companies, which benefit from various incubators and university startup grants. If there's anyone you can connect me with, I would greatly appreciate it
I know you're joking about Halal trucks lol but I anecdotally know someone whose aware of an owner doing a roll-up in that space. Doing quite well. Revenue was close to 1M (~900K) and he took home like half that money for himself after paying staff.
In college rn, minority shareholder in a boring business (think low voltage electrical installation)
Partner with an operator that knows what they are doing and bring your more generalist knowledge of growth and finance to the table.
We started less than 2 years ago with $1000 and are making low 6 figure profit. Reinvesting everything and attempting to go national rn.
That's awesome. How did you find the operator or business to partner with?
Friend that I grew up with. He did a lot of IT / low voltage stuff during high school, and ended up getting certifications. I advised him to start this business and we went from there.
We're doing a deal right now that is objectively a pretty boring and pretty unsexy company, family owned, and their sales guy is next level (humble, grounded, great at talking, positive). But they spent 15-20 years making this thing, and tbh they're not event that sharp, just have a few strong people in the org, got in the market at a great time, and are walking away with $200m+ easily. We're lean so I've got to spend a lot of time with them and got to learn about them and their journey.
My dad is F500 C suite in manufacturing, and some of his friends along the way left to start small companies that sold for hundreds of millions- manufacturing was growing a lot from the late 80s in the mid 2010s, it seems now that market is saturated and margins across the board are falling . But the folks who started those businesses when it was booming (one of them that comes to mind identified that old hard drive manufacturing sites had equipment and standards that would make it easy to repurpose factories in to producing lasers and those types of parts for cars/jets/etc) now he's worth hundreds of millions.
It's easy to get stuck in the trap of thinking that corporate is it, because it's a bit of a clear cut path. But I'd say keep your eyes open to the opportunity in the wrold.
My family owns orchards and I've been long exposed to that industry, and I see that there is a huge market of people that could see real life improvements if they adopted better systems to manage their inventories and control their businesses. I'm thinking a business like this is niche enough where if you have connections you can get traction.
Thank you for your response. Really helpful! Any idea of where / how to start looking? I feel like ideally you'd need a operator to partner with. Perhaps I could bring in $100-200K. But then I image raising further capital for such an unsexy business might be challenging
You mind sharing what industry it is in?
Wondering industry as well
SBA loans are great tools to access relatively large amounts of capital without having the balance sheet to do it. The government loves to subsidize the kinds of business activity this thread is talking about.
Aren’t SBA loans currently high interest and also recourse loans?
Yes and yes.
I worked in property management helping owners managed their apartment complexes. It is a pretty straightforward process. However, these are not your mid-to-high priced units, these are your section-8 friendly tenant residents. The profit margins are there. Right when the loan is paid off, everything else is profits. The headache of the operations is being a people person dealing with tenants with little to no credit, bad credit, prior evictions, section-8, etc.
The owners I knew growing up owned multiple complexes - ranging from a minimum of 10 units per apartment to 30. The owners I worked for had 3, and just seeing the money just flowing in was quite interesting.
Dream goal - apartment owner.
That is indeed the dream.
When you say right when the loan is paid off, everything else is profits -> doesn’t it take years or decades for certain RE loans to be paid off? Or are you talking about section 8 specifically and it works differently for that type of investment?
The owner had a tile business he built from the ground up - sold that business and paid for most of the complexes with just cold hard cash. The one I lived in was paid off, but the unit that was down the street had a loan. My understanding is that section 8 essentially pays for their monthly rent, and the owner was favorable in choosing tenants with section 8 versus cash payments.
He did what he could to fix the issues on his own to reduce costs, and used whatever he made per month towards the principal balance owed on that loan. Once everything was paid off and he had 0 debt, he was collecting a lot of money and retired early (although I would bug him about things here and there occasionally - we had a list of contractors who were dependable to call).
I do not know the specifics of loan packages regarding section 8, hopefully someone on RE WSO can help on that? Does government provide benefits for landlords who want to own section-8 friendly units?
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