Buy Like A Businessman

Real business owners, not large company executives, have always had to face reality when it came time for them to sell their business and consider retirement. If the company they built was large they might hit a home run by selling to a public company and getting an outsized price for their years of hard work. Of course, the company had to have large, growing sales volume, be nicely profitable, financial statements that were audited, and an acquirer that didn't think like a private company. But it happened.

If he wasn't so fortunate the ordinary business owner had to sell to another businessman. That acquirer was either using his own cash or must visit his bank for some help. He didn't get to play with any funny money, public equity. It's all his hard earned cash and he's going to buy smarter than the big company acquirer, or at least cheaper.

The seller sees what similar public companies sell for on the stock market and transposes their P/E to his own company and hopes to go off and sit under a palm tree. It rarely works that way as the businessman buyer wants a return of his money in a short period of time. Years ago when I was active in the M&A arena, the buyers goal was to pay no more than 5 times EBITDA , get a return of 20% and his money back in 5 years. Simplistic but you get the idea. Businessmen drive hard bargains with their own money. That's why you want to sell to a public company if you can pull it off. They have a different mind set.

In today's market you don't have to buy 100% s of a smaller private company to enter at 5 X EBITDA.  Loads of public companies are selling for that threshold and lower. Of course the earnings number is fuzzy today, but reasonable assumptions of reduced profits can be made. There are relatively safe companies, reasonable debt levels and good economic moats, that can be bought at these levels.

Now I think the market will likely go down further and any recovery in prices will not be V shaped, and I continue to be patient before wholesale recommitment to the market, but there are companies that will make you money if a buyer purchases like a businessman buying a company, not an investor buying a stock.