Buyers and Builders
00:19:16 · Chris Rolls, Mikk
But it's just a classic scenario of an industry that was growing with two founders that knew what they were doing. A business that's largely recurring revenue because once you sign up a customer, the customer is the real estate agency and they have to get it done on all of their properties every year. So you sign them up on a subscription service and you've serviced the job for them. And that's basically the industry and it grew very well. [00:19:45] S0: As this wasn't part of the permanent hold vehicle, did you eventually have to sell it and or what happened next? [00:19:55] S1: No. We still got a minority interest in that. That was a business that we had to sell out of the fund and we actually created a continuation fund. And then we we came across another smoke alarm in the industry and we acquired that one as well in the fund. And so that one we bought at a very low price, know, just a a founder that wanted out, probably wasn't running it particularly well and we were able to improve on that. So it's an unusual scenario. And as I said earlier, once we exit the portfolio companies out of our legacy funds then we'll just focus on serial acquirer model.
00:19:55 · Chris Rolls, Mikk
[00:19:55] S1: No. We still got a minority interest in that. That was a business that we had to sell out of the fund and we actually created a continuation fund. And then we we came across another smoke alarm in the industry and we acquired that one as well in the fund. And so that one we bought at a very low price, know, just a a founder that wanted out, probably wasn't running it particularly well and we were able to improve on that. So it's an unusual scenario. And as I said earlier, once we exit the portfolio companies out of our legacy funds then we'll just focus on serial acquirer model. [00:20:38] S0: Now when it comes to your experience of formerly building those businesses for twenty, twenty five years, you have this wide range of experience of improving those businesses. What are some of the things which you have done when it comes to those portfolio companies post close? One being like you can maybe share a story of just raising prices. In one case, you bought the business. You said you paid quite a high price. It was like 7x EBITDA, but then you discovered that these guys haven't raised prices. And once you did it, the the EBITDA multiple just got better for you when it comes to acquisition price.
00:21:19 · Chris Rolls
[00:21:19] S1: Yeah. I mean, it's it's it's it's not sort of rocket science. When it comes to adding or creating value in a business, there's really only three things you can do at the most basically. Well, you can put prices up, you can put costs down, or you can sell more products and services to more customers. Outside of those three things, nothing else add value... Adds value. And and and I... Sometimes we overcomplicate it when we look at a business. We kind of go, well, gee, that's that business is inefficient. What do we do to fix it? Let's cut some of the unnecessary waste out which reduce cost. Or maybe they're underselling their products, let's put the price up or let's just find some more customers and sell more stuff. And the interesting thing about those three mechanisms, price up, cost down, sell more to more people. Price up is the one that you've got the most control of. It's the one that you can do instantaneously. It's not without risk, but if you find the right sort of business, can do it relatively easily and relatively risk free. An example that we were chatting about previously was we bought a business in the strata management industry, business in Queensland. So strata management is looking after compliance once again. They after the body corporate system of a block of apartments. So there might be 20 apartments in a block and the owners form a committee and they engage an organization to look after the finances to collect the body corporate fees from each of the apartment owners. They do things like organize insurance for the building, they do all the financial reporting, they chase up owners who haven't paid their fees, all of that sort of stuff. You know, when you look at that industry, it's a very antiquated industry. Not a lot of technology involved. The owners of businesses in that space are generally elderly. And it's a 100... Pretty much a 100% recurring revenue. It's a business that actually works on negative cash flow. What I mean by that is you get paid quarterly in advance. So as the business grows, end up with more and more free cash flow to grow it than you would with businesses that are capital intensive. So it's perfect from a capital intensity perspective because it works on a negative cash flow base... A negative working capital basis.
00:23:38 · Chris Rolls
And this particular business we looked at it, it was actually the owner of it passed away. He was quite elderly. He passed away. He passed it on to a couple of internal employees in his inheritance and his and his children. And they weren't getting on particularly well so they put the business on the market. And one of the things that when we were looking at it, we noticed was that they hadn't put prices up across most of their services for around eleven years. And it doesn't take a genius to work out that if you buy that business and put the prices up in an industry that is almost a 100% recurring revenue where customers are very sticky, it's hard for them to change because in order to change from a supplier, a body corporate manager, they have to take that to a vote and they have to get a vote of all the residents. And that's time consuming, difficult, and a lot of hassle and so usually they don't. So we put the prices up so they were more in line with market value. We improved the quality of the service over a period of time and we've generated a very very good return from it despite the fact that we paid relatively high price. I think we paid about seven times EBITDA for that for that business which is higher for us than than we would typically do. But one of our best returning investments. And why? Because we knew in advance of buying it that we would be able to the prices up. So our effective seven times multiple really once we put the prices up came down to maybe in the fives or somewhere like that.
00:25:12 · Mikk
[00:25:12] S0: Okay. The price example. What about reducing the cost? When buying a business, you go in, you learn and see what is going on, you already saw some of those things through due diligence. What are some of the common things you're able to do when it comes to reducing cost?
00:25:27 · Chris Rolls
[00:25:27] S1: Sure. So I think the answer to that is it depends on what sort of business it is. So if you take that strata management business, one of the things we did was they have a lot of votes and we implemented a pretty basic cheap piece of technology that allows management votes to happen online. You're not having to hold in person meetings for... You know, to pass special resolutions around buildings. Some of the other things we've done in businesses is we've implemented basic efficiency programs. People are probably familiar with business process improvement or continuous improvement or lean, depending on what you call it. Once you train people in methodologies like Lean, it's not that hard to show them if you can develop the right culture internally that there's a whole bunch of work being done in every business that ever exists that just doesn't need to be done. Is there unnecessary reporting being done? Is there unnecessary work that's being done? Are people not not embracing artificial intelligence? So we have as an as an example, and this is probably a very relevant example, We have a team member, her name is Shelley. Internally, she's our head of of innovation. And what she does is work with our portfolio companies to have a look at basic processes that you can eliminate or automate through AI. So I'll give you a good example. One of our businesses would receive payments from a client. So they... The business is a business that is in the exercise physiology industry and what they do is they rehabilitate injured workers and get them back to work and those injured workers or that rehabilitation is paid for by insurance companies. And insurance company might pay an invoice but the invoice is actually a collection of hundreds of very small invoices. And they were going through a manual process of they would get a payment in, it might be for whatever $10,000 which might be made up of 5,200 invoices. And they had someone there just cross referencing invoices for for multiple hours a week. Something that AI is very very good at just solving. So Shelley jumped in, helped solve that problem. Straight away. You might be removing six to eight hours of work a week. So that's a day a week for a person potentially. So things like that in terms of getting cost out. The other cost is working capital.