Buyers and Builders
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.
00:28:02 · Chris Rolls, Mikk
How can you help businesses collect their invoices faster, pay their invoices later, reduce their inventory, make sure it turns more effectively. Not that many of our businesses have a lot of inventory because they're typically capital light. But even just helping them with their working capital. There's often hundreds of thousands of dollars in businesses by just getting better terms with suppliers, paying them a little bit later, and collecting money from your customers a little bit earlier. You might buy a $5,000,000 business and immediately, over the first twelve months, pull out $400,000 of working capital that the business never needed. So there's lots of examples, but it is very, you know, on a case by case basis. [00:28:52] S0: Let's cover the third one as well. Simply selling more products and services. What's...
00:28:57 · Chris Rolls
[00:28:57] S1: So that's the hardest one. That's the riskiest one. So a lot of people kind of... I I I think most small business owners, particularly people that have spent a lot of time sort of in the startup world, in the entrepreneurial world, their their thoughts about how to grow a business is all about top line revenue. When in fact, the only thing that matters is the bottom line. And even then, not the bottom line, it's the cash that comes as a result of the bottom line. Ultimately, what counts is cash. But most entrepreneurial and entrepreneurial sort of courses and people talk about how to grow grow grow grow grow and they're almost always talking about revenue. And revenue is a terrible measure of growth because it doesn't necessarily correlate to profit. And so it's the hardest it's the hardest one of all. So when we look at a business, we make the assumption that we aren't going to significantly improve sales because that requires an investment which means... Which makes the business more capital intensive. That investment may or may not pay off. Sales in a business are often very heavily dependent on finding the right salesperson and salespeople are traditionally the hardest to employ because they're salespeople, they interview well. So we don't we don't go into a business on the assumption that we can increase sales all the time because that's a risky assumption to make. You can make much more accurate assumptions on things like putting prices up and pulling costs out. That said, we have plenty of businesses that grow but we take a fairly conservative approach. It's a rare scenario where we will go into a business and, you know, invest an extra million dollars or $2,000,000 on growing the sales team or spend on marketing or or that sort of thing. Usually what we're doing is having a look at at how have they grown historically and are there some easy levers to pull in that space. And sometimes there are very easy ones. We're looking at a business at the moment that generates referrals from an organization who sends them work in order for paying them a a a fee on that work. You know, you ask the question of, well, any reason why you don't pay them more and get more referrals? And I said, well, we just like to grow at a certain sort of speed.