Actual returns in search - Part 2
September 11, 2024
by a searcher in Cedarhurst, NY, USA
In response to ^redacted’s recent post on inflated expectations in search, I’d like to emphasize one critical point:
if you overpay for a business, no amount of operational excellence or strategic foresight will salvage the returns.
Lately, I’m seeing multiples being paid that just don’t add up. Overpaying creates a hole that’s impossible to dig out of, no matter how much value you add afterward. The purchase price sets you up with an unsustainable hurdle, and the IRR and MOIC benchmarks become irrelevant if your entry price was wrong.
Search can be a great asset class, but buying right is essential. The price you pay is the most controllable variable in any deal — get it wrong, and your returns will always underperform.
#SearchFund #PrivateEquity #ValueInvesting #DealSourcing #BusinessAcquisition
from Harvard University in Fort Wayne, IN, USA
I remember an excellent talk (maybe David Dodson? It was someone with a lot of search investing reps) where he said he compared his best and worst performers and questioned if it would have changed the outcome if they paid a moderately higher or moderately lower multiples. According to him, the vast majority of the time, it didn’t. Does anyone have that video?
That said, I feel like I’m frequently one of the few folks who push searchers to focus on proprietary deals early in their search for this very reason. I was fortunate to get one, and I’ve invested in two others that were 20-50% below market because the sellers didn’t bring in a broker / banker. Use the second half of your search to work with brokers and play the auction game.
And to be clear, proprietary searching is super hard, with higher highs and lower lows than a brokered search. But it’s pretty exciting / fun to “creatively” negotiate with a founder. A lot of that flexibility goes away when the broker gets involved.
Just my two cents.
from The University of North Carolina at Chapel Hill in Atlanta, GA, USA