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Private to Public arbitrage


premfan
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If anyone is doing this or wants to create a holding company doing this pm me i'll seed invest.

 

The system or theme:

 

1.) Reverse merger with shell company. I believe cheapest way to get listed on OTC ( i could be wrong).

 

2.)  Go to Biz sell or any site that gives you access to deal flow.  Focus on your region ( within 90 miles).  Get a co-founder at least two people.

 

3.) Focus on business's that can scale that are selling for under 5x cash earnings to owner.  Franchises seem obvious.  Creatively, focus, and staying in your lane matters here. Dont buy business that you practically can't add value too. Think Maslow hireachy of needs when selecting core business.

 

4.)  Market it as holding company.  Candid Shareowner letters. Use shareowner.  This is a good start. 

 

Thesis= private business's can be bought for under 5x owners cash.  The market will re rate it higher 8-10x to be conservative.

 

 

 

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Guest Schwab711

The cost of being public is probably >$250k/year for a small company. You probably need at least 0.5 workers dedicated to filings/inquiries, listing costs are $10k-$20k, $100k for auditing, and $50k-$100k for legal work. Once your listed, there's no guarantee you will garner a higher valuation. You also introduce a second layer of taxes with a C-corp that you could otherwise avoid.

 

I think the better arbitrage at the moment is to take OTC companies private. Right off the bat you save 30%-40% on taxes, which could be partially used to incentivize management to stay on board. Recap the company and you can play with house money (more or less the P-E strategy).

 

If you own the super-majority of the company, there's really no benefit to having it listed. The owners get little to no liquidity benefit since if you start selling, your valuation will tank. Maybe you could get The Vampire Squid to loan you money against your stake, but you are going to get ~20%-30% of the market value since it's so small. You can do some shady stuff that screws minority shareholders by setting up specific situations and hope no one notices, but you would be taking some huge risks doing so (and folks like Oddball will write about how terrible of a person you are).

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Adding to Schwabs wonderful rationale for staying private; you can avoid the temptation to manage earnings & manage your business instead.

 

I just watched "Something Ventured" by Zeitgeist films & although the historical presentation of VC is old hat to most members here, I was riveted!

 

It seems to me that unless you have a business which needs a huge volume of capital to achieve scale (or you're trying to create a roll up) staying private & finding local or regional VC's / partners would be the best way to go.

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What does this achieve that you could not do - a whole lot easier?

Simply invest in a moderately distressed portfolio of pfds/debs, margin them, and use your capital contribution as the equity contribution. You will earn a net cash spread, and hopefully a net capital gain as everything mean reverts over time. Simple, liquid, & no hassle.

 

SD

 

 

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The Stephan Company (SPCO) has been an interesting experiment to watch as activists took over the company some time ago. It trades over the counter and has no designated CEO/CFO. Rather, the company is run entirely by the board with an outsourced CFO. So far they've done a good job of managing costs and turning around the company. Still feel like it would be better off private though I'm not sure cost savings would be significant (doesn't appear they audit financials).

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I listened to a podcast recently, where this guy was making unreal returns on small private businesses.  But the problem is the due diligence and low hit rate. 

 

Cultivating a Disaster Resistant, Compound Interest Machine – Brent Beshore [invest Like the Best, EP.10]

http://investorfieldguide.com/beshore/

 

I thought that podcast was great discussion on this market

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What is the financing market like on small private companies (less than $1M of EBITDA)?  I have watched these from afar but haven't taken the jump. Is it feasible to do a small LBO of these companies without a personal guarantee if the company has tangible assets and has a history of financial performance? I see listings which advertise 75% financing but I think that is through an SBA loan with a personal guarantee? There's a few real estate dependent businesses (car wash for example) and specialized equipment rental businesses in my area at what appear on the listing to be attractive valuations.

 

May be covered in that podcast which I'm listening to now. Thanks for posting!

 

 

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What is the financing market like on small private companies (less than $1M of EBITDA)?  I have watched these from afar but haven't taken the jump. Is it feasible to do a small LBO of these companies without a personal guarantee if the company has tangible assets and has a history of financial performance? I see listings which advertise 75% financing but I think that is through an SBA loan with a personal guarantee? There's a few real estate dependent businesses (car wash for example) and specialized equipment rental businesses in my area at what appear on the listing to be attractive valuations.

 

May be covered in that podcast which I'm listening to now. Thanks for posting!

 

If there were feasible every small private dentist, veterinarian, accounting firm, etc. in the country would be part of a 'franchise'; practioners would build up their businesses over their working lives,  sell to the 'franchise' on retirement, work 1-2 years to transition their client over, then leave. Yet it doesn't happen - implying that personal brand businesses are just not suited to this kind of structure.

 

SD

 

 

 

 

 

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What is the financing market like on small private companies (less than $1M of EBITDA)?  I have watched these from afar but haven't taken the jump. Is it feasible to do a small LBO of these companies without a personal guarantee if the company has tangible assets and has a history of financial performance? I see listings which advertise 75% financing but I think that is through an SBA loan with a personal guarantee? There's a few real estate dependent businesses (car wash for example) and specialized equipment rental businesses in my area at what appear on the listing to be attractive valuations.

 

May be covered in that podcast which I'm listening to now. Thanks for posting!

 

If there were feasible every small private dentist, veterinarian, accounting firm, etc. in the country would be part of a 'franchise'; practioners would build up their businesses over their working lives,  sell to the 'franchise' on retirement, work 1-2 years to transition their client over, then leave. Yet it doesn't happen - implying that personal brand businesses are just not suited to this kind of structure.

 

SD

I was specifically curious about businesses with significant tangible assets (real estate or other).

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What is the financing market like on small private companies (less than $1M of EBITDA)?  I have watched these from afar but haven't taken the jump. Is it feasible to do a small LBO of these companies without a personal guarantee if the company has tangible assets and has a history of financial performance? I see listings which advertise 75% financing but I think that is through an SBA loan with a personal guarantee? There's a few real estate dependent businesses (car wash for example) and specialized equipment rental businesses in my area at what appear on the listing to be attractive valuations.

 

May be covered in that podcast which I'm listening to now. Thanks for posting!

 

If there were feasible every small private dentist, veterinarian, accounting firm, etc. in the country would be part of a 'franchise'; practioners would build up their businesses over their working lives,  sell to the 'franchise' on retirement, work 1-2 years to transition their client over, then leave. Yet it doesn't happen - implying that personal brand businesses are just not suited to this kind of structure.

 

SD

I was specifically curious about businesses with significant tangible assets (real estate or other).

 

You still have the same issue.

 

To get the sale you will have to pay a premium, and tolerate goodwill = to what you paid - what the tangible asset could be sold at.

That goodwill is supported by the value the management adds to the business; as measured by a previous X years of quantifiable net income - projected forwards X years and discounted at Y%. Were the business in Canada the projection would be re-performed every year, and the difference in valuation charged off as goodwill expense for the year (IFRS treatment). 

 

The reality is that If you cant resell (likely); you make squat until the value of the tangible asset + net income after tax, made since acquisition is > than what you paid. Lots of uncertainty, & it could take a very long time, while your tangible asset is both ageing & wearing out. If interest rates were high, & forecast to decline - it might make sense; but otherwise?

 

The alternative, is to just buy a call or a LEAP on somebody's REIT.

 

SD

   

 

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