Issue #11 - What's Good Enough?
Have Clear Standards, but Don't Rush to Buy
We regularly come across business owners who are interested in selling their companies to us. Usually, after a bit of questioning, we are able to determine that they will not be a fit with our investment criteria. But, with enough conversations, we inevitably encounter opportunities that are worth pursuing. The profile of these businesses vary and none are perfect, so the exercise in judgment distills down to trying to answer this question: what's good enough?
As we assess these businesses and attempt to answer that question, we are mindful of two things:
First, each of our searchers will only buy a single company and, as a result, we feel a deep sense of responsibility to help ensure that the business they buy is a good one to maximize their potential for success;
Second, we have an absolute bar that every business must surpass and we want, to the greatest degree possible, the business to exhibit both low risk and high expected returns.
By focusing on these two tenets, we are able to further reduce the field of potential opportunities. After all of this, a process involving hundreds of owner conversations and thousands of outreach messages, we are left with a very small number of companies that remain in consideration, each of which fall within a range of attractiveness and suitability. The strongest are easy to advance in our process, but the deliberation on the remainder can be quite challenging. Why is that?
We love businesses. That's both a strength and a weakness in this process. It is good because it enables us to bring optimism and excitement to each new opportunity. It is bad in that it creates a strong temptation to adore businesses that possess highly-risky weaknesses and for us to create rationales to continue chasing companies that realistically have a low likelihood of being bought by us.
Psychology also plays a very strong role in this process, and generally in an unhelpful manner. It is nearly impossible to discount or ignore the extreme amount of effort and time that goes into generating each qualified opportunity. By the time we reach this stage, each company feels precious and we've already started to build authentic relationships with owners. As a consequence, letting a company go at this stage is a let down for everyone and requires a high degree of resilience to continue picking ourselves and our sourcing efforts back up once the decision to pass has been made.
Furthermore, early in someone's search process, there's a lot of uncertainty about what a good deal looks like and a worry that if something looks good early on, that bird-in-hand may ultimately be less attractive than who knows how many yet-to-be-found opportunities that may await the persistent and diligent searcher working an effective deal sourcing process. Chasing better, especially among very confident, successful, and ambitious searchers, is hard to resist, but so is the chance to conclude the arduous and taxing process of looking for a company to buy. Fortunately, our judgment and experience as long-time investors can be helpful to our searchers in these instances and we rely heavily on our learning, so long as a deal is objectively strong by our measures, that holding out for "better" is frequently a mistake.
As long as a business presents itself as meeting our absolute standards, and not relative ones we may be tempted to create, it is usually worth trying to buy. That approach is rooted not only in our experience and confidence in our own judgment, but also in the deep trust we have in the operators we are backing and, in turn, their ability to create value post-close based on the initial investment thesis we create together and their ability to uncover opportunities to enhance our outcome as they gain experience as an operator and participant in the industry in which their company operates.
It is cliche, but if the criteria we set are sound, and we believe they are, then the aphorism "perfect is the enemy of good" is relevant and wise for us to follow. And, as with most hard things in life, this all seems much easier to do in the abstract than it is in practice. These decisions are very hard and cause no small amount of anguish and inner turmoil as we sort out what's good enough from what's not, but with time and practice, we've become habituated to making the hard, often ambiguous, choices required of our profession.
So, when you see an announcement of a company changing hands, keep in mind all of the work, thought, and uncertainty that went into reaching that point. Yes, it is a time to celebrate, but much also remains to be proven and priorities and mindset must immediately switch to manage the risks and opportunities associated with taking a company through an ownership and leadership transition. I'm sure we will cover more of that journey in a future newsletter!