What You Can Learn from Private Equity

Hey there money makers,

Welcome to the Better Business Brief, where I share takeaways from:

running a business I’m building to sell for millions
my consulting with business owners building to sell for millions
tips and tricks you can use to do the same

I’ve been doing a deep dive lately. Long story short, I wanted to understand what the private equity playbook looks like and how this understanding could be beneficial to my work. And boy, has it taught me some valuable lessons.

So today, in less than 5 minutes, I’ll give you:

🤑 The playbook private equity companies use to make money

💸 How you can benefit from it if you’re selling a biz

🤝 How you can benefit from it if you’re buying a biz

Once I “peeked behind the curtain”, I couldn’t believe how simple it was.

I say simple and not easy for a reason. But still.

The way private equity companies make money is quite simple. It goes like this…

Think of the market of businesses in “tiers” where the tiers are the size of company by net profit per year (let’s call this NPPY)
If a company is doing less than $1 million in NPPY, it’s more likely to sell for between maybe a 2x and 3x multiple, on average (so maybe under $2 - 3 million)
If it’s doing more than $1 million NPPY, it may sell for a bigger multiple
If it’s doing $10 million or more NPPY, it’s gonna sell for a much bigger multiple, maybe even 10x or more
And so on, as size continues to increase

Sooooo, you can think of private equity companies like organizers. They come in and buy up a bunch of small companies for small multiples until they make one big company that can sell for a big multiple.

There's a bonus for organizing the companies into one bigger company. And the bonus gets bigger at every tier.

Let's look at an example:

Let’s say they buy 10 different $1 million NPPY companies for a 4X multiple each.
Total price of $40 million (and honestly they’re not going to pay it all at once. They'll finance some of it)
They might turn around and take that collectively $10 million NPPY company and sell it for $80 million or more in a couple years… profiting $40 million 🤯

Needless to say, a great business to be in if you can figure out how to do this..

But for anyone not versed in doing this yet, you may still be either considering buying a business or selling a business

If you’re selling your business, you should know this - if you can get big enough to attract a private equity company working on this type of deal, they’ll pay a nice multiple for your business because they want it fast and easy.

If you’re thinking of buying a business, buy one at a discount however you can, knowing that you can flip around and sell it to a private equity company for more than you paid for it if you get it organized and have someone operating it on a day to day basis besides yourself.

I familiarized myself with all of this by reading the book “Business Wealth Without Risk” by Roland Frasier. I can’t recommend it enough for anyone interested in this world.

I’ll leave it at that. This one was pretty dense, and a lot to chew on. As always…

Be great. Keeping growing and aspiring. And as always: I hope you got something from this.

If you did, share it with a friend who may too, as this is the best way for me to grow it and make this better.

They can even sign up here :)

Happy value-building to all of you!

See you next time for Better Business Brief,

-Brody

If you are considering selling your business soon, let’s talk. Grab some time here and we’ll make sure your plan is on track.

113 Cherry St #92768, Seattle, WA 98104-2205
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