Extreme startup strategy

[fanocks2003]

There are hard ways of starting companies and there are easier ways.

If you are only after the money in startups, then come up with a brand and a brand promise. Then form a company structure, open an international bank account, find yourself an accountant and a business lawyer. Then you find yourself a corporate financier.

When you have this in place, then you go out and find the biggest and most well run company you can find. Then you show this piece to your team (accountant, lawyer and especially your corporate financier, your "money man"). You tell the corporate financier that you want to purchase this company through a 100% financed LBO deal (none of your money involved that is). You tell your corporate financier to sell a company bond with as low a fixed interest rate you can get. Then you use the funds to purchase the well run company.

Your next step is to get that debt down to a healthy state (below 50% against assets in my world).

When you have maximized profit levels and when you have secured the balance sheet, you then go back to your corporate financier and tell him/her: "I want you to find me a buyer for all of my shares.

You cash out (probably with a couple of tens of millions of dollars).

Your investment? What it cost to form the company structure. The rest was free of charge.

Believe me, this works. I just reiterate what other mavericks is already doing. LBO deals is nothing new. But it sure is worth a second thought and it sure gets me excited and I am about to test it with my finance company. I am looking for something to buy in fact so if any of you have a financial company with revenues of at least $10 Million, then send me a PM. It need to be profitable. And there need to be a CEO following with it.

Just wanted you to consider the interesting opportunities out there.

What about the brand and the brand promise? Yes, almost forgot. When you have bought the company you immediately go into branding mode so that your company stands for something you believe in. If you then have a product you want to bring to market, then great. Now, when you have purchased a well-run company, you can use the already existing plattform to market it. Making it so much easier to succeed. And faster as well.

Sometimes it is best to go BIG from the start. Why not do it with a big, fat loan and a cash cow? Why make it hard?

Can't manage it? Well, find a manager then. They are plenty. If you buy a company of a great size they usually follow with the price anyway. No worry.

 

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[Roman]

Wow, Fanocks! you always expand my horizons, I will keep this to thought, I usually think of strategies for extreme startups, never really thought about this option, you just opened a whole new door for me!

 

[fanocks2003]

I tried this, but my "money man" said that Exxon Mobile wasn't for sale, especially if I couldn't put up at least $350B of my own money...

Any suggestions on where I can get $350B? Or should I fire my "money man?"

Well, maybe the profits, interest level and sales price where not in sync? These three points need to be in sync otherwise there will be a need to put up some of your own cash.

Example:

Company ABC is for sale. Numbers are:

Sales price: $100 Million
Profit level: $20 Million
Fixed interest on loan: 7%
Loan To Value: 70%

Can you buy this 100% with a company bond? Let's see:

How much can you borrow of profit? $20 Million X 70% = $14 Million.
How much can you borrow based on fixed interest level? $14 Million / 7%= $200 Million.
How much do you have to pay for the company? $100 Million.
Can you buy this company nothing down? Yes. And with spare money.

This is a staged example of course and these companies do not grow on trees, but they do exist. If you believe that, then great. If not, then OK. I know they exist and my corporate financier are with me on that. LBO deals like RJR Nabisco should give me credibility enough. In that deal the purchaser did have to put up some cash (I think it was 5%), but as mentioned above, that was because the three points above where not entirely in sync. Had they been, then the purchase would have been a nothing down deal.

NOTE: if Exxon Mobile was not for sale, then why try to buy it (your in the weakest position negotiation wise)? It wasn't on the market in the first place. I know you are joking with me. But do you see what I mean?

 

[LaughedAt]

Well, maybe the profits, interest level and sales price where not in sync? These three points need to be in sync otherwise there will be a need to put up some of your own cash.

Example:

Company ABC is for sale. Numbers are:

Sales price: $100 Million
Profit level: $20 Million
Fixed interest on loan: 7%
Loan To Value: 70%

Can you buy this 100% with a company bond? Let's see:

How much can you borrow of profit? $20 Million X 70% = $14 Million.
How much can you borrow based on fixed interest level? $14 Million / 7%= $200 Million.
How much do you have to pay for the company? $100 Million.
Can you buy this company nothing down? Yes. And with spare money.

This is a staged example of course and these companies do not grow on trees, but they do exist. If you believe that, then great. If not, then OK. I know they exist and my corporate financier are with me on that. LBO deals like RJR Nabisco should give me credibility enough. In that deal the purchaser did have to put up some cash (I think it was 5%), but as mentioned above, that was because the three points above where not entirely in sync. Had they been, then the purchase would have been a nothing down deal.

NOTE: if Exxon Mobile was not for sale, then why try to buy it (your in the weakest position negotiation wise)? It wasn't on the market in the first place. I know you are joking with me. But do you see what I mean?

Lately I've been really interested in leveraged-buyouts, I've been reading a lot about the technique and also companies who are famous to have been acquired using leveraged
buyout maneuvers, it seems a bit complicated though!
There's a company who does this regularly, Obsidian Enterprises that's owned by Tim Durham (if you watched Untold Wealth you know who I'm talking about)!
I'd love to hear more about this, can it be done with smaller companies? Do you have any reliable resources with enough information about the subject?
It sounds really interesting, creative and extremely lucrative!

 

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[fanocks2003]

Lately I've been really interested in leveraged-buyouts, I've been reading a lot about the technique and also companies who are famous to have been acquired using leveraged
buyout maneuvers, it seems a bit complicated though!
There's a company who does this regularly, Obsidian Enterprises that's owned by Tim Durham (if you watched Untold Wealth you know who I'm talking about)!
I'd love to hear more about this, can it be done with smaller companies? Do you have any reliable resources with enough information about the subject?
It sounds really interesting, creative and extremely lucrative!

Small or big, doesn't matter. What matters is the three points mentioned. They need to be in sync otherwise it will cost you money.

Though I would say it is easier to purchase bigger companies than smaller because corporate financiers usually do not work on smaller subjects. There is more to gain with bigger acquisitions.

Also, why buy small when you can buy big? Also, big companies can afford you better lawyers, accountants and corporate financiers.

 

[djs13]

Interesting thoughts. It reminds me of a quote I once heard: "If you can't make money without money, you can't make money with money."

Has anyone ever expanded on this idea of purchasing an existing company using other people's money? What type of credit history would one need? And wouldn't it be difficult to find out these numbers when the company isn't listed for sale?

 

[fanocks2003]

Yes, I was just joking...

And the logic of your strategy makes perfect sense...though the execution is likely beyond the skills of most...

Yes, the execution requires that you have a team you can trust and a team with the necessary skills. You need an accountant who can check out the financial side, a lawyer who can check out the legal side, a corporate financier who can structure the financing side and also find and sell the deal to investors. You also need assistance from an insurance expert. If you have all of these people on board and let them do their job and they are worth their salt, then you will have reduced the risk significantly. It is a lot of networking skills involved (as in everything in business).

 

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[fanocks2003]

Interesting thoughts. It reminds me of a quote I once heard: "If you can't make money without money, you can't make money with money."

Has anyone ever expanded on this idea of purchasing an existing company using other people's money? What type of credit history would one need? And wouldn't it be difficult to find out these numbers when the company isn't listed for sale?

Bad credit? Find a partner with good credit and give him/her a piece of ownership or compensate them some other way.

Numbers? You look at companies for sale. When you contact companies for sale your very first question should be "can I get some audited financials?". So that you can see if the three main points mentioned above, is in sync. If they aren't, then you have to decide if you want to put up the remaining part yourself or if you can find someone else to buy a piece.

 

[Giles]

How much can you borrow of profit? $20 Million X 70% = $14 Million.
How much can you borrow based on fixed interest level? $14 Million / 7%= $200 Million.

Could you expand on that please? (Still learning here )

So you can borrow money based on the yearly profits of an existing business? Is this normal practice?

If I myself have $0 income (as an example) and I want to buy a business showing proven profits of $10million annually, I could borrow based on those profits?

:thankyousign:

 

[LaughedAt]

It's more complicated than that in real life, but in theory, yes you can...

Just out of curiosity JScott, if I recall correctly you worked in Silicon Valley so I guess you witnessed countless business acquisitions taking place, have you ever been involved or witnessed a company being acquired this way?
I know it's complicated, I've tried to speak with an investment banker, unfortunately my age is not helping me being taken seriously, this is really annoying, not the first time that I get a silly response just because of my age, I'd love to hear more about it from you if possible!

 

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[Giles]

It's more complicated than that in real life, but in theory, yes you can...

Sounds interesting - if anyone has any resources/books they can point me towards it would be greatly appreciated.

 

[djs13]

Sounds interesting - if anyone has any resources/books they can point me towards it would be greatly appreciated.

I found [ame="http://www.amazon.com/Rich-Dads-Advisors-Other-Peoples/dp/B001J2UVHK"]this book.[/ame] I'm not sure if its any good, I haven't read it myself. Maybe someone knows of another book about this subject?

 

[andviv]

How much can you borrow based on fixed interest level? $14 Million / 7%= $200 Million.

This is the part that I have never seen done. At least not by banks here in the U.S.

When I went asking for loans to buy a company the loan underwriting was very simple...

70% of asking price or 70% of valuation, whichever was less

I'd love to see who lends with the cap rate as the guideline to purchase a business.

Getting access to a resource like this is priceless.

Maybe that is why that either does not exist (at least in today's market conditions) or it is not communicated/advertised. If it were available then business valuations will grow to match the 70% of valuation rule, making it useless. Markets are very efficient and prices adapt according to conditions.

What bank/corporate financier/money men you use? Please do share if you really know them.

 

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[imirza]

It would be next to impossible to pull an LBO in this environment especially if you are not highly experienced. LBO giants like Blackstone Group, Apollo Group, KKR, Caryle etc are having difficulties doing any LBO deals due to the collapse in the debt markets and lack of funds available. This strategy would have worked in 2007 and earlier. I don't see it working for atleast another 4-5 yrs.

To do an LBO, you are going to need funds from the capital market. You work with an investment bank to underwrite the deal and sell the debt(bonds) into the public market. Currently the market for these type of bonds is dead. No one wants it unless we are talking about interest rates in excess of 20% and even then you may have problems getting funding.To top it of you are looking at 100% financing. The debt buyers will say you are putting no skin in the game and will be very reluctant to invest. Solid companies like GE are borrowing money in the public markets at 8-9%. An upstart LBO group would be looking at 20-25% at the very least. How do you find a profitable company to buy when the interest on the financing is going to be 20-25% annually ? It won't work at least not now. If it does I would be shocked. An easier way to acquire a company would probably be to let the owner finance you.

 

[andviv]

imirza, I agree with your point, it may not work at all in today's market.

The question I'm trying to get an answer to is, what banks/institutions do these deals? I know that the big ones, KKK, blackstone, apollo, can sell bonds to finance deals like this...

but how does that work for "small" companies, say "just" 100 millions, like the example above, or other deals in the few millions?

What banks/institutions did this two years ago?

I couldn't find one at the time. I'd love to know more about this so I can have another tool available when the market opens this again.

 

[imirza]

Andviv,

Smaller boutique investment banks. The Goldman Sachs, Morgan Stanleys etc work with bigger deals. If you are looking for deals $100 mil an under you could try Raymond James & Morgan Keegan In Phoenix I know a few smaller firms who would do these deals - FBR & Dinan Co. LLC. Just search for smaller boutique investment banks in your area. You might even try partnering with hedge funds to do deals like this. Some of them have cash and access to big lines of credit. You would need to do intense networking in the financial community.

 

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[fanocks2003]

It would be next to impossible to pull an LBO in this environment especially if you are not highly experienced. LBO giants like Blackstone Group, Apollo Group, KKR, Caryle etc are having difficulties doing any LBO deals due to the collapse in the debt markets and lack of funds available. This strategy would have worked in 2007 and earlier. I don't see it working for atleast another 4-5 yrs.

To do an LBO, you are going to need funds from the capital market. You work with an investment bank to underwrite the deal and sell the debt(bonds) into the public market. Currently the market for these type of bonds is dead. No one wants it unless we are talking about interest rates in excess of 20% and even then you may have problems getting funding.To top it of you are looking at 100% financing. The debt buyers will say you are putting no skin in the game and will be very reluctant to invest. Solid companies like GE are borrowing money in the public markets at 8-9%. An upstart LBO group would be looking at 20-25% at the very least. How do you find a profitable company to buy when the interest on the financing is going to be 20-25% annually ? It won't work at least not now. If it does I would be shocked. An easier way to acquire a company would probably be to let the owner finance you.

You are both right and wrong. You are right if you use the wrong sources, you are wrong if you use the right sources.

As anything in business, every situation is highly unique. Every situation will not work as smoothly as the last one. That's reality. But the model do work and has been proven to work many times over. Startup or not has no real meaning. What has meaning is the management team running the company that will be acquired, and the expertise of the other team members. The management team need to be skilled with managing highly leveraged companies. If you can get someone like that onboard or even have the lenders on board the Board of Directors then you can build trust. Trust is everything, we all know that.

With trust comes loans. With no trust it does not matter if you are in a recession or not. With no trust you will not get the money even if you are in the best of economic conditions.

Experienced entrepreneurs on this forum do know that you can fail in good times as well as in bad times. We also know that a bad entrepreneur can ruin a well run company just as easily as a well experienced one can have a badly run company raise out of the ashes like the Phoenix himself.

So the real question for a creditor to ask is: Can this guy and his team of experts realisticly make this "impossible feat" happen? Many can't. Some do. And those that do always find the creditor/s who is/are willing to assume the risk.

 

[outsourcery]

My problem with this model is that it's a great deal of risk, without a lot of value creation. Sure, if I could get involved in stripping down a company like that I would, but as an outsider and market investor, its a nasty business. You're just extracting value, and by doing so weakening the target organisation.

Judging by the performance leading LBO organisations like Mac Bank (the largest of it's kind in the world- go aussie), the LBO sector is on life support. They're slowly unwinding their investments because the debt is unsustainable in this model. Babcock and brown were another billion dollar 'millionaire factory' that operated in this space, and they've been crushed. What makes you think that you are better connected then these organisations that were doing it for years, 'profitably', and who had many friends right up until the roof collapsed.

Interest rates are low... but real money and someone to lend is scarce.. High net worth people and banks won't soon forget how much money they lost playing this game. This model is dead.

If you can do it, my hat is off to you. But this is not something that even 1 in 100k entrepreneurs could reasonably aspire to...

 

[andviv]

Andviv,

Smaller boutique investment banks. The Goldman Sachs, Morgan Stanleys etc work with bigger deals. If you are looking for deals $100 mil an under you could try Raymond James & Morgan Keegan In Phoenix I know a few smaller firms who would do these deals - FBR & Dinan Co. LLC. Just search for smaller boutique investment banks in your area. You might even try partnering with hedge funds to do deals like this. Some of them have cash and access to big lines of credit. You would need to do intense networking in the financial community.

Great information. Thanks.

Are you "connected"?

If so, what type of deals have you seen happening in the last couple of months, if any?

 

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[fanocks2003]

My problem with this model is that it's a great deal of risk, without a lot of value creation. Sure, if I could get involved in stripping down a company like that I would, but as an outsider and market investor, its a nasty business. You're just extracting value, and by doing so weakening the target organisation.

Judging by the performance leading LBO organisations like Mac Bank (the largest of it's kind in the world- go aussie), the LBO sector is on life support. They're slowly unwinding their investments because the debt is unsustainable in this model. Babcock and brown were another billion dollar 'millionaire factory' that operated in this space, and they've been crushed. What makes you think that you are better connected then these organisations that were doing it for years, 'profitably', and who had many friends right up until the roof collapsed.

Interest rates are low... but real money and someone to lend is scarce.. High net worth people and banks won't soon forget how much money they lost playing this game. This model is dead.

If you can do it, my hat is off to you. But this is not something that even 1 in 100k entrepreneurs could reasonably aspire to...

Of course you are creating a value. You are creating a value for the bond holder if nothing else. Also, if you buy a company through an LBO then I guess, and hopefully assume, you have something unique to add to the exisiting business model. Why do it otherwise?

Also, you don't need to setup multi billion dollar funds to start doing LBO's. That is just prejudice, sorry. With that thinking the majority of us could just give up right now and hope God helps us. I mean, you can by a small local company (say a $10,000 company) with unsecured credit from an online lender. If you do that 100% with borrowed funds and the profits can support such a loan, then that would be considered a clear cut LBO deal. If you start out from scratch, start small. When you have done a couple of successful small deals, you will certainly get a good reputation and a track record to show to these "big shots".

Ask yourself: Are you really an entrepreneur (seriously)? You seem to think in impossibilities. It is hard building a company as is. Having all of that extra "no-no's" does not help you or anyone else.

LBO is just one way of doing business. It has as much risk as any other business model. The risk is as always associated with how smart you are. Also, as in all kinds of business I know of, there is always a "variable risk" involved that you have no real control over.

In the case of an LBO, you can control many things (like the terms for the interest, the loan amount, you're knowledge of the industry and it's behaviours etc). But there is also many things you cannot predict (for example future demand).

As I see it LBO deals are just as sane as starting a company. Just as dangerous. Being employed is just as risky (if you do not know the tricks of the trade you are toast no matter what you do). I guess I would not last a minute as an employee because I cannot really say I know the tricks of the trade when it comes to writing selling CV's And I can't say I am that good in moments of "office politics".

 

[outsourcery]

Of course you are creating a value. You are creating a value for the bond holder if nothing else. Also, if you buy a company through an LBO then I guess, and hopefully assume, you have something unique to add to the exisiting business model. Why do it otherwise?

Ok.. i'll bite. Im in the mood for a caffiene fueled rant. I wouldn't normally bother, but I am procrastinating form work I should be doing...

YOU'RE NOT BUYING THE COMPANY- BOND HOLDERS AND CREDITORS ARE
You're just getting control. There is a difference.

Don't confuse LBOs with flipping companies, they are not the same thing.

ITS NOT *NORMALLY* ABOUT ADDING SOMETHING 'UNIQUE'. ITS ABOUT RELEASING VALUE.
This strategy is very high risk. Much higher then 'other ways of doing business'.

The reason is that the company is forced to take on a lot of unproductive debt. Where do you think that money goes? The money you convince your creditors to pay? Does it go towards expansion? Does it go into cash reserves, strengthing the companies financial position? NOOOOO!

It goes to the original owners- it is value that has been STRIPPED from the company.

So, as the LBO operator, you've gained control of a company for free... the only problem is that your company is a lot more fragile then it was.

Now, you have 3 options to profit from this. Yield, capital appreciation and management fees. Your creditors are going to eat any free cash so yeild is out.

So you need to grow it, or just keep it breathing. The problem with growing it is that you're up to your eyeballs in debt. You don't have the cash to embark on a big expansion, new product, marketing campaign or the like. All of those things are very risky, and cash is tight. Organic growth is your only option.

So to turn a quick profit, your best strategy is to extract management fees from your debt ridden, hobbled company. This extracts more value from the company, making it even less productive per $1 of revenue, compared to its peers.

This limits your ability to manuever in a volatile marketplace. Before you arrived, your company could easily survive the ups and downs of a normal business cycle. It had cash reserves, and a dominant market position. Banks would happily lend to it, or offer cheap overdraft. Now, with debt close to asset value, lenders will be extremely reluctant to lend. ANd what they do lend is expensive.

This places YOUR EMPLOYEES at risk, becuase the company is far weaker, less competitive then it was, and it will stay that way in the long term. I take it that you don't consider the welfare of your employees particularly important? What about your reputation? If the company goes bust and drags down a lot of creditors, people will remember you.

Coming back to my original point, the last thing you want to do is add something 'unique'. This poses the risk that you'll upset revenue, which will cause you to default on debt repayments... after which yibida yibida, that's all folks.

SERVICING DEBT AND MANAGING RISK IS MORE THEN JUST MEETING MONTHLY REPAYMENTS!
As people are now learning. Just because you can meet your repayments now, does NOT mean that you have understood managed risk effectively. If you take on long term debt, you need to have enough 'fat' to be able to survive the good times and the bad. For every 10 years of gravy you're going to have a few years on gruel.

Risk has very little to do with how smart you are. You naively seem to think that your brain can control every aspect of your company. It can't. Your employees, your market place, and the broader business environment have more effect then your level of skill or intelligence. To think otherwise is amusingly ignorant.

A clown can make a million in a booming market (just look at all the property investors that thought they'd made it). Just like a brilliant investor can lose money in a recession <Warren Buffet>.

YOU CAN'T BEAT THE MARKET. You can only play in it.

The risk in the transaction is not incremental like it is for most startups. You're snatching control of a company that grew up without you.

and while i'm at it.... ITS NOT A STARTUP!
I think you summed it up in your title to the thread 'extreme startup strategy'. Only, this isn't a start up strategy, this is an LBO- or what used to be called corporate raiding in the 80s. Interestingly enough, it was popular during the boom time then too, when money was cheap and earnings seemingly reliable. Do you see the similiarities to the past few years? People are remembering now that earnings are not paychecks, they are volatile.

You are not starting something new, you are wresting control of a going concern from its original owners. It is not a startup. It has additional responsibilities.. like employees.

Lol @ start small concept. A better idea would be to build a large company, prove your mettal as a CEO. Then fix another large company in a failing industry. Then do it again, and again. That will get you credibility. Investors aren't going to care that you've bought and sold 8 fish n chip shops in the last 3 years. If you want to play with big money, other peoples money, without putting your own on the table, you need to have a very strong CV...

ONE LAST RANT
The companies historically target by this kind of activity have VERY STRONG long term earnings potential. Think toll roads, airports, public utilities, and natural monopolies. But these are BORING yeah? And you need $$$$ to get control. They also have relatively stable earnings, so you have a snowballs chance of lasting long enough to pay down the debt.

Perhaps I am a rainy day kinda guy, but with all due respect I don't think you really understand what you're talking about. It sounds like you just read a glassy-eyed book from some guy who made a few bucks during the boom. Wonder why he stopped doing LBOs and got into publishing?

You certainly don't understand the risks involved in what you are proposing... but don't be upset about that. The current financial crisis was caused by clowns with much less understanding.

A question, since you are far more entrepreneurial then I. How many LBOs have you conducted in the past 18 months?

Have you ever been involved in a decent sized company acquisition? Say $10M or more?

It doesn't sound like it.

I'm not attacking you personally, but I misinformation and insults irritate me. If others reading this want to give it a go, I say go for it.. but do it with your eyes open. This will improve your probability of success.

Coffee is wearing off.. i'm going to do some work...

 

[imirza]

Great information. Thanks.

Are you "connected"?

If so, what type of deals have you seen happening in the last couple of months, if any?

Andviv - I know people in the local Phoenix community in private equity and investment banking. From what I hear, deals are not being done. No money. Investors don't want to take risk. People are hiding in cash or govt. bonds. The real estate market crash and the stock market has wiped out a lot of people. There is one PE company doing RE deals. They are very selective however.

 

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[andviv]

Thanks a lot for the information.

The reason I'm asking is, if we know what they are buying, and anybody here happens to have that for sale, we ("you") could put both parties in contact.

Thanks for the input, and please let me know when that changes... that is valuable information.

 

[fanocks2003]

Ok.. i'll bite. Im in the mood for a caffiene fueled rant. I wouldn't normally bother, but I am procrastinating form work I should be doing...

YOU'RE NOT BUYING THE COMPANY- BOND HOLDERS AND CREDITORS ARE
You're just getting control. There is a difference.

Don't confuse LBOs with flipping companies, they are not the same thing.

ITS NOT *NORMALLY* ABOUT ADDING SOMETHING 'UNIQUE'. ITS ABOUT RELEASING VALUE.
This strategy is very high risk. Much higher then 'other ways of doing business'.

The reason is that the company is forced to take on a lot of unproductive debt. Where do you think that money goes? The money you convince your creditors to pay? Does it go towards expansion? Does it go into cash reserves, strengthing the companies financial position? NOOOOO!

It goes to the original owners- it is value that has been STRIPPED from the company.

So, as the LBO operator, you've gained control of a company for free... the only problem is that your company is a lot more fragile then it was.

Now, you have 3 options to profit from this. Yield, capital appreciation and management fees. Your creditors are going to eat any free cash so yeild is out.

So you need to grow it, or just keep it breathing. The problem with growing it is that you're up to your eyeballs in debt. You don't have the cash to embark on a big expansion, new product, marketing campaign or the like. All of those things are very risky, and cash is tight. Organic growth is your only option.

So to turn a quick profit, your best strategy is to extract management fees from your debt ridden, hobbled company. This extracts more value from the company, making it even less productive per $1 of revenue, compared to its peers.

This limits your ability to manuever in a volatile marketplace. Before you arrived, your company could easily survive the ups and downs of a normal business cycle. It had cash reserves, and a dominant market position. Banks would happily lend to it, or offer cheap overdraft. Now, with debt close to asset value, lenders will be extremely reluctant to lend. ANd what they do lend is expensive.

This places YOUR EMPLOYEES at risk, becuase the company is far weaker, less competitive then it was, and it will stay that way in the long term. I take it that you don't consider the welfare of your employees particularly important? What about your reputation? If the company goes bust and drags down a lot of creditors, people will remember you.

Coming back to my original point, the last thing you want to do is add something 'unique'. This poses the risk that you'll upset revenue, which will cause you to default on debt repayments... after which yibida yibida, that's all folks.

SERVICING DEBT AND MANAGING RISK IS MORE THEN JUST MEETING MONTHLY REPAYMENTS!
As people are now learning. Just because you can meet your repayments now, does NOT mean that you have understood managed risk effectively. If you take on long term debt, you need to have enough 'fat' to be able to survive the good times and the bad. For every 10 years of gravy you're going to have a few years on gruel.

Risk has very little to do with how smart you are. You naively seem to think that your brain can control every aspect of your company. It can't. Your employees, your market place, and the broader business environment have more effect then your level of skill or intelligence. To think otherwise is amusingly ignorant.

A clown can make a million in a booming market (just look at all the property investors that thought they'd made it). Just like a brilliant investor can lose money in a recession <Warren Buffet>.

YOU CAN'T BEAT THE MARKET. You can only play in it.

The risk in the transaction is not incremental like it is for most startups. You're snatching control of a company that grew up without you.

and while i'm at it.... ITS NOT A STARTUP!
I think you summed it up in your title to the thread 'extreme startup strategy'. Only, this isn't a start up strategy, this is an LBO- or what used to be called corporate raiding in the 80s. Interestingly enough, it was popular during the boom time then too, when money was cheap and earnings seemingly reliable. Do you see the similiarities to the past few years? People are remembering now that earnings are not paychecks, they are volatile.

You are not starting something new, you are wresting control of a going concern from its original owners. It is not a startup. It has additional responsibilities.. like employees.

Lol @ start small concept. A better idea would be to build a large company, prove your mettal as a CEO. Then fix another large company in a failing industry. Then do it again, and again. That will get you credibility. Investors aren't going to care that you've bought and sold 8 fish n chip shops in the last 3 years. If you want to play with big money, other peoples money, without putting your own on the table, you need to have a very strong CV...

ONE LAST RANT
The companies historically target by this kind of activity have VERY STRONG long term earnings potential. Think toll roads, airports, public utilities, and natural monopolies. But these are BORING yeah? And you need $$$$ to get control. They also have relatively stable earnings, so you have a snowballs chance of lasting long enough to pay down the debt.

Perhaps I am a rainy day kinda guy, but with all due respect I don't think you really understand what you're talking about. It sounds like you just read a glassy-eyed book from some guy who made a few bucks during the boom. Wonder why he stopped doing LBOs and got into publishing?

You certainly don't understand the risks involved in what you are proposing... but don't be upset about that. The current financial crisis was caused by clowns with much less understanding.

A question, since you are far more entrepreneurial then I. How many LBOs have you conducted in the past 18 months?

Have you ever been involved in a decent sized company acquisition? Say $10M or more?

It doesn't sound like it.

I'm not attacking you personally, but I misinformation and insults irritate me. If others reading this want to give it a go, I say go for it.. but do it with your eyes open. This will improve your probability of success.

Coffee is wearing off.. i'm going to do some work...

Maybe you should get of that caffeine stuff. What is your background?

 

[outsourcery]

ehehe yeah that was a 3 pot screamer.. not getting enough sleep atm and caffiene is a poor substitute.

My corporate background is in business management. But I am a 'business addict', and it is rare for me to not have a book, a newspaper, or a laptop in front of me. I love economics, finance, and investment, and it seems i'm pretty good at both. I am alarmed at the complacency I see everywhere in regards to risk management, so this is something of a 1 man crusade for me.

Right now i'm dusting off and regrouping after a large failure. Under capitalisation is a b*tch. Everything works as planned except you run out of cash and the engine seizes. I just wish I understood it 3 years ago the way I do now Would have saved myself and my partners a bomb...


Cheers

 

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[fanocks2003]

ehehe yeah that was a 3 pot screamer.. not getting enough sleep atm and caffiene is a poor substitute.

My corporate background is in business management. But I am a 'business addict', and it is rare for me to not have a book, a newspaper, or a laptop in front of me. I love economics, finance, and investment, and it seems i'm pretty good at both. I am alarmed at the complacency I see everywhere in regards to risk management, so this is something of a 1 man crusade for me.

Right now i'm dusting off and regrouping after a large failure. Under capitalisation is a b*tch. Everything works as planned except you run out of cash and the engine seizes. I just wish I understood it 3 years ago the way I do now Would have saved myself and my partners a bomb...


Cheers

Under capitalisation is a b*tch. I know that first hand because I have been there.

 

[australianinvestor]

Very interesting post, Fanocks. I'm toying with the idea of testing a more complicated LBO process, but I haven't finished developing the idea yet. I'd love to see how this turns out.

 

[fanocks2003]

Very interesting post, Fanocks. I'm toying with the idea of testing a more complicated LBO process, but I haven't finished developing the idea yet. I'd love to see how this turns out.

I would love to hear from you on this. Just PM me if you want, I have a ton to learn on this subject myself. There is always something you have missed and when two or more brains work together on a subject you quickly realize what that "missing" thing is.

 

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[australianinvestor]

I would love to hear from you on this. Just PM me if you want, I have a ton to learn on this subject myself. There is always something you have missed and when two or more brains work together on a subject you quickly realize what that "missing" thing is.

Sure The way I am working on is less of the "corporate raiding" style and more of a rehab program for unhealthy companies. I haven't had enough time to consider your original post enough yet, but you are more than welcome to PM me and I can respond with ideas or criticism.