Hair Is Opportunity
We have a joke around the office that we’re in the business of shaving hair. This is in recognition of the fact that small- and medium-sized businesses (SMBs) often come with lots of hair on them in many forms. That can include sloppy accounting, unresolved personnel matters, customer and/or supplier concentration, and even compliance with laws and regulations that is, shall we say, in the gray area. And of course this hair is what can make a business hard to transfer and even uninvestable.
But!
One way to create significant value is to remediate these issues over time i.e., shave the hair. That’s because in doing so, while you might or might not improve the performance of the business, you’re making it more investable. That increases the size of the pool of potential future buyers, making the business more valuable.
In other words, the less hair, the higher the multiple.
To wit, we saw a business recently that had botched an acquisition a few years ago and in the course of trying to integrate it had lost and was still losing quite a bit of money. Further, it had been through several rounds of layoffs, revalued inventory, written off assets, and recategorized expenses. The numbers were a mess.
That’s hair.
And while it’s normally not a good thing to lose money with that much hair, what was oddly impressive about this situation was that the core business had been able to fund those losses for so long. What that meant is that the core business might actually be a good one. Or, at the very least, that it could afford to pay for its shave.
So I said to Holly, “Hey, let’s reach out and see what the story is here. While we’d normally not be interested in a business with so much hair, this hair seems shave-able. And if we can shave the hair, we should do okay.” And Holly, after giving me a funny look, agreed.
The key to shaving hair, though, is not just knowing what the hair is, but also figuring out ahead of time that you can shave it. And there are two keys to that:
The business is generating enough cash to self-finance its shave.
The people at the business won’t resist or sabotage being shaved.
But if either one of those things isn’t the case, well, you might as well just start calling the business Cousin Itt.
-Tim
