VALUE: After Hours (S07 E36): Return on Headache: The Hidden Metric in Small Business Investing

During their recent episode, Taylor, Carlisle, and Colin King discussed Return on Headache: The Hidden Metric in Small Business Investing. Here’s an excerpt from the episode:

Colin: I can’t claim this term, but someone along the way mentioned the term return on headache to me, and that was just so true. It was disastrous for our marriages, disastrous for our personal lives. It just did not check any of the boxes, even if it was a good returning asset. So, I still have PTSD. I’m checking my phone at 2 o’clock in the morning like, “Is someone’s truck broken down 300 miles away from me? Do I need to go deal with this thing?” So, it just wasn’t a business model that we could see ourselves running and owning for a long time. If you can’t do the thing of a company that you own in a small business land, you probably shouldn’t own that company.

Tobias: So, that was an important learning that was like return on headache is a key metric. So, how did you then start thinking about acquisitions after that? Did that sharpen up a little bit what you were prepared to do?

Colin: [laughs] Yeah, so, we rolled the proceeds from that into an e-commerce company. This was back in 2019. And really the thought was, you know it’s a way more flexible business model, you don’t have to be physically located somewhere to store, pick, pack and ship a product. We used a 3PL. So, we were more drawn to that flexible lifestyle sort of business.

So, now, most of our companies operate remotely with the exception of production employees, and retail employees and such. But all of our knowledge staff, they’re scattered throughout the country. So, we started going down this path of, can we lead with a better, more flexible operating style of the businesses we buy?

Tobias: Talk us a little bit through, like, what’s a prototypical acquisition look in terms of ratios rather than– You have to give us the raw numbers just in terms of debt, equity, revenue multiples or EBITDA multiples.

Colin: I view it as a stair step. So, in the early days, our first deal we just bought with cash with our savings and we didn’t borrow any money to do it. And then, when we sold that business, the next company went out and got an SBA loan to buy. So, we were putting 10% down, borrowing 90%. In total dollars, it was still pretty small. I mean, it wasn’t a huge purchase price. We paid maybe half of revenue for that company when we bought it. So, it was attractive, earnings multiple. But we had to step in and play several roles in running that company. There wasn’t a marketing team, there wasn’t any strategy, there was a lot of administrative stuff to pick up.

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VALUE: After Hours (S07 E36): Return on Headache: The Hidden Metric in Small Business Investing

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