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Gather & Grow: Forming a Private Investment Group

A lot of investors are looking for something different. They have a core investment in the market, bonds, portfolios, but most of their returns are a yawn.

Recently, I've been working with several savvy entrepreneurs who have formed at a consortium of investors and instead of picking startups and stocks, they're looking at buying existing, profitable businesses where the owner is looking to retire.

There are some formal investment groups already in place but they tend to either be pretty large (Kiretsu Forum) which is well-established and has a great group, but it is a larger size than some prefer. Smaller groups may be already full.

If you wish to form your own, you may want to establish a due diligence process; find someone to supply deal flow to you (like me); and a set of experts you can place into the businesses you buy who will trust to run the businesses.

Here are a couple of their strategies in growing the value of these businesses:

  1. Decide the scope of your mission. You may be looking to invest in an industry, a purpose, or a characteristic in the market. Even a loosely articulated scope is more helpful than saying you'll invest in "anything".

  2. Assign a talented Due Diligence Team to review and supply details to the rest of the team. This Team responsibility can cycle around the group and experts can be brought in to answer industry-specific questions and specific problem or opportunity areas.

  3. Pick an anchor tenant and buy up the supply chain. If your anchor business is stable and relatively recession-proof it can churn out a core revenue stream, say, a Trucking Company (we will always need goods/services distributed). Then, buying up the suppliers and downstream partners of that company, say, a pallet manufacturer or a distribution services company, you have an automatic advantage of keeping the middle-man profits to yourself.

  4. Assess the team's strengths and fix the same "broken" in various businesses. Say your team has an amazing digital marketing capacity. You can build a nice portfolio of companies who all benefit greatly from digital marketing. Buy these businesses at a good value and apply your fix.

I have several other strategies that can be deployed if you are interested in becoming the ringleader of your own investment group and will share them with you when we work together.

Keep in mind three things when you buy a business that are often misunderstood or unknown to investors:

  1. You only need about 10% of the business value down in order to buy the business. If it's profitable enough, it can sustain the debt service on a loan.

  2. Transition plans can be on your terms. If you need time to learn the business or hire a manager to run the business, just ask for an extended period of training with the owner. A business is rarely transitioned by the writing of a check and a key exchange.

  3. The risk is far less than most alternatives. There are few investments with a better ROI or cap rate than a business that's been profitable for decades. See my ebook "Start or Buy"

I'm developing some great case studies with investors who gather and grow their value by working together on a shared strategy.

Kris FuehrComment