The Weekly (3/10)

Friday, Mar 10th 2023


You may be familiar with the terms Silver Tsunami, Grey Wave, or the Senior Surge. We’re not too keen on any of these labels, but the aging demographic and the opportunities it presents for entrepreneurs has caught our eye. Did you know of the 33 million small businesses (SMBs) in the U.S., Baby Boomers own ~14 million of them? 

All these businesses will have to find a new owner or wind down, eventually.

The sad truth is that roughly 70% of SMBs will just close shop. Any number of reasons can drive this (no children that want to take over, non-transferable relationships, too small for M&A). But there’s another story here: a growing percentage will be bought by burgeoning entrepreneurs who aspire to be CEOs and have more economic upside potential. 

The thesis is simple. Instead of going from Zero to One as you would with a startup, you could simply acquire a business that already has a strong customer base with a trusted brand, and go from One to Two.

Generally speaking, an SMB that would be attractive to an entrepreneur will be valued anywhere between $250K-$5M. Bigger than that, and you’re competing with private equity firms. But new generations of entrepreneurs can “steal” the private equity playbook: use significant leverage to roll up cash-flowing businesses like dental practices, doggy daycares, laundromats, and auto-repair shops. 

And guess what - these entrepreneurs are digital-natives. They can use intuitive levers in legacy small businesses to drive growth. Website built on WordPress in 2004? A few quick updates to increase conversion. No marketing presence? Well update your Google search results. Bloated staff with an office nobody goes into? Virtual assistants.

All of this sounds easy, right? Not so fast. Buying a small business can be hairy, sorting through incomplete (or incorrect) past financials and a full-recourse personally guaranteed loan. This is not for the faint of heart. However, there’s evidence that those who have taken the leap, have been rewarded.

Search funds are small entities run by an entrepreneur that raise capital to buy a small business, and in Stanford’s 2020 Search Fund Study, the pretax return on invested capital was found to be 5.5x, with a pretax IRR of 32.6%. Woah. 

As you head off into the weekend, take a closer look at the local small business you’ve been spending money at for the last 10 years. Main Street Pizza may just be yours one day.

Have a great weekend.

Your Titan Team

As of writing this newsletter, GOOGL is a holding in Flagship. 

As of this writing, GOOG was a portfolio holding of Titan. This security may cease to be a portfolio holding at some point in the future.

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