Decks in The Investment Process

It shouldn’t be a surprise that the hardest part of being a solo investor or operator is that you’re all alone. Unlike investment firms and larger companies that have committees, working groups, and advisory boards, we small time investors and operators don’t have the luxury of getting confirmation from others. But, many of these lone rangers set up informal peer groups to bounce ideas off or get feedback on their latest deal opportunity. However, it’s still hard to take all of those jumbled-up thoughts and come out with a clear summary for others, or even for ourselves.

I’m a huge advocate of using decks throughout the investment process to mimic what larger and more sophisticated investors are already doing. Not only does this formalize and consolidate your learnings into a single package, but it also makes you stand out from the pack.

When you’re looking to buy a business, you’re always trying to impress someone. Whether it’s the seller, your lender, the broker, or your potential investors, there’s a lot of people you need to convince that you can be trusted. But before convincing them, you need to convince yourself.

Throughout your initial industry and deal research, you should be building decks to capture your learnings to better understand the gaps in your knowledge. These decks become an easy way to share information with others for feedback.

There are two main decks I think make sense for people to build:

A Personal Investment Thesis

This is the deck that outlines your overall interest in an industry (HVAC, IT Services, etc.), and the thesis you’re interested in pursuing (roll-up, growth, operational, etc.). While impossible to have all the details figured out without looking at a specific deal, this deck should act as a reference to the things that get you excited about the opportunity, and the things you want to watch out for.

It's good to have a deck like this as you start looking at deals, but as you continue to diligence-specific deals, you’re going to learn more about your overall thesis. This will turn your personal investment thesis deck into a working deck throughout the entire process. Having this deck will immediately make you stand out from the crowd (who are mostly taking the shotgun approach to looking at deals). Your goal is to be the “smart money” that sellers — and service providers — want to partner with.

There are a few key subjects that are relevant to cover in this deck. If you’re struggling to get started, use each one of these subjects as the starting points for your slides. As you learn more, continue to add! Most importantly, while the examples I give are very high-level, data is needed to make these decks truly powerful. A hypothesis is great, but data proving the hypothesis is what gives people the conviction to act. Want to make it easy for people — turn data into charts that are easily absorbed.

‍What is the overall vision and goal? What is the overall mission statement for what you’re doing?

“I want to buy an accounting firm in the Midwest with strong recurring revenue with the opportunity to grow organically and through targeted acquisitions.”

Why is this attractive? This section should include the story and data around why this strategy is attractive.

“There are over 1,000 accounting firms with fewer than 15 employees that serve stable Midwest businesses. On average, these businesses have 90% of their revenue recurring. Over 75% of owners need to retire in the next 10 years and have no transition plan.
“From an operational perspective, these businesses have great economies of scale and as consolidation happens, it becomes easier to increase margins through offshoring back-office roles which should improve margins and speed up work for the client.”

Why am I the person to do it? What is your background and why are you the “woman for the job”?

“I’m an accountant by trade and having worked at a Big 4 accounting firm; I want to be more entrepreneurial. I’m from the Midwest and have a strong connection with business owners there. I know the industry well, and specialize in working with offshore teams which should transfer well to this opportunity.”

What are the big risks? Why would this strategy fail?

“Risk of technology displacing traditional CPA firms as machine learning gets better and better at bookkeeping. Firms unable to provide value-add advice and feedback on top of traditional bookkeeping may lose business”

Simple financial model outlining why the numbers work

It’s impossible to know the exact mechanics of the deal, but it’s important to highlight how your thesis plays out in the numbers. With some basic assumptions, how do returns and capital requirements look?

Deal Specific Memo

As specific opportunities arise, building deal-specific decks makes it easy to track the information you have and the information you need to get throughout the process. It’s easy to use a standard format that you can complete as you learn about the deal. It will highlight the gaps in information and the key areas you should be focusing on. These deal-specific memos should almost be treated like an “outsourced brain.” Someone should be able to pick up this deck and have a complete understanding of your take on the opportunity and areas you want to focus on to ensure it’s a good outcome.

As you develop a peer group of other investors and service providers, sharing this deck can help garner feedback and thoughts as you continue to build conviction in an opportunity. As with the first deck, company data is essential in ensuring that your deal hypothesis are correct.

Overview of the business and the transaction

This is a relatively simple overview on the business you’re interested in purchasing.

How did you source it and what is the structure of the deal?

This is a bit more background information that outlines how you sourced the deal, the interactions you’ve had with the seller, and how the deal is structured.

Financial overview on the business and relevant customer/SKU data

It’s time to share essential data on the company. Put together several slides that show the important financial data on the company and their performance. Apart from standard growth and profitability metrics, it’s great to share relevant customer data around concentration and sales channel, and product specific metrics to help understand where the company’s growth is coming from.

Industry overview and key competitors

Some of this data can come from the deal thesis deck, but it should be more detailed at this stage. What are the key dynamics happening within the industry that impacts this business? Who are their key competitors and how does this business compare to their competitors? What makes them strong and/or weak?

Existing management and go-forward structure

Who is running this business today and what are their backgrounds? In your opinion, where do they excel and where are they slightly weaker? How will the management structure change after you invest in the business?

What is the value creation plan? How do you make money?

Regardless of if your investment period is 3-5 years, or a 20-year hold, you want to go into the opportunity with a good hypothesis on how you’re planning to create value. This plan shouldn’t start the first day you own the business as you’ll still need to learn a lot about the business in the first 4-6 months, but it should be a guide. If it’s an inorganic growth story, it’s helpful to have an initial pipeline or data around the potential pipeline and how that will drive value. For example, if you do one add-on a year for 5 years, how will that impact your overall enterprise value? If it’s an organic growth story, what are the various sales strategies you’ll implement, to grow and how will that impact your value? If it’s an operational story, how will that impact margins and then enterprise value? I think you get the idea – whatever you want to do with the business, connect it to change in enterprise value.

What are the biggest risks?

Don’t skip over this section. All businesses have risks and thoughtful investors identify all of these risks, quantify how they’ll impact the business, and highlight the potential ways these risks can be mitigated through deal structuring and operational changes. I’ll say it again, this section is crucial. Having a deal that doesn’t work out is tough, but not identifying the major risk that caused the bad outcome is even worse.

What is the exit strategy?

Do you plan to exit this business or just cash flow it for the next 20 years? How are you going to exit this business? Who are some potential buyers? What multiples can you sell this business at various sizes?

Your financial model and return expectations?

Finally, we need to see how the numbers work for this specific deal. I always suggest having three specific outcome cases with assumptions CLEARLY laid out so it’s easy to understand. What is the downside case, base case, and upside case for this deal? Don’t try to make it look overly optimistic — be realistic as investors are judged on outcomes, but also on the closeness to projections. Wouldn’t you rather invest in someone who is better at predicting deal outcomes than getting lucky on an outcome?

Investing is really, really, really hard. It’s impossible to keep emotion out of the decision-making equation due to the biases we all suffer from. Not to mention, when you’re putting personal guarantees and big money on the line, not feeling any emotions might be a bit of a red flag. Doing a lot of researching and synthesizing information is a helpful way to ensure you’re looking at the deal in a data driven and methodical way.

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