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Buy or Build a Business?

Each week I get bombarded from private equity groups, family offices, hedge funds and individuals – all wanting to buy a business. All of these people have one thing in common: they are not driven by ROI. Because for the last 3-4 years, it has been a much better use of time and money to build businesses from scratch rather than buy companies.

I’ve written ad nauseum that the math of the middle market (where most buyers are aimed) is not conducive to buying companies for return purposes. This is because the US is not generating enough value-creating middle market companies to go around. Here is the math: of the 250,000-300,000 middle market companies in the US, PEGs/others have already acquired 30,000-40,000 of the “A” companies. This leaves maybe 5,000-10,000 “A-B” companies out there still to be acquired. And these will dribble out over the next 5-10 years. And there are 5,000-10,000 buyers chasing them. Yikes! Every year there are more buyers than there are good companies to buy.

What happens when there are too few good companies to buy? The market bids-up targets to 7-9 times recast earnings, which effectively means that returns to investors are likely be zero (at best) over the next 10 years. I show in Time Really Is Money that according to CalPERS, private equity funds over the past 10 years have generated returns of less than 6% when incorporating management fees and carried interest costs. These returns mirror those reported by various Thomson Reuters studies over the same time periods.

With such low returns, why do PEGs/others continue to buy? Because they have money that must be invested, and it must be invested in the next few years, or they will have to give it back to limited partners. And hell will freeze over before that happens on a large scale. All of this makes sense when you realize that management fees drive the PEG/other financial institutional bus – not returns on investment.

Those of us who are driven by returns (me, for instance) are starting-up businesses. These are not your grandfather’s start-ups. There have been almost 200 unicorns this decade, all from start-ups. I’ve started more than a dozen companies in the past 4 years, without acquiring any businesses. Unless a corporate parent hands me the keys for free, I will not acquire anything going forward .

Financial buyers (such as PEGs) need to read Time Really Is Money. In this book I show what it takes to build business value in the Transformation Age. Here are a few key points:

  • Value engineering trumps financial engineering in the Transformation Age. This is not a friendly Age for MBAs.
  • Transformation business models are disrupting every area of business…and you can rarely acquire companies that have such models. Why even try to buy such companies when you can so readily create them?
  • The new middle market company is an amalgamation of niches that all leverage the same intellectual capital. Once again, it’s far less expensive to build these niche conglomerates than acquire them.

And on and on. Of course I know that financial buyers will continue to write checks that are destined to generate no returns. And I will continue to start-up companies that create billions of dollars in value in just a few years. I have no fund…just the knowledge that is fully available to everyone in Time Really is Money.

There’s plenty of time this decade to create extreme wealth. Are you going to buy or build businesses to make it happen?
– Rob Slee
Respond directly to Rob at: rob (at)

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