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The M&A structure only HoldCo's can pull off
Plan first, buy second.
Michael Girdley
February 15, 2025
Howdy, Girdleyworld!
This week we’re looking at acquisitions as a HoldCo:
5 questions to ask yourself for any M&A
The HoldCo-within-a-HoldCo structure
Let’s do it!
(By the way: we’ve got some sponsor slots opening up in this newsletter. If you’re interested in reaching 42K+ people — with a majority business owners/professionals — reach out to [email protected]!)
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Plan first, buy second
Designing an acquisition strategy is pretty straightforward. But it’s essential to do it ahead of time.
Two reasons why:
First, if you haven’t figured out the parameters you’re looking for, then you’re more likely to jump at a bad fit just because it’s exciting. One of the hardest but wisest things to do in business is waiting for the right deal to come along.
Second, you’ll quickly find that it’s much harder to sell a business than it is to buy one. The seller is the one doing all the work, and the buyer can just walk away. Making a bad buy is a major headache.
There’s lots of things to consider. What’s your overall thesis? What size of deals do you want to be doing? How do you want them structured, and financed?
Once you’ve got a strategy figured out, use these five questions to consider acquisitions.
5 questions to ask yourself before buying
1. Does it work for your big picture?
Let’s say your HoldCo has 4 very capex heavy businesses that are always asking for capital. Let’s assume they can deploy that capital at a high rate of return, so they’re cash hungry and you want to feed them.
In that case, you want to have some other businesses that are high cash flow and low capex, so you can reinvest into your capital-hungry businesses. Think about how you can make that flow happen, what sort of parameters you need to set, to make that fit into your bigger picture.
2. What could change?
Disruption can come into the marketplace in a variety of ways. It could be social change, governmental change, or technological change.
Think about how that potential change may impact your businesses. What is the lifetime of the businesses you already have? How vulnerable are they to disruption?
Say you’re 30 years old. And you’re buying a bunch of tech businesses that are exciting now, but will be obsolete in 15 years (or, given the rate of tech today, maybe it’s 15 months). But you’re not planning to retire for 60 more years.
Keep your vulnerabilities in mind.
3. How much is this a PITA?
Not the flatbread, unfortunately. We’re talking Pain In The Ass. How much work are you going to have to do to manage a particular business?
If you’re looking at running an investment bank or a restaurant, those take a lot of consistent hands-on time (plus they’re really hard). Compare that to something like an insurance agency. Very few things at an insurance agency are going to be down-to-the-minute emergencies.
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4. Risk vs reward
Each acquisition should be considered on the risk-reward spectrum.
Take an extreme example: say you create a portfolio of all businesses that could return anywhere from +40% to -20%.
Usually you’ll do pretty well. But it’s totally possible that some years you'll be in the red.
Ask yourself: Are you ready to embrace that? Do you want to offset the risk with safer bets, but lower ceilings? Or is low-and-slow all you’re looking for?
(I have a friend whose entire business is dependent on the strength of the US housing market. He might make $5M one year, and lose $1M the next. He has to be comfortable with sitting on the far side of risk.)
5. Is this me?
This final consideration is one of the most important. What sort of life do you want to live?
One of my businesses is a chain of fireworks stores, which means I’m busy (like, really busy) around July 4 and New Years. It takes a lot less of my time the rest of the year. But, look, my holidays sucked for years. That’s the trade-off.
And beyond just working hours, consider how a potential acquisition aligns with your values and comfort zone. A marijuana grow op or a gentlemen’s club may be successful businesses, but if you’re not proud to own it then it’s a bad fit for you.
A note on getting it done
Let’s say you’ve considered all of the above, and found a business that’s a great fit.
Now the real work begins.
M&A can be hugely time-consuming. I suggest doing one or two of them yourself, to get to know the process. But many people underestimate how much of a full-time job it is to source, approve, negotiate, close, finance, and integrate new businesses.
That’s why I recommend building an internal team. Running these processes in-house has a lot of benefits. If it’s somebody’s job, and they potentially have equity in your company, they’ll have a reason to focus and find the best deals for the best price.
Of course, beyond a certain size and complexity, it’s worth bringing in the big guns. Good brokers and advisors are worth their fees. A 10x investment bank will create a ton of value for you just like a 10x employee does.
My rule of thumb is: if it’s over $50M enterprise value, get someone to represent you as a buyer. That’s where things get really complex, with bond issuances, weird ownership structures, public markets, etc.
Holdco’s within HoldCo’s
M&A can be hugely time-consuming. I suggest doing one or two of them yourself, to get to know the process. But many people underestimate how much of a full-time job it is to source, approve, negotiate, close, finance, and integrate new businesses.
If your strategy involves a lot of acquisitions, especially of smaller operations, you can streamline those operations into one of your portfolio company (PortCo).
Let me give you an example: one of the companies I have in my HoldCo is a serial acquirer. They’re called Dura Software, and they buy up hyperniche software products.
Their mission is to go after a class of assets that are too small for me to want to buy at the HoldCo level. So they have the expertise, management, and network to roll up a bunch of very small pieces, and the M&A process is a well-oiled machine.
And if I see something that fits their niche, I can send it their way with minimal involvement on my part.
So basically, a HoldCo within my HoldCo.
Just another HoldCo superpower.
3 things from this week
Appetizer: Turns out putting “Is Beer Over?” in your thumbnail gets YouTube riled up. What do you think?
Main: I shared this discussion from the Scalepath community on LinkedIn recently, and got some great responses. One of my favorites was Dave Kline: “Growth isn’t about avoiding problems, it’s about fixing the right ones first.” Care to weigh in?
Dessert: Classic Twitter.
That’s it for this week!
Thanks for reading.
Michael
P.S. We’re almost out of tickets for HoldCo Conference! If you’re on the fence… now’s the time!
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