Book Review: HBR Guide to Buying a Small Business

HBR_Buying_Small_BusinessI read the HBR Guide to Buying A Small Business after listening to the authors, Richard Ruback and Royce Yudkoff, interviewed on the Invest Like The Best podcast. The firm I work for does some private equity investing in exactly the types of companies discussed in this book.

Summary

Ruback and Yudkoff teach a course at Harvard called “Entrepreneurship Through Acquisition.” This book draws on many of their students’ experiences. Rather than go out and start up a brand new company from scratch, one can go out and buy an existing business to become an owner/operator. This is less risky than launching a startup.

Many of the entrepreneurs who go this path are highly skilled and motivated, but for whatever reason do not want to work in a large corporate environment. Maybe it’s a desire for control and flexibility. Maybe it’s a dislike of institutional politics.

This book is a guide to the process, from deciding whether to become an entrepreneur through acquisition up through raising capital and closing a deal. In fact, it works pretty well as a private equity primer. Ruback and Yudkoff are basically walking you through a leveraged buyout, though I don’t think they ever explicitly call it that.

Worth mentioning are the key characteristics entrepreneurs should look for in a business:

  • “Enduringly profitable” businesses with EBITDA margins of 15-20%
  • “Boring” businesses with modest growth prospects
  • Businesses with sustainable competitive advantages (a.k.a “moats”), such as high customer switching costs or market dominance in a local or regional niche

The idea is to buy the business for 3-5x EBITDA and structure the transaction so you are targeting an annual return of about 25% to the equity investors. Structurally, this is a very attractive area of the private markets for smaller institutions and high net worth individuals to invest. Big piles of money can’t flood into the space and drive up prices because the deals are too small, in the $2 million to $5 million range for the most part. Imagine SoftBank’s $100bn Vision fund trying to move the needle on performance investing in deals like these!

Who Should Read This Book

Anyone seriously interested in owning, running, or selling a small business would benefit from reading this book. Even if not going the acquisition route it is useful for understanding business models, competitive advantage and strategic financing decisions, as well as the basic principles of financial modeling and valuation. The book is written for a broad audience and is accessible to readers without a finance background.

This book would also be useful for fundamental investors interested in backing an entrepreneur operating a small business, or investing in small public market companies. It is especially helpful in exploring how a small firm can build and maintain competitive advantages over time (a common misconception is that only large cap companies can possess competitive advantages).

Book Review: Cryptoassets: The Innovative Investor’s Guide to Bitcoin and Beyond

Cryptoassets_CoverI pre-ordered this book on Amazon after seeing it mentioned on Josh Brown’s blog, The Reformed Broker. I was intrigued because it purported to be a rigorous treatment of cryptocurrency and cryptoassets written from the perspective of a relatively sophisticated investor.

Burniske and Tatar state their goal was to produce a book that is the equivalent of Benjamin Graham’s Intelligent Investor for cryptoassets. That is kind of like Dennis Rodman saying he wanted to do for rebounds what Michael Jordan did for dunks. To the authors’ credit I think they have done an admirable job of approaching a fast-evolving space in a balanced and rigorous way.

Summary

The book is well-organized. It is segmented into three parts: What, Why and How.

What: Discusses the theoretical underpinnings of cryptoassets and provides background information on the history and evolution of several major cryptocurrencies: Bitcoin, Ethereum, Ripple, Monero, Zcash and Dash (I may have omitted a couple). Burniske and Tatar take pains to distinguish between cryptocurrencies, cryptocommodities and cryptotokens.

Why: This section provides an overview of Modern Portfolio Theory (MPT) and the use of mean-variance optimization in constructing an investment portfolio. The authors argue for the inclusion of cryptoassets in an investor portfolio based on their potential to improve overall portfolio efficiency, similar to more “traditional” alternative investments such as hedge funds, private real estate and commodities. I skipped most of this section as I am very familiar with MPT.

How: This section was really what attracted me to the book as it lays out a framework for performing due diligence on a prospective cryptocurrency investment. The authors address issues of custody, valuation and trading, as well as some of the nuances of trading in fragmented markets with the potential for wide fluctuations in trading volumes. The valuation model they float for cryptoassets is more or less the Equation of Exchange (MV = PY or in this case P = MV/Y). One issue I don’t think they adequately address is the issue of reflexivity in the “velocity” of crypto transactions (speculative trading activity drives up network activity which in my view creates a kind of feedback loop).

Who Should Read This Book

Anyone looking for a comprehensive introduction to cryptoassets would benefit from reading this book. It would be particularly useful financial advisors looking to educate themselves in order to address client questions or advisors considering cryptoassets for inclusion in client portfolios. The book is very much written in the language of the financial professional.

Who Should Not Read This Book

This book does not contain any secret sauce for getting rich quick. People who are looking for “hot tips” or “hacks” will be disappointed. While the authors are clearly bullish on the long-terms prospects for cryptoassets, they emphasize the need for investors to educate themselves, conduct thorough due diligence and develop an investment discipline. The due diligence concepts outlined in the book are applicable to any asset class or investment opportunity.

My comments on this book should in no way be taken as a recommendation to buy or sell any cryptoasset. If you are wondering whether you should own cryptoassets as part of your investment portfolio you should consult with a financial advisor who can advise you based on your unique financial circumstances.