(replay)Art of the Roll-Up: 40 Businesses in 4 Years

And then they see the kind of three and four number down here and their eyes go wide. So what is, maybe you've just answered the question. What are the multiples that people who come from institutional finance used to seeing that three is just unbelievable?

14, 15?

Okay, great. So 15 to 20 versus three. Three looks nice. On the pre-call, you also made a really interesting observation about down here in the lower, lower, lower middle market, not just about multiples, but about risk premium. Do you recall?

Yeah. And just that there's less heterogeneity in valuation in the lower market. So in the public markets, in large cap private equity, if you have a high quality business, it might trade at two to three times the multiple of a business with perceived lower quality. So the difference between...

traditional, you know, low quality business, some kind of like junior minor speculative thing, you know, and like a Google, Facebook, Amazon, like the difference in multiples between those is, you know, several times different. Whereas in the lower market, you know, maybe this spread is like three, two to three times for a lower quality business and five to six at the very high end for a higher…

And I think that, you know, that shows that there is not as much of a... premium on quality and that was sort of the starting place for my very very you know naive beginning to a self-funded search was just to say hey you know down here in the lower market there are probably some high quality businesses they are not going to be priced at nearly as much of a premium as they would in other you know…

Um, so I'm going to just take the first initial approach of trying to see a bunch of volume, you know, go look at a bunch of businesses with the hopes of finding a couple of things that, you know, that might fall into that higher quality bucket with the confidence that, you know, if I'm successful in finding them, they're not going to be priced at a premium to the other lower quality stuff I'm…

Um, and that was, you know, that was truly the starting point for my journey in ETA.

I'm impressed that it was your starting point because I don't feel like I've had that observation made to be yet after 200 plus interviews and it had never had quite crystallized to me until you said it. That's why I wanted to call it out and indulge me while I just kind of repeat it back to the audience because I think it's so profound. The band of multiples that we see down here.

is at the very low end, two and a half, and you'll hear the random story of somebody paying even less than that. But let's call it 275 up to 4.25. So many of my, the vast majority of my guests have paid in that range.

And yet there's also, as you said, a ton of heterogeneity there, a ton of variety and quality of business. So the idea that you might... just pay 4x for a business that's much higher quality than a business is trading at 2.75x, that difference of 1.25, when you compare it to public markets or large cap private equity is really, really, really not much.