You want to see the companies you invest in do one thing and that’s:
Either by IPO or acquisition— it’s the ultimate goal.
But what if you could get regular payouts on the profits of the company…
And also receive a payday when the company has an exit?
Better yet, what if the startup has plans for multiple exits!
They just might shatter all expectations of the investor-investee relationship.
One part investment fund and one part tech startup, this company buys profitable home services businesses and uses a variety of data and tools to optimize them.
Then, using profits from the newly optimized business, the startup pays out dividends to investors.
While buying, optimizing, and paying investors, the startup is building a portfolio of stable, profitable businesses within their business.
Each business they buy is developed to a point where it can be sold to a private equity firm or strategic buyer for big returns.
All the while, the startup itself is aiming to go public down the road.
A bit confusing? Maybe.
Highly unique and exciting? Definitely!
I’m going to explain exactly how this startup works, how it can afford to pay dividends, why this is incredible for investors, and share my exclusive Q&A session with the founder.
Dividends on a Startup Investment?
Most startups don’t offer dividends. It’s practically unheard of. So, how is this startup able to pull it off?
Firstly, because the companies they buy are highly profitable. They aren’t facing high levels of risk and uncertainty like other startups are. They buy and improve stable, already profitable businesses and use advanced, proprietary methods to make them better. It’s familiar territory for them, being experts in the home services as well as in venture capital.
Being sure they will turn a profit means more accurate projections and more flexibility with how they spend their cash.
Next, this startup isn’t up against rapidly-growing competition. In other industries, particularly in tech, startups have no opportunity to pay dividends. Everything needs to get reinvested back into the company. It’s a growth race against the competition.
Having carved out a nice spot in an untapped and unloved industry, this startup can afford to grow more safely and stably.
In short, the unique business model, experienced team, and great traction mean this startup can afford to spend a little extra to incentivize investors with dividends.
Why This Model Benefits Investors
A big part of being an angel investor is managing your returns. A portfolio is only sustainable if you can consistently “withdraw” returns to then “deposit” them back into startup investments.
For those of us who don’t have unlimited money to spend on investments, managing the time frames of returns is essential.
It’s just like running a business, you want to reinvest profits so your business can grow. Investors want to reinvest returns from exits back into their portfolios to grow their wealth.
When you earn dividends, it just makes your life easier. Now your investment doesn’t sit on the shelf for three to five years while you wait for a liquidity event — you get paid incrementally.
You are still aiming for that big ROI on exit, but now you have some extra cash flowing in while you wait.
Returns from dividends are steady and predictable.
How This Startup Works
First, this startup finds essential home services companies (HVAC, plumbing, roofing, etc.) that are already profitable but could use some fixing up. Specifically, they buy businesses that have cash flow greater than $500,000 per year and are easily expandable via digital marketing.
These businesses are inherently recession-resistant. The services they provide are always necessary and can’t be DIYed.
They look for owners who are ready to retire. In the home services space, there are thousands of businesses run by owners who have no one to pass their business on to. They have worked for years or decades building the business up and don’t want to see it stripped apart or run into the ground.
These types of owners have usually under-invested in growth and marketing. Because of this, with a bit of market research and marketing, profits can be increased almost instantly.
The startup then teaches owners how to optimize their business and step away from the day-to-day operations. The startup hires and trains a CEO and then invests in technology.
This trust-building works to show owners that their business will be taken care of and will prosper. Then, the owners will sell the business to this startup for favorable terms.
Multiple businesses are bought and optimized like this, creating a portfolio of successful home service businesses under a unified brand.
I got the chance to sit down with the founder and ask some important questions.
First, I wanted to address how these dividend payments would work. It’s just so uncommon for a startup to promise growth and still offer regular payments to investors, so I wanted to find out how it would all work.
Q: How do you envision ‘liquidity events’ or potential payouts looking for investors?
A: We plan on issuing dividends for shareholders beginning in 2021. We plan to distribute a percentage of annual profits as dividends plus additional dividends if we sell companies in our portfolio.
The longer-term plan is to reach $10mm of earnings, at which point we have the option to sell the business to a larger private equity firm or a strategic buyer (likely for 8-10x EBITDA).
The long term goal is to take the company public via IPO which would require us to be closer to $20mm in EBITDA.
Next, I wanted to see how the dividends help the startup and improve the bottom line.
Q: Why did you choose this dividend model?
A: The companies we buy are highly profitable and we’ve learned investors appreciate earning a 10%+ annual cash return while waiting for a larger potential exit.
Considering that this startup owns and operates several businesses, plans on buying more, AND is about to roll out dividend payments, I was very interested in the current financials.
Q: What does your monthly burn look like, including payroll, marketing & advertising, and other overhead?
A: We’ll be profitable by September 1st. We’re currently spending ~$10k/mo in legal and accounting fees. The businesses we buy are each profitable and actually generate cash flow each month.
This business only works if it can take profitable small businesses and optimize them for far greater profits. I wanted to let all of you see exactly how this is done.
Q: How much work typically goes into revamping these companies?
A: A lot! We focus the first three months on:
- Ensuring we truly understand the key drivers of customer leads and revenue.
- Evaluating the existing team.
- Optimizing the systems in the business (and incorporating new marketing and operations systems if the company lacks them).
- Spending time optimizing the one to two main channels that drive customers to our door (often Yelp, Google, or paid ads).
- Standardizing pricing across the company.
- Figuring out where the bathroom is.
Over the following three months the focus is:
- Filling any gaps in the team.
- Improving customer support functions.
- Doubling down on referral and repeat customer sales.
- Adding new growth channels (often paid advertising channels).
And then the next six months:
- Identifying team members that have leadership potential and training them for success.
- Continuing to improve our top advertising channels.
- Evaluating expansion opportunities.
It’s important to realize that there are usually other players in the industry doing something similar. This isn’t a bad thing. Competitors can show you the market potential, comparable valuations, and what kind of exits are happening in the space.
Q: Can you share any competitors or comparable companies who have a similar strategy, what has their success been?
A: A few really successful rollups in the home services niche include:
- American Residential Services (~$900m revenue)
- Wrench Group (~$330mm revenue)
- Lee Company (~$225mm revenue)
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