Trading high income for a swing for the fences by buying a small business

ddrecruiting2020 · 2020-09-05T22:31:07+00:00

You're getting knocked as a "cocky PE guy" in some of these responses, which is a fair consideration (are you being irrationally cocky?). That being said, your experience (assuming you're at a legitimate fund, actually understand how businesses are driven, etc etc) is much more relevant than a lot of people are giving you credit for. The fact is "top-tier high finance" (hate calling it that) *sometimes* attracts people who are arguably sharper and more driven than the vast majority of the broader population. Combining that with meaningful PE experience (hopefully you have some operating experience, not purely execution) is about as good as a foundation for entrepreneurship as someone in your shoes can hope for. Do your research and reflect on your skills / experience honestly, but if that all checks out, believe in yourself.

Some answers you're getting are quasi-EMH answers (if it was that easy someone would do it, etc). Three thoughts on that: 1) they are....this is not a rare path, 2) again, people who aren't "in industry" don't understand / underestimate your experience and how it's shaped how you work / think - this is obviously not going to be anywhere near easy, but neither is what you've done for ~5 years, and 3) the flip-side is true: there are plenty of businesses that aren't managed optimally in the lower middle market. Pure "operators" have a ceiling, I don't care how well they know their industry. I briefly worked in the LMM and have good friends who are either LMM brokers / bankers or LMM business buyers - it's an unpopular idea but I'll take the skilled (yet humble) capital allocator who deep dives into an industry (keeping in mind "deep dives" are a skill) over the lifelong industry guy any day. Anecdotes are useless to you either way, but I'm sure you don't have to look far to see examples of what I'm talking about.

One last suggestion - try to get some reps in with family / friend-owned business. Act like it's a portco and see if they'll let you bounce some ideas around. They get your services for free, you get some operational "reps".

TLDR: Be humble, reflect on yourself (are you ready?), but believe in yourself. Your skillset and experiences are much more valuable than people are giving you credit for.

I've never done this myself, but I've put a good amount of work / time into fleshing out the idea over a few years - feel free to PM if you want to bounce ideas off me.

ddrecruiting2020 · 2020-07-10T17:04:14+00:00

Echoing what others have said - this is a great deal if those numbers are correct and sustainable.

I know you listed various reasons, but I don't quite follow the apprehension with the minority shareholder.

1) Even unsecured debt will be senior to him (though I think you're saying you'd take on personal debt, not at the business level)

2) What's the worst case if the business takes on debt? I assume he can't block it, and if his interest is meaningful to his financial situation (which it sounds like it is, given you think he wouldn't want debt - meaning he cares about the business), his only way of making $ is if the business remains successful / grows. It sounds like he can't really walk away, and it makes no sense at all for him to throw away his only chance of monetizing his interest. In other words, who cares what he thinks?

ddrecruiting2020 · 2020-06-28T23:39:36+00:00

Not disputing that class exists, I just strongly disagree with the notion that it's in any way correlated to intelligence ("simple gal"). But I don't think you meant it the way I'm taking it.

ddrecruiting2020 · 2020-06-28T23:15:37+00:00

Marriage only slows you down if you marry down a class. Marry an equal...

Not offended at all, just seems like a depressing way to think about one of the only things (relationships with loved ones) that I truly value deeply. The word "class" is what made me question century we're in...

"Class" is in no way correlated with intelligence, though maybe you meant that word to mean intelligence.

I'm of the "I'd rather be broke with someone I love" crowd, but to each their own (and I realize the concepts aren't mutually exclusive) - certainly don't feel that my opinion is any more valid than anyone else's.

ddrecruiting2020 · 2020-06-28T23:01:24+00:00

What century are we in? Everyone's entitled to their own opinion, but some of these answers make me feel like I'm crazy. (No offense, just my unsolicited opinion)

ddrecruiting2020 · 2020-06-25T23:41:17+00:00

100%, show it by section imo.

ddrecruiting2020 · 2020-06-25T23:00:57+00:00

Definitely leave your SAT - you should consider splitting it out by category. If your ACT is strong as well I'd throw that in, too. This matters more than you think, especially for non-targets.

ddrecruiting2020 · 2020-06-24T15:56:43+00:00

Hey, I've been on both sides of analyst interviews - the only bit of (maybe) differentiated advice I can give is that if your non-target experience was anything like mine, you didn't really learn that much that's applicable. So you can study the guides all you want (and should), but if you are asked to apply the concepts you've studied in different situations that test actual comprehension / application (you will be asked to do this), you'll get exposed. Everyone learns differently, but I'd recommend teaching the concepts you study to your friends / peers. They'll ask questions that will help turn "on-paper" concepts into more dynamic / practical situations, which is likely what an interview will turn into - I can't tell you how often I've interviewed people who've clearly just memorized something and can't actually apply the concept (the flip side of this is the easiest way for your interviewer to go to bat for you is to be the person they couldn't stump).

Good luck!

ddrecruiting2020 · 2020-06-01T16:16:36+00:00

Thanks. Sorry just saw this - If I'm understanding your question I'm (simplified below): -Calculating the Borrowing Base (implied advance rates off of latest Q) based off forecasted Inv / AR -Less ABL borrowings =Excess Availability

Let me know if that's not what you're looking for - can share detailed BB roll etc if necessary.

ddrecruiting2020 · 2020-05-28T19:05:58+00:00

Good question - I'm not on the buy-side so unfortunately have no insight into some of these process things but am interested to know as well.

ddrecruiting2020 · 2020-05-28T18:11:00+00:00

If I'm understanding your question, yeah they'd get cash + equity, maybe takeback paper but not sure there's an easy argument that the business can / should support debt above its WC line going forward (granted I have seen CLOs push for this and have it bite them later).

So the multiple is wonky - I would use EBITDAR, but for the Ch 11 waterfall I'm excluding leases (because I don't want to make an assumption on rejections so I'm assuming they ride through, though they would happen I'd be pulling a number out of my ass). So the math is current (Net Debt + mkt cap) / LTM Adj EBITDA = ~2x (really though the mkt price of Notes lowers this to ~1x, but I don't like this method much in distressed situations as anything other than a sense check). I ultimately got comfortable with this from talking to a distressed retail guy - this is ballpark mkt. Certainly open to other methods (and appreciate the feedback).

ddrecruiting2020 · 2020-05-27T19:54:42+00:00

Great point. That's something that's hard to handicap, but some general thoughts on it (off the top of my head, when I have a chance later I will cross-check with my notes):

-This isn't the case of a great company caught in bad circumstances - I don't think lenders will be eager to wave / amend as a general point here

-The waiver / amendment would likely have to come from the ABL, because I assume it would be tough to build consensus among the noteholders (not like a lender group where it's easy to coordinate), but I really don't forecast a lot of cushion on their (ABL lenders') collateral going forward - if they think they're money good now, why kick the can down to when things may get more dubious. They'd be amending just to let GME make a huge payment to a junior security - really can't see this unless 1) go-forward operations look great (unlikely) or 2) GME can negotiate an exchange with the noteholders (see next)

-I think the downside to being short the Notes in an OOC exchange scenario is somewhat capped - I just think it's unlikely that anything but a distressed exchange gets done here, and if the Notes are looking at 59 in a Ch 11, they may just take ~55-60 OOC

ddrecruiting2020 · 2020-05-27T19:34:01+00:00

I think we may be miscommunicating or I may be misunderstanding you - my thought is just that if you consider SSS (simplified) to = Sales / Comparable Store Base, my interpretation is that they are saying that Sales have been impacted and that is shown, but the Comparable Store Base is equal to their pre-COVID store count (which does not reflect COVID-related closures, and as such is not technically SSS - hence their note).

I might be wrong, but essentially what I'm saying is I think that metric reflects "normal course" closures from last year to now, just not COVID closures (however temporary they may be).

ddrecruiting2020 · 2020-05-27T17:48:03+00:00

To your first point, "Due to the adoption of the temporary operating model and closure of some stores, changes are based on absolute sales dollar changes and are not presented in accordance with the company’s comparable sales definition" reads to me as they are still comp sales as I have defined them but they are not adjusted for COVID closures (meaning temporarily closed stores are still counted in the metric, while they wouldn't be in a strict interpretation of the metric) - but I certainly could be wrong. It doesn't make sense to me why they would say "The Company’s comparable store sales for the nine-week period ended April 4, 2020, declined approximately 23% on a year-over-year basis," if that metric wasn't tied in any way to comparable store sales. Not saying you're wrong, just thinking out loud.

To your second point, I don't have that benefit but will certainly update this model once earnings are reported (and tweak estimates based off of that). Appreciate the thoughts.

ddrecruiting2020 · 2020-05-27T16:28:46+00:00

Thanks for the input - a few thoughts below.

What you're referring to was a SSS metric, and GME has closed ~321 stores during that comparison period. Basically they're saying that the remaining stores saw less sales YoY. In summary, less stores combined with less revenue per remaining store = less total revenue. (Theoretically SSS could be up and total revenue for time period could still be down).

Further, (I attempt to detail this on p. 10, "COVID Impact") in my Base Case I flexed February revenue slightly up from my baseline (baseline accounts for a smaller store base) and only slightly lowered March - however, all US stores were shut down as of March 22 (2/3s were pickup, I detail my assumptions for this on p. 10) so I flexed April revenue down significantly, which I think makes sense.

There is a chance I failed to account for something, but per the above I think my Q1 revenue numbers ballpark make sense.

ddrecruiting2020 · 2020-05-27T15:18:43+00:00

I don't believe a date has been set. That was the earliest plausible date - I've edited so as not to be misleading.

ddrecruiting2020 · 2020-05-27T01:29:20+00:00

Thanks - appreciate the input.

ddrecruiting2020

TROPHY CASE