Investing for Generations: The Strategic Criteria Behind Our Buy Box
When it comes to selecting businesses to acquire, we must be extremely picky. Our criteria ensures we're picking the right opportunities.
Reviewing several hundred deals, we've refined our criteria to align with the greater Township thesis. At our current stage, the following criteria ensure we spend time on the highest-priority opportunities.
No single business will have ALL of the criteria, so we accept that there will be trade-offs.
Initial Search Review
The initial search criteria are our "sniff test" for businesses we find via listings, brokers, or direct outreach. The following criteria deliberately limit the scope of our search so that we can prioritize our efforts on the best opportunities.
Financial Criteria
The business needs to be financially stable. There's no need for any compromise here.
| Element | Target | Reason |
|---|---|---|
| Profitable | Min. last 5 years | We’re not looking for a fixer-upper |
| EBITDA | Min. $1M | Gives us room to make change, add talent, and buy Bitcoin |
| Operating Margin | ~20% | Indicates healthy returns on operational activities. |
Company Criteria
These are our non-negotiables. If the business doesn't cross all of these, we pretty much automatically pass. Each criteria simply identifies a key risk we want to avoid.
| Element | Threshold | Reason |
|---|---|---|
| Geography | HQ’d in Texas | We’re in Texas, so this gives us geographic leverage to meet owners and find talent. This also gives protection as the Texas economy is more robust than other states |
| Business Model | Low complexity/Few moving parts | Low complexity helps focus our efforts and reduces risk through stability. This also can indicate specialization in the target business. |
| Business Model | Intuitively Scalable | Scaling should be intuitive and ideally non-linear. Combined with lower complexity, this enables growth through quality. |
| Industry | Generational: Stable or Growing | The Industry should be established, stable or growing. Declining or consolidating industries require more accuracy to get right. |
| Team | Talent available | Access to internal and broader talent should be identifiable and attainable. |
| Leadership | Willing to stay on at least 3 to 5 years | This de-risks the deal and ensures continuity of operations from day 1. |
Township Criteria
These criteria combine our team's unique perspective with our shared desires. These criteria come from a more intuitive place for us.
| Element | Threshold | Reason |
|---|---|---|
| Downside Risk | Should be intuitive | The key risks in the business should be identifiable and mitigable. We have no desire to take on unnecessary risk. |
| Upside Potential | Imaginable & interesting | The business should inspire a vision that fits the Township Thesis. Otherwise, it’s not worth getting out of bed to solve problems. |
| Reactiveness | Responsive to change | If we push on the business, do we think it’ll move like molasses or like water? This sets expectations on results. |
| Business Model | Productive to a fulfilling society | e.g. We’re not interested in strip clubs & prisons at this time. They do not align with our values |
Additional Questions:
- In what ways does this business excite you?
- What tailwinds are you aware of that would help this business?
- What risks should we be looking out for going into business details review?
Not all of this criteria is immediately knowable, but we can at least do a "gut-check" if the business is worth evaluating further.
Business Details Review
The business details come from talking with the owners, the broker, the seller, or the Confidential Information Memorandum (CIM). As we learn more details about the business we look for more specific criteria and our qualification thresholds take a step upward.
Some of the criteria overlap with the Initial Search Review. A little redundancy is okay to reminding us what's important.
Financial Criteria
The business needs to be financially stable. There is no compromise here. These numbers may not be exact, but we're looking for consistency.
| Element | Target | Reason / Explanation |
|---|---|---|
| Profitable | Min. last 5 years | We’re not looking for a fixer upper |
| EBITDA YoY | Not down | Ensure stability of the cash flows |
| Net Operating Margins | ~20% | Indicates healthy returns on operational activities |
| Net Margins | ~15% | Gives the business room to make mistakes and reinvest in the team & customers |
Owner / Leadership Criteria
The quality of the Owner and Leadership team matters. We intend to spend a significant amount of time with the leadership team, so we want to make it worth our time. Also, any issues here may signal issues with the team.
| Element | Target | Reason / Explanation |
|---|---|---|
| Background | Industry focused | The owner/leadership team should demonstrate the skills and knowledge to run the company. |
| Tenure | At least 5 years | The owner/leadership team should have been with the company for at least 5 years. They must have a thorough understanding of all facets of the business. |
| Compensation | Fair | Outsized money from the business for the owner reduces our ability to incentivize the owner. |
| Stature | That of a CEO | Needs to think like a professional CEO and know their role in the organization. |
| Skills | Curious & sales oriented | Curiosity indicates a willingness to learn. The CEO is largely a sales job of ideas, the customers, the team, etc. If the CEO isn’t sales-oriented, it’ll be challenging to grow the business. |
Product Criteria
Great products sell better, have higher customer retention, and get more referrals from customers. Good products also tend to come from good teams.
| Element | Target | Reason / Explanation |
|---|---|---|
| Product / Market Fit | Should be apparent | This ensures that operations will continue to serve the right customers |
| Product Quality | More premium in the market | Premium typically means better margins and indicates the executive team’s thinking. |
| Product Offering | Understandable with clear demand | The product or service should not be confusing, and there should be clear demand. This simplifies finding customers & talent to support the business. |
| Product Offering | Technical / hard in nature | A product or service that is difficult to produce means more room for creativity, quality enhancements, quality talent, and more ways to retain talent long term. |
| Product Offering | Clear areas of improvement | We should be able to imagine possible ways to improve the product or service from our experience. |
Team Criteria
People are the hardest variable to get right in a business. Mistakes are extremely costly, but success compounds. This criteria highlights a higher quality team.
| Element | Target | Reason / Explanation |
|---|---|---|
| Management | Willing to engage post transaction | If they’re not, operational and deal closing risks go up substantially. |
| Management | Skilled in their own domains | We won’t know their business, so the owner needs to give a strong vote of confidence. |
| Management | Not all retired or about to retire | Need people that can implement change or handle changes |
| Team Tenure | Team has minimal turnover over time. | High turnover indicates low team alignment and bad leadership. Low turnover means we can rely on the team and make changes more easily. |
| Compensation | Fair | Salaries that are too high or low create issues for employees if we need to lower them or for financials if we need to increase them. |
Industry Criteria
The industry in which the business operates is like seas the company sails in. It can be choppy with lots of headwinds, or smooth with lots of tailwinds. We ideally want the latter.
| Element | Target | Reason / Explanation |
|---|---|---|
| Competition | Fragmented | High fragmentation tends to mean many players operating in tighter verticals in a large market with many customers. This gives room for growth, consolidation, and creativity. |
| Growth | Not down | Should be stable or growing. |
| Vendors | Fragmented | See “Competition”. Fragmentation tends to reduce vendor lock-in risk. |
| Total Addressable Market (TAM) | At least several billion USD | This indicates how “large” the vision could be and the scale of games that can be played. |
| Market saturation | Wet to saturated | Wet to saturated means there are lots of customers & lots of competition. We like competition as that drives innovation. |
| Competitive Advantages | Creativity & quality should be rewarded | We want to ensure the industry will reward quality and creativity. For example, mass-manufactured consumables don’t tend to gravitate toward high quality or creativity. See “Responsiveness” |
Additional Questions:
- Would you be willing to part with your bitcoin?
- Do we have a compelling offer that aligns with the owners wants?
- Do we have a high degree of confidence we could own this business for generations?
- Does this fit into the current or long term strategic positioning?
Closing Thoughts
All of this criteria is just our first pass. We want answers at least each of these criteria. Each business will have more criteria based on the business itself, but the criteria outlined above ensures we're evaluating the right opportunities.
We fully expect to own these businesses for several generations. It is a lot like marriage. As such, we do not take the decision lightly and are happy to spend the extra time and energy to find the best opportunity.
Township Ventures is a long term holding company that buys and builds Texas businesses to last generations.
If you're curious to learn more about how we buy businesses or opportunities to participate, don't hesitate to reach out.
