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There’s a whole world of folks who do this, with acquisitions and sophistication ranging from really small businesses[0] to ones in the range the article discus

There’s a whole world of folks who do this, with acquisitions and sophistication ranging from really small businesses[0] to ones in the range the article discusses[1]. It does seem like a numbers game where it makes sense to pool the risk. [0]: https://www.amazon.com/Buy-Then-Build-Acquisition-Entrepreneurs-ebook/dp/B07JKM2F5Q https://www.amazon.com/Buy-Then-Build-Acquisition-Entreprene... [0]: https://www.amazon.com/gp/aw/d/B01KP33K4Y https://www.amazon.com/gp/aw/d/B01KP33K4Y

deleted 3y ago
[deleted]
jeremyjh 3y ago
They aren't buying them for the business upside, but to force the business to buy its own ecosystem of Fintech products.
- notahacker 3y ago
  Doesn't make any sense to do that without a financial upside as well, as the businesses are unlikely to spend more their entire valuation on fintech products (and 84 mom and pop shops owned by the VC signing up isn't much of an illusion of growth to boost the fintech companies' valuation either)
  - ralferoo 3y ago
    The financial upside is that they also own 85% of the company shares, so get 85% of the profits, reducing to 20% over 20 years by selling shares back to the employees. Selling here implies they'll also make profit from that too.
    - sangnoir 3y ago
      Employees who'll likely withstand lower than market rate wages and/or poor conditions because of sunk-cost fallacy. Sucking up profits from both the captive businesses using software licensing, revenue, and employees (as they buy shares from the startup) is well-thought-out evil genius, OR a path towards fully automated luxury worker-led communism, but I'm guessing it's the former in the guise of the latter.
      - deleted 3y ago
        [deleted]
    - smeej 3y ago
      The article said diluting, not selling, so I don't think it does apply here that they'll profit from that process.
      - robotresearcher 3y ago
        The fine article says: "we sell our stock back over time to the companies until it becomes 80% employee owned"
        jeremyjh 3y ago
        That’s how it looks on the books but it has to be part of compensation - it’s booked that way in the GL with the company paying for the shares as incentive out of earnings. Employees in these kinds of business just aren’t going to be buying stock in the company they work for.
        robotresearcher 3y ago
        Right, but as the small company is on the hook to buy the shares from the parent company, before passing them to the employees as comp, the parent company gets cash for their stake.
  - foobiekr 3y ago
    Juicing growth for a pump and dump scheme probably.
  - pdonis 3y ago
    > the businesses are unlikely to spend more their entire valuation on fintech products If the fintech company has a controlling interest in the business (more than 50% of the share ownership), what's to stop them?
- wombat-man 3y ago
  "force" sounds so dark. Small businesses use all kinds of solutions to run themselves. They want to end up with a product that they can pitch to external businesses, it's more like they are using these acquired businesses as market research and testing.
- monkeydust 3y ago
  Are they forced? You would imagine contractual in someway they might be but should the owners be able to tender out and shop around ?
- shostack 3y ago
  That's one helluva customer acquisition model.
version_five 3y ago
I don't have a link handy but I know this is big for the veterinary and dentistry industries. Companies are buying up all the clinics.
- htrp 3y ago
  thats usually PE backed
- pxue 3y ago
  called consolidators I believe. It's pretty genius. Entire model is about buying dental practices with cash, profit share with the dentists and then do all back-office work with economy of scale. Pocket any efficiency gains and reinvest in more dentists, rinse and repeat. I think this model might be a huge opportunity in Mexico.
  - klipt 3y ago
    Bad for the patients though because "efficiency gains" usually translates to "give patients expensive treatment they don't actually need"
    - edmundsauto 3y ago
      Less bad if you add some nuance. Some dental procedures are “you might not need this right now” or cosmetic. There are bad incentives that can be at play for sure - but procedures aren’t a clear line of “necessary”/“not necessary”.
      - mdorazio 3y ago
        Many of them are, though. I suggest you read this article: https://www.rd.com/article/how-honest-are-dentists/ https://www.rd.com/article/how-honest-are-dentists/
        mh- 3y ago
        Thanks for sharing that. Good read. Everyone who reads it should know upfront though, that the article was published in 1997. I didn't notice until the end. So multiply all of those prices by >2.5x to account for the inflation of costs.
aaronax 3y ago
Safe Harbor I think buys marinas as owners age out of them. A marina tends to start out small and grow over time under a single owner, until they are successful yet unattractive for any one other individual to plunk down $x million. So they get bought up by the big org and it gets harder to find reasonably priced mom and pop marinas.

deleted 3y ago

[deleted]

jeremyjh 3y ago

They aren't buying them for the business upside, but to force the business to buy its own ecosystem of Fintech products.

notahacker 3y ago
Doesn't make any sense to do that without a financial upside as well, as the businesses are unlikely to spend more their entire valuation on fintech products (and 84 mom and pop shops owned by the VC signing up isn't much of an illusion of growth to boost the fintech companies' valuation either)
- ralferoo 3y ago
  The financial upside is that they also own 85% of the company shares, so get 85% of the profits, reducing to 20% over 20 years by selling shares back to the employees. Selling here implies they'll also make profit from that too.
  - sangnoir 3y ago
    Employees who'll likely withstand lower than market rate wages and/or poor conditions because of sunk-cost fallacy. Sucking up profits from both the captive businesses using software licensing, revenue, and employees (as they buy shares from the startup) is well-thought-out evil genius, OR a path towards fully automated luxury worker-led communism, but I'm guessing it's the former in the guise of the latter.
    - deleted 3y ago
      [deleted]
  - smeej 3y ago
    The article said diluting, not selling, so I don't think it does apply here that they'll profit from that process.
    - robotresearcher 3y ago
      The fine article says: "we sell our stock back over time to the companies until it becomes 80% employee owned"
      - jeremyjh 3y ago
        That’s how it looks on the books but it has to be part of compensation - it’s booked that way in the GL with the company paying for the shares as incentive out of earnings. Employees in these kinds of business just aren’t going to be buying stock in the company they work for.
        robotresearcher 3y ago
        Right, but as the small company is on the hook to buy the shares from the parent company, before passing them to the employees as comp, the parent company gets cash for their stake.
- foobiekr 3y ago
  Juicing growth for a pump and dump scheme probably.
- pdonis 3y ago
  > the businesses are unlikely to spend more their entire valuation on fintech products If the fintech company has a controlling interest in the business (more than 50% of the share ownership), what's to stop them?
wombat-man 3y ago
"force" sounds so dark. Small businesses use all kinds of solutions to run themselves. They want to end up with a product that they can pitch to external businesses, it's more like they are using these acquired businesses as market research and testing.
monkeydust 3y ago
Are they forced? You would imagine contractual in someway they might be but should the owners be able to tender out and shop around ?
shostack 3y ago
That's one helluva customer acquisition model.

version_five 3y ago

I don't have a link handy but I know this is big for the veterinary and dentistry industries. Companies are buying up all the clinics.

htrp 3y ago
thats usually PE backed
pxue 3y ago
called consolidators I believe. It's pretty genius. Entire model is about buying dental practices with cash, profit share with the dentists and then do all back-office work with economy of scale. Pocket any efficiency gains and reinvest in more dentists, rinse and repeat. I think this model might be a huge opportunity in Mexico.
- klipt 3y ago
  Bad for the patients though because "efficiency gains" usually translates to "give patients expensive treatment they don't actually need"
  - edmundsauto 3y ago
    Less bad if you add some nuance. Some dental procedures are “you might not need this right now” or cosmetic. There are bad incentives that can be at play for sure - but procedures aren’t a clear line of “necessary”/“not necessary”.
    - mdorazio 3y ago
      Many of them are, though. I suggest you read this article: https://www.rd.com/article/how-honest-are-dentists/ https://www.rd.com/article/how-honest-are-dentists/
      - mh- 3y ago
        Thanks for sharing that. Good read. Everyone who reads it should know upfront though, that the article was published in 1997. I didn't notice until the end. So multiply all of those prices by >2.5x to account for the inflation of costs.

aaronax 3y ago

Safe Harbor I think buys marinas as owners age out of them. A marina tends to start out small and grow over time under a single owner, until they are successful yet unattractive for any one other individual to plunk down $x million. So they get bought up by the big org and it gets harder to find reasonably priced mom and pop marinas.