Our thinking on the best ways to connect investors with the small business growth opportunities is best summed up in this letter to investors from one of our partners Callum Laing. If you are thinking of investing in or joining an agglomeration with Unity Group, you should read this:
To those holding stock or those thinking about it.
2018 is probably the most exciting time in history to be alive for entrepreneurs. There have never been more customers, more resources and more talented people available on the planet than there are today.
It is also a time of huge disruption. Technology and Demographics are changing the world around us at an incredible pace. For many that change is scary, for entrepreneurs that change offers huge opportunities.
Whilst the media focuses on spotty young entrepreneurs creating digital Unicorns in their bedrooms, that is not where the majority of value is being created. And yet where the value is being created is a section of the market that is mostly overlooked.
Small to Medium Enterprises make up 50% of GDP in most developed countries yet remain off limits to investors. These are business owners, men and women, with decades of experience in their industry who have already figured out ‘the client / product fit’ and their own ‘unique selling proposition’. They provide childcare to children. Build houses for families and cook meals for hungry people. They don’t rely on eyeballs, growth hacking or crypto pump and dump schemes. They sell a good service for money. And weirdly many of them make profits too, year after year!
And yet this little known and profitable section of the market known as SME has previously remained off limits to intelligent investors. Too illiquid and too risky. Many of us have been burnt investing in a friends new business with a promise of an exit in 3-5 years. Those that have actually got that result are almost as rare as the Unicorns mentioned above.
MBH Corporation PLC now provides a way to reconnect investors with the opportunity in a way that minimises risk and maximises liquidity. Allowing intelligent investors to once again support small businesses but in a way that offers the upside of ‘scale-ups’ with a more predictable and investor friendly approach.
MBH Corporation PLC is probably unlike any other investment you hold and I therefore believe it is important to clearly articulate our approach, our values and our objectives. The Board and the subsidiaries are aligned in their expectations, I believe it is important that all owners of the stock are too.
Our structure and our philosophy around growth and increasing shareholder value give us a unique and very flexible tool with which to approach the market. Our decentralised approach, allowing the entrepreneurs that built their businesses to continue to grow them in the way they see fit, allows us unparalleled flexibility to scale and to bring disparate businesses from different sectors and geographies under one holding group to provide maximum protection for all owners.
For the founders of these businesses, merely being part of a PLC levels the playing field with the big corporates they are competing against. This, in of itself, should lead to organic growth. However, we are not dependent on that as we can develop the group even faster through our steady and consistent acquisition strategy.
Our ultimate aim being to end up with many of the best small businesses across multiple sectors and geographies.
MBH will use the Agglomeration model. Since this is so integral to the business of MBH I will endeavour to explain it.
For MBH to achieve its economic objectives, it will identify and acquire good, well run, profitable and debt free small businesses.
This is probably a good time to describe what we are not. Unlike traditional models, we are neither looking to ‘strip and flip’ the businesses we acquire, nor are we interested in proving our managerial chops by buying struggling businesses and hoping we can turn them around where others have failed. Finally, we have no desire to merge all the businesses in our group into one cohesive brand with centralised command and control structure.
The businesses that join us are many years old, with a good track record of profits and typically still run by the founder who often has decades of experience in their industry. Inevitably before finding us, these founders will have talked to other buyers in the marketplace. Big competitors, Private Equity firms and the like. The reason they are still independent when they come to us is that they value their independence. They like the way they do business, they like their team and they way it works together. Their brand might not mean much outside of their country or even their niche, but it is their brand and their clients trust it. They have no interest in selling to others but will come to MBH because we allow them to scale in their own way.
Ensuring that we keep that promise to the Founders that join is the key to attracting them and the result of attracting them offers MBH the chance to arbitrage the price a small business can be acquired for and the price a big PLC typically trades at. Therefore our primary purpose of existence is to provide a platform for those excellent, cash producing businesses to thrive under the ownership of MBH.
Equally we are not actually offering these business owners an ‘exit’ and therefore do not get drawn into conversations about exit valuations. If founders want to sell their business and leave there are other options out there. We are most definitely not that solution, but we are a fantastic platform for those that want to scale.
This model may not be common, but there are others that have done similar business models with much success and indeed myself and many of the team involved have also worked on this model in the past.
An important part to the puzzle is that in almost every case we will be doing our acquisitions using stock to compensate the Founders joining us. Whilst the constant creation of shares is dilutive, each acquisition will be EPS accretive and we believe offers greater long term value creation for shareholders than using cash. As entrepreneurs ourselves we are all too aware of keeping cash on hand in case things don’t go to plan.
The entrepreneurs that join us are not looking to exit, indeed if they were they might find our initial price at which they swap their stock to be poor compensation for the value they have created thus far. Our model provides an ‘earn in’ approach where the more profit they contribute to the holding company over time, the more shares they earn. While not looking for an exit, the companies that join are ambitious. They are looking to scale and they know that they can achieve more under the umbrella of a big PLC then on their own. The continuity that we offer them, the ability to get on with the business in hand without worrying about rebranding, or merging with an unknown quantity, allows the founder and their team to keep their focus on the business they are building. This continuity offers us a competitive advantage and is one that is fundamental to our business.
Our model is ultimately then very simple. Allow good, well run businesses to swap their private shares for public shares but continue to run their business as before. As co-owners of MBH they too benefit when we bring in other companies and enjoy the value creation afforded to us in the P/E arbitrage.
As companies come in they will sit within verticals under the main holding company. There are no limits to the number of verticals we can create and the benefit that brings to existing companies.
Because of our approach, most of the Shareholders in MBH are the founders themselves and they have full visibility of their own contribution and the contribution of the other founders across the group.
Those ‘new’ investors that we are now talking to as part of going public will be owners, alongside the founders, in the holding company and whilst we might occasionally share case studies of the companies within, the focus will be the consolidated numbers of the group. This gives each founder the confidence to continue to make the right decisions about reinvesting profits where they believe the long term benefit exists to do so.
This model is not for every business out there. ‘Debt free, profitable and well run’ already rules out most. Some would choose to go the IPO route alone, still others have trouble believing in a collaborative approach to anything and a 3rd group understands the appeal but don’t yet feel they are ready to join. This is fine, just through our own network we know of several hundred companies that do fit our criteria and have expressed an interest in joining. In our experience companies have a habit of showing up, when the founder is ready.
This model allows us enormous flexibility to work with great companies regardless of sector or territory as long as it enhances shareholder value.
The values of Agglomeration TM
Can we have universal values when each company that joins has its own unique culture and values? Especially when we emphasise their own independence? We believe so and you’ll see that not only do our values make perfect sense in the context of what we are trying to achieve, they tend to attract companies, and hopefully investors, that share those values.
Trust - As entrepreneurs ourselves we trust other entrepreneurs to do what is right to continue to build value for their clients and their teams. In our belief you get better results, especially with entrepreneurs, when you give control rather than try and take control. If someone has proven they can build a debt free, profitable business and believes ours is the best platform to allow them to scale that business we owe it to them to trust that they will continue to make the right decisions. Whilst a centralised command and control strategy looks great on paper we don’t believe it offers the best solution in today’s dynamic environment.
However, trust does not mean irresponsibility. The companies joining will be fully audited with full due diligence by two outside entities. Unlike others we are not taking punts on early stage businesses, the businesses we work with are proven.
Velocity - When you trust the team you work with it allows you to move fast and make quick decisions. The only competitive advantage a small business really has over a big corporation is its ability to make quick decisions and act on them. The fear is always that it may lead to mistakes and of course it will. But then there are plenty of committees that slow things down and still make the wrong decision. When mistakes are made, as they always will be, the temptation is to start adding rules. Before long you are a bureaucracy where common sense is a diminishing value. The only effective counter to this and the only way to capitalise on moving fast is to trust your team. See Trust above.
Collaboration - We believe that the business world is evolving from an era of competition to an era of collaboration. The Agglomeration is the ultimate form of collaborative IPO for small businesses, but it is also indicative of a mindset that focuses on solutions not problems, that emphasises empathy over confrontation. We use the analogy of pulling your chair round to the other side of the table in order to see what they other person sees. How do we get to a solution together? Of course when you trust each other and are willing to collaborate, the whole business can move at a much higher velocity.
MBH offers to business owners a solution that few others can offer. A platform to scale and the autonomy to do so in the way they feel is best. But our values are an integral part of that. Firstly this model doesn’t appeal to all and so in many ways it is self-selecting, but we are genuinely drawn to honourable entrepreneurs, the kind you would be happy to take home and introduce to your mum. Through our own reputations and those that we bring in it gets easier to attract good people. It may strike others as old-fashioned but these are the people we want to work with, the ones we want owning our stock and ultimately guiding this group in the future.
If those values don’t resonate with you, there are probably better stocks out there for you to own...
How we measure success
Scale, Earnings Per Share, Organic Growth and Synergies.
MBH is designed to scale. The systems have been built specifically to allow the persistent and high velocity approach to scale through acquisition. You will notice that much of the focus in the first 2-3 years will indeed be about the scale. New countries, new verticals, and - if we do our job right - a steadily, if not rapidly, increasing EBITDA and net cash position (usual disclaimers apply).
Earnings per Share is the metric we choose to focus on. As mentioned above we would never do an acquisition into the main group that wasn’t EPS accretive in nature. Obviously we will continue to provide as much data as possible to our sophisticated investors who will choose to do their own analysis but in our opinion EPS is the most prudent measure.
Beyond scale and EPS we must talk about organic growth. MBH exists to support small businesses that want to scale. If we fail to do that then we are purely an arbitrage between private and public markets. It would still serve a valuable purpose, providing liquidity for Founders in small business and allowing investors to reconnect with this valuable part of the economy. However, if companies are not thriving in this environment we create then we are not delivering on our full potential.
From an investment standpoint it should be acknowledged upfront that scaling takes resources and it is rare for a small business to be able to scale significantly whilst increasing their free cash. Whilst we would hope to see signs of scaling pretty quickly upon joining our group, it is unlikely that this will translate into significantly more profits up to the holding company in the short term. However, due to the nature of the ‘earn in’ structure, it is unlikely to signal much of a reduction either.
Small business struggle for many reasons. Credibility, attracting talented staff, ability to retain or attract those staff, inability to go for large projects etc. etc. All of these are issues that should be mitigated when companies join us.
Synergies are rarely the panacea that people want them to be, yet as the number of companies in MBH moves into double and triple figures over the years the opportunities for companies to work together will likely prove irresistible to the Founders who join. Our job at Board level is not to foist synergies and partnerships upon the subsidiaries, but it is most definitely to facilitate the transference of ideas and opportunities between those companies in the group. Indeed many companies will join specifically because they wish to join such an entrepreneurial environment.
Our fantastically talented and able Allan Presland serves as CEO for (rather than of) those companies to act as Chief Collaborator and help facilitate those opportunities to work together, yet ultimately the final decision will come down to the individual founders. Is my team ready for this? Does it really add value to my clients? If they feel it is not right, they will be perfectly entitled to continue to run their business in the way they always have.
(Of course, we will occasionally be sure to cherry pick the best of these synergistic success stories and share them with you as though it was our plan all along!)
Organic growth then is unlikely to show up in the first quarter, it might not even show up in the first year, but if companies are not growing organically by their second year we will need to investigate how we can improve this area. MBH should serve as an incubator to growth.
The companies in MBH
In the media there is much talk that entrepreneurs should follow their ‘passion’. However, when pressed the premise doesn’t hold much water. The market has no interest in what you are passionate about, it only cares about how you can create value. It certainly helps with your persistence if you are passionate about it, but it’s not the defining metric people seem to think.
Perhaps a more useful metric for those starting out, is who are the type of people you are passionate about creating value for? Figure that out and your entrepreneurial journey will be much more enjoyable, if not much easier.
In this we most definitely eat our own dogfood. Entrepreneurs/Small business owners are our people. We understand them, we know the sleepless nights they have and why they do it.
We know how personally they take a customer complaint whilst ignoring the hundreds of positive things people say. And we know and appreciate the way they make the hard decisions with their team to build a business all can be proud of.
These are our people, they are the ones we want running our companies and they are the ones we want standing shoulder to shoulder with us as owners of MBH.
MBH is a company built by entrepreneurs for entrepreneurs. Those that join us care more deeply about the future of their business then purely the ‘price’ offered. So do we.
By definition when we take MBH public we invite in ‘the public’, yet owning MBH stock entitles you to join a particular type of shareholder. The majority of MBH shareholders are the Founders. As above, they are the people we not just want running our companies, they are the type of people we want owning our stock. They are the people we want on the Board and shepherding this venture forward long after myself and the initial team have hung up our gloves.
Entrepreneurs spend their lives creating value for others and paying themselves last. Whilst we want them to enjoy the fruits of their labour these are people who are in this game for the long haul. They believe in their business and they believe in the long term success of MBH. On the Board we will spend all day, every day, courting investors that share that view. The investors we look for are those that understand our model and the value creation the model can create.
By going public we open ourselves to speculators, but those who make short term bets are, in our opinion, missing the bigger picture and opportunity.
It takes time for investors to understand what we are doing, we want to retain them and help them benefit over the long term. Entrepreneurs are terrible at overestimating how much they can achieve in a year and underestimating what they can achieve in ten. We fear many investors share a similar curse.
We are seeking owners that understand small business, understand the principles we share and want to come along on this journey. We are not looking for those who want to be diving in and out of the stock hourly on the basis of the latest ill informed forum gossip. If placing your faith in proven entrepreneurs makes you feel uncomfortable this stock is most definitely not for you.
A piece of ownership and volatility
The nature of the MBH stock, with the majority being locked up by the Founders/Owners means that the remaining public stock can be quite volatile despite our best efforts. As entrepreneurs ourselves, we are dynamic and opportunistic. Whilst the price is high, we will certainly increase our acquisition activities, whilst it is low we are likely to buy back stock for future use.
However, like any good entrepreneurs we will focus on what we can control, not what is outside of our control. Earnings Per Share is what you will find the Board and the subsidiaries coming back to time and time again. The shareprice is a necessary distraction, and not one we will be likely to comment on in the future so I shall keep my thoughts on this succinct.
In an ideal world and a perfect market, the share price would edge up quarter on quarter in lockstep with the EPS we report and the additional profit we bring in with our acquisitions. That is of course not the world we live in and both high and low share prices can cause us some challenges. Too high and we risk our owners, taking profits off the table. Whilst I can’t blame them from doing so, the problem is they are much more likely to sell those shares to speculators. It takes a long time to find co-owners that we like, respect and who share our long term values. Replacing them, however slowly, with speculators changes the dynamic for all remaining shareholders.
Too low a shareprice is a more common concern from PLC’s and of course it makes it harder for us to do our job, but it is by no means critical to the model and may indeed prompt the Board to do a share buy back to keep things more steady and allow us to continue our growth path.
Regardless of our wants or needs the share price will fluctuate based on buyers and sellers in the marketplace.
For obvious reasons, beyond this letter, we will not be drawn to comment further and will focus instead on executing on our plan. It is no secret that the stock price and the intrinsic value of the group will often diverge. We certainly believe that over time, this will ‘come out in the wash’ and the two will converge again. If we can remain focused on creating value, the share price should reflect that in the long term.
Despite the potential volatility of limited public stock and the inherent volatility of the small business space we feel comfortable we can be rather predictable in our growth through acquisition. But even with that, we are no ‘traditional’ PLC and want investors that are able to weather the bumps in the road in order to enjoy journey.
The business has solid foundations. Debt free, profitable companies across multiple sectors and territories. We will continue to add to that, creating a powerful business built for the long term growth and success of the subsidiaries within.
The Future and Human Nature.
When discussing this model we are often asked what is the target number of businesses. What does it look like in the future?
Certainly the Board is committed to fast and manageable growth over the next 2-3 years We believe that is the best, and ultimately safest, approach for all involved. When the number of subsidiaries in the group hits certain internal targets on scale we may, in consultation with the Founders, look at changing the nature of the businesses we bring in or exploring other options, perhaps to spin off one of the Verticals in it’s own IPO. Because we are only working with debt free and profitable companies and they maintain their independence, there is no point when whenwe could not put acquisitions on hold and ‘coast’ for a while if that is deemed to be in the best interests of all.
However, what we must be cognizant of is the human nature to slow things down not as strategy, but as reaction. When working with small businesses there will be challenges. Despite our best efforts a company that joins the group may struggle, that struggle could take many forms, losing clients, or money, a media snafu. It is tempting when faced with such struggles to put a hold on the current strategy and deal with the issue at hand. Yet the entrepreneurs we work with are successful precisely because their ability to not get drawn into every problem that goes wrong but instead focus on the value creation and delivering on the strategy.
On the Board it is our responsibility to not give in to the ‘noise’ but to keep pressing forward with this unique opportunity to support small business and deliver incredible returns to our co-owners. It is also our responsibility to fight against the market that is more familiar and comfortable with a model where companies are merged, systems are centralised and a mass re-branding sounds like a good idea.
We will resist that, despite the pressure, because we believe that we can attract much better businesses into the group by offering them the full autonomy to keep delivering value in the way they currently do.
Finally I want to leave you with an idea that probably will tell you more about our values and ethos than the rest of this letter or prospectus put together. Each one of our founders and all our pre-IPO partners/investors are invited to contribute 1% of their stock to go towards worthy causes.
Each vertical picks causes that are particular to them. In the Childcare vertical it is building schools in developing countries, in Property it’s building Homes. This idea came from the Founders themselves and whilst its completely voluntary it is always one of the ideas that often gets the most excitement from the companies that join.
The growth and success of MBH thus takes on a much bigger role. Yes, we believe that as the companies in the group grows they will serve more clients, create more jobs and thus support their communities. But we are also big believers that it is entrepreneurs who are the ultimate change makers in society. They are the ones that are shaking up philanthropy, that are changing the nature of charity and solving the biggest problems that face the world today.
MBH wants to play it’s own small part in that and we invite you along too.
Benefits of Agglomeration™