redactedTurns out, there are some nuances Back in 2014, we heard somewhere that if you buy a company for 4x earnings, it’s a 25% implied yield and a four-year payback period. That seemed pretty good to us, so we decided to do that. Turns out, there are some nuances. First, EBITDA is not cash flow. If you, like us, buy a landscaping company as your first acquisition, you’ll realize pretty quickly that the conversion from EBITDA to cash matters. A lot. For example, if you buy a landscaping company with $1 million of earnings for $4 million, but then have to spend $2 million over the next couple of years on new vehicles and equipment because of historical underinvestment in the fleet, and you didn’t know any better because you'd never managed a fleet before and your appraisal during diligence said everything was in good working condition, then your 4x multiple doesn’t seem so attractive anymore, and you’re sad. Your 4x deal might be 6-8x cash flow, which might not be the world you want to live in. But understanding how much cash a business actually generates is only half the battle. The other half is figuring out what its earnings really are. High margins can be just that, or they can indicate an underdeveloped leadership team that needs to be built out before any growth can occur. Low margins can indicate a bad business or a wonderful opportunity for improvement. And then there are add-backs. Some are real, some are not. If you're counting on those add-backs materializing to make the deal work, you might be setting yourself up for disappointment. Next is growth rate. Volatility makes things trickier. We avoid rapidly declining businesses. Not our thing. But what about rapidly growing businesses? Should you value them based on historical earnings or give credit for future growth? Will the current fast growth persist into the future? This is highly situational and requires conviction. Of course, none of this happens in a vacuum. Our ideas around valuation don't matter much to a seller who has built a retirement plan with a specific number in mind. They also don't matter to another buyer who has a different business model and is willing to underwrite with an eye toward a near-term flip. All of this means we don't get it right every time and certainly don't win every deal we bid on. We’re OK with that. Experience has taught us that the range of outcomes in small business is wide, both to the upside and the downside. The last thing we want is to buy a company, experience a macro shock or lose a key client or employee, and have a crisis situation on our hands. While it’s nice to think about what might go right, it’s also nice to not have to rely on that. Over time, the most important thing we have learned is that you can get all of the above right and still not get the outcome you want. After all, getting a deal done only buys you opportunity. Sure, it is possible to buy a company for 4x earnings and generate a 25% yield and a four-year payback period. But realizing that outcome is not just a function of deal dynamics or keenly understanding pre-close underwriting nuances. The reality is that if you truly want to do this, consistently, for the long term, you also actually have to run the company. Earnings don't just magically materialize. The back-of-the-envelope math is only as good as our ability to create value for employees, customers, vendors, and community stakeholders. And for us, that is much more exciting (and rewarding) than implied yields. Yes, you can buy a company for 4x earnings. But you can't buy a 25% return. You still have to earn that part. Have a great week, Your Chenmark Team