MBH The Long-Term Game

Primarily this question comes down to the investors that MBH is looking to attract. Around 70% of our stock is owned by the business owners within the group. Their timeframes for ownership are long term. Similarly the investors we are looking to attract are not looking to trade in and out of the stock based on forecasts and the early release of numbers, they are looking to hold as we grow. To hold for the long term.

So what is the long term plan for MBH? Is there an exit strategy? It is one of the most common questions I’m asked.

I understand where this question comes from. Driven by the Silicon Valley approach to business, so admired the world over, the aim is to raise money, ‘land grab’ as fast as possible and then sell to the highest bidder so that founders and investors can get their much needed liquidity to escape.

Having an exit strategy is not how or why most traditional businesses start, and I say with a high level of confidence, it is certainly not how most of the companies we acquire were started.

I’m pretty sure that all of them started their businesses with the simple idea of ‘how do I solve a problem for my clients?’ Growth in their business was achieved by asking ‘how do I solve more problems?’ Or ‘how do I serve more clients?’. Of course some of them might have had a vague idea that they might leave the business to the kids one day, or be acquired by a bigger player in the industry once the time for retirement came close. But no business in our group was ever built for exit.

Indeed it was that first question ‘How do I solve a problem for small businesses?’ which gave birth to the agglomeration model and it is those second and third questions (solve more problems, serve more clients) that determines our strategy along the way.

MBH exists to level the playing field for small business owners as they compete against big corporates. By joining us they can win bigger contracts, they can collaborate with others in the group and they have the liquidity of stock allowing them to diversify their personal wealth and sell down some of the value they have created whilst still keeping control of their business.

Every company that joins the group is acquired in an earnings per share (EPS) accretive manner. Enhancing the value of all the shares in the group. Each business also brings to the group a wealth of expertise, contacts and opportunities to share with the other companies in the group.  

As Directors of this group, we are temporary custodians of ensuring that we can continue to attract new companies to the group and are facilitating their ability to perform better inside the group than outside.

• Accretive acquisitions
• Organic growth 
• Synergies

To that end, as long as we can continue to offer small businesses a healthier alternative to going it alone and as long as we can do so in a way that does not damage the value of the shares or the other companies in our group, it is our responsibility to keep adding and keep growing. There is no ‘exit’ when your plan is to keep growing and keep serving your base.

- attributed to Mark Twain 

(and pretty much everyone else!)

My prediction is that MBH will grow into the largest listed portfolio of profitable small businesses in the world. My hope is that it is a multi-generational business able to grow and expand for a century or more. My fear is that greed, coupled with debt, will be the possible demise of MBH unless all shareholders are willing to hold the Board to the original ideals of serving small business owners and focusing on the long term.

Allow me to expand:

I don’t think this is too big a stretch. Certainly there are many companies out there, either industry focused or conglomerates that are far ahead of us at this point, but we are fishing in a very big pond and by not using cash for acquisitions (we use our stock or our own issued bonds) we will not be restrained as the inevitable cycles of availability or cost of cash rotate.

Many companies joining us are doing so specifically because they wish to grow by acquisition. They come with a shopping list born of their decades of experience in the industry of which companies they want to bring into the group with them.

Other companies, often bigger independents, will join us only as we get bigger. When to do so would not be a case of the tail wagging the dog, but can give them the liquidity and scale they crave now but without the price of going public or losing the privacy and autonomy they enjoy now.

Big companies move the needle, but if 100 companies in the group each acquired one tactical acquisition underneath them each year, then there is plenty of scope to catch up and overtake some of those existing conglomerates who started decades before us.

By offering companies liquidity, access to funds, prestige and other services they do not have as private companies these exchanges fortunes are not tied to any one business but by their ability to keep attracting new ones.

Similar to a stock market, by relentlessly focusing on adding value to small businesses (often too small to be serviced by stock markets directly) MBH can continue to grow and return value to all investors regardless of the individual fate of its companies or even entire industry segments. In effect MBH becomes a micro-market for small businesses and its share price the index.

Many of the business that join us are decades old, my hope and our responsibility is to provide an environment where they can thrive for decades more.

There is one big distinction between MBH and the markets it sits on. MBH has no stake in the markets we trade on. We have no stake in our peers that are also trading, in fact if anything we are competing with the other market clients for the attention of investors. Conversely the companies in MBH group are heavily vested in the success of the whole. They own a stake and it is very much in their interests to support the other companies in the group. An army of small businesses collaborating together, supporting each other, towards a common goal of growing their own business and by doing so growing the group is a formidable force.

Studying successful businesses is fun, although rarely in my opinion is sufficient credit given to the effects of luck. The right time, right place events that lead to the pivotal moments that caused the business to soar and soar again. More instructive I feel is to study businesses that fail. What is it that caused them to fail? If we can avoid that failure ourselves can we avoid failure? And is avoiding failure the same as success? What is more successful, the new app that impacts a billion people in less than 3 years but flames out, is forgotten and shutdown in 5? Or the winery in France that has been trading for over 1,000 years? The paper distributor in Japan still going strong after 1,200 years? It boggles the mind how many jobs, paychecks and happy customers those businesses must have had in that time. But possibly not as many as today’s tech companies?

Of course there is no right answer, it depends on your goals, but if our goal is to help level the playing field for small businesses and our time frames are multi-generational then we owe it both to our existing companies and future ones to ensure that we avoid many of the more obvious mistakes that companies who have come and gone have made.

There is of course a myriad of reasons why companies fail but without question ‘debt’ is the scourge that claims the most lives. At a certain point in our future someone on the Board will make the decision that taking on external debt will allow us to grow faster. Why give away valuable to stock to joining Principals when we can issue cheap cash up front and close the deals much quicker? They will no doubt be right. But growing faster often comes at the expense of growing forever. Does MBH need to grow faster?  

In the mid 1980’s debt in Japan was very cheap. Consequently many companies took on debt in order to expand. With everyone else doing the same it would have been silly not to. One such company was Kongu Gumi. Money was cheap, their competitors were all borrowing heavily and so it was the obvious decision to make. When the bubble eventually burst in the early 90’s and prices collapsed, many companies were left holding nothing but debt. However unlike many of its competitors Kongu Gumi was able to hold on. Just. In fact it limped along until 2006 when eventually the crushing weight of interest payments on its debt finally tipped them over the edge into insolvency.

Nothing too remarkable there until you learn that Kongu Gumi had started in 578 AD. Kongu Gumi had been building temples in Osaka and Kyoto areas for 14 centuries. How many challenges, governments, wars, and other adversities had they managed to weather in those 1,400 years? Only to succumb to a decision that had favoured the short term ahead of the long term.

Capital markets are impatient. That is not something I am expecting to change any time soon and that means that there will always be immense pressure on the Board of public companies to play to other peoples timelines. It is why so many Directors freely admit to sacrificing the long term benefit of the companies they represent for the short term pressures of quarterly earnings. It is not wrong to not play those games, but it takes a confidence on the Board to push back and explain, repeatedly, ad nauseum, that we have a long term focus, that we don’t feel the need to pander to speculators and day traders. It is why so much time is invested in finding the right investors rather than finding any investors and it is why we are announcing our ‘Financial Announcements Policy’ and are backing it up with this longer explanation.  

At a certain point in our future someone on the Board will make the decision that issuing forecasts could help our share price. Or taking on external debt will allow us to grow faster. No doubt they will have read this document and deemed it a relic of a bygone age. But if we have enough shareholders that understand the commitment to the long term and are willing to vote against the short term to protect the long term, then perhaps MBH can join the ranks of the ever diminishing multi-generational businesses.  

I believe we owe it to every company and every investor to try.