This is a No-Brainer
One of the notes back I didn’t respond to last season was from Justin, who pointed out that, while I advise people to only traffic in no-brainers and said that no-brainers are no-brainers for a reason, I had never actually defined the term. So what he wanted to know is what makes a no-brainer a no-brainer?
That turned out to be a tougher question than it sounds, and I decided my initial answer – you know one when you see one – was insufficient. So I put it on my list of things to think about, which is why it has taken me so long to respond.
Now that I have, here’s my answer (at least in the context of making long-dated private equity investments)…
First, for a no-brainer to be a no-brainer, the people and the partnership have to make sense. This is table stakes but also non-negotiable. For 27-year funds to work, we have to work with people we trust and want to spend time with.
Second, it has to be a high-quality business with good margins and fast cash conversion. As we’ve said before, if you get paid a lot and you get paid quickly, you’re probably doing something right by your customers. It might not always be fancy, but it’s useful. And useful compounds.
Third, the price has to be right. This doesn’t always mean paying a low multiple, but it does mean being in a situation where there is plausibly more upside than downside (shoutout asymmetry).
Finally, we need to see where we can be helpful. As our CEO Brent says, small businesses don’t stay small on purpose. If a business is small, something is blocking growth. It could be capacity, systems, capital, confidence, people, or any number of things. Whatever it is, if we can see the blocker clearly as well as the path to removing it, that’s good.
So a no-brainer is a situation where there are people we want to work with, running a good business, that we can be helpful to, where we all stand to earn good returns (though no one bats a thousand) even if things don’t go according to plan.
Like most things that are true, that sounds obvious when you say it out loud, but these factors rarely all line up, which is why it’s been a while since we’ve done a deal. But to do a deal, the deal has got to be worth doing. At least we think so, anyway.
Welcome to Season 7.
– Tim
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