Welcome to Upper Market

Here to give you a quick break from all the noise from “The Odyssey”

Unless of course… that your version of “Going Home” is buying a business…

Then I’m here for it.

What's ahead in this Newsletter:

YouTube Video from the Week:

There are two kinds of revenue.

The first; what you have to win each month. The work ends and straight after, your revenue is back to zero and you start hunting.

The second; what shows up whether you chase it or not. Contracted revenue or revenue spurred by known problems a market has.

Think: Treadmill vs Foundational

When you buy a business, you're really buying next year's revenue. So the question that matters isn't "how much did it make?" - it's "how much of that comes back on its own?" or “how much of this do I need to keep generating?“

Recurring and repeat revenue is worth a premium for a reason. It's predictable, so you can plan and borrow against it. It's defensible, because a customer who's stayed for years won't leave over a small price difference. And it compounds - you start each year further up the hill instead of at the bottom.

Contrast a plumbing business that lives on recurring maintenance contracts with commercial buildings with a builder who needs to keep winning projects. Same trade family, completely different risk. The maintenance firm knows roughly what next month looks like and how to plan ahead. The builder is one lost tender from not being able to eat.

But repeat revenue isn't all equal, so look closer. Is it contracted, or just habit? A signed maintenance agreement is stronger than "people just keep booking”. How long do customers actually stay, and how many did the business lose last year? And is it concentrated - is the "recurring" revenue really one big client who could leave - or spread across hundreds who won't all leave at once?

Don't ask what the business earned. Ask how much of it comes back next month without a fight.

That’s not to say all recurring revenue must be contracted. That’s not normally realistic for smaller businesses. But, market conditions can imply that revenue from consistent customers will continue. A business without contracted revenue demonstrates reliable revenue from consistent sales in the absence of having to change marketing tactics often.

Simply: if the business doesn’t need to lift a finger to generate more demand, the revenue is highly likely to be reliable. It also leads to the question - “what would demand look like if we actually tried to generate it?”.

Short Summary:

$449k of EBITDA, run by a manager, on a 3.5x Multiple. Childcare Centre’s normally come in at a 4x Multiple. Is this under valued?

This is the closest thing this week to a business that seems to run itself. Which is exactly why most of the questions are about the two things holding it up: the manager, and the regulator.

It's a South Auckland childcare centre, licensed for 70 children, that's averaged over 80% occupancy for two years and earns $449k of EBITDA. An ECE-qualified manager and an established teaching team run the day-to-day; the owner's input is minimal. Strong community ties, defined systems, a well-established catchment.

On the surface this is the dream: a hands-off, cash-generative asset in an essential service. But childcare is a business that lives inside a regulatory box and stands on a single manager. Both need to be tested.

What I'd Want to Understand:

First is the manager - because the whole "managed" element may stem from one person. "Minimal owner input" is only true while the ECE-qualified manager stays. So who are they, how long have they been there, what are they paid, and what stops them leaving the month after settlement? The detachment you're paying a premium might walk out the door with that one person.

With that being said, Childcare is what I like to call a “known” industry. It isn’t something novel or unique and therefore you’re more likely to be able to plug talent gaps, should you have any. You don’t have a niche skill that needs to be taught and there’s likely to be a bigger talent pool than other industries (or ability to promote internally).

Second is the regulator and the funding. ECE is licensed, ratio-controlled and heavily dependent on government funding and policy - pay parity, subsidy rates, staffing ratios. A rule change can move your costs or your revenue overnight, in either direction. I'd want to understand the current funding mix, the licence status, any compliance history, and what's coming down the policy pipe. Seeing as it’s an election year, I’m sure there’s something in the works.

Third is occupancy and the catchment. 80%+ for two years is healthy, but it's the number the whole business rests on. What's the waitlist, what's the local under-5 population doing, and how many competing centres are opening nearby? Childcare demand is demographic - I'd want to know the catchment is stable or growing.

Fourth is the premises. A centre is its location and its building. Is the property owned or leased? If leased, how long is the term and what does the rent do? A licensed-for-70 centre you could lose in a few years - or whose rent jumps - is a very different asset than the earnings suggest.

Growth Angle: The obvious levers: lift occupancy from 80% toward capacity (each extra child is high-margin) and optimise the funding and fee mix. It's already systemised and managed, so upside is about filling the last 20% and running it tighter - not reinventing it. A buyer with other centres could also fold this into a group and share overhead, or this could be a cornerstone acquisition for someone looking to bolt-on another centre or two in the future.

The Drawbacks: The detachment rests on one manager, and the economics rest on government policy - two dependencies you don't fully control and are not for the faint of heart. It's labour-intensive in a sector which requires more hires to continue to scale. At 3.5x you're paying a full price for the hands-off quality.

Final Thought: A genuinely manager-run, 80%-full childcare centre is a rare hands-off asset, and it deserves the multiple - if the two things holding it up hold. Lock in the manager, get across the lease, explore the future of funding and policy changes, and confirm the catchment, and you're buying an asset.

If you want more details on any of these businesses or would like an introduction to the sellers, just reply to this email.

SDE of $1.83m. Asking $4.8m. Around 2.6x - and the biggest earner on the board this week.

It's a 20-year-old Auckland manufacturer of cabins and small homes, and it's riding a genuine tailwind: the rule change that lets small homes go up without consent. This seems like a legitimate claim.

The business builds cabins and small homes for residential and commercial customers, has traded for two decades, and comes with 20 skilled staff and $2.2m+ of plant, equipment, work-in-progress and stock included in the price. The owners are retiring. There's $1.4m of forward bookings already secured for the rest of 2026, and the seller points to the regulatory shift as a real demand driver.

Diversified customers, a booked pipeline, a policy tailwind and a proper asset base. It's the most substantial business of the three. Two numbers to interrogate before the multiple: the SDE, and the assets.

What I'd Want to Understand:

First is what's inside the SDE. $1.83m of seller's discretionary earnings includes the owners' pay and whatever else runs through the business. The owners are retiring, and you've got 20 staff - so how much of that $1.83m survives once you're paying a full team and a manager to replace two departing owners? That's the number the 2.6x should really be measured against.

Second is how much you're paying for the earnings versus the gear. $2.2m+ of the $4.8m is plant, equipment, WIP and stock. Back that out and you're paying roughly $2.6m for the earnings stream - which reframes the deal and changes how a bank funds it. I'd want the assets independently valued, and the WIP and stock aged: half-built cabins and slow stock aren't worth book value. Also - the cash reinvestment required to keep buying stock isn't going to show up on the profit and loss. I'd be very wary of the cash flow in this business.

Third is the regulatory tailwind - is it durable? "Small homes now unconsented" is a real driver, but policy giveth and policy taketh away. I'd want to understand exactly what changed, how permanent it is, and how much of the pipeline depends on it. A demand driver a future government can reverse is a tailwind, not a moat. Construction comes and construction goes.

Fourth is the team and the retiring owners. Two owners are leaving a 20-person manufacturing operation. Who runs the floor, who holds the customer and supplier relationships, and is there a manager in place - or are the owners the management? A manufacturer losing its leadership needs someone to step in on day one.

Growth Angle: The seller lays out the levers: offer finance to buyers, build a rental portfolio using your own product, or open a second plant. The tailwind is doing the demand work; the constraint is capacity and capital. This is a business you scale by adding production and financing options, not by hunting for customers - which is the good kind of problem. I think this could be a good fit for a big property investor.

The Drawbacks: It's asset-heavy and cyclical - construction-adjacent, exposed to interest rates and building confidence - and it leans on a regulatory change that isn't guaranteed to last. The SDE flatters what a hands-off owner would actually keep, and it's the biggest cheque of the three, needing real asset-backing to fund. This is a buy for an operator or an aligned trade player, not a passive investor.

Final Thought: A profitable, 20-year manufacturer with a booked pipeline and a policy tailwind is a real business, not a listing gimmick. The whole question is how much of that $1.83m is left once the retiring owners are replaced and the assets are stripped out of the price. Rebuild the SDE honestly and you'll know whether 2.6x is buying an asset or an optimistic headline.

If you want more details on any of these businesses or would like an introduction to the sellers, just reply to this email.