Welcome to Upper Market

Happy Sunday.

It’s been a great week (ETA Conference in Queenstown, Family Lunch in Auckland and Chris Williamson tonight in Takapuna).

Less great is the situation in Iran - and consequentially, the squeeze on margins via fuel prices.

While the world figures out where this lands…

What’s ahead in this Newsletter:

[Short read. Summary at the bottom.]

For the next few weeks, we’ll be addressing each of the constraints that take place in the process of buying a business.

We’ll start at the top of the funnel: Deal Flow.

Filling the table with plenty of opportunities insures you against one of the worst positions you can operate from in deal-making:

Scarcity.

Scarcity of opportunity is what pushes people into poor decisions.

When you have fewer options in front of you, mediocre opportunities begin to look like the right decision.

When you have great options in front of you, you select accordingly.

Part of my edge in finding opportunities at will has always been simple:

I stay close to the market.

On the drive from my parents’ place to mine, I can point out multiple companies that were listed for sale over the last six years and roughly recall when they were brought to market.

That didn’t come from anything sophisticated.

It came from looking at business marketplaces every day.

This builds your first channel: the Broker Channel.

Businesses hit this channel for a few reasons.

Primarily, they are not obvious acquisition targets. This is either due to industry, size, or structure, and the right buyer isn’t immediately clear. They require broad exposure to people actively looking to buy a business.

Within this channel, you will find opportunities worth buying.

But more importantly, it reduces the time it takes to get in front of deals, conduct base-level due diligence, and begin understanding what you like and don’t like.

I call this process “getting your eye in.”

Growing up playing basketball, we would take shots ahead of the game in a shootaround. This got us familiar with the court, the ball, and the rhythm, allowing us to step into the game already in flow.

The broker channel serves the same purpose.

As you search, you’ll begin to notice patterns. Certain industries will become more obvious to you, and you’ll start building a stronger case for why you want to acquire a specific type of business.

This is the foundation of your Thesis (which we’ll cover next).

More importantly, it gives you a clear subset of businesses to approach directly.

This leads to your second channel: the Proprietary Channel.

Off-market, if you will.

Building conviction in an industry should give you the confidence to approach business owners directly.

“But how?”

Simple. Pick up the phone.

Everyone has a way they’re most comfortable communicating. For me, it’s always been calling. What typically gets in the way isn’t the medium, it’s not knowing what to say.

Here’s what I use:

“Hey, my name’s Brandon. We haven’t met, but I saw you own [business name]. I appreciate this is out of the blue, but I wanted to ask - is your business for sale?”

You’d be surprised how well this is received.

On the other end of these conversations are the deals you add to your pipeline: targeted, off-market opportunities that align with what you’re looking for.

The goal is to stay in touch and gradually warm these into real opportunities over time.

You want to be the first person they think of when the time comes to sell.

The lead time on these can be long.

I have opportunities I’ve followed up on for 2–3 years that will become worthwhile in the future.

The final channel is your Advisor / Referral Channel.

This unlocks once you become known as a buyer.

When people know you’re active and transacting in a particular space, they’ll bring opportunities to you.

This comes from building your ecosystem (more on this in Speed Running Capitalism), but for now, the first two channels are where all dealmakers should start.

Where people trip up

Two common mistakes:

In both cases, you must never stop prospecting.

It kills your pipeline and creates the illusion of progress when there is none.

Short Summary:

Fresh produce looks simple.

It’s not.

Anyone can sell fruit and vegetables. Very few build something people consistently choose to go to.

This business has been operating for over 20 years. In food retail, that tells you most of what you need to know. Customers come back, suppliers stick around, and the operation works.

The numbers are strong for this type of business.

Food retail is typically low margin with a lot of moving parts. When something is doing close to $4m in revenue and still producing solid profit, it usually means the operator has control over:

This combination is hard to get right. This tells me that the systems here work.

This is not a commodity produce store.

It sits at the premium end. The focus is on quality, presentation and sourcing rather than competing on price.

This ultimately changes the economics.

Customers are less price sensitive and more consistent. That leads to better margins and more predictable revenue.

There’s also a repeat behaviour element here.

A database of this size in a business like this suggests regular, returning customers. Food is already a frequent purchase. If customers prefer one store over others, that turns into steady weekly revenue.

Supplier relationships matter more than most people think in this category.

If you’ve been operating for this long, you’ve likely built strong connections with growers and distributors. That shows up in product quality and consistency, and sometimes pricing.

That’s not easy for a new entrant to replicate.

What I’d Want to Understand

First is location dependency.

Is this business performing because of where it is, or because of what it is?

That determines whether it can be replicated.

Second is waste control.

Margins in fresh food are heavily influenced by how well stock is managed. Ordering, turnover and shrinkage all feed directly into profit.

Third is staffing.

Retail at this scale can become staff-heavy. I’d want to understand how lean the operation is and how dependent it is on specific people.

If we need to hire, how do we do it and by proxy, how do we train?

Growth Angle

There is a path to expansion here if the model translates.

A premium produce concept can work across multiple locations if:

The Drawbacks

It’s still retail.

Perishable stock, staffing, and daily execution all need to be managed well. There’s not much room for error.

Final Thought

Most produce stores compete on price and only a few build preference.

This looks like one of the latter, but how can we prove it?

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

Hospitality deals are precarious.

At a moments notice you can lose key staff, face a recession or need to haul out cash to refit an entire restaurant.

99% of them I would be staying away from. But here’s one that might break that rule.

And that’s based on the scale of the operation

This is a large-format venue doing serious numbers, with enough size that it starts to behave differently to your typical café or restaurant.

Once you get past a certain revenue & profit threshold, the game changes.

The first thing that stands out here is earnings at scale.

Most hospitality venues never get big enough to:

They sit in that awkward middle ground where the owner is still required to make it work.

This has pushed past that.

At this level of trade, you can:

The second thing is it runs without you.

A “fully managed” hospitality business only exists when:

Most businesses say they’re managed, but this isn’t always the case.

The third thing is throughput.

If the space is designed well and the operation can handle it, volume solves a lot of problems in hospitality.

At the same time, it can also smoke the operation. Large venues have big overheads. Unprofitable days can hurt much more - keep note

What I’d Want to Understand

First is how real the management layer is.

If the current owner disappeared for 3 months, what happens?

Second is how sensitive the business is to the location & ownership

Some venues work because of the operator, or because of where they are.

Location can work. Just be aware of lease agreements. Avoid Auckland CBD

Third is labour discipline.

At this scale, small inefficiencies get expensive quickly.

If labour isn’t tightly controlled, the profit disappears. How is this currently controlled and who does this?

Fourth is age of business

If this is something new, trendy and hasn’t been through over a decade of ownership. I wouldn’t be interested in it

New places get attention in the short term, but a quality establishment is what makes sure people keep coming back for more.

Final Thought

Most people underestimate how hard it is to build a hospitality business that:

That combination is what makes this an interesting opportunity to look at the IM for

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