How Many Good Agencies Can We Buy For $2.5M Anyway?

Hey all,

Earlier this week I was speaking to a potential investor in our agency SPV, and he asked the following:

“How many agencies will $2.5M get you?”

Another investor made a similar comment, but expressing concern that there aren’t any good agencies at that price point.

I figured it would make a good discussion point for this week’s email.

First off, it’s worth remembering that the fund is not going to be the sole acquirer of these agencies.

If we (ONFO) buy an agency for $2M, the SPV might put anywhere from $300-600,000 into the deal to become a minority owner, with Onfolio covering the rest. The purpose of the fund is to help Onfolio make acquisitions as an investment partner.

That means that if the fund raises $2.5M, we’d be buying businesses for a total of 4-5x that amount.

It also means the fund doesn’t have to raise the full amount to be able to succeed.

If we just raise $2M and stop there, that’s fine. We just minority invest into 4 businesses instead of 5, or 5 instead of 6, for example.

It doesn’t change the returns or really impact the diversification.

The other thing I wanted to cover was the quality of businesses for sale in this range.

On average, we’re targeting businesses in the $1-3M price range. That size is what we consider the sweet spot.

Large enough to have a small team, proven business model, track record, and balance of revenue sources.

Small enough to have room to grow. See my post here about how we typically grow them.

An agency worth $2M for example will have around $600-700k in annual net income.

This means they might have $2-5M in revenue. At that point they’ve solved a lot of the growing pains and issues that come up when an agency finally scales past its early stages.

They’ve probably hired and fired their first few leadership team members, built out a sales system, and learned what things actually drive value in the business.

They also likely have a few years worth of income history for us to verify. It’s dangerous to acquire something that’s only been around for a year or less.

These are all important when thinking about acquisitions that will throw off consistent cashflow.

But as well as cashflow we also want growth.

And ideally growth that doesn’t require us to reinvest a bunch of cashflow and jeopardize the dividends.

With agencies, one effective way to grow without reinvesting profits is working on fine-tuning the margins. Putting prices up, cutting out less profitable services, compensating for over hiring during covid (we’ve seen this a lot), launching new services…many things which unlock the next level of growth have not been fully realized at this size.

Hence it being called the sweet spot.

And finally, we’re starting to see opportunities for our acquisitions to cross-promote and work together.

Some of the ones in our pipeline are already excited about the chance to work with both Onfolio and our existing portfolio, and we see this only getting stronger with each company that joins the family.

So in conclusion, $2.5M isn’t the world’s largest investment pot by any means, but what it will do is allow investors to own a fraction of something much larger, while still getting the returns that make it worthwhile.

And the good news is we still have some space left for you. You can hit reply to ask me any questions, or go here to sign up: onfospv.com

Dom

P.S We have 2 acquisitions we are hoping will close by the end of next week, so the timing for you to join couldn’t be any better.