Great Businesses Aren’t Always Forever Holds

In this episode of 5 Minutes in the Lower Middle Market, we explore why good lower middle market deals should not go to zero and why great businesses are not always automatic forever holds.

The lesson: great investing is not just about creating upside, but also about protecting against value degradation.

0:00 Craig Tupper’s view on lower middle market investing
0:33 Why private equity deals should not go to zero
1:36 The tension behind long-term ownership
2:08 Why holding forever can mean betting against capitalism
2:47 When long-term ownership can still work
3:07 Knowing when it is time to sell

Transcript

SPEAKER_00 0:00

Welcome to the five minutes in the lower middle market, where I break down the best ideas I find about buying, building, and owning small businesses in five minutes or less, hopefully. So today's theme is very simple. In the lower middle market, preserving value matters just as much as creating it. The first idea comes from Craig Tupper of Elan Growth Partners, where they partner with Western US companies generating one to seven million in Ibita and they seek to accelerate growth and unlock value in their business. And he made a point that I thought was very interesting. In finance, people often say that in any portfolio, you should probably expect one or two deals go to zero. But Greg's view is different. He argues that in true private equity, where you are buying proven, profitable, growing, well-managed businesses with proven business models, those businesses should never go to zero. And if they do, you have not just failed to create value, you have degraded value. I think that's a very useful way to think because it forces a higher standard. Yes, there is always a risk, especially when leverage is involved. But the broader point is that these are not supposed to be lottery tickets. These are supposed to be stable assets with upside. And if a well-vetted lower middle market deal actually goes to zero, something probably went badly wrong in underwriting, structure, operations, or all three. The second idea is about long-term ownership. A lot of people in the whole co world love the idea of buying a great lower middle market company and holding it for decades, maybe even forever. But there's an important tension. When you buy a business and assume you can hold it for a generation, you're also assuming that the competitive environment will not change too much over that period. And in some way, that can be a little like betting against capitalism. Because capitalism is supposed to attract excess returns. If a niche or a market earns very high returns on capital, eventually more people will notice. What that means? It means competitors enter, it means operators copy what works, private equity and private equity firms show up, and capital flows in overall. And over time, those returns often get competed all the way down. That doesn't mean long-term ownership is wrong. It can produce incredible outcomes if the business keeps its competitive position and keeps reinvesting at attractive rates. But it does mean that holding forever should not become a lazy default. Because by extending your holding period, you may also end up owning the business during the years when the economics begin to deteriorate. And then the real question becomes when is the right time to sell this asset? And that's the thinking exercise here. Not just how to buy well, not just how to hold well, but how to recognize when value is still being preserved and when it may be starting to erode. So if I had a if I had to pull one lesson from today's episode, it would be this. In the lower middle market, great investing is not just about upside, it is also about protecting against value degradation. A good deal should not go to zero, and a great business is not automatically a forever hold. I hope you enjoyed today's episode. That's it for today's five minutes in the lower middle market, and see you in the next episode.