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The Investment Thesis for Business

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acquisition entrepreneur

Every deal you consider should be evaluated according to your investment thesis, a set of rules defining what sort of businesses you’re willing to invest in.

It doesn’t have to be complicated, but it should be your ultimate guide to deals you pursue and ones you let go of. It should be applied to every opportunity you consider.

Where area are you looking? How large of a business are you looking for? What is your risk tolerance?

You should consider these questions and many more while crafting yours.

It should also be an evolving set of criteria that changes as your investment goals change.

Here’s a look at the importance of an investment thesis, how to write and what advantages it confers on your financial decisions.

What is an investment thesis?

An investment thesis is a set of rules or criteria that defines what you will and won’t invest in. It’s a metric you should apply to each deal you are considering.

A well-thought-out investment thesis will ensure you know what type of business you’re looking for and where to look for it.

It can also lay out a clear statement about your future for any business you acquire and how you will make that company more valuable over three to five years.

An investment need not be too complicated and, in fact, sometimes function better when they are extremely simple.

Although this might sound obvious, many companies and entrepreneurs do not use them.

According to a Harvard Business School study of 250 senior executives across all industries, only 29 per cent of acquiring executives started with an investment thesis.

How to write an investment thesis?

Let’s look at how you write an investment thesis.

An investment thesis will help you evaluate business opportunities and guide you towards your personal financial goals.

It is designed to remove subjective opinions and emotions from an analysis of a deal to get at the heart of whether a deal is right for you.

Although each thesis will be specific to each acquisition entrepreneur, several factors should always be considered, including:

  • Location of the business
  • Size of the business
  • Whether it is management-run or ownership-run
  • Whether the business is susceptible to risks like customer concentration or keyman
  • What are your industry-specific advantages to this deal
  • Your risk tolerance

You should also think about your criteria in terms of must-haves and nice-to-haves.

Your must-haves could include finding a business that is large enough to survive any hiccups in the first year, having a seller who is willing to help after the purchase if any problems arise or that the business has a positive company culture.

Your nice-to-haves might include that the company has been operating for more than ten years, has a certain number of employees, or has a specific EBITDA margin.

So think hard about what to include in your investment thesis. It doesn’t have to be particularly complicated or take a long time to write.

You should also refine your thesis periodically as your financial position, or life goals change over time. For example, what was once right in your wheelhouse when you first started as an acquisition entrepreneur may no longer be true three to five years later.

What are the advantages of using an investment thesis?

One of the main advantages of having an investment thesis (and, most importantly, sticking with it) is that you can immediately rule out deals that don’t fit your goals, no matter how tempting they appear.

You should not deviate from your thesis or make exceptions.

It helps you from being clouded by your emotional reaction to a particular business, keeping you focused on the facts. It is trying to separate the signal from the noise.

It can also help you navigate the biggest risks facing your potential business deals.

How will this business withstand a recession? Could legislation alter or damage the industry? How much competition is there in the industry? How do these factors relate to your investment thesis?

You should also consider your unfair advantages and how they can refine your investment thesis. What sets you apart from your competition?

Are you very experience in digital marketing? If so, you should focus on relatively weak businesses in that area but have the potential for growth once they are under your leadership.

Let’s say you are looking at purchasing an HVAC company, and you have several deals on the table. However, your thesis excludes businesses that are too seasonal.

So you’ll probably rule out any HVAC companies with a second product line or service that keeps them busy during the shoulder season.

Use an investment thesis to boost your success.

You can and should use an investment thesis to analyze every deal you are considering.

Think carefully about your must-have criteria and ensure that every acquisition meets those explicit criteria.

Have a list of nice-to-haves that can help separate two deals that appear relatively equal in your must-haves.

You should also stick to your thesis and not deviate. Don’t let your emotions cloud what simply doesn’t fit with what you’re looking for.

A well-crafted investment thesis will boost your success and allow you to attain your financial goals.

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