The Operator Weekly: Unit Economics

Think Like an Owner business note: We are thrilled to share we are adding a second weekly episode to the podcast at the end of October that will be more topic-specific.

In an effort to give back to all those who helped build this show into what it is today, we want to open up the last podcast sponsorship slots to readers of this newsletter. We would love to partner with organizations that want to share how they can add value to our audience of operators and investors.

If you're interested in partnering with Think Like an Owner as a sponsor, hit reply to this email and let's chat!

Everyone knows that metrics matter in terms of looking at how your business is doing.  But something just as important in small business is the unit economics.  

Let’s explore an example.  That plumbing business your friend just signed an LOI for?  At a high level it is doing 20% profit margins on $5M in revenue.  That’s really awesome!  Once they dive into the business, there are multiple teams and services for customers.  Going off the high level numbers is rather unclear.  Where are profits coming from?  Where are most of the costs appearing?  Which team member, or sometimes even entire departments, is using capital well or poorly?

For a true understanding of your business or another one, you must look into the unit economics.  The best way to think about unit economics is to look at each service or product sold as a standalone business unit.  What are the costs and benefits to that product?  In their 2021 annual letter, Boston Omaha’s CEO wrote about how “controlled premium provides complete visibility of the true cost of producing a dollar of surety premium.  This data allows [them] to better understand, better price and better grow surety policies over time.”

Unit economics can help you determine where to reinvest capital, grow teams, or even cut an entire business unit.  What are your costs, fixed and variable, and what are the returns associated with it?  The reason I am being vague here on the different metrics to look at is unit economics differ for industries.  Ecommerce businesses have costs around marketing spend and it is highly iterative.  A homebuilder has different costs and economics of each home sold.  Recurring, asset light businesses like software are strongly desired because of the costs going down per unit with scale.

Something to remember is that business will change over time.  It seems simple, but many owners don’t update their unit economics.  Just like your monthly financial report, it is important to pay attention to your costs and profits.  This can help you sell your business later on, sell away certain business units, or find which teams need more help.

Thanks to Everest Brady for his help, writing, and research in assembling this week’s newsletter.

Read

Little Engine Ventures built out an app called “The LEV Way”.  Having a distinct app that is useful for your leadership and employees.  While it is a v1, we think it is awesome what Little Engine Ventures is building. You can check out the post about the app here.

Listen

Chris Powers – Incentivizing the Process, Not Just the Outcome – you can listen to Chris’s solocast on incentives here.

Trish Higgins and Will Thorndike – The State of Private Equity – These two icons of private equity were interviewed by Brent Beshore on stage at Capital Camp in 2019.  They touch on reality versus expectations, investing in the lower market and more.  You can watch, or listen, to Trish and Will get interviewed by Brent here.

This Week on Think Like an Owner

Alex’s guests on this episode are Kurt Leedy and Kyle Coots, co-founders and managing directors at Miramar Equity Partners. Kurt and Kyle have an interesting vantage point in the search world being backed by a family office with an agnostic time horizon, allowing them to invest in the widest set of opportunities in search and parallel spaces.

The episode focuses on a concept they developed they call the three ways to make money, those being classic LBO, M&A-driven strategies, and organic growth. They dive into the characteristics of each along with a few examples from their portfolio.

They also touch on how the intersection of two or more methods can create exponential outcomes. Finally, they discuss a few theses they find interesting in healthcare and software and how they develop a thesis on an industry.

This Week in SMB Twitter

In follow up:

If you would like to hear more about Ayo and his journey, he came onto TLAO last year, you can listen to the episode here.

Think Like an Owner is sponsored by:

Live Oak Bank – Live Oak Bank is a seasoned SMB lender providing SBA and conventional financing for search funds, independent sponsors, private equity firms, and individuals looking to acquire lower middle market companies. If you are in the process of acquiring a company or thinking about starting a search, contact Lisa Forrest or Heather Endresen directly to start a conversation or go to www.liveoakbank.com/think.

Hood & Strong, LLP – Hood & Strong is a CPA firm with a long history of working with search funds and private equity firms on diligence, assurance, tax services, and more. To learn more about how Hood & Strong can help your search, acquisition, and beyond, please email one of their partners Jerry Zhou at [email protected]. 

Oberle Risk Strategies– Oberle is the leading specialty insurance brokerage catering to search funds and the broader ETA community, providing complimentary due diligence assessments of the target company’s commercial insurance and Employee benefits programs. If you are under LOI, please reach out to learn more about how Oberle can help with insurance due diligence at oberle-risk.com. Or reach out to the CEO, August Felker, directly at [email protected].

Oakbourne Advisors – Oakbourne is an independent retirement plan consulting firm that helps small companies design and implement great retirement plans for their teams.  Whether you already have a 401(k) in place or are looking to start one for your team, please reach out to learn more about how Oakbourne can set your people up for success in retirement at oakbourne.com/think.

Interested in sponsoring? Reply to this email and let’s chat.