Make Money On The Buy
Price every acquisition so the downside is capped before the upside is even modelled.
- Difficulty
- Advanced
- Time to result
- ~months to results
- Steps
- 5
- Confidence
- 92%
Syed Balkhi imported a real-estate underwriting habit into software acquisitions: the profit is locked in at purchase, not at exit. He buys at a discount to his own estimate of intrinsic value, so that a business worth a million dollars is bought for seven hundred thousand. He credits Monish Pabrai's formulation, heads I win, tails I don't lose much, and pairs it with Charlie Munger's inversion habit of asking how the deal kills you before asking how it pays you. He buys all cash, in the single-digit millions, never putting eighty percent of his net worth into one deal, and carries no debt and no mortgages. He describes himself as the chief risk officer of the company and is the sole decision maker on every deal.
Origin
Learned from a Pakistani real-estate mentor Balkhi met through a South Florida cricket league, then sharpened by reading Monish Pabrai.
Core principles
- 01The profit is made at purchase price, not at exit
- 02Heads I win, tails I don't lose much
- 03Invert first: ask how this deal kills you
- 04Never risk a concentration that can end you
- 05Speed and certainty of close are worth more to a seller than a higher number
How to run it
- 1
Form an independent intrinsic value
Before negotiating, work out what the business is worth to you on today's economics only, not on a projection. Balkhi's example: intrinsic value a million dollars.
Pro tip Ask for the P&L early; that is the only document he requires up front.
- 2
Bid at a meaningful discount to it
Offer roughly 30% below your intrinsic value so a purchase of a million-dollar business closes near $700,000. That gap is the margin of safety, not a negotiating tactic.
Watch out If the only way the price works is future growth, you have no cushion; the risk is larger than it looks.
- 3
Invert and price the downside
Ask what your downsides are and how far things must go wrong before you actually lose money. In Balkhi's arithmetic, 40% has to go wrong before the loss reaches roughly a hundred grand.
Pro tip Think about how you die in this deal and then simply do not go there.
- 4
Size it so no single deal can hurt you
Keep cheques in the single-digit millions and never put a large fraction of net worth or cash into one acquisition. No deal should make you sweat.
Watch out Leverage speeds growth but removes the margin of safety and can destroy your autonomy in troubled times.
- 5
Win on process, not on price
Offer a seamless, fast close instead of a bigger number: inbound message, assistant triage, P&L review, LOI within about a week, close 30-40 days later, mostly all cash with occasional seller financing.
Pro tip Sellers dread six months of private-equity diligence; certainty is a real discount you can capture.
In the wild
Balkhi's worked example: you judge a business's intrinsic value at a million dollars and pay $700,000. If it keeps growing, you win. If it stumbles, you paid 300 grand less than value, so roughly 40% has to go wrong before you are down about a hundred grand.
→ The downside is bounded and quantified before the deal is signed, which is why he says no cheque has ever made him sweat.
Coming out of the recession, banks needed leased gas-station properties off their books. Balkhi was an all-cash buyer with the right contacts, so he took the deed on a site already leased to Couche-Tard, the owner of Circle K. The catch was environmental cleanup work.
→ All-in he paid 90 grand for a leased gas station, and now owns ten of them.
Common mistakes
Letting the excitement set the price
Balkhi names this as the primary trap smart people fall into: the excitement takes them away, they overpay on a deal, and regret it later. Usually they have taken investors' money and are on a fund timeline, so they are not disciplined enough to wait.
Underestimating the problems already inside the business
The second failure he names is buyers who diligence the upside thoroughly and the existing operational mess barely at all, then inherit problems the price never accounted for.
Using leverage to move faster
Leverage can accelerate growth, but it removes the margin of safety. Balkhi tells the story of Buffett and Munger's third partner Rick, who was just as smart but in a hurry, carried margin loans, and had to sell his Berkshire shares to Warren at about forty dollars apiece in the 1973-74 downturn.
Is it for you?
Best for
Self-funded operators buying small cash-flowing internet businesses with their own money
Not ideal for
Fund managers on a 10-year clock who must deploy capital on someone else's timeline
From the transcript
“I want to have heads I win tails I don't lose much”
“if a business in your perspective intrinsic value of it is a million dollars and you end up paying $700,000 today”
“You have to invert the situation.”
“So, you know, I'm okay with getting rich slowly and I think I've done all right for where I am.”
From the episode
Syed Balkhi: How He Went From $0 To +$100M Before Age 30
Syed Balkhi