How we bootstrapped a $10M holding company

In 2015, Rowan and I started our first business, SBO Financial.

We had one goal in mind:

To grow the business to $10M in revenue by 2020 and sell it.

Today, SBO is a team of 30+ accounting and finance professionals and trusted advisors to Australia’s leading brands and entrepreneurs. We do multiple 7–figures of annual recurring revenue at above industry average profit margins. All without outside funding.

Whilst I’m proud of what we’ve built, we failed to achieve our goal. 

We didn’t hit $10M in revenue by 2020. We also didn’t sell the business!

Failing to achieve these goals was in fact, a blessing.

A few years into building our business, we came to a couple of realisations:

1. Organically growing an accounting firm from $0 to $10M of revenue in 5 years is extremely difficult/not feasible without an existing platform. Our goal was naïve.

2. We’d be foolish to sell! 

On the latter, we sat down and did the math on how much cash we take home to make if we hypothetically sold SBO.

Here’s a screenshot of the spreadsheet:

We halved our revenue target at exit from $10M to $5M to make it more realistic. 

Assuming a 4x EBITDA multiple, which is the going rate for accounting firms today, and factoring in taxes, we’d walk away with just under $2M of cash each.

And that $2M isn’t even guaranteed.

A common deal structure in professional services is to tie a large component of that sale price to a contingent payment (“earn-out”), as well as a ~5 year non-compete. 

This functionally means that I’d be an employee of an accounting firm again (the most likely buyer) and forced to go into an office and wear a damn suit - the main reason why started the business in the first place!

And let’s be frank - $2M of cash isn’t a huge amount of money.

I mean it is, but not enough to retire on. 

After paying down the mortgage on your PPOR, you’re left with ~$1M.

After investing the remaining $1M and applying the 4% rule, you’re left with $40k of passive income.

This barely covers private school fees for a couple of kids.

But the more important question is this: what do I do with the rest of my life? 

I’m in my mid-30’s - barely hit the peak of my career. 

The honest answer is that I’d start another business. 

Something close to my knitting, like an accounting business and investing operation…

The development of the Arbor Group

Overall, we concluded that selling the business would be short-sighted. SBO was one piece of a larger vision.

Combining our passion for investing and entrepreneurship, drawing inspiration from Buffett’s Berkshire Hathaway, we restructured SBO’s cap table to incorporate a holding company Arbor Group Holdings, or Arbor Group.

The Arbor Group is Australia’s smallest family office. 

Its mission is simple and literal - to compound capital at high rates of return, for the rest of our lives. 

While building out our financial services businesses, we saw an opportunity to leverage our private company knowledge, passion and networks to build an investment function. 

Investing in SMBs is where we love to play. We believe it’s an ocean of alpha. We’re talking returns on invested capital of > 30%.

Not everyone does it because it’s hard, illiquid and messy. Operating and governing small and medium businesses requires skill, patience and most importantly, passion.

It’s not for everyone, but it’s for us.

Today, the Arbor Group is a growing portfolio of private businesses, which includes:

• SBO - accounting, tax and operational finance

• Assurety - M&A, transaction advisory and financial due diligence

• Stark Naked Media - financial literacy education via content and digital product

• Full Circle Venture Capital - an early stage venture capital fund

• Arbor Capital - a permanent capital fund focused on private, digital businesses

Just as Adam and Eve kick-started an activity that led to 7.8 billion humans, SBO has given birth to multiple new streams of cash flow and opportunities for us.

It has been a wonderful platform for us to generate deal flow across our complementary businesses, work with incredible entrepreneurs and keep us close to the ground of what’s happening in our local market.

Crucially, the business is led by a fantastic team, enabling Rowan and I to focus on other investment activities within the Arbor Group.

Our latest project being Arbor Permanent Owners, which I’m ecstatic to share with you in my next instalment.