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1847 Holdings Hunt For Small Business Gems: How This PE Firm Finds Its Diamonds In The Rough

Take the IPO of 1847 Goedeker's, now going by Polish.com Inc. as one example. In April 2019, 1847 Holdings paid $6.5 million for the online purveyor of appliances, furniture and home goods. By June of 2021 when it went public, the company was valued at roughly $60 million. "Our investors were able to sell the shares in what was a fairly robust market," says Ellery W. Roberts, founder and CEO. "It's been rewarding and we're excited about the opportunity to invest capital in the businesses that we have that we believe are going in the right direction, all the while looking at new opportunities to expand our platform going forward."

Seeking Successful Exits

That successful exit is an example of what 1847 may be able to do with its other portfolio companies which include Wolo, the maker of horn and safety products for cars, trucks and emergency vehicles which it acquired for $8.3 million in March 2021, and ICU Eyewear Holdings Inc., a designer of over-the-counter (OTC), non-prescription reading glasses, sunglasses, blue light blocking eyewear, sun readers and outdoor specialty sunglasses which 1847 Holdings bought for $4.5 million in February 2023, among others. The idea is to find those diamonds in the rough, grow their businesses and then either sell them for a higher price or hold on to them, benefiting from their improved business conditions.

Not Your Normal PE Firm

1847 Holdings isn't your run-of-the-mill private equity firm. Unlike traditional private equity firms that create massive funds for investors, 1847 Holdings' shareholders have stock in each individual operating entity the firm owns. "With us you're not investing in the manager you're actually investing in the underlying operating subsidiaries," says Roberts. "Our investors get shares in the additional entities or they benefit from the increase in asset value of our holding company."

When it comes to the small businesses 1847 Holdings acquires, it looks for those gems that have a clearly identifiable blueprint for growth with the potential for breakout returns, are well positioned within their respective industry and have potential value that can be created by building the management team, infrastructure and access to capital. Furthermore, acquisition targets must be headquartered in North America, and the business has to have revenues of $5 million or more, as well as a current EBITDA/pre-tax income of a minimum of $1.5 million and a history of positive cash flow.

Small Business Market In Need Of Reliable Acquirers

1847 Holdings opted to focus on small businesses because the M&A market for these companies is fragmented, providing an opportunity for 1847 Holdings to purchase them at cheaper valuations. Businesses with values of more than $50 million tend to get 30% more valuation premiums than enterprises with less than $50 million, says 1847 Holdings. That's typically because there are fewer potential buyers, third-party financing is harder to come by and sellers tend to worry about non-economic things such as keeping the board and/or protecting employees which can dilute the price. That provides an opportunity for 1847 Holdings to swoop in and get the asset at a favorable price.

But identifying the diamond in the rough to acquire is only one reason why 1847 Holdings thinks it has an edge. It is also a diligent portfolio manager to the companies it oversees. Not only does 1847 Holdings have weekly meetings with management and quarterly board meetings but it actively helps the companies develop operating metrics, sales and financial reporting and establishes governance and other best practices, ensuring the business is running lean, efficiently and profitably. That value is passed on to 1847 Holdings' investors.

Furthermore, 1847 Holdings' fixed costs as a holding company are becoming a smaller part of the overall equation as it adds more assets. "We've reached the scale that we need so the incremental dollars or profits added from each new operating entity that we acquire, a disproportionate amount of their profits flow through to the bottom line," says Roberts. That is showing up in the company's results. In the third quarter of 2023 revenue increased 29.8% year-over-year and gross profits increased 64.9%. Roberts attributes that to the strength of the company's platform and its ability to support the growth and profitability of its portfolio companies. As for this year, 1847 Holdings expects more of the same.

With small businesses accounting for 99.9% of all businesses, they are the backbone of America, and many are undervalued because they lack access to capital and the business experience to grow and prosper. For a select few, 1847 Holdings can help them do that all the while enriching its shareholder base.

Featured photo by Riccardo Annandale on Unsplash.

Contact:

Ellery Roberts
eroberts@1847holdings.com

SOURCE: 1847 Holdings LLC