It’s been a while since I’ve done a mezz thread so...

How do I make money on these guys?

Every summer, companies in Utah and Idaho recruit and send out thousands of young people (mostly men) who have recently returned from missionary service.

Their missionary service has prepared them for one unique aspect of business: door to door cold calling...

They are selling contracts for people to receive various services. The first to do it were alarm companies.

I don’t like alarms because there are too many substitute products and competition.

Another big category is Solar.

I don’t like Solar because of the high price point, the need for government subsidies, and the competition.

The competition peaked 2-3 years ago, but at that point I was getting 2-3 calls a week from people wanting to put solar on my roof.

So, what do I like?

Pest Control!

The economics work like this:

The cost to acquire your pest control contract will be something around 100% of first year revenue. Most goes to the rep (nice kid knocking on your door).

Once growth stops, the companies are printing cash. But people don’t really want to slow down because they see a path to continued growth.

So they borrow to fund the next years growth.

But banks don’t like this business because there aren’t any hard assets.

So they come to me!

The big guys will buy the contracts after a while for 100% (or more) of ARR (again, see CAC above) so the pool of contracts becomes my collateral.

I can keep the LTV < 50% of ARR and charge my normal mezz interest rates even though I’m in a first lien position.

Final Note: I LOVE this business! My two largest clients ever have been in this industry (among others).

Client 1: 16.8% IRR over 3 years

Client 2: 17.0% IRR over 3 years (and counting)

Final, Final Note: Over the last three years, the outstanding loan to client 2 above has doubled in size AND the LTV has gone from ~50% to ~12%.

@threadreaderapp unroll