# The Compounders **Oddbjørn Dybvad, Kjetil Nyland, and Adnan Hadžiefendić** | [[Strategy]]  --- > "What distinguishes a mere 'serial acquirer,' mostly focused on deal-making, from a compounder is a strong decentralized culture combined with a long industrial heritage that has forged a powerful cash culture." Buy low, sell high—that's the saying. But the most astounding investment returns come from buying well and selling never. The companies in this book compound at 15-35% annually for decades because they've mastered two engines simultaneously: organic reinvestment and programmatic acquisitions of small private companies. Most businesses can only run one engine well. These run both. The secret isn't deal-making. It's culture. Decentralisation pushed as close to the customer as possible. Simple profit goals sustained over decades. A cash discipline so deeply embedded that spending feels like it's coming out of someone's pocket. The best of these companies—Lifco, Addtech, Indutrade, Constellation—don't micromanage their subsidiaries. They set clear metrics, provide autonomy, and intervene only when performance deviates. What struck me most: the P/WC metric. Profit over Working Capital. Invented by Bergman & Beving in 1981, still used today across six publicly listed offspring worth SEK 180 billion combined. For every dollar tied up in working capital, generate more than 45 cents of profit. It sounds simple, but the elegance is in how it aligns everyone—from the managing director to the warehouse clerk—around cash generation. No abstract accounting. Just: are we making money on the capital we're using? --- ## Core Ideas ### [[Compounding Earnings Growth]] Three ingredients determine compounding: **reinvestment rate**, **return on invested capital (ROIC)**, and **duration**. You need all three. High returns that can't be reinvested don't compound. High reinvestment at poor returns destroys value. Short duration means the magic never kicks in. Earnings growth isn't free. It takes capital. For a business to grow, it must reinvest some portion of cash flow—hiring, facilities, R&D, or acquisitions. The compounders in this book excel because they can reinvest at high rates of return, year after year. They generate earnings on the earnings. ### [[P/WC - Profit Over Working Capital]] The Bergman & Beving legacy metric. Subsidiaries must maintain a P/WC ratio above 45%. The logic: 15% covers taxes, 15% covers dividends, and the rest funds growth. If you hit 45%, you're self-funding. **Six levers to improve P/WC:** Increase sales volume. Raise prices. Cut costs. Reduce inventory. Speed up customer payments. Extend supplier terms. Every employee can influence at least one of these. The "Focus Model" for capital allocation: - **Above 45%:** Grow revenue (organic and acquisitions) - **25-45%:** Improve working capital turnover and margins before growing - **Below 25%:** Fix the business before doing anything else Lifco writes down receivables older than 30 days to zero. Harsh? Yes. But CFOs go the extra mile to collect when their bonus depends on it. ### [[Decentralisation]] These compounders operate with 6 to 60 people at headquarters running billions in revenue. The centre allocates capital; subsidiaries run operations. Daily decisions happen as close to the customer as possible. **Jan Wallander's philosophy at Handelsbanken:** "Decentralization is a management philosophy that can release the full potential of people in any corporation because it is in accordance with human nature, not against it. People are the only sustainable competitive advantage." Lifco takes this furthest. No business area presidents except one. Instead, 15-20 group managers who each chair 15-20 operating companies. They hold two to three board meetings annually per company—half what peers do. This allows Lifco to scale faster. **The principle:** Decentralisation isn't abdication. Active ownership happens through subsidiary boards staffed with culture carriers. The job of the parent company isn't to run businesses—it's to obtain and retain passionate people, then empower them. ### [[Permanent Ownership]] Most of these companies never sell acquisitions. The time horizon is forever. This changes what you optimise for—and creates deal flow advantages with founders who care about legacy. Heico typically seeks majority stakes (80%+) rather than 100%. Sellers keep skin in the game, maintaining entrepreneurial drive. Call options let Heico buy remaining shares over time based on earnings multiples. **The trust advantage:** Acquisitions are a "people game." More than 80% of Addtech's acquisitions come from internal networks, not brokers. Sellers trust companies with long industrial heritage more than financial buyers looking to flip. ### [[Self-Funded Growth]] The emphasis on self-funding limits the pace of growth—only so much cash flow is available in a given year. But this constraint creates discipline. Growth is sustainable because it isn't leveraged. **Value-based pricing replaces cost-plus.** After onboarding, compounders typically raise prices wherever possible and discontinue products with low pricing power. Many family-owned businesses are hesitant to raise prices. The actual risk of losing customers is lower than they think. ### [[Internal Competition and Benchmarking]] Lagercrantz runs an internal "Champions League" where all companies are benchmarked against each other on the Focus Model. Performance awards displayed on office walls. Healthy competition drives improvement. **The Alvarsson story:** A 65-year-old manager had maintained a 10% profit margin for years. Four years after benchmarking was introduced, he hit 18%. His explanation: "You challenged me!" At Lifco, bonuses for low-P/WC companies weight 80% on P/WC improvement, 20% on profit growth. High-P/WC companies flip it: 80% profit growth, 20% P/WC. Capital allocation priorities drive compensation. ### [[The AMETEK Growth Model]] Four pillars, applied methodically for decades: 1. **Operational excellence** (kaizen, continuous improvement) 2. **New product development** (Vitality Index: % of sales from products launched in last three years) 3. **Global and market expansion** 4. **Strategic acquisitions** What sets AMETEK apart: acquisitions complement organic growth, not replace it. Three of four pillars are about building from within. The Vitality Index forces ongoing innovation investment. **The niche strategy:** "Small is good." Small markets are unattractive to larger competitors. Be #1 or #2 in small, defensible markets. Mission-critical products at relatively low customer cost create lock-in. ### [[Mark Leonard on Tit-for-Tat]] Leonard's insight from *The Evolution of Cooperation*: tit-for-tat is the optimal strategy in repeated games. Start with cooperation. Reciprocate whatever the other side does. Never defect first. **In practice:** The head office provides autonomy and trust from the start. When subsidiaries perform, they get more autonomy. When they underperform, intervention follows. Long-term cooperation benefits everyone. > "At the front-end of the company, client satisfaction has a high priority—but if you run a subsidiary with low profitability, you have to prioritize profitability ahead of client satisfaction." Leonard believes board directors should do more than governance—they should coach. Limiting tenure of skilled directors prevents them from developing the industry expertise needed to contribute meaningfully. --- ## Connects To - [[7 Powers]] — Process Power is exactly what these compounders build: operational excellence plus hysteresis that competitors can't easily replicate - [[The Outsiders]] — Capital allocation as the CEO's primary job; these compounders prove the thesis across dozens of examples - [[The Goal]] — The focus on throughput and cash over traditional accounting echoes Goldratt; P/WC is throughput thinking applied to trading businesses - [[How Finance Works]] — The P/WC metric is a simplified ROIC that anyone can understand and influence --- ## See in Notes - [EBITA-WC](/ebita-wc/) — The ratio serial acquirers use to focus managers on controllable levers - [Organic vs Acquired Growth](/organic-vs-acquired-growth/) — The distinction this book illuminates: can they grow without buying growth? - [Margins vs Growth](/margins-vs-growth/) — Once returns are high enough, reinvestment is the lever - [The Constellation Model](/compounding-acquirers/the-constellation-model/) — The Canadian example of decentralised capital allocation - [The Lifco Way](/compounding-acquirers/the-lifco-way/) — Swedish decentralisation taken to its logical conclusion - [The Bergman & Beving Legacy](/compounding-acquirers/the-bergman-beving-legacy/) — The origin of P/WC and six listed offspring - [The Addtech Succession](/compounding-acquirers/the-addtech-succession/) — Proof the operating model transfers across generations