#196 Brent Beshore: Business Brilliance and Happiness at Home

0:00:00 All investing at the end of the day is the assumption of risk.
0:00:03 The ideal investment scenario is you are assuming a risk that is knowable.
0:00:07 You are being paid more to assume that risk and you have some ability to mitigate that risk.
0:00:13 So we all have three basic moves in conflict.
0:00:17 It’s called move against, which is like the second one is and then the third one.
0:00:22 And so if you watch all of your conflict, we’ll follow that pattern.
0:00:26 Let’s talk about incentives.
0:00:27 How do you set incentives for the CEOs?
0:00:30 I think the ideal system is what if you learned a bit hiring people that most people miss?
0:00:36 I think that’s probably been the biggest leap forward.
0:00:37 And what most people get wrong is most people don’t understand.
0:00:41 What’s the playbook when you take over a company?
0:00:44 So we are
0:01:04 Welcome to the Knowledge Project podcast.
0:01:06 I’m your host Shane Parish.
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0:01:32 My guest today is Brent Beshore.
0:01:35 Brent is the founder and CEO of Permanent Equity,
0:01:37 a private equity firm that buys and grows boring businesses.
0:01:41 And by boring, I mean the kind of businesses that most people overlook,
0:01:44 but that are essential to making the world go round.
0:01:47 Some of his companies include Ace Fence, the largest residential fencing company in Texas,
0:01:52 Chance Rides, the leading amusement ride manufacturing company in the United States,
0:01:57 and Pacific Air, which has one of the aerospace industry’s largest selection of on hand inventory.
0:02:03 I first met Brent about 10 years ago now, and we became friends right away.
0:02:08 I’ve met a lot of people in my life, and I remember flying home after the first time
0:02:11 we met thinking how incredibly special he was.
0:02:14 After this conversation, when Brent was flying home, I felt so grateful
0:02:18 that that chance and counter had turned into a great friendship.
0:02:21 Not only does Brent love the details, he can talk about any company they own
0:02:26 or their competitors at the 50,000 foot level or the one inch level,
0:02:31 but he’s also one of the most thoughtful and kind people I’ve ever met.
0:02:34 He’s bigger on the inside than the outside.
0:02:37 Well, his conversation is one continuous episode.
0:02:40 It comes in two distinct parts.
0:02:42 The first part is about life, and the second part is about business,
0:02:46 and his wisdom is equally profound in both.
0:02:48 We discuss the small changes and mindset shifts he’s made
0:02:51 that have had a profound impact on his personal life.
0:02:54 And about 45 minutes in, we switch to business.
0:02:57 We cover operating out of abundance and what that means,
0:02:59 why longevity matters, why debt is not a source of return,
0:03:03 why not having debt is actually a strong signal of a good business,
0:03:07 what it means to own a business, incentives, his first deal,
0:03:11 taking outside capital, the advantages of personality testing,
0:03:14 and so much more.
0:03:16 In a world where everyone is chasing the next big thing,
0:03:19 Brent is focused on finding value in the overlooked and underappreciated.
0:03:24 And that’s a lesson we could all learn from.
0:03:26 It’s time to listen and learn.
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0:05:35 A message from the government of British Columbia.
0:05:37 What’s changed in your life in the past two years?
0:05:41 I would say my marriage has changed a lot.
0:05:43 My inner life has changed a lot.
0:05:44 My physical outer life has changed a lot.
0:05:48 Ironically, the business has not changed a lot.
0:05:52 It’s been interesting how the different seasons do and don’t overlap.
0:05:56 But there’s been a lot of changes about how I approach work that have changed,
0:05:59 but the actual work itself has not changed.
0:06:01 Let’s dive into that.
0:06:02 What’s changed in your marriage?
0:06:03 What’s changed in your exercise?
0:06:04 Let’s tackle exercise first.
0:06:06 Yeah. Well, I think maybe all of it is connected to a walk I went on.
0:06:12 Gosh, I’m probably pushing now three years ago.
0:06:16 And there’s a gentleman on this walk who was at a small gathering of people in Colorado.
0:06:23 He kind of picked me out.
0:06:24 It was like 40 or 50 people in the crowd.
0:06:26 And afterwards he said, “Hey, can I kind of go to a walk with you?”
0:06:29 I was like, “Sure.”
0:06:32 And he said, “Hey, can I speak truth into your life?”
0:06:34 And he said, “I see a lot of shame in you.
0:06:39 I see a lot of fear in you.
0:06:40 And I worry that that’s dramatically negative when impacting a lot of your relationships.”
0:06:46 It was more in depth than that.
0:06:47 I mean, we talked for another probably 20, 30 minutes about what he saw.
0:06:52 And I just tried to take a posture.
0:06:53 I mean, initially, when somebody says something like that to you, like cut you, right?
0:06:56 Like, how dare you?
0:06:57 I have great relationships, you know?
0:06:59 You’ve known me for a long time now.
0:07:01 We were talking about this at least 10 years and not more.
0:07:03 Yeah.
0:07:03 And, you know, I wouldn’t have said six or seven years ago that I had bad relationships.
0:07:08 No.
0:07:09 I would have said I had really good relationships.
0:07:11 If you’d asked me how my marriage was five years ago, I would have said,
0:07:15 “Oh, like a six or seven, you know?
0:07:18 We have our challenges, but like, we get long.”
0:07:21 And, you know, compared to where it is today, I would say it was like a two.
0:07:25 I just didn’t know.
0:07:27 You know, I think about this idea of, you know, everything’s relative.
0:07:30 So, like, world class is the best you’ve ever seen.
0:07:33 You know, you ask somebody who’s only eating at fast food.
0:07:35 What’s their favorite restaurant in the world?
0:07:37 They’re going to tell you a fast food restaurant, right?
0:07:38 So, you know, the question we have to ask ourselves is like,
0:07:41 what do we have to compare it to?
0:07:44 And are we talking about relative or in absolute terms?
0:07:47 And to be honest, I don’t think I had been exposed three years ago to what was possible
0:07:52 in relationships or what was possible in marriages.
0:07:54 Like, I had not seen marriages up close where I was like, I was comparing my marriage to what
0:07:59 I’d seen in other marriages.
0:08:00 And I felt like we were doing fine.
0:08:01 Like, we were probably right in the middle of the ballpark.
0:08:04 I think what this person did for me was open my eyes to like,
0:08:08 there was a lot more out there.
0:08:09 There’s a lot more possibilities that I didn’t know.
0:08:13 That was like a seminal moment of like a warning shot across the bow of, oh my gosh,
0:08:19 like, I need to probably go and look and study.
0:08:22 Like, who am I?
0:08:24 What makes great friendships?
0:08:25 What am I giving to my relationships?
0:08:28 How do I think about my marriage?
0:08:29 And like, what am I doing in my marriage?
0:08:30 And like, how should it be?
0:08:33 And am I willing to settle for an interior life filled with anxiety and shame and fear?
0:08:39 Am I willing to settle for a marriage where things are being hidden and there’s disconnection
0:08:44 and division, right?
0:08:46 Am I willing to settle for friendships that maybe don’t go that last 10% and create that
0:08:53 really meaningful deep connection?
0:08:55 Am I willing to settle for a physical body that is overweight and out of shape and likely
0:09:01 going to become diseased?
0:09:02 And so I think that was a, you know, that was a major moment.
0:09:04 And then that led into, you know, really finding these different people who’ve shaped
0:09:09 and changed my life, including an incredible counselor who I started working with.
0:09:12 And bringing to the surface a lot of these issues that I didn’t even know were there.
0:09:16 Yeah, I mean, I look back on the person I was even three years ago and I was certainly
0:09:20 far better than I was 10 years prior, but I was compared to sort of where I was now.
0:09:24 I felt very shut down and frustrated and irritable and competitive.
0:09:30 And I feel a lot of those things myself in terms of competitive and, you know, maybe
0:09:35 a bit more anxious than I should be.
0:09:37 What was the next step that you took in this journey that sort of like, okay, well, I realized
0:09:42 something, I feel it.
0:09:44 Now what?
0:09:45 I don’t want to sit here and pretend that it’s like self-reliance is the thing that
0:09:48 got me through this period of my life because it felt like it happened to me.
0:09:54 And it happened for me.
0:09:55 It didn’t feel like that I somehow figured out like outsmarted the world, outsmarted my
0:10:02 shame and fear.
0:10:04 It felt like I had these sort of people be put into my life and these revelations that
0:10:09 started to occur that all of a sudden, I mean, there’s an old adage that like,
0:10:15 when the student is ready, the teacher appears, right?
0:10:18 And I think there’s very much, there’s a choice I had to make three years ago that was like,
0:10:23 am I going to pretend like everything’s fine?
0:10:27 Because that’s what everything in me, that’s what my false self wanted to do.
0:10:31 No, screw you.
0:10:33 You’re wrong.
0:10:34 You don’t know what you’re talking about.
0:10:35 Who are you?
0:10:36 You just met me.
0:10:36 You can’t, you don’t know.
0:10:38 You don’t know me.
0:10:38 You don’t know anything about me.
0:10:39 And it was like, I remember having this very distinct choice to make.
0:10:43 And I remember being like, if I continue on the path that I’m on that would have denied,
0:10:49 you know, it’s sort of this idea of like self promotion, self protection, right?
0:10:53 That’s what, that’s what our false self wants us to do.
0:10:55 Go around self promote, self protect, because then we don’t have to really be vulnerable.
0:10:59 Now we also are shut down and we can’t have great relationships.
0:11:02 We can’t figure out the real sort of us that comes through.
0:11:06 But that was the choice.
0:11:07 And I remember kind of, it was an act of surrender of being like,
0:11:11 I have to take the risk that I’m going to take a look at myself and I’m not going to like myself
0:11:15 very much.
0:11:15 I’m going to admit things to myself that, that are ugly and that I’ve done more wrong
0:11:22 maybe than I’m willing to admit and that I’ve hurt people that I care about.
0:11:26 That was the choice that I had to make.
0:11:28 And I, and, and I remember very clearly saying, okay, I, you know, I surrender and I want to know.
0:11:34 And then things started to change ever so slowly.
0:11:38 I mean, there’s a weird dip that occurs.
0:11:39 I feel like when you, you know, when you go from denial to awareness,
0:11:46 it’s actually way worse.
0:11:49 So like the awareness of your faults and awareness of your shortcomings without the
0:11:56 healing of those is actually puts you in a far worse position.
0:12:00 And so I would say that, you know, that sort of the period of time from three years ago to two
0:12:05 years ago was horrible.
0:12:08 Like it was a, it was not a, it was not a year of joy.
0:12:11 In fact, if anything, it felt like harder.
0:12:14 My relationships felt more strained.
0:12:16 And I think it was because I was becoming acutely aware of how broken they were as a result,
0:12:21 mostly as a result of me.
0:12:22 I mean, yes, other people’s brokenness too, mostly result of me, but I didn’t have any
0:12:26 healing in it.
0:12:26 I didn’t know how to get healing.
0:12:28 And, you know, that season was just an awareness building season.
0:12:32 Looking back on that, but it’s awful.
0:12:34 If you, if you gain awareness without healing, it’s way worse than not being aware.
0:12:39 Give me an example of something that’s changed in your friendships.
0:12:43 We were talking about one last night, actually, that’s a perfect one,
0:12:45 where you always want to pay the bill.
0:12:49 Yeah.
0:12:50 Talk to me about that and the revelation behind it and how it came about.
0:12:54 Let’s see here about two years ago, maybe a little less than two years ago.
0:12:58 I had a friend who was going through some really tough times and personally,
0:13:02 professionally and a mentor of his said, Hey, you got to go to this,
0:13:07 got to go to this intensive counseling retreat.
0:13:10 And he kind of reluctantly, he’s not a touchy feely.
0:13:15 He’s a finance guy.
0:13:17 You know, he’s, he’s not a, he’s not.
0:13:20 This is voodoo.
0:13:20 Yeah.
0:13:21 This is not, it is exactly, this isn’t ooey gooey squishy stuff.
0:13:24 It’s not, it’s not his, his ballgame.
0:13:26 And I watched him go into that hard and hardened and just sort of like shut down,
0:13:32 shut off again, very protective, self-protective.
0:13:37 And he came out of that week, like changed, like distinctively different.
0:13:44 And I remember thinking to myself, like, wow, I don’t know what happened there.
0:13:48 That’s incredible.
0:13:49 He’d worked with this woman the whole week and he was like, you changed my life.
0:13:53 Like, this is incredible.
0:13:54 Like how, you know, first of all, I never be able to repay you.
0:13:57 Thank you.
0:13:57 You know, like, I don’t know anything about you.
0:13:59 Who are you?
0:14:01 And she said, I’ve got kids and I live in Columbia, Missouri.
0:14:06 He’s Columbia, Missouri.
0:14:07 What?
0:14:07 He said, one of my best friends lives in Columbia, Missouri.
0:14:10 I live in Columbia, Missouri.
0:14:12 And so he said, Brent, I’m telling you, like, you have to go see this person.
0:14:19 And it was right around this time that I felt like I hit rock bottom in my
0:14:22 awareness of like my own brokenness and like how I didn’t really see a path forward.
0:14:29 Like I kept like sitting in this dismal state where you’re like aware of how
0:14:36 messy everything is, but there’s no way to clean it up.
0:14:40 And all this self-help stuff, like, none of it works.
0:14:44 Like, at least for me, like, I can only speak, I’m an N of one here.
0:14:48 But like, you know, the self-reliant thing doesn’t doesn’t work.
0:14:51 And so he said, hey, I think you should meet with her.
0:14:54 I’m like, man, this is a true godsend.
0:14:56 Like I had no idea that somebody of that caliber, national international
0:15:00 quality caliber was in Columbia, Missouri.
0:15:02 I started going there and doing these three hour sessions and dredging up things I didn’t
0:15:07 even know was there that were all connected to the behaviors.
0:15:12 So if you if you think about like the way that I think about it now is like we have
0:15:15 these we have these behaviors that other people can see and that we can kind of measure.
0:15:18 Right.
0:15:18 Am I doing good or am I not doing good?
0:15:21 The reality is there’s so many layers underneath that, though, that are influencing that behavior.
0:15:27 Right.
0:15:27 Like, oh, something terrible happened and I really don’t feel anything.
0:15:33 That’s weird.
0:15:35 Right.
0:15:35 Or something very small happened and I’m triggered into this like spiral.
0:15:39 That’s weird.
0:15:40 And what I would do in the past is I would just kind of like shove it down.
0:15:44 Right.
0:15:44 Like, oh, I don’t know.
0:15:46 I don’t get it.
0:15:47 But life’s weird and whatever.
0:15:49 Got to go on.
0:15:50 Yeah.
0:15:50 You got to go on.
0:15:51 And so anyway, through this series of sessions, and I mean, I’ve done a lot now,
0:15:56 like probably 25 or 30 of these now, three hour sessions.
0:15:59 So a lot of time we got down to one of the sessions.
0:16:01 It was actually probably about four or five months ago out of the blues, kind of seemingly
0:16:06 unconnected.
0:16:06 And we were talking about friendship and my counselor said, did you always pay?
0:16:10 And I said, yeah, of course, I always pay.
0:16:14 She was like, hmm, I got out of the last 100 times that you shared a meal with somebody.
0:16:20 How many times did you pay?
0:16:21 And I was like, like 100.
0:16:23 And she got sat back and I was kind of proud of myself, right?
0:16:25 I’m a good person.
0:16:27 I pay for the bill.
0:16:28 I care about people, right?
0:16:29 This is like the thing I told myself in my head.
0:16:31 I do the exact same thing.
0:16:33 Yeah.
0:16:33 And by the way, those motivations are, I think, real and true.
0:16:38 They are bad.
0:16:39 But she said, yeah, I wouldn’t be your friend.
0:16:41 And I remember just being rocked by it.
0:16:42 Like, you wouldn’t be my friend.
0:16:43 She goes, I was like, what, why?
0:16:45 And like totally broke my paradigms.
0:16:48 And she said, because in a friendship, in a real relationship,
0:16:51 you seed control to the other person.
0:16:54 The other person concedes control to you.
0:16:56 It’s not, you’re always controlling.
0:16:58 The whole point of a friendship is that you can trust and you can be vulnerable
0:17:02 and you can see control.
0:17:03 And so paying the bill is merely just a form of control that you’re exerting over your friends.
0:17:08 And I remember going, oh crap, absolutely right.
0:17:13 And she goes, yeah.
0:17:13 And I suspect it’s not just paying the bill.
0:17:17 You like to have your environment.
0:17:18 You like to have your way of doing things.
0:17:21 And I was like, yeah, I do force a lot of relationships.
0:17:25 And again, this is only like five months ago, right?
0:17:27 I force a lot of relationships into these boxes where it’s like,
0:17:30 I want you to be in my box.
0:17:32 I tell myself because I can provide great hospitality or because I can do,
0:17:35 do these interesting things, right?
0:17:37 And I’m caring for them.
0:17:38 Well, and, and, and generally sometimes I suspect the same for you.
0:17:41 Like those are real motivations, but we are this mixed bag.
0:17:46 And I think that’s what I’ve realized is like,
0:17:47 we hook the good and the bad together and then we do things that come off to other people
0:17:52 very differently and confuse and frustrate and constrain.
0:17:56 And it’s really hard for somebody to be frustrated at a friend who’s always buying them
0:18:00 lunch or dinner or whatever it might be.
0:18:03 So what it does is it builds up resentment and frustration in the other.
0:18:08 And they don’t even understand, right?
0:18:09 Like we’re all, we’re all confused.
0:18:11 It’s very hard to see ourselves clearly.
0:18:12 We can see each other clearly, right?
0:18:14 We can’t see ourselves clearly.
0:18:16 I think that we’re designed like that because we’re designed for a relationship.
0:18:19 Like we need one another.
0:18:20 No one is an island.
0:18:21 No one is self-reliant, right?
0:18:23 We need one another.
0:18:24 So how do you handle dinner now?
0:18:26 So what I say, only if I mean it, by the way, sometimes I don’t say this.
0:18:30 But if I don’t mean it, I won’t say it now.
0:18:33 I say it would give me great pleasure.
0:18:35 I would enjoy being able to buy dinner tonight.
0:18:39 But if you don’t want me to buy dinner, I will respect your choice.
0:18:45 And I give them the choice.
0:18:46 And sometimes I buy dinner and sometimes I don’t.
0:18:49 But if they say, nope, I want to buy dinner tonight.
0:18:52 I say, okay, thank you.
0:18:55 And the key there is they have agency now.
0:18:57 They have agency.
0:18:58 And so the resentment doesn’t build even unconsciously.
0:19:01 Correct.
0:19:02 In kind of psychology circles, there’s this idea of a triangle
0:19:06 where you have a victim and a hero
0:19:10 and like a judge or a prosecutor.
0:19:13 And heroes are those who are without knowing the good,
0:19:19 like they tell themselves that they want to do good for other people.
0:19:22 And what they’re really doing, and by the way, I relate very strongly to this.
0:19:26 This is a lot of action that I see myself having done and do,
0:19:30 is to cover up my own shame and insecurities
0:19:34 and sort of to push down the pain that I feel.
0:19:38 It’s like, well, I’m going to go external and go try to help somebody almost against their will.
0:19:42 Like they didn’t ask me to help.
0:19:44 Or if they did ask me to help, my response to them is so outsized
0:19:48 that it removes agency from them.
0:19:51 And so buying dinner is like a very small example of this.
0:19:55 And I’ve got, you know, unfortunately, a lot of bigger examples of this.
0:19:58 You know, I probably, I probably have really engaged in,
0:20:01 I would say dramatic heroics five or six times in my life
0:20:04 where I perceived somebody was in grave danger.
0:20:07 They needed my help and I sprung into action
0:20:12 and did this dramatic thing for this other person.
0:20:15 And, you know, in my head, the thing I’m going to get is,
0:20:19 oh, thank you so much, Brent, you’re amazing.
0:20:22 I’m so grateful for you.
0:20:23 And if you hear even the thoughts in my head, it’s all about me.
0:20:26 So it’s actually not about the other person.
0:20:27 Yes, I can justify it based on the other person,
0:20:30 but really it’s about me.
0:20:31 Yeah.
0:20:31 Five out of five or, you know, six out of six times,
0:20:34 it has been met with initial, oh man, thank you so much.
0:20:39 Like this is incredible.
0:20:40 Wow, I’m like blown away at your generosity.
0:20:43 And I’m like, oh, I got all the good feelings.
0:20:44 And, and then I end up not having a very good relationship with those people.
0:20:49 And it shocks me.
0:20:50 And it almost feels like a slap in the face.
0:20:53 Like, how could they, how could they do that?
0:20:56 How could they not be better friends with me as a result of this?
0:21:02 And then when I started doing the sessions
0:21:04 and started working with her, it became clear to this like,
0:21:07 oh, heroes create victims because you’re removing all agency from them.
0:21:12 And you are telling them that they can’t help themselves,
0:21:16 that they are helpless.
0:21:17 And when you do that, you are creating somebody who,
0:21:23 who is diminished and insulted.
0:21:26 And now, now again, in the moment, that’s not how it feels.
0:21:32 But that’s where we’re constantly chewing on and assessing our environments.
0:21:36 A great example of this.
0:21:37 And this is not a close personal relationship.
0:21:39 I remember my wife and I, one Christmas,
0:21:41 we had a public school teacher who we knew and got to be friends with.
0:21:45 And we were kind of sitting around the dinner table one night and she was sharing.
0:21:49 She was like, that’s heartbreaking.
0:21:50 She’s like, you know, these kids around Christmas that I work with,
0:21:53 and it was a particularly poor school district.
0:21:55 You know, they don’t have any Christmas presents.
0:21:56 They don’t have any Christmas.
0:21:58 Like there’s no joy.
0:21:59 And it really like touched my wife and I.
0:22:03 We’re like, wow, like what if we did this dramatic act and anonymously, of course,
0:22:09 we bought like $30,000 worth of Christmas gifts for like every kid in that school.
0:22:16 And in our heads, we were like, this is amazing.
0:22:19 This is wonderful.
0:22:20 These kids, you know, you can imagine the kids who were like, oh,
0:22:24 we wouldn’t have had Christmas, but now we have Christmas.
0:22:26 And wow, somebody cares for us and loves us.
0:22:29 Like that’s what we were hoping to have done.
0:22:32 And so we did it.
0:22:35 And the response from the, you know, small group people that knew about it was like,
0:22:39 this is incredible.
0:22:40 You all are so generous.
0:22:41 You know, pat, pat, pat on the back.
0:22:43 We’re feeling great.
0:22:43 We’re in the, we’re in the Christmas spirit.
0:22:45 Oh, what joy, you know, all the stuff.
0:22:48 And then it was about a month later and I followed up with the teacher.
0:22:52 And I was just like, hey, how did that, how did that go?
0:22:55 And she was like, it was really good.
0:22:58 You know, everyone was grateful, you know, whatever.
0:23:00 There’s a few people who, who had some challenges.
0:23:04 And I was like, I had challenges with us giving, giving gifts.
0:23:09 She said, well, some of the parents of the kids felt, felt really insulted by it.
0:23:16 And then it like hit me.
0:23:20 And I even like, you know, I’m trying not to get emotional about it.
0:23:22 It, it like, it, it, it cut me so deeply because I realized what I’d done.
0:23:26 But we had done my life and I had done, we had taken away the dignity of those families.
0:23:33 And yeah, they couldn’t buy their kids Christmas gifts.
0:23:37 They were going to do something for them, whatever they could do for them.
0:23:40 And instead, like any kid, you give a kid a present because like amazing, you know,
0:23:46 but then it started asking all kinds of questions.
0:23:48 Well, why can’t you buy me that present?
0:23:49 Do you not love me?
0:23:52 Why do these other people care more for me than you do?
0:23:54 Kids don’t understand how money works.
0:23:56 They don’t understand how some people have more and some people have less.
0:23:59 They don’t understand anything about that.
0:24:01 And so what I’d inadvertently done when I was trying to be kind and generous
0:24:05 was I didn’t put myself in the position to understand what the,
0:24:09 the real consequences were going to be.
0:24:11 The second, third order consequences.
0:24:13 Yeah, a kid would have had, you know, less toys to play with at Christmas.
0:24:17 That’s not the point of Christmas.
0:24:20 I missed, I missed the plot.
0:24:22 The point of Christmas is to show love and care and in doing what I did,
0:24:28 I short circuited the ability for those families to experience love and care.
0:24:32 And I hurt them.
0:24:33 And there’s a great book out there called When Helping Hurts.
0:24:37 And it afterwards actually somebody gave it to me and I read it.
0:24:41 And I mean, you talk about being cut deeply.
0:24:43 It’s a book about when you try to help and it hurts people.
0:24:48 It’s one of the, one of the best books I’ve ever read on sort of philanthropy and,
0:24:51 and how to think about caring for those who you don’t have a relationship with.
0:24:55 And I think that’s the bottom line is like, it all comes down to we,
0:24:59 we can’t go wrong if we’re in deep relationship with somebody.
0:25:02 And we are respecting what their needs are.
0:25:05 We’re, if somebody asks me for help, you’re not a hero.
0:25:09 If somebody asks you for help and you rise to meet the need, that’s called being a good friend.
0:25:13 Where you become a hero and you create victims is when you don’t know somebody,
0:25:18 don’t know their needs.
0:25:19 They never asked you to do something and you rise to meet a need they don’t have.
0:25:25 And in, in turn, you take away agency and dignity from them.
0:25:28 So it’s things like that that, I mean, these are, these are deep waters, right?
0:25:31 These are things that are challenging and stuff that we don’t talk about a lot.
0:25:35 But this is the stuff that I’ve like, it’s been a joy and it’s been awful in some ways
0:25:40 to explore the stuff in me and to see how frequently I am engaging
0:25:44 in this maladaptive behavior under the name of goodness and virtue
0:25:49 and all these things that we tell ourselves.
0:25:50 Yeah, the story we tell ourselves to justify sort of what we’re doing
0:25:54 because we want to be the hero in a way unconsciously in a lot of ways, right?
0:25:58 Like we’re not consciously trying to save somebody.
0:26:00 We see a friend in need and then we want to jump in and help them.
0:26:03 When’s the last time you asked somebody for help?
0:26:05 This morning.
0:26:06 I’m asking, I’m learning.
0:26:08 This is a new learned behavior though.
0:26:09 Because in all the years I’ve known you, this is like, this is different or something.
0:26:14 Yeah, this is different.
0:26:15 I, yeah, I would always be the one who would be eager to help but rarely ask for help.
0:26:23 And again, that destroys relationships.
0:26:25 There’s not just, there’s no way to have a real relationship with somebody
0:26:28 unless it’s bi-directional.
0:26:29 It can’t be you helping somebody and never needing help.
0:26:33 Because then again, it’s the exact same principle.
0:26:36 You’re creating sort of the hero/victim dynamics, the power dynamics in any relationship
0:26:42 are super sensitive.
0:26:43 And where we have best relationships is where we’re on equal footing.
0:26:46 Different but equal, right?
0:26:48 So I always think about it as like, you know, the X-Men or whatever.
0:26:52 You know, you have, everyone’s got different powers,
0:26:54 but everyone can like fight the battles together, right?
0:26:57 And you respect the other’s opinion, right?
0:27:00 You respect the other person’s skills and talents.
0:27:02 But if somebody is always the one who can shoot laser beams and, you know,
0:27:06 blow stuff up and make stuff happen.
0:27:08 And the other person is just, oh, thank you.
0:27:10 I appreciate that.
0:27:11 Thank you for helping me.
0:27:12 It’s not a real friendship.
0:27:15 I had never thought about any of this until dinner last night with you.
0:27:19 And I stayed up late last night just going over all the different ways that I do this
0:27:25 in my own life with my friends from, you know, always offering.
0:27:30 Like it’s not even offering to pay for dinner.
0:27:33 It’s like all race up to the waiter and, you know,
0:27:36 everybody’s sitting down and they go to the bathroom to make sure that I,
0:27:39 and I’d read like, I was just replaying this stuff in my head.
0:27:43 Go like, oh my God, this is crazy.
0:27:47 I went on an apology tour after I had that realization to a lot of people.
0:27:50 And I said, hey, I’m really sorry I did this to you.
0:27:53 And of course people are kind of caught off guard because I don’t even think they realize it.
0:27:56 But when I said it to them, they were like, yeah, thank you.
0:28:00 And so now like my close friends, like I, we have this understanding.
0:28:04 And oftentimes I still am able to buy lunch or dinner or whatever.
0:28:09 Right.
0:28:09 Because I enjoy it and they know I enjoy it.
0:28:11 Like I love hospitality.
0:28:13 I love to be a provision and provide care for people.
0:28:17 It’s like a core part of my personality.
0:28:19 But sometimes they say, thank you, but no, thank you.
0:28:22 And you know what?
0:28:23 I feel super loved in that.
0:28:25 I feel super loved.
0:28:27 So I, so the cool part is before I didn’t feel love either way.
0:28:33 If somebody else bought a meal, I would feel frustrated and sort of irritable about it.
0:28:39 And they took something away from me.
0:28:41 Right.
0:28:41 And if I bought.
0:28:43 Just how everybody else feels when you do it in a way.
0:28:45 Right, exactly.
0:28:46 And vice versa, right?
0:28:48 If I did buy the meal was a little bit like, you start playing with ideas and you’re like,
0:28:52 oh, am I only a checkbook?
0:28:53 Do people really like me?
0:28:55 And it’s like, well, you’re the one who insisted on buying dinner.
0:28:58 And you’re like, well, but the other person could have insisted on buying dinner more.
0:29:00 You know, you start getting into this like weird psychology and fight back enough.
0:29:05 Right.
0:29:05 You hit the old alligator arms, you know.
0:29:07 And so now it’s like the inverse of that.
0:29:11 And I think this is like a good metaphor for life.
0:29:13 Like I think that the more that I meet what I would call elders.
0:29:18 So there’s a difference between elders and elderly.
0:29:21 Elderly or like self-focused, incurred place.
0:29:25 Pascal would call it incurvature, right?
0:29:26 They’re incurved on themselves.
0:29:28 They’re irritable.
0:29:29 It’s all life is all about them and what they need.
0:29:31 And they’re scared and fearful.
0:29:33 And you got elders who are the inverse of this, right?
0:29:35 Who are outwardly focused, right?
0:29:37 The more I meet these types of elders that are like genuinely caring and loving,
0:29:40 the more that I see them exhibiting this type of behavior.
0:29:44 The more that I see them like no matter their circumstance,
0:29:49 in good circumstances or in bad circumstances,
0:29:51 they live with a joy and a lightness and a freedom.
0:29:54 And then you see elderly and sort of now I can pull it back and see in my life
0:30:00 that like no matter my circumstances,
0:30:02 like I’m living in fear and shame and hiding.
0:30:06 And so it’s like, I think that’s the thing that we’re really talking about here
0:30:10 is like these are all even like maybe the second teardown or the third teardown.
0:30:14 Like at the basement of all this stuff, at the very core of all this stuff is,
0:30:18 there are really only two ways to live.
0:30:19 You’re going to live out of fear
0:30:21 or you’re going to live out of genuine love and care for others.
0:30:25 And love and care for yourself.
0:30:28 And like that’s it.
0:30:28 Like everything else rises between those two.
0:30:30 Like fear driven is scarce.
0:30:33 It is the way of the world.
0:30:35 It is a famous author in the 70s.
0:30:39 She said that nature is red and tooth and claw, right?
0:30:43 It’s like this idea that there is nothing but you’re either going to be a predator
0:30:47 or you’re going to be prey.
0:30:48 Everything is a battle.
0:30:50 Everything’s a battle.
0:30:51 Everything’s about competition, right?
0:30:54 And and believe me, like that’s when I am at my worst.
0:30:57 That’s who I am.
0:30:57 And by the way, the world loves my false self.
0:31:00 The world loves that fear driven self.
0:31:01 I can get an extraordinarily incredible amount done in that time.
0:31:06 A friend of mine calls it clean fuel versus dirty fuel.
0:31:09 Like it’s very difficult to see.
0:31:11 Like the car looks like the car from the outside.
0:31:13 Very difficult to understand.
0:31:15 Is it clean fuel or dirty fuel that’s operating the car?
0:31:18 And I can.
0:31:19 I mean, that car can go fast.
0:31:20 It can take a lot of people with it if I’m on dirty fuel.
0:31:23 And somebody’s dirty fuel is a for me.
0:31:26 I’d learned through my life to be it’s a more potent fuel in the short term for me.
0:31:31 Like I get more stuff done quicker and usually even sometimes with higher
0:31:37 excellence out of dirty fuel than I do clean fuel.
0:31:39 That fear is like a heck of a rocket.
0:31:41 It’s higher octane almost.
0:31:42 It’s higher octane.
0:31:42 The problem is it’s got all kinds of contaminants in it.
0:31:45 And you eventually like torch yourself and the car breaks down and you
0:31:48 go off the rails and blow yourself up, whatever analogy you want to use.
0:31:52 And so getting back to the original question, like what’s changed?
0:31:55 Like I think that more and more I’m trying to operate on clean fuel.
0:31:59 I’m trying to be self unconcerned.
0:32:01 I’m trying to become an elder.
0:32:03 I think people listening resonate a lot with this.
0:32:06 So I’m curious what other ways you found yourself
0:32:12 subtly controlling your relationships, whether it be your marriage or your friends.
0:32:16 The paying is an example, but I’m sure you’ve got other ones.
0:32:20 You get older and you get better at hiding your motivations, right?
0:32:23 And you end up wrapping them sometimes consciously, sometimes unconsciously in
0:32:27 these maybe good packages.
0:32:30 But the reality was it was like I was demanding control.
0:32:36 I was demanding care.
0:32:39 I was demanding people to see me and sort of praise me.
0:32:41 And so how do I do that on a daily basis?
0:32:44 It was and by the way, this is not like it’s a victory declared or whatever.
0:32:49 I mean, this is this is like an ongoing battle.
0:32:51 I would say on an hour by hour, minute by minute basis is I can tell
0:32:55 so quickly, am I operating out of fear or love?
0:32:57 And the test is, do I have peace or not?
0:33:00 Am I anxious or not?
0:33:02 And when I’m anxious and fearful and when I’m, you know, I have a tendency to
0:33:07 catastrophize the future and always be running down all these different
0:33:12 rapid holes of what ifs might happens.
0:33:14 And I haven’t, I’ve been given an incredible capacity to do that,
0:33:17 which makes me like my day job as an investor.
0:33:20 It’s really useful because I can run down a tremendous number of scenarios.
0:33:24 My personal life, it’s terrible and I hate it.
0:33:29 It’s the dark side of creativity, right?
0:33:33 When you have vision and creativity, you can envision a future that is beautiful
0:33:37 and bright and loving and wonderful or you can envision a terrible future, dystopian future.
0:33:42 And so, yeah, I mean, examples of this, I mean, I would go into meetings and I would,
0:33:49 I would need to take over the meeting to get praise.
0:33:52 And by the way, I’ve been given a gift to be able to say things and think quickly
0:33:59 on my feet that people genuinely were praising me.
0:34:02 It’s not like, I hope, I mean, no one’s perfect, but like,
0:34:06 we create an organization in permanent equity that’s like very kindly confrontational about
0:34:12 ideas, like we want to be, we want a lot of friction.
0:34:16 And so the last thing in the world I want to do is create an organization
0:34:19 of yes men or yes women, right?
0:34:20 Like we want divergent thinking, we want a lot of variety.
0:34:26 And so I don’t think that they were doing it because it was like,
0:34:29 oh boss, you’re so good.
0:34:31 You know, that type of like, you know, sycophant type of thing.
0:34:35 I think it was genuinely like, in my false self, when I’m really charged up,
0:34:40 like I have a capacity to envision a future that a lot of people like.
0:34:45 I know internally though, my vision of that future is really driving my need to be liked,
0:34:53 my need to be respected, my need to be praised.
0:34:56 And so, and I would have had this high anxiety in these meetings, right?
0:35:02 And then I get out of them and it’s like, I mean, I’m so wired up.
0:35:04 So much cortisol in my system because I craved that.
0:35:10 I needed that.
0:35:10 That was like my sort of my drug of choice in that, in that setting to the degree that I
0:35:14 almost lost my right eye as a result of excess cortisol in my system.
0:35:18 And that’s how stressed and I wasn’t stressed in the sense of.
0:35:22 I mean, yes, like what I call normal stresses.
0:35:26 Like, I mean, there’s always going to be sickness and death.
0:35:29 And as we’ve grown as an organization, there’s just a lot of,
0:35:32 a lot of people and a lot of people are a lot of brokenness.
0:35:34 But I would say the vast majority of the stress I was experiencing was self-induced.
0:35:40 Was because I wasn’t okay.
0:35:42 And I knew I wasn’t okay, but I didn’t know how else to cope with it.
0:35:47 Rather than try to get praised, try to grab things from other people, right?
0:35:51 So it was, I was incurred, as Blaise Pascal would say.
0:35:55 I was the one who was inwardly focused and focused on my needs and what I wanted.
0:36:00 I was not on the path to being an elder.
0:36:03 I was on the track to being elderly.
0:36:05 And the inverse of that is I get more freedom as I, as I, you know,
0:36:09 this stuff kind of comes out in relationships and friendships and my marriage in counseling sessions.
0:36:15 You know, as this stuff kind of comes up now and there’s healing around it,
0:36:18 that I find myself sitting in meetings and like letting other people talk.
0:36:21 Imagine that not having to always be the leader of everything,
0:36:25 not having to have my identity based on short term wins, not being competitive,
0:36:29 competitiveness is the opposite of relationship.
0:36:33 It is the antithesis of relationship.
0:36:35 Like when we’re competitive with somebody, it’s I win and you lose.
0:36:37 That’s horrible, especially when you’re, you’re, you’re dealing with,
0:36:40 like my profession doesn’t have to be competitive.
0:36:44 When I go out and play tennis or pickleball with somebody like,
0:36:48 I don’t have to win, but before I had to win because I’m a winner.
0:36:52 Winners win, right?
0:36:53 Like, and if I don’t win, I’m a loser.
0:36:55 If I don’t win, I’m a loser.
0:36:56 If I don’t win, I’m not okay.
0:36:57 If I’m, if I don’t win, all that stuff is going to bubble up from the basement
0:37:00 and I’m going to feel terrible.
0:37:03 I used to literally lose in tennis and feel terrible for days.
0:37:06 Another thing, I would fight with my wife and I would go do a bunch of email.
0:37:09 That’s an interesting behavior.
0:37:11 Well, why would I do that?
0:37:12 Well, because I get praised for doing email.
0:37:14 I get a lot of interactivity.
0:37:16 Oh, hey, thank you so much for that.
0:37:18 Oh, wow.
0:37:19 It’s 11 o’clock at night on a Friday night and just had a blowout fight with my wife.
0:37:23 I’m going to go and do some emails because people are going to be like,
0:37:25 oh, look how hard you work Friday night.
0:37:27 You’re working so hard.
0:37:29 Social media was deadening to me.
0:37:32 I mean, if you look at the peak of my social media sort of addiction,
0:37:36 it was probably five years ago to three years ago.
0:37:39 Why?
0:37:41 Because I could go online and tickle the ears of people and they would tell me,
0:37:45 oh, this is a really insightful thing.
0:37:47 This is really cool.
0:37:48 Wow.
0:37:49 You’re so great because, you know, whatever.
0:37:50 Validation.
0:37:51 Validation.
0:37:52 It was praise.
0:37:52 How many likes did I get?
0:37:54 Right.
0:37:54 But I found myself, my personal relationship to people like,
0:37:57 are we optimizing our lives for the people who know us best or the people who know us least?
0:38:03 That’s a question that haunts me.
0:38:04 I’ve watched a lot of people up close and personal who,
0:38:08 the more you got to know them, the less you liked them.
0:38:14 And I mean, that’s honestly the lie that we all engage in, right?
0:38:17 If people really knew me, would they love me?
0:38:20 Would they even like me?
0:38:21 Right.
0:38:21 There are people.
0:38:23 A lot of people I’ve come in contact with.
0:38:25 They’re bigger on the outside than they are on the inside.
0:38:28 Like, I want to be somebody.
0:38:30 That was me, by the way.
0:38:31 Like, I, you know, I mean, I think we all have this temptation, right?
0:38:34 The Instagram pic of, oh, my life’s just a vacation.
0:38:37 Everything’s amazing, right?
0:38:39 Twitter’s the sort of the intellectual version of that.
0:38:41 All I think is these great thoughts.
0:38:43 Yeah.
0:38:44 Have all this wisdom.
0:38:45 I’m so wise.
0:38:45 Now, let alone my like marriage disaster, my business disaster, you know, all this stuff.
0:38:50 It’s like, well, yeah, but I can spout platitudes on Twitter and people praise me for it, right?
0:38:55 That’s the lie.
0:38:56 That’s the trap.
0:38:57 Yeah, as this healing has occurred, it’s like, I’m on social media far less.
0:39:00 Not because like, I actually like genuinely want to help people.
0:39:02 And like, when I have something to say that I think could be helpful,
0:39:05 when I’m going to engage in conversation, like, I’ll go on and like, I’ll engage in it.
0:39:07 But like, I don’t feel a need now to like, hour by hour, check and see how many people
0:39:13 have liked whatever in my marriage.
0:39:14 I’m trying to be somebody who’s focused purely on the good for the other.
0:39:18 But focused on the good of my wife.
0:39:20 Like, how can I serve her and love her with no expectation of reciprocity?
0:39:23 Like, it sounds foreign.
0:39:24 It would sound foreign to me like, the view we have of every relationship,
0:39:28 sort of in that fear based scarcity based mindset is like, okay, well, Alexis Dokville
0:39:33 called it self interest rightly understood, right?
0:39:35 Which is like, I do things for you so you can do things for me.
0:39:38 Like, that’s not true love and care.
0:39:40 That’s loving yourself.
0:39:42 There’s a rabbi who calls that fish love, right?
0:39:45 He says, you know, we treat our marriages like we do a good fish dinner.
0:39:49 Right?
0:39:49 Where you’re like, oh, I love this fish because it tastes good.
0:39:52 Because it makes me feel warm because it satisfies a need that I have, a desire that I have.
0:39:59 You’re consuming it, right?
0:40:02 You’re a consumer of that thing.
0:40:04 And I think that without a shift in mindset and the default assumption of the world is
0:40:09 we’re all consumers of one another.
0:40:11 We are all eating one another, including in our marriages and personal relationships.
0:40:15 And it’s poison, straight poison.
0:40:18 I want to spend a lot of this conversation on investing and sort of running a business.
0:40:22 But before we sort of transition,
0:40:24 one of the things that you said to me last night that I found super interesting was that
0:40:29 you’d stop drinking unless it’s a celebration.
0:40:32 Tell me about that.
0:40:33 Well, yeah, the last couple of years have been an exploration of
0:40:38 interior and exterior.
0:40:41 And I think a lot of our exterior lives reflect the accumulation of our interior lives.
0:40:47 For me, it certainly did.
0:40:48 I can remember the first time I was called a fat kid.
0:40:52 I was 10 years old.
0:40:53 And that was an identity that I adopted.
0:40:56 I always was just a little more overweight than everyone else.
0:41:00 I wasn’t morbidly obese, but I was just a lot of weight.
0:41:03 I was athletic, but I was a little bit heavier.
0:41:06 You know, when I became an entrepreneur, it was all consuming.
0:41:09 I mean, my 20s were filled with I had to win at all costs.
0:41:13 I had to I had to put every bit of energy into being successful.
0:41:18 I thought that that was going to make me OK.
0:41:20 So, you know, my 20s were filled with a single minded pursuit of achievement.
0:41:25 And I put on 50 plus pounds in my 20s.
0:41:30 I tipped the scales at one point at 252.
0:41:32 I remember hopping on the scale and I was like, whoa, I’ve gotten big.
0:41:36 I started beginning of last year at 235 ish.
0:41:42 So I was down from my peak, but it was just a battle.
0:41:44 I’d been engaged in like a decade and long battle with like I’d, you know,
0:41:48 try this diet or that diet.
0:41:50 I’d try to work out some I’d make a little progress.
0:41:53 I’d slip back.
0:41:54 It was kind of like I had this set range.
0:41:56 I really couldn’t couldn’t get outside of it.
0:41:58 Kind of all part of the same transformation occurring at the same time, right?
0:42:02 Like I found out that food was something I celebrated with,
0:42:10 was something I turned to for comfort was how I express love and joy and care.
0:42:15 As my counselor said, it sounds like you eat when you’re sad
0:42:18 and you eat when you’re mad and you eat when you’re happy.
0:42:20 I think you’re going to probably be always eating.
0:42:24 And I was like, yes, I am always eating.
0:42:27 Like I always have a pull towards food, right?
0:42:28 Because I was using food.
0:42:30 And by the way, you know, like there are more maladaptive behaviors, right?
0:42:35 It just happened to be one that you can’t hide very well.
0:42:37 Yeah.
0:42:38 But I was using food to do a job for me.
0:42:41 And sometimes that job was, you know, in concert with joy and care.
0:42:44 And sometimes that was in, you know, concert with pain.
0:42:47 But food was like the tool of choice that would make me
0:42:51 both feel out of control and in control at the same time.
0:42:54 And so as those sort of things started releasing and the junk
0:42:59 that was underneath them that caused that pain started releasing,
0:43:02 like I felt a real freedom.
0:43:03 You know, you, I wrote this publicly in my annual letter this year,
0:43:07 like you had a huge impact on me.
0:43:10 And it’s funny how we don’t often, I don’t think when you said it,
0:43:12 you realized like how impactful it was going to be.
0:43:14 But it was like a lightning bolt.
0:43:15 You told me, I was complaining to you.
0:43:17 I think it was maybe January 4th or 5th of last year.
0:43:20 Yeah.
0:43:20 And you told me that, you know, you’re working out or everyone’s like, oh man,
0:43:24 yeah, like I’ve got a news resolution.
0:43:26 I’m going to drop some weight, you know, whatever.
0:43:28 And it’s just really hard to work out.
0:43:29 And I felt kind of defeated about it because it’s like, you know when,
0:43:35 you know when you’re headed to failure.
0:43:37 And it like sort of, that’s the thing about dieting.
0:43:39 And that’s the thing about these like short bursts of like New Year’s resolutions is like,
0:43:44 they head towards failure.
0:43:45 Yeah.
0:43:46 Because they’re not sustainable.
0:43:47 And so I remember you saying this one thing to me that completely shifted internally,
0:43:52 how I thought about health.
0:43:54 And you said, well, I just work out every day.
0:43:56 It’s part of my identity.
0:43:57 I don’t have a choice.
0:43:59 If I’m going to work out, I just have a choice what I do.
0:44:01 And I remember it hit me like a ton of bricks.
0:44:04 I was like, oh my gosh.
0:44:06 Yeah, you’re right.
0:44:08 And around that time, another good friend of ours, Patrick,
0:44:13 I was on the phone with him and, you know, the best of friends tell you the real truth.
0:44:17 Like the pinnacle of friendship is to tell each other the real truth, the hard truth,
0:44:22 the truth that the truth that you gain nothing from and you have everything to lose.
0:44:26 Because that is true vulnerability.
0:44:28 That is truly giving the other person control.
0:44:30 And I remember Patrick took a risk and I said something.
0:44:33 I used to make jokes about being a fat kid, right?
0:44:35 This is that identity that was imprinted upon me.
0:44:37 And they’re funny.
0:44:38 People laugh at jokes about being fat, right?
0:44:40 Self-facing and all this stuff.
0:44:41 And he goes, would you knock that shit off?
0:44:43 And it was like a very stern voice.
0:44:46 He was like, not okay.
0:44:47 Like, I’ve heard you say this over and over again.
0:44:49 You’ve made jokes about you.
0:44:50 In fact, not okay.
0:44:51 Like, you got to quit that.
0:44:53 You’re not a fat kid.
0:44:54 He’s like, why do you do that to yourself?
0:44:57 And it’s again, this idea like we can’t see each other.
0:45:00 We can see each other clearly.
0:45:01 We can’t see ourselves clearly.
0:45:02 That really flipped the switch in me.
0:45:04 That was like, I’m not a fat kid.
0:45:06 I’m going to be healthy.
0:45:06 I’m going to be a healthy person
0:45:08 who’s part of their identity is I’m going to work out every day.
0:45:10 Now I’m not putting my salvation in that.
0:45:13 I’m not putting my goodness in that.
0:45:14 I don’t think that people who work out are better
0:45:16 than people who don’t work out.
0:45:18 But I’m going to make it a core part of me
0:45:20 that I’m going to like honor this body that’s been given to me.
0:45:23 Like I’ve got one container in this life.
0:45:25 And it’s important.
0:45:27 When I say basically every day, like I am now,
0:45:29 I work with a couple of people on the fitness side and like,
0:45:32 their biggest problem with me is that I work out too much now.
0:45:35 Like I’m literally, this is not like a bragging thing.
0:45:38 This is like, I love it so much now.
0:45:40 And this is something I hated to work out.
0:45:41 I hated it.
0:45:42 I would dread it.
0:45:44 I was out of shape.
0:45:45 I mean, I hated working out.
0:45:46 And so now it’s like, I feel the joy
0:45:49 and I feel privileged that I get to work out.
0:45:52 Like I have an opportunity to move my body
0:45:55 and to like experience this world.
0:45:56 And so whether it’s going on a run or a bike or playing a sport,
0:46:00 I love pickleball and tennis.
0:46:01 And or just getting me on a hike or a walk with a friend.
0:46:04 I love it.
0:46:06 You know, the Greeks had this very like,
0:46:07 it’s like body versus soul, like dualistic view.
0:46:10 Like we are embodied creatures.
0:46:12 Like we are one in the same.
0:46:13 That’s not the proper view.
0:46:15 Like our physical health impacts our mental health.
0:46:18 And vice versa, right?
0:46:20 And so I’ve seen this like wonderful,
0:46:24 like I have more energy to play with my children
0:46:26 and the relationships are better.
0:46:27 And like I can, I can, I feel better just in general.
0:46:31 So like, you know, when you feel better
0:46:33 and you can move better, it’s all this, like,
0:46:34 it’s like this virtuous upward loop, right?
0:46:37 And the inverse downward loop
0:46:38 when those things start to fail.
0:46:40 And so the alcohol thing,
0:46:41 very long-winded way of saying it,
0:46:42 I just noticed that when I drink alcohol, things felt hard.
0:46:48 And turns out alcohol is one of men,
0:46:52 especially one of the biggest inhibitors of testosterone.
0:46:55 And we think of testosterone as like the libido,
0:46:57 you know, hormone or whatever, and it is.
0:46:59 But like that’s not the point.
0:47:01 Like I wasn’t like, I was like, oh, well, I’m, you know,
0:47:03 drinking, I was basically drinking almost every day.
0:47:05 And I was drinking a lot.
0:47:07 Like I got the point.
0:47:08 I probably drank to say this even now,
0:47:09 I would never in a million years have defined myself as like
0:47:12 with any sort of addiction.
0:47:14 And like I could not drink and be okay.
0:47:17 But I was drinking like three or four or five drinks a night
0:47:20 every night.
0:47:20 Like, you know, you get home and you open up in a bottle of white
0:47:23 and you’re making dinner.
0:47:24 We cook all the time.
0:47:25 We love cooking.
0:47:26 My wife and I, it’s like kind of a core part of what we do.
0:47:28 And you know, we’re making this meal and, you know,
0:47:30 the, you know, open them, you know, another bottle of wine,
0:47:33 maybe a red, you have a little bit of that.
0:47:34 And then it’s like, oh man, you know,
0:47:36 it’d be really great tonight to have a little H tequila
0:47:38 or some cognac or something.
0:47:39 And, you know, before long, it’s like, it really adds up
0:47:43 and it affects your sleep.
0:47:44 And for me, I just noticed like, you know, testosterone,
0:47:47 the best definition I’ve heard of testosterone
0:47:49 and what it does is it makes hard things seem easy.
0:47:52 And so when I drink, hard things seem hard.
0:47:54 And when I don’t drink, hard things seem easier.
0:47:57 Like I can very clearly tell.
0:47:59 And so I just said it’s not worth it and try to come up
0:48:03 with other alternatives and how to get the ritual of it
0:48:06 and the specialness of it.
0:48:07 It’s kind of like a, you know, you can mark your days, right?
0:48:09 I mean, I went for a lot of my life.
0:48:10 It was like alternating between like caffeine was one part
0:48:13 of my day and alcohol is another part of my day.
0:48:16 And now I don’t drink caffeine and I don’t drink alcohol
0:48:20 for very different reasons, but both of them are health-related
0:48:23 and my life is way better for it.
0:48:25 And so my excuse now, and I shouldn’t say excuse,
0:48:28 the way I think about it is like when I celebrate,
0:48:31 it’s the only time I let myself drink.
0:48:33 The interesting thing to me when we were talking last night
0:48:35 is you mentioned, you used the word rule,
0:48:39 which I thought was really interesting.
0:48:40 Do you have any other rules that you’ve adapted
0:48:43 in the last couple of years that have really helped you
0:48:45 sort of unlock the next level?
0:48:47 Yeah, this is actually a huge part of a lot of these changes
0:48:51 that I’ve made in my life as well.
0:48:52 How we spend our days is how we spend our lives.
0:48:55 Like our habits are who we are.
0:48:58 And habits are very sticky and hard to change.
0:49:03 They require a tremendous amount of focus.
0:49:06 And it’s very difficult to add multiple habits at once,
0:49:09 is what I found.
0:49:10 I’m also not a personality that loves habits.
0:49:14 I don’t love structure.
0:49:16 I really enjoy the variety of life.
0:49:22 And so in many ways, like habits great on me,
0:49:25 but I’ve really come as I get older
0:49:27 to appreciate the value of good habits.
0:49:30 And so the habits I try and I would say as I,
0:49:33 these are most days, almost all days,
0:49:36 I get up and the first thing I do is read and pray.
0:49:38 I always try to tell my kids and my wife that I see them
0:49:44 and I know them and I love them.
0:49:46 And that there’s nothing they can do to ever move outside
0:49:49 of my love for them.
0:49:50 One of the questions I love asking my kids now is,
0:49:56 what do I do when you feel most loved?
0:49:58 And then I really try to focus on doing those things for them.
0:50:03 That’s sort of the magic question that unlocks
0:50:06 a tremendous amount of intimacy with anyone really.
0:50:11 Any friendship, if you ask that same question,
0:50:13 you’d be shocked, I think, what the answers you get.
0:50:15 Because in my marriage and in my friendships,
0:50:18 in my relationship with my children to some degree,
0:50:20 like I used to try to love them the way I wanted to be loved.
0:50:24 And that doesn’t work very well,
0:50:27 because really what you’re doing
0:50:28 is you’re loving yourself by doing that.
0:50:30 And then I kind of went through a phase where I was like,
0:50:31 okay, well, love them the way they should want to be loved.
0:50:34 That doesn’t work well either.
0:50:37 Why don’t they love it?
0:50:39 Why don’t they love it?
0:50:39 Yeah.
0:50:40 Right.
0:50:40 And then I started really being like,
0:50:43 okay, I’m going to pretend like I have no preconceived notions
0:50:47 of how somebody wants to be loved.
0:50:48 And you’re just going to ask them.
0:50:49 Yeah, I’m just going to ask them.
0:50:50 And do you know what’s interesting is most people
0:50:53 both can tell you pretty quickly,
0:50:55 but it’s shocking to them what comes out of their mouth.
0:50:57 Oh, interesting.
0:50:58 So most people don’t actually know
0:51:00 how they want to be loved.
0:51:01 Like it’s not something they think about.
0:51:03 And I mean, you can use this analogy at work too, right?
0:51:06 Like, you know, a question will ask somebody is like,
0:51:08 when do you really feel seen and appreciated?
0:51:10 I think this is the question we’re all trying to ask is like,
0:51:12 how do we want to be loved?
0:51:13 I’m like really getting down on somebody’s level with them
0:51:16 and getting in the muck in the mire with them.
0:51:19 Like that’s real relationship.
0:51:20 Let’s switch gears and talk about business a little.
0:51:22 But I think that a good segue question is,
0:51:25 how do you balance love with operating?
0:51:30 And you’re one of the best operators I’ve ever met in my life.
0:51:33 How do you balance those two things where we’re taught
0:51:38 to come at everything from a competitive point of view,
0:51:40 which you do exceptionally well,
0:51:42 or did exceptionally well for a number of years,
0:51:45 and it made you a huge success.
0:51:46 And then how do you get the same results or better results
0:51:51 operating out of love?
0:51:53 Well, I think the lie that we tell ourselves
0:51:57 is that if we don’t act out of scarcity,
0:51:59 that there won’t be enough.
0:52:00 And what that does is it isolates us and it shuts us down
0:52:07 and it isolates us on everyone.
0:52:09 I mean, anxiety is contagious.
0:52:11 Scarcity is contagious.
0:52:13 As soon as, I mean, if you look at the game theory of scarcity,
0:52:16 as soon as one person acts scarce,
0:52:17 the fear ripples through the entire crowd and love is fragile.
0:52:22 Care is genuinely fragile.
0:52:24 This either this fear mindset or this abundance mindset,
0:52:27 this love mindset,
0:52:28 it requires a tremendous amount of protection
0:52:32 in order to engage in it.
0:52:33 And look, I’m not going to sit here and pretend
0:52:36 that I would often make the same decisions
0:52:39 if I weren’t already in a position of success.
0:52:41 You’re operating end of a position of strength already.
0:52:44 Yeah, I’m coming often times where
0:52:46 I’m already coming from position of strength.
0:52:48 I do think though, I would hope if I hit reset
0:52:52 and I could go back knowing what I know now,
0:52:55 life is just way better no matter how you slice it.
0:52:58 Operating from a position of abundance and love and care,
0:53:02 no matter if you have resources or not.
0:53:05 But money makes you more of what you already are, right?
0:53:09 And so if you look at people with tremendous amount of resources
0:53:12 who made that money through scarcity and through high competition
0:53:15 and through stepping on people on the way up,
0:53:18 when they get to the top,
0:53:19 they continue to exhibit that behavior.
0:53:21 I think there are a number of people who experienced that.
0:53:24 And by the way, that was me in my 20s.
0:53:28 My 20s were filled with doing whatever it took to make it.
0:53:31 And I would hide it and, you know, I’d do it in a more gentle way.
0:53:35 But that my heart was scarce.
0:53:37 And I still battle this on a daily basis now.
0:53:40 So it’s not like, again, there’s no victory declared here.
0:53:42 But what is sustainable long term
0:53:45 is not a sort of Mexican standoff with everyone in your life.
0:53:50 I mean, that’s how most business is done.
0:53:51 It’s like, there’s power structures.
0:53:54 And it’s like, well, I’m going to make myself indispensable
0:53:56 so you can’t get rid of me, right?
0:53:59 And it’s like, oh, well, I wish I could get rid of that guy,
0:54:02 but I can’t, right?
0:54:03 It’s like, that’s a horrible, like, confrontational,
0:54:07 competitive, scarce mindset to be in business.
0:54:10 I feel like this is the norm.
0:54:12 Unfortunately, it’s really the norm in the finance world.
0:54:14 I mean, I feel like I’ve, I’ve, I fell backwards into finance.
0:54:18 I’ve joked on the forced gump of private equity.
0:54:21 And it is as scarce as it gets.
0:54:23 I mean, it is all zero sum is how it’s treated.
0:54:26 As we’ve moved towards a position of abundance,
0:54:30 as we’ve moved towards an ability to try to treat people
0:54:33 with honor and care and create win-win relationships.
0:54:36 I mean, that’s really what we’re trying to do.
0:54:37 You know, one of our mentors, both of us,
0:54:40 Peter Kaufman talks a lot about this, right?
0:54:42 As like the only sustainable long-term path
0:54:44 is that everyone has to win or it won’t work.
0:54:48 If there’s any losers in a system, it’s not sustainable.
0:54:52 So I think that’s just something
0:54:53 that we’ve really tried to pursue.
0:54:55 And so what does that practically look like?
0:54:57 I think is, is a question, right?
0:54:58 It looks like not protecting yourself always all the time,
0:55:04 but giving people the ability, if they want to act scarce,
0:55:08 to do so, but in like lower stakes ways.
0:55:13 So like one of my favorite things to do is, is be,
0:55:16 almost open myself up to being taken advantage of
0:55:18 early on in a relationship.
0:55:21 So if they do, then you’re like, okay, great.
0:55:24 Like, and by the way, there’s no judgment in this.
0:55:26 It’s not like, how dare you or I’m somehow better, you know,
0:55:29 whatever.
0:55:29 It’s just, hey, I just don’t think you’re in a position right now.
0:55:32 I was there before, but you’re not in a position right now
0:55:35 to be able to engage in our system
0:55:37 because our system requires a tremendous amount
0:55:39 of mutual trust and care.
0:55:41 Now again, we’re imperfect.
0:55:43 We screw up all the time.
0:55:44 We’re asking for forgiveness all the time.
0:55:46 We say, sorry, all the time.
0:55:47 It’s not, I don’t want to paint this picture
0:55:48 of like idealistic, like we’ve got it all together.
0:55:51 We got a lot of things to work on, right?
0:55:52 But I think most of the people are trying
0:55:56 to operate out of a position of abundance.
0:55:58 Most of us are trying to work towards wins for everyone.
0:56:03 We’re trying to be thoughtful with not just the buyer
0:56:06 and the seller, you know, private equity.
0:56:08 So we buy businesses.
0:56:09 We’re not trying to just think about the buyer and the seller.
0:56:12 Buyer being us, seller being the person who’s selling
0:56:14 is this thing.
0:56:15 We’re trying to be thoughtful about the executive leadership teams
0:56:17 at these companies.
0:56:18 We’re trying to be thoughtful about the employees,
0:56:19 the rank and file.
0:56:21 We’re trying to be responsible and be thoughtful
0:56:23 towards our customers and our vendors and the communities,
0:56:26 maybe even regulators, depending on the situation.
0:56:28 What does a win look like for a community
0:56:31 that we purchase a business in?
0:56:32 I don’t know.
0:56:33 It’s an interesting question.
0:56:34 I think it’s different for every business.
0:56:36 What does a win look like for the construction worker
0:56:38 on a job in business we bought?
0:56:40 It’s an interesting question to ask, right?
0:56:43 We can’t make anybody happy.
0:56:45 We can’t make anybody fulfilled.
0:56:47 But we certainly can create an environment
0:56:49 that allows more for them to be happy, free, fulfilled.
0:56:53 And this is where, I think, for the rest of my career,
0:56:55 the engaging part for me is not about money for a long time.
0:56:59 Thankfully, I’ve not had to worry about money for a while.
0:57:02 Now, for me, I’m like, wow, what if, when we buy a business,
0:57:07 not only is the work environment better,
0:57:10 maybe we allow them, provide the environment,
0:57:13 maybe show them a better way.
0:57:15 This idea of everything’s relative, right?
0:57:17 Maybe we can show them a better way
0:57:19 where their marriages get better
0:57:21 and their friendships get better
0:57:22 and their relationship with their children get better.
0:57:24 They’re more engaged people.
0:57:25 They’re more active.
0:57:26 I don’t want people who are working
0:57:29 80, 100 hours a week every week.
0:57:31 Now, look, there are weeks where I work 100, 100 hour weeks.
0:57:34 Sometimes you’ve got to get stuff done, right?
0:57:38 So there’s no shame in that.
0:57:39 But if that’s your norm, you just cannot sustain a healthy lifestyle,
0:57:45 healthy relationships, a healthy physical body working that much consistently.
0:57:50 Just no way.
0:57:50 There’s no time in the day to do it.
0:57:51 And so I don’t want people who are sustainably like,
0:57:55 like the whole finance world is full
0:57:58 of just chewing people up and spitting them out.
0:58:00 They use people as objects, right?
0:58:04 Then they throw them away when the object doesn’t become useful.
0:58:06 I mean, my fantasy, and this may be,
0:58:08 look at delusions of grandeur, illusions of grandeur,
0:58:11 is could we show people a better way
0:58:14 that actually you create higher returns long term by treating people well?
0:58:20 You create higher returns over time by using little to no debt
0:58:24 as weird as that is in the finance world.
0:58:26 And believe me, I know all the people are watching this.
0:58:28 I get the math.
0:58:29 You don’t have to send me the math.
0:58:30 I understand how leverage works.
0:58:32 I can do them.
0:58:33 I can do the math too.
0:58:33 But I think there’s real value in examining why,
0:58:37 why is it that we have a system,
0:58:39 especially in the leverage by our world of private equity,
0:58:42 where the norm is buy, lever, strip, and flip, right?
0:58:47 I’m going to lever this business to the moon.
0:58:50 I’m going to try to use as little equity as I can.
0:58:52 I’m going to try to sell it as quickly as I can
0:58:54 to generate the highest return I can.
0:58:56 There’s no way to make good long term decisions
0:58:59 with short term capital with short term time horizons.
0:59:01 There’s no way.
0:59:02 And by the way, what are we doing if all we’re,
0:59:07 there’s no way to create a long term enjoyable sustainable life
0:59:11 by having a series of short term transactional relationships
0:59:14 that you move your life through.
0:59:15 That’s where you end up with these people who can buy anything
0:59:19 who’ve made hundreds of millions, not billions of dollars,
0:59:22 who are miserable.
0:59:23 Like I’ve met these people.
0:59:24 Like they have their IRR etched on their tombstone.
0:59:27 Like no one gives a shit.
0:59:29 No one cares.
0:59:30 At the end of the day,
0:59:31 like David Brooks, I think calls him like eulogy virtues.
0:59:36 – Yeah, yeah.
0:59:37 – Like no one at somebody’s eulogy was like,
0:59:40 he was a great man, made a ton of money.
0:59:43 Hated his life.
0:59:44 Hated his wife.
0:59:44 – But he got 26.5%.
0:59:47 – Right.
0:59:48 – IRR.
0:59:49 – But that, that net IRR, whoo boy, let me tell you.
0:59:53 – Yeah, he was the one, one of the best.
0:59:56 – Yeah.
0:59:57 I mean, and look, we admire greatness.
0:59:59 Like we’re, we’re a society that worships outliers.
1:00:02 And so you’re not wrong to play that game.
1:00:06 That is a game to be played.
1:00:08 There is a game there.
1:00:09 And it does lead to certain things that are good.
1:00:12 It also makes you lose your soul.
1:00:14 And also, I don’t want to give the impression like we’re trying
1:00:19 to absolutely shoot the lights out of returns.
1:00:21 – Yeah.
1:00:21 Just in a different way.
1:00:23 How you go about it, your way, your way is more sustainable.
1:00:26 And there’s a couple of things I want to follow up on
1:00:28 that we talked about there.
1:00:29 Going back to the first part, allowing people an opportunity
1:00:34 to almost take advantage of you.
1:00:36 Often I find that the first request by somebody
1:00:39 is very telling or the first offer.
1:00:42 Here’s what we want.
1:00:44 Here’s what we need from you.
1:00:45 And if that doesn’t come across as fair,
1:00:48 it’s like the biggest signal in the world that it’s like,
1:00:51 oh, this is probably not a relationship that is going
1:00:54 to be win-win.
1:00:55 I’m going to have to work to try to make it win-win.
1:00:57 But you’ve given me this valuable piece of information
1:01:00 on day one without even intentionally doing so.
1:01:03 – Amen.
1:01:04 And I would also say the slight twist I’d make to that
1:01:06 is, and give grace, that I will fall down.
1:01:10 You will fall down and make offers to people,
1:01:13 even though maybe we actually are in a heart space
1:01:16 most of the time that’s not transactional.
1:01:18 This happens to me all the time where I will fall down
1:01:20 and do something transactional.
1:01:23 – Totally.
1:01:23 – And so it’s like, what I often do in that situation
1:01:26 is say, hey, maybe this was unintentional.
1:01:28 Maybe you were having a bad day.
1:01:30 Whatever the reason, this came across to me as transactional.
1:01:33 If I misinterpret it, maybe I don’t understand what you’re
1:01:35 actually– the sentiment underneath it.
1:01:37 But it feels short-term, feels transactional,
1:01:39 feels extractive in what you offered.
1:01:43 Did I misunderstand?
1:01:45 And usually that reaction, the more defensive they are,
1:01:48 the more kind of like, what are you talking about?
1:01:51 Right?
1:01:51 Like, the water we swim in culturally is transactive,
1:01:55 extractive.
1:01:57 It removes control.
1:01:59 It says you will be OK if you can build your own kingdom.
1:02:03 So it’s perfectly normal for that to be the way people
1:02:09 interact and transact.
1:02:10 Like, that is the norm.
1:02:11 So I just want to be careful with how steeped in that somebody
1:02:15 is and how much they’ve realized that maybe
1:02:17 that there’s a better way.
1:02:18 And what I don’t want to do is I don’t want to come across
1:02:21 as judging them or condemning them based on that,
1:02:26 which is a real danger, right?
1:02:27 Because I mean, you can get self-righteous pretty quickly.
1:02:29 It’s just a signal.
1:02:30 Right.
1:02:31 It’s just a signal.
1:02:32 If anything, even if they are highly transactional and sort
1:02:35 of my– like, I have this like–
1:02:37 it’s like a weird feeling that rises up in me.
1:02:39 It’s like, ugh.
1:02:40 Like, ugh, I don’t know.
1:02:41 You’re spidey, son.
1:02:42 Right.
1:02:42 It’s that– I think it’s like a protective thing
1:02:46 where you’re like, OK, I can feel myself rising
1:02:49 in competitiveness, rising in scarcity,
1:02:51 to meet their scarcity.
1:02:53 And I’m like, ooh, I don’t like that.
1:02:54 That’s that dirty fuel that I feel like it’s almost
1:02:56 like a direct injection of dirty fuel into my system.
1:03:00 And I’m like, ooh.
1:03:01 Yeah.
1:03:02 And then it’s like, OK, well, even if I say, hey,
1:03:04 I don’t think we’re in a position right now to probably
1:03:06 do something on this, or like, I don’t think the system–
1:03:08 it would work for you engaging in the system right now,
1:03:12 try to show them a better way and encourage them.
1:03:13 Don’t condemn them, right?
1:03:14 I think that’s the thing that we try to do.
1:03:16 Now, oftentimes, I think people don’t take it as such.
1:03:19 I mean, look, if somebody makes you an offer and you decline,
1:03:22 there’s rejection in that.
1:03:24 And again, I totally get this because I feel this way is,
1:03:28 when you get rejected, it touches things that are way deeper
1:03:31 than just that mere surface level rejection.
1:03:33 Totally.
1:03:34 So when it travels down and starts ping-ponging around
1:03:36 and hitting all those things down below,
1:03:39 that’s where you get these outsized reactions to things.
1:03:43 And again, the response that you want to have
1:03:47 is when you see somebody have an outsized reaction,
1:03:49 it’s to be able to feel stupid, belittle them.
1:03:50 Conflict pattern is something that I really
1:03:53 have enjoyed studying.
1:03:55 So we all have three basic moves in conflict.
1:03:59 And actually, if you watch these, it’s fun.
1:04:01 Like now, whenever I engage in conflict, I know my pattern.
1:04:05 And I very much know my wife’s pattern.
1:04:08 And I try to guess what other people’s patterns are.
1:04:12 You can watch people go through these phases.
1:04:14 But it’s called move against, which is like, no, you’re wrong.
1:04:21 Screw you.
1:04:22 I want to make you submit to me.
1:04:25 It’s very much like a forced submission.
1:04:27 This is somebody who gets up in your face,
1:04:29 who’s yelling, or who’s kind of talking down to you,
1:04:33 very confrontational.
1:04:35 That’s kind of like one phase.
1:04:36 And by the way, again, we do all three of these.
1:04:39 We just depends on the order.
1:04:41 But we all have an order to how we do these things.
1:04:43 And then, by the way, how they interact with one another
1:04:45 is super interesting as well.
1:04:47 The second one is move towards the person.
1:04:51 So the first one’s move against.
1:04:52 The second one’s move towards.
1:04:53 Move towards is we need to be OK.
1:04:56 I’m not OK unless we’re OK.
1:04:57 Let’s just gloss over whatever’s happened.
1:04:59 It’s OK.
1:05:00 It’ll be fine.
1:05:01 Let’s just water the bridge.
1:05:03 Let’s just move on.
1:05:04 Let’s avoid it.
1:05:05 It’s avoid.
1:05:05 Well, it’s avoiding a way that is it feels very relational.
1:05:10 But it’s actually not because it’s not
1:05:11 for the good of the other.
1:05:12 It’s actually for their good.
1:05:13 They want to have things be OK.
1:05:17 But it actually doesn’t address the underlying issue at all.
1:05:20 And then the third one is move away.
1:05:21 So this is the isolate.
1:05:23 And so if you watch all of your conflict,
1:05:25 we’ll follow that pattern.
1:05:27 Talk to me about debt and your thoughts on debt
1:05:30 and the optionality it gives you and when it’s appropriate,
1:05:33 when it’s not appropriate.
1:05:34 Debt is not a source of return.
1:05:37 It is an amplifier of return.
1:05:39 So it makes good things be great.
1:05:44 It can take mediocre things and destroy them.
1:05:46 And of course, it takes bad things and nukes them.
1:05:49 The higher your confidence in the predictability
1:05:54 of the future, the more debt you can use.
1:05:58 I say can use, not should use, in a perfect world
1:06:01 of perfect information where you and I own a business.
1:06:03 And we’re like, it’s a recurring revenue business.
1:06:07 We are for sure going to make, unlevered,
1:06:11 we’re going to make $2 million this year, $3 million
1:06:14 the following year, $4 million the following year.
1:06:16 And it will go up exactly $1 million
1:06:18 in free cash flow every year into the future.
1:06:20 Mathematically, you can create a formula
1:06:23 to know exactly how much debt you can maximize
1:06:25 in that business, you pull out the equity,
1:06:28 the equity returns look out of this world, incredible.
1:06:32 And because you know exactly the future
1:06:34 is there’s no risk in that.
1:06:35 So businesses that have high predictability
1:06:38 of revenues and incomes and feel like that they are,
1:06:42 well, we shouldn’t say feel,
1:06:44 in this case, since we’re creating a scenario,
1:06:45 they know that outside events
1:06:48 are really going to not affect them,
1:06:50 then they can lever a tremendous amount.
1:06:53 And it makes complete perfect math sense.
1:06:57 The reality is that the world, I believe,
1:07:00 is largely unknown and unknowable.
1:07:04 The future is murky.
1:07:07 And so it is a form of pride, a hubris,
1:07:11 to use more debt than you should.
1:07:14 Now, this is very broad, this is like 60,000 foot
1:07:17 because everything’s relative, right?
1:07:18 How much debt should you use?
1:07:20 In the world I play in,
1:07:22 we are buying loosely functioning disasters
1:07:25 that sometimes make money.
1:07:27 I mean, these are small to medium-sized businesses,
1:07:30 call it $3 million to $20 million of free cash flow.
1:07:34 You know, my general view after looking behind the curtain
1:07:37 at thousands and thousands of businesses
1:07:39 is that all businesses are loosely functioning disasters,
1:07:42 like whether it’s a not-for-profit or for-profit
1:07:44 or government institution, like people are messy.
1:07:47 When you get multiple people together, that mess compounds.
1:07:50 When you get large groups together,
1:07:52 that mess compounds even further, it’s exponential.
1:07:55 And the volatility of that messiness is tremendous.
1:08:00 And so when you get to a smaller end of the market,
1:08:04 these are for-profit companies
1:08:05 that are making between $3 and $20 million a year
1:08:08 free cash flow, the volatility of them is tremendous.
1:08:13 And hence the price that we pay is on average less
1:08:17 than ’cause we’re paying to accept that risk.
1:08:21 All investing at the end of the day
1:08:23 is the assumption of risk.
1:08:24 The ideal investment scenario is you are assuming
1:08:29 a risk that is knowable,
1:08:31 you are being paid more to assume that risk,
1:08:34 and you have some ability to mitigate that risk.
1:08:37 And that’s what we’re trying to do in our business.
1:08:39 We’re trying to find things that are highly risky, right?
1:08:43 ‘Cause we wouldn’t pay the price that we’re paying for them
1:08:45 if they weren’t highly risky,
1:08:48 but that we have talents and relationships and systems
1:08:52 that we can diagnose what the risks are,
1:08:55 properly analyze the probability and the magnitude
1:08:58 of that risk, and then work to mitigate it.
1:09:01 And that’s where our returns come from.
1:09:02 The math to me is far less clear
1:09:05 that over the long term, debt makes you more money.
1:09:09 I’ll give you an example of this.
1:09:10 We bought an aerospace business in the fall of 2019.
1:09:15 I don’t know if you know the shame,
1:09:17 but aerospace never goes down.
1:09:19 It’s always flat where it goes up.
1:09:21 We were told by some of the people advising us
1:09:23 on that deal, they were like, are you guys,
1:09:25 did you guys get dropped on your head as a child
1:09:27 or something?
1:09:28 Like you’re not putting any debt on an aerospace business.
1:09:31 Like what is wrong with you?
1:09:32 Like this is tons of assets, highly leverable.
1:09:35 Like banks would be happy to provide.
1:09:37 Predictable is predictable.
1:09:39 Look at the history of the business.
1:09:41 And we said, yeah, we don’t feel like
1:09:44 that’s a responsible thing to do.
1:09:46 Again, debt only helps the buyer and the seller.
1:09:49 It doesn’t help the leadership team.
1:09:50 It doesn’t help the employees.
1:09:51 It doesn’t help the communities.
1:09:52 It doesn’t help the regulators.
1:09:54 Doesn’t help your customers.
1:09:55 Doesn’t help your vendors.
1:09:57 There’s all these stakeholders at the table
1:09:59 that it doesn’t help, but it does help
1:10:01 in certain circumstances, the buyer and the seller.
1:10:04 Which again, if you sort of play short-term games
1:10:07 when short-term prizes, area of scarcity,
1:10:10 non-recourse debt, heads I win, tails you lose.
1:10:14 There’s a lot of incentives to use debt irresponsibly.
1:10:18 I think that most private equity firms look at,
1:10:21 they’re the gas and the bankers of the breaks.
1:10:23 And they’ll just do whatever the bankers allow them to do.
1:10:27 And it’s sort of up to the bankers to say no.
1:10:29 And so our aerospace business, we were called idiots.
1:10:34 I mean, actually even on Twitter,
1:10:35 I think when we came out with our annual letter
1:10:36 that year, people were like, like finance bros were like,
1:10:40 you guys are morons.
1:10:42 It was like maybe, and oftentimes we are morons
1:10:45 and we’re just good to be called out for it.
1:10:47 But like in this particular case, I don’t think we were.
1:10:49 And this is obviously way before we knew
1:10:51 that there was gonna be a pandemic.
1:10:53 And you know, this idea of like, did we get lucky?
1:10:56 Did we get good?
1:10:56 I think you can know that things are not gonna play out
1:11:01 the way you want them to and prepare for them
1:11:03 not playing out and keep optionality open,
1:11:05 which is going to decrease your returns in any given year
1:11:08 but give you the ability to survive over decades.
1:11:12 So pandemic rolls around and we’re worried,
1:11:15 demand in the industry in our segment went off
1:11:19 at one point by 88%.
1:11:21 We started to struggle.
1:11:23 And we looked at it and we were like, okay, let’s,
1:11:26 and by the way, the leadership team there
1:11:28 did an incredible job of maintaining positive cash flow
1:11:32 every single month through the entire pandemic.
1:11:34 Everyone else was negotiating with their banks.
1:11:36 Everyone else was firing people
1:11:38 and we were the only ones hiring
1:11:40 and we were building systems and we were taking risk
1:11:43 and we were able to do that because we didn’t have any debt.
1:11:45 Everyone else is tied up.
1:11:46 We weren’t tied up.
1:11:48 And the alternative is we lever the thing up
1:11:50 and for, I don’t know, four or five months
1:11:53 we get a better return and then we negotiate with the bank.
1:11:57 Hopefully we salvage it.
1:11:59 Maybe we have to inject more equity in down the road.
1:12:02 We’re sure as heck not hiring.
1:12:03 We’re not buying parked packages for pennies on the dollar.
1:12:07 We’re not setting up for 10 years
1:12:08 of future success and growth.
1:12:10 We’re not implementing new ERP systems.
1:12:14 We’re not implementing new process and ordering systems.
1:12:18 The whole thing was basically gave us two years
1:12:21 to completely rebuild that business from the ground up
1:12:24 and to see the fruits of that is astounding.
1:12:27 And the business is dramatically worth more
1:12:29 than it was when we bought it
1:12:32 in spite of having a pandemic
1:12:34 and dramatically decreased demand.
1:12:38 – We can’t predict the future.
1:12:39 When I was talking to Chris Davis
1:12:41 who’s on the board of Berkshire,
1:12:44 he mentioned it’s a strong signal
1:12:47 if you’re looking for a good business
1:12:49 that they don’t have any debt or they have very little debt
1:12:52 because that masks so many things
1:12:54 and the fragility involved is just off the charts.
1:12:58 And people don’t realize the risks they’re taking
1:13:00 and there’s also a world of difference between debt.
1:13:03 2% if you can get long-term debt at 2%
1:13:07 versus sort of now seven, eight, nine, even higher
1:13:12 depending on the circumstances.
1:13:14 And when people enter into a debt transaction,
1:13:18 they just assume that the world is gonna stay
1:13:20 the exact same that it is today.
1:13:22 I’m gonna make the same revenue.
1:13:24 The interest rates aren’t gonna go up.
1:13:26 They’ll only positively surprise me to the downside.
1:13:29 And then you find out that that’s not the case
1:13:31 and then all of your free cash flow effectively
1:13:35 starts getting consumed by debt.
1:13:37 – And it doesn’t take much.
1:13:38 It takes like a five to 10% downturn in the business
1:13:40 which is a perfectly normal-
1:13:42 – Business cycle.
1:13:43 – Reasonable cycle to then throw the business into chaos.
1:13:48 – Yeah.
1:13:49 – I can’t imagine being an operator.
1:13:53 And by the way, we’ve never seen a business
1:13:57 that we wanna purchase ever in the history of the firm
1:14:00 that has debt on it.
1:14:01 Like when we buy it, that has debt on it.
1:14:04 Like no families get wealthy by being like,
1:14:08 “Oh yeah, we have this great operating business.
1:14:10 “Like let’s pull a bunch of income from the future
1:14:13 “into the present and lever up.”
1:14:14 ‘Cause that would be awesome.
1:14:15 So we can increase our consumption temporarily.
1:14:17 – So we can buy a bigger house.
1:14:19 – Like no one does that.
1:14:21 And for a very good reason.
1:14:21 Like it doesn’t make any sense, but somehow
1:14:24 we’ve gotten ourselves as an industry
1:14:25 in the finance industry into this position
1:14:27 where it’s like, it makes no sense
1:14:29 how families build businesses.
1:14:32 And by the way, every business starts as a small business.
1:14:35 Every business starts as a family-owned business.
1:14:37 They then take a business that has been operated
1:14:39 a certain way for a very long time,
1:14:40 gone through ups and downs,
1:14:41 survived for 20, 30, 50, 100 years maybe.
1:14:44 And then all of a sudden it’s like,
1:14:45 actually what we wanna do now is completely gut
1:14:50 how the business operates and runs.
1:14:51 We need to hit it with the steroid needle.
1:14:54 We’re gonna get, we’re gonna jack it up with debt.
1:14:55 We’re gonna strip it of a bunch of cost structure.
1:14:58 We’re going to hire a bunch of new people
1:15:00 who are gonna do amazing things in a short period of time.
1:15:04 And then we’re gonna flip it to somebody else.
1:15:06 And by the way, once you get on that treadmill,
1:15:07 like once you sell the private equity,
1:15:09 traditional private equity, do a leverage buyout,
1:15:11 that business is forever going to be flipped
1:15:14 to the next person.
1:15:15 Or eventually might get sold to a strategic,
1:15:17 but it forever is relegated to a lack of independence.
1:15:21 Like it will never be an independent,
1:15:23 ongoing concern for very long after that.
1:15:26 There’s just no, no examples of this.
1:15:27 So for us, like, you know, I don’t think we’re smart.
1:15:31 I don’t think we’re trying to be geniuses.
1:15:34 We just look at like, okay,
1:15:35 the whole world is built on an entrepreneur
1:15:39 or small group of people, entrepreneurs,
1:15:41 getting together, creating something that the world needs.
1:15:44 It’s hard.
1:15:46 They built it over a long period of time.
1:15:48 They inherently acknowledge the fragility of it.
1:15:51 We just want to continue to honor them, their legacy,
1:15:54 honor all the stakeholders,
1:15:55 and I’ll try to win together over the long term.
1:15:57 And I couldn’t imagine a worse thing to do
1:16:00 than to put debt on that.
1:16:01 – And I think people miss over the long term,
1:16:05 the lack of debt actually works out better.
1:16:07 But over the short term,
1:16:10 and I have the saying which is lack of patience
1:16:12 changes the outcome.
1:16:14 And so when you lever up to get your immediate returns,
1:16:19 and then you’re like sort of like playing with house money,
1:16:23 you can sort of justify almost any behavior.
1:16:27 And when you think long term,
1:16:29 like a family thinks of a business and you sort of go,
1:16:31 well, we can’t do that because what we want is optionality.
1:16:34 You miss the fact that what you guys did,
1:16:37 you had a period of two years where you made more progress
1:16:40 than you would have in probably 10 or 20,
1:16:43 where you’re strong and you’re operating
1:16:47 from a position of strength.
1:16:49 And it’s almost playing on easy mode in a way, right?
1:16:51 It’s like, oh, like now we can expand our business.
1:16:54 People are probably discounting parts
1:16:57 at these fire sale prices.
1:16:59 We can stock up on them,
1:17:01 and our margins gonna expand because of that.
1:17:03 We know the business is eventually gonna come back.
1:17:06 – I mean, I think it depends on how you look at our roles.
1:17:09 Are we owners?
1:17:10 And I’m not talking about legal definitions here.
1:17:12 I’m talking about mindset.
1:17:13 – Yeah.
1:17:14 – If you own something,
1:17:15 it is your property to do with it whatever you want.
1:17:19 You can do anything you want with it.
1:17:20 So like the pushback to everything,
1:17:22 if I was in a strong man, the opposing argument is,
1:17:25 who are you to tell me what risks to take?
1:17:26 – Oh, you can take it.
1:17:27 – Who are you to tell me how to run my business?
1:17:30 Like I own it.
1:17:31 I can do whatever I want.
1:17:32 I used to feel that way.
1:17:33 Big shift for me was becoming a steward.
1:17:36 Right, it’s this idea of stewardship and not ownership.
1:17:38 So the way I look at it is,
1:17:39 families are entrusting us to be stewards of their company.
1:17:43 It’s a responsibility that we have.
1:17:46 Yes, we get benefits from being a steward.
1:17:50 Yes, we get to share in the fruits of the labor
1:17:53 and progress of the company.
1:17:55 But at the end of the day, my job is to make sure
1:17:57 that these businesses remain intact or healthy.
1:18:01 And when you look at it from that position,
1:18:05 the world becomes a lot clearer.
1:18:07 What’s in the best interest of everyone else?
1:18:10 But also me, I mean, I don’t wanna do things that harm us.
1:18:13 But if we align incentives properly,
1:18:15 things that help us should help everyone else.
1:18:17 And vice versa.
1:18:19 Like we will be taken care of if we take care of our people.
1:18:22 We’ll be taken care of if we take care of our customers.
1:18:25 Like it’s not a complicated thing,
1:18:27 but I think again, are we owners or are we stewards?
1:18:30 – Or I think often families take a stewardship mind chat
1:18:33 of ownership, it’s the-
1:18:35 – Exactly.
1:18:36 – It’s interesting to me the,
1:18:38 I try not to judge other people for what they do
1:18:41 or what they choose.
1:18:42 ‘Cause I mean, we’re each playing our own game
1:18:44 or each sort of like doing what’s rationally
1:18:46 makes sense for us, given everything going on in our life.
1:18:49 And if we switch shoes,
1:18:50 we’d probably see the world very differently than we do.
1:18:55 But people, I think they just underappreciate the fact
1:18:58 that you are not thinking about really what you’re doing
1:19:03 over a longer period of time.
1:19:06 And if you structure your thinking,
1:19:09 stewardship is a great example.
1:19:11 Over a longer period of time,
1:19:13 you eliminate a lot of poor behavior
1:19:16 that you would otherwise get
1:19:17 or a lot of things that can take you out of the game.
1:19:19 – Yeah, for sure.
1:19:20 – Let’s talk about incentives.
1:19:21 How do you set incentives for the CEOs of these businesses?
1:19:25 How do you think about them?
1:19:27 Walk me through one in detail, for example.
1:19:30 – Yeah, well, so I think the ideal system
1:19:33 is everyone’s eating at the same table.
1:19:36 Right, so there’s not different tables
1:19:37 that the food falls onto one
1:19:38 and then falls onto the other, right?
1:19:40 Everyone’s incentives are aligned to achieve the same goals.
1:19:44 And for us, when we look at traditional private equity
1:19:49 and the traditional two and 20 model, right?
1:19:52 So on the amount of capital
1:19:53 that you have either gotten to invest or have invested,
1:19:57 depending on the terms of the agreement
1:19:59 with your limited partners,
1:20:01 you get a 2% fee annually
1:20:04 that goes to covering your overhead costs
1:20:06 and the expenses of the operations of the firm,
1:20:09 and the seeking out, the doing of the deals,
1:20:11 the oversight and governments post-close.
1:20:14 And then once you pay them back with a return,
1:20:16 typically a 6% to 8%, maybe 10% depending on the situation,
1:20:20 then you get to share in the upsides of that.
1:20:23 And the LPs, the people supplying you with the money
1:20:26 provide you that capital
1:20:29 for usually in private equity, 10 years, roughly.
1:20:33 Which again, goes back to time horizon.
1:20:36 10 years sounds like a long time.
1:20:38 Shane, isn’t that plenty of time to buy a business and hold it?
1:20:42 Maybe.
1:20:43 I think if you talk to most private equity people,
1:20:46 they would say it’s not the deals that they did
1:20:49 that really hurt, that they did that went poorly.
1:20:53 The ones that hurt the most
1:20:54 are the ones that they were doing great
1:20:56 and they could see a long future compounding
1:20:57 that they just had to sell the business.
1:20:59 You’re like, but 10 years is a long time.
1:21:02 The reality is it takes time to find a business,
1:21:06 get the transaction done.
1:21:07 There’s a sort of initial phase
1:21:09 of getting to know the business once you buy,
1:21:10 you really never know what you actually buy.
1:21:12 No matter how much due diligence you do,
1:21:14 you don’t really know until you get into the weeds post-close.
1:21:17 There’s a period of orientation,
1:21:18 then there’s a period of traditional private equity growth
1:21:21 and trying to hit some sort of metrics
1:21:23 to then sell it to somebody else,
1:21:24 which by the way, selling takes time too.
1:21:26 So you got to buy it takes time,
1:21:27 get to operate it takes time, you got to sell it takes time.
1:21:29 So the really at max, if you hit it perfectly
1:21:33 in the fund life cycle, maybe you get five years.
1:21:36 Five years at most.
1:21:38 Most private equity firms now are targeting
1:21:41 what they’d like is two to three years.
1:21:44 So from the time we buy something
1:21:46 till the time we sell it is two or three years.
1:21:48 Again, it’s maybe four or five.
1:21:50 If you get past five, it’s really distressed at that point.
1:21:52 Like you’re trying to look for,
1:21:54 you’re trying to get rid of it and you can’t.
1:21:56 When we think about incentives,
1:21:58 incentive, nutritional, private equity would be,
1:22:00 Shane, I’d like for you to come on.
1:22:02 I’d like for you to run, do a tour of duty, right?
1:22:05 So tours of duty is kind of the way that
1:22:08 leadership has done in traditional private equity.
1:22:09 Once you tour of duty, it’s going to be two to three years.
1:22:12 Look, you’re not going to see your family much.
1:22:13 You’re going to work your tail off.
1:22:15 But there’s this pot of gold at the end of the rainbow.
1:22:17 If you can get us our returns,
1:22:20 you can get our investors our returns,
1:22:21 then you get to share in the upside of that.
1:22:24 It’s a highly levered bet of sort of your time and tension.
1:22:27 And we think that that doesn’t make much alignment.
1:22:31 This is where you see private equity detonating companies.
1:22:33 This is where you see lots of problems.
1:22:35 I mean, private equity, you know,
1:22:37 as an industry, when I tell somebody I’m in private equity,
1:22:39 it’s like we look up to lawyers
1:22:40 and reputation these days.
1:22:42 You know, lawyers have a better reputation than we do.
1:22:45 And for a very good reason,
1:22:46 like there’s been a lot of bad behavior.
1:22:47 And by the way, the incentives are for the bad behavior.
1:22:51 All the polls of traditional private equity,
1:22:53 leverage, buyout model is towards bad behavior.
1:22:57 Short-termism, treating people poorly.
1:23:00 – Yeah.
1:23:01 – Cutting, all these things that hurt.
1:23:03 I think you’re damaging.
1:23:04 When you fire somebody, you are hurting not just them,
1:23:08 but their entire family, their friend group.
1:23:10 Like you’re hurting communities.
1:23:12 Now it’s also not healthy to keep somebody in the role
1:23:14 that they’re in because you don’t want to fire them.
1:23:15 That’s not healthy either.
1:23:16 That’s not kind, nice.
1:23:18 That’s not kind.
1:23:19 We can talk about that as a separate point.
1:23:20 For what we are trying to do though,
1:23:23 is we’re trying to have a complete perfect alignment
1:23:25 between our LPs, us and the people
1:23:30 who operate these businesses on a day-to-day basis.
1:23:33 So we’re trying to all leave from the same table,
1:23:35 trying to use the same metrics.
1:23:36 Practically, what does that look like?
1:23:38 We are, I used to say unusual in our fee model.
1:23:42 Now it’s unique.
1:23:43 I mean, we couldn’t even get audited right out of the gate
1:23:46 because no one knew what to do with us.
1:23:48 We take no fees of any kind,
1:23:49 no reimbursements of any kind.
1:23:52 There’s no cash that comes from either our LPs
1:23:54 or the companies to us.
1:23:57 Zero guaranteed revenue.
1:23:59 Which you’re like, how do you run the firm?
1:24:01 Thankfully, when we started the firm,
1:24:02 again, we were operators.
1:24:03 So we came in with cash flow and with businesses
1:24:06 and fell backwards into this whole thing of private equity.
1:24:09 I remember the first deal I did,
1:24:12 I was close to accidental as you could buy a business.
1:24:15 I bought it.
1:24:16 I remember my lawyer,
1:24:18 he was like, well, we just gotta do diligence.
1:24:19 I typed into Google DO diligence.
1:24:21 – Was this media cross?
1:24:22 – Yeah, it was media cross.
1:24:23 So what was today?
1:24:24 I remember getting that deal done
1:24:26 and I called up a friend who was like,
1:24:27 my one finance friend from undergrad.
1:24:29 And I was like, hey, I did this thing.
1:24:31 I’m like, I think it’s a good deal.
1:24:33 I don’t know.
1:24:34 And he goes, oh, you did a private equity deal.
1:24:35 I literally Googled private equity.
1:24:37 I owe most of my career to Google.
1:24:39 When I started studying it,
1:24:40 I’m like, what, this doesn’t make any sense.
1:24:42 Like all the incentives are off.
1:24:43 And so what I said was when we came in
1:24:45 and we were, we ended up taking outside capital
1:24:47 for the first time in 2017,
1:24:48 I was like, I don’t need your fees.
1:24:52 Like I don’t want your fees.
1:24:54 I don’t want the incentive to gather more and more capital
1:24:57 which forces you to go up market.
1:24:59 You can talk about that.
1:25:01 I said, and I don’t want to be able to win when you lose.
1:25:05 Like I want to win-win or a lose-lose situation.
1:25:08 Like I am willing to take the risk.
1:25:09 I want to be entrepreneurial
1:25:10 ’cause that was my background.
1:25:11 Like I was an entrepreneur.
1:25:12 And so we have a model where we take no fees of any kind,
1:25:14 no reimbursements of any kind
1:25:15 from the portfolio companies or from our LPs.
1:25:17 We get a percentage of free cash flow
1:25:19 as we return cash back.
1:25:20 That’s how we share with our investors.
1:25:23 Well, turns out what that does for us
1:25:26 is it gives us the perfectly aligned ability
1:25:29 to, if there are high return, high probability projects
1:25:33 to reinvest in the portfolio,
1:25:34 we would be idiots not to take the cash, defer gratification
1:25:39 and reinvest it often pre-tax
1:25:42 at high rates of return with high probability.
1:25:44 That’s what any family would do, right?
1:25:48 That’s what we do.
1:25:49 That’s what our investors want.
1:25:50 They want to defer gratification.
1:25:52 We want to defer gratification.
1:25:54 And the same thing.
1:25:54 We want to incentivize our leaders
1:25:55 to do the exact same thing.
1:25:56 So oftentimes the metrics that they’re measured on
1:25:59 is on free cash flow.
1:26:01 But again, it’s not free cash flow in a short period of time.
1:26:04 It’s free cash flow over a long period of time.
1:26:07 So when we don’t have things to do with the capital,
1:26:10 high probability, high return reinvestments,
1:26:13 the dumbest possible thing you could do
1:26:15 is keep a bunch of cash.
1:26:16 I call the bladder problem, right?
1:26:17 The more money you have,
1:26:18 the more likely you’re going to piss it away.
1:26:20 This is where you see these businesses being run
1:26:23 in ways that you’re like, they are murdering money.
1:26:25 They are destroying capital.
1:26:27 How in the world are they getting away with this?
1:26:28 And it’s like, well, they’re kingdom building.
1:26:30 Refugee building, their incentives are,
1:26:32 build a bigger business.
1:26:33 ‘Cause by the way, you hire the compensation consultants
1:26:35 that tell you, well, yeah, the same team,
1:26:39 and they haven’t really made a great return,
1:26:40 but the business is bigger.
1:26:41 And by the way, bigger businesses command higher salaries.
1:26:44 So you play the game.
1:26:45 It’s a bigger business, it’s a higher salary, more comp.
1:26:48 It’s like their incentives are off.
1:26:49 The firm who bought them, they’re two and 20,
1:26:52 buy, lever, strip, and flip.
1:26:53 Their incentives and the leadership teams’ incentives
1:26:56 often are misaligned.
1:26:57 LPs are misaligned.
1:26:58 Everyone up and down the value chain
1:27:00 of the traditional private equity structure is misaligned.
1:27:03 Now, there’s so much money flowing through the system,
1:27:05 and there’s enough safeguards,
1:27:06 and there’s enough discernment
1:27:07 over a long enough period of time.
1:27:08 It all kind of has worked.
1:27:10 You can make an argument that when rates are continually
1:27:13 decreasing for the better part of two and a half decades,
1:27:16 interesting weird distortions happen in the market.
1:27:19 We just want a perfect alignment.
1:27:21 So we want that operator in the business
1:27:23 to say the first thing I want to do
1:27:25 is keep a healthy business with strong cash flow.
1:27:28 Keep the golden goose cranking out eggs.
1:27:30 Second, we want to take the proceeds pre-cash flow
1:27:33 and look for high return,
1:27:35 high probability projects in the companies.
1:27:37 We can find them, especially pre-tax.
1:27:41 Fantastic.
1:27:42 Reinvest the cash.
1:27:44 They want to reinvest the cash because now,
1:27:46 they reinvested $100 and now they’ve got $25 more
1:27:49 every other year following that.
1:27:51 We love that too.
1:27:53 We’d be happy to defer.
1:27:54 We’re getting $25 as well ourselves.
1:27:56 Now our investors are like, of course, keep the capital.
1:27:59 You’ve got great things to do with it, keep it.
1:28:01 So up and down the value chain, we’re completely aligned.
1:28:04 When we should hold cash, we do and reinvest it.
1:28:08 And when we don’t have anything good to do with it,
1:28:10 we send it out.
1:28:11 – So is it a simple sort of like two variable formula
1:28:14 for all your CEOs then or in terms of pre-cash flow
1:28:18 and invest capital?
1:28:19 – Nope.
1:28:20 Everyone’s just incentivized on that.
1:28:23 – And then do the CEOs get a compensation
1:28:25 on the cash distributed?
1:28:27 – Yep, oftentimes.
1:28:28 Yeah, I mean, it depends on the situation
1:28:30 where sometimes having these CEOs are rolling forward
1:28:33 quite a bit of equity, depending on the situation.
1:28:35 So sometimes they’re getting equity
1:28:38 or getting cash kickers on top of that,
1:28:40 but oftentimes they’re 10, 15, 20% owners in these businesses.
1:28:45 And so the incentive is naturally baked in.
1:28:48 We love that.
1:28:49 We don’t want to buy 100% of a company.
1:28:51 Like if we have our choice, we’re buying 51%
1:28:53 to 70% of the business.
1:28:55 And we don’t allow non-strategic actors.
1:28:59 We want people who are actively engaged
1:29:00 in the business to own the remainder.
1:29:02 – How do you think about hiring and firing CEOs?
1:29:04 How do you know you have the right CEO?
1:29:06 And how do you know when it’s time to move on?
1:29:09 – It’s hard.
1:29:10 It’s hard and it’s messy is the answer.
1:29:13 Since we’re talking about comparing us
1:29:15 to traditional private equity,
1:29:16 I would say it’s one of the things
1:29:16 that traditional private equity has gotten done better
1:29:19 than us in some ways is held people accountable.
1:29:22 I think they go too far in one direction.
1:29:24 I think we’ve reactionarily gone too far in the other.
1:29:27 In terms of the performance of permanent equity as a firm,
1:29:30 I would say in absolute terms,
1:29:33 we’re not doing as well, nearly as well as we could.
1:29:36 And this is an area of active learning for us.
1:29:38 I’m just being honest and transparent about it.
1:29:40 We’ve been tolerant of a lack of performance
1:29:42 to a degree that is unhealthy,
1:29:45 not only for the companies and the returns,
1:29:48 but also for the people that are engaging in that behavior.
1:29:51 And this is an active area of discussion right now
1:29:53 in the firm.
1:29:53 I mean, I’m giving you a real live view
1:29:56 of what we’re discussing.
1:29:58 And it ultimately is a failure on my part.
1:29:59 Like I’m the CEO, I’m responsible for setting the tone
1:30:02 and I deferred too much early in my career
1:30:07 to the promises and to the optimism
1:30:11 that things would get better when things weren’t great.
1:30:13 And if you look at where we have really succeeded
1:30:16 is working with people who were doing well
1:30:18 and making them better.
1:30:20 Where we’ve really fallen down as a firm
1:30:22 is when things get dicey,
1:30:25 we tend to defer to relationship.
1:30:28 And we tend to trust the people that we have,
1:30:31 even when there are many warning signs
1:30:33 that things are not okay.
1:30:36 And I would say this is the nice versus kind principle
1:30:38 that we’ve screwed up.
1:30:39 Being kind to somebody is saying,
1:30:40 “Hey, I think you’re in the wrong role.”
1:30:44 And they’re stressed out, their lives are not,
1:30:48 they’re not enjoying life.
1:30:49 They’re not enjoying their role, their fear-based, right?
1:30:51 When you get into a position where things are not going well
1:30:53 and you don’t know why and you don’t know
1:30:54 how to get out of it, it’s terrifying.
1:30:57 And part of what our role is is to help people.
1:31:01 We look fundamentally at like we,
1:31:03 our job is to serve and help others.
1:31:06 If we can serve and help others succeed,
1:31:08 we’re gonna succeed.
1:31:09 Our LPs are gonna succeed.
1:31:11 And to be honest, we screwed this up.
1:31:13 We have not done a good job of getting people the help
1:31:18 and moving people into roles that they should be in
1:31:22 or having them move on to outside roles.
1:31:25 And we need to do better at it.
1:31:27 – Does it ever work to change?
1:31:28 I mean, I don’t have a ton of experience
1:31:30 with this working out.
1:31:31 Maybe you do, where you change a role,
1:31:33 like, “Hey, you’re CEO,
1:31:36 but you’d really make a great CTO in the same company.”
1:31:39 Because then you create all these internal politics
1:31:42 of like who do I report to and my loyalties
1:31:44 to the person who hired me?
1:31:45 And, or is it just easier to sort of like transition
1:31:48 and move on?
1:31:49 – I mean, that would be wonderful to be able to do that.
1:31:51 I think that a lot of people’s careers would benefit
1:31:54 if they had the humility to be able to do that.
1:31:57 Fundamentally, we all struggle with pride.
1:32:00 And we can’t see ourselves clearly.
1:32:02 Like we are a mystery to ourselves.
1:32:06 And how we see ourselves in our talents
1:32:09 and our weaknesses is often different
1:32:12 than how other people see us.
1:32:13 This is why we need each other.
1:32:14 This is the whole point of relationship.
1:32:15 This is the value.
1:32:16 And this is the terror of where we’ve gone as a side note
1:32:20 with social media being so isolating,
1:32:22 with not having in-person relationships.
1:32:24 Like this is no wonder that deaths of despair
1:32:27 and suicide attempts and anxieties through the roof, right?
1:32:31 We would love to be able to take to somebody,
1:32:34 “Hey, you’re in the CEO role,
1:32:35 or maybe the CFO role or whatever it is,
1:32:37 and we need you to take a step back,” you know,
1:32:41 in order to move forward.
1:32:43 Careers often die by suicide, not by homicide.
1:32:46 Like it’s not-
1:32:48 – Double click on there.
1:32:49 – Over and over and over again,
1:32:50 I’ve watched this tragedy happen,
1:32:52 which is the Peter Principle.
1:32:54 Someone rises and they rise beyond their abilities
1:32:59 and then they can’t take a step back.
1:33:01 They’re pride, they’re ego.
1:33:03 Their identity is rooted now in their title,
1:33:06 in their position.
1:33:08 And you say to them, “We love you.
1:33:12 We think you’re awesome.
1:33:13 We’d love for you to continue to be with us.”
1:33:16 The role you’re currently in is hurting you
1:33:19 and hurting those around you and hurting the company.
1:33:23 And they’ll acknowledge that.
1:33:24 And then you’ll say, “Great,
1:33:25 could we get you into this role?”
1:33:28 No, absolutely not.
1:33:28 People fight, claw for territory, kingdom building.
1:33:35 It’s hard to go from being king.
1:33:37 So maybe an important person in the kingdom,
1:33:40 but you’re not the king anymore.
1:33:42 It’s hard.
1:33:43 It’d be hard for me too.
1:33:44 Would I be okay with RLPs coming to me and saying,
1:33:47 “Brent, I don’t think you’re the right person
1:33:50 to lead permanent equity.”
1:33:51 I’m not gonna lie and be like,
1:33:54 “Oh, that’d be a great conversation to have.”
1:33:57 I hope that I would meet it with curiosity.
1:33:59 I hope I’d meet it with self-reflection and say,
1:34:01 “Wow, I really wanna hear.”
1:34:02 I mean, I think I disagree,
1:34:04 but I wanna meet it with curiosity
1:34:06 and see what they have to say
1:34:09 and see if I could discern out of it.
1:34:11 Maybe I’m not in the right role.
1:34:13 – What if you learned a bit hiring people
1:34:15 that most people miss?
1:34:17 – Well, another journey I’ve been on,
1:34:19 speaking of these like added tools and toolkit is,
1:34:23 I’ve really become much more familiar
1:34:25 with different personality testing.
1:34:27 And specifically, I’ve looked at a bunch of them.
1:34:31 I really like the combination of Myers-Briggs and Enneagram.
1:34:36 If you think about our business as,
1:34:39 you know, we take money and we turn it into more money,
1:34:43 I think you miss the most important thing that we really do,
1:34:47 which is our whole business is predicated
1:34:50 on predicting the behaviors of people.
1:34:53 Like if we can predict the behaviors of people,
1:34:56 there’s no way to lose.
1:34:59 And when we don’t predict the behaviors of people,
1:35:01 we’re almost certain to lose.
1:35:03 Like an increase in incredible volatility in the system.
1:35:06 If I think about my job as CEO,
1:35:08 I need to be helping our team
1:35:10 to be the most thoughtful, well-educated,
1:35:14 up to speed on predicting human behavior.
1:35:17 I mean, this is where the Knowledge Project
1:35:19 has been super helpful.
1:35:21 The work that you’ve done,
1:35:22 collecting the best of what other people have figured out,
1:35:25 getting it, distilling it, right?
1:35:27 I mean, this is what we’re all trying to pursue
1:35:28 and specifically around the wisdom of clicking over
1:35:32 these lenses of these personality tests provide
1:35:35 and giving you a framework to create empathy
1:35:38 and create predictability in relationships.
1:35:40 I think that’s probably been the biggest leap forward
1:35:41 and what most people get wrong
1:35:43 is most people don’t understand
1:35:45 why people are doing what they’re doing,
1:35:47 don’t understand how they should think about incentives
1:35:51 based on the person themselves
1:35:53 and not just the financial incentives
1:35:54 and don’t have much empathy for how other people react.
1:35:58 So take things personally that aren’t personal.
1:36:00 Everyone acts rationally in the moment.
1:36:02 This is the heroin addict who’s choosing heroin
1:36:06 over eating a meal or leaving their family.
1:36:10 In that moment, believes they’re doing the right thing
1:36:14 for them, believes it’s rational to pursue that hit
1:36:17 versus do everything else.
1:36:21 So the question you have to ask yourself is why, right?
1:36:25 And same thing in companies,
1:36:26 same thing with leadership in these firms.
1:36:29 Like the question is why?
1:36:30 What do we think, why did that person go off the rails
1:36:33 or how did that person suddenly disintegrate before our eyes
1:36:36 or why is that person performing so incredibly well?
1:36:39 And so these different personality testing,
1:36:42 it doesn’t, no one’s the box.
1:36:44 No one is a, you know, in the 16 types for Myers-Briggs
1:36:48 or whatever it might be,
1:36:49 there’s no grouping that will perfectly describe anyone.
1:36:53 That’s not the point.
1:36:54 The point, you’ve missed it
1:36:56 if you think that you’re going to put somebody into a box
1:36:59 and it’s gonna predict 100% of their behavior.
1:37:01 That’s why I like having multiple of these
1:37:03 that kind of give you a 3D look at people.
1:37:06 I mean, my experience is it was an eye-opening,
1:37:09 I assume that everyone else operated the way I operate.
1:37:11 I assume people wanted what I wanted.
1:37:13 Turns out I am weird.
1:37:16 So are you.
1:37:17 So does everyone you meet, they’re weird
1:37:19 because they’re mixtures of all these different axes
1:37:21 of how we sit on these things, right?
1:37:25 And how the interplay and interact with one another.
1:37:28 But I can tell you, as an example,
1:37:30 once I understand sort of the four axes of Myers-Briggs,
1:37:33 so where do you gather your energy as the first one?
1:37:38 So this is introverted, extroverted.
1:37:40 This is not how you show up in the world.
1:37:41 This is where you gather energy.
1:37:42 So introverts can appear extroverted,
1:37:44 extroverts can appear introverted.
1:37:46 That’s where this like,
1:37:47 sort of you get these very basic ideas
1:37:49 about how the world works
1:37:50 and you sort of hear like a little bit of these things
1:37:52 and you get misperceptions of what they actually mean.
1:37:55 So it’s really important to understand,
1:37:56 are you getting your energy from inner life
1:37:59 or are you more solar powered, right?
1:38:01 Getting your energy from other people and from the world.
1:38:04 The second one is how do you process information?
1:38:07 Are you intuitive or are you high sensing?
1:38:10 This tells you a lot about where somebody starts
1:38:12 in how they think about life.
1:38:14 So sensors think about life in the present.
1:38:18 They’re present oriented.
1:38:19 They walk from the present into the future.
1:38:22 They’re very practical.
1:38:23 They’re very reasonable.
1:38:24 They’re very rational people.
1:38:26 Intuitives, like maniacs like me,
1:38:29 we start into the future
1:38:30 and then we walk back into the present.
1:38:32 So we get excited about ideas.
1:38:34 We’re like, oh, we’ve visioned this future.
1:38:36 Oh, what might that be?
1:38:38 How might that work?
1:38:39 What might we do?
1:38:40 Who could come along with us, right?
1:38:41 And then somebody says, a sensor comes along and says,
1:38:43 excuse me, I’m glad that you’re 10 years in the future
1:38:47 right now and you have these grandiose visions
1:38:49 of where you’re going.
1:38:50 We’ve got to make payroll this week.
1:38:52 And by the way, that’s on fire and that’s on fire
1:38:54 and like we need to be here.
1:38:56 So you need both, right?
1:38:57 That’s the beauty.
1:38:58 None of these like being introverted or extroverted.
1:39:00 They’re just strengths and weaknesses, right?
1:39:03 There’s always upsides and downsides to each one of these.
1:39:05 But once I can tell, okay, where is somebody powered from?
1:39:09 Right?
1:39:10 How does somebody process information?
1:39:11 The third one is how do they make decisions?
1:39:13 This is a really important one.
1:39:15 So thinkers and feelers, two basic categories.
1:39:18 Thinkers are all about ideas and about truth.
1:39:21 So they’re seeking truth, they’re seeking ideas.
1:39:24 They’re very achievement oriented.
1:39:26 They want to get things ordered up and neatly packaged.
1:39:32 That’s how they make decisions.
1:39:34 So they’re making decisions based on what is truth
1:39:36 and how am I seeking it?
1:39:38 Feelers on the other hand, by the way,
1:39:41 most men are thinkers.
1:39:42 So 70% of men are thinkers, 30% are feelers.
1:39:46 70% of women are feelers, 30% are thinkers.
1:39:50 When we go back up to the sensing and intuitive,
1:39:53 it’s about 75, 25 sensing to intuitive.
1:39:57 So 75% of people are present oriented,
1:39:59 25% are future oriented.
1:40:01 And so I’m like the super weird combination, right?
1:40:03 Where I’m external focused.
1:40:06 I’m an extrovert who is intuitive.
1:40:09 So right there, I’m in the 25%, right?
1:40:11 Introvert, extrovert, 50/50, I’m in 25%.
1:40:15 And then I’m in the 30% of men that are feelers.
1:40:20 So feelers base everything on relationships and values.
1:40:23 So we feel our way to decision making.
1:40:26 It’s how will it impact the world around me?
1:40:28 How will it impact my relationships?
1:40:29 How will it make people feel?
1:40:32 Now, again, it’s not like I don’t have a rational side
1:40:34 and I can’t consider ideas.
1:40:36 And it doesn’t mean a thinker can’t feel anything.
1:40:40 That’s not the point.
1:40:41 The point is, which is the primary lens
1:40:42 that you look through in life, right?
1:40:45 Then the last one, which is really interesting
1:40:47 is lifestyle.
1:40:48 This is a J versus a P, a judge versus a perceiver.
1:40:53 And it’s really about how you like to move through the world.
1:40:58 Do you move through the world in sort of an orderly way?
1:41:01 Do you like structure?
1:41:02 Do you like to, you have a decision to make,
1:41:05 you gather information, you make a decision, you move on.
1:41:07 Right?
1:41:08 You like things structured.
1:41:10 Or are you a maniac like me, who is a perceiver,
1:41:14 who is kind of open for whatever?
1:41:16 I loop on things.
1:41:17 I need to be forced to make a decision.
1:41:20 I need a deadline to do things.
1:41:23 And so again, if you understand people
1:41:25 based on these four parameters,
1:41:27 then you can really have a lot of empathy.
1:41:29 Like my wife and I did this personality testing together
1:41:33 in each other’s presence.
1:41:34 And I’ll never forget my,
1:41:37 we’re going through these lists of like,
1:41:38 are you more like this or are you more like this?
1:41:39 You know, whatever.
1:41:40 And she’s like, of course this.
1:41:43 Like only a maniac would be that.
1:41:46 And I’m like, yep, I’m the other one.
1:41:48 And literally at one point she looked over
1:41:50 and I could tell, but like a look on her face,
1:41:52 she was like, I have children with this man.
1:41:54 Like what, who is this, right?
1:41:56 But again, we’re all in our own heads.
1:41:58 Like we think that the world works the same way.
1:42:01 But for us, it created a tremendous amount of empathy.
1:42:04 Like she, the how I made decisions
1:42:06 and how she makes decisions.
1:42:07 By the way, we’re opposite on every single category.
1:42:09 You can imagine that might create some friction in marriage.
1:42:12 Same thing in work relationships, right?
1:42:14 You ask, what do people mostly get wrong?
1:42:16 I think we get wrong is we assume everyone like us.
1:42:18 And so if you have a certain attribute set,
1:42:21 you tend to want to look at the whole world
1:42:22 through that attribute set and say,
1:42:24 oh, well everyone I hire should have that attribute set.
1:42:27 And if they don’t, they’re bad, they’re bad fit.
1:42:30 Just totally not true.
1:42:31 And so we think about a lot of this stuff
1:42:33 as we are recruiting.
1:42:35 We think about a lot of like, okay,
1:42:36 what are the things that we’re asking this person to do
1:42:39 and what type of person would be good for that?
1:42:42 And then the other one that I’ve really enjoyed
1:42:46 is Enneagram because it really shows you
1:42:48 what is your underlying insecurity
1:42:51 and what are your primary drives?
1:42:53 So there’s nine numbers and each one has a very different set
1:42:56 of pluses and minuses, strengths and weaknesses.
1:43:00 And so when you’re able, again, none of them are perfect.
1:43:02 You’re not, it’s like, oh, I’m a,
1:43:04 be personally like I’m a three, two, right?
1:43:06 Which in Enneagram means I’m an achiever
1:43:08 and I’m like a kind of a people pleaser.
1:43:11 I like to serve, which sounds, oh, he’s an achiever
1:43:14 and likes to serve people like that’s again, like, look at it.
1:43:17 No, no, no, it comes with huge downsides.
1:43:18 Like my worst fear is I’m not enough.
1:43:22 My worst fear is if people knew me, they wouldn’t like me.
1:43:24 I’m adaptive to other people.
1:43:26 And so it’s like, do I know the real me?
1:43:28 Like my serving of others quickly turns into people pleasing.
1:43:31 – Do you give people personality tests
1:43:33 as part of the recruiting process?
1:43:35 – Yeah, we do.
1:43:36 Yeah, we really, and by the way,
1:43:37 we don’t automatically axe people as part of that.
1:43:41 Like it’s not like we’re like,
1:43:42 oh, if they don’t fit this exact personality then,
1:43:44 but what it does is it allows us,
1:43:46 if we’re getting, you know,
1:43:46 it’s usually when we’re pretty serious with a candidate, right?
1:43:49 So we’re trying to make sure that we’re,
1:43:51 we don’t want to do is we don’t want to project onto them
1:43:53 what we think they are and then come to find out later
1:43:57 that they’re not actually capable.
1:43:58 And so when we get really serious kind of down
1:44:00 to the final like three to five candidates
1:44:02 is usually when we start testing.
1:44:04 And they often learn things about it.
1:44:05 And sometimes we actually had this happen recently.
1:44:07 Somebody was like,
1:44:08 I don’t think based on the testing that I went through
1:44:11 and all that that actually would be good for this job.
1:44:13 They opted out.
1:44:14 – I want to switch to acquisitions.
1:44:16 So I think a good way to dive into the subject is
1:44:20 what’s the playbook when you take over a company?
1:44:24 So you go through a process internally,
1:44:28 you come to a decision.
1:44:29 Do you guys write memos internally?
1:44:31 – Yeah, we do.
1:44:32 – What’s in that memo?
1:44:33 – So we are describing the,
1:44:36 what I would call the overall situation of the business.
1:44:39 Who are they?
1:44:41 What business are they in?
1:44:43 How does it work?
1:44:44 We also think about like,
1:44:45 what is the core action of the business?
1:44:47 So oftentimes things,
1:44:48 our favorite deals are ones that look weird
1:44:51 or different on the surface.
1:44:53 There may be a little furry fuzzy things on the deal
1:44:56 or they’re misunderstood.
1:44:58 And hence the price and the connection
1:44:59 between the price and the value is off, right?
1:45:03 So we’re trying to look for mispriced opportunities.
1:45:07 And so in order to be mispriced means
1:45:09 that something about it is either risky
1:45:12 that we can do your jobs right,
1:45:15 ’cause assuming we’re correct in how we do this,
1:45:18 not always correct, but we’re trying,
1:45:20 means that there’s a divergence between the risk
1:45:24 and our ability to mitigate it
1:45:26 and other people’s ability to mitigate it, right?
1:45:29 Or there’s a lack of information
1:45:32 that the other parties have based on their ability
1:45:34 to dive into the weeds on a deal.
1:45:38 And so we like things that are misunderstood.
1:45:43 I’ll never forget.
1:45:44 The second large deal I did was on a pool business
1:45:48 that we still own.
1:45:49 We’ve never sold anything.
1:45:50 So I mean, we still own everything.
1:45:51 I shouldn’t keep caveatting that.
1:45:52 It’s not like we’ve sold anything.
1:45:54 But the pool business,
1:45:55 I remember talking about it with you back in the day.
1:45:57 And most pool builders get big
1:46:00 because they partner with development firms
1:46:04 and they go through these massive boom and bust cycles,
1:46:08 massive boom and bust cycles.
1:46:09 And it’s Feast or Famine all the time.
1:46:13 The other thing that they do
1:46:14 is they’re tempted to be vertically integrated
1:46:16 and do all the work themselves, right?
1:46:18 ‘Cause you make more money at every step of them,
1:46:20 you know, in the more margin,
1:46:21 but you’re constantly then in the booms,
1:46:24 you’re hiring a tremendous amount of people,
1:46:25 which creates cultural issues, tremendous liability,
1:46:28 all kinds of, I mean, it’s just madness.
1:46:30 Margins end up not being nearly as good
1:46:32 as you ever think they should be.
1:46:34 And then in the bust cycles,
1:46:35 you’re having to let go of a whole bunch of people
1:46:37 who you wanna keep, but you have no choice
1:46:39 ’cause the business will implode, right?
1:46:41 And so there are two unusual things.
1:46:43 When I first got the deal memo on this,
1:46:47 I remember thinking to myself like pool builder,
1:46:50 big pool builder, like largest single location pool builder
1:46:53 in the country.
1:46:54 So like at the time, it’s really large.
1:46:56 And I was like, yep, they partner with,
1:46:59 they’re probably vertically integrated
1:46:59 and they probably partner with development firms.
1:47:02 And like, that’s just not, you know,
1:47:04 that’s not something we wanna do.
1:47:06 And then I started asking just a few questions.
1:47:08 I was like, hey, can you tell me what percentage
1:47:09 of your revenue is directed to consumer?
1:47:11 – Yeah.
1:47:12 – I was expecting it to be, you know, 10% or 15%.
1:47:15 It was 97%.
1:47:17 And then I said, oh, interesting,
1:47:21 like what is your CAPEX capital expenditures
1:47:23 on an annual basis?
1:47:25 And it was like microscopic.
1:47:27 And I was like, weird, tiny CAPEX,
1:47:30 good free cash flow, direct to consumer.
1:47:33 So man, that’s a really durable business.
1:47:35 That’s an example of like the risks we were taking
1:47:40 and the way that the company appeared.
1:47:42 Like the core action of that business is
1:47:44 they are in the business of marketing pools,
1:47:46 like selling pools and then handling the logistics.
1:47:49 But they’re, you know,
1:47:50 they’re subbing out the actual construction,
1:47:53 the hiring, the firing, the risk, all those things,
1:47:56 the boom and the bust to other people.
1:47:58 And that what that creates is a very capital light,
1:48:02 highly efficient, high cash flow, high durability business.
1:48:07 That again, everyone else was looking at
1:48:09 as a quote unquote construction business.
1:48:12 So other people that may be interested in it
1:48:14 were turned off and they’re like, no, I don’t want that
1:48:16 because that’s a,
1:48:17 I’m gonna put that in the bucket of construction.
1:48:18 I don’t wanna take that to a, you know,
1:48:19 my senior partner or to the loan to the investment committee
1:48:23 and say, hey guys, I think we should buy a mom and pop
1:48:27 construction business in Phoenix.
1:48:29 They’re gonna be like, what, the world’s wrong with you.
1:48:31 Right?
1:48:32 Versus we look at that and we’re like, ooh,
1:48:33 that’s really attractive.
1:48:34 – Yeah.
1:48:35 – So those are the types of examples.
1:48:36 We’re trying to put all that into the memo.
1:48:38 We’re trying to put all in the memo
1:48:39 the things that we think are holding it back.
1:48:41 So first principles, like let’s go to kind of
1:48:44 first principles on a business that we would acquire.
1:48:46 So this is a business that’s long tenured.
1:48:48 They’ve been around for on average a long time.
1:48:52 And they’re still fairly small.
1:48:55 So something is holding it back.
1:48:58 We think of it as the kind of lids on the business.
1:49:00 And we’re trying to figure out why they aren’t bigger.
1:49:04 Right?
1:49:05 There’s something, so by definition,
1:49:07 there is product market fit if we’re acquiring it.
1:49:09 By definition, there’s some sort of moat.
1:49:12 So a moat being defined as you can generate
1:49:14 above average returns on invested capital.
1:49:16 There’s something unusual about the business
1:49:18 that has allowed them to get into business,
1:49:20 build the business into a successful,
1:49:22 again, minimum sort of $3 million of free cash flow.
1:49:25 Not a hard and fast rule.
1:49:27 We’ve done some smaller deals,
1:49:28 but on average for new platforms, we’re $3 million.
1:49:31 That means there’s something special about the business.
1:49:33 It’s really good in some ways.
1:49:35 And on the flip side, if it’s not bigger
1:49:39 and it’s been around for a long time,
1:49:40 there’s something holding it back.
1:49:43 And so our job is through those memos
1:49:46 to collect all the findings of where’s the moat,
1:49:50 why do we think it’s transferrable?
1:49:52 How durable do we think it is?
1:49:54 And on the flip side,
1:49:56 what do we think the opportunities are for growth?
1:49:58 And make sure that all of that triangulates with price.
1:50:01 So of course, I had the privilege
1:50:05 of spending some time with Buffett at one point
1:50:07 and I asked him this like battery of questions.
1:50:10 And he kind of, I think at some point got frustrated with me
1:50:13 being, I was probably being annoying.
1:50:15 And he said, “Price is my due diligence.”
1:50:18 And it was kind of like the showstopper drop the mic moment.
1:50:21 He was like, ’cause I was asking him all kinds of like,
1:50:23 “How do you think about this?”
1:50:24 Or, “How do you think about that?”
1:50:24 And ultimately he was like,
1:50:25 “I use price as my major due diligence filter.”
1:50:29 So that was brilliant.
1:50:30 It’s like this simple heuristic.
1:50:32 Like the higher the price you pay for it,
1:50:33 the more you’re pricing it to perfection,
1:50:35 the more things have to go right,
1:50:36 the lower the price, the more you can absorb things.
1:50:38 And so we are, because of the nature
1:50:41 of these being smaller companies, they’re messy.
1:50:45 They’ve got some weird stuff going on usually
1:50:48 in these things, they’re not bigger.
1:50:50 So there must be some lids on these things.
1:50:52 We’re trying to figure that out
1:50:52 and then we’re trying to correlate that to price.
1:50:54 And the cool part is after closed,
1:50:56 like all the problems are merely opportunities.
1:50:58 I try to remind our team of this all the time
1:50:59 ’cause you get in these operating situations.
1:51:01 So you’re like, “Whoo, there’s a lot going on.”
1:51:04 Like sometimes relationships are very strained.
1:51:06 There’s weird power dynamics, all these stuff’s going on.
1:51:08 And I say to them, “Yeah, it’s hard,
1:51:10 but this is what we get paid to do.”
1:51:12 Like we’re in the business of shaving fur.
1:51:14 – So do you have projections in this moment?
1:51:18 – Yeah, we’re, you’d like do three scenarios,
1:51:21 like base, upside, downside,
1:51:23 or how do you think about that?
1:51:25 – Yeah, we’re trying to stress test
1:51:26 where we think based on the history of the business,
1:51:30 it’s going, often assuming for most of the deals we do,
1:51:34 that there is no growth.
1:51:35 So we want the business to underwrite
1:51:37 with no change in trajectory.
1:51:39 If it can’t stand on its own,
1:51:41 like we’re not big on quote unquote synergies,
1:51:44 we’re not big on trying to do this massive change.
1:51:46 Like if you’ve, if the business has been operating
1:51:48 a certain way on a certain trajectory for 30 years,
1:51:51 it is nothing but hubris to come in
1:51:54 and think that within a short period of time,
1:51:56 you can completely change the trajectory of the business.
1:51:58 It can happen.
1:51:59 There are some tricks and some outside perspective
1:52:03 that you can kind of look and see
1:52:05 and run a playbook from time to time.
1:52:07 But for the most part, like there’s no easy solutions.
1:52:10 Like I was talking with a Harvard educated search,
1:52:13 searcher the other day, actually I said the other day,
1:52:17 it’s probably a year and a half ago
1:52:19 and bought a business and had all these grand plans.
1:52:23 I was gonna, he was gonna introduce all this technology,
1:52:26 all these like changing systems.
1:52:27 It was an old school business.
1:52:29 And he was gonna, you know, revolutionize with technology.
1:52:31 And this is kind of like, if you go on Twitter, the,
1:52:34 you know, I don’t know what we call it or wherever,
1:52:36 the group of people that are trying to do this SMB land
1:52:40 or whatever, this is often the dominant narrative
1:52:43 of people who haven’t done it, right?
1:52:46 So people who haven’t actually been in the weeds,
1:52:48 who haven’t bought a business,
1:52:49 who haven’t tried to change it is like,
1:52:50 this is super simple.
1:52:51 You buy things for cheap, huge amount of upside,
1:52:54 you go in and you transform them.
1:52:56 – These guys are idiots.
1:52:57 – Yeah, these guys are idiots.
1:52:58 They don’t know what they’re doing.
1:52:59 It’s like, dude, yeah, you may have been to Harvard.
1:53:02 You may be well educated.
1:53:03 That guy’s been working in the business for 30 years.
1:53:05 Do you not think that he knows
1:53:07 at everything you know and far more?
1:53:09 – Of course not.
1:53:10 So anyway, this guy came in,
1:53:12 he had all these grand plans and I talked to him about,
1:53:14 I don’t know, a year later, this is like six months ago.
1:53:16 And I was like, how’s all that going?
1:53:19 And he was like, oh my gosh, I haven’t done anything
1:53:22 that I wanted to do.
1:53:23 I was like, oh, interesting, tell me about that.
1:53:25 And look, the business is actually doing well.
1:53:27 Like he’s glad he bought it, but how it went post-close
1:53:31 was not filled with, oh man, this is perfect.
1:53:34 Now we can hit this huge growth trajectory or whatever.
1:53:36 He’s like, yeah, our servers went out
1:53:38 like the second day on the job, the phones don’t work.
1:53:41 We have all these issues, you know,
1:53:44 the head of sales left shortly thereafter had to replace.
1:53:47 You know, it’s like this constant fire fighting mode.
1:53:51 It’s running a business.
1:53:52 The only people who think buying a business
1:53:55 and operating it are easy.
1:53:58 Most of the people have never done it.
1:54:00 There’s a small group of people
1:54:01 who got lucky the first time.
1:54:03 – Yeah.
1:54:03 – And usually the second and third time they get smoked.
1:54:05 I mean, look, we took the better part of a decade,
1:54:08 toiling away in obscurity, doing things like, you know,
1:54:11 I joke that like we were running the world’s smallest
1:54:13 family office for a good amount of time there.
1:54:15 Just slowly compounding, trying to learn systems,
1:54:18 trying to get, I mean, we were just getting
1:54:20 smacked around constantly.
1:54:22 But that then allowed us through that decade
1:54:24 to get good at this.
1:54:26 And then we were able to scale.
1:54:27 Like if I had been given $50, $100 million
1:54:31 right out of the gate, I would have lost every penny.
1:54:34 – Yeah.
1:54:35 – And this market is so inefficient,
1:54:37 which is by the way, good and bad.
1:54:39 Inefficiency being defined as can you make a lot of money
1:54:42 or lose a lot of money, depending on skill, right?
1:54:44 So like argument is, if I gave you a million dollars
1:54:47 to invest in the stock market and I said,
1:54:49 hey, I’m gonna let you keep everything you lose, right?
1:54:53 So lose as much money as you can.
1:54:54 And I’ll give you 60 days to try to lose as much money
1:54:56 as you can in the stock market.
1:54:57 – Yeah.
1:54:58 – It’d be really difficult for you to lose a lot of money.
1:55:00 – Yeah.
1:55:01 – In fact, you might end up making money.
1:55:02 In the private markets, like give me 48 hours
1:55:05 and I can lose a million dollars.
1:55:07 Like it’s super easy, right?
1:55:09 Which means skill really matters,
1:55:10 which means if you wanna have it as a career,
1:55:13 there’s a lot of value in honing your skillset.
1:55:16 So to me, that’s the ultimate mode,
1:55:18 is it’s very simple what we’re trying to do.
1:55:20 It’s just really, really hard and judgment matters.
1:55:23 And so that’s the reason why we put everything
1:55:24 out on the internet.
1:55:25 Like we literally have our entire playbook on the internet.
1:55:27 Like you can go on the Permanent Equity website
1:55:29 and you can see our entire due diligence toolkit.
1:55:32 Like not only just the questions we ask,
1:55:34 but the why underneath each question.
1:55:36 Why would we do that?
1:55:38 Doesn’t that spark a bunch of competitors?
1:55:40 Doesn’t that help a bunch of people?
1:55:42 Yeah, sure.
1:55:43 – Helps everybody.
1:55:44 – Helps everyone.
1:55:45 – Yeah.
1:55:46 – And we’re stewards and we’re unconcerned.
1:55:48 There’s abundance.
1:55:48 – Do you go back a year later
1:55:51 or is there a milestone, like a predictable milestone
1:55:53 where you go back and you review this memo
1:55:56 and now you’ve owned the business for a while
1:55:58 and like what can we learn?
1:55:59 – Yeah, we actually do this quarterly.
1:56:01 So every single quarter we have, we call them baseball cards.
1:56:06 They’re like one pagers, maybe a little bit longer
1:56:09 than one pagers that explain the overall strategy,
1:56:12 the overall purchase price, the rate of return so far,
1:56:15 where we’ve done well for the wrong reasons,
1:56:18 where we’ve done well for the right reasons, vice versa.
1:56:21 So it’s like the entire memo is a constantly updated
1:56:24 living document of every single investment
1:56:27 we’ve ever made and how we’re doing.
1:56:28 – Almost like value line for your businesses.
1:56:31 – Yeah, for sure.
1:56:33 And like, but here’s the thing is,
1:56:34 how would we do it any other way?
1:56:36 – Yeah.
1:56:36 – Like if we’re in the business of investing,
1:56:39 of buying small private companies,
1:56:42 trying to make them better, we’ve got to learn.
1:56:45 We got to get better.
1:56:46 Like how would we know if we were getting better or not?
1:56:49 How would we know, how would we learn
1:56:51 if we weren’t doing a look back?
1:56:53 So I mean, to me, it’s just, of course, obvious.
1:56:56 And I mean, look, if we’re not good at what we do,
1:56:58 we should do something else.
1:56:59 Like don’t waste this life doing things
1:57:01 that you aren’t good at.
1:57:03 For God’s sake, it’s like, that’d be terrible.
1:57:05 – Do the CEOs make that baseball card or does the,
1:57:09 ’cause you guys, what’s your structure?
1:57:10 You have a, almost like a portfolio managers
1:57:12 in charge of multiple CEOs.
1:57:14 – Yeah, so right now our structure is,
1:57:16 we have a dual hook and structure post-close,
1:57:17 where our financial team
1:57:18 and their financial team hook together.
1:57:20 And we’re constantly getting feedback loops
1:57:22 of what I’d call information from that.
1:57:23 So our goal with our financial team
1:57:26 is keeping scores the easy part.
1:57:29 The hard part is getting actionable, real-time information
1:57:34 to all the stakeholders to make good decisions.
1:57:36 So that’s their primary role is to help those companies,
1:57:39 which by the way, this idea is completely foreign.
1:57:41 We come into most of these small businesses
1:57:43 and they’re like, yay, we give all our stuff
1:57:45 to this accountant and the accountant tells us how we did.
1:57:48 We’re like, sure, that’s not what we’re talking about at all.
1:57:50 What we’re talking about is on a day-to-day,
1:57:52 week-to-week basis, what are the metrics you’re looking at,
1:57:55 how accurate are they, how updated are they?
1:57:58 How can you make decisions, right?
1:58:00 So we’ve got that group that’s working with them
1:58:02 to try to increase the quality of those feedback loops.
1:58:04 And then we’ve got, what I call like a board of directors
1:58:06 in a box model, where there’s one point person
1:58:09 for permanent equity that accesses all the resources
1:58:12 of permanent equity, kind of is the Sherpa,
1:58:14 the guide for the person internally.
1:58:16 So, oh, you’ve got an issue with marketing
1:58:18 or you need help with that.
1:58:19 Like we’ve got external internal resources,
1:58:21 recruiting external internal resources,
1:58:23 legal external internal.
1:58:24 So we’ve got all these sort of helpers that we have
1:58:28 and that person’s job is to help direct them
1:58:29 as well as govern the business.
1:58:32 Those are updated based on the constant feedback loops
1:58:35 of the business over that quarter,
1:58:37 in concert with the leadership teams,
1:58:38 but we’re mostly doing the authorship of them.
1:58:41 – And then you don’t step in and like start issuing directives.
1:58:44 You want the finance plugged in
1:58:46 and you want the metrics that they’re looking at
1:58:48 or you want specific metrics for you or both?
1:58:51 – We want information every which way, the more high signal.
1:58:55 We’re trying to separate the signal from the noise, right?
1:58:57 So there’s tremendous amounts of information
1:58:59 being thrown off of these businesses that doesn’t matter.
1:59:01 We’re trying to get down to a handful of metrics
1:59:03 that we can agree on that the leadership team and us,
1:59:07 that we’re working in concert
1:59:08 to understand what they’re telling us.
1:59:11 That’s actually one of the most difficult things post-close
1:59:13 is just getting on the same page about what matters.
1:59:15 – Totally.
1:59:16 – And when does it matter?
1:59:17 And again, we’re coming in, hopefully with high humility,
1:59:20 saying you all are the experts, we’re not.
1:59:23 But we’re asking questions, like, okay, well,
1:59:25 if that’s the business model, wouldn’t it make sense
1:59:27 that this would be like a leading indicator?
1:59:29 And sometimes it’ll be like, no, we’re like, oh, interesting.
1:59:33 Tell us why, right?
1:59:35 We try to come out from that perspective
1:59:36 as like instead of just telling them what we want to see.
1:59:39 Like, do you think this would be helpful?
1:59:40 Are you like, what are you looking at and why?
1:59:43 Why aren’t you looking at this?
1:59:43 Why are you looking at this?
1:59:44 How does this work?
1:59:45 Again, this is not rocket science.
1:59:46 Like this is like treat people as humans,
1:59:48 be humble, be kind, be long-term.
1:59:52 Things usually work out.
1:59:53 – Do you do anything within the business
1:59:56 from otherwise from the first day
1:59:58 or you’re just sort of,
1:59:59 what’s the reporting cadence back to you?
2:00:00 Is it weekly, monthly, quarterly?
2:00:04 – Yeah, so we are usually in touch on a weekly basis,
2:00:07 depending on if we’re going through periods
2:00:09 of negative change or positive change,
2:00:12 then we’re more active and helpful, being supportive,
2:00:15 being corrective, maybe, if we need to be.
2:00:18 If things are in the box, smooth sailing,
2:00:22 no storms on the horizon,
2:00:24 then we can be a lot less hands-on.
2:00:26 We always tell our leaders like,
2:00:28 we’re always available, everyone has your cell phone.
2:00:30 Like, you can get in contact.
2:00:32 We’re the easiest people in the world
2:00:33 to get in contact with.
2:00:34 Running a business is lonely.
2:00:36 If you’ve never run a business,
2:00:37 if you’ve never been in the CEO spot,
2:00:40 you can look up from in the organization
2:00:43 and it looks rosy.
2:00:45 Oh, look, that person gets paid a lot more.
2:00:47 Look at all the freedom they have.
2:00:49 Oh, I want to be the one to set vision and whatever.
2:00:51 Looking down from that position,
2:00:53 there’s usually no one to share sorrow with.
2:00:56 There’s no, you know, frustrations.
2:00:58 Like, you’re isolated.
2:01:00 And so one of the things we do
2:01:01 is just try to be relationally connected
2:01:04 and offer to be a release valve
2:01:06 for the very natural human tendencies we have
2:01:09 to be seen and heard and blow off steam
2:01:12 and consult on difficult situations.
2:01:15 You know, again, it’s interesting
2:01:18 going back to like the personality typing.
2:01:20 You know, we try to understand for our CEOs
2:01:22 if they’re internal or external processors.
2:01:24 That’s a really important piece.
2:01:26 If you’re a CEO as an internal processor,
2:01:29 then you can go away with your thoughts and be fine.
2:01:32 If you’re an external processor and you’re the CEO,
2:01:35 you have no one to externally process with
2:01:37 or you end up creating inappropriate relationships
2:01:39 with people who work for you.
2:01:41 So that’s fraud.
2:01:42 So that’s one of the things that we can do
2:01:44 is if we’re adept at that and understanding the people,
2:01:47 then we can say, hey, that person’s an external processor,
2:01:49 hey, they need somebody to talk to.
2:01:51 Come talk to us.
2:01:52 Let’s work through things.
2:01:54 The only things I would say is we’re aggressive
2:01:56 about post-close in the short term
2:01:58 is if there’s just any laws being broken.
2:02:00 Which sounds funny to say,
2:02:03 my guess is 80% of the small businesses out there
2:02:08 are either knowingly or should know
2:02:10 that they’re breaking some sort of rules.
2:02:12 There’s a lot of government regulation
2:02:14 depending on the state you’re in.
2:02:15 And often by the way, federal regulation,
2:02:17 state regulation and local regulation
2:02:19 will oftentimes conflict with one another.
2:02:22 And it requires a tremendous amount of background
2:02:24 and understanding to know how to be in compliance.
2:02:28 – I wish they’d simplify this.
2:02:31 I mean, the amount of stuff you have to keep up with
2:02:34 is just insane. – It’s astonishing.
2:02:36 – Yeah.
2:02:37 – Why don’t you do a totally hands-off model like Buffett?
2:02:41 – This is, it would miserably fail.
2:02:43 – In the scale of business you’re dealing with.
2:02:44 – Why would that fail?
2:02:45 – People get divorced, people have health issues,
2:02:48 people die, people lose interest.
2:02:52 Things are constantly changing.
2:02:54 The ability to self-replicate is unbelievably rare.
2:02:58 And the reason why we are in the position we’re in
2:03:00 to be able to buy these businesses
2:03:02 is because we are the best option
2:03:04 for the business to transition.
2:03:06 Oftentimes there isn’t a family member
2:03:10 who has the capacity or either financial capacity
2:03:13 or talent capacity to be able to do it
2:03:15 or some combination of both.
2:03:17 And these businesses are not ones
2:03:18 that you can just like leave alone.
2:03:20 Like there’s no passive income
2:03:22 in working in small business land.
2:03:24 Another way to think about it is like,
2:03:25 you know, sort of buying an index of small businesses, right?
2:03:27 I mean, from time to time is like people come up with this
2:03:29 idea of like, oh, what if you just put like a thousand dollars
2:03:32 with, you know, a thousand of these small businesses
2:03:35 and created like a index?
2:03:37 The reality is over a long period of time that index is zero.
2:03:39 Like it’s really hard.
2:03:39 The governance of these things is difficult.
2:03:42 Like the norm for most small businesses is entropy,
2:03:46 is decay, is dying slow death and being wound down.
2:03:50 Like that’s a norm in the small business world.
2:03:53 You have to fight to grow.
2:03:54 It takes dynamic leadership.
2:03:55 It takes vision.
2:03:56 It takes risk taking.
2:03:57 It takes capital.
2:03:59 It takes mitigating risk.
2:04:00 You’re doing all these things.
2:04:04 And so yeah, the ability to do that is non-existent
2:04:09 in our area of the market.
2:04:10 And by the way, having spent time with both Buffett and Munger,
2:04:13 they would say the same thing.
2:04:14 – Go deeper on this.
2:04:15 – So when you look at them early on in their journey,
2:04:19 so this is like, let’s go back to the Buffett partnership.
2:04:21 Let’s go back to actually when Buffett first met Munger.
2:04:24 Buffett was invested in Sanborn Maps and Dempstra Mill.
2:04:27 Those are the two primary investments.
2:04:28 I think this represented 70 or 75% of the assets
2:04:31 of the Buffett partnership.
2:04:33 One of the things that Buffett and Munger connected
2:04:34 very early on about was struggling businesses.
2:04:39 Was struggles he was having with those two businesses.
2:04:43 The story I think it’s been told a number of times,
2:04:45 but is not often remembered because where they are now,
2:04:50 there’s been like five seasons of Berkshire.
2:04:52 And where they are now bears zero resemblance
2:04:55 to where they were in the early days.
2:04:57 Where they were in the early days is where we are.
2:04:58 Where we like to play.
2:04:59 And this is where again, by the way,
2:05:00 they said they generate the highest returns.
2:05:03 Smallest amount of capital, highest returns,
2:05:04 being able to access small companies.
2:05:07 But Dempstra Mill was a disaster.
2:05:10 Like Buffett had gotten sideways
2:05:11 with relationally with people.
2:05:14 And he was kind of desperate.
2:05:17 – Yeah.
2:05:18 – And he met this guy, Charlie Munger,
2:05:20 who he started to develop a relationship with.
2:05:22 I mean, they actually talked about it
2:05:23 at the annual meeting this year.
2:05:25 Kind of how they got together
2:05:27 and they had a family that brought them together.
2:05:28 And when they met each other, it was like Kendred Spirits.
2:05:30 They stayed in touch.
2:05:31 And one of the things that Munger asked Buffett was,
2:05:34 what problems are you facing?
2:05:36 And Buffett was like, oh, I’ve got this business
2:05:39 that like, I don’t know what we’re gonna do.
2:05:41 It’s upside down.
2:05:42 Sandborn Maps is a whole different story.
2:05:43 And it was kind of upside down
2:05:44 in a different way that worked out.
2:05:46 But Dempstra Mill was just a mess.
2:05:48 Like he needed somebody to go to the middle of Iowa.
2:05:51 I think it was Iowa.
2:05:53 And fix this company and get it fixed up
2:05:56 and make money at that business.
2:05:57 And he’s like, he didn’t have anybody.
2:05:59 ‘Cause he was a stock investor, past investor
2:06:02 and become activist and active in that business
2:06:05 by the nature of how much stock he bought.
2:06:07 And again, this is where the balance sheet was stuffed.
2:06:10 Like they had a lot of resources, low free cash flow yield,
2:06:12 all these things that we get access to as well
2:06:15 in our area of the market.
2:06:16 He got access to then in his area of the market, right?
2:06:19 Things just don’t work out.
2:06:20 And so you get sideways, operating issues,
2:06:23 the value of the business that starts to go pear shaped.
2:06:26 And so he got in touch with Munger and Munger said,
2:06:28 hey, I know this guy, Harry Bottle.
2:06:30 This is a famous Harry Bottle story.
2:06:32 They convinced Harry Bottle to move his family
2:06:34 from Los Angeles to the middle of nowhere,
2:06:36 middle of the heartland.
2:06:37 Harry Bottle fixed the business.
2:06:39 They ended up selling it.
2:06:40 And that, I mean, Buffett said,
2:06:44 without Harry Bottle, without Charlie Munger,
2:06:47 without a few of these things going a different way early on,
2:06:49 there is no Berkshire, there is no Warren Buffett,
2:06:51 there is no institution the way it is today.
2:06:54 One is good to acknowledge just how much luck plays
2:06:57 in our role and all this stuff, right?
2:06:59 I mean, like a big part of humility is just acknowledging,
2:07:01 like we’re far less in control than we really think we are.
2:07:04 Also, when things do happen and you do see a need,
2:07:07 talk about it, voice it, see how you can access
2:07:12 people and resources.
2:07:13 And so I would just argue that no one can take a business
2:07:18 that’s small, loosely functioning,
2:07:21 sometimes makes money and leave it alone.
2:07:24 These are highly variable assets with very difficult
2:07:27 attributes about them and it’s a knife fight.
2:07:29 – The other story is like Berkshire Hathaway, right?
2:07:31 If you think he was hands off and not talk,
2:07:34 I think it was Malcolm Chase who took it over?
2:07:36 – Yeah. – Yeah.
2:07:37 Like they were talking daily and he wouldn’t let them
2:07:40 reinvest in the business, but he knew the numbers better
2:07:42 than Chase did and he still knows the numbers better
2:07:45 than I would imagine a lot of the operating CEOs do.
2:07:48 – For sure.
2:07:49 I mean, Buffalo News, like they were,
2:07:51 Buffett and Munger were very, very active
2:07:54 in many of their situations.
2:07:56 Now, as they’ve gotten into massive businesses that are,
2:07:59 you know, you’re hiring really high-powered,
2:08:01 really paid, high-paid operators,
2:08:03 like they’re gonna be better at operating than they are.
2:08:06 So I mean, at a certain point, like it flips
2:08:09 and you have such an access to capital
2:08:11 and such a need for size that some of those problems
2:08:14 take care of themselves.
2:08:15 Now you got the other problem, which is the fact
2:08:17 that Berkshire hasn’t beat the market in 20 years,
2:08:20 25 years now.
2:08:21 Well, why?
2:08:22 Because they’re so freaking big.
2:08:24 So you got, I mean, there’s problems either way
2:08:26 and there’s pluses and minuses either way.
2:08:28 – You just choose, I mean.
2:08:29 – You just get to choose which one you wanna engage in.
2:08:30 – Where do people go wrong doing what you’re doing
2:08:33 as they scale?
2:08:34 – They try to go too fast, too soon,
2:08:38 assuming they know too much.
2:08:40 So we, from the time we bought the first business
2:08:45 to the time I bought the second business was four years.
2:08:47 Four years of toiling away and correcting and learning
2:08:51 and trying to get a good foundation of capital
2:08:53 and into position to do the next deal.
2:08:56 Now we were looking for deals in between,
2:08:58 but it’s hard buying one business,
2:09:02 one small, medium-sized business, negotiating it,
2:09:05 documenting it, closing it, operating it
2:09:08 and having some sort of either through distributions
2:09:11 or through a sale, positive outcome.
2:09:14 One time is brutally difficult.
2:09:17 It is a brutally difficult thing to do.
2:09:19 Now it gets to do that again and again and again.
2:09:22 And oh, by the way, this is an interesting dip that happens
2:09:26 where, so now you’ve got, let’s say,
2:09:28 you’ve done this three times, three brutally difficult
2:09:30 and you’ve just now cash flowed them
2:09:32 so you still retain them.
2:09:34 So now you’ve got a portfolio of three companies.
2:09:36 Well, now you can’t be a CEO of three companies.
2:09:38 I guess unless you’re Elon Musk and, you know,
2:09:41 somehow he’s figured out how to do this,
2:09:43 but most normal people can’t even operate one business
2:09:46 well, let alone two or three.
2:09:48 So you got to make a choice.
2:09:49 Okay, well now I’m going to take my free cash flow
2:09:51 from three of these companies
2:09:52 and I’m going to build a layer of overhead
2:09:55 to be able to then scale and manage.
2:09:57 So somebody’s got to be out there looking for deals,
2:10:00 interacting with capital partners,
2:10:02 diligence really matters, legal due diligence,
2:10:04 financial due diligence, technology due diligence.
2:10:06 Somebody’s got to be managing all of that,
2:10:08 documenting it, negotiating that process
2:10:10 all the way through, and then of course,
2:10:12 post-close operating these things, right?
2:10:14 A lot to worry about.
2:10:15 Oh, and by the way, you got regulators
2:10:17 all mixed in there as well.
2:10:18 There’s a lot of places to hit a pothole.
2:10:22 And so you say, whew, I’m working 100 hours a week,
2:10:25 every week.
2:10:26 And yeah, we’re making a bunch of money,
2:10:27 things are going great, I’m making up a scenario.
2:10:30 But now you’ve got to basically take all of your earnings,
2:10:33 all the free cash flow of your business,
2:10:35 and go to zero again.
2:10:36 So you started zero or very little, you invested,
2:10:40 you do well, you do well, you do well,
2:10:41 you run the gauntlet two or three times.
2:10:44 Now you got to go back to zero,
2:10:46 because you got to take all your free cash flow
2:10:47 and you got to reinvest it in that next layer.
2:10:50 That’s brutally difficult.
2:10:52 Now you’ve got to hold another set of issues.
2:10:53 Now you’ve got meta problems at the head level.
2:10:58 Now you’ve got personnel issues.
2:11:00 Now you’ve got culture problems.
2:11:02 Now you’ve got technology issues.
2:11:03 And now you’ve got an operating business
2:11:06 that’s trying to operate businesses.
2:11:08 And you’ve got the same issues in the operating business,
2:11:11 the parent co, as you do in all the smaller businesses.
2:11:15 It’s brutally difficult.
2:11:18 And then you go through another phase where you’re like,
2:11:20 okay, now we’ve got a tight group of people,
2:11:22 it’s a small group.
2:11:23 Now we’ve got three or four or five companies, maybe six.
2:11:26 Well, now you’ve got to build a much larger organization.
2:11:29 You got to go through the whole cycle again.
2:11:30 So every time on the way at the cycle up,
2:11:33 you’ve got to pass through this gauntlet of–
2:11:36 – Over and over.
2:11:37 – Over and over and over again.
2:11:40 I mean, it is a miracle that permanent equity
2:11:43 has 15 companies.
2:11:45 It’s a miracle, it’s a miracle that we have a team
2:11:48 that for the most part loves each other
2:11:50 and cares about each other and wants to do good things.
2:11:52 Like it’s literally, down a day goes by,
2:11:54 I don’t think it’s a miracle.
2:11:56 And by the way, the future is not secure.
2:11:58 Like we might screw up badly.
2:12:01 And so there’s always work to be done.
2:12:04 There’s no free lunch, nothing’s easy.
2:12:06 – So why do you do what you do, given all of that?
2:12:09 – I think I have the best job in the world.
2:12:11 I get to meet extraordinary people
2:12:16 from very different cultures around the United States.
2:12:19 One day we’ll be doing a dinner in New York
2:12:23 at a Michelin-starred restaurant.
2:12:24 The next day we’re eating at Hardee’s in the middle of Ohio.
2:12:28 We will go from Oregon to Florida to New Mexico.
2:12:32 The cultures are different.
2:12:33 The food’s different.
2:12:34 The people are different.
2:12:36 The businesses are all different.
2:12:39 I mean, I can’t imagine that.
2:12:40 I mean, we have a blast doing what we do.
2:12:43 And it’s hard and it’s stressful and it’s tiring.
2:12:47 Why do I do it?
2:12:48 Because I feel called to help families transition.
2:12:51 I feel called, I mean, like, in my paradigm,
2:12:55 as a Jesus follower, work is pre-fall.
2:12:57 Work is for our good.
2:12:58 Work is something we should engage in deeply.
2:13:01 This is our co-creation that we get to do.
2:13:04 And I feel that.
2:13:05 Like, I feel that on a daily basis
2:13:07 and there’s thistles and thorns and it’s difficult
2:13:09 and it’s fallen and it’s broken and it’s messy.
2:13:11 And so that’s life though.
2:13:14 Like, that’s what we get to do.
2:13:14 And like, I can’t imagine a better job
2:13:16 than getting to serve the families
2:13:18 and the institutions that give us capital
2:13:20 that trusts with their capital for 30 years.
2:13:22 The amount of trust that they have with us
2:13:24 to give somebody capital for 30 years.
2:13:26 There’s nothing you can get back 30 years.
2:13:29 I don’t take that lightly.
2:13:30 That’s incredible.
2:13:32 I feel honored that somebody would trust us that much.
2:13:35 I want to serve them.
2:13:36 I want to serve them well.
2:13:37 The families that sell us their life’s work.
2:13:40 Sometimes generational work.
2:13:42 Like, that is a heavy burden in some ways
2:13:46 and what an honor in other ways.
2:13:48 And then all of the people who we get to work with
2:13:50 who are trying to be as excellent
2:13:52 as they can at their craft.
2:13:54 Like, I get to interact with so many interesting people
2:13:59 and we get to do such interesting things.
2:14:00 And I don’t know.
2:14:02 Like I said, I think I did the best job in the world.
2:14:04 – We always end on the same question,
2:14:08 which is, what is success for you?
2:14:10 – Success would be to be an ambassador
2:14:14 of the kingdom of God.
2:14:16 My life transformed when I became a follower of Jesus
2:14:20 and I’ve been rescued
2:14:24 and the thing that I want to do most is to,
2:14:27 we’re called to love and serve people around us.
2:14:31 We worship a God who condescended himself
2:14:36 into the physical realm,
2:14:38 who’s the author who wrote himself
2:14:39 into the ultimate book of reality
2:14:42 and came to serve, not to be served,
2:14:46 and to rescue.
2:14:49 I want to, with that same love that I’ve been given,
2:14:53 give that to other people and serve them well.
2:14:58 – What a beautiful way to end this conversation.
2:15:00 Thank you.
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