AI transcript
So that was the first Golden Goose, and then you said you started stacking geese like a rapper, you know, at the club.
So what’s the second geese?
I hope that becomes a term that we can use stacking geese.
Yeah, stacking geese.
We got to get some shirts, baby.
Goose over merch, baby.
Hey, merch guy.
So Brent runs Permanent Equity.
You started off as a founder.
You started buying companies.
And you then started raising money to buy companies.
So you raised like something like 50 million bucks for your first fund.
You started buying companies with that.
Then a couple of years later, you raised about $250 million to buy more companies.
And now you own, I don’t know, something like 16 companies that do over $350 million a year of revenue.
And I believe what you said was $50 million of free cash flow out of the portfolio now, which is pretty incredible.
So that’s who you are.
That’s what you’re bringing to the table.
And I think, Sam, what do we want to go with this?
Because we could ask you about buying businesses.
I have some questions around that, but I kind of want to start with something light before we go into like,
“Hey, can you teach me how to be private equity, please?”
Yeah, we can do the light stuff.
You also, you’ve got the, we call it the all shucks, Warren Buffett attitude, where you’ve got a list of one-liners.
You write amazing annual reports.
You’re a great writer.
So we have a bunch of one-liners that we want to ask you about as well.
Sounds good.
What, can you tell me what’s the, what do you buy and what are the biggest companies?
Do you buy like pool companies and HVAC companies?
Yeah, I mean, we typically, we’ve got everything from a children’s clothing brand to a military recruitment firm,
to manufacturing, construction, business services.
I mean, it’s really the 16 companies.
It’s a, you know, it looks like the island of misfit toys.
For us, they’re, they’re companies that we love the people who we get to work with.
They’re in industries that we feel like are not going to be changing.
And we can talk about how some of them maybe look like high change,
especially like the children’s clothing would seem high change on the surface,
but it’s actually not.
And yeah, we try to partner with them for a long time.
What’s the biggest one in terms of revenue and profit?
Let’s see, our, in terms of revenue and profits,
probably our fencing business out of Dallas, Texas is probably the largest.
So we, we have a big market share in the, in the Dallas market.
And yeah, it’s a, it’s a, it’s a pretty sizable business.
Do you guys remember when marketing was fun?
When you had the time to be creative and connect with your customers with HubSpot,
marketing can be fun again.
Turn one piece of content into everything you need.
Know which prospects are ready to buy and see all your campaign results in one place.
Plus it’s easy to use helping HubSpot customers double their leads in just 12 months,
which means you have more time to, you know, enjoy marketing again.
Visit HubSpot.com to get started for free.
I was going to ask you a similar question.
Like, you know, people are always like, you can’t pick a favorite kid.
And as an investor, you can, you have this portfolio and like some are better than others.
And that’s okay.
It would be weird if all of your companies were equally successful investments.
I wouldn’t believe you.
And so what’s like the golden goose for you?
So which one is like, like, I know in my portfolio, right?
I have like, I have like a mini version of what you do where we have like four or five companies
that we kind of have either bought or own a big stake in.
And I could tell you, I’d be like, oh, this is like for us, like the somewhere.com business was like my golden goose.
Partly because I got in on a great price, but also the business tripled since we bought it.
And it’s just this business that just spits out cash flow.
And it’s like the market keeps growing for this people need this.
And so for us, that’s been the golden goose.
It just keeps laying a golden egg every single month for us.
What’s the golden goose in your portfolio?
Oh, we’ve been fortunate to actually like we’ve kind of stacked golden geese on one another.
That is how I would describe it.
So the very first business I bought is called Media Cross is a military recruitment firm bought that in very early 2010.
Explain in layman’s terms.
What does that even mean military recruitment firm?
What’s happening?
Yeah.
So we at the time worked with two branches of the military.
Now we work primarily with one.
We had two contracts.
One was to recruit civilian mariners into a division of the Navy called military seal of command that resupplies the ships that never came into port.
So it’s about 1400 to 1800 civilian mariners a year or recruited into that division.
That’s our responsibility.
So we do all of the marketing and recruitment efforts and then the processing to bring them into that branch of the military.
Does that mean like you’re out you’re out on the street with people?
Or does that mean you’re running ads and you own like a lead gen website?
All of that stuff.
Yeah, but we’re doing we’re doing lead gen.
We have a whole processing center.
We’re actually doing qualifications for these people.
So it’s a complete soup to nuts operation.
And the government just pays you per recruit or how does that work?
Yeah, we’re on a fixed contract that escalates every year based on the staffing and needs of the business.
So we it’s basically a staffed contract and then we have sort of a built-in profit margin that’s on top of that.
What do you get per recruit or per referral for one of these things?
Oh, gosh, I don’t even know because we’re not we’re not based on that, right?
So we’ve done this for the contract is we’ve had it as a business for 30 years now.
It’s been forever.
And I mean, we’re so deeply embedded into what they do.
We know exactly what it takes.
We I mean, we are the outsourced function of that piece of the military.
And why is that business great?
Is it because you got this cash flow, but you have this contract.
You have the certainty and defensibility with that.
Is that what’s great about that?
Yeah, yeah.
I mean, so like for the most part, we know what our profitability is going to be in three years from now, right?
And so once you get that business optimized and you get great people in place
and the leader of that business we’ve had, I mean, she’s been with the business since the very beginning.
So we’re 15 years into the relationship.
She’s doing a great job and it just it clicks.
So that was that was I would call the original Golden Goose that allowed me to pay back the SBA.
I’ve heard you say you accidentally bought your first business.
Is that what you meant when you say you actually what does that even mean?
How do you accidentally buy a business?
Yeah, I got a call from a guy and he was like, hey, I want to introduce you to this guy.
He’s it’s your he’s in your industry.
You know, he said marketing marketing because I’d launched a call it an ad agency for all intents and purposes before then.
And he was like, hey, he’s in your industry.
She gets to know him and I said, OK, great.
And he’s like, oh, by the way, the guys he’s got left at the altar for the second time trying to sell his business recently.
And I was like, oh, OK, I guess I could take a run at it.
I had no idea what I was doing.
I was 24 at the time.
No idea what I was doing.
And I sat in front of this guy and and you know, we talked about it and we negotiated and he said,
I would never sell it to you for the price you asked for.
And I was like, that’s fine. No problem.
And I didn’t talk to him for seven months.
And then seven months later, he called me up out of the blue and said, just renewed our largest account.
Business is in great shape.
I’m exhausted.
I’ll give it to you for the price you asked for.
But you got to close all cash 60 days from now.
And it was one of those where you kind of like you make the sale on the go down the elevator and you say, oh, shit.
It was it was like that, right?
And I remember getting off the phone and I was like, oh, crap.
Like I just obligated myself to go buy like buy a business.
I have no idea what I’m doing.
Did you know anything about digital marketing?
Oh, yeah.
I mean, we had we had we did digital marketing work back then.
You have a marketing agency.
You stumble into this business.
You’re like, maybe somebody tells you there’s a chance to buy it.
You’re like, all right, I could try.
He says no to the first price.
He comes back.
You’re not even following up.
He comes back and says, hey, still interested, but you don’t have a lot of money.
You’re 24 years old.
So you go to the SBA and you get an SBA loan for this thing.
Yeah, correct.
Yeah, I asked my newly married wife to sign a personal guarantee and she was like, what’s that?
And I was like, God, don’t worry about it.
A big deal.
You’re like, good news and bad news.
Good news, no prenup, but you do have to sign this other thing.
Yeah, exactly.
She was like, what happens if this doesn’t go well?
I was like, it’s probably not going to be great.
Um, so yeah.
So somebody’s never done an SBA loan.
What can you explain?
Just like you put down X, you get Y.
What’s how it all works.
Yeah.
Back then, um, so the requirements have changed a little bit.
I think it’s like five or 10 percent you have to put down now.
And I think you can actually qualify with seller financing.
I’m not an expert anymore on the SBA.
I’ve only done the SBA one time and that was literally 15 years ago back then.
What I did was I count, uh, leveraged the accounts receivable from the existing
business as the down payment and then got the rest of the debt through the SBA.
And so, I mean, I put very little cash into the deal.
So you put basically zero down.
I mean, it was a, it was a lot of my, my money, but it was just tied up in other assets.
But yes, I mean, in terms of actual cash that was coming out of my pocket was not a lot.
I didn’t have a lot of cash.
Um, and so, um, yeah, I ended up asking my buddy at the SBA.
It was, it was part of an SBA lender.
I said, Hey, do you guys do like expedited SBA loans?
And he was like, not really, uh, we don’t do that.
And I was like, well, I need it in 60 days.
And he was like, that’s really not possible.
And I was like, can we make it possible?
Like let’s try.
How much, how much are you talking that you had to borrow?
It was a million bucks.
Yeah.
It was a million dollars.
And was this like your C’s candy, like Buffett bought C’s candy and it’s returned like
a billion dollars in free cash flow or more than that to the, to the headquarters over
the last whatever 50 years or whatever it’s been.
It’s, it’s, it’s like a 20 Xer.
Yeah.
So that’s amazing.
So that was the first golden goose.
And then you said you started stacking geese like a rapper, you know, at the club.
So what’s the second geese?
I hope that becomes a term that we can use.
Yeah.
Stack and geese.
We got to get some shirts.
Hey, merch guy, you know, like Rogan has like Jamie.
I kind of have this like fictional studio in the room.
I’m like, pull that up.
Hey, much guy, get on that.
Like there’s nobody here.
Merge guy, yeah, yeah.
Merge guy.
Um, yeah, I mean, I knew, I knew so little back then.
I remember my lawyer said, okay, we got to start due diligence.
And I literally typed into Google D O diligence.
Like due to like, I had no idea what it was.
Um, and I was, I was like reading about it as he was talking to me.
I was like, Oh yeah, we just asked questions.
Like how hard can that be?
Um, so anyway, uh, it was quite the adventure.
That’s amazing.
Yeah, another, another anecdote on that deal was a week before closing.
I said, okay, so I take all of my money and I give it to you.
You take all the money out of the business.
Like how do I make payroll?
And the guy was like, well, you obviously got a line of credit on the
business, right?
And I was like, no, I didn’t, I didn’t do that.
And he was like, well, the business is going to go under immediately.
And I was like, yeah, that’s not good.
What do we do?
And he was like, well, you got to figure this out because you’re getting
ready to close on the business.
And I was like, can I get a loan from you?
So he actually lent me money to, as a line of credit to keep the business operating.
Cause I didn’t even, I didn’t even think about it.
I didn’t think about like, Oh, well, he’s going to take all the money and
there’s not going to be any cash to operate the business.
I was, um, I was with this guy this weekend and he was like, Hey, should
I start my own business?
You know, I’m 28.
I don’t think I have enough experience though.
And I was like, yeah, I’m pretty sure like a lack of experience isn’t like,
hasn’t stopped a lot of people.
Uh, you can kind of be like a kind of a dummy and get into it.
And you’ll probably learn in like six months and you are a good example of
that.
You don’t really need to know much.
Huge dummy.
Exactly what I think about myself.
And like the lean manufacturing part, uh, like kind of philosophy, they
have this idea of like just in time, right?
You, you, you do things just in time versus doing everything ahead of time.
And so just in time learning is basically what you did.
It’s like, Oh, when I need to close, then I figure out what due diligence is.
Then when I need to take over the business, I learned what working capital is.
And you just, you learned each of the core concepts as you needed them,
which is actually the real way that people learn rather than I’m going to
learn everything up front.
Then I’m, then I’m fully prepared to now to go do this.
And like in reality, that’s not how, how life works.
Yeah.
And sometimes it doesn’t work out.
And I, you know, I joke that I’m a force come private equity for a reason.
So.
What else do you own?
That’s awesome.
Yeah.
So the next business we bought, uh, was a, as a pool business out in Arizona.
Um, and that was, uh, just with, uh, again, started occurring cash and, um,
started building that up and, and bought that business.
And again, that one turned out to be, uh, uh, great investment as well.
You say, you say that nonchalantly like, Oh, a pool business, but it’s also like,
dude, that would be really random.
I don’t think about pool businesses.
Nobody shows me a pool business.
So what were you doing?
You’re talking to brokers.
Where does that deal come from?
Like for you at that time.
Yeah.
So it was about, so let’s see.
So I had no idea I was doing after I bought the business, the meaty cross in 2010.
I was like, Oh, that worked.
Uh, I should do more of what works and less of what doesn’t at the time.
There wasn’t a lot of writing on the internet about this.
Um, so I mean, there was a little bit of, uh, stuff out of the Harvard,
a little bit out of Stanford around search funds, but there was very little
activity online.
And so, uh, I was like, well, I just need to ask ground was like,
are there other people doing this?
I didn’t even literally know that there was a thing called private equity.
That’s how little I knew.
I mean, I started, somebody was like, Oh, you did a private equity deal.
And I literally Googled private equity.
And I was like, turns out there’s a whole industry of people to do this.
Like, why would they not do it?
Like in smaller companies.
And, uh, that was my foray into it.
And so at that point we said, okay, well, if we’re going to go find other
businesses, I mean, how hard can it be?
This one just came to us.
There must be just tons of businesses out there just floating around ready
to be, uh, ready to be bought.
And so we started reaching out to people and developed deal pipeline.
And one of the deals that took us so that, that pool deal we first
saw in 2012, I want to say.
Um, and it took us about three years to get the deal done.
And, um, it was just hanging around the hoop and they actually went
with two other buyers before us and ultimately had a good relationship with
them and so the time between deal one and deal two was three years.
It was, uh, five years.
Sean, isn’t it crazy how long things take?
Like Brent’s like a Brent’s a big shot right now.
Like, you know, people know you and you like, you’re talking
about hundreds of millions in revenue.
But you started this in like 16 years ago.
Like that’s a, I mean, it’s a huge success and everything, but it like
really goes to show you that like you have to grind for, or at least
be consistent for a decade plus.
Oh, absolutely.
No, I mean, I, I say to people all the time, like if I had been given
$50 million to invest in like 2010, I like, I would have lost all the money.
Like it just took so long to build up, like to make a bunch of mistakes,
make a bunch of mistakes that were low stakes, felt like high stakes
at the time that were low stakes, uh, in order to be able to, to, to warrant
having more resources.
And so yeah.
So at some point, somebody did give you $50 million.
How’d you get somebody to give you $50 million to go by companies?
Cause I’d like that.
Yeah.
Uh, well, so, uh, funny story.
I met this guy named Patrick on the internet and, uh, literally he put out a
tweet, Patrick or Shaughnessy put out a tweet.
And this is when he was like an analyst at, at his dad’s firm.
And he put out a tweet about capital allocation.
I responded.
I was like, yeah, I can hop on the phone and talk about capital allocation.
I didn’t really understand when he was even asking.
He was asking about public markets, like capital allocators
and public markets, but I, I didn’t know much.
And so I just reached out and said, yeah, sure.
Let’s talk.
We get on the phone and he’s like, so what do you do?
And I was like, Oh, I buy these, these small businesses.
He’s like, well, how much do you pay?
And I was like, I don’t know, like between three and five times.
And he was like, what?
Like, are these businesses going out of business?
Like, are these, are these going under or these distressed?
I was like, no, these are healthy businesses.
And he’s like, I’ve never heard of this.
What is this?
And so we talked like two or three more times.
And then he said, well, can I come visit you in Columbia?
And I said, sure.
So he flew to Missouri and we spent a day together at the end of it.
He said, like, I want my family to invest in what you’re doing.
Like, I believe in what you’re doing.
And I said, sorry, like, we don’t take outside capital.
Like, I’m not going to do a two and 20, 10 year fun life.
Looked at that, don’t want to do a holdco and value the current assets and,
you know, get saddled with a bunch of partners that don’t know who they are.
Like life’s good.
Like we’re making a bunch of money and compounding and like everything’s fine.
And he asked me the question.
No one else had asked me because we flirted with some family offices to that point.
And and he said, well, what would it take for you to take our capital?
And I said, well, I don’t know.
And he said, well, why don’t you figure that out and get back to me?
And I’ll tell you if we can do it or not.
And so I whiteboarded out our current structure, which is like kind of
the opposite of traditional private equity.
So we take no fees of any kind, no reimbursements of any kind.
There’s no cash that comes from the portfolio companies or from the LPs to the GP.
Outside of we take a percentage of free cash flow above a hurdle as we return cash back.
You got to redo that last 20 seconds.
Can you dumb that down a little bit?
I got you, Sam.
He’s the guy working in Cinnabon that doesn’t touch any of the Cinnabons.
So he’s in an industry where everybody’s like feeing up everywhere.
They’re just getting high on the sugar and he’s like, I’m good.
I don’t need that.
Can we only do Cinnabon references or analogies because that was much easier.
They’re talking about hurdles and sprinting and whatever.
Yeah.
Well, so okay.
So traditional private equity, you raise a fund and you get 2% of the amount every year and 20.
Every year, by the way, you get 2%.
So which is actually like getting 20% of the total.
Correct.
Every year for 10 years.
Which is kind of insane, right?
It’s insane.
I mean, people in private equity get paid well because it’s hard to do and not many people can do it.
And it’s a rare skill set.
And yeah, I mean, it seemed high to me when I first looked at it, but I was like, okay.
Well, that’s the market for it.
So whatever.
And I said, I don’t need the fees because I’m already paying for the team and the overhead and everything.
And so I don’t need the cash flow from the fees.
Just I want it to be entrepreneurial.
If we make money, like we want to share in that making it together.
And so that’s our model and we don’t use debt and we hold it for a very long time.
So we have a 30 year initial term on our capital.
Typically a private equity firm will have 10 years and most private equity firms, you know, use a lot of leverage, put a lot of debt on the businesses at closing.
We typically use no debt.
And so we’re kind of in some ways the opposite of traditional private equity.
And yeah.
So I went back to him and I said, Hey, this is the structure that I think would work that we would take capital.
And he and Jim, his father said, okay.
Wait.
So I think I missed it.
What, what did you do as the carry then?
So you said, okay, no, no, no on the 2% fees, but what did you do for the profit share?
Yeah.
So we get 40% of the, of the free cash flow of businesses as we return it back to the investors.
So you don’t, you don’t have to return all the money upfront first.
You just start participating from day one with 40%.
Correct.
Correct.
But it’s only on what we returned back.
Only on what you returned back.
Okay.
Great.
And then you said you use no debt.
Correct.
Yep.
So these are completely unlevered.
They’re buying all cash, all cash deals using equity from day one.
Why don’t you use like a little bit of debt?
Probably like a little bit of debt.
Yeah.
Just, just, just a little bit of debt.
It’s not a big budge.
Just, just a little icing on top of the Cinnabon.
Yeah, exactly.
Just this one time.
You don’t even do seller notes like nothing.
We will occasionally do some seller notes.
Although we found that having the people that you work with be your creditors is not an
ideal situation often.
So we’ve really shied away from that as well.
Yeah.
No, we typically just close all equity and try to keep things just super simple.
I mean, we think that, that, that transitioning small businesses is a difficult and it’s
pretty stressful on everyone.
We can always lever them up after, you know, after we close, although we haven’t really
done that.
And it’s that strictly like a lifestyle choice.
You’re just saying that just helps you sleep better at night.
Yeah.
Is it a financial decision or a peace of mind decision to not use debt?
I think it’s both.
What I would argue is that the optionality that we have in doing some pretty interesting
things with these businesses to grow them is much better when you don’t have debt,
when you’re not paying all the cash to, to a bank.
I’ll give you an example.
So we bought an aerospace business in 2019 called Pac Air.
And I don’t know if you guys know this, but the aerospace business never goes down.
It always just goes up in the history of the industry.
Never really has a problem.
And I remember when we were closing that deal, one of the advisors to the seller
said, are you guys idiots?
Like this business does never go down.
Why wouldn’t you guys lever the thing up with debt?
And we said, Hey, here’s our philosophy and all the stuff.
Well, it’s not like we actually knew what was coming down the pipe, but 2020 hits and
we were literally the only business out there without debt on it, like literally.
And so we were able to take all the cash flow that we were generating because we were
still generating cash flow, even though the business was down a lot, and we were able
to go out and basically make 10 years of progress in two years.
And that business now is seven-ish times the size is when we bought it.
And everyone else that had debt is, you know, maybe grown a tiny bit out of
from 2019, but not much.
And so it’s really been a transformative experience.
We’ve had that happen over and over again in these businesses.
Like we never know what the future is going to hold, but we know that there’s going
to be options to invest in really interesting things.
If the cash flow is all going to the bank, you don’t have that option.
Right, right.
I’m going to still use a little bit of debt, but I think that’s good.
Can I ask one question?
Never hurt anybody.
We’ve had a bunch of people come on this podcast and I’m always like wowed by
their insights, their personality.
I feel this way about you and so many people that have come on this podcast where
I walk away being like, that guy’s the man.
Like that person’s a master of what they do.
They’re kind of a master of the universe.
This is great.
And it’s so easy.
And it’s so easy, but I and forget the easy part for a second.
I’m just like, wow, that really works.
And it makes sense what they said.
They’re, they’re kick-ass my friends.
If you like MFM, then you’re going to like the following podcast.
It’s called a billion dollar moves.
And of course it’s brought to you by the HubSpot podcast network.
The number one audio destination for business professionals.
Billion dollar moves.
It’s hosted by Sarah Chen Spelling.
Sarah is a venture capitalist and strategist and with billion
dollar moves, she wants to look at unicorn founders and funders.
And she looks for what she calls the unexpected leader.
Many of them were underestimated long before they became huge
and successful and iconic.
She does it with unfiltered conversations about success,
failure, fear, courage and all that great stuff.
So again, if you like my first million, check out billion
dollar moves.
It’s brought to you by the HubSpot podcast network.
Again, billion dollar moves.
All right.
Back to the episode.
And then if you look at people over like a 20 year period or
you know, like a longer period, 10 to 20 years.
There’s this base question which is like, if you just put money
in the S&P, you get some rate of return, right?
So like Sam loves to put money into the index and he’s like,
cool.
I like that because I do no work and I’m going to get, Sam,
what do you want to get?
Eight, nine percent, something like that.
I would be very happy with eight percent per year.
Okay.
So eight percent a year.
And so to be smart and do a bunch of work, you got to beat
that.
And so we’ve had people come on this podcast that when they
talk, they sound absolutely brilliant.
And then later you look at their returns and it’s like,
oh, they kind of don’t beat the index actually.
And I don’t even think that’s really like a knock on them
or I don’t even view that as like, they’re not like a
Charleston.
I just think it’s really hard to beat the index actually.
So what do you try to do in terms of like your rate of
return and what, what’s your score?
So if the S&P is doing nine percent of your compounding,
what are you doing out of, out of permanent equity?
Yeah.
Well, so I’m under all kinds of SEC regulations.
So I can’t actually talk a ton and I would love to talk
about that, but I can tell you what’s been put in the
letters or annual letters.
What are you not, what are you not allowed to say?
I can’t say anything that would be future looking.
I can’t say anything that would be inducing investment.
I can’t say anything that, that would be considered
marketing because we’re like top level registered SEC,
FINRA, all the stuff.
And what if we bleep it out?
What if you tell us and then we bleep it out?
So it’s not, it’s not on air.
Just tell me what to stop.
Yeah, yeah, yeah.
So, so what I can, yeah, here’s what I would say.
So we, we target the minimum underwriting that we have is
we target a minimum of a 30% IRR is, is minimum we
underwrite to, and we’ve historically been pretty
significantly above that.
Okay.
Um, but, um, you know, we really think about term things
in terms of cash, right?
So I think it was last year that we talked about, uh, you
know, our total cash out IRR is in the low twenties and
that’s without any marks.
That’s without anything.
So you, you know, you stack marks in the growing, obviously
cash flows on top of that and the numbers get pretty
ridiculous marks being, uh, the valuation, the valuations
of the business.
Yeah, that’s correct.
And so, I mean, if you, if you underwrite, I mean, if you
think about it, like kind of the bottom line, if you’re
buying a business with no debt, right?
So take the debt side off of it.
You just buying the business for all cash and you know,
let’s say on average, we’re paying between five and seven
times for a business kind of in that range.
And let’s say that the business is organically growing 7,
10% per year and we’re increasing that to, uh, start
to call it mid teens a year, maybe low twenties.
Um, the math gets pretty amazing pretty fast and that’s
without using any debt.
And so I think that’s where it’s obvious from the outside
looking in.
There’s gold in the hills, right?
If you look at small businesses acquisitions, I mean,
this is not a secret anymore.
I think when I first started talking about it in 15, 16,
right?
I remember going on Patrick’s podcast when it was brand
new, I remember Patrick being like, oh, hey, I’m thinking
about starting a podcast.
I was like, yeah, sure.
I’ll help a friend out.
Had no idea was going to turn into what it is, right?
Uh, but I remember going on there and people were like,
shocked, you know, at like what you could buy these
businesses for.
And people say, oh, well, that’s not fair.
It’s an inefficient market is, is inefficient, but it’s
inefficient for different reasons why people think it’s
inefficient, not because people are getting taken advantage
of.
It’s inefficient because it’s absolutely freaking brutally
difficult and it’s so easy to lose a bunch of money.
Like I had a guy reach out last week and say, Hey, I want
to be honest.
I’m looking for a job.
My wife and I went all in.
He was working at a big private equity firm based out of LA
as an operating partner.
He and his wife went all in on a business and it failed.
And now they’re bankrupt.
What attributes make you and others like you successful
versus this other guy, not successful?
Yeah, I mean, I think the, the, in the beginning, if the
first deal I had done gone south, um, and there’s plenty
of opportunities for it to go south.
And so I would say a lot of our success is, is attributable
to luck in the beginning.
And I mean, look, if you listen to any investor, if they
tell you that the early stuff they did wasn’t lucky, they’re
lying to you.
Um, I mean, I remember, uh, getting a chat with a Buffett
about this and I said, Hey, tell me about sand board maps
and Dempster Mill.
And he was like, Oh my gosh.
Like he’s like, if either of those investments go wrong,
there is no Warren Buffett.
No one knows about Berkshire Hathaway.
None of that stuff happens.
Right.
And they were that close.
Like that’s how he met when he met Munger.
He asked Munger, Hey, do you know anybody who could help
help basically turn around Dempster Mill because it’s, it’s
flailing.
And if that goes under, like my future’s done.
Wait, can you, can you, I don’t know the story.
Can you tell the story in more detail?
So Warren Buffett almost failed at the beginning of his
career.
What, what was it?
Can you tell the story?
Oh yeah.
So he had 70% of his assets into these two investments.
One was called sand board maps and the other was called
Dempster Mill.
Um, and this is early days of the Buffett partnership.
So this is pre Berkshire Hathaway.
What do those two companies do?
So sand board maps was a, was a mapping company.
Um, they basically had, uh, at the time, the thing about
this intellectual property for, for maps, right?
If you needed to go build something or if you needed to
navigate something, they had all the best mapping technology.
Um, and so, um, that business was a publicly traded business
and, uh, I think he was a minority shareholder in it,
but he was basically the controlling shareholder.
That one, um, I think turned around independent of him
installing new leadership, but Dempster Mill was a completely
different story.
He, he bought into that to control of it.
Um, and the business was just flailing.
So Dempster Mill, I can’t remember exactly.
I think they were building constructing, um, mills, uh, of
some sort, uh, hence the name Dempster Mill.
And, um, it was basically the biggest headache and he was
staring down the barrel like I did.
And I mean, I can talk about the early days, like we almost
failed like five different times.
So, sorry.
So he, he had 70% of his assets in these two companies, but
those were public companies where he’s just a passive investor
or he was like owned to the majority of those companies where
he could make a change in them.
Yeah.
So I think that he had, he may not have had a controlling
stake in, in, in Sanborn, but I know he had enough shares
where he could basically throw his weight around in that one.
Um, I think Dempster Mill, I think he actually did buy a
majority of it and have control of it.
And so those companies, they’re not doing well.
And you said he goes to Munger and asks him something.
Yes.
We just met this guy, Charlie Munger, uh, who had been back
into town in Omaha and he had kind of gotten a matchmaking
by a mutual friend who said, Hey, you guys are the two
nerdy dudes.
We know you should know each other.
It was like bromance, like love at first sight.
Uh, they get to know one another.
And I think it was actually Charlie who said, Hey, well,
like Warren, what’s your biggest problem you’re facing?
And he said, well, I’ve got these two, you know, problem
children, especially Dempster, you know, Dempster Mill.
And, uh, do you know anybody?
And, uh, Munger said, actually, I do know this guy.
His name’s Harry Bottle and he’s an accountant out here in LA.
We should go talk to him.
And so they took Harry Bottle lunch and pitched him on moving
his family to the middle of nowhere Midwest and, uh, running
Dempster Mill, Harry Bottle, uh, reluctantly agreed, turns it
around, makes Dempster Mill, uh, uh, uh, you know, a fortunate
surprise on the upside.
And, um, you know, again, he starts stacking geese.
As we talked about, so, um, everyone in the beginning.
I mean, look, you, you don’t, you don’t get to be successful
by not taking risks.
Like all investing is taking risk.
And so the question is just how much risk are you willing to
take?
And when you’re younger and you don’t have much, I mean, the
only way to get ahead is by taking more risk.
When you are doing all this research, are you an expert in
the pool business or are you just an expert in looking at
financial statements?
Are you an expert in understanding how leadership thinks and
how to find winners?
What are you great at?
I think I’m pretty good at seeing the big picture.
So taking all those pieces, like I’m not the best financial
analyst.
Uh, the joke is I can barely open up Excel.
Like I’m not an Excel guy.
I’ve never had the skill set and never learned.
I never worked at another, uh, firm.
Like I never took a finance class in my life.
So I don’t have a lot of the, what I would call like hard
skills that you learn as being an associate or an analyst at
a firm.
Um, you know, I think that I’m pretty decent at putting the
puzzle pieces together and then negotiation.
I, you know, I think, you know, and going back to Buffett,
he talks about, I’m a better investor because of an operator.
I’m a better operator because I’m an investor.
That’s true.
And I think operating and investing are two sides of it,
but I think there’s a third leg that’s not talked about a
lot, which is the dealmaking side.
Um, and I think that dealmaking side, especially as you get
into more inefficient markets becomes really the dominant
skill set.
So understanding how to put the puzzle pieces together and
like in that pool business, um, I saw a business that had a
clear track record of growth.
Uh, they were in a durable business.
I mean, you know, we, we kind of joke that, you know, until
people stop dipping their bodies in water for pleasure will
be fine.
It’s been happening for a couple of thousand years.
I think it’ll keep going.
Like we try to have these like very simple feces for everything.
And so if you look at somebody already has a dominant market
share in a market, they’ve had it for a long time.
The business is growing.
The market’s growing.
Um, you know, you look at the business model of it and you
say, okay, look, we’re an asset light business.
Um, they’re not investing in a ton of equipment.
It’s a very simple business model.
It’s fine customers that want pools, uh, do it better than
they could do it themselves and, and, and, and take a rip on
that on the upside.
You know, you start looking at, okay, who is the leadership
and how do you structure a deal and how do you make sure
everyone’s interests are aligned?
Um, how do you continue to find talent to build the business?
I mean, those are all, I, I say this, this is how to make
it sound simple.
It’s not simple.
It’s very difficult.
It’s just not complicated.
You gave one answer to the question.
I think the real answer just was based off of your, how
you’re answering it.
You are a, uh, really good storyteller.
You are very persuasive and you have, um, you’re, I could
just tell you’re a good leader because of how you dumb things
down to be relatively simple and easy to understand.
Right, Sean?
I mean, just him explaining that you’re like, oh, okay,
that’s you’re actually.
Yeah.
Like, uh, you don’t get stuck on the midwit mountain, right?
Like the middle, the middle part where it’s an over, over
analysis, over overthinking, over thesis out.
You know, you’re like, do I think the people are going to
stop dipping their bodies in water for pleasure?
Nope.
Exactly.
All right.
Cool.
Uh, you know, that’s great.
Do I think we’re going to get like, do I think tech, you
know, is AI going to take us out of the pool business?
Nope.
Okay.
Cool.
So this is an enduring business.
Great.
We got that.
Seems like this guy’s been paying himself a lot of money
every single year as the operator.
Great.
We’ll probably be able to do the same.
Also seems like this guy doesn’t do any marketing.
He says that and he doesn’t have any ads anywhere.
If we did a little bit, probably would help.
Right.
All right.
Cool.
Thesis done.
Check, check, check.
Right.
So like not, um, not over complicating things is a skill.
Um, I would also say like, it seems like you have a good
amount of level two luck, which is the action luck.
Like you were talking about that Patrick O’Shaughnessy example.
I thought that was a great luck example because you were like,
you didn’t have any investors.
You’re just doing this with your own money.
This guy tweets out, Hey, I’m looking for somebody, whatever
to talk to me about equities and capital allocation.
So you reach out, right?
And you reach out.
You don’t have some like imposter syndrome or insecurity
that prevents you from reaching out.
You take some action and you’ve probably taken a thousand
actions like that, you know, cheap lottery tickets where
the downside is very low.
The upside, if you made a valuable connection like you did
was pretty high actually.
And so you filled out a thousand of those scratch off tickets
and then he had luck on the other side, which was perception
luck because he’s like, Oh, you’re buying this company for
four times profit.
That means like if you put in a hundred dollars, you’re going
to get 25% yield every year, even without growing the business.
And wait, I’m in the stock market buying things at 25
times earnings and you’re buying them at four.
So like something is good.
That makes a lot of sense.
So he had that’s that third level of luck, which is like
you, you could spot it.
You could spot good luck when it shows up at your door.
And that’s why, you know, that was good on his part.
So I think that’s impressive to me and a good reminder of like
you got to take action to get that action luck.
And then when you know something and you spot something,
what he did a great job was he flew out to Missouri.
He got to know you.
He pitched you.
You said no.
And he’s like, he asked the magic question.
What would it take?
Whereas like, you know, 10 other people could have done most
of that and not gotten the result that he got.
You want to spend more time talking about why you’re successful?
Let me ask you a different question.
So I have, I have this goal.
I want to retire my sister.
So my sister has worked hard.
She’s got her own business, blah, blah, blah.
And she wants to just have an easier life.
So she wants to spend time with her kids.
She wants to travel like her business is brick and mortar.
So she stuck in the certain location where those businesses are.
She can’t really take her eye off the ball in that way.
So I want to buy her a business and I’m like buying businesses
sounds great.
You buy a business that’s already working.
It’s cash flowing.
You hire a CEO or you promote somebody internally in the company
to be the CEO.
But I know there’s obviously a lot of ways that can go wrong.
And so if you’re me and you want to retire my sister,
where do you start?
Like what is your thought process around buying that first business
that’s going to get you to 300 to $500,000 a year free cash flow?
What would you, where would you orient somebody who’s trying to do that?
Yeah.
I mean, I think it’s all about constraints.
Actually, I wrote a piece called how to buy your first smaller company
like literally because this is a question I get a lot from people.
And I can remember I had no idea when I first got going
and I mean, the thing is I, everyone’s got different constraints.
Where do you want to live?
How much do you want to travel?
What do you actually know about?
What are your, what are you good at?
Right.
So somebody with a very different personality type than me should
be buying things that are very different than what I bought.
Somebody who wants to live in LA should be buying things that are
very different than living in Missouri.
People who don’t want to travel a lot or who want to drive to the place.
Like that’s a very different constraint.
Capital constraints, how much cash do you have available to be able to
invest?
I mean, look, like, you know, if you have, uh, you can buy really,
really high quality business assets that are smaller for like seven,
eight, 10 times.
So if you want something that’s going to be more hands off, that’s
an incredibly durable business model, you can get something that’s
either software, software adjacent.
You can get something that has recurring revenue.
Like the, the more you pay up into the value chain, I mean, you’re
going to have decreased, I think total returns.
Um, but ultimately, like there are easier businesses to run.
So like there are like level 10 difficulty businesses.
Like I would not recommend buying into your local restaurant.
Like that would not be something that I would recommend doing, especially
if you want to quote unquote have an easier life.
Like it depends on if you want the role of a hybrid investor operator,
which really is you’re going through a short season of investment.
And then really you, what you’re doing is you’re buying a job.
Like that’s one very specific type of way to leverage your time
against your money.
Um, if you really just want to be in the investor seat, it’s very
difficult to only occupy the investor seat in the, in the world of
small businesses.
It can be done.
It’s very, very difficult.
The first three to $500,000 of cash flow coming from small businesses
are very likely going to require a lot of sweat equity in, in, in
exchange for that money.
Yeah.
You should go to that blog post.
He has a good Q and a, he goes, uh, the question is how hard will I have
to work harder than you’ve ever worked before?
The opportunity in small business, in the small business market is dressed
in overalls and likes to, and likes hard work.
Dude, you’re poetic when you’re right.
Uh, I love that way.
You’re right.
That’s my main skill set.
So yeah, yeah, that’s great.
Uh, you have some one liners that are pretty cool.
Can we just get you, can I read you a one liner that you’ve said and you
just kind of rant on it?
So just basically kind of like make your case for this thing.
Why, why you think this is true or why you believe it, why you think people
should pay attention to this idea.
This is the lightning round, right?
It’s a lightning round.
Yeah.
Here we go.
All businesses are loosely functioning disasters.
Some just happen to make money.
Yeah.
Uh, anybody who’s ever operated a business knows this is true.
The only people who have issues with this are consultants.
So if anytime I’ve said this publicly, the only people who come at me are
people who either got lucky the first time or have never done it.
And, uh, I mean, look, every business I’ve ever been involved in,
it doesn’t matter how profitable the business, how big the business.
Um, I’ve gotten a pretty good view into some very large businesses.
They’re all highly dysfunctional.
Why are they dysfunctional?
Because they’re full of people.
People are messy.
When you get a bunch of people together, that messing is compounds.
Like it is not a complicated concept.
Uh, and so I just think that people should lower their expectations
and, and understand what to expect when they get into a business.
It’s going to be hard.
It’s going to be hard in different ways.
Like, you know, the first time you had to put somebody through rehab,
your, your guide doesn’t show up at the, to me in the warehouse
because there’s been a domestic violence dispute and he’s in jail.
I mean, literally like these are things that we’re having to deal with.
Um, these are things that everyone’s having to deal with.
Now they may come in different flavors, depending on how professional
the business is, but the reality is that these are things that happen.
Sean, have you watched the land man?
I have.
It’s really good.
Um, it’s a, for those listening, it’s a show with Billy Bob Thornton on,
it’s about like the oil industry.
And they, there’s this great quote.
It says, our business is one of constant crisis interrupted by brief
periods of intense success.
Yeah.
How good is that?
Yes.
Yes.
Uh, yeah.
So I have a, I have a quote on my wall and it says, success is
founded on a constant state of discontent interrupted by brief periods
of satisfaction upon the completion of a job, particularly well done.
Um, all right.
How about this one?
The more humility a leader has, the more their business can grow.
What’s an example?
Yeah.
So, uh, look, what is humility?
Humility is acknowledging reality for what it is.
Um, and if you don’t acknowledge reality, you can’t get better.
And so lack of humility is basically a defense mechanism, right?
This usually is one of two forms is either self-protection or self-promotion.
And people are usually doing a combination of both when they’re in, uh,
some form of pride or arrogance.
Uh, they’re usually terrified, fearful.
I mean, I can say this from experience when I get prideful, uh,
is because I feel like I’m not enough and I’m not going to be enough.
And I’m worried that I might not have enough.
And so, uh, what is humility is, is laying that down and saying, Hey,
I, I want to see reality for what it is so I can learn and grow and become better.
And that’s the only way to do that is to get feedback from the world around you.
New York city founders, if you’ve listened to my first million before, you know,
I’ve got this company called Hampton and Hampton is a community for founders
and CEOs, but a lot of the stories and ideas that I get for this podcast.
I actually got it from people who I met in Hampton.
We have this big community of a thousand plus people and it’s amazing.
But the main part is this eight person core group that becomes your board of
advisors for your life and for your business.
And it’s life changing now to the folks in New York city.
I’m building a in real life core group in New York city.
And so if you meet one of the following criteria, your business either
does three million in revenue or you’ve raised three million in funding or
you’ve started and sold the company for at least $10 million, then
you are eligible to apply.
So go to joinhampton.com and apply.
I’m going to be reviewing all of the applications myself.
So put that you heard about this on MFM.
So I know to give you a little extra love now back to the show.
I like that lack of humility, self-protection or self-promotion though strong.
Charlie Munger says this thing.
He says, every time you see the word EBITDA, you should substitute it
with bullshit earnings.
Do you agree or disagree?
Yeah, for sure.
I agree.
I mean, like look, EBITDA can be a useful tool in some very limited
circumstances, but for the most part, it is dressing up something that is
more than often obfuscating reality.
So when you see EBITDA, especially in the small business world, there
usually comes a ton of capex, a lot of reinvestment needs that are on
the back end of that.
And what you have to really do is you have to figure out, okay, just in
a steady state, what is the business actually producing a free cash flow?
Like we look at businesses all the time that are making quote-unquote making
seven, eight, nine million dollars a year that you ask the owner how
much money they’ve taken out of the business and they’re taking out
maybe a million bucks a year, maybe two million bucks a year.
I got news for you.
For the most part, you don’t have a business that’s quote-unquote making
seven million dollars a year.
You have business making one to two million dollars a year.
That’s the reality.
Have you guys, Sean, have you ever learned the history of the idea of EBITDA?
Do you know that’s like a new-ish thing?
No.
So basically, John Malone, I believe, is that right, Brent?
He invented it.
Yeah, John Malone invented it.
So John Malone, his nickname is like the greatest nickname.
He’s one of the Cable Cowboys.
So John Malone, you would know him now as like the guy who owns or founded
Liberty Media, which owns F1 and all this other amazing stuff.
But basically, he owned a cable company.
It was like a small cable company.
I think when he took it over, it was like five or 10 million in revenue,
something like that, like relatively small, and he needed to get loans because
he found that if he could just acquire way more cable companies, cable
companies were incredibly sticky and it was recurring revenue.
I should go out and buy a ton in order to go and get more cable companies.
I need to borrow lots of money.
And for some reason, he came up with this idea that EBITDA was an amazing
metric to convince banks to loan him money.
And so he coined the term EBITDA because for his business, he had
lots of depreciation, lots of things like this.
So he was like, no, no, no, just give me like the earnings before all of this.
And I’m going to convince banks to loan me against that.
And that, I think it was the 80s, the mid 80s became like the term.
And I’ve hated EBITDA.
I think EBITDA is really stupid.
But what I think that like is kind of insane is that we’ve all
collectively agreed that this is like the metric.
And I always thought it was like weird, but I never had the courage to say
like, this is stupid.
And then I would like read about Buffett and all these guys and I was like,
God, I think it’s stupid.
Dude, I take the opposite.
I’m like, this is genius.
I need this in my personal life.
I need this.
I did the husband version of EBITDA.
It’s like, you know, my, my behavior before, you know, before football,
before taking out the trash, if you ignore all those things, I’m great.
I’m amazing actually.
Well, it’s crazy that like you don’t pay your personal taxes on EBITDA.
You pay your personal taxes on a cash flow, or you know, on a cash base.
It’s just there’s so many reasons why this is insane.
But, and also, you know, it’s the most insane thing, adjusted EBITDA.
What the hell does that mean?
It means whatever you want to be.
It’s, that’s insane.
You have another one, another quote you said, you either operate with high
authority, top down or delegated authority.
Hell is in the middle.
Yeah.
So this is hard earned because I would say is I think everyone’s
temptation is to be high authority when you think there’s something wrong and
then low authority when you want to be lazy.
And that, that combination just makes a mess of everything.
And so there’s really two ways to be involved with the company.
You either say, Hey, this is what we’re doing.
This is how we’re doing it.
You need to get in line.
I need people to go and execute this vision.
Or you say, Hey, I want to be supportive and helpful.
It needs to be your vision.
And I’m not going to intervene even when I think that something’s wrong.
I’m just going to go along for the ride and be helpful.
And very, very, very lightly interviewing.
And so you just have to choose.
And I think there’s both can work.
I think both come with certain upsides and downsides, um, but you can’t
do the middle because if you do in the middle, what you end up doing is you
end up saying to the leadership team, Hey, you’re responsible, but I’m
basically telling you what you have to do.
And so it removes all agency from them.
And ultimately everything that goes right is going to be their fault and
everything that goes wrong is going to be your fault.
But to make the lazy, when you say the lazy approach, I’m like, Yeah,
that sounds great.
Sign me up.
Yeah.
But that’s hard.
How do you make that work?
You have to find, uh, the right person and what attributes does that person
have and you know, Buffett and Munger always said that like incentivizing
manager was the number one goal of, uh, of was their number one job.
Is that true for you?
Yeah, absolutely.
A hundred percent.
If you’re going to, uh, try to truly be an investor and not an operator in the
business, uh, it all comes down to somebody has to do the work and somebody
has to exert judgment.
And if you’re not going to be the person to do the work and exert judgment,
somebody else does and you got to be interested.
Got to be aligned with that person.
And so yeah, when I say the quote unquote lazy approach, I mean, ultimately
this is the only way you scale, right?
I mean, if you look, if you look at, again, we keep coming back to Berkshire.
It’s a good thing to think about because when people say, Hey, let’s talk about
how, you know, Berkshire like buys businesses and leaves them alone.
That was not how they operated for a vast majority of the time that they’ve done
it.
Like they had to do that eventually because they got to a such a scale.
They literally couldn’t intervene anymore.
If you go back and look at Buffalo news, like Buffett and Munger were literally
living in Buffalo.
Dude, they’re writing headlines.
They’re, they’re writing like, have you ever read of that Sean?
They bought a newspaper and they would literally, uh, like they, they were news
guys, like they liked the news and they were like, here’s, I want this many ads
on the page.
I think the headline should be like this.
Like they, they, yeah, I did not know this.
This is amazing.
Yeah.
I mean, I was just saying is like Buffalo news is a good example of, of like
basically their, their mode of operation until the call it early 80s, mid 80s, when
they got to have so much money, they literally couldn’t be involved in the
stuff that they were doing was to be highly interventionist.
I mean, they would be involved in the smallest of details.
They would set the tone.
They would help on marketing strategy.
They would replace leadership.
They, I mean, they were doing all the stuff that I’m doing.
They would do all the stuff that anybody has to do because when you’re small,
you can do it.
When you’ve got less capital and more time, you can do stuff like that.
And by the way, the returns are higher when you could leverage your
time against your money.
It’s an advantage, right?
It’s not a disadvantage, it’s an advantage, but eventually you, you have
a limited amount of time and attention and as the money grows and your
attention stays the same, that ratio gets thrown all off and you have no
choice but to say, okay, I’m going to spread a much more thinly layered
amount of judgment over a much wider thing of grouping of things, which
means you have to step out of the day to day operations and then you have to
hire people who can exert great judgment.
And so Buffalo News, I mean, there’s a great quote from Munger saying,
hey, like I’m down to my last like million bucks that I can put into
Buffalo News.
Like after that, I’m calling uncle, like I’m out.
I mean, it was, there’s been various times in Berkshire’s history.
They’ve gotten, it’s gotten very hairy.
It was not a guaranteed success.
And even when they had a lot of success, it still gets hairy in various
points and I think every business has that though.
That’s what should be expected.
Like it should be an adventure.
There’s a great letter that you can read.
It’s from, it’s in 1972 and it’s the Buffett letter to the C’s Candy CEO.
If you Google that Buffett letter to C’s Candy CEO and he says, and because
I went into this, I haven’t like studied Buffett in depth the way that
you would if you’re going to do private equity.
And he, I just thought the, oh, he’s this, aw shucks.
He sits at the table.
He drinks his Diet Coke.
He, he just allocates the capital and he hires great people and they
just do magic.
And this letter, I was like, oh, Buffett had the mind of an operator,
right?
Because he goes, dear Chuck, I was out of Brandy’s a couple of days ago and
I have a few strong impressions to pass along.
Number one, and he basically, he starts talking like details about the
store.
So he goes, people are, people are going to be affected not only by our,
how our candy tastes, obviously, but what they hear about it from others
as well, the retailing environment and which it appears, this class of
the store, the packaging, the condition, like this is like Steve Jobs
talking about the Apple store, right?
Like a product oriented person.
And he just goes through like step by step kind of like things that he
thinks could be improved on, you know, in the store experience.
And I thought, wow, this is different than what I kind of the impression
you get when you hear about Buffett, just sitting in his room reading
all day, you know, making investment decisions off of, you know, financial,
you know, financial sheets.
This is a great letter.
By the way, how awesome is this that this was like a typewriter letter?
Does that make it, doesn’t that make it so much more substantial?
Totally.
He licked, he licked an envelope for this one.
I mean, he licked an envelope.
I kind of want to like start sending letters like this.
It just makes it feel like more authoritative.
Let me ask you something, Brent.
I have, like I said, we kind of, my business is a little bit different
than yours, which is I create content on the front end.
It’s the mullets.
I have content on the front end, which is what I love to do, what I’m
great at, but media and content is not a great business model.
So my back end is basically start or buy businesses that I know I can like
turbocharge and we’ve done this maybe four or five, six times now and it’s
going really well.
But one thing I’ve noticed is like, if I draw a pie chart of what makes it work,
it’s basically like 60% of the battle was just the initial market selection.
When we picked a project that was like the winds were blowing against us.
It didn’t matter how much effort we put in or how great the operator was.
It was always just an uphill battle.
And sometimes we pick these markets that are just like, it’s a pull market.
You’re being pulled in.
It’s just a sweet spot.
The people just need this.
It’s shooting fish in a barrel type of thing.
That creates a big part of it.
The second part of it, the next, I’ll say like 30% is the quality of the CEO
that we picked who’s going to run the business.
And when we pick a sort of limited CEO, we get limited success.
When we pick an unstoppable CEO, we get like massive success.
And the last 10% was just luck.
Like the ball bouncing our way on one or two things that could have easily
not happened, but that they happened or, you know, when the winds that didn’t,
maybe we missed out on something that we didn’t see.
I got a question about that second piece, which is hiring the CEO or evaluating
the CEO, evaluating the operator.
I want to get better at that.
If you sit down with somebody, you’re recruiting an exec.
Maybe it’s a, you’re interviewing somebody who’s maybe in the business
that’s going to become a CEO or you’re taking somebody external to come run this company.
What are you doing to, what are you doing?
That’s like not obvious to get that assessment.
Is there any little tips and tricks, anything that you’ve picked up
that, that helps you find the right operators?
Yeah.
Well, so actually, I think this is a, probably a pretty underappreciated aspect
of being involved in small companies is all about the people, right?
And so the better you can be at the people, the better it’s going to be
for the business.
And, you know, we’ve really deep dived into, I would say all personality
testing is wrong, right?
It just depends on what you’re trying to get out of it.
And so we have actually a huge battery of personality testing that we do
for people to try to get as close to a 360 view of who they are.
What do you use?
Yeah.
So we’re doing a combination of disk, Myers-Briggs and something
called habit story, which kind of has them see like, what are the habits
that they’ve built in their life and how are they kind of supporting
who they are with the structure and apparatus around them?
And I personally also do a lot of study of Enneagram.
And so I think actually, personally for me, when I meet somebody, I’m
instantly categorizing them as what I think their Enneagram number is.
And I’m automatically categorizing them across the four main Myers-Briggs.
Dude, this is crazy to me.
I thought that’s just horoscopes for dudes.
Like, do you really use this as like your core thing?
That’s amazing.
Yeah.
Well, so all of it tells you something about the person, right?
So if you think about, so Enneagram, most people don’t understand this.
So Enneagram basically tells you who you are at your worst.
And there’s nine numbers and basically everyone falls into a number
and then you have what’s called wings, which is kind of where do you tip
from that number?
So for me, I’m a three and I tip two.
So a three is they call the achiever.
My biggest insecurities is that I’m not enough and I want people to like me.
And so again, if you, if anybody’s proud of their Enneagram, it
means they don’t understand Enneagram.
Like, like it’s not a good thing, right?
This basically tells you what are your deepest fears and what, what is
the, your areas of greatest weakness.
But if you can know that about somebody, you can see them.
How is that playing out in their life, right?
So like I, when I’m in my least healthy, I’m a people pleaser.
I say yes to way too much stuff.
Um, I don’t tell people the truth.
Um, it’s really unhealthy.
It’s, it’s highly destructive behavior, right?
I’m very focused on hierarchy.
And, and, and my guess is that you guys have different Enneagrams, right?
I won’t, I won’t guess your Enneagrams, but can you do it?
That’s great.
Yeah.
Do it.
I can’t wait.
Yeah.
My guess is Sean, you’re a three and my guess is Sam’s an eight.
Uh, but what’s three and what’s eight?
Uh, the three is the achievable.
So threes and eights, uh, both achieved, but for very different reasons.
So, so, uh, threes achieved because they want people to love them.
It’s like less about the thing itself.
And then eights really want the thing itself.
So like as a three, like I don’t want money to just like want the, want the money.
Like I want the money because I want people to love me.
Uh, eights really want the money because they want the security and
they want the power that comes with the money.
Uh, so, so I want to learn the, I want to roll over so that I get Pat and
my tail can wag.
Sam just wants a dog treat.
Yep.
That’s exactly right.
Um, that’s right.
What do you think?
Yeah.
Well, like he’s, he’s describing everything in like the most positive way.
So like, yeah, sounds great.
Uh, I’m, uh, I like that.
And then I looked up who other eights were and it’s like Winston Churchill,
Martin Luther King.
I’m like, yeah, okay, cool.
Um, yeah, yeah, for sure.
What you do, but you, what this is like crazy fascinating.
You said like five different things.
So can you give us the exact?
So you said Myers-Briggs, uh, and then you said this, this other test.
What’s like the exact stuff that you’re using.
Yeah.
So, so I, well, there’s two things.
One is when I first meet somebody, I can, I can walk you through what I do.
And then I would say is separately from that in a hiring process.
We, we use that once we get serious about a candidate, then we put them through
a huge battery of testing to make sure we try to understand them.
Right.
For me personally, when I first meet somebody, it helps me so much to be able
to categorize them into what I expect based on just kind of how they’re showing
up in the world, uh, in Myers-Briggs, right?
So you have, you have I and E.
So are they introverted or they extroverted?
Right.
Are they S or they, uh, N, which is, are they, are they in the present?
Are they sensing or are they in the future?
Right.
Um, uh, then are they a thinker or are they a feeler?
Right.
So they, are they primarily excited about ideas or they primarily excited
about, uh, sort of the, the, the people themselves, right?
Um, and then the last one is T and P, which is, um, uh,
are they, uh, it’s kind of, excuse me, J and P, which is, are they, uh,
very focused on rigid schedules and on creating order or do they like to go
and test and try a whole bunch of things?
Right.
And how all these like sort of stack up and combine really gives you
a much more holistic view of who somebody is than when you then pair with
Enneagram, I think gives you probably those two together.
I think creates the most, the quickest and the most holistic view of
who somebody is, where if you can get like a, a pretty good idea quickly
of who they are, like how I would talk to somebody who’s present oriented
is very different than how I talk to somebody who’s future oriented.
And oftentimes, you know, we assume the whole world operates like the way
we do, like my wife and I are literally the opposites in every single one
of these areas.
So you can imagine in our marriage, like how she shows up and how
I show up is so different and it creates all kinds of miscommunications.
We’ve been married now for 16 years and it really, we went through
personality testing together about, oh, three and a half, four years ago.
It was game changing in our marriage.
It was, it completely explained a ton of behavior for her and for
me that had been bothering us for a long time and it was just largely
how we’re wired.
So that’s how we do it.
That’s how I think about doing it in the moment that helps me relate to
people a lot more.
It’s crazy.
By the way, Sean, 16personalities.com is like these websites are huge
that are doing these tests.
Yeah, yeah, yeah, they’re really big.
I mean, this isn’t, it’s an important piece.
I would say five voices is a really interesting one.
They, they, so it’s just the number five voices.com.
I think.
Yeah, those guys have created Steve Cochrum and Jeremy Kubitschek are
the two founders of that business.
They’ve created an overlay for Myers-Briggs that simplifies it.
I think a lot of their stuff is incredible.
And yeah, we definitely use a lot of their work as well.
Then we finish off with a quick tarot reading just to see how the future
is going to go.
And then we’re, we’re all set.
This is amazing.
This is so good.
You, you also have one thing I read that I really loved.
You go, you have this like asshole test.
It’s like, we don’t, nobody wants to work with assholes.
How do we sort of filter for that?
Nobody’s trying to present as an asshole in a job interview.
And you said like, you can eat with them, see how they treat the staff.
You could see them interact with their significant other.
That’ll tell you a lot in their home environment.
And then you said, the most telling environment is to travel with somebody.
It is impossible to fake it when you’re at the airport.
You’re grinding through security.
And if there’s a delay, your, their true colors will come out.
That was great.
Yeah.
Yeah.
It’s fun.
I mean, just want to, I mean, honestly, the business we’re in is predicting
people’s behavior.
Like that’s what we’re trying to do.
And because of all these businesses are predicated on the people who run them.
They’re, they’re all going to have the risks, the primary risks of all these
businesses are going to be the people.
And so what we’re trying to do is get to know people.
Have you guys ever been out with someone and they’ve actually been
an asshole to the wait staff though?
Whenever people say about this, this asshole test, I’m like,
I’ve never been around anyone that’s like rude.
Dude, you don’t remember the dinner we were at where this happened?
Yeah.
But that was like one out of a thousand.
Yeah.
Yeah, it’s true.
The, this guy, we, Sean and I went out with someone and he was like
shooing the waiter when he was like, it was, it was like, it was, it was, it
was, I was, I was ashamed.
I left that dinner.
I’d be like, I felt like, uh, like I had just like participated
in like a porno.
Like I felt like I was like, I’m so ashamed.
Like if people find out about this, like I’m going to be so embarrassed.
That’s rough.
Wow.
Dude, what a fun episode.
This is great.
Oh yeah.
I really enjoyed hanging out with you guys.
That’s the one we guys built.
Brent, thanks for coming on, man.
If you haven’t, go check out his blog and his annual letters.
They’re pretty great.
Follow him on Twitter.
What’s your Twitter handle?
Brent, be sure.
Just Brent, be sure.
Yep.
All right.
Good seeing you, dude.
Thank you.
That’s it.
That’s the pod.
I feel like I can rule the world.
I know I could be what I want to put my all in it like the days on for the road.
Let’s travel never looking back.
Hey, Sean here.
I want to take a minute to tell you a David Ogilvy story.
One of the great ad men.
He said, remember, the consumer is not a moron.
She’s your wife.
You wouldn’t lie to your own wife.
So don’t lie to mine.
And I love that you guys, you’re my family.
You’re like my wife and I won’t lie to you either.
So I’ll tell you the truth for every company I own right now.
Six companies, I use Mercury for all of them.
So I’m proud to partner with Mercury because I use it for all of my banking
needs across my personal account, my business accounts.
And anytime I start a new company, this is my first move.
I go open up a Mercury account.
I’m very confident in recommending it because I actually use it.
I’ve used it for years.
It is the best product on the market.
So if you want to be like me and 200,000 other ambitious founders, go to mercury.com
and apply in minutes.
And remember, Mercury is a financial technology company, not a bank.
Banking services provided by Choice Financial Group and Evolve Bank & Trust
members, FDIC.
All right.
Back to the episode.
(upbeat music)
So what’s the second geese?
I hope that becomes a term that we can use stacking geese.
Yeah, stacking geese.
We got to get some shirts, baby.
Goose over merch, baby.
Hey, merch guy.
So Brent runs Permanent Equity.
You started off as a founder.
You started buying companies.
And you then started raising money to buy companies.
So you raised like something like 50 million bucks for your first fund.
You started buying companies with that.
Then a couple of years later, you raised about $250 million to buy more companies.
And now you own, I don’t know, something like 16 companies that do over $350 million a year of revenue.
And I believe what you said was $50 million of free cash flow out of the portfolio now, which is pretty incredible.
So that’s who you are.
That’s what you’re bringing to the table.
And I think, Sam, what do we want to go with this?
Because we could ask you about buying businesses.
I have some questions around that, but I kind of want to start with something light before we go into like,
“Hey, can you teach me how to be private equity, please?”
Yeah, we can do the light stuff.
You also, you’ve got the, we call it the all shucks, Warren Buffett attitude, where you’ve got a list of one-liners.
You write amazing annual reports.
You’re a great writer.
So we have a bunch of one-liners that we want to ask you about as well.
Sounds good.
What, can you tell me what’s the, what do you buy and what are the biggest companies?
Do you buy like pool companies and HVAC companies?
Yeah, I mean, we typically, we’ve got everything from a children’s clothing brand to a military recruitment firm,
to manufacturing, construction, business services.
I mean, it’s really the 16 companies.
It’s a, you know, it looks like the island of misfit toys.
For us, they’re, they’re companies that we love the people who we get to work with.
They’re in industries that we feel like are not going to be changing.
And we can talk about how some of them maybe look like high change,
especially like the children’s clothing would seem high change on the surface,
but it’s actually not.
And yeah, we try to partner with them for a long time.
What’s the biggest one in terms of revenue and profit?
Let’s see, our, in terms of revenue and profits,
probably our fencing business out of Dallas, Texas is probably the largest.
So we, we have a big market share in the, in the Dallas market.
And yeah, it’s a, it’s a, it’s a pretty sizable business.
Do you guys remember when marketing was fun?
When you had the time to be creative and connect with your customers with HubSpot,
marketing can be fun again.
Turn one piece of content into everything you need.
Know which prospects are ready to buy and see all your campaign results in one place.
Plus it’s easy to use helping HubSpot customers double their leads in just 12 months,
which means you have more time to, you know, enjoy marketing again.
Visit HubSpot.com to get started for free.
I was going to ask you a similar question.
Like, you know, people are always like, you can’t pick a favorite kid.
And as an investor, you can, you have this portfolio and like some are better than others.
And that’s okay.
It would be weird if all of your companies were equally successful investments.
I wouldn’t believe you.
And so what’s like the golden goose for you?
So which one is like, like, I know in my portfolio, right?
I have like, I have like a mini version of what you do where we have like four or five companies
that we kind of have either bought or own a big stake in.
And I could tell you, I’d be like, oh, this is like for us, like the somewhere.com business was like my golden goose.
Partly because I got in on a great price, but also the business tripled since we bought it.
And it’s just this business that just spits out cash flow.
And it’s like the market keeps growing for this people need this.
And so for us, that’s been the golden goose.
It just keeps laying a golden egg every single month for us.
What’s the golden goose in your portfolio?
Oh, we’ve been fortunate to actually like we’ve kind of stacked golden geese on one another.
That is how I would describe it.
So the very first business I bought is called Media Cross is a military recruitment firm bought that in very early 2010.
Explain in layman’s terms.
What does that even mean military recruitment firm?
What’s happening?
Yeah.
So we at the time worked with two branches of the military.
Now we work primarily with one.
We had two contracts.
One was to recruit civilian mariners into a division of the Navy called military seal of command that resupplies the ships that never came into port.
So it’s about 1400 to 1800 civilian mariners a year or recruited into that division.
That’s our responsibility.
So we do all of the marketing and recruitment efforts and then the processing to bring them into that branch of the military.
Does that mean like you’re out you’re out on the street with people?
Or does that mean you’re running ads and you own like a lead gen website?
All of that stuff.
Yeah, but we’re doing we’re doing lead gen.
We have a whole processing center.
We’re actually doing qualifications for these people.
So it’s a complete soup to nuts operation.
And the government just pays you per recruit or how does that work?
Yeah, we’re on a fixed contract that escalates every year based on the staffing and needs of the business.
So we it’s basically a staffed contract and then we have sort of a built-in profit margin that’s on top of that.
What do you get per recruit or per referral for one of these things?
Oh, gosh, I don’t even know because we’re not we’re not based on that, right?
So we’ve done this for the contract is we’ve had it as a business for 30 years now.
It’s been forever.
And I mean, we’re so deeply embedded into what they do.
We know exactly what it takes.
We I mean, we are the outsourced function of that piece of the military.
And why is that business great?
Is it because you got this cash flow, but you have this contract.
You have the certainty and defensibility with that.
Is that what’s great about that?
Yeah, yeah.
I mean, so like for the most part, we know what our profitability is going to be in three years from now, right?
And so once you get that business optimized and you get great people in place
and the leader of that business we’ve had, I mean, she’s been with the business since the very beginning.
So we’re 15 years into the relationship.
She’s doing a great job and it just it clicks.
So that was that was I would call the original Golden Goose that allowed me to pay back the SBA.
I’ve heard you say you accidentally bought your first business.
Is that what you meant when you say you actually what does that even mean?
How do you accidentally buy a business?
Yeah, I got a call from a guy and he was like, hey, I want to introduce you to this guy.
He’s it’s your he’s in your industry.
You know, he said marketing marketing because I’d launched a call it an ad agency for all intents and purposes before then.
And he was like, hey, he’s in your industry.
She gets to know him and I said, OK, great.
And he’s like, oh, by the way, the guys he’s got left at the altar for the second time trying to sell his business recently.
And I was like, oh, OK, I guess I could take a run at it.
I had no idea what I was doing.
I was 24 at the time.
No idea what I was doing.
And I sat in front of this guy and and you know, we talked about it and we negotiated and he said,
I would never sell it to you for the price you asked for.
And I was like, that’s fine. No problem.
And I didn’t talk to him for seven months.
And then seven months later, he called me up out of the blue and said, just renewed our largest account.
Business is in great shape.
I’m exhausted.
I’ll give it to you for the price you asked for.
But you got to close all cash 60 days from now.
And it was one of those where you kind of like you make the sale on the go down the elevator and you say, oh, shit.
It was it was like that, right?
And I remember getting off the phone and I was like, oh, crap.
Like I just obligated myself to go buy like buy a business.
I have no idea what I’m doing.
Did you know anything about digital marketing?
Oh, yeah.
I mean, we had we had we did digital marketing work back then.
You have a marketing agency.
You stumble into this business.
You’re like, maybe somebody tells you there’s a chance to buy it.
You’re like, all right, I could try.
He says no to the first price.
He comes back.
You’re not even following up.
He comes back and says, hey, still interested, but you don’t have a lot of money.
You’re 24 years old.
So you go to the SBA and you get an SBA loan for this thing.
Yeah, correct.
Yeah, I asked my newly married wife to sign a personal guarantee and she was like, what’s that?
And I was like, God, don’t worry about it.
A big deal.
You’re like, good news and bad news.
Good news, no prenup, but you do have to sign this other thing.
Yeah, exactly.
She was like, what happens if this doesn’t go well?
I was like, it’s probably not going to be great.
Um, so yeah.
So somebody’s never done an SBA loan.
What can you explain?
Just like you put down X, you get Y.
What’s how it all works.
Yeah.
Back then, um, so the requirements have changed a little bit.
I think it’s like five or 10 percent you have to put down now.
And I think you can actually qualify with seller financing.
I’m not an expert anymore on the SBA.
I’ve only done the SBA one time and that was literally 15 years ago back then.
What I did was I count, uh, leveraged the accounts receivable from the existing
business as the down payment and then got the rest of the debt through the SBA.
And so, I mean, I put very little cash into the deal.
So you put basically zero down.
I mean, it was a, it was a lot of my, my money, but it was just tied up in other assets.
But yes, I mean, in terms of actual cash that was coming out of my pocket was not a lot.
I didn’t have a lot of cash.
Um, and so, um, yeah, I ended up asking my buddy at the SBA.
It was, it was part of an SBA lender.
I said, Hey, do you guys do like expedited SBA loans?
And he was like, not really, uh, we don’t do that.
And I was like, well, I need it in 60 days.
And he was like, that’s really not possible.
And I was like, can we make it possible?
Like let’s try.
How much, how much are you talking that you had to borrow?
It was a million bucks.
Yeah.
It was a million dollars.
And was this like your C’s candy, like Buffett bought C’s candy and it’s returned like
a billion dollars in free cash flow or more than that to the, to the headquarters over
the last whatever 50 years or whatever it’s been.
It’s, it’s, it’s like a 20 Xer.
Yeah.
So that’s amazing.
So that was the first golden goose.
And then you said you started stacking geese like a rapper, you know, at the club.
So what’s the second geese?
I hope that becomes a term that we can use.
Yeah.
Stack and geese.
We got to get some shirts.
Hey, merch guy, you know, like Rogan has like Jamie.
I kind of have this like fictional studio in the room.
I’m like, pull that up.
Hey, much guy, get on that.
Like there’s nobody here.
Merge guy, yeah, yeah.
Merge guy.
Um, yeah, I mean, I knew, I knew so little back then.
I remember my lawyer said, okay, we got to start due diligence.
And I literally typed into Google D O diligence.
Like due to like, I had no idea what it was.
Um, and I was, I was like reading about it as he was talking to me.
I was like, Oh yeah, we just asked questions.
Like how hard can that be?
Um, so anyway, uh, it was quite the adventure.
That’s amazing.
Yeah, another, another anecdote on that deal was a week before closing.
I said, okay, so I take all of my money and I give it to you.
You take all the money out of the business.
Like how do I make payroll?
And the guy was like, well, you obviously got a line of credit on the
business, right?
And I was like, no, I didn’t, I didn’t do that.
And he was like, well, the business is going to go under immediately.
And I was like, yeah, that’s not good.
What do we do?
And he was like, well, you got to figure this out because you’re getting
ready to close on the business.
And I was like, can I get a loan from you?
So he actually lent me money to, as a line of credit to keep the business operating.
Cause I didn’t even, I didn’t even think about it.
I didn’t think about like, Oh, well, he’s going to take all the money and
there’s not going to be any cash to operate the business.
I was, um, I was with this guy this weekend and he was like, Hey, should
I start my own business?
You know, I’m 28.
I don’t think I have enough experience though.
And I was like, yeah, I’m pretty sure like a lack of experience isn’t like,
hasn’t stopped a lot of people.
Uh, you can kind of be like a kind of a dummy and get into it.
And you’ll probably learn in like six months and you are a good example of
that.
You don’t really need to know much.
Huge dummy.
Exactly what I think about myself.
And like the lean manufacturing part, uh, like kind of philosophy, they
have this idea of like just in time, right?
You, you, you do things just in time versus doing everything ahead of time.
And so just in time learning is basically what you did.
It’s like, Oh, when I need to close, then I figure out what due diligence is.
Then when I need to take over the business, I learned what working capital is.
And you just, you learned each of the core concepts as you needed them,
which is actually the real way that people learn rather than I’m going to
learn everything up front.
Then I’m, then I’m fully prepared to now to go do this.
And like in reality, that’s not how, how life works.
Yeah.
And sometimes it doesn’t work out.
And I, you know, I joke that I’m a force come private equity for a reason.
So.
What else do you own?
That’s awesome.
Yeah.
So the next business we bought, uh, was a, as a pool business out in Arizona.
Um, and that was, uh, just with, uh, again, started occurring cash and, um,
started building that up and, and bought that business.
And again, that one turned out to be, uh, uh, great investment as well.
You say, you say that nonchalantly like, Oh, a pool business, but it’s also like,
dude, that would be really random.
I don’t think about pool businesses.
Nobody shows me a pool business.
So what were you doing?
You’re talking to brokers.
Where does that deal come from?
Like for you at that time.
Yeah.
So it was about, so let’s see.
So I had no idea I was doing after I bought the business, the meaty cross in 2010.
I was like, Oh, that worked.
Uh, I should do more of what works and less of what doesn’t at the time.
There wasn’t a lot of writing on the internet about this.
Um, so I mean, there was a little bit of, uh, stuff out of the Harvard,
a little bit out of Stanford around search funds, but there was very little
activity online.
And so, uh, I was like, well, I just need to ask ground was like,
are there other people doing this?
I didn’t even literally know that there was a thing called private equity.
That’s how little I knew.
I mean, I started, somebody was like, Oh, you did a private equity deal.
And I literally Googled private equity.
And I was like, turns out there’s a whole industry of people to do this.
Like, why would they not do it?
Like in smaller companies.
And, uh, that was my foray into it.
And so at that point we said, okay, well, if we’re going to go find other
businesses, I mean, how hard can it be?
This one just came to us.
There must be just tons of businesses out there just floating around ready
to be, uh, ready to be bought.
And so we started reaching out to people and developed deal pipeline.
And one of the deals that took us so that, that pool deal we first
saw in 2012, I want to say.
Um, and it took us about three years to get the deal done.
And, um, it was just hanging around the hoop and they actually went
with two other buyers before us and ultimately had a good relationship with
them and so the time between deal one and deal two was three years.
It was, uh, five years.
Sean, isn’t it crazy how long things take?
Like Brent’s like a Brent’s a big shot right now.
Like, you know, people know you and you like, you’re talking
about hundreds of millions in revenue.
But you started this in like 16 years ago.
Like that’s a, I mean, it’s a huge success and everything, but it like
really goes to show you that like you have to grind for, or at least
be consistent for a decade plus.
Oh, absolutely.
No, I mean, I, I say to people all the time, like if I had been given
$50 million to invest in like 2010, I like, I would have lost all the money.
Like it just took so long to build up, like to make a bunch of mistakes,
make a bunch of mistakes that were low stakes, felt like high stakes
at the time that were low stakes, uh, in order to be able to, to, to warrant
having more resources.
And so yeah.
So at some point, somebody did give you $50 million.
How’d you get somebody to give you $50 million to go by companies?
Cause I’d like that.
Yeah.
Uh, well, so, uh, funny story.
I met this guy named Patrick on the internet and, uh, literally he put out a
tweet, Patrick or Shaughnessy put out a tweet.
And this is when he was like an analyst at, at his dad’s firm.
And he put out a tweet about capital allocation.
I responded.
I was like, yeah, I can hop on the phone and talk about capital allocation.
I didn’t really understand when he was even asking.
He was asking about public markets, like capital allocators
and public markets, but I, I didn’t know much.
And so I just reached out and said, yeah, sure.
Let’s talk.
We get on the phone and he’s like, so what do you do?
And I was like, Oh, I buy these, these small businesses.
He’s like, well, how much do you pay?
And I was like, I don’t know, like between three and five times.
And he was like, what?
Like, are these businesses going out of business?
Like, are these, are these going under or these distressed?
I was like, no, these are healthy businesses.
And he’s like, I’ve never heard of this.
What is this?
And so we talked like two or three more times.
And then he said, well, can I come visit you in Columbia?
And I said, sure.
So he flew to Missouri and we spent a day together at the end of it.
He said, like, I want my family to invest in what you’re doing.
Like, I believe in what you’re doing.
And I said, sorry, like, we don’t take outside capital.
Like, I’m not going to do a two and 20, 10 year fun life.
Looked at that, don’t want to do a holdco and value the current assets and,
you know, get saddled with a bunch of partners that don’t know who they are.
Like life’s good.
Like we’re making a bunch of money and compounding and like everything’s fine.
And he asked me the question.
No one else had asked me because we flirted with some family offices to that point.
And and he said, well, what would it take for you to take our capital?
And I said, well, I don’t know.
And he said, well, why don’t you figure that out and get back to me?
And I’ll tell you if we can do it or not.
And so I whiteboarded out our current structure, which is like kind of
the opposite of traditional private equity.
So we take no fees of any kind, no reimbursements of any kind.
There’s no cash that comes from the portfolio companies or from the LPs to the GP.
Outside of we take a percentage of free cash flow above a hurdle as we return cash back.
You got to redo that last 20 seconds.
Can you dumb that down a little bit?
I got you, Sam.
He’s the guy working in Cinnabon that doesn’t touch any of the Cinnabons.
So he’s in an industry where everybody’s like feeing up everywhere.
They’re just getting high on the sugar and he’s like, I’m good.
I don’t need that.
Can we only do Cinnabon references or analogies because that was much easier.
They’re talking about hurdles and sprinting and whatever.
Yeah.
Well, so okay.
So traditional private equity, you raise a fund and you get 2% of the amount every year and 20.
Every year, by the way, you get 2%.
So which is actually like getting 20% of the total.
Correct.
Every year for 10 years.
Which is kind of insane, right?
It’s insane.
I mean, people in private equity get paid well because it’s hard to do and not many people can do it.
And it’s a rare skill set.
And yeah, I mean, it seemed high to me when I first looked at it, but I was like, okay.
Well, that’s the market for it.
So whatever.
And I said, I don’t need the fees because I’m already paying for the team and the overhead and everything.
And so I don’t need the cash flow from the fees.
Just I want it to be entrepreneurial.
If we make money, like we want to share in that making it together.
And so that’s our model and we don’t use debt and we hold it for a very long time.
So we have a 30 year initial term on our capital.
Typically a private equity firm will have 10 years and most private equity firms, you know, use a lot of leverage, put a lot of debt on the businesses at closing.
We typically use no debt.
And so we’re kind of in some ways the opposite of traditional private equity.
And yeah.
So I went back to him and I said, Hey, this is the structure that I think would work that we would take capital.
And he and Jim, his father said, okay.
Wait.
So I think I missed it.
What, what did you do as the carry then?
So you said, okay, no, no, no on the 2% fees, but what did you do for the profit share?
Yeah.
So we get 40% of the, of the free cash flow of businesses as we return it back to the investors.
So you don’t, you don’t have to return all the money upfront first.
You just start participating from day one with 40%.
Correct.
Correct.
But it’s only on what we returned back.
Only on what you returned back.
Okay.
Great.
And then you said you use no debt.
Correct.
Yep.
So these are completely unlevered.
They’re buying all cash, all cash deals using equity from day one.
Why don’t you use like a little bit of debt?
Probably like a little bit of debt.
Yeah.
Just, just, just a little bit of debt.
It’s not a big budge.
Just, just a little icing on top of the Cinnabon.
Yeah, exactly.
Just this one time.
You don’t even do seller notes like nothing.
We will occasionally do some seller notes.
Although we found that having the people that you work with be your creditors is not an
ideal situation often.
So we’ve really shied away from that as well.
Yeah.
No, we typically just close all equity and try to keep things just super simple.
I mean, we think that, that, that transitioning small businesses is a difficult and it’s
pretty stressful on everyone.
We can always lever them up after, you know, after we close, although we haven’t really
done that.
And it’s that strictly like a lifestyle choice.
You’re just saying that just helps you sleep better at night.
Yeah.
Is it a financial decision or a peace of mind decision to not use debt?
I think it’s both.
What I would argue is that the optionality that we have in doing some pretty interesting
things with these businesses to grow them is much better when you don’t have debt,
when you’re not paying all the cash to, to a bank.
I’ll give you an example.
So we bought an aerospace business in 2019 called Pac Air.
And I don’t know if you guys know this, but the aerospace business never goes down.
It always just goes up in the history of the industry.
Never really has a problem.
And I remember when we were closing that deal, one of the advisors to the seller
said, are you guys idiots?
Like this business does never go down.
Why wouldn’t you guys lever the thing up with debt?
And we said, Hey, here’s our philosophy and all the stuff.
Well, it’s not like we actually knew what was coming down the pipe, but 2020 hits and
we were literally the only business out there without debt on it, like literally.
And so we were able to take all the cash flow that we were generating because we were
still generating cash flow, even though the business was down a lot, and we were able
to go out and basically make 10 years of progress in two years.
And that business now is seven-ish times the size is when we bought it.
And everyone else that had debt is, you know, maybe grown a tiny bit out of
from 2019, but not much.
And so it’s really been a transformative experience.
We’ve had that happen over and over again in these businesses.
Like we never know what the future is going to hold, but we know that there’s going
to be options to invest in really interesting things.
If the cash flow is all going to the bank, you don’t have that option.
Right, right.
I’m going to still use a little bit of debt, but I think that’s good.
Can I ask one question?
Never hurt anybody.
We’ve had a bunch of people come on this podcast and I’m always like wowed by
their insights, their personality.
I feel this way about you and so many people that have come on this podcast where
I walk away being like, that guy’s the man.
Like that person’s a master of what they do.
They’re kind of a master of the universe.
This is great.
And it’s so easy.
And it’s so easy, but I and forget the easy part for a second.
I’m just like, wow, that really works.
And it makes sense what they said.
They’re, they’re kick-ass my friends.
If you like MFM, then you’re going to like the following podcast.
It’s called a billion dollar moves.
And of course it’s brought to you by the HubSpot podcast network.
The number one audio destination for business professionals.
Billion dollar moves.
It’s hosted by Sarah Chen Spelling.
Sarah is a venture capitalist and strategist and with billion
dollar moves, she wants to look at unicorn founders and funders.
And she looks for what she calls the unexpected leader.
Many of them were underestimated long before they became huge
and successful and iconic.
She does it with unfiltered conversations about success,
failure, fear, courage and all that great stuff.
So again, if you like my first million, check out billion
dollar moves.
It’s brought to you by the HubSpot podcast network.
Again, billion dollar moves.
All right.
Back to the episode.
And then if you look at people over like a 20 year period or
you know, like a longer period, 10 to 20 years.
There’s this base question which is like, if you just put money
in the S&P, you get some rate of return, right?
So like Sam loves to put money into the index and he’s like,
cool.
I like that because I do no work and I’m going to get, Sam,
what do you want to get?
Eight, nine percent, something like that.
I would be very happy with eight percent per year.
Okay.
So eight percent a year.
And so to be smart and do a bunch of work, you got to beat
that.
And so we’ve had people come on this podcast that when they
talk, they sound absolutely brilliant.
And then later you look at their returns and it’s like,
oh, they kind of don’t beat the index actually.
And I don’t even think that’s really like a knock on them
or I don’t even view that as like, they’re not like a
Charleston.
I just think it’s really hard to beat the index actually.
So what do you try to do in terms of like your rate of
return and what, what’s your score?
So if the S&P is doing nine percent of your compounding,
what are you doing out of, out of permanent equity?
Yeah.
Well, so I’m under all kinds of SEC regulations.
So I can’t actually talk a ton and I would love to talk
about that, but I can tell you what’s been put in the
letters or annual letters.
What are you not, what are you not allowed to say?
I can’t say anything that would be future looking.
I can’t say anything that would be inducing investment.
I can’t say anything that, that would be considered
marketing because we’re like top level registered SEC,
FINRA, all the stuff.
And what if we bleep it out?
What if you tell us and then we bleep it out?
So it’s not, it’s not on air.
Just tell me what to stop.
Yeah, yeah, yeah.
So, so what I can, yeah, here’s what I would say.
So we, we target the minimum underwriting that we have is
we target a minimum of a 30% IRR is, is minimum we
underwrite to, and we’ve historically been pretty
significantly above that.
Okay.
Um, but, um, you know, we really think about term things
in terms of cash, right?
So I think it was last year that we talked about, uh, you
know, our total cash out IRR is in the low twenties and
that’s without any marks.
That’s without anything.
So you, you know, you stack marks in the growing, obviously
cash flows on top of that and the numbers get pretty
ridiculous marks being, uh, the valuation, the valuations
of the business.
Yeah, that’s correct.
And so, I mean, if you, if you underwrite, I mean, if you
think about it, like kind of the bottom line, if you’re
buying a business with no debt, right?
So take the debt side off of it.
You just buying the business for all cash and you know,
let’s say on average, we’re paying between five and seven
times for a business kind of in that range.
And let’s say that the business is organically growing 7,
10% per year and we’re increasing that to, uh, start
to call it mid teens a year, maybe low twenties.
Um, the math gets pretty amazing pretty fast and that’s
without using any debt.
And so I think that’s where it’s obvious from the outside
looking in.
There’s gold in the hills, right?
If you look at small businesses acquisitions, I mean,
this is not a secret anymore.
I think when I first started talking about it in 15, 16,
right?
I remember going on Patrick’s podcast when it was brand
new, I remember Patrick being like, oh, hey, I’m thinking
about starting a podcast.
I was like, yeah, sure.
I’ll help a friend out.
Had no idea was going to turn into what it is, right?
Uh, but I remember going on there and people were like,
shocked, you know, at like what you could buy these
businesses for.
And people say, oh, well, that’s not fair.
It’s an inefficient market is, is inefficient, but it’s
inefficient for different reasons why people think it’s
inefficient, not because people are getting taken advantage
of.
It’s inefficient because it’s absolutely freaking brutally
difficult and it’s so easy to lose a bunch of money.
Like I had a guy reach out last week and say, Hey, I want
to be honest.
I’m looking for a job.
My wife and I went all in.
He was working at a big private equity firm based out of LA
as an operating partner.
He and his wife went all in on a business and it failed.
And now they’re bankrupt.
What attributes make you and others like you successful
versus this other guy, not successful?
Yeah, I mean, I think the, the, in the beginning, if the
first deal I had done gone south, um, and there’s plenty
of opportunities for it to go south.
And so I would say a lot of our success is, is attributable
to luck in the beginning.
And I mean, look, if you listen to any investor, if they
tell you that the early stuff they did wasn’t lucky, they’re
lying to you.
Um, I mean, I remember, uh, getting a chat with a Buffett
about this and I said, Hey, tell me about sand board maps
and Dempster Mill.
And he was like, Oh my gosh.
Like he’s like, if either of those investments go wrong,
there is no Warren Buffett.
No one knows about Berkshire Hathaway.
None of that stuff happens.
Right.
And they were that close.
Like that’s how he met when he met Munger.
He asked Munger, Hey, do you know anybody who could help
help basically turn around Dempster Mill because it’s, it’s
flailing.
And if that goes under, like my future’s done.
Wait, can you, can you, I don’t know the story.
Can you tell the story in more detail?
So Warren Buffett almost failed at the beginning of his
career.
What, what was it?
Can you tell the story?
Oh yeah.
So he had 70% of his assets into these two investments.
One was called sand board maps and the other was called
Dempster Mill.
Um, and this is early days of the Buffett partnership.
So this is pre Berkshire Hathaway.
What do those two companies do?
So sand board maps was a, was a mapping company.
Um, they basically had, uh, at the time, the thing about
this intellectual property for, for maps, right?
If you needed to go build something or if you needed to
navigate something, they had all the best mapping technology.
Um, and so, um, that business was a publicly traded business
and, uh, I think he was a minority shareholder in it,
but he was basically the controlling shareholder.
That one, um, I think turned around independent of him
installing new leadership, but Dempster Mill was a completely
different story.
He, he bought into that to control of it.
Um, and the business was just flailing.
So Dempster Mill, I can’t remember exactly.
I think they were building constructing, um, mills, uh, of
some sort, uh, hence the name Dempster Mill.
And, um, it was basically the biggest headache and he was
staring down the barrel like I did.
And I mean, I can talk about the early days, like we almost
failed like five different times.
So, sorry.
So he, he had 70% of his assets in these two companies, but
those were public companies where he’s just a passive investor
or he was like owned to the majority of those companies where
he could make a change in them.
Yeah.
So I think that he had, he may not have had a controlling
stake in, in, in Sanborn, but I know he had enough shares
where he could basically throw his weight around in that one.
Um, I think Dempster Mill, I think he actually did buy a
majority of it and have control of it.
And so those companies, they’re not doing well.
And you said he goes to Munger and asks him something.
Yes.
We just met this guy, Charlie Munger, uh, who had been back
into town in Omaha and he had kind of gotten a matchmaking
by a mutual friend who said, Hey, you guys are the two
nerdy dudes.
We know you should know each other.
It was like bromance, like love at first sight.
Uh, they get to know one another.
And I think it was actually Charlie who said, Hey, well,
like Warren, what’s your biggest problem you’re facing?
And he said, well, I’ve got these two, you know, problem
children, especially Dempster, you know, Dempster Mill.
And, uh, do you know anybody?
And, uh, Munger said, actually, I do know this guy.
His name’s Harry Bottle and he’s an accountant out here in LA.
We should go talk to him.
And so they took Harry Bottle lunch and pitched him on moving
his family to the middle of nowhere Midwest and, uh, running
Dempster Mill, Harry Bottle, uh, reluctantly agreed, turns it
around, makes Dempster Mill, uh, uh, uh, you know, a fortunate
surprise on the upside.
And, um, you know, again, he starts stacking geese.
As we talked about, so, um, everyone in the beginning.
I mean, look, you, you don’t, you don’t get to be successful
by not taking risks.
Like all investing is taking risk.
And so the question is just how much risk are you willing to
take?
And when you’re younger and you don’t have much, I mean, the
only way to get ahead is by taking more risk.
When you are doing all this research, are you an expert in
the pool business or are you just an expert in looking at
financial statements?
Are you an expert in understanding how leadership thinks and
how to find winners?
What are you great at?
I think I’m pretty good at seeing the big picture.
So taking all those pieces, like I’m not the best financial
analyst.
Uh, the joke is I can barely open up Excel.
Like I’m not an Excel guy.
I’ve never had the skill set and never learned.
I never worked at another, uh, firm.
Like I never took a finance class in my life.
So I don’t have a lot of the, what I would call like hard
skills that you learn as being an associate or an analyst at
a firm.
Um, you know, I think that I’m pretty decent at putting the
puzzle pieces together and then negotiation.
I, you know, I think, you know, and going back to Buffett,
he talks about, I’m a better investor because of an operator.
I’m a better operator because I’m an investor.
That’s true.
And I think operating and investing are two sides of it,
but I think there’s a third leg that’s not talked about a
lot, which is the dealmaking side.
Um, and I think that dealmaking side, especially as you get
into more inefficient markets becomes really the dominant
skill set.
So understanding how to put the puzzle pieces together and
like in that pool business, um, I saw a business that had a
clear track record of growth.
Uh, they were in a durable business.
I mean, you know, we, we kind of joke that, you know, until
people stop dipping their bodies in water for pleasure will
be fine.
It’s been happening for a couple of thousand years.
I think it’ll keep going.
Like we try to have these like very simple feces for everything.
And so if you look at somebody already has a dominant market
share in a market, they’ve had it for a long time.
The business is growing.
The market’s growing.
Um, you know, you look at the business model of it and you
say, okay, look, we’re an asset light business.
Um, they’re not investing in a ton of equipment.
It’s a very simple business model.
It’s fine customers that want pools, uh, do it better than
they could do it themselves and, and, and, and take a rip on
that on the upside.
You know, you start looking at, okay, who is the leadership
and how do you structure a deal and how do you make sure
everyone’s interests are aligned?
Um, how do you continue to find talent to build the business?
I mean, those are all, I, I say this, this is how to make
it sound simple.
It’s not simple.
It’s very difficult.
It’s just not complicated.
You gave one answer to the question.
I think the real answer just was based off of your, how
you’re answering it.
You are a, uh, really good storyteller.
You are very persuasive and you have, um, you’re, I could
just tell you’re a good leader because of how you dumb things
down to be relatively simple and easy to understand.
Right, Sean?
I mean, just him explaining that you’re like, oh, okay,
that’s you’re actually.
Yeah.
Like, uh, you don’t get stuck on the midwit mountain, right?
Like the middle, the middle part where it’s an over, over
analysis, over overthinking, over thesis out.
You know, you’re like, do I think the people are going to
stop dipping their bodies in water for pleasure?
Nope.
Exactly.
All right.
Cool.
Uh, you know, that’s great.
Do I think we’re going to get like, do I think tech, you
know, is AI going to take us out of the pool business?
Nope.
Okay.
Cool.
So this is an enduring business.
Great.
We got that.
Seems like this guy’s been paying himself a lot of money
every single year as the operator.
Great.
We’ll probably be able to do the same.
Also seems like this guy doesn’t do any marketing.
He says that and he doesn’t have any ads anywhere.
If we did a little bit, probably would help.
Right.
All right.
Cool.
Thesis done.
Check, check, check.
Right.
So like not, um, not over complicating things is a skill.
Um, I would also say like, it seems like you have a good
amount of level two luck, which is the action luck.
Like you were talking about that Patrick O’Shaughnessy example.
I thought that was a great luck example because you were like,
you didn’t have any investors.
You’re just doing this with your own money.
This guy tweets out, Hey, I’m looking for somebody, whatever
to talk to me about equities and capital allocation.
So you reach out, right?
And you reach out.
You don’t have some like imposter syndrome or insecurity
that prevents you from reaching out.
You take some action and you’ve probably taken a thousand
actions like that, you know, cheap lottery tickets where
the downside is very low.
The upside, if you made a valuable connection like you did
was pretty high actually.
And so you filled out a thousand of those scratch off tickets
and then he had luck on the other side, which was perception
luck because he’s like, Oh, you’re buying this company for
four times profit.
That means like if you put in a hundred dollars, you’re going
to get 25% yield every year, even without growing the business.
And wait, I’m in the stock market buying things at 25
times earnings and you’re buying them at four.
So like something is good.
That makes a lot of sense.
So he had that’s that third level of luck, which is like
you, you could spot it.
You could spot good luck when it shows up at your door.
And that’s why, you know, that was good on his part.
So I think that’s impressive to me and a good reminder of like
you got to take action to get that action luck.
And then when you know something and you spot something,
what he did a great job was he flew out to Missouri.
He got to know you.
He pitched you.
You said no.
And he’s like, he asked the magic question.
What would it take?
Whereas like, you know, 10 other people could have done most
of that and not gotten the result that he got.
You want to spend more time talking about why you’re successful?
Let me ask you a different question.
So I have, I have this goal.
I want to retire my sister.
So my sister has worked hard.
She’s got her own business, blah, blah, blah.
And she wants to just have an easier life.
So she wants to spend time with her kids.
She wants to travel like her business is brick and mortar.
So she stuck in the certain location where those businesses are.
She can’t really take her eye off the ball in that way.
So I want to buy her a business and I’m like buying businesses
sounds great.
You buy a business that’s already working.
It’s cash flowing.
You hire a CEO or you promote somebody internally in the company
to be the CEO.
But I know there’s obviously a lot of ways that can go wrong.
And so if you’re me and you want to retire my sister,
where do you start?
Like what is your thought process around buying that first business
that’s going to get you to 300 to $500,000 a year free cash flow?
What would you, where would you orient somebody who’s trying to do that?
Yeah.
I mean, I think it’s all about constraints.
Actually, I wrote a piece called how to buy your first smaller company
like literally because this is a question I get a lot from people.
And I can remember I had no idea when I first got going
and I mean, the thing is I, everyone’s got different constraints.
Where do you want to live?
How much do you want to travel?
What do you actually know about?
What are your, what are you good at?
Right.
So somebody with a very different personality type than me should
be buying things that are very different than what I bought.
Somebody who wants to live in LA should be buying things that are
very different than living in Missouri.
People who don’t want to travel a lot or who want to drive to the place.
Like that’s a very different constraint.
Capital constraints, how much cash do you have available to be able to
invest?
I mean, look, like, you know, if you have, uh, you can buy really,
really high quality business assets that are smaller for like seven,
eight, 10 times.
So if you want something that’s going to be more hands off, that’s
an incredibly durable business model, you can get something that’s
either software, software adjacent.
You can get something that has recurring revenue.
Like the, the more you pay up into the value chain, I mean, you’re
going to have decreased, I think total returns.
Um, but ultimately, like there are easier businesses to run.
So like there are like level 10 difficulty businesses.
Like I would not recommend buying into your local restaurant.
Like that would not be something that I would recommend doing, especially
if you want to quote unquote have an easier life.
Like it depends on if you want the role of a hybrid investor operator,
which really is you’re going through a short season of investment.
And then really you, what you’re doing is you’re buying a job.
Like that’s one very specific type of way to leverage your time
against your money.
Um, if you really just want to be in the investor seat, it’s very
difficult to only occupy the investor seat in the, in the world of
small businesses.
It can be done.
It’s very, very difficult.
The first three to $500,000 of cash flow coming from small businesses
are very likely going to require a lot of sweat equity in, in, in
exchange for that money.
Yeah.
You should go to that blog post.
He has a good Q and a, he goes, uh, the question is how hard will I have
to work harder than you’ve ever worked before?
The opportunity in small business, in the small business market is dressed
in overalls and likes to, and likes hard work.
Dude, you’re poetic when you’re right.
Uh, I love that way.
You’re right.
That’s my main skill set.
So yeah, yeah, that’s great.
Uh, you have some one liners that are pretty cool.
Can we just get you, can I read you a one liner that you’ve said and you
just kind of rant on it?
So just basically kind of like make your case for this thing.
Why, why you think this is true or why you believe it, why you think people
should pay attention to this idea.
This is the lightning round, right?
It’s a lightning round.
Yeah.
Here we go.
All businesses are loosely functioning disasters.
Some just happen to make money.
Yeah.
Uh, anybody who’s ever operated a business knows this is true.
The only people who have issues with this are consultants.
So if anytime I’ve said this publicly, the only people who come at me are
people who either got lucky the first time or have never done it.
And, uh, I mean, look, every business I’ve ever been involved in,
it doesn’t matter how profitable the business, how big the business.
Um, I’ve gotten a pretty good view into some very large businesses.
They’re all highly dysfunctional.
Why are they dysfunctional?
Because they’re full of people.
People are messy.
When you get a bunch of people together, that messing is compounds.
Like it is not a complicated concept.
Uh, and so I just think that people should lower their expectations
and, and understand what to expect when they get into a business.
It’s going to be hard.
It’s going to be hard in different ways.
Like, you know, the first time you had to put somebody through rehab,
your, your guide doesn’t show up at the, to me in the warehouse
because there’s been a domestic violence dispute and he’s in jail.
I mean, literally like these are things that we’re having to deal with.
Um, these are things that everyone’s having to deal with.
Now they may come in different flavors, depending on how professional
the business is, but the reality is that these are things that happen.
Sean, have you watched the land man?
I have.
It’s really good.
Um, it’s a, for those listening, it’s a show with Billy Bob Thornton on,
it’s about like the oil industry.
And they, there’s this great quote.
It says, our business is one of constant crisis interrupted by brief
periods of intense success.
Yeah.
How good is that?
Yes.
Yes.
Uh, yeah.
So I have a, I have a quote on my wall and it says, success is
founded on a constant state of discontent interrupted by brief periods
of satisfaction upon the completion of a job, particularly well done.
Um, all right.
How about this one?
The more humility a leader has, the more their business can grow.
What’s an example?
Yeah.
So, uh, look, what is humility?
Humility is acknowledging reality for what it is.
Um, and if you don’t acknowledge reality, you can’t get better.
And so lack of humility is basically a defense mechanism, right?
This usually is one of two forms is either self-protection or self-promotion.
And people are usually doing a combination of both when they’re in, uh,
some form of pride or arrogance.
Uh, they’re usually terrified, fearful.
I mean, I can say this from experience when I get prideful, uh,
is because I feel like I’m not enough and I’m not going to be enough.
And I’m worried that I might not have enough.
And so, uh, what is humility is, is laying that down and saying, Hey,
I, I want to see reality for what it is so I can learn and grow and become better.
And that’s the only way to do that is to get feedback from the world around you.
New York city founders, if you’ve listened to my first million before, you know,
I’ve got this company called Hampton and Hampton is a community for founders
and CEOs, but a lot of the stories and ideas that I get for this podcast.
I actually got it from people who I met in Hampton.
We have this big community of a thousand plus people and it’s amazing.
But the main part is this eight person core group that becomes your board of
advisors for your life and for your business.
And it’s life changing now to the folks in New York city.
I’m building a in real life core group in New York city.
And so if you meet one of the following criteria, your business either
does three million in revenue or you’ve raised three million in funding or
you’ve started and sold the company for at least $10 million, then
you are eligible to apply.
So go to joinhampton.com and apply.
I’m going to be reviewing all of the applications myself.
So put that you heard about this on MFM.
So I know to give you a little extra love now back to the show.
I like that lack of humility, self-protection or self-promotion though strong.
Charlie Munger says this thing.
He says, every time you see the word EBITDA, you should substitute it
with bullshit earnings.
Do you agree or disagree?
Yeah, for sure.
I agree.
I mean, like look, EBITDA can be a useful tool in some very limited
circumstances, but for the most part, it is dressing up something that is
more than often obfuscating reality.
So when you see EBITDA, especially in the small business world, there
usually comes a ton of capex, a lot of reinvestment needs that are on
the back end of that.
And what you have to really do is you have to figure out, okay, just in
a steady state, what is the business actually producing a free cash flow?
Like we look at businesses all the time that are making quote-unquote making
seven, eight, nine million dollars a year that you ask the owner how
much money they’ve taken out of the business and they’re taking out
maybe a million bucks a year, maybe two million bucks a year.
I got news for you.
For the most part, you don’t have a business that’s quote-unquote making
seven million dollars a year.
You have business making one to two million dollars a year.
That’s the reality.
Have you guys, Sean, have you ever learned the history of the idea of EBITDA?
Do you know that’s like a new-ish thing?
No.
So basically, John Malone, I believe, is that right, Brent?
He invented it.
Yeah, John Malone invented it.
So John Malone, his nickname is like the greatest nickname.
He’s one of the Cable Cowboys.
So John Malone, you would know him now as like the guy who owns or founded
Liberty Media, which owns F1 and all this other amazing stuff.
But basically, he owned a cable company.
It was like a small cable company.
I think when he took it over, it was like five or 10 million in revenue,
something like that, like relatively small, and he needed to get loans because
he found that if he could just acquire way more cable companies, cable
companies were incredibly sticky and it was recurring revenue.
I should go out and buy a ton in order to go and get more cable companies.
I need to borrow lots of money.
And for some reason, he came up with this idea that EBITDA was an amazing
metric to convince banks to loan him money.
And so he coined the term EBITDA because for his business, he had
lots of depreciation, lots of things like this.
So he was like, no, no, no, just give me like the earnings before all of this.
And I’m going to convince banks to loan me against that.
And that, I think it was the 80s, the mid 80s became like the term.
And I’ve hated EBITDA.
I think EBITDA is really stupid.
But what I think that like is kind of insane is that we’ve all
collectively agreed that this is like the metric.
And I always thought it was like weird, but I never had the courage to say
like, this is stupid.
And then I would like read about Buffett and all these guys and I was like,
God, I think it’s stupid.
Dude, I take the opposite.
I’m like, this is genius.
I need this in my personal life.
I need this.
I did the husband version of EBITDA.
It’s like, you know, my, my behavior before, you know, before football,
before taking out the trash, if you ignore all those things, I’m great.
I’m amazing actually.
Well, it’s crazy that like you don’t pay your personal taxes on EBITDA.
You pay your personal taxes on a cash flow, or you know, on a cash base.
It’s just there’s so many reasons why this is insane.
But, and also, you know, it’s the most insane thing, adjusted EBITDA.
What the hell does that mean?
It means whatever you want to be.
It’s, that’s insane.
You have another one, another quote you said, you either operate with high
authority, top down or delegated authority.
Hell is in the middle.
Yeah.
So this is hard earned because I would say is I think everyone’s
temptation is to be high authority when you think there’s something wrong and
then low authority when you want to be lazy.
And that, that combination just makes a mess of everything.
And so there’s really two ways to be involved with the company.
You either say, Hey, this is what we’re doing.
This is how we’re doing it.
You need to get in line.
I need people to go and execute this vision.
Or you say, Hey, I want to be supportive and helpful.
It needs to be your vision.
And I’m not going to intervene even when I think that something’s wrong.
I’m just going to go along for the ride and be helpful.
And very, very, very lightly interviewing.
And so you just have to choose.
And I think there’s both can work.
I think both come with certain upsides and downsides, um, but you can’t
do the middle because if you do in the middle, what you end up doing is you
end up saying to the leadership team, Hey, you’re responsible, but I’m
basically telling you what you have to do.
And so it removes all agency from them.
And ultimately everything that goes right is going to be their fault and
everything that goes wrong is going to be your fault.
But to make the lazy, when you say the lazy approach, I’m like, Yeah,
that sounds great.
Sign me up.
Yeah.
But that’s hard.
How do you make that work?
You have to find, uh, the right person and what attributes does that person
have and you know, Buffett and Munger always said that like incentivizing
manager was the number one goal of, uh, of was their number one job.
Is that true for you?
Yeah, absolutely.
A hundred percent.
If you’re going to, uh, try to truly be an investor and not an operator in the
business, uh, it all comes down to somebody has to do the work and somebody
has to exert judgment.
And if you’re not going to be the person to do the work and exert judgment,
somebody else does and you got to be interested.
Got to be aligned with that person.
And so yeah, when I say the quote unquote lazy approach, I mean, ultimately
this is the only way you scale, right?
I mean, if you look, if you look at, again, we keep coming back to Berkshire.
It’s a good thing to think about because when people say, Hey, let’s talk about
how, you know, Berkshire like buys businesses and leaves them alone.
That was not how they operated for a vast majority of the time that they’ve done
it.
Like they had to do that eventually because they got to a such a scale.
They literally couldn’t intervene anymore.
If you go back and look at Buffalo news, like Buffett and Munger were literally
living in Buffalo.
Dude, they’re writing headlines.
They’re, they’re writing like, have you ever read of that Sean?
They bought a newspaper and they would literally, uh, like they, they were news
guys, like they liked the news and they were like, here’s, I want this many ads
on the page.
I think the headline should be like this.
Like they, they, yeah, I did not know this.
This is amazing.
Yeah.
I mean, I was just saying is like Buffalo news is a good example of, of like
basically their, their mode of operation until the call it early 80s, mid 80s, when
they got to have so much money, they literally couldn’t be involved in the
stuff that they were doing was to be highly interventionist.
I mean, they would be involved in the smallest of details.
They would set the tone.
They would help on marketing strategy.
They would replace leadership.
They, I mean, they were doing all the stuff that I’m doing.
They would do all the stuff that anybody has to do because when you’re small,
you can do it.
When you’ve got less capital and more time, you can do stuff like that.
And by the way, the returns are higher when you could leverage your
time against your money.
It’s an advantage, right?
It’s not a disadvantage, it’s an advantage, but eventually you, you have
a limited amount of time and attention and as the money grows and your
attention stays the same, that ratio gets thrown all off and you have no
choice but to say, okay, I’m going to spread a much more thinly layered
amount of judgment over a much wider thing of grouping of things, which
means you have to step out of the day to day operations and then you have to
hire people who can exert great judgment.
And so Buffalo News, I mean, there’s a great quote from Munger saying,
hey, like I’m down to my last like million bucks that I can put into
Buffalo News.
Like after that, I’m calling uncle, like I’m out.
I mean, it was, there’s been various times in Berkshire’s history.
They’ve gotten, it’s gotten very hairy.
It was not a guaranteed success.
And even when they had a lot of success, it still gets hairy in various
points and I think every business has that though.
That’s what should be expected.
Like it should be an adventure.
There’s a great letter that you can read.
It’s from, it’s in 1972 and it’s the Buffett letter to the C’s Candy CEO.
If you Google that Buffett letter to C’s Candy CEO and he says, and because
I went into this, I haven’t like studied Buffett in depth the way that
you would if you’re going to do private equity.
And he, I just thought the, oh, he’s this, aw shucks.
He sits at the table.
He drinks his Diet Coke.
He, he just allocates the capital and he hires great people and they
just do magic.
And this letter, I was like, oh, Buffett had the mind of an operator,
right?
Because he goes, dear Chuck, I was out of Brandy’s a couple of days ago and
I have a few strong impressions to pass along.
Number one, and he basically, he starts talking like details about the
store.
So he goes, people are, people are going to be affected not only by our,
how our candy tastes, obviously, but what they hear about it from others
as well, the retailing environment and which it appears, this class of
the store, the packaging, the condition, like this is like Steve Jobs
talking about the Apple store, right?
Like a product oriented person.
And he just goes through like step by step kind of like things that he
thinks could be improved on, you know, in the store experience.
And I thought, wow, this is different than what I kind of the impression
you get when you hear about Buffett, just sitting in his room reading
all day, you know, making investment decisions off of, you know, financial,
you know, financial sheets.
This is a great letter.
By the way, how awesome is this that this was like a typewriter letter?
Does that make it, doesn’t that make it so much more substantial?
Totally.
He licked, he licked an envelope for this one.
I mean, he licked an envelope.
I kind of want to like start sending letters like this.
It just makes it feel like more authoritative.
Let me ask you something, Brent.
I have, like I said, we kind of, my business is a little bit different
than yours, which is I create content on the front end.
It’s the mullets.
I have content on the front end, which is what I love to do, what I’m
great at, but media and content is not a great business model.
So my back end is basically start or buy businesses that I know I can like
turbocharge and we’ve done this maybe four or five, six times now and it’s
going really well.
But one thing I’ve noticed is like, if I draw a pie chart of what makes it work,
it’s basically like 60% of the battle was just the initial market selection.
When we picked a project that was like the winds were blowing against us.
It didn’t matter how much effort we put in or how great the operator was.
It was always just an uphill battle.
And sometimes we pick these markets that are just like, it’s a pull market.
You’re being pulled in.
It’s just a sweet spot.
The people just need this.
It’s shooting fish in a barrel type of thing.
That creates a big part of it.
The second part of it, the next, I’ll say like 30% is the quality of the CEO
that we picked who’s going to run the business.
And when we pick a sort of limited CEO, we get limited success.
When we pick an unstoppable CEO, we get like massive success.
And the last 10% was just luck.
Like the ball bouncing our way on one or two things that could have easily
not happened, but that they happened or, you know, when the winds that didn’t,
maybe we missed out on something that we didn’t see.
I got a question about that second piece, which is hiring the CEO or evaluating
the CEO, evaluating the operator.
I want to get better at that.
If you sit down with somebody, you’re recruiting an exec.
Maybe it’s a, you’re interviewing somebody who’s maybe in the business
that’s going to become a CEO or you’re taking somebody external to come run this company.
What are you doing to, what are you doing?
That’s like not obvious to get that assessment.
Is there any little tips and tricks, anything that you’ve picked up
that, that helps you find the right operators?
Yeah.
Well, so actually, I think this is a, probably a pretty underappreciated aspect
of being involved in small companies is all about the people, right?
And so the better you can be at the people, the better it’s going to be
for the business.
And, you know, we’ve really deep dived into, I would say all personality
testing is wrong, right?
It just depends on what you’re trying to get out of it.
And so we have actually a huge battery of personality testing that we do
for people to try to get as close to a 360 view of who they are.
What do you use?
Yeah.
So we’re doing a combination of disk, Myers-Briggs and something
called habit story, which kind of has them see like, what are the habits
that they’ve built in their life and how are they kind of supporting
who they are with the structure and apparatus around them?
And I personally also do a lot of study of Enneagram.
And so I think actually, personally for me, when I meet somebody, I’m
instantly categorizing them as what I think their Enneagram number is.
And I’m automatically categorizing them across the four main Myers-Briggs.
Dude, this is crazy to me.
I thought that’s just horoscopes for dudes.
Like, do you really use this as like your core thing?
That’s amazing.
Yeah.
Well, so all of it tells you something about the person, right?
So if you think about, so Enneagram, most people don’t understand this.
So Enneagram basically tells you who you are at your worst.
And there’s nine numbers and basically everyone falls into a number
and then you have what’s called wings, which is kind of where do you tip
from that number?
So for me, I’m a three and I tip two.
So a three is they call the achiever.
My biggest insecurities is that I’m not enough and I want people to like me.
And so again, if you, if anybody’s proud of their Enneagram, it
means they don’t understand Enneagram.
Like, like it’s not a good thing, right?
This basically tells you what are your deepest fears and what, what is
the, your areas of greatest weakness.
But if you can know that about somebody, you can see them.
How is that playing out in their life, right?
So like I, when I’m in my least healthy, I’m a people pleaser.
I say yes to way too much stuff.
Um, I don’t tell people the truth.
Um, it’s really unhealthy.
It’s, it’s highly destructive behavior, right?
I’m very focused on hierarchy.
And, and, and my guess is that you guys have different Enneagrams, right?
I won’t, I won’t guess your Enneagrams, but can you do it?
That’s great.
Yeah.
Do it.
I can’t wait.
Yeah.
My guess is Sean, you’re a three and my guess is Sam’s an eight.
Uh, but what’s three and what’s eight?
Uh, the three is the achievable.
So threes and eights, uh, both achieved, but for very different reasons.
So, so, uh, threes achieved because they want people to love them.
It’s like less about the thing itself.
And then eights really want the thing itself.
So like as a three, like I don’t want money to just like want the, want the money.
Like I want the money because I want people to love me.
Uh, eights really want the money because they want the security and
they want the power that comes with the money.
Uh, so, so I want to learn the, I want to roll over so that I get Pat and
my tail can wag.
Sam just wants a dog treat.
Yep.
That’s exactly right.
Um, that’s right.
What do you think?
Yeah.
Well, like he’s, he’s describing everything in like the most positive way.
So like, yeah, sounds great.
Uh, I’m, uh, I like that.
And then I looked up who other eights were and it’s like Winston Churchill,
Martin Luther King.
I’m like, yeah, okay, cool.
Um, yeah, yeah, for sure.
What you do, but you, what this is like crazy fascinating.
You said like five different things.
So can you give us the exact?
So you said Myers-Briggs, uh, and then you said this, this other test.
What’s like the exact stuff that you’re using.
Yeah.
So, so I, well, there’s two things.
One is when I first meet somebody, I can, I can walk you through what I do.
And then I would say is separately from that in a hiring process.
We, we use that once we get serious about a candidate, then we put them through
a huge battery of testing to make sure we try to understand them.
Right.
For me personally, when I first meet somebody, it helps me so much to be able
to categorize them into what I expect based on just kind of how they’re showing
up in the world, uh, in Myers-Briggs, right?
So you have, you have I and E.
So are they introverted or they extroverted?
Right.
Are they S or they, uh, N, which is, are they, are they in the present?
Are they sensing or are they in the future?
Right.
Um, uh, then are they a thinker or are they a feeler?
Right.
So they, are they primarily excited about ideas or they primarily excited
about, uh, sort of the, the, the people themselves, right?
Um, and then the last one is T and P, which is, um, uh,
are they, uh, it’s kind of, excuse me, J and P, which is, are they, uh,
very focused on rigid schedules and on creating order or do they like to go
and test and try a whole bunch of things?
Right.
And how all these like sort of stack up and combine really gives you
a much more holistic view of who somebody is than when you then pair with
Enneagram, I think gives you probably those two together.
I think creates the most, the quickest and the most holistic view of
who somebody is, where if you can get like a, a pretty good idea quickly
of who they are, like how I would talk to somebody who’s present oriented
is very different than how I talk to somebody who’s future oriented.
And oftentimes, you know, we assume the whole world operates like the way
we do, like my wife and I are literally the opposites in every single one
of these areas.
So you can imagine in our marriage, like how she shows up and how
I show up is so different and it creates all kinds of miscommunications.
We’ve been married now for 16 years and it really, we went through
personality testing together about, oh, three and a half, four years ago.
It was game changing in our marriage.
It was, it completely explained a ton of behavior for her and for
me that had been bothering us for a long time and it was just largely
how we’re wired.
So that’s how we do it.
That’s how I think about doing it in the moment that helps me relate to
people a lot more.
It’s crazy.
By the way, Sean, 16personalities.com is like these websites are huge
that are doing these tests.
Yeah, yeah, yeah, they’re really big.
I mean, this isn’t, it’s an important piece.
I would say five voices is a really interesting one.
They, they, so it’s just the number five voices.com.
I think.
Yeah, those guys have created Steve Cochrum and Jeremy Kubitschek are
the two founders of that business.
They’ve created an overlay for Myers-Briggs that simplifies it.
I think a lot of their stuff is incredible.
And yeah, we definitely use a lot of their work as well.
Then we finish off with a quick tarot reading just to see how the future
is going to go.
And then we’re, we’re all set.
This is amazing.
This is so good.
You, you also have one thing I read that I really loved.
You go, you have this like asshole test.
It’s like, we don’t, nobody wants to work with assholes.
How do we sort of filter for that?
Nobody’s trying to present as an asshole in a job interview.
And you said like, you can eat with them, see how they treat the staff.
You could see them interact with their significant other.
That’ll tell you a lot in their home environment.
And then you said, the most telling environment is to travel with somebody.
It is impossible to fake it when you’re at the airport.
You’re grinding through security.
And if there’s a delay, your, their true colors will come out.
That was great.
Yeah.
Yeah.
It’s fun.
I mean, just want to, I mean, honestly, the business we’re in is predicting
people’s behavior.
Like that’s what we’re trying to do.
And because of all these businesses are predicated on the people who run them.
They’re, they’re all going to have the risks, the primary risks of all these
businesses are going to be the people.
And so what we’re trying to do is get to know people.
Have you guys ever been out with someone and they’ve actually been
an asshole to the wait staff though?
Whenever people say about this, this asshole test, I’m like,
I’ve never been around anyone that’s like rude.
Dude, you don’t remember the dinner we were at where this happened?
Yeah.
But that was like one out of a thousand.
Yeah.
Yeah, it’s true.
The, this guy, we, Sean and I went out with someone and he was like
shooing the waiter when he was like, it was, it was like, it was, it was, it
was, I was, I was ashamed.
I left that dinner.
I’d be like, I felt like, uh, like I had just like participated
in like a porno.
Like I felt like I was like, I’m so ashamed.
Like if people find out about this, like I’m going to be so embarrassed.
That’s rough.
Wow.
Dude, what a fun episode.
This is great.
Oh yeah.
I really enjoyed hanging out with you guys.
That’s the one we guys built.
Brent, thanks for coming on, man.
If you haven’t, go check out his blog and his annual letters.
They’re pretty great.
Follow him on Twitter.
What’s your Twitter handle?
Brent, be sure.
Just Brent, be sure.
Yep.
All right.
Good seeing you, dude.
Thank you.
That’s it.
That’s the pod.
I feel like I can rule the world.
I know I could be what I want to put my all in it like the days on for the road.
Let’s travel never looking back.
Hey, Sean here.
I want to take a minute to tell you a David Ogilvy story.
One of the great ad men.
He said, remember, the consumer is not a moron.
She’s your wife.
You wouldn’t lie to your own wife.
So don’t lie to mine.
And I love that you guys, you’re my family.
You’re like my wife and I won’t lie to you either.
So I’ll tell you the truth for every company I own right now.
Six companies, I use Mercury for all of them.
So I’m proud to partner with Mercury because I use it for all of my banking
needs across my personal account, my business accounts.
And anytime I start a new company, this is my first move.
I go open up a Mercury account.
I’m very confident in recommending it because I actually use it.
I’ve used it for years.
It is the best product on the market.
So if you want to be like me and 200,000 other ambitious founders, go to mercury.com
and apply in minutes.
And remember, Mercury is a financial technology company, not a bank.
Banking services provided by Choice Financial Group and Evolve Bank & Trust
members, FDIC.
All right.
Back to the episode.
(upbeat music)
Episode 681: Sam Parr ( https://x.com/theSamParr ) and Shaan Puri ( https://x.com/ShaanVP ) talk to Brent Beshore ( https://x.com/BrentBeshore ) about buying profitable businesses.
—
Show Notes:
(0:00) $50K/yr to 9 figures
(6:04) Accidentally buying a $1M business for $0
(11:06) Just In Time learning
(14:11) Buying cash flow businesses
(20:30) Private equity or index?
(24:26) Buffett’s near-death experience
(32:54) How to buy your first small business
(36:02) Brent’s one-liner speed run
(47:33) Shaan asks Brent how to hire a CEO
—
Links:
• Permanent Equity – https://www.permanentequity.com/
• Enneagram Test – https://enneagramtest.com/
—
Check Out Shaan’s Stuff:
Need to hire? You should use the same service Shaan uses to hire developers, designers, & Virtual Assistants → it’s called Shepherd (tell ‘em Shaan sent you): https://bit.ly/SupportShepherd
—
Check Out Sam’s Stuff:
• Hampton – https://www.joinhampton.com/
• Ideation Bootcamp – https://www.ideationbootcamp.co/
• Copy That – https://copythat.com
• Hampton Wealth Survey – https://joinhampton.com/wealth
• Sam’s List – http://samslist.co/
My First Million is a HubSpot Original Podcast // Brought to you by The HubSpot Podcast Network // Production by Arie Desormeaux // Editing by Ezra Bakker Trupiano
