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Telling the stories of startup founders and creators and their unique journey. Each episode features actionable tips, practical advice and inspirational insight.
00:00:00:00 - 00:00:26:05
The most important lesson that we've learned is don't buy a business with a bad culture. One of the core criteria for selling your business is does it 100% depend on you to survive? Because if it does, you're not going to get a great value for that business. A buyer's going to look at that, and they're going to think to themselves, you know, if I buy this business and the owner retires, I'm really just buying myself a job.
00:00:26:07 - 00:00:48:20
I'm not buying myself a business. Once you have a team that's running your business that covers every main piece of your business, and they know what they're doing. They know what their goals are. They know how to deal with issues. They don't have to bring everything to you. You're going to love your life, right? And the way to test this, to see if it's really working, is you have to go on a three week vacation.
00:00:48:22 - 00:00:57:13
Welcome to the Founders Journey podcast. Inspiration education for Founders by Founders.
00:00:57:15 - 00:01:20:16
Welcome back to the Founders Journey podcast. It's been a while and unfortunately Greg isn't here. But I'm solo and I know, Greg would make fun of me for talking too much, so I'm going to just ask questions and talk too much because we have a really cool guest, someone I'm really interested in talking to because of his approach to funding and supporting businesses for long term growth.
00:01:20:16 - 00:01:46:20
It's amazing. I'm really fascinated by that. I actually have a company that I've had for 15 years, so it's near and dear to my heart. Kiva, did I say that right? That's right. All right. Kazuki is a founding partner of Enduring Ventures, and he's built this really cool, venture model. And he by software companies. Well, it's, like all kinds of companies, really good fundamental companies.
00:01:46:22 - 00:02:08:01
I'm going to throw attempt to explain what it is, because it's really important that you understand what he's doing and how it's different. Hey, Peter. Great to be here. Good to see you. Yeah. So I'm happy to talk a little bit about what we do. I run a firm called Enduring Ventures. As we say in the name, we are a long term holding company.
00:02:08:03 - 00:02:29:03
So what? That means is we look for wonderful businesses to buy that we want to hold for the long term. Now we have two categories for for wonderful businesses. Category one is our steady eddy category. These are businesses that are profitable, that have been around for a long time and that are going to be around for a long time.
00:02:29:03 - 00:02:52:20
So think a plumbing service business or a swimming pool, construction company, a roofer, something of that type. And we're usually buying businesses that are somewhere between 3 to 15 million of profit per year, not revenue, but profits. So 10 million to 150 million of revenue. That's our steady eddy category. And then we have a second category, which is our specialty situations category.
00:02:52:22 - 00:03:10:19
These are businesses that are wonderful businesses that may have hit a speed bump in the road. Maybe they have a lender issue or they're not profitable because something happened with one of their customers for a period of time. In those situations, we have a very hands on operating team that can come in and help the business. We can invest in it.
00:03:10:19 - 00:03:31:11
We can buy the business. We'll work with the lenders in order to to turn that business around and get it back to its wonderful, steady, long term state. And we've been doing this for about six years or so. We own 20 businesses across those two different categories. I guess even before we started this, we were both entrepreneurs. So I have a business partner.
00:03:31:11 - 00:03:59:22
His name is Xavier. I spent ten years building companies, first an education business and then a clinical trial company that I sold. And he spent about 15 to 20 years building much larger businesses. One was, one of the largest booksellers on the internet called Better World Books, which he sold. And then the second business was, a very large off-grid solar company called Solar Electric, where they raised money from venture capitalists.
00:03:59:22 - 00:04:20:23
And, and they basically built hardware and software to light the homes of millions of people all across Africa who didn't previously have access to electricity. So we got together after being entrepreneurs for a while. We'd been friends for a while as well, and we said, you know, we want to build the last business that we ever built. And we came up with this concept of enduring ventures.
00:04:21:03 - 00:04:52:07
We intend to to do this forever. So your special category is that where because I've, I've read some of the things you do. Is that where you would find maybe a company that was in the private equity or venture kind of model that really was maybe a slower growth company. Do you have any companies like that that were in this model that they looked for massive growth, but it's really maybe more of what your steady eddy business would be potentially.
00:04:52:09 - 00:05:10:20
Do you have any companies like that? So when we started this journey, six years ago, we set out to buy businesses in the Steady Eddy category first. Yeah. And that's what we told some of our investors who said, look, we're going to go buy these great businesses at fair valuations and we're going to hold them for the long term.
00:05:10:22 - 00:05:37:23
We'd been looking for businesses for about six months. We looked at thousands of different companies from all over the place. Brokers websites. We talked to owners, and we hadn't quite found the right fit for what we were going to do. And we received this email announcement from a business called Up council.com. And the announcement said, you know, unfortunately, after about being ten years in business, we're going to shut the business down.
00:05:38:01 - 00:06:01:00
We're no longer able to raise funding from VCs. And, you know, we're going to sunset the business. And this was a this was actually a product that I'd used a number of times in my previous companies to hire a lawyer. It's a lawyer directory, basically. So if you're a company owner and you need something done, you need incorporation paperwork, you need some real estate acquisition documents or business acquisition documents.
00:06:01:01 - 00:06:23:22
You can go to up council.com, place a job and lawyers will bid on it. And you can then see their reviews. You can see how much they they want to charge you. And then you can hire a lawyer. And I'd actually found some really incredible lawyers through this and was saving anywhere between 50 to 80% from using, you know, one of the larger brand name firms that that charge you a ton of money.
00:06:24:00 - 00:06:54:19
So when I received this notification, you know, I talked to the shutdown notification from the owners. I reached out to Xavier. I said, hey, you know, here's a business that I think a great business, but it looks like they're shutting it down. Should we reach out and see if we can buy it? And it just so happened that through our network works and in Silicon Valley, because we're both kind of tech tech founders, my background just so happened that, we got a connection to one of the owners, and we reached out, offered to buy the business.
00:06:54:19 - 00:07:21:22
And, of course, you know, they didn't expect that. So we're able to negotiate a pretty quick and fair deal. And in about a week, we bought the business, which had previously been losing quite a bit of money. But we bought it for, for a fair enough price that we had a shot to turn it profitable. And, and we did that with our team, and we ended up having a nice kind of profitable software business that that served a very important niche, for a very fair price.
00:07:21:22 - 00:07:45:17
So it's kind of a win win for everyone, right? We got a good price. We got a good business. And for the owners, they got a good outcome for themselves. And they they got to ensure that the business continued living on. And that experience taught us that. It kind of gave us this insight into this opportunity, where in venture capital, people raise a lot of money to build a massive business, right?
00:07:45:17 - 00:08:06:12
So they're trying to build the next Uber, they're trying to build the next Airbnb. Yeah, they need to go from zero to billions of dollars of valuation pretty quickly. VCs will fund this. Company founders, you know, step on this rocket ship journey. But unfortunately, you know, the VC stats are basically one out of ten of these companies will survive nine out of ten.
00:08:06:12 - 00:08:27:10
We'll just fail, will fail, or will sell, maybe for the price of of the equity that they raised. So there's this whole world of, of businesses out there that maybe aren't going to be the next Airbnb and Uber. They're not they're not designed for rocketship growth, but they're still good businesses. They still have good products that should exist in the market.
00:08:27:12 - 00:08:52:18
And there's really not a world there's really not a buyer for those groups. And that's that's when we decided, okay, you know, we're going to lean into this. We have the experience being CEOs and founders. We've both raised capital before, and we have deep networks in the tech community. So we can really be a resource and an outlet for investors and founders that are looking to get off of this venture capital journey, but don't really see a means to do so.
00:08:52:18 - 00:09:13:16
Right. They're stuck behind a large pref stack, which means like there's a bunch of investors, they're going to get their money back first before them. And it's pretty demoralizing for the founder, when that's the case. So we give them an alternative option and in a way to kind of get off that treadmill, and then we'll step in and turn that business profitable because oftentimes these businesses are not profitable.
00:09:13:20 - 00:09:39:00
And then we'll run them as a small or medium size kind of software business for the long term. So question on that. So they're not profitable is it. By design. They're trying to get that growth out of not being profitable. We're trying to grow at some very steep number. Is it really because they're focused on that too much that creates that profitable, you know becoming not profitable.
00:09:39:02 - 00:10:01:23
That's the model right. We want to kind of dive below profitability and come up at a very steep growth curve. And so they're getting like, you know, really good returns. Yeah. You have to kind of think about the incentives along the way. Right. So a founder wants to build the biggest business that they can. It's going to create the most impact in the world.
00:10:01:23 - 00:10:18:15
That's also going to equal the most money for them personally. In order to do so, they need a lot of capital from VCs, right? They want to grow fast. They want to grow big. They want to be able to take the market. Peter Thiel says, you want to be in a market where there's no other competitors. You want to be an end of one, right?
00:10:18:15 - 00:10:41:10
There can't be an Airbnb. There must be one, right? So you have to move very, very quickly. Otherwise competitors are going to come after you. In order to move quickly, you need capital. You need a lot of capital, right? In order to raise a lot of capital, you have to show a lot of growth momentum. You don't need to show profitability, but you need to show the potential of dominating a market the way Uber or Airbnb have.
00:10:41:12 - 00:11:05:08
So they will raise a lot of money, grow, grow, grow to prove to the next group of X that they are a big opportunity so that they can raise a lot more money and keep going. Now they're not focused on profits in this time. They're just focused on top line growth, right? Right. So hiring expensive, employees in New York and San Francisco is not a problem for them, right?
00:11:05:14 - 00:11:25:00
If you're going to be the size of Airbnb or Uber, having an expensive payroll is not really a problem. But if you're going to run a small software business, has a having a very expensive payroll is going to be your biggest problem, right? Or maybe having or alternatively growing in such a way that is not long term sustainable, right?
00:11:25:00 - 00:11:43:16
When you're a small business, you're only going to put in a dollar of marketing. If you think you can get $3 of return in a very short term. If you believe that you're going to dominate and own a market for a decade, while you can invest a lot of money into that because you can reap your reward at some point at a later date.
00:11:43:18 - 00:12:00:03
So there's there's a variety of different factors that lead to, businesses being not profitable while they're trying to grow, but most of them are due to the incentives of really seeking to be that end of one winner, and to take the whole market to. So also the founders and the VCs can make a lot of money.
00:12:00:05 - 00:12:24:13
Yeah. And so that kind of goes to a question I had about like criteria. What is your criteria when you look at a company, maybe like that it could be your steady hand. Yeah. Those probably a little more obvious. But what is the criteria? You look at a company when you're thinking about buying? I think the first thing to understand is what are we seeking to do in a private holding company?
00:12:24:15 - 00:12:46:07
The goal of a private holding company is, or the goal that we've kind of identified is to build a perpetual cash flow engine. The reason to build a perpetual cash flow engine is because when cash comes in, that becomes the balance sheet, basically our investable capital, right? The more investable capital we have, the more investments we can do.
00:12:46:09 - 00:13:13:03
And that's really when the compounding begins for the cash flow that we are generating. That really allows us to grow bigger and bigger and do more investments and be involved with more businesses. So because of that, when we are looking at investments, we're really backing into how is this investment going to increase our investable capital base? How is it going to allow us to increase the compounding effect of our cash flow?
00:13:13:05 - 00:13:37:11
So with every investment, we care about a couple things, but primarily one thing, right. The primary one thing is, is this business going to create dependable cash flow for our business every single year so that I can go out and reinvest it and buy more businesses. Now under that primary banner, let's call it, of businesses that generate free cash flow.
00:13:37:13 - 00:14:00:21
There's many different levers, right. So one lever, maybe one lever that we consider is we want this business to be asset light, right. We don't want the cash flow created from the businesses to have to go back into growing the business or just sustaining the business, scaling. We want to be an asset. Yeah, exactly. Exactly. Yeah. We want to be able to distribute that cash flow to our holding companies so that we can then reinvest it.
00:14:00:23 - 00:14:21:18
The second element that we look for is payback period, right? If we're going to invest money into a business today, is it going to take us ten years to get our money back the way it does in venture capital, or are we going to see cash flow distributions in the in the month right after our investment? And of course, like our favorite type of investment as we put money in today.
00:14:21:18 - 00:14:41:18
Yeah. And the day after we made the investment, we start seeing some of our money back because it does two things. One, is it immediately d risks our investment and two, it increases our capital base. So we can start reinvesting that capital into future deals. And I'll say this like we you know, we run a private holding company.
00:14:41:18 - 00:15:01:07
So we have a certain set of incentives, right. We want to grow it. We want to own more companies. We want to build great businesses. But I think, you know, if you're thinking about if you're if you're just an individual and you're thinking about your own pocketbook and you're thinking about investing in businesses, I really think that people should think about it in the same way.
00:15:01:07 - 00:15:18:14
Right? Because if you're an individual and you're making an investment today and you have to wait for ten years to get your money back, you're missing ten years of being able to use that cash to reinvest it and frankly, de-risk yourself over that period of time. So, you know, if you're just an an individual, you don't own a holding company.
00:15:18:19 - 00:15:39:11
You're just out there thinking, okay, I want to invest in a cash flowing business or I want to invest in a stock I would seriously consider, you know, thinking in, in some of the similar ways that we do. Right? Investing in asset light businesses, investing in businesses that can distribute cash flow so you can reinvest it because over time those effects will compound.
00:15:39:13 - 00:16:02:15
Yeah. So there's plenty of those out there today. I mean, the ability to be asset like today is, I think, greater than it ever has been. So the internet's been a wonderful tool for that. And it's it is amazing. Like, all my businesses I've run on just SAS tech. We just put tech together and it supports us doing our jobs, you know, and, it's amazing.
00:16:02:15 - 00:16:26:18
In fact, I had an investor, one of my companies that was was an e-commerce company. So it did have an asset issue. One of the investors loved it so much. This is going back to like 2005, because we could run it from anywhere. We had all of our technology for running warehouse and everything, very, very lean because it was all SAS based technology.
00:16:26:20 - 00:16:49:10
And he actually loved it just because of that. He was like, I love this. You could do this. Anyway. But anyhow, so, let's let's actually double click on that because I think that's a good counter example to, to what I'm talking about. So e-commerce is a wonderful business obviously for many different reasons. Right. You can just sit at home, you can sell tchotchkes, you can dropship, you can manufacture your own product.
00:16:49:10 - 00:17:19:18
There's a variety of different ways you can do it. And now you have a platform like Shopify where you can click a few buttons and you can have your own store, right? You don't have to pay for real estate space on Fifth Avenue for people to come in and buy your product. Now, even though there's many different and of course you can you can get customers through Facebook, you can get customers through Google, you can spend on ads, you can automate a lot of this business and have a wonderful company that's run by just a few people.
00:17:19:20 - 00:17:52:00
However, it does not. Most e-commerce businesses do not fit our asset like category. What as you were, you were describing? Basically, what happens in an e-commerce business is you need product to sell, right? So, so especially as you're growing, you need more and more product to sell. And you usually need to pre buy that product. Let's say you order let's say you manufacture the product, you preorder it, you got to prepay your manufacturers, you got to prepay your designers.
00:17:52:01 - 00:18:17:21
And then 60 days later your product arrives in a warehouse. And maybe it sits in that warehouse for another, another 30 to 60 days. Basically what you're doing is you're fronting cash for 90 to 120 days for all of this inventory and all of this product that is hopefully going to sell at some future date. So the faster you grow, the more capital your business is going to consume because you need more inventory.
00:18:17:21 - 00:18:45:16
If you run out of inventory, your e-commerce business is going to stop dead in the water and everything is going to come crashing down around you. So you really have to keep up with that inventory question, right? That is not a cash flow producer asset, right? It is a growth asset because you can't, you know, if your business produces a million of profit one year and you're continuing to grow, you can't just take that million dollars and put it in your pocket and then go reinvested in another business.
00:18:45:18 - 00:19:08:10
You have to set it aside and use probably 80% of that to go buy a new inventory and save some money so you can spend on ads and your employees, etc.. So it is not it is not. It does not fit the category of company that we looked at for those reasons. Absolutely not. You just described my entire experience with that type of business.
00:19:08:12 - 00:19:48:19
I had this company, in 2005 was earlier than that into 2008. And I was leveraging terms. I was getting I had like 60 and I had 90, 90 day terms from a friend of my suppliers, and that allowed me to float and support growth, because I could turn enough that I could pay their them off and then the rest of profit and then but if you if you do really well in a company like this and you have massive growth, the cash requirement to support that growth just became a lot bigger than when you started or a year before.
00:19:48:20 - 00:20:10:12
We had 3 to 20% growth in our business. One year we couldn't buy enough inventory to support the need that we are holding. We all trying to survive. Yeah, it's totally what happened. We didn't survive because, our terms got cut in 2009 when everything kind of turned upside down. The available cash in the marketplace was less.
00:20:10:14 - 00:20:33:06
Our terms just got cut because everyone's nervous about the ability to pay. We still were growing despite all of that, but we still we couldn't get inventory. So it started this cash flow cycle of debt. That's a whole nother podcast we can talk about. But totally understand. I'm in a service business right now. My biggest asset are people.
00:20:33:08 - 00:21:00:07
So we have the ability to scale something that I, I read about you that's really interesting is you really focus on the, the entrepreneur and the operators of the business and making sure there's opportunities for growth and mentorship within that company's growth to continue. Why don't you talk about that and what your advice is to entrepreneurs that would be in a business like that, or how to how to find themselves in a place like that?
00:21:00:09 - 00:21:29:14
Yeah. You know, I, I oftentimes get asked by business owners the following question. You know, they come to me and they say, hey, Shiva, I have this wonderful business and I would like to sell it at some point. You know, I think I'm almost ready to retire. Yeah. So what should I do to prepare? And there's, there's kind of a variety of different factors that I share and actually have like a sheet that I share with folks that we could link in the description if it's helpful.
00:21:29:16 - 00:21:55:07
Unknown
Yeah, absolutely. One of the core criteria for selling your business is does it 100% depend on you to survive? Because if it does, you're not going to get a great value for that business. A buyer is going to look at that and they're going to think to themselves, you know, if I buy this business and the owner retires, I'm really just buying myself a job.
00:21:55:09 - 00:22:18:10
I'm not buying myself a business. Yeah. And when you are considering selling your business in a few years from now, you really need to understand the distinction between those two elements. Are you do you have a job that pays you well, or are you running a business right. And you need to get away from having a job and you need to get towards running a business.
00:22:18:10 - 00:22:48:10
And there's there's a variety of different pieces to this. But one of the core elements is having a team, having a good management team, making sure they're trained up, having systems so standard operating procedures so that if somebody comes in from the outside and, you know, one of the employees doesn't show up, they can pull up a document that explains that the job of that employee down to the last detail, and they can just pick up and continue running the business.
00:22:48:12 - 00:23:10:02
Now, most small businesses don't have that right. Here's how most small businesses work. Let's think of a general contractor. For example. I'm an owner of a general contracting business. I run around, I'm looking for different customers. I'm asking my friends for referrals. I'm asking homeowners for referrals. I get a referral. Then I go and I pitch the my business to that customer.
00:23:10:02 - 00:23:26:21
Right. They asked me for an estimate. I go home, I write up an estimate, I come back, I pitch them the estimate. Once they accept my job, I call on the different subcontractors. I'm looking for an architect. I'm pulling all the pieces together. Then another job that is ongoing is having an issue. So I run over there and I take care of that issue.
00:23:27:03 - 00:23:49:00
It's controlled chaos. They can do this for decades, right? An owner gets used to it. They're in flow. They understand, you know, they're, my friend call it managing by walking around basically, so they can just walk around and they know exactly what's going on. They have an innate feeling for what's going on. But a buyer coming in from the outside can't do that right there isn't a sales process.
00:23:49:05 - 00:24:13:23
There isn't an estimating process. There isn't even like a customer service or a warranty dispute process there. So as a business owner, you need to move towards having systems. You need to move towards having processes that answer all of those questions. Now, if you do this and you achieve this, the benefit is you're going to live a much happier life as a business owner.
00:24:14:02 - 00:24:31:08
Not only is your business going to be worth more to a potential buyer and therefore create more personal wealth for you and your family, but once you have a team that's running your business that covers every main piece of your business and they know what they're doing, they know what their goals are. They know how to deal with issues.
00:24:31:08 - 00:24:53:22
They don't have to bring everything to you. Then you're going to love your life, right? And the way to test this, to see if it's really working is you have to go on a three week vacation. Which may sound crazy to most owners, right? Most owners have been doing this for 20 years. They've never taken more than one week off because when they do, their staff are calling them.
00:24:53:22 - 00:25:10:06
You know, we have this fire, we have this issue. How do I deal with this problem? And they're helping their staff deal with those problems. What you need to do once you set up these systems, once you hire the team, is you need to go on a vacation, start with two weeks and then the following week go for three weeks.
00:25:10:08 - 00:25:30:03
Don't answer your phone. Don't answer your emails. Ideally, go somewhere where you're just not going to be able to have contact with folks because what will happen is in the in your business is in the first week you're gone. People are going to panic a little bit. In the second week, they're going to start figuring out how things work.
00:25:30:05 - 00:25:51:07
And in the third week that you're gone, the business will just run smoothly. So when you come back, all of the processes where you were integral to getting them done no longer involve you, right? There is new connections that were formed for the employees, and they're able to operate without you, and you can extricate yourself from the business.
00:25:51:07 - 00:26:09:10
And now when you come back, you can work more strategically instead of working in the business where you're dealing with day to day calls, you can work on the business, which means that you can be strategic about what is your next level of growth. How do you take your business to the next step? Now be careful. If you've never done this before.
00:26:09:12 - 00:26:25:14
Warning don't just go on a three week vacation. It doesn't work like that. Your business may fall apart. If it's not, you have to have the process right. You have the you have to have the team. You have to have a process. You have to have the systems. And then start with one week, go to two weeks and then go to three weeks.
00:26:25:19 - 00:26:46:23
But you have to get to three weeks. That is the ultimate test. I love that three week vacation. So you said controlled chaos and this walk around management style. Do you think the fundamental reason that they don't an individual that's in a business like this doesn't transcend it is because of control. Like they didn't ever give up control and they're like, oh, they need to go to me.
00:26:46:23 - 00:27:04:20
And I know these people and I'm not going to I don't need to tell them because I know and I'm just going to fill that role. It sounds like it's a control thing. Is that kind of what you're saying? Yeah, I think that's right. I think it's I think it's a combination of different factors and it's different for different people.
00:27:04:20 - 00:27:27:15
But I'd say most folks it's fear based, right? Yes. This is a business that they built from scratch with kind of bloodshed and tears. Right? Yeah. They were up until two in the morning. Answer customer calls, dealing with invoices. You know, I'm sure their wife, her husband was involved, very intimately in the early days. And they're scared, right?
00:27:27:15 - 00:27:48:15
It's all of their money. It's all of their assets. If somebody breaks it or if somebody angers a top customer, they're worried that they may lose everything. And that's that's a really real visceral fear. That's one element. The second element is nobody can do it as good as me. Right. And there is some truth to that sometimes. Right?
00:27:48:15 - 00:28:08:00
There is a reason a business owner is a business owner. And many most people are not business owners. It's very hard to do what business owners do. And the third thing is a bit of lack of imagination, right? Is like they have not they've maybe haven't worked at a bigger company where they've seen how this is done properly.
00:28:08:06 - 00:28:28:04
You know, sometimes it's somebody who, you know, I went to plum, a plumbing academy. I worked at a small plumbing shop, and then I started my own plumbing company. Now I have 20 employees. They're bigger and more kind of evolved than anything they've ever been involved with. So they don't really see. How do you how do they take themselves out of the estimating process?
00:28:28:09 - 00:28:50:11
How do they take themselves out of customer service while still keeping the customers happy? So it's really those three elements. And I think, you know, it takes a little bit of like practice, coaching, mentorship to get there for folks that, that fear, fear, taking that step. What kind of culture do you look for to cultivate in a company to support that long term growth?
00:28:50:11 - 00:29:14:09
I because culture comes up and down and it changes. It's constantly moving in organization. How do you foster that for long term? Yeah. The most important lesson that we've learned is don't buy a business with a bad culture. You know, I think out of the 19, the 20 businesses or more that we've bought, in our early days, we bought two businesses where we could tell something was off about the culture.
00:29:14:14 - 00:29:32:06
The either the dynamic between the employer and the employees was really negative or that's some dynamic between the employees was very negative. And and we kind of thought to ourselves very naively, by the way, you know, we'll buy this business, we'll fix the car culture. We're good people. We can do this. You know, we'll set people on the right path.
00:29:32:06 - 00:29:56:20
And we figured good people want to work in a good culture. And we couldn't have been more wrong. Basically, it's kind of the the learning from that culture is something that permeates deep into the DNA of a business. It permeates deep into the psyche of the people that are working there, and it actually permeates to all of the different areas of the actual business and economics itself.
00:29:56:22 - 00:30:20:14
How do you treat customers? How do you deal with the financials? How clean is your office? Right. Cultures like this, like Silent Hand that affects everything, not just, you know, people's interpersonal dynamics. And we didn't really learn that until after we bought those businesses. And basically what we learned is you actually can't fix culture. Ultimately, you know, we had to replace people.
00:30:20:14 - 00:30:40:08
We had to upgrade how we dealt with customers. We had to change so many different systems and processes. So the key learning there is look for businesses that have a good culture, good for business, and culture is manifested in a variety of different ways. Right. When you show up to the office, is are the windows clean? Right.
00:30:40:08 - 00:31:02:04
When you step into the lobby, is there is that a mess everywhere? Is there. You know, trash everywhere or are things clean? Same thing if you're if you're diligence in a manufacturing plant, if you come in and there's oil everywhere or there's dust everywhere, you know, that is an indicator that is one small indicator of the greater culture that that company has.
00:31:02:06 - 00:31:17:16
And oftentimes, you know, I've talked to people who buy manufacturing plants. They'll say, oh, if I show up and it's dirty or it's messy or, you know, there's papers everywhere. Usually they I'll just stop my tour and I'll kind of move on to the next company because you don't want to have to deal with solving problems of culture.
00:31:17:20 - 00:31:40:09
There's many different problems that you can solve. Solving problems of culture are not the ones that you want to solve. Now, alternatively, on the other side, the other 18 plus businesses, we thought you had wonderful cultures, great relationships between owners and employees, very familial type relationships. You know, one indicator of this is tenure. Are the employees on the roster?
00:31:40:09 - 00:32:10:12
Have they been around for 1 or 2 years, or have they been around for 15 to 20 years? If you find a company where there's great people that have been around, for many people that have been around for 15 to 20 years, you have found a gem and you should really, like double click and find out why. Yeah, so are impact on the culture is we attempt to keep the culture largely the same or similar to the one that the owner defined for their company, and we think that is a signifier of success.
00:32:10:14 - 00:32:29:01
So we don't come in with our outside perspective and say, you know, company A, you guys need to have the same cultures. Company B and this is how we're going to get there. What we do is we try to come in and understand the culture of that company, understand what is it that motivates people, why are they excited to work in this place?
00:32:29:03 - 00:32:53:04
And then we seek to support that culture and support that structure and frankly, support the the CEO and GM who's really the one that that maintains that culture, on a day to day basis. Yeah. And so this culture and this is a question that I was thinking about when I looked at your motto. Do you think that when you show up, you know, in a private equity firm shows up or someone shows up?
00:32:53:06 - 00:33:14:22
It's scared, right? If you're in a play, you're like, whoa, everything's going to change because you have this long term view. Do you think that enhances the ability for your culture to just permeate? Because when you're with someone and you trust them and the team's tight and they're together, like you said, long term it's because they they feel like they're cared and they're heard.
00:33:15:00 - 00:33:38:21
You would assume, right, that that's part of it, that long term view from your perspective, it's really kind of supporting that, isn't it? I mean, what is your feedback and you've seen. Yeah. Let's talk a little bit about the difference between private equity and holding companies long term. Yeah. And companies. So in a private equity model funds. And then we'll talk about fund structure.
00:33:38:21 - 00:34:03:11
We'll talk about some incentives here as well because it impacts the outcome. The outcome is in the private holding company. We hold businesses for the long term. That's our promise to owners and that's our intent in private equity. They're intent is to buy businesses, roll them up together and then resell them at some period in the future, usually 3 to 5 years from now.
00:34:03:15 - 00:34:20:11
Right now, the reason that is in private equity is because they have a ten year fund life, 8 to 10 year fund life, and they usually have a 3 to 5 year deployment window, meaning they have they can invest for 3 to 5 years and then some at some period between now and 8 to 10 years from now.
00:34:20:15 - 00:34:40:16
They need to get all of their money back to their investors. Yeah. So if they buy your company in year five of their fund, they can only hold your company for about four years, 3 or 4 years before they must sell it in order to return capital back to their investors. If you're a business owner, let's say you own a wonderful plumbing company.
00:34:40:18 - 00:34:59:23
You have a great team culture. You have a bunch of employees who've been around for 20 plus years, and you meet with a private equity firm and you really like them. I mean, look like I have a lot of friends who are in private equity. I don't have anything against private equity either. We're just two different models and two different and in my opinion, two different outcomes.
00:34:59:23 - 00:35:18:17
Because of that, you're an owner who meets with, private equity firm. You really like them. These guys are solid. You know, they seem honest. They work really hard. There's a lot of firms like that, right? So you decide. Okay. I trust them with my team. I trust them with my legacy. I trust them with my brand. I trust them with my company.
00:35:18:17 - 00:35:46:17
Right. It's going to live on in these in these people's hands. Great. You sell them your business. Then four years later, that private equity firm has to sell your business again. Now that private equity firms incentives are not your legacy or your customers, or your family members or your employees, that private equity firm has one goal and one goal only.
00:35:46:17 - 00:36:05:09
And it is to maximize shareholder returns, right? It's to get the best price for their business. So now you've sold your business to a group that maybe has to resell your business three years from now to the highest bidder, and you have no idea who those people are, right? So they may fire some of your employees. They may start cutting corners with your customers.
00:36:05:14 - 00:36:24:07
Again, that private equity firm, the second private equity firm, they're going to need to sell your business in three years again. And somehow they need to eke out a profit. And that may mean cutting corners that may diminish your brand, that may change how your employees feel about the business that they're working in. So they're getting rolled up with a bunch of other companies.
00:36:24:07 - 00:36:49:10
So it kind of it's a different company when you do that, you know? Right. You're getting rolled up with different companies. You know, they're they're probably putting in their own managers. They're changing the culture of the business. And then they're selling it to another group. When we buy a business, inevitably there's going to be some change, right? We can't just say like, look like nothing's ever going to change because it's not it's oftentimes not the same owner running the business if they want to retire.
00:36:49:12 - 00:37:09:07
We do have a program that if they want to stay, they can sell us a piece of their business. They can stick around. We've done that a bunch of times. We love that as well. But if the owner wants to retire and we have to hire a new manager from internally, then even or sometimes externally, then no matter what something is, they're going to end up changing over time.
00:37:09:12 - 00:37:31:17
Just our intent is not to package the business up and resell it. Our intent, of course, is to hold the business for the long term. So our incentives are we want to reinvest in the business. We want to take care of the employees. We want to grow the brand. We want to take care of the customers. Because over the long term, those are all things that are going to compound under our ownership of the business.
00:37:31:17 - 00:37:57:02
There's no reason for us to take short term shortcuts in order to benefit ourselves, because it's just going to be cutting off our nose to spite our face, right? We're going to we're going to hold this business for the long term. We want to make sure that the employees are happy. That's amazing because basically it's a fundamental, just fundamental basic business good practices support that long term growth that you're saying, all right.
00:37:57:05 - 00:38:18:14
Taking care of employees, keep them there. The longer they are less turnover. There's a lot of really good things that an entrepreneur could learn from. What would your, recommendation be to an entrepreneur that wants to build a long term business? Be when they're starting out, an early founder? You know, I'll take this from the business buying perspective, because that's really where I spend most of my time now.
00:38:18:14 - 00:38:40:09
Yep. I think somebody who's getting started now should first get some operator experience. So if you've never worked in another company before as a manager or a leader, you should really go try and do that first, because there's a lot of things you can learn while also getting paid a salary, right? So it's basically like getting a free MBA.
00:38:40:09 - 00:38:57:12
Yes. You go work for somebody else. You put in a lot of time and effort, of course, but they're going to teach you how a business should run. And ideally, you pick a good business to work for and not a shoddy business to work for. Then once you have those skills, you can start looking for businesses to buy.
00:38:57:12 - 00:39:18:14
In an industry that's ideally durable. Don't pick, don't pick something that might go away in the next few years, or it might get disrupted by I pick a business that is a service that people need every single day, and that they're willing to pay real money for. Some examples of this include landscaping. You know, we have a landscaper who comes every Wednesday.
00:39:18:14 - 00:39:36:07
They take care of our house. I'm not going to start doing our landscaping. And those trees are growing every single week. And somebody has to take care of them. That's a good business that we're willing to pay money for plumbing. If our toilet clogs or our plumbing starts to leak, we're going to call a plumber. I don't know how to fix that myself.
00:39:36:12 - 00:39:58:06
I and I'm willing to pay a meaningful fee in order to get those things fixed, right? Yeah. Roofing. Same thing. So think about services where if you provide a good service, no matter what, people are going to pay you and they're going to pay you, well, that is usually a good business to get into. And ideally it's not in a new industry that you don't know or you don't understand.
00:39:58:10 - 00:40:20:15
Ideally, it's in a business that you already apprentice for where you worked for a much bigger company, and you learned all the ins and outs, because every single business is quite unique. And unless you have the specific experience in that industry, you're coming in with a disadvantage and that that it may take you, you know, six months to a year to really learn that business for you to be able to run it properly.
00:40:20:16 - 00:40:42:18
Yeah, absolutely. This has been great advice. I love your, practical MBA. Totally believe the same thing. Go work for someone. If you love a business or an industry, go work for someone. Learn. You can skin your knee. You can test and find out new ways to solve that problem. And then start your business. It's I think it's one of the best ways to do it.
00:40:42:20 - 00:41:04:10
So how do people get in touch with you? They want to reach out to you. LinkedIn LinkedIn is a good place. My Twitter DMs are open on Twitter. It's just my first and last name. CV Kosinski I also write a weekly newsletter, and I have a YouTube channel that you can check out. I'm basically the only CA VA on the internet, so if you type my name in, actually, you'll find me out there.
00:41:04:12 - 00:41:22:09
But yeah, Peter, this has been great. I appreciate you taking the time. Yeah. Thanks for coming. So if you liked it, comment, ask a question. I'm sure I'll answer it. And all the social channels, but, thanks. Thanks a lot for coming on. Really appreciate it. This has been great. I love what you guys are doing.
00:41:22:14 - 00:41:35:10
My pleasure Peter, good luck with all the success. Because your success, I think is, it's good for everyone. So thank you.