I Made $50M Buying & Running Boring Businesses

so that was the first golden goose and then you said you started stacking gee like a wrapper you know is it at the club so well what's the second piece i hope that becomes a term that we can use stacking gee we we gotta get some shirt storage merch i feel like i could rule world i know i could be what i want to from at all in it like a days off on a goal less travel never look rent runs permanent equity you you start off as a founder you start buying companies and you then started raising money to buy companies so you raised like something like fifty million bucks for your first fund you started buying companies with that then a couple years later you raised about two hundred fifty million dollars to buy more companies and now you own i don't know something like sixteen companies that do over three hundred and fifty million dollars a year of revenue and i believe what you said was fifty million dollars of free cash flow out of the portfolio now which is pretty incredible so that's who you are that's what you're bring the table and i think sam what do we wanna go with this because we could ask you about buying businesses i have some questions around that but i don't kinda wanna start with something light before we go into like hey can you teach me how to be perfect equity please yeah we we could do the light stuff i you also you've got the we call it the all shu warren buffett attitude where you've got a 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 wanna ask you about as well sounds good what can you tell me what's the what what do you buy and what are the biggest companies you buy like pool companies and hvac companies yeah i mean we typically we 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 sixteen companies it's a you know it looks like the island of mis fit toys for us they're they're are companies that we love the people who we get to work with they're in industries that we feel like are not gonna be changing we can talk about kinda 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 him 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 is probably the largest so we we have a big market share in the in the dallas market and yeah it it's a it's a it's a pretty sizable business i was gonna 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 four or five companies that we kind of have either bought or own a big stake in and i could tell you you'll it'll be like oh this is like for us like the somewhere dot 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 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 the golden juice 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 we've kind of stacked golden gee on one another is how i would describe it so the very first business i bought as called media cross is a military recruitment firm bought that in in very early two thousand ten explained in layman's service 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 worked primarily with one we had two contracts one was to recruit civilian mariner into a division of the navy called military seal of command that res resupply the ships that never come into port so it's about fourteen hundred to eighteen hundred civilian mariner a year recruited into that division and that's our responsibility so we do all of the marketing and recruitment efforts to 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 what we're we're doing we're doing lead gen we have a whole processing center we're actually doing qualifications for these people so let's say it's a complete soup to nuts operation and and the government just pays you per recruit or how does that work yeah we're on a fixed contract that that that escalate every year based on the staffing and needs of the business so we is it's basically a staff contract and then we have you know sort of a built in profit margin that's on top of that what do you get per recruit 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 we we've done this for the the contract is we've had it as a business for thirty ish 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 a piece of the military that's why is that business great is it because you got this cash flow but you have this you have the certainty and def defense ability with that is that the what's great about that yes yeah i mean so i like for the most part we know what our profitability is gonna be in three years from now right and so once you get that business optimized and you get great people in place and the the leader of that business we've had i mean she's been with the business since the very beginning so we're fifteen years into the relationship she's doing a great job and it just it it clicks so that was a that was i would call the original golden goose that allowed me to pay back the sba did i've heard you say you accidentally bought your first business is that what you meant when you say you act what does that even mean how do you accidentally buy a business yeah i i i got a call from a guy and he was like hey wanna 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 a called an adage in see for all intents purposes before then and he was like hey he's in your industry she gets to know him and i said okay and he's like oh by the way the guys he he's got left at the altar for the second time trying to sell his business recently and i was like oh okay i guess i could take a run at it i had no idea what i was doing i was twenty four 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 it and he said i've never sell to you for the price you asked for and i was like 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 to the price you asked for but you gotta close all cash sixty days from now and it was one of those where you kinda like you make the sale and you know they go down the elevator and you say oh shit it was it was like that right i remember getting off the phone and i was like oh crap like i i just ob obligated myself to go buy like buy a business and i have no idea what i'm doing did you know anything about the digital marketing oh yeah i mean had we we did digital marketing work back then you have a market the agency you stumble into this business you're like mate if somebody tells tells you there's a chance to buy it you're like alright i can 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 if you don't have a lot of money you're twenty first years old so you go to the spa and you get sba loan for this thing yep correct yeah i i asked my newly married wife to sign a personal guarantee and she was like what's and i was like to worry about it a big deal you're like good and bad news good news no pre up but you do have to sign this other thing exactly like if this doesn't go well i was like probably not gonna be great so yeah so somebody's who's never done an sba loan what can you explain just like you put down x you get why what's how it all works yeah back then so the requirements have changed a little bit i think it's like five or ten percent you have to put down now and i think you can actually qualify with seller financing i'm not an expert anymore on this i've only done the one time and that was literally fifteen years ago back then what i did was i account leverage the accounts receivable from the existing business as the down payment and then got the 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 my pocket was not a lot i guy didn't have a lot of cash and so yeah i ended up asking my buddy at the sba he was he was part of an sba lender i said do you guys do like expedited sba loans and he was like not really we don't do that and i was like i need it in sixty 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 that you had a box it a million bucks yeah it was a million dollars and was this like your sees candy like buffett bought these candy exactly what i was returned like a billion dollars in free cash flow or more than that to the to the headquarters over the last whatever fifty years or whatever it's it's it's it it's like a twenty extra yeah so that's amazing so that was the first golden goose and then you said you started stacking gee like a rapper you know is at the club well what's the second piece i hope that becomes a term that we can use that gee we we gotta get some shirts swords merch hvac i you know how like rogan has like jamie i kinda have this like fictional studio in the room where i'm like pull that up much guy i get on that like there's no guy yeah yeah merch guy yeah i mean i knew i knew so little back then i remember my lawyer said okay we gotta start due diligence and i literally typed in the google d o diligence like due like i had no idea what it was and i was was reading about it as he was talking to me was like oh yeah just asked questions like how hard can that be so anyway 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 gonna go under immediately and i was like yeah that's not good what do we do and he was like well you gotta 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 because i didn't even i didn't even think about it i didn't think about like oh well he's gonna take all the money and there's not gonna be any cash to operate the business i was i was with this guy this weekend and and he was like hey should i start my own business you know i'm twenty eight 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 you can kinda 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 exactly way you're i think about my like the a lean manufacturing part like kind of philosophy they have this idea of like just in time are you you you do things just in time versus doing everything ahead of time and so just in time learning is basically what you it's like oh when need to close then i figure out what due diligence is then when i need to take over the business i learn 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 gonna learn everything upfront then i'm then i'm fully prepared to now to go do this and like we're in reality that's not how how life works yeah and sometimes it doesn't work out and you know i joke them in the force cup private equity for a reason so what else do owe that's awesome yeah so the next business we bought was a it was a pool business out in arizona and that was just with again started acc cash and start building that up and and bought that business and again that one turned out to be great investment as well you you say you say that nonchalant like oh pool business but it's also like do that would be really random i i don't think about pool business nobody shows me a pool business so what were you doing you're talk of brokers where does that deal come from like yeah for you at that time yeah so it was about so let's see so had an audio i was doing i after i bought the business the media cross in two thousand ten i was like oh that worked 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 so i mean there was a little bit of stuff out of harvard a little bit out of stanford around search funds but there was very little activity online and so i was like well i just need to ask i 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 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 people to do this like why would they not do it like in smaller companies and that was my foray into it and so at that point we said okay well if we're gonna 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 ready to be bought and so we started reaching out people and developed deal pipeline and one of the deals that took us so that that pool deal we first saw in two thousand twelve i wanna say and it took us about three years to get the deal done and 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 reason that between deal one and deal two was three years it was five years sean is it crazy how long things take like brent like a brent 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 sixteen years ago like that's i mean you it's a huge success in everything but it 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 that people all the time like if i had been given fifty million dollars to invest in like two thousand ten i like would would've 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 in order to be able to to to warrant having more resources and so yeah so at some point somebody did give you fifty million dollars how'd did you get somebody to give you fifty million dollars to go by companies because i'd like that yeah well so funny story i bet this guy named patrick on the internet and literally he put out a tweet patrick o's he 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 capital all in public markets but i i have no much and so i just reached out and said yeah sure let's talk we get on the phone he's like so what are you i like i buy these these small businesses he's like how much do she paying 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 was like i've never heard of this what is this and so we talked like two or three more times and he said can i come visit you in colombia 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 gonna do a att and twenty ten year fund life looked at that don't wanna do a hold c and value the current assets and you know get saddle with a bunch of partners out on 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'd flirt with some family offices at 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 won't don't you figure that out and get back to me and tell you if we can do it or not and so i whiteboard out our current structure which is like kind of the opposite of traditional private equity so we take no fees of any kind no reimbursement any kind there's no cash that comes from the portfolio companies or from the lps to the gp outside if we take a percentage of free cash flow above a hurdle as we return cash back you gotta redo that last twenty seconds can you dumb that down a little bit i i got you sam he's the guy working in inc that doesn't touch any of the ci bonds so he's in an industry where everybody's like fee enough 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 cinema references or analog because that was a much easier they're talking about hurdles and sprint and whatever yeah yeah cool me too yeah well still okay so traditional private equity you you you raise a fund and you get two percent yeah of the of the amount every year twenty every year by the way you get two percent so which is actually like getting twenty percent of the total correct every year for ten 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 people can do it and it's a rare skill set and yeah i mean it it it seemed to hide 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 they overhead everything and so i don't need the cash flow from the fees just i want to be entrepreneurial if we make money like we wanna 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 thirty year initial term on our capital typically a private equity firm will have ten 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 the opposite of traditional private equity and so i went back to him and i said hey this is the structure that i think it would work that we would take capital and he and jim his father said okay wait so i think i missed what what did you do as the carry then so you said okay no no on the two percent fees but what what did you do for the profit here yeah so we get forty percent of the of the free cash flow businesses as we return it back to the investors and so you don't you don't have to return all the money up upfront first you just start participating from day one with forty percent correct correct but it's only on what we return back all them what you returned back okay great and then you said you use no debt correct yep so these are completely un unlabeled all cash all cash deals using equity from day one why don't you use like a little bit i'm like a little bit that just just a just little bit bite just up a of bit dud just just a little icing on top of the cinema this is exactly this is what ties you don't even do sell 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 shi 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 the transitioning small businesses is 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 yet 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 optional 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 and i'll give you an example so we bought an aerospace business in two thousand nineteen called pack air and i don't know if 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 advisers to the seller said are are you guys idiots like the this business doesn't never go down why wouldn't you guys lever this thing up of debt and we said yeah here's our philosophy and all stuff step well not like we actually knew what was coming down the pipe but twenty twenty 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 ten 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 that had debt is you know maybe growing a tiny bit out of from two thousand nineteen 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'd never know what the future is gonna hold but we know that there's gonna 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 gonna still use a little bit of debt but that i think that's good i question never heard anybody we've had a bunch of people come on this podcast and i'm always like wow by their insights their personality i feel this way about you and and so many people that have come on this podcast right 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 the universe this is great and it's so easy and it's and yeah it's so easy but and forget the easy part for a second i'm just like wow that really works and it makes right sense what they said they're they're kick ass and then if you look at people over like a twenty year period or you know like a longer period ten ten to twenty years there's this base question which is like if you just put money in the s and p you get some rate of return right so like sam loves to put buzz money into the index and he's like cool i like that because i do no work and i'm gonna get sam do wanna 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 do a bunch of work you gotta 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 kinda 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 charlotte 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 if the is do a 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 regulation so i can't actually talk a ton and i would love to talk about but i can tell you what's been put in the letter or annual letters what are you know now what do you not a 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 that 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 like yeah yeah so so what i can blame at here here's here's what i say well so we we target the minimum underwriting that we have is we target a minimum of a thirty percent irr is is minimum we under write to and we've historically been pretty significantly above that okay but you know we we really think about term things in terms of cash right so i think it was last year that we talked about 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 you stack marks and the the growing obviously cash flows on top of that and the numbers get pretty marks being the valuation the valuations of the business yeah that's correct and so i mean if you if you under i mean if you think about it kind of the bottom line if you're buying a business with no debt right so take the debt side off that you're 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 seven ten percent per year and we're increasing that to sort call it mid teens a year maybe low twenties 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 fifteen sixteen 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 podcast i was like yeah sure i'll help a friend out had no idea i was gonna turn into what it is right but i'm remember going on there and people were like shocked you know at like what you could buy these businesses for and people say 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 a guy reach out last week and say hey i i wanna 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 if the first deal i done gone south and there's plenty of opportunities for it to go south and so i 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 i mean i remember getting a chat with the buffet about this and i said hey tell me about sand moore maps and d 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 mu he asked mu hey do you know anybody who could help help basically turn around dumpster mill because it's it's fl and if that goes under like my future is done like 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 seventy percent of his assets into these two investments one was called sand born maps and the other was called d mill and this is early days of the buffett so this is pre berkshire hathaway what do those two companies do so same maps was a was a mapping company they basically had the time that think about his intellectual property for for maps right if you needed to go build something or if you needed to navigate something they had all the the best mapping technology and so that that business was a publicly traded business and i think he was a minority shareholder in it but he was basically the controlling shareholder that one i think turned around independent of him installing new leadership but dumpster mill was a completely different story he he bought into that to control of it and the business was just fl so a dumpster mill i can't remember exactly i think they were building constructing mills of some sort hence the name d mill and he was basically the biggest headache and he was staring down the barrel like i did and i i can talk about the early days like we almost failed like five different times so sorry so he he had seventy percent of his assets in these two companies but those were public companies where he's just a passive investor or he was like owned the majority of those companies where he could make a change in them yeah so i i think that he had he may not have had a controlling stake in in in sand but i know he had enough shares where he could basically throw his weight around in that okay gotcha i think dumpster 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 he used said he goes to mu and ask him something yes we just met this guy charlie mu who had been back into town in omaha he had kinda got a a match making by a mutual friend who said hey you guys are the two nerdy dudes we know you should know each other it was like bro like love it for sight 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 dumpster you know dumpster or mill and do you know anybody and mu 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 running d mill harry bottle reluctant agreed turns it around makes d mill a you know a fortunate surprise on the upside and you know again he starts stacking in gee as we talked about so at all time 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 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 on 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 i think i'm pretty good at seeing the big pictures so taking all those pieces like i'm not the best financial analyst the joke is i can barely open a excel like i'm not an excel guy i've never had the skill set i've never learned i never worked another of firm like i never took a finance class in my life so i i don't have a lot of the what i call like hard skills that you learn as being an associate or an analyst at of firm you know i think that i'm i'm pretty decent at putting the puzzle pieces together and then negotiation i you i think you know and going back to ba he talks about i'm a better investor because of an operator and better operator because of an investor that's true and i think operating and investing are are two sides of it but i think there's a third leg that's not talked about a lot which is the deal making side and i think that deal making 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 i saw a business that had a clear track record of growth they were in a durable business i mean you know we we kinda joke that you know do people stop dipping their bodies in water for pleasure will be fine and it's been happening for a couple 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 you know you look at the business model of it and you say okay look we're an asset light business they're not investing in as ton of equipment it's a very simple business model it's fine customers that want pools do it better than they could do it themselves and and and and take a rip on that on the upside you know you started lynn looking at okay who is a leadership and how do you structure a deal and how do you make sure everyone's interests are aligned how do you continue to find talent to build the business i mean those are all i i say 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 it just was based off of your how you're answering it you are a really good storyteller you are very persuasive and do you have you're i could just tell you you're a good leader because of how you dump 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 you're yeah like you you don't get stuck on the mid wit mountain right like the the middle the middle part where and over over analysis over overthinking over thesis out you you know you're like do i think the people are gonna stop dipping their bodies and water for pleasure exactly alright cool you know that that's great do i think we're gonna get like do i think tech you know is ai gonna take us out of the pool business nope okay cool so this an enduring business great we got that seems like this guy been paying himself a lot of money every single year as the operator great we'll probably be able to do the same it also seems like this guy doesn't do any marketing he does that and he doesn't have any ads anywhere if we did a little bit probably would help right alright cool thesis done check check check right so like not not over complicating things is a skill 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's as the example i thought 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 to talk to me about equities in or capital allocation so you reach out right and you reach out you don't have some like impostor syndrome or insecurity that prevents you from reaching oh 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 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 gonna get twenty five percent yield every year even without growing the business and wait i'm in the stock market buying things at twenty five times earnings and you're buying them at four so like something is good you 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 and a good reminder of like you gotta 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 ten other people could have done most of that and not gotten the result that he got you wanna spend what time talking about why you're successful let me let me ask you a different question so i have i have this goal i wanna retire my sister so my sister has worked hard she's got her own business blah blah blah and she wants to just have a easier life so she wants to spend time with the 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 wanna buy her 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 wanna retire my sister where do you start like what what what is your thought process around buying that first business that's gonna get you to three hundred to five hundred thousand dollars a year of free cash flow what 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 when i first got going and mean the thing is i everyone's got different constraints where do you wanna live how much do you wanna 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 it should be buying things that are very different than you know living in missouri people who don't wanna travel a lot or who wanna drive to the to the place like that's 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 you can buy really really high quality business assets they're smaller for like seven eight ten times so if you want something that's gonna be more hands off it'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 gonna have decreased i think total returns but ultimately like there easier businesses to run so like there are like level ten 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 wanna 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 a way to leverage your time against your money if you really just wanna 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 five hundred thousand dollars of cash flow coming from small businesses are very likely gonna require a lot of sweat equity in in in exchange for that money yeah she should go to that blog post he has a good q and a he goes of the question is how hard will have to work harder than you've ever worked before the opportunity in small business in the small business market is dressing overalls and likes to and likes hard work dig poetic when you're right i love i've told you too yeah yeah that's great you have some one liners that are pretty cool can we just get you can i read you a one liners that you've said and do you just kinda 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 lighting round right is a lighting round yeah here we go all businesses are loosely functioning disasters some just happen to make money yeah anybody who's ever operated a business knows this is true the only people who have issues with this are consultants so if any time 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 i mean look every business i've ever been involved in it doesn't matter how profitable the business how big the business 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 this compounds like it is not a complicated concept 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 gonna be hard it's gonna be hard in different ways like you know the first time you had to put somebody through rehab your your guy doesn't show up at the to man the warehouse because it's 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 these are things that everyone's having to deal with now they may come in different flavors depending on how professional the businesses is but the reality is it these are the things that happen sean have you watched a land man i have it's really good it's a for those listening it's a show with billy about their 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 this yes yeah so i have a i have a quote on my wall and it's 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 alright how about this one the more humility a leader has the more their business can grow what's an example yeah so yeah look what is humility humility is acknowledging reality for what it is and if you don't acknowledge reality you you can't get better and so lack of humility is basically a defense mechanism right this usually is is one of two forms it's either self protection or self promotion and people are usually doing a combination of both when they're in some form of pride arrogance they're usually terrified fearful i mean can say this from experience when i get pride full because i feel like not enough and i'm not gonna be enough and i'm worried that i might not have enough and so what is humility is is laying that down and saying hey i i wanna 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 i like that lack of humility self protection or self promotion that strong charlie mu says this thing he says every time you see the word eb you should substitute it with so bullshit earnings do you agree or disagree yeah for sure i agree i mean like look eb can be a useful tool in some very limited circumstances but for the most part it is dressing up something that it is more than than often ob skating reality so when you see eb 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 in 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 asked 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 unquote making seven million dollars a year or 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 eb do you know that's like a new ish thing no so basically jam malone i believe is that right brett he isn't yeah malone incident so john his nickname is like the greatest nickname that he's one of the cable cowboys so jam malone you would know him now as like the guy who owns or founded liberty media which owns f one and all this other amazing stuff but basically he he owed a cable company it was like a small cable company i think when he took it over it was like five or ten 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 eb was an amazing metric to convince banks to load him money and so he coined the term eb because for his business he had lots of depreciation lots of things like so he was like no just give me like the earnings before all of this economic convince banks to loan me against that and that i think it was the eighties the mid eighties became like the term and i've hated eb i think eb is really stupid but what i think that like is in 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 i take the opposite i'm like this is genius i need this in my personal life i need this i need the husband version of eb it's like you know my my behavior before you know before football before taking out the trash get it a different door if you ignore all those things i'm great i'm amazing at three well it's crazy that like you don't pay your personal taxes on eb you pay your personal taxes on a cash flow pay or you know on a cash base it's just there's so many reasons why this is insane but and also you know what's the most same thing adjusted eb what the hell does that mean means wherever you wants 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 wanna be lazy and that that combination just makes a mess 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 wanna be supportive and helpful it needs to be your vision and i'm not gonna 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 intervene and so you have have to choose and i think there's both can work i think both come with certain upsides and downsides but you can't do in 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 gonna be their fault and everything goes wrong is gonna be your fault but to make the lazy you the when i when you say the lazy approach i'm like yeah that sounds great sign me up no but that's hard how do you make that work you have to find the right person and what attributes does that person have and you know buffett and mu always said that like incentivizing manager was the number one goal of of was their number one job is that true for you yeah absolutely a hundred if you're going to try to truly be an investor and not an operator in the business it all comes down to somebody has to do the work and somebody has to exert judgment and if you're not gonna be the person to do the working exert judgment somebody else does and you gotta be interested gotta be aligned with that person and so yeah when i say the the quote unquote lazy approach i i mean ultimately this is the only way you scale right i mean if you look if you look 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 such a scale they literally couldn't intervene anymore if you go back and look at buffalo news like buffett and among were literally living in buffalo dude they writing headlines they're they're running like have you ever read of that chance they bought a newspaper and they would literally like they they weren't news guys like they liked the news and they were like here's is i want this many ads on the page i think the headline should be like this like they they yeah i will not know this this is amazing yeah i mean i just say is like it buffalo news is a good example of of like basically their their mode of operation until the call it or early eighties mid eighties 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 intervention 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 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 timing and your money it's an advantage right it's not a disadvantage 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 and you have no choice but to say okay i'm gonna 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 a a great quote for mu saying hey like i'm down to my last like million bucks that i can put into to buffalo news like after that i'm calling uncle like i'm out i mean it it was there's been various times in berkshire history they've gotten and it's gotten very hairy it was not a guaranteed success and even when they had a lot of success it still gets harry in various points and i think every business has that though that's what it which should be expected like it should be an adventure there's a great letter that you can read it's front it's in nineteen seventy two and it's the buffet letter to the seas candy ceo if you google that buffett letter to cease candy ceo and he says and because i went into this i i haven't like studied buffett in depth the way that you would if you're gonna do private equity and he i just thought the oh he's this all shu he sits at the table he drinks his diet coke he he just allocate the capital and he hires great people and they just do magic and this letter i was like oh buffet had the mind of an operator right because he goes deer chuck i was at of brand he'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 in 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 in 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 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 a like a type writer letter does that make doesn't doesn't that make it so much more substantial totally he lick he lick an envelope for this one dude how many we leaked an envelope i kinda wanna 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 we kind of my business is a little bit different than yours which is i create content on the front end it's the mu 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 i basically start or buy businesses that i know i can like turbo charge 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 i if i drew a pie chart of what makes it work it's basically like sixty percent 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 pole market you're being pulled in it's just a sweet spot the people just need this it's you know it's shooting vision a barrel type of thing that creates a big part of it the second part of it the next you know so i'll say like thirty percent is the quality of the ceo that we picked who's gonna 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 ten percent was just luck like the ball bouncing our way on one or two things that could have easily not happen but that they happened or or you know when the ones 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 or evaluating the ceo evaluating the operator i wanna get better at that if you sit down with somebody you're recruiting an exec maybe it's you're you're interviewing somebody who's maybe in the business that's gonna 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 under appreciated aspect of being involved in small companies is is all about the people right and so the better you can be at the people the better it's gonna be for the business and you know we've really deep dived into i would say all personality testing is wrong right it it just depends on what you're trying to get out of it and so we have actually a a a huge battery of personality testing that we do for people to try to get as close to a three sixty view of who they are what do you use yeah so we're doing a combination of disc myers briggs and something called habit story which kind of has them see like what what are the habits that they 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 and and so i think actually if personally for me when i meet somebody i'm instantly categorizing them is what i think their number is and i'm automatically categorizing in them across the four main myers briggs dude this is crazy to me i thought that's shit's just horoscope for for dudes like do you really use this as like a c 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 so gram most people don't understand this so grand basically tells you who you are at your worst and there's there's nine numbers and basically everyone falls into a number and then you have what's called wings which is kinda where do you tip from that number so for me i'm a three and i tip two so a three is is they call the achieve my biggest insecurities is that i'm not enough and i want people to like me and so again if you if anybody's is proud of their it means they don't understand like like it's not a good thing right this this basically tells you what are your deepest fears and what what is the your area is 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 when i'm in my least healthy i'm a people please i say yes to weigh too much stuff i don't tell people the truth it's really unhealthy it's it's it's a highly destructive behavior right i'm i'm very focused on hierarchy and and and my guess is that you guys have different right i won't i won't guess your integrator but can you do it that's great yeah keep going doing it i can't wait yeah yeah my guess is sean a year three and my guess is sam an eight but what's three and what's eight the three is the achieved so three threes and eight's both achieved but for very different reasons so so three is achieved because they i 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 eights really want the money because they want the the security and they want the power that comes with the money oh so so i wanna learn the i wanna roll over so that i get pat and my tail wag sam just exactly treat yep that's exactly right sounds right what do you think exactly yeah well like he's he's describing everything it's like the most positive way so like yeah it sounds great i'm i like that and then i looked up who other eights were and it's like winston churchill hill martin luther king i'm like yeah okay cool yeah yeah for sure what you 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 b and then you said this this other test what's like the exact stuff that you're using yeah so so i there's two things one is when i first meet somebody i can i could 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 okay for me personally when i first meet somebody it helps me so much to be able to categorize them i into what i expect based on just kinda how they're showing up in the world in myers briggs right so you you have you have i and e or are they introverted or they extroverted right are they s or they in which is are they are they in the present are they sensing or are they in the future right then are they a thinker or are they a feel right so they are they primarily excited about ideas are they primarily excited about sort of the the the people themselves right and then the last one is t and p which is are they it's it's kinda or excuse me j and p which is are they very focused on rigid schedules and on creating order 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 gram 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 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 our marriage like how she shows up and how i show up is so different and it creates all kinds of miscommunication we've been married now for sixteen years and it really we went through personnel personality testing together about oh three and a half four years ago it was game changing in our marriage it was it it 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 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 sixteen personalities dot com is like these websites are huge that are doing these times yeah yeah yeah they're they're really mean this is a it's an important piece i would say five voices is a really interesting one they they so it's just the let the number five voices dot com i think yeah the those guys have created steve cochran and jeremy coup check 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 we we definitely use a lot of their work like well and then we finish off with a quick taro reading just to see how the future is gonna go and then we're all sad this is amazing know this is so good you you also have one thing i i read that i loved you go you have this like asshole tests like we we don't know nobody wants to work with assholes how do we sort of filter for that nobody's trying to present as an asshole on a job interview and you said like you could 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 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 i thought that was great yeah yeah it's fun i mean you wanna get i mean honestly the business we're in is predicting people's behavior like that's what we're trying to do and because if all these businesses are predicated on the people who run them they're they're all gonna have the risks the primary risk of all these businesses are gonna 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 waits staff though whenever people say about this this asshole test i'm like i i've never been around anyone that's like rude dude i don't remember the gonna 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 shoo the waiter when he was like it it was whole it was like it was it was i was i was ashamed i left that dinner would be like i felt like like i had just like participated in like a porn like i felt like i was like i'm so ashamed like if people find out about this like i'm gonna be so embarrassed that's rough wow dude what a fun episode this is great oh yeah i really enjoyed hanging with you guys we guys built brent thanks for coming on man if you haven't go check out his blog and his annual letters are pretty great follow on twitter what's twitter handle brent be sure just brent be sure yep alright good see dude thank you that's it that's the pod i feel like i could rule word i know i could be what i want to put at all in it like a days off on a road less travel never looking back