Acquisitions Anonymous - #1 for business buying, selling and operating - How Great Operators Win! How PE does it like pros with Mark Brooks - Acquisitions Anonymous 180

Episode Date: March 31, 2023

If you liked this episode, subscribe to our weekly newsletter and receive new episodes, offers and learnings directly to your inbox every week:https://landing-newsletter.acquanon.com/----Mills Snell (@thegeneralmills) is joined by Mark Brooks (@markbrooks), Managing Director at Permanent Equity, to talk about investor-operator relationships, integrations, pre-close involvement and post-close dynamics, cultural fits, empowering leadership teams, handling tough conversations, and much more.--Thanks to our sponsors!CloudBookkeeping offers adaptable solutions to businesses that want to focus on growth with a “client service first” approach. They offer a full suite of accounting services, including sophisticated reporting, QuickBooks software solutions, and full-service payroll options.Subscribe to weekly our Newsletter and get curated deals in your inboxAdvertise with us by clicking here Do you love Acquanon and want to see our smiling faces? Subscribe to our Youtube channel. Do you enjoy our content? Rate our show! Follow us on Twitter @acquanon Learnings about small business acquisitions and operations. For inquiries or suggestions, email us at [e-mail]

Hey, everybody, Michael here. Greetings from beautiful sunny Colorado. I'm on spring break. And we have something special for you today. This is our number two most popular episode of all time. The great Mark Brooks of Permanent Equity joined us. And he was interviewed by my co-host, Mills Snell. And this has been our second most downloaded episode since we started the podcast while going on over three years now.

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that we're supporting him as well. So thanks a bunch. and cloudbookingbuking.com as the sponsor for today's episode. Welcome back, everybody, to another episode of Acquisitions Anonymous. I'm Mills Snell, one of your co-host, and I'm joined today by a really good friend, Mark Brooks from Permanent Equity. Hey, Mark. Hey, Mills, has it gone, man.

Good, good. We have been varying our style of episodes intermittently with some deep dives into specific topics. Some of them are war stories or horror stories in some cases. Some of them are specific to a certain subject. And Mark and I used to work together at permanent equity. And he is truly, I'm not exaggerating, one of my favorite people to hang out with. We used to get breakfast together in Columbia, Missouri. And I miss Brent.

I miss the whole team. But I really miss my breakfast with Mark Brooks. And Mark, what I love about this story, and this is my version of how you got to permanent equity. And I'm sticking to it. But Brent reached out to Morgan Housel and said, who is the best operator? that you know, the best S&B operator that you know. And Morgan Housel said it's Mark Brooks. He's the top three names on my list. You have to reach out to him. And that was how your journey began to permanent equity. But Mark, give our listeners kind of 30 second background on what

permanent equity is and what it does. And then let's maybe spend a minute or two talking about your role there specifically and what you do. Sure. So technically speaking, permanent equity is a private equity firm, but we don't operate like one in a bunch of different ways. First of all, we're currently investing our second fund, which has a 30-year life on it and a 10-year investment window. So already we're pretty weird in the private equity space because of those two things. We don't use third-party debt to close our transactions, so that makes us super weird at this point. And so we're kind of an oddball in the private equity space. We are focused on partnering with businesses.

We take majority positions in companies that are generating anywhere between three and $15 million in EBITDA annually. So that's kind of our focus. We don't have an industry focus. And so our portfolio looks very eclectic. We own things from pool builders to picture frame manufacturers to air. airplane parts, suppliers, it really runs the gamut. So my job on the operation side is super fun because I get to interface with a bunch of different industries every day at a bunch of different levels of the business. I love it. I love it. That's awesome. So Mark, let's talk about,

I know you probably don't have a typical day that, you know, all five days of the week probably look fairly different. But what are the kind of things that you're doing on a day-to-day basis in terms of interacting with portfolio companies? Sure. So my job essentially is to be the board in a box for a few of our businesses. So we don't do official boards and we don't really do quarterly meetings. We prefer to plug in really on a day-to-day or week-to-week basis with each of our management teams. And my job in a given day can run from long-term strategist all the way down to a shoulder to cry on. So I'll have a conversation one minute with somebody on what their three to five years.

strategy is for their business and what the CAP-X requirements are going to look like so that I can relay that back to the finance team. And the next minute, someone just needs to blow off steam for five minutes because their warehouse manager didn't show up for the third day in a row. So it's very wide-ranging, which is what makes it challenging, but also what makes it extremely fun. So my job is confidant, counselor, encourager, strategist, kind of all wrapped into one. I love it. How much of that can happen remote and how much of it really needs to happen face to face as you're interacting with portfolio companies? I would say once the relationship is established, a lot of it can be accomplished remote. I try to get out on site and visit our companies at least once a quarter.

But most of the time that I spend there is not talking about business. It's having meals, having coffee, seeing what they've been working on, and really pressing into relationships. And I'm we'll talk about this more as the time goes on. But that's how I tend to spend my time when I'm on site with folks. Most of the transactional stuff we can do over the phone or over Zoom or even over Slack or email. So we use all those mediums. Really, a lot of the transactional stuff we handle remote. And then if we do need to cover a particularly sticky issue or one where we're starting at very different ends of the spectrum in terms of our opinion and how we should proceed, those are the things where I'll try to go out and be on site with folks.

And again, trying to make sure that those conversations are happening over a meal or over coffee or on a walk or something like that. Yeah. What do you think, Mark, about this idea that business ownership can be absentee or can be passive or semi-passive? I think ownership can be passive, but I don't think operating can be passive. So, you know, I've seen not necessarily inside of permanent equities portfolio, but in other businesses, I've seen very difficult relationships arise between owners who said they were absentee and who brought in professional management and incentivize them like professional management and then consistently got involved in the daily minutia of the business. And those relationships blow up very easily. So I think if you're if you're going to be an absentee owner, you need to be an absentee owner. Like you need to be an absentee.

If you continue to swoop in, especially at the, you know, at the level of minutia, you know, and in a lot of cases, you know, the businesses that we see, these are typically founders who probably still know more about their business than the, than the professional leadership team that they've brought in. So the temptation is going to be to micromanage that business. And I think we've all probably worked for micromanagers in the past, and we know how exhausting that can be. So I would say, and, you know, being an absentee owner is an exercise in patience and in self-constraint. And for the people that have the willpower to do that, I think it can work.

I think often, you know, people are, people who have that founder and entrepreneur mindset can't help themselves. And in a good way, like it's got a great motivation behind it. but it's also that same motivation makes it very difficult to actually fully hand off a business to a professional management team. So you can do absentee ownership if you're willing to basically cut yourself off aside from quarterly meetings, that sort of thing. Outside of that, I wouldn't really recommend it. But just one guy's opinion. No, I think that's very good. So let's kind of zoom out and think about the process of buying a business. You go from awareness of a potential acquisition to, you know, feeling each other out, you make an offer, there's an LOI,

there's all these different steps involved. But at some point, you know, the exclusivity begins. The kind of, we're not dating other people. We really want to buy you. We don't want you to go sell to somebody else because we as a buyer are going to start spending money and time and energy pursuing this acquisition and beginning due diligence. How do you think about, Mark, you're so involved on the post-closed dynamics. How do you think about your involvement or, you know, someone like you, right, in that role? How do you think about your involvement pre-close? When do you get involved? What types of relationships are you seeking out? How do you kind of lay the groundwork pre-close for a successful and fruitful relationship post-close?

Sure. So permanent equity, as I said earlier, is very weird. and so sellers who are interested in us as a potential partner tend to be looking for something a little bit different than they would from another, from a strategic or from a traditional private equity firm. So for a lot of these founders, the relationship with who they're going to be working with is very important.

So in a lot of cases, we're dealing with founders or owners who want to roll a meaningful portion of their equity, and those are the types of situations that we prefer. we like to partner with folks who still want skin in the game. And for those folks, knowing who it is that they're going to be working with, especially once they're told how involved we like to be on a daily or weekly basis and this is not some quarterly check-in, they want to know who that person is as soon as possible.

So depending on logistics and how, you know, at what point in the conversations we are, I'll sometimes be involved on the first management call, especially if it's an industry that I'm that I'm familiar with or a situation that I've been familiar with. So I can be involved as early as the first management call. Other times, I'm getting involved. If it's later, then I'm probably at least on the first site visit, if not the second. And we'll probably get to this later also. But I also like to start the process of doing our weekly check-in calls before we're closed.

So once we're clear of what we consider to be. the major hurdles of diligence, we like to go ahead and set up those weekly chats with founders, owners, operators so that we can establish that cadence and so that when the ink is dry on the operating agreement, they can detect no change from the day before we were assigned to the day after we were assigned. We want that to be a non-event for the folks operating the business. So I also, just for what it's worth, sorry, another thing that makes us weird, we do the vast majority of our diligence in-house. So we don't outsource any parts of our diligence except for things that are more technical beyond our internal expertise. So my job as the operating partner is to make sure that there's nothing in diligence that would worry me from an operating partner perspective.

So I'm looking at, you know, organizational structure, compensation scheme, you know, all these sorts of things that I'm going to be very involved in talking to the current management team about post-close. So I'm actually pretty involved in the entire pre-closed process, sometimes starting with the very first management call, working through diligence, and then also establishing that weekly or bi-weekly cadence with our operators before we even get to. close. Yep, yep. Have you seen, obviously that's a very different structure, right, almost thinking about integrating yourself into the operational workflow, not to replace anyone, but just to be familiar with the cadence. Have you seen any pushback to that being integrated sooner? I mean, you're asking for another meeting, right, one meeting a week or whatever it is or two meetings a week. Have you had any pushback on that? Or has it blown up in any way? Right. I think the difference, maybe the difference with us is, again, because we're a little bit of an oddball, the folks who want to partner with us or who are looking to partner with us actually want to partner with us.

So we're not doing hostile takeovers. There can be some, you know, sometimes some turbulence when the selling party is separate from the party who's actually operating the business. So that can be a little bit. but different. But again, a lot of that is smoothed over by, you know, we just, we just published a piece on how do no harm is kind of a major operating focus for us post-close. And so we try to come in as partners and not as know-at-alls. So my, I don't, I don't have a 30-day playbook. I don't have a 90-day playbook. My 90-day playbook looks like coming in and listening as much as possible to the people who are actually operating the business. And in all of these industries that we're entering, because we don't have an industry focus,

I'm never going to be as smart as the people operating the business about their industry or about their product or service, about their customers, about their suppliers, you know, about the associations they belong to. And I don't aspire to be. Like, that's not how I'm going to add value as an operating partner. I'm going to come in and typically the operators of the business, Those are the things that they really love to latch on to.

They're in that business because they are fascinated by the industry. They love their customers. They're evangelists for their product or service. And it's a great symbiotic relationship because I'm happy to let them focus on those things. And I'm going to go focus on the things that they and a lot of times say, you know, oh, thank goodness, somebody is going to deal with that stuff because I'm so disinterested in that. It takes away time from the things that I love.

So really, you know, earnestly presenting ourselves as a partner who wants to fill in the gaps that they're not interested in working on can really smooth those conversations. So, yeah, I'm interested in what's going on in the product side, on the service side, what's going on with their customers, what's going on in the industry. I want to be a sponge on those things. And at the same time, I want to be a great right hand for them and a new resource for them to leverage on those subject. matters that they're less interested in. If you kind of think about that first phase as primarily one of listening, like you're not coming in, grabbing the reins, yanking them out of their hands. If it's more kind of that open-handed, do no harm and listening, I'm wondering about the

kind of characteristics of a healthy relationship that is marked by listening. How do you know, Mark, when you're doing that well? and how do you know when you're maybe, you know, needing to step in more or you've overstepped? What are the markers? Yep. Yeah. Honestly, I think one of the greatest indicators can be small talk. So if at the beginning of our weekly chat, if, you know, they're asking me about my kids and I'm asking them about, you know, their pickup sports team or, you know, that sort of thing.

If there's a personal comfort level during those conversations, then I feel like things are going well. Somebody who doesn't want to exchange pleasantries in any way, you know, that's where I feel like I've failed in in establishing that relationship. I mean, look, when you're entering into a relationship with a plan to be in it for 30 years, your approach is very different than one. You know, it's not a transactional relationship. It is a true partnership. And, you know, kind of like, it's kind of like getting married. Like, you don't want to be with someone that you're going to be miserable spending time with, you know, once a week or more frequently. So, so I think that's a great, that's a great bellwether as to how the relationship is going is if small talk kind of dies off at the beginning of our conversations and we're very, you know, we're highly transactional.

We're just focused on the numbers. We're not talking about how employees are feeling. or what morale is like. You know, if people are excited about the new product rollout or not, how conversations with, you know, customers are going. Like all the softer things, if we start to back off, there's something to matter. And that's when, that's when, you know, a signal to go out, do a site visit, you know, have a meal together or a coffee or something like that and see what's really going on.

So it sounds kind of stupid, but I would say small talk is probably one of the best indicators I have of the health the business relationship. I love it. No, that's good. So if you think about that listening phase being kind of 30, 60, 90 days where you're just a sponge, you're not making knee-jerk reactions to correct things because you have the intellectual humility to say, I probably don't know the whole story, but you're probably probing with questions and things like that.

Talk me through kind of your thought process of discovery. You've done some of that in due diligence because it's not outsourced. but when you're still in that listening phase and you're probing and asking questions, do you have a kind of a map in your mind of what you're trying to cover and assess? Or is it just kind of meandering and organic and natural? Right. I think diligence and immediately post-close are pretty tightly related. So the way that we think about the diligence process, since we manage it in-house,

is we have critical diligence issues that might be. be deal stoppers. We have diligence issues that we need to get clarity on before moving forward. And then we have diligence issues that are more of like a to-do list post-close. And those, we hold those very lightly because a lot of times those issues are already being handled in a part of the organization that we just don't have access to, you know, prior to, prior to close and starting the actual official relationship. So sometimes the diligence list can be a guide for the types of questions that we want to ask and the things that we want to probe into. A lot of times it's just following natural curiosity.

So, you know, and being organic with the conversation. And, you know, I find in terms of when we decide to plug in and actually help with something, my strong preference is to be invited in to the first one. So if they, you know, as we're talking about issues and they say, you know, this thing has really been, you know, a pain in our butt for the last several years or, you know, we don't like working with this supplier or this customer or we're really having trouble, like keeping track of all the paperwork, that sort of thing. That's a great entree for us to say, hey, is that something that we could help out with? I'd love to explore that with you.

So when it's their idea to invite us in, especially the first time, it then opens the door for us to be more proactive in the future when we show that we can actually deliver value for them. So that's kind of how I like to pace it out is using natural curiosity, maybe with the diligence list as a bit of a guide for where the best places to dig are. But really just kind of letting the conversation flow freely and letting them bubble up the things that they actually want help with or the things that they just haven't thought to ask for help on yet. And then plugging into those things, showing that we can be helpful. And then that makes the conversations that are more proactive on our part way easier in the future.

Yeah, and I guess it sounds like, you know, you're really trying to communicate. This isn't a game of gotcha, you know, pre-close or post-close. It's not like, you know, you're the boogeyman and you're trying to get them. It's really from a posture of helpfulness. All right. So if you... Yeah, I mean, if we're, if we look like we're, if we look like we're wagging our fingers on on the sidelines, that's not starting off as a productive relationship.

Right. Like we do want it to feel like a partnership. And hey, like a lot of the things that we see inside these businesses that we assume are broken are there for a reason, right? That employee that you can't really figure out like why they're there. They're there because they have some extremely deep industry knowledge that no one knows about. Or this process that seems completely backwards and wasteful has actually been built up over years because of X, Y, and Z in the industry that we don't understand yet. So taking a posture of humility as we go into those things and not assuming that we know the best, smooths that out too, because then that gives them a chance to explain, well, we do that because of this, or that person is there because of this, or we have that reporting structure because of this. And that just enhances our learning and, again, helps us prioritize, you know, where we actually want to be focused moving forward. So, Mark, when we think about the listening, when we think about the listening phase, at some point, it stands to reason, right, that you're going to assert yourself as an owner of a business at some point. You can't be kind of laissez-faire the entire time. When that process starts,

when you start steering or when you start, you know, trying to direct things in a certain course, talk me through your thought process on that. I think about it in terms of like budgeting goodwill, right? I can't go spend all my goodwill in one place and it end up not you. building anything. But how do you think about that process and prioritize? No, I think rationing goodwill is a great way to think about it. And I think it can help at the beginning to do a couple things. One is be super clear about the metrics that you are interested in driving and the metrics you're uninterested in driving. So for me, going into a new partnership and saying, I am interested in cash flow. I don't care.

about your revenue numbers if they don't deliver any cash flow, right? And just being being super clear with that and reinforcing that, you know, call after call after call, stop talking to me about revenue numbers if they're not going to produce cash. So just as it, just as an example. So being clear on the metrics that are important and the metrics that aren't important, that way when you do plug in and, you know, maybe throw your weight around a little bit more, it's around a metric that you've already established is important. And it's not, and it's not surprising. Like, wait, wait a second, that's important to you. Like if we had known that. So being extra clear about that at the beginning, I think is important. The second, I would say,

is the importance of setting boundaries. So I, which sounds, which sounds bad, but I actually think that setting up very clear, very expansive boundaries for people is very freeing, because a lot of folks will tend to stay towards the middle of the yard and not, you know, not leak out to the edges because they're afraid they're going to get in danger, right? So being very clear with very expansive boundaries about what you want people to stick to can also help with that because then when they start to get close to those boundaries and you start to wave a flag at them, that's not surprising either. So the way that we typically do that, especially around the things that are metric driven, is we have conversations about that up front. So we tend to use the Dacey

framework in order to help establish those boundaries. So Dacey, which stands for driver, approver, contributor, and informed. So those are the different, the four different roles that someone can have in decision making. So when we lay that out for a company leadership and they see that in most of those cases, we want to be a contributor or informed on things. And we really only reach the approver level when it gets to, you know, let's say in, in a business of a certain size, hey, we want to be consulted if you're going to spend more than a quarter of a million dollars on CAPEX, right? Anything under that, go, you know, go crazy, but above that, we want to be consulted. Or we want to be consulted on hires above this level. So anything C level and

above, we would like to be part of the interview process. So if you can paint this picture of boundaries, but boundaries that are extremely expansive to the point where, you know, where they're, where they sit in their desk, they can't really see the fence, then it feels far less intrusive, and they understand that they have a nice big playground to go out and work with, and that we're happy to contribute to each of these things if they want to call us in. But really, we trust them to manage the business in most cases where we're just kind of contributing or being informed, and we really only want to plug in at those really critical decisions. So geographical expansion, hiring of a sea level employee, murders and acquisitions, those sorts of things are things that we

want to be consulted on. Everything else, just keep us posted. And we'll, you know, we'll nudge around the edges, obviously, just as you would when you're talking to a friend about how business is going. But that's, again, setting those boundaries, making sure they're expansive, I think, can create that trust relationship that's critical for making sure things flow smoothly. I think that's a good lead in. So it sounds like that is documented. That's in writing. It's clearly communicated and everybody's on the same page. How do you think about that, that kind of similar framework around like KPI tracking and management and oversight? Like if all the sudden, you know, I don't know, I'm just going to use an example, you know, monthly revenue year over

year is down by more than 20% we need to know. Or is that, you're like, look, we don't care. we just want to know, you know, quarterly financials, annual financials. How do you think about the guidelines or boundaries around KPIs? Sure. So we actually have kind of a dual plug-in structure with our businesses. So I as an operating partner am going to be kind of the primary point of contact for the leadership team. And then there's a primary point of contact for the financial team as well. And that really, depending on the size and scale of the business, that could be like an actual CFO down to, you know, one person who's managing AP and AR, right? So that, and that person lives on Tim's team, our CFO. So they have, they have a partner that they can deal with on

accounting issues and stuff that I would screw up anyway if I were to be consulted on it. So it's great for me. So they, they are able to take those, those monthly metrics when we generate financials. And that team in-house for us is generating a ton of analysis on just those sorts of things that you mentioned earlier, Mills. So they're actually the ones who are raising flags about, you know, year-on-year, month-on-month comps, that's sort of a thing. Or saying, hey, this is a percentage of revenue is way out of whack from last week. Let's, you know, let's break open OPEX and take a look at what's going on. So that's how we handle a lot of that. In terms of KPIs, we really want to keep that that universe very, very tight. So in a lot of cases, the businesses that we're partnering with are

tracking way more things than we're interested in tracking to begin with. And most of that, we can learn from because based on their industry, you know, say they're in construction and they're tracking 40 different metrics every week, they have learned over 30 years of operating in that business that those metrics are the ones that are precursors to more important metrics, right? Like that's the canary and the coal mine for this metric that actually impacts what we're trying to drive. So we'll actually learn from the folks who are operating the business, which other things we should be tacking on to that outside of our kind of core, you know, three or four metrics that we agree upon at the beginning. So, you know, we very rarely are

coming in and asking people to adopt a new reporting methodology. Again, we have the benefit of partnering with businesses that are already profitable. We don't do turnarounds. So we don't typically have to go in and reset expectations on what we're tracking. The things that they're tracking already have led to their success, and we just look to further it. So we may have other slices and dices inside those numbers that we want to take a look at on occasion, but typically the things that they're reporting on that have generated their past success, we can build on for future success also.

thinking about that DASI framework, what are the instances where you would say, hey, we have to get into the driver's seat now? We have to really exert maybe the fact that we're a majority owner, right? I mean, best case scenario, that never happens, right? And everything's smooth. But life and business does not always function that way. So what are the instances where you would say, hey, if, you know, terrible things are happening, what are those things where you have to start driving? And maybe those things haven't happened, but I'm just curious when you would escalate. Yeah. I mean, we've been very fortunate that those times have been very rare for us. And I would say, not to get too specific or anything, but if we ran into a situation where we felt like we needed to step into the driver's seat, what that would indicate to us is that we have a leadership problem at the operating company. So we would very rarely step in and try to exert pressure on existing management and try to get them to follow our way. That's just that's a clear sign that we have either a divergence of opinion on where the business needs to go or the decisions that need to be made or we have we have someone who's not a great fit for working with us in that position. So I would say that in the rare instance where we do feel like we need to get into the driver's seat, that would look like probably a change in management or a shift in responsibilities on the current management team.

Because we don't aspire to run all these companies ourselves. We want to partner with really sharp people who understand their industries and who love their teams and employees and communities and want to plug in and invest there in ways that we can. when we're when we're remote. So that's, I think that'd be the, the answer I'd give is if we felt such a strong divergence from where the business was headed and where we felt like it needed to head, that's a, that's an indicator that we need to have a tough conversation about leadership in, in the company. And that's how we would choose to solve that problem rather than trying to ride herd over the existing management team. Yeah, yeah. If that's the destination of, hey, things have gone wrong, what are the early signs that you would kind of see or anticipate and

how would you course correct, given that you're really leaning on the existing management of the business? What do you think, Mark, about kind of first fruits of some of those missteps? Yeah. I mean, I'd go back to one of our earlier questions talking about small talk. Like, I think that a rift in the relationship with that person is probably a bad first sign. So that's one that I would point to. Another is hiding underperformance or metrics that aren't that aren't pointing in the right direction. So either, hey, we want to change what we're reporting on or, you know, something like that would be a bit of a red flag. Most of the time, that's fine.

and it's not subversive. But I'm just saying like shifting, shifting the goalposts is definitely an issue. I would say leadership that is constantly making excuses based on the external environment is a problem also. And that could be a reflection on us, actually, that we haven't imparted to them, that they have full ownership of the business that we're asking them to run. So if they're not taking ownership of those things, I mean, even the leadership team during COVID of our airplane parts business, which obviously got, you know, the industry got completely

hammered, very rarely were there conversations where that team was pointing towards the industry as the source of their challenges. They were way more focused on solving those problems than they were on blaming them on external forces. So that's a, that's another one that I would that I would point to in terms of challenges. But really, I think it all comes back to if you, if you feel like there's a, there's a rift or a gap in the, in the personal relationship, that's, that's really a telltale sign. I think, I think for me is there's a, there's a reason that the trust relationship is breaking down or that they're taking intentional steps away from it.

And that would be a signal for me to, to dig in and figure out what's, what's going on. Fortunately, we don't deal with that very much. So that's a that most of that is hypothetical. If that ever happened, here's what I would think about. Yes, right, exactly. What do you think about, Mark, you know, I'm sure in your role you have had to and you will have to have tough conversations. How do you think about framing those conversations, minimizing, you know, surprise? Like, what are the markers that you would say, hey, this was a successful tough conversation? And are you only having those with leaders, like the leader, the one leader? Or are you also having those with the management team? And I'm asking that because a lot of people who listen to this either own a business

or they want to own a small business. And this is just the nature of the game, right? Tough conversations are part of it. And if you avoid them, they tend to get worse. Yeah, sure. So I think, you know, there's a, there's going to be a difference between some someone like us who is not the acquirer and the CEO at the same time. So I want to have relationships with our CEOs where they're taking responsibility for the management and development of their

teams. So I would say it would be extremely rare for me as the operating partner to go in and have a conversation with a member of the management team. That's something that I would want the CEO to do. But if there were a vacancy or something like that, I would step in and do that. I think I would say a couple of things. We have a tendency, especially as Americans, to be polite and not kind. So a polite person sees food on a stranger's face and doesn't say anything about it. A kind person sees food on a stranger's face and tells them they need to wipe their face. It's not necessarily polite in American culture to point out people's flaws, but it is kind.

especially if someone, it's hindering someone's growth as a leader or as a worker inside the business. So what we try to do is really encourage management to have those conversations early before they become such a huge issue that they turn into an employment issue or a compensation issue or something like that. Let's identify those shortcomings early and have conversations with those employees or those leaders as soon as we possibly can. And that, it just prevents things from snowballing and becoming a much, a much larger issue than they really have to be. The second thing I would say is if you've established that relationship where they, the operators in the business, the leadership team, the CEO especially, understands that you are interested in them as a

person and not as a functionary, a cog in your machine, then those conversations get far easier because they know that they're coming from a place of care and not of, hey, you're screwing out my business kind of a thing, you know, get out of the way. It's, it's, hey, I care about you as a person. I want to work with you for a very long time. So I'm having this conversation with you to clear this roadblock to our relationship and towards your progress with the company. So I think I think those two things, making sure that that relationship is established so that they know that difficult conversations are based on care and not on criticism. And also making sure that we're being kind early and not polite and kind of letting things go and sweeping them under the rug.

You know, making sure that we are leaning into people in ways that are productive, that build the relationship that also make them better equipped to do their jobs in the future. I think that's so good. And it's, you know, one thing to say it. It's easy to say it, right? And it's another thing to do it. And I think the proof is really ultimately in the pudding about whether or not somebody feels empowered or if they feel, you know, well, you say you're empowering me, but really, I'm, you know, I'm very stifled here in this role. And I think a lot of the things that you've dependent on are really good kind of soft tells because if you call somebody into your office and you say, sit down, tell me, you know, do you feel empowered or do you feel stifled? You know, it's very

different than what you're saying. Like you're getting a cup of coffee going on a walk, trying to read between the lines and into the margin to say, does this person feel safe, you know, with me? Do they feel like they have the autonomy that they need? I think that's really good. Yeah. Yeah. And I think, I mean, one of the questions I try to make sure I ask when I'm, on site visits is, are you happy? It's not really a business question, but it actually tends to tease out lots of, lots of things. Very rarely can someone just say with a pat answer, yes, I'm happy. They're going to say, actually, I'm really happy. And if this and this thing weren't a problem, I'd be super happy, right? So you usually get like action items out of those conversations as a partner

that you can kind of dig into and try to clear out for folks. Like, We're big on unblocking our management teams to doing really great work. And so just asking a super simple question like, hey, are you happy? Are you enjoying your job? Are you excited about coming in every day? And it's interesting the things that will bubble up in those conversations that might not have if you were being a little more, you know, regimented in your questioning. Any other good questions like that that help kind of act as a pickax? I mean, I think the best questions that you can ask are why type questions.

So I think if you can establish two or three good starter questions like, are you happy? Yeah, I mean, I'm mostly happy. Oh, why is that? And well, you know, I've got this thing that's come up and I've got this issue with the CFO. Oh, why is that? You know, the theory that if you ask five why is you'll. actually get to the bottom of what a problem is. So I think the best questions really are just listening and responding and not having like a list of questions. I tend to think that a lot of the best

job interviews go the same way, right? You start with kind of one opening question and then you just kind of keep digging on that one thing. You learn a lot about people when you keep, you know, when you keep digging on one particular area, then if you're just kind of skipping across the surface on a bunch of different things. So I don't, I'm not smart enough to have like, the top 10 list of questions to ask people. I just keep digging in on the one that I started with. Are you happy? Why, why, why, why, why, why? That's the best I got. If your icebreaker is good enough, then you don't need multiple ice breakers. So you're good. There you go. That's right. Thanks, Mills. Mark, what do you think about the role of industry expertise or industry familiarity?

You're in a position where permanent equity is not claiming to be an industry expert in anything other than maybe an ad on acquisition for a portfolio company. But now that you're in, right, if you were looking at another aerospace parts distribution business or another construction business in a field that you guys own, you know you have a huge leg up. but you also are making it work, right, in places where you don't have industry expertise. I'm not asking this for you to give first person experience about running a business where you don't have, you know, first-hand experience or industry expertise. But you come from a position and you sit in a seat where you would see the value and the benefit of industry expertise. And there's a lot of people, me included, who buy a business where they're not an industry insider. Any kind of thoughts on that motif? for that idea.

Yeah, I mean, if we don't have someone in our network that we can talk about things with, we'll often go out and look for one. But really, our approach is similar to, and this is probably the only way that we're similar to him, kind of the Jeff Bezos approach of we're not trying to figure out what's going to change. We're trying to figure out what's not going to change. So, you know, one of our taglines has always been we love boring businesses. And the classic example is the pool business that we own, you know, people are going to keep dipping their bodies in water to stay cool.

You know, they've been doing it for millennia. We believe they'll continue to do it for millennia. That's a good business to own, right? So we tend to stay away from, you know, sexy businesses that are trying to skate to where the puck is going. We just want to own the ice. You know, like that's that's kind of how we how we think about it. So in terms, we may not have deep industry expertise and we may need to get some outside expertise as part of as part of diligence.

But really our focus is on, gosh, what do we, is this business tapped into something that we don't think is going to change for a very long time? Is this a need that is going to exist? And if so, and they've got an interesting moat around that, you know, around servicing that need, then we're interested. But yeah, there's, I mean, we do run into acquisition potentials where we need more technical expertise. Like, hey, we've never seen this metric before. Is this good or bad? And, you know, we benefit from a very large network of folks that we've, that we found over the years that, you know, usually we can find someone to talk to about that. Most of the

time, you know, it sounds like an oversimplification, but we can, we can answer a lot of those questions ourselves for, is this something that's going to move over the next 20, 30, 100 years? And if not, then, then yeah, we're interested. Mark, whenever permanent equity is looking at an acquisition, like the numbers have to work, leadership has to be in place. Like, there's subjective boxes that have to be checked. And I think culture, or at least chemistry, right, is one of those. And if there is chemistry, it's probably because there's a cultural fit. Are there instances where, you know, you get in, you've acquired a business, and then all of a sudden you uncover cultural, maybe not glaring issues, but just cultural anomalies where you say, hey, this is incongruent.

How do you think about, you know, addressing those? How do you think about, how do you think about, empowering the leadership team to correct them, especially when some of those things may be tied to a seller who had an idiosyncrasy or something that created those anomalies in culture. Have you dealt with anything like that and any kind of advice or tips or experience? Yeah, I think, well, so for starters, one of our key metrics, one of our subjective drivers, when we're looking at potential partners is our no asshole policy. Sorry, I hope I can say that word on this podcast. But it's really one of the seminal pieces of writing that we've done on the website.

And we find that I'm pretty sure that almost all, if not all, of the folks that we have partnered with have cited that article as part of the reason that they got interested in. us before, you know, before we closed. So a lot of those, a lot of those cultural issues can be summarized in, in that, like, don't be an a-hole. That's, you know, and we can, we, we can identify that at least at the leadership level before we close. Like, we've got a pretty good, a pretty good bead on that one pre-close. I would say other, you know, softer cultural issues are enforcing that policy all the way down the org chart, right? Like having a, you know, having a no tolerance policy for for A-Holes.

And a lot of times when we do make those changes, the employees who are there are kind of like, oh, my, thank goodness, someone has dealt with that. It's a very freeing experience for them. So that's really the major kind of soft box that we have to check post-close. I think a lot of the other ones are really how we do business. So most of those we can also detect it at diligence during the diligence process. Like are we using any shady sales practices? Are there compensation structures in place that incentivize bad behavior or treating customers

poorly or treating suppliers poorly? A lot of that can be identified. But some of it can't. And that's something that we try to nip in the bud very early. Like as soon as we identify it, again, going back to our. discussion on, you know, being kind versus polite, like giving people the chance to know, hey, we've got a, we have a zero tolerance policy around treating people badly. We thought you'd be interested in knowing that before we have to let you go for it. And they're like, okay,

they're either great, I got it, or sorry, this is the way I do business. And we say, but we don't. So see you later. You know, there's, so that's, that's kind of our overarching soft box that we need to check is don't be an a hole to customers, to suppliers, to partners, you know, in the industry, like online. And if we see anything that's violating that, most of that stuff bubbles up during diligence, to be honest. And then a lot of times, things that bubble up after, you know, post-close are going to be with employees who really weren't involved in the diligence process. And then it's just typically some light cultural cleanup that needs to happen. We don't, and I don't mean to make it sound like we have to let people

go for that very often. We really don't. Again, these are successful businesses that have been operating for decades. So in most, in the vast majority of cases, the founders have created healthy cultures where people are supportive of each other and supportive of the people they're doing business with. So it really is rare. But every once in a while, we have, you know, a scab in the organization that we need to that we need to take care of. Well, and I think to that point, you know, as the culture gets clear, or maybe it was already clear, but as it gets clearer and as, you know, reinforcement of those cultural norms gets re-in, you know, gets really embedded, like, hey, we're going to hold people to the standard that we said was important now, maybe more so, then a lot of times

people will self-select out, you know, of, you know, well, I'm going to keep trying to do business this way. And it's like, well, actually, we don't do it that way. And, you know, we keep having to talk about it and people tend to self-select, you know, in or out to those norms. Yeah, I agree. And, you know, a lot of times behavior can be changed with shifts and incentives also. So I think, you know, I think Charlie Munger said, show me the incentive and I'll show you the outcome. I think a lot of times the reverse is true too. Like, show me the outcome. And I can probably guess how the team that's generating that outcome has been compensated. The, the connection there is so, so strong. So if you've got a whole behavior, you know,

going on inside the culture, there's something that is incentivizing that behavior. I mean, sometimes people are just a-holes. So that's one thing. But a lot of the time, bad behavior is being performed by people who are actually decent human beings that are just being incentivized to behave badly. So it's kind of remarkable how much bad behavior you can root out just by giving people clean incentives that point them towards the same goal that the organization is headed towards. That's so good. Mark, as we kind of wrap up, I'd love to know you just have a wealth of knowledge, and I know that you kind of take that mindset of, you know, growth, right? And you're not static in the way that you operate as a person. Are there any resources right now that really have you

excited or things that you found really helpful lately that are worth sharing? Well, I guess Twitter is too large of an answer. But I mean, I really, I consume most of my information in bite-sized nuggets. And I think what has what has helped me a lot is, you know, I tend to watch the S&B space on Twitter. But I'm also in the real estate space and the, you know, the video gaming space and the deep technology space and the crypto space. And, you know, I tend to be a bit of an omnivore when it comes to content. You know, I'm in the philosophy space. I'm in the religion space. Like, there's there's so much out there that is immediately applicable to what we're doing,

not in a tactical level necessarily, but, you know, we can learn from just about anybody. And I think that's a good posture for life is sitting, you can see. sit down across anybody, across the table from anybody, no matter what their background is, no matter how much they're paid, you know, and you can, you can learn something. You just have to be able, you know, be diligent enough to go find what it is and to be willing to share your own story also. So not a super satisfying answer, but I try to consume as much across, you know, enough, you know, bite-sized chunks across enough verticals as I can and try to piece together what I think is actually applicable to what we're doing.

So I'm not a guy to be perfectly candid. I'm not going to read 100 books in a year. But I'll read 100,000 tweets. And I feel like I'll learn probably just as much that's applicable by doing that. But that's just me. Yeah, the distillation of those things into tweets. I love it. Well, Mark, thanks so much for your time, man.

I love chatting with you. and miss being able to do it face to face, but thanks for joining us today. Yeah, man, you need to come back to Columbia and we'll grab breakfast at Ernie's again.