Acquisitions Anonymous - #1 for business buying, selling and operating - How to make it in PE? - Acquisitions Anonymous episode 168

Episode Date: February 17, 2023

Michael Girdley (@Girdley) is joined by Michael Arrieta (@MikeArrieta) to talk about his journey from W-2 to HoldCo operator. He gets to talk about storytelling, how his fund is structured, the challenges he faced, and how HoldCo CEO is the most difficult job in the world.-----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.-----(0:00) - Introduction(0:40) - Our Sponsor is CloudBookkeeping.com(2:10) - Guest Intro: Michael Arrieta(6:00) - How did public speaking affect your career?(7:50) - The gun show analogy(9:00) - What is the biggest enemy we have today?(10:00) - Honesty and vulnerability as an advantage(11:00) - How to grow your network?(14:28) - What is the most important thing about transmitting your message?(16:10) - How do you cultivate missionaries rather than mercenaries?(19:28) - How did you transition from a W-2 to business owner?(22:52) - What was your calling? What is your investment thesis?(25:05) - What was the key to start your fund?(26:30) - How do you build relationship capital?(29:30) - How did you optimize your fund for a permanent hold model?(36:21) - Being smart means you can quote the US Tax code(37:21) - What have you learned in these two years?(40:30) - How do you run a campaign to intermediaries?Links:https://www.joingardencity.com/https://twitter.com/mikearrietaSubscribe 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, Michael here. Welcome to Acquisitions Anonymous, the Internet's number one podcast about small business buying, selling, and operating. Today, we did something a little bit different. It's just me. And we have a guest, and his name is Michael Arietta from Garden City, is the name of his private equity firm. And it's really unique in terms of what they've done. And I spent time digging in with him to understand, you know, the power of how he's used storytelling and his own personal story is a way to put together his firm, how they found their first deals, how he went from zero businesses purchased to one, and how that transition from W2 to actual business owner and hold co-operator went. So really fun, dynamic discussion, and enjoy it a lot. Here is the episode.

Hey, Michael here. Want to talk to you about today's sponsor for the episode, which is cloudbookkeeping.com. So cloud bookkeeping is actually run by my neighbor, Charlie. So I've met him in person, in person and can attest that he's a real human being and a good person. And what cloud bookkeeping does is offer a full suite of bookkeeping services all in the cloud for you around QuickBooks and other technologies that you're using as a small business owner. So if you're interested in getting the bookkeeping part of running a business off of your plate and focusing on running your business, Charlie and his team are one to call. They can put together a bunch of other stuff in terms of helping you manage and grow your business besides just bookkeeping,

sophisticated reporting, definitely helping you get your QuickBooks online set up in the right way, and a number of things around payroll as well. So definitely know them and recommend them. If you want to find out more about Cloud Bookkeeping, you can go to their website at cloudbookkeeping.com, reach out to Charlie. I know many of you have and see if he can help you make running your business easier and more fun by letting them help with a lot of the bookkeeping solutions. And when you call, mention this podcast, it would help us and help Charlie know that we're supporting him as well. Thanks a bunch. And cloudbookkeeping.com as the sponsor for today's episode. Well, cool. Well, Michael, thanks for being here. I'd love to just, you know, I think we're going to

do something fun today, which is instead of doing our normal format, I'm just going to grill you with questions because I think your background and the stuff you're doing is very interesting for the type of audience that we have. It's a group of people that are typically either business nerds or they're interested in buying a business at some point. So I think you've done a ton of those type of things. And you're very thoughtful. And I would love to just kind of wrap with you about that and share your wisdom with folks and give you a chance to tell your story, which I think is really cool. But maybe start with just give us an introduction for like a minute of who you are and how you got to where you are today. Thanks, Michael. Looking forward to our chat today. Who I am and how I got to where I

am today. I was born in Miami, Florida from two really hardworking lower income parents. My father started selling flan like the Spanish custard, you know. And then afterwards, he started moving furniture and then he was furniture salesman his whole life. My mother, she worked in retail stores. And so very, very humble beginnings. First language was Spanish. Had a severe stutter problem when I was five years old, kind of led all the way through my whole life almost. Because of that Sutter problem, I was able to get a disability grants from the state of Florida, which got me good education. And to my parents credit, my two sisters and I were the first in our entire family heritage, family tree to ever go to college. So that was kind of my upbringing.

My father got really sick when I was in my early teens, and I started selling cut co knives to help ease the financial burden of my family. So I started selling a ton of cut co knives waking up at wee hours of the morning asking teachers go to the bathroom in the stall. and I would make cold calls to my friend's parents. They'd be like, you should be in the class right now. And I'm like, I know, but can I come over tomorrow, you know, after school to sell you knives? And so I started making six figures a year when I was a junior in high school, made more when I was senior and just continued that all the way through college.

I sold Kuckko every summer. I Google the most, the richest, most expensive zip code in the country. And it was this place in New Jersey across the Hudson River in Manhattan called Burden County. So I moved there and sold Kukkow Nyes every summer. So that was my upbringing. It was sales, sales, sales, hustle, grit, building rapport with people, connecting with people. I was a kid in the candy store, being in these ridiculous homes and mansions coming from where I grew up, we moved 15 times and 17 years. Biggest house we lived in was probably 1700 square feet, a lot of apartments and whatnot. So I was just giddy about the opportunity.

I got into technology afterwards. I was in technology for over a decade. First startup got bought by Dell. I became chief of staff to one of the leaders at Dell. After that, I joined a startup called DocuSign, which now everyone knows. We drew that from less than 100 people to the time I left. We were over 5 to 6,000 people. I was a global vice president, general manager of enterprise sales. And then I said, if money were no object, what would I do? And given my background where I came from of service working parents and being raised in this environment of service workers

that are just viewed as a cog in a wheel, no purpose, no mission, very little dignity that we provide them. As I grew up, I was like, this is the backbone of our country. I mean, this is the framework that our great country was built upon was these operating businesses. What would it look like if my wife and I just took some of our docusign equity and started buying some of these cash flow entities? I mean, it'll provide obviously a return, but more importantly,

they'll provide a platform to, like, impact people's lives and provide really good jobs. And that led to me telling a couple mentors and friends that were like, hey, I'll give you money. I'm like, if you give me money, how do I make money on your money? And that naturally birthed a private equity fund called Garden City Companies. And we buy small and mid-sized, blue and white collar, family-owned companies from owners that are seeking retirement. So that's what we do. We have five in our portfolio now after three years. And it's special.

I guess I wake up every day and do my dream job. Yeah, that's awesome. Well, so I'm curious, how do you, first of all, that was amazing. Like, like I talked to a lot of people and, you know, the percentage of people that can articulate their story in a way that resonates with other folks, like, that was just really, I mean, it was good. I'm sure you've had a lot of practice because you raised a private equity fund and, you know, I've done the same thing where you have to like sell yourself and hit on the right buttons. Like, were you always, were you born able to do that or do you feel like that was that level of what you just did? like was that a learned skill like and i don't mean to insult it it's not i know you're not being fake i'm just saying like man people most people can't articulate themselves the way you just did like how did that

come about um no it was definitely a learned skill um from when i was i mean from when i started speaking to people again selling cucko at 17 until probably when i was i don't 26 27 during those 10 years i like literally would be hard for me to speak like stutter so when i would cold call people. If I was cold calling Michael, if I was cold calling you, I'd be like, Michael, hi, this is Mike. So that would be it. Like, it would be extremely difficult. Many times I'd have to hang up because words can come out. So to do what I just did is a gift from God itself, you know. So it would just come from a lot of practicing, a lot of sharing my story with others, a lot of investor conversations, friend conversations. So it's come over time a lot. Yeah. I mean,

have you done anything to get feedback on it or was it just mostly trial and error like how did you how did you think about going about developing that story i stopped giving a rip about what other people would think and i um i call it the gun show it's like every time we meet people two people have their guns up and they're all about like how amazing i am and how strong i am and how i've never experienced any burden or heartache or anything and everything's just up into the right and i'm like that's total BS um yeah i've had a lot of heartaches and this is my story and my family wasn't the greatest growing up because of our financial situation and I wasn't the greatest at school. And the only reason we were able to go there was because my stutter and my dad is severe health problems. And there was just a bunch of stuff. And it's, I think what people like about it, it's vulnerability, it's authenticity. It's real. It's, it's raw, right? So I think probably what you picked up on my story more than anything was that you felt that it was real. That's it. Authentic. More, I mean, you probably didn't even pick up like Dell, whatever, the docks time, whatever. But it was like, man, like, I just captured the nemesis of who this man is, right?

And I feel like people that I speak to, they just hold back so much and they just give you this veneer, right? So when I ask you, I'm like, tell me who you are. Right here. I'm in Park City right now. And I was getting fitted the other day. And I'm having an hour and a half experience with this person. Like, tell me who you are. And they wouldn't give it. They wouldn't give. Oh, I was born here. I've been working here now for six years. You know? I'm like, no, like give me all of you, right? Like, be vulnerable, right? But people are scared to show them their true self.

Fear, I think the biggest thing that I think the biggest, biggest, biggest enemy that we deal with on a daily basis is fear. I think we are deathly afraid. I think we are little boys and little girls running around frantically scared. We're scared that we're not enough. We're scared that we don't have enough. We're scared that we're going to mess up. We're scared that we're not going to raise their children right.

We're scared that we're going to make the wrong decisions, that we're not going to be a success. We're scared that we're not going to measure up to our parents' expectations or our neighbors or our kids' friends at school or all of this stuff. We're just constantly running around frantically scared rather than living in freedom, right? It's like fear versus freedom, right? And so I think when we do that, we're just scared that we're going to expose ourselves and people are going to view us and see who we really are versus actually realizing like we're all, messy. I read my kids' book called like, you know, you're messy. And it's like, we're all messy humans. And that's the beauty in it, right? Is that together we get to show like, you're messed up and you're messed up and you're messed up and you're messed up and you're messed up and you shouldn't have.

And you did this, your child, you shouldn't have. You messed up on this business deal and it's okay. And like, we're all imperfect humans, right? And so we don't live in a society that does that. We live in a society that just shows everything up and how great we are and how we never mess up. And those are the people that we should listen to on podcasts. And those are the people that we should listen to on podcast and those are the people we should read their business books, right? It's all the best. But instead, it's like, well, my mentor told me was this, Michael, our success makes us respect one another.

Our vulnerability makes us love one another. So it's like you could respect other people based on their successes, but you only come to love other people based on their vulnerability. Yeah. It's really cool. It's really cool. Well, and so not to switch gears too much, but one thing, you know, I looked at, I looked at the website for your private equity fund.

And it's an evergreen fund, right? That's where you guys are structured. Yeah, we buy and don't intense ever sell these great companies. Yeah. And then it's super cool. I mean, one of the things when I first looked at it and, you know, you and I got connected because you because referral. And when I looked at it, you know, usually when somebody refers, you kind of look at

their website and see, okay, does this pass the smell test? And one of the things that was so interesting was like you're, what you've got this list of LPs. It's just like like kind of stupid. cool. You know, and it's like a combination of like professional athletes and like senior, you know, senior level executives and all these high power companies is, you know, so I was just like, wow, that's like super interesting because like everybody that I tend to work with is just a nobody like me. And so I was just curious, like, how did that like come about? Like what, what was

it about putting together your situation that was like, you suddenly have this like, I don't know, it's like an all-star list of people on the website. And then how do they feel about kind of your story? What brought them in, I guess, is my... So how'd you do it? I'm very curious. It's very similar to back in the day with Kukko, right? It's like people back in the... With any sales, they focus on the sale, right?

That's all they do. They focus on the here and now. They don't focus on that tomorrow, right? And so they'll spend all of their energy, all of their credibility on the sale. And they'll never think about tomorrow. And so when I did Kukko and if I was selling you and your wife, I would be like, hey, look, I'll show you what I have. I'll tell you who I am.

If you decide to buy or not, that's on you. But I am going to make an ask of you. If I do meet your expectations, if you are impressed or blown away or if you admire what I'm trying to do, right? My only ask is that you would consider inviting me or introducing me to other people, like referring me to other people because that's my livelihood. That's how I'll keep on going. That's how the dominoes will keep going. So I would completely take a sledgehammer to the burden and to the weight that you would feel like I'm getting sold. I'm getting sold.

I'm getting sold. And I would remove that from me. I'd be like, I actually don't care if you are. But the one thing I will say is if I do a good job, will you at least consider introduce me to friends? Right. And they'd be like, yeah, yeah, I can do that. That's not a hard ask. Right.

And so in that same exact manner of when I was 17, right, now it's the same exact thing with friends or investors or whatever. It's like I had nothing to ask of you. If you want to invest in Garden City, great, you can invest in Garden City. If you want to do this deal with me, great, you could do this deal with me. But let's build a friendship. And naturally, when you build a friendship with people, they're like, you've got to meet X, Y, and Z. You've got to meet X, Y, Z.

Because they just feel there's no transaction. They feel there's no pressure. They just feel like there's this authentic relationship that actually what I'm trying to do is I'm trying to give, give, give, give, give. I'm trying to out give them as much as I stink and can, you know. And so what they feel in response to that is like, I want to give, right? Like, I want to give. And so that's where it came from, Michael.

It just came from, it came from me having a mentor and talking to him. And he's like, you know what? You got to speak to this other guy. And then that guy's like, you got to speak to this other guy. And that guy's like, you got to speak to this other guy. And that's how it came. The other thing is when launching Garden City, I was very, very, very particular about who I wanted to be part of this journey and who I didn't.

I did not want people to be part of this journey that didn't value service workers. I didn't want people to be part of this journey that didn't want to see companies there'll be a light on a hill. I want people that when I shared what my purpose was, right, of creating these environments where workers could thrive and prosper and flourish and have dignity and respect and upward mobility. When I say that, did they just go into the next thing, be like, yeah, yeah, yeah. So what's your I or are you trying to buy and flip these? You know, what's the fun life of all? Or are they like, yes. I love businesses like Chick-fil-A or Costco Republics or whatever it is, right?

I love those. I believe that that's good business. It's not a nice to have, but it's a competitive mode. Those are the people I wanted part of the company. And when you latch those people on to what you're doing, to your why, they naturally get excited. They want to naturally help expand the mission. And they're like, you've got to speak to X. X is all about this too, right?

He's exact. He's passionate. He and his wife are obsessed with good business, are obsessed with redemptive work environments, right? So that's where it comes. It all starts with the why, all starts with the why, not the how. Yeah. And as I,

I mean, as I look back, you know, I raised a couple of venture capital funds going on 10, 12 years ago here in San Antonio. And like the majority of our investors were in it because they wanted to see that happened in San Antonio. There hadn't been a VC fund here for 30 years before that. And, you know, I think it's so smart.

Like, how do you figure out like the, the emotional connection you can make with people first and then say, okay, well, I'm going to build, I'm going to build on that. And you end up with missionaries rather than, you know, I think mercenaries surrounding your environment and your fund or your effort, which I think is super cool. One of our biggest things that I focus on is how do we cultivate a collective of mission aligned people, right? So we have our 55 investors, right? Governors, senators, professional athletes, Fortune 50 CEOs, all these different people.

How do we cultivate a family and really make it a collective of that? Right. And so we have an annual shareholder summit every 18 months, right? And I'm like, who can I invite to that? So I'm like, do you know who would be a great person here? I want to hear about humility. Who would be the number one person to talk about humility? What about the CEO Boeing that two planes went down under his watch as CEO, right?

In the Philippines or Indonesia, I forgot where it was somewhere there. And what about him talking about bleeding through failure and humility? So I reached out to him. I said what we're about, what we're trying to create or why, I'm trying to create the world's most caring holding company, right? He was gladly able to come speak, right? It didn't cost a dollar. He wants to be part of this, right?

I was like, who would be a great, great, great business leader that came through a family-owned business, right? They could also talk to the political climate, right, that it's not left versus right, but it's like, it's actually all of us being united. So I reached out to Governor Bill Haslam, right? That was an eight-year governor of Tennessee that he sold a flying or pilot flying Jay to Brickshire Hathaway, right? That owns of Cleveland Browns and the Nashville predators, right? Reach out to him and he's like, I would gladly come speak to this. So when you asked. So can I interrupt you?

Yeah. So you went from like zero to five, like Governor Bill Haslitt shows up. Like how did you, you said you reached out? Like, how did you actually do that? Like, what was the, what, did you just like cold email him? Did you get a referral? Did you send a letter? The smoke signals, FedEx.

I'm a huge, huge, huge fan of warm introductions. And I'm a big fan of casting out of vision. And naturally, when you cast out of vision, somehow I call it God. Other people call it the world or whatever it is. When you cast out of vision, somehow things just start lining you have towards. towards that vision, right? And so I've always had this vision of everyone's talking to me about Governor Bill Haslam. And I've never asked anyone for an introduction or anything like that in my life, but everyone's like, man, he sold his family business for billions of dollars. You know,

he's strong about his beliefs. He's strong about leaving this country, song about caring for the service worker. And so me and a gentleman are in the process of writing a book about how to sell your small business. And so he was thought, so I was talking about launching this at our shareholder summit, this author. And I was just telling him, I was like, I would love like for a keynote speaker to be Governor Bill Haslam. He's like, I know Governor Bill Haslam. I gladly put you in touch. So you just put me in touch via text. And we met for dinner, me, him and his wife a couple weeks ago. And I told him my, it's like, I love that you come speak and come out and meet our investors and hear what we're all about. And he was like, I love what you're doing. It's not just private

equity. Buy a company. Get leverage. Buy it and flip it. Go on to the next. All for making. money. Like, we have a short life to live. People want to live for a purpose. Yeah, no, I hear you. Okay. All right. Thank you. So let's maybe go back to an inflection point in your life that I think was really relevant to the people that listened to our podcast. So you're working at DocuSign. And it was DocuSign, right? Not EchoSign. Definitely DocuSign. Okay, perfect. Sorry. I have the memory of a goldfish. So that's all my problem. So you're working at DocuSign. Like, you've, you've You've made some money, but not like stupid island money at this point, but you're a W-2 employee, right? And walk me through kind of that transition of how you go from teammate working at a

startup to deciding to buy like a business. And like, what was that, what was that thinking like and what were, what tactically did you do to go make that happen? Wonderful question. It's one that always gets me really emotional that I hope I never lose the, lose, lose the moment of the feeling of what that season was like. Because, yeah, so I thought, I mean, the goal at DocuSign was we're going to be a unicorn. We're going to be a unicorn. Like, we're going to be a one billion dollar business, right? This was in 2014.

And we achieved that unicorn status. And we were filing our S-1 to go public. And a large tech company, you know, came to us during that S-1 filing and they tried to acquire us. And I remember going home to my wife and being like, sweetie, they offered us. $2.9 billion. I was like, if that happens, I'm going to most definitely do the work of my dreams. I'm going to just like do this. I'm going to buy dry cleaners and car washes and genitorial companies because if that happens, you know, we could just live off our, live off our interest that that transaction happens, right? And that transaction didn't happen. And then we went public.

And then we went public at like $6 billion. And it hit 10, 15, 20, 30, 40, 60, 60, 60. $60 billion, right? I mean, it was bananas, right, during COVID. And what happened was greed, if you want to be honest with you. It was greed. It's seen every 90 days just stock going up and up and up and up. And so I was delaying what I said was my passion and what I said I would do just because I'm like, another 90 days to see what happens to the stock in another 90 days, right? So you're talking about to make sure I understand. You're talking about you're on that golden handcuff ride of the stock is going way up and you've got your, you know, what employee number were you at DocuSign? Like how early were you?

Probably less than 100. Yeah. So you're making a lot of money. I won't do like some other podcast hosts, it would be like, okay, let's talk about exactly how much. But anyway, so good. You're watching the money and it's like every time the stock doubles, like your net worth, you know, potentially from that stock is going along with it. So but you said, so I understand, like what kept you there as opposed to going after your dreams was the golden in handcuffs of this kind of like, oh, man, I just increased my net worth 20% yesterday, that kind of thing. Exactly, exactly it.

That's exactly it. And it's, on one hand, it's what the world does, right? It's like, oh, well, you know, and to your point, I knew I was going to do Garden City since July 2018. So, right? So we went public in like 2017. In 2018, I knew I was going to do Iron City. I didn't leave until February 2020, right?

But the way that I saw it was every 90 days, I'm like, what I just made is more. more than I'll make in a year doing Garden City in the last 90 days, right? So just another 90, in another 90, in another 90. But then it hit when it was basically January of 2020. And I was just like, I had this deep, deep, deep calling conviction that I just really feel called. I feel this calling. I felt like there was a wind behind my back and the words were being flung wide, right?

That there was just this clear calling. Like you were called to go by small mid-sized companies. And I just felt like it would be a misservice to myself to continue to ignore that calling. And so February 14th, Valentine's Day of 2020, I left DocuSign. And by the end of that month, because I was already starting to have conversations with some of my mentors and friends, we did our first close of like $25 million. And so, and then COVID hit three days later on March 3rd or whatever it was. So you went out, so you went out to go raise the fund before you had a deal. you just had a thesis at that point? Was that kind of the approach? Just a thesis, no deck,

just a company name, never done private equity, didn't know anything about investment bankers, intermediaries, proprietary channel, diligence, didn't even know what lower middle market was, and know anything about, didn't even know what getting leverage from banks looked like, zero, zero, zero, zero, zero. I just had a deep why, just had a deep conviction that if these businesses that exist out there can make one, two, five, ten million dollars a year, right and they are probably not radically caring for their people and they're probably not implementing great Silicon Valley docu-sign like technology to drive efficiencies and they probably if they're B2B companies they're probably not they probably don't have world's class executive

introductions to the C suite if they don't have that and they're making millions of dollars per year what would it look like if you did care for the people and you didn't infuse technology and you did have strategic introductions. That was obvious. Yeah. So at this point, you're leaving. At this point, you build up a pretty good network of folks that you've known through DocuSign. You've developed some incredible skills as you're demonstrating today.

Like, I could just hear it and everything you're talking and how you talk about things. But you're going to raise this first fund and you're doing it potentially the harder way, which is you're raising funds before you have deals. Like, what sort of things did you do to make sure you could go raise? that money. Do you have an outside, outsized kind of GP commit? Did you find an anchor who would, you know, you cut that person a special deal to be the anchor kind of, like, how did you go about putting that together, given at this point, like, you're just, you know, no offense, but just another middle market buyout group, like, kind of, you know, with a better thesis and a better

story and like a great. At this point, I'm a guy that did really good selling Cutco from 17 to 21. and I was a manager at Dell and then I got a chief of SAV at Dell and I was lucky enough to ride the DocuSign trained from a startup to 5,000 people. I mean, that's what I want. The good news is on this podcast, not only do I throw in the questions, I also throw in some insults, so you're welcome. You can have those for free. Anyway, I didn't mean it that way.

But like, you see what I'm saying? It's like, like, what did you, you know, frankly, the reason I'm asking kind of this line questioning is like people are most interested in understanding how you did it because they want to copy you. So I'm like, okay, what you tell us what you did. Yeah. Look, the only insult I could give you is I have better hair than you do. Okay, Michael, that's the only answer. Well, hey, this is by choice, man. So it really comes down to there was over a decade of building relational capital. And that's what it was. I mean, I was a chief of staff at Dell. So I was traveling all around the world 300 days a year with the CEO and all the executives at Dell going to world's economic

forum in Davos every year, right, meeting all these different people. And so I built a lot of relational capital. Then it was DocuSign. I worked for a multi-billionaire named Keith Kroc. He started a Riba, chairman of the board of trustees at Purdue, Angie's List, first investor of box, Yelp, right? I was his right-hand guy. I was an extension of him. So every single person that he knew and then invested in DocuSign from day one, they became my friends. I would go into Chicago and stay at the CEO of McDonald's Alice. And then I would go and stay at the CEO FedEx or Office Depot or Dell or Samsung or Salesforce or all these people. So it was relational capital, relational capital, me working at DocuSine, working at DocuSign, putting in the good work, you know.

My mentor was a CEO of Intel. He still is today, Pat Gelsinger. He was my first investor, right? So it was all these relational capital that I just kept putting in. And then when I went off to go start my thing, these people knew me from 2011, right? So they knew me for almost 10 years. And so they knew that I was consistent. They knew that I was honest.

They knew that I worked hard. They knew that I would show up. They knew that I was at least humble and tried to be smart, right? So when I called Pat Gelsinger, this is the way it worked at Intel. And at the time, he was a CEO of VMware. I'm like, Pat, I'm not going to do tech again. Like, I'm not going to, I'm going to follow my passion. And there's these small businesses.

I don't know, you probably see them. They probably service your headquarters or your home or whatever. They're all around us. They make a lot of money. We can buy them at a reasonable valuation. And they cash flow every year. So with your money through cash, it'll pay you back in a couple of years.

Then every year after that, it's called mailbox money, Pat. I'll just be coming in mailbox money. So the return will be there. I don't know if it'll be 15 or 20 or 25 or 30% cash on cash returns, but it will be there because these businesses have been around for a really long time. right and they're predictable we're not going to buy cyclical businesses and we're not going to buy startups and they're going to make at least two million they're going to have a real management team right like common sense things and and that's it and pat i'm going to return all your money to you before i make

a dollar i'm obviously going to make a dollar on management fee so i have a salary and i can hire a couple other people and that's going to be the only way we live right it's going to be a little bit of management but the money that i take from you to go buy a janitorial business or whatever it is we're not making a dollar in that business until you get all your money back and that's it and Pat, the other thing is, the reason why I'm doing this, I don't have to do this to make money, right? I can retire if I wanted, as you know. But the reason why I'm doing this is because I want to radically create amazing work environments. I want to infuse technology to make the process he's better. I want to bless the people that work in those companies. And I want to actually

use you, Pat, on making strategic introductions to open doors if we buy a B2B business. You know? And he's like, what about that? What about that? So how, um, how is the so how is your fund structured so a lot of people have still i think are still trying to figure out how to do permanent hold models in funds right so you end up with these kind of fund structures where it's like 30 years type type stuff which is how you know some of the the more prominent funds out there have done stuff then there's like cold co models where people buy equity in the companies that's that's to some extent what we did for our software business like so how are you guys structured is it in terms of how you put stuff

together and there and secondarily the economics for you kind of as the person doing all the word yeah well first off um i didn't know a lick about the space so there was a guy named brent bshaw um he runs a company called permanent equity and i listened to every single podcast that he did and i learned a whole lot about it um through him um and he's one of my best friends i spoke to me this morning actually about the exact question that you just asked around around the different structures um and so um all credit goes it to him for helping me figure that out But the way that we did it is I was just like, I just want to have a company that what that company does is it buys companies.

Like the operations of this company is that it buys companies. And so my attorney told me, then just create an LLC. And that LLC is a company. It's not a fund. It's a holding company. And the operations of that holding companies is it requires other businesses. And I'm like, well, how does that work if I bring on investors? They're like, well, they're just buying into the LLC.

and they just own a piece of the LLC. And so if you raise $50 million, which we raise a little over $50 million, but if you raise over, if you raise $50 million and someone gives you $5 million, that investor then owns 10% of the holding company, right? And I'm like, well, how do I make money? And they're like, oh, oh, oh, well, when you buy that a company, that guy that put in five of the $50 million that owns 10%, he owns 10% of that, whatever it is, that HVAC company, right?

or that accounting firm. He owns 10% of that accounting firm. And then once he gets his money back that was called down for that accounting firm, he now gets diluted by the percentage of ownership that you and your management team now get brought in. And that's the way it works. It's a holding company. They commit money to a holding company.

That holding company calls the money down to buy other companies. And that's it. And we don't have to buy and flip these. There's not a fun life, you know. We could hold them. We could just cash flow of them. We have a shared services model that we have a. operations and finance and recruiting.

Pretty soon we'll have technology. And so that's the way it works. And then after we deploy all this capital, we will then just go ahead and raise more money into the holding company. And so you get paid. So you end up taking equity stakes in the subsidiaries or you don't, you do not have, do you not have equity at all in any of the main companies or the subs? So we, we are our investors, we use all their capital. to purchase the companies, kind of look at them as the platforms underneath the Holtzco. So we use their capital to purchase the platform under the Holtco.

And then once they get all their money back on a Holtco, a platform by platform basis, we then show up on that ownership cap table saying, hey, we're here, right, at our percentage. Typical in private equity, 20%, right? So just say that we show up as a 20% owner saying, hey, you used to own investors 100% of this of this accounting firm, now you own 80% and we showed up because you got all your money back. So then after return of capital for the subsidiaries, then you guys show up on the cap table because it's much more advantageous for you to get paid as owners through distributions and whatnot. Well, I guess it's all still ordinary income.

So it doesn't really matter how you get paid. Yeah, it's actually the same. And we have a function. So let's just say that you're my $5 million investment. investor. So you own 10% of the money that we raise. So we go buy a company and we have to put in $10 million. So the call down is 20% of our fund. So I need to call down 20% of your $5 million. So I call down Gurley's $1 million every five. And now that next year, I give you back at a cash flow, in the next year, 200, and the next year 200, and the next year 200, that's the business

stays file. So over five years, in that specific example, we, we are just living. on our salary of our management fee. And you are getting recouped through cash flow of that business, right? 20% cash on cash returns, 25, whatever it is, you're finally getting recouped. So in five years, you got your million dollars back. On that six year, right, and depending on what multiple we bought the company at, if we put any debt and how they grew, right? Those three things, multiple debt and growth.

On that six year in this example, you now are still getting mailbox money. You still own your share of the company. It's just that there's now another person in the waterfall. that is now getting, you know, a portion of the profit. So you were diluted by 20x percent, right? So you were diluted by that. But you're still getting mailbox money. However, every five years, our management company,

we come in with our auditing firm and our Q of the firm, and we appraised the entire business. And we say, hey, hey, hey, we bought this company for Forex, and now it's worth six because it's, more EBIT. We bought this company for five, now it's worth eight, right? And we let our investors know, hey, investors, you could actually sell, you could actually sell and liquidate some of your shares at what the current multiple or what the current price of our companies are worth. Do you want to do that or not? It's totally up to you. If you don't, you just keep rolling and getting your

cash-old distribution. If you do, it would be just like there was a private equity transaction, you know? So it's basically an internal secondary market. And where does that cash come from? There's a, there's a sequence. So first, they could come from GP. So me and my partners, we could buy them out through our own capital, our own cash flow. There could be a dividend recap. There could be through the other LPs, right?

So we could put it to the other shareholders and be like, hey, if you guys like this, you could actually buy Johnny's over here for six times, right? We could show you how the returns of that work and you could own more equity, you know? If all of those say no, so no more sort of debt or dividend recap, no more GP wanting to buy, no more LPs wanting to buy, then they could bring in the third party. The goal, though, that I'd tell everyone is, I hope you're not investing in Garden City

to liquidate your shares in five to seven years, you know? I hope you're doing this for compounding kind of interest machine, you know? Yeah, so it's really smart. So they get, then if they do sell, they get long-term capital gains or because you're under 50, potentially QSBS as well. I don't even know. Which I guess is that why you kept it at 50? No, I have no clue what that is.

It's called qualified. Okay, anyway, sorry. I'll shut up. It's called qualified small business stock, section 1202. If somebody sells, sells, own shares in a C-Corp, it's a very tax advantageous thing or an LLC tax as a C-C. Yeah, I know zero about that. I'm sorry, this is your interview. I will not be, I will not be spouting to you.

It's tax laws that I learned. It would be benefit. Yeah. Anyway, let's talk. We'll be BFF about QSBS. It's God's gift to, it's God's gift to small business. business investors. So what, you know, as you, we're running out of time here, but, you know, I'm curious, as you look back over this journey, you know, what kind of learnings of this transition

from W2 to being a fund manager buying these type of companies? Like, what sort of things would you go back and tell, you know, 2020 you, hey, like, really, I wish you to, I wish you'd do this differently. It'll save you a lot of time or headache or make you a lot of money. Like, are there a couple things that come to mind where you advise old you, hey, you should definitely do this? Yes, there's a lot of mistakes that I make probably daily. But one of the first things is that one of our strategies coming out of the gates was we're going to reinvent how private equity finds deals. We're going to go out there and we're going to set up a bunch of different systems to proprietarily reach out to business owners. And we put a lot of time, energy, effort and money into that to reach out to roofing businesses or HOA companies or whatever.

industries that we like, and we were like, hey, you know, we like to buy your business. Here's what we are. Here's how we're different. We got a lot of hits, a lot of hits. And I was like, this is amazing. The activity is 10 out of 10. The response ratio is great. But it didn't mature to anything.

Like after a year and a half, it didn't mature to any real deals. And I was like, why not? And then I realized it's because we were like, we, it's like knocking on someone's house, knocking their door, like, hey, I want to buy your house. and then someone's like, you can come in and we're like, oh, they're letting it sit. They're letting a send. That means that they're clearly interested. And then we're like, can we look in the closet, aka, can we see your financials?

They're like, you can look in our closets. Here's our financials. I'm like, oh, they're really serious. Like, man, this is a proprietary deal. It's going to be a slam done. And then all of a sudden, we're like, okay, well, we're going to make you an offer. Okay, we're going to, yeah, make you an offer. And then we make them an offer.

Like, cool. Thank you so much for telling me that my house is worth a million bucks or my business we're 10, but like, yeah. So we're going to do a deal? Like, well, I'm not really interested in selling my house right now. Where am I going to go? Like, you knocked on my door. I'm not interested in selling my business right now. I'm like, wait, but we've been talking about all this. Or it's like, or I'm not sure my house is worth a million. Maybe I hire a realtor, aka investment banker. It might be we're two, right? I'm like, well, why did you allow me in, right? Or there's not an in penny event. So what we realized was after wasting so much time, energy and effort, it's like, you need

to find business owners that they themselves came to the point after many years being like, it's time to sell. I'm going to sell. I'm going to find out the value, right? And so that's a big lesson learned. I know search funders do it that way and some have success, right? But what we've realized is like, let's get all of our word out to people that buy the sell businesses for a living and just let people know, like, we're not going to ping you business owners.

If you're ready to sell, you ping us through accountants, lawyers, intermediaries, and so forth. That was a huge lesson learned. Yeah, so shifting from doing campaigns towards the owners themselves because you don't know who's actually really motivated and who's just kind of an inverse tire kicker and instead running campaigns. A lot of people inviting you in their house showing you their goods all to know that they feel they feel seen. They feel they matter.

That's like someone likes my business and you're just wasting so much time and money. So how do you how do you go about running effective? campaigns to intermediaries. So there's business brokers, accountants, lawyers. You mentioned, is that kind of the universe of folks? And what, what have you learned about doing that? Yeah. It's just, it's, it just takes a lot of energy and a lot of intentionality and setting him good processes. So we have someone on our team focused on that, that he used to work at investment bank and he was an IR before in Corp Dev and all that. And all he does is he figures out who are the top intermediaries, not kind of where we look to buy businesses, mainly

Southeast, like from Texas all the way on over to Florida, you know. So in the Southeast, looking for those brokers and intermediaries and investment banks, letting them know who we are. And we're kind of weird. We're kind of like, hey, if you're going to send this out to 50 people,

it's probably not going to work because we're not going to get into a bidding war. But if there is a business owner that cares deeply about his people or doing a simple transaction with no debt or cares about people buying and holding forever, sent it to us, you know? And so we really try to stand out to like mentally put a nugget in these bankers heads of like garden cities different and and there is a lot of just reminding them and pinging

them you know um so that's what we do is we really try to stand out to be different so what are the tactics like do you have a do you have a set process that you run i mean what what like could you walk me through what like going from zero with a relationship with an intermediary like that how do you get that to where that's like do you have a process for that how do you think about it or is it just Yeah, finding intermediaries that have done businesses that have sold businesses in the past. That's what we like, blue and white collar service companies, right? That are, you know, it's hard to find the exact transaction amount, but that's somewhere, you know, minimum 10 million all the way up to 50 million of enterprise value, right? 60, 70 million we could go up to.

But finding companies that do white and blue collar service companies, finding intermediaries that are in that lower middle market of even up between 2 and 7 million, right? So finding those, once we find those, go to their website. Once you go to their website, figure out who are the key people to reach out to. You probably don't want to reach out to the managing director, right? You probably want to reach out to kind of the director or VP or principal that is more kind of in the deal rather than the MD that is kind of bringing in, getting brought it to close the deal. He's not going to be doing shouldn't hear about your firm, right?

So figuring out the right person using different tools like Hunter I.O. or Zoom info to figure out what their emails are, right? So you just type in the company name, you can see what their format is, right, on how their emails are set up. Sending that person an email, letting them know, hey, I want to talk to you. We have a committed fund, blue and white service, family-owned companies, two to seven million to be able to buy and hold. No debt. Here's our investors. Here's what we look to buy and grow and hold them, hold code model, right?

Have a call with them. And then just set them up on a drip campaign every kind of 60 to 90 days. Just, hey, don't forget about me. Hey, don't forget about me. So forth. Here you. Okay. Very, very cool. Well, awesome, man. This has been super fun. I learned a lot. Hopefully it was fun, even with all the insults. How can our listeners be supportive of you? What would be something helpful that we could do as a group? And thank you for spending the time for us with us today. Yeah, thanks. If you know any blue and white call or service companies, you know, we pay $100,000 as a finder's fee, which is pretty unusual. So anything, time anyone sends us a business. Of our five, three of them have happened in this way. People have sent us a business. We send them $100,000 finder's fee. Plus, we also donate $25,000 to

the charity of their choice. And so that's what we do every time someone sends us a business. So if you ever come across the business that you've come across that you don't think works for you or too big or too small or anything like that at all, send it over to us on our website or send us my email at Michael at join gardencity.com. So we want people to join us on this journey that we're on. If you know any good operators, I mean, across our five companies, we're looking to hire controllers, operators, salespeople, et cetera. So people that are passionate about the space, feel free to put them in our talent pool or our talent network on our website. And if I could ever be of help, ping me.

Super cool. All right, man. Well, thanks for being here. This was great. And I think we'll be super educational and helpful for everybody. So thanks again. Thanks, man. Thank you all very much.