Chit Chat Stocks - Can Anyone Buy a Small Business? With Paul Cerro

Episode Date: December 22, 2022

Paul Cerro is the CEO of Cedar Grove Capital. As he joins us today, Paul describes the transition that he is making with his investing decisions. Paul is focusing on buying small private companies. Listen closely to learn more about this strategy and how Paul expects it to play out. Enjoy the show! ***************************** Interested in becoming a member of 7investing? Subscribe with code “MONEY” and get $100 off your annual subscription for life: https://7investing.com/checkout/ ***************************** Want updates on future shows and projects? Follow us on Twitter: https://twitter.com/chitchatmoney  Subscribe to our Substack to receive free show notes and charts that go along with every episode: https://chitchatmoney.substack.com/ Interested to see more of Paul's work? Check out their Twitter here: https://twitter.com/paulcerro?s=20&t=6Lm5fCKPvI7wyNNKFZTFdg Contact us: [e-mail] Timestamps Paul's Inspiration | (4:52) How to Find New Businesses? | (17:31) Public Equities | (36:45) Disclosure: Chit Chat Money hosts and guests are not financial advisors, and nothing they say on this show is formal advice or a recommendation. Brett Schafer and Ryan Henderson are general partners and portfolio managers at Arch Capital. Arch Capital and its partners may hold securities discussed on this show. Learn more about your ad choices. Visit megaphone.fm/adchoices

Welcome to Chit Chat Money. This is our Thursday deep dive show where we interview an analyst on a single stock. Oh, not a stock this time. An individual business, let's say, because this is a bit of a, I guess, unique episode, not one that we typically go with. We're typically looking at public stocks. This was more getting an understanding of what it's like to buy a small business. Paul went through the process for the first time and being able to share that experience over a podcast format, I think can be helpful, maybe not for all of our listeners, but for some of the listeners that have thought about doing this themselves. Yeah. And it is not just Paul with no last name. It is Paul Cerro, who's been on the show before, runs an investment fund and

had just started up a new call it project, call it business, where he is acquiring small businesses. These are very, very small. He goes through a lot of the details here, but it's quite interesting, this strategy where there's tons of small businesses out there. He goes through the numbers where I think there's $30 trillion in estimated equity value. And that's just an estimate, but it's really, really quite large from the boomer generation and Gen X and older that will be coming on the market in the next decade or so. So, I mean, the opportunity there is large, but a lot of people do not understand. And we're one of those two, how this sort of things work. So him going through it, I think was quite helpful. Interesting case study. Yeah,

you're not going to be able to buy the stock. Apologies, but we thought it was interesting nonetheless. All right. Well, before we get to our interview, we want to talk about our sponsors for the show, our exclusive and presenting sponsor, 7investing. For this in particular sponsorship, I wanted to talk about what you actually get in an article. So just for reference, and new listeners. Seven Investing gives seven stock recommendations each month. They're thorough picks. So for each one, they have a long write-up. And within that write-up, they touch on a lot of the same things we touch on in our Not So Deep Dive. So they give a really simple demonstration of what the business does. They talk about why

they actually think it's a good investment and talk through any underlying trends that they're seeing, management, the vision, valuation, and a lot of the key risks. It's thorough. There's a lot of graphics as well to kind of help those that are more visually inclined through charts like myself. So it's always nice to have that. And then there's a video at the end of each article that shows them pitching it to the team and they get feedback from their team. So you can really get a lot of value out of looking at all of these. Not to mention they already have more than 200 different companies that they've recommended. So if you use our code money at checkout, you get a hundred dollars off the annual subscription.

We are forgetting to say this, but at the end of each interview episode, at the end of each deep dive episode, we are including a snippet of our conversation that we had with Simon Erickson, the founder of Seven Investing. If you were interested in this and you don't want to just go through the minute and a half pitch we have here in the minute and a half advertisement. It is a five minute overview of what seven investing subscribers get. So if you're on the fence, listen to that and maybe you'll learn more. All right. Well, once again, the code is money. And without further ado, here's our interview with Paul Serro. Welcome to Chit Chat Money. On this show, host Ryan Henderson and Brett Schaefer interview

industry experts and riff on the world of investing. As a quick reminder, Chit Chat Money is a CCM Media Group podcast. Ryan and Brett are also general partners at Arch Capital, and Arch Capital may have positions in the securities discussed in this podcast. Anything discussed on Chit Chat Money by Ryan or Brett or any other podcast guest is not formal advice or recommendation. Now, please enjoy this episode. all right welcome in today we are joined by i want to say multi-time guest i'm not really sure what did we talk about last time it was petco right long petco shorty shorty thesis or build a bear build a bear is uh we talked about that that was that was that was me and him me and him

did the research but um stratton's the public speaking correct so yeah chewy and uh pecto and Yeah. And this is going to be a unique episode. I think some, you know, it might not be maybe more of a learning lesson than public equity takeaways here. But big news, Paul's Cedar Grove Capital officially is the owner of a small business now. So I guess let's start with your maybe inspiration. Like, why did you choose to go down this route? Because if I remember correctly, I think the goal was to be a long, short fund with public equities, but I guess you've now gone the private route as well. Yeah, no. So it was actually when I first started Cedar Grove Capital, it was a long, short hedge

fund. And I always thought I would just stick to that. but the the issue is and like that's that's what i figured out in the first half of the year it's like yeah you can in general long short is kind of like dying um you can kind of have some superstars that live within that space or you know that strategy um most have kind of pivoted to just long only um but yeah this first half of the year really uh really put into perspective just how hard maintaining a long short book only is especially when it comes to volatility that's been off the charts so um while so your group capital management is is the public side of

things when you know when you're seeing the market like collapse for like depending on where you're investing in no reason or little reason um it made me think like well you know you have all these funds who have invested in the public side but then also made private transactions right like the biggest one is tiger global management making all those private investments into tech that got completely crushed and they're doing absolutely terrible but on the side of that i'm like but what if you actually did public and private except the private side is a little bit more logical right it wasn't like trying to invest in the pot pie in the sky ideas of tech growth and what that meant was cash flow, cash flow, cash flow. You become an owner, not necessarily like a speculative

owner in the future, but like I can get paid today if I wanted to get paid today. And that's when I kind of pivoted from just a long, short book for Cedar Grove Capital Management, which is transformed into a multi-strategy fund just because it's a lot, it opens the doors for ways to make money, but then also making Cedar Grove Capital Holdings the private side of the business, which is investing, not investing, I shouldn't say investing, it's more just acquiring and rolling up small businesses. So yeah, I can still have the public exposure through Cedar Grove Capital Management, but then Cedar Grove Capital Holdings will be the private side of things where I can get

paid today with the businesses that I own because of me just outright owning them. Yeah. And we're going to get into the specific investment because I think people are interested in the process and how it works, but what's the structure? Do you have the same outside investors? Is it two separate funds or is it just a mix? It's different. So Cedar Grove Capital Management, which is the public side, that's like managed money. Cedar Grove Capital Holdings, since that's the holding co, that encompasses Cedar Grove Capital Management, which is a public fund and anything that I roll up into that.

So I own a hundred percent of that. And that's kind of how that's structured. So it's a holding company that has the public fund in there, but then also what will be all the other smaller entities of private businesses as well. And that's kind of how I structured that. well i imagine it's probably and i guess you'll maybe it hasn't said it yet but i imagine it's probably pretty nice to not have prices quoted to you every day for what your business is worth you know what yes because like you know i said this whole year i've been sitting in front of

the screen like why is this dropping five percent today i can't find a set i can't find a single reason why it's dropping and you know yeah you're seeing stuff like tick by tick which is obviously not what you're supposed to do but like in a market volatility like this you're kind of like biting your nails to the point where you know like there's nothing left um so while that is true i will say that so instead of focusing on the tick marks you're now focusing on your like daily or weekly pnls which is kind of like same same but different more more on the operation side okay let's let's talk about kind of the process that you went through here um how long did it take from going from, all right, I'm interested.

I would rather have something that's not quoted every day and it's going to generate real cash for me to finding a business and closing on it. Yeah, so to put it into context, so I'm dipping my feet, not even my feet, sorry. I'm dipping my toes in. And for everybody that's listening, what that means is not like I'm buying out there

going and buying a $10 million business or a $20 million business. I'm actually buying a few hundred thousand dollar business. So this is kind of like on par with what the cost would be if you bought a house, right? Except instead of you living in said house, I'm actually getting, there's operations under it, there's cashflow, et cetera. So when everyone is listening to this, it's more put into perspective of like the average Joe, I would quote unquote on that now, I don't know what the average is anymore, could

potentially go down this path. So, and I wanted to do that because I didn't want to like put too much capital at risk god forbid i screw this up you know it's like hey going with a small little venture um i can go with a smaller deal so i was looking at deals um back in august actually because that's something that hit me in the face i was like i gotta diversify because this public stuff is not going to be getting me the returns that i want solely um so i started looking around in august you know i wanted to look at certain key attributes of businesses that i'd like to acquire one is that i needed to have like some kind of knowledge in it and since i invest in in consumer companies um it was kind

of like hey it's going to be consumer focused and that kind of like narrows down your list because you know it's not going to be i'm not going to buy a concrete you know slab maker or like brick laying company i'm not going to do that right i'm not going to buy sass companies because i don't know sass companies i can i can try to but i don't know how to you know um you know grow them And so, as a consumer companies, you know, within the space of, I wouldn't say recession-proof, but recession-resilient. And there's a very clear difference between that because it can still be affected by a recession, but just not as much, right? So, it needed to have low underlying trends of cyclicality. So, like, some people are just going to need it, right?

and it's actually something that not only would I know but also something that I would actually be like remotely passionate about because it's not it's not just like cranking numbers on a spreadsheet right if I'm not going to be invested into the business and it's almost like I'm not going to be caring as much which you know is obviously not good so I kind of narrowed down my search and that kind of landed me in the pet business because no matter if there is a recession or a boom you need to take care of your dog um and the only reason why you wouldn't take care of your dog is for two reasons actually one you're a negligent pet owner or two um you gave up your dog because like the recession was too bad or something right those are the only like real reasons why it would

happen and given how the trends have um you know been moving uh toward in this space you're gonna do it. So pet services is what I landed on. And specifically about grooming and bathing. So there's always going to be people who need their dogs groomed. There's always going to need people who need their dogs bathed that they don't do it themselves for whatever reason. And, you know, there's also the ancillary services too, that you need like nail clippings, eye cleanings, ear cleanings um uh slight trims you know um it's all that stuff that it's basically like dog maintenance i would almost i would almost chalk it up to like a woman getting her nails done like nail uh whether it's her pedicure or manicure stuff like that that's kind of what i would nail

it out so landing on pet services specifically grooming and bathing um but yeah that's what i landed on are you leading uh just so listeners understand because i think you know there's people out there that are listening in the investing world that might want to replicate this someday or something similar are you leaving the owner uh running the business and you just own it or sorry sorry the the previous owner running the business still or are you trying to operate this thing um i guess that's a good that's a good question because i think a lot of people when they do buy out businesses they they would rather keep the owner on so that they can just It's like, hey, I'll just pay you a salary, you stay on, and then I'll just reap whatever benefits basically come out of that net, right?

My owner, the one who sold it to me, she wanted to move. So that's kind of why she was getting rid of it. She's like, hey, I want to move down south. I am tired of New York. It is too cold up here. I hate it. So that's why she wanted to sell it. But she already had a staff.

so what essentially ended up happening was um you know i bought it from her you know she's out but she part of her part of the contract was her training not only myself but then the current staff to basically operate uh without her and that includes you know getting a manager in there to take her spot so it's not me really running the day-to-day per se it's going to be the staff that's already there, plus the manager. And then I would be checking in on it and making sure that I can do whatever I can to improve the business, whether it's operationally or growth-wise for marketing, et cetera. So in this particular case, the owner did not stay on, just isn't being held on for contractual training purposes. But then after that, she's free to go.

Was this an intimidating process for you? A hundred thousand percent. I did not realize how complicated this was because it's so easy. Like when you're buying a public equity, right. You're just like, Hey, you know, give me like 10,000 shares of XYZ. Give me long up until this price, you know, et cetera, et cetera. Like you're, you're, you're, you're executing on an order that could be filled in like a millisecond. And that's all, that's all it is too. The only thing you have to worry about is just like your risk exposure and like what you think is going to happen here is like, okay, legalese, like you got to have paperwork. that's got the comma the commas and the periods to a t you got to make sure that you know like your your bank that's financing which i did sba financing is um you know able to not only facilitate it for you but then also like kind of like not have issues with the deal because you know there's there's there's certain leeway that banks like to have when it comes to funding so make sure that you're not like over leveraging yourself um so it's a ton of paperwork gathering proving who you are, proving who they are, making sure the money makes sense, making sure the

financials make sense, making sure that the bank is not going to get screwed over and lending you money because rates now, SBA goes off of the Wall Street prime rate, which people don't know. It's basically an aggregate rate of what banks are lending at. And that's been skyrocketing with the Fed's fund rate. And then on top of that, you get a spread. So you're talking like, at this point it's almost no yeah at this point it's double digits uh for percentages so you know you got to make sure that the business is healthy enough to take on that level of interest rate on your debt you know this is a bunch of all this like paperwork that needs to get done before you even get the before you can even distribute the money even get the money and distribute the money

um so it is not for the faint of heart i will admit that but it's definitely i learned a lot in the last three months. Yeah. But I feel like there's some sense of security in buying public equity because you know that there's a collection of investors and there's a different management team and you're really hands-off and there's, I don't know, some confirmation or comfort in thinking that, but when you're buying a business outright and you're the sole owner i imagine that process can be uh yeah maybe not for the faint of heart um so how did you get in touch with the previous owners yeah it's actually funny because you know starting from scratch you know and again this is a few hundred thousand dollar business so

or deal so it's not like you know i'm using you know insider network here i actually went to a site and it was funny because uh i saw it in some youtube ad actually not youtube sorry it's some youtube like interview or podcast or something and it's called biz by cell it's like the best or the biggest um online listing place for businesses uh to to sell themselves um and that's actually how i found the her and the business um and you know immediately kind of just like jumped at me just from the listings I knew something wasn't right um but um you know I went ahead and like called anyway and then uh she basically had like mislabeled it on the actual listing and that's kind of I guess that's why nobody was really reaching out to her because

it looked like it was a bad deal um so when I contacted her we actually got the right information I'm like okay this makes a lot more sense now and I was just from like my gut just deciding to reach out uh but there are plenty plenty of businesses that are selling and actually one stat that i wanted to give um anybody that's listening because you know you have thousands of stocks that are on the stock market right whether you're talking about like domestic or like adrs you know if you're going abroad you know etc etc there's just like so many businesses that are out there that are looking to be sold so they're one of the biggest reasons why i also went into you know besides like getting cash out the door is that i saw these stats and i it kind of blew my mind so if you

want to talk about big picture like 30 000 foot for you here there's about 30 trillion dollars worth of small businesses in america right now like 30 trillion and um of those 30 trillion There are 10,000 baby boomers, the generation post-war, that are retiring every day. And there are currently 2.4 million businesses that are on sale right now. And 70% of them are expected to be sold in the next 10 to 15 years. So you have basically everything working for you in the sense that the market is there. there are people who are like hey i've done my time i want to get out and sell it to the next person who wants to take it on for me aka someone who's willing enough to take on that challenge

um and uh it because of how the baby boomer generation was you have not just like in the next couple of years you have over the next decade to basically strategize and get to pick from these businesses that these boomers want to leave um so you're you're talking about ripe pickings right now and so happened that person that i bought it from was looking to get out and move and i that's like there you go that's one of them right there um so that connection with biz by cell got me in touch with this business um and then we went through the whole like shebang of sba financing and due diligence etc um and now as of yesterday i own it all right beautiful take us through what the business is as best you can i know there's some things that

since it's, well, I don't know how much, you know, you can share, but I think listeners want to be interested in, would be interested in, you know, how a business like this looks compared to a public market company, um, and what sort of multiples. Oh yeah. And this is very important because it's not what you're used to. Right. And this is what's key. So if you look at, let's just talk about, let's just simple business that probably everybody knows all right like let's say like lululemon right lululemon is um as you know let's go something simpler we're gonna go with like literally just like a restaurant like let's talk about like one single mcdonald's restaurant right if you're looking at the public markets

you're looking at mcdonald's the company as a global entity right like you don't you the line items that you work with are the line items that they share with you on their you know 10ks 10qs et cetera. You really don't know what's exactly going into SG&A. You don't know exactly what's going into sales and marketing. Those are just line items that you can just see the trends and make extrapolations on, but you don't know anything past that. If you go one step below that, now let's go with private equity. Private equity would take the business, and they know a little bit more because of the owners and operators. They have to understand what goes in to, oh, sorry, let me backtrack. The McDonald's at the public equity side,

let's just say you're paying like 20 times earnings for it, all right? That's just because that's what everybody else is trading at, 20 times. Now, if you go to the private equity side, they know what's happening operationally. But since they're putting on a ton of debt, they're not going to be buying it at 20 times earnings because they're loading it up with leverage. So they'll pay like something, let's just say, let's cut it in half, let's say 10 times. They'll pay 10 times earnings because of all the leverage that they're putting on it. you know they do the back-end math because they think they can cut costs here um i think they can grow it this way or like do some type of like internal partnership network stuff that they

currently have to make it better flip it in a few years and make some money but what's interesting is that if you go down to the next layer you know below p we're talking every day you me you know john smith from the coffee shop because of how these businesses are you don't you do not value them the same way meaning like you're not going to be taking out its cash flows five or ten years and discounting them back and then boom that's the value no that's not how you do it that's how you do it when a company is big enough and you know it's it's going to continue to the person who's selling it is not looking to have retirement money, right? You're looking to get paid now, not five years from now. So when you look at these small businesses, they do get valued on

a multiple basis. So that's the one commonality. But what you're paying on is far less. And it's on a metric called SDE, which is seller's discretionary earnings. Because if you're talking about a small business the owner of the small business is technically that's that's pretty much how they're making their money that's how they're making their living so when you talk about sde that's like what they bring home from the business to live off of to pay their bills etc and the multiple that you pay can be anywhere from something low like one times earnings to depending on what the business is like maybe like six seven if it's like an internet type of company or something like that um and and the reason why you do that is because if i'm selling it to you

today i'm like hey you pay me two times my my last year or my whatever this year's uh earnings i'm out you're in i can go retire i'm done with it and then you can do whatever you want because as an owner you're looking to get paid now and not what it could be worth 10 years from now if that makes sense no that totally makes sense and they can yeah they want that retirement basically that's their retirement savings and they can put it into whatever a 60 40 portfolio whatever they want they're looking for security at that point um what is like i guess it's not too relevant but what is this business uh in the pet market because you know what attracted you to it and is your goal to grow this thing or you know managing i guess that's probably the big you

know question anyone listening has is you know there's all that nervousness around all right i got this thing now what do i do operationally yeah and i think so here's my goal this is and this is kind of what the true phase of cedar grove capital and it's you know and and state would look like right it's buying up all these consumer related companies in different spaces and the interesting is like if i'm paying let's just hypothetically say i buy 10 pet salons at two times each right so like you know i call you know call it like i don't know like five hundred thousand dollars at two times each one's each one's a million right um that's 10 million dollars in quote-unquote value that i have paid for right but the thing is once you actually have enough of these like

we're talking like not just like three or four right you're talking about like over 10 maybe a dozen you know more what's interesting is you've now reached a new class of valuation you've now reached interest of private equity level because private equity firms don't care about buying out the one small business they want to buy groups of things because that's how they can actually be able to you know leverage their expertise and make money so now even though i just paid two times for the business the business is because i've graduated to a new class private equity starts getting involved and now it's not worth two times it's worth like six seven eight times and automatically because i've entered a new class because i've rolled up these businesses

i've already created immediate value just from that me graduating into the next class so my my idea is having you know different kinds of pet businesses i'm looking into um fitness businesses understand fitness i'm looking into um you mean not pet fitness i mean yeah different kind of things because the thing is like if you just keep getting them you can become like one big conglomerate of companies that you can kind of like carve out things in the future if you need to um because this business is not rocket science the one that i just bought it's literally you're bathing a dog and you're cutting the tear that's literally it there's no rocket there's tons of those out there that do quite well there's tons of them there's tons of

them um i mean this woman made so much money over the life that she's had this business um and she's ready to get out so it's it's it's i use this analogy because i know you guys know the company it's almost kind of creating like an internal like iac but like for yourself right it's just a bunch of different brands under one holding company and like that's just what it is and there's plenty other software or sorry conglomerate examples out there so you're trying to take the best lessons from i mean you know we're not no one's going to replicate constellation software overnight but you're trying to take the best lessons from someone like that and then the best yeah because the thing is uh if you if you do it right right and you just keep rolling up

the equity like the thing is like i don't have to worry about shareholders it's just me i don't have to worry about um like uh going to a board you don't know that yet one day maybe one day that's the thing that's because it's like i i actually asked a bunch of people i was like do you think you would do this alone or do you think you would do it with somebody else like i didn't mean just somebody like just other people right like shareholders and you know he told me that he told me like if you want to go uh fast go alone but if you want to go far you know go with somebody else and i'm like that's a good point and it's like what do i want to do do i want to go fast or do i want to go far and i'm a very contrarian and thinking too and i'm like why can't i just

have both you know um so like it's still tbd on like what will happen but i think if i can get to a point where i've done so much on my own i just won't have to dilute myself in the future as much because i've already built up such a strong enough base that if anybody if anyone wants to buy in you know i'm not i'm not having to give up as much um so while there might be people out there listening in right now who are like hey if i can own like one two three businesses and make like half a million dollars a year great and then there's some people who are like you know i don't want three businesses i want 30 businesses then it's a different kind of game you're playing right but but no matter how you cut it one way or another there are so many average people that

can still play this game it's just a matter is you have to decide which one you want to play okay let's put the uh the ceo hat on or maybe the operator hat for a second and talk about this business specifically what are i guess what are the risks like what would stop this business from generating a good a healthy amount of earnings for you as the owner and then maybe do you plan on like building another one of these kind of stores like what's what's the the upside for it this is it yeah and so i know brett you asked me this earlier and i kind of got off five track so i think there's two ways that people look at these businesses when you when you're looking to buy them right like one is just like hey if i just buy it right now and just keep it

going is that is that enough cash flow to me where i can just you know live off not even maybe live off just like treat myself with things right i can get i can get that car that i wanted i can pay for my my kids college tuition i can um you know get a nicer house right because this business is able to give me that i don't have to do anything other than just keep it going and not die you know etc right but then you have the people who are like me or it's like um i'm i'm trying to juice my returns here i'm not just doing this for like you know like some side money you know so it's like right when i look at the business you know there's an advantage that i think a i don't want to say season but i want to say like someone who actually has some

like operational knowledge um has right so a lot of mom and pop businesses lack a lot of knowledge in like technology operational efficiencies you know cost cutting things and you walk in there and you're like i could save so much money if i just cut that out or i could actually improve sales if i just like increase the price on this you know it's like your mind just keeps racing with like what can i do with this business and for the one that i just purchased she has done an excellent job with this business she has grown uh i think uh sub 20 percent over the last three years and that was through covid um so compounded for the last three years sub 20 percent um so she's done excellent and when i go there i'm like all right well you know like we can do we can add

in more groomers right we can get more sales coming in the door because we're fully booked if we're already having demand and i don't have supply let's let's meet that right we can get more money through the door um when it comes to efficiency it's like uh how can i get my workers to you know groom more dogs faster or bathe more dogs faster can i improve store layout to make it so that um you know they can get uh three dogs done in an hour instead of like two you know it's stuff like that um and then also improving like worker happiness making sure they stay um improving like efficiencies like can i get some cost deductions on um like bulk uh inventory stuff like paper towels and uh paper towels towels soap um like all the stuff that

we need like is there anything i can do to negotiate that kind of stuff um because when you're talking about a physical retail store footprint it's like how much can i maximize my sales per square foot to the point where i think i can get to that and that's why when you're doing these walkthroughs, everything races through your mind. I'm like, all right, what can I improve? And what can I get from me? So let's say November 22nd, 2024, you've collected two years worth of owner earnings and haven't made any, it's done well, but you haven't made any changes yet. Would you want to take that cash and reinvest it into a different kind of consumer business? Or do you think you would maybe pop up a second one in Hoboken or like try to expand this in particular brand?

Oh, I mean, so you're saying within two years, if I didn't do anything besides like just let it do its thing, what would I do? Would you rather reinvest it in this existing business or buy a different one? That's the beauty of it. Because with this business, which applies to a lot of businesses. So if anybody's looking for a small business acquisition, it applies to a lot of them. If you can grow the business more than what it's like, I guess, baseline growth is, you're going incremental here. Any type of reinvestment you do can literally just be off of that growth, depending on how capital intensive it is. For pet grooming, it's not capital intensive. It's a service, right? What am I paying for physical goods? I'm not selling you dog food. I'm selling you someone's time to groom your dog. So if I can be able to get more of that, that's high margin. That's super high margin. So I can actually take my incremental gain of earnings by growing the business and improve on maybe another grooming stand, which would then yield me more ability to get in more dogs with more revenue. Or I can do another bathtub to give me incremental dogs coming in for baths.

Or I can just keep my employees happy by getting them nicer tables, nicer equipment, et cetera, et cetera. So I can just do all of that with my incremental earnings just because of how well I'm doing, allegedly, right? Because when it comes to the baseline earnings, you can take that and you can do whatever you want with it. Like I said earlier before, take that money and buy a house, take that money and buy a car, do whatever you want with it. me, I'm taking that money and I'm going to be buying another one because I would rather hedge my risk in acquiring a business that I know is going to be, is doing well and will continue to do well than try to start from scratch. Just don't get me wrong. You can make more money if it starts from scratch because you get to keep all of it, right? It's like assume presumably a lower cost

to build depending on, again, depending on what the business is. But I would rather pay a little extra for something that I know has already worked, that already has a client base, that already has systems up and running and a staff and not have to worry about that and just be able to take whatever fire is going on there and then just pour a little gasoline on it and then I can just keep doing it and keep doing it. And that's the whole point of the whole roll-up strategy. How has this, if at all, changed the way you view public equities or public equity investing? um it's only changed it in one way i still think for the most for the majority of investors out

there public equities is still the way to go um and you know i i do you guys follow or know of him he's on twitter michael girdley i've seen the name yeah yeah yeah he's yeah he's one of the bigger twitter um smb guys he's was smb twit or something i don't know what it's called but yeah so he he actually put um he asked a question the other night he's like what's the most annoying business advice you're you you've heard and i told i responded and he agreed with me i said um when somebody tells you that anyone can do it because in reality no not anyone can do it this isn't like that chef from ratatouille like no no one can not everyone can cook some people should not cook you know what i'm saying so when it comes to like public equities i think a majority of

people can invest in public equities. It's not hard, but I do think a majority should not be active. I think a majority should be very passive. And that's why you have the index funds, you have these ETFs, you know, power to you. But what I think the problem is when it comes to, I mean, this is why my views have kind of changed. When it comes to public equities and private transactions, right? You have this, and I think COVID really screwed it up, is you have this like logic in your head where you're like, if I'm not making over 25% this year, I suck as an investor. It's like, no, dude, that's not how it works. It's like you do this over the long run because the game that you're playing is for the long term. If you don't understand that, then you

should not be playing this game. That's why you have institutional investors who manage money because they're not playing that game. They're playing, I need to get returns in a year, not 10 years. You know what I'm saying? Some funds obviously are like that, but for the majority, it's the other one um so when it comes to private transactions it's not like hey i'm gonna buy this i'm gonna flip it next year it's like no that's not gonna happen you gotta have the mindset that you're gonna be in this for the long run and you have to have the and you have to have the knowledge to be an owner operator and improve this business otherwise it's just existing you're really not getting much out of it um so when it comes to my logic it's like i can get like in my post that i

made, I can get 60% cash on cash returns on my first year of owning this business 60%. And I can get paid back my entire equity, my old principal that I put in, in seven months. Whereas if I'm looking at a public equity side, if I make 15% this year, which no shot that's happening, but if i made 15 this year that's great for the public markets you know there's very different you know lenses and perspectives that are going on between public and private and that's the real difference is like you got to know like what you're shooting for and like the realistic targets are does it does seeing the intricacies and being so hands-on of the small business so like you know putting up flyers or contributing to google ad sense to try to get new customers and

you know finding the right software to to kind of run the business does that give you a newfound appreciation for like a large cap business like how much easier that is how much more fluidly that runs at that stage you would think it does because the thing is like we're so we're so numb to thinking that large cap companies have figured it out and while they really have they do they have they have the ability to test a lot of bullshit excuse my language of seeing what could work and not work right like not every ad campaign that we've seen from these large cap companies makes sense i mean like um i can't name one off the top of my head but like uh actually was oh you guys watched the world cup so i'm sure you've seen it did you see that louis vuitton ad

between uh messi and ronaldo playing chess amazing amazing ad and it's just it's a still frame picture and it's an amazing ad for the brand and to coincide with that marketing that's an excellent marketing thing but they have the ability to kind of just screw around with campaigns like the car car company spent billions of dollars every year on ads and does that make you want to go out and buy the car like no but it's going to make you think about that car and the next time you maybe want to, you know, when it comes to small businesses, if you're spending money on marketing, that marketing campaign has to have an immediate return, or that's just cash you just lit on fire that you're not going to get back, you know? So while you can, you're going to

have play money in large caps, small businesses, if you make a campaign, you got to make sure that it actually works and that it has some type of like call to action for you to get an incremental business otherwise you're not going to do it less efficiency at the at the larger scale plus a small business you don't have to worry about stock-based compensation so there you go i see yeah no dilution i love it that's another positive that is that does complicate things i guess um all right so i guess i think this has been probably helpful for people that are interested in this do you plan on doing some more of these maybe not in the near term but and do you plan on having outside investors that's uh i guess a big question i want to honestly i want to see

how far i can get on my own just because i'm greedy and i'd rather keep the whole thing for myself if i have to get investors like yeah there's been a ton of people who are like i will write you a check right now and i'm like yeah i don't know if i want to right now um because like once you start talking to them about these opportunities they're just like wait you're making how much like you did you bought this for how little you're like yeah that's just how it works um and you know they see the opportunity but then they themselves know that they are not an operator person they're like hey i will write you a check but i'm not going to be in there in the trenches you know like figuring out how to grow this business from the ground up you know

that's that's that's on you you know and i'll just pay you to do that um i do have a goal of getting another like potentially depending on size like one to two next year which will bring in a decent amount of money um but the thing that like i guess your viewers really have to take from this and that's kind of like i'm sorry i've kind of gone off track with that is that um there are plenty of businesses out there for people who feel that they can do this now i don't say can you i don't mean financially i mean like if you think you can actually be a business owner um and maybe even still hold your main job i don't know right uh then there's an opportunity out there and then when you when you look at it a little bit further

you have to really look at yourself and decide all right there's thousands of different types of businesses out there which one's the best for me maybe not the one that has the best returns but which one's the best for me because i need to be vested in it otherwise i'm going to let it sink because just you know laziness or boredom or like whatever i don't know what i'm doing um and i think you guys would agree that over the last two years there's been so many of those stupid tiktok video ads about do this for passive income and do that for passive income yeah there's no such thing as passive income that's all bullshit but but you can find a business that can produce you an additional income stream right that may not be as intensive um and i think what

was it like when stat was like most of the like 98 of millionaires have like seven income streams or something like that well you own another business boom there's two you know what i'm financing um so it's being able to strategically not only build up your net worth maybe through these businesses but also increase the cash that is going to you with all these like tax incentives of being a business owner so that you can you know write that check for your college tuition you can buy that new car that you want you can upgrade your house you know stuff like that um and the process is a hard one and that's why i said no not anyone can do this there are quite a lot of people that cannot do this um and you have to make sure that you think the juice is worth the squeeze

and understand how hard that squeeze is going to be because it's not it's not easy um but if you're up for it that there are businesses out there there are ways to finance things i can't even mad you can't even describe to you how many how many ways i've learned how to raise capital for a business i wanted to uh on the small business side um and um yeah going from there seeing if it's worth it you know like there's so many people on hashtag smb uh twitter that's like just talks about this stuff and you know if it's something like you know even you you yourself if you want to expand your podcast by you know doing like some type of acquisition of another podcast just to get their their their customer base that's dude that's that's that's what an acquisition of a small

business is you know i'm saying it's like that's how little it could be there's a lot of yeah there's a lot of small businesses out there and like you mentioned uh people are retiring every every every day podcasts are generally high margin so there are not many costs that's the thing it's like would you would you rather what's the size of a of an investor's portfolio these days uh it Was it like 20 grand, 25 grand? Let's just say $25,000. Sure. For a retail investor, let's just say they have 25 grand

in a brokerage account. Let's just say best case scenario, you can compound that for 10% a year for the next like three years. And on the public side of things, great, no problem. But let's say you took that 25 grand and you bought a vending machine business. That's literally all you have to do is just refill,

you know whatever and you put in that full twenty five thousand dollars but it gives you like an annual return of like twenty percent net of you know taxes and interest and everything right that's like that's like cash that is a logically speaking with numbers that is a better business that is a better way for your own personal capital allocation you just have to do a little bit more work than just buy and sell on a brokerage you know what i'm saying a little more potentially more headache it's a little bit more headache but the thing is like more risk more reward right but this this risk is something that is honestly it's a hundred percent dependent on you you are the masters of your own fate like Brett Ryan you guys are the masters of your podcast whatever

happens that you can't blame it on somebody else it's you guys if you want to make it a success which you have been doing which I love listening to you guys's podcasts all the time you you have been working hard at it if you want to make it a success you will make it a success and that's how deposit my money in a crypto account and make 20 APY because there's no fucking reason because it doesn't make any sense that's on you dude you took that risk but that doesn't make any sense what i'm buying right now is tangible i can hold it i'm the master of my own fate and whatever happens is because it's on me and whatever i reap is because of what i did so if i can get you know a 20 return on a business because i got to put a little bit of legwork and you know

in doing it great or i can just sit back and make on average what's the return yeah nine percent ten percent whatever an s&p fund the choice is yours you know what's uh who's that guy matt damon on crypto like fortune favors the bold or brave or something like that yes whatever that's stupid thing yeah but it is it is it is only for those who want to take on that risk and there's only a certain amount of people who actually would want to do that and there's only a certain amount of people who have that section who actually pull the trigger and they are the ones who everybody on who everybody on twitter kind of like looks up to isn't like oh man that's such a great idea like that guy's killing it blah blah blah you could be that guy if you feel like you could be

that guy you know yeah there i mean yeah i think it's more what would you characterize as the risk the risk of time spent is that kind of are you able to spend the time is that what people should be asking themselves or i think it's i think it's yeah i think it's a combination of the time you have to spend but then also like the knowledge of that particular business right like i'm never going to enter a car mechanic business i don't know shit about cars you know like i just i just give it to the mechanic and let him do his thing but a pet business like i own a dog i've invested in public equities of pet companies like i understand that business so i can actually add some you know value there i'm not gonna know how to cut a hair's dog's hair i don't you know i

don't have to do that i pay someone to do that um but the other thing too is and i think it's tough for everybody like you me everybody's listening the notion that in the public markets if i'm down 30 and i hate this so much with a burning passion you always have like those people in the background oh yeah but dude you're a long-term investor just wait 10 years you'll make back your money and i'm like if i'm down 30 in a year i gotta wait 10 years i'm gonna say 10 i'll go five years to make it back that sucks are you kidding me if i'm a business owner right i'm like rolling up these businesses if i'm down 30 in a year something happened right that i did not foresee coming like like whatever you know so that's just not gonna happen right so it's like

I can keep, if you're talking about ebbs and flows here, the differences between like what a potential investor might have is like, I don't have to have those ebbs and flows. I really don't want to have those ebbs and flows, right? Like if I have to, you know, like hit pavement to get things back on track, I can do that. I'm not going to walk into Tim Cook's office tomorrow and be like, hey, what's up with this capital allocation strategy, dude? You got to do more share buyback. That's not going to happen. You know what I'm saying? So that's a very big difference that I've noticed is like thinking all this

whole, like down 30% long-term investor bullshit. And then the private private business owner, like, yeah, I can just keep growing because again, I'm in control of that. Not what the market tells me. Right. All right. Well, I think that's all the questions we have. I know we're coming up on time for people that want to keep up with you and, and keep up with more of any, any small business developments. What's the best place to do that?

yeah you just go on my twitter my personal twitter it's just at paul cerro c-e-r-r-o um i usually just talk about that kind of stuff and i usually link the work from cedar capital management whenever i post updates on the uh the fund um or what is now the new holding company twitter but that's a work in progress all right perfect well that is going to do it we want to remind our listeners that brett and i are not financial advisors anything we say or discuss here on chitchat money is not formal advice or recommendation we are however general partners at arch capital uh we don't have any the investors not have any positions the business discussed on this podcast today but and i can say for confidence that it will that is

you know no one except paul for the foreseeable future right but uh nevertheless it's it's not financial advice so uh appreciate everyone listening and thanks again paul for coming on the show and we'll see you all next time. Hey, Simon, we wanted to ask you a few questions about 7investing so listeners could get an idea of what they're getting. What inspired you to start the company? And what exactly is sub-investing? Well, hey, Ryan, thanks again for having me. You know, from years of working in the investing industry, it was inspired by conversations with people that would just always have kind of the same negative perception of the stock market, right? It's too hard, or I don't have time for this, for this to stack against me.

And those conversations kind of led me to say, hey, we need to create a site that actually does inspire people to say, you can take control of your financial future. You can invest in stocks, you can find good stocks to buy and hold for long periods of time. And at the end of the day too, we know that everybody is different. We don't believe that there is one stock that fits for everyone, right? Maybe you're a dividend loving, paycheck cashing income investor that might want an option that's going to be a lower risk dividend paying stock, especially right now with the economy being what it is. And then other people might say, hey, I'm ready to hold on for 20 or 30 years. I want to take some swings for the fences. Let's go after those high growth

opportunities. And so I said, this would be something that would be even more fun rather than just doing educational and by myself. I said, what if I brought together a team of seven advisors, all with a diverse background and a diverse perspective of the stock market so we could uncover more stones and look at a bunch of different stocks with a bunch of different investing styles in a whole bunch of different industries. And so 7investing is kind of the genesis of all of those that we started in March of 2020. And we said, let's look at a whole bunch of different stocks. Let's do the legwork of the analysis. And let's present our seven favorite actionable ideas every month for investors to choose from. And let's start the conversation

about which of these stocks is right for you and which one might be the right fit for your portfolio, knowing that investing is a very personal thing. All right. If you are a subscriber of 7 Investing, what do you get? Can you give an overview of what subscribers get? On the very first of every month, Brett, we release our seven new recommendations. So we are coming up on October 1st here, at least in the recording of this. And on October 1st, we'll release seven recommendation reports. Some of them will be low risk. Some of them will be high risk. Some of them will be biotech. Some of them will be financial services. We run the full gamut. And as a member, you get immediate access to all of the new reports. But you also get

access to all of our old recommendations as well. We track all of them in real time on our scorecard at 7investing.com slash recommendations. And we also provide company updates on all of those previous recommendations as well. We check in on how things are going. And sometimes we even see red flags that we think people should be aware of. There's risks for any opportunity at the time that you recommend it. And sometimes it's really needed for investors to kind of understand the risk and reward relationship. And then the last part of it is, in addition to issuing new recommendations and providing updates on them, is we know that this is a long-term journey. We know that investing is something that we want to take years, if not decades,

to accomplish whatever we want to get to as the end goal. And so we always, every month, make it a point to be very available for our subscribers to ask us questions. We have a members-only call right in the middle of every single month. We have a community discussion forum that we have available 24-7 to not only talk to our advisors, but also other investors. I think that's one of the key differentiators for 7investing is that we know this is a long-term journey. We know it's a very personal thing. We know they're going to have questions along the way. We don't want to just broadcast stock picks and disappear. We want to be here with you throughout this entire journey.

And you mentioned, so seven recommendations each month. Sometimes those might be repeats, But obviously, there's a lot of companies now in the 7investing universe. So how do members get a grasp on the advisor's conviction around certain ideas? Like which ones do they have a way of knowing whether advisors like certain ones more? That's the most common question we've gotten actually since we started is what's your favorite ideas right now? You know, we've done the diligence on almost 200 unique companies now and put them on the scorecard and people would say, hey, this is too much to keep up with. How do I even know where to start?

And so we've kind of evolved as a company. One thing that we've started doing is best buys every month. Each advisor gets to pick any of their or another advisor's previous recommendations and put the flag on it that says, this is my best buy for October. And we publish those for subscribers. The other thing that we've started doing is issuing conviction ratings on companies that are also right there on the scorecard. So if you see a previous recommendation, we go everything from potential sell, which is the most negative flag we can put on a stock, to strong buy, which is the most positive bullish flag that we can mark things with. And you can filter through all of those to really quickly see here's some of our favorite opportunities.

And we've taken this even one step further now, Ryan, which is we've created a strong buy portfolio where every quarter now we've gone ahead and self-selected as a team through a pretty methodical process our 20 favorite ideas, our 20 highest scoring companies that we've collectively come up with, our favorites of the entire scorecard. And we put these into what we're calling a strong buy portfolio that we publish each quarter, also available as an added benefit for no extra charge for seven investing members. All right. Last question here. What does it cost to become a 7investing subscriber? And as we'll talk about, or we have talked about before, if you're a listener, use code money to get $100 off your annual subscription. That's right. We do have a monthly option. You can come in and check out the entire scorecard for a month just to see what you're looking at for $49 a month. But our most popular plan is actually the annual option because it's at a discount to that. In fact, we've got a discount

on the discount, like you mentioned, Brett. $399 for the year is our annual option price. But if you use money, the Chit Chat Money promo code, it's down to $300. So you're basically getting the subscription for half price if you sign up for the annual offer with that promo code. That does not expire after the first year. As long as you remain an active subscriber, you get to lock in that $100 off a year benefit. All right. Well, as he mentioned, use that code money. Thanks for joining us. Thanks very much for having me.