Invest Like the Best with Patrick O'Shaughnessy - Brent Beshore – Cultivating a Disaster Resistant, Compound Interest Machine - [Invest Like the Best, EP.10]

Episode Date: November 8, 2016

This week’s guest is Brent Beshore, Founder and CEO of adventur.es, a family of companies that invests in family-owned companies. Brent has a very specific mission with this company, to cultivate a disaster resistant, compound interest machine. At just 33 years of age he has already built a portfolio of private companies that has produced impressive results.  He’s done all this out of the limelight and with no outside investors.  Brent discusses his rewarding but difficult journey and what he has learned, including sourcing and evaluating businesses, how he and his team have improved profitability at his portfolio companies after acquisition and so much more.   For comprehensive show notes on this episode go to investorfieldguide.com/beshore/ For more episodes go to InvestorFieldGuide.com/podcast.  Sign up for the book club, where you’ll get a full investor curriculum and then 3-4 suggestions every month at InvestorFieldGuide.com/bookclub Follow Patrick on twitter at @patrick_oshag

This podcast is sponsored by CFA Institute, the Global Association of Investment Professionals whose mission is to lead the investment profession by promoting the highest standards of ethics, education, and professional excellence for the ultimate benefit of society. CFA Institute serves a global community of investment professionals working to build an investment industry where investors' interests come first, financial markets function at their best, and economies grow. The chartered financial analyst credential is the most respected and recognized investment management designation in the world.

The views expressed in this podcast do not necessarily represent the views of CFA Institute. Hello and welcome, everyone. I'm Patrick O'Shaughnessy and this is Invest Like the Best. This show is an open-ended exploration of markets, ideas, methods, stories, and of strategies that will help you better invest both your time and your money. You can learn more and stay up to date at investorfieldguide.com. Patrick O'Shaunisey is a principal and portfolio manager at O'Shaunicee Asset Management. All opinions expressed by Patrick and podcast guests are solely their own opinions and do not reflect the opinion of Oshamacy Asset Management.

This podcast is for informational purposes only and should not be relied upon as a basis for investment decisions. Clients of O'Shaunacy Asset Management may maintain positions in the securities discussed in this podcast. My guest today is Brent Beshore. This is the first interview he has done in this format and his story is incredible. Brent's mission is in the spirit of Buffett and Munger to cultivate a disaster, consistent compound interest machine. Still just 33 years old, Brent has built a portfolio of private companies very quietly outside the limelight. He has no outside investors. The results he has generated are otherworldly. But his journey hasn't been easy. We discuss all the lessons he has

learned along the way, sourcing and evaluating businesses, how he and his team have improved profitability at his portfolio companies after acquisition, and so much more. Okay, here we go. Please enjoy this conversation with Brent Bishore. All right. Well, Brent, thank you so much for taking a bunch of time with me today. I think our goal will be to, as you say in your firm's motto, explain what cultivating a disaster-resistant compound interest machine is all about. Sounds like someone brilliant in marketing came up with that.

I couldn't come up with a much better slagher for building a business. So maybe what we could do is start by you giving us a bit of a business. a background about who you are, how you got to this point, and why you've chosen kind of your path as the best way to express the things you're good at. Yeah, yeah. Well, first of all, thank you so much for having me on. It's a pleasure. As I think I told you over email, I hope that I can provide negative framing to your other

guests who are the who's who of the finance world. So, yeah, so my journey has been very entrepreneurial and very winding, is how I would describe it. We started companies. We've bought companies. We've sold companies. We've invested early stage. We've done complete acquisitions. We've pretty much done almost all of it in an effort to find out what we think works better and what doesn't. I think that's, you know, kind of the motto that we always talk about is having the highest opportunity costs in the world and playing in the most inefficient markets, right? If you get nailed those two things and you happen to be decent at what you're doing, I think it produces some pretty interesting results.

So for us, I mean, the biggest opportunity that we see is participating in what we call the lower end of the lower middle market. So we look at companies that are between $1 and $10 million of owner earnings. And we looked at about two, a little over 2,000 of them last year in an effort to get three deals done. So very, very few deals do we get done. We're trying to be very choosy. We're trying to find, well, if you want to use a Ben Graham analogy, we're trying to. to pay for a cigar butt and hopefully get a cigar. So how I describe what we do is we buy boring businesses and make them less boring. We pay a reasonable price for them, help the company's

leadership to transition, and hopefully make everyone's life a little bit better. So I don't know if that gives you a good framing. It does. You already mentioned something very interesting, which is this 2000-sized universe that you looked at just last year. And there's been so much about the shrinking of public markets, both through buybacks, so less float, but also through companies going private, going out of business, fewer publicly listed stocks. So it's a good reminder that there is a massive universe of businesses out there, which could be investment targets, acquisition targets. They're just private. For sure. Maybe we could back up even further to how you got to where you are today. So what was your early background? What did you study in school?

what were some first jobs, you know, in your early 20s? Sure. So I, let's see, I studied politics in college. I went to a real small university in Virginia called Washington and Lee, which most people think is either Washington University or William and Mary. It's actually neither. It's the ninth oldest school in the nation. It's sort of famous between George Washington and Robert E.

Lee were two of the people involved at the school at various times, George Washington and doubted. So anyway, so I went there. I went there because when I started looking at schools, I saw that there was this university that had produced the most presidents and CEOs of any school in the nation, which happened to be Washington Lee. And it was ranked as the number two party school in the nation. So, you know, getting your priorities straight. Good combination. Exactly. And it was definitely a work hard, play hard, sort of sort of play. Super smart people. Way smarter than me. And I was able to be coached

up, I think, a lot through that process. But I studied politics. And then I had to, an emphasis in poverty studies. So I got done with my major at the end of my sophomore year and had an opportunity to major in college, I think, is how I describe it for the final two years, and got really interested in poverty, in human capability, and understanding, sort of looking through the eyes of somebody who had a very different background than me. Urban poverty, rural poverty, did some really interesting research projects through that program. And actually, I'm still involved in that program today on the board of directors for it now. and really think it added a just unbelievable dimension to my life that I, you know,

forever grateful to Harlan Beckley, who's the director of that. So anyways, after that, I didn't know what I wanted to do. Somebody told me, well, if you don't know what you want to do, you either go to law school or get your MBA. And so I said, well, being an overachiever or trying to be an overachiever and arrogant, I said, okay, I'll just do both. So I came back home, Holmes, Missouri. I grew up in Joplin and I wanted to get closer to my grandparents who I was really close with and spend some time with them while I could and went to get my law degree in my MBA.

Got sick of school pretty quickly. I don't know how PC this is, but I call it academic masturbation, right? So like just the idea of just doing things to do them instead of like, you know, I wanted to get out there and test my ideas. Yeah, yeah, get my hands dirty. Test in the real world. So I started a business. It was an event marketing business. It was pretty much the worst business in the entire world.

I had drank a little too much the night that I agreed to do it with my best friend's wife. And the next morning I woke up and I was like, well, I'm committed. I've got to do it now. I'd highly advise that you don't take a similar path. But, you know, it was low margin. It was high replacement value. It had no moat. We didn't have a ton of expertise.

It was local. I mean, it was everything you don't want in a company. But I was able through that to realize what I did want and it gave me a path forward. So that led to starting an ad agency that grew pretty quickly, which led into starting a research firm, software development firm, and a film studio, which then led into this whole entrepreneurial journey of buying a company as the result of having some opportunities from that, seeing that side of the world and sort of fast forward. today and we have five late stage portfolios at this point that are all fairly good-sized companies. And then we have a number of early stage investments that we mostly today focus on partnering with people that we trust who are really good at that space.

And it's just a small part of our portfolio in terms of dollar volume. One of the interesting things that people out there may be excited to hear about is how we met. So once again, Twitter proves to be a bizarre and very interesting place. I was working on a research project specifically on how public companies allocate their capital and whether or not there were better or were strategies, even factors, quantitative factors that you could look at to differentiate companies. And so I asked publicly, is there anyone interested in talking about capital allocation? And that's how we connected and had a really interesting conversation.

And what I found most fascinating was the fact that this is entirely sort of captive capital, that it's your money, the company's money, there aren't outside investors. And that allows you to have what everyone says they have, a long-term vision and goal, but very few are actually able to execute on because capital is so fickle, outside investors, as we know, higher and fire at all the wrong times and way too often. And so I'd love to hear more about how that transition happened, let's say, from the last entrepreneurial or business experience you had into adventures, where you then started investing in businesses. So did you sell a prior business as a way of funding the initial, you know,

the initial version of adventures? Well, you know, so it's interesting. We, the agency started, you know, generating some cash flow. And by the nature of the business, we'd built up a good amount of accounts receivable. And so it was probably almost eight and a half years ago at this point. I had a mutual friend say, hey, one of my business, we'd build up. Buddy is in the agency business, wants to sell his agency, and you should go talk to him. I should say, buddy, it was an acquaintance of this person. And so I was like, you know what, I'll just roll the dice and I'll go talk to him. And here I am thinking that the guy's primed up and ready for me to, you know, to make him an offer and, you know, all of that.

And I sat down and he said, why in the hell am I sitting here? and he had been left at the altar twice before. And so we ended up over the course of about nine months striking a deal. And I leveraged the accounts receivable of my agency business to buy this other business, which is he considered an agency. It's really had a military focus and a recruitment focus. And we actually still own that company today. And we've done really, really well with that.

You know, I joke sometimes that we, you know, we started with a micro capital base. but the beauty of compounding is when you can compound at a very high rate, even small amounts of capital, as we found out, turned into larger amounts of capital over time. So we took that business and were able to grow it pretty considerably and have owned it since. And it's been really a nice investment. We also, through another one of our investments, we started another company, co-founded it called Influenco, that was on the Forbes most promising companies list.

was Inc 500 this year, and it's really been a nice investment as well. And then we, through the years, have had small, I would say, you know, singles and maybe doubles with different things we've done. But, I mean, it takes time, right? You know, anybody who claims that there are any sort of overnight success is just full of it. And we've, you know, we've toiled away very, very long in obscurity. And rightfully so, we had to get our stuff together. And so it's been just really about building capital as we've been able to do well in the businesses, letting it sit on our balance sheet, and not trying to get greedy. What were some of the early books or influences that shaped your investment approach? I know you and I offline have talked a lot about sort of

the classic margin of safety monger and Buffett, but everyone knows about that stuff. And it could be that simple. It could be that, you know, this is, there's a lot of wannabe buffets out there. And it never really works out. And maybe this is, something different. But maybe explain your early influences and what shaped how you go about evaluating companies now. Yeah. So, okay, I've got to admit, I read pretty much everything Buffett Munger have ever said or written, right? I think that's almost table stakes these days if you're going to be in the investing business. I'd say, you know, in terms of books that really help shape what I was thinking, poor Charlie's Almanac, you know, what Peter Kaufman put together there was just, I

just spectacular, right? And the clarity of thought, I think, was really important. I'd say that some of the books that maybe not as well known, the fish that ate the whale was a big influence on me. Really? Yeah. I don't know if you've ever, if you've ever read it, but it's about. I have a lot of Buffett similarities. I actually wrote an article called. Oh, really? Well, I'll send it to you sometime soon. Basically, the similarities between, I'm forgetting the guy's name, the Banana King. Sam Zimori, yeah. Yeah, Zimori. And we have a Tulane guy here at our firm. So that's how I came across him. Interesting. But yeah, an amazing, amazing book.

Yeah, I'd highly recommend it. It's actually one of my favorite books that just, it's not a super long read, but you talk about a guy who immigrated from Russia, had nothing. Hustled, hustled, had no capital base, had nothing to do except for just hustle. And he ends up basically taking over the one of the largest companies in the world is responsible for the term the Banana Republics. and had an amazing impact and amazing not always in good ways. I mean, I think that, you know, he's a really good example of how everyone's a mixture of virtue and sin, right?

But it also showed me, you know, what you can do with almost nothing and what you can, how, you know, almost nothing can turn into a tremendous amount over time and by making, you know, wise decisions. The story that I always remember from that book is that early on he had nothing, as you said, and was trying to sell bananas. And the big sellers would basically discard overly ripe bananas. And he would snatch him up for free, so no cost of goods. And just through hustling would rush them to vendor sites before they went bad and sell them to vendors. And that exemplified the rest of his life and career where it was just out hustling, out-efforting everyone.

And just an amazing guy. Yeah, he, I love it. And that's a good thing to bring. I mean, that story alone, it shows you, you know, you're taking a byproduct, basically, of a big company, right? So they were trying to take the bananas and, you know, develop a really long supply chain, right? So you had to, whenever the bananas for the big companies were loaded in, they were all green bananas because they had to travel such a long distance and took such a long time.

So they literally would just take, like, really good bananas that you'd want to eat now and just dump them. They were a complete waste. And so, yeah, it's an amazing story of how you can. you take a byproduct that no one else wants and turned into gold. And I mean, he ended up taking over that company. I think it was called the United Fruit Group or United Fruit Company or something like that. But anyway, so yeah, I would say that's a big book.

You know, I really like the book, The Mistakes Were Made, but Not by Me, which may sound like an interesting investing recommendation, but it really talks about the psychology of self-deception. And I think, you know, that is something that in, you know, what is Buffett's rule? rule number one, don't lose money. What's rule number two? Remember rule number one? Right? And like, the easiest way to lose money is by deceiving yourself and thinking that you're getting into something that's just not true. And so the illustrations that are in that book of how we can deceive ourselves, I think, is just, I don't know, it's had a big impact on the way I think about things. Kind of like Dan Ariely's book about dishonesty. That's another really interesting one to just really hold the mirror up about

who we really are, I guess, would be a way to say. Yeah, we're going to come back a lot to psychology because one of the things we've talked about that I find most interesting is how the importance of psychology, if anything, is amplified in the market that you're operating in with smaller businesses. So we'll come back to that. But before we get there, so rewining back to the first, you know, the first major, the military company, which was, I guess, finance, you know, through leveraging receivables. How now do you source financing for new acquisitions or investments? Do you use debt or is it just cash? Yeah. So we do use a little bit of debt.

I think that's probably a fascinating topic to discuss independently, right? It's really hard to hurt good companies without the use of debt. And so we're very reluctant to put much debt on a company or even come close to the line where you say, maybe it's not wise. So we try to stay clear of that line. You know, in terms of financing, so it's all internal capital. So we harvest excess capital from our existing. investments. We pool that together. It's very much a, if you want to call it a barbell strategy,

right? We have a cash sitting on the balance sheet, and then we have these highly illiquid, highly profitable investments. And we, you know, over time, as those investments bear fruit, we harvest that cash and then really just pool it together. So we are using, so I would call a modest amount of debt in some of the deals, depending on the type of company, right? Some companies can handle debt better than others. The less variance, right, the less cyclicality that it experiences, the more reasonable it is to put a considerable amount of debt on it, the more visibility you have into the future, the easier it is to put debt on the company. So currently today, I mean, we're trying to use as little debt as possible that we think is

reasonable. So you said, could you just outline once more the current kind of makeup of the portfolio, so the number of, you know, the major businesses you own and then also the seed stage ones and kind of just give a flavor of the profile of the overall portfolio? Yeah, absolutely. So we have, like I said, five late stage portfolio companies. So we have the military recruitment firm called Media Cross Base out of St. Louis. We also have a fairly big office in Norfolk, Virginia.

And it does what I would call the hardest recruiting jobs for the military. So in the past, we have recruited physicians into the U.S. Army Reserve. We've recruited very specific types of instructors into various parts of the military. government. And the largest contract today is recruiting civilian mariners into a branch of the military, a branch of the Navy actually that resupplies the ships that never come into port. So it's a really fascinating business. It's a, it's been an interesting journey to watch the efficiency of what we're able to do for the government. You know, it's so easy to follow the narrative of all those darn government contractors. They're, you know, taking everyone's money.

They, you know, they're not efficient. I can tell you that we, we do an amazing. amazing job on behalf of the government. And they issue something called a CPAR report card. And our marks on there, I think we've been, gosh, 12 or 13 years straight of just excellence across the board, which puts us, you know, in the very top of government contractors. But it's a, it's a great partnership. That's really what it is. So we've got that business. We've got another company that we helped co-found called Influence and Co. Influence and Co. Supplies content to some of the top publications in the English language and works with Fortune 500 companies, Venture backed startups to help land columnist opportunities, sometimes one-off column, sometimes

ongoing column gigs at these various publications. And really, it's kind of a matchmaking service with a lot of expertise built in on both sides. So we've got that company. That was the company I referenced before that was on the Inc. 500 this last year and should be on the Inc. 500, I would guess, for the foreseeable future. It's really done amazingly well. We own the, I think it's safe to say now. It used to be the second largest pool builder in the country, swimming pool builder. So construction business. I think they're the largest now in the country, would be my guess. And then we own two manufacturing companies that manufacture products in the swimming pool space. And it's our patented products. We manufacture in China,

and then we import and actually distribute worldwide. So that's the late stage portfolio. The early stage portfolio really varies. We've got great investment, amazing service called Zack. I don't know if you ever heard of it. They helped connect the APIs of various software. So let's say you wanted to say, everyone I talked to on Twitter, I want to take that contact information. I want to put it into Salesforce. And I want to set a reminder for, you know, six months later to contact that person in

my calendar. Zapier does all of that seamlessly. So we were the first money into Zapier. They went through White Combinator. Wonderful company, great people. We're a very small investor in Mattermark. I was a company in San Francisco, which actually we found through AngelList. We've been big fans of AngelList and what Naval and that group's built.

It's been a really interesting to watch them evolve over time and just couldn't be bigger fans of that work. So I don't know if that gives you a good flavor, but it really is across the board. It's military, it's software, it's construction and manufacturing. We're really, we're fairly agnostic. Our rule is as long as we can really get to know the business and understand the wins in the industry. Yeah, it's a great overview, and it begs the next question, which is maybe the thing I'm most interested in across our whole conversation, is how you filter. So you mentioned, you know, the number 2,000 companies that you at least looked at to some degree. So what are you looking for?

And maybe what are you looking for at different levels of interest? So obviously there's a ton you just screen out right away. How do you do that? How do you then take a more narrow list and decide whether or not, you know, you know, you know, you are going to make offers, do further diligence. A walk through your process would be extremely interesting, given how different it is in smaller private businesses. Yeah.

So I would say most of the time, it's pretty easy to see that there's nothing differentiated about the business. And I would say, when I say nothing differentiated, I don't mean that the business itself isn't differentiated because anybody who's making at least a million dollars a year in a business, there's some reason why they're doing that, right? There's some product market fit there. They're providing value to their customers. Unfortunately, most of the businesses that we see are the extension of the owner.

So we can't buy a business, or it's very, very difficult, I would say, to buy a business where almost all of the value of the company is tied up in the goodwill of the owner. So, you know, there's some guys. We looked at a business recently that it was in the furniture space. Everyone in town knew the guy. He had great labor relationships. He, you know, had great financing relationships with all. the banks. He had every relationship in his industry. And people just liked him, right? That's a moat in and of

itself, you know, longevity over time. So what we try to look for is where is the advantage of the company if it's not in the owner? And most of the companies, I would say, of those 2000 we reviewed, gosh, probably we only got serious. And by his way, serious, I said, you know, taking a much harder look on three or four hundred. Most of them are fairly obvious that it's commodity-type business, that it's really the ownership that's driving it. And, you know, one of my favorite phrases is small businesses don't stay small on purpose. And so what we're really trying to understand when we first look at a business is why is the business smaller? Right? When I say small, that's not to be an insult. I'm saying in the sort of sphere of businesses, let's say if you're

running a 10 or 15 million dollar company and you've been running it for 30 years, like that's still considered a smallish business. So why is it stayed small? You know, what are the things that it's maybe lacking or it's doing that it shouldn't be doing or misallocating resources, just not optimal. And then we try to figure out, is there a way that we can step in and help that transition in a way that's meaningful? So the first thing we're really trying to understand when it gets through the kind of the first filter of do they have some sort of an unfair advantage or any sort of hint of advantage. I think that's the first filter. And the second filter would be how much money do they actually make? What's their, we call it owner earnings. So owner earnings being

defined as EBITDA plus or minus how much capital is really required to operate the business. We looked at a company recently that was making $6 million a year of EBITDA, but the owners could really only keep about $2 million a year of that business, right? Like that's not a, it's not a fantastic business in and of itself. I mean, it's making $2 million a year is really what comes down to it. But when you use a term like EBIDA, which we can obviously riff on for a long time, it just doesn't, it doesn't add up in that way. Bullshit earnings, as Munger would say. Exactly. That's near and dear to my heart. Yes. So we, you know, we're really trying to understand how much they earn, what's the stability of earnings, what's the visibility into future earnings,

and then how much of that is tied to the current ownership. So, I mean, that's kind of the next filter down. And some stuff, we just can't, we just can't figure out answers to those questions, right? We looked at a cell phone technology recently that was doing extremely well, and we had an inside look at it. And we just couldn't figure out their largest customers were all the big telecoms, and we couldn't understand and we couldn't get comfortable with, you know, how long would they stay? Could it be disrupted? It's just, you know, it's sort of like Buffett Munger's two hard pile, right? So we're big believers in that concept that almost everything should go into the too hard pile and then you sort of have a, I don't know, negative filtering of everything else, right?

If it doesn't go in your too hard pile, then, wow, why is that? So sort of default to know and then force yourself into the yes column only if everything sort of lines up. So I'd like to talk for a minute about the people selling to you and their motivations because one of the things I'm always interested in in public markets is who's on the other side of the trade, you know, what are their motivations? and what do they know that we don't? So how often is your edge, so to speak, someone that needs, say, just liquidity, that they've,

you know, they've built a business and they want to retire or move on? What kind of multiples are you willing to stretch to? And what kind of competition do you face, or maybe an example of some stiff competition you've faced when you found a business you really like, but have to discipline yourself in not getting into a bidding war of sorts? Well, so to answer your last question first, we have to discipline ourselves almost every day, if not every week, right? I mean, it is, you can go out and buy and buy and buy. There is an ocean of companies for sale.

The trick is to make sure that you're not overpaying. And we've seen a lot of this. You know, the multiples have now risen pretty considerably depending on the sector you're in. And everyone, you know, the bias is most of these sellers are selling for the first time. so they don't know what reality is. Everyone loves their own business, right? It's their baby. How much is your baby worth?

It's worth a lot. It's hard to get some sort of baseline. And so, you know, we often find that, unfortunately, especially in the lower end of the lower middle market, there's a lot of intermediaries that are willing to BS their potential clients in order to get their business and put them on the market and tell them unreasonable multiples. The good ones don't do that. The good ones for sure are extremely valuable. We do see a lot of people saying, you know, people saying,

to a fairly commodity business that's doing a million dollar a year of owner earnings, yeah, it's worth six, seven times earnings. Like, that's just, you know, unless you're in aerospace or something with high predictability and, you know, contractual relationships, I just, that that's not going to fly. But occasionally you can find some retired executive who wants to jump back in the game, who's never run a small company and thinks they can do it, who will overpay, right? I mean, this is the definition of inefficiency. You know, if you can try to lose money and you can easily, then by definition it's inefficient, right?

So, you know, I would say that that we do face a lot of stiff competition. There's, we've, you know, we never used to run into private equity groups, traditional fund-based private equity groups below. Gosh, $5 million of EBITDA to use an industry standard term, which I hate, but that's kind of the way people talk about it. So below $5 million, we never used to competition just by the nature of how asset prices are, I mean, maybe not to veer too far out of my circle of competence here, but I think things are fairly high. And with interest rates being so low, it obviously inflates the values of every asset. And I think we're seeing that to some degree in our market. So, you know, we look forward to the day when there's kind of a washout and we can be holding cash, if that makes sense.

Have you ever had a scenario where there's more to do than you can either fund internally or via debt, which is another way of asking, have you ever considered or would you consider taking outside capital? Yeah, I mean, this is, yes, we have. We actually went through this exercise recently. And it's been, it's been a tough, it's been a tough decision-making process. We find stuff that is just too big for us to bite off. And we have considered partnering on some things, but there's just such an opportunity with the capital base we have now to generate really just unsustainable returns is how we describe it. They're so good that it's hard to give them up to other investors right now. So we really haven't.

I recently had a conversation with a guy. I just can't tell you how much I respect him who's a legendary investor in his own right. And he said, Brent, you got your head up your ass. You're not thinking about the right way. It's not about the money. It's about getting the right people, the smartest people, the wisest people, the most connected people in the world. And getting them to care about what you're doing. And I said, oh, gosh, it's hard.

I get it. And I probably am wrong on the topic. And I think that we will end up taking outside capital sometime in the future. It's just hard when you're generating. you know, unbelievable returns and what you're doing to take a passive investor and say, even though I really don't need to, here's how I, you know, I want to start shoveling money over in a different direction, if that makes sense. So what kind of returns are we talking about, you know, returns on capital or however you want

to, however you want to formulate it, ballmark. Yeah, so we've been, okay, some combination of lucky and good, and I even hate talking about the numbers rather than in specifics just because it does seem, you know, pretty fantastic. But, you know, we're buying it, let's say, an average multiple of around four times owner earnings. So our, what I would call base case yield, if the business doesn't go up at all, if the business doesn't go down at all, we're generating about a 25% return. From there, we have a history of taking companies that are, that we're buying around a four times multiple, sometimes even lower. And then we're doubling or tripling the profitability over a fairly short period of time. So when you do the math on that, it's pretty decent returns.

It's, you know, you see a lot in value investing circles in public markets. And I'll say that owner earnings, and I know your exact calculation is, is relatively similar to free cash flow as we would define it. And in public markets, you know, you see a 10% free cash flow yield. And that is, that's pretty impressive as a steady state. And, you know, to talk about, you know, two and a half times that as, as your kind of starting point shows the power of, we'll call it a much less efficient market to hunting, where, you know, your scale, your smaller scale is a huge, a huge advantage.

Exactly. And this is, I mean, I, I know Howard Marks has talked about this a lot. I know that some of the top of us, you know, everyone says like, you know, play to your strengths, right? So if you're, if you have a tiny amount of money, you know, don't go and compete against Ray Dalio, right? Like, that's not, like, that's not, like, that's not the, you know, the best waters to probably fish in if you think that's what you want to do for a living, right? If you're not indexing and going that direction. But yeah, I mean, the reason why, okay, so let's go back to the kind of the underlying theory behind what we're doing. So if we're starting at a 25% cash on cash yield, right, pre-tax, everything's pre-taxed I talking about right now

because most of the businesses that we buy, actually all of them currently right now that we own are all pass-through entities, right? So I'm taxed personally. We're not taxed at the corporate level. But when you talk about the types of yields, it would indicate that there's something going on. Not only is it inefficient, but it's also really, really, really hard. And we happen to have found a niche and learned things that are fairly uncommon, right? That's why we're allowed to get the returns that we're generating. I think, you know, hopefully we're good at it, some combination of, you know, being lucky and being good. But, you know, just to, I don't want your listeners to think, oh, gosh, well, I should go out and

immediately drop my entire savings on some small business. Like, there's no faster way to lose your money than to do that, just as a disclaimer. Not that any of this is financial advice, but yeah, I want to make sure your listeners don't take it as advice. We are loaded up with disclaimers on this. Good, good, good, good. So you mentioned something earlier, which was interesting. So you've got your screening process.

You're looking for really solid, but maybe even boring businesses where you're not reliant on the goodwill and sort of the owner as driver and leader of the success of the business. And you're paying a fair price, right? So it all seems really reasonable. Obviously, it sounds a lot easier than it is in practice. Anyone with hands-on experience knows that. But then you mentioned that one of the other things that happens is that the profitability levels often grow pretty fast from the point of your acquisition forward.

So I'd love to hear more about that because, you know, one of the models I'm fascinating, with and I guess just broadly speaking is the venture model. But Andreessen Horowitz, regardless of their returns, and I think they borrowed this strategy from the entertainment industry, one of their things is it's not just a check. It's a whole bunch of connections, efficiencies, services, et cetera, expertise that can make the business a lot better after acquisition. So how do you think about that? What are the employees that you have that work on that?

talk about expanding the profitability post acquisition. So I think it can fall into kind of a few different buckets. The first bucket is what are the things that the business is doing that it shouldn't be doing? And this may sound, you know, like a no kidding. Of course, sort of, you know, yes, the lowest hanging fruit. And it is in most businesses. So if you think about it, if one person's been running a company for 30 years, at a certain point, just human nature is to get used to.

whatever you have. Some people call that the hedonic treadmill, right? I think the principle also works for these smaller companies in the sense that there's a lot of things that, you know, coming in with a fresh set of eyes and just asking, hey, why are we doing things that way? Like, why are we taking, you know, $150,000 here and plowing it into that? It doesn't seem like that's generating good returns. And they kind of, you know, will look at you and depending on the nature of the relationship, either be irritated that you're bringing that stuff up or say, yeah, you know what, it's just I've had other things to do. I got busy, right? And that's an honest, I mean, we all do this in our lives, right? It's not, it's not a value judgment at all. And these people

are, you know, without exception, every single person we've ever transacted with is very good at what they do. But they've been doing it for a long time. So we come in and typically are asking, you know, what I would call the dumb questions, which usually yield some sort of result. To give you an example on this. We bought one of the businesses, and it was putting quite a bit of money through through media, buying media. And we came in and we asked, well, why don't we put all that buy through credit cards? And the owner was like, well, because we don't want the debt. You know, we just like to do everything in cash. And I said, well, sure, let's pay it off, but we get an extra 30 days float on all that money, right? And we get an extra 1%, 1.5% yield on that spend.

And he just couldn't wrap his head around it. But he didn't. He didn't. just was like, no, I just, we've always done it this way. And I said, well, you know, now that we're in the driver's seat, that's what we're going to do. And by God, we immediately did it and started generating one and a half percent in profit above and beyond on that spend through the credit card rebates. And our cash flow jumped by, gosh, I don't know, half a million dollars. Like, that's not complicated. Yeah, very simple things. Yeah. So I would say that sort of the, the one bucket is, you know,

what are the things that the company's doing that they shouldn't be doing? Or what are the easy ones that you just sort of flip a switch on? Those are typically pretty rare depending on the situation. We try to get to know those through due diligence and have a pretty good idea of how we want to handle those. The harder question is what are the additional services we're providing? How are we helping and jumping in? And really, honestly, we've been having this conversation a lot recently. We've historically tried to under promise and over deliver. One of the intermediaries I respect most that we've gotten to work with said, you guys do an absolute crap job of selling yourselves, which is sort of ironic given circumstances. But we have three primary buckets we like to look at. We like to look at marketing, advertising, and lead gen as sort of one bucket. That's my background. I come at most things from a marketing mindset, and that comes with advantages and disadvantages. And a lot of the team members around me are there.

because their expertise is, and their mindset's very different than mine. So the second bucket we look at is technology. We'd like to call ourselves technology agnostic. To us, what that means is we're not thrilled with technology. We don't think you need to be the first adopter of technology. In fact, we think there's a lot of value destruction by sort of implementing the latest and greatest. You know, we would not recommend that our, you know, military recruitment company jump on Snapchat right now. I don't think that's going to be yielding the highest.

results, but maybe someday. And we also at the same time are comfortable with technology. So we've had a lot experience building out mobile applications, mobile sites, databases, you know, just different software systems. And so we try to come in and implement, well, recommend, I should say, not implement, but help them understand what technology could, how could be valuable. One of the things that, you know, we are going to very rarely touch on on this podcast for sure, which means it's interesting to talk to you about it is the first one. So this idea of lead generation and marketing, I talked to Ted Cydides about hedge funds and the importance of charisma, which I guess is one form of marketing. But maybe you could flesh that out a bit more. I know, for example, that you write for

Forbes and that your articles are, you know, broadly about business, thinking, strategy, what have you, but that those serve as sources of leads for, you know, people, companies contacting you because of what they read. So that's just one example. Maybe call that content marketing. Maybe expand on your, on your marketing background, how you think about it, what strategies are effective. And for anyone that's running a business out there, maybe something they could think about

that they aren't already. Yeah. So I think marketing is actually fairly simple, but has some interesting, I guess you could call it tactical secrets, right? So content marketing is sort of a hot rage right now. Everyone's doing it. Everyone wants to be in it. And I think using that as an example, is content marketing a good use of resources? Well, it depends on your opportunity costs, right?

It depends on what other channels you have. Most people think content marketing is, oh, right, a great. piece of content, whatever great means, and regardless of audience, right, right, a quote-unquote great piece of content and people will be beating down your door. And that just doesn't make any sense, right? If you think about the value chain that would have to occur for that to produce, you know, call it a new customer and new investment for us, that means that, you know, let's say on average, on a Forbes piece, if it does pretty well, 10,000 people would read it. Okay, well, so now you've got, you know, a universe of 10,000 people who've read an article.

Of those people who were qualified to sell their business and actively looking to sell their business, likely none, probably, maybe one to three, hopefully. Then they've got to read that article. They've got to think to themselves, gosh, that was so stellar. I wonder who wrote that. Then they've got to find my byline. They've got to click through to my website. They've got to spend time reading my website. Oh, by the way, this entire time, they can't get interrupted or distracted because they'll probably forget.

right? So what are the chances that somebody who reads that article is going to come through and, you know, raise their hand and say, you know what? I think Adventures is the place that I want to go to sell my business. It almost never happens. And this is kind of the tactical, using that as an example of how to think about it. But once somebody has found us, regardless of the way they found us, content is crucial to scaling education and trust. So the way I like to think about content is it allows you to spend a lot of time on one conversation, one conversation being the content itself, that you can then have that conversation at no additional time to yourself. So it's kind of like the software business and at scalability to be able to scale that trust and scale that education with a potential

client, partner, employee. I mean, there's endless uses of it. But it allows you to scale conversations that just really weren't available before. I mean, why do we think we know celebrities so well? Why do we, you know, we're all wired to think in a sort of tribe-like fashion. And when you watch somebody or you read something they wrote or listen to a podcast, you sort of feel like you're getting to know them, even though you're not. Right? I mean, you kind of are, but you're kind of not. You're scaling that conversation. So I don't know if that makes sense.

You know, every situation is a little bit different. And I hate to, you know, use the old it depends. But really for marketing, I would say most people fall down by not understanding the value chain that it would take for somebody to be successful. And so at the end of the day, all marketing is is sort of a value. you funnel concept. You know, you try to dump as many people of, you know, that are qualified and that could possibly want whatever it is that you're selling in the top and then move them down through the funnel over time. And how do you move them down through the funnel? It's trust and education. So overcoming what are their concerns, their questions, you know, are you legitimate?

Do you have value? Are you thoughtful? Do you have integrity? All the questions, you know, are going to screw me at the first opportunity? You know, how would I, how would I know how to use your product. How would I know, you know, the potential options that I can customize it or, you know, whatever the situation is, you know, content is an amazing way to push people down that funnel. But most people have these, you know, I would say highly a mismatch of expectations. And I think that's where a lot of the value is lost, you know, an old quote in the ad agency businesses. You know, I know half my marketing spend is wasteful. I just don't know which half. You know, I think that's a lot where it originates as people are just not understanding how that

value chains connected. So we spend a lot of time with our companies trying to figure out what is that value chain, what are the highest opportunities, mass media still holds, look, a lot of value. I'm actually kind of a contrarian. I love direct mail. I think direct mail is awesome, mostly because no one else is doing it and because it actually gets in people's hands remarkably. But a lot of that stuff that's out of fashion, I think is out of fashion for maybe the wrong reasons or shouldn't be nearly as out of fashion. And a lot of things that are the hot new thing, You know, just getting on Snapchat's not going to drive leads to your business. You've got to understand how to use it. You've got to use it sort of best practices around it. And it's got to make

value, you know, sense to your value to your target audience too. Did you ever read either Robert Collier's letter book or scientific advertising? I wrote scientific advertising, yeah. Yeah, it's the, it's kind of a fun, weird sub subgenre of books about how to write direct mail ads, which sounds like no one would want to read it. But, but what really is great about those two books in particular is that they're great, like, writing tutorials about removing fluff, focusing on you, or on them, not you, rather, and maybe two more books that people might be interested in checking out. So I never really thought about it that way. Certainly no marketing genius by any stretch. I think you're doing okay. But the, maybe we could

use an example of wanting to remove or to neuter your, it depends. Maybe we could focus on just one example. So the one that seems obvious in your portfolio would be influence and go just because of the title. So if you can, would you be willing to walk through marketing in the context of that business and kind of what that funnel looks like? Absolutely. Be happy to it. It's really interesting because they definitely eat their own dog food, right?

They are, that business, I mean, it's based out of Columbia, Missouri, which is, you know, my hometown where I am recording this podcast right now, not based out in New York, not based us in San Francisco. And really, no one had worked in marketing except for me before we found it that company. So you take a company that is full of young people that's in the middle of the country and you say, how in the world have they grown, I don't know, how many hundreds or thousands of percent, you know, on an annual basis, you know, moving back. It's through content marketing, right?

And content marketing, you know, the name of the company is influence and co. because what they really try to help, like I said, bigger companies, oh, I shouldn't say bigger, bigger-ish companies, or venture back companies, to use content to drive influence. And so driving influence has, you know, a lot of different opportunities, depending on who you're trying to drive influence with.

Most people think about it only in terms of your customers or gaining, you know, gaining additional clients. But there's a lot of other ways to use content, you know, to attract employees and talent to, we had actually one of the clients that business raised over a million dollars of venture capital like out of the blue because one of their potential investors read an article that she had written this female entrepreneur had written and said oh my gosh that is the company I want to invest in. So it has a lot of different applications and I guess that was my point kind of in content

marketing talking about that. So what they do is they eat their own dog food. They're out there publishing a ton. They have columnist opportunities at all the top publications. And they're using that to build influence amongst their customers, right? Venture-backed companies and CMOs, VPs of marketing, using those to start conversations, using those to, I mean, really just develop relationships to what's come down to. You know, it's not a quick and easy sell. A lot of times people have to, you know, understand what is it exactly that you're doing and how are you doing it? So there's a lot of education. There's a lot of trust building. And there's a lot of they're doing it typically from afar, although they travel a tremendous amount.

So, yeah, I don't know if that, I mean, I'm happy to go into more details. I mean, they had that website optimized for downloading content, gated content. They're doing, you know, lead gen forms. They have a pop-up that allows you to talk to somebody on staff anytime. I mean, the best practices and sort of conversion optimization, I would say, that they're using as well. But, I mean, the primary driver of their value is the product that they sell, which is using content that's delivered off. site linked back to on your own site. But, you know, putting an article on a Forbes or an ink magazine or entrepreneur or, you know, Wall Street Journal or wherever it is. And hopefully your

target customers will read that. And if they find you some other way, they'll look at that content and say, hmm, these are people that answered all my questions and helped develop trust with them. Let's talk a bit about data, how you use it, whether or not you, you're a believer in in gathering, you know, detailed customer data, which is certainly in the entertainment side of things, becoming, you know, the lifeblood of the Netflix's and Amazon's and, you know, these massive, I think now the top five companies in public markets are all tech companies. And a lot of that is, you know, facility with data to improve interactions with customers, et cetera.

Obviously, I'm a huge believer in applying data to just about every aspect of business and investing. And a sort of 1A question on the data question is maybe you could touch for a minute about your new relationship with Shane Parrish. I know a lot of people will know Shane and Farnham Street. And if you don't, you should for sure go check out what is a wealth of interesting writing on all things, really, and a great source of books in and of itself. But maybe touch on data.

I know one of Shane's many competencies is working with data and how you incorporate that in the overall Adventures business. Yeah. Well, so actually getting back to one of your early, and I'll talk about Shane as part of the answer, but getting back to one of your earlier questions about sort of how do we do value ads that, you know, I talked about we have three buckets. One is marketing advertising. The second one is technology.

And the third one is what I would call business systems. And the whole point behind business systems for us is does the management team, executive team for sure and hopefully even a layer two beyond them have access to good, clean, actionable data. And to give you an idea of where the bar typically is, and I say typically is not to call anybody out, but most of the companies that we see, their owners probably beyond the basic numbers, don't understand how the business runs. In fact, I would say a good chunk of them don't even know how much money they actually make.

And through our process of due diligence and helping, you know, helping them even understand where their business really is, it's sometimes a painful process. So we try to create scalable systems, try to help the companies get data and be able to look at dashboards and make good decisions. That's what it ultimately comes down to, which is perfect lead in for Shane. I've known Shane for, gosh, a while now, probably four years. And he's just a, he's a remarkable human being. He's an awesome, awesome guy in and of self, super smart, very driven. Yeah, I've been a long time admirer. And we've gotten to be good friends.

And through the process, you know, he's done some quite a bit of public investing and done very well in the public markets. He also worked for an intelligence agency and has a background in technology. He's a computer programmer by background and happens to be an amazing writer as well. I mean, that doesn't tell you everything you need to know, just right there. And so, you know, over time, we'd have very transparent conversations about what he wanted to do with the rest of his life and what we were doing. And, you know, we shared information. And we were kind of a, I joke that we have a group called the nerd squad that there's four of us who email, I would say, three to ten times a day, various articles and books that we're reading and observations about the world and really just share information to try to, you know, help each other get a little bit better each day.

And so Shane and I got to know each other through thousands of emails probably and spending a lot of time together in person. And eventually it made sense to have him come on board. And so we couldn't be more excited about it. He came on. He's actually, I think, finishing up his first month. He came on September 1st officially and full time. And he's still, Farham Street's still doing its thing. He's still involved in that.

We absolutely want him to be involved in that. That is a fantastic opportunity for us. but I think it's a great opportunity for him, too, to use the, you know, the mental models and the principles that he's, you know, been so deeply immersed in, as well as his, I would say, more formalized skill set to help us build out systems and technology and really bring a depth of understanding to the company that's, I think, pretty unusual in the space with playing. One of the, it's a good bridge into my next question, which is one of the kind of Buffett maxims is this idea of, you know, shares in a public business.

being really just that fractional ownership in a business and that the stock should be evaluated as such. From your seat, and we've talked about the multiples you're willing to pay or seek to pay and what you try to do after acquisition, what are some of the absurdities that you see when you look at public markets? Is there anything when you look at public markets and just scratch your head and think, how could this be happening? Well, I mean, so I don't want to step outside of my circle of competency too much here. I mean, I've done a little public investing in the past. I mean, everyone, before I found the thing that I wanted to focus on and before I found what I would call the most inefficient market in the world, or at least the safest most inefficient market in the world, you know, I paid attention, pretty close attention to the public markets. And I mean, I think there's no doubt that interest rates have caused a distortion in my humble opinion. I think,

it's really hard if you're an individual investor to, you know, beat the average. I can't remember I saw a stat recently. And Patrick, you probably know 10 times where I should be interviewing you on this topic. But, you know, I saw a stat that if you're an individual investor, you know, the likelihood that you beat the average is like 7% or something or 6%. I mean, it's just unbelievably small. Most people, you know, are significantly underperforming benchmarks. And so I think the absurdity is it, you know, and it is, I don't think. I think I can beat Ray Dalio. Just to use an example, I mean, I think when you have people looking at every nook and

cranny in the market and pricing things on a per second basis, and I think it's just really hard to find much alpha there, right? And again, you may completely disagree. That's my own personal take on it. But that's why I don't even, I have no money in the public markets. I'd never plan to put any money back into the public markets just for that very purpose. If I did, I am putting money on behalf of my daughter. and my new daughter who's going to be born here in a week or two, I plan to put money into

the markets for them, but I'm buying an ETF, actually buying a Vanguard S&P 500 and planning on never selling it. So I'm betting on the future of American industry and leaving it alone. That to me is the only logical thing for me that I can do. What is your most memorable day at, well, you can choose either at Adventures or throughout your career, let's say. Boy, professionally then, because I've had some pretty interesting days personally. Let's do both. Let's do both. Okay. Okay, so professionally, I can remember when I had just bought Media Cross. So Media Cross is the military recruitment firm in St. Louis, and the owners, the way it rolled out, we closed in the morning, and then he had an all-hands-on meeting, all-hands-on-deck

meeting. And I think it was 1 o'clock or 1.30 in the afternoon. And so gathered back in his office. No one knew who I was. I had a guy with me who was my right-hand guy at the time and was in his late 40s at the time. So we go into the conference room. The entire staff has gathered there. We're kind of seated off to the side. The owner, former owner at that point stands up and says, well, guys, I have big news. I sold the company to Brent Beshore. And he kind of points in our general direction. And all of a sudden, people start looking panicky. Is it, which guy is it? Right? And I, you know, your listeners can't see this. I look about 19 now. And I think at the time, I looked about 13 or 14. And so they were like, you know, they looked over and the

guy's name was Craig, who was my right hand guy. Awesome, awesome human being. And they, you know, looked at him and they were kind of like, okay, I don't know who this guy is. And he said, Brent, why don't you stand up and come here and talk to the group? And I stand up. And I can still remember the looks on it looked like somebody had been publicly executed. Like the looks on their face were sheer horror, terror. They had, the company had just been sold to a 12 year old. And I will never forget that day, probably for the rest of my life, because there's nothing I could do about it. Right.

There's nothing I could do about it. I totally understand their reaction. I like to joke about how young I look still today. How old are you? I'm 33. So, but I get carded sometimes. I actually was on a, uh, on a trip. Uh, and the drinking age was 18 and I got carded two years ago.

So I look young. There's just no two ways around it. I may not look 19, but I feel your pain. Yeah. I actually thought about buying what, like some reverse just for men early in my life. I need some gray in there. A little bit of gray hair. Actually, it's funny you say that.

Uh, we always used to joke, uh, Craig, the guy who I was with at the time. that his main role was to just stand there and look and posing, look older, right, so that he could olden this up if you want to call it that. So, yeah, I mean, I would say that's probably a moment. That's amazing. How about personally? It sounded like you probably have an interesting one on that or two on that side as well. So I had the opportunity in law school to go and study international law in Cape Town. And I don't know how much you know about apartheid politics and the sort of remnants of apartheid, but it's still a messy place today. I mean, African, yeah, okay, so it's messy.

You know, my interest in poverty and helping alleviate poverty, help understand the underlying causes and how, you know, really just get a more full picture of the complexity led me to an interesting situation that I got one of the professors that I had worked with a little bit through the law school who was friends with an owner in Google Lettu. So Google Lettu is made famous by the Google Lettu, seven, seven women and children murdered in broad daylight by police under the apartheid regime. Horrible situation, extremely impoverished area. Over a million people live in a very dense, shanty town environment. I mean, these people are scraping by as an understatement. And so I wanted to go in and help understand. I want to see it sort of touch the medium, right?

I wanted to understand it for myself. And I got to the same. And I got to go. this guy to take me in and he assured me that I'd be, I'd be safe. It is, it was a remarkable experience, but for an unexpected reason. I thought I was going to go in and, you know, see if people beaten down and misunderstood. And, and there was that, but there was also a lot of hope and a lot of amazing vibrancy to it. And I couldn't quite figure out, you know, when we got out of the car at this butcher shop, this big guy met us and he said, oh, this is the owner of the butcher shop and went in and they put a giant bowl of meat in front of me. When I say a bowl of meat, I mean probably three and a half pounds of seven different times

of meat, kinds of cooked meat, right? And I had already eaten. And the guy said, welcome, Brent, welcome, eat. And I said, oh, I'm good. And the guy who I was with, like, you know, hits me in the side and says, eat the meat. Like, eat it now. And so I started getting down on the meat. We went on a tour after that of the town.

And when I say the town, I mean, just a tiny little portion of it. And everyone was looking at me. I mean, I was the odd man out. And I had this weird feeling where it looked like people were kind of looking down, looking sideways. And so it was a very strange experience. I get back and come to find out the owner of the butcher shop was the largest drug dealer in all of Cape Town. That butcher shop was well known for taking care of people who didn't jive with his wishes and desires. so let's put it that way.

Very interesting experience. So I touched the medium in a way that was, I think, a little unexpected if you want to put it that way. Wow. So you probably needed a glass of wine after that day. Yes. That brings me to your foray into winemaking. Oh, yes. The boondogel.

Yeah, this is going to be probably unbelievable that this is yet another dimension, given you're 33 years old, they're making me feel like I need to speed things along. But talk about wine. So Be Shore family vineyards. What was the story there? So my wife and I, when we first met and had just gotten married, so she's a scientist. Like I told you, I think before I actually started recording. Like I married up in a big way.

She married down in a big way. I apologize for it every day. She's a PhD in molecular microbiology and amiology. So she's incredibly brilliant. wonderful, kind-hearted person. And we just figured out early on with my background as an MBA and JD and her background with a PhD, we kind of struggled to find mutual shared ground, like, early on, right? And so we started enjoying wine together. We both sort of got interested in it. We started going out to Napa Valley. And to make a long story short, met some owners out there,

got to really be integrating in the community over, say, seven, eight, ten trips. And, and, And somebody said, you should start making your own wine. We said, no, we're from Missouri. And the guy said, no, no, no, I used to be an architect in New York. Like that guy used to be, whatever. Everyone out here is out here for the dream. You should just start, you know, just do it. And I said, well, how does that work?

And you said, well, you just, you know, find a winery. You sort of get a consulting winemaker. You buy grapes. You, you know, buy barrels. You rent a crush facility. And, you know, you just do it. And I said, well, okay. I guess we need a hobby and it'd be fun to try it. And so we did. And that was kind of the start. My wife and I just decided to make, I think, the first year we made two barrels. No, no, no, we did three barrels. We did one Pino Noir from Russian River, which is an area in Sonoma that's where our favorite Pino comes from. And then two Cabernets, one from Howell Mountain and then one from an area called Coombsville, which at the time wasn't an AVA, but now is and recognized. And it's pretty interesting.

kind of upcoming area of Napa Valley. But did you ever run across Oshana C. Wine? It's no relation to me on Howl Mountain. We are Wine Club members. There you go. Yep. We started, my wife's maiden name was Messina. And so at our wedding, we had Messina beer and O'Shaughnessy wine.

Oh, that's awesome. Neither was affiliated with either family. That's really cool. For anyone that's interested in wine, the O'Shaunicee Hall Mountain Cabernet is pretty good stuff. Oh, it's off the charts. It's actually, I think they're fully allotted now. We got into the wine club before they became fully allotted. I don't think you can actually, I don't think they're taking any new wine club members, unfortunately.

So if you ever see it, I think they have a limited distribution. So if you ever see it at a menu at a restaurant, it's not cheap, but it's delightful. So where does it stand now? Do you still make wine? So we made wine this last year. We're going to take a break. It's a lot of work and it's a lot of headache. And it's sort of, it's like owning a boat, except instead of pouring your money,

into the water, you just pour your money into the ground. What we've learned is that we like drinking wine. We like making wine less. And yeah, so I think I think we're going to, we may go back to it someday and test on it some more, but I think for the time being, I think I've got, I don't know, 80 or 100 cases of our wine in my basement. So I think we're good for now. What are the, I have no snappy transition to get back to business. One of the most interesting things that I've read that you've written was about different types of debt. So forget traditional money-based debt. You write about culture debt, code debt, systems debt, expectations debt, things along those lines.

Could you maybe pick a few of those and describe what you mean and why they're important to businesses and maybe how you think about them when looking at targets or managing your portfolio companies? Yeah, absolutely. So this goes back to the comment I made earlier about small businesses, you know, not staying small on purpose. So typically when we go in and we analyze the, what I would call the quality of the underlying business, it's not only what's the growth rate, it's not only, you know, what do we think the future prospects would hold on the upside. It's also what's the downside. And I think a lot of these things are a mixture of, you know, if you don't have, so let's just take code debt.

Code debt's an easy one because if you're in technology at all, you know the term code debt. What code debt means is you wrote code, the underlying technology. let's call it that for the product, it has been written quickly and not documented and isn't easy for somebody else to jump into and is kind of patched together over time. So instead of being thorough and systematic and sort of setting the table for long-term success, the decision was made either consciously or unconsciously to take some shortcuts, let's call it that way. So that we do find code debt in some of the companies, depending on what their technology systems and stack is.

But I would say more often we find what I would call culture debt or leadership debt. And culture debt is just, you know, there's not high trust amongst the employees or there's a certain cultural element that is impeding success and potentially causing some extreme liability. So I would say an example of this that we see quite a bit is a focus on making the employees focusing on making themselves happy. at the expense of their customers. And where does that usually flow from? It usually flows from an owner or leadership group

that is focused on making themselves happy at the expense of the employees. So, you know, we try to go in and sort of diagnose what are these pockets of opportunity? Because we're paying for a base case, right? So we're paying at the prices that we're paying, there's risk is baked into the equation, right? So the margin of safety is fairly considerable, at least in the types of deals that we do.

And so we're assuming we're going to find, I call it the squiggly things, right? So you pick up a rock and all of a sudden there's all these squiggly things underneath the rock. And what do most people do? They take the rock and they put the rock right back down on the squiggly things. And they're like, whew, I don't want to see that again. Our job is to pick up the rocks, look at the squiggly things, figure out how to remove the squiggly things. or at the very least mitigate some of them. And kind of, you know, sunlight is the ultimate disinfectant.

So bringing these things up over time, I mean, it's not a, you know, slam down the door first day. You've got to build trust. You know, it's a function of being able to earn the respect and earn, you know, the trust of the people over time, make sure they know that you're not trying to call them out and trying to make them look ridiculous or like they don't care. is never true. I mean, we work with amazing people. It is unbelievably brutally hard to run a company. And I think that's one of the things if I was going to say, the average investor that I've met significantly

underestimates how hard it is to run a company. I've heard investors, especially public market investors say, oh my gosh, look at that business. Any idiot can run it. Right? And Buffett's quoted saying, you know, buy a business that any idiot could run because sooner or later that'll happen. And while that may be true and the dream come true is to own companies that idiots can run, idiots aren't running successful companies typically and hopefully aren't running the companies that we choose to get involved in. So it's more just, you know, opening people's eyes to what more could there be? How could we choose to focus time and the highly limited resources that we have into the highest and best use, right?

We've got to look at opportunity costs. We've got to look at, you know, the risks to making the chance. And those risks are not insignificant, right? Even in a culture that you think it'd be easy to say, oh, gosh, if we just focused everyone on caring about the customer war, if it was easy, they'd already be doing it. So it takes a lot of time. It takes a lot of effort. You have to redo incentive systems.

You have to help kind of realign people. And ultimately, if people don't get on board, you've got to make tough calls. And I think that's a large part of what we're able to do is just really hold the mirror up. What's the biggest miss that you've had, a company where maybe you looked and passed, and this could be a more late stage type or an early stage type, and maybe what lessons, more broadly speaking, beyond the biggest miss, have you learned from deals that you've not done? Yeah, that's a great question. Boy, this one's painful for me. Okay, so I try not to think about this one much. Actually, I do think about it a lot. But we had a chance, gosh, six years ago, I had a proprietary deal. Proprietary means there's no intermediary involved and there's no other, it's not a competitive bid situation.

So this is a person coming to me and saying, this business is for sale. If you can buy it at this, you know, if you can come up with this much money, the business is yours and you can own it. So we had a proprietary deal come. It was a good friend of mine who brought it to me and said, hey, I know these guys real well. They're some discord in the company. The owners can't get along. It was in the advertising technology space, and they owned a lot of inventory, and they were very

early on installing widgets on sites and gathering ad inventory and then reselling it at unreal margins. So anyway, we had an opportunity to buy that company for, I think it was a million three, maybe a million four at the time it was doing oh gosh i want to say 250 000 a year maybe 300,000 a year of profit. So the multiple looked high on it and at the time i sort of definitely was into the ben graham style private investing i would call it right i hadn't i hadn't found my munger yet my munger gene and i wasn't willing to overpay under any circumstances and i love the business I thought it had longevity. It was a great for sale opportunity.

I was getting it at, you know, in hindsight was a tremendous discount. That company was sold to somebody else. And then three years later, that company sold for about $35, $40 million. That hurt. Jeez. Yeah. Ouch. So, yeah, I mean, the lessons I take out of that, right, are, you know, I saw somebody in the venture business said this the other day,

you can't always focus on the downside. You also got to use your imagination and say, what could it be? And there's some businesses that just lend themselves better to that than others, right? You know, if you're getting into an old school, old style business that, you know, is selling a very clear package of services. And, you know, it's easier to see, you know, what it could be. But if you're getting into newer technology areas, if you're getting into sort of interesting, unique models for businesses, I think that you have to use your imagination. And we've tried to do that.

I'm more and more and more be willing to stretch a little bit if the situation presents itself. Maybe a twist on that question of, is there an example of one that you said no to for some reason? And you could tell me the reason. And then it really worked out. So not a missed investment, but one that you passed on that turned out to be a great pass. Oh, yeah. Boy, I would say I've got tons and tons of those examples. I'm trying to think about it.

I mean, this is basically almost every day. Yeah, I guess, yeah, you mentioned earlier, you know, most businesses in the 2000, you know, 1700 of those probably, probably are examples. Yeah. And I think this is actually the interesting point, you know, because, you know, if I was one of your listeners and I wasn't familiar with my area of the world, I'd say, man, it sounds like a load of BS that you can buy a company for a 25% cash, immediate cash yield, right? Like, that's just not, there's no way that's true. It sounds insane. Yeah. Yeah, that's just, it is, and it is insane, right?

It's only insane, though, if you can find the ones that are deserved to be sold. The problem is, most of the companies are untransferable or intransferable. I don't know what the proper English is, but they shouldn't be sold. Most of these companies are set up, and there's so much, you know, of the types of debt we talked about, culture debt, leadership debt. There's so much inherent risk. You know, I think of the, was it, Buffett or Munger talks about the buried suit problem, right? Like the...

I heard that one. Oh, I think it's in one of Buffett's letters. way, way back. And he talks about the guy got a call from his sister and he said, his sister said, oh my gosh, our father's died and he was overseas. He couldn't attend the funeral. He said, well, you know, you get everything taken care of. I'll pay for it.

And so, you know, the funeral happened. He got, you know, the bill for the funeral. He paid it. And then every month thereafter, he started getting another bill. And he went back to his sister and said, hey, what's the deal here? I thought I'd taken care of all the expenses for the funeral. And it says, oh, yeah, sorry about that. accidentally buried dad in a rented suit. Right? So I always think about that analogy. To me, that's a really interesting mental model for what we're potentially inheriting

with the businesses we're buying, right? Like, what are the buried suits that we're buying that we're going to be paying on for basically the rest of our lives? And a lot of that is the debt that we talked about. So, you know, the honest to God truth is that most of the businesses that are under, I would say for sure, under $5 million of owners. earnings and even some under 10 million, you know, gosh, it's a pretty hairy situation and it is fraught with all kinds of risk. And I think if you run a Monte Carlo simulation on those

companies, I'm not sure that you get to a place that gets you much of a return. And so again, you know, our big, you know, if we want to call it edge or the thing that we've done that's that, or at least what we're trying to achieve is, you know, buying cigar butts, what look like cigar butts at cigar but prices. And hopefully we buy a cigar through either assessing the business better, discovering the business better, or adding a lot of value. We try not, though, to overnegotiate. And I think that's an unusual point. I think that's something that actually is a big differentiator for us. And I don't know if we want to sort of dive into that side of things. But we try not to, we're trying to develop a relationship. And there's no worse way to

start off a relationship than saying, ha, ha, ha, I got to. great deal you got screwed, right? So we got to play the long game. So how does that work? Let's take an example of you bidding for a company. How many back and force will there be? What, when you say you don't over, overdo it or overnegotiate, flesh that out a bit more. That seems interesting. Yeah. So if you think about it, I think this is, if you ask me, what is our single greatest edge we have or sort of what's the adventurer's competitive advantage? It would be our mentality seems to be so different than almost everyone else we're bidding against in the sense of we're playing the long game. We're not playing a one-time game, right?

We're playing a very, very long game with an ownership group that we hope to actually, you know, keep on their expertise, have a great relationship with them because they're the key to the business, at least in the medium term. And we don't just do that only for that reason. I mean, it is self-interest rightly understood to use a, you know, Tocqueville quote, right? But more than anything, you know, we're doing it because it's profitable in the long term to do it that way. And it's also the right thing to do. I mean, how lucky are we that we get to, you know, engage in activities that are both, you know, fruitful and I think morally sound, I guess you could call it.

So we try to really focus on incredibly high integrity. We try to be extremely reliable. So we're not flaky. So much in private equity is lob out term sheets, deal sheets. Just, you know, kind of, it's a machine. And you just lob enough out and enough come in and you kind of screw around with people and you don't close and you try to renegotiate. And we don't do any of that. We only get, you know, whatever we put on paper we stick to unless there's sort of a material change in due diligence that we find, which is not uncommon but also not incredibly common.

either. And, you know, we just try to focus on a win-win situation, right? I mean, if it's a, if it's a win-lose for either party, it's not sustainable. Like, there's no way that that makes sense long term. So people will hear or have heard, you know, 25% cash on cash returns. And that's the, that's the stuff of, you know, salivation. And, and, and, and I'm always, I'm always hesitant to think, even let myself think about returns like that. And as it died in the wool, albeit quantitative, but a dyed in the wool value-based investor, where a lot of the best outcomes come from growth, individual outcomes come from growth stocks, but as a category, it's been very bad. And so chasing after, you know, 25% returns is almost going to certainly result

in inferior returns in most situations. But if someone was interested in doing something similar to what you do. What are some of the maybe personality characteristics that you have or key people that work with you have? Or things, skills, skill sets that people could work on cultivating, especially younger people out there that could allow them to thrive in, we'll call it the private, you know, small mid-market private investing space. Yeah, that's a great question. So in order to answer that question, I think it would be helpful if I, I know this was actually you're kind of part of your last question that I didn't even answer because I forgot that you asked it. But what is the actual process? So let me walk through the process and there's no

magic to this. This is, I think, pretty standard. But you first got to find deals. And this may seem like an easy task considering at the end of the day you're selling money, which should be intuitively the easiest thing in the world to sell. It's not. It's really, really hard to find good deals. The easiest way, especially if you have very little money, to find deals is to go on deal websites. There's like buy sell biz, there's a bunch of these listing sites, right? And unfortunately, the inside ballgame on that is if it's for sale and it's up on one of those sites, it shouldn't be sold, basically. Shouldn't be bought. I mean, there are exceptions to that. There are, there are rare situations, but for the most part, it's, you're going to be chasing your tail a ton

because those are businesses that sort of have no other options. So if you find a business that's publicly listed, it just probably isn't a fantastic base case situation. So how do you find deals? You've got to go knock on a lot of doors. You've got to talk to a lot of intermediaries. They get hounded all day long, you know, lawyers, accountants, wealth managers. And there's an incentive sort of an inherent negative bias that they're going to have

because they know as a service provider to these companies, if they say, sell, right, the lawyers, accountants, those types of people, typically they're going to lose that piece of business. So in fact, it's a really, really hard place to find them, but that's, you know, that's a source. Intermediaries are another source, as I mentioned, they come in all different kinds of flavors. I kind of put them into two buckets of on a spectrum. One is the very, very low-end business broker. These are the people that it's basically a real estate agent for a business is the way I would look at it. Those people, are, I mean, they are just a pure connector. They are saying, hey, my client is over here,

you're over there. Here, hold hands and good luck to you and let me know if you guys sell and I'll take my fee. So very much like a kind of a real estate transaction. And then on the opposite into the market are very, very, very skilled intermediaries, which are typically known as investment bankers, depending on the firm and depending on the reputation, they're going to be doing very deep analysis. You've got to be careful with those people. like anybody else, that if they're doing all the analysis and they're providing you with all the numbers, there's going to be a bias against giving you an accurate picture or not completely clear picture. And typically on the upside for the business selling, of course, what's the

proverb or the old saying, who's bread I eat, his song I sing. So I think that's a, that's kind of dangerous situation too. But you got to, you know, going to intermediaries is a must. The way you got to look at that is unless they're bringing the deal to you as for a very specific reason, they're probably taking the deal to, oh gosh, 100, 150 people. They may be hitting an email list. And so, you know, you always got to look at your base case chance of winning a deal. So if, you know, just at the pure number standpoint, if it's sent to 100 people and you're one of 100 potential buyers to the business, what are your chances of winning the business? 1%, right? So, you know, I think that finding the deals may seem like the easy part is actually not. So I would say, you know, that's really challenging. Once you found the deal, understanding, doing the actual analysis, which I would say is pretty close to what any investor does, and that's what we kind of covered earlier, it's really, really hard, right? But you've already had to go through another hard gate to get to that gate, which is hard. Once you get it under a letter of intent, so that the pacing of it is, you know,

get to know one another, sign an NDA, review data, send over what's either called a term sheet or an indication of interest. Once that indication of interest is in the quote unquote ballpark, then you draft what's called a letter of intent. Letter of intent is much more fleshed out, detailed version of the term sheet. And typically gives the buyer of choice the exclusivity on the deal for a certain period of time, call it 60 to 90 days, somewhere in that ballpark typically. Here's the interesting part.

Actually, I'll ask you, Patrick, what do you think the odds are once a letter of intent is signed in a deal in the lower middle market, it closes? Hmm. Good question. I'll guess like a third of them close. 22%. So you've got to think about it this way. One in five. One in five close.

So that shows you again how difficult it is to even once you're the exclusion. buyer, once you have exclusivity on the deal, there is so much that happens and is so difficult to try to get information. I mean, these people are running the company. There's egos involved. There's maybe an intermediary involved. You're not sure what kind of game of telephone you're playing. You know, it is, there's so much intricacy. I mean, the deal that we closed in December, I remember we were, let's see here, two weeks before closed and I had an open issues list that I was running, this kind of part of my process and due diligence, you know, what are the issues we still have to resolve before we can close the deal? And two weeks before close, a pretty hard close date,

I had 130 open issues, 130 things that I had to negotiate as part of that deal. And this is two weeks before close. The intricacy and level of detail and making sure the taxation gets right and making sure that the incentives are set up properly. I mean, it is mind-bogglingly hard. And by the way, you haven't even closed on the business. You don't even own that. the business yet, right? So I'm trying to present an accurate picture. You know, why can you generate those, you know, high returns is because even before you get to the starting line, which is, hey, you closed on the business now you own it. What are you going to do with it? Right. You've got to get through, you know, 15 really, really high gates. And the chances of even closing a

deal, you know, are hard. I would say, if you ask me from a standing start, what is the likelihood that a smart, well-read, well-versed, maybe even experienced business executive would find a deal and close a deal that is a valuable deal, that's a good deal, that would be a positive ROI deal in the first two years. And I would say maybe 20% chance, maybe 15, somewhere in that ballpark. And again, that's where it sounds like a dream come true when you just look at it retroactively or historically. Yeah, we've been able to generate great returns, but we've also eating a lot of glass. What keeps you going? So let's assume, you know, you're 33. Let's assume you do this for another seven years and you're... Oh, gosh, in seven years. No, no, no, I plan on doing this until I'm 85 or 90 or 95.

Yeah, so it starts to get to the answer to my question, but under the hypothetical that, you know, you compound at, you know, maybe not 25 percent because you get bigger or something, but an impressive rate and obviously it's not about the money. So what particular aspect of it creates this, what seems like a tremendous like personal momentum in you or insatiability? Like is, is there a, is there a part of the process, um, which is laid in with difficulties and high, high hurdles, as you point out that, that keeps you coming back every morning? Yeah. I mean, I, I, I love what I do. Right. So my, my test on, am I, am I on the right? track or not is do you do what you love in a place that you enjoy with people that you admire,

right? Like that to me is the, that's the ultimate test. And I'd be happy to not close a deal for five years or, you know, if we're so lucky that we can find the best deals that we want to close, I'd be happy to close five of them in one year, right? Ultimately, it's not about the outcome per se. It's about making, I kind of make an analogy for golf, right? So if you ever play golf and you know that you can.

can make a good swing and get a bad outcome. But typically, if you make a good swing, you get a good outcome, right? And I just love swinging. Like, I just, everything about it, I get to work with some of the smartest people in the world. I mean, you know, Shane coming on board. We've got an existing team that's just absolutely dynamite. I have a ton of respect for the people I work with. And it's just, it's a blast. I get to, I get to hang out with really, really, now, not everyone would say they're cool people. They're not celebrities, right? They're not, you know, sort of Nobel Prize winners typically. They're really good people and they really care about their communities and they're having a lot of fun typically themselves. And they've done very

well for themselves before we came along. And so, you know, I, uh, I just can't imagine having a better job. Like, you know, the joke that Buffett says about tap dancing to work. Like, that's me most days. I think I live the most blessed, great, I'm so grateful for my life. Like, it's just absolutely amazing. What are the things that, you know, I ask this of everyone, because I'm just fascinated with, and you've already mentioned how important for you process is that, you know, you're not setting some return goal or wealth goal or anything. It just sounds like you want to enjoy yourself every day. And I'm always fascinated to know what the things are that you do every day that you feel are the most important habits or sort of daily values that have led to, you know, the well-being and good

things in your life. Maybe that people can emulate. The results won't be the same. But sort of daily systems are, are everything, I think. And so I'd be curious to know what your key points are on a daily basis. Yeah. So, I mean, I'd say the single biggest determining factor of the success we probably have had is the compounding of knowledge, giving yourself time to.

understand how the world works, think deeply about the way the world works, try to learn new things about the world, and try to get a more accurate picture of reality every single day. I make a lot of time to, well, I shouldn't say. It depends. I go through sign waves, right, where sometimes I'll have like a lull and deal flow and everything's kind of clicking along at the portfolio companies, and if I was going to jump in, I'd probably cause more of a mess than I would help. You know, thank goodness I have a wonderful woman who's the president of our firm named Suzanne Bileland, who's, you know, she's the best business decision I've ever made partnering with her. And, you know, she'll tell me to go sit in the corner for a while. And as I, I like to call myself an isolated extrovert.

So I have this desire to engage. And I think the way I have an outlet for that is in reading. I have a conversation with the authors that I read. I read, you know, depending on where my interests are, I read a lot of articles. I have probably a stack of 50 books that I'm going to get to, you know, at some degree. And sometimes I'll read 10 books in a month or 12 books in a month. And other times I'll read two or three in a month. So, you know, it kind of varies depending on where my interests are and engagement.

But I would say just the compounding of knowledge. I mean, for me, you know, a lot of knowledge is found in the Bible. And my, you know, prayer life's important to me. That's something that, you know, I've really, you know, has been a blossoming for me. and I'd be remiss if I didn't say it. And I think that's, you know, again, kind of goes to the whole compounding of knowledge and understanding. Fascinating stuff. What is the kindest thing that anyone has done for you, we'll say professionally?

Wow. Kindest thing. So it's easy to look back and tell a tight, nice story of how everything came together. And, you know, I hope anybody with experience probably realizes that that's not the case. Right? Life is far more messy than quick sound bites explain. And I, you know, my entrepreneurial journey initially over the first couple of years was rough.

I had gotten myself into a challenging spot. I mean, making money's hard. Creating a stable company from scratch is just, it's like eating glass. I think that's a great analogy every day. And, you know, I'd gotten myself to a spot where there was a lot of big egos involved in in the business and some challenging things that happened. And I had some people who acted very unethically and unprofessionally. And man, I was just kind of at the end of my rope. And there's a guy who worked for me, his name's Craig Brace. And he's the guy I was mentioning before that

was looked a little older and came into the acquisition with me. And it was probably, you know, six months or so before that that I, you know, really hit the bottom of the trough. And I can remember, crying on my way to work. I mean, the sound, you talk about raw. I mean, this is just the reality of it. I think a lot of people go through this. But, you know, I thought I was complete failure. I thought I was doomed to, you know, I sort of had dreams about, you know,

having to get a fast food job or something, right? And I had a guy named Craig who was older, much wiser, super, just one of the kindest human beings I've ever met who, you know, I opened up to him. And he was one of my employees, right? And I kind of had this moment where I was like, I should be working for him and not in reverse. And he just, you know, he gave, you know, he sat there, listened to me, was patient with me. And for about, you know, a month or six weeks, I mean, kind of nursed me back to health. I don't know how else to describe it like mentally and emotionally.

He just, he was a rock. I mean, just unfailing rock. And, you know, if it wasn't for him, I mean, I probably haven't told him this enough. You know, I think things could have turned out very differently. So I think sometimes we all just need a person to be real with. And, you know, I hate the culture around business and that everyone's killing it, right? And that's why even I hate talking about the returns and all that side because it sounds like such bravado BS. And I don't want it to come across as that.

Like making money is brutal, right? Like trying to be successful in business and just operate any business regardless of the business you're in. I'm sure the investing business is exactly. the same. It's just so hard. And I think you need to have real relationships with people. And, you know, I'm not saying trust, you know, to that degree, a lot of people. But I think you need to find some people that you really can cry in front of and be your worst in front of and be your most insecure in front of. And I hope they love you regardless. And yeah, he definitely, he definitely was that for me. So I don't know if that's, that's probably a really weird answer. No, it's a, it's a

great one, and this is one of my routine questions, and like many others, it's sort of, the answer is one of integration and understanding. So I think that's a great place to wrap up. This has been just an awesome, awesome conversation for me, since it's totally outside of my area, of what's led my career. So thanks so much for all the time, all the interesting stories, all the lessons, I think, that certainly are super applicable for someone that wants to be in the private investing world, but more broadly as well. So Brent, thanks so much for all your time. Patrick, I really appreciate. Thank you so much for having me on. Hey, everyone. Patrick here again. To find more episodes of InvestorField Guide.com

forward slash podcast. If you're a book lover, you can also sign up for my book club at investorfieldguide.com forward slash book club. After you sign up, you'll receive a full investor curriculum right away and then three to four suggestions of new books every month. You can also follow me on Twitter at Patrick underscore Oshag, OSHAG. If you enjoy the show, please leave a quick review for us on iTunes, which will help more people discover Invest Like the Best. Thanks so much for listening.