We Study Billionaires - The Investor’s Podcast Network - TIP393: Fundamentals for Private Deals W/ Brent Beshore

Starting point is 00:00:00 You're listening to TIP. Today we are exploring capital allocation in private markets with the CEO of Permanent Beshore. Brent started out as an entrepreneur and through his own M&A strategies has now found himself purchasing small to mid-sized companies with the intention of holding forever. In this episode, we discuss what he has learned from breaking bread with the likes of Warren Buffett and Charlie Munger, key lessons and approaching acquisitions, managing styles and the importance of autonomy, learnings from the private market that translate to public markets and a whole lot more. Brent is an empathetic leader whose style is a great reminder that a simple approach, although not easy, is most often the best approach.

Starting point is 00:00:38 This was a really fun discussion, so sit back and enjoy learning about private acquisitions with Brent Be Sure. You are listening to The Investors Podcast, where we study the financial markets and read the books that influence self-made billionaires the most. We keep you informed and prepared for the unexpected. Welcome to the Investors podcast. I'm your host, Trey Lockerby, and today I have a very special guest with me, Mr. Brent Bishore. Welcome to the show.

Starting point is 00:01:16 Hey, thank you so much for having me on. Really excited to have you on. We're going to be talking a lot about investing in private companies today. And before we get into all that, you know, it stood out to me that you were an entrepreneur yourself before finding yourself as a now capital allocator of sorts. And I'm curious what led you to now have. having permanent equity. I mean, what was the roadmap that got you after being involved in marketing? Yeah, yeah. Well, so I often joke that I'm the force company, private equity, because I've never taken a finance class in my life. I can barely open up Excel. I never worked another firm.

Starting point is 00:01:50 So I was an entrepreneur and operator, started a couple of businesses, and that led into accidentally buying a business as close to accidentally you possibly can and did well with that. And, you know, honestly, today, I still feel like I'm more of an entrepreneur and operator. I mean, yes, we make investments, but really what we're doing is expressing a skill set and operating skill set through the companies that we are able to partner with. And so we very much look at it. I mean, we can get into this a little bit later, but we're very much the opposite of private equity in the sense that we're not financially engineering these companies. So the only way that we create value is to create good long-term win-win relationships for everybody involved and try to make these

Starting point is 00:02:23 companies better. Now, it's pretty easy to gloss over background a little bit. As an entrepreneur myself, I have to double click on this a little bit because, look, it's not an easy, feet to say like, hey, we started this business that led to this and we did this. Here we are. Great. But like, I know that there's way more to it than that. So talk to us a little bit about at least what you loved about marketing to begin with. What got you into that service-based industry to begin with? And do you find that you're applying those skill sets even today? Yeah, well, to answer your last question first, I mean, for sure, I would say that marketing, advertising, lead generation, sales development, I mean, all those things are things that every company

Starting point is 00:03:02 needs. I mean, we've got companies across the country, across manufacturing, construction, military recruitment, we have matchmaking firm, right? All those companies need the same thing, which is to find more customers and then to service them better. So for sure, marketing is always a key component of that. To be honest, I fell backwards into that as well. I mean, this is the story of my life and my career in many ways. I was getting a law degree in my MBA at Mizzou, and met my wife who was getting your PhD, and was out having some drinks with friends, maybe a few too many drinks, to be completely honest, and maybe it was late at night and had a friend's wife say, hey, I want to start this event marketing company. And at that time, I kind of decided that I wasn't

Starting point is 00:03:35 going to be a lawyer and can go into that if you want. And so I said, hey, I'd love to start it with you. Terrible business. Learned a lot, made every mistake in the book. And I think that's a large portion of what we bring to the table is that, you know, we've made a lot of the mistakes that hopefully we're trying to help other people avoid. But then that led into working with agencies. And the more we started working with agencies, we said, gosh, they get paid a lot more to do seemingly a lot easier job. And so we said, well, I think we could get into that. And so started kind of more doing and more agency work. That agency work led into doing some software development, more online marketing. Again, this is back in 2008. So you got to remember online marketing back then was still nascent.

Starting point is 00:04:13 There's a lot of people who, I mean, honestly, still even back then didn't even have a website. So I started getting into that. And then, like I said, had a mutual acquaintance say, hey, you should meet this guy. He just got left at the altar for the second time. And I took that to me and I should try to go buy his business. Why else would you tell me he'd been left at the altar for the second time. The friend had no idea. He was as shocked as anybody. And so I don't know, I got about 25 now. I looked about 14 then and sat across the table from this guy and said, hey, I want to try to buy your business. And he laughed at me, as anyone would. Well, this is an interesting turn of events because if someone's telling me, hey, check this guy out, he just got

Starting point is 00:04:47 left at the altar twice, wouldn't your first thought be, well, why? Why is he getting left at the altar? Like, there's got to be something wrong with this and said, you went, hey, I was attracted to this. So talk to us about that attraction there. Yeah, well, so it was in an adjacent industry. So they were doing military recruitment marketing, working with some universities as well. By the way, we still own this company today. It's called Media Cross. Great partnership. CEO, Jenny, Molly's phenomenal woman. Really proud to be a partnership with her. And yeah, I mean, I looked at the business and I said, this is a really beautiful kind of complimentary to our current business. Our current business was we had a lot of talent on it, but it was, you know,

Starting point is 00:05:21 heavy fluctuations in cash flow versus Media Cross had long-term government contracts. So it was, you know, it's sort of a ying and yang thing going on. A lot of the things that they lacked in terms of skill sets and talents we had on our staff. And a lot of things we were lacking they had. So it was just a really nice, you know, sort of marriage from the outside looking in. Now, like everything, it's hard. It's difficult. I mean, all the things that can happen, you know, we experience a lot. But I would say is, I told him that price that he was asking for the business was too high. And I said, I think that's the large part of the reason why the two previous buyers couldn't get the deal done. And so we were able to negotiate a lower price and make it good for everyone.

Starting point is 00:05:57 Just had a curiosity. Was the arrangement a cash deal as you do often now? All cash. Yeah, I went on and got an SBA loan. So I leveraged the accounts receivable for my existing business. And thank God for the SBA. I mean, honestly, I love the program. It's not right for everyone. But it was certainly the only way I could have gotten into a business. And so put far more than 100 percent of my net worth on the line. Let's put it that way. And my wife, we just got married. And she said, what happens if this goes poorly. And I was like, it'd be bad. It'd be bad for us. Let's just hope that it doesn't happen. And of course, there's ups and downs like everything else. Certainly. And interestingly enough, what you have now is been referred to as like the baby Berkshire a little bit. You've got this

Starting point is 00:06:33 holding company. You've got going in. Don't give us the curse. Well, what I'm curious, I guess, about first and foremost, is going from this, as you put it, never opening Excel, not having a financial class, that's not your wheelhouse to becoming a capital allocator. I mean, when you compare to someone like Buffett, which I think we'll do a lot on the show, because we do study him quite a bit, it's just interesting because he was wired, you know, to do that. And he talks a lot about being wired to do it and how that set him apart? But you kind of have come at this, I think, from the total opposite end of the spectrum and had a lot of success. So how would you define your skill set that you're bringing to the table as opposed to someone like Buffett who's very more quantitative? So it's actually interesting. I got to have dinner with Mr. Buffett and his country club in Omaha. And it was three and a half hours. And I got to ask him, this like came prepared to the people that was with left and maybe. because I came prepared with like 50 questions I wanted to ask him. And I think I got like 31 in during the dinner. But a lot of them were all about the early days and about how he thought about

Starting point is 00:07:27 Demster Mill and Sandborn Maps. And honestly, the answers, remember, I was able to ask him questions about how did he feel leadership? How did he think about concentration risk and all those things? It was very similar to how we thought about it. Now, obviously, he's far more talented than I am. And he's been at it for a while. And there's never going to be another Warren Buffett, right? We're not trying to be Berkshire. I'm not trying to be Warren Buffett. But I think that the way he thought through deals and the way that we think through them is very similar, which is what is the downside, and then what's the upside? And we want to get into asymmetric bets. We want to get into things that, you know, if things go poorly, we lose a little bit of money. And if things go well, we can hold them

Starting point is 00:08:01 for a very long time and make a lot. And I think it's the exact same way he thought about it early on, especially in the days where you're, it's like a while West, when you get down the lowest end of the market where he was early in his career. I mean, it's just wild. Like you get to strike deals and it's all about relationships. And I think that's where over time, it's almost like he had, I think, and nostalgia for the early days because it doesn't work like that when you've got, you know, $140 billion on your balance sheet to try to invest. So I think it's many of the same traits. You know, I think God just blessed me with an ability to see how deals come together and try to see anything about the stakeholders in a deal. You know, most people just think about the buyer and

Starting point is 00:08:34 the seller. Really, there's far more complicated than that. If you only think about the buyer and you only think about the seller, you're going to come up short and often in how you structure deals. And so the way we try to think about it is, what does the families of the seller think about this? What's the leadership teams, the employees, the vendors, the customers, the communities, maybe even the regulators, depending on the industry you're in. You really got to look at it from everyone's point of view and you've got to try to create a deal that's sustainable long term. And the only way you create a sustainable partnership long term is if it's a win for everyone.

Starting point is 00:09:02 And I think that's what a lot of people miss. A lot of people just try to strike the best deal, quote unquote, at closing. Let me tell you, if you strike a great deal with somebody, they're not going to be too happy with you very, very shortly after close. We always talk about we want to strike a fair deal, maybe a good deal for everyone. But oftentimes you've got to see where your interests are not overlapping to make sure you can satisfy theirs and satisfy yours at the same time. Well, I do see those comparisons now, especially, you know, Buffett doesn't open Excel either,

Starting point is 00:09:26 it sounds like, and has been done deals over a handshake. But, you know, referring back to Dempster Mills and some of these others, these were turnaround events, right? And as I understand it, this is not the same pool you're fishing in, so to speak. I mean, you're looking for already successful kind of businesses, which I think is much harder to find a deal. Yeah, I mean, I would say, look, in the smaller end of the market, right? So depending on how you look at us, we're either on the very low end of the lower middle

Starting point is 00:09:49 market or we're sort of on the higher end of the micro private equity space. If a business has been around for a long time and the size they are, there's something lacking from the company. I mean, there's something that's holding the company back, right? So I would say is we're certainly buying companies that are successful and would be successful without us. But there's definitely a component of something lacking. And I think that's when a turnaround is very similar, right?

Starting point is 00:10:10 So, you know, by definition, by the way that we're able to kind of go down and lower into the market, we're able to get better pricing. right on sort of a cash flow basis. And then there's also more opportunity to improve the company. So we think it's like sort of a double whammy of goodness to experience, you know, a higher cash yield to close as well as the opportunity to increase, you know, the quality of the company over time. And we do we think about both quantity and quality of earnings, certainly. But yeah, I mean, look, I often say this is all businesses of this size are loosely functioning disasters that happen to make money. I mean, every small business is hectic. It's

Starting point is 00:10:40 stressful. I mean, I equated to a knife fight often. It's very difficult to operate these companies. And so it takes a special type of leadership in the companies, a special type of mindset that when you kick over rocks and you ski the squiggly things, you don't run and hide, right? You pick up the rock and you say, okay, let's deal with what's underneath it. And I think that's the mentality that we bring to it. You know, we don't think of ourselves again as investors. Like when we show up to meet the sellers and their leadership teams, you know, we never talk about our investing prowess and we never talk about, you know, degrees we have or where we've been, right? I mean, mostly because it's frankly not that impressive. But often it's also because we relate to them as

Starting point is 00:11:13 operators, right? Everyone in the company that is working with our companies has been an operator themselves. It's actually a requirement for when we bring people on staff. And we want them to know that because oftentimes if you don't have that operating experience, if you've been kind of flying at 40,000, 50,000 feet and you're, you know, your viewing spreadsheets and you're thinking about the numbers, it's really difficult to get the humanity to kind of pop up. And so if you look at all companies, really all organizations in general are just collections of people. And so if you don't understand how people work and you don't understand how operators interact with the companies, it's going to make your life very, very difficult if you sort of want to move beyond just what I would call your sort of

Starting point is 00:11:47 wrote capital allocation. And for us, it just wouldn't be helpful if all we did was, hey, we're going to give you a check. We're going to financially engineer the company and call us if there's a problem. Well, first of all, Buffett didn't do that in the early days. In fact, he didn't do that for most of his career. He certainly has done that as the companies have gotten bigger. And frankly, as the companies have outstripped his operating prowess. But I think early on, like he and Munger, and I got to have lunch with Munger and had conversations on the same topic with him, they looked at this day, this beautiful tropical island, right, of fruit everywhere. And it was just a matter of them going and picking it. Ultimately, the island shrunk and they got too big for the island. And so I think

Starting point is 00:12:20 that's where strategies have to adjust and change over time. Thankfully, we think we've got a long runway to be able to do what we do for hopefully a very long time. These meals with people like Buffett and Munger are precious. I mean, they really are, right? There's so much of value in those conversations. I'm curious with the 31 answers you got for Buffett, was there one that surprised you the most? One that from a question you asked and you said, oh, wow, I've never thought about it that way. I mean, I don't think I surprised me with, to be honest, with any of my questions.

Starting point is 00:12:47 He's been answering very, very thoughtful questions from people far more thoughtful than me for a very long time. I would say the one sound bite that came out of that dinner. Of course, there's a lot of it that was off the record that, yeah, I can't talk about. But the one that was interesting was I pushed him a lot on due diligence. And I said, you know, you've kind of given this error that you meet the guy and you kind of ham it up and then you give him the price and he says yes, and you shake hands. And you write him a check.

Starting point is 00:13:10 Easy peasy. I said, come on, like, you've got to diligence these companies. You've got to understand, you know, what's going on. And you've got to get comfortable with what you're actually buying. And he kind of hemmed and hawed and his Buffett way, kind of worked around the edges. And I kept pushing him, kept pushing him and kept pushing him. And I think he got a little annoyed with me, which, by the way, the best sound bites apparently come from getting annoyed with me because he said, price is my due diligence.

Starting point is 00:13:31 And it was kind of like that was the hammer that kind of fell on that line of questioning. And I just sat back and I said, well, it makes a lot of sense. Like everyone at the table was kind of like, now what does price mean? and how low can you go and what's the margin of safety in that? I mean, that's the art of it, right? But it's true. And it's something that that quote and that line of thinking has really impacted what we do as well. Because, I mean, you can diligence a deal to death.

Starting point is 00:13:52 I mean, it's super easy to try to kick over every rock. And that's not helpful. And I think that depending on the price you buy at and the situation you're buying into, I think there is a lot of safety and price. And so we try to be thoughtful about that. Of course, in these markets and with the competition that's out there, price is often a pretty charged issue. So we try to stay disciplined.

Starting point is 00:14:10 Buffin and Munger, you know, they're at this certain echelon that's almost untouchable nowadays. And there's that old saying like never meet your heroes. I'm not saying that was the case. I'm only questioning, was there anything not bad, but like surprising about their personality, was there something that stood out to you that made you understand, okay, this is how they've gotten to where they are. I can see it very clearly. I mean, I would just say the logic of both of them was crystal clear.

Starting point is 00:14:35 It was easy to see where they were going and it was amazing to see how quickly they got there. I would say one thing that stood out to me, because I had to have the lunch and the dinner kind of almost back to pack with both of them. And Munger struck me as far more of a nerd than Buffett. It's funny as that sounds like I always thought it was maybe be the opposite way. But man, Munger was just nerding out about climate science and I mean, all kinds of like battery technology. Buffett really just like to talk about investing in sports. Sports. He loves sports. We talked about that quite a bit too. But yeah, I mean, I would say just both of them. I mean, it was clear that both of them had developed a magnetism. I mean, the personalities matter. And they were good at forming relationships.

Starting point is 00:15:09 I mean, at the end of the day, if you can use good logic and you have the basic principles down and you know how to form relationships, like, good things usually happen as long as you stay in the game. Did Munger answer any of your questions with nothing to add? Let's see here. At one point, I was asked to stand up and talk about what we were doing. You know, I rambled for about 30 seconds and he, the person who'd asked me to stand up, he said, well, Brent did a crap job of explaining what he did. And I was like, oh, my gosh, this is like a nightmare for me, right? And so he asked me a few other questions. I kind of went on.

Starting point is 00:15:39 And five, six minutes later, you know, Munger just kind of sat back and said, make sense. Very good. And I was like, well, I guess I got blessed by the Pope. You know, it's kind of like he just, yep, that's going to work. Good. And I was like, well, glad to hear it. Got that going for me.

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Starting point is 00:19:55 WSB. That's Shopify.com slash WSB. All right. Back to the show. One of the things I've most respected about Buffett's early days was the fee structure of his partnerships. And you have a very interesting fee structure as well at private equity. I want to talk a little bit about how you've developed that fee structure and how it works. Yeah.

Starting point is 00:20:19 So our fee structure, I think I can say, is unique. There's actually a few other people that are now, I think, going to either employ it or trying to employ it, which I'm highly encouraging people to rip off anything. In fact, I actually talked to our lawyers about open sourcing our fund docs and just helping other people to, I think, align interest better. Yeah, how our fee structure and how really my career took a sharp left turn was we had started experiencing some success. I'd compounded my own capital. Out of that first deal, did well with it and paid back the SBA quickly. Started compounding capital and some other opportunities. And so you fast forward seven, eight years later and life was good. Life was going great.

Starting point is 00:20:54 There's always hiccups and bumps in the road, but business-wise, like, we were on a really good trajectory. And we've been approached by a couple of family offices, one foundation, and they said, hey, well, you start taking outside capital. And I said, no, we've got a great thing going. Like, we're doing great. Everything's fine. Why would we, you know, rock the boat? And they always came and said, here's the box you got to fit into. You got to go two and 20 or your other option is you could do a hold co. And we value all your current assets and you contribute them into the holdco. And when it got down to it, they, you know, almost everyone wanted a big discount on the current assets. And I was like, look, this is what I have.

Starting point is 00:21:25 This is really important to me. I know what they're worth and they're worth a lot more than I think objectively from the outside you would want them to be worth. And so it always just felt like there was tension, right? In the Holdco model, how further capital calls would work, how the governance would work. It just never felt natural, let's put it that way. It felt like a forced thing. And then two and 20 would have completely wrecked our model.

Starting point is 00:21:43 I mean, you know, I think it would have incentivized me and look, I'm a creature of incentives as well to get bigger and to go after larger and larger deals and not in the good opportunistic way. I just don't need that hole in my life. I think I'm too weak and I'd be worried about where that would send us. And so anyway, I'd kind of put it to bed. I wasn't going to take outside capital and I was comfortable with it. And then I met this guy Patrick O'Shaunise, who I think you might know also runs a podcast. And it's funny because I knew him before the podcast and I knew him before he was CEO of Osam and all the stuff he's done. And we were just, you know, we met on Twitter and we kind of nerded out about capital allocation. He was like, oh, what do you guys do? So I told him and he goes,

Starting point is 00:22:20 okay, I don't want to talk about capital allocation. I want to talk about that. And he's like, are these, you know, liquidating businesses for what you're buying him for. Like, no, these are good solidating. He just couldn't believe it. So he said, hey, can I come in and see you? So we spent the day together and literally talked for, oh gosh, I don't know, 10 hours. I mean, he, from very early on, I knew we were going to be good friends. Like he and I think, I don't know, we think a lot of like in many ways and differently enough about some things that just always keeps it interesting. And so we talked for a long time. And at the end of it, he said, okay, well, look, my family wants to invest. I said, that's flattering. Thank you. But we're not taking

Starting point is 00:22:50 outside capital. He said, why? And I said, well, because we got these structures and they just don't feel right to me. And he goes, well, why don't you create your own structure and tell me what it would take for us to invest with you? I kind of sat back in my seat and okay, it was a challenge, right? It was a challenge of creativity. So I went back and sat in front of a whiteboard for days on end. Literally, I would come into the office and I'd whiteboard a little bit and I'd go sit down and do some other things. I'd go to the whiteboard again. And over the course of a couple days, I've settled on the structure that we have now. We originally asked for 50-year lockup. We got a three-decade lock-up on our capital, which makes us highly unusual. And then the way our fees work

Starting point is 00:23:23 is we take no fees of any kind, no reimbursements of any kind. There's no cash flow that goes from the GP or from the LPs to the GP outside of when we call capital into the, so we have a fund, a committed fund, but we call capital on a deal-by-deal basis. And then we timeweight that capital and it generates a rate of return. The investors get the first chunk of rate of return and then we get a catch up. And then we have a split on free cash flow. So the better the company's doing free cash flow, the more that we enjoy it, the more that they enjoy it. The way it all kind of all shakes out is if we do about what traditional private equity does in returns, we get paid about what traditional private equity gets paid. If we do more poorly, then we get paid a lot less.

Starting point is 00:23:59 And if we do a lot better, then we get paid more. And so it's a very entrepreneurial structure. And I think that it aligns interest. So what we can do now with that structure is our CEOs and leadership teams are incentivized to generate high rates of return on cash flow that they keep. And if not, they send it up and then we send it out. And so our investors get a biannual distribution of free cash flow that's quite meaty, but we're always looking for the best places to reinvest in these businesses. So everyone's interest are aligned. If there's a high rate of return, high probability project that we can invest in across the portfolio, by all means, we want them to keep the cash and reinvest in it. And if there's not those opportunities, then let's not

Starting point is 00:24:34 murder money. So there's no limit on this return on capital for your individual companies. They can, is it their discretion to say, hey, we want to invest 100% of this free cash flow back to the business and you guys say, okay, or do you guys have any sort of voting rights on that? Well, I mean, ultimately, we have control of businesses. So, I mean, yes, we're ultimately checking off on it. But we've never seen an investment that's high rate of return, high probability that we've said no to. I mean, it's against our interest to say no to it. In the same way, it's against our interest to say yes to something that would be an inferior return. So we just try to set a high benchmark, a high opportunity cost in the portfolio. And, hey, if you can

Starting point is 00:25:09 meet it or exceed it, by all means, keep the cash. If you can't, then by all means, don't. So it tries to make it pretty clear. I mean, there's always judgment calls that are going to have to be made. And we certainly like to have conversations around probabilities of success. And have we done this in the past, what would indicate that we think that things are going to go a certain way in the future. But beyond that, we try to be thoughtful and kind and generous and long-term oriented. I mean, we're not looking to generate the highest return, the quickest we can, because we intend on holding these companies for a very long time and compounding them both financially and relationally.

Starting point is 00:25:39 That long-term mindset is hard to find these days. And you mentioned locking up capital for three decades. I heard it was something like 27 years, which more specifically only stood out to me because it's such an odd number. So I was one of my questions was why 27 years? And how do you sell that to somebody most of all, right? Yeah. Yeah, so 27 years.

Starting point is 00:25:58 So we had 27 years with three one-year extensions, three decades. I asked for 50 years. And I originally got 50 years. And then the lawyer for our lead investor, our anchor investor on the first fund, came back and said, son, I've been at this for a long time. There is absolutely no way I'm letting this family lock up their capital with you for five decades. He wasn't going to budge. I mean, let's just be honest.

Starting point is 00:26:17 Like the guy was pretty locked in. And I said, well, what's the longest you've ever seen? And he said, oh, I don't know. And I said, no, really. Like, tell me literally what was the longest you've ever seen. And he said, I one time saw a real estate deal that was, I think it was 27 years with three one-year content. And I said, okay, we'll take that. That was it. Market rate.

Starting point is 00:26:36 Exactly. I mean, the question was, is that the hill we're going to die on, right? I mean, if we don't get them as an anchor investor, I mean, you know, like any, I think like anything, so much of fundraising is momentum. And it felt like we barely got to 10 on the first fund. We ended up raising 50 in our first fund. We barely got to 10. We got from 10 to 30, like, within weeks.

Starting point is 00:26:55 And then we kind of closed in the 30s. And then we had people just pile in afterwards and like demand that they invest with us. I mean, it was kind of shocking, considering how hard it was. to get to 10. So anyway, so it's like anything else. It takes momentum. How did we convince somebody to give us their capital for three decades? I don't know. To be honest, I think part of it is like, I just didn't even know what I was asking for because I don't come from a private equity background, where I don't come from an investing background. My argument was it's better for you if we have your capital locked up for three decades than not because we're going to be able to generate

Starting point is 00:27:24 better returns. We're going to get access to better companies. We're going to be able to set up things relationally to generate higher quality and quantity of earnings. So I think that the investors, there's plenty of people who laughed at us. I mean, literally laughed at us, including top endowments, foundations. I mean, I had one foundation, CIO say three decades, like three decades from now, you're going to be on your fourth wife, you're going to have stepkids all over the place. You're going to be vacationing in your fifth vacation home. And he just kind of rocked back and was like, hell no, we're not going to invest with you. And I said, sir, that seems oddly specific. But okay, glad we had the meeting. So some might call that a projection. But no, I mean, I think in all seriousness,

Starting point is 00:27:59 the logic makes sense that the issue is trust. And I think that, you know, we've tried to be as trustworthy as possible. I mean, do we make mistakes? Absolutely. Do we rub our noses in our mistakes? Absolutely. Like we tried to, you know, one of our investors recently said to me, he goes, gosh, every time I get your letter, he's like, you know, you have two paragraphs on all the things that are going right. And, you know, overall things are going great. And then, you know, I've got five pages of all the things that are going wrong, you know. And he said, you know, make sure you balance out a little bit. And I said, well, Tam, I said, look, you don't need to know about all the good things we're doing. We want to show you, and we want to bring you in underneath the covers to

Starting point is 00:28:33 show you what's really like to be in these businesses. It's stressful, it's messy, and we want to be thoughtful about how we do that. And so I think that's where we've developed a high level of trust with our investors, where they believe we have their best long-term interests at heart. And we do, you know, it's a beautiful thing when you can get those things to line up. It's interesting that you invest in family businesses and you had your own family business. That was, I understand it, didn't have outside capital, right? You took on SBA money, et cetera. I'm curious, getting to that 10 million mark, that initial, was that just pool of people you know you do personally that? Because they weren't invested in your business. You didn't have a proven track record necessarily with them. So, you know, that momentum, I can totally respect. It's hard to get going. But for a lot of our listeners out there that are in a similar position right now, what was the playbook that helped you start getting momentum finally? Yeah, I mean, I got to be honest, I felt very serendipitous. I mean, we had, we were somewhat well known. I think, you know, kind of people looked us as this kind of like odd experience.

Starting point is 00:29:28 going on in Missouri in the private equity world. And so I think we had some sort of name ID from that. But I mean, frankly, if it wasn't for Patrick and his family, I mean, they brought a lot of relationships to the table. I mean, Patrick went and traveled with me and helped open doors. I mean, I remember when he said, you know, so I presented back to him and his family what the structure was going to be and everything. And he said, okay, that sounds great. We'll do that. And I said, that's fantastic. Where does the rest of the money come from? He goes, we know people. Come on. We'll introduce you. And literally, I mean, he and his father, Jim, it's hard to describe how kind and generous they wore to me. I mean, they brought me to, threw me a party in New York,

Starting point is 00:30:00 through a party in Greenwich, Connecticut, and invited all the people who write checks. And it was a whole new world to me. I remember even asking him, I was like, can I wear jeans to dinner? He was like, no, you can't wear jeans to dinner. You got to put slacks on for this one. But it means that type of thing. I mean, I just, I didn't have connections to the, those types of resources. You don't like anything else. I think that once you get one person to believe in you in a sort of inner ring, the world works the same everywhere. You know, you got to find a trusted person that's going to share the trust, right? It's going to do the trust transfer. And I think that's just how it worked for us. And it was a lot of people saying no. And then a few people said yes. And they invited their friends

Starting point is 00:30:34 to say yes. And before you know it, we were kind of off to the races. So yeah, no, I wish I had some advice for them other than find yourself a Patrick and Jim. Clarifying some things. With your current structure, is there operational leverage in that if there is money that's flowing to the top, as you put it, are you then reallocating it to another business potentially and say, okay, you don't need money over here, you're good, but we need to supplement over here. And that those decisions are being made before there, obviously, there's payout to the investors. And that takes priority, I would imagine. Yeah, I mean, we've actually never had to do that. I mean, a lot of the companies that we're getting involved in are very asset light and they throw off far more cash than they can

Starting point is 00:31:12 consume reasonably, right? We never had to do that, but we can. And we would be all in favor of it. Even through a pandemic. Yeah. Well, it's helpful not to use debt. I will tell you, that's one of things that people laughed at us, and I think still some do laugh at us, we've closed our last six transactions, five, six transactions with no debt, no outside lender at all. I mean, we'll use some leverage in operations in terms of working capital lines and things like that, but no transaction debt. And we feel very strongly about it that actually it produces better long-term results because it gives you a much better discretion over your cash flow. So instead of having to pay a lender every month, you can take that cash. And sure, you can distribute it out, but oftentimes you can find really

Starting point is 00:31:49 interesting things to do with it. And so, you know, that's how we think is the right long-term way to do it. But certainly in a pandemic, it helps if you're the only one not having debt on your balance sheet. And I mean, for a lot of our businesses, I mean, our aerospace business is a great example of this. The aerospace business went down a ton, frantic like everyone else. We're trying to make sure we knew where bottom was. But the business produced cash every single month. And we were able to hire people we never would have gotten access to any other way. And sort of when we came out of it, March was tough, April was tough. May was, we were starting to see a little light, not in terms of actually things were still continuing to go down, but we felt like we could see some trajectory,

Starting point is 00:32:22 right? And then really come June of 2020, we were in full offense mode. We were, how do we buy pack parts packages for cheap? How do we hire people? And the CEO out there, Jason Harp, has just done a absolutely marvelous job of transforming the business, put it, you know, implementing a new ERP system. I mean, heck, if you've got a lot less orders coming through, reorganize your warehouse, implement an ERP system, implement a new quoting system. I mean, do all the things you always wanted to do. Don't miss the opportunity. crisis. And so, I mean, obviously, on a personal level, COVID's been horrible, right? Had people die that I know family, friends have issues, but from a business perspective, not having debt

Starting point is 00:32:58 allowed us to really do things that no one else could do. And I think that for us, it's really kind of solidified our view that we're in the right on this topic. You know, talking about the aerospace industry and a couple others you touched on really raises the question for me around industries. I mean, you seem to be sort of industry agnostic. Is that the case? Or do you feel like you have a competitive advantage in anyone particular or like, I would say a circle of competence even that you don't stray out of. How do you approach that? Yeah.

Starting point is 00:33:21 So the way we think about is our circle of competence is in the style and size and stage of the company that we get involved in. So look, we've never operated a company that's doing $100 million of free cash flow. I'm sure they're amazing. I'm sure you can recruit incredible talent. I'm sure you can, you've got the IT guy you can call whenever the IT system breaks, like when your computer needs to get fixed, right? You've got the CFO and the assistant CFO and all that.

Starting point is 00:33:45 The types of companies, you know, we're getting involved in. are in this very odd adolescent phase. And they're all going through the exact same stuff. So we call it the table stakes of business hygiene across every area, whether it's marketing, advertising, sales, technology, operations, HR, any of that stuff, depending on the type of business it is. I mean, there's best practices in all of these. And the businesses for sure, and this isn't anything new.

Starting point is 00:34:08 None of the CEOs or the sellers would say this is surprise to them is they're not doing the best across all those. If they were, they'd be a lot bigger business. And so in terms of circle of competence, the businesses that are the size that we're, and when I say size, we're typically going to be between three and eight million dollars of cash flow. That's kind of the sweet spot for us in the size of business. We'll go up from there. We probably won't go typically below three these days just because we feel like the best risk or reward in the marketplace is in that sort of that tight band. Prices are still low enough and we feel like there's still a lot of work that we can do.

Starting point is 00:34:38 We don't want a business that's all shipshake, that's all tied up and, you know, with a bow. We like to have a little hair on these things and we like to be able to see, opportunities for improvement. And so the businesses, though, are not complicated themselves. It's not like we're taking apart a conglomerate or some, you know, really complicated operating system. And these businesses are straightforward, right? Our airplane parts, we buy them. We buy parts packages. We split apart those packages. And then we sell them, right? We sell them individual parts. So it's not hard to understand. Where do the parts come from? Where do they go? How quickly do we do get them there? What's the pricing on the parts? So it's not like we need to know the aerospace

Starting point is 00:35:11 business inside and out. It's not like we need to have, you know, aeronautical engineers on staff. We have a repair station also that helps certify the parts. That was a little bit more difficult to get comfortable with, but they're darn good at what they do and we were able to. So, you know, if you look across all of the things we're involved in, whether it's construction, manufacturing, the organizations themselves from a business model perspective are fairly straightforward. We can understand what the risks are, you know, your input costs.

Starting point is 00:35:33 If we're molding plastic, what are plastic costs, what are shipping costs, where can competitors come in? What IP protection do we have? You know, you can kind of see across all these businesses, the simplicity of them. The complexity is in the people and in bringing the skill sets to bear. And oftentimes it's not hard to know what needs to be done with these businesses. I mean, I've said this before, but investors always have this like pompous attitude towards businesses where it's like, well, let me show you my 147 page deck on everything you could be doing better. Oftentimes, when we say to somebody, have you ever thought about blank?

Starting point is 00:36:01 They'll say, yeah, of course, who's going to do the work? Great question. Right. So oftentimes it's more getting involved and just trying to help them grow, trying to get the right people in the seats on the bus. I mean, I think that's the biggest issue. You know, finding talent, discerning talent is really, really difficult. Oftentimes these businesses get in a situation where they can't pay to attract top talent.

Starting point is 00:36:19 And so they settle for inferior talent that they can't do much with. And so oftentimes we're coming in again and just trying to help solve a lot of these issues. We've got a talent network called the orbit, which has been fantastic. We recruit out of it all the time. And these are just people up and down the seniority levels all around the country and even beyond the United States that are just raising their hand and saying, hey, we'd love to come work with you someday.

Starting point is 00:36:40 Let me know when something fits my skill set. And so we're often calling people sort of the bench, often calling people out of the bench and works out great for them. Works that great for us. You know, something I don't hear talked about enough or very often around family businesses is sometimes you find that the family starts leaching off that business. I mean, people who don't even work at the company, right? If you start growing this business, all of a sudden you've got a lot of obligations

Starting point is 00:37:04 or responsibilities to some people in the family. I've seen this happen in other companies. I'm just curious from your vantage point, having looked at so many, Is that a common occurrence where you as the investor are taking control or saying, well, that's easy to clean up and take out. We pay off those folks. And then all of a sudden our margin just doubled or whatever. Is that, do you ever see something like that? Yeah.

Starting point is 00:37:22 I mean, here's what I would say is oftentimes these families, there's no difference between their personal income statement, personal balance sheet and the income statement balance sheet of the company. And so they operate it that way. If you've got kids and they need health insurance, they can sometimes go on the business, right? How much work are they actually doing? Can fudge a little bit, right? I would say we're not often coming in and just finding massive areas of waste that they're taking hard-earned money and they're just flushing them down the toilet. If anything, I would argue, it's actually the opposite is far more common, which is, look, as you get older, your risk tolerance

Starting point is 00:37:53 decreases. It's just natural. Your time horizons decreasing. Obligations typically financial and otherwise are increasing. It's a perfect storm to take more and more cash out of the business. And so we often see businesses where they're just run for maximum cash flow on an annual basis out to the investor, right, out to the family that owned them. We will oftentimes, not always, but oftentimes then come in and say, okay, look, to the leadership team, what are things that we should be investing in that we're not? What are things that we'll have a great rate of return, not just a good rate of return, a great rate of return, but that you just didn't have the stomach for or the seller said no. And we oftentimes get just a big list of projects that are high

Starting point is 00:38:31 return, high probability, and that really forms the basis for opportunity costs. And it's a beautiful thing. We love that. In fact, we love asking, you know, what are the things that we can invest in that probably won't show up for five years, but we know we're great investments. We love investing in things like that. That's how you build a long-term, durable business that moves from being a small business to a bigger business. And we've seen that happen in our portfolio. It's such a beautiful thing. It sounds like you had a successful merger early on with that one of the first acquisitions you made. And I'm wondering what you learned from that as far as like merging cultures together, because that can also be a really tough thing. So getting the right incentives in place,

Starting point is 00:39:06 not only that, like actual culture fit. How important is that with what you're looking? I mean, how does that compare or how does that rank on the list of diligence? Yeah, I mean, I would say is the people's always going to be the hardest part in the area of the most opportunity, always. So every time we get involved with the company, we are very attentive to what is the cultural, what are the cultural norms? I mean, every company has sort of norms that are unwritten, unsaid. You know, what are the things that we don't touch? What is the culture towards creativity and change?

Starting point is 00:39:36 How do we think about compensation? How do we think about bringing on talent to the organization? Are we an organization that we're okay with smart people coming on board and outshining other people? Are we, we want everyone to be mediocre? I mean, there are a lot of different ways. Are we hierarchical? Or are we very flat from a power perspective? These things are not obvious looking in. And when you get into them, you have to treat each culture uniquely. And so that's what we try to do. We try not to standardize. We try to treat everyone, obviously, in a favorable way, a long-term way, a kind way, but we try to honor the culture that's in place. Then, of course, there's certain things that we want to move them on a spectrum over time. So we would like them to push down decision making more over time. Well, how do we model that behavior for the leadership team that's in place?

Starting point is 00:40:20 You know, oftentimes right after closing, we'll have somebody say, okay, yeah, yeah, you told us that we're autonomous and all that garbage. Like, for real, like, what do you want us to do now? Say, no, for real. Like, do what you were going to do, you know, next Wednesday anyway. Then next Wednesday comes and they say, okay, all right, here's the deal, Brent, you know, or whoever's leading that organization. We want to hire a. a $40,000 a year front office person. What do you think? I don't have any opinion. You should do it if you think you should do it and you shouldn't if you shouldn't. I mean, we're not going to get involved in that level of decision making. And so what we're trying to do is to model them the way

Starting point is 00:40:48 we want them to model behavior to their staff. And so over time, what we'll find is that people are using more diffuse decision making. And really what it does is strengthen the health of leadership and really provides a nice farm system for bringing up new talent. So that's just one example of things that we try to move over time. But all of it's very gradual. Like, we're not trying to hit these companies with a steroid needle and sell them in another two or three years. We're trying to partner with them and develop trust for the long term. So, I mean, I keep saying that over and over again, but it's just such a different framework and different incentive structure that we think it's just really, it works out great over time. I'm kind of curious how you approach

Starting point is 00:41:23 it as CEO of permanent equity. And not to make another Buffett comparison, but I've heard his method referred to as nose in, body out. So he's, it lets people be autonomous, but he knows what's going on. Like, he's very in the weeds, actually, to some degree, it seems like, with his companies. And he knows, he might even ask questions that he knows the answer to, just to kind of test people a little bit here and there. Do you see that in your own style at all, as far as like how you balance autonomy versus being actually in the weeds with your, the generals that are in place and your companies? Yeah, I mean, I would say, I really think a lot of it comes down to making good decisions around what you get involved in and don't.

Starting point is 00:42:01 And that's really where I try to take much more of a lead. So you think about two sides of the business. There's the acquisition side and there's the operating side. I'm certainly far more involved, not always, but far more involved on the acquisition side than I am on the operating side. Just because if I know the company's inside and out when we're acquiring them, I've got a pretty good idea of what we're coming down with. And look, we have an amazing team at permanent equity. And I say this, I'm not trying to be like falsely humble.

Starting point is 00:42:24 I'm not trying to say this just to, you know, to blow smoke. Our team is incredibly talented, far more talented at what they do than I am now. And so, you know, whether it comes to team members, like, I defer to them because they actually know better. They make better decisions than I do. I would say, you know, nose in, rest of the body out. Like, I would say my heart is in. I'm in touch often with our CEOs.

Starting point is 00:42:46 I enjoy spending time with them. I enjoy it. And I always say, hey, you got my cell phone number. If anybody ever, you know, does something they shouldn't call me immediately. I want to hear about any ways that we can get better. I try to maintain those relationships. It's difficult. It ebbs and flows over time.

Starting point is 00:42:59 But I care. And so I care enough, though, not to know, not to butt my nose into things that I shouldn't. And, you know, if there's a decision that's really big, existential, something major going on, of course, as a leadership team, we're always talking about that. We're trying to all help each other. And I participate in that. You know, I've got a different skill set than everyone else on the staff, right? And so I would say we're very collaborative in that way, but like, I don't try to play gotcha. I don't stick my nose into things and try to make sure that things are going the way they should.

Starting point is 00:43:28 I feel like you've got to trust the people you have and treat them really, really well. And develop enough trust, well, they'll bring you stuff if things are not going well. And that's often what happens. Oftentimes the conversation's not around the 30 things that are going great. It's around the one or two things that aren't. And what do we need to do and to be helpful. Let's take a quick break and hear from today's sponsors. No, it's not your imagination.

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Starting point is 00:46:58 fund funders perspective at fundrise.com slash income. This is a paid advertisement. All right, back to the show. What is some of the items of diligence that are applicable, either in private markets in private markets or public markets. So for example, comparing a company's competitive moat or NPS scores or what other metrics do you kind of look at maybe on the private side that could be applied to public companies? Yeah, I mean, so maybe we can zoom out a little bit. So our diligence checklist, I think 23 pages, single spaced. It's a lot of questions. And to be honest, most of them are inconsequential. What we're trying to do with most questions and diligence is just to make sure we're not missing anything major. Oftentimes, we'll ask the same question two or three

Starting point is 00:47:40 different ways, just to make sure we're not missing anything. Really, the best way you can do due diligence is decide on the three to five things that really matter and really go deep on those things. And I think this is the same way in the public markets, right? It's the forest and the trees issue. You can set up an incredibly elaborate spreadsheet and tinker with your opportunity costs and rate of capital and rate of return and all those things. Look, you can make a spreadsheet say anything you want. At the end of the day, what it's about is, yeah, there's probably a handful of things that they go well. It's going to be really hard. You could screw up a lot of other stuff and the investment's probably going to go pretty well. And there's a handful of things that those same handful of things

Starting point is 00:48:12 that if they don't go well, probably doesn't matter what else happens with things. And so one of the things that I battled over the years is with outside legal counsel on this, right? They'll say, hey, we don't want you to close on this deal for another two weeks because we need to get an appraisal to come back on the property that you're going to lease because you have an option to purchase. Guys, what are we talking about? In six years, we may buy this property. And at that point, we need an appraisal to make sure there are options correct. Like, who cares? What's our exposure on this? We know we're paying in our lease. Who cares? And they'll say, well, I'm just saying, I'm just warning you, right? So I think it's a lot of making sure, I think in the deal making process,

Starting point is 00:48:43 it's always knowing where your margin of safety is. I mean, I think that's the concept that is the most important, knowing how much margin of safety you went into on the deal. And no deal gets better during due diligence. I mean, literally, I've never seen, I've never even heard of it. So it's always going to get worse. The issue is how much worse. And over time, you know, as that margin of safety erode, you have to be really careful with not falling in love with the deal. And that's something we talk about a lot in our office, right? We have to be very spot-like about how we approach this. I mean, we fall in love, but after you're married. And so, you know, I think it applies in the public marks the same. I mean, I hear a lot of people

Starting point is 00:49:16 getting caught up with minutia and stuff that doesn't matter. And I think as long as you keep your head about you and just try to look at the major factors that are going to influence the outcome, get those right. Make sure you're diligence in those. Talking about deal flow a little bit. I'm curious, it seems like your firm tends to play more defense than offense. But I'm curious, I've also heard that, the best businesses are those that don't want to be sold or are not trying to be sold, right? So how do you typically find deals and how do you know, I mean, do you know in five minutes? Do you know in a day? Like, when do you really know it? And have you tested your gut feeling towards the end of the diligence process and said this correlates pretty closely?

Starting point is 00:49:53 Yeah. So everything typically comes inbound to us. So we do, we try to be thoughtful about what we put out in the world. We think about to use a marketing, because content marketing, right, as being a great way to repel the wrong people and attract the right people. So the more things we can put out there and say, hey, this is our stance on this or that, this is how we operate. It's equally important or even maybe sometimes more important to not waste our time and not waste their time on things that never would work. So we try to be very thoughtful about how we set criteria, what does our website look like,

Starting point is 00:50:20 how is it organized, how easy it's to find information. And then just the volume of things that you can read about us, it often takes people quite a bit of time to get familiar with us. But then the beautiful thing is when they come, they're familiar. And we can kind of start on second base. I mean, we're sorting a lot out quickly, and I'm sure there are some false negatives in there. We've been at this for a while. I think at this point we've probably seen, I don't know, 12, 13, 15,000 deals.

Starting point is 00:50:42 When you look at that many companies, you start to develop a taste for the types of things you like and don't like. And you start seeing the movies over and over and over again. And so pretty quickly, I would say within 10 minutes of getting information, whether it's a deal book or information we request and help them put together, we can kind of get a, it's a mosaic, right? No one piece of information is going to tell you everything, but it's kind of you're painting a picture with it, right? You're trying to make sure that the pieces fit together. And oftentimes

Starting point is 00:51:09 within 10 minutes, 15 minutes, we can directionally know if there's an opportunity to do something or not. I would say from there, it's probably another, I don't know, four to six hours of work to really kind of dig down on the major controlling issues. These are the things that, the same things we probably dig into during due diligence and verify. And, you know, that process is really more of a, okay, this is worth getting involved in, and then it comes down to price. At what price? So there's often things that we will say, look, almost at no price, is it worth it? Because we think there's just too much latent risk.

Starting point is 00:51:40 And at some price, you mean, you know, somebody's going to sell you a $5 million free cash flow business for $10. Yeah, you should probably buy it no matter what does it come with, assume it's not, you know, big pile of liabilities with it as well. But, you know, reasonably somebody's not going to sell the business for, you know, oftentimes less than three times free cash flow, right? That's kind of you're just baseline starter. And so the question is, if we'd offer three times, would that be insulting, four times?

Starting point is 00:52:04 And then it's like, how much work are we really going to put in? And oftentimes, I think sellers don't appreciate the amount of workpost closed to help transition these organizations because they know it and they do it so well themselves. But oftentimes they're not creating the redundancies and the systems necessary to transition them properly. And so it's a real challenge. I'm glad you kind of brought up the multiples there because I was curious about that myself, you know, three times free cash flow being sort of the minimum. Do you see the multiples on the

Starting point is 00:52:32 private market correlate or go parallel with the private market in any way? Are they pretty different? They're really different. I mean, so in our segment of the market, prices really haven't moved for the most part in a decade, probably. I mean, really since we've been getting involved, I mean, maybe a tiny bit over the last five years, but not much. There's just just kind of, it's really hard. I don't know else to say it. So there's a skill set gap that keeps people out of our area of the market. And frankly, it's just for the amount of work and the amount of risk that you have to assume, there's just sort of a natural equilibrium, I would say. There are certainly exceptions to that. What I would say is anything that is standardized.

Starting point is 00:53:11 So right now, if you went and sold a one-off home services design business, I'm just kind of making this up, right? Let's say it's doing two or three or four million dollars of free you're probably going to get, I don't know, four-ish times, spending on the quality of leadership, maybe you get five times, something like that. If that same business as an HVAC service company, you're probably getting eight to 12 times. The question's why. I mean, fundamentally, they're not that different of a business. Well, because one can be standardized and one can't. And if you've got private equity coming in, typically the private equity roll up strategy is you buy one platform, you pay up for it, and then you bolt a lot of stuff on this cheaper. So for a good quality

Starting point is 00:53:47 company that they can bolt stuff onto, there's a lot of people out there looking for that. And that's where they're willing to pay up. And so I would say with the exception of if private equity is rolling up that industry, the answer is prices really haven't changed. If private equity is rolling up the industry, it's going to be elevated. It's going to be quite expensive. Interesting. Going back to price, how early on are you floating prices at these companies?

Starting point is 00:54:09 Is it an LOI offer? Is it actually on the paperwork? Is there a business agreement before paperwork? How early does that get floated? Very, very early. So what we try to do is we try to give them ballpark. So what oftentimes we'll say is we're not sure exactly where we'd be, but we'd be kind of somewhere between this and this with kind of these types of terms. How does that sound? And if they say,

Starting point is 00:54:29 that's crazy, we say no problem at all, completely get it. We hope you get what you're looking for. And then we're done, right? And we often have those types of people, we always try to be kind and generous and leave it in a good spot. We often have these people, they just don't know. And so, look, if I was my head down for 30 years and everyone values what they have more than other people, right? I mean, everyone thinks their house is worth more than it actually is, right? Well, maybe not in the pandemic, but maybe some people were surprised. But normally, that's the case. I think if you've had your head down for 30 years and you've been toiling away in your business, and you know, you hear at the golf course, you hear at the restaurant, like somebody whispers in a year that they got 12 times or 15

Starting point is 00:55:04 times. And it's like, you know, my only thing is 15 times what? The multiple doesn't matter. What matters is the price that's paid. And so, yeah, I would say we float price. We try to help educate them on that we're right in the ballpark. I mean, we're typically never offering something that should be insulting to them. If you're insulted, it means you probably don't understand the market. And that's no problem. Go out and find some other else. And look, there's always maybe a billionaire's grandson or granddaughter that thinks this is a great way to get involved in and we'll write a huge check. We've seen that before. We've gotten out bid on a couple things over the years by 100 to 300 percent because somebody came out of nowhere and

Starting point is 00:55:39 never bought a small business before and said, boy, this looks a lot better than buying whatever the Tesla stock, right? And look, if that's your opportunity costs, then yes, almost anything. in the private markets is going to look more attractive with a slight difference that it's maybe a little easier to hold Tesla stock than it is to buy and operate a small business. Looking at tens of thousands of companies, I imagine there have been, where Buffett always refers to as his mistakes of omission. Do you have any examples of mistakes of omission or anything you've learned from maybe misses? Oh, gosh, yeah. This is like every year we miss out on all kinds of things that do great. I mean, that's just part of life. I mean, yeah, I've got, I mean, I missed out on a business

Starting point is 00:56:17 early on that, I mean, gosh, we would have turned two into $30 million within about 18 months. At least somebody else did. And honestly, it's hard to play that game because maybe they brought an unusual skill set that we didn't have. Maybe it wouldn't have worked out the same way for us. So like, I'm pretty comfortable and not going back and trying to play what ifs on that side. It's just so hard, like the information that you, the feedback loops are not consistent. I mean, look, if we could get perfect information and know exactly what somebody else paid under what circumstances, what do they do with the business, would we have done that? and then compare it to an exit sale price, sure, it just, it feels like the information feedback loops are so unhealthy.

Starting point is 00:56:53 Let's put it that way that I just, I think it's better for us just to focus on, did we make a good swing or did we not? Not the outcome itself. Yeah, it's hard to go back and learn from omission mistakes. I can respect that. Are there any other mistakes that you would say was a big turning point for you and your own personal learning, perhaps around incentives or perhaps around, you know, structure or price or anything like that? Yeah, I would say going back to it, it's all about. People. People has been where we've made all our mistakes. Who you get involved with under what circumstances really matters.

Starting point is 00:57:23 And when you're going to own something that's a highly illiquid asset for a very long time, the people matter a lot. And it's easy to gloss over this. It's really easy to not put the weight on it that you should. The numbers can tell a very different story than the reality on the ground. So I would just say all of the things that we've learned over the years is just points in the same direction, which is do business with people that you'd enjoy being stuck in an airport with, do business with people that you admire, do business with people who you trust. And if you can't do

Starting point is 00:57:50 that, then just be very careful. I mean, I'm not saying that an asset that comes attached to a person that's not of that type is unsaleable. You just got to approach in a very different way. And that's not something we enjoy. What we really enjoy doing is partnering with families for a very long time and helping them prosper in the process as well. We're not trying to get the richest we can, the fastest we can. I mean, my wife and I, we're going to give it all away during our life. Our kids are going to be fine, but like we want to return it back, right? We consider ourselves stewards, not owners. And so, look, at the end of the day, if you're not doing it just to get rich, then do it for the enjoyment. Like, I love what I do. I love the people I get to do it with. It's fun and it's exciting and

Starting point is 00:58:27 it's meaningful. And so what more do you want, right? And so I think it's oftentimes I feel like there's this compromise that you have to like work with people you don't like and kind of hold your nose. And look, we're all messy. Like, don't give me wrong. Like, it's not like we're perfect by any means. We make plenty of mistakes. I have to say, I'm sorry, a lot. So, and we can We encourage that, right? We encourage people to push the boundaries and to be themselves and don't be fake and false, right? But I say, yeah, everything circles around people and just the beautiful thing about getting older and having interacted with a lot of people is you kind of fine tune your taste for who you like to work with. Speaking of Messi, you wrote a book called The Messy Marketplace. That's a good plug for that. What drove you to write the book? Yeah, so we had always, so there's like five, six hours of conversations that we want to have with every seller.

Starting point is 00:59:13 And we found that we were just repeating the same things over and over again. We thought, okay, surely somebody has written a book that we can just like pull off the shelf, give it to somebody and say, hey, would you go read this? Then we can talk. And we did a survey of like 60 books on the topic. And we just couldn't, we couldn't find anything that we really appreciated as much as some stuff that we wanted to say. And so at the end of the day, it was honestly, it was selfish for us. It was a time saver.

Starting point is 00:59:39 We put everything into a book, everything we could think of that a seller would want to know, and now we can give it to them. And it saves us a tremendous amount of time. So when somebody approaches us and says, hey, we're thinking about doing this, I say, first thing I say, is, great, let us send you a copy of the book. Please read it, highlight it, mark it up, ask questions. It gives us a point to jump off from. And we can really jump into that seventh, eighth hour of conversation. So it saves us a tremendous amount of time and effort. And there's always things you forget. And so for us, I mean, we hope it was helpful to sellers. We've gotten feedback that it has been.

Starting point is 01:00:13 In fact, it's helped us with a couple of the deals we've done. Sellers, you know, so they really appreciated it. And that's good for us. You know, you talked about not coming from a private equity background per se, which would mean that you're somewhat self-taught, right? So I'm curious what other resources besides your own book, what other books maybe you came across over the years that really made an impact that were very helpful for you?

Starting point is 01:00:35 So certainly the investment classics. I mean, from an investment perspective in understanding, analyzing businesses. I mean, it's hard to beat the Berkshire letters and Howard Marx's letters. I mean, I think they're a perfect combination. I encourage people, especially on Marx, because he's written a couple books now and the most important thing, you know, I always tell people is like 65% of the value of reading his letters. I really think there's value in, especially earlier on, I'm not trying to disparage anything he's written recently. I think it's still very good, but I think a lot of the investing principles, you know, he really did a thorough job on early.

Starting point is 01:01:08 So I really, you know, I always recommend that. And of course, all of the, the, I don't know, all the classics, right? All the classics that you and all your, I look at your bookshelf from back there and all the things you've read, right? I would say, honestly, I googled the heck out of a lot of stuff in my career. It would be hard for me to understand how I would have the career that I had before Google came along. I'm being totally serious when I say this. Like, it's kind of a weird thing to say because I didn't have a playbook that I learned from another investor. I didn't have a firm that I worked at that I was sort of apprenticed. And so I still remember on my first couple of deals.

Starting point is 01:01:40 I mean, heck, I still even do this. Don't tell anyone today. Somebody will say something and I'll be like, yeah, absolutely. And I'm like furiously Googling in the background and then trying to like hold the conversation long enough to say, oh yeah, yeah, yeah, we should definitely do that. Or, you know, on second thought, I think we're not going to do that. So, I mean, I had no idea. I remember the first time somebody said, well, what do you think about reps and warranties?

Starting point is 01:01:58 And I was like, I think they're good. And they're like, what? I'm like, was that not the right answer? You know, I'm like, I'm like, Googling reps and warranties. I'm like, yes, I think that we would be down the middle. And, you know, like you're trying to act like, you don't ultimately. It's just we're all trying to figure it out. I'd say Google is a good friend.

Starting point is 01:02:14 I love that response and the transparency in it. And we'll be sure to put Google in the show notes for the listeners. Yeah, yeah, yeah, yeah. Sell it out for people. Yeah, make sure you do that. Oh, man. Brent, this was so much fun. I really, really appreciate it.

Starting point is 01:02:27 It's a refreshing approach. And I'm really fascinated by the private market stuff. And this has been really enlightening. So thank you for coming on the show. And before I let you go, I just finally want to make sure people, I give you a handoff for people to, find you and look up anything you want to share with the audience. Yeah.

Starting point is 01:02:41 No, I really appreciate, Tray. Thank you so much for having me on. Yeah, I mean, we're at Permanent Equity.com. Super straightforward. I've got contact form on there. I'm on Twitter. DM me, my DMs are open. I'm always trying to be helpful to people.

Starting point is 01:02:51 I encourage people to explore this area of the market. There's a huge opportunity set that's out there. It's just really hard. And so we've written a lot of stuff on the website that hopefully can also help investors that are thinking about potentially getting in this area to think thoughtfully about what their opportunity costs really are. and how their skill set matches up. And so if something I've said is sparks you,

Starting point is 01:03:10 feel free to reach out. Like I said, I'm always trying to be helpful. Brent, thanks again. Thank you. All right, everybody, that's all we had for you this week. If you're loving the show, please don't forget to follow us on your favorite podcast app so you get the episodes automatically.

Starting point is 01:03:23 Brent and I originally connected on Twitter, so if you want to find me, you can find me there at Trey Lockerbee. We love to get your feedback. And if you're looking to 10X, your investing acumen, I highly recommend you go to the Investorspodcast.com or simply Google TIP Finance. And with that, we'll see you again next time. Thank you for listening to TIP.

Starting point is 01:03:41 Make sure to subscribe to millennial investing by the Investors Podcast Network and learn how to achieve financial independence. To access our show notes, transcripts or courses, go to theinvestorspodcast.com. This show is for entertainment purposes only. Before making any decision consult a professional, this show is copyrighted by the Investors Podcast Network. Written permission must be granted before syndication or re-reportation. Broadcasting.

We Study Billionaires - The Investor’s Podcast Network - TIP393: Fundamentals for Private Deals W/ Brent Beshore

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