Two Truths and a Take, Bonus Episode: Season 1, Episode 26b
|Oct 13||Public post|| 8|
Brent’s business is Being a Good Owner. He and his firm discover, buy, and own (for the long run) SMBs who do something really well, and whose founder / CEOs are looking to put the business in good hands when they turn to the next phase in their life.
I got acquainted with Brent initially through Twitter, and over the past couple months I’ve been lucky to have his point of view cutting through my feed. Most people in my professional bubble have been busy spilling ink over WeWork and direct listings and other existential fretting about what is the correct pace at which billion dollar platform businesses should be operating at a loss. Meanwhile, I really think that everyone on Tech Twitter should follow Brent and others like him, because:
Most businesses aren’t all-or-nothing bets that the world will be radically different in a few years
Most businesses actually earn money, and do so from the very beginning of their life
Most businesses stick to doing one or two things really well
People sometimes say that VCs are the ultimate optimists, but I believe people like Brent and the business that he runs actually represent a deeper and more fulfilling kind of optimism. I think you’ll agree after hearing from him today.
To begin, let’s talk about family businesses. Your company, adventur.es, focuses on investing, recapitalizing and acquiring American family businesses that earn, say, $5 to $10 million a year. For some people in tech or on the coasts who might not appreciate this - how many of these businesses are there out there, and how important are they to the country?
With over 30 million strong and employing almost 60 million people, small-to-medium sized businesses (SMBs) are the backbone of the United States. On the small end of the spectrum, businesses with net incomes below $1M, are the restauranteurs, dry cleaners, landscapers, and insurance brokers who make the economy function. (Here are some stats put out by the Small Business Administration.)
The businesses we work with are bigger, but still considered small. We’ll look at organization that have greater than $3M of net income, but our sweet spot is $3M-$8M in earnings. These owners have done extraordinarily well, but usually have capped out in growth and most don’t have an exit strategy.
When you survey who owns these larger small businesses, it’s dominated by Baby Boomers who are aging out of their work. After I bought the first business almost ten years ago, I thought I had missed the retirement wave. But due to the Great Recession and trends in longevity, the tidal wave of Baby Boomer exits was delayed about ten years. I guess it’s better to be lucky than good.
What are your favourite characteristics in a family business that you look for, beyond the usual good signs of a healthy company? Are there any particular sectors or features that just really get you excited? Anything that doesn't really have a rational explanation, but you just love to see?
Different investors look for different things differently. That’s what makes pricing so dynamic.
For us, we like steady, boring, useful, and faithful companies. These are organizations that have been built brick-by-brick over a long period of time, serve a necessary function in the economy, and care about their clients, employees, and communities. These businesses are change-resistant and people-driven.
This style naturally leads us to business services, manufacturing, distribution, and construction. If you look at our current portfolio we’ve got a little bit of everything — the U.S.’s largest pool construction company, a military recruitment firm, a specialized glazier, the world’s highest-end matchmaking firm, a handful of manufacturers, and most recently a couple aerospace distribution firms. It’s eclectic, but the unifying themes are all there.
Beyond the obvious, we like to see fairly-to-generously compensated employees, high levels of repeat business, pricing power, and an executive team that shares mutually deserved trust. We won’t buy from a seller who’s not already wealthy, because if they didn’t become wealthy doing it, neither will we. And we like to see the seller genuinely care for others, which is unfortunately rare.
My grandfather, Léon Danco, dedicated his life’s work to helping owner/managers of family businesses with the challenge of handing off the organization: either to the next generation of the family, or alternatively to someone else who could continue its success.
One of the recurring themes of his books and lessons was the idea that family business CEOs, who often single handedly built their businesses, often seem inseparable from the company. If you take them away from their desk for longer than a weekend, things start to fall apart fast. Their weekly tasks and responsibilities aren’t comprehensively written down anywhere, or formalized into anything that can be handed off - the CEO just takes care of them.
When you look at a family business like this, how do you go about assessing the ease with which a business can be successfully handed off by its founder? Any lessons you’ve learned the hard way?
Your grandfather nailed it. This is, by far, the single biggest challenge facing smaller companies. It goes by a lot of names. We call it owner-moat and refer to these businesses as hustles at scale. Everything hinges on the owner. There is little, if any redundancy. Relationships, processes, expertise, and decision-making can be hit by a bus.
The only way to transition these businesses is by coming alongside the owner over a long period of time and building the knowledge, processes, and redundancy. That’s not something we feel comfortable doing, so we pass on these opportunities. For a buyer-operator, there’s big opportunities if you’re willing to take this risk and invest the time.
We counsel sellers to take these steps themselves. This often looks like hiring a second layer of leadership and promoting someone else to the CEO role. Over time, processes get hardcoded into software and documented. Decision-making is delegated. Relationships get diversified.
The difference in valuation is dramatic. People often confuse size and scale. We have seen hustles as big as $15M of earnings and occasionally will come across a highly conservative owner with a real business at $1M of earnings. The reason why bigger businesses often get valued far higher on a multiple-basis is not because they’re big, but because they’re durable and ready for future growth. Conversely, smaller companies seem cheap because they can’t be grown reliably and could go to zero with one accident.
At adventur.es you have a scout network that helps you find great businesses; I suspect there might be a few Snippets readers who’d make great scouts. Who are the kinds of people you’re looking for, what is it that Scouts get up to, and what’s your pitch for joining?
The Scout Network is a group of people from all walks of business life who get to know adventur.es and refer opportunities as they arise. We have quite a few of who you’d expect — lawyers, CPAs, financial advisors, and bankers — people who know and frequently interact with business owners. But we also have non-competitive private equity people, government officials, MBA students, entrepreneurs, and even a monk.
The pitch is simple: All businesses need to be transitioned and when the time is right, the greatest gift you can give a business owner is a warm introduction to an acquirer who will treat them well. In exchange, we share some of the economics of the deal by giving the Scout a $100,000 check, plus a $25,000 adventure of a lifetime vacation.
If someone is interested, they can find out more by visiting adventur.es or by reaching out.
Let’s shift gears for a minute and talk about startups. A funny thing that’s been happening in the past few years, as the overabundance of capital in the VC ecosystem has trickled down into costs like customer acquisition, is that startup managers are all of a sudden learning all these lessons about business that “regular companies” live and breathe every day. I’ve remarked before that the startup version of Cost of Capital / ROIC is CAC / LTV; now entrepreneurs are having to learn that even though money’s cheap, a high CAC means you need to start caring about things like payback period. Who knew! So my question for you is: what do you think is going to be the next big business theme that startups will “discover”, but which comes as second nature to people who run small businesses?
To answer your question directly — profits and profitability. I hope this doesn’t make me sound too out of touch, but sooner or later, all businesses must make money to survive, let alone thrive. The funny thing is that no one disagrees in theory, but VC trends have allowed the focus to shift because we hit a period of development where the classic J-curve worked exceedingly well. Losing money temporarily in order to make gobs of money later is smart, as long as the underlying economics are sound. Hence you get companies like Google and Facebook. But, this also allows bad businesses to masquerade as intentionally unprofitable.
I’ve angel invested, which usually equates to for-loss philanthropy. The handful of highly successful early-stage companies I’ve invested in all shared a seemingly odd focus on profitability from the very beginning. In fact, some of their biggest struggles have been with VCs who want them to burn more cash and take on more capital. That’s an odd dynamic.
In general, I’m a pretty optimistic person, and I’m especially optimistic about how the internet and modern tech is empowering a new generation of entrepreneurs and business owners to go build. What do you think are some under-appreciated ways in which software and the internet have democratized something essential for small business owners? And what do you think have been the under-appreciated consequences of that availability?
Immediacy and fluidity of communication has to be the biggest enabler of small business success, as well as quality of life. People like to bag on email, but it’s incredible. Write a letter, hit send, and it’s instantly delivered. The asynchronicity of it is delightful. Layer in text and Slack, and communication friction is reduced to the messiness of merely being human. The result is an acceleration of accomplishment without overhead and much great location independence.
SaaS and small-scale targeted advertising both come in a close second. SaaS allows small businesses to have access to latest technology without capital intensity, while targeted advertising enables small businesses to find niche customers previously obscured by the expensive blunt hammer of mass advertising. With AWS, some basic light SaaS applications, and a Google Adwords account, small businesses can now compete.
Finally, I feel like a lot of people who read Two Truths and a Take are based out of a handful of regions: the east and west coast, maybe a few other superstar cities in North America and around the world. You’ve found an incredible home for adventur.es in Missouri; how did that come to be, and what’s your pitch for coastal people to spend more time in the middle of the country?
I understand why people live in big cities — physical density of the interest graph has a meaningful impact on serendipity and access to infrastructure, quality of distraction, and broad variety is beneficial. Rural America is built on family, the outdoors, and community. It’s just a fundamentally different lens to view the game of life.
With that said, there are many “Goldilocks” towns in the U.S. and my hometown of Columbia, MO is one of them. We frequently host visitors from the coasts and virtually all of them remark about how they “get it.” We’re a college town with about 130,000 residents without students and roughly 40,000 students in the area. We blend the quality of food, music, sports, and art of a bigger city with a toned down pace and focus on community. There’s no traffic. It’s cheap. People are friendly and welcoming. We have a vibrant downtown, beautiful outdoors, and host some of the top film, music, and book festivals in the country. We put together short slide deck about it here:
My pitch is that there’s far, far more going on than wherever you physically find yourself in the world. That area of the country you fly over looks barren, but it’s not. For instance, two of Y-Combinator’s most valuable companies originated in Columbia in the past 8 years (Zapier and Equipment Share). CNBC ranked Columbia as the second best place in the U.S. for women with careers. Forbes ranked Columbia as the 10th best place in the country for business. Plus, the internet cord stretches all the way out here and there are jet planes that can take you anywhere you want to go.
You should come check it out. I’d be happy to show you around.
Thank you again so much to Brent for taking the time to share this with us. If you want to learn more, head to adventure.es to get started. Or, better yet, take Brent up on his offer and head down to Missouri.