It's great to have you on. And we've got a lot to get into today. But before we do that, Brent, for people listening who might not be familiar with your background, I thought maybe it would be helpful to set some context and to have you walk us through the arc of your career, what led you to permanent equity, and maybe a little bit about what permanent equity does?
Yeah, I appreciate you asking. I often joke that I'm the Forrest Gump of private equity for a reason, because I've never taken a finance class in my life, I can barely open up Excel. And I've never worked at another firm, I actually got my start. In entrepreneurship, I was a founder and an operator of a couple businesses and then had a chance to buy a business kind of unexpectedly pop up. Didn't know enough to say no, didn't have any idea what I was doing Googled a lot, I almost did my career to Google. And it worked out pretty well. And that led me down a path to see that there were a lot of family owned businesses that didn't have a transition plan. And that was, gosh, over 10 years ago. Now, that was 2009 2010, so 12 years ago. Yeah. And it's been a wild ride ever since. I did it with my own capital for the better part of a decade. And then 2000, see, 2019, or 2017, excuse me, raised a $50 million fund. And then 2019 raised a $300 billion fund. So we went pro and haven't looked back.
That's great. And tell us a bit about the types of businesses that permanent equity acquires. And you have a unique stance as it relates to hold periods. So I'd love to hear a little bit more about that as well.
Yeah, we're weird in a lot of ways. You know, I think when I first got into doing this, I didn't understand anything about private equity, traditional private equity. And the more I learned, the less I understood why it was being done that way. And what I've realized is there's some very good reasons, and there's some not so good reasons why I would say traditional private equity employs the buy lever strip and flip method. Say buy a company, they put as much debt as they possibly can on to the business, small equity check. They try to reduce cost structure, while also growing the business at the same time. And then ultimately, are pretty focused on selling it to somebody else within a short period of time. So I can't I think the average hold time in the last couple of years has been like two and a half years for private equity. So somebody else is going to own the business in a very short period of time after that. And that didn't make any sense. Because to me, that's not how family businesses were created.
That's not sort of this non intuitive, from just a first principles, thinking. So really, what we did was we said, well, I don't understand why everything is, you know, done that way, what I would like to do is just figure out what should be done and how to you compound relationships and compound wealth over a long period of time, and hopefully serve all the stakeholders, not just the investors, but also the employees and leadership teams in the community. The vendors, maybe even regulators, depending on what the with the businesses. And so in many ways, we're the opposite of private equity, we buy with no intention of selling the business, we typically use no debt in our transactions. We like to keep leadership teams intact, we don't reduce cost structure, and we don't look to sell it to somebody else. And so for us, it works for us, I think, the other model can work very well depending on what stakeholder group you're talking to. But ultimately, I think that what we've done is created a system and a model that gives the opportunity for greater compounding than is normal in private equity.
So we're gonna spend a lot of time today talking about your experience as an investor, but you alluded to your experience as an operator. And that's actually where I'd like to start today. I've come to learn that your early career included founding an events marketing business, an ad agency, a software development firm and a film studio. And I'm curious, in light of that background, what did you find most difficult or perhaps even surprising about navigating the transition from operator to investor?
Well, this may not be the answer you're expecting, but I actually still don't consider myself to be an investor today. I know a lot of investors, they're incredibly smart and they've got they're trying to look around the corner and allocate capital and do all these very smart people things. How I spend my days is with people, and we're focused on operations. In fact, everyone at the firm is an operator by background for a reason, but the actual investment decision making that we do is very easy. These are no brainer investment decisions. The hard part comes in when it comes to the people and the operations and the structure and the technology stack. And how's the brand performing? And what is the HR systems recruitment systems that they have in place? And how are people compensated and incentivized, and that's really where the rubber meets the road. So I would say, I never got out of being an operator and investment for us, the investor hat is really the small part to enable what we love to do, which is help operators.
Yeah, it's really interesting, because I'm conscious of the fact that most people prop from an external perspective probably look at you as an investor. But in many respects, some of what you just alluded to, you're very much still an operator. And in fact, you happen to be operating an investment business, at least directly. So I'm curious, in your role as an investor, right, like any investor, presumably you spend time advising your management teams evaluating what's being done, well, what can be improved, said you suggesting changes that they might implement in their businesses, etcetera. I'm curious, though, as an operator, have you ever caught yourself perhaps not practicing what you preach in your role as an investor? So said another way, have you ever found yourself making the same types of mistakes or falling victim to the same blind spots that you try to steer your portfolio company CEOs away from?
I mean, every day. Yeah, I mean, I would say, we've gotten, I think, pretty decent at advising companies, because we made a lot of mistakes ourselves. And to be honest, I still see a lot of the same mistakes being made now. For sure, I mean, look internally at permanent equity, you know, we're really trying to figure out how do we build a scalable firm and do something that, to my knowledge, no one's ever really tried to do there's there's kind of two ways to scale small private investment firms. One is to go up market, which is what everyone tends to do, because it scales much better. Right? Meaning you don't do more deals, you do larger deals over time, as you you know, allocate capital appropriately and gain more trust with people who have capital and compound the capital that you have. You move up market, this is what I would call like the Berkshire approach. Right? So I was fortunate to have dinner with Mr. Buffett a while back and for three and a half hours, got to ask him all the questions of what were the early days like when when Dempster Mill and Sanborn maps and how involved were you in operations?
And I mean, the truth is, like, he was incredibly involved, he was intimately involved in every aspect of the company, he is replacing leadership, he was dictating strategy, he was doing a lot of things that you have to do when you're operating small companies. Ultimately, he discovered that that was not his talent, or what he desired to do. And so he moved much more into a, what I would call traditional investing role as he moved up market gained more of his own capital, acquired more capital from the outside and ultimately, you know, built Berkshire into this incredible dynastic organization, I think that's a clear path. The other path, it's less well worn. And I think, for very good reasons is to scale up through scaling out and doing more transactions of a similar size. That's what we're trying to do. We love the area of market that we're in, we like firms that we call it, the adolescent phase of business, which is, you know, too big, to be small, too small to be big. We think that's where our skill set really is honed in helping these companies exceed what we call the ceiling of brute force.
So where you just kind of work and work and work and you could just never get above a certain level, we have experience in helping companies exceed those limits, and really get on to a larger growth trajectory. So we love that. And we think that's where our skill set is, that's where our heart is, those are the people we like to work with, we'd like to work with sort of more mainstream businesses. And so we're focused on that. And part of doing that is building a firm. And so, we've gotten to be 20 people. Now here at permanent equity. We have the same challenges that [inaudible] firm and our systems and our culture and trust building and making sure communication lines are open. And so I would say, we are making, very long answer to your to your short question. We are making often the same mistakes we see our portfolio companies making. I think we're able to catch them a little sooner, and hopefully be able to change course.
But at the end of the day, I mean, look, we're all messy, right? I mean, we're all human. And business would be easy if it weren't for the employees and clients and vendors, turns out those are all people right. And so I think that that's maybe what investors get wrong often is when they look at a company cracks me up when I see these like decks that investors put together that are activist and they say, Oh, if you'd only thought through this very obvious thing that you could do to the business? And it's like, well, yeah, no kidding, you could do that. It's never the problem that the problem is almost never that the strategy isn't obvious. It's who does the work? And do we have the culture to be able to move in that direction? That's where the really hard part comes in. And I think that's what we're facing as a firm too, is how as we grow, do we scale a culture built on incredibly high trust? And try to scale kindness. I mean, that's a very difficult thing, especially in the finance world.
It's easy to be a food critic. It's not necessarily easy to be a chef, as I often say. I'm curious, Brent, given the pattern recognition, and the sense of context that you've developed as an investor, through evaluating hundreds, or maybe even 1000s of businesses, has a small part, have you ever considered being an operator again? And when I say, operator, in this context, I'm talking about, you know, a CEO running a company that sells a widget, a product or service? Have you ever had that temptation, given all that you know now?
I mean, I think I enjoy it. I mean, I feel like I am an operator now. And I am selling a widget, that consumers buy, it's just the widget looks very different and unusual compared to what most people sell. I mean, I very much view permanent equity as an assembly line approach model, which is, again, we're so weird, we're very different than every other investment firm that I'm aware of, most investment firms scale by hiring more partners. So partners are people with lots of experience good judgment. They're kind of a private equity firms in a box, that you scale up the number of deals you can access, the number of deals you do, and the number of deals you can manage by hiring these very experienced, thoughtful, great judgment people. We hire, hopefully, those same types of people, but we'd like to put them into a system that's very different. Instead of everyone doing everything, traditional private equity firms, the same person who's out there hunting for deals, is also doing the deals, who's also managing the deals post closed.
We think that there's real value in specialization. We're big Adam Smith fans here. And so we think that specialization unlocks things that you can't get any other way. And so we've set up the business to be really a manufacturing type firm, but we manufacture deals that we get to do with family owned companies, and we get to manage them post closed, but everything's on an assembly line. So the team that brings in the opportunities and evaluates them is different than the team that's diligent seeing and documenting the deals, which is different than the team that's operating post closed. Now, there's crossover between each one of them and you can understand there's clear downsides, and maybe challenges that would occur with the sort of handoffs between groups, you get into some finger pointing and get into well, it's not my responsibility, that type of thing. Which has happened and will happen and is a challenge. But we think that the upside to the model dramatically outweighs the downside.
So you mentioned that you hire operators, as a point of explicit strategy. Am I safe in assuming then that the implication is that you think great operators necessarily make great investors? And I guess part B, do you think great investors make great operators?
Well, I would say since, like 99%, of what we do is operating and not investing, I actually don't think about trying to take people who are operators and make them investors, I think about taking operators and help them do operating better. So everyone at the firm is an operator by background, because almost all of the work we do is operations related. So in terms of the the like, when you think of it, when I think of investors, right, let me maybe frame this, maybe I want to make sure we're not talking past each other. I think of you know, maybe a hedge fund or some of my friends that do public markets investing. And they're outrageously intelligent, they're like reading everything, they're deeply analyzing, they've got these beautiful deep spreadsheets, that they're running all this kind of math through to try to see if you know maybe the growth rate on some publicly traded stock is going to change more than the market expects it to and they're in this complex adaptive system.
And they really have no control over the investments they're just a passenger along for the ride, which means they've got to be incredibly insightful about all the different ways that the business could evolve and change and they've got to have backup plans for their backup plans. That's just not what we do for a living. So what we do for a living is we buy companies for between call it up four and seven times multiple on free cash flow which if you don't screw them up produces a good return. I hope the maths easy on that right, like the maths on hard. If you're not using debt, right, and you're buying companies with heavy cash flow that you're starting with, call it a you know, mid to high teens yield and maybe up from there depending on the situation. The first rule of business is just don't screw them up, right? You're not trying to be a smart guy. You're just trying not to do stupid stuff to them.
And then you're trying to develop trust over time where you can make some maybe decisions that were obvious in hindsight that weren't obviously the people doing them, or there's some cultural reason why they couldn't do them. And you're trying to unlock these lids that are on the business, this is all operational. The actual, like, math is done on the back of a napkin, right? I mean, it's very easy to understand what we're trying to achieve. The structures that we're trying to put in place, I used to try to do complicated structures, I've learned just pay people in cash, two simple deals. You know, if there's a valuation gap to maybe bridge, you know, get a little bit creative, but for God's sakes, don't do anything too complicated. Everyone should understand what they're getting themselves into. And it should be easy to understand how the math plays out over time.
So we're not really trying to look around corners, we're trying to find businesses that are obviously good businesses and good industries with good people involved in them. And we're trying to buy successful businesses and help them become more successful and buy them at a reasonable price. Like it is just not what I think of as traditional investing. Is it technically investing? Absolutely. Are we taking capital are we investing in regenerating return? Of course, but like, that's every family on business in the world, right? Every business got to start as a family owned business, small family owned business. And every small family business eventually got more and more sophisticated as it became more successful. But every business is doing the exact same thing. They're generating return, hopefully, free cash flow, and they're choosing to either reinvest that or to distribute it out to shareholders, like that's what we're doing.
I'd like to dive into some of the lessons that you've learned over the years that you've referenced this context in this pattern recognition a few times. And this is a borderline selfish question, because I am an investor in search funds. And by definition, I'm investing in inexperienced, often first time CEOs. So as someone who has looked at hundreds or 1000s of lower middle market businesses, micro cap businesses, whatever you want to call them, I presume I'm safe in assuming that you have evaluated potentially hired a wide range of CEOs. Are there any generalizable lessons that you've been able to tease out over the years related to experience CEOs running your portfolio companies versus inexperienced CEOs doing the same? And are their businesses or industries that naturally lend themselves more towards one type of leader but not the other?
Yeah, well, first of all, it's a great question. I'd love to hear your answer to this too. I guess my response is, yes, we've hired a wide range of people. Yes, the business definitely can dictate the range of CEO that you can bring in and range of leader, what I would say is, the more difficult the business model, and the more difficult the period of time that the business is going through, the more importance we place on experience above all things. I mean, another great, sounds like very name dropping. But another great conversation I had at one point was with Charlie Munger, and I asked actually this question to him, and he said, the only way he's ever been able to evaluate talent is to see what people have done. Like, that's it, right. I mean, it's proofs in the pudding. So I would say, we can talk about characteristics. And obviously, there are personality traits and characteristics far beyond just mere experience that matter deeply.
I would say the biggest one being, humility, and an ability to look at reality for what it really is, and face it. That is probably at the very top of the list of those other characteristics. But experience gives you the ability to do the important things and see the important things for being important and not important things for being not important. What I've noticed in, and I definitely have experienced this, especially early in my career, before, I had much experiences, I didn't know what was important, what wasn't important. And so what it led me to do was to spend a lot of time on things that in hindsight, were just a complete waste of time, and were non consequential, and it took my eye off of things that were outrageously consequential. And I didn't have a finely tuned sense of what was important, what wasn't. So I can relate to when I say, young, inexperienced CEOs, no matter how intelligent, well educated you are, if you've never run a business, you don't get it.
That's it, the only way to learn how to run a business is to run a business. Now, I actually think the search fund model is brilliant. I used to kind of rag on it. And I used to say, it kind of hit didn't make much sense until I realized it actually makes a tremendous amount of sense because you're getting somebody with incredible I mean, hopefully, right? It's all contingent upon selecting the people well, but you're getting somebody with, hopefully high character, high drive to succeed, high level of education, and maybe less experience, but the person is going to learn into the job and be a much better CEO and your 345. And the way that the search fund model, at least historically has worked is they're highly incentivized to stick with that business for a long period of time until there's a positive outcome for everyone. And only when there's a positive outcome for everyone do they share in that which really locks them into this learning machine that the hopefully they can build real value and over the long term. So I think it's brilliant, I would say, for us, we're probably airing on bringing in more experienced people in most of the roles, with some obvious exceptions, depending on who the person is.
So one of the questions that I'm asked most frequently from acquisition entrepreneurs, we'll call them. Those are folks considering acquiring a small or medium sized business. One of the questions that I'm asked most frequently, particularly over the past six to nine months or so, is whether or not now is a good time to acquire a small to medium sized business. So how should buyers think about the current macro economic climate, I should say? Is that Is it a help to acquiring quality business at a great price? Or is it a hindrance to acquiring a quality business at a great price?
I would say, if now's the time for me, and I feel strongly that I want to go and acquire business for the first time, the macro environment really shouldn't matter. Because it's such a micro decision in a macro environment, that it it doesn't often matter to me. Of course, this is all caveated with like, you know, use your brain don't buy into something that obviously got a massive COVID Pop that's on its way down and pretend like it's not happening, right. Or don't not pay attention to what you're stepping into. But the macro environment should be obvious how it's being influenced on a micro scale. There's no right or wrong time to get into being an entrepreneur through acquisition, it just takes a long time, and you got to see a lot of reps to see the right thing. So I would say the far better question is, are you setting the table to have the endurance, both psychological endurance and financial endurance, to find the right business for you, I tell people that at a minimum, I would budget two years, often more like three to find the right thing.
And I think that the biggest danger to me if I was an investor in search funds, which I'm not would be that the people who are, because the clock that's put on them, people end up feeling more and more pressure. Which, you know, look, pressure can be a good thing, in some ways, it motivates you. But the bad side of pressure is it can allow you to make really bad decisions, and the incentives can get pretty far out of whack. And so I would just encourage people to make sure that they have the ability to be in the game for an extended period of time and know that lightning could strike, you could find an acquisition target, that's perfect for you, you know, second week on the job, more likely, it's going to be seeds you planted into year one that are going to bloom in year two and year three.
Yep, yep. That's very consistent with my experience as a former search for entrepreneur myself. Brent, there's a lot of institutional investors that are famous for executing on a playbook of sorts after acquiring companies. I come from the software world. So Vista Equity Partners and Constellation software. These are two firms that come to mind, who become essentially famous for the playbook that they execute on after acquiring software businesses. So I'd be interested to hear whether or not permanent equity has a playbook of sorts, whether it's formal or informal, that you tend to execute on more often than not within the first year or two of acquiring a new business? And if you do, whether it's a formal or an informal playbook, I'd be curious what are those some of the most common changes or initiatives contained within that playbook?
That's a great question. We have what I would say, a people playbook and a business playbook, and they're very different playbooks. And I'd say we want to go and execute on the people playbook first, and that it will eventually lead into the knowledge of what to do on the business playbook. The people playbook is simple. How can we develop genuine meaningful relationships, high trust, low presentational value, low ego relationships with the people that we partner with and work with? How can we surround them with resources that maybe would be unusual for that area of the market, and think about how to coach them into using their time in the highest and best use possible. So these are often people at the very top of these organizations who have done everything, they are the chef that has also been the line cook, and the fry cook and the guy who's cleaned the grill and the front of house and everything else, right? If you wanna use the restaurant analogy.
They are usually really, really, really talented at a couple of those things and they love to do them. People tend to gravitate towards things that they're good at. We often find that they're in a position though, they're not using their talents in a way that maximizes their time. Even even a small amount, most of the time we're coming in, and by the way, I feel this pain even in my current role is like I said this somebody the other day, I feel outrageously valuable about 5% of the time, and I feel like 95% of time, I'm just okay. I'm doing okay. Right. We want to work with our portfolio company leaders to identify what are those highest and best uses? So what's the Venn diagram and things are great at, the things they enjoy, and the things that are high value to the organization? And how can we hit the bull's eye, the center of that repeatedly over and over and maybe drive that percentage up over time from five 10% up to 50, 60, 70% of their time, where they're just really in the flow, and they're doing great work, and they're loving it?
So that's, I would say, the people playbook. And we have the ability to do this, because we're not going to exit the investment for a very long period of time, potentially decades. So it gives us a time horizon to really invest in the relationships and the people, and be patient with the business outcomes and set the table for the future growth. I mean, I think people have said, you know, oh, permanent equity, like, I want to go do that, like, I'm gonna go raise a fund, I'm gonna go do that, you know, next year. And I said, that's great. You got to remember that we toiled away in obscurity, and learned a lot over about a decade before we took on any sort of meaningful amount of capital. Right, we were the world's smallest family office for a long time. So, I would say the second part of your question, the playbook is, we have a saying here, internally, we call it the table stakes of business hygiene, which are kind of like what are the base level competencies that you need to put in place in every single area of the business, right?
Marketing, sales, technology, HR, legal accounting, finance, all that the areas of the business that are sort of the categories, and it's the everything tastes like chicken layer, it's that layer of business, that doesn't matter if you're selling widgets, or contracts or whatever. It can be a service, it can be a product, business all runs the same way, you got to find customers, you got to serve them, you got to hire people, you got to motivate them, incentivize them, you got to treat them, well. You gotta obey the laws, gotta have data and feedback loops, you gotta have technology that you're working with your business. So these are all the things it doesn't matter what the business is, that's really the layer that I would say we specialize in. Our ideal partnership is a group of people who are unbelievably talented at the thing they do. And unbelievably not aware and maybe not talented at all the other stuff, the business of business, the everything tastes like chicken layer.
That really over time, as we develop that high level of trust, we can say, Hey, by the way, this business would be, we think, even more valuable if maybe we brought in somebody that had this unusual talent. And they say, oh, you know, that feels a little threatening to me, because I have been doing X, but you know what, I've developed enough trust with you now that I believe you. And yeah, let's roll the dice. Let's go find somebody who can help us do that. And then they see the fruits of that. And they're like, I cannot imagine ever going back, right? That's like the fantasy situation. Now, again, we're people, we're messy. Egos flare and trust sometimes gets broken, apologies need to happen. So this is not a beautiful linear process of up into the right, it is very squiggly. And that's life. And that's what makes it interesting.
I'm curious how you think about how quickly to move in implementing this playbook post close, because on one hand, I can envision a situation where you see a lot of low hanging fruit in the business. And as a result, you want to start executing on it as soon as possible. On the other hand, my experience buying a business and becoming the CEO was that I learned more about that business in the first month of operating it than I did in the 12 months of due diligence that preceded the purchase. And so as a result, I found that I was best served really taking the time to kind of diagnose before prescribing and truly understanding what the problems and opportunities were in the business before making definitive decisions around them. So it's a bit of push and pull in terms of how quickly one ought to move and implementing that playbook Post close. How do you think about that?
I would say we are very quick to move on the people side. We want to in fact, even prior to close, we actually start management calls on a weekly basis when we have a clear line of sight on closing. So usually between four and 10 weeks out. Our operations team is starting weekly calls where we're treating them like they're a portfolio company already and helping them and serving them and being on the same team, and building that trust. And so I would say the people playbook is an immediate and it's really a no lose situation. Right? I mean, some people are gonna be more receptive to building relationships than others. People have wounds, people have experiences that they've been burned in and we're trying to overcome maybe some prejudices that they have against you know, what does it mean that quote unquote, have a boss? What does it mean to be in partnership? What does private equity mean?
Right, there's all these preconceived notions and we're trying to break down a lot of those barriers, we're trying to spend time with people, we're trying to model behavior to them that we would expect them to model for their employees. So I would say that playbook is very straightforward. And by the way, I would 100% agree, in my experience me, I operated the first X number of companies that we bought. And so I would completely agree our philosophy has been built over time by experience and saying, we come in with a humble, low assumption approach. And the first rule is do no harm. And in order to do no harm, you need to learn a lot. And so we spend, I would say, the first six months to a year, building the relationship and learning and asking a lot of questions. But we've learned enough that when you start pulling on maybe a string, and it looks like it's not connected, all of a sudden, half the ball of yarn falls off on the other end of the side, right?
I mean, it, everything's connected. And so we're really tried to be thoughtful in how we approach changes, what I would say is with one obvious exception, and we've had this happen a couple times. If there's something illegal or unethical going on in the company, whether it's known or unknown, and we find out about it, we want to be pretty quick to mandate that change. Just kind of without exception, we want to be way clear, whatever line there is legal line, we think we should be way on the other side of it. Any sort of ethical line, we want to be on the other side of it, we think that life's too short to bump up into too many gray areas. So that would be the exception. But the rule is, be humble, be kind, learn, develop trust and relationships.
Now, given that, you're often purchasing companies from their founders, or at least I suspect that's the case. And these founders presumably have been running their companies for 10, 20, 30 years at the time, I suspect more often than not, the sale of the company is actually quite surprising, maybe even unsettling, maybe even fear inducing for the employees of that company. And in light of that, I'd be curious to learn how you handle that early communication with the employees, the companies that you acquire, how do you alleviate the worries? Or how do you speak to those concerns? And also, how do you avoid making promises that you might not be able to keep? So for example, I'm thinking of the townhall, where I announced my own acquisition alongside my sellers, and someone asked me, can you promise us that all jobs will be safe? And I kind of froze? Because I really didn't know how to answer that. So can you just talk about that early communication and how you think about speaking to the ambiguities and worries and potentially fears that the employees of that company might have?
Well, first of all, I think the number one thing is be empathetic, if roles were reversed, I would also have anxiety about somebody who's coming in, and change is scary, right? People don't change unless they feel understood. And when the change happens, and is thrust upon them, there's a feeling of being fearful about being misunderstood, and almost a assumption that there will be a misunderstanding. So we try to go into it with high empathy, every situation is a little bit different. But oftentimes, we'll do a town hall, we'll have our team that's directly working with the company, answer as many questions,sit there for as long as possible. They'll do public, they'll do private, they'll do one on ones, they'll do small groups, they'll meet with teams. And I think you what you said is obviously born from experience, there is a temptation to answer questions, what I would call the easy way, the expedient way.
We try to never do that. Now what we can say to people is, hey, look, when we told you that, you know, a year ago, we meant it, things have changed, though, and here's the reason why they've changed. And that's why we're having to, as the information changes, where I would change our opinion, right? I think that's fair. And most people would understand that. We thankfully very rarely had to, in fact, we've never, I think within the first year had to let go of anybody in terms of like, that the company wasn't doing well, or we're gonna go do cost cutting. I mean, there's been plenty of people that leave companies as a first year just as the natural churn of the company. But yeah, we're trying to go in, and we're trying to tell them like, look, here's what we stand for. Here's what we believe is true about the world. Here's the behavior that we want to see modeled, and by the way, hold us to our own behavior, because we're flawed and messy ourselves.
And so if you see us not behaving in a way that you would assume would be the case or they violate something we said, which by the way, we'll raise our hand and say, that is very possible, you might see calls on it. And hopefully, we will have the humility to see it and apologize. And if we don't continue to call us on it until we see your perspective. So I don't know I that's that's our approach. It's worked better than the alternative.
Let's dive into the deal process itself. This is something that I've had to deal with many times, both as an acquirer, and now as an investor, I've noticed that at the small end of the market, intermediaries like business brokers, small boutique investment banks, etc. They're obviously supposed to facilitate transactions. But I've noticed that at this end of the market, unfortunately, all too often, they actually act as the primary impediment to a transaction, or at least the bad ones do. And often through giving bad advice to their CEO clients. So I'm curious, how do you navigate situations in which there is an otherwise attractive company or opportunity? But the CEO is clearly receiving bad advice, either from their legal counsel or from their business broker? Or someone who's just supposed to be there as a trusted adviser? Do you immediately walk away and just save yourself a massive headache? Or are there other ways that you've learned to kind of navigate these types of prickly situations?
Well, you're correct, people get funny about money. And when you bring a group of people together, and everyone's got different interests, right, you got a lawyer with different interests than an investment banker or broker with different interests different from a seller with a different interests, different from leadership teams with different interests, employees with maybe a different interest in them, is a cocktail for a lot of hurt feelings, a lot of misunderstanding. I would say, when it comes to advisors, or the helpers of sellers, this may be obvious, but that there are people too, and for the most part, they're not trying to do a bad job. I mean, one of the things that I've learned over the course of my life is that no one's doing the thing that they're doing, because they think it's stupid to do it. There's a reason why they're doing it. And so what we try to do is we try to understand what are the incentives?
And what are the reasons why different actors that are maybe doing things differently than we would assume that they would do them or that seem odd. Everything's explainable with enough information. And so what we really tried to do is get them off to the side, have a confidential conversation with them and say, hey, I want to be kind, but want to be transparent at the same time about what we're seeing happening. Help us to understand maybe where our approach is off, or where we're causing friction? Or is there something we could be doing that would alleviate your concerns. And usually what happens we see is, whether it's lawyers, again, investment bankers, there's a pride issue that comes with, they're set in their ways, and they want to win, and they want to show their client that they're awesome. And by the way, they want to show themselves that they've still got it or that they're better.
There's a temptation in this world, that I think we all feel if competition, right? I mean, we've we've we want to be not just better, we want to not just win, we want to be better, right? And better being better than somebody else. And so there's a lot of one upsmanship, and a lot of rising ego that can happen in these deals. And what we try to do is just take the low road and deflate, we try to get people and say, hey, I totally understand why you're saying that. That doesn't work for us. So maybe we could find a different solution. But obviously, we want to make sure you look good. We want to make sure that you feel like you're winning, because we want to create Win Win Win opportunities, not just win on our side. And you know, and we try to say that to them and say, is that how you approach things, too? Oftentimes, I mean, this is a, unfortunately, a fairly rare approach from our experience, people almost get caught off guard, and there's a cynicism that can kick in on their side and say, Oh, this is just a ploy to get more of what you want.
And we say, No, we're trying to set the table for great long term partnership. And hopefully, whether it's the lawyer or the investment banker, like, let's play the long game, let's play it. Let's pretend for a second that this is not a one time game that we're playing. And a zero sum game, what if this is an additive game, right, and maybe a positive sum game that we can play here together, and maybe it's a multiple time game that we can play together. And by the way, even if it's is a one time game, like I'm going to try to treat you as made in the image of God. And I'm gonna treat you with with care and empathy. And when you do something that makes me feel rejected or harmed, not always, but we try to go back with an approach that shows them love and care, not to be soft. Like that is not a soft approach that is a useful and valuable approach. And I think they often see that. So I don't know that's a very long answer and very nuanced answer to a simple question, which is, yes, we try to get into the mess and we try to fight for the deal and fight for the relationship.
Yeah, makes a lot of sense. That makes a lot of sense. I'm curious what I got to work on my transitions here. I'm jumping all over the place, but at the risk of doing so, I'm curious what have you learned about granting equity or stock options to the management teams of your portfolio companies. This is a very common mechanism to align interests and provide key people in the company with upside. It's easy to understand why at least at a intellectual level, but when dealing with small illiquid, private companies where liquidity tends to come in the form of an exit events many years into the future, and with private company stock options being very difficult for the recipients to value and sometimes difficult to understand in my experience. I found that in some instances, granting options and equity is actually less motivating than the finance textbooks might otherwise suggest. So I'm just curious, what is your experience taught you in this regard?
Obviously, you're bringing a nuanced and experienced approach, because I think the novice approach, especially amongst investors to incentives is to like, quote, Charlie Munger, and be like, incentives are outrageously ungodly, important. And therefore, we're just going to pretend people are robots and incentivize them as if they were. And I think that's exactly the wrong approach. Not saying that Charlie's wrong. I'm not saying that incentives don't matter. That's not what I'm saying at all. What you have to ask fundamentally, at the end of the day, with every incentive that you're gonna put into place is okay. What is the behavior that this person is exhibiting now that I believe that by putting this incentive plan will change and they'll stop doing? Or alternatively, and maybe it's a bundle of these things? What are the things that they're not currently doing that by putting this incentive plan into place, they will start doing?
And it's so easy to say, Oh, well, if I just incentivize our leadership teams with X amount more equity, they would just make more money, because obviously, they want to make more money, and we want to make more money. But the reality is, even for leadership teams, that causality between their actions, and the profitability of the firm, is not always obvious, especially on a day to day basis. So when you really boil it down through that formula and say, look, what is the behavior positively or negatively, that we think is going to change as a result of the incentive, it often results in, I don't think the incentive is actually going to change that much. Now, what we want to say is, we want to operate from a position of shared fairness, and bordering on or hopefully even exceeding generosity. So if we win, we want them to win with us, not because maybe their behavior would have changed that much, but because truly, we want people to be incentivized to sort of be all in on what they're doing.
Not all in, in the sense that they lose sight of their families and relationships and lead to unhealthy lifestyle, which by the way, can occur if you're trying to shoot a business with a steroid needle, and rip it apart, rebuild it and sell it within a short period of time. I think that's a disaster for families. But with our approach, we're trying to build over a long period of time, call it 5, 10, 15, 20 years, depending on the situation with the obviously the executive. And so what we're trying to incentivize them to do is to say, hey, let's take the long view, let's make decisions that are obvious from a capital allocation decision. If there's good things to reinvest in, let's reinvest in them. If not, let's put an opportunity cost on that capital that also hits home with you and with your family. And so we're depending on the situation, sometimes there's a heavy rollover in the deals, and there's less of a need to align incentives. And sometimes there's no rollover, and there isn't more a need to align incentives, but I would say is, I think incentives are incredibly important. And oftentimes, much less important, depending on the situation, then people would assume.
Yeah, I issued options and equity to my management team. And I think there was some component that helped aligned interests and help generate buy in, but I learned a couple of things. The first is that the link between the desired action, the desired reward needs to be pretty easy to understand, in order for any incentive to have a power. Two, the time between action and reward needs to be minimized as much as possible. And for me, that's really where equity kind of fell. Because it was so long term in nature, I found that my leaders thought of these options as basically lottery tickets, these nebulous things they couldn't quite understand. And that led to kind of observation number three, which is like the quote, tangibility or understandability of the reward needs to be pretty clear.
And I just found that with options, these were incredibly intelligent folks, but they didn't necessarily understand what they were worth at any given time. So if I could do it all over again, I might just simplify my life and give out cash bonuses, depending on the goal that we're trying to achieve. What what types of incentives have you found to be most valuable in your businesses, particularly given that you might be holding it for 20 years, and as a result, an option that you give to a management team member today might not have any value for 20 years? What incentives have you found to be most powerful in your experience?
I would say you nailed it. I should be the one interviewing you on this podcast. Because what you just said and how you described the incentives is mirrors. I mean, exactly what we've experienced over time, which is the best laid plans for long term incentives. often result in people discounting those incentives. Yeah, that's unfortunately true. Yeah, we've much more defaulted to cash based quarterly short term, potentially even monthly, quarterly, whatever the time period is, much more towards those types of incentives, that of course you want to correct for any ability to game the system. But look, we have found that short term performance based bonuses in cash that families can feel, are by far the most motivating.
Yeah, yeah. And there's something to be said from the perspective of the owners of that company. The extent to which that simplifies your life is also, I think, a relevant consideration. Brent I want to dive into two questions with respect to permanent equities portfolio. So you guys have several investments in what I will, perhaps in an intellectually lazy kind of way refer to as old economy type businesses, like manufacturing, pool construction, and things of that general nature. These businesses often tend to employ blue collar workforces that on average, tend to be difficult to attract and retain at the best of times. And over the past year or two, there's been wage inflation, lots of employee turnover across industries, and the relative balance of power seems to have shifted a bit more towards the employee than the employer. And it seems like these types of folks have been particularly hard to attract and particularly hard to retain, over the past couple of years. How have these dynamics changed how you think about investing in these kinds of old economy or blue collar type businesses if they've changed it at all?
I would say the challenges which had been many, across all businesses, for the most part, and especially in more blue collar trades based organizations, which yes, we we do have some of those in the portfolio. They've always been difficult, I don't think it's the difficulty of them as a new thing. I think that this has been a period of time where it's been particularly difficult. But we went into those businesses eyes wide open at the difficulty of them. And this is always the weird double edged sword of investing in businesses like this, which is the the difficulty of them is somewhat of a moat in and of itself, right? There's a lot of people who won't touch those types of businesses. So therefore, you're able to have much wider selection, give them a better price, I mean, all the things that would you know, sort of result from a lack of competition for those assets?
So I would say we definitely learned from a business model perspective that not all what are called Blue Collar businesses are made the same way not have all that same dynamics. There's a lot of blue collar businesses that are really high quality businesses sort of masquerading as low quality businesses. And we've also seen a lot of what would be considered high quality businesses that really are masquerading because they're really low quality businesses as well. So I think that's from an investment perspective, selecting the right things, I mean, that's what really trying to do is to find things that may other people may on the surface look like low quality, but for some reason, they're bypassing some some things that we can see in those businesses. I would say in terms of our coaching around this particularly difficult time, which yes, wage inflation, material availability, logistics and shipping issues.
I mean, golly, it's it feels like the list never stops, right. And then you've got sort of this just general raging inflation right now, which is really new for my lifetime. It was professional lifetime. Our advice to the leadership teams of these companies is let's just be thoughtful, let's be kind, let's play the long game. And let's get through it, because there's a lot of businesses that are going to blow up in the next year to 18 months, because they struggled to make it work in the best of times. And there's just a lot of low quality businesses that aren't going to make it as interest rates continue to ratchet up and the economy gets more difficult. So, hopefully, we've set things up with no debt, with higher trust, with good leadership teams. We're improving systems, we do a lot of work on quality of earnings beyond quantity of earnings. So we really want to see how those that that quality is increasing over time. And hopefully it allows for a durability of the business that gives us an advantage to take in the tough times.
So continuing on the theme of how you think about portfolio construction. I was listening to a podcast recently where you would refer to software as one of the world's best business models. And I am very biased I had purchased and run a software business myself, so I would tend to agree with that. But unless I'm mistaken, I also note that permanent equity doesn't appear to own any software companies and I'd love for you to reconcile this for us and walk us through why you haven't yet invested in a software company? Is it entirely valuation related? Are there other considerations that have thus far precluded an investment in in the software business?
Well, I'm pleased to report that we actually did invest in a software business, the last investment we made in a Duluth based Minnesota company called Ad Advance, which is a software business with a service layer on top of it, using software to help people sell stuff on Amazon and across the internet, far better. So we actually didn't make the leap into software. It's our newest investment. And we did it because it sort of broke the model that we had for a long time, which we didn't feel like we had the expertise and competence on staff to do it. Well, we know a lot of really competent, excellent software investors. And, frankly, they're better at it than we are. And we know that it's kind of like, you know, I have a buddy of mine in Texas who is in the oil business. And he just said, Hey, Brent, just want to let you know, if you see an oil deal, come out of Texas, know I passed on it twice.
I feel like the same same thing in the software business, I've gotten the chance to get to know, you know, quite a few of the top software investors and they are really good at what they do. They are very sharp. They're well funded. They're highly focused. And to be honest, they're just better at that niche than we have been. Until we found an opportunity where we love the leadership team, we thought the culture fit was fantastic. And we were able to get involved in the business, I would say is higher than normal price for us, but a very reasonable price. And we're excited about the investment. And it's working out great so far. Traditionally, software has been priced, very high. And it's required the use of a lot of leverage, which we're just sort of, sort of generally opposed to using a lot of leverage for a variety of reasons. I think software, it works better because of the predictability of the revenue in the business.
But we still think there are some pitfalls with that. And so it just hasn't been attractive. And there are exceptions to every rule, I would say is we're not all in on software investing, we have hired recently, people who have experienced in software investing. That are bringing in expertise to the table that levels us up to be more competitive in that space. And ultimately, though, everything has to compete with everything else, we have high opportunity costs and a software deal we have to see it's going to exceed our projected returns, that we would be getting from manufacturing or construction or business services. And oftentimes, we think that because of the way we're set up and the expertise we have, we can generate more opportunities, maybe more through traditional businesses, old world businesses. But there are exceptions to that rule. And we're excited about software as well.
So now that you've brought some software capabilities in house, now that you've acquired a software business that I clearly did not do my homework on, but you will be able to build experience and context and pattern recognition. How do you think about the software investing opportunity moving forward? And I'm always curious to get inside the heads of other investors? How do you think about buying a business in industry X, Y, Z for four times cash flow versus buying a software company for four times revenue? I mean, how do you think about the opportunity costs inherent in that decision moving forward?
Yeah, I mean, I think that the risks are almost the exact opposite. Right? In the four times free cash flow world, you're worried about a disintegration and the quality of of earnings. And you're worried about sort of the competition taking you out in a way, that I don't think you're as worried about in software, because of the stickiness? I mean, obviously, I'm making gross generalizations. There's software is a very wide world, and there's lots of exceptions to the rules. But in general, I think with software, you're worried more about sort of a decay of the of the opportunity set over a very long period of time, or that maybe doesn't grow into what you assume. So you're making a lot more assumptions, I think in software about the long term viability of the opportunity than you are in the humility that maybe it would be expressed through buying at a four times multiple or a more traditional mainline business. I think that both opportunities can generate great returns.
I mean, it's obvious to be able to see this over time with obviously organizations like Constellation or VISTA, to use ones that you brought up earlier. I also do think from an investor set, I mean, I know like I said, a lot of very smart, very well funded, thoughtful investors that have continued to move into the space. I mean, I feel like that of all the people that approached us to say, hey, you know, we're thinking about doing this, here's what our plan is to watch them play out over time. I would say a disproportionate number of them that succeed are in the software space. And I mean, that's a testament to the durability of the space. It's a testament to the quality of the businesses they're buying. But man, I tell you what, anytime you see a bunch of people charging in that are really, really smart, well educated, thoughtful people, that always gives me pause. So I'd like to go fish in ponds that maybe have a little bit less competition.
Yeah, that makes sense. So Brent, in my experience, a very common investment thesis for those purchasing companies in the lower middle market revolves around sales and marketing. And in fact, this was a part of my own investment thesis. When I acquired my own company 10 years ago. A lot of these types of businesses under the ownership tenures of their founders, they lack internal sales and marketing efforts. In many cases, they generate their sales through word of mouth. So the investment thesis basically says, hey, the company has grown a lot with our internal sales and marketing, imagine how quickly it'll grow once we actually do build out these internal capabilities. And I found that this investment thesis makes intuitive sense, how could it not? But my experience is that building out these capabilities from scratch is almost always much harder than basically every investment memo I've ever read might suggest. I'm curious, what has been your experience in this regard?
Well, I would say, again, you nailed it, it is a thesis that I think is a viable thesis. I mean, every business is fine. Customers serve customers rinse and repeat. I mean, let's just break it down to the core of what it is, if the business is good at doing the thing, and not good at finding the customers. By finding more customers, you will increase the quality of the business the value of the business now, we've experienced this, a couple of our businesses we got involved in we especially early on, hit him with sort of a growth curve that they weren't expecting, or if they were expecting didn't understand the consequences of them, and it almost broke the business. So I think that growing any business rapidly results in a lot of turmoil and a lot of heartache and pain. And it's not obvious that that growth will result in increased cash flows over the duration of the investment. So I've seen a lot of situations where what goes up easily comes down easily.
And when you find sort of a new area to increase growth, if you can find it quickly, it can usually go away quickly as well. So what we would like to focus on now over time is is looking at every area of the business and marketing is certainly one area sales is certainly another you can break them down by subcategory in terms of sort of cleanliness and hygiene. And just doing the right things repeatedly over time,getting the right talent in place, empowering them to make good decisions, aligning incentives, all the things that's just good hygiene, you'll see a natural lift in the business that's sustainable over a long period of time. I think it is a fallacy for the most part, unless again, your goal is to do something and then sell it to somebody else who is going to take the mess on and maybe not even see the mess that's there. I think it's a fallacy to think you're gonna come into a business that's been growing at seven, 10% per year, consistently increase up to 30% per year, and you're not going to create massive problems, they're going to take a long time to work out.
It's so interesting that you talk about the realities of managing growth. As I reflect back on my own time as the CEO, the year in which our financial statements looked the most attractive to the external observer highest growth, specifically, I found was absolutely the hardest year for me, both professionally and personally. And it was only through that experience that I came to appreciate how running a business, a high growth business is very different in many respects from running a low or medium growth business. I'm curious what are reflections that you have with respect to the realities of running a high growth business that the external observer just might not appreciate?
Yeah, I mean, that is the truth. Running a high growth business is I mean, all business feels like a knife fight, right? You just get out of bed, trying to get stabbed, get back into bed and do it all over again, right, or like eating glass. I mean, in high growth businesses in particular, you are typically hiring, so think about what what is high growth mean? High Growth means you're acquiring more customers more revenue, there's gonna be more employees. There's going to be a higher need for every type of capital, human capital, financial capital, relational capital, I mean, you need all of it. And you need all of it at the same time. And all of those things every time you double in size and organization, you break all the systems is kind of just a general rule. Sometimes it's increased 50%. Sometimes it's increased 150%. But usually rule is double the organization break all the systems.
So you can imagine, you've got this rocket ship that you're trying to ride up, and you're constantly breaking your systems, and you're constantly experiencing interpersonal turmoil. And communication is breaking down, and fiefdoms are being built, and customers are pissed off, because you can't keep up with them. And you're trying to serve everyone, you're trying to keep, it feels like a ball of chaos, that you're constantly trying to just keep it together. And it is incredibly nerve racking and burns people out. And there's high stress and high anxiety and there's a lot of fear. And it is not a pleasant position. Anytime I see somebody who from the outside looking in, it's like that they're going through this incredible growth trajectory. Like I was, like, privately messaged them, if I have a relationship with them and be like, hey, if you ever need somebody to talk to, like, let me know. And you would not believe how many times people call and like be in tears and be like, Oh, my gosh, I just won these awards.
Like the valuation of our company is dramatically increasing. And I am miserable. And I feel horrible. The reality is that everything's hard. And growing a business is I feel like, you know, maybe second to in difficulty to managing a business down and in a fast shrinking business. I mean, that's even less fun. But like, it's only second to that. I mean, you know, I think the best, if you're going to optimize for happiness, like steady plotting, sturdy growth is like by far the best lifestyle.
Yeah, yep. I would agree with that. I heard a phrase recently, I don't remember who said it, there's a chance that it was you that said it. In doing research for this podcast, the phrase says that every successful business is a loosely functioning disaster. And I thought my god, Truer words have never been said.
Yes, that was me. I say all businesses are loosely functioning disasters, and some happen to make money.
When I heard that I honestly laughed out loud. And I was like, yes, this guy has clearly run something before because that is bang on, that is bang.
Yeah, that's the thing is until you run something, like think about the trajectory, and obviously you're dealing with these people a lot more than I am, but like the trajectory of like an average search funder, right? So they are elitely educated. They are what, late 20s to early 30s, maybe mid 30s, depending on the situation, they probably have some operating experience. But usually they're coming in with sort of a non entrepreneurial background. I mean, there are exceptions to this, but they're coming in from like a corporate background or an investment banking background, they have been a high functioning COG in a very big system, right? And, and they're coming into a situation and saying, Okay, now I want to go and I want to go and buy this company at an attractive price, I'm gonna, you know, quadruple it, I'm gonna make millions of dollars, everything's gonna go great. And I just look at those people. And like, the only way I feel like that you go into those situations with the confidence you have is just out of ignorance, right?
I mean, anytime you think something's gonna be easy, it means one of two things, either you got lucky the first time, or you've never done it before. And I feel like that the pride that's exhibited. And by the way, I don't think that I mean, potentially, as a system wide thing, like this pride may be a positive thing, right, especially for investors, because you're able to get highly motivated people to do a very difficult task over a long period of time. But I feel like that, how quickly their eyes are going to be opened. And one of my favorite conversations that I have, probably Donald three or four times a years with maybe a search funder who is in year two or three or four after buying their business, and they are just in the dip. They are just getting beaten up, investors aren't who they thought they were. They're irritated. The investor irritated with them. They irritated the investors, they're frustrated with their leadership team, they're frustrated their customers, they're working 80, 100 hour work weeks every week. And I just I think the reality is that that's okay to know going into it as well. But anybody who thinks that's not what they're signing up for is just deluding themselves.
Yeah, yeah. The quote that comes to mind was from Jeff Immelt, the former CEO of GE, he said, every job looks easy until you're the one doing it. And that is certainly true in my experience. Brent, I'd like to conclude with a couple of personal questions, if you don't mind. The first of which is how would you advise somebody let's say in their mid to late 20s, perhaps early 30s, who is a debating taking the entrepreneurial path at all? And I recognize, of course, it's a very personal question. But if you were maybe talking to your 25 year old self, how would you advise 25 year old brands on whether or not to take the entrepreneurial plunge? And maybe more specifically, if I can ask somewhat of a selfish question, how would you think about pursuing an entrepreneurial career through starting something from scratch versus pursuing entrepreneurship through acquisition? Which in a way, is what you've done many times over your career?
I think it's a good question. It's a really hard question. I mean, I get this question a decent amount. And the first question I always ask in return is, what are you optimizing for? Because most people can't tell me what they're optimizing for. You know, most people are like, well, the obvious path is I want to do what the world tells me, I should do, which is become rich and famous and powerful. And I should pleasure myself. And so I say to them, I say is that what you're after? Because I think that there are real opportunity costs in this life. And this is not the dress rehearsal, like we got to go at it. And a lot of the people who are, you know, sort of 25 to 35, that are thinking about starting something, the opportunity costs are high for that decision. Probabilistically, if you want to live a very good life, it's a very dumb decision probabilistically to start your own company. It's very stressful.
And the odds are, you know, there's a selection bias of who are aware of, but the odds are that you're gonna end up like, broke and discouraged from starting something. And a lot of people who buy things as well fall into that category, like, I can't tell you how many times people have reached out and said, oh, my gosh, like, I took on an SBA loan, and the business went under, and now I'm declaring bankruptcy. And I'm 34, and I have this elite education. And now I've got to restart my life, like, I don't know what to do, right. So like, don't mistake like the selection bias of what you hear about what's made aware of through media, through social media, in particular, of being the most likely outcome, like, there's a lot of people who fail, and failure is a very real option. So I would say is probabilistically, if you want to make good money, not great money, it's better to join something that's already working.
Now, I think that entrepreneurship through acquisition is a path. That's a de-risk path. And in some ways, depending on the situation depends on how it's set up to to joining something that's already working in making it better. It already has its post product market fit. Right? So the question is, what's your skill set, too? Right? So what are you optimizing for? And what what talents do you really feel like you can bring to the table? If you're a, you know, visionary, which I mean, I'm using visionary, not in the broad sense, I'm using a very specific like, almost like psychological clinical sense, right? These are typically EN TJ EN TP People, that are able to go into the future. They're very future oriented future looking. It's I think, less than one and a half percent of the population fits this bucket. These are typically people, you'll see starting companies from scratch, because they have an ability to see things that other people can't see.
And solve means that other people can't readily knowledge, right? I think if you have that, look, and you know, if you have that ability, and do you think you like a desire in your heart is to get fabulously wealthy and sort of accrue a lot of gain personally, then yeah, it's a good probabilistic path to go down that one. Just knowing that even though the probabilities are more tilted in your favor, with that sort of background and desire and skill set, the odds are, you're probably still going to end up like broken, discouraged. So I don't know that that sounds like terrible advice. But I think it's like, you should go into the decisions knowing that ultimately, like, what are the probabilities? And what is the sort of base level of success in in the thing you're getting into, and the base level of success in raw entrepreneurship, not through acquisition, but just starting to them from scratches, you know, almost everyone fails.
And it's really tough. I think the odds are, again, better to join something that's already working, but you're also having to put more of yourself, depending on the situation, on the line or more of an investor, somebody's got to put up the money the difference, right? So if you start a company with $50,000, or $100,000, to get it off the ground. You know, in order to get into the entrepreneurship through acquisition game, you got to have millions of dollars, broadly, to get into the game. Money's got to come from somewhere, there's more risk in that, there's also a de-risking because of its post product market fit.
Right. Brent, can you think of any examples of generally accepted wisdom within the micro cap PE ecosystem that you completely disagree with?
Boy, that's a hard question. Let me think for a second on that one.
I mean, certainly, it sounds like leverage is one such example and your general stance towards the use of leverage.
Yeah, so let's talk about, I would say the use of debt is probably where we are most is countercultural. I mean, the math behind debt is, it's not hard to understand, right? It's pretty easy. If you lever something, the equity gets to keep the difference between whatever the cost of debt is, and whatever the returns to businesses are. So like, it's not complicated what that does to equity. But what I would say is the thing that's unseen in that situation is the opportunity cost of what you can do with those dollars if you're not paying a bank, and the lack of stress in the system and what that can result in. And I'll use a great example of this. So we bought an aerospace business in Los Angeles in 2019. Now, remember, 2019, when we buy this aerospace business, aerospace never goes down. It never has a hiccup. It never cyclical, the cycles are very mild, if anything, and there's always work to be done.
And it's basically an up to the right business. Than 2020 hits. And we intentionally even though we knew aerospace was an industry that didn't go down, we just said, hey, we're going to run our playbook here, we have a lot of changes we want to make to this business, we want to improve it, modernize it. So we're not gonna use debt, we're gonna have a lot of free cash flow to reinvest back into the business, and hopefully really grow it over a period of time. Come 2020, that business was made, like 10 years of progress in about a year and a half, because we didn't have debt. And this is the counterintuitive thing that you can gain from not having debt because everyone else, all our competitors were negotiating with banks. We were negotiating with those people's employees to come on board with us. So we were able to hire the very best, we were able to reinvest back in the business, we were able to buy parts packages, that no one else.
Like no one else had cash, we had cash, we were cash buyer, everyone else was having to negotiate, you know, 90 120 day terms and everyone else, like we were getting discounts of 50, 60% off of what everyone else was getting, because we were like, yeah, we have the cash on hand, we'll be happy to pay you, we will write you a check. Being able in those times to make huge progress is only enabled by the ability to have the optionality the flexibility to do so. And debt is an amazing way or lack thereof, to provide that optionality and flexibility. So that's been our general philosophy behind it is, can you generate higher returns on equity over a period of time, if you know the future completely? And you can predict it? Yes, of course. It is a high humility approach that we take. And we think that humility has not been well played out over the last 15 years. I mean, one of our investors, I was joking with him, and he was joking with me, he said, look like in the last 15, 20 years, for the most part, you were paid to buy things that grew at all costs.
Doesn't matter what it was buy things at all costs, pay whatever price, lever to the moon, you get paid to do it now, obviously, over the last six months, we're seeing that come down. And who knows what the future holds, I don't know? Maybe we go back to good times are plenty and the government starts injecting money back into the system, and modern monetary theory is is rock solid. And we all just get to live in pleasure land for the next 150, 250, 5,000 years. I don't know, right? Or maybe things return, sort of to the gravity of how things have always worked and times are not as easy anymore. And we see rapid inflation because of tremendous government intervention. And maybe it's really difficult to stamp that out. And maybe having a lot of cash on hand and high flexibility is the way to go. I don't know, I would tell you that the people who called us idiots two, three years ago for not using debt are the same people who are blowing themselves up now. So take that for what it is.
Brent, I'd like to end on a more personal question. Given the success that you've enjoyed as an entrepreneur, and as an investor, it might be easy for somebody to look at you as somebody who's never really failed at anything, at least anything of consequence in their professional lives. But as you know, as an entrepreneur, myself, I suspect that isn't true of you, nor is it likely true of anybody. So I'm wondering if you're able to share with us a time or two in your professional life where you felt very insecure, very uncertain, you felt like a complete imposter. What was that thing? And how did you work through it?
That was this morning. No, I mean, I'm being actually totally serious. I was praying this morning, and we have challenges like everyone else. There's some of the stuff I can't get into. But they're challenges all the time. And anybody's life who you look at from the outside looking in, that looks perfect and that you want. You have no idea what you're talking about. And for God's sakes, don't do that. Literally this morning, I was praying for God's rescue in two different ways. As I was praying that he would give me a sense of peace and comfort, through some very difficult interpersonal situations that I'm tangentially involved in. I would say, about every six months, we this is the entrepreneurial journey, maybe the backup, is I feel like anybody who's been an entrepreneur has known this, but like, you go from being like, oh, my gosh, everything's amazing, everything will always be perfect. We're going to the moon.
And then like, the next moment, you turn around, and you're like, oh, my gosh, we're gonna go under, and I'm gonna look like the biggest city in the world, right. And those can like happen in the same day. As you get older and sort of more experienced, I think that the, the curves up and down sort of evened out more, like nothing's ever as good or as bad as it seems. And I have to frequently remind myself of that. And look, the valleys make the mountain tops better, right. And the mountaintops remind us in the valleys that there will be there will be mountain tops in the future. So I think there's a rhythm to life. And it's how God designed us that we need to be reminded that we are all loosely functioning disasters, and some of us somehow happen to make money. Right. But that it is not always up into the right. And I think this is a I mean, maybe more broadly, not just in business, like I have lived long enough and seen enough in my personal life.
Like, it is not an inevitable thing that your personal relationships get better, that your marriage gets better, that your relationship with your kids get better, that your relationship with your co workers get better, that the businesses grow, that you make more money, like it is not an inevitable thing. And I think being humble about that, and appreciating when things are working, at least working better than maybe you would have expected, to be really grateful. I mean, I'm reminded of the Norm MacDonald, I think he tweeted this before his death, he said, smart man says nothing's a miracle. I say everything's a miracle. And if you think about, I mean, it is a miracle that we get to do what we do. I mean, we both live incredible lives. And to be honest, if you listen to this podcast, and you don't think you live an incredible life, like you need to take a hard look and realize like the time you're born into, like, we have problems, of course, but look, we're born into an incredible life of gifted privilege.
And it's something that, you know, I joked with, we're literally talking about this at dinner last night with my wife and my daughter's like, incredibly joyful. She's eight years old, she just has this zeal for life. And, you know, we do this thing every night where we asked, okay, what are you happy about? What are you sad about? What are you excited about? What are you thankful for? And as we go around, three daughters, and then my wife, and I answer as well. And my daughter just last night was like, I am just happy to be alive. Like, I am excited about life. And I was like, You know what, like, I need more of that, like, I should wake up every day and be like, man, I am pumped. Did you know that today I woke up again? How incredible is that? Right? Like, we get the privilege of talking about really interesting, important things and having people listen, like, I get a roof over my head, and I get provision in my life.
And I get to help hopefully improve the lives of others and others pour into me, like, let's not lose sight of the thing that is placed sort of most important, which is we've been given this incredible gift. And so yeah, is there hardship? Of course. Is there difficulty? Like we are, you know, it's a Genesis three world, we are post fall, we are all messy and broken people. But the cool part is we also are made in the image of God, and we're given this incredible gift that we get to experience every day. And let's not forget it.
That's really a fantastic answer. And I said that was going to be my last question. But I'm going to immediately contradict myself and ask you one more if your game. You mentioned the ups and downs of the entrepreneurial journey, I can absolutely empathize with that. I'm curious to help you manage through the inevitable ups and downs of that journey. Are there any tools or practices or rituals or routines that you employ? I mean, certainly sounds like spirituality, maybe even an explicit gratitude practice, are two things that you lean on. Any other kind of tools that our listeners might be able to replicate or experiment with themselves that have proven to be helpful in kind of managing yourself and managing your own psychology?
Yeah, for me, I mean, I was an ardent atheist in my 20s. And I very unexpectedly and oddly, now follow Jesus, like unexpectedly because I never. If you'd asked me, you know, my mid 20s if I would ever follow Jesus, like there's just no way, and it's been like this complete revolution in my life. And I can't even imagine how different my life would be without that. And so, that's the base of everything now, which has given me this ability to look at things and say, okay, I'm working with the resources that have been given me to steward, to work to build that a plan that God's put the good works in front of me. But ultimately, he's Lord of the outcomes. And so it's given me a relief to enjoy the game and enjoy the ride, enjoy the process, whatever analogy you want to use, without being obsessed with the outcomes, which is what I used to be.
If you're trying to build yourself and you look at the world as being gain, you know, it's my job to gain every day. And by the way, these struggles, it's not like I'm immune from it, I still have like this whole side of me that is sort of unsanctified sort of fleshy self of me that has these desires to and really is a reminder to me of the true state I'm in. And it's the in between, right, it's the in between. I know how the story concludes, I am very confident that the reality that I see now is true reality. But my goodness, it is a difficult thing to live out on a daily basis, but it has given me a freedom that I never could have experienced any other way. So I'm really grateful for it.
What a great place to end. Brent, thank you so much for your time. Thank you for being generous with your insights. We are all better off for having benefited from them today. Thank you so much for your time today.
Hey, thank you. I'm really excited we did this and I greatly appreciate the invite.
