Think Like an Owner

Today I'm chatting with Peter Bell and Justin Turner from Traction Capital Partners in Tacoma, WA, just south of Seattle. Peter and Justin both reached out over Twitter and the more I learned about their firm, the more interesting to me it became. Traction is a small private equity firm that blurs the lines between a private equity fund and a permanent capital vehicle, which is what made them so interesting to me. They have a handful of long-term investors and seek to buy and hold great companies indefinitely, which gives them the unique ability to make long-term oriented decisions and wait for great opportunities. We begin with Peter telling me about a content idea he has for Traction and move through the topics of starting a private equity fund, lessons learned, what they look for in both businesses and owners, and a few stories. Peter and Justin are both deep thinkers and have been fun to get to know, and I hope that shows in the episode. Links • Hodinkee • GF Data Show notes 1:25 Peter's video/audio content idea 2:50 Firms using content to attract deal flow and find business owners 4:28 Backgrounds and early days of Traction Capital 6:10 Justin's jump to private equity and general views on investment banking 6:45 Founding of Traction in April 2017 7:26 Peter's background and work in investment banking and BlackRock 8:38 Team at Traction, division of labor 9:28 Balance between using Traction as an investment firm and offering a service to the seller 10:20 Traction's operating philosophy compared to traditional private equity's perception 10:50 Group of investors and their philosophy 12:26 Evolution of Traction's source of capital 13:43 Benefits of being a permanent capital vehicle with closing deals 15:10 General discussion on current valuations 16:06 GF Data 16:44 Lessons learned in starting Traction 18:40 Lessons learned in operating companies in that first year after acquisition 19:25 Importance of people in small companies 20:20 Perception of private equity 21:34 Growth of Peter at Traction 22:22 Looking for intellectually curious people, private equity is designed for insatiably curious people 23:49 Frustration with deals not closing 25:38 How small can private equity funds invest?, Economics of investing in small deals 28:18 Traction fits between private equity and search funds 29:16 Backgrounds of Traction partners and benefits of having operating backgrounds 30:29 Differentiation of Traction 31:25 Optimum business owner and ideal characteristics 32:33 Finding passionate business owners who are focused on their people and business, rather than the highest price 33:50 Looking for businesses where the owners has effectively has taken themselves out of the day-to-day 34:41 Questions to ask during due diligence 35:03 Red flags that come up during research and due diligence 40:09 Importance of background checks on management 41:02 Relationships with intermediaries and the evolution of those relationships 42:29 Establishing credibility and a reputation at Traction 44:40 Will Traction go upmarket or remain in micro PE size? 44:57 What class in college would you teach? 47:30 Mental models used in private equity 50:09 Most fortunate event to have happened to you by chance 54:02 Best business you've ever seen I'm also the founder of The Operator's Handbook, a print publication where small company operators share their insights and ideas for building more effective and profitable companies. Articles focus on process improvement, sales, hiring and training, managing culture, and all responsibilities within operating a small company. If you run a small business and are looking for new ways to grow and improve, subscribe today and join your peers in the endless pursuit of better at theoperatorshandbook.com.

This is my first conversation on this podcast with more than one person. I'm meeting with the team from Searchfunder.com, an online community dedicated to search funds and the various parties involved. A search fund is the smallest form of micro private equity I've found thusfar and is typically one entrepreneur seeking out a company to buy and run as the CEO. The team consists of the two co-founders, Luke Tatone and Mark Yuan, and their COO Karen Spencer, all of whom are graduates of MIT. Luke is the first speaker, followed by Mark, and finally Karen. During our conversation, we discuss what a search fund is, how they're structured, who participates in search funds, and how they've evolved over time. If you are interested in running/buying/or even starting your own company one day, this conversation is for you. I met the team after signing up on Searchfunder only to discover all three of them lived here in Portland, OR. Mark initially reached out and invited me to coffee where we chatted about all things search funds and I quickly met the rest of the team. This conversation is the result of one of my most recent, and favorite, small world stories. I hope you get as much value out of this conversation as I did. Links mentioned Stanford Report Asurion Stanford 2018 Report Housatonic Partners Alpine Investors Peterson Partners Show notes 1:38 What is a search fund? Structure, goals, parties that participate 3:08 Harvard business school: Royce Yudkoff, Richard Ruback, Jim Sharpe 3:26 Search fund accelerators 4:18 What individuals create search funds? 5:38 Risks of launching a start-up vs running a search fund 7:20 Shift from finance professionals to operational professionals 7:47 Most valuable experience to have had prior to launching a search fund? 9:00 It is important to investors that you're able to lead a team 9:32 Number of searchers that Searchfunder.com has studied and had on the site 10:01 Strong growth in number of search funds launched and corresponding acquisitions 10:34 Number of search funds formed last year compared to five years ago 11:09 Reasons for growth in number of search funds 11:30 Who are these searchers buying from and why is the owner selling, normally? 12:22 Steps in creating a search fund and acquiring a company 13:30 Best thing to do to learn about search funds, intern for one 15:44 Importance of practice and repetitions 21:33 Average distance between the searcher and the company eventually acquired 24:19 Normal size range and multiple size of companies acquired 25:44 Why do these companies have lower multiples than larger companies? 26:30 A business is only as worth as much as someone is willing to pay 27:27 Lower bound of company size in search funds 27:51 What types of companies are these search funds buying? 29:00 Examples of companies acquired 39:14 Role of interns 40:01 How many companies close after signing an LOI? 40:40 Structure of deals 41:58 Using seller note 42:39 Benefits to self funded in terms of deal structure 43:09 What should a searcher do in their first year with the new company 44:35 Holding period 45:55 Search fund market on Searchfunder.com 46:15 Stanford report on search funds 47:45 Why they started a site on search funds instead of a search fund 49:43 Would you like to run a search fund in the future? 50:15 How Karen joined Searchfunder.com and importance of your alumni network 50:55 More than just search funds on the site, goals for the site 53:11 Gap between mature private equity and micro private equity/search funds 53:37 How do these larger private equity firms access this space? 55:08 Economics of mature private equity firms buying these small companies with in-house staff 57:33 What's the most fortunate event to have happened to you by chance? 1:00:40 Best business you've ever seen

My conversation today is with Mike Boyd. Mike is originally from Brisbane, Australia and currently lives in Singapore where he runs one of the leading car rental comparison websites in the world - Vroom, Vroom, Vroom, among other portfolio companies. He has been an entrepreneur for virtually his entire life, starting at a very young age. Mike built on his experience starting businesses and has evolved to buying them whole. Today he invests his own money, permanent capital, into digital-only companies and intangibles globally, with the goal being to build a portfolio of cash-flow producing companies for the very long term. Our conversation includes discussion on his early entrepreneurial stories, how he became CEO at such a young age, what he looks for in digital investments, and his experience building a remote team. This one, and our prior phone call, are two of the most memorable conversations I've had about business and investing. I hope once you finish listening, you will feel the same way. I got to know Mike after he reached out over Twitter after seeing my conversation with Trish Higgins and was very generous with his time and experience. If you work in micro private equity or permanent capital, or know someone who does, please feel free to reach out through my website or Twitter - I'd love to have a conversation. Links mentioned Mudbrick Capital video on future of workplaces Vroom Vroom Vroom Upwork CEO AMA Hiccup Insurance CarHire Envato Show notes 0:00 Introduction 1:49 Early entrepreneurial businesses, keg rental business, video on future of workplaces 2:15 Planning 18th birthday party 4:50 Decision to start keg rental business, Coolybar Keg Hire 6:50 Story about inbox filled with orders for keg rentals, top of Google results for "keg hire Brisbane" 8:40 Evolving beyond college, moving from Brisbane to Singapore, started non-profit called The Hive 10:20 Getting to know various entrepreneurs through starting non-profit program, mentorship 11:45 Using photos to market Coolybar Keg Hire 12:12 Digital/social media consulting 12:50 Vroom Vroom Vroom opportunity 13:30 Owners of Vroom Vroom Vroom reached out 15:26 Offered, and accepted, to run Vroom Vroom Vroom as CEO 17:01 Starting adding/fixing processes within the company, scaled 21:20 Frequently seeing poor business skills within digital world 22:10 Discussion on why only digital companies, finding these companies, filtering 23:28 Vroom Vroom Vroom business model 25:45 Why Mike moved to Singapore, remote workforce 27:30 Training freelancers for remote work 28:50 CEO AMA's, http://ceoama.co/ 33:40 Sourcing acquisitions and deals, finding new digital companies, filtering 34:25 Hiccup insurance 35:44 Mudbrick Capital, private company diversification 36:20 Finding opportunities in digital intangible space 38:05 Types of digital companies sought out 40:12 Challenges in reinvesting capital in digital companies 42:20 Types of companies found, examples, transacting sellers 45:40 Purchase price multiples 48:00 Example prospective acquisition company 52:30 Demographics of owners 53:27 Benefits of permanent capital for sellers, Mudbrick value proposition to sellers 57:54 Reasons why digital companies with great economics don't receive higher multiples than 2-4 times EBITDA 1:01:08 Add backs/withdrawals from EBITDA to get to true "owner earners" 1:04:02 Reinvestment risk, if Mudbrick Capital is in part solution to this risk 1:07:01 Carhire 1:09:38 Can only really reinvest in marketing when it comes to digital companies 1:10:26 Most fortunate event to have happened that was completely by chance 1:16:34 Best business you've ever seen, Envato

For the first conversation of the podcast, I'm meeting with Trish Higgins who, along with her husband James Higgins and brother-in-law Palmer Higgins, run Chenmark Capital in Portland, Maine. Chenmark Capital acquires and operates small companies for the long term using their own capital, with no intention of selling - a perfect example of permanent equity. What makes Chenmark unique is they look for slow growing, steady, and boring businesses and seek to operate them as efficiently as possible. Trish is the perfect first guest for Think Like An Owner because she has experience being both the investor in the business and serving an operator role in their portfolio companies. Our conversation ranges from discussions around capital allocation within portfolio companies, to the "Chenmark carwash", and why the small business acquisition market at the moment feels a lot like Zillow. We held our conversation in a quieter area of a shopping mall in Boston so there is occasional background noise. I assure you however, that this past audio performance is not indicative of future audio performance. In fact, I hope it makes the conversation sound more authentic and relatable. Please enjoy my conversation with Trish Higgins. Chenmark Capital: https://www.chenmarkcapital.com/ Twitter: https://twitter.com/chenholdco I'm also the founder of The Operator's Handbook, a print publication where small company operators share their insights and ideas for building more effective and profitable companies. Articles focus on process improvement, sales, hiring and training, managing culture, and all responsibilities within operating a small company. If you run a small business and are looking for new ways to grow and improve, subscribe today and join your peers in the endless pursuit of better at theoperatorshandbook.com.