Building a HoldCo 101 with Michael Girdley

"As a holdco, do you do capital allocation? How do you know when to take earnings or distribute them?" This is a total Twitter question. Oh, we're going to get through a few.

I studied the Twitter questions just so I'd know. Look, I think in my course, by the way, I'm here to— I got to promote my course.

That is, if you look on the screen and you go "holdco course," we're about to get there.

It's super funny because every time I talk about the course and stuff, By the way, I made the course because I was so sick of answering people's questions for free. And I was just like, "Okay, fine. If you would like the answers to these questions, you could pay me." Anyway, and it's also great because it selects out. If you can find somebody willing to pay $2,500 for a course, they're going to be some people with some wherewithal and they're going to be truly motivated rather than the people who are just DMing me random questions. But anyway, the way I think about it in terms of capital allocation, capital calls, and how that works with the companies is there's a hurdle rate that is risk-adjusted. On a per-company basis. So I will take a look and say, "Okay, I want to have an IRR, for example, of X or a yield of Y on my overall portfolio," and then I will adjust that up or down depending upon what the company's kind of risk profile is. And then if they are investing below that, they need to send money up to Papa Gerd. And if they don't, if they have a great place to deploy it, which most of them do, Then they can keep reinvesting capital and we'll go from there.

And as far as if they do have somewhere, is there a hurdle or a certain return that you want? Does it have to be in year 1, or do they just have to convince you it's good? Or how do you know it's a good place to deploy capital?

Yeah. So early on with the smaller stuff, we will be doing a lot of wet finger in the air kind of, "Does this make sense by feel?" As the companies get more mature, we will do more sophisticated kind of sensitivity analysis around those. So, um, you know, our fireworks business is very sophisticated in terms of how we do underwriting of deals at this point. Like, they'll build LBO models— or not, not LBO models, but leverage models in terms of site development and estimations, um, all that kind of stuff. And so we have a hurdle rate for them, and then the individual businesses will analyze those kind of on a per-initiative standpoint.

All right, we're going to get to the course in just a second.

That's fine, we've promoted it already. That's the part—

no, actually, I actually, I think We're going to tie what we just talked about with Holdco with being a creator, and the plan was to kind of bring it down to this thing. But when you have 11 companies, you have 11 CEOs. 11 CEOs are— what's the typical profile of a CEO? Hard charging, maybe a little ego in there, maybe a little, "I think I'm right." All great people. But I guess the question becomes, what happens if you're at odds? You don't seem to me to be somebody that you get at odds and maybe we're going to be mad and fight over it. But when things— when you just do not align with what the CEO wants to do, are you ever— is your system set it up to where that filters it out really far in advance to where you're not being surprised by something? Because once you have 11 personalities, It seems to me like there could always be something where it's like, "All right, we're in severe disagreement here." How have you thought through that?

Yeah, so I think having an aggressive interaction model with one-on-ones, being on the same page, and them understanding kind of where we're each at in terms of what we want to achieve out of the business is the right model there to not be surprised by anything. Is there a time in which we get to a point in which I will occasionally say, okay, we're— there's a, there's a tie here, and guess who wins? That's usually— that, that happens, but it's rare. It's maybe a couple times a year. And the reason is, is, you know, A, you try to avoid that by having those, you know, kind of interactions ahead of time. But the, the second reason is, is like, I really want the CEOs to be taking ownership of the business, right? I want them to feel like they're in control of it. So it's very rare that things get to a point where I'm like, no, We're doing it my way, and that's by design. It's because I'm going to put ultimate trust in them. I think that creates a pretty healthy dynamic because they all take it super seriously. They're like, "Man, I'm really being trusted with this. I need to really bust my ass because we're putting faith in them." You had done a thread on it at one point.

I think it was how to hire a CEO, but are there best practices for how to incentivize a CEO?

Yeah. I mean, I think there's different models in which you can do it and they can get tailored by the situation. So if you say somebody's coming on really early and they're a co-founder CEO, a great way to have them is give them equity from day one, right? They can share in the risk. If somebody's coming into an established business, it's oftentimes more difficult to give them equity. So the model that I actually use is a bonus-style structure that is incentives based around them being aligned with the interest of the owner. So say, for example, if the investment thesis to own a business is maximizing multiple for time of exit 5 years from now and we don't care about profit, you can incentivize them around that. Or if it's healthy growth, you can create an incentive around there. So I did a thread on that. It basically ends up being a 2x2 matrix where it's like EBITDA versus revenue. And I use that with pretty much everybody at the C-level in my companies now.

Okay. All right. We're going to now take it back to the top on holdcos. So when I think of a holdco, just so we're all speaking the same language, but I think you've said there's multiple different types. Some people like to think a holdco is like, "Oh, you just don't do a whole lot. It's just this entity and it owns all these businesses." And maybe Warren Buffett's made it seem easier than others, maybe not. But in your opinion, what is a holding company? Because as I watch people on Twitter, I sometimes see these people that say they have holding companies, but then I watch what they're tweeting. I'm like, you're an operator, dude. This is a fake hold company. This is an operating business. So to you, what is a hold company or what are the different types of hold companies?

Yeah. So, you know, at its core level, a holding company is a business that owns multiple independent businesses with leaders that are empowered to run those businesses, you know, subsidiaries And there are different flavors of those. There's everything from a Warren Buffett style, what I call a pure holding company, and that's what I do. It's like a disparate set of unique assets and you may even run different strategies. And then there's all the way at the other end of the spectrum where you may only buy, say, things targeting the same industry, or you may only buy this— Our software business Dura is a holdco, but it's a different type of holdco because they only buy B2B software companies. So they can run a different model than what I do where I'm totally distributed in terms of my holdco. And then there's roll-ups, which I also consider holdcos, where you buy 3 different chains of oil change places. That's a roll-up that technically could be considered a holdco, and I'd consider it that. And ultimately, I think the differences between an operating business and a holdco is what the CEO does every day, which to your point, people think, "Oh, you just kind of hang out and you go to Dairy Queen and you—" drink your Diet Cokes and you hang out. Most every holdco operator I know operates more like I do where we're working our ass off because we don't own Union Pacific and all this stuff that Warren Buffett— Yeah, I wouldn't do anything either if I owned Warren Pacific, you know, GEICO. But guess what? The baby boomers bought all those companies. They're not around anymore. So the rest of us Gen X, we got to figure it out. But in my case, what the CEO does all day is capital allocation, coaching, supporting, monitoring. So the operation I'm doing is supporting those CEOs, and it's a full-time job.

Is there a capacity where you just can't take on anymore?

So what people mostly tend to do is you end up creating people underneath you to take— Portfolio manager. Portfolio managers, yeah. Will you do that? Possibly. I mean, I've got a lot of room to scale right now just because my model's really low low touch, right? Um, I mean, low, uh, low time requirement. Like, I just go to board meetings and do one-on-ones, and, you know, like, say per company I would spend 2 to 3 hours a week max.

Okay, but that— okay, but to be fair, even if it's 2, that's 22 hours a week. If it's 3 hours a week, that's 33 hours. Absolutely.

Yeah, but I'm only at 11, so— but then you've got Threads, right?

We're gonna get to what does a week in the life of Girdley look like, but But in fairness, let's just say you added 4 more companies, then you're kind of at a spot where maybe you have to hire that next person. Absolutely. Yeah.