Private Equity Business | My First Million Podcast | 03/31/2020

What's up everybody? Sean here with Sam and special guest for this episode, Brent. Brent, how do you say your last name?

Bishore.

Bishore. All right, cool. I've been trying to get you on for months. I think our email thread goes back months. The reason why is because I'm interested in the business of buying businesses. I've been looking to do this myself. So, after I sold my company, I said, great, I got some cash. I can either put this in the stock market, I could do, you know, I can go gamble this on a riverboat, or I can potentially buy a cash-flowing business that's a good, solid, stable business. And so, I started learning about that world, stumbled around and saw Permanent Equity. And yeah, I've been interested in having you on the podcast since then. So, why don't you tell us, give us like, you know, the minute version of who are you and then also, What is Permanent Equity?

Yeah, so Permanent Equity is, we like to describe ourselves as a family of companies that buys family-owned companies. So technically, we're a private equity firm now. We were just a small collection, it was my own capital in the beginning. I was an entrepreneur and then accidentally bought a business about 10 years ago, and that's what led into kind of what we do today. But you raised a—

You accidentally bought a business?

Yeah, so I had a mutual acquaintance say, "Hey, you should meet this guy. He's in your industry and he just got left at the altar for the second time." And I took that to mean I should try to buy his business because why else would you tell me that?

He had no idea.

He was just trying to connect two people that were in the same field or similar fields. And so, I don't know, I look about 24, 25 now. I looked about 13 or 14 then and sat across from this guy and told him I wanted to buy his business. And he laughed at me and said to 2 grown men tried to buy my business. How in the heck do you think you're gonna do it? I said, I don't know, I'll figure it out. And we negotiated and he told me no thank you. And then 7 months later called me back up and said, all right, let's move forward and get it done.

So what was your company before?

So I started a kind of collection of regional marketing companies.

We started in 2007, kind of really got going in 2008 and '09, which were, as you all know, interesting times. But it actually allowed us to grow and we adopted some video technology that ended up becoming standard. We think we were probably the first people in the world to use it for commercial purposes, but—

What does this mean? What's regional marketing?

You know, we were doing, look, we were doing like ad agency type work. We were doing media buying, we were doing digital work, you know, trying to scrap and claw and sort of make a go of it, you know.

So you're just an agency, you're an agency just figuring it out.

Yeah, we were an agency.

We had some unusual talents kind of under that agency because being in Mid-Missouri, we didn't have access to a lot of specialty groups, so we started building out our own specialty groups. So we built that research, we did some mobile and app development as well, and then some film work. So those were kind of the 3 unusual buckets that you typically don't get into an agency.

And I'll—

yeah, give us a sense of the like level of success. I think a lot of people— one of the things we hear a lot is from the audience is like they hate when we fast forward and someone's like, yeah, I did this thing, and then all of a sudden these amazing opportunities opened up, and they sort of are like, wait, where were they before? And so give us the before picture. How were you doing? How was that business doing financially?

Did it—

was it a big business, small business?

You know, yeah, yeah.

So we, um, so let's see here.

So, um, I'm trying to— it's been a while since I've thought about the numbers. Um, so we grew to 26 employees, I think, at the peak of that, kind of before we were So we were doing fine. I could make a living doing it, make a good living doing it. It wasn't, you know, the agency business is hard. It's really, really hard. And I think that's probably what I've learned in my career is I've made all the mistakes. I've tried and tested a lot of business models and sort of taste and try something and you're like, oh, didn't realize how hard that was gonna be. And you sort of, you know, move around. And so, you know, I would say, you know, moderately successful regional marketing firm, nothing special. I mean, I would say, you know, when, yeah, when we bought the firm that we did called Mediakross, you know, we were kind of co-equals is how I would describe it, kind of in the marketplace. They were much more focused on government contracts than we were. We didn't have any government contracts, so that was really attractive about the acquisition. And being able to combine those organizations gave us a lot more cash flow than having them separate, just based on cross-selling different products that we had and being able to fulfill a lot more of the gross profit through sort of the larger organization that they had been farming out some stuff. So that was kind of a nice combination.

Wait, so did you buy that first company under the umbrella of your marketing business?

Yeah, yeah, correct.

Got it. And so it wasn't its own entity?

No, well, I mean, it was, I mean, if you wanna speak technically, it was its own entity, but it was 100% owned by me and 100% of the other firm was owned by me. So I mean, it's shared resources. Got it, got it.

You didn't have a co-founder or any outside investors or anything?

Yeah. So I bought it with an SBA loan.

Thank God for the SBA. And so, no, it was just an SBA loan and rolled the dice.

And so just to give people a sense of where you're at now, I think Permanent Equity, you guys raised a second fund, $248 million. It's a 27-year fund, which I think is interesting, and you can talk about that. And you have a 10-year investment period. And so, so the first fund, $50 million, second fund, $250 million roughly. So what are you guys up to? Explain what the model is here and why that should be interesting for people.

Yeah, well, so if you think kind of from first principles, families got wealthy by getting involved in a business and holding it for a very long time, and then over time using those cash flows to either fund new investments or opportunities. And And so we just have very much the same mindset. Private equity is kind of the main methodology of how people have bought and sold companies in the past. And it's a very short time clock if you think about it that way. You're really— from the time you buy to the time you sell, it really needs to be probably no more than 4 years or 5 years at most, and that's if you catch it kind of early on in the lifecycle. Most private equity funds are 7 years with 3 1-year extensions, so up to 10 years maximum. I mean, technically, if you can't sell the asset, you can go longer than that and everyone gets irritated at you, but you're expected to sort of have the capital returned. And so what that forces is, you know, you just can't think longer than your time horizon for holding the business. And so when you combine that with, you know, most private equity firms are trying to put in as little equity as they possibly can and maximize the debt. And so what you end up doing is you take these great family businesses that have been around for a long time, you're sort of hitting them with a needle and trying to supercharge them to grow them and get a higher multiple when you sell. And you're making just very short-term decisions by necessity. And you're opening yourself up, which is pertinent now, it wasn't as pertinent 3 or 4 weeks ago, but now you're opening yourself up to a lot of downside risk. You just can't withstand nearly as much shock as you could if you didn't have any debt. So we've just really taken the opposite approach and said, we want to own businesses like a family would. So we buy with no intention of selling the business, and we're typically using no debt as part of our transactions, which in the private equity world means that we're the weirdest duck in the world.

So how much—

what's your total— what's the total revenue of the collection of companies then?

We'll see. So, uh, total revenue, gosh, I mean, uh, 100—

oh gosh, 100 80, 180 million, something like that.

And then I imagine you guys try to run this like super profitably. So then if you have 180 million in revenue, I bet you have, uh, 40 million in cash flow.

Uh, let's see here. So hold on, I, I, you literally put me on the spot here.

I've not done our calculations recently. Um, yeah, I mean, we're highly profitable. I mean, the organization does real well. Um, I don't know if we're at 40 million, uh, because we have some lower margin businesses We're lower than that, but yeah, we do real well. And look, I don't own all that anymore, right? So just from a— like, I don't want this to come across differently than this. We've got investors. The first fund owns 5 of those investments, and then I own 4 outside the first fund that were the group that we put together before we raised that first fund. And then the second fund, we haven't deployed any of that capital. And yes, we've got a bunch of dry powder. I mean, obviously, it's been extremely fortuitous for us to raise the time that we raised. And I've been having lots of conversations with our investors, and there should be lots of opportunity, lots of pain out there, which is unfortunate. We've got to try to toe that line. We can talk about it between being a white knight and a loan shark, and that's not an easy one to toe.

Right. And so, so let's just— if we just take a look at the portfolio as is, what types of companies are you trying to buy? So you're trying to buy Is it a certain price point? Is it a certain business model? Is it a certain type of owner? What are you trying to buy?

Yeah, so we first want to buy something that we think is going to be durable and around for a really long time. So, you know, if you look at our current portfolio, we are in the swimming pool business, like digging holes in the ground, shooting concrete. We're also manufacturing in that space as well. Another company that's unrelated in the backyard product space, so bunch of different SKUs that sell through mass retail. We are, we have a military recruitment firm. That was the first firm that I acquired, Medi-Cross. We've got a military recruitment firm.

So is that like lead gen for military?

Yeah, so we actually, so we work, I mean, we have a number of different clients, but one of our main clients is a civilian branch of the Navy that resupplies the ships that never come into port. So it's called Military Seal of Command, and we're responsible for finding and onboarding all of their staff on a yearly basis.

So it's like a staffing firm for a ship?

Yeah, well, for a whole branch of the military. So it's, there's staffing. I mean, there's a lot, you know, 14, 15, 1,700 civilian mariners a year into that division. So it's a pretty large operation, but—

Is it digital?

Some of it's digital. Yeah, yeah, we have, you know, online application products.

But not mostly?

I mean, there's a lot of physical activities as well. We have physical recruiters and it's, you know, online, offline. It's the, not sexy, where the rubber meets the road, real deal business.

So we were talking about some of the different businesses you guys owned. So MediaCross, which is a military recruitment firm, swimming pool business, Backyard Space. So you have a couple of there. So you were saying you're looking for durable businesses. That's like, let's say, attribute one.

What are the other sort of key attributes you're looking at? Yeah, I mean, so we want to find a leadership team that we can partner with. There's so many, you know, it's so hard to grow a business, right? And so a lot of the businesses we're looking at, we either call it has been right before the line of professionalization or maybe it's just crossed it. And there's this, this real interesting, you know, sort of in-between gap where a lot of these firms, they're, they're too big to be small and too small to be big. And the leadership team's kind of capped out. They're just brute forcing as much as they possibly can, but they don't have the systems, the talent on staff to be able to grow larger. And so a lot of the times we're trying to figure out from them, you know, do they want to get bigger? There's some, there's some firms that we talked to and And they say, well, even though— so I want to get bigger, but the, you know, the CEO's answering 60 calls a day on a cell phone, and I mean, there's just no way, right? Um, and so we're looking for a leadership team that I think has the base skills, is really, really excellent at what they do. And we're looking for the, the company to have a position in the marketplace that is, um, protected somehow, right? So I mean, we're not looking to get into just commodity-type businesses. We want them to have something unusual about them that we can really build on and help them grow. And then, you know, this is gonna sound like a, like maybe a no-brainer obvious one, but we got to get to a price in terms that, that, that are acceptable to both parties, right? And there's roughly 400 decisions that have to be made sort of during the acquisition process. I mean, it's 400 opportunities to not agree, and it's very difficult and time-consuming. And so a lot of it is just trying to make sure that we think that a deal could be done as well.

And so when you say the leadership team can, you know, what you want them, you want them to scale. So why are they selling if you want them to stay in place? So they're not looking to kind of like go do something else or retire or whatever. You want them to continue to operate. Yeah. And are they just looking for liquidity? What is the kind of core motivation to sell? And then do you have a problem where once they've sold, or do you structure the deal so that they're still incentivized to stay on and do a good job?

Yeah, it's a good question. So part of it is, so the leadership team and the ownership is not always the same thing. So some of the organizations that we get involved in, the owner is very much part-time and hasn't been directly involved in the business for a long time. And so for us, it's actually, that's a decently good situation because we love to just, you know, continuity of it, keep the leadership team, treat them well, and try to augment the talents kind of as we go along. Some of the owners that we got involved in have stayed on and it's worked out great. Second bite of the apple they get down the road would be much larger than even their first payment, despite them selling a majority of the company. So it really is situation-specific. I mean, I would say, yeah, for the most part, some are wanting to take chips off the table, some realize that they need help in scaling and growing. So it's a variety of different reasons. I would say that All of them have an exit somehow in their minds. I mean, if you're in your, call it, 30s or 40s and you want to work for the next, you know, 30, 40 years, um, you know, I, I don't think many people like that are selling their business, um, at least in the size range and the style of businesses that we buy.

Hey, earlier you said that one of the best ways that families have created wealth was by having a business and owning it for a very long time. So something tells me that you study like the wealth creation process. I'm not talking about like just building a business that makes money, but like, like creating like a true wealth. And so I guess what I'm wondering is with these people who are building these companies, like I'm looking at, I'm looking at like things that maybe won't ever be like massive, massive, but can create great wealth. So I'm looking at Game Group. I'm looking at Selective Search, which is executive search meets personal matchmaking. And that actually probably could be big anyway. Um, when you're doing this, like, what, what are some of the paths? I mean, like, cause in Silicon Valley where Sean and I live, the path for most people, or the sole Silicon Valley stuff, which is sometimes bullshit, sometimes not, is creating something and raising loads of money and owning a very small percentage and not truly getting wealthy until after you sell it, or not getting liquidity at least. And their salaries will be $100,000 to $150,000 a year. So you can't like— and you're living in San Francisco, so you're not building it there. But I have a feeling that you guys look at this differently. Is that true?

Yeah, well, I mean, certainly the types of businesses— I mean, you know, we, uh, we have a rule, we don't buy from somebody who's not already wealthy, because if they didn't get wealthy doing it, we're not going to. Um, so they're already, um, they're already doing well. I mean, these people are the chairman of the country club. They're, they're In the geographies they're in, they're probably the people that, you know, the Chamber of Commerce would point to and say they're a really vibrant, good local business, or they're a bigger business, national business that's based in that geography. And so, yeah, I mean, they're getting wealthy from cash flow. Yeah, yeah, these things make money. I mean, you know, the, you know, we're typically, I mean, if we're getting involved now, the company's making more than $3 million a year of real real owner earnings, what sticks to the owner. So look, anybody— and these are closely held, so typically the owner will be 1 to maybe 3 or 4 people at most. And so, you know, usually the 1, 2, 3 people that are owning the company are doing very well. They've taken a lot of risk, which maybe sometimes is hard for people to see, and they built it over a long time. But I mean, yeah, they've done well for themselves and they're successful separately and outside of the transaction itself.

And so the owner— let's just walk through a typical one. So I'm a hypothetical owner of a business that manufactures wheelchairs. We're based in Oklahoma, and I'm the owner, I'm the sole owner, and I pull in, let's call it, $3 million a year owner earnings. And owner earnings would be different than sort of EBITDA in this case, right? So you're—

yeah, I would say EBITDA minus operating interest, any sort of necessary capital expenditures to keep the business on current trajectory, and a normalized compensation structure for the owner if they're in leadership of the company. So it's like kind of if you hired somebody to run the company for you and you made all the necessary reinvestments, how much would be left over for at your discretion where you could either try to inject it back into the company and grow it further or buy a boat?

So fill in the blanks for me. So if I'm making $3 million a year, what's a typical EBITDA then for that company if the owner's pulling in $3 million on the types of companies you look at?

Yeah, I mean, probably EBITDA would be 3.5 to 4, something like that, probably.

And then say it again. So that was on $3 million in owner earnings would be $4 million in EBITDA, roughly?

Yeah, roughly.

I mean, 3.5 to 4. I mean, depends on the type of company. I mean, we looked at an aerospace company a couple years ago and they were doing 7 in EBITDA and owner earnings was like 3.5 or 4.

Why?

It depends on— because of the investment.

So just, they had— they just— they needed a large cash buffer.

No, no, they're having to reinvest in equipment to just keep their market share and sort of stay steady in place. It just, you know, um, all that cash flow would be rolled back into, uh, buying new equipment, buying more inventory, you know, all the, all the type of things that the cash would be sucked into.

And how are they getting the money out of the business? I mean, uh, are they— is it— are they typically LLCs, or—

yeah, typically. I mean, it's a mixture. I mean, I would say probably 90/10, maybe 85/15 is, uh, LLCs. Either way, I mean, if they're a C corp, you'll typically see owners paying themselves a lot to avoid that double taxation.

So they're just paying themselves big old salaries and just having to pay 50% tax.

Yeah.

I mean, if you live in California.

If you live in California.

So let's keep going for a second. So let's say you're at $3.5 to $4 million EBITDA, and when you guys go to buy these businesses, what type of multiple— of course, it depends on industry and it's very dependent, but what's the range? Is it 1x, 2x, 3x, 4x? Is that the sweet spot of kind of the bulk of your deals?

Yeah, I would say kind of 3.5 to 5.5 would kind of be the normal range. I mean, we maybe would go higher for a really high-quality asset, but I would say that's a pretty normal range in our segment, which is, you know, kind of our strike zone is $3 to $8 million of owner earnings. So, in that range, I mean, on the upper end, you can get into more traditional private equity territory and You can see some, some— well, you used to see as of 3 weeks ago. This is, again, I got to reorientate myself to the new reality. But, um, um, yeah, I would say 3.5 to 5.5 times. And then there's usually a component of that that's held back, uh, earned out, or downside protected in some way. So we're typically paying 2 to kind of 2 to 3.5 times cash at close, and then the rest kind of on, on the upside depending on what happens.

Gotcha. So you might have a, let's say, $10 million price tag, uh, for the cash at close, and then plus maybe $4 million, $3 million, that's earned out. So now, you go to SBA, and what you were saying is that you guys don't do debt. You guys do no debt or you use less debt than a typical private equity firm?

Yeah. So, the SBA was on the first transaction I did.

Oh, you don't do SBA?

My own money that we have no involvement with banks or the SBA or anything like that now.

You guys just do cash deals. You say, here's $10 million, we're done. And why don't you use debt?

Yeah, well, so that's one way to take a good company, make it a fragile company. You know, the more debt you're layering on and the sort of the wider the variation of outcomes that you expect to happen. And obviously, pandemic risk is something that was not on a lot of people's radars, us included, until recently. But it's a, you know, it's a good example of why we think that not levering these companies, especially in the beginning when you're starting to get to know them. I mean, until you own these companies, you just don't know what you're getting, really, until you get, you know, underneath the hood, and there's always more risk there than you think there will be, right? So, you know, our mentality has been going with all equity, no debt, try to keep them very, very robust on the balance sheet and make sure— and we're buying these with full balance sheets attached to them, right? So working capital is all included. So the net worth of the company will be, you know, fairly robust going into the transaction. And then, of course, as we— over time, as we build cash into these companies, Then we can decide what to do with it. But working capital bucket is kind of like the— you got to fill up the bucket first before the owners can get anything out, right? Because you got to keep the machinery lubricated.

And when you buy a company, what is the first 3 months, 6 months? Are you hands-on with that? Is it— do you have an operating partner who does that? How do you guys make sure that when you buy an asset, you don't A, destabilize it, and B, you actually start to grow it, which is, I assume, why you bought it in the first place?

Yeah, so, so our philosophy— there's a lot of private equity firms out there that have these like, you know, 30-day, 90-day, 120-day plans, right? We don't do that. What we try to do is take a humble attitude towards it and say, look, we know some things, we have some talents, but we want to learn and come alongside them. They're the experts. They've been doing it for a long time. So there's a team of 16 of us. So, so it's not certainly— if I don't get the impression this is just me, there's people far talented, more talented than I am on staff. And there we have a dual hook-in structure post-close. So our financial team hooks into their financial team and creates feedback loops. And then we have a, we call it a portfolio partner. They're kind of a board of directors in a box that is overseeing kind of the executive leadership, helping make very high-level decisions. I mean, these are autonomous operating units. I mean, so these are not, we're not injecting these people into the companies to run them, but they're in touch with the leadership teams all the time, doing, you know, a variety of different types of calls and meetings throughout the year.

And how many companies are there?

There's 9.

That you guys own?

Yeah.

Got it. So that seems manageable.

Yeah. I mean, it's— so for every kind of 3 to 5 companies we acquire, we got to hire one high-level financial person and one portfolio partner. And that's kind of their grouping of companies that they're kind of running. So we're almost creating like a fractal, if you want to think about it that way, down into the organization so that it scales as sort of linearly in that way.

So Andrew from Tiny, uh, Sean and I are friends with him and we— I just shoot the shit with him every once in a while. And he emailed me, he like tweeted this thing and he sent me the tweet of how he met a guy who had a cool furniture store and he goes, oh, this is neat, you need to put that on Shopify. And okay, I'll partner with you, let's do it. Now I own part of it. And he also did the same thing with like a local news outlet in Victoria where he just like Seems like he's spinning up stuff so fast. I'm like, Andrew, I don't know how you track all this. This is crazy. Tracking Nine is easier than— tracking Nine is hard, but it's a little simpler because it appears from the outside as though he has got 40 different things. How does that compare, do you think, with something like Tiny? And does keeping on top of all this— I mean, that seems really hard to focus on where to put your focus.

Yeah, I mean, I know Andrew a little bit. I don't know him super well. I mean, it seems like he's been successful. I think they're getting involved in, for the most part, more internet-based, software-based type companies. So it's just a very different model. So I would say I have no idea how they're organized internally. I can tell you on our end, is it a lot of work? Is it difficult? Of course it is. Right. Anything worthwhile is going to be hard. You know, internally, how we've created that structure, though, it creates a very manageable focus group, right? So you can, you can allow a small group of people to be highly focused on certain outcomes as opposed to being all over the place. I mean, if it was just me and a partner of mine, like, that we were trying to ham and egg this thing, like, I'd go nuts. There's no way, especially right now. I mean, with all the turmoil that's happening, there's just no way you can keep everything separate and you know, watch legislation that's coming out and watch legal and accounting and meet deadlines for audits. And I mean, it takes a full team. And so, yeah, I mean, we're obviously blessed to have that.

Earlier you talked about one of the things you buy a company— okay, so you said that there's— your sweet spot is in between like it working out, like it working and it being professionalized, right? Yeah. And I think that when I— so I started The company that I have, uh, I started when I was 24. It's, it's a good business now, but what I learned the hard way was that actually to make something more valuable, you need to take yourself out of the equation as opposed to like, you know, this Mark Zuckerberg thing where you're just going to super Superman this thing into like existence. It's actually far more valuable, even if that means you have a lower revenue number, to have it where it's like a machine where people can be where you put people in place and it's not just on the shoulders of one person. Sure.

Can you—

and I learned this from David Hauser. Sean, you know David Hauser?

I don't.

Okay. This guy named David Hauser, he's one of our little— we raised a little bit of money. He's one of our investors. He started Grasshopper, which it was like a— you know, Grasshopper. Okay. He started that. Okay. So it helps entrepreneurs. It gives small businesses a phone. So it's like Google Voice on steroids. And he sold it for, I think, $300 million. Really successful. And he wasn't even the CEO. He started it and owned the company and hired a CEO to run it. And he taught me how to do that. And I think that's fascinating.

Can you talk—

but that's different than what a lot of our listeners probably think about. They think about if they're going to start it, they got to be like running the show. Can you talk about where you've learned this process and why? And I guess the companies who you've bought, how have they successfully navigated that to where the owner is no longer like the person? Yeah.

Yeah.

So, I mean, for, for us, I mean, well, one, I knew my own limitations. I knew that there was no way that I could just brute force this thing on my own. And I mean, I think always subscribe to the bring, bring people that are far smarter and more driven around you. So that's how we build the organization. I hope in 3 to 5 years I'm completely useless and they just give me my ball of yarn and let me play with it. So, but in the organizations that we look at, We call this founder moat. So this is probably the biggest danger of acquisitions, is you buy a company that is— that largely all of the goodwill is tied up in the relationships, expertise, drive of the founder. And there's just no really way to transition those, uh, separate from maybe coming alongside them and over a very long period of time, um, making that transition happen. So for us, we try to select against that. We want to see repeatable processes, we want to see a healthy layer of non-owner management. We want to be able to see that. We always call it hit by a bus risk. So if anybody in the organization can get hit by a bus and destroy the value of the business, that's just a no-go for us.

But tell me what you've learned on these people. So how do I want to make my company like that? How have you— what have they done at best?

Yeah.

So, I mean, I think the methodology that we've seen work the best is take the things that either you aren't good at or you don't want to do and start giving them to other people. And then over time, as you sort of continue to offload and offload and offload, You just kind of move up until eventually there's nothing much for you to really be working on. I mean, if you have a lot of free time and you have a lot of flexibility, we always talk about if you have the optionality to get involved or not to get involved. A lot of these owners, you being a good example of that, could probably add a lot of value if you chose to get involved, but you also know that the thing's going to work out fine if you don't get involved. And so that's always ultimately the test. Now, we also have a lot of owners we talk to and they say, oh, I'm not needed in the office at all. I, you know, this thing runs itself. And we say to them, oh, that's great, when was the last time you took a vacation? They're like, oh, I think 3 years ago I went on a weekend getaway with my wife. And, uh, yeah, you know, and you're like, really? So there's that balancing act of self-awareness as well.

Is there any resources that you turn to or have turned to to learn this, or that you can tell me and our audience to, uh, turn to in order to learn how to do this successfully?

Gosh, I, I don't. Um, it's more just you know, getting hit in the face over and over again, um, the hard knocks.

And Brent, where are you finding these companies?

So are you—

is it broker network?

Are you—

are there websites you use? Is it inbound because you do a lot of content? Or, you know, what is the— explain how you find the companies that you end up looking into and potentially buying.

Yeah, yeah. So, uh, we're fortunate now, um, we do a lot of content out there. Actually, podcast is one of the things that's been helpful for us. Um, so thank you guys for having me on. But we have it, it's all inbound at this point, so we're not going outbound to anybody. By the way, website— oh, there you go, I got your book.

If you're listening to the audio version, which you almost certainly are, I'm holding up The Messy Marketplace, which is Brent's book. I bought this like, I don't know, 6 months ago. I bought it right after we sold our business, so it wasn't really applicable. I was kind of like, oh, what did I do wrong type of thing. Yeah, it turns out just timing was good. You know, getting in before the whole world descended into chaos was a good idea, a good time to sell, but I didn't know that. But you put out this book, and it seems like you do more content than I would say the typical kind of buyer or private equity firm.

Yeah, I mean, so, you know, I owe most of my career to just ripping off venture capital, is in reality. So you just look at how did all the, you know, Fred Wilsons, Brad Felds, Schuster's, Andreesen, all those guys, how did they break into the world? And it was basically by pulling back the curtain and helping educate people. And so, I mean, that's what we've taken that to heart, and we started very early on. So we've been producing, producing content, talking to people for probably 7 or 8 years now. It's gone back a long time. And so, yeah, over time that compounds, right? In the beginning, you're just shouting into the darkness and no one cares, and over time you know, you sort of get people's attention. Our goal is just to be the first stop for anybody who wants to sell their business, and we also try to be helpful on the back end. So all of it's inbound. We have a scout network, which is common in Silicon Valley but very uncommon in private equity. So we have about 700 people now that scout opportunities for us, which is fantastic, and we obviously pay them when we are able to consummate the transaction.

And you have a Capital Camp, right?

Yeah, yeah. So Patrick and I, uh, yeah, so we, uh, we, we were complaining one night, uh, about how all the events in finance were terrible and, uh, how it'd be fun to get like a cross-section of people together because there's typically, you know, VC events, private equity events. There's very few events that get sort of a broad cross-section of people doing interesting things together. And so, uh, we complained about it enough, I, I, I said to Patrick, I said, well, why don't we just do something about it? And so He and I partnered up and we hosted the first one last year. It was fantastic. About 250 people from 11 countries, 5 continents came in, and that was great. We had a wonderful time hosting in Columbia, Missouri, in my backyard. But it was, you know, I think I— there was one other guy from Missouri there, so it was very, uh, not, not a regional crowd, if you, if you know what I'm saying. Um, and unfortunately this year we had to postpone it, um, due to the virus, so We're pushing into September. Hopefully that we are able to flatten enough by then that we can have it hosted then.

Give us some predictions about the virus and the way the sort of what's happening to businesses right now. You know, on one hand, you said your timing was good in the sense that you raised your big fund before all this, and now a bunch of businesses are gonna need liquidity. They're gonna need, you know, somebody who's a stable capital partner to come in and buy them. What are you guys seeing? What's your prediction on how this is going to play out? Well, for you and for the economy, I would say.

Yeah. Well, so, so for— well, let me, let me say broader, I think what we're predicting, and of course, no one has any idea, right? We're trying to do the best we can to triangulate information. We think it's going to be a pretty long— if you want to think about it, a good analogy I heard was, is a blizzard a winter or an ice age, right? It's kind of the three stages, probably. You know, I think the blizzard is gonna last for another at least 6 to 8 weeks, probably longer than that. And then I think we're going through a period of— it's gonna be hard to restart a lot of these businesses. So there's— in theory, it sounds, oh, there's economic problems, it's no big deal, you just kind of go into hibernation and come back out of it and everything's fine, right? In practice, there's a lot of start-stop problems. I mean, you guys have run businesses, you know, if you had to mothball everything and try to restart it, I mean, you're not gonna be able to do it, or at least be very difficult to do it. And so my guess is there's gonna be a lot of pain and suffering. So in our portfolio, you know, because we don't use debt, we have good balance sheets, and obviously we have a financial firm to back it up, you know, we're gonna be fine. I mean, a lot of the businesses we're involved in have been doing better than we expected probably 2 weeks ago. With that said, you just have no idea where demand's gonna go. And I mean, we're bracing and we have plans for, you know, depending on what level of pain and suffering happens, what the plan is. And we're gonna try to get the things back up and running as fast as we possibly can. The government intervention that just came out is interesting in how it's structured. So the CARES Act just got passed, I don't know, 20, 30 minutes ago. And it is, it's better than nothing. It's going through the SBA, and the SBA is, to be generous, like the DMV of the finance world. And so it's not gonna be an easy, thing to get all that money deployed. Also, the SBA lenders that we're talking to that are at these banks— and we're not using the SBA, but obviously if it's forgivable loans, then it'd be insane for us not to participate in that— and they don't even know what the rules are, right? And so they're trying to get triangulated on what things are. So I think there's gonna be a lot of confusion. I think it's gonna take a lot of time to get the money into people's hands. I'm not sure it's gonna actually stem the tide as much as they think it will on unemployment. And so I fear that unemployment could go to 20, 25, maybe even 30%, which is—

you think that's realistic?

Yeah.

Yeah. Fucking A, man. That's crazy.

Yeah.

To put that in perspective, to put that in perspective, the Great Depression was what, 18 or 20?

I think it touched high 20s. Um, so, so I mean, at the peak, and like I said, I mean, I look, I hope I'm wrong, right? Let's just say what it is. I mean, I hope that that's not This is not a good environment for us, actually. I mean, this is an interesting— we could talk about it as being a firm that has a lot of cash right now. I don't think this is a good environment for us at all. I would much prefer a 2008, which was much more shallow downturn, recession. This, the violence of this, is basically rendering all information available like a non-issue. You just can't— there's nothing predictive about what's happened in the past and how it goes in the future. And demand curves, I mean, we don't— no one knows. No one knows what the demand curve looks like.

Are you betting for a 20% or 30% unemployment rate?

Well, I'm not betting on it. That's what I think is going to happen.

But I think that you think that's going to happen.

I think, I think we'll probably touch 20%. I think we could touch 30%.

Yeah.

And I think we'll see it in the next 6 weeks will be, will be when it really comes down. My guess is I called jobs— the jobs number, the unemployment number that came out, I had said previously I thought it was going to be about 3.5. It ended up being about 3.3, which was wildly higher than what the sort of consensus was, a million. And if you're involved in small businesses and you said there was a million people filing for unemployment, I said that's like a joke. Of course, it was going to be way higher than that. There's no way it couldn't be way higher than that. I mean, what we're seeing is— I mean, I had a buddy this week who laid off 4,000 to 5,000 employees this week. Had another friend who laid off 585 of 600. I mean, and this is—

that's just me.

I mean, what I know, they in the hotel industry, or what was it?

Just industry that—

yeah, food service is one, and construction was the other. So it's just, it's, it's, it's a tough—

I mean, and why do you say this is, this is not a good time versus 2008? What's— what is the core difference there?

Yeah, so the core difference is the violence at which this has downturned is basically— you could see in 2008 a nice trend line, like you could see it's kind of like a soft— in private businesses, right? I'm not going to talk about the stock market. Stock market and private businesses are totally different. But in the stock market, it sort of had a violence to it and then kind of petered out and then had another violence to it.

This happened in fucking 8 days. Right, right.

I mean, obviously, Lehman and all that stuff come crashing down.

Oh, no, I'm talking about right now.

Oh, but yeah, right now.

That's what I'm saying is right now in private business, businesses, it is worse in private businesses than is reflected in the stock market right now.

It's hard to know what's priced in.

And what do you do with monetary policy when you have basically an unlimited bid?

I don't know.

Right.

But I mean, when you look at it from the businesses that we interact with, it's carnage everywhere. I mean, you maybe have—

I would say 90% of businesses have been adversely affected.

5% are probably sort of unaffected.

And then maybe 5% have some sort of tailwind that's weird because of this. Um, but 90% are just—

it is suffering. I mean, I— it is unbelievable what's happening right now.

And I mean, Sean, like 4 weeks— no, wow, only 2 weeks. Whenever you sent me that link, Sean, where you go, the NBA's canceled. Yeah, I like— a few hours before that, I'd booked a flight to Germany. And because I was going to a conference, so they paid for it, but I like gave them my information. I was— they're like, yeah, the conference is on. and then Sean sent me this link on at 7 or maybe 5 o'clock at night, and he goes, the NBA is canceled. I was like, oh, you mean like they're just pausing it for like 5 days? It's like, no, no, no, like it's done for the year, the whole thing. And then, and then the next, the next day it was like, oh, my flight's canceled, everyone's flights. Like, it was like, that was only 2 weeks ago, Sean.

Yeah, that's insane. I remember people thought I was crazy. I started working from home the week before everybody did because I was like, hey, I think there's like this once in a hundred year virus out there. I'm just gonna start working from home. We did one podcast together and I was like, yeah, I'm not doing any more in-person stuff. I'm not coming into the city. I'm not doing any of this. And then it just felt like day after day, it's like escalation, escalation. And now I think the, the sort of the data is outpacing the fear even at this point. I think that, I think that the situation is worse than people realize even now. And because it's growing exponentially, and so, so I totally hear you, Brent. You know, my, my sister owns schools, my brother-in-law owns gyms, um, my brother owns a, uh, my brother owns a concert promotion business, right? And nobody prepares for zero revenue overnight for two months. You can't, you can't plan for that.

Yeah, we were talking about our revenue. I mean, I, you know, uh, again, calculating in my head, maybe we're, maybe we're gonna be at $160 million this year, let's say, under normal. I mean, we may be $110 million or $120 million. I mean, we have no idea. I mean, it depends on how things go off the cliff, right? I mean, it's, it's literally no one has any idea what's going to happen. What we know is that it's not good. If you look across our business, I mean, our military business is very robust, and obviously we want to keep people, you know, employed in that. But I mean, if you look in construction, there's a longer lead time, the sales cycle is longer, right? So you'll have a longer tail to it. But that's still, if you're shut down on a construction site, we were working, one of our companies was working on the Wynn Casino. They just shut everything down. I mean, there's like nothing to do. And so you have all the materials you bought, you have all the labor that's right there, everything, you're coordinating it. And what do you do? I mean, it's like I said, it was like Prohibition except for everything.

So where's the opportunity here?

Well, I mean, the opportunity is there's going to be a lot of these family businesses that are very, uh, durable, you know, business under any sort of normal-ish circumstances, um, you know, would have easily gotten through a 2008, uh, which everyone would consider to be, you know, a detonation prior to this, that are going to need help, and they're going to need capital to get through this. They're going to need capital to restart the businesses if that's what it takes. And as well as just taking some chips off the table. I mean, you know, if you're— there's a lot of people we've talked to that are holding on for sort of the last couple good years, and then they want to sell. And, you know, we had these conversations 2 or 3 months ago with an owner who is like, look, I'm in my 70s, I certainly can't go through another 2008. But Man, business is really good right now. Like, I'm just going to hold on for another couple years.

That changed, you know.

Um, it's tough. And by the way, I'm not saying it was the right thing for him to sell then either, right? I'm just saying it's like, it's always a bet. And, you know, one of the things that is maybe nice— it's not, you know, if there's any silver lining in this— is I think people had gotten certainly not immune, but had, had gotten a pretty good resistance built up to risk in general. And I don't think most people were seeing it. I mean, I, you know, most of the people were talking to us, hey, there's nothing on the horizon, there's no contagion that could cause things to go down. I mean, I would hear people say this all the time. I mean, what could it be? Could it be student loan debt? Maybe. Ah, that's going to be contained. Could it be, you know, the bubble in private equity? Ah, that's going to be contained. You know, gosh, we had no idea what was getting ready to come down the pipe.

I think that's what Marc Andreessen, or maybe Peter Thiel, was talking about once, which is that when everybody keeps asking if thing X is a bubble, that's not the bubble, right? When we're all aware of it, we're all talking about it, that's usually not the actual bubble. It's something that a very few, you know, small set of people are sort of saying, wait a minute, we've removed too many of the Jenga blocks here, this thing's about to tip. And, you know, this isn't a bubble, that's a minority.

But this isn't— this wasn't a bubble-driven thing. I mean, I, you know, the war, it literally is a war. Like that, I mean, I think that's the best analogy for it.

I think we're— I think this is closer to Pearl Harbor than it is to 2008.

Yeah.

Oh, I would— I mean, I would absolutely agree. And the issue is that, you know, for Pearl Harbor, obviously a lot of people went over and fought, but it never come come on to home soil. I think this is the thing is everyone's fighting a war in their backyard. And I don't think that's ever— I mean, look, you don't know. You don't know what the death rates are actually going to turn out to be. You don't know what the infection rate is going to be. You know, I certainly don't want to be comparing it to things that are horrible, traumatic events that affect generations and generations, maybe. And God help us if it turns into that. But at the very least, I mean, the economic side of it is just absolutely unprecedented in every way right now. And anybody who thinks this is going to be a short, like V recovery, where it's going to just pop right back out of this thing, it has never been in a business. And those are most of the people that I hear that are investors saying stuff like that.

They've never operated a business.

I mean, you guys know.

Well, if this makes you feel any better, Brent, um, I, uh, I feel horrible right now. I, I called the hospital to get— I call— I try to get a test and they're like, uh, like, don't waste it on yourself, but it sounds like you have it. And so they think I have it, but it's not confirmed. It sucks. It doesn't suck that bad, but for a 30-year-old, it stinks, but it doesn't— the way I describe it, it just yesterday crossed the threshold to where I would stay home from work and not exercise.

Really? So you think you have it?

Yeah. Well, me and the doctors, but it's not confirmed.

Pretty sure he has it.

Yeah. Yeah. I mean, like, Like, breathing sucks, but it's more annoying than it is scary. And, um, yeah, I am so sorry, man.

I had, I had no idea. I mean, I'm—

well, I know it's not— look, no, my point is not to get sympathy. My point is to let you know, maybe for most people it's not the worst.

Yeah, yeah, that's, that's great. I mean, and look, I, I hope that's the case.

I hope we can get back to some semblance of normal life.

I think that the— unfortunately, the economic damage even if you wave the magic wand and brought everyone back to these businesses right away, I think there's a lot of damage that's been done depending on how long your lead cycles are and all that stuff. But I mean, it's just, it's tough. I mean, it's tough as demand dries up. I mean, you got to think about the supply chain all the way back. I mean, people aren't ordering stuff from factories, right? Because their demand's dropping off on the other side. If the fact, if the store said, no, no, no, we want, you know, all of your inventory now, they'd say, we don't have anything to sell you, right? Because everyone's preparing for winter. And so, yeah, the stop-start problems are just gonna be tremendous.

Wait, Sean and Brent, you guys are both— I mean, we are all— I have no idea where people are, but we all are people who probably aren't poor. Have you guys cut your spending?

Oh yeah, for sure.

I, uh, I did the first thing I did was I cut the— I cut my exposure to the stock market, which I think is gonna, uh, drop like a rock now. Um, and so that was the first That was the first thing I did because that's more than spending, is just wealth destruction. And so I wanted to avoid wealth destruction first.

But secondly, your monthly subscriptions—

I didn't, I didn't go through that yet, but we have sort of, like, me and my wife now, before we do something, we're like, yeah, do we really need to? And so we're, you know, it's starting to creep in, but we haven't gone and audited and said, hey, necessary, unnecessary, necessary, unnecessary. But yeah, you know, probably should and probably will.

Even though like I have plenty of money to last for a very long time, I'm like, I don't— I'm gonna buy the generic brand of this food.

We're still spending on food, but we— I mean, if you look at our bills in the past, there's been a lot around travel. And yeah, we're not doing that. I mean, we did— we did spring, by the way, the best investment I've ever made. I've got 3 girls under 6, and we just bought a bounce house and have in the backyard. And by the way, that's the best It's the best $300 I've ever spent in my life.

There's a business you should buy. That sounds not sexy but interesting enough.

Exactly.

Bounce houses for viruses.

Yeah. Okay. My last question for Brent is this. You're 25, 30, 35, and currently, like, let's just imagine you are— I have no idea how old you are. I'm 37. But let's say you're young enough to like start Okay, well, let's say you're, uh, you're, you're starting your career, you're in the middle, early part of your career now, um, knowing what you know about what makes valuable companies and what builds wealth, what are some businesses that you'd want to start right now and what would you optimize for and what metrics would you try to optimize for and how?

Yeah, I mean, I think it depends on what you're, what you're trying to optimize for. If you're just trying to—

I'm asking you. Well, I'm asking you.

For me personally, um, I mean, I, I, I really find value in balancing home life and work, right? So family is super important to me. So, um, my answer would probably be a little bit different for me, and I want to live not in a big city.

And so, okay, I want to hear what you would do. Yeah, yeah.

So if I was starting over today, um, I would probably, uh, start something in the construction space or home services space, office services. I want to get in something that's that's, um, you know, I, I like, uh, competing in areas where there's not a natural selection of people into that, right? So you don't want to be in the winery business because everyone in Silicon Valley that exits a business goes and buys a winery, right? Um, and pumps a bunch of money into it. Um, like, I don't, I don't want to be in the, the film business because everybody who, you know, every son of a billionaire, you know, makes movies. Um, you know, owning restaurants is really difficult. I mean, separate from all the stuff we're going through now, because everyone, you know, that makes any money thinks it'd be easy and wants to own their own restaurant. So I like the things that sort of have a natural selection bias against them. Like nobody drives by somebody building a swimming pool in Arizona in the summer and says, you know what, I really want to quit my job in the air conditioning and go dig a hole in the ground, right? So we want to, you know, get involved in things like that. I would try to take something probably that is small and partner with them, that they already have the infrastructure in place, the the sort of the technical side and the systems there. And then I would really try to spend some time, you know, how can we use, you know, latest technology to make us more efficient, try to build something that's scalable sort of beyond a geography and get a model down, a billing model, a sales model down that we thought was replicatable and that really had some sort of moat around it. And then I would try to scale it over time.

And I specifically— yeah, anything specifically?

I think it would depend largely on what I could find in the geography. I mean, here in Colombia, I mean, there's a fantastic HVAC service company that's still fairly small, but they've got great systems. They actually develop their own software. It'd be something like that that I'd want to partner with and say, okay, look, I want to get my hands dirty. I want to get involved in it. I mean, I'm not an investor by heart. I mean, I'm an entrepreneur. That's what I love to do, and that's how we think about our business is being operators and entrepreneurs. And so, I wouldn't necessarily get involved in finance. I mean, finance to me is a mechanism that allows and enables entrepreneurship and, you know, running real companies. It's not trading paper back and forth. So I would probably get far more involved in sort of non-tech entrepreneurship, which I know you guys are in Silicon Valley and this can fall on deaf ears.

No, I like what you're saying. But you said HVAC, you said—

Yeah, I'd say HVAC.

Pools.

Yeah, pools, lawn service. I think Uh, you know, I like lawn service. Yeah, like lawn, like lawn and garden care type stuff. I mean, have you ever tried to get somebody to call you back? It's—

yeah, you want to hear something cool? We had, um, so Brian, you know who Brian Scudamore is? Scudamore, uh, 1-800-GOT-JUNK.

Oh yeah, yeah, yeah.

Okay, so the guy owns— the guy who owns it, his name's Brian. He's Canadian. He's friends with me and Sean. Um, I shoot the shit with him every once in a while. It's like a What is that, Sean? Like a $500 million a year company. He owns all of it. And he, um, we either me or some one of us asked him where opportunity is, and he goes, man, if I had to do the same thing, I would do 1-800-GOT-JUNK, but I would do it for, uh, lawn care or for irrigation.

Yep, yep, that's the type of stuff I'm talking about. Yeah, I mean, there's, there's, there's all these like strange, I mean, niches that you can get into. What I would do is probably take my time and go and talk to a lot of people who are already in business business and say, what is your biggest problem? Like, who's the supplier that you're most annoyed with? You know, what's the customer that you have that's just killing it? That type of thing. And I'd probably go try to snake my way into one of those, one of those businesses. And then just, it's really just about getting a foothold, right? I mean, that's what you need is you need a foothold, and then you can start building on it from there. But I mean, the problem is if you've got a, if you've got a boat that you're trying to row that's rickety, and, and it may look pretty on the outside, but it's just not going to go anywhere. It doesn't matter how hard you row it. And I think that's, you know, early in my career when I was involved in, you know, more the agency business, that's how I felt. It felt like, I mean, I could just row that thing as hard as I could and I'd maybe get an inch further. Um, and that's why I just want to get out of businesses that are like that.

Right. All right, well, we should wrap it up. Uh, thanks for coming, man. Uh, if you're listening to this, you want to get a hold of you, what's the best way for people to follow you? You know, yeah, keep tabs, become a scout, whatever you want.

Yeah, yeah, yeah.

So, so permanentequity.com is the, is the website. Um, And I'm on Twitter @brentbeshore, on LinkedIn. I mean, just hit me wherever. Try to be very available. And if I can be helpful, let us know. Yeah, it's been wonderful to have you guys on. And I hope you get— I hope you feel better. That doesn't sound like any fun. Now you're terrifying me.

So, well, no, look, my point was the opposite, was to not terrify. Look, do I seem sick to you? I mean, I'm sleeping in, so I didn't get out bed. I didn't wake up until about 9:30 or 10 AM this morning because I was like, I'm just going to sleep as much as possible. I'm drinking a lot of water. I would not exercise today. That's how bad I feel. I would not go to work today, but I definitely would not even consider going to a hospital. And normally I wouldn't even have gone to a doctor.

Oh, all right.

Well, so this is how I'm trying to paint this as in a positive way as best as I can.

Well, Sean, don't you get sick.

Yeah, you can't get it through Zoom, so we're good.

All right guys, hey, take it easy. Really appreciate it.

Thanks. Take care.

Bye.