The Exchanges

Q So when I was reading your letter before this, I didn't realize how big you were. So today, you know, your portfolio of companies, you know, have 700 full-time employees and you've got just under a three hundred and fifty million dollars of annual revenue. So the scale has become big. Um, now obviously the economy is weak right now. How are you feeling about 20 23 and permanent equity?

A Having a portfolio of companies, you're going to have some that are going to do better in certain environments, uh, than others. And the nice thing is that we're very different than traditional private equity in, in the sense that we don't, um, typically put any debt on the companies. So, um, for us, we have a lot of operating flexibility. I mean, we can, you know, earnings can go down 50, 60% and everyone still keeps their jobs and We actually had a conversation yesterday. We were in Dallas with a new acquisition and We had this conversation with them. We're like, Hey, if you all think that things are going to be tougher this year than they were last year, like, let's not miss an opportunity to invest in people and technology and hopefully come out the other side of this way stronger when everyone else is retreating and entrenching. Let's be aggressive. Um, because we have the ability to do so because we're not beholden to a bank and covenants and taking all the free cashflow that we have and sending it to a, to a financial institution. So, um, We really encourage our companies when there's adversity, like don't miss the opportunity for a good crisis and, um, serve as well.

AI assessment note: “let's not miss an opportunity to invest in people and technology”

Q How do you deal with acquiring a business that you really don't have domain expertise in? So for example, like you might realize, you know, swimming pool business is a huge opportunity. The numbers make sense to you, but you know, you don't know the first thing about how much chlorine to put in a pool.

A Yeah, we never are experts at the businesses that we acquire. In fact, that's a, you know, we think of as we're the experts in the business of business. So, you know, we joke that everything tastes like chicken layer of business where no matter if you're doing pool building or matchmaking or, you know, um, uh, recruiting for the military, it's all the same things you need, you know, marketing, advertising, sales systems, you need accounting systems. You need to make sure you're in compliance, taxation, HR systems, recruiting. It means all the things that are the business of business, uh, is where we really feel like that we want to build expertise. And then we want to partner with firms that are deeply knowledgeable, excited about, talented in the thing that they actually do. So, you know, we always say we're not going to be involved with a company that wouldn't be successful without us. What we're trying to do is be good long-term partners and bring a talent about the business of business to them that typically most small businesses lack. I mean, we like to say often that small businesses don't stay small on purpose. There's a reason why they stayed small. And usually there's some lids on the business that we're able to release over, over time that help the business grow.

AI assessment note: “we want to partner with firms that are deeply knowledgeable”

Q Like, how do you think about technology businesses in general? A lot of people who listen to this, this podcast, uh, either run technology businesses or work for technology businesses. It sounds like Primarily the businesses you buy are more like brick and mortar type businesses. Is that, is that fair to say?

A Yeah. I mean, we actually have one software based business that we acquired, uh, last year. Um, which is, I mean, there's technology in every business, but that was a more technology forward business that we, that we acquired. Um, so we're not Luddites, but yeah, I mean, what do I think about technology businesses? I think they're incredible. I mean, I think that once you have an advantage in, you know, the, the business model of a lot of these technology businesses are some of the best in the world, right? I mean, software as a service is an incredible business model. Recurring revenue is, is Stickier than project-based revenue. There's a lot of advantages to it and technology can do incredible things, right? In terms of, you know, specific businesses, I think there's an ease in, in sort of a hype cycle that I've seen where, you know, um, maybe crappy business models get lumped in with great business models because it's all under the umbrella of technology and they get funded in a way that, um, doesn't make a lot of sense to me, but That's not my world. Right. And I mean, there's a lot of people who are a lot smarter than I am, who, uh, have done very well for their investors and have done very well by companies by funding things that I wouldn't have expected to work. But again, um, we all have our, our role to play.

AI assessment note: “what do I think about technology businesses? I think they're incredible.”

Q Uh, I think they got acquired for 1.8 million dollars. My hunch is that that was like a reasonable valuation given where they were at. That's one of the reasons why I wanted to talk to you, frankly, is because, you know, as we get more acquisitive in 20, 23, I think like, yeah, I guess this is a question for you, which is how do you value a business?

A Great question. I mean, I think this is where, uh, at the end of the day, what everyone's trying to do, whether they understand it or not, is trying to value How much cash is going to come out of the business and when, right? And that's ultimately how any business is valued. Present value of future cash flows. Now, there's a lot of differences in how you value, how you think about the cash flows that will come out. And there's a lot of preferences for, uh, some people are fine delaying those cash flows for a very long time. And some people are very excited about having those cash flows now. And so this is where the, the, the differences in valuation and preferences in the marketplace. You have one person who's, um, excited about cash flows. Now they're probably not gonna acquire a technology company with no cashflow. And maybe even that needs to needs more at reinvestment. Ultimately what that technology company is trying to do is build Future cash flows through investments now. And this is where you see incredible businesses like Google and Facebook were, you know, highly unprofitable for a period of time and then flipped to profitability. And now they just gush cash and, you know, Uh, it's incredible. If you, if you, you know, looked at their income statement in the very beginning, it wouldn't have looked anything like what you see now. And so that's the maturation of the bus…

AI assessment note: “Present value of future cash flows.”

Q decided to decline it cause you know, we really liked what we do and we want to do it forever. That kind of forced us into the position of like thinking about it. Do you think that just, just like how, you know, every year you sit down and you write your letter should, should a business owner every year sit down and be like, should I sell my business?

A I would say no. I think that largely if, if going through the exercise of do I want to sell or not is, um, unless there's a reason to, I don't think it's a very fruitful exercise. I mean, you know, you should understand what you have, but I mean, look, if you think about it in, in terms of private business versus a public business, if you owned a publicly traded company, Greg, like you would have prices shouted at you every second of every day of exactly what people think the business is worth. Right. Does that mean you should sell your position in the company just because somebody's shouting at you a price? Like probably not. Right. I mean, you should, you should be proactive.

AI assessment note: “I would say no. I think that largely if, if going through the exercise”

Q Okay. So we have a good understanding of what it means to be a good capital allocator. Now, how does one Level up their skills and, uh, where could people go to on the internet or yeah, where can they go to learn?

A I'm a big fan of, Reading older things that have stood the test of time. Um, and so if you think about many of the best, uh, investors of sort of our generation are steeped in thoughtful things that were written quite a while ago. And so I would go back and read what I would call the classics right now. Um, depends on how you define it. And a lot of these, by the way, are people roll their eyes out and they're like, oh, everyone's read these. Well, look, if you're, if you're already at the level where you've read all of the greats, Then like, why are you taking advice from me? You're probably a better investor than I am, right? Like that's fine. Um, but I'm probably gonna say the things that, that most people who have been in this space have done, which is go back and read the Berkshire letters. And when I say read the letters, like get out of, you know, print them out, put them in a binder. And like turn off your phone and go get a pencil or pen out and mark them up. And when you come across a concept that you don't understand, and I mean, you gotta really test yourself. Do I really understand what he's talking about? Do I understand this concept fully? If you don't put your pencil down and go research it, Google the shit out of it. Right. And try to figure out what people are saying about that concept and really try to make the connections between that concept that he's menti…

AI assessment note: “go back and read the Berkshire letters”