(Ep.64) The Acquirers Podcast: Brent Beshore – Baby Buffett, How Permanent Equity Is Building The Next Berkshire

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In this episode of The Acquirer’s Podcast Tobias chats with Brent Beshore, Founder & CEO of Permanent Equity, and author of The Messy Marketplace: Selling Your Business in a World of Imperfect Buyers. During the interview Brent provided some great insights into:

  • Finding Good Companies That Are Available For Sale
  • The Benefits Of Locking In Capital From 27 Years
  • Dealing With The Long-Term Consequences Of Moth-Balling A Business For Months
  • We Want To Compete Against Businesses That Are Not Very Good At What They Do
  • Focus On A ‘Size Specific’ Circle Of Competence
  • The ‘Foie Gras’ Strategy
  • If Your Company Can Use $3 Million Dollars Responsibly, Get In Touch
  • The Benefits Of Taking A Majority Holding
  • Most Employees Prefer Cash Over Equity Incentive Programs
  • Partnering With O’Shaughnessy Asset Management

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Full Transcript

Tobias Carlisle:
When you’re ready, sir.

Brent Beshore:
Let’s do it.

Tobias Carlisle:
Hi, I’m Tobias Carlisle. This is the Acquirer’s podcast, my very special guest today is Brent Beshore of Permanent Capital. We’re talking to him about how he got started, what he does, how he sees the economy after COVID and the shutdown. We’ll be talking to him right after this.

Tobias Carlisle:
Hi Brent. How are you?

Brent Beshore:
Yeah, I’m doing great. How are you doing, sir?

Tobias Carlisle:
I’m very well, thank you. I should have mentioned, too, we’re going to talk about your book a little bit. But first of all, for folks who don’t know, your firm has recently changed name to Permanent Capital. Can you just talk a little bit about … Or Permanent Equity, I’m sorry.

Brent Beshore:
Permanent Equity, yeah yeah yeah. It’s Permanent Equity. Look, it’s a new name, so everyone … I still say AdVentures for quite a while.

Tobias Carlisle:
What is Permanent Equity?

Brent Beshore:
Yeah, so Permanent Equity is a private equity firm. We like to describe ourselves, though, as a family of companies that acquires family owned companies. When you think of private equity, you think of buying with a lot of debt, you’re going to try to flip them in a couple of years. The LBO model. We’re about as far away from that as possible. We like to partner with closely held family businesses. We like to typically use no debt in our transactions, and work with them to grow the business. I mean, it’s built on kind of the first principles of how every family built their business.

Brent Beshore:
If you’ve got a family business, been around for a long time, you typically have not leveraged it a lot over the years, or you’ve been very selective in how you’ve brought on debt. I think we’re living through a period right now that explains why.

Tobias Carlisle:
Yeah, I’d love to get into the detail of how you look at targets and how you manage after you acquire. But let’s start way back at the beginning. You were an entrepreneur, initially?

Brent Beshore:
Yeah, correct, yeah. I was getting my law degree, my MBA, and met my wife who was getting her PhD. Gosh, that was a long time ago. It was 2006, 7. Yeah. Yeah, started a business in the marketing space, and ended up developing kind of a small grouping of regional marketing companies. Then had a mutual friend say, “Hey, you should meet this guy. He just got left at the altar for the second time,” and that was in 2009. I said, “Great, well I guess that should mean I should try to go buy his business.” The guy had no idea that’s what I was going to do, and I don’t know, I look about what, 24, 25 now? I looked about 14 then.

Tobias Carlisle:
What’s the secret?

Brent Beshore:
Got across the table from this guy. Yeah, it’s the baby face is … I don’t know, it feels like I never age. I’m sure that’ll catch up to me eventually. I’ll have this incredible flip. But anyways, so ended up acquiring that firm over 10 years ago. That got into the world of acquisitions. I mean, literally I did my first, I guess private equity deal before I knew there was an industry called private equity. Then just tried to learn as much as I could on it. I mean, had started businesses, had operated businesses myself. Then had acquired this business, and … A lot of it was the same. We like to joke that there’s an “everything tastes like chicken” layer to business.

Brent Beshore:
But there are some obviously nuances, and differences. Kind of set off on this journey of trying to understand what businesses were out there, who owned them, what situations were they in, what were their plans, and is there an opportunity for us to fit into the marketplace in a way that was meaningful for us, and eventually for our investors? But also meaningful for the families that wanted to keep these businesses going.

Tobias Carlisle:
You started out, it was a marketing firm, and through running that firm you had done some acquisitions of regional marketing firms before you sort of embarked on a change of industry?

Brent Beshore:
No, well, yeah. The first business that we acquired was MediaCross, which was kind of in the marketing space. I mean, they’re a recruitment marketing firm, so they focus on recruiting for a very specific branch of the military, called Military Sealift Command. They also work with a lot of educational institutions to help recruit students. That was the first acquisition, and then over time we moved outside of that. I mean, you kind of … I think like anything else, you sort of go a little bit tangential to what you’re doing, and then you go tangential to that, and it kind of continues to move out.

Brent Beshore:
If you think about the portfolio today, we’re in construction, manufacturing, still in military recruitment, still own MediaCross today. That’s kind of a part of our long term hold strategy for these companies, and we can talk about the fund, how we can do that. But yeah, we’re in a lot of different industries. It gives us an unusual seat to see the commonalities between these businesses, as well as there’s some very big differences.

Focus On A ‘Size Specific’ Circle Of Competence

Tobias Carlisle:
I know that you had a meal with Warren Buffett, and you’ve probably like many of us taken on some of the precepts that he espouses. One of them is circle of competence. How do you get comfortable with a business that might be something that you haven’t seen before? Might be you would consider outside your circle of competence. Not do it, or is that a chance for study?

Brent Beshore:
Yeah, well so … I think obviously, like any answer like this, it’s going to be situation dependent. I would say our circle of competence, instead of being industry specific, is size specific. I think we like to focus on these businesses that are typically between 3 million and 8, 10 million dollars of earnings when we’re acquiring them. Those types of businesses are in a really unusual situation, where they are too big to be small, but too small to be big. They’re either kind of right on the line of professionalization, either right before or kind of right after it.

Brent Beshore:
Our circle of competence is working with those companies, which are going to be, if we’re getting involved with them, hopefully excellent at the thing they do. But probably have some rough edges across kind of the disciplines that you would say are kind of the business of business. What we’re able to do is to come in and say, “Okay, look, you guys continue to do the thing that you’re good at, that has that sort of moat around it,” if you want to kind of use traditional value investing terms. But we’re able to help come in and sort of augment with skills and maybe a perspective that’s unusual for that type of size of company.

Brent Beshore:
I would say there are certainly things that we look at all the time that we say, “Hey, this is just above our pay grade. There’s just nothing we can do with this.” Then there’s a lot of companies, I would say the vast majority are fairly easy to understand. I mean, unlike large conglomerates, the mechanics of these businesses are fairly simple, right. I mean, if you’re in a construction firm, it’s who’s buying it, what is the actual work being done, why are you superior? What’s your performance delivery on time? What supplies do you need? I mean, the mechanics of it are fairly straightforward. It would take you 15, 20 minutes to actually understand the core.

Brent Beshore:
Now, that’s not to say that the skill itself is easy by any means. I mean, quite to the contrary. There are incredible nuances to each one of these businesses that make them really special. But in terms of the sort of macro layer, I mean it’s fairly straightforward to understand them.

Tobias Carlisle:
Are you seeking to professionalize them, or are you totally hands off when you acquire them? You require management in place, or do you bring your own management? How does that work?

Brent Beshore:
Yeah, so again, it’s situation specific. We have partnered with sellers who have rolled forward, and still remained with the company. We’ve done it where we bought out 100% and helped find new leadership for the company. It’s been both. What I would say is the commonality, I’ve never worked another private equity firm, so I don’t know, and I think that you can’t sort of paint anything with a broad brush. But it seems like we’re far more active than a normal private equity firm. When I say active, we try to be helpful. Our whole thing is, we don’t want to annoy the people with more reports and more sort of distraction. We want them to stay focused on what they do, but we do have some very unusual skillsets that aren’t common in that segment of the market. We’re able to express those, whether it’s in marketing, advertising, sales, technology, operations, finance and accounting. We’re able to help step in, and when you get a cease and desist order, how big of an alarm fire is that, right? You know? We’re able to help diagnose that.

Brent Beshore:
When looking at new technology contracts, I mean, we have people on staff who have done a lot of that, right. We’re able to help guide, and kind of counsel. What we say is, look, we have some governance side of the business that we say, hey, these are the things that need to be done. We’re gap audited. We want to run a clean ship, right. But at the same time, that’s not where the focus is. You don’t make money doing that, that just protects your down side. We really want to give them the opportunity to hopefully prosper far more, and all of us win together in the process.

***

Partnering With O’Shaughnessy Asset Management

Tobias Carlisle:
You’ve recently, in the last few years, launched your first fund and then raised a second one. I know that some of the impetus for that was from the O’Shaughnessys. Can you just talk a little bit about that process, and how that’s changed what you do?

Brent Beshore:
Yeah. Well, so … Yeah, I met Patrick through Twitter. He asked a question about capital allocation, and I was … I thought, “Well, I’m a capital allocator, I’ll answer it.” He had no idea that there were people out there that did what I did. We got on a call and he was like, “Okay, so tell me what you do.” I kind of gave him the 30 second elevator pitch and he said, “Yeah, I don’t want to talk about anything that I thought I was going to talk about today. Can we just talk more about that?”

Brent Beshore:
We probably had, I don’t know. Three or four good conversations over, I don’t know, a six month time frame. Then Patrick said, “Hey, do you mind if I fly to St. Louis, and can we meet up there, and let’s chat?” We just spent a day together, and it was fantastic. We talked the entire day about life and business. At the end of it he said, “Great, well I think my family wants to invest,” and I said, “I don’t know what you mean. We’ve never taken outside capital, and we have no structure to. I don’t know what you mean.”

Brent Beshore:
He said, “Well, you should.” And I said, “Okay, well what do you recommend?” He said, “I don’t know, make us an offer.” That was the first time that anybody had said that to us. It was always, we had talked to family offices in the past before then, and it was always, “Hey, here’s our box, you’ve got to fit into it. We want to do a holdco structure, we’ll do this and that, this and that.” It just never sat well with us. We never could kind of get there. Patrick took the exact opposite with his family, and Jim as well, and said, “Make us an offer.”

Brent Beshore:
So I did, and they said, “Yeah. A little tweak here, a little tweak there, looks good.” And I said, “Okay, great. Now what do we do?” He goes, “Well, I’ll help you raise the rest of the money.” It was just a beautiful gift. They helped us … I mean, look. We were, I don’t have connections to Wall Street. Just a team of us operating out of a house in Columbia, Missouri. Right? It is a far cry from what you think of as traditional private equity. We raised, the first fund was just $50 million. We invested that across five companies over the last two years, and then just announced a $248 million in December. We’re starting to invest out of that.

Brent Beshore:
It’s been a fascinating ride. I mean, lots of growth. Been amazing to see how the team’s come together. We’re still trying to figure it out. I mean, I don’t think anybody has the exact roadmap, especially under the current circumstances.

***

The Benefits Of Locking In Capital From 27 Years

Tobias Carlisle:
I followed you on Twitter while you were going through this process, or maybe just after you announced that you’d done it. I saw some of the interesting conversations that you related on a … Just folks find it very hard to, or folks who were familiar with private equity find it very hard to understand the structure or understand the reason why … The main point of difference seems to be that the fund is very long termed. I think you said it’s 27 years.

Brent Beshore:
Yeah. We lock our capital for a minimum of 27 years. There’s actually an option to renew at year 25. It’s functionally permanent capital, I mean, is what it is. Then the other thing that’s unusual is how we do fees. We actually do no fees, no reimbursements of any kind, and then we take a percentage of the free cash flow of the companies above a hurdle as we start to invest the money. It’s very entrepreneurial, it’s very long term. My argument would be, it’s exactly like a family, right? If you think about it. It is, families eat last. The owners eat last, and so just like us, we want to as the investors in these family owned companies, we want to eat last. If we perform, great, we should get paid for it. And if we don’t, we should probably do something different, and we shouldn’t get paid for it.

Tobias Carlisle:
What’s the mechanism by which the capital is released at the end of 25 years? Do you expect to list, or do you expect to cash folks out? Can you talk about that?

Brent Beshore:
Yeah, well so … I mean, the short answer would be, we’ll figure it out, we don’t know. I mean, if we have a basket of, let’s call it … Gosh, 15 to 25 businesses that I’m sure through the years … We’re not opposed to selling. We just want to sell for the right reasons. We think there’s some good reasons and bad reasons to sell, and so-

Tobias Carlisle:
Can you go into that a little bit after this? I’ll come back to that bit.

Brent Beshore:
Yeah, yeah, of course. But I think … At the end, I mean, we’ll have a basket of hopefully good companies. There’s always going to be a market, I guess absent a global pandemic for a short period of time. There’s always going to be a market for good assets. I guess if we were to hit the 25 year mark and our LPs decided not to vote in interest to renew for another 25 years, then we would go ahead and spend that next two years winding it down and moving on. But that’s a really long ways from now. I mean, the idea was that we would just want to be in a position when we acquire something not to be in the mode of when we’re going to sell it. We’re just not in that mode. When we acquire something, we’re acquiring it based on certainly the financials, and sort of where they sit in the industry stack that they’re in. Where’s their competitive advantage, their moat, whatever you want to call it. As well as obviously, well, who are their people? We just want to treat them really well over a long period of time.

Brent Beshore:
To the question about when would we sell. It’s funny. I’ll have a-

Tobias Carlisle:
Or just what are some good reasons why you’d consider that?

Brent Beshore:
Yeah, yeah. Owners, it’s interesting. I had a conversation with an owner probably six months ago, and he said, “Okay, so you’re agreeing never to sell my business, right?” I said, “No, not at all.” And he goes, “Well, if you’re not going to agree never to sell my business, then why wouldn’t I just go with traditional private equity?” I said, “Well, do you think there’s something inherently wrong with selling the business?” He said, “Absolutely. I don’t want my business sold, ever.” And I said, “Well, you’re selling the business.” He kind of paused for a second and took a step back and goes, “Well, yeah.” I said, “So maybe we can agree that there’s good reasons to sell and bad reasons to sell.”

Brent Beshore:
I think that unfortunately traditional private equity is hamstrung by mostly bad reasons to sell, which is, you have to return the capital back to your investors. I mean, if you think about a traditional, sort of seven year term, three one-year extensions. From a fundraising cycle, we can talk about this, but everything is geared up to basically holding an asset for no longer than three, maybe four years. If you hold it for longer than that, and certainly some do. It’s kind of almost frowned upon in the industry.

Brent Beshore:
If you think about it, three or four years, that’s not very long. Heck, some companies are flipped in under a year. You can’t make good long term decisions if you have a short time horizon. There’s just no way. It’s impossible. We think that by not having the intention of selling, we’re going to operate these businesses in a good long-term mindset, as if we’re never going to sell. Then if somebody comes along and we think that the price they pay and that they’d be a better long term owner than we would, I think it would be problematic if we wouldn’t be open to selling.

Brent Beshore:
Now, the reality is that we get offers quite frequently. None recently, based on the current circumstances. But before that, quite frequently, for the assets that we have. Most of the time the answer is really easy. It’s just no, and we always try to talk about it with the leadership teams. We’ll have open discussions with them. But we’re very optimistic about what’s in our portfolio, and the long term growth. We think that a lot of these companies are just on the very front end of hitting the growth curve, and we just want to be able to support them the entire way up.

***

Finding Good Companies That Are Available For Sale

Tobias Carlisle:
How are you sourcing the deals that you’re doing? Because that is one of the more difficult things to do in this business, is to find companies that are available for sale. It’s not as simple as going and looking at any of the business sales websites. They seem to be filled with nightclubs that you can buy on two times revenue.

Brent Beshore:
Yes. Yes.

Tobias Carlisle:
What’s the process for that?

Brent Beshore:
Well, so we’re in an unusual position. We’re probably the only private equity firm that I’m aware of that doesn’t go outbound and try to convince people to sell us their business. In fact, we actually take the opposite tack, which is we try to talk people out of selling their business. When people come to us, we try to have very sobering conversations. A lot of that is, the reason why we wrote the book, The Messy Marketplace, was it’s kind of the first five to seven hours of conversations we want to have with a seller when they come in. In the book, we specifically talk about how the math just is pretty straightforward. If you sell your business, you’re going to have less income in the future, assuming that the business works out and continues to grow and prosper.

Brent Beshore:
You’ve really got to have a desire for a life change far beyond the financial resources. I mean, we have kind of a saying around the office. We won’t buy a business from somebody who’s not already rich, because if they didn’t get rich doing it, we’re not going to.

Tobias Carlisle:
That’s good insight.

Brent Beshore:
We want, certainly the money matters, right? I’m not going to sit there and tell you it doesn’t, and price matters. But I would say we’re really looking for a type of seller who’s far more interested in beyond the money. They’re interested, they care deeply who buys the business. If you care deeply who buys the business, it’s probably going to echo down in a very positive way into how you treat your employees, how you treat your vendors, how you treat your customers, right? It’s probably going to be a very sustainable type of business, as opposed to somebody who’s just, “Hey, I’m going to try to flip this thing for the biggest cash I can and close, and then move on and sort of reinvest it into something else.” Right, we call those hustles.

Brent Beshore:
Yeah, we’re … I mean, everyone does it a little bit different way, but we try, that’s kind of our way.

Tobias Carlisle:
I have the book here. I haven’t read it completely, but I’ve enjoyed it, and I love the way that it’s laid out. It’s not something that you just sort of sit down and read cover to cover. It’s more of almost a reference guide. That was the reason for writing it, that you could perhaps accelerate those first five to seven hours of conversations.

Brent Beshore:
Yeah, yeah. To get back actually to your original question, which was, how do we get deals. Deals are all inbound to us. We just wait and see who reaches out. Sometimes it’s intermediaries, sometimes it’s sellers themselves. We’ve been getting a lot of conversations recently, directly with sellers. But it’s all inbound, and then what we try to do is just be highly responsive, obviously very confidential, and try to be helpful regardless. I mean, the odds that we’re going to be the right fit are probably pretty low. But we try to be helpful regardless.

Brent Beshore:
And yeah, writing the book, the big motivation was we … We always try to say, how can we replicate conversation, right? The book is something that we can hand to somebody and say, “Hey, here’s kind of what we think. Here’s the first five to seven hours of conversation that we want to have with you. If after you’re reading it you’re done with it, and you think that we’d still be a good fit, we’d love to have a conversation. By the way, if you read through that and you say, “You know what, I’ve decided not to sell, or I don’t think you guys would be a good fit.” Fantastic. Either way, it’s saved us a bunch of time and money.

Brent Beshore:
Yeah, the book is kind of meant to be our kind of conversation, initially, but it’s also meant to be a reference guide. We tried to chop it up in a way that … We actually even reference it during deals, so we’ll say, “Hey, can you flip to this chapter, and we’re going to talk about working capital. Do you mind going and kind of referencing that?” It provides a mechanism to sort of smooth the relationship, and I’ll just be very transparent. I mean, we never want to catch anybody off guard or surprise people with what we’re doing, and try to be up front and honest about how we’re doing it.

Tobias Carlisle:
Have you sourced deals through the book?

Brent Beshore:
Oh yeah. Yeah, yeah yeah. I mean, certainly lots of opportunities come. It’s gone better than I think any of us expected. I mean, it’s a pretty niche audience, we thought. It’s certainly started a lot of conversations that we wouldn’t have had any other way. It’s also probably equally as well, repelled some conversations that would have been a big waste of time.

***

If Your Company Can Use $3 Million Dollars Responsibly, Get In Touch

Tobias Carlisle:
I see you’ve had … Since we’ve gone into the COVID shutdown, you’ve had some advertising on your site, and you’ve been pushing it on Twitter, where you say, “If you can use three million dollars responsibly, get in touch.” What’s the idea behind that marketing push, I guess?

Brent Beshore:
Yeah, so we created a program called Safe Harbor. Typically in the past, there’s only been one way to work with us, which is we’ll buy a majority of equity in your firm, and we’ll work together. Right, I mean, that’s it. We’ll buy somewhere between kind of 60% and 100% of the firm. We realized that there’s a lot of really good businesses that were going to need short term bridges over a very difficult situation. We thought that it would be a good idea … We still, we’re not interested in sort of loan sharking. Obviously the line between loan sharking and being a white knight is pretty thin these days.

Brent Beshore:
But we wanted to use this as an opportunity to say, hey, let’s work together in maybe a smaller way, that then leads to working together in a bigger way. Those are the conversations that really we’ve been starting. I mean, I had a conversation with the owner of a highly successful business yesterday. Having this exact conversation. He said, “Hey, I’m not ready to sell a majority. I think I could probably sell 35%, but then I’d also want sort of part of the deal, maybe some debt attached to it.” And we said yeah, that sounds interesting.

Brent Beshore:
Long term, we still would like the ability to own a majority, in the long term. But we can price that later, we can do all kinds of things to sort of be flexible. The reality of the situation is, we came up with the program before the government came out with their programs. The reality is that really the efficacy of that program is dramatically diminished under the current circumstances. I mean, we want people … We never want to play the gotcha game, right? We want people to go and access capital in the best possible way they can. Right now, the government’s offering really really cheap capital to a lot of different businesses. We’re encouraging people that we had had conversations with and started down that path to just go and apply for those government programs, assuming they’re qualifying for them. Then down the road, we can kind of resume the conversations later.

***

The Benefits Of Taking A Majority Holding

Tobias Carlisle:
Why seek a majority holding, or a 60 to 100% holding, as opposed to a minority holding?

Brent Beshore:
Yeah, well so … We try to be very hands off, and I think one of the reasons that allows us to be hands off is because ultimately, we do have control, right? We try to be very benevolent in how we exert control in these organizations. But long term, we do want to have the ability to do what we think is in the best long term interest of the business. A lot of people have different time horizons that we do. We don’t want to be in a position to have to be a forced seller, and so if you’re a minority shareholder, most times there’s drag-along rights, is what it’s called. There’s also something called tag-along rights.

Brent Beshore:
But we don’t want to be dragged along into a deal that we don’t want to do. Often times, we want it to be meaningful, right. We want to be able to have our work sort of be of a size and of a materiality, not only to our investors, but also to sort of our effort. If we have less than a majority, it’s just likelihood that even if things go well, it doesn’t really mean much to us. Obviously there’s a fine line between 51% and 49%, right. Again, it kind of comes back to, we know who we are and we know what we want to do. We try to be very up front about that, and then it’s just a way of aligning everyone’s interests.

Brent Beshore:
Also, long term, if you have a pretty fractured shareholder base, there’s issues long term with how decisions are made. When there’s disputes, how those decisions get resolved. You see that it’s a lot in sort of third, fourth, fifth generation family businesses, where maybe the ownership is so fractured that then it gets political. We just like to keep things super simple. Us owning a majority and being able to rarely exert that control really helps simplify the situation. I think it’s been definitely a source of returns for us over time.

***

Tobias Carlisle:
What’s a typical experience when you undertake an acquisition and … I imagine often you’ve got, it’s probably the founder of the business, who’s now reached an age where they want to step back from the business a little bit. There’s either a second generation coming through, or it’s someone who’s been with the business as a lieutenant for a long time who’s stepping into more of a leadership role. What’s the experience? Do you find that that’s a difficult transition to make, or do you feel that people sort of are set free by that? How do you find?

Brent Beshore:
Yeah. I mean, look. I think every situation is different, right? Change is scary, to everyone, me included. I think that there’s a time of building trust and sort of testing your relationship. Our preferred path is to take somebody who’s in the business and elevate them to help lead it, and really kind of help everyone grow up into those roles that they could be.

Brent Beshore:
In that sense, I mean, I think that it provides incredible opportunity for people at existing companies. I mean, we will occasionally go out and find outside talent, when we think it’s really necessary. In those situations, we never try to … It’s never pulling one over on anybody. We’re always trying to be very honest and transparent about kind of where we are, and co-create that plan with the seller. For instance, the last acquisitions we did were for two aerospace companies, Pac-Air and Air-Cert, that are actually in your neck of the woods, or neck of the beach, I should say.

Brent Beshore:
Everyone on staff, all the executive leadership said the same thing, as well as the owners said, there’s just really no one who’s in a position to step up to be CEO, for a variety of reasons. We all agreed, and we were all very transparent about it, and went out and did a national search, and found an incredible leader who’s doing a great job. Often times, there’s this cloak and dagger mentality to a lot of this, and we just say, throw that away. That’s garbage. Just be honest and transparent with people. Be kind and generous, and try to do right by the employees and ultimately they’ll do right by you.

***

Dealing With The Long Term Consequences Of Moth-Balling A Business For Months

Tobias Carlisle:
You’ve got a reasonably differentiated view of what happens in the economy, I think, because you hold a number of businesses but they’re all at a certain level. What have you seen as a … What’s been the impact on the businesses as a result of the shutdown and COVID?

Brent Beshore:
Yeah, we own nine companies. The range is, we have a few businesses who are, if I looked at the income statements, I wouldn’t be able to tell you anything is going on. To a few that have had a pretty big downturn in demand. It really runs the gamut. What I can tell you is … My favorite source of information is relationships that I have with businesses, right. I’m sort of spending, I would say, gosh. At least 20% of my day these days is just giving calls to different people and saying, “Hey, what are you seeing and how are you seeing it? Give me sort of your honest view on the ground.”

Brent Beshore:
I think that the consensus is, if you have … Things are bad. I’m not going to sugarcoat it. In main street America, even if you’re outside of the obvious travel, airline, event kind of space. Restaurants. It’s still bad, and your prospects … I said that probably 90% of businesses have been negatively affected by this. 5% are kind of robust to it, they’re unaffected, and then maybe 5% actually have a tailwind. Look, no one was on the pandemic anti-fragility train prior to this. It’s not like people saw this coming, and it was sort of a good play. You got lucky if this helps your business.

Brent Beshore:
Most of the business, though, are somewhere between I would say … Gosh, kind of 10% off, and 30 or 40% off. These are just sort of normal businesses. Then you’re seeing leading indicators, KPIs on longer sales cycles, that are all softening. Now, could they all bounce back? I mean, this is an interesting question of, when you look at different businesses there’s some businesses that can defer demand. For instance, our glass and glazing business is a good example of this, right. No one is signing contracts right now to glaze a building. There’s a lot of bidding going on, but no one is signing contracts.

Brent Beshore:
Buildings are still going to get built, the question is just when. The demand that you’re losing now, and there’s a backlog, so you don’t immediately feel it. But sort of intermediate demand could snap back, and everyone says, “Okay, let’s get back to work,” and things open back up, it’s business as usual. That’s very much unlike a travel business, or a restaurant, where if you don’t do it then, you’re sort of lost it, right. It’s not like you’re deferring demand from that day to the next. It’s not like a restaurant’s going to go out of business for three months, and then going to have six months of business in the next three months, right. You can only eat so much.

Brent Beshore:
I think there’s a lot of dynamics like that in these businesses, that … It really varies from being not great to pretty dire. Then you have a stop-start problem in a lot of these businesses as well, where trying to mothball a business … If you’ve never run a business, trying to mothball it sounds reasonable. Right? Yeah. You shut down, tell everyone to come back later, no problem. In reality, when you restart these businesses, you’ve got to think about all the key stakeholders. The stakeholders are all going to have differing circumstances, they’re going to have different changes in their lives, and so employees are going to move. The momentum of going to work every day is not going to be there, right. You’re maybe going to have different demands on your time, different responsibilities that pop up as a consequence of this.

Brent Beshore:
You’re not going to have the same employee base when you come back, sort of try to flip the light switch back on. Supply chains are a mess right now. Almost across industries, without exception. When you-

Tobias Carlisle:
Was that pre the shutdown in the States, as a result of the shutdown in China?

Brent Beshore:
It was exacerbated certainly by it. I mean, it certainly depends on when you … How much ordering you’ve done, when you ordered it. Chinese New Year had just preceded it. If you’d stocked up prior to Chinese New Year, you’re kind of in an okay spot. It was actually very fortuitous in that way. If you missed Chinese New Year and you didn’t stock up before then, I mean, you’re decimated.

Brent Beshore:
But it’s a good example of the supply chains, you flip on the lights and say, “Okay, I want to start manufacturing my widgets again.” All the ingredients that need to go into the mix to manufacture, you’re likely going to have trouble getting a lot of those things. If you have a key component that you say, “Okay, now I can’t get it through the guy I’ve worked with for 15 years. Let me go out in the market and source it.” It’s likely going to be a lot higher. You’re going to have a pretty big delay on negotiating the contract. Sort of the natural friction of business is just going to kick in. You could be delayed, let’s say the economy opens back up. You could be delayed by another two or three months, just based on the supply chain.

Brent Beshore:
Now it’s going to turn to customers. Do customers have the same demand? Do they go and look for other people who can service the demand and want to snap back faster? I mean, there’s all these issues that happen. When you think about, you sort of turn off the light switch, you mothball the business, and you try and go turn it back on. There is just a tremendous amount of friction, let alone the capital needs. I mean, you have lags in working capital. You’re funding losses typically, to get things back off the ground. There’s all these things that, what I fear, I guess, when it comes down to brass tacks, is that big companies are better set up for this than small companies. There’s more redundancy, there’s more access to capital. There’s more heft to throw around with vendors. They’re more critical for customers. Just frankly all around, big businesses are better set up for weathering this than small businesses are.

Brent Beshore:
I just fear that a tremendous amount of mainstream businesses are getting smoked. It’s not that these owners are going to be losing six months to a year of income, that’s not the problem. The problem is that they’re losing their lifetime work, and they can’t ever recover back into a competitive position. With that said, I don’t want it to be all clubbing baby seals and drowning kittens around here, right. There’s going to be … American ingenuity is incredible, right. The spirit of entrepreneurship.

Brent Beshore:
I am very long term bullish on the United States. I think it’s just unfortunate for current owners, current executives, operators, employees. There’s just going to be a lot of destruction. Some of it is going to be creative destruction. I think there’s just going to be a lot of destruction that’s just destruction, though. It’s unfortunate.

Tobias Carlisle:
Yeah. That’s the view that I have as well. Just before coronavirus kicked off, what was your view of the economy? Did you feel that it was running fairly hot, or what were you seeing? Can you remember back to … There was a time before coronavirus?

Brent Beshore:
Yeah. I had this really weird experience. I was out in Arizona, the day before it really hit me what was in front of us. I was out in Arizona the previous two days, and this was in very early March. We were having discussions with companies out there about expansion, about potentially opening up new operations. The economy. We actually had this exact conversation. What does the economy feel like? What are we seeing on the ground? The economy felt strong and sustainable, is how I would describe it. It did not feel like it was running hot in the sort of 2006, 2007 way. It felt …

Brent Beshore:
In fact, ironically, it’s so funny to look back, and God has a great sense of humor. I even think I probably used the term, I just don’t see a contagion on the horizon. You know? Whoops.

Brent Beshore:
Look, I think there’s going to be a new normal that resets here. The economy was strong going into this. There’s been a lot of destruction. I think there’s going to be a lot of repair needed, and it depends on how long this thing goes, right? I mean, there’s two schools of thought. There’s the, hey, either the flattening the curve has worked or the virus is less deadly than we previously thought. All of the epidemiology projections have just been way off, I mean by in some way magnitudes order off. Which is great. I mean, that’s something that should be celebrated. That’s a wonderful, wonderful thing.

Brent Beshore:
One school of thought looks at that and says, okay great, we just open the economy up, in let’s call it … Sometime in early May, and we get back to normal. Okay, I don’t know what that normal would really look like. The challenges, if you look at a Singapore, who flattened the curve … It basically went down to very few infections. Opened back up, and then had to shut down again. That’s kind of a nightmare scenario for the United States, is sort of rolling lockdowns over the next … Really, until we develop an effective therapeutic or …

Tobias Carlisle:
A vaccine.

Brent Beshore:
Yeah, immunization of some sort. I think that we’ve got kind of three phases to this. I think we’ve got the lockdown phase, or the rolling lockdown phase. We’ve got sort of a period of winter, for all intents and purposes. It’s just going to be really hard. It’s going to feel like you’re kind of running in mud, type situation. A lot of risk aversion. I mean, capital markets are locked up right now. I mean, nothing is getting done that requires sort of banking and lending right now.

Brent Beshore:
That’s mostly everything. I mean, real estate is locked up. Private equity is locked up. Venture capital is locked up. It’s tough right now. I think you’re going to have a period of a lot of risk aversion. I think you’re going to have a period of dramatically reduced demand, sort of sustainably reduced demand. Then I think you get a new normal, where … My best guess is that we’re probably not … Of course it’s going to vary by industry, and there’s going to be exceptions to this. But I think overall, we’re not going to see the level of economic activity from 2019 until probably, gosh, 2022, 23. Maybe even 24. I mean, I can see a scenario where we have a pretty contracted economy for quite a while.

Brent Beshore:
The unemployment numbers are stunning. I’ve talked about this on Twitter quite a bit. It’s way worse, the problem is … It’s bad. It’s unbelievably bad, and it’s way worse actually on the ground than what those numbers are pointing to. Because 10 in 99 employees do not get counted, those don’t get counted here. A lot of companies had been sort of wait and see on what the demand curve was going to look like. A lot of white collar … Sort of blue collar, retail, hospitality all went first. The next wave you’re seeing is, a lot of Silicon Valley startups that are starting to lay off 20% to 50% of their workforces. I think that’s going to ripple, ripple ripple ripple out into the economy.

Brent Beshore:
I still think 20% unemployment is probably a foregone conclusion, that we’re going to hit that. Which is stunning. I mean again, it’s just unbelievable. What does the economy look like? I mean, when one in four of your neighbors doesn’t have a job and probably can’t pay their mortgage. It is a challenging thought to go down that path, right? It’s a challenge.

***

We Want To Compete Against Businesses That Are Not Very Good At What They Do

Tobias Carlisle:
Yeah. Before we went into coronavirus, there’s been this pretty material divergence between different types of companies with different types of business models. As a … I’m a deep value guy. I tend to be invested in slower growth, lower return, heavier industries than some of the faster growing, software as a service type businesses. The multiples for the software as a service business, type businesses, the faster growers, less capital intensive businesses, has been expanding at a very rapid rate. If anything, the slower growers have been contracting or staying fairly static.

Tobias Carlisle:
Have you seen any of that in your business … What sort of businesses are you looking to acquire, or what do you … Does that impact the way you do anything?

Brent Beshore:
Yeah. I mean, we typically shy away from software companies. There are people who do that really really well, and we think that market has been well covered. We focus more on main street businesses. What I would say is our sweet spot is blue collar, sort of necessary, durable type things, that we can also grow rapidly as well. I think that’s one of the things, the advantages that we have with working in smaller companies is, certainly they’re more fragile. Certainly they can go to zero more easily. But you can also grow them much more quickly.

Brent Beshore:
We want to find things that … If you think about the intersection of low net promoter score, low customer satisfaction rate, if you want to call it that-

Tobias Carlisle:
Can you just expand on that a little bit? What are those things?

Brent Beshore:
Yeah. Yeah, so we want to compete against people who are not very good at what they do. Right? If you … The classic one of this is, when was the last time that you called somebody to come … Your HVAC company, or some local home services, office services, and they got right back on it. They were a pleasure to work with, they showed up on time, right. Great billing systems, easy to pay them, all that stuff. Very, very unlikely that’s happened. Right?

Brent Beshore:
If you look at a lot of the business that we’re in, the people that are operating those businesses don’t have a background in business. They typically were the person who did the thing itself, and then sort of hired a guy, and then hired another guy, and kind of grew it from there. When we look at a business, we always want to compete in areas that there’s not a non-financial reason that you’re operating that. Every billionaire’s son and daughter produces movies, right, or buys a winery. Even the marketing firms. Something that we were involved in early on, sort of on the sexier end of things, right. Marketing, advertising. We kind of shy away from that. We want to get into things that are … You would never be a customer of that and say, “You know what I want to do, I want to change from the job I have now into doing that thing.” No one drives by a home in Arizona in the summer and sees somebody digging a swimming pool and chuting it with concrete, and says, “You know what I want to do? I want to get out of my air conditioning and go out there and dig some pools.”

Brent Beshore:
Those are good examples, or roofing, or something like that. Those are the types of businesses. We look at kind of net promoter score … Fragmentation is another really big one for us. We like to get into things that are high fragmentation, meaning there’s a lot of smaller players. There maybe a couple of bigger players, but there’s a lot of room for consolidation and for growth. We’re kind of looking at the intersection of those two things primarily. Looking for teams that we can partner with.

Tobias Carlisle:
That’s very interesting. How do you apply that to say, the two aerospace companies that you’ve bought? How do they … When you apply that analysis, how do they appear?

Brent Beshore:
Yeah. Well so, when you actually look at the nuts and bolts of those businesses, they are warehouses of parts that you’re sort of buying at one price, warehousing, repairing maybe, and then selling. The actual … I mean, you say aerospace, it’s like, oh, that’s a sexy business, right?

Tobias Carlisle:
Yeah.

Brent Beshore:
We’re not designing supersonic jets here. We are in essence a hedge fund for airplane parts, if you want to think about it that way.

Tobias Carlisle:
Interesting.

Brent Beshore:
We’re physically taking custody of the asset, right, and then having risk that the demand drops, or that the price falls, or whatever it’d be. The core engine of that business is a warehouse of four or five hundred thousand airplane parts, and they vary from large pieces to microscopic tiny little pieces. That for us a great example of, it’s boring, it’s mainstay. Certainly we could talk about the demand curve and how a 95%-plus drop in commercial air traffic changes that business, at least short term.

Brent Beshore:
But I mean, long term, look. People are going to fly on airplanes. Travel is not going to be decreased sustainably over a long period of time. We’re going to have a reset period. But look, it’s a blue collar business. It’s high fragmentation, I mean there’s a lot of these small players that service the parts business. High fragmentation and most of them are I would say … Well, we bought the business we bought because we thought they were very very good at customer service. Great reputation. There’s a lot of shady actors in that space, and there’s a lot of value in being sort of the cleanest shirt in the closet.

***

The Foie Gras Strategy

Tobias Carlisle:
How do you assess growth for businesses, not necessarily the aerospace business, but how are you thinking about growth when you find that, not a particularly sexy business in a fractured, fragmented market, rather. How do you then think about growing that business?

Brent Beshore:
Well, again, it depends on the business. I mean, most businesses grow because they can’t find new customers, and can’t sell them well. One of the things that we really like to do is work on the marketing and advertising and lead-gen side of the business. We joke, we call it the foie gras strategy, which is to just cram as much down the front end as possible, and you get something beautiful.

Brent Beshore:
Yeah. How sales systems work, sales incentives. All of that I think matters. For the most part, though, these businesses again are really good at the thing they do. They’re probably just not good at, again the business of business. It’s sometimes as simple as putting up a website, not joking. I literally am not joking. Other times it’s a pretty advanced online marketing system. It’s maybe engaging with some PR. It’s hiring, and helping staff the companies. I mean, access to talent is a really interesting challenge in these smaller businesses.

Brent Beshore:
Not only is there … If you just take a step back maybe, and say, who works in these smaller companies? Typically if you, either as a full time employee or as a contractor, have the ability to work at a larger company, more prestigious company, higher paying job.

Tobias Carlisle:
Yeah.

Brent Beshore:
You typically take it, right? This is not complicated. What you find is, access to talent for a lot of these small businesses is really challenging. What we’re able to do, we have a program called Orbit that’s people who have raised their hand and said, interesting in working with Permanent Equity, either at the Permanent Equity level or in your portfolio companies. That’s how we’ve recruited a lot of the people who now work in the companies. Being able to bring in a type of talent that a small business owner just normally wouldn’t have access to, wouldn’t have the relationships with, wouldn’t know how to compensate, wouldn’t know how to talk about it, and can also sort of hive into a larger team that … Yeah, can be really productive.

Brent Beshore:
I would say it’s a combination of all those things, along with the proper financing, and how do you organize things, how do you get audited. These are all the things that just … It’s professionalization, as you said earlier. That we’re trying to help, slowly over time, bring to the table. We don’t want to … You could sort of shock the business so much by instituting all of these processes and procedures, and it makes it really difficult to actually do the thing itself that you should be doing. We never want to take our eyes off of our customers, and we always want to be focused on them. But at the same time, we believe that you can constantly be getting better. One percent better every day, right, type mentality.

***

Most Employees Prefer Cash Over Equity Incentive Programs

Tobias Carlisle:
One of the … I’m not sure if it was you who tweeted it out, or if it was something that I saw that perhaps you were commenting on. But one of the things that I was surprised that I saw on Twitter, you were discussing incentives, or you were discussing pay for management. I think that it was … The very vast majority of employees prefer cash to any sort of equity, which I thought was completely counterintuitive. Was that you who sent that out? Do you have any comment on that?

Brent Beshore:
I mean, I don’t know exactly what you’re referencing. But I would say, yeah. One of the lessons that … I mean, most people want to be paid in cash. For sure. Certainly long term incentives matter, and you want to be generous and share, as the company wins, you want to share that. How that actually looks, though, in practice, is usually you pay people more in cash, and people are really appreciative of that. If you don’t have a background in finance and you don’t understand what risks and rewards, sort of the trade offs of what you’re doing … A lot of times, equity programs, and by the way rightfully so, don’t get paid out. I think there’s a natural distrust. There’s a lack of knowledge and a natural distrust of sort of deferred compensation, unless it’s outrageously clear.

Brent Beshore:
That’s one of the things we really try to work on in our companies, is making sure that whatever the incentive programs are, incentive systems, how we win together is abundantly obvious. It’s not gamed, it can’t be cheated. Yeah. In theory … It’s one of those things, in theory a bunch of deferred equity that sits under a bunch of debt, kind of how traditional private equity is incentivized through leadership teams, sounds really really great. Until you’re part of the big chunk of companies that never pay that out. Then you just take in reduced comp for a very long period of time, and don’t have a lot to show for it.

Tobias Carlisle:
You’re less interested in the precise detail of the incentive plan, and more interested in that it be very clear and well communicated, and not gameable, as you say.

Brent Beshore:
Yeah, and fits the situation, right? Every type of company is going to have a slightly different reason for incentivizing, and you’ve got to be really careful. You can get some very perverse incentives very quickly, that are sort of not obvious in the beginning, by changing and tweaking around incentives. Our position on, whether it’s compensation or processes in the businesses, is a high dose of humility, in coming in and saying, “Hey, look. We’re getting involved with you all because you’re successful already. This is not a turnaround situation. We don’t want to strip everything and restart from scratch.” We’re very careful if we say, “Look, we think that you’re incentivizing this way now.” We had a company that was incentivizing sales people based on revenue. Well, discounting is a pretty logical conclusion in that. If you start incentivizing based on gross profit, or on net margin or whatever you want to call it, that’s going to incentivize some different behavior.

Brent Beshore:
There are things like that that I think are more obvious, but we certainly would not want to come in and say, “Okay guess what everyone, we’re going to pay you X amount more, but you’re only going to get 80% of your current comp in cash, because we’re going to do this other incentive program.” People would revolt, and I would revolt if I was them. You intentionally selected into that company based on that compensation program, you’re okay with it, hence you’re still there. For us, we want to kind of be very very careful and high humility around how we tweak stuff.

***

Tobias Carlisle:
For folks who are interested in entrepreneurship through acquisition, or search funds or anything like that, do you have any advice for folks getting started in something like that?

Brent Beshore:
Under the current circumstances, it’s going to be a really tough … I’d spend a lot of time, before you went out on your own right now, setting up your capital and making sure that it’s really rock solid. Because I can see somebody saying, “Yeah, sure sure sure. I’ll back you, no problem at all.” I think there’s going to be a lot of disappointed deals on the finish lines, over the next couple of years. I think my best advice right now would be, make sure you get your capital sources locked down. Make sure you have a clear vision of how the entire capital stack would be organized. Then yeah, just make sure you get all your ducks in a row.

Tobias Carlisle:
Yeah, my experience is you raise about 20% of the capital that you’re promised, so you need to raise five times as much as you think you need.

Brent Beshore:
Yeah, that’s correct.

Tobias Carlisle:
Brent, absolutely wonderful talking to you today. Very much appreciate the insights. If folks want to get in contact with you or follow along with what you’re doing, how do they go about doing that?

Brent Beshore:
Yeah, so permanentequity.com is the website. We’ve got some email lists you can sign up for that we release whenever we release content or do something. We typically try to hit that list and let people know. I’m @brentbeshore on Twitter, on LinkedIn, yeah. I try to be very accessible. Our whole team, we try to make sure that we’re available. As you are holding up the book there-

Tobias Carlisle:
And the book. The Messy Marketplace.

Brent Beshore:
Yes. You can go on the Amazon and pick up The Messy Marketplace. Yeah. Let me know if you have any feedback. I really, one of the things I enjoy most is when people read the book and have some very constructive criticism coming out of it. Hey, I’d really love for you in a later edition to include this, or I disagree with this. It starts really good conversations. Yeah, if anybody has any feedback, would love to hear it.

Tobias Carlisle:
Brent Beshore, Permanent Equity, thank you very much.

Brent Beshore:
Hey, thank you, sir.

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