During his recent interview with Tobias, Brent Beshore, Founder & CEO of Permanent Equity, and author of The Messy Marketplace: Selling Your Business in a World of Imperfect Buyers, discussed Focusing On A ‘Size Specific’ Circle Of Competence. Here’s an excerpt from the interview:
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?
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.
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.
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.
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.
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?
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.
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.
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