Serving the Six-sided Teeter Totter

2018 Year In Review


Most of the year it felt like we were sitting in the middle of a big puzzle, during a particularly windy day, watching pieces plop down around us and scrambling to figure out how they all fit together. $50M fund raised. Wham. Two new portfolio companies. Bam. One sold. Whoosh. Compounding deal flow. Bang, bang, bang. Six new team members. Book published. Southeast office. Lots of new friends. Click, click, click.

Strong gusts came at us from all sides, both trials and triumphs. Disappointment was steady. We experienced debilitating illness, suffered through treatments, and lost friends and family. Death mocks achievement and accumulation. For about a week in August, I couldn’t walk or read, and continue to recover slower than I would prefer. Talk about being brought low, literally. Perhaps most tragically, I bought a minivan. Pray for me.

We also had births, successful surgeries, out-of-the-blue victories, wonderful shared experiences, and a whole lot of laughter. My third daughter should be arriving any day now. Life is best lived deeply and we have a tremendous amount for which to be grateful.

We count it all as blessings, even the hardship, realizing we’re far less in control of our lives than we like to pretend.

Netting out all the ups and downs, 2018 was a nice year for and our family of companies. Investment returns remain strong, operating metrics are pointed in the right direction, and the economy continues to feel stable despite recent volatility in the stock market. We found probabilistically excellent reinvestment opportunities in the portfolio, paid down considerable portions of seller notes, and made a meaningful distribution to Permanent Equity I LPs. We anticipate an even stronger 2019, while actively preparing for challenges ahead.

Utility of False Models

We’ve long thought about as being a manufacturing firm, with a helpful product for owners and leadership teams. Create a kind, thoughtful assembly line and get ‘er done. Buying one company is brutally hard. Buying a handful of companies is an order of magnitude harder. As we’re finding out, scaling an organization that frequently acquires and perpetually holds has to rank in difficulty right up there with getting a toddler to eat something green.

Statistician George Box said, “All models are wrong, but some are useful.” The problem with our model, as useful as it has been, is it conveys a false sense of linearity. Life, like business, isn’t lived between two axes (think math, not splitting wood). The relationship between inputs and outputs is a heck of a lot more complicated than a straight line. People, us included, are beautifully messy. Our model needs to anticipate, accommodate, and appreciate that complexity.

We’ve realized, albeit slowly, that the puzzle we’ve been putting together for over a decade has been a six-sided teeter totter on a global playground. Opportunities, relationships, due diligence/documentation, portfolio management, capital, and talent must all be leveled up simultaneously. If any side lags, the whole organization is bottlenecked. If any side sprints too far ahead, there’s tremendous waste. And when things are in balance, it’s astounding what can be accomplished.

People are the Ends, Not the Means

As we think about teetering on the totter, everything comes back to people. Organizations are started by people and owned by people for the purposes of serving people. Leaders lead people. Deals are discovered by people, negotiated, diligenced, and documented by people, transacted between people, funded by people, and operated by people. All six sides of the teeter totter are seats for people.

Someone once joked to me, “Business would be great without the people, especially the employees and customers.” While cynically funny and too often relatable, people are neither the means to success, nor the obstacles. Employees aren’t automatons to be directed, or cogs to be wheeled. Customers aren’t money piñatas to be beaten, then discarded when convenient.

Employees and customers, as well as vendors and communities, are people and people were created in the image of God. All of them, especially the difficult ones like you and me, are wonderfully made. We’re also hot messes of self-obsession, self-righteousness, and self-interest. And while daily life is largely mundane, it’s the people that make it spicy, sweet, and savory. People are the ends, not the means.

When put in proper context, people, including all their flaws and shortcomings, become the best of business. The kind and generous ones offer a glimpse of what was intended, while the more difficult ones provide an opportunity for love and forgiveness, and a reminder of how much we’ve been forgiven. A life of kindness and understanding solely towards those who agree and flatter inevitably results in the shallow emptiness of self-preservation. We’re meant to be poured out, not stuffed full.

Orbiting The Teeter Totter

My favorite new initiative of 2018 was the launch of the Orbit. It’s a little structure thrown over what we’ve always loved to do — getting to know people. Through the years, we’d have employment opportunities pop up and no one available to step up. Or, we’d meet someone fantastic, search like heck for the right fit, only to fail and eventually lose touch. We knew we needed to get better at connecting, organizing, and remembering.

We took a hard look at our disorganization and found someone willing to jump into the fray. Kelie Morgan took the reigns a short time ago and has done a fantastic job. She immediately reached out to everyone who had contacted us in the past two years and asked a variety of get-to-know-you questions. She test drove software systems to catalogue what we know and landed on one that seems ideal.

We’re now ready to connect people and opportunities, and more specifically, the right people with the right opportunities. Since launch, we’ve had college professors and college students sign up, in addition to lawyers, CPAs, and even a medical doctor. Orbiters include highly experienced professionals ready to lead large companies with momentum, as well as recent grads looking to grow from a new challenge. We wholeheartedly welcome them all.

Differences of experience, expertise, and perspective make good companies far more successful. No company of all engineers, all marketers, or all accountants would ever be able to compete successfully against a diverse bunch. Youthful energy is wasted on youth, unless it’s directed. Calm wisdom can quickly become lazy without a jolt of youthful vigor. That’s what makes the Orbit so special — it’s a bunch of seemingly disconnected individuals bound by a common interest in serving smaller companies and constantly learning, while having a blast doing so.

The big idea is, as opportunities arise, we now know who to call. It’s people we’ve gotten to know, think highly of, and believe would be well-suited for the job. In the short time it has been operational, the Orbit has already matched opportunities in marketing and operations. Many more should follow.

To date we’ve hosted a handful of get-to-know-you Orbit events in snowy New York, sunny Columbia, MO and Fighting Irish South Bend. We have plans for Orbit events in South Florida, Phoenix, LA, Chicago, and Charlotte. If you feel we should host an Orbit event somewhere specific, get in touch and tell us why. Chances are we’ll agree with you and find a way to make it happen.

For crystal clarity, you should sign up for the Orbit if you want to be shown employment opportunities connected to It’s confidential and the price is right (free). We often send out announcements, thoughts on recent events, and request feedback. If you love your current job, great, sign up anyway. If you’re looking for something new, get plugged in. If you’re ready to be an accountant, or accounting manager, CFO, or CEO, we’ll eventually have opportunities for every skill set and experience level. Sign up and let’s get to know one another.

Mapping the Terrain

As a good friend of mine often says, “The map is not the terrain.” The first five times he said it, I couldn’t figure out what he meant. Don’t maps show us the terrain? Then it finally dawned on me, maps and terrain often diverge and when they do, discard the map. Maps are made by others based on their experiences. Reality rarely matches theory, and the terrain can change.

Since we started, we’ve been using other people's maps to navigate. To be honest, they’re usually pretty darn good. For example, when we needed to figure out how to put together a purchase agreement for the first time, we hired an experienced lawyer who let us ride shotgun. He relied on a standard agreement, a rough map, that provided the bones for him to hang the meat.

As we’ve gained more experience, often by hitting our collective face on the pavement, we’ve begun to veer off others’ path more often, creating our own maps as we go.

The traditional map for private equity deal flow is a little dance known as the Biz Dev Shimmy. It suggests showing up at conferences, slinging business cards, and hammering owners with a barrage of emails, phone calls, and occasionally a sports event invite, then giving ‘em the old hard sell.

We stopped following those directions after realizing that we’re terrible at networking. Plus, we always try to talk a seller out of selling. That’s an awkward conversation if you’ve just given them a top-ten list of reasons to do a deal.

Our map for sourcing deals now looks a lot more like an old fashioned slow dance. We get to know people, make sure that we’re a good fit, start dancing, and see where it goes. This was a driving force behind opening up our office in South Carolina. We wanted to be more available, especially in person.

One thing that struck us earlier this year was that we knew of no good maps that lay out the market for smaller companies. How many intermediaries are active and where are they? What about lawyers, accountants, wealth advisors, family offices, and acquirers? So, we put on our cartographer hats and got to work.

We’ve collectively spent over a thousand hours and six months mapping intermediaries in the U.S. and we have twelve states still left to complete. Did you know that there are around 950 lower-middle market intermediaries in Florida? The terrain of our market turns out to be a lot larger than we imagined, and that’s with about a decade of experience looking at maps.

Another one of our mapping projects has been laying out common purchase agreement terms, which we call The Middle Ground. We sought to define the breadth of terms, what each party is likely to want, and where the middle ground is often found. Graham Lloyd, our corporate counsel, has a staggering amount of time invested in the map and the output has been well worth the effort. Our hope is that by mapping out the deal terms, we can dramatically cut down on the friction between sellers and buyers, our transactions included. With the publishing of this letter, it’s now a public resource and hopefully helpful in finding common ground more quickly. If you’re a deal professional, please help build the body of knowledge by reviewing and commenting where you disagree, or feel like more explanation is needed.

In the future, we plan to keep mapping aspects of our business as we see a need. Some maps will remain private, like our database of intermediaries, but most will be released into the wild.

Tree Branches and Promises

We often get asked by sellers, “What will do for my company? What resources will you provide? What kind of growth can you promise?” Our answer is short and meant to be sweet — plan on being a fair, long-term home for the business and its people, and nothing else. The response is almost always met with incredulity and usually leads to a great conversation.

What organizations do is overrated, while what organizations don’t do is highly underrated. It’s easy to make promises and we’ve certainly made plenty over the years that haven’t turned out well. What’s hard is following through — doing what you say you’ll do, when you said you’d do it, and under the terms agreed upon.

What’s even harder than doing what you say is intentionally not doing, and being transparent about it. Our first rule is “do no harm.” Humans are creatures of progress and crave shortcuts. We’ve learned that progress (almost) never comes by prescription, nor pill. Knowledge can light the path, but it can’t walk it for you. Often the right decision is to wait, gather more information, and reassess.

We ask that our sellers and company leadership have low expectations for us around everything except how we treat them. We’re not in the business of interventions, although we have paid for rehab a few times. If we intervene, we must see it through. It’s like a tree branch that is growing in the wrong direction. Merely pulling on it won’t solve the problem. The branch must be pulled and held, almost indefinitely. Sometimes we can help identify a poor direction, but leadership teams are the ones who pull and hold the branches.

Make It Rain

Speaking of helping identify, pull, and hold tree branches, is looking for a Chief Revenue Officer. Duties include overseeing everything related to revenue within the portfolio, including marketing, sales, partnerships, adjacent business lines, and tuck-in acquisitions.

We’ve yet to meet a company that doesn’t want more customers and more revenue. It’s the need that never goes away, and often the most pressing, in virtually every organization we meet. The challenge is finding and educating prospective customers cost effectively. It’s not hard to increase revenue, but it’s brutally hard to do so consistently and profitably.

Operating a business is a daily knife fight. You get out of bed armed, stave off an onslaught of attacks, then stumble into bed at night and try to get some rest. As you can imagine, sitting still in the quiet of your thoughts and contemplating distant opportunities seems laughable. It happens, but not frequently, and for very good reason. Thoughtfulness is too often a luxury.

Another challenge for smaller companies is the selection bias of skill sets. Much of business is counterintuitive until you do it. You learn how to build large sales teams by building large sales teams. You learn how to develop a marketing funnel, or content engine, or partnership structure by doing those things, over, and over, and over again. By default, if a business is small, it almost always means those skills are lacking.

The only other way to acquire a skill set is by hiring outside talent, a consultant, or a firm that can perform the difficult task. Again, there’s a nasty selection bias at play. If you’re excellent at a difficult-to-acquire and valuable skill, you typically don’t seek employment opportunities, or consulting gigs, or customers in small business, and especially in non-sexy industries.

While there are certainly exceptions, this leaves most small company business owners drawing conclusions like “marketing doesn’t work” or “consultants are worthless” or “there’s no great talent out there.” The conclusion is accurate for them, but definitely not true. Small businesses don’t stay small on purpose, and usually revenue acquisition is a primary impediment.

Our goal is to find someone who has a range of experiences in successfully generating revenue through varied channels, building teams, and taking ownership of results. We know it’s humanly impossible for one individual to have deep experience in all the revenue disciplines. We expect this leader to build a team, both at the level and within the portfolio companies, and draw on some stout resources already here.

We’re starting a national search and would love to fill the position quickly, although we’re happy to wait on the right candidate. Like our CFO search, which produced a fantastic result, this position is located in Columbia, MO (which is fantastic) and the person will become a senior member of the team. If you, or someone you know, might fit the bill, please reach out through the Orbit.

Book: The Messy Marketplace

We wrote a book. I say “we” because it truly was a team effort. I drafted most of the initial copy in mid-2017, but the whole team, especially Emily Holdman, and around 35 outside advisors spent hundreds of hours contributing to and reshaping it. Apparently it needed a lot of work. Mea culpa.

The result is 154 pages of dense, zero-fluff reality about what it takes to sell and buy companies. In a world filled with 300+ page texts taking one good idea and flogging the hell out of it, we wanted to go the opposite direction. There are only a handful of short stories. We removed extra words and redundant concepts. We even threw in the due diligence checklist in the appendix.

Why write a book? Great question. I must admit, I feel like a fraud. Books should be sacred containers of wisdom, from people with a lifetime of experience and something to say. This book is nowhere close to that. I’m 35 and have a tremendous amount of learning left to do, God willing.

We wrote the book we couldn’t find. About two years ago we surveyed the landscape and became disillusioned. We were looking for a map to send to sellers that would capture the situation, the process, and what they should expect. What we found were not-so-subtle consulting invitations filled with half-truths and some outright lies. A clear exception was “HBR’s Guide to Buying a Small Business” by Ruback and Yudkoff. If you’re launching a search fund, go read it.

Since what we wanted wasn’t available, and we were spending a tremendous amount of time educating prospective sellers on the same mechanics, we decided to do something about it. That’s how we think about everything we write, including this — it’s a way to scale conversation. We spill our guts, then ask the reader to respond. It goes a long way towards selecting for people we want to befriend. Attract the right people. Repel the wrong people, or at least the wrong people for us.

The book is called “The Messy Marketplace: Selling Your Business in a World of Imperfect Buyers” because the world of buying and selling businesses is a loosely functioning disaster. We say that with respect for all parties involved. Unlike a house, or a car, businesses can’t be standardized because businesses are collections of people and people are messy. So when you take a messy seller of a collective of messy people and partner with messy advisors, it’s a mess.

I haven’t yet mentioned the messiest people of all — Buyers. Besides being an odd breed, we’re extra messy because of our misaligned incentives. All professional buyers are paid to get deals done. This goes for private equity funds, fundless sponsors, search funds, and most family offices. If Vegas wasn’t built on winners, investment firms weren’t built by hanging out in the grandstands. We like to get stuff done, or as a friend in PE says, “I just want to blow stuff up.” Amen brother. I feel you.

The issues created are numerous and largely obvious. If you have dry powder and an itchy trigger finger, it’s easy to get the wrong stuff done. This is why we built guardrails at Opportunism is impossible if you can’t wait for opportunities. We have zero incentive to get deals done because I’m terrified of what that would create, mostly in me.

When you whisk all these imperfect components together, you have the messy marketplace. But, it doesn’t have to stay quite as messy. We hope that by pulling back the curtain, we’re able to help every stakeholder understand the motivations, biases, and goals of one another.

If that’s of interest, pick up a copy and let us know what you think. And, if you buy the hardback, the Kindle version is only $2.99. Funny enough, no matter how many copies it sells, we will have lost a lot of money writing it. Book economics are the power law’s power law.

Capital and Clarity

For those unfamiliar with’ story, about a year ago we raised $50M in a 27-year fund with an unusual structure. I wrote about it in last year’s letter and won’t rehash all the specifics. This year we have gotten many of the same questions about the fund. In the spirit of scaling conversations, I thought it would be worthwhile to respond in writing:

How has it been to “go pro?”

It has been unexpectedly stressful, but I’d do it again in a heartbeat. For all you seasoned investors out there cackling at my naiveté, settle down. Yes, the stress was predictable, but not in the same way I hear other investors talk about it. Our investors have been spectacular to work with. In fact, my expectations were high going in and have only been exceeded. Call it an act of God, or dumb luck, but our investors have been thoughtful, supportive, and even jumped in occasionally to do research on an area of expertise.

The stressful part is that I appreciate them so much and feel so indebted to their trust that I’m terrified to lose their money. We play a dangerous game. All businesses are dysfunctional. Buying them comes with inherent risks. There’s a balancing act between being brash and being paralyzed. We consummated two deals this year, but likely should have done two to three more based on the quality of our deal flow. Errors of omission are largely hidden except to those who commit them. The swings we didn’t take pain me, and in some ways, I feel like I let investors down by making those mistakes.

Has the fund caused to move “up market?”

Yes and no. Are we looking at larger deals? Yes. Are we trying to move “up market?” Heck no. The bar for investment remains high. We’re not interested in scaling up to deploy more-and-more capital into larger-and-larger deals. I think that’s a fool’s errand for everyone but the GP, who creates a win-lose relationship with LPs. If it’s a $3 million earning company, or a $13 million earning company, we’re still focused on the dichotomy of risk and reward.

If we believe a company is staffed by a solid team, has a defensible market position, and can be bought at a fair price, we’re interested in anything above $2 million in earnings. If it’s unattractive, the size doesn’t matter.

How many deals will you do in the first fund? Will you raise a second fund, and what will be the minimum investment?

We don’t have a plan. If we do a couple of larger deals soon, we’ll blow through the fund quickly and may raise capital again in short order. If we don’t find the right opportunities, we’ll take our time. If/when we decide to raise, we’ll survey our needs and set the target fund size. We want to focus on deals and talent, not capital. If it’s a larger fund, then we’ll likely raise the $1 million minimum from the first fund.

We recently added a contact form on the website for LPs to get to know us, and vice versa. In the meantime, we’re heads down trying to serve our current investors by serving our sellers and leadership teams.

Would you keep the same structure for a second fund?

To keep rolling with the guessing game, we’re not sure. A few prospective LPs chose not to invest because they were fearful that without a management fee we’d go insolvent exactly when we should be ramping up. And having expanded our team significantly this past year, I can see where they’re coming from. Operating an investment firm is expensive.

That said, I still think the pros outweigh the cons. Our current structure is clean, crisp, and clear. Our investors eat first, and we get a cut of what’s left over. That’s how it should be. If we can’t add significant value to the process, we shouldn't get paid.

Note: If your question wasn’t answered, there’s a good chance it was described in last year’s letter. If not, feel free to ping us. We’re an open book.

Markets and Cycles

Below traditional private equity, we’re not seeing expectation inflation outside of the software industry and some business models that mimic software dynamics. Multiples have crept up slightly at the lowest end of the market (below $2 million in earnings) due to the influx of independent sponsors, search funds, and country club deals. Our sweet spot ($3 million to $8 million in earnings) is business as usual. We have competition, but not more competition than a year ago. Prices are stable, if not slightly in decline. If that sounds outrageous, here’s the data.

The question is “why?” All things being equal, we shouldn’t expect a single asset class to remain largely untouched by elevated valuations found almost everywhere else.

The baby boomer exit tsunami has been predicted for a while now, but has largely failed to materialize. As the thinking goes, the vast majority of small-to-medium, profitable, mature companies are owned by people over 55 years old. As they age, their businesses must eventually be sold, gifted, or shut down. Most owners don’t want to or can’t afford to gift the bulk of the company to their heirs and don’t want to liquidate for obvious reasons, leaving door #1 as the only option. The glut of sellers will draw more buyers in, but because it takes time to hone the skills necessary, build infrastructure, and gather capital there’s a timing mismatch. More sellers and relatively fewer buyers will drive down prices. It’s basic supply and demand.

All those dynamics are still in play, but have been delayed. Boomers are living longer and healthier, especially high-income earners. This extends the “working age” and pushes the supply curve into the future. Said differently, boomers are keeping their businesses and continuing to work. At some point the music will stop and business owners will need a chair to rest. I believe we’re seeing the early signs of this happening. While a small sample size, our data suggest that the average age of serious sellers is increasing.

Every economic downturn wreaks havoc for would-be sellers. The company’s trajectory changes with instability, or the appearance of instability. Most buyers exit the market and the ones that are left flee to cheapness and/or predictability. This leaves sellers with the option to liquidate the company’s assets, sell for cheap, or battle through another 5 to 10 years.

When the inevitable happens, we want to be a cash buyer. We’ve planned for a downturn by structuring conservatively. We keep plenty of cash on hand, insist on fat balance sheets at the portfolio company level, maintain cross-trained redundancy at all critical junctures, and have lined up ample “adventurous” equity capital.

Old Lions of Kindness

Last year I had the pleasure of sharing meals with Charlie Munger in Los Angeles and Warren Buffett in Omaha, both of which were unforgettable experiences. Their wisdom had long influenced me, but witnessing their in-the-moment, first principles curiosity was something to behold. And, both showed me a kindness I’ll never forget.

This year I got to spend some time with David Green in Oklahoma City, the founder and CEO of Hobby Lobby, and Ross Perot in Dallas, the businessman and two-time presidential candidate. As with Mr. Munger and Mr. Buffett, much of the conversation was off-the-record, but here are some takeaways:

Mr. Green spent the vast majority of the conversation, about six hours in total, talking about others — their impact on his life and how grateful he was for them. Anytime the conversation drifted towards him, he quickly nudged it away. He reveled in his faith, his family, and his co-workers, who he also considers family.

When it came to business, without a doubt, Mr. Green is still in charge, both as the visionary and in the details as mundane as merchandising. When pushed on why Hobby Lobby enjoys much higher margins than competitors, Mr. Green said, “We do a handful of things differently than everyone else, and I’m sure we’re doing some of them wrong, but we just don’t know which ones work, so we keep them all.”

A couple other of my favorite quotes were:

  • “We work hard to keep things simple.”

  • “In retail, close counts. That doesn’t work for brain surgery.”

  • “Whatever your hands find, do it to the best of your ability, unto the Lord.”

  • “Make as much as you can, fairly, then give it all away.”

What’s more impressive than buying the Magna Carta? Selling the Magna Carta for a big profit and giving that money to charity. And Mr. Perot has done both, and so much more that it’s hard to wrap my mind around his life. Everywhere I looked, his office told a story. From bin Laden’s walking stick to Russian cosmonaut space suits to the original painting of George Washington crossing the Delaware. There were personal letters from seemingly every notable figure of the 20th century, including Winston Churchill, President Eisenhower, and Steve Jobs.

Despite all that status, Mr. Perot couldn’t have been more welcoming and generous with his time. A small group of us talked about business, heard stories, and enjoyed each other's company. Just when it seemed like Mr. Perot was going to say goodbye, something would catch his eye and he’d launch into another seemingly tall tale, all of which were verifiably true. Some favorite sayings were:

  • “The world wants things done, not excuses. One thing well done is worth a million good excuses.”

  • “It may be farther around the corner of a square deal, but the road is better.”

  • “A clock-watcher never becomes a man of the hour.”

  • “You can learn a lot about a person by noting what he says about others.”

These experiences, including my time with Mr. Buffett and Mr. Munger, have reinforced that we are always blessed to be a blessing. Nothing more. Each of these old lions humbly tolerated a barrage of dumb questions from a young pup and offered nothing less than encouraging words. It’s a lesson I hope to mimic in my old age.

Shameless Ask

Most people know the owner of a small company, and when the time comes to transition their business, we’d love to be the first call. Whether it’s now, or later, here are the basics of what we’re looking for:

If you suspect an organization would be a good fit, please send them our way. We pledge to be highly responsive and completely confidential. Call us (573-445-0678). Email us (Emily Holdman - Ping us on social media. Or, stop on by our offices in downtown Columbia, MO or Columbia, SC and chat.

I’m going to close this letter the same way as I have in the past: All-in-all, it was a challenging, frustrating, exciting, fun-as-hell, and ultimately fruitful year. We can’t wait to see what 2019 has in store for our small family of people and companies.