David Krock, Sunset Coast Capital - Transcript

Well I'd like to begin by discussing your music background and then we could go into sort of how did you became an entrepreneur and now an investor. I find that the more I learn about the micro PE and the permanent capital space, the more variable the backgrounds get. Your background is obviously very unique and there is no one set of backgrounds that fits everybody, so I'm looking forward to hearing about yours.

Yeah, so my first career basically was in the music business. In high school I started playing drums, and my junior year of high school a few other guys approached me about joining their band. So we started, started the band, started playing out, started recording, it was going pretty well. So when I got to my graduation in 1997 when I graduated from high school, I basically just said, "I'm going to keep doing this. I don't really have a desire to go to college." My parents were not, didn't push us one way or the other when it came to that. So I thought, "I'm going to keep going." So I basically just kept doing the music thing, playing gigs, doing some small tours, kind of local, regional Midwest stuff. I'm in the Midwest, I'm actually in Michigan right now so I'm along the shores of Lake Michigan in the beautiful beach towns of what we call the Sunset Coast. And I grew up in Chicago which is basically straight across the lake.

So some small things in the Midwest, but for me the part I loved most about being a musician was spending time in a recording studio and putting together an album. Basically taking all of the ingredients to go from scratch to a finished product that people would enjoy. Side note, the number of entrepreneurs that I've met now who are also musicians, it's actually quite surprising, and I think partially because the process between creation in art or in music, and just creative endeavors in general, and creating a new company or a new product, it's basically starting from nothing and creating something out of nothing. I think that maybe there's a common mindset or something that people are drawn to.

So for me just as music developed, I mentioned I found a passion kind of in creation of the finished product from scratch. That was the best part, and it was for me anyway, I fell in love with sort of the production side. So I would be in the role where I'd be working with all of these different personalities, all of these different people to actually get a finished product. So I'd have the musicians that were like myself that were "down with the system" kind of people, right? They didn't want to be in the suits. They didn't want to have anything to do with "the system" but they were the artists, right? They wanted to create, create music and they wanted to be able to eat, right? You need to be able to survive if you're a musician. So had that group of people, had the people that were more the engineers or the technical people who were doing recording and kind of doing the post-production and editing and things like that. You had more of the business types that were from either record labels, or management, or guys like that who wore the suits.

So you had all these different personalities and people that had different interests and different ways of looking at the world, and you basically from this role as a producer, you had to take all of those personalities and end up with a product, end up with something that everybody loved and would be commercially successful, or could be commercially successful. So for me that was fascinating. I loved that creative endeavor. In some way, I don't know if it was just my desire to be liked by people, but somehow I got along with all those different personalities. Michael Gerber, the author of The E-Myth Revisited, he likes to say that the myth of the entrepreneur is that it isn't people that go in with this sort of bracing against the elements seasoned business people that start businesses. It's people that do something that they really enjoy or an in an industry and they get what he calls an entrepreneurial seizure. They basically say, "I'm going to start." Let's say I'm a plumber, right? "I'm going to start a plumbing company because I know how to plumb really, really well I can do it better than this guy that's my boss. So I'm going to branch out and do that." Well I got the entrepreneurial seizure to start my own recording studio.

So that was my first sort of foray into having a business or doing something on my own, and I thought it would be easy. I thought I would just keep doing what I was doing, but now I get to keep all of the money, right? Not knowing how much money there was or whatever. So the process of doing that, now I had to, would basically I took literally everything I had. I took all of the money that I'd built up, I'm probably 19 years old at this time, all the whatever life savings I had, and sold things, and basically poured everything into the studio, and then we opened the doors and I'm sitting there at the desk or at the console, and I'm like, "Now what? Now what do I do? Aren't the people just supposed to be lined up outside ready to walk in and just start recording and paying us lots of money, right? That's how it's supposed to work." But of course that's not how it works. You actually have to do all of these other things that come with business like marketing, or finance, or all of the other pieces that come with it, and I knew none of that stuff. People that are familiar with a startup, there's a key metric that startups use called "burn rate" which is basically how long can you survive on the cash that you have.

Now, we didn't have any seed investment or anything like that other than our own stuff, and so I was not able to survive very long in a business that was making no money, that I had to kind of feed every month. So I eventually kind of got out of that and was left with some debts and kind of was in a position where I had, I'd skipped the college route, I'd skipped building sort of a resume and working my way up in an industry. Basically had no money and now I was in a position where I was actually in debt as I was doing this, and so I had kind of like a now what moment, right? And so one thing leads to another and that's kind of part of my story, but I ended up kind of sliding over into the business side of things and the entrepreneurial side of things in part because of the experiences that I had in the music industry, and it is a very, very similar sort of thing, but I think what's missing in the music industry is that business knowledge that I didn't have either for a lot of artists.

Did you see that as you began your business career that you had certain advantages due to your music background and also not having your college background that helped you along as you became more of the business side of things?

I think in hindsight I like the journey that I took, but I don't know if. Yeah, there's pros and cons I think, because I think you can learn how it's supposed to be done in school, and you can learn how it's supposed to be done from books and other ways to learn or to kind of ramp up your skillset or your knowledge base around the subject, but as Mike Tyson I think said, "The minute you get punched in the mouth, your game plan goes out the window," and now you have to actually figure out how to operate in space and take the resources you have and the situation, all stuff and the people you're working with and be able to create from that point.

Had I not learned that side of it, had I not learned how to operate in a space with limited resources and had to try and figure out how to make something successful. I think it would've taken me a little bit longer to get where I am now, but the other side of it, the con side of it is had I had that foundation, and had I approached things with a certain strategic rigor maybe in terms of the early years, I probably would've built a bigger foundation or have gotten further quicker in one line of work, but I actually really enjoy the varied sorts of things that I'm doing in the I guess what I call the ecosystem of businesses that I have.

What sorts of lessons did you have to learn by failing in those early years?

In many ways there are so many lessons I had to learn, and there are so many ways in which I've failed again and again in all of the, probably all of the areas of business. But I think the biggest one was probably centered around the people stuff. Around managing people, around working with a group of people to get something done. I think in many ways I liked the idea of living in the spreadsheets and basically coming up with the game plan of what was supposed to happen and how it was all supposed to play out, but in reality you actually have to work with what you're given in the team that you have. I've heard in some previous episodes on your show when people talk about, they buy a business and they have this master plan that they go in with about how they're going to grow the thing, and then they realize "oh my gosh, we don't have reliable Wi-Fi in here and much less going to transform the industry."

So I think that kind of, those sort of lessons were definitely prevalent for me. And I think the other thing that I missed out on and I didn't learn this until more recently I would say is just the willingness to ask for help. The willingness to appear as if you don't know what you're doing or to in many ways just be real about where you are in a given situation. I think when you're young and inexperienced and are trying to basically level up and play in a bigger playing field, you don't actually have those things. You tend to hide sometimes behind a facade, and now I'm like, "Oh my god." I could've gotten so much farther had I just been more open and transparent about what I needed, and just asked the question. Just asking the question sometimes in so many areas of life and in business I think is a superpower.

What were some of the businesses you initially started?

So the first business I had, kind of coming off of, so if we come off the recording studio debacle, so to speak. I spent a lot of time, so what I was ... Actually life devolved a little bit for me at that point and I became a little bit more, I wouldn't say depressed, but my emotional state wasn't great. One of the things that I had to lean on, or one of the things I did lean on was growing up we didn't have a lot, but one of the things that we did for entertainment was to go to the library and check out just books after books, right? So I at this pointed lived in the library eating out of the vending machine there and just hanging out and reading everything I could.

What happened was, I read books on personal finance and getting out of debt because that was kind of where I was starting from, and that led to subjects like investing, like entrepreneurship, like things along those lines, and what started to happen was I started to see in this way of doing work an opportunity for me to sort of take who I was as a person and the things that I really enjoyed, and the creative aspects of what I liked to do and now actually play that out in sort of your vocation, where I thought, I thought work was basically this thing you did that you hated until you got to a certain point where you could stop doing that thing and then your real life could start. For me, I fell in love with the creative prospects of building a business, and so what I started to do was I would just meet up with people that had similar interests, and one thing let to another.

I was actually sitting at a red light at one point in time, and I had an opportunity that night to go to a meet up of people that were really fired up about entrepreneurship, and investing, and bettering their lives, and I'm sitting at this light and I basically I've been my own worst enemy especially in my younger years in terms of shooting myself in the foot when I had an opportunity, and I had an opportunity this particular evening to meet up with some really dynamic interesting people. I did not spend time around these kinds of people at this point in my life and I had a chance to level up, so to speak, the people that were around me. As it was true to my nature at that point in time, I started to tell myself a story about why me going to this restaurant and meeting up with these people probably wasn't a good idea and that I probably didn't have much to offer them, and what are you doing here, and that kind of thing, and actually talked myself out of going to the restaurant.

So I'm sitting at, I don't know where I was going to go that night, but I'm sitting at a red light, and the light is red for a really long period of time, so I've got some time to think, and it also happened to be situated just underneath a highway overpass that went over the top of this intersection that happened to be the highway I would've needed to have been on to go to the restaurant to meet up with these people. So in hindsight I look back at that moment and I'm like, "I was at literally at a crossroads in my life." I had the opportunity when the light went green to continue on the same path I'd always been on which was continually creating a worse and worse sort of situation for me, or I could make a U-turn and I could go back to the on-ramp and get on this highway to a different place. So as I sat there at that light and just struggled with what is it that I'm going to do here, what am I going to do with my life, how am I going to make things better? Again, struggling with the idea of going to meet these people.

Something changed in that moment. For the first time in my life I actually overcame sort of some of the doubts that I had about myself. And so light goes green, I pull a U-turn, get on the highway, go to the restaurant and one other guy showed up. Of the whole group of people that was going to get together, one other person showed up and we had an amazing conversation. This guy was 13, 15 years older than me, he had started some businesses, he had a lawn and landscape business, he had done some real estate investing, he was just a really interesting dude, and one of the best parts about the whole situation was he treated me as an equal because we thought about the same sorts of things and we were passionate about the same sorts of things and in about changing lives and those sorts of things. So I left that meeting thinking, "Oh, this is so cool. I need to spend more time around people like this."

So of the group of people that were going to get together that night, everybody has an excuse why they weren't there and we decided to do it again. So the next month we decided to get together and there were 15 people that wanted to come. So we got together at the same restaurant and sort of had this "Where do you want to be in a year?" Kind of conversation, or what are your goals, what do you want to get out of life, and it turned out to be just a really eclectic dynamic group of people, not all that dissimilar to the groups of people that I dealt with in the music industry trying to pull an album off. You had people that were investors, you had people that were creatives, you had people that were entrepreneurs, you had people that were doing their own home-based businesses, and the excitement in that room was so great that we decided we were just going to get together every month to just to share stories, to support each other and to grow. And so, and I'm getting to your question about my actual business that I transitioned to.

This group grew every month. The next month we had 35 people that wanted to come, and eventually it grew to have more than 500 members, and we had to organize monthly meeting where you've got about 20% of those members that would show up every month into this really dynamic association of like-minded people that were there to help each other. So out of that group, what I was doing during the day because I hadn't really done anything yet other than meet up with these people and spend time at the library learning, was I was just filling my head with what does it take to move to the next level? What does it take to grow a business? What does it take to become the sort of person I want to become? And it was just this fertile soil, because every month I would get together with these people who were at various stages of their advancement in the things that they wanted to do, and I was treated as a peer, and because I was reading so much I became known as the kid that had probably read something that had to do with a challenge you were facing right now.

So people would just have conversations with me and would just start spitting out random bits of knowledge or whatever that I collected over the course of the week or the month, and I was helping people just because I was interested in sharing what I'd learned and it was, and people have limited amounts of time, and so I had a lot more time to read and learn. So from that eventually a gentleman approached me and said, "Hey, I've got this business. I've been able to grow it to about $600,000 in sales and it just has plateaued. I can't get it to grow any more, I don't know what I'm doing wrong. Every time that we've had a good conversation you've offered some advice or you've had some tips or whatever. So are you interested in coming to help me with my business? Are you willing to consult for me?" Or something along those lines, and I said, "Yes. Can we go right now? Let's just get started." And his next question to me was, "Well how much do you charge for this?" And I had this moment where as a kid that has basically worked odd jobs and done some gigs, hand to mouth kind of work situations, I was like, "I can charge for this?"

So I went home, looked up online what exactly am I doing, what would that be? How much could I charge? And I realized for the first time that I was actually just as a starting kind of business consultant with the base knowledge that I had, I was able to effectively 10X the amount that I had ever earned per hour just by having learned, and grown, and improved the value that I could provide to other people, which blew my mind. So we went to work on his business and in a year we were able to raise the level of sales from 600,000 to over a million, and it grew from there, and other people would ask me if I could help them with their business. So I basically just started consulting and coaching with entrepreneurs to basically take their business to the next level utilizing some first principles and things that I had read, and we tested things out. So my real first successful business was a consultancy. It was a coaching business, and from there things just started to grow and the clients were happy, and I kind of got sick of watching everyone else's business grow while I was just offering advice, and I got sick of trading an hour for a dollar, that whole sort of arrangement, and I thought, "Well, I want to start doing some things for myself."

So I started doing some smaller projects, meeting up with people and creating small businesses in the service space, a little bit of small time real estate investing, things along those lines, and eventually a gentleman came to me and said, "Hey." One of my former clients, and said, "You did great work with us. I see that you're doing some real estate investing now. Myself and I are looking at a large retirement community a couple of states away and we think you would make a great partner. Are you interested in trading some time for equity and a little bit of cash, and getting involved in this business?" And I said, "Yeah, I would love to take a look." And as we evaluated that opportunity, it was a business plus the real estate. So you kind of had both of those components coming with that purchase. And as we evaluated the opportunity, I could see that essentially Business 101, basic principles, would've been able to transform the prospects for that business and really increase its value. We were able to buy that business at a discount from where it was already.

So what we did is we actually went to work prior to ever closing on the business. We took over management, we locked in our price, we took over management and did some improvements, and then by the time we actually closed the property, it was worth well more than we were paying for it, and one thing led to another and I ended up moving to that community two states away because I saw lots of opportunity to start or acquire other small businesses in that area.

And of the companies that you tend to acquire now, are there any particular industries that you find most interesting? I know we talked about hospitality and seasonal wedding businesses. Are there industries that you like in particular or are you just looking for specific characteristics?

One of the things that I realized as I started to, once I had three or four businesses, I realized that I sort of needed to parameters, some criterion if you will for getting involved in new things, and I came up with sort of three crude pillars of the stool so to speak. The first one was that I was looking for businesses that were in some way shape or form complementary to something that I was either already doing or it was like a tertiary kind of business. So this is, I guess this speaks to the whole circle of competence phraseology that you hear our good buddies Buffett and Munger talk about, that to me is a big part of it. It's got to be something that is either complementary to something I'm already doing or that the learning curve is quick.

So the other two parameters that I started with were I already needed a really strong leader in place. I was not going to be that leader for a new business that I acquired, I never looked at things in that sort of search fund mentality that people do where the intention is to buy a business that you will then run, that was never part of my acquisition strategy once I started acquiring businesses. But the third thing was I needed to be able to realize a 50% cash on cash return in the first year, which really narrowed the field when you talk about opportunities that are available. So obviously business that's performing successfully in a complementary industry to what I was already doing, and then had strong leadership already involved.

What that meant was so the first sort of foothold business in the community that I moved to was a retirement community, so a large piece of real estate, very stable sorts of, the business was not going to grow by 20, 30% a year. If we grew 3% that was a big growth for the year, but really predictable in terms of its cash flows and what not, and really diversified. It was a 130 unit building, so if a few people moved out here and there, we were able to kind of quickly replace that income. So it became this platform from which, I moved to the community and so other opportunities, the first of which was this beautiful outdoor space we had attached to the property that we ended up turning into an event venue because it was gorgeous. The building itself was a 1920s brick limestone tall Mediterranean column style property that was a hotel originally and it's purchased on a bluff overlooking one of the Great Lakes. So it's just a beautiful property and now is being utilized for senior living and the VIPs at that point in time were now the seniors of the community, and this outdoor space was just gorgeous and it wasn't being used. So the game plan was let's figure out a way to make it be a profitable piece of the puzzle.

So started that up as an event venue, eventually started a sort of a management company to manage that space that was separate from the senior living community, and then recognized that there was another opportunity in the industry, specifically in the wedding industry. That was something that I never would've predicted I would be in, and lo and behold here I am with a bunch of holdings in that industry, and to me is an industry that has a ton of upside as well.

Yeah, can you talk a little bit more specifically about the wedding industry or wedding business model, both in terms of your experience and upside, but also the sort of pros and cons of being a seasonal business?

Yeah, so one of the things that I love about, what I love about the wedding industry is that in many ways this is something I've fallen into and this is just serendipitous, but a lot of the businesses that I have are centered around life events, like things that don't change. Every year in the United States around 2.1 million people get married. That number varies some. We have people waiting longer to get married or we have sometimes the rate of marriage amongst people goes down from time to time, it ebbs and flows with generations so to speak, but pretty stable you might have max 5% change in terms of that amount of people and it renews every year, right? This isn't a repeat customer, although sometimes it is, but we don't experience that, hopefully not.

Hope not.

You have 50% off for your next time around. But no, about the same number of people get married every year and about the same number, growing amounts of people are retiring and needing housing that serves an aging population, and a few others sort of life event type things, travel and things like that that have developed for me. When we launched that event venue attached to the retirement community, the thing that we learned pretty quickly was 95% of our clients were couples that were getting married and needed a beautiful place to host their wedding reception, and we thought we'd be doing corporate events, and nonprofits things, and galas, and banquets and things like that. We even called it a banquet facility for a long time until I quickly realized that that phrase was outdated. People don't look for banquet facilities anymore. They look for great, beautiful, unique spaces to do things with the people they care about.

So what I realized was okay, now we have this specific clientele that is looking for a really unique space, most of the time, at least in the area that we're centered around, they were traveling. The area that I live in in Southwest Michigan is really nicely situated between Chicago is 90 minutes away. I can be in Downtown Chicago in less than 90 minutes. Detroit is a couple of hours away in the other direction. Indianapolis is a few hours away to the southern direction in a really budding growing city of Grand Rapids, Michigan is an hour and 15 minutes to the north, and we're on a major highway actually. I-90 stretches from Boston to Seattle, and I-90 is basically 20 minutes to the south of where I'm at. So you have this sort of intersection of lots of different things happening, but from the ... And we live in a beautiful area. Basically my office looks out on the beaches of Lake Michigan. So people want to come to this area to experience unique events.

So we actually saw a major influx of people that were wanting to travel to host a destination wedding so to speak on the shores of Lake Michigan in some beautiful spaces. So we realized quickly that most of our clients were from out of town, and in the cycle, this is one of the fascinating things about this industry, your clientele essentially contracts you to provide service to them anywhere from on average 12 to 15 months in advance of when you'll actually provide the service, and there's this gap. There's this giant gap in time between when they book you and when you're actually providing the service that is essentially a relationship. So what we learned really early on is that well, first of all, one of the first things people do when they get engaged is they start looking for places to host their reception and their wedding because until you actually nail down that place, you don't have a wedding date, and that is an important part of the whole wedding experience is the actual day. Actually being able to have a day you get married.

So for us we realized that we were one of the earliest things that people booked, which meant we were so early on in the process of what somebody was doing as they were planning for this special event, that we actually could be a resource to this people, and that the relationship of 12 to 15 months was actually an opportunity for us to take them on a journey through all of these different things that they could participate in or provide recommendation for, and it just became an amazing sort of experience. So since then basically created a small ecosystem in that space, in the event space. It started with one event venue and then I built a service business off of that which was in the event planning area. We added a rental company, rentals, lighting, decor, things like that. I had an opportunity to buy a trolley and so started a transportation company, and we just kind of continue to add to that mix of services of additional things we could provide to those clients that we have a long-term relationship with.

So just earlier this year I bought a special event floral company. Actually we closed in January on that, so now we're developing out sort of the event design side of things with the floral side. But as you mentioned, that industry is quite cyclical and it's quite, I wouldn't say cyclical, that industry is quite seasonal because the prime months for having weddings are actually in typically in your summer months, right? And for us we're a destination area and a lot of my venues have an outdoor component to them. So May through October is kind of our on season, when we're doing most of our events, and the rest of the time we're actually spending focused on building the business to I guess to make another Michael Gerber E-Myth reference, we work in the business May through October and we work on the business hopefully all the time, but we get more time to focus on it November through April. So you get this cyclicality or the seasonality in terms of how those things work, but I actually think there are some benefits to seasonality or cyclicality in business if you're structured properly.

To me the real issue with seasonality or cyclicality is how it affects cash, because typically you have expenses year round, we have peak times of expenses and peak times of cash flow, and it's basically bridging the gap between when you have cash and when you need cash, that's the cycle or the struggle there. But if you can develop ways to improve your cash conversion cycle, how fast a dollar you invest in the business comes back to you with profit, how fast you can get paid versus when you pay vendors, and what we figured out as we were able to design a system that actually utilized that 12 to 15 months to our advantage. So for us we have, yes, we have an incredibly seasonal business, but from a cash flow standpoint we typically have anywhere from 30 to 75% of the revenue in advance of when we need to provide the service, and not just a few days in advance, months and months, and in some cases years.

So very interesting, and if you can, essentially if you can keep that cycle rolling year after year, you've pulled your profitability into previous years or into sooner timeframes. So if you're very good at managing, how you invest that money and what kind of return you get on that money and the turnover, the asset turnover rate in that area, you can actually do quite well. The other thing I've noticed about the industry is there are no real dominant names or brands in the wedding industry. Just the event space rental, renting spaces for events is a $47 billion industry, and you have larger players like WeWork and some of those that are doing some of the commercial side of that sort of thing, but there is a big gap there and there's also an opportunity to I think roll up some things and to continue to develop that ecosystem. So I'm quite excited about it.

Yeah, that does sound really exciting. What sorts of specific cash management strategies do you have that could help businesses that are cyclical and need that cash flow to be smoothed out a little bit more?

Well one of the things I would say is that the resources that you, there's so much available that is essentially free to learn around this subject. What usually happens though is when things are going great in a business, the business owner is like, he's not really thinking about typically, not really thinking about wow, how could I eke out a few more extra days in my cash conversion cycle? Or how could I ... What tends to happen, this is human nature, right? When things are riding high, we get complacent, and when something hits the fan or goes sideways, then we think, "Oh my gosh, I got to figure something out here." And that's what happened for me a little bit.

I had some things go sideways in the cashflow standpoint in one of the businesses, and I went back to my playbook which is what do I do? I go the library, right? Well I don't go to the library anymore, but I go to Amazon, right? Or I go to my Kindle, or I go to, I have a pretty extensive library now so I have books that I have never read yet that are on the shelves. So I go to the library in my house and I pick stuff up, and a couple of books that really made a difference for me in terms of cash management, the one that kind of started it off for me is by Verne Harnish, he's the founder of Entrepreneur Organization. He wrote a book called The Rockefeller Habits, but my favorite book of his is Scaling Up, and that I literally carry a copy of Scaling Up with me in my bag, in my work bag, everywhere I go.

It's essentially, so the subtitle is How A Few Companies Make It And Why The Rest Don't, and it's basically all centered around the idea of taking a business that has gotten to a certain point, whether it's getting some stable cash flow when it's early, or is a business that has a lot of growth potential and scaling it up and moving through, there's really kind of four areas. He thinks about people, strategy, execution, and cash. Basically what's great about this book is you can pick it up and flip to the section that kind of is where your greatest level of need is at the moment, and for me at that point in time it was the cash area, and basically the subtitle of the cash area is accelerating cash flow.

So what I did was I picked up that book and I started reading, and he started referencing many other books and authors and things, and so one thing leads to another, and I read a book called Simple Numbers, Straight Talk, Big Profits by Greg Crabtree, which is another really fantastic shorter book, just centered around some of the key numbers that you want to know as a business owner, and I basically just took some of the different things and strategies from there and started to apply them and then started to morph the strategy or the tool I used to track the metric or whatever I'm doing kind of into my own system. So some of the things that I really pay attention to are ... It all starts with the sort of the owner's earning and free cash flow of where you're at, because that's essentially the lifeblood of your business and the lifeblood of your investment, your investment firm. So from there it's how to manage that, or how to grow that, or how to multiply that or whatever.

So a few things to really focus on sort of the core capital within the business which is basically like your, I wouldn't just say it's your working capital, but it's like the excess. The amount that you have in the business that if your cushion. Typically it's a couple of months of total expenses, that if you have that in hand or on hand in cash at all times, and your business is producing good returns on the cash that you leave in the business and are employing in the business. It's one thing to just leave cash in a business when you don't need to, that's not what I recommend, but kind of looking at those things in conjunction with each other really produces a good picture. I do a lot of analysis on labor efficiency in terms of the every dollar of labor that you're adding into a business, how does that support and grow the business and how can you measure how every dollar of additional labor is measured. All these things matter so much more when you're growing rapidly. I think when you have a really stable business, you don't typically need to add a lot of expense in advance of things, but if you are pursuing rapid growth or going after a quickly scaling opportunity, then I think some of these things become more valuable.

Some other metrics I take a look at, return on net operating assets. So basically take off the short term debt that you have, take off some other things and look at what is the equity plus, sort of the cash that you have in the business plus debt that you have employed in the, long-term debt that you have employed in the business and see what is the return that you're getting on that, in return on equity in general. So what is the, from the ownership standpoint, what are you leaving in the business. Then I mentioned asset turnover. I track that as well. Because it's one thing if you have cash in the business, but if it's, and if it's turning over and you're getting good returns, then that's great. That business is a good usage of cash if you have excess cash. If the assets are not turning over but you're still getting a good rate of return on stuff that you have in the business, then you have an opportunity to pull that cash out and apply it elsewhere and so.

Those are some of the things that I look at, but I mentioned the cash conversion cycle earlier, really knowing what that is for a business. It is possible for a business to grow broke. You can have improving revenues, you can have improving paper profits on the P&L, and for that business to go backwards every month or every day in cash, which is mind-blowing to actually think about, but it's totally possible and that's why I think you need to be aware of the business behind the business so to speak, and those are some of the ways that I.

Yeah, and now that you have a portfolio of companies, how do you think about using earnings from a few companies and then investing them either in some of your other portfolio companies, or how do you view your incoming cash flows?

Basically I mean, that's the golden goose, right? The whole thing is a golden goose that lays these eggs, and so how are you stewarding that which has been generated, and for me it's ... I don't know. I don't really have like a step one, step two, step three kind of situation when it comes to what are we doing to redeploy capital. It's a mix of principles I think. One is, some of the actual technical metrics that I mentioned earlier were looking at that stuff really closely to see is the usage of cash in this business efficient, and doing well, and providing growth that it needs and whatever. I think also some of it is, you can anticipate growth in a business and not have a metric for it. You can see an opportunity to maybe acquire another business or to try a new thing, or to take some combination of anecdotal data that you're getting back from your clients that are telling you, "We could really use this one thing." Maybe that thing doesn't exist yet so you don't have an easy projection model and whatnot. So sometimes you do have to operate a little bit off of gut when it comes to those things, but this isn't gut that is sort of rolling the dice. This is gut that's built upon a lot of different principles and a lot of things learned over a period of time that you're kind of reapplying.

So somewhere deep in your subconscious there's a lot of calculation that's going on in that gut equation, but sometimes you are making decisions about how to redeploy capital, how to allocate it, that you can't really point to the specific number as to why that is the case, but you can't make that call if you don't actually have cash you have to make a decision on. So you have to have done all the work upfront to grow a stable business that is producing great returns and actually have cash to redeploy. Have that good problem of cash to redeploy in order to be doing some of these things. So I think gut would probably not be part of the decision making equation for me if the amount of cash available were really thin. I think at that point in time you have to get to the things that you know, you have to try and, first rule of investing is don't lose money, right? So you have to protect that downside.

How do you think about funding various projects in your businesses? So if one business has some expansion that they want to put money into, how do you think about or how do you weigh that opportunity versus maybe another business that you have available? Do you use sort of a hurdle rate of sorts or is there some other thought process you usually go through?

Yeah, I think hurdle rate is certainly. I like using that as a phrase in this case because investing is all about your alternatives. If you've never seen an opportunity above 5%, above 5% projected return in your life, and you've got a chance to deploy into something that is three or 4% right now, you're probably going to take that and you feel good about where that's going. But if you've been getting some of those 50% cash on cash returns in a business, it's really hard to take a project that doesn't have a strategic advantage to it or some form of other advantage, other than it might make 10, 15% on the money and really say, "That's the best use right there." So I think you really have to think through those things in terms of how you're deploying it.

Yeah, it seems really hard to know what are all other alternatives to that money being invested that you just don't know about. I'm curious, when you say 50% cash on returns, how do you, how are you getting those numbers? Is it just because the businesses you're buying are at low multiples? Is there some leverage you're using? Is there some combination of those factors or others?

A lot of it has to do with the choices that you're making, and I will preface this by saying I have one investment currently that is in the tech space. So all of these businesses that I'm talking about are either brick and mortar service based businesses. Basically when you're taking about cash on cash returns, a big part of actually evaluating whether a business is profitable, not profitable and what not is actually including all of the effort and the working effort that goes into that business by the owner or by the people that are starting it up and whatnot.

So sometimes it takes a minute to get to those returns. So may see the first year investment the business may lose money, the second year it may make a little bit of money or break even. The third year it might make 10, 15% on that money, and then it starts to take up. The next thing you know you're making greater than 50% cash on cash returns because you've taken the work, you don't have a ton of debt on the business, you've taken and you've been able to put into that business a lower amount of money and be able to leverage it through the other people that are working there, and the growth maybe in conjunction with other businesses that you have there's a strategic advantage. So you start to generate this free cash flow without having take some of the big sort of VC swings or without laying out a bunch of debt in order to grow, or you kind of get to this place where over the course of time you figure out what that feels like, and I hate to use some of these touchy feely terms, but there's some truth to it because you start out knowing nothing, or you start out thinking you know everything, right? And then you get into the wild and you realize that wow, I really don't know a lot.

So I have to learn all these different specific things to think about and do a ton of spreadsheets and things like that, and then there's like a simplicity on the other side of complexity that starts to kick in, where you're using shorthand phrases with the people around you when you know it all, what that means, and you know, you've done the work ahead of time to be able to have sort of a more gut or feel level reaction now, but you're doing it based upon sound principles. So I think you get to this place where you kind of incorporate all the various things that you've learned and situational things that have come up. You do this enough times and there's nothing new under the sun, at least categorically I should say. There's always new situations that come up, but categorically there's not that much that is new. So you've kind of learned what is a good way to deploy opportunity in this specific space, and you also spend a lot of time saying no to things. If it's not obvious that there is a way to achieve some of the high returns better or equal to the alternatives you might have to keep money into a business, sometimes you don't do that project.

So there's a survivorship bias that is certainly at play, right? Because a lot of the things that wouldn't have made it didn't actually get out of the gate that far, or you shut it down quickly, or you pivot quickly and sort of cut the downside or cut the losses and retain that cash for use in higher return opportunities or areas of deployment. So over the course of time you really figure out where the levers are in order to maximize the return on that cash, and a lot of people use debt to do that. I don't use debt as much as some people, and I probably use it more than others. I think of the Adventur.es And the Brent Beshores of the world, they're not using a lot of debt. They're coming in with an equity model and maybe the seller is holding back some of that equity, but they're not using a lot of debt. I tend to use debt where there is hard assets and there's an opportunity to really utilize some of the hard assets in a way where the risk profile of the debt being employed is not that of just I'm buying goodwill, I'm leveraging goodwill which is really hard to do in general, but a lot of people try and use some of the intangibles of a business and leverage that purchase to 70, 80, 90% of the purchase price.

So I tend to look for situations where I don't have to employ a lot of debt, although I will if there is hard assets involved, and a lot of what I do has a real estate component to it, and so you do get an opportunity to utilize debt in what I would say is a safe and responsible way. Then when you have a business component that's on top of that, sometimes you get a business where the real estate of that business is performing on its own. Just because of the business rent from the property, and then you get the business on top of that, that does fairly well. So you've actually take a decent amount of the purchase price and allocated it towards the real estate or the hard assets and been able to leverage that safely, and then you get the business side of it that you have a chance to grow well beyond just the rent it's paying to the underlying real estate.

So you kind of have some of these multipliers and levers that you can pull, but there's no magic formula to get in there. I have some long-term plays that are going to be anywhere nowhere close for a long period of time to some of those levels, but I think it's ... I don't know. It's hard to really describe, but it's this process of constantly honing and constantly cutting where you need to cut, and cut losses.

We both recently read that Zack Kanter article about Amazon where, kind of a rough summary that Amazon created new companies to help solve a lot of their problems, and it sounds like you have that similar idea for your own business. Would you talk briefly about the strategy behind what you're up to?

I love doing what I do, and so as opportunities come along if ... Well, so I'll back up. I mentioned earlier I had sort of three pillars that I was using to kind of gage whether something was worth doing or not doing. If your filter is wide enough, stuff gets through and you tend to accumulate businesses, or accumulate opportunities, or just things that you have to pay attention to, and over the course of time, I would say over the last 15 years I've started to acquire more than 20 companies, and the mix is not that many now, but in the course of doing that, I realized that I needed a little bit better a process. A little bit better way to sort of manage the holdings because I was more involved, it wasn't a purely hands-off sort of situation, because many of these companies I had started. So I kind of simplified the entity structure. I do have a holding company for a lot of the wholly owned things. I do have a capital company that focuses on some of the things that I'm investing in outside, and then within those two main kind of areas, all of the major categories of businesses are organized. So I sort of organized things around some of the major industries like hospitality, or transportation, or events, or real estate, tech, media, things like that, marketing.

So that helped a lot because now what I could do is I could attract employees, or investors, or partners, or whatever, that had a common set of interests around those subjects and could provide value to the various businesses or involvements that were in each area. So that helped a lot, and I started that in 2011. Then what I realized with the course of time is that I probably was not going to stop building, or acquiring, or starting companies or businesses, and so I realized what I actually needed, because you just get spread ever thinner across everything if you are involved in some way, shape, or form. So what I needed was a little bit of a structure that allowed me to do the things that I do, because I don't just invest in sort of a fund structure where we're just wholly acquiring companies and treat them in a portfolio sort of fashion. I'm involved with the people, and so for me, I know every employee. I know all of the leaders. We spend FaceTime together, whether I'm involved operationally or not in that business. So for me to have that level of involvement with the people, I needed a structure around that that would allow sort of the business development or the business of developing businesses to continue to run whether I was the guy doing that or not.

So what I realized is that there's so much from the world of agriculture, and gardening and things like that where there's so many parallels that you can draw at a business, just like the musical component, where you have. Essentially what is happening is you're never, we can never live in any other moment than right here, right now, right? The future doesn't exist yet, maybe it won't exist the way we thought it had. The past is unchangeable and we're already not remembering it exactly as it happened, right? We've already colored the events, but the only place you can live in time is right now. So the same applies to whatever you're focusing on that day or that moment in business. The only business you can work on is the one that's in the hot seat right in front of you. So what I realized was I needed the ability to focus on the business that was in front of me, had to choose which one to work on next or work on today, and I also had to figure out how to provide that business in the hot seat, what it needs from a resources standpoint or to take the gardening standpoint analogy, the nutrients that it might need, right?

So I would like to point for the record, I think that was the first time in our conversation that I use the phrase that a lot of us use in this business, right? You ever notice that? People will say things that are esoteric and they'll go through some a whole bunch of legalese or something and then they just say, "Right?" As if you knew exactly what they were describing. So I think that might have been the first time, but I think at some point you should put together a snapshot that is just an edit of all of the times that people on your show have said, "Right?" I think it would be 10 minutes long.

All the little catchphrases.

Yeah, all the catchphrases. So what I realized was I need to take the DNA of how I approach business, how I approach growing things and build sort of a methodology around it. So DNA is basically, it's this underlying set of instructions that expresses itself in a human, or in a plant, or in whatever. So I have this underlying sort of way in which I do things that needed a way to express itself within this ecosystem of companies. So what I kind of settled on was looking at the business that builds businesses from sort of a four stage process. The first thing I want to do is attract investable people, ideas, and opportunities. At the end of the day that's what we're doing here, right? We're attracting or we're finding, but I would prefer to attract, investable opportunities, or it might be a person that comes across the transom that they are the right person to either start a business, or work in a business, or to advance to the next stage of their career, and they need something to get them there, and I want to have the best people around.

Or there might be an idea that really doesn't have a specific business yet or a specific opportunity to invest in. It might be this maybe a thesis that you find that, I don't know, maybe it would be great if cars could drive themselves, right? And this is before self-driving cars at some point that somebody comes up with this. Well, there's no actual business there, so exploring the idea, but it's investable, and exploring the idea and figuring out is there a new company here, a new code that could be created with the right cash and the right people. Then opportunities would be very specific situations where you know, it's a business that could be purchased, or it's a business that could be started, we know how we would do it and what not. So the first stage for me is to attract investable people, and ideas, and opportunities.

Then once you've got the person, the idea, or the opportunity in the hot seat in front of you, figure out what nutrients it might need at that particular time. So the way that I look at resources or nutrients, it's a handful of things. It's cash, could be cash. It could be advice or coaching. If it's a person or a business it could just need encouragement. Sometimes the resource that is needed in a particular point in time is somebody saying, "I believe in you, man, and here is how I can help you get to the next level." Or, "Here is how I'm going to support you getting to the next level." It might be business development, it might be finding partner opportunities or growth opportunities, and doing some of the legwork to make that happen. It might mean people stuff, recruiting people or hiring, or something along the lines of pulling in the right group of people. So it could be specific services, which this is the area that kind of touched on for me, the Amazon model in terms of what they've done with, specifically with Amazon Web Services.

The story there is they basically got to this point where how large Amazon could grow was constricted by the speed with which they could provision new servers, and would provision new, the tech basically, right? So there were long wait times that they had in kind of growing in that way. So they figured out and made it a huge priority within the company that they could develop something that would allow them to instantaneously effectively, instantaneously provision server space and grow in that fashion, and do it kind of in a incremental fashion, however they needed to do it. But what's interesting about that is when you develop a business like that internally that serves your own company, it's a separate thing, right? It needs its own team to build that out, and that it's effectively providing service to its same company, to Amazon. What happens a lot of times in those situations is if you're not having to compete on the open market, if you don't have to be innovative because the next guy is going to steal your business, and you've got a captive customer, it's very easy to get complacent.

So they realized, I don't know exactly who did this, but I'll give the credit to Jeff Bezos, that if we turn this thing, number one, people would pay for this, but number two, if we turn this thing to be market-facing, to be customer, to be external to the company facing. One, we expand the surface area that the whole company reaches because this is a whole other area of service that we are not currently in, it's not necessarily a retail business, right? But then the other thing is people, the business will have to compete on the open market, which is going to only improve its ability to do what it does, and it's going to improve us Amazon being one of the customers, it's going to improve what we get from AWS.

So it's brilliant, it's very smart, and it's grown amazingly, but for me one of the things that I realized was as I've grown businesses, not every business is of a size to have its own internal IT department, or its own internal full-fledged marketing, or I call it the growth department, but growth area, or a full-fledged finance team. You don't have a C-level exec over every one of those businesses, especially if you're in some of these smaller biz spaces where it might make a million or two million a year, or something like that, or smaller. But having that skill set and that advice in the service of that is still valuable.

So I thought, "Well, rather than at the parent company, so to speak." Sounds like those brands, rather than just hire a CFO, a CMO, a CTO, a whatever else we're doing experience and all those sorts of things and having this sort of myopic they all serve the one customer so to speak, or at least the one set of businesses. Why not develop service-based businesses that were those sort of incrementally available, right? You've seen CFOs for hire, whether you can hire an incremental CFO of chief marketing officer, or whatever. But if you actually had effectively the skill set of digital advertising, or of media, or of finance, or of property management, or of HR recruiting people stuff, and you had that market-facing, you had the opportunity not only to grow those individually as businesses, but the value that they're providing to the customer that is internal is going to keep growing because of that natural competition. So that's what I've started to do with the sort of the services side of what we do. But that's one of those nutrients that we provide to the seedlings so to speak, is the shared services.

Yeah, and then of those shared services, which of those departments are you going to start beginning building a company around?

Well I've already started on a couple of them. The main area that I'm focused on right now is in the growth or the digital marketing space. I think that as a function, the growth function of a business in terms of ... I love to break down a business in terms of a little bit of a formula, in terms of how it grows. What are the key components to this business getting where it needs to go. So combining that with the expertise to achieve, to go through the various ways that a business can grow in terms of its marketing function so to speak. I feel that's a critical area and in an area that I most want to develop first. So that's, we're in process with that right now launching a business called the GrowthLab.

If you could go to college and be a professor of any class you can think of, what class would you want to teach?

I was thinking about this question a little bit before we hopped on the horn here. I think if it wasn't a class on how to build a collection of beautiful, healthy businesses in an ecosystem, I think it would be a class about paying attention to defining and becoming aware of the foundations of your life. So we talk a lot about setting goals, we talk a lot about business growth, but every single one of the people that you have on your show, the people that are listening now, everyone that's out there has, they're an individual human being that really there are some foundations to who they are, what they think about and what's important to them that a lot of people don't pay attention to I think until you get some of these moments in life where you're shaken awake to pay attention to them. So I think I would teach a class on the foundations of your life.

For me in trying to do goal setting, and I do this every year, I always felt a disconnection from the bigger picture. I'd come up with these habits and goals that I wanted to pursue, right? But there'd be this disconnection from who I am as a person sometimes, because it happened to related to what was right in front of me that I needed to take care of or needed to adjust, or whatever. But I didn't have a framework for how to focus on the foundational stuff. So I actually spent some time a year ago figuring out a framework to look at. I call it the foundational map of my life, it looks like a bullseye in a way, and I started from the middle which is this identity piece, like who am I as a person, what am I about? And then, sort of the next ring outward is how is it that I want to be in the world? What are the things that I value? How do I want to approach how I interact with people? All those sorts of things. How do I want to be in the world? Regardless of what happens to be specifically in front of me right now.

The other thing that was really important that I realized was everything in life is hard, no matter what you're going to pursue, it's going to be hard. Something will happen, things go sideways, whatever. It'll just be hard, it's all hard, but some things are worth it, and if things are hard, if there's going to be a little bit of a struggle to kind of achieve that what you want to achieve, then what are the things that you're willing to struggle well for? What are those things that you are willing to endure hardship and willing to endure what's necessary to grow yourself as a person, to scale yourself up as a person before you scale a business? So that was another key for me to the foundation, and then from there, if you know who you are, you know how you want to be in the world, you know the big things that you're willing to struggle well for. Now starting to set some of these goals and decide what are the habits that I need to pursue to achieve the goals. I need to know who I am as a person, I need to be a person that does certain things to then have what I want to have. So getting that be, do, have for me right was so important.

Then it just plays out from there. You can get more and more fine and closer to the present moment. How does daily life, how is daily life go? How would today be great if I've got this foundation behind me in the things that I want to do, and who I want to be, and the things I'll struggle for, and then stuff happens. The path kind of unfolds, but you're then led to this sort of this present moment. We're now in the moment when I'm sitting here with you Alex, how is it that I want to be in this moment? And if I haven't thought through all those other things, I could be 20 different ways with you right now, but I feel very comfortable and able to just be who I am in that moment, and I think that's something that I missed out on a lot in my younger years, and I think a lot of people do too. So I think I would teach a class on the foundations.

What would you say is the most fortunate event that had happened to you that was completely random?

That would have to be the U-turn that I made. Thursday, March 7th, 2002. That was when that happened and it's probably somewhere around 6:30 PM in the evening, Central Standard Time. But from that decision to show up at that dinner with one other guy that was willing to show up, it led to starting a small club of entrepreneurs and investors which grew to more than 500 members, out of which I was able to start sharing knowledge, and coach, and help, and provide some income for myself, which led to one of my clients asking me to come into a large real estate investment and trading some effort in cash for that, into moving to a community where I saw opportunity, where I was able to start more than 15 other companies, and all of that happened from one single U-turn when for some reason, for some reason I said yes to the opportunity when I had shot myself on the foot. I know in my life that U-turn, that single U-turn was the difference between a life that was headed probably nowhere, or at least not anywhere good, and me sitting here right now talking to you.

What would you say is the best business you've ever seen? Not necessarily through your own active investing, but even just something you've seen through reading or an article somewhere?

Well, I definitely think the best business is always ahead because there's always a chance to improve, these are living, breathing things, but I think there's different ways to answer your question. So in many ways it's a little bit of a Rorschach test that you have going on here, and I think it's interesting how people choose to answer that question, but I think there's different ways to answer it. To me it's, I like to think of it in the framework of it's the best a business for something. So it could be the best business for ... What is the best business that I'm most excited about? And right now that's the overall sort of ecosystem of things kind of building this gardener, this master gardener business so to speak, that assists with everything else.

It could be the best business for just pure cash flow, in which case sometimes in that instance you're looking at some of these sticky niche SAS products for specific industries, with massive free cash flows, a percentage of revenue that really if you don't care about what the business is, you're not concerned about legacy and you're not thinking about, maybe it's not the most exciting thing, but that might be the best business for that particular aspect of something that would be important for cashflow. Or it might be the best business for maximizing your impact in the world. I'm thinking of like ... That might be like a gig economy platform that allows people in remote impoverished parts of the world to earn income like regardless of the circumstances or opportunities directly around them, and you might change the world for billions of people, and that would certainly be in many ways one of the best businesses in the world.

So I don't know if there is a specific answer I could give you of one individual business. I think if we mentioned Brent Beshore earlier, I've heard him on some other podcasts mention that maybe the simplest business model is a pet crematorium, because essentially all you need is a storefront and an oven.

Yeah, that one always sticks out in my mind. It's one of those businesses that obviously exists and someone has to do it, but you never think of as its own business with an owner, and revenue, and all those other sorts of things. Are there other businesses like that that stick out in your mind when you think of kind of a unique business that maybe no one's heard about but is more profitable than most people would think?

You know, I don't know. There's I think quite often businesses that are like right in front of you that we don't even think about. Like things that just happen that kind of take care of, like black topping businesses. We're probably not going to make past blacktopping in having parking lots and stuff like that, although maybe they'll be fewer of them as the self-driving car piece perpetuates, but some of those businesses can be really interesting. Just boring things that are in front of you that potentially could be highly profitable, but to me the most interesting businesses for me if I was to say okay how, if I just wanted to sort of achieve maybe the more tactical sorts of goals that I have, it would be things along the lines of some of those niche SAS businesses that we were talking about earlier.

That would be something that would be very interesting to me because essentially at the end of the day we are trying to get to a place where the dollars that we're investing come back to us plus additional dollars that are ready to work hard for the next phase. But if I wasn't only thinking about the tactical, which I don't only think about that, and I'm thinking about the people, and I'm thinking about the legacy, and I'm thinking about how it is I want to be in the world, then I think there are some other avenues that I would pursue that maybe the metrics don't always look as great, but are certainly well above a level of acceptability, and especially in this world of micro PE that we like to play in. I mean, you can achieve returns on businesses that maybe aren't as great as the best business out there, but are well in excess of what people are getting in the public markets.

Thank you very much David for sharing your time with me today. I really appreciate it. I've had a great time chatting with you.

You're welcome. It's been fun for me too. I always enjoy our conversations.

Me as well. I'm looking forward to the next one.

Same here.