Mikel Berger, Little Engine Ventures - Transcript

I'd describe myself not as an entrepreneur and actually that's a bit of why the types of businesses that we're trying to buy. So I'm more closer to the profile of the business seller that we're trying to offer. We say we're trying to offer a service to that they're really our customer or we're providing them a service to exit out of their business and the things that they want in doing that. Daryl is a little closer to the profile, our limited partners. I came to Purdue University in 1997, ended up getting a bachelor's and a master's degree in software development. So I haven't written code in a good long time and I don't have any business degrees, so I tell everybody I'm just making up all this business stuff as I go along. But for me, I really like that I have a couple of technical degrees. First off getting in and starting my first business right out of school with one of my professors. I had a skillset that I could come in and use and kind of provide correct value from day one, because I could write some code.

So that company that we started was called DelMar. It's still around. It's 15 years old and also about 15 person, software development contract and consulting firm. It originally started to be a software products company. So this was like pre iPhone days and I was doing some mobile apps for pocket PCs and things like that. I was pretty good at writing software, but it wasn't very good at everything else it takes to make a software business. So marketing, sales, understanding your customer segments, understanding what customer segments have money and which ones don't. Very first product was a soft basketball statistics software for high school coaches. So they do not have a lot of money, let me tell you that. I think I knew my audience pretty well. I'm kind of an Indiana stereotype, grew up playing basketball. It was pretty bad. So I kept stats. So, and this was also like pre iPhone days. So I think I charged initially like 300 bucks for the software, which now sounds crazy for what was basically an app.

But back then it wasn't that crazy. It was still kind of high, but then also nobody had a handheld device. So the coaches that used it had to go pay 500 bucks to buy a device and then pay 300 bucks for my software. So I’m 800 bucks into this thing. That took a pretty dedicated high school basketball coach to want to do that. But the idea was to bring the kind of the money ball sabermetrics type of stats that were getting popular in baseball then to basketball and particularly to high school, small colleges. There was even one semi-pro league that used it for a while, so I got a few hundred teams to use it. I joke, I got it to Mikel's hobby with a slight revenue stream. But I have bills to pay, so I took on contract work, about, 10%, 15% of DelMar's contract work was startups stuff coming out of Purdue University and things like that. And so those projects were always a ton of fun because it was blue skies and everybody was excited about whatever thing they were working on.

And it was kind of cool to come in and be the software team to build out a prototype or take a prototype to have like first commercial version kind of a level. But a lot of times it was super frustrating because a lot of those founders didn't know. They also didn't understand their market or what the real pain point of their customers was or what real value they were adding in there. And so like a lot of startups, a lot of them died something else and when we did just did his contract work and we got paid and so it was okay. Some of them though. We started to do for equity and then I realized, holy cow, when I don't get paid, I mean it's just when it was my time, it was like not good, but I just had to explain to my wife like, why things are going to be tight for a while. But then when I started paying like other people real salaries and then I was left holding equity or in some cases some invoices that I didn't know how I'd ever be able to pay. Like I got to start thinking like an investor on this because at least for me it was some pretty significant money and I didn't understand the business side of things.

Meanwhile, most of DelMar's clients have always been much more traditional businesses. Non-tech businesses that in some way had a forward enough thinking business owner that knew they needed some custom software development, that they were oftentimes at a size where their excel spreadsheets or the homegrown systems for small guys, were working at a few million dollars in revenue, but as they had grown past five, 10, $20 million in revenue, they weren't quite big enough to use the big boy software. Or they had something unique about what they did that maybe it was their secret sauce and was really why they were doing well or maybe it's just the way they wanted to run the business. They wanted software to work the way they wanted it. So that was a lot of fun. We could come in and you're kind of improve the bottom line, mostly kind of operational efficiencies. We did stuff in agriculture, education space, manufacturing handful different industries were those industries we kind of liked and got some good experiencing.

But honestly, if it was data and user interfaces and web and mobile, like we didn't really care as ton of fun to get in and learn at these different businesses. You get understand how their business processes worked, if you were going to write the code. And I learned, I really liked that part of it. So yeah, that was a lot of DelMar's clients was these more traditional businesses helping them improve the bottom lines. But a few of them, handful of them had enough of an even deeper vision to productize some of those software things and say if my company needs this, there's a whole lot of other companies like mine that could also use this. And so it could be commercialize those software. So we got to do that handful of times. The most successful of those was my partner now at [Little Engine 00:05:58], Daryl.

So he had a very traditional AG business that over, depending on how you look at it, six to 10 years, he transformed by using my software development firm into a total software as a service platform. So we saw this very geographically bound regional, AG firm that basically had customers in a two hour radius because that's what you could afford to pay a guy to drive a pickup truck out to visit your customers. And to the summer, we launched the [SAS 00:06:27] product. We had customers everywhere they grow corn. So he grew that up and then eventually sold that to a firm out of Illinois. So that was a lot of fun. He went and worked for him on the technical side. We helped transition things over. But after about a year and a half, the next joke is that he got tired of having a boss, because he'd never had a boss before. And Daryl started his first company was 13, something like that. And so he made it about halfway through his earn out period, which is pretty decent, left on good terms and a great team over there, but just was ready to do his own thing.

So I went back to him and was like, "Hey buddy, that was fun. Let's get the band back together. We'll do the next thing and make it even bigger." And he said, "I don't know Mikel." He's like, "I like you. We work well together. But I don't know if I have a software idea, that I need DelMar to write code for, but I'm like, I have some money now so I might buy a business or two and get something going. So I was like, oh, interesting, because I've been trying to figure out both on this startup side of things, what equity in a business should really be worth. And a lot of these startups seem like really overpriced but I don't know why I think that, but it just seems crazy. And also I said, I've been thinking about like some of my clients are actually some of the businesses that I think should be clients, but I can't convince the owner to do it. I'm like, if I own that company, here's how I would run it. Some of my clients are getting older and it doesn't seem like they have an idea of what their succession plan is.

And so anyway, we got to brainstorming and he really had already done a lot of the work for what has become Little Engine kind of laying that groundwork, but it just aligned with a lot of what I was thinking. So I had been in a process of moving myself out a day to day operations at DelMar. DelMar had grown to a point where early on I was doing a little bit of everything and I loved it. But then as it got bigger, I was the pinch point. So I was holding everything back. I was in, I call it the cage years. My partner was a big help in that, but I was still all through those times, but it still was, a lot of things depended on me. So it's really frustrating to be in a cage. It's even more frustrating when you built the cage yourself and you put yourself in it. So I took about three years and unwound myself out of that. So I'm still active or I'm still an owner in DelMar with my partner Kyle there, but I have no regular day to day responsibilities.

So that's what I tell sellers now. I'm like, "Look, if you can do it, I did. You could own, why not own your business indefinitely? You don't have to sell to us because that's what I thought, I'm prepping this business to sell it. Then I got to the point where I was done and now I'm like, "Wait, crap, this is a good business. I don't have to sell it. I got good people here and if I want to do more I can. But if I want to focus my time, other places, I can do that too." So that was kind of a journey I was on. I said, if I just got there at a weird age, like some folks figure that out when they're 55 or 60 and then they're able to kind of move into a more passive role. Some don't figure it out until they're 65 or 70 and then they're like, I would do that, but I need to be done now. And so that's kind of the profile. That's how that kind of leads into the profile of the ideal business seller for us is somebody that's ready to be done but has a good solid business.

Where did the name little Little Engine Venture come from?

My partner, Daryl came up with it. So it means a few different things. The main thing is, I don't know, it's funny to name a fund after a children's book. We both have relatively little kids. But in all seriousness, the stories, I mean, you probably haven't read it in awhile, but it's a story about optimism, hard work, you're willing to do whatever needs to be done. You're not too proud to take the little toys over the hill. The Little Engine would and the other ones didn't want to waste their time with it. So we think we're willing to do whatever it takes to help these businesses stick around and grow and those kinds of things. We're also, Daryl and I are both alums of Purdue University, which is the boilermaker. So there's a train ish homage to the Alma Mater there.

Then I also say we buy these Little Engines of economic activity and they're more powerful than they seem, especially when you aggregate them together. In aggregate these small businesses, they play a huge impact on the economy, huge impact on our local communities, those kinds of things. And it's also, Daryl likes to say it's a 40 year joke in the making. So someday hopefully Little Engine will be very big and the name will be ironic.

What sort of businesses do you like to acquire a Little Engine Ventures? Just looking through the list of investments on your site that you've made. There's kind of a theme of ... to your point, not software business, more hard businesses, if you will. So can you describe just a little bit about the kinds of companies you acquire and look for.

When I explained this, there are a few kind of like metrics, but actually it's more of a characteristics, a little bit of the business, but of honestly even more so the business owner that makes it a good fit. So we're looking to buy stuff with kind of 1 to 10 million in revenues. Really right now 1 to 5 million is our sweet spot. So I joke in the micro private equity space or something or in the broader private equity space, there's kind of this like pissing up the tree thing. And I think in the micro space, we pissed down the tree like ... So I don't know. Some guys are like, "Oh we buy stuff with a 1 million of EBITDA like we'll go that low." And I'm like, "1 million of EBITDA, that's like our upper range, like we'll go even lower, we'll buy smaller stuff." So we're looking, so like I said, 1 to 5 million in revenue. We like something with 30% plus gross margins because you can find growth out of that. But we're more permanent equity. And so we look to evaluate, can we buy, can we own this business? Can we see ourselves owning this business for at least 10 years, if not indefinitely? So is it going to be around for awhile?

And the auto glass that we've done, my example for that is even if in five or 10 years, we're all driving autonomous vehicles, they're probably still going to have windows in them. And those windows are probably still going to break and you're going to want to get it fixed. Even if some Purdue material science person figures out some unbreakable glass that's actually cheap enough to put in normal people's cars, like it's going to be 10 years before 80 or 90% of the cars on the road have those have those windshields in them. So we've got time to figure out our alternatives and stuff like that. So want to own them for a good long time and we can grow on over that time period. So that means we don't rule out any industry. No, I mean some industries are obviously harder, pharma medical devices, but even with that, like there's sometimes some like weird little niches even in some industries like that that have good businesses.

We tend to win and fairly, stuff that's fairly asset light, light and tangible assets. because that it's really, I mean our competition as it is, is mostly individual buyers. Individuals that are looking to some of them just buy a job. Some of them looking to buy something to really grow it. But if there are more tangible assets, more likely they can get an SBA bank loan and they can drive the purchase price up on us a little bit. I mean, we tried to direct deal source all of our deals but sometimes there's one or two people looking at it. So we tend to win a more service space oriented things with a little bit of assets. Then the geographic radius, we say we kind of publicly say 180 miles. Technically our PPM doesn't restrict us so I can buy a business in New Mexico if I wanted to. That's a good business. But we are even more now practically where we're really hunting in kind of a 90 mile radius around Lafayette, which you don't know your Midwest geography is basically Lafayette, Indianapolis, kind of almost up to Chicago, Northern Central Indiana, which when we started, we started with a much broader geography.

We were looking in and with tighter industry focus and we inverted that about a year in, so we tightened the geography but broadened our industry and basically said, look at this, I always say 80% of the problems, which is a totally made up stat, but vast majority of the problems are a function of the size of the business, not the industry. You'd have some industry expertise, some domain expertise, but most of it is managing cashflow, knowing how to hire, knowing when to fire, managing all those things. Having the systems in place. I mean we kind of take a business from this owner operator level and try to systematize it, but it's an inappropriate system for the size of business. They are 10 to 25 employees and kind of set a good base for it to go from an owner operator function into a, or those owner and operator functions are separated. That's kind of in a broad sense, has the function that we want to serve in the market for these kinds of businesses, set them up for future growth.

Like why the 90 mile focus? Is that so that you can easily travel to these business owners?

I am lazy and I don't like to drive that much. And part of that is true. The biggest reason is brand. So we're trying to establish a brand for Little Engine amongst small business owners as the best home for their small business. If they don't have a family member to pass it down to, if they don't have a key employee that can buy the business, then we want to meet, be that next option. And we'll say that somebody's already in the business should be able to run it better than us. But in a lot of these businesses, there isn't somebody that the owner has groomed. If they haven't been proactive about it, they haven't groomed them to buy the business. Banking laws are different now, so a lot of them can't finance it. And these kinds of businesses we're buying employees probably aren't putting enough away to buy the business even maybe on a longterm seller's note.

And again, the profile of our typical business owner, when they're done, they're ready to be done and even a five years seller's note is just like, "I don't have to repo this thing from this employee that I love." If it doesn't go well and so they at least have the mental weight and we're a cash buyer at closing and small short transition period. And they move on and they feel proud about what they've done with their work life and we wanted to retirement or whatever their next adventure is, time with their grandkids or camping or ...

So how do you structure Little Engine Ventures to have that long time horizon while also having investors who invest in Little Engine Ventures? How do you structure those two sides?

Yeah, so a lot of it is what people think, but what we don't do is we don't raise capital on a deal by deal basis. Large part of that is because I can get better deals. I give a better experience to the seller because when I put an LOI out, it's not contingent on bank financing. It's rarely contingent on bank financing. It's never contingent on me taking this back to my investor pool and network and having them say yes or no. Me and Daryl make the investment decisions. The limited partners are truly limited, they don't make those decisions. So if they invest in the fund, because they believe in this space and they trust us to find those. So we have 35 limited partners. We don't want a lot of limited partners. If you look at any kind of investing book, you should spend the least amount of time on LP management. But I think more so than the number is the type. So almost all of our limited partners are small business owners themselves, so they get what we're doing. I would say I can explain carry to a small business owner that's never invested in a fund before.

I will never be able to explain small business to a "professional money manager" that doesn't understand how small businesses operate and the ups and down and the fluctuations. And philosophically that helps because they know they're in this for the long haul. We also manage that in a partnership. So I probably have 35 of ... 250,000 is our minimum. We also have a maximum, we won't take more than 1 million from anybody at the initial onset. So we need to get to know them and they need to get to know us. And I can't let any one partner get too big because then even if for very valid and good reasons, they're like I'm 80% of your fund and I need my money now. Sell stuff cheap and everyone else is like, what just happened? Like why are you selling stuff? I'm like, "Well, I got to pay back the big dude and sorry, that will happen to you but ..." So we're a little bit pseudo market makers. We can get into more details of it if you want, but basically they have an annual in and out that they can request after a lock up period and stuff so people can do ... We don't do dividends.

When cash comes back up from the ... If the companies are cash flowing and they're returning money to the fund, Daryl and I are charged with reallocating that into either existing businesses that need it and the most cases to do, that's how we do the next round of acquisitions without taking on additional capital and diluting the partners, the existing partners as we do at the cash flow. So we don't dividend out. We do our annual reval and then people can kind of come in and out with whatever portion they want. Again, after that lockup period and can adjust based on their family's needs. So actually we provide more liquidity than the traditional fund that's got you locked up for five, seven years until they flip the company. We're trying to be an alternative to their existing private business that which any business owner knows. Sometimes it takes a lot of capital and sometimes it has work. If it's run well, sometimes it goes into modes where it has more cash and it knows what to do with. And you can take money out and reward yourself for the hard work.

So Jason Fried talks about that with Basecamp in that part of the pricing and having the tiers or no tier, sorry, only the $99 per month for every customer. The whole point is to not have that customer that can pull out and ruin your business. It seems like you've kind of taken a little bit of that.

Yeah. Exactly. We look at LP concentration just like any business looks at customer concentration. So for me the parallel to DelMar is I've always managed clients. I had a rule at DelMar, I tried to never let one client get over 20% of my business. Sometimes with guys like Daryl when he was growing fast and it's like crap. He was 40% of my business last quarter. Like so I can shut him down and say, "Hey, I'll stop doing this work for you." Or I lost it and we found more clients so he got back into a happier proportion for me without having to ... But that was tough. That was, I mean, was a good problems to have, but there's still problems. We've never had to lay anybody off because a client dropped us or had something bad happen in their business. You've got to have these protections and stuff, which is ... Also, we tried to do on the company side, every company's its own legal entity.

I mean we've done 12 acquisitions and that roughly correlates to seven companies. So we're like, we've done to auto glass, we've done to roll off dumpsters and those are combined up into the same entity. If they're truly different businesses, we've got them in a separate entity and so they've got to live and die on their own mistakes hopefully don't propagate. We are trying to propagate the good stuff, but we're actually really careful about having things be too homogenous across all the operating companies because as Daryl likes to say, the knife cuts both ways.

Yeah. You've kind of touched on it a little bit that the point of the maximum investment and also the lockup wasn't just to protect you Little Engine as the business, but also the other investors. Could you talk a little bit more about how you protect investors?

Yeah. I mean, that's the main way and also that everybody's treated equal. It doesn't matter what their net worth is. We tell every individual investor, we want you to think about this as a business partnership with yourself, Daryl and Mikel. Yes, there are other folks involved, but every individual investor just thinks about those three. Now we do some things. We do an annual meeting where everybody gets together. Because they're kind of cut from the same cloth. We like that. We have folks that have referred friends into the fund and stuff like that. So there's kind of little pockets of people that know each other. Other than being small business owners, they're actually quite a variety. There's a variety of ages. I mean, most of them are a little older. He got got to have some money to be able to do this. But we have a few younger business owners, they have profitable businesses and they're at a stage where they have some cash to kick off and they like being invested in small businesses, but they don't want the managerial burden of ...

Several of them I've done acquisitions themselves, but kind of within their main business and they want to diversify but still stay in small business. And so they know if would have more of a manager, a burden if they got something outside of their area of expertise, again, they get it. They're like, what's carry? I'm like, think about it. Like the fee that you pay me. So when the manager quits, he calls me and not you. And they're like, okay, sweet, that is a good deal. I will take that because I get it. Like, yeah, they're going to call me, they're going to call Daryl. They won't call you. That's the benefit of being limited. You also don't get the cherry to pick the deals, we will screw up and we'll probably buy something that's not very good. But on the whole, hopefully we'll be better than average.

You talked about how quick you are to from signing a letter of intent to closing on the business and part of that is not being dependent on investors or very rarely financing. How else do you make that process smooth and efficient for you and the seller?

Yes, it's a good question. We do try to be quick by I'd say not hurry. We also talk about clock time and calendar time. So to do a lot of these deals, I mean, that's fundamentally what Little Engine is doing is there's very good reasons that larger private equity doesn't play in this space. And I think it's basically around a transaction costs so we can keep the friction of the transaction boat and a lot of that is time. So I need to minimize clock time because I'm a basically permanent capital, my calendar time can be really long. So I'm meeting business owners this year that are not going to sell to me for three to five years, but they now know I exist. Once, maybe twice a year I'll check into them and when they're ready to go, I just need to be ready to act. Then that's when I need to be quick. And 60 days, 90 days, our current record is 45 days for meeting the owner to wiring funds and being in the business. We're not trying to do it fast. It's whatever works for that business seller.

So it's like, "Hey, talking now like end of the year, you want to finish out this year and close in January for tax reasons or for your own personal holiday plans? You want to be out earlier?" I mean, it's very personal things here. I mean, you get into people's lives. I mean, people, guys that have had heart attacks. I survived the heart attack. Thankfully the business also survived the heart attack, but I don't want to cause myself to have another one kinds of things. So you get into some pretty personal stuff. At the same time it's really cool to be able to help people in a time when they're trying to take care of their family. They're trying to take care of their employees and our customers and figure out what it is. So that's how we think about it. So it's calendar time as long, clock time is short. I can't spend too much time on any business.

I fall in love with them all. They all look so pretty on the first date. But then you just got to move on if again maybe it was just the timing's not right. I mean there's a lot of bad businesses out there too that just deserve to die and we're not here to rescue them all. We're hopefully going to find the good ones and ones that have growth potential. It's really the businesses of that size. We're not turnaround guys. That's a very specialized skillset. That's a unique thing to be able to do more power to those guys. I have some friends in that area, but we're looking for something where the owner is just almost explicitly left opportunity on the table. He got enough a step or two and saw the third or fourth step and just said, yeah, no, I mean this, I'm comfortable. It's step number two here. It's good. I've done it. I proved to myself I could do it or whatever the reasons are. Back in the day when I started this, I had nothing to lose, so I was really risky.

But now all these people around me depend on this thing. I think it's a lot about time horizons as the main thing we do in these businesses is as a business owner gets older and their time horizon shortens, they start making different decisions, don't invest for the long term. So when we come in and become the owner, we reset the timer horizon and we give it a 10 plus year hopefully extension and you start making some different decisions and maybe reinvest in certain areas. Maybe you drop something that was the pet project of the owner but never really made any money.

To the point of the annual meeting, I want to talk a little bit about your branding and marketing. I find it really interesting that a lot of businesses, or at least for most businesses, the point of marketing and branding is to increase sales. But for a micro PE fund or firm, the marketing doesn't necessarily serve that kind of purpose. So how do you think about your marketing and then what sorts of things do you do to market? You have the annual meeting, there's blog posts, but what's your framework for thinking about it?

We're a bit of a marketplace in a way. So we have two groups of folks that we consider are our customers. So the first is the LPS. We're providing a service to them or providing management oversight of the businesses that they own. I get Daryl and I have our own money in there. So we're also included in that group with the 35 owners in the group. Little Engine Ventures Fund I is the owner of these businesses, LED capital management provides those management services and oversight of those. And we charge fees for that. And so they have to believe in that. And again, so they have to have a super high level of trust because they get to make the decision to invest and then to keep their money in the fund. Are the two basic decisions that they get to make. So we need to keep them informed, I mean, quarterly reports and all those things. But I think there's, again, at this level and the type of customer that we have as a limited partner is a small business owner. So it's not just about money.

They also like the feeling and the feeling being true that they're an owner of the business. That's my brewery, that's my dumpster companies. I have partners and it's not all mine, but that's mine. And so that's part of the brand that they understand who their partners are, even if they don't know all the names of every partner, they know the type of people that they're aligned with. So they are our customer and so that's part of that branding. And when we're in times of raising more funds, we want to find more people like that. Now I can't solicit and blah, blah, blah, all the SEC regulations. But for accredited investors that think like that and we want to be that when they find us or we're able to find them. Then the other side is, the more that I especially think about as our customers is we're providing a service to these small business owners. Technically we're paying them, but we tell them, you we are not going to be the highest purchase price. So they are in effect paying us with a lower purchase price. But we think we're giving them more than just cash.

So I would say these transactions there are always a financial transaction, but they're also always more than a financial transaction, nevertheless. A lot of folks talk about capturing the value in your business or transferring the value in your business and there is financial value. My hats off to these guys, mostly guys, a few ladies that have created these businesses. A lot of them, kind of 55 plus 60, 65, 70, I spent most of my days talking to guys that age. I love it. It's actually you hear a lot of really cool stories. You learn the top lot, I make up for not having a business degree by second information from guys like that. So yeah, but they value other things too. They value their legacy, they value their reputation. In small towns in Indiana, they value knowing that their employees are going to be taken care of. They value not having 42 people poke at their books and at their business because some broker listed it on a website for a year and then nobody bought it. They value all those things and we give them all those things.

That's the brand. Then again, they too, I mean it was just about money. Like, whatever, you can think I'm a jerk and like, here's the money, give me your business, but they want to align with people that they think have similar values about business. I mean, and also they get it. They're like, you're going to do different things. I was with a business owner a couple of weeks ago, early stages of conversations with him. So I always ask, like, if we get to a closing, what do you want your role to be here? Three months, six months? Do you want to maybe work indefinitely? Very few do but I was asked, is like, "Mikel, I like you if ... I got a lot more to learn about you, but we wouldn't be having these talks if I didn't like you. But if I was around here and you were the owner, he's like, I don't know what I would do. Like I'm used to being in charge."

And I'm like, thank you. That's so refreshing. Like you actually understand yourself and you know like why you're here. And someone’s like, oh yeah, I'll totally just do this. And like, yeah, no, I don't think you will. If you would be fine with limiting yourself to just these couple of decisions and day to day work, like you wouldn't have done what you did and that's really cool what you did. So anyway, I don't know why I got rambled on that, there was a point. Oh, customers. So yeah, that's why we have branding, though we tried to be a bit understated with it. I mean it's black and white LED in a golden rectangle.

That probably most people don't know is a golden rectangle, but there are like stuff like that. So he designed the logo. I mean it's kind of the anti or the unbrand, we try to promote, it's about their business that they're buying. We're big fans of the Story brand stuff, Donald Miller's book, kind of being the guide, making your company to guide and your customer the hero. I don't know. We're not marketers, but we try to follow some of that kind of thinking. We think it resonates again with this craftsmen business owner that is our customer.

Does your marketing and branding work, does that help bring in a direct deals or is there another side of Little Engine that helps facilitate that?

Yeah, actually I don't think that it's ... we're only three years and so it's a little hard to tell. I mean, we are hoping someday that the Little Engine name and brand will kind of do more of that lifting. I think right now, our direct, some direct deal sourcing that we do through direct marketing and honestly just working our networks, which is, there's really the biggest if I haven't mentioned already, really you asked about the geographic radius. That's part of it. Like Central Indiana is not that big. So especially amongst small business owners and they talk. It's pretty hard to get a small business owner to pull her head up from running their day to day of their business. And when they do, they talk to small business owners, they talk to accountants and lawyers, insurance people, bankers and they make offhanded comments like, next Christmas needs to look different in my house. And I want every accountant to know, what do you mean by that? Well, my wife has really been wanting to take a two week vacation with the grandkids and I just can't be away from this thing for more than three days.

And well, what are you going to do when you finally decide to hang it up? Like I just want that conversation to be happening and eventually to get around like, well, have you see these Little Engine guys up in Lafayette, they're doing some kind of interesting and then they go check out our website. They ask around and they're like, "Oh wait, I know the people that used to own that business, Little Engine owns it now. I didn't even know that changed hands and stuff.

So we've gotten a couple of deals that way where basically somebody called up and be like, I knew the old owners of whatever and I've been watching you guys for six months. How did Bob get that deal? Like, how's this work? You know, explain this thing to me. I want the same deal Bob got. Yeah, that's more of how the ... and then like I said, we do a little direct mailing. We target it certain industries that we like and stuff, we'll do a little bit of direct mailing and that's real low pressure, real low frequency stuff. I just want to be in the back of their mind when they're ready to make a change.

Do you track the ways that people or the owners hear about you so that you know, as you close successful deals, you can look back and say like, wow, like four of the seven heard us through this way. Let's spend more time doing that.

Yeah. We use Trello right now. So we have Trello set up in a kanban pseudo CRM ish way. It actually just one of the bigger decisions we're trying to make is like when we switched to a real thing, but Trello is just so super flexible right now. But yeah, we have a Trello board with, I don't know, somewhere around a thousand businesses that we've looked at in three years. Some of them are in the past forever column, don't look at this business, it looks bad. And there's some whole categories of businesses that have moved into that and some of them are in the like, slow burn, let's try to contact these quarterly or a couple times a year and see where their owner's at or we'd get an owner to respond and stuff. So yeah, we track all of that. If some day Little Engine itself is worth something, I think it'll be that data set that we're still refining. That's what a software degree taught me is to learn to think in systems and processes. And we did it. We do a cheesy, semi-cheesy annual meeting video.

It's up on our website now. And my horrible acting skills, I say, I think of Little Engine as a software company. We haven't written any code yet, but it's the systems and processes of what's the data we track and how do we create tighter feedback loops and get better faster. Which is why we, part of the premise of doing a lot of deals is right now I'd rather buy 20 $1 million companies than one $20 million company. I'll get better at the transaction process. I'll get more efficient. I get my due diligence costs down and then that opens up even more and more companies to be able to buy. I do that.

Yeah. So how do you apply your software background and systems thinking mindset to some of your portfolio companies? Does that come in a lot into improving operations and making things a little bit more efficient? How does that work for you?

Not as much directly as you might think. DelMar has never done a contract software development for one of the companies that we've bought yet. One is we practice very decentralized management. So in theory at least, if the CEO of the company sitting in a custom software development, I would hope he'd get a quote from DelMar, but he should also be doing this job, get a quote from or three other folks and see if DelMar's overpriced on that. It shouldn't be a default conflict of interest there, but also is like, we're buying these tech businesses or buying these non-tech things and honestly, man, like it's just like, "Hey, can we stop, tracking customers on that yellow legal pad and use some sort of CRM, maybe just Trello even?" That kind of stuff is most of the things. We also say we're growth oriented, but again, I think if you understand how small businesses more typically grow, because we're not a VC fund, we don't require a hockey stick growth curve.

We expect more of a stair-step growth curve. So there will be some times where you will push hard and you like, we're going to triple this business. But then you're going to like let off the gas and you're going to let cashflow catch up and you're going to let processes that you put in place stabilize and you're going to let employees catch your breath. And again, then we can reallocate funds into other businesses. So ideally we always have some percentage of the portfolio that's growing quickly and some percentage of the portfolio that's not growing slightly and cash flowing and stuff like that. So there are opportunities, I think some of them are farther in the future because we're just buying such little stuff right now and some of them got to get a little bit bigger. Honestly, they can buy, they can adopt off the shelf things so cheap now. But I think it's part of that like, I mean that's what I always kind of prided myself on that DelMar was telling somebody you don't actually need custom software.

You need to try two or three off the shelf systems so you can tell me like why they suck and why the thing we would build would be any better, because the first copy of software is super expensive. Every copy after that is really cheap. If you're going to build custom software for business, they pay for the one copy, they only need one copy and it can be pretty expensive. It can be really impactful though if you do it right, but you've got to really understand your problem space. And I would say, I'm a technology guy, but I'm not a technology guy for technology's sake. So it's a tool.

Earlier we chatted a little bit about these craftsmen businesses that you've been coming across and I kind of want to discuss that a little bit. Can you tell me more about some of these businesses and what makes them so unique and interesting to you?

Yeah. I love these guys. Like I said, I try to still consider myself a craftsman more than an entrepreneur. Maybe now my, I say now my craft is no longer as software development is the craft is being a small business owner. I'm just trying to be the best small business owner that I can be, for these craftsmen business owners and craftsmen respect other craftsmen. So they can come in and say, "Look, I'm the best auto glass changer or I'm the best beer brewer or whatever business we're in." And I can say, "That's awesome man. I love to learn more about that. I do not know how to brew beer, I do not know how to change a windshield." But I do think I know small business pretty well and so maybe this is why this would be a good transition. So I described these small business craftsmen, small business owners, as never wanting to be in business. They sort of felt they had to start a business or they got into small business ownership, because to practice their craft the right way, that was the way they had to do it.

Nobody else was going to hire them and let them do it the right way. Whatever, whether they're right about that or not, that's what they believe. So it means they value different things and it gives their business kind of a unique flavor. So we say a small business owner is successful if they know how to allocate their time into three areas and these craftsman, small business owners are awesome at the first area technical competency. So they're great. They do great work. It's always top-notch. And the best ones, they're not afraid of surrounding themselves with other technically competent people. In fact, sometimes people better than themselves. So I mean, the biggest decision we have to make is, is this really a business or is this some guy's livelihood and he has a handful or a couple of handfuls of people hanging off of it and if you pull him out, the whole thing falls apart.

But if he's got a good technical team around him, then you can pull him out and you lose it, deep down a little bit but not that much and you can build back up. Build that back up because you still get a good solid team. Again we're not buying stuff, hopefully with a bad team, we've got a good team, we're going to keep them in place and in fact maybe even allow them to increase their salaries or hourly rates as a business might grow. So technical skill is the first area, the second area is administrative and frankly, they're probably adequate. Like, if they were horrible, the business would've gone under, the E myth kind of person that loves baking bread. And as a horrible business owner like this, not these people, they're adequate. They get the bills mostly paid on time. Payroll mostly gets run on time so employees don't quit.

But again, they're always delivering quality work on time, but the administrative is like adequate. And then honestly they suck at sales. But you can get a business up to $5 million in revenue by being awesome at what you do and hardly ever telling anybody about it. Your work, sort of speaks for itself. But I think it's really hard to get over that $5 million mark especially over 10 million in revenue if you don't get good at some kind of sales technique. But if we bring in executive in, that's awesome in administration, sometimes even just decent at sales, but if they're great at sales and you combine them with a remove the owner but you still have a good technical team like now, all of a sudden, that's a pretty kick-butt combination. Again, if all sides respect each other. So that new guy has to come in and say, I don't know this thing. I mean a lot of cases they don't, sometimes they've had some industry experience but it's never been their kind of bread and butter area of competency. So we're not looking to replace the owner with somebody like themselves. They're great. They were great for that stage of the business but to go to the next stage, the leadership is going to have to probably have a different mindset.

Are there are a few unique examples of these you've come across?

I think of Larry at Lafayette Tool and Die. So Larry was toolmaker in a manufacturer here in Lafayette and like the 80s, the company moved a bunch of manufacturing, not all of it, but a bunch of it to Mexico. And then so they didn't have enough need for a full time tool shop that he was running. And the story as I understand it is Larry went to his boss and said, I'll buy this equipment, like super cheap so you don't have to move it to Mexico because it's really heavy. And he set up his own shop because he just wanted to keep doing machining work. And so he got his old company as a customer because they still had some tooling work they needed, just not again full time. And overtime, he got almost every manufacturer in the county. And he's got a great staff. It's a craftsman's workshop that kind of forgot to hire apprentices a few years ago.

So that was the biggest risk. So we've hired some young guys and we said, "Larry, are going to be okay with that?" And he said, yeah, the risk is on us because we hired the wrong person. Larry's a super smart guy, so a lot of things were in Larry's head from the day we bought it. Like job number one is get stuff out of Larry's head and into some kind of process and system and things. So that one's been a ton of fun to own, I'm learning a ton.

Do you have a Little Engine office or is it all just coworking space and remote and that sort of thing?

Yeah, we have a small office in downtown Lafayette along the way I talked about DelMar, but I helped start a nonprofit co-working space. So part of the reasons I say it's nonprofit as I tried to do it as a for profit and the business model is really hard. And so if it wasn't going to make money anyway, it might as well be a nonprofit. Little Engine's office is a few blocks away from the co-working space. So we do a decent chunk of our meetings and my individual desks and stuff is a few blocks away, but still trying to be part of the entrepreneurship community of small business owners and startups and independent contractors and all the other crazy folks that call matchbox home with the coworking space here. But yeah, technically I'm just a, they let me call myself a co-founder but technically I'm just a board member of the nonprofit, so there's staff that run it. So matchbox also was actually kind of part of, it was in the DelMar cage years. Matchbox was a safer way to kind of test some of those theories.

So I spent a decent amount of time getting matchbox started. It was a way to kind of see if the systems at DelMar were working that I could step away for ... No, I didn't step away from like big long blocks of periods of time, but I could take a day, I can take two days. So you always got to have, I mean, again, this is kind of the software, you have ways to do little tests and get feedback on yourself and the tighter that feedback loop is the better you can get. So I don't really care what somebody knows. I care about how fast they can learn and apply that learning. So it's rate of change. So the faster you can do that, I can be way behind you right now if I can grow and change faster, it doesn't take very long before I've surpassed.

When you buy a new portfolio company, how do you make sure that you can find an executive to come in and replace the owner as the effective CEO? How do you manage that process?

Yeah, so we actually find the executive first. When we started, we formalized it about a year in, so now we call it our executive on deck program. I joke with them, it's a 12 month, kind of awkward interview process. But we both get to know each other pretty well in that. And so we basically say, let's go find a business for Joe or for Pam or for whoever. Now again, so it's knowing their criteria. So we've talked about Little Engine's criteria, and then I say with every executive on deck or potential one, like what's your business criteria? And in some cases we help them figure out what that really is. But their geographic radius might be smaller than mine. They're like, I don't want to move, I got kids in school and I'm willing to drive 35 minutes to work every day. All right, that's where we're work. Or I only want to work in this industry, or no, I'm open to a bunch of different industries. Or I'll say like, "I love to buy these perfect little small businesses that cashflow and just have a great team and have sales figured out." But like, those don't really exist or if they do, the owner rightfully wants a price higher than I'm probably willing to pay.

So it's really about finding the problem and saying, man, Joe is really good at these kinds of issues. And so if we find a business that is big enough that can pay him a salary that he wants and he's in the radius of where he wants to live and if both of those things are within our criteria as well, then it's really like, I think Joe would be really good at coming in and figuring these things out that I don't know how to solve them, but he's got the experience to do it. And so I got, so these businesses are so small and you can destroy a good business even if it's an awesome business, you can destroy it fast. I think of any size, but especially in a business this size, if you put the wrong person in. So we try to find them and get to know them first. One of our LPs about a year ago said, you spend more time on due diligence of the executive than you do on the business. And I hadn't really thought about it that way, but it is totally right.

Again, a great executive, they're not saviors, they can't buy ... If I buy a bad business, like it's still a bad business. They can do a lot of things in these small businesses because the ship is not that big, you can turn it up. I mean it takes time and sometimes really painful but culture and change, add or subtract products you can, there are things you can do. We just need the right person to do it, somebody with ideas. We actually want people that have a decent amount of autonomy. I don't want somebody to just like tell me the playbook for how to do this and I'll go execute it perfectly.

Every time I'm like, I don't know dude. I don't have the playbook. I have some general rules. I have a compass heading and some boundaries like don't do illegal stuff, take care of the customer. But you have to figure out what to take care of the customer looks like. That's beer customers are different than auto glass customers are different than farmers buying non-GMO seed corn. People are people though still too but how you work with them, how you communicate to them is different. We think decisions are best made closest to the customer.

For our first closing question, if you could teach a college class on any topic you wanted of your choice, what would you teach and why would you teach it?

I thought more about the college classes I would take if I was forced to go back to college. I've said that I'd probably take philosophy and psychology classes because like I figured out how the machines work. I'm really glad I have technical degrees, but dang, the people are hard. So software and tech and stuff is relatively comparatively easier. I would probably want to try to teach, well, so see this is the problem is probably get on like some soapbox here, right? So entrepreneurship, I would teach something in entrepreneurship education that basically says entrepreneurship education is bunk and you just need to go start a business and learn it and do it. So again, like it's not total bunker, you can learn some basic principles and stuff like that. But occasionally, maybe because I do it like this, I get asked a little bit less lately, but like going in an entrepreneurship class was like 50 students in there.

And I'm like, "How many of you already started business?" And there's like, nobody raises their hand. I'm like, "Okay, that's fine. Well, how many of you, like as soon as you finish this semester or as soon as you graduate, you're going to start a business?" And like four hands go up. And I'm like, "All right, why are the rest of you here?" I'm like, well, entrepreneurship looks good on resumes these days. And I'm like, that's kind of not the point of entrepreneurship, which is fine. Not everybody's meant to be an entrepreneur. It's fine. I just like, it's the hot thing to do or it's the cool thing to do. So yeah, I would probably try to chase those out. I would say like the best entrepreneurs that I've met that have come out of Purdue didn't take an entrepreneurship class.

They were too busy building their business or learning other things that they've then applied into their business. Most business stuff is pretty straight forward. To teach the non entrepreneurship option immersion class, I would scare people away. But then I would know who was really real, which is actually what I've also said too. I'm like, well I'm glad the entrepreneurship classes existed because I know where the entrepreneurs aren't. And so when I find somebody doing cool stuff, I know who the real ones are that I want to become friends with. I'm being a little overly harsh, but not too much. I believe most of it.

What would you say is the most fortunate event that happened to you that was completely random and by chance? The idea of being, trying to find out what part of your success was more luck rather than skill.

I would only debate the premise of the question. This is another thing I do too. I don't answer questions, I just debate the premise of it is that there is nothing, I think everybody's kind of looking for like the thing. And I'm like, it's just a lot of little decisions like why is DelMar still in business? Like everyday I got up and decided not to quit so I did. And I just didn't make a mistake that forced me to quit. And some of that is my own just like stupidity or stubbornness or just unawareness of other options or things I could have done. And some of it's really, it's probably the luckier things are the things that never happened. Like I had a super supportive wife that in the early years taught high school and she taught chemistry. And so she didn't make a ton of money, but I knew we knew exactly how much she was going to bring in every month. And I knew they didn't cut chemistry classes and I knew she was pretty good at her job and she wasn't going to get fired. And so I was like, all right, we got this to live on. If we live like Grad students for another couple of years, like we'll make it. And she never got sick.

They didn't shut her school down, something random like that, that was outside of our control. When we started having kids, I'm blessed with two healthy kids. I have friends that have special needs kids or had other things and they rightfully as I hope I would to prioritize their family and they need to spend more time or they don't have a flexible schedule that I have. So it's all those random things that never happened to me. I feel I've been really blessed. I think God's really, I don't know why, but given me a lot of opportunities. I need to take advantage of those and maximize them, not just for myself but for my family and the town that I live in, those kinds of things. So it's all the random stuff that didn't happen.

But I mean it's everything from like the professor that I met in my first programming class, like grew up less than 30 minutes from where I grew up. I mean 15, 20 years older than me or 15ish years older than me. So we kind of had this little connection and I liked his class and he hired me to be a grader for him. And then when the Dotcom bubble bursted and I was finishing undergrad, he said, why don't you hang out in Grad School for a couple of years? And then we mentioned started a company together. So like he didn't like six random things that, let me start my first company when I didn't even want to start a company or didn't even think of that as an option. If Daryl doesn't sell his business and I'm not restructuring DelMar at about the same time. When we liked each other, we worked together, again on a contract or vendor relationship and a really close business relationship. And if those things don't align, like the timing's just not right. Daryl's off into his next thing by the time I'm ready to go or something like that. Or I make a bunch of stupid mistakes that Daryl probably prevent me from because if he wasn't ready to go, I try more stuff and it doesn't work.

What would you say is the best business you've come across?

I love little niche stuff. I love somebody that just dominates their niche, knows it, it's a high gross margin, repeatable process. Something that can do really good revenues with a small team. I mean those are the things that I like. There's a guy I know a little bit. He's down in India, he makes accounting and he's a one man show. He makes software for accounting and tax professionals. Dude just seems to like have freedom to do his thing, he knows his market well. His wife is an accounting and tax professional. So he's got some insight to someone there and he's a one man show and he can write code and he can market it and support his customers and can also travel and do some of those things. So it serves him well, I think that's it. I mean, that's my generic, again, non-answer is like any business that serves their owner well is a good business.

Thanks for being a guest on the show. This was awesome. I really enjoyed the conversation.

Yeah, you're welcome, man. I really enjoyed it as well. Thanks for having me on and thanks for getting this community going and your role in that. I really appreciate it. Thanks. Really cool, what you're doing.