Brandon Laughridge – Blending Real Estate and SMBs – Ep. 41

My conversation with ^Searchfunder member‌ on:

- Blending RE and SMBs

- His wife's store Nell Hill's

- What drives key employees

- Using SBA loans to acquire co's

- Why Brandon moved away from online businesses

Enjoy!

https://alexbridgeman.com/podcasts/brandon-laughridge-blending-real-estate-and-smbs-ep-41/

Think Like an Owner Sponsors

Live Oak Bank – Live Oak Bank is a seasoned SBA lender focused on search funds, independent sponsors, private equity firms, and individuals looking to acquire small companies. Live Oak has closed billions of dollars in SBA financing and is actively looking to help more small company investors across the country. If you are in the process of acquiring a company or thinking about starting a search, contact Lisa Forrest or Heather Endresen directly to start a conversation or go to www.liveoakbank.com/think.

Hood & Strong, LLP – Hood & Strong is a CPA firm with a long history of working with search funds and private equity firms on diligence, assurance, tax services, and more. Hood & Strong is highly skilled in working with search funds, providing quality of earnings and due diligence services during the search, along with assurance and tax services post-acquisition. They offer a unique way to approach acquisition diligence and manage costs effectively. To learn more about how Hood & Strong can help your search, acquisition, and beyond, please email one of their partners Jerry Zhou at --@----.com

Oberle Risk Strategies – Oberle is the leading specialty insurance brokerage catering to search funds and the broader ETA community, providing complimentary due diligence assessments of the target company’s commercial insurance and Employee benefits programs. Over the past decade, August Felker and his team have engaged with hundreds of searchers to provide due diligence and ultimately place the most competitive insurance program at closing. Given August’s experience as a searcher himself, he and his team understand all that goes into buying a business and pride themselves on making the insurance portion of closing seamless and hassle-free.

If you are under LOI, please reach out to August to learn more about how Oberle can help with insurance due diligence at oberle-risk.com. Or reach out to August directly at --@----.com in sponsoring? Send me an email at --@----.com Transcript:

Thanks Brandon for joining us. I’ve been excited to have you since we chatted nearly two years ago, and now you’ve been on Twitter for a little while. I’ve loved following you. I want to hear a little bit about that specifically, but also just your background and how you got here and what you’ve been using Twitter for.

It’s funny, odd shows that when you join Twitter, and I think I joined in 2007 or 2008, so a long time ago but has totally just been an RSS feed for about 11 and a half of those 12 years. And then I think like many people when fun networking stuff dried up due to COVID, I got a little more active and happened to be personal friends with a couple of Twitter gurus in the SMB space, I guess you could say, and just had some fun interactions with them. And then one particular thread that just went viral in June or July, I don’t remember exactly what it was.

Was that the thread about the path to building wealth through buying small companies?

Yeah. And so now my persona is the guy that’s just like zero virtue signaling, let’s just make money. So I’m embracing that on Twitter and probably seem like a lot more of like a money focused jerk than I think I really am but I’m rolling with it.

Well, what inspired it? What led up to that tweet and then just the journey you’ve had so far?

I guess if I start at the beginning of my entrepreneurial journey, if you want to hear that, I’ve always been a little entrepreneurial, did various little schemes in high school, never anything great though. A lot of people have the story of their E-bay business that did millions of dollars in revenue or something like that. Never quite had that traction. It was always shiny object syndrome, try something, maybe get a little bit of success. And then of course I found the thing that was going to be 10 times bigger, and I had to jump to that. So there was a glimmer of some entrepreneurship interest, I guess, in high school but never much success.

And I went to college at the University of Missouri and I actually found a job through Craigslist, is an ironic start to what later became a pretty good, big relationship, defining relationship really in my life. I was working for a startup in Columbia, Missouri that did basically what Airbnb does now, except there was definitely no Airbnb at that time. This was###-###-#### VRBO was actually pretty big and it was called VRBO at that time, not Vrbo as they’ve it to today. And a couple of guys had started a vacation rentals listing website after poking around VRBO and seeing that there’s a million listings on here that are paying $300 per year just to be listed on this website.

And it’s funny before we jumped on the call, we were talking about what’s a perfect business and I was telling you, I was struggling to think of a perfect business. Although Vrbo might’ve been the perfect business, literally just a directory that was three or $400 per listing per year. And that’s all they did. It was pretty amazing. So anyway, I started working for a company that was building out niche vacation rental sites. So they were targeting coast rentals, Slow Rentals was one of the names of the niche websites and Lake Rentals, which was the big one because the University of Missouri is pretty close to the Lake of the Ozarks. And a couple of the guys that were involved with that website owned some lake vacation rentals and that was how they got exposed to that world from the start.

So I was hired there as just like a online marketing Jack of all trades I guess. At the time, SEO was a lot easier than it is now. And you could go, and if you wanted to rank for Lake of the Ozarks vacation rentals, it was really just a matter of getting a few links to a page that had a lot of content about that. And it was pretty easy to game. I say, a game, you weren’t always gaming it. I mean, you could be doing things the white hat way but still you’re trying to trick Google a little bit. So we had a team of people that would go out and get links and mentions like every… I probably emailed every realtor across the country 100 times saying, “Hey, can we get a link on your website even though you’re in Montana? Can we do a little article about how great it is to visit the Lake of the Ozarks or something?”

So that business, it ended up being a moderate success. Small, I guess probably wouldn’t even call it a moderate success. It was a flop. It was hard to grow and it was sold ultimately to The Weather Channel strangely enough, they wanted to own the businesses that advertise on their website. And this is all in college by the way, that was probably the first year, year and a half of college. From that, I moved onto a different business that these guys owned. It was a lead generation business that generated mortgage leads. So just doing the same things except instead of trying to rank on Google for like the Ozarks vacation rental, you’re trying to rank for VA loans, FHA loans, mortgage calculator, those sorts of things.

And the scope of what I did expanded a little bit beyond just cold emailing day in and day out to having a little more direct responsibility for a few of the properties that they owned, internet properties that they owned. And by the end of school, I was running one website that was actually not core to the main niche that they focused on, which was VA loans and the same guys that own this business, they owned a mortgage company and they actually generated leads and sold them to themselves basically. And the mortgage company itself was highly successful.

And I worked there for a short time and the guy, Nate who founded the vacation rentals business was the CMO eventually of the mortgage company. And we ended up leaving that business, which was called Veterans United to start an agency, an online marketing agency. And this is like right at the time that I graduated college but our premise was that we didn’t want to do fee for service. We wanted to do equity for service, I guess you could call it. So we would partner with somebody and as opposed to getting a $5,000 a month retainer, if we hit certain metrics, we actually got equity in the business or revenue share or something that had greater upside. I think a lot of people have tried that. And I think most people have come to the same conclusion that we came to, where you basically get treated like an agency and you don’t get paid. So it really stinks. It’s super difficult to do well and it’s maybe one out of 10 deals that you could really truly come into with the purest of intentions actually work out. It’s very difficult.

So that business actually ended up pivoting into what we set out not to be, which was an online marketing consulting business but we had to keep the lights on. And we grew that to I think about 20, 25 people and a couple of million dollars a year in revenue. And this was about two years after college and found ourselves in a position where we actually hired someone to run that business. And I only spent probably half of my time working in that business because a lesson that I have learned, although I certainly need to relearn now that I’ve bought some businesses is from those guys that I worked for in college, they were always very quick to replace themselves as the day-to-day frontline management. And so we saw them do that and thought it would be the right thing to do.

And it was great. We had moved to California and had our little business frat house on the beach, basically because of course we hired everybody like us, which is not my MO now. But at the time it was fun and it was great to have a business that was doing well and didn’t have to work super hard in it. But we were never fully invested in that business ourselves because it always felt like I was alluding to before a little gimmicky and a little bit like it could go away any moment, Google could change their policies and our supposed niche of being good at getting things to rank well on Google could be gone basically.

So we were always, my partner and I at that time were always looking for the next thing and didn’t happen upon anything for a while. We ended up running that business for three or four years and we sold it to one of our clients. And in retrospect, it’s amazing because it’s now been six or seven years ago that we sold it. It has done well ever since. There was no reason to sell it. We weren’t even working in the business and we could totally still own it today and not work on it. So it was a missed opportunity but a lesson to look at the bigger picture and weigh the risks and don’t be afraid to… I guess, I don’t know what the real lesson is there. Just an early exit is not always a smart thing.

But as time progressed in that business and we were definitely less and less committed to it, I spent time looking for other opportunities. And one of the things that I happened upon was potentially buying a business. And through that journey, I met Tim Ludwig, who was one of those guys that’s now big on Twitter, like we were talking about at the beginning of this conversation. And actually Brent Beshore and I and my partner, Nate and bunch of other people that were involved in Columbia Missouri’s entrepreneurial scene. I wasn’t that involved when I lived there but had stayed in touch. And of course he’s gone on to be the godfather of this world, even being online I guess, not like he created this world but has been the content marketing guy that’s been out there a lot. So he definitely helped foster the interest in me a lot as well.

And after we sold our business, our marketing agency which was called Spread Effect, we ended up joining a small, very, very entrepreneurial duct taped together, almost private equity firm out of Canada and had the opportunity to buy a couple of businesses for them in the United States. They wanted to set up shop and it really made no sense to partner with us from their perspective, other than the fact that we were willing to roll up our sleeves and we were definitely like operators, not financial engineering types. We certainly didn’t have that pedigree. And frankly, I probably couldn’t have even modeled a deal like I can now at that time. But it was awesome experience. We bought two businesses for them and we were there for a couple of years.

I realized I had a little more fun running the companies and I did like pursuing deals and they were very deal oriented. So that led me to the conclusion of wanting to do a search fund or something similar to a search fund. And at that time, I got very deep into learning about SBA loans and how I could potentially do it without raising a true search fund because I mean, I didn’t go to an Ivy League school, get an MBA, all that classic stuff. And frankly, it was more appealing to me to buy a business that was say five times smaller. And I owned 100% as opposed to five times larger and I owned 20% or something like that.

Throughout that period of doing the online business, I had been buying rentals in Kansas City, Missouri, where I’m from and had been exposed to the world of property management a little bit and landed on the crazy idea that I should buy a property management company because it would allow me to focus full-time on real estate stuff. And it’s recurring revenues, service business, a lot of the dynamics that you look for in search funds. And it just so happened that when I reached out to, I think I was either one for one or one for two, because there’s literally only two companies that would fit the profile of what I wanted in Kansas City of a scattered site, property management company that works in the areas where I want to spend my time and like to invest a cooler hipster type area. I don’t think I even emailed the second one. I just emailed one.

And I caught his attention. It was your typical, like, would you ever consider selling your business type thing? And it took a number of years to develop after the initial email, but I just lucked out and found somebody who was interested in moving on, had been doing it for 15 years. And I think he saw in me the fact that this is a very niche business that requires a personal interest beyond just like, “Hey, I want to own a business.” You need to know, okay, who are the players that own properties in this area and those sorts of things that a business broker can’t just go out and find that person.

So I’m not saying I’m special, but I came with that interest and knowledge and I didn’t have to develop it, which made it more likely I think that I would perform. So that’s North Terrace Property Management, the business that I run now. The theory with that business was that it would be a hub, I guess. And then I could go out and syndicate multifamily deals when it made sense, which it hasn’t made sense too much for the last year or two with prices just being crazy in value. And multifamily is super expensive right now. But I don’t have to do deals because they have the operating business and I can just sit on it and wait for opportunities.

But since I bought the business, I have been able to buy a couple hundred apartment units between deals that I’ve sponsored myself and then co-investing with some clients and things like that. So the theory has definitely worn out. And then separate from that, very, very long-winded background here, but separate from that, about two years ago now. So just for reference, it’s the end of 2020, I bought North Terrace almost four years ago. Almost two years ago I was talking to a business broker here in Kansas City. And I had inquired on an HVAC business because I thought, “Hey, this is an interesting niche.” As a lot of people do in the search fund world right now for a number of reasons, it’s Amazon proof, it’s a recurring need. There’s a lot of low-hanging fruit in terms of the customer experience, et cetera.

And in some ways it’s synergistic to the property management business. We leverage the same bookkeeping and answering the phone and that sort of thing. Well, it turned out the business that I inquired on, the teaser just wasn’t specific, which of course it’s never specific. And it was an industrial cooling tower, very hardcore type business that was not at all synergistic with what I was doing and was really more of like an engineering firm. So not relevant, not something that I would have any business getting involved in. But in talking to the broker, he asked if I would ever want to buy another business. And I said, “Yeah, I’d love to. Had dream of building a little portfolio of businesses here in Kansas City.

And I would be interested in something that is what I thought I was calling about, which is something that’s synergistic with my real estate business or something that’s just like a local institution. Every Metro has the little chain of coffee shops that everyone loves just because they’re local and it’s legendary or what we bought, which is a local home goods store. It was like the Martha Stewart of the Midwest is a good way to say it. The business that we ended up buying, everybody in Kansas City knows this business it’s called Nell Hill’s. The lady founded it in a small town that was about 45 minutes outside of the city and had since moved it into Kansas City but has just an incredible reputation, very much wrapped up with the founder prior to my wife and I buying it through a group of friends and family.

And I think for whatever reason, what I said, just pinged enough on his radar. He was about to bring this business to market and we were lucky enough to catch it before it went out. Although I’m not 100% that it wouldn’t have been an opportunity even if it was more widely marketed because it was a niche size where it wasn’t super small and you really needed a personality to plug in for the founder, which my wife just happened to have fortunately. So yeah, that’s where we’re at today. I run my business, she runs her business. We’re definitely business partners and looking at it all as one thing. But yeah, that’s bringing us to present I guess.

Yeah. That sounds almost like a small Nebraska Furniture Mart type business.

Yes. She would take offense to that illusion, sorry, Warren Buffett and Patrick Mahomes of course just can do no wrong in Kansas City. But if you ask my wife, she’s not a fan because he is endorsed by Nebraska Furniture Mart. And every time I have the chiefs game on, it’s 100 times Patrick Mahomes and his fiance every commercial break talking about how amazing Nebraska Furniture Mart is. Nebraska Furniture Mart, you might spend 1,000 dollars on a sofa. My wife’s business it’s custom and it’s like $3,000. So a different audience. So I say that ingest.

Yeah. How big is the store?

So the physical footprint is 16,000 square feet, which is pretty good size. I mean, compared to Nebraska Furniture Mart, it’s probably the size of, I don’t know, their refrigerator section or something. But it’s really packed to the gills. The aesthetic is very much traditional, over the top maximalist is what she jokingly calls it. But just for general scale on the business, I think there’s 45 or 50 employees. So it’s not a small shop. It’s very active. And it has an interesting niche where it doesn’t feel like a furniture store. It feels more like you’re going to someone’s home and they change it out basically every week. So there’s a lot of regulars that just go in every week or two or month or whatever frequency, because it’s just something fun to do. It’s not a static furniture store per se.

Interesting. What’s the business model like for a furniture store? I’d imagine if it’s selling hardware goods and it’s retail, it’s probably not as profitable as maybe your property management or other businesses might be. But maybe that’s offset a little bit by how popular it is in the city. And you know that while it may not be as high margin, it’s going to be around for a long time but of course I’m making assumptions here in the question. So I could be wrong.

It’s interesting. It’s just they’re basically totally opposite business models. So my business has essentially no inventory. We have receivables. We perform a service say on the first day of the month for a property that we manage. We’re going to get reimbursed for what we’ve laid out there at best 45 days later, sometimes way longer. You never know. So that’s my business. Her business is you buy a ton of inventory, a lot of inventory. And there are zero receivables because it’s not all cash and carry, but you either buy little trinkets that are on the floor, or you might put a deposit down. So in my $3,000, so for example, you’d put $1,500 down, then Nell Hill’s and orders that piece from a manufacturer and gets it made to the customer’s specs and then the good comes in a couple of months later, a little bit delayed right now, I guess, due to COVID.

But usually about two months later, customer gets a call and you pay for the balance. So it’s an interesting working capital situation where it’s very split. It’s either really amazing with no upfront working capital or just inventory that you’re hoping you sell. Now, they’re good at it. I mean, that’s really simplifying it but very different dynamics. I mean, per business is very, very well-known and people do just kind of… I mean, they do marketing, but people just show up, I mean, 100, 200 people a day just show up every day. Jokingly said, it’s like a little theme park and the turnstile keeps going and they do things to make the turnstile spend a little bit more, but they could stop marketing and it would continue for a long time.

It’s interesting that your past businesses were all online and digital and there’s no inventory or parts to worry about. And it seems like you’ve done the complete opposite with your businesses in Kansas City. Is there anything to that or did you look for online businesses while you were looking for this property management business or what caused that shift to more physical type companies?

Online businesses and software businesses, obviously they’re the perfect business model when they work. But I think I’m self-aware enough to know that I’m not that smart and I’m afraid of how many smart people are going after those things. And I just know that it’s a race to the bottom in a way. You’ve seen it a million times. Somebody comes up with a tactic that works in online marketing, and then it’s always 100% of the time, it’s a flash in the pan because that thing is going to… Either it’s something that’s slightly shady or it’s just something that if you just do more of it, you can win basically.

I don’t want to be competing in places where there’s going to always be somebody smarter than me going after that. And if it’s online, the nature of it is people all over the world, they’re going to probably be going after it versus there’s not people from all over the world, raising their hand saying, “I want to start a property management company in Kansas City. And they shouldn’t be. So I think it was just 10 years of having that feeling of, “My gosh, I just want the opposite of something that can go away overnight and something that draws in naturally just tons and tons of competition.” And so it’s sort of I guess the competitive moat is signing up for things that other people don’t want to do.

Yeah. Certainly. And you’ve talked about using SBA loans. Did you use SBA loans for these two businesses?

Yes. So my business that I run, we own it, just my wife and I. Nobody else is involved. And for her business, we actually raised a little bit of money from friends and family. So more similar to what you see in the search fund world when people do a self-funded search but then raise a little bit of equity to get a deal done.

Can you talk a little bit about the experience applying for an SBA loan and going through that process for these two companies?

The first one that I did, my business North Terrace, I actually just did it through a big bank, Bank of the West. And it was with the local lender at the local branch. And he was pretty good. But being in Kansas City, which is not a big market for Bank of the West, I got kicked to somebody that wasn’t local. And they didn’t do a bad job but it also didn’t feel like it was totally their focus, which on the second deal, which I can talk about I came to see what that really looked like, a bank that specialized in it. I mean, there’s probably tens of thousands of people that quote unquote do SBA loans for a bank. But there’s an amazing difference when there’s someone who really specializes in helping fund small business acquisitions through SBA loans.

The process is not too bad to be honest. You have to put together a business plan. You have to put together… Which there’s no definition on what that has to look like. For the second business that we bought, it was really just like the deck that we gave to our friends and family that were going to invest in the business. You have to do a transition plan. Of course you have to do a personal financial statement. And then there’s a number of tick off the box tax returns for the business and insurance policies and all that due diligence type stuff. But it’s not as bad as I think most people make it sound. There is a lot of CYA stuff that the banks have to get because part of their guarantee is their documentation has to be absolutely perfect because the way that it’s been explained to me, thankfully, I’ve never experienced it.

But if you were to default on your SBA loan, the first thing, the bank’s going to try and come after you for the money, but say that that doesn’t go well. And they go to the SBA saying, “Hey, we need you to backstop this. Come through with your guarantee for your portion of this 75%.” They’re going to not even look at me as the borrower first, they’re going to look at all the documentation that the bank got from me at the beginning of that loan. And they’re going to look for mistakes and they’re basically trying to get out of it. And I think they’re almost upfront with saying that that’s their MO because it instills in the bank, we’re serious. This has to be perfect. We’re not going to say, “We’re going to make an exception for you.” Or, “You’re one of our favorite banks. So we don’t care that you did this wrong.”

The thing that I think a lot of people get frustrated with, especially they’re very entrepreneurial, just weird stuff like the provenance of the down payment, which if you’re… Our first business was fairly small, so it wasn’t that big of a deal. We all had that cash just sitting in the savings account. But for the second business where that was significantly more money and it was a few different people, there’s all this weird seasoning that they need to see. And we had to prep for that three or four months in advance. And there were still other issues like, “Hey, I see there was, I don’t know, interest income in this checking account. We need some documentation of whether that’s truly interest income or is there some other reason that there was a dollar or 50 put into that account?” Just bizarre specific stuff. So for the like eight or nine people that put a little bit of money into that deal, there was hundreds of pages of documentation just for the down payment provenance.

Since they’re all part of the down payment, they all had to contribute that paperwork?

Yes. And we did our best to tell everyone months in advance, “Hey, you might even set up a new bank account, put this in there. Then all we’re going to have to ask for is two bank statements.” Or whatever it was. I don’t remember exactly but I think it was 60 days worth. And I think one or two people did that. Nobody else did. A few people took it off of the home equity line, which then it’s a whole other process. So it was the 11th hour. And by nature they are… By rule, they have to do it right at the end because they need to see that it wasn’t money laundering or whatever. So they’re doing that the day before close. So it’s nuts.

That is nuts. So then is there something that the second bank you used who is more specialized? Is there something that they did that made the process a little bit easier for you?

So I know one of your sponsors is Live Oak Bank. Byline Bank is the bank that we actually used on the second deal. And I think they’re right up there with Live Oak in terms of specializing in doing acquisition loans and understanding, okay, most small businesses are not going to be collateralized 100%. This is a cash flow loan basically. So the fact that they understand that from the start is very helpful because the SBA seven eight program is just like a framework that banks can put things into but they can layer their requirements to an extent on top of it. So a lot of times you might go into a bank and it says SBA loans, and you could say, “Hey, I’ve heard about buying a business with an SBA loan.” And that banker will say, “Okay, well, what’s it look like?” You say, “The EBITDA is 300,000 and I’m going to buy it for 900,000 and it has 100,000 in assets.”

Then that lender you, “Well, that’s impossible. There’s no collateral. We’re not going to do that deal.” That could be true for that bank. I don’t think they’re actually supposed to explicitly say that because there is a mandate that lack of collateral itself is not a good enough reason to deny a deal. But you’ll hear answers like that. Versus people like Live Oak Byline, a couple of others, I think Celtic Bank is another one on the East Coast that really have a little practice built around this. They start from like, “Okay. We like you as a sponsor. This business looks interesting. Let’s figure out how we can get it done.” Not, “Please, mister banker, will you consider my plea?”

So then post-close, is there any interaction with the bank afterwards and keeping up to date with any additional documentation?

So not at all like a normal… Let’s say you were going to a regional bank and getting a 2X EBITDA cashflow loan to recap a business or buy a business or whatever. They’re going to have covenants, regular reporting, fairly strict rules probably on cash distributions, that sort of thing. SBA loans do not have any covenants. There is reporting that’s required but it’s very simple. And I don’t think they even, they don’t do anything with the information that you give them other than maybe they use it to track potential issues and maybe they report it back to the SBA. I’m sure they do that. But it’s not like if you send a bad set of financials on a traditional bank loan and now, okay, they’re going to start pulling things or start tightening the screws on you a little bit because they see a problem.

They don’t really have any power to enforce anything. This year has been interesting with the PPP program and everything else that’s gone on where we have had a lot of interaction with them. But yeah, in normal times, I think quarterly, they ask you. I think one of our businesses they ask quarterly and the other one, they just ask annually for updated financials. Once in a while, we’ll have a conversation but I think it’s a little bit more geared towards their just relationship building than anything. It’s not holding us accountable or anything like that.

So using an SBA loan, what might a structure look like then?

And you’re talking about that Twitter thread that went viral this summer. I don’t remember the exact numbers that I put in that for my hypothetical deal. And I don’t think the math is as easy as I’d want to make it here on the fly. But let’s say for instance there was a business that did a million in EBITDA. And you had agreed with the owner to buy it for $5 million. With the right lender and with the right risk aptitude or right risk appetite I should say, personally, you could actually buy that business for $5 million, put 5% down because you’re actually supposed to put 10% down although they allow the seller to contribute half of that 10% so long as it’s structured as a note that’s on full standby for the entire term of the SBA loan. So it’s got to be in last position. It can accrue interest but you’re not allowed to pay anything on it.

So for all intents and purposes, it’s a little bit of a lottery ticket for the seller, but obviously it’s easy to price that into the deal. In my example, I guess you’d be talking about 0.25 turns of earnings. So that’s not a crazy amount to ask them to wait 10 years and a month for. And then the balance of that, so the 90% of the five million can be an SBA loan. Now most people would split that up between an SBA loan and a seller note to keep the seller engaged. Maybe you can get better terms on the seller note and then maybe you use it where indemnification might happen if there’s issues post-close or whatever, as opposed to an escrow. But you could borrow as much as four and a half million on the deal that I described.

And the actual limit for an individual is $5 million. Practically speaking, you could probably do as large as… I mean, you could do any size but probably a $10 million purchase with an SBA loan if you threw a seller note or some mezzanine financing with a larger equity check. But in my example, that $5 million deal, typically the SBA portion of that and the seller note are going to be amortized over seven to 10 years. Rates right now, I think five, 6%. And the seller notes just whatever you negotiate. So if you do the math on that, it’s pretty amazing cashflow from day one with a million caveats of anything could happen basically. But if you’ve got a good steady business that you should want to buy, it’s really amazing on a spreadsheet. That doesn’t always work out that way. So far so good with our businesses but it’s a very, very serious commitment but a very compelling one too.

And so when you have excess cash in North Terrace, do you try to pay down the SBA loan with that just to de-risk things a little bit, or are you pretty comfortable just letting it ride at the normal payment schedule?

I don’t pay that down because it’s not a line of credit where if I wanted it back, I can get it back. I don’t actually have anything on any lines of credit right now. I did at one point and I would pay that down. And that’s nice. Like I said, because if you need to go use that for something, you still have access. I use North Terrace as a vehicle to buy an owner-occupied office building which is an interesting thing to do. We’ve got a business that doesn’t own its real estate. That was not an SBA deal. Banks love to do owner occupied real estate, which makes sense. It’s pretty good to have your tenant and the owner be the same thing. I’ve thought about replacing the financing on that office building with the line of credit and then sweeping down our operating cash against that building line all the time. So I guess that’s on the list but it’s a ways down the list right now.

So what are some advantages for you and with your business and the real estate when you’re buying owner occupied real estate that you are the owner and occupier of?

Certain types of vacant real estate, it’s just worth a ton less simply because it’s vacant. So I purchased this office building that North Terrace is in from a nonprofit. I was the third guy to make an offer on it. One was a neighboring property owner. One was just somebody off the street. And then there was me who would be an owner user. And I got lucky because the first two brought expectations down. And then I think by the time the third person gave a number in the same range, they adjusted their expectations. It also happened to be I think about 60 days before the end of their fiscal year and they really wanted to get it off the books. So that was a nice little lucky break as well. But it was interesting because there was just a huge disconnect percentage-wise. I think the building appraised for 40 or 50% more than I purchased it for simply because I the appraiser appraised it based on what our occupancy costs would be.

Now, it’s not a super easy thing to do at least in our area to buy an office building and just lease it out to a third party. It’s not difficult but there’s long hold times and you don’t get credit for it in the same way that you would get credit for occupying it yourself when you have control of the tenant. So it’s still pretty illiquid and I don’t get super excited when I think about the gain on that but it is nice in terms of enabling other things and it actually, it turned out to be pretty critical in enabling us to have a nice little bump to our personal balance sheet, to get the lender on the bigger business acquisition, to look at us as a bit of a better risk even though it’s not like I could turn around and just sell this building super easily. But I definitely think, I don’t want to say anyone with a business should own the real estate that they’re in but it’s most of the time far superior.

Yeah. And looking at the bigger picture now. You have two businesses, apartments and a real estate. Is there a longterm aim to be in one or the other? Are you using your companies to just build a longterm real estate portfolio and you want that to be your largest holding or do you see like a place for both companies and real estate in your portfolio over the next 20 years or so?

There’s things that interest me about both for sure. Real estate is more scalable for the lifestyle that I want, which is I don’t want to build a firm per se doing what we do or anything like that. I enjoy it just being like my wife and I owning some businesses. So the thought of scaling, buying 10 companies or something like that is not really reasonable, whereas buying more apartment buildings, the incremental tax on me personally is not that crazy. I mean, it’s a little bit of an influx of work when you buy something and then you put it into the system and it’s set and you don’t have to work super hard on it. So that’s appealing with real estate. There’s also all sorts of tax benefits. And some of those are permanent. I hope tax benefits.

And some of those are short-term things right now that are especially compelling with like the JOBS Act. There’s some depreciation stuff that’s very interesting if you’re a real estate professional. So I would love to buy more real estate right now. And I think long-term, I would like to continue buying real estate. I’m not fully convinced that exactly what I do is going to be an opportunity forever. I mean, there will always be probably opportunities in multifamily. But the space that I plan, which is like $5 million and under multi-family is very, very saturated right now. And I don’t think actually that limit of $5 million is… Much higher than that it’s very saturated too. It’s just tough to find any interesting opportunities.

So from that perspective, it does lead me in the direction of wanting to go a little bit more after either buying businesses or focusing on growing our businesses a little bit as opposed to buying more real estate, just because that’s so much more fragmented and businesses don’t get listed for sale and get five offers the day that they’re listed for sale, the way that real estate does right now.

So I’m a bit of an opportunist and open to both. And I would say my intention for the next few years is just to… I want to get both businesses just dialed in perfectly so that I truly have the option to do either. Because right now I don’t think I have that option. I really have to run my business and my wife has to run her business. It’s not like anything’s going to run itself.

Yeah. So how do you think about removing both of yourselves more and more from the businesses? So using real estate more as a lifestyle investment compared to buying a portfolio of companies, how do you see yourself being removed over time from the day-to-day operations?

Well, in both businesses, we have some really key employees who probably could run the businesses without us if I’m being totally honest with myself. But I think we need to continue to empower them and then actually give that authority to run the business if it’s something that they want. My business having clients. It’s a little bit more difficult because there’s a personal relationship and it could be a little bit shocking if I was like, “Well, I really don’t work there anymore.” Yes, I own it but I don’t work there just because it is so relational and our other client wants to buy something and you had dinner with him and that kind of a thing. But it’s not to say that it’s impossible. And I’m happy to do that stuff right now. So I’m not totally trying to remove myself. I’d like to just set up the option at some point.

Gotcha. Yeah. That makes sense. I’m going to move into some closing questions as we’re bumping up on your time here. What class would you teach in college if you could teach about any subject you wanted?

I told you my silly Twitter persona was just let’s make money silliness. So I’m going to roll with that theme and say… I would have loved a class in college called how to get rich and just dissecting basically how to build wealth, creative ways that people have built wealth and super tactical stuff too just like how does a mortgage work? Not sort of basic personal financial concepts because there are personal finance courses of course at college. But slightly up the chain a little bit.

Also I think it would be fun because if you titled the class how to get rich, I think you would instantly be like, one of the most popular classes in the course catalog. So that’d be fun. Just come in and instantly unseat the academic people that have been trying to be popular or whatever. But I just think it’d be super fun because the main reason that we all go to college ultimately is to improve our financial future yet we spend so little time actually talking about that while we’re there, that it just seems crazy to me. And I think it’d be super fun to just drill down into very tactical ideas and strategies and be the anti college class.

Nice. How do you think you would structure it and do you think you’d have a few guest speakers?

Definitely guest speakers. That was actually one of my favorite things in college. Mizzou was big on that. I’m sure every college is but always tons of super interesting guest speakers. And you tended to be able to like go and have lunch with them or grab a beer with them if it was the upper level classes later in the day. So that was always fun. So definitely good excuse to get the university to pay for the lunch, I guess. As far as how I would structure it, that’s a good question. I did not think that far into this.

What would your topic areas be, like topics of focus?

I think inciting urgency on some of these couple of very basic things that you can do at a young age that absolutely set you up later in life. The one thing that I knew that I should have done that I didn’t do which I regret is just buying a duplex with an FHA loan when you’re super young. I mean, you instantly have set yourself up assuming that that property doesn’t just totally go to hell. But if you decently manage it, you’ve got to live there for one year and then you’ve got call it a half a million dollar asset if it’s a half a million dollar property that you’re going to pay off. So just some of those super tactical things even if one kid that came out of the class went and did it, it’d be super fulfilling.

Excellent. Yeah. I like that idea. I’m sure you can talk a lot about real estate and how it can blend with business ownership and to that point. That’d be really a fun class to be a part of.

Yeah. I actually had an opportunity to do a very mini version of this. Mizzou does, they call it Professor-for-a-Day. And they’ll have recent alumni back and just anybody they want to have back. And I did that a few years ago and I actually talked about buying a business with an SBA loan. So that was my one day version of this and it was super fun. And everybody was like… There was nobody staring off in space in the back of the room. It seemed like everybody was on the edge of their seat, probably because I was putting, “These are real numbers. This is really what you can do.” Versus theory.

What’s the belief you used to hold strongly that you’ve changed your mind on?

Kind of going opposite to the types of stuff I was just talking about that money is the easiest motivator and that we’re all mercenaries. I absolutely used to think that in my earliest businesses and it is very, very untrue. In fact, it’s not a great motivator at all usually. I mean, people want fair compensation. But the main reason that I’ve had people leave businesses when it wasn’t my choice is not because they went and got some big raise somewhere else. It’s because they maybe were unsatisfied with some aspect of their job. And I never noticed, or I never asked him and I never did anything to address it or they didn’t get a new challenge in a year or two and just weren’t empowered to do more.

And I used to think that just money could solve everything related to team morale and motivation and it doesn’t. And I know that that’s probably very obvious to many people but I came to realize that for myself and our team at the same time that you could offer me a lot more money to go do certain things that I would absolutely not want to do them. And I’m not referring to things that are just like blatantly, you shouldn’t want to do that because it’s unethical or bad for some reason. I like what I do. And it’s exciting that it’s a business that I own and there’s opportunity to make a lot of money. But there are a lot of businesses that might be a good deal financially that I don’t want to be involved with at all.

Yeah. That makes a lot of sense. Matt Estep on the last podcast was talking a little bit about how the employees, like your best employees often aren’t motivated just by money. There’s often much larger things at work and it’s interesting that you bring that up as well.

I didn’t listen to that one, so I’m not stealing. I will listen to it though. It’s super interesting. And it can be very different for a lot of people. For some people it’s authority or even just perceived authority through their job title. And other people will just laugh at that. Like, “You can call me the king of whatever and it doesn’t matter. I’m just here to do my job.” So I’m trying to get much better at spending my time empowering, holding people accountable, those sorts of things as opposed to jumping in and just taking something on myself, which has been a problem in the past. And then you end up with this string of half finished things and we’re not all improving.

What’s the best business you’ve ever seen?

Well, I’ll say two. So I said VRBO because that came into my head earlier in the conversation, amazing business. Just anything that’s like a directory like that, man, wouldn’t it be amazing to own the Better Business Bureau or something which I don’t think is actually a for-profit business but everybody knows it’s like a mafia type situation and it’s a great little racket for them. So a directory business like that is amazing. And then this isn’t the best business I’ve ever seen but it’s a great inspiration for me. There’s a group out of Colorado called Monarch Properties. And what I like about them, one, they publish a nice bit of detail on their finances and their structure and their business model on their website. And they’re not like a REIT or public in any way.

So that’s interesting because you can dive in as an outsider a little bit. But secondly, what’s interesting to me is in a space, so multifamily value add that is so built around finding a deal which is a terrible thing to build a business on. That’s not their model. Their model is that they are owner operators and they’re vertically integrated and they basically can underwrite an opportunity. And they know that, okay, if expenses and revenue are X and Y that they can decrease expenses by 5% and increase revenue by 5%. And that hits their marks versus most people who are trying to do something temporary that bumps a value, they have a long-term competitive operational advantage.

And it’s just an amazing story that business founded in the early 90s by an accountant who I think grew fed up with seeing how all his clients were getting super rich off real estate. And he decided to put together some deals himself and then built this huge operating business around that. So they have like 60,000 units. And so very much an institutional scale but they actually raise most of their money still from mom and pop country club type investors. And I think that’s pretty interesting too.

That is pretty interesting. Thank you so much for sharing your time today. This has been awesome. I haven’t had a whole lot of real estate discussions in the past or how the two SMBs in real estate can blend together. So it’s been fun hearing that from you.

Absolutely. Thanks for having me. I love what you’re doing.

Thanks, Brandon. We’ll talk to you soon.

All right. Thanks. Bye.