My guest for this episode is Kaustubh Deo. Kaustubh recently acquired a tree service business in Seattle through a self-funded search after working in private equity in New York. I’ve had the pleasure of getting to know Kaustubh over the last two years and have found him to be one of the most insightful thinkers in the search space.
A good portion of our conversation focuses on concepts like risk-reward and making transitions, topics he has given a lot of thought. Throughout our discussion, we talk about the differences operating in large private equity compared to in small companies, loosening his deal-breaker list, effectively investing his time learning the new business, and YouTube strategy for the tree service industry.
Live Oak Bank — Live Oak Bank is a seasoned SMB lender providing SBA and conventional financing for search funds, independent sponsors, private equity firms, and individuals looking to acquire lower middle-market 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 transcript:
Alex Bridgeman: It was fun chatting with you about all things trees and even some of the YouTube channels you’ve seen other tree companies do. Do you think you’d ever do a YouTube channel or anything like that?
Kaustubh Deo: I think about it. The problem is- so, there’s this one really big guy Guilty of Treeson, who’s actually based out here. I don’t know if I told you about him, but he was working for a company.
Alex Bridgeman: You did. It’s the greatest name for a YouTube channel I’ve ever heard.
Kaustubh Deo: And he was working for a company out here in the suburbs of Seattle. And I don’t recall the name of the company, but the company had a crane fall on the house, which is just like an absolute disaster, and like so many screw ups had to have happened for that to come out. Anyways, as a result of that, the guy stopped posting for a while because it was like total disaster. But then the other thing I heard was that there was some like controversy about who owned the content, like whether that guy owned the content or the company owned the content. And so, I’m not really sure how he’s progressed. I do see him on Instagram. He is posting on Instagram, and I think he’s left that company, so now it’s like his own solo page. But there’s this interesting culture in this industry of like really intense tree climbers tend to be contract climbers. They’re like hired guns who you can fly in for like a week of work, and then they leave. And they bring all their own equipment, they carry their own insurance, and they make a ton of money per day. But they’re not interested in being W2 employees, and they’re some of the best climbers out there.
Alex Bridgeman: Wait, why aren’t they interested in W2? Just because they enjoy the freedom and flexibility of being a hired tree climber?
Kaustubh Deo: Yeah, they can travel all over the country. They don’t work full time because they make enough money. Like some of the best guys will make like a thousand dollars a day. So, if you’re doing a thousand dollars a day, you’re like okay, I don’t want to work like a seven to three full time job, I’m just going to work whenever, like a few days here or there and make my money. I don’t know, there’s basically a company structure around W2 employees, which is what my company is, which allows you to build culture and allows you to like create growth in the team over time. And then there’s companies that are just production focused in terms of like let’s get trees chopped down ASAP and that’s how they operate. And so, for them, these contract climbers are awesome because they’re really high production.
Alex Bridgeman: How much would you have to pay a climber to hire them full time? I’m assuming you wouldn’t pay $300,000.
Kaustubh Deo: In the Seattle market, it ranges from, depending on your level of experience, depending on if you have an ISA Arborist certification, it’s anywhere I’ve seen from like 30 for a more junior climber to like 50 for a very senior climber an hour. And so, it’s a pretty good career. And at 50, you are crew leading, you have the certification, there’s a lot of bells and whistles at that point. And I think if you don’t have the certification, you’re probably- like the top end of the market’s probably around 40 an hour. But like that’s a pretty- it’s a full-time job, you get health insurance usually, you usually have other benefits, and you’re making 40 an hour, so that’s roughly 80K a year. That’s a great career, I think. It’s the kind of thing that you could start out of high school at the grounds worker level if you’re willing to work hard and kind of haul brush for a while. So, you’d start at like 20 bucks an hour. This is in Seattle; our minimum wage is higher and our competitive market is higher. But you could start at 20, you can put in a couple of years as a grounds worker then become like a junior climber if you’ve learned all the basics of tree pruning and all that, which does require some work outside of work, like some learning outside of the office, so to speak. But you can kind of bridge yourself from 25 an hour to like 40 an hour over the course of call it 7 years, which is with no college education, without any vocational school or anything like that even, no trade school, no certifications. So, I think it’s a pretty cool career in that sense. And then over 10 years, you can be at 50 an hour in theory.
Alex Bridgeman: Yeah, no kidding. Are you starting to recruit any folks out of high school? Or what’s your kind of main recruiting base?
Kaustubh Deo: Yeah. At the moment, no, that’s like a long-term approach, and I’m still in short-term mode in terms of like the transition and hiring. So, my current base is existing tree workers, people with some experience in the field, especially because I need to hire some more climbers. But longer term, yeah, it would be awesome to create like a real path from high schools. And in this area, there’s a couple of technical high schools that are more like vocational/trades type high schools that it would be really cool to partner with them and make more of like a program. I know the largest companies in this industry, they have more of like a training academy type concept, which they have the scale to be able to do, but like tree services, at the end of the day, is just a business of finding really experienced professionals who know what they’re doing and providing them to homeowners who don’t know what they’re doing. And so being able to like create experienced professionals and provide them with the experience and teach them how to get there, like that’s differentiation in this industry.
Alex Bridgeman: Yeah. Do you think that Guilty of Treeson YouTube channel, do you think it helped with recruiting at all as part of maybe just folks reaching out to them or they would go to a school and show one of their videos of someone climbing a huge tree with a giant saw and crane? Do you think that was helpful?
Kaustubh Deo: I think it probably- it must have been. I don’t know for sure. But like the people who work in tree services, they love it. You know what I mean? It’s like a passion industry. People love like the big trees. They like working in the big trees. We see this all the time actually, we’ll seek potential candidates from the Midwest or from like Florida or whatever who want to move to Seattle or the Pacific Northwest because this is where the big trees are. You know what I mean? So, it’s kind of like the hub, so to speak. This is like New York City for finance, this is like the area for tree companies, you know what I mean? And so, in that sense, having videos and cool footage of your guys working on awesome trees, that is sort of like a recruiting thing. And I’ve been thinking do I want to get some drones and take drone footage of our guys up in trees and stuff. So, these are the things I think about late at night.
Alex Bridgeman: Yeah, the drone feels like an easy investment to make if it’s going to help you on that recruiting side, even maybe not today, but eventually, and you can start getting the practice and developing a channel of some kind. It seems something that’s more visually driven. I don’t know if- I’m not sure how many podcasts there are on tree service, but I imagine just as a guess that some of the more visual stuff like YouTube channels or Instagram might be more successful than like a podcast on tree service. Although, do you see others doing broader content strategies?
Kaustubh Deo: The podcast side of it I’ve seen as more like the vendors in the space, like SingleOps, which is a big tree focused CRM, they have a podcast that focuses on tree service operations. I haven’t seen a lot in the realm of the actual tree operators themselves. But it’s just like an unbelievably fragmented industry. And so, there’s not a lot of like institutional or even, I don’t know, even like John Wilson sized players in this space as far as I’m aware. And so that makes it a little bit- I just don’t think people have the time to focus on it. Like it is really mom and pop across the industry.
Alex Bridgeman: How’d you get to tree service? Obviously, just from our conversations, you’ve been talking about search for quite a while and thinking about it for a long time. What’s been your evolution, your career up to this point?
Kaustubh Deo: Yeah, so look, my background was as a generalist in private equity. I did distress debt before that. And so all of my training was not industry specific. All of my training was how do you identify a good industry? How do you identify a good business within that industry? How do you identify good people within that business? And then, when I was doing distress debt, it was how do you identify the right security on the balance sheet? That was like the last level of that work. And so, when I came to search, I took a very similar approach. Because I didn’t have a search fund behind me. I was doing it self-funded, so I didn’t really have committed capital as private equity fund. I didn’t have like quasi committed capital as a search fund. So, I didn’t have a funding advantage over any other buyers. I had no operating experience because it was all coming from finance. So, I didn’t have like any kind of operating edge over any other buyers. And so, I was like, okay, I don’t have any edges here. Like what is the way in which I can out-compete? And the way I figured I could compete is that what I am good at is learning industries and businesses really quickly. And so, I think like a lot of searchers, they sort of create industry boxes. And part of the reason for creating industry boxes is so that they can focus and not waste time looking at a myriad of random things and having to learn new industries constantly, which makes sense if you actually have an edge in those industries. Since I didn’t, my focus, I was like, okay, I’m going to keep the industry filter wide open and just like that’s where I’m going to spend my time is learning these random industries as they roll in the door. Because I did, I pretty much only spent time on brokered search. And so, I looked at, I don’t know, probably like a hundred odd companies and from really any industry and like all kinds of random things. And so really it wasn’t like I was looking for tree services. It was more that a tree services deal came to me, and I looked into it and I was like, huh, this industry works, there’s something here. And then, as I dug more into it, the more I was able to confirm that.
Alex Bridgeman: Yeah. And you eventually narrowed yourself even to just the Seattle area. So, what did your search look like before? And then what made you choose Seattle? Of course, you’re living there and you moved there, but I’d love to hear a little bit more about that focusing down to Seattle.
Kaustubh Deo: Yeah. So, I started looking somewhat nationally. And then I was like, okay, the best part of this small business search process, especially as a self-funded searcher where you end up owning a majority of the company is there’s this really big upside potential if you can own it for like 30 years and this is like your life now. And I realized after I was doing the national search for a while, I was like, oh, these are a lot of places I don’t actually want to live for 30 years. Like, it’s fine for a traditional searcher who will most likely exit in a few years. They think about it as like this is a finite moment in my life. But for me, like the buying and the selling of the business is the largest friction point, like I would love to set up the buy the first time for a business I can own forever in theory and just throw off a ton of cash. And then maybe in like 30 years we sell and I’m one of these old guys selling companies. So, then I basically cut out the national search and focused on kind of major cities that me and my girlfriend would want to live in long term. So, then I was searching on that basis for a while. And then what I found is in major cities, it’s more competitive. There’s more buyers. Like yes, there are more sellers, but there are a lot more buyers too. And I didn’t find myself being taken seriously by brokers or sellers who would be like, okay, are you really going to live in Boston? I mean, that’s a bad example because I did live in Boston. But there was no tie in. It’s like when you try to get a job in some random city, they ask you what are your ties to the city, I couldn’t express that to sellers in a meaningful way. And so, then I kind of doubled down the focus on just Seattle or the Bay area because those are basically the two cities that I know the best personally. Like I grew up in the Seattle area, a lot of my extended family’s in the Bay area, so I know that that area very well as well. And so, when I started doing that, especially in Seattle, it was like night and day in terms of the traction I would get with the brokers, traction I would get with the sellers. Like when you can tell them I went to high school here, like I grew up in this suburb and, oh, you work in this area, my best friend lives down the block, and that kind of thing, it was just a different type of traction. And I really knew I was onto something with it when the brokers- you know how there’s like good brokers and then there’s like eh brokers, when the good brokers were starting to give me the time of day and like meet me for coffee and they would suggest let’s get a coffee, then I was like, okay, something is working here because no broker in any other city had ever done that for me. And so, that’s sort of how I ended up focusing more and more on two cities. And then ultimately Seattle was like the most natural fit given I grew up here.
Alex Bridgeman: And once you focused on Seattle, did you focus to a handful of industries or just stay within Seattle, you just kept it wide open, just any deal that looked interesting?
Kaustubh Deo: No, I kept it wide open. I looked basically, I don’t know, like 40-ish mile radius around Seattle. But yeah, when you focus on one city, your deal flow goes way down. And so, if anything, my industry filter was even wider than before, because that’s- you just have to look- this is a little bit of a numbers game. Like you just have to look at enough deals to figure out what you can and cannot live with.
Alex Bridgeman: One thing we also talked about or have talked about extensively is just the different points in a deal that can fail and how, before searching, everyone builds a model to figure out if this is the right way to do it or whatnot. I know you’ve done a little bit of the same but have had to move things around quite a bit. What was your deal process like? And then did that model that you built hold up, or what changes did you have to make?
Kaustubh Deo: I think everyone who does search for at least several months kind of has a list of stuff that matters to them, and they have like a prioritization of that list. And some of them probably fall into like deal breakers and some of them fall into like I can live with this and some of them fall into like I don’t mind this at all. And I think the reality for me, and maybe I’m just like not a disciplined enough buyer, but I found finally to get a deal done, at least one of my deal breakers ended up being broken and yet I did my deal. And so, I think that was a reality for me. For example, in my deal, there was a seller note PG that I did not want to give. And I just felt like on principle, that’s not how seller notes are supposed to work. Like it’s supposed to be seller has full risk on the business, blah, blah, blah. And I talked it over with my investors and my brokers- or not my brokers, my advisors. And it just became- they were basically like, look, this is pretty common in this end of the market. Yes, it’s odd and doesn’t really achieve the incentive alignment you want. But like is this really the reason you wouldn’t do the deal? And I think when I started my search, I said, yes. And when I was like on the one yard line to close the deal, I said no, and I closed the deal.
Alex Bridgeman: What goes into breaking down some of those deal-breakers where they feel less like a big deal? Is it partly just that you’ve been- just through the search process, you’ve seen a lot of search deals and done this process a lot, or you’ve talked to more searchers who talked about a wider range of things happening in their deals, and you’re like, oh okay, this thing I thought before would be a deal breaker actually isn’t that bad because more people do it then I thought? Where do you kind of put that evolution?
Kaustubh Deo: Yeah, I think if you come from a private equity background like I do and you go into search, you’d probably need to see like 30 to 40 deals to like recalibrate what a small business deal looks like. And I think I had to go through that process. If anything, I should have probably sat back down a few months into search and been like, okay, let’s reassess my list of priorities and what I actually care about. Like owner dependence is a big one. Small businesses are very often heavily owner dependent. And that to me felt like a deal breaker early on. And then, at some point, I was like, okay, at the size that I’m searching in, that’s just what comes with the business. Like that’s how these work. And traditional searches are doing bigger things where there’s actually like a manager layer and all of that, which is great, and I appreciate the value creation that happens there, but at the range I was looking at on the self-funded side, that just wasn’t what these deals looked like. And so, I think there’s, I don’t know, I think I described it to a friend as there’s like a little bit of a grieving process of like, oh, you had this amazing idea of what a self-funded search could look like. And then, once you’re like 20 deals in, you’ve realized that vision has died. And then once you’re like another 20 deals in, you are like, okay, you’ve grieved about it, and now you’re like ready to do a deal.
Alex Bridgeman: What were some of the hardest deal-breakers or things that would turn you off to a deal to let go of?
Kaustubh Deo: For me, I brought up owner dependence because I think that was the hardest. Because especially when you think about businesses that have a specific trade or a vocation attached to it, like a skillset, these are things where I cannot just fill in for the owner and like work really hard and be good. It’s one thing if it’s like the owner worked super hard as the manager and keeping the books together and keeping everyone scheduled and all of that, like that I can grind at and probably fill in. But most of these businesses, the owner is also an individual contributor on the actual like services level. And so, that’s the part that was really scary for me to kind of step into. And I ended up doing the deal I did because the former owners were extremely good to work with in terms of saying like, no, we’ll give you a real transition period during which you can find the right replacement hires to replace me at the individual contributor level. Without that, I couldn’t have done this deal without that. And you’re still dependent on them holding up their end of the bargain there. They just got a chunk of money. They can just move to Hawaii the day after closing. And so, so much of small business deal-making fell down to like trust with the seller. And we can talk more about that because that’s crucial. But in private equity deals, the day the deal closes, the seller tosses you the keys, and you never talk to them again, unless you’re suing them for something. And so, it’s just that was like a big change. It goes hand in hand with owner dependence that small business acquisitions are not like a private equity deal. They’re like a handing off of legacy that takes months. It’s not like closing day isn’t the day so to speak.
Alex Bridgeman: Yeah. Talk a little more about that because that’s an interesting comparison you’ve done a lot of or have done a lot of thinking of between much larger private equity deals where there’s several layers of management and things generally are kind of established in businesses versus owners getting involved and all sorts of other stuff. What have been some interesting comparisons you’ve seen between small business deals versus larger private equity deals? Just on the deal side. Like we’ll talk about operations later. But deal side, what are some differences you’ve noticed?
Kaustubh Deo: Yeah. So, I mean, there’s several. So, one is always just understanding the core financials is a very different process. Like in PE deals, we just bring in like a big four accounting firm. We pay them like six figures to do a quality of earnings and whatever, that’s it, you’re done. And all you’re really fighting about are the EBITDA add backs, which is a very different commercial negotiation. In small business deals, there’s a lot more of like, wait, what is happening here and actually making sense of the financials and making sense of the general ledger. Like I did way more accounting in my small business deals than I’d ever done in my private equity deals. Like I’d never actually had to work with the general ledger or the trial balances or anything like that because we had highly paid accountants do that for us. And so, I think that was a learning process, and you’ll find different types of small businesses have very widely varying levels of financial sophistication, which just massively impacts your ability to understand what you’re buying. So, I think that’s one. Two is in private equity deals, you spend a lot of time with the management team because almost always the management team’s coming to you. And unless you’re hiring a whole new C-suite as part of the deal, which that happens, but it’s not the most common transaction. And so, you spend a lot of time with the managers pre-closing, pre-signing to figure out what they’re all about. You often meet their level twos or threes, because in bigger companies, everyone knows that the operator and the owner are different entities and the owner can sell and it doesn’t mean anything changes for the operator because the operator is still there. And that’s just not the case in small businesses. Like the owner and the operator are the same person. And so, when you have the owner transition, it’s like you’re ripping out like the spinal cord of the business and inserting this new guy as the spinal cord. And so, as a result, like one, small business owners almost will never let you meet their employees. And two, the impact of the owner leaving is massively more impactful than it is in private equity deals where you have operating consistency. So, I think learning how to navigate that and kind of try to learn what is the company culture without actually being able to talk to anyone in the company was a challenge and something that I think like search fund acquirers really have to spend time thinking about and like digging into in a way that you just don’t- it’s just easier in private equity.
Alex Bridgeman: Yeah. What are some ways that you tried to learn more about the culture of your business without talking to many of the employees at all?
Kaustubh Deo: It’s really you just like talk to sellers and what did they look for when they’re hiring somebody. Because you’re going to have to make replacement hires almost for sure in a small business, especially in the self-funded side. So, I would ask sellers questions like, okay, to replace you, we need to get somebody in X position. Can you tell me what does X position look like? Like what is the type of person you would hire? What types of skills, what types of characteristics and qualities, and that tells you a lot about what the company culture is because, yes, they are obviously very important in the business, but they probably have a couple other people who you basically need to hire like one more of. And so, it’ll tell you kind of about the type of people they’ve already hired. The businesses are too small for things like Glassdoor or whatever. In theory, you would use Glassdoor, but you can’t really do that. I think the other thing I liked to look at was the Google reviews or the Yelp reviews and whatever. And it’s always interesting to see what did customers notice? And so, in my deal, I just noticed that there were a lot of reviews that said stuff like the crews seemed to really enjoy what they were doing, comments like that. That’s just unusual, I think. I don’t know, like I don’t think I’ve ever seen a landscaping company with like, oh yeah, the crews seemed to have a lot of fun out there. Like that just tells you a little bit about the culture in sort of a roundabout way.
Alex Bridgeman: Yeah, it’s interesting using reviews for some due diligence because there’s folks I’ve talked to who’ve looked at reviews to try to get a sense for how involved the owner is. And if tons of reviews, like 40% of reviews mentioned that the owner was really nice, and they did all their work for them, like maybe the owner is a lot more involved then you think if they’re getting mentioned so much. Did you notice that? Did you notice that there were certain employees mentioned frequently in reviews or was it pretty wide ranging?
Kaustubh Deo: It was pretty wide ranging. It was a little bit of it just because of the owners being so involved, obviously. The reality was that our customers, they mostly- they have one interaction with the sellers at like the estimate point, but then most of their interactions are with the office staff, which are totally different people. And so, what I have found is obviously the actual service work for them needs to be done correctly and they care a lot about that, but a lot of their perception of how things went is like how easy is the communications flow with the office team. And so, I actually saw a lot of reviews that complimented specific people in the office, even though they don’t do any of the actual service work. And so, I think that was interesting to me to realize, oh- and I see it even now after we’ve closed, like when customers are frustrated, it’s often nothing to do with the tree work. The tree work was done perfectly. It was done to the contract specifications, all of that. It was really like there was a gap between expectations and reality. And that gap was created by our- on the office side, like our communication’s not exactly reflecting what they should have expected. And that can be like little things like oh, I didn’t realize how many chips, like wood chips, they were going to leave behind. And like when a customer tells us, hey, you can tell the crew to leave wood chips, it’s on us at the office level to be like, okay, but FYI, it’s going to be a driveway full of wood chips. You know what I mean? And if we don’t communicate that, like the crew doesn’t know, they’re just doing their- they’re doing what their job is, which is to dump chips out of the chip truck. And so, there’s these interesting moments of like expectations versus reality, which we can really manage at the office level that I’m trying to- that’s what I’m trying to get better at because that I can directly impact as the person in charge of the office and like customer communication side. Because the thing about this business is that the tree work side we’re excellent. Like the crews are excellent. The team is excellent. I know the actual quality of service is really top notch. It’s really like- it’s a weird industry because the customers don’t know what they want or what they should have. Like you can look at a tree pre pruning and post pruning, and it might not look that different, but it’s actually been really carefully pruned on the inside of the tree for health and structure and a customer, that might not be in their head what they thought they were going to see. And so, there’s some like expectations management that we need to get better at in terms of just how we explain stuff to the customers.
Alex Bridgeman: Yeah. What are some ways that you think that the process is going to improve? Is that a training system, like where that falls in terms of opportunities for improvement?
Kaustubh Deo: I think one thing that I’m hoping to do in the future is to provide more reference materials for customers because I think a lot of the communication happens over the phone, which is great, but I think then customers forget what we talked about. And so, I think moving more and more into writing, or like as an example, one of the things we do is we provide a treatment for Birch trees, and in order to provide this treatment for the Birch tree, there is some stuff the customer needs to do after the fact in terms of watering it sufficiently and other stuff. And we explain this to them verbally, but one thing I would love to do is have just a very easy handout that we can give them and say like your Birch treatment has been applied, don’t forget to do X, Y, Z, otherwise the Birch treatment might not work. And that’s because otherwise customers are unhappy a year later when the treatment didn’t do what they thought it would do. But again, this is like a communication issue, it’s not a quality of service issue.
Alex Bridgeman: Yeah, it sounds like a good opportunity for a YouTube channel where you could have different playlists for different treatments or different things that you did, or like here’s how many woodchips this operation is going to put on your driveway. Like here’s how the process works. Yeah, and then you can just ask them how much of this do you want, that sort of stuff. And you could like link YouTube videos to different docs. You could still create like a PDF or a webpage and then just embed or link different videos that are pertaining to that thing. There’s probably a way to do that.
Kaustubh Deo: It’s funny you say that just because my instinct is so like just write it down and send it to them, but you’re right, the visual of a video is probably the more accurate way to do it.
Alex Bridgeman: It could be an interesting way to do it, especially if you’re able to automate it in some way where I don’t know if you can tag YouTube videos, but if there was some system on your end for order management or whatever, where if they order this Birch treatment, it builds a report for them and then just pulls in all YouTube videos tagged with that treatment or general, and it pulls them into this webpage or PDF and emails it to them. Something like that would be kind of cool. I don’t know if you could build that or what that would look like.
Kaustubh Deo: I mean, that’s a future problem. The first thing is just have a video that I can send them. That would be the next level of like pulling it in automatically that we’re far away from.
Alex Bridgeman: Yeah. Where else do you think that area of office to customer communication can improve?
Kaustubh Deo: So, a big part of it I think will be more on the CRM front, which I know it’s like so cliche for a searcher to be like, oh yeah, I’m going to install a CRM. I get it. That being said, I think one of the big benefits we will have is all of our contracts are handwritten because we have an estimator go out in person and write down what we’re going to do for them and then gives them a copy, like the carbon copy behind the form. And that’s kind of the only piece of material they have that exactly says what it is, and they often will lose it. And that’s a point of communication gap. And so, one of the things that I am looking forward to once I get a CRM in place is basically being able to memorialize every bid we do into the CRM and resend that to them and then have them check yes like on their browser on their phone or whatever. And so, then it’s very clear, you know what I mean? And I think that clarity will just, I think it’ll alleviate a lot of issues that we sometimes face. Because we also, like some of our estimates become quite involved where it’ll be we’re going to work on these nine trees, of which like three of them are options, and six of them are the base work. So, here’s your bid for the six, here’s the price for option tree one, option tree two, option tree three. And then we need to go call them later and say like, hey, do you actually want to do these options? If so, which ones? And therefore, this is your actual price. Like all of that happens over the phone which works mostly fine. But it’s like the 2 or 5% of the times that somebody forgets what they said, or we didn’t write down exactly what they said, that creates like 90% of the issues we deal with in the office. And so, I think like the more of that we can move to a written record of like you checked yes on this, yes on this, no on this, it’s just going to- my hope is that turns like 5% of issues to 1% of issues. But also, those issues are easier to resolve because we have a written track record of everything.
Alex Bridgeman: Yeah. Is that something where you give folks or your service side iPads so they can show like the customer like contracts when they are there?
Kaustubh Deo: I don’t think we- I mean, potentially. For now, we just have to print them out. Like that’s step one. And so, we do that currently; we give the crew a copy of the work order of the contract page so they have it with them when they’re on the job site. But I think even just having it be typed out with the customer having like checked them off just makes it a little bit more official. And it also means that the customer on their computer can go and print it themselves because they have a live like a dynamic webpage. They can always check to see what their order was. And they’re not just relying on like the handwritten estimate that the crew member gives them. It just like- it’ll ease things so much in terms of like the customers being confused and just limiting the number of calls we get in that are easily resolved. You know what I mean? But they would have been- we could just avoid the call in the first place.
Alex Bridgeman: Yeah. I imagine they could also pay online too, because I think you talked about how a lot of customers still pay via check, right?
Kaustubh Deo: Yeah, we process a ton of checks every week because we charge them the processing fee if they run a credit card. And so, one of the things that’ll happen once I launch a CRM is they’ll be able to make ACH payments for free through the payment portal, or if they want to take the credit card fee, they can pay through that portal for the credit card side as well, which at the moment, the only way they can pay by credit card is to call into our office.
Alex Bridgeman: What’s been your transition like going from searching and working on this business and learning all about it to actually running it and running teams and running the office and seeing how things actually work with the real employees? How’s that all been for you?
Kaustubh Deo: My experience has been that, and I was talking to some of my investors about this, like some of the stuff that I thought would be easy has been harder than I thought and vice versa, which is probably- like said differently, I feel like I was wrong about almost everything. But as an example, I have a finance background and accounting background, like getting the accounting system set up and pulled over to the new entity and everything has been like an unbelievable pain. Everything about it makes me want to like burn Intuit to the ground, Intuit being the publisher of QuickBooks. And I don’t know, like all of that’s been way harder than I thought, and it’s just like such a distraction. But the problem like with accounting is the more you kick the can down the road with accounting, the harder it is to recover it because your accounting is happening every day, so that’s why I had to prioritize it. So, something like that’s been harder than I expected. Like we have to find a new office place. In theory, when you’re like in diligence, you can see all these places listed and it feels like, okay, yeah, there’s space and we’ll find a spot, it’ll be okay. And then once you’re in practice and you’re like, oh, well, this place won’t let us store chainsaws indoors because of the gas in the tanks. And that place has really awkward access so it is going to add like five minutes every day for every truck, which really adds up in terms of productivity. Like all of a sudden, the places we can actually put ourselves goes way down. So, that’s been the side that’s been harder than I expected. And easier than I expected, I was really worried about the team kind of looking at me as like who are you? Like you’re not from tree services, all of that. They’ve been actually very gracious and very welcoming. And so that’s been a really welcome surprise- or not surprise I guess, but just like a welcome outcome that they’re all like- they understand I know nothing about trees. I’ve gone out in the field a few times with them and as they’re doing the work with me, they’re explaining what they’re doing to me. Like they’re kind of training me almost. And so that’s been I think a really pleasant outcome and something that I thought was going to be a lot harder being easier than I expected. Also, the customer communication side, while I did- we obviously talked about the difficulties with it, but I thought the customer service side of it was going to be a real bear and like something that I struggled with and found annoying. And I think I’ve actually enjoyed that a lot because coming from private equity world, we don’t have wins almost ever. Like you work for months and months and months, and then the deal dies. And then you work for months and months and months, and then the deal dies. And then maybe a deal happens like once a year. And so, the moments you have a win are so few and far between, that’s how I’ve been conditioned. Like small business, I feel like I’m getting dopamine hits like every 10 minutes. It’s like a totally different life. And so, I’ve actually enjoyed the customer service side of this a lot because when a customer calls, and we have my office assistant and scheduler, they kind of are the first line of defense, but if there’s something complicated, then they’ll pass it to me, and being able to resolve those moments of conflict, I’ve actually found very personally gratifying. It doesn’t scale; I get that. We’re going to have to- it doesn’t make sense for every customer resolution to come to me at the end. But for now, at the scale of business we are like, that is my job, and I’ve enjoyed that a lot more than I thought I would.
Alex Bridgeman: Yeah. How helpful has that learning been, kind of seeing all these customer service interactions firsthand? Has that been pretty educational?
Kaustubh Deo: Oh yeah, super educational. It’s allowed me to actually understand the handoffs from customer- because they start with our office staff to schedule an estimate. Then they work with the estimator who goes out in person. And then they come back to the office staff to schedule the job. Then they go to the crew who’s out there to do the job. And then they come back to the office staff to get the invoice and pay. And so, there’s actually like a ton of handoffs here that are somewhat like you don’t even notice. And so, the fact that I am the office staff with one or two other people means that I’m actually like feeling every handoff like to the other- to the crew teams and back to us. And that’s been super educational in terms of knowing, okay, this is the friction, this is the handoff that’s actually hurting or that’s causing confusion between us and them. Like a big example we face all the time is parking because we have to park trucks and we operate in Seattle proper, which is like small residential neighborhoods. And so, there’s a lot of customers that they don’t want to pay for the no parking signs that we could put out, get a city permit for no parking and all that. So, they say, no, I’m going to work with my neighbors, and we’re going to block off the section of the street for you. Fine. But then we at the office level need to be reminding them constantly like, hey, your tree job is in four days, remember you’ve got to reserve parking for us. And then the night before, hey, we’re coming tomorrow at this time, we need this parking clear. And if for some reason that doesn’t happen, the crew can show up and they have literally nowhere to put the truck and it totally screws up the day. And so, there’s some of these very key friction points that I’ve been able to kind of understand just because I am part of the actual flow. I’m not like sitting above the flow.
Alex Bridgeman: Yeah. Earlier we talked about the difference in deals between larger private equity and small business. Broadly, operationally, how does that compare from your days in private equity to running a small business now where obviously you’re much more involved and you interact directly with employees versus at the private equity level? But I imagine there’s some differences too in just how big these companies are versus how small this one is.
Kaustubh Deo: Yeah. I mean, I was sort of- in private equity, I was sort of middle market, upper middle market, so these were much larger businesses, obviously. If I had known I was going to do search, I probably would have done lower middle market first, but I at that time didn’t know I was interested in search. I mean, they’re just totally different. I was listening to your podcast with David Dodson a couple of days ago because I was out in the field doing some work myself. There were some like solo jobs that we got overbooked for, so I was like, you know what, I’ll tackle these, whatever. And just like did a poor job honestly and need to go back and fix things. And so basically, I was out there doing these tree treatments and listening to your podcast with David Dodson while I was doing them. And he’s talking about how he was like, yeah, good leaders are super precious with their time. And there’s this like specific- he was making this point about how the difficult part is not going from individual contributor to manager. It’s going from manager to manager of managers. Because when you go from IC to manager, you can kind of fill in and just work more and kind of fill in like what- and just fill in the gaps, which is literally what I was doing while I was listening to the episode and I was doing it poorly, and it was obviously not the right use of my time, and I should’ve just organized the schedule better. But anyways, it was just like a slap in the face while I was doing it and being like, okay, I need to be better. But my point to your question was like this business, there’s no manager of managers. There’s just me, the manager, and then a lot of really good individual contributors. We’re not at that level to have managers of managers, whereas in private equity, every single deal I did, by nature, the people I was interacting with were always managers of managers, of managers, of managers. You know what I mean? Just so many levels removed. And so, I think in PE we were always- like our CEOs and CFOs were extremely strong leaders and they also knew how to manage us as investors. And so, there was this constant dynamic of we’re partners with you, but also like don’t get too into the weeds because you guys are the investors, we’re going to manage the operations. And that’s actually the way we wanted it to be also at the PE level because for our business, as a private equity firm, it’s not scalable for us to be involved in depth with every business. We can try and plug in when there’s problems or gaps, but like a good business is the one that we can leave alone and let the CEO CFO manage it. That is now obviously different where like every problem in the business I am the ultimate owner of. Like down to the level of, hey, no one took out the trash this week. Okay, I’ll do it because otherwise no one will. You know what I mean? I don’t know. It’s so like different in terms of the level. Like in either case, we were in theory, the owners of the business, but this is like a different type of ownership.
Alex Bridgeman: Yeah. It feels like a much more direct ownership. Any broad advice for folks contemplating a search or in the middle of a search?
Kaustubh Deo: I don’t know. If anything, what I have found is that there’s a lot of different search models now. And you’ve had speakers come on and talk about the different models of search and espouse like what is better, what is worse, and what are the pros and cons. And what I have found is there is significant personal preference here. I think the business I’m in, I’m having a lot of fun. It’s stressful and it’s a lot of work and all of that, but I’m also having a lot of fun. I do not think it would be a good fit for a lot of people, especially if you just went to business school and spent like 200K on a business school tuition and want to be like a CEO. Like I’m not a CEO, you know what I mean? That would be like silly of me to say because it doesn’t make sense. And so I can totally understand better now than I did before why a traditional searcher coming out of business school doesn’t want to buy a business like this because it doesn’t really fit where their life goals are and doesn’t fit kind of the track they’ve put themselves on. But for me, I really opted into this. Like I selected out of finance to select into this. That’s a very different path and the different process, and I’m very pumped about it. So, I think if there’s advice to give, it’s really to be honest with yourself about what do you hope to do? Like, is it going to stress you out to like not be a manager of managers and to be a manager of individuals? Like if that’s not the life you want to live, like a business at the self-funded scale is probably not the right fit, even though you can own more of it. Like you can own all of it in theory. So, I think there’s kind of like the financial realities of it, but there’s also a lot of where are you going to find the personal fulfillment. And I think that probably- like, I think a lot of searchers get into it with an idea and then like halfway through, they should probably reassess and be like, okay, wait, what do I actually want out of a search deal?
Alex Bridgeman: Yeah. What did you start your search- What were your personal preferences when you started your search versus three-fourths of the way through when you found this deal and started to get into the weeds a little more?
Kaustubh Deo: I think, when I was starting out, I was looking for bigger companies and I was looking for businesses that had more of like an operational manager layer, kind of like a traditional search would look for. And as I dug into it, I became friends with a lot of people in the search community who had sort of done both sides of this, like bigger traditional search deals that are more established, smaller, like more of these independent trade companies. And as I dug into that, what I found was for myself as a relatively younger person, less operational experience, all of that, I really actually liked the idea of these smaller independent trade companies because it felt like I could show up and kind of my hard work could translate directly into the business performance. It was a lot more one-to-one, which is exactly what David Dodson was talking about. And then eventually you can kind of get into that traditional search size deal. But I just didn’t feel like I was nearly as differentiated to be able to buy one of the bigger companies and sort of take that on to the next level. And so, I really- I thought I would go the other way, basically, I thought I would keep looking for bigger and bigger businesses. And that’s what I think a lot of searchers do. I became more and more comfortable with buying a smaller business as I understood from hanging out with friends who own these types of businesses like what does it actually mean to live in it. And one of the things I did during my search is I kind of did a “job shadow” where I spent a couple of days with a few different searchers who had already closed on their deals and kind of understand- like when you’re in private equity, being an operator has this weird mystique to it. And like we don’t know what they do, and somehow they do it and cashflow comes out. And so, I think for me, it was important at some point to go and actually be in a couple of these really smaller trade businesses and understand what is real life and kind of lift the curtain a little bit. And that got me a lot more comfortable with it and actually got me excited about it.
Alex Bridgeman: Yeah, that was really smart to do the different job shadows. I remember you talking about that and getting to see a whole bunch of different industries too, I think, as well. Like they weren’t just trades. I can’t remember all the different companies you looked at, but those are a pretty wide range.
Kaustubh Deo: Yeah. I mean, I went and visited Chase Murdoch who’s been a guest on your podcast, and he’s got a few different eclectic businesses that are really cool. And that I visited a couple of landscaping companies. So yeah, that process for me was just eye opening in terms of like, oh, not that it’s not hard, but it’s not like mystical, you know what I mean? And I think that was important for me to get over the hump. Where I was really focused I realized on buying a business that had managers of managers because I didn’t know what they did, you know what I mean? And I was like, okay, well at least if I buy a business with managers of managers, the managers that I’m managing know what they’re doing. And that was where I was sort of finding comfort. And then I think by going and visiting smaller businesses, I was able to get a little bit more comfortable with this idea that no, the businesses that it’s just like a manager of ICs, it’ll be okay because the ICs know what they’re doing. And they like are- they’re not looking to leave. Like they like their jobs. They enjoy it. As long as you don’t mess with the culture and you buy a business with good culture, like that’s actually workable. And they will often just be excited about the fact that the new manager has a new 20-year growth vision because their old manager was kind of ready for retirement. And so, once I kind of got comfortable with that concept, it really opened the doors in terms of what deals I could look at.
Alex Bridgeman: What are some 10 year growth ambitions you have for this business in Seattle? Are you going to look to acquire other tree businesses or just keep hiring aggressively? Like what are some 10 year visions or goals that you might have?
Kaustubh Deo: Yeah, that’s a good question. So, we have a really good core group of guys right now. I think when I think about like 10 years from now, what success will look like, I think retaining almost all of them will be a core element of that. And hopefully they’re making significantly more money as part of that, because they’ve sort of leveled up as the business has leveled up. So I think that to me is one pillar of success in theory 10 years from now. I think a second pillar of success is basically linear growth, which I view as like adding crews and adding equipment. So, we currently operate about two crews and then so like getting the third crew and then the fourth crew and then the fifth crew. I don’t have a target in terms of 10 years from now what that looks like, but that’s like linear growth, like one crew at a time, so to speak. And so, we should do that and that’ll happen. And then I think the third kind of what I view as sort of like non-linear growth potential is one of two things. One is acquisitions, like you said, which I’m not prepared to do it right away because there’s just too much to like learn the business. I want to wait until I’ve learned it. But acquisitions is always an opportunity. There’s over 50 mom and pop tree companies in Seattle alone. And so, the runway is there. So that’s one. And then two is service line expansion, where tree companies in general, one of the big areas of growth they have found is plant healthcare, like providing treatment to trees and protecting them against infestations and stuff like that. And so, what that does is it takes your existing base and allows you to sell back into it in a more recurring way. And so, I think that’s a form of nonlinear growth that I would love to like 10 years from now be able to say, yeah, that’s a service line that we offer and is a meaningful part of our business. Again, like that’s not- the next year or two is like don’t screw it up and figure out how to support the guys who are here and make sure they’re happy and growing personally, financially, all of that, and pursue linear growth. That’s the most obvious next step is to pursue linear growth, which is the third crew and then the fourth crew. But that nonlinear growth side of it is I think, like 10 years from now, something I hope I will have achieved.
Alex Bridgeman: Yeah, that’s pretty exciting. I want to get into some closing questions here. What college class would you teach if it could be about any subject you wanted?
Kaustubh Deo: I was thinking about this one, and one of the things from leaving private- so private equity is a pretty solid career path. Like it’s a very clear path to making a lot of money doing interesting work. The downside of it is like the lifestyle can be brutal obviously, but it’s a pretty low risk career. And I think the college class I would probably teach is around risk taking and really decision-making with a risk framework, if that makes sense. And this comes from my first job. My first job was in distressed debt, which is this really crazy world of balancing risk and reward constantly and trying to figure out like- because every deal in theory is a bad deal. Like if you are a venture capitalist, you would have looked at every deal we ever did and been like no way would I touch this, there’s no potential here. And our funds, like net returns, are still better than like VC median returns. You know what I mean? And that’s a function of being able to really carefully balance risk and reward. And so, it was really foundational for me to learn from the partners in that firm how to balance risk and reward. And it has a lot of impact on the way I think about my personal life and how I make career decisions, like how I made the jump into search. And I would love to- I don’t have like a class designed yet, but in theory, I would love to teach a class that helps folks like actually write down what are the risks they’re about to take in their personal life. Because I think like when I talked to my friends about changing jobs or changing career paths, going back to grad school, whatever, they think about it in a very like this is scary, but they haven’t written it down as to like why is it scary, what could actually happen, like what are the potential risks and downsides, upsides, all of that. And I just find that framework makes it so much easier to make decisions. And so whether or not it’s like- I don’t want to tell anyone what decision to make. I just want to help them actually rationally think through what is the right decision for them.
Alex Bridgeman: Yeah. Is there a framework or certain questions you ask yourself to figure out that perfect risk reward balance for any decision?
Kaustubh Deo: I don’t have a clear framework. I have this one concept from one of my coaches in high school. I had gotten into college, and I had already committed. I applied early decision to my college. So, it was like you’re in once you’re in, like you can’t choose to opt out. And I had applied into a dual degree program. So, I was super committed. Like I was in these majors, it was done. And I was having this like moment my senior year of high school being like, oh man, did I over-commit? Maybe I don’t want- like, most of my friends were going into college undecided and all of this thing. And she was like, look, start doing it, and if it’s not working, figure out a way to change it and like fix it. And I felt like that was very- like just that mental model of, oh, you don’t have to continue down a path just because you selected that path. Like you can give yourself license to fix the issue and figure out a solve. That for me was super helpful in thinking about the downside risks in every decision I make, which is like every bad decision starts you to down this downside risk path on the decision tree and being able to say like, no, I have the power and the agency to stop that path and turn it into something else. It allows your brain to say, okay, if we’re in this downside path, it doesn’t mean it continues on all the way down to hell. Like it tells you, hey, we just need to recognize that and then fix it. And that’s one of the things that has helped me take more risk in my life is saying, hey, you have the agency to go solve it when things are going poorly.
Alex Bridgeman: I like that a lot. That’s a really good one. That’s probably one of my favorites. What’s a strongly held belief that you’ve changed your mind on?
Kaustubh Deo: I was thinking about this. I don’t know if I’ve changed my mind on the core point of this. Okay so, we have this concept in investing, like institutional investing of what is a good business, and there’s all these parameters of what is a good business. And when I’ve come to search world and talked to all these folks who kind of- they didn’t start in institutional investing world, they started in entrepreneurship world, their conception of a good business, I have found, tends to be different. And in many ways, it can be more accurate in terms of what is a good business for the entrepreneur. Whereas, when I put my investing hat on, we’re thinking about what is a good business for an investor? And I think I started out thinking that that is the correct definition, what is a good business for an investor because on the time span of a hundred years, that is actually the business that will last the longest is what is a good business for an investor, not the one, like the good business for the entrepreneur. But the reality is it doesn’t matter. Like, it doesn’t matter if you’re right over a hundred years, it matters if you’re right in your lifetime. And so, once you realize that, and you’re the entrepreneur, it’s like, oh, well, no, actually what matters is what is a good business for the entrepreneur? Again, they’re not like super different. And I think the good business for an investor is still like the generationally right answer, but it does like- it broke my kind of view, like my kind of boxed view of what a good business is. And to dig into it, a good business for an entrepreneur, it can be things like allows them to live a lifestyle they want, it can mean like generates enough cash flow for them but doesn’t necessarily scale. Like there’s so many good businesses out there that are 2 to 300K a year for the entrepreneur. They enjoy the work, but it’s not overly taxing. They go to every baseball game for their kid. And that is a- you cannot tell me that’s not a good business. Even though from- it probably has a bunch of external, like extrinsic risks associated with it that would mean that from the investor standpoint, it’s not an investible business. It’s not a good business from the investor standpoint. But it’s like if you can get that thing to run along for a 30-year career, it’s fine. Like your life is good and things worked out. And so, whereas an investor, like a good business for an investor, it’s things that are resistant to recessions, resistance to seasonality, resistant to being outdated by technology, like all these other types of things that are again, like I said, I still think that is the right way on a generational scale, but it just doesn’t matter for you the entrepreneur, the owner operator.
Alex Bridgeman: Yeah. Speaking of great businesses, what’s the best business you’ve ever seen?
Kaustubh Deo: I’ve seen a lot of good businesses and I’ve been kind of really lucky to have my whole career be deal making so far so I’ve gotten to see hundreds and hundreds of different businesses and meet management teams. I’ve loved that about my job in private equity. I think the best business I’ve seen and this one actually a little bit crosses- kind of sits on both sides of good for investor, good for entrepreneur, is ship management, which is basically for commercial, like ocean going commodity vessels. So this is like dry bulk vessels that are shipping like coal or things like grain and coal and stuff like that or other metal ore. Then there’s like oil tankers. Those are the two that I really looked at a while ago. So basically, you have ship owners, people that actually own the ship. You have ship charterers, which are the people that have cargo to be moved. And they generally interact directly with each other. Like they’re basically renting the ship to move their stuff. But then you’ve got this layer of ship managers who, on behalf of the owner, will do basically the technical management of the ship, like actually doing all the maintenance, doing all the repairs, making sure it’s getting refueled, all of that kind of thing. They can do crewing, so the crew management, so they’ll actually get the crews for you. And the third leg of it is commercial management, which is going and finding the charters for you. So, you can think about it almost like a property manager in real estate but for ships. And it’s kind of a sweet business because it doesn’t require a lot of people, it’s pretty capital light, and it’s super sticky because it’s not- usually if you can pull together 10 to 15 vessels from a few different owners, you can give them economies of scale they didn’t have on their own. And so, if you have less than five vessels as an owner, you’re probably not making enough money. Like you’re not big enough to have economies of scale, but once you’re like at 50, you are. And so, this allows them to access economies of scale. And then what’s really interesting about it is it’s actually very counter cyclical because the shipping industry is like super up and down, very cyclical industry. But what happens is when you’re in a bad part of the cycle, the ship owners go bankrupt. They give their ship to a bank. And so even if the ship owner used to manage it themselves, now the bank owns the ship. They can’t manage the ship, so they have to use a third-party outsource manager. And so, at the worst parts of the cycle, there’s ships moving into third party management, not out of third party management.
Alex Bridgeman: That’s really interesting. Did you buy that- Did your fund or your firm buy that company?
Kaustubh Deo: No, I tried. I was networking with a bunch of people trying to figure out would somebody sell to me. And then this was the problem was that they are like very good businesses to own as an entrepreneur. They don’t really need the capital from us. And so, they were like, no, basically. There’s one bigger manager, it’s called V Ships or V Group, that Advent, which is a big private equity firm, Advent bought them I think in like###-###-#### And they might still own it actually. So there’s only been one major transaction in that space that I’m aware of. But all the smaller- if you can manage like 20 ships as a third party manager, that’s a good for entrepreneur business. Like you’re going to have a good life.
Alex Bridgeman: That’s awesome. Well, thanks Kaustubh for sharing a little bit of time on an early Saturday. I appreciate it. Good to chat with you and record one of these conversations. We have them all the time, so it’s fun to actually hit record and get to share this one a little more widely. That’s awesome. Thanks for sharing. This has been fun.
Kaustubh Deo: Thank you for inviting me. I’m excited to see what the chopped up final version sounds like.
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