I’ve had my guest, Nick Haschka, on once before for episode 5 and I wanted to have him on again to talk through a thesis of his more in depth. The core element of his thesis is acquiring a small company, between $200k and $500k in cash flow, quickly can often be more beneficial for someone looking to buy a business than going the traditional search route. This is the path he’s taken and so draws a lot from personal experience as well as deals he’s seen over time.
We talk about advantages and disadvantages of acquiring small, some unconventional ideas of his such as not using accountants or lawyers, unique items to look for in due diligence, and a few stories. If your plan is to acquire a company in the next few years, this is an idea you should listen to and pay some consideration. I hope you pull a few lessons from Nick’s thinking here.
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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:
You talked a lot about going small in your writings. You’ve done a few articles on Searchfunder. You’ve had a bigger Twitter presence and lived the thesis as well of going after a smaller company, three to 400,000 in earnings versus something larger like a traditional search fund might go after. And I’ve been looking forward to kind of diving into that thesis and idea a little bit deeper with you. So I want to first hear about what does a small strategy, or going after a small company really mean in your eyes?
The typical criteria we look for around say one to 5 million in revenue, usually 10 to 20 employees, owner earnings on the more attractive businesses of that size tend to be in the 200 to 300K range. So a solid six figure income for the seller. But that’s not always the case. Some of them are a little say less profitable maybe because they’re run a little bit more passively. But in general, that’s about the size that we look for.
And we focus on service business. Mainly because we’re in Northern California. So you don’t find a lot of manufacturing business that I would have a high degree of confidence would be here for the long haul. Maybe if I was searching in a different geography, you might find small businesses with similar characteristics that may look a bit different in terms of what industries they can be in. But yeah, we’re primarily focused around service-oriented businesses. And they tend to be local, and they have to be local, because it’s a local clientele. And the service is performed locally. They can’t ever be anywhere else. They can’t really be relocated. They got to be here. Those are the main attributes in terms of honing in on a size.
So a little while ago, you also published this graphic on Twitter of the different timelines for a traditional search. And you had the self-funded search, and then your going small strategy. Can you kind of walk through the story of those different timelines, and how yours compares?
I’d been in a lot of different search fund conferences, and was learning really after the fact about the different paths that people are pursuing in terms of entrepreneurship through acquisition. And I wanted to just put something out there that would be a little bit provocative, but I think true to my experience about what some of the value proposition of the going small path might be. And I think one of the big ones is speed. Speed to basically proving to yourself that you can do this. And going small I think is the fastest way.
And the traditional funded search, there’s lot of steps. There’s a lot to learn because it’s an ambitious pursuit. You got to find a deal that is not just perfect for you, but also perfect for the investors, and the bank, and the seller. And it’s going to have to be big. And there’s a lot of other people that want that deal too. To me, it’s a very difficult needle to thread. And it’s not that it can’t be done because there are plenty of success stories. But there’s also plenty of amazing, incredible people who read those same success stories and couldn’t do it. And that’s surprising somebody who you would never bet against can fail doing self-funded search. And for me, that was a scary thing to learn about or find out about that path.
And then you have the self-funded search where you’re bringing in outside investors. And there’s a lot of people pursuing that path right now. And there’s increasingly more getting written about it. And it’s kind of the same path as the traditional path, only the sponsor has a bit more equity. But a lot of sponsors are assuming massive, massive personal risk in that pursuit. They’re writing personal guarantees on $5 million loans. And they have to put the same rigor in that the funded searchers do. It comes at the same personal cost of potentially not knowing whether you’re going to succeed for 2+ years. And I just think the self-funded search is kind of a way to ease into it. You can get there a lot faster. There’s a lot less risk. You don’t need to go and take a giant loan that if it doesn’t work out, you’re done, and you’re kind of stuck in it until that loan is paid back because you’ve guaranteed it.
I think if you bootstrap, and you experience a modicum of success, and you grow the business, and you pay down the debt, you’ll be in a position where you don’t feel shackled to it. Even in a scenario where you’re not growing like crazy, like the interview with Rich about his massive early successes. I don’t think you even need that kind of success trajectory to get to a point in a bootstrap, self-funded, going small search where you can get to a point where the business is running well, and you’re doing what you set out to do, and you have the confidence. And you can decide, “Do I want to hire somebody to run this? Do I want to step away? Do I want to go do it again? Do I want to keep at it and take it to the next level?” All those options are there by about the maybe two or three year point.
And that’s kind of the same point that the self-funded searchers and the traditional searchers who set out at the same time as you might be still transitioning ownership or learning the giant business that they just bought, and really figuring out if their diligence was right or not. So me, that was sort of the rationale behind, and some of the motivation for just putting it out there. Because I think a lot of people immediately or on its face discount even the idea of going alone and going small. Because everybody says not to. And I think a lot of the people that say not to, they haven’t actually done it before. So their advice is based on not a whole lot of experience. Just based on repeating what everybody else is saying.
So then talk us through a little bit. And we talked previously in our first episode, which we’ll link to as well. But you talked a little bit about your time searching for and acquiring The Wright Gardner. Could you give a one minute synopsis of that and how you live through that strategy?
We found The Wright Gardner. It was a brokered listing that hadn’t been on the market for that long. But it was certainly in that criteria. It was 12 employees, between one and 2 million in revenue. Really long history, had been 30 plus years. Relatively steady growth in terms of top line and bottom line for the seller. So no crazy recent windfalls or crazy explosive growth in the years just prior to the acquisition. It was just a really high quality business that was real steady, predictable, and was delivering a service that we really liked, which was office plant service. It covered most of the Bay Area with a heavy presence in San Francisco. And we really liked a lot of the operating characteristics in terms of the way the service was performed. It was Monday through Friday, it was during the day. People tended to really like their service technicians. And it was a service that never was too emotional. It wasn’t ever super mission critical. Sort of a luxury. But also at the same time, an expectation in the market. If you work in a nice building, they’re going to have plants. So it really just checked a lot of boxes.
So we acquired that business four years ago, and put a lot of elbow grease into the operations. Streamlining, improving. With the thesis that if we applied all the modern tools of business, a lot of technology tools in particular, that we could run it really well, and we could grow it, and deliver the same or better service that the company had been used to delivering, at a much larger scale.
And so far, that’s proven out pretty well. Acquiring customers has been harder than we had initially anticipated, but we’ve made up for that in finding other owners who’ve come to us who’ve also wanted to sell their plant businesses and been able to add on quite a lot of clients through buying out customer portfolios from other operators who were also looking to sell.
And how quickly did you find The Wright Gardner from the start of your search?
We started searching in about September, and we were in contract in mid November. And then we closed in February because it’s kind of a holiday peak. So we didn’t want to try to close while that was going on. So the timing ended up, we closed at the end of February. And there’s also an SBA loan, which those can take a long time to close. So we sort of allowed enough time to get through all the documentation and paperwork required for that. But yeah, we were really only searching in earnest for roughly two months or so.
And that was February, 2019 that you closed?
We closed February, 2017.
Oh###-###-#### Okay. Got you. So I guess we’re alluding to a few of the advantages, but why do you believe so strongly in going after small companies? Obviously one you just talked about was the speed at which you can find them, but what are some other ones along those same lines?
So I think in the due diligence processes, I think especially going small for a first-time searcher is a good strategy because of the speed. You’re still kind of as a first-time searcher, almost testing it out and committing two years to finding the perfect company in a career that you’ve never done before, and you don’t know that much about, and everything’s new for the first time, to me is potentially a bit much. And it seems like a big deterrent to even doing it in the first place. I think there’s an abundance of these small companies out there. There’s not an abundance of buyers who actually want them and can take them on.
The multiples are pretty low. They can be bought at pretty modest prices with quite a lot of debt relative to the value without really stressing yourself out. The finance community would look at our leverage percentages and especially at the beginning of these types of deals, and think we’re crazy. But the reality is when you buy something at two times earnings or three times earnings, those can absorb quite a lot of debt without really stressing out the cashflow of the business that much. So I think that’s helpful buying at less expensive prices.
Like I said, there’s not a lot of competition. If you can move relatively fast, you can kind of have your pick. They’re not all that hard to due diligence. They’re messy, but not complicated. So you can due diligence and actually see quite a lot of the company before you even close. And I think with larger businesses, you’re buying a lot of stuff that you’ve never seen before.
And then I think the other thing is the owners tend not to be super sophisticated. A lot of them are founder-led businesses making a solid six figures for the owner. That owner often started doing the frontline work, and grew, and hired people to take that over. And through a matter of usually many years, sometimes many decades, got good at it and got a good client base, and a good reputation, and good will. And I think that’s a great pattern to look for in something that you can be a successor for. And it should set you up for success because there’s the survivorship bias of if a business has been around for 30, 40 years, I think it’s probably a pretty good bet. You have to look at the details and really understand why it has survived that long and make sure there are certain things. You want businesses that are ideally being held back by the owner and not being held together by the owner.
Right. Yeah. A lot of these businesses are small for a reason, of course. And if the founders started it 30 years ago, there’s a reason it’s not bigger. What’s usually that reason? And then as a new operator, how do you kind of break through that and start to grow the business?
It’s a good point. And I think in this space, you find a lot of owner operators. And the reason it’s not bigger is because they never wanted to be more than an owner operator. They like the work. They like the clients. They like the hustle and bustle of being a small business owner. And they’re making really good money for what they, especially compared to the money they were making when they started, and often the money that they left by starting it.
So I think there are a lot of folks out there, and I’ve met many, who they just never wanted it to be more than that. It created a job for them. It created a job for a lot of people that they cared about. And they weren’t trying to get out of the operator seat. And I think that’s really common in these solid six figures, because it would be really expensive for them relative to their earnings to hire somebody to run it. They’d basically have to fire themselves. And then what are they going to do? They’re not wired to think about trying to build an empire of small businesses. They’re just trying to make their business successful. And the way that they know how to do that is to run their business. And I don’t think it necessarily has anything to do with that they’re in a bad business, they’re in a business that couldn’t be big.
Now as a buyer, you have to flush that out and make sure you’re right about that. Some of them are obvious. Like the plumbing market is huge. You’re not going to fail to grow because there’s not demand pursuing a small business in the plumbing market. But the other thing about small businesses is they can be really big relative to how big they are, even in pretty small markets. Because you’re starting at a really low, low base. And chances are if you find that pattern where that owner, they made more money than they ever thought they would, they took care of their family, they made good investments, they built the nest egg. And they’re just now at a point where it’s time to retire. Those can be really good to take on as acquisitions.
Of course, there’s also a lot of risk with smaller businesses like that, that are of course built really strongly around the owner. And you take that person out and put a new person in, it’s easier for that to go wrong than perhaps something larger with a more established management team as well. So what are some of the more disadvantages of pursuing a small company?
Yeah. So you really have to get into the seat of that owner, and understand the business. Basically the financial flows of that business, and the activities going on the day-to-day basis. And what that dependence looks like. Some owners are really hard to replace, and some owners are not particularly hard to replace. So if I’m choosing as a buyer, I choose a business that has an owner that’s not that hard to replace. Maybe they were an accountant and they didn’t really keep up with the times in terms of the operations, but they got a good business that has good cashflow and good margins, and they run it pretty well. And they’ve accumulated some industry experience, but the business itself doesn’t necessarily depend on the industry experience. That’s an awesome pattern.
If you’ve got a business where the performance and the profits depend mightily on the specific expertise of that owner, they just know how to do things that other people don’t know, and that’s why people hire them. And it’s really the owner who’s really the full brains of the operation, that could be problematic. That’s a really hard person to replace.
Yeah. I know you’ve talked about a deal beforehand that you saw before, where the owner was an absolute expert in their field. Can you talk about that deal perhaps a little bit?
This was a home generator company. And it was, I think maybe a million and a half in revenue. Maybe a couple hundred thousand in seller earnings. And I think he wanted about 600,000 for it. And on paper, this deal was pretty good. He had a staff of nine people. We felt like there was some low hanging fruit, and that that owner would readily admit that he was more of a technician who happened to have employees and who did a lot of the work. And it took us a while to really sift through that business and understand the economics and how it worked, to realize that there were two things going on that were really problematic for us in terms of being able to replicate the results. One of them was profit concentration. While the revenue concentration box, we ticked it. There was not any really scary revenue concentration. The issue was though, some of those bigger clients where the revenue was concentrated, all the profit was in those. To the point where there was no profit coming off the rest of the business. And then when we dug into some of those projects, we realized that those were the projects that he was doing. And none of those were projects that the team was doing.
So if you look at what that business looks like without him, there’s no profit left, or very little. So he was truly generating the lion’s share of the profit for that business. And those projects he got because he had the other clients, but he wasn’t making any money off of them. Essentially, the entire business that he was selling was sort of a loss leader for his specialty projects where he was the true expert. And there’s really nobody else in town who could have done those projects. So once we figured that out, we had to step away. Because it was just too risky for us. We didn’t know what were we really buying at that point, because he wanted to retire.
Yeah, certainly that’s a lot more challenging. So when you talk to the owner of The Wright Gardner before you bought it, what did this owner’s day-to-day look like, and what made it attractive to you?
So his day-to-day, he was a manager. He was kind of the general manager of the company. He made key personnel decisions. He made strategy decisions. He made investment decisions. He was an expert in the field of plant care and interiorscaping. He did some sales, but his sales work was pretty part-time and sort of when he wanted to. He had an administrator, he had another salesperson, and he had crews who did all the day-to-day work. So he had a place that was a couple hours away, and he would come late on Monday or Tuesday. And he was able to get away from the business for quite a bit, and for extended periods of time. and the business could do just fine without his day-to-day presence. And for us, that gave us some real confidence that we would be able to sort of learn and quickly pick up the slack in what was lost in taking over the ownership role there.
And you found this via a broker, right? A broker site, or BizBuySell or something like that?
It was straight off of BizBuySell. I remember the night I saw it, I was sitting on the couch, scrolling BizBuySell. And I sent it to my partner, and I talked about it with my wife. And we thought man, this looks amazing. This is exactly what we’re looking for. And of course, that was only a few weeks in. So it’s hard. Sometimes especially early on, you might not know a good deal even if it slaps you in the face. But for us, that was it.
What things would you ignore or at least downplay the importance of if you’re looking at a new deal today?
When we were first looking at stuff, there’s a lot of feasibility questions that you only know through the exploration of an actual deal. So feasibility around lending is one in particular. The SBA and the SBA process. If you haven’t been through it before, it’s a big black box for one thing. And understanding all the things you need to understand to enter that process, there’s some homework involved. So it’s really hard to do without having a deal in hand, because they got to put your personal finances into it, and they got to look at it, and check ratios, and all of their underwriting criteria, and all that. So that’s a big one.
But even just knowing how small businesses work, the tricks I guess of running a small business in terms of tax optimization, and just different tools and experts you go to, and all of that. I think yeah, just knowing how those owners think, and how they operate, and what they care about. It takes some time to process if you haven’t been steeped in that world.
Did you spend any time reaching out to owners directly, or did you only focus on broker sites?
We only really focused on broker sites, because we didn’t know how much time we had for searching. We weren’t committed to searching for the long haul. So we felt like our most likely and fastest path was buying something that was on the market, and then making the best of it. And we didn’t really know where that would take us, but we knew that as long as we didn’t make a really, really bad mistake, it would be okay. So we just needed a business that was more focused on downside protection above all.
Speaking of downside protection, I know a lot of people get hung up on personal guarantees for SBA loans. How did you personally, you and your partner overcome some of that? Maybe not the fear, but the magnitude of the debt you were taking on that was going to be personal too.
We kept it small. And that’s I’d say another proposition of why you go small. I talk to a lot of people who are excited about the fact that they can get up to $5 million from the Small Business Administration, but that personal guarantee isn’t really worth the paper it’s written on. So I question from the side of the lender, are they really going to write that loan? I don’t know, you’re really going to have to shop that. But at the same time from our standpoint, we had to collateralize it. So we had to put up our house, our spouses had to co-sign. They make you take it very seriously. And that just kept us pointing us smaller, and smaller, and smaller in terms of what kind of deal we’d be willing to do for the first one. Because the risk is the total purchase price, not the equity.
Have you seen a few folks buy a business and then have that personal guarantee kick in if things go wrong, or as things go wrong?
I never have. I’ve never talked to anybody who’s been in … I’ve heard folklore about, but I don’t know of any story that I could even minor detail of a situation of what happened and how it went down. So I don’t really know how to read that.
But I do know in the small business world, personal guarantee is the norm. If you can’t get your arms around personally guaranteeing, because it’s not just the acquisition loan. It’s the credit card account. It’s every vendor account, it’s every vehicle lease. It’s pretty much everything you do, you are personally on the hook for.
First, you need to get your footing and get comfort with that business that whatever goes wrong, that you’ll be able to fix it. And be comfortable that there’s nothing that is real likely to go to wrong. Because you have this risk in your everyday life too. Once you own property, somebody can slip and fall, and hurt themselves, and sue you over it. I mean, that’s a reality. The world is a risky place. So you can’t not do things because of that. But we felt comfortable with this business, and the risk we were taking on that yeah, it was scary, and we were cautious. And rightfully so, and many people are. But we would have been more cautious, and I’m still even cautious today about going out and getting a real big SBA loan relative to my entire net worth, or total assets available, or any of that. We’re still pretty financially conservative.
Yeah. So in structuring a deal, the SBA loan is a pretty big portion of that because these are such small businesses. So do you then just have a small amount of equity that you raise from investors? What did your deal look like when you bought The Wright Gardner?
So ours was just three partners, me and two other partners. We pulled savings to come up with the equity. So we didn’t have outside investors. We didn’t have outside interests. Everything we did, we did inside the partnership. So that makes it real clean. Because more or less, everybody’s in the same boat. Even though technically, I was the CEO and I was the one responsible for the first acquisition, and I was managing the day-to-day. And my partners were doing other things, but they were sort of doing other things in the interest of the partnership. And that kept things feeling fair and equal so that there was no rift in the partnership for call it regret, or I guess resentment that somebody else is, I’m stuck there going to the business every day, and they’re off doing whatever.
So we had kind of worked that out in the partnership agreement, and there was no outside investors. And I think for these size businesses, it’s really good if you can do it that way. Because A, they are not big enough to really have outside investors in my opinion. And I think they should if you’re doing this I think in the way that we would suggest, they shouldn’t be so sophisticated that you would even need additional expertise. Most of it should be stuff that you should be able to figure out relatively easily. And yes, things can be hard, and things can go badly. But you’re buying at a price point where there’s quite a bit of margin of safety built in.
So one thing I wanted to ask you about too was you’ve talked before about not using accountants for a quality of earnings, and also not using lawyers for your deals. I assume part of the benefit, or the ability to do that is partly because you’re going after smaller companies. But that’s a take I haven’t heard anyone else say before. So I’m curious just a little bit more depth on why you have those two beliefs and some of your reasoning behind it.
I think the plain and simple answer is these deals can’t really afford that. The transaction costs are too high relative to the deal itself. We’ve developed our comfort transacting on really simple legal documents. And we do our own legal drafting, and negotiating. And my partner and I have pretty good familiarity with the various deal documents, and have been through this quite a few times without legal counsel. It’s not that we won’t use lawyers, but we won’t let lawyers negotiate the deal. We’ll do the negotiating. We haven’t had any real legal challenges that required lawyers for drafting specific terms in any of our smaller deals. But I could envision that being one way that you would use lawyers cost-effectively in these small deals is honing in on key areas where you actually need a little bit of counsel and potentially even a little bit of drafting support to write terms in the right way.
But in general, I find that the lawyers will be able to find and pick as many fights as you allow them time to. And then if you have lawyers negotiating, if you bring in lawyers to negotiate, then they have to as well generally. Because lawyers want to deal with other lawyers. And the costs just escalate very quickly. So we’ve never led with a lawyer. We’ve always kind of just kept them out of it. And I think a lot of times, the seller will have somebody in the background. But if they’re dealing with us, then they’re going to be more inclined to kind of keep their legal counsel and not let them run the show. Because the lawyers are really good at running up fees to come up with things that they can argue about. And we just never really let that happen.
On the accounting question, these businesses are pretty small. There’s not a lot of transactions. There’s not an infinite abyss of accounting minutiae to even go through. And that’s one of the nice things about them. You should be able to do your own due diligence. And I go into these thinking I don’t want anybody else to know more about this deal than I do. So if we have really specific accounting questions about accounting treatment and things like that, we have a CPA who we can ask those questions. Or sometimes, we’ll just research them ourselves because we actually genuinely want to know. But for the most part, we just haven’t taken on anything that required professional support.
Do you think I think if you went after a slightly larger deal, that you would bring in accountants and lawyers in that case?
Maybe, it depends. Because some of bringing on professional help is to give other people who you need to give confidence in your deal, such as equity investors the confidence that you’ve checked the boxes, and that you’ve protected them and done professional diligence. We don’t work that way, so we don’t need to. We’re the ones on the line. We’re the ones signing the guarantee. It’s our equity. If we make a mistake, we’re going to live in the consequences. And we buy insurance, and we be as rigorous as we can. And we figure out stuff that we don’t understand. And if we miss stuff, then we live with the consequences. We deal with it and move on. So probably not, but if we were to take on a more complicated or bigger deal, I could see us using more professional help for specific things that we either don’t understand or want a little bit of another perspective on. But not really letting them go wild producing a quality of earnings or producing 1,000 pages of purchase agreements, and leases, and the whole array of legal documents when something much skinnier and simpler would probably do the job.
That makes a lot of sense. You alluded earlier to understanding how businesses work, and that that gives you an advantage when buying these small companies that are built around an owner. And you also talked about some tools to do so. So what are some software tools or other tools that you’ve found that are helpful for kind of bringing a business up to speed with technology of today?
I mean, it’s never been easier to be a small business owner, from the standpoint of the tools that you have at your disposal. Relative to a decade ago, two decades ago, however long, there are great products out there that can do most of what’s complicated about running a small business. So like QuickBooks Online, we switched from desktop to online. It’s probably not even worth going into the differences, and I don’t even know that I know desktop anymore, but there’s a lot of great resources just built into that product. We use Zenefits for HRIS, benefits. I know a lot of people use Gusto as well. We use Asana for project management and tracking our recurring tasks. We use G Suite. It’s never been easier to set up an IT infrastructure for a business and self-administer it. We use Ooma for phones. Super easy to transfer phone numbers, set up call routing. The tools just make it so easy to do things yourself and just not need to staff up. So we’ve really, I’d say taken advantage of that. We use pipe drive for CRM.
And I think we’ve gotten pretty good at building connections between our different systems, and really trying to streamline processes, and eliminate work, and eliminate waste in things that maybe used to be really manually intensive. And a lot of it is just being hungry and asking over and over again why do we do it this way? Why do we do it this way? Is there a better way? And finding that waste and just eliminating it little by little.
Is there a process that you came into the business and it was all on paper, or it was a really tedious process that you found a interesting solution for? Can you kind of walk through maybe a story or two?
One for Wright Gardener was scheduling. We had one person scheduling the 12 employees. And it was about 30 hours a week of work. Just figuring out where everybody’s going, when they’re going. It was actually pretty evolved. It was online. The technicians could get their schedules online. And our scheduler was manually updating HTML files and publishing them. It worked, but it was super time intensive, and difficult, and error-proned. So our scheduling process now, all the schedules are actually in a spreadsheet. But they’re delivered through an app that we built using AppSheet, which is a low-code, no-code environment. And it’s maybe 15 minutes a week of work for 35 people. And same guy still does it, but he does a lot of other things now.
And all that was just a function of redesigning the tool sets, and what data needed to be collected, and how that data was processed, and how it was used. And we use computers to do the things that they’re best at, which is remembering things, and presenting lists. So yeah, once we figured out the data structure of the company and got all of our data cleaned up, and figured out, and made it workable, we could just do a lot of things that we couldn’t do when a lot more stuff was on paper, or it wasn’t structured in such a way that was easy to use and easy to consume.
Do you have a good sense for … you alluded to a little bit, the return on the investment in those tools. So that person who was doing it before, they spent 30 hours a week, now they do 15. Have you seen other benefits from freeing up time around the company that have led to new growth in new ways?
I think of it as the continuous improvement mindset. You’re always looking for ways to do things a little bit better. And being willing to invest what little bit of incremental elbow grease it takes to do that. So as far as return on investment, I don’t really know. But I think you have to trust that if you’re always pursuing better, a lot of the time you’re going to be right. And especially on these smaller businesses, it’s not hard to spot waste. You’ll find it. Things that just take more time than they should. And then getting to the root of why.
I think the return on investment, it’s got to be really, really high, especially if you’re growing. Because what it does is it differs the need to bring on additional labor to do things. So in the case of a lot of the tools stuff, if you can take a process that was taking everybody a little bit of time every week and turn it into something that takes one person just a little bit of time once a month, the benefits will accrue to everyone. And then, you freed up time that they can be reinvesting in other things.
So I’m going through this right now with figuring out what processes, what are our next evolution of processes. And we don’t have a lot of really obvious, super wasteful ‘bad’ practices, but we do have is a bunch of little minor inconveniences. And those things add up. And once you can eliminate them, everything else that remains will be done better, because it’s fundamentally less distracted. You’re reducing the number of activities that need to be done, need to be thought about. And there’s all sorts of these just I think little benefits that you get culturally and practically to being willing to always be chasing better.
Yeah. I remember at this summer internship I did in college at this software company in Portland, it was funny enough a software company, but our expense reporting was all on paper. So employees would create an Excel sheet, input their expenses, they’d print it out, and then staple the receipt from whatever it was. Even if it was parking. And they had a parking for all 30 days of that month. And there’d be this thick staple with all the tickets, and they’d put it in a bin. And then you’d take that bin and then put it back into the computer, but in a different specific way. And we inputted, I think we did Expensify, and that just eliminated so much time. So I can definitely understand how that frees up resources and just feels better at that point because you’re not bogging everyone down with this annoying process.
So there’s all these tools out there that help you modernize and potentially scale this business that was pretty small to something that’s a little bit more substantial. Why do more people not decide to go down that path?
It’s a good question. I think there’s a lot of perceived risk around going into business for yourself and business ownership. People tend to be averse to spending the money that they’ve saved and accumulated on ‘speculative’ endeavors, startups in particular. This kind of gets I’d say thrown together with starting a company. I do think it’s a pretty different thing, but ultimately you are writing a check out of what savings you’ve accumulated to do this. And there’s something that feels not quite right about buying your job.
So I think there’s always a lot of little things that together add up to dissuade people from going down this path. It’s easier not to. If you can make a good living and make good money working for somebody else, working in another business that’s already kind of figured out, that’s the path of least resistance for most people. You really got to want to do this, and you really got to want to do it for yourself, and your family, and whatever other motivations you have. But I think there’s a million reasons to say no. And all it takes is one of them to materialize on any given day, and the pursuit can be over.
So why did you want to do it? Because you had all this background from McKinsey and other businesses. So what made you choose this path versus the myriad of other options you must have had?
For me, I pursued this path when I was 23. And it ended up okay. I don’t know why I did. I had always had an entrepreneurial desire, and I’d been in entrepreneurial businesses. And I did one that when I was super young, and not really ready for it, and probably too naive to realize how much risk I was taking. And it turned out okay. We went into it with not that great of a plan. So that gave me the confidence that, “How bad could it be?” Even though I had a one-year-old at home, and a mortgage, and a lot of things that stop most people who are 30 from taking the plunge. So that prior experience I think gave me confidence that a lot of people don’t have who haven’t been through it before.
And I had I think, I had a spouse, a working spouse who brought in some income for the family. So I really wasn’t alone. And that actually made it a lot easier, because we had that to fall back on. And I’d say that that’s the risk mitigation perspective. And then the more affirmative case of why do I want to do this, I think entrepreneurship is super rewarding. You can employ people and help people become better. I really enjoy just the process of exploring and making improvements. And at the end of the day, I think my best days are the days that I got home and I can think like, “I improved like this and that. And there’s three other things today, all in one day.” And those are the best days. And I try to have as many of those days as I can.
I love it. On the first episode, I asked you about the class you would teach, and then the best business. Curious if you have a different answer to the best business now, but the third one I didn’t ask you was what’s a belief you used to hold strongly that you’ve changed your mind on? And I’m curious your answer to that one.
As an MIT trained engineer, I guess I’m not really an engineer, but lifelong math nerd. I’ve always had a strong commitment to rationality and believed myself to be hyper, hyper rational. I’m reading this book now called The Righteous Mind. And the basic thesis of the book is that rationality serves the emotions, and not vice versa. And your emotional response is the immediate response to basically everything. And then humans work to rationalize whatever those emotions were. And this book tries to explain deeply held conflicts between morals.
But I think I believed myself to be super rational. The ability to look at the facts and use that to guide me in a pure and scientific way. And I think as I’ve gotten older and learned more about myself, I’m more of an emotional being than maybe I ever realized or would give myself credit for. And being aware of that is super, super important. And one of the things my partner Anu always makes me do is when we have to make a big decision, we have to sleep on it. We are not allowed to make it today, which is against everything I stand for. But it helps you at least give yourself a chance to reason through things and explore some of the nuances of that decision, and try on how is that going to feel. And am I making an emotional reactive gut decision here, or do we still feel like a thorough and reasoned approach lands us on the same decision that we wanted to make today so that we could make that decision today?
That’s a good book recommendation. I’m going to have to check that one out. Thanks for sharing a little bit more of your thesis on here. It’s been fun to read about it, and it’s fun to have an episode to kind of recap some of your thoughts around it. So thanks for sharing your time. This has been fun.
I’m glad to be here, and thanks for having me back Alex.