My guest on this episode is Peter Bell. Peter and Justin Turner were guests on my fourth ever podcast episode and were very early supporters of the show. Their firm, along with two other partners, is Traction Capital Partners in Tacoma, WA. Traction is an independent sponsor which now owns 3 companies with a potential 4th on the way in the next few weeks. Peter joined in late 2018 and set to work at their first portfolio company, SeaWestern, in Kirkland, WA. SeaWestern is a distributor of firefighting equipment across the Pacific Northwest and Peter was tasked with learning the business and looking for avenues of growth and improvement. Needless to say, in the two and a half years since, he’s learned a lot.

During this episode we talk about stepping into a new leadership role, learning a new business model, growth opportunities at SeaWestern, and why your resume doesn’t matter in a small business. And for a thorough background on Traction, I highly recommend listening to episode 4 where Peter and Justin share Traction’s mission and investment model. And now, enjoy the episode.

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Peter, it’s good to see you. It has been since March, 2019, that we had you on the episode. You and Justin were the fourth episode of Think Like an Owner, and now you get to be the 75th plus episode on this podcast. So it’s really fun to have you and a ton of it has changed since we started the podcast and started talking. You took over some operations roles at SeaWestern and have been working with Traction for a while. I’d just love to hear all about that. But for those who don’t know and who didn’t hear that fourth episode, can you give us a quick background on who you are, how you got to Traction and a little bit about SeaWestern.

First of all, thanks so much for having me back on the podcast. I feel like even at that time when we first recorded, I gained so much from going through that process and starting to get more involved in Twitter and seeing a lot of the connections that you started to build around this small business micro private equity world. I owe a lot, especially with connecting with folks on Twitter to going through that first episode with you. So I really appreciate you having Justin and I on. It’s been really fun to watch the progress of the podcast, especially seeing it soar in its early stages and to see you kind of build a business out of it. So kudos to you and it’s been really fun to watch.

Since the first episode, that was March of 2019, we were five months into acquiring our first business which is a fire equipment distributor business based out of Kirkland, Washington and at that time it was serving around 500 or 600 fire departments up in Oregon, Washington, and a little bit in Idaho. We came in kind of as operators, there was a brother and sister who owned the business. The brother stayed on to be kind of the head of sales, president of the business. And then we replaced the sister who was the back office kind of general manager up in the Kirkland kind of headquarters.

Gosh, a ton has changed since then. It’s been a ton of fun. We’ve grown the business and I’m sure we’ll get to kind of the nitty gritty of what we’ve taken it from that point up until now. But I think the biggest change has just been we’ve added two more companies to the portfolio, which is around $2 million in EBITDA for both of them, one and a half to $2 million in EBITDA. It’s been a ton of fun working with all these people in this small business. Micro private equity search fund world has been super, super rewarding and have just been really thankful to be a part of it.

Can you talk a little bit about how Traction is organized and how these companies are acquired?

We have three partners at Traction and then myself. We have what we’ll call an operations operating partner, which is Dale, who I work with the most. We have Justin Turner. We were on the first podcast together who kind of runs the deal side of things and a little bit of the fundraising. And he even does a little bit of the operations work as well for our business down in Bend, Oregon. And then we have Brian Haynes, one of the other partners who focuses kind of on the fundraising side and maintaining a lot of the relationships with our investors. So three partners and then myself, and we’re actually kind of in the process right now of going through some controller interviews to sit at the Traction level to then provide because that’s a lot of what Dale and I do right now is kind of the nitty gritty controller accounting work. So we’re hiring a controller to oversee the accounting for our three businesses and then hopefully a fourth one here in the next month or so.

Can you break down the SeaWestern business into, you mentioned it’s a distributor of firefighting equipment, but can you break down what regions you sell to, what types of products you’re offering, that sort of thing.

When we took over the business, there was five traveling sales reps that generated the revenue for the business. This is a sales rep who has a truck, has some demo equipment in their rig. I was taking that car from where they live, their truck, and then going around and meeting with all the fire departments in their territory in the hope that they then generate sales from each one of those departments. We had five reps when we first started. That was Eastern Washington, Northern Washington, Southern Washington, Seattle Metro area, Northern Oregon, and then Southern Oregon. So, we had a pretty good coverage of the I-5 corridor with those four reps. And then we had a gentleman out in Eastern Washington that did mostly kind of the Spokane area and then a little bit of Idaho.

This is reps going into the department and this is outfitting the firefighter from top to bottom. So this is helmets, hoods. This is the turnout gear. So this is the coat and pants that the firefighters wear when they’re out on duty. So this is the black or tan with the yellow trim that they wear, and then boots. And then we also focus on the self-contained breathing apparatus that they throw on their back with the cylinder on the back, 45 minutes cylinder. And then another big ticket item for us is the compressor which sits at each one of the departments to fill up and maintain the 45 minute cylinders or 60 minutes cylinders, whatever the department uses. So our three kind of big ticket items are compressors, SCBAs, which is the self-contained breathing apparatus, and then the actual gear, that coat and the pant that the departments use.

To give you an idea of kind of our penetration up in Oregon and Washington, I think this was done about a year ago, but we were on the I-5 corridor. I believe we had 85% of the fire departments in our turnout gear, which is from our manufacturer, LION. And this was already pretty well established when we got into the territory and it was one of kind of our investment thesis is this is recurring revenue turnout gear. So they’re going to purchase from us probably two times a year. All their new recruits that come in will be a new recruit class that they size for and then we sell to, and thinking about switching costs.

So if you go from one turnout gear that is super safe and has provided everything that department wants and fits well, the firefighters love it, and to go and switch to something else, we saw that as a nice margin of safety going into the investment because the switching costs going back and forth between different turnout gears and one doesn’t work and one does and you have firefighters lives on the line, they have to make sure that they’re in the best gear. And so we’ve been very lucky to partner with LION who is our manufacturer for the turnout gear and where we kind of come into play and why they don’t have just sales reps running around Oregon and Washington doing it themselves is this is boots on the ground sizing the firefighters.

This is really understanding the product and having even if it’s one or two sales reps going in on one of those sales calls. It’s a touch and feel kind of product. It’s not a we’ll send you a demo, you can try out the software, let us know what you think. This is meeting with the chief, assistant chief head of PPE and laying out the turnout gear on the table and walking through kind of each piece of it. So, for a group and a manufacturer like LION to go in and do it themselves means they would be hiring 6, 7, 8 reps in our territory and we’re a much better partner and business strategy decision from that standpoint because we’re already with the departments, they know our name, we’ve been selling to these departments for 45+ years now. We’re just kind of the go-to, especially on the turnout gear side. I could get kind of into some of our other products, but I think that’s the big one in our main strategy right now for getting to other territories as well.

Are there any other trends that affect the demand for those core products besides just growth in recruits at those firefighting departments, or is there some factor of population growth in various cities? What are some other trends that impact that demand?

Population growth not as much. A lot of it has to do with just budgets that the departments get and then FEMA grants. The budgets throughout the year, especially up in Washington, are determined by how much sales tax is collected. So that’s a piece of it. During COVID, for probably four or five months, there was a huge pullback in ordering from a lot of the departments because they didn’t know what their budget was going to look like for the rest of 2020 and then start of###-###-#### But with that being said, if you think about what the departments have to buy and have to supply their firefighters with, turnout gear and a lot of the products that we supply are top of the list, versus like improvements to what they’re currently using or enhancements. These are must haves if they’re going to bring in a recruit class and we’ve really benefited even with the pullback because there was a significant pullback in ordering there for about four or five months that has since pretty well bounced back in this year.

And then the other component there is FEMA grants, which is more of kind of a wild card with what’s going to happen. They’re always granted kind of April, May, and then the departments use them in the fall. So throughout the year we’ll probably have a million or we’ll probably have around $2 million in sales orders per month. And then during the fall we’ll ramp up to it could be six or seven because this means the departments have got a big FEMA grant, maybe for a million or $2 million, and then they’ll go out and buy new SCBAs with new turnout gear, new compressors, and spend quite a bit more money kind of during that time period.

That’s fantastic. Thanks for that breakdown. I’d be curious, did you have any experience prior to joining SeaWestern in distribution businesses or firefighting at all?

No. My exposure was, we looked at a couple of businesses when I was doing investment banking that were similar in nature but you still really don’t understand the business. There was a couple of businesses that we valued at BlackRock that were similar. But for the most part, no, this has been all brand new and back to some of the Twitter discussion from the start, I feel like I’ve gained a lot, especially with the service focus on Twitter about how to kind of approach growing your business, going to other territories, especially from a service standpoint. So it’s more kind of thrown in the fire and see what you can do.

Can you talk a little bit about that learning process? Like what was the first month at SeaWestern like for you?

Honestly, I didn’t really know what to expect going into it. I joined basically the day after we closed the deal. I think I had a week after the deal had closed. And then I went in with our operating partner, Dale. This was in October. My first project was working on pricing for all of our products going into 2019 and calculating margins, figuring out where we were going to be comfortable with pricing, and then working with the previous owner understanding exactly what she accomplished during the day, which we found out was almost like three jobs worth. She was incredible, high attention to detail. You kind of have an idea how much work a person is doing but you really don’t know until you sit in a wood paneled room with them and see from start to finish all that they accomplish.

She was just a machine and I’d tried to learn as much as I could from her in the beginning, but with an owner, what’s tough making that transition is that they’re used to being so busy. They’re not used to spending three hours, four hours of their day explaining anything to other people in the business. They get stuff done. At least in this case, this was her mantra and she was really good at it. It was challenging because at times she would just be kind of going around the office getting stuff done without us kind of like following, like should we follow you, see what you’re doing here or hey, what did you accomplish? Like were you working on commissions? Were you working on chatting with vendors? It was hard to get a full grasp early on.

It took about, I would say, four months, five months to really unpack everything, all the details behind what she was getting done during the day. The first couple of months actually weren’t that stressful. Like we had a pretty good grasp on pricing and we weren’t dealing with any major price increases from our manufacturers. It’s not the scenario that if you were to buy a business right at this point that you’d have to go and have those conversations with customers right away. Ours were pretty modest. It was maybe a 3-4% increase in prices in costs that we were dealing with.

We weren’t going to surprise any customers going into the new year, which was favorable for us. Once we got through the beginning, the hard part was the previous owner actually, or that Susan who was working in the back office, was gone after five months. So she didn’t have a full year to transition. So we had hired an office manager behind her to take over some of her duties, but like I said, we underestimated how much she was really accomplishing. So, that kind of fell on Dale and I to pick up the slack on everything that was getting done. That was the first five months.

Then we went through some pretty serious employee issues and I’ll just keep it really vague and just say we fell behind like crazy on ordering and making sure we’re invoicing the customers at the right time. It was like first four or five months were okay and figuring it out and going well. And then the next, gosh, probably maybe four or five months after that were pretty stressful realizing that we had some ordering issues and just not accomplishing what we needed to, from a PO perspective, getting product to the customers and then invoicing at the right time.

I know off-podcast we’ve talked about different systems migrations. You did an ERP migration that was pretty substantial. How did you start to recover from that four or five month period and start to rebuild the business in a sense, or at least rebuild certain processes within the company. How did you start doing that?

The last day that Susan was in the office, the previous owner, we kind of joked around like she was the ERP system. She handled from start to finish every part of the process. When she was gone and we realized this was… We had about five months in between then and when we were moving towards going to a new ERP system, those five months in between we realized really quickly that we were going to have to get something in a lot quicker to handle just purchase orders, sales orders, invoicing. We decided on NetSuite around that time with the goal of launching it in about four months. And as we’ve chatted about, ERP migration is very challenging, especially in a small business that maybe doesn’t have all of its data cleaned up.

I think when we had talked about it, that was one of the main frustrations or things you kind of have to look out for if you’re going through one of those migrations is making sure you have super, super clean data. That’s the items that are in your system we are moving from QuickBooks. So items in your system, the cost. So everything that goes along with that item, the description, price, cost, what kind of item it is. And then the other side of that was with our customers. Making sure we had the right emails, up-to-date emails, addresses, cell phone numbers, you name it. When we made the switch, that was the biggest issue we ran into is not all of the, especially on the items, migrated over correctly. So we had some non-inventory items that were treated like inventory items. We had custom products that were pre-configured and already had the wrong cost in them.

And so those first it was about three or four months after we went live with NetSuite were really challenging because we should have done way more cleanup on the front end. The minute we decided that we were going to move to a new ERP system, we should have been in QuickBooks every day making sure that all the items were prepped and ready. Not that we waited until the last second, we just didn’t realize how much of an impact, if they were wrong, it would have in NetSuite. So NetSuite is really great and other ERPs are similar in that it forces all of the issues, versus QuickBooks you can kind of swing around and do things how you want to without the system pushing back on you and NetSuite just full stop will not let you go through a certain transaction unless your inventory is correct or pricing, whatever it might be.

We learned the hard way, no doubt. It was a challenging couple of months. That was probably the hardest, most stressful part going through the transition and working in a smaller business. But once we got through it, now it’s the reason we’ve been able to scale and grow to other territories. So, definitely thankful for it.

Yeah. That grow into other territories is a big piece we’ve also discussed at length. I’d be curious to hear how did you go about thinking through different which territories you’d expand to? Do you hire sales reps in the same way? Do you modify your hiring a little bit? What’s your job description look like, products you sell? How do you go about expanding it to new territory? I’m sure you’ve thought through all of these-

All really good questions.

I would love to hear about it, yeah.

Once we had gone live with NetSuite, it was killing two birds with one stone. We needed to replace the owner with a true ERP system because she was getting so much stuff done. And then also if we’re going to go and scale to other territories, we have to have a way to get through those sales orders and that revenue volume, invoicing volume, versus how it was done in the past, which was reps would email in an order to a single The person sitting at that desk would then put that order in QuickBooks. It was just very antiquated. We knew that we had to have a system that we could hire new reps on without having them come to Kirkland for a month or two months to teach them everything and be able to launch them on a new system in a new territory.

It was about, I would say, six months after we’d launched NetSuite. So this was going into###-###-#### We started working with our major manufacturer, which was LION, to talk about moving more into Idaho, move into Colorado and then move into Alaska. They have some distributors in those territories but the market penetration for them was maybe more around 20, 30%, whereas we were 85% in Oregon and Washington. So we had proven through our model that we were the go-to for turnout gear and it’s a really good intro into those departments. If you can sign up a turnout customer, they’re going to continue to buy from you every six months and then buy a lot of the ancillary products along with it. So if you’re sitting in front of a department and you’re selling turnout gear size numb, that’s a great opportunity to sell hoods, gloves, boots, all the other products that we add to our catalog.

Our strategy was if we can get into those new territories and start to add turnout customers, which are going to be recurring revenue moving forward, then we can start to add on some of the other products which will then make up for our fixed costs. Hiring a sales rep in those territories comes with a certain, obviously a salary and then a commission that goes along with it. If it’s just turnout gear on its own, the payback period, because it’s a long sales process, is quite significant because you think about a customer transitioning from an old set of gear into a new one is not a two weeks sales process. It’s like a six month sales process. You have to go through a wear test. You have to go through a whole process with not only the chiefs but sometimes even the city to make sure that they’re okay switching over to some new gear.

So if we’re going to start at beginning of 2020, we hired two reps in Colorado with a call a business development person over the top of them who knew most of the major fire departments in Colorado. This was a person who’d worked in the fire industry for 30 years and did some training with them and it bounced around between some of the major Metro departments he was going to oversee because he already had those relationships. And then we had two reps who were going to come in and actually do the day-to-day work with the departments, get them sized, start to transition them over hopefully to our turnout gear. And then we hired one rep up in Alaska a little bit later, but our core focus was to start in Colorado because it’s I think pretty similar from a fire department perspective to Washington and it has more departments than Oregon. So if we’re going to go after a new market, let’s go after the big one first and start there.

From a training perspective, we would hold training at our office in Tacoma, which is a great… It’s a pretty cool office. You’ve been there when we did the first podcast. It’s a great spot to have 20 or 30 people come and watch a presentation. So with those new reps, we spent about two weeks in training in Washington at the office. And then one thing that I was very involved in throughout that was putting together a full NetSuite product module so that they had like a blueprint, knew how to order everything, knew all of our items and had a full process doc presentation that they could refer back to.

At that time it worked okay. We’re still hiring reps like crazy and we still have a lot of fine tuning to get through no doubt, but with some of these products, a lot of it really is touch and feel. And so the couple of weeks that they trained in Tacoma were great. And then the NetSuite training kind of worked okay. A lot of it was over the phone and then doing Zoom calls with them to train them up. It’s definitely something we’re still working on as we’re hiring new reps.

When you hire a new rep, do you try to hire someone, like you mentioned the business development person in Colorado having prior experience working with those fire departments. Do you hire for just network experience or do you prioritize just relationship development ability and sales and personality and that sort of thing? Of course there’s a balance, but I’m curious what that balance is.

It’s a really tricky balance because you have firefighters that know the product really well. They’ve used it, touched and felt it, wore it. They’ve beaten maybe even fires with the same product that they will eventually be selling. But then you also have the email, working in an ERP more professional experience that firefighters just don’t have as much in their day-to-day job. So it definitely, definitely is a balance. We’ve gotten super lucky with our reps, Alaska and then in Colorado that we’ve hired, the new reps that we’ve hired. Most of them came just from a sales background.

So the boots on the ground folks were actually sales reps previously, whether that be for an alcohol distributor or maybe another distributor in our industry. Those have worked really well. And then from a business development standpoint in Colorado, it was someone who we just knew had all the contacts at the major metros and then could introduce our sales reps and kind of start the sales, like the slow drip sales process, because they have those connections. But it’s a tricky balance. We’re still working on kind of making sure we have the right fit. We’ve been super lucky with our people right now, but it’s also becoming a lot harder to hire and keep good people.

Are there any other marketing channels you utilize or is it purely just 100% sales reps reaching out to fire departments for new sales?

There is a little bit. One thing we did right away, maybe it was actually after about a year as we did a new website for the business. It was just a one pager old school. We’d sell maybe like 5,000 worth of gear during the year. So it was minuscule. But just from a business to business marketing standpoint, it was not showcasing at all who SeaWestern was, who the leaders were, what we’re about, kind of our mission statement. And so that was one thing we accomplished pretty early. And granted, it’s not a direct to consumer. We’re not doing a ton of sales on our website. But just from a business to business standpoint, the departments seeing who we are and being able to, especially in new markets, say, okay, who’s this rep from SeaWestern. They can go to our website and actually have a little bit of basis, which is not much of an accomplishment to get a website done, but it was big. It feels big when you’re in a small business just to accomplish it.

And then there’s a little bit of, this got shut down all of last year but there’s trade shows, like the very classic trade shows with a lot of the departments. There’s a thing called daily dispatch, which is just a marketing service that goes out to all departments. I imagine this will change a little bit moving forward. This industry is very used to having reps in at their door chatting with them about product and doing a very hands-on face-to-face sales process. I imagine that that’s going to morph here soon. Some of it won’t be able to change. Some of the major products like it is a touch and feel have to see it in person, but for some of the other products, what we’re working hard on right now and is probably our next major project especially here is setting up a system so that the departments and specifically firefighters at those departments are able to order and put in their sizes, get their gear through like a wholesale platform because that’s what we struggle with.

Our reps have to go in and size and figure out sizes for each one of these firefighters, whether that be boots or it could be your helmet. And then obviously the turnout gear is coming up with a system so that they can go, whether it’s at their department or at home, put in their sizing, get everything squared away so that the sales process has less friction and a rep isn’t out there having to meet with them every day because it costs. You’re talking about customer acquisition cost for selling some fire equipment is pretty high. You’ve got a rep traveling in a vehicle to those departments and then meeting with them, spending time, all of that all adds up to the acquisition cost and we’re trying to really reduce that with a wholesale pricing option which would be new to this industry but it’s something that’s really needed.

Can you talk a little bit more about some of these other methods of growth that you have? Expanding regions, have you added any new products since you’ve acquired the business or has it just been doubling down on the existing portfolio?

We actually haven’t added, that has not been the main focus. We’ve added a few products, like the equipment that’s actually used, which could be like a fire hook or some of the extrication gear. But overall it has not been a main focus only because we really have covered kind of our niche. Like we haven’t gone into fire trucks and we haven’t gone the route yet on going heavy into wild-land because it’s a little bit different customer. But for the most part, our kind of bread and butter and what has worked really well for us, we’ve kind of really tried to stay within that group as we’re expanding especially to not overload the reps with not only are you going into a new territory, you’ve already learned these 20 products, now you’re going to learn five more to go and sell to the department. So, a lot of it is just making sure that we have our bases covered and don’t get too over our skis, especially because we’re trying to grow like crazy right now.

What are the top two or three things that you’re constantly thinking about in a growing business?

Maybe I’ll start from a competitive perspective. There’s kind of three tiers of service providers and I think this is similar with other service businesses that you have the kind of like a mom and pop shop, but maybe a previous firefighter who just started a business maybe started selling firetrucks or started selling boots and then it’s grown to maybe a five or six person shop. And then you have then the big boys who are doing the entire US have maybe 100 to 150 sales reps and managers that over the top of them. We kind of sit, at least right now we kind of sit right in the middle. So bouncing on both sides, on the smaller side, you have low professionalism, you have from a quoting perspective and just the communication with the customers and a lot of the products they offer, they just don’t have a full suite and professional sales process in place.

Often they won’t have an ERP system. They might be doing their quotes in Word documents and sending it over or in Excel. They just haven’t got to that stage where they can really invest in the business, haven’t made enough money where they can really invest in the business to kind of take it to that next stage. So we run into these folks in all of our markets. And then on the other side, you have the larger players who are national and while they have all of the professional, they have the ERPs, they have everything a department needs, they’re maybe not as touch and feel service oriented with the departments and are in there or able to be in there everyday because often they’ll cover a much wider territory and not put as much care on the customer. And on top of that, have a commission structure that doesn’t lend itself to really being a service provider.

This is what we think based on how they’ve done their deals, but for some of our sales, a lot of what works for us, especially with the self-contained breathing apparatus is we sell this big chunk of gear to a department. They go through a training process. They spend probably two months getting used to their gear before they even think about going and taking it out to a fire, especially if they’re switching between manufacturers. Our group is really all about making sure after that training happens, that we’re there, whether that’s on a monthly or weekly basis, with the departments training them up, helping them out, making sure they know what they’re doing and truly being a console and providing the best service we can even if they’re getting extra sales. This is a sale that was already done and we’re just there making sure that that department’s taken care of.

Whereas what we run into kind of with the big guys is they’ll happily make the sale at a very, very low margin, take the sale, go drop off the gear and then they’re onto the next one. So, we have a big competitive advantage against the big guys because they have to get to a certain level of sales volume, which means they’re not as focused on each one of the smaller departments or even after they’ve done a million dollar deal somewhere that they have to spend and go and spend time there, they need to go out and get another million dollar deal. So, that commission structure has worked well against us. Yeah, I guess it is against us because we’ve set ours up so that our reps are well taken care of even if they do go and spend time training up and spending time with the departments without generating the sales that they’re really looking for.

So we kind of sit right in the middle and maybe it’s a little bit different with other service providers, but that’s what we really are to the departments is we’re their go-to when they need any sort of advice or looking at new products and less so on the sales side too, like the overly salesy process. Topic right now and I’m sure it’s common with a lot of leaders in this space is just people, is just making sure you have the right people in place. You’re taking care of them. They’re happy with their roles. They’re compensated like they should be. And that there isn’t a way another one of our competitors to draw them away from our business. And part of that is the numbers and compensation, all that. But a lot of it too is just the culture we have.

The previous owner has so much energy and drive and he’s super hardworking and really loves what he does. We love what we do too. Dale and I coming into this business, we feel like there’s a lot of really good energy at SeaWestern and I think the culture has played a big part in helping keep employees because we’ve done a pretty good job with that. But that’s something we’re thinking about constantly is, okay, if we were to lose someone in this territory, how do we replace them? How long is that going to take? From a sales perspective, how many months of orders are we going to lose out on? And then how will that impact our financials for the next year? So the people side kind of drive the rest of what we’re thinking about.

Product has been solid right now. I mean, we’re definitely going through some price increases and have to manage that with customers, but it hasn’t been super detrimental to the relationships with the departments. Like the departments understand and we do our best never to take anything extra on it. It’s just whatever we’re getting from the manufacturer, we’re going to take whatever we were taking before and make sure that the departments aren’t getting overcharged or having to deal with the price increases. They understand that.

One thing that we’re contemplating right now is even additional territory. We’re in seven states or kind of six and a half. We’ve talked about going into other states and other territories. It’s hard because we’re just now at the point where we’re starting to really leverage the growth in the newer markets. So from a sales perspective, we’ve gone from 15 to we did 24 this last year. So in three years, 15 to 24. Pretty solid sales growth. Nothing crazy but solid. But with that, our EBITDA margins have taken a little bit of a hit.

Given that we’ve hired so many new folks, we’ve promoted a sales rep to a sales manager, we’ve got our CEO right in the middle of this growth in the mountain states and so, it’s kind of like do we decide to stop at the growth now and start to take up that EBITDA margin at the same sales or do we take the same hit, maybe go to some other states and delay that increase in EBITDA for another two years but then really leverage it, flywheel it four or five years down the road? So that’s something we’re talking a lot about right now. I wouldn’t say we don’t have a set plan quite yet, but that’s probably the biggest topic of growth and expansion in what we’re going to do next.

It seems like primarily a re-investment decision. Do you have enough opportunities to reinvest that? It’s okay to take that EBITDA hit because you know it’s being invested properly versus now let’s let EBITDA expand and we’ll reinvest it elsewhere. So if you think of it as a reinvestment problem, is it a matter of if we see opportunity we’ll take it or are there other things outside of growth that you need to reinvest in and that’s going to take more attention?

When we first had the opportunity to grow into these new markets, we didn’t even think twice about it. We didn’t go through any sort of capital allocation, IRR, okay, let’s look at the fixed costs and then determine if we want to go into these markets. It was, okay, we’ve made the investment in NetSuite. Now we have a CEO and owner who’s ready to really grow this thing. We have the right people in place at the office. We didn’t even think twice about it. Now at this point, given that we’re almost three years into the deal, so we’ve paid off quite a bit of debt and we’re in a really solid spot financially is just like you said, do we take that cash, invest in some vehicles, invest in some new reps, go into this new market, assuming we can establish ourselves like we have in the mountain states, or do we take that capital and then maybe roll it up into Traction and do another deal with it or what our other reinvestment opportunities are.

I think for this, how we’re kind of thinking about it is the long-term impact and what we’ve kind of modeled out given the assumptions of what we’ve done in Colorado and maybe in some of these other states is that the IRR would be too high to pass up on. The challenge is if we feel like the industry still is kind of getting tugged around quite a bit right now with pricing and margins and some new players in some of our markets, that there’s no doubt some risk associated with that IRR that we’re looking at and it’d be very easy for us to stay in our current markets and start to just uptick that margin and not have to worry about it.

But the other side of it, IRR aside, is the time that it takes. We’ve got Dale and I operating right in the middle of this, the fire equipment business, but now we have two other businesses and then possibly a third other business here soon. And so if we think about our time spent on growing the business, spending the money, and then being how involved we’ll have to be to accomplish it, we’re definitely weighing that as well kind of in junction with the growth that could take place if we go to those other markets. Our CEO is right in the middle of it as well and he can absolutely handle going into those new markets, but we want to make sure that we’re not leaving people on an island and that we’re here for support because we’ve kind of been doing that since day one.

It’s probably also a function of just time horizon at SeaWestern. I remember previously we’ve chatted about not having any set time horizon for selling SeaWestern down the road. But I guess if that became more of an idea, then you’d probably want to beef up margins. But be curious, do you have any sense for time horizon with SeaWestern?

That’s what’s really nice about making this decision is that we don’t have any time pressure. I think ideally just like we had gone into this investment and Traction’s thesis is being able to hold these businesses for the long-term. We really don’t have any pressure either way. There might be a little bit of a window where we can expand over the next couple of years into those territories where we will absolutely have to make a decision, but we definitely don’t have a fund pressure or any sort of specific time horizon, whether that’s a specific EBITDA number or margins on the sales that we’re generating. It’s really nice to have that flexibility with our investors in the way we’ve structured these deals so that we don’t have to go and say, okay, we can’t go and expand because we’re going to sell in two years and we need to get our EBITDA now up to 12 or 13% margin where it’s at maybe 10 or 9 right now. So it’s very, very nice and it’s how the Traction partners we structure these deals so that we don’t have that pressure.

Yeah. That’s a phenomenal place to be. Could you use any debt financing to have that growth and then keep some of the cashflow and use elsewhere? How does that math work for you?

For the costs that go into expanding into these new territories, we utilize basically, well, let’s call it a vehicle line of credit to purchase the new vehicles. We don’t have to worry about spending 50K in cash to buy a new truck and outfitting the rig with all the wear tests and demos and all that good stuff. So the cost to go and expand actually really from a cashflow perspective isn’t all that bad. It’s just the continuation of adding layers of debt onto the business. So, take a step back and let’s just look at it just from a capital allocation standpoint. Of course you would want to go and expand. You’re talking about maybe a 20% to 25% IRR versus a 6% cost on the vehicle line of credit and then the added percentages that hit the P&L with salaries, buying equipment for those folks, and then all the trainings that take place. So bringing those folks up to the Northwest, paying for their travel, and then the expenses that go along with the sales reps.

So from a just pure IRR play, okay, yeah, of course, we’re going to go and do it. But like I said before, we’re thinking about it also within the context of the time that it takes to get into those new markets, the time that Dale and I would spend in the business helping grow it. I think if we had one more person at the Traction level, operationally we could probably get it done. It’d be an easier decision and we’re kind of in the process of working on that. But for right now, it’s a balancing act kind of between those two of, okay, we’ve got time, we’ve got this IRR opportunity. We don’t have any pressure pushing us either way and we’re kind of just taking it slow and making sure that in these new markets, we’re well-established enough and we know that we can go and grow and have some success before we go into maybe some of the other territories.

Absolutely. On our first episode, the closing questions I asked you, I asked you the college class question about what you’d want to teach and you responded with a class about Charlie Munger’s mental models. Would you keep the same answer or is there a different class or modification to that class that you would want to teach today?

I think when we chatted, I was like fresh off Poor Charlie’s Almanack and was just in that classic Munger mental model, just tunnel vision. I still love Munger and still read about him quite a bit, especially through Tren Griffin’s 25iq. I’m still I’m about like 70% of the way now through that and he references Munger all the time. So it’s still a topic in top of mind, but I would definitely switch up my answer this time around. One class I think that would be really fun to teach or to learn is studying some of the biggest corporate disasters or corporate blunders that have taken place.

So maybe start with some of the bigger ones like WeWork and Enron and Borders, but then also look at some private company disasters and just kind of invert the, hey, we’re going to talk about business strategy, we’re going to talk about incentives, we’re going to talk about accounting decisions, we’re going to talk about growth, but in the context of what not to do. So just invert it and say we’re going to study the worst business decisions that have taken place. And then within the context of whether the students or whatever know it or not in the context of, okay, now you know what not to do. Here’s probably closer what you should do.

I like it. Is there any private company that you’d be excited to add to the class?

Ooh, definitely some private companies. I would say like a very classic bankruptcy with a private equity sell to private equity sell to private equity full leverage end up in bankruptcy. That would be more kind of on the financial what not to do from a financial engineering standpoint, but there’s probably some business strategy incentives at play in there as well. I think the incentives piece would probably be the most interesting because often for specific to private equity and selling a business to another private equity firm and keep continuing to lever it up, often the main reason that those go downhill is that the incentives not only at the private equity groups but at the management level to make sure a deal gets done and they go this, okay, your goal is to go and sell it, you’re going to get X bonus, willing to do it even if it means putting the business at more risk. So I imagine that class would be mostly around incentives with key stakeholders.

That sounds fascinating. I hope you can turn it into some sort of blog, at least, before you retire and become a professor at Puget Sound or what have you.

I would love to be a professor. That’d be a ton of fun. And I know there’s a bunch of case studies out there on, I mean, probably the main three. There’s probably a lot more, but the case studies out there on them are fantastic. Maybe there are some classes already out there that are focused on that, but that one would be a pretty fun one to teach.

I love it. What strongly held belief have you changed your mind on?

I had an answer prepped for this one yesterday and I think I’m actually going to change up my answer literally of a thought I had on my commute into work this morning. Thinking back on when we first chatted, one belief that I held pretty strongly, right, wrong or indifferent, was coming from BlackRock, your resume was such a piece of your identity and who you were and how much success you were going to have at a bigger business like that. I was lucky to work with some of the sharpest folks I’ll probably ever come across at BlackRock. But that was Harvard, Stanford, Wharton MBAs, Columbia. Going into a smaller business, I still kind of felt that your resume and where you went to school carried a certain amount of weight and made such a big impact in your work.

Working in a smaller business, you realize very quickly that people really don’t care at all where you were at or what you did before. What people care about is your work ethic, being able to get stuff done and doing what you say you’re going to do. Whether that means you just had a high school degree or you went and got a Stanford MBA or a Harvard MBA, in this world just executing and working really hard and having passion for what you do is so much more important. That’s been a huge, very positive by-product for me because it’s so easy to get caught up in what’s on your resume or what you throw up in front of someone like this is my identity, this is what I went and did when in reality the most fun in really developing some of those relationships in this world has been just getting stuff done, accomplishing things, working hard with a group. I feel like my mindset has changed on that a little bit.

It sounds freeing almost knowing that whatever you did before doesn’t matter, it’s what you can do today that is what’s going to be important.

I’m pretty sure when I said I worked at BlackRock in my first week, most people thought I was talking about BlackRock Coffee. It holds absolutely no weight and in a good way. It completely humbles you immediately that you get the look from employees, “Okay, great. So when are we going to go in and hire this new rep in this new area?” It is very framed. I would say it’s been a very positive by-product.

That’s awesome. I love that. What’s the best business you’ve ever seen?

Since we chatted the first time around, I literally think about this question, one, when we get a new sem and we’re opening up is, okay, is this business going to be the next one, without even thinking about the podcast is like is this next one going to be the best business we’ve looked at? So asking that question the first time around has been really fun to think about, really trying to break down the business models and think, okay, what is truly the best, best model out there? Fortunately, recently, nothing has popped up kind of within the last couple of months, but last year we had a business that we looked at and still a little bit bitter because we never were able to get in front of the owner.

I think it was actually on BizBuySell and it was a heater and generator rental business serving home builders in the Midwest. This was a small group. I think the business was maybe 10 people. They had a catalog of generators and heaters that they owned. They would work with the nine or 10 major home builders in their region and go and simply rent out their generator to them for a very low fixed cost for a month to six months, and then take it back after a certain period of time. And then during that time charge fuel for running that generator or running that heater. The business that we looked at was doing maybe $5 million in sales and probably 50% EBITDA margins, maybe even a little bit more. How they structured this pricing and… Who knows if it, I mean, we didn’t go through a QV or they didn’t have a QV done. So maybe these numbers were just made up.

But from on the surface, it was a fantastic business. How they really made their margins is they would go as a low fixed cost compared to their competitors, and then they would tack on fuel charges during the one month, two months, six month process. Those fuel charges, they were marking up 300% and making about 75% gross margin. This in combination with the rental side of the business, which is rental was a great business as is. They were making even an extra layer on top of that given the fuel nature of the duration of these builds. Yeah, it was a great business. It’s really funny since looking at that one. We’ve kind of tried to target and focus on other rental businesses up here in this area. All of the CEOs, owners on LinkedIn are all connected with like all of the searchers up in the Seattle area. So it’s clearly top of the funnel as far as thesis goes for a searcher for some of these other buyers because it’s a good model.

Clearly. No kidding. That sounds awesome. Thank you so much, Peter, for coming on the podcast. Again, I’ve loved getting to know you. You were literally one of the first people to reach out after I started the podcast. I think I had maybe one or two episodes before you reached out on Twitter. And so you’ve literally seen it since the beginning and it’s been so much fun to watch Traction and SeaWestern and see what you do next. So thank you for sharing your time once again after all these years.

Absolutely, man. I really appreciate it. It’s an honor to come back on the podcast and it’s been really fun to track and see your progress since then. It feels like it was yesterday, but it also feels like it was a long time ago, especially with what you’ve built. So it’s been really fun following along and can’t wait to listen to some more great guests.

Perfect. Thank you so much, Peter.

Thanks Alex. Appreciate it.