Digital Exits Podcast With Jock Purtle

On this week’s episode, we talk with Brent Beshore as he shares how he is buying, holding and operating companies. We cover a wide range of topics starting with Brent as an entrepreneur, him as an investor, how he asses deals and where he finds them, what he does after he closes and how he sets them up for success to run without him.

In 2016 he looked at 2000 deals and acquired 3. He targets deals in the $1m to $10m in EBIDTA range.

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Jock: Hey Everyone,

It’s Jock and welcome back to another episode of the digital exists podcast. I am super excited to be talking to our guest today. he has recently come up on the radar of my investing research and I wanted to get him on the phone today because I think he is doing really amazing things and wanted to dig deeper into his process, his mindset, and really understanding what it’s like to built a portfolio of many portfolio companies. His name is Brent Beshore from adventures. we jokingly said I wanted to call him the mini warren Buffett. He politely declined and said the expectations should be set a little bit smaller. But I am going to give him that kudos. we are going to talk about him acquiring companies he already had multiple acquisitions with a long career. So without a due Brent welcome to the call

Brent: Hey Jock thank you so much for having me on the call I really appreciate it

Jock (J): Perfect. So I am gonna link everyone to a couple of interviews that you have done in the past. That as customary for everyone that’s kinda too lazy to go and listen to them. Do you want to start off with a quick background of yourself?

Brent (B): Yea sure, we started in 2007 and umm we are in the business of helping entrepreneurs to reach a point in their lives typically in their early-mid 50’s on the early end to late 70’s on the later end to transition to a permanent home for their businesses. So we’ like to help companies that serve in the 1 million of pretax earnings to 10 million on the high end and work with their communities work with any sort of regulators if that’s the case as well the leadership within the company and the employees to really create a win-win situation over a long period of time.

J : So what are the things that you did, for a lot of the people listening. You’re a buy and hold guy. Whereas a lot of our clients generally look at a 2-5 year growth and resale. Why do that? For the uneducated on the sort of Warren Buffett principal. Why do you see that as an opportunity in this let’s call it micro or small mid-market sector?

B: Well so I think you can come at from a couple different angles the way we like to think about it is 1- the health of the business in general. So I think it’s challenging, not impossible but it presents some challenging incentives to really be focused on how do you maximize the numbers over a short period of time. And like I said you can do it and I don’t think it’s always the detriment of the company but often you find yourself in this weird tug of war between things that you know you should do that would pay off in 5, 10, 15 years and position the company strategically extremely well. And on the other hand, you want to maximize the earnings of the current company especially when you go around to sell. Jock you know probably better than anybody you know so many financial buyers are driven by even and odd numbers and what’s the raw earning power of the company and the seller is always going to be in  a far superior position of knowledge to the buyer to understand the real capacity is but often the tug o war maximizing the short term vs knowingly making decisions that are gonna consume capital  in the short term versus over the long term. So the way we look at is a great achieveing factor us is being able to tell our companies hey we want you to do things now that may not even pay off for 10 years knowing that there is high volatility in those decisions and the future is murky and all of that but at the same time i think there are some  obvious things that you can do in most  companies that conflict with the short-term mindset. I think that on a very broad level I’d say that’s kind of the th philosophy, but I also think there is some interesting compounding things that occur as we talked about before we went on air, the difficulty of finding an opportunity that you really wanna ink your life into they come around rarely and the amount of co factors that have to come together are so many and so difficult to get a deal done that once you do get a deal done, exiting from that and knowing it has great potential and you’ve been investing in that company and you have made promises to people it’s so much easier to not have to rely on somebody coming along and overpaying in some ways for the asset to generate your return so we look at cash, returns is the primary we are going to generate returns over time and hold over a very long period.

So one of Buffet’s or he defines as his competitive advantage is the fact that he buys and never sells. He buys and doesn’t strip the company. So how often are you seeing business owners in this 1-10 million range caring about that when you present it to them?

Thats a great question. I wish the the average cared more umm and I think that it’s a great selection bias that we love to exploit. Its pretty easy to tell quickly if someone cares who they sell their business to. Cause selling to private equity is the easy path, I shouldn’t say easy because it’s still going to be hard and challenging process but there’s plenty of private equity shops especially as you exceed the 5 million dollar EBITDA benchmark and sort of go above that and  love to buy a good business. They are doing their thing, they are very upfront about it. They are upfront about their whole periods, they are upfront and how they generate returns.. I mean there’s only so many ways you can generate returns right? Cutting umm,long term investment is a great way to generate short term cash flow. It’s not complicated right? You have a certain top line revenue and you decrease your expenses. That produces more profit. What we see often is that those skeletons start to appear much further down the road than you expect in some situations and so we try to explain to owners that principal and help them to understand what it would mean. And some some don’t care. i would say a good chunk of people that we have that conversation with may say yea that’s super important who buys my business as long as they give me the biggest check. So we are looking for that rare combination of people that have set up their business with the mindset that they really do care who buys it because  that’s going to ripple down into so many other facets of the company  that are almost impossible before the purchase to understand. We like to say if you don’t care who you sell your business to them we probably don’t wanna buy it.

J: So you actually use that as a filter.

B: Oh absolutely.

J: that’s very interesting to know. Lets jump into the pre questions that I have here. Let’s start with you as an entrepreneur. So you are a life time entrepreneur, is that right? After college went into?

B: yea, I dropped out of law school to start my first company so yea its been my pretty much my entire adult life.

J: Got it so reflect on what’s made you successful just as an entrepreneur before you started investing

Brent: Sure, what’s made me successful? You know I think that um my willingness to be able to adjust my behavior based on the feedback loops that I get seems to be an unusual trait I would say. I think I’ve had so many misaligned perspectives and continue to have you know all kinds  of flaws and shortcomings and if I can say I’ve done anything better than average is probably rubbing my own nose in my own mistakes and surrounding myself with people who will tell me the truth and just trying to grind on it day by and day and get a little better everyday. Learn and I know that sounds so  cliche and non usable, unusable in terms of how do you implement it. I mean spending time studying the business of business and being a student of life is something that is wildly underrated even as popular as it’s sort of been as a throw away advice in the last ya know I’ve seen it come up more and more but I tell you what that’s probably the single thing. I have gotten into some terrible businesses in the past and some bad situations and I’ve learned what I am good at and not good at. And it’s been ya know, I think it’s been a winding. It’s not a straight line it’s been a winding journey to try to understand your own. You got to understand yourself before you can really try to understand anybody else. And that’s probably the single greatest thing.

J: Well that’s a really good segway into the next question. What are you good at?

B: hahahaha. Well um, so I think I have a nose for understanding how value is created is how I would describe it. Um, and it’s probably less of a skill and more of a learned trait in terms of. I wasn’t naturally born with it I don’t think I think it’s one of those things that  once you look at the number of businesses that I have been in as many situations. Like I’ve had a hell of an education um, through mostly pissing on the electric fence myself about what to do and what not to do and you now I’ve seen  some things work and I think that’s you know collecting things that work and doing more of them and finding things that don’t work under most  circumstances and avoiding them. As funny as that sounds it’s way better to go about life doing it that way then trying to be super smart. So I would say curating sort of a list of mental models or types of situations being paired with circumstances and sort of talents is something I do better than most. It’s a form of pattern recognition I would say.

J: So are you the ideas guy or the systems guy?

B: hahaha It’s funny you say that. i was having this conversation with a friend of mine the other day. I use to think of myself as the ideas guy until I realized most of my ideas are absolutely terrible and I’ve learned the old phrase if you wanna go fast go alone if you wanna far go together. I don’t know how you can scale anything in life without systems. Like I think that I wrote about this a little bit. I call it the ceiling of brute force right? But there’s just this point at which everyone has a capacity based on their natural intelligence level skill set situation their in to take something to the furthest point that they can personally take it. Um and when you get there it feels like the entire world is working against you, nothing you do you can get any progress. You are kind of the person putting their finger in the um dam that keeps breaking all around them. And they keep pulling their finger out of one place and putting in another place. And you just can’t get anywhere right. I think systems are the only way to go. Am I now more of a systems guy? I think so. My natural inclination is still to jump in and fight like hell on the things that I think I can do. But  I try to restrain myself and try to allow people to do their jobs and maybe do they differently than I would do them. It’s the only way that I can gain any sort of amplification.

J: I think that both you and I see is a lot of the reason that some people are selling their companies that have hit that limit of you know what their ability is. You know like their skill set to take a business to 0 to 5 million is completely the opposite of taking it from 5-50. And that’s especially in this lower part of the market you see people stack it like that. 5 million in revenue in mark and it’s just because the owner is the bottleneck.

B: Yes. You know it’s funny you say that I love the phrase what’s gotten you here is not gonna get you there. And it exactly the point of that right? I mean I see so often that everyone is well meaning everyone wants the same things , everyone wants to prosper into you know not have high stress and provide for their employees and provide for their family and everyone is trying to do their best. I can’t tell you the last time I saw an effort issue amongst you know owners of a company. RIght? You sell select out a lot earlier than that. It’s really the ability to take your eyes off doing the work in the company and sort of take a step back and say ok what are the things we need to do and what are the gates we have to get through, over or around or under or somehow figure out a way to make it happen  that is limiting um the growth. and so that is a lot of the situations we look at and to be honest most of the companies and this  is the unfortunate part we look at two thousand plus companies last year in our size range for acquisition and you now Id say other than maybe 50 or 60 of them they were really weren’t candidates for transition because the business had been so um organized around 1 cultivate personality or a couple cults of personality that to try to retrain the entire staff in order to cancel. The best case scenarios in those companies is you find another huge personality to step into those shoes and it will probably still be  messy but they can at least have a go at it for somebody like us that really tries to partner with leadership that’s in place and tries to promoat within and try to um have a smooth transition it just doesn’t work very well. And that is sometimes a tough conversation to have.

J: Um, what personality traits make you a successful investor?

B: Boy, um. I would say I have a pretty good delayed gratification mindset probably would be my um where do I go on that? I mean, yea it’s interesting like. You obviously have to understand accounting right? SO accounting is the language of business and if you are not deeply fluent and understand how income statements balance sheet cash flow statements all flow together and understand where one thing ticks up over here  you should see another tick down over here. I mean there’s so much of that, that has to be deeply imbedded to even sort of, as the table stakes. but if you get beyond that I mean delayed gratification is about the most important thing I can think of. being able to not want to pull as much money out of companies as you possibly can keeping your personal burn rate as low as you possibly can. I think is the most underrated part of investing. I don’t know. I  want to ask you the same question but I know this is an interview me.

J; I’d agree with that. ive yea, always been the long term guy. Um and I generally seem to partner with long term guys as well. Um, Im if you want in my closet there’s like 5 black t shirts, 5 gray ones 2 pairs a jeans, some underwear, some socks, few colored t shirts. LIke that’s all I need to live. Now my girlfriend on the other hand, she takes up 3 bedrooms full of closets but that’s another story. I think thats, its so underestimated isnt it? If you’re paying 1550, 1800 bucks a month to lease your ferrari or whatever that’s a pretty high opportunity cost. And it’s not even cash it’s more like mind drain. Um, there’s only so much space you have in your head and if it’s been taken up by crap thats wasting that precious capacity you’re not gonna be optimal in terms of your output.

B; Yea I would also say that it also potentially, you run the risk of it forcing you to make decisions that you know are incorrect and the way I think about this is the physics princicial of the skate velocity. SO if you think of personal spending and byt the way this principle goes for personal spending, a businesses spending level and  the affluence the company is use to um living. But if you look at that as  being the gravity and you are trying to get this rocket into orbit. The stronger the gravity is the amazing force especially close to the ground that you have to expect to get a little bit of breakage and to be able to move up in the atmosphere is just tremendous right? The easiest thing you can do is lower the gravity lower your personal needs and lower your expectations right? it allows you to compound into things that you otherwise would this is the reason why big firm lawyers even though they hate their life most of the time, it’s kinda a big generalization but most of the people I know that went to big law firms that I went to law school with, ya know are pretty miserable with a few exceptions. ANd by why don’t they leave? Because they got use to making a half a million bucks a year and you look back on your life Gosh was it worth wasting my life over a half a million dollars a year on income where I could have been incredibly happy if I would’ve started my own thing or gone into a different type of practice. I mean whatever you do, whatever is going to fulfill you. it just feels like that gravity restricts people and they know they care barely walk up right let alone get off the ground. Anyway, its an interesting challenge though.

J: Let’s flip this around. Biggest weaknesses and holes that you need to fill

B: hahahaha- Um yea so let’s see here. I am kind of strange from a personality, I shouldn’t say strange. I don’t meet a lot of people that have the same collection of oddities so I’m a what I like to call and isolated extrovert so by nature I like to be around people but bc of the nature of what I do it works out most of the time that I am by myself and need to be thoughtful and so you pair that up with my other trait which is that I am a verbal processor so it really helps me to talk through things with people. So when those things become combined what makes me from what I say the biggest weakness standpoint I need other people to be the spark that gives me the ability to do my job. SO I know I annoy the hell outta some people on our team and they are extremely patient and gracious with me when I call them up and I’m like hey I gotta talk this through with you. And I spend 90% of the time talking and they are like I didn’t add anything to that and I was like no you did! I got to the perfect place that was exactly what we needed to do and they are like no i agree but i have no idea how we got there And I was like just let me barf all over you for a while and then it will all magically come together I don’t know how it works but anyways. So it’s challenging though because I want nothing more than to be the person that can be in the corner being thoughtful thinking quietly to myself and coming to great conclusions I just can’t do it.  I have learned over a long period of time, that’s why I love reading so much bc when I am reading it’s like a conversation with the author right? And I even write notes in the margins to ask questions of the author. I doubt any of your listeners will be the authors that I have pestered over the years but I have frequently asked.

J: Hey throw it out there. Who do you want to connect with?

B: Oh no, my list is so long I won’t list people specifically. I have actually connected with quite a few over the years with authors that were like I have never gotten a question set from a reader like yours. I will just send them like a novel of questions and thoughts and I interacted with the book. That’s just my way of being an isolated extrovert and verbal processor.

J: Who’s your charlie munger?

B:hahaha um, well um, I would say the closest person to that is a woman who’s my right hand person my partner in business her name is SUzanne Byland. She’s amazing, absolutely amazing it’s been um a very steadying force in my life and in the businesses and we compliment each other very very well. You know I don’t think that Buffett/Munger analogies really and interesting one. Um, because I think there’s a danger to over fit the verve to pattern fit a little too close and say ok well there’s no doubt that you need counter balances in your life do you need one of them or two of them or three of them or four of them. I know that situation between umm between munger and buffett um, fairly well and they each have their own sounding board separate from each other but they certainly did everything together And so you know my um, recently brought on a gentleman by the name of sheen perish who um he and I have been intellectual sparring partners for awhile. I have a group of people that um I like to joke we call ourselves the nerd squad that interact almost on a daily basis to um bounce off ideas on each other. And I think a lot of that is the function that um Buff and Munger serve for one another right to call each other out. To speak truth in each other’s lives um yeah to be kind of the check and the balance on somebody else so I don’t know if I answered your question though.

J: Uhhh yeah, I agree with you on the fact that their relationship is so unique that you get to benchmark and that it’s not really copiable. Um, you kind of like moved into my next question which is. You know I, your balance in terms of your personality like is that you know is that employee is that an equity partner um like we have a lot of conversations about conversation of people you know what’s your thoughts on you know how to split up a pie per say.

B: Sure. Yeah I mean boy that’s a good, huge question. We could probably do an entire podcast on how do you split up the pie. Um, I think the general the philosophy is um air on the side of generosity? But pay attention to two separate things going on when you talk about the pie. Um, one is what I would call capital or even a sweat equity investment. Verses uh markets skills set, right? So if you think about how compensation should be distributed over time is based on uh compensating somebody you know. And like I said generously um you know not being stingy by any means but you know giving them uh near market rate for the talent and history and predictability of outcomes and all the things that you know you would say in a normal kind of situation and then you pair that up with the risk of capital or the risk of investing you know long periods of time of your life with very little chances of pay off which is kind of more of a start-up mentality. Or the start situation. You know I think that there is a risk capital premium that is also commanded um, so for instance if somebody is in one of the companies is an equity partner because they put in their own money they should be much higher rewarded if the company goes well. And somebody who didn’t buy into any equity and who is um making a market rate for their time and talent.

J: Let’s transition to you as an investor. You started at a very successful Ad Agency. You know, why not double down on that. Why move on to investing in sort of buy growth strategy rather than you know chasing one off to the finish line?

B: Yeah, that’s a great question. Um so well um you know I think if you take step back, the way I think about it is we’re all investors um in the same ways. We may have buckets of things to invest. You know, we all have the same amount of time. We have different levels of relationships and type of relationships and then we have you know this idea of monetary investment and I’m always trying to look for a way to um maximize the return based on the combination of those variables right? and not just financial return and I think this a big difference as an investor you know are you just strictly talking about financial returns and I think the answer to anybody who has um thought about it enough should be know. Right? none of this just do the thing that is going to net the most money. Um we want surround ourselves with you know great people to give back to communities. You know I think trying to understand what you’re maximizing for and this changes over the course of my life right like I have two young kids now. What I’m optimizing for now is different than what is was before but in terms of how you look at doing an individual company vs doing what we’re doing in portfolio. It’s all about trying to maximize your time, talents, skills, relationships, money and leverage in a way that meets your goals. And so for me, I determined that having a portfolio of companies that i can interact with in a specific way and just surround myself with just really excellent people which i have been so fortunate to do. Um was the best path and maybe it wasn’t the optimal path for me i don’t know, I mean it’s all about opportunity costs and uh and you know sort of the outlook and predictability of outcomes. But that’s the path that I chose and you know I wouldn’t do it differently for anything. I’m so glad it’s worked out the way it has and it’s definitely not a fork on confusion it would have for sure.

J: Let’s go back to the single company. So did you not see the growth potential for that agency? Tell me about that.

B: Yeah that’s a great question. So yeah okay. This gets a little bit into theory behind crowded waters in almost a second law thermodynamic sort of thing here right? So if you think about thermodynamics you want to have the hottest heat source synced with the coldest output right? To be able to maximize the output of the energy into the system right? And in many ways the agency business in general…I got into it because I didn’t know any better and it’s just such a sexy business right? It’s all about ideas and art and smart people and all that’s true right? Absolutely. It’s also just an incredibly crowded space and it’s got this weird element of beauty pageant type to it um that just didn’t. It just didn’t fit with me with what I wanted to do with my life. I got frustrated when I really got deep into it. You know, even though we were growing and you know we were doing well. It was frustrating in the sense that we would um do really really well on a project and get our teeth kicked in for it and the client wouldn’t recognize it and then other times we’d have the exact opposite happen. We looked at ourselves and were like GOSH we just…talk about screwing the pooch we did not deliver at all and the client is thrilled with it. And so the disconnect with the causality I think was you know, uh, it was really challenging to accept that. And I wanted more direct causality to sort of link and a business that was also far lower competition and which you’re probably thinking to yourself, “wow investing is far lower competition.” But in some ways I would actually argue that from a talent standpoint, especially the type of investing that we do is lower competition than most ad agencies. I find that level of talent in ad agencies and gosh all the sexy industries, right so movie business…

J: Oh there are geniuses there

B Yeah, I mean just absolutely amazing and I just I’m not smart enough to compete with those people. And so you know I try to pick the most uncrowded waters that I can you know work with really excellent, you know salt of the earth people uh that I share values with and that you know we can go and have fun together and when I came to the realization that was not the agency business, um then branching out and saying okay what other areas do I want to get into and I become more and more attracted to you know what I would say are blue collared businesses for that exact reason.

J: So the first company that you bought was the defense

B: Yeah military recruitment

J: Yeah so um what were the soft factors with that? Like was that just a deal that dropped on your plate and you were like this just such a killer you know I’m gonna do it?

B: Hahaha yeah it’s kind of funny that you say that. At the time I uh, that’s kinda what got me into the work that I do today because at the time I was running an agency and um someone directed me to this person and said hey you guys should just sync up uh you know the guy might be in a position to where you might want to do something you know exit out of the business. And so I thought he was telling me that I needed to step up to the plate and you know make a move here and he thought he was just making an introduction two industry colleagues uh and fortunate for me that miscommunication um set my career on a very different trajectory than it had been previously and so it was some combination that it had got dropped on my lap and you know taking advantage of opportunity when you see it.

J: And so how did that segway into the next company you bought? And then what was that and then you know were you hunting for the deal? What was the projection?

B: Yeah. Yeah so I mean i think you know first of all it took me a while to learn how to operate multiple companies. So as brutally difficult it is to operate one company which by the way you obviously know this job better than anyone but it’s just hard enough to operate one company, trying to scale yourself into two separate companies is um.

J: Is impossible. It really is.

B: It’s almost impossible. Right. It is almost impossible and so I had to figure out through a lot of trial and error how to get over that um hump of impossibility if you want to call it that.

J: Well here’s what i think it is, it’s the you want to know what’s happening but you need to receive and control whoever is the operator. That’s the biggest challenge I believe.

B: Yep, yep, and you have to pick the right people and incentives them in the right ways and make sure the KPI’s are you know the data is being cleanly generated, the organization that trickles up to you in the appropriate way and you know the truth is being shaded and not intentionally or deceivingly. It’s just it’s human nature and you know all those things to try and figure out how hard should you push, what should your expectations be, um, yeah I mean it’s tough. It’s really really tough and you know how much do you guide strategy vs not and how much are you rolling up your sleeves and getting dirty in the business, you know. And how counterproductive can that be sometimes so anyway a roundabout answer to that saying I had to take you know some years there and really try and infuse that into my system and learn from my mistakes and come out the other side and so we ended up buying another very specialized agency. We also started quite a few companies which was an interesting detour into entrepreneurship start-up land um that lasted and doing that simultaneously for awhile with a late stage which yielded nice results as well but uh ultimately determined that my passion was in uh accusation side so.

J: Sure. To the extent that you know. What makes you get out of bed in the morning? What’s driving you at the moment?

B: Great question. You know I’ve always said I want to do what I love in a place that I enjoy with people that I admire. That’s always kind of been my test and I know as cliche as that sounds um I love playing the game. Like I just love it. I can’t imagine not doing it.

J: It’s a pretty good game isn’t it?

B: Oh gosh no I mean it’s the hardest game on earth right? Um you know you’re trying to martial people to accomplish seemingly impossible goals and in some ways outcompete other groups of people. I mean it is like the ultimate thrill and the ultimate game and you know maneuvers matter and decisions matter and um yeah it’s just an incredibly fun and rewarding and has nothing to do with the financial rewards that can come from it either. I mean those aren’t bad but man I tell you what you talk about stimulation haha. I can pretty much pick up any book and read any book from tolstoy to the latest business book and I’m unifying something that I’m thinking about in relationship to one of the businesses. Like I don’t think I’ve ever read a book since and not had that happen and so I just love playing the game and I’ve just been so fortunate I love where I live in Columbia, Missouri I like being in the middle of the country and being able to access the coast really easily um. And I’ve got great people that I you know, they’ve tolerated me and seem to continue to tolerate me for a long period of time and just a really grown up in business together that really is remarkable. And I am deeply and forever grateful for their involvement in my life and so you know gosh why, how could you not get out of bed in the morning? Right like I jokingly, not to overuse one of Buffett’s quotes but you know tap dancing the work most of the days I’m…that’s me. And then the other days I’m uh eating glass. So it’s an ultimate.

J: Let’s talk about assessing deals because I think that’s, not only is it vital but it’s…you speak to a lot of equity guys and their like if I could get a good deal for the ripe of rice, I’ve already won the game. And I don’t have to do anything else operationally. You know if I can buy a great business at a great price then I’m 85% of the way there. So um, what does your checklist look like. You know what are your filters?

B: Wow checklist and filters. I mean I uh so we have I think a 22 page single spaced organized checklist system that basically tries to help us with what we call complete stupidity right so it’s nothing revolutionary it’s just making sure that every box is checked and that you thought about the business from every angle possible we know trying to update that pretty frequently um and you know like I said it’s not revolutionary or anything.  You know we’re looking for businesses that have um something unusual about them or a competitive advantage or a moat which is another term to be used. That gives them an ability to earn above average returns for an extend period of time and you know unfortunately the moat in most of these businesses is the under themselves who is you know I would say most of the people we talk to are hyper intelligent and driven, big personalities typically and unfortunately that’s not a saleable moat. And so we’re looking for something about the business that is um it’s unusual that catches our eye and then the next filter is people. Right? I mean that’s the two biggest things. Talk to me about the force and then I got to get to know the job. The people, you know the joke, that people are everything i would say that is absolutely true. You know you can not do a good deal with bad people. There’s’ just no possible way that you’re going to get a good outcome if you cringe when you look at your phone and they’re calling if you know you have to constantly be watching your back. There are like 10,000 ways that I could screw over people who are in my company and 10,000 ways they could screw me over, right? and if I’m worried about that the heat lost in that system is just so great, that’s where all the profits go. right? Um so you have to figure out how um how’s the company positioned strategically. And then who are the people you’re going to be trusting to do their job and to do it well and how are they going to take feedback and I mean we are so blessed to work with people who you know take their jobs very seriously and are extremely passionate about what they do and happen to be really skilled at it right? And that’s just such a rare combination that you know we’re able to work with those people. So that’s why you know finding a needle in the biggest of haystacks is how I like to describe what we do. and Looking at over 2,000 fields last year and completing three acquisitions I mean gosh I. It sounds like there is just an incredible loss there but I would say it’s a testament to how picky we are.

J: What are your biggest figures on dependency? What are the markers that you look for that equals a company that isn’t on a dependent. So like of the three companies that you acquired, what’s some common traits that you find other people will look for?

B: Yeah so I would say um the specifically when it comes to not having an owner in a business I think that you gotta find something in the company that is unusual about it. Again that allows for those above average returns over a long period of time that don’t stem from the direct involvement of the owner. And so every situation is going to be different right? In that sense. I mean one of our companies is intellectually property driven. Another one has incredible consumer marketing techniques so things like that is what you’re looking for. But in terms of the hallmarks of the company that the owner is doing a good job of scaling themselves, I would call it up and out. I mean the highest compliment you can pay to the owner of a company is your not necessary. Right? And as funny as that sounds right? Which goes directly against most people’s ego. That’s one of my favorite things to talk to owners about I say, “So what do you do on a weekly bases?” “Oh I’m involved in this I’m doing this” I go oh okay that’s great! So don’t you think if you exited that it would be a big problem? Oh no this place could run without me!

J: hahaha

B: Well okay so are you just doing all of that stuff because it’s fun or like are you trying to waste other people’s time or increase the difficulty level? Or what are you doing?  And they’re like oh well you know, you could replace me pretty easily. Like okay well that’s not the same thing. Hahaha. And by the way, never true. Replacing owners is you know, I mean you know how do you replace somebody who has had their incentive structure so deeply intertwined I mean it’s perfectly aligned with the business and you know has been doing it for 20, 30, 40 years? I mean how do you replace somebody like that? The answer is that you can’t. It’s usually replacing multiple people into the organization and then you know, that’s a whole separate conversation but um. So long way of saying, the hallmarks around the company are indicative in the decision making and delegated authority would be a huge one. So you know we are fascinated in how decisions are made. That’s the thing that i would say, you know tell me beyond the competitive manager and the moat and help me understand the personal perspective of the people the next thing that we’re going to look at is that. And we’re really trying to assess you know when critical decision, well first of all how I’d critical decisions get surfaced into the organization? You know what are the feedback loops that are self-correcting the organization over time and then who is the person, people, committees, power structure such that the people with the correct information or at least with the most correct information are the ones executing on the decision. And then how does the accountability work? Right? and you know these are all the same thing um and you know I would say that the companies that get that right are the companies that are salable. At least to us. And it depends on if you’re going to write a search fund and you’re going to do a one-off company and you’re going to go in and be the boss. Like it takes care of so many of those problems. Oh my gosh so many of these problems. And have I have so many guys I know and women I know that do that and they’re very very successful in doing it that way. That’s just the different style in many ways from what we’re doing.

J: Um why did these companies stay small? I know you wrote a really interesting article on medium about this. You know there’s a reason. Let’s talk a little bit about that.

B: Sure. Yeah so I call it the ceiling of reports right? This is kind of what I looted to earlier. Um You know it’s mostly a function of not having the breathing room to look up and sort of consider the circumstances combined with a lack of available resources in where to go and I think people get burned over and over and over again. I  was talking with a company recently and they said they had gone through 7 marketing firms within 8 years and I said gosh! That sounds like it has been a waste. And they were like oh you need just to find good people to help you and I said well where are you looking? And they said well what do you mean? We’re looking in our region. And I said okay, I said you know the size of budget you guys are though, don’t you think the people who are really really good probably would be selecting out of that market anyways? and they kind of said oh crap yeah, I didn’t think about it that way. And so I said yeah you probably need to try to find somebody who you can get educated and trained up or pull somebody from a different company into that company. Instead of trying to outsource it in that way. I’d say would be a pretty good reason to insource at least the type of marketing you can do and it just completely changed and it’s just that little tweak was like an eye opener to them. They just never considered the fact that if somebody was willing to take on their account at the size that they were maybe by definition they would probably be the best people for the job. So I think little things like that to where you can help tweak the perspective a little bit and just help open up possibilities is the thing that most business owners crave right? So there’s YPO, EO, there’s a lot of these groups that people participate in, like why are they so popular? Because everyone’s craving the same thing. Everyone needs a sounding board. Everyone needs thoughtful advice from people that have the right motives to tell you what they should be telling you. So you know I think that, why do small businesses stay small? It’s not on purpose and it’s mostly because they lack the ability to look up and also the resources that can help guide them through the obvious challenges. It’s not because they don’t care, it’s not because they’re not smart. They’re both of those things. Like I said I really met an owner who completely tapped out and I don’t think I’ve never met an owner who is not high capacity. I mean you just don’t get to be a million dollars a year pre tax earnings. I don’t care who you are, without being thoughtful. So.

J: Two thoughts then. You don’t know what you don’t know.

B: Yep

J: That’s a big one. And then the second thing is um, yeah you’re not a schmuck. If you’re doing a million dollars in earnings like you’re doing something right.

B: Exactly. Exactly.

J: And uh if you find that the limitation isn’t so much that they don’t want to grow. I’m sorry let me rephrase the question. They are like kind of happy they’re making a million bucks a year and how often do they come across that?

B: Yeah i mean it’s an interesting question. It’s really hard for me to get a good read on them. I mean I can speculate. I mean complacency is sort of the opposite of the hydronic treadmill right? I mean we always want more and more and more but you know we also don’t want to suffer pain. And in many ways running a business there’s a certain level of pain to it and I think after a certain period of time and the pain has washed over you for the thousandth time uh I think there’s a numbing effect to where I say hey you know could I make a million 2, a million 3 if I really went all out and pushed as hard as I could and shift things up and took some new risks? Yeah I probably could. Do I want to do that? No. You know I’ve got grandkids, I’ve got this hobby over here or you know I want to travel more. And by the way, all of those are perfectly legitimate reasons to do exactly what they’re doing.  One of my favorite perspective tweets that has happened in the last five years has been you know judging people for making different decisions than I would to really switching that and saying. Everyone is making the best decision in the moment based on their wants, needs, preferences. You know the amount of information they have, the type of information they have they’re making a rational call in the moment. You just may not agree with the call and then hindsight may look illogical but in the moment, I don’t think anybody says oh well I know this is the decision that I should make and that’s what’s going to help me. But I’m not going to make that right? The preferences are choosing some things over others right? And so um I think there are perfectly good reasons why people make the choices they make it’s just different choices than we would make. I think that you know we occasionally step into situations where we can say hey, we would like to take this on and do these things and make these changes and they say of course! That sounds great in fact we’re in discussions with an acquisition candidate right now that’s says hey here are the fifteen things I should be doing with this business but I choose not to. We’re like those all look very reasonable and thoughtful he says yeah I just don’t want to do them, but you should do them. Great! haha

J: That’s pretty nice of you.

B: Yeah absolutely. He’s a nice guy. So.

J: What um. Let’s talk about moats. Because I feel there is this perception that you know Coca Cola has a moat and American Express has a moat.

B: Sure

J: What type of moats are you seeing with these smaller companies and then falling on from what. How can someone do it in your company at the moment create a similar moat?

B: Great question. I love the topic of moats, so for moats to ferment properly at least the way I like to think about it is um what is the reason why a business will be able to sustain above average return on investment capital and again depends on your discount rate right? But you know significantly above whatever some sort of norm would be over a period of time. Right? And so that’s all it is. It’s a fancy, fancy way for basically saying you know how is the company able to prosper when other people in what I would call would maybe look similar to them may not. Right so why is Coca Cola, Coca Cola and I don’t know Jone’s soda, Jone’s soda? Right? To use a public investing analogy. Right why is Jone’s soda a small struggling, still public company um but small and struggling and why is Coca Cola behemoth right? And there’s a moat there that Coca Cola has, mostly around sort of brand and um Munger Buffett talked about Coca Cola’s taste preferences. In how it is, it does have addictive characteristics combinations of sugar and caffeine and well, originally cocaine. But um you know that is the moat that has developed. It has sort of reached a tipping point and the distribution now is probably the biggest moat that then has been created. I mean go and try to compete with you know Coca Cola you know in Nigeria. Right? Like good luck. haha Like they’re everywhere right? So that’s where you get into this weird duopoly you know Coke and Pepsi type thing where there is only one main challenge to them and they can eliminate competition through acquisition and all these things.  So to kind of use the analogy to a small company, you know you’re trying to figure out what are the things that they can do to get a head start in that um would be very challenging or very unusual to try and match. So analytical properties are always an interesting one. Although fairly rare. Manufacturing has more of those characteristics to it than other service based companies. Relationships are brand reputation, relationships are another moat. So why is McKenzie, McKenzie? Right? I mean that’s a big company, but there’s plenty of small consulting firms. So why is McKenzie, McKenzie? well because they have a brand of serving extremely large customers well using the best talent in the world and using the most advanced techniques. But they’re fundamentally doing the same type of work that ad agencies are doing in some ways that other consulting firms are doing, accounting firms are doing, I mean, it’s not..

J: It’s not rocket science is it?

B: Right it’s just you know it’s just the brand and the ability to attract talent I mean that’s another moat right? I mean why has Google recently had an opportunity to spend a day with a lot of people from executives from Google and I mean Good Lord those people are smart.

J: Sure

B: I mean they are just I mean smart! And they’re multinational right? I think I mean maybe there was one, maybe one American born person of the 7 or 8 I spent the day with. And all of them were so you know so thoughtful, and intelligent and I mean just how is Google going to succeed? Gosh, I mean that seems like a moat to me. Not only do they have a heck of monopoly around search but they also have the smartest people in the world working for them. So you know in small businesses are very similar characteristics. Regional monopoly I say are definitely a category where you just get a reputation for being the best in your region and it functions much the same as Coca Cola functions right? So if you’re known as the best…

J: Pool builder in Arizona?

B: Haha Exactly. When you’re known as hands down the best pool builder in the region, um you get more opportunities and it creates a motor around the business and so you know we’re looking for either regional monopoly, you know some sort of geography-specific monopoly um, or sometimes you get into these weird um smallish categories of industries where maybe the industry is total of a 100 million dollars a year of sales but you’ve got a company that’s doing 30 million of the 100 million, I mean that’s a great position to be in. We looked at an aerospace company recently and aerospace is not a specialty of ours by any means. I want to disclaim that. But we looked at this company and they were doing some very intricate work on missile systems that they had the technology in them and you know that to me is defensible. Now how defensible is really gets into and I just can’t, we ended up passing on the opportunity but you know it clearly was something defensible if it could hold up. Right and that’s just always the challenge. How quickly can the moat be destroyed. You know we never want to get into a situation to where somebody could throw a little bit of money at the problem and hurt us dramatically right? So I always think of myself, you know, if we’re going to buy a new company, you know if somebody came along and had 20, 30, 50 million dollars could they put us out of business? And if the answer is yes, pretty delicate situation to say the least.

J: Sure. So are you buying 100% of these companies? What’s the structure?

B: No, not all always. Sometimes we’re buying 100%, um almost always we’re buying majority and um, we like to have ultimate control but never exercise it which is how we like to describe it. Right? So I can’t remember the last time we told one of the company leaders that they had to do something a certain way. Like it never even comes up, uh everything is through consensus building and you know really trying to make a good come common decision with a aligned incentives. But at the end of the day if you know. Something has to happen. You know having a majority control is obviously a safety net in order to be able to protect returns. And protect employees, and protect the community and I mean weird things happen. Like I said sometimes you know people diverge unexpectedly from the path you think they’re on have life circumstances that pull them away from you know what they need to be doing. and so when that occurs, I mean it happens exceedingly rarely but um having that extra insurance policy is certainly nice.

J: Are these CEO’s or Founders staying around? Like what’s the structure there.

B:  Sure it’s a mix. So we ideally our best case scenario would be to have an owner who says you know I really want to work another five to ten years and I want to soft land this thing in the right spot with the right people and have an extremely graceful transition. That sometimes occurs um most of the time I would say it’s… well I shouldn’t say that. I should say half the time that’s the case and then half the time they are really wanting to take a step back and enjoy the sort of fruits of their labor and de-stress. I mean that’s a huge tribor too. It’s not so much the finances I mean we have always said that we will almost never be the top bitter for the the company. It’s a competitive bid situation, in fact we don’t even participate in most competitive bid situations. Because you know if my definition is, if there’s 100 bidders and we’re one of them we already knowing then we have less than 1% chance of somehow making it through the gauntlet. But we’re never going to be the top bid but you know we try to offer all these other attributes that align with the owner who just truly want to takes some chips off the table and not uh and not live with the sort of slow drip in stress that they’ve you know endured for a long time and understandably so.

J: So where are you finding these deals? Because obviously when we’re representing a company it’s most time 100% exit. Are these like private deals? Are they represented? Like what’s the source?

B: Yeah, so um we have worked hard over the years to develop relationships with um lawyers, accountants, investment bankers, you know different types of intermediaries that frequently run across deals and when I say frequently, I mean some are actually intermediating multiple deals a year some of them are hey I’ve got a client who…I can’t tell you we probably have 150 or 200 relationships where it’s like, “Hey I’ve got a client in three years who will likely do something, right?”

J: Sure

B: And we will typically get the first swing and we try to position ourselves as who we are which is we’ll be honest, we’ll be quick, we’ll be fair. We won’t screw around. We’ll tell you what we really think of the business and then we’ll also tell you if we’re not the best partner and we tell people that frequently. We say hey, you guys are great, and we’d be lucky to have you but it’s just not a good fit strategically for where we are but let us direct you to some other people who we really do think would be a good fit and that’s worked out great. We get a lot of direct deal flow just right through the website or people calling.

J: So of the three deals you’ve closed last year, what percentage came from your inbound marketing versus your outbound?

B: Well it’s an interesting situation. So of the three deals, all what I like to call, you see we have this boomerang effect that we noticed most often which is we get into maybe not a super competitive, they’re not wildly shocked but they’re hey we’re gonna contact 5/6 partners, 7 partners and see who would be the best fit we will frequently lose those deals on the first time around and then they will come back and we’ll be the, the position that if we’re going to lose a deal that we’d like to be in is man it would have been really amazing to be able to partner with you but we completely understand the reason why you gotta go with the other group. If anything ever happens uh please please please give us the first call and we’d love to reconnect. You know we’re not going to hold your feet to the fire and hold it against you that you know you took somebody else to the prom. Right?

J: Sure

B: And all three of those deals last year boomeranged back around. And we worked on gosh uh all three of them for over two years to get them to close. And so it’s a hard and you know Jock, I mean it’s a..

J: Oh man it’s emotional, emotional rollercoaster. That’s what I tell my clients, I’m like you’re in for a ride.

B: Yeah and look it should be right? You’re selling your life’s work and you’re bringing somebody into the relationship with you that is deeply personal and they can have a dramatic effect on your life, right? You know when I talked about doing a good deal with bad people. I’d say it’s more often than not the bad deal, it’s the investor that comes in that thinks they know everything that’s trying to you know take the bull by the horns they know all the answers, they’re very directive and you know you talk about having a miserable life. Can you imagine. Well you can imagine, I’m sure you’ve seen this in your businesses going from having control and authority and having a way of doing things to having somebody who really doesn’t know much about your business coming in and telling you what to do. Gosh, I’d hate that right? And so that whole idea of not doing a good deal with bad people, I mean, it’s mostly for the fear of the owners more than anything. I mean there’s so many people out there that you know the fundless sponsor model. I don’t know if you’ve gotten much into it. I’m sure you’ve seen it quite a bit in the intermediator side of your business but you know..

J: Yep

B: you know we’ve just seen so many people that have no financial resources. They haven’t been that successful on their own business and they just keep lobbing out big numbers. You know it’s a game right? They have very little opportunity to actually close on these deals, um they’re just trying to use the only leverage that know how to pull which is I”m just going to put a big number in front of you that I never fullfill right? And I have very little means to try and sort of like dog whistle you into choosing me.

J: So we had a deal. Smaller deal. Like five million and uh we had two offers on the table. One for the entrepreneur, a guy who had chase in the bank who had a low offer and we had a second deed on that which was from a little PE shop I don’t even know if you’d call it that just probably like some guy back by some other guy putting it all like four million dollars over but wouldn’t put any money down as a deposit, was going to raise the funds and mostly use debt, you know like strike rate of ten percent. LIke you know?

B: Maybe, maybe.

J: You know even if that, and you know the client was like Jock, what offer should I take? I’m like it’s your decision but if I was sitting in your seat, I’d take the burden at hand with the cash in the bank.

B: Right. And that’s unusual though. Most people in your position unfortunately we found don’t say that. Like mostly they dance around the issue and say well maybe they can do it. I think they can probably do it. And you know the payoff is a lot bigger if it does come through. Payoff being strictly monetary, right? I mean I don’t’ know what the percentages were on that deal you specifically referenced but you know if somebody is going to try and load it up with a bunch of dept and try to raise money, not only not closing but what in the hell are they going to do with the business after its closed. Right? For the employees and the community and the legacy, I mean I don’t know. That’s not something that I’d want to screw with but again, just depends on what you’re optimizing for.

J: Well here’s a gripe I have with the something MNA industry. Is I get so many clients that I lose because I’m the realistic guy. I’m like here is what your company is actually worth and you know they’re like not exactly FU Jock, but they’re like yeah I can get a bigger price. They go with someone else and then you know 6 months later, 9 months later you know hey Jock, let’s get this sold. And I’m actually happy to do that because you know I know it comes around um but I think there’s a massive misalignment with M&A advisors with the whole fee retainer model.

B: I agree.

J: Like there’s a shop in Dallas that…

B: hahahaha I know who you’re talking about

J: You know like boiler room sales, three seminar, fifty thousand dollar engagement fee and they closed like 42 deals last year and they had like a thousand represented. This year I have 100% strike rate on deals.

B: Yeah for anybody who’s listening by the way, sorry to interrupt you Jock, but for anybody who’s listening. What Jock’s talking about is wildly important. I mean wildly important. When you’re picking an advisor, you should pay way more attention to the number of deals they close to the ratio of how many deals they taken on the total deals closed. Some of the best M&A advisors that I know close like 1 or 2 deals a year. And they do an amazing job but they are not going for volume. So anyways. Sorry to interrupt you Jock.

J: 100%. Anyway, that’s a little broad.

B: Yeah well it’s the same problem that we have right? So it’s this idea that you’re going to throw a big number out. We had a direct seller the other day that came to our website and said hey I’m kind of in final discussions with uh MNA advisor and they’re telling me this is what my business is worth but I really love you guys and I’d think that you’d be the best partner but so I’d rather avoid having to pay them the fees and you know if we could just go direct and I said well alright let’s have a conversation. And they tell me well this guy tells me I’m going to get a seven in a half times multiple on an Ebitda or my multiple for my two million dollar business and I said yeah here’s the problem, you’re going to get taken for a ride. I said that’s just not even in the ball park and the nice thing is you know we send out the survey data that shows average multiples depending on company size and I was able to educate him enough to where he, he chose to go a different route. We may stay in touch we may end up eventually boomeranging around but we said hey this is what we think the business is worth. I do think you could probably get more if you went through a process. Here’s what that’s going to look like but for goodness sakes don’t go with somebody who just you know, talk about blowing sunshine. I mean that is just nothing worse than over promising and under delivering and not even had a chance at delivering. I mean seven and half times multiple on a business that small? Unless you’re a tech company on some sort of highly prized intellectual property? I mean that just doesn’t even make sense. If you do ten of those deals as an investor, you’re going to lose at least half your money, at least.

J: Yeah. The other thing that pisses me off is evaluation companies.

B: hahaha no skin in the game right?

J: Oh my goodness, so I had a client come in the other day. An agency doing like one and a half million in…1.4 million in selling his discretionary earnings and it’s not EBITDA so selling his discretionary and a couple founders and first of all the MNA shop had them listed at 10 million. I’m like there is nothing intellectual about this company and they paid them $200,000 in retainer fees, yeah so that was number 1. Number 2 is they sent me both of the evaluations that they sent and they used discounted cash flow, they used the public multiple comparison and they used silicon multiple comparison and unlike.. And here’s the thing, they used a growth rate at like 50% so like they’re expecting in 2016 they went from 3.5 million topline to 5.7 million. I’m like, anyway.

B: Right. In fact this is a little trick that I use; I pull out the deal book or skip over any projections. Like I don’t even look at them because I don’t care. I could literally care less what somebody is going to tell me about the industry. I mean I want to hear what the owner thinks is going to happen but I can’t tell you. I would say 98% of the books that we look at that are prepared by MNA advisors have this incredibly…like it’s such a joke. If they would just dial it down a little bit it might be believable but it’s like oh sure the company has stayed flat for five years.

J: But it’s going to grow by like 100%.

B: But think about that. As soon as owner who has put their blood sweat and tears into this company who has deep expertise leaves, it is bound to do nothing but shoot through the roof. But come on. Right?

J: Haha Yeah. Oh man.

B: We could talk forever. But I think it’s like anything else right? You gotta look and you know what’s the old adage you know his bread I eat, his song I sing. You know if somebody is getting paid to put together an incredibly in-depth evaluation. What’s their incentive? It’s to make it complicated.

J: Sure

B The incentive is not to say you know roughly I think it’s going to be worth, blank and blank because this is my experience and this is what the number say. Right? They’re going to do all kinds of gyrations and complicated math and you talk about false precision. I mean all you need to do is take a look and say hey I want to understand from multiple advisors or from one advisor that you trust, what do you think it’s worth because they’re going to tell you what it’s worth. Now can they tell you is it going to be 6 million or four million and is it going to be 6 million with three million of it up front or all six up front or whatever? No, they can’t tell you that. But you can easily distinguish between a business that’s worth five million and one that’s worth ten. I mean there’s just no problem at all.

J: Anyway, we’ll get off the gravy train and have some meat and potatoes eh?.

B: Oh yeah, sorry, sorry!

J: Transition. You know, day one, you take over the company. What do you talk priorities within the first 100 days?

B: Learning. Learning about the people, about the business so this makes us very different than the typical 100 day plan that I think most private equity shops seem to put together. That seems to be the standard thing. My uh and maybe this is just my ????  or uh lack of understanding or experience. But I don’t understand how you can be an outsider in a company and go in and have a plan for what the people who have been working in that company and have been investing themselves in it for so long don’t know how to do or shouldn’t. Like how does that work? And maybe I should be asking you but like, the way I look at it is, I want to learn from them. I want to earn their trust. and by the way, when I say I, this is the team right so this is what we have a team that does right? Um we come in and we really try to understand who are the people, what is the business, how does it work, you know what is the cash cycle like I mean we’re seeing all the stuff in theory in due diligence. But you know until you close on a deal, you really don’t know what’s going on in a company. I mean you have some ideas but you know first 100 days, unless there’s some obvious tweaks, which again are rare, i would say learning and then trying to use good judgment to try and determine where things might want to go. I mean again, it’s presenting opportunities to the leadership at the company and trying to understand what makes them tick.

J: What’s your first focus? Is it growing sales or reducing costs?

B: Oh yeah well this is an easy one. So we want to grow the pie. We don’t believe that you can uh. The logic of the strategy of cutting your way to success in the long term doesn’t make any sense. So depriving an organization of resources in the hope that you know produce short term cash flow will always, always always without exception, damage the future of the company. you are selling the future to profit in the present. Right and again it’s a late gratification issue. The way we look at it is, there’s only one way for everyone to win and when I say everyone to win. I mean to have a community that loves and appreciates the company, to have an ownership group that feels rewarded, and that their life’s work continues on. To have an employee group that says this is not only the company that I am thankful for working for now. But I can’t imagine ever working anywhere else. There’s only one way to do that. I mean you gotta grow the pie. Right? So what we’re trying to do is help make decisions and encourage decisions that are… It’s not like we’re sitting there making all the decisions, in fact. Boy I can’t even remember the last time I was the sold decision maker on anything. Most of the time it is presenting opportunities for additional resources, ideas for potential investments that we can make into the business. Improvements to processing, but again.. You know the hubris to say that you can come into a business that is by definition doing well already and have that sort of immediate impact, requires a lot of soft touch to be able to understand what buttons…it’s a complete adaptive system right? So if you poke one side of the system, it’s going to have ripple out effects that you can’t predict and that’s what I’m terrified of doing too early on the process is poke this side thinking that that’s the only side that will have an effect and then all of a sudden you’ve got half the business falling apart elsewhere. Which is more common than you’d expect, well maybe not you, but somebody who’s never been involved in the business would expect.

J: Interesting. Is there any chance for cost cutting did you see or do you just leave costs alone?

B: Well I mean I think um, okay. We had a company that we were involved with at one point that had um this reoccurring problem that a bunch of errors were being made and nobody could figure out how the errors were getting there. It was like this great mystery and we kept investigating and investigating it. Turns out we had a person who was intentionally creating chaos in the company to maintain power over a division. Uh, that’s a good opportunity to cut costs. hahaha So I would say short of that, we’re coming in and typically offering at least as good as sensory benefits and at least at a minimum keeping compensation level. And then over time introducing whether it’s profiteering programs or some sort of incentive systems. So typically our employees, in fact I can’t even come up with a scenario, this isn’t true uh are always on the beneficial end of us getting involved in the business. As the business does better they get to share in that. Um, cutting costs, I mean we did come into one situation where there was a bunch of R and D expense in an area that I believe was extremely low probability and over the course of about a year we did discover a low probability and um there was sort of a shift of heart in that and I think that was the right decision and yielded some good results. Short term and continued on the same projector but at a lower cost structure you know sort of permanently. And I think that’s probably the only exceptions. I mean most of the time we are focused on how to help them make the thing better.

J: Um let’s talk about that, employee compensation. You know, what’s fair. Like what are you? One percent of the pie, five percent of the pie, ten percent of the pie. Like it’s a really important concept because um as a, what’s the word, decentralized, model you need to lean on the team a lot more than if you were leading the charge.

B: Yeah and I don’t think if I actually was quote on quote leading the charge and was the sort of the person at the very top of the organization on a day to day basis that should be any different per say maybe the employee make up or the leadership make up would be different but you know every situation, and I hate to be wishy washy here but every situation is so unique. What I can tell you is that we’ve never lost any leader of a company or leadership of a company to not paying them enough right?  So I think that we’re doing enough right. Now the definition of fairness is sort of a tricky topic. Fairness is objective and you know kind of like our newly elected presidents and that worth and it depends on your mood right. Jock are you properly compensated?

J: Well what’s my brand worth. What’s the Jock Purtle brand. worth?

B: Exactly! So I mean I can even tell you personally right. My expectations for what I think is fair. You know how much of the pie should I get vs. not get, it fluctuates week to week and month to month. Heck even depends on my mood right. So I think it’s tough to say if there is some sort of objective fairness that everyone sort of agree upon. I mean the idea that we try to operate under is we want to feel fair ourselves right so sort of check that box, look in the mirror and be able to say do we treat people fairly in our eyes. So we never want to violate our sense of fairness and then secondarily what are two mutually consenting adults willing to come to an agreement on that shares in, you know that aligns incentives and shares in the pain and shares in the pleasure and so every situation is different right. And so depending on if it’s a seller that’s staying on board, they’re going to probably incentivised based on more of an earn out structure especially if they’re still staying in the driver’s seat and maybe get bonuses based on extraordinary performance and if um you know if the leadership or at least a portion of the leadership is not sharing in the ownership then we have to make sure they’re incentivised to do so. And feel fairly treated, I mean it’s an ongoing discussion I think that you know we try to have, it’s a relationship right? So it’s not, I think that the worst thing you can do is to draw a line in the sand and say take it or leave it and eventually when you have that attitude people leave it. Right?

J: Yeah

B: We don’t want that. We hate surprises. We always tell people if they’re feeling under appreciated or they feel like they uh not only need more but deserve more we should have a conversation about it and maybe it’s a difference of opinion that we can rectify and maybe we’re wrong. We want to have a humility to us that says we don’t always get it right. Maybe our perspective is off in some way and we tell everyone we just want to win. and we want to win together. so we try to formulate a plan to do that.

J: Team of eight. That’s your investment team and so who are they and what are their responsibilities?

B: Yeah so we have let’s see as a breakdown so there’s Susan and Shane who both of them are, both of them sort of have dual purposes in the organization. Susan manages part of the portfolio and is sort of the human in change. She’s as I said is incredible speaks  six languages, mastery of economics, been to law school, like yeah she Sweedish so she’s very uh to the point, let’s call it that. Love her to death. And then we have Shane who actually works out of Canada. He uh helped build the cyber defensive initiatives in Canada’s system. He’s a programmer by training. Heavy background in technology. He started a media property in his spare time called Farnam street which is very widely influential in the investing sphere and he carries the dual purpose of kind of chief technology officer as well as getting ready to take on his first portfolio company. Helps to observe across portfolios as well. We have two fantastic marketing specialists, experts, on staff that help not only develop deal flow for adventures but also help our portfolio companies with winning and marketing and helping drive sales in the organization. We have let’s see here two CPAs on staff that are keeping everyone in alignment. And understanding the numbers and getting us good actionable data.I think that’s crucial, I mean you know Jock, most businesses don’t even know how much money they make. Like really actually make.

J: Most don’t even have their numbers right to start with.

B: Right. And so the first thing we try to say to a company is one thing we will not budge on, one thing that is in the hundred day plan, is you will have good clean actionable data. Period.

J: Sure.

B: There’s not another good way to run a business. Right? So the two of them really do a good job there. We have a corporate council and special projects guy. And I think that’s it at this point, me included.

J: So is that office, are they re-moat? What’s the structure there?

B: Yeah, so the headquarters in Columbia. So Suzanne actually lives in Tulsa and Shane lives in Ottawa. Everyone else is in Columbia. We’re fairly independent in our work so we’re always in communication on the phone or Slack or Skype or something. Right? And then Shane and Suzanne are in town, gosh, at least once a month if not more often.

J: Got it. The re-moat vs. the office environment, you wanna weigh in on that one?

B: Well we’re kind of a hybrid right? You know, I wish that. Here’s what I’ll, I wish that I could spend every day in close physical proximity to everyone on our staff but the way that our work is and the lives that we lead, I mean even for the people who technically live in Columbia we’re on the road a lot attending you know different events we’re trying to be on site with the companies. So you know I would say, in an ideal world physical proximity communicates a lot of things that you can’t get any other way. Or you have more difficulty getting other ways, I should say, but I mean one of our early stage portfolio companies that are just amazing. Done incredible called zappier.

J: Which I am a fan by the way.

B: Haha yeah they’re amazing. They’re absolutely incredible guys. And so anyways amazing wonderful human beings doing.

J:  Wonderful stuff.

B: Yeah they have a great company. But I mean they are completely re-moat. And I talked to the founders of that company probably once every six months to a year and um you know they love it. They absolutely love it. They built their entire systems around being re-moat and it really works for them. Gives them access to talent they wouldn’t get any other way. In many ways I’m envious. I just think you got to take one tact or the other. And it’s really hard to do a hybrid of both. Which ironically is what we’re doing now but it works.

J: So two more questions before we wrap up. Number one is, you missed out on yourself, so what’s your responsibility on the team?

B: So I am the the developer of most of our front end relationships in terms of the relationships with the sellers so I try to be the first line of defense, well I shouldn’t say that. Emily Holdman who is VP on our staff she does a lot of initial calls within intermediaries, maybe even take some of the calls with the sellers. As soon as it reaches a threshold like maybe there’s a possibility, this might be an option. Then it gets kicked over to me and my job is to assess the situation, try to determine the moats. Try to get to know the people and then once we get a letter of intent I am the one driving typically the due diligence process working with our lawyers out of Chicago. Shout out to Nixon Peabody and Dave and Kim up there. And accounting firms we’re working with as well as communicating within our intermediary and just really trying to drive the thing to close. Post close, it depends on the situation. I am more involved with some companies than others and it’s you know to match my…like I have some talents in marketing and sales as well as systems development but you know outside of that I’m probably not the best person on staff to contact right? We have really thoughtful people that Shane in technology. And even Emily and um Rebecca in marketing that really do a great job and finances with Sarah and Lori, anyways. To answer your question, I am mostly on the front end although kind of working post close on the strategy and sitting on boards and things like that.

J: Got it. One of my previous guests was a recipient of some information Charlie Mouth that if he was a young man again, he would buy online recurring revenue companies. You want to comment on that one?

B: I wouldn’t disagree with that. You know I think in terms of, should everyone get involved in buying a business right? Or starting a business. I think those are two different skill sets. And I think most of it is about the difference between the two at a broad level is you know pre product market fit versus post product market fit and you know driving to scale. As far as the business model I would go after I mean I think reoccurring revenue is awesome. I would love to own more recurring revenue businesses. I don’t know, it all depends on the price you have to pay and the stability of that accruing revenue and I think Charlie is probably pointing to the fact that if you’re young, the greatest leverage you can put on your financial earnings is the time you have. So I’m a pretty big believer in leveraging your time against your money until it doesn’t make sense to do so. Which is why then you get into the business model that Munger and Buffett did where you move up market and really more focus on the by side as opposed to operating influence.

J: Just talk to that a little bit more. Because I think that is a really good point.

B: Well okay so at a certain point you lose the ability….the amount of capital you have to deploy becomes so large you’d have good problems to have. So I would say of all your listeners, this is probably the most irrelevant discussion we’re going to have. It’s most interesting but probably must be relevant too because if you find yourself in a position that you have so much capital that you can’t exert influence over the sort of the operations of that capital or the asset that that capital acquires. You are a very very rich man or woman right? And so I think if you look at the history of Buffett/Munger you know they pass that point at different times and they sort of loosely work together at times but Charlie I mean he worked in flipping properties and using leverage to flip properties I mean he was super smart right? To build capital and then at a certain point you get to a point to where it makes more sense, you know Buffett/Munger now have over 78 billion to capital deployed in cash right. Unlevered cash but if Buffett goes into one of his portfolio companies and takes it from earning 100 million dollars a year to 120 million dollars a year and then you’re like oh my gosh he directly affected 20 million dollars of extra earnings! The funny part about that is based on the opportunity costs of deploying the 80 billion dollars of capital he actually lost a tremendous amount of money. But that’s the funny part. and when you talk about returns and talk about leveraging time against capital, it’s all gotta be based on the opportunity costs and the opportunity set of the individual people doing it. I mean we’re experiencing a little bit of this now and I’m obviously not nearly on the same level but there are things that we could do if we just sort of not do another deal and not sort of move the process forward in the existing portfolio that could generate pretty significant additional returns but the opportunity costs of that involvement is just too high. So you’re always going to have the struggle, in fact I don’t know anybody who doesn’t have that struggle. I mean even executives in one company have the struggle could they, as we talked about earlier could you take your company from earning 100 million to 1.2 for killing yourself? Sure, but do you do it? No, you don’t. Right I mean it’s the exact same principle.

J: Got it. I think it’d be nice to have 78 million dollars to deploy you know. That’s a good problem to have.

B: There are worse problems.

J: Exactly. Hey Brent anything that I missed that you want to touch on?

B: No you know I think it’s been uh a fun discussion. You know it’s a, we’re really accessible if any of your listeners would like to get in contact with me. You know I’m very available on LinkedIn or twitter. If you have an opportunity that you’d like for use to look into we’re super confidential [email protected] that’s our website but other than that I mean I really appreciate to being on the show and I look forward to the next time we get to chat. `

J: I’ll throw a plug in there for you, Brent has a bunch of great content either written, he’s got a great interview podcast which I found which I will link in the show notes here. Yeah good education on the buying process, the assessment process, etc. on the adventure side. So definitely go and check that out. Brent it was a pleasure. Thank you very much for having a chat with us today.

B: Thanks a lot Jock I really appreciate it.

The post Brent Beshore – Building A Mini Berkshire Hathaway appeared first on DigitalExits.

On this week’s episode, we talk with Brent Beshore as he shares how he is buying, holding and operating companies. We cover a wide range of topics starting with Brent as an entrepreneur, him as an investor, how he asses deals and where he finds them, what he does after he closes and how he sets them up for success to run without him.

In 2016 he looked at 2000 deals and acquired 3. He targets deals in the $1m to $10m in EBIDTA range.

On this week’s episode, we talk with Mario Lucibello, Partner at Greenhaus Riodan & CO LLP. We talk about the tax implications for buying and selling an online business. 

On this week’s episode, we talk with Mike Paton of EOS Worldwide. Paton shares his lessons from the book he published "Get A Grip" as well as the operational framework Traction. 

“What get’s measured, get’s managed” coined by management theorist Peter Drucker. One of the most important things in running a business is knowing your numbers. We talk to Scott Scharf of Catching Clouds about that exact fact and the value of a great accountant.

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On this week’s episode, we talk with Scott Scharf as he talks with us about the value of a good accountant for your ecommerce business. We discuss why a great accountant can not only save you money but also allow you to grow your business successfully.

Jock: Jock here, and welcome back to another episode of the Digital Exits Podcast, In this episode, we’re going to be talking about what I believe is a topic and business process that most entrepreneurs inherently really are bad at, and that’s accounting, specifically, ecommerce accounting with Scott from CatchingClouds.net. Scott, how are you today?

Scott: I’m doing well. Thank you, Jock.

Jock: Excellent. So we connected via Shopify. You’re a prolific publisher of guest posts on topics around accounting and ecommerce. Do you want to start with sort of a quick background on the company and what you do for your clients?

Scott: Sounds great. Catching Clouds is a partnership between myself and my wife. She’s a CPA and accountant, and I’ve been in IT for 30+ years, focusing really on process, and spent most of my career working with small businesses, but also some time working for large multinationals. Catching Clouds, we provide outsourced accounting services for ecommerce businesses. So we understand not only the accounting and the cloud tools and specifically ecommerce tools like cloud inventory, sales tax, and others, but we actually have virtual bookkeepers that do bookkeeping for our clients on a daily basis so your books are up to date. As ecommerce businesses, the things that you look to outsource, that you probably don’t want to do are your shipping, if you’re still fulfilling all of your own products, definitely help on marketing, even though I know Jock will say, “Look, you’ve got to do a fair amount in order to be yourself and understand what’s going on,” that’s his space. And then the accounting, because most people don’t go into business to do the accounting, okay? They go into the business to make money, to do great things for their families, and then provide great products as well as help the local communities. And they probably enjoy the products or hobby or niche they’re in, or certain aspects of their business, but it’s typically not accounting. We really focus on making that a manageable process for ecommerce businesses, so that they have current, accurate, and actionable financial information so that they can make the right decisions, as well as look forward and know if they’re profitable or not, and how they’re doing as a business.

Jock: So we’ve had a previous discussion about when your services are required, and there’s a certain threshold that you need to be at as an ecommerce business before you should start really considering outsourcing your accounting. So do you want to sort of go through the growth stages of an ecommerce business, and then when you start to make sense for the company?

Scott: Absolutely. Really, for businesses, same thing if you’re starting your own business, you end up doing the work yourself for a while, and there are definitely different stages in an ecommerce business. But you definitely have to hit at least $1 million dollars and be a million-dollar business, so you’re looking at $60-70,000 per month of consistent revenue. Anything below that, you really need to be looking at your business and spending that money, a certain percentage, whether it’s 50-50, or 66% and 33% on both inventory and marketing your business, so people continue to come to your business. You want to find that balance. If you’re spending money on either outsourcing your accounting before that time, or spending it on outsourcing to a warehouse too soon, it can slow down your growth and it’s not necessarily the best strategy. So we really want to give our clients the best advice. Anybody below that point, we really try to point them at how to do it themselves until they can’t take it anymore. Now, if you have really high margins, or you see a good run rate, and you’re really ready to invest in that, and you understand that it’s going to cost you in sales that you’re either marketing to or the products you’re buying, we’re happy to talk to people, but that’s really the key threshold, and then really looking at the complexity of your business. We work with mostly multichannel sellers, selling on Amazon, eBay, one or multiple shopping carts that really have a lot going on in their business, and they need someone that can help pull all that data together so that the information makes it into their financials and they can understand how their business is doing.

Jock: We talked about your outsourcing accounting. However, there are other services that you provide that, I think, is a unique proposition to any ecommerce store out there. Do you want to sort of discuss that?

Scott: We, of course, do the accounting and we actually do the work. Really, ecommerce businesses end up with a couple key things that send us all the copies of all the documents of what’s going on in the business and you still have to pay your own bills. We want access to your data, not your money, so we’re going to keep that information. What we’re offering is not only the accounting and doing the day-to-day bookkeeping and the controller who will help you interpret your numbers and walk through them. And everything we do is fixed fee. This isn’t an hourly, variable thing. You understand the cost to your business each month. And the other key piece we provide, with my technical background, is all the cloud accounting tools. We set up the accounting. We migrate your existing data. We help set up the cloud inventory, and help find the best cloud inventory solution for you. If your business is either mostly drop-shipping, or you’re doing lots of B2B and wholesale, or you’re multichannel, or you’re multi-currency, and you’re selling in multiple marketplaces and regions around the world. There might be a different cloud inventory solution that’s best for your business. We help you find that solution and then we help implement it so these things are set up properly. They’re integrated together, where we’re pulling all the data that we need from the accounting perspective, but then we really focus in on helping optimize the process for our clients, whether it’s optimizing your purchase process, your inventory management process…and then, of course, knowing profitability per SKU and the other components. So it’s a combination of not only the accounting, and somebody that’s actually doing the accounting for you, and then we’ll explain that information back to you, but it’s the automated technology tools to connect that data in the cloud. As an ecommerce business, you’re already in the cloud, and we want to pull that data together and make it more visible to you and provide tools that you can see. The nice thing about zero.com, the cloud accounting platform that we use, you can log in 24/7 and see your books, and know every weekday, by noon each day, everything’s been updated so that you know that you have current information and you’re not just running your business off the balance in your business checking account

Jock: What’s the biggest problem that your customers have when they initially come to you?

Scott: They don’t know if they’re profitable or not. They…they’re not quite sure and there’s a big difference between the cash in the bank and whether your business is profitable or not. They just don’t know where they stand, and so there’s a lot of stress related to not knowing. Think how stressed you’d be if someone told you that you had five minutes, and then you were going on Shark Tank, in front of the Shark Tank hosts, and you have to rattle off your customer acquisition costs, your profitability per SKU, what your revenue is, what your average margins are. And if you don’t know those things, you need know those inherently so you can sleep better at night. That’s really the main thing. And then, the time they lose, not just stress, spending time doing accounting, vs. focusing on sales or social media and driving more business to their business, or getting better deals on products they’re purchasing.

Jock: You talked about some key metrics there – customer acquisition costs, customer lifetime value, etc. Part of the accounting process is you calculate those things?

Scott: We pull different data together. So from the accounting perspective, we’re going to pull together and tell you if you’re profitable as a business. We’ll keep track of your sales tax liability so you know if you have $5,000 of sales tax that’s not yours. We’ll show profitability per channel – Amazon margins vs. Big Commerce or Shopify or other pieces. Then when we’re implementing different cloud inventory tools, we will focus on what your key metrics are and help implement the right tool. So cloud inventory is going to show you your profitability per SKU. The good ones will show you the velocity at which products…which products aren’t selling or selling slower. When you’re looking at your customer acquisition costs, and some of those other lifetime value components, then you need to adapt those and make sure that you are monitoring those metrics and pulling that data typically either into an ecommerce CRM solution. There’s the right place to do these things and aggregate the data. Cloud inventory is fundamental for keeping track of profitability per order, profitability per SKU, the cost of goods sold, the value of inventory, how much inventory or cash are you sitting on? And then you look at those different elements. We can help identify the best tools for your business to get those answers

Jock: Can you give some examples of how, when a client comes to you and they’ve started tracking their data, how that’s changed the growth and profitability of their business?

Scott: Yeah, absolutely. One of…the key challenges are is that you’re awash in data, and things like Amazon Seller Central can provide some insights but not great insights. The key thing is, we’ve had people that have held back on purchasing inventory, or moving into another channel because they didn’t think their business was profitable, and they kept putting more and more money aside into savings, not understanding that they could see the trends in their business to really identify how they were doing as a business, that they were doing $50,000 at the beginning of January of last year, and that they’ve been easily adding, and you can look at it, 20% doing the things that they’re doing. Then what we can do is identify those trends where you see a month that dropped off, not just because it’s a month that’s not Christmas, and dig in, pull up the data, and say, “Hey, because we know this challenge, let’s go look,” and we were able to find what was going on. In their guts, most business owners know something’s wrong. Sometimes, and a lot of times, they might have the right gut reaction as to what it is – customer service or costs are a problem or repricing or competitors, but you can’t really get to that final answer to kind of teach your gut. Over time, we provide more and more value of really being able to analyze those numbers, so on a weekly basis, when we provide a cash flow report, they know what they should be spending their money on, whether it’s more marketing or more products, or a balance between the two, or when they can be safe to actually take money out themselves. There are a lot of people that really starve themselves personally for funds for way too long when they actually have a business that’s successful. We have a client now that has a full-time job, has a viable going ecommerce business. They’re going to clear well over a million dollars, and they’re concerned that can they afford to quit the job and my – our – response is, looking at the numbers, is they really can’t afford not to, because they have plenty of cash flow to cover their overhead and their personal overhead, and they can cover that change in their income from the job that was going to be a fixed amount of money that year with maybe a little bit of a bonus, to making more money each month in a week, and then the other three weeks, they’re just making additional profit between focus on selling, purchasing smarter, adding products, listing products faster online that they’ve bought, which is just cash sitting there getting no interest. Those are the kind of things that those decisions – bigger decisions as well as point decisions – that we really help make on a consistent basis because these conversations come up every week.

Jock: Let’s transition to someone that’s not at a million dollars in sales yet. You’ve got a lot of data from your clients that is helpful for someone growing an ecommerce business. What would be your tips for someone not yet at that million dollar mark?

Scott: Treat your business as a business, not a hobby. That means, do the basics. Sign up as a business, as an LLC or a partnership. Open up a separate business bank account. Make sure you get a federal EIN so that you’re putting any of the business assets against the business tax ID, not your personal one. Open up a business checking account and keep as much as possible, your finances separate, and keep track of every receipt. Scan it, take a picture on your phone, but treat it like a business. That’s the first piece. Get registered for a sales tax license, at least in your own state. There’s other issues related to an Amazon FBA seller which we could or could not talk about, it’s kind of down the rabbit hole with those things. But treat your business as a business and don’t commingle things. It’s OK to use a personal credit card to fund the inventory and keep your business going. Don’t commingle them. Use a separate card for the business and then use another card for going to the grocery store and buying clothes and living your life. You can use a personal one if you don’t have credit in your business yet. That’s fine. But treat it like a business. And then the next piece is, if you’re treating it like a business, is set up accounting. Our preference is zero.com, but QuickBooks online is a viable option as well. Connect it and do enough – you’re becoming an entrepreneur! Learn about doing the basics in accounting. And then, you can look at cloud inventory, but just keep track of everything. Keep a copy of everything, so when you go to that point so someone like us, or another CPA or someone else that can help you really organize your business can get access to that information so you have access to everything. And then make sure you stay compliant with sales tax using a tool like Taxjar.com or Taxify.co. But those are really the basics. Treat it like a business. Think about it – you’re being a business. Learn about being a business. Set up the basics of registering with the state and becoming a corporation. Separate checking account and then set up the basics that you need. These cloud accounting tools are only going to cost you $30 a month. Sales tax might cost you $10 a month plus a little bit for filing. And then look at a cloud inventory tool that might cost you between $50-100 a month, but it will help you optimize your business. If you do those things and take the time to optimize those things, those are the core basics and then you can grow from there.

Jock: We were having a discussion about valuation on businesses that are purely reliant on Amazon. I’m going to add a high level of a discount to that business. What are your thoughts on that particular topic?

Scott: The challenge with Amazon – selling on Marketplace – is, if you’re looking and you have your own brand, that’s a little bit separate. You can control the MAPP pricing. Those are other pieces. You’re one of many. There are rarely any areas where you’re the only seller there. There are a couple other challenges too, if you’re selling on Amazon FBA – so fulfilled by Amazon – where you ship your 1000 widgets to Amazon and they handle everything else. That’s wonderful from a logistics standpoint. You’re not packaging every single product, you send a couple big shipments once a month, a couple times a month, and then money just flows into your bank account every two weeks, and then you monitor customer service and then buy more products and move forward. From a logistic and starting standpoint, that’s really great. The challenge from an Amazon FBA seller is that Amazon generates sales tax Nexus in fifteen states. And that’s wherever Amazon has a warehouse, they’ll dynamically take all of your product and move it around. As a single seller, if you’re not selling your business, from a risk-management perspective, you can decide to, “I’m only going to register in my state, or a handful of states,” but that is a liability to the business, which is that sales tax liability, where you’re not collecting and remitting sales tax in 1-15 other additional states, so that’s one of those challenges where it’s one of those technicalities. It’s a risk-management decision, as the business owner, if you’re not going to sell. But if you’re looking forward to selling your business in x amount of time, you want to focus on making sure you’re sales-tax compliant, your personal property tax returns for your business, and, of course, any income taxes are all up to date on top of making sure you have accurate financials so that you get the full value of the business.

Jock: So let’s talk about cloud accounting. For those who don’t know what it is, can you explain it for me, and then can you explain the benefits for someone who’s already got an existing solution in place, but the solution you provide and how that’s different.

Scott: There’s a new world of tools in the cloud. Not only are your shopping carts and Amazon online, but there’s a wave of cloud accounting solutions, and the benefits of working with these and many cloud tools is that they’re modern interfaces, they’re easy to use, they’re in the cloud, so they’re available any time as long as you have internet access, which is most places anywhere in the US these days. You don’t have to be concerned about versions, or backing up the data, or making updates when there are new features or updates or changes to tax codes or other changes. You don’t have to do that; you pay for a solution that is stable and online in the cloud. The advantage of some of – the additional advantage of the accounting solutions is online, they connect to your online banking. So online every day, real time, each day, they download all the transactions from the previous day from your bank. You don’t have to type any transactions in. You don’t have to export and import any data. It’s going to dynamically pull all that information together. The other advantage is having a solid cloud accounting platform that has an ecosystem of add-on partners, like Shopify has add-on partners for mailing, through MailChimp or Constant Contact. Accounting systems like QuickBooks online or Zero have a whole ecosystem of add-on tools, whether it’s expense management, or bill payment, or cloud inventory. These tools will integrate together and feed all the information from one cloud app to another so you don’t have to do the data entry. And it’s always online. Compared to what a lot of businesses are on, they’re either on QuickBooks Desktop, or they’re using QuickBooks Enterprise, and advanced inventory, leveraging that tool. Now you can take a solution like that, instead of having it on one of your PCs in your office, which you have to back up and protect, and make sure it’s protected from viruses, from power outages, and all the other things you have to do to protect a server or a dedicated system with that data, you can host QuickBooks in the cloud, and there are a number of certified QuickBooks hosters in the cloud that will do the online backup and get you partway there. You still have QuickBooks which is a much older technology. It’s not a great database, it’s not optimized for the cloud, but you can keep using QuickBooks Desktop and QuickBooks Enterprise hosted in the cloud at places like Right Networks or Cloud Nine, and get partway to the cloud, so you get some of the protections, but you still don’t get all the automation, the efficiency, the automated upgrades, and a number of the other capabilities you get with a new cloud accounting platform. The next level of these cloud accounting platforms, is they’re finding newer, better, more efficient ways to get things done with automating billing and payments and automatic payments and receiving information from different areas, where there’s new capabilities, features, functions, and whole new ways of doing things that are much more efficient, that small business leveraging very dynamic cloud companies like Zero, can take advantage a lot faster than either mid-sized companies that are working on big solutions like Dynamics or NetSuite or others. These solutions are evolving rapidly, and you can take advantage of these functions very easily on an ongoing basis.

Jock: Let’s talk about sales tax. The conversation that we had the other day. What are the risks for an entrepreneur and, first of all, what don’t they know? And then, now that they know what they know, what are the risks?

Scott: Sales tax, unfortunately, is a reality for really any business, whether you’re a retail store and you’re collecting locally, or you’re an online business. It is a reality. It is based off main term called nexus and where does your business have nexus? Your business has nexus where you are, where you’re registered as a business, where your employees live and work, and you’re where you have significant personal property, whether that’s a warehouse or your inventory, and you own your inventory until it’s received by the end customer at their home. It’s where you store inventory, not where it’s in transit. You’re only in one state, all of your employees are in one place, your warehouse is there, you have nexus in one state. Where you have nexus, you are required by law to register for a sales tax license, collect sales tax on every transaction where anybody’s buying in that state, not anywhere in the US, but in the state where you have a tax license, and giving all that money that you collect to the state. It is worse to not collect any sales tax and owe money out of your own profits to a state, than you holding money that you’ve collected as sales taxes and not given it to the state. That’s where you cross over into illegal criminal activity. It’s painful to register online for many of these states. Then you have to know how much you’ve collected and how much you should collect. Most shopping carts have an automated configuration, whether it’s Amazon or Shopify or Big Commerce, that you can say, “Hey, I’m in Florida or Colorado or California,” and it will start automatically calculating sales tax, collecting it, and giving it to you. So if you turned on sales tax a year ago, and you’ve never filed or remitted, you need to go look at how much money you’ve collected and make sure you go file that. Another challenge is, if you’re an Amazon FBA seller, you need to collect or remit in up to 15 states. It’s your decision on which ones you register in. You want to register. To keep track of that, manage it, you really want to look at an automated tool, like Taxjar or Taxify.co, that will pull in all the data from YouCommerce or Shopify or Amazon or wherever else and you can upload any direct sales or any other sales you have which will total up all the information and then show you how it needs to be broken down so you can fill and file those sales tax funds that you’ve collected. Or at Taxify.co, that will actually file in all 50 states. Taxjar will file in some states, up to 26 states, and Taxify will file in all 50 states. It’s kind of a matter of registering where you have nexus, collecting sales tax and configuring it, and another key component is if you have sales tax nexus, you have to collect on all sales, so if you sell on Amazon, EBay, Etsy, and your own shopping cart, and in person, you need to collect sales tax for all of those transactions. Make sure you’ve configured every site. It’s still fairly complicated for getting every site. In general, sales tax is extremely complex. There are 13,000 jurisdictions in the US. We’ve gone a little crazy on the compliance stuff. What you can do is make the best effort, find a balance between the time or cost that you’re paying for someone to either do this for you, or for you to do it yourself, to be compliant. And there’s no law that says that you have to spend 100% of your time or all your profits or anything else on the business. You need to find that balance of risk management, but you always want to stay current in your own state, where they can come audit you, both as a business in the state, and you’re physically there. So, those are the key elements. What you don’t know is that one of the hard things…it’s make the best bet, do a little bit of research, read a few blogs. You will hear people finding different things of “I found this trick to not do it!” Well….no. There are a few tricks, like with California. The big trick, I’ll tell you, is you want to register for a sales tax license, not with the Secretary of State, in any of these states, especially California, because if you register for a sales tax license, you’re saying, “I want to be able to sell products.” If you register with the Secretary of State, you’re saying, “I’m a business in that state.” Then you might have to pay income tax in that state, and a ton of other paperwork, you’ve got to pay your accountant to do an income tax return in that state. So when it comes to California or any other states, especially your Amazon sellers, you can only log on to the California site to log on and register online, but when you get to the point where it asks you for the Secretary of State information, stop there, save your reservation, call the Board of Equalization in California and tell them that you’re just a remote seller, and they’ll uncheck that requirement to register with the Secretary of State, and then you can get only a sales tax license. The only state, if you’re an Amazon FBA seller, that requires, by law, that you can’t get a sales tax license without registering in the state, is the state of Washington. That’s my super-detailed tip that I’ll cover

Jock: What haven’t I discussed that you want to talk about?

Scott: OK, you didn’t go into business to do accounting, but take the time to understand your business. Whether you’re watching TED talks, or you’re reading business books, you really want to take the time to continue to grow your education as an entrepreneur. I suggest getting the book Financial Intelligence for Entrepreneurs. It’s very dry reading. It’ll take you a while to get through it. Keep in mind, I’m not an accountant, my partner is. But you will start to learn the terminology. You’ll start to learn when you show some business people your financials, and they can look and in five seconds, tell you that your business is either failing or doing well or talk to you about it, and that’s where you can start learning about those things. So what I have to say is, if you’re going to do the accounting yourself, educate yourself. You don’t have to enjoy it, but it’s a reality of being in business. If you’re going to outsource anything, whether it’s the accounting or the warehouse or whatever else, do it yourself for a while so you understand what you are outsourcing. When you’re interacting, just make it clear as to what your expectations are. You want specific reporting and answers to specific questions, but in general, keeping track and knowing your numbers will help you stay in business. There are a lot of businesses that are profitable but go out of business because they’re not monitoring cash flow, which is critical. There are other businesses that you don’t realize you’re losing money, and you don’t take the time to cut back and drop products or make other big changes to stay in business because you’re just not aware of the issue until it’s too late. Take the time, and when you’re ready to outsource, do it as smartly as you possibly can.

Jock: If someone wants more information about your services, where can they go?

Scott: Thank you Jock. You can go to our website, which is CatchingClouds.net. Please look around. We have quite a few blogs. We’re constantly trying to share the information so if you have any specific questions. The best thing if you have very specific questions and you’re interested in outsourcing your accounting services, please contact us at 720-414-1444 ext. 1. Or you can reach out to [email protected] and we’ll definitely respond. We really enjoy working with entrepreneurs and ecommerce entrepreneurs that have already taken the risks, that are putting their kids’ college fund or looking to quit their job, or if they’ve quit their job or they have an established ecommerce business and they’ve been doing it for years, we really enjoy working with these people, helping them optimize their businesses and make them better. Jock, I really appreciate the opportunity to talk today.

The post Ecommerce Accounting with Scott Scharf appeared first on DigitalExits.

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You can find show notes and more information by clicking here: http://bitly.com/1Hqo8BQ

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