Brent Beshore, founder of Permanent Equity, walks through how he accidentally bought his first business at 24, stacked “golden geese” over 15 years, and built a portfolio of 16 companies doing $350M+ in revenue with $50M in free cash flow. He breaks down his unconventional all-equity model, his framework for finding durable businesses, and his system for evaluating operators using personality testing.
Speakers: Shaan Puri (host), Sam Parr (host), Brent Beshore (guest, founder of Permanent Equity)
Introduction: Stacking Golden Geese [00:00:00]
Shaan: So that was the first Golden Goose, and then you said you started stacking geese like a rapper, you know, at the club. So what’s the second?
Brent: I hope that becomes a term that we can use — “stacking geese.”
Sam: We got to get some shirts made. Hey, merch guy!
Shaan: So, Brent runs Permanent Equity. You started off as a founder, you started buying companies, and then you started raising money to buy companies. So you raised something like $50 million for your first fund, you started buying companies with that, then a couple years later you raised about $250 million to buy more companies, and now you own something like 16 companies that do over $350 million a year in revenue. And I believe what you said was $50 million of free cash flow out of the portfolio now, which is pretty incredible. So that’s who you are, that’s what you’re bringing to the table.
I think, Sam, where do we want to go with this? We could ask you about buying businesses — I have some questions around that — but I kind of want to start with something light before we go into “can you teach me how to do private equity.”
Sam: Yeah, we could do the light stuff. And you also have the “aw shucks Warren Buffett” attitude — you write amazing annual reports, you’re a great writer — so we have a bunch of one-liners that we want to ask you about as well.
Brent: Sounds good.
The Business: What Permanent Equity Buys [00:01:30]
Sam: What do you buy? What are the biggest companies? Like pool companies and HVAC companies?
Brent: Yeah, I mean, we typically have everything from a children’s clothing brand to a military recruitment firm to manufacturing, construction, business services. The 16 companies — it looks like the Island of Misfit Toys. For us, they’re companies where we love the people we get to work with, they’re in industries that we feel are not going to be changing much. Some of them maybe look like high-change businesses on the surface — the children’s clothing would seem that way — but they’re actually not. And we try to partner with them for a long time.
Sam: What’s the biggest one in terms of revenue and profit?
Brent: In terms of revenue and profit, probably our fencing business out of Dallas, Texas is the largest. We have a big market share in the Dallas market, and it’s a pretty sizable business.
The First Golden Goose: Military Recruitment [00:02:30]
Shaan: I was going to ask you something similar — people are always like, “you can’t pick a favorite kid,” but as an investor you can. You have this portfolio and some are better than others, and that’s okay. So what’s the Golden Goose for you?
I’ll be honest — in my portfolio I have a mini version of what you do, where we have four or five companies we’ve either bought or own a big stake in. I could tell you which one is the Golden Goose. For us, the somewhere.com business was like my Golden Goose, partly because I got in at a great price but also because the business tripled since we bought it. It just spits out cash flow, the market keeps growing, people need it — it just keeps laying a golden egg every single month. What’s the Golden Goose in your portfolio?
Brent: Well, we’ve been fortunate to actually stack golden geese on one another, which is how I’d describe it. The very first business I bought is called Media Cross — it’s a military recruitment firm. I bought it in early 2010.
Shaan: Explain in layman’s terms what that even means. Military recruitment firm — what’s happening?
Brent: So at the time we worked with two branches of the military; now we work primarily with one. We had two contracts — one was to recruit civilian mariners into a division of the Navy called Military Sealift Command, which resupplies ships that never come into port. It’s about 1,400 to 1,800 civilian mariners a year recruited into that division. That’s our responsibility. We do all the marketing, recruitment efforts, and then the processing to bring them in.
Sam: Does that mean you’re out on the street with people, or does that mean you’re running ads and you own a lead-gen website?
Brent: All of that stuff. We’re doing lead gen, we have a whole processing center, we’re actually doing qualifications for these people. It’s a complete soup-to-nuts operation.
Sam: And the government just pays you per recruit? How does that work?
Brent: We’re on a fixed contract that escalates every year based on the staffing and needs of the business. It’s basically a staffed contract with a built-in profit margin on top of that.
Sam: What do you get per recruit, per referral?
Brent: I honestly don’t even know because we’re not based on that. We’ve had this contract for 30-plus years now. We are so deeply embedded into what they do — we know exactly what it takes. We are the outsourced function of that piece of the military.
Shaan: Why is that business great? Is it because you’ve got this cash flow but you also have the contract, so you have certainty and defensibility?
Brent: Exactly. For the most part, we know what our profitability is going to be three years from now. Once you get that business optimized and get great people in place — the leader of that business has been with it since the very beginning, so we’re 15 years into the relationship — it just clicks. So that was the original Golden Goose that allowed me to pay back the SBA loan.
Accidentally Buying the First Business [00:05:00]
Sam: I’ve heard you say you accidentally bought your first business. What does that even mean? How do you accidentally buy a business?
Brent: I got a call from a guy who said, “Hey, I want to introduce you to someone — he’s in your industry.” This was because I had launched what was, for all intents and purposes, an ad agency before then. He said, “Hey, you should get to know him. By the way, the guy has been left at the altar twice trying to sell his business recently.” I was like, “Well, okay, I guess I could take a run at it.” I had no idea what I was doing. I was 24 at the time.
I sat in front of this guy, we talked about it, negotiated, and he said, “I would never sell it to you for the price you asked.” I said fine, no problem. I didn’t talk to him for seven months. Then seven months later he called me out of the blue and said, “Just renewed our largest account, business is in great shape, I’m exhausted. I’ll give it to you for the price you asked — but you have to close all cash in 60 days.” It was one of those moments where you make the sale and then you go down the elevator and you say, “Oh, crap.”
I remember getting off the phone thinking, “I just obligated myself to buy a business and I have no idea what I’m doing.”
Sam: You have a marketing agency, you stumble into this business, somebody tells you there’s a chance to buy it, he says no to the first price, you’re not even following up, he comes back — and you don’t have a lot of money. You’re 24 years old. So you go to the SBA and get an SBA loan for this thing?
Brent: Yep. I asked my newly married wife to sign a personal guarantee, and she was like, “What’s that?” And I was like, “Don’t worry about it. No big deal.” You’re like, “Good news and bad news — good news, no prenup, but you do have to sign this other thing.”
Sam: What happens if this doesn’t go well?
Brent: I was like, “It’s probably not going to be great.”
Sam: For somebody who’s never done an SBA loan, can you explain it? You put down X, you get Y — how does it work?
Brent: Back then — and the requirements have changed a little bit, I think it’s like 5 or 10% you have to put down now — what I did was I leveraged the accounts receivable from the existing business as the down payment, then got the rest of the debt through the SBA. So I put very little cash into the deal. It was tied up in other assets, but in terms of actual cash coming out of my pocket, it wasn’t a lot.
I asked my buddy at the SBA — he was part of an SBA lender — “Hey, do you guys do expedited SBA loans?” He said, “Not really. We don’t do that.” I said, “Well, I need it in 60 days.” He said, “That’s really not possible.” I said, “Can we make it possible? Let’s try.”
Sam: How much did you have to borrow?
Brent: A million bucks.
Shaan: Was this like See’s Candy for Buffett — like a business that returned way more than you paid?
Brent: Yeah, it’s like a 20x return.
Sam: That’s amazing. So that was the first Golden Goose, and then you started stacking geese.
Stacking the Second Goose: The Pool Business [00:09:00]
Brent: I knew so little back then. I remember my lawyer said, “Okay, we got to start due diligence,” and I literally Googled “do diligence” — like I had no idea what it was. I was reading about it as he was talking to me. I was like, “Oh, yeah, we just ask questions. How hard can that be?”
Sam: That’s amazing.
Brent: Another anecdote on that deal: a week before closing I said, “Okay, so I take all my money and I give it to you, you take all the money out of the business — how do I make payroll?” The guy said, “Well, obviously you got a line of credit on the business, right?” I was like, “No, I didn’t do that.” He said, “Well, the business is going to go under immediately.” I was like, “That’s not good. What do we do?” He actually lent me money as a line of credit to keep the business operating because I didn’t even think about it — he’s going to take all the money and there’s not going to be any cash to operate.
Shaan: I was with this guy over the weekend and he was like, “Hey, should I start my own business? I’m 28. I don’t think I have enough experience.” I was like, “A lack of experience hasn’t stopped a lot of people. You can kind of be a dummy and get into it and you’ll learn in like six months.” You are a good example of that.
Brent: Huge dummy is exactly the way I think about myself. And in lean manufacturing they have this idea of “just in time” — you do things just in time versus doing everything ahead of time. Just-in-time learning is basically what you did. Oh, when I need to close, then I figure out what due diligence is. When I need to take over the business, I learn what working capital is. You just learned each of the core concepts as you needed them, which is actually the real way people learn.
Sam: So what else do you own? What was the next business?
Brent: The next business we bought was a pool business out in Arizona. Started using cash, built that up, and that turned out to be a great investment as well.
Sam: You say that so nonchalantly, “a pool business.” But dude — that would be really random. I don’t think about pool businesses. Nobody shows me a pool business. Where does that deal come from? Were you talking to brokers?
Brent: So after I bought Media Cross in 2010 I was like, “That worked. I should do more of what works and less of what doesn’t.” At the time there wasn’t a lot of writing on the internet about this. There was a little bit of stuff out of Harvard, a little bit out of Stanford around search funds, but very little activity online. I was like, “I need to ask around — are there people doing this?” I didn’t even know there was a thing called private equity. Somebody said, “Oh, you did a private equity deal,” and I literally Googled private equity and thought, “Turns out there’s a whole industry of people that do this. Why wouldn’t they do it in smaller companies?”
So we started reaching out and developed a deal pipeline. That pool deal — we first saw it in 2012, and it took us about three years to get the deal done. They went with two other buyers before us, but we maintained the relationship and eventually got it.
Shaan: The time between deal one and deal two was three years?
Brent: It was five years.
Shaan: Isn’t it crazy how long things take? Like Brent’s a big shot right now, people know you, you’re talking about hundreds of millions in revenue — but you started this 16 years ago. You have to grind, or at least be consistent, for a decade-plus.
Brent: Absolutely. I say to people all the time: if I had been given $50 million to invest in 2010, I would have lost all the money. It took so long to build up — to make a bunch of mistakes that felt like high stakes at the time but were actually low stakes — in order to warrant having more resources.
How Brent Got His First Outside Capital [00:13:00]
Shaan: So at some point somebody did give you $50 million. How’d you get somebody to give you $50 million to go buy companies?
Brent: Funny story — I met this guy named Patrick on the internet. Patrick O’Shaughnessy put out a tweet when he was an analyst at his dad’s firm, about capital allocation. I responded. I was like, “Yeah, I can hop on the phone and talk about capital allocation.” I didn’t really understand what he was even asking — he was asking about public markets — but I just reached out and said, “Yeah, sure, let’s talk.”
We get on the phone, he’s like, “So what do you do?” I said, “Oh, I buy these small businesses.” He said, “Well, how much do you pay?” I said, “I don’t know, like three to five times.” He said, “What? Are these businesses going out of business? Are these distressed?” I said, “No, these are healthy businesses.” He said, “I’ve never heard of this. What is this?”
We talked two or three more times and he said, “Can I come visit you in Columbia?” I said sure. He flew to Missouri and we spent a day together. At the end of it he said, “I want my family to invest in what you’re doing. I believe in what you’re doing.”
I said, “I’m sorry — we don’t take outside capital. I’m not going to do a 2-and-20, 10-year fund life. Don’t want to do a holdco structure. Don’t want to get saddled with a bunch of partners I don’t know. Life’s good — we’re making money and compounding.”
He asked me the question no one else had asked me: “Well, what would it take for you to take our capital?” I said, “I don’t know.” He said, “Why don’t you figure that out and get back to me, and I’ll tell you if we can do it or not.”
So I whiteboarded out our current structure, which is kind of the opposite of traditional private equity.
Sam: Can you dumb that down? That was a lot.
Brent: Okay. So traditional private equity — you raise a fund and you get 2% of the amount every year. Every year. Which is actually like getting 20% of the total over a 10-year fund life. Which is kind of insane. People in private equity get paid well because it’s hard and not many people can do it. But I said, “I don’t need the fees because I’m already paying for the team and overhead. I just want to be entrepreneurial — if we make money, we share in that.”
So our model: we take no fees of any kind, no reimbursements, there’s no cash that comes from the portfolio companies or from the LPs to the GP outside of a percentage of free cash flow above a hurdle as we return cash back. We don’t use debt. And we hold for a very long time — we have a 30-year initial term on our capital. A typical private equity firm has 10 years.
Sam: What did you do for the profit share?
Brent: We get 40% of the free cash flow of businesses as we return it back to the investor.
Sam: And you don’t have to return all the money up front first — you start participating from day one?
Brent: Correct. But only on what we return back.
Sam: And no debt. You’re buying all cash?
Brent: Yep, all-equity deals.
Why No Debt? [00:18:00]
Sam: Why don’t you use a little bit of debt? What’s wrong with a little bit of debt? Just a little bit — just a little icing on the Cinnabon.
Brent: We will occasionally do some seller notes, although we found that having the people you work with be your creditors is not an ideal situation. So we’ve really shied away from that as well. We typically just close all equity and try to keep things super simple. Transitioning small businesses is difficult and pretty stressful on everyone. We can always lever them up after we close, though we haven’t really done that.
Sam: Is that strictly a lifestyle choice — just helps you sleep better at night? Or is it a financial decision?
Brent: I think it’s both. The optionality we have in doing interesting things to grow these businesses is much better when you don’t have debt — when you’re not paying all the cash to a bank.
I’ll give you an example. We bought an aerospace business in 2019 called PackAir. The aerospace business never goes down. In the history of the industry, it always just goes up. One of the advisers to the sellers said, “Are you guys idiots? This business never goes down — why wouldn’t you lever this thing up?” We explained our philosophy.
Well, 2020 hits. We were literally the only business out there without debt on it. So we were able to take all the cash flow we were generating — even though the business was down — and go make 10 years of progress in two years. That business is now about seven times the size as when we bought it. Everyone else who had debt had maybe grown a tiny bit from 2019 but not much.
We’ve had that happen over and over again. We never know what the future holds, but we know there are going to be options to invest in really interesting things. If the cash flow is all going to the bank, you don’t have that option.
Beating the Index: Returns Discussion [00:21:00]
Shaan: I want to ask about returns. We’ve had a bunch of people come on this podcast where I walk away thinking, “That person is a master of what they do.” But then if you look at people over a 20-year period, there’s this base question: if you just put money in the S&P, you get some rate of return. Sam, what do you want — eight, nine percent?
Sam: I would be very happy with eight percent per year.
Shaan: So to be smart and do a bunch of work, you have to beat that. And we’ve had people come on who sound absolutely brilliant, but then later you look at their returns and they kind of don’t beat the index. I don’t even view that as them being charlatans — it’s just really hard to beat the index. So what do you try to do in terms of rate of return, and what’s the scoreboard?
Brent: I’m under all kinds of SEC regulations so I can’t talk a ton, but I can tell you what’s been in our annual letters. The minimum we underwrite to is a 30% IRR, and we’ve historically been pretty significantly above that. What I can say is that our total cash-out IRR is in the low 20s, without any marks — without any valuations of the businesses. You stack marks and the growing cash flows on top of that, and the numbers get pretty ridiculous.
If you think about the bottom line: you’re buying a business with no debt, all cash, and on average paying between five and seven times earnings. If the business is organically growing 7 to 10% per year and you’re increasing that to call it mid-teens, maybe low 20s — the math gets pretty amazing pretty fast. And that’s without using any debt.
I think that’s where it’s obvious from the outside that there’s gold in the hills if you look at small business acquisitions. This is not a secret anymore. I remember going on Patrick’s podcast when it was brand new and people were shocked at what you could buy these businesses for. And people say, “Oh, that’s not fair — it’s an inefficient market.” It is inefficient, but it’s inefficient for different reasons than people think. It’s not because people are getting taken advantage of. It’s inefficient because it’s brutally difficult, and it’s so easy to lose a bunch of money.
I had a guy reach out last week. He said, “I want to be honest — I’m looking for a job. My wife and I went all in.” He was working at a big private equity firm in LA as an operating partner. They went all in on a business and it failed. Now they’re bankrupt.
What Makes Someone Successful at This [00:25:00]
Shaan: What attributes make you and others like you successful versus that guy?
Brent: I would say a lot of our success is attributable to luck in the beginning. If you listen to any investor who tells you the early stuff they did wasn’t lucky, they’re lying to you.
I remember getting to chat with Buffett about this. I said, “Tell me about Sanborn Maps and Dempster Mill.” He said, “Oh my gosh — if either of those investments go wrong, there is no Warren Buffett. No one knows about Berkshire Hathaway. None of that stuff happens.” They were that close.
Shaan: Wait — can you tell the story in more detail? Warren Buffett almost failed at the beginning of his career?
Brent: He had 70% of his assets in these two investments. One was called Sanborn Maps and the other was Dempster Mill. This is early days of the Buffett Partnership, pre-Berkshire Hathaway.
Sanborn Maps was a mapping company — basically intellectual property for maps. If you needed to build something or navigate something, they had the best mapping technology. It was publicly traded and Buffett was essentially the controlling shareholder.
Dempster Mill was a completely different story. He bought into that, took control of it, and the business was just flailing. He was staring down the barrel.
So he had just met this guy Charlie Munger — they’d been introduced by a mutual friend who said, “You two are the two nerdiest dudes I know, you should meet each other.” Love at first sight. They get to know one another, and Munger said, “Warren, what’s your biggest problem?” Buffett said, “I’ve got these two problem children, especially Dempster Mill. Do you know anyone who could help turn it around?”
Munger said, “Actually, I do — this guy Harry Bottle. He’s an accountant out in LA.” So they took Harry Bottle to lunch, pitched him on moving his family to the Midwest, and running Dempster Mill. Harry Bottle reluctantly agreed. Turns it around. Becomes a fortunate surprise on the upside. And Buffett starts stacking geese, as we talked about.
Everyone in the beginning — you don’t get to be successful without taking risks. All investing is taking risk. The question is just how much risk you’re willing to take, and when you’re younger and you don’t have much, the only way to get ahead is by taking more risk.
What Brent Is Actually Good At [00:30:00]
Sam: When you’re doing all this research — are you an expert in the pool business? Or are you an expert in looking at financial statements? What are you great at?
Brent: I think I’m pretty good at seeing the big picture — taking all the pieces together. I’m not the best financial analyst. The joke is I can barely open Excel. I’ve never had that skill set. I never took a finance class in my life.
I think I’m decent at putting the puzzle pieces together, and at negotiation. Buffett talks about being a better investor because he’s an operator, and a better operator because he’s an investor. That’s true. But I think there’s a third leg that’s not talked about enough, which is the deal-making side. And in more inefficient markets, deal-making becomes really the dominant skill set.
With that pool business, I saw a business with a clear track record of growth, an enduring business model — we joke that when people stop dipping their bodies in water for pleasure we’ll be fine; it’s been happening for a couple thousand years, I think it’ll keep going. We try to have these very simple thesis for everything.
You look at somebody who already has dominant market share, has held it for a long time, the business is growing, the market is growing. You look at the business model — asset-light, simple model, find customers who want pools, do it better than they could do themselves. Then you start looking at who’s the leadership, how do you structure the deal, how do you make sure interests are aligned, how do you continue to find talent to build the business.
It sounds simple. It’s not simple. It’s just not complicated.
Sam: You gave one answer, but I think the real answer — based on how you were talking — is that you’re a really good storyteller, you’re very persuasive, and you’re clearly a good leader because of how you dumb things down to be simple and easy to understand.
Shaan: Yeah. You don’t get stuck on “midwit mountain” — the middle part where it’s overthinking, over-thesis. You’re like, “Do I think people are going to stop dipping their bodies in water for pleasure? No. Okay, cool.” All right — seems like this guy’s been paying himself a lot of money as the operator every year? Great, we’ll probably be able to do the same. Doesn’t do any marketing and doesn’t run any ads? If we did a little bit, it would probably help. Thesis done. Check, check, check.
I’d also say it seems like you have a good amount of “action luck.” That Patrick O’Shaughnessy example — you were doing this with your own money, he tweets out looking for someone to talk to about capital allocation, and you reach out. No impostor syndrome, no insecurity that prevents you from reaching out. You’ve probably taken a thousand actions like that — cheap lottery tickets where the downside is very low, but the upside if you made a valuable connection was pretty high.
And he had “perception luck” on his side — he could spot something when it showed up at his door. You’re buying businesses at four times earnings, which means if you put in a hundred bucks you’re getting 25% yield every year even without growth, versus the stock market where he’s buying things at 25 times earnings. He spotted that. Then he asked the magic question: “What would it take?” Ten other people could have done most of what he did and not gotten that result.
How to Buy Your First Business: The Framework [00:36:00]
Sam: Let me ask you a different question. I have this goal — I want to retire my sister. She’s got her own business, she wants an easier life, she wants to spend time with her kids, she wants to travel. Her business is brick and mortar so she’s stuck in a specific location and can’t take her eye off the ball. I want to buy her a business — buying a business that’s already working, cash flowing, you hire a CEO or promote somebody internally. But I know there are a lot of ways that can go wrong. If you’re me and you want to retire my sister, where do you start? What’s your thought process around buying that first business to get to $300 to $500,000 a year in free cash flow?
Brent: It’s all about constraints. Actually, I wrote a piece called “How to Buy Your First Smaller Company” specifically because this is a question I get a lot.
Everyone has different constraints. Where do you want to live? How much do you want to travel? What do you actually know? What are you good at? Somebody with a very different personality type than me should be buying very different things than what I bought. Somebody who wants to live in LA should be buying different things than somebody in Missouri. Capital constraints — how much cash do you have available to invest?
If you want something that’s going to be more hands-off, an incredibly durable business model, you can get something that’s either software or software-adjacent, something with recurring revenue. The more you pay up into the value chain, you’ll have decreased total returns, but ultimately they’re easier businesses to run.
There are level-10 difficulty businesses. I would not recommend buying into your local restaurant if you want to have an easier life. It depends on whether you want to be a hybrid investor-operator — which really means you’re going through a short season of investment, then buying yourself a job. That’s one very specific type of way to leverage your time against your money.
If you want to purely occupy the investor seat in the world of small businesses — it can be done, but it’s very, very difficult. The first $300 to $500,000 of cash flow coming from small businesses is very likely going to require a lot of sweat equity in exchange for that money.
Shaan: He has a good Q&A in that blog post. The question is, “How hard will I have to work?” And the answer: “Harder than you’ve ever worked before. The opportunity in small business is dressed in overalls and likes hard work.”
Brent: That’s my main skill. Poetic writing. Yeah.
One-Liners: Lightning Round [00:40:30]
Sam: You have some great one-liners. Can I read you a line you’ve said, and you just riff on why you believe it?
Brent: Sure, go for it.
Sam: “All businesses are loosely functioning disasters — some just happen to make money.”
Brent: Anybody who’s ever operated a business knows this is true. The only people who push back on this are consultants. Anytime I’ve said this publicly, the only people who come at me are either people who got lucky the first time or have never operated a business.
Every business I’ve ever been involved in, no matter how profitable or how big — I’ve gotten a good view into some very large businesses — they’re all highly dysfunctional. Why? Because they’re full of people. People are messy. When you get a bunch of people together, the messiness compounds. It’s not a complicated concept.
People should lower their expectations and understand what to expect when they get into a business. It’s going to be hard in different ways. First time you have to put somebody through rehab. Your guy doesn’t show up to man the warehouse because there’s been a domestic violence dispute and he’s in jail. These are things everyone’s dealing with. They come in different flavors depending on how professional the business is, but that’s reality.
Shaan: Have you watched Landman?
Sam: I have. It’s really good.
Shaan: For those listening, it’s a show with Billy Bob Thornton about the oil industry. There’s a great quote: “Our business is one of constant crisis interrupted by brief periods of intense success.”
Brent: Yes. I have a quote on my wall: “Success is founded on a constant state of discontent, interrupted by brief periods of satisfaction upon the completion of a job particularly well done.”
Sam: “The more humility a leader has, the more their business can grow.”
Brent: Humility is acknowledging reality for what it is. If you don’t acknowledge reality, you can’t get better. Lack of humility is basically a defense mechanism. It usually comes in two forms: self-protection or self-promotion. People are usually doing a combination of both when they’re in some form of pride or arrogance. They’re usually terrified, fearful.
I can say this from experience — when I get prideful, it’s because I feel like I’m not enough, I’m worried I might not have enough, I want people to like me. Humility is laying that down and saying, “I want to see reality for what it is so I can learn and grow.” The only way to do that is to get feedback from the world around you.
Shaan: I like that. Lack of humility — self-protection or self-promotion. That was strong.
Sam: Charlie Munger says every time you see the word EBITDA, you should substitute it with “earnings.” Do you agree or disagree?
Brent: I agree. EBITDA can be a useful tool in some very limited circumstances, but for the most part it’s dressing up something that is more often than not obvious — skating reality. When you see EBITDA, especially in the small business world, there usually comes a ton of capex and a lot of reinvestment needs on the back end of that. What you have to really do is figure out: in a steady state, what is the business actually producing in free cash flow?
We look at businesses all the time that are “making” $7, $8, $9 million a year, but you ask the owner how much money they’ve actually taken out of the business and they’re taking out maybe a million or two million a year. I’ve got news for you — you don’t have a business making $7 million a year. You have a business making one to two million a year. That’s the reality.
Sam: Have you guys ever learned the history of the idea of EBITDA? Do you know this?
Shaan: No.
Brent: John Malone invented it. His nickname — he’s one of the cable cowboys. You’d know him now as the guy who owns or founded Liberty Media, which owns F1 and all this other stuff. But basically he owned a small cable company, and he found that if he could acquire way more cable companies — cable companies were incredibly sticky, recurring revenue — he should go out and buy a ton of them. To do that he needed to borrow lots of money.
He came up with this idea that EBITDA was an amazing metric to convince banks to loan him money. His business had lots of depreciation, lots of amortization, so he was like, “No, no — give me earnings before all of this, and I’m going to convince banks to loan against that.” That was the mid-’80s. It became the term.
Shaan: I’ve always thought EBITDA is really stupid, but I never had the courage to say it. Then I’d read about Buffett and all these guys and I was like, “God, they think it’s stupid too.”
Sam: I take the opposite view — I need this in my personal life. I need the husband version of EBITDA. My behavior before the football game, before taking out the trash — if you ignore all those things, I’m great, I’m amazing actually.
Shaan: It’s crazy that you don’t pay personal taxes on EBITDA. You pay on cash. There are just so many reasons why this is insane. And the most insane thing: “adjusted EBITDA.” What the hell does that mean? It means whatever you want it to mean.
Sam: “You either operate with high authority — top-down — or delegated authority. Hell is in the middle.”
Brent: Hard-earned. I think everyone’s temptation is to be high-authority when you think something’s wrong, and low-authority when you want to be lazy. That combination makes a mess of everything.
There are really two ways to be involved with a company. You either say, “This is what we’re doing, this is how we’re doing it, you need to get in line — I need people to execute this vision.” Or you say, “I want to be supportive and helpful, it needs to be your vision, and I’m not going to intervene even when I think something’s wrong. I’m going to go along for the ride and be lightly helpful.”
Both can work. Both have upsides and downsides. But you can’t do the middle. Because if you’re in the middle, you end up saying to the leadership team, “You’re responsible, but I’m basically telling you what you have to do.” That removes all agency from them. And ultimately, everything that goes right will be their fault and everything that goes wrong will be your fault.
Sam: The “lazy approach” — that sounds great, sign me up. But how do you make that work?
Brent: You have to find the right person. Buffett and Munger always said that incentivizing the manager was their number-one job. If you’re going to truly be an investor and not an operator, it all comes down to: somebody has to do the work and exert judgment. You have to be aligned with that person.
And look — this is the only way you scale. People say, “Berkshire buys businesses and leaves them alone.” That was not how they operated for the vast majority of their history. They eventually had to because they got to such a scale they literally couldn’t intervene anymore.
Go back and look at Buffalo News. Buffett and Munger were literally living in Buffalo. They were writing headlines. Have you ever read about that?
Shaan: I did not know this. This is amazing.
Brent: They bought a newspaper and they would be like, “I want this many ads on the page, I think the headline should be like this.” It was Steve Jobs and the Apple Store — a product-oriented person in the details.
So their mode of operation in the early-to-mid ’80s was highly interventionist — involved in the smallest of details, setting the tone, helping on marketing strategy, replacing leadership. All the stuff that anybody has to do when you’re small. When you’ve got less capital and more time, you can do stuff like that. The returns are higher when you leverage your time against your money. It’s an advantage.
But eventually you have a limited amount of time and attention, and as the money grows and your attention stays the same, that ratio gets thrown off. You have no choice but to spread your judgment thinly over a much wider grouping of things. You step out of day-to-day operations. You hire people who can exert great judgment.
Shaan: There’s a great letter — you can Google “Buffett letter to See’s Candy CEO, 1972.” He says, “Dear Chuck, I was out of See’s a couple days ago and I have a few strong impressions to pass along.” And then he basically goes through the store experience like Steve Jobs — talking about how the candy will be affected not just by how it tastes, but what people hear about it, the retailing environment, the class of the store, the packaging, the condition.
Brent: That letter is so different from the image you get of Buffett just sitting in his room reading all day, making investment decisions off of financial sheets.
Shaan: How awesome is it that that was a typewriter letter? He licked an envelope for this one, dude.
Sam: I kind of want to start sending letters. It just makes everything feel more authoritative.
Shaan’s Portfolio: The 60/30/10 Framework [00:54:00]
Sam: Let me ask you something. My business is a little bit different than yours — I create content on the front end, so media and content on the front end, but that’s not a great business model by itself. The back end is I start or buy businesses that I can turbocharge. We’ve done this maybe four, five, six times now and it’s going really well.
One thing I’ve noticed: if I drew a pie chart of what makes it work, about 60% of the battle was just the initial market selection. When we picked a project where the winds were blowing against us, it didn’t matter how much effort we put in or how great the operator was — it was always an uphill battle. And sometimes we pick markets that are just a pull market. People need this, it’s a sweet spot, shooting in a barrel. That’s a big part of it.
The next 30% is the quality of the CEO we picked. When we pick a limited CEO, we get limited success. When we pick an unstoppable CEO, we get massive success. And the last 10% is luck — the ball bouncing our way on a couple things that could have easily not happened.
My question is about that second piece — hiring or evaluating the CEO. I want to get better at that. If you sit down with somebody you’re recruiting to run a company, what are you doing that’s not obvious? Any tips and tricks?
Brent: This is probably a pretty underappreciated aspect of being involved in small companies — it’s all about the people. The better you are at the people, the better it’s going to be for the business.
We’ve really deep-dived into personality testing. I would say all personality testing is “wrong” — it just depends on what you’re trying to get out of it. We have a huge battery of tests we do for people to try to get as close to a 360 view of who they are.
Sam: What do you use?
Brent: A combination of DISC, Myers-Briggs, and something called Habit Story, which helps them see what habits they’ve built in their life and how they’re supporting who they are with the structure around them.
Personally, I also do a lot of study of the Enneagram. When I first meet somebody, I’m instantly categorizing them — what I think their Enneagram number is, and automatically mapping them across the four main Myers-Briggs dimensions.
Sam: This is crazy to me. I thought this was just horoscopes for dudes. Do you really use this as a core thing?
Brent: All of it tells you something about the person. The Enneagram tells you who you are at your worst. There are nine numbers, everyone falls into one, and then you have “wings” — where do you tip from that number.
For me, I’m a Three, and I tip Two. A Three is called “the achiever.” My biggest insecurity is that I’m not enough and I want people to like me. If anybody’s proud of their Enneagram number, it means they don’t understand the Enneagram. It’s not a good thing — it tells you your deepest fears and your areas of greatest weakness. But if you can know that about somebody, you can see how it’s playing out in their life.
When I’m least healthy, I’m a people-pleaser, I say yes to too much stuff, I don’t tell people the truth. It’s highly destructive behavior.
Brent: I won’t guess your Enneagrams but — go ahead, do it.
Sam: Please.
Brent: My guess is Shaan’s a Three, and Sam’s an Eight. Threes and Eights both achieve, but for very different reasons. Threes achieve because they want people to love them — it’s less about the thing itself. Eights really want the thing itself. As a Three, I don’t just want money — I want the money because I want people to love me. Eights really want the money because they want the security and the power that comes with it.
So I want to roll over so I get pet and my tail can wag. Sam just wants the treat.
Sam: Yep, that’s exactly right.
Shaan: Sounds right. What do you think?
Sam: Well, he’s describing everything in the most positive way, so yeah, it sounds great. I looked up who other Eights were and it’s like Winston Churchill, Martin Luther King — I’m like, okay, cool.
Shaan: Can you give us the exact battery? You said Myers-Briggs, you said this other test — what’s the exact stuff?
Brent: Two things. First, when I first meet somebody — let me walk you through what I do. Separately, in a hiring process, once we get serious about a candidate, we put them through a big battery to try to understand them.
For me personally when I first meet somebody, it helps me to be able to categorize them into Myers-Briggs. You have I vs. E — introverted or extroverted. S vs. N — are they sensing, in the present, or intuitive, in the future? T vs. F — are they primarily excited about ideas or primarily about the people themselves? J vs. P — are they very focused on rigid schedules and order, or do they like to go test and try a whole bunch of things?
How all these stack up and combine gives you a much more holistic view. Then when you pair that with the Enneagram, those two together create the quickest and most holistic view of who somebody is.
For example, how I talk to someone who’s present-oriented is very different from how I talk to someone who’s future-oriented. We assume the whole world operates like us. My wife and I are literally opposites in every single one of these areas. You can imagine how she shows up and how I show up creates all kinds of miscommunications. We went through personality testing together about three and a half, four years ago. Game-changing in our marriage. It completely explained a ton of behavior that had been bothering both of us for a long time.
Shaan: It’s crazy — 16personalities.com and these testing websites are huge.
Brent: Big business. Five Voices is a really interesting one — fivevoices.com. Steve Cockrum and Jeremy Kubicek are the founders. They’ve created an overlay for Myers-Briggs that simplifies it. A lot of their stuff is incredible. We use a lot of their work as well.
Sam: And then you finish off with a quick tarot reading just to see how the future is going to go, and then you’re all set.
The “Jerk Test” [01:04:00]
Sam: You also have this “jerk test.” Nobody wants to work with jerks, but how do you screen for that? Nobody’s presenting as a jerk in a job interview. You said: eat with them and see how they treat the staff. See them interact with their significant other — that tells you a lot in their home environment. And then the most telling environment is to travel with somebody. “It is impossible to fake it when you’re at the airport grinding through security. If there’s a delay, their true colors will come out.”
Brent: Yeah. The business we’re in is predicting people’s behavior. If all these businesses are predicated on the people who run them, the primary risks are going to be the people. We’re trying to get to know them.
Sam: Have you guys ever been out with someone who was actually a jerk to the wait staff?
Shaan: Whenever people talk about this test I’m like — I’ve never been around anyone who was rude to the waiter.
Sam: Dude, you don’t remember the dinner we were at where this happened?
Shaan: Yeah, but that was one out of a thousand.
Sam: The guy we were with — he was just shooting at the waiter when it was like— It was awful. I left that dinner feeling like I had just participated in something I was ashamed of. Like, if people find out about this, I’m going to be so embarrassed.
Brent: That’s rough.
Wrap-Up [01:06:00]
Shaan: Wow, dude. What a fun episode. I really enjoyed hanging out with you guys.
Sam: What you guys built at Permanent Equity — thanks for coming on, man. Go check out his blog, his annual letters are pretty great. Follow him on Twitter.
Brent: @BrentBeshore — just Brent Beshore.
Sam: All right. Good seeing you, dude.
Shaan: Thanks for coming on.