Brendan Anderson – Building a Compounding Advantage

Live Oak Bank — Live Oak Bank is a seasoned SMB lender providing SBA and conventional financing for search funds, independent sponsors, private equity firms, and individuals looking to acquire lower middle-market companies. Live Oak has closed billions of dollars in SBA financing and is actively looking to help more small company investors across the country. If you are in the process of acquiring a company or thinking about starting a search, contact Lisa Forrest or Heather Endresen directly to start a conversation or go to www.liveoakbank.com/think.

Hood & Strong, LLP — Hood & Strong is a CPA firm with a long history of working with search funds and private equity firms on diligence, assurance, tax services, and more. Hood & Strong is highly skilled in working with search funds, providing quality of earnings and due diligence services during the search, along with assurance and tax services post-acquisition. They offer a unique way to approach acquisition diligence and manage costs effectively. To learn more about how Hood & Strong can help your search, acquisition, and beyond, please email one of their partners Jerry Zhou at [email protected]. 

Oberle Risk Strategies– Oberle is the leading specialty insurance brokerage catering to search funds and the broader ETA community, providing complimentary due diligence assessments of the target company’s commercial insurance and employee benefits programs. Over the past decade, August Felker and his team have engaged with hundreds of searchers to provide due diligence and ultimately place the most competitive insurance program at closing. Given August’s experience as a searcher himself, he and his team understand all that goes into buying a business and pride themselves on making the insurance portion of closing seamless and hassle-free.

If you are under LOI, please reach out to August to learn more about how Oberle can help with insurance due diligence at oberle-risk.com. Or reach out to August directly at [email protected].

Interested in sponsoring?

(4:21) – Are there any market indicators you focus on that have broad implications for your portfolio of companies

(5:31) – Where do your CEOs get most of their information?

(6:37) – How are you bringing your companies together to share best practices?

(8:40) – Can you walk us through the TAC method?

(13:47) – Brendan’s background and career

(23:16) – What were some notable misses you’ve seen across your 3 funds and what did you learn from them?

(27:16) – How do you find great talent locally in your area?

(29:35) – How do you think about scaling your recruiting pipeline?

(31:03) – How do you retain great people?

(33:52) – What is the “fund route” you offer people?

(34:52) – Are there career advancement opportunities for people working in your portfolio who may want to jump to another company under your umbrella?

(35:49) – How does your mindset shift when you’re operating with a long-term hold mindset rather than selling within a few years?

(37:30) – What kind of freedom does someone at a ScaleCo company have relative to working elsewhere?

(39:03) – How do you view debt within a long-term time horizon?

(42:19) – What’s the top-of-mind idea for you right now?

(43:36) – What college class would you teach if it could be on any subject?

(46:52) – What’s a strongly held belief you’ve changed your mind on?

(47:55) – What’s the best business you’ve ever seen?

Alex Bridgeman: One fun place that I think would be interesting to start is just hearing about with- I usually start with background, but I’d be curious to hear your thoughts on this. When you look across your portfolio of companies, and then you look at the macro environment, what kinds of numbers or indicators do you look for that maybe have some predictive value for the rest of your portfolio? What do you generally pay attention to when you have several companies and can look at stuff and then relay that information back to your CEOs? Are there numbers or things that you keep track of?

Brendan Anderson: Yeah, actually, it’s embarrassing, I don’t think we do. I think, what we’re really focused on in most of the portfolio is building the team and kind of building the backlog of kind of the future revenue and, quite frankly, the future joint ventures or add-ons. And so, obviously, it’s more kind of internally focused. Probably not a great answer, but obviously, we’re trying to get out and talk to kind of industry people, kind of what’s happening in the industry, but that also kind of falls heavily on the operating partner, the people leading the company. They really seem to- they are the real experts in the industry and the company, and we rely on that a lot.

Alex Bridgeman: Yeah. Where do your CEOs get most of their information? Is it industry friends and experts that they have calls with or exchange emails, or are there certain sources that they’ve found that are pretty good for getting a sense for what’s going on?

Brendan Anderson: I think they all do the standard trade shows now that we’re kind of traveling again. And we try to build the boards of people that know the industries or at least resources for the entrepreneurs. I also have this theory, and as you’re going to quickly figure out, I’m not horribly sophisticated when it comes to a lot of my theories, but I feel that if you try to call, if you’re trying to figure out an industry and you call ten, fifteen industry experts, and once you get to the spot where you do it kind of on a regular basis and they all start saying similar things. And so, you can kind of predict what the next person’s going to say. That’s about- I joke and I say let’s call ten people and see if we can predict what the eleventh and twelfth person is going to say. Alex, that’s as sophisticated as we’ve gotten, but it seems to work for us. I mean, and it’s also something that can be done regularly and consistently.

Alex Bridgeman: I also loved hearing a little bit more about how you try to bring your CEOs together and share ideas and go through different processes together. Can you walk through kind of the ways that you bring your companies together and allow them to exchange information and processes, best practices with each other?

Brendan Anderson: That’s great. And this is we’ve tried a lot of things that haven’t worked, and this is one that I’m just really excited about. I joked with you before we started here that we go back, and we used to sit in a room and we would analyze the companies and we’d kind of run them through our process, and the ideas kind of stop with the people in the room. And so, one of the things that- we call our process the TAC method, and it stands for transformation, you transform the company, then you accelerate the organic growth, and then obviously, you can consolidate and start buying companies. And we had this kind of crazy aha moment when I was realizing that some of the operators of the companies knew way- they just had so many wonderful ideas, were such better managers and so forth than I am. And so, we really get- we consider this TAC method a kind of living, breathing process, and most of the great new ideas come from the operators. So, we really get them in the same room, and we talk about kind of what’s going on with each business and the interaction between how do we gain- if we were having a problem or how do we kind of accelerate or make the process more efficient. And as I was saying before we jumped on, it’s amazing how we’ve been doing something for so long that we keep asking the portfolio companies to something, and then one of them will raise their hand and say, well, why are we doing it? And then wouldn’t this be an easier way to do it? And you’re like, of course, it is. And so, it’s just all profound knowledge comes from the outside. And what we find is that most of our operating partners are obviously very energetic, knowledgeable people and they have wonderful ideas. And so why wouldn’t we tap them for that?

Alex Bridgeman: Can you walk through that method a little bit more deeply? I’d love to hear more about it.

Brendan Anderson: The TAC method?

Alex Bridgeman: Yeah.

Brendan Anderson: Sure. And again, I always love it because, in my mind, it’s transformational and I think most people that hear it would say, oh my God, that’s so simple. It’s simple, but it’s hard. So, I look at the transformation piece, and what I would say is that, you’ve got to have great financial statements looking backwards or some sort of predictive measures looking forward. And that’s much harder to do in small companies than one would think. And so, we spend and have wonderful resources internally here at ScaleCo that focus on just getting good numbers. And again, it sounds crazy, but when we’ve had trouble in the past, we’ve had trouble with financials, just knowing where cash is, predicting cash, predicting future revenue, and that sort of thing. So, there’s a real deep topic there. And it sounds- again, I’ve seen big companies that don’t know their numbers and we see most small companies that have just lived by whatever, the amount of cash on the balance sheet, the cash coming in. And so that’s a big piece we spend a lot of time on. And the second part of the transformation is getting the right people in the right seats. I know everybody says it, but it’s absolutely key. We use a process called EOS. I know that’s kind of a term that maybe 10 years ago when I did my original training, nobody knew. Now it’s like every, it’s absolutely everywhere, which I give Gino Wickman and the EOS crew a lot of credit. But it works. I mean, I just can tell you that until we started using that, you would struggle with alignment, you’d struggle with vision. And I just feel like it’s a great common language. It’s a great way to figure out who’s rowing in the same direction. And I think it’s also a great tool to say, hey, this isn’t- this organization might not be for you in the sense of if you don’t want this growth, if you don’t want to be held accountable, if you don’t want to do this, maybe this isn’t the ideal place. And unfortunately, that happens periodically, but I think it also is best for everybody. So those really are the two biggest parts of the transformational piece. And I can go on for days, but fundamentally, if you take a little business and you have great numbers and you have a great team that’s aligned with a common vision, you’ve transformed the general business. I mean, in my humble opinion, and that’s not as easy to do as I’m making it sound, obviously. So that’s the key portion. The acceleration piece is most small companies that we love don’t have a salesforce. They’re the entrepreneur, or they’ve got a couple big customers. The entrepreneur is the main salesperson or maybe they have a couple other people. And we just find that until you can get your organic growth going, get your value proposition out there, the companies, it’s going to be stuck there. So, most small companies don’t really have the skillset to go hire a sales manager, train the people, kind of identify the market, really put together that sales infrastructure. And that’s something that we think is just extremely important. And we also couple with the acceleration, some sort of technology enablement, and sometimes it’s really simple. Some API we will build with a big customer that we can sell to other people. Sometimes it’s much bigger. We have a company that does payment processing for large OEMs around for- OEMs, car OEMs around car warranties. And I think our technology’s extremely good for processing the payments, the paperwork, the regulations, and so forth. And it’s weird, it can be all over the board, but we think technology is a huge piece of it. So now we’ve done the T and the A, which we’ve kind of transformed the company. We’ve got great financials. We’ve got an aligned team that’s got some vision. We can kind of hold people accountable. We’ve got the company growing organically again, and we’ve got a sales infrastructure with some predictive measures, and we’ve got some sort of technology plan. And for the technology people out there, we’re not talking about the next Google or whatever, but it’s something that we feel like is going to be value added to the customer, value added, make our operations much more efficient. So, we feel like it’s when you have those pieces in place that you can start doing small tuck-ins, add-ons, or bigger ones. And that’s where we can get more money to work, where we’ll start relatively small, but if you can get that going, we have a dedicated staff to help the portfolio find these add-ons. And they can be small. They can be big. They can be product lines. They can be joint ventures. And we just find that we’re in a spot where we can be very creative on that piece. And that’s a big part also to recruiting a lot of the people that we’re trying to recruit because they don’t want to come run a $5 million business forever. They want to be able to get those things done and add onto it. And it’s important to our investors too because they want to put more money behind the bigger deals or the better deals.

Alex Bridgeman: Yeah, I’d love to hear just within your- if you could walk through your background and then also kind give us moments that influence this process you’ve created, so moments where it was important to have financials or maybe didn’t have financials or technology, these other pieces, like EOS. Can you give us your journey up to this point including almost points of interest along the way where all of this kind of came from, all these ideas and this focus on building a method around it?

Brendan Anderson: Yeah. I’d love to give my background. I will say that I’m kind of a forum junkie. I’ve been a member of EO, the Entrepreneur’s Organization, for 20 years. I just joined Vistage. I do a lot of other splinter groups and I just find that those are- for entrepreneurs out there, my God, find a mastermind group or something to do that. But I will kind of go way, way back. Out of undergrad, I was a banker, a lender in Chicago, and I was lending to a lot of small businesses. And I often found that almost every time when I was meeting with the entrepreneur, I wanted to be on the other side of the table. And I got lucky, I had a wonderful group of- my boss at the bank was a brilliant entrepreneur, also hard to believe. And he had just a wonderful group of customers that he had cultivated through 25 years plus of banking experience. And I would complain about being a banker to my boss and to my customers. And I don’t suggest that for the average person, but that seemed to work for me. And they just said, “Well, go buy a business.” And I said, “Well, how does that work?” And they helped me find a business. They helped me finance the business. And Alex, I swear, I just thought that’s the way the world worked. I was in my twenties. I just thought that people just, oh wow, you want to buy a business? Let’s go find a business to buy. And I realized that was the ETA before there was such a thing or such a word or such a phrase. I was just lucky. And the first one wasn’t even a business. It was a bankrupt industrial park we took over. And we went out and I helped them put a bank charter together, raised a whopping 5.2 million bucks, opened up literally a community lending company out of a double wide trailer in Sugar Grove, Illinois. But I kind of got the entrepreneurial bug. I understood how that worked. And then I was living in Chicago, wanted to get back to Ohio – I grew up in Stark County, Ohio. And I literally put an ad in the newspaper basically saying do you want to buy out your boss? A partner then and still an investor today, a guy named Kent Marvin, replied to the ad. He was a director of manufacturing for a large diameter two bending company in Mentor, Ohio. And he and I bought that company, owned it for like 19 years, and learned a boatload. And you talk about best practices, I mean, we went through, it’s a very cyclical business, so we’re supplying people that made large equipment and moved lots of air and water and things. And so, we got to learn how to grow and build a second shift. So, we got to learn how to deal with the massive recessions. And so that’s probably the first point about the financial statements and being able to predict cash and predict the future or better predict the future and so forth. And that was one of my other things, as we were talking about earlier, not necessarily in a growth deal really wanting to partner with banks. I mean, I think they’re really good for consistent working capital and things like that, but it’s not good if you’re going to really think about growing. And so really kind of got my- I was an operator for the beginning part of my career, but just really started kind of dreaming of kind of that environment that I was part of in Chicago where people would back us to grow companies, and back people kind of untraditional people. I didn’t go to Stanford, I didn’t go to Harvard, and I didn’t go to Booth, but people still backed me. And so, we kind of dreamed of a model there and to do that. And so, we formed three traditional funds, relatively small funds. We backed 16 management teams. And I can tell you that there’s so many things we learned during that period of time. Fund one, we were heavily focused in Cleveland and Chicago and turned out to be a very good fund and had a pretty tight knit- started building a pretty tight knit community. And then fund two, we were go worldwide, and we started doing deals all over the country and didn’t have a very big team and really kind of that probably suffered. We didn’t do as well as we’d hoped. I think we fought back pretty hard. One of the goals in forming ScaleCo was really to build some more infrastructure to support the team, the teams much like the people in Chicago did for me many years ago. And so, another lesson learned was if you’re going to build a community, it’s probably easier to stay in a tighter geographical area. And so, we’re heavily focused drivable from Cleveland. I’m not sure investors really care where we invest, but we just know that we’re going to be more successful if we kind of keep it closer to home for many reasons. But really just five, six years ago, I mentioned I’m kind of a forum groupie, junkie, joined with Gino Wickman at EOS, he suggested I do Vistage, or sorry, do strategic coach and again, that was kind of transformative. They were like if you want to do what you’re doing, you’ve got to build the team, all the things that we say we do together, companies, we really just went back and kind of did five, six years ago, and it’s been wonderful. So fast forward to today, we’ve really just kind of- to me, it’s not about the companies, it’s about the people we back. And we use a term stolen from a Lencioni book, we’re trying to back happy people. And we define that as humble people, people that kind of look outward, outward mindset, hungry people, people that you don’t have to ask to do stuff, that are just always driving forward, people smart, people that are aware what’s going on, aware of what their actions are doing to other people. And then obviously, a passion for entrepreneurship. And I’m just a big believer that the more happy people you can find, the possibilities are endless. There’re so many other markers I probably could have gone with, Alex, on the TAC method, kind looking backwards, most of it like kind of looking backwards on deals. Obviously, we’ve gotten hurt before with not having good numbers where just it’s hard to know what to do when you don’t have good numbers. And there’s many deals, some of the ones that are probably the worst performing deals were deals where we didn’t until we lost control of those things. I would argue that team is always the most important. I mean, I know that there’s the jockey or the horse. And I would just say that it’s all about the team. And I would think that we’ve learned from the EOS process about getting it in, putting it in upfront, making sure that people understand that that’s going to be part of the process. And I just think it helps us kind of move much faster. And I think that that’s been- we’ve tried many different ways to do that. And one of the things that we did last year was we brought in our own just unbelievable resource to implement EOS, so we do it for the companies. It saves them some pretty good money, but it also helps us get a lot closer to what’s going on. And so that’s, again, many different times that we just weren’t able to get those teams aligned or that they would go out of alignment so fast, and we weren’t close enough to it. And then, organic growth. Alex, there’s sometimes that we would- There was a great entrepreneur with a wonderful vision, and we would say here’s an extra million dollars, go build a salesforce. We’d come back two years later, the million bucks is gone, and there’s no salesforce. And you’re like- that happened over, and maybe not quite that bad, but you sure didn’t get the value. You didn’t get that machine that was driving forward. And also, I think it’s unfair to just say to somebody that hasn’t done that before, just go build a salesforce. I mean, there’s more to it. You got to have the right CRM. You got to have the right message to the community. You’ve got to know who your customers are. And then you’ve got to- and some people just- And so we step into those shoes often, or at least we try to help that happen. And then I’ll just say, from a technology enablement thing, when we’re able to do that, it just transforms the value. I mean, it just absolutely- it’s what buyers are looking for. It’s what our customers are looking for. It makes selling easier. I’m not saying it’s easy to pull off. I’m just saying that when we’ve done it. And so, when we go into new deals or new operators, we often just say, what’s the technology? It’s a hook. It’s a what is it that makes us more efficient? What is it that makes the customer locked in? And it really helps a lot. And then, obviously, moving on to the consolidation piece or the acquisitions, we’ve made huge mistakes. We’ve had deals that have gone horribly. But when they work, even starting small, it really helps these small companies. You can buy a small company at a pretty fair multiple, and you can start kind of tacking on some other revenue that really gets you there a lot faster. And honestly, it’s interesting, our investors really do want more money in a deal. We’ve been able to, the last couple deals, get $15 million into them, and maybe the IRRs aren’t quite as good, but it does help move the needle for some of the larger investors and justifies a bigger fund. And I think, the larger investors really like to see that. I’ve been rambling here for a while, and I could literally tell you the 55,000 million mistakes, that’s the number that we’ve made.

Alex Bridgeman: That’s great. It sounds like the second fund was a big challenge. What were the most notable misses within that fund or just within that time period? I imagine there’s a ton of learning from fund one to fund two to fund three. I’d love to hear some of those learning experiences.

Brendan Anderson: This is a long list, Alex. I could go on for a long time. Fund one was geographically concentrated in Chicago and Cleveland. I mean, literally Chicago and Cleveland. And we could get to them. We knew them. And we had a small staff and so we had five companies that I think we knew a lot about them the whole time we owned them. In the middle of fund two, and this is you look the mirror and sometimes you just want to say I can’t believe we did this, but we weren’t buying companies across the country, but there was a period of time between funds two and the beginning of fund three, where we had companies in Seattle, Southern California, Denver, Dallas, Vegas, Mississippi, and we also had some around here too. But it’s very hard with a very small staff to take those things on. And we had a fire in Southern California, a troubled company, it’s all consuming. You’re not going spend time on the winners. Intuitively, you want to put out the fire. And so, I think we’ve revamped our staff. We’re much deeper now. We’re heavily focused on including the operators of the companies in this has been so valuable. I mean, it gives us a lot of leverage. I mean, so much leverage, it’s unbelievable. And keeping them closer helps a lot. I mean, I know we mentioned, we went to Top Golf yesterday and it’s just get people together. It’s just I think it helps a lot and get their friends together and you can help find- I said the key to this is the people you’re investing in. I believe this to be absolutely true. One is that there’s just way too much cash out there, and cash is a relative commodity. Again, I wish I had more, but fundamentally if you’ve got a great deal, you can find the investors to invest in it. Number two is I think the drivable from Cleveland, and most the United States has lots and lots of wonderful little businesses that have been around for many, many years. They’ve made money in the good times and the bad times, but they just haven’t grown. And so, I think there are lots of those businesses around that most private equity doesn’t really want to buy because they don’t have a lot of the thing we’ve talked about. They don’t have a team. They don’t have a salesforce. They are not growing. And I think that the valuable commodity is the is the happy person. That humble, hungry, people smart person that has a passion for entrepreneurship, that’s the valuable commodity. And we believe you can- that those people have diverse backgrounds and are a lot more places than most people look. And we’re going to do our best to find them and put them in the right spots. And hopefully it’s transformational wealth for them. And hopefully, one of the things that we- kind of the bigger vision for ScaleCo is really to get more people that have a similar background to mine. You start off operating a company, you help us perfect the process, you learn what we’re doing, and ultimately, we hope we’re creating another whole pool of future fund managers or investors. And that’s another way that I think we can attract the right talent is that yes, you go in and you make some wonderful wealth running a little business, but in the longer run, there’s a lot of people that should be able to invest that can and will be able to invest capital the way that we do it and probably way better than I can. I think as we’ve kind grown our staff the last four or five years, the talent that understands the search world that you guys are leading, it’s way better than what I’ve got going. I mean, just I chuckle because I think about if people backed me to buy a business and you look at kind of ex- kind of young banker, so forth, there’s just so much wonderful talent in Cleveland and Columbus and Detroit, and that’s where we’ve got to focus.

Alex Bridgeman: How do you find great, talented people who are ambitious and excited and want to go work for you? Do you put newspaper ads still out, or what’s the best way to reach local people in Cleveland and Chicago?

Brendan Anderson: And that’s a great question. Honestly, tapping into networks like this one has been big. It’s interesting, Alex, if you go back, and this is a little bit embarrassing, and I’ll give a shout out to a Bennetta Young consultant that’s been helping me think through some of the stuff for the last couple years, Benetta Young and Associates out of DC for anybody that wants look. She really forced me to kind of look at where our deal flow was coming from, and it was typically my network or somebody that we knew or something. And so, we made kind of a deliberate goal of hiring a pretty diverse, wonderful, talented group of people and, hopefully, continuing to try to gain the trust of what we’re trying to pull off here, but their networks are just fantastic. And so, we’re trying to get our message out through venues like this. But it really is kind of that network that kind of snowballs. And again, I just keep saying, as long as we live by our values and try to really gain the trust and inspire people, I think it’ll snowball. There’s an extremely talented operator that I met 15, 20 years ago, his name’s Donnie Bedney, and I actually met him at Shaker Heights Country Club. His grandfather ran the locker room, and Donnie, when he was in high school, was working there. And he’s just one of these extremely talented guys that has an incredible career, but he just stays in touch, stays in touch, stays in touch. And we found a little deal and I remember picking up the phone, and he was working at Press Ganey at the time.and wonderful career. And I sent him the information and said, “Is there any chance you want to take over a little company in Pittsburgh?” and he is like, “I’ll do it.” And like three months later, he is running a company in Pittsburgh. But again, I think his network has been extremely valuable. Then he introduces us to people. And we hired a young woman out of the venture capital world, and she’s got an incredible network. And so, I’m just going to drone on about the fact that it was the moment when I realized I had to look past my network to really find younger talented people.

Alex Bridgeman: When you started, we talked about that before and how, for a lot of the early years, you’ve been able to just reach out to someone in your network, and usually there’s someone there who’s awesome and you can have them come join you. But as you look to make the recruiting process more structured and professional and have a pipeline going, what does that look like? How do you think about building that pipeline and recruiting on a slightly larger scale?

Brendan Anderson: A couple, three months ago, a young, talented manager joined us. His name is Andrew Newsome, and he’s got incredible management experience. He’s been a fanatic kind search ETA person. He’s grew up in Washington and is living here, actually same hometown as I live now, in Shaker Heights. We’ve hired him to kind of get out there and meet people and tell our story and recruit. And as much, it’s amazing, Alex, I think back to the deals we did, and it was literally like we would get some information on a company and I would say, oh my God, I know somebody. And so, that deal could get done because we could put the pieces of the puzzle together. And so now, Andrew and the team here, we have a higher probability of kind of finding a match for a company that we think, okay, this meets the criteria. Now we got to find the person to do it. So, Andrew’s charged with that right now. And we’re all charged with it, but Andrew’s the primary person. And so, we’re still figuring that out, Alex, but Andrews’s very good.

Alex Bridgeman: So, once you have someone who has been a good fit for you and is doing an awesome job, how do you keep them? How do you make sure that they’re continually excited to stay with you and help continue building companies? And I’d love to hear a little bit about some large-scale things you do to keep people excited and maybe even some small tactical stuff, like there was a medium business I saw recently that has unlimited Amazon Kindle purchases as like a small benefit to working there. I would love to hear like all up and down the size range of benefits or engagement that you have for folks that you’re excited about and you want them to stay.

Brendan Anderson: Look, I think we’re at a spot now where we are continuing to learn and hopefully get better at retaining people. I would say the biggest promise we make to people when they come in is that we want to help them with their entrepreneurial journey. So, whether they want come in and eventually run a company, whether they want to help us develop a TAC method, work with the portfolio, and someday be maybe even a fund manager, our goal is to build ScaleCo community. And I’m just absolutely convinced that the more we include everybody, we can teach the TAC method, that it’ll help in that regard. Having said that, we’re big believers in sharing equity. I mean, that was something I couldn’t believe – when I was in my late twenties, people let me have a piece of a business, and that was life transforming. And so, that’s a big piece of what we’re doing here. We’re asking- we share some equity around the portfolio because we kind of charge all the operators to help each other grow. But at the end of the day, again, if I have somebody that wants to join the team and they come in and just absolutely kick some butt and help some companies grow, earn some equity, and they want to go off and do something else someday, I mean, I’m a big supporter. We had two younger guys that helped us for three years, were just unbelievable. They just believed in what we were doing. But they set the record straight very early in the game that they wanted to go buy their own business and ideally wanted to kind create a family business that they would own themselves. They were two high school buddies, Wiley Runnestrand and Mike Martof. And they went in the beginning of this year, they left and started a iPad, ITF, a disposition business, a business that we taught them. We have a business like that in Mississippi. And we’re fully supportive of it. We just think it’s a huge part of the ScaleCo community. And it’s wonderful for us that they’re in Youngstown, Ohio, or outside Youngstown, Ohio, and they mostly say great stuff about us, and we even have them still represent us in some of the things we’re doing in Youngstown. So, again, Alex, I don’t have a great answer other than we’re just going to be open, transparent, and hope everybody has the same entrepreneurial passion that we do.

Alex Bridgeman: So, when you say fund route and you want to give that option to people who are ambitious and want their own fund one day, what kind of fund does that look like? How does that path work?

Brendan Anderson: Yeah, I don’t know. We’re going to find out. But what I believe is this, is that what we can do is provide is obviously credibility that they know how to run a business. What we can do is provide investment track record. And what we can do is be the lead investor in a fund. And what I believe, and again, we’ll figure this out, is that the market is so big in our world that there’s kind of an unlimited number of these small companies and the capital is there. What I know is that our investors want us to put more money in these good deals. And so, you think about how to develop a diverse group of fund managers. If you can give them operating experience, if you can give them a track record, and if you can give them kind of the starting capital, I think that’s a pretty good recipe for at least a start. And then it’s up to them to see what they can do from there.

Alex Bridgeman: Yeah, absolutely. Are there any career advancement advantages to having multiple companies? Like if one person is doing really well in one company and they want to try something different eventually, and you have another company that they might be able to work for that you already own or have some interest in, do you see that happening? Is that a path or idea that folks take advantage of, or is that less common than you’ve seen?

Brendan Anderson: Obviously, I think it’s really important that if somebody’s running a business that that’s their main priority, that’s where they’re going to really be able to make that kind of transformational wealth. But absolutely. I mean, we’re desperate to have other- I mean, there’s just always needs in every one of these companies. And so, we’re absolutely convinced that- and again, kind of expanding that network, including them in these things is a big piece. And we have in the past, when companies run into trouble, we have used other resources. We’ve used managers from other companies to kind of step in and figure out a way to make it make sense.

Alex Bridgeman: We’ve talked a lot about having a long-term mindset and having LPs who are happy to be involved in businesses for a very long time. I’d be really interested to hear what are some ways that you’re able to run companies that you intend to hold for a long time that are different than if you had to turn around and sell them in three, four or five years? What does that allow you to do with a time horizon like that?

Brendan Anderson: Yeah, I think, honestly, I can’t imagine operating in a time horizon where you felt like you had to do something. And again, I’m just maybe not smart enough to figure that stuff out. But to me, it’s the more you take the long-term mindset, the more you invest for the future, the more you hire for the future, the easier it is to build a company, and quite frankly, the easier it is to- I think you’re driving value. And so, in a weird way, it’s like by doing those long-term mindset things, you’re increasing the possibilities of even selling in a shorter period of time. Now, once you get those things and you probably choose not to, but I think it’s, again, I think when you take the longer-term mindset, it just opens up so many more possibilities about what can happen in the company. And look, we’ve run funds where it kind of gets to an end, and it’s not much fun to be in a spot where you’ve got a really killer asset and a killer management team with lots of excitement and you’re selling to a mid-market fund that then turns it into a $50 million EBIDA business. I mean, again, you’re happy for the team, but some of our investors are like, well, wait a minute, why aren’t we participating in this, and why aren’t we facilitating this, and making it easier on the operators too?

Alex Bridgeman: Yeah. So how does that make the operator’s lives easier? Like what kind of freedom does someone at a ScaleCo company have that would be really hard to replicate elsewhere?

Brendan Anderson: I’ll tell you, I think the freedom that they have, and this may be, I’m not sure how different it is, but the vision of growth, the vision for growth for our companies largely comes from the team, and again, we’re going to really focus on the TAC method and make sure a lot of that blocking and tackling is getting done. But I think as it relates to where the growth goes and kind of the sorts of ideas, it’s really up to them. And I think it’s the freedom to chase that and kind of transform the business as they see fit. And as long as kind of we’re working in the TAC methodology and so forth, hopefully we unleashing their entrepreneurial spirit where kind of they have confidence and trust that as long as they’re doing what we all agreed they would do, that we will be there for the add on capital and so forth. And again, I never worked in an official private equity fund, so to me, I’m very sympathetic to the entrepreneur. I’m very sympathetic to the operators, and I know how hard it is to do what they’re doing. Maybe it’s a mentality. Kind of it’s just that we’re here to kind of make sure that those companies grow. And the great thing about our model is that if we can make sure in the deals where the entrepreneurs, the operators make a lot of money and kind of make that transformational wealth, everything else takes care of itself. Everything else works.

Alex Bridgeman: I would also love to hear a little bit more about within a time horizon like this, where you’re able to think very long term and you have operators who are excited to build your companies for a while, how do you view debt in a scenario like that? I imagine it’s helpful in some areas. Or as the company’s growing, there must be some way that debt becomes a factor or becomes an option on the table that’s maybe more or less interesting. What’s your view of debt within a long-term time horizon like this in companies that it sounds like generally are growing?

Brendan Anderson: I think that we learned through the downturn and through some other things that maybe if you’re buying a small company, you don’t use debt in the beginning. It’s 8 or 900,000 EBITDA, you get it up to $2 million, and then you start borrowing. But you start borrowing for expansion. You start borrowing for growth. You start borrowing for neat little add-in acquisitions and that sort of thing. And that’s really where we’re at. We don’t try to tend to push that too hard. And then once you get up into the over 5 million bucks, again, I think, obviously the lending environment gets really- gets easier. I mean, not easy. I would also say that in a small business, the terms of debt change. I mean, if you’re a really small business, the bankers want personal guarantees, and it changes the dynamic of debt. And then, once you get over a certain EBITDA, the guarantees start going away, they’ll actually start looking at the company, they’ll start looking at cash flow lending, and that changes the dynamic. And so, we really try to- we start using the banks when we can kind of get that next tier of borrowing ideally. I think I may have mentioned to you that we actually have lent. In almost all of the deals, in those beginning years, if there’s some working capital that needs to be done, our fund has actually lent the money. It’s just quite frankly easier to it in the beginning phases during that phase of are there personal guarantees and so forth. And that’s something that we make sure that our operators don’t have is personal guarantees. It’s just not- I mean, obviously, it’s hard to make growth decisions when your house is on the line. The only thing on debt, we just don’t push it. It’s just not something that we feel like we need to get our returns. When the companies get bigger and we hold them maybe for a longer term, we will kind of push that a little harder, but it’s just not something we feel like we need to push very hard to get the returns we need. I mean, if you go across our portfolio through the history, again, if you get a small company growing profitably, that cashflow pays for a lot of growth and that’s our favorite kind. But have we put maybe two turns on at times? We have, but that’s probably, again, that’s probably once it gets over 3 million of EBITDA and we feel like it’s extremely stable, and so forth. And it is almost, I mean, it’s always for growth. It’s for something that we think is going to accelerate the growth. And so, that’s not very sophisticated, but that’s my game plan is staying on not sophisticated.

Alex Bridgeman: Yeah, absolutely. What’s the top-of-mind idea for you right now that you’ve been thinking about over the last couple weeks or couple months that you’re really excited about or just spending a lot of time thinking about at ScaleCo?

Brendan Anderson: We touched on it earlier, it is just the snowballing effect of getting some of these entrepreneurs out there and building this network of people, kind of supportive operators. And the more I think about it, just the absolute more I’m convinced that it’s going work, and it’s a lot of fun. So, it really is that snowballing effect of what’s happening here. And I just think that everywhere I turn now, in talking to investors and talking to the entrepreneurs, talking to these small business owners, there’s a huge need for it. There’s so many of these small business owners that are maybe 60, 70 years old, and they’re really not sure what to do with their business, making a million dollars of EBITDA, and they want to make sure that their employees are taken care of and that the future of the business is taken care of and so forth. And so, the concept of finding the right operator, leader, manager to put in there is just, I don’t know, just it’s a lot of fun. I probably like it too much.

Alex Bridgeman: That’s awesome. Well, that’s a good place to focus a lot of energy on for sure. Definitely some higher returns of people. Moving into closing questions. What college class would you teach if it could be about any subject you wanted?

Brendan Anderson: It’s funny, it’s an easy one. I always say that it’s some sort of personal finance, how money works class. I just find it amazing you get to a spot in life where people have no idea about debt. They have no idea about how compounding interest works. They have no idea how taxes work. They have no idea how fees work. And again, I’m sure, they’re smart people. If they sat there and thought about it, it would make sense. But I just think that I can’t believe you get all the way through graduate school, and nobody sat down and tried to explain to you how all that works. So, that’s probably the easy one for me.

Alex Bridgeman: Yeah, I love that one too. I did a speech in high school, I was on the speech and debate team. We did a speech on personal finance classes in high school, which still not really sure if that would work or not. But if you were to run a personal finance course, what concepts and ideas would you want to focus the most on that you think are most commonly misunderstood?

Brendan Anderson: I think it’s the impact of spending, the impact that if you probably- the compounding interest, if you actually could put money aside and let it grow, how wonderful that is, and the impact of spending decisions, the impact of kind of not having money work for you as opposed to you working for your money. It’s a little of the rich dad, poor dad mentality. It’s kind of like- and so, it’s also, again, being somebody that loves entrepreneurship, the concept of finding something that you really love to do and people pay you for, and then saving. It’s capital gains. It’s like you own a little business, how the wealth generates, and you don’t have to pay taxes on it every year until you sell it, contrary to having a job. And so, I’m not sure that’s in the first week in the personal finance class, but it’s definitely something towards the end.

Alex Bridgeman: Yeah, certainly. The Berkshire Hathaway meeting was this past weekend, and someone asked Buffet and Munger what they should be doing in an inflationary environment where inflation’s really high and it’s really uncertain. And Buffet’s response was invest in yourself and develop your skills and find a passion and something that you’re excited about and good at, and just invest in that skill because that skill can’t be inflated away. And I thought that was really topical and really well said.

Brendan Anderson: And I’ve heard him say that before, and it’s a killer response, right? I mean, it’s just, it’s absolutely on. And I think it’s not to, again, this is self-promotion, but I just don’t think most people believe that they can go buy a small business. Most people don’t- I mean, again, I didn’t; somebody showed me how to do it. And so, I think most people think that you’ve got to have some crazy, wonderful idea and you’ve got to go out and start the business and do that sort of thing. And just I bent tubes for 19 years and learned a lot about truck exhaust and heavy equipment and moving air and moving water and chillers and so forth. So, it’s just amazing what people do on this planet to make a pretty compelling living.

Alex Bridgeman: Yeah, it is pretty amazing. What’s a strongly held belief you’ve changed your mind on?

Brendan Anderson: Again, it’s an easy one. I would’ve bet the farm 20 years ago, if you introduced best practices to an existing founder, an existing entrepreneur, that 95% of them would’ve ran to that, embraced it, and just set the world on fire. And I think Gino Wickman uses the phrase “letting go of the vine” and I’m just- through history, we haven’t been very successful convincing the founders of these smaller businesses that some of the things we’re doing really help you transform the business. It’s not universal, but I would’ve bet the farm that 95% of them would’ve fully embraced it and ran towards it. And what we have found through time is that it really does take that outside manager, transformational person, team to transform the business. And it kills me because I would’ve bet a lot of money on the other side, but I was wrong so far.

Alex Bridgeman: That’s a good one. What’s the best business you’ve ever seen?

Brendan Anderson: So, obviously there’s a long list of wonderful businesses that everybody knows about, but I’m a little biased towards the teams that we have backed. So, you’re probably not surprised by that. But there’s an entrepreneur that we, again, I found through an ad I put in the paper, and it was again, do you want to buy out your boss? And he approached me about doing a startup. It was a real estate transactional services business that he wanted to do. He worked for a big title insurance company. And I said, “Well, we don’t do startups, but is there some company around that we could buy and you could grab your team and we could put him in it.” And he said, “Yeah, I do actually know one; there’s one down in North Carolina called the Accurate Group.” And Paul Doman and his team have absolutely just killed it. He’s a software enabled real estate service. They do back-office services for banks, business that those guys have- the whole team, I think they went from 30 employees to over 400, from 5 million bucks to well over a hundred million bucks, just really creative, sticky business, just a neat, neat business. And you talk about a happy person, a humble, hungry, people smart, passion for entrepreneurship, and this is the type of people that you call and you want to nominate them for some big award, they are like no, I don’t- Yeah, don’t mention my name to anybody. You’re like, all right, that’s cool, that works. That’s my favorite. And just that’s one of the older ones. So I have a lot of other favorites in the portfolio, but that’s one that’s really proven the wonderful test of time and it’s a deal we did in ’09, and it has been fun to watch it go. And I have high expectations for all the other ones.

Alex Bridgeman: Certainly, definitely high expectations. Thank you so much for sharing a little bit of your time. It’s been really fun. I always appreciate getting to chat with folks who’ve been exposed to a lot of businesses and been involved for a really long time in their communities. So, it’s always really fun to chat with folks like yourself. So thanks for sharing a little bit of your time.

Brendan Anderson: Thank you so much. And I appreciate your sharing of your knowledge about the ETA and search world because it’s really a neat, dynamic open community. So, thank you so much.