Chenmark Series 3: Recruiting CEOs and Future Planning

Ravix Group — Ravix Group is the leading outsourced accounting, fractional CFO, advisory & orderly wind down, and HR consulting firm in Silicon Valley. Whether you are a startup, a mid-sized business, are ready to go public, or are a nonprofit, when it comes to finance, accounting and HR, Ravix will prepare you for the journey ahead. To learn more, please visit their website at https://ravixgroup.com/

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].

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(04:51) Earning the right to take risks

(11:10) Accelerating acquisitions and faster processes

(13:04) Expanding capacity beyond headcount growth

(17:25) Reinvestment in current companies vs. new platforms

(22:08) Not having a full-time person searching for deals

(26:13) Chenmark’s GVP Associate’s Program

(36:31) Hiring CEOs and Operators

(1:04:16) How to make Chenmark be successful for another 20 years

(1:07:17) How to carry on a Newsletter long-term

Alex Bridgeman: Thanks for coming on the podcast for a third part of the episode series here. It’s been a lot of fun. I think for today, it’d be fun to dive into what Chenmark is going to do to grow and scale further and then a little bit of some of the people and talent programs that you’ve had, which are pretty interesting and unique in many ways. But I think there’s one concept I’d love to start with, which is something you’ve coined earlier about earning the right to take risk. And I’d love to hear how as you’re- given that you’re, what, seven, eight years into Chenmark now, how do you feel like your perspective on earning the right to take risk has changed? Do you feel like you’ve earned the right to take some risk? What’s been your recent perspective on that idea?

Trish Higgins:  Well, I’ll tell just the origin of that, where we got that saying. We actually worked together before I went to business school sort of randomly at a macro hedge fund. And I learned a lot from my boss, we both did, and he had a lot of experience in trading and managing portfolios and stuff like that in a lot of different contexts. And his philosophy on trading was that you start off the years, the year trying to just make singles. And that once you build up a decent return for the year, so say you’re up 10% on the year, then that’s when you can start making bigger and bigger bets because you sort of, in his words, you’ve earned the right to take some risk. So you really don’t want to take risk when you’re down, and you don’t want to take risk when you’re at zero because that’s when you can really lose everything. But if you’ve built up a cushion, you take some risk, sometimes that can work really well and your 10% year can go to a 40% year. But if you take some risks, and you’re already up 10 or 15, or 20%, then you kind of are back down to zero or a little below zero and you’re not dead, you just kind of have to build back up from there. And so that’s something that we both internalized in terms of thinking about risk taking. And so when we started Chenmark, there’s a tendency for people to look at a deal and only see the upside or put a lot of debt on it or think there’s going to be tremendous growth and no growth in operating expenses, all those sorts of things. And the way we applied take the- earn the right to take risk at Chenmark was at the beginning of Chenmark, we’re really just trying to hit singles, we’re trying to be conservative with our underwriting, not use a ton of debt, assume basically no growth, and so that over time, we can hit a bunch of singles, we can build up sort of a base on which we can start to take some more risks. So that’s sort of the background of that concept and how we’ve applied sort of some of our learnings in the hedge fund space to thinking about building a portfolio of small businesses, which I think has served us very well so far. If anything, we’ve probably been too conservative in some cases, and we’ve missed out on opportunities where maybe we should have paid a little more for something, or now that interest rates have gone up, I feel like we should have taken out more debt and locked it in at lower rates. But I think so far, that mentality has been good for setting a strong foundation for Chenmark. Do you want to talk about kind of how we’re thinking about-?

James Higgins: Yeah, I mean, I think depending on sort of how flexible you want to be with your thinking, there’s a number of different ways to apply the general concept to individual company operations or sort of the overall like Chenmark ecosystem. At the individual company level, I think the way that kind of manifests for us is just a very strong emphasis on getting things right and really understanding deeply sort of like the single transaction level of any given business. So before you’re really shooting for aggressive growth of any sort, we want to make sure that we have a very, very good understanding of how the core business works and if there’s any improvement that needs to be made, that we’re making that before we’re pursuing any type of sort of future growth agenda. To be honest, with that frame, I think that will be a feature of how we look to operate businesses indefinitely. So there’s less of a earning the right to behave in a different way and more just sort of a baseline for how we want to think about the sequencing of getting to know a new business that we acquire and how we want to operate that going forward. Sort of generalizing to more of the macro, it’s interesting, I think the benefit of sort of the holding company structure and owning a number of companies now is that over time, assuming you run the companies well, there’s sort of a natural sort of deleveraging effect. And you sort of benefit from the strength of the overall enterprise. And so what that means is that on an individual transaction basis, you can maybe be a bit more aggressive from a capital structure perspective for new acquisitions while leaving the sort of summary metrics from a holistic perspective actually quite conservative. So I would say that as we’ve grown and as we’ve had more companies perform well, that sort of earned us the right, so to speak, to be a bit more aggressive in our structure, especially in our structuring, less so in our valuation, but more in our structuring for new acquisitions. But if you were to look at it holistically, it doesn’t really look like taking bigger swings than we’ve ever taken before. We’re kind of managing to a fairly consistent, pretty consistent sort of global leverage level over time.

Alex Bridgeman: I was listening to Will Thorndyke’s recent episode on Invest like the Best, and one thing he talked about was a lot of serial acquisition entrepreneurs will acquire slowly in their early years, and then kind of as you alluded to, they’ll slowly accelerate as they get more comfortable and learn their playbooks and how to have a smooth acquisition process. Do you feel like with the idea of having more control or flexibility with your structuring, do you think that would also lead to accelerated acquisitions and other processes might become quicker or change somewhat if you’re more flexible now with structuring?

James Higgins: I think that’s- I mean, I’ll answer quickly, and Trish, you can add in. But I do think that is sort of a natural feature of just even just the basic compounding math where if your goal is to make sure you are reinvesting the capital that you generate internally as it’s being produced so you’re not having a large drag associated with uninvested cash, there is a natural acceleration of the deal process. And so then really, the challenge is to think about, alright, what processes need to be scaled, refined, improved, etc., to make sure that we are able to execute on a higher frequency sort of deal or sort of reinvestment cadence. And so, I think we oftentimes talk about it in deal terms, but that also can mean reinvestment in the existing companies. But I think the point is, as you have more companies generating more capital for reinvestment, having places to put that and making sure that sequencing is relatively efficient is a key part of it. And so making sure all the different pieces of that, from sourcing to execution, making sure all of that is calibrated to the pace at which you want to operate now, but also is improving so that you can ramp that as your capital ramps is kind of a key thing that we’re pretty focused on.

Alex Bridgeman: You mentioned that compounding just naturally leads to an acceleration of acquisitions. What does that look like from a team composition side? Do you need to- are there ways to expand capacity with beyond just headcount growth that you’ve started to refine and learn how to do?

James Higgins: Yeah, so I’d say three big buckets. So you have kind of what I call like organic reinvestment opportunities in the existing businesses. So, are there ways to deploy capital sort of outside of a transaction that could represent interesting reinvestment opportunities and sort of high return on capital options. Second would be tuck ins for existing businesses. So, are there ways to expand the franchise of something that we already own. And then third would be kind of new, quote unquote, platform deals where we’re getting involved in a new industry or potentially getting involved in the same industry but in a totally different geography where it makes sense to establish a wholly separate subsidiary. So, of those three, the first two are lower frequency, but have less of a burden on the sort of talent and sort of the team kind of growth dynamics. So if you can find an opportunity to reinvest in one of your existing companies organically, you might need additional bandwidth sort of below the CEO level to manage whatever that project might be. But you’re not sort of having to go through the process of setting up like a new leader. On the tuck in side, same kind of concept. And so from a team scaling perspective, really what we’re mindful of is how much of the capital we have to redeploy is being redeployed into wholly new operating businesses that require like an entirely new management team because those are what really consume a lot of like operational talent, essentially.

Trish Higgins: And then, just in terms of how do we think about managing growth of Chenmark from like an oversight, overhead perspective, we don’t really like having a lot of overhead at our sort of, quote unquote, HQ in Portland, Maine. We’ve already moved offices three times. And since I somehow am the person that’s responsible for that, I would prefer for us to never move offices again. We like the idea of every business that is in the Chenmark network could be cut off from Chenmark and exist perfectly fine on its own. And so, all of the work is done by the businesses. We don’t have anything centralized in terms of billing procedures or anything like that. Anytime we’ve tried to centralize things, we have tended to realize, sometimes quickly, sometimes slowly, that that is a mistake and push it back to the companies to handle. So in terms of supporting our growth at HQ, we have some- one person in HR, one person in marketing, a couple people in technology to support the businesses. And then from a search perspective, we don’t have a search team or a deal team. James, Palmer, and I are the deal team. But we also want people that are coming in for our CEO and training program called the GVP program, they essentially do search when they are in the office. And so that does mean that we have probably some fits and starts to our search process and that it’s potentially not yielding as much as it would if we had a dedicated team of people who were doing that all the time. But for us, there’s a lot of reasons why we’ve set it up that way, which we can go into. But we have found that we don’t need to be finding 10 businesses or 20 businesses a year to buy. And so we’ve been able to balance sort of the number of people who are coming in the CEO program sort of helps balance out the number of companies that we’re looking for. So we don’t really foresee that changing too much, regardless of how much Chenmark grows.

Alex Bridgeman: Do you have a rule of thumb or sense for what percentage of reinvestment you want to be at your current companies versus in new platforms, and if it’s lower in one area or the other, then it’s maybe a key or a clue that something is amiss, that something should be- there should be reinvestment opportunities being identified in one place or the other?

James Higgins: So kind of two things to highlight there. First, very, very consistently, when they come up, the opportunities to redeploy capital either into like organic expansion opportunities or into tuck in type sort of inorganic growth opportunities, that our existing businesses represent much higher returns than, much higher return opportunities than new platforms. So, all else equal, if it could be 100% in our existing businesses, that would be great. I think the reality is those opportunities are not unlimited and often quite small, the opportunity set is quite small. So making sure that we are engaging in the search process and having sort of a robust opportunity set associated with sort of other acquisition opportunities is sort of an important thing to make sure our reinvestment opportunity set on the whole is compelling. So, yeah, that’s kind of the guidance I’d give there. The other piece that’s really important to highlight is that not every company has reinvestment opportunities. And that’s really not a problem for us. So I think we’ve spoken a lot before on this sort of bait shop concept where some companies that have big scale opportunities and an ability to consume large amounts of capital over a long period of time for whatever reason, you have other companies that have a little bit of a captive, some sort of a dominant market presence for whatever reason it may be, and as a result, those companies can generate very high earnings without really an opportunity to redeploy that capital. And so those end up being generally very high cash generating businesses for us, but without a lot of reinvestment needs. And so those end up being great sort of funding mechanisms for the other businesses that we own that tend to be larger consumers of capital. So for us, we’re not really- it’s not a pressure thing where we’re saying like, hey, why aren’t you uncovering more reinvestment opportunities? It’s more sort of evaluating what the dynamics of that particular business happen to be and kind of calibrating how we think about reinvestment accordingly.

Alex Bridgeman: On the search side, you mentioned that given it’s a role the three of you share, there can be some fits and starts. Does that mean that your investing in new platforms is more often opportunistic and less of we have themes in these different industries, and we’re going to have specific strategies towards each of them? Or perhaps I’m missing something there, too.

Trish Higgins: I would say we’re fairly often opportunistic. I mean, we do look for opportunities in fields that we already have a presence, either an industry presence or a geographic presence. But we look at all sorts of things. And by fits and starts, I mean mostly that, if you talk to someone who’s just out doing a search, all they’re doing all day searching, and they’re sending out like a million emails a day, and they have like 17 interns, and like it’s a whole thing. By fits and starts, I just mean more that realistically we might have a couple people in the office in our GVP program who are doing some outreach or connecting with owners, and we’ve never really been in the camp of spamming businesses. But we would have people working on deal sourcing, but then they take an opportunity in one of our businesses, which is ultimately where we want them to be. And then maybe there’s only then one person in the office that’s really focusing on that. And then, maybe we don’t have two other people starting until a couple months later. So it just kind of ebbs and flows in terms of how many people are actually sitting in the seat focusing on that work at any given time. So sometimes, it can feel like we’ve got a lot of people focusing on it, and then they all leave to work in the businesses, and then for a couple of months, nobody’s working on it, and then it starts up again. So, it’s just a nature of- We don’t really want to have a full time deal sourcing staff on payroll. So that’s just sort of the way things are for us at the moment.

Alex Bridgeman: So what’s the reason behind that? I can imagine at least one person full time focused on deal sourcing could be helpful in many ways. But what’s been your experience with that role and not having someone full time?

Trish Higgins: Well, in our experience, we haven’t had any issues finding deals doing it the way we’ve been doing it. And so our issue has been much more on finding the right people to run the businesses for the long term. And so, we have found that prioritizing that is more important than having people full time deal sourcing. If we had a problem finding deals, we would adjust our approach. But so far for the number of deals we’re looking for our setup at this moment, it hasn’t been a pain point. So we haven’t had a need to change it. Now, I will say that looking forward, that may need to change as, again, things scale and things accelerate and we have more capital to deploy. We may have people that are more full time dedicated to search, but at the moment, it hasn’t been a problem we’ve needed to solve.

James Higgins: I think, to expand on that, I think it kind of comes back to the pace question that we talked about at the beginning. So thus far, sort of having the natural governor on search activity associated with people moving on to other roles in the business, like that actually has created an interesting kind of governor on sourcing, which has actually made our deal opportunity set actually stay roughly in line with our capital and talent, which has been somewhat helpful. I think as things accelerate, we will need to make sure that the deal sourcing is appropriately calibrated with the other two legs of the stool. And so it probably will make sense at some point to be permanently staffing some people in that sourcing role. I think the other piece to highlight is just kind of a hierarchy of importance thing for us internally. So to Trish’s point, in general, for whatever reason, we’ve been able to find interesting opportunities to deploy capital fairly consistently over our history. But I think for us, the much more important factor has been, and probably will always continue to be, the performance of our businesses and their ability to generate free cash. So when we hire somebody new into our leadership development program, about 50% or maybe even more of someone’s time in that role is spent focusing on search and the deal process. And then you kind of graduate into more and more operationally focused roles until you sort of ultimately sit in the CEO seat. Our bias basically from day one has been to, as soon as we identify talented people who can do the job and are a great cultural fit, our goal is to get those folks into operational seats where they can be adding tangible value to our companies and contributing to the cash flow generation process as quickly as possible. And so I think we’re okay with a little bit less high frequency sourcing activities. So we’re okay with a few fewer outreach emails going out if that means we have talented people in seats where they are actually helping our companies generate positive outcomes. So that’s a tradeoff we’re willing to live with. Growth may create stress on that that we’ll have to adjust to, but I think that’s how we’ve been- that’s how kind of philosophically we’ve set things up.

Alex Bridgeman: Yeah, that makes a lot of sense. The GVP program is pretty interesting and one that we’ve alluded to in earlier episodes in the series, too. I would love to just dive into it directly. It sounds like it’s been becoming formalized over time. But generally, the idea is to get young people into your different companies and then find the right operating roles for them. What kinds of problems early on with the program or that style of finding a young up and comer and bringing them in, what kind of problems were you looking to solve and that this has begun solving for you?

Trish Higgins: I’ll kick that off. A couple of years ago, we were leading, looking for new companies to buy. And we realized we primarily work with these smaller businesses that have owner operators who are looking to retire. And there were a number of deals that were great, but we couldn’t execute them because we had nobody to take over. And we learned the hard way that just putting an ad up on whatever, Indeed or Zip Recruiter for a CEO of a small business doesn’t really work very well. Especially because you need, for us, we need people who are a really good culture fit or very long term oriented and kind of really fit with a specific set of Chenmark values, that it’s very hard to just screen for that in a couple of conversations in a CEO for hire setting. And so we realized that for us to be able to grow, and I give James full credit for this, thinking about how do you create the systems that we need to support our growth, we needed to sort of take a step back and be able to recruit people to come work for us, learn our culture, learn our values, how we kind of like to do things, work their way up in the business, and then those are the people that can become CEOs for us. So, the challenge really was we had companies that we thought would be good opportunities, but we had no one to run them. And so we needed to take a step back and figure out how do you solve that problem in an ongoing way, as opposed to just an ad hoc kind of, oh, maybe this person could run it, maybe not. So, it was a little haphazard for a little while there. But then we started saying, okay, this is formally the program, and I have to give the people who joined up for the program, the first, second, and third person, there was no program. And so they really helped us create it and the experience, and so far, we’ve been very pleased with it, and it has generated a lot of momentum, and it has been really good for us.

James Higgins: I think that’s a key, well, a couple of things. I think sort of going back to- really kind of thinking through a lot of this in sort of 2017, ’18, ’19, kind of that timeframe, and sort of to combine things, one, really some pretty challenging experiences with what I’ll call sort of like hired gun CEOs. And a lot of that is a byproduct of the time pressure of the deal process itself, particularly in a small business context. So you work really hard to get a company under LOI. It’s very difficult to recruit a CEO pre LOI because, as anyone who’s involved in small business M&A knows, there’s a lot of uncertainty, there’s a lot of uncertainty post LOI, but there’s certainly a bunch pre LOI as well. So, pretty weird to recruit for a CEO pre LOI. And post LOI, you’re trying to get the thing closed ideally in 90 days or less. So that creates a pretty condensed window to post job ad, run through whatever recruiting process you want to run through, establish cultural fit, and sort of evaluate all the relevant skill sets.

Trish Higgins: And it’s hard to walk away from a deal, if you got a person in the pipeline and deal that’s about to close, you can explain away a lot of things because you just want to get the deal done in that moment. And it’s hard to be objective and realize there’s no point in owning a business if you don’t have a good person to run it. Like full stop. It’s hard to really feel that in the moment.

James Higgins: So yeah, some what we will call learning- experience is what you get when you don’t get what you want. So a lot of experience picked up kind of trying that not one but a couple of times, like several times, all unsuccessfully. So that’s kind of the downside piece. And then the upside piece is, honestly, like to basically cover our mistakes, Palmer originally and then Trish as well jumped into operating roles at our companies and knocked the cover off the ball. They’ve both been one A and one B for like most successful CEOs. And so now you’re starting to say, wait a minute, neither of them had CEO experience. They fit the profile of the general sort of GVP avatar that we’re looking for. But there’s a limited supply of Chenmark partners to keep the overall ship running and also to operate our businesses. So we’re kind of thinking, alright, how can we do more of this while avoiding a lot of the big mistakes that we’ve made? And so that’s really what kind of led us to think about, alright, how should- let’s take a step back, how can we systematize this in a way that’s scalable and repeatable and all those different things? So that’s what we did. And I think kind of the other thing I’ll say, and this is not unique to the GVP program, but a lot of our, quote unquote, progress, it looks organized and thoughtful sort of after the fact as we’ve figured it all out in the same way that a lot of like holding company structures look organized and thoughtful once you actually have five companies and all these different systems set up. But I think for us, it wasn’t like we went away and thought deep thoughts in some room and then came out of this like retreat with a fully formed view of how this should work. We tried to hire one person. And at that point, we weren’t even calling it the GVP program, we were just hiring a guy, like a finance and operations, whatever, vice president or something. So, a lot of it was saying, hey, we know we need help here. Let’s get someone on board and iterate from there. And I think that’s representative of a lot of how we’ve grown over time is sort of figuring out where our pain points are, taking kind of minimum viable product type steps in those directions, and kind of iterating and improving from there. And then generally, over a period of months to years, what evolves is something that looks a little bit more like a formal, thoughtful program. But I think if we were being totally honest, it doesn’t necessarily start that way.

Alex Bridgeman: Yeah, I can imagine. When you think of the top of funnel for the program as it stands today, plus all the experiments you’ve done with you mentioned Indeed maybe not being the best source, but where do you find are good areas to search for those GVP type folks that you’re looking for?

Trish Higgins: So I mean, business schools is a very natural place because people are looking for jobs. And especially schools where there’s a search fund/ETA presence in those schools where people are vaguely aware of the concept, they might have taken a class. A lot of the classes at business school have a ton of interest from students because I think it’s tapping into a lot of students’ desires to do something a little different or just have a different experience essentially. But then, I believe the conversion ratios, if you have, whatever, 90 kids in the class, you might have one or two actually do a search. So specifically doing a traditional search is a very unique path. And it speaks to some people that say that’s exactly what I want to do. There are other people who are generally interested in the space that they don’t want to do an exact search. And those are generally the people that our story kind of and our program resonates the most with. So certainly business schools and just having postings on the job boards, being present at career fairs, being on panels, or doing chats or coffee chats or whatever, just having a presence to make sure people know that we exist as an opportunity is sort of where we are at the moment there. And then there’s a ton of people out there who are sort of mid career, maybe they could have gone to business school but they didn’t, they chose to stay in their jobs, and they’re just looking to do something a little different.

James Higgins: Or they went to business school, learned about search, decided to do something more corporate, but always had it in the back of their head, hey, some interest.

Trish Higgins: And so those are people who reach out to us from all different types of backgrounds and geographies, honestly, looking to be part of the program. And there’s no sort of, for us, there’s no one perfect background or anything. There’s we’ve had the privilege of meeting with a lot of small business owners, and they all have different backgrounds and skill sets and personalities. And we have all sorts of different businesses that require different types of skills. We have some businesses that require more of a sales focus in the leadership role, other ones that are more sort of data analytics kind of focused, and kind of everywhere in between. And so we, I think, have a pretty wide filter at the top, sort of wide funnel at the top for people coming in from all sorts of different backgrounds and life experiences and everything because we’re ultimately trying to decide do we think this person could be a good long term CEO of a small business that can take about a million different shapes and sizes. And so try to keep that very broad, business schools, a lot of word of mouth, a lot of people hearing about us on podcasts, a lot of people sometimes get our newsletter and get to know us that way. But for us, it’s just about having as many touch points out there as we possibly can so that people just know that we are an option for them if that’s something they want to learn more about.

Alex Bridgeman: So once you get people in that top of funnel and you get to a point where you’re now interviewing a candidate directly, what sorts of questions and characteristics are you looking for, given that they’re not going to be put in a CEO job immediately, and even if they’re not fit for a great CEO role, they could still be an operator in some other role at a company? Given that there’s not like a defined job that you’re comparing against, what sorts of questions and filters are you using?

Trish Higgins: I guess I’m technically on the hiring squad, and you’re not, so I’ll answer the question. So we have a group of people in the company from all different levels of seniority and focuses in the hiring squad, called that because I have a strong vendetta against committees. We’re just a group of people who get together frequently to talk about hiring decisions, not a committee. And so we- Sorry, I lost my train of thought. What was the question?

James Higgins: So I mean, first and most importantly, we recruit against core values very definitively. So basically, everyone on the hiring squad is evaluating candidates sort of against the core values first and foremost. So that’s kind of part one. I would say there’s two other, really kind of three other big pieces that we’re paying a lot of attention to. One is what I call sort of like speed of conceptual understanding. So if you look at a business or you’re evaluating a certain situation, are you able to not just understand what’s going on in that particular moment, but can you distill that to first principles or like the underlying mental model, so that you can take whatever the core concept is and apply it to an unrelated situation that comes up in the future? So, as we’ve talked about, we’re generalists, we invest in lots of different companies, lots of different industries. And in a lot of cases, we’re getting involved in new things that we have no exposure to previously. So it’s really, really important that up and down the organization, we are cultivating an ability to get up the learning curve very quickly in new spaces. So that’s kind of part one. So, if we kind of summarize that and saying like, hey, how well can- how well do you understand something? Or how quickly can you get up to speed in a new area? Sort of second part of that is, that’s great, you understand it really well. Now we need to figure out, are you good at explaining that to a third party who may not have the same educational background, life experience, sort of management capability, etc. So can you then distill what you know in a way that allows you to explain it ideally simply to your peers, the team that’s reporting to you, an external third party, so on and so forth. So that sort of clarity- we call that clarity of expression. And then the third piece would be like a pretty strong focus on what I call, call it grit, call it resilience, call it mental toughness, but sort of the bottom line is small business is messy, things happen, both positive and negative. But especially for the negative stuff, we need to be identifying people who can handle stress and sort of deal with that and keep moving forward. So those are the things that I’d highlight.

Trish Higgins: And I’d say, by the time people get to an actual interview, they’ve completed a case study that sort of just sets a baseline for analytical skill set. So being able to think about, take incomplete data and form an opinion is important in the CEO role. But that’s something that sort of has been screened for before they’re coming in for an in person interview.

Alex Bridgeman: Gotcha. And then once they’re in the program, they’ve been accepted, and they’re now in an operating role somewhere or with Chenmark directly, what kind of ongoing screening and learning and observations are you doing with that person?

James Higgins: So just to be clear, everyone comes through sort of the Portland office as a first step. The timing varies quite a bit, but everyone comes through Portland first and then on to an operating role at one of our existing companies before taking on a CEO role either at an existing company or more often at new acquisitions. In terms of ongoing kind of evaluation or whatnot, there’s a variety of different things, but I would say you’re not sort of giving a formal test, but you’re making sure there’s a diversity of kind of work product that that person is coming across, especially in their early experience at Chenmark. So, as we mentioned, all the people at the first stage of the program, at the GVP stage, are very involved in search. So there tends to be a number of opportunities to evaluate a potential acquisition, both quantitatively and qualitatively. So those are opportunities to learn and provide feedback on what’s good, what’s bad, what needs to be refined, etc. There are also opportunities to get sort of exposure to our existing companies on all sorts of different projects. So those are opportunities both to evaluate the individual person, but also for those people to start building sort of relationships with other people throughout the organization. What I’d say is there’s not like- our daughters’ just started taking jujitsu, so we’re sort of top of mind of like, oh, gymnastics or something. So you have like, you train and train and train, and there’s like an evaluation opportunity. And either you earn the little stripe on your belt or not. That’s very much like not the drill at Chenmark. What we tend to find is, if we’ve done everything well on the front end of the recruiting stage, to be honest, it’s like quite obvious very, very quickly that someone has the goods to be a very effective contributor to the team. So there’s not a lot of like prescriptive evaluation that we’re doing.

Trish Higgins: I mean, we’re just spending time with them. We’re together, we’re interacting with them constantly in small and big ways. It could be something, there’s the actual content, but then there’s just some of the softer skills about does the person put their dishes in the dishwasher, or do they help their colleague out, if they’re going to get a coffee, are they asking anybody if they want one, just like the little things, like is this person a good teammate? You see, we have a very small office, we’re all together, we see things.

Alex Bridgeman: Are there any types of characteristics or behaviors you’re looking for to determine if this person would be a good CEO versus some other non CEO role? Is there any one thing, or maybe not one thing but like a handful of things that make for a good CEO, but if you’re missing these things, it’s going to be less likely to be successful?

Trish Higgins: If we don’t think somebody will ultimately become a CEO of a Chenmark business, we will not hire them into the program. That said, we do understand that given people’s backgrounds, some people might take longer to become a CEO because maybe they haven’t had a certain type of professional experience, and they need to have that to round out their skill set. And so, this person might take a couple of years or whatever before they’re CEO, but we think ultimately, they will get there, then that’s fine. But if we’re like, hey, this person is a good culture fit, but they’re probably not going to- they’re maybe a CFO or COO, we would pass on that person. So sort of by definition, if you’re in the program, we think that you have the ability to become a CEO. In terms of characteristics, it is a very, very qualitative thing. And again, it comes back to sort of having interacted with a lot of very effective successful leaders and small business CEOs ourselves, the ability to- a lot of people that apply to the program, if we have a bias, there tends to be a lot of people who would be very, very good CFOs, very good analytical skills. Some of those people and the ones who will be successful in our program have the ability to take analytical skills but then also translate them, as James was talking about, to a group of people and use that analytical skill set to lead people. If we think that person can’t make that transition, can’t ultimately lead people, then that would be something that wouldn’t work. Because you have to be able- you can be introverted, I’m quite introverted myself, you can be very introverted and quiet but an effective leader. And we have a number of people on our team who are quiet leaders, and I love a quiet leader. So it’s not necessarily that you have to come in and be some big, boisterous extroverted person to lead a group of people. I really don’t think that’s the case. But there is a feeling that usually when we’re in our hiring meetings, a number of people will either say like, yeah, I think this person can ultimately lead a group of people, or just be like, I really don’t- I can’t see people following this person, I just can’t see it. And again, very subjective, but comes from having experience with a lot of different leaders in different spaces.

James Higgins: I’d say, I mean, all the things that we talked about as screening tools for the GVP program, so the conceptual understanding, the speed of- the clarity of communication, the resilience, and all the core value stuff, like all of that, I mean, the reason we screen for that at the GVP level is because we evaluate CEOs in the same way. So, that all is very consistent across the entire organization. I think the other thing I’d add is, just to summarize, like Trish captured this really, really well in one of the recent weekly thoughts articles on sort of being a first time CEO and sort of how to conduct oneself. But I would say there’s like- I’ll sort of summarize it by saying it’s kind of a bias for action. So, we tend to- the recruiting process is quite effective at making sure people have the requisite intellectual capability to sort of do the work. And we’re not acquiring extraordinarily complicated businesses. So, pretty much everyone we hire, everyone we interview, for the most part, is very, very smart. So really, the question is less about aptitude and more about I’ll call it kind of like bias for action. So, are you going to show up at the office every day, are you’re going to show up ideally early, you’re going to stay late. Are you willing to be kind of in the foxhole with your team in a really authentic way, and not because you feel like you have to, but because you’re engaged by that. And so that’s a little bit tough to sort of put like a kind of quantitative rubric around, but to Trish’s point, it’s very qualitative, but there is kind of this element of, do you want to actually do the work and do you understand what you’re getting yourself into, that’s really kind of an important piece to make sure that we’re identifying.

Trish Higgins: We have found that most people who apply to our program and do well in the interview process have some type of personal exposure to small business, and that’s why this opportunity speaks to them. So it’s usually either they worked in a smaller business themselves, but very often they had a family member who was- they grew up in a small business, they had an uncle who was a small business owner, a friend’s dad or mom, or whatever. But those are the people who tend to understand sort of innately what we actually do. Because sometimes people can come in, and their appeal- they find Chenmark appealing because it’s a Holdco, or they think they can do deals, or like all this sort of stuff. And to be a small business CEO is a lifestyle, and it is a lifestyle that appeals to some people, and it does not appeal to others. And that’s where we find the people who have a personal experience or have educated themselves on what it is like to actually be in a small business tend to be the ones who do the best in the process. Not always, but usually.

Alex Bridgeman: What kind of pivots or refinements have you made with the program over the years?

Trish Higgins: Well, the first program was really just, I think I can use his name, Edward. And he just joined us because we had an operating role and then kind of bounced around. So it went from just sort of Edward to, hey, this seems like it’s working, we should have- we should call this something so that we can get other people in. So I think the first- the biggest stage was when it went from Edward to a program. And that was the biggest refinement. And then James was really the mastermind of the sort of three stages and how that would work. But since you put that together, it hasn’t really changed from its structure. It has certainly, when it was first put together, we had more probably like initial thoughts on how long each stage would take. And we’ve had to be adaptable to that as people have come in. And some people have been very talented. And we realized we need to get them out of here and into an operating role as quickly as we can, as well as we have opportunities come up, and we need people to get into these roles as quickly as possible. So definitely, things have moved a lot faster, people moved through the program a lot faster than we originally thought. I think that some of the- one thing we certainly have had to contend with was people in that second stage of the program, they’re working in a business, there’s a tendency or there’s a risk when people are in that stage of it that they sort of view it just as a pitstop to something bigger and better and don’t necessarily treat that role with as much- Or they’re sort of constantly saying, oh, well, I have this like Chenmark thing to do, I have to be on a Chenmark call, or sort of trying to not fully embrace that second stage as much. That’s happened a little bit. And sometimes the CEOs have been a little bit like, okay, well, is this person actually reporting to me, or are they reporting to James, or where do the lines sort of, the clarity of reporting patterns and stuff like that fall? So that’s certainly something we’ve had to be much more clear about in terms of people come into the program, when you are in a business, the CEO is now your boss, and you can’t be not doing things in the operating company because you have to do some like phantom special fancy thing at Chenmark. And so that certainly has been something that we’ve really had to focus on and iterate. And then the final thing I think is that when a person takes a CEO role, communicating that that is at least a five year commitment. It’s not sort of, oh, I’ll do this CEO thing for a year, I’ll get bored, I’ll move on to the next thing, whatever. I think we do want people to move- to have opportunities within Chenmark. But we have found that it is disruptive to the companies if people are sort of there as a CEO and then say like I want to move, and it’s not the best thing for the companies and that’s what we have to prioritize. So now we’re being much clearer with our expectations for when you get into that CEO role, what the commitment is, which is something honestly we just didn’t even think of doing when the program first started. And so that’s certainly a lesson learned. But there are all sorts of things at the margin that we’ve had to refine and iterate.

James Higgins: I’d say like, it’s not so much, like the core structure’s basically unchanged. So that part of it’s been the same. I’d say there’s some things that have sort of some unintended benefits that have popped up that I’ll talk about in one second. And then there’s some things that are known friction points that we’ve had to spend a lot of time managing. So on the unattended benefits piece, this was started from day one as a mechanism for training future CEOs. But one of the huge benefits is that you end up getting just a massive talent boost like all throughout the organization as people are plugged into all of our operating businesses. And so I think what’s the surprising element or the, yeah, surprising element has been how quickly people can sort of jump into a new seat at one of our operating businesses and add value in a real tangible way. And that has created, especially as you get GVPs who move through the program and take on CEO roles, that has- basically like people are creating new operational roles that will absorb people from the program at that second stage because that cohort represents just a very- like a very rich talent pool. So I would say the benefits that we’ve experienced for the run rate operations of our existing businesses has been a huge sort of unintended benefit of the program and the way it’s designed. So that, I would say, not necessarily a pivot, but kind of like a surprising sort of outcome. In terms of friction points, the probably three that I’ll highlight, Trish brought up a great one, so sort of unclear reporting lines. So if someone’s at the first stage, the GVP stage, and say they’re working on a deal, but then there’s an opportunity at one of the operating companies to step into an operating role, so it’s very clearly an opportunity to step up to sort of make progress toward being a CEO. So oftentimes, people will do that. But they have a lot of time invested and, frankly, interest in the outcome of that particular transaction. And so that sort of creates a system where you may be pulled in a few different directions. And so that’s just one example. There’s lots of different manifestations of that dynamic, partly just as a result of the fact that we’re a small team. And so, whenever someone moves up, there’s not immediately someone to backfill the role that’s being vacated. So often, just sort of the frictions associated with being a small growing team mean that people are wearing multiple hats. And that is something that we increasingly are trying to sort of think through in an organized way to make sure there’s clarity for everybody involved. But there have been some bumps there. Second piece is managing life logistics. So there are huge cultural benefits in our view of having people work out of the Portland office to start and then move to an operating business to get sort of boots on the ground experience and then into a CEO role. It depends a little bit on which companies are involved in that transition period. But often it can mean multiple moves, which can be quite difficult for someone who has a spouse that has a thriving career in his or her own right and/or a young family with school or daycare or whatever other commitments might be present. So, we’ve found that that’s a friction point. And so, we try to do our best to help manage that, but it is a pain point that we have to be mindful of and help each individual person work through. And the final thing I’ll say is, for a lot of companies, the idea of a very high level person stepping into a senior leadership role with a sort of- even if it is- at the second stage, often people are staying for a matter of months or maybe even at the outside a couple of years. But regardless, that’s a pretty tight window in small business world where often you can get people in roles for 7, 8, 10, 15 years. And so in a lot of situations, especially in businesses that we acquire, you’ll find a lot of the senior team has been the senior team for decades. And so the idea of someone stepping into the org chart, adding value, and sort of leaving the- a lot of folks in the office have read this book Legacy about the New Zealand All Blacks, and one of their big mantras is leaving the jersey better than you found it. The idea is that, hey, you’re in the seat for a period of time, you need to leave the seat better than you found it, whether that’s a sales role or finance role or whatever it is. But just that dynamic of, hey, this is inherently transitory is new for a lot of people culturally in the business. And so making sure that they’re not feeling- that they’re feeling that the person who’s in that seat is engaged, cares about outcomes for them both in the short term but especially in the medium or long term. And we’re being mindful of that kind of cultural dynamic is also something that we’ve had to kind of focus on. So nothing that requires a pivot per se, but those are just areas that require extra attention and thoughtfulness as we’re continuing to scale.

Alex Bridgeman: Yeah, I remember, Trish, you came down for SMBash last year in Orlando, and perhaps I’m misremembering, but I remember you saying something along the lines of you found that in any new acquisition, you need to replace the founder in almost every case. Has the GVP program given you more confidence to make those kinds of changes now that you have kind of a base program that’s finding potential new CEOs for you now?

Trish Higgins: Yeah, well, I mean, now, we really only work with companies where the founder is 66+looking to retire. So I mean, we have to find a replacement. The CEO, by definition, does not want to be there anymore, that the transition has- the transaction has happened. So this program has allowed us to come in and present offers for companies that we wouldn’t have been able to previously.

Alex Bridgeman: I want to also quickly touch on the associate program. So the GVP program is the more established and well known program, but what’s the goal of the Associate Program? Is something similar or a little bit different, too?

Trish Higgins: Yeah, so I mean, it started with Austin, same thing, started with one person. And we had put up some job posts for summer interns at local colleges, and at one local college, we only had one application, and that was Austin. And so, he got the job. But he worked for us as a summer intern. But then it was during COVID, and he was doing good work, and he didn’t have anywhere to go. So he came to our office and did some classes online and did some work for us. And sort of we got to know him. And he did a great job. And so, we offered him a job when he graduated. And he was our official first generalist associate, even though we didn’t call it that at the time. But he worked for us doing analytical work. And then an opportunity came up for him to take over sort of a bookkeeper/CFO role at one of our businesses. And it certainly is a big learning curve for him. But we thought he certainly has the capability to do that. So he took on that role about a year, yeah, about a year ago and has been doing that and has been absolutely crushing it. It’s awesome to see. And so, he essentially is on his way to developing the skill set where if things kind of keep progressing, there’s no reason he couldn’t be the CEO of one of our businesses. It’s just going to take him longer to get there because he has less experience. And so given our experience with him, we said, there’s an- as well as we would get people who were applying to the GVP program who weren’t quite there; they’re a little more junior. And so we said let’s create a parallel program for people who might need a little more seasoning, which effectively just means more time in operating roles in the companies to get some more experience. But eventually our goal is for them to also sort of become CEOs. There’s no reason they can’t. And we’ve gotten some wonderful people who’ve joined the team who are either right out of undergrad or have one or two years of experience, a couple of years of experience post college and have kind of come across us in one way or another. But I think we all find that program very exciting. And we have a number of very talented people in that program.

James Higgins: Yeah, I think, going back to the recruiting part of the conversation, you’ll notice that a lot of the things we’re filtering for are pretty qualitative. So we’re trying to identify sort of character and behavior traits more than we’re trying to evaluate how many functions somebody knows in Excel. And so, you can find people who fit that kind of qualitative mold at the undergraduate level or at the graduate level. And so, the only difference really is how much sort of technical skill or technical training that individual sort of needs to go through before they’re 100% ready to step into a leadership role. So, the folks who have come or going through our Generalist Associate Program are very compatible culturally with the whole rest of the team and in a lot of ways would be, unless you were like really digging into a financial model, you wouldn’t necessarily be able to tell the difference. So I think the biggest sort of difference between someone who’s a GVP and someone who’s a GA is just the time it’s likely going to take before they’re ready to step into a CEO role. And I think, to be honest, something we haven’t really talked about but it’s worth mentioning is we talk a lot about us evaluating the individual, but I think a huge part of this is also making sure that that individual is excited and really confident about their ability to execute once they’re in the seat. So one of the things that we often find talking to aspiring searchers or folks who are more at the undergraduate level are saying, hey, I’m 22, or I’m just out of business school, and you want me to be a small company- you want me to be the CEO of this business, I don’t know if I’m ready for that. So as much as there’s sort of an evaluation piece on our part, it’s also about making sure that person can sort of day t minus one can sort of step into that role and be like, yeah, you know what, I’m excited about this, and I’m ready to knock the cover off the ball. So sometimes that can take a little bit longer for somebody a little bit younger.

Alex Bridgeman: What do you feel needs to continue for, continue or change for Chenmark to continue to be successful for the next 10, 20 years or so?

Trish Higgins: Well, I think a lot of stuff that we’ve done we just need to keep doing it and stay focused on during the next deal well like day in and day out and not having any complacency. But I think that also, for Chenmark to be successful over the next 10 or 20 years, it means deemphasizing the importance of James, Palmer, and I. We are very much focused on similarly like we want all of our operating companies, you can cut them off, and they will be just fine. We are very focused on we want to be involved with Chenmark, but we don’t want Chenmark to be reliant on us. And we don’t want to be sort of the center of the culture. We want the GVPs and the companies and everything to be the center of the culture. So the more we can do to bring other people into the decision making process to sort of push things, responsibilities as well as like cultural norms throughout the organization and deemphasize it as the- like this is not the James, Trish, and Palmer show, this is Chenmark. And ideally, over the next 10 or 20 years, we become less important, and the company- we create systems that allow the company to carry on whether we’re involved or not.

James Higgins: Couldn’t agree more. It’s really about, and this has been a key part of our culture from the jump, but so like team first in everything that we do, our ability to- our individual ability to directly impact that is just naturally going to go down over time as we have a bigger and bigger team. And so, you don’t have as much ability to curate culture. And so you need to make sure that we are  democratizing that essentially and sort of bringing other people, developing other leaders in the organization and almost like asking people to sort of contribute to the culture forming process in a way that- and I think, to some extent, this is happening where hopefully we’re creating an environment or an ecosystem where people are genuinely excited to be a part of and are interested in sort of defending as a group. So I think the more we can make it less about what one of the three of us, Palmer, Trish, or I, do we want this person, not want that person, is this okay, is that okay, the more we can have almost kind of the group be deciding that, the better we’re going to be for the long term as we continue to scale.

Alex Bridgeman: I think the Weekly Thoughts newsletter is approaching 400 issues now. I think it’s getting fairly close. I love all the Taylor Swift and Patriots references, although those are less frequent now it seems. What gives you energy in continuing the newsletter, and what gets you excited to write it each week?

Trish Higgins: Well, I’d say I do most of the writing these days. I enjoy it. I mean, if I didn’t like it and it was a slog, we would have ended it years ago. But I enjoy it. I mean, usually, for me, it’s Wednesday afternoon, and I just block off some time and get it done. Sometimes it’s annoying, and I’m like where am I going to find the time to write this, or it’s an additional stressor, but I enjoy the process of thinking about the topic, of writing it and putting it out. It has become a lot easier over the years to actually do it. So the more you do it, the easier it is. For me, it’s also a forcing function to consume content. So if you’re sort of in your own world, if I’m running a tour business, do I really need to be listening to whatever podcast or reading Bloomberg or whatever, so it helps, for me, make me read and consume content broadly. And I also think that it’s encouraging because every week we get people emailing in saying that they shared this note with their team, or this had a big impact on them, or whatever. So it is cool to see, hey, something that we put together, essentially kind of for fun, has an impact on people, is neat and rewarding in that way. And so, it has been a really good way to maintain a network that’s larger than just what we do at Chenmark, a good way to keep in touch with people and have various sort of touch points. If there’s a topic that I think one person might like, you can forward it, and I think our email gets forwarded a lot. And so, at this point, it’s enjoyable. So just keep doing it as long as we are having fun with it.

Alex Bridgeman: Yeah, I know a lot of- There’s a holding company friend of mine who forwards your C Corp reasoning newsletter as a reason for why they chose a C Corp. So it definitely gets forwarded. I also like the length. It’s clearly written by a CEO for a CEO. Like it’s not this multiple paragraph or multiple page newsletter that takes me 15 minutes to read. It’s something I can kind of read- Yeah, it’s something I can read fairly quickly.

Trish Higgins: Nobody else reads those things. The problem was the long stuff is I always flag it to consume later when I have more time. And then I don’t have more time later. So, then it just never gets read, until finally, like four months later, I’m like I guess I won’t read this one.

Alex Bridgeman: Yeah, I don’t have a rule of thumb yet for like how many days a tab needs to stay open on my browser before it gets closed, but it’s getting shorter now.

Trish Higgins: I’m looking at James’s computer right now, and there is a number of tabs open. A long time.

Alex Bridgeman: I always open your newsletter in the browser, so it becomes one of those tabs, but I very quickly get to delete it because I read it quickly. You’ve set that expectation that I can read it within three to four minutes and get the idea and then go to the next thing and it’s great. Huge fan. Please don’t change that format.

Trish Higgins: There is no way for us writing longer pieces.

Alex Bridgeman: Excellent. I appreciate that. Thank you both for sharing a little bit more time. This was a really fun series, and I always enjoy getting to chat with you all. So thank you for sharing a little bit more.

Trish Higgins: Absolutely.