My guest on this episode is Michael Arrieta. Michael is the founder of Garden City and has raised $51 million in permanent capital to acquire family-owned businesses across the country. The raise was completed in March 2020, and already they have three wholly-owned companies and minority stakes in two.
Michael came highly recommended by Brent Beshore, and I can see why from our conversations. It’s clear that Michael is a student of business and has mental models of hundreds of companies floating around in his head. He also has a remarkable sense of empathy and mission at Garden City, a mission which we discussed throughout the episode extensively.
During our conversation, we talk about raising without a private equity background, how to involve investors in your portfolio companies as mentors, how they recruit, the technology and systems they implement at their companies, and all things Chick-fil-A, a business Michael has studied extensively. Please enjoy my episode with Michael.
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.
(4:42) – Michael’s background and career
(7:27) – What was it about VC that caused you to hesitate to pursue your career in that world?
(8:59) What memories stick out from your time as a chief of staff that have helped you in your current role?
(12:00) – What’s the thesis behind Garden City?
(13:39) – How did you go about fundraising?
(17:12) – What started to become possible once you saw an increase in capital interest and were there any tradeoffs you had to make in order to secure more funding?
(22:14) – Where are you seeing your deal flow come from?
(24:55) – What are some of the companies that you own?
(28:52) – How do you approach implementing technology in your acquisitions?
(31:42) – How do you find great people to bring on to your companies?
(34:11) – How much advice do you get from your investor base?
(36:25) – What do you view as your role within Garden City?
(39:21) – How do you build relationships with leaders in the companies you acquire?
(41:26) – What companies inspire you?
(47:46) – What college class would you teach if it could be about anything?
(48:25) – What strongly held belief have you changed your mind on?
(49:41) – What’s the best business you’ve ever seen?
Alex Bridgeman: Thanks, Michael, for coming on the podcast. I’m glad Brent was able to introduce us, and it has been fun to chat with you a little bit about all things investing and Chick-fil-A and a whole bunch of other stuff. First, let’s start with your background. It’s not the typical kind of private equity up until raising a fund background. Can you kind of walk us through your journey up to this point?
Michael Arrieta: Yeah, absolutely. I started my career selling Cutco knives when I was 17 years old. I did that from 17 until graduating college, so probably when I was 21, 22, something of that sort. So, Cutco paid my way through school to graduate debt free and help my family. From there, I went to Silicon Valley. So, I joined a startup. We sold that startup to Dell. I got to do an interesting position that now is much more well-known across the country called Chief of Staff, so kind of being the right-hand guy to the executive there. So, I was the Chief of Staff to our CEO of the Dell Cloud Group, and that just gave me a lot of cool exposure to see what it’s like running a company. And so, after that, I became Chief of Staff to the Chairman and CEO at a startup called DocuSign. And so, I was his Chief of Staff, a gentleman named Keith Krach, and I was his Chief of Staff for about three years. And then after that, I was the Global Vice President and General Manager for our enterprise sales business at DocuSign. And so, I did that for a couple of years. And then when we went public, I started doing some investing basically in technology companies. And as I was doing investing, I really started asking myself if money were no object and I could do anything in the world, what would I do? And it wasn’t VC investing that really made me get excited. It was actually investing in very small non-sexy operating businesses that were cashflow positive, but I didn’t think you could make any money that way. And then some people started telling me about this world called the lower middle market, that there’s just hundreds and hundreds of thousands of small family-owned companies across America that are highly profitable, and they’ll make millions of dollars per year, and that you could actually buy these businesses for 3, 4, 5, 6 times net cash flow, which is very different for me, Alex, coming from Silicon Valley where everything trades at 10 or 20 times top line revenue of next year, a future run rate. So, I was like, hold on, not 10 or 20 bottom, 10 or 20 top next year. So, the investment thesis looked really promising to me. And so, I said, well, you know what, I want to buy these small business and radically, radically, radically pursue the enrichment of working class people and create companies or really create cultures in these companies where people could thrive and prosper and flourish. So that’s where I launched Garden City in 2020.
Alex Bridgeman: Yeah. What was it about the venture world that made you kind of hesitate a little bit? Like this wasn’t necessarily where you wanted to spend the majority of your career, and were there just certain things that just didn’t match their personality, or was there just something else that was going on?
Michael Arrieta: I think both. I think one is that I’ve always been a meat and potatoes type of guy, that one plus one always equals two with me. I’ve never considered myself that smart. I tried to take the GMAT once, and I didn’t even get through five questions, it was so difficult for me. And so ever since I was little, I’ve always walked into a restaurant or a carwash or dry cleaner, and things have just made sense to me. Like, wow, they should do better marketing, or their pricing could be better, or for operations, it would be better if they did X, Y, and Z. It’s always very simple things around sales, pricing, go to market, operations that have made a lot more sense to me than trying to figure out how to scale something like Lyft or TripActions or Uber or whatever new software snowflake. Those kind of non-tangibles for me have always been a little bit more difficult for me to relate with than traditional kind of more people-oriented businesses. So that’s where I came from. My family has always worked in kind of those service light companies that you could feel, see, and touch those local operating businesses. So, I think it’s just what I was raised with.
Alex Bridgeman: Yeah, certainly. It’s also funny that you’ve had two Chief of Staff roles. I just took a Chief of Staff role with HousingWire, which I’m pretty excited about. But one thing I’d love to hear about is the- those two roles, like what are some memories that stick out in your mind of hands-on experience you got that has helped you with some of the companies that you’re running today?
Michael Arrieta: Absolutely, a lot of lessons. One is that it’s all about building a high-performance team. It doesn’t matter how good you think you are as an individual leader, it’s all about building a high-performance team. Two, people support what they help create. Number three is to have a very clear vision and mission and strategy. Both of my CEOs had very clear charters as to what we were trying to do and when. And number four, I would say, is to truly realize that there is always wealth in getting constant advice and counsel and direction. So, both of my CEOs had to go through all of those. They were constantly looking at bringing the best people on board. They would never content with the team that we had. So, at DocuSign, every time that we hit a new level of growth or revenue, it was what would be the better CFO? Now, we wouldn’t get rid of those CFOs. We would look for different positions that would better suit them. But who would be a better Head of Sales, who would be a better CRO, CFO, COO, Head of Product, so always building a high-performance team. People support what they help create. Every big decision that my CEO ever had to make, rather than making it, even though he was almost positive it’s the decision that he was going to make, he always included other people into the discussion so that once they made it, they were all supportive of that decision. If he would have just made the decision without having them be included into it, they would have never supported it, and it would’ve never taken hold. Having a very clear vision and mission and strategy, we always, always, always talked about the vision at hand; at DocuSign – we will be known as the global leader of electronic signature, that we will be known as the global leader, that we had to win the enterprise market, that we had to go into the international markets, that we had to win the real estate space. So, everybody from the janitor on up knew our vision, knew our mission, knew our values. And the other constant was that our CEOs have always looked for mentors and advisors. My CEO was six years old, but his mentor was John Chambers from Cisco. They met once a month, I think it was, for a donut and diet Coke. And my CEO, even though he was a serial entrepreneur himself, he would always come with his list of questions to ask John Chambers. So, there was a lot of key lessons learned from being the Chief of Staff role that applied to us at Garden City every day.
Alex Bridgeman: Yeah, and so talk about coming up with Garden City and kind of the fundraising behind that and pitching and just designing that model. What was that early time like at Garden City?
Michael Arrieta: Yeah. So, Garden City really came to me from realizing I know nothing about private equity, I don’t really want to know anything about private equity, I love small businesses, and there’s hundreds of thousands of small business owners that don’t have a succession plan because their children don’t want to run the business, and they don’t have a liquidity plan, they don’t know where to go to sell their business. And so, I just said this can’t be that rocket science. I mean, why don’t we just create a holding company, like Berkshire Hathaway, where we keep things simple, straightforward, and easy for these business owners that need a succession plan and need a liquidity plan. So, we’ll have committed capital. We’ll find businesses that we like. We’ll give them a fair and generous offer. We’ll keep the due diligence process at 60 days. And once we close, instead of replacing the management team, we’ll come alongside the management team to help with operations in whatever way they see fit. However, we can help them, we want to help them there. We have a playbook that we think works, and they may only need a couple of things from that playbook, but we have a playbook to offer them. And so, in terms of launching it, we just said let’s create a buy and forever hold holding company, little to no debt, keep diligence simple, treat business owners the way that we want to be treated. So, we didn’t really- it wasn’t rocket science. It wasn’t rocket science. It was just building something that we ourselves would want if we were in their shoes.
Alex Bridgeman: How’d you go about fundraising without the- I mean, of course, you’ve been in companies before. You’ve seen a lot of very quickly growing companies through some of your venture experience. How did you translate all of those experiences into that story and narrative to raise for Garden City?
Michael Arrieta: So, to be honest with you, I never tried to raise a fund. I believed that my wife and I were just going to use our own capital to buy smaller businesses. And if I needed a little bit more equity, I could call one or two people that maybe knew that industry that I was connected to, and they would have an appetite to co-invest alongside my wife and I. But what happened was I started telling one of my personal mentors, the CEO of Intel, Pat Gelsinger, I was telling him about, hey, Pat, I’m going to leave technology after almost a decade and I’m going to buy businesses like pool building and janitorial and whatnot. And I’m going to try to make them the most caring and the most innovative in the pool industry or the janitorial industry or the whatever industry. And Pat was like, “I love it. If you do anything with high intention, you could be the best in that. If you’re the best in that, you could drive a lot of impact and make great profit. So, I want to be an investor.” And Pat Gelsinger was my first committed LP, I guess you call it. We never even knew what that word meant. So, I called my attorney and I was like, “Hey, I know that we are building an Evergreen holdco. We have somebody that wants to own part of it. I don’t even know how that works.” He goes, “Oh, well, you’re getting an investor. He’s committing X dollars. And as you acquire companies, you’ll call down that capital.” And so, then I told another mentor and another mentor and another mentor, and they just kept saying, “I love this space. I love lower middle market. I love that you can buy businesses for three to six times and help grow them through culture and technology and sales. I love that you’re trying to impact the lives of these employees. I think it could work really well.” So, it just happened by happenstance. And about six months into fundraising, we raised $50 million, and that’s kind of how it happened. So, I guess the biggest lesson learned, this hit me last week or two weeks ago, is we never really talked about the what we did in fundraising, as much as the why we’re doing what we are doing. I didn’t really know about the what. I didn’t know how to answer the what in terms of how are you going to get deal flow? How are you going to diligence these companies? How are you going to operate? We’d never done it. But what we knew is we were highly convicted about our why. It’s the whole Simon Sinek why thing. So on every investor call, I would say why we’re trying to build the best holding company in the world where all workers thrive, why the small to mid-sized business owners so desperately need a good option for succession and liquidity, why we could help them with culture, and why we can help them with tech, and why we can help them with increasing their sales, and why having debt is not good, and why having these value-add mission aligned investors could be so helpful. So, it was all about the why, and coming alongside us on this journey of what could be possible. Imagine being part of this company where we are the mini Berkshire Hathaway creating the most caring, the most innovative companies in the world that are all small, midsize back bone of America. And people wanted to be a part of that. So it was never about the what, it was always about the why in fundraising.
Alex Bridgeman: Yeah, that’s a great way to tell a story. One question that I have been thinking a little bit about, too, just through our conversations was: As folks expressed interest in giving you capital, of course, there’s natural trade-offs you have to make there. Like your plan initially was to use your own capital, maybe some co-investment at most. Once folks started expressing interest in investing in you though, two questions, like what started to become possible with more capital in your mind when you started thinking about it? And at the same time, what trade-offs did you have to make for those additional benefits? And how did you weigh the two?
Michael Arrieta: So, in terms of having more capital to deploy and creating more opportunity, one is when you are looking to buy businesses, if you have plenty of capital to deploy right away, it reduces a lot of risk and fear from the seller. Many buyers out there, especially independent sponsors or search funders that are operating a lot in this small space with companies with EBITDA of 2 million to 7 million, they don’t have committed capital. So, a very big competitive advantage that we have is, say, we have $50 million of permanent equity ready to deploy. So, we do not have to raise it. There’s zero, zero risk of us not being able to come up with the capital, which is arguably the biggest reason why deals do not close – the buyer cannot come up with the capital. So that was very advantageous for us. The second thing that it provided is that it provides us to be able to do multiple deals. Rather than if it was my capital, I would probably want to do one deal every year or one deal every two years, a fear of deploying capital. When you have 50 plus million dollars, you could probably make five to seven platform acquisitions in this lower middle market. Number three is the ability to raise debt, and it doesn’t have to be personally guaranteed when you have a holding company that has $50 million of capital subscribed to it. Another reason for having capital that it provides is you have a management fee. So, we collect a management fee on our $50 million, which provides us the opportunity to have a full-time team. So, we have a full-time team that looks for deals, diligences deals, deal team, operations, post-close, so could never have happened unless we had capital. Investment bankers, although we do not actively try to partner with investment bankers because we don’t participate with deals that go to auctions, letting investment bankers know we have committed capital, that we are a real player, that is just pretty rare in this lower space of private equity, so that allows us to stand out from the rest. So, a lot of benefits. As my dear friend and advisor Brent Beshore, who connected us, told me, he does not see one downside of having investors so long as you do not jeopardize what your company was intended to do. And so, on the second part of your question of what tradeoffs do you have to make, the answer is absolutely zero. We have never made a tradeoff to get an investor, nor will we. Nor will we. With all of our investors, we shared what we’re doing. We felt what was put on our heart to build is the finest holding company in the world where all workers thrive, that we are building a collective of family, of the most caring companies in the world, and that we will buy these companies, grow them and hold them indefinitely. And we said do you want to be a part of that? Here is what we’ve come up with terms, with our structure, with our operations, with our investment committee, with diligence, and if you want to be a part of this, please do. If there’s anything you want to change, we’re always open to advice and counsel, but no one has the vote.
Alex Bridgeman: Gotcha. So, you just laid out very strict or you drew lines to make sure that you attracted the right investor then; that part makes sense. One interesting thing about compounding, especially when using outside capital is that you can do more deals now. So instead of doing just one deal a year, now that you can do five or six, I would imagine that, if you look over like a 10 or 15 year time horizon, the compounding effect of being able to do deals more often and get your name out there more often and validate the fact that you are a legitimate buyer more often, that has to have compounding benefits long into the future that you wouldn’t have had if you were only able to do one a year. Like, if you just did one a year and you had your one in March, right now, and then you had another great one come up in June and you tell them you can’t do anymore, like that has to hurt your reputation at least a little bit. Don’t you think?
Michael Arrieta: Yeah, for sure. Absolutely. I think activity yields activity. And so, when you have a lot of activity and you’re buying companies, naturally deal flow comes from that; naturally, your name’s in the industry, your name’s in the media, it’s in the space, you are hiring people, so forth. So, we constantly say activity yields activity.
Alex Bridgeman: Yeah, I like that point. So, in practice, where has this deal flow come from? Where has this activity originated?
Michael Arrieta: Yeah. So that’s one of the other great things about having a cohort of mission aligned and value-add investors. It’s that we really see Garden City as a collective of 50 families investing as one. And so, this is not just Garden City full time team members, employees looking for companies. We’re a collective of 50 families. So, we constantly are communicating to all of our investors saying here’s an industry that we’re looking at. Please let me know if you know anyone, please let me know if you’re going to any conferences, if you know anyone that we should meet with, if there’s any marketing opportunities. So, I would say probably 50 plus percent of our deal flow comes from our 50 investors. I would say more than half of our deal flow comes from our investors always referring us deals constantly, every day just about from their networks. So, they take pride in knowing that they’re part owners of a holding company that cares about employees and people to thrive. I would say the other 50% comes from a plethora of things like speaking to our service providers, to their companies. So, I speak to our CPAs. I speak to our attorney, to our law firms. I speak to our quality of earnings firms. I speak to our diligence firms. Anyone that does business with Garden City, we ask them, can we come and share what we do with all of your legal associates? Can we come and share what we do with all your CPA associates? If it’s my wealth advisor, I asked to speak to their company. So, we’re constantly trying to get the message out as to there’s a different way of private equity – to buy and forever hold, to not mess up the culture where it’s actually could live for decades to come, where it doesn’t have to have all debt on the business. So, we’re constantly looking for opportunities there. I’m on LinkedIn a lot. So, I’m constantly trying to share things on LinkedIn, which a lot of our deal flow comes from people messaging me. And we pay $125,000 to people that refer us deals. So, I think on our five investments that we’ve made so far, three of them have had referral bonuses associated to them. So, we give someone a $100,000 plus $25,000 to the non-profit of their choice. So, our friend Brent Beshore, he referred us the pool company that we purchased. We gave him 125,000, and because Brent’s generous, he decided to give all of that to a nonprofit called New Story. So that’s just a such a cool example to see kind of you’re incentivizing people to help you find deal flow, and they will, and everyone wins in the end.
Alex Bridgeman: So, can you walk us through a few examples of a few of the companies that you own?
Michael Arrieta: Yeah, absolutely. So, I’ll walk you through the two acquisitions that we just made. One of them was the largest and premier pool builder of south Florida. And so, we did not really know about the pool market, and we didn’t know if we should be bullish or not, but as I mentioned, Brent Beshore, he referred us this company, and it meant a lot coming from Brent because he owns arguably the largest pool builder in the country, out there in Arizona. And so, for years, he’s told me how great the pool building market is, especially for a lot of different reasons, but for us specifically, the way that we underwrote this investment, one was a COVID effect. People were spending more time at home than ever before. Home values, especially Florida, are increasing at an exponential rate. People are refinancing, taking refinanced dollars and investing further into their homes. One of the biggest investments they’re making in their homes in Florida is their pools. Another thing about south Florida market that we liked was the actual market itself, the sunshine state, sun a majority of the year, no state income tax, a massive move and migration of people moving to south Florida. So, we liked that aspect of it. We liked that the company was around since 1981, so it had a very, very strong brand and reputation. We loved that the general manager was staying with the business. We loved the fact that there was an over 200 pool backlog for another year and a half, so even when we bought the company, business was already locked in for the next year and a half. We loved the fact that the owner wanted to have an earn-out. So, he was so positive and bullish on the future of the business that he was willing to roll a large amount into earn out, which showed us his confidence in the business. We loved that the culture would go very, very far with the subcontractor model. Many times, subs are not treated properly. So we wanted to create a family that said not only if they’re just a W2, but if you’re a sub, you’re all part of the Essig pool family. We saw there was a massive opportunity for technology. A lot of pool construction-like industries don’t know how to leverage technology. Things like HubSpot, DocuSign, things of that sort of nature, Gusto for HR. So, we saw a lot of efficiencies there. We invited Governor Jeb Bush to co-invest alongside us because one of the biggest opportunities was commercial development with pools, very, very large pool contracts. Governor Jeb Bush based in south Florida could open a lot of those doors for us. So, there was a huge, huge narrative as to why we loved it. Double digit margins attracted buy in multiple. So, it checked nearly every box. So, we’ve now owned that since Christmas of last year. So, it’s been going great. We over-performed, Q1 highest quarter in history. We created a vision for the company, a mission, values. We’re donating a portion of every single pool to every child, a swimmer, so children that are lower income in south Florida know how to swim. We’ve brought on another GM to help run the business. So many things changed. The sales comp around that the employees asked for, we do a monthly town hall, so all the employees know how we’re doing with construction, with margin, with profitability. We had a holiday party that’s never happened before. We wrote every employee a thank you card. We give them all employee bonuses. So, we really try to go above and beyond. So that was one example for Essig Pools. And not to give you the full other example, but we also bought a janitorial company here in January, the largest one Eastern Tennessee called Duncan & Sons, been around for 30 plus years, great team, 300 plus employees, and so forth. We love the reoccurring aspect of that, very large customers, and so forth.
Alex Bridgeman: Yeah, those are some fantastic examples. You’ve talked a lot about in addition just to culture but also tech enablement in some of these companies. Can you walk through perhaps some of the tech side of things that you do with new companies or maybe a few processes or systems that have worked well in a few companies that you’ve implemented them in?
Michael Arrieta: Yeah, absolutely. So, we look at tech, our tech playbook. So when we buy companies, we look to add value around culture, technology and sales. When you click on the technology, there’s three areas within technology that we look at. One is sales, two is operations, and three is general. So, one on sales, we look at what current CRM do they use to intake everything from quote to cash, from the second the lead comes in, capture the information from that lead, take the notes from that lead, pass it to the salesperson, have the salesperson input all the information there, pass it to construction or the actual on the ground operations team, all the way to close. So, CRM. What sales engagement system do they use for pipeline, things like Salesloft that’s good for building new leads and outreach of cold emails to customers. We look at things like LinkedIn Sales Navigator, and we look at DocuSign to improve the sales efficiency process of sending things out. So that’s the first overall. The second thing that we look for in technology is core operations. So, in the janitorial business, core operations is dispatch, scheduling, cleaning, so systems like Procore, ServiceMax or service sort of fusion, other appointment things like, I forgot the names of them, but a lot of appointments, scheduling, dispatch systems, where it’s very friendly for both the employees and the customers. At the pool company, there’s a system called Pro Edge that manages the entire construction process. There’s 16 stages. So, we look at what are specific industry solutions within this, should we use it, or do we need to customize something that’s already off the shelf? And the third part is general. So many of these small businesses, Alex, they don’t have a HR cloud first system. They don’t do QuickBooks or Xero. So, we use things like Namely or Gusto for HR and payroll. We use systems such as Xero or QuickBooks for accounting. So those are other systems. We make sure that they’re on GNET. We made sure that their domain is being hosted somewhere that’s easy to update. So, there is an entire playbook that many times these small businesses have never thought about it through this lens.
Alex Bridgeman: Yeah, that’s pretty impressive. And then, you’ve talked also a lot about the team at Garden City that helps with a lot of these different functions and improvements. One we’ve kind of mentioned or alluded to throughout our chat so far is just recruiting. So how do you continue to find great folks to add into your companies? And how much of that is done at the individual company level versus the Garden City level?
Michael Arrieta: So, at the Garden City level, we have one gentleman that is responsible for portfolio company operations. And really what he’s doing is he’s figuring out what are the most important things in this business that need to get done and then connecting them to the appropriate maybe service providers to help us with that. So, a perfect example is this morning, we had a call with one of our portfolio companies, and they’re looking to hire new people. And so, our portfolio operations manager said, “Where do you guys post things on?” And they said, “We post on Craigslist and Indeed.” He said, “Well, I’m in my thirties, and I don’t think anyone in their thirties continues to use things like Craigslist or Indeed. Have you ever thought about posting it on LinkedIn?” They go, “We never go on LinkedIn.” So today he made them LinkedIn banners. He told them to update their LinkedIn headline, told them to update their position, and show them how to post a job on LinkedIn. And it costs $10 a day to post a job and amplify across your networks. We’re looking for a controller for one of our companies, so he connected them to two top recruiters in their specific local markets to say we’re looking for a controller. If you place this controller, we’ll pay you a finder’s fee. So, things of that sort. So, we’re constantly educating our portfolio companies on different ways to go about that. We just implemented a $500 referral fee that if you refer someone for an open position in the company, if you’re an employee and you refer someone, you get a $500 referral fee for bringing people. So, we’re trying to say that maybe the best recruits for the company will come in from the existing employees that work there. So those are three strategies – an online strategy of LinkedIn, an old school recruiting strategy of finding the best recruiters locally, and then an existing employee strategy. Versus before, not because they were doing it the wrong way, but before all they did was post something on Craigslist. And they never asked the people internally, never gave them an incentive. They didn’t connect with recruiters because they thought that they all had to be on a permanent retainer, and they never used the latest tools like LinkedIn.
Alex Bridgeman: I love that. That’s a great walk through. How much advice do you get from your investor base on a weekly, monthly, quarterly basis? And how do you keep all these different groups of investors involved and helpful and almost use them as mentors within your different companies?
Michael Arrieta: Communication is key. Communication is key to any marriage, and communication is key to any business relationship as well. And so, I know that if we really want to be a collective of 50 families investing as one, we must have constant communication because constant communication is clarity. And so, I constantly am speaking to them on a daily basis. Just about every day, I’m speaking to a couple of our investors. I include specific subject matter experts about specific companies on that deal. So right now, we’re about to buy an IT implementation company. So, I have a handful of investors that know that space pretty well. I update them early on. I let them know about the company. I involve them into it. They’ll join us in diligence meetings. They’ll join us on some investor calls, on some customer calls, and so forth. So, I communicate with them that way. I communicate with our investors on an email basis, nothing formal, but I constantly send them emails monthly or quarterly – here’s our deal flow, here’s some new team members, here’s what’s happening with these companies and so forth. I do an annual investor summit, husbands and wives because we’re trying to make this a family affair. So, we have that coming up in April where all of our investors and their spouses, almost a hundred people, are coming together for an investor summit. So, we come together, we fellowship, we have a little retreat. We get to know each other. We get to hear from fantastic speakers, like the CEO of Chick-fil-A or the founder of the Ritz-Carlton or Tim Tebow or Drew Brees or all these folks. We’ll have them come speak to share some insights while letting them know we’re all in this as one family. So constant communication. When I’m on the road, I stay at their homes, so it gives me an excuse to catch up with them, break bread with them, save some of our management dollars, and so forth. So, I involve them because we really are one family. Without them, there would not be a Garden City.
Alex Bridgeman: Yeah, that’s impressive. What do you view as your role, like your actual responsibilities within Garden City? Because I’m imagining there’s been a number of long-term holdcos that have gotten raised over the last few years, and there’s a bunch that are prospective as well. And I’d be curious to hear your thoughts on since even though Garden City is relatively new time-wise, you’ve added a few companies, so you have some maturity, some early maturity, perhaps. But I’d love to hear just your thoughts on what you view your job is at Garden City because you’ve built a team that helps you with a lot of different things, but specifically to your role, what do you view your role as?
Michael Arrieta: A couple of things. Overall, if I had to answer, gun to my head, I would say to make sure our vision and mission are never sacrificed. So that is my chief responsibility as founder and CEO of Garden City. Our vision is to build the best holding company in the world where all workers can thrive. So, I want to make sure that every lens that we look through is always people first, always people first, always people first. And our mission- Our vision is really hard to accomplish – the best holding company in the world where all workers thrive. It’s the big, hairy, audacious goal that may never be accomplished, but it’s what we definitely strive towards. Our mission can be accomplished. Our mission is to build a family of the most caring companies in each industry that they find themselves in. So, to build a family of the most caring companies. That we can do. We can build a family, which we are, now we have five companies, and to be sure that we are the most caring. So that is my ultimate responsibility, to make sure that we never sacrifice that. It’s easy when everything’s about multiples and deals and returns and leverage and performance and financials and diligence and quality of earnings and background checks and whatever else. It’s easy to make it about that. So, I have to constantly ensure that I never make it about that. What my day-to-day responsibilities are is make sure that I speak to our investors constantly because their value add, get their counsel, direction, and advice, constantly get pipeline and deal flow, strangers, let them know we pay $125,000 if they refer us a deal that we buy, to going to events I’m speaking at, to constantly sharing our investment criteria for our investors, to investment bankers and so forth. And then, talking to business owners, the ones that we own already. I spent a lot of time talking to our portfolio companies’ CEOs. It’s lonely at the top. So, I just constantly call them randomly to just see how they’re doing. I would say 80% of my conversations with them are personal conversations, not even about business. When they know that I’m in the trenches with them on the things of life like family and children and health, they know that the worst stuff figures itself out.
Alex Bridgeman: Yeah, you kind of alluded to an interesting point there with 80% of calls being personal. I’d love to hear a little bit about your thoughts on building good relationships with other leaders in your organization and perhaps external as well. What are some insights or kind of rules of thumb or kind of models in your head for how do you build good relationships with people?
Michael Arrieta: Great question. I think if I’ve been blessed by anything, it’s the ability to build authentic, real relationships. For me, it all starts with the premise that everyone struggles and we’re all messy. We’re all messy people, and we all deal with really messy things. And so, there’s not one person walking on this planet that hasn’t had hardships in their past, or hasn’t had trials in their paths from their upbringing, or dealing with something right now, or something didn’t pan out the way that it could be or should be or ought to be. And so, I call it the gun show where in life, we typically always have guns up at each other, trying to show that we’re strong and resilient and confident until the other person puts it down and shows their weakness and shows that they’re vulnerable. The second they put their gun down first, the other person follows typically. And so, I constantly try to lead with my vulnerabilities first. I typically say a part that I’m struggling in life – with my marriage or a part that I’m struggling with trying to be a father of three or a business leader, or never being in private equity before, or the deal fell apart, or we mis-projectioned this company, or I haven’t worked out in three weeks and so forth and so forth and so forth. I’m constantly leading with my weakness. And then typically the other person then has empathy, and they start to share where they’re also missing the mark. And then from that actually comes a real, authentic, vulnerable relationship. We’re there for each other, and we don’t have to worry about what we’re saying because we just want to see the other person actually succeed and get better. And so that’s where it comes from. It comes from a posture of really being in tune with yourself and realizing the importance of humility, realizing the importance of vulnerability, and putting yourself out there.
Alex Bridgeman: Yeah, certainly. One question I’ve been excited to ask you a little bit about is companies that you take inspiration from. And Chick-fil-A has been mentioned a few times here, and I’d love to dive into that one. But before even talking about Chick-fil-A, are there other companies that you take a lot of inspiration from in just how they build cultures or how they recruit, how they work with customers? Is there a list in your head of companies that you take a lot of inspiration from?
Michael Arrieta: Absolutely. Yeah, Chick-fil-A is definitely the top of my list. I think I’ve said many times we desire to be the Chick-fil-A of every industry that we find ourselves in. And the reason why I specifically talk about Chick-fil-A is last year, just to share some numbers, last year, they were the fastest growing restaurant group in the world. Every other restaurant group grew by very small single digit numbers, 1, 2%. Some of them- many of them went backwards, but Chick-fil-A grew at significant double-digit margin or double-digit growth. As a fast-food franchise owner, you’re often fighting a war for pennies, and food is the most competitive industry out there. And it has the highest level of investment of any other industry, the highest failure rate, and the lowest margins. And so, you just look at how difficult an industry like that is, and you see what Chick-fil-A has been able to do in the midst of all that, while being closed on one of the busiest days of the week, which is Sunday, while not having an income model of collecting massive franchise fee or development fee. And so, you’re just like how in the world do they do that while being a private family-owned company? And they are the second largest restaurant group now in the world. And they only have like 1500 locations or something like that. So, it’s just, when you look at the data, it’s just like the craziest outlier on how they’re a $20 billion juggernaut growing at double digit growth, they’ve never gone international, and all these things. And so, I spent a lot of time, especially living here in Atlanta, I spent a lot of time getting to know their business and really getting to know the leaders behind the business, specifically the family behind the business. And I’ve been absolutely blown away by their commitment to really making sure that everyone that comes in contact with Chick-fil-A has a positive experience. So, they want to make a positive impact for all that have come in contact with Chick-fil-A. To share some very interesting comments with you, just I know you want to talk about what is it about Chick-fil-A that makes it so interesting. So, in order to build a fast-food franchise, you typically need a net worth of several million dollars. So, the minimum net worth required for a fast-food restaurant like Wendy’s is $5 million. If you look at a place like a McDonald’s, your net worth has to be at least half a million dollars, Taco Bell, 1.5 million, Burger King, 1.5 million. At Chick-fil-A, your minimum net worth requirement is zero. It’s zero. The reason why those companies have such large minimum of requirements for net worth is because they need to build out the actual real estate and the development of it. They own the building, the development, the equipment, all of that is responsible for the person that actually wants to be the franchisee. The other thing is once you have that capital, now you actually need to come up with a franchise fee to just open the location. Burger King is $50,000. McDonald’s is $45,000. This is just the franchise fee to open it. This is the only fee Chick-fil-A charges. They only charge $10,000 to open a Chick-fil-A franchise because they are the ones that actually are building the location and all the build out of it. They’re the ones that actually own all the equipment of it. So, they just completely flipped the model on its head, to say how can we actually get the best operators to run the business? Because if we have the best operators to run the business, we know everyone will be treated well and everyone will succeed in the end. So having someone with a large net worth, they’re probably not going to want to spend their time in a Burger King. But with Chick-fil-A, they said it’s not about the amount of money they have, it’s about the amount of character that they have. So, it’s about the fact that this will be their only thing. This will be their full-time thing. They cannot open another location. Only very few have more than one location. They will work six days a week in this business. They have to go through a dozen interviews. It’s harder to get accepted into a Chick-fil-A than it is to get into Stanford school, Stanford University. So, there’s this great article out there that just shows the acceptance rate for a Chick-fil-A – 60,000 people apply to be operators every year, only 80 are selected out of 60,000. That’s a 0.13 acceptance rate compared to a 4.8 acceptance rate at Stanford. So, they choose just the highest quality people. And the way they make it up on the back end is they charge a higher royalty fee, 15% sales instead of the average 4.5%, and on top of that, they collect 50% of profits. So they flipped the model on its head, and that allows them to focus on the people that work there. They call them team members, not employees. They call their headquarters the corporate support center, instead of headquarters, all these different things. They call them operators instead of franchisee. So, the high, high, high intentionality. The last thing I’ll say is Kathy has a great line of saying, “We’re in the people business, it just so happens that we sell chicken sandwiches.” So high intentionality created a juggernaut of $20 billion of sales with extremely high profitability.
Alex Bridgeman: Yeah, I love that. I could talk about Chick-fil-A for hours, but unfortunately, we can’t. I want to move into some closing questions so we can get you out on time. What college class would you teach if it could be about any subject you wanted?
Michael Arrieta: Relationships. Yeah, building relationships. As I said, it’s not about what you do, it’s who you do it with. I believe you can do anything with the right people surrounding you, with connections to the right people, and you’ll be wildly successful, and you’ll have a fulfilled life, a very purpose filled life if you have the right relationships. I unfortunately do not remember any college classes, any classes ever being about relationships and serving others the way you want to be served.
Alex Bridgeman: I love that. That would definitely be a really, really helpful class. What strongly held belief have you changed your mind?
Michael Arrieta: That my way is the best way. Being young and successful at a young age, I always thought that my way was probably by far the best way. Other people just needed to get on the same page. And the older I get, the more I realize is most of the time I’m wrong. And I just need to really seek wise council.
Alex Bridgeman: Are there any most notable things to you where you thought, oh, this has to be the way to do it because I’ve done this before and it’s worked, and it turned out not to be the right way?
Michael Arrieta: Yeah, I think really everything, everything with thinking that I was going to now have a child to rear, three children, and realizing that way wasn’t really working well, didn’t feel like it. So, I had to get wise counsel. Thinking that we were going to build deal flow the perfect way at Garden City. We were going to cold email thousands of business leaders because we know technology and outreach better than any other private equity company. But unfortunately, that’s not the way people sell their businesses. It’s much more emotional than transactional. So, we had to learn it that way. Just a plethora of things that I’ve just always realized be quick to listen and learn rather than speak and act.
Alex Bridgeman: I like that one a lot. What’s the best business you’ve ever seen, and it can’t be Chick-fil-A?
Michael Arrieta: I love Costco. Costco is a phenomenal, phenomenal business. I think some technology companies like Notion are phenomenal businesses. Patagonia, Publix, In-N-Out, Hobby Lobby. These are just truly built to last, enduring businesses that are treating and honoring their people in the right way, while still being highly profitable and a blessing to their community.
Alex Bridgeman: I like that one, especially Costco. Costco has been another favorite on the podcast in addition to Chick-fil–A and a truly outstanding business that’s been an incredible force in a bunch of different cities.
Michael Arrieta: Same thing. I’m not going to get into it, but just like I went off on Chick-fil-A, same exact way with Costco – flip the model upside down, grocers operate at very low margin. They flipped model, charging membership fees, fighting for the customer’s best interests, and so forth. So, love that business.
Alex Bridgeman: Yeah, they’re fantastic. Thank you so much, Michael, for coming on the podcast and sharing a little bit about what you’re working on. It’s always fun to chat and I’m glad we could actually get to record one of these conversations. So, looking forward to next time.
Michael Arrieta: Thank you very much for having me on, Alex. I appreciate it.
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Michael is the founder of Garden City and has raised $51 million in permanent capital to acquire family-owned businesses across the country.