Host: Welcome to Acquiring Minds, a podcast about buying businesses. My name is Will Smith. Acquiring an existing business is an awesome opportunity for many entrepreneurs, and on this podcast I talk to the people who do it. Chenmark is a name that many of you will recognize. Chenmark buys small businesses with the intention to grow and hold those businesses forever. Now this sounds like a small business holding company, a popular concept these days, and Chenmark is that. But the three founders started doing this seven years ago, before the concept was as talked about as it is today. And because it was so unconventional at the time, especially among their peers on Wall street where all three had worked, they really had to develop a strong conviction around pursuing this path. And not just financial conviction, but personal conviction that they were choosing a professional life that had a distinct flavor and did they want that? Happily, seven years later, their conviction seems only stronger than when they founded Shenmark. So I was excited to hear the story of this business and the philosophy around it. I have two of the three co founders on Brothers, James and Palmer Higgins. Trish Higgins is the third co founder and wife of James. All three of them have been on other podcasts to discuss various aspects of Chenmark, and I'll link to those in the show notes. Last thing before we begin. If buying multiple businesses over years appeals to you, also make sure to listen to the January 24 episode of Acquiring Minds with Justin Turner, who is on a similar path to Chenmark with his firm Traction Capital. And with that, here are James and Palmer Higgins, co founders of Chenmark, James and Palmer Higgins brothers, and two of the three partners of Chenmark. Chenmark is a company that acquires small businesses around North America to hold for the long term. So it's really one of the exemplars of what is now called permanent equity and an inspiration to many acquisition entrepreneurs who love the concept of not buying just a single company, but a portfolio of small businesses and holding them for the duration of their careers. So I'm really excited about this conversation. I've listened to you both on other podcasts. I'm thrilled that you have to now have you on mine. So thanks for coming and welcome.

Guest 2: Thank you.

Guest 3: Thanks very much for having us.

Host: Let's start with a quick intro on each of you individually. James, if you'd go first, give me a minute on your background.

Guest 3: Yep, sure. I started my career on Wall street first on a currency trading desk and then I moved from there to a few different hedge funds on a variety of strategies from merger arbitrage to various credit strategies to macro investing before starting Chenmark. And so at Chenmark I focus on. We've all had a few different roles over the years, so things have rotated a bit. But right now I run our search process, so sourcing, diligencing, executing on new acquisitions and tuck in deals for existing companies. And I also run our GVP program which we can get into in a little bit. And also our strategy services team here in our office in Portland.

[3:16] Host: Cool.

Guest 2: Awesome. Also got my start on, I say Wall street, but we were in Midtown like most of the other financial companies at that time. But I was doing buy side equity research at JP Morgan. So fundamental analysis, financial statement analysis, basically model jockeying, which is what it was called back then. Did that for a couple years and then went to join a digital textbook elearning startup. Did that for a couple years before linking back up with James and Trish and starting Chenmark about seven years ago. And first iteration, I'd say part one was we were all doing everything together. Part two, I was leading up the search and deal side of things and part three for me was stepping in to run one of our operating companies, which is a company called Mainly Grass, a residentially focused lawn care company in northern New England.

Host: And so you're operating that now, Palmer. And how long have you been in the seat there?

Guest 2: Three years. February in February. February 2019 was my, was my beginning. So coming up on three years.

Host: Okay, so let's do a quick history on Chenmark itself. For those in the audience who don't already know. You formed this, this business around a thesis, really and a vision. So there's a real founding story here. So if you guys would, would articulate that, what, what led to the formation of, of Chenmark and the path you're now on.

Guest 3: Sure.

Host: So

Guest 3: I think there's a couple of different elements to it. To put it simply, there's an investing math component to it and then there's also sort of a kind of personal philosophy component to it. On the investing math side, it's really just sort of the simple kind of back of the cocktail napkin analysis of the return profile associated with acquiring a small, consistently profitable, high, highly cash generative small business for three to five times multiple, with a reasonable capital structure and some fairly benign operating assumptions. The rough math there translates into a pretty attractive return. And that to us was very interesting, especially in a world of relatively low interest rates, relatively high equity valuations. And so when comping, when sitting in a seat at an investing firm, when you're comping, kind of the return profile associated with owning and operating small businesses against sort of the return profile on offer in the public markets. We found that compelling and worthy of further inquiry. I think as we studied it more, you know, it's pretty clear that there are nuances to owning and operating small businesses. And we've learned that lesson over and over again over our history. But I think to us, rather than have that be a sort of cautionary thing to the contrary, for us, it actually seemed very exciting. And there was this notion, I think for all three of us that the world would be a more interesting place if we were not spending 12 hours a day behind a Bloomberg terminal, but instead were applying a lot of what we had learned to the real economy and to sort of into real businesses. And so that was really kind of, that combination of factors sort of led us to start the firm and to sort of build a company around that idea. And there's some more detailed nuances around kind of deciding to look for multiple companies as opposed to just one that we can get into. But I think from a high level, that's, that's what we're looking at.

[7:01] Host: And when you had this insight about the, the financial attractiveness and the multiple attractiveness of small businesses, certainly you know that, that, that's, you probably weren't the first to have that insight. So why, why is it, what makes you all different that you took this plunge? There are many hundreds and thousands of unhappy Wall Streeters and yet they, they stay there. So what vision is different? Just the gumption to do it or there's something there because everybody knows that a small company is cheaper than a big company.

Guest 3: Great point.

Guest 2: Yeah, I think I have a pretty good answer to this. I've answered this question a few times. The way I answer now is I think James, Trish and I, in a lot of respects, I don't think we're all that special. I know I'm not that special. James is incredibly smart, but I know I'm not that smart. But what the three of us have in common is a pretty unique and extreme delayed gratification muscle and a fairly high willingness to bet on ourselves. And the two of those in combination lend themselves to the Chen Mark model. And one of our core values of playing the long game, the way we have decided to approach small business equity, necessitates a very long term horizon. And that's one that we're very comfortable playing in and one that is, I think, fairly unique. And so it allowed us to do something that on the surface or to other people might seem crazy or ridiculous or irrational, but to us felt right.

Guest 3: I think. Very well, said Palmer. I think for me, I guess for us there's a. I think when going into this, I think there's, at least for us, there was a bit of a period of significant introspection and sort

[9:09] Host: of

Guest 3: investigation around kind of core values. And I think for us the appeal of owning a small business and sort of the associated sort of tangibility and in particular autonomy that comes with it were very interesting and more compelling for us from a values perspective than say, the number at the bottom of our W2, at least initially. And so to Palmer's point about delayed gratification, the tricky thing about trying to build a holding company that owns a lot of small businesses is the first thing you need to do is move to Maine and buy a snow plowing business and run that for a while and make sure that goes well. And then maybe if you're lucky, you get an opportunity to buy another one. I think there can be a lot of perceived opportunity costs associated with that, depending on what your exposure is and what your previous experience is. And so having a very clear sense of what's important to you and your family and whoever else is involved, I think is a pretty important thing. And I think we were fortunate to have a lot of alignment between the three of us in a lot of those key areas.

Host: One more question on this before we get into Chenmark itself. Just this introspection process that you went through before you started down this path, The kind of Wall street that you were moving away from the Wall street life, that you were moving away from the professional life. One thing that it probably offered, I think I heard one of you say this was it is intellectually quite stimulating. You're around a lot of high achievers, smart people, really at the top of their game. And not to say that small business isn't filled through and through with a lot of smart people, but smart in a different way. Certainly not the kind of like academic, you know, just trying to squeeze out an edge experience of Wall street type thinkers. So I'm just curious about how you thought about that. Coming from. Coming from a really probably traditionally intellectually stimulating environment to one where you're going to be using your hands a lot more or maybe you're, you know, you're in your people skills and management, eq, different part of the brain. Did you consider that? And what have you, and whether or not you did. What have you found on that question?

Guest 2: We have two different answers.

Guest 3: Yeah, I'll take a stab. But we probably have different answers. So I would say that and I, you know, with the benefit of hindsight, I think one of the interesting things about where we are now in sort of operating a bunch of small businesses, I think it's kind of your question gets at this sort of juxtaposition between breadth and depth. Oh shoot, we do have the same answer, man. So, you know, I think in any sort of high performing kind of professional sphere, so, you know, banking, consulting, sort of, you know, private market investing, any of that kind of stuff, you of course have extremely smart people all tackling, I think, highly specific problems with a level of rigor that just frankly isn't matched in the small business space. And so that is 100% true. And you do sacrifice some of that. I think what you pick up is an incredible diversity of experiences across the full spectrum of business operations. So I can sit on a bond trading desk and be a complete expert at reading credit agreements, understanding covenant structures or whatever it happens to be, but I may never have the opportunity to have to fire someone, have to hire someone, have to build out a marketing program, acquire another company, negotiate a price with a customer, any of these types of things. And you know, oftentimes in our lived experience running Chenmark, you know, we're doing most of those things each day to one degree or another. And so I think, I forget which one of us said that, but I think we said it fairly early on in our, in our kind of trajectory, so to speak. And you know, it's certainly true. I wouldn't take it back per se, but I would. I think one of the things that we've learned is that there is absolutely intellectual stimulation, just like the format of that is a little bit different than you would encounter at a bulge bracket investment bank.

[13:59] Guest 2: So it turns out we did have the same answer. I was going to say breadth versus depth. And I would say I've been more intellectually stimulated via Chenmark than previously and I really enjoyed my time at J.P. morgan. I think a way to frame that is something I actually heard James say a number of years back. I don't know if I've actually told you that. I still remember this day when James was talking about his experience. He's like, yeah, I've had four years of experience, but I've had four one year experiences. I've had four years of the same year of experience. And so the learning curve is steep, but then it gets quite repetitive quite quickly, especially for smart people. And seven years has felt like seven years of experience at Chenmark. Because of the range. The range of things that you have to and can do.

Guest 3: Great.

Host: Well, let's get into what the business looks like today. How many businesses does Chenmark own as of January 2022?

Guest 3: 7 at the moment. Working on a couple of more. So hopefully we'll be a little bit higher in maybe a few weeks.

[15:04] Host: And list the seven for me.

Guest 3: Sure. So we own three different companies in the landscaping space. We own a lawn care business. We own a food manufacturing company that manufactures frozen dough. We own a tourism company that's in the boat tour space, does whale watching and puffin tours here in Maine.

Guest 2: Paint.

Guest 3: Oh, and most recently we acquired a paint retailer in western Canada.

Guest 2: Great.

Host: And we're going to get into that one in just a second. And how many employees in total do these seven businesses and then the Chenmark mothership represent?

Guest 3: Yeah, so they're. It varies a bit because the number of our businesses are fairly seasonal, but sort of rough math, about 450 or so total across the organization. And in Portland, that's also moving target influx a little bit.

Guest 2: Moving target.

Guest 3: I'd say full time.

Guest 2: Seven.

Guest 3: Yeah, seven or eight, something like that.

Host: Okay, so seven or eight are at Chenmark proper and then the rest of the 440ish are spread across the seven businesses.

Guest 2: Yep.

Host: Okay. Well, obviously I'm sure each of those seven businesses is a story unto itself. We don't have that time. But let's just hear about your most recent acquisition also, because it strikes me as the most unlikely, but I'm sure you'll disabuse me of that. So Benjamin Moore in Kelowna, British Columbia. So for those, the Americans in the audience who don't know where or what Kelowna is, it's a medium sized, 100 ish thousand people size town city in British Columbia, I think no direct flights. You got to fly through Vancouver or Seattle to get there. Am I right about that?

Guest 3: That is true. I mean it's.

Guest 2: Sometimes you have to fly through two different places to get there.

Host: Yeah, it depends on where you're coming from.

Guest 3: The third biggest city in British Columbia. I mean, you got to give it some credit, right?

Guest 2: Right.

Host: Well, I actually spent a few months in Vancouver, so I feel like I know what Kelowna is, but I think I didn't know before I got to Vancouver. Hard place to reach, especially if you're in Portland, Maine, I would imagine. Or I'll just say there are many easier to reach. So I'm curious. Tell us about, you know, tell us the quick story on this Acquisition and how it's justified buying. Buying, because I imagine you guys have deal flow at this point. Your name is out there. So why this business that's so far away?

Guest 3: Sure. So I guess to us it doesn't seem. I mean, sort of geographically it's far away, but I think to us it doesn't seem as far away. And so we'll give a bit of the Chenmark history here. So my wife Trish, our third partner, is from British Columbia originally and actually has family. That whole area of kind of like central BC is called the Okanagan Valley. And there's a number of different sort of cities along, like Okanagan, which sort of runs north, south, sort of throughout the valley. And so Trish has a bunch of family that retired to the. Either lived in the area or retired to the area. And so we have kind of roots, I guess, there. And one of the first deals we ever did, which was this frozen dome manufacturing business, actually happens to be located in the Okanagan Valley. So we've had roots, both familial routes and business routes in the area for a number of years. And so there's a connection. It didn't just come up out of the blue. I think, in terms of how this deal came up, one of the things that we've observed, you know, we certainly see plenty of deal flow from traditional sources. So, you know, we look at our fair share of brokered transactions. But when we're doing our own kind of proprietary outreach, we tend to focus a lot on sort of building up proprietary networks in either industries or geographies, which we already participate in. So we spend a lot of time in the Okanagan and trying to interact with other business people, intermediaries to business people, other business owners, et cetera. And so this opportunity popped up by virtue of that effort. And I would say, and we did our diligence and found it kind of an attractive opportunity, which of course we can get into, but from a high level, that's the connection to the geography and how the deal sort of popped on our radar.

[19:44] Host: Gotcha. Okay, well, so here we are. This is January 2022. Your first acquisition was in early 2015. So really seven years that you've been full throttle at this in the seat. And much of my audience is going to be people who are considering acquisition, entrepreneurship. They've already decided to do it, and they're searching, or maybe they've already acquired their first or even second business, but they're not nearly as far along as you two are. And So I really want to extract as much value from your 7 hardw years of experience as I can for a more beginner audience. So first question on this is going back to your vision for the business, your thesis, seven years later, how's the thesis holding up?

Guest 2: I think stronger than before. It's hard to think back seven years and it's possible your listenership might not have known about search seven years ago. Certainly when we started chenmark we didn't know about search. Trish went to HBS but didn't actually take any of the search fund classes. And I think that kind of ignorance was helpful because had we, we probably would have been talked out of our model because at the time the holdco structure wasn't a thing, that wasn't search. There was the traditional funded model, there was a self funded model and that was it. There was no entrepreneur in residence, there was no accelerators, there was no nothing. And so the idea that three people, which was again not a thing, two was the max in terms of search partnerships. So three people were going to go and buy multiple small businesses that weren't a roll up in a varied geography and in varied industries. That wasn't search and it certainly wasn't private equity because we were going in with the expectation that we were going to own these companies indefinitely. And so I think flash forward seven years it's kind of cool to see that now the hold co structure is a thing and people are talking about it as a ETA model. So I think in that sense, yeah, I think the thesis holds every bit as much if not more now than it did then.

[21:58] Guest 3: And then there's some irony there. Right. I think from the beginning we were pretty explicit about our desire to build a kind of diversified collection of small businesses diversified with respect to industry, with respect to geography really the idea was if you can build a pool of cash flows where the individual sources of that cash flow are relatively uncorrelated with one another, that just becomes a very attractive and very steady stream of earnings and reinvestment capital. The sort of irony of course is that to get that going you need to buy one company. So there's nothing about owning a single entity that resembles a holding company and then. Or diversification and then from the beginning, or uncorrelated.

Guest 2: Right.

Guest 3: And then from the beginning we've tried to be again,

Guest 2: a lot of our

Guest 3: sourcing efforts have been focused on industries or geographies in which were. Which were sort of currently involved. And so functionally that's meant that in the early days a Lot of our acquisition activity after the first one was also focused on the landscaping space. So you know, year one we don't look like a holding company. Year two or three, you know, we're a holding company insofar as we own different businesses but we still look more like a roll up than we do like a diversified holding company. And so ironically enough now the diversity of our holdings today and sort of the diversity of our opportunity set today, looking ahead is much more of conglomerate esque or diversified than it has been to date. And, and so I would say the vision actually is more real now than it has been in Chenmark's history.

Host: Right. But not because the vision has changed or hit roadblocks. Simply just takes time to do those acquisitions.

[24:07] Guest 3: Yeah, absolutely.

Host: And I want to get into diversification. I know you have addressed this a lot and I know you have strong thoughts on it and I just, but I think it for people who haven't heard that I want to spend some time on it, but not just yet. First I wanted to ask. So Palmer, as you just put it like five, seven years ago, to the extent that people were doing this out of the fancy business schools, it was just traditional search funds. The idea of search or self funded search or holdco was nascent to non existent. On the other hand, outside of the kind of ETA bubble or upper echelon MBA program bubble, there are obviously people, entrepreneurs, acquisition entrepreneurs, call them what you want. Local investors who buy small businesses, that's who business brokers have traditionally served. They get a deal and they call their local network of people who buy local small businesses. What differentiates Chenmark from those anonymous unknown folks who, who have been doing this forever. And it's basically, it's basically who business brokers have always picked up the phone and called.

Guest 2: I got a couple.

Guest 3: Yeah, go for it.

Guest 2: So I think one, those people generally are more ad hoc. They're going to be more geographically driven. So I think Chenmark is by nature more professional because it is our business. It's not just hey, I'm going to call the guy who founded this business has done really well and so with some of his spare cash he buys some other businesses on the side, but they're not his main focus. You know, acquiring operating businesses and operating them is our focus. So it's like it is our professional focus. So I think that's a big difference. While I don't know if it would necessarily be all that different from the cohort you're talking about, but us being family and talking to small businesses which are either formally or informally almost by nature. Also, family makes us just different. So being able to talk to an owner and with their spouse in the room, whether they're on payroll or not, and explain that we are also a family business and be able to relate to them in that way, I think is powerful. Anything to add?

Guest 3: Yeah, I mean, I just, I think there are going to be elements of what Chenmark offers that are analogous to sort of the kind of tried and true sort of long term approach.

Guest 2: So

Guest 3: to Palmer's point, a lot of, a lot of those interactions with the traditional sort of business broker world, a lot of those are going to be very relationship based and largely geographically centered. And that resembles a lot about how we approach the deal process. I think what we would hope to do is when we're comped against, say, sort of formal private equity, we appear a lot more like sort of the business owner next door who a traditional business owner, a business broker, might have called. And when we're comped against the traditional small business owner, we resemble a more sort of professionalized organization that is going to be focused not just on operating the company, but also professionalizing it and scaling it over time. And so I think ideally, if we do our job right, and there's a lot that goes into that, but if we do it right, then we're sort of blending a few different options for a small business owner in a way that ideally is pretty attractive.

[27:51] Host: The professionalism that private equity can bring with the, the family je ne sais quoi aspect that is the intimacy of small business.

Guest 2: Human touch.

Guest 3: Right? Yeah.

Host: Thank you. Better put. Okay, back to 2015 and the seven years that you've been at this. So what were some of your rookie errors or a rookie error that you can share with the audience so they can learn again from your mistakes and break that apart into me from a searching rookie error and an operating rookie error. And just to interject also, it's interesting to me because you guys had all of this Wall street experience. I mean, you really had, in a certain sense you were really prepared, at least from the financial aspect, to go into this much more than many other acquisition entrepreneurs. On the other hand, I love the fact that you basically, when you decided to go down this path, you googled how to buy a small business. So in some sense you, you were starting from the same blank slate that many of my listeners are. So you didn't really know what you were doing and you must have made some mistakes. What were they on the search side and on the operating Side.

Guest 3: Sure. So I got one. All right, go for it.

Guest 2: Honestly, it blends between search and operating. But I say, like, when you take the traditional financial background that we had and you apply sort of the more traditional private equity playbook of, well, equity is going to align incentives. That's just how it works. You don't realize that people value equity very differently. And so equity incentives don't actually work the way you might think they work when you have different parties who value it differently and specifically value the liquidity piece of equity very differently. And we've definitely learned that. And I remember trying to explain options to a seller once and realized that this is not going to go well and we need to pivot. And this is not one of the things that's going to translate well from our finance background to small business.

[30:04] Guest 3: I would say that's definitely true. I would say on the operating side, I think there's a healthy debate in the ETA space and in all business, really, this sort of argument about whether it's the jockey or the horse. So if you pick the right industry, does it matter who the operator is? Or, you know, can a good operator run a successful business? Regardless, I would say in our experience, the operator is extremely, extremely important. And to the extent we've had, we've made mistakes, it's been, I would say, a lack of sort of appropriate scrutiny on kind of who we're bringing on board or trying to make decisions about sort of important key personnel on a tight timeline without sort of the appropriate time to sort of build a relationship and ensure there's good both skill set and character alignment. So that part of it is incredibly important. On the search side, I think, transitioning from bigger, particularly public companies to smaller private ones, and let's not mistake, there's a pretty substantial size gap. I think you go into it with an assumption that there's an ability to obtain, if not perfect, at least comprehensive information on whichever target it is that you're evaluating from a diligence perspective. And I think the one thing we've learned is that even if you get kind of financials or even if you get fairly detailed operational data, there's just going to be this sort of extra component of unknown information that is very, very hard to uncover in diligence. And so, to us anyway, there's not really a way to risk mitigate that other than building in an appropriate margin of safety around deal structure and setting appropriate expectations for what can be accomplished in the first 90, 180, 360 days operationally, while you're kind of learning what you don't know. And that's been a consistent element pretty much of every deal we've done. And so I think that's a big lesson learned, is just understanding that you're getting into a world of imperfect information. So you need to do the best you can. It doesn't absolve you from doing the work. But even if you do all the work perfectly, there's still going to be a gap, and you need to make sure you accommodate for that in your planning.

[33:02] Host: Would another way to frame that be that the first six months, maybe 12 months of ownership after you've acquired a business, you just. Your list of the 200 things that you're going to do that's going to have to be shelved. Like, sure, make the list, but don't. Trish tells the story of your first acquisition. I think it was where she had a PowerPoint of all the things, all the tech stuff she was going to do on day one and come to find, like email wasn't being downloaded from the server or so, you know, just totally different than she thought. And in fact, that's a theme that comes up over and over with my guests. The very same thing. I mean, you're just chomping at the bit to improve this asset, this business that you just acquired. So you're, you know, one's eagerness can't be. You can't blame you for the eagerness, but it's just never, once you're in the seat, it never looks like what you think it's going to. And it just can take a lot longer to get your arms around the business than you think.

Guest 3: Yeah, that's absolutely true. And I think what I'd add is, in a sense, what we look to do is a little bit arrogant, to be honest with you. So typically, we're buying a company, in almost every case for us, we're buying a business from someone who's run it for multiple decades. And so the benefit that any of the real asset that each of those owners has developed over time is just a very powerful kind of instinctual understanding for how the business works. And what that basically allows them to do is to operate the business without a really well defined, sort of transferable set of operating procedures. And nor do they need that because, look, they've gone to the school of hard knocks for three decades, so they've earned the right to kind of fly by instinct. And we're coming in and saying, hey, guess what? We can figure out, figure out how to do all of that almost overnight by implementing sort of process, sort of data analysis procedure, kind of business intelligence, et cetera. And it's a pretty arrogant thing. And so it takes a while to replicate that structurally. And I think just making sure to build in time for that to take place is important. I can imagine that, I'll phrase it succinctly.

Guest 2: The first 90 days are figuring out what that list of 200 items is going to be. Yeah, yeah.

Host: I imagine in some ways it's a little bit more relaxed when you buy a new business now. It's like, okay, we've bought the new business and we're going to be observers taking notes here for a while rather than breathlessly trying to fix everything.

Guest 3: Yeah. I mean, I think it's different for different people in our organization. So one of the things we spoke about, the importance of the operator and the importance of ensuring cultural alignment, and one of the ways that we've worked on solving that problem is by building essentially what amounts to a leadership development team in house here. The folks that come on board and work with us in that program have their eye on stepping into a CEO role at some point. And I think for anyone who steps into a new CEO seat, even if they've heard of the experiences from the other CEOs who work at Chenmark companies, there's just a newness to that that is overwhelming at times. And so that's a feature of kind of our onboarding a new company is someone typically is stepping into that role for the first time and is kind of learning how to navigate as a new CEO. I think for Palmer, Trish and I, with the benefit of having seen a number of acquisitions happen, surprises still come up for sure, and things to learn from. But there is a little bit more of a playbook now where you can kind of implement this. You can kind of go through the same procedural elements and to make that process a little bit more predictable and the cycle rate a little bit faster to go from zero to, hey, we feel comfortable kind of pushing this business forward now.

[37:26] Host: Well, that's got to be exciting to kind of be able to develop a playbook and see some scalability with your model. Talk to me about this program that you've now mentioned a couple times. So you're developing a bench of talent so that when a new acquisition comes along, you have people lined up and ready to hop into the. To the chair. Tell me about it.

Guest 2: Yeah.

Guest 3: So typically we work with. Not all the time, but most of the time we work with business owners who are looking to retire. And so that creates a void in the org chart. And Palmer, Trish and I don't scale particularly well. And so sometimes what we found is we'll buy a business from a retiring owner and there's a number two person already at the business who is a great fit for that CEO role. And to the extent we can promote that person to the top seat, that's been a great outcome for us. In other situations, that person isn't there. And so we need to supply our own management in those situations. As I mentioned in the early days, we tried that a few times on a tight timeline by posting an ad on LinkedIn or whatever it is. And it turns out that when you hire for a CEO on LinkedIn in two months, you tend to get what we call kind of more, I guess, mercenary type CEOs rather than sort of missionary type CEOs. And so our solution to that has been to be very deliberate in building kind of an internal leadership development program. And so there are kind of three stages to it. First, folks come on board to and work at Chenmark HQ here in Portland. And basically they split their time between what I would sort of financial and providing financial and operational support for our existing companies and then helping to source in diligence new acquisition opportunities. From there, folks kind of graduate to an operating role at one of our existing companies. So think kind of C level, but not CEO. So head of finance, head of sales, maybe branch manager, something like that. And then that cohort of kind of senior operating company leadership becomes the natural. They become the natural candidates to step into CEO roles when they become available as we acquire new companies. And so we hire them at a different company.

[39:53] Host: At a new or different company.

Guest 3: Yeah. So for example, we talked about the Benjamin Moore acquisition earlier in the discussion. So Dwayne Lucetta, who was one of our first, we call the program this GVP program. It stands for Generalist Vice President. So Dwayne was one of our first hires into the program. He graduated from working in Portland to being actually Palmer's CFO at Mainly Grass, and then from there stepped into the CEO role at Benjamin Moore out in Kelowna.

Host: And what type of person is, is good for the GBP program? Like what, what are they looking to do with their careers? And what are you looking from. Looking for from them?

Guest 2: Sure. We're about to interview a bunch of them, so we'll see if they listen to this. I'd say number one for me is, is humility and, and true interest and understanding of what small business is and a desire to get, to get into that world, it's, it's very tangible. But you're, you're definitely in the action. So the way I phrase it is there's no such thing as a boardroom CEO and in the world of small business, but what you pick up is range. And so if that's appealing to you, then, then that's. That, that could be a great fit. Another way I phrase it is, it is, you have, you get a ton of autonomy and you have a very direct feedback loop to your impact on a company. And the price of that is a fairly healthy dose of responsibility and accountability. And for people who like that trade off, I think it's a phenomenal position, one I'm living currently, but it is a pretty unique thing. So I think people really need to understand what is a small business CEO and do I want that?

Host: And why would somebody differentiate this opportunity from just me being somebody who wants to run my own small business, Being an acquisition entrepreneur and buying, buying a business and having all the equity or some much larger percentage and being a CEO and still having all the experiences that you just talked about?

[42:08] Guest 2: Sure. I mean, that is an awesome opportunity. And so if that's you, I think you should go do that. I think that the difference is what you're going to pick up in Chenmark is you're going to be part of a network of other operators and with a support infrastructure around you. At Chenmark, we have a whole team that we call the shared services team that are subject matter experts in sort of the business infrastructure of small business to help our operating companies be as good as they can be. And we have a growing team of CEOs who get on a call every single month and formally talk about the challenges we're facing, the opportunities we're facing. But also you can pick up the phone and call them at any time, as can your team. Head of sales can call another head of sales, different company. So what you pick up is this network of support, sounding board of lessons learned to help you sort of along your journey. Because search can be quite lonely, what you're going to give up is the fact that it's just you. So if, if you are all about being the sole equity owner and being alone and you love that independence, then yeah, Chenmark's probably not right for you. But if you are interested in small business operations, but maybe search feels a little lonely or feels a little bit isolating or feels a little bit scary because there are, there is not a Lot of support then I think chenmark is an awesome opportunity because you know, it is, it's going to be very operationally heavy but with a, with a ton of infrastructure around it.

Guest 3: I think, you know, there's lots of different flavors of search and so the it, I think it requires anyone who wants to be in first. I think the first sort of, the first decision anyone needs to make is and has to be around kind of do you actually want to be in the seat? So, and that's not really a deal thing, not really a capital allocation thing. Do you want to run a business and be accountable to the outcomes of that business? And if you can answer that, then it becomes a question of trade offs about different options. So if you really want to be the 100% equity owner and you want to do a self funded bootstrap sort of acquisition, then yeah, you should go out and do that yourself. If you're comping kind of a chenmark GVP program against a traditional search where you're raising a fund and have a bunch of investors, I don't know that the economics there would be that different. It's just sort of a different profile in terms of who you're interacting with on a, on a day to day basis.

[45:00] Host: Palmer, you went from working sourcing deals and working on at Chenmark Capital hq. Right. To being the CEO and operator of Mainely Grass. Why did you make that decision and, and anything that you can share from that experience?

Guest 2: Sure. So the why is really because I, we had, we had to,

Guest 3: we bought,

Guest 2: we bought the company, put a person in place on one of those sort of tight timelines and in relatively short order realized that it wasn't a good fit and needed to, needed to make a change. And James, Trish and I were in. It wasn't this conference room, but it was one not too far away from where we are right now and didn't know anyone within the company that we thought could elevate to the CEO level. This was 35ish days before the season was about to start. It's a highly seasonal business and didn't have anyone at quote unquote HQ that could step in. HQ was a lot smaller back then, so looked around the table and realized it was going to be one of us and had a conversation and six days later I was introducing myself as the CEO of Mainly Grass.

Host: Well, three years later something must have gone right because you probably could have found another replacement CEO in that time.

Guest 2: They all keep becoming CEOs. I had one in the making and then he went and started to sell paint in Canada.

Host: Okay, so you were, James, you and Trish were on Patrick O' Shaughnessy's podcast, Invest like the Best, back in almost five years ago in 2017. And there were a few things that, observations that either you or Trish made during that, during that conversation that I wanted to just revisit and now that we're basically a half decade later, one was about the competition. So this is, I think part of the thesis of chenmark is that this small business acquisition is this kind of great opportunity and not a lot of people doing it. So you know that that part of the part of returns being high is because there aren't a lot of people doing it. So five years later is, do you still find that to be the case? Obviously podcasts like mine exist now and there are more people, there's more attention on search, but still, you know, the ratio of actual searchers to businesses to be acquired might still be totally out of whack. Anyway, what, what are your thoughts five years later on that, on the question of competition among searchers?

Guest 3: Yeah, it's a great question, I would say. I think in the publicly available areas there's absolutely more competition. So for instance, if there's a high quality broker deal out there, every searcher is going to be all over it and whoever's representing that company is probably going to have 10 or 15 LOIs in fairly short order at probably fairly aggressive valuations. And so in that sense there's certainly competition and I think prices for what I would say are kind of bread and butter search type companies or ETA type companies have definitely gone up. So I think that puts more of a premium on proprietary searching and developing kind of sort of unique or sort of under researched industries or geographies or just sort of doing the work of building proprietary relationships with people who represent sources of deal flow. So on that, I think there's actually quite a bit of room for a number of people to be successful in that area. Right. You know, to your point, a lot more businesses available than there are searchers or ETA firms or permanent equity vehicles or whatever it is. You know, I think it's what you're seeing is what's publicly available represents a fairly small percentage of the overall market. And so I think the easy thing to do when you're getting up and running, doing your search is to scour all the publicly available sources of information. So you end up having kind of a herding effect, which is 100% true. I don't know that it represents kind of competition, broadly speaking, to the point where it's not an attractive opportunity set any longer.

[49:54] Host: One of the things that is debated in the search world is how big to buy. And traditional search funds, folks, of course, buy quite large when comparing different types of acquisition entrepreneurs. But many of my guests have bought businesses that are a million dollars million and a half dollars in revenue and 2 to 5, 6, $700,000 in EBITDA, which would be considered buying small. Any, any thoughts on that? Not for Chenmark, but just general generalized wisdom for the loan acquisition entrepreneur out there?

Guest 2: Oh, I definitely do. I get this question a lot. And it's sort of influenced by, I guess, like our entry, quote unquote to the the search space when it was sort of what we were doing wasn't considered search. And it was, it was wrong. And I thought it was just kind of funny that search, even back then was this small thing. And to then have the perception that there were right ways of doing it and there was wrong ways of doing it seemed odd. And what I tell everyone is whatever you want to call it, people are looking to try and get access to small business equity one way or another. And whatever the approach, whether it's a method that you've heard about or a method you want to design on your own, I say go for it. And that is entirely dependent on you, where you are in your life, your risk appetite, your family situation, your career ambition, and a whole host of other things. And so I don't think there's a right way or a wrong way at all. And so I don't think there's too big or too small. I think it's highly individualistic. So you want to go buy a 200k EBITDA company, have at it. And don't let anyone tell you that that's the wrong way to do it.

[51:38] Host: Great. One of the other things that came up in that Patrick o' Shaughnessy interview was earning the right to take risk. I think Trish said this, citing one of her previous bosses from her Wall street days. And you've now, seven years later, five years from that podcast. Have you earned that right to take risk? Are you still is kind of the profile of investment company that you look to buy essentially as kind of you're mitigating as much risk now as you did back then. You're trying to at least.

Guest 3: So yeah, I would say it's interesting to kind of think about the, to make a distinction between the macro and the micro. So I would say we tend to think fairly incrementally in just how we, how we operate, how we operate each business and how we operate in the, in the aggregate.

Guest 2: So

Guest 3: and so on that score, I think we're very much still in the earning the right to take risk mindset. So, you know, the, you know, our, you know, you ask what's our plan for 2022? Well, it's to make sure that the next deal we do is well structured and, you know, gets onboarded well and that we operate it sort of consistently with how it's been operated in the past and have it be successful. I think our goal is not to build up a big cushion and then take a huge sort of company wide swing. It's to kind of do little things right consistently over time in a sort of habitual way. And so I think actually in doing that, it makes the defensibility of the overall holding company, it makes us sort of more insulated over time as we do as we add well structured deals in kind of a serial way. So I think if anything, we're just as committed to that mindset now as we were in the beginning. We just think about it more in terms of individual company operations and individual deal by individual deal. We don't really think about it as sort of building up capacity from a top down holding company level and earning the right then to take a big swing on something.

[54:09] Guest 2: I'd phrase it in a different way too. In the traditional investing game, risk is a unit of measure, if you will, that you have no agency over. In the world of small business, you have agency over a lot. The way I view it is earning the right to take risk is you're actively de risking things. So things that were risky for us five years ago are less risky for us now because we have more capabilities, we're more sophisticated, we have a bigger team. We're able to do things now that we couldn't do then or we're able to acquire businesses now that maybe we wouldn't have been in a position to acquire five years ago. So I actually view it as agency over risk, de risking it. So we're doing things that maybe would have been considered more risky five years ago, but now it's not like we're taking, to James's point, bigger swings

Host: on, on that point on risk and diversification. Palmer so having agency over. So I don't have the same training, finance training that you all did in portfolio theory and et cetera, but I understand the concept.

Guest 2: It's not super useful in small business operations just so you know, I can't, I can't remember last time I talked about the efficient market hypothesis to field technicians at mainly grass well, and yet,

Host: and yet portfolio theory of diversification I think does play a key role in how you approach your acquisition, your own portfolio. And so I just want to work through that a little bit because I understand diversity. Wanting to diversify all of the business that you're acquiring, to diversify, diversify away some risk. On the other hand, you are, like you just said, Palmer, you're gaining in small business. Like you have agency over a lot of these risk factors. And there's so much to be said for learning in industry. And then presumably you're so much smarter for that second, third, fourth and fifth acquisition. And so while you might be going, you know, you're not diversifying by doing a roll up of lawn care or landscaping companies, you're, you know, all, all your bets are in one a single industry. On the other hand, I feel like that could be offset by all of these other things, all these other advantages that you're gaining by this really deep expertise and really just knowing this industry inside and out and having better deals be presented to you because you are the people that buy in this industry, et cetera, you know, you know the argument for the roll up, essentially. So, and it just, and it just feels, it feels, that feels more natural to me and I think it does to most people, which is why roll ups are more common than chin marks. So if you would just defend that again, I know you do a lot, but do it for my audience, please.

Guest 2: Sure, yeah, no problem. Actually, so three things. One is no one ever said we didn't buy companies within the industries we already operate. So when you ask the question how many companies you own, we call those platform acquisitions. There's seven of those. We don't really count it. But Trish said on a podcast recently, we've done like 30 deals, right. So the balance of those are going to be small tuck in acquisitions. And so that's, you know, Mainly Grass bought three small lawn care companies the winter of 2019. Right. So that does happen. I would. And so, and that is now that can be an attractive way to grow. I caution you that say to say, hey, that, you know, the deep industry expertise is true, you know, better questions to ask, you know, better diligence to go through to understand. I'd say you can still fall into the trap of any tuck in looks great in an Excel model. Because what an Excel model cannot capture is the human element. And combining Two organizations, the people element, the culture element of that is something that gets tremendously overlooked. And I was in the car a lot this morning just listening to a podcast in the trenches, actually. Steve dewickis, who's in the search world.

[58:03] Host: Yeah,

Guest 2: yeah, talk. Talking about like some, some recent studies that say like 70 to 90% of acquisitions actually are horrible, invest horrible allocations of capital and asking why. And the why is almost always like, it's, it's because people fail to recognize the human element of, of merchant companies. And so I think that is overlooked when you think, just roll up. Yeah, just buy a bunch of companies and smash them all together. You know, no big deal. Looks awesome on Excel. And the third part is, I think in small business, the challenges that small businesses face and that CEOs and operators face in small businesses are very similar almost regardless of geography or industry. I know that because every month all seven of us get on a call and we talk about what's going on and we all have the same problems. And so now Bruce's problem at the frozen doe company and my problems at Mainly Grass, despite there being 4,000 miles between us, and one's a manufacturer of frozen dough and another is a residential lawn care service provider, there's actually remarkable overlap. And so I think the skill of being a small business operator is one of range and flexibility and not so much of deep industry expertise.

Guest 3: I think Palmer is absolutely right. The two things that I'd add that are a little bit unique to Chenmark have to do with time horizon and organizational design. So on the time horizon piece,

Host: I

Guest 3: think there's no question that if you want to kind of get there faster, buying a single company, focusing on that industry and doing the sort of roll up thing is going to be a more efficient exercise because you can kind of iterate faster and get up to speed and implement those learnings more effectively. For us, the timeframe over which we earn a return is not as important as it might be for, say, an investment fund that had outside investors that required their money back on a certain timeframe or measuring things based on an irr. I think for us, we're perfectly comfortable stepping into a new industry and understanding that, hey, it may take us a little bit of time to get up a learning curve here, but those learnings compound over a long period of time. And so if that means that we can now have capital deployed into a few different industries, if we're looking at doing this for 50 plus years,

[1:00:59] Guest 2: what

Guest 3: happens in year three is not quite as important. And so I think we have tolerance for an interest in kind of deeply engaging in the work of getting up the learning curve in new industries. That's a little bit differentiated from kind of other buyers also. Similarly, we sort of have the benefit because we've kind of bootstrapped this to a large degree of the operating function and the capital allocation function are integrated in a way that, that isn't really a feature of a lot of other companies. So what I mean by that is you go raise capital for traditional search or you're a publicly traded company in X industry. Generally speaking, your shareholders are going to want to make capital allocation decisions that are outside your lane. So you're successful running SaaS business and you generate excess cash. You know, unless you're going to redeploy it back into your SaaS business, your investor is probably just going to want their money back so they can figure out what to do with it. In our model, you know, we have pretty complete integration between those two things. And, and so to us, you know, having a robust and very diverse set of reinvestment opportunities for kind of the free cash flow that our businesses generate is actually a huge competitive differentiator because it means we can redeploy capital very effectively at similarly high rates of return. And so if we can and we, and we have the ability to do that because, you know, the business is majority owned by Palmer, Trish and I, so that's a little bit unique. But for us, we're pretty excited by the opportunity to say, hey, here's an asset in a different industry that has a lot of the same characteristics as maybe an asset that we already own or one that we feel like we can understand, we're not really buying particularly complicated businesses in most cases. And so to the extent we can find something, even if it's in a different, different industry or geography that sort of checks a lot of our diligence boxes and represents a compelling place to deploy capital. You know, we actually think that's a feature, not a bug.

[1:03:32] Host: Well, I think it's powerful that if you kind of have a small business taste like chicken approach and you, and you're just developing the skill of operating small business, that is, that is just a very strong competitive advantage that, that you can just, again, if you're industry agnostic, small business industry agnostic, you can just deploy whenever you see a good opportunity, regardless of the.

Guest 3: I mean, I think it's important to highlight that. I mean, I don't want to be cavalier about it. Right.

Guest 2: So.

Guest 3: Make no mistake, again, kind of coming back to this sort of arrogance point. You know, we understand that we are getting into areas that we don't, where we don't have perfect knowledge and we don't know everything. And there's a huge burden on our whole team, particularly the person stepping into the CEO seat to kind of go to school for whatever, in whatever sort of space it is that they're getting involved in. And so, you know, it kind of comes back to our recruiting but we want to make sure that we're identifying people who are up for that in the same way that Palmer, Trish and I were up for it as when we bought our first company.

Guest 2: Yeah, it's simple but not easy. I think the last thing I'd say on just buying different types of businesses is it allows us to be open to types of businesses that I think would normally not pass even initial search fund screens because, and I'm not a, I'm not a search funder funded or self funded but certainly on the funded side my understanding is there's, there's pretty steep IRR hurdles in order to unlock economics for operators. And so what that means is you have to buy a business that either can tolerate just a very aggressive capital structure or that that is going to grow quite a bit. Otherwise you're not going to be able to hit the IRRs that you need to hit, especially in any kind of medium term and definitely not a long term timeframe. For Chenmark, having that sort of escape valve of reinvestment opportunity outside of the business in that industry means that we can look at the bait and tackle shops that we've written about a ton in weekly Thoughts that don't have a ton of reinvestment opportunities but earn tremendous returns on capital. They just don't have a ton of ability to redeploy additional capital and that works great in our model and that works great for our operators too.

Host: Last question for you. Two of the things that you've said make Chenmark unique are that you're a family and you're, you're, you're collective delayed gratification muscle among the three of you with, with Holdcos being trendy today, everyone wants to have a mini Berkshire Hathaway. What type of person, you know, my audience is considering buying businesses or maybe they bought their first. What type of person should pursue what you guys have have done, what you and the three of you have done versus doing a roll up or some other path? I mean yours is, there's a very strong vision around yours and I'm Just wondering, for those in the audience who admire what you've built, who is this right for? Ooh,

[1:06:45] Guest 2: man. There's going to be heavy overlap in terms of screening the answer to screening for potential Chenmark CEOs, but I'll take a stab and say. If you want to have a more tangible impact in what you do and you derive purpose and meaning in having that kind of an impact. For me, that's what I love about Chenmark is I can. It's. It's intellectually stimulating on a lot of different levels. I've. I have been able to have experienced the operator side of it. I've experienced the deal side of it, experience a lot of the side. All the sides of Chenmark. And for me, it keeps coming back to the impact that I can have on people and a. And a bigger number of people. So at the beginning of this podcast, you asked how many employees we have across Chenmark. I'm actually glad you asked that, because it's not a question that most people ask us. Most people ask us how many businesses and then what do you do in revenue? And James, Trish and I couldn't care less what we do in revenue, to be honest with you. We care a lot about free cash flow, but more than that, we take a lot of pride in the number of people that work at Chenmark and therefore the number of families that we're supporting. And. Shoot. I don't know how many years I've been out of college, but, like, fresh out of college, sitting in Wall street, that's a mind frame that I would never have thought that I had.

Host: Sure.

Guest 2: And it's been incredibly rewarding.

Guest 3: Yeah. I think sort of the only thing I'd add to that, and that's sort of by far the most important piece, but the only thing I'd add is that I think it comes back to some of this sort of introspection piece where I think it requires a pretty clear sense of what's important. And if you can have those discussions with yourself or with your family or whatever it is and determine that autonomy is important, impact is important, sort of tangibility is important, and kind of an end result over a long period of time is important, then I think it can end up being a great thing. But it needs to be. I think there needs to be an understanding that it comes with sort of the necess, maybe not necessary, but an associated opportunity, a perceived opportunity cost, both in terms of current income, especially in the early years, and in terms of potentially social capital, depending on where you come from and what your experiences are, what your exposures are. And so those trade offs ultimately are, to your point, a very personal thing. But if you can have that conversation and, and realize that a lot of those factors, these sort of tangibility, kind of sort of long term compounding factors are valuable and sort of tip the scale in that favor, then I think it's a great path.

[1:10:13] Host: Do your old Wall street colleagues look at your success over the last seven years and are they starting to say, huh, you know, eating their words or are they still like, no, I'm glad I'm spending all day in Excel and on Wall street, thank you very much.

Guest 3: Yeah, I mean, I think it's different paths, right? So I'd say there's, I mean, I don't, I think we still feel as though we're in the very early innings of what we're trying to build here. So I think it's probably a little bit too early to say that we're, quote, successful. We've certainly learned a bunch over the last several years. You know, I think there's still a degree of confusion around what we're doing.

Guest 2: So.

Guest 3: And I, and I think that probably won't become clear for even a number of years into the, into the future. So I think a lot of people still think that we went off, we went a little bit crazy and moved to Maine and bought a snowplowing company. And you know, I think there's, there's not a lot of sort of understanding of, of the kind of Holdco Capital compounding elements of that. But I think over time, you know, over time that that might start to change. We'll see.

Guest 2: I'd say the, what I see. Well, I guess there's definitely a cohort of people when we, when we did what we did and we bought our first company, they, you know, they, the response was some form of, I don't get it. You're going to cut my grass now for me in a very demeaning interrogatory way. And I don't talk to those people anymore. So that actually was a great filtering mechanism. But for those that weren't in that category, I think they're just stoked that we're doing what we want to do and they find inspiration that we took that leap and they want to do something similar or have done something similar, regardless of how successful they think we are or we are or that's sort of an external validation piece that I don't really spend a lot of time thinking about. But I think for the most Part it's like, yeah, good on you for doing something you wanted to do and not getting caught in a trap where you're disenfranchised in what you are doing, but a little bit paralyzed to make a change.

[1:12:34] Host: One observation I'll make about what I've heard you say today and other podcasts is this, you know, for a lot of acquisition entrepreneurs, particularly if they're coming from corporate experiences, private equity experiences, they, you know, the people element of buying a small business is, is the thing that they have to get used to. And many of them are recognized that that's going to be the biggest change to their lives. But it's usually, it's usually positioned as kind of a flaw. You know, it's, you know, it's all people issues. It's going to be hard. So on not it's something to overcome and you all seem to have kind of run toward it or at least embraced it. In fact, your choice of words impact, I think says all it needs to is that you see it as a positive, as an opportunity to have an impact on people's lives. And that strikes me as a different underlying philosophy that you have than many of my guests do.

Guest 2: Yeah, I think people are the single greatest point of leverage that you can have as an individual. And so I can appreciate that there are times when dealing with personnel problems is something you don't want to be doing and you're throwing your hands up in the air saying, I can't believe I'm dealing with this, it's such a ridiculous thing. And I've had those experiences myself. But there's a saying that I quite like. It's if you want to go fast, go alone. If you want to go far, go together. And nothing is accomplished by yourself. Nothing big at least. So if you view them as problems, then you're probably not in the right business. And if you view them as opportunities, and on balance you realize that the positives far outweigh the negatives, then I think you're in a good spot.

Host: Well put.

Guest 2: Great.

Host: What is the best way for people to follow along with what chenmark is up to?

Guest 2: Subscribe to Weekly Thoughts, number one. Definitely do that. We do have technically have a Twitter account en Holdco, which I think only gets weekly thoughts. So you could get weekly thoughts there, but you should subscribe to Weekly Thoughts and not to deter any listeners from your podcast, but big time small business Chen Mark's podcast is going to be making a comeback here now that I've shamelessly gotten other people at Chenmark to help defray some of the time commitment to actually make that a reality. So, Will, I'll be joining you on your side of the microphone here in due time.

[1:15:03] Guest 3: Come visit us in Maine if you ever happen to be in this neck of the woods. Every Friday we have a team meeting, and if you ever want to kind of see how the sausage is made, so to speak, you're more than welcome.

Host: A great invitation. Thank you, James. Thank you, Palmer. This was great. Really appreciate the time.

Guest 2: Awesome. Thank you.