Host: Return on assets. It's a basic financial metric very familiar to those who analyze public equities for a living, but perhaps not so familiar to those buying a business for the first time. And yet it is the metric that today's guest Dan Tagliatella used to assess which business he would buy, which ended up being a 50 year old asphalt ceiling business, no recurring revenue, consumer facing discretionary spend. And yet, using the lens of return on assets, Dan saw a valuable business, a 1 in 100 opportunity, one that today enjoys almost 40% margins on $1.8 million in revenue and requires only about three hours of his time a week. Not that it was easy. In the pre call, Dan described his transition to me as, quote, drinking from a fire hose while another fire hose sprayed me in the face. He doesn't regret that brutal learning curve though, and believes that it's what enabled him to make so many improvements to the business, which in turn enabled him to step out and buy another business, this one residential window washing. We spend a few minutes at the end on that acquisition. Please enjoy my conversation with Dan Tagliatella, owner of Stutts Driveway Ceiling and a and a window cleaning two Quick Announcements an event you should know about In May, The M&A Launchpad Conference is bringing together searchers, experienced business buyers, owners and private equity investors for one day to go deep on buying businesses. Walker Deibel, author of Buy Then Build is one of the keynotes and 30 other experts will be on hand sharing their expertise. It's happening May 11th in Houston. The organizers are running a promotion just for us. $200 off with the code acquiringminds go to malaunchpad.com and use the code acquiringminds all one word. Also, next Tuesday is the fourth installation in our webinar series with Sam Rosati. Our fourth and final, at least for now. This one on a topic that can badly trip up first time operators. That can mean the difference between a successful transition and a nail biting. One that can mean the difference between life and death of the business. And that is working capital. It's a topic whose subtleties are easily underestimated, which is why it often ends up being a problem. So Sam is going to do a primer on the topic how you should approach working capital while negotiating your deal. Then how you should think about it once you become owner. The webinar is next Tuesday, March 26th at noon Eastern. The registration link is in the show notes right at the top where it says register for the webinar. And if you can't make it next Tuesday for the live webinar register anyway to get emailed a link later to the recording. About the presenter Sam Rosati. He's an SMB owner, investor, independent sponsor and educator and he's also the co founder of SM Bash, happening April 18th through 20th in Salt Lake City. I'll be there, as will many names familiar to Acquiring Minds listeners. Okay, Come learn how to approach working capital in your deal and beyond. Tuesday, March 26th noon Eastern. Registration link at the top of the notes. 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 people who do it. August Felker is a two time successful searcher, first with a traditional search fund. The second time around he did a self funded search. Today, August runs Oberle Risk Strategies, an insurance firm with a dedicated practice group for searchers and acquisition entrepreneurs like you. If you've got a business under loi, Oberly will provide complimentary due diligence on that business's insurance and benefits program. A great no risk way to get to know August and team. They love helping searchers. They've worked with hundreds. Oberly is a specialty insurance brokerage for searchers by a former searcher. Check out oberly-risk.com O B E R L E- risk.com link in the show notes Dan Tagliatella welcome to Acquiring Minds.

[4:55] Guest: Thanks for having me. Will. I've been listening to you for a while now, so I'm excited to be on.

Host: Appreciate that. Dan, you bought a home services business in a lesser known niche, driveway ceiling. Your first year in the business was hard, very difficult. Took years off your life, your words. But the experience was invaluable. And today your acquisition entrepreneurship journey is cranking. So let's get into it. Start us off Dan, with some background on you, please.

Guest: Sure. I'm, I'm from Rhode Island. I went to school here, high school and college in Rhode island. And I got my first job out of college in Rhode Island. I went to Bryant University in Smithfield and then right out of college I went to an insurance company called Amica Insurance in Lincoln, Rhode island. And I joined their investment department. They had various investments, but I joined the public equity team. So at the time I was there, I started in January of 2013. They had about a $2 billion public stock portfolio and I was one of the analysts. My job was to research companies and make recommendations for what stocks we should buy or if we already Own them if we should buy more or if we should sell them. And I'd make my presentation to the chief investment officer, who was also the portfolio manager, and then he would decide what to do. And then it was my job to follow the companies as they went along and keep my eye on the stock and make recommendations if we should continue to buy more or less or sell out.

[6:26] Host: Great. How long were you doing this public stock analysis investing?

Guest: I was there for four years. Yeah. January of 13 to January of 17. And then I quit in January of 17, bought my first company at the beginning of the middle of 2018 and then my second company just last year.

Host: Okay, so, okay, so connect the dots between buying your company in 18 it was and what you were doing at this insurance company most.

Guest: What we were doing was fundamental investing, which, which means that we look towards the company's sales and profits and cash flow to come up with a value for the company, and then we compare that value to what the stock price is and we try and find big discrepancies between the two. And so that exercise, there's a whole framework that, that we were using, and it's pretty widely known in the public investing space and even in large private equity, trying to discover what makes a business really good or bad, if you're looking at a good or bad business. And then you try and make a projection out a few years as to kind of where the business is going to be. And then based on that projection, you compare that to the price that the stock is selling for. You compare it to what other people are thinking. There's the sell side, which is like the brokerage firms that public re that publish research on stocks so you can kind of tell what they're thinking. And then you compare that to what you're thinking. And if there's a big discrepancy, maybe there's an opportunity to make an investment in a company and then have the stock go up more than more than the indexes go up. So trying to find good companies with downside protection, buying them at a price that gives you some downside protection as well, was something that I was just used to doing for four years. And prior to even coming to Amica, I was researching investing, you know, for the prior five years, trying to formulate my own opinions as to what makes a good company or not. And I had this whole framework that I basically developed and wrote down. And I have like this. It's not a checklist, but it's like a rubric that I use basically to try and funnel all companies that I'm looking at through. And I did that because I liked it. I thought it was fun. Um, and then it was useful when I was at the insurance company as well and became invaluable when I quit and started to, you know, buy my own companies on my own.

Host: So five years before Amica, you were you. In the five years preceding Amica, you were doing this on your own. That corresponds with college and maybe a little bit even into high school. So were you some. Were you kind of a. A kid who was always interested in investing in business?

[9:02] Guest: Yeah, absolutely. I. I opened my first brokerage account when I was like 14 or 15 years old. I opened it with my dad and he gave me a little bit of money, and he said if I made money, I could keep the profit and I pay him back. And if I lost it, then it was just on him. And so I pretty quickly lost it all. So that kind of turned me off from the stock market when I was a teenager. And then I started looking at other opportunities to make money. So I started getting interested in real estate and, you know, like, you can buy all these properties with no money down. And so I kind of pursued that for a couple of years. I joined like a real estate club locally. And, you know, I'm by and far the youngest. The youngest person in there when I was 17, 18 years old. And then I eventually kind of made it back to the stock market as I continue to try and figure out how I could do business on my own. And then I realized through reading and everything that stocks are just the way you own a company. It's. It's a company behind there. And so you own part of the company. It's a very, very, very small piece, but you're a business owner when you own some stocks and you could assemble this portfolio of stocks and you could have your own little empire of these stocks. You don't get to control anything in the companies, but if you pick them right, then they can do really well. So then I started reading a lot about how to. How to evaluate companies. And so I did that a lot on my own. When I was in college, I went to school for accounting. So I was kind of like dovetailing a lot of the accounting work that I was doing with my own research on the side for in more the investing world. And it was really invaluable because accounting is like they say, it's the language of business. And it's kind of like if you were to pick up and move to Japan and you don't speak Japanese. I feel like if you don't really understand accounting, you just won't feel really comfortable evaluating companies because so much of it is the financial analysis. It's not all of it, certainly, but. But a big, big chunk of it is. So you really have to be fluent and kind of know what you're looking at. So the accounting training, with my own training, I thought, really set me up well, and it allowed me to make the switch from accounting into investments and ultimately get the job at the insurance company. We ended up owning too many stocks. The portfolio had about 350 stocks in it. And while that was cool, it didn't really jive with what I wanted to do. I wanted to own, like, 10 stocks. And, you know, if you spread $2 billion across 10 stocks, you're making 200, $200 million investments, which. Which was cool, but it was never going to happen. So I felt like I was spending all my time doing all this research and everything. And then we'd get to take a position in a company that I liked, and on $2 billion, we would put in 2 million. And so if it doubled, you know, we made $2 million on 2 billion. It was just a rounding error, so it felt like I was putting in a whole lot of effort for. For not a lot of reward, I would say. And.

Host: And when you say you would like to own just 10 stocks, what. What does that mean exactly? At its core, what are you saying?

Guest: It means it's more fun. It means that if you're going to do all this research, find a company that you're really excited about, and then you're going to put, like, just to bring the numbers down, you know, billions don't really compute for people. But, like, if you're going to throw 50 cents into a stock that you've spent six weeks researching. Yeah, it's just, why even bother? Why spend the six weeks? I mean, so I enjoy doing this, and so if I'm going to spend six weeks, I want to go all in. And so for my whole life, I was very, very frugal, just kind of naturally. So I had saved up a lot of money on my own, and I felt like I had the bankroll where I could buy a company large enough on my own and just do it, and I could push it all to the center of the table. And if I feel like I knew what I was doing, which was maybe a little bit arrogant to think at the time, but I put in. I mean, I had read thousands and thousands of pages. I had this 50 page rubric that I created that I kind of boiled down to eight pages that I would funnel all these companies through. And so I felt like I had a pretty good idea. And you can watch what happens with these companies because they're public. So by the time I got to the insurance company, I felt like, you know, I kind of had a good idea of what, what I should be doing. And then as you start to put that in practice across multiple companies, you can, you can see it work or not work. And so ultimately I just figured, hey, I've got a lot of money saved up on my own and this isn't really doing it for me at the insurance company. Let me set aside two years, I'll just quit and see if I can't find something locally to try and buy.

[13:23] Host: And so you had come up with this notion on your own. In other words, had you been exposed to quote unquote search or entrepreneurship through acquisition eta?

Guest: Not how you're framing it. I mean, we had private equity investments at the insurance company. I had read all, all the books on private equity. I was very familiar with what that industry was. And so I just figured, I'm in public equity, it's the same thing as private equity, except you don't have to source the transactions, you just turn on the Bloomberg terminal. So but the analysis is pretty much the same. The time frame is shorter because stocks are priced every day. So you have to perform quicker. But it's ultimately the same thing. You're just investing money in businesses. Instead of having fractional stakes, you have a controlling stake. And so that was kind of the framework that I took. I said, well, I have now private equity managers, they don't use their own money. And you know, no one's going to give me money at 26 years old, or at least not me personally. I don't have that network and you know, the pedigree to do that. So I just had my own money and I, I didn't save it up my whole life in anticipation of doing this. I just saved it up because I just, that's how I am. So it was there and that kind of all coincided with what I was doing professionally. And so I just said, well, I'll do my own private equity deal on my own and just kind of do my own little mini leverage buyout. And so that, that was the framework. And then it was maybe six, seven, eight months into me being unemployed and looking around and I would have loved to known about the community because I was still living at home at the time. And, and, you know, my dad would, like, see me in my pajamas at 11am Some. Some days when there wasn't anything to do, and he would tell me to get a job. And I could have told him, you know, hey, I'm searching. This is searching. This is what this looks like. You know, he would say, I'm unemployed. But so, no, it wasn't until six or seven months in me looking that I even came. I even heard of this term ETA or anything like that, and it didn't really strike me as. It was kind of weird. I thought that it was kind of like a branding of something.

[15:21] Host: Yeah.

Guest: It was not like anything new. But it's kind of interesting to me that all of a sudden you slap some terms on things and create some acronyms, and all of a sudden it's like a big thing now to do, so. Yeah, yeah, exactly.

Host: And don't forget, teach it at Harvard and Stanford. And then that's all you got to do.

Guest: And then you got legit.

Host: You got a thing.

Guest: And so it's legit.

Host: Well, obviously this podcast is a. Is a contributor of all of that branding and the kind of the ecosystem and, and calling it by names and considering it a thing. But as I, and everybody in the space will acknowledge, it's. It is in fact, nothing new buying and buying a small business has been done since time immemorial. That said, I, you know, I'm always more impressed with people like you who choose to do this path without having been exposed to, quote, unquote, search or eta. Because despite the fact that it's been done forever, it's still an unusual path. It's not that well known. In fact, we hear a lot of. A lot of my guests will say, you know, it never even occurred to me I didn't know I could buy a business. You know, I always thought entrepreneurship. I had to start one from scratch. I, of course, also was. Was that until way late in life that I learned that this was. There was a path here. So for when I, you know, I'm intrigued and impressed when people like you kind of arrive at this. This path without any influence or any awareness or exposure to that ecosystem. I think that's. And especially Dan, because, like, because it is kind of a path less taken being exposed to search. And in fact, arguably one of the reasons acquiring minds exists is to expose more people to this, to normalize this as a way to become an entrepreneur. Because. Because it seems so abnormal if you're not seeing story after Story after story of people who have gone before you and done it.

Guest: Yeah, I think, I mean, private equity is a huge industry, so it didn't. It doesn't feel abnormal to me. I guess it feels abnormal to use your own money and do it on a small scale and kind of step off the corporate path. Yeah, but. So I guess that's abnormal in a way. But you're lucky that you had ideas for businesses you can start. I would have started my own company if I had any ideas. I felt like kind of a dummy that I was looking and looking for something to do. And, you know, you're seeing like in the early 2000s, you know, Mark Zuckerberg create Facebook and Tom create MySpace. Who is Tom? I've never even seen that guy interviewed. But, you know, he had an idea and everybody's got these ideas for creating things. And, you know, I just didn't. And I was looking really, really hard and I just never found anything. And so that led me into investing. Like, hey, you don't have to be creative or that smart. You can just buy something that's already there. And there's, look, there's all these public companies for sale every day. And so if you can figure that game out, you can be in business and, and not have to think up your own ideas. And so I was like, that's great, because I don't have any of my own ideas. So if I just figure out how to analyze other people's ideas and what that future holds for those companies, then I might be able to do something with it and then learned about private equity and, and then my own personality is kind of a square peg. You know, I, I tend to just do what I feel is right at the time and, and not really. I don't really follow a track necessarily. So on a personal level, it didn't feel that abnormal for me to do something like this. So.

[18:50] Host: Well, on the. Having an idea or not or how how somehow a career in investing is. Is somehow requires less capability or talent, I would push back on that pretty hard. Money attracts smarts. And trying to find alpha or trying to find good investments, you're competing with a lot of very capable people. So it ain't, it ain't easy. It ain't. It ain't easy path.

Guest: No, that's for sure. But, you know, it wasn't the path for me ultimately because now I'm. I'm on my own path. So it was, it was the right choice. And, you know, now I've got two companies and I'm having fun doing it, although I'm exhausted, but it's still fun.

Host: An SBA loan broker, as opposed to a direct lender, doesn't work for a particular bank. Instead, the broker pairs you with the right SBA lender for your deal based on industry terms, risk thresholds, then helps you navigate the process better than many lenders themselves do. Matthias Smith of Pioneer Capital Advisory is just such a broker. Matthias worked at two of the country's top 10 SBA lenders. So he's been on the inside of the SBA process and knows well the pitfalls and hurdles and how to avoid them. He struck out on his own to laser focus on the ETA and search space. Our niche is his niche. You'll see Matthias at all the ETA conferences. He's closed over 30 search deals since starting Pioneer in May of 2022, including some acquiring minds guests. To learn more and get in touch, go to PioneerCapitalAdvisory.com or click the link in the notes. Perfect segue to circle back around. Now, you said you had money from childhood and a good bit frugal as you are. Can you tell us how much?

Guest: Yeah, by the time I quit my job when I was, when I was 26, I had a $250,000 and I didn't do anything spectacular to really, to get it. It was just, I had my first job when I was 12 years old and I, I worked ever since every summer in between, you know, school years and everything. And I just kind of saved it all. And you know, at the insurance company, I was there for four years and they had a pretty good bonus program. So a lot of that, I don't know, probably half of that came from, you know, those four years that I was there and, and I was still living at home, so I didn't really have any big expenses, but it was just kind of methodically and anyone who knows me would, would say that I'm frugal. So it's. So Yeah, I had 250,000. And you start doing some research as to what small companies can sell for and how much a bank could get you and everything like that. And I said, okay, well, you know, with 250, I can buy a decent sized company, certainly enough to make it worthwhile to do. So that was basically what I did. And I said, you know, I've got enough money. Why, why wait any longer? I had kind of set aside in my mind years to find a company and I figured out, you know, what my living expenses might be during that time. And and so that was it.

[21:56] Host: And you were living at your parents house. So you were, you were going to be really low on expenses.

Guest: Yes.

Host: And so you could sustain that two months, two years. Even though with your balance sheet you could have.

Guest: Unless I got kicked out of, kicked out of my house. But I wasn't anticipating that happening.

Host: You did get kicked out of your house?

Guest: No, no, I said unless. I would have been able to maintain those. Unless I got kicked out. But luckily I didn't.

Host: Your, your dad finds you at 11am in your pajamas one too many times and gives you the boot. Okay, well give us a picture. Aside from the pajama image, give us a picture of your, of your search. How did it go?

Guest: It started in January of 2017 and I ended up signing the LOI for the company that I bought in February of 2018. So about a year and a month until LOI and then we closed in May of that same year, 2018. The seller went away for six weeks on vacation in the middle of the, you know, in between the, and the close. So that's why there was such a big gap. But I, you know, I had the company locked up by, by February of 2018 and in that, in that year or so I had signed 100 NDAs, made one offer and that was the company I bought.

Host: Okay, and so 100 NDAs. What did your search look like? The websites, brokers. Anything proprietary? Give us a picture.

Guest: No, I, I didn't do anything proprietary. I, I just looked on Biz Buy Sell and, and there's some brokerage like professional groups that brokers can join. And I actually got that from the book I, that red book from Harvard about the professional network. So there was like two or three of them and I just looked those up on the Internet and I typed in the geographies that I wanted to look in which was Rhode Island Mass. And Connecticut. I kind of wanted to stay within two hours of, you know, my home. And I just called all the brokers in Rhode Island, Mass. And Connecticut that looked like they did small companies, not giant investment banks or anything like that. But I think I came up with a list of about 100 brokers and maybe 15 of them were the ones that were doing, you know, most of the, most of the business. So once I kind of looked around at all the companies they had either that they on their websites or on Biz By Sell, there was kind of not much else to do. I was just waiting for the next one to come up and I was continuing to just check in with the brokers, you can't pester these people once a week. So I would like call a broker and then I, six weeks later I'd call them back and just kind of check in. And so that was it. So it was kind of, I had a rotation of calling brokers and I had the alert set on biz buy sell. And that was basically how I went about it.

[24:36] Host: And you know, that doesn't sound like you would have gotten a ton of deal flow. Were you looking at deals really often or was it like, what did that feel like?

Guest: I looked at 100. So in about a year you could say I did like two a week on average. And most of these companies, like the small companies, anyone who's, who's in this right now looking, I mean, it is like slim pickings. It's like garbage. A lot of these companies, it's nothing you would want to buy. So within five minutes you can kind of tell that you're not going to do anything. So of 100 NDAs that I signed, there was maybe five that I was really kind of like piqued my interest. And the other 95, I just instantly knew as soon as, as soon as I read, you know, what the broker put together, that this was not for me. So if I'm looking at two a week and it's taking me 10 minutes a week, like five minutes each, no, it felt very slow, but that was fine. I didn't expect it to go fast and I just figured that that's what it was. I mean, and so I just continued to binge watch Netflix in the meantime.

Host: Well, this is where the fact that you, you weren't plugged into the search ecosystem or, you know, you hadn't been influenced by the way things should go probably helped you because I feel like a lot of searchers who are following the search path would be really nervous with only looking at two deals a week and their crappy deals that they can dismiss in five minutes. You know, there's, there's a sense of urgency often and oftentimes that there's the constraint of people don't have the money to just keep going indefinitely. You were living at home, so your expenses were really low and you had this chunk of change and you. Anyway, but, but it is funny to hear kind of how relaxed, in fact your search was. I mean, did you ever get a little, a little, a little nervous? I mean, you know, 50, 50, 50 weeks of looking at two a week and, and, and every two that you look at almost are crappy. Are you, like, are you ever like, is this gonna work?

Guest: I don't. I mean, I. I had given myself two years in my head. And so, you know, when I was eight, nine months in, I felt like I wasn't even halfway there yet. So I only had to hit once. And. And I knew what I was looking for. So in the meantime, I, like, I grew up, and, you know, my friend's parents own small businesses, and they seem to be doing okay. So I knew, like, there was good businesses out there, but you also don't know the numbers. So I. I mean, I felt like there's got to be something out here that's. That's going to come up, and I just got to wait, and I just got to be patient. And I had the advantage of having my own money on the line. And so that really focuses not you, but me. Me in a way where, hey, I'm. I can't. I can't mess this up. So there are no marginal companies. I'm not getting a deal fee when I close on it or anything like that. It's not free money. I'm not getting any options in this company, so to speak. No equity grant. It's not like I'm using other people's money. And, you know, when the deal closes, I get a fee, and then it. Time vests after that or whatever. So I just need to get something done. And if it's so. So then just. So be it. I'll get in there and just try and figure it out. This was, like my entire life savings and. And everything I had up until that point. And, you know, my favorite move in poker is to go all in. And when I do that, I like to make sure I have the best hand. And so I felt like I was going all in on this and. And then borrowing money on top of it. It wasn't just all in. It was, like, supercharged all in. And so for me to find a deal quickly or to get discouraged or anything like that, that it didn't really cross my mind. It was just like, hey, if you're going to. If you're going to shoot the biggest shot of your life, you got to make sure that you're. You're shooting at something that's like, right in your sweet spot, and it's like the bullseye. And so I was happy to wait because I knew when the time came, I would pull the trigger. And you only have one chance to do that, right? Once the money's out of your bank account, you don't get to like, save the receipt and be like, oh, I want to return this company seller, give me my money back. So I just felt like I couldn't mess it up. And for me, how that feels is I got to look at a lot of things and develop an idea of what's out there and then make my move when, when the time is ready. And so that's, that's ultimately what ended up happening.

[28:44] Host: Let me just push on that a little bit, because I understand everything you just said, but the fact that these businesses, so many of them, 95% of them, as you said, were just really bad, just you dismissed them out of hand. Didn't it concern you, the disparity between what you were seeing and what you needed to see? It just seemed like I might just convince myself this method isn't working or something, because practically everything that I'm seeing is not going to be, is not going to hit the bullseye. You know, it'd be, it's not like, you know, 20 of them were almost. It sounded, it sounds like 95 of them were hard nose.

Guest: No. I just figured, though, if I was going to buy like, you know, an outlier company, a top 1% situation, then if I was going to buy one and I was thinking it's going to be a top 1% company, I'd have to look at 100. So, yeah, I just felt like, you know, I ended up looking at, I mean, that ended up being exactly what it was, but I just felt like I had to look at a lot of things and you just keep turning over rocks and turning over rocks and turning over rocks. And from the public space, there's all these companies out there, you know, in the public markets, but how often do they really get attractive to you at a price that's worth buying? Not, not that often, really. So if you're making, you know, two good investments a year and in the public markets and you can put those positions on at size and they work, you're doing really, really well. So I kind of came from that mentality that you're not, you're not making a lot of investments. And so it just, it didn't seem foreign to me. I get what you're saying, but just from my perspective. But yes, it was in the back of my mind, like, man, I might have to go back to work or something like that eventually, but I wasn't there. I mean, I, you know, there was plenty of time. In my mind.

[30:28] Host: I'm, I'm reminded of the kind of the Warren Buffett ism about pitches. And you know, you can, you can, in all these pitches can come by investment opportunities, but you just wait for the one that's just the perfect pitch that you can smack out of the park. And, but, and, and the good news is unlike the game of baseball, you're not actually penalized for watching, watching pitches come by and not swinging. You can just do that forever if you want. But the, what it, where the discipline comes in is that you gotta be patient and, and swing big and swing hard when you get the perfect pitch. But don't, but you gotta wait for the perfect pitch. And that can take some discipline. And people get antsy. They get, you know, they, they loosen their own standards because that pitch hasn't come along yet. And so they start swinging at stuff that isn't, isn't right down the middle.

Guest: Yeah. And he, you know what he says is there's no called strikes in investing. And that's true. And so, but imagine though, if you took a swing and if you missed, you'd lose everything. You know, would you wait for that pitch? Would you not be as antsy? In fact, you might not swing at a pitch that was close, but if it's not right down the middle, you're not going to swing because the consequences are so big. That's why I say I had an advantage that I was investing all my own money and didn't have any investors because I could feel that. And that focuses you like you just can't believe. And if I had investors at first, especially if they're kind of faceless investors, if I was investing like my parents money and my in laws money, I wasn't married at the time, but you know, people that I know and care about, that, that's a different thing. But if I'm investing, you know, some fund to fund money that has like a hundred different investments and I don't know these people and they don't know me really, and they're just a source of money. That's, and that's not a criticism of anything. I mean you got to do what you got to do. So if you want to do this path and you, you don't have money and you have to raise it, that's, that's what you got to do. But it, I might just take a swing at something if it's been eight months and, and nothing's come and it's like, well whatever, so just take a chance. It's none of my own money. The personal guarantee means nothing because I have nothing. And you know, I'LL just pick, pick back up if it doesn't work out. And frankly, if These guys own 100 or 150 companies in their fund, it doesn't mean anything to them either. So it is, but that was not the situation I was in. Um, so I, I, I really couldn't screw it up.

Host: And Dan, what was this perfect pitch? You, you really knew what you wanted. What did you want? What were your criteria?

Guest: Yeah, when I, like I had said, I had been reading a lot and kind of taught myself a lot about investing, and I had developed sort of a rubric that I had had used when I was at Amica to analyze public stocks. And it's nothing new. It's just I, I developed it my own way and through my own primary research and kind of compiled it on my own. And basically it was, it was a quantitative and a qualitative framework that both of the, that all the companies had to pass and in order to be a good company. And this is, these are not my ideas. This is like, well documented in the field of, you know, microeconomics, industrial economics, and everything like that. So quantitatively, you can kind of equate all businesses, no matter what type of business they are. Every business takes some amount of money that has to go into the company to make it, to make it run. So that could be property, plant and equipment, so trucks and machinery. There are expenses that you need to pay for before you get paid. Those are your receivables. And then if you're selling something, you have some degree of inventory, those are the assets that you have to basically put into the business. So if you think of it like a bank account, you have to deposit a certain amount of money into this bank account. And then that money then gets converted into all these other assets, equipment, receivables and inventory. And so there's an amount of money that a business takes in order to run, and that's its asset base. And then it then employs those assets in the business, and then it earns profit on that. It does has sales, subtract expenses, and you get profit. The relationship between the profit of a business and the assets that it takes to run it is a percent. So if, if you're earning 100,000, but you need 400,000 in assets in order to make the company run, then you've earned 25% on your assets. And if you do that calculation across a multi, you know, a multitude of different businesses, you start to realize that there's kind of wide discrepancies in what businesses earn and so as I was looking at companies both at Ameca and on my own, and that's what I was doing, I was just saying, okay, this Caterpillar is earning, you know, 20% on its assets, whereas John Deere is earning 30%. Why is there a difference? They're kind of the same type of company. They manufacture equipment and they both have captive finance companies in there and they sell through dealers. And so you say, well, these are kind of the same companies. Well, why does one earn 30 on its assets? And why does one earn 20? And in economics, that's kind of the way that they analyze things. When they measure profit, they, they measure it as the long term return on invested capital in a business. And so if you look at different companies and you start to do that calculation, you can see, okay, some of these companies are really profitable and, and some of them really aren't. And that's not necessarily the profit margin or the actual dollar that they're earning. I, I kind of think of it as if, if you were evaluating some money, where would you put it? You can say, okay, I can put it into this bank of America CD and get 4%, or I can put it into this investment and get 6%. Well, why would this pay me 6 if this is going to pay me 4? Well, maybe it's a little bit riskier, but what if it's not riskier? What if, what if they're the same and one's earning six and one earnings four? What's going on here to make that, that be the case? And so then you have to dive into the, the qualitative to try and figure out exactly why. And there's tons of frameworks that you can use to try and figure that out. So basically I was trying to look at companies that were earning huge returns on their assets, like returns that didn't make sense to me. When I did the calculation, I was like, damn, that's a, that's a lot of money. And so when you find that in certain types of businesses and in each industry, it's kind of different because there are some industries that just earn higher returns on assets or invested capital just because of the financial model of the industry, like maybe they have negative working capital, maybe there's not a lot of fixed assets required, there's more people that produce the money. So there are different dynamics between the income statement and the balance sheet that produce the return on capital. But within industries, if you're looking at specific companies, there are still going to be ones that stand out or not and so trying to understand why can really give you insight into if this is a good company or not and why that's the case. So, so for me, Dan, let me

[37:22] Host: hop in with a quick question. Hold your. Don't forget where you were. Where you were. The. When you say so return on assets. You gotta, when you're evaluating companies, it's got to be apples to apples. It's got to be two companies in the same category. And then you can compare return on assets. Not cross category, cross categories.

Guest: Why in general, like, in general that has to be the case. Like Caterpillar sells construction equipment, John Deere sells farming equipment. But right, they're all equipment. Like, they're, they're very similar. They're manufacturing companies. That's what I mean.

Host: But okay, but fair enough. When you take this metric return on assets, why do you apply it, why don't you apply it first at the industry level and say I'm only going to look at industries that have incredible return on assets rather than, I'm going to look at companies within these industries and really choose companies that have better return on assets than it. Than their competitors?

Guest: Well, yes, that's, that's a, that's a common public investing strategy. In fact, that's like a fact. They call it factor investing now. That's a factor that people use, but they call it quality. Companies with really high return on assets that are stable are, you know, are high quality companies, they call them. And you can buy index funds where they just do things like that. So that is a popular strategy with these small private companies. You don't have the luxury of having, you know, all of these companies in front of you and you're just kind of, kind of handpicked. So when I was looking at these hundred companies that I looked at in 2017, it was basically, you know, this is a food distributor, this is another kind of distributor. Okay. And they're kind of, they have trucks. This company has trucks. And so you're trying to make comparisons sort of loosely along the same. I would not compare like an accounting firm to like the company I own, the ceiling company or, or the window washing company that I own. So you're trying to make general characterizations and that's more of just having a lack of data. So.

[39:10] Host: Okay. Okay, great. And just before one thing, before we get off the concept of return on assets. Well, actually two questions. First. So how does. You said that like return on assets is, is, you know, a metric and that it can have, it has its own dynamics with like the the income, the income statement, for example. So how do I think about a business that requires, requires a lot of assets even if it has a high return on assets. So it seems appealing versus like you, like you alluded to, like a very people heavy business that doesn't require any, or very little capex. How do I think about that? I mean the little, the little capex company that you're just, you know, it's mostly just selling labor. Is that, does that therefore mean a really, really, really high return on assets? Or am I not. Yeah. Correctly.

Guest: There are some business models that are just asset light. So it's just by definition they earn a high return on assets. So but that doesn't mean that those companies. Because, because then you have to go to the qualitative. Like if you've got a bunch of companies like a consulting firm that is just people heavy and asset light, they can earn a really high return on assets. But those businesses tend to not be businesses. They're like professional services or things like that, or software companies, which, which is a business. But when you've got a business that has a bunch of people and then they all go out and start their own firms and everything like that, that's part of the qualitative analysis. You say, if I'm going to buy one of these companies, is that return on assets going to continue in the future for me? And so you want something where you can say, yeah, I mean it's not like all the people leave. There was like a phrase I heard. All the assets go down the elevator at the end of the day.

Host: Elevator elevator money or elevator revenue or something. Yeah, yeah.

Guest: And so I mean that's, that's a risk. So you can say, okay, these businesses earn really high return on assets. But why? And you can say, well, because it doesn't take much capital. Okay. Why? Well, because everything's in these people's brain and they went to school to educate themselves. And so you didn't pay for their schooling. You're, you're paying them a labor rate. But now they can then take that. And that's why you have so many accounting firms and so many lawyer firms and anyone can just hang, hang a shingle. Now if you're talking about the like for the accounting firms, like the public accounting firms, those have a competitive advantage because they need to be registered with the pcaob and there's only four of them and you need a public company auditor. So whether those partners leave or not, PricewaterhouseCoopers is a fantastic business. And those are Private companies. But so you have to have something that that's. That. That you can explain as to why. Yes, you can identify that it's high, but then the question is, is that going to persist in the future and what's the risk associated with that return? Because that's really the dynamic you want to find. The definition of an undervalued investment is that you're being overcompensated for the risk you're taking. So this company's earning 45% on its assets. And after your analysis and after researching it, you're like, I don't get why. I mean, a company like this should not be earning such high profits. If you're looking at some of these small companies like, like that I was looking at, and let's say they've got a half a million dollars invested in the company. That means, like this owner, this family, invested half a million dollars throughout his life into this company, and he's earning a half a million dollars on that. So if he took that half a million and he put it in a bank account, he'd earn like 4% today. But instead he took that and he put it in this business and he's earning half a million dollars on a half a million in assets. So that's like a, that's a hundred percent return. It's like he's got a bank account that's paying him a hundred percent. Well, that shouldn't be the case. So either it's like ultra risky or you've got a really good situation here. And maybe he's actually got a really, really good business. And so that's the qualitative analysis that you need to do. It's not necessarily that, you know, Eastman Kodak had a huge return on assets for a very long time, and then they went bankrupt. It's not a guarantee, but it's. Yeah, if you're trying to sniff out, is this a good business, is this. Not to me, it's like a tautology. Like in math, you know, they have three instead of two lines on the equation, there's three. So it's like definition, definition, definitionally equal. It's like a good business has to earn good money or else it's not a good business. How can you have a good business that's earning bad money, then it's not a good business. So the first, the first step that I took was I'm only looking for good businesses. So I'm only looking for businesses that are earning good money. What's good money? High return on Assets how high? Very. Like you don't have to think about it. So for me, I wouldn't even look at anything if it was a company that took capital, not an accounting firm, not a consulting firm, but a company that had equipment, that had maybe inventory, that had a big receivables. A lot of these asset light, like construction companies, you think they're asset light until you have, you see that have got, they've got like 35% of their sales in receivables. That's money you have to come up with out of your pocket while you're funding your operating expenses until you get paid. So receivables are a huge chunk of the assets.

[44:17] Host: Okay, well, let me, let me ask a follow up.

Guest: Big money. That's what I was looking for.

Host: Let me ask a follow up, Dan. So I, you know, use as kind of my shorthand for an interesting business, margins. You know, that admittedly quite simplified, maybe oversimplified at times, but it's a good starting point. You know, if a business has low margins, probably means it's highly competitive, less room for error. You know, one, one bad season or one bad year can mean the difference between being in the red, being in the black. Whereas high margins means the opposite. I mean, there's, there's room, there's room there for some swings. It means probably that that business has a strong competitive position, that it, you know, has some pricing power and probably many other things. It's probably a signal for other things. But I guess that, that, that is my point is that it is a. Not only. It's a barometer of. It's a, it's a signal of strength. At least that's the way I use it. Have I been wrongheaded? Please tell me. No, because that's what I've been saying for 200 episodes, always asking about the margins. Also, it tells you what the profit is, like what the person is the owner might be taking home, or it gives you directionally what the person's taking home. So that's also why I ask it. But I do think margins speaks loudly about the quality of the business. Am I wrong or right?

[45:44] Guest: No, the margin is a component of the calculation. So a high margin increases your return on assets, but it's basically the profit margin is a piece of it. You have to then do the other side. That's your numerator, essentially. So you have your sales minus your expenses equals your profit, and then you take your profit, and then you have to look at how much money you had to put up to make that profit. It was the same way. If you're, like I said, if you're going to think about putting money into, into a cd, you're saying, I have to put up this much money to get this interest rate back, and the profit is the interest rate. But you're forgetting the other side of the equation, which is how much did you need to put in to make it happen? And I'm just right now just talking about what the company has in it, not what you have to buy it for. Because a company that earns a really high return on assets, you're gonna have to pay more than the assets are worth, and that's what the goodwill is. But you've got to look at, if you've got a hundred dollars in sales and $40 in profit, those are 40% margins. But if it takes a thousand dollars in assets to make that $40, I mean, that's not very good. You know, was that 4%? So it's, you would expect, like real estate companies have very high margins. If you look at, there's publicly traded real estate companies, those are 40% margins. And, but all the assets are on the balance sheet. You know, all your costs are on the balance sheet. And so you just got to have a relationship between the income statement and the balance sheet. And the other thing which, which you know is also important is that ebitda, we're talking about profit. And you know, I think you're assuming ebitda. I mean, that's not profit. EBITDA is like, that's the gross cash flow. But if you take all that money out, you're in trouble. So you know, that's not really what the profit figure is. So if you have 40% margins and $1,000 in assets, you might have to save up for maintenance capital expenditures. And that 40%, once you take that into account, is really maybe 10, depending how asset heavy the business is. So no, but margins are a component of it. And certainly you want higher margins than lower. And certainly higher margins offer a bigger degree of protection when the sales fluctuate. So I, I would say, yeah, you definitely want high margins if you can find them. But a low margin business doesn't necessarily mean it's bad because if it, if you have to invest a very low amount of money in that. So if you're, you have sales of 100 and you're earning $3, that would be a 3% margin. But if you only have to put up a dollar to do that, you know, out of your pocket, then Then you're still making good money. And that is what the model of many distributors look like. Very, very low profit margins. You know, they might only mark up. If you look at some of the big public companies like Costco, I mean, I think they only have a 10 or 15% mark up, which means that their margin on that, if you just do the numbers out, it's much, much lower than that. In fact, I don't even think they make money on their, on the product sales. Their whole model is selling the, you know, the subscription. And there's a big industrial distributor. There's plenty of these distributors tend to have very low margins, but the asset base is lower. And so you can make that work.

[48:51] Host: Well, Dan, I don't, I don't want to get too sidetracked here, but I think this is an important education for, for me. And then, therefore, I would assume somebody who's listening to this as, but does, does the calculus change as business buyers? Because if, if we're, we're not thinking about the initial assets that have to go into getting a business up and running, the business is already up and running. So as long as we don't delude ourselves about EBITDA and we think more in terms of like, EBIT and in fact, you know, what we're going to have to pay in capex on an ongoing basis. And we factor that in realistically to, you know, we account for that and, you know, an annual spend and then we have at the end a margin or, you know, a final cash flow number. And we look at that compared to the money that we had to bring to the table for the deposit for our SBA loan or however we did it doesn't that, that calculation isn't that kind of the be all and end all. And that encapsulates what, whatever assets were there or whatever the founder needed to put in to get the thing going that's already baked in.

Guest: Well, I mean, to a certain degree, yes. But you know, what, what would you say, what would you throw out as kind of a typical multiple that you might have to pay to buy a small company?

Host: Say, three and a half?

Guest: Okay, I'll just say four, because the math will be easier. So if you have a company that is making a hundred thousand dollars, right? And there's, let's say, $200,000 in assets, so it's earning 50 on its assets, which is very high if it, if it has capital, you know, equipment and everything like that. So if you're making a hundred and you pay four times you're going to pay 400,000 for the business and it has 200,000 in assets. So people talk about buying a dollar for 50 cents. You're, you're buying 50 cents for a dollar, you're paying double what the owner actually invested in the company. And the reason you're doing that is because he's earning a high amount of money on that. So you're paying four times, but you're paying two times what this guy actually put in. So he put in 200 and you're cashing him out at 4. Why would you ever give someone 400, 000 and get 200000 in return? Right. The reason is because it's earning a hundred thousand a year for you. The reason why the return on assets going forward matters and not just at that initial initial base, is because now that you own the company, it's going to affect the rate of growth that you have. So theoretically, if you have a hundred thousand and two hundred thousand in assets, if you save that hundred and plowed it back into the business, that 200 in assets is now 300,000. And if you can still earn 50% on that, your hundred and your hundred thousand in earnings now becomes 150. You just grew your profits by 50%. So it's the return on incremental capital that's really important. And that is taken into account when you say, okay, if I accrue for maintenance capex, that's great, but what if you accrue for growth and so you say okay, I want to grow this company. If you have a company that's only earning 5% on its money, if you take all your money, save it and reinvest it and you're able to deploy that incremental money at the same time return on assets as the base business, you can only grow at 5% a year because you're capital constrained. And so I'm trying to look for a situation where I'm not capital constrained. It doesn't mean you have to have a capital light business, but if you have capital in the business, it needs to earn a huge amount of money. And so that way you can have what I, what I think of as like an and business. You can max out the growth of the company. It's very hard to grow a business 50 a year, but especially in these small companies. But if you can grow it at 7, 8, 9, 10% a year and you're earning 50% on assets, well, you can reinvest 10 to grow it at 10 and then the other 40 you can take out. So I, I call that an. And business you can grow and distribute. If you're only earning 5%, then on the company's assets, you have a choice to make. Either I can take this money out, and you might need that to, like, live. Either I can take this money out, but then there's no growth because it's going to require me to invest in order to grow. And so you have a. Or decision. You can either grow or distribute the money. And that's why a low return on assets is, you know, is not great if you have plans to grow. And it also means that probably it's pretty competitive industry because, you know, the returns have been competed down to that level. High returns are dangerous because they invite competition. Everyone's seeing, like, wow, this company's earning a lot of money. So you really have to have a way to protect that and protect those high returns. And that's, that's the gamble you're taking if you buy, you know, a company like that. And so it helps when it has a very long history of earning those high returns. And it helps if you can specifically identify why you think that is. And you can say, yeah, I'm going in here. This guy deposited a half a million and he's earning a half a million. Well, why isn't everybody else doing it then? And, oh, here's the reason. And that's, that's then the qualitative part of it that you have to do. So you. It's just a screening tool, and it's something that's really widely used in the public markets, probably even in big private equity. I've never worked there, but certainly in the public space, when you have so many stocks to choose from, how do you whittle them down? This is one of the metrics, you know, that you can, that you can whittle down and say, what companies do I want to do further research on? Well, it's really just the good ones, you know, and I define that as a high return on assets for a long period of time, but that's what happened in the past. Your, your job as an investor is to make a judgment call about the future. And so just because a company's earned high returns in the past, that doesn't mean it's going to continue to do that in the future. And so this is where the game is played. This is ultimately why, you know, you're really just a gambler at the end of the day, and you're trying to be a really Good one.

[54:42] Host: Dan, any thought on why return on assets is. Is a metric that we don't talk about much. I, I mean, it could just be that I'm not asking and everybody else uses that metric all the time. I doubt it, but maybe, but let's just. For the purposes of this question, this question, assume that it's not talked about, used a lot among searchers. Any thoughts on why that might be, given that it's such a common metric in, you know, in, in stock analysis, public equity analysis. Land.

Guest: Yeah. When you're doing fundamentals, you know, fundamental stock analysis, it's very, very common. And so it's. It wasn't necessarily new to me. I don't know why I've, I told you I listened to a lot of your episodes. I've talked to some kids offline. I call them kids. I mean, they're, you know, young adults. And I've never heard anyone really talk about it. And I, I frankly don't know why. I, I guess there's more pressing things that. I guess they're more concerned with the incremental, what they can do incrementally. So, you know, if a company's earning 5% on assets and, and then they're like, well, I can come in and change things. And, you know, to go to. From 5% to 6, that's a 20% growth, you know, and then to go from 6 to 7. So they feel like, you know, But I feel like looking at the base of what you're actually buying and how it's been over a long period of time is really indicative of the ease with which you're going to be able to do something with this. Not that it's not going to operationally be complex, but really, do you have a wide open field in front of you or is it very crowded? And it's going to be really tough. And I feel like if you're ignoring the base business and you're just looking at the incrementals of what you're going to do with it, but you're ignoring that. It's not really that great to begin with. I feel like you're going to have a tough, tough time.

Host: Thank you for the education, Dan. Let. We, we got us. This has been great, but we got to circle back now to your story. Now. Let's hear about. And we're gonna. I guess we're not gonna fully leave the topic because we're gonna hear about how Return on Assets and your qualitative filters performed when you applied them to the company. That you found. So, so tell us about what you found and quickly, how did you find it and then why did you like it?

Guest: I was just calling the brokers, like I had said, and I called one of them and the company wasn't listed because it's a seasonal company. It only operates six months out of the year. And, and I called the broker in August and the company was operating and the guy didn't want to put it on the market while he was still like working like a madman during the season. So he said it was going to come on the market in October. I called him in August. He said, call me back in October. I did. I got the information, signed the NDA. Like I said, I did that calculation. I saw the last five years of financials. I did the calculation on the last five years. I was like, you know, salivating. And then eventually after we signed the NDA, I went back, let me think, it was, it was 2017 that I saw, and I went back to 2006 as well, and I did the calculation for each year. And I'm saying, wow, this is, you know, it's even getting better as time goes on. It's, you know, it's growing. The return on assets is growing. He's earning higher and higher profits on the same asset base. And so I was like, yeah, this, this to me is I better start sniffing around here. And it's certainly got the, the financials that I'm looking for. And so then that, that was it. I just was calling the broker and, you know, serendipitous.

[58:04] Host: Great, well, so tell us what the business is, what it does, what service provides, more about the history, employees, revenue, etc. Give us the bullet points.

Guest: It was, it was a pavement sealing company. Sealer is, I'm sure everyone knows what asphalt is, but like on parking lots and driveways, it's a liquid coating that you put. Put over the top of pavement and it dries and it's kind of like a protective layer on the surface of the pavement. And we also fill in cracks on asphalt and we fill in potholes. So if we see a piece of pavement, we'll put hot asphalt in a pothole, we'll fill in all the cracks, and then we'll put the sealer on top and it makes it look really good. And it also helps to prolong the life of the pavement so that you don't have to replace it as soon.

Host: And primarily focused on driveways. So a residential.

Guest: Yes, almost exclusively residential.

Host: Great. And this actually isn't a business Or a service that I heard about before. Of course I've heard about asphalt businesses, but never this particular. So this is a niche within asphalt. You come in after asphalt has been laid, right. And you put this layer on top. So, so why is. Have I again, just been ignorant of something that everybody else knows about? Or is this some super niche thing that's only found in Rhode island or

Guest: what do you think the company is in Connecticut? So I moved away from Rhode island and I went to Connecticut. I don't know. It's. It's certainly in the areas we operate. I mean, a lot of people are doing it and it's not just when they get the driveway paved. In fact, it's, you know, it's every couple of years or so that it's being done as kind of a maintenance thing. So I don't know, I never, I didn't know what it was either until I, until I found the company. But it's something that people do. And certainly they do it on parking lots a lot, but people, people do it on their driveways as well. And he had a pretty good sized company in the areas that he operated in and it was earning good returns. And it was probably doing so because it was very niche. And big commercial ceiling companies aren't really interested in residential work. And so we've got a pretty good sized residential business. And so I bought it.

[1:00:06] Host: And why wouldn't like, do traditional asphalt businesses offer this service? Like, why, why don't. This seems like it would just be an additional service that they'd offer.

Guest: They do, but traditional asphalt businesses, they do the initial paving, so they lay the asphalt. You don't seal a piece of pavement until at least a year, preferably two after. And so it would seem like a thing where they would lay the pavement and then they'd get you on the maintenance schedule after for the ceiling. But the reality is, is the dollars are small in ceiling compared to paving. And, and nobody likes to chase small dollars. And so they'd rather just go and do bigger and bigger paving jobs. The equipment is different, so you have to have a whole different, you know, set of equipment that you have to invest in and buy. And at the end of the day, if you're a large paving company, the money you'll make from doing the ceiling afterwards, it's kind of like a headache. It's even more seasonal. It's extremely weather dependent. If it rains, you know, you could have the whole. All the stuff wash out. It's kind of a big headache. And that's why I think a lot of people, they'll start ceiling and then they move into commercial ceiling, which is even easier because the customers are less picky. And then eventually they all start chasing paving. So the question you're asking me is like, why don't people go in reverse? It's really the other, it's the other way around. They, they start out small, doing little residential ceiling jobs, then they try and do commercial ceiling jobs, then they buy big expensive paving equipment and then they want to do paving and the dollars are a lot bigger in paving. So there's plenty of large paving companies that have big commercial ceiling divisions as well, but it's still only like single digit percentages of their businesses because ceiling is just not a huge, huge attractive thing for them to do. So we don't play in the commercial space really at all. We, we have very niche residential business.

Host: How old was the business?

Guest: It was started in the 70s by the guy I bought it from and

Host: how many employees and, and what was the revenue when you bought it?

Guest: When I bought it. So I bought it in 2018. So you know, the prior year, a couple of years were all pretty much the same. It had, they were running three crews, four guys to accrue. So like 12 employees plus the owner, and they were doing 1.2 million and earning 440 on that. And on that 440, there was about a half a million in assets.

Host: Okay. So, so there's, there's the, it was

Guest: just north of 80%.

Host: There's the metric that you like so much. And so 80 is huge. In your experience,

Guest: if you put money into a bank account and we're making 80 interest rate. Yes. You would think that would be very, very high. Yeah. And certainly in, I mean if you're earning 20, like in the public company space, if a company is earning like 20 return on capital, that's, that's very good. You know, that's really, really good. And so something that's 80. There's one of two things. Either it's just a temporary thing, which I knew it wasn't because I went back almost a decade on the numbers and saw that it wasn't temporary, or it's just like a highly risky thing that, that's, you know, but you're sealing pavement. I mean, it's labor, it's material you buy. Company's been around for 40, 50 years doing the same thing the same way. There wasn't any sort of technological innovation that was going to happen really that I couldn't adopt. No one was going to seal a driveway any differently, China's not going to come over and compete with me and ceiling. Amazon's not going to undersell me and ceiling. It just didn't seem like there was much that could be disrupted about the company other than me dropping the ball, providing bad service, you know, the employees, you know, having bad relationships with the employees and things like that. It seemed like a pretty stable and boring thing to do. And so why would something like that be earning that much money on its own assets? And it's. It's because it's. It's a good business.

[1:03:56] Host: Well, but why? You had said, like, at least in public markets, if you're getting great return on assets, that attracts it, that attracts competition. Why hadn't this guy's return on return on assets number been chipped away at over the years? And also why did he not follow the trajectory that you just explained of in this industry where somebody might start out doing driveway ceiling, but they aspire and graduate to, you know, commercial jobs and pavement?

Guest: I asked him that question a couple of years after I bought it from him, and the answer he gave me was he. He just wanted to keep his life simple. He was happy earning what he was earning. His passion in life is traveling. So his only purpose for work was to make as much money as he could in six months and then shut down his house for the winter and travel all across the world. He's been to every country that you can safely travel to. He told me one time, he added it all up. He spent over a year of his life in Italy. He. When I bought the company from, he says, you know, I've worked for 40 years and had 20 years of vacation. So this was just. It supported his, like, travel addiction. And so he really. He knew how to do driveways, he knew how to handle the residential customers in terms of their common complaints and things. And he just had no aspiration to try and grow any bigger than that. And what happened was the business over 45 years, grew on its own, and he just stuck to his knitting. And because he didn't have, I don't want to say the ambition. I mean, he would say, I didn't have the ambition to do it, but because he didn't really want to go chasing higher and higher dollars and have people owe him bigger and bigger checks, and he had to chase them for money and stuff, and he just didn't want to do it. And so it was sort of like a quirk of his personality, right, that this developed this way. Nowadays we'd say, you know, he had a strategic vision of just finding a niche. And, you know, but he didn't. It just happened because that was his personality, and it developed into something. So what happens is every time we do a driveway, a yard sign goes out up front. And so you see this driveway look really nice, and then it has our yard sign. And then someone drives by and sees it and they call us, and then, you know, we do their driveway and another yard sign comes up. And so he was in this very tight geography. And over a period of 40 years, he ended up doing thousands and thousands and thousands of driveways. And he built up this really, like, geographically dense customer base. And they were all doing residential work. And so all these yard signs would go up and it kind of fed on itself. In most businesses, there's a trade off between price and volume. The more volume you're doing, the lower price you're going to get or have to pay, and the less volume, the higher price you're going to have to pay. So residential jobs, in terms of the square footage of pavement, they're small. And so you generally are able to charge a higher price per square foot than you would if you were doing a giant parking lot. Those get bid out, they're more competitive. The margins are lower, but the actual dollars are bigger. Whereas in the residential business, the actual dollars are lower that you're making on a 300 job, but the margins are higher, and nobody has a problem with that. So what happened? And the reason the this business is good is because of the geographic density. We are able to seal as much pavement, square footage of pavement in a day, almost as much as a commercial company can do. They don't have to drive around. They pull up to the job, they park there for the whole day, and all they're doing is working the whole day. When you're doing a lot of little jobs, you have to drive around. So there's a lot of down setup time, driving time, unloading the equipment. And so there's a lot of productivity downtime because we basically roll up to a neighborhood, drop anchor and do all the driveways. We're able to get a large amount of square footage of pavement so sealed in a day, and do commercial volumes at residential prices. So we don't have the tradeoff between price and volume, because the only way that was really achieved is because of the density. And then the route optimization that has to happen around that. And so when that happens, if there's 20 driveways on a street and we do, let's say eight of them. The other 12 people see our yard signs and then they end up calling us. Not all of them, but, you know, we'll get a few phone calls from that neighborhood, and then we do their job. And then more yard signs go up, and then more people see our yard signs, and then we get more phone calls. And so it kind of feeds on itself. And what happens is we develop a reputation as the driveway ceiling company, you know, in this area. And because people don't generally purchase contracting services on price alone, having a brand and a name reputation is a form of brand protection. You know, it's. It's like a structural advantage that we have because people will generally, they saw their neighbor have their driveway done, so they know we did a good job and they don't have to risk that a contractor is going to take a deposit, not show up, splash the sealer all over their house because they know we do a good job. And for a few hundred dollars, it's not worth saving 20% or 15% to just go with the guy your neighbor used and that everybody knows. And, and so we have a few things going for us, which is we have this density so that we have this, you know, profit dynamic, whereas we can do high volumes at high margins. We have this branding around all of our yard signs that are up. And we also have, because we're so highly productive, we have prices that are very, very competitive with anybody that would be able to come in. So if you were to come in and try and like, outcompete us and charge really low price prices to try and get volume, one, people don't care enough to really switch, you know, for a 25 savings to switch from the company they've been using for 20 years. And two, you couldn't generate the volume of work that you would need to get your labor and equipment as productive as you would need it to be in order to make it worth your while. The other thing is it's just a small industry. I mean, 1.2 million in sales, that's. That's not huge when I bought it. So you'll do all this effort and risk all this money to basically, you know, not make that much money. And, you know, in the grand scheme of if you're a big company trying to come in, so. So it's kind of insulated in that way. And as long as we kind of continue to stoke the fire, you know, we can have a good business. And we've done, you know, a lot of the demographic work on, on our Geographies that we operate in. We know how many households are in there, we know the income levels. And the plan is to just do contiguous geographic expansion where we can preserve our brand name and just expand on the margins of, of where we operate. And we think there's, there's a lot of room to grow. There's not infinite room to grow, but there's a lot of room to grow just kind of at the margins in, in the areas that we operate in. And so, you know, I've owned the company for six full seasons and when we bought it, it was doing 1.2 and 440 and I was doing everything, you know, I, I was doing the work of three people. I've hired three people to take over all the tasks I was doing. So, and just this past season, you know, sales, we did 1.85 and, and EBITDA was 760. And it went from 440, me doing everything to 760, you know, me working maybe 100 hours a year, you know, a couple hours a week in the business now. So as we.

[1:11:06] Host: Congratulations, dude.

Guest: Thank you.

Host: 760 in SDE.

Guest: No, that's EBITDA and that's EBITDA.

Host: So that excludes. So that's.

Guest: Everybody's paid for.

Host: Everybody.

Guest: Yeah, Everybody's paid for.

Host: Wow, 760 and EBITDA for a few hours of your time a week.

Guest: Well, yeah, but I don't, I mean it was, it was a lifetime of my time over the past five years.

Host: Well, we're gonna get there, don't you worry, because there's a lot there. Although we are, we, we spend so much time on return on assets, we got to be a little bit efficient. Hearing what you're to trying transition was like. Let me just ask a couple follow up questions on this interesting positioning you have in the market or this moat you had said you can you see yourselves kind of moving outward in this radius, contiguous neighborhood to contiguous neighborhood. But I'm just wondering like, given that I didn't even know a garage, that driveway ceiling was first of all, how many neighborhoods are there really? You know, Even if there's 50 neighborhoods and you, and you, and you're able to penetrate one, you know, a week, that's which is like, you know, you know, you're hitting the bullseye every single time you're, they're not that many neighborhoods. 50, 100 and you know, in a given radius. And then you probably don't need to reserve them because how often do people get things their driveways resealed yeah, where. You see where I'm going with this. I mean, like, the Tamil seems small and you've already said that it basically is small. It, it seems even smaller maybe than you're making it sound with your growth strategy.

[1:12:42] Guest: But no, I think our goal, me and my manager, our goal is to double from here over the next decade. So I think we, I think we can double the volume of business that we're doing over the next 10 years. That's a 7% growth rate that's not going to knock anyone's socks off, but that's really, really solid. You know, if you, if you're talking about the multiple you bought the company at, and you know, we're already up from 440 to 760 is what, over 70%, you know, in five years, that's already a really good return. If we double again from there, you know, we'll be sitting pretty at a million and a half or so. And you know, for a nice niche business, there's no need if we can grow beyond that, that. So that's one location. We have one shop. We have a geographic radius where it makes sense to travel from our shop each day and back. So I think one shop can do double, given the amount of households in our area and how far we can realistically travel in a day and still maintain our productivity. There's a radius about that. And so I know how many households are in that radius. I know our penetration rates, and I know if we make some assumptions about penetration rates that are really conservative, that seems to be where the numbers pencil out. Question is, is can we create that demand? You know, can we start marketing in a way that's enticing to people and start doing that? We've already been doing it over the past five years, you know, to go from 1.2 to 1.85 in sales, that's over 50%. So it's, it's been happening and that's what, that's what's going to keep my manager busy over the next decade. And, and by, you know, by that time, if we're able to achieve it, that's one location. You could then theoretically open another location and do the same thing and then do the same thing and do the same thing. I'm not sure if we have the ambition to do that necessarily. You know, your life's going to get really complicated at that point, but certainly that's an option. So we're just focused right now on trying to maximize the productivity of the one geographic area. That we have. And until that happens, you know, we don't really have any grand plans beyond that.

Host: Well, to the point about potentially someday opening a second location or not. But, but just. That's a segue back to something I wanted to, to ask you about this, this interesting market penetration that you have and how it, you know, it allows you to kind of, it gives you kind of a flywheel in the neighborhood. You know, one job begets another with the signs and the reputation. That's actually not a dynamic I've ever heard, although it's, you know, basically just word of mouth marketing is, is what that is. But I wonder if it's something that people listening who have home services businesses or aspire to buy. A home services business is something that they can affect, that they can deliberately kind of a strategy that they can pursue. Where you have, you know, the very, the very effect that you described. Do you think it's. And therefore like you kind of talked about it as something that happened organically over 45 years. Could it have been, could it, could it be for the listener, accelerated, compressed, if, if they, if they proactively went after such a strategy?

[1:15:46] Guest: Yeah, I mean, you're talking about at a very high level. It's, it's a route density model. In order to maintain the productivity, you have to have your guys working for the most amount of time during the day and not driving around. So any type of business where you have multiple, where the guys are starting somewhere at the beginning of the day and they're going out as opposed to the customers coming in, so they're going out and they're doing a bunch of different stops and then coming back. So it could be anything, any type of distribution business, landscaping companies that are mowing lawns, the ceiling business like I have, there's a lot of businesses where, you know, you've got technicians on the road and you're trying to maintain their productivity. The way that you achieve density, though, you can't like in an H Vac, like an emergency plumbing or like something like that business, you have to have a backlog from which you can pull tight jobs if you're scheduling on the go. In other words, a plumber, hey, my, my toilet's clogged. You need to come here. But you don't have like a thousand jobs to choose from in your backlog. And then you pick the 20 that are close together for that day, you understand? So you're just kind of going wherever the customer takes you because it's an emergency service. So there are Some dynamics where it just, it won't work work. But if you have the ability to plan out in advance the routes, then yes, I mean, that, that, that could work for sure and you can accelerate it. It's going to be risky because you're going to have to invest a lot in marketing and there's no residual value to that if it doesn't work. So you could just be like lighting money on fire. But certainly you can do it. I mean, yeah, it's not a unique model at all. It's the model that was specific to this company that I bought. And we're trying to exploit that as much as we can by getting even denser and denser and denser and then taking that and exploit, know, expanding on the periphery in order to preserve the brand and maintain the equipment and labor productivity. But there's nothing unique about it. If it's however much money you want to spend to try and make it happen and accelerate it. But you have to have the right underlying structural dynamics for that. So if I thought I was going to buy a plumbing business and do this, and then I got into the plumbing business and I realized all these calls are like, just in time, so to speak. Like, you get an emergency call and then you have to immediately go out. And then you have to immediately go out. Well, if they're on two sides of town, you don't have a choice or else you're not going to get the call because people buy plumbing services partially based on your availability when they have an emergency. So the purchasing decision on the part of the customer doesn't really elicit itself or, or, you know, to doing what I'm talking about doing in this, you know, in this space. So you've got to do the analysis. Right? But absolutely.

[1:18:14] Host: Dan the. So we've talked about return on assets. We talked about this interesting moat that the business had other than just strictly financial quantitative. Quantitative analysis of this business. You know, you kind of, as you've described to us, you kind of start there and then you bring in kind of qualitative assessments of the business. And I know that you had a couple that you, you would then look at a business with. What were those? And why did this business check the, check the boxes for those.

Guest: So the quantitative analysis is a long, a long history of a high return on assets. The qualitative analysis is trying to figure out why and figuring out, yeah, it earned that much in the past and that looked good in the past. But like, I'm buying it now and my return is going to come from the future. So is it going to look that way in the future? And that's what you have to try and figure out. So part of the qualitative analysis is just what I just described, figuring out why is this company earning this high money. And then if you go through the procedure, okay, they have extremely dense routes, Their guys are really productive, and they can charge a high price per square foot. And they have this flywheel with the marketing and everything like that. And the customer purchase decision on contracting is generally not solely based on price. And so you can develop a brand name. And so all that work is the qualitative and say, okay, it seems like this return is pretty protected. But what you don't have, what you have in, in these small businesses that you don't have in the public markets is you buy one of those companies and they come with professional managers. And now it's like, okay, can I do this? Yeah, the numbers make sense and the theoretical framework for why it's looks like it does make sense. But like, I've got to do this, I've got to put the numbers on the board. Whereas the old, the, the seller is the one that was actually doing this. So the final analysis was more personal. I was like, could I do this? And, you know, I just basically talked to the guy and asked him what he was doing all day. And he, he answered me, he says, I answer phone calls, I answer emails, I give estimates, I schedule the work, you know, I route the crews. And I said, okay, this seems like something I could maybe do. And this sounds, sounds easy enough. And it didn't require any sort of like, training. It wasn't like he was an electrical engineer or something like that. And I don't know anything about that. So it kind of fit. I said, okay, if he's going to stick around and teach me how to do it, whatever it is, I'm 26, I'll just dive in and whatever it takes, I'll learn. And it seemed like I could learn it. So it felt to me like the numbers were right. The explanation around the numbers that I could come up with were right. And it seemed like I could then replicate it myself. And so that was really it. And, and so I, I ended up making the offer and, and bought the company, swooped all my clothes out of my closet and drove down to Connecticut and rented an apartment. And, and that was it. And then it was smooth sailing from there.

Host: Dan, what did you. So in real quickly terms of acquisition, what did you pay for it? And Was this a SBA 10 maybe. You already said so, but remind us.

[1:21:10] Guest: I, yeah, I got an SBA loan from it. The multiple I paid is kind of like in that generic range that, that you hear everywhere. I don't want to say specifically because I'm still in the game and I consider that to be kind of competitive information. You know, I, I bought a second company and you know, I don't want to put my deal terms out there too specifically, but it was a normal deal that you've heard on 200 episodes.

Host: Okay, fair enough. All right, so. And, and then you, you know, happily ever after. Right. Okay, so tell us, tell us about, tell us about the transition and you know how what the seller was doing was no big deal.

Guest: So he, he didn't, like, he didn't lie to me or mislead me in any way. Everything he said that he was doing, he was doing, but I didn't realize how he was doing it. So. And that was maybe my, my fault because I was just willing to say, hey, whatever the day to day life is going to look like, I'm just going to do it. I mean this is a great company earning high returns in an industry that's not, that's stable and you know, I'm just going to do it. And so what I found was that he had kind of a unique schedule and way of doing things. So he would wake up in the morning around 7am when the guys got down to the shop and make sure everything was good. He worked from his house and so he wasn't down at the shop, he was in his home, just kind of a vacation, available to take phone calls. And the way that we schedule work because it's so weather dependent is we don't plan it too far in advance. So we're generally calling customers just a day or two in advance to tell them that we have their ceiling planned for the next day. The way that he would call customers because we're doing like you know, 100 a day, is he would set up, he had a robocall thing and it plugged into his landline phone. It was like this, like, it looked like a Nintendo 64. And he would plug one side into his computer and the other side into his like phone jack on his landline phone. And he would then export out of his database into the phone system all the numbers he wanted to call. And he had a pre recorded like tape and it was his voice. And the phone would dial, the customer would pick up or it would go to voicemail and he had A message that was pre recorded that told them we were coming tomorrow. And the instructions for what they had to do to get ready for us. If you're. Each phone call took about maybe, I don't know, two or three minutes, let's say. And so if it took three minutes to go through a list of a hundred calls, it took 300 minutes, right? And so it was like there was like the phones were dead because he couldn't, it was, it was using his phone line so he couldn't do anything. So he would wake up at 7, send out this call at about 9, and then he would go back to bed and he'd sleep till about 1 o' clock and he would get up at 1 o'. Clock. So this phone thing would be running while he was sleeping and he would call, he would get up and he'd have a bunch of voicemails. And so from about one o' clock till about five o', clock, he would answer messages, he would return a bunch of phone calls. The phones would be ringing with customers and he would be doing desk work. At about five o' clock, he would go out for about three hours and he would do estimates. And then he would come back at around 8 o'. Clock. It's a seasonal business, it's still light out. And he would, until the end of the night, he would put in all his estimates in his database, answer any messages, deal with any problems that the guys had. And then at around like 11 or 12 o', clock, he would do the routing for the next day after all the customers called in and canceled and everything. And any, you know, this is who we were going to do tomorrow. He had all these maps they would print out by hand. He would go to Staples and print out like three by three maps of every town we went were in. And he'd print out like, you know, 50 or 100 of them. And then he would clear his kitchen table and he'd sit down with these paper maps. And because he knew all the roads off the top of his head, he was able to route the crews on these paper maps with a pencil. You know, this job first, this job second. But he would just like know where like Smith street was. So his hand would just like go, okay, number one. And then like whatever the next street, he would go over here and like put number two. And I didn't know that. So he would finish up this routing at like midnight or one o' clock in the morning. And then he said he would eat dinner and maybe like go on the treadmill and he'd go to bed around like 3:00am and then he'd sleep till 7, 8 and he'd sleep till 7:00am and then he'd wake up and then he would send out his robocall and deal with any problems that the guys had or any like customer issues. 9, 9, 9am in the morning, he'd go back to bed until about 1 o' clock and then he'd repeat. So he basically split his day, his sleep up and he was kind of like semi nocturnal almost. And I was like, I'm not, I'm not doing this, so. And I didn't have the ability to do it. So I had to very quickly come up with a way to like route the crews better and just figure out a better system. So the last piece was the database he was using was one of these old school databases where you don't have a mouse, you have to use your cursor, the screen's blue, all the text is white, your cursor's blinking white, white. And it only worked on a Windows 2000 machine because the company went out of business and they never. Right, there was no other versions that. So I very, very quickly had to replace his database, figure out a different way to call these customers and figure out a different way to route them. And so in the meantime I was trying to run the business and do all this stuff and so I quickly replaced the database. Found online that there's plenty of like SaaS programs where you can just pay monthly for robocalling services. And so they'll use their own phone line and they send out the call in 30 seconds, not four hours. So I could easily just export upload. Boom, the call goes out. I get a barrage of calls back, people calling me back after they get called, but the whole thing's done in 30 or 45 minutes. And then you can go onto your normal stuff, which is your normal, normal customer phone calls. And you can start on your routing, you know, at like noon, not midnight. And the database plugs into, it's a custom database. It's a desktop relational database. We've now got it hosted in the cloud on an Oracle server and we integrated through an API into this robocalling system. So we don't even have to pull up the robocalling system on its website. We do it right from our database. And then we found a rod optimization software. I initially was using Google Maps Maps, but then we switched to, you know, a real route optimization software that we also pay a monthly fee for that we also integrated to our database with an API. So I was doing all of that and running the company at the same time. So that's why I said to you, you know, it took five years off my life. I feel like I'm going to die five years earlier just from the stress of that, you know, that 2018 season, trying to do all this. And I. I had to. I mean, I don't have a Windows 2000 computer, so it was like, you don't have a choice. And I had to figure out a new database, and I didn't know the streets off the top of my head, so I had to figure something out. And this, like, phone tree thing that he was using, that was the brand name phone tree. I don't even have a. Do they even have landline phones anymore, like, with phone jacks like they did. So I was just like, I had to do this, and I could have easily of. I don't want to say avoided, because had I known ahead of time, I might have not done the deal. You know, I'd be like, what, you sleep like, during the day? I mean, I'm. Why do you do that? And he would explain it, and I'll be like, wait, so how. What am I going to do? And I might have not even done the deal, but I was so drawn to the financial characteristics of it that I said, whatever is going to happen is I got to figure it out. And so I just dove in. And when you are put in a situation where you've got everything you have on the line and you've moved away from your home, I don't know anybody in Connecticut at all, and now you've got a situation that you have to adapt to, and you don't have a choice, and everything's on the line, you know, you'll elevate to a different level that you didn't even know you had, and, you know, you'll get things done that you otherwise might not have. So it was. It was really a gift that I didn't know about this ahead of time. Going forward, I mean, if I bought another one, I don't, you know, I don't want to do something like that again. I might be a little more savvy. And in this second company, I. I kind of was, which I'm not even sure we're gonna have time to talk about. But so. But. But it was good. I was young and. And I wouldn't recommend it for everybody. The one thing I did want to say about it that I've heard a lot you know, on your podcast about. Well, just you got to buy a bigger company, you know, that's why something with 440, when you buy it, you got to buy a bigger company. Yeah, it's not that the company necessarily has to be bigger from a profit standpoint. It's just that the functions of the company have to be covered by more people. So this guy was doing everything. He didn't, he did everything except the labor. And ultimately I had to hire three people to, to replace the work I was doing. I have a full time estimator now and I have two people in the office, my manager and someone else in the office that do all of the routing and the customer communication on the phone and email and the estimator does the estimates. And so, you know, but had the business been 440 when I bought it and had all those people, it would have been the same thing as 440 without those people. In terms, it doesn't have to be like more profitable. It's just that it has, the functions of the business have to be covered. And now what I did was I, you know, I took the 440 and it grew and then I used a lot of that. That was 440 with just an allocation for just paying me in that number. That's not SDE. So that's 440 in EBITDA, paying myself one person. It, it's now 760 and I'm paying three people, you know, so a lot of that growth, I, I purposely reinvested to try and you know, achieve something where other people could now help and, and have opportunities of their own. And my manager set up, he's, he's about to buy into the company as well. I'm offering him an opportunity, opportunity to buy in. And so he's very excited about, you know, he knows all about this growth plan that I talked about and now he's got a great opportunity in his life that he wouldn't have otherwise had. So it's very cool because I, I've got to achieve something for myself that I, that I wanted to do and, and him and the other people that we hired as are doing so as well. But it's not that the company has to be bigger, it's just that it has to have more people doing more things.

[1:31:11] Host: Well, I do think that the, that that is how it's communicated. You know, try to get a million dollar SDE business because it suggests a larger, less, a less fragile business because usually SD is an indication of, you know, A signal of size. But of course, as we've talked about on the podcast, like $1 million in SDE could be, or maybe not a million, but call it 750 in se could be that because the owner is doing so much and he's or she is not paying other people to be. To doing it. So to to be doing stuff that he should. So in fact it would be look more like a $400,000 SDE business with you know, a management layer or two managers and you know, that's not super fragile and can survive without everything just coming apart if somebody sneezes is effectively the same thing as a $600,000 STE business where the owner is doing absolutely everything and it's, and it's super fragile. So you really have to understand, you know, if there, that's the question be asked is are there, you know, if you poke this thing, will it, will it topple over?

Guest: Yeah. And, and I would just go alone.

Host: Does not tell you, does not answer that.

Guest: So that's correct. Yeah. Yeah. Just because it's high or low, you can have a 900,000 SDE and you still got the owner doing everything. I mean, or you could have a 400,000 where the owner has kind of delegated and trained people and stuff. So it's not the presence or absence of a high profit number. It's more, you've got a, that's part of the qualitative analysis on the operational side, figuring out what are the functions of this business. Scheduling, estimating, answering phone calls and emails and who does those things. But again, that wasn't a consideration for me because at the time I was 26, 27 and whatever he was doing, I was going to do. And if this was how I had to get into the opportunity, then that's what I was going to do. And after looking at 100 companies and not finding anything close to an 80% long term decade return on assets like that, it didn't matter what he did, if he went out in the middle of the night and did the rain dance, I was going to be out there with him doing it. So it's just whatever it took was what I was going to do because I wanted to make sure that my 250,000 was as protected as possible. And that meant to me I had to buy the highest quality company that I could find in my geographies that I could afford. And that was my opportunity set. And this was the one that popped up and you know, I took a

[1:33:43] Host: swing and reflecting back on it now, despite the fact that you're going to live five years less than you otherwise. Otherwise would have, it's that you. You sound very content with how. Or more than content with how things worked out. Even the grueling first high season, you know, it seems like you feel was, you know, you. You earned your stripes and you learned a lot, and you push yourself to another level of performance, for sure.

Guest: And then I'm a masochist, so I did it again.

Host: Okay, well, we have about five minutes to hear about that, but is there anything else to say about. And by the way, what's the name of the business, the ceiling business?

Guest: Stutz Driveway Ceiling.

Host: Stutz Driveway Ceiling. Is there anything more to say about that? You've told us where you're sitting now, but basically, sales are up, what, 50% in five years? But EBITDA has doubled, so not quite double, but.

Guest: Yeah.

Host: Okay, right. Not quite doubled, but close to whatever that is. Almost 80% higher. Fantastic. And, oh, and that.

Guest: And the important thing.

Host: Yeah.

Guest: If we go back to the return on assets, it's the same number of trucks. So the productivity has continued to increase as the density has gotten more and more and more dense. There's less and less and less driving, and so we're able to do more and more and more jobs per day. So we're still running three trucks. We were running three trucks at 440. We're running three trucks at 760.

Host: And you've turned that $250,000 that you'd spent the first quarter century of your life saving into a bank that throws off three times that amount every year.

Guest: Yeah.

Host: Is that a way to look at it?

Guest: That would be correct, yeah. Pre tax, you know, before tax, a moderate amount of maintenance capital and before the debt, too. But yes, I mean, effectively. Yeah, just. I think just the distributions. I was looking at the numbers. Just the distributions that I've taken have been nine or ten times. And then if you assume kind of standard multiples, you know, on the 760, it's probably another seven to 10 times in equity value. So, you know, somewhere between 17 and 20 times.

[1:36:01] Host: 17 and 20 times your initial investment of 250 five years later.

Guest: Yeah.

Host: Well done. All right. You know, I'm not so sure you're masochistic. I. I think you're just chasing, you know, 20xing your money all over again.

Guest: I think I've chased 1 milk.

Host: Let's have five minutes on. On the. On the second acquisition.

Guest: So after, you know, I had hired everybody and trained them and the way I trained them was I created these training manuals that are literally step by step. They're like hundreds of pages to how to do everything. And I train these guys on these manuals, and I was there. So it took me a year and a half to train the manager. It took me another half a year to train the guy that. That he works with, and then another half a year to train the estimator. So they're very, very well trained. They know what to do. And so that basically, I found myself bored. And so, you know, because I was frugal, I don't spend all the money. And so it was just kind of accumulating. And I got to the point where I said, okay, I can. I can probably do another one of these things. And we wanted to move back to Rhode island, so. So we did. So I live in Rhode island now. The company's in Connecticut, about two hours away from me. And I started, you know, kind of looking at other companies, and something came up. This window cleaning company in Rhode island that had the same Dynamics, same thing, 80%, almost. Almost on the dot, return on assets. And for a long period of time, it was being sold by somebody who was in his late 30s. His grandfather started the company. He. He inherited part of the company. He owned it with his dad. And he. He didn't. It wasn't his passion. You know, the. The Stutz company also had. The owner had a son my age, maybe a year or two older than me, and he didn't. He's a management consultant. He flies between New York and London. And he didn't want to. He didn't want to take it over, so that's why he put it up for sale. So it was a similar situation. The. The guy that I bought it from, very nice family. They. He. He likes real estate. He's a real estate investor. He owns a lot of real estate. This was his dad's thing. And. And it got to the point where his real estate was big enough that he could sell this company, the window cleaning company. So he did. He put it up for sale. And. And I bought it. And so they had an office staff in place at the time, and then they have about 20 guys out on the road every day cleaning windows all across Rhode Island. So it's a pretty residential. Yeah, it's almost the same model. I didn't intend for that. I would have bought anything. I would have bought a manufacturing company, a distribution company. I just had to have the financial model and a way for me to explain why that was going to persist into the future for me, but this just happened. It just happened to come up. So I saw it. I already know about the routing, already know how to manage the guys. That's a big, big part of it. And getting the productivity out of the guys, not only through the density, but actually through their attitude and, and them actually getting the work done every day.

Host: Talk to, talk to us about that. What, what did you learn at stuts to become a better manager?

Guest: That it's sort of like Goldilocks, like, you can't be too hard and you can't be too soft. You have to be like, right in the middle. I think a lot of people struggle with being an authority figure. When you employ somebody, you, whether you like it or not, you have a certain degree of power over them. In the, in that context, the reason you can say, hey, the floors need to be sweeped and they'll go and sweep it, is because you control their income. And just like we try to avoid customer concentration in, in the business purchases, they are concentrated. They have one customer, they sell their labor to you, and that's one customer for them. So because of that, they're willing to do what you say in order to keep working. And that, whether you like it or not, has a dynamic where you are able to control their actions to a certain degree. And that is very uncomfortable for a lot of people. And a lot of people shy away from that. And they don't want to have the confrontational conversations that are required to really effectively exercise that authority. And that doesn't have to be big stuff. It doesn't mean you're firing people or doing anything. But like, if they have to keep this area clean and it's not clean, well, it's not going to break the company if you don't say anything. And so you just don't say anything. And then things start to accumulate. And that's how you build the culture. And so being a good manager, to me, the hard part about it is setting the standard and not letting everyone around you slip from it. And in order to not let every. Anyone slip, it's like there's this term in physics, entropy from kind of like from order to disorder. And that's the natural order of things. And you are, are the boss. It is your job to not let anyone slip from the standard. And when they do, you have to kind of gently bring them back to the standard. And it doesn't mean you're yelling or screaming, but it's just by the nature of it is a Confrontational thing to do, to tell somebody to do something or to tell them, you know, they're not up to this. And this is what I need to see improve. And it's so easy to avoid that. And so what I've learned is, no matter what, we're not going to slip from the standard. And that doesn't mean I'm authoritarian at all. I'm pretty laissez faire. But I would say my management approach is pretty barbell. I'm very, very laissez faire. It's kind of whatever you want to do to get the work done, as long as it's done correctly. But if it's not done correctly, and I bring this to your attention one or two times, ultimately you're either getting demoted, suspended, or fired and sticking to that, even when, you know it's really tough to do. And you do that a few times and people see that and it starts to change the culture pretty dramatically, pretty quickly, in a positive way, because all the people that were doing that stuff, they don't like the people that weren't anyways. And so. But. But as a business owner, you're like, man, I need this guy. But, like, you really don't. I mean, you'll. You'll find somebody to replace him and, and they'll be better and everything like that. So the hard part of being a manager is not. It's. It's internal conflict that you have where you want people to like you. You know, you want people to think you're a nice guy. You want to have frictionless interaction with everybody, and you want everybody to think you're great. And that is not possible by any stretch of the imagination. Everybody is going to tell you what you want to hear now. Everybody is going to laugh at your jokes. I've never been so funny since I own these companies. So you're. You're kind of walking through this haze where they say it's lonely at the top. You're walking through this altered reality where everybody's on guard around you and there isn't any way to not have that happen. So you have to accept it and accept the position that you're in now and just say, look, the way that I get these people to like and respect me is to preserve their jobs and to make their lives as easy as possible by not having them drive around too much, not breathing down their neck for minutiae things and showing them respect when I talk to them and just how I conduct myself in front of them. But they will. They'll respect you and like you more for doing that, trying to, than trying to be kind of more friendly with them. And that I would say that's the biggest takeaway that, that I've learned.

[1:42:58] Host: And, and you went and you learned that the hard way at Stutz, your first acquisition.

Guest: No, I wouldn't say so. The, my, the guy Stutz was like that and so I just learned from him. I, I never managed anybody at 26. Like I, I'm managing guys that have been doing this their whole life that are in their 40s, like who am I? But all of a sudden because you have this authority, you control their paycheck, they will listen to you. And so it's like, wow, you need to rise to the occasion. What am I going to do with this? And you could really mismanage that. And that's why people hate their jobs and hate their bosses and everything like that. So he was really good at it, I thought. And so whenever there was a sticky situation that came up, I called him and I just asked, hey, this is the situation. What do you do here? And he would tell me and then I just repeated it. And eventually over time, that's how I learned. And I would say with, with this next company, with the window washing company. A a the name of the company is a, a window cleaning because the guy that I bought it from was not fully kind of immersed in their day to day. He was doing his real estate stuffs and the culture of the company really that this was a huge skill set that I brought. I had to kind of bring everybody back and, and we let some people go absolutely at first that, that weren't willing to come on board or improve and, and what we've got now is guys that have been working there for a very long time that I promoted, very happy to get the, the promotion and they're just kind of like even keeled calm guys that just get the work done and everybody is very, very happy with how it's going. So that, that was something that needed to happen and it, and it did. And it's, it's been, it's been going great since and the guys are a lot more productive. You know, it's amazing how much better work we're. I've owned the company less than a year. Sales are up 20 with the same number of guys because they're getting their work done every day. It's like I didn't do anything. Yes, I'm helping them with the routing. I'm giving them a little boost because they're not driving around as much, but maybe that's half of it. The other half is just they're finishing their work and they're not screwing around. And, and it's because I think they feel a lot more respected and they feel like, you know, I'm paying attention and this is my focus and I'm treating everyone fair and the guys that are screwing around, they're not there anymore. So we've got a good, a good cast of characters now and we've got about 20 of them. So you know, it's.

[1:45:13] Host: Last question on your second acquisition just to solidify this return on assets lens. This business sounded like it also really showed a strong performance on this metric. Can you explain that to or you know, walk us through what you saw there. And then sounds like you're always follow up question when you see really, really strong return on assets is why what's the. What's the. How is a company able to maintain that?

Guest: Yeah, the numbers were about 80% same as same as the ceiling business and it had the same dynamics in terms of the density. So it's again, I didn't, I didn't pick this company because of this, but it just happened to be the same thing. So if you think of the square footage of glass you're cleaning because we're so heavily concent concentrated in residential, we do a lot of commercial too, more than the ceiling company but it's, it's vast majority residential. If you park in front of a giant skyscraper and you're there all day or two days, you, you're highly productive the whole day. But the price you're going to get for those windows is a lot lower because you're doing so much and they get bit out. It's the same thing. It's a few hundred dollars. The average price is even cheaper to clean your windows than do the driveway. It's a few hundred dollars. Customers do it a couple times a year. You go into their house and into their home. So you got to be a reputable company. So a brand name matters. They're not just going to let anybody off the street, you know, into their home, into their bedroom and things like that. So you're there for a couple of hours and so you really have to be reputable and have a good reputation. So even though we don't have the visible yard signs, the company has a phenomenal online presence and that is sort of the effective yard sign when people look us up. And because the company's been in business since 1930, it had a really, really good word of mouth reputation. And so it had this big base of customers that I bought and they were really close together and, and the routing was not optimized. They did not even use a map to schedule. And so we've built a custom mapping program that we've integrated to their SAS database CRM through the APIs, and that allows us to now visually schedule jobs. And so we've improved the routing and so we've achieved the commercial volume of window cleanings at residential prices. So it's the exact same thing. And we've done it through the routing and we've done it through even more at this company, getting the guys more productive as well. And so that's, that's basically what the model is. We've got a structural advantage because of the density. Those profits are protected and we're able to price our services accordingly to protect ourselves from people coming in at scale. There's always going to be somebody who can just like hang a shingle and kind of walk around with a bucket and do it. But okay, so let's say they do that and they take 10 of our jobs. Well, how are they going to grow from there? You know, once. And then they have to start adding overhead and all this type of stuff. So they're always going to be these little small guys. But you're talking about a company now we're doing, and we cover the entire state. We're by far the biggest company by far. It's not even close. And so we've got a nice model here and we've got a really good online reputation. And that matters in this business, your reputation matters. And we're able to protect it through charging very, very fair prices because of our labor and equipment productivity and still earn the high return on assets.

[1:48:30] Host: And what does revenue look like? And you said 20 employees. What does revenue look like?

Guest: How I bought it at the beginning of 23. So in 22, it was 1950, just under 2 million. And it was doing 580 on that. So it was like 30%. And just like I said, it's up 20% over that in less than a year just from, you know, the routing efficiency and the labor. The guy's actually just getting it done. So we're just under 24 now. And. And that's up to 800 because most of that just dropped to the bottom line. I haven't added anybody yet.

Host: All right, Dan, this has been a lot of fun and an education, as I've said. Any last anything we didn't touch on or any last message for people listening before we close out.

Guest: Yeah, go for it. You know, if you, if you, you know, your personality, if you have the personality where you can do this, then just go for it. I mean, it's not that hard to educate yourself. It would take a little bit of time. But if you, you know, if you learn a little bit about accounting and you learn a little bit about economics and, and you know, this return on assets and long term return on assets and then you do the qualitative work, there's all stuff out there that you can, that you can read. You can read a microeconomics textbook. You can read, you know, Michael Porter, those, those are major, major books. For me, the, the five forces. You get like a page and a half in college on that. Those books are 900 pages. He wrote a book in 1980 called Competitive Strategy that introduced the five forces in 1980, and then he wrote in 1985 a book called Competitive Advantage where he introduced the concept of the value chain and everything like that. Those books are 900 pages combined. So the page and a half you get in contact college on the five forces. That is not even close to the depth that he goes into to help you evaluate businesses from, from a qualitative standpoint and understand what's going on in the industry and what's going on in the particular business and the value chain of that business, that you can educate yourself. So if you, if you really want to pursue this, there are resources out there that you can pursue and read and learn to try and make it a lot more likely that you'll be successful with the acquisition. It just takes a little bit of education and time and learning. But, and look, I'm not saying I know all this and, and this could all blow up on me next year. So, you know, I'm still in the game. It's not like I've retired yet. So I think you should go for it. And, but it's definitely not for everybody. And if you're considering that it might not be for you, it, it's not for you, because it's going to be. You have to be kind of all in mentally and willing to do whatever it takes. And if you're a little timid or anything like that, I guess that's normal. But to me, this was an obvious path. Like, it was just kind of like hit me like, like an anvil fell out of the sky and just hit me in the head, like, this is what I'm going to be doing and kind of nothing's going to stop me from doing it. So I would say if you've got the personality for it, it's a cool thing to do. It's very, very stressful. There are definitely negatives to it. But if you don't think that you have the personality, I would highly encourage you not to do it because will break you very, very quickly.

[1:51:39] Host: All right. All right, Dan, on, on that note, what's your preferred method of outreach? If people want to ask you a

Guest: question, you can find me on LinkedIn.

Host: Dan Tagliatella, thanks for so much time. What a fun and illuminating conversation.

Guest: Thanks, Will. Hopefully other people find it useful.

Host: Sam.