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- [00:00]
A
Hello, everyone, and welcome to Investing by the Books, a podcast by Red Eye. I'm your host, Eddie Pangen, and today we're delighted to have Jeff Totten on the show. Jeff is the founder and CEO of Evergreen Services Group, a holding company for technology services businesses. The firm is based in San Francisco and has done over 160 acquisitions in its first nine years, currently generating about $1.5 billion in revenue. For this episode, Jeff has selected the book Built from Scratch, How a Couple of Regular Guys Grew the Home Depot from nothing to $30 billion. I really like this book, which is written by the founders of Home Depot, and I think it proves how far common sense can take you, but also the many challenges along the way to success. Built from Scratch was published in 1999, and we're thrilled to discuss it on the show today. Here comes our conversation with Jeff Potten. Hi, Jeff, and welcome to Investing by the Books podcast.
- [01:00]
B
Eddie, good to see you.
- [01:02]
A
It's great to have you on. We recently met in Stockholm at Red Eye Steer Acquires conference. Where are we reaching you today?
- [01:10]
B
I'm in Minnesota, so a little bit colder than Home Base, which is San Francisco.
- [01:16]
A
Very good. And to begin, I'm curious about your upbringing and how this has shaped you as a person.
- [01:23]
B
Yeah, so I. I grew up in the Bay Area, you know, close by where the company is, is based today in San Francisco. And my dad was an entrepreneur. He had a construction company. And I always looked up to him. He was kind of my role model growing up. And I wanted to be a business leader and entrepreneur like he was. And so in. In high school, I started a photography company. I was interested in photography and. And decided to turn that into a business. I would go and take pictures at, you know, high school events, could be a sporting event or Eagle Scout event. And I would sell digital downloads to the parents, which was me, very easy audience to sell, sell to. I'd sell, you know, mostly to my friend's parents. But that. That's how I got into the business. And from there I took an interest in, hey, how do you build a business up? And so I went to the bookstore and grabbed every book off the shelf that talked about business. And there happened to be some books on investing that were right next to the books on running a business. And so that's when I came across Warren Buffett in the book Snowball about Buffett. And that's when it really clicked for me, this idea of building companies through. Through acquisitions. And so really been interested in it since I would say High school when I first discovered Buffett and the power of acquiring companies and operating companies and being an entrepreneur.
- [02:54]
A
And how much investing have you done like on the private side and investing in public companies for your own sake since those days.
- [03:04]
B
I've been investing since I was in high school and it was a fascinating time. This was during the great financial crisis. So it was a fascinating time to start investing. Obviously it's a good time to start investing. When stocks are pretty low, you can feel pretty good about how you're doing when stocks are at a low. During my lifetime through that it was also an interesting time to read about what makes businesses durable and able to survive a recession, but also some of the things that people get wrong running businesses that can cause them to go out of business. I've been investing in public companies since, since high school. And then on the private side I got into private equity directly out of undergrad and invested both through the private equity firm and then I also personally invested in several search funds during that period of time. So I got good exposure both personally and professionally to private investments directly out of undergrad.
- [03:58]
A
And nine years ago in 2017, you founded Evergreen Services Group where you're still the CEO. And can you tell a bit about. And we will get into to the business and how this has formed but can you say a bit more about how this came about?
- [04:14]
B
My, my co founder Ramsey and myself, we were both working at a private equity firm called Alpine Investors and really a pretty innovative private equity firm and one that's had a lot of success with buy and builds and with backing early talent into companies. And we loved the whole model of acquiring middle market businesses and helping them grow. So we, we enjoyed that part of the work within private equity, but we also really admired Berkshire Hathaway. And we went to the meeting in 2017 and just saw what Berkshire built over 50 plus years. And we're really impressed by that. And one of the things that stood out is just the power of the holding company structure, the idea that the company doesn't have a lifetime, similar to how a private equity fund has a lifetime to it. And we thought hey, that's the right structure to build in for us. Like we wanted to do something over many decades. We wanted our work to be cumulative, not more project based. And so we proposed the idea to Alpine coming back from the the Berkshire annual meeting. What if we built something similar to Berkshire backed by Alpine? And that was our big audacious idea and Alpine supported us. You know they, they back early talent and they supported us in getting this off the ground with their, their backing. It took, you know, a few weeks after we got back from the meeting to have the initial commitment from Alpine and the one piece of advice they gave us is, you know, we know you want to build Berkshire Hathaway long term, but start by focusing on a single industry. And so we decided to focus in on the managed IT industry to start and that's. That built our foundation of the company.
- [05:49]
A
Amazing. And how old are you now and what stage of life do you feel like you're in and how is that for you now?
- [05:57]
B
I'm mid-30s. You know, my wife and I are, are starting our family. Actually all the partners, Evergreen are, have recent, recently started their families and it's I, I find to be a very fun point to be building and to be a leader in a company. We've been doing it for eight, nine years. So I think we've made some mistakes and learned from those mistakes. We've got some experience but at the same time we're very early in what we're building. We feel like this is just getting started and so we feel like we can build upon, upon that over the next several decades as a company. So in some ways it feels like Evergreen, we've scaled to a billion and a half dollars of revenue. It feels like it could be a mature company in a lot of ways. It feels like we're just really at the beginning of building the business right now.
- [06:47]
A
And today we will speak about the book that is also starting something from the beginning. It's called Built from Scratch. Can you briefly tell us what is this book about?
- [06:56]
B
Yeah, it's about the founding of Home Depot and really the first 20 years of the business being built and it's written by the founders. So that's one of my favorite parts about the, the book is that it's a first hand story. You know, Bernie Marcus and Arthur Blank telling the story of building the business truly from scratch. And it's, it's a more entrepreneurial story than you would expect. You know, Home Depot today is a big business, but really they started by trying to raise a few million dollars and built the business from the ground up. And it ended up being a very entrepreneurial business just the way that they built. I think that really comes through in the book as you read through some of the stories in the book. And I think what's surprising about it, people think about Home Depot, they think of a national brand, I think more consistency across all the stores. But it's actually a highly decentralized business, at least in how it was built by the founders, which is comparable to how we're building Evergreen. So I found it to be a very enjoyable book, a very impressive entrepreneurial story.
- [07:58]
A
When did you first come across the book and why did you select it for. For this episode?
- [08:04]
B
Yeah. Well, you made it kind of hard to select a good book because you've profiled so many good books that I love. My favorite book is the Outsiders by Will Thorndike, but you got. You had Will on for that, so I had to go deeper down the list. But this is one of my favorite books, actually. I read it fairly recently, actually, after my son was born. I remember reading it while he was napping in our nursery. So it was an interesting time to be reading it because Evergreen was established at that point. It wasn't a. A new business in its formative years. I think I was thinking a lot about how to scale our learnings in the business, scale our culture during that period of time. And so it came at a good time from that standpoint, thinking about how do we kind of take the culture that's working for us at Evergreen and really scale it up and how do I need to evolve as a leader? And I think the fact that it's 20 years into the journey is when the book was written is really relevant because I was in year six seven when I read it.
- [09:03]
A
And in Build to Scratch, we learned that one of the role models for Home Depot was Walmart. So in your way of building Evergreen, which companies do you look up to for inspiration?
- [09:16]
B
Well, the super audacious one is Berkshire Hathaway, naturally. And that was the inspiration, but a little closer where we are, but still far ahead of us are, you know, on the acquisition side, we look a lot at, you know, Constellation Software. We look at the great Swedish serial acquirers that we are profiled at the Red Eye conference. Those like businesses that inspire us from a capital discipline standpoint, from an acquisition strategy standpoint, and then on the. On more of the how to create value in our company. Part of our strategy is how do we acquire businesses, hold them forever, be a great home for them. Another part of our strategy is how do we create as much value as possible in the businesses that we own? And there we really look up to Transdigm as an example company that's through their three P's playbook of driving value creation. So that's another role model that we have in a company that we pay close attention to.
- [10:14]
A
And if you look at Berkshire, they can basically Invest in, in anything. And you mentioned you have focused to begin with, at least in one sector or area. Why was that? And can you speak a bit more about the type of companies that you want to own?
- [10:30]
B
Yeah, I think when you think about where we play in the market, we play far down market. And so if we had to get up to speed every time we bought a company, it'd be very hard to operate at the pace that we operate. We've acquired over 160 businesses over the past eight to nine years and I think it would just create too much risk for us as a company to be getting up to speed on a new business Every time after we acquire the businesses, we're trying to create value in those businesses. So there's value to having cumulative learnings from each acquisition. Should make us better at acquiring businesses in our space. Should also make us better at operating businesses in our space. And so that was a core principle from the get go and really important and valuable advice that Alpine gave us to focus on. So really the way we've built the business over time is we've established three verticals. MSPs are the big vertical that we started with and a fully outsourced IT for small businesses. Then we got into implementing ERP software, which is basically accounting software for middle market companies. And then the last industry is government IT services. They're all under this broader kind of technology services umbrella. And there's know, there's knowledge we have from MSPS that made us better at buying ERP partners. There's knowledge from ERP partners that made us better at buying government it and we will expand our, our mandate over time. I don't ever see us buying kind of a hodgepodge of businesses. When we go into a vertical, we want to make multiple acquisitions and we want to become experts in that vertical.
- [12:02]
A
And if we go into the lessons from the book, the founders before starting Home Depot, they got fired from their previous jobs and that's quite early in the book. That was of course very tough for them, but turned out eventually to be a blessing considering what they built. I'm wondering if there have been any such pivotal moments for you during the journey with Evergreen.
- [12:25]
B
Well, the founding was pivotable, was pivotal, not because we got fired. I mean Alpine backed us and supported our vision from the getgo. But that leap of faith that Alpine took on us was a big deal. It put us into business when we were in our mid-20s at the time. So that that was a really pivotal moment more from an adversity standpoint. I'd say a pivotal moment was in our first year. We bought a company that had an existing M and A strategy that was quite a bit different from how we were doing acquisitions. We were doing acquisitions on a decentralized basis. So each business we acquired kept its own brand, it had its own CEO. And this business had a successful track record of buying businesses and fully integrating them into their platform. And so our thought was, hey, let's keep that going. In fact, with our scale, why don't we accelerate how much M and A that they're doing? And that turned out to be a bad strategy for us. It turns out when you're doing that level of integration and you're changing up the management team, you can't move as fast as we were trying to move. And there were some cracks in the foundation of what we were, you know, what we acquired, particularly when you put that much stress, that many acquisitions on top of it. And that was in our. Our first year of starting the company. And so it was. It was, you know, a pretty risky moment for the business. But we. We paused acquisitions at that company. You know, we got, you know, we got that business to a stable point, and we pressed ahead in building the business. And it was, you know, what we had to look at is we're trying to build this business over multiple decades. We had a very big vision for the company. And Ramsey, my view is just the only way that we could move forward was aiming towards that vision, continuing to buy quality businesses outside of this company, getting the performance stabilized, and really driving organic growth at our other companies. And it was kind of a critical moment where we just had to lock in, in that first year. And so we have an unusual story in that we did more M and A in that first year than we did in the second year as we tried to get things back on track. And then from there, it's been a really fast growth experience. But we, you know, it was a. It was a tough moment for us making, you know, very early on where we weren't sure how that was going to turn out for the business.
- [14:35]
A
It's really clear from the book that when you're young, you're very vulnerable. And you mentioned the funding and being backed by Alpine was really important for you. And in the book, they had a lot of struggles with that as well, how to find capital. Can you. Can you share some stories from, from the book, how they did actually raise capital to fund the business in the early days of Home Depot?
- [15:00]
B
It was a long time ago, but it was, it Was a pretty small even I think by the time standards it was not a very big capitalist, like a couple, a few million dollars they were trying to raise. And they had a. There's a very important person who wrote a separate book, Ken Langone, who's their investment banker and really like almost served as a third founder of the business alongside them. And he helped arrange financing for them. And multiple times they got pretty far along with investors. And you know, the founders, Bernie and Arthur, decided to pull out because there wasn't values alignment. One case it was Ross Perot and they, he said, my people don't drive Cadillacs and they happen to have like a used. The founders of Home Depot happen to have a used Cadillac that they drove for work. And that was a signal that after the investment was going to happen, he was going to have more. That investor was going to have more say over how they run the business. And they wanted a partner that trusted them. So they worked through multiple iterations to that until they finally found an investor base that was more aligned with what they were trying to build. And ended up, I think it was going out to much smaller investors, a more diversified group of investors to back them. I think the biggest learning from that, that moment for Home Depot was really making sure everyone you partner with, you know, from a financing standpoint, investor standpoint, and key people in the business has to be values aligned and has to believe in you and there has to be trust kind of across the board. I thought it was actually quite impressive, you know, at moments where they, it seemed like they were on the brink of, you know, be able to raise, fundraise, raise the capital that they needed. They pulled out because. Because they saw some little sign that there weren't values aligned with their investors. And I think that's hard to do when you're starting a brand new company and you're very close to the finish line. So I think big credit to them. In our business, it's something we really focus on. Are we aligned with the people that we're partnered with in the business? The leaders of the companies, our financing partners, our investors, business owners that we acquire companies from. You just need to have that alignment across the board because life's too short to build people that aren't aligned with you.
- [17:10]
A
And speaking about that alignment, as you say, it's not only about funding, it's about many other things as well. And in the book we read that the founders of Deepwood, they really say, like culture, you can't just delegate culture. It's something that they must personally carry and transmit and this has to be on from the get go. So how do you think about culture and philosophy at Evergreen and aligning that with everyone?
- [17:37]
B
We're definitely structured a lot differently than Home Depot. We're not a single national brand. Right. So we do. One of our core values at Evergreen is empowerment. And therefore we let our companies have their own cultures. Now, those cultures generally only work if there's some sort of alignment with Evergreen's values. At the end of the day, we're not going to buy businesses from founders or companies that don't have a high level alignment with Evergreen. From a cultural value standpoint, we buy the company, we don't change the values. We let the team locally set their own values. And so we're a little bit different in how we're structured from that regard. But I think about the Evergreen culture, it's about we're decentralized and so we're very focused on empowering our leaders to run their businesses as if they're running an independent venture that they started. And that's really important. We think that's how you get outsized results in these small businesses. Next, we are very focused on persistence and that really started with Ramsey and me starting the business and going out and finding our first acquisition opportunities. We found that the only way to be successful when we were in our mid-20s and trying to build the business was to just keep after it. Whenever business owners rejected us or the deal didn't work out the way we wanted to, or that early challenged acquisition that we had. We just had to keep going and keep pressing ahead until we got the results that we were looking for. And that mentality kind of is pervasive across our group of companies. Whether you're a CEO running an operating company, whether you're on our M and a team trying to make an acquisition, or whether you're a frontline technician serving the customer. We keep going until we get the results that we're looking for. And the last part of our culture, which is probably a bit more unique, is just our long term orientation and our core value associated with that. We call it Rolling Snowballs and what we mean by that. And Snowball is a book that I, I really love about Warren Buffett. But the we mean by rolling Snowballs is you have to do some hard work to. To roll a snowball off of a steep hill. First you have to climb to the top of the hill, then you have to compact a snowball to make sure you got a good foundation. And then you roll that snowball down the hill and you got to let it go all the way to the bottom. It gets bigger and bigger as it goes down to the bottom of the hill, as it picks up more and more snow. And that's really what we try and do in our business. We're trying to make bets our business. We'd make investments that require a lot of work from a foundational standpoint to get up and running. It might be not, might not be the type of investments you would make if you were a traditional private equity company with a five year hold period. For us, we're willing to make these upfront investments, compact the snowball and roll it down the very long hill. And the other thing is to not interrupt compounding. You don't want to stop the snowball halfway down the hill when it's not nearly the full size that it could get. To make that a little more tangible, we announced actually as we're recording this today, that we're launching a brand new company to be an AI native business that will be within our Pine Service Group company, which is our ERP business. In that world, there's a lot of people coming that are thinking about how do I have a AI native ERP solution? And they're going to think through which partner they want to choose to implement that ERP solution. So instead of just trying to slightly modify one of our existing businesses, we launched an entirely new company to provide that service. Now that might not, that investment might not pan out over a traditional private equity hold period. I think over the next 10, 15, 20 years, we'll build something really special that business. And that's a, that's a, a small example of kind of in our culture how we roll snowballs, you know, ideally every quarter.
- [21:15]
A
And when it comes to decentralization, this is of course a key word for many of the Swedish Seal aquaries and, and many others in Home Depot. As you mentioned, they were having this system in the business. Quite naturally they wanted the autonomy from, for the store managers to take the best decisions. I found it funny that they didn't the door to the headquarters of Home Depot, they didn't say headquarters, they said store support center. So they were really just wanted to be there for the stores. And they spent so much time, the founders, they spent so much time in the stores. I think it was 60% of the time or something I mentioned. But of course they have to delegate some things. But is there something in Evergreen that you could never delegate to someone?
- [22:05]
B
Well, first off, the store support center was one of my favorite parts of the book, the fact that they named their corporate headquarters the store support. I sent that around to the company after I read the book because I just, I love that it truly made the store top of the hierarchy as opposed to making corners corporate at the top of the hierarchy and so many companies corporate at the top of the hierarchy for all the wrong reasons. So I just love that aspect of the book. And also in reading this book, I didn't realize when I picked it up, reading about Home Depot with a national brand, it would be such a decentralized company. I've been a fan of decentralization for a long time. I was surprised to learn about decentralization and a book about national brand company like Home Depot. So it's pretty, pretty unique. But to your question, in terms of what we won't delegate at the holding company level, we do centralize capital allocation and that's less about not trusting our operating companies or the verticals to allocate capital. It's more about just focus that we really want our operating companies and our verticals to be very focused on organic growth. And we think that oftentimes if you delegate M and A out too far into the organization, M and A is exciting and it tends to be where people want to spend their time. And often people take their eye off the ball on the really important work of serving the customer, of driving organic growth. And so we've centralized M and A in part because we want to have a strong competency on a central basis, in part because Ramsey and I just personally love doing M and A. And we want, we want to drive that kind of work. But one of the things we figured out after we launched the company was the power of, of keeping all of the operating companies and verticals highly focused on organic growth. And so we hold that very dear. We share most other responsibilities or fully delegate other responsibilities to the operating company. So day to day operations, the majority of data strategy all lives with the operating companies. Any shared functions like finance and accounting or talent acquisition for the CEOs, you have some resources at the holding company to help out with that, but still most of it happens at the verticals or at the operating companies. So really I think probably the best way to explain it is we have over 6,000 employees at the operating companies. We only have 50 at the holding company and those 50 are pretty focused on M and A and a few kind of reporting and key talent roles. But it's a pretty limited. We really try to limit the subset of things that we focus on at the holding company and make sure we're very good at those things and then we delegate the rest to the operating companies.
- [24:53]
A
And you mentioned that organic growth is important for you. What other type of metrics do you have or how do you evaluate whether an operator in your group is performing as you want it to?
- [25:04]
B
Yeah, organic growth is central. So and we focus both on top line growth. Are we seeing particularly recurring revenue growth in our businesses? We focus on margins. And is that top line growth dropping to the bottom line? Those are very important. And then we also focus a lot on this just underlying health of the business. So retention is a very critical metric there. Net revenue retention, customer retention, gross revenue retention are things that we focus on. I think that's an area where a lot of private equity backed businesses in our space have struggled because they have centralized a lot of functions, gotten further removed from the customer. And we hold those metrics very dear and we believe that decentralization supports those metrics. We also pay close attention to employee mps and customer mps. And again, these are metrics that maybe they don't move the needle on bottom line growth this year. When you're trying to build a multi decade, hopefully a multi century company, you have to make sure that employees are happy. And with the Home Depot story, the employees being happy was central to delivering a great service over the long haul. So we pay a lot of attention there. And right now we're putting a lot of focus on innovation and AI is transformative to our business. And we're thinking about are we being bold enough in terms of making bets within our companies that will transform the model in terms of our value proposition, our level of efficiency at our companies, and also the revenue that we're generating from AI at our businesses.
- [26:39]
A
You mentioned customer NPS is one of the metrics there. And in the chapter about customers in the book, it's very clear that Home Depot, they will do whatever it takes to please their customers. Uh, they, one example was that they even gave money back for tires that someone bought and came back with to a store. And they are not selling tires and they never had, so they never sold tires. But they just wanted to make this customer happy and come back. What do you think about this? Should you really serve every customer everything they want?
- [27:07]
B
Such a great story and one of like one of a few in there where they really, they, they took on short term expenses or, or you know, they let revenue surpass that they could have captured if they're solely focused on the bottom line. But instead they focus on serving the customer. That was incredibly powerful for them. And we, we encourage the same with our operating companies. Now, we wouldn't tell our operating companies how to serve their customers. They know how to serve their customers best and they, they're the ones that are on the front lines talking to their customers every day. But absolutely, we, we would encourage our companies to do whatever it takes to take care of our customers. We're in a business that's a highly recurring revenue business with very long customer relationships. And so it is economically foolish to do something in the short term that might make you an extra dollar that in any way threatens the trust that that customer has with our business. And so we very much would encourage the same and we would celebrate. Know similar stories as, as Home Depot. We. I hope we can rack up more stories like the ones that Home Depot has over the years. It's true. It's truly an inspiration. The examples that they have of, of serving the customer.
- [28:21]
A
And as we talked about, the founders spent a lot of time in the stores. They were both helping out with stuff in the stores, and they were also disguising as customers, just walking into stores and seeing if someone would help them if how they would be treated. And that is not really decentralized in a way. How do you go about it? Do you also go out in the operating businesses or how do you actually check what's happening out there?
- [28:47]
B
Yeah, we're structured a little bit differently. I do think you need to be in touch with what's going on on the ground. And so from my vantage point, I personally spend a lot of time on acquisitions. And so I love to go visit business owners and go see how they operate their business, go learn from new acquisition opportunities. And when I'm on the road, if there's an opportunity to go visit one of our operating companies, it's close by. I love to go visit one of our operating companies. But we're very decentralized. We're very much empowering our operating companies and our vertical CEOs. We also. There's a high degree of trust in what's going on the ground and letting the leaders locally lead their business. And when we look at our vertical CEOs, they're more focused on the organic growth side of things. They're on the road much more often. Specifically focused on. Well, I'm on the road focused on M and A. They're on the road, focused on our operating companies. And so they're, they're regularly getting in front of our businesses, engaging with them. Learning from them, checking in on, sharing best practices that are learning from other companies. And so there's a, there's definitely a high degree of engagement and being in touch with what it's like to operate one of these managed IT service providers, one of these ERP partners. At the same time, we don't operate the same way as Home Depot. And Home Depot, while it was very decentralized, there was a little bit more central work and a little more standardization how they were operating than how we operate. So because of that we're a little bit more hands off and we let our operators lead their businesses with a little bit more autonomy than I think Home Depot does.
- [30:15]
A
And when it comes to acquisitions, were there any lessons for you on what to do or what not to do from, from Home Depot?
- [30:23]
B
Well, I think the just the level, how in touch the founders were with how the stores operate was pretty powerful and how much they were looking for opportunities to celebrate a success in the stores. I think oftentimes when we come from this background of, of doing diligence on, on businesses, it's natural to kind of look at, hey, what's wrong here? Like, what's the thing that's going to get us in trouble if we buy this business? Which is very important. It's very important part of the job. There's also an opportunity, particularly when you're acquiring a lot of businesses in the same industry, to also identify something they're doing right. It's an upside with that business, maybe something we could teach other businesses. And I feel like the Home Depot did a good job of going into a store and noticing someone doing something right. And that's something I've tried to bring into. How we approach M and A is like let's catch an acquisition opportunity, let's catch an existing company doing something right and go profile that. We call them bright spots internally. Opportunities to kind of learn from one company and spread it across other companies. And Home Depot is an inspiration on that front.
- [31:29]
A
And have those criteria that you're looking for in acquisitions changed since you started?
- [31:36]
B
They've definitely evolved, definitely in the nuance. At the high level though, we've always been focused on a strong value proposition to the customer, highly recurring revenue, healthy organic growth, strong retention and low customer concentration. You're never going to find something that's green across the board. We do have a stoplight, red, yellow, green on each of those metrics and you're rarely going to find something green across the board. We have a sense of, across our data set. Our gigantic Data set of 160 companies. We have a very good sense of where the boundaries are on each of those metrics, where we start to get in trouble or where we start to see really exceptional results in companies. So that's been, that's been pretty true from the early days. I'd say we've really evolved in the details of what we're looking for. We've seen that businesses as an example that operate with more of a public cloud offering, particularly in the United States, and to perform better than businesses more of a private cloud offering. We've seen examples of where founders are really instrumental to all aspects of the business versus other examples where there's kind of a robust sales team at a company that reduces the kind of founder centrality, particularly for new business development. There's kind of these nuances below the surface that have been helpful for us, identifying which companies are going to do exceptionally well, which companies are higher risk. From day one, we've been very focused on this kind of high level criteria. I think the hard part is not setting the criteria of what makes a great company. I think it's going out and fighting those companies, convincing them to join Evergreen and then staying disciplined. When something comes in and it, you know, it's always exciting to do an acquisition, but if it doesn't meet our criteria, you got to stay disciplined and pass. You gotta, you have to have an opportunity set that's broad enough where you don't sweat it too much. So you have to pass on a lot of opportunities. Yeah.
- [33:30]
A
And when it came to Home Depot, they did both acquisitions of other companies and then in a way when they opened up new stores in a new geography, for example, in the US that was kind of like an acquisition in its own way.
- [33:44]
B
Definitely. It's a huge capital allocation decision. Right. Because you're signing a big lease and you're putting in a ton of inventory into one of those stores. So it's a big capital allocation decision. And you know, our, our business, we don't have as much on the internal. We're, we're in much more capital light businesses than Home Depot. So we don't have as much kind of internal capital allocation. We're actually starting to see that right now. Specifically with, with AI where we can fund projects internally. That could be an existing company where we want to drive an automation. It could be an existing company where we want to generate a new revenue stream. Or the example I shared earlier where we're just launching a wholly new company. So this is actually. You're catching Me at a moment in time where we're actually doing the most internal capital allocation that we've ever done. Historically, almost all of our capital allocation has been more on the acquisition side of things.
- [34:33]
A
And when Home Depot got started, they actually found the concept, the founder. They had thought about it and how they wanted the stores to look like. But then they actually went out and saw a store that was everything they had dreamed of and it already had happened to be there and they wanted to acquire this. But then. And this was like a creative genius, as we can see throughout the book, this person comes back every now and then with like this creative ideas and how they should do things differently than others, which usually worked out well. But when they looked closer at the business, he wasn't looking at paying his suppliers or anything. He was just caring about the growth. Of course you wouldn't go into such an acquisitions. You do very thorough due diligence, I'm sure. But if you find someone who has these creative mindsets and can just generate business in another way, would you be interested in acquiring such a talent? But maybe not necessarily the business or how do you go think about that?
- [35:36]
B
I'd say the analogy for us is that we do back entrepreneurs into our businesses, leaders who run our companies and I think run one of our companies. You do need to have that, you do need to have that kind of pulse on, on how to run a business, how to manage a P and L. But we, we have leaders that come from different profiles. Some of them are more growth oriented and driving the sales side of things. Some of them are more operationally oriented. And either other profile can work as long as you make sure to surround yourself for people that kind of, kind of make up for your weaknesses. And I think that might have been the issue in the example from Home Depot that the store that they modeled Home Depot after. I'm not sure that the entrepreneur surrounded himself with folks that could kind of compliment his weaknesses or maybe they could tell him no when he needed to be told no. But we do back entrepreneurs to run our companies and we find that talent is usually the catalyst to drive growth in our companies. So whenever we buy a business, we try and find some place to install talent. You know that it could be that the founder of the business is retiring and we back a go forward CEO. So we manage like we manage through a succession plan. Another case is the founder might want to continue on with the business or the management team might want to continue on. And then we might look for placing a chief revenue officer or an operating leader. We almost always found that find that founder owned businesses tend to have a gap on the talent front. And we bring in a capability where people are excited about the broader opportunity within Evergreen, broader backing. They might not be willing to join a small business and take some of the risk entailed in joining a small business, but they are willing to join a company backed by Evergreen and so they join us and they join one of our companies. And we often find that that's a catalyst for growth, the catalyst for operational improvements and we try and find someone that complements the team that's currently there. So if the team is really operationally endowed, we might hire someone more growth oriented. If they're very growth oriented, we might hire someone more operationally oriented. And it's a really critical juncture for the business. And one of the, that's the the ultimate driver of us then executing our value creation playbook or trying to drive accelerated organic growth on the top line, extended margin and better service delivery to the customers. It always starts with the person. But short answer is I don't think we have any businesses run by a creative genius that where the financials are falling apart. We're, we're excited about how the business is going. I think if we found a creative genius like that we would probably pair them with a, with a great operator and make sure that we have that balance in each of our businesses.
- [38:14]
A
That's the benefit benefit of all your experiences and being being a larger group. Of course you can take care of that talent. We talked about the number of different capital allocation decisions now focusing on the organic growth or buying companies or doing internal capital allocation decisions. Something that is often debated with for example the Swedish stereo crisis, that they do have dividends and they distribute that back. How was Home Depot thinking in terms of returning capital or reinvesting?
- [38:46]
B
My recollection for the book, and it covers the first 20 years, is they were pretty focused on reinvesting and growing the business throughout they were a public company. I'm not sure if they ended up paying any dividends during that, that period. But I do I my recollection is they were very focused on redeploying capital and, and that's, you know, that's how I would think about things too in that growth period, that first 20 years. It's the time to build the business and you know there's always opportunity to buy back shares or even do dividends over, over time. But when you have opportunities to redeploy capital at exceptional rates of return, which I think Home Depot had during that period and long thereafter, you want to keep going and keep, keep building and keep reinvesting. And that's what the founders were doing during the period of the book.
- [39:34]
A
So it seems like you have many opportunities to invest and is it nowhere near any saturation in terms of growth or acquisitions?
- [39:45]
B
Yeah, we're incredibly early and have a lot of opportunity to redeploy capital right now. And you know, M and A is the natural place to redeploy capital. For us. We're seeing solid returns when we acquire businesses and then grow them organically. And so we're trying to find every opportunity we can to do that. And I think just the way our mindset works, that's our first preference. The only other preference we'd have is to repurchase shares in the business, which is hard to do in a private structure. But we do love our business and would love to buy more of our own business, first and foremost. But the primary opportunity we have ahead of us is to redeploy capital into acquisitions. And doing dividends at this point would not make much sense because we would have to source other capital to complete acquisitions.
- [40:35]
A
And you're currently nine years in of Evergreen. In Home Depot's case, they went 13 years before they went public in 1981, and that was mainly to fund growth as I understood it from the book. What are your thoughts on this staying private versus listing? Of course, as you mentioned, the benefit is that you could buy back your shares more easily if you're public.
- [40:57]
B
That would be a great benefit for sure, but it comes with some other.
- [41:02]
A
There are some other consequences of being listed that might not be positive, of course.
- [41:06]
B
Sure, sure. I mean, we're first and foremost focused on building the business. And we built the business with the concept of be able to hold businesses forever. And so that's our priority in terms of any sort of structure, as long as we can accomplish that in the private markets. We love operating in the private markets. The public markets are another way to accomplish that and have permanent capital at our scale. We like to be ready for either environment and comfortable with either environment for us in the long term. But our focus right now is just continuing to build. And we try and put the vast majority of our attention and time towards compounding the business. And we think if we do a good job compounding for acquiring businesses at a healthy clip with good returns, if we're growing organically, we'll have a lot of options from a capital standpoint. But for us, both options are on the table and we'll be ready for either option. But we haven't slept, selected a route yet.
- [42:01]
A
My understanding is that it's easier to be or have a higher leverage when you're a private company compared to when you're a public company. How do you think about leverage and that aspect of it?
- [42:14]
B
Certainly yeah, in the private markets a lot more comfort with leverage. And we've used leverage and financing from our partners to finance our acquisitions and that's worked well. And we have a highly recurring revenue base, highly cash generative business, very clean earnings and that enables us to support our, our debt and finance financing and generate really strong equity returns. So we've let, we've used financing in the, the private markets and we'll, we'll continue to do so. Obviously public markets have different viewpoints on, on financing and you know, our, our goal is just to drive as much organic growth as possible and maintain strong cash flow conversion. And if we do that, you know, know over time the business deleverage and, and you know that'll set us up well whether we're in the private or the public markets.
- [43:03]
A
Do you have any more specific leverage riches that you think are within the range that where you want to be now and, and looking ahead, I like
- [43:14]
B
anything we do, it's all about continuous improvement. We're, we're just focused on how do we delever the business with each passing order and, and year and, and that, that's what we're doing currently. We're, we're growing the business top line organically. We're grow, we're expanding the margins of the business and then we're increasing the cash conversion of the business and those all kind of compound to improve the leverage profile of the business over time. And right now we're in a very comfortable place as a private company, you know, and as a public company you would need to be less leverage. But you know, we, we've operated this way for the past eight years and are in a deleveraging stance right now.
- [43:53]
A
And if we look ahead, built from scratch, the book that we have been talking about, it was published in 1999 covering the first 20 years of home Depot. A lot has happened in the world since then. Have you followed anything about how Home Depot has developed?
- [44:10]
B
Certainly not as closely as Constellation and Transdigm and Berkshire. But yeah, I did follow because it's an interesting example of you know, there's a lot of companies that start out decentralized and then after a founder transition they centralize more and that's what happened at Home Depot during its second chapter after the founders transitioned out, Bob Nardelli from GE joined the company to run it for, you know, after the founders. And he took a much more centralized approach to the business. He's a lot more focused on cost cutting at the time, same store level. And my understanding is that led to not as good of an experience for, for the store associates that were so, as you read about, so critical to the first 20 years at, Home Depot and that didn't go very well for the business in terms of, you know, growth or stock price performance lows during that period. Performed very well. Home Depot did not perform well under, you know, under Nardelli after, after he was succeeded by a series of internal successors that did perform better and kind of my understanding is returned more to the roots of Home Depot and prioritizing the store associate. It's not a company I track. I, I love the book. I love reading about the first 20 years and I understand the principles have come back to a large degree. Posted our Nardelli era, but not a company that I track super close mostly.
- [45:37]
A
And in your case you are still in your mid-30s, but you, you mentioned earlier in the conversation that you wanted to build a multi decade, even multi century company here. How are you thinking about the long term identity for Evergreen and what happens after you.
- [45:53]
B
Yeah, well, already I would say Evergreen is much bigger than, than I am. So that, that I would start there and, and we've already built a, a culture that's much stronger than any one person than just Ramsey and myself. It's actually really cool to go into the office every day and see people sharing the Evergreen story with business owners. We have a mission that is inspiring us to be the best home for businesses and their leaders. And that's much bigger than any one person at Evergreen. And I love hearing other, other people sharing that story, but more importantly delivering on it. We actually track how we do with business owners after we buy their company, check in to say, hey, did we live up to our mission to be the best home for businesses and their leaders? What contributed to that? What detracted from that? And I think we are living up to that today and we're living up to that across a large list of leaders across the group of companies. I think the only way, as we think about succession, we think about it at multiple levels throughout the company. So it starts with the operating companies and the operating companies. We want to have talent, depth at each operating company. So every time we buy a company, we're Placing a leader into that business, that could be the CEO or it could be someone else on the senior leadership team. And after we make that first hire, we continue to look for opportunities every year. Where else can we build a more robust team? You know, might have bought the business at $5 million of revenue when it gets to $10 million of revenue, might need additional, you know, know, leadership capacity to drive its next kind of growth phase. That's true at the vertical level. So we have the three verticals across our group of companies. We want to make sure we have depth of talent at that level. Straight the holding company. We have a very strong M and A team. We have a very strong leadership team around me. And I think there's the two things I would think about in terms of, like, how do we make sure Evergreen last decades, hopefully a century plus after the current leadership team? The two things that we're focused on is just keeping the mission alive, making sure the mission matters to everyone throughout the organization and that we uphold it day in and day out. And then packing the organization with talent. We don't want it to be dependent on one person. We want to have talent at every level of the organization. We think if we keep the mission top of mind, if we pack the organization with talent, the business models might change over time. The market environment will change over time. We think that 100 years from now, being the best home for businesses and the leaders will matter as a mission. It'll matter as an offering to business owners who are looking to sell their company. And so if we do our job right of getting the right leaders in place to uphold that mission, we think the business can last long beyond us. Therefore, even though we're in our mid-30s, we do spend a lot of time thinking about succession planning and thinking about how we make this business last long after we're gone.
- [48:46]
A
It will be exciting to follow and hopefully we can have a conversation in, say, 10 years and see where you have gone since this episode was out.
- [48:55]
B
That'd be fun. Count me in.
- [48:58]
A
But as this is a book podcast, we like to wrap up with a few questions on reading and writing. So curious, what other books have been influential? You mentioned Snowball and a few others, but maybe there are more examples besides built from scratch.
- [49:11]
B
Yeah, I mean, first off, I love. I personally love reading stories about actual businesses. I don't love, like the generalizable kind of business book that's like business takeaways that are kind of watered down for anyone to learn something from. I like reading stories about actual companies. Because there's usually twists and turns and there's ups and downs and that's why I love Built from Scratch. That's why I love Snowball About Berkshire Hathaway I love the Outsiders by Will Thorndike. I mentioned that at the top of the conversation. Maybe one other one is Made in America by Sam Walden and I don't know if I have a fascination with these retail concepts. They're very tangible. But I think Sam Walden's such a fascinating leader and the fact they just flew all over the country to visit the stores and the fact they'd be on family vacations and go visit a competitor store and take such detailed notes. You just seemed like a total learning machine and was so far ahead of his time in many ways and built a very enduring company as a result. And then there's other companies that are kind of similar format to the Outsiders that I like. Recently the Compounders came out. I really enjoyed that book 100 Baggers, Money Masters, which was the one inspirations for the Outsiders so I can keep going. I love reading about business stories and particularly the ones that have some ups and downs along the way.
- [50:34]
A
Are there any other disciplines that you're reading books from or non business books that have inspired you?
- [50:42]
B
My team would laugh at that question because I'm kind of one track mind with my reading. I probably read one book that's not a business book per per year. So I'm not very, I'm not a Renaissance person as it relates to reading and I'm very focused on reading, reading business books. So gosh, I, I would say right now I'm spending a lot of time on all the LLMs trying to learn. And so in terms of my learning outside of business books, I, I'm just kind of pulling on strings of curiosity about how AI works. When you think about past disruptive technologies, how have they come into the world? I'm reading the book on Palantir right now, which is a business book. But it's interesting in this time period. I wish I was a more dynamic person, had more varied interests to talk to you about, but I'm pretty one tracked mind when it comes to
- [51:43]
A
it's also good to be focused when, when it comes to writing. Is that something that you'd like to do or have an ambition to do?
- [51:51]
B
I, I love writing. I. I write an annual letter to our shareholders and I've written a few things that we've posted online. I. I wrote something about why, why we believe in decentralization at Evergreen, how it helps us grow faster, attract the best talent. Why business owners like the model. And uh, I, I wrote a letter to Buffett after he stepped down. Uh, I haven't gotten a response. It was, it was cathartic to write it. It was a very cool moment to be at the meeting when he announced he was stepping down. And I posted that online. So I do enjoy writing. It's my favorite way to organize my, my thoughts and and to communicate with our team.
- [52:30]
A
Great. Jeff Tten thank you so much for coming on Investing by the Books podcast. Talk about built from Scratch and your exciting journey with Evergreen. If our listeners want to get in touch with you or follow your work, how can they do that?
- [52:44]
B
Check out our website, evergreen sg.com and then I'm pretty active on LinkedIn, so that's a good way to follow me or to message me directly.
- [52:53]
A
Wonderful. And I hope to see you in Stockholm or Omaha or somewhere else.
- [52:57]
B
So I'll look forward to it. Thanks, Eddie.
- [53:00]
A
Thank you so much. Jeff thank you for listening to Investing by the Books, a podcast by Red Eye. Follow us on twitterbredai and email us at ib Podcastede SC to improve. We'd love to hear your feedback, so please rate and review us. Notice that the content in this podcast is not and shall not be construed as investment advice. This information is meant to be informative and for general purposes only. For full disclaimer, visit Redeye Search. I'm your host, Eddie Palmyan, and until next time, I sincerely wish you the best of luck on your journey through life and investing.