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Richard S. Ruback and Royce Yudkoff, "HBR Guide to Buying a Small Business: Think Big, Buy Small, Own Your Own Company" (HBR Press, 2017)
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- [00:01]
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Rick Ruback
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Caleb Zakrin
Prices and participation may vary. Prices may be higher in Hawaii, Alaska and California and for delivery welcome to.
- [01:15]
Rick Ruback
The New Books Network.
- [01:19]
Caleb Zakrin
I'm Caleb Zakrin, editor of the New Books Network. Today I'm speaking with Rick Ruback and Royce Yudkoff about their book the HBR Guide to Buying a Small Business. Think Big, Buy Small. Own your own company. Rick and Royce teach a course about entrepreneurship through acquisition, often referred to simply as eta. Notice the popular podcast Think Big Buy Small where they interview business people who have taken the ETA path. While Think Big Buy Small has generated a cult following among business school students, their lessons and ideas are valuable for anyone interested in taking a slightly more unconventional path to entrepreneurship. When we think of entrepreneurship today, we often picture the tech startup with dreams of becoming a unicorn. This path can be extremely risky with a failure rate of over 90% in the United States alone. There already exist hundreds of thousands of boring businesses with solid reputations, repeat customers and owners looking to sell Think Big Buy Small teachers, readers, how they can buy and then run one of these businesses. For people who want to run their own business but want to take a less risky path, ETA is definitely worth exploring. Rick and Royce, thanks for joining me today on the New Books Network.
- [02:24]
Royce Yudkoff
Thank you for having us, Caleb. It's a pleasure.
- [02:26]
Rick Ruback
I'm delighted to be here too.
- [02:28]
Caleb Zakrin
I was really excited to get the chance to speak with you both. I first heard about your podcast and sort of what led me to the book and led me to learning about the course. A cousin of mine was in business school and is, I think in the process now of actually searching for a business. I haven't heard what the story is recently, but he told me about it and it sounded really interesting to me. I think part of the reason why I was so intrigued about it is I work for a three person company, as you know, when it a tiny, small little podcasting business. So you know, I'm always interested in how people run small businesses, all the different types of small businesses out there. I think you know, when you really start learning and often, you know, oftentimes I learn about the different types of businesses that exist out there through your podcasts. It's just remarkable. All the different things that people are doing, the different ways that people are making a living outside of, you know, the typical paths that you might see students wanting to take like finance or consulting or, or you know, other paths that might be a bit more expected for someone going to business school or just, you know, going to Harvard. So before even talking about the book, I was just wondering if you each could introduce yourself a little bit, just tell listeners about yourself, you know, independent of this whole ETA phenomenon that you really, really helped kickstart. So.
- [03:44]
Royce Yudkoff
Royce Yudkoff. I graduated from Harvard Business School receiving an mba. It was a transformative, life changing experience for me and I've always felt very grateful for the skills the school taught me. After a short stint in consulting, I co founded a private equity firm which bought mid sized companies and I ran that for 25 years before stepping aside along the way. Rick and I had met. Rick, as he'll tell you, was a faculty member at the Harvard Business School and had written some cases involving our firm. And that was our original meeting and we got along well and liked each other. And now fast forward when I stepped aside, I actually was invited to come back to the Harvard Business School. And Rick at that time had just come back from his sabbatical with an idea to do a small firm's course, the specificity of which was sort of in process, yet to be defined, and was looking for a partner to help develop it. And so that's where our careers merged together. I'll let Rick follow up on that piece when he talks about his own background. But think of me as someone who spent the previous set of years buying companies and financing them, albeit larger than the small firms we focus on now. Rick?
- [05:06]
Rick Ruback
Yeah, Rick Rebec here. I'm a lifelong academic. I got my PhD at 25 and went to teach at the Sloan School at MIT and then came over here six or seven years later. I've been here ever since. And that's, it's not 40 years yet, but it's getting close. And I've always specialized in corporate finance and I've taught pretty much everything at the Harvard Business School and the corporate finance side. And as Roy said, I came back from a sabbatical eager to do something new and different. And so with Royce, we developed this. I developed, we developed this course on small business and that became that beginning led to a series of courses on in the small business space, including the fodder for our book and podcast and continual work in the area.
- [06:08]
Caleb Zakrin
I'm sure over the years the course has developed quite a bit. You know, this book that you've written, it's a few years old, though still highly relevant. I just read it, read it recently and found the insights in it to be really, really interesting. I was wondering if you talk a little bit about how you first begin, you know, your introductory lesson. You know, when students come in, I'm sure not every single one of them necessarily thinks that they're going to take the ETA path after school, but what do you tell them to kind of convince them that it might be something worth considering?
- [06:43]
Rick Ruback
We have roughly 200 students in our fall class, which is a case based course. And there you don't really need to be particularly focused on searching or pursuing the ETA path. You just need to be interested in practical corporate finance. We have about 920 or 30 second year students at the Harvard Business School. We get about 200 of them. We could easily, if we had seats, have more. We could probably easily go to 300, but we just don't have seats in our classes. So students come interested in practical corporate finance. Some of them, some of them come because they're interested in the ETA path. We don't do much evangelizing early on in the course. We teach by the case method. So our students are reading every class. They're reading about people who've done this in various ways and at various stages of their journeys. And for almost every class, we bring the case protagonist to class. And so as a result, the students get to hear about situations and they're constantly asking the question, how would I do in this situation? Would this be a situation I want to be in? And then they look at the protagonist and they say, could I be that person? Is that person taller than I am? Are they better looking? Are they smarter? Are they harder working? Do they have a skill that I don't have? Were they in the army? And so they're naturally good at leading blue collar workforces. And I wasn't, you know, so there the students are all the time thinking about how this would work for them. And as a result, right about this time of year, around Thanksgiving, we find that more and more students ask the question, would this work for me? And increasingly they say yes.
- [08:49]
Caleb Zakrin
What are the baseline skills or personal qualities that you think lend well to someone exploring the ETA path? You know, what, what sets their personal or personality type maybe apart from. From other paths that students might be considering taking?
- [09:06]
Royce Yudkoff
Well, the first thing I would say is that all different types of people find success in eta. It's not just quantitatively oriented deal people or sales oriented people. All different skill sets and all different backgrounds. You know, from salespeople to engineers to military officers. I would say that a common set of skills. And Rick, I invite you to add to this because I'm sure I won't get these all. But I would say a certain comfort or desire to make decisions, knowing you'll get some right, you'll get some wrong and come back and fix them, but you won't be paralyzed by making decisions. A sort of curious mix of confidence and humility. Humility in their dealing with other people like employees and customers, but confidence that underlies that, you know, because. Because you do have to make decisions and lead an organization. Curiosity about learning and a hunger to succeed, kind of a grit would be my sort of list of what goes into the formula for a successful ETA entrepreneur. Rick, would you modify any of that or add to that?
- [10:14]
Rick Ruback
No, I think that's. I think that's just about right. I would, I would just emphasize this willingness to work hard. This is not an easy job. It is while you're looking for a business. It's long and frustrating. So there's kind of an optimism. Really helps, I think, both as CEO and as a searcher. And then once you buy your business, that first year is always very challenging for the searcher, for their families. There's just a lot going on. And so you really have to have this ability and this willingness to work hard. I don't think there's very many jobs that our students or people like our students go to that don't require them to work hard. The difference here is that everything they do is very much self directed. So it's one thing if you have a boss and your boss makes you work a hundred hours a week or expects you to work 100 hours a week and you're doing something, and you spend a significant amount of time doing something you later assume is stupid, you then conclude your boss is stupid. That's an easy answer, right? A hotter answer is when you are the one who set you on the task and now you have to explain to yourself why you did something that in the end turned out to be stupid. And it's so much easier to think your boss is stupid than to think you're stupid. So there's a kind of personal responsibility for decisions that is special. And you have to be willing to both make mistakes and learn from your mistakes and move on. I kind of think about it as, like, in some ways, being a successful small business entrepreneur is like being a major league pitcher. Every once in a while you're going to give up that home run, and after you do that, you're going to take a deep breath and throw the next pitch.
- [12:20]
Royce Yudkoff
You know, I would, I agree with all of that. I would just add one more point, which is notably not on Rick's or my list is prior experience as a CEO, because almost zero searchers have been a CEO before. Nor is having held most or all of the jobs that report up to a CEO, because most people who search have typically spent their prior years in one functional area, not in three or four. So those are not skills that are, or experiences that are required.
- [12:53]
Rick Ruback
And nor since we're on the not required list, Royce, also not required is some enjoyment of risk. That is a confusion that people have. People say, oh, entrepreneurs love risk. That is not the case. Especially people who go through it in the ETA path. In the ETA path path, the people who buy companies through the ETA route, every one of them that I've ever met, and we've met hundreds, they all work really hard to mitigate and reduce risk. They understand when you own your own small business, risk is part of that equation, but they do everything they can to minimize it. They don't love it.
- [13:40]
Caleb Zakrin
Yeah, it definitely, you know, just the way that you, you lay it out, it seems like a potentially much less risky path to go down than just starting your own company from scratch with zero customers. You know, you get to, to kind of bank on the, the work that someone else has done and, you know, hopefully you, you're able to spot something that, that you can do that will make it more efficient and actually make the, make it much more, more valuable than, you know, the entrepreneur that maybe has, has run out of good ideas already with the business. The, the search process itself seems quite Challenging. And I imagine for people going down that path that it can be, you know, after months and months of doing it, if you still haven't found the right business, you still haven't closed yet, it can be, you know, haven't started that process. It can be quite nerve wracking. How do you recommend that people prepare for the search process even before they start?
- [14:34]
Rick Ruback
I was just going to give my famous line, which is I think you should get a dog. That, that I really do recommend some kind of form of unconditional love because you get beat up in the process. And I don't know, I don't think you really get that from your kids or your spouse, but you do get it from your dog and sometimes you need it.
- [15:01]
Royce Yudkoff
Well, I certainly agree with that and I do agree with your description, Caleb, and I know Rick does, which is it is a tough process. And there are a couple of things that make it tougher. First, in most tasks, you know, it's a little like climbing a mountain where every hour you get closer and closer to the summit and you can see that you're getting closer. But here, you know, until you get a deal done, you can convince yourself that you've made no progress. It's not actually true, you become a more skillful searcher, but it feels that way and that's what makes this hard. And also the emotional ups and downs are huge. You're getting a deal under a letter of intent. You be less than human if you didn't dream of what life would be like running that company. And then for whatever reason you have to kill the deal or it gets killed on you and you have that emotional letdown. So that's where Rick's recommendation of the dog coming in because that dog will love you on those bad days. But it is an emotionally challenging process. Even though it's a lot of hard work. I don't think it's so much the work that makes it hard. It's just the emotions of going through that process are challenging. And probably the best preparation after getting a dog, I would say is before you embark on it, talk to a number of people who are searching. It will help normalize this activity for you and at least you will feel this feeling I'm feeling right now that's totally normal. I'm, I'm behaving just the way I should and there's, there's nothing weird happening. Yeah.
- [16:31]
Rick Ruback
And if you're, and if you're really short on self confidence, maybe this isn't the path for you.
- [16:38]
Caleb Zakrin
So when people are then beginning to do this search, you know, as you describe in the book, that, you know, it can take months or, you know, years. Certain case, in certain cases, obviously it costs, cost money to do that. And, you know, if you are trying to raise money for a startup, you know, you might have an idea at a pitch deck, but if you're beginning a search process, you might not even know what type of business you're going to buy. So how do you actually convince someone, assuming you're, you know, you don't have the funds to support yourself during that search, how do you convince other investors to just support you as an individual to, to do this search?
- [17:16]
Rick Ruback
Well, the most common investor is usually a spouse or a family member, like a parent. And, and that investment usually takes the form of, in the case of parents, you're, you've moved back to your childhood bedroom, or you're living in their basement or mowing the lawn for food and laundry. So there's that kind of family funding. And I won't get into the exchanges that spouses might have with each other. But if you're going to take cash from somebody who's not a family member, even if a family member, I suppose if you're going to do it in a contractual basis, then what you're really doing is selling yourself. You're selling your good judgment, your ability to find a firm. You're selling your persistence. And by the way, that isn't very different from what you sell when you're seeking angel investing. Because when you're starting in a venture, generally you don't have a finished product. You don't know what the market's really like. You don't know who else in the marketplace is doing something similar. You don't know anything. In the end, you're bet an investor is betting on the person. And that in the early stage of a search, some people come in with a hypothesis, but everybody understands those hypotheses. I'm going to buy in home health care. I'm going to buy H Vac, I'm going to buy, you know, a coffee shop, whatever it might be. Those change a lot throughout the search. And so in the end, what you're betting on is the person. And you generally either seek funds from people who are established investors in this space or people who, you know who are in your network, mentors who are excited about what you're doing and want to be supportive of it.
- [19:10]
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- [19:40]
Caleb Zakrin
Throughout the book, you have different examples of past students. You know, you also teach cases and then on the podcast as well, you're constantly interviewing people that have gone through this process. Obviously we can't talk about every single one, but I was wondering if maybe, you know, there's a particular example of someone, you know, a particular story of one of these searchers that, that you found, you know, pretty interesting. Someone that, that found a particular, you know, had an idea maybe for a particular industry that they wanted to go into and set out to actually find that business. Is there, is there a particularly interesting search story that you've come across that really sticks out in your mind?
- [20:20]
Rick Ruback
Okay, one really interesting example that we did a case in this year and also featured on our podcast is Main Street Auto, where the entrepreneur Logan Leslie had a vision that he could transform the independent automobile repair business. And so he buys businesses with six to 10 bays in it, usually run by people who have began as master mechanics and you know, grew their shop to get to be this size, but know nothing about management or marketing or organization or alike. And Logan buys those businesses replaces because they're sold by a retiring owner brings in, usually there's usually a master mechanic there that becomes the CEO or the general manager of that, of that shop. But all the administrative functions go up to, if you will, the mothership up to Main Street Auto central command. So you have accounting, finance, scheduling, pots, purchasing, all that stuff being optimized at the corporate level. And he's found great results. And it's, it's just changing the way that business is done and in my mind, changing the way people ought to think about a common strategy called rollups. Because what, what he's demonstrated is that, that you can find these nuggets of value not by buying low, but by changing the way the businesses are run in a intuitive, thoughtful way that makes it better for the workers, makes it better for the customers, and it makes it better for the investors. It's a win in every dimension.
- [22:14]
Royce Yudkoff
You know, that is a great example. I would just add what Rick and I see are searchers searching in two ways. Some of them will start by developing an industry thesis. And by the time they buy their company, they might have gone through two or three or four industries on which they developed theses and then became quite knowledgeable about the industry. That's a good way to do it. But the other is to sort of go horizontally just to create a large flow of different companies for sale through brokers. And there. And Caleb, you touched on this at the start of the interview. What you see is the amazing variety of small niche businesses. Often they're great businesses sheltered by some niche which keep out larger competitors. And within that niche, they're a. They're a devastating competitor. And you can't find these with a thesis. You simply have to drop your net in the ocean of small companies for sale and filter them to find these gems of companies. And so we see a lot of searchers approaching the market in that way as well.
- [23:19]
Caleb Zakrin
Yeah, it is remarkable just the variety of small businesses that are out there. And oftentimes they're the types of businesses that people probably interacting with on a monthly basis and aren't even aware. I think we're so used to interacting with the giant tech behemoths every single day that we sometimes forget all the other companies that are crossing our paths. And oftentimes it's a company that's just run by our neighbor and we might not even be aware of it. The search process, I imagine, can be stressful, but also quite fun and really just open up the world, the world of different types of companies out there to people. And you mentioned working with a broker. There's also maybe just having a particular knowledge of a certain industry already and knowing companies already in that. What are some of the best ways that you recommend people actually go to find out about companies that are for sale?
- [24:22]
Royce Yudkoff
Well, what Rick and I often recommend is that you start by reaching out to small business brokers. And in the United States alone, There are about 3 to 4,000 brokers of small private firms that are for sale. And there are websites like bizbuy Sell where many of these brokers will post the companies they have for sale on an anonymized basis. And so it's one good way to get started is by introducing yourself to a number of brokers, getting a flow of companies, and starting to root yourself in. What does a good small company actually look like? I mean, you'll go into this process with some criteria. Size, location, recurring revenue, low customer concentration, sensible criteria. But you'll find that you start to have to make judgments. This company has three of my five criteria, this has four of the five. And as Rick and I like to say, bathing in deal flow helps you sort of understand what a good company looks like and introduces you, Caleb, to what you described. Just the amazing variety of highly profitable, wonderful smaller businesses that exist throughout North America.
- [25:33]
Rick Ruback
Yeah, my, my advice is that I agree with everything Roy said, but I also think it's really important that, that potential searchers stop strategizing and start doing. It is so much easier to spend hours and hours and days and weeks deciding what appropriate name of the LLC that you'll use as an acquisition entity. And then that's just wasted time. You know, you just have to take that first step. You have to take a step forward. And once you take a step forward, the world gets to be a better place. You start grounding yourself in the realities of the marketplace. So I think I, I, I think not, not, not to oversimplify, but I think, I think the, the way you begin this journey is by taking the first step.
- [26:27]
Caleb Zakrin
Sometimes when a company is up for sale, you might wonder why are they selling it? Is there, is this a failing business and they're trying to get out? Is there something that they're, that they're hiding? I imagine that, that there are a lot of potential red flags that people need to be aware of. What are, what are some of like the, you know, the, the very simple techniques or skills that you recommend people look for just so that they can, you know, kind of immediately dismiss a company before actually spending time digging in to all the documents, doing their due diligence, actually meeting with the people there, do it, you know, talking to customers, getting their sense of it, you know, just so that they, they're not wasting time with, with a business that, you know, to your eyes would, would obviously be not, not the type of business that someone would want to try and purchase.
- [27:16]
Royce Yudkoff
Well, you know, most companies that are good, small companies end up being sold when the owner wants to retire. And because of the size of the company, there's no next level of management to take on that role. Now, you don't want to make that a gating criteria for selecting because good companies that don't have that ownership situation also sell. But I mention that to sort of disabuse people of the notion that if a company's being sold, it's because something bad around the corner might be happening. That's usually, usually that's not the case. But the place I would start and Rick, I'm interested in your comments. The place I would start is A look at the historic financials. Because you want to buy a company that is enduringly profitable, that has a long history of profitability in good times and in bad times, because that is a huge risk reducer to you. If you're buying a business that's been around for 10 or 20 or 30 years and been profitable for a long period of time would be a good signal early on and as easy information for the prospective buyer to get. Rick, what would you look at early on?
- [28:23]
Rick Ruback
I would just extend that a little bit by saying if you can only look at one number, look at margin, and if the margin is high, then the firm is doing something right. You don't know what, but it's doing something right. And so that would suggest further study. If the margin's low, I think it's usually time to move on. I think it's almost that simple. I think trying to figure out why a seller is selling is really complicated. We imagine that the best place to search is at the cardiologist's office. You find people staggering out, clutching their chest, and then you say, oh, here's an loi. Would you be interested in selling your business? What a perfect time. They're compelled to sell. They're going to, you know, they're having an event which is giving them a brush with mortality. Of course, they're thinking about that sailing vacation they never took. What a perfect time. Turns out that just doesn't really work. It's not that reliable. And the reason is because when people get distracted by those kinds of events, they're usually not interested in thinking about something practical like should I sell my business now? Because after all, they're not going to get to spend the money.
- [29:45]
Caleb Zakrin
Maybe.
- [29:46]
Rick Ruback
So, so it, it, it's, it's hard to find a committed seller. And oftentimes the seller is committed for reasons they don't want to talk about. You know, they're overcome with stress, they're having a mental health crisis. They've been doing it for so long, they're exhausted, their spouse is ill, they have something going on in their family, they're, you know, having whatever. It can be any number of reasons, some good, some bad, but, but they don't want to tell you what it is. They're generally secretive people. A lot of these reasons are private. So I don't think you can laser focus on why is this person selling. You need to make sure they're committed to selling and you need to have enough conversations so you're convinced by that. But then I think you look at the fundamentals of the business and if the margins are good and healthy, then that's suggestive that the business is worth a deeper look.
- [30:51]
Caleb Zakrin
Right. And for small businesses, obviously unlike publicly traded companies, there aren't, aren't thousand, you know, millions of people or you know, be traded maybe oftentimes having institutions trading on their behalf. But you know, the, the, the valuations of companies, especially publicly traded companies, you know, are, are very, going to be very different than the valuations for these small companies. You know, I mean if you could look at some of these publicly traded companies now and the, you know, the, the, the, the, the P E ratios are, are quite, quite crazy. But, but for smaller companies obviously it's going to be much, much smaller too. So how do people, how should you actually recommend people think about valuation? Because you know you can, you can always have someone trying to tack on extra multiples, you know, using all sorts of arguments.
- [31:44]
Royce Yudkoff
Well, valuation is one of the things that makes this sector so attractive to entrepreneurs. And just to sort of give you a reference point, you know, if a company is making somewhere between $700,000 and maybe a million one or a million two in pre tax profit, a small business in that size and it's growing at a moderate rate, 5, 7% a year, I think Rick and I would expect to see that business trade at about four times its annual pre tax profit, maybe four and a half times. As you said Caleb, that's a fraction of what a big publicly traded company would trade at. And Rick often says the magic is in the multiples. And what he means when he says that is one of the great reasons to buy here is you can get a high quality company at a very low multiple. And the reason for that is that it takes a somewhat rare kind of person to be able to purchase this. They're just not that common. It's someone who can organize a transaction, raise the capital and the, and borrow the money on the company to buy it and then run it. And so that's a lot. That's a lot. There's a lot fewer people who can do that than can that can get online and buy 500 shares of Microsoft. So, so that and other reasons account for the fact that the purchase prices are so attractive in this space. Obviously if the company grows is growing faster, the multiple will be higher. If the small company is bigger, the multiple will be higher. But it gives people a reference point of, of when we say these companies are attractively priced, what we mean.
- [33:20]
Caleb Zakrin
Yeah, that makes sense. So once someone then has found a company that they're interested in and they're ready to basically express interest in it, basically get some sort of a letter of intent signed. That process, then they have to actually go and raise the money. What's that process like for people exploring ETA compared to maybe someone who's, you know, going to, to venture capitalist? Are they, are they trying to talk to the same people or are the, the people that are going to finance ETA investments Different, different types of investors.
- [34:01]
Royce Yudkoff
It's a totally different population of investors than venture capitalists. These are investors who expect most of their investments to perform because they're investing in established companies that have been profitable for many years. So the two types of sources of money that you'll be talking to are high net worth individuals or small funds that routinely invest in searcher companies for a portion of the equity and banks that will lend the other portion of the equity. Those would be non existent in the venture capital world, but here perhaps half your purchase price to 60% of your purchase price will be borrowed and 40% roughly will come from equity investors who recurringly invest in the space.
- [34:48]
Rick Ruback
Right.
- [34:49]
Caleb Zakrin
The book itself deals a lot with the process of searching. And someone could, as the title, it's a guide. So someone could literally read this book and use it almost in a step by step way to follow.
- [35:01]
Royce Yudkoff
We intended it that way, Caleb, we wanted it.
- [35:04]
Rick Ruback
And people do do it that way, which is a lot of fun.
- [35:09]
Caleb Zakrin
You got to get your 1%.
- [35:12]
Rick Ruback
Well, we don't, sadly, but in both of us routinely, I mean, it happens two or three times a year that we'll run into somebody who we don't know, they weren't our student, we've never met them before and they tell us, we read your book and we just purchased our company or we read your book three years ago and we purchased, you know, we just purchased our company and we just doubled in size or something. We get progress reports all the time. And that's just wonderful, wonderful to see. We influence sort of 200 people a year through our classroom and our book has sold, I don't know, what is it, Royce? About 70 or 80,000.
- [35:54]
Royce Yudkoff
A little over 80,000.
- [35:55]
Rick Ruback
Little 80,000 copies, which is a lot for a reasonably specialized book. And it's just wonderful to see that outreach that people, that people are reading the book and it's changing people's lives. It's hard to do that in a book. So we're really pleased by that. And we're seeing a very similar kind of influence from our podcast. We're creating people are Seeing opportunities for their lives that they didn't otherwise see. Because by humanizing this option, they're saying, oh, I could do that. I guess. I could be like this guy. I could be like that woman.
- [36:39]
Caleb Zakrin
I think what is appealing about it, as you sort of lay it out, is it's a, you know, that there's potentially, you know, there's upside, you know, like in any sort of entrepreneurial path, but it's safer upside. It's also, you know, rather than starting from scratch, you know, you get to at least have some kind of like an infrastructure to work with, especially if the company is set up well. And, you know, obviously, as you lay it out, someone shouldn't really buy a company unless it, unless it meets, meets, you know, certain conditions. But, but once someone actually then becomes an owner of, of one of these businesses and, you know, they've never been a CEO before, you know, what, what should they. They do in terms of actually thinking about the best way to, to run the business? Now they have the business, you know, what are they going to do differently? Are there, are there any things that you recommend they, that they do?
- [37:34]
Rick Ruback
Well, the way you ask that question, it's a little bit like the dog catching the school bus. You know, it's like, now what am I going to do with this bus now that I've got it?
- [37:43]
Royce Yudkoff
That's right.
- [37:44]
Rick Ruback
Anyway, Royce, I'm sorry I intervened.
- [37:46]
Royce Yudkoff
No, no, I think that's a great image. You know, perhaps the most universal recommendation Rick and I make is if you've bought the kind of business that we recommend in the book, which is a established, profitable, enduring business, often with sticky, loyal customers. If you've bought that kind of business, then one of the things you should do is not make big, expensive, hard to reverse decisions for the first six to 12 months you'll get in there. Usually there'll be a transition with the seller, so you'll find your way around the business. You'll start to make lots of everyday decisions. You'll get many of them right, you'll get some of them wrong, and you'll fix them. It'll be fine as you learn the business. But try to avoid really big, expensive decisions for six to 12 months because you will be a much better, more knowledgeable manager. And by that I'm talking about, you know, investing in a large piece of software or a large piece of equipment or cutting price things that are just hard to take back. And usually the type of established business you've bought can defer those decisions. So it's A bit of a step by step process taking over. Rick, what would you add to that?
- [39:00]
Rick Ruback
I think that's exactly right. We recommend going slow and learning people. We like to talk about the first year, but the truth is I think there's the first couple months where you're just overwhelmed with activity and, and just basic learning of the business. How's the scheduling work? How do I send out an invoice? How do I deal with the basics of hr? Like I have to get people paid, I have to make sure that people's health insurance is intact. What do I do with the person who just fell down on the job and has now has a sore back and is putting in a workers compensation plate? What do I do about all. How do I get my schedule? How do I get my scheduling done when 10% of my workforce is absent on any given day? How do I manage that? If it's a business that involves anything outdoors, one of the things we always hear about is they spend an enormous amount of time fixating over the weather. You know, is it going to be too. I can't wash windows in the rain. Should I tell my workers to stay home? What if it doesn't rain all day? What if it's windy? What if it's cold? Things that you wouldn't necessarily think about or study when you're doing due diligence, but now you have to make those decisions. So there's just, particularly in the first three, six months, there's a massive amount of learning. And typically the seller will stay for a transition period, maybe that's three months. And then the next three months is when you learn how you. How you want to do it. And maybe the next six months is just getting comfortable. And then maybe a year later, you know, sometime at the end of that first year of ownership, you've started to make meaningful changes. But you don't rush those meaningful changes. You wait. Because if you borrow good business, there are multiple ways to win. And one way to win is usually just not goofing the business up. And there is nothing that goofs a business up by making big changes before you know what those changes should be, right?
- [41:24]
Royce Yudkoff
Hi, I'm here to pick up my son, Milo.
- [41:26]
Rick Ruback
There's no Milo here who picked up.
- [41:28]
Caleb Zakrin
My son from school.
- [41:29]
Rick Ruback
Streaming only on P.
- [41:34]
Caleb Zakrin
I'm gonna need the name of everyone that could have a connection.
- [41:36]
Royce Yudkoff
You don't understand.
- [41:37]
Caleb Zakrin
It was just the five of us.
- [41:39]
Rick Ruback
So this was all planned.
- [41:40]
Caleb Zakrin
What are you gonna do? I will do whatever it takes to.
- [41:44]
Royce Yudkoff
Get my son back.
- [41:45]
Caleb Zakrin
I honestly didn't see this coming.
- [41:46]
Rick Ruback
These nice people killing each other.
- [41:49]
Caleb Zakrin
All her fault.
- [41:50]
Rick Ruback
A new series streaming now only on Peacock.
- [41:53]
Caleb Zakrin
I imagine oftentimes too, when people are, you know, they want to make changes, they, they see. They see that they can or they believe that they can, you know, drastically improve something by implementing some new software by doing a, you know, a complete redesign of the, you know, of the brand identity. And I do think that that's, that's great advice just to give, give it some time to actually learn, you know, learn all of the little, the little ins and outs and details because I think that, you know, obviously from, from afar, you know, it can. It's easy sometimes when analyzing a company to think that you understand everything that the company does just by, you know, one like little, little sheet explaining the, you know, the financial health of the company. But then, you know, but then whether or not it's 65 degrees versus 72 degrees can, can really impact, you know, what the profitability is for that day. And that's really important for, for, for someone to learn. I'm curious, you know, now that you've, you've been teaching so many students and seeing people go through this process, you know, what do you hear from people as they. Obviously, you said people, you know, that didn't even take your course but have read the book will reach out to you and you get these, these progress reports. But is there anything that, that you have learned from these progress reports that people have given you that has, has helped reshape and change how you teach the class?
- [43:14]
Royce Yudkoff
Well, we learn all the time. Caleb and Rick referenced that, you know, here at the Harvard Business School, we teach in the case method, which is for those who aren't familiar with it, a short nonfiction business story that ends with decisions that have to be made and that forms the basis of our discussion. And over the last decade, Rick and I lean very much into finding a graduate of the course and the school looking at what they've done either in their search journey or in the business they bought or decisions in the business. And we bring that back into class as a case because we're both very familiar with the facts and it. And the students can connect very well with it. And I'd say we're always, we're always learning from our students experiences about better ways to do due diligence, better management decisions, recruiting decisions to make. And I think, I think over time we learn, we see patterns. In other words, we see what are the common challenges that people face. In the first six months, the Six months after that, when there's new competitor, when there's problems with some of your employees. And how are these handled best as we look across these groups? So we're constantly learning from our former students.
- [44:30]
Caleb Zakrin
About 50% of new books Network's listenership is internationally based. And I imagine in your class you probably have a lot of international students as well, given that Harvard Business School attracts people from all over the world. And I'm wondering, you know, what advice you might give for someone that might want to go back to, you know, their home country or leave the States to try and do this. Are there any things that you know, that you've learned? Warnings, you know, maybe ways that they might take some of the advice and apply it differently depending on where they're actually trying to do this process?
- [45:08]
Rick Ruback
Yeah, we've had students from all around the world go back and do ETA in their home countries. Usually the motivation is, is pretty straightforward. It's that they want to go home sometimes for a family reason. You know, parents are ill or they're married, and that's where their spouse lives or, you know, have children, whatever the story is. So they want to go home and they're faced with two choices. They can do ETA or they can join a multinational company. If they join a multinational company, the risk is that as they succeed in that company in advance, they're going to have to leave the country because that country isn't the home base for the entity. And in the end, if you excel, you're probably going to have to move. And so for the people who really want to be home, ETA is a great path. And in many of these countries, the ETA ecosystem is less developed. That means the searcher has to be extraordinarily creative in how they find their businesses and how they do due diligence. But that said, their acquisition costs are much, much less than a developed economy because they're not only the first person to approach this owner, or often they're the first person in the country or the first couple of people in this country to even try one of these transactions. And so if you think of Royce's example earlier, that a business would sell for four times, in a less developed country, this business might sell for one and a half or two times. You know, we have a case where somebody buys a business in Africa and does a tuck in acquisition for the cost of a used car. You know, they give the seller a used car in exchange for their business. And it's just that it's all you have to scale it for the economy you're in. But what I don't think you want to lose track of is the less developed the ETA ecosystem, both the harder it is to do, but the greater the rewards to being successful.
- [47:38]
Caleb Zakrin
Yeah, that's really interesting. And yeah, I think, I think it's a great point too that you know, the options too of, you know, for someone who's from a country where there might not be, you know, with the exception of maybe the United Kingdom and the United States, most, most multinationals, they don't have their, their home base outside of London or New York or maybe Chicago. So you know, that is, that is a really great point that if you want to stay in your home country, then it actually is a really great, great potential opportunity. My last question is if the two of you were to quit your jobs at Harvard and go and do ETA right now, is there a particular industry.
- [48:19]
Rick Ruback
As an entrepreneur, not as an investor.
- [48:21]
Caleb Zakrin
As an entrepreneur, as an entrepreneur, you're going to go and you know, start running, you know, start a, you know, an H VAC company or is there a particular industry that you, you know, could see yourself doing this in right now?
- [48:35]
Royce Yudkoff
Well, Kayla, let me just say one thing. While Rick and I continue to teach at hbs, we each have a child who has gone off and bought a small firm. So that is almost like us doing it. It's part of us doing it. So, so you should just know that.
- [48:49]
Rick Ruback
It'S a little bit like watching your kid drive. It's, it's scarier than driving yourself sometimes when they're teenagers. Now when you get to be a certain age, it gets is it's more relaxing to have your child drive you.
- [49:00]
Royce Yudkoff
But anyway, you know, I would answer it, I would answer your. We may, this will be interesting because we're going to see how each of us answers this. I would answer it less by industry than by characteristics because I think the characteristics are most important and those would be, I would look for a company which has highly recurring revenue because it's in the customer's interest not to switch vendors. There's something about that service or product which makes the customer prefer not to switch. So year after year the same customers show up and buy from me that I don't have customer concentration. That when the economy cycles up and down, this is the kind of product or service which just is non discretionary and needs to be bought where I don't have supplier concentration and where as a result of those different factors my profit margins, my pre tax profit margins are big and fat because price is a secondary issue to the customer. There's something about that service or product relationship that makes them want to keep buying from us. That would be my filter. And I would buy a company that looks as much like that as possible. And then whatever the product or service is. So be. It's kind of the way I would think about it. But, Rick, maybe you have.
- [50:19]
Rick Ruback
I certainly fully agree with all the characteristics you listed, Royce. Enduringly profitable is really an important criteria, I think. What I think is that that's the wrong way to be, Caleb. With respect, that's not the way I would begin my search. I wouldn't begin my search by asking what industry I want to be in. I would begin my search by asking, by asking what's available. Where are the quality businesses in the set of businesses that are available? One of the things our students struggle with is how to manage their geographic preferences. Do they want to live in a particular place? If you want to live in a particular place, then you can't be really very fussy about industry. And. And you know, I'm a New Englander, as odd as that seems to somebody who's not from New England. I really like New England. So it's just where I've spent most of my life. And I'm happy here. So I don't think I would ever imagine buying a business that would force me to leave New England. But I don't think I'm so different from other searchers. It might not be New England, but it might be Chicago, it might be Los Angeles. Whatever it is that people come to this world of ETA with the same tastes and preferences that they come when they look for a job, which is, I want to pick an employer that's going to let me work and live in the way I want to do. I want to pick a company that's going to let me work and live where I want to be. So I would be a geographic based searcher. I would look for all the criteria Royce listed. And I think I might be, you know, if there would be a difference between us, I might, I might lean more towards blue collar businesses than Royce. Maybe because you just don't like machines all that much.
- [52:21]
Royce Yudkoff
That's right, Rick. You get the, you get the business with the machines and I get the service businesses.
- [52:26]
Rick Ruback
Yeah, my dad was a Caterpillar mechanic, so I think there's like some higher calling to coming home smelling of grease. I don't get to do that in my current job. You know, I'd like to do that once.
- [52:37]
Caleb Zakrin
Yeah, well, I Love that. I think that that's a great answer from both of you. It was really such a pleasure to get the chance to speak with you both, and I think I've learned a lot in the conversation, and I really look forward to continuing to listen to your podcast. I always find it really interesting, and I learn about businesses that I never knew about, never thought about before, so it's always opening up my world. So thank you both so much for being guests on the new Books Network.
- [53:05]
Royce Yudkoff
Yeah.
- [53:05]
Rick Ruback
Thank you. We're about to begin recording our next season of Think Big, Buy Small. So we're really excited and thank you for the positive thoughts about our podcast because I know there's a little bit of work in producing a podcast. So it's. It's. It's nice to get the positive feedback. So thank you so much.
- [53:23]
Caleb Zakrin
And there'll be a link in the show notes for, you know, in addition to the book, there'll also be a link in the show notes to the podcast, too, for listeners who want to check it out.
- [53:29]
Rick Ruback
So, yeah, perfect. Thank you so much.
- [53:32]
Royce Yudkoff
Thank you, Caleb.
- [53:45]
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Rick Ruback
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