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Ep. 60: How to Do Hard Things in a Human Way | Think Medium
Aug 4, 2022Tap to summarize[00:00:06] Gary Bisbee, Ph.D.: Our guest today, Rasmus Hougaard asks the question, how can you balance compassion for your people with effectiveness and getting the job done? Rasmus is the founder and CEO of Potential Project, a leadership development consultancy. He’s the author of “Compassionate Leadership”, for which he surveyed 350 CEOs and CHROs. Rasmus found that the most successful leaders have a compassionate and caring attitude, while also displaying a business acumen and courage to make difficult decisions. The best leaders can do hard things in a human way. Rasmus describes how to lead across age and cultural differences. He encourages leaders to unlearn robotic prescriptions for mentoring and leadership, and to approach conversations with vulnerability. We discussed the great resignation, which Rasmus frames as an opportunity. Employees want good work experiences. Companies that can provide them will attract and retain the best talent. Above all, Rasmus recommends that leaders take care of themselves, get enough sleep, and take time to rest and recharge. Only when you take care of yourself can you take care of others. Well, good afternoon, Rasmus, and welcome. [00:01:26] Rasmus Hougaard: Thank you very much, Gary. A pleasure to be here. [00:01:28] Gary Bisbee, Ph.D.: We’re pleased to have you at this microphone. As you know, this show is about sustaining leadership excellence and you fit right in with your career that involves really significant work as an author. You’re, of course, the founder and CEO of a global business. So what led, if I can ask, Rasmus, what led to the founding of Potential Project? I know we are covering multiple years there, but what really led you to found your global company? [00:02:01] Rasmus Hougaard: I think, for anything in most people’s lives, that’s not just one thing that led to that, but there’s probably at least three strands that leads to that. The first one was, when I was quite young, I was about 17, I actually completely lost confidence in the Western model of getting a good education, getting a good partner, getting a good car, getting a good career. All of that just didn’t add up to me. I didn’t see the point in it. And I felt I had to look elsewhere for a different way of doing life. And I went to Nepal and India and stayed there for quite some time and studied with some, let’s say, spiritual teachers from Buddhist tradition and other traditions that taught me meditation and taught me a different way of looking at the world and at life, not thinking about yourself first, but thinking about the impact and positivity you can bring to the world. That was definitely what was the foundation. Then I came back. I got my degree. I became a researcher and really learned the value of data, the value of thorough study of a situation before you come in and try to change something. Then I moved from there into corporates. And that was like when the coin dropped. I was working in the Sony Corporation as a leader for a number of years. And I saw how my employees and my peers and my superiors were constantly stressed out. They were not creative. They were not happy. They were overworked. They were burned out. And one day my own boss called me. We had this major, major meeting with our largest clients and he called me five minutes before and said he couldn’t make it. And I said, why not? And he said, I’m sitting in my car. And I said, what are you doing in my car? And he said, I can’t move. And he had just completely, out of stress and burnout, lost his ability to drive the car. I was just shocked by that. And it made me open the eyes and see he was not the only one, but everybody was suffering. Nobody was living up to their potential. And I thought, when I was young, I received all these amazing practices to train my own mind and to train my heart, to be a good person and to be clear minded, focused and resilient, and creative, and here amongst all these people that don’t have that. So I got to do something about that. And that’s when I decided to start Potential Project. [00:04:23] Gary Bisbee, Ph.D.: Well, can you describe it for us? [00:04:27] Rasmus Hougaard: Yeah. So, Potential Product is, as you said, a global company. We are in some 30 countries working with around, I would say, 500 global clients like Microsoft and Cisco and Accenture, and all the big companies. And what we do is research leadership development, and consulting, really helping our clients to ultimately create a more human world at work, creating a more human world of work where people can be truly themselves, where people can feel truly cared for, where leaders are really good human beings that unlearn management and relearn being humans. It’s all about creating a world where, I have three kids and they are going to join the workforce in just a few years. I want them to have a good experience. And that’s the kind of world of work that we’re trying to create. [00:05:16] Gary Bisbee, Ph.D.: Rasmus, we’ve learned through the years, thousands of interviews, that if we can hear from our guests about their early years growing up, how they’ve evolved as a leader, that that gives us a better understanding of their leadership style and performance. And to that end, let me just start with, what was life like growing up for you, Rasmus? [00:05:40] Rasmus Hougaard: It was actually really wonderful. It was beautiful. I loved my childhood. My parents came from a part of Denmark that is quite conservative and they moved to this little island in the Baltic Sea. A lot of artists, creative thinkers, moved there and my parents were some of those. So it was a very, very beautiful community of very free spirited people. And it was a lot of nature. So I just, I see myself as this little boy walking around in the woods, around the lakes, at the big cliffs at the water, with the waves coming up. That was what life was like, and just surrounded by a lot of really beautiful people. It was a beautiful time. [00:06:21] Gary Bisbee, Ph.D.: Well, and I think about your time in New York City in contrast. That’s quite a change. But that sounds like an idyllic existence, really. What did the young Rasmus think about leadership? At what point did you begin to think about leadership? [00:06:40] Rasmus Hougaard: I would say I didn’t spare that a single thought when I was a child, not a single thought. But having said that, I think I learned a lot because the community that I was surrounded by was very non-hierarchical. The school I went to, there was not a school principal. Teachers together were making decisions. So everything was very flat in that way. Not hierarchical, not top down. And I think that has just always been how I thought about how to get stuff done, is through influence and through communication, but not through mandates and commands. That has definitely shaped how I see leadership. [00:07:20] Gary Bisbee, Ph.D.: How about your parents? Have they influenced your leadership style? [00:07:25] Rasmus Hougaard: I think so, a lot. They both were in leadership positions in healthcare and social work. And I think they also embodied this very flat, very, you lead by influence, you lead by having good conversations. And so it’s just always been natural to me. I’ve always questioned the other way of leading, the more traditional top-down. It just never really made sense to me. [00:07:45] Gary Bisbee, Ph.D.: You’re a prolific author, Rasmus. Do you enjoy writing? [00:07:52] Rasmus Hougaard: I think it’s like anything else. If you have the time, anything is beautiful and wonderful, or at least can be. In my situation, leading some 200 people, I don’t have that much time. And when I used to, I really enjoyed writing. But these days, I have to confess I am using a lot of my colleagues and a professional writer to make things more polished and clear. But when I have the time, I really enjoy it, yes. [00:08:22] Gary Bisbee, Ph.D.: Do you have a pattern? Is there a certain time that you write? Some people write early in the morning? Some people write late at night. Any pattern? [00:08:31] Rasmus Hougaard: I tried to do that and it just didn’t work because the intensity of my work is just so that there’s no time of day where I’m standing still. So I realized I need to take out chunks of time. So it’s like everything from three to seven days, I just block completely, go to somewhere with no internet, and then just sit and write with the people I write with. [00:08:53] Gary Bisbee, Ph.D.: Well, let’s dig in to “Compassionate Leadership: How to Do Hard Things the Human Way”. One of the obvious questions, given that you operate in 30 some countries, does each culture interpret the term compassionate leadership the same way? [00:09:09] Rasmus Hougaard: No. No. There’s a lot of different interpretations of that. And even the word compassion is so differently understood even in a country like America, where it’s the native word. Case in point, most people don’t know what is the difference between empathy and compassion. And they think it’s the same thing. And it is absolutely not. Empathy is a really important skill for leaders. We need to be able to connect with the suffering we see in other people so they can see we understand them. And then there is communication. But as a leader, if we stay in empathy, where we are literally taking on the suffering of that other person, we can’t be effective in helping them and driving an agenda. So making that distinction is really important. And so in any culture, we have to help define what compassionate leadership means, including, the biggest misinterpretation people have is, when we’re compassionate, we’re nice. We’re nice people giving people what they want, which is not what compassion is. Compassion is about doing the right thing for people, helping them on their path, which can be giving really tough feedback, which can even be laying people off. So, yeah, there’s a lot of ...
Transcribe →The Stupidest Thing You Can Do With Your Money (Rebroadcast) - Freakonomics Freakonomics
Apr 3, 2018Tap to summarizeA study found that only the top 2 to 3 percent of active-fund managers had enough skill to cover their cost. (Photo: Visual Hunt) Our latest Freakonomics Radio episode is a rebroadcast of an episode from last year called “The Stupidest Thing You Can Do With Your Money.” (You can subscribe to the podcast at Apple Podcasts or elsewhere, get the RSS feed, or listen via the media player above.) It’s hard enough to save for a house, tuition, or retirement. So why are we willing to pay big fees for subpar investment returns? Enter the low-cost index fund. The revolution will not be monetized. Below is a transcript of the episode, modified for your reading pleasure. For more information on the people and ideas in the episode, see the links at the bottom of this post. * * * What would you say if I told you that everyday investors, people like you and me, are just throwing away billions and billions of dollars? Kenneth FRENCH: It’s not something that just started today. It’s been going on for the last 20 or 30 years. Is it some kind of a tax? Barry RITHOLTZ: It’s a tax on smart people who don’t realize their propensity for doing stupid things. Just how stupid is this stupid thing? Eugene FAMA: Basically, we were saying, “You’re charging people for stuff you can’t deliver.” But in recent years, there has been a backlash. Some would even say it’s become a revolution. John BOGLE: It’s definitely a revolution. RITHOLTZ: We are in the middle of the Copernican Revolution about the proper way to invest or at least the rational way to invest. Today on Freakonomics Radio: the revolution in low-cost index investing — also known as Wall Street’s worst nightmare. RITHOLTZ: There’s too much B.S. on Wall Street. * * * It’s hard to think of any other realm where empiricism — or at least what’s dressed up to look like empiricism — clashes so directly with delusion. I’m talking about investing; the stock markets, primarily. The alleged empiricism comes in the form of sales-pitch data: FRENCH: It’s easy to think — by seeing the ads and reading newspaper articles and stuff — that if you’re just clever enough, you’re going to win. The delusion comes in the form of how the stock markets actually work. FRENCH: We don’t understand the negative-sum nature of active investing. Whatever you win, I lose. Whatever I win, you lose, and we both paid to play that game. That’s Ken French. FRENCH: I am the Roth family distinguished professor of finance at the Tuck School of Business at Dartmouth. So the negative-sum nature of investing is one problem that’s often overlooked. FRENCH: And then the second problem we have [is] most people suffer from overconfidence, particularly in noisy environments where the feedback is weak. That describes the stock market. It’s incredibly noisy and it’s really easy to misinterpret what the return on your portfolio means. But wait a minute — we know how to interpret our portfolio returns, don’t we? Those big money-management firms and mutual fund firms and investment advisors, they’re so helpful in telling us how much our hard-earned money is growing. Right? Okay, it can be kinda hard to keep track of all the fees they’re deducting. But still — isn’t it amazing that the firm you chose — no matter which one you chose — just happens to be better than everybody else at picking the best stocks and funds? RITHOLTZ: There’s too much B.S. on Wall Street and being able to say, “Here’s what the data show” is really a useful skill. That’s Barry Ritholtz. RITHOLTZ: I run an asset-management firm called Ritholtz Wealth Management. DUBNER: All right. Explain how you, Barry Ritholtz, actually make money. Who is paying you to do what? RITHOLTZ: We get paid a percentage of assets. I haven’t looked at it this quarter but it’s somewhere under 1 percent, about .88 or .89. Somewhere in that range. The more assets we gather and the better those assets perform, the more revenue the firm sees. That’s a pretty typical setup. Many investors pay firms to manage their money — sometimes a percentage of assets, sometimes a flat fee. In return, you may get a variety of services — including advice about insurance or taxes. And, of course, investment advice: how best to save for a house, or your kids’ tuition, or retirement, whatever. Why pay someone for that advice? Because, let’s face it, investing can be confusing, and intimidating. All that terminology; all those options. So you hire someone to navigate that for you — and they, in turn, use their expertise to pick the very best investments for your needs. This is called active management. They actively select, let’s say, the best mutual funds for your needs. And you pay them for their expertise. You also pay those mutual funds, by the way — sometimes there’s what called a sales load when you buy it; and an expense ratio, a recurring fee the fund deducts from your account. So, between the mutual fund fees and the investment fees, that’s usually at least a couple percent off the top — and that’s whether your funds go up or down, by the way. So hopefully they go up. Hopefully the active management you’re paying for is at least covering the costs? FRENCH: What we actually found was the top 2 to 3 percent had enough skill to cover their costs. And the other 97 or 98 percent didn’t even have that. In 2010, Ken French and Eugene Fama published a study in The Journal of Finance called “Luck Versus Skill in the Cross-Section of Mutual Fund Returns.” FRENCH: So what Fama and I were doing in that paper is trying to figure out when a fund does really well, should we attribute that to a manager that is incredibly talented and really beating the market? Or are we just looking at the result of luck? That is, did their funds rise in value because of their stock-picking skill — or, perhaps, simply because the market was rising? And, again, the Fama-French finding: FRENCH: So the top 2 to 3 percent [have] enough skill to cover their costs. Everybody else: down below that. Ouch. It’s enough to make you think that maybe it’s not worth paying those investment experts for their expertise. If only there were some simple, cheap way to avoid all that active investing that often doesn’t pay off and just passively own, say, a small piece of the entire stock market. Well, as you may know, there is. They’re called index funds and E.T.F.s, for exchange-traded funds. They can be bought very cheap. And in recent years, a lot of people have been buying them. RITHOLTZ: When we look at the fund flows over the past few years, there is a massive outflow from active fund management. BOGLE: The number comes out to around a trillion and a half flowing into index funds and a half a trillion flowing out of active funds, which is a $2 trillion shift in investor preferences. It is definitely a revolution. That is John Bogle … BOGLE: … often called Jack, and I’m the founder of Vanguard and the founder of the world’s first index fund. How big a deal is Jack Bogle? Here’s what Barry Ritholtz thinks: RITHOLTZ: Jack Bogle is one of the unsung heroes of the American middle class. He has allowed people to invest over the long haul very inexpensively with excellent results in a way that they probably wouldn’t have been able to do without him and without Vanguard. Warren Buffett, the most famous investor in the world, had this to say recently: “If a statue is ever erected to honor the person who has done the most for American investors, the hands-down choice should be Jack Bogle.” RITHOLTZ: Vanguard is clearly the leaders in low-cost indexing. They’re now $4 trillion, right? That’s an astonishing number. How astonishing? Four trillion dollars could buy you every major sports league in America; and Apple — the company, all of it; and put 8 million kids through college. And you’d still have a trillion left over. That’s how much money we have collectively given to Vanguard. Why? Because they were the first to offer an alternative to the old-school, expert-driven, high-fee investing model. Let’s get back to Jack Bogle. DUBNER: You said recently, “What’s clear is we’re in the middle of a revolution caused by indexing. It’s reshaping Wall Street, it’s reshaping the mutual fund industry.” Now, for the man who really can claim way more credit than anyone else for starting the revolution, does it seem like a revolution or more of an evolution? In other words, it’s been a long time coming. BOGLE: It is a revolution, still going on. It started in the last few years. It’s actually accelerated and I don’t think that acceleration can continue. But I do think the dominance of the index fund will continue simply because we’re in an industry where cost is everything and no one wants to compete on cost. Managers don’t want to compete on cost. They want to make money for themselves. It didn’t bother me that it took a long time. It takes time for people to understand, keep up. I did my best to help. One way Bogle helped was by setting up Vanguard as a cooperative. It’s owned by the fund’s shareholders; rather than distributing profits, it lowers its fees. DUBNER: As the founder of Vanguard, as the father of index-fund investing — how have you turned out financially? Are you worth billions and billions and billions? BOGLE: No, I’m not even worth a billion. They laugh at me. I’m not even worth $100 million. But I was never in this business to make a lot of money for myself. I’ve been nicely paid, particularly in the days when I was running the company, and I am not a spender. I buy a new sweater every once in awhile or a new shirt from L.L. Bean. My wife is the same way. We’re just not interested in things, toys. We’re very happy with our standard of living. We have a nice small house that we love. We have a wonderful family. At 88 years old, I might be the most blessed man in the United States of America. Bogle created Vanguard in 1975, when things weren’t going so well for him. BOGLE: It wa...
Transcribe →The Stupidest Thing You Can Do With Your Money (Rebroadcast) - Freakonomics Freakonomics
Mar 28, 2018Tap to summarizeA study found that only the top 2 to 3 percent of active-fund managers had enough skill to cover their cost. (Photo: Visual Hunt) Our latest Freakonomics Radio episode is a rebroadcast of an episode from last year called “The Stupidest Thing You Can Do With Your Money.” (You can subscribe to the podcast at Apple Podcasts or elsewhere, get the RSS feed, or listen via the media player above.) It’s hard enough to save for a house, tuition, or retirement. So why are we willing to pay big fees for subpar investment returns? Enter the low-cost index fund. The revolution will not be monetized. Below is a transcript of the episode, modified for your reading pleasure. For more information on the people and ideas in the episode, see the links at the bottom of this post. * * * What would you say if I told you that everyday investors, people like you and me, are just throwing away billions and billions of dollars? Kenneth FRENCH: It’s not something that just started today. It’s been going on for the last 20 or 30 years. Is it some kind of a tax? Barry RITHOLTZ: It’s a tax on smart people who don’t realize their propensity for doing stupid things. Just how stupid is this stupid thing? Eugene FAMA: Basically, we were saying, “You’re charging people for stuff you can’t deliver.” But in recent years, there has been a backlash. Some would even say it’s become a revolution. John BOGLE: It’s definitely a revolution. RITHOLTZ: We are in the middle of the Copernican Revolution about the proper way to invest or at least the rational way to invest. Today on Freakonomics Radio: the revolution in low-cost index investing — also known as Wall Street’s worst nightmare. RITHOLTZ: There’s too much B.S. on Wall Street. * * * It’s hard to think of any other realm where empiricism — or at least what’s dressed up to look like empiricism — clashes so directly with delusion. I’m talking about investing; the stock markets, primarily. The alleged empiricism comes in the form of sales-pitch data: FRENCH: It’s easy to think — by seeing the ads and reading newspaper articles and stuff — that if you’re just clever enough, you’re going to win. The delusion comes in the form of how the stock markets actually work. FRENCH: We don’t understand the negative-sum nature of active investing. Whatever you win, I lose. Whatever I win, you lose, and we both paid to play that game. That’s Ken French. FRENCH: I am the Roth family distinguished professor of finance at the Tuck School of Business at Dartmouth. So the negative-sum nature of investing is one problem that’s often overlooked. FRENCH: And then the second problem we have [is] most people suffer from overconfidence, particularly in noisy environments where the feedback is weak. That describes the stock market. It’s incredibly noisy and it’s really easy to misinterpret what the return on your portfolio means. But wait a minute — we know how to interpret our portfolio returns, don’t we? Those big money-management firms and mutual fund firms and investment advisors, they’re so helpful in telling us how much our hard-earned money is growing. Right? Okay, it can be kinda hard to keep track of all the fees they’re deducting. But still — isn’t it amazing that the firm you chose — no matter which one you chose — just happens to be better than everybody else at picking the best stocks and funds? RITHOLTZ: There’s too much B.S. on Wall Street and being able to say, “Here’s what the data show” is really a useful skill. That’s Barry Ritholtz. RITHOLTZ: I run an asset-management firm called Ritholtz Wealth Management. DUBNER: All right. Explain how you, Barry Ritholtz, actually make money. Who is paying you to do what? RITHOLTZ: We get paid a percentage of assets. I haven’t looked at it this quarter but it’s somewhere under 1 percent, about .88 or .89. Somewhere in that range. The more assets we gather and the better those assets perform, the more revenue the firm sees. That’s a pretty typical setup. Many investors pay firms to manage their money — sometimes a percentage of assets, sometimes a flat fee. In return, you may get a variety of services — including advice about insurance or taxes. And, of course, investment advice: how best to save for a house, or your kids’ tuition, or retirement, whatever. Why pay someone for that advice? Because, let’s face it, investing can be confusing, and intimidating. All that terminology; all those options. So you hire someone to navigate that for you — and they, in turn, use their expertise to pick the very best investments for your needs. This is called active management. They actively select, let’s say, the best mutual funds for your needs. And you pay them for their expertise. You also pay those mutual funds, by the way — sometimes there’s what called a sales load when you buy it; and an expense ratio, a recurring fee the fund deducts from your account. So, between the mutual fund fees and the investment fees, that’s usually at least a couple percent off the top — and that’s whether your funds go up or down, by the way. So hopefully they go up. Hopefully the active management you’re paying for is at least covering the costs? FRENCH: What we actually found was the top 2 to 3 percent had enough skill to cover their costs. And the other 97 or 98 percent didn’t even have that. In 2010, Ken French and Eugene Fama published a study in The Journal of Finance called “Luck Versus Skill in the Cross-Section of Mutual Fund Returns.” FRENCH: So what Fama and I were doing in that paper is trying to figure out when a fund does really well, should we attribute that to a manager that is incredibly talented and really beating the market? Or are we just looking at the result of luck? That is, did their funds rise in value because of their stock-picking skill — or, perhaps, simply because the market was rising? And, again, the Fama-French finding: FRENCH: So the top 2 to 3 percent [have] enough skill to cover their costs. Everybody else: down below that. Ouch. It’s enough to make you think that maybe it’s not worth paying those investment experts for their expertise. If only there were some simple, cheap way to avoid all that active investing that often doesn’t pay off and just passively own, say, a small piece of the entire stock market. Well, as you may know, there is. They’re called index funds and E.T.F.s, for exchange-traded funds. They can be bought very cheap. And in recent years, a lot of people have been buying them. RITHOLTZ: When we look at the fund flows over the past few years, there is a massive outflow from active fund management. BOGLE: The number comes out to around a trillion and a half flowing into index funds and a half a trillion flowing out of active funds, which is a $2 trillion shift in investor preferences. It is definitely a revolution. That is John Bogle … BOGLE: … often called Jack, and I’m the founder of Vanguard and the founder of the world’s first index fund. How big a deal is Jack Bogle? Here’s what Barry Ritholtz thinks: RITHOLTZ: Jack Bogle is one of the unsung heroes of the American middle class. He has allowed people to invest over the long haul very inexpensively with excellent results in a way that they probably wouldn’t have been able to do without him and without Vanguard. Warren Buffett, the most famous investor in the world, had this to say recently: “If a statue is ever erected to honor the person who has done the most for American investors, the hands-down choice should be Jack Bogle.” RITHOLTZ: Vanguard is clearly the leaders in low-cost indexing. They’re now $4 trillion, right? That’s an astonishing number. How astonishing? Four trillion dollars could buy you every major sports league in America; and Apple — the company, all of it; and put 8 million kids through college. And you’d still have a trillion left over. That’s how much money we have collectively given to Vanguard. Why? Because they were the first to offer an alternative to the old-school, expert-driven, high-fee investing model. Let’s get back to Jack Bogle. DUBNER: You said recently, “What’s clear is we’re in the middle of a revolution caused by indexing. It’s reshaping Wall Street, it’s reshaping the mutual fund industry.” Now, for the man who really can claim way more credit than anyone else for starting the revolution, does it seem like a revolution or more of an evolution? In other words, it’s been a long time coming. BOGLE: It is a revolution, still going on. It started in the last few years. It’s actually accelerated and I don’t think that acceleration can continue. But I do think the dominance of the index fund will continue simply because we’re in an industry where cost is everything and no one wants to compete on cost. Managers don’t want to compete on cost. They want to make money for themselves. It didn’t bother me that it took a long time. It takes time for people to understand, keep up. I did my best to help. One way Bogle helped was by setting up Vanguard as a cooperative. It’s owned by the fund’s shareholders; rather than distributing profits, it lowers its fees. DUBNER: As the founder of Vanguard, as the father of index-fund investing — how have you turned out financially? Are you worth billions and billions and billions? BOGLE: No, I’m not even worth a billion. They laugh at me. I’m not even worth $100 million. But I was never in this business to make a lot of money for myself. I’ve been nicely paid, particularly in the days when I was running the company, and I am not a spender. I buy a new sweater every once in awhile or a new shirt from L.L. Bean. My wife is the same way. We’re just not interested in things, toys. We’re very happy with our standard of living. We have a nice small house that we love. We have a wonderful family. At 88 years old, I might be the most blessed man in the United States of America. Bogle created Vanguard in 1975, when things weren’t going so well for him. BOGLE: It wa...
Transcribe →Kalzumeus Podcast Episode 13: Selling Online Businesses With Thomas Smale | Kalzumeus Software
Oct 10, 2017Tap to summarizeI sold Bingo Card Creator, the business I’m probably best known for, through FEI last year. Thomas Smale, the principal of that brokerage, is now a buddy of mine, and he agreed to chat with me a bit about what goes into buying and selling online businesses. I think it is of particular interest to those of you with SaaS businesses already, but it might also be interesting for those of you who might found one eventually, as you can make early decisions (like e.g. technology stack) which built improved saleability into the business from day one. I’ve previously written about the BCC acquisition here. Note that this interview doesn’t go into much depth about that acquisition per se, partially because that isn’t a new topic for me and partially because I’m NDAed with regards to specifics. [Patrick notes: As always, the below transcript occasionally has my thoughts inserted in this format.] What you’ll learn in this podcast: Why SaaS businesses (and others with recurring revenue) receive a valuation premium Why you should use a broker to sell a business How to start getting a business ready for sale months before the process formally starts How to ease the acquisition process, both for the buyer and the seller MP3 Download (~50 minutes, ~60MB): right click here and select Save As. Podcast format: either subscribe to http://www.kalzumeus.com/category/podcasts/feed in your podcast reader of choice or you can search for Kalzumeus Podcast in iTunes, Overcast, or another aggregator of your choice. [powerpress] Selling Online Businesses With Thomas Smale Patrick McKenzie: Hideho everybody. My name is Patrick McKenzie, better known as Patio11 on the Internets. I’m here for the 13th episode of the Kalzumeus Podcast with my friend Thomas Smale, who runs FEI. It’s a brokerage for online businesses, which I used last year to sell Bingo Card Creator. Thomas Smale: Hi, Patrick. Thanks so much for having me on. Patrick: Thomas, last year, you helped me sell Bingo Card Creator, which was the first business that I had been running from about 2006 through 2015 selling bingo cards over the Internet to elementary school teachers. Do you guys do a lot of work with SaaS companies? Thomas: In the last 12 months, just to put it in perspective, we did about 80 deals, and this year, we’re on track to do around 100 deals. At the moment, around a third of our business is in the SaaS or software space. It’s not all we do, but it is quite a big focus internally. Patrick: Just out of curiosity, what are the other sort of businesses that you guys see a lot? Thomas: If we broke it down a third, a third, a third, to keep it quite simple, we do e-commerce businesses, selling on Amazon or Amazon FBA. E-commerce through their own store would be about another third. Then the third content businesses, whether that’s content-based sites monetized with AdSense or Amazon affiliates, they’ve gotten quite popular, especially on the lower end. Then we also have a mixture of other businesses we do. Generally speaking, if it’s an online-based business, we will take a look at it. Patrick: One of the things that was interesting to me was comparing and contrasting how the acquisitions work at the scale of the economy and also how that’s similar and different to more traditional acquisitions for start-ups or for larger firms. One of the interesting things is that, just like in larger firms, SaaS gets a valuation premium relative to the revenue or cash flow that’s coming out of the business. Can you explain what that looks like in your experience? Thomas: Generally speaking, a SaaS business on average, assuming all parts being equal and equivalent, an e-commerce business or content business will sell for more. In terms of how much more, generally speaking, you’d probably be looking at about 25 percent premium. The real driver there is the fact that a SaaS business has that recurring income and that baseline. I think from a buyer’s perspective, worst case scenario, even if you can’t grow the business or even if it starts to decline, you’ve still got that baseline of subscribers. Also, with a solid subscriber base, you can build momentum quite quickly. We’ve seen quite a few buyers come in to acquire small SaaS businesses where the owner has either moved onto new projects or run out of ideas with it. They’ve managed to scale it quite quickly, because you’ve got that baseline that’s already there. That tends to be the appeal from the buyer perspective, and what drives multiples up compared to other business models. Patrick: We’re well aware of this because you do 80 to 100 deals a year and I saw the process through the nitty-gritty, but I’m guessing that most of my audience doesn’t know exactly what the multiple we’re calculating is. We should probably be pretty explicit that the multiple is a multiple of what’s called the SDC, seller discretionary cash flow that’s coming out of the business. How about you explain that for everybody, because you probably know it better than me? Thomas: We use SDE, which is seller discretionary earnings, but it’s basically the same thing as seller discretionary cash flow. You might hear it be described a few other things, as well. Effectively it’s the net profit of the business. Some people like to use EBITDA, or EBIT, or a similar calculation to that, and then adding back, so effectively it’s not taking into account anything the owner has taken out of the business, for example, the owner’s salary. Anything else you might take out for tax purposes, for example, personal health insurance, a car, rent. [Patrick notes: For example, in Japan, self-employed individuals can write off 40~60% of their apartment’s rent against the profits of the business. I’ve done this for years, on the advice of both my accountant and the National Tax Agency. This is strongly discouraged by the IRS unless you meet their much-more-stringent definition of a home office.] Anything that’s not entirely relevant to running the business. The reason that’s done is to standardize the sale of small business, because one owner on exactly the same business might pay themselves $50,000 a year, and the other owner might pay themselves $200,000 a year. If you don’t use an SDE calculation, the owner who pays himself less would look like their business is more profitable and worth more. It levels the playing field. That’s generally used for any business making less than a million a year in profit, or SDE in this case. Patrick: After you’ve calculated what the business’s revenues minus the necessary expenses to generate those revenues are, we multiply by a number, which is set by market conditions, mostly, where buyers and sellers are willing to transact. At the moment, my understanding is in SaaS that it’s about, roughly, three years? Thomas: That’s about right. We have an internal evaluation model that we’ve built out, which looks at all of our past sales. At the moment we’ve done about 400 transactions now. All that data’s in there, and we’ll look at past deals, look at similarities. Depending on the group, if you look at the last 12 months we see SaaS business go up to five times, or even six times, annual, but that’s looking at the last 12 months. If it’s growing, if you look at the last three months, we would generally extrapolate that out for the next 12 months, and then apply a three-times multiple to that. It’s more like five times the last 12 months, or three times, extrapolating the last three. [Patrick notes: Let me put some fictitious numbers here to make this sound more concrete. Suppose that your business was doing $8k net income monthly last year and has added $1k of MRR consistently in every month at no meaningful marginal cost. Your net income for the last year is $162k. Your predicted revenue for the next year is $306k. Thomas is suggesting that if you valued the business at 5X its last year it would be worth about $800k, but given extrapolation of the clear growth trend, it would get 3X next year’s implied next year revenue, or about $900k. Note that the valuation for more stable businesses is generally around 3~3.5X of the trailing twelve month’s net income — the market places a hefty premium on demonstrable growth, in small businesses and unicorns alike.] We only really do for SaaS businesses, because the growth can be a little bit more predictable and the revenue is a little bit more predictable. Whereas in a e-commerce store, for example, you could have had a couple of good months due to a sale, or running a promotion on Groupon, or something like that. That’s not sustainable. It doesn’t really increase the value as much as an increase in MRR that you see in a SaaS business. Getting Ready To Sell Your Business Patrick: E-commerce businesses are also typically very sensitive to seasonality, which is uncommon in SaaS businesses, says the one guy with the extremely seasonal SaaS business that I used to run. [laughs] When I was in the process of selling Bingo Card Creator with you, going through the process took a couple months to complete. Before that there was, obviously, a longer process with me thinking through, “OK, I want to sell this business. What do I start to do to get my ducks in a row?” You gave me some good advice with regards to things that I could do that would both make the transition a little smoother, for both myself and the buyer, and which would tend to increase the valuation of the business. What are some of those things that folks who might own a SaaS business and be thinking of selling it in, say, the next 12 months could start to do today to make that process easier for themselves? Thomas: That’s a good question. This is another good point that it is important to think about these things well in advance of the sale. You definitely did the right thing coming to us months before you were planning it. Most of the successful clients we see, who do sell their business, have done that, as well. ...
Transcribe →Kalzumeus Podcast Episode 13: Selling Online Businesses With Thomas Smale | Kalzumeus Software
Mar 21, 2017Tap to summarizeI sold Bingo Card Creator, the business I’m probably best known for, through FEI last year. Thomas Smale, the principal of that brokerage, is now a buddy of mine, and he agreed to chat with me a bit about what goes into buying and selling online businesses. I think it is of particular interest to those of you with SaaS businesses already, but it might also be interesting for those of you who might found one eventually, as you can make early decisions (like e.g. technology stack) which built improved saleability into the business from day one. I’ve previously written about the BCC acquisition here. Note that this interview doesn’t go into much depth about that acquisition per se, partially because that isn’t a new topic for me and partially because I’m NDAed with regards to specifics. [Patrick notes: As always, the below transcript occasionally has my thoughts inserted in this format.] What you’ll learn in this podcast: Why SaaS businesses (and others with recurring revenue) receive a valuation premium Why you should use a broker to sell a business How to start getting a business ready for sale months before the process formally starts How to ease the acquisition process, both for the buyer and the seller MP3 Download (~50 minutes, ~60MB): right click here and select Save As. Podcast format: either subscribe to http://www.kalzumeus.com/category/podcasts/feed in your podcast reader of choice or you can search for Kalzumeus Podcast in iTunes, Overcast, or another aggregator of your choice. [powerpress] Selling Online Businesses With Thomas Smale Patrick McKenzie: Hideho everybody. My name is Patrick McKenzie, better known as Patio11 on the Internets. I’m here for the 13th episode of the Kalzumeus Podcast with my friend Thomas Smale, who runs FEI. It’s a brokerage for online businesses, which I used last year to sell Bingo Card Creator. Thomas Smale: Hi, Patrick. Thanks so much for having me on. Patrick: Thomas, last year, you helped me sell Bingo Card Creator, which was the first business that I had been running from about 2006 through 2015 selling bingo cards over the Internet to elementary school teachers. Do you guys do a lot of work with SaaS companies? Thomas: In the last 12 months, just to put it in perspective, we did about 80 deals, and this year, we’re on track to do around 100 deals. At the moment, around a third of our business is in the SaaS or software space. It’s not all we do, but it is quite a big focus internally. Patrick: Just out of curiosity, what are the other sort of businesses that you guys see a lot? Thomas: If we broke it down a third, a third, a third, to keep it quite simple, we do e-commerce businesses, selling on Amazon or Amazon FBA. E-commerce through their own store would be about another third. Then the third content businesses, whether that’s content-based sites monetized with AdSense or Amazon affiliates, they’ve gotten quite popular, especially on the lower end. Then we also have a mixture of other businesses we do. Generally speaking, if it’s an online-based business, we will take a look at it. Patrick: One of the things that was interesting to me was comparing and contrasting how the acquisitions work at the scale of the economy and also how that’s similar and different to more traditional acquisitions for start-ups or for larger firms. One of the interesting things is that, just like in larger firms, SaaS gets a valuation premium relative to the revenue or cash flow that’s coming out of the business. Can you explain what that looks like in your experience? Thomas: Generally speaking, a SaaS business on average, assuming all parts being equal and equivalent, an e-commerce business or content business will sell for more. In terms of how much more, generally speaking, you’d probably be looking at about 25 percent premium. The real driver there is the fact that a SaaS business has that recurring income and that baseline. I think from a buyer’s perspective, worst case scenario, even if you can’t grow the business or even if it starts to decline, you’ve still got that baseline of subscribers. Also, with a solid subscriber base, you can build momentum quite quickly. We’ve seen quite a few buyers come in to acquire small SaaS businesses where the owner has either moved onto new projects or run out of ideas with it. They’ve managed to scale it quite quickly, because you’ve got that baseline that’s already there. That tends to be the appeal from the buyer perspective, and what drives multiples up compared to other business models. Patrick: We’re well aware of this because you do 80 to 100 deals a year and I saw the process through the nitty-gritty, but I’m guessing that most of my audience doesn’t know exactly what the multiple we’re calculating is. We should probably be pretty explicit that the multiple is a multiple of what’s called the SDC, seller discretionary cash flow that’s coming out of the business. How about you explain that for everybody, because you probably know it better than me? Thomas: We use SDE, which is seller discretionary earnings, but it’s basically the same thing as seller discretionary cash flow. You might hear it be described a few other things, as well. Effectively it’s the net profit of the business. Some people like to use EBITDA, or EBIT, or a similar calculation to that, and then adding back, so effectively it’s not taking into account anything the owner has taken out of the business, for example, the owner’s salary. Anything else you might take out for tax purposes, for example, personal health insurance, a car, rent. [Patrick notes: For example, in Japan, self-employed individuals can write off 40~60% of their apartment’s rent against the profits of the business. I’ve done this for years, on the advice of both my accountant and the National Tax Agency. This is strongly discouraged by the IRS unless you meet their much-more-stringent definition of a home office.] Anything that’s not entirely relevant to running the business. The reason that’s done is to standardize the sale of small business, because one owner on exactly the same business might pay themselves $50,000 a year, and the other owner might pay themselves $200,000 a year. If you don’t use an SDE calculation, the owner who pays himself less would look like their business is more profitable and worth more. It levels the playing field. That’s generally used for any business making less than a million a year in profit, or SDE in this case. Patrick: After you’ve calculated what the business’s revenues minus the necessary expenses to generate those revenues are, we multiply by a number, which is set by market conditions, mostly, where buyers and sellers are willing to transact. At the moment, my understanding is in SaaS that it’s about, roughly, three years? Thomas: That’s about right. We have an internal evaluation model that we’ve built out, which looks at all of our past sales. At the moment we’ve done about 400 transactions now. All that data’s in there, and we’ll look at past deals, look at similarities. Depending on the group, if you look at the last 12 months we see SaaS business go up to five times, or even six times, annual, but that’s looking at the last 12 months. If it’s growing, if you look at the last three months, we would generally extrapolate that out for the next 12 months, and then apply a three-times multiple to that. It’s more like five times the last 12 months, or three times, extrapolating the last three. [Patrick notes: Let me put some fictitious numbers here to make this sound more concrete. Suppose that your business was doing $8k net income monthly last year and has added $1k of MRR consistently in every month at no meaningful marginal cost. Your net income for the last year is $162k. Your predicted revenue for the next year is $306k. Thomas is suggesting that if you valued the business at 5X its last year it would be worth about $800k, but given extrapolation of the clear growth trend, it would get 3X next year’s implied next year revenue, or about $900k. Note that the valuation for more stable businesses is generally around 3~3.5X of the trailing twelve month’s net income — the market places a hefty premium on demonstrable growth, in small businesses and unicorns alike.] We only really do for SaaS businesses, because the growth can be a little bit more predictable and the revenue is a little bit more predictable. Whereas in a e-commerce store, for example, you could have had a couple of good months due to a sale, or running a promotion on Groupon, or something like that. That’s not sustainable. It doesn’t really increase the value as much as an increase in MRR that you see in a SaaS business. Getting Ready To Sell Your Business Patrick: E-commerce businesses are also typically very sensitive to seasonality, which is uncommon in SaaS businesses, says the one guy with the extremely seasonal SaaS business that I used to run. [laughs] When I was in the process of selling Bingo Card Creator with you, going through the process took a couple months to complete. Before that there was, obviously, a longer process with me thinking through, “OK, I want to sell this business. What do I start to do to get my ducks in a row?” You gave me some good advice with regards to things that I could do that would both make the transition a little smoother, for both myself and the buyer, and which would tend to increase the valuation of the business. What are some of those things that folks who might own a SaaS business and be thinking of selling it in, say, the next 12 months could start to do today to make that process easier for themselves? Thomas: That’s a good question. This is another good point that it is important to think about these things well in advance of the sale. You definitely did the right thing coming to us months before you were planning it. Most of the successful clients we see, who do sell their business, have done that, as well. ...
Transcribe →Porter Stansberry
Jan 1, 2017Tap to summarizeEpisode #27: “There’s Going to Be a Big Bill of Bad Debt to Pay” Guest: Porter Stansberry. Porter Stansberry founded Stansberry Research in 1999 with the firm’s flagship newsletter, Stansberry’s Investment Advisory. He is also the host of Stansberry Radio, a weekly broadcast that has quickly become one of the most popular online financial radio shows. Prior to launching Stansberry Research, Porter was the first American editor of the Fleet Street Letter, the world’s oldest English-language financial newsletter. Today, Porter is well-known for doing some of the most important – and often controversial – work in the financial advisory business. Since he launched Stansberry’s Investment Advisory, his string of accurate forecasts has made his advisory one of the most widely read in the world. Date: 10/25/16 Run-Time: 54:42 Topics: Episode 27 starts with a quick note from Meb. It’s a week of freebies! Why? Meb is celebrating his 10th “blogiversary.” (He’s officially been writing about finance now for a decade.) Be sure to hear what he’s giving away for free. Namely, his last four Ebooks are free on Amazon and he is giving away a free month trial to The Idea Farm. Lastly, our Cambria crowd round is almost full. If you’re interested you can view the raise here. But soon the interview starts, with Meb asking Porter to give some background on himself and his company, as Porter’s story is somewhat different than that of many guests. Porter tells us about being brought into the world of finance by his close friend and fund manager, Steve Sjuggerud. This conversations bleeds into Porter’s thoughts on how a person should spend his 20s, 30s, and 40s as it relates to income and wealth creation. But it’s not long before the guys dive into the investment markets today, and you won’t want to miss Porter’s take. In essence, if you’re a corporate bond investor, watch out. Porter believes this particular credit cycle is going to be worse than anything we’ve ever seen. Why? There’s plenty of blame to go around, but most significantly, the Fed did not allow the market to clear in 2009 and 2010, and it means this time is going to be very, very bad. Porter gives us the details, but it all points toward one takeaway: “There’s going to be a big bill of bad debt to pay.” Meb then asks what the investing implications are for the average investor. This leads to Porter’s concept of “The Big Trade.” In a nutshell, Porter has identified 30 corporate offenders, “The Dirty 30.” Between them, they owe $300 billion in debt. His plan is to monitor these companies on a weekly basis, while keeping an eye out for liquid, long-dated puts on them that he’ll buy opportunistically. He’ll target default-level strike prices, and expect 10x returns – on average. Meb likes the idea, as the strategy would serve as a hedge to a traditional portfolio. Next, the guys get into asset allocation. Porter’s current strategy is “allocate to value,” but for him that means holding a great deal of cash. Meb doesn’t mind, as wealth preservation is always the most important rule. This leads the guys into bearish territory, with Porter believing we’ll see a recession within the next 12 months. This transitions into how to protect a portfolio; in this case, the guys discuss using a stop-loss service. Porter finds it invaluable, as most people grossly underestimate the risk they’re taking with their investments, as well as their capacity to handle that risk. He sums up his general stance by saying if you don’t have a risk management discipline you will not be successful. Next, the guys get into the biggest investing mistakes Porter has seen his subscribers make over the years. There’s a great deal of poor risk mitigation. He says 95% of his own subscribers will not hedge their portfolio. Meb thinks it’s a problem of framing. People buy home insurance and car insurance. If we framed hedging as “portfolio insurance” it would probably work, but people don’t think that way. He sums up by saying, “To be a good investor, you need to be good at losing.” Porter agrees, pointing out how Buffet has seen 50% drawdowns twice in the last 15 years. If there’s a takeaway from this podcast, it’s “learn how to hedge.” There’s far more, including what Porter believes is the secret to his success. What it is? Find out in Episode 27. Episode Sponsors: Founders Card and Lyft To listen to Episode #27 on iTunes, click here To listen to Episode #27 on Stitcher, click here To listen to Episode #27 on Pocket Casts, click here To listen to Episode #27 on Google Play, click here To stream Episode #27, click here Comments or suggestions? Email us [email protected] Links from the Episode: The Porter Allocation 10% in hedges like puts on The Dirty Thirty 10% Gold and gold stocks 30%+ cash 25% High Quality Stocks 25% High Quality Corporate Bonds *Owns no stocks himself Investing to Avoid the Consequences of Being Wrong US Industrial Production Index S&P Earnings Declines TradeStops.com More information on Porter’s “Big Trade” Stansberry Research Selected charts: Running Segment: “Things I find beautiful, useful or downright magical”: Porter: Save $50,000 in cash before you invest Meb: Life is not a dress rehearsal Transcript of Episode 27: Welcome Message: Welcome to the Meb Faber Show where the focus is on helping you grow and preserve your wealth. Join us as we discuss the craft of investing, and uncover new and profitable ideas, all to help you grow wealthier and wiser. Better investing starts here. Disclaimer: Meb Faber is the co-founder and chief investment officer at Cambria Investment Management. Due to industry regulations, he will not discuss any of Cambria’s funds on this podcast. All opinions expressed by podcast participants are solely their own opinions and do not reflect the opinion of Cambria Investment Management or its affiliates. For more information, visit cambriainvestments.com. Sponsor: Today’s podcast is sponsored by FoundersCard. I usually don’t spring for paid membership programs, but this one is a little different. The offering is targeted at entrepreneurs and business owners, and the card enables premier benefits from leading airlines, hotels, lifestyle brands, and business services. A few of my favorite benefits include free access to MailChimp Pro, Dashlane Premium, and TripIt Pro. You can even get big discounts of services I love like Silvercar, 99designs, Apple, and AT&T. My favorite though, are the travel benefits where you get an automatic status such as Hilton Hhonors Gold, American Airlines Platinum, and Virgin America Gold. And while I often use the great app, HotelTonight for travel, the FoundersCard discounts can be massive, too. If you go to founderscard.com/meb, podcast listeners can sign up for the discount at 395 bucks a year with no initiation fee, and that’s a saving from the normal cost of around 600 bucks per year. Again, that’s founderscard.com/meb. Meb: We have a great podcast coming up for you today with special guest Porter Stansberry. But before we get started, wanted to let you know that today marks the 10-year anniversary of my very first investment blog post. In honor of this 10-year blogiversary, as we call it, I’m gonna give you, the listeners, 5 gifts [SP] and also ask for something in return. But first let’s take a look back. In the last 10 years, I’ve written over 1,700 articles on the blog. That equates to about 15 per month. We’ve written 10 white papers, 1 of which is the all-time, number 1 most downloaded on the SSRN database, with over almost 200,000 downloads, and that’s out of a half of a million papers. We’ll also update that when it has its 10-year anniversary this February. We’ve had readers in over 200 countries around the world, and we’ve also written 5 books. So to celebrate, all week is gonna be a week of free giveaways. First, I’m making all of my e-books free to download on Amazon all week. Monday to Friday, you can download the last four investment books I’ve written, my gift to you, all week long, no strings attached. Second gift to you, I’m gonna offer every single listener of this program and the blog a free month of our investment research portal, The Idea Farm. If you go to the blog post, and we’ll link to it on the show notes, for my 10-year blogiversary, we’ll have a link to let you sign up for a free month, The Idea Farm. Again, no commitments, no strings attached, cancel at any time. Enjoy. Lastly, the one thing I want to ask for you, as you’re likely aware, my company Cambria, just launched our new investment management service called the Cambria Digital Advisor. We’re really proud of this service, spent a many years building it, and I honestly believe it’s the best way I know how to put together a portfolio that has a lot of tilt such as value, and momentum, and trend. And I believe in it so much, it’s how I invest 100% of my net worth. So if you could do me a favor, take a minute, visit cambriainvestments.com, check out our new digital offering. And lastly, I wanted to say thanks to all the podcast listeners and blog readers that have been around for 10 years. You all made it what’s possible. I often get asked, “Meb, you know, how do you churn out so much content? Do you not have a life? What’s the deal?” And I say, “No, actually, like, the biggest benefit is 10X benefits me getting to meet the people, the wonderful, idiosyncratic, intelligent, quirky, wonderful listeners that have been following for 10 years. So a big shout-out. Thanks to you, and here on to the show. Meb: Hello, friends. Welcome to the podcast today. We have a special guest and close friend, Porter Stansberry. Welcome to the show. Porter: Hi, Meb. Great to be with you. Meb: Porter, where in the world are you Skyping in from now? Porter: Well, today I’m actually home. I’m on my corn and soybean farm in Baltimore County, Maryland. Meb: I didn’t know you were a fellow farmer. What is the…...
Transcribe →Kalzumeus Podcast Episode 13: Selling Online Businesses With Thomas Smale | Kalzumeus Software
Aug 27, 2016Tap to summarizeI sold Bingo Card Creator, the business I’m probably best known for, through FEI last year. Thomas Smale, the principal of that brokerage, is now a buddy of mine, and he agreed to chat with me a bit about what goes into buying and selling online businesses. I think it is of particular interest to those of you with SaaS businesses already, but it might also be interesting for those of you who might found one eventually, as you can make early decisions (like e.g. technology stack) which built improved saleability into the business from day one. I’ve previously written about the BCC acquisition here. Note that this interview doesn’t go into much depth about that acquisition per se, partially because that isn’t a new topic for me and partially because I’m NDAed with regards to specifics. [Patrick notes: As always, the below transcript occasionally has my thoughts inserted in this format.] What you’ll learn in this podcast: Why SaaS businesses (and others with recurring revenue) receive a valuation premium Why you should use a broker to sell a business How to start getting a business ready for sale months before the process formally starts How to ease the acquisition process, both for the buyer and the seller MP3 Download (~50 minutes, ~60MB): right click here and select Save As. Podcast format: either subscribe to http://www.kalzumeus.com/category/podcasts/feed in your podcast reader of choice or you can search for Kalzumeus Podcast in iTunes, Overcast, or another aggregator of your choice. Podcast: Play in new window | Download Selling Online Businesses With Thomas Smale Patrick McKenzie: Hideho everybody. My name is Patrick McKenzie, better known as Patio11 on the Internets. I’m here for the 13th episode of the Kalzumeus Podcast with my friend Thomas Smale, who runs FEI. It’s a brokerage for online businesses, which I used last year to sell Bingo Card Creator. Thomas Smale: Hi, Patrick. Thanks so much for having me on. Patrick: Thomas, last year, you helped me sell Bingo Card Creator, which was the first business that I had been running from about 2006 through 2015 selling bingo cards over the Internet to elementary school teachers. Do you guys do a lot of work with SaaS companies? Thomas: In the last 12 months, just to put it in perspective, we did about 80 deals, and this year, we’re on track to do around 100 deals. At the moment, around a third of our business is in the SaaS or software space. It’s not all we do, but it is quite a big focus internally. Patrick: Just out of curiosity, what are the other sort of businesses that you guys see a lot? Thomas: If we broke it down a third, a third, a third, to keep it quite simple, we do e-commerce businesses, selling on Amazon or Amazon FBA. E-commerce through their own store would be about another third. Then the third content businesses, whether that’s content-based sites monetized with AdSense or Amazon affiliates, they’ve gotten quite popular, especially on the lower end. Then we also have a mixture of other businesses we do. Generally speaking, if it’s an online-based business, we will take a look at it. Patrick: One of the things that was interesting to me was comparing and contrasting how the acquisitions work at the scale of the economy and also how that’s similar and different to more traditional acquisitions for start-ups or for larger firms. One of the interesting things is that, just like in larger firms, SaaS gets a valuation premium relative to the revenue or cash flow that’s coming out of the business. Can you explain what that looks like in your experience? Thomas: Generally speaking, a SaaS business on average, assuming all parts being equal and equivalent, an e-commerce business or content business will sell for more. In terms of how much more, generally speaking, you’d probably be looking at about 25 percent premium. The real driver there is the fact that a SaaS business has that recurring income and that baseline. I think from a buyer’s perspective, worst case scenario, even if you can’t grow the business or even if it starts to decline, you’ve still got that baseline of subscribers. Also, with a solid subscriber base, you can build momentum quite quickly. We’ve seen quite a few buyers come in to acquire small SaaS businesses where the owner has either moved onto new projects or run out of ideas with it. They’ve managed to scale it quite quickly, because you’ve got that baseline that’s already there. That tends to be the appeal from the buyer perspective, and what drives multiples up compared to other business models. Patrick: We’re well aware of this because you do 80 to 100 deals a year and I saw the process through the nitty-gritty, but I’m guessing that most of my audience doesn’t know exactly what the multiple we’re calculating is. We should probably be pretty explicit that the multiple is a multiple of what’s called the SDC, seller discretionary cash flow that’s coming out of the business. How about you explain that for everybody, because you probably know it better than me? Thomas: We use SDE, which is seller discretionary earnings, but it’s basically the same thing as seller discretionary cash flow. You might hear it be described a few other things, as well. Effectively it’s the net profit of the business. Some people like to use EBITDA, or EBIT, or a similar calculation to that, and then adding back, so effectively it’s not taking into account anything the owner has taken out of the business, for example, the owner’s salary. Anything else you might take out for tax purposes, for example, personal health insurance, a car, rent. [Patrick notes: For example, in Japan, self-employed individuals can write off 40~60% of their apartment’s rent against the profits of the business. I’ve done this for years, on the advice of both my accountant and the National Tax Agency. This is strongly discouraged by the IRS unless you meet their much-more-stringent definition of a home office.] Anything that’s not entirely relevant to running the business. The reason that’s done is to standardize the sale of small business, because one owner on exactly the same business might pay themselves $50,000 a year, and the other owner might pay themselves $200,000 a year. If you don’t use an SDE calculation, the owner who pays himself less would look like their business is more profitable and worth more. It levels the playing field. That’s generally used for any business making less than a million a year in profit, or SDE in this case. Patrick: After you’ve calculated what the business’s revenues minus the necessary expenses to generate those revenues are, we multiply by a number, which is set by market conditions, mostly, where buyers and sellers are willing to transact. At the moment, my understanding is in SaaS that it’s about, roughly, three years? Thomas: That’s about right. We have an internal evaluation model that we’ve built out, which looks at all of our past sales. At the moment we’ve done about 400 transactions now. All that data’s in there, and we’ll look at past deals, look at similarities. Depending on the group, if you look at the last 12 months we see SaaS business go up to five times, or even six times, annual, but that’s looking at the last 12 months. If it’s growing, if you look at the last three months, we would generally extrapolate that out for the next 12 months, and then apply a three-times multiple to that. It’s more like five times the last 12 months, or three times, extrapolating the last three. [Patrick notes: Let me put some fictitious numbers here to make this sound more concrete. Suppose that your business was doing $8k net income monthly last year and has added $1k of MRR consistently in every month at no meaningful marginal cost. Your net income for the last year is $162k. Your predicted revenue for the next year is $306k. Thomas is suggesting that if you valued the business at 5X its last year it would be worth about $800k, but given extrapolation of the clear growth trend, it would get 3X next year’s implied next year revenue, or about $900k. Note that the valuation for more stable businesses is generally around 3~3.5X of the trailing twelve month’s net income — the market places a hefty premium on demonstrable growth, in small businesses and unicorns alike.] We only really do for SaaS businesses, because the growth can be a little bit more predictable and the revenue is a little bit more predictable. Whereas in a e-commerce store, for example, you could have had a couple of good months due to a sale, or running a promotion on Groupon, or something like that. That’s not sustainable. It doesn’t really increase the value as much as an increase in MRR that you see in a SaaS business. Getting Ready To Sell Your Business Patrick: E-commerce businesses are also typically very sensitive to seasonality, which is uncommon in SaaS businesses, says the one guy with the extremely seasonal SaaS business that I used to run. [laughs] When I was in the process of selling Bingo Card Creator with you, going through the process took a couple months to complete. Before that there was, obviously, a longer process with me thinking through, “OK, I want to sell this business. What do I start to do to get my ducks in a row?” You gave me some good advice with regards to things that I could do that would both make the transition a little smoother, for both myself and the buyer, and which would tend to increase the valuation of the business. What are some of those things that folks who might own a SaaS business and be thinking of selling it in, say, the next 12 months could start to do today to make that process easier for themselves? Thomas: That’s a good question. This is another good point that it is important to think about these things well in advance of the sale. You definitely did the right thing coming to us months before you were planning it. Most of the successful clients we see, who do sell their ...
Transcribe →Kalzumeus Podcast Episode 13: Selling Online Businesses With Thomas Smale | Kalzumeus Software
Aug 26, 2016Tap to summarizeI sold Bingo Card Creator, the business I’m probably best known for, through FEI last year. Thomas Smale, the principal of that brokerage, is now a buddy of mine, and he agreed to chat with me a bit about what goes into buying and selling online businesses. I think it is of particular interest to those of you with SaaS businesses already, but it might also be interesting for those of you who might found one eventually, as you can make early decisions (like e.g. technology stack) which built improved saleability into the business from day one. I’ve previously written about the BCC acquisition here. Note that this interview doesn’t go into much depth about that acquisition per se, partially because that isn’t a new topic for me and partially because I’m NDAed with regards to specifics. [Patrick notes: As always, the below transcript occasionally has my thoughts inserted in this format.] What you’ll learn in this podcast: Why SaaS businesses (and others with recurring revenue) receive a valuation premium Why you should use a broker to sell a business How to start getting a business ready for sale months before the process formally starts How to ease the acquisition process, both for the buyer and the seller MP3 Download (~50 minutes, ~60MB): right click here and select Save As. Podcast format: either subscribe to http://www.kalzumeus.com/category/podcasts/feed in your podcast reader of choice or you can search for Kalzumeus Podcast in iTunes, Overcast, or another aggregator of your choice. Podcast: Play in new window | Download Selling Online Businesses With Thomas Smale Patrick McKenzie: Hideho everybody. My name is Patrick McKenzie, better known as Patio11 on the Internets. I’m here for the 13th episode of the Kalzumeus Podcast with my friend Thomas Smale, who runs FEI. It’s a brokerage for online businesses, which I used last year to sell Bingo Card Creator. Thomas Smale: Hi, Patrick. Thanks so much for having me on. Patrick: Thomas, last year, you helped me sell Bingo Card Creator, which was the first business that I had been running from about 2006 through 2015 selling bingo cards over the Internet to elementary school teachers. Do you guys do a lot of work with SaaS companies? Thomas: In the last 12 months, just to put it in perspective, we did about 80 deals, and this year, we’re on track to do around 100 deals. At the moment, around a third of our business is in the SaaS or software space. It’s not all we do, but it is quite a big focus internally. Patrick: Just out of curiosity, what are the other sort of businesses that you guys see a lot? Thomas: If we broke it down a third, a third, a third, to keep it quite simple, we do e-commerce businesses, selling on Amazon or Amazon FBA. E-commerce through their own store would be about another third. Then the third content businesses, whether that’s content-based sites monetized with AdSense or Amazon affiliates, they’ve gotten quite popular, especially on the lower end. Then we also have a mixture of other businesses we do. Generally speaking, if it’s an online-based business, we will take a look at it. Patrick: One of the things that was interesting to me was comparing and contrasting how the acquisitions work at the scale of the economy and also how that’s similar and different to more traditional acquisitions for start-ups or for larger firms. One of the interesting things is that, just like in larger firms, SaaS gets a valuation premium relative to the revenue or cash flow that’s coming out of the business. Can you explain what that looks like in your experience? Thomas: Generally speaking, a SaaS business on average, assuming all parts being equal and equivalent, an e-commerce business or content business will sell for more. In terms of how much more, generally speaking, you’d probably be looking at about 25 percent premium. The real driver there is the fact that a SaaS business has that recurring income and that baseline. I think from a buyer’s perspective, worst case scenario, even if you can’t grow the business or even if it starts to decline, you’ve still got that baseline of subscribers. Also, with a solid subscriber base, you can build momentum quite quickly. We’ve seen quite a few buyers come in to acquire small SaaS businesses where the owner has either moved onto new projects or run out of ideas with it. They’ve managed to scale it quite quickly, because you’ve got that baseline that’s already there. That tends to be the appeal from the buyer perspective, and what drives multiples up compared to other business models. Patrick: We’re well aware of this because you do 80 to 100 deals a year and I saw the process through the nitty-gritty, but I’m guessing that most of my audience doesn’t know exactly what the multiple we’re calculating is. We should probably be pretty explicit that the multiple is a multiple of what’s called the SDC, seller discretionary cash flow that’s coming out of the business. How about you explain that for everybody, because you probably know it better than me? Thomas: We use SDE, which is seller discretionary earnings, but it’s basically the same thing as seller discretionary cash flow. You might hear it be described a few other things, as well. Effectively it’s the net profit of the business. Some people like to use EBITDA, or EBIT, or a similar calculation to that, and then adding back, so effectively it’s not taking into account anything the owner has taken out of the business, for example, the owner’s salary. Anything else you might take out for tax purposes, for example, personal health insurance, a car, rent. [Patrick notes: For example, in Japan, self-employed individuals can write off 40~60% of their apartment’s rent against the profits of the business. I’ve done this for years, on the advice of both my accountant and the National Tax Agency. This is strongly discouraged by the IRS unless you meet their much-more-stringent definition of a home office.] Anything that’s not entirely relevant to running the business. The reason that’s done is to standardize the sale of small business, because one owner on exactly the same business might pay themselves $50,000 a year, and the other owner might pay themselves $200,000 a year. If you don’t use an SDE calculation, the owner who pays himself less would look like their business is more profitable and worth more. It levels the playing field. That’s generally used for any business making less than a million a year in profit, or SDE in this case. Patrick: After you’ve calculated what the business’s revenues minus the necessary expenses to generate those revenues are, we multiply by a number, which is set by market conditions, mostly, where buyers and sellers are willing to transact. At the moment, my understanding is in SaaS that it’s about, roughly, three years? Thomas: That’s about right. We have an internal evaluation model that we’ve built out, which looks at all of our past sales. At the moment we’ve done about 400 transactions now. All that data’s in there, and we’ll look at past deals, look at similarities. Depending on the group, if you look at the last 12 months we see SaaS business go up to five times, or even six times, annual, but that’s looking at the last 12 months. If it’s growing, if you look at the last three months, we would generally extrapolate that out for the next 12 months, and then apply a three-times multiple to that. It’s more like five times the last 12 months, or three times, extrapolating the last three. [Patrick notes: Let me put some fictitious numbers here to make this sound more concrete. Suppose that your business was doing $8k net income monthly last year and has added $1k of MRR consistently in every month at no meaningful marginal cost. Your net income for the last year is $162k. Your predicted revenue for the next year is $306k. Thomas is suggesting that if you valued the business at 5X its last year it would be worth about $800k, but given extrapolation of the clear growth trend, it would get 3X next year’s implied next year revenue, or about $900k. Note that the valuation for more stable businesses is generally around 3~3.5X of the trailing twelve month’s net income — the market places a hefty premium on demonstrable growth, in small businesses and unicorns alike.] We only really do for SaaS businesses, because the growth can be a little bit more predictable and the revenue is a little bit more predictable. Whereas in a e-commerce store, for example, you could have had a couple of good months due to a sale, or running a promotion on Groupon, or something like that. That’s not sustainable. It doesn’t really increase the value as much as an increase in MRR that you see in a SaaS business. Getting Ready To Sell Your Business Patrick: E-commerce businesses are also typically very sensitive to seasonality, which is uncommon in SaaS businesses, says the one guy with the extremely seasonal SaaS business that I used to run. [laughs] When I was in the process of selling Bingo Card Creator with you, going through the process took a couple months to complete. Before that there was, obviously, a longer process with me thinking through, “OK, I want to sell this business. What do I start to do to get my ducks in a row?” You gave me some good advice with regards to things that I could do that would both make the transition a little smoother, for both myself and the buyer, and which would tend to increase the valuation of the business. What are some of those things that folks who might own a SaaS business and be thinking of selling it in, say, the next 12 months could start to do today to make that process easier for themselves? Thomas: That’s a good question. This is another good point that it is important to think about these things well in advance of the sale. You definitely did the right thing coming to us months before you were planning it. Most of the successful clients we see, who do sell their ...
Transcribe →Davis v. Ayala | The Oyez Project at IIT Chicago-Kent College of Law
Mar 7, 2015Tap to summarizePrint this transcript Transcript: ARGUMENT OF ROBIN URBANSKI, ON BEHALF OF THE PETITIONER Chief Justice John Roberts: We'll hear argument next this morning in Case 13-1428, Davis v. Ayala. Ms. Urbanski. Robin Urbanski: Mr. Chief Justice and may it please the Court: The California Supreme Court's harmlessness determination was an adjudication on the merits because it denied relief on the basis of the intrinsic rights and wrongs of Mr. Ayala's claim. A Federal habeas court is authorized to set aside that final State judgment only if Ayala can show two things. First, a legal error as a matter of this Court's clearly established laws; and second, actual prejudice under Brecht. As to the first point, the Ninth Circuit took the view here that there was no adjudication on the merits, and it proceeded to review the entirety of Mr. Ayala's claim under the de novo -- Justice Sonia Sotomayor: You know, your -- your brief confused me, and it took me a while to pull it apart. All right. I don't know that there's a dispute -- or at least there's a dispute in the application. But really, the deference here was given to the harmless error finding or purported to have been given. So there's no -- there's no dispute that the court below committed an error, meaning that the court below didn't apply the right standards, a factual question. The issue, I think, that you're trying to arrive at is under the circumstances of this case, that the Court also reached the performance prod of Strickland, and that's really where the dispute is, isn't it? Robin Urbanski: Well, the issue before the court was a Batson issue. It was whether the procedures employed by the trial court had in fact -- were the proper procedures in terms of excluding defense counsel. And the Ninth Circuit in this case took the view that there was no adjudication on the merits with respect to the State court's finding of harmlessness. And it proceeded to review the legal claim de novo. Justice Elena Kagan: Ms. Urbanski, let's say that they -- that the Ninth Circuit is wrong in that respect. Let's say that there is an adjudication on the merits here. All right? But I think that that doesn't solve the basic problem of this case. There's an adjudication on the merits, but there are these two prongs; there's the harmlessness prong, and then there's the substantive violation prong, whether a Batson violation occurred. And what the court here said was if a Batson violation occurred, it doesn't matter. It would be harmless. So if you -- for whatever reason, right or wrong -- if you take that harmlessness determination out of the picture, if you say that that was an unreasonable application of law, all right, we're left with essentially a vacuum; right? And so what happens? What does the court do where there's been no finding as to a Bat -- Batson violation? And you're saying that it should kind of make up a reason why there might not have been a Batson violation and -- and go with that. And why is that the proper approach? Robin Urbanski: Your Honor, the reason why that is a proper approach is because on Federal habeas corpus, what the Federal court is doing is deferring to the State -- the final State court judgment of conviction. Even in the case that Your Honor has presented, the State court has ultimately denied relief. It simply did so on harmless error grounds. Had the State court done precisely the same thing as a matter of a silent denial, that decision would have been entitled to deference. Justice Antonin Scalia: Why is -- why is the harmless error thing out of -- out of the picture? I -- I don't really understand that. I mean, if in fact the State court found that whatever error there was, if there was any, was harmless and if that's a merits determination, why do we even have to get to the point of whether there was a violation? Robin Urbanski: The problem, Your Honor -- that is correct. But the problem, Your Honor, is it leaves us with what the Ninth Circuit did here, which was to look at the underlying constitutional issue from a de novo perspective. That is not the proper start for -- Justice Antonin Scalia: I'm saying you don't have to look at the underlying constitutional issue. Once there's been a determination that it's harmless -- whether there was a violation or not. If there was one, it was harmless. Once there's been that determination, why do you have to investigate whether there was one or not? Robin Urbanski: And that's correct, Your Honor. The harmlessness determination would resolve the claim. Justice Elena Kagan: Well, you only do if the harmlessness determination is an unreasonable application under AEDPA. So if that is an unreasonable application, you face the quandary of what you do with respect to the substantive violation. Justice Antonin Scalia: Right. Right. Justice Elena Kagan: It obviously doesn't arise if the harmlessness determination is perfectly fine. Robin Urbanski: Correct, Your Honor. Justice Antonin Scalia: And -- and don't you contend that it was fine? Robin Urbanski: Yes. Certainly in this case, that -- Justice Antonin Scalia: So that ought to be the end of the case as far as you're concerned, right? Robin Urbanski: In this case that isn't an issue. However, in the case where the State court has left unresolved the issue of the underlying constitutional error, we still do have the problem for future cases of how are we going to review that aspect of the claim. The Ninth Circuit took the approach here that the proper standard -- Justice Antonin Scalia: We review judgments. We don't review legal issues. I mean, you'd like us to answer that question even though it's unnecessary to this case, right? Robin Urbanski: Well -- and I don't disagree with Your Honor that if the finding of harmlessness is a -- is a reasonable application of the Chapman standard in this case, then that certainly is the end of the inquiry. Justice Sonia Sotomayor: I -- if we were to find that it wasn't a reasonable finding, then we would have to reach the first decision. Robin Urbanski: That's correct, Your Honor. Justice Sonia Sotomayor: So assume that it was unreasonable. Let's go back to the first issue. Yes, in Williams and Harrington, we have said that if there are multiple claims and the State court just says everything's denied, you assume that means Federal and State. If the State claim is the same as the Federal claim, we say, they -- they -- they -- we assume they meant the Federal claim as well. But this is sort of an interesting case because the -- they said there was constitutional error under State law, but they studiously avoided Federal saying there was one or not under Federal law. And they dismissed the Federal claim just on the harmlessness prong. And what the Ninth Circuit said, as I understand, they didn't reach it. Constitutional avoidance made them decide that it was easier for them to just say there was State error. Why do we reach a different conclusion? Robin Urbanski: That's correct, Your Honor. The State court here did not resolve the underlying constitutional aspect of the claim. And it proceeded to under -- to resolve the claim based on the harmless error grounds alone. That is an adjudication on the merits. What the Ninth Circuit could not do is precisely what it did in this case, which was out the gate look to the underlying constitutional issue and simply resolve that based on what it would have done on the issue. Justice Sonia Sotomayor: I'm sorry. Why not? If the State court didn't reach the Federal constitutional error, you're asking us to assume it did when you've admitted it didn't? Robin Urbanski: No. I'm not asking the Court to assume that it did. What I'm saying is that on Federal habeas corpus, the deference that is owed is to the final State court judgment. And in this case, the final State court judgment was a denial of relief. Justice Elena Kagan: Well, suppose -- I mean, that's a very broad kind of rationale. It would apply even if the State court said that there was a violation; right? Then you would -- there's a violation, but no worries, it's harmless. And then you decide that the harmlessness issue is -- is out because that's an unreasonable application. And then you're going to have a reviewing court say, notwithstanding, that the State court found that there was a violation, we think that there's a credible argument that there wasn't such that we can support the judgment. Is that what you're asking? Robin Urbanski: And that is correct. That is how the scenario would play out, Your Honor. And I recognize that that is a more -- Justice Elena Kagan: It's a little bit counterintuitive. Robin Urbanski: A little more challenging case for sure. However, again, what a Federal court is deferring to is the finality of the State court's judgment. And on Federal habeas, the question is whether the habeas can -- petitioner can meet his very high burden of showing both clear error under this Court's precedence and actual prejudice under Brecht. And that does not depend on what the State court may have thought about -- Justice Sonia Sotomayor: So why do we bother saying in Williams that there are circumstances -- I happen to think this one of them -- where -- and you do, too -- where a State court hasn't reached an issue, that we don't give it deference. Under your judgment, we made a mistake when we said that in Williams. Robin Urbanski: No, your Honor, because the -- what this Court also said in Richter is that you look to the -- the decision of the claim as a whole. You do not parse it into its components. And here the decision on the claim as a whole was that no relief was warranted because any error did not rise to the level of a constitutional violation such that the Defendant suffered sufficient harm to grant relief. So that is the decision that the -- that resolves the claim, and that's -- Justice Sonia Sotomayor: Why do we a...
Transcribe →Riley v. California - Cell Search 2
May 3, 2014Tap to summarizePrint this transcript Transcript: ORAL ARGUMENT OF JEFFREY L. FISHER ON BEHALF OF PETITIONER Chief Justice John G. Roberts: We'll hear argument first this morning in Case 13-132, Riley v. California. Mr. Fisher? Jeffrey L. Fisher: Mr. Chief Justice, and may it please the Court: This case involves applying the core protection of the Fourth Amendment to a new factual circumstance. It has always been the case that an occasion of an arrest did not give the police officers authority to search through the private papers and the drawers and bureaus and cabinets of somebody's house, and that protection should not evaporate more than 200 years after the founding because we have the technological development of smartphones that have resulted in people carrying that information in their pockets. Justice Anthony Kennedy: Just -- just to test the principle for why the police can search and seize some -- some objects. Consider a gun. The arrestee has a gun on his person and the police take the gun. Is part of the reason for that seizure to obtain evidence of the crime or is it just for the safety of the officer and the safety of the community? Jeffrey L. Fisher: Well, what this Court said in Robinson at Page 235 is the reason supporting the authority for a search incident to arrest are the two Chimel factors, which are gathering evidence to prevent its destruction, and officer's safety. Now-- Justice Anthony Kennedy: What about gathering evidence in order to make the case? For instance, with the gun, could they take fingerprints? The -- the gun is in the police station where the arrestee is being booked. A, could they take fingerprints? B, could they copy the serial number? C, could they see how many shells were left in the chamber? They obviously have to empty it for safety purposes. All for the purpose of building the case, of -- of obtaining evidence? Jeffrey L. Fisher: --Yes, of course that's done every day. Once the gun is in the police -- the police department's lawful possession, I think Edwards says that they can do all that. Justice Anthony Kennedy: So -- so if -- if the proposition then, if the principle then is that some objects that are obtained from the arrestee can be examined in order to build the State's case, is that at least a beginning premise that we can accept in your case, although, obviously, there are problems of the extent and intrusiveness of the search that are -- are your case, but not in the gun hypothetical. Jeffrey L. Fisher: Well, Justice Kennedy, the Court has never described that as one of the things. If you want to think about this case the way you thought about the automobile search in Gant, it would be a beginning premise; but I think you're right, that even if that were a beginning premise, it would be only that, a beginning. In Footnote 9 in Edwards, this Court said that any search incident to arrest still has to satisfy the Fourth Amendment's general -- general reasonableness. Justice Anthony Kennedy: I think you're right that Gant is probably the best statement in support of the principle that I've -- I've suggested, and then you might say, well, that's limited to automobiles-- Jeffrey L. Fisher: Right. Justice Anthony Kennedy: --and then we're back where we started. Jeffrey L. Fisher: Right. And there's important things to understand if you want to start thinking about Gant, because both in terms of its history and its modern application, it's dramatically different from what we have here. Justice Samuel Alito: Well, Mr. Fisher, before we do that, have you been accurate in what you said about Robinson and about the Court's cases? In Weeks, which was quoted in Robinson, the Court said: "The right, always recognized under English and American law, to search the person of the accused when legally arrested to discover and seize the fruits or evidences of crime. " Is that historically inaccurate? Do you want us to repudiate that? Jeffrey L. Fisher: No, Your Honor. What Weeks said, you quoted it, fruits and instrumentalities of the crime have always been something that could be seized from a person. Now, Weeks, of course, as this Court said in Robinson itself, was dicta. And there was that historical authority to take fruits and evidence -- I'm sorry -- fruits and instrumentalities of the crime. Justice Antonin Scalia: Did it say instrumentalities or evidence? Which did it say? Jeffrey L. Fisher: Weeks used-- Justice Antonin Scalia: Because Justice Alito said evidence. You -- you changed it to instrumentality. Is one of you wrong? Jeffrey L. Fisher: --Weeks uses the word “ evidence ”, but, Justice Scalia, because it was not at issue in that case, the -- the Bishop treatise that you cited in your Thornton concurrence talks about tools and instrumentalities. Now, I don't think we have to debate that here, because even if we're in a world where the police can seize some evidence and keep it and use it for the prosecution simply for that reason, even if they don't fear destruction, there are still very, very profound problems with searching a smartphone without a warrant, because even under the Robinson rule, this Court has recognized, for example, when it comes to blood draws, search -- something like a strip search that might occur at the scene, there are limits even to the Robinson rule. So it brings us-- Justice Samuel Alito: Well, smartphones -- smartphones do present difficult problems. But let me ask you this: Suppose your client were an old-school guy and he didn't have -- he didn't have a cell phone. He had a billfold and he had photos that were important to him in the billfold. He had that at the time of arrest. Do you dispute the proposition that the police could examine the photos in his billfold and use those as evidence against him? Jeffrey L. Fisher: --No. That's the rule of Robinson, that any physical item on a arrestee can be seized and inspected and then used as evidence if it's useful evidence. We draw a line. Justice Samuel Alito: Yes. What is the difference between looking at hardcopy photos in a billfold and looking at photos that are saved in the memory of a cell phone? Jeffrey L. Fisher: The difference is digital information versus physical items. Physical items at the scene can pose a safety threat and have destruction possibilities that aren't present with digital evidence. What is more, once you get into the digital world, you have the framers' concern of general warrants and the -- the writs of assistance. Justice Samuel Alito: Well, how does that apply -- how does that apply to these hardcopy photos in the billfold? They don't present a threat to anybody. And I don't see that there's much of a difference between -- the government argues there's a greater risk of the destruction of digital evidence in a cell phone than -- than there is in the photos. So I don't quite understand how -- how that applies to that situation. Jeffrey L. Fisher: Well, let me take those one thing at a time. I take it the theory of Robinson, this is the theory the government itself propounded, is that any physical item, because it contained a razor blade or a pin or anything, needs to be inspected to be sure. And so you have a categorical rule because of the ad hoc nature of arrests that police don't have to distinguish physical items one from the other. Justice Anthony Kennedy: Well, but the -- but in the wallet -- we'll just stick with Justice Alito's hypothetical -- they find a business card or something which shows a car rental service. Can they turn the card over and read it? They're not looking for a pin or an explosive. They're trying to read what's on the card. Can they do that? Jeffrey L. Fisher: I think they can, if nothing else, under plain view once it's in their hand, Justice Kennedy. But I really don't want to fight-- Justice Anthony Kennedy: No, they turn -- they turn the card over. Jeffrey L. Fisher: --I think that is fine under the categorical rule. I think what you have in Robinson is a categorical rule that obviates these exact difficult case-by-case determinations. You can make an argument, and if I needed to, if it were a diary case or a billfold case, you might be able to make an argument, but I think the Court wisely decided under Robinson that we need a categorical rule that's easily administrable in the field. Now, when you have digital evidence, the categorical rule, we submit, cuts exactly in the opposite direction. Because digital information -- even the notion of flipping through photos in a smartphone implicates vast amounts of information, not just the photos themselves, but the GPS locational data that's linked in with it, all kinds of other information that is intrinsically intertwined in smartphones. Chief Justice John G. Roberts: Including information that is specifically designed to be made public. I mean, what about something like Facebook or a Twitter account? There's no real -- there's no -- any privacy interest in a Facebook account is at least diminished because the point is you want these things to be public and seen widely. Jeffrey L. Fisher: Well, Mr. Chief Justice-- Chief Justice John G. Roberts: So I guess my question would be: Could you have a rule that the police are entitled to search those apps that, in fact, don't have an air of privacy about them? Jeffrey L. Fisher: --I think that would be extraordinarily difficult to administer that rule. And let me tell you why. Because most of the information on smartphones is private. Much of it is just, like the photos in this case, just kept on somebody's phone and not shared with anybody. Even a Facebook account is a limited universe of people who have access to it. You're right that-- Chief Justice John G. Roberts: More -- more or less limited. I mean, you know, maybe it's 20 people; maybe it's a hundred people. But it's certainly not private in the sense that many of the other app...
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