Supported by Greenhaven Road Capital, finding value off the beaten path.
I don’t know what format Patrick O’Shaugnessy has found but it’s a darn good one. His interviews always educate, inform, and include a laugh out loud moment. The conversation with Trish and James Higgins was no exception.
Here are my notes.
1/ Google it. When Trish and James wanted to get started in “permanent equity” (O’Shaugnessy’s term) they just googled it. “We just went on to Google and we were like ‘How do I buy a small business?'” said Trish. The first search results led to more questions, but it was a start.
How simple is that? Google it. When Ken Grossman was building Sierra Nevada Brewing in the 1980’s he couldn’t ‘GIK’ but he had curiosity like Higgins. Grossman writes that he approached problems one bit at a time. Otherwise, it would have overwhelmed him. That’s what Trish did, one small search at a time.
There are no panaceas, only lots of little steps. One of those early first steps may be a Google search.
2/ The checklist. Trish and James described what they want in a business. Don’t worry about copying this list(see #5), James says there are probably 2,000 opportunities here.
- “An industry that we think will be around for a long time,” says Trish. “The question we are trying to answer is entirely related to the durability of the franchise,” said James.
- Low revenue variance. The landscaping business they bought had 70% of customers on 1-5 year contracts. For their bakery business, there are high switching costs.
- Owners stay on. Incentives are a big part of the Chenmark system and that means including people with skin in the game.
- Location. You can own a bait shop. You can live in Maine (“Living in a small town,” Brent Beshore told Trish, “is a competitive advantage.”). Geography can even make you a prisoner. Where you are matters.
I wonder how much specificity matters with checklists. Maybe it depends on the science of your study. Atul Gawande’s featured examples are medicine and aviation, two firmer sciences. Buying business is softer so maybe the checklist should be too. Danny Meyer has soft checklists and a softer industry (hospitality).
3/ Red teaming. Once Chenmark Capital gets an idea it’s time to test it. “The process from there was a progressive attempt to break the thesis,” said James. Ideally, hammering will strengthen the original idea. James explained that the landscaping business they bought looked even better after they red teamed it.
Red teaming is one way to get out of your head and see things from another point of view. It’s to avoid what Beshore calls “progress anxiety”.
Bill Belichick has practice squads do this. Neville Isdell had his Coke executives dress up in Pepsi gear. Whitey Mack chased Soviet submarines this way. Chris Voss wrote a book that centers around this concept.
Organizations can implement this if they argue well. Marc Andreessen says that he “trashes the shit” out of ideas that his partner Ben Horowitz brings in. Wilbur Wright “was always ready for a scrap.” Charley Ellis said that David Swenson has succeeded – in part – because he argues well. Sam Hinkie wrote that good organizations “have a willingness to tolerate counterarguments.”
All ideas need testing and good ideas remain standing.
4/ Incentives. O’Shaughnessy asked about what edge the Chenmark team has and James says it’s the relationships they build. You have to “be willing to spend two to three hours in someone’s living room talking to them about their hopes, dreams, and what they care about.” Buyers want more than money. That is, there are many Incentives.
Later in the interview, the tables are turned and Trish and James consider if they would take on capital (via limited partners). Now they are the business owner with people wanting to buy. “For us, it’s really only interesting if someone is like, ‘Hey, I get what you’re doing and I think that there is value in it.'” said Trish. That is, there are more reasons that just financial ones.
Aligned incentives could have lollapalooza effects. Charlie Munger’s explained:
“The next great model is the idea that especially big forces often come out of these 100 models—which several models combine…You get lollapalooza effects when two, three or four forces are all operating in the same direction. And, frequently, you don’t get simple addition. It is often like critical mass in physics where you get a nuclear explosion if you get to a certain point of mass—and you don’t get anything much worth seeing if you don’t reach the mass.”
You can get lollapalooza effects from people. Danny Meyer suggested that you figure out what someone’s ideals are and make sure those are satisfied. Each incentive – money, recognition, time, relationships – can add up to have large effects.
Compare the Chenmark model to venture capital where investor’s incentives are for a mammoth exit. If this isn’t your goal, says Andy Weissman, don’t take venture money.
5/ You are your competitive advantage. “When you go down market there is a premium associated with rolling up your sleeves,” said James, “and getting in the weeds and making things happen. That process is something we really enjoy.” Trish put it this way, “we’re trying to build something and if things go wrong we’ll figure out it.”
Here’s a difficult job, and as such, it pays extra. It would be perfect for someone who likes this kind of (difficult) work. And that’s exactly what happened!
The last part of the interview is about whether this Chenmark thing is risky and neither Trish or James say it is. It may appear risky – and induce risky articles – but is it? Trish and James don’t think so and give three reasons.
- Being a contrarian doesn’t feel risky. From Howard Marks to Sam Hinkie we hear the advice to be different. It makes sense too. If you want different results you have to take different actions.
- Believing in yourself doesn’t feel risky. Both Trish and James exuded a sense of ownership, or even, Extreme Ownership.
- Having a slight edge and trusting compounding doesn’t feel risky. Trish and James would pass the marshmallow test with flying colors.
Thanks for reading. If you liked these notes you’ll probably like this interview with Brent Beshore too.