Welcome to Think Big Buy Small, a podcast from Harvard Business School of that entrepreneurship through acquisition. We're your hosts, Royce Yudkhoff and Rick Rubach. Rick and I are delighted to be speaking today to Logan Leslie, who searched and for the last three years has been running the business he acquired, but also very interesting is the fact that he is conducting from day one a roll-up of smaller enterprises into his larger company. So Rick, Logan is different from a number of the guests we've interviewed who have bought a company and from time to time done an add-on to it, from the very beginning his goal was to pull together a series of very small companies into a larger enterprise. Yeah, that's a great thing. Logan, tell us about your background. You were in our class, what? Five years ago? Yeah, five, six years ago. Tell us about your journey. So I'm from Connecticut, originally, pretty blue-collar household. My dad was a machinist and my mom worked in hospital administration and I had two brothers. We all went in the military right after 9/11, so right out of high school, went to basic training and started off in the 101st Airborne, went to Iraq. And when I came back from that, I decided to join special forces, so I did that for a number of years and on my third deployment or my wife at the time decided that it was time for me to get out of the military. And so on that deployment, she was pregnant and not very happy that I was never really home, so I decided to apply to colleges. I think I was 25 then, came back, had my first daughter and got accepted into Harvard College where I went on the GI bill. So moved to Cambridge. Different from the typical Harvard undergraduate? A little different. So I continued to serve in the National Guard, got my economics degree, through undergrad, and then went to the joint law business program here at Harvard. And through that, I had a number of internships and finance and private equity, hedge fund, and decided none of that was really a good fit for me. I wanted to be an entrepreneur, start my own business, set the culture of the firm. So I decided to start my business in that summer before that last year, between the third and fourth years of the year. Oh, right, 'cause you're JDMBA. That's right. 'Cause I tried to graduate early, so I graduated undergrad early, and I tried to do the JDMBA in three years and they denied it. But I had done essentially all my credits in three years, so I had a year just to be here. And so I started Northern Rock as a kind of a roll-up platform that summer, didn't really get off the ground. We had a number of businesses under a letter of intent to purchase, raise some investor money to do diligence on those businesses. And these were much larger businesses and cost a ton of money to do the diligence on, had a number of broken deals across that process. So version one of the business didn't get off the ground, I'd say. Once I graduated, I moved everybody down to Atlanta, Georgia, and you took a little break from trying to buy a business, so I operated a security firm in Charlotte, North Carolina for about a year. Left that in the end of 2020 and then restarted Northern Rock version 2.0. And this time, really focused on a discipline roll-up in one industry, which is what I'm doing now. So tell us about that industry. It's automotive, repair and maintenance services on vehicles. So we don't do any collision, auto body, car wash. And when you think about repair in services, it's really anything on one end of the spectrum from emissions, so a very, very simple, quick job, and on the other end, engine swaps, transmission swaps. Every one of our shops does the whole range of services. So did you focus on auto repair because you were interested in auto repair? All you focused on it because you thought it was an industry in which you could make a lot of money. To me, it wasn't at all about the subject matter of the business. I was looking for all the fundamentals that I wanted to see in a roll-up opportunity, which I can go into in auto. I think it's an excellent industry to do this in. The other piece was Cultural Fit, so I learned this two ways. And in the military, it was a really good cultural fit for me. I love the people. I got the best me in that environment. When I ran that security business, it was not the same. People there were all XTSA agents, and the TSA is not known for being a well-run organization. The fit wasn't there. They're good people, but you weren't going to get the best me. So I looked at auto as a place where I really like the people. I feel like I have credibility in that environment, and I really love working with those people, which to me is probably more important than the business characteristics or fundamentals. How did you find your way to this business? So I was unemployed at this time. First, I panicked because I had a mortgage and kids in private school, so I thought, look, I need to get a job. Because when I left that security business, it was abrupt. Then I started, I calmed down a bit, and I said, well, now's the time. If I don't do it now, I'm never going to do it. Let's do this roll-up. I was in some military training at the time, remote, because of COVID, which is about half time of my day. So I spent the rest of it researching and thinking of different opportunities. And honestly, I found five or six that I would do, and were great fits. Auto to me was the best because of a number of characteristics that I think that the other ones just didn't have, which I can go into. Tell us about what it was that drew you to auto. What were the economics that appealed to you? So in the industry, most of the revenue is non-deferrable, non-descriptionary. It's a really stable, non-recurring, but very robust and sticky revenue base. Because when your car breaks, you're going to get a fix. You got to get a fix. You can defer certain things like oil change, but the vast majority of the services we do are just non-deferrable. Your car stops working and you need it. You have a choice to either fix it or buy a new car. Those are really the two options. And sometimes people do buy a new car, but a lot of times they'll put their money into their car. They describe a lot of businesses as highly fragmented, but this one is like ultimate fragmentation. Not a ton of aggregators out there, not a ton of big names. Not a ton of big chains that have, I would say, broad credibility. And so I like that. Especially in the south where I live. You drive around and everywhere you look, there's a huge auto shop with 10, 12 bays, pumping out one to $3 million in revenue. The sellers are typically older, boomer generation guys that don't have a transition plan. And so it just seemed like fertile ground for getting out and getting them and putting them together. Matt, the typical auto repair shop? Yes. So the typical shop is a seller that's a man who's been at it for 30, 40 years. It's been very successful. They own the real estate. They're of retirement age. They don't have a good succession plan. They don't know how to sell it. There's not a great liquid market for selling these things. And they're still operating. And they're drawing good amount of cash. But this is a really tough business to run as an owner operator because you can never get away. Well, maybe it's a northern thing, but the auto repair shops that I see that are independently owned tend to be one or two bay kind of things, not 10 bay. Yeah, that's why we're not in the Northeast yet. I mean, land is more abundant in the Southeast and people drive further. So where I'm from in Connecticut, you know, we used to take our car to a two bay shop that was attached to a gas station. To me, that's, that's not a great acquisition target for a number of reasons because it's just too small. It's just too small. And you were saying the revenue and your typical purchase is sort of one to three million dollars. And what would the normal EBITDA margin be on, say, a two million dollar auto repair shop? Before diligence zero, and because, you know, none of these things are showing any earnings. Yeah. The owners are living inside of the business. Exactly. And you see a wide range. Your gross margin is usually 35 to 45 percent. And then you have a couple hundred K of CapEx on there. So if it's a one and a half million dollar revenue shop, you can expect to have 300 to four hundred thousand of EBITDA. So an attractive margin business. What percent? It's like 20, 25 percent. Yeah. And we deal with EBITDA, because mostly sellers own the real estate. So, so that would be an EBITDA number. It would probably push it closer to 20 percent or 15 percent. You know, we have landlords. So our EBITDA margin across the portfolio is closer to the 15 to 20 percent right now. Because you don't buy the real estate. You sign a lease with the seller and he keeps the real estate and you just buy the operating company. You go buy the real estate and then we'll conduct a sale lease back. Okay. A triple net lease on to some institution. Yes. That makes a lot of sense. So when you buy these businesses, I'm assuming from what you've said that the seller, because he's close to retirement age, retirees, tell Rick and I a little bit about how you run these businesses after he gets his money and goes. The company is known as Main Street Auto. And the vast majority of these shops have been in these communities for 10, 20, 30 years. A lot of brand equity in that name and all that. We don't want to wipe that clean. But at the same time, we want to have a unified company, if I'd brand where we can put a strategy behind it. And so we do more of an umbrella brand. So the existing customers come and it's still Ed's tire. They recognize it. It all looks the same. And then for a new customer acquisition, they can see that it's part of a portfolio of other companies and it's a highly professionalized business. We have 86 shops today. Is that like 86 acquisitions you've done basically? That's probably 75 acquisitions or something. 75 acquisitions in three years. So that's every other week on average. Yeah, but it's very chunky. So we'll go like months with nothing and then we'll do 12 in a week. That's a real roll-up. It's a lot. It's a lot. But my view has always been, I don't really want to get involved in something entrepreneurial. If there's not a clear path in my mind to making it an industry leader or multi-billion dollars of revenue. So that also limits what industries you want to play in. But in auto, you certainly can. And so from the early days, it was how fast can we put in processes, procedures and team. The processes and procedures are often inexpensive or free to build, but I was doing a lot of that myself from the early days. Once we had more capital and that, we can invest in the team. So it took really about almost two years to actually have a full executive team. But our executive team today will be the same executive team when we're at 1,000 units. They're just really high-power people. When it comes to actually the hands-on management of these, it's very expensive and intensive. To transition, an acquisition and to run it. I think anybody can do deals, particularly in spaces like this. It's not hard to go get an SBA loan and buy one of these and it is kind of difficult to run one. It's very, very, very hard to keep running multiples or 80 or so. Yeah. So breathe some life into this for Rick and me. If you would, I'm envisioning you buy a 10-bay shop and the owner has been working long days and basically solving every problem and making every decision. And now that person is gone. How do you make sure your labor force is doing good work? And they're running efficiently and not taking time off or not unassigned to jobs? How does that happen? Just to put a little more color on it for me, the seller, my gas, does not want a long transition agreement, right? They want out. Yeah, they're out in day one. They're out in day one. So at closing, you get the keys to the buildings and equipment and everything else. You own that. The seller doesn't come back in a work the next day. Who goes into work to run the shop? Not you. Not me. I mean, I bet in the early days, it was you. It wasn't actually like, so I was deliberate about never getting involved in the operations of the business. So I hear all these war stories of searchers talking about mopping the floors and I love that. But I was, I never was going to be on the counter. I was never going to be doing these things because I felt like the time I got pulled into that, it would, you know, be like a trap that I couldn't get out from. My time was best spent focusing on the next deal and focusing on team and processes. That's really surprising to me because you seem to be the kind of guy who would love to get involved in that. Well, there's a difference between loving something and knowing you shouldn't do it, right? That is true about so many things in life. So you, you say, I'm going to take over this 10-base shop, but I'm actually not going to go there. I'm not going to show up and say, okay, who are you ordering your pots for? I'm going to send somebody else. Who do you send? It is. Yes, I was there every day. I was present. I was just being very deliberate about not being the one in the operations at the store level. So in most cases, there's a really strong number two that's handling a lot of the GM functions, but not called the GM and there's no upper mobility and a mom and pop shop. So this is their opportunity to get a pay bump, a responsibility bump, and 99 times out of 100, they perform excellently. And there's continuity. You know, if we don't have that or we don't have confidence that there's someone there, we'll drop in a GM from outside or a strong employee from another shop. And as we got scale, we had more and more opportunity to flex people from one shop to the next. Right. That must be one of the big advantages of scale. Huge. And the other one, I guess, is you know when a business is well run. Exactly. That's something we figured out the hard way too is the number one deal risk or how it's the operational risk of a deal is seller involvement. And it's not immediately evident sometimes how involved the seller is in the deal. So for example, we had one shop where the seller was amazing and his amazing, he's a great guy and he supported us, but he was communicating with all the best customers on his personal cell phone. And so the day he's not in the business anymore, as much as he wants to be helpful, he's not answering his phone. Your phone stopped ringing. Not his. And so you can see it in the revenue immediately. We lost a ton of recurring customers. Who would think to ask that question and do diligence? Yeah. What number? To the customer's call. I will tell you Logan, because it'll make maybe make you feel better that a one researcher never inquired about what the address was that the bills got. And so all the revenue went to the owner's personal mailbox. And so for the first month or so, it was like, well, where's the revenue? Rick, one part of Logan's description is different from what you and I typically experience when we see searchers by small companies, which is most of the time, there's no one in these small companies who can step up and replace the owner, general manager. And indeed, that's part of the reason why he or she are choosing to sell as opposed to sort of stepping back and owning the business, but not operating it in these small businesses, the management bench or supervisor bench just is not strong enough to provide a general manager. But you, Logan, you seem to be able to find people more often than not in these small companies to step up and run them and I'm just wondering what's different about this from the typical small company we see. Yeah, there's a lot more to that story. So an owner operated shop will see typically they'll spend half their time in a week on admin function. So approving statements, counting, you know, adding a cost on statements, payroll, general accounting, things, well, none of it, I would say is directly value additive to the business, but it's just how you have to operate these things. On day one of our acquisition, the GM is no longer doing any of that stuff. We get a lot of leverage out of our corporate team on everything admin. There's a huge difference between it being a GM of a one of our shops, a mainstream out of shop and the being a GM slash owner of a shop. It sounds like you're almost focusing the job on running a group of technicians fixing cars and everything else is stripped away. Exactly right. And we also focus on leadership as opposed to management. I didn't go into this earlier, but we spent a lot of time, money and energy into our training function. And so we have a full training staff. We have a very strong culture, we have a very strong reputation and we have a handbook. We literally wrote our shop handbook, which is everything that someone needs to know to operate a shop like we want them to and is on version 20 probably and we give them the literal handbook. They get scorecards, they get mentorship from a regional manager. So everyone gets flown to our corporate office, goes through our training, they'll be continuing training and so just a different feel. I want to return to the roll-up because I find this so intriguing, Logan, you might not recall that I am generally skeptical of roll-ups. You actually told me that in officers when I told you this concept. I remember it vividly. So I've been consistent at least all these years. As I say to my current students, I say, you know, I'm not a big fan of roll-ups, but there are all these people doing really, really well, making a lot of money and being very successful doing roll-ups. So what am I missing? And I think I'm learning what I'm missing from this conversation. So I imagine in roll-ups that there has to be some gain for the consolidation. And the gain I used to imagine was that there was a revenue gain. You can market better, you can sell. But from what you've said, I'm getting hint at where your advantages are. Can I take a guess? I'll put in my own words and you'll correct me. Which is that the secret sauce, the magic in your roll-ups, is your bringing professional management to enterprises that had not been professionally managed. So you're controlling costs. You're basically taking a 10-bay shop that was run in kind of a back-of-the-and-below fashion and you're professionalizing it at the corporate level. So you're importing professional accounting, you're importing controls, you're importing safety, you're importing training. Things that would be really uneconomic for a 10-bay shop to do on its own. And that as a result, the operations just become better, more efficient. Customers are happier, maybe prices go up, maybe they don't. But in the end, you're providing better products, better services and having a more efficiently run enterprise. What really matters is the management operation. Is that fair? Yeah, I'd say you nailed it. We have all the typical returns of scale of the roll-up. Our number one is that, I would say it's that 50% time of admin function going away, freeing up the time that now the manager in the shop can focus on developing the technicians in the shop, customer relations, issuing work evenly, making the place look clean, you know, way more value-added of things. And the only way you can do that is if you actually do have a very well-run and efficient back office, and then standards in policy. So we have regional managers sit over all our shops, so typical regional have 6-11 shops. And those regional managers are always in those shops, we're going through the scorecards, and the margins looking at the opXs, talking about which technicians are doing well, which you're not doing well. That's a level of leadership development and operational support that a mom pop is just not going to have. And control. And I guess the other thing that's really special about this for you in this business is that in other businesses, when we've seen successful roll-ups, for example, in quick service restaurants, the franchise or is providing you data so you can tell when you're a well-run or not. As a franchisee, you can tell whether you're after was meeting the standards of the very best in the system. But for what you're doing, you're really developing the data as you go along because there is no data. So there's nobody collecting data of what a well-run 10-bay shop looks like. And as you consolidate them, you can pick the very best practices across your entire network and then roll those out. I'm glad you mentioned data. So we probably spent a million and a half bucks on proprietary dashboards and data infrastructure. And we started that when we had no money with an outsourced team that we found on Upwork. Paying them not very much retainer just to get it built. But in this industry, most shops use a point of sale system, which is a shop software. And so that's what generates their pair of orders. It has all the part numbers on it, all the revenue items. It doesn't have labor costs. That's the one missing piece. And none of them do. So to get a whole picture, you have to build your own system that takes all the POS information and then integrates labor costs. And so on day one of acquisition, we're on our point of sale system. And we have trainers in there, you know, training the staff on how to use it. But it's piping all that great data into our backend and all shops are sending it there. And we're dashboarding it, visualizing it, benchmarking it in real time, down to the technician level. So because it's real time data, you can track technician performance. And they're basically a technician level P&L every hour. And so we'll give that information to a GM. And, you know, it sounds kind of scary because I think people will kind of think that that's a way to pay people less. We've observed is actually the opposite is that these technicians are then becoming better. They're getting paid far more than they were before we took over. Yeah, because the learning that working harder and being better is rewarded. Yeah. It's really interesting because it's so different. It is changing the way I think about roll ups in this discussion because I really had thought I need some external factor to gain. And here the gain is all coming internally. It's all I can run these better as a system, even if the customers never wear. Yeah. I agree with that. I think that's a really good description of how this becomes more profitable when consolidate together or put another way, you know, if you or I Rick looked at buying one of these auto repair shops, doing a million and a half in revenue, clearing $250,000. And the owner who ran everything was getting ready to retire. We would pay very, very low price for that because that meant that one of us would have to step in and run it or would be very dependent on some person that we found to go in there and run it. And how would we know that that was a good person? Right. How can I evaluate a mechanic? So the market would be very small for that couple of $100,000 of cash flow business. But to you, with dozens of these under your ownership and systematized, investors would pay a lot for that cash flow because you've made it more stable, more predictable. I have another question about the value creation you do in buying these companies and it centers on the purchase transaction. You had described that you buy these businesses and you'll typically have a couple of hundred thousand dollars of pre-purchase EBITDA, $250,000. You haven't said how much you pay for them. But I'm going to guess the range might be two and a half to three times EBITDA, something like that. Would I be far off? Not far off. But you're buying the building as part of that purchase. And then you're sort of aggregating some of these buildings and you're selling them to someone institution that'll triple net lease them back to you. My guess is the rent might be $10,000 a month, $120,000 a year, is that? Usually higher. Usually higher, $150,000 typically 8 to 10% of revenue. These are big, square feet, right? Yeah. So it's easy for me to see why an institution would want to buy this facility and rent it back to your company because you have dozens of these, you know, you're a professional organization with lots of resources. This is mission critical to your business. So they might pay 10 times the annual rent for that piece of real estate, which means when you sell the real estate to them and rent it back, you're probably recapturing most of the purchase price, or all of it, or maybe a little more than the purchase price. We've done that on a number of cases. It was a lot more lucrative when cap rates were lower. Yeah, of course. But it's something that owner couldn't do, no institution is going to want to buy that 8 Bay, 10 Bay property and sign a 20 year lease, but they are with you. That's exactly right. And we explain that to the owners, you know, we'll buy the real estate for a price and then we'll sell it for more than the price, usually the same day. And we have to explain, it's really financing mechanism because now we're paying a very high rent for 20 years and it's guaranteed by the whole corporation. So we can never shut that shop down. Right. Yeah. Well, that's a critical difference. But what it means is you're sort of picking these shops up on average for zero cash. You obviously have this rent obligation that goes on for 20 years, guaranteed by the whole company. And then you're professionalizing them and now have 150 or $200,000 of EBITDA or EBITDA after rent on which you have zero capital invested. Only in real cases was it ever zero. Even from the early days, we've put in close to 10% equity cushion. Now it's higher, but still very efficient use of equity. Very efficient use. I guess that's what I was getting at. And it follows on from risk description of how you're professionalizing it. To also you're able to get very attractive high leverage, high financing to purchase price through this mechanism of leasing out the property because as a bigger company, you get better terms from an institution. Exactly. Individual. Exactly. It's super charged our growth. Because of as a form of financing, so it allowed us to do a lot of acquisitions in a short of my time. Logan, this is really very clever. Did you have this in mind when you started? On the real estate question, that was a happy accident. You know, again, I wanted to be hyper disciplined on doing one thing really, really well. Real estate was not part of that. I didn't understand real estate and I didn't want to get distracted. But when we first started prospecting for deals, all these deals had real estate. And I begrudgingly started buying real estate partially because the SBA debt was more attractive with real estate as part of the deal. You know, the amortization is longer so our cash flow is higher. And so I ended up sitting on all this real estate and through coincidence, Metta, Sale, East Bag, Broker. And what he was telling me just seemed too good to be true. And my investors were telling me what he's saying is too good to be true. There's nobody asking me buying this stuff at a six cap or a seven cap. And we said, well, let's see if you can do it. And we just so happen to have enough scale where they could sell the story. I like operations, but this was never about operating an auto shop. It was about building a company that operates auto shops and you know, built a team very quickly and have essentially a 100% hit rate on leaders in the organization, which I find to be pretty rare. You know, I've been really good at that. And that's been the only reason we've able to grow this quickly and not have it fall off the rails. So how many people in corporate probably 65 or 70 if you include admin staff and how many people working collectively, pulling wrenches and all the shops that you have. We have about 740 employees across the organization. Okay. So you have a little less than 10% humans just by count in corporate overhead. That's right. More than half of that is a, you know, admin staff. Right. I was trying to get a sense of the gauge of of how big a commitment at the corporate level of professionalization is, so it's not 10% by dollars, because as you say, some of them are not as highly paid, for example, as a master mechanic, but I get the scale just in terms of numbers. It's less than 10%, but not far from 10%. It's not going to grow very much to because you're going to get some economies of scale. We're going to get a ton of leverage out of it because the big chunk of that SGA is executive team. So myself, a CFO, a chief growth officer, chief acquisition officer, chief operating officer, we have senior VPs, one layer down from that. It's all very expensive, huge investment in the team. That's going to be the same team when we're at a thousand units. You've built this grow. You've built this over three years. So, you know, if we go back four years, zero people, zero, uh, our workshops, three years go by. You've got this large growing organization 800 employees, about 740 total. So it will be at 800 next month. When you guys sleep at night, you're responsible for a lot of human. Well, that's my one vanity metric because, you know, HBS everybody talks about how much money they've raised as a vanity metric. And to me, it's how big is your organization, how many people's lives are you improving, you know, and then your customers. So we have almost 400,000 customers a year. That's a lot of impact. Maybe you already know about naked short selling, maybe you've personally shorted stocks yourself. But do you know about the time short sellers ruin to Super Bowl, basically? For me, I was a little late, but red flags went up like, what is going on? This is, this is really scary. At Planet Money, we get the story behind the money to explain how money works. Listen on the NPR app or wherever you get your podcasts. Royce, let's get back to the conversation. Tell us a little bit about how the acquisition process works. I mean, I heard in your list of executives, you have a chief acquisition officer. Does he drive around and stop in and, and say, do you want to sell your shop? And then how have you simplified the acquisition process so you can do 12 in some record week and on average, one every few weeks? So the sourcing is me in the early days just driving around and never wanted to do cold emails. And are you now in this phase, in this early phase, are you like cold door knocking? Is that what you're doing? We have a team of eight people out there in their corporate cars and we'll give them target lists. They know these communities are driving around and and hitting multiple shops a day and sometimes hitting the same shop many times over six months, building rapport. No appointment, just showing up and saying, I'm Logan, I'd love to buy your business. Oh, yeah, and we have these metal business cards and so they don't get thrown away. And they're great people. I mean, a lot of veterans, guys with tattoos like myself and walking in, it's just not the like New York finance crowd doing a cold call. Oh, typecast, typecast, typecast. So that's really interesting because you have the people who are soliciting deals that look sort of like the sellers. Yeah, except they're young. I mean, I've bearded tattoos and drive a Toyota pickup truck and because I want to, not because I'm putting on a show, that looks a lot different than pretty genuine, right? And I suspect the same things are true for these people who are out looking for deals. They're, they're not putting on an act when they wake up in the morning. That's who they are. Okay. It's part of the culture, the cultural fit that I talked about earlier. It's just that that's the type of people I want to work with. Yeah. And so we source deals. We started with me and then one of the best decisions I made in this business was when I bought the first shop, a guy came to install my credit card system and I love this guy. And he, he was also a full-time cop in that county. And I knew right away that he was, there was something about this guy. So I hired him. I think a couple of days later as my business development guy, at that point, no longer had time to go visit shops. But he hadn't done any business development ever. No. For a while there, he was the highest paid guy in the company. And he got us to, we probably got to 40 shops before I hired another one. He sourced every one of those. But how do you find a policeman who's installing credit card machine on his off hours and look at that human and say, wow, he's going to be outstanding at convincing. If you could teach that, then you'd, you'd have a really good course at it. Yeah. I was looking for that. No, but I mean, I mean, I'm serious. What was it? You talked to him and, yeah, he's just a, he's a go getter. He's a hustler. He's, he's had a lot of energy and trustworthiness and my first impression was 100% correct. I'm not the guy for three and a half years now and he's, he's sourced, you know, 45 of our 86 shops. And I just knew. I don't understand this. I just knew. What does that mean? What does it mean when you say that? Maybe it's something about military and I don't want to make more of it than, than there perhaps is. But in special forces, you're on a team of 12 guys and, you know, you do everything with them and you're, you spend nine months overseas with them. That's the only Americans you see for most of it. When you get to read people, you get to pick up on cues, know who you can trust and get really get a value in people, I think. And so maybe that's some of it. It may not be that at all. I don't know. So now I'm, now I'm understanding what you said earlier in our discussion where you said that what you think you've done best is building the team. Some of it's this vision, which is clearly terrific and very creative. But the other piece of it is the sense that you can evaluate who's going to fit in the roles and it's not by looking at their resume. So when it came time for executive hiring, that's all I did for almost four months. It's literally the only thing I did. I went on LinkedIn Recruiter, which I'm plugging. I don't get any money from them, but they're, to me, that's the best hiring resource. And I hired personally every single executive and senior VP. So you talk to everyone. So the first post was the CFO, was the CFO hire and we got four or five hundred applicants. And I whittled it down to maybe 150, 15 minute calls back to back. And I was ruthless because if I was two minutes into a call and I didn't think it was a fit, I would say it's not going to work like next. And then that went down to maybe 20 in-person interviews. And then we did the second round with a two. And then I ended up with our CFO who's been better than I kind of ever imagined. And through that process, by the way, you start learning what you want, because who I thought I wanted and before I talked to 150 was very different than at the end of that. And I did that for the other roles too. So interesting. You're adding color to this concept of building a team that it's not easy work. I mean, you can imagine the way a lot of people do this is they look through a resume and they say, has this person had prior employment that suggests they would be successful? I'm sure you're doing some of that, but that's not the primary thing. It's the conversation. Yeah, exactly. You got a promise to teach me this. Yeah, I'm still trying to learn here. Well, you got to love it. That's not easy. And that's why I talk about fit a lot, because even if you know that's the right answer. And if you don't like it, you're not going to spend four months doing it. And you just can't force it. And I love doing it. And so I wanted to do it. And I want to do more of it. And that's why it worked. Oh, so you're saying that given that like, like my aversion for talking to people in a telephone is now, it's now, that might be limiting. It's going to be limiting, right? I guess that's right, Rick. No 150 phone calls for you, even if they're only, I want to dive a little deeper into this, too, because it's so interesting. Are there some words that describe the type of people you want to bring into your organization? Or is it different for each role? It's definitely different for each role. I think about, like, checks and balances a lot, and this isn't answering your question. So remind me to circle back, but I want my deal team to be making this strong case on why we want to do all these deals. I want my ops team to be the opposite and because they're going to own that shop on day one, they, but heads a lot. And I said over him and I explained this to him over and over again. So like, look, you're both right. You, they're going to figure it out, which they do nine times that 10 or I'm going to, I'm going to decide. And then we're going to go with it. I want the marketing team to be, you know, have their own incentives. And I want my CFO to be kind of a counterbalance to me because I'm a irresponsible risk taker in a lot of scenarios. And if I had a CFO that was also like that, we would drive the thing off the cliff and Rob is, he's a risk taker, but he's, he's a very good counterbalance. So I think about that organizational wise, as how is everybody competing with one another for ideas? And how can I make it work without me, like, settling arguments and done a good job there? We tend to be younger organization. We are diverse, we have lots of females, especially at the management level and the shops and there, there's some of our best managers. And I think, you know, we're, we're very, very fast and in risk taking. And so you have to be comfortable with that. I don't know what word would describe that. That's okay. You're doing a great job. I would say bought in. We have extremely low attrition at the whole company actually, but at the corporate level, no, very, very low attrition. And I think it's because people like what we're doing, we sponsored NASCAR races. You know, which some people would say is irresponsible use of marketing dollars. But like, we get a lot of buy-in and fleet customers there. We're about to move into a new office and I negotiated hard to have dogs in the office, even though it's a non-dog building, and they agreed. Nice. I'd love to turn a little bit from team to financing on this. Tell us a little bit about how you finance the enterprise. You had touched on the fact that early on, you used SBA loans, but maybe tell us a little bit about how you organized the dead and the equity yet. Even going back to version one of the business, it failed. And I lost these two guys that are very close to me, very close business mentors and friends, current investors and board members in this business. They invested me in that business and I lost their money, which hurt. And so when I started creating the thesis for this business, I had met several people in Atlanta that I could have raised capital from for very cheap. But they weren't going to be as involved in the business. There were a lot of things they were not going to be able to contribute that these two other guys did. And I had this loyalty having gone through this with these two other guys. And so I went to them with this idea, but I was very careful to actually have progress before I even talked about terms. So I had, I think, three or four shops under a letter of intent and modeled that out, showed what an implied valuation would be. And then it was a very small equity check. And then I used SBA debt that was 90% levered to buy the first shop. And that's first shop was a small deal. I had real estate, but it was just over two million bucks. We used the rest of the equity check on the next two and then those were also SBA debt. And then we raised another round from these two guys, like incremental round, which is a little bit bigger, but still very small equity dollars and got to eight or nine before we started selling the real estate. And because we had already purchased that real estate, you know, whatever was left over after paying off the SBA debt, which was a significant amount with cash to the balance sheet. And so we used that for, you know, the next deals and we did sale, respect transactions on all the deals for dozens and dozens after that. And so very efficient use of that capital. Then we raised our first institutional round in that closed in January at 23, which is a fair amount of money that we still use that for the sale, respect transactions going forward. And then we just closed the much larger institutional round a couple months ago. I have to ask this and maybe where this question comes from is that Rick and I frequently have office hours with students and our students are very talented people. But there's a meaningful portion of them that despite their training and their work, relevant work experience, pause before doing entrepreneurship through acquisition because they don't feel ready yet to do this. Even though most of the time, Rick, you and I will look at them and say, here's a hardworking, scrappy individual. They're absolutely ready. Was there like a moment where you said, I'm not sure I'm ready to do this, but I'm going to plunge ahead anyway or I am absolutely ready to do this. Can you tell us a little bit about what was in your head as you dived into the deep end of the pool? Yeah, the moment where I felt ready was out was immediately upon failing the first time. I think getting a fail on the board is helpful. Wow, why is that but it's you're going to fail like I remember my investor at the time said Logan, if you had succeeded on that idea, you just would have been lucky. And then you would have had a lot of money and went around on podcasts talking about how great you are, but you just would have been lucky. So it's like the person, it's like the person who goes to the casino and wins $75,000 on their first day and convinces themselves that they should be a professional gambler. Yeah. Well, and the other thing is like I had my back against the wall like during a lot of this, you cannot replace having your back against the wall. I couldn't fail again. He had to succeed or else, or else he wouldn't feed his family. He didn't have a safety net. I remember when I decided to launch version one, it was around finals time. So I was in grad school for four years. So it was that right after the third year, that summer, I knew I was going to run out money. Like I couldn't pay rent by the end of it. And I said like, well, I don't want to do another internship. Like I want to build a business like I'm going to do it now. Let's do it. And it was scary. It was really scary. And so we had progress and then raised a little bit of money from those two guys I mentioned. And similarly, that happened again on this business where I left that security business in October of 2020 and had a little bit of money. But I had a mortgage, I had kids in private school and I had no money. You didn't last very long. I was trying to do military training, making some some mental cash and everything. And I ran out. And so I called the school and I was like, I just can't pay tuition. Like maybe, you know, can we finish out the school year and I'll pay you back when we can. And I remember I went to my investor and I said like, and try to do something similar to a traditional search is like, can I raise some capital that I can live off of? And he's like, he's like, that's Logan, that's, that's not a good use of money. He's like, you need to make some progress before I've been put money into this. And he said, you'll, you'll go further than you think you can. And I remember thinking, well, I don't think that's true. But I literally did like we got, you know, with that little bit of cash kind of stretch and payables, but got pretty far. And was about to make it because we were supposed to close that first deal in May of 2021. And you know, SBA Lenders, some of them aren't the best and it got delayed till June. And I had a mortgage payment coming up and I had zero money in the bank. And I called John. I'm like, I've made it as far as I possibly can. Like, I need some cash to get here. And he asked me, what is the percentage chance that this deal happens? And I said, I think it's 90%. And he was like, okay, I'll give you an advance. And I made it there. And it didn't stop there. Because then I, all my credit cards were maxed out. And this shop wasn't producing a lot of cash. So we had to get that second one and third one to get some cash to actually, you know, dig out of the hole. And I think that it was really hard work. As you know, and I don't think I would have been as successful if I just wasn't against the wall like I was. You started your question, Royce, with the students who are equivocating. Am I ready? Am I not ready? Is this the right time? Is this the wrong time? And I think what I'm hearing, you'll correct me is that yes, you had that necessity to move forward. But there was also some confidence, I think, behind that the mountain wasn't higher than you could leap over. Yeah, I think I try to stay humble, but this confidence and humility are not mutually exclusive. That's right. And I think that I've always thought that if somebody can do this, then I can do it. And you need that to go to special forces, for example. And it's really scary to go to selection and then having, you know, if you fail, you go back to the unit as a failure. But I thought like these guys are doing it. Like, why can't I do it? It's scary to leave the military and go to college, but I thought like, hey, these people are doing I can do it. And that's how I fell in your class with reading those cases is like, it doesn't seem that hard. It's hard, but like if they can do it, I can do it. Yeah. Well, then there's a lot of truth in that. I mean, that's, that is the way we structure. And that's what the podcast is all about too. So the podcast is about an every one of their cases that we teach is some normal person who is able to construct this life for themselves. Logan, we always end by asking our guests if they have any questions for us. Do you have any questions for Royce and I? Yeah. Why don't you think more searchers are taking the roll up route and there are? Well, maybe because I'm teaching them. And telling them like I told you in office, I was, you got to find some magic here. And what what I've learned today is that maybe just better management is the magic. But you know, one of the things that that our students see when they look at prior searchers who've done roll ups, some of them don't do the hard work you've done. That is to say they just simply go on an acquisition spree acquire as many companies they can make no operational changes or improvements, but put them as a package and resell them. And I'm really skeptical that that's going to last and the way they make their money is not by increasing profitability, but by simply relying on multiple expansion and I'm not a fan of that strategy. What you've done is very different what you've done is acquired the businesses, but then fundamentally change their operations improve them dramatically made the employees the customers much happier both the employees and the customers are much happier because the businesses are just better run. People are making more money customers are getting higher quality services and higher valued services so every it's a win and the win is from better management. I think Rick and I have seen a increasing number of students pursue roll up it's still a distinct minority of searchers, but you know we go back a decade almost none of our students pursued roll ups that buy a business maybe they do an add on or two across their ownership. But today, you know, I think 10 or 15% of the class might be interested in roll ups 10 or 15% of the class or 10 or 15% of the people who search the people who search. So, if there's 20 people, you mean maybe two. Yeah, yeah, exactly. And I was thinking about what makes your remarkable success different from what they look at. And I think part of it is you're buying unbelievably small businesses and rolling them up because you have a way of industrializing them. Right? Like Rick, I don't think we have any searchers who are buying $200,000 EBITDA businesses either as a standalone or frankly as a roll up I think they're looking at businesses that might start at the low end at half a million dollars of EBITDA or $700,000 of EBITDA. And I think the reason is most businesses this small just sort of fall through your fingers as soon as you remove that very active owner and what you've done that is so unique in my experience is found away on day two to just transform that way that businesses run so that you can elevate an elevated tech to lead tech to do that or bring in somebody and I think that's a bit of secret sauce that we have not seen before. Rick, I'd be keen on your reaction. One of the things I hate to do is say something that is a first time thought. I like to expend those in the mirror before I leave the house, then get Rick aside in a lonely spot and try it out on him. And as you know, I prefer to offer my thoughts up for the very first time in front of a large group. That's why we nickname ourselves the Department of Planned Work. That's me, the Department of Unplanned Work. That's Rick. That probably rings true to you. That's right. I think that Logan's magic is professionalizing the business. But I think it goes deeper than that. I think it goes one step below is the confidence that he can go in that shop. Meet the person who has been acting as number two and make an assessment that that person can grow into the right role. And it's this skill he has at picking leadership and finding the right roles for people. So what he's saying is, okay, I can take that person and maybe she's just been ordering the parts because she can manage the whole shop. And that's a skill and an assessment that is very special, I think. And we don't see very often. I don't think Logan looks at this as saying this is a very clever financial transaction. Many people look at roll-ups as financial transactions. I think you think assets first. I think you're saying, I can combine these resources and make them more efficient and do better things and make the process of repairing that broken carburetor transmission or you join to whatever it is. I can make that better so that everybody's better off the person orders the pots, the person who supplies the pots, the customer, the mechanic who replaces the usually all that stuff. Everybody's going to be happier because nobody's going to be running around circles wasting time. Nobody's going to be frustrated. And that's very different. I don't know if you've ever studied this, but years ago I studied the roll-up that Craig McCaw did. He was buying two or three cellular telephone licenses a day. And I guess before that, A&P was buying a grocery store a day. So there have been these rapid roll-ups. But both of those like you had these visions that we can just do this better. There's something about the way the businesses are functioning stand alone that we can make better. So that idea is not new. The new idea is the better thing can be better management. Logan, thank you so much. What a great story. I'm really, really impressed. It's very special. One of the things that intrigued me about what Logan is doing is his creation of a back office that simplifies the job of a local general manager. I don't think I've ever seen this before in small firms. The typical small firm owner, like the owner of one of these garages, is doing lots of things and it's impossible for them to retire and turn management over to one of their employees. Because that set of skills is just found rarely. And Logan's solution to that is take a huge chunk of those skills and put them into a scale back office to simplify the job of general manager and give Logan more choices of people he can plug in to replace that seller. I think that's just a fascinating strategy to execute in a roll-up of small companies. What do you think? Right. You've taken management of people and financial management off the menu of characteristics that you need. So now you need somebody who knows how to fix cars. You need somebody who can recognize talent and fixing cars and you need somebody who can talk to customers. But they don't need to understand a balance sheet. They don't need to understand an income statement. They don't need to know when to use accelerated depreciation and when not. They don't need to know how to do any of that. I think this is very clever. The conversation with Logan really moved me on the efficacy of roll-ups, particularly in this small space. What I will say is the success of this is really going to depend on realizing the operating leverage. And what I'll be fascinated to see is whether he can grow the business without growing SGA more than proportionally. As you know, we've seen other businesses that have had similar themes, for example, in home nursing where you're going to build this front office and then you're going to have all these nurses and it's going to be just fine. And what we've discovered is it's really hard to maintain profitability in that business because you need just lots of supervision. This supervision really eats up the gain and we see little hints of this in Logan's business because it's true we've pulled out the accounting and the financial management and the pricing and all those business decisions. And so we have a general manager with a more limited portfolio in each repair shop. But now we also have a regional manager on top of that and I wonder if we're going to end up. Soon you have to have a division manager to supervise eight regional managers and all of a sudden, right, the advantage of being big is pretty clear, right? You get this huge economies of scale in the back office. And as you point out, you don't have to look for this unicorn. You know, you don't have to find the master mechanic who's good with customers and also knows accounting really well. You don't have to find that person anymore. That's a big advantage. That's huge. The question is whether you can grow and keep those costs down. I think you've raised an excellent question. I think the solution would be if there's new forms of scale advantages that become available. Like for instance, at some point, he's big enough to force down the cost of parts because he's such a big customer in the market. Something that helps him because I've no doubt that the management will get more complex as you add more units. Yes, although I do think that he's engineered his central services for a lack of a better word to be able to grow easily and sort of keep control over the SGNA. I think he's had this in his mind. He's a very clever guy and has this wonderful ability to see and manage talent from, you know, the people who sweep the floors to the people who do his financial strategy. I think he can communicate with that whole range of humans, which is a rear-trade. I think Logan's thought about all this and he's going to figure out how to do it. And what's really interesting is what Logan is doing has the potential to unlock the engine of roll-ups across a whole collection of businesses that we've not imagined rolling up before. And so maybe what we're going to find is that when Logan's hugely successful at this, what he's done provides a model for rolling up independent electricians, independent plumbers, independent pest control, such an exciting thing that he's done. What a great conversation that was with Logan. He has pulled so many levers to construct this collection of small companies into a promising big company with lots of growth potential. Next episode, Rick and I turn to listener questions. We've been collecting all season long. That's always so much fun, Royce. Craig McDonald is our audio engineer. If you have any questions, comments, thoughts, feel free to just email us, Rick and
[email protected]. We'll be back next week with another episode of Think Big by Small.
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