Buy Fast: A Good Reason to Buy Small | Rob Carpenter Interview

Rob Carpenter, welcome to Acquiring Minds.

Thank you so much for having me. I'm really excited to be here.

Rob, I've had guests who fled tech to come over here and buy a traditional small business, but I haven't had one whose journey saw him leap from one extreme end to the other on that spectrum. This is going to be fun. Start us off with some background on you, please.

Yeah, I think, uh, if we go all the way back to the back, I was born and raised in Dillingham, Alaska, right on the Bering Sea, where we would have grizzly bears that would walk into the the mudroom of our house. Uh, despite what you might have heard, I cannot stand on my back porch and see Russia. Uh, but it was a very, very interesting life experience. So I spent all 18 years up there, moved down to the States, uh, got an undergrad degree in entrepreneurship. Like probably most people on this podcast, read "Rich Dad Poor Dad," "Millionaire Next Door," and from a glossy surface level, I was like, that looks like a pretty nice life. I'd love to do that and have always kind of been on that trajectory. You know, lawn mowing business in high school, like a lot of people, advertising business in college. And then I ended up out in Denver in 2010, got a master's degree in Enterprise Technology Management and started my first company, which was a custom software development company. We built and launched native mobile applications. I did my first acquisition at 26, bought a company in Hyderabad, India, to do vertical integration, and then I bought another company in London. So over the six and a half years that I ran that business, we built and launched 350 custom software applications. Sold that company when I came up with the idea for my artificial intelligence company, Valiant AI.

And Rob, let me stop you because, because Valiant, Valiant is going to deserve, uh, a few minutes here. The Hyderabad acquisition and the London acquisition, how big were those?

Um, not that big. They were more from like a labor standpoint. Um, so the Hyderabad, India one was like half a million dollars, and then the London one was a couple hundred thousand.

Okay. The India one was interesting because we don't realize how good we have it here in the States in terms of how easy it is to start up and run a business. Um, it took us, for even that small of a transaction, it took us a year to get it done, and we'd be literally having to like FedEx documents back and forth to India. I had documents get rejected because I used the wrong color ink on the forms. Uh, and so with like intense focus and diligence, it was about 12 months end to end to buy a small, you know, half a million dollar company.

Yeah, yeah. I've often heard that about India, that the bureaucracy and red tape is still kind of friction to to development. The, and then your exit of that business, was that significant or, and can you be specific?

No, it wasn't. I had, uh, accumulated a decent amount of debt on that business. We, in the transition from Obama to Trump, for whatever it was, like all of our customers kind of freaked out, and we lost like 90% of our revenue in that 30-day window. And so I ended up taking on a bunch of debt to keep the company going. We got it back, we grew it, we stabilized it, but that debt was still hanging over my head. So basically, on that one, I got out without it costing me any money, and I still to this day consider that a win.

Yeah. And the 300 plus applications that you developed, these are all mobile, all phone apps, or the gamut, web stuff, phone, everything in between?

I'd say 80% were native mobile applications, uh, with the remaining mostly being backend database type systems. The biggest, most notable app we built is the My Colorado digital driver's license app. So our governor at the time was, uh, Hick, and he pushed that through Congress, got approval for it, the state, the state, uh, Congress, and then, uh, hired us and hired two other companies to build that, and we did all the mobile app front-end infrastructure. But Colorado is the first state in the entire country to have a digital driver's license.

Oh, wow. Okay. Didn't know that. That's a pretty marquee contract to have won.

Yeah, it was basically the last one I closed right before I sold the business, and so it helped because it's like, here's this massive contract and company, you know, here you go.

Great. Thanks for that, Rob. Okay, so now, what year is it as you turn your attention to Valiant?

2017.

2017. Right as Trump takes office. Okay. So Valiant, tell us about your pivot here.

So the big, the big hairy audacious goal for Valiant is we were trying to build straight-up holographic employees. And so we used a transparent OLED display, think a piece of glass merged with a flat screen TV, and we set it inside of basically a kiosk infrastructure. So it's about 4 feet wide, 6 feet tall, but you could look through it. And then we used Intel NUC computers and the Unity gaming engine, and then we rendered a 5 and a half foot tall fully animated person. And we used the Intel RealSense camera, so it could recognize you, the AI could greet you by name. And the idea is that we could start to automate frontline labor tasks. You know, it could help you with a mortgage at a bank, it could sell you a cheeseburger, you know, it could help you at a retail center get directions around Home Depot, you name it. And so we had conversations with Target, Walmart, US Bank, MetLife. We won a startup competition for Visa, within their accelerator. But what we found very quickly is that we could make a visually interesting product, but, and this is again, 2017, 2018, the conversational AI, the ability to talk to it, was horrendous. And so I knew that if we were ever going to be able to scale this product, you had to be able to carry on a fluid conversation with it. And so we decided to dial in and focus on fast food, and we decided to let the visual element go and just focus on the voice and pivot from sort of an in-store experience to drive-thru. Which for anybody that doesn't know, 70 to 80% of the revenue for fast food restaurants come through drive-thru. So if you can automate that from a labor standpoint, it's a no-brainer. There's a quarter million plus restaurants in the United States. That is a very big technology company if you can build an accurate product and scale it.

And by the way, not tracking AI super closely, that is one of the favorite use cases for generative AI today. It remains one that people are really excited about, although I guess, as you'll, you're about to tell us, easier said than done. But basically, yeah, the idea that it's like, what, where can we really add value by being able to speak, have computers understand us, and be able to interact with them in a pretty well-defined kind of set of commands and and requests? And it's a menu at drive, at drive-through. So it does seem intuitive that this would be low-hanging fruit for a kind of generative AI, uh, application, although of course, also, you were before ChatGPT, before the whole world was excited about generative AI.

Y. So keep going.

Correct. We, we were the OGs in the space, a little bit around this stuff. Yeah. Um, so, yeah, so we started digging in. I'll fast forward a little bit over the timeline. We raised over $18 million. I personally closed deals with Burger King, Chick-fil-A, Wendy's, Hardee's, Carl's Jr., Checkers and Rally's. Um, we had a lot of buying and a lot of support from the investment community and from the customer base, and everybody wanted it. Problem is, and I think this is still the case today, is that it's really easy to create an AI demo. It's very hard to build a scalable product at an enterprise level that is 98 to 99% accurate. I mean, when I left nine months ago now, we were testing it actively, and it's like, you could get ChatGPT to like 60 to 70% accuracy, but we just, you don't have base-level control over ChatGPT. And so we just couldn't get it over that. When we launched in 2017, nobody was doing this. And during the time that I ran this company, we saw over 30 companies enter our space, make a big splashy announcement, and then die. And I would argue when I left, there were probably only three companies that still had a viable shot of bringing this technology to market. The fundamental challenge is you have a daisy chain issue. There's about 10 key things that have to happen in a row, and every one of them has to happen perfectly. Even if you have 2% degradation at every level, think like speech to text. If you have a 98% accurate speech detect system, that's like world-changing like in this minute. And that's one of 10 things, and they all have to work perfectly. And if they don't, you've now degraded your overall experience to 60, 70, 80%. And so we spent those seven years just grinding and grinding, and, you know, we were improving by 10 to 15% per year, but we just couldn't get it to where it needed to be where the restaurants could really jump in and then mass roll the product out across their entire ecosystem.

So, is this a use case or an application that AI technologists are excited about, or is it well known now that it's a much more challenging problem than at first glance?

Um, both, I would argue. We're probably still five-plus years away, and we probably need to see one or two like meaningful improvements in the core infrastructure of AI to really see rapid scale and rapid adoption, but it will happen. It's just a matter of time.

Okay. Well, much as I'd love to spend another 15 minutes on this topic, um, we, I want to get to your story. So maybe we'll have a chance to return to it and riff on AI a little bit at the end, time permitting. But as CEO, founder of Valiant, how does this story wrap?

Yeah, so, you know, thankfully, midway along the way, the board gave me the opportunity to sell some shares on the secondary market, and so that had a pretty meaningful impact, uh, on my life overall. But fast forwarding to the end, basically, I was burned out. You know, radical, uh, transparency here, it was creating issues in my marriage, it was creating conflict, challenges for our kids. The stress, uh, was massive. Early on, we'd get large chunks of funding, but then towards the end, we'd only get enough runway for like six months. And so then within one to two months after closing a round, I'd be out trying to raise, uh, more money. And so it really just kind of got untenable. So I went to the board in August of last year and I was like, hey, I'm, I'm done. I need to step down. And they were basically like, cool, like, we agree. And like, as I started to walk towards the exit, they kind of like pushed me out. But it's not, it's not uncommon. Once the, once the leader is done, you need to get fresh blood in there. So I don't harbor any ill will, and I completely understand where they're coming from. So took the rest of the year off, spent time saying like, I know I don't want to do another VC, private equity backed company. I played around with the idea of getting a job, but I'm like, nah, once you're an entrepreneur, you just, you're broken. Can't work for other people after that. And I'm in EO, Entrepreneurs' Organization, with a wonderful group of seven other business owners, and four of them, of the eight, had bought businesses through ETA. And so they were able to kind of break down and explain the whole process to me, and I'm like, I like that. That sounds like I can find a business to buy. I knew I wanted to buy small, I knew I didn't want to buy with any outside capital, and I wanted something that was just kind of easy to run while I like rested and recovered. And I still don't know, is this a two to three year play? Is this a five to 10 year play? To be determined.

Just going back to Valiant for a second, you were really experiencing the tech VC ride. What I mean by that is it was a very high-profile company, as you said, you were talking to blue-chip names, you had some of them as customers or at least trials or what have you. You also got press from blue-chip publications. What was that? Say, say a little bit there.

Yeah, we got, we were front page of the New York Times. I got interviewed live by Larry Kudlow on Fox Business. You know, you typed in Valiant, the number one search is like, is Valiant public? You know what I mean? Like the demand was there. CNN, BBC, like everybody was already on the wave of like, oh, AI is coming and this was really even before ChatGPT launched two years ago. They were like, AI is coming, it's going to be big. We're interested. Oh, here's a company that's talking about massive labor automation for frontline employees, which is its own thing to discuss. We were interested in that. And so we got massive amounts of outreach from news publications that were interested in learning more.

So even though it didn't end up with a, you know, going public event or some giant liquidity event for you, you still did experience what it was like to be kind of the hottest thing or, you know, in that, you know, you know, a young founder CEO of a very hot startup in a very hot space and getting just tons and tons of attention. Anything more to say about that? You, you've talked about how the stress was starting to kill you, partly kind of with the relationship with the investors, and they were started to eventually only trickle out the find, the funding that you needed. But anything else to say about flying high? Was that exciting at times, or was it kind of all stress all the time?

Oh, uh, it got, it was more like all stress all the time the last like 18 months. And the first year was fine. But nobody knew who we were. And then those middle like three to five years, those were a blast. It's fun, and it builds up your ego. It's hard not to, it's hard not to get excited about these things that you're doing. We got invited to the TechCrunch AI and Robotics competition, and we actually won that competition. And so those types of things, like they get you a lot of notoriety, and it's easy to build up your ego in those types of situations. Fortunately or unfortunately, at this point, I've been an entrepreneur for about 15 years, and I think where entrepreneurship can kill you is if you let the highs get you too high and you let the lows get you too low. And what I've learned over the course of my career is you have to learn how to not get too excited and not get too down, and you just kind of ride the the wave of the ocean of entrepreneurial startup.

Yep, yep. And just a little pressing here on the personal stuff, but when you said it was really starting to affect your family life, what did that look like? Were you just, were you just grumpy at home? I don't mean to minimize it, but was it just kind of like you were not present and you were short-tempered and so forth in the house? Kind of picture.

Yep, yep, definitely all of those kinds of things. You know, Christmas Eve, I'm taking investor calls, and they're angry about one thing, and, you know, they might be yelling at me and stuff like that because it's not growing, expanding as fast as they want to. And so it's like, then it's hard to then leave that and just be like, okay, I'm going to leave that in the office because I'm working from home, right? And then go out and like perfectly matriculate and be in a good mood with my family. And so I think that all played a role. The other thing that was going on, which which had a meaningful impact, is that my wife was diagnosed with effectively terminal cancer in, uh, 2020. And we had a one-year-old and a four-year-old at the time. So I'm like trying to run this high-growth startup, my wife is like battling cancer, like an aggressive cancer, right? And we have these really small kids. And so, you know, the process of going through that, yeah, my, my wife is stable and everything is going well now, but during that period, right, like how do you not just take on massive amounts of stress in that kind of situation?

Wow, Rob. Well, that was a curveball. Geez. Well, uh, yeah, well, you know, it's life. Nobody gets out unscathed, right?

Right. Well, it's wonderful to know that she's, she's stable now.

Okay. She's doing great. Good.

Uh, another thing in your backstory that I need, need to pick at. I heard you use the word "easy." What, what did, what was the word that you used when you, what you thought small business, buying a small business was going to be relaxing? No, there was a word in there. What was it?

Uh, I'm just gonna buy this business and do chill something post.

Yeah. Uh, and maybe after the experience that you went through, this small business land, which we always hear is, from my guests are always talking about how how gritty and not easy it is. Maybe from where the, where you were coming from, it is a lot easier. We, we'll get there. But just to, just to hear again, so you were in this EO group, and four of the eight of your compatriots in this group, all bought their businesses. And they, they were all kind of ETA searcher types, or were they, are they all kind of young?

Oh, wow. Okay. Anybody that we know? Anybody from the pod?

No, nobody that's been on yet, although I've pinged them and told them that they should come on the pod. One guy who's like, just your, like, you know, total outdoor enthusiast, bought a whitewater rafting company. And it's like, talk about like a perfect business to fit your personality. And at least once a year, he like hosts us all to come up to his business and do intermediate whitewater rafting with them. So it's super fun.

Cool, cool. Okay. Well, you like this idea. It was still going to be entrepreneurship. It was going to be something that you could do well at financially. So this is the path you choose. Okay. So now we're at January of this very year, January 1st. And what do you envision? What are your kind of the parameters of your search?

Yeah, so I had a couple of different things that I was looking for. I decided to self-fund the whole thing, and I, uh, did not want to take out, again, happy wife, happy life. And, uh, the idea of taking out, you know, two to five million in SBA debt was sort of off the table, uh, from a happy house standpoint. So I needed something that was basically a million dollars or less, but something that could be managed, something that could be run and grown. And ideally something that I would have, you know, some level of capability to do versus like a, you know, bioscience was out. I, I had just come from restaurants, I didn't want to touch restaurants with a 10,000 foot pole. I know some people on here have done wonderful with them, it's just not, not for me. So I was really looking for something where, uh, honestly, I had the fewest number of employees possible with the, you know, greatest amount of profitability. I really wanted recurring revenue, I didn't want any project-based work. And ideally something that was sort of low overhead, low capital intensive, and ideally lots of customers so I didn't have customer concentration issues, and preferably something in the commercial space versus residential.

Okay. Well, all of those seem achievable, although finding all of them in one business, maybe less so. But except for the, uh, high profitability per person, that is not something that you typically see, particularly in blue-collar business. When coming from tech, for example, where, you know, in a software company, you can have a million dollars of revenue generated per employee. Totally. If you were going to buy a blue-collar business, you weren't going to find that. Did you not realize that, or were you okay with that, or did you envision buying a white-collar business? Or say, say more about that particular metric that I'm picking on.

No, I think you're absolutely right. I don't think it was possible to find something that hit every one of those categories perfectly. And if you, you know, let's say, what did I throw out like eight metrics? You know, I just rate it on a zero to eight, how close am I to my goal? And if I hit eight out of eight, great. But if I hit six out of eight, that's still really good too. And I think because I've been in entrepreneurship for a while, I've bought companies before, even if they were smaller, I don't look at this like other people do, where it's like, oh, I've got to do this for the next 20 years. You know, if you're in a VC backed company, that could be a 15-year commitment, right? But with some of these businesses, unless you don't fundamentally fail or there's not something fundamentally wrong with the business, if you really hate it, and you know, two years, three years, like you just sell it, you know, and go buy something else, right? So I didn't look at it as some sort of massive lifelong commitment.

Wow, okay. Well, it sounds very logical when you spell it out like that. The other thing that was important to you was speed. Yeah. Talk to us about that.

Well, I think that is really important, and I think the number one reason that I reached out to you, Will, was specifically because of that speed component. Um, I have found Acquiring Minds to be amazingly valuable. I learned so much listening to this podcast over the last like, roughly year, as I kind of sort of started thinking towards this direction, and I learned so much in the process. And the one potentially unique thing that I think that I bring to this is there's a lot of people that you've interviewed where it's taken them a year, two years, three years, five years to buy a business. And when I look at this as a potentially two to five year hold, I'm like, five years, I should be out and onto my like second set of businesses by that point. And so I had just out of the gate a bias towards speed. The other critical thing for me is that I was self-funding this, and so not only was it money coming out of my pocket, but it's also money that I need to live on. And so the longer it took me to buy a business, the less money I would have to buy a business. Now, this maybe doesn't apply as much if you're a more traditional searcher and you're getting capital from investors and things like that, but if you're self-funding and the money's coming out of your pocket, you need money to live on. And so as that money gets used, you have less money to work with, which is orders of magnitude in terms of impacting the top line of what you can buy. And so in my mind, I was very clear of like, you know, geography is an important thing, industry is an important thing, size of the deal is important, but time is also really important. And so I kept all four of those factors in mind when I was looking for a company to buy.

Great. And while that all sounds, that sounds very logical, Rob. The counterargument would be the obvious, that buying a business that is not a good business is really perilous, and better to buy no business than a bad business. So the reason that people are very careful is because they, to your point, actually, they don't see that they can just, if they get into that, they can get right back out, or even that they can get back out in two years, that it's really going to be a commitment and they're going to be stuck if they don't like their business, or worse, the business doesn't like them and it's going in the wrong direction. Why do you think that you were so comfortable with the risk, essentially, of buying a bad business, whereas, whereas it can cause real paralysis or extra, extra conservatism from other guests you've heard?

Yeah, I mean, I think one is just experience, right? Having run businesses for, you know, going on almost 15 years at this point, there is some level of like, I've kind of seen a lot, I've done a lot, I've been in really bad times, like, you know, the situation where we lost 90% of our revenue and I had to take debt out to keep the company afloat. It's like, I've seen, seen bad times, and you start, I got a level of comfort with that and with handling the ups and the downs of the experience, so it doesn't affect me as much, uh, as it might somebody that's new that's coming in. And I will qualify, like, even having bought other companies, when I was buying this business, I had a little bit of that like, oh, am I really doing this? Am I really writing this check? So, you know, I'm still human, and I get that everybody kind of feels that along the way. Um, but I think fundamentally, you know, the business that I bought felt like it would be hard to truly screw it up where the business would straight up fail. You know, and enough equity was going into the business that I had some wiggle room to play with if it, if it really went poorly. But, you know, we'll get into this, other than a massive recession, I have a hard time seeing this business really like lose 90% or something like that. So I think I felt somewhat comfortable from that perspective. Plus, because of my budget and because of what I was looking at, it just tended to be a lot of blue-collar stuff that people need. Like, you need HVAC. If you live in any state that's getting hot right now and your air conditioning goes out, you're hiring an HVAC person, right? So there was some element of it like, I'm specifically going away from risk. I'm not trying to invent brand new technology that's never existed in humanity, right? The business I bought, you know, goes back to the Romans, so it's like, this business has been around forever, and it's probably not going away until the Tesla bot, you know, actually launches in a decade and and truly does the work that Elon says it'll do. So I felt protected from that perspective.

Yeah. Well, all of, I, I think all of this comes down to kind of where you're anchored. And because you come from zero to one VC entrepreneurship, startup entrepreneurship, where you, yeah, you are doing the thing where you're creating something new, putting it out to the market, trying to invent a product that works and demonstrate that there's actually demand for this product and that people will pay what you need them to pay and have it be profitable. I mean, there's so, there's so many unknowns there that we all know and why we all try to avoid that. And that was kind of your, where you were anchoring from. So coming from that and into small business, where market demand is, is, is there, it's just your ability to operate and execute that's really the more of the variable. Would certainly make it seem safer, and indeed it is safer. That's, that's that is the pitch of ETA. But, but would, so, but exactly, but what's so interesting though, is that people can come from ETA. They might, they don't, not everybody listening comes to ETA from where you did, from startup VC zero to one land. They might come to it from an investor's perspective, where they're really downside focused, and where they're really scared of, you know, going the business to zero, or they, you know, they're just, they're just anchored to a lot less risk. That's where they come. So this now feels a lot riskier. So it's kind of like, maybe, maybe I'm just, um, I'm, I'm convoluting the point that everybody has a different risk threshold, but I also just think it has to do with like, what path you enter ETA from. Is it a more risky place? Like in your case, then ETA is going to feel pretty safe. But for others, ETA, they're coming into ETA and they're going in a more risky direction. So could be that everybody, everybody's reality is their own. And I think at the end of the day, everybody has to make their own decision about their risk profile. And the other thing we haven't talked about too much is like, what percentage of your net worth is this? Right? Like if you have a million and a half net worth, but going to max out SBA, and you're going to take on a $5 million business, like, okay, that's super scary. Like, be thoughtful about that. You know, this was a smaller percentage of our overall net worth, and so I think that also helped to reduce a bunch of the risk. It's like, okay, I could lose every dollar, and it's not going to fundamentally destroy our lives. I guess from that perspective, right? And so I think that's another important thing. But for anybody that's listening as they're thinking about this from a spectrum perspective, you know, you can just analyze it for yourself. And I just want to provide a counterpoint that it doesn't have to take a year or two or three years to buy a business. You can get these done quickly if you want to.

Yeah. Well, thank you. That's another excellent point. Be going to my other point about anchoring, because we hear, oh, a year is kind of the norm, or we hear 18, a year to two is the norm. And so as a searcher, you think, okay, well, if I'm at month five, I still have a long time to go. It's a subconscious thing, but you're like, oh, I'm not taking too long because it's 12 to 12 to 24 months is normal. But that can be a little bit dangerous because it's kind of like, yeah, it doesn't give you the sense of urgency, or it doesn't cause you to act when maybe you could. You're just, your mind is anchored to this 12-month number. Um, and you did a good job of really resisting that anchoring, or maybe because you were just, I don't know, I mean, or maybe because you just had this great, this, this great insight that like, every day I'm not owning a business, there's a big opportunity cost of time. Or you're just thinking in shorter time horizons. You want this to be maybe a five-year project, where others are thinking about this over more years. I don't know. But you were able to kind of not have that influence your thinking.

Yeah, I think that really had a big impact on how I went about this whole process. And again, it's my way is not right for everybody. Yeah. But consider it as a counterpoint. And it was one of your podcast episodes where somebody was at the end of their two-year runway, and then they ended up buying a blue-collar business that they had passed over, and they're like, I don't want to do that. But at two years, they're like, all right, I need to either do this or quit and go get a job, right? And to me, that was just a little bit like, like you could have done that six months in, and then that was a year and a half, you could have already been down the path of paying down debt and growing your company, right? And so that struck a chord with me, and that also pushed me to go faster.

Great. Rob, well, it is a great counterpoint, or, you know, data point. Your story here. Okay, so tell us about the business that you found.

So I bought a three-territory Merry Maids cleaning franchise, which I have to say, when I was flying high with an AI company, is not necessarily something that I thought that I would have done. And I'm not perfect, I don't have everything figured out. There are definitely times where I have to check my ego and I'm like, H man, am I really doing this right now? But, you know, I'm, I think I have a plan and I've got a vision and I'm excited about that. And so it's like, I probably won't be operating a lot of the other businesses that I buy with this sort of kind of next chapter in my life, but I think going through getting dirty, doing the operations of the business out of the gate is just a good way to fundamentally understand the business. And basically, the calculus that I'm making, what I'm trying to do is, I bought a Merry Maids cleaning franchise, I want to go buy more businesses, and I want to grow my total EBITDA dollar value. So what I bought was about $200,000 in EBITDA, and I bought it for 2.8 times EBITDA. If I can go and I can grow that to seven or $800,000 in EBITDA, both from organic growth and from acquisition, I get arbitrage. And now I can get 3.5, four. I'm seeing some things here in Denver at 4.2 to 4.3. And so now, even if I'm taking on debt for these other acquisitions, the value of what I can sell it for is substantially higher. And again, in five years, you know, I could easily be at that number and be ready to then sell the whole portfolio off or recap it and then use the cash to go buy more stuff. And I don't want to burn two years of a five-year journey looking for a business to buy. And I think what's interesting about this business is that there's a lot of owners that have been in the space for decades, and it's getting ready to start turning over. There's more younger people that are coming into the space that are buying these types of blue-collar businesses. The person that owns the territory where I live, you know, they're over 70. That's a natural person to say like, hey, I've got financing, I've got everything. You've known this other owner that I bought from for 20 years, he'll tell you what a great job I did. Do you want to retire right here? Here's an LOI. And so that I think is kind of what, what gets me excited moving forward is just look at a rollup in this space and professionalizing it. And there is a lot of opportunity to professionalize and modernize this business.

Just on your point about the ego there, Rob, you said sometimes you're like, wow, I was on the cover of the New York Times and now I'm doing the Merry Maids thing. But you said then I have a plan and a vision. So what, what is the plan and vision that you feel like quiets your ego? Is it basically a rollup that you sell for a number of millions of dollars, and that's kind of that assuages your ego if you do that?

It does. So the goal is $800,000 in EBITDA. I've got a bank that will finance 100% of the purchase of additional territories. It's SBA financing, so basically for no money down, I can go roll up all of these other territories with a bunch of people who want to retire. There's things that are being done that are super analog, they're super slow, they're labor intensive, mostly from a back office perspective. I can make these businesses exponentially more efficient. You know, and let's just say round numbers, I pick up four of these businesses at $200,000 AP pop. Now I've got an $800,000 in EBITDA business that I can go and sell, let's round numbers, you know, for four times EBITDA, and I'll try to pick them all up for 2.8 to three times. And that really comes back to my massive calculus of moving from AI to Merry Maids is that in AI, you have a whatever percent chance, 1% 5% 10% chance to sell your company in 10, 5 years, and then you make your 20 to 80 million, right? And you, you feel great. But the odds are stacked against you that you're going to be successful. But you come into a business like this, and you know, if you're thoughtful about the business, you buy the right one, you've got a plan, I can then go and I can, you know, sell this rollup for, you know, $2 to $3 million. And so the, the $2 to $3 million is substantially less than the $50 million, but maybe instead of a, a 5% chance of success, I now have an 85% chance of success. So in, in baseball terms, it's like instead of trying to hit the home run and betting everything on that, like let's just go for a really nice single or double, basically.

Sure. And when you talk about that rollup plan, is that a concrete plan, or are you going to build, acquire these additional businesses, build up to $800,000 EBITDA, and then basically have optionality? So if you want, you can just keep building, then maybe you become, you just, maybe you diversify into up, buy other businesses and have some sort of holdco, or you sell, or what have you? You don't need to know that right now, sort of thing, or are you pretty committed to like a, a PE style rollup?

Absolutely. I want to buy and sell companies. I almost think of it, you talked about this as well in a prior episode, of like trading cards, right? I'm almost looking at these blue-collar businesses as trading cards, and like, let me collect a few, and then I'll turn those in, I'll get a better one, and I'll trade another one, and like, and I just want to kind of keep growing this portfolio. I think right now, although I could have massive access to capital because I've got a tremendous amount of experience in fundraising, I love the freedom of not owing anybody anything other than the bank, which has its own things, right? But it's, in my mind, it's fundamentally different because when you owe the bank money, as long as you pay your debt payment, you can, to some degree, do whatever you want with the rest of the money. When you owe investors, you need to account for every single little penny, and you, you need to know where everything is going. And from my perspective, there's a lot more pressure from that standpoint. So in this moment, I'm really liking the idea of having no investors, no board. I start smaller, I start more humble, I check the ego, but if I can grow and build this over time to something where I never have to report to an investor or a boss again, I think that's the ultimate form of freedom. And so I'm willing to check my ego, restart a little bit, and then start to build that up. I think it's 50/50, and it really will come down to how the next three to five years go of do I recap this and take that and go buy something else, and then I have somebody sort of run the cleaning, you know, portco, or do I just bundle it up, sell the whole thing, get a dump of cash, you know, and then go try to buy a, you know, $1.5 to $2 million EBITDA business, and then just keep, you know, ratcheting it up like that. It'll, I think in my mind, come down to right now, this business is fairly labor intensive, obviously, right? We sell labor hours, but it's labor intensive from me to manage this business. And if I can get to a point where I have the right people in place and the business is effectively running itself, then I think I'd hold on to it because the cash cycle in this business is fantastic, and we can get into that now, or we can get into that later, but I love, love, love the cash cycle of this company.

We'll get into that a little bit later. Um, so when you talk about Merry Maids being a three to five-year adventure, you mean Merry Maids specifically, but it sounds like in terms of buying businesses, you see that as longer term, in the way I just, like your, like this is your career now.

Yeah, this will be my career from now on.

Well, you're what, five months, six months into this new career?

No, I'm like two months into it.

Well, starting with your search in January. But yeah.

Oh, true. Yes. Yeah. But starting as an operator. Um, and actually, I wasn't gonna, I wasn't trying to make this point, but now I'm, it's occurring to me to make, how can you be so certain? Are you so smitten that you're just like, no, this is the way? What if you find out you don't like small business compared to the, the glory of startup land, for example?

Then I'll sell it and go do that. I mean, I think I'm looking at it from a freedom perspective, you know, like I'll have that ability to do that. But it does feel like a fundamentally different place in life to own this company where it truly is the first time ever where I like don't really have to worry about the the cash flow, right? Which I had with my custom software company. I don't have a board of directors to respond to with my AI company. And then before that, I had jobs and I had bosses. Like, it's hard to explain how free this business feels relative to the things that I've done before. And, and I'm not trying to be too arrogant with that, everybody has their own perception and everybody's had tough experiences with businesses, but your perception is your reality. And I came from a pressure cooker. So relative to that, I mean, and we talked about this in the pre-call, but I'd say my stress level is down 90% from where I was with the AI company. So it's just, it's all about your perspective.

Exactly. Yeah. Well, I guess, audience, that's the secret to buying a small business and having it not just beat the crap out of you, is just come from, come from do a harder one first. Yeah. Exactly. Like, like everything, just do harder first, and then scoot back down and then backtrack. Yeah, it feels a lot better.

Well, before we get too far away from just the transaction and the search, I want to ask a couple of follow-up questions there. We glossed over this, but it's an important point. Your net worth, it was probably bigger than a lot of the people listening, not huge. You never had some massive exit from Valiant, but you did say that you had the opportunity, there was a moment where you sold some stock in the private market, that was some liquidity. So you have a nice, this nice balance sheet. And forgive me, how much of that net worth did you see putting at risk?

I'll be a little cagey on that one because otherwise you can do the math on my net worth, but I'm to talk about the finances of the business. But it was a smaller percentage of my overall net worth. My wife would be really unhappy, but I wouldn't lose a tremendous amount of sleep over it.

So even so, if it went to 100% zero?

Yeah. If it went to 100% zero, you still have half your net worth left over, at least.

More. Yeah. Yeah. Okay. And and that is clearly, uh, a different, going back to this point about people taking two years to find a business, that is a big difference between them and you, is that, you know, a lot of people listening to this, they, you know, the business that they buy, they're putting all of their chips, uh, into doing that. So it's gotta, it's got to be a safer bet than than you were able to do. So very important. And, and I, by the way, don't know that I would do that. Right? And everybody is different, everybody has different perspectives. I don't know, especially if you have a wife and kids, I don't think I would risk everything. You know, I would take on investor capital before I would take on pure debt and go at my net worth or multiples of my net worth to buy a business because especially if you've never been an entrepreneur, that's how you don't sleep during the night. That's how you end up having a heart attack at 45, right? Like the amount of, uh, physical and emotional stress and the pressure that that puts on your family is huge. From my own experience, right? So, uh, again, just, it's, I'm one data point, but I, I would not do that because that, it's not fun when you can't sleep at night.

And follow-up point to this, so, so the business that you bought was $200,000 of EBITDA.

Yep.

And you bought it with, what was the structure of the deal? Tell us. I'm not sure you told us.

Super random. And I don't even know that we.

I talked about this point yet, but I bought the business where I went under contract in six weeks from when I started this process. This was the fourth offer I put in in six weeks, so I mean, like, I was getting after it. So, uh, one, one was a landscaping company, one was an HVAC company, one was a commercial garage door company, and then I got this, uh, this cleaning company.

So the, the numbers on this one, they had it listed at 650. Uh, I got the LOI accepted at 550,000, and I got the owner to take like 85,000 in seller financing on top of that. Um, but the reason I brought up the prior deals that I submitted offers on, specifically the commercial garage door company for a million in revenue, they only had five employees. And so I was like, I was like, that sounds great, like that's what I like, you know. And for contrast, I've got, uh, 13 employees in the cleaning company, and the landscaping company had 25. Um, and so I like the commercial garage door company, and I wrote a full-price offer with SBA financing, and I asked for a little seller financing. And they're like, you came in fourth of four, like we almost didn't even bother telling you that you didn't get the deal. And, uh, that was, that was offer number three. And so I realized, like, I need to find ways to make myself more competitive.

And so the offer I submitted for the Merry Maids franchise, I submitted an all-cash offer, but we used alternative financing for it. And just financing could put together faster. And so I put, you can take debt out on, like mutual funds and stock market investments that you have. I have Vanguard that let you take up to 50% of what you have invested with them as debt that they'll just give to you. It's called an i-lock. So I did a portion of it as an i-lock, uh, and then I did a portion of it as a mortgage on our primary residence, which my wife was not super psyched about. Uh, because we were able to get that paid off. Um, but I was able to get that done in like two weeks. So I was able to get all the cash together in a relatively short amount of time to then buy the the business and hit the timeline to close.

It's got some things that are a little annoying about it. It's not the end of the world, but especially as I look to buy a second and third company, I'll see what can be done to sort of recap and see if I can just get everything, you know, subsumed into one loan. But it did allow me to close very quickly, and I did get the deal.

Yes, but I, I would assume that those sources of of financing are pretty expensive. So why, correct me if I'm wrong, or maybe they're not? No, I mean, SBA is expensive. So at least, you know, when we're doing this in June of 2024, SBA is 10.75, or it was two months ago when I was going through this whole process. Um, so the investment one was right around there. It was like 11, 12%. So I will say that one was higher, but I got the, I mean, I got that in 48 hours. Like they write checks quickly if anybody wants to do it. Um, and then on the commercial loan, I think it's like 6.5, and that's what the bulk of the capital is that I use to buy the business. And so that's like almost half of what the SBA was. So that made sense from that perspective.

And sorry, the the commercial loan by that you mean the second mortgage on your home? First mortgage, we had our house paid off, right? But you can also do a HELOC, and so that's an option as well. And they'll loan upwards to, uh, 80%. I don't know if it's 80% of the value or 80% of the equity. Um, but you can get HELOCs again within a week to two weeks. You can get pretty attractive interest rates on those that are substantially lower than SBA financing.

Good tips here, Rob. Surprised I don't hear about these these instruments more often. They're just nice to be competitive. So if you're writing offers and you're getting your butt kicked by all-cash offers, these are some tricks you can decide if you want to employ or not to have a more attractive and a more aggressive offer. And and when you put in the offer for the Merry Maids and you knew you were going to have faster access to this capital, did you just articulate that as part of your offer? It's like, this is, these are my sources of capital. I can get them done in a couple weeks. They didn't ask, and I didn't tell them. I just said it's cash. Don't worry about it. It's not SBA.

Okay, okay, okay. And they never were like, specifically, where's the funds coming from? And I didn't offer it up.

Okay. And the third deal that you put an L, that you put an offer on, and it was rejected, and they said you were fourth of four, we almost didn't even bother telling you your offer was so unattractive because you were the only SBA. You were SBA. No, three, we were SBA. Only one was all cash, and the all-cash offer got the deal. Uh, the second, third, and fourth place, we were all SBA. And then I was the only one of the four that asked for seller financing. And so I asked for, I think 10 or 15% in seller financing, which wasn't even, in my opinion, that aggressive of an ask. Um, but it's again, June 2024. It's a, it's a tough market out there right now. It is definitely a seller's market. Um, and so it's really hard when you're asking for them to carry debt, 'cause even with SBA, which has some pros, has some cons, they get all their money for the most part right when the deal closes. And so my banker at the time, I think he said only like 20% of his deals that he was working on had seller financing. Really? So it was a very unattractive tool in my very, very small data pool.

Oh, that's so interesting. I, clearly have a different set of data in my guests versus your your lender because I feel like almost all of my guests do 10% or something, their give or take. Yeah, yeah. And this was just one lender, and this was just Denver, and this was just March, right? Or April, you know, when I was getting this deal done. So everybody's going to have their own data point. That was just my direct experience of actively writing offers.

Okay, okay. And but I did, for contrast, get seller financing on this deal, right? So it's still not 100% from a data point perspective. And jumping a little bit forward, but since we're on the topic of financing now, tell us a little bit more about this, this agreement you have with a lender now who will allow you to roll up these businesses without any additional money down. Where did that come from? How did you negotiate that? Tell us more, please.

Yeah, so this is Huntington Bank. I think they're a regional bank, um, but they're pretty big out here in Colorado. And so I mean, I met with probably five or six SBA lenders when I originally thought I was going to go that trajectory. I really like the guy that I was working with on this transaction, but then after I lost the deal because of SBA and because of asking for seller financing, I just told him I was like, look, I'm going to try to put this alternative finance together so I can get these deals done. Like, I'm sorry we can't work together, but I really liked you. And he was like, totally fine. He's like, I get it. Just so you know, if you want to go buy more territories, we will finance 100% of the purchase once you are in the system. And you still got to meet some of our like debt coverage ratios, they have to be viable businesses and yada yada yada. But for no money down, we will finance all of your other purchases.

Now, I haven't done one yet. I'm going to hold their feet to the fire here in about six months, and so we'll see. Um, but yeah, that's what I'm shooting for. And he said that they would do that for both acquisitions of existing Merry Maids businesses and for whitespace new territories.

And so what does that tell us? Does that tell us anything that we can extrapolate? Do SBA lenders in general just really like franchise system rollups or franchise system development? Or just it's just a, you, you'd be hesitant to to extrapolate this is just what this guy does? Yeah, I'm, I'm meeting them for coffee next week, so I'll keep grilling them on the details. Um, but I think if nothing else for anybody that's listening, it's a question to write down if you're interested in these types of existing franchise systems. I don't know if this is an SBA deal. I don't know if this is a Huntington deal. I don't know who is making up that 10%. That'll be all the stuff we'll find out next week.

Well, now, and let now let's turn our attention to the fact that you bought a franchise. I don't think I heard that as one of your eight criteria that it be franchise or not be franchise. Interesting, 'cause that's always, that's usually one of people's key key criteria. And usually no franchises. I was very against it on the front side. And then, uh, somebody kind of forced me in a friendly way to take a look at a new franchisor that's getting going called Rolling Suds. Sure. Um, mean, they're like a power, power washing business. And so I was like, looking at the unit economics and I was like, okay, I kind of get this. I think both of my prior businesses, they're the zero to one startup. And it's a little bit of, you know, when you don't have a lot of knowledge, it's easy to be blasé and arrogant about it. So I'm like, you know, I don't think I really need the franchise system. Like, I know how to start businesses. I have great marketing people and accounting people and branding people. Like, why not own 100% of the whole thing? Um, and so I think I was initially very against it until I started looking at some of these businesses and then starting to get in and look at some of the details on it. Um, and honestly, I really like it. I, I like the infrastructure. I like that there's all these other owners. I like that everybody shares their data. Like I've got my P&L uploaded into an online platform that Merry Maids uses, and I can benchmark myself against everybody. And so I can see like, where am I spending too much? Where might I be spending too little? You know, what do you want to do? Take it from a million to two million. All right, we'll call the guy with two million. What do you want to do? Buy cars. We'll call the guy down the road that's got cars, right? He'll tell you his insurance agent. So there's a, a level of information sharing that I think is really, really nice. And it is to some degree nice to have this sort of step-by-step playbook. And I actually just went last week to Merry Maids train out in Memphis, Tennessee, and it was a week, and it was insane how much information they tried to impart on us while we were there. Um, one of the other more sophisticated owners that was there when I was there was the former CEO of TGI Fridays, and he was buying a Merry Maids location down in Florida for his wife. And he's currently a GP at a large private equity fund. And he's like, I've been inside of a ton of franchise systems, and he's like, I'm very impressed with Merry Maids. He's like, I would consider this training and this process in the top court for franchise systems. And so there's a lot of places where I've gotten lucky so far with this business, and I think that was one of them because they really didn't do a tremendous amount of due diligence on the franchisor or the health of the system, the relationship, because there are some franchise systems where the franchisees and the franchisor like hate each other, and there's a tiny bit of animosity at points in Merry Maids, but by and large, I would say it's a pretty healthy corporate entity.

And what of how mature is it? So, and and just to plug Brian Beers, who's been on the podcast a good year and a half ago now, you probably know Brian, the guy who has, he and his brother have 30 odd Midas, uh, franchises, franchise locations, or excuse me, maybe it's, it's 30 million, but I, they're probably a million per shop. So yeah, it's probably 30, 35 locations, yeah, in the Philadelphia area and beyond. And his whole thing is to roll up franchises and look for mature brands where a lot of the owners are going to be Boomers. Midas is a decades-old brand, so perfect fit. How does Merry Maids fit against that, exactly?

So Merry Maids pretty much sure right down the center of the fairway. So Merry Maids was really the first national kind of corporate franchised cleaning business. It goes back to the mid to late 70s. Um, and then the owner sold it in the 80s to ServiceMaster for, it's like $10 million or something, which in the 80s is a massive amount of money. And then it was run as part of the ServiceMaster business up until the early early 2000s or 2010s. And then it was sold, uh, to RoR Capital. And RoR, for anybody who doesn't know, owns like half of the fast food franchises in this country. And they've got, uh, I think eight different kind of home and business-based franchised businesses, of which Merry Maids is like one of the eight. So all RoR does basically is run franchised businesses. And so I think they have very good systems and processes in place. They've just brought over several of the from Dunkin Donuts, which RoR bought for, want to say it was like 11 billion about 18 months ago. And they've now moved into Merry Maids, and their focus right now is a system is to triple the size of Merry Maids over the next five years. Um, and so RoR's investing a bunch of money. And I would say 60% of the owners are Boomers, with several that are in their 70s. Um, and they're all looking to start retiring. And then cleaning as a whole, which was very attractive to me, is extremely fragmented. Um, and then as a result of that, there's massive amounts of customer business that can be won. And the labor pool is so challenging that there tends to be a lot of customer churn. It's not like I'm a point of sales system company, which I dealt with a lot in restaurants, where it's like, well, we've worked with these guys for 20 years, we're just going to keep working with them, right? Like, you know, the average life cycle of a customer with a cleaning company is like two to four years, and then they're coming up and they're unhappy for one reason or another, and they're looking for somebody else. So businesses for fragmented customers are fragmented. I would consider a fairly healthy franchisor entity, and I think that's a really nice recipe for rolling up businesses.

Well, this point about the abbreviated life cycle of your average customer, although two to four years is is is a lot longer than one-off project-based business, let's say. Um, but I should say, I've got customers that go back to the 90s, right? So it's not across the board. So I do have customers that have been with this specific territory for 30 years.

Okay, all right. But you are painting a picture of basically dealing with fickle consumers who we, who we all are in our private lives when we're not business people. Um, and and so you feel like by applying best practices, that actually is an opportunity, not a threat.

Oh my God, there's so much opportunity. So I secret shopped the Merry Maids where I live when I was looking to buy this business. The entire process from my initial outreach to like finalizing the payment and concluding the transaction was a week. At one point, they're like interviewing me on the phone to learn about my house. And then I don't hear from them for four hours. And then I get an email with an attachment that's a picture of a carbon copy receipt. So somebody like wrote down all the notes when we're talking, and they're like, I don't know, it's like 400 bucks, and they circle that, take a picture of it, and then email it to me. Like, it's very, very antiquated. Um, today was actually the first day, but I just joined the IT Council for Merry Maids specifically. So from a big picture perspective, I can start to help move some of these technology initiatives forward. So I would say, you know, problems from a brand perspective, they have no mobile app, no website, no real e-commerce presence. It's still a very old, very analog business. I mean, when I came in here, 90% of the operations of this business was run on paper. We're probably down to 5%, and we're going back and we're shredding 30 years worth of data. Like, don't know that we need that customer's credit card info, you know, stuck in this filing cabinet. Um, and so there's just, there's a lot of opportunity to bring AI in certain places, software in a lot of places. I'm using virtual assistants where I can't get software, um, to try to automate and sort of speed up the process of running these businesses and professionalizing the company.

Well, let's, let's hear about a few of those specifically, Rob, because we, we talk about that as a, we often just kind of gloss over that, putting in tech, improving the processes. What are two or three hard examples that you can give us of stuff you've done in the business to make it so much more tech-forward so quickly?

Um, not a 100% tech, but one is call center. So system-wide, Merry Maids averages about 14 to 15% of leads are converted. When I started, and I was taking customer calls and I was working on quotes, I would average about 21%. Um, but I've now brought on a call center company, which was one of your prior guests, Gary at Top Dog. And when a customer picks the phone up, they have a 40% conversion rate. And so those are opportunities where you don't need to buy more leads, but if you're converting three times more customers than the system average, like you're going to grow like without a doubt. Um, and so I think that's one of the key things. And even here, where I'm like in the day-to-day of the business, it's hard to take leads because I might have an employee walk in, I could have another customer that's called me, I might need to be out doing something. And and I in general just don't want this business to need me. And so if I have to be here to take calls, then I have to be here, and that's not what I'm looking for in this type of a dynamic. And so I'm automating and I'm outsourcing. That corporate has just started to test their own internal call center, and they're running about a 20% conversion rate. So for your average rank and file Merry Maids employee, that's still a substantial improvement from when they're doing it themselves. Um, but I, I think it can be a lot better. And when I look at the franchised home services businesses that I want to emulate, most of them are private equity backed. And one of the things is that when you call them, they pick up right away. Or if you submit a lead, somebody's calling you within like 60 seconds. Like that is modern home services, right? And in some of these situations with Merry Maids, it can take hours for somebody to get back to you and talk to you. And it's like the CEO of Home Advisor, which is now Angie's, they say that if it takes you more than 16 minutes to follow up with a customer, your chances of closing that customer go down by 80%. So speed to lead is super, super important. And so getting that call center automation, I think was really helpful.

One of the other things we started looking at, and I will say this was not successful, was starting to build e-commerce where you shouldn't have to call and even talk to a human. Like if you're a millennial and you just want to get online and you want to type in the data for your house and you want to get a quote, do it. You know, you should be able to get a quote in five seconds. You shouldn't need to wait an hour for somebody to call you back and then take you through a 15-minute questionnaire. Um, I built a prototype of that within 30 days of starting, but we use Salesforce as our backend infrastructure, and it's an old instance of Salesforce, and it just has no real modern API infrastructure. And the way that we price is also a little convoluted. So we didn't find the conversion rate to be as good by giving the automated quotes. And so now we're just going really heavy into the call center and just trying to get back to people within 60 seconds of them submitting a lead and trying to pick up every single time that they call. So those are two examples.

It's great. Thank you. What else did you do? Take us now a little bit post-transaction, and what has the transition been like? Two months into the business, how's it going?

I mean, you've, it's going really well. Yeah, I mean, I just completed training, so that's always good, right? It gives you a ton of energy and vigor and and motivation. So I think that's really good. I'm probably averaging about four hours of working in the business, and I'm constantly with my other four hours focused on how to get that down as much as possible. And so I would say that at this point, I have 80% of the day-to-day operations of the business off onto my office manager and my like lead house cleaner are basically handling the bulk of the work. And now I'm building up a VA. And the goal of building up the VA is I can take work off of the office manager's plate, and I can have the office manager start to focus on retention. And so that's the next critical thing is like, we need to hire better, we need to train better, and we need to do better quality for customers, and we need to do better follow-up. And so that's all the stuff I'm going to be working on over the next 60 days because right now we have very high turnover. And so then it doesn't matter how much money you spend on PPC or how many leads you convert, if you're losing the vast majority of those customers, you're not really moving your business forward. So I did a lot of work on inbound leads, which are going great, and call center, which is going really well. And now I need to turn my attention to focusing on retention and providing a best, better customer experience. Um, and then I'm actively starting to network with all of the other Merry Maids owners around the Denver metro area, especially if I can get the 100% financing letter in place, then I want to be their like go-to that, hey, if you're late 60s, 70s, you're burned out, you have a tough day, oh, look there's that like LOI sitting on my desk from Rob. Let me give him a call and see what the opportunity is there.

The turnover that you're experiencing with customers, that's because that's the nature of the business, or because the quality of your, of the business's service left something to be desired?

I think it's both ands. Um, but quality is definitely an issue, and I can own that. I don't come from a cleaning background. I don't have all the knowledge. Um, I inherited a lot of systems from the prior owner, who, um, this is a super random tangent, his name was Brian Peterson. His dad, actually, founded Merry Maids when he was like, yeah, my dad started it. I was like, oh, you mean this location? And he's like, nope, he started the entire business in the 70s and sold it to, he was the $10 million exit guy. Yeah, yeah, in the 80s. And Brian was his last son that was still running a a Merry Maids location. So, you know, there's a lot of really good things that Brian was doing, but there were a lot of probably not best practices as well. And I inherited a lot of those. And I think some of those were leading to turnover. You know, last year, turnover was close to 200% for labor. And I think there's a direct correlation between labor turnover and customer turnover because if you're a customer and you're inviting somebody into your house, your private space, and every single time it's a new face, and they don't know your intricacies, and they don't know how you like your couch vacuumed, right? I think personally, that that leads to a lot of turnover. And so if you can find good people and you can retain them, and they do a good job for the customer, you should extend that timeline and that LTV of the customer. And so starting Monday, when I got back from training, I'm now super focused on that. One of the first things that we're doing, we used to invite people in for a working interview, and then we would just send them in the field and kind of sink or swim. How do they do? How did the team captain say that they did? And then, okay, we decide if we bring them back or not. You know, now we're going to, you know, take the jump. We're going to invest in them. We're going to keep them back in the office for several days. We're going to do a bunch of training with them, and we're going to try to send them out into the field significantly more equipped than what they were previously.

You just run the risk that they go out and do it for a day or two, and they're like, wow, this is really hard, or this sucks, or it hurts my ego, and they bail, and you've invested already a bunch of money into them on the front side. So it's, I think for me, it's more conversations from a labor standpoint. It's being a lot more choosy about who we bring in, and then it's significantly better training, better support, you know, better guidance when they're in the field.

And but would you say that it is characteristically a bit of a high turnover labor pool? So it's, Oh, absolutely. Yeah. And that's just because, I guess, it doesn't take any, I mean, to the extent that you can train them all the better, but it doesn't take any schooling or certification or anything. Uh, and so it's a kind of people, I imagine it's a very fluid workforce. It's a very fluid workforce. Yeah.

Okay. And it's different, you know, coming from Valiant and the company before that, you know, I'd average 5% turnover per year. And now, like system-wide, the average is like 100% turnover per year. So I will also say right here, any business you buy, my own personal opinion, it will have a problem. It will have a red flag. And I think a lot of people, that can lead to the delays in what they buy because they're like, I don't like that red flag, flag, or I don't like that red flag. I think you've got to pick which red flag you want to deal with because very few businesses are perfect, right? And I think labor is a challenge to this business, and I knew that going in. And part of what I wanted to do when I left the AI company is like, I'm tired of solving the same problem over and over again for seven years. There's always problems as an entrepreneur. So like, give me a new problem to solve. So labor is now my new problem that I get to solve.

Well, I love your pick your poison point because it is so often, I think people come into this space looking for no red flags as opposed to looking for the type of problem that attracts you. Because if you can find your brier patch, then it can be, that's really what you want, because there's going to be, there's going to be no business that is easy or perfect or problem-less, otherwise it wouldn't be on the market, probably.

Yeah, and I mean, I have deep discussions with all my friends that are entrepreneurs, and nobody ever says, oh, it's perfect, everything's great, I've never had a problem. Yeah. And if they do, it's like, you're lying and you're not upfront, like, what's really going on? And when you get a truly transparent and significant amount of time with other entrepreneurs, like it all you do as an entrepreneur is solve problems. It's all you do. And so every business has problems, you just pick which problem you want to work on.

Yeah, yeah. It's such a good way to see things. Let's hear a little bit about the cash cycle, which you were such a fan of. You have now been in businesses where working capital was a big problem, I guess, in your agency business or in your development shop business, and now working capital is not a problem at all. So it's a topic that comes up again and again on this podcast. It's seemingly easy to understand, but it's one of these where you only really understand it when you experience it. So tell us what you can about how magical it feels to have a negative cash cycle.

Yeah, indeed. Uh, I'll go back just a little bit to to provide perspective because again, everybody's perspective is their own, and things I talk about, people might feel totally different. It's just my perspective, my data point. What, uh, I, I'll just, it's the negatives. What I hated about the agency is that it's all project-based. There's no recurring revenue. You know, so if you don't close customers, suddenly you got a bunch of labor and staff, and you don't have money coming in to service those customers. And then generally, and I know some people do it better, we didn't do it great, but we'd get paid, you know, a third to half up front, a third along the way, and third to half at the end of it. But when you're doing custom work, there's almost always misunderstandings. And I mean, we'd get to the point where we'd have like 60, 70 detailed wireframe documents of what we were going to build, and we would still have arguments with the customer. And it's the customer would be like, well, it just makes sense to have X feature. And we're like, I get that, but we didn't estimate it, and we didn't put it into our budget for you. We can't do that. And then you end up in these really conflict-based systems. So for me, when I was looking at this business, kind of my third main act from a business standpoint, I was like, I don't want any project-based work. I do not want to be arguing with people about budgets and stuff like that. And we had three to five customers at a time. So I also really dislike that element of it as well. With, uh, the cleaning company, I've got 200, right? So I don't have any customer concentration issues, really. And it gives you, in my opinion, a lot more leverage around negotiation and pricing versus, oh, I've only got three customers. I've got bandwidth for five. I really need to get that fourth and fifth customer in the door so we can make payroll. So I'll offer better deals. I like any of that also. And I, I have this in the residential cleaning company. I really don't like dealing necessarily with individuals. Everybody is always more stressed out when it's their personal money because we worked with a lot of entrepreneurs in that custom software company. And so in a lot of situations, they were taking out 401ks, they were taking cash out of their checking account. They were so much more intense about it versus when we started to work more with customers, it's just somebody's job. Like it's just a job. It's not even their money. It's the company's money. Like the stress level working with an individual on custom projects versus a business on custom projects was like 50% lower. And so I've always to this day just sort of liked commercial customers more because of that. And then a lot of that carried through with the AI company, where you're dealing with these huge corporations. They can be slow, which was a challenge, and we had massive customer concentration. We might have only had one to three customers at any given time. So there was so much pressure to make every single one customer work and not leave, which was very, very stressful.

Getting to your question, what's glorious about this business is that we charge customers day of. So if it's a $400 deep clean of their house, the team heads out at 8:30, and by 8:45, my office manager is going through and charging everybody. So we're collecting all money for that day, you know, within an hour of the day starting. And then we don't pay people until a week later. And as we all know, labor is one of our big expenses, right? And so let's say that day was a Tuesday, so then you go all the way to Friday, and then that starts the the week period, and then you pay them a week from then. And so you collect all the money, and then you don't pay anybody for one to two weeks later. So you basically, you don't really need working capital unless you're going to be making investments to grow the business. So anytime you can just bill people, which is more residential than commercial, but you can bill them the morning of that you're doing all the work, is amazing. And it's all agreed to upfront, so there's no negotiation around pricing and things like that. We don't discount it if we're out earlier, and we don't charge more if it took a little bit longer. It's just that's what the price is. We've already charged you. We'll be back in two weeks. Um, and so I really, really like that element. A lot of businesses, especially when you have commercial customers, you know, you could be net 30, net 60. I have a friend that works with the government that can be net 120, right? So you've now outlaid massive amounts of cost of goods sold and labor and things like that, and then you're not going to get paid for one to four months later, right? And so then your working capital needs are massive. And you've had guests that are like, I love that. So this is my perspective. Everybody do their own thing. Uh, I love getting paid well in advance of having to make any payments to anybody else.

That was fantastic, Rob. Pretty, pretty convincing as well. Okay. Um, all right, I want to start, uh, wrapping up, but I, and I want to kind of zoom back out, but just one more in the weeds question about your current business and your plans for it. I don't think, did you tell us what the revenue of your, of your three territories are? Your the total revenue?

Uh, it's, it's a, it's a million. A million bucks.

Okay. So this is a 20% 20% net margin business. Um, where do you think that you can get it in another two or three years? Of course, so much of that is contingent on how many other territories you can acquire, but what's your, what's your spreadsheet say?

Um, I mean, I think within 12 months, I could grow 50% if I can get the retention stuff dialed in, and I've got a couple months to get that figured out. But that's my goal is to grow, be at, yep, organically to be at 300,000 in EBITDA instead of 200,000 on a 12-month, uh, look forward. I think, uh, I could probably get this one to 2 million in topline versus 1.5 million in topline, which is the 50% growth. But that's probably getting close to the top. So maybe I could get this territory to 400,000 in EBITDA, but I think 300 is a well-run business, and 400 is I'm a rockstar within the system. Um, and then from there, it's buying the other territories. And I get the sense that a lot of the other territories are doing about the same, about a million, about 200,000 in EBITDA. And so in my model right now, I'm just looking at growing this one by 50% and then just tacking on other $200,000 business locations. Um, obviously, long-term, the goal will be to grow all of them because the more total dollar figures I have, the better the multiples are at exit.

Sure. Well, as I think about a lot of what you just said about the lack of working capital needs, the very low capex here, and the deal that you have that's the handshake deal, nothing set in stone yet with your lender, you know, it really seems like you could acquire, you could acquire really quickly because you're in a franchise system, so there's very little to no integration that needs to happen. Everybody's already on the same systems. Um, all you really need to scale up is kind of your recruiting function. Although I guess every territory there might be quality improvements that need to be made, like actual service delivery, just like you're experiencing here. And so that there would then require, that would require a training regimen and standing up a training program. So not to, not to minimize it, but there's, this is such a light business, an asset-light business, and it's so systematized, and the cash cycle is so favorable, and it's in a franchise. I mean, it just, it feels like one where you could, you could start knocking down some dominoes pretty quickly.

Okay, well, you've convinced me. But, but am I, am I, is that not Rosie? You're feeling the same?

No, I would agree with you. Yep. I feel totally the same. I think you can have office managers in each one of the individual territories that you own, and then you can start to split costs, whether it's a trainer or QA person or a virtual assistant, you know, and you can spread those costs out over multiple locations. Plus, at 200,000 in EBITDA, it's not a lot compared to a lot of businesses we've talked about, right? So you tack on debt, and you tack on my salary, not a ton that's left over to invest in the business. But you go buy another $200,000 business, $200,000 EBITDA business, and you've got 40 to 50,000, let's say, in debt. Well, that 150 to 160 now acres to the bottom line, right? And so I think that this is a system that once you get going, the momentum will start to carry you forward from that perspective. And, you know, there's one side, which is just take the debt, get the lower multiple, and there's another side, which is go to these owners and say, hey, let me take over running your business. I'm going to automate a lot of stuff, we're going to professionalize everything, we're going to standardize everything. Come along for the ride, and in three to five years, join me in this, you know, exit multiple, whether it's a recap or a sale.

Come along for the ride, meaning what? They retain a chunk of the equity? Roll a bunch of their equity in? What's your incentive in doing that? Why wouldn't you want to just say, thank you, sir, Madam, but I'll take over from here? I don't have to go from talk to my wife about taking on a bunch more debt.

Yeah. Well, I wanted to ask that. How's she feeling about this about this adventure? A couple of times you've said she needed some arm twisting. She's feeling good about it now. After I was home for four or five months, she's like, dear God, get out of the house. She's like, go do something. She's like, you need a toy to go play with. Go entertain yourself. So she's happy. And again, stress levels down like 90%. The, the home life is is massively better, not only because my stress is down, but she's actually been off of her cancer meds since last fall, and she's still going strong. So great. The doctor's like, if it's another like year, we can call it a remission. And if it's another year, two years after that, we could call it potentially a cure. And it gives me goosebumps every time. But the medicine she's on was approved by the FDA 30 days before she was diagnosed. W. So it's just crazy. And anybody that's touched by, you know, cancer, the only thing I would share real quick is that cancer today is not what cancer was 10 years ago, and it's absolutely not what it was 30 years ago. It's amazing how far they're coming with some of these medications that they have. And maybe it's not an outright cure, but it's, it's almost like the HIV drugs when they came out, they extended everybody's life so long that it bought time for more and better drugs to come out. Yeah, and I think that's what we're starting to see, uh, right now.

Well, the pattern that she, that you just described in her case, that where she was just within 30 days of, she just kind of just reached where this drug was released, and she could take advantage of it. It's what we hear about this phase of longevity, that eventually somebody's going to be born pretty soon, we think, or futurists think, that is never gonna die because they're gonna, they're gonna be, is that, does Ray Kurzweil talk about this? I know he's the futurist guy. Yeah, where if they can, if you can just get to the other side of when some drug or some development in health is released that extends you long enough to buy you enough time to then be alive for the next one. Level, it kind of perpetuates itself, and then you've got escape velocity, and you're alive forever. So my, I'm a total like sci-fi nerd. And so I don't know that we can get our bodies to do that, but I think what we would be looking at is some ability to upload our consciousness. Because if you really think about it, your brain, what makes you you, your personality and everything else, it's just little neurons that are firing back and forth. And some, some people think it's other things. I'm just saying from a purely scientific perspective. And so it's like, could you map those 80 billion neural connections and recreate that in another environment? So sure, that's how I think I could see people living forever.

Sure. Yep. Um, well, good segue to my last few questions, which is, which is circling back to the top now and tying this all back up to your experience in a high-flying AI startup. Two questions. First, on the My First Million podcast, Sean Puri will talk about startup business as kind of the Olympics of business, you know, at the highest levels, the highest stakes, the most competitive. Um, and business doesn't have to be that. You can, you know, you can compete at frankly an easier level and still have a wonderful life and wonderful outcomes and get wealthy and be a self-employed entrepreneur, etcetera, etcetera, etcetera. So coming from the, the, the, the Olympics business Olympics, as you, as you did, is it, do you find that basically this is easier? I mean, are, is this kind of the phrase that we, we kicked around on the pre-call, is this you bringing a gun to a knife fight because it's, it's just the business is easier? You're, you're not building cutting-edge technology, the competition probably isn't as stiff or as ambitious. The many different facets of of the business here being different than what they were at a high-flying startup.

I, I mean, it's massive. It's night and day. It's, it's hard to quantify. I've met a lot of really, really wonderful Merry Maids owners. The vast majority of them are individuals that have worked in the business for 10 or 20 years, and the owner has retired, and the manager is basically like, oh, I might be out of a job if you sell or shut this company down, so I'll take an SBA loan to buy it. But they don't have any real professional business experience in terms of running the overall organization. And they, they generally by and large, what I've noticed, probably don't have traditional education. Um, and so it, it very much is a different, uh, situation coming from, you know, 15 years of experience of running companies and a master's degree and all that kind of stuff. But I don't know, it's dicey. I get too far down this path and then it's just arrogant. So all I'll say is like, I feel well-equipped to be successful in this space.

Yeah, but I, and I, and I do just want to, um, explore this for a minute because one of the things that you often hear, one of the cliches about businesses down here is small businesses are small for a reason. And it's not that the owners are incapable, it's just a lot harder than it looks. And the scalability, for one thing, you know, when you're dealing with humans.

Like there's just kind of there's there just the the friction there is just you can't outsmart that in some ways. But it doesn't, you you feel like maybe it really these businesses don't have to be that it's not their fate to be small forever. That with the right appetite and the right whatever critical thinking or, you know, more sophisticated business skills that you bring from from an AI startup down here, that indeed these don't have, these aren't, these aren't destined to be small businesses.

No, I agree with you completely. I think these things can absolutely be scaled. I think, you know, I'm guilty, and I think other people are guilty of it's easy to look at a business from the outside and be like, oh, what are they doing that's crazy? They don't know what they're doing. And you get in and you're like, oh, wow, they're actually pretty sophisticated, right? You know, in usually in terms of the the operations of the business, there's there hasn't been quite as much sophistication around, well, we've done it this way for 20 years, so I think we just have to keep doing it this way. So there is significant benefit for your listeners, for myself included, that you come into these businesses with a fresh set of eyes. And it's like, why are we printing all of this stuff? This doesn't make sense. Like, you know, you got to be careful you don't change too much too fast. But I have found by and large most of that stuff is like, well, we've just done it this way for 30 years, right? Like, I mean, I had to throw out like fax machines, desktop computers from the late 90s, right? Like there was just so much physical, digital paper, you know, legacy that was going on that it just needed to be cleaned out and things needed to be looked at from a different perspective.

Um, there's also just some fundamental things where like most people in this business, whatever is left over from a profitability standpoint goes to them. They work really hard. And so they have a hard hard time saying like, well, the franchise wants me to spend 5% on marketing, so I'm going to spend 2%. So it's more money that comes to me. And I'm coming in and saying, I'm gonna spend 10%. You know, like I'm GNA just dump a ton of money into this thing and try to like get, you know, get escape velocity from some perspective. You know, depending on how localized you are, I think you start to run up into some type of infrastructure constraints. And then I think you need to start looking at buying other territories, opening up new locations, things like that. That within any demographic market at some point, you're either saturated or there's only a certain number of people in my case, every month that are looking for cleaning services, right? So there there I think there are some of those natural limiters on it. But there are ways to grow, uh, asymmetrically, right? Right, namely acquisition, correct? Okay. Um, or expand, or you could expand into other, you know, verticals and things like that. I could buy a commercial cleaning company, or I could buy a window cleaning company, right? There's bolt-on things. There's other ways to.

And then the last question tying back to your previous experience, Rob, the how do you feel about just the intellectual stimulation? So before you were working on cutting edge technology and deploying cutting edge technology into a use case that could really be transformative in a way that was really visible to consumers. I mean, those of us who eats fast food, raising my hand, um, we we experien the drive-thru and and that could you could really be, you know, bringing a a large change to society. Um, there's excitement to that. And this is not that. How does that feel right now?

I just feel liberated. I feel that feeling of my wife just wants me out of the house. She's like, go do your thing. I have no board to respond to. I have no crazy cash cycle, working capital crunch issues. I get to play with different projects. You know, call center, it took 30 days to get stand up and get humming along, right? So some of these things can be done pretty quickly versus like AI, it's a multi-year, multi-decade process. It's really fun to have like an idea, implement it, and be like, that's great, let's scale it. Or like, yeah, that sucked, let's let's take that down and let's try something else, right? I think that especially there was a lot just to learn the business, the lead up to training, doing training, now coming back with a massive amount of additional things that I want to tackle. I'll be busy for the next few months. And then I think I'll have it pretty optimized and automated where it can be and VAs where it can't. And then from there forward, I think then my focus moves towards the acquisitions and growing from that perspective. And so I think those things will keep me interested. If the ability of the hold code wasn't on the table, additional acquisitions for whatever reason weren't on the table, then I think there would be a real risk that in another six months it'd be like, all right, I'm starting to get kind of kind of bored with this process. So I don't know, have me back in a year, we'll see what's going on at that point.

Yeah, indeed. Rob, anything that we didn't get to that you wanted to share with the audience?

Um, I mean, again, the reason I reached out is just it's one data point. You don't have to do it, but if you want to, you know, from kickoff to under contract, it took me six weeks. And from, you know, contract to close, it took me six weeks. So it was 90 days end to end from starting my search to owning a business. So it is one perspective. You can go fast if you want to. Uh, and look for businesses with with negative cash cycles because it's awesome.

Great, great, great pair of takeaways for the episode. Rob, if people want to reach out, uh, how can they do that?

Uh, email Rob Frost, Rercapital.com or LinkedIn. Although now that I'm post my big AI tech startup, I don't spend as much time there. So feel free to feel free to email me. I'm an absolute entrepreneurship nerd, so I love talking to people about this kind of stuff. At least half a dozen of your prior guests have taken my calls and chatted with me and given me advice. So I think it's a really cool community that you're building. And last thing is just thanks for doing this. This is super super, it was for me super valuable. I think a lot of other people find value in it. So thanks for being here and thanks for helping the community.

Well, I appreciate that, Rob. Really nice of you to say. Uh, wonderful point to end on. Rob Carpenter, thanks a lot for coming on. I hope you enjoyed that interview. Make sure you subscribe to the Acquiring Minds channel below. We are now publishing twice a week, so tons of new interviews and stories to come, stories that will help you along your own path to acquiring a business.