Brent Beshore – Update on Small Business and Private Equity - [Invest Like the Best, EP.164]

My conversation today is with my close friend Brent Beshore. Brent is a private equity investor who owns and interacts with many small businesses, which have been hit especially hard by COVID. We discuss the various impacts that COVID has had and may have on both small business and the private equity investing community. Brent also proposes some policy actions which he thinks may help those most in need. Please enjoy. For more episodes go to InvestorFieldGuide.com/podcast. Sign up for the book club, where you’ll get a full investor curriculum and then 3-4 suggestions every month at InvestorFieldGuide.com/bookclub. Follow Patrick on Twitter at @patrick_oshag Show Notes 1:13 – (First question) – What Brent sees as the current landscape for small businesses 3:25 – The real problem for small businesses right now 6:02 – How long can small businesses survive these freezes 9:14 – Ideas to help businesses stay afloat during a global shutdown 11:01 – The cost of restarting businesses on the other side of this 13:41 – Policies that could help 14:30 – government co-paying some business expenses 16:05 – Suspending payroll taxes 16:17 – The small business bond 18:00 – Wider latitude for banks 20:03 – How effective would Brent’s ideas actually be at lessening the pain 22:41 – A look at how things look in the private equity complex 25:39 – What are the potential opportunities out there 29:24 – What is a balance sheet product 32:00 – How this is personally impacting Brent 34:20 – How this is personally impacting Patrick 35:45 – Importance of relationships for personal health Learn More For more episodes go to InvestorFieldGuide.com/podcast. Sign up for the book club, where you’ll get a full investor curriculum and then 3-4 suggestions every month at InvestorFieldGuide.com/bookclub Follow Patrick on Twitter at @patrick_oshag

Speaker names marked ? are inferred from speaking time and the show’s known hosts — they are not voice-verified.

• 0:00Patrick O'Shaughnessy?

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• 0:36Patrick O'Shaughnessy?

  Hello and welcome, everyone. I'm Patrick O'Neal and this is Invest Like the Best. This show is an open-ended exploration of markets, ideas, methods, stories and of strategies that will help you better invest both your time and your money. You can learn more and stay up to date at investorfieldguide.com.

• 0:57Speaker 01

  Patrick O'Neal is the CEO of O'Neal Asset Management. All opinions expressed by Patrick and podcast guests are solely their own opinions and do not reflect the opinion of O'Neal Asset Management. This podcast is for informational purposes only and should not be relied upon as a basis for investment decisions. Clients of O'Neal Asset Management may maintain positions in the securities discussed in this podcast.

• 1:22Patrick O'Shaughnessy?

  My conversation today is with my close friend Brent Beshore. Brent is a private equity investor who owns and interacts with many small businesses, which have been hit especially hard by COVID. We discussed the various impacts that COVID has had and may have on small businesses and on the private equity investment community. Brent also proposes some policy actions which he thinks may help those most in need. Please enjoy this conversation.

• 1:45Patrick O'Shaughnessy?

  Brent, thank you so much, my friend, for doing this with me. I thought you would be a perfect person to check in with this week on, today is March 19th. Because of your proximity to what I would call real American business, small business, not only as an investor, but just the number of relationships you have with business owners who obviously are facing a dire situation. So I appreciate your time and I figured a fun place to start would just be to get sort of a subjective lay of the land from you. How are you feeling? What are you seeing out there? How has this evolved so far for you?

• 2:16Speaker 02

  First, thanks for having me on. We chat, what, at least once a day, if not twice a day?

• 2:21Patrick O'Shaughnessy?

  Three times a day.

• 2:22Speaker 02

  Three times a day. Yeah. Are we up to three times a day now? It's gotten that bad?

• 2:25Patrick O'Shaughnessy?

  Yeah, yeah, that's the crisis count.

• 2:27Speaker 02

  Exactly. No, I mean, I'd say subjectively, look, there's a new normal. And I think that the new normal is no one knows how long it's going to be. And it's going to start trickling out. Just to be completely frank, I mean, I think we'll talk about maybe some bright spots and some things that could happen, good stuff, a little bit later. But I mean, just the frank thing is I'm sad. I mean, just to be completely honest, I'm sad of all the people that are going to be losing their jobs, who already lost their jobs. I'm sad that it's upended a lot of people's lives. And look, mine and yours included. I mean, I'm with my family at home. We've been practicing doing our social isolation part since Friday of last week. It's completely changed life. I mean, I'm sure, you know, I've got three kids under six that are in the house here. So it'd be an absolute miracle if three in our discussion, one of them doesn't come bang

• 3:09Speaker 02

  on the door or barge in and start singing in the background, which is, which is awesome.

• 3:13Patrick O'Shaughnessy?

  It's part of the game.

• 3:14Speaker 02

  Yeah. I mean, it's awesome in some ways. So, yeah, I mean, I would say that the lay of the land is small business. I mean, I'm only going to speak to what I know and what I'm seeing personally. It's tough. I think that the shorter your feedback loops are for your customers, right? So that if you're selling stuff daily and you can sort of see the feedback loops coming. I mean, there's been a dramatic drop in revenue. It's just unmistakable. If you've got longer feedback loops, you know, B to B contracts, longer sales cycles, things like that, you can start to see the KPIs are going off a cliff. But, you know, the revenue is still there and you're still doing work. And at least for the most part, unless you're shut down, which we've had offices in some of our portfolio companies in no commerce zones, basically. I mean, only essential services provided. So you literally can't work. So it's tough.

• 3:57Patrick O'Shaughnessy?

  What do you think is going to happen near term in terms of policy response? Maybe asked a different way. What do you think should happen? You came out this morning, I know we were talking about it last night. I think you're up all night writing this memo, which as somebody that's an investor in, but also an operator of a small business, you're in a uniquely good position to sort of communicate what you think actually might make a dent in this problem as the country has come sort of to an economic standstill. Walk us through some of what you think are the highest potential impact things that the federal government or other government entities could do for small business owners.

• 4:29Speaker 02

  So maybe a good place to start, and by the way, I was up part of the night. A bunch of people on my team, permanent equity, were up, based on the Slack channel, seemingly the rest of the night, working on this thing. And so it's definitely a labor of love. We were trying to be, doing our civic duty to try to get the word out there about what's really going on and what we think might be some policy solutions. I mean, look, we're not policymakers. We're just people who try to help small businesses. But so maybe before we talk about the solutions, maybe we can just kind of take a step back and maybe talk about the problem because I think a lot of people, if you've never owned or operated a business, just don't fully appreciate kind of what it's like. I had a friend of mine who's a real estate investor ping me and he was like, "Wait, doesn't everyone have like two years of savings on hand and isn't everyone have their house paid off? Like, I don't understand. I thought business owners were making it rain."

• 5:12Speaker 02

  And certainly there are business owners that have stocked up and did really well, but I'd say the majority of even successful, smaller entrepreneurs, business owners, they have income, but they're not wealthy in the traditional sense outside of their equity in their business, which just got much more difficult to monetize and probably had a significant impairment and potentially a permanent impairment to that. So maybe we could talk, step back and maybe talk about the situation. So for many small business owners, the finances of the business are really commingled with their personal finances in a way that I don't, maybe it's obvious, maybe it's not. So, you know, a business loss is a direct personal loss. It's not like they're going to be taking a loss in the business and personally they're okay and still getting a salary. It's all the same pot of money typically, especially when you have a single owner or maybe, you know, two owners and it's really concentrated.

• 5:57Speaker 02

  And so there's only so much financial pain and loss the owner can endure before really the only responsible decision is to pull the plug and that's terrible. Pulling the plug is not just a financial decision and I think that these owners, if you've never operated, I mean, you just don't understand how much heart and soul you put into what you do and how much you do care for your employees. I think that for us, I mean, it's like we're trying to go through disaster planning in our companies and we will talk about that later and what we're trying to do. But, I mean, it just breaks our heart to try to figure out, I mean, how do we take care of people? How do you, how do you be kind to people? But also the least kind thing you can do is not have a business for them to come back to. That's the path you have to go down.

• 6:34Patrick O'Shaughnessy?

  So before we get to the, the policy stuff, I just want to dig a little bit deeper here on this concept of what it feels like, the felt experience of being a small business owner. Say a little bit about, maybe using generic examples or something, the sort of window of time that different kinds of small businesses have to make it through this. Is it days? Is it weeks? Obviously, there's a sliding scale here of if you're a restaurant in New York City, you know, your revenues, unless you're doing takeout, went to zero. Or if you're an AMC theater, your revenue's at zero. Like, how long can a small business survive a freeze of commerce like this? And then kind of what's the spectrum?

• 7:08Speaker 02

  If you get kind of back down to the, the accounting principles, you've got your fixed and your variable overhead. And depending on the type of business, it's going to vary between fixed and variable. And by the way, I would say restaurants across the country are in the same situation. It's not just New York City. My favorite restaurant, which you've eaten at a lot here in Columbia through the years, Bart Owl, they went to takeout only and very limited menu and they're still trying to serve cuts of meat and stuff out of their butcher shop. But I mean, sales are way down. They've had to, you know, lay off most of their staff. My friend, he has a restaurant chain and called me up and they've, they've had to lay off over a hundred and fifty people in the last week. And these are people that they don't have any savings. They have nowhere to go. I mean, it's just a really tough situation. How long can they last?

• 7:49Speaker 02

  I think if you have no debt, which is typically a rarity in the restaurant business, but if you have no debt, operational debt, and you maybe don't have any debt on your building that you own, I mean, this would be a very, very fortuitous situation. I think you can probably maybe four or five months, six months at most, and, and then it's just, it's a real dire situation. I mean, it's dire anyway, but it gets real dire in that case. People are dipping into savings regardless. I mean, it's not like you keep tremendous amount of equity in the business in form of cash. And so it, it's just going to be eating through personal savings, the higher your burn is. Some people are able to get some abatement from lenders and say, you know, can we stop all, pick the interest and no principal payments for six months to try to help me get through this?

• 8:33Speaker 02

  I mean, I think some lenders are, are on board with that, some aren't. I think that the longer this thing goes, of course, depending on what the government ends up doing, the more they're going to be open to things like that. I mean, you don't want to torch all of your loan to the business because you won't help them through it. I mean, there's sort of a mutually assured destruction. So, yeah, I mean, I would say I've gotten calls or text messages or Twitter DMs from thirty or forty businesses. And I mean, everyone's in the same boat, which is they're seeing revenues either fall off the cliff or they have line of sight on going off the cliff. And everyone's just asking, what do you do? No one has planned for a complete shutdown, virtually a complete shutdown, almost a complete shutdown of the business, and no business can withstand a eighty to ninety to a hundred percent drop in revenue, even for a short period.

• 9:17Patrick O'Shaughnessy?

  It's such a strange crisis because in many ways, we know how it ends. There's a lot we don't know. There's a ton of uncertainty of the path from here, but, you know, we can say with reasonable confidence that we will. Beat this thing back, whether through social measures or medical intervention or pharmaceuticals or something like humanity will find a way and the world will keep spinning. The question is, can you find a big enough board to cross that chasm and survive? And like you said, have a business on the other side. So I'm curious, both within your own, the companies that you and your investors own, you personally and others you've talked to, what some of the ideas are for how to cross

• 9:57Patrick O'Shaughnessy?

  that chasm such that you can have restart assets or restart cash on the other side and keep the thing going?

• 10:04Speaker 02

  I mean, I think the guessing game is just how long is it going to last? And what does the trough look like? And I mean, everyone's just a guessing game. I mean, we're watching in our, in our organizations, we're watching every key performance indicator, every leading indicator we can possibly see right now. I mean, we are having twice a day stand up calls and all the companies trying to understand what's going on. We're watching obviously cash like a hawk. And really the waiting game and the guessing game is just what happens to revenue? How does it trickle down and for how long? And that's the guessing game that no one knows. I mean, our, our reactions are, we want to be prepared for the absolute worst. I think the worst for us would be in some of these businesses, having a six month total shutdown of the business. I mean, in essence, I didn't even know if this is possible. I mean, no one's really ever done this. Can you mothball a business?

• 10:49Speaker 02

  I mean, maybe the closest proxy is like prohibition. If you're in the alcohol business, how do you mothball the business? And so we're trying to actively talk, be open and honest with people about where we think this thing's going and how we think it might work and try to just be as loving and kind and generous to people as we possibly can, including keeping the business in a state that we can start it back up. And that's going to require a lot of capital in these cases. The machinery, once it stops spinning and you know, sort of got your AR that starts building when you get back started, so you don't have the cash flow coming in. I mean, all that stuff has to completely restart. It's going to be a Herculean effort if you do have to fully shut down or even shut down all but skeleton crew. I mean, to get it back up and running, I mean, it's, there's, there's a massive start and stop problem.

• 11:33Patrick O'Shaughnessy?

  What are the other key considerations there? So accounts receivable is sort of really clear and obvious problem that even once things get going, your cash isn't collected yet. What other key considerations are there generically that you've thought about for businesses in terms of the costs of starting back up and the capital or effort that that would require?

• 11:50Speaker 02

  Well, just think about all the stakeholders. So depending on how severe it gets, you know, you've got, let's say it's six months and there's zero chance that all of your employees can come back. They're gonna have to do something else and they're gonna find something else and maybe they get themselves locked into a situation where they can't come back. Maybe they have to move locations, maybe they go take care of a relative or a friend who's gotten sick. You can imagine just the start and stop on if you freeze time or, well unfortunately, we're not freezing time, but if you're freezing the business in time, pulling it back out, it's just not, the same people are not gonna be there. Hopefully, a lot of the same people are. Customers are gonna have different needs potentially and there's definitely gonna be a warm-up period depending on the type of business for those customers to come back. It's not like you flip the light switch back on, it's like, "Okay, we're open for business."

• 12:34Speaker 02

  You know, you gotta get the word out, you gotta set meetings, you gotta have phone calls, you gotta go through the sales process, depending on what the business is, that can be a very long time. Could be another six months of selling before you actually get sales at the door. And that's assuming that demand is built in to the same degree it was before and I'm not sure in some of these businesses that's the case. I mean, I think 20 years from now, if we don't have another catastrophe like this, could demand get back up? Of course, maybe it's even exceeding it. But in the next couple of years, I think there's gonna be a shift and just a reduction in many of the types of things that people were used to buying and I think it is what it is. There's not much you can do about it. So, customers are definitely one key suppliers. I mean, how, you know, let's say you're manufacturing and let's say you're contract manufacturing.

• 13:19Speaker 02

  Getting your supplier to come back online, well, what if you wanna get in business, what if you wanna stay in business, but your supplier goes down? Or suppliers, right? What about the expertise that was in those companies that were servicing you, right? What if that expertise goes away? Now, your quality drops. So, just all these, like the discontinuity of mothballing something, it's just, to my knowledge, it's never been done. I mean, I would love feedback if anybody's ever done this, has the playbook, please email me, find me somehow and tell me because, I mean, we're trying to make it up as we go and, and look, you're hoping, I mean, that's the worst. I don't wanna get the impression that every business in the country is gonna mothball. I don't think that's the case. I do think, though, there are a lot of businesses that still today are in denial, that they are gonna have to do that or just frankly, are just out of business.

• 14:01Speaker 02

  And the case is for a lot of these small business owners, if you torch all your equity, trying to keep the business alive, hoping that it will be, come back sooner and it doesn't. You have no capital to restart these businesses back up. There's nothing there.

• 14:14Patrick O'Shaughnessy?

  I read this policy paper yesterday that I shared around and it identified kind of two unique problems, one being a liquidity problem, the other being a solvency problem. So I'd love to kind of parse through these ideas with you. Liquidity, obviously, you know, is pretty straightforward and I do want to talk about ways in which liquidity can be injected into small businesses in the form of interest-free loans or other means that can help them. But solvency seems like a potentially even bigger issue here and solvency being, who cares if you have capital that's on an interest-free loan? If there's no revenue, the business may be, just be insolvent. So we've talked about the bottom up. What do you think the best policies are that might increase the odds that this goes smoother than it appears to be going right now for small business, based on the memo that you put together?

• 14:58Speaker 02

  We identified four key things that we think could be done. The first one is that government could co-pay, let's call it 80% of small business payroll expenses for salaries up to a certain amount. I said $100,000 for the next three months. And look, the danger here is that, well, if the government's paying for it, everyone stays on payroll, right? Who cares? At 80%, I think there's incentives there where you're really only going to keep the people that you think you need to restart or that you're going to get through this with. And that may be, I mean, obviously, that would be a tremendous amount more people you'd keep on payroll than you would otherwise. And of course, you know, there's always going to be trying to cheat the system. So, you know, you have a qualifying period where the people had to be on payroll by, let's call it March 1st, and had to be back on payroll by April 15th.

• 15:41Speaker 02

  That would allow employers who had already done layoffs to hire them back immediately and try to get through it. So that's kind of one that I think that, again, it's just unprecedented. I mean, it's not these businesses have made bad choices. No one's planning for a government mandated shutdown of your business. There's no business playbook that takes that into account. So I think that that would be a government program that I think would be very beneficial. And again, you could play with, is it 80%? Is it 90%? Is it 70%? Is it $100,000 a year, you know, salaries? Is it $50,000? I mean, kind of wherever you want to play with it, right? I think there's a lot of give and take in there. But I think in general, just that idea of having the government kind of come alongside you and say, hey, look, for very good reasons, and I'm not making a value just at all.

• 16:24Speaker 02

  In fact, I wholeheartedly support social distancing and a lot of the shutdowns that are going on. I think it's really important to save lives. But I think it would be a way for the government to say, hey, look, we helped to get you into this mess, we're going to try to help get you out and all be in this thing together. A pretty easy one would be temporarily suspending the payroll tax. So I think this is pretty self-explanatory. You could have up to a certain amount of income, maybe use that $100,000 threshold. It would just give both owners and employees more take-home pay and liquidity. Probably the one that's the most out there is this thing we call the Small Business Bond, which would be a new program, literally just brainstorm this thing up, that would provide temporary financial security in a long payback period. In essence, it would be a loan that you would have to have a lender do a conforming loan to this.

• 17:06Speaker 02

  It would have, you know, sort of a 10-year loan term or longer, no principal or interest payments for the first year, 3% or less interest, but it's personally guaranteed by the borrower, and, you know, probably some sort of maximum, I said $5 million. And the idea behind this would be, okay, so if you have a long enough amortization period, whether it's 10 years, 15 years, 20 years, 30 years, whatever it be, if you have a long enough amortization period, you can make, even though it is debt, and even though it's a liability that you're burning equity in the business by using that to fund sort of income statement losses, when you get restarted, it won't be such a drag on the business that it would impede the kind of future growth of business. In essence, it would just be an additional tax on the business over a very long period of time. And I think that's important.

• 17:50Speaker 02

  I'm not of the mindset that we should just try to make all equity holders of all businesses whole. I think the President of France came out and said he's, you know, he's not going to let any business go under. I think that's terrible. Small businesses go under all the time. I think what we want to try to do is try to say, hey, look, if this is the cause, which we're going to see just a rash of this being the cause of unemployment, businesses shutting down, whatever it is, I think there is an opportunity to have skin in the game from the owner of the business. Look, they're taking a hit, it's a future tax on their earnings, but also giving them every opportunity to stay in business if they can, and if they want to. I mean, that's another thing, like, you know, a lot of people in 2008 that were older just threw in the towel, and I think that's really tragic, they just said, I don't have it in me to do this again. And I think there's going to be a lot of that that goes on, too.

• 18:32Speaker 02

  The last one that we talked about was just wider latitude given to banks to create temporary loans based on inventory accounts receivable. There's a lot of bank regulation, as you very well know, and a lot of it is impeding the ability of banks to get creative. Bank loan examiners are coming in and saying, now, wait a minute, why did you do that? Why did you do that? I think if you gave a moratorium on, I think this is going to sound terrible, and you can, of course, see some perverse incentives in this, but a moratorium on sort of bank lending standards, and said that, hey, for the next two years, we're just going to give you a free pass, we want you to lend money, go lend it. And lend it in a way that maybe you wouldn't have lent it otherwise. I mean, like the SBA is a good example of this. I mean, the process, which by the way, SBA is a great program. That's how I bought my first business. I talk to people all the time. They're trying to buy their first

• 19:17Speaker 02

  business and I say, look, look at the SBA. Great program. The problem is it just takes, call it 60 to 90 days, probably 90 being more on average, under normal circumstances, being flooded with all these opportunities. If we try to jam this thing through the SBA, I mean, they could be looking at six, seven, eight months of backlog to even get a loan done. And that doesn't help anybody. So I think that another thing we got to do is diversify out the sort of lenders that we can use. You know, I would love to see Square be a partner on this, more the fintech side, or just even unqualifying banks that don't normally have SBA lending practices. And so I think that the combination of all that, I think, would do a lot to get us through this. But again, it's all depends on what the duration is going to be.

• 19:58Patrick O'Shaughnessy?

  It's amazing to watch the change in mindset. I'm curious how much you see this too, of everyone, right? Of the government, of you and me, this sort of widening of the aperture, if you will, the realm of what is possible and what we might do. You know, you hear about industrial companies stopping production and making ventilators is a great example. It feels like a wartime ramp up of our country's resources, which I'm incredibly hopeful can shorten this pain or lessen the pain or make it more likely we make it through to the other side of this thing. I think your point about like, commercial banks being some of the lenders, or even the Stripes or Squares of the world is super interesting. If that happens, let's say that the government, you know, straight from your mouth to the Congress's ear, and they adopt

• 20:40Patrick O'Shaughnessy?

  every one of your memos, policies, what do you think will happen? Like, how, how much will these things get used by small business? Do small business owners, are they even going to understand kind of what, what's going on and what's available to them? How effective do you think this would be at lessening the pain?

• 20:55Speaker 02

  I think that it would be used tremendously. I mean, look, everyone right now, I mean, desperation is a heck of a motivator. And everyone right now that I talk to, like, I literally don't know a single business owner that's not desperate right now. A single one, and I think that the danger is you roll out something very, very complicated. What was passed, I think it was last night, is an expansion of FMLA, which is paid time off requirements. And I mean, people are freaking out today because if basically you've been impacted by coronavirus, now you're paid by your employer to go off the payroll and to take care of people, which is again, a very noble, like the intention behind it is fantastic. The problem is they're compensating people through tax credits, and no business owner right now is worried about paying their taxes. Like, there's going to be no taxes to pay. So it does them absolutely no good.

• 21:40Speaker 02

  In fact, it just absolutely, it kills their short-term cash burn even worse than it would be otherwise. And again, for a very noble reason. I'm not like, that, it's not a value judgment on that side. But I would say having policymakers really talk to small businesses and understand what stresses the maybe good intentions that they have or putting on the business in practicality. And I mean, if you talk to any small business owner and ask them, "Hey, how important are tax credits right now?", they'd say, "Uh, none." Like, "Not at all." And so I think a lot of these things are really, they're going to be incredibly valuable if the government can roll them out in a way in which are simple and straightforward, and it's just no qualifying, the, all the stuff around, you know, "How much paperwork do you have to fill out? How much, what do you want to do?" And of course, there's going to be fraud. Of course, there's going to be fraud.

• 22:23Speaker 02

  There's going to be opportunity cost to everything, of course. But I think that the more that you can just get, create a simple program, it's super straightforward and easy to understand. "Hey, here are your five options. Here's immediately what we're doing. This is how you do it. This is where you go. Here's a list of approved vendors in essence." Super straightforward. I think that you would see a usage rate that probably exceeded 90%.

• 22:44Patrick O'Shaughnessy?

  It's amazing when I looked at the other, I just pulled up the other kind of paper alongside yours, or the two that I'm kind of sending around. And it's a lot of the same stuff, like, long-term loans, zero rates, uncollateralized, three months, no payment whatsoever, like, just a pure bridge across, hopefully, what will be the worst of this, with, you know, obviously some qualifying criteria and, and limits on the loans, et cetera, but the ability to use them very broadly. Talk about something that would have been shocking to read a month ago as a serious policy recommendation gives you a sense for where we are. I'd love to switch gears to- The investment world, we've talked about the sort of boots on the ground business world a bit. What do you think about the private equity complex, which is where you spend your professional time?

• 23:25Patrick O'Shaughnessy?

  You know, I know we've talked endlessly about how you are an odd duck in this world and are effectively unlevered, unlike almost all private equity in the businesses that you own, and yet still face this incredible crunch. If you're able and willing to share a bit of like your own businesses, you know, what you're seeing there, things you're considering and what you think must be happening in the rest of the private equity complex.

• 23:45Speaker 02

  It's funny how you think stick in your head. I had a conversation with a guy in the private equity space who called me irresponsible for not using leverage about six weeks ago. And look, I think there's an argument to be made if everything goes to the moon and we never hit any problems or speed bumps. I think it would be irresponsible. The issue is that we don't live in a perfect world and obviously this is now shocked at the system in many ways that no one could have ever predicted. We carry no debt. We have one business that has some debt on it, moderate amount. But the first fund that we raised, we closed five companies, zero senior debt. We have some lines of credit that we help fund growth, but I mean, look, super strong balance sheets. If those businesses go under, I don't know who survives.

• 24:26Speaker 02

  In absolute terms, it feels like we are in a tough spot and we're right alongside everyone who feels that way. In relative terms, we're in the best position you possibly can be in. We've got good customers that pay us, you know, we've got great balance sheets, we've got no debt, good leadership teams. I mean, like we're in perfect position relatively, but it still feels terrible. I mean, we're going through all this stuff. I mean, I said in the beginning of the discussion, we're doing twice a day standups and we're trying to review every AR and AP and making sure that the AR comes in and that we're really judicious about AP right now and trying to make sure that that we're having active conversations with a lot of our vendors. Hey, what are you seeing? How does this work? What do you think? It is a tough, tough situation. I cannot imagine right now if I had

• 25:12Speaker 02

  two times leverage with my previous, you know, when we say two times leverage, what we're saying is like two times EBITDA is typically what people use as sort of a leverage ratio. EBITDA is going to drop precipitously across virtually every business. I mean, you're going to have some weird counter cyclicality here and all that stuff. But I mean, for the most part, 95% of businesses are going to be less profitable this year than they were in 2019. So those ratios, if you've got two times EBITDA of 2019, I mean, your EBITDA leverage just shot up through the roof. I can't even imagine. And two times is like, you know, as one of my private equity friends would say is child's play. That's nothing. And I literally, I don't know how those businesses are going to survive without a massive infusion of equity. And I mean, and that's just going to drive down the returns. You know, I think

• 25:55Speaker 02

  that many private equity firms right now are going through the calculus of which of their portfolio companies to save and which ones not to save. And so I think there's going to be a huge washout that comes down the pipe here of unfortunate layoffs and like everyone else. But I think it's going to be exacerbated in situations that didn't have to be that way.

• 26:11Patrick O'Shaughnessy?

  In every one of these environments, it's hard to focus on, I think, which is why the opportunities exist. There always, always are opportunities, things that in the hindsight, looking back on this two years from now, will point to certain things you and I on a call and say, can you believe this business or this purchase or this whatever could have been had at these prices? Are you starting to see anything like that across the businesses that you deal with in terms of just screaming distressed opportunities to make great investments?

• 26:39Speaker 02

  So let's talk about this thin line between being a loan shark and a white knight. Because I think it is pretty darn thin and maybe getting thinner by the moment. And it's really tough. We are interested in setting up good, long-term win-win relationships. It's really, really hard to do that. It's exceptionally hard normally. It's like unbelievably hard in times like today. Distressed assets, like the problem is you're buying it from somebody who's distressed. And this is the toughest position we're in. And honestly, I'll just be completely frank, we're not sure right now what we're going to do. We've been discussing a suite of products that could help people, you know, sort of bridge them through with some balance sheet stuff, depending on what the government ends up doing, if they do anything. We have no interest in, in sort of being a high-yield junk bonds

• 27:24Speaker 02

  to small businesses. Like, that's not of interest to us. But the alternative is these businesses go under. And so we're in this really weird position where no one's trying to start a relationship in dire circumstances and then try to make it work later. And then there's always going to be resentment that's built up and it's just a really tough time all around. And so frankly, I mean, just being honest, we're struggling through it. We're trying to figure out what we can offer. We're trying to figure out how can we maybe take some of these products that we could offer that are more balance sheet products and create good long-term win-win relationships where, hey, look, we helped rescue the company. Let's all try to win together in the long term. You may not have as much money as you would have otherwise, but it's better than nothing. It's better than a lot less than we would have otherwise. So I think there will be incredible opportunities. I would

• 28:07Speaker 02

  say expectations are such a funny thing. So it was two weeks ago this morning that I emailed my team and said, I think we really got a really big storm on our hands here. And, you know, we started talking about what does it mean as of, let's see, your last Friday, what does it really mean for investing going forward? And as of then, every intermediary that we dealt with, a lot of the business owners were like, no, it's fine. We'll schedule the visit. Everything's great. Business is continuing on. As you've gotten into later in this week, this is Thursday afternoon on the 19th now, as you've gotten later in the week, everyone now is hitting reset and saying, hey, we're stopping our processes. I mean, saying stuff like, obviously, given the circumstances, dot, dot, dot. So we're starting to see at least the absorption that things are different. I think that everyone's

• 28:52Speaker 02

  still in shock, would be my guess. And there's certainly a significant amount of people who just don't see anything different in their business today because they have longer sales cycles, as we talked about before. So I think it's going to take a while to wash through. I mean, if you look at when in the last kind of full cycle, so 2008, 2009, 10, it wasn't really until 2011-ish when business sales and sort of the M and A process on the lower end really started picking back up again. And so, I mean, a lot of people have this thing of like, okay, well, I'm just gonna wait it out. My revenue's down a lot. I'm just gonna try to get through this and then my business will be worth what it was before and I'll sell in three years. So I think you're gonna see a lot of that, you know, holding on.

• 29:32Speaker 02

  Of course, there's gonna be opportunities and I think that what we wanna do is just try to treat people super fairly, be honest with them, give them an option, say, hey, this is what we can do. It may not be what you want and that's okay and we hope that you find what you want. And really just try to structure things in the in the kindest way, maybe not try to take everything off the table that we could, if that makes sense. Try to leave a little bit on there, more than we possibly could. I think that goes a long way in in terms of showing good faith.

• 29:56Patrick O'Shaughnessy?

  Just to be clear for listeners, can you describe exactly what you mean by balance sheet like products as an investing product? What exactly does that mean?

• 30:03Speaker 02

  So if you think about it, we are typically exchanging equity. So we're changing cash for equity. That's our normal business. So we're typically doing buying a majority of the firm and then working with the sellers to kind of help their exit long term. So sometimes we'll buy it to a hundred percent, but most often we're buying seventy to eighty percent of the equity of the business, so the ownership of the business. A balance sheet item would be more like providing a short term loan or some sort of bridge financing, similar to what we're talking about that the government providing. If the government doesn't step in, there is just gonna be a tremendous need, an overwhelming need. And certainly, there's gonna be a lot of people who suffer as the result of that, but better something than nothing. So these would be maybe factoring receivables, maybe giving a line of credit based on inventory.

• 30:48Speaker 02

  It's basically, you know, what banks would be doing normally if you were sort of a very conservatively financed organization, but doing it at much higher interest rates and probably doing it potentially without personal guarantees. So it's kind of de-risking it for the person who's using it personally. So there's all different kinds of products that you could create there. You could certainly keep them on an individual level. You could try to package them up and securitize them. I mean, there's all different kinds of things you could do. That's really not our business. The problem is we're kind of in a position where our core business right now is just very difficult to execute on. I just don't know how many people right now are gonna be like. Now's the right time, all things considered, to sell a bunch of equity in my business because I just feel like retirement. That's not probably the course anybody is, hardly anybody's going to take, maybe a couple

• 31:33Speaker 02

  of people, but hardly anybody. But we're not lenders and we don't want to be lenders. And so we're just trying to figure it out. We're trying to figure out, you know, could you do something where we say, look, we're going to get you back on your feet. Here's kind of what we need to make and we feel comfortable that we can make you this debt product to you. Here's how long it'll be. Here's the payback terms on it. And by the way, if you can get through this mess and get us payback, we're still going to generate a nice return for our investors, but it's not a permanent impairment to their business. Or if God forbid, they can't get through it, then we feel comfortable taking the keys and saying, okay, look, we're going to cram you down. Maybe, you know, instead of you owning a hundred percent, you now own eighty percent and we take over the eighty percent of the equity and convert over that debt product into equity. It's just an idea.

• 32:17Speaker 02

  You know, they still own twenty percent. They're still in a better position they would be if they owned no business. Certainly a lot of people's jobs would be saved through products like that. So I think it's a very necessary product. You've just got to structure it in such a way that you feel like it still can be as much of a win-win as, as possible.

• 32:32Patrick O'Shaughnessy?

  So in closing, I thought it'd be interesting, since you and I are such good friends and know each other so well, I can't really do this with anybody else, to just talk about kind of the personal emotional roller coaster that this has represented for you. I'm happy to share the same, but I'd just love to hear how, how you've been handling it. What have been the highs, what have been the lows? I think everyone's going through this, so just to hear from somebody on the front lines of small business, just from a personal level, I think would be interesting and valuable for those listening.

• 32:59Speaker 02

  I'm blessed with a lot of smart friends, you being one of them, who, we talked about the coronavirus very early on. And, you know, I think that my trajectory on the actual health side of it was, huh, that's interesting. I wonder if that's going to be a problem to warming up to, hey, this might be a real thing to just frankly outright panic. I mean, I'll call it what it is, sort of unvarnished. You know, I think I probably won the doomsday prepper award at a grocery store or two in the past two or three weeks. And so it's been a lot of trying to get my parents and my grandparents to listen and to try to understand what's going on. Of course, the older you get, then you've never seen something like this. It's, it's not that big a deal. Look, we've, we've faced panics in the past and trying to get them to understand that

• 33:42Speaker 02

  this really is different, you know, has been hard at times. And I think that I'm thankful that, you know, I went to work on it and tried to raise the alarm and raise the alarm early. Personally, it's been, you know, I have three kids under six and, you know, my oldest is five and a half and she kind of somewhat understands what's going on and is having trouble and being scared and of course, my wife scared and scared for our friends and relatives and city and region and country and just trying to figure out how we can be helpful as well. I think that's a really tough thing, you know, social isolation for us, like we want to be on the front lines and help serve people. Like, I mean, we were talking about, gosh, can, this is going to sound terrible, can we go ahead and just get the virus if we get immunity? Can we just get it, get it over with so we can go and

• 34:24Speaker 02

  like serve and take groceries and help people and, you know, not just be so isolated. I mean, I think that's probably the toughest thing right now that I'm struggling with personally and us as a family is just self-isolation feels like the opposite of what we want to do right now for our friends and community. And it just sucks. And I mean, I think you, you know, it's the right thing to do. And I think that you're being kind by isolating right now is definitely the right tact to take, but it sure feels terrible. I don't know. How about you?

• 34:52Patrick O'Shaughnessy?

  For me, it's all about communication. You know, I feel like that's the one thing that we can overdo in a time like this, whether that's in your business. I've certainly done that, done that in our business and with friends like you. And it helps me the most just to talk because when you talk, you can be empathetic, you can share information. I think both of those things help overcome fear and panic. And again, I would be lying if I said I haven't had my moments of, of real fear about the system, about my own health, about my family's health, various family members, of course, just like everyone in the world is going through. But I find, you know, when everything is, I said this to my team, when everything around you is going down, like you just have to find things that you can make go up. And for me, that's the number of conversations that I'm having

• 35:35Patrick O'Shaughnessy?

  with those I care about, with a big part of that being the people I work with and with friends. And yeah, I mean, other than that, I'm not sure what to do, right? It's just focus on things that are under my control, that I can make those counts go up while everything else goes down. It seems like, at least just speaking from personal experience, the best that I feel, I should start taking a journal five times a day, one through 10, how am I feeling right now? Looks like, it looks like a chart of the VIX volatility on that score. But the, the best scores come when I'm just talking to my friends. And it's a give and take. Like sometimes I need to be pepped up and sometimes, a lot of times, admittedly, I'm doing a lot of the pepping. And yeah, it's a unique thing. We'll never forget it. And there's not much more you can say about it.

• 36:17Speaker 02

  Yeah, I think the relationships you just keyed on are just, they're everything. And I think that socially isolating is kind of a, maybe a misnomer. We should be physically isolating. We should be socially over-communicating and engaging. And, you know, I certainly think that's something that I could do better myself. I tend to want to hunker down and try to close ranks and help, you know, the sort of the immediate people around me. And I think that's the wrong approach. I think that we need to be reaching out to people and being somebody they can, they can talk to and just be a good listener. And I mean, truly that we're all missing together. I mean, it's a united, it's a united problem. I mean, we're all facing the same common threat. And my prayer every day right now is that somehow this brings to us together as a country and as a world.

• 37:01Speaker 02

  You know, I mean, that sounds probably pretty cliche, but I mean, I think it's true. I mean, like, I hope that we can focus more on overcoming this than borders and trade wars and all that stuff. But yeah, I mean, maybe my, my only maybe funny observation is that, I mean, cabin fever is definitely starting to set in. It's been cold in the Midwest and rainy. And I am convinced after, you know, a week of being at home, one, that my wife is an absolute saint and that she has a job that's way more valuable and way more difficult than mine. And two, that I think school teachers should be paid about a million dollars a year. I'm convinced that the actual work they're doing is just, it's unbelievable.

• 37:38Patrick O'Shaughnessy?

  Amen, amen. Well, well, look, as always, I appreciate the perspective. There's no hiding what, what we're facing here. And the key thing we can all do is be constructive and look for solutions. And I think what you wrote last night, hopefully it finds the right ears. I'm sure it will. I really appreciate you doing that and talking to us about small business today.

• 37:57Speaker 02

  All right. Hey, take it easy, man. Thanks.

• 38:01Speaker 03

  Hey, everyone. Patrick here again. To find more episodes of Invest Like the Best, go to investorfieldguide.com/podcast. If you're a book lover, you can also sign up for my book club at investorfieldguide.com/bookclub. After you sign up, you'll receive a full investor curriculum right away and then three to four suggestions of new books every month. You can also follow me on Twitter, at Patrick underscore Oshag, O-S-H-A-G.

• 38:28Speaker 03

  If you enjoy the show, please leave a quick review for us on iTunes, which will help more people discover Invest Like the Best. Thanks so much for listening. [Music]