Building a Berkshire for the Middle Market – Tracy Britt Cool (EP.521)

My guest on today's show is Tracy Britt Cool, co-founder of Kanbrick, a long-term investment partnership that provides owners of family-owned, midsized businesses with a differentiated option from traditional private equity. Tracy launched the business after spending ten years at Berkshire Hathaway as one of Warren Buffett's few deputies. She started out of business school as a financial assistant to Buffett, served as Chair of several Berkshire portfolio companies, and later became CEO of Pampered Chef. Our conversation covers Tracy's journey, including lessons from Buffett and the value of operating experience. We turn to the application of those lessons at Kanbrick across its strategy, sourcing, deal dynamics, operational improvements, and long-term holding periods, all supported by the firm's creation of a community of 4,000 executives who share best practices in hiring, operations, excellence, and growth. AlphaSense free trial for Capital Allocators listeners here https://www.alpha-sense.com/capital/. Learn more about Juniper Square here https://www.junipersquare.com/. Learn More Follow Ted on X at @tseides https://twitter.com/tseides?lang=en or LinkedIn https://www.linkedin.com/in/tedseides/ Subscribe to the mailing list (https://capitalallocators.com/) Access Transcript with Premium Membership (https://capitalallocators.com/signup) Editing and post-production work for this episode was provided by The Podcast Consultant (https://thepodcastconsultant.com https://thepodcastconsultant.com/)

• 0:00Speaker 00

  I told Warren it would take me a year, maybe two years to get this thing coming. It had been in decline for about a decade. It was a big turnaround that I needed to go do. It ended up taking nearly four years to do it. Everything is harder in operating than it seems. Even though I knew what needed to be done, I had the strategy in my mind. I knew I needed to go get the people on board, build the culture. It's a lot harder than you expect because it all involves people and people are tough. You hire the wrong people, you've got to change them out, or you've got to work on culture and retention, which doesn't get changed overnight. If you've had challenges in that in the past, you've got to go invest in people getting up to speed, learning new tools, new practices, new spaces. You've got to build all this together. That was a huge surprise. Humbling, probably not dissimilar from how most investors think.

• 0:45Speaker 00

  Let's take margins from 10% to 14%. That's one click in my spreadsheet. In reality, in a business, that takes a lot more work to do. There's a lot of missteps and mistakes and learnings along the way to get to there.

• 1:03Speaker 01

  I'm Ted Seides and this is Capital Allocators.

• 1:09Speaker 01

  My guest on today's show is Tracy Britt Cool, co-founder of Canbrick, a long-term investment partnership that provides owners of family-owned mid-sized businesses with a differentiated option from traditional private equity. Tracy launched the business after spending 10 years at Berkshire Hathaway as one of Warren Buffett's few deputies. She started out of business school as a financial assistant to Buffett, served as chair of several Berkshire portfolio companies, and became CEO of one of them, Pampered Chef. Our conversation covers Tracy's journey, including lessons from Buffett and the value of operating experience. We turn to the application of those lessons at Canbrick

• 1:52Speaker 01

  across its strategy, sourcing, deal dynamics, operational improvements, and long-term holding periods, all supported by the firm's creation of a community of 4,000 executives who share best practices in hiring, operations, excellence, and growth.

• 2:10Speaker 01

  Before we get going, you're on a plane headed to an annual meeting. And this time of year, you're definitely on a plane headed to an annual meeting. With all the travel in front of you, it's a very busy time, so I'll keep this particularly short. Before you doze off in the thin air of the cabin, that's a great time to let the soothing sounds of Capital Allocators fill your ears. And when you find yourself at a cocktail party at one of those meetings, in that uncomfortable moment where you're not sure who to talk to or what to say, that's a fantastic time to tell them about the Capital Allocators podcast. It's an icebreaker that's the gift that keeps on giving. Since you're at an event, if you've come to one of ours, that's a great time to tell someone you think highly of about our Capital Allocators summits.

• 2:55Speaker 01

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• 4:24Speaker 01

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• 5:05Speaker 01

  and most durable relationships with LPs are the ones that have both strong returns and strong operations. AI raises the stakes on operations, and having Juniper Square as your operations partner helps ensure your data is organized, accurate, and accessible so you can unlock operational alpha. That's why thousands of GPs trust Juniper Square. Learn more at junipersquare.com/capitalallocators. Please enjoy my conversation with Tracy Britt Cool.

• 5:40Speaker 01

  Tracy, so great to see you.

• 5:41Speaker 00

  It's an honor to be here. Thank you so much for having me.

• 5:43Speaker 01

  I'd love you to take me all the way back to where your first interest in investing in business came from.

• 5:49Speaker 00

  I grew up on a family farm. My dad did nothing in investing, except for he invested in soybean futures to hedge his position on the farm. That was my first exposure. I didn't fully understand commodity investing is a bit different than what I got interested in. Then over time, when I went to college, I found Warren Buffett. I started reading a lot. I naturally gravitated towards it, building great businesses, finding companies that are undervalued, investing in them. That concept resonated with me early on.

• 6:18Speaker 01

  It was rare that somebody picks up that material, then they find a way to connect with Warren. Walk me through that story, how that all happened.

• 6:27Speaker 00

  I started out writing to investors that I admired and respected and I wanted to learn from, CEOs of different firms on Wall Street. I wrote a letter to Warren asking to bring a group of students out to Omaha. I had started a nonprofit focused on investment education for women. He had had MBA students come, but hadn't had undergrads. He generously said yes, and we brought a group of students out to Omaha.

• 6:49Speaker 01

  What happened from there?

• 6:50Speaker 00

  Got to know him a little bit through it, planned that trip three or four times. When I graduated business school, wrote him another letter, asked if I could come out a day, a week, a month and pick his brain, assuming he'd say no. Fortunately, he said yes. So I spent my post-MBA summer working with him. At the end of summer, he said, I'd love to hire you, just don't have a role. Berkshire's 25 people at headquarters. I started my full-time job and he called a few weeks later and said, if you're interested, I'll create a role for you to join. Quit my job and moved out to Omaha later that year.

• 7:18Speaker 01

  What do you think it was, or maybe what did he tell you after the fact? It's so rare that that would have happened, if at all.

• 7:26Speaker 00

  Warren's always been very open at bringing people into his life at different stages. He was nearly 80 when I joined Berkshire. To trust me at that age was something special. I never asked him specifically why, probably a combination of grit, resiliency, willingness to work hard, personality, those dynamics that came together. I had a number of people over the years write me letters. Occasionally, they stood out to me, too. My partner, Brian Humphrey, wrote me a letter when he was in Stanford at business school. That's how I met him. For some reason, that letter resonated with me and what he was sharing and was doing. Hard to put your finger on it, but you know it when you see it.

• 7:59Speaker 01

  If you're giving advice to people who are asking you about how to approach someone that they admire, is there anything that you've been able to pull from the ones that resonated for you?

• 8:08Speaker 00

  One is you want to try to find a mutual connection. You're from the same town, you're interested in similar things, same school, same interests, being humble, being yourself, definitely not using AI to generate it, not sending the same letter to 30 people, customizing it. Physical letters were far more impactful than sending emails or connecting on LinkedIn because that's so pervasive these days, it doesn't stand out.

• 8:31Speaker 01

  When you showed up at Omaha, what was the job as the 26th employee?

• 8:36Speaker 00

  I was Warren's chief of staff. I spent time working on anything that crossed his desks, looking at investments. I worked on insurance deals, acquisitions, a variety of things. It was just an opportunity for me to learn and grow, which was remarkable.

• 8:49Speaker 01

  What did that feel like day to day?

• 8:51Speaker 00

  There was a lot of responsibility. I joked Warren had a few IQ points on me as well as 50 years of experience. So I had a lot to catch up on. I spent a lot of time reading, learning, working late, trying to understand our businesses at Berkshire, why we invested in them, what worked, what didn't work. Warren was very gracious of spending time with me, going to lunch, talking about those companies in detail. That helped me become a better investor, more thoughtful in what I was doing. The day to day work was what was coming across his desk. It varied widely. It was going deep on a variety of topics that there was some need or some interests on the Berkshire side.

• 9:25Speaker 01

  How did your time there transition from pure investing to jumping into some of the portfolio companies?

• 9:31Speaker 00

  When I was at Berkshire, I would travel and meet some of the companies. Warren started asking me my thoughts on the businesses. The first was Larson Jewel, which is a custom framing business. Then there was Benjamin Moore, Oriental Trading Company, Johns Manville and others. As I did that, Warren asked me to come in and a chairman role. Typically, those businesses were ones where the company wasn't operating to its full potential. There was an opportunity to help it. I'd come alongside management team, help them figure that out and navigate it. In some cases, changing out the management team to help support that. That was my first foray into operating. As I did that, what I realized was that there was going to be more value created on the operating side going forward. In the buyout world, the days of buying businesses for seven times and selling them for 12

• 10:12Speaker 00

  a few years later was probably gone and you needed to add more value. I thought to myself, if I go get operating experience, I'll be a much better investor. I'll have more credibility, more empathy, more ability to help these businesses. That was the turning point in my mind of this power and this shift that was happening in investing and operating.

• 10:31Speaker 01

  I'd love you to walk me through a story or two in your time at Berkshire of those operating roles.

• 10:38Speaker 00

  Benjamin Moore, I was chair of that business. Benjamin Moore is an amazing brand, built over 100 plus years, tangible, sold through a dealer network. Over a 10 year period, it had lost its way. Volume growth in terms of gallons had come down considerably. Earnings were relatively flat. The business was cutting marketing spend, taking price to maintain earnings instead of investing in the channel, investing in marketing, investing in the brand, which is critical in that type of business. When I joined, it was this opportunity, how do we reinvest in the core part of the business? If we do that well, we can reposition the stores as leaders in their space. We can reinvest in our dealers and see the specialness of that. Over the time, we significantly improved the earnings of the business while strengthening the channel, driving it through

• 11:23Speaker 00

  volume growth, not just financial engineering.

• 11:26Speaker 01

  What did you see from going into the company to help them do that that was different from seeing on paper that they had decreased marketing spend and there was less of a sell through as a result?

• 11:36Speaker 00

  Going into businesses, understanding what are the key drivers, what is influencing management and their decisions and what they're doing. In that situation, their incentives were misaligned. They were focused on how do I retain earnings versus how do I reinvest in the future of the business? It became clear, we need to reinvest in the future. What does that look like? In a business like that, brand is incredibly important. Getting awareness, visibility, that connection. They had cut brand spending and marketing spends. The second is the store experience. When you walk into a store, what does it feel like from a customer? Starting with that customer, what does that look like and how can we improve it? The last thing I would say is always culture. There's oftentimes in these organizations where they've declined, there's a cultural element that's got off track. In that case, it becomes stagnant. They were afraid to make

• 12:20Speaker 00

  decisions. They weren't leaving the building. There was an opportunity to reinvigorate the culture to help support those first two things.

• 12:26Speaker 01

  In that example, what did you learn about what had happened over those 10 years that hadn't been in place before that led to that period of time where you could change the inflection back up?

• 12:38Speaker 00

  Going back and understanding and asking questions, why did we do this? Why didn't we do this? What was happening along the way? I find when sometimes you take a step back and look at like a 10 year period, you can see stuff that each year you don't see. When you're looking at a business each year, a little decline, a little decline, maybe it was the market, maybe it was some conditions, maybe it was an anomaly. You don't take ownership of a decline. When you look over 10 years, your volumes declined 10 plus percent. There's something serious going on here. Then you start to dig in and say, why is that happening? Looking at those next levels? And you can look at others in the market. You know, Sherman Williams had done a great job during this time period as an example. What do we need to go figure out to improve that? In this case,

• 13:17Speaker 00

  the incentives were misaligned. They had focused on the wrong part of the dealer in the relationship and the experience. They felt like the dealer was waning and they started shifting away from the dealer instead of leaning into the dealer. They were exploring other partnerships with big boxes at the time, and that wasn't the right strategy for this brand. Helping coming in, re-centering, refocusing. Usually the answer is in the building. People know what the needs to be done and how to do it. Either you're not getting to it, or you're not listening to it, or something else is influencing the decisions that's leading to the wrong outcome.

• 13:50Speaker 01

  When you look at that example in the context of everything you did at Berkshire, how did you think about managing your time?

• 13:57Speaker 00

  Warren always said, if you want something done, give it to a busy person. It'll get done over time. So I took on more and more, starting on the investing side, became chair of each of these businesses, kept those roles when I became CEO of Pampered Chef, wanted to go get operating experience. When you're doing a lot, you start to realize what's most critical? How do you prioritize and how do you focus? That ends up being what's most interesting. Usually there's three to four things that matter and we get stuck doing all of these different things. The same thing goes with an investment. There's three or four things that matter. We have a hundred page deck that goes through all these other items. If you know those three to four things, you spend your time on those and you can get them right. Likelihood that you're successful is much greater with time is focusing on the things that matter most that are going to move the needle.

• 14:39Speaker 01

  How about the distinction in your time from being chairman of several companies and then CEO at Pampered Chef?

• 14:45Speaker 00

  When I was chair, what I realized was there is this opportunity to help management teams and support them. But if you've never been in the shoes, you're always a step behind. You needed to drive real earnings growth in businesses. If I could go be a CEO and get that operating experience, I would have more experience that would help me in the future with investing or working with management teams. Went to Warren and said, I'd like to be CEO of Pampered Chef, which I was working with at the time. What I saw was there's a lot of opportunity in that business. It had a strong brand. It had a strong channel. It had been under managed. The transition from chairman to CEO was for a lot of people surprising. Seldom do you see investors go into operating roles. I felt like the future of investing was going to be operating. I would be a much better investor if I went and got that experience directly, gain that credibility,

• 15:30Speaker 00

  the empathy, the connection with these leaders that would resonate with sellers in the future, resonate with management teams.

• 15:36Speaker 01

  As you look at those different connections with the company from investor to chairman to CEO, how did you think about going in for the first time, communicating what a plan would be?

• 15:48Speaker 00

  The best way to go in is to go in open mind with more questions than answers. Investors usually come in with answers. Here's our 90 day plan. This is what we're going to go do. You don't actually get the best outcomes in doing that. We started Cambric with listen and learning. How do you listen to people in the organization? How do you understand what's going on? How do you ask the questions that are going to help you be smarter, but also further the conversation? If you do that well, you get to a better outcome. You can co-create something that's meaningful in terms of the strategy and the direction and the focus. That is far more powerful than coming in with a plan or a direction.

• 16:19Speaker 01

  What was different from what you expected at Pampered Chef?

• 16:22Speaker 00

  When I came in, I had been working with the business for about a year. I'd spent time learning, listening. I had a strong view at that stage of what we needed to go do. I told Warren, it would take me a year, maybe two years to get this thing coming. It had been in decline for about a decade. It was a big turnaround that I needed to go do. It ended up taking nearly four years to do it. Everything is harder in operating than it seems. Even though I knew what needed to be done, I had the strategy in my mind. I knew I needed to go get the people on board, build the culture. It's a lot harder than you expect because it all involves people and people are tough. You hire the wrong people, you've got to change them out, or you've got to work on culture and retention, which doesn't get changed overnight if you've had challenges in

• 17:03Speaker 00

  that in the past. You've got to go invest in people getting up to speed, learning new tools, new practices, new spaces. You've got to build all of this together. That was a huge surprise. Humbling, probably not dissimilar from how most investors think. Let's take margins from 10% to 14%. That's one click in my spreadsheet. In reality, in a business, that takes a lot more work to do. There's a lot of missteps and mistakes and learnings along the way to get to there.

• 17:27Speaker 01

  As you progress, you spend this time as a CEO, you can imagine being at Berkshire for a career, going in and working with different companies, larger companies. At what point in time did you decide you wanted to go do your own thing instead of doing it within Berkshire?

• 17:42Speaker 00

  I was nearing the conclusion of the turnaround at Pampered Chef. We had the business in a good place. I had met my now co-founder, Brian Humphrey. He had joined me as CFO there. We were aligned from a vision and values perspective. I could be at Berkshire forever. I'd have an amazing time there. It's a remarkable company. There's nothing like it and I don't think there ever will be. It was getting big in terms of capital. It had 150 billion in cash at the time. Now it's 300 billion plus. Hard to move the needle with that size of check. What Berkshire had done 30 or four years ago was more interesting to me. Buying businesses like Benjamin Moore, where you could partner with them, help them accelerate the growth. What I was seeing in the market at the time was there was a growing group of families and founders who wanted something different. They didn't want to sell the traditional private equity. They wanted a Berkshire like

• 18:27Speaker 00

  home, but they were just too small. There was this opportunity in that moment to build something that was unique and different, that was solving a pain point. Yes, I could stay here and be happy forever. There's also this opportunity to build something special and unique that was differentiated in the moment.

• 18:43Speaker 01

  When Brian and you decided you were going to do this? What did you lay out as the core tenets of your philosophy having pulled from your experiences at Berkshire?

• 18:53Speaker 00

  There were a few things that resonated with us that were important. One is long-term thinking and a long-term structure. Oftentimes, long-term thinking conflicts with structure. Having those two things together was important to us. That was paramount to Berkshire, something we wanted to replicate at Cambrai. Second was providing that operating lens and that operating expertise. We had built what is now the Cambrai Business System from the ground up, learning from greats, Danaher and Marman and Toyota, TransDigm and others, taking those, applying them for mid-sized companies. Lastly, was this partnership mindset, working with families and founders and coming alongside them. So much in traditional private equity is you get told what to do, or go drive this,

• 19:35Speaker 00

  or hit this plan versus how do we co-create, build something special and unique? That partnership mentality is core and critical to how we operate.

• 19:43Speaker 01

  What did you do differently structurally from the way private equity traditionally runs?

• 19:49Speaker 00

  We did a longer-term structure. We have 15-plus years in our structure. The benefit of that is it self-selects investors who are long-term oriented, which is beneficial. It's unique for owners. Owners who say, "Look, I'm concerned with the three- to four-year treadmill of private equity." It gives them comfort that their business isn't going to be bought and sold and bought and sold. It's that longer-term horizon that allows our management teams to focus on how do I build this business for decades, not how do I build this business for a quick flip?

• 20:16Speaker 01

  What'd you find when you went into the market with that structure?

• 20:19Speaker 00

  From an investor perspective, there's some investors it isn't a fit for. It doesn't match their structure, their duration, their liquidity needs, which we understand. There was a group of investors who were immediately resonated with them. It was aligned with how they think about building businesses. A lot of our businesses will generate a fair amount of cash because they don't have a lot of leverage. We can return capital. We have a business JM Test. We've owned it three years. We've Forexed the earnings in the business over that period and returned our initial capital to investors. We still own our 70% plus of the business. That is a great model where, yes, there's liquidity. It's not the same as an exit. We'd rather continue to own that business than exit it.

• 20:57Speaker 01

  How did you encapsulate that idea of partnership?

• 21:01Speaker 00

  There's a few things that we highlight. Structure is important, but it's one part of the three-legged stool. There's a long-term structure that allows us to invest in these high-quality businesses. There's our Cambrai community, which is how we get to know companies. We build relationships over the long term. There's the business system as we add value. They all get mutually reinforced and powerful together. By having that longer-term structure, our management teams can think longer term. By our management teams thinking longer term, we can drive above-average returns. By having our Cambrai Business System, we can use it in our community. By having that in our community, we get to know owners and CEOs well ahead of any potential partnership. When those things start to compound on each other, you get the value of it. It has been tough to communicate that story because it's not a simple, easy one.

• 21:46Speaker 00

  Our belief and our competitive advantage is those things. That becomes stronger and stronger over time and harder for someone else to come in and replicate. The most powerful part of the story, though, is seeing it in the results. When we started a few years ago, it was a much harder message to get it out there and able to communicate because it was a vision of what we were building. It wasn't yet to come.

• 22:05Speaker 01

  You mentioned the Cambrai community. What did you build to generate that community?

• 22:11Speaker 00

  When I started as CEO of Cambrai Chef, it was lonely. I had to go out, meet with owners, meet with other executives to understand how do you manage a business effectively and well? When I was doing that, I thought, wow, it'd be so great to have a resource, someone who could come alongside me and say, "This is what a great strategic planning process looks like, or this is how you can improve your executive hiring skills." When I started that journey, I realized there was this need to help owners. They wanted to learn and grow, and CEOs in particular. So when we started Cambrai, we brought that idea forward with this opportunity to get to know owners and CEOs over time. We built the Cambrai community to be that home that we wanted to have in terms of learning and growing together. Now we have 4,000 CEOs in the community and owners and C-suite executives where we're

• 22:56Speaker 00

  helping them with their business, taking a step back and saying, "This is what a great KPI process looks like. These are what the best benchmarks are." That community relationship has been powerful and helpful for us. We learn about new spaces. We get to know businesses. Most importantly, these companies get to know us. We build trust and credibility. All of our investments have come through direct relationships. Four of our seven have come through the community. We're building goodwill. We're building trust. Even if the companies aren't ever going to take a partner or not interested in a partner, what we find is they become great ambassadors for us. They share about Cambrai with their friends, other CEOs. That's been powerful.

• 23:35Speaker 01

  How do you get from 0 to 4,000?

• 23:38Speaker 00

  We started with our first program. It's called Build with Cambrai. CEOs applied to it. In our first cohort, we had five CEOs we selected. Those first five CEOs recommended other CEOs. We went out to our network and started inviting them. At the end of our first year in 2021, we had 127 CEOs. It was still nascent at that stage. We went from 127 to 500 to 1,000 to two to three. When you add value, it becomes more of a referral community where people are inviting other people. Now we've extended the programs. We have that three-month program. We also have a three-week masterclass where you can go deep on hiring. We'll do three 90-minute sessions and help you in hiring. We have webinars every month on different topics. We just did one on mission-critical roles.

• 24:21Speaker 00

  And we started doing local and national events where we bring people together in different communities in person so they can connect with other leaders in their regions or in their areas. That has become more of a compounding nature where the relationships become stronger, our connections become more powerful. We get to build this trust with these individuals. It's been a journey. It's been amazing to see the power of that, how many people engage in it, how much they share and bring other people into the community.

• 24:49Speaker 01

  What's the breadth of what you've taught to these CEOs through the community?

• 24:54Speaker 00

  We start with our business system, which is focused on how do you manage a mid-sized company? Starts with people. How do you attract, develop, and engage talent? Everything from mission-critical roles and hiring to talent engagement, communications, town halls, to incentive plans, talent development, career planning, career mapping, those types of conversations. And then we have the operating system, which falls into how do you build a plan? What's your strategy? How do you resource that plan? How do you think about capital allocation? How do you think about KPIs, budgeting? All of those dynamics and how you manage a business. Then we have operational excellence. How do you continually get better and have better use of your assets, your costs, anything that you have supporting the business? And then growth. Where's the growth in your business and what does that look like?

• 25:38Speaker 00

  That's the core of where we spend our time, and that helps probably 80% plus of companies. They struggle with topics within that. Each business is different. For one, it might be hiring. For another, it might be KPIs. We're helping them in that. There's other topics we've expanded out by demand. How do I think about M&A? How do I think about developing a board? How do I think about AI? How do I think about tariffs? We've led roundtable sessions as those topics come up. We're sharing our own experience and perspectives, but we're also getting best practices and learnings across the cohort and across the group. We learn a lot with people who are at the forefront of what they're doing in their industry or on a specific topic.

• 26:14Speaker 01

  How have you nurtured and cultivated the community once you've built it to that many people to make sure that people stay engaged?

• 26:21Speaker 00

  Every month, we put a written brief out on topics that we're covering that we think are helpful. The sessions that we're hosting virtually and in person that have those touchpoints. Beyond that, it's those personal touches. We're thinking about you. You told us you were focused on hiring and that was a tough challenge. Here's some new material as it relates to that. Understanding where people are, touching base with them and connecting. Everyone is struggling with something different in their business. As we get to know them, we can be more helpful in doing that. Making connections might be you're looking for a board member in this space. We have five community members in that space who might be potential board members or know someone. Facilitating those introductions, connections strengthens the power of the community.

• 27:01Speaker 01

  As a small firm, how do you scale your resources to be able to deliver that type of customized experience across so many people?

• 27:07Speaker 00

  It's everyone's job to help support the community, participate in events and what we're doing. It's core to how we operate and how we think. That becomes second nature to everyone and what we're doing. And then we're thoughtful about how to do it. We're going to be focused. Once we build the muscle, it becomes easier and it becomes more scalable. Build with Cambrai, the first program we launched five years ago, we constantly improve it. The core stays the same. We have a new cohort, new members. We're not changing everything constantly. That allows us to scale and add on specific programs and initiatives that are meeting our leaders and our CEOs where they are.

• 27:41Speaker 01

  I'd love to turn to how you leverage that into your investing. You have all these people now in your network. What have you decided that you're looking for of the companies that you may want to buy?

• 27:52Speaker 00

  We start off big picture on what we're looking for, which is industrial, services, manufacturing, some consumer. We're focused on high-quality businesses. We're looking at businesses that are 5 to 50 million in earnings. What's most important is the business model. Does it have a moat? Does it have a competitive advantage? Can we see it quantitatively? Qualitatively, can we understand what's happening with that moat? That's what we're focused on and what we're looking for. Anyone can join the community who has a business over 10 million in revenue, a CEO of 10 million in revenue can join. By doing that, we have a lot of people who aren't in our target space or what we're looking for, and we're completely happy to have them join the community. With the people that we get to know and that are interested in their businesses or they're interested in a potential partner, we spend more and more time with them.

• 28:36Speaker 00

  The days of auctions, it's transactional. It's not how most people think about their businesses. If you've built your business over decades, or it's a family business, or your founder, the idea of selling it through an auction doesn't resonate with a lot of people. You care about your employees. You care about the future of your business. Price is important, but it may not be the only thing that's important to you. It's the future value creation, your legacy, how you're going to focus on customers. The relationships we're building through the community, we think are more powerful and over time, how more businesses will be transacted will be through those relationships versus a traditional auction process.

• 29:12Speaker 01

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• 29:57Speaker 01

  and powerful AI agents that automate away operational drudgery. So your talent can shift from managing old technology to materializing new ideas. RidgeLine helps asset and wealth managers understand and improve their firm's growth trajectory. To see how your firm compares to 16,000 of your peers, visit ridgeline.ai/trajectory. If you file Form ADV, your firm is already there. Then talk to RidgeLine about how you can do more with the team you already have.

• 30:30Speaker 01

  What are your favorite metrics in assessing a business? The quality of the business for the moat?

• 30:36Speaker 00

  We look at a return on invested capital and other derivatives of that. Then we try to see over time, are those returns in capital going up, going down, staying the same qualitatively? Can we understand why? What is the moat? Is it brand and channel? Is it network effect, niche scale? Is it route density? Do we think that's going to get better over time, worse over time, or stay the same? And that qualitative assessment is important in understanding the overall quality of the business, what the potential future path might be.

• 31:06Speaker 01

  How about assessing management?

• 31:07Speaker 00

  We look at five Ms. Moat is one, market's a second, third is management, fourth's more potential, and then last, margin of safety. On the management, what we're trying to see is, do they have a track record of success? Do they have strong integrity? Do they care about the business? Are they there for the right reasons? Do they have a view on the future of the strategy of the company? And what does it look like? There's an opportunity to come help them. But maybe we've done a great job building our business. We think that we need to build out other skillsets or focus on people, revenue or sales that we haven't done before. We come alongside them to help build out that broader framework and team. We're trying to assess how strong, have they delivered? How strong are they from a character integrity perspective as well?

• 31:48Speaker 01

  In family-owned businesses, inevitably you have the family involved. How do you balance a business that you think you like, and maybe could be better under your ownership, with a family that's been around it for a long time, who you may not think is the right long-term leader?

• 32:05Speaker 00

  So we try to understand, what's the motivation or the goal of the family and the leaders in the business when we partner? Sometimes it's different. We find about half of our partners are looking for a successor. They want someone to come in and help them in this next phase of growth, right away or in three to five years. They don't have a successor in the business. That's a common trend among a lot of baby boomers. The second profile is typically someone who's a builder, a founder, or maybe second, third generation. They want to build their company, take it to the next level, but they want someone to come alongside them and help them. We have both. Scott Morrison at JM Test, when we were partnering with them, he wanted a successor, or he wanted to transition out over the next few years. Brandon McVah at Laboratory Testing, he was the next generation. He wanted to build and scale. From there, we understand and say, are we aligned in our vision for the business?

• 32:50Speaker 00

  We try to be really upfront, what we think we can build together. If it's not a good fit, we'd rather acknowledge that and do it before we close versus have these disagreements or uncomfortable conversations post-close. We try to be really transparent of what we're thinking and what it looks like. Fortunately, we've been aligned with our leaders. We think there's shared vision, shared values, shared concept of what we're going to go build together. That's how we think about the seller profile.

• 33:15Speaker 01

  Once you've found something that you're excited about, you've had productive conversations with the family, what are some of the deal dynamics of getting one of these deals done?

• 33:25Speaker 00

  We usually start off with what's important to you in a partner? What are you looking for? Trying to understand what they're thinking about in that next phase. And in that comes out a lot. I care about the headline value today. I care about my future value creation. I want to retain estate. Or I want to make sure my team members are protected, they're in a good place. Understanding what that looks like is important. We usually ask our owners what they think about valuation. They know the business better than we do. What do they think is fair and reasonable? Sometimes we're not in the ballpark. It's different than what we think. It allows us to start that conversation there. Usually some surprises come up. Maybe the earnings is a little bit different than what they have in their books as we do a quality of earnings. Perhaps market conditions change a bit. We just have a conversation. This is your goal, and this is our goal. What's a win-win that we can develop?

• 34:10Speaker 00

  We try to put ourselves in their shoes. If it was our family business, what do we think would be fair and reasonable? That usually gets us to a place where we can have an attractive structure that is a win-win for both of us. We're solving the needs real time as we go. Versus a traditional auction process is, you don't talk that much with management. You don't understand, there's 10 other people in the process. You're putting forth your best bid, but you can't work through the nuances. You don't get to the best structure, the best alignment in those situations. We think it's more effective to be able to understand what their needs are and then structure something that works mutually for both parties.

• 34:44Speaker 01

  How do you manage around the inevitable family dynamics that might come up, even if you think you're aligned with the people on the other side of the table?

• 34:52Speaker 00

  We try to take it with a transparency, trust, and honest conversation about situations. There's surprises that come up. We've got all these family members in the business. Some are working, some aren't working. We have a lot of people married. There's all these dynamics that come up. We try to be reasonable to say, what would we do if we were on the other side? What might be an issue and what might not be? Family businesses are special because the people in the business usually have grown up in it. They know so much. They have this depth of understanding and knowledge. And we want to reward that and support that when we find it. Also recognize when there's gaps or issues. At JM Test, Brad Morrison, who was third generation, he was a director in the business, doing a great job. We met him and he's remarkable.

• 35:36Speaker 00

  We're going to promote him to COO. We want to enhance his leadership in the business. There's other situations where you meet family members in the business, and they're not the right fit. And so you've got to have that conversation of, I know you're getting a paycheck, but we're going to transition you out over these months or years if it's not the right fit for the business. Our goal is to always do what's best for the long-term health of the business. We're going to make the decisions that we think help support that. We're not going to get it right every time. That's our focus. If we focus on what's best for the long-term health for the company, that's going to ultimately be what's best for employees. That's going to be best for owners and best for investors because we're going to get the best outcomes. That may require some tough decisions along the way.

• 36:14Speaker 01

  How do you plan for having difficult conversations if there is a family member who you've decided probably isn't a very long-term fit for the business?

• 36:23Speaker 00

  With humility, with respect, almost always in person, not getting on a Zoom and saying, Johnny's got to go. We're focused on what's important to the business. How do we approach it with the respect that we would hope someone would approach us in our family businesses? Having that conversation, it's understanding, coming in with an open mind. Sometimes we come in with too many preconceived notions of this won't work, or why do they have that? We just ask questions. You've done it this way, why? What do you think is working well or not working well? What do you think we need to do to get better? Oftentimes, we can get there together, where it's not us saying something needs to change. It's coming to the realization that maybe this isn't what's best for the business. If that's the case, okay, what are we going to do to address it?

• 37:02Speaker 01

  Once you've bought a company, how do you take the plans that you have and roll them out in that first year of ownership?

• 37:10Speaker 00

  We start with listen and learn. We don't come in with a 90-day plan, or we're going to hit these goals. It's understanding what that business needs, asking questions. Are there other similar industries that might be relevant for us to learn from? As we go through that, we work with the management team in co-creating, what's our vision for the future? What are we building towards? What are our goals? What do we want to go accomplish? What does success look like? In co-creating that, it becomes ours together. It's not Cambric saying this, or the management team saying that. It becomes one plan. And it's powerful because there's true ownership in the management team. Once we have that established, and our Cambric Business System team works closely with the management team in building that, then we have the North Star. What's our purpose? What are we going to go achieve? What's our strategy to get there? What are our goals associated with it?

• 37:56Speaker 00

  What plans, KPIs, resources do we need to have to go accomplish that?

• 38:01Speaker 01

  As you go to implement different aspects of KBS with different companies, I'd love to ask you some of the key things you've found that work well. What do you coach or teach about hiring practices that are effective?

• 38:16Speaker 00

  We first start any business understanding what are the mission critical roles? Almost every midsize company has 15 to 20 critical roles you need to be successful. What are those? What's our talent look like in those roles? Do we have the right people? Do we have the right roles? Do we need to make adjustments? That starts us. Once we do that, there probably are a handful of roles we need to go hire for. How do we create a strong hiring process? We've built ours based on GH Smart or WHO process, which we think is single-handedly the best hiring process. We've adapted it for ourselves. We have three components of it. The first is around scorecard. Do you have a clear scorecard of what success looks like? Do you have a mission? Do you have objectives? Do you have outcomes? And that most people skip over. They start a JD and start hiring. That helps us get alignment of what type of leader we need,

• 39:00Speaker 00

  what type of goals do we need to have to accomplish this? Who disagrees with that? Get all the stakeholders to get their input in. Once we have the scorecard, then we think about sourcing. Most sourcing is reactive. You post and whoever's available applies. Usually the best people are happily employed. You need to go find them. We spend a lot of time proactively building those relationships. And we focus a lot on our employee value proposition. Why does someone want to join one of our businesses? What are they going to learn? Where are they going to grow? What are they going to gain from that experience? Communicating that. Then we focus on selection. That's where most people spend their time when they think about hiring. It's a combination. There's the interviews. We're structured. We have competency-based interviews, cultural-based interviews. We have outcomes-based interviews.

• 39:42Speaker 00

  After that, we do a case study that depth of analysis and understanding how they think, how they operate. We layer in cognitive behavioral assessments, back channel references. Most people understand intuitively that this can improve their hiring process. They don't have the discipline and the adherence to it. We find the business system is driving that adherence to a system and a structured way of thinking. If we have that discipline in hiring, we can improve our odds of success. GH Smart estimates that 50% of hires are mistakes. If we can get that improved to 70% of the right hire, or 80 or 90, it's a huge unlock in a midsize company where people are everything, driving the value of the business.

• 40:21Speaker 01

  As you're bringing in aspects of the system, metrics, KPIs, to a company that hasn't had it before, what does that rollout process look like?

• 40:29Speaker 00

  Understanding where they are to start. Some companies are further along on their journey than others. Then it's understanding what are the biggest business drivers? Sometimes we have a sense of them. There's the obvious ones we need to track, revenue or earnings. There's a lot more behind that. Once we understand what the biggest drivers are, then can we get clarity and visibility into them? Then can we drive that throughout the organization? At JM Test, as an example, we quickly realized that turnaround time was one of the most critical metrics. At the time, they didn't know their turnaround time at the company, let alone a branch or down to the individual. We tried to understand this turnaround time. How do we provide the dashboards, the clarity, the visibility that our team members can understand it? Once we start doing that, then you unlock potential where your entry-level workers or frontline workers can say,

• 41:15Speaker 00

  I can drive turnaround if I reconfigure my workspace and change these things. Then you get more people thinking about how to drive turnaround time, not just the leadership team. That's when you start getting powerful. Then what we start to do is say, can we align our incentives to those KPIs? If we align our incentives to those KPIs, people have a motivation to do it. And then we start rewarding them. At JM Test, in the first couple of years, our bonuses went up 3X because we had been driving the results and they were seeing it. As they start to get the benefits from it, they're like, oh, great. I want to go do more of that. Then we can start raising the bar in terms of our goals and what we want to accomplish together. We try to be thoughtful about how do you make sure you do that effectively?

• 41:52Speaker 01

  How do you think about taking a business that's had a certain cadence of growth and inflecting it organically?

• 41:59Speaker 00

  In midsize companies, usually they have grown nicely, but there's something that we can unlock in the business. That's what we want to focus on is how do we understand what that is? In some business, it may be expanding into new markets. In the case of Marine Concepts, one of our companies, it was building out a dealer network in the Southeast. In the case of JM Test, it was driving productivity improvements and focus on sort of customer experience at each of their locations. When we think about earnings growth, 35%. Kager that we've had in our companies, the vast majority of that's organic. We're not doing that through acquisition. We're focused on how do we enhance and improve what they're doing today? Almost all midsize companies, there's some opportunity that they haven't been able to focus on. We recently partnered with a business, Keep Supply.

• 42:43Speaker 00

  It's an amazing industrial refrigeration business. They've compounded that business at 70-plus% for the last five years. When they've been growing so fast and taking share, they haven't focused on the customer segmentation or vendor relationships. We can say, here's some opportunities where you haven't had the time and the resources to help understand what's possible there. We're going to come alongside you and continue to drive growth and improve the business in these fundamental ways. Each business is so different. It's coming alongside them and understanding that, saying, how can we be helpful?

• 43:14Speaker 01

  You mentioned at the outset that even though you're going to tend to hold businesses for a long time, some will pay dividends, there could be return to capital recaps. How do you go about making capital allocation decisions at these small midsize companies?

• 43:26Speaker 00

  We think of capital allocation decisions on multiple levels. The obvious is acquisitions. There's also the capex in terms of we're going to invest in a new factory or new facility, or we're going to expand in some area. And then there's hiring. We think of capital allocation across that spectrum, trying to help them understand if you invest $100,000 in this role, that means you have $100,000 less that you can go do over here. Does that make sense? Does that trade off? Getting people to think like owners, act like owners as they're investing in the full suite of options. As we start getting to acquisitions, we have team members on our side who come alongside them to help to think about capital allocation. What is a good investment? What are the criteria that are important? Valuation, how do we think about integration? That's important to us.

• 44:10Speaker 00

  We may not focus on acquisitions right away in a business because there's so much opportunity in the core or there's so much capability we need to build and muscle. We don't want to go do it until we have that. But it's important for us to think about capital allocation in a broad sense. All of these other touchpoints, getting each employee to be thinking about it with that mindset, making the best decisions that they can for the business.

• 44:31Speaker 01

  When you're buying a business with a good moat at a reasonable price, implementing your system to help grow it, still a good business, how do you think about exit strategy?

• 44:43Speaker 00

  Too many firms exit businesses too soon. When you have a great business that's compounding at 20% plus a year, you'd rather continue to hold that and compound it than try to go find a business you know less well that has more risk that you have to go invest in. The traditional fund structure pushes you to exit those businesses prematurely. We want to continue to own those, have that opportunity to compound those, still give opportunity for investors to have liquidity along the way through recaps or other mechanisms, focus on how do we build? We still look at, is a business ready for exit? What's the market going to pay this? What do we think the future growth of the business might look like? What do we think the risks are to the company? Usually the risk is exiting too soon versus exiting too late. We'd rather continue to compound,

• 45:28Speaker 00

  especially if we can turn capital along the way for investors.

• 45:32Speaker 01

  At what point in time would you look to sell?

• 45:34Speaker 00

  There's a few things. Let's say the market is going to pay us a silly price that it's going to be hard for us to achieve ourselves. That might be a candidate. Or the market looks risky in the future. We've driven a lot of growth in the business. There's something changing. It's a business that's going to be affected by AI that comes along and we think that the future earnings are more risky than they are today. That might be a candidate. Maybe there's a future home for the business that is a better home for us. It's a partner that can help accelerate in a way that we can't today. They'll pay us for the earnings of the business that we've had. We think it's a better home for the business. Those are all factors.

• 46:08Speaker 01

  When you step back from owning one business to a portfolio of companies, how have you thought about the breadth of different types of businesses you want to own?

• 46:19Speaker 00

  When I was at Berkshire, we had a number of businesses, 60-plus core holdings plus a number of subsidiaries in all different industries. I grew up in an environment where it wasn't specialized. It was a generalist approach. At Cambrik, we're more specialized than that, but we're not going to be deep sector specialists. We're going to focus on the highest quality businesses that we can grow and compound. We think the business system works regardless of industry or space. At this size and stage, we can help grow it. The overarching portfolio and approach is bringing more high-quality businesses that are compounding, creating a system that allows us to help the businesses build the muscle in the companies. What we find over time is they own more and more of what they're driving and what they're doing. We're coming alongside them, building the muscle.

• 47:03Speaker 00

  By having a longer-term duration, we have benefit of doing that. If we're going to exit a business in four years, it doesn't make sense to build the muscle deep in the business. Or if we're going to own a business for 10-plus years, there's a benefit of doing that. That's how we think about the construction. If we think about the management, how do we create a system to manage it that allows us to buy the highest-quality businesses, grow and compound them over time, treat them like we'd want to be treated if they were our businesses?

• 47:27Speaker 01

  So you have owned seven. What's the difference between the marginal company that you have partnered with and one that you were very close to but didn't?

• 47:39Speaker 00

  We look at about 500 investments to do one or two. When we look at a business that's right on the cusp, there's usually a couple of things that happen. There might be a business that we'd invest in, but they decide to continue to own it. That usually is the most likely path. If it's something we like, it's not that they're selling to someone else. They usually just decide, I'm not going to sell right now. That's great for us. We'd love to stay in touch if that's the case. The businesses that are on the cusp of us passing on, either we can't get comfortable with the industry, some dynamics, growth, challenges, the moat's there, but it's not as strong as we'd like, or there's some aspect that it might get disrupted over time. Sometimes we're just not aligned with management in terms of their vision of the future, or we're concerned about how they'll show up or how they'll engage with us. Those would be other ones that are on the cusp.

• 48:23Speaker 00

  We want to continue to have a high bar in terms of the quality of businesses we have, being selective and making sure the ones that we partner with are aligned with us in terms of vision and values that we think will compound nicely over time.

• 48:35Speaker 01

  I'd love you to take me through one of your portfolio companies, Soup to Nuts. And for fun, maybe pick the one that's been most challenged relative to your expectations.

• 48:45Speaker 00

  One of our earliest is an aftermarket marine business. They sell high-end boat covers. It was started by Randy Kent, who was a boating enthusiast, loved boating, but hated covering his boat at the end. It's a 30-minute process. He invented this track system that sits above the boat. The cover drops around the boat and then you zip it up. Takes two minutes to cover your boat. He invented this system, patented it. They have IP on the track system, solved a pain point that boat owners had. Launched it in Lake of the Ozarks. Business had NPS in the 60s. Great NPS. Customers loved it. He had grown it and wasn't interested in taking it to the next level. He was more interested in other pursuits. He connected with us because he was interested in a partner and scaling and growing it. We saw this opportunity to build out a dealer network.

• 49:30Speaker 00

  That was exciting to us, helping take the company to the next level. We partnered with them. It was smaller than we usually look at. Couple million in EBITDA. We usually look above 5 million and above. In hindsight, what we learned from that is that's a hard stage for us. The business system gets more value as there's more earnings in the company. We prefer businesses that are 5 million in earnings up versus two. Our first mistake there was it was a smaller stage than we were accustomed to. Our second mistake is we brought in the wrong leader. The owner wanted to transition out. It was part of the process. We hired a leader who had strong industry experience. He had grown and scaled a similar type marine business. We over-indexed on that strength of that experience. Building off dealer network was harder for him and harder for the team than they had expected.

• 50:15Speaker 00

  We were trying to help him and culturally wasn't a great fit. The learning there was not only do you need someone with experience, but you need a strong culture fit and alignment. Fortunately, we hired Steve Handel, who joined us 18 months ago. He'd been at Red Ventures and then in an operating business. He's done an amazing job. He's course corrected in terms of the dealer network build out. The business is in a much better place now. We've doubled the size of it. A lot of growth and opportunity there. The starting point was a tough one and then some mistakes that Brian and I made along the way. High-quality business, still has the strength in the moat, still has the opportunity. We'd much rather be spending our time at 5 million EBITDA businesses than two.

• 50:50Speaker 01

  How about one that's right in your speed spot?

• 50:53Speaker 00

  JM Test is a great example. We partnered with the Morrison family, 40-year-old family business. They had grown nicely over time. They wanted an alternative to traditional PE. They had talked to a number of private equity firms, connected with us. They're in the calibration services space. They calibrate industrial equipment, anything that measures flow, pressure, temperature, electricity. Great business, sticky, customers don't change. It's a small purchase price relative to the cost of failure of the products. That business has Forex since we partnered with it three-plus years ago. There's opportunity to continue to grow and partner with other regional players. The owner wanted to transition out over a couple of years. We brought in Andrew Trenor, who was someone we worked with previously. He's been a strong leader in helping accelerate that.

• 51:38Speaker 00

  We've had a lot of great talent in that business. We've been able to support the leadership there. A lot of opportunity, exciting to see the growth and the progress of that. Also a business that we think continues to compound and is a nice growth story.

• 51:50Speaker 01

  What is the team around Brian and you executing the strategy?

• 51:54Speaker 00

  We have a team of 16, three key areas. Our investing team, which is focused on the companies we're investing in, the diligence, the research, keeping that high-quality bar. Our community team, which is building the relationships with owners and partners well ahead of partnership or transaction. Then our Cambric Business System team, that's our largest team. It'll always be our largest team. That's the team that's coming alongside the owners and working with them. They are a combination of generalists, also specialists focusing on topics like talent or finance, tech and AI, recruiting, those types of topics, the hands-on partner that continues with the company throughout its life.

• 52:31Speaker 01

  Where are you hoping to take the business from here?

• 52:34Speaker 00

  We want to be the best business builders in the world. We want to help organizations and people reach their full potential. That's what we're focused on. There's a lot of opportunity to go do that. There's this growing group of families and founders who want something different, unique and special. Our hope is to continue to build that for decades to come. Brian and I are still young in our careers. That gives us a long runway. In addition to our companies compounding and having that long runway, we think there's this great opportunity to compound what we're building at Cambric with a long runway and investing in a great team to go do that.

• 53:03Speaker 01

  Tracy, I want to make sure I get a chance to ask you a couple of fun closing questions. What was your first paid job and what'd you learn from it?

• 53:10Speaker 00

  I started on our family's farm, working. I was in first grade, making 50 cents an hour, working on the farm, running the cash register. I couldn't even reach the cash register. I had to stand on a turned-over milk crate to reach it. Taught me so much, work ethic, integrity, business, from that vantage point. I'm fortunate to have had that experience.

• 53:27Speaker 01

  What have you changed your mind about the last few years?

• 53:30Speaker 00

  AI is affecting everybody and people are thinking a lot about it. When it first came out, I thought a lot about what it would change, what it would do to all of us. In the white-collar world especially, how do we think about intelligence working and what that looks like? It'll still be disruptive, but I believe now that the people, the culture, the relationships will be even more important. I thought for a while, will you need that as much? That's even more important now than it ever has been. We're under-invested in that as a society and there'll be this great opportunity to invest in that more.

• 54:00Speaker 01

  Which two people have had the biggest impact on your professional life?

• 54:03Speaker 00

  Hands down, Warren Buffett had a tremendous impact on me, both in terms of giving me an opportunity when I had little experience. The trust and competence that he had in me over time, the types of opportunities that he gave me. The other I'd say is my husband. He's affected my personal life and our family life, even more so my professional career. It is especially important that the person you marry is supportive of what you're doing. Especially for women, it's the most important career decision. Do you have a supportive partner who can be there as a sounding board, can help you, also flexible and willing to believe in you? My husband Scott has been that and more. I couldn't have done what I've done without him and his support. Those would be the two.

• 54:43Speaker 01

  What's a life lesson you wish you learned earlier in life?

• 54:47Speaker 00

  One would be when you trust and believe in people, you help them, you can get more so out of anybody than if you are too involved, too overriding, too micromanaging. Warren believed in me and I saw that trust. I've seen it even more so in the work that I've done. Wish I would have learned that even sooner.

• 55:05Speaker 01

  Tracy, last one. If the next five years are a chapter in your life, what's that chapter about?

• 55:10Speaker 00

  It's about building. At Cambric, we're building something special and unique for this next generation of companies. This first chapter has been building the foundation. Now we have a strong foundation. It's what we can build from here. The next chapter for me is definitely building.

• 55:23Speaker 01

  Tracy, wishing you all the best of luck to continue building what you've already built upon.

• 55:27Speaker 00

  Thank you, Ted. We appreciate it today.

• 55:30Speaker 01

  Thanks for listening all the way to the end. If you made it this far, how about one ask from me? Tell one friend about the show. It's the best way to keep growing this incredible community. Thanks so much. And until the next one, stay curious and keep compounding knowledge, relationships and capital a little bit at a time.

• 55:54Speaker 02

  All opinions expressed by Ted and podcast guests are solely their own opinions and do not reflect the opinion of capital allocators or their firms. This podcast is for informational purposes only and should not be relied upon as a basis for investment decisions. Clients of capital allocators or podcast guests may maintain positions in securities discussed on this podcast.