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Private Equity and the Hidden Cost of Selling a Business - EP016 · Freedom Flip

• 0:00
  Are the investment bank and private equity firm going to screw you? Yes or no? Yeah. They want to do the fund structure as short as possible because they can maximize what goes into their own pocket. All of these private equity firms are destroying your returns because the profits are getting leaked to the investment banks and the private equity firms not to do it.
• 0:16
  They have a timeline of five years, meaning that they really destroy the businesses. They put a lot of debt. They give very bad deals to the founders, which usually create a lot of frictions. They are focusing very short-term things to do, which tends to destroy the business and the long-term possibility of the business. I'm going to lose all my freedom. I'm going to lose all my cash flow. And I'm going to keep working for this guy to pay the debt that this guy took on my business to pay me. This is the worst thing.
• 0:41
  11. What people care is how much money am I getting? Because someone wrote in a book somewhere that what matters is the money that you get at the first bite of the apple. That's all it matters. How are you going to sustain yourself without cash flow? How is this going to impact you psychologically? Not having cash flow after 30 years of having cash flow? How's it going to impact you having to have a boss now? No, no, no, no, no. Because you know what? We need to sell this thing in four years. And that's it. The most powerful point that's the root cause of it all is
• 1:11
  Short-term thinking, of course. Against colliding with long-term thinking. Founders planning to do this has long-term vision is okay for a bad quarter, a bad month. PE's coming in and they're flipping the whole business because they're on a one-night stand. They're not in for marriage. Don't ever sell your business. Just let's partner together. Let's create a partnership. We have 20 businesses. Those are 20 partners along with the two co-founders. We didn't buy you. We don't want to screw you. We want to be in marriage with you.
• 1:37
  I look in the eyes of the founder and have to determine, are they in it for the money? Are they in it for the business? There's a really good theory that I learned in college and it changed my life. And it's basically external bias. And I'm using not the exact words, but it basically says we as humans have a bug where I think everything that goes wrong is everyone else's fault. Everything that goes right is me. Wait, it's not like that? What? This is right. Huh?
• 2:07
  It's so fascinating to me because I, they drilled it into my brain because exactly like you said, in college, I was like, well, yeah, I'm right. They're idiots. And I drilled it in my brain. So every time somebody's like, Hey, this is wrong. My initial reaction was like, nah, you're an idiot. I'm like, just flip. And I still, you know, it's not every time, but it's the stats are crazy. Like 93% of the time there's a mistake. We assume it was the mistake of the other person. And then 87% or something like success. We attribute it to ourselves and the input we had in the project.
• 2:36
  I need to go back to my whatever class, but it's one of the most powerful misconceptions. Yeah, that's wild. All right. So what a day. I'm so excited to hear about the whole week. After the first event, I met with Anastasia. We had dinner and I gave her a lot of feedback. I said the rhythm was not consistent during the event, meaning at the beginning there was too relaxed and flowy and she was not really taking the position of being in charge
• 3:06
  Okay, la, la, la, la. Feminine. I think there is more uncertainty and insecurity because it's the first time that she's doing it and whatnot. Rather than, dude, this is going to be hardcore. Get ready, guys. I would have not expected anything less than that. I'm like, this is going to be hardcore. And what kind of like the feedback that I gave to her is go f***ing.
• 3:25
  all-in a million miles per hour if we are crashing we will tell you don't worry we are not like normal ships that are gonna be like okay okay whatever it's like no trust me we're gonna tell you can we do a 10 minute break 15 minute break hey can we do this tomorrow do you have anything don't worry about just
• 3:41
  push. Then I also tell her that I think that we wasted a lot of time by allowing people just to go on tangents for a very, very long time. And I think that that's why we have therapy sessions, and we should channel all that in therapy sessions. Wow, that's so right.
• 3:57
  It's difficult to find the balance because you want people to share certain things, but you also don't want people to just dominate and then be like, okay, now you're wasting everyone's time. Wow. It's a challenge. So... But we were too far in one way. I think so. Especially the first two days. Then the following two days, she was like, I am not going to finish this. So the other thing that I said to her, this is like I said, we start at 9am. You are telling us that we start at 9am and you are showing up at 9.15. Like that's unacceptable.
• 4:27
  with my time if i want to sleep now i am not sleeping as much as i want because i you are telling me that i have to be ready don't do that i'm cool let's start at 11 i don't give a but tell me when and and commit to your word so that was another feedback that i gave her the other one is there was especially we saw this in the last couple of days we saw that i don't know if you realize this but the letters were were getting smaller and smaller and smaller and smaller and i
• 4:51
  That is not okay. Like you should have consistent big letters all the way. And one more feedback. There's many slides that you are like, okay, that's fine. Doesn't matter. This one doesn't matter. This one doesn't matter. I'm like, if it doesn't matter, don't put the slide. Yeah. Put it in the appendix just in case for, you know, but get it out of the way. Remove it. I don't know if you remember, she scrolled through many slides. Like, okay, this is what is so important. Okay, this one is.
• 5:14
  You're right, especially because once she felt behind, then it was threw everything off because of your two first reasons. To calm the feedback, I think that she redid all the slides. She changed the order. She changed the format. I should have come back. Yeah. Well, come to the next one. Are you going to go again? It's going to depend. If I am and I am a 30-minute flight, I may go for sure.
• 5:36
  She should have an in-person assistant, a person there all the time taking care of everything so she can do her thing. But anyhow, coming back to the event, just for you to get an idea. The slides are so much better. Incredible, in my opinion. We started on a Monday and we started late because people, their airplane arrived later. And so instead of starting at 5 p.m., we started like at 6.30 or 7 p.m. So we started.
• 6:02
  Then the next day, start at 9 a.m., which continue all the way the next day. So that was Tuesday all the way, Wednesday all the way, and Thursday. So the event ended up today, Friday at 7 a.m. That's the checkout. Do you remember that we continue? We did the reputation in the last day, right? So on Thursday, if I'm not mistaken, around 1 p.m., we finished the whole thing.
• 6:26
  The whole thing. And then we did something that was amazing. One of the guys, I can't remember how this came about, but Anastasia has the approach of, she might be seeing something in you or in me or in others, but she's not really saying, hey, ex, you cannot keep thinking about new ideas. I know that you're really excited. You just exited.
• 6:48
  Your brain chemistry is all f***ed up. You need to go back. You need to work out. You need to take care of your body. You mentioned multiple times that your sleep is bad. Your relationship with your spouse is eh. Dude, what are you talking about starting this other business? Stop. This is why I explain things in order. That's what kind of like we asked. Like, come on, Nastassia, just share with us like that. And then one of the guys are like, maybe we can do it private. And then I said, maybe we can just give it the option. Some people may not want any feedback.
• 7:16
  good for them, whatever. Some people may want feedback personal one-on-one because whatever. Some people may want to say, you know what? No, give me feedback in front of everyone so also everyone can learn because this may also help other people. So at the end of the day, everyone did this in front of everyone. We put the chairs like this, like in front of each other and we were all like sitting here like popcorn, right?
• 7:38
  Who went first? You? No, no, no. I went in the middle. And, but that was amazing. That was really good. And she was, I wouldn't call it savage because it's not about being savage. It was so good and so different what she mentioned to each person. Like that part was like, whoa, that is amazing.
• 7:58
  Yeah, I think that is amazing. And then I told her, hey, I want to keep meeting with you on a weekly basis. And she's like, yeah, but for me to help you, it's like, no, dude, for me to help you. Because you have now enough data of people that are telling you, do a couples retreat. Do just one for the spouses. Let's do a monthly call. We need to meet so you keep going because I know how this is going to end. Unless I am like...
• 8:22
  pinching you to move forward. It was spectacular. I ended up learning more things that... So I learned also a lot seeing other people. But this part that I shared with you... Well, I shared many things, but the part of being like the founders and how they pair with each other and the benefits, the difficulties. And it was fascinating to see that there are not many examples...
• 8:48
  of co-founders that are our combination, which is very interesting. Now, question, when you, you said that you are a complicator, right? Correct. And then you are creator or investor as number one?
• 9:03
  Probably creator. I'd be curious to have Anastasia diagnose me as well, because when I have conviction around investments, I almost look at creating as a way to invest for me. Right? So like seeing Bitcoin, it was clear. I went all up. So the best way to find this out is in the workbook. There is a part where we are talking about founder edge. And basically we write down all the things about our business that were so successful and all the stuff basically about ourselves, because we are, the businesses are a reflection of ourselves.
• 9:31
  And by reading those things, by reading your answers, then you can clearly see if you were more focused on the product, you were more focused on the operations and the systems, or if you were more focused on allocating resources. Yeah, that's a good reminder to go through. I'm trying to just think from remembering. Because even this is an interesting discussion of, I enjoy the process of creating the system of how to allocate resources. That gives me energy.
• 9:59
  Just combine all of them. Yeah, I know. And that's what I'm thinking. Maybe it is creator, but it's like, you know, because I love the systems of how do we set up the incentive structure. What I don't enjoy is operating the weekly cadence after creating it. Now, when it starts to break down or be less efficient, I love adjusting it and understanding or predicting three layers out from first, second, third order consequences.
• 10:22
  So let me give you an example. One person in the event, this person was saying, I am a creator. And when this person was talking, it was so obvious to me that this person was an operator. She was so... the light was coming out of her. She doesn't mention like systems, SOPs and whatever, but she's talking about how to put the engine together, basically.
• 10:46
  And then this person was saying, well, but no, no, I'm not an operator because I don't like the doing and the da-da-da-da, which is kind of like similar to what you are saying. And I'm like, okay, I hear you. Let me ask you a question. How is your follow-up? I'm going to ask you the question first to you, and then I tell you what she answered.
• 11:06
  How is my follow-up? Yeah. When it's creating the system and the structure, I'm like 10 steps ahead. And it actually, it's problematic because I'm so aggressive with people. Like, this is the new way. Here's how the structure is going to work well. And it's like, they can't stay with me. I'm dragging them. And that's feedback I got from my former partner was like, hey, Peter,
• 11:24
  Let's communicate so I can create the bridge from your vision and the creation into the new system we're going to operate. When it comes to like, okay, the system's now running. And actually, let me be clear. When I view the system as probably 80% done and implemented all the way through like, you know, there's questions because there's a new team member or this or that.
• 11:42
  That's where it just drains my energy to do like what I'd view as menial. Now, recognizing in the past, I was usually hiring people that didn't really have the ability to go run with it. And now I've just pay up to have really quality people that can go execute. Okay. So let me give one example. What I've realized through the nonprofit high school hustle, through hedge fund, through a variety of things is when I have someone that can think clearly, and maybe I've just grown a lot in the last five years of how I communicate, it's like massive.
• 12:08
  magic of I can visualize this system that people are like, you know, where is this coming from? And I don't know. It's Rain Man, right? It's like lines. And then working with them, I think I've improved a lot. I used to be weak to communicate here. Here's how it's going to function. Here's the pitfall to avoid. And this is how we're going to set up the system. If I flipped it and said, what is my true gift? That's the gift. Try again in a different way. Let me just give an example with high school hustle. With our thing, we did this whole system this year. We learned a lot. We failed, blah, blah, blah.
• 12:37
  And it was so clear to me this could never scale. And I got this, you know, download this whole new system that I'm so excited about of how we connect the dots to align incentives to create this wheel that will just operate. It's working. We have these people with a million followers. That's the call that I was late for.
• 12:53
  I joined, this guy's a million followers, and he's like, I want to drop everything to support you guys and support myself on this. So imagining how the wheel operates of basically onboarding or bringing in the talent, lining up the incentives, delivering the product to closing the loop and creating that loop. That is where I think I have a gift and I'm in the 1% of the world. You come up with an idea of how things should work, a system, let's call it, and then you
• 13:22
  Do you follow up to make sure that this gets done? Do you check the, let's say, the KPIs to see how it goes? You checked out in the middle. How does that work? I think imagining the KPIs, designing them and structuring them really excites me. You know, but taking it from 85 to 88 or 90 is not interesting to me.
• 13:45
  Now, realizing it's down at 20% and we need this at 80 or 90, that is interesting. Like that's creating a new system, an entire new function. Are you excited to also follow up to look at the numbers? Great question. I have been because I know I have this operator partner that's going to go take this idea. Like I can see the magic thing that needs to be tweaked. And when he goes and tweaks the levers and does it and spends five weeks, I'm so excited to follow up next week and hear how it worked or failed.
• 14:13
  And when it failed, I asked five questions to get down. I'm like, oh, but you didn't do that one lever. Okay, I didn't communicate that or we didn't, we had a miscommunication. Try that. That is interesting because I think that you are talking, everything that you are talking right now is operation. Maybe the challenge is that I have in my mind, I have this perception of Peter as the person that doesn't do anything. And I'm thinking it's impossible to be an operator and don't do anything. You need to be there, right?
• 14:38
  My own interpretation is like, you look at my house and in your mind, because you don't know the system, it's me doing nothing. I love working on the system in my house because I'm visualizing. I enjoy the process of, I set up the structure, right? We need a new person there overnight.
• 14:55
  because we're going to be switching off this nurse. And I want someone that could be here for six months. You're going to hire them. Here's the process. Go through these six steps. Tell me if you have something that breaks up. And I said, we also need someone to backfill for your role so you can move up to a chief of staff. Here's how you're going to do it. So in your mind, you may not realize that conversation goes on or I didn't communicate it. There's just not communication, right? I view it as I'm creating the wheel
• 15:18
  so that the wheel can always go. And I'm creating it, and then I'm adjusting or creating the systems to ensure that, you know, even when the tire blows up, right, the wheel cracks, oh, we have another wheel ready to go. Like, those are things that give me so much joy, right, of also thinking through the insurance policy of like, hey, like, you know, the family's a funny one to talk about, right?
• 15:38
  how big is our bench? Well, our bench is a 10 person group that are trustworthy, capable, you know, people that we've spent money and invested on the time, energy and relationships so that they're in our house and my wife trusts them and they do a good job. Yeah. So I think that it could be that you are an operator.
• 15:53
  I don't know. I really don't know the answer, right, between the two of them. I do love getting into businesses. I really do. Like, that is a passion. Getting into businesses? What is the meaning of getting into business? Digging in. How does your business, it's like doing the operating room, right, doing the hospital. On your business, right, where are your limiting beliefs? Like, when I did the, I did a trip with a small business, right, and I'm talking through with him, and I'm like, where are your limiting beliefs? Why do you assume that?
• 16:16
  Okay, why, why, why? And it's suddenly, I told him, I go, this single thing when you change will 10x the revenue of your business. And he's seeing that start to achieve, right? I said, within a year, you're going to 10x because of this change. Because there was one thing where he was being poor in his mindset and his approach. And that breakthrough would be so powerful. It's going to be interesting. I would encourage you to speak with Anastasia to have like a personal session to dig deeper into this. Well, I want the feedback too, like she gave you all.
• 16:41
  Yeah, I think that is very important because all this, you know, in my mind, I'm thinking like, okay, first of all, Anastasia keeps saying that her studies show that it takes one year of thinking and iterating the idea and chewing the idea and testing it and see what the market tells us rather than, all right.
• 17:03
  Let's go right now. And then the other part is, what does each person do? How do we divide, let's say, things? Then when there is a problem, when there is a disagreement, who makes the final decision? And yeah, I think that just setting up a clear understanding and expectations of, and this is a conversation, right? If you ask me, okay, Pablo, what are you willing to do? I'm like, I don't know. Honestly, I have no idea. A couple of things. One, I wish I would have come with you this week, but I also am really happy I went to this.
• 17:32
  I met a guy who set up a $30 million dedicated fund that is supposed to go forever. I don't know what that means. Basically, he's trying to not be a private equity fund. Dude, the words coming out of his mouth, I was like, holy shit. He goes, I couldn't stand in front of these business owners and tell them I'm going to take care of your business when I was just trying to get the best price. And then I was going to sell it in five years. He goes, and I did this work on myself and I recognized. He did the Hoffman process and he had some good realized his alignment and childhood experience.
• 17:59
  needing external validation. And, you know, he was kind of transactional. It all comes back to this. I haven't heard anyone say this, and maybe I have, and I'm just reusing, but it's transformational versus transactional. They raised 30 million. Now they don't get an incentive. They're a little bit more of a private equity firm than I would like until eight years. At eight years, they can look at how they performed. And basically, you know, the 20% carry would convert into shares for them. And then another time at 16 years, and then never again. So their investors,
• 18:27
  are realizing these are long-term investments, long-term alignment, long-term everything. And I got through a lot of his structure, which was really fascinating to hear what went well, what went poorly. The guy who hosted the actual event, he has a 30-year private equity fund. So it's a private equity fund, but it's a 30-year hold. And he raised 50 million and now he has 30 million. And he uses zero debt. It's called permanent equity. And it was really neat just to dig into these models as other examples.
• 18:52
  And it was just so clear to me, right? I met an investment banker who lives in Indianapolis. He had sold his own software business. And he was like, yeah, I was kind of bored. So I'm doing this banking. I go, what? Banking sounds boring. Like, what attracts you to this? He goes, well, we don't work with any private equity funds.
• 19:07
  We've never represented them in 30 years and we never will. And I go, why is that? He goes, because there's an inherent conflict of interest. If you work with private equity funds and you're selling a founder-owned business, you probably get one, maybe two shots to work with the founder. But the private equity firm is your repeat business. So you end up basically screwing this founder. And he goes, so we are founder aligned. You represent the founder, but a founder pays you. But your real repeat customers is the private equity, of course.
• 19:34
  Your recurring revenue comes from the private equity firm. Insane, yeah. So he said, there's a conflict of interest. So I talked to him, I was like, who do you represent? He's like really good cash flowing businesses, many in the services industries and blue collar. And I was like, wow, we need to sit down together. So it was weird because I kept getting these pings of like seeing this, like, wow, this is whatever reason, however, God is delivering these messages, like very explicit, direct.
• 19:59
  Like, hey, alignment, alignment, alignment, right? Which is why I'm obsessed with the lazy readers, physically, mentally aligned. I'm bringing these all up because it was so fascinating to see the models of every even person I met that felt transactional. I was having visceral responses where I just had to like leave, leave and go away.
• 20:15
  And then I'd find myself talking with someone with 10, 20, 30 lifetime plans. And I'd be having two, three hour conversations. That's like the headline, right? It was fascinating. I kept getting pushed into transformational and pushed away from transactional. Isn't that funny? That is amazing. And I am thinking, give me a couple more details on that, like a 30 year private equity fund. Like who invest for 30? Like, I don't understand. What is that?
• 20:38
  So here's even cooler. I met with his head of business development, the guy that goes to find the businesses to buy. And he randomly, I do this thing, you'll find funny. It's this complete hippie thing. I walk in the room and I sit there and I go, who am I supposed to talk to? And I just like see where my energy is drawn. And it was this big like football looking guy. And I saw him. And then, you know, he was in a conversation. I was, I let fear, which is the enemy, right? That's to me, true evil is fear.
• 21:02
  I was like, I don't wanna go interrupt. So I didn't. And then boom, that night or the next night, he comes up to me and sits down and he's like, what are these weird red glasses you have? And then he was like, I'm really trying to get in my sleep. So we talked for 30 minutes. All I did was ask questions about what he's doing asleep. I never even said a statement. He was like, you're hitting my soul.
• 21:19
  Because I was like, do you set an alarm to go to bed? I was like, when do you eat? When do you stop eating? And he's like, because he goes, last night I always eat at five. But last night I ate at eight. And I had the worst sleep I've had in three months. And it was just questions, right, that I'm asking. So we go through sleep, health. And then he's like, I'm a former football player. I raised money. Now I buy businesses for this 30-year private equity firm.
• 21:38
  And I just drilled him for half an hour. And basically he was like, we don't have any competition because we buy these businesses with no debt, only equity. We're going to hold them for 30 years to compound at small, you know, continued growth at small, not crazy amounts. And then we either hold them or sell them, but it's a, it's a three decade hold. So it's essentially in the finance world, it's considered forever. And they did a $50 million fund and they just closed on a 300 million. I'm not saying I want to do exactly that. 300 million you said? Yeah. His second fund is 300 million.
• 22:07
  Okay, wait a second. Explain to me how that works. Let's say that you are the footballer, okay? Or the boss of the footballer. I am an investor. What's your pitch to me? Give me money, I give it to you in 30 years. Let's address your biggest concern right away. You have a surprise liquidity need in five years or four years. Well, we can use cash...
• 22:28
  No, no, no. But before that, try to make me invest in your third year. Yeah, it's kind of the same pitch we do. Hey, all of these private equity firms are basically destroying your returns because the profits are getting leaked to the investment banks and the private equity firms, not to you.
• 22:44
  As Warren and Charlie say, it's all about compounding, let's say, 10%. The key question is how many years do you compound at 10%? We want to compound directly at 30 because these smaller businesses we're buying, small mid-market businesses, we can compound at 20% a year, year over year. So I take a medium to smaller business that we know has true potential, good management. We're going to compound it at 20%.
• 23:08
  straight through for 30 years, right? And the cashflow from that is going to go to the holdco, which we're going to reinvest in additional compounding businesses. That's their model? That's their model. Doing that without selling avoids taxes, avoids investment banker fees, avoids the private equity fee. Wait, wait, wait, slower. Doing that without selling avoids... If you compare that to traditional private equity,
• 23:29
  In 30 years, you would have had six, five-year. At the most conservative, you'd have six turnovers of the whole fund. The simplifier is when you do short holds, the investor gets... Because? Because all the gains get leaked out. Not all. Not all. Much of the upside gets leaked out into the pockets of...
• 23:52
  Private equity. Because you need to pay a commission to the banker. You need to pay taxes, I guess. And the biggest 20% carried interest to the private equity firm partner. Well, but wouldn't that be the same at the end of the fund if we do 30 years? This is math. This is where it gets really fascinating. It's only one time. So that's the theory, right? I didn't go through exact numbers with them. I think that it should be the same.
• 24:15
  No, no, it destroys. That's like you telling me that a wealth manager taking 2% of my wealth. I need to see numbers. This is the other part that I really realized. Let's forget for one second if you are an operator, investor or creator, but you are for sure a complicator. And something that I realized is if you are trying to explain something to a simplifier, you shouldn't. Or you should use my pitch deck that is meant to be for a simplifier. I think that's true, except with first principles.
• 24:44
  Right, because first principles, as she said, is that everything you said is right. Yes, but what I'm saying is, yes, but this has nothing to do with anything in this moment. What do I mean is, I understand management fees. I understand the 2%, the 20%. I get it. I'm not an idiot. I'm not as advanced as you, but it's not, I don't understand the terms. What I'm saying is, even though it's something that it's simple, complicators tend to complicate something that is simple because complicators need more words. They are drawn into the complexity. Even though...
• 25:14
  It can be explained in a simple way. It can also be explained in a very complicated way. Part of what you're saying is right. So all I'm saying is asterisk. I think that is very important for us to understand who are we talking to. And this is the same challenge that we had that first time that you created all the slides. I'm like, this is too complicated. These slides might work great for a complicator. For a person that is in the receiving end as a complicator, I'm like, oh my gosh, I totally get it.
• 25:40
  Like, I saw it, and that's his reaction. It's like, oh, this is amazing. Yeah. Okay, there you go. Without me even talking to him about it, right? He could just go through the slides and just track. Yeah, and I think that, if I'm not mistaken, Aaron is a simplifier. But what's interesting is he got this so fast when we talked. Yes, but he sees other things just...
• 25:58
  He's like, hey, this is not going to work unless you do like this. How are you going to solve this, this, this, that? Much easier. All I'm saying that I think that is important to understand, and this to me really the penny dropped, is the time that I have a hard time with someone is when a complicator is using complicated terms trying to explain me something that it can be explained in a very simple way, which I understand. It's like blaming a Chinese for speaking Chinese to me. I get it, right?
• 26:23
  Let me flip your comment just a little bit because I think everything you said is right. But you're all looking at it as a simplifier. There are certain areas. I think part of the reason Aaron understands these things is because he's in the fund structure right now in his day-to-day business. So he's already very aware of this kind of opaque, weird finance world and fund structures. The other piece you're not thinking about is just let me explain it now from a complicator side.
• 26:45
  When simplifiers hear things that have some like weird hairy edges and different parts that are flowing and it's not a more direct one-to-one, they're just like, they're like, I have no interest. Exactly. Peter, Peter, if you are explaining this to a potential business partner, let's just say another Amazon business, Amazon business owners, most likely they are simplifiers. Sure. If you are doing this. In the rocket.
• 27:06
  Their brain is going to be like, no, not interested because I don't get you. You're completely correct. I think the deep question would be how many of these are going to be simplifiers versus, and we don't know. It doesn't matter. But we need to align based on who it is. What I'm saying is what language does the person speak? Oh, Spanish. All right. Let's speak in Spanish. Oh, English. Oh, let's speak in English. Okay, cool.
• 27:27
  Agreed. That's what I'm saying. I agree with all of that. I think Anastasia gave a powerful thing, which is I like using the first principles. Things like rather than going through what I just said to you, it might be let's use first principles. Are the investment bank and private equity firm going to screw you? Yes or no? Yeah.
• 27:42
  The way they screw you is clipping off. They want to do the fund structure as short as possible because they can maximize what goes into their own pockets. If you share numbers, this has a whole different impact. This is the part that I think that I am great and you miss sometimes. Yeah. Because I can bring you the simplicity on something that you're like, no, no, no, no, no. Let me just explain this to you in five slides. You will get it. Don't worry, dude. And I'm like...
• 28:09
  Peter, if you say, do you see your return is 50% lower than if we do it in 30 years? So as an example, if you put a million bucks, instead of getting 10, you're getting not even five, you're getting 3 million. Do you see what I'm saying? That is how you create impact. And I think even for a complicator, we want to have the explanation like that. I think it's just the easiest way to follow. People who truly understand
• 28:35
  long-term investments, realize that if someone's willing to defer their gain that long, they're not you. That's a simple way to say it. They are really, really aligned with you. There is alignment of incentives. Peter, there is a reason why 99% of people or 90% invest with private equity rather than 30-year private equity. This is why I'm so excited about going the opposite direction of that.
• 29:01
  Do you know why that is? It's the same reason the hedge funds. It's the same reason all of these people are investors. Because it's the exact opposite of the 10-year question you asked me at Tesla and Bitcoin on your birthday. It's the exact same simple theme in a different scenario of investing. You said, stop thinking about 12 months and a year and a half. What will you regret in 10 years? It's another example applied to private equity of buying businesses, not buying pieces of public companies.
• 29:27
  Yeah, I think we disagree on that is a very unique language for very unique people. This is at least what I might believe. I don't think that people are ready to even comprehend what the f*** you are talking about. Even if they can listen to you and they can understand the words in their mind...
• 29:44
  But you're going to two different things. I'm not pitching a 30-year private equity fund. We are pitching a forever fund. Correct. Which is even easier because it's a way bigger jump from a 30-year private equity fund. Let me just simplify the pitch here and tell me what I'm getting wrong. So we are a forever fund, let's say. Let's just call it 30 years. And why is this better than anything else? First of all, we don't use debt. Second, we are totally aligned with the business owners.
• 30:11
  We are totally aligned with you, the investors. And the reason is because private equity funds, they have a timeline of five years, meaning that they really destroy the businesses. They put a lot of debt. They give very bad deals to the founders, which usually create a lot of frictions. They are focusing very short term things to do, which tends to destroy the business and the long term possibility of the business.
• 30:32
  And the founder's relationship because of that. But not only that, then after five years, they sell it. Then you need to pay the carry. Then your returns as an investor is lower. And then what do you do with that money? Well, you invest in the next fund that they are raising. So now instead of having one fund, like a 30-year fund, you're having four, five, six funds. And your returns, instead of being X, Y, Z,
• 30:55
  Because they are looking to grow the business by XYZ. We, by taking long-term approach, we end up growing the business in a way higher percentage. You don't get destroyed with all these fees that we need to do when we sell, and the carry and so on. And therefore, here is the delta. The only question that I have is, as an investor, let's say, on the fund is, okay, how do I get liquidity if I need liquidity? Because 30 years, 30 is a long time.
• 31:19
  Typically, funds like this, once a year, get a third-party audit of the total values of the assets, the entire value asset, at which time they would say, hey, we have cash on our balance sheet or other investors in our fund that will buy you out if you want some liquidity for unknown reasons or surprise reasons. That's the most common way. Okay. Maybe it's quarterly. Maybe it's annually. Okay.
• 31:46
  And when you say other investors means other people that want to get into the fund or something like that, you mean? Usually they limit it to current investors. Oh, I see what you're saying. Hey, we start today, we raise 30 million bucks. Pablo puts in five, Peter puts in five. Another person gets divorced a year in. Pablo and Peter can buy his shares at the fair market value. Now this assumes... Fair market value, you should get it at a discount, right?
• 32:09
  This is a negotiation, right? Because if it's growing, people might say, I'll pay above auditors fair market value because it's an artistic valuation. You may say, hey, now it's worth 40. Yeah, that's a negotiation of the secondary space. It's just a negotiation of secondaries, correct. That is a very good answer. The true response, Pablo, I think that what I would say is, this is probably a little bit of plant medicine experience I have as well as I just love the psychology is. I think that, I don't know if there's a code word you want me to use, but we all lean towards how we see the world as being right.
• 32:38
  It comes back to the very first thing. And I think there's certain moments where I can feel even more of like, you're looking at complicators. You're like, well, complicators are, this is the problem. I did not say that at all. That's what you listen. You didn't. But I think in your mind, right? They're doing something, whether or not you communicate, they're doing something that's not ideal.
• 32:58
  Do you want to ask instead of assert? Way better. Good question. Do you feel you do that? Yes or no? No. Like what percentage would you say? Because I do do it. Say the full question again. Do you feel the way you see the world or your brain, the personality type? What percentage of the time do you see that as this is the one way, right?
• 33:17
  I would say this is the one way most of the time that works for me, for sure. Oh, yeah. Because I am looking to translate whatever I am seeing in a way that I can use it. We can talk about investments, companies, brain surgeries, relationships, energy, anything...
• 33:35
  I am looking to understand. I'm looking to translate it in a way. You know, you use the acronyms because that's how you translate in a way that works for you. For me, that's too complicated. I cannot remember all that. So I'm like, okay. And then I don't know how, but maybe I remember a word.
• 33:50
  Well, it's actually the personality types that allowed me to, I think, break through a lot of this. Like, please help me understand that book. Because now I know how my mom thinks and I know her personality type. And I can map that code to anyone with it. So now I can literally put on her glasses of how she sees the world. Not truly, right? Maybe 70 on a good day, 85%. On a bad day, 30 to 50%. But I can literally understand the framework she uses.
• 34:17
  And when I meet a woman or a man that's got the same type as my mom, and I know five to six different ways to type people, it just like I can get there fast and actually put on their glasses of how they see the world. Does that make sense? Yeah.
• 34:31
  And again, this is how we are translated to ourselves. Then many times it happens. Now I am realizing why many times I struggle with people in our community because most of these people are complicated. Most, for sure. Most people are complicated and they tend to go on tangents that I'm like. Totally true. Why are we here?
• 34:52
  Why are you even talking about this thing right now? No, no, listen. This is very important. When the Romans in the ear, I'm like, what? I just asked you about what did you order for? Like, what are we talking about?
• 35:07
  No, no, but you will comprehend. So here's what happened, right? Julius Caesar, when he was eating lunch, I'm like, I don't give a f***, Julius. Come on, dude, just come back. Here, headline one. This is what's so interesting, Pablo. When I think about...
• 35:22
  When we were discussing something and I realized when we're not in alignment, all I have to say mentally or with you is basically say, hey, what's our goal? And that pulls both of us out. And sometimes you might see the mountain as this goal and I might see this goal. But then we combine it and we're like – or we just throw mine away or throw yours away and we're like, oh, it's this new one. Or it was Peter's or Pablo's. And that is now a framework I will use every single time it feels like we're not aligned. Please do.
• 35:49
  Does that make sense? I love it. Please do so I can also. Learn from it. What I realized as a complicator is I'm trying to dig through this stuff. Like let's say I'm the guy talking about the Romans to find that framework that then can be used in 90% of situations. I've realized flipping in 80% to 90% of situations. If I flip something, I have a whole new perspective on it and I usually find a better path.
• 36:11
  Like just by flipping the idea. It's a simplifier technique, right? It's a very simplified, but it's also first principles, but it's also a complicator technique because it's actually way more complicated to not say, hey, we should go down this way. Let's try the exact opposite way that everyone's going. It's all three.
• 36:27
  Right? Simplifier, complicator, and first principle. And that's where I think the beauty with us truly is like, as long as people are speaking in first principles as their language, it doesn't matter which path they take. Mine might be windy and I take a couple circles and roundabouts and end up. And yours might be like, but with a simplifier, I think the problem they come across is if there's a wall there, sometimes they're like,
• 36:50
  I can't, I'm trying to get into the wall. And it's, whereas like with the help of a complicator, it's like, oh no, no, you just do a circle around it and then you're through. We tend to hit the wall two times and we were like, ah. Yes, it's not worth it. Eh, whatever.
• 37:07
  There's a guy from Indianapolis that has a partner and I ran into them and I like didn't want to talk to this guy. I kind of knew him, but I was just like not interested. He comes up to me and he's like, Peter, how are you? We met three years ago. And I'm like, hey, how are you? And he's like, yeah, you know, this is my partner. The partner was awesome. They buy these little businesses. They go on Craigslist. They go on real estate sites when people are listing real estate of a business and they're buying bottom of the barrel businesses.
• 37:34
  But they're getting them for like at most one times revenue, usually like a couple times EBITDA. Well, one times revenue might be five times EBITDA. Usually two or three. Two times EBITDA is not one times revenue, unless they are doing 50% EBITDA, which is insane.
• 37:50
  Not insane when you have really small businesses. So like they bought a business that's doing 800,000 revenue. It's probably 350 in profit. And I haven't seen the P&L, but I struggle to believe that that's true. If, unless you are adding back the salary of the owner that works full time. Yeah. Well, but that's not how life works, dude. On these lower end businesses, that is how it's done.
• 38:11
  All I'm saying is, sorry, it's not one-time revenue. You can call it one-time EBITDA. The first emotion I was having was like, oh my gosh, this is amazing. Huh, that could be interesting. And then boom, I was like, no, that's cigarette butts. These are small businesses. These are headaches. These are not the things I want to be doing. And I was like, absolutely not. But every conversation I had was an affirmation of think, even them to their credit, they're like, yeah, we want to hold these businesses forever.
• 38:35
  We haven't used external equity. We use SBA loans. We use some debt. We had some scary days during COVID where we thought we'd lose a business or a couple and all the expected things. One of the businesses they bought, their employees, four or five employees, two of them quit day one. They were driving trucks around. Really hairy stuff. Now, I was so proud of myself because I was like, this is where Pablo's wonderful influence and the Charlie Munger approach of like, no, just go for the very best.
• 39:03
  Don't waste your time on anything below the 1% of businesses that exist in the world. Because even the 1% of businesses is still a great large group. And aligning with them in a way that no one else, the 99% of people never could align, right? That's the key. We're finding the 1% of businesses and aligning them.
• 39:20
  with them the way 99% of businesses, private equity firms, public companies cannot align, do not align. That is, you know, I wasn't really planning or thinking through your questions, but that's, that's the key takeaway is I could feel the people that were clear, one, they move into way more of a missionary approach.
• 39:37
  Two, your job actually becomes easier because you're the black cow. You're a black sheep. There's no competition, right? And you said this, right? Oh, you know, people may not understand. You're right. Clarify numbers. And that's for investors. It's a little bit different with actual partners where you're
• 39:53
  You're partnering with him. Don't ever sell your business. Just let's partner together. Let's create a partnership. You know, we have 20 businesses. Those are 20 partners along with the two co-founders. We are partners. We didn't buy you. We don't want to screw you. We want to be in marriage with you. You know, we want to break bread permanently with you. That's the ethos and the thing, the thought that kept coming through my mind of through the conversations and how different that is.
• 40:17
  But it sounds that also you met people that are pretty much aligned with this idea, maybe doing things a little bit different. But this 30-year private equity fund, I mean, I never heard about that.
• 40:28
  He's like his own world and he's been doing it, I think, since 2017. How does he even make money? It's just 2% management fees every year. I didn't dig in on that and they wouldn't tell me their returns. I was like, what are your returns? He's like, I can't give you that. But we're competitive to private equities, what he claimed. Why he wouldn't give you the... Because they're a private investment firm and... But don't you, if you want to invest? Well, I didn't...
• 40:53
  They don't really take much investment. So they have a couple billionaires that basically wrote their checks, and they don't – it's not a broad – they're not seeking investment actively. That is interesting also. He said, I look in the eyes of the founder and have to determine, are they in it for the money or are they in it for the business? That was the gem. That was the key one. And that's the gift I think I have along with –
• 41:15
  Some people in my life, as well as just skill of learning is like that key question of seeing and communicating them the risk. And so then summarizing the conference. So one, there were like three or four groups that were, let's call them like permanent capital type structures or long-term capital structures. Those were really interesting. The separate one is flew with a gentleman that has a incredible business. And I pitched him this whole thing. He's like, that's awesome. Everything you're saying I love.
• 41:40
  Now, it's not like a good candidate because it's a real estate space, but he goes, what do you do with his big thing on his mind is transition. If he wanted to move to a chairman role and how you set up that. And it was fascinating because I said, we don't really intend to partner with someone that doesn't want to keep running the business indefinitely. Like that's our initial thought is help them move into a chairman role, but there's still always going to be, this is a passion of theirs. This is a thing they take pride in. But it did bring me back to the private equity thing of,
• 42:07
  Just a slightly comment on that because there's a big difference between people that are running their business and people that are chairing their business. These are two different things. You just mix these two things in one sentence. I'm just giving you some tips on your pitch. We want people that only run their business forever. And I think that not necessarily because some people may want or may find
• 42:28
  that they are way better at just being a chair rather than the being the day-to-day and they may because it's similar to my story right i just look at my numbers and tell me what am i doing and you will not be able to understand what i am doing when we think about you agreed totally the interesting question would be if we look in buffett's charlie and and warren's 70 companies how many of them do we think the person was more of a chairman or a ceo because it's really you flag something we should dig in on more
• 42:57
  We need all the data on all the companies to understand properly from the beginning until now to better understand their investments and their return and the share in Berkshire that all these companies have. Because honestly, I have no idea. I have no idea what drives the price of Berkshire. Is Geico or is Dairy Queen or is Coca-Cola or is Apple? I don't know.
• 43:20
  You're right on everything you're saying. I think it's a good flag for us just to dig in more because to answer you, if we could find Pablo's all day, I would love, I would take 30 of similar people, you that want to be chairman, you know, high level. Awesome. I think we just need to investigate. You also are unique. I don't know. There's just a lot of, are you a unicorn? That's hard to replicate. Coming back to this guy that you said he wants to transition. What do you mean? He's done this business since basically he was in high school, legitimately since he was in college. Okay. How old is he? Early fifties.
• 43:50
  okay, so this person has been doing this for 35 years. And he says, hey, I want to shift my life to 80%, 90% business. Now, he's decided his business will be his mission, right? It's his way to give back to the world. And he goes through his employees and helps his huge number of staff, etc. But he said, I want 30% business, 30% the nonprofit business.
• 44:15
  And then I think 30% more kind of family, just travel, just enjoy. If he stops showing up in the business, what happens with the business? Like this is an industry, let's just say is highly tied to trust in him.
• 44:26
  Yeah, so real estate, I think that you mentioned. Yes, which just makes it very hard. So that is a little bit of a red flag. If you disappear, then the business disappears. Now, I guess that people may have thought the same thing about Steve Jobs, about Ford, and about all these massive companies. The only difference is the market is pretty efficient. And the market really looks at these real estate companies, development firms, owners differently.
• 44:51
  And they're not worth much in most cases because it's proven out. So, you know, you have a lot of data points. It was more of a cool conversation to talk through. I talked to another business that's one of the biggest contracting firms in the country, and they're talking to a strategic that's... When you say contracting, you mean contracting what?
• 45:08
  Like a blue collar labor that they provide. They're one of the largest in the country in this specific niche. So when people think contractors, they think electric, plumbing, HVAC, painting, all that kind of stuff. Another cool example, these guys started the business, two partners in high school, became business partners and started this, Contractor.
• 45:25
  You know, they've grown, they've learned, they've tried new stuff. They're now one of the largest in the country. And I talked with one of them and he goes, you know, and this was kind of more of, I'd say the finance one, they're 50, 50 partners on everything. And he was, he goes, this sounds awesome. We're going to do it now. They're already, they're under LOI ready to sell to a strategic.
• 45:42
  You know, in the strategic, they believe and they say, we're going to take care of you and you're going to run everything. And sorry, it's not it's a roll up of this type of contractor firm that's owned majority by a private firm. That's not a strategic. It depends how you look at it. They're being bought by the largest platform that is already in the space. Now they have investment, their equity capital. How much debt are they going to strangle the business with?
• 46:05
  I don't know the exact. Dude, those are great questions. Well, no, I said to him, you understand what happens when you have the debt. You become very fragile. You can't make the big expansion because they're looking for a one-night stand. Are you better asking questions or asking questions and giving answers?
• 46:19
  Depends with kids or adults. Everyone? Everyone's a harder. If you try and average it, I'd say I'm like average. The person that you... Okay, adults, let's say. It depends, man, because you gave me great feedback. And let's say 30% of the conversation was like, only ask questions. They went great. And then if I was lazy or not thinking clearly about it, I'm talking more. And it was... I didn't enjoy the conversation much. I don't think it was as...
• 46:40
  Powerful. So right now you just shared very interesting scenario. Yeah. And then what question did you ask about that? They don't know. Their answer was, I don't know. That's not what I asked you. I didn't ask you what's his answer. Oh, whether or not I asked about that? I asked what question did you ask them about that? I don't remember if I asked or not.
• 46:59
  I think that that sounds very powerful when speaking with a person that is about to sell the baby or about to whatever. What happens with the debt? To say, hey, what are you considering? Well, we are considering private equity. We are considering roll-up. We are considering X, Y, C. Oh, interesting. Okay. Do you know how much debt are they going to put in the business?
• 47:18
  Oh, no, I don't know. Okay. Do you have any idea? No, zero idea. Would you like to learn about it? Yeah, I would like to learn about it. Okay. Would you... What I have seen is that the debt is three times C, Vida, four times C, Vida. That's usually what could be, let's say. Let's say that it's something like that. So then the next question is like, do you know what happens with your cash flow that right now you're getting? No. Okay. Do you want to try to guess what's happened with your cash flow? Exactly. Yeah, go to zero. Okay.
• 47:47
  And do you know where the cash flow goes? Bingo, yes, exactly. To repay the debt, huh? Okay, so you are asking questions. To educate them, yeah. Or show the lack of education. And the person is like, holy, I know nothing about this thing, which is the most important thing. I'm gonna lose all my freedom. I'm gonna lose all my cash flow. And I'm going to keep working for this guy to pay the debt that this guy took on my business to pay me. This is the worst deal ever.
• 48:16
  You know what's so funny, Pablo? Is I just, when I'm not asking questions, I'm doing what I pointed out you may or may not do as well. I'm assuming they see the world the way I do and they understand these things rather than asking the questions to help understand where they are
• 48:34
  And if they have any kind of knowledge in this or not, it's fascinating. And I mean this sincerely, it's humbling to recognize that. It's like when I'm having this conversation, I'm like, well, they would, if they're going to sell it, they would have to want to know how private equity works and how these things work. We have no idea how they work.
• 48:49
  And it just depends every person. They did take a small investment from a guy who is knowledgeable, that is a mutual friend, but I don't know if he's really taught them or they just defer to him as like, hey, what do you think? In my experience, and again, this is just a very niche vertical, what people care is how much money am I getting? Because someone wrote in a book somewhere that what matters is the money that you get at the first bite of the apple, that's all it matters, but they're not considering what also matters is what are you gonna do with that money?
• 49:18
  What also matters is how are you going to sustain yourself without cash flow? How is this going to impact you psychologically? Not having cash flow after 30 years of having cash flow? How's it going to impact you having to have a boss now? How is it going to impact you to what you wanted to do certain things with the business and then your new boss says, no, no, no, no, no, no. Because you know what? We need to sell this thing in four years. So no.
• 49:45
  And that's it. The most powerful point that's the root cause of it all is what?
• 49:50
  Yeah, short-term thinking, of course. Against colliding with long-term thinking. Founders planning to do this, has long-term vision, is okay for a bad quarter, a bad month. PEs coming in and just flipping. They're flipping the whole business because they're on a one-night stand. They're not in for marriage. That's what it is. And all of those are downstream. Every single problem we bring up is downstream. Why do you use so much debt? Well, because I need to flip to maximize return. Yeah.
• 50:17
  Why am I firing a bunch of employees? Well, I need to juice my margin to get ready for a higher EBITDA before the sell. Well, but I need those employees if we're going to achieve sustained 20% rather than a quick 30, 35, and then we start crashing to 10, 10, 10 or negative growth. Yeah. So that is my ideas to you. I know that you don't like feedback, so that's my ideas. I want you to always hold me to it because it's something I'm trying to transfer from children to adults. It's changed my life with children.
• 50:46
  Yeah, you do great with children. It's all expectations. I used to expect a lot of kids in all these books made me remove those bars. I need to remove them for adults. Seriously, you say expectations. I get the sense that you like talking about this. You like educating. You enjoy a lot of educating. But one education form is by asking questions and therefore speaking very little. And then the other one is by asking very little questions and speaking a lot. The worst. Seriously. I mean, just objectively. Yeah.
• 51:16
  Because I could go ramble for 20 minutes. Do I know if you learned any of it? No idea. I say, hey, do you like that? Yeah. No. Out loud. Yeah. In my head. No. Everyone loves to be asked questions. Not everyone. Most people. You know what? It's so funny. I think you're really good once you see something at identifying what the problem is.
• 51:44
  I think I'm really good at before it happens, understanding what the problem will be in the future, which are both great. That's interesting. Like I went to Anastasia's event and I said, this was awesome. And I meant every word I told her, but when you said, man, we had these people going off the rails, as soon as you said it, I was like, oh my God, yeah, that's probably 20 to 30% of the event that was unnecessary. That was not beneficial.
• 52:10
  So what you mean is it's hard for you once it happened, but it's easier for you. I don't like go into that rear view. I don't know if it's I don't enjoy it or my brain doesn't work that way of simply cutting through the same way you can cut through where it goes wrong based on. And it's funny. It's exactly what we're talking about with this. You want me to show the paper. I can see exactly where things will work or won't work.
• 52:34
  But that's interesting. Okay, wait, wait, let's just build on that. That's interesting. I totally agree with you that I can see the current situation and I'm like, okay, I know that I can dig and I can find the problem and therefore come up with cures to that.
• 52:49
  I think the cures or the future orientation, I just lean into more. Future orientation. When you say, okay, this is how it's going to play out and so on and so on. Okay. I am seeing the same picture as you. I am disagreeing in the way that you are explaining it for certain people. Or I am seeing the future problem of you explaining it like this to certain people and other people. Because I gave you, think of it this way. I gave you a plate, right? I can put the food up.
• 53:18
  Right. You looked at the plate and you were like, no, no, no. The thing on the left tastes like garbage. Throw it away. Whereas like I'll kind of eat it because it's all healthy. And I'm like, ah, whatever. You know, like I ate all the anesthesia stuff. I was like, ah, it all feels pretty good.
• 53:34
  Like even though it was not, you could zone in on the parts when you saw the plate of food. What I am really good at is thinking like, what just happened? I have a system where she knows it's noon and if I'm at the house, I want lunch.
• 53:49
  And she knows the things to serve me. And I can create the systems ahead of time. And I can think through the problem to make sure food shows up at my, and you look at that and you go, what is this magic weird stuff that's happening like this? This seems like Peter has no idea what's going on. No, no, no. It's a thoughtful, thought out system that I love getting into the future problem, solving it before it hits us in the face.
• 54:11
  You get excited about the future. I get concerned about the present. So all these things end up many times clashing and not really helping with the progress. I think that summarizes a lot and comes back to one of the personality tests. I live in the future. You are really grounded in like...
• 54:30
  ignore, ignore, let's just, you know, this is the problem here, let's do that. And I think you're right. When I come back to that, it's like, I can identify whether it's the work or whatever when that you're spot on.
• 54:42
  Like this is right. There's no question. Digging through this, whether or not we decided to do it, it's the best thing for both you and me in our lives right now. That's the clear thing. Regardless of any business, I mean, we're in a great position. We don't have to do anything. So now it's a choice. Should we do something, right, which is one interesting question. If yes, it's that thing. And the best way we know of right now is a framework that our friend created and provided that –
• 55:07
  we're excited to dig into. And doing it with someone else is a lot more fun, even if we do it individually and then just trade notes or like call each other on bulls**t. It's going to be a hell of a lot more fun like working out with a friend than it is to be like, I'm going through this notebook. A hundred percent. I don't want to. All right, brother. Love you. Love you, brother. See you soon. See you, man.