Why Would You Want to Own a Business?

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Loren Feldman:
Welcome, Shawn, Jay, and Jennifer. It’s great to have you here. I think we’re gonna have some fun today. I recently quoted in the Morning Report from a post written by Brent Beshore. Brent’s a very smart guy who buys small businesses for a living. Technically, he has a private equity firm, but it’s a different kind of PE firm. He buys companies with no intention of flipping them or of ousting the founder. That’s why he calls his company Permanent Equity. He also introduced a big event last year called the Main Street Summit, which was really interesting for a lot of reasons maybe we’ll get to.

In his post, Brent wrote, “I’ve had the privilege of peeking behind the curtain at 10,000-plus businesses. Some observations.” And then he listed 12 or 13. I want to go through some of these observations and get your reactions. I can tell you, they paint a pretty bleak picture of life at a small business. And I’m wondering if it made sense to you guys. The first one was, “All businesses are loosely functioning disasters.” Shawn, you responded to the LinkedIn post with a little bit of a pushback, I would say. Do you want to take that one on first?

Shawn Busse:
Yeah, I mean, I read his list. And I thought about it a bit. And I was like, “Wow, this doesn’t sound like any of my clients.” And I realized, it really depends on who you’re looking at. If you think about the small business landscape, 90 percent of small businesses are under a million dollars. So you’re talking about a lot of organizations that don’t have a lot of structure: a lot of solopreneurs, a lot of really, really small organizations. So I think, yeah, if I reflect back to my business in its early days, if you were to look at it then, when it was under a million dollars, it probably was a disaster in a lot of ways, but it’s not today.

Loren Feldman:
Well, let me say this: Most of the companies that Brent looks at are probably not under a million dollars. He looks at bigger companies.

Shawn Busse:
Yeah, I mean, I’ve definitely seen some larger companies that are a disaster. But I don’t know, it just seemed pretty cynical to me. This hasn’t been my experience.

Jennifer Kerhin:
It reminds me of what people say about marriage, too. You know, “50 percent of marriages end in divorce. Why get married?” Well, that 50 percent is also people who are on their second, third, fourth marriages. And I feel like, that doesn’t mean if there’s one failure, or if you peek under or inside the house of someone who’s married at any given snapshot of a day, that marriage might look like a disaster. But overall, it’s functioning, it’s strong. It’s the marathon, not the sprint. And I don’t think that’s fair.

Shawn Busse:
Right. And I also thought about, like, who’s coming to Brent? Like, who’s giving Brent their financials? So this is somebody who probably wants to sell a business. I have seen, in many cases, the people who are really eager to sell their business, even urgent to sell a business, they’re often the ones that are not doing really well. If you’re running a really healthy business, you’re often in no hurry to sell it.

Jay Goltz:
Well, unless you’ve gotten old, which is the case with most of the people he’s probably dealing with at some point. But Loren, read the first few words: “All businesses”— what was the word he used?

Loren Feldman:
“All businesses are loosely functioning disasters.”

Jay Goltz:
Okay, that’s all we need. This is my line: “Everyone who speaks in absolutes is always wrong.” What a ridiculous comment, for God’s sake. “All businesses?” Really? There’s no businesses out there that aren’t? I mean, talk about hyperbole.

Loren Feldman:
Yes, it is hyperbole. I’m going to stop you there. People talk that way. You happen to be very precise with the language that you use, and that’s a good thing. He says at the end: It’s really not all businesses.

Jay Goltz:
Okay.

Loren Feldman:
Let’s focus on the substance.

Jay Goltz:
Okay, I got it. Let’s just say “many businesses.” Okay, fair enough.

Shawn Busse:
Many is probably true.

Jennifer Kerhin:
Yeah, and I also think businesses are made up of people, and people can be complicated. Human life can be messy. If you look at any given business, at the moment, could it be a little messy? I think “loosely functioning disaster”—I think Shawn, you said this—is a cynical view of it. I think if you look at it from outside, could it look messy? Could it look not super functional? But we’re people. We’re not robots. We’re not AI.

Jay Goltz:
My argument is, if they were that big of a disaster, they wouldn’t be in business. It couldn’t be that bad, or they wouldn’t be in business. So is there something to what he’s saying? Absolutely. I fully understand his point, because until I joined business groups, I thought I was the only one who had problems. And you know, it is eye-opening. You think you’re the only one that has problems with management. You think you’re the only one that has problems with cash. So his point is—I got it. I would agree with Shawn. It’s cynical, for sure.

Shawn Busse:
It’s like asking a divorce attorney about marriage, right? If you ask a divorce attorney about getting married, they will give you a certain point of view. So I think that’s the point.

Loren Feldman:
I know Brent a little bit. He’s not a cynical person. I think it’s a matter of choosing the right word.

Jay Goltz:
Yeah, sure. No, no, there’s truth in it. Spoiler alert: there’s not one of these that there isn’t some serious truth to. I just take exception, and I do react to the hyperbole that’s built in, that I don’t think was necessary. I think it would have been just as effective to say “many businesses.” But yeah, there’s something to what he’s saying.

Shawn Busse:
Actually, I think Jennifer’s got a really good point here. There are points in the trajectory of my business where if you looked at it, and you looked at the P&L, you’d be like, “Wow, Shawn has got his shit together. This business is so well-run. He’s making good margins, awesome growth, etc., etc.” But if you were to talk to me, I would be like, “This is frickin’ hard. I’m miserable.” I’d have people in my office crying, people super sad. You know, just lots of things that don’t show up on the P&L.

And then at other times, you look at the business, you’ll be like, “Wow, Kinesis isn’t doing so great. I don’t know. I wouldn’t buy that business.” And you talk to me, and I’d be like, “You know what? I’m really happy. This is a great place. People care for me. Things are going well.” I mean, that might be even a little bit of Jay’s arc. You know, Jay, you talk about super fast growth. But yet how unhappy you were in your earlier days.

Jay Goltz:
I was stressed. It was terrible stress. Terrible stress.

Shawn Busse:
So it’s like, I think Jennifer makes such a good point here, because there’s such a subjective perspective. And if you look at the P&L, it’s just through one lens you’re seeing it. And I think this is the trap businesses fall into when they go through a merger or an acquisition or they buy a business. They’re looking at it through one dimension. And I see this all the time: “Oh, this is going to be so great!” They buy a business. They shove these two businesses together, and it’s a disaster. And that’s because they’re not seeing it in its full picture.

Jay Goltz:
And you brought up a good point. Maybe one of the things that’s not in the financial statements: How many people have been crying in the bathroom this year? You know, that would be a good metric to keep track of. Because basically, what I’m saying is we’re all 100 percent right. And he’s got a lot of hyperbole. But there isn’t one of these things that there isn’t a point to it.

Loren Feldman:
All right, let’s try another one.

Jay Goltz:
Go ahead.

Shawn Busse:
Bring us another one.

Loren Feldman:
“Small businesses don’t stay small on purpose.”

Jay Goltz:
Agreed. I’ve got no problem with that one.

Loren Feldman:
Is that true?

Jay Goltz:
Yeah. I don’t think people consciously say, “Oh, I don’t want to get big.” I think they’re held back because they’re held back.

Loren Feldman:
Well, if you have a restaurant—I mean, it depends on what kind of business and what your goals are.

Jay Goltz:
That’s true. Sure.

Shawn Busse:
I mean, you know, Loren, we had that interview with Cameron a few weeks ago, talking about his co-op, switching his business to a co-op. I think he was very clear on his choice of growth. I mean, his trajectory is going to maintain him as a small business for the next, you know, 50 years. So, I think he’s made a choice for a certain level of stability. I know a lot of owners who are like, “Yeah, I like it, because I’m making a lot of money.” So they’ve made that choice. But I think there are a lot of folks where the business is out of their control.

Jay Goltz:
I’d largely agree. Again, I think if you put “most” on all these, it would make them better, but this one’s pretty true. I think that most small businesses would like to get bigger, but can’t.

Shawn Busse:
What about you, Jennifer? What do you think?

Jennifer Kerhin:
I’m not sure about this one. Sometimes they might want to stay small, but they can’t because of the forces around them: competitive pressure. You have to grow, or you’ll wither and die. Or you get an incredible offer. You have these small tech companies, they might want to form a certain niche, and then they get this ridiculous offer. It’s hard to say no to transformational wealth. To me, I took that as a negative. Maybe some people would like to; they just can’t for the purposes around them—the competitive market. So I don’t know about this one.

Jay Goltz:
Next!

Loren Feldman:
I know people who are solopreneurs and have chosen to stay that way. They don’t want to hire employees. They’re happy with what they’re doing. I think there are certainly exceptions to that one. But again, I think his larger point is right. Next: “Most companies don’t make much money.”

Jennifer Kerhin:
I think that’s totally false.

Jay Goltz:
Oh, see. I have to tell you, I think that one could largely be true.

Shawn Busse:
Well, let’s get clear here. We’re talking about net income? Are we talking “make money,” meaning money you get to keep versus revenue?

Loren Feldman:
That’s the way I would read it.

Jay Goltz:
Yeah, and how many businesses make half a million dollars net? Not many. Three hundred thousand a year?

Shawn Busse:
The statistic is most businesses are under a million dollars in revenue—91 percent, something like that. So if they’re making 10 percent net income, they’re only making $100,000. That’s pre-tax. So after tax, what? They’re taking home $60,000?

Jay Goltz:
I think that one is largely true.

Jennifer Kerhin:
All right. That’s a good point. I was thinking more of: You don’t stay in business if you can’t figure out the money. But I didn’t think about how many small businesses are under a million. You’re right.

Jay Goltz:
No, Shawn’s 100 percent right, because I’ve looked into this. Most businesses are very small. I mean, that’s a fact. That’s a fact. Doing the ESOP stuff, I looked into that. And clearly 99 percent of businesses are too small to even consider an ESOP. So that one, I think, is statistically just true.

Jennifer Kerhin:
And Jay, I wonder if that is, to Loren’s discussion of consultants, they’re businesses in almost name only, because it’s really just a consultancy. And they have no intention of growing it past being a consultant. So they have no intention of having employees, and they can only take as much work as they can personally handle. To me, I know legally they’re businesses, but I think of consultants as very different from a business.

Jay Goltz:
Well, that clearly is part of the 99 percent. I mean, whether it’s 10 percent or 20. But a lot of them are hair salons. You know, there are plenty of service business, landscapers. You can make a long list of small businesses, and that isn’t an opinion. That’s a fact, that 99 percent are small. So that one’s pretty true.

Loren Feldman:
“What money they do make is almost always reinvested back into the business.”

Jay Goltz:
Probably true. Yeah, sure.

Shawn Busse:
That’s fairly true.

Jennifer Kerhin:
Yeah, I think that’s true.

Shawn Busse:
And I think that’s the thing a lot of employees don’t understand, especially if you don’t do open book management. Hat tip to your sponsor, Loren. I think the perception is often, “Oh, you own a business. You’re making big money.”

Jennifer Kerhin:
Yes. Yes.

Shawn Busse:
Employees and the general public just don’t understand how much you’re reinvesting back.

Jay Goltz:
Here’s an interesting point: I’ve spoken to several MBA classes—Northwestern, okay? These are the smart kids, quote-unquote. No one’s ever gotten my riddle right. It’s kind of surprising to me. I show them: If you’re growing at X percent, and you made X amount of money, and you need X amount of money to fund the business, how much is left? Nne of these smart kids has ever said, “Well, you’ve got to pay taxes on that money, even though you didn’t take it out.”

That’s the reality. And I’ve suffered from that terribly over the years. When you make money, even if you don’t take it out, you’ve got to pay the taxes on that money. This is what causes more cash-flow problems. So you’re paying the taxes, but you don’t actually have the money, because you put it into inventory. So I would say that one’s pretty true.

Shawn Busse:
Or, Jay, I don’t have inventory. You just put it in your bank account for a shitty day, and you still have to pay taxes on it.

Jay Goltz:
Or receivables, or hiring new people. There are lots of things you could put money into that are not a tax deduction, that you end up paying the taxes. Yeah, so I think that is largely true.

Jennifer Kerhin:
I also think that, unfortunately, a few very, very large businesses run by billionaires have done a disservice to the incredible work that small businesses do for this country. And so a lot of people have this view that we’re all like Dr. Evil, like we’re all this billionaire with this yacht—

Jay Goltz:
Or spaceship.

Jennifer Kerhin:
Yeah, we’re just trying to squeeze every penny out of it, instead of reinvesting into companies. And I think that’s an issue for capitalism in this country. Small businesses really help define communities. They’re the ones who are giving back to the local baseball group or the girls soccer group. They’re the ones doing it, not these giant billionaire-type companies. And I think it’s a shame that they set the mood.

Loren Feldman:
Every six months or so, Jay tells us he doesn’t want to be known as a CEO. I think for specifically that reason.

Jay Goltz:
Yeah, it’s true. CEO’s have a bad connotation. And in my case, I’m a little company. This occurred to me last year. I paid literally millions of dollars in taxes, between the real estate taxes, sales tax, payroll taxes. I pay millions of dollars in taxes—even if I don’t make money. That’s the key. Even if I don’t make a dollar, I still gotta pay the real estate taxes, still gotta pay the sales tax, still pay the payroll tax. So it’s the small businesses of America that are funding cities. There’s no question.

Shawn Busse:
Yeah, and I think you both make a really good point that I didn’t understand back when I was all about demonizing the business world. You know, I was like this idealistic artist. I was like, “I will never be in business.” And what a lot of folks don’t understand is that until you become super rich, you are going to pay actually a maximum tax bill. You’re going to pay crazy amounts of taxes. And when I mean super rich, I’m talking hundreds of millions of dollars. Then you can afford to do all these crazy schemes that allow you to pay, like, no taxes.

And this is why I think, to Jennifer’s point, we have this class of quote-unquote business owner, who the country kind of hates, rightly so, because they are not contributing to our society. And then at the same time, you’ve got this chunk of folks who make between, let’s say revenues of $500,000 to $100 million, who are paying huge sums in taxes. Like, huge sums. And there’s just no way around it. There’s no game to get out of paying those taxes, which is fine. But I think there’s a disconnect, because we get lumped in with that class of business owner who none of us really care for.

Jennifer Kerhin:
Well said, Shawn. You said it much better than I did.

Loren Feldman:
I’ll say it. You’re the good guys.

Jay Goltz:
That’s what I was looking for, Loren. Thank you.

Shawn Busse:
Well, we’re good, yeah.

Jennifer Kerhin:
I don’t want to say good guys or bad guys. No, I don’t want to say that.

Jay Goltz:
How about, “We’re not the bad guys”?

Jennifer Kerhin:
We’re not the bad guys.

Shawn Busse:
We’re contributing. We’re contributing. And I don’t think that’s well understood.

Loren Feldman:
I’ll say it: You guys are all good guys.

Loren Feldman:
Here’s one I found most interesting. “Most owners unknowingly tolerate a tremendous amount of risk.” True?

Jay Goltz:
Absolutely.

Jennifer Kerhin:
Absolutely.

Shawn Busse:
True. Yeah. One hundred percent.

Loren Feldman:
Well, tell me about the “unknowingly” part. What part did you not realize— [Laughter]

Shawn Busse:
Loren’s like, “Ooh, more!”

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