Episode 46: Private Equity’s Curious and Incurious

Tony (02:05)
Well, thank you for joining our latest episode of Higher Smart with Tony Missouri. Super excited. And one of my greatest best friends in the industry, Russ, Russ Kathrein Vice President of Lumber and Bill Materials for Do It Best Organization. it's just it's special relationship that goes decades. And and I guess kind of one of the things that go comes along with that is we see some things. So Russ, welcome.

Russ (02:26)
You can say that again. We've seen a lot of things.

Tony (02:29)
a

lot of things from different angles and yeah and you know I generated an article earlier and you were kind enough to reach out and and share kind of your thoughts and and as the conversation rolled we're just like this would be something that we think would help a lot of leaders in the industry space. and you know the the the concept here is private equity is not the problem. It's arrogance that is that is just blind arrogance that is just seem to have come out of the woodwork into our industry space around these private equity held business models.

And you know, like for us, what what have you seen? What's different? What's new today in the

Russ (03:04)
Well, I would put it this way. I would say it's not private equity's bad. That's like saying Republicans are bad or Democrats are bad or whatever. It's yeah, there's some great actors, there's some average actors, and there's some poor and bad actors. you know, arrogance is definitely a problem. I also think strategy and purpose is a problem. You know, when you when you when you look at why the private equity is getting into it. I mean

And I've joked. I mean, we've had guys call us up and say, I'm gonna own a lumber, and you Why is I love the smell of lumber? Well, that's not a very good strategy, you know. I think from my perspective, the the people who get in without knowing what they're doing, and the people who get in strictly as a money play. You know, they really you know, they would they would do any industry they're looking for whatever industry will be the money play, those are the ones that seem to give the the private equity the bad name.

Tony (03:56)
you know, I mean, I invest in private equity deals on the side, right? Like we don't we don't do those to lose money, right? but there but there is an objective to creating a a solid environment, a great career path for individuals and people, and to increase the wealth building across the organization for the people that are are driving that are driving the business and doing the hard work. it

I'm just gonna share with you. Internally in our office, we have we call it the kindergarten rule. any private equity project we take on, we treat them as though they're in kindergarten. And they've got to graduate into first grade before we'll even start start moving with the project. Just because of the fact we've made mistakes in the past by making some assumptions that there's some pretty basic fundamentals that they were that they were aware of. And and why do you think?

Why do you think it's different today? Like what do you think what do you think the factors are that why are we seeing all these these you know lackeys in the in the private equity space?

Russ (04:50)
I was thinking about this and I thought about kind of three time periods pre-Great Recession, post-great recession to COVID, and then after COVID. Yeah. Pre-great recession. There was some really strategic and first out-of-the-box private equity, family. You know, I I worked with ProBuild, Devon Share Investments, which is sort of fidelity. you know, they had a buy and hold strategy.

They were very selective of who they bought. They wanted to buy the best. and yeah, they, you know, everyone stumbled in the Great Recession. And then I think after the Great Recession, you had a lot of because of the all the fallout, you had a lot of very talented individuals. You look at LT Gibson, you look at some other people out there that said, Hey, I want to start some up. And they went and they went and found private equity to back them. So there you had people with a strategy and with experience that were in the industry and wanted to go out and say, Hey, I've got a vision.

Help me fund this. And they're okay, we'll come along for the ride. Then with COVID, and this is probably where you and I've talked most recently, it was like it looked like it was shooting fish in a barrel for for these lumbery. So you had people jumping in afterwards that are just like, Hey, I want to make a lot of money. I want to be in the lumber business. And and those are the ones that don't really have a strategy. They probably don't have a long term, you know, buy and hold strategy. They're probably looking at a you know, five, seven year exit, which is fine too. But

I think the five, seven year exit it can can kind of cloud the judgment a little bit. We can, you know, we can riff on that a little bit. So I I think the problem is the floodgates have opened. Now you got a bunch of people in that don't understand the business, don't really wanna understand the business, they just wanna make money.

Tony (06:29)
And and we all know, right, individuals that have been in the industry for a long time know that there are just some tremendous macroeconomic trade wins. When when housing demand goes high, yeah, you can be a knucklehead out there and and all of a sudden your P<unk>L has a double-digit number on the bottom. Right. Even

Russ (06:45)
Yeah.

Tony (06:47)
though you're making every mistake out there, the demand is so high that you're making a ton of money and it creates this false sense of security and and and easy it creates this easy money kind of concept.

The other thing I think is as we you take a look at all the different industry segments that are out there, over the years, for for multiple decades, private equity coming out of Manhattan has optimized, systemized, crystallized just every every SOP possible in all these other industry segments. And the building products industry for a long time was distanced, was getting the Heisman because you know, the volatility in the commodities, the volatility in the housing start dynamic.

The high fragmentation, dealing with you know contractors directly, just all that's fraught with a ton of risk. But to your point, yeah, coming out of you know, it took a long time after after the after the big downturn in 08 for the the the larger, broader private equity groups to get involved. But I think COVID absolutely kind of put a beacon light out there for everyone thinking that it was easy money. It just that just isn't the case.

Russ (07:52)
I was gonna say I I have one of my best friends. Well, you know him, Tim. He's he's in he's in the veterinary business. Yeah, he opened up his own veterinary clinic, did real well. And coming out of COVID, or maybe it was even before COVID now that I think about it, I think it was. a lot of the PE looked at industries and said, What what businesses are recession proof? And a whole bunch of them zeroed in on veterinary practices. He got courted by gosh, I think it was like 10 different veterinary companies.

Wow. And and but it was the guy there was the guys that had a vision, and that's the one he ended up going with for actually less money. But then there were the guys that are Hey, we're gonna make you rich. We're gonna do this, we're gonna do that, you know, we're gonna, you know, they come into their business. I look at the business, and I remember him telling me a story about one of them was they looked around and said, Okay, all this stuff that's gonna be gone. We're gonna fire half your staff to do this, but you get to stay on and make some money, and then we'll resell it, and then maybe you could stick around and get another squeeze of the lemon. It was like, Yeah, no, thanks. So

know, it's not just the lumber business. I think I think you've just got you've you've got your good players, you've got your bad players. Or poor players. I don't think anyone is is bad from the sense of evil. I think it's just more of a, you know, poorly thought out. Yeah.

Tony (09:00)
Yeah,

Correct. and it really does create a really you know, we certainly don't want to paint everyone with the same so with the same brush, because there are those organizations out there where they do a great job in in setting up setting up a long term plan. And they bring a lot a ton of value, right? A ton of smart business practices, good acquisitions, and a and a good strong organic growth plan to to continue to continue to build and make an impact in the industry space. do you think it was

I did I mean, there's been so much consolidation that's taken place. I mean, if you look at the you know, anyone on the list, HBS dealers, you know, top one fifty list, whatever. I mean, the the size of those companies that are left from a dealer perspective, if you if you look at it, like I mean, it used to be you had to be a fifty million dollar business or up to to even make the list. Right. Right. And now

Russ (09:49)
Guys on the list were like eight million. Eight million.

Tony (09:52)
Yeah,

right. Because they're just and and so I think there's a certain amount of the fragmentation that where it things have consolidated so much that which kind of creates almost amplifies the problem. So now these businesses that these private equity companies are trying to buy are so small and so we call it, you know, hairy, icky, sticky, right? They've got just tons of problems with them that it even it amplifies their their challenges that they're gonna take on.

Russ (10:20)
all the more reason you better have a sound operating platform and strategy. you know, if you're just buying them for assets, you're probably getting, you know, I don't want to say poor, but probably mediocre business operations. Yeah. You know, and that that kind of brings us to the other side. I think just as much as there's blame on the PE side, there's blame on the the seller side or the ownership side too. mean

How many guys have you known have sold their business and said to you, hey, they told me nothing's gonna change? And it's like, first off, everything's gonna change. Now the question is, do you want that change or not? And I I can't think. I'm trying to think the last time that I know an owner stuck around or a president stuck around for longer than maybe a year, year and a half. Usually they get pretty frustrated. And it's not.

It's it's frustrated because the company's coming in and and changing a bunch of stuff. Well or and or it's frustrated that the ownership doesn't understand the business. So, you know, it takes two to tango.

Tony (11:23)
It you know, that's a that's a fantastic, that's a really a fantastic point. You're absolutely right. And it and for I mean, to be a founding entrepreneur, to be someone that starts a business up, right? Or or takes it takes a business that was a legacy family business that was smaller and scales it to a certain level, you know, all companies and all organizations have their have their arc, right? I mean, have their different different stages of growth.

And it's pretty rare to have a leader that can that can lead through all those different stages. and and yeah, you're absolutely right. Like a private equity company is not going to pay multiple times of an EBIT profit to your business and then say just keep it the way it is, right? and and typically it's the psychology of the leader that limits that growth for the organism. Otherwise, it probably wouldn't have sold, right? Like ultimately, either as a lack of succession plan.

didn't have a good solid president coming up that was going to take the business forward for the next 10, 15 years. Or the psychology leader is such that, hey, listen, I've done everything I can. I've built this business to this level. And it's yeah, it's arrows.

Russ (12:29)
Yeah.

Tony (12:30)
There's nothing else. Yeah, like I I'm I'm and and you know, other thing it's we find interesting is those organizations that have only grown 100% organically end up becoming really quirky.

Because because they've never had to accept another culture and another business practice. And whatever they've done in their continuous improvement process, however fast or however slow that might have been, was based on their, you know, kind of their cadence.

Russ (12:57)
Right. Well, and they have a distinctive culture that's baked into their business. It is. And and it's probably very inbred in terms of their people who've come up through. They haven't brought a lot of people from the outside. Yeah. And why and when I say inbred, I don't mean that you know, critically. It's just kind of a fact. Yeah. yeah, it's you know, the other thing is I think some of the successful privately held companies have a long term view.

And I mean, give me an example, take the extreme. There's a lumber yard in Chicago that he had he had high-end customers, high-end lumber, very niche business. And it was all about quality and service. And during the winter, when most lumber yards would lay people off or go to winter hours or part-time or whatever, he kept his guys busy.

To the point of he had him painting the chain link fence with a gloss black fen bla gloss black paint. He had his his even though he was in a kind of a rough area of Chicago, his facility looked fantastic. And he wasn't

Tony (14:01)
the

name of that business because you looked at acquiring it, right?

Russ (14:04)
Yeah, yeah. I'm I'm I'm gonna leave the name off just just because I don't have

Tony (14:09)
But it's really profitable, it's really successful.

Russ (14:11)
very problem. Well, the reason we were so interested in it, and this was when I was running Alexander Lumber, was because it was just a fantastic business. Now the owner ended up not selling because again, kind of the quirkiness. You know, he took X amount of money out, he did certain things, and he didn't want anything to change. And it was gonna have to change. I mean, even we weren't private equity, but we were gonna have to, you know, run things the way we did. But it really drove home after spending time at ProBuild, which was was, you know, a private equity.

The one thing at ProBuild is we did not invest a lot of money in the long, long term. You know, facilities were what was necessary. It wasn't what was the right thing or what was the merchandising thing or whatever, you know, yeah, we'd fix a pothole or that, but gee, you know, putting new siding on the building, why, why not just paint it or something like that? Then you had this guy who went to the nth degree to create that perception. And, you know, I always thought that if

If you if you come in with a strategy, whether you're private equity or a roll-up company and say, This is my strategy, this is my market niche. You know, like for for pro build, I think the majority of our market was major metro. Major Metro sell national accounts. Man, oriented around that, I ran a whole bunch of yards that were out in rural Midwest and and West. And it it didn't it didn't fit with their strategy, but they didn't want to give up the the revenue. Revenue. Right. Yeah. And but it did just didn't fit.

But we weren't investing in it. So you kinda as as Joe Hardy used to say, we were we're slowly becoming death on a cracker.

Tony (15:42)
Ouch. Ouch. So our our our favorite question here internally that that it it just really flushes out just exactly kind of where these private equity people come in and what or what their what their capabilities are gonna be is you know you can say you can talk strategy, you can say all these different things, but simply where are you gonna play and how are you gonna win? Like what is that unique value proposition that's gonna that's gonna be able to command you to to capture and grab the business? We had a recent situation where where a private equity group, I asked him that question.

And he paused, you know, because all these individuals are highly educated, you know, Harvard grads, what have you? Well, that's a good question, Tony. He's like, what you need to understand is, you know, it's a hundred million dollar business with you know, 12 locations, but you know, these are all really small real markets. We really don't need a strategy to get these cat. Yeah, that's honestly that was his response. And to the real what you'll appreciate this in the rural markets, what don't you have a lot of sales talent.

Really good OSRs and the OSRs end up really carrying the the the you know 99% of the value proposition for those organizations. And for them, for this organization to not understand exactly what their strategy would be, you're gonna lose some of those OSRs and trying to replace them in small fractional markets, really difficult. It's impossible. And that brand sticks forever. Like people live in those small towns because

They kind of they want a slower pace growth. They don't like a lot of change and your but your brand stands multiple generations. Boom, gone.

Russ (17:13)
Well, and and I mean it's even something as simple as, you know, okay, we're gonna save money, we're gonna close on Saturdays during the winter. Well, when you open up back up in the spring, people remember coming and say you closed, you never come back. I mean, that that's logical. But it's the same thing. You you know, in a small town, you've got X number of builders, you piss off half of them. Now you've now you know you're not gonna get back. So yeah, that that's been the pro I think the rural markets have have been, unless you have a roll up company, P it doesn't have to be private equity.

that specializes in rural markets and says, hey, this is this, you know, I know a I know of a roll up company that says we do not want to be in any town larger than 50,000 people. We do not want to be in a metro area. We want to be X number of miles from it. So they've got a distinctive rural strategy and it's been very successful for

Tony (18:02)
Yep, because you're

Russ (18:03)
They want their managers to live in the market. Ideally they want their managers to be from that market. They they pay well.

But paying well in a in a in a metro in a rural market might not be throwing a lot of money. It might be more of instead of having a straight commission for your outside salesman, you kill what you eat, you can make a fortune, is giving them a steady income and recognizing that you're not gonna have a five million dollar salesman in a rural yard. You might have a two million dollar salesman, but he's getting a good margin and he's paying for himself. Yeah. But but you know, then but and this is a problem with like a metro versus a rural strategy.

You're used in a metro area going, Hey, there's there's tons of opportunity. I want the I want the big game hunters and I'm gonna pay them. I'm gonna, you know, you go out and get big game, I'll pay eight hundred thousand dollars. But you know, two million dollars in sales, you're gone. Even if it's straight commission. Well, that does that same logic doesn't fly in a role market.

Tony (18:54)
No, no, it doesn't. Completely, completely different needs, completely different, completely different agenda from the standpoint of how how you how you're actually gonna win. You mentioned something earlier about time, which I think is is interesting. So you you private equity hold commonly, you know, where are you at on the horizon? It's typically a five to seven year hold before you've got to, you know, return the money to investors, which means there needs to be some type of change of ownership to take place. And we're gonna stick with change of ownership. I'm not gonna approach the

selling it to a bank and ending up being being up being up being being nine times your debt is nine time nine or ten times what your EBIT is as there's a large organization or industry that's net star right now or publicly traded where it's by the queue right whatever you whatever you've got to hit your quarterly budgets and and what those look like. I think there's a huge opportunity for privately held businesses here to have a longer view for them to really simply say, hey listen, you know

We're not gonna, you know, we are gonna make these investments in our people, in our strategy, in our approach, because we've got a long-term view with the investments and the return that they're gonna provide for us over a over a 10 and 20 year 20 year period of time. That's completely different. That's a completely different approach, foundationally, culturally, everything with how they how they work. And remember, I mean

You and I, unfortunately we're at a point now where our kids are are out of the house and and we're we're we've got grandsons now. But, you know, if when we were young, when we had kids, you know, and we're concerned about college 10 years away, 15 years away, we're very conscious of where we were hitching our economic wagon to to make sure that the house payment was going to get made and there was gonna be viability to the family. And we had to look at things from that perspective. And I just think a lot of talent out there is looking for that level of stability.

And commitment.

Russ (20:48)
Yeah. Well, I I think you know, there's some we're seeing in some of the sales that we're aware of involved in, we're seeing family offices come in, which is interesting because family offices might not have that. Hey, I've got a bunch of other people, I've got our money. actually, I think that's what Devonshire was with Fidelity or with Cobilt. So they tend to have a little long-term out outlook. You know, you you talk about

What we were looking for were young, and I think one of the questions you asked me is, you know, if you're a 35-year-old sales manager, what would you ask if you're talking to private equity and interviewing for a job? Well, my first comment is if you're interviewing for a job and you're talking to private equity, run. Because that means the private equity is so involved in the day-to-day operations.

Tony (21:33)
Really bad, right? Yeah.

Russ (21:35)
Yeah, they're they're micromanaging. now if it is, if if you're interviewing with somebody who was private equity, I think you want to talk about, hey.

You know, what's the investment horizon? What are they gonna do? That kind of stuff. Because when it gets time to start flipping it, that's when all of a sudden the investment stops, chasing the revenue, you know, all the all the fun stuff we talked about.

Tony (21:57)
All investment stops. Well, first of all, whatever your needs are from a rolling stock perspective for your trucks or or forkless or that but that budget's gone. Right. They're gonna they're gonna they're you know, the whole depreciation rate, they're gonna try to, you know, expand, you know, pull as much cash forward as they can. And then of course there could be some key leadership that all of a sudden they're gonna get rid of because they're gonna sell in ninety days and it and it props up the that props up that even a number. so I mean

Russ (22:27)
I think back my my son Michael, he interviewed and and took a job with a private equity company, different industry. But the story was they wanted to build this thing, they want to do this, this, this, and he's like, Okay, cool. And he identified that hey, there's certain investments we're gonna need to make in software and that. And they're Well, that's what we want to bring in because you know experience on that. He's on the logistics side. He went in and they're like, Hey, here's the deal. We just don't have the money for that. But if you stick around

And you can make this all work, you'll make a bunch of money when we when we cash out. So it was like, you know, that didn't happen overnight, but basically he, you know, he we went in eyes wide open with the commitment they were gonna make the investments, and then within six months, they're like, Nah, we're not gonna do that now. And I mean, that was just devastating to him. That was his first experience. So but I like but I get it. That does that mean the guys were bad guys? No, that means they probably were.

were banking on certain things happening. Then it didn't happen. They had a they had a hard, you know, what do you ownership change date they needed to hit or, you know, a window. And you know, that's the situation they're in. So it's not that the private equity was bad or evil. It's just you gotta understand what situation you get yourself in.

Tony (23:41)
Yeah, correct. Right. Understand the game that you're playing and realize too that's that some of those some of these, you fly by private equity groups are gonna there's something's gonna be shining in some other industry space, right? you know, AI build-outs or or whatever that that's gonna get their attention and all of a sudden they're gonna divest themselves from one industry and and and head to another. And the other major rule too is whatever they say, get it in writing, please. Like this promise, this promise of equity or this promise of value, and understand in detail what

the the mechanics and tools are of how this thing's going to be executed. I've just I I've just spoken with a handful of leaders that are just super upset. They made this commitment to a private equity and leader group and a roll-up and and they sold and they sold to an organization that has no idea what they bought and it's just a total chaos mess. But on the equity, he made them roll 35% of their cash out. The top level guys

They took a hundred percent, they took all their level all the but all the middle all the middle leaders that you know had put money into the deal and and what have you and had these earned these ear in equity stakes, thirty-five percent roll, which it which creates this, of course, golden handcuff for them to hang on as long as possible through this mess. And unfortunately they're gonna end up losing it because you know, they're they're from their perspective

Russ (24:57)
It's a mess.

Tony (24:59)
because it's so bad they've quote unquote.

Tony, you've heard of Ca of Katara, right? You've heard of Intecra. Well, put our organization as number three on that trophy. be just because they've, you know, they they bought a roofing business and you know roofing, right? It's all renovation remodel, your AR is different, your inventory. they're they're pushing to j just in time inventory program. Well, how how's that gonna work when shingles go on allocation, right?

Russ (25:28)
It's not on allocation now, so it seems like a great idea now. Yeah, right. Great idea.

Tony (25:31)
you

know right but but they they they're they're trying to smash together this with an LBM business and trying to force the LBM business to the same cash turn cash cycles and inventory cycles which is just ridiculous right like you've got a new construction you've got what six to eighteen month

Russ (25:48)
there you have it again. You know, there's two different forget about markets. Now it's two different businesses that would have two different distinct strategies. I remember when I I took over roofing for Pro Build, we wanted to grow that. you know, you go to IBS, or all the software companies are talking about permits and development and what's going on. And you know, yeah. And and you go to the IRE International Roofing Expo, and it's all weather software because nine out of ten homes are replacement driven by weather. Only one out of ten are new construction.

So right there you got new construction with a longer time cycle is the majority of the business on the lumber side or the big the big opportunity. And in in roofing, the majority is on replacement and storms, quick cash cycle, customers that aren't credit worthy, that kind of stuff. It's just a different, completely different business. Two totally

Tony (26:34)
Totally like if you're looking if you're evaluated in roofing business, you want to look at two to three years of EBITDA numbers of PLs because the odds are you're gonna have a major storm that's gonna increase the profitability of that business.

Russ (26:46)
Or

odds are they had a major storm, you gotta t you gotta factor that out. You gotta correct.

Tony (26:50)
Right, right. Because sands sands sands the storm, it might be a two, three, four percent profit business, right? But all of a sudden the store comes, it's a fifteen percent bottom line profit business, right? And it just yeah, the volatility of it, the the quick turns, and it's and you know, these leaders are like they the owner has no idea what business they bought. It's just it's a total cluster. Yeah. And it's again, I guess we just kind of come back to it's that ego arrogance thing, right? Like

And I I you know, to be curious, to be humble and to just come forward and you know, hey, what is it that I don't know that's gonna run me over next? Like let's let's think about from that perspective.

Russ (27:30)
Well, then you think about the things that might have chased out a great operator that if they had if the if the acquiring company, PE, whoever, had just been honest, not that they're dis but said things like, Hey, a lot is gonna change. We're gonna put you on our ERP system. We're gonna put your name. I can remember back in two thousand seven, two thousand eight when Pro Bill bought

was it Williams Brothers down in Atlanta? The the management team was like, You can't change the truck color. That's our that's what we're known for. And you know, they probably were. And I looked at my said, the truck color's gonna change. Not like we're gonna go repaint everything, but I guarantee we're not gonna paint, we're not gonna buy green trucks anymore. They'll probably be white. Just want you to know that right off the bat. Yeah, yeah. You know, but but I think the disappointment of something like they thought these little things wouldn't change.

Is with disillusions the guy makes them leave. Whereas if you're honest about it and said, Hey, you know, we're gonna, we're gonna move your back office here. So, yep, you know, Mary who's worked for you for 30 years, probably won't be her two for years from now, but we can try and transition her. You know, try and have a little humility, a little empathy and and let them know what they're getting into. But the problem is the acquiring company wants to close the deal and they don't want to muck it up at all. So they try and keep it.

as clean as possible and stay away from the emotional issues. But then as soon as the acquisition happens, all these emotional issues come up. And then the the guys who agreed to stick around feel lied to, cheated, disappointed. They're the ones who have to go fire Mary and they're like, why am I the bad guy? You sold the company and I lost my job. Thanks, Tony. You know, that kind of thing.

Tony (29:08)
Yeah, yeah, yeah. Certainly, you know, they've got to listen very closely

Russ (29:11)
You know, when we talk ego and humbleness, I mean just something as simple as that is just being honest and being straightforward about, hey, these are the changes we see. that's a humility that I don't think we we do a lot.

Tony (29:24)
No, I think it's in I think it's important to be up front and to recognize just exactly and and and on both sides of the equation, right? Like what like what are what are the tenants or what are the what is the philosophy, cultural dynamic, what does that look like from one or one organization to the next, from size to next when you start scaling and you start moving into these larger business models? Things I mean things are going to be different. And which to that point,

And this is a little off topic, but you know, it's we we have a just a incredible number of high high number of executive projects we're trying to we're trying to fill right now. We're change leadership and and really kind of from a cultural perspective, from a process perspective, it's we've got to have that trait. And our building products industry space has been rolled up by all these larger organizations where they've they've scaled and systemized.

I gotta tell you, it's it's challenging trying to find those true entrepreneur leaders that can come in and really drive a change initiative just because of all the scale that we have at this point.

Russ (30:34)
You know, I I think what made me successful in being able to drive change was the fact that yeah, while I was entrepreneurial, I wasn't long I I was actually a turnaround guy. And I think if you look at things from the perspective of a turnaround guy is the one who's gonna come in and you know, the old line, I I love the line, Henry Ford, you can have any color you want as long as it's black. Yeah. That's kind of you know, that's kind you just gotta be straight with people. Hey, no, we are gonna change. Yep, we're gonna change the name. Yep, we're gonna do this, yep, we're gonna do that. Instead of

Trying to split the baby. And I think that's the problem with the entrepreneurs is they fight, fight, fight and try and get some ground and split the baby when they're better off saying, I agree with this, we're gonna do this. This one I don't agree, and here's why, and make it all very strategic. it's just there's a lot of emotion. Now it is also easier to make change when the platform's on fire. It's a different story when your successful business you just sold. It's like, why are you changing? I have a successful business. Why are you making all these changes? So timing.

And circumstances make changes a lot harder too.

Tony (31:36)
It does. And at this point, what we're seeing is a lot of organizations out there that typically had, you know, five, you know, six, seven, eight, eight, nine percent EBITDA numbers now have dropped dramatically because you've got these ten billion dollar players that are out buying them on the buy side. Yeah. Right. And and then on top of that, their OSRs have are starting to age out and retire. So they're losing their value proposition from their, you know, outside salespeople being able to to really, you know, leverage their construction science.

product knowledge, logistic flow, you know, relationships with the customer. And these cust and these companies now are floundering with a with a three percent EBITDA and they can't figure out what happened because they just they just remember post COVID when they were nine. Like

Russ (32:17)
I'll throw I'll throw another one in there. Not only is the sales force aging out, but their customers are aging out. And and their sons or next generation or neck, you know, whoever's stepping up and taking that business, they do business differently. So even if you kept your your legacy salesperson whose runway might be, you know, five years, he's like, I I can remember talking to my salesman, the guy going, you know, the hi he dealt with the dad. Now the son's going, the guy never calls me. He goes, he never answers my phone, never answers my phone. I go, try texting him.

Or he I'll call him and he won't answer. He'll text me. He's that's the way he wants to communicate. And it's just that generational struggle. And then you got these guys that you know didn't grow up having a lumber yard. They you know they grew up online and they they want to be able to do it. They don't want to have to go in and pick stuff up. They want to be able to do it online. So I mean, just getting the whole business. But that's where the entrepreneurs are better at responding to that. When you get the guys who get it, yeah, they do really well. Whereas

I don't see a lot of entrepreneurship at these roll up companies because they're focused on, hey, I'm just trying to get my hands around it. You know, I'm I'm I'm trying to I'm trying to figure out how to how to get back to a five percent EBITDA because we're at three. So obviously I gotta cut expenses. I gotta do this, I gotta do that. And it's not they're not growing. They're def you know, if you're d on the defense, you're not on the offense.

Tony (33:35)
And many of them create this Walmart kind of approach. No, we're Walmart. This is your strategy. Here you go. Even though the market's different, the customer mix is different, product mix and all those things. Cool. Well, excellent. So what so what so for individuals out there that are building careers that find themselves in this place, like what what should they do? What do you what do you see?

Russ (33:56)
I would tell you there's nothing wrong with taking a stint working in and I'm not I'm not gonna make it just about P I'm gonna call it a roll up company. Whether it's whether it's you know, someone large. I'm not talking about I mean let's divide into two things. You've got a local guy who wants to build by the neighbor and maybe he's one yard, two yards, four yards, whatever. That's a different story.

Tony (34:19)
Over a billion dollars in revenue. Larger larger business. Yeah, larger business roles.

Russ (34:23)
Those

those guys, it's not a b I learned a lot working for Pro Build. I learned a lot working for Joe Hardy at eighty four lumber. Different guy. One was a highly successful entrepreneur. The other was a was a really large, you know, brought a lot of large disciplines. It might not you might not learn stuff that you definitely would take with you. You might learn stuff that you wouldn't take with you. but it's I wouldn't I wouldn't discourage people from working there. but I wouldn't if you have a really good deal going and someone's dangling a care and it's all about money, no.

If you've got a situation where you're working for someone and your owner's retirement, not sure where your future is, and the opportunities to go work for a BFNS or go work for a private equity company, hey, you're gonna learn a lot. There's nothing wrong with that. But but in term but just go with your eyes wide open, I think. now, in terms of you're running you're running a a store, you're a highly successful salesman, you're a highly successful area manager and a recruiter.

calls up and says, I got a private equity company that wants you to do this and do that. Man, you got to go in with your eyes open. you you didn't give me the lead, but a number of years ago I got I got recruited by a private equity company to come down and run their group of they had bought up a bunch of trust companies. And I think I talked to you at the time about it and and went down there with my eyes open. And you know, I just well first off the guy who brought me down there who was interviewing for private equity got busy.

So he couldn't meet, you I was down there for a whole day, couldn't meet with for except for like a half hour at the end, kind of pawned me off on people. So this is a waste of time. But then when I met with him, his whole thing was about squeezing lemon. You know, I got the same speech. It's like, hey, yeah, here's how it's gonna be. You're gonna be the CEO of this company and you're gonna and we're gonna pay you a ton of money and you're gonna call me every Friday and you're gonna tell me what you did and what you're doing and this and that. And then in three years we're gonna flip this thing and you're gonna make a ton of money. If you're lucky, you get to stick around and squeeze the lemon again.

What do you think? I mean, that was basically his pitch. Yeah. If I said, first off, it doesn't sound like a CEO job. It's never doesn't sound very strategic. And you're not talking about people. You're not talking about building anything. You're not so that I mean, I tried to ask the question, you know, what was important to me? Important to me wasn't to get rich and sell my soul. Important to me was to build something like I was at the point in my life I wanted build something lasting. I wanted to leave a legacy. I wanted to impact other people. And none of those were addressed. So you got to know what's important to you.

Tony (36:41)
Yeah, and let's flip that and let's flip that script the other way too. So private equity firms that are out there are looking to come into the industry space. Make sure that you have individuals either on your board or certainly your operator that understands the industry space that you're going to be dividing in and and are trying to take trying to take share in and can sell well because of the fact that they've given they've they've developed a really strong unique value proposition. Where are you going to play? How are you going to win?

that is something compelling that's a soft spot relative to where the competitors are. And there are plenty of soft spots out there in the building product supply chain. Like there's lots of opportunities, but you have to be very strategic and very focused and kind of that objective and and and then put put reasonable amount of resources behind it to to make it happen. terrific.

Russ (37:28)
No, I totally agree. You know, again, if it it's just a matter of of you know, some of it's who if you put yourself in their shoes. If I'm the guy going to interview with private equity, say if I was private equity, had this money I wanted to build, what kind of questions would I ask me? What kind of things would I try and sell me on? What kind of person would I want? Flip it around to the private equity guy coming in and said, Okay, if I was an executive, what would it what would what would what would in and make me interested? Now I think a lot of them just fall back to money.

It's like, hey, we're gonna make you rich, we're gonna make you rich. Not fun getting rich if you're waiting for five years and if for it to happen hoping it happens in the meanwhile, living a miserable existence because you're working seventy hours a week and by the way, you're constantly going and having to let people go in closed locations or whatever. So

Tony (38:15)
finance person looking over your shoulder, scrutinizing the difference. Yeah. Everything that happens. Yeah. Not a not a fun, not a fun light to live at all. Yeah. Cool. Awesome. Well thanks Russ. This is excellent. Super excited to show us. I think we're gonna we're gonna help a lot of lot of leaders here as they as they map out their career plans and through this through these economic topics

Russ (38:33)
Okay. Sounds good. Thank you. Appreciate it. It was a lot of fun.