Thanks Palmer for joining us. I’ve been looking forward to having you. I’ve had Trish on twice and she obviously moved to being an operator and you did the same a little before, so I’m excited to hear about that. But can you tell us a little bit more about your perspective in starting Chenmark and your initial role and then your role today?
Sure. Yeah, hopefully I don’t disappoint the Chenmark legacy on the podcast. Thanks a lot for having me on. Chenmark was really started serendipitously by James, Trish and myself looking to put our skillset that we had learned in a more traditional finance to work in a different way and really to find a way to bet on ourselves, I think that’s probably the thing that brought us together. The most was a pretty strong desire to bet on ourselves and a willingness to play the long game. We’re pretty big into delayed gratification, and obviously the path that we’ve chosen in small business equity is one of a pretty long game.
And we just happened to all be in a place in our careers where we were willing to make the leap. To be honest, at the time, amongst the three of us, it didn’t seem like as crazy a leap as it might’ve seemed to other people on the outside to leave relatively lucrative jobs in finance and Wall Street for zero paycheck and a fairly uncertain, totally unproven future. But at the time it felt like a good thing to do and right thing to do. And yeah, we kind of made the plunge and I guess classic entrepreneurial journey of kind of figuring it out along the way.
I’d say in the beginning part of Chenmark and the classic partnership angle is one plus one, or in our case one plus one, plus one should equal more than three. And when we first started one plus one, plus one probably equal one and a half, because we all did everything together. It was not the most efficient way to do it, but I think it gave us a really good sense of how to work together and what we were all good at and what we weren’t as good at. So then as we grew and there was more stuff to be done and we needed to branch out, we kind of naturally gravitated to different areas of Chenmark. So that sort of second iteration, I gravitated more towards search.
A we started to acquire businesses, I was focused pretty exclusively on M&A for new acquisitions. And then second phase of that was I deployed into a CEO role of one of our portfolio companies about two years ago. And that’s where I am today.
So that move for your own personal learning or is there just a hole you had to fill in that CEO role and you didn’t have enough time to find a candidate?
Yeah, it was more the latter, to be honest with you. I think the former has proven out to be incredibly accurate. I’ve definitely learned a ton. I think it’s been an incredibly good experience. Trish is now an operator of a company. So I think it’s a experience that is highly beneficial to us as partners of Chenmark. But certainly the impetus was, we had a portfolio company that wasn’t really performing with a CEO that wasn’t a great fit for the company. And we needed to source a new CEO.
Mainely Grass, the company that I run now is a very seasonal business. This all came to pass right before their season was about to start. We didn’t really have a great deal of confidence that we could find someone on that short of a timeline. And so we sort of looked around the room between me, James and Trish, and kind of knew that it was going to have to be one of us. That was my start as being a small business operator.
Is there something about your time as an operator now that allows you to empathize with some of those sellers you were working with on the M&A side early in the Chenmark days?
The short answer is yes. It definitely would make me a better searcher. I think I would ask different questions and there would be some things that… When I was more focused as a financial analyst, there are things that I was more focused on then that I’d say like are probably not worth even focusing on, and there’d be other things that are much more operational or cultural that I would focus on way more. And having that experience as an operator has given me sort of that angle that I would be sort of… I think I just ask better questions.
What are some examples of better questions you might ask?
I think the tendency, especially coming from our background in finance, is to be fairly financially analytically oriented, but most small business operators aren’t, they don’t have that same background. So you’re not going to necessarily get the answers you want. And so I think there’s just ways to get around.
You’re probably still tackling the same fundamental themes, but if I were to analyze a company now being probably more in-depth and trying to piece together the structure of their business, their business infrastructure and how they operate and how replicable it is, which would I think, tell you a little bit about their culture and their leadership style and sort of the intangible stuff that’s very hard to model in an Excel spreadsheet, but pretty critical in business success and certainly in longterm success.
I think broadly speaking, I would probably focus a little less on super minute financial metrics and more on global, operational, cultural, thematic topics.
Are there topics that you would ignore pretty much entirely new companies you were looking at?
Black and white. Those questions are tough to answer. I’d be hesitant to say there’s things I’d wholesale ignore. I think one thing that I’m probably more comfortable with than the traditional searcher mindset is customer concentration. That seems to be something that everyone really clues in on. And certainly if you have a 75% customer, I’d be clued in on that too. But it’s fairly common to see a 10, 12, 15% customer, and I think people get really freaked out about a 15% customer.
And the reality is, if you’re delivering your core product or service that customer well, and they’ve been around for a long time, then they should continue to be around for a long time. So unless you expect to come in and do worse at delivering that core product or service, I wouldn’t be as worried as a 10 or 15% customer, as I think a lot of the standard financial analysis, they know that that’s a huge red flag.
And you said that primarily the owners you talked with didn’t have the same financial acumen that you had being a financial analyst. What skills did they have that you’re now starting to build yourself?
Yeah, I think they have a sense of it, they just don’t have the terminology that we’d use. I think a good example of that, one thing we talk about a lot is working capital management. We focus very intently on free cash flow and one big component of that, that doesn’t really get focused on a ton is working capital management. Every business owner is very clued in on when and how they pay their bills, and when and how they get paid by customers. But they’re not necessarily clued in to talking about day sales outstanding and days payable and cash conversion cycle. It’s the part of the jargon.
So that’s what I mean by, I wouldn’t be really harping on like inventory turnover, if it was a manufacturing company, I’d just be asking questions about how do you think about inventory? How do you work through it? What happens if you have really old stuff in inventory? I’d try and use less and less financial lingo and get more and more at sort of how do you structure your company and why? How do you pay your vendors? Why do you pay them that way? Or why do you pay some vendors this way and others that way? And that sort of tells you more about how the company set up, than well, this is what the cash conversion cycle is, and I’m going to model it at this going forward.
Can you talk about the deal process with Mainely Grass and how you found them, how you got to know the owners and how that process went for Chenmark?
Found it through a broker, the same broker that we had done a previous deal with. And so he came to us, it was a landscaping deal we’d done previously. So he came to us with Mainely Grass, which is a lawn care company, serving predominantly residential customers. Also in Maine, so he thought we might be a good fit, and so got to know the business through him. It met a lot of the business dynamics that we like to see in a business. The owner I’d say was a classic situation that most people would find in the small business world.
Who’s owner, operator, founder, who’s running the company and looking to retire and enjoy the value and the success that he had built for himself in this company. So it was clear up front that he was selling because he wanted out of the business entirely. And for him specifically he wanted out of the businesses as soon as possible. Great, it’s always helpful for me to know what the seller’s looking for. The way I always say it is, “The more I know exactly what you’re looking for, that’s the lens through which that I can look at the deal and I can’t promise I can give you everything you want, but at least I know what you want and I’ll try and get as close to that as I possibly can.”
The toughest thing to deal with is a seller who sort of says, “I can leave. The day after closing, I can hang around for three years and I could do this, like open to anything”. And my guess is they say that because they’re trying to appeal to sort of any type of buyer preference, but I actually would prefer the inverse, that they come to me with a much more direct idea of what they want. So that way I know that that’s how I’m going to look at the deal, and that’s what I’m going to try and solve for as close to it as I can.
Do you think there’s an ideal amount of time that the seller stays in the business after close?
I really don’t. Certainly in industries that are more technical, you might skew longer, we’re acquiring businesses, and I would say that the core product or service is excruciatingly complex from a technical standpoint. So it’s not like we need to really get up the learning curve on some hyper technical, industry specific experience. So then it’s just more understanding where things are, key customers, key suppliers, key relationships, transferring them in a thoughtful and meaningful way. And again comes down to the seller’s preference as well.
We’ve done transitions as short as two or three months, and we’ve done some more extended transitions, I think in general certainly in the small business space, a seller who’s probably a sole-owner, the reason they’re selling is they want to take a step back. I’d probably say, in general a longer transition is probably not worth it, unless you have an extenuating circumstance, like a highly technical industry or an operator who’s incredibly involved in one specific process that can’t really be taken over by anyone else in the short-term.
So how did the transition go with you in the first month or two in that business? Was your head swimming a little bit, and it was a lot to orient around?
35 days before our season was about to start, we basically run and gun for seven, eight months of the year, and we don’t earn a dollar of revenue for five months out of the year. So I came in 35 days before the season, I needed to get up to speed with the company, and obviously I ran the deal to acquire it, so I knew about the company, but I wasn’t involved in day-to-day. Mainely Grass had done a couple of tuck-in acquisitions that off season that I had helped run and negotiate and coordinate. So I was familiar with those, but didn’t have personal relationships with any of the key employees, any employees, really.
So first thing was internal facing. I just had sit downs with every single person in the company for as long as they want to talk to me. So that was basically my normal workday time, was one-on-one sit downs with the entire company and then nights and early mornings was I was trying to tackle my job. So it was easily from an hours and time perspective. Easily the hardest I’ve ever worked in my life. I gave myself pneumonia after a short period of time, and then realized I needed to dial that back.
I was pretty under the gun to try and get up to speed before the season started. And I had a couple of key objectives that I wanted to accomplish before the season started, which put me on a pretty tight timeline.
What sorts of objectives were you looking to accomplish?
I had pretty high conviction that the guts of the company were really, really good, and we just needed to orient our thinking around how we evaluated ourselves a little bit differently. So I came in and didn’t really change anything from an operating perspective. I changed a lot about how we analyze what we did to sort of try and measure our performance. Especially a company like Mainely Grass, we have many thousands of customers in a very large service area through most of New England, Northern New England especially.
Trying to figure out where we were on track and where we were off track, was when I started very heavily anecdotally driven. And that’s a very difficult thing to do when you have 50 people on the road every single day in their own vans, all visiting 15 to 20 customer properties, every single day. We just needed to be more data centric in terms of how we evaluate ourselves and be a better finger on the pulse of what was really going on in our business. So luckily part of the beauty of Chenmark is I have sort of shared resources at the Chenmark level, who are subject matter experts to sort of help all of our portfolio companies succeed. And one of them is a incredibly proficient and skillful full-stack engineer.
I tapped Dave on the shoulder and said, “I really need some help. The data’s in here, but it’s not sliced the right way, and we need to slice it a different way, so we can better quantify and measure how we’re doing so we can make better decisions going forward.” And he ran just as fast as I was running to try and get this basically custom business analytics engine stood up before the season started and he did. And it’s one of the things that’s been hugely beneficial to us as a company.
Yeah. Was there any statistic or number within the business that you were surprised at?
Tech utilization, I think is one we’ve developed a number of KPIs that I think are a little bit different, but I would take a little bit of time to explain, but tech utilization is one very simple. Our technicians are those that are out in the field doing the work. What’s the percentage of time that they’re actually on a property doing a job versus not. We didn’t actually know what that number was when I started. That’s a very common theme that we see in small businesses.
There’s almost no end to the number of interesting questions you could ask that would be worthwhile to evaluate, problem is that you don’t even have the data to analyze that question. So the first step is you got to go get that data, and get in a way that’s not so prohibitively expensive to gather that it makes the analysis worthwhile. So when we first started we didn’t know, after the first year we had enough data to know that tech utilization was 42%, which was crazy because we actually had a great year that year, so it was crazy to think that we were performing pretty well financially and operationally yet only 42% of our technicians time was spent on a property. And it just goes to show how important route density is to a business like Mainely Grass.
It was an a-ha moment when you sort of asked them, “What do you think this number is going to be?” And everyone was wildly over 66, 70%, maybe 65%, it’s like it’s 42%. Technicians are on properties less than half of the time. And that was just a whoa. That’s one metric. It doesn’t move very frequently, so gains in that are very slow, but they’re very meaningful.
So are gains in that coming primarily now from your softwares better able to make a route for you, and then is there some equipment on hand, like at the job site that makes that job more efficient, so you can get to the next one quicker? What kind of combinations are you using there?
So the first one I’d love to get there, so that’s what we call computer-based routing. Where a computer will tell you what property you go to on what day, and in what order. We have what I would call computer-aided routing, where we’re picking what stops… A human is picking what stops get done on what day and a computer is telling you what the best way to organize those stops for that day is based on where they are located. Certainly a BHAG of mine is to go computer-based routing for sure.
The way I talk about it internally is UPS and FedEx move packages all across the world, and I guarantee there’s not people who are trying to figure out how to get a package from Tokyo to JFK circling dots on a map. We’re not there yet. We’re a little bit hamstrung by the functionality of our system. Dave, our guru, our tech guru, he knows how to do it. He knows the algorithms that we would package up and we know what the constraints would be. And so we kind of know how we could do it and we have the capability, but we’re hamstrung on our software’s functionality to then be able to process that data and then get it back into our system to push into our technicians tablets into our ERP system.
So kind of at a stand still there, but other ways to drive that, probably the biggest boost we got this year was we moved to what we call combo routes, where we do a bunch of different types of services at customers’ properties, and all of them require different state licensing to do, that we’re in a fairly regulated industry. For a long time, way before my time, incentivized technicians to get multiple different licenses so they could do multiple different types of services throughout our service territory. But historically on any one day they were only one type of tech.
So they were either doing lawn care services or they were doing veg control services, or they were doing tick and mosquito services. One of the things that I challenged the team to do was outfit the vehicles and get enough equipment, and structure our routing so that a technician who had multiple different licenses could leave our shop and then their first stop might be a turf stop, their second stop might be a tick and mosquito stop, and their third stop might be a veg control stop. As long as they had all the licenses and that manufacturer’s density where you might not have it.
Otherwise, you might not have houses that are in close proximity, but instead of driving by a few properties to get to your next turf stop, if you can pit stop along the way to do a different type of service on a property that’s closer that drives density, which drives tech utilization.
So in these sit-down meetings with your employees, what were some of the key questions you asked each of them, and then what sorts of thing did you hear?
I have it in a Google doc, so I could probably go through. The prompt was really, I’ll be here for as long as you want to talk. The only requirement is we have to get through these questions, and I wanted to make sure I asked everybody. In general, it was a little bit about myself, just so they got to know me as a person and ask them the same, just get to know them as a person, and then sort of page one was about their role and what they saw as their role, what they liked, what they didn’t like, what they felt like they were lacking in terms of resources or support. And then the page two was really more about the company, but same thing. What defines us as a company? What separates us? What makes us good? What are we missing? What are we lacking?
From those conversations, it was a super helpful to see where we all agreed and where we might’ve disagreed. The end result of those conversations was a big company-wide presentation that I gave. And basically like, “These aren’t even my words, these are your words”. But probably given that we operate across multiple branches, across multiple states, the company doesn’t really come together all as a group, all that frequently. So to do that and have that sort of shared story of what everyone said in response to these questions, and it helped put us on a path or trajectory of shared consciousness and just shared awareness. And then that sort of led into some goal setting and some initiatives that we’d been working on ever since.
And you said that this is a company that doesn’t make revenue for five months out of the year, it’s very seasonal. So how do you maintain a seasonal workforce and culture when you only have them little over half the year?
It’s tough. Certainly seasonal businesses, not earning a dollar of revenue for five months is not awesome, but I think there’s two ways to look at it. So obviously the not awesome way to look at it is, we don’t earn revenue for five months out of the year, so it’s sort of every year you have a drought period you have to sustain financially and operationally. I choose to look at it as a positive that “Look, we have something that most businesses don’t have, which is this gigantic pause button that happens every single year that allows us to take a deep breath, recharge the batteries, and then spend some really concerted time doing deep thinking and deep work on how to make ourselves better next year.” We can either use it or we can let it pass us by.
And so I certainly want the team to sort of recharge. I also want the team to feel a sense of purpose, ownership, urgency, and sort of expectation that we have to make the most of this< otherwise, it will just be five months of not making revenue. But instead, if it’s five months of building for the next seven, then hell yeah, we can make that work all day.
Within that break, are there a few questions or key items within your business you go over each year during that break that you really try to focus on? Does it shift every year just based on the goals and how the business has functioned in the last seven?
Well, I’ve only been in Mainely Grass for two years, so hard to say if there’s some stuff that’s going to be repetitive. Certainly training and development is a huge one for us. We’re in a fairly technical industry. So turf science, turf management and agronomy, pest control, it’s regulated, but it’s also highly scientific, and it requires a lot of, not just certifications, but a lot of continuing education. So how do we get the whole company to keep upping our game in that realm?
And it’s not just so we can do the technical side of our job, it’s so then we can then educate our customers on what we’re doing to make them informed, because we’re obviously performing services on their property and they want to know what’s going on. We’re not in control of everything going on in their property. So it’s important that they understand what we’re doing and why. So that’s a very central theme for us in both these last two off-seasons, but there’s stuff that’s unique to every single year.
And we spend certainly the back half of the season, myself and my senior leadership team especially, sort of putting together a list of our off-season goals. And then we try and go through a prioritization process where we’re triaging, what are the most important things to do this off-season, because obviously you can’t get everything done. It’s sort of a giant triage to try and focus on. What’s going to have the most impact for us this next season or for the seasons to come.
You also talked about having tuck-in acquisitions in this company. So what kind of characteristics did you look for there in those smaller companies?
A lot of our businesses have done tuck-in acquisitions in the lawn care space. I’d say it’s a little bit more attractive because lawn fertilization and pest control the scope of services is fairly, I’ll call it more systematized. So while we might go about it with different products or slightly different service offering, for the most part, the programs or services and other company are more transferable, than let’s say like a landscaping business where the scope of work might be totally different. The pricing structure might be totally different. That just makes an integration between two companies a little bit more complex.
So I think tuck-in acquisitions can certainly add value whether it’s growth into new geographic markets or it’s just to sort of supplement density and you’re in a market you already serve. The trick as is the case in my view with all tuck-in acquisitions is everything looks great in an Excel spreadsheet, especially when you start building in synergies, execution is what really matters. And if you’re trying to combine cultures, trying to integrate best practices, there’s a hefty amount of execution that goes on that’s really hard to model. So being fairly transparent and aware of what that entails is important.
So how do you structure these deals with some of that in mind, where you want to give yourself a little bit of cushion, such that there’s things that off the spreadsheet are going to be perhaps different, maybe even wildly different than what you think? So how do you kind of build that into your deal process?
Oh, you’re asking for some of the secret sauce. I have been known to be fairly unique in some of the deal structures that I’ve put forward for tuck-in acquisitions. Without getting too in the weeds, I’d say that your standard multiple of EBITDA, I think is not as applicable… Can be, but it’s not as applicable for smaller tuck-in acquisitions, especially like I just said a tuck-in acquisition, they’re not all the same. So a tuck-in acquisition might be growing geographically, it might be acquiring an expertise or technical knowledge you don’t already have, or it might just be you’re acquiring a book of business in which case you’re basically buying goodwill and customers or contracts and anything in between.
So I think it’s just important to know what you’re looking to accomplish in that acquisition and then trying to structure and/or model it accordingly. And my personal view is to always be fairly conservative. If you’re banking on high synergies, high pro forma growth or awesome contribution margins, the execution risk just ratchets up to a huge degree. And certainly, I don’t know if I’ve gotten enough reps to have really high degree of confidence that I can take a tuck-in acquisition and really perform at that sort of top 10% level, and for sure know that I can turn an acquisitions 50% gross margins into my 62% gross margins in year one, that was in the details.
So what’s the most challenging part with perhaps just gross margins there? So if a company has higher or lower, what’s usually the contributing factor to that? Is it the way they pay their labor versus the way you pay labor, or equipment cost and quality? What are those key differences there?
Step one is you have to try and figure out what the key differences are and if their financial reporting maybe isn’t as consistent or detailed, you might have to do a lot of leg work to try and piece that together. This is what I mean by lawn care industry’s a little bit easier than the landscaping industry. So for the most part pricing across the board is predicated on the size of your property. If you’re doing a lawn fertilization application, it’s pretty much directionally based on how big your lawn is. So try and understand… So if their pricing is off, it could be that they just have lower prices than you, but it also could be that they’re measuring it and they haven’t measured it correctly.
Maybe they measure it too quickly and they didn’t… Or the turf area has expanded over time, or they just didn’t measure it appropriately right time. So you got to have to kind of go down and figure out, is it a measurement issue? Is it a price issue? The labor stuff and the product that’s easier to compare, kind of just go head to head, what products do you use here? What’s your price for those products? You know what you’re going to use in terms of materials, what’s your price for materials and the same thing on the labor side. It is doable, might not be obvious if you were just looking at the P&L though.
And do you look for companies that have the same lawn care, with a pest control element as well, or do sometimes go for just one or the other?
I’d say either. All the above. So I’ve looked at lawn only companies, I’ve looked at tick and mosquito only companies, I’ve looked at both, I’ve looked at some companies that do plant healthcare, which is something that we don’t do anymore. We used to, when I started, that was another one of the changes I made. We weren’t that great in plant healthcare, it wasn’t a very big division for us. There were some idiosyncrasies about that business line that we were at a sort of a crossroad, where either we needed to invest heavily into it to make it more of a legitimate business line for us, or we needed to get out. And so we got out.
So I definitely see a lot of acquisitions that also do plant healthcare, which poses a little bit of a problem because it’s unlikely that a tuck-in acquisition that does a portion of their business as plant healthcare is unlikely to bring us back into plant healthcare.
Gotcha. And then the pest control side, is this pest control that is only confined to outdoors and lawn, or would you ever expand into pest control that could be inside the home as well?
Some of my teammates must’ve emailed you ahead of time asking you to ask me that question. I get that internally all the time of, let’s get into pest control, it’s so tangentially related to what we do. Crossing the threshold and going inside the home is a pretty big decision to make. But a lot of pest control companies are what’s considered perimeter pest control. Very rarely actually enter the home. A lot of pest control is actually making sure pets don’t enter the home. So it’s more defensive than it is curative, but it’s a conversation I have all the time internally, but for now, I want to get really good at doing what we do now, before I start thinking about new lines of business.
What makes you most nervous about going inside customers’ homes?
Liability, number one, just the insurance requirements. It’s the first thing everyone asks. Like, “Do you go inside the home? Why?” I was like “Well, because your insurance is going to skyrocket if you do.” It’s also, I think more operationally once you go inside the home, you need a homeowner to be around. So from a scheduling perspective, that’s just very different than what we do now, where we’re not scheduling specific times. “Hey, we’re going to be there at 3:30. We’re going to be there 2:15.” We will give customers a heads up that we will be out there today, we’re not giving them a time slot.
Once you start having to give customers a time slot, because they need to be home and they want to be with you or point something out, that’s just a much harder thing to manage logistically and we’re not oriented that way.
Is the training and licensing also different if you’re doing pest control inside? So you would need new training or perhaps new employees who could handle that part of a pest control business?
Yes and no. So to get into perimeter pests, our team would have to get a new set of licenses to do perimeter pest. Like I said, highly regulated industry. So pretty much any different flavor of services are going to require a new state license. Here’s a great example. One of our offices is in Newington, New Hampshire. It’s 25 minutes from North Shore Mass, it’s in New Hampshire and it’s literally six minutes from the main border. So those people might be doing service in three different states, which would then… And we offer predominantly three types of work that would require licenses.
So those people at peak licensure might have 9 to 12 licenses to do all of the stuff that we do across three states. And if we were to enter perimeter pest, they’d have to get all new licenses in Maine, New Hampshire and Mass. Yeah. It’s very license heavy.
That’s a lot of paperwork to handle.
A lot of licenses, a lot of testing, and all of them require continuing education. So if you fall out of line with that, then have to go retest.
So you think that’s the biggest hurdle or is there something else that’s maybe holding you back a little bit from taking that leap?
Yeah, perimeter pest inside the home. You did talk about of course, wanting to get better at your existing business first, but assuming that’s fixed, is the licensing the biggest hurdle in that training or is there something else you have in mind?
No, I think we’re actually getting pretty good at training and licensing and onboarding. So I’m not super concerned. I guarantee if I called up the team after this, said, “You know what? Alex convinced me we’re getting into perimeter pest and we’re doing it in 2021.” A lot of people would be stoked. “Let’s go.” And I’d have people licensed within a couple months for sure. So if you’re saying that we were excellent at what we do now, so that’s not a limiting factor, what’s going to be the hardest part of perimeter pest, I think it’s just really understanding what drives that business and how it’s different than what we do now to make sure that we are tackling in the appropriate way.
So what drives customer outcomes there? Not just the operating model, but the pricing model. There’s a lot of similarities, but no one should be delusioned to think that just because we can do lawn care well, it means we can do perimeter pest well. If you assume that, then you’re probably assuming too much.
So would you train for perimeter pest and then just have your current employees train for that and get licenses? Or do you think you would go find an existing perimeter pest company and just have that as your starting piece and then build out from there?
Probably the former, but more so just macro wise. Fanatically perimeter pest control companies are selling for exorbitant multiples. There’s huge consolidation going on in that space. There’s four big strategics in the industry and they’re all super inquisitive, that has pushed pricing for pest control companies to multiples that are obscene to me and financially unviable for our model.
So you’re seeing pest control companies, even $3 million revenue, $5 million revenue pest control companies being sold for three times revenue. It is not a market that I can financially justify an acquisition, even though I would love to acquire that competency and bring that in house and I think that would be awesome. But given the current market environment, I don’t think that is a legitimate option.
This is a role that you thought would be temporary and then you’ve decided to be more permanent, or is this something that from the get-go you knew would be at least three to five year type role for you?
Certainly not. I didn’t go into the expectation it was going to be a three to five year role, and I don’t know how long the role will be. I get this question a lot. I’m going to sort of re-ask the question in a way that’s going to be probably easier for me to answer, but I think still insightful. So among the Mainely Grass team, what I tell them is, I go season by season. And sort of mid-season sort of around July 4th timeframe that’s when the sales part of our season is largely done and we’re sort of into more run rate type operations. And we haven’t started really in earnest for the next year.
I sit down with my senior leadership team and take stock of my value add to the team and their desire to have me stay. So the way I phrase it is, I’ll stay at Mainely Grass as long as two things remain the same. And the first is that, in my role as CEO of Mainely Grass, I’m adding the most value to Chenmark. So far, that is the case very hard to find and acquire businesses much easier and cheaper to grow businesses. And so, as long as that is going on, and I feel like the trajectory for Mainely Grass is definitively pointing in that direction, then why wouldn’t I stay? Because I can add more value to Chenmark in this capacity than I would try to search for and buy a company.
And then the other piece is, am I blocking someone from progressing in their careers to step into a CEO role so they can add the most value to Chenmark? Part of my job is to build a bench and build depth and try and grow CEOs, if not for Mainely Grass, for other Chenmark companies. What I definitely don’t want to do is sort of sit in the seat and ossify and block someone else from progressing and trying to add value in their own way.
I’m in the fortunate position of being able to flex in and out of Chenmark and portfolio companies as a partner. My focus is how do I do that by contributing the most of the team that I possibly can. Another way people ask me that is, are you going to be at Mainely Grass in 10 years? And to that I answer, “Well, if I am, something’s gone really, really well.”
That’s a better phrasing. I want to switch gears just briefly to your podcast. I know a lot of people really enjoyed it, I personally enjoyed it as well.
Is it something that you want to pick up in the future at some point, or is it going to be kind of put off to the side for a little bit?
If I can find a way to reduce the time commitment I would gladly bring it back. I was told that podcasting was very easy when I started it and it was super quick. And then I realized pretty soon into it that it is a labor of love. Maybe I didn’t do it right, or maybe I was sort of too anal about trying to make every last detail as perfect as it could be, but it was taking me like eight to 12 hours per episode, as a side part of my job at the time, it was a huge component of it. And then when I transitioned into the CEO of Mainely Grass and I was running and gunning there, I really had no time to keep it going. And just to block off the call it 10 hours, every two weeks that’s a significant portion of time.
Unclear if it had the return there, I enjoy doing it. Hopefully, it was something that people like listening to. The reason we do weekly thoughts and reason I started the podcast was to try and give people a window into who we are and how we think. James, Trish and I all feel that’s far better done via blog post or a podcast than a bio of where we’ve worked in the past or what schools we’ve been to. So I still very much believe in that philosophy, but need to defend the time to make it happen.
What kind of returns did you see from the podcast? Were there a few interesting relationships that you were able to build as a result of them?
Yeah, certainly locally. One of the things that I required in the podcasts that I did was to do them all in person. So getting to meet business owners in Maine, I think has helped promote the Chenmark name just from an awareness perspective. And hopefully we can try and build a reputation in Maine or Greater Northern New England and hopefully beyond there over time, so that when business owners think of maybe transitioning out of their business they think of Chenmark, and that’s the ultimate dream. Is that, a little bit like the Berkshire Hathaway people call Warren.
If we could be in a position where small businesses call Chenmark, that’s the dream. I think that’s decades away from being the case, but any step we can make in that direction, I think is a positive one.
I think you’re overestimating your timeframe there, but hopefully that happens quite a bit there.
We’re long-term oriented, so it’s easier to talk about things in decades.
Yeah. You’re happy to wait I should say. I want to get into some closing questions so I can let you go back to your work here. What class would you teach in college if you could teach about any subject you wanted to?
Yeah, I knew these were coming, so I actually spent some time thinking about this. Maybe I shouldn’t have admitted that. So if my answers are terrible, then people might think that they were just off the cuff. So I had kind of two answers somewhat related. The first one would be first principles thinking stolen directly from Elon Musk. I’d caveat both of these to say I’m no expert, I just have found them useful. And so I would actually like to take this course too, I don’t know if I’d be the one teaching it. First principles thinking I think where I’ve had the most breakthrough is to really boil down pain points issues, bottlenecks into their root causes and sort of building up from there and then to think second or third order effects so that you’re not running into something like, “Oh shoot, I didn’t think about that.”
I think what it requires is a little bit of space, a little bit of thoughtfulness, a little bit of time to sort of properly think through things. You can come out at a decision that’s much better. And what that ties into is actually something I learned from my first boss at J.P. Morgan. So shout out to Dave. He was one of the most productive people I’ve ever seen in my life. And he always talked to me about return on time invested, ROTI, ROTI.
He’d tell me the most scarce resource is time, and so you have to be super efficient. And how that manifested for him was, we were on the buy side doing equity research and so we’d always get sale side people looking to take us out to dinner or lunches. And he’s like, “Look, the ROTI on a two-hour lunch is just not there. 30-minute breakfast, way better. So he always did breakfast meetings, he never did lunch meetings. And so that concept of return on time invested, has really stuck with me and I think about it all the time, of trying to think about how do I allocate my time so its being maximally spent.
So with that ROTI, what other little things did he do that kind of surprised you or like, “Wow, that’s impressive I’ve never seen anyone do that before”?
He was really good at blocking off his time and being really task-driven and not getting distracted. He’d always come in the office early, I tried to beat him in the office, it’s your job as a junior analyst, but it would be me and him and no one else on the floor. And that was his sort of quiet time to do deep work. He wouldn’t run the risk of someone walking into his office and that would almost always result in sort of a litany of things for me to follow-up on as his day sort of got going and got more and more monopolized by meetings.
So sort of chunking time, trying to block off deep work he was really good at, I’m significantly less good at, I definitely get distracted. I have my email up 24/7, keep telling myself one of these days, “I’m not going to do that,” but I still do it. But the concept is still there and it’s something I think about, not just in a work setting, but personally like return on time invested, time is a very scarce resource, I would probably add trust as the other scarcest resource. And so I was just thinking about sort of super nerdy, but capital allocation, time allocation is equally as important.
The point about being distracted, do you think that’s mostly his personality that he’s just really easily and naturally driven to avoid distractions? Or is that something that he learned and others can learn as well?
I think you can definitely learn it, I think it’s about prioritization. One thing, I was also very surprised isn’t the right word, but I admired. He had a wife, he had kids and he lived out in the suburbs and going to see his family before his kids went to sleep was incredibly important and when you work in Wall Street in New York, the culture is very much like a grind culture and certainly when I was in my 20s, that was me.
I didn’t have a wife and kids to try and make it back to, but he was in the office early and he always caught the 6:20 train or the 6:23 train, whatever it was, no matter what, but he was still highly productive. The guy just cranked through work, he didn’t waste time, he never read puff articles to sort of fill time, he was just really driven. And the payoff was that he was always home to see his wife and kids and be there for dinner. It stuck with me. ROTI is something I type in emails to the team all the time.
I like that. I wonder if having the family to go back to knowing that that’s time you wanted to spend just with them, he couldn’t be focused on work. I wonder if that drove him to be super, super focused during the time he did have available for work.
I forget what it’s called but work expands to fill the time it’s allotted to, right? So there’s a bit of you put yourself on deadlines and you hold yourself accountable, you’d be surprised what you can get done. I see that in myself. I might end the week feeling like I’ve totally buried the string of days, where more stuff gets on your to-do list and comes off of it and then you just feel totally behind the eight ball. I try not to enter Monday feeling like I’m already behind. So I tend to take Saturdays off now and I tend to work Sundays for a period of time, sometimes a very short amount of time, sometimes almost a full day.
But really it’s just set myself up for a good week, so I don’t feel behind and I can absolutely crank through work on a Sunday. No one’s bothering me, no emails are coming in, I’m not getting distracted and I’m very on mission and on task, and I’ll come in thinking “I’m going to be in the office for five hours, I got tons to do,” and two and a half hours later, I’m walking out the office having done everything with quality. At least I feel like it’s with quality and thinking like, “Holy shit, I need to bottle this, because I’m super productive today.” Yeah, I think you have to hold yourself accountable to some degree.
I like it. What’s a belief you used to hold strongly that you’ve changed your mind on?
I’ll say this is a Chenmark belief. When we started the thesis of Chenmark, the idea was always to build a portfolio of operating companies and operate them for optimization of long-term free cash flow generation with the purpose of pool and that free cash flow to acquire additional small businesses. And when we sort of came up with that, we had this expectation that macro economics taught us that if small businesses had been around for 20, 30, 40, 50, 60 years and they were still small by our definition, then some market force was keeping them small.
There probably wasn’t going to be a ton of reinvestment opportunities in those small businesses, but that was fine. If you bought them appropriately, you structured those deals appropriately, you didn’t need them to have huge reinvestment opportunities as long as your reinvestment opportunity was a new business. And then very quickly, once we got into it, we realized that all these businesses have reinvestment opportunities, some more than others, but they all have reinvestment opportunities. And if you can build the foundation of a company, you can invest in its infrastructure, so it has the systems and processes to scale< it can grow.
And we’re not talking tech type, VC type growth rates, we’re just talking steady 10, 15% growth rates that should be easily attainable. So that’s something that we’ve totally pivoted on that there are plenty of reinvestment opportunities and I think it’s important for our portfolio companies to pursue those opportunities. Because another thing that I’ve developed, is a company needs to grow at least to provide its best employees opportunities to progress in their careers, otherwise you’re going to get a brain drain. I care actually less about revenue going up and more about are we growing as an organization? That doesn’t necessarily mean revenue has to go up, I mean over time kind of has to, but not in any one given year. But that doesn’t mean that a company can’t grow and develop and progress.
That’s a good point too. If you’re a high performing employee, you want to be in places that grow. So it sounds like if you can get your company to grow, it becomes an attractor to more high-powered employees who… Growth begets growth after a while perhaps.
That’s where I caution this sort of growth. People assume growth means revenue going up and certainly that is a manifestation of growth and I think that is important, but it’s not the only thing. So if you take the one employee example, unless they’re starting as the CEO, there’s plenty of opportunity for them to grow in their career even if the company’s not growing, there will come a point that if the company is not growing, then they will top out a benefit of the Chenmark model is that they have opportunities to grow within Chenmark but outside their organization, but maybe within a different organization.
So I think there’s that added layer that I think is unique to Chenmark and quite interesting. Yeah, certainly you want people who are… A-plus people they want to grow, they generally have a growth mindset, they want to do better, they want the next frontier, they want to work towards the next hill to take. As a leader, as a manager, you need to make sure you’re providing them that opportunity.
What’s the best business you’ve ever seen?
Now I remember the one Trish gave on hers. This one is actually one of the first deals we looked at and it was a Canadian gas testing and device maintenance company. So in Canada public spaces that had throughput larger than a certain number required testing of the ambient air for certain gases, and those devices had to get obviously purchased for new buildings or buildings that were being brought up to current code, but also had to get certified and maintained on an annual basis by law. And so it was a very interesting classic search fund type company. Had a very good market position in Western Canada. Unclear exactly how much it could grow because the laws were provincial.
They work there in other provinces, but changed in other provinces every year they had to get re-certified every other year, but they were all there. And I remember looking at it, we all loved it, but we were incredibly value conscious at the time and I remember talking to the brokers, them telling us that we needed to be at five times EBITDA to even be a player in this business and to us at the time that seemed like a crazy multiple win. We were looking at other businesses in the three to four range, we let it go and in hindsight it was definitely worth five times EBITDA.
Have you tracked the company since then?
I haven’t actually. I was thinking about this conversation, thinking through there was another one that I like quite a bit. I still talk to the owner, I have a great relationship with the owner. Then I thought about talking about… This one sort of came up as a very unique type business and one where the reason for us not pursuing it was just sort of a concern of evaluation and in hindsight was probably totally worth it, so I thought it was a better fit for this question.
So have you shifted that value mindset just a little bit, where you’re not just looking at price anymore? Obviously you’re looking at price and quality every time, but are you emphasizing quality more today based on those lessons?
I think we have a better handle on what quality is. Five years ago when we just started I think you would have told us that… We would have definitely told you it’s price relative to the durability and the quality of the business. I just think we’re better at analyzing and really determining the quality of the business. For us, quality is subjective, it might be a very quality business for a different buyer than for us.
So I think going all the way back to the topic of me being an operator and having sort of a different lens to look at acquisitions, I actually seen a lot of cases, I’d be even more value-oriented, I’d have a more acute sense of what it would take to build the type of infrastructure that we’d want to see in a company. But on the flip side, I think I would be more aggressive once I’d spotted something truly quality and unique for a small business. I hope I would be more aggressive in willingness to pay a higher multiple for a business like that.
I like it. Thanks Palmer for coming on. This has been awesome. It’s been fun to chat with your family about Chenmark over the years, and so excited to finally get John to hear about your time as an operator. So thanks for sharing your time. This was great.
Absolutely. Thanks for having me.