What size business should you actually build toward?

Sam: Once you're debt-free and you've grown a little bit, which you can do over a five-year period of time, you're putting 3, 400K of owner earnings in your pocket. That is amazing. And you have complete agency, right?

Kaustubh: Correct.

Sam: Now, I should say you have complete agency in air quotes because if you're still in a revenue producing role in a residential home service trade and, you know, there's after hours, you might be taking those calls.

Kaustubh: But I guess, like, my thought is, like, you can have the under 2 million revenue target be an end state goal. I don't think you can actually have the 2 to 5 million revenue end state as an end goal.

Sam: Can I argue with you on this one again? I mean, this is great. Like, I actually... I disagree with you on your first conclusion. I disagree with you here.

Kaustubh: Sweet.

Kaustubh: Okay. Welcome back to The Intentional Owner. It's Kaustubh Deo with my co-host Sam Rosati, and before we dive in, a little programming note that I'm gonna be in Tampa Bay on November 10th, so about four months from now, for two reasons. Reason one, which is what we're announcing, is we're gonna have some sort of a small business ETA happy hour event, probably on the evening of November 10th, Tuesday the 10th. So please, if you're in the area or Tampa Bay adjacent, we'll put some info out there on Twitter and LinkedIn and all the usual places, and we'll talk about it more on the podcast. But soft circle that on your calendars and come hang out with us. And the other reason I'm coming is, for longtime listeners, as in you've listened for over a year, last summer we did a big fitness bet that Sam thrashed me in. And so the bet was the loser had to fly to the winner's city and pay for an exceedingly nice round of golf. And so, like, had I won, he would've flown here, and we would've played at Chambers Bay. I lost by a long shot, so I will be in Tampa, and we will be playing at Cabot Citrus Farms.

Sam: Yeah, but to be clear, just so that there's not too much, like, sympathy headed your way, you're not paying the golf. I'm paying the golf, right?

Kaustubh: No, no, I'm paying the golf. I think that's what the bet was.

Sam: Yeah, I feel bad 'cause you're both paying to travel and doing the travel.

Kaustubh: Yeah, I should've done some fitness. That's how the cookie crumbles. So anyways, it'll all work out 'cause I'm gonna come to Tampa, hang out for a few days. We'll play some golf. We'll hang out with SMB folks, and then I'm gonna drive to Fort Lauderdale because that is where our big annual tree conference is this year randomly. There's not a lot of trees in Fort Lauderdale, but that is where the conference is.

Sam: Okay. Well, it'll be fun. And again, Tampa, TBD location, but Tampa Bay, Florida, on... What night did we say? Monday the 10th?

Kaustubh: Tuesday the 10th.

Sam: Tuesday the 10th. Yeah. And as far as I know, it's a pretty darn big community here. So even if you're coming from afar, give us a shout, shoot us a DM, and we'll start taking some...

Kaustubh: And we will. Details to follow. Okay, before we dive into the topic, I have a really quick story to tell you, which is barely small business adjacent. But the way in which it is small business adjacent is that I've noticed small business owners are a very particular type of intelligent, but they're also really dumb in other ways. Like, good at holding a lot of random tasks, juggling a lot of balls. I don't know small business owners to be very detail-oriented. That is, like, not what I would say our forte is. I mean, obviously your mileage may vary. That's not what my forte is. Anyways, a quick story. So behind me you can see I have these new posters up, right? And what they are, one of 'em is the Seattle Times cover page from when the Seahawks won the Super Bowl in 2013. And then I got a new one, which is when they just won it earlier this year. And so I already had the old one framed, so I took that to the frame shop here in Ballard that I go to, and I was like, "Hey, here's two copies of the new Seattle Times for this one." And I gave 'em two 'cause I was like, just in case one ripped or something. "Can you frame it for me exactly the same way?" And I left them the old one as the model, and they're like, "Great." Pick it up like a month later, so this is like April. About like two weeks ago, I finally get around to like, "Oh, I gotta unwrap those and put them up. I forgot." So I unwrap them both, and they're both the new Super Bowl poster.

Sam: Don't tell me they threw away the old ones too.

Kaustubh: And so I have this moment where I look at it, I'm like... Because at the store I had checked the proof, right, when they opened it, but I only looked at one. I assumed the other one's the old one. I didn't look at both of them, 'cause they were both wrapped. And I was like, "Oh, no." I immediately was like, "Oh, no, they threw out the old one. They mounted both of the new ones." I call them. The manager at the frame store picks up. I explain it to her. On the phone she goes, "Oh, no. That's a huge mistake." And we're starting to like do some problem-solving. And she's like, "Okay, let me do some thinking. I'll call you back." I'm like, "Okay." I get off the phone. My wife walks in at this point, and she's looking at the situation, and she's like, "But didn't you get two of them 'cause you were gonna give one as a gift?" And I was like, "Oh, you're right. That's why I gave them two." And so then I called her back being like, "Actually, I looked at my receipt and I actually paid for two. So maybe you just have the old one." And she's like, "Oh, okay." And so she goes in the back, and she finds the old one just sitting in their back office.

Sam: Oh my God.

Kaustubh: And so I just didn't even think when I picked it up that I picked up two when I should've picked up three. Like, this is the kind of thing where, I don't know, sometimes I feel so dumb.

Sam: So what is the moral of the story here? You don't have good attention to detail, or the other company doesn't have good attention to detail?

Kaustubh: Well, that's also a small business, you know what I mean? This is all small business all the way down. Anyways, the nice thing is I have a new poster, the old poster, and a new one to give away, so it all worked out.

Sam: So I always like to think through, all the way through. Did the small business offer you any kind of discount or freebie or anything?

Kaustubh: No, 'cause I'd already paid for it like three months ago when I picked them up.

Sam: Will you return there as a customer?

Kaustubh: Yeah.

Sam: So I think that takeaway is reflective of the fact that as a small business owner, you can kind of goof things up and now granted, you're way more easygoing than a lot of customers.

Kaustubh: Oh, for sure. I mean, part of it is because I'm a small business owner. I know how difficult painful customers are. And frankly, like, I don't know if this was your experience when you were more in the day-to-day of a business, but like the difficult customers we get, we serve them worse, not on purpose, but like we're not as willing to cut them a break if they're being a jerk.

Sam: Correlation is not the same as causation. All those one star reviews on Google. We're gonna go paste this transcript there.

Kaustubh: Exactly. No, and so like if we screw something up and the client is super nice about it, like we'll go out of our way to try to make it right. Right? And so like there's a little bit of self-serving, like I'm just way more chill now with small business in general, 'cause like I know it's just a person on the other side making a call. With big business, I don't think that's the case. They're following like this laundry list of SOPs and stuff, and it doesn't really make a difference. When the big business customer service, the squeakiest wheel gets the grease. But I think in small business customer service, like kindness works.

Sam: That's really interesting also because you came from a world where you don't have to be all that smart to be a good investment banker, or at least a junior one. But you don't have to be strategic. You have to be incredibly detail-oriented.

Kaustubh: Oh, yeah, no. That was the one negative feedback I got in my early years at Bain Capital was attention to detail was lacking, and I just waited it out. I didn't get any better, and I eventually got more senior in private equity, and then you get to this point where the feedback flipped to you're really good at focusing on what matters. You just gotta wait. You don't actually have to solve attention to detail.

Sam: To be clear, which goes to say you might've been a better senior investment banker or private equity professional than junior one, 'cause the job changed a lot.

Kaustubh: Oh, absolutely. I was not a good junior PE analyst. I pushed back on, like, edits. This is such a random aside, but we had this one deal partner who I liked in general, but for some reason they were extremely militant about, like, the formatting of the model, and the colors and blah, blah, blah, which I just didn't buy into. Because I didn't do true investment banking ever, like, I didn't get that beat into me the same way.

Sam: You were never in customer service.

Kaustubh: Correct. Not in the same way. Exactly. And so I sent this partner a model, and they were in a different office overseas. Like, we would basically trade an email once a day back and forth because of the time zones. So I sent them this model. They returned it to me with comments, and they had gone through and re-color-coded everything, which I found so annoying. So I made all the edits, and I took it back to my coloring.

Sam: Oh. That, guys, is the modern-day version of passive aggression.

Kaustubh: Correct. Exactly. Yeah, it's the kinda thing that, like, thankfully I was just good enough at my actual job to kinda get away with it, but if I weren't, I wouldn't have gotten away with it. It's not the kinda thing that's looked upon favorably.

Sam: It's a great anecdote. I hope people actually listen to that.

Kaustubh: Yeah, I had my first review at Bain Capital. Actually, I remember the partner who was giving me the review said something like, "I don't know if it's, like, a West Coast thing, but... And I know you care. But you don't really look like you care."

Sam: Well, no matter what that person said after that lead in.

Kaustubh: Yeah. But here's the kicker. That partner who gave me that first review, which was actually quite helpful 'cause I didn't really know I was coming off that way, he's one of the investors in Blooma.

Sam: Really?

Kaustubh: Yeah. He was like one of my biggest advocates in the firm.

Sam: Can I offer another piece? It's not nearly as good of an anecdote, but maybe a warning to folks that are ETA curious. So when I sold the first two businesses we ever bought and ran, sort of like what I'll call phase one of my journey, we sat down and just did, like, some soul searching, right? Like, okay, that sort of felt like a phase, and now, like, a new fork in the road. How do we wanna take it? We've kinda done this a couple times. We've learned a lot. We've made enough money to have options, but not enough to not be able to do anything. And one of the things that I sat down and noted for myself about what to do next was when I was an operator, like a president of a small business the way you are today, I had a really hard time sifting through all the minutiae, like making a prioritized to-do list. Because as a small business owner, that list is impossibly long.

Kaustubh: Correct. It never ends.

Sam: I think the attention to detail that's in both my personality and in my training as an M&A lawyer held me back from allowing things to slip.

Kaustubh: That's a really interesting point.

Sam: And so as a small business owner, I always felt like I was drowning by my to-do list, that the need to cross everything off the list, the challenge of prioritizing and letting the other stuff go or delegate or later, that sort of... I think that's the Eisenhower matrix that instructs that way. That inability to be good at that or the obsession with the detail is ultimately what I think caused me to take the path to become an independent sponsor in sort of that next phase. Which ultimately ended up being great. Worked great. I'm happy. But it was a really interesting learning.

Kaustubh: Well, so I've written about this in my blog before, but the first couple years of ownership, I was really white-knuckling it and just trying to, like... I wasn't really using to-do lists, 'cause when I was in PE, the way it worked is you just, like, finish your to-do list or you didn't go home, right? And that might take you till 3:00 AM, or it might take you to... Whatever. It was what it was. So I never actually learned how to, like, manage my workload, 'cause I just did my workload all the time. And so it was only... It was, like, two years in, and I had gotten this advice from one of our portfolio company CEOs, like, right when I bought the business about setting aside CEO time every Monday morning to sit down and set my priorities for the week, and he was like, "You have to spend 30 minutes to two hours every Monday morning deciding what you're gonna work on this week, and set that prioritization up front before your week blows up." And so it took me, like, two years to actually do that, but now that I'm doing it, it's way easier. Like, all of my Q2 filings for every city are due by July 31st. So I know it in the back of my head. It's on my to-do list, but I didn't actually bring it to the weekly priorities until yesterday, right? And so the last several weeks, while I'm aware that that has to happen, it just hasn't been on my list as something I'm drowning in 'cause I'm like, "Yeah, I'm gonna prioritize that when it's time to prioritize it."

Sam: Interesting. You know, it's funny 'cause, like, I look at my calendar, and if I were to try to do that on Monday morning, my calendar has probably already been destroyed by things that have been put on it for that week. So I actually do something similar. We recently have been making it a priority in the business, encouraged by our EOS implementer. And I'm doing it midweek the week before so that I have enough lead time to... 'Cause the only way that my priorities get done is by blocking time. Like, making a list is a waste for me. I have to actually block the time.

Kaustubh: Interesting. Yeah, I think part of what I'm doing is I'm not blocking, but, like, I'm not accepting meetings in chunks of time just so that I know whatever I have to do, I have time to do it that week. And, like, I have some slots, like Thursday after my sales team meeting until the afternoon. Like, I usually have a lot of time on Thursdays. I usually have a lot of time on Tuesday afternoons 'cause we do our recordings in the morning, and then I have kind of the rest of the day to just get stuff done. So I have these sort of dedicated slots that on Monday I will sit and be like, "Okay, these are the things I'm gonna do," but when I set the due dates for those tasks, I set them for Tuesday or Wednesday morning or Thursday midday or Friday morning. Like, I have these open evenings.

Sam: Smart.

Kaustubh: Anyways, that was a long-winded way to get to actually the topic, which you said it well in terms of you went through that sale, recognized what you wanted your life to look like and what kind of your day-to-day tasks would look like, your day-to-day requirements and priorities, and you moved towards the independent sponsor life. And so what I wanted to talk about today, you know, we've spent a lot of time and searchers spend a lot of time thinking about what size business to buy, right? Like that we've talked about ad nauseam, and there's a million discussion points about it. Fine. What I was actually curious to talk about today is like how do you set a goal for what you're trying to build towards, right? And I was talking to another owner recently, and he asked me this question, basically. He was like, "Hey, like five years from now, what are you hoping Blooma will be?" Right? And so that got me thinking about, like, the different sets. Like, what are my options for a company like Blooma? Like, what could it be five years from now or 10 years from now? And so I'll just read off the kind of categorizations I came up with, but then I was curious to go through each one of them and say like, what does your life as a business owner look like once you've achieved that, right? And so these are all sort of end states. They're also obviously, like, starting states, 'cause you could buy at the size too. But I'm more curious to see, like, what does it mean if you build into that state. Does that make sense?

Sam: Yeah. Yeah. I follow.

Kaustubh: Okay, so I have sort of separated it out into smaller plays and larger plays, and then within smaller I would say you end up with a small local operator that's really owner-led with no middle manager. So that's usually up to two million in revenue. And so I think of that as like you either started up a trade business, you bought something really small, and you've built it over a few years, but you still haven't put in a middle manager layer. Then there's the middle size that I've called, like, kind of the trap size operator, which is you're somewhere between two to five of revenue at the end. And this is where I am right now, and I would like to get out of this size obviously. And I call it trap size because you don't quite have enough P&L room to invest in a middle manager layer, and you're kind of like pulling it together as you go. But the business is too big to manage on your own. And then I think of, like, you're a large local operator that has a strong org chart, well-structured, and that's five million plus of revenue. So I lump all of that into kind of smaller goals, basically. So that's one. And then there's the larger one, which just continues on, right? Where I think you try to build to a regional player, which is more than one location or more than one geography served. And at that point, you're probably north of, you know, 10 to 15 million of revenue. And then lastly, a true national player, which you're not necessarily serving the whole nation, but you're multi-state, multiple regional leads. Like, at that point, it's a large business, which I think, and correct me if I'm wrong, but PSG is probably in that category, right?

Sam: Yeah. Yeah. I mean, almost all of our locations are in that category.

Kaustubh: Yeah. No, exactly. So that's the gist of it. But, like, I think there are pros and cons to getting to each of those outcome sizes. Obviously, it depends on where you started and how much debt you have and all of that. But I was curious, like, before we kind of dig into that, like, off the cuff, any reactions or thoughts about that categorization?

Sam: Well, I actually think it's pretty thoughtful in the way you broke down the smaller plays, and it's really easy just to quickly say, "Well, you want bigger is better," and not articulate why. So I've got 1,000 different thoughts here, but I have never owned... Sorry, I have. I have been an owner. Like, the law group has been an experience of seeing us, even though it's a startup, go from, like, essentially a three-man band to almost a 20-person band today and sort of go all the way up this size spectrum. So I kind of feel like I've experienced that in the last three or four years. What I think is important to step back and do is to suggest everything has a trade-off. So everybody here wants to buy the regional player, as you call it, like a larger operation because it does two things. The magic, it spits off, in theory, a bunch of cash, and it's not owner-centric. It doesn't depend just on you. It can support the team that allows you to have a better quality of life, so you get the two best worlds. Except in order to pull that off today, you're gonna have to pay how many turns more of earnings to buy that business relative to the small ones, or to build there takes a lot longer. It takes more capital, debt, and equity. And so I'm not sure that's... I mean, that sounds to me like a five-year journey to acquire there, and I know the framing was a little different.

Kaustubh: No, that's right.

Sam: I think the question you wanna ask is, among the smaller plays, where do you wanna start and where would you like to finish?

Kaustubh: Yes. Well, 'cause the very classic thinking here, right, is if you can get from one size to the next size up, you generate a ton of value, right? Like, if you take a business from even a large local operator, like a 5 to 7 million revenue business, and you take it to a regional player that is two to three locations, 15 million of revenue, it's a different asset class altogether, and you're gonna get a different multiple, a different buyer group.

Sam: No, I think your point is right. So the better framing may be if you can go from one to the next, you're gonna create a bunch of value. Where does maybe your skill set best lie? Because I don't think it's the same skill set to go from 2 to 5 to 10.

Kaustubh: Correct. Absolutely not.

Sam: And in some part you're experiencing some to most of that journey.

Kaustubh: Yeah. There's something about the skills it takes to get from 2 to 5 to 10, the lifestyle it is at each of those sections, and what I would call like the entry, right? Like how long it takes you to get from where to where, right? And so, like, I think if you take as almost a given that getting from one to the next of these sizes is five years per. Maybe it's like three, maybe it's four, maybe it's five, but whatever. You say it's five, right? Like, if you buy under 2 million, I think it's pretty unreasonable to expect to become a regional player in five to 10 years even, unless you're pursuing a big roll-up strategy.

Sam: Yeah. You buy your way there.

Kaustubh: You buy your way there. And so there's a little bit of like, yeah, where you buy clearly has an impact on what you can realistically project to get to. But I think part of what I was thinking about here is... Like, I was talking to my friend about this, and he was asking me this question, and you know what? I think I'm just gonna read you verbatim what I said and see what you think about it. He said, "What do you think your life looks like in five years, basically, like, if things go well?" Right? And I said, "I would have only one direct report at Blooma, and that would be the CEO." Right? I would be generating enough distributable post-tax cash for me to live my life in a pretty comfortable way, which for me is probably, like, something like [figure omitted] a year for living life in Seattle. I would spend 10 hours a week max with Blooma, which is probably, like, two hours of one-on-ones with the CEO and then, like, eight hours of just, like, local networking, brand marketing, sort of being in the community, and then I'd have a handful of coaching clients, some board roles. I'd do, like, one to two new investments per year, right? Like, if I could pull that off, that'd be pretty sweet, and, like, the key thing that... Like, if you unwind that, what that means for Blooma is I build Blooma to be a large local champion, right, but it's not a multi-location regional play, right, where I'm now traveling to, like, manage different location managers at every site, which I've watched friends do, and it's a very different thing. Like, I would love for five years from now for Blooma to be, like, [figures omitted] of revenue and EBITDA. Like, that to me is that large local operator size, not regional player, and I think I like that as my end state. Or not forever end state, but, you know, like, that is my goal for now more than anything, not going up another size.

Sam: That's a great way to articulate it. And to be clear, 'cause I'll say it 'cause nobody else will. Everybody thinks you are supposed to get as big as possible, and I don't think that's true. I think as you ride up the size spectrum, your job changes. It doesn't necessarily get better.

Kaustubh: So that's the part, like who in PSG is like CEO?

Sam: That is my partner, Wes. I'm gonna try and frame it like using your framework. It's his family's business. He's my age, by the way. It's his family's business that was the platform of PSG. And when he started running it, it was a large local operator. But it wasn't a very large, it was like right around that threshold between trap size and large. And, you know, now runs a multi-hundred million dollar revenue organization. So he has changed his role over the years, too.

Kaustubh: So I'm curious, like as somebody who's really watched him go through that, when he went from large local operator to you guys bought your first locations away from the platform, and now you're a regional player and now north of 10 of revenue or whatever, how did his job change?

Sam: Oh, fundamentally. I mean, and I'll even go a little lower just to frame the whole conversation. When you're a small local operator, a couple million dollars of revenue and below, the way I think about it is the owner is still in the field. And maybe there's not a field because it's not a field-based service business, but maybe they're still in the shop. For a law firm, they're still doing law. For a bootcamp, they're still teaching the course. Do you see what I'm getting at? Like, they are a part of service delivery.

Kaustubh: They're revenue generators.

Sam: They're revenue generators. That's it. And so I think a big part of a transition an owner makes is do they, can they, do they want to stop being a revenue generator? And that is different than a BDevver. Like, I think about those differently. There's a difference between producing revenue and developing business for your company. Like, you run marketing for Blooma. So in large part, you're part of BDev. You run BDev for Blooma.

Kaustubh: Totally. Yeah, that's, I mean, arguably my most important role at Blooma.

Sam: So then trap size. Man, I love that framing because I think it's a perfect mix between you are so close to the action still that you cannot feel like you're removed. There is not a single direct report to you that separates the mess. I'll say it like you are not able to separate the visionary and the integrator roles that you play. You are both still.

Kaustubh: Correct. And the way I think about it is, or, like, one way to explain it, is when I bought Blooma, we were at the very bottom of trap size, and I'm working my way through every single size within the trap size. And what happened is, like, when I went from two to three and then a little bit more, like, the number of direct reports just went up, right? And it's only now as we're starting to get closer to that higher edge of the trap size that my count of direct reports is starting to go down again because we have that manager layer in between. So, like, I'm now finally managing managers, whereas there was a point, like, two years ago where I think literally every single person in the company reported to me. And, you know, at that point we were at [headcount omitted] people, right? Like, I was a terrible manager 'cause you can't manage that many people effectively.

Sam: Totally.

Kaustubh: You have to get out.

Sam: Yeah, exactly. Part of getting out for both our experience, Wes, and could be for you, too, was when the business got pivoted from resi to commercial, revenue can spike pretty dramatically fairly quickly. Job sizes are pretty high or relatively high. The volume can be just as high. So, like, rev can scale fast. That doesn't mean earnings will scale fast. That does not mean cashflow is gonna scale fast.

Kaustubh: Usually it's the opposite. Cash is getting eaten up.

Sam: That was kind of my joke.

Kaustubh: Yes. No, that's painful.

Sam: So I think part of the transition from sort of trap size operator, large trap size to, like, large local operator in our experience was that pivot to commercial and a big push to grow revenue allowed the business to absorb OPEX that got the business to be far less owner-centric and develop the people infrastructure you're referring to, to get the operator to be a, like a CEO and not just sort of in that size you're playing where you're both the visionary and the integrator every day.

Kaustubh: Right. No, that's right. But what's interesting, as I was thinking about these sort of sections, like, there is a good life to be had if you buy really small and never intend to go past two million of revenue. It's a specific life, like you have to like that specific life, but it's about as good of a way to make good money as anything. Like, I don't think you're working any easier or harder than a private equity person, and you're making as much, if not more, and you have more control of your life, in theory.

Sam: Yeah, so here's what I think. What's beautiful about both ETA and starting a business is you can change your life. Not only the money potential, but the time control and the agency. Isn't that, like, the holy grail of entrepreneurship? And if you are a technician somewhere working for somebody else, I think you can... Like, if you're in the residential home service trades, and you're a technician, and you have that entrepreneurial drive, I think there's a real argument that you're better off going and building, potentially.

Kaustubh: Oh, totally. If you have a marketable skill, like, totally.

Sam: And sort of going from being a technician for somebody else to, for a business you own, and yes, you might still be in a revenue producing role for that business. I mean, that's an incredible change of life. You can do so well for yourself, your family, if you can go from working for someone to owning a million and a half dollar revenue home or commercial services business that you... That skill set, that trade you have, you just turn it on for your own company. So I love that path for a huge swath of people.

Kaustubh: I do think for ETAers, right, like, who don't have the skill, I think, like, as long as you can get the transition right, like, I do think you can buy 500K of revenue and learn the trade and slowly take it to a one, one and a half of revenue.

Sam: Okay. And maybe this is where we duke it out because I disagree with you. Okay. This is where, like, I didn't know any better back when you let me partner with you on Blooma. But I guess, and to be clear, like Blooma was more profitable on an EBITDA basis, or SDE basis, than its revenue sort of otherwise would indicate.

Kaustubh: Totally.

Sam: So maybe for your business, revenue was the wrong metric, 'cause you might have bought in at the high end of sort of one range there, and it really probably functioned more like the low end of the next.

Kaustubh: Correct. Yep. No, that's true. But so that's where I'm like, when I talk to ETA folks today, though, who are struggling to find a deal, right, there's something strange where because of the trap size dynamic we've talked about, if you buy 2 to 3 million of revenue, like, you can't actually just get to 4 or 5, but you need to kind of blow through that and get north of five for you to actually enjoy your life because of the amount of debt you're gonna take, the amount of complexity in the business, and the amount of building that needs to happen. Whereas I think if you buy sub-1 of revenue and take no investors, it's just your money and SBA debt, and you're willing to learn how to do it and be the revenue producer, like, you can grow that to just... I say just, but, like, you can grow that to just 1, 1.5 of revenue and potentially net to your family, like, 3, 400K a year.

Sam: Think about that, what we're saying. Like, once you're debt-free and you've grown a little bit, which you can do over a five-year period of time, you're putting 3, 400K of owner earnings in your pocket. That is amazing. And you have complete agency, right? Now, I should say you have complete agency in air quotes because if you're still in a revenue producing role in a residential home service trade and, you know, there's after hours, you might be taking those calls.

Kaustubh: Correct. But I guess, like, my thought is like, you can have the under 2 million revenue target be an end state goal. I don't think you can actually have the 2 to 5 million revenue end state as an end goal.

Sam: Okay. Can I argue with you on this one again? I mean, this is great. Like, I actually disagree with you on your first conclusion. I disagree with you here.

Kaustubh: Sweet. Okay.

Sam: I talk to tons of small business owners who are content here. Do you know what the difference is?

Kaustubh: Wait, here meaning where, in the two to five?

Sam: Two to five.

Kaustubh: Okay. Yeah, tell me what.

Sam: They are the baby boomer sellers that sell to all of us. And they have a few things that are fundamentally different, and they change my conclusion from where you lie, and that is they have no debt. And so, you know, in that $4 million of revenue range where they're making 800, 750,000 of owner earnings, that happens most years. And then, you know, a good economics run will happen, and for two or three years they'll make a million of owner earnings and hopefully sort of save some excess cash. Then they'll ride down and do a recession, and they'll make $250,000 of owner earnings. But every average year they're making more than they spend. In the recession years, they don't lose money. They don't have the gun to their head that is the PG on their SBA loan, and so they sleep well. And they are at a phase of life where they just don't worry about the details as much.

Kaustubh: Okay, so I hear you on that, and that's very true. I think the difference is if you unwind their clock 20 to 30 years and inflation adjust it, like for them, 3 million was probably the threshold to be a large local operator, or 2 million even was, right? And so they took on debt or they took a ton of risk early on to build to that. They cleared that threshold, paid down their debt, and now they're coasting north of it. The problem is for us, the trap size is two to five. For them, the trap size might have been one to two.

Sam: Got it. So there's like also a little bit of like survival bias there, right? They got past that phase and now they're just reaping the reward of that debt-free inflated dollar size.

Kaustubh: Like if you could hire a general manager for 50K a year, and now you have to pay 150K a year, like the trap size is fundamentally different.

Sam: Okay. Yep. Yeah, you might be right, but I don't know why it is. Maybe another thing. A lot of what I think about is designing like a saleable business. And let's all be clear, like that $4 million revenue business where the owner is doing a lot but also doesn't care that much, so they're not that attentive to detail, they ride customer concentration up, like all the things. Like that's not a saleable business.

Kaustubh: No, that's true.

Sam: You know, so they got there and their life is good and they're making good money with a lot of agency, but they didn't build anything they can sell for any kind of money.

Kaustubh: Yeah. That's a different path, which is a lot more like earnings driven than equity driven, which works, right? But it's more akin, I think, to the like dentist, orthodontist, doctor path, right, where you're so owner dependent in a way that's actually quite hard to diffuse that it's gonna have a long term impact. Luckily, like the finance industry figured out how to innovate around that with like DSOs and whatnot, but that wasn't a given like 20 years ago.

Sam: Good point. So real quick, 'cause I wanna close the loop. Because maybe I'm gonna disagree with you again here. Okay. So then that is maybe not disagree with your analysis, but your point is for you, you'd like to be in the 5 to 10 range, single location, so to speak, large local player. That would maximize both your quality of life and your earnings.

Kaustubh: Right. Well, it wouldn't maximize my earnings, but it would maximize my quality of life relative to earnings.

Sam: True. Sorry. I actually think about going from like 5 to 10 to 15 as needing, in order to retain any kind of balance and quality of life, you actually have to ride down earnings as you bring in, call it location leaders.

Kaustubh: Correct. Yeah, exactly.

Sam: And that is to me as hard of a transition for people to make in my experience as somebody going from a revenue producing role on a $2 million or less business than going to where you're at, like that is a fundamental change in the role and the skill set required to be successful as the 5 to 15 change.

Kaustubh: Totally. I mean, to be fair, like I might get there and be like, "Hey, you know what? I'm actually excited to learn and build those skills." In which case, I will, right? Like that's what I'll do next, right? But at least for right now, that's not actually calling my name that hard.

Sam: Another risk is once you go from like single location to multi, and there's like different flavors of that, that remember, you're always like one phone call away from enough chaos happening in the core business or in one other for it to risk bringing the whole house down, that you have no choice but then to come all the way back into the business. Where you think that you were so close to being like the visionary leader that didn't have to come into being integrator and a functional leader, and then all of a sudden you're all the way back in.

Kaustubh: Right. Is there a size that that goes away? Like when do you think Wes felt like he is not one call away from being like a frontline manager?

Sam: I will tell you, but before we get there. Maybe the magic that is what Wes has done is he has gone from a large local player to a nationwide, you know, we've got 13 physical locations CEO. That... I don't know if I've ever said it to him. That is an impressive evolution of his skill set.

Kaustubh: Absolutely. That is not easy to do, and a lot of businesses go through meaningful leadership churn through those steps.

Sam: It's incredibly impressive, actually. Now that I take the time to think about it. I think he would laugh if you said, "At what point did you get to a point where you can stay totally on the business in the visionary seat?" He'll laugh at you. Because even at this point, he would say that's not the case. But within the last year and a half, we have gotten large enough where we have and can afford some incredible leaders around the country in functional areas to support sales and marketing, operations and admin finance, like true EOS setup. And it's really not until we're talking a dozen physical locations, some serious size to get there.

Kaustubh: Yeah. And so then that kind of brings back to the question of like, okay, if I don't really intend to do that with Blooma, right? Like, I don't actually have any aspirations of being like a national size roll-out by any means. Like, I can't imagine a world in which I enjoy this enough. Like, hey, like, let's expand to Portland or let's expand to Boise, right? Like I could see that, but I don't see doing what PSG did, right?

Sam: So to be clear, we didn't do it the right way.

Kaustubh: Oh, okay. Say more.

Sam: We could have. I said we didn't do it the right way. We also broke the rules and got lucky with timing, and here we are. We started in Tampa and covered the five county Tampa Bay area, and also had like a remote traveling group that did work outside the state. But in large part local. We acquired in Orlando, and we were able to cover really well the bulk of Florida. We had good geographic density, we could share physical resources, all of it. The next move we made was to Atlanta. That also made sense. It gave us good geographic coverage and in large part allowed us to keep our hands around everything, like no time zone changes. You get a lot of general contractor customers that cover all of the Southeast, so you can sort of be a one-stop shop for a lot of their jobs. All the stuff that makes sense strategically. We then made this next buy in Phoenix, where you wanna laugh around, like the idea of synergy is, like there were none. And so I think we broke the business by going west and having like these two completely standalone regions that could support each other in no way, and then we kinda backfilled it in.

Kaustubh: Yeah, you built the org on top of that, right? Though, in fairness, you had to at some point break that glass to ever have more regions than the Southeast.

Sam: And we broke the glass so fast, so big, that then the P&L could afford bringing on a ton of people to help digest and actually integrate the collection of businesses that we had put together under PSG.

Kaustubh: Yeah, I mean, that's part, like for me, that is not exciting to me, right? Like, I don't want to go buy something so far away that I can't run it in that same way. And so what that means for me is like, okay, if Wes didn't really get it, or you didn't get that feeling of like, okay, we're not a couple calls away from the business breaking until you are at multi-state, multi-location. Like then I'm like, okay, but so what am I actually solving for? Like, why take on the headache and the stress, unless I just want to for fun?

Sam: Well, to be clear, maybe two things. One is, I actually think if we would've stayed Florida only, 'cause that was our original strategy. And if the third deal or the second add-on had been another one in Florida, so if instead of Tampa, then Orlando, then Atlanta, we went Tampa, then Orlando, then Tallahassee or Jacksonville or Fort Myers, then I think we could have been in the position maybe you're thinking about, which is like multi-location, but still geographically dense in a way where you can create some operational synergies among your locations. And preserve your quality of life while having a bigger business.

Kaustubh: Right. Well, like I've seen, so Bartlett Tree Experts is one of the three big national companies that's been around forever. They're still family-owned. And they appear to basically open a new location any time one location gets to around five of revenue, right? And like then, and so like in the Northwest, they've got one in Seattle, one in Portland, one in Spokane, and one in Corvallis. Those are their four serving Oregon and Washington. And like, they're not attempting to build one $10 million or $15 million location. That's the model they've gone after, which is instructive in its own right, that rather than trying to build like a huge Seattle branch with a bunch of little outposts, they're just saying like, "No," like each of these... And like they have some synergies. Like they have one regional manager for all four, which is how I know about, like I've hung out with him. And sometimes if there's a storm they can move some crew members from Spokane to Seattle or, you know, there was a big ice storm in Portland a couple years ago, so they took a bunch of Seattle folks down there. But other than that, there's not really a lot of synergies between those groups.

Sam: Good point. Good point.

Kaustubh: And so they're kind of just running them all.

Sam: Yeah, but I think like now after you will have done this for five, six, seven, eight years, you're gonna have so much pattern recognition around how to hire, fire, train, manage, lead from afar, to be able to do that from afar. And you have this M&A expertise that's really hard to recreate. And so I'm still holding out a little hope that you get comfortable and realize, "You know what? I wanna go see what the next big step function looks like."

Kaustubh: No, it's entirely possible. Now that I've been in the operations for long enough, I have caught a little bit of the bug of like I want us to get our operation right, right? Such that like if I were to go buy another one or a bigger one or in another location, we have a bit of a playbook to bring.

Sam: You know what helped me not know really anything about the fence business early on?

Kaustubh: What?

Sam: I couldn't be so attentive to detail and the operations to allow that to slow us down.

Kaustubh: Yeah. That's the path to get to national.

Sam: Remember all the way back to the beginning, I said my big hamstring in my first two ETA experiences was getting caught in the to-do list and sort of the micro of operations. And that's why independent sponsorship allowed me to like kinda get out of those weeds.

Kaustubh: Yeah, and just be the deal guy.

Sam: And just fire the gun, like big picture. Let's see if we can build something big and fast and early and have great people helping to essentially digest and build and operate.

Kaustubh: Right. Yeah, and I think that's where like at this stage, like I think I have real opinions now on how a tree company should be run, right? And like how arborists should be managed and how they should be compensated and all of these things. Which means that like aggregating EBITDA is not as exciting to me as it probably would've been when I was coming out of PE.

Sam: Sure. Yeah. To be clear, if you can continue to grow organically, there is no financial engineering better than that.

Kaustubh: No, absolutely. Yeah. That's the path of, whatever, not least resistance, but that's the most efficient path.

Sam: And you've still been incurring so much chaos over the last few years where you don't feel like it's easy or stagnant. Right. But maybe if you were to go through like five years of doing five million of revenue.

Kaustubh: Yes. Then I'd be like, "Okay, I'm ready to step function a little bit." I think that's very possible 'cause I do get the...

Sam: To be clear, a lot of people decide, and you kinda already hinted, that if you were to go there, that you might wanna reinvest your energy in maybe other things, not Blooma.

Kaustubh: Totally. And so that's... We'll have to see. I mean, our largest independent competitor around here, which, you know, like I like the owners and they're doing it well, but they've definitely grown into that large local operator. But it does not seem easy. Like, from the outside in, it looks really challenging to really effectively operate that with that many people and that much equipment. And like, it's not obvious to me that that's actually going to be something that looks like a fun time.

Sam: Or think about it like you could do some sort of big push into commercial, grow a second division that's equal in size and all of the chaos that would be involved, and I'm not sure... You could go through all of that and not be worth a whole lot more and not have a better life and make a ton more money.

Kaustubh: Exactly. And so that's where I'm like, I'm trying to be smarter about, you know, like picking my shots. So I don't know. We'll see. Cool. I think we've beat that one to death. That was interesting.

Sam: That was great, man. Good stuff.

Kaustubh: Awesome. Any parting thoughts? Yeah, I know. I feel like we've found some rhythm here, which is cool.

Sam: Even though none of y'all have sent us any... no, I'm sorry, the capital allocation one. We got a good one.

Kaustubh: Yeah. And the starting a business was a listener question.

Sam: Shoot. Okay.

Kaustubh: So those, that was great. But the rest of you are slacking. Gold star to those two listeners and that's it.

Sam: To be clear, 54 minutes in, most of you are not listening anymore.

Kaustubh: That's true. We're now only talking to ourselves. That's perfect.

Sam: All right, man. Well, that was fun.

Kaustubh: Cool.