What does it cost to build a business that runs without you?

Sam: When an investor is interacting with the searcher and trying to assess their ability to be a good searcher and owner, assessing that capability is really hard. Assessing a searcher and a business owner's ability to make good decisions before they've bought is so hard, near impossible.

Kaustubh: There's something about how a searcher carries themselves in terms of, like, how they manage the email flow, how they come into the first call, like, their level of preparedness, the kind of questions they're asking. Like, it's so hard to quite put into words what I'm looking for there, but, like, you can kinda tell when somebody has it.

Sam: And Grant did a nice framing of, like, he thinks about it in terms of green flags and red flags.

Kaustubh: Which is totally the right way to do it, right? Like, everyone has some mixture of green flags and red flags.

Sam: Okay. Welcome back to today's episode of The Intentional Owner. This is Sam Rosati. I'm taking the mic of introducing us from my colleague, Kaustubh Deo.

Kaustubh: I like it. You're ready to take the leader's chair today.

Sam: Something like that. I just had a ton of coffee, so that's why.

Kaustubh: I know. We obviously rotate who leads these podcasts. I feel like I lead a lot of podcasts, though. I don't know why. Maybe that's just how it feels, but I know we rotate them. But, yeah, why do I always do the intros?

Sam: Well, generally because you're smarter than me.

Kaustubh: I don't think... if I were smarter than you, I would not be the one leading the podcast more.

Sam: So what I tell my kids all the time, you don't have to be the smartest one in the room. There are other ways to win.

Kaustubh: This is so true. Being the smartest one in the room I think mostly is not to your benefit.

Sam: The good news is, like, I don't think people realize that until they get, like, way deep in, and you kind of know what your interests are, so you can kind of follow your interests and not just be worried about being the smartest one in the room. I actually have two... You know what? If they hear this, good on them. Means they're listening. So I actually have realized how unintelligent I am through two friends that I've had over the years. One of which was my college fraternity big brother, and he and I went to school at University of Florida together way back when. And so I always knew he was really smart, but when he graduated from UF, he went to MIT to get his PhD in nuclear engineering. And so I went up to visit him, and I remember thinking, "Whoa," like, "I'm never getting into any of these schools up here in Boston."

Kaustubh: Yeah. There's something else happening there.

Sam: Yeah. He subsequently, I don't believe he ever finished his PhD because he, along with his wife, also a nuclear scientist, essentially like a rocket scientist, quit to start a business that is now called Oklo, and Sam Altman is a big investor, I believe.

Kaustubh: Oh, I thought you were gonna say they quit and bought a plumbing business that does 1 million a year.

Sam: No, no, no. Remember, we're talking about smart people.

Kaustubh: True, yeah. That's a path reserved for dumb people like us.

Sam: Exactly. Thanks for stepping down to my level. So anyway, if you just Google Oklo and Jake DeWitte, like, you'll see what Jake has built, and he's sort of at the forefront of this portable nuclear power generation capability that's being developed. It was being developed for its portability, but now it's, you know, just to sort of drive this AI boom and the electricity need.

Kaustubh: Seems like a good place to be.

Sam: The second one was in law school. I'll actually get to today's topic in a bit. Here I am. I've had coffee. I've got stories. My classmate in law school who I remember, like, there was a specific class where his ability to logic his way and reason his way through a cold call kind of caught me off guard in, like, how articulate and thoughtful it was. And we never talked about grades. We actually talked more about, like, golf and softball and stuff like that. He ended up becoming the clerk for John Roberts, the Chief Justice of the United States Supreme Court.

Kaustubh: Dang. Yeah, I mean, it's a good reminder though, right? Of like there's so many different forms of intelligence, right? Like, that kind of interpersonal, emotional, social intelligence is so different than your first friend who... I mean, he might also be good socially, I'm not saying he's not, but it sounds like his form of intelligence is more of that kind of like raw intellectual kind and like a logical type. Like an engineering type of intelligence.

Sam: Yeah, totally. So what's funny is, like, I do think it kind of dovetails all the way back to TIO here in that I actually don't think raw intellectual horsepower has anything to do with success in owning and running a small business.

Kaustubh: Totally.

Sam: In fact, like I in many cases think, like the game of golf that you and I enjoy so much, it can be a detractor where, you know, in the game sometimes you're just better off just swinging hard and chasing it and having fun and letting the game go.

Kaustubh: No, I'm 1,000% with you. I think, like, you need a base level intellectual horsepower, right? Just like most. But like it's not that high to run a small business. It's not like we're making actually extremely difficult decisions, like that you have to really carefully logic your way through. We're just making like a lot of decisions and managing a lot of, like, people relationships and vendor relationships and client relationships. It's not like, I think of, you know, there was this guy when I was in college actually who went on to become a math PhD, and I think he's a math professor at Penn now. Sorry, this is a diversion again. Now we're just talking about old people, but he was great and I don't think he'll listen to this, but he was a little awkward socially. When we were freshmen, one of the upperclassmen came up to him. And we had a bunch of, like, nicknames on the team, and one of the upperclassmen came up to him and was like, "Hey, what's your nickname?" And he just goes, "It's Pending." Like, as in it's not there yet, and that just became his nickname. He was called Pending for the next four years. Anyways, besides the point. But I actually don't think I could tell you what his name is. I know him as Pending. But anyway, Pending, like, I remember once I was complaining about some math issue I was having in a class, and he just looked at me and was like, "I don't get it. That math is trivial." And I was like, "What do you mean it's trivial?" And it was just like, yeah, like the kind of math I was doing at the time relative to what he was doing, it was just trivially easy to somebody like him. And it's just, it's not actually, like it doesn't require intellectual horsepower. It just requires like learning how to do it and doing it. That's kind of what small business is like. Like, you don't need a lot of intellectual horsepower. You're not reinventing or inventing anything. You just need to have enough to learn, do some pattern recognition, and get good over time.

Sam: Totally agree. And on another episode we can get into maybe, I was about to say quantifying EQ, which itself is an oxymoron. But the set of skills you actually need, I think we've probably talked about this at some point, but decision fatigue is so real in this job. I think you can build the muscle.

Kaustubh: Well, we are talking basically about like attributes of a good small business owner, right? Which I think connects to the tweet you wanted to talk about.

Sam: Totally. So I think what's also funny is I was saying to my wife, a large part of what will often tire me out in my work is it's a lot of times about managing people and process, and it feels like I'll get resistance a lot. And when all my job feels like is having, like, hard conversations with people or about process, it really can wear me down when it happens too often in a short stretch of time. And it's one of those things I never imagined that this job would be, right? I thought I could sit behind a spreadsheet.

Kaustubh: No, it's such a big part of it. We are in the middle of our midyear review cycle at Blooma, and this is actually one of the easiest ones for me because our operations manager's doing all of the crew member reviews, not me. I mean, I have to support her, obviously, and kind of help think through how we address each person. But just, like, not having to be in the room and take on the emotional labor of each review is a significant... Like, it's really important work obviously, and I'm so glad she's doing it, and she's doing it better than I am 'cause she is higher emotional intelligence than I am. But it's draining.

Sam: Draining. For introverts, I will warn every introvert on planet Earth, small business ownership and introversion can be opposed in many respects. Be wary.

Kaustubh: Yeah, we're both introverts, so we've both felt that.

Sam: Yep. All right, so let's get into it. So our friend Grant Hensel has an interesting tweet that went out a couple weeks ago, I think.

Kaustubh: Grant's great, by the way. I only met him, like, six months ago, and we ended up investing in this tombstone deal together. Me and him are the only two investors, and he's awesome. He's a really smart, thoughtful investor.

Sam: I have FOMO now. Thank you. No, especially now I know that you got that deal toy. Okay, so back to the tweet. So the tweet kinda had me think through a discussion for today around when an investor is interacting with the searcher and trying to assess their ability to be a good searcher and owner. Assessing that capability is really hard. Assessing a searcher and a business owner's ability to make good decisions before they've bought is so hard, near impossible. And Grant did a nice framing of, like, he thinks about it in terms of green flags and red flags. It's not a quantitative metric. It's not a, "These are the things that cause me to walk." It's just like some of the facts put together.

Kaustubh: Which is totally the right way to do it, right? Like, everyone has some mixture of green flags and red flags.

Sam: So before we get into the tweet, though, I want to know how do you assess them and their ability to be future decision-makers and operators?

Kaustubh: Yeah. I mean, I've always talked about the two key attributes that I look for are humility and agency, right? And that kind of interplays with what Grant was talking about. But there is something about how a searcher carries themselves in terms of, like, how they manage the email flow, how they come into the first call, like, their level of preparedness, the kind of questions they're asking. Like, it's so hard to quite put into words what I'm looking for there, but, like, you can kind of tell when somebody has it.

Sam: So Matt here on my team would say, well, you can't tell people that they either have it or they don't because that's sort of like saying, "Stop having a dream." So you gotta say something more useful than that, which is if you were to define like the it factor, I think it's more so around things like EQ, ownership, showing that skill that is agency. You will always as the searcher need to be moving the balls forward. You will always need to be hyper-communicative, but not too much. You will always need to have the balance of humility. Let's say a potential investor asks a question around the business that you don't know the answer to. There is a balance where you can sort of have the humility and say, "Gosh, great question. I'll go chase it down." If you always say that, you're always deferring to their questions, you're always trying to feed them the warm and fuzzy responses, well, that's too much. So this is a tricky one. What else?

Kaustubh: Well, I guess like when I think of like do they have it, it's not like a threshold of they have surpassed some level of knowledge or capability or skill or anything like that. Like when I think of like do they have it, like I'm thinking more like are they of the right mentality to be able to go figure out whatever needs to get figured out, right? Which to me is like an extremely wide range of people and backgrounds and experiences and ages and whatnot. It way more has to do with just like... Like it's almost like are you a good learner, right? Like, and are you able to like ask good questions? Like those two go really hand-in-hand. I don't know. I'm kind of struggling to say this in a categorical way.

Sam: That's the point. Isn't that the point?

Kaustubh: Right.

Sam: And so in today's day and age where like information is typically not a competitive advantage, it has so little to do with, okay, the question was asked to searcher, searcher didn't know it. The coming back with the answer in quotes is not the it factor. It's the ability to, for example, actually go get the answer and to articulate it in a way where the investor believes the searcher understands the why and the how.

Kaustubh: Well, so interestingly, Josh from NewCo Risk, he tweeted something yesterday, one of our sponsors, that I liked where he commented on a searcher. Like, basically there was some question around does this target company need workers' comp insurance? Do they have the right policy? Blah, blah, blah. And the searcher came back to Josh and was basically like, "Hey, checked in with the seller. Seller confirmed that they don't need workers' comp in Texas." Which is just, like, not true. Like, it's so obviously not true, but, like, we know that 'cause I think we've just been around long enough. But, like, that to me is one of those moments where like, hey, like, as a searcher you need to have the wherewithal to understand like, hey, like, the seller either, A, doesn't know they're supposed to have workers' comp insurance, in which case they can't give you the answer anyways, or B, they do know they're supposed to have workers' comp insurance and so they're doing it incorrectly on purpose, in which case they're not gonna tell you the right answer 'cause they're trying to deceive you. Like, either way, the answer does not lie with the seller there. The answer lies with going to a third party knowledgeable person who can give you a clear answer. And so it's like, it's not just, like, asking the question, it's knowing, like, who to ask the question to, how to assess that person's incentives and, like, coloring the answers as such. So, like, I don't know. It's something about that tweet. I was just like, "Ugh, this rankles me."

Sam: So here we are. Like, isn't that kinda what makes this tweet and this question so great is the two of us are struggling with giving, like, a clear, coherent answer.

Kaustubh: Yeah. There's something around, like... I interact with searchers a ton, right? And I interact with searchers where I'm like, "I don't think I would back this searcher." And, but, like, if they were to ask me for direct feedback, I feel like my immediate feedback would be like, "I just need you to be better," which is unhelpful, or that's bad feedback.

Sam: All right. So let's go through his tweet real quick 'cause this will help us a little bit. He has a green flag, red flag. The green flag is fundraising decks and models created with genuine human thought, not just AI. I was just gonna reposition this as a red flag. That is, if I ever get those emails where it's so clear the deck and the model were made by AI, I largely just press delete. Sometimes I'll take a little bit of time, but immediately my intent is up, and typically that's been a pretty good indicator of if it looks like AI, it is AI. And it's really easy for a seasoned investor to ask two or three questions and realize the searcher has not put an iota of human thought into it.

Kaustubh: Correct. And like I'm not anti AI at all, like in terms of doing work and like I'm fine with a searcher using AI to help like design the slides and whatnot. The part to me is like building your pitch deck or your investment deck or whatever you call it, like that is how you figure out what you need to do due diligence on, right? Like to me, that is an integral part of underwriting, is like you start to build out your slides, and you're like, "Okay, I only gotta write my organization chart page," right? To lay out the team. Like, that's how you then figure out, "Oh, actually, I don't really understand what this person does," right? Like, "I can't create this slide very well, and I can't explain because I haven't asked the questions yet," and that's how you figure out, oh, there's a gap here. So like the act of creating the model and the act of creating the slides is how you learn the business.

Sam: All right. That was a nice meatball to his second point, which is sharing their thought process in detail, both what decision they are leaning towards and why, often in writing. And I think that is spot on.

Kaustubh: Totally. No, for sure. And I think there's a... I mean, people come from different backgrounds, obviously. And so I think like if you come from some kind of corporate culture where to get your idea across the table, you have to be pounding the table and just be all gung-ho. Like that doesn't actually quite work that well, I think, in an investment space. Because as an investor, we wanna see a searcher come in eyes wide open with the like, "Hey, here are the potential issues. Here are the risks," right? 'Cause like there are risks. Like that just is the case. Like every deal has things that are gonna blow it up, and if you haven't articulated what those are, and you don't understand them, and you haven't explained why you think they're mitigated, like you haven't actually, in my view as an investor, you haven't actually understood the deal.

Sam: Totally. That might be actually my favorite slide is the risk mitigations slide discussion. Yes, exactly. Because it's so obvious when the risks are like just meant to be layups for the searcher to slam dunk on people. Okay. So last one on green flags is demonstrating a mastery of the details and logical connections between them. For example, they know that days sales outstanding rising sharply during diligence means they should probably change the working capital peg from TTM to trailing three months. So here's where I'll maybe push back a tick, and that is to say that implies really good grasp of accounting, transactional things, structures, concepts. I think I'd be willing to give a pass on this in some respects if humility can overcome that. Like, it is clear that if they... It's clear they don't understand accounting and its impact on how to negotiate points of a deal. I can get past that if they can prove to me that they can teach themselves the accounting thing, the skill, and become a better manager because of it. Because to your point, that's kinda all about... That's what operations is.

Kaustubh: Yeah. Like to me, okay, if DSOs are going up, it's acceptable to me for the searcher to come back to the investor group and say something like, "Hey, I noticed this in the latest financials. I don't quite understand the interplay with the rest of the accounting or what's happening. Here's my hypothesis. Like, what do you guys think?" Basically, right? And that's using your resource as well. But you do need to be able to identify a potential issue even if you don't know why.

Sam: Totally. And I'll say like, maybe one of the best things about AI is how helpful it can be in getting up to speed on a concept or something you don't understand. It is incredible.

Kaustubh: Totally. Immediately into Claude, and be like, "Hey, help me read this document," right?

Sam: It's incredible.

Kaustubh: I love that. No, that is really useful in those contexts.

Sam: All right. So then maybe we'll cover a red flag and then switch for a bit. I think this one happens all the time, I think it's pretty obvious, which is like making decisions first and then backing into them with the support to protect your conclusion rather than the other way around. Which is... I'm gonna maybe take the meta takeaway, which is too many searchers will go under letter of intent, and they act as if they need the deal to close regardless of the risk. And so they'll pretty much throw whatever support they have to justify doing the deal and creating mitigants and all the things, when sometimes the answer is just like recut the deal and/or walk away.

Kaustubh: Yep. No, I mean, I don't have more to say on that. That's just correct.

Sam: Okay. Cool. So Grant, that was a great tweet, man. I just gave you a repost because of it.

Kaustubh: Did he have more red flags? Or were they all the flip of the green flags?

Sam: No. I mean, so the next one is focusing on what is possible, underappreciating what is probable, especially with foreseeable risks.

Kaustubh: Man, that one kind of drives me nuts actually. And again, I'm not an optimist by nature. It's probably one of my weakest parts of underwriting is underwriting growth. Like, I am way more focused on potential things that'll break the business, and how do we maintain it, like steady state. But obviously, when I read pitch decks, people are pitching the growth, and there's a lot of times when people are pitching an idea that's just so out there that it... Which is fine, like it might work, but like they're sort of baking it into the underwriting, and then they're pricing the deal off of that, and it's just like, no, no, no. Like, we gotta have an understanding of like what is probable, what is possible, what is way out there, and like actually kind of expectations weight things.

Sam: So that goes into point number three, final one, choosing options that provide short-term benefit but long-term problems. And I think the one that we'll see all the time is the searcher will, I guess, make assumptions regarding growth, or the one I am seeing more is, like, they're trying to solve for maximum ownership for them. And so they'll put a lot of leverage on the business, which assumes like, you know, cash earnings are whatever they're underwriting forever and ever.

Kaustubh: Yep. It's a tough path.

Sam: Tough one. All right. So today we're gonna have like a different kind of conversation, if you're so inclined to talk about Blooma and the update that you shared. I will say that even though you shared a version of this privately for those of us lucky enough to be on your cap table, you also shared some version of this with your newsletter, because I saw it.

Kaustubh: Yeah. Yep. It was sort of like a somewhat sanitized behind the paywall, but yes, like a lot of the similar concepts. I just didn't include like financials and all of that stuff that I gave the investors, obviously.

Sam: Yep. Okay. So I wanna just click into a couple things because, first of all, it's so fun to watch the operational maturity build and then to see, like, how it impacts just you and your vibe when sales are ripping versus slow and then ripping again and slow. And then to sort of layer in the fact that you have an SBA loan and seller notes. And so let's just get into all this. So tell us about the pros and the cons of that operational maturity you've built in. You kinda led with it at the beginning. You're not taking any of those performance reviews with any of your field laborers, so, like, talk about Flavia.

Kaustubh: Yeah, so like Flavia's doing this really methodical and intentional process of taking a task that we used to do operationally that lived in my head, 'cause I did most of these as like the, quote-unquote, I was the operations manager and the production manager and the GM and the HR and whatever, right? And so she's been slowly, like... I figured out how to do them mostly, but just well enough to get by. And then once I hired her two years ago, it'll be in September she'll have been here for two years, which is crazy. And she is basically taking those, and she's been doing them herself, like I've delegated most of it to her. But now she's sort of going through the process of SOPing them, which is amazing. Like in the EOS framework, it's very much more of a visionary integrator set up finally, even though we don't actually use like EOS itself. And the benefit of that is like we've really tried to get away from the idea of thinking of roles in a business. We've really focused on thinking about systems and outputs, right? And then we can allocate systems and outputs to a variety of people, right? And frame a role around that. But most recently the biggest change we've made in leadership is we elevated one of our most experienced crew leaders into this production supervisor role now. And so he is sort of now managing a lot of the day-to-day crew dispatch stuff. So whether it's like somebody calls out sick in the morning, how do we change staffing? Like equipment breakdown, what do we rotate around? Like he's doing a lot of the day-to-day service troubleshooting and management. Flavia still owns kind of the HR side for the crew, though over time I'd love for that to also kind of get delegated. And what that means is like Flavia now has one layer between her and like the day-to-day dispatch. Though in the transition period the way we've done it is Zane is still in the field Mondays and Tuesdays, so he really is office Wednesday, Thursday, Friday. So Flavia still owns it Monday, Tuesday, and then the back half of the week she kind of gets time back now. And in getting that time back, she's building out new systems. And like you start to compound this like operational maturity over time, where as she can systematize and SOP more and more things and turn them into like discernible tasks that more junior people can do. Even though like, I mean, the junior people, they're elevating themselves in their career, but it is more junior than Flavia. It just keeps opening up bandwidth for her and then for me, 'cause I can push things down to her then that she takes on. Like over time, you know, I own all of sales and marketing. Like the hope is over the next year for her to own sales, and I only own marketing.

Sam: So I just want... You said something here, I'm just gonna read it. At that point where Flavia's essentially been elevated to an integrator or COO role, I know you're not using roles, but so you're gonna get to this point ideally where you have a more traditional visionary integrator setup where Flavia is, you know, insert the title. But really the defense between you and the leads on sales and marketing, hold there for a sec, operations and admin, accounting, finance. And so compare that and contrast it with where you were when you acquired Blooma, where not only did you not have a Flavia line of defense, not only were you visionary and integrator, but you were likely the lead on the functions of sales and marketing, operations, and admin finance accounting.

Kaustubh: Yeah. No, I mean, when I started, I owned all of the production management. I didn't work in the field, thankfully. The former owners did, so we had to hire replacements very quickly for that. But I didn't work in the field on crew. But I did, you know, like, open and close the gates every day. And, like, if somebody called out sick, like, the call out came to my cellphone and no one else. Right? So that was sort of the frontline management, and I did that for the first two and a half years of ownership before, and then I hired Flavia two years ago. So I started transitioning it to her two years ago. So there's that. I owned all the accounting and kind of... I actually did the bookkeeping myself for the first couple years, which in hindsight I should've delegated that sooner, but I did that myself for, again, like two and a half years or something like that, almost three. I did all the maintenance, kind of fleet management in terms of working with like third-party mechanics and whatnot. We didn't have a mechanic on staff at that time, whereas we now have a part-time mechanic, which is like so much better. And then on the client-facing side, like we only had one other call taker when I started, and it was a physical iPhone, right? So like she just had the iPhone during work hours, and I took the iPhone home the rest of the time. So I would answer the phones on the weekends, like just to this physical cell phone, versus now we have a customer service team in the Philippines with a customer service manager. She's been with us for three years now. And so I have not answered a phone to our main line in at least a year or two.

Sam: Well, I'm just sitting here thinking that is an incredible transformation in the size of the team, the scope of the responsibilities that aren't falling to you as the first line of defense, and in theory, an improvement in the quality of your life.

Kaustubh: Totally. The weird thing, and I've written about this recently, when I... Like, I wrote a couple pieces about like my marketing framework for small business 'cause, you know, that's my focus these days. And the weird thing I've noticed, right, is as you build out these layers and you build out the operation, like you as the owner, you don't end up actually having necessarily less work. You kind of like almost promote yourself. Right? So a marketing lens, the way I wrote about it was like when I started, I was really the like marketing analyst, for lack of a better term, or marketing manager. Like, I was managing a couple freelancing agencies, and I had to do all the... Like, everything was sort of me. And then over time, the hope is you get better agencies. You turn into eventually, like you hire a marketing manager to like execute your strategies, and you start to become a CMO, right? Like there's like these layers you can build, and like that's the part that I don't... Like, it's weird. Like when you're really small, you actually just don't do those functional areas. Like you don't have the time or bandwidth to really be smart and strategic about your marketing strategy like the way a CMO would. Whereas like once you have more bandwidth and time, you actually promote yourself into being a CMO, and you start doing these things that you wish you had done all along. So it's not like actually the work goes down. It's just you start to do the more and more senior work that should've been happening the whole time.

Sam: So like the searcher will ask all the time, like, why not just hire for all that stuff right away? And ignoring the financial considerations, think about how much better you are at managing the functions because you've had to own the functions.

Kaustubh: Yeah. I mean, the short answer is exactly what you said, is like I couldn't afford to hire for all that right away. Right? There was no resources for it. But you're also right that the ability to manage the team is that much easier if you've been in that role and you know what's reasonable.

Sam: All right, so now let's talk about what it took or the cost, the actual cost. Can you give people maybe size comparison in terms of revenue today versus then when you bought it?

Kaustubh: Yeah. We've a little bit more than doubled revenue.

Sam: So there is a requirement likely for everyone, especially if you're using any kind of leverage, that you have to grow the heck out of your business to be able to afford this. And of course, like there are little tricks, right?

Kaustubh: EBITDA's still down, to be clear, right? Like EBITDA's below what we underwrote it as, right? So I've more than doubled revenue, and every dollar and some has gone into the P&L.

Sam: Exactly. So I was gonna ask you like how many dollars of expense did you add to the P&L to get in this position, but I don't think that really matters as much as the fact that you've doubled revenue since you bought it, and you're not quite back to level par in terms of bottom line.

Kaustubh: Well, one way to think about it, right, is when I bought the business... Well, let's say like roll forward the business maybe like a year or like six months, right? So like I've transitioned the owners out kind of. Like at that moment we had [headcounts omitted] crew members and office staff, including me. And so that ratio if you think about that is like roughly three to one. Today we have more crew members, but our office staff has grown much more.

Sam: That is incredible.

Kaustubh: Yeah. And obviously, like, we're massively helped by using global talent. We could not afford to do all that onshore. But yeah, like, that office team to revenue-producing team is closer to one to one, whereas it used to be, like, three to one, right? And that's why we can run a business that feels like a place with systems and whatnot. The nice thing is, like, from here, when we talk about operating leverage, like, the next four to five crew members we add, like, revenue-producing people we add, will only need, like, one to two incremental overhead hires, right? And so then we'll start to improve the ratio again, and that's when you start to drive EBITDA.

Sam: Yeah, so you said this thing, and that's where I wanted to go next is, like, all that to say Blooma's functioning as strongly as it ever has and has the capability to handle the next one million plus of revenue with limited additional overhead investment. And so it's one of the things I didn't ever expect to happen becoming a small business owner is to experience these sort of step functions where you as the owner-operator, the business owner, the manager, you go from running very what is likely lean to start, and then you sort of feel like as you take on more, then layer in people to backfill taking on more, more in terms of revenue and more in terms of responsibility. At some point then you feel like you've not overinvested, but you have created excess capacity where your team has the ability to do more revenue than you're doing. And so where you feel that is your bottom line.

Kaustubh: But importantly, the distinction is your indirect labor team has the capacity to support a larger direct labor team than you currently have.

Sam: Correct. Correct. And then you have the added challenge of then, like, you need to scale your direct labor team in line with your lead flow and backlog. So this is the game. And for anybody who is buying a small business and trying to grow it to that next layer where, say, a private equity firm would be interested in using it as a platform because I think maybe that... Where you buy Blooma where it is today, and then where somebody would look at it as a platform, you spend your entire life cycle of being a business owner... Sorry, nobody can see this on the screen, or I guess some people can. It's a straight line. Diagonal line. And that's what it looks like on a piece of paper or a spreadsheet, just like up and to the right. But it feels like it's these steps up and then across, and then up and then across, and they're very uncomfortable.

Kaustubh: Yeah. No, that's right. Yeah, I mean, that's exactly it. Like, when I bought the business, we were [figure omitted] of revenue, and now we're at [figure omitted] of revenue, right? Like, to be able to do that, we needed to add the same amount of overhead as we will need to do the next size up, right? Like, that's the problem, right, at its core, is we had to step function our overhead to a business one size larger, and then we had to grow into that size while having all that cost in the business.

Sam: And so this is my next question. Is the reason that you are retaining, I'm gonna call it like sales and marketing, but I think it's just marketing because you're specifically saying lead generation, your role is to fill the funnel of prospects, and it's your team's responsibility to convert them into sales and to then turn that into revenue? Is that how you think about it?

Kaustubh: I still manage our sales team, though.

Sam: Got it.

Kaustubh: Okay. So I am the sales manager. So the sales arborists report to me, and our customer service manager reports to me. And so I do still own, like, the sales funnel all the way down to a close. I'm just not the one literally doing the sales, except for, like, on the... You know, we've talked before about launching more commercial. Like, I am leading a lot of the commercial work myself. Like, I'm the one going out and doing the site visits for that. But all the residential, like our bread and butter, I'm not doing that.

Sam: Got it. So what's funny is, like, now you've created the operational leverage to go do the next million or two of revenue very profitably because you can do that revenue without any more OPEX. But now the job shifts back to you have to go do that revenue.

Kaustubh: Correct.

Sam: And so getting it in the door and converting it is your primary focus.

Kaustubh: Yeah. It's kind of nice though, right? 'Cause I wrote this in my annual letter as I thought ahead to Q1, and I wrote about it now in this most recent update. Like, it's actually kinda simple for me right now. Like, my job as the owner is just to drive leads and drive revenue. Like, we've got the team, you know, both in the crew, we've got the team on the overhead side. Like, we have a really strong group of people right now. Like, we just need to push tree work through that system.

Sam: Yep. All right, so let's shift then, 'cause I'm kind of trying to tell the story in a way where people will feel it. The one you wrote to us. So you're doing this all within the constraint of cash flow because you've got some leverage on the business.

Kaustubh: Totally. A lot of leverage on the business.

Sam: Right. Yeah. But to be clear, most searchers have a lot of leverage on the business.

Kaustubh: Absolutely.

Sam: So the sort of two special projects you're considering, one you've kind of completed in large part and it's now in maintenance mode, and the other is maybe starting. The first one is you tried to skinny up working capital in order to improve your cash position. Talk us through what that actually means, with no fancy finance terms.

Kaustubh: I mean, what it actually means is we had to become systematic and methodical at asking for money from our clients.

Sam: Correct. So you don't have inventory, right? So the inventory part of typical working capital doesn't matter. So it's collecting money from receivables, the IOUs from your customers.

Kaustubh: Correct. And we don't honestly have much in the form of payables either. Like, almost all... Like, we have a lot of stuff that we can actually pay on our credit card, so there's like an effective net 30 in there, so that helps. But our biggest cost by far is payroll that we pay weekly, right? So it's, like, pretty close to cash effectively. On the revenue side, we take deposits, which helps a lot, right? So that obviously helps. And I've thought about maybe we just bump that up and that even, like, makes our working capital even skinnier. But the deposits really help in terms of growth not bankrupting us. And then, but the rest of it, it really comes down to just collecting checks, right? And we are primarily residential clients. We don't have, like, a huge non-payer issue or there's not even they're necessarily pushing terms on us like a commercial client might. It's really an issue of them, like, remembering to, like, mail us a check or to pay online. Like, we have all the ways for them to do it. And when I owned all the bookkeeping, it was more me, or, like, the one person who reported to me, like, me kind of reminding her, like, "Hey, we gotta go send some reminders out. Like, we're not collecting well." Like, that's a bad system, right? Like, the system needs to be that, like, every Tuesday at 10:00 AM, every outstanding invoice gets an email reminder or... And then, like, every invoice that's, like, more than 30 days due gets a call or, like, whatever. You know, you build your system. But that's what Flavia and her team have done over the last several months to a year.

Sam: And to be clear, like, another recurring cycle that happens among like searcher-owned businesses is they will go in these phases where they're heavily focused on sales and ops, sales and kind of building out the delivery team. And for most businesses that have net term receivables, they just sort of... It's easy to forget how important it is to collect on time, and it just ticks up. And that whole concept of receivables suck cash out of the business, payables inject cash, is such a mind bender to many of us that it's easy for people to grow their EBITDA, their profitability, and not see it in cash because it's sitting in their receivables.

Kaustubh: Totally. Yeah, it's a humongous part of owning a small business, right? And especially if you're in an inventory-related business or, you know, like construction where there's like work in progress type stuff. Like, yeah, it's all of it.

Sam: Okay, so then second project is like refinancing. Just open-ended. Tell us about the special project on your mind.

Kaustubh: Yeah. So I've done one refinancing before, which is when I did the small add-on acquisition of Add On A Limb. Not that small. They were like a third our size. And so at that time, I was two years into my loan, and I needed to upsize it to do the acquisition, and it actually just made sense to do a full refi because it took, you know, eight years left on my big chunk of SBA loan and stretched that back out to 10 years. So my payments on that portion went down. So even though I did the add-on acquisition, my overall payment impact was not that material. I mean, it was material, but it wasn't as big as it could've been. And that really worked. That really helped our overall cash flow. I'm glad I did it then. We got a little bit lower interest rate. We got a little bit bigger line of credit at the time. So all of that stuff is good. And so now the question is we're now about two and a half years past that loan, right? And so, you know, we've paid down some debt. Obviously, this is interest loaded on the front end. But we have made some pay downs, and the question is like, okay, like, our cash position is still really tight. Like, basically every single dollar of EBITDA is going to principal and interest. And so I would love just from like my own stress perspective as an owner to create some room on the cash flow. So then you start to say like, okay, well, we've got seven and a half years left on our SBA loan now. Like, should I stretch that back out to 10 years, right? That's kind of the open question.

Sam: How's the rate situation?

Kaustubh: [Rate details omitted.] Like I'm not gonna get that much interest rate benefit. It is really on the reamortization is where the benefit would come. The one added funkiness is like I have a couple different seller notes, right, from the acquisitions I did, and the purpose of the seller notes, which was to kind of keep skin in the game and make sure we do a smooth transition, like those have all been met to those objectives. All the sellers are out of the business and have been for over like two years at this point. And so there's something to be said for like, you know, one of them has a maturity, like, with a bullet payment that's coming up in a couple years. And so there's something to be said for like cleaning that up and kind of resetting the term on a bunch of those and just simplifying the balance sheet. So there's some benefits there. But the weird thing with the refi is like basically every month I wait, like, we pay down a little bit more principal and hopefully our EBITDA goes up a little bit more so it's easier for the bank to underwrite the refi. So there's not an urgency per se. It's a little bit of a when is the right time to press the button on it, and commingled with the fact that, like, given how tight our debt service is to EBITDA, like, the bank has to underwrite it obviously, and they need to really understand the vision and the where we're going from here. And that just is easier and easier to pitch the longer I wait, 'cause I know EBITDA's gonna keep improving over the next year.

Sam: Yeah. Query though that at least with the seller notes, everything can be, you know, a discussion. So, you know, going back and saying, "Hey, you know, can we bump it out? You'll keep getting an interest payment," you know, that cashflow. And so at least you've got potentially some flexibility.

Kaustubh: Yeah, and so I mean, that's the other part, right? Like, especially with the one that has a maturity. At some point I'll reach out to that seller and say, "Hey, like, you're getting these consistent monthly payments. Do you actually want the full payout? Like you're not gonna be able to earn the same rate, you know, in the market, so to speak, or in money markets or whatever." And I'll see what he says, right? Like, I think it would make sense as a retirement account or whatever for him to keep sort of just getting his payments off of this. And that loan is kind of nicely set up where it was already set up on a 10-year amortization. It just, we had a maturity at six years and so like we could just reset the maturity out to 10 years if he agrees, and like it would just pay out naturally then. So again, all of this is like negotiable, and so there's a lot of ways you can address it. It is really just as an owner kind of deciding how you want your capital stack to look and how you want your uses of cash to look.

Sam: Totally. And then like I want to touch on this a little bit because it's interesting how the sort of sales funnel management is a concept that a lot of people aren't familiar with when they become an owner.

Kaustubh: I definitely wasn't.

Sam: I wasn't either. So like PSG has a very clear, we're a contracting sub. So bids, backlog, the conversion thing we call like a booking, it is a very closely watched set of KPIs. And so what's funny is like you can go through 1,000 different like business owners or business write-ups, and people will call things different. Like you used the word sales in the context of what I'll call a booking, which is a conversion of a prospect to a customer, but before you've done the work and have the right to claim revenue.

Kaustubh: Correct. Yeah, exactly. I think of sales as when you have closed the job, but you haven't actually done the work. So you don't have revenue yet, you have the sale.

Sam: And so I must talk to 100 fence company owners a year, and that terminology is more common. I'm the one that's sort of thinking about it using goofy terminology.

Kaustubh: No, bookings makes sense to me, too. I get like, sales is a funky word to use. I think it just feels more natural 'cause like it is our sales team. They sold something. But then the actual crew has to go generate revenue.

Sam: Yeah, so what's funny is I had a conversation with a business owner a few days ago, and he mentioned his sales for last month were the best in the company's history. And it wasn't until I looked at the P&L that I realized the terminology he was using is your terminology, not mine. Because sales just means your... It got added to the backlog. A contract was signed, so backlog grew, but sales, whether it's cash revenue or accrual revenue, can be a very different number. And so, like, you're going through that now as you manage a backlog to match your ability to execute, like, your direct labor capacity. And so you kinda see in months where your sales, your bookings exceed your revenue, your backlog will grow. Or counter that with other times where, you know, sales are slow, that's what you're experiencing right now, so you're kind of eating into the backlog.

Kaustubh: Exactly. And so, like, I would say for us roughly speaking, like, May through November should be when we are selling more than we're completing. Right? And then December through May or December through June is when we are doing more work than we're selling, right? And so that's the natural seasonality we have. Which is why, like, you need to know that to be able to say, "Hey," like, when we are in June, being like, "Hey, we're not adding backlog at the rate we should be adding backlog," right? Like, that's a problem. Because the problem won't present itself until January, but it is a problem, right? And so that really kind of lit a fire under my butt to be like, "Hey, we gotta go on this," right? And we've... And July went much better, which is good, and hopefully we can kind of sustain that for the next few months. That's really the question. But, like, the math I was thinking through with Flavia was basically, like, "Hey, we are currently, we've got about five weeks of backlog." I like to end our busy season, like, in November. I wanna end around 10 weeks of backlog. 'Cause I think that'll give us enough to get through the winter, basically, without running out.

Sam: Without running out at your level of, I call it install capacity. That's not the right word.

Kaustubh: Correct. Yeah, exactly. Crew capacity. Without giving up revenue. Right? And so what that means is, believe it or not, there's only 20 weeks left in the year. Like, excluding the Christmas/New Year's week. Yeah, there's only 20 weeks left from now. And so if we wanna add five weeks of backlog and do 20 weeks of our normal revenue, that means we need to, over the next 20 weeks, we have to sell 25 weeks of work. Right? And so 25, that means we need to sell, like, one and a quarter our weekly capacity every week on average, right? Now, I also know that, like, December is always a bad sales month, so it's like, and November is weaker. So like, really we probably need to do, like, 1.3, 1.4 times for the next few months, and then it'll get lower in December. So that's how I'm sort of thinking about it right now.

Sam: How many years of ownership did it require for you to fully understand the seasonality and the dynamic you just talked about? Because it's something that a seller, it's so inherent in their business and how they run it, they won't even speak to it if you don't ask.

Kaustubh: Yeah. No, that's right. Like, year one was measuring it for the first time. Year two was feeling seasonality for the first time. Year three was, like, the first time I was able to say, like, "Okay," like, "this is sort of in range or out of range." And then year four is when I feel like I understood it. And even then, like, this is year five for me, right? I'm in year five of ownership. Like, the season turned around for us later than I expected, which I don't know if it's economy or season or what, right? But like, the plus side is I saw it happening, right?

Sam: Yes. That's the key, is like you felt the leading indicator. And the pattern recognition to know to press the foot on the gas while there's still plenty of time.

Kaustubh: And so like we reduced prices this year for the first time. I haven't done that before. And so, I mean, my hope is to bring it back up eventually, but if we are not selling at this like 1.3, 1.4x our weekly capacity for the next few, like I'm just gonna leave it. Like, because the weird thing is when you have this many people, keeping them efficiently full is actually a bigger driver of profitability than just straight up price. Which is also not a very intuitive concept at first.

Sam: You... I can't remember if you wrote about that or if we talked about that, but I remember it.

Kaustubh: No, I think it's a post I wanna write, though. I gotta think about how to frame it well, but yeah.

Sam: All right. I think we're an hour in.

Kaustubh: Yeah. That felt like we covered a lot of ground.

Sam: Cool. All right. That was fun. Thanks everybody for listening. Our usual reminders. First, leave us a comment, a review, whatever it's called. Five stars.

Kaustubh: On Spotify or Apple Podcasts or whatever.

Sam: Boom. Yeah, that. Second, DM us on Twitter if you want to add to any kinda topic you want us to cover. And third, thanks to our sponsors for keeping us alive.