The Weekly Handbook: On Compounding

Hiring for Scale

Once you go from a solo operation or just an idea to having employees, things get more serious.  You need to keep track of them, ensure they know what to do, and make payroll.  Those training practices and formal business practices can be a nightmare for some and an operational delight for others. It ultimately comes down to taking some things off your plate (and mind) and trusting them to do the work well.  It is often a scary jump, whether it is the first employee or a key hire.

You should aim to hire for where you are going to be, not where you are at currently.  Getting ahead of the puck is a good thing here.  Forecasting demand, customers and workload is important for your business.  You can pull from this data to make decisions on hiring needs.

On the Ignore the Headlines podcast, Stephen Olmon discussed with Connor Abene hiring his first employee (Listen in).  Connor is getting to the point where he doesn’t have the time to onboard more clients.  The decision making process to bring in someone else can be thoughtfully planned with huge upside.  Most importantly, your time is freed up and output can scale linearly or exponentially with hires.

You will eventually outgrow where you are at today.  The demands of more customers, higher revenues, lower lows, etc. require skillsets and adaptability for someone new to grow into.  When hiring for where you want to be or expect to be one day, you can try to hire those already ahead of the curve.  

In a way, hiring for scale relates to last week’s essay “On Compounding”.  Hiring people who have done it before, compounds knowledge faster. Similar to investing from a higher base amount of capital, that knowledge base you have from hiring those who’ve done it helps your business.

A question we would like to ask to keep the conversation going: when hiring for scale, how do you pay them?  What are incentive structures you have used?

Oftentimes, it is equity in the upside. Ujwal is giving a manager equity in the realized value during their leadership.  This tweet Steve Ressler posted has interesting comments and eventually the answer of equity comps for hiring someone to run a $100M business.

Of course, there are downsides to hiring ahead of genuine needs.  Be careful and thoughtful about hiring ahead of predicted demand.  Perhaps the best way to think about this is hire the people you would want with you at any scale.

Thanks to Everest Brady for his help, writing, and research in assembling this week's newsletter.

Read

Where Is My Flying Car? by J. Storrs Hall.  This book uses historical research, technological expertise, and poetic magic to help us understand what happened to major scientific innovation in energy and other technologies.  Not all doom and gloom, Hall describes a fantastic reality that is possible.

Big Deal Small Business wrote about using KPIs in your business, with a great overview of methodologies used and how owners can think about picking the right ones.

Eads Bridge Holdings wrote about developing FP&A process and best practices for small business owners.

Listen

Eric Jorgenson had Chris Powers on the podcast this past December.  He started out buying student housing at 17 and now 17+ years later is buying half a billion dollars in Class B industrial real estate, annually.  What did he do in between?  He bought a variety of assets, got into VC, and didn’t have a clear direction for Fort Capital, himself, and his employees.  You likely have heard most of Chris’ story repeated on his podcast (The Fort) or as a guest, Chris shares more about that messy middle period that isn’t often talked about in this episode.

Chris came onto a shorter TLAO episode for our Real Estate Miniseries discussing boring businesses and industrial real estate.

SMB Job Postings

Byron Assistants, owned and operated by Ujwal Velagapudi, is hiring for a Chief Operator role.  Byron pairs US based, college educated virtual assistants with customers and is already at high 6 digits ARR.  The role will have full autonomy and significant upside as you learn the business inside and out.  You can see the job description here and apply here.

Ujwal also came on TLAO covering how he acquired 9 companies (including a large vending business), real estate, close calls, use of debt, and more.

This Week on Think Like an Owner

I’m joined by Sara Heston and Peter Kelly. Together at Stanford, Sara and Peter, among other projects and teaching, assemble the Stanford Search Study that has been released every year on even years. The study is widely considered the go-to resource for learning about search funds and is often the first resource shared with folks considering the path.

The first study in 1996 was only two pages long, and the 2022 study released in July is over 30 pages, reflecting both the growth in the Search Fund Model and the increased availability of data. Our conversation covers the purpose of the study, it’s evolution since 1996, a half-dozen interesting trends they have observed among Search Funds, characteristics of ideal Searchers, and data sets they want to add to the study in future years.

This Week in SMB Twitter

Check out this networking thread to find and meet some interesting people!  For example, Grant Rudow (@GrantRudow) is on a mission to build the best offices.

Think Like an Owner is sponsored by:

Live Oak Bank – Live Oak Bank is a seasoned SMB lender providing SBA and conventional financing for search funds, independent sponsors, private equity firms, and individuals looking to acquire lower middle market companies. If you are in the process of acquiring a company or thinking about starting a search, contact Lisa Forrest or Heather Endresen directly to start a conversation or go to www.liveoakbank.com/think.

Hood & Strong, LLP – Hood & Strong is a CPA firm with a long history of working with search funds and private equity firms on diligence, assurance, tax services, and more. To learn more about how Hood & Strong can help your search, acquisition, and beyond, please email one of their partners Jerry Zhou at [email protected]. 

Oberle Risk Strategies– Oberle is the leading specialty insurance brokerage catering to search funds and the broader ETA community, providing complimentary due diligence assessments of the target company’s commercial insurance and Employee benefits programs. If you are under LOI, please reach out to learn more about how Oberle can help with insurance due diligence at oberle-risk.com. Or reach out to the CEO, August Felker, directly at [email protected].

Interested in sponsoring? Reply to this email and let’s chat.