Introduction

Patrick: [00:00:47] My conversation today is with my close friend, Brent Beshore. Brent is a private equity investor who owns and interacts with many small businesses, which have been hit especially hard by COVID. We discussed the various impacts that COVID has had and may have on small businesses and on the private equity investment community. Brent also proposes some policy actions, which he thinks may help those most in need. Please enjoy this conversation.

Impact of Covid on Small Businesses

Brent, thank you so much, my friend for doing this with me, I thought you would be a perfect person to check in with this week on, today is March 19th, because of your proximity to what I would call real American business, small business, not only as an investor, but just the number of relationships you have with business owners who obviously are facing a dire situation. So I appreciate your time. And I figured a fun place to start with would just be to get sort of a subjective lay of the land from you. How are you feeling? What are you seeing out there? How has this evolved so far for you?

Brent: [00:01:44] First, thanks for having me on. I mean, we chat at least once a day [crosstalk] .

Patrick: [00:01:47] Three times a day.

Brent: [00:01:48] Three times a day. Yeah. Are we up to three times a day now? It's gotten that bad.

Patrick: [00:01:53] Yeah, that's the crisis count.

Brent: [00:01:54] Exactly. No, I mean, I'd say subjectively, look, there's a new normal. And I think that the new normal is no one knows how long it's going to be and it's going to start trickling out. Just to be completely frank, I mean, I think we'll talk about maybe some bright spots and some things that could happen, good stuff, a little bit later. But I mean, just the frank thing is I'm sad. I mean, just to be completely honest, I'm sad at all the people that are going to be losing their jobs, who already lost their jobs. I'm sad that it's up ended a lot of people's lives and look, mine and yours included. I mean, I'm with my family at home, we've been practicing doing our social isolation part since Friday of last week. It's completely changed life. I mean, I'm sure, I've got three kids under six that are in the house here. So it'd be an absolute miracle if during our discussion, one of them doesn't come bang on the door or barge in and start singing in the background, which is awesome.

Patrick: [00:02:41] It's part of the game.

Brent: [00:02:42] Yeah. I mean, it's awesome in some ways. So yeah, I mean, I would say that the lay of the land is small business, I mean, I'm only going to speak to what I know and what I'm seeing personally. It's tough. I think that the shorter your feedback loops are for your customers, right? So if you're selling stuff daily and you can sort of see the feedback what's coming, I mean, there's been a dramatic drop in revenue. It's just unmistakable. If you've got longer feedback loops, B2B contracts, longer sales cycles, things like that, you can start to see the KPIs are going off a cliff, but the revenue is still there and you're still doing work. And at least for the most part, unless you shut down, which we've had offices in some of our portfolio companies in no commerce zones, basically. I mean, only essential services provided. So you literally can't work. So it's tough.

Patrick: [00:03:25] What do you think is going to happen near term in terms of policy response? Maybe asked a different way, what do you think should happen? You came out this morning, I know we were talking about it last night and I think you're up all night writing this memo, which as somebody that's an investor in, but also an operator of a small business, you're in a uniquely good position to sort of communicate what you think actually might make a dent in this problem as the country has come sort of do an economic standstill. Walk us through some of what you think are the highest potential impact things that the federal government or other government entities could do for small business owners?

Brent: [00:03:57] So maybe a good place to start, and by the way, I was a part of the night, a bunch of people on my team from an equity were up, based on the Slack channel, seemingly the rest of the night, working on this thing. And so it's definitely a labor of love. We were trying to be doing our civic duty to try to get the word out there about what's really going on and what we think might be some policy solutions. I mean, look, we're not policymakers. We're just people who try to help small businesses. But so maybe before we talk about the solutions, maybe we can just kind of take a step back and maybe talk about the problem, because I think a lot of people, if you've never owned or operated a business, just don't fully appreciate kind of what it's like.

I had a friend of mine, who's a real estate investor, ping me. And he was like, "Wait, doesn't everyone have like two years of savings on hand and isn't everyone have their house paid off. Like, I don't understand. I thought business owners were making it rain?" And certainly there are business owners that have stocked up and did really well. But I'd say the majority of even successful smaller entrepreneurs, business owners, they have income, but they're not wealthy in the traditional sense outside of their equity in their business, which just got much more difficult to monetize, and probably had a significant impairment and potentially a permanent impairment to that. So maybe we could talk, step back and maybe talk about the situation.

So for many small business owners, the finances of the business are really co-mingled with their personal finances in a way that I don't, maybe it's obvious, maybe it's not. So a business loss is a direct personal loss. It's not like they're going to be taking a loss in the business and personally they're okay and still getting a salary. It's all the same pot of money typically, especially when you have a single owner or maybe two owners and it's really concentrated. And so there's only so much financial pain and loss the owner can endure before, really the only responsible decision is to pull the plug and that's terrible.

So for many small business owners, the finances of the business are really co-mingled with their personal finances in a way that I don't, maybe it's obvious, maybe it's not. So a business loss is a direct personal loss.

Pulling the plug is not just a financial decision. And I think that these owners, if you've never operated something, you just don't understand how much heart and soul you put into what you do and how much you do care for your employees. I think that for us, I mean, it's like, we're trying to go through disaster planning in our companies. We will talk about that later and what we're trying to do, but I mean, it just breaks our heart to try to figure out, I mean, how do we take care of people? How do you be kind to people? But also the least kind thing you can do is not have a business for them to come back to if that's the path you have to go down.

Patrick: [00:06:02] So before we get to the policy stuff, I just want to dig a little bit deeper here on this concept of what it feels like, the felt experience of being a small business owner. Say a little bit about maybe using generic examples or something, the sort of window of time that different kinds of small businesses have to make it through this. Is it days? Is it weeks? Obviously there's a sliding scale here of if you're a restaurant in New York City, you know your revenue's, unless you're doing takeout, went to zero. Or if you're an AMC theater, your revenue's at zero. Like how long can a small business survive a freeze of commerce like this? And then kind of what's the spectrum?

Brent: [00:06:36] To get kind of back down to the accounting principles, you've got your fixed and your variable overhead. And depending on the type of business it's going to vary between fixed and variable. And by the way, I would say restaurants across the country are in the same situation. It's not just New York City. My favorite restaurant, which you've eaten that a lot here in Columbia, through the years, Bardot , they went to take out only and very limited menu. And they're still trying to serve cuts of meat and stuff out of their butcher shop. But I mean, sales are way down. They've had to lay off most of their staff. My friend, he has a restaurant chain and called me up and they've had to lay off over 150 people in the last week. And these are people that they don't have any savings. They have nowhere to go. I mean, it's just a really tough situation.

How long can they last? I think if you have no debt, which is typically a rarity in the restaurant business, but if you have no debt, operational debt, and you maybe don't have any debt on your building that you own, then this would be a very, very fortuitous situation. I think you can probably maybe four or five months, six months at most. And then it's just, it's a real dire situation. I mean, it's dire anyway, but it gets real dire in that case. People are dipping into savings regardless. I mean, it's not like you keep tremendous amount of equity in the business in form of cash. And so it's just going to be eating through personal savings the higher your burn is. Some people are able to get some abatement from lenders and say again, can we stop all pick the interest and no principal payments for six months to try to help me get through this?

I mean, I think some lenders are on board with that. Some aren't. I think that the longer this thing goes, of course, depending on what the government ends up doing, the more they're going to be open to things like that. I mean, you don't want to torch all of your loan to the business because you won't help them through it. I mean, it's sort of mutually assured destruction. So yeah, I mean, I would say I've gotten calls or text messages or Twitter DMS from 30 or 40 businesses. And I mean, everyone's in the same boat, which is they're seeing revenues either fall off the cliff or they have line of sight on going off the cliff. And everyone's just asking, what do you do? No one has planned for a complete shutdown, virtually a complete shutdown, almost a complete shutdown of the business. And no business can withstand a 80 to 90 to 100% drop in revenue, even for a short period of time.

No one has planned for a complete shutdown, virtually a complete shutdown, almost a complete shutdown of the business. And no business can withstand a 80 to 90 to 100% drop in revenue, even for a short period of time.

Patrick: [00:08:44] It's such a strange crisis because in many ways we know how it ends. There's a lot.We don't know, there's a ton of uncertainty of the path from here, but we can say with reasonable confidence that we will beat this thing back, whether through social measures or medical intervention or pharmaceuticals or something, humanity will find a way and the world will keep spinning. The question is, can you find a big enough board to cross that chasm and survive? And like you said, have a business on the other side? So I'm curious both within your own, the companies that you and your investors own, you personally, and others you've talked to, what some of the ideas are for how to cross that chasm such that you can have restart assets or restart cash on the other side and keep the thing going?

Brent: [00:09:31] I mean, I think the guessing game is just how long is it going to last and what does the trough look like? And I mean, everyone's just a guessing game. I mean, we're watching in our organizations, we're watching every key performance indicator, every leading indicator we can possibly see right now. I mean, we are having twice a day stand up calls and all the companies trying to understand what's going on, we're watching obviously cash like a hawk and really the waiting game and the guessing game is just what happens to revenue? How does it trickle down and for how long? And that's the guessing game that no one knows. I mean, our reactions are, we want to be prepared for the absolute worst. I think the worst for us would be in some of these businesses, having a six month total shutdown of the business.

I mean, in essence, I don't even know if this is possible. I mean, no one's really ever done this. Can you mothball a business? I mean, maybe the closest proxy is like prohibition, if you were in the alcohol business. How do you mothball the business? And so we're trying to actively talk, be open and honest with people about where we think this thing's going and how we think it might work and try to just be as loving and kind and generous to people as we possibly can, including keeping the business in a state that we can start it back up. And that's going to require a lot of capital in these cases. The machinery, once it stops spinning and you sort of got your AR that starts building when you get back started so you don't have the cash flow coming in. I mean, all that stuff has to completely restart. It's going to be a Herculean effort if you do have to fully shut down or even shut down all but skeleton crew. I mean to get it back up and running, I mean, there's a massive start and stop problem.

Patrick: [00:11:01] What are the other key considerations there? So accounts receivable is sort of really clear and obvious problem that even once things get going, your cash isn't collected yet. What other key considerations are there generically that you've thought about for businesses in terms of the cost of starting back up and the capital or effort that that would require?

Brent: [00:11:17] Well, just think about all the stakeholders. So depending on how severe it gets, you've got, let's say it's six months and there's zero chance that all of your employees can come back. They're going to have to do something else and they're going to find something else. And maybe they get themselves locked into a situation where they can't come back. Maybe they have to move locations. Maybe they have to go take care of a relative or a friend who's gotten sick. You can imagine just the start and stop on, if you freeze time or, well, unfortunately we're not freezing time, but if you're freezing the business in time, pulling it back out. It's just not... The same people are not going to be there. Hopefully a lot of the same people are, customers are going to have different needs potentially. And there's definitely going to be a warm-up period, depending on the type of business for those customers to come back.

It's not like you flip the light switch back on. It's like, Oh yeah, we're open for business. You've got to get the word out. You got to set meetings, you've got to have phone calls. You got to go through the sales process. Depending on what the business is, that can be a very long time. It could be another six months of selling before you actually get sales in the door. And that's assuming that demand is built in to the same degree it was before. And I'm not sure in some of these businesses that's the case. I mean, I think 20 years from now, if we don't have another catastrophe like this, could demand get back up? Of course, maybe it's even exceeding it. But in the next couple of years, I think there's going to be a shift and just a reduction in many of the types of things that people were used to buying. And I think it is what it is. There's not much you can do about it.

So customers are definitely one's key suppliers. I mean, let's say you're manufacturing and we'll see your contract manufacturing, getting your supplier to come back online. Well, what if you want to get in business? What if you want to stay in business? But your supplier base now, or suppliers, right? What about the expertise that was in those companies that were servicing you? Right? What if that expertise goes away, now your quality drops. So there's just all these, like the discontinuity of mothballing something it's just, to my knowledge has never been done. I mean, I would love feedback if anybody's ever done this, has the playbook. Please email me, find me somehow and tell me because I mean, we're trying to make it up as we go and, and look, you're hoping. I mean, that's the worst.

I don't want to get the impression that every business in the country is going to mothball. I don't think that's the case. I do think though, there were a lot of businesses that still today are in denial that they are going to have to do that. Or just frankly, are just out of business and the cases for a lot of these small business owners, if you torch all your equity trying to keep the business alive, hoping that it will come back sooner and it doesn't, you have no capital to restart these businesses back up. There's nothing there.

Recommended Solutions for Small Businesses

Patrick: [00:13:41] I read this policy paper yesterday that I shared around and it identified kind of two unique problems, one being a liquidity problem, the other being a solvency problem. So I'd love to kind of parse through these ideas with you. Liquidity, obviously it's pretty straightforward and I do want to talk about ways in which liquidity can be injected into small businesses in the form of interest free loans or other means that can help them. But solvency seems like a potentially even bigger issue here and solvency being, who cares if you have capital that's on an interest free loan? If there's no revenue, the business may just be insolvent. So we've talked about the bottom up. What do you think the best policies are that might increase the odds that this goes smoother than it appears to be going right now for small business, based on the memo that you put together?

Brent: [00:14:25] We identified four key things that we think could be done. The first one is that government could co-pay, let's call it 80% of small business payroll expenses for salaries up to a certain amount, I said a hundred thousand dollars, for the next three months. And look, the danger here is that, well, if the government's paying for it, everyone stays on payroll, right? Who cares? At 80%, I think there's incentives there where you're really only going to keep the people that think you need to restart, or that you're going to get through this with. And that may be, I mean, obviously that'd be a tremendous amount more people you'd keep on payroll than you would otherwise. And of course there's always going to be trying to cheat the system.

So you have a qualifying period where the people had to be on payroll by, let's call it March 1st, and had to be back on payroll by April 15th, that would allow employers who had already done layoffs to hire them back immediately and try to get through it. So that's kind of one that I think that, again, it's just unprecedented, it's not these businesses that made bad choices. No one's planning for a government mandated shutdown of your business. There's no business playbook that takes that into account. So I think that that would be a government program that I think would be very beneficial. And again, you could play with at 80%, is it 90%? Is it 70%? Is it $100,000 a year's salaries? Is it 50,000?

I mean, kind of wherever you want to play with it, right? I think there's a lot of give and take in there, but I think in general, just that idea of having the government kind of come alongside you and say, hey, look for very good reasons, and I'm not making a value judgment at all. In fact, I wholeheartedly support social distancing and a lot of the shutdowns that are going on, I think it's really important to save lives. But I think it would be a way for the government to say, hey, look, we helped to get you into this mess, we're going to try to help get you out and all be in this thing together.

Pretty easy one will be temporarily suspending the payroll tax. So I think this is pretty self explanatory. You can have up to a certain amount of income, maybe use that $100,000 threshold. It would just give both owners and employees more take-home pay and liquidity. Probably the one that's the most out there is this thing we call the small business bond, which would be a new program, literally just brainstorm this thing up, that would provide temporary financial security in a long payback period. In essence, it would be a loan that you would have to have a lender do a conforming loan to this, it would have sort of a 10 year loan term or longer, no principal interest payments for the first year, 3% or less interest. But it's personally guaranteed by the borrower and probably some sort of maximum, I said $5 million.

And the idea behind this would be okay. So if you have a long enough amortization period, whether it's 10 years, 15 years, 20 years, 30 years, whatever it be, if you have a long enough amortization period, you can make, even though it is debt, and even though it's a liability that you're burning equity in the business by using that to fund sort of income statement losses, when you get restarted, it won't be such a drag on the business that it would impede the kind of future growth of the business. In essence, it would just be an additional tax on the business over a very long period of time. And I think that's important. I'm not in the mindset that we should just try to make all equity holders of all businesses whole.

I think the President of France came out and said, he's not going to let any business go under. I think that's terrible. Small businesses go under all the time. I think what we want to try to do is try to say, hey, look, if this is the cause, which we're going to see just a rash of this being the cause of unemployment, businesses shutting down, whatever it is, I think there is an opportunity to have skin in the game from the owner of the business. Look, they're taking a hit, it's a future tax on their earnings, but also giving them every opportunity to stay in business if they can and if they want to. I mean, that's another thing. A lot of people in 2008 that were older just threw in the towel. And I think that's really tragic, but just said, I don't have it in me to do this again. And I think there's going to be a lot of that that goes on too.

The last one that we talked about was just wider latitude given to banks to create temporary loans based on inventory, accounts receivable. There's a lot of bank regulation as you very well know, and a lot of that is impeding the ability of banks to get creative. Bank loan examiners are coming in and saying, no, wait a minute. Why did you do that? Why did you that? I think if you gave a moratorium on, it's going to sound terrible and you can of course see some perverse incentives in this, but a moratorium on sort of bank lending standards and said that, Hey, for the next two years, we're just going to give you a free pass. We want you to lend money, go lend it and lend it in a way that maybe you wouldn't have lended otherwise. I mean like the SBA is a good example of this. I mean the process, which by the way, SBA is a great program. That's how I bought my first business. I talked to people all the time. They're trying to buy their first business. And I say, look, look at the SBA, great program.

The problem is it just takes, call it 60 to 90 days, probably 90 being more on average, under normal circumstances. Being flooded with all these opportunities and we try to jam this thing through the SBA. I mean, they could be looking at six, seven, eight months of backlog to even get a loan done and that doesn't help anybody. So I think that another thing we've got to do is diversify out the sort of lenders that we can use. I would love to see Square be a partner on this, more the FinTech side, or just even unqualified banks that don't normally have SBA lending practices. And so I think that the combination of all that, I think would do a lot to get us through this. But again, it's all depends on what the duration is going to be.

Patrick: [00:19:25] It's amazing to watch the change in mindset. I'm curious how much you see this too, of everyone, right? Of the government of you and me, this sort of widening of the aperture, if you will, the realm of what is possible and what we might do you. Hear about industrial companies stopping production and making ventilators is a great example. It feels like a war time ramp up of our country's resources, which I'm incredibly hopeful can shorten this pain or lessen the pain, or we're making it more likely. We make it through to the other side of this thing. I think your point about like commercial banks being some of the lenders or even the stripes or squares of the world is super interesting. If that happens, let's say that the government straight from your mouth to Congress' ear, and they adopt every one of your memo's policies, what do you think will happen? Like how much will these things get used by small business, small business owners? Are they even going to understand kind of what's going on and what's available to them? How effective do you think this would be at lessening the pain?

Brent: [00:20:22] I think that it would be used tremendously. I mean, look everyone right now, I mean, desperation is a heck of a motivator and everyone right now I talk to, I literally don't know a single business owner, that's not desperate, right now? A single one. And I think that the danger is you roll out something very, very complicated. What was passed, I think it was last night is an expansion of FMLA, which is paid time off requirements. And I mean, people are freaking out today because, if basically you've been impacted by coronavirus, now you're paid by your employer to go off the payroll and to take care of people, which is again, a very noble, the intention behind it is fantastic. The problem is they're compensating people through tax credits and no business owner right now is worried about paying your taxes. There is going to be no taxes to pay.

So it does them absolutely no good. In fact, it just absolutely kills their short-term cash burn, even worse than it would be otherwise. And again, for a very noble reason. I'm not like that, that's not a value judgment on that side, but I would say having policymakers really talk to small businesses and understand what stresses the maybe good intentions that they have are putting on the business in practicality. And I mean, if you talk to any small business owner and ask them, "Hey, how important are tax credits right now?" They'd say, "Ah, none. Not at all." And so I think a lot of these things are really, they're going to be incredibly valuable if the government can roll them out in a way in which are simple and straightforward and it's just no qualifying the, all the stuff around how much paperwork do you have to fill out? What do you want to do?

Of course, there's going to be fraud. Of course there's going to be fraud. There's the opportunity cost to everything, of course. But I think that the more that you can just get, create a simple program, it's super straight forward and easy to understand. Hey, here are your five options. Here's immediately what we're doing. This is how you do it. This is where you go. Here's a list of approved vendors, in essence, super straightforward. I think that you would see a usage rate that probably exceeded 90%.

Outlook for Private Equity Investing

Patrick: [00:22:12] It's amazing. When I looked at the other, I just pulled up the other kind of paper alongside yours and the two that I'm kind of sending around and it's a lot of the same stuff, like long-term loans, zero rates, uncollateralized three months, no payment whatsoever, like just a pure bridge across hopefully what will be the worst of this, with obviously some qualifying criteria and limits on the loans, et cetera, but the ability to use them very broadly. Talk about something that would have been shocking to read a month ago as a serious policy recommendation gives you a sense for where we are.

I'd love to switch gears to the investment world. We've talked about this sort of boots on the ground business world a bit. What do you think about the private equity complex, which is where you spend your professional time? I know we've talked endlessly about how you are an odd duck in this world and are effectively unlevered, unlike almost all private equity in the businesses that you own, and yet still faced this incredible crunch. If you're able and willing to share a bit of your own businesses, what you're seeing there, things you're considering, and what you think must be happening in the rest of the private equity complex?

Brent: [00:23:14] It's funny how things stick in your head. I had a conversation with a guy in the private equity space who called me irresponsible for not using leverage about six weeks ago. And look, I think there's an argument to be made, if everything goes to the moon and we never hit any problems or speed bumps, I think it would be irresponsible. The issue is that we don't live in a perfect world. And obviously this is now shock to the system in many ways that no one could have ever predicted. We carry no debt. We have one business that has some debt on it, moderate amount, but the first fund that we raised, we closed five companies, zero senior debt. We have some lines of credit that we help fund growth. I mean, look, super strong balance sheets. If those businesses go under, I don't know who survives.

In absolute terms, it feels like we are in a tough spot and we're right alongside everyone who feels that way. In relative terms, we're in the best position you possibly can be in. We've got good customers that pay us, we've got great balance sheets, we've got no debt, good leadership teams. I mean, like we're in perfect position relatively, but it still feels terrible. I mean, we're going through all this stuff. I mean, I said in the beginning of the discussion, we're doing twice a day stand-ups and we're trying to review every AR, AP and making sure that the AR comes in and that we're really judicious about AP right now and trying to make sure that we're having active conversations with a lot of our vendors. "Hey, what are you seeing? How does this work? What do you think?" It is a tough, tough situation.

In absolute terms, it feels like we are in a tough spot and we're right alongside everyone who feels that way. In relative terms, we're in the best position you possibly can be in. We've got good customers that pay us, we've got great balance sheets, we've got no debt, good leadership teams

I cannot imagine right now if I had two times leverage what my previous, we say two times leverage, what we're saying is like two times EBITDA is typically what people use as sort of a leverage ratio. EBITDA's going to drop precipitously across virtually every business. I mean, you're going to have some weird counter cyclicality here and all that stuff, but I mean, for the most part, 95% of businesses are going to be less profitable this year than they were in 2019. So those ratios, if you've got two times EBITDA in 2019, I mean, your EBITDA leverage just shot up through the roof. I can't even imagine, and two times is like, as one of my private equity friends would say, is child's play, that's nothing.

And I literally, I don't know how those businesses are going to survive without a massive infusion of equity. And I mean, that's just going to drive down the returns. I think that many private equity firms right now are going through the calculus of which of their portfolio companies to save and which ones not to save. And so I think there's going to be a huge wash out that comes down the pipe here of unfortunate layoffs like everyone else. But I think this would be exacerbated in situations that didn't have to be that way.

Patrick: [00:25:39] In every one of these environments, it's hard to focus on, I think, which is why the opportunities exist, there always are opportunities. Things that in the hindsight, looking back on this two years from now, we'll point to certain things you and I on a call and say, "Can you believe this business or this purchase or this whatever could have been had at these prices?" Are you starting to see anything like that across the businesses that you deal with in terms of just screaming distressed opportunities to make great investments?

Brent: [00:26:07] So let's talk about this thin line between being a loan shark and a white knight, because I think it is pretty darn thin and maybe getting thinner by the moment. And it's really tough. We are interested in setting up good long-term win-win relationships. It's really, really hard to do that. It's exceptionally hard normally, it's like unbelievably hard in times like today. Distressed assets, like the problem is you're buying it from somebody who's distressed and this is the toughest position we're in. And honestly, I'll just be completely frank, we're not sure right now what we're going to do. We've been discussing a suite of products that could help people, sort of bridge them through with some balance sheet stuff, depending on what the government ends up doing, if they do anything. We have no interest in sort of being a high yield, junk bonds to small businesses, like that's not of interest to us.

But the alternative is these businesses go under. And so we're in this really weird position where no one stressed our relationship in dire circumstances and then try to make it work later and then there's always going to be resentment that's built up and it's just a really tough time all around. And so, frankly, I mean, just being honest, we're struggling through it. We're trying to figure out what we can offer. We're trying to figure out how can we maybe take some of these products that we could offer that are more balanced sheet products and create good long-term win-win relationships where, hey, look, we helped rescue the company, let's all try to win together in the long-term. You may not have as much money as you would have otherwise, but it's better than nothing. It's better than a lot less, than would have otherwise.

So I think there will be incredible opportunities. I would say expectations are such a funny thing. So it was two weeks ago this morning that I emailed my team and said, "I think we really got a really big storm on our hands here." And we started talking about what does it mean, as of let's see here, last Friday, what does it really mean for investing going forward? And as every intermediary that we dealt with, a lot of the business owners were like, no, everything's fine. We'll schedule the visit. Everything's great. Business is continuing on. As you've gotten to later in this week, this is Thursday afternoon on the 19th now, as you gotten later in the week, everyone now is hitting reset and saying, "Hey, we're stopping our processes." I mean, saying stuff like, obviously given the circumstances, dot, dot, dot.

So we're starting to see at least the absorption that things are different. I think that everyone's still in shock would be my guess. And there's certainly a significant amount of people who just don't see anything different in their business today because they have longer sales cycles as we talked about before. So I think it's going to take a while to wash through. I mean, if you look at when the last kind of full cycle, so 2008, 2009, 10, it wasn't really until 2011 ish when business sales and sort of the M and A process on the lower end really started picking back up again. And so, I mean, a lot of people have this thing of like, okay, well, I'm just going to wait it out. My revenues down a lot, I'm just going to try to get through this. And then my business will be worth what it was before and I'll sell in three years.

So I think you're going to see a lot of that holding on. Of course there's going to be opportunities. And I think that what we want to do is just try to treat people super fairly, be honest with them, give them an option, say, hey, this is what we can do. It may not be what you want and that's okay. And we hope that you find what you want. And really just try to structure things in the kindest way. Maybe not try to take everything off the table that we could, if that makes sense, try to leave a little bit on there, more than we possibly could. I think that goes a long way in terms of showing good faith.

Patrick: [00:29:24] Just to be clear for listeners, can you describe exactly what you mean by balance sheet like products as an investing product? What exactly does that mean?

Brent: [00:29:30] So if you think about it, we are typically exchanging equity. So we're changing cash for equity. That's our normal business. So we're typically doing, buying a majority of the firm and then working with the sellers to kind of help their exit long-term. So sometimes we'll buy it to 100%, but most often we're buying 70 to 80% of the equity of the business, so the ownership of the business. A balance sheet item would be more like providing a short term loan or some sort of bridge financing, similar to what we're talking about that the government providing, if the government doesn't step in, there is just going to be a tremendous need, an overwhelming need. And certainly there's going to be a lot of people who suffer as a result of that, but better something than nothing. So these will be maybe factoring receivables, maybe giving a line of credit based on inventory.

A balance sheet item would be more like providing a short term loan or some sort of bridge financing, similar to what we're talking about that the government providing, if the government doesn't step in, there is just going to be a tremendous need, an overwhelming need.

It's basically what banks would be doing normally if you were sort of very conservatively financed organization, but doing it a much higher interest rates and probably doing it potentially without personal guarantees. So it's kind of, de-risking it for the person who's using it personally. So there's all different kinds of products that you could create there. You could certainly keep them on an individual level. You can try to package them up and securitize them. I mean, there's all different kinds of things you could do. That's really not our business. The problem is we're kind of in a position where our core business right now is just very difficult to execute on. I just don't know how many people right now are going to be like, now's the right time, all things considered, to sell a bunch of equity in my business, because I just feel like retirement.

That's not probably the course anybody, hardly anybody's going to take, maybe a couple people, but hardly anybody. But we're not lenders and we don't want to be lenders. And so we're just trying to figure it out. We're trying to figure out, could you do something where we say, look, we're going to get you back on your feet. Here's kind of what we need to make. And we feel comfortable that we can make you this debt product to you. Here's how long it'll be. Here's the payback terms on it. And by the way, if you can get through this mess and get us payback, we're still going to generate a nice return for our investors, but it's not a permanent impairment to their business. Or if God forbid, they can't get through it, then we feel comfortable taking the keys and saying, okay, look, we're going to cram you down.

Maybe instead of you owning a hundred percent, you now own 80% and we take over the 80% of the equity and convert over that debt product into equity as just an idea. They would still own 20%. They're still in a better position than they would be if they owned no business. Certainly a lot of people's jobs will be saved through products like that. So I think it's a very necessary product. You just got to structure in such a way that you feel like it still can be as much of a win-win as possible.

Patrick: [00:32:00] So in closing, I thought it'd be interesting since you and I are such good friends and know each other so well, I can't really do this with anybody else, to just talk about kind of the personal, emotional rollercoaster that this has represented for you. I'm happy to share the same, but I'd just love to hear how you've been handling it. What have been the highs? What have been the lows? I think everyone's going through this. So just to hear from somebody on the front lines, a small business, just from a personal level, I think would be interesting and valuable for those listening.

Brent: [00:32:26] I'm blessed with a lot of smart friends, you being one of them, we talked about the coronavirus very early on. And I think that my trajectory on the actual health side of it was, huh, that's interesting. I wonder if that's going to be a problem, to warming up to, hey, this might be a real thing, to just frankly, outright panic. I mean, I'll call it what it is. Sort of unvarnished. You know, I think I probably won the doomsday prepper award at a grocery store or two in the past two or three weeks. And so it's been a lot of trying to get my parents and my grandparents to listen and to try to understand what's going on. Of course, the older you get when you never seen something like this, it's not that big a deal. Look, we faced panics in the past. And trying to get them to understand that this really is different, has been hard at times. And I think that I'm thankful that I went to work on it and tried to raise the alarm and raise the alarm early.

Personally, it's been I have three kids under six and my oldest is five and a half and she kind of somewhat understands what's going on and is having trouble and being scared. And of course my wife's scared and scared for our friends and relatives and city and region and country. And just trying to figure out how we can be helpful as well. I think that's a really tough thing. Social isolation for us, we want to be on the front lines and help serve people. I mean, we were talking about, gosh, this is going to sound terrible, can we go ahead and just get the virus, if we get immunity, can we just get it, get it over with so we can go and serve and take groceries and help people and not just be so isolated.

I mean, I think that's probably the toughest thing right now that I'm struggling with personally and us as a family is just, self isolation feels like the opposite of what we want to do right now for our friends and community. And it just sucks. I mean, I think you know it's the right thing to do. And I think that you're being kind by isolating right now is definitely the right tack to take, but it sure feels terrible. I don't know. How about you?

Patrick: [00:34:19] For me, it's all about communication. I feel like that's the one thing that we can overdo in a time like this, whether that's in your business, I've certainly done that, done that in our business and with friends like you. And it helps me the most just to talk because when you talk, you can be empathetic, you can share information. I think both of those things help overcome fear and panic. And again, I would be lying if I said I haven't had my moments of real fear about the system, about my own health, about my family's health, various family members, of course, just like everyone in the world is going through. But I find when everything is, I said this to my team, when everything around you is going down, you just have to find things that you can make go up.

And for me, that's the number of conversations that I'm having with those I care about with a big part of that being the people I work with and with friends and yeah, I mean, other than that, I'm not sure what to do, right? Is just focus on things that are under my control that I can make those counts go up while everything else goes down. It seems like at least just speaking from personal experience, the best that I feel, I should start taking a journal five times a day, one through 10, how am I feeling right now? It looks like a chart of the VIX volatility on that score, but the best scores come when I'm just talking to my friends and it's a give and take, like sometimes I need to be pepped up. And sometimes a lot of times, admittedly, I'm doing a lot of the pepping and yeah, it's a unique thing. I will never forget it. And there's not much more you can say about it.

Brent: [00:35:45] Yeah. I think the relationships you just keyed in on are just, they're everything. And I think that socially isolating is kind of a, maybe a misnomer. We should be physically isolating. We should be socially over-communicating and engaging. And I certainly think that's something that I could do better myself. I tend to want to hunker down and try to close ranks and help the sort of the immediate people around me. And I think that's the wrong approach. I think that we need to be reaching out to people and being somebody they can talk to and just be a good listener. And I mean, truly that we're all in this thing together. I mean, it's a united problem.

I mean, we're all facing the same common thread and my prayer every day right now is that somehow this brings us together as a country and as a world. I mean, that sounds probably pretty cliche, but I mean, I think it's true. I mean, I hope that we can focus more on overcoming this than borders and trade wars and all that stuff. But yeah, I mean maybe my only, maybe funny observation is that, I mean, cabin fever is definitely starting to set in. It's been cold in the Midwest and rainy, and I am convinced after a week of being at home, one that my wife is an absolute saint and that she has a job that's way more valuable and way more difficult than mine. And two, that I think school teachers should be paid about a million dollars a year. I'm convinced that the actual work they're doing is just, it's unbelievable.

Patrick: [00:37:05] Amen. Amen. Well, look as always, I appreciate the perspective. There's no hiding what we're facing here. And the key thing we can all do is be constructive and look for solutions. And I think what you wrote last night, hopefully it finds the right ears. I'm sure it will. I really appreciate you doing that and talking to us about small business today.

Brent: [00:37:25] All right. Hey, take it easy, man. Thanks.

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