Rick Ruback
speaker
94 appearances
1 recordings
1 series
first heard May 2025
last heard May 2025
Rick Ruback’s voice in public audio — every appearance, attributed to the second.
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I agree with that. And dealing with the other part of your question, Patrick, I think when you list off the businesses that you did, and Rick and I could list more, but just for our listeners, roofing, HVAC, veterinarian services, there are a whole series of these that have attracted the interest of searchers. And when Rick and I look at them, the services are all different at a superficial level,
You're fixing your roof or you're taking care of your dog. But when you look beneath that, the reason the searchers are attracted to them is they all look alike when you're looking at the economic characteristics. They have recurring or reoccurring revenues. They have a very diverse customer base, vendor base.
They're not economically cyclical because you have to purchase that service when something prompts that. And that's why searchers are drifting into these areas. And it turns out that amazingly, despite all these smart people looking for these opportunities, it seems like every year or two, there's a moment of epiphany and, oh my goodness, there's another area.
There's overhead garage doors or there's automotive repair. And a new area becomes hotly pursued like HVAC began to be five or seven years ago. I think it's these businesses that have these characteristics that are being unearthed.
I would say that's extremely rare, but I would say what's not rare is if you persistently invest in this space, you will get money multiples of like 3X, 3X, 3X, 3X, 8X, 3X, 3X, 3X, 10X, 3X, 3X, 3X, 7X. You can make a living doing that. That's really okay. You might have some 1Xs mixed in there too. Rick's right. You'd have a few 1Xs mixed in there too.
But I think that is much more representative of the space. I think any private equity firm in the world would love to hang their hat on those kind of multiple of invested capital.
It's the nature of the professional investment management industry that you're basically paid... very much by the amount of money you manage. And so you enter at the bottom end because usually you can raise a small amount of money because that's a very fruitful part of the market. Those people who go in there and do a great job have more money offered to them and they raise a larger fund.
And to make sense of that portfolio, they buy bigger companies. And so it goes. The most talented teams just move up in assets under management. They move up in investment size and they leave that space that they were so good at making it available to new entrants in the market. It happens in no other industry, right?
I mean, Coca-Cola executives don't wake up and say, oh, we've done a fantastic job here. Let's make garden furniture and give this up. But private equity does that all the time.
I'd say it's a job, not a company. You misjudge something about the owner, CEO, where it's a set of personal relationships or personal expertise that is really driving the company. And it's not really a business. It's too much her or him. That would be a red flag that you don't pick up in the numbers.
This is really unique to small firms. In small firms, the owners, to some extent, live inside of the company. It's routine that in a million and a half dollar EBITDA business, the owner is spending $100,000 on personal expenses and running them through the business. And as a buyer, that's his decision. You're going to add that back to EBITDA because it's really EBITDA spent in another form.
And that's just common. I'm not making a moral judgment on it. It's just common. But what you have to watch out for is sometimes you see these companies where the owner has just gone wild and there's just this gigantic amount of living within the company. It's not 5% or 6% of EBITDA, it's 50% that's getting added back.
And the issue you have to start thinking about is not even documenting that to make sure that's true. It's that If this person is so willing to take those kind of risks and color outside the lines, how is he going to treat you as the buyer who, no matter how much due diligence you do, the information advantage is asymmetric and in the seller's favor?
And so at some point you have to say, there's an ethical question here that could stab me in the chest. That's a small firms thing. You don't encounter that when you're buying shares of Microsoft or dealing with companies that go into big PE firms.
And so does the seller.
I agree with that. That's the pattern we see again and again.
Yeah. Rick, I entered academics 15 years ago to partner up with you. You've been in this longer, so I'm going to be really interested in what you say. I would offer two things that we've done consistently. One is the class is extremely practical.
There's very little theory taught because we think that the students come to this class because they want to evaluate whether they want to do this as a profession. And then if the answer is yes, they want to stack the odds in their favor of doing it. Every time we write a case, every time we develop a teaching plan, we're always thinking about what practical lesson are we teaching these students?
And the second thing we do is we bring in the case protagonist. for almost every class. And part of this lets the students ask questions and breathe some additional life into the case.
But really, the reason we have them there is there are two questions that Rick and I know are on the students' minds, that they can look at this person and listen to this person, and they can answer, do I want to be this person? And can I do what this person does? And that's hard to teach, but easy to show. And so
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