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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Those are two of the things that I think Rick and I have found are very powerful and students in their end of year evaluations routinely comment on those. So that's what I would offer as things that we've done well. Rick, thoughts?
I would say we direct our students to businesses that are capital light. So once they buy a business, and we probably should have put this on our list of qualities, which is superb free cashflow characteristics, we are nudging them to business service companies where EBITDA almost exactly equals free cashflow. And so capital allocation decisions are very episodic.
They usually center around a tuck under acquisition. Sometimes they're expenses that are really investments like launching a new sales force. And of course, they're taught how to do projections and see what kind of return on expense there is. But I don't think there's a lot of allocation that goes on in these businesses because of the nature of the businesses we suggest they buy.
I agree with everything Rick just said. I'd just add a couple of numbers that add to this, which is the sense of possibility here. In the United States alone, because searching has become global, there are approximately 3,000 small business brokers, professionals who do nothing but intermediate small businesses.
There's something like 300,000 small businesses that change hands every year where the seller sells. It is not that hard to get in the flow of this harder to filter and find a good business at the right price with a committed owner. But getting started at it and bathing in a flow of companies, which is how you learn and how you find, that's really not that hard.
Do you agree with that, Royce? Yeah, totally. That's when these entrepreneurs have really learned what the customer wants and start to come up with programs and service lines that address that.
Before we go to that, I want to say one more thing. Will Thorndike, who you know well, and we know well, and has been a long time and thoughtful investor in this space, has actually looked at a lot of the data and concluded that everyone sells too early, that the successful companies really compound their success in year 7, 8, 10, 12, and that really there should be much longer holds.
And I think we agree with that idea because the successful searchers we know really well keep getting better and better and the companies keep growing.
What takes searchers out more than anything else early, meaning year five or six of operating the company, is that they have 95% of their net worth in this one company and it's a good company, but their capital allocation is just not sensible anymore. And they're an entirely different manager than they were when they were a newly minted MBA.
They are now an accomplished CEO entrepreneur with seven years of experience. And maybe there's a different economic deal that they could get on next. And in many cases, this propels a sale. which I think, Rick, I know you'll speak to this too, but I think we have questions about that.
It's a little bit like if you bought a business and went through the J curve of the initial investment and you sold right after that. Here, you finally become a really expert CEO in this business. You've got the business pointed in the direction you want. It's really doing well. Why would you deny yourself the next half decade of that? I think it's a capital allocation issue.
I co-founded it with someone named Andrew Banks, who had been my partner previously at Bain & Company. And when we started it, it had a strong sector focus, which was different to new in the late 80s and early 90s. Today, it's table stakes in the private equity business, but it was a powerful driver of every partner's success. And he and I ran the firm for a quarter century. We did it for 25 years.
It was a wonderful experience. Metaphorically, I ran to work every day because I enjoyed myself. What I'm about to say is true about Andrew as well. We started to try and envision how we would reflect on our lives at the age of, say, 75 or 80 looking back.
And if we spent the incremental 15 years, so not a quarter century, but 40 years running a private equity firm, would we think that that was a really sensible allocation of our professional life? And the answer was no. No, it really wouldn't because 25 years was a great experience, but there are other things in life that are different and interesting.
That really motivated us to want to do something different. By the way, it helped the firm was doing well. We had a talented group of partners in the next generation who could step up and this would be good for the investors and for them. That was important. But that was really what was driving our thinking. And I will add two things. One is that there was a catalytic event for me.
I was working late one evening in my office, and my dear friend and longtime partner, Andrew Banks, came in. And I always think of this a little bit like in Charles Dickens' The Christmas Carol, when Jacob Marley comes in and wakes up Scrooge and tells him what the future will be like if he doesn't listen to his partner, Jacob Marley. And Andrew said, Royce, when we started this thing, we had
more time than money, and now we have more money than time, and we ought to act accordingly. And I thought to myself, that is really good advice. I'm not going to admit it to Andrew. It'll just ruin him. I guess I just admitted it. Hopefully he doesn't listen. But those were the reasons for leaving. And when I left, it was very disorienting because I was leaving something I was very good at.
What could I do to replace that? I had the immense good fortune of partnering with Rick Ruback and building this in a partnership with him. And boy, I'm so glad I did it.
I so agree with what Rick said on this. I think at great institutions, there's a tension between research and practical teaching. Schools have to find a balance because different constituencies want different things out of those institutions. Faculty, alumni, the general public want the benefits of the research and new ideas that come out of them.
Often the students want a very practical education. And... You're operating one enterprise that's trying to produce both of these, and finding the right balance between those two is like an eternal challenge for a fine school.
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