Royce Yudkoff
speaker
143 appearances
1 recordings
1 series
first heard May 2025
last heard May 2025
Royce Yudkoff’s voice in public audio — every appearance, attributed to the second.
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If people are doing a national search, it's a very different process, but again, it's heavily brokered or maybe it's direct outreach in an industry. But what I think doesn't work is theorizing what industry might be exciting in the future and spending six months theorizing about an industry before you actually call.
So when we work with new searchers, we say, your goal for this week is to have an owner's meeting. Just have a telephone conversation with an owner. Just do that. That leads to something.
I wanna just think a little bit more about your example because everything you said made perfect sense, but that's not the way the empirics look. What looks is that people buy their businesses and then they all project five or 10% growth in their conservative case their first year, and they all have five or 10% losses their first year. It's 5% worse than their base case year.
Some of that's because sellers sell on good years. And so this averaging central limit kind of thing But it's also learning the business and meeting customers and distraction and the seller's distraction and the business has some degradation during the sale process. All those things happen. But I think the idea is that what you said is right. The first two are about getting to the transaction.
That is getting the transaction. Talking to the customers happens often during that first year, but you're not able to capitalize, make good on those ideas, usually for a year or two. So what we see is year three, the really good year.
Yeah, I think it's diversification. Diversification issue. Thank you. As another way of putting words in Royce's mouth, some investors are willing to recapitalize and re-incent the CEOs. It's a cumbersome thing because you don't really know what the value of the business is. It's really hard. And a lot of it depends on the business.
CEOs, because they're so focused on their business and have such a concentrated position in their portfolio, they may have a key contract, three-year contract, and they won each of the last three years, but they get convinced that the next one they won't be able to win. And I don't think it's because the facts on the ground have really changed that much.
I think it's that they look and say, oh my word, if I don't get that contract, it's to my personal wealth and I don't want to be at that risk. So I think as you have more to lose because you've accumulated wealth and you have an illiquid, undiversified position, I think that tends to drive people to sell.
Whether they sell too early or not, I don't know, because I think from an investor standpoint, they might be selling too early. From an entrepreneur standpoint, they might be selling at just the right time because they're living with this really high cost of capital because they're bearing all this total risk, not just the diversifiable risk.
Well, that's a hard question. And I think I'm not the best person to answer that because I'm really limited by my experience because I'm not a very techie guy. I mean, I can log into my computer and I got a new phone. I don't even know how to shut it off. So I don't know. I'm not a person who really thinks deeply about how AI is going to change our educational experience.
But what I can say is I taught at MIT before I came to Harvard. And at MIT, we taught things. At Harvard, we really teach situations. And what I find our students are extraordinarily good at is pattern recognition. It's hard to see how this learning happens. It's hard to measure it day by day. It's hard to quiz them on it.
But what is absolutely true is after two years of a case-based education, you've seen hundreds and hundreds of situations and life is going to give you those situations. So I can't tell you the number of times I'll meet with an alumni and they'll say, we'll be talking about something and they'll say, oh, that's just a bottle of lumber.
Now, it's not about lumber distribution in whenever that case was first written in the 1950s. That's not it. But it is the case of a company who's, in the case of bottled lumber, makes financial profits but no cash profits because all the cash goes into working capital. So there's that pattern recognition that just sticks with people.
And I think it's really hard to Google your way to pattern recognition. It's like so many other things. There's no gizmo to teach you how to be a really good alpine skier. There's no piece of AI or science that's going to make you stronger in the weight room or faster on the track. I think you just have to do the work. As I like to say, success only comes before work in the dictionary.
I think that is true in learning. I don't think there's an easy way to learn. I think there are fun ways to learn, but I think you actually have to put in effort to learn.
One of the things that's special about the Harvard Business School is we understand we're a business school. We're not an economics department. We're not a behavioral science department. We are very much a business school. So while as faculty members, we spend more than half our time doing research, that research has to have a business focus for it to be valued by the institution.
Now, what that business focus is can be almost anything. It can be some behavioral way or it can be some new way of managing a workforce. It can be a new way of managing a portfolio. It can be all kinds of things.
But I used to like to apply the rule, and I don't know if the institution would still agree with this rule, but I do, which is if you're working on a research project at the Harvard Business School, you need to imagine that somebody would actually pay for the results of your work. Maybe not the cost of the research, but they should be willing to pay something for the results of your research.
And if nobody cares enough to pay for your research, then maybe you should be doing it in the economics department or God forbid, the Kennedy School, but not here.
I mean, we certainly get questions about specifics in the small firm space. I'm considering this deal. The seller wanted to do this. Does that make sense? Does this equity rollover make sense? Does this structure make sense? I'm having problem with somebody on my board. How would you approach that? So we certainly get those practical business questions. I think we get questions.
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