What If The Normal Distribution Is The Biggest Lie In Your Business

Right. I. By the way, I was so immature in college that I, I really had no right to graduate with a degree. And I went to a million years ago, University of Michigan. Of course I learned close to nothing. And my first job out of college was a think of middleware. So in 1991, boy, I had to really reach back. When I to do that they would hire relatively smart raw materials like me who could sit between the mainframe and the use of the data. It was for a large retail conglomerate and it did teach me the. The math behind call it business. Right. I mean it was structured data that was. I, I just couldn't imagine myself this comp. Retail was already in the phase of consolidation and you could see the. It was very volatile business. So I did go to business school which was really my college. So I don't want to inflate it and make it sound like it was something important.

But I finally went to ucla, took business school very seriously and sponged it all up. I think I was relatively mature by then. Went to Intel Corporation as a market research analyst. And I heard now equipment. I heard that guy named Wayne Huizenga was backing a construction equipment rental roll up and that brought me into the equipment rental business at the age of 28. And I'm now 56. So 28 wonderful years later. Hope I didn't put you to sleep.

Rental businesses. Yeah, 100% he was waste management.

I don't know. I wasn't close enough to that. Entity. I know that it had. Very humble. He was very, you know, had a very simple investment thesis. I really wonder if he read like John D. Rockefeller's autobiography, I'm.

Or biography, I'm curious because he employed a lot of the same techniques. He grew through acquisition. He courted his sources of money. So he, people bought into. His investment thesis was rental. You didn't have to acquire the customer twice. You just have to take care of her or him. And he really built a reputation in Wall street and had relatively an unlimited supply of capital. Right. And would, would roll these companies up. So yes, started with Waste. Most people know him through either Waste or Blockbuster Video.

Well said.

Blockbuster for construction equipment rental.

Well, million. I talked my way into the company. I had interned because of him. I had interviewed him when I was in college for a paper and I went back the next summer, said I would love to be an intern. I went to Mr. Heising his house and interviewed him. And they, you know, you only know this now as you get older. I wasn't name dropping at the time, but somebody said, put me at the front of the pile because of that. And I interned. So I, as a fearless intern, I would walk into his office, I would participate in the M and A meetings. When I say participate, I want to make it clear, sit in the back row and listen. And I just got sort of hooked on the pace that they moved at. So when I heard they were starting Nations Rent, which the company ended up doing, 50 acquisitions, I talked my way in and I worked for the chief operating officer, amazing operator named Phil Petrocelli.

And I was the overflow for whatever the corporate vice presidents wouldn't do. Right. So he would use me as sort of a catalyst for either unstructured problems or something that he couldn't get them to move quick enough on. Right. So I was this little kind of badger who would. He would use as a, as a tool to get his team to move faster. So I did everything from. It was really. I say I went to business school as my college. Working for Phil was my business school because I got to touch so many things that were blowing up with these acquisitions. One of them was customer concentrations, which you and I talk fair amount about. Ron. 3% of blockbusters or excuse me, Nation ran's customers did 62% of its business. It was 15 people per store. The reason that was material is Nation Trend ultimately went into chapter 11. Many people say why. And it was actually comorbidities.

One of the comorbidities was it generally lost five of those 15 customers per store, meaning the acquisitions were no longer accretive. And it happened through changing moving from local ownership which treating those top 15, the 62%, the three doing 60T too as, as VIPs. And you just change some things. And they voted with their feet and left. From a corporate perspective, they were trying to normalize things so they could get scale off of the acquisition. Right. Fold it in. Everybody gets the same credit terms. Nobody gets special treatment the way they would have in the past. You know.

Yeah.

Yeah. Or there was a great entrepreneur, Don o' Neal, as you. You've heard me speak about him. He's actually whose name Built Data is named after, which is a rock in his backyard, which is. Peter built his house in a rock. It's a Bible verse. But they, they had bought Don's company as the platform. He was very, very well respected in the industry. His son and he just recently sold Rental one to Holt But Don had passed a little over a year ago. But they made Don president and had they sort of anchored his many, many, many, many good business principles in the business, it would have done fine. However, Don, I want to say, left after about a year for a health reason and his, you know, without the wise leader, experienced equipment operator at the top, the company really struggled to control the debate and it had too many temptations. It would move from general equipment rental into heavy, very heavy like Arctics.

And, and when those weren't performing, just disposed of them. Right.

So you had this just whipsawing effect that where you didn't have a strong experienced team, in my opinion, did the best they could, but it was too much to overcome. Oh, God knows people have opinions in the equipment business.

Yeah. Don was one of them. You were. Frankly, I shared this with you. There's so much I discover about you. Accidentally. You were there at day zero and so whoever came after you and Alex.

Well, so Nation Trent went into chapter 11, I want to say the fall of 01. Brian Rich, right, came back in. He had sold his company. He and Bill Stewart were running the northeast region. Brian had partnered up with Bow Post, bought the debt distressed at a very advantageous price. And because the company was, it was an operating entity, meaning it was a going concern, it was very, very debt heavy that. So Bow Post and Brian bought the debt for pennies. I'm speaking just from what I've read and what little I've spoken to Brian about it bought control of the debt, took control of the company, recapitalized it, stabilized it for about three years and then. And just sold it to Sunbelt. And they, they really did maybe what should have been done at the beginning, which is very stable operating team. Don't change too much. Right.

Let let you know, grow into your new pair of shoes, so to speak, and operate a little bit conservatively as opposed to aggressively. There were many dynamic forces. Brad Jacobs, who turned out to be, I think just a. When I was a young man, he was somewhat vilified to me or I was. I was allowed to, you know, say, well, Heisinger competed with Jacobs in the waste business. And from, from my building, people would Say, well, he's a Wall street guy. Yeah, he did come out of deep finance. And I would say from the work, the circles I was in, vastly underestimated. Vastly underestimated. He's probably one of the most capable operators. You know, you talk about operators that I'm aware of, but nations ran in United were in this horse race and that caused overpaying for acquisitions. It caused the loss of discipline, passing on deals. Right.

So as Nations Rent was trying to, you know, that was a time where you could amortize goodwill so you could ever pay and stuff it into goodwill. Not a good practice. Right. You're going to pay for it someday, but you could put it into goodwill and term it out. But nations and United at the time, both were very, very aggressive financially and that caused both companies to be challenged. United came out of it. United, as you know, was going to be acquired by Cerberus. And then Cerberus pulled out, Jacobs came back in. And that, that I want to say the stock was at six bucks a share. I want to say pre ipo, I could be wrong on my numbers, you know, now I don't even look anymore. It's north of. It's in the 4 80s, maybe it's at 500. It's nuts what's been accomplished under Michael Nyland.

Yeah.

They do, yeah.

Well, I one of the executives left Nation Trent and became the CEO of a new rental division for Volvo. And so I joined a. It was kind of cool. It was a startup, multi, you know, multibillion dollar startup within Volvo Construction Equipment to formed to for construction equipment rental called Volvo Rents. And it was kind of cool because it was a clean sheet of paper and it was also many things they did. Right. Was segregated from the mothership. Right. But had. So it was somewhat well protected in the sense that the OEM through their systems and processes which could be very, very good but incompatible with rental. So this business under Barry Network had the luxury of being segregated out and we could focus on putting local owners. The investment thesis what put was putting local owners back in business. So Pete, you mentioned John Caskey who sold his bit one of his business in Asians, right?

Go find the John Cassidy's and put them back in business to go compete. And I'd say it largely was successful, in some cases not.

I, I, you know what, I have been on the sidelines of that discussion and I've mostly, I'm going to say I mostly agree. I, I'll say this, I agree which is they're all their systems and processes are set up very differently. And when I've seen it under one roof by example a large cat dealer, the it there seems to be the bigger revenue, right? Human beings, you know, I hate to say it but somebody at the top says I'm responsible for this. And I've just seen rental get crowded out consistently when it's part of a dealership. I agree with you. I have heard some people say clearly, right on paper they should work together, right? So I have heard some people say it can be done. It seems to me you can like everything in life. You can map out these systems and processes, you can make a very effective presentation, but it's almost impossible. I haven't seen it work.

I've seen it impossible, I've seen it not work when it is not truly a separate segregated entity. People would argue that, right? But I would argue that, you know, some OEMs with sort of branded rental programs, I would argue they, you know, there's some questions in those numbers looking

Yeah, I'm with you.

Yeah.

Well, I think it was lumpy, right. So I'd say a third if there, there, if there were a hundred franchise owners that was right. That franchising was a, is a very, very interesting way to do, go to market it. This, it taught me a lot because the fr. You would think when somebody signs 300 pages of, of documents that you can tell them what to do. Not really you, actually you. But it was really instructive, very formative for me. You probably know this intuitively through your success. But when you're in a corporate office, you got to be very careful with people lying to you by omission because you carry this, you know that this aura of authority. No matter how sweet and humble you are as, as a leader, people would begin to say that's headquarters, right? That's the, you know, it's the, you know, it's authority, right. It's where I'm going to get my raise, my bonus, my special treatment, my promotion.

Franchising flips that even the, the owners in the field are your customers and you're, and they're very, very vocal. And if you do not listen to them, they will not recommend you, they will sue you, they will form a union. Right. Or do some form of collective bargaining. And you become very aware of that super quick. So it was very, very smart decision to franchise. And the company, the franchising forces you to allocate capital properly. So we taking that learning from nations around about the 3% doing 62, 11% did 83. When franchise owners by example would contribute into a marketing fund or even paying their royalty fees, I'd say, you know, 80% of that capital was actually pushed back to them when it was done to. It became a learning system. So capital was allocated back to them when they executed decisions that facilitated high margin business. High margin, high growth business. Those decisions were very good. What didn't work.

Sure.

Yeah, you do. Yeah.

So I want to establish it. The 3% was 15 people per store. And when you break those numbers down, you know, people would often say to me, well, we open a new store, people know what the Volvo car is, but they don't. Never heard of Volvo construction equipment and certainly never a Volvo rents. Well, franchise owners, you could get on the same page with Them and say, well let's make a list of 15 people looking to acquire or 30 people we're looking to acquire. Let's round up to a hundred. If we can't do that then we shouldn't even open the doors. Right. And how do you do that? You go to the abc, you go to the agc, you go to Nuka. You find the good people in the market who are relationship driven and have networks and doing high volume. That worked well. What didn't work well was in some cases there were financial owners that came as franchisees because of 10 to 1 debt equity. And now that, now you could see how this works.

Well, I'm just going to hire somebody who knows I'm going to hire an operator. And so the top performing third were generally past franchise, excuse me, past owners who ran a business. Pete Post, Chris Cole, I I could go I think on Chris Leatherwood on and on and on. Ex United Rentals people, ex US Rentals people, X blank. Those folks tended to do very well. On the bottom performing would have been or in the middle performing would have been people who saw this 10 to 1 debt equity and said shit, I can grow a big business and leverage this, you know, the heck out of it. And in some cases they were able to hire an operator and do okay, in other cases not. It was kind of a random outcome. In the bottom third were were folks who may not have had operating experience when they worked for a US Rentals, a rsc, A you know, Sunbelt, Ashted, etc and they came in undercapitalized on the, under the 10 to 1.

They took advantage of the, call it the amount of money being that it was accessible to them and they got behind and they got in trouble. So third, A third. A third.

Can you fill in that a little bit more?

That is true, yeah. And you're, you, you just cut right through it very wisely. Yes. And a lot of that, you know, was it called a constraint? Somewhat. Of course that was the strategic or the investment thesis for the parent, meaning Volvo 8B and Volvo Construction equipment to go into the rental channel. They said, hey, we're producing this stuff. We want to find a home for it. Rentals growing, right? At the time, rental was 35% of all construction equipment demand. Today it's 50 and climbing. And so they said we've got this compact equipment. Another risk factor thrown in there. It, they said, well, we'll use our rental channel and curate products into it. And so we have rental fleet out there.

So it was somewhat of a constraint because if you really go back to sort of a root cause, it, Volvo by example produced a first generation skid steer. Guess what? It missed the mark. You don't think about those things. What's that?

Sure. Tell me why.

I. I Can. I can't speak to the current state because I don't know it.

Well, Chicago, I would say Volvo was on a very. I was speaking to their very good guy named Gary Rolly. He was their former head of global marketing. Brilliant. He's actually helping me quite a bit with built data and he was doing the brand position. And so I'm speaking. Before I joined Vulva Rents, they had sort of restored the brand. The brand being not the logo, it was more the promise being made to customers. And it fit and it. So it was a very strong articulation of the promise to customers is that Volvo cared more, it created some internal energy. It was very well done. Right. You could argue that's probably the best place to succeed with a branding campaign which is internally generated. A lot of internal pride. And they were able to strengthen and grow the dealer network and to increase share along the way. I can't say I know what the catalyst was, but certainly the 08910 financial crisis didn't help.

Some people say they could have seen it coming. All the presidents men couldn't, of course, but that the company also made some very aggressive acquisitions from Ingersoll Rand. The paving business had done some new product introductions and I assume post financial crisis, Volvo rents by example. They had to take back a lot of the paper that was issued to franchisees and they begin to took a more conservative stance. Well, we know what happens then. Right. May have been the right stance. So that would have now taken Volvo out of a rising. You know, I hate to speak so broadly, because I am not.

I, I wish I knew.

Well, what got me into it is, and I don't ever want to inflate what I do. I believe if you can count to 10, then you can make different piles of what's in that 10. I left the industry when I was 41, I'm now 56. And I was, I used a lot of the 80, 20 rule because that's what the data said. Right? You put the data on the scale 3% at 62, 8% did 11, 11% did 83.

And it really, what's interesting, Ron, you and I have talked about this before, but in the United States, 96% of the businesses in the entire country employ 4% of the people. That is small business in construction. I have to do the math in my head, so bear with me. 83% of the companies have less than 10 employees and they employ. 17ish percent of the people.

You can pull it. We do it through a lot of our research. But you could arrive at these findings from the census, right?

It's hiding in plain sight.

So 17% of contractors employ more than, excuse me, 23% of contractors employ more than 10 people. And that group, that cohort 10 plus companies up to infinity employ 77% of the people. Okay, so you just overlay the two, right? I said 1183 and we're looking at 23 and 77. Forget about the 96 doing four. And so what? You just have to realize that you can apply a sense of realism to your business and say, look at the companies that are more stable to grow and expand with, because in the equipment business, especially rental, they're renting your capital, right? So why would they do it? They would do it because it's advantageous to them to, to use your capital arguably at a higher theoretical interest rate than it would be to buy it. So what got me into this business was I was working for a CAT entity, I'm going to say a large dealer group, very, very nice owner of the company. And I saw some very.

They had every person on the planet, every system on the planet, I'm going to say every law of abundance, very generous group of people, provided all of the resources to their team. And I would argue they. That they had the owner, I believe had the pro, didn't have the profitability that he wanted and said, can you help doing some analysis? And the analysis is so simple, right? Take 10 piles, put them the best ones over here. It was looking at where they were getting their own results, right? And then there again it was about 20% of their clients did 80% of the revenue. But in marketing and somewhat in sales, 80% of their capital was allocated to the lowest value segments. So you tell me, right? I mean it's a relatively.

80% of customers or outcomes that generated 20% of the revenue and profitability, it was the exact opposite.

Right?

The transition to the middle, meaning the rising stars.

Well, I. Like all things you're Going to know more than I do. I see that. You can just look at it kind of. I don't want to call it mathematically, but the Sunbelt and United are just. And Herc combined are the. Combined are. The Amazon effect. They are the giant sucking sound out of the industry. They. They can. They have huge revenue numbers, but they have huge capex and they have huge disposals. Each of those is disruptive. It's its own way. Certainly to the OEMs and definitely to dealers. They also have very.

Yeah.

Completely. Yeah, there's that question. And they allowed it.

Oh, that's interesting. I never thought about that.

Y.

There's definitely two economies out there. There's no question. And if you said the what to do with you know, all I can. You and I have talked about this before. All I can do is break it down into something I understand before. I can choose and we can identify and you could do the math. If. If you're $100 million business. If 11 do 83, how am I going to do 83% of it? Okay, now I know it's 11% of the customers. If I have a thousand customers then I know it's going to be 110 and you're going to go, have to go, you know, look at those row by row by row of those 110. Good news. You can, right? You don't have 32,000 customers. You're now down to this 1100 group. And, and you have to plan your growth. And if you look at the, you mentioned the metal segment and we'll come back to that if you don't mind. If you go to the top end, the national accounts, the data centers and the energy is mopped up. Right. Caterpillar's done a very, very good job of it.

Some of the major OEMs have done a good job with national accounts, but they don't do regional accounts. Right. It's just inconvenient. It's a pain in the neck. Right. I got to go get Ron and Steve and Nick to agree as dealers to cooperate to serve the customer. We'll just do it. Otherwise you're seeding the national account business. And I would think Caterpillar probably does one of the best jobs that I've seen. You would know more than I would. But those national accounts should by no means have been seeded to the large final companies. In my opinion it's a self inflicted wound knowing that 50% of the construction economy is data centers and energy for the time being. So you must go after and be competitive in that segment and that is through national accounts. You have no choice.

You know more about that? Yeah, you know more.

Well, yeah, I guess if you nail it down. Many of these companies, I would just do a compare and contrast that I've seen. I've heard, I've sort of specific knowledge of two large cat entities. One of them, they don't see these. I don't even know if it's second or third generation. I don't think they've ever met this individual because they're off. It's passive income. That parking lot at 4:57 you would be run over by the half the people that show up to work at the other enterprise. You would hear the voice of the customer to say so and so when he was alive would have not tolerated this. Okay, so I mentioned Jay Lucas the other day. Jay had a very good potato recently. He, by the way, I spoke to him. He you and two are talking or looking to get together.

Cool, can't wait to listen to it. Two legends. So he was saying that there's an owner, one of his clients who would literally drive to every store and speak to team members. But the notion was he was really looking for continuity and leadership. It's not that he was just speaking to the person who's the tip of the spear. He was looking to make sure that they were well taken care of. Right. Servant based leadership. Donna Neal did it very, very well. I think you're right. This kind of return to basics will work. There's one of the OEMs where I have a ton of respect for one of the CEOs or presidents of North America. This person is definitely putting their heart into making their dealer network successful. You have to sort of love and protect your dealers and get out there and shake hands and do one deal at a time. I wish I had a better answer.

The only thing I would say is make sure you're shaking the right hands because your time is absolutely precious.

Well, one is you and I need

Do you mind if I build on that?

I know we're almost out of time, but you and I talked about two ledgers, right? You have two income. You have an income statement and a balance sheet. And this phantom making statement of balance sheet. I would map out. I would look at your customer concentrations. Let's call it where you are today. I would say where do I want to go? And I would look at the capital that I'm allocating to that group on each piece of paper and I would be absolutely. You have no choice but to be ruthless and cut those things that are not serving you, whether it's enterprise licenses for CRM or other call it processes. At some places it's called continuous improvement. I would be absolutely ruthless in turning around your business. And the good news is if there's anything that if there's good news, there is is AI if you can jump sort of the technology curve today, it is completely Accessible to business owners and you can do it.

However, you must establish a source of truth in the data because you're making decisions. Right? That's your compass, that's your map about what you're trying to accomplish. You must establish a source of truth. And what I find is a lot of people are called, confused about their data and you know, fucking devil's very percept, you know, perceptive. There should be zero confusion, there should be zero confusion about the results that your own team has produced. None. So you can distill your data down to identify these customer concentrations, decide if that's who you want to be, embark in the law of small numbers, ruthlessly cut the processes and expenses that aren't serving that other group and look for a small group of people that is not married to legacy decisions and can help you jump this tech curve.

And if you can't get your data because it's confusing, then somebody is lying. And that lie could be by omission or it could be overt. Both are terrible.

Yeah.

Yeah.

Yeah.

That was your Lou Gerstner story, of course.

I didn't know that.

he's special. There's no question.

Well, I feel blessed to know you. And through the grace of God, I do know you because I didn't earn a relationship with you. And, you know, I'm. I'm at your service. I think if, if you cut the path and, you know, people like Steve Clegg, John Anderson, Tammy Richards are. We want to help people. Like, if you, if you strip all this aside, I don't know what is all this about. And I would say this industry has allowed itself, broadly speaking, to have inferior margins. Layers of fricking confusion have entered that the industry can work together to restore margins. This doesn't have to be a zero sum game. There's incredible value that's created by the construction equipment industry and it doesn't get its fair share of returns. That's not right. Now you could say, why is that? I. In my small world, there is a. Some of the public data that is available is gross, grotesquely wrong.

And if decisions are being made off it, like every good lie, it's a kernel that grows and it's a. It's a drop of poison.

May not kill you. It's going to make you sick, though. And you may not realize it at first, but there are layers of brain damage that make me want to. The good news is relatively easy to solve. Let me skip to the end. This country and this industry has boundless capacity for renewal. However, it needs to establish sort of a baseline of truth and build from there. Good news is you can jump the tech curve now.

Tell me more about that. Because you, you know more about that than I do.

Sure. I mean, first of all, I always learned from you. And it's really cool because I get to speak to you twice in two days. And the notes that I take off to the side you can't see. But so thank you for that. I would say go to Ron as a source of truth. I would say make your ledger of those hundred customers that you want. I mentioned Phil Petrocelli and Brad Jacobs and different entrepreneurs. Phil has succeeded time and time and time again through a very defined strategy, saying, these are the top 200 companies that we're targeting. They may have many children and mathematically you can back into how to solve this. So you have sort of an ethos that you, as a leader, can push down to the tip of the spear. Probably the most important person in the enterprise is that person you mentioned shaking hands with the customer. Whether it's a salesperson or product support, this can be solved. There are many, many customers who are dissatisfied out there.

So this is not a faded complete. You have to just do what you did. Target the right doors when you're selling encyclopedias and ask for the right person. Yeah.

In Hawaii.