Royce Yudkoff:

Welcome to Think Big, Buy Small, a podcast from Harvard Business School about entrepreneurship through acquisition. We’re your hosts, Royce Yudkoff…

Rick Ruback:

…and Rick Ruback.

Royce Yudkoff:

Rick and I are delighted to be speaking today to Logan Leslie, who searched and for the last three years has been running the business he acquired. But also very interesting is the fact that he is conducting, from Day One, a roll-up of smaller enterprises into his larger company. So, Rick, Logan is different from a number of the guests we've interviewed, who have bought a company and from time to time done an add-on to it. From the very beginning, his goal was to pull together a series of very small companies into a larger enterprise.

Rick Ruback:

Yeah, it's a great thing. Logan, tell us about your background. You were in our class, what, five years ago?

Logan Leslie:

Yeah, five, six years ago.

Rick Ruback:

Tell us about your journey.

Logan Leslie:

So, I'm from Connecticut originally, a pretty blue-collar household. My dad was a machinist and my mom worked in hospital administration, and I had two brothers. We all went in the military right after 9/11. So, you know, right out of high school, went to basic training and started off in the 101st Airborne. Went to Iraq and when I came back from that I decided to join Special Forces. So, I did that for a number of years and on my third deployment, my wife at the time decided that it was time for me to get out of the military. And so, on that deployment, she was pregnant and not very happy that I was, you know, never really home. So, I decided to apply to colleges. I think I was twenty-five then. Came back, had my first daughter, and got accepted into Harvard College, where I went on the GI Bill. So, moved to Cambridge…

Rick Ruback:

Different from the typical Harvard undergraduate.

Logan Leslie:

A little different. So, I continued to serve in the National Guard, you know, got my economics degree through undergrad, and then went to the joint law business program here at Harvard. And through that, had a number of internships in finance and private equity, hedge fund, and decided none of that was really a good fit for me. I wanted to be an entrepreneur, start my own business, set the culture of the firm. So, decided to start my business in that summer before that last year, between the third and fourth years of a four-year program.

Rick Ruback:

Oh, right, because you're JD/MBA.

Logan Leslie:

That's right, because I tried to graduate early. So, I graduated undergrad early and I tried to do the JD/MBA in three years and they denied it. But I had done essentially all my credits in three years so I had a year just to be here. And so I started Northern Rock as a roll-up platform that summer, didn't really get off the ground. We had a number of businesses under a letter of intent to purchase, raised some investor money to do diligence on those businesses – and these were much larger businesses and cost a ton of money to do the diligence on. Had a number of broken deals across that process. So, version one of the business didn't get off the ground, I’d say. Once I graduated, I moved everybody down to Atlanta, Georgia, and I took a little break from trying to buy a business. So, I operated a security firm in Charlotte, North Carolina for about a year. Left that in the end of 2020 and then, you know, restarted Northern Rock version 2.0, and this time really focused on a disciplined roll-up in one industry, which is what I'm doing now.

Rick Ruback:

So, tell us about that industry.

Logan Leslie:

It's automotive repair and maintenance services on vehicles. So, we don't do any collision, auto body, car wash. And when you think about repair and services, it's really anything on one end of the spectrum from emissions – so very, very simple, quick job – and then on the other end, engine swaps, transmission swaps, and every one of our shops does the whole range of services.

Rick Ruback:

So, did you focus on auto repair because you were interested in auto repair or were you focused on it because you thought it was an industry in which could make a lot of money?

Logan Leslie:

To me, it wasn't at all about the subject matter of the business. I was looking for all the fundamentals that I wanted to see in a roll-up opportunity, which I can go into in auto. I think it's an excellent industry to do this in. The other piece was cultural fit. So, I learned this two ways. In the military, it was a really good cultural fit for me. I love the people. I got the best me in that environment. When I ran that security business, it was not the same. People there were all ex-TSA agents and, you know, TSA is not known for being a well-run organization and the fit wasn't there. They're good people, but you weren't going to get the best me. So, I looked at auto as a place where I really liked the people. You know, I feel like I've credibility in that environment and I really love working with those people, which to me is probably more important than the business characteristics or fundamentals.

Royce Yudkoff:

How did you find your way to this business?

Logan Leslie:

So, I was unemployed at this time. First I panicked because I had a mortgage and kids in private school. So, I thought, "Look, I need to get a job." Because when I left that security business, it was abrupt. Then I calmed down a bit and I said, "Well, now's the time. If I don't do it now, I'm never going to do it. Let's do this roll-up." And I was in some military training at the time, remote because of COVID, which is about half-time of my day. So, I spent the rest of it researching and thinking of different opportunities. And honestly, I found five or six that I would do and were great fits. Auto to me was the best because of a number of characteristics that I think that the other ones just didn't have, which I can go into.

Rick Ruback:

Tell us about what it was that drew you to auto. What were the economics that appealed to you?

Logan Leslie:

So, in the industry most of the revenue is non-deferrable, non-discretionary. It's a really stable, non-recurring but very robust and sticky revenue base.

Rick Ruback:

Because when your car breaks, you got to get it fixed.

Logan Leslie:

You got to get it fixed. You can defer certain things, like oil change, but the vast majority of the services we do are just non-deferrable. You know, your car stops working, you need it, you have a choice to either fix it or buy a new car. Those are really the two options. And sometimes people do buy a new car, but a lot of times they'll put the money into their car. People describe a lot of businesses as highly fragmented, but this one is ultimate fragmentation. Not a ton of aggregators out there, not a ton of big names, not a ton of big chains that have, I would say, broad credibility. And so I like that, especially in the south, where I live, you drive around and everywhere you look, there's a huge auto shop with ten, twelve bays pumping out $1 to $3 million in revenue. The sellers are typically older, boomer generation guys that don't have a transition plan. And so it just seemed like fertile ground for getting out there and getting them and putting them together.

Rick Ruback:

Is that the typical auto repair shop?

Logan Leslie:

Yes. So, the typical shop is a seller that's a man who's been at it for thirty, forty years, been very successful. They own the real estate. They're of retirement age. They don't have a good succession plan. They don't know how to sell it. There's not a great liquid market for selling these things. And they're still operating, and they're drawing a good amount of cash but this is a really tough business to run as an owner-operator because you can never get away.

Rick Ruback:

So, maybe it's a Northern thing but the auto repair shops that I see that are independently owned tend to be one or two bay kind of things, not ten bay.

Logan Leslie:

Yeah, that's why we're not in the Northeast yet. I mean, land is more abundant in the Southeast and people drive further. So, where I'm from in Connecticut, you know, we used to take our car to a two-bay shop that was attached to a gas station. To me, that's not a great acquisition target for a number of reasons.

Royce Yudkoff:

Because it's just too small.

Logan Leslie:

Just too small.

Royce Yudkoff:

Yeah. And you were saying the revenue on your typical purchase is sort of $1 to $3 million of revenue.

Logan Leslie:

Yeah.

Royce Yudkoff:

And what would the normal EBITDA margin be on, say, a $2 million auto repair shop?

Logan Leslie:

Before diligence, zero because none of these things are showing any earnings.

Royce Yudkoff:

Yeah, the owners are living inside of the business.

Logan Leslie:

Exactly. And you see a wide range. Your gross margin is usually 35% to 45%, and then you have a couple of 100K of CapEx on there. So, if it's a $1.5 million revenue shop, you can expect to have $300,000 to $400,000 of EBITDA.

Royce Yudkoff:

So, an attractive margin business.

Rick Ruback:

What percent?

Royce Yudkoff:

It's like 20%, 25%.

Logan Leslie:

Yeah. And we deal with EBITDAR because most of these sellers own the real estate, so that would be an EBITDAR number. It would probably push it closer to 20% or 15%. You know, we have landlords so our EBITDA margin across the portfolio is closer to the 15% to 20% range.

Royce Yudkoff:

Because you don't buy the real estate. You sign a lease with the seller and he keeps the real estate, and you just buy the operating company?

Logan Leslie:

Typically, we'll buy the real estate and then we’ll conduct a sale-leaseback.

Royce Yudkoff:

Okay. A triple net lease onto some institution?

Logan Leslie:

Yes.

Royce Yudkoff:

That makes a lot of sense. So, when you buy these businesses, I'm assuming from what you've said that the seller, because he's close to retirement age, retires. Tell Rick and I a little bit about how you run these businesses after he gets his money and goes.

Logan Leslie:

The company's known as Main Street Auto, and the vast majority of these shops have been in these communities for ten, twenty, thirty years, a lot of brand equity in that name, and all that. We don't want to wipe that clean. At the same time, we want to have a unified company, a unified brand where we can put a strategy behind, and so we do more of an umbrella brand. So, the existing customers come and it's still Ed's Tire. They recognize it. It all looks the same. And then for new customer acquisition, they can see that it's part of a portfolio of other companies, and it's a highly professionalized business. We have eighty-six shops today.

Royce Yudkoff:

Is that like eighty-six acquisitions you've done, basically?

Logan Leslie:

That's probably seventy-five acquisitions.

Royce Yudkoff:

Seventy-five acquisitions in three years. So, that's every other week on average you're buying something…

Logan Leslie:

Yeah, but we'll go months with nothing and then we'll do twelve in a week.

Rick Ruback:

That's a real roll-up. It's a lot.

Logan Leslie:

It's a lot. But my view has always been, I don't really want to get involved in something entrepreneurial if there's not a clear path in my mind to making it an industry leader or multi-billion dollars of revenue. So, that also limits what industries you want to play in. But in auto, you certainly can. And so from the early days, it was how fast can we put in processes, procedures, and team? The processes and procedures are often inexpensive or free to build. I was doing a lot of that myself from the early days. Once we had more capital, and that we can invest in the team. So, took really about almost two years to actually have a full executive team. But our executive team today, it will be the same executive team when we're at 1,000 units. They're just really high-powered people. When it comes to actually the hands-on management of these, it's very expensive and intensive to transition an acquisition and to run it. I think anybody can do deals, particularly in spaces like this, like it's not hard to go get an SBA loan and buy one of these, and it is kind of difficult to run one. It's very, very, very hard to keep running multiples, or eighty or so.

Royce Yudkoff:

Yeah, so breathe some life into this for Rick and me, if you would. I'm envisioning you buy a ten-bay shop and the owner has been working long days and basically solving every problem and making every decision, and now that person is gone. How do you make sure your labor force is doing good work and they're running efficiently and not taking time off or not unassigned to jobs? How does that happen?

Rick Ruback:

Just to put a little more color on it for me, the seller, my guess, does not want a long transition agreement, right? They want out.

Logan Leslie:

Yeah, they're out on Day One.

Rick Ruback:

They're out on Day One. So, at closing, you get the keys to the buildings and equipment and everything else, you own that. The seller doesn't come back into work the next day. Who goes into work to run the shop? Not you?

Logan Leslie:

Not me.

Rick Ruback:

I mean, I bet in the early days, it was you.

Logan Leslie:

It wasn't, actually. So, I was deliberate about never getting involved in the operations of the business. So, you hear all these war stories of searchers talking about mopping the floors, and I love that but I was, I never was going to be behind the counter, I was never going to be doing these things because I felt like the time I got pulled into that, it would be like a trap that I couldn't get out from. And my time was best spent focusing on that next deal and focusing on team and processes.

Rick Ruback:

That's really surprising to me because you seem to be the kind of guy who would love to get involved in that stuff.

Logan Leslie:

Well, there's a difference between, you know, loving something and knowing you shouldn't do it, right?

Rick Ruback:

That is true about so many things in life. So, you say, "I'm going to take over this ten-bay shop, but I'm actually not going to go there. I'm not going to show up and say, 'Okay, who are you ordering your parts from?' I'm going to send somebody else." Who do you send?

Logan Leslie:

In the early days, yes, I was there every day. I was present. I was just being very deliberate about not being the one in the operations, at the store level. So, in most cases, there's a really strong Number Two that's handling a lot of the GM functions, but not called the GM. And there's no upper mobility in a mom-and-pop shop. And so this is their opportunity to get a pay bump, responsibility bump, and 99 times out of 100, they perform excellently and there's continuity. You know, if we don't have that or we don't have confidence that there's someone there, we'll drop in a GM from outside or a strong employee from another shop. And as we got scale, we had more and more opportunity to flex people from one shop to the next.

Rick Ruback:

Right. That must be one of the big advantages of scale.

Logan Leslie:

Huge, huge.

Rick Ruback:

And the other one, I guess, is you know when a business is well run.

Logan Leslie:

Exactly. That's something we figured out the hard way too, is the number one deal risk or, I would say, operational risk of a deal is seller involvement. And it's not immediately evident sometimes how involved the seller is in the deal. So, for example, we had one shop where the seller was amazing and is amazing, and he’s a great guy, and he supported us, but he was communicating with all the best customers on his personal cellphone. And so the day he's not in the business anymore, as much as he wants to be helpful, he's not answering his phone.

Royce Yudkoff:

Your phone stops ringing, not his.

Logan Leslie:

Yeah, and so you could see it in the revenue immediately. We lost a ton of recurring customers.

Rick Ruback:

Who would think to ask that question in due diligence, “What number…

Royce Yudkoff:

…do the customer's call?”

Rick Ruback:

I will tell you, Logan, because it’ll maybe make you feel better, that one searcher never inquired about what the address was that the bills got. And so, all the revenue went to the owner's personal mailbox. And so for, you know, the first month or so, it was like, “Where's the revenue?

Royce Yudkoff:

Rick, one part of Logan's description is different from what you and I typically experience when we see searchers buy small companies, which is most of the time there's no one in these small companies who can step up and replace the owner, general manager. And indeed, that's part of the reason why he or she are choosing to sell, as opposed to sort of stepping back and owning the business but not operating it. In these small businesses, the management bench or supervisor bench just is not strong enough to provide a general manager. But you, Logan, you seem to be able to find people more often than not in these small companies to step up and run them. And I'm just wondering, what's different about this from the typical small company we see?

Logan Leslie:

Yeah, there's a lot more to that story. So, an owner-operated shop, we’ll see, typically they'll spend half their time in a week on admin function. So, approving statements, adding up cost on statements, payroll, general accounting things. None of it, I would say, is directly value-additive to the business, but it's just how you have to operate these things. On Day One of our acquisition, the GM is no longer doing any of that stuff. We get a lot of leverage out of our corporate team on everything admin. There's a huge difference between being a GM of one of our shops, a Main Street Auto Shop, and being a GM/owner of a shop.

Royce Yudkoff:

It sounds like you're almost focusing the job on running a group of technicians fixing cars and everything else is stripped away.

Logan Leslie:

Exactly right. And we also focus on the leadership as opposed to management. I didn't go into this earlier, but we spent a lot of time, money, and energy into our training function. And so we have a full training staff, we have a very strong culture, we have a very strong reputation, and we have a handbook. We literally wrote our shop handbook, which is everything that someone needs to know to operate a shop like we want them to. And it's on version twenty, probably. And we give them the literal handbook. They get scorecards, they get mentorship from a regional manager, so everyone gets flown to our corporate office, goes through our training, they'll be continuing training. And so it's just a different feel.

Rick Ruback:

I want to return to the roll-up because I find this so intriguing. Because, Logan, you might not recall that I am generally skeptical of roll-ups.

Logan Leslie:

You actually told me that in office hours when I told you this concept.

Rick Ruback:

I did. Okay.

Logan Leslie:

I remember it vividly.

Rick Ruback:

So, I've been consistent, at least, all these years. As I say to my current students, I say, "You know, I'm not a big fan of roll-ups, but there are all these people doing really, really well, making a lot of money and being very successful doing roll-ups. So, what am I missing?” And I think I'm learning what I'm missing from this conversation. So, I imagine in roll-ups that there has to be some gain for the consolidation. And the gain, I used to imagine, was that there was a revenue gain. You can market better, you can sell. But from what you've said, I'm getting a hint at where your advantages are. Can I take a guess?

Logan Leslie:

Sure.

Rick Ruback:

I'll put it in my own words and you'll correct me, which is that the secret sauce, the magic in your roll-ups, is you're bringing professional management to enterprises that had not been professionally managed. So, you're controlling costs. You're basically taking a ten-bay shop that was run in kind of a back-of-the-envelope fashion, and you're professionalizing it at the corporate level, so you're importing professional accounting, you're importing controls, you're importing safety, you're importing training, things that would be really uneconomic for a ten-bay shop to do on its own. And that as a result, the operations just become better, more efficient. Customers are happier – maybe prices go up, maybe they don't – but in the end, you're providing better products, better services, and having a more efficiently run enterprise. What really matters is the management operation. Is that fair?

Logan Leslie:

Yeah, I'd say you nailed it. We have all the typical returns of scale of a roll-up, but our number one is that, I would say, it’s that 50% time of admin function going away, freeing up the time that now the manager in the shop can focus on developing the technicians in the shop, customer relations, issuing work evenly, making the place look clean – you know, way more value-additive things. And the only way you can do that is if you actually do have a very well-run and efficient back office. And then standards and policies. So, we have regional managers that sit over all our shops. So, typical regional have six to eleven shops, and those regional managers are always in those shops. We're going through the scorecards, watching the margins, looking at the OpExes, talking about which technicians are doing well, which are not doing well. That's a level of, you know, leadership development and operational support that a mom-and-pop is just not going to have.

Rick Ruback:

And control. And I guess the other thing that's really special about this, for you in this business, is that in other businesses where we've seen successful roll-ups, for example, in quick service restaurants, the franchisor is providing you data so you can tell when you're well-run or not. As a franchisee, you can tell whether your stores are meeting the standards of the very best in the system. But for what you’re doing, you're really developing the data as you go along because there is no data. So, there’s nobody collecting data of what a well-run, ten-bay shop looks like. And as you consolidate them, you can pick the very best practices across your entire network and then roll those out.

Logan Leslie:

Yeah, I'm glad you mentioned data. So, we probably spent a million and a half bucks on proprietary dashboards and data infrastructure. And we started that when we had no money, with an outsourced team that we found on Upwork, and paying them not very much retainer just to get it built. But in this industry, most shops use a point-of-sale system, which is a shop software. And so that's what generates the repair orders. It has all the part numbers on it, all the revenue items. It doesn't have labor costs. That's the one missing piece, and none of them do. So, to get a whole picture, you have to build your own system that takes all the POS information and then integrates labor costs. And so on Day One of the acquisition, we're on our point-of-sale system and we have trainers in there training the staff on how to use it, but it's piping all that great data into our back end, and all shops are sending it there, and we're dashboarding it, visualizing it, benchmarking it in real time, you know, down to the technician level. So, because it’s real-time data, you can track technician performance and basically a technician level P&L every hour. And so we'll give that information to a GM. And, you know, it sounds kind of scary – because I think people will think that that's a way to pay people less – but what we've observed is actually the opposite, is that these technicians are then becoming better. They're getting paid far more than they were before we took over.

Rick Ruback:

Yeah, because they're learning that working harder and being better is rewarded.

Logan Leslie:

Yeah.

Rick Ruback:

This is really interesting because it's so different. It is changing the way I think about roll-ups, in this discussion, because I really had thought I need some external factor to gain, and here the gain is all coming internally, it's all, “I can run these better as a system, even if the customer's never aware.”

Royce Yudkoff:

Yeah, I agree with that. I think that's a really good description of how this becomes more profitable when consolidated together. Or, put another way, you know, if you or I, Rick, looked at buying one of these auto repair shops, doing a million and a half in revenue, clearing $250,000, and the owner who ran everything was getting ready to retire, we would pay a very, very low price for that because that meant that one of us would have to step in and run it. Or it would be very dependent on some person that we found to go in there and run it, and how would we know that that was a good person?

Rick Ruback:

Right. How can I evaluate a mechanic?

Royce Yudkoff:

So, the market would be very small for that couple of $100,000 of cash flow business, but to you, with dozens of these under your ownership and systematized, investors would pay a lot for that cash flow because you've made it more stable, more predictable. I have another question about the value creation you do in buying these companies and it centers on the purchase transaction. You had described that you buy these businesses and they'll typically have a couple of $100,000 of pre-purchase EBITDA, $200,000, $250,000. You haven't said how much you pay for them, but I'm going to guess the range might be two and a half to three times EBITDA, something like that. Would I be far off?

Logan Leslie:

Not far off.

Royce Yudkoff:

But you're buying the building as part of that purchase, and then you're sort of aggregating some of these buildings and you're selling them to someone, institution, that'll triple net lease them back to you. And my guess is the rent might be $10,000 a month, $100,000, $120,000 a year. Is that…

Logan Leslie:

Usually higher.

Royce Yudkoff:

Usually higher, $150,000?

Logan Leslie:

Yeah, typically 8% to 10% of revenue.

Royce Yudkoff:

These are big square feet, right?

Logan Leslie:

Yeah.

Royce Yudkoff:

So, it's easy for me to see why an institution would want to buy this facility and rent it back to your company, because you have dozens of these, you know, you're a professional organization with lots of resources, this is mission-critical to your business. So, they might pay ten times the annual rent for that piece of real estate, which means when you sell the real estate to them and rent it back, you're probably recapturing…

Rick Ruback:

…most of the purchase price.

Royce Yudkoff:

Or all of it, or maybe a little more than the purchase price.

Logan Leslie:

We've done that on a number of cases. It was a lot more lucrative when cap rates were lower.

Royce Yudkoff:

Yeah. Of course, of course. But it's something that owner couldn't do. No institution is going to want to buy that eight-bay, ten-bay property and sign a twenty-year lease, but they are with you.

Logan Leslie:

That's exactly right. And we explain that to the owners. You know, we’ll buy the real estate for a price and then we'll sell it for more than the price, usually same day. And we have to explain, it's really a financing mechanism because now we're paying a very high rent for twenty years and it's guaranteed by the whole corporation, so we can never shut that shop down.

Royce Yudkoff:

Right, yeah, and that's a critical difference. But what it means is you're sort of picking these shops up, on average, for zero cash. You obviously have this rent obligation that goes on for twenty years, guaranteed by the whole company, and then you're professionalizing them and now have $150,000 or $200,000 of EBITDAR, EBITDA after rent on which you have zero capital invested.

Logan Leslie:

Only in rare cases was it ever zero. Even from the early days, we put in close to 10% equity cushion. Now it's higher, but still very efficient use of equity dollars.

Royce Yudkoff:

Very efficient use. I guess that's what I was getting at and it follows on from Rick's description of how you're professionalizing it to also you're able to get very attractive, high leverage, high financing to purchase price through this mechanism of leasing out the property because as a bigger company, you get better terms from an institution.

Logan Leslie:

Exactly. Exactly. It's supercharged our growth. Again, we view it as a form of financing, so it allowed us to do a lot of acquisitions in a short amount of time.

Royce Yudkoff:

Yeah.

Rick Ruback:

Logan, this is really very clever. Did you have this in mind when you started?

Logan Leslie:

On the real estate question, that was a happy accident. You know, again, I wanted to be hyper disciplined on doing one thing really, really well. Real estate was not part of that. I didn't understand real estate and I didn't want to get distracted. But when we first started prospecting for deals, all these deals had real estate. And I begrudgingly started buying real estate, partially because the SBA debt was more attractive if real estate is part of the deal. You know, the amortization is longer so our cash flow was higher. And so I ended up sitting on all this real estate and through coincidence met a sale-leaseback broker. And what he was telling me just seemed too good to be true. And my investors were telling me what he's saying is too good to be true. There's nobody that's going to be buying this stuff at a six cap or a seven cap. And we said, "Well, let's see if he can do it." And we just so happened to have enough scale where they could sell the story. And I like operations, but this was never about operating an auto shop. It was about building a company that operates auto shops and, you know, built the team very quickly and have essentially 100% hit rate on leaders in the organization, which I find to be pretty rare. You know, I've been really good at that, and that's been the only reason we've been able to grow this quickly and not have it fall off the rails.

Rick Ruback:

So, how many people in corporate?

Logan Leslie:

Probably sixty-five or seventy, if you include admin staff.

Rick Ruback:

And how many people working collectively, pulling wrenches in all the shops that you have?

Logan Leslie:

We have about seven hundred and forty employees across the organization.

Rick Ruback:

1. So, you have a little less than 10% humans, just by count, in corporate overhead.

Logan Leslie:

That's right. More than half of that is admin staff.

Rick Ruback:

Right. I was trying to get a sense of the gauge of how big a commitment at the corporate level the professionalization is. So, it's not 10% by dollars because, as you say, some of them are not as highly paid, for example, as a master mechanic. But I get the scale, just in terms of numbers. It's less than 10% but not far from 10%.

Logan Leslie:

It's not going to grow very much too…

Rick Ruback:

Because you're going to get some economies of scale on that.

Logan Leslie:

We're going to get a ton of leverage out of it because the big chunk of that SG&A is executive team. So, myself, a CFO, a Chief Growth Officer, Chief Acquisition Officer, Chief Operating Officer. We have senior VPs one layer down from that. It's all very expensive, huge investment in the team. That's going to be the same team when we're at 1,000 units.

Royce Yudkoff:

You've built this to grow. You've built this over three years. So, you know, if we go back four years, zero people, zero auto repair shops. Three years go by, you've got this large, growing organization.

Rick Ruback:

Eight hundred employees.

Logan Leslie:

About seven hundred forty total. We'll be at eight hundred next month.

Rick Ruback:

When you go to sleep at night, you're responsible for a lot of humans.

Logan Leslie:

Well, that's my one vanity metric because at HBS everybody talks about how much money they've raised as a vanity metric, and to me it's, “How big is your organization? How many people's lives are you improving?” You know, and then your customers. So, we have almost four hundred thousand customers a year. That's a lot of impact.

Royce Yudkoff:

Tell us a little bit about how the acquisition process works. I mean, I heard in your list of executives, you have a Chief Acquisition Officer. Does he drive around and stop in and say, "Do you want to sell your shop?" And then how have you simplified the acquisition process so you can do twelve in some record week and, on average, one every few weeks?

Logan Leslie:

So, the sourcing is me, in the early days, just driving around. I never wanted to do cold e-mails.

Royce Yudkoff:

And are you now, in this phase, in this early phase, are you like cold door knocking? Is that what you're doing?

Logan Leslie:

Yeah, we have a team of eight people out there in their corporate cars, and we'll give them target lists, but they know these communities. They're driving around and hitting multiple shops a day and sometimes hitting the same shop many times over six months, building rapport.

Royce Yudkoff:

No appointment, just showing up and saying, "I'm Logan. I'd love to buy your business."

Logan Leslie:

Well, yeah. And we have these metal business cards so they don't get thrown away. And they're great people. I mean, a lot of veterans, guys with tattoos, like myself, and just walking in. It's not like the New York finance crowd doing a cold call.

Rick Ruback:

Oh, typecast, typecast, typecast. So, that's really interesting because you have the people who are soliciting deals that look sort of like the sellers.

Logan Leslie:

Yeah, except they're young.

Rick Ruback:

Yeah, except they're young.

Logan Leslie:

I mean, I have a beard, tattoos, and drive a Toyota pickup truck because I want to, not because I'm putting on a show. That looks a lot different than…

Rick Ruback:

Yeah, it's pretty genuine, right? And I suspect the same things are true for these people who are out looking for deals. They're not putting on an act when they wake up in the morning. That's who they are.

Logan Leslie:

That's right. It's part of the cultural fit that I talked about earlier. It's just that's the type of people I want to work with.

Rick Ruback:

Yeah.

Logan Leslie:

And so, we source deals, we started with me. And then one of the best decisions I made in this business was when I bought the first shop, a guy came to install my credit card system, and I love this guy. And he was also a full-time cop in that county. And I knew right away that there was something about this guy. And so I hired him, I think, a couple of days later as my business development guy. At that point, no longer had time to go visit shops.

Rick Ruback:

But he hadn't done any business development ever.

Logan Leslie:

No. For a while there, he was the highest paid guy in the company and he got us to, we probably got to forty shops before I hired another one. He sourced every one of those.

Rick Ruback:

But how do you find a policeman who's installing a credit card machine on his off hours and look at that human and say, "Wow! He's going to be outstanding at convincing…”

Logan Leslie:

If you could teach that, then you'd have a really good course at HBS.

Royce Yudkoff:

Yeah, we're always looking for that.

Rick Ruback:

No, but I mean, I'm serious. What was it? You talk to him and…

Logan Leslie:

Yeah, he’s a go-getter, he’s a hustler. He had a lot of energy and trust-worthiness. My first impression was 100% correct. I've known the guy for three and a half years now and he sourced, you know, forty-five of our eighty-six shops, and I just knew.

Rick Ruback:

I don't understand this, “I just knew.” What does that mean? What does it mean when you say that?

Logan Leslie:

Maybe it's something about military, and I don't want to make more of it than there perhaps is, but in Special Forces you're on a team of twelve guys and you do everything with them and you spend nine months overseas with them. That's the only Americans you see for most of it. And you get to read people, you get to pick up on cues, know who you can trust. And I got really good at valuing people, I think. And so maybe that's some of it? It may not be that at all. I don't know, but…

Rick Ruback:

So, now I'm understanding what you said earlier in our discussion, where you said that what you think you've done best is building the team. Some of it's this vision, which is clearly terrific and very creative, but the other piece of it is this sense that you can evaluate who's going to fit in the roles – and it's not by looking at their resumes.

Logan Leslie:

So, when it came time for executive hiring, that's all I did for almost four months. It's literally the only thing I did. And I went on LinkedIn Recruiter, which I am plugging. I don't get any money from them, but to me, that's the best hiring resource. And I hired personally every single executive and senior VP.

Rick Ruback:

So, you talked to everyone.

Logan Leslie:

The first post was the CFO hire, and we got four or five hundred applicants, and I whittled it down to maybe one hundred and fifty 15-minute calls, back to back. And I was ruthless because if I was two minutes into a call and I didn't think he was a fit, I would say, "It's not going to work. Next.” And then that went down to maybe twenty in-person interviews. And then we did a second round with two, and then I ended up with our CFO, who's been better than I could have ever imagined. And through that process, by the way, you start learning what you want because who I thought I wanted before I talked to one hundred and fifty was very different than at the end of that. You know, and I did that for the other roles too.

Rick Ruback:

So interesting. You're adding color to this concept of building a team, that it's not easy work. I mean, you can imagine the way a lot of people do this is they look through a resume and they say, "Has this person had prior employment that suggests they would be successful?” I'm sure you're doing some of that, but that's not the primary thing. It's the conversation.

Logan Leslie:

Yeah, exactly.

Rick Ruback:

You got to promise to teach me this.

Royce Yudkoff:

Yeah, I'm still trying to learn here.

Logan Leslie:

Well, you got to love it because it's not easy and that's why I talk about fit a lot because even if you know that's the right answer, if you don't like it, you're not going to spend four months doing it and you just can't force it. And I love doing it and so I wanted to do it and I want to do more of it, and that's why it worked.

Rick Ruback:

Oh, so you're saying that given that my aversion for talking to people on the telephone is now famous…

Logan Leslie:

That might be limiting.

Rick Ruback:

It’s going to be limiting, right?

Royce Yudkoff:

I guess that's right, Rick. No one hundred and fifty phone calls from you.

Rick Ruback:

No one hundred and fifty phone, no.

Royce Yudkoff:

I want to dive a little deeper into this too because it's so interesting. Are there some words that describe the type of people you want to bring into your organization? Or is it different for each role?

Logan Leslie:

It's definitely different for each role. I think about checks and balances a lot – and this isn't answering your question, so remind me to circle back – but I want my deal team to be making the strong case on why we want to do all these deals. I want my ops team to be the opposite because they're going to own that shop on Day One. And they butt heads a lot. And I sit over them and I explain this to them over and over again. It's like, "Look, you're both right. You're either going to figure it out" – which they do nine times out of ten – “or I'm going to decide and then we're going to go with it." I want the marketing team to have their own incentives, and I want my CFO to be kind of a counterbalance to me because I'm an irresponsible risk-taker in a lot of scenarios. And if I had a CFO that was also like that, we would drive this thing off a cliff. And Rob, he is a risk-taker, but he is a very good counterbalance. So, I think about that organizational-wise, as how is everybody competing with one another for ideas and how can I make it work without me settling arguments? And we've done a good job there. We tend to be younger organization. We are diverse. We have lots of females, especially at the management level in the shops, and they're some of our best managers. And I think, you know, we're very, very fast in risk taking, and so you have to be comfortable with that. I don't know what word would describe that.

Royce Yudkoff:

That's okay. You're doing a great job.

Logan Leslie:

I would say “bought in” because we have extremely low attrition across the whole company, actually. But at the corporate level, very, very low attrition. And I think it's because people like what we're doing. So, we've sponsored NASCAR races, which some people would say is irresponsible use of marketing dollars, but we get a lot of buy-in and fleet customers there. We're about to move into a new office and I negotiated hard to have dogs in the office, even though it's a non-dog building. And they agreed.

Rick Ruback:

Nice.

Royce Yudkoff:

I’d would love to turn a little bit from team to financing on this. Tell us a little bit about how you financed this enterprise. You had touched on the fact that early on you used SBA loans, but maybe tell us a little bit about how you organized the debt and the equity.

Logan Leslie:

Even going back to Version One of the business, it failed and I lost, these two guys that are very close to me – very close business mentors and friends, current investors and board members in this business – they invested in that business and I lost their money, which hurt. And so when I started creating the thesis for this business, I had met several people in Atlanta that I could have raised capital from for very cheap, but they weren't going to be as involved in the business. There were a lot of things they were not going to be able to contribute that these two other guys did. And I had this loyalty, having gone through this with these two other guys. And so I went to them with this idea, but I was very careful to actually have progress before I even talked about terms. So, I had three or four shops under a letter of intent and modeled that out, showed what an implied valuation would be, and then it was a very small equity check. And then I, you know, used SBA debt that was 90% levered to buy the first shop, and that first shop was a small deal. It had real estate, but it was just over two million bucks. We used the rest of the equity check on the next two, and then those were also SBA debt. And then we raised another round from these two guys, like an incremental round, which is a little bit bigger, but still very small equity dollars, and got to eight or nine before we started selling the real estate. And because we had already purchased that real estate, you know, whatever was left over after paying off the SBA debt, which was a significant amount, was cashed to the balance sheet. And so we used that for, you know, the next deals, and we did sale-leaseback transactions on all the deals, for dozens and dozens, after that - and so very efficient use of that capital. Then we raised our first institutional round and that closed in January of 2023, which is a fair amount of money. We still use that for the sale-leaseback transactions going forward. And then we just closed a much larger institutional round a couple of months ago.

Royce Yudkoff:

I have to ask this, and maybe where this question comes from is that Rick and I frequently have office hours with students and our students are very talented people, but there's a meaningful portion of them that, despite their training and their relevant work experience, pause before doing entrepreneurship through acquisition because they don't feel ready yet to do this. Even though most of the time, Rick, you and I will look at them and say, "Here's a hardworking, scrappy individual. They're absolutely ready." Was there like a moment where you said, "I'm not sure I am ready to do this, but I'm going to plunge ahead anyway," or "I am absolutely ready to do this"? Can you tell us a little bit about what was in your head as you dived into the deep end of the pool?

Logan Leslie:

Yeah. The moment where I felt ready was immediately upon failing the first time. I think getting a fail on the board is helpful.

Royce Yudkoff:

Wow, why?

Logan Leslie:

It's bad, but you're going to fail. I remember my investor at the time said, "Logan, if you had succeeded on that idea, you just would've been lucky. And then you would've had a lot of money and went around on podcasts talking about how great you are, but you just would've been lucky."

Rick Ruback:

So, it's like a person who goes to the casino and wins $75,000 on their first day and convinces themselves that they should be a professional gambler.

Logan Leslie:

Yeah. Well, and the other thing is I had my back against the wall during a lot of this. You cannot replace having your back against the wall. I couldn't fail again.

Rick Ruback:

He couldn't fail. He had to succeed or else he wouldn't feed his family. He didn't have a safety net.

Logan Leslie:

I remember when I decided to launch Version One, it was around finals time. So, I was in grad school for four years. So, it was right after the third year, that summer, I knew I was going to run out of money. I couldn't pay rent by the end of it. And I said, "Well, I don't want to do another internship. I want to build a business. I'm going to do it now. Let's do it." And it was scary. It was really scary. And so we had progress and then raised a little bit of money from those two guys I mentioned. And similarly that happened again on this business, where I left that security business in October of 2020. And had a little bit of money, but I had a mortgage, I had kids in private school, and I had no money. It didn't last very long. I was trying to do military training, making some supplemental cash and everything, and I ran out. And so I called the school and I was like, "I just can't pay tuition. Maybe can we finish out the school year and I'll pay you back when we can?" And I remember I went to my investor and I said, to try to do something similar to a traditional search, like, "Can I raise some capital that I can live off of?" And he's like, "Logan, that's not a good use of money. You need to make some progress before I even put money into this." And he said, "You'll go further than you think you can." And I remember thinking, "Well, I don't think that's true," but I literally did. You know, with that little bit of cash, kind of stretching payables a bit, got pretty far and was about to make it, because we were supposed to close that first deal in May of 2021. And, you know, SBA lenders, some of them aren't the best, and it got delayed until June and I had a mortgage payment coming up and I had zero money in the bank. And I called John, I'm like, "I've made it as far as I possibly can. I need some cash to get here." And he asked me, "What is the percentage chance that this deal happens?" And I said, "I think it's 90%." And he was like, "Okay, I'll give you the advance." And it didn't stop there because then all my credit cards were maxed out and this shop wasn't producing a lot of cash. So, we had to get that second one and third one to get some cash to actually dig out of the hole. And I think that it was really hard work, as you know, and I don't think I would've been as successful if I just wasn't against the wall like I was.

Rick Ruback:

You started your question, Royce, with the students who are equivocating, "Am I ready? Am I not ready? Is this the right time? Is this the wrong time?" And I think what I'm hearing – you’ll correct me – is that, yes, you had that necessity to move forward, but there was also some confidence, I think, behind…that the mountain wasn't higher than you could leap over.

Logan Leslie:

Yeah, I think, I try to stay humble but this confidence and humility are not mutually exclusive.

Rick Ruback:

That's right.

Logan Leslie:

And I think that I've always thought that if somebody can do this, then I can do it. And you need that to go to Special Forces, for example. And it's really scary to go to selection and then if you fail, you go back to your unit as a failure. But I thought like, "These guys are doing it. Why can't I do it?" It's scary to leave the military and go to college but I thought like, "Hey, if these people are doing, I can do it." And that's how I felt in your class, reading those cases like, "That doesn’t seem that hard. It's hard, but if they can do it, I can do it.”

Rick Ruback:

Yeah.

Royce Yudkoff:

Well, and there's a lot of truth in that. I mean, that is the way we structure our course, right?

Rick Ruback:

That's what the podcast is all about too.

Royce Yudkoff:

It's what the podcast is about, and every one of our cases that we teach is some normal person who is able to construct this life for themselves.

Rick Ruback:

Logan, we always end by asking our guests if they have any questions for us. Do you have any questions for Royce and I?

Logan Leslie:

Yeah. Why don't you think more searchers are taking the roll-up route than there are?

Rick Ruback:

Well, maybe because I'm teaching them and telling them, like I told you in office hours, you got to find some magic here. And what I've learned today is that maybe just better management is the magic. But, you know, one of the things that our students see when they look at prior searchers who've done roll-ups, some of them don't do the hard work you've done. That is to say, they just simply go on an acquisition spree, acquire as many companies as they can, make no operational changes or improvements, but put them as a package and resell them. And I'm really skeptical that that's going to last. And the way they make their money is not by increasing profitability but by simply relying on multiple expansion. And I'm not a fan of that strategy. What you've done is very different. What you've done is acquired the businesses, but then fundamentally changed their operations, improved them dramatically, made the employees, the customers much happier. Both the employees and the customers are much happier because the businesses are just better run. People are making more money, customers are getting higher quality services and higher valued services. So, it's a win. And the win is from better management.

Royce Yudkoff:

I think Rick and I have seen an increasing number of students pursue roll-up. It's still a distinct minority of searchers but, you know, if we go back a decade, almost none of our students pursued roll-ups. They'd buy a business, maybe they'd do an add-on or two across their ownership. But today I think 10% or 15% of the class might be interested in roll-ups.

Rick Ruback:

10% or 15% of the class, or 10% or 15% of the people who search?

Royce Yudkoff:

The people who search.

Rick Ruback:

So, if there's twenty people, you mean maybe two?

Royce Yudkoff:

Yeah, yeah, exactly. And I was thinking about what makes your remarkable success different from what they look at, and I think part of it is you're buying unbelievably small businesses and rolling them up because you have a way of industrializing them, right? Like, Rick, I don't think we have any searchers who are buying $200,000 EBITDA businesses, either as a stand-alone or frankly as a roll-up. I think they're looking at businesses that might start at the low end, at half a million dollars of EBITDA or $700,000 of EBITDA. And I think the reason is most businesses this small just sort of fall through your fingers as soon as you remove that very active owner. And what you've done that is so unique, in my experience, is found a way, on Day Two, to just transform the way that business is run so that you can elevate a lead tech to do that or bring in somebody. And I think that's a bit of secret sauce that we have not seen before. Rick, I'd be keen on your reaction. One of the things I hate to do is say something that is a first-time thought. I like to expend those in the mirror before I leave the house, then get Rick aside in a lonely spot and try it out on him.

Rick Ruback:

And, as you know, I prefer to offer my thoughts up for the very first time in front of large groups.

Royce Yudkoff:

That's why we nickname ourselves “The Department of Planned Work”, that's me. “The Department of Unplanned Work”, that's Rick.

Rick Ruback:

That probably rings true to you, doesn't it?

Logan Leslie:

Yeah, that's right.

Rick Ruback:

I think that Logan's magic is professionalizing the business, but I think it goes deeper than that. I think it is the confidence that he can go in that shop, meet the person who has been acting as the Number Two, and make an assessment that that person can grow into the right role. And it's this skill he has at picking leadership and finding the right roles for people. So, what he's saying is, "Okay, I can take that person and maybe she's just been ordering the parts, but she can manage the whole shop." And that's a skill and an assessment that is very special, I think. And we don't see it very often. I don't think Logan looks at this as saying, "This is a very clever financial transaction." Many people look at roll-ups as financial transactions. I think you think assets first. I think you're saying, "I can combine these resources and make them more efficient and do better things and make the process of repairing that broken carburetor or transmission or U-joint, or whatever it is, I can make that better so that everybody's better off, the person who orders the parts, the person who supplies the parts, the customer, the mechanic who replaces the U-joint, all that stuff". Everybody's going to be happier because nobody's going to be running around in circles wasting time. Nobody's going to be frustrated. And that's very different. I don't know if you've ever studied this, but years ago, I studied the roll-up that Craig McCaw did. He was buying two or three cellular telephone licenses a day. And I guess before that, A&P was buying a grocery store a day. So, there have been these rapid roll-ups but both of those, like you, had these visions that we can just do this better. There's something about the way the businesses are functioning stand-alone that we can make better. So, that idea is not new. The new idea is the better thing can be better management.

Royce Yudkoff:

Logan, thank you so much. It's been delight talking to you, and for Rick and I to hear your story.

Rick Ruback:

What a great story. I'm really, really impressed. It's very special.

Logan Leslie:

Thanks for having me on.

----------

Royce Yudkoff:

Rick, one of the things that intrigued me about what Logan is doing is his creation of a back office that simplifies the job of a local general manager. I don't think I've ever seen this before in small firms. The typical small firm owner, like the owner of one of these garages, is doing lots of things and it's impossible for them to retire and turn management over to one of their employees because that set of skills is just found rarely. And Logan's solution to that is take a huge chunk of those skills and put them into a scale back office to simplify the job of general manager and give Logan more choices of people he can plug in to replace that seller. I think that's just a fascinating strategy to execute in a roll-up of small companies. What do you think?

Rick Ruback:

Right. You've taken management of people and financial management off the menu of characteristics that you need, so now you need somebody who knows how to fix cars, you need somebody who can recognize talent in fixing cars, and you need somebody who can talk to customers. But they don't need to understand a balance sheet. They don't need to understand an income statement. They don't need to know when to use accelerated depreciation and when not. They don't need to know how to do any of that. I think this is very clever. The conversation with Logan really moved me on the efficacy of rollups, particularly in this small space. What I will say is the success of this is really going to depend on realizing the operating leverage. And what I'll be fascinated to see is whether he can grow the business without growing SGA more than proportionally. As you know, we've seen other businesses that have had similar themes, for example, in home nursing, where you're going to build this front office and then you're going to have all these nurses and it's going to be just fine. And what we've discovered is it's really hard to maintain profitability in that business because you need just lots of supervision. The supervision really eats up the gain. And we see little hints of this in Logan's business because it's true, we've pulled out the accounting and the financial management and the pricing and all those business decisions, and so we have a general manager with a more limited portfolio in each repair shop, but now we also have a regional manager on top of that. And I wonder if we're going to end up…

Royce Yudkoff:

Soon you have to have a division manager to supervise eight regional managers and all of a sudden...

Rick Ruback: (1:20:08)

Right. The advantage of being big is pretty clear, right? You get these huge economies of scale in the back office and, as you point out, you don't have to look for this unicorn. You know, you don't have to find the master mechanic who's good with customers and also knows accounting really well. You don't have to find that person anymore. That's a big advantage. That's huge. The question is whether you can grow and keep those costs down.

Royce Yudkoff:

I think you've raised an excellent question. I think the solution would be if there's new forms of scale advantages that become available like, for instance, at some point he's big enough to force down the cost of parts because he's such a big customer in the market, something that helps him. Because I have no doubt that the management will get more complex as you add more units.

Rick Ruback:

Yes, although I do think that he's engineered his central services, for lack of a better word, to be able to grow easily and sort of keep control over the SG&A. I think he's had this in his mind. He's a very clever guy and has this wonderful ability to see and manage talent, from the people who sweep the floors to the people who do his financial strategy. I think he can communicate with that whole range of humans, which is a rare trait. I think Logan's thought about all this and he's going to figure out how to do it. And what's really interesting is what Logan is doing has the potential to unlock the engine of rollups across a whole collection of businesses that we've not imagined rolling up before. And so maybe what we're going to find is that when Logan's hugely successful at this, what he's done provides a model for rolling up independent electricians, independent plumbers, independent pest control. Such an exciting thing that he's done.

Royce Yudkoff:

What a great conversation that was with Logan. He has pulled so many levers to construct this collection of small companies into a promising big company with lots of growth potential. Next episode, Rick and I turn to listener questions we've been collecting all season long. 

Rick Ruback:

That's always so much fun, Royce.

Royce Yudkoff:

You’ve been listening to Think Big, Buy Small. We’re your hosts, Royce Yudkoff…

Rick Ruback:

…and Rick Ruback.

Royce Yudkoff:

Katie Zandbergen produced today’s episode. 

Rick Ruback:

Craig McDonald is our audio engineer. If you have any questions, comments, thoughts, feel free to just e-mail us – rickandroyce at hbs dot edu.

Royce Yudkoff:

We’ll be back next week with another episode of Think Big, Buy Small.