Creating an Ownership Culture | Connor Leonard
Connor: So Chris mentioned I was fortunate to start my career at IMC. It's a holding company that's in Raleigh. It started over 50 years ago, and it was kind of an accidental holding company. They started off I think they raised $50,000. They set out to create a casual dining restaurant.
The first one was called Golden Corral. They build that. The $50,000 is the only money that ever went into the business. They grew the business to 500 locations across the country. Those original shareholders all did really well.
And then, over the last 2 decades, IMC really transformed into this holding company, not by a grand plan. It just was sort of like, what do we do with the cash the Golden Corral is generating? We've never done the distribution. When people wanna sell their shares, we'll talk about how they can do that. And so we became kind of this investment group that sat on top of a buffet restaurant chain.
And, and so that's where I happen to start working out of college. I'd never eaten at a Golden Corral. I was really lucky to work with a great family and got to learn a lot working there for about a decade. And then in the last 2 years, I set up Arbor National, which is really a spin off, and the family helped me set it up, and they're really the capital behind this whole venture. So Arbor National is a brand new venture.
We do own 2 small insurance companies. We're not gonna talk about insurance today. I thought what would be most helpful for this group is let's talk about some of the lessons learned over those 50 years at IMC. Frankly, what's some of the stuff that I'm kinda trying to borrow for this new venture? Maybe you can implement it in your own companies.
I think that's my phone going off. Thank you. So really quick, what we're gonna do, we'll start off with some frameworks, we'll tell some stories, and then we'll kinda get practical of what are the systems we use, what are the tools we use in our company. So we're investors at heart. What drives investment results?
I think it depends on your time, Razzin. There's a bunch of people in the public markets who focus over here. They're focused on the external factors of a business, the valuation, the multiple, do they beat earnings, subscriber numbers, all that stuff. I think there's a bunch of private equity groups that are kind of in the middle here. They're playing, like, a 3 to 5 year game.
We've been fortunate at IMC where it's all internal capital. We never have to sell a company. We're really focused on how can we build great businesses over decades. Sometimes, we do sell the companies, but it's never the plan to sell the company. And what we found is over the long run, it's all about the people and the team and the culture, and we're fanatical about culture.
If you had to distill our investment thesis down to kind of a nutshell, it would be that over time, businesses are gonna change. If you own a company for decades, you better believe the market's gonna change, new competitors are gonna come in, companies are gonna fail, but, basically, the best teams are gonna adapt and win. And so our whole thesis is we wanna create an environment where the best teams wanna work with us, and they're gonna thrive and hopefully improve over time. If we do a good job of that, the results will take care of themselves. So you hear a lot about culture.
I think a lot of people view culture as mission vision values. You know, you go and you do an off-site, you come back, you have some great words, you come back to work on Monday and, like, kinda everything's the same. We have this view that words are really important, but, behaviors are really what matters. So for us, culture, it's just as simple as what are the set of behaviors that people are living every day. That could be what matches what's up on the wall in terms of mission, vision, values, but the stuff I focus on, whether we're running companies or investing in companies, I wanna go see how does the CEO greet each person as they're walking around the building.
It to me, culture is where does that person park? Do they have their own special parking space, or are they parking like everybody else? It's it's all those little details. I think that's way more important than whatever you put up on a slide deck at a board meeting. And so we became really curious about this concept because our whole thesis is we wanna invest in the best teams.
How do you know the best teams before you invest in them? Everybody sounds pretty good in a 60 minute Zoom or something like that. And so we really did a deep dive back at IMC of what are these behaviors that make elite teams, and we sort of studied the companies that we've invested in. We've had some great outcomes. We've had some terrible outcomes.
We've had everything in between. We started studying NBA basketball teams. Like, why are the San Antonio Spurs so good in a hypercompetitive league? We started meeting with Special Forces people of, like, what makes these elite teams that are going over and producing an incredible results overseas. And we tried to kinda put it all together, just so we could be better operators ourselves, share with our companies, then hopefully, it would help us find the next great company.
So we basically distilled it down to 3 things. What are the behaviors of elite teams? The first 2 are kind of a pair. High standards, high compassion. Now one thing to point out with this, high standards, I don't think that's gonna surprise anybody.
If you wanna outperform people, you have to have a higher bar than most of your competitors. I used to think naively that you either had high standards or you had high compassion. I thought you either worked in this great family environment where everybody took care of everybody or you worked for, like, Netflix or Goldman Sachs or something like that, and it was like this ruthless cutthroat environment. What we found with our own companies and with some of the teams that we got to interview was that the best teams pair these two concepts up. They take care of people, and they hold them to really high standards.
They're not mutually exclusive. And if you're truly an a player, that's the kind of environment I would wanna be in where somebody's gonna say, you need to do better, not because I'm just being hard on you, but because I care about you and let's help you get there. So that's a theme that we're always trying to impress on our companies, and the final piece is what we're really gonna talk about today which is the ownership mentality. An ownership mentality, yes, it can literally be do you own part of this company, But it extends beyond that, and we're gonna get kinda go through, some tools you can implement in your company to really build up this ownership mentality. So real quick, a story.
I mentioned we all started with Golden Corral in 1971. So the Golden Corral restaurant chain has evolved numerous times. It was like a small format steakhouse, and it's a really large format buffet. COVID, frankly, almost killed the business. We made it through somehow, and they're doing great, but they're having to evolve again.
And and so the point being, if you're gonna be in business for 50 years or more, your business is gonna have to adapt all the time. The thing that's really remained consistent has been the culture, and they have a pretty unique, incentive scheme. So kind of the core belief, and that's James Maynard over there. He's the guy who kinda started everything, is that owners are gonna be managers every day. And so what we found is that he set up a system a long time ago where if you were gonna be a manager at a Golden Corral, you would put up your own money.
It might not be a lot. It might be 10,000, $20,000, but something that's significant to you, you would have actual skin in the game, and then you personally would have 20% of the cash flow of that restaurant. So within those four walls, you own that business and you got 20% of the cash flow. And the promise that they made when they're out recruiting people, they didn't say this will be the easiest place to work or you'll make the most money day 1, but they basically said if you're really good and you wanna bet on yourself, you can make multiples here than you could at any other competitor. They started hiring all the best managers, and I've been fortunate to interview some of those best managers and just learn what makes them the high performers in a in a big system.
We met this one guy and he started talking about what it means to be an owner in a company. Now he's a 20% owner, and it's more of like an incentive scheme, but he really views it as he's an owner in the business. So he told us stories, you know, every day in a restaurant, you you have a bunch of cash. You have to take it to the bank. Whenever he goes to the bank, he asks for the rubber bands back.
All of the pens that he used were free ones that he got from conferences. All the paper he used to write out notes were, like, you know, the backside of printer paper and stuff like that. And then he told us the story. They have this big dumpster out in the, parking lot, and one of the big expenses is waste. And you basically have to you get charged by the the ton or, you know, it's the amount of weight in this dumpster is what he has to pay.
He started realizing that rain water was pouring up in this dumpster all the time, and that was coming out of his cash flow. So he went out 1 night when nobody was looking. He got a drill and drilled holes in the bottom of the dumpster so all the water would drain out. The restaurant started making money. He started making more money.
The point of that story is that if you're a hired manager and you're working on a salary and you're clocking in and clocking out, I don't think you're out in the garage drilling holes, you know, in the dumpster. So we had this core belief that traces back decades that entrepreneurship is really powerful. If we can unleash that, we own 3 franchise type businesses. The franchisees are always gonna outperform the corporate units, and we tend to have some corporate units just to really test the model to understand what's out there happening, but we wanna bet on entrepreneurs. So then the challenge we kind of asked ourselves is, well, how do we implement that in all these other diverse businesses?
So what we kinda started looking at, it would be 2 things. 1 would be incentives, and 2 would be education. Incentives, I'll I'll get in the weeds on sort of what are the actual structures that we use in our companies that are pretty consistent across all the IMC companies and now that we're using it at Arbor National? I think there's not any secret sauce in there. I'm happy to go offline with you guys and talk about it.
I'm not a lawyer, but I've spent a lot of time on this stuff. The big piece that I'd share with you guys for today is the education. If what we're basically talking about doing, if you're a small business center, if you're talking about you wanna share some of the pie with your employees to grow the overall pie, people have to know what they have. If you're giving away 10% of the company to the team and they don't actually really know what that is, they don't know how they can go buy a lake house with that one day or whatever it might be, then you've kind of lost on both sides of the spectrum. So we really overinvest on the educational piece.
We try to make it as simple as possible, and that's where you kinda connect the dots and get it really working. So I'll start on just sort of our structures. So we're a privately held company. We've got 7 different companies at the IMC level. Arbor now has 2 companies under us.
IMC is kind of our parent company. We we believe in this, concept of 3 buckets. So, first of all, we like when people have skin in the game, which I mentioned was all the way back to Goldencrowd. So, if you're, I'd say, c suite or senior level in a company, each company is a little bit different size. It could be half a dozen people.
It could be up to 20 people, but if you really wanna become an equity owner, we want you to write a check into the business as an equity owner. Now that check's gonna be totally different depending on when we partnered with the people, how old they are, how long their career has been. For some people, that's $20,000. For some people, it's $2,000,000. We don't have a set prescription on it.
The only ask is that we kinda want you to write a check into the business that you really feel like a partner, that you feel like this is an important like, the type of conversation you'd wanna have a conversation with your spouse before you wrote this check, and this is now one of your family's biggest assets. And that's a totally different number for everybody, but we feel like it's important to have that skin in the game. Then what we do is we make a loan available in a one to one ratio. So if you invest a $100,000, then we, at the company level, will make a loan of up to a $100,000 for you to buy more shares. That doesn't mean you need to take it.
What we found is that some people are really debt averse. Some people don't wanna have a mortgage on their house. You know, just things like that. So we're just saying you can borrow up to a one to one ratio. It's generally very favorable debt.
It's kind of at the minimum federal interest rate. And, if you know anything about finance, you're gonna wanna take it because if you can borrow it 3% from a very friendly lender and hopefully compound the company at much higher than that, then it's a great bet. And then the final bucket is profits interest, and so you could call that stock options, profit interest. It kinda depends on what form of entity you have. But think of this as that's more of the upside.
That's if we take something that's worth $100 today, we make it worth $200. You're you're capturing that value that's been created over time. I think that's a little bit more common in, like, private equity deals and you see that, but we like pairing them up because if all you have is this lottery ticket, then you're really incentivized to kind of go for it, and you don't have any downside risk. The way I describe it is that on the left there, that's kind of anti to the table. If you wanna be in the ownership game, you really need to write a check.
But how you're gonna make money that actually impacts your life and your family, it's probably gonna come from the profits interest. And so we try and kinda pair those 2 up. Second thing we do is it's normally maybe the first, second, third meeting when we're at a you know, meeting the company for the first time. They'll say, okay. That's all great, but how do we actually get our liquidity?
Because we typically don't plan on selling a company. And so I think a lot of times when you have stock options or profit interest, the big payday is when you sell out or you go public or there's kind of this windfall moment. We try to set up a system where we don't rely on that. So we have a buy sell formula or some people would call it a put call. And, basically, if the really simple way of explaining is if we bought a company for 10 times earnings, we just say that company is worth 10 times earnings.
And if if you ever wanna sell your shares back, you can sell it at 10 times earnings. There's normally a window in kind of early I'd say, like, April or May after the audited financials are done, and everything's based off of an audited financial. And we normally have kind of a lower bound in there where you say, it'll be the average over 3 years or it'll be based off book values kind of a 4 because we don't want it to be that if the company has one bad year, people get screwed on a price or something like that. But everybody knows that the value will be there. Now be transparent with everybody that there's pros and cons to this system.
Sometimes you buy a company and it's the market's 10 times earnings, and then the market goes up to 15 times earnings. And you might be missing out on that crazy bubble period. But, we're gonna leave it at 10 times earnings. Conversely, sometimes the market cools off like we're in right now, and maybe the multiples have all gone down, and we're just saying it's 10 times earnings. So that way, the people who are running companies, they're not worried about timing markets.
They're not worried about, kind of top ticking or things like that. We're just saying if you can double the value of the company, that you're gonna double the value of your ownership, and we try and make it as simple as possible. The other thing you have to think about, though, if you start doing a system like this is, well, what if everybody decides to sell all at the same time? That's kind of like a run on the bank. So what we normally do is we have a liquidity cap.
So we basically say that 50% of the prior year's net income, that's the pool that people can use to to sell your shares back to the company in that given year. The board always has discretion to go above that level, but we sort of say that is the threshold. That's kind of the pool that's created. And if more than so let's say a company made $2,000,000, there's a $1,000,000 pool. If we got, you know, $4,000,000 of redemption notices, then it would just be split kind of pro rata in that $1,000,000.
Realistically, if people who are running the companies wanna sell their shares, we're gonna try and find a way to get them liquidity when they we want it. We kind of need to have a protection in place so that the company's not broke all of a sudden from everybody selling their shares. And then the final thought here on on in terms of structure is that each company we own, it's a little bit different. We actually have some smaller companies where literally every single employee is an owner, and it's a great concept. It's a little bit messy, though.
So we've had you know, we're granting $5,000 worth of stock to somebody who, I think, frankly, might just rather have $5,000 or have a a trip or something like that. So what we've kinda started to work on is these top few buckets here, that's really for kind of leadership within the company for people who can write checks into the business. Then we try and create incentives that are kind of ownership like that are more unique to each company. So for our insurance businesses, well, we we really focus on there's kinda 2 engines to an insurance company. There's the underwriting income, and then there's the investment income.
We handle all the investing side at Arbor National, so we don't want anybody in the businesses focused on, like, our bonds going up or down or what are the stock markets doing. So we basically say, underwriting income, that's the bucket that you all can really focus on. And so even if you're not an equity owner, we have bonuses that are based on underwriting income. That's kind of a specific metric for that industry, but we want people to see how they can kind of get the benefits of being an owner even if they're not actually putting up their own dollars and everything like that. The final piece here, which I touched on, is it's one thing to have all the structures in place, but you have to close the loop.
And what we found and where we've tried to get better is you can go 90% of the way there and sort of leave it that, oh, yeah. Everybody is now an owner, and you pat yourself on the back, and this all feels great. But if people don't actually understand what they have, it's like you've kinda missed it. And that last part is really important. This is where we try and challenge ourselves to really be teachers.
And if we're we have a business that has a 100 employees, I mean, how many of the employees know what EBITDA is, or how many people know what buy, sell formulas are and stuff like that? And if you don't really know what you have, you you typically don't trust it. And so we've really over invested in the HR departments in each of our companies and even at the parent company level of kind of doing education of how does this all work? How can you actually impact, you know, your own fortunes here? It leads into this culture of transparency.
So across all of our companies, we're really big into oversharing metrics within the team. So whatever we're putting together for board meetings, we're sharing within our companies the next week. It's normally not quite as detailed. It might be, like, sort of an abridged version of a P and L or things like that, but we want everybody in the business to kind of understand, are we winning? Are we losing?
Here's the scoreboard, and I think it was a little bit scary to do that, but if we're gonna make a bunch of people co owners with us, we wanna share information so that they can really understand what they have. And we found that most people respond pretty well to it. Even when you have an off year, you'd be worried like, oh, we don't wanna share that we're having an off year, but I also don't want people walking around the building thinking everything is going great if it's not going great. So we kinda believe in, let's overshare. Let's trust everybody.
We tell everybody this is just for our group, even if it's a fairly large group. And then we wanna have really simple setups and show the impact. The goal here is that if somebody actually owns part of this business, I want them to be able to do, like, on a calculator, like, on their iPhone, they can just do a couple numbers and say, okay. If the company doubles or triples in value, I get this amount because I have this many shares, and then I can, you know, do whatever I've been dreaming to do with that amount of money. Where we, I think, screwed up historically is we'd come up with these crazy transaction structures, and there's all this nuance.
And unless we had a transaction lawyer, we didn't know, you know, how these waterfalls worked and stuff like that. So simple is always better. If you can kind of write it out on the back of a napkin, I don't think people are gonna really buy into it. And what you ultimately want and kind of the whole point of doing this is that you wanna change certain behaviors within the company. So we want somebody who's worked at the company for a number of years to say, hey.
Wait a minute. We've got this subscription over here, and we never use it, and it costs $10 a year. And so that's gonna help our earnings by $10,000, and that means the company is worth, you know, this much more and that that means and so once you start kinda getting that flywheel going, it's really powerful, and that's where we've seen some of our companies that are we've never invested in high-tech or high flying companies who never had an IPO or anything like that, but our rate of compounding has been really strong just through kind of normal boring businesses that are we think run a little bit better than their peers. And to us, kind of this ownership model has been our, you know, kind of our secret weapon. So, something I'm trying to steal on my own, and hopefully, you guys can implement it too.
Go for it. Yeah. It's a good question. Yeah. We normally talk about it pretty close.
We wanna implement it pretty quickly after close. We kinda go in with the assumption that this is the team we wanna work with, and we're not going through a trial period of saying who's on the team or not on the team. We really put a lot of autonomy in each CEO. And and from our seat, I'm not making employee decisions. I might have some thoughts or opinions, but, if we start saying, we gotta wait and see what the team looks like on the back end before we can do this.
It's it's almost like us saying we're now sort of making those calls on on their behalf. Yeah. We we do end up changing them. It's not ideal, but I think if it's better to have to change the plan and explain it, and even though it takes a lot of time than to have the wrong plan in place. I think if you're changing the plan every year, people are getting whipsawed, and it just so I would sort of say really think about the plan for your business, get it in place.
If you're 2 or 3 years in and you have to make a change, go for it. But it shouldn't be the type of thing where, like, every year, what's the new plan? Because then people just kinda lose trust. 100 and Oh, yeah. Well, I mean, some of it's, you know, numbers change over time because, yeah, I I think employee like, it's it's a very qualitative process.
I mean, I don't I don't wanna I'm not prying into people's personal finances and, you know, sort of saying, like, no. You can do more. I think we just, there's sort of an honor system. And, I I think, generally, if somebody's writing in a low check and we kinda know what their salary is or what they've they just got $10,000,000 from selling the company, and they wanna write a $50,000 check, and we'd be like, that's not that doesn't quite work. But, it's it normally isn't a problem.
Most people are actually pretty excited to write the check, because it's kinda like becoming partner in the business, and it's it's a pretty big career milestone and everything.
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