E138: Why Winners Go Broke

27:04My father-in-law has a business. They do downhole tools for drilling companies. And somehow he got his name got on one of the lists that those type of people like they look for distressed businesses and they reach out. And he had a whole bunch of people reach out and he was like, I don't I don't need capital. I don't want capital. But, you know, like whereas I would just reject the phone calls. He's talking to all these people. And he talks to one guy and he texts me afterwards. He's like, I think that guy might be mixed up with the mob. And I'm like, really? And he's like, yeah. So he starts following this company.

27:36It's this Florida company. And he finds a job listing where the job listings like they need somebody for like a loan collection. And then they explicitly call out in the job listing, you know, criminal history is not a disqualifier or, you know, or it was like, you know, it was basically like we encourage people with a criminal history to apply. It was something like that where it was kind of like, okay, this is a different class of lender that you probably don't want to be involved with. But to kind of your point, Sean, of like this not being a doomer episode, I think a different way to frame this that will really resonate with everybody who listens to us.

28:13Because anytime we do any content around selling your business, it pops off in a big way. People are super interested with the idea of like, okay, how do I sell things? Turns out people like money. It turns out that investors care a lot about an asset's ability to produce cash. And so what happens a lot of times is that you'll see a deal that happened and it's like, wow, why did they get that multiple on revenue? Or why did they only get four times earnings? Or, you know, why this? Why that? And the answer actually has to do with cash flows. and that anybody who buys your business, they're most people that buy your business.

28:49Sometimes there's a strategic where it's not that they're trying to get cash out of it. But most investors, they're trying to figure out what kind of cash on cash return can I generate from buying this asset? And so they're gonna really care about your cash flows even more than they care about revenue growth or your P &L. And I think that that's one of the reasons to really focus on this. It's not likely if you're running a good business that you're gonna bankrupt yourself, like just not understanding what you're doing. But it is possible that your business, you could think your business is worth X and it's worth 60 % of that because of discrepancies between your cash flows and your earnings.

29:25And so managing this and being really aware of your cash flow statement, your balance sheet can make a big difference when it comes to a transaction. Okay, Rag & Bone got bought about six months ago by Guess. Okay, Guess was a publicly traded company. They've just got taken private, so there's a lot of consolidation happening in the fashion world. But Ragabone, great brand, was really hot for a long time. They got bought, I think, for 0.2x revenue, right? That does not sound very good. They were EBITDA positive, right? They were a healthy business. They ran out of money. They literally ran out of money because they did bad inventory buys.

30:01And so the whole lesson takeaway from this is like my philosophy on business, why do I, you know, preach about more conservative levels of growth? Both, it comes down to inventory is you're taking cash and you're buying cash and you hope that you're spending a dollar to buy a$5 bill. Sometimes you're spending a dollar to buy 10 cents, right? So it's like, it's a big risk, obviously. And it's where a lot of businesses just get caught up and it just ruins everything for them. So making sure you protect the cash above all else, then EBITDA and then revenue. It's a nice to have. This reminds me of I took an investing class in college and they showed us a company that was trading for a less.

30:44It was a mall company. I can't remember which of the ones, but, you know, you think about the different types of stores they had at like Spencer's Gifts or something. I don't remember what it was, but it was one of those types that had a bunch of mall outlets. And the company had two hundred and fifty million dollars in cash on the balance sheet and the stock was trading at one hundred million dollars. And the professor said, how is this possible? How is it possible that a company would be trading at less than half of the cash that they have on hand? And anybody want to guess what the answer was?

31:15Yeah, there had a massive amount of debt or something else offsetting it. And they didn't have debt the way that you would think of debt. They had massive lease obligations, which is like debt. Right. It's a good example that it's like they were committed to all of these physical spaces on like 10 year contracts. And the market was looking at that and they were saying, sure, you might have 250 million in cash right now, but you've got 300 million dollars of lease obligations. and we know which way malls are going. And so you're worth literally 40 % of the cash that you have. And so it just shows this point, right?

31:52That like what's going on on your balance sheet. And I think the point that I'm trying to make is there's debt that's like I borrowed money from a bank and then there's other types of debt and leases are one of the best example where it's still a liability whether you think about it or not. Yeah. And that happens a lot to biotech companies. It happened to Allbirds, where they end up being worth less than the cash. And yeah, there's hidden debt there where people do not trust management. Opendoor just had that same thing happen. Opendoor was worth like, I think,$50 million or something. And they had like 350 million cash on hand.

32:32And now we've seen that company just rally like crazy. Shopify alum goes over there. The stock's at like$10. It's up like, what, 80 ,000 % or something.

32:44You know, it's one thing to be directionally right about your margins and another to be precisely right. And that's the big difference between saying our margins are around 30%, 20%, and knowing it was 24.7 % on Shopify and 28 % on Amazon yesterday. Those few percentage points add up fast when you're doing 20, 50, 100 million in sales. That's exactly where Sarah's pulse comes in. Sarah's gives you daily contribution margin reporting by channel, category, even down to each SKU. all pulled automatically from Shopify, your ERP, your 3PL, your ad platforms, everywhere. So instead of guessing or waiting weeks for finance to update your numbers, you wake up, you know exactly how profitable you were yesterday, and you make moves.

33:36Maybe Facebook was down 20 % because of free shipping promos, but Amazon held strong at 35 % that day. That's the kind of insight Sarris gives you in real time. And contribution margin is one of the things that really matters. It's not just product cost, but it's everything. All the variability, shipping, pick and pack, packaging, returns. That's your true profit per order per SKU. You should know that. With Sarah's Pulse, you spot leaks before they become losses. Keep cash flow visibility every day and show investors or partners exactly what's going on. For a$50 million business, even a 10 % improvement in contribution margin means millions to your bottom line.

34:20And Saras helps you find that. We love it. I mean, every dashboard I look at running our business is coming out of Saras. So stop flying blind. Start operating with absolute financial clarity. If you don't have a Saras dashboard, if you don't have Saras Pulse, you're leaving money on the table. Check out Saras Pulse. That's S-A-R-A-S. and see how daily precise data can transform your business's profitability. Well, actually, Sean, do you want to go over the ways that you can protect cash? Would that be helpful for people? Or do you think that we just leave that? Because there's a lot of tactical things that I think we could get into.

35:02Yeah, no, look, I think it makes for a great episode. I think the biggest tip is you have to try to offload your cash liabilities to whoever you can. And to the biggest tip, we've said this a bunch of times, is you find a supplier who is willing to give you better and better terms so that you don't actually have to get formal lines of credit to pay for your inventory. When you're Jason scale, it's not going to work. You should trade gross margin for cash float when possible. What I mean by that is you find a supplier and they're like, hey, you have to give me the money up front and then I'll ship it later.

35:40That's how most suppliers work. It's like you pay before it ships and you say, hey, I'll give you an extra$2 a unit. I will hurt my gross margin. I'll pump up your gross margin, but I will pay you 90 days after it ships. The reason why you want to do that is you want to create your own negative cash conversion cycle. If you can land this inventory and sell it before you have to pay them, you've just created money out of thin air. That is the number one tip anyone one could possibly take. Easier said than done, but that's how you can save your business. If you're a younger brand, I mean, I get this question all the time when I talk to founders, how do you convince or get a manufacturer to do that?

36:21Most people I know are on some kind of prepay, either prepay entirely or prepay some percentage of, and then net 30. The product isn't even onshore before they've paid all their bills. Yeah. So smaller to your factories. That's just the reality. Does anybody have anything other than that? Well, I think it's just leverage. I think the point that I would make is you think about as your company scales, then you become more important. You become more important to Walmart. You become more important to your manufacturers, whatever. How do you use the leverage you have from being more important. And usually what companies will think is I'm going to use my leverage to drive down my costs.

37:09But another way you can use your leverage is on payment terms. And sometimes that makes a lot more sense. Like me saving an extra five cents on a water bottle does not matter to me nearly as much as drawing my terms out from net 30 to net 60, net 45. Right. And just to kind of specifically put a point on this, my primary manufacturing partner in Asia told me that he can borrow money at two percent in China right now. And the, you know, party officials are basically like, you should really borrow as much money as you want at two percent. So it's a good example of like me pushing down on his margins doesn't make nearly as sense and it's not as much of a whim for both of us as me just saying, well, hey, okay, let's put some more in working capital.

38:01Like let's figure out a way for you to extend me more credits and sure getting it at 2%. And that it's interesting also because you can see this is exactly what the retailers have done. Instead of pushing for better pricing, they basically push for better pricing in a different way, which is just they'll come to you and say, well, hey, everybody's at net 90. You know, sorry, there's no negotiation here. You're at net. You were at net 45. Well, now you're at net 90. And really what they're doing is it's a different way of using their leverage to drive down their costs through the responsibility of the receivables.

38:36Yeah, I mean, and also if you're a big retailer, like you can just everybody over as much as you want. I mean, like, it wouldn't surprise me if they go to all their, you know, retail leaseholders and they're like, yeah, actually, we're going to start paying 90 days in the future or whatever. Like, we're actually not going to pay right the next quarter and we're only going to pay, you know, the following quarter or whatever. They can just do all that type of stuff because of just how massive those businesses are. Yeah, it's leverage. It's that if you don't take this, somebody else will. But then, like, when you have a really hot brand, right, if you told Target, you know, like, I don't know if you're whatever at the height of like, you know, you're, you're a company that's at the height of its popularity.

39:16Um, if, if you went and told a retailer like, Hey, you're going to have to pay me in cash on delivery for me to give you anything, you know what, they're going to pay you cash on delivery until you cool off. And then they're going to tell you you're a net 90 again. And so in a lot of ways, retail is a leverage game and the key to playing the leverage game well, I think there's two keys. One is that you need to understand who has leverage and how much in every situation. And when you have leverage, how are you going to use it? And then number two, be very mindful of the fact that leverage moves around and that there will be points where you have it and points where you don't.

39:55And when you do have it, don't abuse it because people will come for you with pitchforks when you don't have it. And so you have to be a good partner, even when you do have leverage so that you don't just get murdered when you don't have leverage. Can I ask you guys a question on this? How much do you look at cost of capital? So like one thing I was thinking about coming into this episode, like Sean, you've got like, here are the things you can do to create a better cash position for yourself. But I was thinking like when it comes to debt, there's so many different types of debt and there's lots of sources of capital, right?

40:34Do you guys actually like actively, and Jason, this might be a good one for you at your scale. Like, do you look at everything and sort of like stack rank cost of capital? This is like the, Sean, your comment on a rag and bone getting acquired, like public companies have such incredibly low cost of capital compared to the rest of us. Right. And the smaller your business is, the higher your cost is just naturally you have less available to you. But I'm just curious, like, do you guys put any thought or cycles into this at your sizes? Like Jason, is this for you guys now? Yeah. We, we look at the cost of financing for things.

41:09Um, we, we don't have like a real cost of capital analysis or a return on invested capital analysis, like kind of Matt, Mike does some of that stuff. Um, uh, we believe in a healthy amount of financing, whether it's debt or otherwise at reasonable rates, like at market rates. And I think that's like prudent. We're focused on the prudent use of leverage just because of my background as a banker. I've seen like really not prudent use of leverage. But I think it's with that tax shield on debt, it is if you can borrow money, If you are a credit, you know, if you're a good credit, it's worth it. I think younger businesses that are trying to finance their business, I think all the things that Sean talks about and a bunch of other people talk about, I think you're just like in survival mode at that level of business.

42:09And it goes back to the first thing I said, which is like you need to make sure your working capital house is in order and doing everything. Like everyone's always talking about credit card points, right? And credit card rebates and cash back and all that. And Sean talks about it all the time. And I look at it, I'm like, you know, we could actually probably be making a lot of money off that. And that's an area that it's almost like too much of a hassle for us to do it. And we're leaving money on the table because we just like to do things a certain way, right? But we look at the cost of debt if we're going to do something or not.

42:49If debt was more expensive than it is now, maybe we wouldn't carry the leverage. But right now, if you can borrow at 8 % and your marginal tax rate is like almost 50%, it's pretty good financing. It's pretty cheap money. Yeah. So what Jason's talking about with the tax yield is that you can write off interest, right? EBITDA is before interest, right? So when you go to pay your taxes, your net income, you get to write off all that interest. So it's essentially half the interest rate you think it is. So if you're paying 8%, it's effectively four, four and a half or whatever to borrow this money.

43:25That's what Jason's talking about. And then you brought up credit card points. It's just good to talk about that. Yeah. The best credit card points you can get will have the worst float, right because you know if you if you want a two percent cash back card great just pay me in advance just give me the two million dollars i'll go buy treasuries with it you spend two million dollars and then i'll give you the points we run that back so if you want to get more runway out of your cash flow you can go to a lower cash back card they'll give you more float right there's some cards where you could pay 60 days after it ends without paying any interest on that so it's It's like, yes, another survival tip.

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46:04Manscaped, Dollar Shave Cloak, Hexclad, Grunz, and many more. So if you want to see what real deterministic view attribution looks like, go to northbeam.io slash demo to book a demo and tell them that we sent you. Because if you're still flying blind on clicks only, you're missing the full picture. What I want to bring up, and this is, take it with a grain of salt because I haven't done either of these things, but I wouldn't poo-poo equity financing. I think it's totally fine to sell pieces of your business in exchange for money and for that money to become primary capital in your company. I think so often I talk to entrepreneurs and they're like, I'm never going to sell a share of my business.

46:48And it's like, I don't know, man, like debt has some pros and it has some cons like anything else. The cons are it's expensive and you owe that money back at some point. You have to pay it back where equity you don't. It's like you're selling an asset directly for cash. So Sean, I would, I would, let me just, let me just jump in there because this is, this is a love, I love this topic as a former banker, right? Get ready to bleep this out. Take the money. Okay. Take the money. If people are offering you money, equity capital, take it. Okay. Take it. You cannot predict the future. You have no idea what's going to go on, what's going to happen.

47:27And unless it's just like super egregious, um, you know, people are crazy about thinking about their valuation and like, dude, you know what your valuation is? Whatever someone is willing to pay you. That's your valuation. I don't care what your comp is. I don't care who you think your comps are. You are not their comp. Every comp that someone shows you is not your comp. If people are offering you equity, I would absolutely... No one would give HexCloud money when they started. No one. Everyone laughed. That's the problem is that people don't... I think the point you're getting at, Jason, and this is worth saying, is that if you looked across all the equity, all the shares and all the companies ever created, probably 0.1 % of it ever transacts.

48:23Like nobody's buying it. In general, when you create a company, like the odds are greatly against the equity ever being bought of that company. It's the 0.1%. It's so bad. The math is so bad. And so like you just need to know that going in. Like it's extremely unlikely that someone's going to want to buy your equity in your company. And the point that both Sean and Jason, you both made, and this was true as Simple Modern. Like I tell people we were bootstrapped partially because people thought it was a terrible idea. You know, like when your uncle at Thanksgiving asks how your Yeti knockoff is doing, like that's a sign that people don't believe in the idea.

49:04and so like when somebody really does want to pay for your equity that's you should take it seriously but the problem a lot of times is that when your equity isn't ready to produce cash nobody wants to buy it and then when it is producing cash they want to buy it but they want to buy it at at less than you know market rates and so like I don't know I don't paint with as wide a brush as you do, Jason, but I would just really emphasize to people, it's very unlikely over the life of your business, you're going to get many people that want to pay for that equity. Yeah, I 100 % agree. As a guy who's like, I've sold a company and I've raised a lot of money.

49:43When we've been offered equity capital at reasonable prices, we're like, well, that's reasonable. We're taking the money. I've been in Jason's camp for a while. It's like, absolutely, I'm taking it. And then part of the math I do on that has always been, And I got advice from a friend of mine who runs it. He's a VC where he told me years ago, like, if you're going to raise equity capital, you should assign an interest rate to that so that you can evaluate equity capital against debt or whatever other sources you have. Otherwise, equity looks free, right? And equity is not free. And most equity capital is coming into companies in this form of preferred shares.

50:21And preferred shares do sit on your balance sheet as debt. They should. and they make it harder to bring in more capital, both on the debt side and especially, I'm involved in a deal right now, where like there's a Series A and the Series A have preferred and there's a lot of rights. And that makes it more difficult for more money to come into the company unless basically a lot of times your Series A will have kind of super majority rights to block future investments that might dilute them or they have all kinds of specific rights. All the terms are important. Don't get me wrong, right? But you got to evaluate the terms.

51:01You've got to have a good lawyer. Don't half-ass it. And look, if you're a business that's at scale with a tremendous trajectory and is making money, then yeah, you can walk away from equity deals. Because by and large, if you're growing and profitable, you're always going to be worth more later. I'm talking about the younger companies. Yes. that like if you don't have a track record, like there's nothing is guaranteed. You know, in 2022, we walked away from some numbers that were pretty good for a lot of people, but we just knew that what we were going to do, you know, for the next two years, because we just had the track record.

51:39We got it and we didn't need the money. But if you're like a sub$50 million in revenue company or even a sub$100 million in revenue company, like take some money, take a little money off the table. You're going to be better because you're going to have a little money put away and you're going to be able to focus more on executing with being a little bit cocky is good, right? Being a little bit like less afraid because I've got some money in the bank. Even if the valuation isn't great, even if you think the cost is a little high, I've just seen this so many times, guys, in 25 years of people walking away from money and it was the best deal they were ever going to get.

52:33And then when they did a deal, it was either for less or actually they never got it. Or they never got a deal. I mean, Jason, you guys are in the survivorship bias, right? You're like, we didn't take the deal because we knew we'd be worth more. But you know what? There's probably three or four other companies that didn't take the money at those 21, 22 levels that never got any money and just went away. Okay. So you guys know that meme? It's from Arrested Development where it's like, it doesn't work for anybody, but it can work for us. That is like, this was really true 2022 to like 2024. I hope it's less true now, but a lot of brand owners would have been better off getting a job in big tech, right?

53:15If you ran the numbers, it's like you sweat, you're hard out, you work, everything's on the line, and then your business ends up being worth basically zero. I'm going to bring up one business by name. So Parade, it was like a darling, right? It was like women's underwear done on the internet for Gen Z was super, super cool. They raised some money. Their business got bought for$1, okay? That's a really, really hard place to be. I was multiple on that, Sean.

53:48It's a really, really hard place to be, right? And like Rag & Bone, it's a best-in-class business. I'll sit here today, Ridge is not as good as Rag & Bone, and Rag & Bone got bought for 0.2, right? The way they were able to penetrate culture and reach massive scale, it was so well executed. So it's just a really, really hard game we're playing. There's a lot of survivorship bias, to Mike's point. And as a business owner, here's what I think my priorities are. Taking care of my employees, taking care of the shareholders, taking care of my suppliers, taking care of my vendors. That is what I have to go out there and do.

54:25And if you are below the other person on that stack, I'm sorry. Oh, I guess paying the government's the first thing. I guess that's number one. And so I will try my hardest to make sure there's enough money for everybody every single month when I'm running this business. But if there's ever not, it's like, okay, the top of the stack gets paid first. Government's going to be paid. I'm going to pay sales stacks. Then I'm going to pay employees. Then I'm going to pay suppliers. Then I'm going to pay vendors. So Jason's question was, how do you extend runway? Suppliers is one of the easiest ways. We talked about credit card giving you more float.

54:57Do the other one is just, if you have vendors, it's like, hey, I'm not going to pay you this month or I'm going to pay you half this month, right? I'm going to pay you the other half later. I did that back in April. I do this all the time and it sucks. I love all my vendors. Thank you. Fulfill, NorthBean, Postgres, RichPanel, Saras Analytics. Thank you guys. But they're really my vendors and they know I'm the worst person on earth to deal with. I'm not paying you. So it's like, what are you going to do? But you can do that because you have leverage. If you didn't have leverage, they'd be like, well, then guess what?

55:31We're not shipping any of your product and you're screwed. And so that's where you really just have to understand where you're at. The problem that companies run into is that when you get distressed, everybody notices that you don't have leverage and nobody plays ball. It's like, oh, well, then you know what? We're holding all your POs hostage if you don't pay us. And if you don't, in fact, actually, no, you're not on net 30 now. You're on net 10. Or you know what? we need a 40 % deposit. This is the reason why you don't get financially distressed, because you build your financial models around the way things are right now.

56:02But when you get financially distressed, everything gets a lot worse. People get a lot more nervous about getting their cash from you. And so they want to extend you less credit. And that's where you can go from thinking like, okay, you know, if the numbers play out, if everything stays the way it is right now, Now we should be fine with this much cash or this much, you know, kind of margin for error. And then all of a sudden you're not OK. And it's because things do change. So you always have to have more margin for error when it comes to your financing than you think you do. Can we all just agree?

56:36Can we all just agree that Sean is a maniac, though? I mean, is it fair? Let's just let's just say it live. I wish everybody who listened to the pod could see some of the emails and texts Sean shares with us. I mean, I have mad respect for Sean being a maniac to his suppliers, to his employees and to us. I appreciate it. But also, you know, Sean mentioned all of the vendors that he's paying. And it's funny that like they're our sponsors. So I got a really cool overview of all of our things that we've achieved. with Saris since we started. Like all the, I just asked them for this and it just came in.

57:24It was like 31 big completed tasks that they've done in three quarters. And then I'm looking at like the next 46. It's amazing like what good partners will bang out for you. So we give our sponsors, we give our vendors a hard time, But the good vendors who do good work, they get taken care of. It's a part of... But the process is to hold... You got to hold everyone accountable. You got to hold them... And also not let them screw you. Everyone is out there to screw you. I get a text when I woke up this morning. Your defender is ready for pickup, your annual maintenance. we recommend that you change your engine filters.

58:15It's$1 ,200. They're a little dirty. They're a little dirty. Okay,$1 ,200 because my engine filters are a little dirty because you think I'm a patsy. You think I'm a sap and my car has 10 ,000 miles on it and I got to change the engine oil filter. So everyone is trying to screw you. And so like I think this, you know, the Sean mentality actually is unfortunately you need that. Right. Because everyone is trying to screw you, including the Land Rover dealer in Los Angeles. I think you can. I think there's a middle ground where you say, listen, I'm going to be a very nice guy and I am going to care about you being successful, me being successful.

58:58But don't ever let me believe that you're not playing by the same rules because then it will be elbows out. and like that's I think that that's kind of the way that I try and approach things is like I'm going to be the best partner I can possibly be I'm I'm going to care about everybody else succeeding and if somebody if I can't trust somebody to act that way to me I'm just not going to do business with them but you're absolutely right Jason like people will try and take advantage I mean I had a situation once where a friend of mine went through something very very very hard and I was like, I'm going to buy him a car.

59:32And I went into a car dealership and I saw the car and I talked to a salesperson. I said, I want to buy that car. I want to buy it for this price. That's a fair price. Will you do it? And he said, yes, I'll do it. I said, I'm going to come back. I'm going to bring my friend. I bring my friend. I show up. The salesperson's like, well, you know, we still need you to talk to the business manager. We need to fill out paperwork. He gives me paperwork. Of course, the paperwork's asking for what I do. It's asking for income. It's asking for a bunch of other stuff. So I fill it out and sure enough, they screwed me.

1:00:05They took the price up 3K, 4K or some crazy amount. My friend is there, so I'm not going to back out of the purchase, you know, but I never went back. I had bought every car through that dealership. I never went back. I was done with them. And I just think that that's the other alternative is that you assume good faith and you act in good faith until somebody shows they're not worthy of it. And then you're done. Totally. Talking about leverage, this happened to me in probably February with a supplier. We sell knives and we wanted to switch from one knife supplier to a different knife supplier.

1:00:41So orders stopped coming in. They still had an order they had to ship out. And they're like, hey, it was supposed to be 90-day terms. They ship it, I pay them in 90 days or whatever. They saw that order stopped coming in. And so they're like, we're holding this order. We are not going to ship this order until you pay the rest of it. And you know what I did? and actually it was probably a 10 % deposit and then whatever. I pay the rest of it 90 days later. They're like, we're not going to ship it until you pay. And I'm like, you're trying to f*** me? I don't want the stuff anymore. Throw it in the ocean.

1:01:08And I've never paid for them. I've never paid. They made this stuff. They tried to big dog me. I'm like, I just won't accept it. It's like now every week they email me being like, will you please take this stuff? And I'm like, no way. You tried to screw me over. I am not going to accept this stuff. Yeah. So to Mike's point, if someone tries to screw you over, you gotta you gotta fight back look i think i think any sass company coming into consumer has to know that like consumer is a is a razor thin margin industry so like and you are not at the top so like that i think you should just know that this is a very difficult industry to be in and cash is always going to be a i would say a fluid thing i'm about to name the greatest shopify brands of all time ridge hex clad true classic dr squatch port and leather goods princess poly kitsch pit vipers and hundreds more what do these brands have in common they're all using revo the number one retention accounts loyalty memberships referrals cashback, everything app on Shopify.

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1:03:26I think on the topic of good partners, though, I think Mike's right. I think, you know, we make the assumption that, like, everybody is actually not trying to screw us. So I would be the opposite of Jason. I think they're just trying to run a good business. But sometimes they make decisions where it's like, listen, that doesn't work for us. I guess I'm more in Mike's camp with how we would look at our partners. During COVID, we actually asked our landlord to defer rent for a year. And I'm like, can you just extend the lease another year? And I just don't want to pay for as long as you can take it.

1:04:02And they came back and they were like, yeah, sure. We'll give you. I asked for 12 months. I think they gave us like nine or six. Like it was, I was surprised at what we got. And then it turned out that COVID was really great for a consumer. But like when COVID first hit, I panicked, which actually like is a, some of the best advice I ever got is just to operate paranoid when it comes to cash. So like when the news of COVID hit, I like straight up just went full paranoia. I'm like, stop paying everybody. Like just who can we call? Tell them all that we're just not paying them. And then like three weeks later, sales started to rip and it was way less terrible than I thought it was.

1:04:36But it's still, I think the operating paranoid when it comes to cash is actually a great place to be. Dude, and also don't ask, don't get. You got to just start asking for stuff. So, I mean, that was awesome. I should have asked to not pay my rent either. That's genius play, Matt. It's a really good point that never assume that you know what somebody on the other side of the transaction wants. I mean, in general, like, yeah, people want to make money. But in terms of like their priorities, this is a good example. I'll go back to our manufacturer. These manufacturers, especially in China, their incentive structure is just different than U.S.

1:05:10businesses. And so like it's very important, for example, for the political leaders in their provinces that they create jobs and they might want to in any given quarter create jobs more than they want to create profits and have a bunch of financial incentives to do that. It's like, well, that's good to know, because that means that we might be able to strike a deal around POs where we're giving them more volume, but we're getting different payment terms or we're getting different pricing or whatever. And I just think that I'm always like assume good intent on the other side, believe the best about other people, ask questions.

1:05:49I mean, you're not wrong, Jason. There are some people that are malevolent out there that just want to they just care about themselves. But I don't think most people are like that. I think that if you ask questions and you look for creative solutions, there's almost always a way to find a solution that works for both parties. And I said this earlier, but I'll say it again. If if when people are down on their luck, if they feel like you kick them while they're down, they are going to file that away and then they are going to it will come back around. It's just the way that life works. And so like there's another story I was told one time, this this guy in Oklahoma City who very wealthy and he had been in a few business deals with with this other guy.

1:06:36I'm not going to say his name, but he'd been in a few deals with this other business guy. But this guy drove the hardest bargain in this town. I mean, it was just like, you know, you he would he would fight you for every last nickel. And so this businessman that I know that's been really successful, he got offered to come into the best deal of his career. And he said, well, I usually have this other guy involved in deals with me. Can I bring him along? And they're like, no. That guy, he's so terrible to work with. You cannot invite him to be a part of this deal. And that guy, because he'd driven such a hard bargain on a bunch of other deals, he missed out on this really lucrative deal.

1:07:12And I think it's just like that's how business tends to work. That managing cash is hard, but being fair, being likable, being partnership oriented in how you do it really matters, especially if, you know, God forbid, cash gets really tight or things get very difficult. And that deal, the first light bulb in Oklahoma City. And that man was Abraham Lincoln. Why is it every time I hear Mike say Oklahoma City, I just want to say something? You know, it's because you're a freaking West Coast elite that thinks they're better than flyover country. And we get it. You know, that's fine. And you're ivory tower on the coast.

1:07:59Jason's complained about the Land Rover dealer in Los Angeles. I know. Jason's very connected to working class people. I grew up working class Staten Island, New York, boys and girls. All right, Matt, what else do you want to talk about? I think that's the pod. I think we keep this as a cash pod. I love that. And now to end this, we're going to put Sean in one of those booths with all the dollar bills and we're going to see how many dollar bills he can grab out of the air. Let's talk, Sean, what's your cash stack now, right? Because you're always talking about credit cards and vendors, et cetera.

1:08:38What's your cash stack now, if you're willing to share? The cash management stack? Yeah. That's a great question. I thought you didn't want to do free plugs. I thought you only wanted to plug people who pay us. We'll bleep it out, Sean. We'll bleep out all the company names. Yeah. So, I mean, no, we bank with Chase. They've been our bank since we started the business. Like, super, super great. Yeah, so do we. I mean, look, as far as, like, the problem with legacy banks is that they're slow to do anything. If you want to increase your line, it's like 15 people. No joke, I've had lunch with 15 people there at once.

1:09:11being like, hey man, I just want an extra million dollars. How does this make sense to anybody for me here? But I mean, it's a very large institution. There's lots of checks and balances. You know your money's saved with them. So we keep all of our working capital in there. And then we have to pay taxes. So we just put all that in treasuries, right? California's had a ton of extensions for the past. There's fires and then there's water damage or whatever. So instead of paying in April. Typically, it's in October. So we keep all the money in treasuries all year. And then we run all of our bill pay, credit card, everything just through Ramp.

1:09:50You could probably get better deals out there. You hear about a Bank of America card that has 2.6 % cash back. You hear about a Citi card. You hear about all this type of stuff. Ramp is just such a beautiful piece of software. It just works every single time. You get bill pay, expenses, like everything is just in that stuff for us. So we love Ramp. Congratulations, Ramp. Yeah, huge. I mean, they're worth like$30 billion. And they care enough where they came to my office, so the CEO or whatever. I'm like, what are you doing here? This is a credit card company. So yeah, they're pretty good. And then we use Armanino for our day-to-day tax filings, and we use Mouse Adams for our audit.

1:10:28That's the full financial stack of Ridge. Are you finally getting an audit? this will be audited this year yes we've done we've done several reviews but you know no dude i'm doing a stub year this year jason because we're trying we're amalgamating two entities and we're doing a stub financial year and because of what that means what's a stub year mean stub year is like you're i'm gonna have to basically like close out my books in september for my companies and then i'll have like another fiscal from like september it's like october 1st to December 31st. We're going to change our fiscal year from 1231.

1:11:05For retail business, it doesn't make sense to have a 1231 fiscal. What are you changing too, Jason? I think we're going to go to end of Jan. Yeah, that makes sense because you have so much of the Christmas stuff closes out in Jan. That's a great point, Jason. If we're going to go through the pain of a stub year. But anyway, my point is, Sean, I'm doing two audits this year. I like them so much. Give me another one. It's so funny you guys are talking about this. We're talking about going July to July. I think that makes like the most sense for our types of businesses. It's like your year starts on July.

1:11:39Well, and one other thing we didn't talk about in the whole episode. I don't know if we brought this up on the pod before. I feel like we've talked about it. But like the other thing about managing your cash is that you actually have good controls and process where people don't steal it from you. I had a guy that is very close to me that had a friend embezzle several hundred thousand dollars from his company recently. And like you need to have processes to make sure the cash that should be in your company is actually in your company. Because unfortunately, there are people that will tell themselves whatever story they need to to justify taking cash.

1:12:16So this is where having a good controller matters. This is where having audits or reviews really matter, having good processes, because otherwise that cash will get up and walk away. Dude, I honestly like the under-investing in proper finance team as a consumer goods business, I think is a mistake. I think you should have a strong financial person early in the company. I'm with Jason. I think every company should try to get to audit as fast as possible. if you believe in your business and it's growing and you're going to get bigger, these things matter. Having somebody who knows how to run a 13-week cash flow is just so valuable.

1:12:56I see too many companies with like, I got a bookkeeper in the Philippines. That's my finance team. You're a$30 million a year business. You're f***ing, dude. I mean, honestly, Ridge didn't have a CFO until we did 75 million. We didn't have any in-house. But that's not a good model. No, no, no. I'm telling people to not learn from us. Yeah, yeah. Do not do what Sean did. That's right. It was a lot of pain. I had an offer to get bought for$300 billion that I couldn't do because I didn't have an accounting team. It's like it wouldn't have happened. By the way, fun fact, and then we'll wrap it up.

1:13:32That's exactly why I joined HexCloud because their business was crushing and I was like, you couldn't do a deal. You wouldn't be able to do it. so you know let me come on board and we'll you know we'll do this for a year two years whatever and then and then you know we'll be we'll be ready and it turned out that it's much more fun running the business than doing a deal so anyway how did how did it change your mind jason did because you you came on expecting it to be shorter duration what changed your perspective i mean i i i under we all underestimated how valuable the business could be You know, everyone told the guys that you're going to be capped at X, you're going to be capped at Y, but nobody realized that consumer pattern was going to change around cookware.

1:14:19And then, you know, Hexler was actually one of the first ones to start spending money online. But very soon thereafter, you know, the other usual suspects that we know of, like they started spending a ton. and it's great for us. We love when they spend because it's just raising awareness for the market and then people just realize that, hey, I don't want to lug 20, 40 pounds of cookware out of a store like I can see an ad and just buy it. And so apart from Costco where people are used to lugging out big, you know, wagging, big carts and stuff. So yeah, it was just, it just was like, yeah, we're just going to be worth more later and we're just having so much fun that it didn't, but that's why I did it.

1:15:05So, and I think that's a great, it's a great move. Like if anyone can find someone with a good generalist background that understands finance. Yeah, good finance leader. Actually, bankers are great. Like analysts that come from private equity or bankers are awesome because they've just seen so much stuff. I mean, Jason, to your thing about like coming into HexCloud and your role, I was talking to a founder like a few months ago. He was getting ready to sell his company. No finance team. Like almost nothing, right? Had a couple of bookkeepers. And I'm like, dude, you realize like, imagine going and buying the nicest looking house on the street and finding out there's no electrical or plumbing in it.

1:15:42That's what you're trying to do. You're trying to sell a company without plumbing or electrical. It's so true. And then you just will not survive due diligence. No, you're going to get erect, man. It's just too hard. Any reasonable, reasonably intelligent buyer. or you'll get beat up to such a degree that you can't even fathom it, right? It's like, yeah, it's a billion dollar deal marked down to 50 million because it's not a real company. But all right, guys, that's the pod. Let's finish there. All right. All right, thanks for making it all the way to the end of this episode. Wherever you are in the world, it is awesome to have you here.

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