Don’t Compete with Dave

One of the first companies we looked at many years ago was a small carpet cleaning company run by a guy named Dave. While he didn’t run his business with precision, he ran it with sweat, strength, and a streetwise attitude and knowledge that left him “in the know” regarding the local influences affecting his business. He ran a textbook “good business” (at least in the North Beach Holdings textbook). The company provided carpet and various other cleaning services to apartment buildings and complexes. The inherently transitory nature of renters ensures that there will always be renters coming and going creating a revenue opportunity each time. Additionally, they had contracts governing weekly or bi-weekly cleaning of the common areas of the apartment buildings, creating a good source of recurring revenue.

But we could only see half the picture.

Dave was the sole office staff, maintenance worker, and emergency response team. He worked jobs by day, managed the books in the evening, and performed emergency services at night. Additionally, as we examined the financials, it became apparent that there wasn’t enough margin to hire more staff to assist. Dave was doing it all not because he was ignorant but because to be profitable, he had to.

In the previous blog titled “The Art of Small Business Investing,” I explained the types of “business terrain” we seek to battle on and the many that we don’t. While in that blog I discussed our aversion to competing with very large companies, our experience with Dave showed us that the very small companies can also kill you in some industries. There are many “Daves” out there, often in the simple, down-to-earth industries that we want to invest in. We have the utmost professional respect for Dave – in a head-to-head carpet cleaning contest, we would lose.

This is why we only invest in businesses with a distinct and definable competitive advantage that shields profitability not only from large multinationals but also Dave. One advantage is a superior customer base – targeting particular markets and clientele that value service and quality over price. Some niches’ customers are difficult to move because the supplier has a deep and applicable knowledge base regarding their specific needs and wants. Apartment buildings don’t meet any of these criteria. They run on razer-thin margins, and while Dave has their business today, another Dave could easily displace him for a lower price.

So we did not buy Dave’s business and we learned an important lesson.

We seek to conduct business only where we have the utmost advantage, including recurring revenue, integration with a diverse customers base, lack of quality competition, and a reputation for excellence in the field, to name just a few. We seek protection from large companies with massive operating budgets and small companies run by gritty entrepreneurs.

Fortunately, we learned this lesson for free – don’t compete with Dave.