Building Great Businesses | Tracy Britt Cool
This episode features Tracy Britt Cool, co-founder of Kanbrick and former financial assistant to Warren Buffett. She shares insights on turning around struggling businesses, evaluating performance, and how long-term thinking, incentives, culture, and structure create lasting success.
Deep Dive Analysis
24 Topic Outline
Lessons from Alan Mulally's Ford Turnaround
The Pampered Chef Business Transformation
Shift from Investing to Operating for Value Creation
Reasons Companies Struggle to Adapt to Change
Lessons from Growing Up on a Farm
Writing Letters to CEOs for Learning Opportunities
Key Lessons from Working with Warren Buffett
Kanbrick's Approach to Buying and Building Businesses
The Three Components of True Long-Term Thinking
Balancing Short-Term and Long-Term Business Focus
The Foundational Importance of People and Culture
Evaluating and Developing Talent in Businesses
Sourcing and Evaluating Potential Acquisition Targets
The Five Lenses for Business Evaluation
Understanding and Strengthening a Business Moat
Quantitative vs. Qualitative Business Analysis
Post-Acquisition Playbook and Partnership Approach
The Kanbrick Business System and Its Evolution
Debt, Leverage, and Margin of Safety in Investing
Three Ways to Think About and Utilize AI
Lessons from Public and Private Company Boards
Warren Buffett's Teaching on Financial Statements
Evaluating Integrity in Hiring
Impact of Quarterly Reporting on Business Behavior
6 Key Concepts
Value Creation Shift
Value creation in the investing world, particularly on the buyout side, has shifted from primarily buying businesses at lower multiples and selling them higher, to requiring more hands-on operating improvements. This is due to capital becoming commoditized, meaning sellers capture more value upfront, necessitating operators to create more value post-acquisition.
Long-Term Thinking (3 Components)
True long-term thinking involves three components: having a long-term horizon and perspective, establishing a structural setup that encourages and allows for long-term decisions, and understanding that 'long-term' itself has gradients, with 50-year thinking being distinct from shorter durations.
Business Moat
A business moat refers to a company's competitive advantage that defends its 'castle' (strong business) from competitors and new entrants. Moats can be driven by factors like strong brands, unique channels, low-cost provider status, network effects, or limited supplier power, and their strength can change over time.
Return on Invested Capital (ROIC)
ROIC is a quantitative measure used to assess a business's moat, calculated by comparing the earnings (typically EBIT) to the capital required to support those earnings. A higher ROIC (e.g., 50%+ for a great business) often indicates a stronger moat because the business generates significant earnings without needing excessive capital investment.
Kanbrick Business System (KBS)
The KBS is an integrated, scalable, and repeatable framework for managing businesses, focused on continuous improvement. It combines best practices from successful companies like Danaher and Marmon, with a particular emphasis on people and culture, to help mid-sized companies achieve their full potential.
Hand-Waving (Interview Tell)
Hand-waving is a tell in interviews where a candidate avoids directly answering a question, instead speaking broadly around the topic or becoming vague when drilled into specifics. It often indicates a lack of deep understanding or clarity in their area of responsibility.
9 Questions Answered
Companies struggle to adapt because change is happening faster, making it hard for leaders to focus on external landscapes while managing daily operations. Additionally, leaders often grow up within one business, gaining depth but potentially losing perspective on how other industries have navigated similar shifts.
The most foundational aspect of any business is its people and culture. In mid-sized companies with limited resources, a strong focus on people, culture, engagement, and talent development is incredibly valuable for enhancing the business and driving long-term value.
Kanbrick evaluates talent by first identifying 15-30 mission-critical roles in a business and assessing if the right people with the necessary capabilities are in those roles. They also use interviews with structured questions to gauge understanding and curiosity, and then implement goal setting, KPI tracking, problem-solving training, and real-time feedback for ongoing development.
Kanbrick evaluates businesses through five lenses: Moat (competitive advantage), Market (growth rate and dynamics), Management (strength of the team), More Potential (unleveraged growth opportunities), and Margin of Safety (resilience against unforeseen challenges).
An attractive market is characterized by its growth rate (ideally above GDP and sustainable), and its dynamics, such as whether it's fragmented with consolidation opportunities, or if existing players are rational. Understanding these factors helps determine where a business can effectively compete and grow.
Kanbrick is conservative with debt, typically using 2-3 times leverage compared to traditional private equity's 4-6 times. They may also utilize seller notes, which are more flexible than bank debt, to maintain a higher margin of safety and avoid pressuring companies into short-term decisions.
A common mistake is skipping the in-depth scorecard process and jumping straight to writing a job description and interviewing. This leads to misalignment, ineffective candidate sourcing, and potentially hiring the wrong person, costing significant time and money in the long run.
Integrity can be evaluated through situational interview questions (e.g., 'Tell me about a time you made a mistake'), behavioral assessments, and thorough reference checks. Shifting the conversation from 'if I call your manager' to 'when I call your manager' can also encourage more forthright responses.
Quarterly reporting, especially in public markets, is often a net negative, fostering short-term thinking and incentivizing decisions (like moving sales into a quarter or offering discounts) that may not be best for the company's long-term health or investor value. While intended for transparency, it can distort behavior.
50 Actionable Insights
1. Prioritize Reputation Ruthlessly
Prioritize your reputation above all else, remembering that losing a shred of it is unforgivable, and apply the ’newspaper test’ to decisions: how would you feel if it were on the front page for your family to read?
2. Manage as Sole Family Asset
Approach business decisions by imagining it’s your family’s only asset and cannot be sold for 50 years. This embodies true long-term thinking and guides decision-making.
3. People-First Business Model
Start by focusing on people and culture, then define the business’s purpose and strategy, and only then focus on performance. This foundational approach drives alignment and ultimately creates the most value.
4. Embrace Long-Term Compounding
Value long-term thinking and compounding, and ensure your structure is set up to encourage this perspective. This creates significant value over time.
5. Build Role Scorecard First
Before hiring, create an in-depth scorecard for each role, outlining the mission, outcomes, and competencies required, and gain alignment with stakeholders. Skipping this step to save time upfront leads to costly mis-hires and wasted time later.
6. Hire for Integrity & Passion
Find and hire people with high integrity who care about their work, then provide them with the right incentives and encouragement. This fosters autonomy and high expectations.
7. Commit to Daily Learning
Engage in continuous learning and improvement every single day, as exemplified by Warren Buffett and the Berkshire ecosystem. This helps you get smarter and better over time.
8. Balance Short & Long-Term
While thinking long-term, ensure you also manage short-term fundamentals and immediate challenges. Neglecting short-term dynamics can prevent you from reaching your long-term goals.
9. Master Business Fundamentals
Prioritize doing the fundamentals well rather than solely focusing on grand strategies, as the best CEOs consistently excel at basic blocking and tackling. This is especially crucial in midsize companies with limited resources.
10. Evaluate with Five M’s
Assess business opportunities using the ‘Five M’s’ framework: Moat (competitive advantage), Market (growth and dynamics), Management (strong team), More Potential (unleveraged opportunities), and Margin of Safety (resilience to setbacks).
11. Adopt Integrated Business System
Implement a holistic, integrated business system, like those at Danaher or Toyota, where all components reinforce each other. This creates more value than isolated efforts.
12. Implement a People Calendar
Apply the same discipline to people management as to strategy or budgeting by creating a ‘people calendar’ focused on attracting, developing, and engaging talent. This ensures a holistic approach to supporting the organization.
13. Identify Mission-Critical Roles
In any business, identify the 15-30 mission-critical roles that create the most value and ensure you have the right capabilities for them. This helps assess talent needs and build necessary skills.
14. Proactive Talent Sourcing
Shift from reactive job postings to proactive talent sourcing, where hiring managers actively seek out desired candidates who may already be happy in their current roles. This helps find top performers who wouldn’t otherwise apply.
15. Augment Interviews with Assessments
Enhance the interview process with behavioral and cognitive assessments, case studies addressing real business topics, and in-depth ’top grading’ interviews that review every past role, outcomes, and manager feedback. This provides a comprehensive view of candidates.
16. Structured Panel Interviews
Implement a structured interview panel where each interviewer focuses on specific scorecard components like outcomes, functional competencies, or cultural fit. This avoids redundant questions and provides a more comprehensive assessment of the candidate.
17. Verify Manager Feedback
During top-grading interviews, ask candidates for their past managers’ names and roles, and explicitly state you will contact them for feedback. This often encourages more forthright and honest responses from candidates.
18. Seek Unprovided References
When conducting reference checks, seek out individuals not provided by the candidate, as these references are often more likely to offer insightful and unbiased information about a person’s character and performance.
19. Disarm for Honesty
Create an interview environment that disarms candidates and encourages them to be as honest as possible, recognizing that people naturally want to impress and may have blind spots about themselves.
20. Cultivate a Talent Bench
Maintain a talent bench of impressive individuals, including past interviewees and known contacts, for future roles or opportunities. This is a great way to cultivate talent and leverage relationships over time.
21. Define Employee Value Prop
Clearly define and communicate your employee value proposition, focusing on opportunities for learning, growth, and meritocracy. This attracts passionate talent, especially to businesses in need of transformation.
22. Ask ‘What Should We Do?’
Ask employees ‘What are we not doing that we should be?’ to uncover their innate engagement, excitement, and curiosity about the business, often revealing insights beyond their direct area.
23. Assess Fundamental Understanding
When evaluating talent, seek individuals who can clearly and crisply explain the ‘why’ behind their craft and business fundamentals. This indicates deep understanding, even if they don’t yet have all the solutions.
24. Tailor Communication Levels
Adapt your communication style and level of detail to the audience, recognizing that frontline staff excel at the ‘10-foot view’ of problems while leaders need the ‘30,000-foot view.’ This ensures effective conversations.
25. Diagnostic for Co-Creation
Utilize a diagnostic to assess an organization’s sophistication in areas like talent, strategy, and KPIs, then collaboratively build a roadmap based on shared understanding. This ensures a tailored and effective partnership.
26. Provide Strategic Frameworks
Serve as a strategic partner by collaboratively assessing opportunities and then providing the necessary skills and frameworks to execute those plans.
27. Address Midsize Business Gaps
Focus on solving common midsize business challenges: ensuring the right people are in the right roles, building strong culture and engagement, developing effective strategy, and driving accountability for execution.
28. Implement Systems Incrementally
When implementing new systems like KPIs, start with the executive team to ensure understanding and alignment, then roll it out incrementally to subsequent levels. Rushing implementation to the entire organization can be a huge mistake.
29. Provide KPI Problem-Solving
When introducing KPIs, provide employees with problem-solving training and guidance on how to achieve them, rather than assuming they will figure it out independently. This makes implementation more effective.
30. Build Trust Before Feedback
Before implementing 360-degree feedback, ensure the organization has established trust, psychological safety, strong communication, and transparency. Without these foundations, feedback can be unproductive or defensive.
31. Continuous System Improvement
View business systems as living and breathing, constantly improving them through reflection after each partnership and learning from others. This ensures they remain effective and adapt to new challenges.
32. Conservative Leverage Approach
Adopt a conservative approach to leverage, typically two to three times, to maintain a margin of safety and avoid situations where everything must go perfectly. This prevents undue pressure and short-term decisions.
33. Invest in Inflation-Resistant Moats
Seek businesses with strong competitive moats that allow them to pass on inflation costs to customers, making them more insulated from economic pressures.
34. Boost Productivity Annually
Combat inflation by consistently improving business productivity by two to five percent annually through disciplined efforts. This helps offset rising costs.
35. Focus on Business Fundamentals
Avoid trying to predict or invest based on macroeconomics; instead, focus on finding high-quality businesses with good fundamentals at reasonable valuations. This approach helps absorb dynamic market changes.
36. Target High ROIC Businesses
Seek businesses that generate a high Return on Invested Capital (ROIC), with great businesses typically achieving 50% or more. This quantitatively indicates a strong competitive moat.
37. Prioritize EBIT Over EBITDA
When assessing earnings, primarily use EBIT (Earnings Before Interest and Taxes) because depreciation and amortization are real costs, and relying solely on EBITDA can give false confidence about a business’s true cash generation.
38. Seek Low Capital Businesses
Identify businesses that do not require a lot of capital to support their earnings, as these often represent the best businesses.
39. Analyze Market Attractiveness
Assess market attractiveness by analyzing its growth rate relative to GDP and understanding its dynamics, such as fragmentation, presence of dominant players, and opportunities for consolidation.
40. Reinforce Your Business Moat
Regularly assess your business’s competitive advantage and actively work to reinforce and strengthen its moat, especially in the face of disruptive forces like AI.
41. Three Ways to Use AI
Utilize AI in three key ways: enhance internal efficiency and productivity, identify industries and businesses where AI strengthens competitive moats, and within portfolio companies, apply it to structured management aspects and improve productive workflows.
42. Gain Operating Experience
To become a better investor, actively operate a business to gain hands-on experience beyond just boardroom discussions. This provides a rare perspective on what it takes to grow and sustain companies.
43. Cold Outreach for Learning
Write letters to CEOs and experienced professionals, especially as a student, to ask for their time and pick their brain. People are often willing to help young individuals, providing access and learning opportunities.
44. Start Small, Learn Business
Engage in small business ventures, like a farmer’s market stand, from a young age to learn fundamentals of supply, demand, pricing, and building repeatable, scalable systems. This improves odds of success and provides valuable learning experience.
45. Foster Foundational Skills
Create environments, like a farm, for children to learn work ethic, commitment, and problem-solving skills from a young age. This provides valuable life lessons and independence.
46. Assess Job Fit Regularly
If you’re not having fun four out of five days in your work culture, it’s likely not the right fit, and you should consider moving on. This ensures commitment and engagement in your role.
47. Demand Cultural Alignment
Leaders should clearly set culture, expectations, and an operating system, then require employees to align with it or choose to leave. This ensures a committed and engaged team focused on results.
48. Beware Quarterly Reporting Pitfalls
Understand that quarterly reporting, especially in public markets, can be a net negative, fostering short-term thinking and incentivizing decisions aimed at immediate results rather than long-term value.
49. Cautious Public Political Stance
CEOs should be very thoughtful and cautious before publicly expressing political opinions, especially on divisive topics where customers or employees may hold differing views.
50. Leave Things Better
Define personal success as leaving everything you touch—companies, people, and family—better than you found it, building impactful lives and creating value for yourself and those around you.
5 Key Quotes
If you're not having fun four days out of five in this new culture and environment, it's probably not right fit for you. And we encourage you to move on. We'll promote you to customer, whatever it may be.
Tracy Britt Cool
If you lose money, I'll be understanding. But if you lose a shred of reputation, I'll be ruthless.
Warren Buffett (quoted by Tracy Britt Cool)
I think that oftentimes we think of the big things we could go do, you know, what should the strategy look like? Or what's the future vision of this? Or what's it going to mean? Versus how do we do the fundamentals and do the fundamentals well?
Tracy Britt Cool
Leverage amplifies returns on the upside, but also on the downside. And so we want to have a bit more margin of safety. We don't want to put the company at risk.
Tracy Britt Cool
Finance is just a vocabulary and a language that people, if explained to, can understand. But if you've never been explained to it, it can be tough to understand.
Tracy Britt Cool
2 Protocols
The WHO Process for Hiring (Augmented)
Tracy Britt Cool- Build an in-depth scorecard for the role, detailing the mission (specific, time-bound, measurable), 3-5 clear outcomes, and necessary functional and cultural competencies.
- Share the scorecard with stakeholders to ensure alignment and address disagreements early in the process.
- Implement proactive sourcing by having the hiring manager or recruiter actively seek out desired candidates, rather than just posting the job and waiting for applicants.
- Conduct a structured selection process including a screen by the recruiter, a deep dive interview by the hiring manager, and an interview panel where different individuals focus on specific outcomes, functional competencies, or cultural fit.
- Augment interviews with a behavioral assessment (for motivators/drivers), a cognitive assessment (for aptitude), and a case study (deep dive on real topics).
- Perform a top-grading interview (90 minutes to 3 hours) going through every past role, scope, outcomes, performance, and asking what past managers would say about strengths and development areas, shifting from 'if I call' to 'when I call' for honesty.
- Verify information through reference checks, including those not provided by the candidate, to gain a comprehensive understanding.
Kanbrick's Post-Close Playbook for New Partnerships
Tracy Britt Cool- During diligence, conduct interviews with 70-75 people in the business to understand their views on the industry, business, and biggest opportunities.
- Upon closing, use a diagnostic tool to assess the company's self-diagnostic on frameworks like attracting/developing/engaging talent, strategy, KPIs, and budgets.
- Collaborate with the management team on a strategic planning process to define the future direction, identify opportunities, and address challenges.
- Simultaneously assess and build necessary capabilities and roles to support growth, such as expanding into new markets or pursuing acquisitions.
- Develop a detailed roadmap for the first 12-18 months, outlining joint actions and goals.
- Provide resources and frameworks through the Kanbrick Business System (KBS) team, assisting with KPI implementation, budgeting, resource allocation, and talent development (e.g., leadership training, quarterly town halls).
- Act as a strategic partner, offering outside perspective and asking probing questions to co-create a shared vision, without taking over CEO/CFO roles.