Sam Zell on Operating

Have a Problem Solving Mindset:

“In my definition, an entrepreneur is someone who doesn’t just see the problems, but also sees the solutions, the opportunities.”

Entrepreneurship is not a profession, a degree, or a title… it’s a mindset. And that mindset is mostly focused on problems. Companies are started by solving a customer’s problem, and they get better by solving employee, customer, and industry problems. A problem solving mindset is the key to building and improving.


Make Decisions Based on Numbers not Sentiment

“… I make a point of shutting out the noise, doing what makes sense to me”

Often the best opportunities are sitting right in front of you… they just look weird, insignificant, or like hard work. A great operator develops a knowledge of their industry and business, and then uses this to skillfully turn problems into cash.


Long Term Relationships are Key

“In any negotiation, I believe in leaving a little bit on the table. And in any relationship, I believe in sharing the stakes.”

Often, within in an industry, you’ll deal with the same people over and over. It’s critical to remember this and build relationships with people where they will want to work with you again and again. Removing the need to build trust or prove it, allows for faster and faster growth.


Business A Puzzle, not a battle

Your approach to business is everything, and for Sam Zell, his lens as a puzzle. This fostered his ability to focus on the problems and come up with unique solutions rather than on the people and wage war. This also feeds into the previous lesson on building relationships.


Value Multiplication through Combination

When looking at combining properties in his college town, he realized that separately they were worth little, but the simple act of doing the hard work and buying a whole block could lead to the parts being worth more put together since a developer could buy the block and build student housing. This concept occurs over and over in operator where you get efficiencies or value increases from simply combining like but smaller parts.

This same thing occurs in the business world. Once your EBITDA gets above 5 million or so, you can get a higher multiple on that business. So, combining 2, 2.5 million dollar businesses gets you a value bump from nothing except combining them.


Market Stratification

Different parts of business, products, and assets are worth more to different parts of the market. This example surfaced with William Zeckendorf who developed many buildings along Chicago’s miracle mile. William realized that by looking at the whole of the business, each part was worth more to different people. So in order to maximize value of an asset or operation, understand who will pay for what, and sell to the highest bidder.


Scarcity Leads to Irrationally high prices (and margins)

“You can be a genius, but if there’s a lot of competition, it will not matter”.

He first realized this when he could buy magazines as a kid in Chicago, and sell them to his friends at massively inflated prices in the suburbs… when there is no supply, there is also no cap to prices.

Choosing to work in supply constrained niches will give you a value boost in your work beyond what might be rational. Avoid auctions, bids, highly competitive commodities, excess supply situations, or heavy competition where possible.


Redundancies and Waste

Like Sam did with Itel, you can boost value by cutting out expenses that are not revenue related. Over time pretty much any business starts to acquire assets, bills, and other expenses that don’t directly drive revenue. A savvy operator can boost EBITDA through asking this about each expense: Is this necessary to drive revenue and deliver our product or service. Sometimes it’s obvious, like with Persian rugs, other times it’s just excess software.

Another operating play, and way to increase value through summation, is to cut redundancies. If you have two companies, and they both have an AR department, you only need 1, so cut 1. These gives you an immediate margin boost.


Recession vs Expansion

There will always be tough times in any industry. During these times, assets will go for far cheaper than normal. If you can wait and have dry powder ready, you will be able to build a small empire in a short amount of time. Sam did this a few times in the industry, and it allowed him to scoop up prime assets far below their actual value.

Expansion are a time to maximize cash flow so that you can really build on the downturn that inevitably always comes.


Replacement Value Plays

Buying assets below replacement value is a way to build your operation. If you can acquire a company which has equipment for cheaper than the equipment itself, you get the equipment PLUS customers and cash flow. This is far superior to buying new equipment or building. Buying at below replacement value almost always is an opportunity to utilize that asset, wait for the right time, and make money off the spread.


Buy from bad operators

If you are a good operator, there is opportunity in buying from bad operators and fixing. Like Sam bought Arthur Cohen, you can buy a bad operation and fix it, and capture the value of a decent business.


Know your counterparty incentives and end goals

Knowing your counter parties incentives and motives, gives you the knowledge to be able to create win-win scenarios. This goes for acquisitions, financing deals, and any other deal. The more you know about the other side, the more creative you can get!


Optimize for Fun not Profit

The money will come, make sure you are having fun and staying challenged.


Partnership Breakdowns

Sam was pretty clear on this: 50-50 partnerships are the only way. Find someone who is your counter, build extreme trust and respect, and build with that partner for life.


Tax Law Opportunities

Changes in the details that few watch often present your best opportunities. Changes in how you could carry forward net operating losses created a massive opportunity for Sam to buy assets and realize losses from past history to offset any gains. These tax benefits then covered his costs and gave an immediate return on his purchase.

Staying in the details of your industry will allow you to play a game that few if any others are playing. And when there is little to know competition, you win.


Overall, Sam operating on a few key principles that would serve any and all operators well:

  1. Have fun
  2. Build long term relationships
  3. Treat everything as a puzzle to be solved
  4. Know the details of your industry better than anyone
  5. Make decisions by the numbers, not the sentiment
  6. Increase value by
    1. Combining together
    2. Cutting redundancies
    3. Removing waste
  7. Problems are opportunities… recessions are opportunities - so be ready with cash, time, and relationships.

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