The Power of Why: Brad Morehead on Leadership Shore

Anderson Williams: Welcome to Bigger, Stronger, Faster, the podcast exploring how Shore Capital Partners brings billion-dollar resources to the lower middle market. In this episode, I talk with Brad Moorhead, partner and head of the business services fund at Shore Capital Partners. Brad is obviously an investor, but he’s also been a CEO, a CFO, a business professor, and has built and run his own companies. 

Brad, like all Shore Capital leadership, is always looking for that next edge, that next learning, that next way to get better as a leader and an investor. In that spirit, we talk today about business models and what you can learn and share from companies in vastly different industries but with similar business models. 

More significantly, he talks about what you can learn and share across a portfolio of nearing 70 companies: skills, tools, technologies, customer acquisition strategies, and so forth. Brad talks about how models can evolve and the importance of leaning on the experiences of Shore Capital board members who have lived and led those changes before. 

And as we wrap up the conversation, Brad shares his own lived experience when his company was acquired and the challenges that came from trying to integrate business models, even though the two companies were in the exact same industry, even though the acquisition premise took these differences into account. 

Brad compares the reality to trying to build something by bringing Legos and an Erector Set together. They both build and build well, but in very different ways Welcome, Brad. To get us started, will you just introduce yourself and say what you do here at Shore? 

Brad Morehead: Great. Glad to be here. Brad Moorhead, head of the Business Services Fund at Shore Capital, and excited to be talking with you about this subject and some of the changes that are going on.

Anderson Williams: Yeah. And you’ve played a lot of roles. You’ve been a CFO, a CEO, an investor, obviously here at Shore. When you think about business models, how do you think about them? Because it feels like something that’s a deceptively simple idea or perhaps an academic idea. You’re also a professor. How do you think about business models just at the highest level?

Brad Morehead: I think what we’re seeing is that regardless of industry, certain companies share the same tools and methods of using those tools, no matter what type of market they’re going to. And then being able to take those companies that share those tools and those same methods of using the tools and let them help each other, even if one is serving pet owners and the other one is serving people that want to eliminate pests in their home, right?

Yeah. Which is kind of ironic, maybe that, uh Yeah … one’s trying to keep their pets healthy, one’s trying to get rid of bugs. Yeah. But I think, you know, when you have something that’s B2C, you can use some of the same tools to go acquire those customers. And in the end, right, that’s really what we’re trying to do is how do we acquire customers for cheaper and make our relationship with those customers more valuable?

Anderson Williams: Yeah.

Brad Morehead: And looking for those ways that there’s interconnectedness between the different business models and where those companies can help each other out is, I think, a big part of what Shore tries to do with its tools in the village of resources and experts that it puts around its companies.

Anderson Williams: And is it oversimplified to say that at its core, the business model is how the company makes money, how it serves customers?

Brad Morehead: Exactly. I think it’s the unit economics of how efficiently do you acquire customers and how do you grow your relationship with that customer in the most profitable manner, right? And if you can do that well, then you can make a lot of money. But that comes back to the unit economics and how do you efficiently build those customers and that customer base for that company’s particular industry.

Anderson Williams: And you lead business services investing for Shore.

Brad Morehead: Mm-hmm.

Anderson Williams: Just within that, in thinking about a thematic vertical, can you give an example of a couple of the different types of business models that you see, even in a common vertical just within, uh, your own investment portfolio?

Brad Morehead: Let me start with one that’s a common discussion that we have in some of our B2B businesses, right?

And that’s do you go direct or do you go through a channel partner? And that is something, especially in the B2B world, that a lot of people have to think about. So some of our IT consulting and services businesses, you may need to go through one of the software or product companies to get introductions to some of the clients, but you may also wanna have a direct channel, which in some ways might offer multiple products and compete with the other channels.

So how do you handle that, right? That’s a very specific discussion that applies to those B2B companies that have that particular model within their industry that really doesn’t apply to some of the B2C companies or other companies that are only direct in their industry. So we wanna get those companies together, no matter what the end market is they’re serving, whether it’s food and bev or industrials or business services, and let them have those conversations about what are the pros and cons of both types of models.

Which one do you start with? A big part of, I think what we do at Shore is we look for companies that are a similar age and stage, and we say, “Hey, we focus on the microcap,” and so those companies are this age and stage. This to me is the next iteration of that which is now we’re taking companies that are at a similar age and stage and with a similar business model, and so we can further refine it.

‘Cause now we have a portfolio of 70 companies to choose from, and so we can break those into smaller groups that can help each other out more, ’cause not only are they at a similar age and stage, but they also have a similar business model.

Anderson Williams: And is it fair to say, uh, you know, you’ve seen a lot of companies grow and evolve, not just within Shore, but elsewhere. 

I mean, the business model for the most part stays the same. Is that fairly accurate? 

Brad Morehead: I think for the most part, but there is an evolution that happens, right? One phase that you might see is you go from founder-focused selling, right? It’s the founder of the business. They built the business from scratch. 

They took it to a certain level, but they couldn’t quite take it to the next one. Now we have to professionalize that, and we have to take it into an enterprise level for scalability and to actually build value in the business. So, you know, I think the business model, or at least the go-to-market motion can change. 

I do think there are other businesses we have where we are trying to change the business model a little bit. Certain businesses, maybe H2Ocare is an example, maybe Dillard is an example as well, where we’re taking businesses that were traditionally install or break/fix businesses, and we’re converting them to have a much higher degree of recurring revenue or maintenance revenue. 

That’s transformational, right? It’s a much more valuable business when you have a higher degree of recurring revenue as opposed to just installation project-based revenue or break/fix revenue that occurs ad hoc. 

Anderson Williams: Yeah, that makes sense. From the perspective of, you know, Shore, we, we obviously invest in the microcap space. 

We are hands-on. We’re in the operations with these businesses. We’re talking business models, but from where you see… Let’s just take one of those examples, that shift for an H2Ocare or a Dillard. How does that shake out in the day-to-day in how you structure a company based on that business model? 

Brad Morehead: Yeah. 

I think as you’re potentially shifting some of those business models, you’re gonna create the org structure a little bit differently, right? I love for our companies to say, “All right, what’s your org structure right now for what you have?” Then think about what is your org chart and your org structure for what you want it to be. 

If you’re moving to a recurring revenue and maintenance agreement type business, you probably need a lot more in account management than you may have had when you were an installation break/fix project type business. So think about that future state org chart. Then come up with what’s your transition org chart- Mm 

and org structure in the middle ground, and then you can have a good idea of, right, here’s where I am, there’s where I’m going, but then there’s this middle step in here, and then you can start to design your systems and your processes around that. 

Anderson Williams: Yeah. 

Brad Morehead: And I think a great source of information on this are our board members, right? 

Some of them have been through those transformations of businesses before, and it may be someone who’s on a board of a different company. It may be someone from a different industry, where you look for an analog in, in a different industry about how they did that transformation. HVAC, I think the entire industry has been going through that over the last three, four, five years, maybe plumbing too, as some of those trades say, “Oh, wow, you know, how can we make that transition and get to more of a subscription or membership services model?” 

And I would encourage, you know, our teams and our executives to say, “All right, well, how do I add a board member who’s done that?” And maybe there’s someone in the home security industry where recurring revenue has been something that’s commonplace for decades. Bring that person onto your board ’cause they know that business model, and they know what that future state org chart needs to look like when you wanna get there and, and they also know how you wanna get there. 

Anderson Williams: Yeah. And I think what’s implicit in that is when you’re thinking through the lens of the business model, whether you were in HVAC or in home security is less important to how you build and grow and structure a company than did you have that same recurring revenue business model. Yeah. I mean, is that fair to say? 

Brad Morehead: Yeah, I think that’s fair. Lots of things are gonna change, right? The org structure is gonna change. The financials is gonna change. You may have some startup costs as you evolve some of these business models. I think a big thing is your KPIs, like how are those gonna change? Whether it’s are we winning or whether it’s the other KPIs you use to actually manage the business maybe more completely or holistically, I think that you’re gonna maybe emphasize certain things more, right? 

A big thing, you know, you might start to look at for some business models is attach rate, right? Attach rate for other services or cross-sell rate or your recurring revenue attach rate. So not that that’s the only business model, but I think it’s a good example of when we look at business models, how we can start to think about managing some of those transitions, and especially from things that are project-based or one-off revenue over to a recurring or a maintenance style revenue base. 

Anderson Williams: And how has that or does that thinking, you mentioned before some entire industries that are starting to shift their traditional business model. How do you and the rest of the investment team look at markets differently when you think through the business model? When you’re trying just to explore, “Here’s an area we want to invest. 

This seems like an attractive market,” where does the business model pattern play a role in that first level of exploration? 

Brad Morehead: Yeah. I think this is going to help us at Shore be able to look for some of those patterns that we see in other industries, right? And so to continue maybe the example, right? All right, this is what happened in home security. 

Then you’re now starting to see that happen with HVAC. Then you’re seeing plumbing. Now you’re seeing bundling of services, right? So you’re taking some of those patterns and what’s happened with those multiples in the industry. As the quality of revenue, the predictability of the revenue, the predictability of the cash flow gets better, the multiple tends to go up. 

And then you’re able to identify opportunities where maybe it hasn’t yet happened in an industry, buy at the lower multiple because there’s a lower quality of revenue, and then with your team, using other companies and other industries with the business model you want, maybe not the business model you have, look for opportunities to really get a bump in multiple at exit. 

Anderson Williams: Well, and that even goes back to my question about the stability of the business model. That would even suggest that there’s an opportunity actually for markets that haven’t shifted but need to shift to actually invest to make that, to help expedite that shift. 

Brad Morehead: Yeah. Yeah, for sure. 

Anderson Williams: Yeah. 

Brad Morehead: And I think, you know, we’re also going to start to see tools that can be shared in ways that maybe we didn’t see before, right? 

We’re starting to see that I think a little bit with some of, um, our B2C businesses where there’s an opportunity to use an AI-enabled tool to handle after-hours calls, texts, emails, so that you don’t lose that kinda after-hours revenue because you were slower to respond. Well, it doesn’t matter if you’re serving the healthcare market with, you know, a dental appointment or a vet appointment, or if you’re serving the pest control market, right? 

You still need that tool. And I think we’re gonna be able to share that more readily across some of the business models and have better conversations, whether it’s in our Monday morning meetings or our board meetings, because we’ve been able to recognize those patterns faster across business models that have commonalities.

Anderson Williams: And how do you think about… I mean, you’ve obviously got a ton of industry experience. You’ve got a ton of investment experience. How do you think about teaching this? I mean, you’re also a professor, so there’s the sort of academic side of teaching this. But when you think about cultivating the next wave of investment professionals within Shore, how do you teach that to somebody who’s young and doesn’t have decades of experience? 

Brad Morehead: Yeah. There was a mentor of mine, Spencer Fleischer at FFL, and he was really, really great, I think, at this when this type of situation would come up. It was pretty simple, but I would just watch him work, and it was the power of why. He would just dig in with thoughtful and genuine questions. And so when someone gives you that pushback and you say, “Well, tell me why it didn’t work,” you know, “Tell me more about what happened and why,” it does a couple things, right? 

One, it helps you get to the root cause of what actually was the issue, so it helps educate and inform you. But it also validates what they’re saying as opposed to being dismissive, right? ‘Cause when they say, “Oh, we tried, it didn’t work,” they’re sort of being dismissive of your idea. So instead of reciprocating with being dismissive, right, he would drill them with, you know, more thoughtful and genuine questions. 

And so I think the power of why and asking that helps you validate them, open them up, show that you care about their opinion, but also helps you learn more about, you know, what’s different this time. And then you can say, “That’s really interesting,” right? “And I see why you tried that. I understand it didn’t work. 

You know, what about this, if we did it this way or tried this? You know, why is that the same or different than what you did?” And it helps open some doors to, um, maybe be able to get some better change management and people management as you, uh, evolve the business model. 

Anderson Williams: So there’s the sort of learning the industry, but there’s also learning the patterns of how founders in an industry think, and perhaps even for some of our founders that have really been around a while, eras of an industry. 

Brad Morehead: Mm-hmm. 

Anderson Williams: It feels like that is as much a learning opportunity for those younger investment professionals as anything. 

Brad Morehead: Yeah, I, I think so. And getting really good at asking really good questions is another thing that I think could be a superpower for some of our investment professionals. And again, this mentor of mine, he was so good at it, and it does… 

It’s just a magical tool because it, it opens a person up, it validates their thoughts. And the cool thing is you can have your opinions, but when you’re asking why, you can’t be wrong when you’re asking a question. I love that. And I think some of our junior people, right, they’re earlier in their careers, and they may be nervous about being wrong, and it’s actually empowering to just get really good at asking questions ’cause you can’t be wrong. 

So I think you can go deeper, you can go a lot further in some of your questioning because you’re not having to put out a hypothesis, you’re just trying to learn. And in the end, that’s intellectual curiosity. I think that’s one of the things that I’ve seen from other people that I respect a ton when they just have that genuine, you know, drive and intellectual curiosity to truly want to learn why something worked or didn’t work. 

And the ability to dig in and ask thoughtful questions in a sincere manner is something I want to develop even better, and I hope others do ’cause I, I think it becomes a superpower as an investor. 

Anderson Williams: On the flip side of that, if someone is listening who’s a founder and is open to the conversation of a partnership with Shore or otherwise, any advice on how they think about or communicate or otherwise their own business model prior to entering this kind of conversation? 

How would you advise someone who’s a founder thinking about a partnership to just think through and prepare for that? 

Brad Morehead: One of my favorite questions Justin asks is, “If I gave you an incremental million dollars of capital, you know, where and how would you spend it?” And I think that’s always a fun one to see what does that founder think about, right? 

‘Cause they face pressures, limitations, and obstacles, whether it’s capital or people, they face those obstacles all the time. And so getting them to sort of take off the blinders that you have to have, right, that I had to have when I was operating and running my own business- For sure … right, and just say, “Wow,” right? 

“What would it be like if I, you know, had an extra million dollars of capital? Where would I do it?” And so that gets you to go and think sort of… There’s a book, The Goal. It talks about theory of constraints. A lot of people- Mm-hmm … have read that and seen it, and I, I find it really valuable, but it gets you to think about sort of bottleneck analysis. 

What is the bottleneck of growth for your business? There’s only one bottleneck, right? But if you can systematically eliminate that bottleneck, then the next bottleneck, then the next bottleneck, you should grow. As long as there’s enough demand in the market, you will grow if you systematically eliminate bottlenecks in your business and increase the throughput. 

Anderson Williams: Yeah. 

Brad Morehead: If there’s not enough demand, that’s a whole ‘nother problem. Yeah. But getting people to think about that in that manner, I think helps you start to understand, all right, where are the opportunities in this business? And sometimes the answers are, “Well, if I just had more salespeople,” right? Okay. So let’s talk about it. 

Tell me, what does the average salesperson do, right? How many leads do they handle? What’s their closing rate? What’s their pipeline look like? What’s the velocity of sales? Then you can dig in on some of those. Or sometimes they’ll say, “If I just had another warehouse or another plant,” or, “I need, you know, another technician truck.” 

All right. Well, those are pretty solvable problems, right? Technician truck, that’s about one of the easiest problems to solve, right? Let’s go lease a truck today. But questions like that, open-ended, that allow you to really explore where are the bottlenecks in the business and the business model and compare it to other business models and how we’ve solved that, I think help really reveal some of the opportunities to build and grow that business for that founder seller. 

I think Brent at Action Pest, AXN, he was amazing. I remember one of our first meetings and, um, we go in and we’re in the conference room and we’re asking him some questions like this, and he’s like, “Well, I can just show you,” right? And he whips out his computer and pulls up his dashboard, and he has all of his metrics in there, and he’s like, “Well, this is what our salespeople are doing. 

This is the leads. This is the conversion rate.” It’s like, oh my gosh, that’s amazing. And I think there’s huge value in that, right? ‘Cause you’re like, all right, this guy, he gets it. He knows how he is creating customers efficiently, and he knows how to maximize value in those customer relationships. So, you know, there are ways to do it. 

It, it doesn’t have to be super complicated. It can be a lot of different types of businesses and business models. But just having that understanding of, you know, how do you create customers efficiently and how do you maximize value for those customer relationships is a, a huge step forward even in, you know, some of its most simple terms.

Anderson Williams: What other parts of this story do you think would be useful from an internal Shore audience perspective and potential partner perspective about how we’re thinking about this? 

Brad Morehead: I think this focus on business models is really important, not just for the opportunities that it will help us spot or the value it will help us create, but I, I think it’s also helpful for mistakes it will help us avoid For example, you know, a couple businesses I’ve been involved with, one had negative working capital, which is actually a good thing ’cause you’re financing your growth with the customer’s money. 

So that’s great, as long as you’re growing. If it’s a seasonal or cyclical business, if you have negative working capital, then there’s all of a sudden this whipsaw effect with your working capital, and it can really come back to bite you. And that business model exists. Knowing that business model, knowing what can happen in that business model with a later-stage company and an earlier-stage company, I think that’s something that would be really valuable to share across that type of business model where some have customer deposits or prepaids or whatever else that might come in that are related to that business model. 

There are a few different businesses like that in our portfolio, so I think sharing that, whether they’re healthcare end markets or consumer or industrial, that’s one example. The other one is companies that maybe have a, uh, upfront subsidy that goes to acquiring new customers where it costs you more than you take in to acquire that customer, but you make it up over the life. 

Think like a cell phone, right? Like, they subsidize you to go buy the cell phone, and the cell phone they say is free, but then they make it up ’cause they charge you $200 a month for however many years until you switch away from AT&T, you go or whatever- … or Verizon or whatever. So that has very different working capital implications. 

Mm-hmm. And so being able to watch out for that, ’cause you can actually grow yourself out of cash when you have that type of model. So I think looking for some of those things in the business model groups that we’re putting together where it’s not just the opportunities, it’s not just the upside, but it’s also the gotchas and the watch-outs and the landmines that we have to be careful of will help us prevent some of our companies from having some of those challenges. 

There was one other thing I was gonna mention, and I think it highlights a little bit of the business model, and this is a personal experience. So when I sold my security business, we were purchased by a strategic buyer. We served the exact same industry, but we actually had totally different business models. 

Now, that was part of the reason they wanted to buy us is ’cause we had a different business model, right? We were direct to consumer. We were shipping things online. It was all wireless. Again, just very, very different business model that we had borrowed from lots of other e-commerce and, and other types of, of business models. 

And I think they came in with a much more traditional dealer agent-focused business model. And I think they didn’t appreciate, even though we served the same industry and even though they wanted this to be, you know, an extension into this new part of the market, I don’t know that they fully appreciated how different the business models were even though the industries we were targeting were exactly the same. 

And there’s probably more to unpack there in other ways. Yeah. But as we were talking, it just came to me as like, “Oh man, I, I think I lived through this,” right? You lived that. You lived that. Where, where it was the exact same industry- Yeah … but totally different business models, and the challenges that come up from that are sometimes even harder than you realize. 

Yeah. And look, they were great. They’re great people and, you know, still talk to them, you know, to this day, but I don’t know that all of us realized just- Yeah … how different the business models were- Yeah … until we really got in and they’re like, “Well-” You know, you pay that commission, but, you know, we pay this and you pay… 

It’s like the business models were totally different. Yeah, 

Anderson Williams: yeah. 

Brad Morehead: Right? And look, fine- And 

Anderson Williams: had they, had they been security versus healthcare, everybody would’ve seen it. 

Brad Morehead: You would’ve- 

Anderson Williams: You would’ve never brought them together. 

Brad Morehead: Right. 

Anderson Williams: Right. 

Brad Morehead: Exactly. And look, they still knew, and, and again, like- Of course … that’s, it’s not that they didn’t know. 

Like, we all knew, but it’s when you’re then day to day in it- Yeah … you appreciate business model matters- Yeah … is kind of my point, right? Yeah. And you need to really dig in and understand that. And so even when it seems like it’s the same on the industry, and we were in the exact same industry, we had different KPIs, we needed different org charts, and you can’t kind of put those together in exactly the same way. 

It’s like, I don’t know, maybe when I was a kid trying to put Legos together with an Erector Set. Erector. Right? And it’s like, that, that doesn’t- Yeah … that doesn’t work. 

Anderson Williams: They both build things.  

Brad Morehead: You got it, right. They both build things. Yeah. You put it together, you have instructions, but, like, they don’t go together- Yeah 

’cause they’re, they’re very different models. 

Anderson Williams: Yeah. 

If you enjoyed this episode, be sure and check out our other Bigger, Stronger, Faster episodes as well as our Microcap Moments and Everyday Heroes series at shorecp.university/podcasts or anywhere you get your podcasts. There you will also find our newest series, Raw Talent. This podcast was produced by Shore Capital Partners with story and narration by Anderson Williams, editing by Reel Audiobooks, sound design, mixing and mastering by Mark Galup of Reel Audiobooks. 

Special thanks to Brad Moorhead.