Weekly Thoughts


Weekly Thoughts: Tax or Return?

Here is something that caught our eye this week:

Tax or Return?

At Chenmark, we try to maintain a bias for action. This means we attempt to drive toward decisions with an eye toward championing those initiatives that will earn a return (make things better), while trying to identify and eliminate those things which will result in a tax either now or in the future. Importantly, we don’t necessarily mean ‘return’ or ‘tax’ in the traditional finance sense of the word, as benefits or costs can manifest themselves in many forms across many time frames.

For instance, some of our companies have under-invested in vehicles for prolonged periods. While we knew about this during diligence, we underestimated the impact of fleet neglect on morale and business continuity and are currently in the process of paying down what we think of as an ‘under-investment tax’ by implementing comprehensive fleet management plans across the board. We have also had experience with a company that suffered from a lack of leadership and investment in its people, the consequence of which was an employee base whose morale was battered and beaten, resulting in apathy and turnover. Consequently, new leadership has spent considerable time and money putting in place new training systems, operational processes, and recognition programs in what we think of as working off a ‘culture tax’ associated with the old regime.

Conversely, ahead of a snowstorm, some of our companies will prepay subcontractors as a show of good faith. Although not contractually required, and not the best way to manage working capital, optimizing for a “return on happy vendors” increases subcontractor loyalty and job performance during times of extreme weather. Another one of our companies has spent the majority of the last six months grinding through the implementation of an ERP system and a Food Safety program both of which, while painstaking to execute, will create returns related to business intelligence, consistency, and scalability.

As we gain more experience, we have noticed that decisions to follow the path of least resistance generally result in a tax somewhere down the road and that the hardest decisions usually end up making a return, a sentiment echoed in a recent blog post from venture capitalist Fred Wilson:

“I spearheaded quite a few restructurings this year…. It was a year of hard decisions and hard conversations. But as I sat in my office and read through the reports and decks, what came across loud and clear was that we had made a bunch of right decisions. A lot of companies that were wandering in the wilderness are now headed in clear and exciting directions. I continue to feel badly for the people who lost their jobs or quit their jobs in the wake of these restructurings. I realize that many of them had a hard year too and I am sorry for that. But I feel great for the companies who have been revitalized and for the people who are working in them with a jump in their step and a feeling of optimism and purpose. This time last year I had a bad feeling in my gut and was having trouble sleeping. I knew what I had to do and dreaded doing it. Right now, I have a good feeling in my gut and am sleeping like a baby. That is a nice return on hard decisions.

For the Chenmark team, the tax and return framework allows us to process the various events that occur while managing a growing portfolio of operating companies. As we use this framework, the key is to hold each other accountable for making the decisions that will lead to long-term positive results, while also making sure we can manage our way through the various taxes we will inevitably have to pay whether the currency is monetary, emotional, or sleep-related.


Weekly Thoughts will return in 2018. Have a great holiday,

Your Chenmark Capital Team

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