Jack Stack Explains What He Loves About Recessions

Even before the Great Recession ended, Stack, CEO of SRC Holdings, started planning for the next recession. And now he’s doing it again.

By Saul Elbein

In 1983, Jack Stack led a group of 13 employees in the buyout of a Springfield, Missouri engine factory that International Harvester was preparing to shut down. In the almost 40 years since then, the company Stack created, SRC Holdings — its main business is remanufacturing engines – has evolved into a highly entrepreneurial mini-conglomerate of diverse companies with more than 250 employees and more than $600 million in annual revenue. Much of that success can be traced to Stack’s adoption of “open-book management,” which stresses sharing the employee-owned company’s financials with employees, teaching them to understand what drives profitability, and giving them a real stake in the outcome.

But there’s also been another factor. Early on, Stack learned to see recessions as opportunities, using each one since 1983 to buy assets, shift strategies, and transform the business. In 2010, as SRC emerged from the Great Recession, Stack created a plan to set aside $100 million that would serve as dry powder for the next recession. Back then, he figured it would likely hit somewhere around 2020. In a conversation that’s been edited for space, we talked to Stack recently about how that worked out.

You guys are well known for keeping cash on hand so you can make big investments during a recession.

We’ve been in four recessions in the last 30-some years, and historically what has happened to us is we’ve been able to really make great acquisitions. And what we’ve learned over a long period of time is that when you’re ready to hit a recession, that’s the time you want to redo the company. And when we have done this in the past, we’ve been in a position that doubled the value of the company five years after each recession. And since the value of the company is spread across all our employees, because we’re employee-owned, they’re thinking long-term the entire time.

Tell me about that first recession. That one must have been really hard, because you guys had taken on so much debt to buy the company.

Oh yeah. We had to suck it up. We borrowed $9 million and only a hundred thousand dollars down. And our original loan was at 18-percent interest. So we had about a million in interest expenses our first year or so. We hated that. So we put a program together: If we can get the debt down to 1 million bucks at 18 percent, that’s $360,000. We’ll give [employees] $180,000 to split up amongst yourselves and another $180,000 to the profit line. Six months later, they’d dropped to $1 million of inventory. We think, we’re done. We’re the smartest guys in the room.

That first year, I’m on a shop floor, and the janitor comes up to me. He goes, ‘You told us that equity was all about job security.’ Yeah, sure. He said, ‘I looked at your receivables the other day. Seventy-six percent of your receivables is in the truck market. The truck market has a recession every six years. So you’re gonna lay us off anyway. So what difference does it make?’ And he kept pushing his broom.

So what did you do?

I just went, ‘Holy shit.’ You don’t have any frigging idea how smart your people are. That’s the whole idea of open-book management and transparency, by the way. Our people can tell us what to do when we can’t see it ourselves. But then we said, Okay, if trucking slows, what goes up in a recession? Well, car parts do, because people hold onto their cars longer. So we said, Let’s figure out how many car engines we have to make if there’s a downturn to make certain our people keep their jobs. We knocked on General Motors’ door, all of a sudden we had diversified the business.

I don’t think most people view recessions as opportunities.

In 2009, for example: this one construction equipment company gets out of construction equipment in the United States. They were going to close the factory. That was 89 tremendously qualified, technically brilliant people, and they were gonna just shut the doors. That’s the kind of thing that happens in Fortune 500 companies. When there’s a down cycle, Wall Street wants to see heads roll. They want to see closings, pain, reductions, and things go out on the marketplace for cheap.

It sounds like panic-selling.

To me, it’s kind of a knee-jerk reaction, but I can’t tell you the number of businesses that have operated that way for the last 50 years. Wall Street is not about long-term patient capital growth. Wall Street is about short-term results. Caterpillar, for example, knows the next 500 people they’re going to get rid of in the next downturn; a lot of companies have these hidden plans they’ll execute in a heartbeat. But eventually you get an up-cycle, right? And then you’ve got to do everything you did before in reverse. That guy you’re looking for? You just let him walk out the door.

How do you look at a slowdown?

Well, we’re interested in the long-term, and that makes it easier for us. We can weather a downturn, and we can keep our people knowing fully well there’s going to be something coming up. We don’t have to lay people off. So that construction company I was talking about? They did $16 million in annual sales, and in 2009 we bought them for $100,000. We bought a 250,000-square-foot building for a $2.5 million investment. Those are the kind of deals that happen in downturns.

How do you get yourselves in a position to do that?

In 2009 when the last recession hit, we wrote our next 10-year plan. By 2019, we wanted to have $100 million set aside to make moves. Everybody in the company knew that was the objective. And so by 2019, we were able to raise a hundred million bucks.

There must have been times when you were tempted to spend it.

Never. We scaled, we grew so quickly that it was easy to generate income that [we could] bank and not spend. The hamster was running really fast between 2016 and 2018. We were just smoking. But we knew we were going to spend it in 2019 to get ready for the turndown in 2020.

Obviously, to be able to do these deals, you need to have strong financials.

Yes, and a lot of people forget that. It’s your innovation, it’s your baby, but if you don’t get your financial flow in line, you’ll outrun your coverage, and now you’re in no man’s land. You borrowed every single dollar you could borrow. Your credit cards are maxed. Your families are after you. You’re thinking about bringing in private equity. There’s no oxygen in the room. You can’t breathe. And some people will spend 15 years in that room. You know, it’s a shame.

So how do you deal with that?

Me? I try to avoid it. Why do you have to be so quick? Why do you have to move so fast? Why can’t you generate your funds and reinvest them? Why do you need a fountain in your lobby? Why can’t you work out of a box versus a desk? Like how much do you really need? Well, maybe just get that. When people come in looking for an investment, a lot of times they need to scale back and start a little slower. Because I try to tell them that if you go to private equity, if you’re going to bring in partners, that’s where you begin to lose your baby. Once you start bringing in money outside of your money, you’re going to feel the heat that you’ve never felt before in your entire life.

So you got your recession in 2020, but it wasn’t a typical recession. It came with a pandemic. How did it affect SRC?

Oh, the recession hit us boom. Our earnings in 2020 took a 40-percent hit compared to 2019. But we brought our cash flow up, which allowed us to add $102 million to the capital fund that we had planned to use to buy cheap assets. So we now have $200 million that we need to find a return on.

You didn’t end up spending the fund on 2010-style deals?

Nope. We calculated 2020 to be a downturn, and we could acquire buildings, property, companies at fair market price or below. And we were right about the first part, but we didn’t foresee that the fair market would be subsidized. I mean, the government spent trillions, and that floated the economy. In our industry, everyone was wounded but survived — and the valuations were ridiculous.

So what are you going to do with that $200 million?

We’ve launched a 10-year program to scale 1.5 million square feet to add rental income to the company earnings over the next five years. Instead of asset purchases, we’re going to take a portion of that fund to put into buildings and warehousing and commercialization of logistics and distribution. So instead of buying things cheap, we’ll invest in significant growth, and have a more secure confidence that the cash flow will be there. Usually in a downturn, the rental income you have off properties is a steady form of earnings. So we’ll increase our funding into that area.

What kind of opportunities do you see in real estate, specifically?

There was one building we bought in the last 10 years at a fire sale price — an old electric starter factory. It was on 43 acres and had about 450,000 square feet. We bought it for $8.9 million. The street it’s on is the main street, and suddenly property values went up 1 million an acre. The minute we bought the place, we got calls from people who wanted to build a whole retail strip center in front of the business.

Within 24 hours, we erased $7.9 million of that original $8.9 million—just off those 7 acres of the 43. So now we’re gonna take those and build our strip mall. We can put a 40,000-square-foot retail center, and they’re gonna put a hike and bike trail. If you’ve got any kind of rental income on a trail, you get a 20 percent higher price, because people want to be living by these trails.

So it’s retail, and it’s those storage places, and warehousing. And we could build the warehouses for somebody, and that’s a big business right now. One of the biggest private equity portfolios, their biggest holdings are warehouses. For next day delivery, you need inventory on hand — which means warehouse space.

Do you think the value of SRC will have doubled five years after this recession?

I think if we execute this rental-income program, yeah, I think we do. Even with all that’s going on in the other areas. We got all that goofiness around. So much shit going around it’s unbelievable. If you’re anywhere near carbon in any way shape or form, you really got to assess whether it has any growth in it or not. Like we have construction units support the [Keystone XL] pipeline; we have units that go into the fracking zones. We sell a ton across the border to Canada.

What does that mean for you guys that the larger economy is moving away from carbon?

We’re going where the puck’s gonna be rather than trying to control the puck. Right or wrong, [the transition away from fossil fuels] is happening. I think there’s 10 years of business left, but it’ll be diminishing demand, based on competition from new products as much as government regulations. Still, if you’re in automotive? There’s 240 million cars in the U.S. burning carbon. You’re damned if you don’t supply that market — you’ve got to deal with what you have. But underneath that, you bring in more businesses, products, services. For us it takes three to five years to mature a new service, or a new business line.

What do you see on the horizon for the next recession?

I think it’s going to come from interest on all this debt that’s being handed out. I mean, right now everyone’s taking on debt because debt is free. Take it on, layer it over 30 years. But once you have to pay for it [whistles], wow that hurts. We’ve been at a Russian drunk orgy, and we’ve drunk so much vodka, we can spend as much money as we can print, and all our prognoses that more debt wasn’t bad, so why should it in the future? Let’s assume you can print money as long as you can!

But you have trillions of dollars in debt out there. Let’s say you get even a 1-percent rate on that; let’s say it starts coming due, and it’s not layered over time any more. Sure, you can hold the principal forever, and not pay it back forever — if no one wants it back. But once they do, that’s when you’re going to get the next crash.

What does that mean for SRC?

It means I’m staying out of debt. I’m only putting the money in hard assets, which is why we’re investing in buildings. I’m not investing in a software program that has high risk and no assets. There’s a lot of single proprietor people building podcasts, apps. They’re requiring capital, and there’s capital going into it. But I’m not putting our capital into it. I’ve got an obligation to 1,800 people to continually have security and jobs. So we have to measure the risks that we take. Of the four choices, we’re low-risk, low-return people. Certainly not high risk, high return. We only invest back the money we create. We don’t borrow. We’re going to stay in our lane.