Is Your Contracting Business Sellable?
Is your contracting business actually ready to sell? A smooth sale takes the right setup, a clear understanding of what buyers are looking for and the systems needed for a strong exit and handoff.
In this episode of Cracking The Code, Jason Walker and Brad Barron sit down with Patrick Lange of Business Modification Group to talk about acquisitions, valuations and building a business buyers can believe in. Patrick explains why owners need to understand what their company is worth long before they are ready to sell, and how the right systems, clean financials, strong service and repair revenue, and less owner dependency can make the business more valuable. He also breaks down why acquisitions should support a healthy business, not be used to fix a broken one.
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00:00:00:01 – 00:00:18:12
I think acquisitions can be great for smaller companies, but you don’t need to be doing 50 million or 100 million for it to make sense as an owner. It takes a different skill set to run a company doing $2 million in sales than it does doing $5 million in sales.
00:00:18:14 – 00:00:46:17
Welcome to another episode of Cracking the Code with your host, Jay Dub and my co-host Brad Barron. We are super excited because we are going to deliver something special today, just like every single week. But this week y’all got to pull over. You got to take notes because we are dropping bombs, right? Firecracker. Brad. Boom boom. POW! Our guest today.
00:00:46:19 – 00:01:08:05
Our guest today we got a special guest. We got Patrick laying in the hot seat Patrick. First off, I gotta say, it’s an absolute honor for you to be on cracking the code or to have you as a guest, because your knowledge of what you’re doing and how you’re helping contractors across the nation is absolutely amazing. I’m excited to be here.
00:01:08:06 – 00:01:26:06
I get to first time in the studio here. I’m excited to be on with you guys. Thank you so much for having me. Love it, love it. So for those that don’t know who Patrick is, right, Patrick, can you please give a quick little bio of what you do and how you created your name in the industry? Absolutely.
00:01:26:06 – 00:01:44:09
So I’m a business broker that specializes in the sale and acquisition of heating and air and plumbing companies. I’ve been exclusively in the trades. I’ll back up a little bit. I owned a heating and air company prior. My son and daughter in law bought me out seven years ago or so, and at that time I switched my business just selling heating and air and plumbing.
00:01:44:09 – 00:02:09:08
And I’m blessed that as of yesterday, I sold my 173rd company in the last six years. So seven years ago. Was that your first acquisition you sell into your kids? Know that? I didn’t count that one. So that would be 174. So that was I owned the company, ran it for two years, went to sell, and my son came to me and said he wanted to buy it and I sold it to him.
00:02:09:08 – 00:02:27:19
And at that time we were a small company, right under $2 million in sales. And at that time, I felt that there was a gap in the market. If you were doing $20 million, people would line up to help you, right? You didn’t need to go far to get help. But if you were doing a million and a half, 2 million, $3 million in sales, there wasn’t a lot of accurate information in the marketplace.
00:02:27:19 – 00:02:50:05
And so I thought there was an opportunity. I listed a company I’m based in Florida. I listed a company in Florida, then one in Georgia, then South Carolina. Many people struggled in Covid. For me, it was an incredible opportunity. Covid allowed me to go nationwide. I could fly anywhere in the country for next to nothing, and every rent a car was available.
00:02:50:05 – 00:03:11:17
Every hotel room was free. And and so we expanded nationwide. And we’ve been fortunate to work with a lot of people and help a lot of people since. Now talking about acquisitions and things like that, because there’s probably small business owners and operators that are watching this, and they might want to scale their company to be bought out by private equity.
00:03:11:18 – 00:03:30:02
What do you say for those companies that are in the we’ll say 1 million, $2 million mark? What are you all looking for or are they too small? Well, it’s kind of a challenging question to answer, broad strokes, but I think one, you need to make sure you’ve got your own house in order before you buy somebody else.
00:03:30:03 – 00:03:50:23
And that sounds weird coming from somebody who sells companies for a living. But many people think it’s going to solve all their problems, right? And the reality is, if the phone rings more and you’re not in a position to handle the calls, you’re not the position to maximize the calls. You don’t have your pricing in order. You don’t have training and retention in order.
00:03:50:23 – 00:04:12:21
It ends up creating bigger problems as opposed to fixing them. So I think if you’ve got your own house in order and are just looking at growing, then, then I think it’s okay. The other part is, is timeline, right? If you’re if you’re looking to sell in the next year or two. I’d say don’t buy a company, because oftentimes when you bring in that new company, there’s going to be some bumps in the road, right?
00:04:12:22 – 00:04:36:15
Things aren’t going to go perfect. And oftentimes you’re not going to make your money back and doing it. Yeah. What are some of the things, Patrick, that you would encourage like if if someone was let’s go to roots here because I think they’re really important roots. Let’s let’s keep going on what you said. And that is when it comes to looking to acquire a company, what are the things that you should be looking for?
00:04:36:15 – 00:04:54:03
And then on the flip side, if you’re looking to sell a company in that 1 to $5 million range, what are the things you should be doing to prepare for that sale? So let’s start though, because I think that’s we don’t talk a lot about the acquisition side, right? A lot of times we’re talking about get your company ready to sell, get your company ready to sell.
00:04:54:04 – 00:05:19:21
But what if you’re not ready to sell? What if you want to keep growing and acquisition is part of your mechanism of growth. What are the things that you are or you would encourage contractors to look for? If they’re looking to bring or add a company into their umbrella? Yeah. Great question. And so I think acquisitions can be great for smaller companies that you don’t need to be doing 50 million or 100 million for it to make sense.
00:05:19:21 – 00:05:49:02
And I think buying smaller. Right. I think as an owner, it takes a different skill set to run a company doing $2 million in sales than it does doing $5 million in sales. And so you need to grow, in my opinion, as an owner. So I often suggest buying a company smaller than yours. Right. Once you’ve got above that million and a half dollar hump or $2 million hump, you’re probably in a position to bring on somebody who’s doing a million because you know where they’ve been, what needs to be done to to maximize that.
00:05:49:03 – 00:06:03:21
I think location is another thing. I have people call me and they say, hey, I’m in Sacramento and I’m looking at this company in Phoenix, and I’m like, well, how are you going to manage it? Right? You don’t have the you don’t have the people. You don’t have the process. You don’t have the things in place to do that.
00:06:03:21 – 00:06:24:10
So I think for your first acquisition specifically and for a smaller company is proximity, right. If can you buy something local where you can save money on rent because you can put them under your roof, where you can train and develop, and if you lose somebody, your guys or girls can go run that call for that other company that you’re bringing in.
00:06:24:10 – 00:06:45:04
So I think proximity is the thing. I think when you’re looking at acquisitions, finding a company that’s focused on service and repair, many companies out there, it’s complete change out model. And if you’re a small business, in my opinion, and this will probably ruffle some feathers, but buying a company that does all change outs you may be buying somebody’s warranty headaches.
00:06:45:05 – 00:07:05:04
Right. So and well, and here’s the other thing. I’ve never met with a seller that says, hey, we do horrible work and we have a bunch of callbacks, right? Everybody says we do the best work in the area. We’re the best company in the world. Everything’s perfect. But that’s not always the case, right? I’ve been and seen some companies that that quality is not as important as it should be.
00:07:05:04 – 00:07:30:17
And so I, I also think buying something that’s got a good reputation, what is what is the online marketplace saying about them is important. And then the final part I think sometimes people buy companies too small. You know, if you’re buying, as the industry calls it, a chuck and a truck, right. Oftentimes those customers are cheap because that guy or girl that’s been running the business can give away services and still make money.
00:07:30:20 – 00:07:51:22
Well, if you have staff and overhead and rent and uniforms and vehicle wraps, you’ve got to charge enough money to be able to support those things and deliver that service. And and those customers aren’t used to that. And so if you buy a business and automatically double or triple pricing, chances are you may lose some of those customers or a lot of them.
00:07:51:23 – 00:08:15:19
The other part is oftentimes those customers are used to having the owner’s cell phone number and calling them on Sunday night at 9:00 and saying, somebody needs to come out tonight and fix it, right. And because they’ve done it right, so that customers been conditioned for that kind of relationship. And so sometimes if if the seller is the best tech, the best installer, the best CSR, the answer, all the calls, they do everything.
00:08:15:19 – 00:08:37:07
And that’s who the customers are dealing with. You need to be careful with that acquisition. Does that make sense Brad? Oh, not only does it make sense, I love it. I think those are important things for people to hear. So let’s flip it though. Let’s go on the. All right. Looking to prep to sell. Right. And let’s talk about things like runway.
00:08:37:08 – 00:09:09:13
Like how long should you be preparing yourself, your team, your company. And then what are some of those milestones that should be hit or those tasks that should be hit prior to even engaging a broker? Or maybe, by the way, you know, we’re not in a position right now, Baron. We’re not looking to sell. So I’ve never asked this question before, but asking it of you as a, as a, as a leader in this area, what are the questions that we should be asking the potential brokers as well?
00:09:09:14 – 00:09:29:23
Right. As we’re looking to find someone to help sell the business. Fantastic questions. And so I’ll kind of answer each of those separately. Yeah, it was a compound question I asked them and what Jason was really good at it. If you if you just sit in the bar too high my memory go in and everything here. Yeah. No worries.
00:09:29:23 – 00:09:45:17
So. So the first thing I think you should, the first thing you should ask any broker and you should ask them the day you own the business is. What’s it worth? For most most of my clients, they have no clue what their business is really worth. Yeah. And for most people, it’s the largest asset that they own. And so.
00:09:45:23 – 00:10:03:06
So I think you should know what the business is worth today. Next week, next month. We have people that we do evaluation for. Every year we do free valuations. And I’ll kind of get back to the why behind that in a minute. But we do free valuations for people because they don’t know what it’s worth. And they’re getting offers.
00:10:03:06 – 00:10:19:23
Right. If you own a heating and air company in the country today, somebody’s calling you daily or weekly saying they want to buy your company. Now, they may not really want to buy it, but they’re saying that they do. Or you’re getting emails or calls. And so knowing what your business is worth, if they get nothing else out of me being here today, get a valuation done.
00:10:19:23 – 00:10:35:12
And whether it’s me or somebody else, I don’t care who does it, but really get one done. Because I have sat in living rooms and kitchen tables with 70 year old people and had hundreds and hundreds and hundreds of meetings where I’ve got to sit there and look them in the eye and say, hey, you’ve done it wrong.
00:10:35:12 – 00:10:56:00
It’s not worth anything. Nobody’s going to buy what you’ve done, and it’ll absolutely rip your heart out doing that over and over, because they didn’t know who to ask and nobody ever told them so they thought they were doing it. So. So that would be the first part. Second part of that is, is if you have a very sellable business, it’s a much easier business to run.
00:10:56:00 – 00:11:17:05
And so for your own benefit, finding out what buyers are looking for is super important because it’s going to be easier for you. And then then the back to what should they be focusing on? There’s four things I preach anytime I get on stage, anytime I get on a show like this, any article I write and one of them is get out of the van, you’ve got to get out of your own way.
00:11:17:07 – 00:11:34:16
You’re never going to be able to grow your business to a sellable value. If you’re the one who’s running every service call and doing everything. There’s never been a buyer that calls me and says, Patrick, I’d love to buy a business where I can work in the field 16 hours a day and then go home and do paperwork for five and six hours, right?
00:11:34:17 – 00:11:53:19
Just doesn’t happen. And so there’s no value there. So getting out of your way and that’s, I say getting out of the van. But then as you’re growing your business it’s the next step to right. So once you’ve gotten out of the van then you typically become the best salesman. Okay. Well now you need to replace yourself as a salesman.
00:11:53:19 – 00:12:13:09
And then you become the best CSR and bookkeeper. So each as you’re growing the business, replacing yourself, and when you’re doing that, the business is becoming worth more. And then the reality is you don’t want to sell it, right? Because it’s not a grind. It’s not 24 hours a day. It doesn’t consume your life or it’s for itself now, absolutely, 100%.
00:12:13:09 – 00:12:38:12
And then it’s a business instead of a high paying job. So first step, get out of the van. The next step is clean books and records. Most people run a business to save taxes, right. And so they’re running everything through their business. And there’s no separation between personal expenses and business expenses. So then they come to somebody like me and they say, hey, sell my business, look at this business.
00:12:38:12 – 00:12:54:04
And they give me their tax returns, and they’ve been losing money for five years. Yeah, well wink wink, they’re not really losing money. And so now you’re trying to come up with all these add backs and trying to maximize value. And, and and the other things, they don’t have processes and systems in place and that’s part of that.
00:12:54:06 – 00:13:17:04
Clean books and records. Right. If you’re gone for a day, what happens with the business? Can your guys and girls run the business? Are there systems and processes to replicate that? That’s the second step. The third is a business built on service and repair. Yeah. And and maintenance agreements in my opinion, are one of the best things from a growing value of the business.
00:13:17:06 – 00:13:39:10
Not just not just so you can rip somebody off maintenance agreement, but so you can develop a relationship with your customer so you can talk to them about options so you can understand that their son has asthma. And increased filtration may be a better thing for them. So you can really dialog it right. I see too many companies and I own one two 4th of July weekend.
00:13:39:11 – 00:14:02:14
Your guys are running ten calls a day trying to keep up with everybody. They’re going in and, you know, sucking out a drain line and run to the next call. Right. They’re not really spending time in the customer’s home finding out what’s going on, what what are they really looking for. And so I think that maintenance agreement gives them an opportunity to deliver value, and I mean really deliver value on the maintenance and spend time with them.
00:14:02:14 – 00:14:20:02
And then the customer is paying for their own loyalty. Right. If I’m paying you 250 bucks a year for a maintenance agreement, whatever that figure is, if my unit breaks, I’m calling you. Right. So they’re paying for their own loyalty. And so when I, when I look at tax returns of a company that’s high on maintenance agreements, I don’t have to ask them the maintenance agreement count.
00:14:20:02 – 00:14:43:11
I can tell by profitability. I can tell by staff tenure. Right. Because they’ve got something in the shoulder season for the guys to be doing. I can see by customer concentration. It’s not not a real customer concentrated business. They’ve got a lot of different customers that generally a lot of different revenue. And so I think maintenance agreements are so key to growing that business long term and keeping that customer loyalty.
00:14:43:11 – 00:15:02:04
And the fourth thing is more of a don’t instead of a do. And it’s stay away from new construction when, when when I’m at a lot of events I preach that and people are ready to throw tomatoes at me because they make a lot of money in construction. But the reality is, when I look at companies, for the most part, construction is often a race to the bottom.
00:15:02:10 – 00:15:24:07
The GC controls your time, controls your money, controls the relationship, and they’re cheap. So now you’re putting the cheapest equipment possible into a customer’s home and slapping your sticker on the side of it. So when it breaks and you have to show up to customers home, you say, well, we put the cheapest stuff in there possible. Now it looks it’s a bad reflection on piggyback.
00:15:24:08 – 00:15:41:10
Absolutely. Yeah, yeah. And so, so so it’s a bad reflection on you. And then when, when things get lean, then the contractor doesn’t pay you, you’re out a bunch of money and you financed all these homes for nothing. And so it’s, so it’s a race to the bottom. It’s not what buyers are looking for. And buyers are scared to death of it.
00:15:41:10 – 00:16:02:23
So it reduces value. So those are the four things that I would focus on if I’m growing. I love that you mentioned, you know, stay away from new construction because royalty being a newer company, right. You try to find out what avenue is best to make the most income quick. Right? But I’ve stayed away from new construction because one thing that I understand is cash flows.
00:16:02:23 – 00:16:22:15
King. Okay. And when you’re dealing with new construction, a lot of times for business owners or new business owners, right, they got up front a lot of their cash flow. And from my understanding, it might take a couple months to get paid for a certain job. Absolutely. Yeah. You’re financing it. Right. So you look at and I look at when I look at a tax return, I look at the balance sheet.
00:16:22:16 – 00:16:41:00
Right. And I want to see what that AR looks like. The beauty in my opinion, of residential service repair replacement is your technician leaves the yard and they come back with more money than they left with. Yes. Every day a business that’s run right, they’re leaving the shop and they’re coming back with more money than they left with on a construction business.
00:16:41:01 – 00:17:00:02
They’re leaving and leaving and leaving, and you’re paying them and paying them and paying them, and then you’re billing them out. So your AR is killing you. And so that’s not the best way to be running a business now. Oh go ahead Brad. Oh I was just going to share just on that note when I took over as CEO.
00:17:00:02 – 00:17:20:16
So I was the operating officer for a number of years prior to 2023. So I took over from my dad in 2023. And the first thing that I did is and it’s funny because you can’t see it. But above my camera here on my corkboard is a newsletter I sent out at the beginning of 2023 when I took over talking about my vision and everything for the company.
00:17:20:16 – 00:17:41:17
But at the time, about 15% of Barron’s revenue was new construction, and in that newsletter followed up very quickly with a company meeting. I, I did a nine month phase out of new construction because about 15% of our business was part of that, and it’s for all the same reasons you talked about. I think we’re talking about valuation of business.
00:17:41:17 – 00:18:03:11
So there’s there’s that. Right. And that’s an important facet. But to your point, it’s a it’s a drain on cash. You’re no longer your own boss. You’re, you know, working for someone else. Essentially there is no value long term in that relationship. Like, yeah, you’ll slap a sticker on, you’ll cross your fingers and pray, right, that they call you and they need maintenance or service.
00:18:03:11 – 00:18:22:02
But you didn’t get to meet that homeowner. Most likely you didn’t get a chance to talk to them, to introduce yourself to their kids, their husband, their wife, whatever it was. If you’re looking for a customer for life cycle, new is a really hard way to do that. There are people out there, by the way, and businesses that that is their model and good for them.
00:18:22:02 – 00:18:48:21
But I definitely think when it comes to looking at growing a home service based business, don’t serve two masters. That’s biblical, right? Focus on retrofit, get out and get after it. So that was all I wanted to add. Love it, love it. One thing that you were talking about, Patrick, was sometimes maybe as a smaller company or a smaller outfit, we’ll talk about royalty, you know, being established for only two years.
00:18:48:23 – 00:19:09:17
We’re going to do 2.2 million this year in revenue. But one thing you’re talking about is maybe if you want to see more growth to purchase a company right at the state that we’re at about 2 million, would you say by a company around our same size, or go for someone a little bit smaller? I think it’s going to depend on each owner.
00:19:09:18 – 00:19:28:18
Right. It’s going to depend on your ability. But I would I would probably start smaller because also I’m a huge believer in culture, right? I think the culture of the organization is huge. So if you’re a $2 million company, and we were talking before we got started, Jason, you know, you’re running pretty lean, right? Your guys are working and doing a great job.
00:19:28:19 – 00:19:48:04
Well, if you buy another company that’s not as lean as you are, right. So that could be more of a headcount. Well, oftentimes what happened is when you buy that company that their culture ends up taking over your culture. Right? Because just there’s more people, right? At the end of the day, if you’re buying something bigger, there’s often more people.
00:19:48:04 – 00:20:13:15
And and you could lose your culture, in my opinion, especially when you’re not used to acquisitions. Right? There’s a lot of moving parts and acquisitions, but if you buy a smaller company and less people, oftentimes you’re able to get them to fall underneath your culture and continue to grow what you’re trying to grow. Patrick, quick question when you talk to different business owners about acquisitions or purchasing or even selling, what do you feel like?
00:20:13:15 – 00:20:37:01
The biggest fear is wow. Great question. I think it’s it’s on either side. Right. So if you’re talking about selling for most people, it’s their baby, right? You know, to me, in a sale of a business, the money is the easy part, right? Mathematically either makes sense dollars and sense wise. But for many people they’ve been known as the heating and air guy or girl.
00:20:37:01 – 00:20:58:17
Right. That’s been their family identity their entire life. And the thought of leaving and leaving their employees and who they’re handing them over to. Yeah. It’s scary. Right? It really is scary. And so I think that’s that’s part of the selling side. And there’s no do overs when you sell. Right. When you cash that check, it’s a permanent decision.
00:20:58:17 – 00:21:15:01
And so you need to make sure you’re ready for it. On the buying side, many people have never done it. And I think there’s a lot of fear there. Is it the right company? Can you handle it? Are the numbers really what you think the numbers are? What questions am I supposed to be asking that I didn’t ask.
00:21:15:02 – 00:21:31:01
And so I think there’s a lot more moving parts on the acquisition side. Then there is on the selling side. I think the selling side is more of the emotional. I’m really going to walk away and and many of the companies we sell, right. They’ve been in business 20, 30, 40, 50 years and they’ve got employees that have been there 30 years.
00:21:31:02 – 00:21:45:16
Yeah. Right. So so you’ve you’ve given somebody a job and you’ve said, hey, I’m going to take care of your family. And many times they feel like they’re walking out on them. And so that’s scary that all the time to I’m sure. Yeah, yeah, yeah. It’s by the way, I just want you to know, I had a we do this a lot.
00:21:45:17 – 00:22:06:20
I had a goosebump moment again Jason, when you said fear on my notepad, I literally wrote the word. You can’t see it, but it’s afraid. I was thinking to myself, like, what are the things that people will be afraid of? I have a question for you, Patrick, and it rhymes with that. So I, I get a chance to coach contractors all across the US and very blessed through one of our companies called Hull Home Alliance.
00:22:06:21 – 00:22:28:03
As part of that, I recently was having a conversation with a contractor. I’m not going to name the name for the sake of this podcast, but doing about five and a half, $6 million in revenue, they had a couple thousand memberships, right? So very service oriented. But you go back to Covid years, right? They were, you know, in the mid teens and Ebit, right, or EBITDA.
00:22:28:03 – 00:22:46:00
And now they’re, you know, like 5 or 6%. So they had a pretty dramatic shift down because leads are more scarce. And their neck of the woods like things are challenging. They’re of the age they’re still looking to exit. But their question to me, and by the way, maybe they’ll listen into this episode and you can help them because I didn’t have the answer.
00:22:46:00 – 00:23:12:13
And I’ll always tell people if I don’t have the answer. So my question to you on their behalf is this at a five and a half to $6 million company, right. Looking at a couple thousand memberships, but a reduced Ebit over the last couple of years because they’re in a tough neck of the woods. Is it still a good time to still engage or broker to have that conversation like they want to get out, like are they going to suffer, you know, immensely or the value of the business?
00:23:12:13 – 00:23:28:15
Because a lot of what they do is based on their recurring revenue, and they have some long standing customers. And by the way, because I work with them, I will also share. They have an amazing culture too. So yeah, so I think you have to we have to look in the numbers. Right. And so I think it’s worth it to see what it’s worth.
00:23:28:15 – 00:23:52:17
And I can tell you 5 million in my experience. And you guys are a lot smarter than I am about operational. I see 5 million as really a tipping point. I see a lot of companies at 5 million that are 20% net. Yep, because they’re running super lean. Right. But I also see a lot of companies at 5% or at 5 million that are only at 5%.
00:23:52:18 – 00:24:14:09
Right. And and oftentimes I see the rationale is because at in order to grow above 5 million, you’ve got to make some strategic hires. There’s got to be more layers of management and those layers of management don’t put any money to the bottom line. Right. And so I often see either super profitable or not profitable at all at 5 million.
00:24:14:11 – 00:24:44:13
Yeah. And oftentimes the, the the not profitable is always because they’ve made those hires already to make that next leap to continue growing. So my experience has been with the buyers in the marketplace. They’ll look at that and understand it okay. And on that 5 million they’ll know what they can do with 5 million okay. Right. So so there’s a lot of buyers in the marketplace that aren’t going to necessarily by off of just the EBITDA number.
00:24:44:14 – 00:25:02:18
Sure, they’re going to buy off of that gross number as well. And 5 million is often that threshold where they can still make a very big payday without being super profitable. Does that. Does that answer your question, Brad? Yeah, I think that it does. And that was one of the things that they had asked me was out there.
00:25:02:18 – 00:25:26:07
Other things like, you know, team member infrastructure. And it’s by the way, you just gave me a goosebump moment. Patrick Jason doesn’t because one of the things they just did at my coaching encouragement, right, was they needed to add another manager as an example. Right? Like and that needed to it wasn’t to replace themselves. It actually sort of moved themselves out.
00:25:26:08 – 00:25:43:15
They still draw a good salary, but they had moved themselves out. And so to get to the next level, they needed to hire another person in operations. They needed to split service and install. Right. And so that was the higher they made. And to get a good, you know, service manager and they’re not going to woods. It was $125,000 your job.
00:25:43:15 – 00:26:01:16
Right. And so they added that, you know a year ago and that is a hit immediately on Ebit. And then that person has, you know, support and infrastructure and benefits and all those things vehicle blah, blah blah. And from there they’ve also added a couple install and service trucks to as they’ve looked to grow to seven and a half and ten.
00:26:01:17 – 00:26:19:20
So all that to be said, I think that answered the question. Well, my hope I’m going to send them a note is they listen to this because they were afraid and that fear or afraid, that’s what I wrote down here. They were afraid that they would go to someone like you, and they would laugh and say, hey, you used to be 20% or 15%.
00:26:19:21 – 00:26:40:00
Now you’re five. You can’t sell it, you know, crap, right? And I tried to say, I don’t think that’s the case. I think there’s a lot of other things that they’re going to be looking at, and you’ve got a lot of good things going on in your business. So especially especially with the maintenance agreement, especially with staff tenure, especially with the I’m assuming their reputation is good.
00:26:40:01 – 00:27:00:11
All those things are in their favor. Yeah. Good company. Yeah. And so all of those things typically will carry them up. I have sold I’ve sold a lot of $5 million companies. And you’d be shocked at the difference between the girl making $1 million a year and the girl making $500,000 a year from a sale price standpoint. Got it.
00:27:00:11 – 00:27:26:19
Perfect. Let me ask you, you know, you being a part of a lot of buyouts and sales and everything. What has been your biggest witness of a buyout when you say biggest witness, biggest size, biggest, not biggest size, biggest payout. So I sold a company in Florida and it’s been probably two years ago now that they got they were only doing 10 million in sales, making 1.2 million.
00:27:26:20 – 00:27:57:00
And they got a 13 time multiple. Oh nice. But but it was because the buyer was buying another company in the area and were they were getting a great deal on that company. And so they were able to overpay for this company and have them even themselves out because of the size. So they were able to become a $20 million company in a market overnight, and where they paid not much for one, overpaid for another, it washed itself out.
00:27:57:01 – 00:28:19:11
Yeah. So that was strategic. That makes sense. Yeah, yeah. I have a question for you. As you’re looking to to next steps for you and your business. Like what are your one, three and five year goals? I sometimes we don’t talk about that a lot. But you know, what are the things that you want to make sure you accomplish over the next half decade or so.
00:28:19:12 – 00:28:44:19
What what feels your tank gives you passion, you know, what does that look like? If you waved your wand and and your prayers were answered. So yeah. So my youngest son, who’s not very young anymore, works with me in the business as well. And so he has for probably he did a year. He was he, he played sports in college and so he couldn’t really play sports, go to college and have a regular job.
00:28:44:19 – 00:29:05:04
So he worked for me behind the scenes. So he worked for me for probably two years in college, and now he’s been graduated for two years. So he’s been with me probably four years, three and a half years, something like that. And so he is stepping up and taking over more. And so probably for that to continue to see him grow and develop, I’m nearing the end of my career.
00:29:05:05 – 00:29:28:22
I mean, I’m not I’m not planning on retiring anytime soon. But if I look at, say, ten years out, yeah, we’ve been developing staff. My first few years in the business, it was me. So I, I was ignoring my own advice that I’m preaching to people about not getting out of the van. Right. So I’ve been that way with my brokerage business and, and so and we’re adding we’re doing more in plumbing and electric now too.
00:29:28:22 – 00:29:51:01
And so seeing that continue to expand a little bit, I don’t have the desire to be 20 different trades. But if we could be heating an air, plumbing and electric and be helping as many people as we do now, we’ve really been blessed. We typically sell 20 companies, 20 to 25 companies a year. As of this morning. We’ve already done 23 this year.
00:29:51:03 – 00:30:10:11
And so we have 15 more under contract to close in the next month and a half. And so here we are in August. So I think we’ll probably get close to 35 or 40 this year, which is incredible growth for us. But we’ve been able to do it by adding staff. And so to me, this to me, it’s personal, right?
00:30:10:11 – 00:30:31:20
Every deal is personal. And so I say those numbers not to brag on myself or our business. This is somebody’s life right at the end of the day. And and so not losing focus that it’s somebody’s life is super, super important to me. I don’t ever want a client to say, well, it was just another deal for him because it’s not right.
00:30:31:22 – 00:30:57:05
And, and we try very hard to to make that happen. And as we increase in volume and we do a lot of small companies and by industry standards. Right. So bulk of what we sell are under $10 million in sales. Typically we’ll do 2 or 3 a year, over 10 million. But really our sweet spot is kind of 2 million in sales to say 6 million in sales and not necessarily by choice or focus.
00:30:57:05 – 00:31:14:23
What I have found. And now get on my soapbox here. But you asked me about my business, so I get to do it for a change. So really, to me, if you’re doing 20 or $30 million in sales, you’re probably a pretty sharp business person, right? To get to that level. It’s not luck. You’ve really spent some time and energy to get to there.
00:31:15:02 – 00:31:33:12
To me, if you are a 20 year company and you’re doing $2 million in sales, you’re probably a great technician who’s taking great care of your customers. Yeah, you probably don’t know much about EBITDA or about private equity, or about rolling equity or all these other things they’re going to throw in there at you. And there’s a lot of professional buyers in the marketplace.
00:31:33:13 – 00:31:57:01
So my belief is the guy or girl doing between 2 and $5 million in sales probably needs my help more than the person doing 30 or 40 million. And so I get a lot of satisfaction and holding their hand and helping them through the process and answering their questions. Why have you hold my hand with royalty? Because I actually have some questions rolling off of that.
00:31:57:01 – 00:32:18:11
I mean, your spin out some great information and there’s so many, I think viewers and watch people watching the podcast that are smaller operators like yourself. Right. My question to you is I don’t, you know, I know the numbers, I know the multiples, but I don’t know if my numbers are realistic. So with royalty, I have a five year mission, okay.
00:32:18:12 – 00:32:37:14
My five year mission is to hopefully grow it to 20 million, keep it at the 18 EBITDA. And I’m hoping I know multiples have gone down, but I’m hoping anywhere between 8 and 12 would be my soft spot. Very real. I just want to make sure that that’s real. That’s real. So maintaining the 18 EBITDA at 20 million is the bigger challenge, correct?
00:32:37:16 – 00:33:02:14
The reality. And so what we see, we often see companies doing $10 million in sales that are not netting any more money than the guy doing 5 million, like we were talking about the 20% at 5 million because of these layers of management, insurance, people building all these things that have to happen to get above that level. So I think 8 to 12 at that size is a very realistic very today.
00:33:02:15 – 00:33:29:17
Right? I don’t know what it’s going to be five years from now. Right. My crystal ball works half as well as anybody else’s. But but today that would be a very realistic figure on a company that is focusing on service repair and replacement. Right. They’re taking care of the customer. So question about royalty. So if we’re if we’re doing 2.2 million this year and I was we’re growing right.
00:33:29:17 – 00:33:55:23
We get we get 18% EBITDA. We’re netting. We’ll say 20 something right. Net profit. What do you think. And I know the numbers are without you going through the hard core numbers, you wouldn’t know exactly. But what do you think the Rome of what a company would be worth at two years of being operational at 2 million with, you know, running good processes, have great culture.
00:33:56:00 – 00:34:20:12
I’m just curious to see, you know, do we have value in our company yet being a new startup. Yeah. So so you’re you’re the exception to the rule. And so typically somebody’s not doing your numbers in two years. Right. We don’t see a lot of people that are able to grow like that and put the processes, people training systems in place.
00:34:20:13 – 00:34:38:00
Typically when somebody is getting to 2 million, they’re fumbling to 2 million, right? They’re figuring out the phone’s ringing and they’re adding people. And what about this? And who’s doing that? They don’t have other jobs. They’re not on podcasts. They’re not doing the things that you’re doing. Right. Clearly, you’ve got the people and the processes in place. So that’s a hard question to answer.
00:34:38:00 – 00:34:57:01
The biggest part that’s hurting you is the two years in business, because growth is expensive no matter how you look at it. And often a buyer is going to say, well, how loyal is that customer, right. They answered an ad from you three months ago, and when you sell, are they really going to be there? That’s the biggest question they’re going to have.
00:34:57:02 – 00:35:19:06
Let’s reverse that though. And you’re a $2 million company that’s been in business for 20 years. That company I would expect doing 2 million to the bottom line, I’d expect them to be making around 300,000 a year. Real. What we see in a lot of the tax returns, we look at $2 million company in a decent sized market, service repair, replacement, good reputation, doing $300,000 a year.
00:35:19:06 – 00:35:37:21
I would expect to sell for a four time multiple would be real. So 1.2 million is where it would be. I think only two years in if you would get that kind of payday. And I’m talking about cash at closing. You walk out the door because of that short term, I think a buyer is going to put some strings attached.
00:35:37:22 – 00:35:58:14
I think that’s going to be tied into some sort of earn out or some sort of performance after the sale, because they’re going to be worried that you’re just a good sales organization, not a good relationship organization. And they haven’t had time to see that last. So they would keep you on as the owner for a couple of years to make sure you maintain or hold your some of your money.
00:35:58:15 – 00:36:20:11
Right. So they’re going to say you can leave, but we’re not going to give you all your money at closing. We’re going to keep some of it. You’re going to have to hit certain metrics metrics in order for that to happen. So they feel comfortable that they don’t buy it. And the the system not work without you, where if there’s customers that have been there 20 years, they feel confident that the people are going to be there anyways.
00:36:20:11 – 00:36:44:14
So the the newness is what would hurt you, not necessarily the performance. So I was going to say it’s kind of devil’s advocate, right? Like even though you were able to grow quickly in two years, someone that’s been operating for you listeners operating 20 years, 15 years at 2 million, right? You will have a better advantage than someone like myself.
00:36:44:14 – 00:37:05:02
So I want to make sure that everyone is aware of that. That’s listening to the podcast, because again, I think that counteracts into fear and being afraid. Yeah. And you’re 1% accurate there, Jason. So buyers will always ask me first one of the first few questions. How long you been in business. Right. And if I say whether five years like we’ll take a look at it.
00:37:05:03 – 00:37:27:01
If I say I’ve got a 20 year company doing $2 million in sales, absolutely send it over. And that’s the answer they give me when we send it to them. And so so you’re 100% accurate. The newness will hurt you more than the longevity. Absolutely. Patrick, what is a question or two that we should have asked that we didn’t ask you?
00:37:27:03 – 00:37:50:02
Wow. You guys are full of good ones here. That’s our job, man. That’s me. You should have given me a list before I got here. So? So I think you know what we covered the water buyers looking for. But. But really, one thing I get asked a lot is, is this a business doing $2 million or a million and a half dollars or $3 million sellable, right.
00:37:50:03 – 00:38:07:13
Because on stages and you guys go all the events that I do, you watch all the shows that we watch, read the articles that we do. It’s always there celebrating the $30,000,050 million person. And so I have a lot of people call me and say, well, my business probably doesn’t even have any value. I’m only doing $2 million a year.
00:38:07:13 – 00:38:28:04
And my my response to them is consistent. Listen, be proud you’ve stayed in business, right? You made it past a year in business or two years or five years or ten years or whatever you’ve done. You’ve taken great care of your customers and your employees and your little league organization every year. So so there’s absolutely value, but it’s having realistic expectations.
00:38:28:04 – 00:38:57:01
And that goes back to me starting the show saying get a valuation done. Many people go to an event, somebody stands up on stage and said, I sold for 500 gazillion dollars, right. And they give all these crazy numbers and multiples. So they think mine’s going to be worth that, or they think mine’s worth nothing. And so finding out what it’s worth so that, you know, and if there’s something you need to fix, you can tap into an organization like EGR and say, hey, I want to get part of the coaching.
00:38:57:05 – 00:39:06:08
I want to get Jason to come out and talk to my guys and teach us systems. And he talks a lot, by the way. Just talks, talks.
00:39:06:09 – 00:39:22:21
But you guys are in a position to help them, right? So I’m not the guy that helps them. That’s not my position. We’re going to do a valuation and say, hey, you need more maintenance agreements. I’m not going to tell you I don’t know how to give more maintenance agreements. You need to tighten up your numbers. You need to focus on your processes and your people.
00:39:22:21 – 00:39:38:06
And so we’re going to tell them to go find it. But I’m not the one to do it. But knowing that today, when you’re 40 years old or 50 years old or 60 years old, is so much better than coming to me when you’re 70 and I say, hey, you’ve done it wrong and you don’t have any gas left in the tank, right?
00:39:38:06 – 00:39:57:21
You’re done. You’re ready to check out. And I’m saying go revamp your entire business. Because back to those four things that we talked about when you asked earlier, Brad, that I’m not saying rip the Band-Aid off and do them all today. If you’re doing a bunch of new construction, I can’t expect you to call up your contractors and say, we’re not coming back, right?
00:39:57:21 – 00:40:17:17
You’ve got guys to feed, you’ve got a family to take care of. So I’m saying put a system in place to replace that. If you don’t have a lot of maintenance agreements, put a system in place to get maintenance agreements. If you don’t have sales processes, get a system in place. So it doesn’t happen to happen overnight unless you are at the end of your career.
00:40:17:17 – 00:40:38:14
And then it does. And so I’m saying do it earlier. Love it. And I and I’ll get off my soapbox. And I answer your question in a long drawn out way. But it’s there is value for smaller companies. It just takes a different approach. Right? When we go to business, when we go to market with $1 million company doing a million in sales, I’ve got a market and advertise and promote and find somebody who will buy it.
00:40:38:15 – 00:41:03:10
When I go to market with a $20 million company, I pick up the phone and call ten people and they’re going to bid against one another. So it’s a different process, but it’s absolutely sellable. Yeah. When you get a new acquisition or a new owner approaches you and you put it into the pool of different people that, you know, typically what’s the process from start to beginning?
00:41:03:12 – 00:41:21:05
Incredible question. So and we do have a process. So my biggest thing starting out as we do the valuation once again. And then we go to market. And when we go to market we do what’s called blind ads. Right. So I, I don’t want your customers, I don’t want your competitors, and I don’t want your employees to know what’s for sale.
00:41:21:06 – 00:41:35:18
So when we do an ad depending on the market you’re in, like if you’re in Atlanta, Georgia, well, I can say ten year old heating and air company in Atlanta doing $2 million in sales. And nobody’s going to know where it is. Right? They’re not going to know who it is. I live in a tiny town that has two heating and air companies there.
00:41:35:19 – 00:41:54:19
If I say Madison, Florida Heating and Air Company for sale, doing $2 million in sales, everybody knows who it is, right? So depending on where you are, we describe the area differently. And then when people raise their hand and respond, the first thing we do is have them sign a non-disclosure agreement that says, hey, if you say anything to anybody, we’re going to sue you.
00:41:54:19 – 00:42:08:17
The second thing we do is vet them. We want to know who the buyer is. Is a local competitor just kicking tires to see who is for sale or is it really a buyer? And we ask, we, do they have money? Are they really in a position to buy it? Do they have the license required to buy it?
00:42:08:17 – 00:42:27:16
If not, what’s their plan for that. So we vet them and then we give them a summary of information. Once they’ve reviewed that summary, if they’re still interested. I believe in getting a buyer to seller together right away. Now, many brokers that goes against their belief, they want to keep them separated until they close, right? Don’t want any fights.
00:42:27:17 – 00:42:45:23
Why do you think that is? Well, I think because personalities get in the way and they’re worried about losing a sale. My belief is if somebody’s buying your legacy, you need to know who they are, and you need to feel comfortable with them. And if you’re the buyer, you need to know who you’re buying from. So I get them together as quick as we can.
00:42:46:00 – 00:43:04:18
Typically, we’ll do a zoom meeting or a Google meet right away. And let’s see you just meet one another. Let’s see if it’s a good fit personality wise. Right. They’ve already seen the numbers. They already know who the business is. Let’s see if it’s a good fit. And I tell sellers listen, the market strong enough. If you’ve built a good company you don’t have to sell to a jerk, right?
00:43:04:23 – 00:43:19:21
Right. Yeah. Most most of my clients aren’t moving. You’re preaching right now, right? I mean, they’re not moving, right? They’re going to go to the same church. They’re going to stop the same grocery store. These employees, they’re still going to see. And I don’t want you to have to hide your face that oh my goodness, I sold to this person kind of thing.
00:43:20:00 – 00:43:40:07
Right. So let’s get that out of the way early. Then after that, if it’s still a fit, let’s set an in-person meeting. Do we typically do it after hours in the weekend so we’re not walking through the shop lying to your employees, saying it’s an insurance adjuster, read off site somewhere or we’ll do it on a weekend. And so that way let’s let’s get together and see if it really is a good fit.
00:43:40:08 – 00:43:59:22
Let’s look at the let’s look at the trucks. Right. Let’s look at the location. What are let’s let’s kind of get something behind. Just a report that I sent out. And then from that we start fielding offers depending on the size of the business, depending on the location. Sometimes it’s 30 offers, sometimes it’s three offers. Right? It just depends on where they are and what they’re doing.
00:43:59:22 – 00:44:19:18
But then we start fielding offers. And what does the offer look like? Is it an all cash offer? Because that’s the other thing. Back to the people that get up on stage. They often say, oh, I sold for 50 gazillion dollars, but they didn’t say they financed the whole transaction, right? They don’t have any money. They’re walking away broke, and they’re waiting on the money to come in, or it’s tied into future performance or all these other things.
00:44:19:18 – 00:44:38:19
So comparing every offer, is it all cash at closing or is it an urn out of some sort, or are they asking them to stay around and run the business? So there’s all these things that go into it, and then we compare them and let’s see who’s the best fit for you. And then we go under contract. And the under contract process.
00:44:38:19 – 00:44:54:17
We call it due diligence. So a buyer gets the vet. And this is back to the buyer’s side. The questions we were talking about earlier a buyer gets an opportunity to to kind of look underneath the hood. Let’s look at the tax returns. Let’s look at bank statements and make sure that what they’re telling us is really true.
00:44:54:18 – 00:45:12:22
Let’s look at all their Google reviews and every their SOPs. Can they hand them a book that says this is how we do it? Or is it all in the owner’s head and they’re going to need the owner to be there, right? So so all of these things are part of it. And working that till closing. And then we work to what we call day one.
00:45:12:22 – 00:45:31:18
And day one is you handing over the keys and getting a check. And you know, selling a business is different than selling a house or anything else, right? We don’t close the business down for two weeks and say, okay, get everything ready. And now we’re going to go move out. Right. We’re closing on. We’re closing on a Monday morning, notifying staff on Monday afternoon.
00:45:31:18 – 00:45:52:03
And we’re running calls Monday afternoon. Right. I mean, we’re everything’s got to keep going. We can’t tell the customers business. Right. Yeah. We can’t fix your air conditioner today because we’re selling the business. Right. That doesn’t exist. And so so we work behind the scenes for that day one. We want to minimize the impact on the staff because here’s the reality.
00:45:52:03 – 00:46:07:03
The staff are the only people involved that don’t have a say in it. Right? Yeah. They’re the ones that are that have the biggest impact and they don’t get to vote. Yes, we like them or no we don’t. They will afterwards. Right. If they stick around they’re going to they’re going to vote. But but through that process we try to get everything ready.
00:46:07:03 – 00:46:25:02
So do we have gas cards in place? What about uniforms? What about payroll? What about insurance? What about banking? What about accounts of the suppliers? There’s all these moving parts that we don’t think about when you’ve been running a business for years. And obviously, Jason, you just went through it starting up from scratch. So you had to buy a van and get a wrap and hire a guy.
00:46:25:02 – 00:46:44:16
What about a uniform and and are we going to get a logo or you know, what are we going to do. And all right. Yeah. SEO person and and Google my business and all these things that go in there that we have to have on day one transfer over. So, so that’s that’s a lot of moving parts. That’s a that’s a process.
00:46:44:17 – 00:47:09:18
Absolutely it is. And to have it happen on day one right. And here’s the reality. They’re buying your vans but they haven’t bought your vans yet. And so you can’t ensure their van. So now we’ve got insurance lined up that’s going to have to hit the ground running and make sure everybody’s protected. So there’s a lot of things like that that people don’t think of in that process, that we’re behind the scenes trying to get ready to go, hey Patrick, it’s been so awesome having you on cracking the code.
00:47:09:18 – 00:47:23:14
Anything you like to say about you and the business that you run? Yeah. Thank you so much for having me. I had an incredible time. And thank you for doing what you’re doing for the industry. Right. I think there’s a lot of people that get a lot of benefit from doing this. And as you mentioned, don’t know who to ask.
00:47:23:15 – 00:47:41:11
Ask me if it’s a question about valuation. If it’s a question about selling, we’re not going to give you on a sales pitch. We’re happy to answer any questions you have. You can reach out to me, my website, business modification group. I’m active on social media, LinkedIn, Facebook, Twitter. I’m on. I’m on everything. I’ve got a YouTube channel.
00:47:41:12 – 00:48:05:07
Feel free to watch videos on there. If I can help out in any way, I’d love an opportunity. Patrick, you are a very honorable individual, right? That has created a massive imprint within the community of the trades. And like I said, just to be able to have you in in studio, just to let you all know, Pat flew all the way from Florida.
00:48:05:08 – 00:48:21:00
Yep. I just I just just landed 20 minutes before we started through the door and sat down. So you talk about putting someone on the spot delivering exceptional information. It’s been an absolute honor. Until next time of cracking the code. Signing off late.
