Acquiring Minds: How to 4x a Contracting Business in 3 Years
Episode: How to 4x a Contracting Business in 3 Years
Release Date: January 16, 2025
Host: Will Smith
Guest: Mike Heath, Co-Owner of Stateline Products
Introduction
In this episode of Acquiring Minds, host Will Smith delves into the journey of Mike Heath, an entrepreneur who successfully quadrupled a small garage door contracting business within three years. Through in-depth discussions, Mike shares his experiences, challenges, strategies, and key insights on acquisition entrepreneurship.
Mike Heath’s Background and Transition to Business Buying
Mike Heath began his entrepreneurial journey in real estate, focusing on flipping houses and managing rental properties. However, after experiencing both successes and a significant loss of $80,000 on a real estate deal, Mike sought a more scalable path to financial freedom.
Mike Heath [06:04]: "I liked the mortgage business but taking phone calls to 11:00 at night really didn't fit the lifestyle that I wanted."
Encouraged by a broker friend who had a track record of acquiring over 150 businesses, Mike shifted his focus from real estate to buying established businesses, seeing it as a faster route to financial independence.
Acquisition of Stateline Products
The Deal Structure:
In November 2020, Mike and his two silent partners acquired Stateline Products, a garage door contracting business in St. Louis, using an SBA loan of $250,000, requiring only $50,000 in cash from the partners.
Narrator [00:00]: "In the very first year of ownership, Mike and team got it to $7.5 million."
Growth and Challenges:
Mike rapidly expanded the business, increasing revenue from $2 million to $7.5 million in the first year and further to $9.5 million in 2023. However, this aggressive growth led to significant cash flow management issues.
Mike Heath [35:17]: "Understanding the cash flow is the biggest thing."
Cash Flow Struggles:
The primary challenge was aligning vendor payment terms with customer payment cycles. Mike underestimated the cash needed to sustain rapid growth, leading to vendor pressure and a temporary reliance on personal funds from partners.
Mike Heath [04:39]: "We didn't realize if we just had the conversation at the beginning and explained that we weren't able to build, you know, the material dropped early, so we weren't able to bill and it's going to take another 15 days."
Incentivizing the Operator: Jesse’s Role
To manage the growing business, Mike brought in Jesse, a trusted employee from a competitor, as the operator. Jesse’s compensation was structured to align his interests with the company’s success, offering equity incentives based on performance.
Mike Heath [21:49]: "We gave Jesse 5%. And the deal was for every $100,000 dollar business netted, we would give him a percent increase up to 20%."
This structure motivated Jesse to drive business growth, eventually increasing his equity stake to over 15%.
Mike Heath [79:55]: "I think he's over 15 though."
Lessons Learned from the Initial Acquisition
Mike emphasizes the importance of thorough due diligence, especially regarding cash flow understanding and establishing a line of credit from day one. He acknowledges that better initial systems could have mitigated early cash flow crises.
Mike Heath [74:44]: "Understanding the cash flow is the biggest thing."
Additional takeaways include the necessity of implementing robust systems and leveraging technology to streamline operations.
Mike Heath [76:28]: "Sightline... was really cut her hours by 10 hours a week, just not having to deal with the stuff."
Financial Performance and Growth Trajectory
Under Mike’s leadership and with Jesse’s operational expertise, Stateline Products saw impressive revenue growth:
- 2020: $2.5 million
- 2021: $7.5 million
- 2023: $9.5 million
- 2024 (Projected): $4 million
- 2025 (Projected): Over $9 million
Despite the projected dip in 2024, Mike remains confident in the business’s resilience and growth potential.
Mike Heath [33:03]: "It was extremely stressful. We didn't understand the cash flow of the business."
Expansion into the Pool Business
In May 2023, Mike expanded his portfolio by acquiring two pool businesses: Pool King Recreation and Florida Pool and Spa. These acquisitions were made with cash and later refinanced with conventional debt, aiming to diversify and stabilize revenue streams.
Mike Heath [83:14]: "We closed on Pool King May 1st and we closed on Florida Pool May 26th. So two transitions at the same time. Chaotic, hectic."
These businesses added significant revenue, with Pool King generating around $5 million annually and Florida Pool anticipating $1.4 million.
Insights on Acquisition Entrepreneurship vs. Traditional Paths
Mike reflects on the differences between his hands-on experience and the more formal, education-driven approach of MBA graduates and private equity-backed searchers. He values real-world experience and resilience over academic credentials.
Mike Heath [80:54]: "I feel like I'm paying my tuition right now."
Despite feeling out of depth at times, Mike appreciates the unique insights and perspectives brought by his experiences, differentiating him from peers who rely heavily on theoretical knowledge.
Current Status and Future Plans
Today, Mike orchestrates three businesses, having streamlined operations and reduced his active involvement to minimal hours thanks to effective delegation and system implementation. His future plans include further acquisitions, particularly in the commercial service sector, and continued organic growth.
Mike Heath [85:00]: "Pool King is sitting around $5 million a year and Florida Pool is... $1.4 million."
Mike envisions a diversified portfolio with robust revenue streams, leveraging the strengths of each acquired business to sustain and enhance overall profitability.
Conclusion and Key Takeaways
Mike Heath’s journey underscores the potential of acquisition entrepreneurship, highlighting critical factors for success:
- Thorough Due Diligence: Understanding cash flow dynamics and establishing financial safeguards like lines of credit from the outset.
- Effective Team Structuring: Incentivizing key operators to align their success with the business’s growth.
- System Implementation: Utilizing technology and structured processes to streamline operations and reduce dependency on individual efforts.
- Resilience and Adaptability: Navigating financial crises and operational challenges with grit and strategic problem-solving.
- Strategic Expansion: Diversifying acquisitions to stabilize revenue and mitigate industry-specific risks.
Mike encourages aspiring entrepreneurs to take actionable steps without overanalyzing, emphasizing that imperfect deals can still yield substantial growth with the right mindset and adjustments.
Mike Heath [93:16]: "Sometimes you just got to do it."
Notable Quotes
- Mike Heath [06:04]: "I liked the mortgage business but taking phone calls to 11:00 at night really didn't fit the lifestyle that I wanted."
- Mike Heath [21:49]: "We gave Jesse 5%. And the deal was for every $100,000 dollar business netted, we would give him a percent increase up to 20%."
- Mike Heath [35:17]: "Understanding the cash flow is the biggest thing."
- Mike Heath [74:44]: "Understanding the cash flow is the biggest thing."
- Mike Heath [79:55]: "I think he's over 15 though."
- Mike Heath [93:16]: "Sometimes you just got to do it."
Further Resources
- Stateline Products: YouTube Channel
- Episode Summaries: acquiringminds.co
- Follow Acquiring Minds on YouTube: Acquiring Minds YouTube
- Subscribe for More Episodes: Visit the website or sign up for newsletters through Acquiring Minds
Tune in to this episode for a comprehensive look into the trials and triumphs of acquisition entrepreneurship, and gain actionable insights from Mike Heath’s real-world experiences.