Owned and Operated - Episode #161: Private Equity vs. Co-Investment: Strategies for Scaling Small Businesses

Podcast Information:

• Title: Owned and Operated - A Plumbing, Electrical, and HVAC Business Growth Podcast
• Hosts: John Wilson and Jack Carr
• Description: This podcast focuses on the growth strategies for electrical, HVAC, and plumbing businesses. Hosts John Wilson and Jack Carr provide actionable advice on advertising, lead generation, talent recruitment, and mastering marketing strategies to scale home service businesses.
• Release Date: January 16, 2025

1. Introduction and Personal Updates

The episode begins with John Wilson and Jack Carr exchanging updates about their businesses and the fluctuating weather conditions affecting their operations.

• John Wilson [01:15]: "Dude, it's cold. Love that. For us, November finished okay. Missed budget but it was also 80 degrees in November."

• Jack Carr [01:26]: Discusses the unusual weather patterns and how the cold snap has led to overbooked schedules in their HVAC and plumbing services. He also mentions hiring new technicians and onboarding a new service manager to handle the increased demand.

2. Exploring Growth Through Partnerships

The conversation shifts to their recent experiences with outbound campaigns and partnerships with software and lead generation platforms.

• John Wilson [00:24]: "Earlier this year we started an outbounding campaign and we really didn't know where to begin... ultimately we ended up with Hatch. Hatch has been an awesome partner for us."

They discuss the effectiveness of Hatch in automating multi-touch outreach across various channels, which has significantly improved their lead management and conversion rates.

3. Private Equity vs. Co-Investment: The Core Discussion

The core of the episode revolves around comparing Private Equity (PE) investments with Co-Investment strategies as methods for scaling small businesses.

3.1. Understanding Co-Investment Partnerships

• John Wilson [04:11]: "The difference is it's like operations focused and like real partnership. It's not PE... we're not PE. If we said, 'Hey, you want a million dollars, we're going to invest every penny of that million dollars further into your business,' it makes a ton of sense."

John introduces the concept of co-investment, where instead of traditional PE, business owners invest in each other's companies to leverage shared resources and expertise. He emphasizes that this model focuses on operational enhancements rather than just capital infusion.

3.2. Advantages Over Private Equity

• John Wilson [16:31]: "It gets ridiculous. So they're running in the 30% nets, and that's inclusive of some shared services exposure. Without that, they might be like 35%, because there's nothing there anymore."

Jack highlights the operational efficiencies that come with co-investment partnerships, such as consolidated call centers and better purchasing power, which often exceed what traditional PE can offer.

• Jack Carr [08:34]: "You still get some of the buying power... but you get a person on our team for best practices who understands operations... that's where the huge value is."

3.3. Challenges of Minority Investments

The hosts delve into the pitfalls of minority investments, citing real-world examples and personal experiences.

• John Wilson [25:49]: "They took the company because of some decisions that she made and she missed her cash flow covenants. She sold minority and she lost majority, which was probably the most expensive mistake of her life."

They discuss how minority stakes can lead to loss of control and potential takeovers, referencing Jenny's Ice Cream case where minority investors exploited contractual clauses to seize control.

• Jack Carr [18:54]: "The problem with minority contracts is they are not written in their favor... they end up losing the company."

3.4. The Importance of Control and Trust

Maintaining majority control is emphasized as crucial for operational integrity and long-term success.

• John Wilson [37:09]: "Imagine making a minority investment in something like that, expecting a return, expecting good financials... I don't think it's possible without control."

They argue that without control, managing financial transparency and operational standards becomes challenging, increasing the risk of fraud and mismanagement.

4. The Role of Operators in Scaling Businesses

A significant portion of the discussion focuses on the operator's role in business growth and how their effectiveness can make or break scaling efforts.

• Jack Carr [28:07]: "Why did they miss it? And the answer is probably operator. There's an issue with the operator."

They observe that often, the operator is the bottleneck in scaling, and replacing or enhancing the operator's effectiveness is key to successful growth.

• Jack Carr [37:20]: "It's always the operator. It’s always the guy in charge."

5. Potential Group Investment Models

John and Jack explore the possibility of multiple small business owners forming a consortium to invest collectively, aiming for greater leverage and shared best practices.

• John Wilson [32:04]: "How do you leverage enough to buy like a billion-dollar shop... trading 5% equity and everybody gets into something like that."

They discuss the complexities of leadership, trust, and centralized operations required to make such a model work, acknowledging the high risk involved.

6. Legal and Operational Hurdles

The conversation delves into the legal complexities and operational risks associated with co-investment and minority stakes.

• John Wilson [35:36]: "Everybody's company used to do it. But at some point, you have to professionalize."

They emphasize the necessity of robust legal agreements and transparent financial practices to safeguard against potential pitfalls in co-investment scenarios.

• Jack Carr [26:38]: "It needs to depend on who the large operator is that's doing this. Because either there needs to be a long-term vision..."

7. Future Directions and Scaling Plans

The hosts conclude by discussing their plans to expand into new markets and the strategies they intend to employ, considering the insights shared during the episode.

• John Wilson [39:53]: "It just makes sense, you know. I was describing it to these other people, and I'm like, oh, my God. Like, this actually just makes sense."

They express interest in partnering with like-minded operators to leverage shared resources and scale efficiently without the constraints of traditional PE.

8. Conclusion and Call to Action

Wrapping up the episode, John and Jack invite potential partners to reach out and explore co-investment opportunities.

• John Wilson [39:19]: "If you're in Ohio and you want a partner, hit me up, I guess."

They encourage listeners to visit their website, www.ownedandoperated.com, for more information and updates on strategies to grow home service companies.

• Jack Carr [40:15]: "There’s only four cities in between us... Columbus, Cincinnati, Lewis, Louisville, Bowling Green, and then Nashville. So five cities, man."

Key Takeaways and Insights

• Co-Investment as an Alternative to PE: Co-investment offers a more operationally focused partnership compared to traditional PE, emphasizing shared expertise and resources to scale businesses effectively.

• Risks of Minority Stakes: Maintaining majority control is crucial to prevent loss of operational integrity and ownership, as minority stakes can lead to unintended takeovers and loss of control.

• Importance of Trust and Professionalization: Successful scaling through partnerships requires high levels of trust, transparent financial practices, and professional management to mitigate risks.

• Role of Operators: Effective operators are pivotal in driving business growth. Identifying and enhancing operational leadership is essential for scaling home service businesses.

• Legal Safeguards: Robust legal frameworks are necessary to protect investments and ensure that partnerships function smoothly without conflicts.

Notable Quotes

• John Wilson [04:11]: "The difference is it's like operations focused and like real partnership. It's not PE... we're not PE."

• Jack Carr [08:34]: "You still get some of the buying power... but you get a person on our team for best practices who understands operations."

• John Wilson [25:49]: "She sold minority and she lost majority, which was probably the most expensive mistake of her life."

• Jack Carr [18:54]: "The problem with minority contracts is they are not written in their favor... they end up losing the company."

• John Wilson [37:09]: "Imagine making a minority investment in something like that, expecting a return, expecting good financials... I don't think it's possible without control."

For More Information: Visit www.ownedandoperated.com to explore strategies for growing your home service business, access additional resources, and stay updated with the latest episodes.

Thank you for tuning into Episode #161 of Owned and Operated. If you found value in this discussion, subscribe and join us every Tuesday for more insights on scaling your plumbing, electrical, or HVAC business.