#183 The $250M HVAC Collapse: Inside Air Pros' Bankruptcy

Summary

Owned and Operated - A Plumbing, Electrical, and HVAC Business Growth Podcast

Episode #183: The $250M HVAC Collapse: Inside Air Pros' Bankruptcy

Release Date: April 3, 2025

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Introduction: The Collapse of Air Pros

In Episode #183, hosts John Wilson and Jack Carr delve into the dramatic bankruptcy of Air Pros, a major player in the HVAC industry. This episode unpacks the series of missteps and aggressive strategies that led to Air Pros amassing $250 million in debt, culminating in their downfall.

Aggressive Growth and Exuberant Spending

The conversation begins with an analysis of Air Pros' growth strategy. John Wilson remarks, “If we look at some of the decisions Air Pros made, the question wasn't if, it was when Air Pro Solutions has filed for bankruptcy. And then the way they spent money was absolutely wild” (00:00). Jack Carr echoes this sentiment, highlighting the unsustainable financial practices: “What happens when you give an average 32 year old $200 million? They ended up racking up $250 million of debt. Boom. Just freaking boom” (00:13).

Air Pros’ strategy involved aggressive acquisitions during a period of historically low interest rates. This allowed them to expand rapidly across eight states with nine different business units. However, the spending was reckless, including extravagant marketing expenses such as sponsoring Miami Dolphins cheerleaders for HVac acquisitions—a move Carr describes as “nonsensical level of expenses” (04:08).

Private Equity and High Leverage

The hosts discuss the role of private equity in fueling Air Pros' expansion. Andrew Pereira, Air Pros’ founder, exemplified the new wave of young, high-leverage executives in an industry traditionally dominated by older, more experienced leaders. “These old white hair guys who are 50, 60 years old... But, some of the people out there who are playing this private equity games and really levering up on $200 million in debt. Yeah, they're in their early 30s” (05:19).

Wilson summarizes the critical factors leading to the collapse: “Too much debt, not enough cash flow, irresponsible expenditures, and exuberance in pricing” (05:49). Carr adds that while debt can be a powerful lever for growth, it becomes detrimental when it outpaces cash flow: “Debt is an amazing lever to grow, but it can't outgrow your cash flow” (25:10).

Integration Challenges and Mismanagement

A significant portion of the discussion centers on the difficulties of integrating multiple acquisitions. Both hosts agree that merging diverse businesses is inherently challenging. Carr notes, “Smashing businesses together and running multiples is not an easy thing” (06:28). They draw parallels with their own experiences, emphasizing that successful integration requires meticulous planning and competent management.

Wilson shares his struggles with running construction-based businesses, admitting, “We don't know how to run a construction business. We just don't” (36:56). This lack of expertise in core operational areas contributed to the inability to effectively manage and integrate newly acquired units, exacerbating financial strain.

Fraud and Due Diligence Failures

The episode also touches on fraudulent activities within Air Pros' acquisitions. Specifically, the acquisition of a company run by Lewis Bruno, who had a history of fraud allegations, highlights glaring due diligence failures. Carr recounts, “They bought a company that was a dog. They expected it to be X in revenue, and that revenue is probably zero or just way, way less because of fraud” (07:12).

Despite clear red flags, such as Bruno’s criminal history and multiple customer complaints, Air Pros proceeded with the acquisition, likely due to their overly optimistic growth projections and rushed decision-making.

Financial Mismanagement and Debt Overload

Air Pros amassed substantial debt without ensuring adequate cash flow to service it. Wilson explains, “They were expecting like $50 million of EBITDA after all these deals” (18:59), which was unrealistic given their actual financial performance. The company’s unsecured obligations totaled $45 million, primarily vendor and seller notes, adding to the financial burden.

The hosts highlight the unsustainable nature of Air Pros' financial strategy: “They were paying just absolutely insane prices” (18:20). This overvaluation, combined with high-interest floating debts, set the stage for inevitable financial collapse when market conditions turned unfavorable.

Broader Industry Implications and Future Outlook

Wilson and Carr discuss the broader implications of Air Pros' bankruptcy, suggesting it may be indicative of a larger trend within the HVAC and home services industries. They anticipate more companies experiencing similar fates due to aggressive leveraging and inadequate cash flow management.

Carr points out, “What happens when you give an average 32 year old $200 million and they think that they're a branding expert and they're going to go through and they're going to spend” (05:49), critiquing the trend of young executives making high-stakes financial decisions without the requisite experience.

Lessons Learned and Strategic Advice

The episode concludes with valuable lessons for business owners in the home services sector:

1. Cautious Acquisition Strategies: Ensure thorough due diligence and realistic valuation of target companies to avoid overpaying and inheriting problematic assets.

2. Sustainable Debt Management: Align debt levels with actual and projected cash flows to prevent financial strain.

3. Effective Integration: Prioritize competent management and strategic planning during the integration of new acquisitions to maintain operational efficiency.

4. Ethical Practices: Avoid associations with dubious partners and maintain high ethical standards to protect the company’s reputation and financial health.

Wilson advises, “Ask them real questions… you should ask real questions. Like, hey, what are you marked at right now? What is the current success?” (34:02), emphasizing the importance of transparency and informed decision-making in business transactions.

Conclusion: A Cautionary Tale

The bankruptcy of Air Pros serves as a stark reminder of the perils of unchecked growth, excessive debt, and poor management within the HVAC and home services industries. Through their comprehensive analysis, John Wilson and Jack Carr provide listeners with critical insights and actionable advice to navigate the complexities of business growth responsibly and sustainably.

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Notable Quotes

• John Wilson (00:00): “If we look at some of the decisions Air Pros made, the question wasn't if, it was when Air Pro Solutions has filed for bankruptcy. And then the way they spent money was absolutely wild.”

• Jack Carr (00:13): “What happens when you give an average 32 year old $200 million? They ended up racking up $250 million of debt. Boom. Just freaking boom.”

• John Wilson (05:49): “Too much debt, not enough cash flow, irresponsible expenditures, and exuberance in pricing.”

• Jack Carr (06:28): “Smashing businesses together and running multiples is not an easy thing.”

• John Wilson (18:20): “They were paying just absolutely insane prices.”

• Jack Carr (25:10): “Debt is an amazing lever to grow, but it can't outgrow your cash flow.”

• John Wilson (36:56): “We don't know how to run a construction business. We just don't.”

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For more insights and detailed discussions, visit www.ownedandoperated.com and subscribe to the Owned and Operated podcast on your preferred platform.

Transcript

[A]

If we look at some of the decisions Air Pros made, the question wasn't if, it was when Air Pro Solutions has filed for bankruptcy. And then the way they spent money was absolutely wild.

[B]

What happens when you give an average 32 year old $200 million?

[A]

They ended up racking up $250 million of debt. Boom. Just freaking boom.

[B]

I think we're gonna have some trouble. There's gonna be a few more that pop through.

[A]

I think we're gonna see more. So the latest thing that we've been working on is maximizing our LSAs, which is local service ads, and also optimizing our Google my business profiles. So what that means is we're making sure that all of our LSAs are on when we need them and they're maximized to give us the best ROI. And then for GMBs, it's been partnering with service scalers to drive way more traffic through our GMBs. GMBs are almost like the new SEO. The more you put onto them, the better the performance. So our GMBs have been consistently getting better week after week after week. And it is our currently our single most impactful organic lead channel. So we'll sell hundreds of thousands of dollars a week through our GMBs. And I think last week we got 900 phone calls. So really impactful, awesome investment. And we've been able to partner with service killers on both of those things. If you want to hear a little bit more about service scalers, check out service scalers.com welcome back. Yeah, but I'm, I'm excited and look, I, I just, I'm not excited for like the pain, the loss, the, you know, the, the job, job impact of this. But I'm, I'm excited because this is, we're, today we're going to be covering the largest bankruptcy in H vac in a long time and we're talking about the $250 million explosion that is Air Pros.

[B]

Boom.

[A]

Just freaking boom. Absolutely wild. I mean we, we've been talking for a while on the show about like, hey, people are struggling, people are whatever. And, and I've known a lot of people on the brink of bankruptcy. I do know a lot of bankruptcies unfortunately, like north of 15 more mostly small operators. But this is the first humongous one. But there's some other companies that are really struggling. I don't know if we've talked about, you know, Gettle's revenue is down like 60 or 70%.

[B]

We talked about it at the end of last year because I, we ran through 2023, 2024 numbers on people locally to my market who are down 20, 30%. And these are 100 million dollar companies.

[A]

Yeah.

[B]

And so that, like, you know, we've talked about before, especially for you, less so for me. But on a percentage base, there's a huge difference between being 20% down on like 3 million in revenue and being 20% down on 219 million revenue or whatever.

[A]

Yeah, no, 100%. I mean, and ghetto, you know, Ghetto got up to like 180 million of revenue. I think they're at 60 or 70 right now. It's wild. I mean, they sold off $40 million in California and then their other primary branches have really struggled. This isn't about Ghetto. We're talking about Air Pros. But it was just interesting because this was our first real big explosion. So I'm gonna, I'm gonna set the stage, set it. 2017, a man in Florida, I feel like up in Ohio. That's how all the, that's how all the news starts. A Florida man. So Air Pro. Air Pro was founded in 2017. And I think I've got the guy's name in here of who the founder was, but they sold it pretty quick. So Air Pro, they bought a company in Florida in 2017, and then they went on to aggressively grow through greenfields and acquisitions and like aggressive. Aggressive, like kind of crazy. And then the way they spent money was absolutely wild. Like there was some pictures on Twitter of like some cheerleaders from some major sports team. I don't even know.

[B]

Like Dolphins.

[A]

Miami Dolphins. Yeah, well, they sponsored the Miami Dolphins. I think it's just a sponsor. But then the cheerleaders came and did a photo shoot with them over acquiring another H Vac company. Like, it's like nonsensical level of expenses. Right? Like that. That just doesn't even make sense. They got through eight states, they had nine different business units. And basically this is a product of super low interest rate acquisitions. 8 Exuberance, like having CH, like a major football team, cheerleaders come and like take a photo shoot with you over an H Vac acquisition is like the definition of exuberance to me. So like 2020, 2021, free debt. Money flying in from the government all over the place. H VAC is starting to heat up and these guys just absolutely went crazy. Acquiring all these companies for prices that just didn't make sense.

[B]

Well, I mean, yeah, even 2017 through 2020, I mean, the interest rates were ridiculously low. Yeah, all the way throughout. All the way probably up until, what, 2021, 2022, when we started seeing the. The Prime plus start to decline. And his name was Anthony Pereira, I believe.

[A]

Yeah.

[B]

And you know, the crazy part to this, John, is like, he's our age.

[A]

Yeah.

[B]

You know, I always. I always imagine, like, this private equity playbook in this group is the. These old white hair guys who are 50, 60 years old. They've been doing this for years and years. But, you know, some of the people out there who are playing this private equity games and really levering up on $200 million in debt. Yeah, they're, you know, they're in their early 30s.

[A]

Yeah. I mean, you know, someone's got to be the operator. Like, this is. This is tough. Yeah. If I were to. If I were to like, summarize the next 30 minutes that we dive into this, it's going to be too much debt, not enough cash flow, irresponsible expenditures, and exuberance in pricing.

[B]

Yeah.

[A]

It's like those four things are the killers. Because I think. I think it's easy to look at it. And they can be like, ah, it was bad timing. Interest rates rose. And I'm like, interest rates didn't make you sponsor the Miami Dolphins.

[B]

Yeah.

[A]

Like, there's clearly like, dumbness going on.

[B]

I also don't think that. That it was exuberance in itself. I think that there's a big part of this that's. That's not talked about very often is the difficulty of actual acquisitions. Right. It was a non understanding of, you know, we hear this, this. This trope of, oh, you just take a bunch of businesses, smash them together, and they have a, you know, a higher multiple arbitrage. And the reality of it is like, smashing businesses together and running multip.

[A]

Oh, yeah.

[B]

Is not an easy thing. Like, I'd love to, during this episode to like, hit your story about buying electrical. We talked about how amazing electrical is, but it was a hard.

[A]

Took a lot of work. It took a lot of.

[B]

Buying a plumbing company took a lot of work. Like, this isn't easy.

[A]

Yeah, it's. It's definitely not. And I think, who are you buying? I think there's a couple, like, a couple lessons to walk away from this with is, who are you buying? Like, if you were the acquirer and if you're getting ready to sell to, who are you selling to? And asking them real questions about, like, hey, what are you marked at right now? What is the current success? You know, I had. I had somebody. It was like, I want to do an episode all alone on this because the level of stupid was so astonishing that I was like, I have to communicate this to a large group of people. I got cold texted the other day. I don't even know how this dude got my phone number. I got cold texted the other day by some random ass guy, and he's in my community, and he's like, hey, do you want to sell? Do you want to sell the. The business? Here's the other brands we own in the market. The other brands he sent me in the market are like 500,000 to, like, $2 million brands, and the largest one being, like, 12 to 15. And I'm like, 1. The way he spoke was insane. So, like, the way he, like, came off and presented himself was very like Grant Cardone. And I'm like, okay, well, the brands you have are terrible. And the reason that you have these terrible brands is the only people that. That are going to resonate with the way that you're approaching them are people with bad brands. Like, if you want to be taken seriously, you should be serious. Yeah. It was. It was just so unbelievably dumb. And then he went on. And then I went on to just ask some probing questions, like, hey, walk me through the platform a little bit. And his answer was so succinct. I was like, this is actually probably going to be the next Air Pros. Like, because his answer was, hey, we're succeeding around the country. And I'm like, oh, my God, you guys are bankrupt. Like, you have 15 brands. They're all terrible. The largest one is $12 million. You're in a couple states, like, you are the next Air Pros. You guys are going to go bankrupt. So just because somebody reaches out to you and says they've got a couple bucks, which this guy, and I quote, I will back up the Brinks truck for you. Which was such an idiotic way to approach somebody. I was like, this. This is going down. I'm fascinated to watch this go down. I will buy the parts.

[B]

Yeah.

[A]

Which is what some people are doing with Airbrush. But be really cautious who you sell to. Just because somebody has a couple of bucks doesn't mean shit.

[B]

I was to say, they usually don't have a couple of bucks there. They're playing with somebody else's money. High interest rate to get someone to loan them or back them at that. That's about it.

[A]

Yeah. I mean, and how many sellers. How many sellers sold Air Pros going off of the story of Air Pros without understanding the financials of Air Pros, like if you dive into this, which we will. Like they've been, they've been working for over two years to un this business.

[B]

Yeah.

[A]

So they, they hired like turnaround people back in 2023. Like they knew this was a problem two something years ago. And how many deals did they still do in 2023 and 2024 and sell the owner on the dream of the second bite when they're working through like bankruptcy.

[B]

I was going to say that's one of the sadder parts of the story is the owners that have sold because you know, they rolled in equity 20, 30, 40, 50%, who knows how much.

[A]

Or $200 million of revenue. You should roll equity. This thing's worth X. Yeah.

[B]

You have an earn out in three years and we'll roll you in 20 million. And you're going to make 6x on that. Yeah, that 20%. Excuse me, you're gonna make 6x on that 20% and they walk away with way less. Way, way, way less.

[A]

Yeah. Now I, I will say I am very pro rolling and earnouts and whatever it is that we bring on a partner. I will roll a ton of it. I will also ask a lot of questions.

[B]

Yeah.

[A]

Because I think that people just assume that the bigger companies know what they're doing when really it's just some freaking idiot talking about backing up a Brinks truck. Like this guy has no idea what he's doing.

[B]

Tell us how you really feel, John. Tell us.

[A]

It was just the mo. Like I'm, I'm like I'm, I'm reading these texts and I'm like, is he like, am I being like pranks right now? It was, it was such a level of stupid to approach a business my size. I was just amazed. And then I look at the portfolio and it's all a bunch of one million dollar shops. And I'm like, got it. You just actually don't know how to approach very dumb. Okay. So Air Pros. You know, one of the other things I thought was interesting about. And we'll go through like a timeline, but one of their first couple deals is they bought the Lewis Bruno guy.

[B]

Yeah.

[A]

Who I don't think anybody's allowed to talk about, but I don't have an NDA. But Lewis Bruno was like, it was this thing down in Florida and I think he was doing a grant Cardone style. Like, I'll take 30%, we'll teach you how to sell stuff. And I don't think he ended up going to prison, but he's Been investigated for fraud and all types of crazy over the past couple years.

[B]

Yeah. The court of public opinion has definitely is not a fan. Not a fan.

[A]

Yeah.

[B]

I mean he, he is the, the, the bottom feeder that we in the industry, you know, does no benefits for the industry whatsoever.

[A]

I don't even honestly know. I wouldn't recognize the guy in a picture. I had never heard of him until a few months ago. Someone, another like. Well I think I was talking about like Grant Cardone and like that whole like freaking racket right now. This, this guy came up and I was like, who, who is this? I've literally never heard of him. But I gu. Probably bigger in the south. But yeah. So they hired, they brought on Bruno. Total home performance. Bruno's been investigated for fraud. They were using scare tactics to convince customers and seniors to buy like crazy H Vac repairs. That honestly reminds me a ton you at Pantheon. I can't believe Service Titan did this but they brought that freaking comfort advisor on that single handedly sold $15 million. And when you dive into what he's doing, dude, he IS Force feeding 3 year old systems into sales. And I'm like, I don't think Service Titan wants that on their Pantheon main stage because they're basically saying that that's okay. Like it was, it was a, it's a really gross story. He was doing forgery and loan fraud. They were submitting fake loan applications using forged signatures. When our, when our lending companies have told us that people do that. I thought that was a joke. So this is. I never knew that somebody actually did this. 245 complaints filed and they were all customers being misled about pricing, financing terms and installed H VAC units. The guy was arrested and charged in 2020 for defrauding customers and lenders. I wonder why people can't talk about him. Because people, I've had people say to me like, ah, you can't talk about him. It's something to do with this court. Dude, you did this like you were arrested.

[B]

Yeah, I mean I think the, the big thing on this entire segment is allegedly because I don't know if he was convicted. Right. So he was arrested. We can say that but we can't say that he was doing these things. He allegedly was doing these things. And that's where I think it fault the final.

[A]

I'll say where there's smoke, there's fire. Tends to be my default operating mode.

[B]

Jack is saying allegedly.

[A]

Yeah. So look, if you're, if, if you're being. If a lot of People think you did fraud. You probably did some fraud. Okay, so, so I think the important there is like hey, who are you buying? My guess is Air Pros had no idea they were buy some fraudster running like a crazy ass business that would later be sent to jail. Like that's a huge risk. No one's going to sign up for that.

[B]

So let me ask you this though. Shouldn't like I feel like a decent portion if you knew the industry well enough, which you should if you're going to do a private equity roll up of H Vac companies. Like I feel like you shouldn't be able to find that in due diligence. At least some hint of that. No, I don't know.

[A]

I mean I'm going back to the idiot that texted me like his reference of like why he was interested in Wilson, which he gave to me. I didn't ask him were like nonsensical but I mean like it was like. So like my point is I don't think he had any idea what we were doing. I don't think there was any level of due diligence at all. Otherwise he would have approached it very different.

[B]

Yeah, but so, so say you said yes though. You said yes. It goes into a due diligence acute.

[A]

Yeah.

[B]

And then at some point you're going to run like a legality due diligence. Like are you in any kind of lawsuits right now? What do you have on the books? I. If you had 240 complaints, they didn't come in one year or in like six months. They came over.

[A]

Yeah.

[B]

The course of the thing and you're still like ah, so he's got a few complaints.

[A]

Yeah.

[B]

So what?

[A]

Yeah, I mean it, it could be in 20, 20 maybe like deals were picking up. I mean I do think this is, this is back to my point of exuberance. Like you're right, that should have been caught. And I bet they still did that deal. Like they obviously did and they probably overpaid for it because they were exuberant. This is also the same people that had Miami Dolphins in an acquisition. So in my mind we're like they were in a different frame of mind.

[B]

Yeah.

[A]

They, they clearly thought they were going to a billion or bust.

[B]

Yeah. I mean they're riding the train of easy money. Right. And we can, you know that that was my point in the beginning with just like what happens when you give an average 32 year old $200 million and they think that they're a branding expert and they're going to go through and they're going to spend. Like you see it, you don't see it so much in the H VAC field. But back when we were in, back when I was in San Francisco during the same time, like we saw that same kind of VC money hit.

[A]

Yeah.

[B]

All these different.

[A]

I mean, we work.

[B]

Yeah.

[A]

You know, another really great example of like absolute exuberance and like nonsensical expenditures.

[B]

And an over expense on like weird branding play. And just like this, this idea that, that hey, the money's easy and that we're going to make a ton in H Vac and the home services industry when in reality, like we run pretty tight margins comparatively.

[A]

Yeah.

[B]

And so the.

[A]

And acquisitions are hard.

[B]

And acquisitions are hard. So there's really not that much room for like this crazy exuberance. The only place there is actually room for Exuberance is the $1 million companies where it's the owner by himself and he can buy a boat.

[A]

Like 300 grand of cash flow.

[B]

Yeah, he can buy a boat, but it's nowhere else. It really is.

[A]

I agree, I agree. So they ended up, they ended up racking up $250 million of debt to throw down all these deals. So they, they were shopping.

[B]

Was it nine?

[A]

Looks like nine deals. I know they had some greenfields. I think they have 15 locations or 20 locations. It was a lot. I mean, eight states, you know, there's a lot going on there. Almost 200 million bucks in a term loan. There's 23 million in revolving credit. I'm sure there's vendors on top of that. And I think that's just like. That's their secured debt.

[B]

Yeah.

[A]

The unsecured obligations is 45 million dollars. So actually I understated it. It's not 250 million, it's 300 million. And the 45 million in unsecured obligations, that's probably going to be vendors. That's going to be like seller notes. That's going to be like. That's going to be people caught up in the blow up. That's not even the bank that. That allowed this. It's going to be people caught up in the blow up.

[B]

Exactly. And so that on average of across those 15 locations is like $20 million per location. So if you want to talk about overspending, I know some of the ones that they bought, I was going through the list as I was looking at them. They're not $20 million companies. I mean, maybe they spend more on some and less on others.

[A]

Yeah.

[B]

But on the Whole, there's no way they, they paid market value.

[A]

Well, they were paying, they were paying just absolutely insane prices. Now there are, you know, during the peak of this, back in 2021, there was a company here, Heartland, if, if you've got a strategic location, the multiple changes, right. According to what they're willing to pay. And maybe that's like a gap in their market or that's usually what it is. So at one point, heartland paid an 18 times in 2021 for an H Vac business in Ann Arbor because it was a gap in their market. 18 times?

[B]

Yeah.

[A]

That is a flabbergasting number. Just unreal. And my guess is that's similar to what happened here, where they were overpaying just to the absolute hilt. And a lot of it, you know, when we talk about like $300 million of obligation, a bank will comfortably give you three to four times your EBITDA in debt. So I think a lot of people on Twitter were like, how did they even get that much money in debt? Because their EBITDA now is like under what's probably $5 million. It's probably very low for the size of business they are, but they were expecting like $50 million of EBITDA after all these deals. So the way their spreadsheet mathed it together is they were gonna, they were gonna be at roughly a 4 to 5 times debt to EBITDA, which is heavy, but it's not that crazy compared to, I think last year they actually finished at like 18 of EBITDA or 15 of EBITDA. But they have to pay their $300 million of debt. So I, and I think a lot of it just from what I've seen in the, some of the deals we looked at, like Bruno's a great example. Look, they bought a company that was a dog. They expected it to be X in revenue, and that revenue is probably zero or just way, way less because of fraud. I, I think a lot of bad acquisitions and then just levering to the hilt.

[B]

Did, did you, did you get any information? I couldn't find any information on it. Of like the, the. Where they secured the debt from or the type of debt.

[A]

No.

[B]

Yeah, no, couldn't either.

[A]

Yeah, I mean, I think some of it private.

[B]

Yeah, I, I would probably invest in, you know, things like that. Yeah, but that's my curiosity because I was, I mean, I wouldn't be surprised if they picked some kind of, you know, I don't, to be honest with you, I don't know what debt looks like at 200, 300 million. I would imagine it, it's, it's different than debt at 1 to 5 million. Just like banking 1 to 5. Like I don't understand terms in, in that range. So I was looking to see like, what. Well, maybe it's the type of debt, because I've seen like, yeah, high, high interest, not fixed debt. Like. Yeah, of course, yeah, it goes up two, three points and then boom.

[A]

Well, I think that's a lot of it too. Like a bunch of this debt is floating. Yeah, yeah. A bunch of this debts floating, conventional debt. I mean, I don't know about these specific terms, but when we've shopped conventional seven year terms, really strict covenants. And like this business, there's a book, it's by Jeff Sands and it's called Corporate Turnaround Artistry. And it is a great read. I encourage it for everybody. I've read it when the business was going through some really challenging moments because I've wanted to understand fully what does bankruptcy really look like. We've never gotten close enough to really experience any of it, but it walks you through it. And in this case, the bank starts calling the shots. At a certain point, a founder doesn't get to run this thing into the ground. The bank starts calling the shots. So in 2023, the bank started saying like, hey, we're, we're bringing in our people. We've given you hundreds of millions of dollars. We're going to start mandating our own team to be inside this business to help fix it. And like you're going to be kicked out.

[B]

Which is why he left in 2024, right? He left before the bankruptcy, left a year before. Yeah, it's been bad for a while prior.

[A]

Two years. Yeah.

[B]

You know, yeah.

[A]

What I'm fascinated by is how many others of these are we going to see. Like this is two years. I haven't honestly heard about Air Pros being a challenge. I have heard about Ghetto being a challenge. I've heard about Next Gen being a challenge. I've heard about a lot of, you know, Heartland went through a really challenging point. I think they're doing better now. But I'm, I'm fascinated to see how many other breakups we see like this. And this is just following Sila selling for like record dollars. Heartland is going to try to trade in the next year. All the big ones are going to try to trade and now they're like, they're plagued by this massive bankruptcy. We're about eight months into Avoca and Avoca has Been an awesome partner for us in our call center. So what Evoca does for us is they do two different things. One, they have their Coach product. And Coach has been helping us do what it says, coach our csrs every single day. It listens to every call and uses AI technology to basically pick apart that call and tell us where we can improve. And for the last eight months, we've been consistently improving our scores, which has been awesome. The other product they have is just conventional book, and it's an AI tool that books over the phone. A customer calls in and it either handles overflow, as in our phones are full, or it does nights and weekends for us. And a customer will call in and actually deal with an AI agent all the way through booking. And the savings inside call center has allowed us to ramp up our marketing to continue to grow even more. Thank you, Evoca, and thank you, Tyson, for your partnership.

[B]

So, I mean, all you have to realize, right, that all of these private equity companies are on a three to five to maybe seven year timeline before they have to trade to return to their investors. Right? And so most of these businesses started with this boom at the late 20 teens and into the early 2000, 2000s. And so if they started up in 2019, 20, 20, 2021, like, yeah, they're at that point where they have to return to their investors. And I'm talking about hundreds of millions of dollars that they have to return to their investors. Their investors are not going to sit on it for another 2, 3, 4 years while they get their books. Right. And like, that corresponded perfectly at this time in 2023, 2024, where we saw a downturn in the H vac market that, I mean, we expected, but a lot of institutional investors weren't expecting, they were expecting, hey, huge amounts of growth for the next, you know, up until 20.

[A]

Forever. Yeah, forever.

[B]

And so, yeah, those two things compiling, I think, put a lot of private equity and a lot of investment groups in a very bad position rolling into 2023, 2024. And I think this, these next, like year to two year segments is going to be the key. If we have boom years again like we did 2022, I don't think we'll see too many more of them. They'll just trade. But if we don't and it stays kind of status quo to the 2023, 2024 numbers, I think we're gonna have some trouble. There's gonna be a few more that.

[A]

Pop through, I think. So. I mean, I think all of the south is still struggling. And whether or not they go, you know, whether or not they go this path or a different one, I think we're going to see more just because I. We know that there we know ghetto struggling like and the, you know, pe. The way it works is they come in and they load a company down with debt, crippling debt, which is what we're looking at. And they use that to go buy a bunch of more stuff. They want to grow as fast as they can. They want to outpace the debt. And this is an example of what happens when that doesn't work out.

[B]

Yeah, I mean debt's a great lever to grow just. And this is a great, you know, asterisks to anyone's business here that's listening. It's like debt is an amazing lever to grow, but it can't outgrow your cash flow. Right. If your debt payments start obviously outgrowing the pace of your growth and what you can bring in, you can't pay the debt. And it's super simple. But I think it's something that's often overlooked or you know, the industry changes and you don't cut fast enough.

[A]

What I thought was kind of interesting. I would love to peek a little bit deeper but they took over $20 million of financing in order to run a like transition period. Because they're basically selling off all the business units. Actually I have a friend that's buying one of them, which is kind of interesting for like 20 million bucks.

[B]

I think touch it with a 10 foot pole. I mean I get that there's, there's people that it makes sense.

[A]

The contracts, the contracts are, are fascinating. Reads like hey, if we lose X percentage of staff during the transition, I get 40 off like the pegs are w. So they're, they're pretty protected. But I agree that was my stance too. I, I don't have. I mean maybe, maybe John two years ago or maybe John two years from now, but John today has zero appetite for anything that looks like that.

[B]

I mean the deal would have to be so good because the court of.

[A]

Public deals weren't that good.

[B]

Destroy you like I feel like it would.

[A]

Yeah.

[B]

I mean you'd have to bad.

[A]

You'd have to rebrand not not only.

[B]

From like a customer point of view because. Right. The one big thing that, that large companies have or one of their big advantages is my warranties and my guarantees. Everything is secure. And now you have this negative PR that's coming out. But not only that, like technicians which run the business, you have to.

[A]

Yeah. So they're sell, they're basically selling off the parts. I think it's 11 different transactions. It's inside the bankruptcy filing. Alec from Home Pros did an awesome, some like breakdown of this, but they're selling off the parts into all these different business units and they're selling them off to the stocking horse bidders. Again, I, I really encourage the corporate turnaround artistry book. It's a lot of fun because it actually walks you through this whole process and like what leads up to it and what happens after. And usually it's like bank driven and then court driven and there's a certain point where you just lose control of the company. Like they just take it from you and that's a part of taking on that much money in debt. Like the bank has a lot of rights if you miss.

[B]

Right. So if you run a $200 million debt into the ground, like they, they probably should take it.

[A]

Yeah, yeah, yeah. And, and I think like I, I'm back to exuberance. I'm sure everything looks good in the moment, but I mean paying 12 to 15 times for deals that aren't that good and like sponsoring NFL like all of this stuff is just dumb. Like it's, it's. I don't know, I feel like, you know, if you're going to do that, you need to be in a rock solid financial position, which these guys have never been in a rock solid financial position. Position.

[B]

Yeah. I was reading that they were taking net losses of half a million dollars per month regularly, just like consistently for, for multiple months at a time in some of their breakdowns. And I was going, oh my gosh, no wonder. But I didn't get to, to peek behind the curtain into what their exuberance was.

[A]

And then the way they're spending, it's like you don't have a chance to turn it around because the how you spent priority, like it's really hard. Like once you pay a price for an acquisition like that is the price that you paid.

[B]

I think that one of the really important things to even like barring the exuberance and all that kind of stuff, that I think is a really important thing and to your point is the difficulty that comes associated with these large acquisitions and smashing them together and lining them out.

[A]

It's hard work.

[B]

It is very hard work. Because if you think about it right, the reason that a lot of owners are selling is because they, they don't want to do this anymore. And so you either have to put in an Operator. Or you have to convince the seller that they need to sell.

[A]

Yeah.

[B]

Or run their business in a different way and stay. And that's. It's just a hard thing because if they knew how to do that and they wanted to raise prices, they would have done it or they would have sold a different way that private equity wants them to sell. Like, they would have. They would have implemented a lot of these things because it's usually not a capital issue. It's like a. It's a leadership issue.

[A]

Yeah.

[B]

And why they didn't get to the next level and why they sold at that. That point. And so to be able to convince the leadership team. Like, I. I've been pretty vocal on. On this podcast about. I love talking to private equity. I. I love the private equity model when it's done right, too.

[A]

Yeah.

[B]

That being said, like, I. They talk about sometimes the, The. The issues that come along with buying ownership.

[A]

Yeah.

[B]

And I've ran into buying ownership issues and you ran into buying ownership issues.

[A]

100. Yeah.

[B]

It's. They. Almost every time that an owner stays on it is a nightmare. Almost every single time. Because they've run.

[A]

Yeah.

[B]

They've run their business for 10 years. They don't want to raise prices. You come in, you're like, hey, you're 20%. Then they raise their prices. They don't believe you. You try to. They're in charge of convincing their team now to go and sell at 20% more. The team doesn't believe in it, and it doesn't work.

[A]

Yeah.

[B]

I'm off my, My pedestal now.

[A]

But, like, no, I mean, I, I agree. I think. I think it takes a special owner. I think, honestly, Tommy's a great example of it where that, I think, ended up being a really big win for him. And I think it ended up being a win for both of the firms that he's dealt with. But I think otherwise, it's. It can be a really big challenge.

[B]

It's a motivation thing. Like, why are they selling? And now I'm flipping, like, the other coin. Why is the owner selling? Are they selling because they're done or are there. Are they selling because they've. They've taken on too much debt and they're ready to get out?

[A]

Well, I think this is choosing a partner, like, for us. You know what we've talked about the idea of, like, selling to an apex. For me, for other people, this isn't. I'm sure this isn't the case. Obviously, they've done, like, hundreds of deals at this point, but the idea of selling to an Apex would be really disappointing.

[B]

Yeah.

[A]

Because, like, I don't want to be a branch manager. Like, that's not what I. That's not why I, I do this. I wouldn't last, you know, a couple weeks. But if I, if there was a partner that, similar to Tommy, where, like, hey, I want to be. I don't want to be Apex's 300th deal. I want to be the first deal in a platform, and I want to build a platform.

[B]

Exactly.

[A]

That would be far more interesting to me, and I would stay on for that because that would be a dream. That would be a lot of fun to go around and be the platform. And I, I think that's like, our likely scenario. Whereas, you know, like an Apex or somebody else that's 100 deals in or 50 deals in. I don't really want to be the first COG or the last cog. You know, pre trade. I'd rather be the first.

[B]

Yeah. Because, I mean, I think you're. In my motivation to be very similar in the sense that, like, if I'm bringing on a partner, I'm bringing on a partner so that we can grow to 100 million or 20 million or 50 million. Like, it has to be somebody who's going to objectively help me get there. Not just, like, dumb money in there, but someone who's gonna say, hey, Jack, we are going to get to 100 million in, like, yeah, five years. Let's crunch. Let's do it. I'm gonna bring in a whole C suite team that's just for this project. I'm like, like, okay, let's do it. But yeah, to, to buy in and be like, hey, I'm. I'm like your Tennessee guy, and we can kind of grow Tennessee, and here's a little bit of money, and we'll take all the, the bookkeeping off your back. It's like, no, no, thank you.

[A]

Yeah. Yeah, I mean, I, I agree. Yeah, I agree. Yeah, I, I, I agree. I think just be cautious of who you're partnering with and ask them real questions. Like, and, and if they can't actually answer it or won't actually answer it, then, like, you should be alarmed. So someone's saying, like, oh, we're. We're succeeding nationwide. I'm alarmed. Like, I immediately don't take this guy seriously because he clearly can't answer the question because it's probably a ridiculous answer.

[B]

I don't want to call anyone out. But Cole, was that. Did you talk to him? Is that who the other friend was who gave him that advice that he needed to know his numbers down to the T. Yeah, yeah, yeah, yeah. And so but like that's the perfect point is like, yeah, we're succeeding nationwide is not an actual answer versus we're winning in this market. This market. In this market at this percent ownership of this and that, you know, like.

[A]

And what do you mark towards? Yeah, yeah. What do you mark to? Like, what are you saying your current value is? What's your current ebitda? And, and like I asked and then his immediate response was what's yours? And I'm like, why the would I tell you that? Like you don't even seem to know yours. If I told you mine, I don't even know what it would make sense to you.

[B]

You called me, you texted me, I'm.

[A]

Like, like bro, like you're trying to be taken seriously and I'm not taking you seriously. Like you are coming off like a joke. Yeah, I mean ultimately my take highlights the highlights the bad. We all know it's hard out there. I think this is the first very real example of like, hey, this is really hard. Like growing through acquisitions is really hard. Integrating is really hard. Running multi location is really hard.

[B]

John, I mean are you open to talking about your integration with electrical? Because I know like that's actually a really good example. Like my, my plumbing one was meh. But like your electrical example, like I think is the key here to the integration issue.

[A]

Yeah, I mean I think like if you're bringing on the, the electrical company we brought was great before we bought it. They were doing their thing, they were cash flowing. It's a construction based business. And the reality is it wasn't a them problem. It was an us problem for like it was an us problem and a timing problem. Now I can say the same thing about air Pros. Timing problem. But a lot of it was us. Like we don't know how to run a construction business. We just don't. And like guys, I've been in this industry for 16 years and I've probably done it longer than most of you and I don't know how to do it. And I continue to have to learn that lesson. We learned it for the final time, thankfully. But it's hard. So I'd be fascinated to know how many of these deals were construction businesses. A lot of people, I know so many people who buy these construction businesses being like, I'm going to pivot it to service. And like I've been in this industry my whole Life and I've done that three times and each one is harder than the last. Like I, I likely know more than you. I have done it. I would not recommend it is really hard. So yeah, so that, that business was good before us. If you can run a great construction business like pop off right, like Kelly was just on and Matt Ballard was just on and they're running incredible construction businesses, amazing construction businesses far better than I. So if you, if your core strength is construction, like amazing, like that's not mine. I'm really good. Like one of my weaknesses I've gotten a lot better at in the last year. But one of my weaknesses is I really struggle with like running a penny pinch business. Again. I've gotten a lot better at it. Like we talked about financials last time. Like Q1 was a really big win for us. But construction is a penny pinch. Like I'm going to do this job at X price and my, the entire rest of my life is project managing down to the penny to maximize that project at that price. I'm not very good at that. I am very good at increasing the overall pie. I can drive more market share, I can increase sales, I can bring on more people. That's a game I'm really good at playing.

[B]

So specifically though from the, from the integration is kind of where I'm referring to. Yeah. Like different business, you had to change it up a little bit to match your business. But from like an integration aspect, didn't you at one point actually have to like step in as the full time operator?

[A]

Oh yeah, yeah, yeah.

[B]

Like so solely.

[A]

So we bought the business. Right. So we bought the business and again it was good before we got there and there was some stuff that we brought that was bad and there was some stuff that was bad timing. So within the, you know, we, we took it over 1-1-22 and the stuff that was bad that we had no control over was, hey, I, I didn't know when we bought that business that inflation was going to start in 2022 and ramp up. Yeah, I had no idea that materials was going to go up 9% week over week over week for 26 straight weeks. No clue. So all these projects that we sold seven months ago, we are now hemorrhaging cash on in early 2022. Gas prices tripled, interest rates tripled. So those three things, suddenly the economics of this company that was already lean on margin because it was construction were gone, like immediately gone.

[B]

Yeah.

[A]

So what that forced us to do was pivot harder and faster than we would have liked into converting the business to service. We tried to co run both for about a year and a half but at the end of the day all of their contract, all of their customers which were contractors went bankrupt. So like their, our customers were laying off people left and right and even for the. And the ones that weren't were so undersold because material was 70% higher than it was when we bid the job.

[B]

Plus your 90 days out and. Right.

[A]

Plus you're 90 days out if you get paid.

[B]

And then so with that though, right. At one point I remember you guys had an operator. You didn't have an operator. Then you got like a manager, then you had to step in and so.

[A]

Like that's where we hired the business. Yeah, we hired a very competent manager. What we thought was competent manager day one. We actually hired him 45 days before we carried the salary and we were going to bring him in to run this branch. The, you know, the circumstances I just described are challenging. Like that's hard stuff.

[B]

Yep.

[A]

And what, what a manager, like a manager can do a good job when they're given a good scenario. But you know, it's sort of hard for me to be like, ah, he wasn't the right guy. He probably wasn't the right guy. But the challenges were also extreme. You know, that was like a once in a career Covid, you know, and the backlash of COVID that is a once in a career thing and he just was not able to handle it. So yeah, I personally took over the business for a year and integrated it. I drove it to profit in about four months in as all of the ugliest ways you can think. But the only non option I've ever had is failing. So yeah, I'm with you there.

[B]

But like that's the key and that's like that. I'm trying to draw the parallel parallel here. Like I don't want to get too far off of Air Pros and into this scenario. But like they couldn't do that because yeah, they're so big and so too many branches. Branches and grow. Yeah, like you can't just throw like. Like you said, the guy's competent, he was a smart individual, he's a good manager. It wasn't a bad hire. It was just like not good for that time in that place in that situation. And so that's what Air Pros went through in the last two years. Right. 2022, 2023, 2024. Like oh, this is kind of going in the wrong direction. We tried integrating. We don't have the right people. It's really hard.

[A]

Yeah.

[B]

To find the right person to make it. And we can't lean back on the owner. You can't fail because this whole life is this like.

[A]

Yeah.

[B]

Like in a real situation. Right. You put some, you put an operator in there, it doesn't work. They, they just quit and they go work somewhere else.

[A]

Yeah. Good company.

[B]

And so like.

[A]

Yeah. I mean look, PG debt with the pressure of a third generation company. That's a hell of a drug. You'd be amazed what you can do when you know your entire family's looking at you.

[B]

Right. You also have brothers too. Right. So like, like it's literally like everyone. Oh good.

[A]

Yeah. I mean look, I'm running my grandfather's company.

[B]

Yeah.

[A]

So like that doesn't weigh on me often. But anymore when I do something dumb it does.

[B]

Yeah. Right.

[A]

Anymore, anymore. It used to weigh on me a lot more but. But I feel like I've made enough of my stamp on the business that I'm allowed to claim it as my own. But yeah, at the end of the day it's a third generation business. So a lot of eyeballs.

[B]

Yeah.

[A]

So yeah. I think it is hard to replicate that founder energy. The guy with the pg, the one who's going to do whatever it takes because I'm always going to do whatever it takes because the only non option is failing. Yeah. So I, I think and you know, it, it. The past couple years have definitely tested me on like how far I was willing to go and I found out pretty far. But yeah, they just can't do that when they get that big. You just can't. Like it's, it's really hard to beat a founder.

[B]

Yeah. I mean it's hard to beat a founder. My biggest thing as we like circle back through, go through the Air Pros, like that was one of my biggest issues is you can't overspend and then hope that these someone else is going to save you.

[A]

Yeah.

[B]

It's just a natural risk with private equity and they can try and mitigate that with world equity and stuff like that, but it really is.

[A]

Yep.

[B]

Proper purchasing of good companies and making sure that, you know, you really have a team up at the top who understands what they're doing. Not to say that, that the air pros didn't understand what they're doing. Just to say that in general though, making sure that whoever you're selling to you really understand what you're getting into.

[A]

Yeah. As a, as a seller or as a buyer. Like who am I dealing with on the other side? And like what am I going to get with this?

[B]

Yeah man, this was, this is super interesting though. I'm. I'm.

[A]

Yeah.

[B]

You know, there's a part of me that, that knows that it's not good for the industry to see these but there's another part of me that knows that, that there has. I had to at some point be a culling of some of these bad operations.

[A]

At the time, the, the question wasn't if it was when, you know, I was talking to, I was talking to friend of mine. He's an investment banker, League park, which has done some of the biggest deals in the country. And what he's repeatedly said is like look, the biggest thing that everybody has to worry about from a multiples and like will multiple stay is who's the first bankruptcy. Like that's it. That's going to temper the appetite of like buyers, what people are willing to pay. Now this is kind of interesting. It's going to be fascinating to see in like six months what the impact is because look, before this Sila set.

[B]

The tone I was just.

[A]

They had a 20 times multiple. So like we have both sides of the coin here. We're like, hey you actually we have now set a precedent that a 20 times at 100 EBITDA is an achievable transaction level. And you also have, hey, here's what happens with exuberance. So I kind of feel like it honestly balances out. And if we look at some of the decisions air pros made, it seems like one off exuberant. Bad pricing, bad buying, bad decision making timed with bad timing. So I, I don't know that it'll make that big of an impact versus hey, Sila just exited and that was a win.

[B]

Yeah.

[A]

Heartland's transaction is probably going to be a win at 20 times or whatever. So I think that's going to continue to see but I really think we'll find out. You know, multiples at my level, multiples at your level. Those are almost completely determined by what size does seal exit at.

[B]

Yeah.

[A]

Or what size does Heartland or wrench Apex. What do they get when they go. So do they get a 25 times. Great. That means they can afford to swing pretty big on us. But if they get a 15 times.

[B]

Our numbers a lot gets compressed really quickly. No, I mean that's a really good point. And so we'll see whether it's more of a operation, it was an operational Biff or if it is a systematic. Hey, this is an industry downturn, Biff. So, I mean, yeah, in, you know, in the grand scheme of things though, I mean, we're going into a huge transitionary period in H vac specifically and in home services specifically with AI, with the changes in regulation. So, I mean, in my outlook, which is, I mean, I'm not a team of thousands of economic advisors and experts, but like boots on the ground looking at it, I think that they're. There is a really large potential to keep this train rolling in the right direction for, for those large companies.

[A]

Yeah. Well, this was a good, this was a good. This was a good conversation. Fascinating to unpack. I think we should unpack the SILA transaction. I think it'd be fun to see the other side of like, hey, what does a multibillion dollar deal look like?

[B]

Was that public enough to be able to see, though? Need it. We need to.

[A]

Let's find out. Let's find out.

[B]

Let's get some deets.

[A]

Thanks, everybody for checking it out. Make sure you check out our. Make sure you check out our YouTube channel. Give us a five star review wherever it is that you listen to. Podcasts. And we're just launching Owned and Operated Pro, which has been pretty cool. I think we have 25 or. Yeah, I think we have 25 or 30 members in there. It's a peer group for home service companies. So that's been really cool. Like launch week is this week, so by the time this episode airs will be a week or two in. But that's been a lot of fun so far. Sweet.

[B]

Thanks, guys.