← Owned and Operated - A Plumbing, Electrical, and HVAC Business Growth Podcast
Owned and Operated - A Plumbing, Electrical, and HVAC Business Growth Podcast
#210 Trying to Buy a Business: Here’s What No One Tells You
00:54:01
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- [00:00]
Jack Carr
Welcome back to Jackquisitions, guys. This is the second episode in the Chris Barr series, following him along as he purchases his first business. The first episode was a lot about who he is and some strategies to find his first business. But we start to deep dive into some really cool topics here this week. Really excited that you guys are sticking along for the journey and enjoy. Welcome back to Jackquisitions. We have the one, the only Jack Carr, but also the one, the only Chris Bar here today. Hey, Chris, how's it going?
- [00:39]
Chris Barr
Good to meet you guys. Yeah, doing well, man. Appreciate you asking. Good to be back. Yeah, good to be back for round two.
- [00:45]
Jack Carr
I, as well as many others that I'm talking to, are really excited about your journey. For those who don't know, Chris is a searcher. He's been doing this for three months. If you missed the first episode, he is trying to buy a business down in Florida. And with that, today we have some updates and I'm super excited, man.
- [01:08]
Chris Barr
Yeah, yeah, likewise, man. Yeah. I'm just kind of the general update for the past week, you know, as I'm sure we've all gone through managing opportunity cost, it's. It's a. It's a tough one. You know, I had a lot of bandwidth get sucked into a smaller deal and then kind of got to the end of the week week, I'm like, where did my time go? And I went into this, and that's really not even going to be, you know, a main purchase for me. So, you know, taking notes and again, you know, it's. It's not going to be. It's not gonna be perfect. I think any search process, if done right, is going to have a lot of imperfections along the way. So adjusting as you go is the name of the game.
- [01:41]
Jack Carr
Yeah. I mean, you're learning, right? This is. This is a huge learning process. Whether. And I feel like the goal is not necessarily to get to the finish line on any one business or one week, but. But the goal is to pick up knowledge and information from each. Whether that's, hey, now I can. I can research a business at a better rate or I can do this better or like, hey, I understand the SBA better now that I've gone through this deal, fell through at the last minute, but I understand what the SBA is asking and looking for in terms of questions. So there's. There's like a learning process that's almost more important. It's like dating, right? You know, a lot of people do marry their high school sweethearts. But throughout the dating process, you're dating these businesses to figure out which ones you like or don't like.
- [02:23]
Chris Barr
No, absolutely. And yeah, as part of that learning process, which is weird because I've almost like put that as at high of a premium as actually getting the business bought. It's like I, I want to be robust in knowledge when I go into this thing. So at the end of the day a few deals follow through, but I feel like I really learned something. It sounds like very cliche and cheesy to say, but like I really feel like that is not time waste wasted at all. Exactly.
- [02:48]
Jack Carr
I do put a huge, also big, big shout out to any brokers listening. I'm sorry, you know, I say that and then I'm like in my head I'm going, ah, yeah, that probably doesn't sound so great to a broker who's, you know, job is doesn't get paid until they close. But realistically that, that is the way it goes unfortunately. And I was a commercial real estate.
- [03:08]
Chris Barr
Broker for years and I gotta say, good brokers have to accept that as part of the process.
- [03:12]
Jack Carr
Yes.
- [03:13]
Chris Barr
They have to be patient and realize they're in it for the long haul as a marathon with their buyer, their seller, whoever they're working with. So. But I do hear you, it's probably not great.
- [03:23]
Jack Carr
So update me though real quick on like the, the actual search itself. So what are you doing to, to bring in new leads? How are you viewing that? Time spent or did you just not bring in any leads this week? You were just working on that singular smaller option.
- [03:38]
Chris Barr
You know, it's been a mixed. Both I would say mostly have been kind of have bandwidth taken up by the stuff that's on my plate that I'm reviewing now. Of course you have to something else learn from days you have to constantly be developing the pipeline because the second that what is on your plate currently dries up to not have anything to backfill it with is a very spooky feeling. So no, that there's always going to be. So that pipeline build and that outreach, you know, again all the listings come through on Monday. You know, that's a good part of my Monday is flipping through every listing I feel like I haven't seen seeing if there's anything worth filling out NDA, you know, again, since I'm hunting in such a tight geographic area, some weeks it's just not going to be much new on the market that's worth poking into. So it was one of those weeks. But. And I would say that as we talked about last time, the networking and establishing myself within the community has been a, been a big practice. So a lot of coffee dates, a lot of meeting with people, letting them know what I'm doing. That was, I was probably doing that for a total of 10, 12 hours last week. And again, I have to accept that those aren't going to always materialize quick. That might be one where somebody's having a conversation a month down the road. They talk, somebody who mentions they're selling, they say oh I talked to this one guy. So that's, that's a long play. And again it's, I think that that's something that we were talking about in between weeks is getting comfortable with standing by to stand by but also not being complacent and consistently showing up every day to push the ball forward and kind of what, what, what that balance looks like.
- [05:11]
Jack Carr
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- [06:28]
Chris Barr
Sure. Yeah. As I mentioned, subscribe that D and B Hoover's database. So I've been cold outreaching to businesses and a lot of owners really just like and again I try to pose, hey, you know, young ambitious entrepreneur here would love to, you know, buy you a Cup of coffee, buy you lunch, you know, just take a few minutes of your time. And again, they really just are too crammed up for that. They really have no interest in really sitting down with you. It's got been much more effective. Get to the point of hey, I'm trying to buy a small business, you know, ever thought about selling? But how I'm sourcing the coffee dance to answer the question is I went to a few chamber of commerce events that was huge, huge. One of the individuals I met there invited me to another local networking event. So met a bunch of great contacts there. I felt like that was very highly worthwhile. So been following up to that entire group that I met with and taking each one out for coffee every week. Estate attorneys I felt like would be a great opportunity to source commercial lenders also sat down with them. So good mix of people.
- [07:29]
Jack Carr
Here's what I'm going to challenge you on to do in the next month, which I found to be absolutely an amazing source. Even though on, on the surface they, they kind of come off to you as maybe private or as a competition, I just gave it away. But a private equity group, right? So if, if you decide that you want to get into H Vac just hypothetically, right. For anyone out there, I want to get into plumbing. Go and find yourself a private equity group or a few private equity groups. Some of them, you know, especially the smaller ones are more open to this, but the bigger ones tend to just, you know, do what everyone else doesn't like, shoo you off. But right. A private equity group has a certain minimum that they're looking for, right? They're looking for a million dollar EBITDA business or half a million dollar EBITDA business. They have their parameters in which they really don't go under. That being said, they're paying somebody for lead generation, right? They're sending out mailers and they're calling and they're doing. They still get these leads, right? They still get these H Vac guys and plumbing guys who are ready to sell, but they're just like, hey, I'm a $300,000 EBITDA H VAC company, I'm too small for you. And so you know what they do with those leads? Nothing. They say, hey, hey buddy, call me back in next year in February when you grow. And we'll have this conversation later. But that owner still wants to sell and wants to sell probably now. And so if you could get in close with them in a few of these, these private equity groups and say, hey, you know, we're looking for this, this lead size that's much smaller than yours. If you happen to get one, we'd be willing to pay you for it. They generally don't want any money as far as I've, I've used it as a lead source before and they kick the deals over as kind of a friendly, we're all in the same industry type thing. But that I would definitely challenge you to try and reach out to whatever industry is, is on your, your list this week. And try that.
- [09:26]
Chris Barr
That is huge, man. I never even really thought about, you know, taking the table scraps from private equity groups, but, man, I'll be the Emerald Lagasse of table scraps, man. I'll make a whole meal out of that. So. No, I, I love where your head's at. I'm definitely gonna try that on this next week and excited to let you know how it goes, man.
- [09:41]
Jack Carr
Sweet. And so, so two weeks ago, you, you did a drive along though, right? So you, you did go with an owner on, on a. We can't do specifics obviously, because you're under NDA, but I mean, we should break down at least industry. Sure.
- [09:56]
Chris Barr
Yeah. Pool servicing. So, you know, again, can't gotta be somewhat sensitive. But they do have, you know, a pretty full service component. They do obviously your standard, you know, chemical changes and cleaning. They also do equipment installation and equipment sales as well as, you know, full pool remodel. So pretty soup to nuts on what they cover in the pool service industry.
- [10:17]
Jack Carr
Okay, so, yeah, that's interesting because I mean, we see a lot of routes. We've talked to a lot of people who, who view the pool industry as just routes, routes, routes, routes, routes. And they do a really good job. But this actually like remodel installation and like an actual construction component, just percentage wise. What was that split? Because like I said, I don't want to get too close.
- [10:42]
Chris Barr
No, absolutely. I think that they said, looking at my notes here, they said it's roughly about 30, 30, 30, and it might be a little bit more heavily skewed towards the remodels. And that kind of fluctuates because those their biggest jobs of the year. So fewer. Yeah, of course, remodels, you know, that's going to end up, you know, a bunch more of their revenue, but they kind of have it pretty well compartmentalized. They say the routes generally kind of keep the lights on that, that pays for overhead both personally and professional. Again, we talk about expensing personal through the business, which, you know, is its own issue. But the fact that you know, the route, which is again what people view the pool business as and that's their most consistent component and is keeping them afloat and providing at least a break even. And then that, you know, equipment sale, installation, remodels, things of that are really just kind of gravy on top. And then the route component as you mentioned, because those are so, so prevalent, especially down here in Florida, I see routes going for sale all the time. To me, what jumped out was scaling. You know, if I get my arms around this thing and I have it operating well for you know, three to five years and then want to buy additional routes, absorb some of their staff, build it out from there, pretty, pretty easy business to scale from that perspective. So again that's, that's kind of where my head's at.
- [12:03]
Jack Carr
So in terms of like why, why. I mean I get that their scale is probably within your price point. What was the, the big pros that stuck out to you and how does this exactly fit into your framework?
- [12:17]
Chris Barr
100%. You know, it's a service related business which was I think kind of first and foremost really what I was looking for. And because one of the reasons I was looking for, for service base is again low overhead. And so I think that they definitely fall within that bucket. Especially considering the, the scale of the operation they currently have. The fact they keep overhead relatively low is, is impressive. Their margins are pretty on point. And it's again, I wanted to be in service initially. Had a love for home service, got a bit more agnostic. But again, this falls within home service and especially within home service. It, it, this was my mistake. Something I didn't know until the ride along is I figured, yeah, it's not something like H Vac in Florida, which is very much a need, not a want. You can't not have H Vac, you know, come August down in West Palm beach or you're going to be frying. So I thought that pool servicing was more of a want based thing and kind of more of a luxury. But no, the way ohas work down here, if you let your pool go green and you don't service it, someone's. Someone's gonna find you, someone's gonna say something. So there is a more kind of need component established.
- [13:23]
Jack Carr
I had initially thought, yeah, I mean I'm mixed on those ones because I mean I was a, a, I mean as yourself, we're probably the same age. A child, a teenager through the 08, you know, shutdown of, of everything in Kind of one of the largest foreclosure markets in the the United States and one of the, the two that I had on my list that I would never do though I looked at them like yourself, was pool routes, pool businesses and landscaping. And the reason behind that was, I mean as a 18 year old kid I think that the, the statue of statue limitations is that the word I'm looking for is, is expired. I'm not going to get in trouble for this. But like we were kids, we'd go around to all these foreclosed houses and the like the commonality in all of them, what we would look for is giant overgrown front yards and dirty pools that were nasty green and just like the grossest algae growing in the back. And so that was always my worry with those two was that in if I'm, if I have to pick between heating, cooling or like cleaning my pool and I'm on the edge of foreclosure, I'm probably not cleaning my pool even if like I'm risking the HOA fee, I'm maybe dumping a bottle of bleach in. But that being said, I definitely think it's one of the more sustainable sides in the sense that unless they're right there at foreclosure, which at that point they're probably not doing their H Vac either, to be honest. They're, they're probably buying a window unit and saying, given the middle finger to the HOA and say find me for the, the window unit. Like it's one of those things where if someone's on the edge of foreclosure, I don't think it actually matters which home service you run other than plumbing. Plumbing is what I've come back to as being like the actually only one.
- [15:12]
Chris Barr
Water finds a way. Yeah, no, that's a heavy need. Base. No. So I get what you're saying. I think that that's really where my head was taken. Me as well is yeah, probably not as bulletproof as maybe plumbing or H vac and I step above that. But at the end of the day, if something has to really, really, really go wrong and at that point if we are in another 8 scenario, sure I can kind of fine tune which sector I'm in to really make myself as recession proof as absolute possible. But if we're hitting another 08, everybody's going to be struggling along with myself, regardless of sector. So you know, again, and I think that that's a really important, that's a good framework for the acquisition cycles is a lot of this Gray area. You love black and white. So you love. This is a deal killer. This is a green light by here. But you get so much in this gray area of like it's not as bulletproof as this, but you know, if it is going down the tubes, everything's going with it. So you kind of end up back in this indecision land, which is a. Not a comfortable spot to be stuck in.
- [16:12]
Jack Carr
Yeah. I think my only caveat to this is this is a unique pool business. So I've looked at pool businesses we've actually covered. John and I covered it on owned and operated pool businesses with Tim Ryan. The interesting part is that this isn't a route. A route. Right. This is actually a decent portion of this is construction. It's remodel work and I'm assuming repair work. So the repair work is probably a little bit more stable in the sense. But the remodel work I would imagine is a nice, nice to have it sits along the same lines as construction and remodeling of your kitchen. Right. It's not something that you necessarily do. So that that one component I would say is important to remember as you go through this process. In the same way that if I was buying any other home service company with a large construction aspect, I would be very careful and my multiple would actually be a little bit lower. I wouldn't say like you don't, you know, zero out the multiple, but if I was buying anything with construction risk, it definitely receives a second look for me, especially when I'm taking on debt. Right. Because in the off chance that what we saw, a common one we saw is, is talking with people who took out large SBA loans for like construction plumbing and construction H Vac. The, the thing that we saw that was similar is like all of it ground to a halt in like 2022 for whatever reason. Like there was potential recession on the horizon and all the contracts grounded to a halt. And a few of my buddies who, who own these businesses, they said if they didn't have their loans structured in a certain way, they would have been absolutely wrecked because they can't sustain, you know, a six month pay if you didn't finish any houses and get paid. Whereas if you'd structure that deal more from a. At least a portion. Right. As a seller earning or a seller earn out or seller financing, then you can eat a little bit more of that just because, hey, I can't give you, I can't. Bank finances is the key, right?
- [18:14]
Chris Barr
Yeah. No, and I think that that's Kind of again coming from that traditional commercial retail background, seller financing. Financing is a totally new concept to me, you know, something I really read about back in like November deck December. When I was researching this process up front I was like oh like that's really nice. Like I can have the, the seller cover a portion of this and again it incentivizes them to want to strike a fair and equitable deal because again their earn out and their ability to get paid is based on, you know, the health of the business maintaining. So good way to insulate yourself from a little bit of risk there. So yeah, definitely something I will be looking into and would absolutely be a component of the pool business, you know, should I decide to move forward with that. Which kind of really brings us to the cons of, of that business.
- [18:57]
Jack Carr
So before you start, I do have two more, more pros I wrote down for these businesses. So what I liked about this is your, the ideal client size. So on average they were you know, multi million dollar house clients which is huge because you know as people have larger houses they tend to be more well insulated from the market and from downturn. So there is that kind of extra added benefit. They can handle the extra income or the extra costs associated with owning those kind of luxury items and that's what it becomes, a luxury item. So I really love that aspect. I liked that's a highly fragmented, fragmented market. As you mentioned, there's a lot of scale opportunity in the pool service industry. I think the gentleman's name is Malcolm, I forget his last name but he's down in Texas. He has a 15 million dollar roll up of service pool service routes. And he started a few years ago and has been doing an absolutely amazing job and proving kind of the point of hey, this is a fragmented market. If you're able to bring scalability through systems, if that's your strong suit, then there's a lot of opportunity to grab that. And then I, you know, the, the pro and the con is the mix, right? Having kind of a big ticket item on the back end to be able to sell versus just you know, I only do routes which are you know, two hundred chemical cleaning or hundred dollar a month cleanings. And then maybe I have to shock the pool and do all this kind of stuff so for a little bit extra. But yours actually has a high ticket item which is nice. It's the H Vac unit sale, it's the re pipe, it's the, the big dig job. So that, that was a neat aspect where you could as you Work with customers, you can build those relationships and then eventually sell them the repair work. So I love, I love home services that have like this small reoccurring and then a big ticket at the very end.
- [20:59]
Chris Barr
Yes. And I think that that was the biggest pro I saw in all of it too, is kind of this, you know, threefold range of services that they provide. Again, it gives me the consistency of the route, which again, I don't know that I would want 100% to be on there because I would like a bigger ticket item, you know, for some leverage. But again, relying solely on, you know, a handful of these bigger projects come throughout the year is a little bit too concentrated for me. So the fact that I kind of have a Goldilocks situation and the best of both worlds here is attractive. And you made a great point about, you know, they really fine tuned their ideal customer. You said, you know, we're here in Palm Beach, Mar a lago a yo. The president is right, right across the intercoastal and they do have a handful of projects over on the island. He says, but when you get to $30 million homes, everybody's so paranoid that they're out to be had. And the $300,000 home, they feel like, you know, they really are pinching their pennies. The $3 million home just understands it's what needs to be done. They write the check. It's, it's very low hassle.
- [21:59]
Jack Carr
So that's funny you mentioned that. That's a very true, like, theory that, that we see kind of across, you know, across industries. All right, awesome. There's the pros, why we like it. Why don't you like pool services?
- [22:16]
Chris Barr
You know, and this is, you know, we've had a few conversations about expectations versus reality. And this is one I just kind of might have to get with the program a little bit. And also I, I, I'm not an accountant, not CPA. Understanding the differences between 1099 and W2 labor is something I'm still fairly new to, but a lot of their employees are 1099. And I feel like that's generally the case for a lot of services and especially home services business. Now, again, if they're not truly independent, if you're directing them in any sort of way, from my understanding, that should be W2. And I don't want to expose myself to risk or to have to get whacked by the IRS down the road. But maybe that's like, hey, it's not officially the way it's supposed to be done, but that's the way everybody does it. So you just kind of got to learn to grin and bear. I don't know. But it is something that does give.
- [23:03]
Jack Carr
Me pause about this business and as well as it should. So the. The framework that I utilize for looking at a business that has the 1099 versus W2 conundrum is what is the actual. You're right. Right. If. If they're driving in your trucks and you're putting them on a schedule, if they're wrapped with your logo and wearing your uniforms, they should be W2. But then you have situations like roofing contractors. Most roofing contractors, the sales people and the project managers, they're all working for the company. But all of the actual roofing installers and deconstruction people, they are all 1099. So you are telling them where to go, but they're not showing up in your trucks and they're not wearing your uniform. They're just acting as, you know, labor. And so it's this very fine line that you do run into, I think, in pool businesses. You probably are making a good choice here because the way I look at it is you want them in your branded trucks, you want them with your uniform, and then you have to schedule them where they're going to go multiple times a day. So my initial feeling, I'm not an expert in the pool of service industry, but is at least on the service side, those would definitely be W2 employees. Potentially on the construction side, you could sub out that labor, like the dig job and the tile work and all that kind of stuff would be subs because it wouldn't make sense to keep it in house. But for your, your, your residential Service and Route 100, W2. And with that, if they're 1099 right now and you have to convert them to W2, whether that's through you or through just, hey, we're scaling, we've doubled the size of the business. Now it's actually a risk. Now there's an associated cost with that, and that's insurance. Bingo.
- [24:51]
Chris Barr
Yep. Yep.
- [24:52]
Jack Carr
And so it's okay to buy like this, in my opinion, as long as that you understand that you're pricing that in, you're pricing that conversion factor in.
- [25:01]
Chris Barr
And then again, that's a. That's a dollar amount. It's a line item at the end of the day. And so, yeah, no, I'm really glad we were able to hash out here because it was something that I was starting to hear rumblings on. I spoke my accountant kind of fairly Briefly on it. You know, briefly enough to not be charged at least. But yeah, I kind of got be sneaky about those ones. But yeah, yeah, got his two cents and got. Got the idea that these guys probably should be W2. And again, that gave me pause and something about to refactor into pricing. So, you know, not a total deal killer, but, you know, something to happen.
- [25:32]
Jack Carr
The other part that I don't like about that in particular, the whole W2 is you actually. And this is. Comes from Tim Ryan. So he. Tim Ryan, for anyone who doesn't know, he's. He's a friend on Twitter. He's started and sold, I think three plumbing business or plumbing three pool route businesses and does a very good job. He's working on some SAs for pool services right now. Great guy, lots of good information. But his theory was that the actual stickiness of the route service business for pools is having the individuals in someone's backyard. It's a personalized experience where this person sometimes is going into your backyard unannounced. It's a relationship and you have to build these things. And so you really want it to be a branded experience where not only are they comfortable with the individual in the backyard who's locked in because they're a W2, but also because you want them branded, because you want them comfortable with you as the company. And so I don't like that that they're subbing out. Kind of a key part to the. The. The route side of the business is you want them to be invested and to be. To be a W2 employee and to care about your business, because that's how you actually get the stickiness of the customer base.
- [26:54]
Chris Barr
No, that makes total sense. And yeah, they, we did speak on the. Right along a little bit about the trustability and like, again, going into, you know, people's backyards, he goes, you know, every now and then, you know, we had change labor. I've got a call like, oh, was there a new guy? Or whatever? And it doesn't sound like it's necessarily been an issue, but one thing he did bring up, and again, it's not a huge red flag, but he's like, you know, I, I was driving the route. I was checking in on these customers. I was popping, you know, not unnounced, but I was popping by to, you know, do it, do a service check myself just to again be owner, you know, face in front of them. He's like, and I don't anymore. He's like, but if you were to buy this business I would definitely recommend, you know, dedicating some hours to that, which I'd be, you know, more than happy to do. And so I think that, you know, again, that could be mitigated with if there is a labor changeover going with them the first time, saying, hey, it's me again. You know, this, you know, is Joe Blow. He's going to be, you know, the new service tech seeing you guys every week. So I just wanted to make the introduction myself. You know, the brilliance in the basics, you know, a little bit of, you know, fundamental relational ability. I think it smooths some of that over. And again, you are going to have difficulties keeping and holding labor in any sector. So while it is somewhat of an issue in this particular business, again with the trustability being in someone's backyard, there are some mitigation factors there. And again, how much worse off am I going to be in this sector versus others? Difficult to say.
- [28:12]
Jack Carr
Yeah. Was there, were there any other giant cons that you saw in this specific business or in the pool industry itself?
- [28:19]
Chris Barr
Yeah, you know, industry wise, again, it was something that I'm from Illinois. We know we don't have. I know you're California. We don't have pools in Illinois. It's cold up there, man. So, you know, it just really wasn't something I really considered the way that, you know, H Vac and others are such a pressure washing. You know, again, we have, we have those up north. But so the industry as a whole, again, I see that it's mostly route based and I wouldn't want that. The fact that this is, you know, threefold businesses in one kind of mitigates it. I would say that there was a big bump in SDE numbers and we've talked about this. And expensing stuff through the business versus just eating the taxes like you should. And this is one I want your $0.02 on because again, uninformed, uneducated, I'm learning here. But to me it was a little bit of a net positive of, okay, hey, listen, if you're expensing new parts for your boat and putting it on the business, if you're expensing, you know, home repairs or whatever through the business to avoid paying taxes, well, that's just additional SD to me. Well, all that means that the business is doing better than we can see. And then I'm going to be then receiving these fruits at the end of the year versus them getting spent on erroneous personal stuff. So it's kind of all gravy on top from what I was seeing, but as you said, all those dollars expensed are worth four to me. And I would just love a little bit more context.
- [29:43]
Jack Carr
Yeah. So we talked about this offline, and I want to be clear with, with everybody listening, is that you and the seller are naturally in an adverse position because any dollar that they can put into the business that you are paying for, if you're paying on a multiple basis, a three, two, three, four multiple, you're paying two, three or four times that dollar that came through the business. And so my saying always is, is actually kind of how you look at it. It's great. You know, there sde, there's extra net, there's extra money in this business that should come out of expenses when I buy it. But the big butt here don't pay for that. Right. Because for them to have to prove that, they would have to provide me every single receipt that's possible. And then on the back side of this is the saying goes, this is a very common saying in the industry, if they'll lie to the irs, they'll lie to you. And so it's, it's verify and check and verify and check. But I wouldn't take a single dollar off, you know, towards the purchase price if that was considered an add back that they're trying to add back. Like, oh, I added back 30,000 that I, you know, used on my car. It's like, well, provide every receipt and every gas and, and every step because I don't trust that, number one. Number two, if you're using the business as like a personal slush fund, I don't actually trust any, any of your numbers anymore. I've lost all my, my trust for your accounting because you can, once you run a business as like I do, I run multiple. You realize how easy that is? It is so easy to tell your bookkeeper, oh, this Venmo account that, or this Venmo purchase was for a subcontractor when really it was for something else. Like that's the extent of the lie. And you're eating that at the tune of 30, 40, $50,000 times 2, 3, 4 multiple. And you know, if you're paying for that and it's a lie, you're going to get smashed. Absolutely smashed. So I think if they'll lie to you, if the lie to the irs, they'll lie to you because, because there's a chance and when they lie to the IRS that they're going to jail or getting a fine, when they lie to you, the risk is, hey, they'll make more money. Probably one of the most important decisions you can make in your ETA journey is which SBA lender You are going to pick a lender who will be in your corner to get you close closed on the deal as well as set you up for future expansion. That is why we partnered with Alan Peterson from First Internet Bank. He and his team take a how can we approach as well as I personally know they specialize in home service acquisitions. Mention the show or my handsome bald head and receive a reduced good faith deposit as well as a detailed deal review and maybe even a buy side pre qualification, no strings attached. Head on over to Alan fib.com that's a l a n f I b dot com or click the link below to get connected.
- [32:39]
Chris Barr
Yeah, yeah. And so that was kind of my. And I am totally with you there in that. Hey, I'm not taking anything on hopes and dreams here. You know, you're just telling me like hey, this one was actually for, you know, this person looks bad. It's like okay, great. Again my response to that is show me the receipts.
- [32:57]
Jack Carr
Yep.
- [32:58]
Chris Barr
You know like that's, that's totally fine but show me the receipts, show me the receipts.
- [33:03]
Jack Carr
And then what I would do mentally it, you know, it still could be a great business. Like the owner could legitimately say hey this is actually my slush fund. I used only this amount for this items. Stop. Hard stop there. And they're being truthful. There's a, there's definitely a chance there's good people out there. I'm not saying that they're all bad but, but what I would definitely mentally put into play is saying during due diligence process during like where we're actually verifying and paying accountants to go through with a fine tooth comb to check definitely pay for the higher packages, the higher packages that make sure that the quality of earnings are good and that the expenses match up and that all of the, the money out and the money in tracks perfectly to what they're saying. It tracks. Two deposits are right. Expenses are correct. Because like I said, what you'll see is, is more times than not is if they can hide money here or there, push it there, there you, they'll just naturally do it. And it might not even be to be honest, it might not even be malicious that just hey, I forgot I expensed a six thousand dollar bathroom remodel on my house through the business.
- [34:11]
Chris Barr
Yeah. And what I'm thinking of how, again thinking of how I would play this one potentially there was a bit of a revenue drop in an esteem, more of an SDE drop due to high cogs and stuff like that in 2023. And they're asking about if like a 4x deal. And so I'm thinking of taking really their past like three or four years averaging that SDE out and saying, hey, listen, I'll offer you forex based on this more averaged out number. They're saying that the 2024, again, it's the classic story if they didn't plan on selling until 2024. So 2024 numbers and everything look great. And me saying, listen, we're not going to go Forex based on 2024, like that doesn't really give me a full picture. Let's average out the past three or four years and I'll give you a 4x or 3.5x based on that. And then they say, well, this year's lower because of all these, you know, slush fund expenses. It's like, oh, okay, cool. Then we verify the receipts or you take the, you know, the forex, the average. Because that's what I can verify on a tax return. So yeah.
- [35:18]
Jack Carr
So is that, was that their explanation for the low SDE or was that in 2020?
- [35:24]
Chris Barr
It's, it's a combination of that. And then they gotta be careful of NDA stuff. They added a component. They are the component of their remodel business.
- [35:33]
Jack Carr
Okay, fair enough.
- [35:34]
Chris Barr
That they didn't previously have that required a big upfront purchase of materials which cut into cogs, which also.
- [35:41]
Jack Carr
Yeah, and there's easy ways to verify that too. Right. You can go in and you can look at gross margins. Gross margins for high expense year shouldn't change. And then finding those expenses in what area should be a fairly easy task. So that's where it focuses revenue, gross margins. Because you generally people don't, you know, there's no changes to the cogs themselves. That's the health of the business. You're looking at labor, materials and gross revenue. Like that's the health of the business to get your gross margin. And if their gross margin is kind of staying consistent but their expenses are changing, then that story. Right. It kind of works out better. Because your gross margin shouldn't change year to year unless like hey, there's a health issue with the business or hey, build's the businesses doing healthier because we put this, this and this initiative into play.
- [36:36]
Chris Barr
Yeah, okay, that makes sense. So that's something I can go back and verify pretty easily. And then revenue to me is again, it's Hard to. That's the one thing that feels like it's hard to lie about. It's hard to BS Revenue. Like, if you did the sales, you did the sales. If you didn't, you didn't.
- [36:51]
Jack Carr
Yes.
- [36:51]
Chris Barr
I could be wrong there.
- [36:52]
Jack Carr
Yes and no. So, yeah. Yes. Right. And the way I always look at it in the same sense to your point, is it's actually harder to generate more revenue. It's easier to cut expenses. Right. So it's easier to say, hey, you know, we're just getting rid of this program slack. No, we're going to Google teams for half the price or whatever. Like, that's an easy transition, which will save you money on your back end. That being said, you have to be careful because when you look at businesses, what I've seen, which is a commonplace and is you'll see a business that does $7 million, then it does $8 million, but you see that bottom line, like do huge fluctuations and you go, whoa, what changed? And then you look at it and, and it's like, oh, you've tripled the ex. The, the marketing expense this year. So it took them 3x marketing to get a million more dollars in revenue. That, that's not a healthy system they have in place in the marketing. So they're destroying their net to try and keep the revenue the same. You see what I'm saying? So, like, that's the. Watch out. Is. Yes. Revenue is almost. It's not king, because obviously EBITDA is the king of all of this. That being said, though, revenue is an important metric. You just have to make sure that, that their revenue is steady with the systems in place that are also healthy. Because if they're, if they're zeroing out net just to hit the same revenue, it's like, why would you, you wouldn't do that.
- [38:20]
Chris Barr
It's a no sense. Yeah. And I think in that regard, I mean, I would obviously need to go back and check, but I'm pretty sure that again, marketing efforts, labor efforts, have stayed fairly consistent as their revenue's gone up. But again, I, and also within a.
- [38:35]
Jack Carr
Great way to check that, by the way, is just ask them for it as a percent of revenue. So that's how we do it internally in our business, is we manage that by making sure that as a percent of revenue, it stays consistent. Right. So we spent 10% on marketing this year, we spent 11 next year, and we spent 10 the third year. And that way, you know, hey, their system is, is a system. Right, because they're. Their revenue is going up, but their marketing is staying the same. And what that allows you to do as a healthy business, right, is you just scale. You turn up your marketing, your revenue turns up, you turn up your, your vehicle expenditures, your revenue is turning up or your revenue turns up, then your vehicle expenditures turns up backwards. But still it's like that's a healthy business versus if you start to see like big waves inside, certain expense rates like you go, okay, well that's super weird. Why is that really high this year?
- [39:31]
Chris Barr
Yeah, and I like the analogy you, you know, made of, you know, if you see a big wave and again, surfer. So I like any kind of wave analogy. But you know, I would say that you're going to inevitably see waves and to expect those. There's growing things as you're doing more revenue, as you're growing your business, you're going to start doing things more bit differently, changing up practices a little bit. So you're going to see some variance. But how, what's the size of the wave where we put a red flag.
- [39:56]
Jack Carr
On it, you know, My point is though, like actually the wave itself is the red flag. Just, just because, I mean, hear me out, right? What you're buying in a business is you're buying the systems. You're buying. Like you're buying. You could go out and spend a million, pretend this business is a million dollars. I don't know how much it is. You could go out and spend a million dollars on a buy vers build. Kind of the idea of buy versus build. If you spent a million dollars, you would probably build a pretty solid business. Maybe not the same, but decently close. A nice. You buy the buy side business because it's a business in a box. All the systems are in place, I show up. Yes, I have to do certain things that the owner did, but systematically, right? Everything is somewhat in place so that I can step in, continue that system and continue that same revenue and therefore I can turn that knob up on that system and then the revenue turns up or vice versa. So like if you see giant swings, for example, in like vehicle maintenance costs and then they'll say, oh well, we had a bunch of old vehicles and that the old vehicles are breaking down. We had to buy transmissions and motors. Like that's the reason for the expense. And then my, my answer to that is like, well, that means you don't have a system in place to either do maintenances properly or your vehicles are all old. Which I bought a vehicle like this, so I'm not like talking shit. Your vehicles are all old and they all suck. So you don't have a system. You just have a bunch of old vehicles that you're patching whenever they break down versus like, hey, oh, we have a leasing program where we turn them in every three years so that, that doesn't happen. Right? That's a system is like a leasing program on fleet. Fleet, which every five years they recycle out so that you don't have huge expenditures. You just have the same like 10% of revenue every, every year for, for fleet. You see what I'm getting at right there? Like, no, I do seriously wave is, is the issue sometimes.
- [41:54]
Chris Barr
No. And I, I, I, that does make sense. And now as you're pointing out that specific vehicle example, I'm like thinking of this pool service business. I'm like, yeah, I don't like the way they do vehicle maintenance specifically. Like it's a, it's, again, it's, it's not, it's not systemized. So again, bringing myself back to I'm not really buying an sde. I mean I am, but really think of it as I'm more buying systems is a really, really good perspective to have, which kind of cuts through a lot of the fat and makes you unglued to that kind of bottom line number that I know we can all, you know, sometimes.
- [42:27]
Jack Carr
So that being said though, right, on this entire conversation, there's never a perfect business because you know why they wouldn't sell it. If it was a perfect easy to run business that was like cranking out money, no problems at every system. Perfect. They wouldn't, they wouldn't sell it. I must cuss on this podcast. They wouldn't sell it. That's the answer. It's like they wouldn't sell it.
- [42:50]
Chris Barr
Again, you know, I, I can hope for that. Wait for the owner to have a heart attack and then, you know, they are in a distress situation. Need to sell. Like, you know, but again, like I can't sit on my hands and just like wait for this unrealistic opportunity to fall through. So it's at that point, it's a question of how much hair do I tolerate on a deal.
- [43:08]
Jack Carr
Yep. You know, and I think that's a personal thing. I mean, my, my, you know, I mean, I work in frameworks, I work in themes and kind of these generalistic ideas. And for me, the, the big, the big caveat on how much hair you are willing to take on a deal as someone who has taken a deal with all of the hair is like sasquatch.
- [43:30]
Chris Barr
Of a deal. Yeah.
- [43:31]
Jack Carr
All it comes down to at the end of the day that in my mind is is it going to sink the like, is it going to sink you as an owner because you're taking on hundreds of thousands if not a million plus dollars in debt. If SB up to $5 million in debt. Right. And so with that, like that's life changing. If it goes wrong, I don't care how you cut. It's not the end of the world. Don't, don't hurt yourself. But like it is life changing. You can lose business. It's your personally guaranteed. You can lose your house, you can lose real estate, you can lose all of these things. And so my big watch out to you isn't like don't buy a deal with hair. It's don't buy a deal with hair that's going to sink your ship.
- [44:15]
Chris Barr
Yeah. And I think that that. And we talked about this a little bit and it's like, it's weird them being like all vulnerable on camera. It's a weird thing for me to talk about. You know, again, what my family does with their portfolios, well, has in the past been really. That's their business. This is my business. But as I mentioned, you know, I was tapped very, very recently to potentially come on and help out the family portfolio. So would really cut my opportunity cost when it comes to acquisitions. So, you know, kind of having to take that into account as I make a decision here. But then also, you know, looking at that kind of macro picture in regards to that portfolio and kind of doing those numbers it on a good note. It took a lot of the pressure off wanting to buy a business and wanting to put pedal to metal again. Still me, the J acquisitions go live. I'd like to have something bought one year. I'm not ghosting on you, man. But at the same time, it really hammered at home that it would just be unwise for me to really push myself into a deal again. Not that anything's ever going to be perfect, but to push myself into something that really wasn't a great fit. Because you can make a lot of these businesses work. You know, I could buy something that had. Again, you bought a sasquatch deal with all the hair on it and you made it work just fine. I'm confident that I could do the same. But it really feels like that's not a wise decision when the global kind of macro picture looks pretty good. So again, there's two sides.
- [45:40]
Jack Carr
Rich Jordan talks about this a lot, which I love. And it's just. It rings true for me is the worst deal you're ever going to make is your first one. And once you come to grips with that, that's wonderful because you have to pay to actually play the game. You have to pay to. To join whatever home service team or restaurant or whatever you're buying. You got to play to get in. And then once you're in, you. You create this network around you that actually gives you. It feeds opportunities. So I would never have gotten opportunity two, three, or four if I never bought opportunity one. That being said, right? Like, it doesn't mean opportunity one was great for me. It was a very difficult time. It was a very difficult opportunity with lots of hair. Whereas if I would have bought something else, I would have been way, way better off. That being said, I would never been able to scale and run a business and have this podcast and do fun things because you have to pay to play. And so it's just this really kind of balancing act that you have to balance to answer the question of, like, perfect fit versus expectations. That's why I leave it at this kind of gray area of don't let it ruin your life, but you're gonna overpay, and it's gonna be a hardship. At some point, you're gonna wish you bought a better deal. But like that, once you get to. Once you grow out of that and once you get past, like, the. The SBA debt portion of your headache, then it's fine again. And so, you know, a lot we get asked a lot. Like, this kind of dovetails nicely into another question that we get asked a lot is like, should I pay off an SBA loan right away? Like, how do I pay off? And like, when do I pay off an SBA paying off SBA loans? Like, five years, two years. And I remember asking Twitter on my one year, like, I'm one year in, should I dump all this money into paying off my SBA loan? And I was told by a very smart individual, a mentor of mine, he said, jack, don't worry about the loan, pay off or put the money towards growth initiatives, because the minute that you outgrow your SBA debt, where it's not really an issue anymore, you. You're. You're generating enough money that the SBA debt is just such a small percentage of your total revenue, then it's not a big deal anymore. Like, it really isn't. So, I mean, if. If I'm going be Frank, we pay $10,000 a month towards SBA. Would I love $10,000 a month to pay for something else? Yes. But do I worry about making my loan every month? No. Like, it's just part of what we build into our break even point. We have to hit that every month. But it's, it's like, whereas before months, six of owning a business, I was like, oh crap, this, you know, this isn't going to be, it's, it's March, I made 60,000. Like, and that's gross. Like, this is rough. Like, I have to, I'm not paying myself this month because I got to make spa. But once you put all that money, when you get it into growth initiatives, you get so big that, that little piece is so small now that it's not a big deal.
- [48:38]
Chris Barr
Man, that makes a lot of sense. And again, there's a ton of overlap between, you know, the coin commercial real estate acquisition process and small business acquisition. But there's a ton of huge differences. And that is a major one of like, and we slap everything on like a 25 year amortization and like a 5 year balloon note, you know, pay minimal debt service, just kind of like hang out. You know, this is a whole component of like you can rush it, you can put everything towards SBA debt. People do it. But also with a piece of commercial real estate, you can't really scale it and put into growth initiatives to really get the business and the income stream to outsize the debt to a point where you're really not worried. Like, that's not an option. So the biggest part of it that way.
- [49:15]
Jack Carr
Yeah, the biggest parable would be like a small like duplex or triplex that you remodel, you buy it, you know, you buy it on, on a mortgage, you know, debt of a thousand bucks. And the, the, the s, or excuse me, the mortgage was a thousand bucks, but the rental income from the duplex was 1200. It's like, oh, if, if the water heater breaks, it's coming out of my pocket. But then you remodel it, you up rent to, you know, $2,000 a unit and it's, it's, you know, cash flowing, three, 200amonth. Now you're like, okay, do I need to. And I have a 3% interest rate because I refinanced in 2020. Now I'm like, I don't need to pay this off. Like, I'm just gonna leave it. There's no point in trying to rush the mortgage on it because like the, the, the, I mean you're kind of capped, which sucks. So you can only put so much into it, but at some point you're like, it's, it's just part of it's, it's income producing debt and so I'm just going to leave it until it pays itself off.
- [50:12]
Chris Barr
Sure. And I think that's another really kind of inspiring component of the small business acquisition process. You know, again, compared to the real estate is what you kind of just described the duplex. That is like a classic textbook value add opportunity. You know, to buy something that I can, you know, have much value to and you know, so on and so forth with. It's essentially buying a piece of crap and making it not a piece of.
- [50:34]
Jack Carr
Crap, you know, but in small business, even the hair.
- [50:37]
Chris Barr
Because with this whole buy versus build concept, everything's a value add opportunity. You know, I'm not buying the perfect strip center on main and main and saying how can I add value to this piece of real estate? Like you can't. Like it's kind of capped out at whatever value could be added to it. But with a small business, even if they've got really solid systems in place, even if you know you're buying something that's already really, really well functioning, there's always space and room to adjust to turn the knobs and to crank something up to continually add value. So that kind of limitless ceiling on a value added opportunity when you're really not buying a piece of crap in the first place again is, you know, it's motivating, it's exciting.
- [51:17]
Jack Carr
So there's nothing like hosting a acquisition show about buying companies and just calling them buying pieces of crap. That's. We should change the name, dude. No, it's. You come up with a love for it. But that's awesome. I'm excited. So what's on the docket for this upcoming couple weeks? Like what are you focusing on? What. What do you think that we should expect to see from you next month?
- [51:41]
Chris Barr
Calling some private equity firms?
- [51:43]
Jack Carr
That's. Yeah, yeah.
- [51:44]
Chris Barr
So no, honestly. And as I said with me feeling like there's been a slowdown of fresh listings that I'm seeing that I'm excited about, I can't tell you. Well, you know, I guess I will refreshing the broker network kind of reaching out and just doing some personalized calls there and staying steady on that is always components. So I'll definitely continue to hit that. But I'm honest to being totally frankly I'm not holding on a lot of hope for what brokers and to come with through within the next couple of weeks. So again, private equity love where I'm going to take that. Again, cold outreach via the DMV to talk to individual business owners to actually speak because again, the networking is great and I think it's a great long term play but it's not getting any opportunities in front of me right now and that's what I'm really feeling a thirst for. So I think ramping up the cold calls on actual legitimate businesses rather than people who can potentially connect me with businesses is going to be my other main push. So PE direct outreach to legitimate businesses, not just people within their network and then refreshing the broker network because that's always.
- [52:52]
Jack Carr
You gotta always do it. Yeah. Sweet. Awesome. Well, I appreciate it Chris. Thank you for your time this week. This was awesome. It's good to hear what you're doing and I'm so excited for next week. If you, if, if a reminder for anyone that wants to reach out and get a hold of you, where can they find you to send you awesome businesses that they have found in South Florida that they think would be a great place for you to look at and buy?
- [53:14]
Chris Barr
Yeah, we say there's not a perfect opportunity. So somebody drops into my inbox thanks to this podcast but it is Chris Chr I s@kc acquisition partners.com you can also Google or go to kc acquisition partners.com that's our website. Check us out. Yeah.
- [53:30]
Jack Carr
Hope to hear from some. That's the letter. That's the letter K and the letter C. Correct? Not.
- [53:35]
Chris Barr
Yes.
- [53:36]
Jack Carr
Awesome guys. Well thank you for listening this week. If you have any questions, comment them in the notes below. Leave us five stars wherever you review and head over to owned and operated.com to check out the workshops and the groups there. So much going on over there that, that I'm speak on once a week as well and absolutely love. Thank you.