← Owned and Operated - A Plumbing, Electrical, and HVAC Business Growth Podcast
Owned and Operated - A Plumbing, Electrical, and HVAC Business Growth Podcast
I Bought 15 HVAC, Plumbing & Electrical Companies — Here’s What Actually Happens After Closing
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The hardest part of buying a business isn't buying it, it's the fact that you have to run it after you buy it. Over the past 10 years, we've bought around 15 businesses in plumbing, H Vac and electric. And it's probably a lot different than how most people would think it is. So today we're going to talk about how to source deals, how to negotiate them, how to price them, and how to close them. I'm John Wilson and I run a home service company in Ohio, Indiana and Tennessee. And we run this channel where we talk about how to build yours. So if you approach, approach this like a sales process, you're going to do great. I have seen people waste years during a search process trying to find the perfect business. And often I think you just need to get into the game and more and more deals come. Sourcing seems to be one of the biggest issues for people that have not done this before. There's a part of the industry called search fund and the idea is that an MBA student will graduate, they will raise a fund, maybe it's a hundred thousand or two hundred thousand or a million or something, and they will go search to find a business to buy and then run after. I have talked with a lot of search funders that have spent six months a year, two years searching for this perfect business to buy. And two years is a long time. Sourcing tends to be the most complicated thing where people really get stuck. And I kind of actually think it's one of the easiest things to solve if you do it right. Some quick hits on how to do it. What? One, yes, you can do it online. So I'm going to recommend the other two. One is just getting out there and hitting the pavement. I have a friend that has literally knocked on doors for plumbing companies, H vac companies, to see if they want to acquire them. So do the things that people aren't doing. Join networking groups, cold call, knock on doors, maybe letters and postcards. But don't just wait for inbound. This is a contact sport, this is sales. So don't wait for it to come to you. And I think that's where most of the search fund or people looking for their business fail is they're waiting for that perfect thing to come across their desk instead of hunting it down. The third one is just get in the game. And I don't think people talk about this enough. I bought a very small plumbing company 10 years ago. We bought a lot of other plumbing companies. Since I get contacted from someone every day from Pine Grove Capital or pick a name and it's always a tree. And they're always saying, hey, we respect the legacy. We want to do whatever. Like, nobody cares, right? Like, we get these letters all the time. If it's another plumbing company approaching another plumbing company, much higher response rate, much more likely to go somewhere. That's just two contractors talking. That's just two business owners chatting about, like, hey, is there possibility here? So getting in the game is one of the easiest ways to start seeing deal flow because people in the industry will take you more seriously. A ton of our deals have come inbound, and that means someone just reaches out to us because they know that we're acquiring and they know that we're a local plumbing company. There are things like brokers and biz, buy, sell, but to me, that's an accessory. Those are the nice to haves. If you get a deal from there, that's awesome. But the problem is you can't build a business on, hey, does somebody happen to have a deal where I need it or want it to be? In order to build a business, you have to be intentional. I need to be here by X time. Let's go hunt that thing down now. One of the most common questions is, how do we actually value a business? A great resource for this. HBS wrote a book called how to Buy a Small Business. And that walks you through valuation. The best way to think about it, if you are buying a small business, they are typically going to sell for somewhere between two and five or six times their profit. Now, that is not enough of the definition. It could be last year's profit, it could be the last three years average profit. A lot of the dynamics depend on how competitive is this industry. We're plumbing H vac and electric. What we're often seeing is the last 12 months profit multiplied by four. A lot of conversations that we've had is around educating the seller on how their business is valued. If we're knocking on their door or if we met them without a broker involved, this is probably the first time that they've ever had their business valued before. And you're a buyer, so you have to be able to confidently walk through that exercise. We wrote a little pamphlet that we hand to sellers now, and it's called the Process. And it just walks them through, here's how we value it, here's how the company has to be left. You have to pay off your debt, you have to pay off your vehicles. We're going to buy the vehicles, and that really helps start the Conversation in the right way. We've had a few prospects that misunderstand the multiple. They think that it's a multiple of revenue, not a multiple profit. And if you're an unsophisticated business owner or seller, they don't know what to multiply by. So they're going to multiply it by the biggest number they have, which is revenue. There is no right price. There's definitely a wrong price, but there's no perfectly correct price. Like the value of a business is in the eye of the beholder. What is it worth to the buyer? What is someone willing to pay for it? Will the cash flow cover the debt? Do you have a growth plan to make it grow? Do you, does it fit perfectly inside your organization? Is it strategic like it gives you a new market or it gives you a new service or trade that you've been looking for? All of these things impact value kind of a lot. When a seller has an asking price, what they're saying is, I have an idea of what I would like. That does not mean that that is what that business is worth. Many times companies go on market and they say, hey, I want $2 million. Amazing. I'm super happy for you. To me, that business is worth a million. How do we cover this gap? This is an emotional process for a lot of sellers and rationality has a tough time fitting in. Because as a seller is preparing to sell their business, they're thinking about a few things. They're thinking about, hey, I sacrificed for decades to build this business. This might be their only retirement. So often when we talk to sellers, it has nothing to do with the actual value of the business. The number that they give me that they're wanting is, hey, here's what I need to retire. It doesn't have anything to do with what the business is worth at all. So it's emotional. It's not rationality. It's not really math. This is conversation and negotiation. And it's a human to human conversation about how to get this done in a way that works for both parties. Step three is diligence. You presented a value, the seller accepts it and you provide them with a letter of intent. That gives you 90 to 120 days to perform due diligence. This is called being under contract. And you have exclusivity while you go through that diligence. You're going to look at years of bank statements, you're going to look at years of financials, customer records, vendor partnerships, software contracts, rent, leases, everything. And we are looking For a mess, that's the ideal scenario often is. We want to find something that we can fix. We want to find an unoptimized business. So when you find something that's okay. Businesses are loosely controlled disasters that just happen to make money. Our job is to take something broken and turn it into revenue. All you need to be thinking about is is the problem fixable? Is it worth it to fix? Like can I turn this around and make it great or do I just need to walk away from this and go find the next one? As you do due diligence, you are looking for the thing that will kill you. After all that work you, you just started. The funniest part about buying a business is people treat it as this stage, but it's kind of like engagement. It's leading up to the marriage before close. As you're going through due diligence, you're finding these problems. You need to be building the integration checklist, the 100 day plan. How can I make more money than the last guy you're going to walk in? And those employees were probably used to this to the previous owner for a decade or decades, that's really challenging. They're going to react to you differently, maybe good, maybe bad. You have to be thoughtful on how you approach that. The key here is as you think about your post closed life, you're not looking for that perfect business. You're looking for something that you can improve and that you will enjoy running. I think a lot of people sort of get lost when they think about this process and they sort of imagine it like real estate businesses are moving and messy and human and a house can't really quit on you, but employees definitely can. And as you're thinking about the business, the most important part is post close because that's when you actually are going to work, despite the work that it felt like when you were buying. If you're serious about buying a business, start with sourcing. Try to go where nobody else is. Yes, there's biz by sell, yes, there's brokers. But the real value gets created by getting in the game and knocking on doors or joining groups or just getting out there and talking to people. That's where you're going to find deals. That is where all of this begins.