Episode 134: Win Or Learn with Private Equity Deals, Pt. 2

In our previous episode, To The Point veteran Ken Goodrich gave a crash course on what private equity (PE) is, how it operates, and what you want to look for in a PE partner. In part two, we’re diving into how operating with a private equity mindset with your business can set you up for success.

The Future of Private Equity in Home Services

First and foremost, many contractors are wondering: is this rush of PE in the home services industry over? Is it sustainable? Are these multiples ever going to go down? Ken looks at other roll-ups that have happened in the past in similar industries to try and predict the future. There are still remnants of a roll-up in industries such as fire monitoring and sprinkles. Multiples spiked up to 14, bigger players got involved, and things have slowed down since. But what hasn’t happened is multiples falling all the way back down to 4.

That being said, Ken believes now is probably the peak if you want to get involved. Just make sure you understand your “why”. Why are you interested in getting involved? Ken talks to plenty of owners with great businesses that don’t really want to get into a faster game. That’s perfectly fine!

Why Does Private Equity Target Our Industries?

Something you need to understand about these private equity guys is that they are looking at your business like they would a commercial building for rent, for example. They know that the building is going to rent for X amount and bring in a certain amount of cash flow each month. They aren’t worried about the internal systems and the minutia of your business – just that this “thing” brings in this much per month. It’s that simple. But why have they specifically targeted the HVAC industry and adjacent service industries?

For starters, it helps that we’re “recession-proof”. When COVID hit, things like restaurants got hit HARD. The HVAC world? We saw not just steady growth, but explosive growth in some cases. There were some casualties, sure, but nothing like other industries. The big piece, though is that the HVAC industry grows pretty much on its own by 4% each year. So just by doing nothing but business as usual, returns are pretty predictable. If you tweak something here or there – add in new leadership, infuse some additional capital, make an acquisition – you can jump that 4% to 10%, 20%, and above. That’s what’s so attractive.

Your Business is an Asset…Treat it as Such!

Ken knows better than anyone what it’s like to come into work and have 50 fires that need to be put out. It can be really hard to shift your attention and look at your business from a higher level. But you have to understand what you have, what it could be, and what you need to get it there.

Take a step back from your business and think about it like the asset it really is. How do you maximize the value of that asset? Even if you aren’t planning to get into the PE game, you should be playing it like you are! Track the value of your company, the value of your growth, and look at your long-term goals for your business and include that in your company’s value. Hedge your operational decisions based on that. What would a PE firm want to see?

Even if things are going great, life can happen. You may want or need to sell at some point. That’s why you always want to be paying attention to the value of your business. It’s no different than having real estate holdings or assets. You’re just working on this thing you built, trying to increase its value. If you think about your business like you’re private equity every day, you’re going to be driving your business to the best outcome possible. You’ll also be determined to understand the cause and effect of the levers you can push and pull, the fidelity of your numbers, and the systems and processes that influence the outcomes you want to achieve.

Being Prepared…Recession Proof?

Anyone watching the news is hearing the term “recession” getting thrown around. No one can predict the future with 100% certainty, but there are some indicators that things might get a bit more difficult relatively soon. Even if they don’t, things ebb and flow naturally. How do you prepare and ensure you’re ready for whatever comes your way?

Efficiency and productivity

Ken says things are sliding a bit already, but it’s not like the 2008/09 events. He anticipates approval rates on financings going down, and that there will be some pressure put on pricing. Nothing that serious, but you’re going to have to be more efficient. Efficiency and productivity are going to be the real game.

Competition is Rising

Goettl has several locations, and Ken enjoyed not having a lot of competition there for many years. The second Ken stepped into the Phoenix, AZ market, he knew he was in the man’s game. There are some real operators there. Same thing with Vegas and San Antonio. There are real players now, and not just in the biggest markets. The level of sophistication and competition is rising, and consolidation will only accelerate that rise.

If you’re an independent, this isn’t necessarily cause to ring the alarms. Just be aware that this is happening, and you have to step it up a little. Again, efficiency and productivity. Think about scaled models, and scaled players. There will be some markets where the level of players will raise the required skill level for everybody.

Know the Numbers

You have to have a high fidelity of the numbers. Bottom line. Once you get to that point, you will really understand the cause and effect of each number on your financial statement and understand how to pull those levels. You’ll understand how you can run your business differently and change your model as needed.

Brand Equity

Brand equity is a big piece of the puzzle here. If a big player comes in and you don’t have brand equity, that’s not good for you. They’re going to bring their own in. Are you focused on developing your brand? Who are you, what do you do, and why do you do it? Do people know who you are?

Best Practices

Ken is constantly shocked at how many contractors aren’t in a best practice group. You have to be in one. You need to be exposed and have resources to get the answers and tools you ned to succeed. Most of the things Ken has learned, he didn’t know he needed to know until he saw it! When people ask Ken for advice about starting a business, he always tells them to find a best practices group for that industry and spend a year there first. Know the players, know what’s going on, and build your business model with those tools first.

Build Your Infrastructure

You can’t just focus on the revenue number. If you’re growing, more revenue demands more infrastructure. There has to be somebody (ideally, a team) working on the infrastructure of your business every single day. Otherwise, it doesn’t matter how many sales you bring home – it won’t translate into a profit. All of these guys pounding their chests and talking about going from 1MM to 60MM in EBITDA overnight? They don’t even have a damn bookkeeper.

You are building a machine. It has to have the internal pieces that grow along with the revenue. That takes time and effort. Ideally, it’s like a see-saw. Your sales are going up? Work on your infrastructure. Growth costs money, requires attention, and demands more systems. You aren’t going to go from 50MM to 250MM in 2 years and be profitable without building the infrastructure.

“You need the right people and the right setup to build (the infrastructure) on the fly, all while you’re flying the damn airplane.”

Your infrastructure includes a great management team. Metrics on every employee. A compliance division that makes sure everything that needs to be checked off is getting done right. It’s management development. It means knowing the areas of your business that can trip you up are being monitored. This is a valuable business. A lot of PE firms will buy a business and help put the infrastructure in place, but if you want a higher multiple, having in place already is going to drive that valuation up. Either way, it will make your life a hell of a lot easier.

What’s Next for Ken?

Goettl has a new partner, and Ken and his team are working on their second 1,000-day plan. He’s still driving Goettl as CEO and is going to remain so until they recognize the vision of Goettl-izing the nation. He’s also looking for partners who want to recognize that vision. People who are really looking for that next move; to be part of something bigger. To really step up their game and their experience. He also has his eyes set on finding another industry to roll up. Ken wants to make sure he isn’t just a one-trick pony!

If you’re not learning and growing, you’re stuck in a circle of experience. Go out there and learn business, not just your business and how to sell something. If you have questions for Ken, he’s always happy to help! Just reach out to us for his contact information and we’ll get you in touch.