Acquisitions Anonymous - #1 for business buying, selling and operating - Is This $4.5M HVAC Business with 33% Margins A Smart Buy?

Episode Date: September 20, 2024

In this episode, we reviewed a $4.5M plumbing and HVAC business with a strong focus on repair and replacement services in the Northeast US. With 1.4M EBITDA and 2,500 active accounts, it has a balanced revenue stream, recurring income, and no exposure to new construction. The big question is whether the impressive 33% margins are sustainable as the business scales.Thanks to this week's sponsor:Acquisition Lab and their team have been longtime supporters of the pod.Acquisition Lab exists to help people buy a business and navigate all the complexities of the process, as well as provide a trusted framework, tools, and resources to support you from search to close.If you are serious about buying a business, check out acquisitionlab.com or email the Lab's director Chelsea Wood, [e-mail] and mention us ;) Business At A GlanceRevenue: $4.5M (2023)EBITDA: $1.4MCustomer Base: 2,500 active accountsLocation: Northeast USRevenue Mix: 60% plumbing, 40% HVACTeam: 23 employeesFocus: Repair & replacement onlyWhat We ThoughtCustomer Base QuestionsJohn raised concerns about the definition of "active" accounts. If the 2,500 accounts are truly recent, it's impressive. Otherwise, it could indicate a weaker client base than advertised.Multi-Trade ChallengesAt $4M, managing both plumbing and HVAC might hurt focus. John thinks focusing on one service would improve margins.Northeast Market StrengthThe business benefits from higher ticket prices in the region due to hydronic heating systems, but unionization could pose a challenge depending on location.Subscribe to weekly our Newsletter and get curated deals in your inboxAdvertise with us by clicking here Do you love Acquanon and want to see our smiling faces? Subscribe to our Youtube channel. Do you enjoy our content? Rate our show! Follow us on Twitter @acquanon Learnings about small business acquisitions and operations. For inquiries or suggestions, email us at [e-mail]

All right, on this one, what do you think? I mean, no new construction. This is like a watershed. I'm into that type of thing in, you know, in residential and commercial services. Yeah. And I feel like it's like grass is always greener. Well, so that acquisition anonymous. Hello, another episode of Acquisitions Anonymous. Welcome back, everybody, to another episode of Acquisitions Anonymous. I'm joined today by John Wilson from Own and Operated podcast and also Wilson Co. We talk about a really interesting. Axial deal of plumbing and HVACC business in the Northeast. It's around 4.5 million in revenue, 1.3, 1.4 million in EBITDA. And it checks like so many of the hot boxes right now in this space. It's no new construction, all residential, and almost all recurring services with a little bit

of a niche with like boilers. Super interesting in-depth episode. We talk about the metrics that they've given us in the teaser. What matters, what doesn't depends on the buyer type. But we talk about just the dynamics of this industry as a whole. John is a really, really deep expertise operator in the space, has done multiple acquisitions. It's a really in-depth episode. If you're looking at something plumbing or HVAC-related, this is like a must listen.

Hope you enjoy the episode and stick around for a quick word from our sponsor. This episode of Acquisitions Anonymous is sponsored by Acquisition Lab. Acquisition Lab and their team, they've been longtime supporters of the pod, and they provide a really great service for people who are looking to acquire a business. So it's created by Walker Diabell, who's become a friend, the author of Buy, Then Build. to outsmart the startup game. So Acquisition Lab is an accelerator with a highly vetted, cohort-based, educational and support community for people who are serious about buying a business. So a lot of our listeners like you, you tune in every week to our deal reviews. You want to get in on buying a

business. You know, you're on this podcast because you're trying to learn how to buy a business. But if you're not quite sure where to start, Acquisition Lab is a great place to start. So they exist to help people buy a business and to navigate all those complexities of the process, everything you hear us talk about on the show. They provide a proven framework, tools and resources that support you all the way from search to close. They do it. There's a whole bunch of educational material and support. So if you're serious about buying a business, check out Acquisitionlab.com, or you can actually email the program director Chelsea Wood directly. Her email is Chelsea at buy then build.com. John, what's up, man? Glad to be back. Talking deals, talking plumbing.

I love that you're back. And it's just me and you. When everybody heard that John Wilson was coming on the podcast, they ran for the hills because they're going to, they want to hear this fresh live recording where you explain what's up with plumbing and electrical HBCAC. This is just it's, it's too much wisdom to handle really live. Like you have to be able to pause it, soak it in. I totally get it. My wife tells me the same thing. my kids are like hey we want to listen to the podcast and I'm like it will put you to sleep okay so that's

totally fun my yeah and for our show like my wife listens to every episode and I'm like that's a lot of support like you have to listen to me talk a lot and you in you choose to listen to me in this yeah like that's kind of amazing to this this is extra credit wow that is amazing my my wife does not do that so I'm gonna I'm gonna let her know she's like really dropping the ball Yeah, yeah, she's behind, man. All right, well, I got a deal for us. And we said this right before we hit record, but you are our most active guest. You're our most repeat guest.

And so thanks for, you know, staying ahead of the curve and keeping it going. But we pretty much always talk about something in your circle of competence. And we got another one today that is from Axial. It's a $1.3 million EBITDA residential plumbing and HVAC business. So it says this is a residential plumbing and HVAC business. They've established a strong reputation and substantial customer base with more than 2,500 active accounts. The average customer spend exceeds $1,500, demonstrating the company's ability to generate significant value per client. They say the key attributes of the business are they have a balanced revenue stream.

They generate approximately 60% of their revenue from hydronic heat and plumbing services. That's like boilers, right? Yeah. with the remaining 40% coming from HVAC services. They have a service focus. It's exclusively repair and replacement work with no involvement in new construction. Can't we talk about that? Recurring revenue, significant portion of the revenue is derived from on-demand services,

maintenance contracts, and repeat customer work, ensuring a stable and predictable income stream. They boast a loyal team of 23 skilled professionals. Many of, many of them have long tenure with the company. They say that the investment highlights are that you could expand geographically, excellent opportunity for a buyer seeking to enter or expand into an attractive northeast market. Recurring revenue, they've talked about customer integration. They're kind of saying, hey, if you have some other business, you could actively just tap into this 2,500 customer list. Revenue in 2022 was $4 million, top line, EBITDA 1.1 million, so 27.5% EBITDA margin.

Then in 2023, they grew by about 12.5% to $4.5 million. in revenue and 1.4 million in Iva. Margins are at 33.1%. And they're looking for outright sale, change of control, and that it's located in the Northeast U.S. They, I think, probably specifically didn't tell us where it is, but northeast U.S. There's a little bit to go on here. What do you think, John?

I mean, there's a few data points that I'm just interested in. So, like, in that first two sentences, you know, we talk about 2,500. active accounts and we talk about 1,500 average spend per client. You know, my first couple questions are like, what time period are we measuring active by? And what time is like LTV, 1500 or is that like trailing 12 or something like that? Yeah, so when somebody says something like this, like 2,500 active accounts could be, we have 2,500 total historical customers since the origination of the business. Right. And that would be small.

Yeah, $2,500. Yeah, that's a pretty small, that's pretty small. So the fact that they're driving $4 million out of $2,500, that feels like, I'm kind of impressed. I feel like we miss something here with the average spend at $1,500. I wonder if they mean $15,000. Or I wonder if, because it's repair work, I'm wondering if it's like, their average order value, not their like lifetime value of the customer or annual, you know, annual average spend of the customer.

I'm thinking that might be, you know, per-trip. I think they've got to miss, yeah. Well, you know, I divided, I divided four and a half million by 2,500 active accounts, and it says 1,800. Yeah. But yeah, like, so usually active accounts in my industry is we touch that house in the last three years. Okay.

So last 36 months, it deemed it kind of active. Right. 18 months for HVAC, it's a little bit different by trade because you just don't need a plumber more than once every two, three years. But with HVAC, you know, you probably need an HVC guy once or twice a year, tune up your furnace, tune up your air conditioning. So active can mean a lot of different things. I do wonder how many are inactive. You know, total customer accounts is kind of an interesting. That's something that we started to get a ton of value on later as we just improved our tech stack of how do we communicate with these customers.

So it used to be, you know, we would have bought this business and we would have done a really poor job. We like maybe send one letter. Like, hey, we, you know, we own them now. Yeah. And but there's enough tech out there now that you can do some really interesting stuff. like that $2,500 can turn into, or 2,500 customers can turn into a really substantial new lead source and you can activate them more frequently. Yeah. So I'm kind of into $2,500.

It's a small amount, but I'm into it. I have a friend in Chicago who bought a company with, I think, 4,000 or 5,000 active accounts. Uh-huh. And that company went from $6 million to like $18 in like 24 months. Wow. And a big focus of that was reactivating those active accounts. Yeah, yeah. So, yeah, I think there's some value there.

I'm surprised by how young that is. But the company, they didn't talk about tenure of the company. So it could also be a new company. Yeah, yeah. Like maybe it's two years old. I mean, what do you think about this, the idea, and I know you have strong opinions on it, of being a multi-trade business at $4 million in revenue? Yeah, I mean, it's a bad idea.

Like, you know, I was talking with, we had Aaron Gaynor from Eco Plumbers on our show yesterday. And Aaron was, he's $75 million, the south side of Ohio. So Columbus and Dayton and Cincinnati and their core branch is like $55 million in Columbus. And he ignored the conventions. and stayed pure plumbing up until like $30 million, like kind of late for compared to what you see, for the most part. But he was probably right. Like, that's probably the right decision, because then they became this best in class plumbing company. They accelerated their growth. And, you know, each of these trades is like totally different businesses. Like, we're a three trade

business and it is complicated and messy. And we're mid-20s. And I think, like I have friends that are our same size, but pure HVAC or pure plumbing, and their businesses are just better than mine. Like they just are. Like way more focused, way higher margin, way better cash flow. They're just so much more dialed into the one thing than we are just because that's all they can think about. This seems really, really small to try and do both. But, you know, if you've got, I think the hardest part, right, is the skilled technical.

labor. And so if you've got 23 employees and you got, you know, 15 of them in plumbing and you got eight of them in HVAC, I mean, if you buy something like this, it's not like you're going to get rid of, you know, 40% of the revenue of a business that's this small. So I see how people get into it, right? Like their phone's ringing. They're thinking, how can we capture more of this? They maybe find a key employee who jumps starts it or something like that. And next thing you know, you're trying to be all things to all people. Yeah, I think my own lived experience and then just watching what other people do is there's these different plateaus in your business and you don't know how to do what's next. So like you'll sit there and maybe you're $2 million or $3 million or $20 million.

Like it can happen at any point really. And you're just looking for like what does the next step change in order to put us over the hump? Yeah. And usually we choose wrong. Like I've chosen wrong a ton of times where like, hey, the next step change. Like I'll talk to, and I said this myself five years ago, but at one point I thought that that I had capped the potential of my market. And I was like a $3 million business. And I was like, I don't think I can grow anymore here. And I'm like, you know, you know, 3,000 or 10,000 percent growth. later. I'm like, well, that was stupid. And I talked to these guys and they're like, they're doing a million bucks or two million bucks. And they're like, I think we got to open a new market. And I'm like, what are you talking about? Like you haven't even started yet. Yeah. Yeah. So I see that's how usually guys end up in these multi-trade things is they, they just don't know what's next. And launching HVAC looks easy because it kind of is. Like once we know the steps,

to something, it looks easy. So if I've taken a company from $1 million to $5, I know the steps. So if I want to go launch a new location in my brain, I'm like, well, I know how to take a company from one to five. That's actually kind of easy. I know exactly how to do this and go do this and whatever, ignoring all the actual difficulties of running to markets. So I think that's how guys usually end up in it.

They're looking for this sort of like easy button for a step change instead of doubling down on their one thing. Yeah, and on those core, like those core processes. And I suspect that's what happened here. What do you make of the Northeast geography? It's an interesting geography. And it really like boiler, we don't have that many residential boilers.

Yeah. You know, down here in the Carolinas. But obviously, this is like a huge installed base geographically and aging equipment. So, like, I like that, but what do you make of the geography and the kind of, if most of their work, they're not, doesn't seem like they're doing like tons of, they don't mention like drain cleaning, right? They don't mention like some core kind of potential attributes. Like, if their specialty is boilers and like steam pipe, pressure as pipe. Yeah.

Yeah. I mean, could be. That section of the states is kind of interesting. I think, I think in general, it's a good place to be. Like Northeast is kind of an interesting market. Obviously, you have like a lot of different potential cities. And the difference of being in Boston versus being in like, you know, rural New Hampshire are going to be different. You know, just different Tams.

But from what I've seen of just like friends in those markets, the average ticket's way higher. Average household income is way higher. Their average system is more expensive. So from outside looking in, it's a good place to be. And boilers are expensive. Like average boiler ticket might be 15 to 17,000, whereas if that was HVAC, that might be like 9 to 11. Yeah. Versus a tank hot water heater that might be 3,000 or something, right?

Right, right. So it's a good market to be in. Now, I think that it's a good market to be in on the consumer side. A lot of the Northeast is still heavy union. So like it's very different being in Boston than being in Ohio. You know, there's not really any unions in Ohio. Do you think that this doesn't mention it because it's not union or you think it doesn't mention it so it doesn't scare people away? I can see it going either way.

Yeah. Yeah, I could see it going either way. Yeah, union. Are you guys union? No. There's no unions in South Carolina. Yeah. Yeah, there's some unions in Cleveland.

but it's like very large hospitals. Like, let's build a hospital. I don't even know. Yeah, it's an interesting dynamic. I know people who are in our trade, in roofing, who are union shops. And, I mean, if you're in a geography where it matters, I mean, you just figure out how to live with it and work with it.

I will say that the cost, like I compared notes with somebody, Um, my kind of revenue or sorry, my, what I plug in for takeoffs, what, what our estimers plug in for takeoffs on these larger commercial re-roof and new construction for an eight man crew per day is like one tenth of what the union guys plug in for just the cost per crew per day. It's just astronomically higher. That's fascinating. Yeah, we don't, we don't compete against it at all. Like we have, um, because we just, one, we just don't touch commercial. And it's almost always like very big new commercial construction, which I would say doesn't really happen around where I am anyways. Like we're not in like a building heavy area. And there's a couple really,

like really big outfits that are all union, like 200 million commercial contractors. And they'll work from the Carolinas to, you know, God knows where. But they drive out, you know, they run out of Ohio like Canton. Or we'll run into like a bunch of track home. Or we'll run into like a bunch of track homes. So they'll do that type of thing. But no one's really touching residential service. I don't know. Yeah. Yeah. But in Boston, that is a thing. Residential service is unionized, which is weird. Would you like this business more if it was suburban or if it was or if it was like a real dense city center? Like, do you, what's your preference? I don't personally know how to compete in a super dense city.

So it's hard for me to give like an opinion on that. Like I would like like if it was $4 million and we're in like a burb of DC, I'd be I'd be all up on that. That would be cool. Try to think of some other. But if it's like a really dense urban environment and like these trucks are not moving, I'm thinking it's not really, I guess it could benefit from the route like route dynamics and route optimization and things like that for this kind of routine

service work. But you're just saying that's a totally different business in terms of the dynamics of how to run it. I feel like that's a different business. And maybe I'm just not thinking about it. I actually don't really know. I could probably send out something on LinkedIn and just find out. But I don't actually know anybody that runs like a downtown New York City. Obviously somebody's doing it. A lot of people are doing it. They're doing it. They're probably making so much money, hand over fist, that they just shut their mouths and they don't talk about it. Yeah. Well, yeah, I mean, you would have to, like, their billable would have to be two or three times mine in order to cover the traffic or like, hey, we can do four jobs a day. Maybe they can only do two, even just being in a tighter area. Or like, how do you keep stock or like the problems are so different. Yeah. We got to say, too, if you're doing residential plumbing in the suburbs, it's one house on one parcel and it's probably got a crawl space or a slab. Like, it's a very different dynamic.

I went into a building yesterday. We're looking at the re-roof. It's 17 stories tall. Yeah. And like it, the job is so small in terms of the square footage of roofing. But the logistics is like 90% of the job. We got to have a $25,000 a month crane. Totally.

And, and in that scenario, like, really you're, uh, it sort of breaks the stereotype of a residential plumber because like, yeah, you're doing, like, you're doing a selling process with the homeowner, but you're in a commercial building. Like, that's a commercial building. Yeah. You might have a six-inch main. You've got pumps everywhere doing stuff. And that's a totally different plumbing environment.

Yeah. Now, granted, if that's what you're used to and trained in, then okay. But yeah, I would say suburban just because that's what I know. And I feel comfortable with that. Is that if, if like you have a first-time buyer looking at this, you know, do you think suburban is the kind of path of lease resistance for new buyers? I mean, there's more of them. Yeah, I would say so.

Like, path least resistance and frankly, everyone else in the world, like how many cities have the problems that we just described? 10? So the other, you know, 4,000 cities that all have, you know, peers to talk to don't have those problems. So as far as like, you know, the bigger you get, the more you rely on peers, this is a conversation that, Rich and I have kind of often. You sort of go through these stages as you grow your business. And the first stage is like, okay, I'm going to have friends that are business owners. It doesn't matter what business.

And then it's sort of like the business tastes like chicken. And that's like the EOS and like the, you know, we're going to do culture index. And like, okay, business tastes like chicken. This stuff has to happen regardless. And then the bigger you get, the more you start to rely on industry peers or industry betters to like drive the next stage because you don't need generic answers. You need specific answers to your specific problems. Yeah. Yeah. Yeah. How did you navigate this thing that's very nuanced? Yeah. This exact problem. Someone has this answer. Yeah. So there's just from my

perspective, there's more people that have the answer in a suburban residential service company. Rich and I actually talked yesterday and we talked about this. Like I've really dialed back from just kind of like the general, like, Twitter, S&B conference, you know, kind of world. And I've spent a lot more time on industry association things where I can rub shoulders with people who are further down the path and like see around the corner a little bit. It's the, yeah, same thing for Rich and myself. I basically haven't been able to engage in any, because I, if I'm going to go to one or two conferences a year, like they have to move the needle for the business.

So it has to be the things that will. answer my very specific problems. Yep. Yeah. So I think Suburban's probably more friendly just because there's so many more of those service providers out there that you can get answers from. Hey, Michael here. I want to let you know that I'm hosting a conference, first time I've ever done it.

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All right, on this one, what do you think? I mean, no new construction. This is like a watershed. I'm into that type of thing. Yeah. You know, in residential and commercial services. Yeah. And I feel like it's like grass is always

greener, right? Like, there's this dynamic where you either do or you don't. And I, like, we do tons of new construction on the commercial side. I don't really know people who make it work on the residential services new construction with very sustainable margins. But I look at this as a huge plus for this business. Yeah, I mean, it is. Like not having new construction exposure is. is good. Like it ups the value. Chris Hoffman has done a couple posts on this, which I think is like generally helpful.

But like the apex value of our industry is residential service under 10% commercial exposure, no new construction, good tech stack. Like that's it. What do your Google reviews look like? Are you on, if not service, tighten, are you on one of the two or three other top CRM that they would know how to handle your data? And then, yeah, what's the exposure to anything non-service?

So that's like top of value. And if you have, and that all being said, I'm still totally blown away by how many, not even from like a value, but I just don't see how people. don't get it. Like, and I'll talk to peers in the industry. I'll go to these conferences or these workshops or whatever. And I'm like, we've got a $10 million business over here that's got five of it is new construction. And I'm just like, what like, it's 2024.

Like, we all know better than this. Like, I don't know. So counterpointed to that. And this is a different trade. But my business, we do, we do 100% commercial. We do probably 50%. new construction. Yeah.

And the, the, I get it on the, on the residential services side because residential new construction is either super high margin, really high end, low volume, or it is very high volume, low margin track. Yeah. And it's hard, I think, to get either of those very large. And there's two different, two different customer experiences, two different customer types, probably two different tech types, right? If you're doing track home, you know,

new construction plumbing, that's very different than the crew that you would send to a really, really high-end home to install like, you know, $25,000 shower or something. Yeah. But our business, the thing that I like about new construction for us is that we are capturing a lot of margin in a very short amount of time.

Our average order value is probably, $350,000. And we're, in essence, taking 20 years worth of activity. And a roof is a 20-year product plus or minus. So we're capturing like 20 years worth of margin in, you know, a four to six-month period. I think in your industry, it makes total sense. And I don't know that I have any like big thing against new construction as a, as a thing itself. I have an issue when I see it inside like this business.

So if this business had it, so I'll walk through how new construction happens in the residential service side, because I think that might help. So guy launches company, me, John. I go and launch a plumbing company, and I need food. I call my friends. I call my family. I'm on Facebook. Hey, yeah, I can replace your toilet or whatever. And you need work.

So guys get into new construction because it sort of falls in their lap. And they end up doing this contract and they, oh, yeah, I put together a Huntington or I did a, you know, a gas station or whatever. And it kept me busy for three weeks. So normally it's a stability of the owner's home life that gets these owners into new construction and doing projects that they just shouldn't. because the reality is like if they would have taken that same amount of time instead of laying pipe in Huntington, they could have gone door to order. They could have figured out how to market.

They could have done anything. But it's almost always a lead flow problem. Like they just don't know how to drive leads. So then they end up with new construction. It's not well thought out. It's not like, hey, let's approach this contractor. Hey, let's do this. It's like, I'm doing this in order to feed my family.

Then it usually grows as the rest of the business grows. But the way you, like, you can win in new construction. Like, there's companies so much larger than me, it's ridiculous, in residential new construction. And they beat me all day long. But, like, that's all they do. Like, that's their core business. Instead of what I usually see is, like, the $2 or $3 million business

or the $10 million business that, like, they really just need to focus because those are two totally different things. Yeah. But I had Matt Ballard on our show a couple weeks ago. And he's amazing. Like $55, $60 million, nearly all new construction HVAC business out in Vegas. Absolutely monstrous. Like, he's a machine.

And he's killing it. Like, that's great. I have no stones to throw at that. Yeah. I just, it's the same thing that we talked about. Like, hey, I feel like it's early for you to be in plumbing and HVAC. Like, what are you talking about here? And it's the same thing with new construction and service.

Like, those are two totally different things. If you can approach it and, like, master it and be amazing at it, like, rock on, man. But usually the guys that I see, they're not. They got into it in a state of desperation. They hang on to it because they're scared of, like, down season or, yeah, it's almost always like, ah, keeps us busy in the winter. And they're like, well, you should learn how to market. Like, that's, you know, that's really the answer that you're looking for, but you're just not doing it.

What do you think, John, about these margins? Are they real and are they sustainable? Real, maybe. sustainable no. Because if you grow this business at all, you have to actually start figuring out real customer acquisition and that cost something? Yeah.

Yeah. Yeah. I mean, if I talk to this owner, they would probably tell me they don't market. Like, oh, we don't market. You know, we just told them we do HVC. So now we're really complicated, but we don't market. And then, you know, 5 million is when you

you have to add some more infrastructure, usually, that 20 to 30 guys, which I think they said 23 somewhere in there. Yeah. Yeah. Yeah. That's a lot. You know, my bet is they either don't have a service manager or the owner is the service manager in order to achieve those margins. So, you know, eventually you have to add a manager if you're going to keep going. 20-some guys is quite a bit.

I'm sure the office looks pretty stripped down, like one or two people on the phone. So, yeah. Is it real? Like maybe. Like could be. I don't look at that and I'm like, dude, no way. Like it could do it. It would just be really hard to replicate. Yeah, you're not going to maintain 33% margins doubling this business. No. No, there's no way. I mean, like if we walk through the decisions that got them there,

like I'm assuming there's maybe one service manager, maybe. probably no install manager, and the owner is going to be carrying a lot of those hats. Two people in the office picking up the phone, maybe a third one part-time, they're doing dispatch, no real marketing. That's why they launched the other trade is because they couldn't figure out lead flow in the first one.

So they're just like, oh, these people are calling. I don't know what to do. Let's offer this and keep growing. So, yeah, they haven't made the reinvestments that you need to go to the next stage. I think you've talked about this some on Twitter, but what does this business sell for and what is it, like, realistically actually probably worth?

Depends on the buyer, obviously. Like, let's say this business is one market away from you. It's an adjacent market. Is it of any value to you? Yeah. Like, I'm looking at a deal that looks ish like this, like a little bit more revenue and less EBITDA. And, yeah, it's worth something to me.

but most of my value in it is it's exactly that. They're like 20 minutes away. And I would prefer to not have a competitor by it. So that's like, okay, we'll cut a check. This is like right in the sweet spot, though, of ETA and an independent sponsor buying this and owning and operating the business. Like from an EBITDA standpoint, like it's in the sweet spot. it probably can get done with SBA 7A is my impression. But I mean, what is what are people paying for this right now?

Dude, all over the map. So I'll talk to guys that, I'll talk to guys that on this business and I haven't seen this exact one, but I saw one pretty close to the day. And it was like three and a half million of revenue and like one or 700 somewhere between there of earnings. And they're like, I think we got to come into it six times. and I'm like, what the fuck are you talking about? It's just kind of wild. I think people are still in this very aggressive

mindset on some of the stuff. And personally, I don't think it's necessary. Now, granted, I haven't been in the buying market, but this one that we're working on, like, ours was like a three and a half. And it was a, you know, decent side. And if it goes above that, like, I'm good. I'm going to tap out.

I think, especially in a case like this where the margins are just not repeatable. I think, like, let's get to what the number is actually going to be moving forward. And usually, I like to pay, like, half of revenue is, like, a good number that, like, if the sale price goes above that, I'm like, I'm tapping out. And if you're paying more than a one-times of revenue for a company this small in plumbing HVC, like, I think you lost the plot. Yeah. And the reality is, and this might like sound jerky, but like you could rebuild this business in two years for a hell of a lot less than $5 million or whatever else they're trying to get.

I think that's the whole dynamic right now that I've seen you key in on is like, you know, why buy this when you could build it? But there's a much more kind of well-trod path on buying, you know, and getting that jump start and having kind of a critical mass. but I think that's the question. I think it depends on the circles. I really like, I'm going to take us back to the what circle are you in. If you're in an industry circle and you told people you were going to pay four and like a one-time's revenue for this business, which would only be a three-time multiple from what I'm looking at here. Yeah, yeah.

Like if you said that to a group of people that used to work at Bain, they'd be like, yeah, it makes total sense. Three times multiple, yeah. If you told that to another guy in the industry, he'd be like, what the fuck are you talking about? Like, you could literally rebuild this in a year or two. So, like, why would you pay, you know, $4.5 million or $6 million because you had to pay it for four times? It just doesn't make any sense. So I really think it's like, what circle are you in? And maybe the bigger lesson there is like, hey, if you're looking at an industry, there's a ton of Facebook groups where people just really openly share and they're going to be your peers if you buy into that industry. Maybe you should just dig in there and just talk to people, get a better idea of like, hey, does this make sense? There's a $6 million purchase price, which is four times, which would not be a crazy purchase price.

It would be crazy, but it wouldn't be a hard for multiple. Yeah, it's four times. I would just stupid check that with some peers in the industry. But we're still seeing, like I got an email yesterday. Some guy, it's like a two or three million dollar revenue business. And he's like, I think I'm going to pay five for this. And I'm like, dude, you cannot pay five million. for this business. Like, what are you talking about? Like, I, I get it. I get that it's a million of EBITA.

I get it. And I get that like, whatever school you went to told you that five times is good. But like, yeah, you got a stupid check this. Yeah, you got a stupid. This is dumb. This is a really bad decision. So, yeah, guys are still doing it. Yeah. Yeah. I just, it's an interesting kind of dynamic when, you know, that whole, if, you know, if you're at the table and you don't know who the patsy is, like you're the patsy, you know, like, yeah. I think, and like our tables are always kind of changing, you know, in terms of your opportunity costs and the way that you look at deals. There's deals that you probably would have done five years ago that now you wouldn't touch. Yeah. And probably things that you really like now that in five years you can say, that doesn't make any sense.

Yeah. Well, my tolerance for, I realized this the other day, I encourage people to buy small. I continue to do that because I think that that's a good thing. but like my tolerance I was looking at a deal and someone was like hey do you want to participate in this in like a meaningful way not like a equity but like do you want to like be on the board or whatever

and I was just like no I have zero desire to have $5 million revenue problems like I am good on that like I am good I think I don't even know that I could dip below 15 because just like I need a leadership team I need I need to infrastructure team I need infrastructure. I need to be insulated. I just saw somebody buy a residential roofing business

in like a couple of markets away, but in the southeast. And it's an independent sponsor deal. And they're like, we bought a leading, you know, leading residential and commercial roofer in the Carolinas. It's doing like two and a half million in revenue. Yeah. Yeah. Yeah. Yeah. You know, and like, hey, good. Like, you probably are going to triple the size of that business. And it's going to be great, you know. Yeah. Yeah. So my quick metric for like, are you getting a decent price? I personally don't care about multiples of earnings. So, you know, people will turn over in their graves, I'm sure. I really care about weight against revenue. So if I'm paying more than a 50% of revenue, I'm like, do I like do I like it that much? I've only ever paid. one times for a business, and it's because, like, most of it was assets.

They had a ton of really heavy assets. But, like, 50 to 60 percent is usually where I try to land. And that's because it's kind of like, I don't care what you're doing below, you know, below the, like, revenue and cogs. Yeah. Yeah, it's relevant. I know what I can do with it, so to speak. Yeah, yeah, it's irrelevant.

And, yeah, we really don't care. So, like, the things that we're looking at when we're looking at deals is, like we ask for weird stuff. Like, hey, I don't really care what your EBITO was. Like, it doesn't matter. Like, you have a machine that produces X amount of revenue at X gross margin. Like, that's the thing that I care about. So, like, how many phone calls do you get?

How many GMBs do you have? How many reviews do you have? How many active accounts? Google my business. Google my business, yeah. How many active customer accounts? Like, those are all, those are the drivers for us. So, okay, if you get 50 phone calls,

a day. I'm like, all right. Yeah, I can do something. I can do something with this. If you get three, I'm like, yeah, not really. Like, I'm going to tap out on that. So, yeah, most of ours is tied into that. But like, how many people you have picking up the phone or like, what you pay your bookkeeper, it just doesn't really matter. Even the managers, like, it usually doesn't, usually doesn't matter. Like, we'll try to slide them over, but my tolerance for people doing things their own way inside. My business is very low. That's a sound of maturity. That's a sound of maturity. That's a good thing. Yeah, I'm like, we're going to play by my rules or you can yeat.

Yeah. But yeah, I think that's just the game changes as you as you grow bigger and bigger where like they're like the deal that we're looking at. Again, it's like nothing really matters other than revenue and gross margin. Like that's basically it. And then we just get to add those gross profit dollars into our machine. Yeah, yeah. All right, as we wrap up, this deal gets done, don't you think? Like, somebody's buying this, this business transact.

It is, it's kind of shocking the size of a business it takes to make a ripple on the market. And that size in plumbing and HVAC now is like $4,4.5 million. Yeah, it's not big. So, you know, if a deal goes to market, like near $5 million, you got eyeballs. You got a lot of eyeballs looking at that. I mean, thousands of eyeballs looking at that deal, which is just kind of crazy. And if you go north of 10 or like 20, man. You're crowded.

Really crowded. Oh, yeah. It's crazy. Because you just, every deal you look at is one to two million bucks. So the moment one is above that, you're like, whoa, okay, this is real. So no, yeah, someone's going to buy it. Now, what they buy it for, P.E's appetite is real different this year, depending on, you know, who that buyer is.

They're looking for high quality, which some of the boxes here do get checked. You know, no construction. Yeah. That's going to be a big one that nobody wants to touch right now. John, this was good, man. I always learned something when we talk, and I love having you on the pod.

So thanks for being our most. I hope I keep getting invited back. You do. You do. The invoice is in the mail. Perfect. Thanks, perfect. for tuning into another episode. If you enjoyed this, John's got a podcast too,

own and operated. That's really high quality. And we're big fans of his. And so check out our website, AQUAnon.com. We've got all the deals on there. They're all tagged and cataloged based on what you're looking for and can be a helpful resource to you. But thanks, thanks, John. And thanks for everybody for sticking around. Thanks for having me on.