Money Rehab with Nicole Lapin - Why Boring Businesses Are Skyrocketing— And How You Can Benefit

Episode Date: November 22, 2024

PE is obsessed with this one sector right now: boring businesses. We're talking plumbing, pest control, cleaning companies— you know the ones. But this isn't just a move for PE investors; you can do it too. Nicole explains.

I'm Nicole Lapin, the only financial expert you don't need a dictionary to understand. It's time for some money rehab. There's a hot investment opportunity that private equity has been all over lately. But unlike most private equity ops, this moneymaker isn't just for ultra high net worth people. For once, the investment market favors the people who like to get their hands dirty and who can see beauty where other people might not. And this big opportunity is boring businesses. I'll start by giving you one cuckoo bananas example that really paints a picture of how red hot this industry is right now. And this example is plumbing.

To really let this sink in, I'm gonna give you a little backstory. All of the geniuses from the big MBA programs, we're talking Wharton, Stanford, Harvard Business School, have been gunning for one job, Alpine Investors CEO in Training Program. The acceptance rate is itty bitty, it is 1.6%. And to put that into perspective,

Harvard accepts 3.6%, which sounds like a breeze compared to Alpine. But the CEO in training program is considered an elite fast track to becoming a CEO. At least 55% of graduates go on to helm companies. So what secret sauce does Alpine have to cultivate the leaders that will take over the most important businesses in our world today?

Are they telling CEOs in training to go hit the books? To debate founder mode vs manager mode? To pull all-nighters? No, they're not. According to Alpine's Chief Talent Officer, Tal Lee Anderman, these baby CEOs are learning by doing. As she puts it, quote, you're moving from Yale Law School and Harvard Business School to Jackson, Mississippi to run a plumbing company.

So you know how some people say getting an MBA is like throwing money down the drain? It might literally be true. Alpine didn't create this program out of the goodness of their hearts or because of a passion for plumbing. They had a problem to solve. After snapping up smaller investment-worthy

boring businesses like plumbing companies, they needed leaders to actually run them. Enter the CEO in training program. While they've turned it into an employment pipeline, Alpine isn't alone in snapping up plumbing companies. According to data from PitchBook, private equity investors have bought over 800 plumbing, electrical, and HVAC companies since 2022. These so-called boring businesses have boomed in popularity because they are gold mines. You may have seen plumbers are being called the new millionaires next door, which is why I'm really leaning into this case study in this episode, but it's not just plumbing companies. Of course, revenue depends on scale, location,

and a bunch of different factors, but on average, cleaning companies make $585,000 in annual revenue, pest control companies make $402,000 in revenue, laundromats generate around $150k in revenue, and nail salons can also make in the six figures. These boring businesses are ripe to be scooped up by P.E. because many of these types of businesses are local mom and pop types. There's not an Uber for pest control or an Amazon for cleaning services. And so because these businesses are often run by the owner, if the owner retires or doesn't have a successor, they'll have no choice but to shut down, fire everyone, and auction off equipment.

Everything they worked for gets sold off piece by piece. It is pretty bleak. But if a buyer is willing to step in, many owners are happy to train the new boss and assist in financing. After all, it is their legacy that they want to be preserving. Here's a little secret.

You don't need to be a massive PE firm to join the boring business boom. Anyone with entrepreneurial dreams and a little bit of funding can take advantage of this opportunity. And no, it doesn't have to be plumbing. Look around. Any thriving local business with an owner looking to retire or to move on may be your big opportunity. Does your dry cleaner talk about retirement? Or maybe your nail tech is pregnant and ready to sell her shop. That's your cue.

You could leap over the counter and go from customer to CEO without needing an MBA from Harvard, but of course, still needing to put in the work to get smart on the business. If you don't find these boring business opportunities out in the wild, what are some other options we have? Well, you could start by cold-calling plumbers in your area asking if they'd sell, but there are easier ways. If you don't know what company you would want to buy, there are national services like Biz Buy Sell or Biz Scout, which function like a Zillow for businesses. There you can look and see what's available and get an idea of pricing and deals. Ideally, you'd identify the sector that

you're interested in and learn everything you possibly can about how it works in your area. Another option is working with a business broker. These are like real estate agents that specialize in buying and selling businesses. They help you find the right fit and ensure that the seller sticks around to train you instead of taking off as soon as the ink dries. Many sellers have their own broker, so you could just find your perfect match while you're trying to learn as much as you possibly can about businesses for sale near you. So I mentioned how lucrative these businesses can be, but you're also going to have to throw down some cash to buy the business.

The good news is, these boring businesses often cost less than a fancy house, and while they're not cheap, they can create a steady revenue stream for you. In a quick peek online, I found plumbing businesses for sale from $449,000 to $2 million. I found one company for sale by a husband and wife who want to retire, tell as old as time. Indulge me and nerd out on this for a moment. Let's just follow the numbers. The business is for sale for $850,000 with a down payment of $85,000. This business has a revenue of $1,482,000 in 2023 and the owner's profits before taxes were $404,000. So assuming the business follows the historical projection,

you'd have enough profit to recoup your initial investment in a little over two years. That's not bad. This particular business had been pre-approved for a small business loan of up to $787,000 with a 10-year loan term. For this particular company, I was stoked to see that the lease was still good for four

years. Sometimes, businesses can be at the end of their lease when they go up for sale, which can be a red flag. The owners also offered two weeks at 30 hours a week of training. I can't say that in 60 hours I would know enough to run a plumbing company, but maybe that would work for you. And if so, I love that for you. So maybe there's a company near you offering better terms.

Of course, 850 grand is a lot of money, but not all boring businesses go for that much. There are nail salons for as little as 80 grand, bookkeeping and accounting companies for under 100. If you don't have a big stack of cash lying around, there are financing options. The seller might finance part of it themselves, allowing you to pay them directly over time rather than taking out a big loan. This can be ideal because it means the seller won't get all their money

unless the business stays successful. This keeps them invested in training you and working toward your future. The Small Business Administration also offers loans with pretty good rates, especially if your business provides a social benefit like childcare. And of course, there if your business provides a social benefit like childcare. And of course,

there are traditional business acquisition loans as well. You can even mix and match all three methods if you need to. Often when we see private equity firms making big moves, the barriers to entry are too high for us regular folks. Sure, you probably shouldn't buy an emergency room, which is by the way, another popular PE move, but a plumbing business, a pest control company, that is by the way another popular PE move, but a plumbing business?

A pest control company? That is definitely within reach. And honestly, it's better if these businesses are owned by local folks who care about the community. So this is one move you can totally copy. For today's tip, you can take straight to the bank. Looking for other ways to invest like a private equity firm? There are a few sneaky ways to try and duplicate their moves.

There are ETFs that try to mimic the moves of PE and venture capitalists. There are also companies like Fundrise that allow regular investors to attempt to mimic the real estate moves of private equity investors. And there are PE firms that are public companies that you can invest in directly like KKR and Blackstone, so you can find one that has a lot of exposure to boring businesses and hope for an exciting return. Money Rehab is a production of Money News Network. I'm your host, Nicole Lapin. Money Rehab's executive producer is Morgan LeVoy. Our researcher is Emily Holmes. Do you need some Money Rehab? And let's be honest, we all do.

So email us your money questions, moneyrehab at moneynewsnetwork.com to potentially have your questions answered on the show or even have a one-on-one intervention with me. And follow us on Instagram at Money News and TikTok at Money News Network for exclusive video content. And lastly, thank you.

No, seriously, thank you. Thank you for listening and for investing in yourself, which is the most important investment you can make.