The Pomp Podcast - #741 Building A Landscaping and Home Service Empire w/ Mike Botkin

Episode Date: December 5, 2021

Mike Botkin is the Founder of Benchmark Group. In this conversation, we discuss purchasing every day businesses and building a scalable service company. This episode is a must if you want to get into the world of business acquisition and how you can get started.

what's up everyone this is anthony pompliano most of you know me as pomp you're listening to the pomp podcast simply the best podcast out there now let's kick this thing off mike botkin is the founder of benchmark group i really enjoyed this conversation because mike has been rolling up various landscaping and home services companies we talked all about the economics and the advantages he has in that market it's a fascinating conversation and i hope you enjoy just as much as I did. Anthony Pompliano runs Pomp Investments. All views of him and the guests on his podcast are solely their opinions and do not reflect the opinions of Pomp Investments. You should not treat any opinion expressed by Pomp or his guests as a specific inducement to

make a particular investment or follow a particular strategy, but only as an expression of his personal opinion. This podcast is for informational purposes only. We've got Mike here. Mike, how are you? I'm doing well guys. So Mike, what's really fascinating about this is you've got a background where you did some stuff in technology and then you realized this other market opportunity and you went over and you started to kind of build a great business here in more of like home services. Can you just walk us through, you've done two acquisitions is my understanding right now, but just walk us through maybe at a high level, like what is the strategy of what you're trying to accomplish? Yeah, exactly. So we're in home services. We are, our acquisition so far

have been landscaping, but we are, our investment thesis is broad in terms of just general home services. We want to buy businesses that are ran by service people, not business people. And that's not disrespectful to them because a lot of them live like kings in their own kind of area. But we feel like we can come on, we can add systems and processes, we can add capital and just an overall better business strategy than what they've had and magnified the multiple that we can get. And we're seeing that a lot of the businesses that we've inquired about and we've acquired the multiples that we're paying for, you know, are two to three X, whereas in software, we

were paying anywhere from 10 to 15 X. And, you know, we're seeing a good back end return on, you know, the home service industry. Got it. And so when you start to look at these businesses, walk us through kind of the dynamics of a deal, right? So the first business you bought had kind of sub $1 million in revenue. How do you find the business?

How do you think about the valuation? What's that negotiation like? And then how do you actually take over ownership? Do you run the business? Do you have somebody stay and run the business? Like how, just walk me through that first transaction. Yeah, so it's, you're familiar with the search fund model. I purposely did not go through

the traditional search fund model to the degree of the criteria that a search fund model looks for, which has asked me this EBITDA with this revenue and it has to meet all these criterias. And I have a big, big issue with search funds, which is probably a conversation for another day. I think they're a joke. The model that I used was I need to go prove my thesis before I go raise a lot more capital. And which is what search funds traditionally do prior to running business. So we went and bought a smaller business to prove, Hey, do these processes work? Can I run

this? Can I operate this? Can we put someone in place to operate it? And I manage it from a higher level. And we did that. We acquired our first one in December of 2020. It was a smaller business than what a traditional search fund will look at. And we grew it by 40% in eight months since owning the business. And that allowed us to go out and look at bigger deals, which are more traditional search funded type businesses that they acquire and it was able it enabled us to raise more equity and find you know good partners and acquire bigger business and we are about to close actually our third acquisition in the landscaping space okay so when you buy this first business it's a million sub a million dollars in revenue i don't know if you're allowed

to say how much you paid for it uh but just talk to me about how you underwrite the valuation and then by growing it 40% in eight months, what do you do? You go sign up more people to, to cut their lawn or like, how does that work? Yeah. So this is the best part about home services, right? Cause I looked at a ton of different industries and categories to see what was best for, you know, not only my personal money, but also my time, right? This is what I'm going to do. And this is going to be my thesis. And what attracted me the most about the home services was the multiples that you're buying it. So we bought the first one for 2.4X of,

this one is on SDE, so seller discretionary earnings. Traditionally, you would value them off EBITDA, but when it's a sub-million dollar landscaping business, they're gonna trade off SDE. So we did a 2.4X purchase on that. We closed within 30 days. It's a very simple transaction, a simpler business model, not a ton of due diligence from a traditional standpoint and we got in there we implemented

all basic type business processes i mean uh answering the phones right like um making sure the crews know where they're going and what they're doing making sure we have drip campaigns and we have seo set up and a google my business which was not done and in the area we bought this that guy in that business that we bought was like the creme de la creme and they didn't have a website. They didn't have a Facebook page. They didn't have a Google My Business. And it allowed us to go in and buy it for pretty cheap. And when we started, and that was on market, I found that through a traditional business broker. And when I bought that, I got inundated with people asking if I'd buy their business, their landscaping business as well. So to fast forward, we ended

up buying one that was off market. And we paid a little bit bigger multiple, but the business was about uh five times in size and it really is allowing us to have a platform but it was very similar we closed it took us about 60 days to close on the second one but again it's do you have customers are they true and accurate customers is your revenue accurate great let's do it because we're buying it you know that one for just over three eggs we think that we can add a ton of value to it and if we wanted to retrade these we would be retrading them for 10 to 12x and so how can we not continue to purchase them if we're getting that good a purchase price got it and so when you start to think about this really what you're doing is you're buying a lawn care or home service

type business right you're just saying hey what what do good businesses do we answer the phone we do marketing we've got good seo uh we treat our customers right all that stuff you're professionalizing the business to some degree is that because the owner of the business previously was too focused on actually delivering the service. So they're physically cutting the lawns themselves. They're the ones who are out in the field kind of executing and they don't have time to also run the business. Is it because they haven't actually hired the right team?

Like, how do you look at why they haven't been able to do that, but you are, is it a knowledge thing? Is it just an effort? Is it a focus? What is it? Yeah, I mean, I think a lot of it's focus. And I think to answer your, you know, your question more directly.

So, and to give you live examples, the first business we bought, the guy was a true service guy. He was out in the field every day with the crews and checking on the customers. And we came in with an approach of we're going to layer this with an org chart and a manager and a quality control guy. And we're going to put a business dev guy in it. We're going to grow the business. Right. And that that's kind of what I meant. My very first comment was we want to buy these from service people, not business people. as a business person it sounds very simple to us but the guy that started a landscaping business

you know with one truck and his buddy and then grew the business to 15 trucks he's never had to learn that he's never had to know that he's never had the need for it it's just word around town he's a good guy and he gets business whereas we come in with a more systematic approach so i i think the be direct with it i think they don't know what they don't know and a lot of these guys get scared of more revenue because more revenue means more customers, more customers sometimes means more headache. And we look at it from a completely different approach. If we can get in and set good expectations with the customers and have good quality control and have processes and systems and training, it's just like any other business, right? If you can do your ABCs at this

level of business, which we're kind of looking at sub $10 million of EBITDA, it's really just the blocking and tackling when you think about uh adding additional businesses to a benchmark group is it something where you're saying okay we're going to buy any home service business do you think of it sequentially like okay we start with lawn care and then maybe we'll buy like a power washing business because that's tangentially related and we'll move from outside the home into the home or like just talk to me a little bit about the strategy as to how do you select the types of businesses that you want to acquire next yeah absolutely you're absolutely right so we are kind of broad stroke um we'll look at anything from pressure washing to hvac to plumbing

to um tree care to christmas lights there's a huge thread the other day on twitter with a guy with christmas lights well i reached out and see and you know wanted to know if you wanted to be acquired um we're essentially looking for a do they have a good operator in place and is there a need for the capital that we can provide and what would it do but really other than that is it a profitable business and can we add value to it? Because we're buying them as such good pricings that if we can add value and they're already profitable, our capital should just explode them and put gasoline on it. Yeah. The part to me that I think is so fascinating as well is that there's a lot of people who are scared of this type of work, right? It's hard work. You

got to go and you got to do the work. Do you have a sense for how many of the operators are older folks versus younger folks. And what I'm thinking about is how many of them are digital natives understand how to use the internet to market their business, how to use technology to run the operations versus, Hey man, we've just been doing this for 20 years. We've done it the same way. We've got a phone, we've got, you know, kind of paper records and that's just what we do. Like, well, how do you think about technology integrations and the digital native aspect of the operators of these types of businesses? Yeah. So the people we're buying from are more paper and pen kind of guys. And a funny story, like when I bought the first one,

they didn't even have pen and paper i asked the owner i'm like hey what's this guy's route just so i can do an analysis on it he's like oh it's this is this well how do you know that oh it's just in my head well how do they know that oh they just remember it and it's like what like it's insane and i continuously preach to the younger generation or nba guys or search fund guys that reach out to me get in this business get in these lines of work because you know again just basic basic business practices and knowing how to be digitally savvy is such a huge plus and these industries have not had that they've had guys that want to do the grunt work and want to you know be out there you know i'm based in orlando and the businesses we fired in orlando

in the summer it's 105 degrees right so that's different and these businesses are ran by guys I like doing that where I think some people that are more traditional search phones or MBAs or guys looking to get in could come in and really elevate those business practices. So I'm gonna let my brothers ask a couple of questions here in a second. My last question for you is how much of this is you want to acquire existing businesses versus you think that you would start new businesses? So, Hey, we've got a lawn care business. You know what?

We know that we need power washing. Oh, why don't we just go ahead and put a little bit of capital in from an investment standpoint, hire an operator and build the company from scratch versus no, we only want to go out and find people who are already doing it and then buy their business? Yeah, it's a great question. And it's something that we're discussing internally because of the number of customers and the quality of customers we have. I think our first reaction is to look outside to acquire and bring in because we're acquiring expertise, right? Hey, I don't know

shit about moms. I truly don't. But I know how to manage an organization. I know how to get the best out of somebody. I don't know shit about pressure washing, but I can go find someone that does and why not take an existing business if we cannot find that for whatever reason that is and we have a demand for we'll have the conversation of let's just invest our capital internally and create that um you know one we looked at recently was and again this has like been pretty trendy on twitter is cleaning your garbage cans the trash can cleaning we looked at one i tried to acquire them it didn't work for whatever reason and now we're going to look at that internally. Joe, John, what questions you guys got? Mike, what's going on, man? Thanks for

joining us. So I have two quick questions. So Benchmark Group is the holding company and then there's a landscaping company underneath. So my question would be from a geographic perspective, how does this work? Are you going to have to expand to other cities, other states, or do you just focus solely on Orlando because of the synergies that combining different companies can create? Yeah. So right now we're focused on central Florida and really more the I-4 corridor. I mean, I know you guys are Miami now. So the I-4 quarter from Daytona to Tampa right now, just for the synergies of customers. But if there's go back to what I said, our kind of criteria is if there's a great business in Miami, then let's do it. If there's a great business in Atlanta, let's do it. It does have to make sense.

We looked at one recently in California and Silicon Valley, and it just didn't make sense. We couldn't really add a ton of value just because of the location. But for sure, Orlando, we'll take it tomorrow, the Southeast for sure. And once we get kind of more stabilized in that regard, we'll definitely expand elsewhere as long as we meet our criteria. And what made you start with landscaping? Yeah. So going back to your guys' conversation before I jumped on, I was a CEO of a real

estate investment firm and we had all of our own internal properties, right, that we owned and invested in. and when COVID happened and the world was going to shut down, did shut down. Um, I was still going to the office. I was the only one going to the office. Our CEO is in, uh, Ireland and so is our C CFO. So I was going to the office and, and listen guys, like I had to lay off over 200 people and like, so I'm not making this comment in disregard of that, but, um, I was going to the office and the only people that I continuously saw on the road was home services, plumbing companies ac companies landscaping companies and the gas station just like full of them and i was

like shit like i'm missing something here we just have to lay off a ton of our staff we don't know what's going to happen with our business in the market and you know luckily i think with a lot of other businesses they survive and that real estate firm is growing like crazy still but i saw something there that no matter what you always need your lawn cut no matter what you need your worked on um hey i own a landscaping business and i still don't cut my own yard and i'm not it's hot as shit in orlando in the summer and i'm not doing it um i would for our business but you get my point pete it's something that people increasingly are not going to do themselves and we'll look at house i guess the thing is that you're acquiring companies that can help you do

that john what questions you got yeah yeah thanks for joining us mike love the love the thinking process you have about recession-proof businesses and also just adding your strengths to businesses uh, where they have maybe a weakness. So my question would be, where are you going to acquire these businesses? Yeah. So the first one was a broker deal. So I reached out to a broker that I knew and got it. The other ones, the one, the second one we closed on and the one we're about to close on has been off market. Um, the third one is a relationship deal that I have. The second one, I saw the trucks driving the road. I called, uh, the owners and that's what they wanted to sell. Right. And that's as simple as it gets. A lot of these guys are not going to

have attorneys, they're not going to have, you know, accountants that are reaching out in a traditional sense, how businesses are normally acquired, see the trucks and call them, right? Do some legwork, do some, you know, feet on the ground kind of work and see what happens. And when we acquire business, we get a ton of inbound from other people in that industry wanting to see if we will acquire them. So we feel like the more we acquire, the more natural organic inbound will come to us when you when you acquire any new we'll do lawn lawn care for right now when you do you rebrand or do you keep this existing brand they already have yeah so we did rebrand the first two acquisitions just because they were so close in orlando together we wanted to have a similar

brand because we were you know using all the synergies right phone systems accounting all that kind of stuff so we did rebrand but our goal if we buy one that has a deep history in a community, whether that's Orlando or Atlanta or Miami, why change the brand if we don't have to? Because normally these businesses, again, are started by a guy in a truck or a female in a truck and how that builds. We don't necessarily want to change that, right? We want to keep that hometown kind of feel to it while adding bigger practices to it. Completely agree. So Mike, here's a couple more questions I got for you. When you start to build these service based businesses, you obviously get an incredible customer base, right? So I'm

going to just make up some numbers here. But let's say that you got a lawn care business, you're in the Orlando area, you're servicing hundreds, if not 1000s of homes over a given year, those are kind of your captive customer bases, whether seasonal or throughout the entire year. How much of this do you then start to think about like, all right, we're in the service business, but we should transition or add a product based business, we should, you know, get fertilizer, we should get some sort of other types of physical products that we can sell to these same customers and almost get into like the vertical integration game versus simply just, hey, we're going to come in, we're going to show up, we're going to cut your lawn,

blow your leaves, and then move on to the next house every single day. Yeah, you're exactly right. So what we want to do is we want to take an average customer ticket and grow it, right? I think one of the best ways to grow your revenue is the existing customers you have. And our thesis on landscaping in general is vertical integration, not only from a customer standpoint of we want to be your supplier of everything of landscaping at your house but even when we're acquiring businesses right so you know kind of a saying that i have we want to own from the farm to the yard so we want to own a sod company that's where you know the sod is grown right we want to own the fertilizer company that fertilizes it we want to own the supply chain

that sells the mulch and the rocks to landscaping businesses we want to own the tree company the irrigation company. So if you look across the horizon of landscaping in general, we want to own the entire vertical. So no matter what, we're touching it. Talk to me about the capital intensive nature of the business as well. Obviously, you talked about these home services, they got trucks, they got equipment, they've got to keep all of that up in the maintenance. That's very different than a lot of software-based businesses. How do you think about the pros and cons of the capital intensity, uh, intensity, and also the kind of physical nature of a lot of the, uh, the, the, the CapEx or, or, uh, or the assets that you own. Yeah. So I think we're more, I look at us,

we're more in a logistics business than we are in a landscaping business because of what you just said, our biggest assets by far are our equipment, our vehicles. So a logistic, if I didn't tell you what business I own, and I said, we have guys that have to get from point A to point B as fast as possible, as efficiently as possible, and we get from point B to point C and deliver a quality of goods, you would not be able to guess I was in a landscape businesses without a few tries. So whoever can master the logistics of this will win. And so that's why I think we're in the logistics business, right? The transportation business. And to answer your question, we look at that as their trucks, right? They take fuel, they take maintenance. It's a huge, huge liability

an expense for us we are actually going to be transitioning this over the next couple years to electric trucks and electric vehicles and to reduce the fuel and to have just better lasting equipment and we're trying to be one of the first ones to do that fleet across the entire board we have some competitors that are looking to do it um and guys like when we talk about the landscaping space in general just to give you like an idea because when you first say hey when i first told my mom, I'm leaving a real estate investment firm and I'm going to do landscape. And she cried, right? And just because the nature and notion of it, but the top three landscape businesses in the country all earn over $2 billion a year. One of them is publicly traded and another one's going

to be publicly traded. The top 100 companies in the country do over $16 billion. So, and it's a super fragmented space so when you look at some of the you know your competitors and what they're doing um it's a big space even though it's super fragmented and cap the capex and the equipment is something if we can be a first mover on and take advantage of that we think we can get some inroads the one other thing that uh i think is really fascinating as well is uh how do you think about word of mouth versus digital marketing right so word of mouth i would assume most uh of these lawn care businesses or home services businesses. Hey, I need somebody to cut my lawn, ask my neighbor who, you know,

your lawn looks great. Who cuts yours? Okay. They introduced me, but I'm assuming that there's a huge white space as well with digital marketing for these businesses in order to drive top of funnel, um, kind of, uh, uh, lead acquisition, if you will. Yeah. So residential lawn maintenance, which we are not really a part of is through more word of mouth and would help with SEO and digital marketing. We are playing in the commercial space, your hotels your banks your schools your hospitals and that is more uh biz dev and more

relationship uh acquisitions of customers versus your traditional um seo and just word of mouth and your trucks but a lot of these businesses grow to do a couple million bucks a year by word of mouth right everyone knows their neighbor everyone has a guy um everyone sees your truck at wendy's or at mcdonald's or just on the road and that's huge for these businesses and so branding super important and to answer an earlier question with this one that's why we don't necessarily want to change the brands of everyone that we acquire because those brands mean something in that community but on the commercial space it's really about relational relationship selling last question actually this time is uh commercial versus residential why commercial is it just

bigger contracts b2b uh you've got kind of easier targets you know who they are you know where they They are located, you don't have to get into the kind of higher cost acquisition of the residential or is there some other reason? No, a lot of it is with human capital, right? So a homeowner will command the same attention of us as a hospital or HOA or any commercial business would, except the homeowner's paying, you know, 150 bucks a month and the commercial place is paying us 20,000 bucks a month. So it's really just where do we want to spend our time?

And we think on a retrade basis, um, we are able to retrade commercial contracts a lot better. If we ever get to that point of selling, um, you know, for that 10 to 12 X multiple I talked about earlier, then we would a residential because, you know, people don't really want to buy a residential landscaping business as much as commercial. When you get into the other trades, like HVAC and plumbing, it doesn't matter if you're commercial or residential. Makes sense. Where can we send people to find you on the internet or find more about the business? Yeah, absolutely. Twitter has changed my life completely. It's where we connected. I raised both of our funding rounds completely through Twitter. So Twitter has changed my life,

you know, like you wouldn't believe. My Twitter, it's put up on the screen. It's at Mike Botkin underscore. That's the best place to reach me. Awesome, man. You're a fucking legend. It's not just an F word. Kid show, kid show, kid show. You're a legend, dude. I get excited about this stuff because I think there's two things that end up happening right you need good operators people understand capital markets go buy the businesses etc but two is at the end of the day it's just hard work right and there's a lot of people who uh who i think forget that there's uh massive opportunities in these types of businesses so uh i'm a big fan please keep it up and we'll definitely bring you back as you continue to

build the business uh maybe when you do the next acquisition we can uh we can bring you on we can talk through kind of the details of it yeah absolutely thanks guys all right buddy talk soon