Selling Your Business Starts with “Why” - Fred Silberstein | Podcast Ep. 20 | Toolbox for the Trades

What drives price, mostly for the more successful contractors, is size. The bigger you are, the more ebitda, the more revenue you're going to get, the better outcome, right. And it's a part of, it's just kind of a personal decision as to when you want to do it.

You're listening to Toolbox for the Trades brought to you by Servicetitan I, a podcast for top service professionals where we interview leaders for their best tips and tricks of the trades. Learn how industry trailblazers stay ahead of the competition and how you too can be at the forefront of an industry. Let's jump in.

Hello contractors, and welcome to the Toolbox for the Trades. Today's guest is Fred Silberstein, president of SF&P Advisors, a business brokerage firm that specializes in the merger and acquisition of trade businesses. Fred himself has personally overseen over $1 billion in business sales. I picked his brain on what contractors should do today if they want to sell their business in the future or acquire similar operations to grow theirs. This conversation was fascinating and for me, a little intimidating. But Fred was an absolute delight and patiently answered all of my questions. If you want more tips from Fred or his business partner Brian Cohen, go to servicetitan.coms or click the link in our show notes to access our exclusive webinar with them. Enjoy.

Fred, welcome to the Toolbox for the Trades podcast.

Thanks Jackie.

I am super excited to have you join me today and I'll tell you why. What you specialize in, I have very little knowledge on and I always love talking to people who are going to teach me something new. So for the folks that are listening, why don't you just tell us who you are and what you do.

Perfect. So again, my name's Fred Silverstein. I'm a CPA by trade. I actually grew up at Pricewaterhouse. I like to say it was a little bit of an education there. I started there, started my professional career 1998. I was recruited out of there by a startup H VAC consolidator called Blue Dot Services. Blue Dot, like many others in the late 90s, it was a failed roll up attempt. So everyone thought we would go public and ultimately it didn't work. But I went around the country and I made a lot of folks millionaires. I grew blued off from 75 million to 350 million. When blu dot imploded, I helped sell some of the locations back. They were discounted at that point. We sold them back for nickels, dimes and quarters on the dollar. But a lot of the great companies that are part of Service Titan today and came out of that Blue Dot environment. And so after Blue Dot, after the Blue Dot implosion, service experts saw that we got some meaningful value for some underperforming assets. They brought in our group. We helped them unload. I think it's 54 locations. I had a client recently, he was like, I think was in the 40s, be that as it may. So worked on kind of the disposition process through that. Shortly thereafter, I met the ars guys in 2006 and they took it out from ServiceMaster. And they obviously appreciated me for the contacts that I had made in the industry. And when they had something to sell or they had something to buy, I helped them on both levels, both on their underperforming assets. And there are a few of those. I think one of their biggest acquisitions to date is a company up in New Jersey called A.J. perry. I helped them buy that business. And for a while, you know, you had kind of the big. You had the big guys, you know, the big strategics like service experts and ARs. And there was always a certain amount of deals that were being done locally. You know, guy buying one of his competitors down the street. And really what happened? About five, six, seven years ago, private equity came into the space. Kind of found out about all the H vac contractors and plumbing contractors, you know, created a thesis around it. And fortunately, I've been able to put together a lot of the bigger private equity deals. Last year, as an example, we closed 15 transactions totaling about 190 million. This year, given Covid and everything else, we've already closed four transactions, have another one under LOI this year in closed revenue. We're already at 85 million. So we're not tracking too far below on a revenue on a revenue basis from the deals we did last year. Throughout my career, I've done over a billion dollars. 1.06 and closed transactions and 200 and 250 deals. I'll go back from 2000, let's say 2015. I'll name one big transaction in each of the years. In 2015, if you're familiar with the Rents group, I sold Coolray to Alpine. Alpine later sold it to Invest Corp. Today it's owned by Leonard Green. Obviously, the Wrench Group is pretty dominant player in the space. 2016, I sold an asset in Louisville, Kentucky, Downhour Plumbing. I sold that to Tribest, which they now operate under Turnpoint 2017. The big one in that year was Horizon. Horizon Home Services in the Northeast helped them partner up With Sun Capital. Under Sun's guidance, I've done six out of their 10 acquisitions. Sun recently sold it to New Mountain at the end of last year, going back to Trivest, including the two deals. Three deals I sold to them this year. I think I've done seven out of their 15 transactions. Brings me to 2018. I did the Gettle bond transaction. I think Gettle's another big service titan member. And 2019, I did the best home services in Southwest Florida. 2020, I've done Anthony Plumbing, Heating, cooling and electric in Kansas City. There was another one. They're going to convert him soon to service Titan. Home Comfort experts in Indiana so certainly have done. Those are the bigger deals. There's been a lot of obviously smaller deals along the way, but those are some of the more memorable deals that I've worked on.

So you know what you're doing when it comes to selling businesses and valuating them.

It's been 22 years of doing this, so I think I've learned a couple things along the way. And definitely, you know, I was actually talking to Kevin Cumberford who just completed a deal with the Wrench Group. And it's, you know, we were both saying how fortunate we are to be and be part of this industry. And I've enjoyed working with the contractors through the year. And I think I've added, you know, the specialization that I work in is pretty meaningful. And working with these guys, I love that.

And I'm so happy you brought up private equity. That wasn't part of my initial questions with you, but that's definitely something I want to get back to, especially towards the end of this conversation. So I love that you also started off at PwC. So it sounds like PwC, blue dot service experts, the reg group, turnpoint horizon Home Services, Gettle Best home Services. Dude, you have worked with like some of the most impressive service companies in the United States. That's awesome.

It is. It's been a great ride and I think there's more to come. So there's, you know, the interest in the space, it's just, you know, we're an essential. We work for essential home service providers.

Right.

And it just seems like when I was having this conversation with a client whose deal's not complete, so I won't mention his name, but, you know, the amount of interest in the space, it's incredible. People have to deploy capital, you know, somehow into private equity. Really likes, you know, has really come up with some good thesis about the space. And there's been a Lot of success stories.

Right.

So for every time that, you know, Wrench has been sold or Horizon's been sold again, and it keeps happening at a higher multiple, you know, there's other. There's other copycats, which is the sincerest form of flattery. Right. So there's other groups that want to get in. We tend to get, you know, on average one to two, sometimes three in a week, believe it or not, who are just have found out about us, asking us, you know, who we have, can they get involved in some of our processes?

I love that. So, you know, you started at PricewaterhouseCooper, which everyone is very familiar with PwC.

I was there actually when it was just PW and then they merged in with PwC. So that just sort of ages myself. Back then it was the Big six, and today it's only the Big four. And I was there when they merged in with Cooper's and I guess that was some more M and A experience. And prior to even Blue Dot, what I really enjoyed in my background was the. Was the deals. I worked on some big transactions at PW like Carnival Cruise Line, Bob Canard Cruise Line. I was on WR Grace. They were always buying and selling and, you know, guys, when you get to a transaction, the firms that buy, you always do quality of earnings. So I was one of those guys who could go in and really understand gap accounting and understand the numbers. But I've parlayed that into the career that I've built in terms of helping clients with their succession planning.

Got it. When you decide when you first were working as a CPA when you first got into, you know, pw, did you know you wanted to go into mergers and acquisitions? Or did you just kind of find.

That naturally shortly thereafter, like I got exposed to some transactions and some big transaction and, you know, the education and being one of the, I'll call them the Q of E guys or an auditor, it's really great. It was a great basis for what I do today and understanding, you know, certainly the gap side of accounting and understanding all that very prevalent. And working with contractors. And there's specific things that apply to contractors, right? How you defer revenue for your service contracts and warranty, reserve and allowance for doubtful accounts. But, you know, so that was a great basis for it. But what I discovered is I enjoyed the art of a transaction and blued out, obviously, you know, that experience at Blue Dot, I got my feet wet certainly, and was able to do, you know, a lot of transactions that. And in a short period of time that were, you know, it was pretty fluid environment and I never stopped.

Right.

So while I was at Blue Dot, I actually had said to my boss and after a couple of years I said, well, where do you see me in five years? And she's like with a lot more M and A experience but you're not taking my job. She was the CFO at the time. And I said, great, can I start SFMP Advisors and keep you guys as a client? And I launched SFMP Advisors January 1st of 2001 with Blue Dot as my first client. And it just continued to snowball from there.

What do you like about working with service businesses specifically?

You know, there's a lot of things I like. I mean it's really a great industry and I think the dynamics in it are really incredible. A lot of times these guys really don't realize the asset they built and the value that they've created. And I think there's a level of sophistication that I can provide and help them, you know, kind of analyzing their business and what it's worth and what it's worth in real dollars. And I think a lot of contractors get so caught up in the day to day and the operations and the mundane and I'm able to help them take a step back and analyze the big picture, where they want to go, what they want to do and what's their goal.

Right.

You know, most people would say there's some out there that, you know, they're buying in. It's. They're staying in the family and they don't ever want to do a transaction. But I'd say for the majority of them, you hear the conversations like, you know, I'm buying it for one day. You know, I'm in the industry for one day to, you know, have a transaction. The one they have that very meaningful life changing event, generous, sometimes generational, changing wealth and those type of things.

That's awesome. That has to be really. And the fact that so many of these businesses are so personal and they're essentially empires that owners have built on their own. Especially when they get to the point where you can make a transaction, there's probably a lot of feelings and emotion that go into every deal that you do. I would imagine so.

I always say, you know, for the sellers, it's very emotional.

Right.

And it's like their baby. And it becomes a very emotional thing. For us at sfmp, this is our business, so we try to take the emotion out. One of the home comfort experts deal that I, that I did recently, at the end of the deal, when the deal closed, he called me up the next day and he's like, you know, you're also a psychologist, right? And I'm like, what do you mean? And he's like, you know, you kept me calm and sane through the whole process. He's like, I couldn't have done it without you. You know, I needed somebody to, to kind of hold me on. And transactions there are emotional. There's things that come up during the transaction and it's good to be level headed and hold their hand kind of throughout the process. You know, they've got a bit. And on top of it while they're doing a transaction, they still have a business to run.

Right.

And so going through a transaction becomes, you know, in essence a second full time job. It's almost like another marriage that they're embarking on, depending on, you know, whether the owner staying and leaving. And that's kind of a separate thing. But it is emotional for them and it's easy for them to get caught up in it. And we try to be a calming influence and let them know it's going to be okay, we're going to get through this. Whatever issues pop up. I used to say this at Blue Dime. It's still prevalent in all the deals today. Every deal has adjustments. Every deal they're going to find something, there's going to be adjustments. It's a question of how material those adjustments are and what the buyer's view on those are. And a lot of times, depending on who the buyer is, they'll see the bigger picture. But there are some. And you get into, I hate the word retrading and I hate when I'm involved in a process and something goes a little squarely. Because of my background as a cpa, I'm able to look at that and say that was justified or that was not justified. And sometimes in accounting, a lot of it is black and white and some of it is gray. And when it's subjective and the auditors are using their opinions, I'm able to push back on that and say, look, this isn't fair what you guys are doing. And sometimes it is. Sometimes there could be a revenue recognition problem that's totally justified, something along those lines. And sometimes it's not. So we've got a unique ability to be able to really look through and see what the guys are coming out with on the quality of earnings and see how pertinent and relevant those adjustments are and then we can push back accordingly.

Nice. I'm trying hard not to get into the weeds because I don't want to be talking about revenue recognitions for the full hour. But I want you to know that literally, I would say every eighth word you're saying, I'm like, wait, what's that? But I am following. So I'm super excited about this conversation. So the big one I really wanted to ask because I think on your websites, like, something of 90% of all the transactions you've done have been in the service space. So given that our audience are contractors, you know, service contractors who are in the process of building their own business or, you know, they're either, you know, first year, fifth year, tenth year maybe, looking to sell. What are some of the biggest lessons you've Learned in your 22 years of experience? And what would you like to what kind of knowledge would you like to impart on our listeners today?

Sure. I would say some of the bigger lessons that I've learned and doing this for as long as I do, it's understanding what your transaction goal is.

Right.

What do you want to get out of a transaction? And that can be different for a lot of different folks. One is there's obviously the liquidity that comes with that, but there's a lot of other different things. So I think for contractors, for them, understanding what's their definition of success, you know, and what does that look like? And maybe that's a dollar amount. Maybe it's finding a partner to grow with, you know, And Horizon's case, when first time I met those guys, they were 8 million. When I sold it to them on the way out, they were 12 million. When I did their private equity deal a few years ago, they're 130 million. Today, they're close to 300 million.

Right.

So they needed a PE firm to help supercharge that growth. And they had the secret sauce and had, you know, how they do things. And it was just a question of rolling out to the other locations. And they got so big that it becomes, you know, to the point where it doesn't necessarily make sense to keep doing it on your own.

Right.

So it provides a liquid, a liquidity event, and it provides a vehicle for growth. And so, you know, it's different in every circuit. It's different in every circumstance. But I think, you know, for contractors, understanding the keys that they want to get out of the transaction, right. It's. And exactly what that looks like. And there's been other transactions where guys want to get out and they're like, look, I'm Selling the business. I don't want a partner. I've never had a boss. It's an exit for me, and that's fine. But I think the clarity around that as well. I did another transaction in southwest Florida. I don't know if they're servicetitan. I think they are now because they're part of Turnpoint. All Turnpoint puts everybody on service titan. And I had a conversation with the seller about, well, what do you really want to do? And he said, well, I'm not sure this and that. I'm like. And then we got to the crux of it. And he's like, I want to be done. And I'm like, okay, let's make sure that those expectations are clear. And I negotiated a deal where he was done in about three months. And for some of them, it's a lifestyle, right? They've developed a really good business and the business runs on their own. They're not day to day operating in. They want to make sure if they do a transaction, they're not going to come back in and say, oh, I sold my business and now I've got to be there, you know, 50 hours a week.

Right.

They want to keep running the business the way we have. And I think what's kind of nice is through Covid and all and everything that's happening now, we're a lot more virtual so people can run these businesses, you know, remotely. I, I talked to somebody yesterday, has a nice sized business in Texas, and they're like, yeah, we're up in Colorado where you are, and, you know, we're able to run the business, you know, kind of remotely. And we're doing our huddles every day. And, you know, it's. We're just not physically in the same location. And so that's, that's been interesting to see as well. But, you know, I think it's important to understand your expectations, you know, of what you're trying to get out of a transaction. And you know, one of the things that we've seen people do, one of the mistakes that, that people have done kind of throughout is they like to move the goalposts, right? So they come into the transaction thinking they want one thing, and we start giving them options for that one thing. And then they're like, well, you know, maybe I want this. We did a big mechanical contractor a couple years ago and the guy was not sure if he wanted to partner with the strategic, if he wanted to be pe. And you know, we went down kind of several paths until he Kind of formulated and came back to, like, I think the best opportunity for my team and for myself is, is to do a transaction with the strategic buyer as opposed to, you know, doing his own thing. So it's important to understand, kind of going into the transaction, you know, what you're looking for.

Got it. What kind of transactions would you say are the most popular or tend to be the most beneficial to contractors who have built up an asset and now can sell it?

So I think, again, I think it depends on the contractor and what they're looking for.

Right.

There's certainly options out there. There's totally different options. And when we think about private equity, a lot of the things that private equity likes to do, and there's guys who will buy a majority position, there's guys who will buy a minority position. But. And the interesting thing about that, I'll take you into the weeds just a little bit here, but let's say we had a $60 million transaction, and the buyer was bringing in $30 million worth of debt and $30 million worth of equity. And the seller wanted to maintain a 30% interest.

Right?

So on a $60 million, with $30 million of debt and $30 million of equity, if he wanted to own 30%, you're just using that 30 million. So $30 million times three would be. Would be 9 million.

Right.

So that would come off, and then he would own. He would own, you know, nine divided by 30. He would own nine divided by 30 would be his. Would be his percentage.

Right.

So it becomes. Because they bring in. Bring in some leverage, the equity becomes really cheaper for the guys. And I think a lot of the contractors don't quite understand that they're able to buy in at cheaper equity because of the. Because of the debt portion of the deal.

Deal.

Most private equity firms are called leverage buyout firms. So they are using a certain amount of leverage, and because they're using leverage, you're able to buy in at the equity becomes cheaper than the total enterprise value. Makes sense.

I mean, as much as it possibly can. For someone who does not do math. Well, I will say to anyone listening if you think that you are bad at math, I thought that for a long time too, but it usually just means that you need to concentrate a little bit harder on it. I want to keep this. You are talking, and I could tell just by the way you're talking about this, that you love your line of work and you're really passionate about it. So I do not want to bog you down with giving me an Accounting lesson. So one thing that really caught my attention with what you just said is, you know, we need to figure out what the contractor actually wants. And you mentioned even before, you know, that guy calls you and he thanked you for being his therapist during his sale. So, like, what are some of the questions? I would assume that a contractor who, you know, if he took the traditional contractor path of he was a great technician, he made great money, and then was like, you know what? I'm going to do it on my own. And then he went through this whole process where he learned how to run a business and now he's at the end and he's like, I guess I can sell. What are some of the questions you ask to clients who are maybe thinking about this to kind of get them to define their goal post? And so you guys know what process to move forward. Does that make sense?

Sure. Yeah, absolutely. One of the things that we obviously want to know is, you know, what is it that they're looking for? Are they looking for? And it's different in every case and every transaction takes on its own form. But one of the things that we always like to know is what are you looking for? Are you looking for a partner to fuel your growth? Is it a cash out strategy? Are you looking to retire? And kind of depending on where the particular contractor is in his life cycle, a lot of that dictates it.

Right.

And so there are times I have a guy right now who's younger, he wants to be a platform, right? He doesn't want to join Wrench or Turnpoint or one of these other big groups. He wants to be the next horizon, the next Turnpoint. He wants to go out and he's built a really good management team. So I think understanding where they want to go, for some guys, they want to join something, they don't want to do all that work. It's kind of nice to join an organization that has a lot of that, that has the best practices, that has some purchasing power and they can stay localized and just run their branch. Sort of the Wrench model, right? And so I've seen, you know, kind of different models that have been born out of private equity and the different things they've done. And I can explain kind of the different variables and then be able to go and be able to show, you know, potential seller what he's, what he's looking for. And then, you know, it's usually interactive. It's a Q and A. And we like to have those kinds of, you know, fluid conversations and figure out what they really want out of it. And then it's our job to go out and find them, you know, what they want, what they're looking for.

Got it. So in terms of stuff like the Wrench Group and Turnpoint Services, I know a couple business owners who have sold to those, to those larger entities. Are those considered private equity or no?

Yeah, so they're. What I would call them is strategic backed private equity.

Right.

So they are strategic. Wrench Group is a strategic, you know, most people wouldn't even know there a great line. The guy who runs Wrench, Ken Haynes, he's the CEO of Wrench. One of the things he said to me through the years, which is a great line, he's like, you know, and I did his deal obviously with Alpine originally. He said, best thing that ever happened with being part of private equity, my employees don't know anything differently and my customers don't know anything differently. And as he's doing these transactions, he's had these material events along the way which, you know, life altering, you know, financial, financial events. And so from the, from the customer standpoint and even from the employee standpoint, you know, nothing much changes.

Right.

And the idea is with private equity, they're not trying to get in. They may have some ways to help or assist, but they're not trying to recreate the wheel. They want the existing business. What they're really buying is the people and the customers.

Right.

And so they just want, they. Obviously it's critical for them for that to stick.

Right.

It's critical for the employees not to leave and they upset the workforce. It's also critical for the phone to keep ringing and the opportunities that keep being created and that type of thing. And so it shouldn't change anything.

Right.

The idea is maybe it enhances and there's best practices they can share by being part of an organization. But on a day to day basis, the business as it stands today, before the transaction should look largely the same as it does after.

Right.

Most of these brands, they still use the legacy brand. The brand doesn't change. There's then once in a while there's an example where it does change. But most of them, it doesn't really change. And so, you know, it should be business as usual for the, for the employees. You know, nobody ever wants to take away benefits. So if they're getting something, the idea is, you know, they don't, they don't go backwards, they go forward and they add to it and the opportunity should increase as they join a different organization. But private equity isn't. Isn't. Isn't looking to go in and make wholesale changes in the operation.

Tell me more about private equity. We've alluded to it a bunch. And so let's just tell me everything you know and want to say about private equity.

We wouldn't have enough time for me to tell you everything I know about private equity.

Right?

But private equity, you know, it's a different vehicle than, say, the public markets.

Right.

You don't have the same Sarbanes, Oxley and the same kind of, you know, requirements that the public entities have. It's a way to deploy money. We constantly hear from PE folks, they have a lot of dry capital, a lot of dry powder that they want to deploy in the industry. They look at our space and they see how fragmented it is, and they see the opportunity to take these businesses and scale them. I did a deal in New Jersey once upon a time, and they said they were in 50,000 unique homes a year. I was like, that's pretty impressive. It's a nice number. And they're like, we think we could be in 3 million homes in the state of New Jersey. They were in central New Jersey, and they went north and south and they were like, so they're penetrating 1.67% of. Quick math. I happen to know that number. But they're penetrating 1.67% of the market. So you think about the opportunity they have to continue to grow. And I think that's one of the things that private equity really likes about this space is how fragmented it is. Even if you look at some of the dominant players in a certain market, what are they really getting? 5, maybe 10% of the market.

Right.

So there's so much room to grow organically and to keep growing organically. There's a number of reasons why pes kind of come into the space and they've come in in force, right? And it's, you know, I kept wondering if it's going to slow down. And it's actually been the exact opposite. Private equity keeps wanting to find more operations to partner up with and to keep growing. And it's like, one of the things I wonder is, where does it go from here? There's been all this private equity interest. Does somebody eventually take all these different ones and try to consolidate and maybe take it public at some point?

Right.

Because some of these companies have grown so much, but they generate. These businesses generate so much cash flow. The successful businesses generate so much cash flow. So they do provide a nice return on the business. And then you figure in the leverage that they're bringing and what changes a little bit from owned individually is you got to keep the profits and you got to dictate, you know, if you're putting the money in your pocket or what you're using the money for. With private equity, you don't really get that same. That same distribution. The profits are really used to pay down debt or maybe reinvest in some other assets where they make their. Their bang on the, on the buck is when they sell it to somebody else. There's. There's actually a great video. I can send it to you offline by Warren Buffett. And he talks about, you know, what's, what's private equity and what he does, what it does. And he's like, they take the companies, they increase the revenue, they increase the profits, they add to it, they try to make it bigger, and then they sell it to another private equity firm. And the circle just keeps going and onto the next guy who's going to continue to have that organic growth, maybe have the acquisition growth and keep going and try to get the next high multiple in the space. What we've seen is with some of the larger guys, they're really able to get aggressive multiples, really high multiples in the space, and it just keeps going. So it's been really neat to see.

I mean, the main thing that I'm hearing right now is that if you're a contractor who's built a pretty good business, you're building an asset. You're building an asset that people want. You made a good decision. Way to go, bud.

Exactly. Exactly. It's funny, one of the guys in my office, we joke about if we knew what we knew, like back in high school, we'd been like, just open a contracting business and grow it over the next 30 years.

I say the exact same thing, especially as, from what I hear, even just has, like, female comfort advisors. They tend to perform much. Not much better than their male counterparts, but there's a lot of that trust factor there. And I think about it all the time. I'm like, you know what if service design doesn't work out, maybe I'll just get my master plumbing license. I know you guys picked a good line of work. Congratulations.

Yes.

Let's talk about the difference between mergers and acquisitions. Obviously, in the case of Horizon and then the Wrench Group, you got private equity that are trying to buy up these really successful brands and grow them organically. Talk to me about the difference between those mergers versus acquisitions. What do you usually spend your time on and how should contractors look at those two traditional terms?

So I view myself as an M and a expert.

Right.

So I'm a merger and acquisition expert. But differentiating between a merger and an acquisition, an acquisition is more of a buyout, you know, they're completely buying something out and a merger is more of a partnership. But fundamentally there's not much difference between the two.

Right.

So you may. And that goes again into maybe selling a piece of the business and not selling the entire business.

Right.

So kind of depending on the size, sometimes it's just an outright acquisition. You're tucking something in. Some of the deals are smaller and that's easy to do. A full acquisition, a merger, you start thinking about the tax structure at the top. And I don't want to bring you down into the weeds on the tax structure, but there's different ways to merge into different entities so that the buyer gets some tax benefits, some step up in basis and those type of different things. So I'd say the bigger deals tend to be more along the lines of mergers. The smaller deals tend to be more outright acquisitions. But fundamentally, from our standpoint, when the work that we do and what goes into it, there's not a ton of difference. It's still a transaction.

It's still a transaction. Would you say that regardless, the owner of the business that's being acquired or merged is still going to have a significant financial event in their life?

Exactly.

Very much, yeah. Sounds very significant. So if a contractor.

But.

Yes.

So if a contractor has the goals to at one point have a big financial event in their future, what are the things that they should be doing now to set them up for success?

So one of the most important things they should do now is, and obviously this comes across as a little self serving since I'm a cpa, but they should be getting their books in order to. That's most important thing. And I guess one of the things that we've seen, and this is maybe a good lesson for the contractors, we always find the guys that are bigger have the most systems and process in place and are the most organized and are able to pull data. And the smaller guys, so for me it's actually easier to work with the bigger guys because you're getting the stuff.

That you need, right.

The smaller guys, you're kind of constantly trying to pull data and trying to get them organized. And so the first thing, the most important thing they should do is get their financial house in order, get gap compliant, start working with all the relative financial aspects of it. And a lot of that is bringing in somebody. An owner can't do everything himself. And typically when I've met operators, they don't want to spend money on the scorekeeper. Accountants, by nature are scorekeepers. They're not adding to the bottom line, but the investment in making in a really good controller, CFO type of person is going to pay off at the exit. And I think that's certainly a critical part of the process. Now, there's other things that you should be thinking about as you're growing your business, right? There's the time when you're in the growth strategy, and then there's a time when you're a little bit more in the mature marketplace, right? So there's things you should be doing as you're growing your business and there's a payoff in doing that, right? But as you think about selling your business, you may not get that investment back. So you've got to kind of think about when you pull back off of the throttle. Marketing is a good example. When you have marketing expense as you're growing your business, you may start to spend 10, 11, maybe even 12% on marketing. But as you reach a critical point, as you get to a certain point, it's probably more realistic that you're spending 6 or 7%. You streamline your marketing, you've tracked your marketing, you know, you're getting the most optimization. So, and you're in the growth phase, you're willing to do a little bit more. But as you think about coming out of that growth phase and being a little bit more mature in the marketplace, you want to throttle back your marketing. Another big thing that contractors should always be doing is service contracts. Service contracts. We all recognize the benefit of service contracts. You're putting a nice fence around your customer, something breaks, they're not picking up the phone book to call anybody. They're calling the person they have the service contract. So always be building your service contract base no matter where you are in the cycle. And buyers, you know, it's reoccurring revenue. It's also an opportunity, right? When you have, when you're on a routine maintenance, you know, you're in the house and there's an instant opportunity to look for things and figure out, you know, your good, best and better opportunities, right? And figure out it's again, a nice selling opportunity. But that's obviously an important thing to continue to build your, your service contract. Pace, succession, planning, all, you know, big thing, right? So if you've got an owner who's, you know, looking at a sale, as you know, I'm getting out of the business sure better have developed his team around him. He sure have developed, you know, what that bench looks like and who his key people are. And you know, if he wants to leave, he better have a good gm, you know, somebody in that, in that driver's seat. And that's a really critical path forward. Again, buyers are looking to buy the people. So if you haven't developed the team underneath you, it's going to be a little bit more challenging, especially if you want to leave the business. So if you think about selling and you think about you wanting to exit, having the key guys in critical seats or girls, right? The key guys or girls in critical seats is certainly an important, we always say, and this one's harder. But acquisitions, you got to have a plan. It seems easy for me to sit up here and talk about, about doing acquisitions, but acquisitions are not easy. But if you can do them right, they can be very accretive. There's usually some back office savings. You know, there should be some synergies. And if you have the plan to do the acquisition, it's pretty important. And you know, we recommend that contractors look into acquisitions. Now the more you can integrate those into your operations before you think about selling, the better it is. You know, sometimes just the way timing works out, it doesn't necessarily always happen, but the more you've integrated the results, the more successful will be in adding value to your, to your enterprise value and getting you more for your business.

So I want to talk about acquisitions, actually with the point that you just said, so I'm assuming you mean acquisitions by growth. So say you have like a 10 truck operation in your town and there's, you have a competitor that maybe has three trucks and you're like, you know what, let me buy them. So this way I can get their database, I can get any memberships they're dealing with. So when would you say acquisition through growth is a smart strategy and when would you say it's maybe not appropriate?

So there's a couple things. One, obviously it's the terms of the acquisition, right? And if you have an opportunistic acquisition, then it makes a lot of sense to do it despite the timing of it, right? But again, it kind of goes where you are in the life cycle as you're growing your business and you have the opportunity to expand your customer base, you know that's going to lead to more revenue. So the sooner you do it, the sooner you get the results in, the better off it's going to be. Now, again, integration, which is a big part of acquisition. Easy buzzword, but there's nothing easy about the integration. And sometimes culture is very important when you think about an acquisition. It's making sure the cultures line up. And the last thing you want to do is bring two companies together who have completely different cultures. Guess what's going to happen when that's the case, right? You're going to lose half your work, you're going to lose some of the guys because it's not a culture fit. There's things to look at when you're doing an acquisition, and it's important to understand the basics that go into it and what an integration plan looks like and how exactly you're going to do it. But the point is, and we've talked about this and we've done webinars on this, one plus one is not going to be two. It should not be two.

Right.

It should be something greater than two. So when you take these two companies and you put them together, there should be some significant savings and some back office synergies and different things like that that make it really accretive to the bottom line. I'm a big proponent of doing acquisitions. Provided you have the right operator, you're only as good as the people. So if you have the people to do it and execute the plan, it's a great thing to do. If you don't, it's going to be a little bit more of a struggle. But, you know, we certainly seen several examples of doing acquisitions and what it means and to your point, Jackie, about adding, you know, the 10 person truck and adding three, that makes sense all day long. As long as there's a culture fit and you can integrate them and do everything like that.

Got it. Thanks, Fred. So we've alluded to now, like the succession component and also the culture fit. So what are some things that owners should be doing to groom their staff, the folks who work for them to kind of take on those roles? What kind of conversations should they be having with their GMs, you know, like when should they be saying, like, hey, tap, tap, I'm going to be leaving here in a little bit. So, you know, what should that be looking, what should that look like, you know, as they prepare to have that big financial event?

So what I would say is there's a lot of, you know, serial entrepreneurs and guys in this space and it's hard for them to give up the control.

Right?

And they've built a Successful business and you know, they know the business and it's hard for them to take that step back, to be able to give up, to get able to give up some of that control. And what we found are the guys who are willing to, you know, put the right guys in seat and let them, you know, you got to manage them a little bit, you got to give them the tools so that they succeed. But the ones who are willing to, you know, allow the, the guy they're grooming to the ability to succeed and grow the business and take a step back and be there to support them but not be so involved in the day to day stuff. We find that's really important and those are the ones who win and are able to walk away from the business. But we've certainly seen other folks who, it's hard, it's their baby and it's hard for them to step back and allow other people to do it. And it's also an ego thing, right? They know what they're doing and it's hard for them to believe that somebody else could do just as good a job as them, if not more and have some different creative ideas. So I think the ability to walk it back a little bit, take us and still manage the business, but allow that new person and let's call it the new GM to flourish is a critical path forward.

What about in terms of, I agree with this, by the way. This is very aligned with everything I've heard from the podcast before. Hire the right people, get out of their way. But what about when it comes to communicating with those folks that you're going to leave? Do you ever see like GMs that are like, whoa, whoa, whoa, I don't want to work here if you're not here, or hey, what if I wanted to buy? You know, what are some potential outcomes that happen once these conversations take place?

So we get asked constantly, when's the right time to tell our folks that we've even engaged you guys and how do we protect confidentiality? And you know, there's, I've seen different guys do different things. Some people have been more of an open book and they say, look, this is what's going to happen. The one real benefit by them partnering up with somebody is it should provide further liquidity for some of the key folks. A lot of these private equity groups will have some sort of, we'll call it phantom equity or a management incentive pool. So the opportunity for the key guys in the organization increases with a transaction. But then it becomes when's the right time to do it. And I always say, look, buyer, who's buying your business, and you're looking at transitionality, either close to close or even within a couple years. Guess what? They're gonna want to meet the key people in that organization and know what they're buying.

Right.

So you're gonna have to have that conversation anyways. And some of them are like, okay, we get it, Fred, but not yet. Show us that what we have is real. And typically, at some point during the deal cycle, once you're in an loi and you're have an exclusive arrangement with a buyer and they're digging in and doing all their diligence, at some point, you're going to have to have that conversation with the key people, because the buyer is going to want to know what you know, is going to want to meet those key people, see if they're talented. And so there's usually a small group of individuals within an organization who are brought into the. Who are brought into the conversation. Obviously, the more people who know about, the more work gets out and you know, you know how people respond. The only thing that's constant in this industry is change.

Right. But.

So there's a fine line to walk there by making sure the key people know, but trying to keep it as buttoned up as you can until the transaction is really at close to close or at closing. And a lot of times you find people, the transaction closes, and when the deal closes, we tend to be obviously very much less involved. But we've heard about meetings when they bring in the whole workforce and they announce it. And, you know, most of the times it's the owner's perception.

Right.

If the owner's like, look, this is a great opportunity for you guys. And this is, you know, gives some of the reasons why they made the decision. You know, there's maybe a little bit of a shock factor, but then 10 minutes later, they're, you know, back to work and back to creating their own opportunities, and it's business as usual. And so there is a little bit of the right way to go about managing it. And I do find the folks that bring in kind of their core people up front, the deals tend to work a little bit better and a little bit more smoother.

Yeah. And I think you also just touched upon such a key point there, which is your attitude. What's the vibe that the owner brings when he finally makes that announcement? So the more optimistic you are, the more positive you are, the more positive your people will be.

Exactly. It's Amazing how important that is. And obviously the partner or the buyer, they do try to spend a little bit of time together, you know, kind of beforehand, massaging that message and make sure. And make sure that the right message is conveyed to the team.

Got it. This conversation's flying by, but I want to talk a little bit about, you know, KPIs and like, what are some like, big indicators to an owner that like, oh, maybe now is a time to consider taking this step into M and A. Like, what is what, what kind of sign should they be looking for in their business? Because theoretically you could have as many trucks, you could have five trucks, you could have 500. You know, really, when to sell is up to you. But are there any things that people should be looking for?

Well, there are some things that they can control.

Right.

Which are the internal factors and some of the KPIs. And I'll get back to that in a second. Then there's the external factors, what's the market conditions, what are interest rates and different things along that. So there's the external and the internal.

Right.

We're in a period right now and going back over 22 years, it hasn't always been like this. So the microeconomics that we're in right now and the ability to transact at a higher multiple. I spoke at an event last year and I said seven is the new five.

Right.

So five was the multiple kind of historically and for those businesses we're getting seven. And for businesses kind of above that, a lot of it's. There's a lot of factors that we've touched on. Who's the management team and how many service agreements. Agreements and various things like that. What drives price mostly for the more successful contractors is size. The bigger you are, the more ebitda, the more revenue you're going to get, the better outcome.

Right.

And part of it's just kind of a personal decision as to when you want to do it. And we've talked to guys for years and it's when they want to go. And sometimes I. I've been telling people recently that I've been talking to for years, it's actually worked in your favor because multiples have continued to gone up.

Right.

And do I expect at some point, just through the cycle, price will come down, multiples will correct whether we get into a recession as a country or what have you. So there are certain factors that happen, but guys who are buttoned up and who are using KPIs and who really manage their business looking at the right. KPIs, that's going to come through in the management meetings.

Right.

And so when we bring folks to town and we go through kind of the process and bring different bidders to town and they see, you know, the KPIs are using and how folks are managing the business, that becomes pretty compelling them. The guys who do it the right way and have the right KPIs in place, guess what? They become a more attractive asset. You may be able to have a better outcome. And you know, there are certain guys, again, the smaller guys who aren't using KPIs, they're not getting as much for their business.

Right.

For obvious reasons. It's, you know, so the guys who have really embraced it and used it and managed their business through. And you can see all that, you know, through the work that we do and kind of how we present the companies and then that comes out through meeting the team and meeting the head guys. You know, those guys are really going to succeed and get the upper end of the multiple range.

I love it. And I love that you mentioned EBITDA too. I know a lot of people probably know what this is, but would you mind defining it for folks who do not?

Yes, and I'm going to give you a little caveat on the definition. But it's earnings before interest, taxes, depreciation and amortization. I like to. So basically measures cash flow. That's the idea is it measures true cash flow of the business.

Right.

I actually like to expand the EBITDA definition. I say it's EBITDA plus another A and that other A is add backs.

Right.

So those are all the things that are non recurring in your business. You know, a lot of folks, you know, live out of their business. They have personal, you know, charges that go out of the, that they run through the business and that type of thing. And so we've obviously doing this for 22 years. We've learned some tricks about add backs and there's different add backs that can apply. I like to say, you know, these are a little bit harder when it comes to business add backs. But if you've got the ability to look back and say, you know, I did something that just totally didn't work out and there was cost associated with that, even though it was a business expense, I've successfully argued, you know, that those can be add backs.

Right.

So if there's a marketing campaign that's coming off the books, if there's. I had a client once who had an ambassador program that, that didn't work out and he scrapped the ambassador program. So the cost associated with that, we've gotten an ad back. Some of them when we talked about acquisitions and how accretive acquisitions can be. Well, guess what? As we talked about, the timing doesn't always work out.

Right.

So if you have an acquisition that's between you haven't integrated for a full year, you don't know the full year results, we're going to look for an add back to give you the full year results.

Right.

As if you had owned it the full year. So that extra A and the EBITDA definition is really important. Then you take that number and whatever it is, times a multiple, it becomes pretty material.

Right.

So if it's, let's just say there's 100 grand worth of an add backs. I mentioned a seven multiple earlier. Now you're talking about 700 grand that you've just added to the enterprise value. So there's a lot of different ways to increase the valuation. And it's one of the things that we pride ourselves on is getting the EBITDA right. And I think that's why we're as successful as we are at getting deals over the finish line. Because we understand what's legitimate EBITDA and what's not. And we try to put a number out there that will stand up that the buyers will have, as I mentioned earlier, will have quality of earnings and they'll go in and part of Q of E. It's sort of like an audit. But they also want to make sure things are in the right period. When you own the business, you may not necessarily care that the whether it's in the right period or not because it happened in 18, so it's, you know, but it was really belonged in 17. So there's different things along those lines that we make sure. But EBITDA is what everyone's looking at and that's how all the deals are measured. And you know, contractors focus in on net income. It's a little bit like ebitda, but you got to add back all the depreciation, interest, amortization and add backs to get to that, to get to that, even a number.

Love it. Thank you for explaining that. So we have about 9ish minutes left. You've mentioned already quite a few very impressive businesses that you've worked with. But I would love if you could kind of tell me the story of one particularly memorable experience you had with a service client who was looking to sell and how it worked out for them.

Sure. So I'LL use Horizon because, you know, I've watched those guys. First time I did a deal with them was 1999.

Right.

So I've watched those guys kind of grow and just seen their remarkable growth that they had through the years and being able to watch and stay close to those guys. And Dave, Dave Geiger would always say to me, when I get here, I'm ready. And I'd be like, dave, are you ready yet? And he'd be like, nope, I told you when I get here. And he got to a certain point and he was ready to go and had a really successful outcome. Had a great partnership with Son when under Sun's guidance, they did 10 acquisitions and continued to use the Horizon playbook. And sun had a really successful outcome last November when they sold to New Mountain. And it's been a really incredible story just to witness and be a part of and do so many transactions with them.

That's awesome. Talk to me a little bit about how you've gotten involved in the Service Titan space and how you work with so many of our wonderful customers.

Sure. So Brian Cohen, who's my business strategist, I think he's, I guess, going all the trade shows, we've kept running into you guys and I remember, you know, pretty early on there was always a gap. I'll even go back to the Blue Dot days. We were. One of the biggest problems we had at Blue Dot is we didn't have a common platform, we didn't have, you know, software. And I remember going to these meetings at SAP and we were trying to figure out and the investment was so huge and, you know, I don't know exactly when it was somewhere in the five to ten year range, you guys came along and just kind of kept popping up everywhere. And the more I sat through some of these management meetings and saw kind of the benefits of Service Titan. It was incredible to see and see how much it benefited the contractor. And it's been a really great experience to see you guys and see how you've evolved. And you guys are clearly the leader in this space. And all the contractors that I work with are very happy with, with the information that you get. And I think it allows them to be a lot more efficient. And it's been incredible to kind of watch it from my end as somebody who's been in the industry as long as I have.

Well, thank you. I imagine it's also kind of nice if you're merging two businesses together and they both use ServiceTitan.

It definitely makes it easier, right and so it's also nice how some of these groups, for instance, Turnpoint, which wasn't on originally and they got into ServiceTitan, and now they're able to, within three days after closing an acquisition, get them all integrated. And they've really figured out how to do it quickly. It's been nice to see. And then you see the growth that happens once they're on service titan. It's just incredible.

That's awesome. Is there anything we should have talked about? I'm sure there was, but is there any one lesson that we should have talked about that we didn't? When it comes to selling a business, acquiring a business, merging your business into someone else's, any final tidbit of knowledge.

You'D like to include? You know, I would say a couple things. You know, number one is with all this private equity interest in the space, and I'm amazed at how many people they have calling owners directly and trying to reach out. You know, there's mistakes that we see contractors make all the time, right? They think they can go at it alone and they, and they try to do it. And I think they're, they're fooling themselves a little bit. And I think it's important, whether it's us or somebody else, to make sure you have an intermediary, make sure you have somebody who's watching your back. These guys are experienced, savvy deal makers with tons of deal experience. And for a contractor who understands the contracting business but doesn't understand a transaction, I think it's very short sighted for them not to use somebody else and not to have somebody who makes sure that they have, you know, kind of their back and make sure they're negotiating. You know, everything that, that's, that's proper. Let me see what, what else is, is, is important. I think it's, you know, understanding the worth of your business, right? Understanding a business valuation, how you do a business valuation, it's. It is another thing that, that we like to do for our clients. We do both, you know, an informal valuation which is, hey, we'll sign an NDA. Give us, you know, some basic information. We can kind of give you a range of where the, where your asset would trade for. And then we also do a more formal valuation which we have to charge money for because it's a lot of work. But we go through and figure out what your gap deficiencies are and all those different things. And I think doing some of that prep work up front, you know, it's important. Transactions, you know, can seem Easy. They're not. They're complicated. They're hard. And making sure you have somebody, you know, kind of working through it and understanding, you know, everything that goes into transaction, it's easy just to look at the enterprise value, what the dollar amounts are, but there's so many other different points of a transaction that are important. We didn't even mention working capital.

Right.

And so working capital is part of every deal and how much working capital you need to leave behind, what's normal. And there's certainly games that buyers can play with. The working capital calculation and making sure that that's buttoned up appropriately with would be another good one. But a lot of different points to the deal.

That's wonderful. Thank you for sharing.

Fred.

If the folks who are listening want to get in contact with you, where can they find you?

So we're on the Internet at www.sfp advisors. You can find all of our contact information, you know, through our website is probably the best way.

Got it. I'm almost regretful that I didn't talk to you actually about what it's like to run your business, which is really like the fundamentals of this show. But I still think we got some incredible information. Are you ready for my rapid fire questions?

Let's do it.

How do you take your coffee?

I'm pretty much a chai tea drinker. I don't drink a lot of coffee. I tend to take a sip out of my wife's, but that's about it. I'm not a big coffee drinker.

Nice.

Love to chai tea. If you could have dinner with one person, dead or alive, who would it be?

That's a good one. I'm gonna go to an old sports guy that I really admired. He was a little bit older than me, but. Roberto Clemente.

Oh, nice.

Yeah.

What kind of sports guy was he? I'm not a sports person at all, so you gotta tell me.

He was a baseball player that. I guess my dad used to grow up, you know, when I. He was, he was much older. He wasn't part of the generation that I watched, but he was a Latin, like one of the first big Latin player baseball players in America. My dad would just say how he was so adored in Pittsburgh, which is where I'm born from. And you know, he, he was, he was incredible to watch and the fans loved him. And the irony is he actually. 3,000 hits in major leagues, kind of a big deal. He landed on exactly 3,000 hits and then he died like on some relief effort for hurricane. So he was helping, like, people from Nicaragua, and he was sending relief supplies, and he was on the plane, the plane crashed, and it was kind of a tragic story. So wow. To, you know, hear from him, but he's not around anymore.

Oh, wow. That's insane. Also, I could tell you were an east coaster because you talk really fast, just like me. What is the number one thing you're trying to learn more about right now?

Number one thing I'm trying to learn more about right now besides Covid and the impact of, you know, kids and all that type of thing, because that's pretty relevant. You don't know what information is real out there. I'd say kind of specific to the industry. And one of the things that I'm really curious, I mentioned this earlier, is where does it go from here? So you've got all these different PE groups who are buying, and where does it end up? Does it end up in a public vehicle where there's another wave of consolidation or what happens from here? So that's. That's something I'm certainly curious about.

Definitely. And for the record, this interview will go live probably in September. And which place, which. Who knows what's going to happen with COVID Who knows that if it'll actually, like, materialize into a physical monster and then we're in, like, Godzilla type of situation, we'll find out. Okay. If money weren't an object, so you'd have unlimited resources, what's the first thing you would do?

Buy a private plane.

Nice. Are you a pilot?

I'm not, but the few times I've flown private, it's just so time efficient, and it's so enjoyable. And it would make my job if I could pop into locations, several locations in a day, it would make my job just so much more efficient.

Nice. What's the number one thing every contractor should do to run a successful business?

Grow the service contract base.

Agreed. All right.

Well, Fred, I want to thank you. This conversation was absolutely delightful. I was a little intimidated by it because I truly am not an expert in your field, but you did a fantastic job explaining it and relating it back to our audience, so I want to thank you.

Awesome. I enjoy it, so thanks for having me.

Hey, guys.

I hope you enjoyed my conversation with Fred. To watch him and his business partner, Brian Cohen, share some actionable tips on how to sell your service business, go to servicetitan.com sfp or click the link in our show notes.

Ever wonder how much your business is worth? So many owners ask that question and have no idea where to turn for an answer in just a few clicks, Service Titan's new Service Business Valuation Calculator can give you an easy and free estimate of the current value of your business, whether you're thinking about selling your company or looking to track growth. Check it out now. Visit servicetitan.comvalue Again, that's servicetitan.comvalue. see how much your business is worth today. Want to network with fellow service entrepreneurs and former guests of this podcast? Join our private Facebook group Toolbox for the Trades to get immediate access to the best tips, tricks and tactics from fellow service entrepreneurs. Visit Facebook.com groups toolbox for the Trades or click the link in our Show Notes to join.

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