Paul Giannamore: How are these guys doing something somebody else isn't? If you've got a very defensible and durable explanation to that, you're going to find yourself slightly more wealthy when you sell.
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Patrick Baldwin: Paul, we're doing it. We're going to have three weeks in a row of The Buzz. I'm proud of us.
Paul Giannamore: We will, PB. You're heading down to PR for the shindig we got going down here. There's going to be about 15 or 16 people down here. We'll be doing a lot of Potomac TV. I don't know if we'll get a Buzz in while you're down here, but I hope so.
Patrick Baldwin: Thanks for the invite. I look forward to that. It's been a little bit so we'll have a good time. Unfortunately, people have asked me, like, “What's Puerto Rico like?” I'm like, “I have no clue because I get locked in a five-block radius. I got work to do.”
Paul Giannamore: This time around, you'll get locked into a five-block radius. The Mexican wanted to do deep sea fishing with the crew but a lot of people are bringing their wives and girlfriends down and it's complicated to do deep sea fishing. I don't know that a lot of these women are going to want to do that.
Patrick Baldwin: I hope you heard the Mexican’s deep sea fishing invite for me, like, “We're going to go on a boat. PB, you're not invited.” I love it.
Paul Giannamore: That's been canceled now, Patrick. The deep sea fishing expedition, you can only fit so many people. They're not big boats. Now, we've switched it up and we're going to do somewhat more of a romantic sunset cruise with some jet skis and that sort of stuff.
Patrick Baldwin: Is he the crewman?
Paul Giannamore: No. We're going to get to a seaworthy craft with professional wait staff, captains, and the whole nine yards.
Patrick Baldwin: That's awesome. You've got a couple of listener questions and one of these is from Jared. I had a similar thought from another listener and the question is, “How much growth is too much?” In this case, if I can get some specifics here, we've got a couple million-dollar company doing almost 50% growth year over year. The company I'm thinking about, he's in the teens, roughly pulling 40%-plus year over year growth. both of these companies are high growth, putting a lot of money into growth, not as concerned until today about bottom line. I'm going to put it to you, how much is too much?
Paul Giannamore: As I always say, you get your return from your business in 1 of 2 ways, you're either dividending out in real-time or you are getting capital appreciation. Some guys look at it and say, “My pest control business is a growth stock and I'm going to reinvest everything back into it.” Naturally, you'll have super low bottom line margins if you're investing everything back into it. If your focus is on capital appreciation, as long as you can keep the wheels on and grow it, I don't know if there is such a thing as too much growth.
If you can deal with the chaos and complexity of a rapidly growing entity and you've got a long-term time horizon for an exit, I don't know that there is such a thing as too much growth. However, what you're talking about are some of these guys out there that are growing at a massive clip but also eyeing a very near-term exit.
To a certain degree, you'll be penalized because in the era of financial sponsors, private equity firms buying these businesses want to see a lot of top-line growth but what they want to see is cashflow that they can lever. There is a balance there. We've talked about EBITDA targeting in the past. As you start to approach an exit, you want to be above 20% adjusted EBITDA. You need to focus on getting that up. There are a lot of these guys that are running 5% operating margins, which is too low when you're thinking about an exit.
Patrick Baldwin: Sometimes you don't have control over the exit. If something was to happen and you're dealt with what the business is currently doing, then they're going to be looking at, “What is the EBITDA right now or adjusted EBITDA?”
Paul Giannamore: As we've discussed before, if you are growing at 40% a year, your EBITDA margins are probably going to be lower because you've got a ton of expenses, probably a lot of advertising sales marketing. If you're growing at 40% a year, an acquirer will apply a higher multiple, a faster growing business gets a higher multiple, but they'll be applying it to a much lower absolute number of cashflow. Sometimes it doesn't come out in the wash.
I know guys will look at it and get frustrated and be like, “These other guys are growing at 8% a year. They're barely keeping up with inflation and I'm killing it but I can't seem to get the right number.” When you're looking at things from a revenue multiple perspective, you're right, you might not. From an EBITDA multiple perspective, you might. It is important to be cognizant of cashflow.
We talked about this in Bubble Trouble. As the Federal Reserve focuses on increasing the front-end of the curve, raising policy rates that flows through the economy, we see the long end of the curve go up, the immediacy of cashflow becomes more and more important. The discount rate goes up. Cash today becomes far more important than cash tomorrow when you live in an inflationary environment with yield spiking. That has proven to be true for many years and it's certainly proven to be true in this cycle. The immediacy of cash is more important in an era of rising and elevated yields.
Patrick Baldwin: Let's take 40% or 50% year over year growth and these aren't startup companies. They're already doing a couple million in the teens here, the other firm. There are either strategic acquirer or private equity. Do either of those have pause in thinking, “Those are some astronomical growth numbers. I don't even know if we can sustain them.”
Paul Giannamore: 100%. Every strategic out there will normalize a financial statement based upon their own performance in the area. It's changed a little bit with private equity. Back in the day, when it was just the strategic acquirers, if we go back to 2019 and before, a strategic acquirer would come in and if you had a business growing at 40% per annum, if they're growing at 40% a year, an acquire will look at that and say, “I'm only growing 10% per year in that market. There's no way I'm going to keep that up.” They're going to normalize that and you'll get penalized for it anyway.
The same thing with extremely high profit margins, they're going to look at that and say, “I've got far more costs. I've got more corporate-compliance-type stuff. I'm not going to be able to run the business like that so I'm going to haircut the cashflow.” There's less of that going on with financial sponsors but to a certain degree, it does still exist.
At the end of the day, they're buying the future so they're going to try to understand how sustainable that growth rate is going forward. It's much easier to grow a $2 million business at 40% per year than it is to grow a $20 million business, no doubt, it takes far less cash, and it takes far less managerial skills and capabilities. 40% of $2 million is $800,000 a year, which is a lot. 40% of $20 million, you do the math, it's a lot.
Patrick Baldwin: In both of these cases, these two listeners, neither of them are doing door-to-door, which is really interesting. Usually, when you're hearing that high growth or, what I hear, it's typically on the doors, this case it's not. Does that impact also how the acquirers look at it? The taste of door-to-door has changed over the last few years. They're looking at route density. It's become normalized to acquire door-to-doors or at least the business. In this case, it's not door-to-door growth. Does that impact how they're looking at it? If they're like, “That's your marketing and advertising. That's how you're achieving all this growth. All we have to do is at least spend that much money, if not more, and we'll continue to grow the same clip.”
Paul Giannamore: When you look at companies that are growing at that rate, it's usually a direct function of what they're putting into advertising, sales, and marketing. It's very rare, although it is possible to see companies that are spending 2% or 3% on advertising and marketing and still growing at 15%-plus. I had a call with a client as we're starting to prepare for their exit. We've been working with them for a couple of years and fine-tuning things. They've hit on a really great formula where they're able to spend less than 3% per year on advertising and marketing. They still grow at north of 15%.
For the first quarter, they clocked-in 17% growth year over year. It's hard to do but it's possible. My main point is that usually, high growth rates are a function of spend. If I'm a sophisticated investor and I'm looking at this, I would want to understand if the yield on their advertising and marketing is way above and beyond what normal folks could get. Because you can spend extra money and grow quicker, it doesn't necessarily mean you should.
If you figured out a secret formula there and that's a competitive advantage for you in the marketplace, that's interesting. I would argue that you might have a smaller company that does $2 million or $3 million in revenue versus a $20 million business. I could see that there being a lot more arguments for faster growth at that rate than for a larger company because you get over certain plateaus. If you're going at 40% or 50% a year and you're doing $2 million, in 3 or 4 years, you're now above $5 million in revenue.
You've really not sucked a lot of money out, you've reinvested everything, and now you've got a much bigger base. You can hire better managers. You can hire folks. You can really invest in the business. Now, you've got yourself a little platform. You start getting in the teens or the twenties, unless you're just focused on capital appreciation and you want to build that thing up as quickly as possible and then slow down the growth to target your EBITDA north of $20 million, you can certainly do that. I don't know that I would.
Patrick Baldwin: What do you mean?
Paul Giannamore: Again, this is all personal shareholder goals and objectives. It depends on what sort of investor you are. Are you looking to take cash out of the business or are you looking to really dump it all in there and get capital appreciation? On the one hand, it's wise to focus. You don't want to do a million different things. On the other hand, I also think it's wise to have some sort of diversification. It is important to pull money out of your business and put it in other things. I don't know that I would want to be the guy that owns a pest control business that's worth $80 million and not having any other assets anywhere else.
Patrick Baldwin: One wrong move and the whole thing collapses.
Paul Giannamore: One wrong move, like the market changes dramatically. If people pest control transaction multiples fall, which they will at some point, God knows when, and I really hope they don't, I do think the market's been re-rated to a certain degree, but when they do fall, there's going to be a lot of pissed off people, myself included. The Mexican is going to be an angry Mexican.
Patrick Baldwin: Angrier.
Paul Giannamore: I do think it's a good idea to have some diversification across your portfolio.
Patrick Baldwin: A follow up question to the same person I was speaking with, is there a sweet spot you should be going for? You've talked about multiple expansion in the past. He's thinking, “Top-line revenue is probably the easiest way to think about it but are there bands of top-line revenue, which the multiples are maximized?” Selling a company at $5 million, $10 million, $20 million, $30 million, $50 million, and so on, you're like, “These deals in this range run a great process and get a great exit.”
Paul Giannamore: Unless you are a door-to-door business, the larger your business is, almost by definition, the scarcer it gets, and there's certainly some scarcity value. Would I rather have a business doing $20 million in revenue versus $40 million? No, I'd rather have the $40 million business. We don't see nearly as much multiple expansion across size in pest control than we do in other industries. What I mean by that is when you think about multiples expanding or transaction multiples increasing as a company gets larger, there's less of that than in other industries.
I've written commentaries in the past about multiple expansion and how it has changed over time. Now, there's far more multiple expansion in pest control today than there was historically. If we look back to 2005, Erlich was getting sold at 1.2 times revenue and 6-or-7-times trailing EBITDA. At the same time, a $2 million player right down the street was selling for 1.2 times revenue and 6- or 7-times EBITDA. Back then, we didn't see a whole lot but we had a very moribund, tired market or weren't a ton of acquirers. It was just not a particularly deep and active market and now it's changed.
We do see that multiple expansion. It tends to narrow out significantly once you get above $3 million or $4 million in revenue. You don't see a huge delta in transaction multiples between a $3 million, $4 million business, and, let's say, a $15 million business. You do see some, especially if that $15 million business is an ideal platform acquisition with great fundamentals.
Your best-case scenario is how you play the multiple expansion game through the whole arbitrage of going out and buying those million or sub-million-dollar businesses. if you can find sellers that are relatively ignorant as to what's going on in the day-to-day market, if you can buy a quality $1 million business at five times EBITDA, you should do that all day long.
Patrick Baldwin: You started your whole reply and said, “If this does not apply to door-to-door.” Everything you just said, how is it different for our door-to-door brethren?
Paul Giannamore: With the door-to-door business, it's extremely active on the doors. The larger it gets, it becomes riskier. We'll use some round numbers here. Let's say you've got a door-to-door business that's doing $100 million dollars in revenue and this year, they're going to grow at 40%, which is not unreasonable for door-to-door business. That means they're going to put on $40 million in new accounts. At the end of the summer, they'll have $40 million in new accounts. If half of those accounts disappear, you're going to lose 17% of your total revenue, not counting attrition on that $100 million dollar base. It is riskier. That's number one.
Number two is the larger a door-to-door business gets, the smaller the acquirer pool gets. For example, if I were to take Arrow Exterminators, they got to be doing $350 million or so per annum, they largely cover the Southeast, tip into the West a little bit there in Arizona. They are very old business, they are a very durable business, and they're not door-to-door at all. That's a business, and I haven't seen Emily since Hawaii, since PestWorld, so I don't know what they're doing revenue-wise.
Let's just pretend for a second that it's $350 million. It could be $250 million or it could be $400 million, I don't know. Let's pretend it's $350 million. Arrow is going to have a lot of potential suitors between Rentokil, Rollins, and Anticimex, all of those guys would be interested in it. There would be dozens of financial sponsors that would be interested in buying that business. If you take the same business that's doing door-to-door and it's growing at 40% a year or 30% a year adding on all those new accounts, you're not going to have the same level of interest. You're likely not going to have any interest from any of the strategic acquirers at that size.
The interest that you'll get from the financial sponsor community will be dramatically smaller because of the door-to-door component, not just from an attrition perspective with accounts but also because door-to-door businesses tend to run narrower margins. As rates go up, the immediacy of cash becomes more and more important and it becomes harder to lever that. Financing for those sorts of deals is much more difficult to come by than it was two years ago. There's a variety of different reasons why the larger you would take a door-to-door business, the more concern you'll have from a valuation perspective largely related to the acquisition pool.
Patrick Baldwin: For simplicity's sake, what's the litmus test on a door-to-door business when you say it's a door-to-door business? Is that a percentage of their new customers coming from door-to-door or, historically, it's been door-to-door, or every case you're selling it that's part of the story, it says, “This is a door-to-door.”
Paul Giannamore: When I think about a door-to-door business, I don't know that there's an international standard.
Patrick Baldwin: You can make it right now, Paul.
Paul Giannamore: I'll make the international standard. What defines a door-to-door business? When we sold Jared and Kyle’s company called Pointe, and they were doing $21 million in revenue, give or take, they had grown that business on the doors. Kyle was one of the best. From what I hear, he was a legend in the field. He was an awesome sales guy and they grew that business from door to door. It started way back in the day. Aaron Allred was a partner in Pointe in the Midwest.
As they started to think about a potential exit, they started to scale off the doors. The business was kicking off a lot of cash at very dense routes. They started to slow down on the doors to the point in which when we sold that business in early 2022, they were doing a little bit of door-to-door but a very tiny amount, a couple hundred thousand in account value per annum for the last three years prior to selling that business.
One metric would be the quantity of door-to-door. The other metric is what sort of investment did the company make in capabilities. If you'll recall, Jared was down at my place in Puerto Rico and one of my favorite discussions with the pest control guy was what we had with him when he talked about how the y built that. If you haven't watched that interview, you should watch it, it's on Potomac.tv, Jared Borg. They did some phenomenal things at that business with the use of data and data analytics, the management teams that they built out.
On the one hand, is the company knocking on the doors? That's one indicia of being a door-to-door company. The other one is are they just a sales machine? There's a huge difference between companies that are just sales machines versus companies that are buying or building a real pest control business. When I think about what's a door-to-door business, anyone that is building a company on the doors but ultimately wants to sell it, if you get off the doors for 2 to 3 years and you can demonstrate that business can grow organically, one of the things that strategic acquirers often will ask themselves is, “Am I buying a wasting asset? If we get off the doors, would that business continue to grow or will it not?”
Understanding how much business comes from inside sales and actual organic sales from online and digital, all of those different channels are instrumentalities of sales and marketing versus the doors, you can start pulling things away saying, “If I remove this, what's the growth rate? If I remove that, what's the growth rate?”
That's an important metric because the question is, “Am I buying a wasting astronaut?” You're always buying the future. What you said earlier that it's becoming door-to-doors normalized or becoming more forgiving, I don't know if that's necessarily the case as much as it is the fact that door-to-door companies themselves have changed and exit opportunities have driven those changes.
Here's what I mean by that. There was a time from the late ‘90s up until the late teens and early ‘20s where the only exit opportunities for door-to-door businesses were Terminix and, to a certain degree, Orkin. Orkin hadn't bought a door-to-door company for a decade plus. Back in May of 2015, they bought some EcoShield offices. That was back in the era where Orkin and Terminix looked at it and said, “We're just buying a bundle of accounts and what we're focused on is attrition rates.
How are these things retaining? We're going to buy these accounts. What are we going to buy these accounts for? How much are we going to pay for them up front? What's the take and pay structure going to look like?” That was it. Guys would build these door-to-door businesses and know that, in 2, 3, or 4 years, they're going to put $5 million in account value. They’re going to turn around and sell it. They're going to make $5 million or $6 million. When it's all said and done, between the profit they've taken from the business, take the cost and association, and all that sort of stuff, they're going to may have made $3 million or $4 million. That was a good run.
Back in the day, when they knew that was their only exit opportunity and there were only 1, 2, or maybe 3 requires, and they were never going to be able to turn it into anything above and beyond just the sale of a bundle of accounts, there was really no incentive for them to build out proper management teams and pay technicians more money and focus on lifestyle and culture and all sorts of other things.
As the market began to change, folks realized, “Wait a second, I can use door-to-door as a tool. I can invest in door-to-door but also invest in other aspects of my business.” Here we have it. You well know when you look across the market, you still have those door-to-door businesses, which are nothing more than sales machines, which will ultimately crumble and fall apart.
You also have the mediocre players, the middling players, and they’re not sure what they are. “Are we a real company? Are we just a sales organization? We're not quite sure. We'll figure it out. Maybe next year, we'll sell.” You also have guys that are like, “I'm going to use door-to-door specifically as a tool but I'm building a long-term sustainable asset and I need to focus on managerial capabilities.” I digress.
Patrick Baldwin: If I can put some of the things you've said together, in terms of this high growth strategy, those two companies at the top of us talking saying, “How much growth is too much?” You're saying that an acquirer is going to look at and normalize that growth rate. Right now, those companies are investing back into the business, top-line growth, and not a lot to the bottom line in general terms. They're sacrificing profit, if you will, for growth.
Paul Giannamore: I want to qualify that though. Let's stop you right here. My point was that, historically, the strategic acquirers would try to rationalize the growth rates to something that was more equivalent to what they could do in that particular market. A financial sponsor won't necessarily do that.
Patrick Baldwin: That makes sense. Their financial sponsors might be an entry acquisition and they're taking all the management with it and they're not trying to crunch it in. Companies are selling for multiples of EBITDA, higher multiple if they have a higher top-line growth. I'm following you and picking up what you put down here. Those top line growth rates might get normalized maybe for the strategic acquire and also kind of tying in the high growth rates that have door-to-door and they think an exit on the horizon 2 to 3 years out.
They've got to think about maybe focusing, like, “Top-line growth, we can pull that back. We need to put in a strong management structure. We need to think about cashflow. We don't have to be focused on door-to-door. In fact, we need to think about top-line growth rate that's not door-to-door to make us look like not such a door-to-door business and focus on customer retention.” Those last two years, more so than top-line growth, probably, maybe. Are you picking up what I'm putting down?
Paul Giannamore: Yeah. You're talking about almost like a dog's dinner objectives here of a variety of different things. I know you're not doing that on purpose because this is a little bit complex.
Patrick Baldwin: Dog’s dinner? I've heard dog’s breakfast from an Australian. Now, I've got dog’s dinner.
Paul Giannamore: There are a lot of different things you got going on. Door-to-door, when these guys want to ultimately sell, they need to focus on bottom line, they need to focus on customer attention, and they just got to scale off the doors, that's what they got to do. Push that aside. We'll talk to most people out there. You've got a $2 million business and you're growing it at 50% a year, that's great. You want to get some scale. You're not even thinking about acquirers. Don't worry about it. Focus on getting scale.
You're getting scale, you're building that revenue base, you're able to hire more people, hire more managers, and you're getting yourself a base. If your goal is to get it to a certain number, “I'm going to get to $5 million in revenue or $10 million in revenue and sell.” As you approach that number, it would behoove you to slowly decelerate your growth rate. At the end of the day, markets can't be timed and it's very difficult to do that as we know.
We also don't know what the prevailing equity markets and trade environment will look like whether investors are focused on long duration, which means cashflow in the future versus cashflow today. There are all those sorts of things that go into it. A simple way to look at this is say, “Does my business have the ability to generate a 25% adjusted EBITDA margin while still growing faster than my local market in nominal terms?”
For me, for a privately held company, you always want to start at your gross margin level. Your question should always be, “What do I need to do in order to get my gross margin up?” That is where this should start. It's hard to worry about EBITDA and a lot of folks focus on penny pinching in the SG&A cost structure. If you think about it, what is going to move the needle the most? What's going to move the needle the most and affect your bottom line the most is your gross margin.
There's a very small number of variables that fit into that and number one is your pricing, “How am I priced?” Higher, the better. Number two, “How dense are my routes?” Number three, “How am I retaining customers? Have I ever sat back and thought about customer retention program?” How are we going to thoughtfully and almost systematically save customers? Do we have a playbook for that? Do we know how we're talking to customers who are calling us up and they're pissed about something they want to cancel?
At the end of the day, those three factors affect gross margin the most. In a lot of ways, you can run your business without any sort of financial statements whatsoever. Those are forward-looking leading indicators. What your pricing is, your routing, and all those sorts of things are ultimately going to trail into your financial statement. I've gone off on a tangent here. I do think that targeting EBITDA is the most important thing that you can do as you start to think about a sale, targeting that cashflow. You could have a successful sale at a 20% EBITDA margin.
In a perfect world, you'd want to be 25%. You were about to say that the strategic acquirers are certainly giving haircuts to revenue growth rates based upon what they can do themselves. Historically, strategic acquirers would give targets margin haircuts based on what they can do themselves. If you run a 30% EBITDA margin and I'm Rentokil and I’m a 19.5% EBITDA margin in that area, that 30% is not going to last under my regime.
The strategics, in a lot of ways, will still look at that the same way today. The financial sponsors will be less concerned about that and they'll ask the smart questions, like, “How are these guys doing something somebody else isn't?” If you've got a very defensible, durable explanation to that, you're going to find yourself slightly more wealthy when you sell.
Patrick Baldwin: You make me sound smart when you summarize that like you did. Thanks, Paul. As you were answering that, I was thinking it's been four years of The Buzz and I'm thinking probably this is something you said years ago. What you just said was growth rate by the region, by the area. Let's say Terminix is growing at 10% year over year in the greater Texas area. You previously had said you need to be at least double their top-line growth rate. You need to be at 20% year over year. Does that still hold true?
Paul Giannamore: You want to, at the end of the day, have a good sense for what your local market or your region is growing at. If you're in the state of Massachusetts, Massachusetts has been blessed with Goldilocks, weather, climates, and all sorts of other stuff. I'm making this up, I have no idea. If Mass is perfect but Illinois is a train wreck in slow motion, it's super wet, super cold, and all sorts of problems, which is pretty normal for that area of the country, you shouldn't necessarily compare your revenue growth rates to Illinois or to National.
Although, here's the thing, I say that but I have to be careful now of what I say on The Buzz because I know there are going to be some dudes out there taking notes saying, “I got to figure out what my local growth rate is. What's my market growing at? I can't compare it to a national average. I can't do this and I can't do that.” I don't know that I would worry so much about that. The older I get, the more I think about if you disregard what everyone else is doing and you try to make incremental improvements on what you are doing and also taking into consideration Mother Nature can be a real bitch and we're in this industry where that does come into play.
If all else being equal, weather conditions and stuff, if you can quarter over quarter and year over year make incremental improvements in your growth rates and your gross margins, that's where you can make some wins. Not only are you making your business more valuable, you're comparing it to metrics that you fully understand. They're yours, you understand them better than anyone, and you know what they are. You can get wins in that way. Sometimes, when everyone's looking around comparing themselves to the Joneses, it becomes a lonely world. The guys that can focus on benchmarking against themselves is a powerful way to do it.
Patrick Baldwin: Makes sense. It's funny, Paul, what you said about, “You're out there. Be careful. You're taking notes about what you hear on The Buzz.” There are a lot of universal general answers that are given. I love what you do with the FRAXN clients that are also talking to you all at Potomac. You're drilling down on these global answers and then saying, “Specifically, for your area, your territory, your market, here's what pricing should look like, here's what the route density should look like, and so on.”
Potomac is 100% sell-side as far as I know or maybe 99% sell side. You're giving a lot of great buy side advice. I know you have some buy side masterclass coming out here shortly. There was a client that called me who listened to The Buzz and says, “I'm looking at doing this deal. I'm already servicing this area, it's a couple hundred thousand dollars. Help me out. How should I offer it? What should I buy it at?”
I said, “I've got a great answer for you if you want to get specific about your market, that market, and what you need to do with your business. Let me get you connected to the Mexican.” It hurt me. I died a little bit inside recommending that someone talk to the Mexican and that the Mexican is smart. I know that the Mexican could provide a lot of value for buy side and you all are doing that for free as far as I know.
Paul Giannamore: We probably did 50 buy side transactions. We don't do them per se. It's not us doing them, it's our clients.
Patrick Baldwin: My eyebrows went up. I was like, “I don't think you do buy side transactions.”
Paul Giannamore: We don't. I'll give you an example. We had a client that engaged us some years ago and he was getting prepped for a sale. He was an ideal platform acquisition for a private equity firm. He had a lot of contacts out in the market with some smaller players. He said, “Do you think I can get some arbitrage on this?” I said, “You're the type of business that's going to sell for five times revenue.” He said, “Okay. I can go out and buy these things at 1X or less and turn around and sell it at 5X. I'll be able to print tens of millions of dollars.”
I said, “If you get the deals done. That's the theory here.” He started talking to folks. He would sit down with a $500,000 guy and he wants to buy them. Because he was our client, he would say, “Here's a request list.” He would give the request list to the target and say, “Give me X, Y, and Z tax returns, whatever you can give me.” His deal team here at Potomac would put together the financial model and structure of the deal for him. We give LOIs and all sorts of stuff. We don't do legal work. That's just one of the benefits of being a Potomac client where he had a buy side team on tap and we don't charge for that.
We don't charge for that because I don't have time to do 50 $500,000 deals in six months. It’s not how I get paid. We do have a massive team. We've got 6 or 7 transaction services folks from Moss Adams, Deloitte Touche, and Ernst & Young. We got all these guys on staff so we're able to do DD, cash proof analysis, and we're able to do all of those sorts of things and we do it to build value and build the relationship with our clients. You're going to meet one of these guys down here, Patrick. I'll be doing a little interview with him on Potomac TV and I'll talk to him about buy side M&A. We do a lot of that.
Probably, at least a dozen FRAXN clients have reached out to us and we are doing financial models for them. The team is saying, “I've got a target that does $300,000, $200,000, or $1 million. Can you guys put together a model? Tell me what you think this is worth to me. Tell me how you think I should structure it and how can I get it financed and what should I do?” You know what the Mexican’s feelings on take and borrowing money to do deals. You've heard what he says, “Don't do it. Make the seller pay for it.”
The best value that I could help these guys build their companies is to go out there and buy businesses on the absolute cheap. create a ton of value right out of the gate. If you buy a $1 million business, on the day you sign that purchase agreement and write that check, you literally might create $500,000, $1 million, or $2 million in value out of thin air on the day that you do that deal. You've got to do this right. You've got to put together a formal M&A program. You got to get your ducks in a row. You got to understand how this works.
We talked to Chase. Chase was one of the guys that when he was looking at that door-to-door business, I even forgot he mentioned it on the episode, I completely forgot he tracked me down for us to take a look at the numbers there and let him know what we thought. I love doing it for FRAXN clients, I love doing it for Potomac clients, and we will continue to do that. It's one of the services that it's funny, for me, because I try to kill it for our sell side clients. I want to move the needle every time and do eye-watering deals. When we're on the buy side, it's all about figuring out how we do the exact opposite. For us, it's been great. We don't do buy side work for private equity firms. We don't do buy side work for strategics. I don't need to help those guys. I'll let the other folks out there in the industry sell their souls to the big players.
For me, it's the privately held guys, I want to kill it for them on the sell side. Those guys, I want to go out and do deals and I'm going to help them buy stuff on the super cheap. To your point, we do have some videos and some classes that we put together. I've got to determine what I'm going to do. I'm not sure if I'm going to put all of that on Potomac TV or if I'm just going to put some of that on Potomac TV and just do the rest of it in-house. That'd be one of the things we'll talk about here in Puerto Rico.
Patrick Baldwin: That's awesome. We've got the Ask Me Anything coming up for our FRAXN clients that are Potomac clients. I'll be headed down to PR. A lot in store.
Paul Giannamore: That's right. Dylan is going to begin to release some of the talks that I did at AzPPO. I did one on the sell side process. The other one somewhat turned into almost like an Ask Me Anything. These guys had me speaking at 8:00 in the morning both days. I'm not a particularly great morning person so we'll see how these turned out.
Patrick Baldwin: I appreciate it, Paul. Until next episode.
Paul Giannamore: Until next episode, Fat Pat.
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