Paul Giannamore: It's all about being able to auction your business off to the largest acquisition universe.
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Paul Giannamore: Welcome back, Fat Pat.
Patrick Baldwin: I was going to welcome you back first. I'm back from Indiana, Middle of Amish Country cornfields. I was like for Pauly Shore if you remember that old Son in Law movie.
Paul Giannamore: I certainly do.
Patrick Baldwin: You do?
Paul Giannamore: I know who Pauly Shore is, I remember him from MTV back in the ‘90s.
Patrick Baldwin: Son in Law, when you have time. I bet the Mexican would love that one, it talks about chicken a lot. Your trip was probably more exciting than mine.
Paul Giannamore: I was up in New York City with a Mexican and we stopped by an Indian restaurant because, as you know, I can't get Indian here in Puerto Rico. We had two Indian meals while we were there. The first one, when it came time to take the Mexican's order, I don't think he's ever eaten Indian food, he looked at the menu, and the menu was on iPads and they had photographs of food so he saw the garlic naan and he ordered that as his dinner. He's like, “I'll take a garlic naan, please.” You know what that is, right?
Patrick Baldwin: I don't know what that is.
Paul Giannamore: It's a round Indian bread. It's a side to whatever you eat. Of course, the waiter said, “That's a piece of bread. I don't think that's dinner for you.” He ordered something else. The next day, we had dinner with a client and we went back to an Indian restaurant, a different one. I ordered my food, I ordered drinks, and I ordered sparkling water and mango lassi. Do you know what that is?
Patrick Baldwin: I don't know what that is.
Paul Giannamore: Mango lassi is just yogurt and mango, there's no alcohol. Of course, the Mexican saw what I had at the Indian restaurant the other day and he said, “I'm going to have to follow his lead,” so he did that. The look on his face when he took a sip of the mango lassi was priceless because there was no alcohol in it so he scowled and said, “There's no alcohol in this,” and I said, “No, there's not.” PB, on Potomac TV videos, I'm always drinking scotch or bourbon. As you may know, I don't drink a whole lot offset. I'm not a big drinker. It's not often that I order alcohol and it's not often that the Mexican doesn't.
Patrick Baldwin: Did he send it back?
Paul Giannamore: No, he winced and drank it, and then, of course, he doubled down on something more tasty in his mind.
Patrick Baldwin: A good old Mexican. The AAC Distributing put on their wildlife conference and Seth spoke at it. That is the best group of people, Tony Siri, his wife, Randi, and Jack Searles are an incredible team. They are loved, an incredible group of people. I've never been to a conference where there's a fireworks show before. It wasn't like, “This is awesome.” Hearing Tony's stories and the fireworks. I love them, they're awesome. Thanks for having me out there and Seth out there. It was great.
Paul Giannamore: What did Seth talk about?
Patrick Baldwin: Seth ended up picking up a second talk about putting a CEO in a succession plan. What it was was Kyle Scappaticci was going to do that, they had a family emergency, and Seth had helped them figure that out a while back. Seth was easily able to step in and talk about putting a CEO in place in your business. You could throw a topic at Seth and he'll knock it out of the park. Speaking of you out gallivanting and making deals happen out in New York and wherever you were, I was asking if you went and saw, while it's a little ways away, New Jersey, DiGiulio boys.
Paul Giannamore: I didn't go through the drive-thru state this time, the armpit of America, New Jersey. We announced the transaction. DiGiulio brothers sold Total Home Services and Last Bite. They have a pest control business and a mosquito control business. They grew that to one of the larger mosquito control businesses in the country all the while being full-time teachers. These guys were full-time teachers and had 100-some-odd employees. They go to school and then after school, they go into the office. It’s an incredible story. One of these days, we'll get those guys on The Buzz because it's interesting. I still rack my brain trying to figure out how they pulled that off.
Patrick Baldwin: Full-time teaching.
Paul Giannamore: Yeah. These guys are full-time teachers and they grew a business from nothing to quite a decent-sized operation.
Patrick Baldwin: I'd love to hear their story.
Paul Giannamore: I don't remember when this one closed.
Patrick Baldwin: At least over a year ago, right?
Paul Giannamore: Yeah. What happens sometimes is, in a pest control business, if you have a material customer that needs to sign a contract, particularly when you have government contracts, sometimes they're difficult to sign. The contracts say they're not assignable. You've got to work through it and get that contract signed by the acquirer.
In those particular cases, we delay announcements until all that stuff is done. I don't remember when this one closed but that's finalized. We did National Exterminators down in Florida with Anticimex. There are constant delays in the announcements of the PE firms. The three transactions that we closed over the last couple of months won't be announced, they're keeping it quiet. I don't think they'll announce those things until ultimately they get up a little bit more scale.
Patrick Baldwin: Paul, I've got a couple of questions. I know it's we've got College football and Chick-fil-A all on the same day. It's a big day for me over here. Two questions and one right off the back of episode 145 here is, “I love The Buzz. Episode 145 on mergers was great. Can you help provide some direction going the other way? What about a spinoff? I have a $7 million business, half residential, and half commercial. I would say I'm a natural leader for residential and I have a longstanding manager for my commercial side, he's a great leader. Would this be a good opportunity to stake him in a new business and split off a commercial-only sister company or are spinoffs best left for larger businesses?”
Paul Giannamore: That's a great question. It sounds to me maybe from a branding perspective. Did you understand that to be the question meaning that if his $7 million business is all under XYZ pest control and he's doing commercial and residential, is the question, “Do I spin off commercial and have it branded separately?”
Patrick Baldwin: I think about branding, naturally where I went, and it's funny thinking about it, I was thinking about DiGiulio, you've got Last Bite and Total Home, the same company, two different brands that are under the same business.
Paul Giannamore: If you thought it would be better to brand commercial separately, why spin it off and do a different entity? Why not just brand commercial services as commercial? You can call it whatever you want. It could be the same company. You can have two lines of service, a residential line or a commercial line, and commercial can be branded separately.
Patrick Baldwin: Terminix did that and then they didn't do it and they undid it.
Paul Giannamore: There are a lot of companies that do that and you see it a lot. in New York City, you’ll sometimes have companies that are union shops and then non-union, and those are typically separate entities and different names, you couldn't keep them in the same entity. Sometimes ABC pest control is a union shop and XYZ is a non-union shop and they keep them separate because there are certain jobs that you need to be union to do.
I would say that's more of a branding issue than it is a spin-off into a separate entity, a separate business issue, quite frankly. Now there could be some practical reasons to do that. Let's say that you were planning on selling the commercial business sooner. This guy wants to run residential for the next fifteen years but he's like, “If I can get some cash from my commercial, maybe setting it up in a new entity with an entirely separate brand makes it extremely modular and easier to sell”. I don't see any practical purpose for doing it now with the information that was provided in that question.
Patrick Baldwin: Does it make a difference in the size of the business?
Paul Giannamore: How so?
Patrick Baldwin: I’m thinking about the larger businesses. We saw Terminix do that. I was earlier thinking about Terminix ServiceMaster, they spun off ServiceMaster, the brand’s business. Aramark spun off the textile uniform rental side of the business with Kim Scott. I don't know if the larger businesses make sense if maybe it's publicly traded or there's something that's about to happen or they're preparing for something to happen. Terminix, of course, we know that deal went through. I don't know if larger businesses make sense because they have enough capital and resources for branding to set up businesses however they want, their own brands. Smaller businesses just don't have the resources to do it well.
Paul Giannamore: If you look at the purpose of Terminix, Terminix effectively spun off Front Door and they took that business public. You saw the ServiceMaster, back in 2019, sell ServiceMaster brands. That was an attempt to create a pure-play pest control business. They were getting rid of things that they believed, at that point in time, Terminix was the largest portfolio company and ServiceMaster was spinning off or otherwise selling assets that weren't core to their business.
The reason why they were doing that is they wanted to trade more like a pure-play pest control business than a conglomerate. That wasn't so much from a capabilities perspective or customer-facing perspective. That was purely a corporate strategy of divesting non-core businesses so that they could trade more like a pure-play pest control business. You wouldn't necessarily have the same considerations in a pest control company on the private side unless, of course, you have businesses that are non-pest control that are baked into your pest control company and then you might otherwise want to sell them off.
Mike Rogers, for example, had Killingsworth Environmental. Under Killingsworth, he had plumbing and HVAC. When we sold Killingsworth to Anticimex as a platform, as part of that transaction, we sold off the HVAC business. It was not simultaneously, it was shortly thereafter. Mike could have taken those businesses and entirely separated them. They were separate entities, those businesses, but they were all operating under the Killingsworth brand umbrella.
His HVAC business was called Comfort Air but it was branded under Killingsworth but it had its own separate brand name within Killingsworth. The same as Modern had a residential division up in Maine. They became an Anticimex portfolio company but Modern had Modern Pest services. Their commercial division was Ecocare. They branded that separately. Of course, Anticimex wanted both, residential and commercial. Not many strategics will want to buy Killingsworth and take the plumbing and HVAC division as well.
Patrick Baldwin: If you could rewind time and speak to Mike Rogers and say, “If you brand it separately, would you have done Comfort Air differently going into that transaction knowing that there was an exit on the horizon?”
Paul Giannamore: That's a good question. What I've done differently is make it completely standalone, making it stand on its own brand.
Patrick Baldwin: How did it complicate that transaction or transactions?
Paul Giannamore: That was a division of Killingsworth so there were a lot of shared resources. The back office, billing, AP, customer service, and all of that stuff was baked into one. While it did operate autonomously, Mike built those ancillary businesses up, cross-selling to his pest control customers. Would it have been easier? It just happened to work out that way. Every one of the other acquirers would have done the same thing. Had Rentokil bought it or ServiceMaster bought it, they would have disposed of the HVAC division, for sure.
Patrick Baldwin: You were still part of the HVAC Comfort Air selling off, weren't you?
Paul Giannamore: Yeah.
Patrick Baldwin: How much time was between selling the pest control to Anticimex and selling off the HVAC? I didn't even know who purchased the HVAC.
Paul Giannamore: The HVAC was super easy. The Killingsworth was far more complicated. That's one of those things that worked out. Everything works out for Mike Rogers for some reason and that was another example of one of those things that worked out for him. We live in an environment where private equity firms are buying residential services businesses that are integrated. It's less of a concern now than it was.
We did Killingsworth in 2018 and that was back when financial sponsors were not paying nearly as much as strategics. We did bring financial sponsors into that mix and none of their bids were appropriate and ultimately went to Anticimex. It's much less of a problem now than it was because most of these transactions are financial sponsor deals, private equity deals, and they have the ability to be a lot more flexible with integrated home services versus just pure-play past. Whereas Anticimex is going to want to buy pest control.
Patrick Baldwin: Did Anticimex buy Comfort Air and then sell it off?
Paul Giannamore: They bought the whole thing and then immediately turned around. While we were doing that transaction, we were setting up the buyers for the HVAC business while AX was in the process of acquiring Killingsworth.
Patrick Baldwin: Now, there are more secrets I've got to uncover at some point. Thanks, Paul. What you've said in the past is if you've got a good employee, you vest them in another business.
Paul Giannamore: Patrick, sometimes you get guys that you know are going to go out and do this on their own. Sometimes it makes sense to staking them.
Patrick Baldwin: I had that conversation in AAC. Of course, franchising is an often brought up topic. I probably would have gone a different route. Licensing is an alternative but, in this case, even staking someone. If it's a different geography, a different brand line, or a service line, putting that great person, keeping them in your midst, still rewarding them and yourself, maintaining that relationship, and working together. In this case, you're splitting off a separate division. You've already got a book of business for them to run with, which I love. I love this question and this idea.
Paul Giannamore: We've seen this happen across a variety of industries where you'll have somebody who wants to go out on their own. Instead of them starting from scratch, you can get behind them and stake them and they can license the brand and be in a different geography. They can run under your brand or they can brand their business entirely separately but now you're a shareholder in that.
Patrick Baldwin: It works for me.
Paul Giannamore: Two transactions I did, that was already the case where somebody had staked somebody else out in the market. A former employee staked them, invested in their business, and now owns a portion of that and has sold their businesses. That creates complications from a non-compete perspective. Depending upon where they're operating, that could cause some complications. Obviously. an acquirer worries that if Fat Pat, you're a partner with me, you sell your business and you're in Waco and I'm up in Dallas, it becomes interesting now for me to say, “Terminix owns Fat Pat's business. Now I can go down and poach off those clients.” It does create complications.
Patrick Baldwin: Are there any workarounds to that?
Paul Giannamore: There's going to be a lot of pressure from acquirers for you to divest in your ownership of me. You could do what politicians and Fed boards do. You can set up a blind trust. There are a lot of different things that you can do to get these guys somewhat comfortable. Some acquirers are more comfortable with that than others. One potential remedy is a liquidated damages clause where if they poach customers, damages are already determined, and a methodology for determining whether or not they've been solicited is documented.
An acquirer has a right of first refusal on my business now, right? You've sold yours, your partner, and mine, but you've got to convince me to give that acquirer a right of first refusal. If you stake somebody who's operating in your geography, the shareholder agreement needs to provide for the fact that if you, Fat Pat, are investing in my business in Dallas and you're down in Waco, in that shareholder agreement, you've got to either have the right to drag them along. You've got drag-along rights and it gets packaged up.
The alternative to that would be having a right of first refusal that you can transfer to an acquirer. That makes some acquirers happy but it doesn't make all of them happy. They might buck and say, “A roofer doesn't do much for us.” I have seen some of them be content with that. When you stake somebody, if anyone's going to go out and do this, you have to run a simulation in your mind of all the various different things that could happen with your own business.
What happens if you find the ideal acquirer who wants to pay a lot of money and is not comfortable with you owning a portion of that business? You might find yourself in a position where you have to divest that portion and there better be a mechanism that's easy to execute and that you're not arguing with me in perpetuity as to the value of that stake.
Patrick Baldwin: My wheels are turning and you can see it. Run me through this again.
Paul Giannamore: You're selling your business and you've staked me. Let's say that you own 45% of my business. For all intents and purposes, we're in the same market because non-competes tend to be statewide, not always. Sometimes the non-compete can be curtailed to the geography in which your business operates. You have to realize that certain acquirers just won't accept that. It's all about being able to auction your business off to the largest acquisition universe.
Let's say you're a pure-play past, you got ten acquirers you can bring in, and they're like, “This is great.” Half of them are going to want to get you to sign a statewide non-compete. Now you're a partner in my Dallas business and you own 45% of it. You're effectively removing half of your buyer universe because you're going to have a problem because you're not going to be able to sign a statewide non-compete, you'll be an immediate breach.
You have to have thought through the remedies for this already. There's a laundry list of potential remedies for this situation. If five of those acquirers are like, “No, I need a statewide non-compete,” and you're like, “I've got a ROFR, right of first refusal, baked into this.” One of them might say, “That works for me,” and four of them saying, “I don't care.” You go down the list.
In our shareholder agreement, did you say, “In consideration, Paul, for me staking you, I don't intend to sell my business for X number of years. If I decide to sell it for whatever reason, I can drag you along.” Even though I am a minority partner in your business, if I sell my business, I can drag you into a sale and you have to sell. That's another way to do it.
Patrick Baldwin: Both would have to go at the same time.
Paul Giannamore: Correct.
Patrick Baldwin: These are roughly an hour and a half apart.
Paul Giannamore: To some acquirers, it would be considered competitive. This is probably too long of a discussion for this Buzz episode but we can certainly get into those considerations if there are people out there who are in the business of licensing and otherwise staking other individuals in their market. I know there's a lot but it's the minority of folks that chat with us.
Patrick Baldwin: It's interesting looking at this relatively simple question but definitely some complicated implications that arise out of spinning off a business, a branch, or a service line. I like it.
Paul Giannamore: It happens.
Patrick Baldwin: Of course, I can complicate things. I got one more for you. “Paul, I'm roughly 5 to 10 years out from selling. You've asked and answered commercial versus residential but I'm open to hearing about that if you've seen new trends.” That’s one part of this question. “What about urban versus suburban versus rural? I'm in a suburb of a major metro area and don't know if I should expand out where there's less competition or press into the city where I'd be a small fish in a big pond. I imagine I'd still be a small fish before selling.”
Paul Giannamore: A lot of the companies that I have seen historically that are suburban players, which is the majority, that press into a city, you're going probably from largely residential to commercial. If it's a major metro area, it is cities that tend to be urban pest control, and that's a different capability. I can think of a half dozen companies over the years that have bought urban pest control businesses, they're based out in the suburbs, and they say, “We got to get into Philly,” for example.
They buy a small pest control business doing commercial in the city and then ultimately turn around and sell it because it wasn't the right decision. It's less about competition and more about what business are you operating. I was in New York and I dealt with a lot of urban New York pest control businesses that are exclusively commercial, they don't do a single dollar a year in residential. They're not the guys that are going to be going out into the suburbs of New York. They're not going to be going out in Westchester and getting it done.
In fact, there are companies that are based outside of the city that go into the city and do commercial. If you're out in the suburbs and you're doing commercial, it's logical for you to extend that into an urban area. In fact, the question is, why haven't you done that? That's where there's dense commercial work. If you're out in the suburbs and you're a mixed player, resi and commercial, and you tend to have a higher portfolio on the residential side, you might be better served by doubling down on your residential revenue out in the suburbs.
Patrick Baldwin: What I did not hear you say was the move towards rural. Here's me coming out of Amish country where it's a bunch of cornfields and not a lot of people and a lot of land, a lot of windshield time. Is there any desire from acquirers to be buying rural-based businesses?
Paul Giannamore: That happens all the time but that's not an area where you should focus your attention. You have to do the math on windshield time, it does impact your gross margins. You're not going to be able to go out in a rural area and say, “I've got a lot more fuel costs and a lot more time on the road so I need to be able to charge more.” If you can pull that off, that's great, but that's not the case.
If you're a suburban player, you focus on the suburbs, you probably don't go into the city, and you probably don't spend much time going out in the rural areas. Rural companies tend to have lower gross margins, which makes logical sense because you're driving. It’s not for nothing though. Depending on what market you're in, it could be complicated being in the suburbs with traffic patterns. It's like, “I'm not driving twenty miles. I'm driving two miles but it's taking me as long as if I were driving twenty miles out in the rural areas.” There's probably some investigation on your end to determine what that looks like.
Patrick Baldwin: If you're in suburban, either double down on suburban or if you're commercial heavy and suburban, why aren't you in the urban market doing commercial?
Paul Giannamore: My default position is if you're in a suburban area unless you can honestly look at yourself in the mirror and say, “We have massive market share and there's no more penetration here,” unless you can do that, your default position is like, “We need to stay in our finite geography and build market share and build density.” That's the default position. You could say, “The suburbs I'm in are particularly competitive.” There are some areas that aren't as competitive and you've got to do that analysis. Again, the default argument is always to stay in your market, getting a larger market share, and getting more route density.
Patrick Baldwin: When you're having conversations with the acquirers, what does that look like? Does this come up often where it's, “This is a dense market,” or, urban market versus, “This is a dense suburban market,” and they tend to favor one over the other?
Paul Giannamore: Acquirers come in all sorts of flavors. One analysis that they often do on any acquisition target, at least a material one, is, “What market share does this company have in its market?”
That's a primary question that they try to determine. Market share is an important function in the value equation when acquirers are looking at a variety of different potential acquisition targets.
You always want to err on the side of having a substantial market share in your market. Depending upon the size of your market, if you have 3 million people in that suburb, you might have a 2% or 1% market share. The population is 182,000, you might have a 20% market share. Understanding those dynamics, it's relative market share to everyone else.
Patrick Baldwin: That makes sense.
Paul Giannamore: When you think about market share, people are sometimes confused by that. Let's say that I have a population of 3 million and I have 10, 000 customers, what's my market share? Is your market share your number of customers over the total population of a market or are my customers over the total addressable market, which is not 3 million people? It might be 750,000 or 600,000.
Patrick Baldwin: Of the people who have pest control, how many of my servicing?
Paul Giannamore: Exactly. That’s a much simpler way to say what I was attempting to say.
Patrick Baldwin: You got ahead of me on my question here because I was heading here. What is the answer? What I'm hearing you say is if it's relative to the competitors, it's not the 3 million, it's the 750,000 that are getting pest control.
Paul Giannamore: Correct. That's exactly right.
Patrick Baldwin: You've got to take into consideration also commercial businesses so not just households, but also commercial. Is it dollars spent in a market and how many dollars am I pulling out?
Paul Giannamore: How this stuff is estimated is when you're looking at market share in a market, we'll pick a county, Montgomery County, Pennsylvania. We've got fifteen pest control companies servicing that market and you try to extrapolate based on the number of pest control companies and the number of technicians each of these customers have and you try to determine what that current market looks like. One of the ways they do this is to determine, “What's that pest control market in that county look like?” It's $30 million a year and you're doing $3 million in that market, you've got a 10% market share, that's some rough math on that.
Patrick Baldwin: Is there a good data source for that?
Paul Giannamore: There are some decent data sources for that. A lot of it, though, comes down to research. If you want to get this right, you can't just get online and click a few buttons and say, “Here it is.” You've got to do the hard work. There are ways to pull this stuff up. A lot of states, depending on the jurisdiction, will publish how many licensed technicians a company has and you can back into that quickly. You know that a pest control company has 10 employees, you can assume that if there are 10 employees, 7 of them might be technicians.
If they're doing between $150,000 and $200,000 per annum in revenue, now we know that XYZ pest control company is doing so much in revenue and we try to determine what markets they're operating in. You have to have a lot of local knowledge. You, being in Waco, know who the other players are, you probably know the relative size of their firms and you also probably know their service footprint. If you have some local knowledge combined with the ability to pull up some data, you can figure this stuff out. It's always estimations but we're always talking about estimated market share.
Patrick Baldwin: I’m curious if you're doing that homework and research on your side or if the acquirers are coming in with theirs or if you're both doing it.
Paul Giannamore: We always do it. The acquirers do it as well but we always do it. It's an important data point. Sellers are notoriously wrong at these calculations. There's probably a cognitive bias there. Everyone always thinks their market share is bigger than what it is. They tend to ignore certain data points. If you're honest with yourself and you want to understand, “How do I grow? How do I increase penetration? How do I increase market share?” I wouldn't spend a ton of time doing this but it's an interesting exercise to try to map out what the competitive landscape looks like in your particular market and where you need to focus your resources going forward in order to get the best bang from your buck in growing the firm.
Patrick Baldwin: We've had a large cable company come into us for advertising and this would have been 2013 or 2014. They told us that we were between 30% and 35% of the market. It was far enough out of the water to know that it was way overestimated. We were not, at that time, a third of the market. I know when it's wrong. A quick exercise is how many trucks are on the road. We thought about Orkin and Terminix and the locals. We are not a third of the trucks on the road. A little back of the napkin for us. What about the other part of this question that asked about trends, resi and commercial? Have you seen a change over that?
Paul Giannamore: Not really. Everyone was extremely concerned with the pandemic and that would have a substantially negative impact on commercial. Ultimately, from a long-term trend perspective, it probably will. A lot of the New York operators now on the commercial side have exceeded pre-pandemic commercial revenue targets.
There are still a lot of vacant offices in New York City and they're attempting to convert those into residential properties, which is going to be extremely difficult considering all those buildings are built for commercial. The way elevators are laid out and plumbing, they're not set up for residential. I don't have any data on commercial versus residential trends myself.
Patrick Baldwin: I've got one more for you. This is my question. We've seen strikes lately. You mentioned unions. These are not related to residential commercial services but we've got the writers out striking in Hollywood. We've got three major auto workers striking.
Paul Giannamore: UAW.
Patrick Baldwin: Knowing that you come from your degree in union busting, is that what you call it?
Paul Giannamore: Yes, industrial labor relations, that's right.
Patrick Baldwin: Does that tell you which way the economy is going or is that a leading indicator of something else?
Paul Giannamore: One of the things that pops out to me is labor inflation. We're effectively in the US in somewhat of a stagflationary environment. We got a lot of inflation data that came out that shows that inflation has surprised the upside, both on the consumer side as well as the PPI or their producer side. We got an upside surprise. We've got growth slowing.
If you remove the tremendous amount of government spending from GDP but look at the real economy, we've got growth slowing and we've got inflation remaining above trend. That's somewhat of a stagflationary environment. That's a phenomenal environment for labor militancy. You've got costs going up and productivity levels for flat. You've got growth slowing.
The Fed always has to keep its eye on that wage growth spiral as it impacts prices. We're going to be stuck in this position for quite some time. We see it, prices are going up. Now, of course, we've got the strategic petroleum reserve. The war on administration in Washington has effectively emptied that out. The last inventory numbers I saw were at 40%.
The strategic petroleum reserve is low and we've got Saudi cutting production. WTI was $90 a barrel. It closed out above $90 for the first time since December 2022. That is going to impact prices at the pump and impact prices everywhere. This whole inflation story is not done yet. As we've talked about on The Buzz before, it'll be stickier than many folks in the administration hope.
Patrick Baldwin: The union strikes you see as a byproduct of this inflationary environment?
Paul Giannamore: Absolutely, I do. If you think about labor strife over the centuries, a lot of this comes in inflationary times like this, prices are going up, and workers want cost of labor adjustments. One thing that fuels this stuff is tight labor markets and we still have a tight labor market so it gives leverage to the cartel. When I say the cartel, I'm talking about organized labor and concerted activity. It gives unions more power and it feeds into the price wage spiral.
We'll probably see more of this and we're starting to see concerted activity in the pest control industry. I can think of a couple of companies that have recently been organized, these are residential companies where you've got local unions popping in, and organizing technicians saying, “You should be part of the union. This is what we can do for you.” We've dealt with unions for a long time in New York City but it's weird to see concerted activity or unionization in suburban areas with residential pest control companies but we're seeing that now.
It's a proliferation of the organizing activity in the Starbucks of the world and all these other different types of things. We'll start to see more organization. If you look over the last 45 years, union activity or organization in the US has declined substantially as we've moved away from a manufacturing economy and we ship that stuff overseas and become more of a service economy and more of a knowledge worker economy and so on and so forth.
You see less union activity and it's bizarre to see it so much in an industry like pest control. Due to my background, I get a lot of labor calls, particularly when unions are popping up. I remember one guy called and said, “There are union organizers that are hitting up my technicians.” The Mexican happened to be in my office, he was on the box, and he's like, “You cracked those guys in the head. You break their kneecaps.”
There are important ways of dealing with this because under the National Labor Relations Act, you have what's called anti-union animus, and you could add up with a National Labor Relations Board claim. There are a lot of different things that you have to acquaint yourself with. If union organizers show up at your shop, the first thing that you should do is contact a labor attorney immediately. Another thing to do to protect yourself is to make sure you pay your people right.
I had drinks with Andy Klein in New York and, as you know, Andy used to own Assured Environments. We were talking about labor activity. Assured was unionized. These guys operate in a city where if you want certain jobs, you've got to be a union shop, that's just the way it works there. For some of the companies out here that are out in the suburbs that are doing resi work, one of the first questions I ask is, “What are you paying your guys?”
The better the work environment and the more money they get paid, the less likely they are unionized. Organizers use data. The good ones come in armed with a lot of prevailing wage data in order to talk to technicians and say, “You're getting paid $12 an hour. Everyone else is getting $18 an hour. This company here is paying $18. I talked to this guy over here, he's getting $19 at this shop. Why are you getting $12 an hour?” There's a lot of work to be done. “Here's the benefit of joining our union and we can handle all this for you.”
Guys start talking and they're like, “I get $12 an hour and they're telling us we can get $20. Maybe let's vote in this union.” Once they're in, almost impossible to get them out. When you talk about union activity outside of New York City, it is difficult to sell a unionized pest control business. Now, if I'm an acquirer and I run a non-union shop, there are things that I can do. Rollins bought Waltham Services. Terminix bought Assured Environments. Those were union shops. It becomes difficult to isolate them.
The last thing you want to do is go out and buy a $10 million business, a resi business that's organized. Now you do $1 billion in revenue and you buy this and now all of a sudden, the union guys are talking to your other offices, and next thing you know, your entire organization is unionized. If you were to be unionized would make it difficult for you to exit.
You brought up unions, I don't think that this is a threat for most people out there. I don't think this is something that the average owner needs to worry about or think about but it's happening now more than it has in decades. It's something to at least be on the lookout for. If you start to see organizers show up at your shop, you immediately gauge, counsel, and you start to focus on some of the things that you can do on the front end to smite that activity.
Patrick Baldwin: Are they required to announce themselves or disclose themselves as a union rep when they show up at your place?
Paul Giannamore: Nope.
Patrick Baldwin: There's a lot of manufacturing in Waco. We’ve got M&M’s – Mars. There's Timco, the Street Sweepers, and all this. Someone I was speaking with said where he works, if you mention unionizing, you're immediately fired on the spot. I don't know if that's legal. That was my first thought, “I don't know if they can terminate you if you mention forming a union.”
Paul Giannamore: I don't want to give labor advice on here.
Patrick Baldwin: Here we go. Give me your disclaimer, Paul.
Paul Giannamore: You can read the National Labor Relations Act. It's been a long time since I've consulted it but it's section four that might talk about anti-union animus and what an employer can and cannot do in the face of concerted activity or unionization. There are things that you're not supposed to do under the act.
Like everything in life, you have to weigh the pros and cons. You're not supposed to fire somebody who talks about concerted activity, that's protected under the NLRA. Sometimes, doing that, taking that risk, and potentially having an NLRB action, sometimes the risk of not firing them is outweighed. I do know that employers will take a calculated risk and suspect that this will never turn into a claim. I'm not condoning that, I'm just saying that this is what some employers will do.
Again, this is an area where if that stuff does happen, you want to get a great labor attorney who can advise you on what to do and what not to do because The National Labor Relations Board can effectively overturn a lot of your historical decisions, they can fine you, and they can make your life extremely miserable. I'm not talking about even firing people, I'm just talking about comments that you make as an employer. It can be deemed anti-union animus, and action against concerted labor activity in the United States. The administration has been focusing a lot on supporting that.
Patrick Baldwin: This takes me back to our first question about spinning off business. The larger the target, the more likely a union is going to be attracted to the business. They're like, “That business is large. They have a lot of employees or technicians. That'd be a great place to go union.” If you keep your businesses separate, the target is smaller and less likely to have a union come in. You are seeing a little bit of this in the pest control as you're talking about, even the residential service side. These are larger businesses that are getting approached this way.
Paul Giannamore: I don't know that these organizers are as strategic as that. It's sometimes easier to organize a smaller shop.
Patrick Baldwin: There goes that theory.
Paul Giannamore: You can get a plurality of votes pretty quickly in a small shop and then once you get installed there, then you branch out from there. I wouldn't say, “I'm going to stay small or I'm going to break my thing up.” I am small so I'm less likely to have a target again. We've probably over-talked the whole union situation here and I don't think it's a major threat, it is a minor threat.
I do think the ones that will get clipped and organized are not necessarily going to be in good positions. If this discussion serves one purpose, it's to say to every owner out there, this stuff is going on now in the pest control space on the resi side, which I haven't seen in my existence in this industry. It's something to be cognizant of.
Patrick Baldwin: The attorney comment is the right thing to do. Before you make a rash decision or make a rash comment or fire someone for saying the wrong thing, anything labor-related, not even just the union, from my experience, speak with an attorney first before doing something stupid. It's irreversible.
Paul Giannamore: Correct, that's exactly right.
Patrick Baldwin: Awesome. I'm out of questions. I got mine in. I got the listener questions in. I've got a few Apple podcast reviews that came in, I know that probably made you week so keep those coming in.
Paul Giannamore: I did not notice that.
Patrick Baldwin: Did you see that?
Paul Giannamore: I didn't.
Patrick Baldwin: They're good.
Paul Giannamore: All right, I'll take a look. FP, until the next episode.
Patrick Baldwin: Awesome.
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Dylan Seals: Thank you so much as always for supporting us at The Boardroom Buzz. We know your time is valuable and the fact that you spend 45 minutes or an hour with us means the world. All the media that we put out from Potomac is meant to honor and celebrate you, the service industry owner. As Paul would say, “Yee who toil in the pest control vineyards.”
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