Paul Giannamore: You probably will not find anyone who cares as much as you do about the business but I can guarantee you that you're going to find somebody who's better equipped, better trained, and smarter than you to run that business.
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Patrick Baldwin: Happy New Year, Paul.
Paul Giannamore: Happy New Year, Fat Pat.
Patrick Baldwin: Welcome back.
Paul Giannamore: Thank you.
Patrick Baldwin: Did you celebrate New Year's up in the big city?
Paul Giannamore: No. As a matter of fact, I got back, which would have been New Year's Eve. Given the flight delays and all, it was around 5:00 AM by the time I got in. I celebrated down in Puerto Rico.
Patrick Baldwin: I'm not big on crowds. When I hear about people having to wear adult diapers to watch the ball drop, that gets me far away from ever wanting to be there. Not on the bucket list.
Paul Giannamore: I'm not aware that there are people that wear adult diapers for the ball drop.
Patrick Baldwin: They want to get there so early. I don't get it. I don't have that desire. I don't want to be in crowds and I don't want to wear adult diapers until the time is right.
Paul Giannamore: I'm typically never in New York City during New Year's but I did walk through Time Square while they were prepping it right there building all the stands and all that sort of jazz. I have never seen New York as busy as it was. The crowds were insane. It's finally back post-COVID now. It was something else.
Patrick Baldwin: You're back. Are you ready for 2024?
Paul Giannamore: I am ready for 2024.
Patrick Baldwin: You're ready for 2024 because I know that the Mexican is not in the office and that makes it a great year.
Paul Giannamore: Yes, indeed. What do we have for our first show of 2024, Patrick?
Patrick Baldwin: I do have a listener question. This listener was thinking about selling on the brain. He is involved in the business. He wants to know from a valuation perspective as the acquirers are looking at it, does it matter and to what extent does it matter his involvement in the business.
Paul Giannamore: That's obviously an extremely common question. Every time somebody calls up and starts thinking about selling, if they're an owner-operator, if they're involved to any extent in the business, they say, “What's going to be required of me?” The majority of people that want to sell want to depart. A lot of the times it’s retirement, sometimes it's burnout, and sometimes it's cash out of the business and invest in another opportunity.
Everyone always wants to know what their involvement will be going forward. If you're going to be a platform acquisition for a private equity firm, the investor is going to want to partner with you as an individual along with your business. In 2023, the extreme majority of our transactions were private equity deals, 90% percent, and most of them have not even been announced.
It frustrated the Mexican because he's like, “We can't announce any of these deals.” More than half the transactions that we did in 2023 have not been announced. In fact, some of them have been announced and one private equity firm said, “We would rather you not take credit for being on the sell side. If our investors find out that we acquired a business and Potomac was on the other side, they will know we overpaid for it.”
Patrick Baldwin: That's a nice compliment.
Paul Giannamore: They said, “The institution and investors know you guys. If they know you were on the other side, they will know we overpaid. Will you not announce your association with that transaction?” I have done them a favor and not do it but that was a platform acquisition for a private equity firm that has gotten into the space.
Patrick Baldwin: Does The Boardroom Buzz count?
Paul Giannamore: They specifically said, “Do not talk with Fat Pat about it on The Buzz.” They also said that. They covered all bases as they sent over an email. I agreed to do that. In that particular case, you are sticking around. You are rolling equity meaning you are going to partner with that private equity firm. At some point, you guys will exit together in the future, 5 years from now, 7 years from now, or what have you.
Outside of that, when you think about an owner's participation from a valuation perspective, let's walk through a little example here. Let's say that you have a $2 million business. In some cases, that $2 million business might be a tuck-in for Rentokil. Rentokil might have a large service center and say, “We're going to buy this $2 million business and tuck it in.” In some instances, Rentokil might have some white space over there and say, “That's not a tuck-in. That'll be a little standalone acquisition.”
It’s similar to what Terminix did. Your business down in Texas was bigger but that was considered a standalone operation. You guys weren't being tucked in anything. You guys were now their Waco service center. In an instance whereby it's a tuck-in, a seller is most likely to find himself in a position where he can depart almost immediately. When it's being tucked in, there's management in place.
Sometimes if it's a standalone operation, sometimes if the owner does not have any bench or second string that could run that business, sometimes the owner has to stick around and help run that for a while, and that could be 3 or 6 months a year. The acquirers usually do a good job in replacing somebody if they ultimately want to go. If they want to do that deal and the seller agrees, “I'm going to stick around,” they'll work out some transition plan.
There’s not a huge difference between a tuck-in or a standalone operation as long as it's not a private equity platform business. When you talk about valuation, you have to think about the economics and that's just math. If you're running a $2 million business and you pay yourself as an owner $300,000 per year and it runs through the P&L and it’s your W-2, that wouldn't necessarily be a great idea to do it that way but some folks do it that way. Either way, you get paid $300,000 a year. It comes down to, “What economic benefit are you providing the business?”
How you determine that is, could you go out on the open market and what would it cost you to replace yourself? If you're honest about what you do as the owner for that business, what's your day job, how much would it cost you to go out and replace those services by somebody else? If you pay yourself $300,000 a year but you could go out and hire somebody for $80,000 a year to effectively do what you're doing for that acquirer, that is your replacement cost.
You would adjust the P%L by $220,000 so there'd be an adjustment there pulling out $220,000 costs and leaving $80,000 as the replacement cost of yourself, the owner. I don't know that the question so much was about the mechanics or the way that I interpreted the question is. If owners are extremely active in the business versus some owners that are more passive, does that impact the valuation of the company? Is that how you interpreted that question?
Patrick Baldwin: I take it’s similar to what I was following there with you saying, “If an owner can replace himself with an $80,000 manager, does he go ahead now with end in mind and hire that manager? Is he going to get the return on investment, pull himself out of the org chart, and then knowing that he's going to leave a manager behind to go through the deal?” In this case, when he sells the business effectively, he wants to exit call it after three months or whatever is standard.
Paul Giannamore: The way I look at it is are you an $80,000 a year type of guy as the owner or do you value your time more? If you only value your time at $80,000 a year, then keep that job. If you look at it and say, “I can put myself to higher and better use,” than taking an $80,000 a year job, then you'd be an idiot to not replace yourself. Where a lot of owners get themselves into problems is that they don't think about things in terms of economic return on their time invested.
Patrick Baldwin: You're suggesting that regardless of doing a deal.
Paul Giannamore: Yes. If you follow first principles of, “How do you build value in a business?” If you're doing everything “correct”, it shouldn't matter what the acquirers want because you're doing things the right way, which is going to ultimately add value to the business and add value to your life personally. The right thing to do is determine whether or not you are CEO material and we could talk about that on another episode but the majority of you are not and there's nothing wrong with that.
I told the story about, years ago, a guy who owned a pest control business and he wasn't a great manager but he was a phenomenal sales guy. He had the ability to connect with people and people loved him. He had a great personality and he was able to sell. The guy couldn't do math. He was a horrible manager. He was a great person but he wasn't a great manager of people for whatever reason.
He made the mature decision to say, “I am going to demote myself from president and CEO of this pest control business. I'm going to change my business cards and I'm going to become the head of commercial sales or whatever. That's what I'm going to do. I'm just a sales guy. I'm going to promote this other guy and I'm going to make him president. I, as the owner, will control the board but he, as the president, will be the manager of that business. I will work with him and I will go out and focus my efforts on sales and building a sales team.” That's exactly what he would do.
To the public, at that point, he was just a commercial sales guy and so and so was the president. That business grew at a dramatic clip until he ultimately sold it. Understanding whether or not you're cut out for that job is a good question. I am not cut out for that job. There are so many people out there that would be better managers than me.
Patrick Baldwin: I’ll run a little split test with you. A $2 million dollar business. Let's say $80,000 is the market wage for a great CEO in that market. If he goes through the sales process and he has an $80,000 branch manager, like a GM in place versus $80,000 himself in place, do those businesses sell for the same thing?
Paul Giannamore: Probably but it potentially makes it easier if he's got that manager in place. What I mean by that is it may give him a little bit more optionality. It gives him a little bit more flexibility if he's got somebody in there running that business. If you can look at a buyer and say, “I'm just an owner. Sure, I go into the office but all I am is the owner. I've got Frank over here who's running this business and here's his role and here's what he does on a day-to-day basis.”
What do you do, Paul? I interfere with things. I piss people off. I ask questions that no one wants to answer. For the most part, I don't provide any value to the business. That's great because now when we buy your business, there's no key man risk. If you drop dead tomorrow, the business doesn't tank because we've got a guy in here who runs it and everyone views him as the president and things go on. Now it puts you in a better position as a seller to have that, for sure. I don't know that it would necessarily impact value. Sure, it’s possible. More than anything, it broadens your options.
Patrick Baldwin: De-risk the deal.
Paul Giannamore: It certainly does that to a certain degree. On a split test, PB, if you had two $2 million businesses in those scenarios where I'm the president and the other one where you've gone out and hired somebody to be the president and you're sitting back there collecting your coupons. If the businesses are exactly the same, except for that dynamic and your president is as good as me, you would be in a better position than me.
Patrick Baldwin: Why does it not affect the deal? My hunch was that it would affect the deal like the sales price.
Paul Giannamore: What if I took the position? Yeah, Fat Pat got Frank, the manager, over there but I'm just as competent as Frank and I'm willing to stick around and do what I have to do. Maybe it'll take a year or so but we will replace me. Guess what, acquirer, instead of getting stuck with Frank, who Patrick chose, I'm going to work with you and we're going to jointly make the decision to get a manager that you're excited about who might be better than Frank.
At the end of the day, that's just a lot of words. What's happening in practice is now I am sticking around in order to make sure this transition happens. Is the business transacting for a different valuation? Unlikely. It's extremely likely that they'd be valued exactly the same but it gives me less optionality than you.
Patrick Baldwin: If an owner stays, does that not tie back into an earn out? An owner has cashed out, he's fat and happy, and now he needs to stay because he doesn't have a replacement manager. Now we're saying, “I'm going to help you grow and help you transition,” but he's already fat and happy. How much effort is he going to put into a business that he doesn't own anymore?
Paul Giannamore: That is a great question. Usually, a buyer will try to size up whether or not I'm full of it or if I'm going to do it. The question that you had is would an acquirer say, “Paul, you said you're going to stick around and you're going to help us but we're going to make some of this purchase price contingent upon you doing that.” I would certainly propose that it's unlikely that a buyer would get away with it from a market perspective though.
I'm virtually certain that the seller, myself, in this case, would have a lot of other opportunity where there would be acquirers that weren't going to make any of my purchase price contingent upon me doing what it is they want me to do and otherwise just build a relationship with me and say, “Paul is a man of his word. If he says he's going to stick around for a year, he's going to do it. If he doesn't, we need to make sure that we have a contingency plan in place.”
Patrick Baldwin: We've hovered around this $2 million top-line revenue concept. Private equity doesn't have a place here as far as a private equity platform.
Paul Giannamore: Certainly, a private-equity-backed acquirer could buy a $2 million business and does it all the time. You're right, that wouldn't be a platform business for a private equity firm, unless it was extremely tiny.
Patrick Baldwin: If this is a $5 million business, private equity might come into play as a platform. Does that change the scenario?
Paul Giannamore: Even $5 million is a tiny platform. We tend to see them at $10 million or above. We've sold $20 million or $25 million businesses to private equity firms that weren't platforms, they were add-ons. It just depends. It's like fractal math, these things scale in certain ways. There are funds out there on some of these deals that won't touch a business doing less than $100 million in revenue.
For them, that's a platform. It's got to be $100 million or above. For others, smaller funds, a $10 million business is a platform. Irrespective of the size, let's just assume that it's of the size that it would be a platform for many financial sponsors. In that particular case, they are going to want to partner with the owner. At the end of the day, these are growth equity investments.
Private equity firms, being quite different than strategic acquirers, are coming in and saying, “Fat Pat, you've got a $10 million business. We want to take this to $50 million. We like partnering with founders. You've done a great job thus far so why don't we buy 80% percent of your business and you own 20% of it? We're going to invest some capital in this and let's grow it together and we'll exit and we'll all be super rich and everything will be great.”
In that particular case, usually, private equity firms are targeting people who are younger. They're not targeting 70-year-olds to do this. They're targeting that 30-year-old to 50-year-old range and they want to scale these things. In that particular case, the owner would be important. In fact, the caliber of the owner, in a lot of ways, I've heard private equity firms say, “I don't trust this owner. I don't want to partner with them.” Those things become important.
Patrick Baldwin: Enough to kill a deal?
Paul Giannamore: 100%. Not kill the deal per se but enough for that particular financial sponsor to not move forward with that particular salary.
Patrick Baldwin: Putting myself in his shoes, a $2 million dollar business, where the question came in from, not day-to-day active already but the business is dependent on him. If he pulled out right now and left it without a manager, the business would not be stable or viable.
Paul Giannamore: There are a lot of examples out there of a $2 million business where an owner might have some sort of a GM or a long tenured employee who does a lot of things that a traditional owner would do. That owner still might be the guy who does the books of the company, he's processing payroll, and he's doing all the product ordering.
There are a lot of things that an owner will hang on to, which is not right or wrong, but an owner will hang on to that somebody else at the business doesn't do. If the owner died of a heart attack the next day, the business would struggle from the standpoint that the operator in there doing it is more tactical and not spending time figuring out advertising campaigns and all of the things that the owner is doing.
There would be problems but the business could run on a day-to-day basis, it just wouldn't survive longer term. The owner dies on a Monday, on a Tuesday, payroll doesn't need to be done, and advertising is not being purchased so the other guy can continue to run it on a day-to-day basis, deploy the troops, get the job done, and make the customers happy. There's a split of duties. Is that what you're saying?
Patrick Baldwin: Yeah. I was thinking more of, like, “I would favor finding a replacement at this point in his situation.” Now he's doing the books, doing the payroll, and all that stuff. Those are tasks in which an acquirer would naturally take over if it's a tuck-in. Those aren't ordering chemical and all that. I'm saying “easily replaceable”. They're already doing that.
Paul Giannamore: We talked about the Dunning-Kruger effect. We've had David Dunning on the show. We all believe that we are way better at everything than we are. There are a lot of owners out there who think, “If I want it done right, I have to do it myself. I'm not going to find somebody who is as good as I am running this business.” Quite frankly, you probably will not find anyone who cares as much as you do about the business.
I can guarantee you're going to find somebody who's better equipped, better trained, and smarter than you to run that business. If you start to introduce a little humility into your mindset and start to think about, “I'm getting paid $300,000 a year from this business but the economic value that I provide, if I'm honest with myself, is $80,000 a year. I am working full-time in an $80,000 a year job.” Could you not go out and find somebody better than you for $80,000 a year and focus on board-level, high-level, and strategic level decision making? Get somebody in there to run that business better than you and then reallocate your time to hire and better use. That's how you ultimately become wealthy.
The mindset of being the president of a $2 or $3 million pest control business in perpetuity is how guys end up being millionaires but they don't end up having $50,000, $100,000, or $200 million in wealth because they're focused on playing a small game. If you can get good, it takes a mindset shift. If you can do that, that's one of the ways that you can scale growth. Anyone who is reading this who has done that are probably shaking their heads saying, “Yes, that's right. It took me a long time to get out of that role but now that I finally did, I realized I stayed in it too long.”
Patrick Baldwin: Is that what you hear a lot?
Paul Giannamore: I hear it all the time. If you sit down and you talk to these guys, a lot of these guys who have scaled these businesses, when they get some distance from the actual sale of their business and they can reflect on life, the right choices they made, and the wrong choices they made, inevitably, the majority of them will look back and say, “I should have focused earlier on sacrificing hiring higher quality people to run that business and me getting out of the way.” Once you do it, you realize that there are a lot of guys out there who are better than you.
Patrick Baldwin: I think back to a phone call I had with Jared Borg a couple of years ago and he jokingly said, “I don't have keys to my business. I go to Chicago and DC as long as it's during office hours and I can get in the building.” These are offices that he owned in which he didn't even have access to. He said that a big changing point for the business growth was when he stepped out of it and had the right people to run those.
Paul Giannamore: Correct. Jared did a phenomenal job building that team. He had a great management team over there. He's 100% correct. He was entirely worthless from the standpoint of getting into those buildings. He could talk about the business from a high-level perspective, which is where he lived and breathed, which is where he should have been.
Patrick Baldwin: With all due respect. You said worthless.
Paul Giannamore: That's where you ultimately want to be. He would take that as the highest of compliments. Jared Borg, what do you have to say about that? Think about it, if you ultimately find yourself in a position where you're creating value where you can and you're reaping the rewards and collecting the cashflow of the business, it's a great place to be in.
Patrick Baldwin: I love it.
Paul Giannamore: In 2024, those of you out there who are thinking about scaling, you might start to think about, “What is it that I do on a day-to-day basis and how can I replace myself and put myself to hire and better use?” If you have a small company, a lot of you guys out there have your own families and you’re trying to put food on the table. I get that.
A lot of times, there’s not an opportunity to do that. You got to push yourself out of your comfort zone as soon as you possibly can. If you start replacing yourself, that's how you build a business as opposed to maintaining an $80,000 a year job. It's not easy to do. There are tons of people around the world in all sorts of industries who have effectively done that so they could be good counsel to you.
Patrick Baldwin: Following that thought of finding a replacement right now, can you give an update? I think about the economy and hiring a good manager right now. Have you seen changes in the market in labor force?
Paul Giannamore: That's a good question, Mr. PB. Labor continues to soften. In December, the Fed has effectively pivoted. They haven't decreased interest rates. They've now finally said that, in 2024, they're going to cut. We just got that question as if the Fed cuts, is that a good sign from an interest rate perspective, specifically because the Fed controls the front-end of the curve? If you look at the long end of the curve, they don't have much influence on that.
My interpretation of what took place at December's FOMC meeting was largely related to the Treasury as opposed to the economy and the jobs market. If you look at the financial system and the amount of money that the US government is spending right now and the amount of government paper that they are issuing, the pivot on short-term interest rates is entirely related to the US government's ability to finance itself. It cannot finance itself at 4% to 5% short-term interest rates. That's what we're starting to see now.
There's the debate about, “Are we going to get a soft landing, a hard landing, or a no-landing?” I still believe that we can't live in a world of 0% interest rates for fifteen years and then all of a sudden see 5% rates. Things don't hit hard so I still believe that is in the cards but we will see. Anecdotally, when I talk to people, they're having an easier time hiring now. We're certainly not hearing the same problems that we heard a couple of years ago. Is it a tight labor market still? Yes. Has there been structural shifts in the labor market? Yeah, absolutely. I can think of 4 or 5 people who have hired managers.
As a matter of fact, I met with somebody at PestWorld. I had a drink with somebody at PestWorld who was looking to hire a new COO to run his business and I made some recommendations. He made some phone calls. I got back from my trip and there was a gift basket at my house that said, “Thank you for finding us a new COO.” By the way, I have not thanked this person yet so I'll do this on now. It was kind of you to send me a gift basket and I'm glad that I was helpful.
Patrick Baldwin: What was in the gift basket?
Paul Giannamore: A lot of things that I can't eat. It was a sweet gift basket but that's okay. There's a lot of family and kids running around that will be able to indulge in that stuff.
Patrick Baldwin: Does Fat Pat need to come and help?
Paul Giannamore: Fat Pat, I'm sending you up on a special mission to eat cookie cakes and candy.
Patrick Baldwin: Other than receiving gift baskets, I heard you had a warm welcome reception from Mike Stanczyk down at PR. Would you have him over for Christmas?
Paul Giannamore: Stanczyk was down here. We went out to Dorado on Christmas day. He comes down to PR every year. He took his family down again. He took his children out to the beach and all that sort of jazz. He was down here. I got to see him. Puerto Rico is full of pest control guys right now here in December 2023.
As we are recording this, Patrick, there are a small handful of pest control guys down here. A couple of them are here independently of each other looking to relocate to PR for the tax incentive. We've got a wave of them through over the last few months. There's already a few down here and there seems to be more. We're always, of course, the first stop on that train. I do what I can to help these guys find the right advisors and get themselves set up and see what happens.
Patrick Baldwin: Was the Mexican a good host for your guest?
Paul Giannamore: He's a fantastic host here in Puerto Rico. He knows the island like the back of his hand. He takes these guys to places that they would never otherwise find themselves on their own so it's always a good experience.
Patrick Baldwin: I don't know what that means but it sounds nice.
Paul Giannamore: He is a great host for these guys.
Patrick Baldwin: Paul, for 2024, I was putting my travel calendar for the year. For years, you've told me to avoid these industry events and here I am making the rounds.
Paul Giannamore: I didn't tell you to avoid. I told you I avoid them.
Patrick Baldwin: I'll be at WorkWave, Energy, and AzPPO. Paul, what about you?
Paul Giannamore: Fat Pat, I'm going to go to more industry events this 2024. I've been asked to speak at these things. Historically, I've declined to speak. I haven't been too excited about speaking at events. Every time I get asked, I say, “I'm going to go ahead and skip this year. Maybe next year.” It was really the Mexican, he's like, “You suck at life. You're a loser. You hang out in Puerto Rico. You need to work for a change and go to an industry event.” I decided I'm going to do it. I will be speaking at a handful of these things here in the Q1. I've got to determine exactly what I'm going to be speaking about but I'll be doing it.
Patrick Baldwin: It's funny they ask me not to speak when I go to these things.
Paul Giannamore: That's a good practice, PB. The Mexican was not particularly thrilled by your presentation in New Jersey, although I heard good things about it. You heard his reprimand.
Patrick Baldwin: I got my biggest critic.
Paul Giannamore: Yes, you do.
Patrick Baldwin: That's why he's on your payroll and not mine, Paul.
Paul Giannamore: What did he say about your presentation?
Patrick Baldwin: It was the best thing since sliced bread.
Paul Giannamore: What did he really say?
Patrick Baldwin: I don't know if I can say that, Paul.
Paul Giannamore: You can't say that, can you?
Patrick Baldwin: We've kept this episode PG. I don't want to ruin it.
Paul Giannamore: He has some choice words for you.
Patrick Baldwin: Do you know when you watch those comedy shows and there's a heckler in the audience and you're like, “Stupid hecklers, kick them out,” or the comedian just trolls him?
Paul Giannamore: Yep.
Patrick Baldwin: What's it like having a heckler at a talk? That's what I had. You can't even understand him, that's the problem.
Paul Giannamore: Maybe that's the good thing. Yes, I will be showing up at WorkWave. The WorkWave guys wanted to do something. They wanted me to do something on private equity so I'm not sure what's going to happen there. I guess this is coming up in a week's time so I got to figure that out. At the end of the month, I'm going to be at Seth's Energy conference. I'm going to talk largely about the lessons I've learned over years in this industry from the guys who've built the biggest businesses. I'm going to pull some lessons for that. Yes, PB, I will be going to the AzPPO.
Patrick Baldwin: You've got Dave Gilmer, the president right now, and Christy, his wife, the executive director of AzPPO.
Paul Giannamore: I know you went to AzPPO and you raved about it. David has asked me to open both sessions. I guess it's a two-day conference so I'm going to open both sessions talking about two different things each day.
Patrick Baldwin: It is a phenomenal show. His wife, Christy, is the executive director right now there. I can't wait till you have the heckler in the audience for two days in a row.
Paul Giannamore: Who will heckle me?
Patrick Baldwin: That's a good point. You're going to have his paycheck in hand without a signature line on it.
Paul Giannamore: He knows better to heckle me. He'll heckle me probably and it would be good entertainment.
Patrick Baldwin: With his swim shorts on and sunglasses on top of his head.
Paul Giannamore: That's 100% how he's going to be rolling.
Patrick Baldwin: In his Peloton shirt. It's going to be a heck of a year, Paul.
Paul Giannamore: Yes, sir. Fat Pat, I will see you next episode.
Patrick Baldwin: That's true. Sounds awesome, man. Safe travels. Happy new year, Paul. I’ll see you soon.
Paul Giannamore: Happy New Year, man. Talk soon.
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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.”
As part of giving back, we have this podcast, but more than that, Paul and I have been working our tails off over at POTOMAC TV. We've spent a tremendous amount of time, energy, and resources to build out that platform to bring you market updates, to bring you visual breakdowns of the merger acquisition process, and to tell stories and present information in ways that, frankly, it's not possible for us to do on The Boardroom Buzz.
Adding the visual element takes it to the next level. I want to invite you to go to YouTube and find us, it's POTOMAC TV. Potomac.tv will get you there. Go there and subscribe. Check out some videos and leave some comments. Let us know what you like and let us know what you don't like. Let us know what you want to see more of and we'll see you over there.
