Paul Giannamore: If you really want to dig into performance metrics, the key is pushing the pedal to the metal and benchmarking against yourself.
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Patrick Baldwin: Welcome back from Orlando, Mr. Paul.
Paul Giannamore: Fat Pat, going to Orlando in the winter was much colder than I expected it to be. I didn't realize I needed to bring a jacket to Florida. That's the problem when you come from Puerto Rico.
Patrick Baldwin: I'm jealous. I wish I was in Puerto Rico right now. It's 22 degrees outside here in Texas so I'd rather be in Orlando but I'd much rather be in Puerto Rico. Before we get into this episode and before we dive into Orlando, I want to start by saying that we were at the WorkWave Conference there in Orlando, that's what brought us there, with a Mexican in tote. He brought his own babysitters. You moderated a private equity panel and it was fantastic. I want to kick off this episode with a clip from that. Dylan has queued this up for us and then we'll come back after that and chat some more.
Paul Giannamore: Sounds good.
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Audience: An investment banker running the process and so forth. You guys have talked with your PE guys and you're dealing directly with the people. If you're trying to maximize the money and may not know the ropes and you hire an M&A investment banker to do that, how's that process going and how do you guys look at that and look down on that?
Paul Giannamore: I'll start that because that's exactly what they need to do that. It's funny that they always say that but they always use bankers when they sell their portfolio companies. At the end of the day, he asked a question on evaluation. Valuation is a range concept. When you take a business to market, in theory, how it's done right is you should be agnostic as to who the buyer is. You start the process, you get yourself a valuation benchmark, and you understand what your value is or what a range of values might be.
You put together your materials and you determine, “What transaction do I want to have?” You're not for everyone so you're going to repel people, which is good. The firms that are going to like you are going to like you that much more. Determine what it is that you want. Keep in mind that when you own an asset, there's one unique asset. You've got that $15 million pest control business and that $10 million lawn care business sitting in this geography. There's 1 of you and there's 100 buyers.
You have to run a competitive process and that's the way that you get leverage. The way I look at it is you don't put an asking price on a business. You step out into the market and you run an auction process, it's like a private market bid process, and you go through iterate stages. How it might work with private equity is materials go out, confidential and from memo, and it goes out to 60 participants. They write an IOI or an indication of interest and they say, “Your business, we're interested in maybe paying $15 million to $20 million for it.”
They might put a range and they might put one number but now you collect all these IOIs. The buyers have to earn the right to be able to even sit down with management. They've got to tender an IOI, maybe you get a stack of them, maybe you get 5 or 30 of them, depending on how broad the process is, and from there you whittle it down. You choose a handful of participants that you'll bring into management meetings and then you'll get an opportunity to sit down with the financial sponsors and strategics.
From there, they've got to revise their bid forward. At every stage in the process, the buyers are revising their bid forward until you finally get into, in a perfect world, a run-off situation between 1 or 2 buyers. A transaction we closed, the delta between the first highest bid, the winning bid, and the second bid was $50 million and they all clustered around $50 million. You never know.
I've done this for over twenty years. I do over $1 billion in transaction volume a year. I tell every single client that I have zero idea who's going to buy this business. Everyone likes to say, “The best buyer for my business is this company.” More times than not, it's not that company. If you go broad and you run the process right, you let the market speak. One of the hardest things for sellers to do is they've got to stand back and emotionally detach from it. Let the process drive that.
Audience: A lot of good stuff in there. When you do talk to one or multiple of these parties, they'll come in and tell you, “This is what I think is going to work.” That's interesting but it is whatever. At the end of the day, the process will dictate the value that you get. If I was in your shoes, would I be kicking the tires more? Tell me what you've done.”
Get me comfortable with the transaction you've done and that you're in this space. Someone could just come in and say, “I can sell it for this.” Marrying that with, “We've done 1 million transactions like these guys,” that's a definite bigger driver of a good outcome for someone who's in the space and someone who has the experience. They know the buyers and they know the questions they're going to ask. They're going to help shepherd you through the process.
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Patrick Baldwin: Paul, what's it like moderating?
Paul Giannamore: First off, WorkWave did a phenomenal job with the user conference. I've never been to a user conference before, whether it be WorkWave or any other software. They really did a great job. They spared no expense. It wasn't phenomenal food but as far as conference food goes, the lunches that they catered there and the food that they had was the best conference food I'd had and I've been to a lot of conferences in my day.
Patrick Baldwin: Here we are judging things by food again. Everything is falling down to the lowest common denominator. The panel, which was a lot better than the food, you're on one end, you have guys next to you, they're running private equity, they're GPs, you've got someone like Ryan Bradbury that's running Rockit Pest, and someone else that's taking an exit. The question came from the audience in terms of what they should be thinking about running a process. I love it. You're like, “If any of these guys were thinking about selling, they would use an investment banker.”
Paul Giannamore: The guy who said that is a private equity firm. He works for a private equity firm and he was there shopping and looking to buy businesses. It's always interesting because, a lot of times, the private equity firms will tell sellers, “You don't need an advisor. You don't need a banker.” Every single time they dispose of one of their portfolio companies, they engage advisors, and they run a formal controlled process. It's almost like they don't do what they say and do what they do.
Patrick Baldwin: In this less than five-minute clip, you effectively said, “It's a range concept. This is how we run a process. This is how we run up a process. This is how you get higher and higher valuations. This is how you deal with them.” If you took all of The Boardroom Buzz segments and put them into four minutes, that covered it. Thanks, Paul.
Paul Giannamore: PB, I don't think I talked about anything at that panel that we haven't already discussed on The Buzz. Dylan is going to put a copy of the entire panel discussion on Potomac TV. Maybe by the time this episode goes out, it'll be there on Potomac.tv.
Patrick Baldwin: It's interesting thinking about private equity. While I was there at the WorkWave conference meeting with someone, I was like, “What would it be like to exit to private equity?” To me, I didn't have that personal experience because when we sold Black Bear, $3.75 million top-line private equity, and, in 2021, private equity wasn't even a consideration.
Paul Giannamore: That's right. It wasn't then and wouldn't necessarily be now an opportunity for you and from a platform perspective. Most of the transactions that are “private equity deals” in the industry tend to not be traditional private equity deals. It’s either the private equity firm is using a platform to make an acquisition. Anticimex, for example, is a private equity-backed pest control business, which, quite frankly, isn't a whole lot different from publicly-backed pest control companies like Rentokil or Rollins. The shareholder base is long-term capital.
In the public markets, you buy and sell those shares all day long. The asset that the company owns, which would be Anticimex for example, is not a whole lot different from Rentokil or Orkin. Even when you look at a lot of the platforms out there, they're doing add-on acquisitions. It's the platform investment where they're asking you to roll equity. That's where you're partnering with a private equity firm. Those aren't necessarily ideal for owners who want to turn around and exit completely. They're not ideal for the 60 or 70-year-old guy who wants to get out because he's not going to be co-investing with a private equity firm.
It's ideal for somebody who might be 40 years old, has a business, and says, “I need some additional capital. I need some help with governance. I need a variety of other resources and capabilities that I don't have so I'm going to partner with a strong financial backer. I'm going to bring in those capabilities and I'm going to blow this business up. In the meantime, I'm able to monetize some of my investment in that business, redeploy it into other investments, put it in cash, buy real estate with it, or whatever else.” It's the whole have-your-cake-and-eat-it-too model.
Patrick Baldwin: Years ago, you worked for private equity. You bring a whole different experience and knowledge.
Paul Giannamore: I’m getting old, Fat Pat. That's true.
Patrick Baldwin: Sorry, I wasn't trying to throw that at you but that's where you come from talking to these owners that want to exit. I think about what the experience after they sell? For us, a full change of control immediately out of BUGS. With private equity now, there is an opportunity to stay on. What is it like when you have an owner that's in charge every day answering to himself and no one else and then tomorrow, he's having to go answer to private equity?
Paul Giannamore: Every fund is going to be different. In the private equity space, you have funds that are very active in management and you have funds that are more passive from a management perspective. You have to keep in mind that I worked for a company called American Capital and, at the time, it was the largest publicly-traded LBO shop, Leveraged Buyout firm, in the United States.
Although American Capital would make sub debt investments and Mezz finance investments, the majority of what we did was LBOs, control buyout situations where we would go in and buy out at least 80% of a company. The deals that we were doing were a little bit bigger. We would get involved in management buy-ins as well as management buy-outs. American Capital wasn't particularly active from a management perspective.
My job was similar to the fellow that was sitting next to me who made the comment about, “You don't need to hear from me.” I wasn't the guy who was sending out the emails saying, “Jim, I love what you've done with XYZ pest. Let's get on the phone. Let's have a conversation.” I was on the deal team. My job was a deal would come in, either a proprietary deal or a deal from an intermediary or another professional that we work with, and it was my job to go out and sit down with management and then write up the business case, the thesis.
After I would write up the thesis, my boss, who was the managing director of the office there, would look at it and we'd determine whether or not we were going to submit it to the investment committee to move forward in the process and make a bid on the business. Fast forward to the fact that once we made an investment so we went out and bought a business, my job was being a board observer.
There was monthly reporting that the company would do. We'd get the financial statements. We had an accounting and finance group at the fund, at the private equity firm, that would take all the monthly reporting and consolidate it and put together board books. We'd have quarterly board meetings. What I had to do is I was a board observer. Depending upon how much equity we owned in the business, American Capital may have 2 or 3 board seats, it depends.
Being relatively young, I was a board observer. I would get folks coffee, bring big stacks of documents, and sit there at the boardroom table and listen to the discussion. I truly believe that a lot of the management teams that dealt with us found it to be enjoyable. They got a lot of value in it. That's probably pretty consistent across the board.
When I talk to a lot of the folks in the lawn care space, in the pest control space, or a lot of former clients that have sold these businesses, I've heard that the funds are relatively passive, most of them, some of them are very active, but there's a lot to be gained from the board discussion. Private equity firms have a small number of levers that they can pull to create value in a business and one way they can do that is upgrade management. Of course, they're focused on bringing in the right capabilities. A lot of times, you might take a $25 million pest control business or lawn care business that doesn't have a proper CFO.
They're bringing a CFO in. They’re bringing technology experts. They're bringing a lot of folks that currently don't exist at the platform. You had a brief question, which was, “You're used to running the show yourself and now you're working with private equity, what's that like?” Sure, you report to a board now so you can't fly by the seat of your pants. A lot of times, the additional resources that are brought into you definitely outweigh any frustration you might feel by not being able to fly by the seat of your pants anymore.
Patrick Baldwin: Does it take away that entrepreneurial spirit?
Paul Giannamore: If you're a significant co-investor with a private equity firm, your interests are aligned. You want to build your business. You want to ultimately exit it at a substantially higher price. We've lived through a massive long-term expansionary stage. Since the great financial crisis, we've been printing money, and everything's been going up. We haven't fallen on difficult times. It's not 1981 or 1982 and it's not 2008 or 2009.
There haven't been a lot of complaints lodged yet. A lot of private equity firms have moved away from the 1980s era of financial engineering-play only, which was, by business, levered up, put a ton of debt on it, and then started stripping out costs, pulling it apart, and flipping it. Some of these managers are now more focused on creating value. We fall on hard times, Patrick. We might hear some complaints because PE overlords as it were might decide to do some things that the entrepreneur might not do.
Patrick Baldwin: Does it come down to whether you play well with others?
Paul Giannamore: Do I play well with others?
Patrick Baldwin: No, the owner that's selling. Considering private equity, is he okay not having the final say?
Paul Giannamore: In a lot of cases, he probably would have the final say. You have to look at it from a growth equity buyout perspective when you think about an actual MBO or an LBO where the buyout shop is owning the entire thing or a substantial majority of it. With growth equity investment, I'll give you an example. You've got a $100 million firm and you say, “I'm doing $100 million. I'm not big enough to go public. This thing is now starting to get a little unwieldy for me to manage. I need to upgrade some management.”
I got to bring in new systems. I'm going to need to put in an ERP system. There are so many things that I need to do. I'm going to partner with a sophisticated private equity firm or financial sponsor that has bought dozens of companies in the past and has a track record of taking a material number to them public.” Now, I partner with them, I take some chips off the table, and maybe they buy 40% of the business. I, the founder, stay in control. I still control the board.
They're an equity investor along with me for the ride. They're bringing in all these resources. There's an ecosystem of portfolio companies. I can talk to other CEOs or bring in digital marketing and financial strength. They're bringing all sorts of stuff into the business. They're helping me set up board governance. The business is structured right. I've got everything getting lined up for ultimately becoming a publicly-traded company at some point. Five years from now, maybe I can take it public.
Patrick Baldwin: The basis of all that is that you've retained majority control.
Paul Giannamore: Yeah. When you take a minority investment, by definition, you are a majority shareholder and most growth equity investments by private equity firms tend to be minority investments.
Patrick Baldwin: We talked to Clairvest many moons ago.
Paul Giannamore: They're minority players. They do growth equity investments.
Patrick Baldwin: Going back to the WorkWave conference, your first user conference, it happens to be my second because I went to FieldRoutes’ conference in Las Vegas.
Paul Giannamore: Is it fair for me to ask you to make a comparison?
Patrick Baldwin: That's fair. I don't know if I will. I will. Here's a big difference that I noticed, as an outsider looking in, I was never on FieldRoutes and PestPac. In WorkWave, there's more than PestPac. What I noticed was there are two different types of people, culturally. Both are wonderful conferences, well done, and not a knock on either of them. Looking at the users, I find a lot more residential-based over at FieldRoutes and a lot heavier commercial or 30%-plus commercial where they know they need these capabilities over at PestPac. We know eventually we want to grow into PestPac so we're just starting with it now. There are older companies.
Paul Giannamore: To your point, WorkWave has RealGreen so it's got lawn care and commercial cleaning. There were 5 or 6 different software packages there and 1,400 people. Surprisingly, I almost say the minority was pest. I almost felt like you could tell by the lanyard colors people were wearing, there were a decent couple hundred pest people there but they were largely from the other software.
Patrick Baldwin: The lanyards were helpful to know who's who. PestPac is the newest addition to this conference. They've been going with RealGreen for a while and then, like, “Now, we're going to bring in bug guys.” It’s interesting because it was the same thing in FieldRoutes. The Ignite Conference was Aspire software, the green side of things, and then they added in FieldRoutes. There were a few people that were at the WorkWave conference that I didn't expect to be there.
When I think about their business mix and their background and where they've come from let's say on the doors and then all of a sudden, like, “What are you doing here? Why are you here?” They stick out a little bit and surprise you. I almost think if I know your business, I know what CRM you're on. I'm not a great judge of that but there are some rules of thumb. Great time in Orlando. I had a couple of client meetings. I know you had some client meetings. One thing that came up was talking about strategy for the year.
Paul Giannamore: Fat Pat, it's always an interesting time of year for me. It's January and everyone likes to parade around their numbers for 2024. To me, it's a time of massive wish lists because people come out and say, “we're going to grow by 20% this year.” To your point, I was there for 24 hours and I did spend a good part of the day trying to get out of there due to the weather. I was there for 24 hours, I spoke on the panel, and had Indian with you and the crew, which made me very happy. That was your first Indian.
Patrick Baldwin: Thank you. I just let you order. I had no idea what that was but I'm still alive.
Paul Giannamore: How did you feel about Indian?
Patrick Baldwin: It was great. The heat scared me because they're like, “This is spicy.” I didn't cry so that's a good sign. It was really good.
Paul Giannamore: Are you going to dine on Indian in Texas? Do they have that down there?
Patrick Baldwin: I don't know of any Indian restaurants but now we'll start looking for them. I'll just call you, “What should I order?”
Paul Giannamore: Being in PR now, I often have to connect through Miami. I'll fly into Miami and make sure that my connection is at least a few hours because I fly in, I hop in a taxi, I go to an Indian restaurant there that I like, and I make sure the cab waits out front with the engine running. I call the restaurant on the way over, I order the food that I want, I dine, I hop back in the car, go to the airport, and I'm good to go. I can't get Indian food down here and I'm a big fan.
Back to your question, I was there 24 hours, I did a quick chat, and then I did meet with some clients. A few of these companies are going to be going to market in 2024. It was a good time to have conversations about 2024 plans. The fact that I would say 85% of our transactions in 2023 were with financial sponsors or private equity, I feel like 2024 will likely be a repeat of that considering that the strategics will remain relatively quiet.
I have to be on my game when I talk about financial performance and the forecasting of financial performance. I'm going to talk about somebody who I know is listening because this is the exact conversation that we had. I'm not saying anything on the air that I didn't say to him directly. He lays out his one-pager and says, “Paul, it's going to be an exciting year. We're going to grow by 20%.” I said, “What's your strategy?” “This is our strategy. We're going to be number one in this market. We're going to grow at this rate. We're going to hire these people.” I’m like, “That's great. That's a list of goals and objectives. What's your actual strategy?”
The look that I got is, “Are you deaf? Do you no longer remember how to speak English? This is our strategy,” which is in fact not a strategy. A list of goals and objectives isn't a strategy, it's a list of goals and objectives. The word strategy implies some sort of action, the use of relative strength against relative weakness. You can talk about growing a business at 20% per year and then the next question is about, “How?” Inevitably, you hear about, “We're going to spend more money on sales and marketing.”
If you say something like, “We're going to spend more on sales and marketing,” there's action behind that but that action has a complex set of implications, meaning the first question is, “Why haven't we done that before? What changes will we have to make to the business?” It's rare to sit down with a client who comes to me and has thought through the business strategy and has first off diagnosed problems. Strategy is overcoming an obstacle and it always is related to some sort of action. You have to first diagnose what the problems are first and then figure out if you can put together a coherent action plan and marshaling resources to overcome that obstacle.
Oftentimes, in the pest control industry, those obstacles are more or less related to constraints within the business, sometimes external constraints but usually constraints within the business, bottlenecks, for example. It makes scant sense extending an ineffective system because it creates more problems in the future.
If you've got an inefficient system right now, instead of just dumping more money on sales and marketing and growing that inefficient system, now it becomes more complex and chaotic as it grows. I do think a lot of times there's an opportunity to sit back and collect all of the issues and the bottlenecks that you have within your own organization to cluster them and then sit down with a team and filter through them and say, “How are we going to overcome these obstacles?”
An example of that, Fat Pat, is something that we talked about when Seth was on The Buzz. A basic exercise is pulling out the P&L and looking at ratios and asking a very simple question, “What is going on here? What is the cause and effect behind this particular number because the number is a result?” If you want a cheat sheet for how to do that, start looking at your own financial results and asking, “What's going on here?”
Patrick Baldwin: If you’re on an island here, then how do I know where to begin diagnosing if I think something's out of whack? Maybe it's not even financials, just customer retention, for example.
Paul Giannamore: I'm going to throw out an anecdotal number. I've never done the math. You know me, based on my Kolby score, I like to be able to do the research before I talk. Anecdotally, let's say somewhere between 10 and 20 companies out of 100 have a pretty good idea on their numbers in general. I don't just mean their numbers as in like how much money they made. When I talk about numbers, if you can answer a basic question, which was, “Let's look at the last five years, tell me what your annual retention rate was each of those last five years. Is it deteriorating or is it improving?”
You would think in a subscription business like pest control or lawn care, for example, that would be an extremely important number because, at the end of the day, you are selling the subscriptions so retention would be key. Patrick, 90% of people can't answer that question without doing the math and doing the research. I'd say 90% can't even answer it for one year and can't say, “Our customer retention rate was X for last year.”
Of those that can, a full 50% of them are entirely wrong. Being able to go into your customer base and export that stuff, maybe the software systems have gotten better over the years but, in 2023, at last glance, I was not happy by any of the ways that any of them calculated retention. You could very simply export your customer-base into Excel and color code every single customer and mark every customer that was on the books on January 1st and look to see how many of those customers still run the books on 12/31. That would be a cohort that existed on January 1 and that's a very simple way to do it.
There are more sophisticated ways to do that that’ll provide you more information but that's not the purpose of this Buzz today but understanding what that is. I know your next question, you're going to say, “Let's say that I get my retention number. I'm looking at that in a vacuum. I've heard some things. I listened to The Buzz. I heard people talking about retention rates. Now I'm looking at my retention rate and I calculated this to the best of my ability and 80% of my customers existed in December. What should I do?”
Patrick Baldwin: Am I that predictable?
Paul Giannamore: I've gotten to know you quite a bit over the years having these chats.
Patrick Baldwin: You've dogged on benchmarking a little bit. You talk about benchmarking against world-class organizations and not averages. I would think if 80% is the number that kicks out, I would look at years past and say, “It's better than 76% or 78%.” That might be my only marker of improvement but 80% still might be well-below what it should be.
Paul Giannamore: That's a couple of things. Let me address your first point. I dog on benchmarking against averages. If you want to create value in your business and you're taking the time to benchmark, you might as well do it right. If you don't care to look under the hood and think through it, then why even benchmark against an average? Every business, if you take pest control, is unique. If I wanted to benchmark gross margins, I can't benchmark gross margins for a rural firm in the middle of Kansas versus one in Singapore versus a door-to-door company, a residential versus commercial.
They're different businesses and they have different strategies. You can look at an average and say, “I'm better than average or I’m more than average.” That would, in fact, be true, I just don't know how helpful that is. Unless, for you, it's the threshold effect. It’s like, “If I'm at least as good as average, I'm a C student. I'm going to pass.” That's fine. If you want to dig into performance metrics, the key here is pushing the pedal to the metal and benchmarking against yourself from a performance improvement perspective.
Patrick Baldwin: Let me take it back to these conversations about goals and objectives. When you're doing an evaluation for a company, you're saying, “What is your expected revenue for 2024 and 2025?” What happens when you say that but how are you going to do that?
Paul Giannamore: I get a lot of blank stares.
Patrick Baldwin: Then what?
Paul Giannamore: I'm not saying that you shouldn't do this, it's just me. I have not attempted to project revenue. I've never established revenue goals in our business. It's almost like you want to lose weight.
Patrick Baldwin: Here's a Fat Pat joke again.
Paul Giannamore: Fat Pat, let's say that you got 50 pounds to lose. What do you weigh now, Patrick? What would you say?
Patrick Baldwin: 195.
Paul Giannamore: Let's say Fat Pat wants to get down to 165.
Patrick Baldwin: It's all muscle, by the way.
Paul Giannamore: You want to lose 30 pounds. You could, of course, put that arbitrary goal out there, which is like, “I'm going to lose 30 pounds.” What is far better is to not worry so much about the weight in and of itself. Worry about the routines, the habits, and the systems that impact that and make sure that you focus every single day and week after week after week that you're accomplishing those things and then ultimately the weight will take care of itself.
When we just talk about an ideal future state, unless you spend a lot of time reverse engineering what that looks like, I just don't know that those goals matter much. There's a lot of survivorship bias when it comes to goals. I talked to a lot of business owners who said, “I set this as my goal and I was able to accomplish it. Goals are important.” A lot of people set goals. We don't hear from the ones that established their goal and didn't make it. We hear from the ones that set the goal and accomplished it.
I'm far more interested in the resources and capabilities of the firm and what you are doing. In business, how do you compete? What sort of edge do you have over your local competitors? What are you doing to build any unique capability? Are you just going to compete on price? We can bucket advantages or edges. It's like trading, you shouldn't buy or sell a commodity or an equity security unless you have some sort of an edge.
It's the same thing in business, you need to have an advantage, and that can be bucketed into, in my mind, four classifications. Information, what do we know that somebody else doesn't know or know how or particular skills? Positioning, things like brand and reputation or any particular system that you have. Walmart, for example, is not a chain of retail stores, it is a logistic network, and that's how they were able to effectively crush Kmart.
Three would be efficiency. Do you have a certain amount of scale that allows you to be more efficient? Do you have a particular technology? Do you have experience? What have you done to increase efficiency so that you can operate at a lower cost from your competitors? Of course, management of systems. Management, of course, gives you a strong competitive advantage in a marketplace if you've got an awesome management with their head screwed on straight.
You've got effectively four broad sources of an edge. When I sit down and have these discussions, we'll go through the dog's dinner of objectives, which is a mismatch of all the different things we're going to do. There's some sort of broad goal out there, which is, “I'm going to add 20% top-line in 2024.” Inevitably, I start asking questions, like, “What are you going to do to slow down your defection rate and your customer attrition rate?” What's your edge?
Patrick Baldwin: Differentiator is what I think of.
Paul Giannamore: Differentiator can be perceived or it can be actual and part of that comes from the second bucket where I mentioned positioning. You would have a reputation, whether perceived or brand as perceived. In our lines of business here, in general, if you take pest control, who's got the brand? You've got the big boys, which have brands.
Look at Orkin or Terminix, they have these implicit brand guarantees. These firms have been around as long as we've been alive. Everyone knows them. They're trusted. We'll recall from the article that I wrote about my father, Why My Father Chose Orkin. Outside of these big firms, a lot of the smaller ones and relatively new firms are not fortunate enough to have a reputation or significant brand position in any sort of market. We have to figure out other ways we can get an edge.
Patrick Baldwin: Did you have to mention Kmart? I got a little teary-eyed talking about Blue Light Specials. Nostalgia, Paul.
Paul Giannamore: Blue Light Special, Patrick, I remember that.
Patrick Baldwin: Kmart didn't adapt.
Paul Giannamore: It's not that Kmart didn't adapt, it's just that Walmart was a logistics system at its core. They used all the variety of customer data from purchasing decisions and then they made the decision many moons ago to open that system up to all their suppliers so their suppliers could see in real-time as merchandise flew off the shelf.
Now their suppliers could use that data in manufacturing as well as shipping and logistics, which allowed them to have in-time inventory. Walmart didn't have to store a bunch of stuff. The suppliers didn't make a lot of extra goods that ended up being sold at a fraction of the cost at some point in the future because the retailer couldn't sell it. In exchange for that, it was able to give Walmart much better pricing than, for example, Kmart was able to get.
Patrick Baldwin: Have you seen some good edges in pest and lawn?
Paul Giannamore: Yeah, as a matter of fact, I have. There can be a lot of them. I'll give you an example of one. Most pest control companies just grow and they just exist. They go out and they hire an online marketing agency. They might do flyers, they might do signs, and they might do some direct mail, but for the most part, they just cover a large metro area. You might have a neighborhood with 120 houses. You get on your software system and you realize, “There are 120 houses in this neighborhood. Why are we only servicing two?”
You turn around and you geofence that area. You spend sales and marketing dollars. You got your guys cloverleafing in that particular area. You're doing innovative and creative things. You're saying, “Let's go out to every single house in this neighborhood. Once we get 25 neighbors signed up to our residential pest control plan, we will provide everyone here free tick and mosquito treatments or treatment. Maybe 2 or 4 of them. Maybe we'll do pre-holiday sprays.”
You're not cutting the costs and you're not giving them a discount but you're giving them additional value because you're going to have people out there. Now you're able to do 25 homes in one day whereas before, that same technician could do those two homes and they had to go to another subdivision so maybe he could only get eight done. On that particular day, you've dramatically increased your gross margin. It's about thinking about effectively diagnosing your situation, figuring out what your obstacles are, and changing your systems.
Patrick Baldwin: Sometimes pests can be too healthy, the margins are too great, and it's too resilient to have to force yourself to dive in and see if you could improve it. Pool services are weekly, you have to get an advantage there to route and be efficient. For pest, good margins. You might have two houses in the neighborhood you would never even know unless you dive in.
Paul Giannamore: That's pretty consistent with any sort of business. You can just survive and get by but if you want to grow one of these businesses rapidly, it is possible to grow a pest control business at 30% per annum. You can do that for an extended period of time but you have to have your act together.
Patrick Baldwin: What happens if someone has 10% year-over-year annual growth rate and they come to you for evaluation and say, “This year, we're going to do 30% year over year.”
Paul Giannamore: I hear that kind of stuff a lot. My first question is always, “Have we ever done that?”
Patrick Baldwin: You're selling future cashflow so you have to be able to stand behind that document. They have a plan to do this and not just pull it out of their butts.
Paul Giannamore: It depends on what sort of deal we're looking to do too. Let's say you own a pest control company, Patrick, and you're like, “I want to sell 60% of this, take some cash off the table, and then I want to own 40%. I have five more years and I want to grow this. I've got the right stuff to get this done. I could use some additional capital and some other resources and capabilities. for the most part, if I got a strong financial sponsor or partner, I'd be able to do this.” Your five-year-go-forward plan has just gotten immensely more important than if we were having the same discussion with Terminix or Rentokil. That's only looking out for the next year or two.
They're going to discount what you say anyway and they're going to fit you in with what they would typically do in that area. It doesn't matter nearly as much but if you're going to affect some sort of a financial sponsor transaction, you better have thought through your financial projections and pressure tested them. It's not for me to do, by the way. We do that in conjunction with our clients but that's not my job nor should it be one enforcing you to think about it because that's something you're going to own. You should care about it more than anyone because how are we going to create value?
Patrick Baldwin: I love it. One more thing about the user conference, what I noticed is there were a few companies that came across that invested in their people and brought their people to the conference. I thought, one, it builds culture, but, two, it helps them advance their capabilities. Three, it elevates them outside of their business.
I've even had a meeting with two owners that drove in and they had two people there at the conference so that they could learn more about PestPac. They just came in for a meeting and they let their office people learn more about PestPac because they want to stay out of the day-to-day or the nuts and bolts of, “If there's a problem, don't come to me about PestPac. I don't want to be that guy.”
I thought these user conferences can unlock, learn more about the systems, and they can become more efficient if they can bring things in-house. There are a lot of capabilities already integrated into the software so you don't have to necessarily bolt on outside systems to do it. The one thing I loved is I got taken to dinner one night with an owner and four of her people and had a fabulous time. We got to sit there and enjoy and be part of a family. There was camaraderie and they loved each other, which is fun to be part of.
Paul Giannamore: PB, you raise a good point. I am not a proponent of any individual software platform and my data point of reference is only the WorkWave conference. If I were a company using one of these softwares and there was a user conference, especially doing it now in the middle of the winter, I would certainly be bringing members of my team that were directly associated with that software. Not only did they have a ton of breakout classes, they did a good job.
As much as everyone thinks I'm a big drinker, I've got stacks of bottles that people have sent me. Because of Potomac TV, they see me drinking a scotch or whatever. That's pretty much the only time I drink. Now, I have my offices lined with a variety of different things. I got a bottle of Macallan Rare Cask. I also have a bottle of this. This is unopened. Can you read this, Patrick?
Patrick Baldwin: Kentucky Straight Bourbon Whiskey Van Winkle Special Reserve 2020.
Paul Giannamore: This is a bottle of 12-year Pappy Van Winkle Special Reserve.
Patrick Baldwin: Being the silver guy here, Paul, that's cool.
Paul Giannamore: These are almost impossible to get at retail, probably the secondary market. Somebody probably spent $1,500 on that bottle of bourbon.
Patrick Baldwin: They really like Potomac TV.
Paul Giannamore: It's hard to get bottles of alcohol shipped to Puerto Rico, I've heard from a variety of people. I've gotten them in innovative ways. Anyway, I say all of that because even at the bar, WorkWave had all those bars set up and it wasn't one of those things where they've got tequila, vodka, and Coors Light. They had ten different types of beer and all sorts of drinks. I didn't do any drinking but I would imagine, I had people that enjoyed it. The Mexican was there, he cleaned them out. I'm sure that set them back.
Patrick Baldwin: He sure did.
Paul Giannamore: If WorkWave increases its pricing for 2024, the Mexican is partly responsible due to how much he consumed at the open bar, I'm sure.
Patrick Baldwin: Speaking of the Mexican, I'm babysitting him this week at the Eastern Conference so you owe me big time.
Paul Giannamore: That is right. You two are going up to the Eastern Conference. If you are going to MPMA's Eastern Conference in New Jersey, definitely swing over. I don't know where you guys will be and what you'll be doing. Track the Mexican down, you won’t miss him. I'm sure he’ll have shorts on and sunglasses.
Patrick Baldwin: In this cold weather.
Paul Giannamore: I will say I did have a meeting with him in Chicago when we left Orlando. It is Chicago in January 2024 and the guy walked out of the hotel in shorts and a t-shirt in the middle of January in Chicago with snow on the ground.
Patrick Baldwin: Did he complain?
Paul Giannamore: He didn't last very long. He wasn't prepared for that.
Patrick Baldwin: I was going to say he doesn't have feelings.
Paul Giannamore: He certainly does not. Fat Pat, have fun out there. Talk soon.
Patrick Baldwin: Thanks, Paul. See you, man.
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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.
