Paul Giannamore: This episode is a Fat-free episode. Fat Pat is, once again, on the road. As the Mexican would like to say, “He's finally working.” We won't be hearing any commercials for Chick-fil-A or that cookie company down in Texas that he likes that I can't seem to remember the name of. This episode will be a relatively brief episode. What I'm going to do is attack some of the questions that I've received here in my inbox.
Before I start, I wanted to say thank you to everyone who sends me comments, questions, and thoughts. I do enjoy reading them. I respond to every single one of them. It might take me some time but I do respond. In this episode, I'm going to talk about a few of these questions. Unfortunately, I can't go through all of them because, quite frankly, there are a lot of them that if I read them, there's too much information. I never want to put anyone in a position where I could potentially be identifying them over the air so for those, I will respond privately. If you decide you want me to publicize my answer, I'll be happy to do that.
Before we get started with questions, I wanted to talk about something I have been thinking about quite a bit and it just came up once again on my recent travels sitting down with a client. Many of our clients we've had for years so I've gotten to know them quite well personally. The more you get to know somebody personally, the less the conversation is purely about the business and more it becomes one of psychology and what goes on in the mind.
One of the recurring themes that I hear quite often is business owners comparing their performance to other businesses. For example, “Paul, I started this business around the same time as so and so. Ten years later, he's twice the size of me but I've got a better brand, I've got better people, I've got this, and I've got that. He doesn't have it but he's got a better business and he's going to be richer than me and it's extremely frustrating. What am I doing wrong?” I hear it a lot. I heard it years ago when I first got into the pest control industry.
There was an individual who started his business over 50 years ago and had the exact same complaint and it frustrated him and dragged him down. He and his crosstown rival started the same year. Twenty years later, the guy was 4 or 5 times the size and revenue that he was. I don't think that line of thought is helpful to anyone and it's certainly not healthy. We all aspire to greatness. We all want to be the best at what we do. I don't know that size of the business is a great metric for that, number one.
Number two, all of us have different circumstances. We're all Born to unique parents at unique points in time. We’ve gotten unique opportunities in life. A lot of that makes it incomparable. In the case of the old I was discussing, my client graduated from high school, he didn't go to university, and he started working as a technician, he did that for some years, and then he left and started his business on a shoestring. He was working out of the kitchen and wife helped him do the books. He grew that over time to a $5 million or $6 million businesses.
His crosstown rival, of course, is university-educated, not that I think that matters but a different set of opportunities. He had a wealthy family. He had a father who owned a large resi commercial services business so there was cross-sell opportunity. He had a wealthy and retired uncle who wanted to deploy some capital so his uncle invested significantly in that business.
That guy had his own office that he rented the first day he started. He was able to buy vehicles right out of the gate on the first day of business whereas my client didn't have any of those opportunities. With capital and connections, you're able to do a lot of things that you can't without them. I don't think that is healthy. We all aspire to greatness. The older I get, I look at it and say, “We're all dealt a particular hand.”
On my gravestone, what I want is, “Paul was dealt a hand and played that hand the best that he could have.” What you should be focusing on is building your business to the best of your abilities. It is your duty to build out those abilities and educate yourself and get smart. Sure, that's stuff you need to do but you can't compare yourself because it's counterproductive. That goes right into what we talked about when Fat Pat was around, we talked about goals.
I got an email, somebody was shocked and astounded that I don't believe in goals, which is not what I said. I've felt like a lot of business goals are not particularly helpful and they're specifically not helpful at all if they're confused as strategy. Take a simple example of, “I want to lose weight. I want to lose 50 pounds. I can make this big goal. I'm going to lose 50 pounds by June 1st.” That could be helpful but do you know what would be more helpful? It’s saying, “What can I do right now today to change my lifestyle? I can quit drinking calories. Henceforth, I'm going to drink unsweetened coffee. I'm going to drink water instead of soda.”
“Every evening, I sit my fat ass on the couch and I watch Netflix. Instead of doing that or some stupid sports game, I'm going to walk or I'm going to go to the gym. I'm not going to worry about that 50-pound goal but every single day I'm going to start to make these small incremental changes in my lifestyle. For lunch, I'm not going to eat that bag of shit that I usually get from McDonald's. I'm going to switch that out and I'm going to eat something far more healthy and nutritious for my body.” Small changes to your diet over time and small changes to your lifestyle ultimately results in the 50-pound weight loss goal that you have.
The same thing in business, we can all make all these great, “I'm going to grow revenue by 10% or 20%.” If you sit back and look at one thing, you make these small Kaizen-like changes in your business and say, “Last year, we had a problem. We had so many incoming calls in the office and we did not have enough people to answer the phone. This year, if I do nothing else, I'm going to make sure that not a single call comes through that's not answered on the second ring.” If you start doing that, I guarantee you will see an incremental improvement in your business.
There could be a myriad of different things but what I'm trying to get at is instead of coming up with this random goal that doesn't have any action behind it, start to think about the lifestyle changes that you can make in your business. It's still January 2024. What lifestyle changes would you make to not be a fat ass anymore? What lifestyle changes could you make in your business to make it more efficient, more profitable, and less risky?
That's all I'll say on that topic. Let's delve into a few questions here. I'm going to dispense with a lot of the preambles and go right into the nuts and bolts. “What areas of the country would you open an office in? What cities are getting the highest prices now?” For those of you who are informed, you would know that that's a classic door-to-door question. We're going to open up some new offices. What's the best area? What's hot? Where's the top dollar? All that sort of jazz.
I don't know that that's necessarily the right question because you're asking where the highest prices are today and where they might be a year or two or five years from now. It’s indeterminate and I can give you some concrete examples of that. Back in the old door-to-door days when Terminix was around and effectively the only buyer of door-to-door businesses, the Carolinas were largely off limits because Terminix was not prohibited to operate in the Carolinas due to the franchise relationships.
Anyone that built a traditional summer sales business, a business that threw a bunch of accounts on the doors, ran it for three years, and tried to sell it did not have a whole lot of exit opportunities. As the market has changed and more companies are willing to buy businesses that have been built up on the doors has changed. North Carolina has been a pretty great market for companies that have been built up on the doors but that was not the case for decades before that.
Where I would probably take this conversation is not so much where the highest prices are but always go back to first principles. What makes an asset particularly desirable? When you think about it from a geographic perspective, we have talked about tertiary markets, meaning sometimes it's better to be a big player in a small market than a small player in a big market. There are some caveats to that.
For example, I'll use the Mexican’s terminology as he calls it, Arc-Kansas, and the rest of us may know it as Arkansas. If you were to open a business in Arc-Kansas, you might not have nearly as many exit opportunities as you would if you opened a business in Northern Virginia. In Northern Virginia, not only do you have a plethora of private equity-backed platform businesses making acquisitions. Of course, you have all the big players out there. In Arc-Kansas, you would have not nearly as many.
Back some years ago to a roughly $15 million business that we sold, it was in what I want to call a rural state but it wasn't up and down the coast. It was in a non-traditional area for acquisitions. The acquirers were all brought to the process and there were a lot of private equity firms in the mix and the PE firms all looked at it and said, “Wait a second. This is a very desirable business. It's got a great growth rate. It's got great cashflow margins, 20%+. It's extremely recurring, 75%+ percent.”
It's a great business but there's a problem. Hundreds of miles around this business, there are a small amount of small players. If we have to pay the player overpay to make this acquisition, we're not going to be able to blend down our multiple by buying smaller businesses at rapid clip. Therefore, we're not going to be able to get our return and coming out to see you guys for management meetings wouldn't make a whole lot of sense so we're out.
Anticimex came out and showed up at the meeting. They got through the first phase of the process, got to management meetings, and loved the business. I got a similar call to them, which was, “Paul, we would love to get a new platform. We don't have anything in that area. This would be an ideal player for us from a fundamental perspective. With one caveat, there's not shit to buy around that business. We're going to have to go ahead and pass.” It was ultimately bought by one of the other strategics in the space. The deal did get done but it wasn't an ideal situation.
How I would answer that question is you shouldn't think so much about where the market is today because it changes, particularly in the era of private equity driving geographic consolidation in the space. If you would have asked me this question years ago, I would have had much more concrete examples as to where Terminix and Orkin were buying certain assets. Now, with the advent of Rentokil being a large player and Anticimex in the market and all the other private equity firms, where the market is hot doesn't make a whole lot of sense.
If you have the luxury to choose where in the United States you would want to open a pest control business, I would tend to focus on population centers. From a personal perspective, I like businesses that are in colder climates because the natural barrier to entry keeps customer pricing up and it keeps competition down. It is hard to run a business in some of those cold crappy climates of the upper Midwest from a seasonality perspective.
The next question, “I was approached by a company that wants to buy my business and I would actually really like to sell to them. They made an offer that I think is fair. Should I accept it or should I try to negotiate? I don't want to scare them off.” This is probably one of the worst ways you could possibly sell a business. There are a million things that I want to say about this but I'm going to guard rails on my discussion.
I'm going to answer your question but let me preface this by saying that you should never find yourself in a position where you're dealing with one buyer. When you go out and date, do you meet a girl at a restaurant and, the next day, she tells you she wants to marry you and you say, “That's a great idea. Let's do this.” It's not particularly attractive coming from a female, number one. Number two, you haven't done any dating. It's a bad position to find yourself in.
Number two, you said the offer is fair. In the M&A world and just like in the real estate market selling any sort of asset, sometimes it's hard to ascertain what's fair if you don't understand what the market is. You can't understand what the market is unless you have comparables. You have one unique asset in a specific market and you should have a handful of buyers vying to make that acquisition. That's not the question that you asked me so I'm not going to talk about the formal M&A process. Instead, I'm going to answer your question. Should you just accept it? Let's roll reverse. When you're talking about M&A, strategy, and tactics, reversing the role is always a good way to think about things.
Let's assume for a second you are making the acquisition. You rolled up on a company you liked, you wanted to buy it, you thought long and hard, you put together an offer on paper, sat down with the owner, and handed it to him. He takes a look at the offer and says, “I'm going to talk to my wife.” The next day, he comes back and accepts your offer. What is the first thing that you think? I'm not sure what you think but what I think is, “I overpaid for that business. I could have done better.”
When somebody accepts your first offer, the immediate response to that is, “Damn it, I could have done better as the buyer.” You never want to put yourself in a position where now you've made that buyer feel like he could have gotten a better deal. In negotiations, in general, as a rule, you should never worry about scaring anyone off. Whoever is most concerned about whether or not the deal dies seeds a tremendous amount of leverage to the other side and that's number one.
Number two, people are not happy unless they work for it. It’s like that chick who you met yesterday who said, “It was great meeting you yesterday. I think we should get married.” You didn't work for that. How are you going to appreciate that? Seriously? No. The other side has to work for it. You have to be willing to ask for things that are ridiculous.
When you're selling a business, you should start getting in the business of asking for things that embarrass you or would embarrass the reasonable person. I bring that up because the Mexican always asks for things that embarrass me. They don't embarrass him and they should but he's not the average or the reasonable person. Unfortunately, he and I travel a lot together.
On a trip to the UK, he and I booked our economy class tickets. I'm on the million-mile a year program with the Oneworld Alliance so I usually get upgrades. He has not flown as much as me so he often does not get the upgrades. On that recent trip, I was upgraded. He had his economy class ticket. I hopped into business class, was all muscled in, and got my champagne. I was thinking, “This is going to be great, nine hours of not having to deal with the Mexican.”
The next thing I know, I look up and here's this knucklehead coming down the aisle sitting in the row right in front of me. How did he do that? He was not qualified to get an upgrade. He was so far down on the list. He asked for it. He asked for it once, twice, four, or five times. He harassed the front desk nicely but kept asking for it. He gets his way by asking for ridiculous things and he does that all the time and that's exactly what you should do from an M&A perspective.
No, I would not under any circumstances just accept that offer because if you do, the other side is going to feel like they could have done better and they're going to make sure they take it out on you in the process. There’s a myriad of other things they can do once you get an exclusivity to beat the crap out of you. That's not a good way to do it.
In closing, I'll go back to my discussion on comparisons, comparing your business with that of your competitor. I live down here in Puerto Rico and there are some significant tax incentives. There are some pest control people who have taken advantage of those tax incentives and are down here in Puerto Rico. It has attracted a lot of billionaires. There are a lot of individuals down here who've had multi-billion dollar exits who are down here in Puerto Rico. Some of these guys are the healthiest they've ever been. It's sunny 365 days of the year. It never gets too hot, it doesn't get cold, and the sun is shining. They're able to work on themselves.
A lot of these guys I feel are not particularly happy. As a business owner, you can get focused on having $1 million, $5 million, $10 million, $100 million, or $1 billion. There are a lot of guys out there who want to be billionaires. The older I get and the more time that I spend with people that have tremendously more financial resources than I do, I come to realize that be careful of what you wish for. I'm not exactly sure who said this and I would credit him or her if I could remember, especially for men out there, life's really not so much about the pursuit of happiness but the happiness of pursuit.
If you get focused on how you can make yourself better, work hard on yourself. How could you make yourself better mentally, spiritually, and physically? How could you focus on your family? How could you focus on building the absolute best business that you can given the resources that you have and the hand that you were dealt? It's what it comes down to.
If you continue to compare yourself, if you got $50 million or $100 million dollars in the bank, I guarantee you there's somebody with $500 million or $1 billion. It doesn't do a whole lot for you. Sure, it gives you the freedom to travel and do these things. No one wants to work because they have to. At the end of the day, I do think that these false comparisons based upon your unique hand versus others are not productive.
The reason why I'm bringing this up is because it is very prolific. I talk to a ton of business owners every single year on an intimate basis. I talk about families, divorces, death, and kids, you name it. I know a lot of things that business owners aren't comfortable talking to anyone else about because it is lonely being at the top.
In life, a lot of these guys who have exited, guys that you've heard on The Buzz, guys that you know out in the industry, just because you get a $100 million check doesn't dramatically change your life. It changes your life in one particular way and that you don't have the happiness of pursuit. There are a lot of these guys who itch to get back into the game. You can sit on a ton of cash but, at the end of the day, it's going out there and proving yourself, improving your business, and making the world a better place. These are the things that give men joy.
I'm not talking to the exclusion of women here but I am a man and I have never understood how women think so forgive me. When I think about things as a man, it is that happiness of pursuit, the thrill of the chase, and building something. There is a profound sense of loss in the lives of entrepreneurs when they no longer have their business. Some quickly redeploy capital and do other things that are more exciting and I get that and that's a great thing to do. The false comparison based on your hand versus somebody else's hand will get you nowhere. Focus on those incremental improvements in every facet of your life and I guarantee you'll be much happier for it.
I will close this brief episode by asking you a few questions. Number one, anyone with any sort of suggestions as to guests that you would like to hear, definitely write in, TheBuzz@PotomacCompany.com. We're going to be kicking off a new season of guests. We were supposed to record a guest but since Fat Pat was on the road, we pushed that off. I'd love to hear the sort of guest request the audience has.
Since Fat Pat is not here, Fat Pat runs an accounting business called FRAXN. Fat Pat is not an accountant. I wouldn't trust a guy to calculate the tip on my restaurant check. No doubt about it, he's the exact opposite of an accountant or a bookkeeper. I will say he's done a phenomenal job. Cameron, who is a total nerd, is the type of guy I would trust with my books. The rest of his team, Brittany, Andrea, and nineteen bookkeepers on staff, many of whom have CPAs. I've gone through the books because now we are doing valuation work for FRAXN clients.
To give Fat Pat credit where it's due, I don't give him much credit but I'll give him credit, the team has done a wonderful job. The books are super clean and I like what I see. As 2024 kicks off, if you find yourself in a position where you need assistance with bookkeeping and accounting, which to me sounds like a horrible and boring thing to dedicate your life to, Fat Pat seems to love it and his team has done a great job. I like to give him a lot of shit but do reach out to him and tell him the name sucks. If you need bookkeeping, that's the first call that I would make.
That said, I am heading out of here. We're going to see Seth Garber and team at Energy. We're going to be recording a lot of Potomac TV content. We've got a multi-part series on private equity investments in the pest control space and we've got one on lawn care and landscaping as well. That will be going up in the month of February 2024. If you're not a subscriber to Potomac tv, that's Potomac.tv. Get on there and subscribe. I guarantee you'll find what we're doing interesting. Until, next episode.
TheBuzz@PotomacCompany.com
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