Paul Giannamore: You're on the buy side, you want to get the sell side talking. It's all you want to do. You got questions, you sit back there, relax, and listen. The more information you can get, the better.
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Patrick Baldwin: Paul, we did get some listener questions.
Paul Giannamore: Good.
Patrick Baldwin: You ready?
Paul Giannamore: I'm ready. What do we got? These are listener questions that I have yet to peruse because people tend to go to you rather than me so let's do this.
Patrick Baldwin: Surprise. Here we go. “I was approached by a local competitor doing about $1 million per year in revenue that wants to sell his business. He said that he is talking to one other buyer. How can I determine the value and what is the best way to position myself against the competition?”
Paul Giannamore: Let's reverse the roles, PB. How would you answer that question? I'll provide support.
Patrick Baldwin: I channeled a little Bill Hoffman thinking about before this happens, hopefully, I would have been building a relationship to make that positioning easier. Finding out what he needs, what does he want? What is he looking for? I want to get a good deal on it. What's important to him? If I can, I want to be able to cashflow it so lower down payment to do it.
Also, making sure that he feels like it's a culture match because a lot of people selling their business wants to make sure that their people are taken care of, that they have good opportunities, and that they're going to get paid. Also, they're going to get the best offer. Personally, as a buyer, I want to de-risk it. I want to put more on a personal performance base but give him more upside. Knowing if he's confident that his business is going to stick and his clients are going to stick around, then everyone's going to win. I want to pay more for that business but I want to pay less up front.
Paul Giannamore: As you're talking, I was thinking about your boy, Chris Voss, was down here. I had breakfast with him. He's down here in Puerto Rico from Never Split the Difference. I know you were the one who originally recommended that book.
Patrick Baldwin: I said, “Paul, you should learn about negotiating. Read the book.”
Paul Giannamore: I read that book and I didn't like it. It's not that I didn't like it, I didn't think it was directly relevant to that which I do on a day-to-day basis, which I can tell you it is not.
Patrick Baldwin: Did you tell him that?
Paul Giannamore: I did. As a matter of fact, we had an hour-long chat about it. He's going to get on Potomac TV at some point. We're going to try to do it but he didn't have time. We're going to do that hopefully at some point in the next few months when we get on Potomac TV because I told him, “Chris, I want to talk to you about your experience.” If you've read the book, he's a hostage negotiator. He worked for the FBI and he did that for seven years and he's done a variety of other things. What didn't hit me until when I met with him is that in almost all of his negotiations, he is the buyer. I'm letting you think about that for a second.
Patrick Baldwin: He's got money and resources and they've got the hostage.
Paul Giannamore: That's right. He is trying to get the other side to let something go. If you're the hostage taker, you're somewhat akin to the business owner that owns a business. The hostage is the scarce resource, as is the business. Unfortunately, as the hostage taker, you can't create leverage through competition and those things. At the end of the day, he has to use a lot more finesse, which you would have to do as a buyer.
I've talked about this a lot on The Buzz as well as on Potomac TV that when you're on the sell side, you're more of an auctioneer. You're worried about auction dynamics and creating a process by which you can create leverage using things like deadlines to your advantage, information, and so on and so forth. Whereas, a buyer, you've got to play by a different set of rules. His brand of negotiation and the types of things that he talks to is far more relevant to the buy side where he talks about empathy, mirroring, and those things.
It wasn't until we were having a chat that it struck me that it is just negotiation but from a different angle. What you were saying is correct. When you look at most sellers out there, particularly the smaller ones, even some of these large companies have zero idea what they're doing. Number one, they can't value their assets. Whoever asked the question said, “How do I value this asset or how do I determine what it's worth?” The seller is having the same problem. For the seller, it's worse because the seller has got one shot at this and has zero idea. He's heard some things, he's talked to some folks, and he has no idea.
Patrick Baldwin: I heard, three times, recurring revenue for a business that was less than $500,000. It’s like, “It’s not quite.”
Paul Giannamore: It’s a total non-starter.
Patrick Baldwin: That's what their question was. That wasn't the actual deal. They're like, “I heard through the grapevine that that's what businesses sell for.”
Paul Giannamore: Obviously, you should never price an asset in a large financial transaction. Large is relative based on what other folks are chattering about. Anyway, he's trying to get some price discovery. When you put yourself in the buyer's shoes, number one, you have to assume that most sellers, no matter how sophisticated they are, if they're not running a proper process, they're going to make one error after the next.
I always tell buyers, “You need to go in there and, number one, build the relationship.” A lot of the private equity buyers in a variety of different industries but particularly our sorts of industries, home services, come off like total douchebags. A lot of these guys are condescending pricks. They'll come in, they'll talk about the MBA, they got the investment bank they work for, and the deals that they've done before. They wear their vests and, quite frankly, sellers are like, “I don't give two shits how much you're going to pay me.”
You've got to use the opposite playbook from the douchebag private equity guy or the arrogant guy that works for Terminix who's going to come in and tell you how to run things. You have to take the opposite position and try to build a relationship with the seller. You nailed it right on the top. What made me think about Chris Voss is understanding what it is that these guys want. What are their goals and objectives?
If you can start the conversation that way, get to understand them, shut your mouth, let them talk, and do more listening than talking, you can understand that maybe they're not ready to hang up the boots. Maybe they don't want to work for another five years but they're burned out. Maybe their wife is ill. There are a lot of different reasons why they might want to sell. You might find yourself in a position to get a good deal for yourself and help out a seller if you sit back, shut up, and listen.
Yes, you nailed it trying to figure out what it is exactly that they want. Number two is trying to differentiate yourself from your competitor out there trying to buy them. At the end of the day, it never ceases to amaze me how much money people will leave on the table to sell to somebody they like. They'll justify it in their own mind and convince themselves that they did do full price discovery. There's a real psychological bent to this.
Another way is to make sure that the seller thinks that price is objective or I should say value is objective rather than subjective. They talk about going prices. We talk about this all the time that they should think in their mind that no buyer is going to view it differently from a value perspective, which is exactly opposite and false but most sellers will believe that.
I'm here trying to help buyers and not sellers but most sellers will eat that. A lot of it comes to justifying things that they want to believe irrespective of whether it's true or not. What I mean by objective versus subjective is the value of a $1 million business to company A might be substantially higher. For example, if company A sits right on top of that business and can create a lot of cost synergies and maybe some revenue enhancements and can use some of those employees versus company B that's outside of that footprint that wouldn't get nearly as many synergies and won't get the same cashflow from that business.
Maybe they don't want it nearly as bad as company A would. The subjective value that both of those buyers are going to put on the table for that business would be entirely different. Sellers often don't think that way. They think, “This is my business. There's some sort of a going rate.” Convincing them that that's the case will only help you typically as a buyer.
Patrick Baldwin: Paul, I'm putting some things together here. You've talked about, in terms of investing, your entry point is the most important thing. You're talking about return on investment. You've also talked about, at the end of the day, a seller is going to sell this asset once in his lifetime, once every 20 or 30 years, it's a rare, maybe a one-time-only occasion, and they have to live with this.
If there's not full price discovery, then they're living with regret. As soon as they are accepting that letter of intent, they move into exclusivity and there's no more price discovery. It's always like, “Did I do enough to find the best price? Did I do enough to get the best offer?” This is not something to glaze over on.
Paul Giannamore: It's inevitable that anytime somebody signs a letter of intent, which means they're an exclusivity now and you haven't done the deal but you've signed up with a buyer saying, “I'm going to work to get this deal done with you and I'm not going to talk to any other lovers out there.” You're exactly right. All of a sudden, the question is, “I didn't talk to any of their buyers. Am I getting an awesome deal or am I getting screwed?” There's no way to tell unless you went out and got full price discovery. I can't tell you. I value more pest control companies than anyone else on the planet and I can't tell you that. That's the only way to know. If you don't do that, you will always ask that question.
Patrick Baldwin: In terms of just pure logic, the opposite of getting full price discovery is answering and taking the offer of the first person that called you that you fall in love with.
Paul Giannamore: That would be correct and that's what you want.
Patrick Baldwin: As a buyer, that's what I want.
Paul Giannamore: You want the girl to ask no questions and be like, “Yes, I found the one.” That's what you want. “Do you live at home with your mom?” You don't want her asking that. You want her all in. I don't have enough information to give you a good sense of how I would value that business. As a buyer, the first question that I would ask myself is always the build versus buy scenario.
We've had a lot of people on The Buzz over the years and a lot of guys have made acquisitions and a lot of guys have started offices de novo. Both groups of people have made horrible mistakes and they've also had some great wins. You always have to make the build versus buy decision and only you know that. When I think about a $1 million business, what am I buying? Maybe ten employees. What's the owner going to do? That's a great question.
When I go down to P&L, and we've talked about this on The Buzz and this might get a little bit repetitive, the first thing I look at is the growth rate of the business. Where are we at? Is this growing or not? Secondly, I look at the quality of the revenue stream. What is the pricing of that business? What are services priced at? How recurring in nature is it? Are we taking credit card payments? Are we getting paid quarterly at service charge? How is all of that done? How does it match in with your own business model?
Before you start thinking about cashflow and valuation, you have to ask yourself, “Is the pricing right on this? If I buy a bunch of low-priced services, am I going to be able to raise the price here? How active is the owner of this business in the relationships with the customers? If I lose this owner, what's going to happen? Are these guys are going to dart out of here?” In my opinion, you can't and you should not go right into valuation unless somebody comes to you and says, “Here is asset X and here's what I want for it.” If there's an asking price and this is what I want, you could start saying, “Does this price make sense?”
One of the things we've always talked about, Patrick, is you have investment value and you have fair market value and those are two different standards of value. When I think about a standalone $1 million pest control business, if I were doing it, I would say, “Forget me for a second. Forget my business. Forget me making this acquisition. What is this business worth to the seller on a fair market value basis? What would this thing be valued at if there were no deal going on right now?”
Hypothetically, if it was a non-strategic buyer or a financial buyer, what would they be willing to pay for this business? Which is purely based on the fundamentals. Of course, you can make a calculation based on what is the strategic or the investment value of that asset based on what it's worth to your business and the Delta or the difference between fair market value and investment values. They value the creation zone of the transaction.
The closer the price is to fair market value, the more value you, the buyer, is extracting from the transaction. The closer the price is to strategic value or the highest value available to you, the more value created in the deal that you're handing over to the seller. What we saw in pest control is, years ago, we fought hard to rest as much of the value creation zone as we possibly could from buyers, Terminix, Orkin, and all those guys. It was extremely difficult.
Over the years, as asset prices have gone up, there were a lot of deals done where these acquirers were creating no value and doing the transaction. The seller was capturing all the value creation of the deal for themselves. That's still continuing to a certain degree today. We can talk deeper about valuation in another episode. I do think you're on the right track. The core of all of this is, remember, these are people who have built these businesses over the years. They want to feel warm and fuzzy about who they're selling their business to. The best thing that you can do as a buyer is be extremely humble.
Patrick Baldwin: If I'm the seller and you're the buyer and I come to you and say, “Paul, I want to sell my business for $1 million dollars.” Would you accept that number? You're going to ask some questions, like, “What's the revenue quality? What's the pricing?” To me, you're better off negotiating one direction or the other, not just accepting that $1 million ask.
Paul Giannamore: Never, under any circumstance, could you accept the asking price without at least attempting to negotiate. I'll give you an example. Let's say that I have a car here that I want to sell.
Patrick Baldwin: Is it a Jaguar? Is it purple? Was that a purple Jaguar? The Mexican was selling a Jaguar on Facebook marketplace.
Paul Giannamore: He's constantly moving cars. He steals cars and sells them, I'm not sure. Let's say I've got a car I want to sell and I could probably sell it for $20,000 and you roll up on me and you say, “Paul, I want to buy your car. What do you want for it?” I say, “I don't know, Patrick. What would you give me for it?” Give me a number.
Patrick Baldwin: $15,000.
Paul Giannamore: I'll take it. How would your response be to that?
Patrick Baldwin: As quick as that was? No pushback? I'm like, “I should’ve asked for $13,000.”
Paul Giannamore: There you go. No matter what, people always have to work in a transaction. They have to bargain for a price.
Patrick Baldwin: It’s not American culture. You go to the store, there's a price on everything. In other countries, it's a respectable thing to negotiate buying and selling. If someone comes and knocks my door for selling me pest control for $99, I’m like, “No. How is $79?”
Paul Giannamore: It's a little different. There are certain products, you walk into a store, and there's a price tag. The price of onions at the supermarket has not arrived at the bargaining table and it's like, “Here's the onions, $0.99 a pound. Take it or leave it.” With other things, with larger assets, with things where markets may be a little bit more opaque, you got a used car, there's not a set price for that. There's not a manufacturer suggested retail price. With regard to used cars between private buyers and sellers, I do think people are always willing to negotiate. Americans are ready to negotiate that.
In that whole car example, if you offered me $15,000 and I immediately took it, you would be like, “I could have done better.” You would have left the transaction feeling like, “I didn't do such a great job as a negotiator. What do I not know? I didn't get a good deal for myself.” If I would have fought you for it and you ended up paying probably $17,000 or $18,000, you may have felt better about the deal in and of itself than paying $15,000 because you fought for it. I do think you have to fight for it.
Patrick Baldwin: Going back to this example of buy side and sell side, we're sitting down at lunch, you want to sell your business, and all this. If I'm the buyer, are there foolish questions? Here are some foolish questions that get asked all the time and I don't know if they should or not. I'm the buyer. Paul, is it okay for me to ask you, the seller, “Are you talking to anyone else?”
Paul Giannamore: For me, there's no questions that are off limits. You're a buyer and so you naturally feel like you have to sell yourself to the seller, especially if there's competition, which is true. You have to go in and demonstrate why you would be the preferred buyer at any price. Sometimes, some of the people that work for the buyers get more focused on talking about themselves and talking about all the accolades of the buyer and tooting their own horn and it puts people off.
The worst thing you can do as a buyer is come in and talk too much. I have given buyers advice over the years saying, “If I were you, I would say substantially less than you said.” Every word that comes out of your mouth doesn't improve your case. You should ask a lot of questions of the seller. When you think about leverage, how do you get leverage in any transaction? You get leverage from the use of competition if you're a seller. That gives you leverage.
Judgment gives you leverage. You have an advantage in edge if you've got great judgment honed in years over deal making. Information gives you leverage and advantage. The more information you can get about the other side and simultaneously, the more information you can conceal on your side, the better off you are, bar none. I was once involved in a negotiation and it was when I was at American Capital, which is a private equity firm.
We sat down with a seller and it was a proprietary deal, it was one that we had reached out to the guy just like everyone gets contacted today, “We're interested in your business. Dear, Patrick. You run a wonderful firm. Everything that we've seen online is great. We want to sit down with you.” We sat down with a seller and we started to get to know the guy. Around the third meeting, when it started to get serious, we signed an NDA, we passed some numbers back and forth, and then he started to get more and more comfortable with us.
He let slip that his daughter was getting married and he was going to be gone for two months. He was going to the wedding and then he and his wife were going to take this trip that they had planned forever and ever. He had a deadline that impacted him but did not impact us. We were able to use that knowledge and we slow rolled the negotiations until a few days before this big trip. He was going to his daughter's wedding. He was going to go on a two-month trip. We were very slow in our negotiations.
All of a sudden, a couple of days before the trip, our firm all of a sudden decided we needed to make some decisions. We also knew that he needed to make some decisions. He told us that not for any other purpose other than the fact that he was talking and getting to know us and thought it was inconsequential. I have no doubt in my mind that was probably an expensive mistake that he made because he wanted to get the document signed before he got on a plane to go to the wedding and the two-month trip.
He was willing to acquiesce to some things that he never should have. The question is, is that taking advantage of somebody? I do not believe that it is. I believe that, as a negotiator, it is your duty and responsibility on behalf of your client to get the best deal that you possibly can without cheating and lying and fraud. You should use this stuff if you can extract information.
In that particular case, we had the topic of not only a deadline, which is the use of time for leverage, specifically a deadline that impacts. I was talking to Chris Voss about this because he doesn't like deadlines. When you're thinking about it from a buy side perspective, he may be right. I use the shit out of deadlines, particularly when deadlines impact the other side and don't impact me.
Patrick Baldwin: I was going to call you Dirty Paul, Buy Side Paul, but you told me it wasn't dirty. It was leverage.
Paul Giannamore: These are small things that you can use to your advantage and you should use them to your advantage.
Patrick Baldwin: Is it okay to ask, if I'm going back to my question, “Are you talking to anyone else,” if I'm a buyer? I know that information but it might also plant the idea in you that you would be. You would asking yourself. If you're a seller, you don't do a lot of deals, or this is your only deal, I'm asking you if you're talking to anyone else, that might raise a red flag. Why is that important?
Paul Giannamore: There are ways to ask that question without asking that.
Patrick Baldwin: How would you fish around that?
Paul Giannamore: You tell me? I, Paul, I'm the seller, and if you wanted to know if I was talking to anyone else, what could you ask me without asking me that question?
Patrick Baldwin: I was thinking about that. I don't know an indirect way to ask that.
Paul Giannamore: Give it a whirl.
Patrick Baldwin: I'm channeling someone else here for a second. I would never sell to an Orkin or Terminix. Maybe I'm positioning my question this way and saying, “Paul, surely you would never ever sell to an Orkin or Terminix. You'd rather sell to a Fat Pat like me, right?” Maybe that's a terrible way of positioning it.
Paul Giannamore: I would take even a more simple approach and start to ask, “Patrick, I appreciate you sitting down with me. You built a great business and I wouldn't be here if I wasn't interested in it. What's most important to you and a buyer? Why did you decide to sit down with me to begin with?” That would start the conversation and I would start to extract from you what's important from you and a buyer and see where that conversation went organically.
Patrick Baldwin: That might divulge where he's like, “Talk to other people. I met with so and so and that didn't fit what I wanted.”
Paul Giannamore: Exactly. Always, you're on the buy side, you want to get the sell side talking. It's all you want to do. You've got questions, you just sit back there, relax, and listen. The more information you can get, the better.
Patrick Baldwin: Now, I'm curious. Voss talks about anchoring. You've talked about anchoring a lot. If I'm the buyer, you're the seller. Is it foolish for me to ask you how much you want for it?
Paul Giannamore: I'm the seller. I typically don't do that. If I were talking to the CEO of Terminix, I might ask that question. The more sophisticated the seller is, the more comfortable I would have asking that question directly. If you've got a seller that has a $500,000 in revenue business and thinks it's worth $7 million, the last thing that I want to do is enter his ballpark. I don't even care what he has to say because it's completely asinine and has no bearing on reality. I want to be the one that's in control of that situation.
My rule of thumb is I size up the principle or the seller's knowledge of prevailing market prices, valuation in general, and so on and so forth. The more sophisticated they are, the more likely I would be to have a direct conversation about price. The other thing that I would also focus on is with smaller sellers, price matters but a lot of other things matter almost just as much.
I have seen people swing deals on the fact, like, “I don't want to have to buy my own health insurance.” I don't know how much it costs. What is it? $10,000 a year? $50,000 grand a year? Who the hell knows? On a $2 million transaction and you've got a guy who doesn't want to spend $2,000 a month on his own health insurance, throwing in health insurance may get you a $1 million discount on a purchase price. It sounds ridiculous but these things happen all the time.
You've got to first understand what is most important. You can sit down and I would say, “Patrick, in order for me to do a deal with you, this has to work for me. This has to make a lot of sense for my company.” I'm going to be writing you a check and it's got to make a lot of sense. It also has to make a lot of sense for you.
Let's start with you. You're the one that has this great business. What are some things that are important for you? You've been working here for twenty years. Are you looking to retire or is it something that you would be excited about sticking around for a while, which you would like to work on for the next five years? By the way, in an ideal world, how this would work for you, don't tell me what you think I want to hear.
If you tell me the truth, I'm going to try to make this work no matter what it is. The more you tell me the truth, the ideal situation for you, the better I'm going to be able to tailoring my offer to what it is that you want. You should just focus on their goals and objectives. Especially if you're a privately-held business going out making acquisitions, you can do a lot of things. You can get creative in ways that big public companies can't do. You might find some things that really interest this guy.
Patrick Baldwin: Why is that? Why the flexibility? Where do public companies have their hands tied?
Paul Giannamore: It's against the RSA for us to put you on a healthcare plan if you're not working for the company. You want to be a W-2 employee but we can't have that because you're not working X number of weeks and you wouldn't be a proper employee. We can owe you a 1099 deal. I'm like, “I don't give two shits. It's my company. You want to work ten hours a week, I'll make you a W-2 employee. I'll give you health care. I don't care.” You can do things that they have red tape and stuff and they can't do. We beat that question to death, Patrick.
Patrick Baldwin: I had one more for you. Do you ever feel like going back and doing buy side?
Paul Giannamore: I'm not good at buy side.
Patrick Baldwin: I don't know, Paul. I was about to sell you a business.
Paul Giannamore: Patrick, I love the sell side.
Patrick Baldwin: I know.
Paul Giannamore: It's where I am. Although, I was quite good at buy side.
Patrick Baldwin: The truth comes out. That was leveraging. You were trying not to give that information that you were good at buy side so that no one could use it against you. Thanks, Paul.
Paul Giannamore: You're welcome, Patrick.
Patrick Baldwin: I see what you're doing there. Another question, “We have some excess sales guys and want to move into a new state this year. What are the best cities or states to start a pest control business?” This is door-to-door-esque when I hear this question.
Paul Giannamore: I was going to say, is there a phone number in that email? Does it start with 801 or 435? Is that the other one out there?
Patrick Baldwin: The Mecca of door-to-door.
Paul Giannamore: That's definitely a door-to-door question. We've definitely talked a lot about door-to-door. It's impossible for me to tell you what state to go to. Was it you I was talking to about what states I wouldn't go to?
Patrick Baldwin: No.
Paul Giannamore: California.
Patrick Baldwin: That's for sure.
Paul Giannamore: It's weird because I've really heard a lot lately, specifically with financial sponsors of the private equity firms. When we run California deals, I'm seeing the number of sponsors wanting to bid on that dwindle very quickly. I know California is a hard place to do business but it's starting to amaze me the guys getting scared off of California.
Patrick Baldwin: It seems like, every day, I'm talking to another California operator that's like, “Help. I want out.” At least physically moved out of the state just to deal less with that state.
Paul Giannamore: Two states I would avoid would be the state of New York and the state of California. Both of those are getting worse by the day. One area of keen interest from financial sponsors is another than the Fat Pat state, the Lone Star state. We're not going to talk that long about this one. I don't know where to tell you to send your sales guys as long as you avoid California and Utah. Utah is not a good place to do it either because tons of door-to-door guys practice in Utah.
Patrick Baldwin: Alaska? There are ten companies up there.
Paul Giannamore: I don't know what goes on in Alaska. I've never been to Alaska. We got to track Jacob Borg down and ask him. He bought that little shack up there because he likes to do his salmon fishing. Which reminds me, I need to get more Omega-3 fatty acid in my diet, Patrick.
Patrick Baldwin: I'm glad I could help you. Paul, I don't know if I was allowed to talk about your diet or not so I was avoiding it. Since you brought it up, how's that going?
Paul Giannamore: It's not really a diet, PB. I have cut down on red meat though. As you know, I'm having one serving per week.
Patrick Baldwin: Don't go all crazy having one serving a week, Paul, splurging like that. I don't know if I can welcome you back into Texas as a vegan, just saying.
Paul Giannamore: I'm not a vegan. I had a dinner meeting. There's one place here in Puerto Rico and only one that serves great sushi and the rest of them are total garbage. The Mexican told me about a joint that I went to and I thought it was great. The Mexican’s way of choosing a restaurant is, “Mexican, where do you want to eat?” He would look around, “There.” He just picks whatever is in eyeshot. That's how he eats. When I'm in Manhattan with him, it doesn't matter what it is.
Patrick Baldwin: We're done beating that dead horse talking about your red meat diet.
Paul Giannamore: Yes.
Patrick Baldwin: One more, Uncle Paul. “When moving into a new market, is it better to build a branch from scratch or buy an existing business?”
Paul Giannamore: Didn't we just talk a little bit about something like that? The first question, we talked a little bit about buy versus build. I don't know if it's a better idea or not. It depends upon your capabilities. It depends upon the availability of assets that make financial sense. Historically, look back over 30 years in pest control, it would have been a great idea for many of those years to go out and buy a new office. Now, I'm not so sure.
You have to calculate, what's going to cost me to buy a branch versus how much will I have to invest today in terms of financial resources as well as time to get me from point A to point B in a new location? Patrick, I would say probably some of the benefits of home growing, you're building your culture there, those are your people you're hiring, and you're not dealing with anyone else's problem so that's an advantage.
The advantage of buying it is you're already a known entity in that market. You've got employees. I tried not to take the narrow view as Daniel Kahneman says when decisions placed binary, this or that. Why does it have to be buy versus build? Why can't it be buy versus build versus a strategic partnership with a channel partner in that market or buying another type of business and cross-selling pest control?
Let’s say you can afford a pest control business that is $10 million in revenue but for the same price, you can get another services business that does $10 million in revenue and kicks off more cashflow but sells at a dramatically lower multiple. You get a much bigger business for the same price and then you can turn around and cross sell pest control to the customers of that business and you could set up a new office.
If you've got Fat Pat’s Pest Control and then you buy Paul's Lawn over here, you're cross-selling to my lawn care customers your pest control services. There are ways to get creative. The answer to that is you probably have to do some mathematical calculations but don't always look at it either-or or this or that. Don't take the narrow view to things.
Patrick Baldwin: Going to the narrow view though because that's where I have a question for you, you would trade money for time though in terms of you're buying time. You're paying up for it but you're able to launch. I'm thinking in terms of your fixed overhead or even paying a technician, if you’ve got to hire a technician and compensate him to keep him and you’re building it one customer after another, you’re losing money doing that. If you can come in and have a book of business, then you can staff a technician, maybe cover overhead and now pricing might be low. They might have a wide variety of services that you might not want. You've got to change some things.
Paul Giannamore: Let's think about large scale and then scale it down for a second. If you are a publicly traded company or a large company and you have the resources to move into a new market and you could build it from scratch or you can buy a company. If you buy the business, you're not going to run startup costs through your P&L.
You're amortizing those costs in an acquisition so they're not hitting your earnings. You're probably able to use leverage to do it whereas maybe a Greenfield operation becomes more complicated. If you scale it down to Fat Pat, you've got your pest control business. To your point, if you can buy an operating business, let's say a dozen million dollars a year in revenue and $150,000 a year on the bottom line, and you could take out a loan to buy that business and maybe your annual debt service is $125,000, now you've got a $25,000 margin.
You're basically using somebody else's money to buy that thing. You're getting a little bit of margin off it. If you can make incremental improvements, you're creating a tremendous amount of value upfront immediately. There is time and resources devoted to going from 0 to $1 million. How long is that going to take you? Can you do it in six months? Can you do it in 18 or 24 months? What is it going to take you? I don't know. You do have those considerations. If you can get the financing, it might make sense to pay a little bit more but use somebody else's money to do it.
Patrick Baldwin: This goes back to our first question, using the seller's money, seller finance.
Paul Giannamore: I have a friend who bought a division of a publicly-traded company. It was a small division. He bought it for $30 million. He used the cash on the balance sheet of that division and bank financing and put not $1 in it. Four years later, it's twice the size.
Patrick Baldwin: That's awesome.
Paul Giannamore: There's a tremendous amount of opportunity to get creative. If you get good buying things, you can make a ton of money but you got to buy right.
Patrick Baldwin: That's what I'm thinking. All these years, we've talked about multiples of revenue or multiples of EBITDA. At the end of the day, what I heard you say, “If this is kicking off $150,000 of profit, let's call it cash for simplicity's sake, you can finance it $125,000 on a note, that's where it's at.” Is that the better way to think about, “I need to finance it. I'm not coming out of pocket. I can buy however much if I can get the financing for it.” As long as the numbers at the bottom make sense. It doesn't matter so much multiples of revenue.
Paul Giannamore: I don't know that I would say it doesn't matter entirely because you could take out $20 million for a $1 million business amortized over 50 years at 50 basis points of interest. I get your point though. It's the same way Americans shop for homes and cars. They don't look at price. They go in and they sit down with their mortgage broker and their mortgage broker says, “You can afford $500 a month. This home is $500 a month, irrespective of what the purchase price is.” I don't think that that's necessarily the best way to shop for businesses. In concept, it's correct, particularly if you can use somebody else's money to buy it and you've got a way to add value to it to increase the value of the asset that you're buying. If you're getting the right capabilities, you can do it.
Patrick Baldwin: Paul, that answered a lot. I have a lot more questions now from it. We'll get more listener questions. I love listener questions, almost as much as I love red meat, Paul.
Paul Giannamore: That means you like them a lot. I do enjoy the listener questions as well. Quite frankly, a lot of these questions are sometimes questions that I wouldn't think of so I appreciate folks sending them in.
Patrick Baldwin: I do prefer red meat over a cookie. For all those that know I'm gluten-free now, I appreciate the cookies that you've been sending but you can just send meat.
Paul Giannamore: Fat Pat, good luck on the road.
Patrick Baldwin: Thanks. Be good times. You too. You're going to red meat Turkey. That's white meat turkey.
Paul Giannamore: What will I eat there? We'll see.
Patrick Baldwin: Tofu?
Paul Giannamore: I don't know that they have it.
Patrick Baldwin: What are they serving? Don't tell me Turkish food.
Paul Giannamore: Turkish food, Patrick. They have a lot of different kebab-type dishes. The Iskender kebab is one of my favorites.
Patrick Baldwin: What's Iskender?
Paul Giannamore: It's the Turkish word for Alexander. It's a lamb kebab. There's a red sauce that they put on it. It's quite tasty. Put a cream that's similar to sour cream on it. It's great. I will be having some red meat in Turkey as I always do.
Patrick Baldwin: You could do it. I'm proud of you, Paul. Safe travels, Paul. I'll see you after spring break.
Paul Giannamore: Sounds good, brother.
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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.
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