Paul Giannamore: If you run a pest control business that does $3 million in revenue, you may be bringing $500,000 to the bottom line. If you had an additional $2 million to invest in the business, think about what you'd be able to do with that.
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Paul Giannamore: Mr. Fat Pat, it’s the Federal Holiday, President's Day. Down here, we have The Day of Illustrious Puerto Ricans.
Patrick Baldwin: That sounds shady, Paul.
Paul Giannamore: It's a real holiday down here.
Patrick Baldwin: Is the Mexican coming into the office without clothes on?
Paul Giannamore: He's already been in. He is picking up a delivery from Mr. Jacob Borg. When we closed that transaction, Jacob was kind enough to send us some gifts. I'm looking forward to seeing what he sent down. Thank you in advance, Jacob. I don't know what it is yet but the Mexican is picking up a box.
Patrick Baldwin: Jacob is the gift giver. He gave the Mexican a skateboard, didn't he?
Paul Giannamore: He gave the Mexican a skateboard when he was down here. We had management presentations down here in Puerto Rico. The private equity firms came down and Jacob and his team were here. Jacob brought up a skateboard that had the Mexican on it.
Patrick Baldwin: I was thinking that Jacob didn't want to travel back with it, he's like, “Mexican, here's a gift.”
Paul Giannamore: It's probably more like it. Jacob sends a lot of cool stuff, he's got a home in Alaska, he's big into fly fishing, and he catches 500 pounds of salmon a year. In the summer, he goes up there, cleans it, and ships it back to his estate in Idaho. When he came down for a meeting and brought frozen sockeye salmon, fresh from the river in Alaska, it’s probably the best fish I've ever had in my life. After having that, I thought to myself, “I have to go up to Alaska and do some fishing.” It was phenomenal.
Patrick Baldwin: Looking at two businesses from the outside looking in, you've got Jacob and Jared both Running Pointe. You think the same brand identity. How different would you say those businesses were running from your viewpoint?
Paul Giannamore: They were quite similar from a cultural perspective. They were different business entities in different areas of the country. Usually, as you pointed out, the same brand name. Culturally, they were similar. Jacob and Jared are different people. Jared gets excited about data analytics, all the different dashboards he had, and the uses of BI within the company. Jacob was probably more on building culture, it’s not to say that Jared wasn't. They were relatively similar businesses, both extremely well-run businesses that have been around for a long time. As the Mexican says, he has reunited the brothers under the PestCo banner. Both Jacob and Jared are board members at PestCo.
Patrick Baldwin: They're Borg members, is that what you said?
Paul Giannamore: The Borgs are on the board. I'm super excited for those guys because they exited at the right time, they've got some upside in the future. What PestCo is doing over there is going to be pretty interesting. They're already at over $100 million in revenue, probably over $20 million or $25 million in EBITDA, and they've been around for 15 or 16 months.
Patrick Baldwin: How big is Thompson Street Capital's fund?
Paul Giannamore: Their current fund is maybe $1.2 billion or $1.3 million, squarely in the middle market.
Patrick Baldwin: Do they come out and say, “We're allocating this much of it towards the pest portfolio in PestCo,” or it’s still TBD?
Paul Giannamore: Internally, they've earmarked a specific portion of it to PestCo. The partner, Jeff Aiello, who's running that, has been quite successful over there in recent years. They were in Mar-Mac and they exited. It hasn't been announced yet.
Patrick Baldwin: In private equity, they sell off a business. It's within that same fund I'm assuming from PestCo. They could turn around and use it to buy something else.
Paul Giannamore: You have the asset management company, which is the actual private equity firm or the financial sponsor. The private equity firm will have a series of funds. They raise a fund, which is a closed-end, limited-duration LP. The private equity firm becomes the GP or the General Partner in the fund and they take limited partners so they'll raise money. Institutions will commit capital during the fundraising period.
They pony some up front and then the private equity firm will draw down on that money as they're buying businesses. There's the building phase where they're out making acquisitions. Ultimately, you get into the harvesting phase where they're exiting. This LP’s duration is 7 to 10 years on the actual life of the fund itself. That's why you'll see most private equity firms will have fund 1, fund 2, fund 3, fund 4, fund 15, 16, 17, and it goes on and on.
Over the life of the private equity firm, they're constantly raising new funds while they're simultaneously deploying funds from preexisting LPs. The private equity or the asset manager lives in perpetuity as a general partner and they continue to raise funds. The more successful they are with each fund, the more money they're able to raise on subsequent funds.
Patrick Baldwin: I'm assuming there's a time constraint on this fund for PestCo. Seven years, I pulled the number out here. When they sell off that business, does that money roll back into the fund to do other things with it or are they returning that to the LPs?
Paul Giannamore: Typically, they're returning that to the LPs.
Patrick Baldwin: Does PestCo have a finite date? The fund ends and either PestCo goes away or do they roll that into another fund? Where does that brand live? Is it time constrained by the fund?
Paul Giannamore: Usually, what'll happen is you will have a limited duration so the fund might be set up as a limited partnership for ten years and that's pretty standard. In the LP agreements for the actual fund, in most of the ones that I've seen, there's an additional 2 or sometimes 3 years that the private equity firm can draw on so to speak in the event that they've gone out, they've deployed the cash, and they've bought a bunch of businesses that are the portfolio of that particular fund.
Let's say we hit a 2008 financial crisis, that's not a great time to sell a business. You don't want to be at the sunset of a fund and be forced to dispose of assets. In certain circumstances, they can elect to continue. We've seen in recent years the advent of continuation funds. Anticimex was owned by one of EQTs funds.
That fund was coming towards its twilight and it was ultimately divested of and acquired by another EQT fund, which is the continuation fund. That means a longer duration. The individuals that were in the LP that owned Anticimex could elect to roll or exit. The individuals that worked for Anticimex that had stock could elect to roll or exit to a certain degree.
Patrick Baldwin: Years ago, you were working with the largest publicly traded private equity firm. Is that right?
Paul Giannamore: In the United States, correct.
Patrick Baldwin: Over the past twenty years, have you seen this evolution of private equity? I see an acceleration. Thinking of pest control, it's under a microscope. In my spectacle here, I'm thinking there's a lot more private equity activity in pest control. Have the actual theories changed much over the years?
Paul Giannamore: There might've been 500 private equity firms years ago and now there are 15,000. It's ballooned. There are a lot more private equity investors now than there ever were, historically.
Patrick Baldwin: Do you see that changing? Is that going to mean revert?
Paul Giannamore: That's an interesting question.
Patrick Baldwin: It's President's Day, I can ask you all sorts of interesting questions.
Paul Giannamore: I don't know if that would necessarily mean revert because I don't know what the mean is. It's such a relatively young industry. It kicked off in the ‘70s and ‘80s. There were random private equity firms in the ‘50s and ‘60s but for the most part, it didn't become what we would call an alternative asset class until the ‘80s.
In the ‘90s, it accelerated particularly in a lot of the VC-type stuff that took place out in California and Boston. In the early years, a lot of private equity firms were bigger and were focused on publicly traded companies, taking them private, for example, taking them from the public markets to the private markets. Now you've got an endless number of private equity firms focused on the metal markets.
Patrick Baldwin: Do you see my confusion whenever you say the largest publicly traded private equity in the US? To me, those are two different things but somehow you mashed them together.
Paul Giannamore: It makes sense. In 1997, American Capital went public. A private equity firm takes an equity position in a privately held company so it's not public, it's privately held. You're an asset manager, you're raising funds, and you're investing in privately held businesses. Once American Capital got to a certain size, they said, “We can take this public. Now we can raise money on the public equity markets.”
It went public and instead of getting private limited partners, what it would do is do secondary offerings so it could go out and say, “We need to raise $500 million. Let's sell $500 million in stock. Take that money and we'll invest that money. The shares of the company are traded on the public exchanges.” Other firms have done that. There's been a good handful of large private equity firms that have gone public in more recent years. If I remember correctly, American Capital did it in 1997 and they were the 1st or 2nd ones to do that. By the time I was there in the early 2000s, they were by far the largest.
Patrick Baldwin: The investment vehicle is still a privately held business but instead of going out and finding LPs.
Paul Giannamore: It's a funding source.
Patrick Baldwin: It finally makes sense. I'm glad I finally asked you.
Paul Giannamore: There you go.
Patrick Baldwin: Now I'm thinking about friends and family. Bring it all down to the industry, which is, “I need capital to go build my business.” It’s either to start or to expand. Naturally, you're going to friends and family saying, “I've got this wonderful business. It's worth throwing out crazy multiples with what they've seen with the industry.” Naturally, you would think, “I can sell off a percentage of equity.” I know that might complicate things. Are there lessons to take away from what you've seen in private equity and imply that towards almost this GP LP model of running a pest control business or another service business? Maybe it's cost prohibitive. I don't know what it would take to pull that off.
Paul Giannamore: One of the biggest constraints for growth for private health businesses is access to capital. If you're out there, you run a pest control business that does $3 million in revenue, you're maybe bringing $500,000 to the bottom line. If you had an additional $2 million to invest in the business, think about what you'd be able to do with that if you're a good steward of that capital.
The proliferation of private equity across residential services, as we've talked about in recent episodes, has been staggering in the last few years. A lot of it has to do with the fact private equity has gotten attracted to residential services due to the fact that everyone's been working at home during COVID. There have been massive bumps, we've seen it in pest control. I remember old Tommy Mello, I caught up with him when I was driving back.
Jason and his family were down, they came for President's Day weekend and we were out at Dorado. This is Jason's second time down here in less than a month. He's an associate professor at Harvard Business School now, Jason. He's heavily involved in search funds. We were chatting about that. On my way back, I got a call from old Tommy Mello, who is a host of home services expert podcasts. He also owns A1 Garage. That business does $100 million and change, shy of $150 million. He did a recap with Cortec, which is a private equity firm.
Patrick Baldwin: Did you say $100 million in garage doors?
Paul Giannamore: $150 million. They do a lot of garage doors.
Patrick Baldwin: Lenny Gray was working with them.
Paul Giannamore: I introduced those two a couple of years ago.
Patrick Baldwin: Good job, Paul.
Paul Giannamore: To do some door-to-door on garage doors, so to speak. I'll cut you off in advance, Patrick. They weren't knocking on garage doors. They were using the front door.
Patrick Baldwin: Thanks, Paul.
Paul Giannamore: He went out and did that so he could, number one, take some chips off the table while transaction multiples are extremely elevated. He was able to put some money in his pocket. He was also able to get a partner that has experience in doing deals and doing add-on acquisitions, which a lot of business owners don't because they've never had the opportunity to do it because they don't have the capital. They're going out and doing a lot of deals. He's now got a partner.
One of the main benefits of having a private equity partner is the ability to raise debt capital. You've got $20 million in revenue pest control business, it is hard to go out and get that. The business is entirely intangible. There are not a lot of assets that banks can grab onto. You're unproven as a borrower per se. You're a $20 million business, you haven't done a lot of loan facilities over the years, and you don't have that great of a track record of paying stuff off. You take on a private equity partner that deals with lenders every single day of the week and you've got now significant backing.
You're much less risky being a portfolio company of a sizable private equity firm than you are being Paul and Patrick out on our own. You have the ability to draw down in debt capital and debt capital is the way to grow this because it's substantially cheaper than equity. Equity is expensive. To sell equity, you're giving up a lot. In order to become a partner, you've got to sell some equity. Once you do that, you can take on debt capital to help you grow. That provides some benefits.
Also, private equity firms come in and do a lot of other things that most business owners don't do with regard to corporate governance. Now, you're a portfolio company of a real private equity firm, you have to have a proper board and proper governance. There are a lot of changes in the business to effectively professionalize it to make it a potentially attractive asset at some point in the future for somebody else to buy or otherwise make public.
Patrick Baldwin: Going back to that $3 million pest control business, do those things translate? It sounds like debt's not an option unless you can go to friends and family and pick up debt instead of equity Governance these things to plan ahead on.
Paul Giannamore: For a $3 million company, I don't know that there's a whole lot. From a governance perspective, you are constrained. You can go out and get an SBA 7(a) Loan. You can certainly take on some leverage, it's just not sizable capital. It is borrowing money in the private markets. You and I haven't talked about this but one of the things that a sister company at Potomac is going to be doing at some point is we intend to do some lending in the resi and commercial services space providing capital.
Patrick Baldwin: This is news to me. You're raising your eyebrows like I should know, but I don't yet. I don't know.
Paul Giannamore: It's been on the back burner for a long time but I see some interesting opportunities with some resi and commercial services businesses, particularly pest control that do need capital and have a hard time getting it. In my capacity here as an M&A advisor, I've seen what companies have been able to do by borrowing and effectively using that capital to grow. That'll be something that we're going to get heavily involved in here within 2023.
Patrick Baldwin: Are you suggesting debt or equity or both?
Paul Giannamore: There are probably going to be certain circumstances where it's a debt only. There'll probably be certain circumstances where it's debt with warrants, meaning debt with some equity kicker on it based upon growth perspectives. It's a traditional sub-debt, which is usually the majority of it is debt but there is sometimes an equity component. It might be preferred, it might be common, or it might be warrants.
Patrick Baldwin: Why do you make me think this hard? It's a holiday, Paul. I'm thinking.
Paul Giannamore: That's why I wanted you to think.
Patrick Baldwin: Someone comes to you and says, “Uncle Paul, I want you to invest in my business.” What is that conversation like?
Paul Giannamore: We'll talk about it on The Buzz in the future when it's more developed but I get those calls 4 or 5 days a week. Everyone's always looking for capital and most of the time, it's things that I don't want to get involved in. Sometimes there are interesting opportunities with partnership buyouts. If you take pest control, for example, there are a lot of companies out there where two guys may have started a business from scratch and it gets to $10 million and one wants out and one doesn't and the one that doesn't wants to continue to grow and take it to $50 million.
That's an interesting opportunity to do a partnership buyout financing that banks typically won't do. By the time you get to a certain size, you're not eligible for a 7(a) loan. There's a lot of growth financing. When I look across the industry where the owners and management team has their head screwed on straight and they're growing business, one of the ingredients that they're missing is access to capital in order to make, for example, accretive acquisitions in order to drive sales and marketing. I love the growth equity play as well.
Patrick Baldwin: Paul, one more question on the lending, is that okay?
Paul Giannamore: We're going to punt the lending questions down the pike until future episodes once this is better developed. I didn't intend to talk about it because I don't want to get 1 million phone calls saying, “Paul, write me a check.” It will become a reality here in 2023. In future episodes, we'll talk about it. PB, on the last episode we talked about the fact that we've got a ton of travel. I’m going on a plane going to London and then I'm going to the Middle East.
You, my friend, are going to exotic Melbourne, Florida to deal with inspectors, which is an interesting industry. One of the reasons why I wanted to expand out of pest control is over the last couple of years, over hundred-some-odd episodes, we've delved pretty deep into pest control and there's a lot more to talk about. I thought that this is a good opportunity to begin to expand this show into other industries but always keep our core on pest control.
When I look around other industries, specifically residential and commercial services businesses, on occasion, we’ll go out into technology in other spots because there's a lot to learn. One of the main things right out of the gate is, on The Buzz, we've talked about channel partners before. You're going to go to the home inspector show, the home inspection pest control, that's a prime example. There have been companies and we talked about the Lunsfords who have built a pest control business by partnering with a home inspection firm.
The home inspection firm makes money by going on inspecting homes, and writing reports. Inevitably, termites are discovered. It doesn’t even have to be termites, it could be pest problems, and referrals could be made to pest control. In the resi service space, I have seen pest control companies partner with lawn care businesses, for example, plumbing companies, and other home services businesses to get referrals.
ISS, a Danish firm, a good chunk of it was acquired by Anticimex. There were fourteen countries that bought ISS’s pest control business. That was built by cross-selling pest control services to ISS’s commercial cleaning customers. ISS was a commercial cleaning and hygiene business based in Denmark that focused extensively on Europe and, to a lesser degree, Asia, and the United States. They did buy a company called Sanitors years ago down in Houston.
They ultimately were doing $500 million in revenue in the US so it’s relatively small compared to the rest of the world. It was a company that would go out and buy commercial cleaning businesses at extremely low multiples. Commercial cleaning is not a sexy business and it's not a high-margin business, but it's a massive business. They would go out and buy these commercial cleaning businesses and then turn around and sell pest control services. Where ISS ultimately got into some problems is that they reversed that model. The law is to always cross-sell higher-margin services.
Patrick Baldwin: You've told me that before.
Paul Giannamore: Don't take a pest control business and cross-sell cleaning services, that's not what you do. You take cleaning customers and you cross-sell commercial pest services. As our friends and family out in the industry listen to subsequent episodes of The Buzz, as we start to talk to folks in different industries, one of the most important things that you guys can do from a marketing and sales perspective is think about the current market you're in now and what channel partners you can build.
How can you get referral partners? How do you find companies that are going into homes and businesses that do not do pest control and that you can pay them a referral fee or vice versa? In a perfect world, you're doing a bilateral arrangement whereby you're referring tree care, the tree care company is referring pest control work, and both of you are happy.
There are some guys that have done this effectively and we're going to be talking to them because it's an interesting way to ignite growth in a relatively short period of time without laying out a bunch of capital. If you've got two salespeople today and now have 150 of them a month, it puts you in a good position. I want folks to open their minds and start to think about potential channel partners in their markets.
Patrick Baldwin: I think about how closed-minded I am on pretty much everything in life but specific to pest, over fifteen years in the industry, involved in the associations of pest control, only know the pest control software that is out there. On my LinkedIn contacts, I would say 95% of them are pest control. I think a lot about pest control. These outside books here, it's a lot of pest control. This is a way to get out and think through how they design their organization or how they do advertising. These channel partners, what do they do with their sales methodology? How are they using systems to become more efficient? I'm excited.
Paul Giannamore: There are a lot of guys out there globally that have thought about themselves as not being in the pest control industry specifically but began to ask themselves, “What are we good at?” If you think about the development of FedEx over the decades, FedEx, at one point, sat down and asked themselves, “What are we good at?” The mundane run-of-the-mill answer is, “We're good at delivering parcels.” In effect, what FedEx was better at than anyone was logistics. They started their logistics consulting business which grew rapidly.
If you're in the pest control space and you have built particular capabilities, you can begin to ask yourself, “What are we good at?” I'm not saying you should go out and start hanging Christmas lights per se. Oftentimes, folks who are in finite markets get to a certain size and growth starts to slow down. It doesn't always have to be pest control. I'm not saying that your pest control company has to have allied services outside the industry.
There are opportunities where you can say, “What are we good at and how do we leverage that capability into another industry?” You quit thinking of yourself as a pest control guy and you start to think of yourself as a company that's extremely effective at marketing residential services or extremely effective at routing. Every firm builds some unique capabilities and how can you leverage those and bring those into other industries? I want pest control operators to somewhat think out of the box.
Not everyone should do this but there should be a few of them out there that say, “We can get into some sister businesses and build an ecosystem.” If you go back to the Jared Borg Has Never Regretted Being Bold, the episode that we did in San Juan, Jared talks a lot about how he learned from the appliance company. I don't remember if it was a refrigerator or a washing machine. Do you remember that discussion where he borrowed a service protocol from another resi services business?
Patrick Baldwin: With the booties.
Paul Giannamore: They're a five-star service plan, this, that, or the other. There are things to learn from other industries. My goal here and what I'm hoping is that we all keep from being myopic and only focusing on pest control and we start to think of ourselves more as a company of unique capabilities that can be leveraged in other industries and we can borrow from other industries. That's where I hope to go with the expansion discussion that we're going to begin to have here when we return.
Patrick Baldwin: Paul, you mentioned something earlier and I was thinking about it. As we get into these expanded services, you made a comment, forgive me, but I'm going to paraphrase here. If you're going to add on additional services, make sure it's a higher margin. We learned our lesson from carpet cleaning. We had high expectations for getting into low-moisture carpet cleaning, followed a franchise system, and thought our technicians could go out and sell it.
We could share our technician labor to make it all happen. It didn't go well but it's probably more of a knock on us and poorly executing it. I could never tell you if the margins were better or not because I don't even know if we didn't have good margins there. As I think through other people that have these additional service offerings or they hear these different episodes and they're thinking, “I could get into this or that.” What guidance do you give? Is it that if it's a lower margin, don't consider it?
Paul Giannamore: As the CEO, you're charged with allocating capital. When you start to look at returns on capital outlays, one of the metrics that you would use is your gross margin, your operating cashflow, or your contribution margin from that particular service. If you were to say, “I run a pest control business and I have a 25% adjusted EBITDA margin. I see an opportunity to do carpet cleaning.” For one, I don't know what the margins are in carpet cleaning but I would imagine that they're substantially lower than pest control.
You're now taking resources away from higher-margin pest control. Everything is a trade-off, you have limited resources, time, money, human capital, and so on and so forth. Why on earth would you take some resources that could be deployed in pest control, higher margin, and allocate them to carpet cleaning? I know you're recalling the day when we sat at Mike Rogers’ dinner table and he talked a lot about how he added plumbing, added carpet cleaning, added lawn care, and added five different service lines to pest control.
His philosophy is, “I already own the customer relationship so I should go out and sell them everything that they need.” You can extend that to a ridiculous extreme. You could be doing prostate exams and preparing dinner. There are a million things that you could do because your customers ultimately need these things. I don't know that you should have your technicians also doing colonoscopies. At the end of the day, I never bought that from an efficient resource allocation perspective.
I always looked at it and said, “You're allocating resources away from a higher-margin opportunity.” Until you blast through and saturate the higher margin stuff, which he did not and most will not be able to do, why allocate it to lower and worse use so to speak? It's the way that I look at it. That's how companies get themselves in trouble because they say, “I own the customer relationship and I should be able to sell a million different things to them.”
He owned a carpet cleaning business and he looked around and said, “Maybe I can sell a service like pest control where the margins are maybe 300% that of carpet cleaning. The duration of the customer is seven years versus two years for a carpet cleaning customer.” I don't even know what attrition rates and carpet cleaning look like. That's how ISS got themselves in trouble, in my opinion, is that move to, “We already have the relationship with the commercial facility. Let's sell a lot of stuff to them.” It was good when they were doing it by selling pest control. It was bad when they started selling commercial cleaning.
I don't know if Jim McHale said this on The Buzz but as JP McHale, up in Westchester, New York, was expanding, they were doing lawn care, moisture control, and they were doing a variety of other services. His theory was if you're good at pest control and then you start to do lawn care, tree services, and other lower-margin services that you're not an expert at, and if you piss the customer off, it's great to have them pay you for 5 or 6 different service lines.
If you piss them off in one, is that going to negatively impact your relationship with them? Are they going to can you? Now you've lost pest control. That was always his big concern. He told me directly that that's how that tends to prove out in life. Ancillary services, a lot of times, tend to be second-thought services, “We already own the customer relationship so let's sell it even though that's not our core.” You end up doing a shoddy job, you piss the customer off, and then you're worse off than had you not done it, to begin with.
I'm a big believer in the modularity of businesses, specifically route-based, recurring revenue businesses, and if you have a pest control business that's its own entity that's doing pest control. Let's say that you want to start an HVAC company because you want to capitalize ala Mike Rogers on the relationships that you have with those homeowners. You don't need to do it through your pest control company. It should be an entirely separate brand and your pest control company should be your channel partner but it should not be the company that's doing it.
If you want to set up an HVAC business and you set up a different business, you capitalize on that business, you buy the equipment, you hire the people, and now your pest control technicians can cross-sell for that other company, which is an entirely different brand. That provides a lot of benefits. First off, ideally in the mind of the customer, it’s viewed as a separate company. If the HVAC company screws up, they don't get rid of your pest control business.
When you're building your pest control company and you ultimately want to exit that, you have not encumbered that business by putting on a $10 million HVAC business. That's one of the issues that we had when we did the Killingsworth deal if you recall. He had an HVAC business that was in Killingsworth and it was called Komfort Air. Komfort Air was a brand but it was within Killingsworth, it was all in one entity.
At the time, maybe it was doing $5 million or $6 million in revenue in the HVAC business. He built that through cross-selling Killingsworth customers, which is great, but no one wanted it. There was not an acquirer out there that wanted to buy a pest control business that wanted HVAC and carpet cleaning. We ended up having to do a two-step deal and I had to remove that HVAC business and turn around and sell it in order to get the pest control business done.
Patrick Baldwin: Wasn't it called Koolingsworth? Get your Koolingsworth.
Paul Giannamore: That may have been their tagline, Patrick. I always talk about modularity with the door-to-door guys making sure that things are set up to the extent that you can use separate entities to do so. There's always a delicate balance. If you look at Rentokil North America up until the Rentokil-Terminex merger, Rentokil America was one entity, think about that. All of the companies that they had acquired, Allgood, VDA, and hundreds of them, they would buy these businesses and would dissolve those entities into Rentokil North America. They only had one entity.
Patrick Baldwin: With multiple brands.
Paul Giannamore: Multiple DBAs but one entity in North America. Other companies and you look at Orkin and Anticimex have scores of entities. This isn't a legal discussion per se on asset protection and the benefits of using multiple entities. You have to sit back and ultimately to the best of your ability come up with that proximate objective of what you’re trying to accomplish over the next 5 to 10 years as you grow a business.
If you're growing an asset that you ultimately want to sell, you have to say, “I'm not exactly sure what's going to happen but I need to be set up for a variety of the most likely scenarios.” If I've got a business in three states, I might decide to sell one entity as opposed to the whole kit and caboodle. We see that a lot on the door-to-door side. It warrants some thought in entity structuring.
Patrick Baldwin: Paul, I keep giggling thinking about your technicians doing colonoscopies at home. I wonder if that pool queue that you talked about episodes ago was for research and development. Don't hate me for asking about Proctor and Gamble because I know we had an episode on this. If I see the economies of scale, thinking about specialized service, and you'd set it up as far as being modular businesses thinking about whether it's asset protection or eventually, selling it in a few years and making these easy to separate and get a deal done. Going back to the P and G thing, instead of two residential brands that were in the same market, what about a residential and a commercial brand in the same market? Would you make that recommendation?
Paul Giannamore: You can find arguments on both sides. Take a look at vehicles. Residential companies tend to have more flamboyant vehicles, so to speak, whereas commercial is more low-key. On a commercial side, in pest, you would tend to see the white vehicles with maybe a small detail. I don't know that I would necessarily separate the entities. If you run a residential company and you want to do commercial, I don't know that I would go through the hassle of separating the entity because there would be a lot of good shared services. I don't even know if I would necessarily brand it differently.
I've seen people do that and they make good arguments where XYZ pest control is purely commercial, “This is how our trucks are. We only deal with commercial.” It resides within a business that does both residential and commercial but separate technicians and separate CSRs. I could see arguments being made on the same side.
For me, I would probably simplify it and try to magnify one brand in a market. Every time you separate, you've got two brands now and that's additional work from a branding perspective. Although you could argue that selling commercial services is different, whereas, on the residential side, people see the trucks, people are searching on Google, whereas commercial is more creative sales outbound. I'd have to give that some additional thought.
Every time you separate and you create an additional brand or a different entity, you're effectively creating more work for yourself. There are diminishing returns at some point. I think about it from an acquisition perspective, it's not like an acquirer would say, “We just want to buy commercial pest, we don't want to buy residential.” At least that doesn't exist today in this market and it hasn't since I've been around. I can't imagine that happening in the future. From an exit perspective, I don't see any reason for it.
Patrick Baldwin: Have you had a client come to you and say, “We want to sell off our residential business in this market,” or, “We want to sell off our commercial business in the market and focus on the other.”
Paul Giannamore: Yes.
Patrick Baldwin: How do you handle that?
Paul Giannamore: It's very easy. 9 times out of 10, it's the business that's majority commercial that ended up doing residential like in the towns in which it sits. Now they've got an orphan residential business and it becomes more of a hassle so they want to sell it off.
Patrick Baldwin: Like Sprague.
Paul Giannamore: Something like that. Yes, that would be a prime example. It's exclusively a commercial business but it's built some residential and it doesn't want to do that because it feels like it's out of its core. You're just selling technicians and accounts. It's a pretty easy thing to do. I see what you're saying. Maybe if it's all XYZ Pest, you own the marks. How do you sell that brand? You don't. You're just selling the accounts.
Patrick Baldwin: Gave me a lot to think about. A good thing is we have an extra week for me to think about these things, Paul. Thank you.
Paul Giannamore: PB, one other thing I'll say is we're going to have a bye week, Patrick. I'll be on the road and you'll be on the road so we're not going to have an episode.
Patrick Baldwin: Different roads, by the way.
Paul Giannamore: I will be filming a lot of stuff. I'll be spending a full day with Andy Ransom while I'm out in the UK, it's his 10th year as an FTSE 100 CEO. The FTSE 100 is the 100 largest publicly-traded companies in the United Kingdom. It's his 10th year this 2023, Patrick, which is rare. Not a lot of these guys make it to ten years at the helm of an FTSE 100 company. In order to celebrate that, we will be taking him to Guy Richie's pub and having an interesting discussion. Subscribe to POTOMAC TV, you'll see that and a variety of other things. After London, I have to go to the Arabian Gulf.
Patrick Baldwin: You're not going to Dubai now, are you?
Paul Giannamore: No. I was going to go to Pest World Dubai. Rentokil has earnings coming up in February 2023 so we needed to set this discussion up at a certain time and embargo it for securities regulations. We had to move things around and unfortunately, my UK trip now is interfering with the Dubai trip. As a matter of fact, I will be going to Dublin on the 1st or the 28th. We've got some sessions we'll be doing there. No Pest World Dubai this 2023 but I will be in Doha afterward.
Patrick Baldwin: Send a postcard. I'll be in Melbourne and then Texas.
Paul Giannamore: I will send the postcard. No The Buzz for a week, we apologize but tune in to POTOMAC TV in the meantime as you'll be seeing some cool stuff. As we start to head around the world for a long time, I've wanted to take the show on the road literally and we'll start to do that. We intend to look at resi and commercial services businesses and a variety of different countries and see who's doing what and how they're done differently.
Patrick Baldwin: It's awesome. Safe travels, Paul.
Paul Giannamore: You, too.
Patrick Baldwin: Take good care of your Dylan for me.
Paul Giannamore: Indeed.
Patrick Baldwin: I'm sure the Mexican will take great care of your office while you're gone.
Paul Giannamore: I'm sure he will.
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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.
Jared Borg Has Never Regretted Being Bold – past episode
POTOMAC TV
