Let’s keep this short and sweet. Paul and Patrick answer six listener questions.
So the 6th listener to email thebuzz@potomaccompany.com with the Subject Line “I actually read this” will get a gift.
Audio Mixing and Editing by www.verbell.ltd
Let’s keep this short and sweet. Paul and Patrick answer six listener questions.
So the 6th listener to email thebuzz@potomaccompany.com with the Subject Line “I actually read this” will get a gift.
Audio Mixing and Editing by www.verbell.ltd
Paul Giannamore: Always resist the urge to be like, “I'm huge throughout the whole state of Texas.” Who cares? Be in one small city and be wealthy.
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Patrick Baldwin: Paul G, welcome back from Seoul.
Paul Giannamore: I got to tell you, PB, that the thirteen-hour time difference is a big difference. Usually, for me, it's the Middle East or Europe. In Asia, a few times a year. This time, it hurt me.
Patrick Baldwin: Did you get any work done?
Paul Giannamore: I did a couple of meetings but I also took the time to enjoy Seoul. It was my first time in South Korea and I was blown away by it. I highly recommend visiting South Korea. The food was great and the people were great. Seoul was clean, organized, and beautiful. I spent more of my time in Jungle Asia than in Mountain Asia. Philippines, Malaysia, Indonesia, and Vietnam are Jungle Asian. Whereas Mountain Asia, Korea is a pretty cool climate country. It's extremely mountainous. There's not a lot of livable land in South Korea but it was beautiful. I liked it. I will be back this 2023.
Patrick Baldwin: Did you lose your phone? No one stole it? Did you feel safe in Seoul?
Paul Giannamore: I felt very safe in Seoul. It was immensely different than the dumpster fire in London. My first morning there, I was sitting there having a cup of coffee, and there was a woman sitting at the table next to me. She got up and left her purse on the table and she walked away and then I was looking around and I was like, “The lady left.” I was about to grab her purse and run after her.
Patrick Baldwin: That looks bad.
Paul Giannamore: The bathroom was down the hall. It would've looked like I was about to run off with it. I thought, for sure. She was done, she threw her stuff out, and why she would leave her purse at the table, go to the bathroom, come back, and grab the purse was beyond me. It’s very safe.
Patrick Baldwin: She was testing you to see what you do. You're looking for cameras.
Paul Giannamore: I went to a lot of different places in South Korea. First off, in Seoul, you rarely see any foreigners. There are not many foreigners in Seoul. Outside of Seoul, there were none. They're all Koreans, they're Asians, so they look very different from me. One thing that I got a kick out of is the little tiny kids that are six months, 1-year-old, and 2-year-old. Whenever I was outside of the city and they saw me, they had huge smiles on their faces. They were waving to me from afar. They got a kick out of seeing a foreigner out there.
Patrick Baldwin: “Uncle Paul.”
Paul Giannamore: It was a great experience. I enjoyed it and recommend it.
Patrick Baldwin: That's awesome. You said the bar was low but you also gave a strong recommendation. You went in with low hopes, I thought.
Paul Giannamore: The bar wasn't extremely high for South Korea but I was blown away in every way. The food was fantastic. I did the whole chicken and beer thing. I did the hot tofu stew. I did the kimchi stew. I went to a Michelin-starred restaurant and then I went to a place in a back alley that you walk in and they were pointing at things other people were eating and giving me the thumbs up or thumbs down whether I want to eat it or not. That's how this went.
Patrick Baldwin: That's cool. Paul, changing topics though because we do have some listeners submitted questions. We're going to get back to London in a second on one of these. I'm going to start from the top. We've got one from Ryan. Are you ready for this?
Paul Giannamore: Let's do them.
Patrick Baldwin: “I have a wildlife business that does $2 million per year. We don't do any pest control. What is the market like for a business like mine? I'm getting close to retirement and don't know if I should add on pest control this year before trying to sell it or if I should go to market. Your thoughts would be greatly appreciated.”
Paul Giannamore: The age-old wildlife question, we hear it all the time. Businesses, for the most part, are sellable. If you would talk to the Mexican, he might say that's unsellable. What he means is that's unsellable at a multiple of cashflow that wildlife pest control owners often think they're going to get because they're in the “pest control industry.”
Patrick Baldwin: You're going to tell me you agree with what the Mexican said here.
Paul Giannamore: I don't agree with him. Now that I think about it, they are sellable. In the wildlife business, we've talked about this a lot on The Buzz, valuation and risk are inverse. The riskier business is typically the lower the valuation. One of the main things that makes a pest control business relatively low risk compared to other businesses is that it is a subscription business. There is recurring revenue and you've got visibility on that. Everyone in the industry looks around and knows companies that you're amazed that they continue to service customers. They're hard to break.
A wildlife company typically will have no recurring revenue. Sometimes they'll sell warranty products on exclusion but it's typically 10% of revenue or less. The stream of cashflow is relatively risky. When I talk to a lot of the larger players out there, they'll look around and say, “Paul, why would I buy a wildlife business that does $4 million in revenue when I can literally go out and hire quality wildlife people, flip a switch, and cross-sell to my current customer base?”
I can build your $4 million wildlife business in a couple of months if I'm Anticimex or Rentokil. There was a year of wildlife companies being acquired back in 2016. Do you remember the whole Catseye transaction? It was a wicked high multiple and that was because Terminix was attempting to buy wildlife capabilities. The same thing, Terminix bought MoleMen out in Michigan. They were trying to get those capabilities. Those businesses sold for multiples that I don't believe they would sell for today.
Ryan, great question. My suggestion to you is if you have the ability to legitimately add pest control, a recurring pest control, and you can build up your recurring revenue base, it'll expand the number of acquirers that will likely look at your business. It'll also de-risk that business and therefore make it more valuable. That doesn't happen overnight so you need a few years’ runway, I'd say probably at least three. If you do that, you'd be better off and you would be selling an asset worth more money. If that's not in the cards for you, your business still is sellable. It will sell at probably 1/3 of the valuation that a pest control company would sell for. Ryan, don't feel bad about that because the flip side is your margins have been higher. You're selling these big multi-thousand dollars jobs. You took your cash in real-time as current pay as opposed to in the future as part of the capital asset. That's my thoughts, Mr. PB.
Patrick Baldwin: It makes sense. He's got the whole base. He can sell this recurring. All the contacts are there, Ryan. Do it, Ryan. Come on.
Paul Giannamore: I agree with you. Ryan, you should take this season if you're licensed, or if you're not, get somebody who is, and experiment with it. Maybe this 2023, you don't even go out and advertise pest control publicly. Maybe you're only cross-selling to current customers and see how that goes. That way, you build slowly.
Patrick Baldwin: Keep us posted.
Paul Giannamore: Ryan, let us know how it goes.
Patrick Baldwin: Joe says, here's another one, “Paul and Patrick, I love what you guys are doing at The Buzz. I look forward to it every week. I have also recently discovered Potomac TV and the interviews are amazing.” They are.
Paul Giannamore: That's because people can finally see me. That's why they're so amazing, Patrick.
Patrick Baldwin: I don't know if that's what he said.
Paul Giannamore: Am I adding?
Patrick Baldwin: “Keep up the great work, guys. Paul, will valuations in the industry be higher or lower one year from now?”
Paul Giannamore: This is an area that the Mexican and I will disagree on. He's 100% convinced we're literally in the second inning of the private equity consolidation in the space and he may be right.
Patrick Baldwin: Is the Mexican a betting person?
Paul Giannamore: No. I am.
Patrick Baldwin: You can't wager this?
Paul Giannamore: I'm a betting person but I only bet on sure things.
Patrick Baldwin: You could switch offices with Jess and the Mexican could flip offices if he's wrong. That's the wager.
Paul Giannamore: That would put him closer to me so I would end up losing either way. It's hard to say. I will say, finally, even the Federal Reserve came out and admitted that there will be a mild recession in 2023. You look back through decades and decades of Fed minutes, I don't remember them ever admitting that.
The timeline is one year, I'm going to have to go with lower. Think about it, we get into an earnings recession at the end of this year, capital continues to dry up as it has been. That complicates things for us one year for now but we'll see. When I look at the market right now today, Patrick, we've clearly seen the market bifurcate. What I mean by that is, on the whole, valuations are lower but still yet on these scarce premium assets, we're doing deals at five times revenue. Who knows?
Patrick Baldwin: For those at home, the jaws dropped. For real?
Paul Giannamore: For real. It's not all of them but I would say that the premium private equity platform acquisitions, 4.5 to 5.5 times revenue, is where you'll see probably 5 or 6 of them get done this 2023.
Patrick Baldwin: That's awesome. What inning does it put it in? If the Mexican is still stuck in second, where are you at?
Paul Giannamore: It'll probably be easier to have this discussion 30 to 60 days from now because we need to see what the full ramifications of this budding banking crisis will do to lending. It's slowed down over the last 30 days. Lending had already slowed down quite a bit since ‘20 and ‘21. Now it's almost come to a complete halt. We'll see what happens there. Lending contracting like that has a direct and dramatic impact on valuations because deals are credit financed. Everything is credit financed now.
Patrick Baldwin: Do you think the well is going to dry up if they stop lending credit or interest rates will continue to hike and in turn, they won't go get the debt?
Paul Giannamore: I don't see how the Fed doesn't hike in May 2023. I can't imagine that they won't. It's like, “Recession now or stagflation later,” is what they're faced with. We'll check back in on the well, Patrick, in another month from now and see what the lending is up to.
Patrick Baldwin: Paul, I got you another one. Let's see where this goes. Maria, “Thank you for The Buzz. I started listening earlier this year when my friend told me I was missing out. I got a little FOMO. You do such a great job. I wish I found this sooner. I'm still catching up on earlier episodes. Forgive me if you've discussed this question. For Paul, negotiating, I imagine it's like playing a game of chess. Is that an accurate depiction? Is there a better analogy for negotiating? Masterclass negotiator, Uncle Paul.”
Paul Giannamore: Maria, you love to give us stumpers on the show, don't you? When I think about selling a business, for example, it's different than other forms of negotiation like a hostage negotiation, for example, they're different things. When you're on the sell side of a business, it is somewhat like chess because you have opening moves, closing moves, and shut-down moves. In chess, the board is uniformly set up at the beginning of each game but then you have an opening move.
When I think about an opening move, it might be how the process is set up. Is the process a formal controlled auction? What I mean by that is they're extremely strict process rules. Is it a little bit more fluid-modified? You've got opening moves there. When you think of the end game in chess, you would have certain shutdown moves whereby you would change deadlines. In the no-more process, for example, we were running a traditional auction process. At the very last minute, we made the decision to go to a Dutch auction. PB, let's see if you remember what a Dutch auction is.
Patrick Baldwin: It’s chocolate is what Fat Pat thinks about.
Paul Giannamore: Any other suggestions or ideas? What else do you got?
Patrick Baldwin: Here's what I remember about you explaining this. I'm wondering if you went into the process thinking you would go Dutch on it.
Paul Giannamore: Good one, Patrick. Go Dutch. You didn't even catch it. You've got so many dad jokes and puns. They come out and you didn't even know it.
Patrick Baldwin: You got into a max, thought you hit a ceiling, and you're like, “It's not enough. I want more money.” Someone got greedy or whatever it is. You thought you could get more juice out of that lemon. You end up flipping and reverse-auctioned it. You jump up, you name a price, and say, “Who's going to hit this new number?” You even work down from that.
Paul Giannamore: That's exactly right. If we wanted $200 million and the highest bid on the table was $180 million, and we talked about this before so I won't go into a lot of detail as to what made us make the decision to go Dutch as it were but we did. If we want $200 million, it might start at $220 million. We're now making the offer and it's time-bound. You have eight hours to accept or reject this and then it goes to the next party and then the number goes down.
Each subsequent party gets a lower number and they have to accept or reject it. If they reject it, it goes on to the next one. At some point, an acquirer might look at that and say, “I don't want to pay $215 million for this.” There's a high likelihood that the number could go down to $210 million and somebody else will hit the bid.
With Dutch auctions, like everything in negotiations, you can change up the rules on the fly. You might go in large increments up front and then go to smaller increments or you might have some real fun with it and change the increment drops as they go. Maria, chess is a good analogy. The one major difference I would say is that chess is a game of process rules. There are finite rules within chess. Whereas in negotiations, if you're doing it right, you're the process setter so you're making the rules and negotiating not only process but substance as you go.
Patrick Baldwin: You changed the chess port, didn't you?
Paul Giannamore: Yes.
Patrick Baldwin: No one will ever know how many potential buyers were there when you flipped it into Dutch. It could have been one.
Paul Giannamore: Of course, we talk about that concealing information, which is one of the main reasons why I find that a lot of individual sellers go out and attempt to sell this on their own, and this is the same reason why a private equity firm would never go out and sell a business without an advisor, is that it becomes difficult to conceal information. Of course, you have to do that because you don't want the other side to know how many actual bidders are there because that can impact things. There's not a massive distinction between 1 bidder and 10 bidders if the other bidders out there think there are 10 bidders.
Patrick Baldwin: At the beginning of the answer, you said negotiating and selling a business is different than a hostage negotiation. I understand the stakes are different. What impact does that have? I think about Never Split the Difference by Chris Voss. I don't know if you've read it but I have takeaways from that.
Paul Giannamore: In a hostage negotiation, he talks about modeling, mirroring, and labeling.
Patrick Baldwin: That's right versus your right, those are the big ones.
Paul Giannamore: If you're selling a financial asset and you've set up the process right, it should do the majority of the negotiation for you. Chris Voss’ book would largely be cross-table negotiation. Whereas the M&A process is not only some cross-table negotiation but it's also the same side of the table because you've got all the buyers on one side of the table and me, the seller, on the other side.
You want to find yourself in a position where at least 8%0 or 90% of the heavy lifting is done on the same side of the table negotiation. There are some nuances there. In certain circumstances, there are some big differences. Some of the advice that he provides to negotiation based on a hostage scenario would be counterproductive and potentially expensive if used in a negotiation for the sale of a business.
Patrick Baldwin: Such as? I liked the book. There's got to be some takeaway from it for business.
Paul Giannamore: I put you on the spot a few weeks ago when I talked about Thinking, Fast and Slow and you had not completed reading it yet. It's been 7 or 8 since I read Chris Voss’ book. I read it once and have not returned to it. I do remember when I read it, there were a variety of things that I disagreed with directly. If you want me to reconsult that book and have it as a point of discussion, it could be an interesting discussion for a future episode. I'll go back and reread it.
Patrick Baldwin: I feel like I'm in the middle of negotiating while we're recording this. I felt like you were going to say that if I finished reading Thinking, Fast and Slow, you would go back and reread Chris Voss's book.
Paul Giannamore: That sounds like a deal.
Patrick Baldwin: Deal.
Paul Giannamore: Patrick, we struck a deal.
Patrick Baldwin: Let's go on. Thanks, Maria, for that one. Let's go to Larry's, “We're working on acquiring a smaller company but now find ourselves doing damage control.” This one hits home. “The seller's office admin opened a FedEx envelope mail with our signed lease agreement for the building. She's freaked out, needless to say. What should we do? Is there a better way to handle this in the future?”
Paul Giannamore: There would've been a better way to handle it, which is to not ever send anything to the seller's office. The deed has been done. We'll talk about it. As a side note here, we should never be sending anything FedEx, US Post, you name it, to a seller's office, nor calling them. When you enter into serious discussions with a seller, it's good to get the ground rules figured out.
If I have to send you something and in the modern era, unfortunately, in Europe, Asia, and the Middle East, we have to pass around a lot of paper so I'm always using DHL and FedEx for that because everything is a lot more paper-based. In the United States in 2023, I don't think anything needs to be sent in a paper copy anymore. Anyway, get the ground rules figured out. Usually, I'm dealing with the rumor mill.
Somebody is in the process of selling a business and somehow there's some smoke somewhere. Somebody tells a distributor or an employee gets suspicious and starts talking to somebody or an acquirer is a little bit careless and one of their people says, “I saw the big boss man with Joe Blow of XYZ Pest. What are they doing?”
The rumor happens. Usually, as a seller, you want to keep this as confidential as possible up until the last minute. You also don't want to be in a position to lie to your people because if you lie to them, it ultimately happens. You'll never have their trust and the transition will be complicated. What else is he or she lying to me about?
My suggestion is to be as honest as you can and say, “We are approached all the time. As you know, we get letters, we get phone calls, and we get emails. I constantly entertain people. At some point, I'm going to have to sell this business. I have no intention of doing it right now but if I get an offer that I can't refuse, I will do it. However, I will make sure that you and I sit down and we have that discussion in advance of the deal getting done.” Even if you're in diligence, even if you sign a letter of intent, the deal is not done until it's funded. You can always live up to that commitment to have that discussion with that particular person prior to when it happens.
Now, your life has gotten a little bit more complicated but at least you can be honest and say, “I will talk to you before this happens.” A couple of days before it happens, say, “I've decided to sell this business and I'm going to sell it on Tuesday.” When we've used this approach historically, the majority of the time, most people, unless they've been through an actual process, they don't know. It's a multi-month process.
A lot of your typical team members will think, “Fat Pat got up on a Monday and decided to sell the business and then it was sold on a Wednesday.” They don't know that you're going through that entire process and perhaps now that they're listening to it, they'll know that there's a little subterfuge but what can you do?
Patrick Baldwin: I remember that was one of the things we're like, “We have to tell somebody.” The landlord. Every lease I could think of is unassignable.
Paul Giannamore: I do things differently. As you'll recall back for Project Black Bear, I took issue with them on assignments and assumptions. You sold to Terminix. They were a royal pain in the ass. When it came to assignments, they wanted assignments from landlords, for example. For years now, I've pleaded with acquirers to sign over things. Sign over a top lease. That means even though the commercial lease requires that you, Fat Pat, would go out and get an assignment of the lease contract to the buyer, there's no economic damage to the lessor.
Let's say that you sell that business to Terminix, Rentokil, or whoever. Rentokil is paying the rent, they've got more money than you, and they've got a massive balance sheet. They’re a publicly traded company. What's the landlord going to do? Say, “You breached the contract. I'm booting you out.” It’s unlikely. A lot of times, they don't know. If it's me, Paul, I own a building and you're leasing it, I would figure it out. Most commercial property management companies don't even know. They're getting the check and they're getting paid. You send it to them at the first of every month by ACH, what do they care?
Patrick Baldwin: Money is money.
Paul Giannamore: Ask for forgiveness, not permission, and those issues.
Patrick Baldwin: I work at home.
Paul Giannamore: I tend to ear on the side of forgiveness rather than permission for the most part.
Patrick Baldwin: It's served you well so far. You're still alive.
Paul Giannamore: I'm alive and well.
Patrick Baldwin: Back to London. We're flying back. We're doing some traveling on this one with these questions.
Paul Giannamore: Let's go back to it. We got Charlie, “The Andy Ransom video on YouTube, wow.” This question takes a turn quickly. “How about safety on the streets of London? Is London that dangerous? On a serious note, we don't think or talk much about safety. We haven't had any major issues, just a couple of small fender benders. It sounds like we should talk about safety but where do we start?”
Patrick Baldwin: That's a good question. I do believe quite a bit in what Andy said, safety is a cornerstone. If you don't focus on safety, what other things are you not focusing on? It's pretty common for small businesses. You got a small handful of technicians. A lot of owners make the assumption that they're using common sense and that they're not going to do anything to harm themselves or others.
As a business grows and gets more complex, you've got to institute policies. What is your talking on the phone while driving policy? What about your footwear? Rentokil has been doing this for a long time. I do remember when I first started doing deals with them, they'd close the transaction and they would issue new footwear and new shoes to everyone in the company. It doesn't matter what it is, lawn care, or pest control, you name it. You go to the company, everyone's got different shoes on. they're using different boots and different footwear.
Rentokil went out and did some studies and determined that these are the anti-slip, safest, they protect the toe, and all the different things that they were looking at and gave footwear. It's those things. They are big in safety training. What happens if something gets in your eye? What happens if there's a fire here? All of that stuff. It's an important thing. Where do you start? I don't know. PB, you tell me, where would you start?
Patrick Baldwin: There's a lot more risk on the road than in the customer's yard. A semi-truck driver calling the office, “Your guy in this Nissan Cube with your fully wrapped vehicle cut me off.” You call the salesperson and he's like, “Yeah, I did. Sorry.” That could be bad. A semi-truck versus a Nissan Cube, there's no chance. I think about one of our clients was ExxonMobil. They handled the pipelines in the region so this was an office here. They took us through their safety training every year. Anyone on a property to service that account had a sit-down and watch the safety video and take a quiz. Be like the technician.
We had multiple people go through safety training because if someone was out sick, someone else could hop in and be on property and do the service. I think about safety cones, that was a thing for them, at least for their vehicles when they park. I see that now with Terminix and Rentokil. The 855 Bugs trucks are still floating around. They've got safety cones when they park. We learned from ExxonMobil about backing in the vehicle. When you're approaching the vehicle and you walk by the front and then they walk around the vehicle. If possible, they would always back in if that makes sense.
Paul Giannamore: Why is that?
Patrick Baldwin: You don't have as good visibility backing up and something can always walk behind the truck and you won't see it. As opposed to the front of the vehicle, your eyes are forward and you could see something walking from left to right or whatever. You're going to have a lot better angle so a lot less risk to hit a pedestrian was the risk there.
Paul Giannamore: Did you ever notice when you were down in Puerto Rico that everyone backs in?
Patrick Baldwin: You told me that. Because you said something, yes.
Paul Giannamore: You noticed it.
Patrick Baldwin: Was it a law or something or a ticketable offense?
Paul Giannamore: If you go to Walgreens, for example, there are signs up that say, “Back in.” As you said, it gives you better visibility on the departure. Also, if shit goes down, you can get out quickly.
Patrick Baldwin: That’s why. Especially at that Walgreens.
Paul Giannamore: It's universal down here. Everyone backs in everywhere. If you go to the parking lot in our building, every single car is backed in.
Patrick Baldwin: I like it. It makes sense. If ExxonMobil is doing it for safety, then why shouldn't I, even with my personal vehicle? We had one chemical claim, one that went to insurance. I can think of two incidents and one was a termite graph. I know that the state is always looking like that's sensitive to that.
Paul Giannamore: That's a Texas-centric thing to a certain degree.
Patrick Baldwin: Texas is impacted from other states watching what has happened in other states. The way this all played out, I got to know a lot more about termite work because of one job.
Paul Giannamore: That's how it usually goes, I guess, right?
Patrick Baldwin: Learn from my mistakes. This situation is worth talking about for a second. Termite graph was noted, like, “Drill here. Trench here.” The customer did not live in town so it wasn't there. We were sending documents through email, go figure, all digital graphs. We went to do the job and the technician figured out because it was a pure beam that he should have rotted and not trenched or else the application would've gone away. He made the right call.
Here's the problem, he did not update the graph. When the clients saw the graph and said, “There are no trench marks here. You clearly did not do what you said you were going to do.” The state gets involved. Anyway, we make it all work out. The insurance is not involved, that's one. Termite is sensitive at least in Texas and other states. I think a lot of it has to do with pretreats is where it all came from. If you back up, why we're sensitive now, it's because of poorly performed pretreats in the past.
The other one was the koi fish pond, in which granules got spread out because they're pretty. It's got a little careless, super sensitive, of course, aquatic animals, and pyrethroid. We took out a coy fish pond. The client thought his koi fish pond was expensive and sure enough, they were. What we thought would've been a $2,000 or $3,000, “Let's drain the pond and get you some new koi fish.” It turned into over $20,000 of him relining his pond and buying expensive koi fish. That was fun.
Paul Giannamore: How much does a koi fish cost, Patrick?
Patrick Baldwin: $5. How much is his koi fish?
Paul Giannamore: That's what I'm asking.
Patrick Baldwin: What were they like? Angel or butterfly koi fish something?
Paul Giannamore: Those are delightful.
Patrick Baldwin: They are wonderful.
Paul Giannamore: How much were they each?
Patrick Baldwin: Over $1,000.
Paul Giannamore: Per fish?
Patrick Baldwin: Yeah. Maybe it had to do with the size. It sucked. The insurance took care of it. There are specialized insurance companies in our industry. There's a handful. I'd recommend finding one that knows the industry for issues like that.
Paul Giannamore: As do I.
Patrick Baldwin: I got one more for you. Cameron, “I enjoyed the interview with Ryan Bishop and how you're expanding The Buzz to similar industries. We can all learn from others. I'm 45 and found myself taking the plunge and the ownership ten years ago. I come from the HVAC world into pest control. Ryan mentioned servicing 75% of the counties in Texas. Is that an option for the pest industry? If so, How?”
Paul Giannamore: PB, what do you think? You're down in Texas.
Patrick Baldwin: It's a big state. I fly to El Paso, that's a nine-hour drive.
Paul Giannamore: I attempted to fly from Waco to Dallas.
Patrick Baldwin: How'd that turn out for you?
Paul Giannamore: It was in your car. It didn't turn out.
Patrick Baldwin: Hold that against the Waco Airport. It's a big state. The model I've only seen do this is Ecolab, at least at scale. The reason I know this is we interviewed an Ecolab technician to come over to Bugs. What Ecolab set up is self-storage. They have self-storage containers but they go get their chemicals out of self-storage and that's their remote office or chemical supply storage for the day. That's how they run their route. It's almost like a bread route. They're individual operators and they work on their own schedule and they're spread out. To do that in Texas at least, you have to be at the top level of licensing to be unsupervised on a constant basis. Licensing is the limiting factor for me. You get culture. There are a lot of things.
Paul Giannamore: It's certainly an option. I see this all the time. We sold a business called PestTech, it was a Copesan shareholder. Terminix bought it a year or two ago. They covered the whole state of New York. Bruce Davidson and his son, Mark, had built that business up. It was largely a commercial business and they got into residential over time. They were based in Ferndale, New York, which is in the middle of nowhere.
I've known Bruce for a long time and whenever I was in upstate New York for even the last decade, I would pop by and hang out with him. I always dreaded going there because it was like one gas station and one diner in his office. It was in the middle of nowhere but they covered the whole state. He was doing that though for the Copesan accounts and for his other commercial accounts that would have locations throughout the state.
They ended up having maybe seven branches but they did have some strangler out in the middle of nowhere that clearly didn't need a branch. Ryan Bishop, of course, ran a commercial cleaning business. Over the commercial accounts throughout the state, I would almost reverse the question and say, “Can I make as much profit in one city in Texas as somebody else that covers the entire state?” You're in a route-based recurring revenue business and density is extremely important.
Always resist the urge to be like, “I'm huge throughout the whole state of Texas.” Who cares? Be in one small city and be wealthy. That's the way that I would personally think about it because if you're in finite geography and you've got a massive market share and crazy density, you're going to be profitable. You're not going to worry about stuff that's going on an hour away or two-hour away. Let alone in Texas, a ten-hour drive.
Patrick Baldwin: It worked for Rentokil, I guess.
Paul Giannamore: It certainly did. That's the approach that I would take. Every pest control, lawn care, and HVAC company, all of these companies out there need to ask themselves, “How can I operate in a smaller geography and make more money?” In
Patrick Baldwin: Brian's case, it's the largest grocery store chain in Texas and they're continuing to expand. I don't know if it's the most profitable but it's definitely a lot of revenue.
Paul Giannamore: Here's the deal and this is the whole national accounts conundrum. Years ago, I was talking to Ransom about Rentokil’s national account business in the United Kingdom. Some of this stuff is super low margin. I'm looking at this and I'm saying, “Guys, why are you doing this when we advised on the disposition of Terminix UK?” It was a company called Mighty and they sold the national accounts business at a super low margin.
Rentokil had to dispose of it and Terminix bought it. Now, we had to dispose of it again for the deal. This is super low-margin stuff. I remember Ransom, this was back in 2017 or 2018. I remember him looking at me and saying, “National accounts business is a low margin, yes. If we are effective in using those national accounts to build up density around it, it makes sense. If we're just doing national accounts to do national accounts, it does not make sense one iota.”
Folks in Copesan, if you look across Copesan partnerships, Chris’ business up in the Midwest, he had $4 million to $5 million per year in Copesan business. A lot of that was in rural Midwest areas and they did attempt over time to build up routes around it but it's complicated because sometimes that geography is sparse. Those things were super low-margin.
Modern had the same thing, they had these Copesan accounts. They were doing $1 million a year in Copesan and they finally started shedding it and got to the point where they were only doing $150,000 per year in Copesan revenue. In the middle of nowhere, Maine, there's a grocery store, a gas station, and a school. What else are you going to do? It takes you three and a half hours to drive up there. You just get rid of it.
Patrick Baldwin: You've got no control. You're depending on that client's expansion territory and you're getting drawn into it.
Paul Giannamore: If you take a page out of Michael Porter's Five Forces, those large clients have a lot more bargaining power. They've got leverage from a pricing perspective. For the smaller operator, what I mean by that is everyone who's not even a large player, you shouldn't focus on national accounts or trying to build a large business. You should focus on restricting your geography. We hear that from Buzz listeners over the years.
We talked about the monthly billing and separating the service cycle from billing and so on and so forth and all the various things that we talked about on The Buzz. It was getting folks to focus on smaller geographies is one of the things I hear most often that they've internalized here from listening to the show, which is, “I don't need to be big in terms of geography. I need to be big in terms of how much cash is rolling in.”
Patrick Baldwin: This density thing and revenue per technician strikes the chord. Seth and I went to AzPPO, a wonderful conference. I don't know if we've talked much about it since then or if at all. The AzPPO puts on a great show. An owner flew in from Dallas to come to the show. We spoke with him and he listens to The Buzz. He had a door-to-door team and put them all over Dallas without controls. If you can imagine Dallas Fort Worth and the traffic and not having controls, it sucks for him. He is figuring this out, “How do I fix this malfunction if you will?”
Another owner in Arizona has a hundred in the valley so he's 100 miles wide and 4 technicians and revenue per technician is somewhere in the $150,000 or $160,000 range. He is struggling to get his efficiency up because he's so spread out. There's a decision to be made there. I want to ask you this, Paul. Revenue per technician. Is it possible to get $2 million of business done in a year with four technicians? Have you seen $500,000 per year?
Paul Giannamore: There's a company in Singapore. Of course, Singapore is a city-state and it is extremely dense. You would have these massive apartment complexes. They had high-end places. The property management company would hire the pest control company and they were doing the common areas but then the individual apartment owners were responsible for their own pest control.
What these guys would do is go in. Let's say one building would have 700 units. These are massive buildings. They would go there twice a week to do the common area and then they would put sales guys out there to sell to the individual apartment owner. I don't remember the numbers but if you're going to do 250 apartments in a day with a couple of guys, yeah. Not everyone is blessed with that density.
Patrick Baldwin: Currency exchange factored in. Do you remember what the revenue per technician was?
Paul Giannamore: $349,000 per technician.
Patrick Baldwin: That’s incredible.
Paul Giannamore: Density.
Patrick Baldwin: Is that a possibility here in the state somewhere?
Paul Giannamore: I would imagine maybe in dense cities. For those of you who have been to Singapore know how dense it is. It's crazy, I remember in addition to buying your vehicle, you got to pay probably $40,000 per year for a permit to drive that vehicle. It was something crazy like that. It's been a while since I've done a deal in Singapore but I'm not going to say it's impossible to do $500,000 per technician. I would love to see this guy be able to do it and come back and tell me how he did it.
Patrick Baldwin: That's what I said. I said I’d make a statue if he does. Send your questions to Buzz@PotomacCompany.com. Check out Potomac.tv and watch these awesome YouTube videos. We need reviews, Apple Podcasts. Give us some reviews and show the love. Until the next episode, Paul.
Paul Giannamore: Until the next episode.
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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.
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