Paul Giannamore: It is a Fat-free episode once again. We got Fat Pat roaming around the streets of Texas. I’m not sure what he's doing down there, I would imagine it's something like a Texan version of Ferris Bueller's Day Off. He's probably standing with Israel, fighting gays and lesbians, and protecting the border.
As I sit here, I get ready for a couple of days heading off for Tampa. I'm working on a speech. Usually, I can get up and talk about M&A and I don't even have to be prepared for something. This time around, in Seth's Energy event, which I'm looking forward to because it's one of the best events of the year. It's small and intimate. There are 150 to 170 people there so you get to meet everyone. It’s a great group of people. He calls it Energy. It does have high energy. He called it Power in 2023. I didn't feel the Power. I felt the energy. Now, he's called it Energy because, quite frankly, there's a lot of energy.
I have to write a speech and my speech is about the things that I've learned over the years from some of the guys that have built the biggest and most valuable pest control companies in the industry. I was thinking, one of the things that stood out to me, and I'm going to try to work this into my discussion, is I once had this client. Years ago, I remember having a drink in a major US city. We had dinner, we had a meeting, everyone went, and it came and gone.
It was he and I and we were having a drink and he said to me, “If I had a proper board of directors, not friends of mine, or golfing buddies, people that pay and were not afraid to fire me, would they fire me or would they give me a raise for doing my job as CEO of this business?” I didn't think about it much at the time but he certainly went on to do that. Within two years of having that discussion, he went out and put together a proper board of directors. He didn't go to his golf club, although he was a member of two different golf clubs.
He went and got some people, mostly outside of the industry, style directors, and most of them were operators. He brought them on, he set up a board, he set up a compensation committee, and he had to live up to the performance requirements of a board of directors. He said it was one of the best decisions. It required him to focus on every single quarter sitting down and concisely laying out the progress of the business as well as defining the obstacles and the challenges and then having a third-party look it over and call bullshit on the things that he was saying.
It ties into the fact that a lot of us might be pretty honest with most people but we tend to lie to ourselves the most. I remember having that dinner discussion with him some years ago and the reason why he came up with this is he said, “I live a pretty honest life but I find myself constantly lying to myself. I find myself constantly breaking commitments to myself. If I had a board overseeing what I was doing, it would cause me to execute.” He gave the board the ability to hire, fire, and give him a raise. I'm happy to report he ultimately sold that business and he was CEO. He and his family made a whole ton of money on that. He turned out to be a great CEO and the board turned out to be a great decision.
A food for thought as I think about what I'm going to talk about. We did have some questions and I'm going to go into those questions in this episode. This one is a long one, “I love The Buzz, Paul and Fat Pat. A question for you, Paul. You've mentioned unique capabilities in previous episodes. I think about acquirers buying a book of business, getting trained employees, and maybe building some density or entering into new markets. Are there unique capabilities that you've recently seen acquirers get excited about?”
He goes on in the second paragraph to say, “I'll be going to the NCOA conference again this year. I've been hit up to sell my wildlife business or at least to partner up quite a bit recently. I'm expecting to run into a few of these companies while I'm at the conference. Did something change? Is private equity finally interested in wildlife? If so, why?”
I was at that WorkWave conference and I started to have a variety of different chats with financial sponsors about wildlife. I know the Mexican will be heading down to NCOA and Fat Pat will be there as well for FRAXN. Right now, there are more wildlife transactions going on than I have seen in a long time. If you're a longtime listener of The Buzz, you'll remember back in 2012 with Critter Control, you had the early teens where Terminix and Orkin looked around and said, “We're throwing out a lot of leads that we get for wildlife. Instead of throwing them out or referring them out, let's try to do them ourself.”
Terminix bought Bowman at Michigan and started their wildlife division. At the time, they had 302 branches. They hired a guy who was going to roll out wildlife across the organization so you had wildlife at Terminix. Orkin bought Critter Control. Of course, they still franchise that business and they own some of them as operating businesses. They bought Trutech, which, at the time, was a $9 million business. With Trutech, in 2010 from Lenny and Stan, it was probably doing about $10 million in revenue, $7 million of that was wildlife, and $3 million of that was recurring pest. Now, it's probably a $60 million business, give or take.
I do think there's a lot of opportunity in wildlife. Private equity has gone out and done a lot of consolidation in pest control, no doubt about it. There are over a dozen platforms in the space. It's expensive. Pest control is expensive. When you look around, you can buy a pest control platform at 15 to 20 times EBITDA or you can go out and pay less than half of that and buy a wildlife platform. The problem that you're going to have is you're not getting nearly the amount of recurring revenue that you would get so you don't get the visibility that you get on general pest.
With wildlife, what you do get is you get that emergency requirement. It's rarely ever an emergency with pest. “There's a cockroach in the kitchen and that's a shit show. We got to get out there,” I get all that. A couple of ants in the bathroom or crickets here and there, it's never a life-or-death situation, at least on the residential side. For commercial, this is different. On the residential side, it's not. On both the residential and the commercial side for wildlife, it can be a pretty bad situation when you've got mice running around and your wife wants to kill you and you got a raccoon in the attic.
There is all sorts of crazy stuff that goes on that when you've got that problem, it doesn't matter if it's 2:00 on a Saturday morning, you want that taken care of. I do think private equity will likely start to build out wildlife platforms. I do think that it'll do this because it is a way to enter into resi services, particularly on the “pest control”. You can get wildlife and cross sell pest. You can buy those businesses much cheaper than you can pest control. In the pest control market, at some point as prices go up, it brings all the returns out of the market and it becomes a series of bad investments. Pest control, like any other industry, is like this echo chamber of how awesome we are.
This 2024, I'll be going to conferences for six different industries. I'm starting to pay attention to how people talk in those industries and they talk the same way that we've always talked in pest control and everyone in pest control talks about, “It's a great business. It's constantly growing. It's resilient. We're doing something great for society.” The whole circle jerks at how awesome it is and everyone should buy pest control companies and they should sell for a ton of money. That's every industry. Now, we're getting what we had wished for. Prices have gotten extremely expensive.
We've rung all the returns out of the market. Now, you find yourself in a position where it's hard to make a good investment. There's no asset that's so good that it can't become a bad investment if the price is too high and this is what we're starting to see. As private equity firms roll around town, they realize that success doesn't come from buying good things, it comes from buying things well.
In order to buy things well, you have to move to wildlife, which might be viewed as something that's not such a good thing as pest but you're able to buy it well, meaning you pay much less for it. By paying much less for it, you're baking your returns in on the upfront of the transaction. For those of you who have been in the financial world for more than a month buying and selling assets, you know that the extreme majority of the hard work is done on the entry price.
80% of your returns are determined on the day you go to closing when you write that check. It's how you buy that matters more so than ultimately how and when you sell or how you run that business. Whether you're running your own business or you're going out making acquisitions, you always want to keep that in mind. It's how you buy will largely determine your returns. In closing on that question, yes, I do think wildlife will be, as the Mexican likes to say it, going to be the new pest control. I'd like to challenge him on that. I hope he is correct. I don't know that he will be but I’m willing to go with the flow.
I do think that there's going to be a half-dozen-plus wildlife private equity deals in North America this 2024. If you would like to chat with us about them, you can certainly reach out to the Mexican directly, especially if you're going to NCOA. I'll be so kind as to give out the old Mexican's number here. The Mexican's number is 787-664-1133. He will be in Texas. Keep in mind, Patrick is off right now protecting the border in Texas. NCOA will be in Dallas this 2024. Will the Mexican make it? I don't know. We'll find out. 787-664-1133, track him down, and talk to him about private equity in wildlife. He would love to chat with you about it.
What do we have here from a next question perspective? This is a long one. I'm going to read it out to the punchline. This is a doo-to-door business, a rather large one that talks about growth equity versus a buyout. The crux of the question is what is the difference between a growth equity position and a buyout position from a valuation perspective and what considerations would you have and why? That was the last part of a long question from a context perspective.
When you think about the private equity interest in pest control, you have funds that go around the country and they buy platforms. If we take this to very simple initial entries into the US, all we have to do is look back at Anticimex. Anticimex finally entered the US market in the summer of 2016 and they bought some platform businesses. As they were starting to kick off this entry, I remember it was late 2015 Michael Johansson who changed his name to Michael Vigne, which is weird because sometimes it's Swedes and the man changes his name to the wife's name. It's a sketchy thing. That's how they do it.
Michael, I used to refer to him as Michael Johansson and he became Michael Vigne. I remember being in Singapore doing an AX deal and having a conversation with them about their entry into North America. How they were structuring this and sketching it out on paper was we're going to go in and we're going to buy 80% to 90% of these businesses. We're going to let shareholders of former sellers retain significant 10% to 20% percent of these businesses and be able to recapitalize that at some point in the future or when we otherwise go public. They can take some chips off the table.
It took a while for that to catch on. As you can recall, back in 2016, barely anyone could pronounce Anticimex. There are still a lot of folks in the United States, particularly the Southerners, who call it Antisemetic. They can't seem to get it just right yet. You have Antisemite and Anti-simex, either way it was relatively unknown and it's still largely unknown, believe it or not. It took them some time but over time, they were able to buy a variety of platforms.
If you look up and down the East Coast and some of the West Coast, they would buy these $15 million, $25 million, to $30 million businesses and let shareholders rule equity. Those are buyout transactions whereby when we talk about buyout, the buyer controls the entity post-closing, meaning controls it in fact through votes as well as owns the majority of the equity of the business. That's a control deal.
A minority deal or a growth equity investment is exactly that, it is buying less than 50% of the equity of a business. The majority of private equity transactions in the world are growth equity investments. I haven't looked at the stats recently but the last time I looked, buyouts were still in the minority. It’s the growth equity investments where private equity firms look at privately held businesses and they invest up to 50% in the business, in businesses that are mature but still have some potential growth opportunities based upon there might be acquisitions they could do, there might be some new technology they can acquire.
There are some things that they can do to beef up growth. They need some additional capital. They also need additional capabilities and board governance. For the same reason that our client and friend at the beginning of this discussion took on a formal board, that's one of the same reasons why somebody would take a minority equity investment from a private equity firm.
In the pest control space, there's been some minority investments and they are based upon the fact that you have some decent-sized businesses that ultimately want to go public at some point. They go out and maybe sell 45% of the business and say, “We're going to sell 45% of the business. We're going to be super quiet about it. We're not going to tell anyone. The private equity firm will take a 45% stake. We, the current owners, will own the majority of the business and we'll still control it. We'll be able to make a lot of the decisions.”
“We're going to put together a formal board. We're going to hire a CFO. We're going to do all these sorts of things. If we do it just right, and it might take us 5 or 10 years, but at some point we're going to have a business that's big enough to go public. We are going to have a private equity partner that has taken dozens of businesses public in the past. We, the owners, have no idea what we're doing. We are taking a business public, we're just pest control guys.”
“Now we've got this partner, they've got the playbook, and they've done this a million times. Now we're partners. They give us some money. They help us grow. Now we're able to grow at 3 to 4 times the speed that we were able to do unfunded in the past and everyone's happy and gets super wealthy.” That is a growth equity position versus a buyout position. It is a complicated discussion to talk about this from a valuation perspective.
You've asked me about considerations, the biggest considerations that you have to deal with is when you're partnering with a private equity firm and they are buying a minority position in your business, there are going to be a variety of blockers and consent rights. There's going to be a body of law written up about what you, the founder, can and can't do given the fact that you've got a well-heeled partner that doesn't control that board and they're going to need to have some control.
We've talked about this on The Buzz. This is a conversation for another time because it is a lengthy one. From a valuation perspective, I would say a rule of thumb for you and pest control is you're probably not going to see a massive delta between valuation from a growth equity versus a buyout perspective, it's just not going to be that big of a difference. This is a complicated discussion. If a lot of people have questions on it, I will certainly talk about it on The Buzz or I might even do something on Potomac TV on it but it gets long and complex. Unless others ask, we'll kick that off.
The next question, “On Potomac TV, you talk about how you will be putting up more buy-side classes. I love what you have up there now and I have learned a ton from them. When will you put up the rest of them? One of the things that you mentioned is rather confusing. If I'm on the buy-side, should I be making the first offer? Yes or no? You gave multiple scenarios whereby either of those two could be true and I understand what you're saying.”
I will put some buy-side stuff. I promise you, in Q1, I will load up. I get more buy-side questions. For a guy who doesn't do buy-side, I get more buy-side questions than I get anything else. I owe it to you guys because I said I would put these things up there and I will certainly do it. By the end of Q1, I'll put the rest of the buy-side stuff up on Potomac TV. With regard to should you make the offer? Yes or no? I know what you're talking about. I try to talk in generality sometimes without giving rules of thumb because rules of thumb, over time, become relied upon.
A lot of the buy-side stuff that I'm focused on is not helping a private equity firm or Rentokil go out and buy a $20 million pest control business. I'm helping you, the pest control entrepreneur who's toiling in the pest control vineyards, who wants to grow his business by acquisition and wants to pay a great price, and wants to create a lot of value and otherwise not get screwed. That's who I'm talking to and trying to help here. With that said, you, the buyer, are in the best position by taking control of the situation and putting the first offer on the table.
I would say the same thing if you're a seller. This is probably why it's confusing because if you're selling, I always say, “Let the buyer handle this.” If you're buying, I always say, “Let the buyer handle this.” The question is why wouldn't a seller then want to take control versus why are you just telling the buyer to take control? There's an important reason why I'm doing that. On the buy-side, you want to take control of the process because, more times than not, the seller is not taking control of the process.
I'll give you an example. Let's say I have my pest control business and I want to sell it for $1 million. Who cares what it's worth? I want $1 million for it. you take me out to dinner and you say, “Paul, you're getting old, you're getting big, you've been eating a lot and drinking a lot. You're getting kind of tubby. Maybe you need to slow down and focus on your health. Why don’t you sell your business? I'll be a great home for it.” I say, “That's nice. I think I could sell to you.”
The last thing you want to do is say, “Paul, what do you want for that business?” What you want to do is you want to sign an NDA if you have to, you want to get some materials, and you want to anchor to a number that's substantially lower than the $1 million I want. You want to be negotiating off a $500,000 number as opposed to negotiating off of my $1 million or worse. I could turn around and say $2 million bucks. “Paul, what do you want for that business?” “$2 million is a fair number.”
Now, you're negotiating off a $2 million number for a business that you might only want to pay $750,000 for. Take control because anchoring is important and it does impact these negotiations. I promise you it doesn't appear so but it really does. You want to be the guy to anchor and anchor low when you're the buyer. “Paul, if we do this, don't we risk offending people?” Yes, there is a risk that you'll offend people. As you see this play out year over year, at volume, the chances of offending business people are relatively low and it's a risk that's worth taking because you can't concern yourself with other people's feelings. It's a business negotiation.
On the sell side, you want to control the process and what that means is you are now an auctioneer. If I were selling my business, I'm going to be agnostic as to who the buyer is, I'm going to go out to all potential buyers simultaneously, and I'm going to require them to bid to give me a bid or a proposal for purchase on such and such a date at such and such a time. I'm going to give them directions on how to do that so I can compare apples to apples. The last thing I want to do is get 3 or 4 different offers that are difficult to interpret, meaning difficult to compare to one another because I, the seller, did not provide proper instructions to the buyers.
Every time we'd take a business out to market, we'd send a process letter. The process letter says, “Here's the date and time the offer is due. Here's what we need to see in your offer. What would you pay on a debt-free or cash-free basis? Would it be a specific number? Is this a range concept? How are you financing it? How much money do you have in the bank? Who's your financing source? What would you do with management? What would you do with the seller?”
There's a million questions but it is a lot easier if you've got 10 to 20 questions that are answered at the same point in which you're reviewing the initial proposal that you, the seller, are taking control of the process. If you're a buyer, you want to fight that. As a buyer, you want to do the things that you want to do and make your offer extremely difficult to compare to others. That's a way in which you'd attempt to fight the auction. That's a discussion for another time. That's it for this episode, just a few quick questions. I'm going to finish up my speech for Energy and then I will see the rest of you guys when Fat Pat surfaces in Texas. Till next time.
