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Bill Hoffman: The money is not the deal-breaker. The deal-breaker is, “I don't like the way this guy is going to treat my customers,” or, “I don't like the way they're going to treat my employees.” That's the deal-breaker.
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Patrick Baldwin: Paul, I'm excited because we finally got another buy-side episode.
Paul Giannamore: Patrick, this is an interesting buy-side one. It's important when you think about our follower base. These are guys that are out there toiling in the pest control vineyards to try to build their businesses. What I like about the discussion with Bill is he tells us exactly how he's done over fifteen acquisitions.
Patrick Baldwin: The proof is in the pudding. You met Bill years ago. I don't know how big it was then but look where he is today.
Paul Giannamore: It is 2022. I first met Bill Hoffman in 2007 or 2008. He and his partner were doing $2 million a year in revenue. He's put some nice growth on the board both organically as well as going out and doing deals. You and I talk about when we have some of the bigger acquires on The Buzz, they're interesting discussions but you can't model what you're doing. You can't model Rentokil, Orkin, or Arrow. You don't have those resources.
Patrick Baldwin: I'm not going to buy a $2 billion company.
Paul Giannamore: You can't do it. As much as you'd like to, Patrick, it’s not going to happen. What you can do is you can get out there in the mix as Bill has. It's an interesting discussion.
Patrick Baldwin: You and Bill were catching up about your days back in Philly and you said, “Bill, you've been growing that business. Why don’t you get Patrick a jingle and come on the podcast? If you're willing to talk about buy-side, let's do it.” I appreciate it because I've been itching for this one. He opens up and gives real tangible, like, “Here's how to do it.” I love it.
Paul Giannamore: What do you say, Patrick?
Patrick Baldwin: Let’s step in The Boardroom with Bill Hoffman.
Paul Giannamore: Let's do this.
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Paul Giannamore: Bill, thanks for joining us in The Boardroom.
Bill Hoffman: I appreciate it. Thank you.
Paul Giannamore: You and I met each other about 15 years ago. I know you had maybe done a deal or two way back when. You have outdone yourself. You and your partner have grown Hoffman’s Exterminating to almost a $10 million business down the Mid-Atlantic. Is that right?
Bill Hoffman: That's correct. We’re $10 million as of 2021.
Paul Giannamore: That's fantastic. Congratulations.
Bill Hoffman: Thank you.
Paul Giannamore: You've done that through a series of not only organic growth but acquisitions and that's one of the things that I wanted to talk to you about, Bill. Here on The Buzz, we talk about Rentokil and Orkin and Anticimex doing acquisitions. That's interesting for a lot of people. For the most part, it's not particularly helpful when you're out there with a $2 million, $3 million, or $5 million business and you're trying to grow it.
You see what the big acquirers are doing but it's not germane to what you're doing out there. Some of the insight that you've gathered over the years can be extremely helpful. Before I get into some particular questions, why don't you give us a little bit of a background on what acquisition program you've got going on over there and how it's helped you grow your business?
Bill Hoffman: We first start thinking about this--me being involved in the pest control associations listening to the members talk about where they see their future, what's going to happen, and will they be able to sell to the big guys? Over the years, I'm looking at their businesses and saying, “I don't think so.” Without being crude or honest, I was like, “I don't think your business is what they would be looking for.”
I worked in Corporate America. I worked for Western Pest Control for ten years, so I knew the corporate side a little bit. Being around the association, I got to meet other people from Orkin, Terminix, and Rentokil. These smaller companies that were 1 or 2 main operations, realistically, their wife, their son, their daughter, themselves, that was the company. There were four people working in a company and three were family members.
Putting myself in the corporate world, I’m like, “I’m not sure this is what Corporate America is looking for.” It wasn't stable. It wasn't a platform company. They designed and ran their company how they felt it should be run. I started jumping in and saying, “If you want to sell your company somewhere down the road, let me start working with you.” I’m seeing if it has the potential to be one of those companies that a larger company would be looking for.
I start working with them for free. I didn't charge them. I’m being a mentor and saying, “You don't have standard operating procedures. You don't have a handbook. You don't have any protocols or systems in place. You run the company on emotion day-to-day.” As I started working with them, I realized that they are probably not going to get there. They're not going to get to the point that a company is going to look at them and say, “I want to look at your book of business. I want to look at your P&Ls. I want to look at your valuation.” They're going to say, “Here's my checkbook.” That's not what they're looking for. They want to look if their business has some potential upswing, some accountability.
Most of these people would come back to me and say, “What am I going to do with this company? My son doesn't want it. I'm 60-plus years old. What's my future?” We started to say, “What if we took over your business and come up with some exit strategy for you? If your son's working in the business, does he want to stay? Does your wife want to retire with you? Does your daughter stay on board? Your best friend who’s worked with you for fifteen years, what's their future?”
We started having those conversations probably 15 years ago with somebody that was a one-man operation. His wife was the CSR if you would and bookkeeper. He got sick and he was out of work for about a month. He called me and said, “Can you do my work for me?” I’m like, “Sure. I'll get one of my technicians to do your work.” After that, we met with him again and he says, “I can’t do this again. I can't risk everything because every dollar I make comes from the business. I realized that when I wasn't working, the business made no money.” We knew he had something if we figured it out.
We met with that person first, “You come and work for us. We'll take care of your customers. We'll pay you almost a percentage of every one of those customers over the next few years until we figure out it was right for me and right for you.” That's how it formed how we started acquiring these companies. It started with building a relationship, mentoring them, and listening to what their concerns were. From that, it kept getting better.
We got a little more sophisticated. We got to the point that we can look at these books of businesses within 30 days. Also, understanding what our up potential would be and what their potential would be as far as having some sustainability income, having some exit strategy, and knowing that those businesses were not going to be in the wheelhouse of the larger companies.
We have another company we acquired, which was a heat company. It’s great timing with somebody that I wasn't mentoring but Eve was mentoring for years that helped with Eve being a mentor to this person and then deciding that I'm done. I want to keep working in this industry but I'm not going to run my own business anymore. I want to be part of something bigger.
It worked out. It was a handshake deal. We met down on a pontoon boat. We talked, struck the deal, and sign a piece of paper. The next day, we have a heat and bed bug company and a new employee. Sometimes that’s easy as it gets. Sometimes it gets complicated where you have lawyers and stuff involved. Sometimes you need lawyers. You need legal representation.
The simpler you make it, the better for everyone because it's costly. With legal representation, it's to make sure that you're doing everything you're supposed to. Hopefully, you never look at that contract. If you look at the contract, that means somebody's not happy. Hopefully, you sign that deal, you bury it, and you never look at it again.
Patrick Baldwin: I love how you found this niche. It comes across as selfless, “Let me help you out.” It’s a wonderful industry. You mentioned fifteen acquisitions in the last six years. Did you think you'd be doing that many?
Bill Hoffman: We knew there were a lot of companies out there. What we didn't know is what their plan was. If you ever go to a local state association meeting and you go to one of the meetings, you look around the room and there are many smaller companies, a lot smaller than larger. By listening to what their needs are, they're there for credits. I'm like, “Are you here for business? Do you want to learn about sales, marketing, or business?” They’re like, “No. I need my credits.”
We all get in business like we're indestructible. We can do this forever. You then get to be 60 or 65 years old and realize you're still doing a route and you're like, “I don't know if I want to do this anymore.” There was never a plan to get rid of the business. We're in a different world where the 2nd and 3rd generations are not there anymore. There are a few but I would say the majority of those owners that have these sons or daughters, I don't know if they want or understand how good pest control could be financially and sustainability.
Patrick Baldwin: How much staff do you have dedicated to working on the acquisitions?
Bill Hoffman: I usually find them or Eve finds them. It's because of the relationships that we've already built over the years. We've never brought on a partner or an acquisition that we already didn't know. These are people that we've known for years, we've seen their businesses, we know their people. We usually find somebody and we usually start talking about what they want. Everybody wants the same thing.
Regardless of what they say, they want to make sure their customers and their people are taken care of. That's the number one thing that we found that the smaller companies want. Even though sometimes maybe you've could have got a little bit more money from someone else, but what they know is that we're going to take care of it their customers and their people.
We can be a chameleon. Everything does not have to fit our way. We are adaptable. If they have a certain specific way they run their business, if it makes sense, we will try to adapt that so that the customers and their people completely aren't blown away. Nobody wants to change. Customers don't want change. Employees don't want change. If you come in too harsh and try to change everything too strictly, then you're going to lose both customers and employees. We can't afford to do that.
The larger companies have a certain percentage that they almost anticipate they're going to walk away with. We don't. I want 100%-plus. We want the employees to stay. We want the customers to stay. We then take that potential and say, “How can we grow this employee? How do we develop them better? How do we develop the customers into a more strong base?”
Patrick Baldwin: How do you do that? You're in there and girding different service types, service frequencies, different brand names, different payroll structures. How do you keep a grasp around all that?
Bill Hoffman: The advantage we have from an employee standpoint is we usually have better benefits, better pay, better development strategies. Put yourself in the same situation. If you're 1 of 3 people working for a mom-and-pop operation, where do you go from there? There's no place to go. Also, they come into our fold.
We have over 100 people working for us. Right away, they see potential. They say, “If I work my butt off, I can be a manager, salesman, or service manager.” There's so much more potential. Because of that, we wanted to have structure. We have 401(k) plans, we have dental, we have health insurance, we have great advancement strategies, we have meetings and fun things that we do.
We're involved in the community and other big partners. If you're a smaller company, all of a sudden you come over to us and we're working with the Philadelphia Eagles, Philadelphia Flyers, and Philadelphia Union. We're working with 3 or 4 colleges. We have significance now. We're not working for a 1 or 2-man operation. We're not too big that we don't know who they are.
We fill that niche where you're working for a bigger organization but you work with the owners. Anybody can walk into my office at any time. They can get me on a cell phone. I have that niche where a larger company is going to be difficult to compete with that, they can't. They're not made up to have that type of personal experience.
The employees always work out better. With the customers, because we keep the service the same, they have more flexibility now. We have different ways they can pay the bill and things they can get on access with a portal through WorkWave. We also have many different services that we offer and a bigger geographical footprint.
It's not unusual for a customer to say, “I've been a customer for them for years. I didn't know that you had an office down Jersey Shore, Philadelphia, or Delaware. I have a relative. I have a friend. I work in another state.” Customers start becoming our best salespeople. They start telling us where they're at, who they know, and what other services they're interested in based upon our portfolio.
We always have bought a business where it's have grown within the first six months. It's never gone backward. We don't have that 20%, 15% attrition. We have the opposite. If we lose five customers, we pick up ten. That's what Paul is saying. That's why we don't just have the acquisition growth, we have the organic growth because we have a bigger customer base. That customer base is all the leads, all that great base that you grow on.
Paul Giannamore: Bill, what's your typical deal look like? You've done over a dozen. What's your average transaction look like? How's it structured? How do you value it? Talk to us a little bit about that.
Bill Hoffman: The average is probably $500,000. We've done some as small as $50,000 in annual sales. We've done some that are in that $700,000, $800,000 range. The valuation we look at is much different than the acquisitions that are going on. We're not looking at multiples of 2, 3, or 4. We're looking at their client base and say, “How much of that is recurring?”
We realize that the smaller companies don't know the difference between recurring and non-recurring. Most of their non-recurring business is customers that call them every year for service. They don't put them on the books as a contract. They wait for the customer to call and then do their service. I'm like, “That is an annual service.”
We look at the difference between how many new customers are calling out of the blue, webpage, and things like that. How many of these customers get service every year for the last 15, 20 years but we don't call them annual services? We look at everyone's direct costs. Surprisingly, that is accurate. When you break down a small company and a big company, direct costs seem to be the only consistent. It costs you so much money to do the work. I tell people that all the time. I don't care if you're a $10 billion company or $100,000, it's going to cost you so much money to do the work.
We can figure that out within seconds. We look at how much revenue they do. I ask the question, “How many people does it take to do that revenue?” I have to try to break it down because the owners don't include themselves in that. I say, “Including yourself, how many times are you out there doing service work? How many technicians do you have?” Once we break that down, even if they don't have good metrics, we can figure out their pricing even if they don't know their pricing.
A lot of people will say, “How much do you get an hour?” They don't know. They put a thumb up and they say, “That job is $150.” “How much is it per hour?” “I don't know. I get $150.” We take that scenario and we can say, “Their return per hour in these smaller companies are pretty good. They're not bad. They don't charge bad money. They don't manage the business well.”
Once we figure out how many people does it take to do the revenue, we can divide it up and say, “We know we're going to have a 45%, 42% cost. I don't care how big or small you are, it costs you between $0.40 and $0.50 on the dollar to get the work done between your trucks and your employees.” Once you get bigger, you hire a service manager. You start adding support but it still costs you that amount of money.
If we buy a business for $500,000, we can pretty much think it's going to cost us about $250,000 to get the work done whether it's their employees that we hire or ours. We have $250,000 left. For us to figure out what the payout is going to be, we look at the staff. Are we bringing in any staff? Do we have the staff that already support this and the owners are retired? 75% of the time, we're bringing in the technicians.
The wife and husband want to retire. They've got to the point where they don't want to work anymore. I'm like, “My CSR is going to handle the workload. My manager is going to handle the workload.” I'm bringing in the direct costs and the customers. Now I say, “If I'm going to buy a company for $500,000 and I get a $250,000 profit from that business, what's fair for the employee? What's fair for us?” We usually try to come up with a 3 or 4-year term.
Every one of these deals, the owner held the note. We came up with a percentage upfront and then we say, “We're going to pay you over 3 or 4 years.” We always give the option that if they want to stay engaged where they want to stay for six months, while they're here, if they can call on customers, if they can go visit customers and they can increase their own business, we get a percentage of that as well. Some do well. After a while, some get bored and say, “It's boring doing this.” It's not as engaging as running your whole ship.
Paul Giannamore: Let's use technicians for example. I would imagine those are the employees you're most likely to take on. How often do you run into issues where the compensation for the technicians of the target is wildly different than yours?
Bill Hoffman: It's always different. Ours is usually a little bit better. Remember, when that technician decides to come on, we’ll vet and train them. Depending on how close the relationship is if it's a son or daughter, we realize that the training on those people was the worst. If it's an employee, their training is better. The sons and daughters of the owners, we realize that their training was the worst. They say, “It's all dad or mom around for a while.”
We bring them in and say, “You're going to do some of your own customers.” Geographically, we're routing by skillsets. We're truly putting a route together. Within the first month, they're not just doing my customers but they're doing their customers in a route. All of a sudden, we're building in those efficiencies that allow them to make a lot more money. It's not unusual for small companies. They take on any customer anywhere regardless of the route. That's not my mentality. I'm not going to drive two hours to do 100-hour service with the mentality that I need that customer. We're not taking on that customer.
One of the things we do is we sub out a lot of our work outside of our territory because it doesn't make financial sense to take on that customer. The smaller companies are like, “No. I need that box.” I hear the same story that you'll hear 100 times, “Don't worry. I'm going to eventually build a route up there.” It never happens. You take on customers because you don't have any work that day. Doing stuff for $100 bucks is better than zero. You're better off not taking that stop and sitting back and trying to figure out how to make $100 by efficiencies. It’s not the other way around.
Paul Giannamore: They forget the opportunity cost side of the equation. When you think about these technicians, what you see with most acquisitions out there is Western goes out and buys a company. They've got more associated payroll costs because a lot of companies don't have health care plans and are not given pecuniary bonuses or all these things that big companies have to do.
I would imagine that a lot of times, your technicians are at least paid more from a compensation perspective. When you do an acquisition, do you keep those technicians on at the same pay they were making historically? Do you harmonize them with your technician base? What's the thought process there?
Bill Hoffman: The way our technicians are paid is it's based on skill levels and experience. If a technician wants to get multiple licenses, multiple skillsets, that's how they advance through our system. The first thing we do is almost re-interview that technician. We ask them, “Do you have licenses and skillsets?” Surprisingly, most of them are okay. Most of them have 3 or 4 state licenses or sometimes multiple states. We'll say, “Based upon your skillset, this is where you would fit into our range.” Most of the time, it's more than they were making with that company. We also give them incentives. They usually go up, which is good.
If there's a time that it looks like they're going to go down, we will give them six months to get up to that level. In other words, that old owner was maybe overpaying them. They’re like, “I can’t lose this guy so I'm going to overpay him.” We're not going to overpay. We're going to give you six months to get these necessary licenses in check. If you do, great. We’re going to keep you at that same level.
If a guy or girl doesn't have the right license, there's usually a reason. It's not the owner. If I hear, “The owner wouldn't let me get licensed.” I never met an owner that said, “I don't want you to get a license.” We usually say, “That person is not going to work out.” There's a reason they're not getting their license. They don't want to keep up with it. They don't want to give the effort. We've done well with the people that have come aboard that decided to stay on and they've done well. They're making more money. We don't have an added cost. We know our costs are going to be X amount for a technician.
Paul Giannamore: How do you assess your M&A program and the returns on the capital you invest into it?
Bill Hoffman: There's a lot of stuff we don't want even though we end up buying usually the package deal. Most of these companies don't have trucks that have a lot of value and they don't have a lot of inventory. There's not a lot of assets you're buying. All the assets is in the goodwill. When we come up with a strategy, we break it down almost as if you're going to the open market. Here are your trucks and here's what they're worth. Here's our inventory, not much of a cost. We look at computers and furniture. It's amazing that when you break that down, there's no value in the assets. They’re low.
We say, “Here are your asset values.” Everything else is in the goodwill of the customers. When we look at that goodwill, we break it down by what's your return? Your customers are paying $100, $150 an hour on average. Our average customer commercial is fourteen years. Our residential is eleven years. We can say, “This has a long gold revenue. We're not going to give you three times multiple.” Our average sales are 1.2 or 1.5 times their top-line revenue. We will ask them, “What is the best way to get this money?”
The one thing that we realize is that they're mostly to the point that their businesses have done well personally for them. They bought their houses, their cars. Both cars are through the business. With all those great perks that these smaller companies have, we sit down and educate them about how much they're going to lose. They realize that their wife's car, their car, maybe their son's car, their cell phones, their trips, the addition in their house, we start breaking that down. We're like, “You're not going to have this next year if you sell your business. That's gone. How do you now make the difference up? How much of this money do you need today? Have you talked to a financial person about your tax planning?”
We will throw a number out to him. We'll give him a crazy number, “Your business is doing $500,000. We'll give you $700,000 for it.” Before we go any further, that's all we think it's worth for us. Go meet with somebody and ask them, “What is the right way of doing this?” Nine times out of ten, they’ll come back and say, “My account said that if that's what we're going to get, that's how we should be paid.” It can be paid some upfront, some overtime. They'll come up with all these crazy contraptions.
Some people will stay as a retainer and stay on for six months as a consultant and help us grow their business. We can filter that. Most of the time, they'll say, “Before the deal is made, can I keep my car?” Believe it or not, it's always a knockdown. It's not the build back up, “Can I keep my car, cell phone, and computer? My wife wants her car.” All of a sudden, all that stuff that they bought through the business, when I say, “I'm going to buy your business and all that's mine now,” they’re like, “Timeout.” We start going back and forth.
When we're done, it's like, “Does this work for you? You keep your car. Your wife keeps her car. You get your cell phone and computer. This is what your business is worth and I'm going to pay you today. How much of it do you want over time and what works for you?” I let their financial guy tell me because everyone has a different story.
Patrick Baldwin: Bill, have you ever gone to a bank for additional financing for these deals? Have you all been able to finance them in-house?
Bill Hoffman: Luckily, twice, we were able to get financing. Right before the pandemic, we went to a bank and we went through the SBA to get funding. Even though we're doing this with the owner financing, we have five deals going at the same time. I'm like, “Holy crap, we're letting a lot of money out.”
From a buyer, you got to be cautious because you're putting out all this cash but you're not claiming on it. You can't claim on taxes. It's going to be written over 14 or 17 years. The cash is going out a lot faster than you can take it on your taxes. If you have too many to go at the same time, you're going to be paying taxes and gains on that even though you don't have the cash.
We did five within a two-year period. We have $2 million worth of owner notes. I’m personally guaranteeing it. My business is guaranteeing it. All of a sudden, I said, “This might need some financing.” We were able to go to a bank and the SBA financed this. They paid off some of these debts, cleaned our slate, and we went out and grabbed a couple more.
We made sure that the SBA knew that we might have some more in the future and they say, “Go ahead and get them. Come back to us in a few years and maybe we'll do it again.” We're in a process of taking the ones that we purchased since we did the SBA financing and looking to see does it makes sense again with their low interest to bundle these again and extend our terms?
Patrick Baldwin: On the books, these businesses are asset lines. You're talking about vehicles that have 100,000, 200,000 miles on them and little equipment. What was the SBA using to underwrite these deals?
Bill Hoffman: Cashflow. Realistically, there are two things they’re looking for. The SBA is perfect for these deals because a traditional bank wants collateral, they want the assets. They don't want to run your business. They don't want you to sell your business. They want hard assets. The SBA is perfect to bridge that asset, that airball, and that's perfect. The SBA will come in and say, “There is no collateral for these deals. What's your cashflow projection?”
We'll do a strategic cashflow projection and say, “By buying these deals and by consistently putting them in our own geographical footprint, we become more efficient. If we are going to finance these correctly, our cashflow has a positive cashflow.” The SBA wants you to pay their debt. That's what the SBA is looking for. They're guaranteeing the bank 75% of the loan. The bank is like, “We only have a 25% airball.” There are now enough assets to cover the bank's liability exposure. The SBA is saying, “We're here for the other 75%.”
It's a little more expensive for finance and a little more fees but if I'm paying an owner over four years but the SBA is going to finance it over ten, my cashflow increase dramatically. We see the immediate return on our investment that way. These smaller companies that are interested in buying, sometimes you can use your own cash. Using your own cash to buy these deals is probably not the best way to use your own cash.
You're going to use your cash but you're going to depreciate these or amortize for over seventeen years. All of a sudden, you could run out of cash fast if you decide to get into this market. There's a great market for this type of business. There are a lot of other players my size or even smaller that could benefit because there are a lot of these smaller companies. Under $500,000 companies are all over the place.
From an industry standpoint, it's healthier for the business. Working in Terminix, if they buy everybody, it's not good for the industry. These smaller deals that are happening keep the industry, which it always was. 75% of the industry is run by smaller companies. It keeps that model down and makes those companies stronger anyway.
Patrick Baldwin: SBA is a three-letter acronym that has the government behind it, FBI, IRS, SBA. It's the shroud of darkness and unknown. I've never wanted to touch with a ten-foot pole. Is it something I could do on my own and go apply for an SBA loan and get through that? Do I need to get outside help?
Bill Hoffman: There are certain banks that have an SBA department or department head and they're the ones you want. Any bank will work with the SBA but there are certain banks that do well with the SBA. There's also small grant money and stuff like that out there. This is the third SBA loan I've had. It is more expensive than financing but it's exactly there when there is an airball with collateral. You could put everything up you want personally.
Unfortunately, in small businesses, with regards to how big you get, you're never big enough where the banks don't want some personal guarantee. We're not an asset rich business or goodwill-based business. If you got a $10 million business, how many assets do I have? Less than 10%. Everything else is goodwill. The bank doesn't want to run your business. They're interested in you not foreclosing. They're interested in cashflow.
I always tell people that are in business, “Make sure your books are smart. Make sure you're good at accounting. In the end, if you want to go for financing, they don't care how big you are. Can you afford to pay it back? Can you show that you have enough cash to pay back a loan?” You'd be surprised at how many people don't know how to do that. They don't know how to do cashflow projections, “What's my cashflow going to be next year? If I buy these five companies, what's my cashflow going to be?”
Paul Giannamore: We've heard a lot of things that you've done right. What are some of the mistakes that you made and some of the lessons you've learned by doing these deals over the years?
Bill Hoffman: The biggest one is your ego. That will always get in your way. It’s like, “I need this deal. I have to have this deal.” If you get more excited about the deal, your business mind takes up that burner, your ego system, “This deal is great. I want this company.” You start getting excited about the business and your accounting is not checking. I did this a couple of times and then I backtrack and say, “I probably overpaid for this. Maybe it wasn't the right fit at the right time. I did it too fast when I had something else going.” You then have to backtrack.
You have to have that sense of consciousness whether it's a financial person or a partner. Somebody has got to be in the background saying, “Why do we want this again? Tell me why.” If you can't answer that other than, “I want it. It's a great fit.” A good example is we bought a mosquito company because we thought it was going to be a good fit and it wasn't. A mosquito business in the northeast is not a good fit for pest control all the time. If you're in the south, mosquito and landscaping work works well with pest control. In the northeast, we are still seasonal. We're pretty much shut down for three months from pest control. You’re buying a mosquito business and you're ramping up at the same time, everything shuts down, everything starts up, all of a sudden, it wasn't a good fit.
We remodeled. After we bought this company, it did not work the first year. It was a different model than we're used to. We're doing 21-day services five months a year. It was completely different. We struggled with that one. It was one of the things I wanted. I wanted it more than I thought was a good move. It took us two years to rethink. I said, “How do we change mosquito work that fits in a traditional northeast pest control market that you're doing quarterly services or something of that nature?” We didn’t. We lost a lot of customers and we got some back. I didn't have that conscious kick me in the butt saying, “Don't do this. You're not ready to take on a seasonal service.”
What we should have been looking for is what is the service we can do in slower months, in the fall-winter to offset our slow season? We never had problems getting worked on. We're so busy in the season that we probably didn't need another business that dumped on us. We should have been looking for exclusion work, we’re in control work, animal trapping work, something that is all set to keep our people working twelve months a year, at least in the northeast.
Patrick Baldwin: I appreciate you saying that and being transparent about the ego and that getting in the way or maybe you've sunk because of going after a deal and your emotions getting into it. Do you find yourself further in the process where these red flags are coming up, “Maybe I shouldn't proceed,” other than the financials, “Why am I paying this much?”
Bill Hoffman: Now we're looking at it, “Does it make sense?” I realized that I don't need every deal when I first get that call. We're working on one and it's a long shot. This is where it makes sense to us and we've already told the seller, “This is what we have to offer. It might not be the best fit for you.” It was one of these things that within an hour I said, “This is what we can offer. You tell me if you think it makes sense.” Not worrying about the ego. If it doesn't work out, it doesn't work out. Somebody else will grab it.
I’ll go back to hiring somebody. You interview somebody who has the experience and they’re saying, “I have two other interviews with your competitors.” As soon as they say that, all of a sudden, they become a better candidate. Why? You don't want to lose them to another competitor. Even though before they said that you're 50/50 on the fence and they also say, “If you don't hire me, I got an interview tomorrow with Western.” All of a sudden, it’s like, “I'm going to hire you today. I don't want you to go in there.”
It works with these acquisitions where you have to say, “If it's not right for me, something else may get you but that's okay. There'll be other deals.” In the beginning, you get excited about the deal. The deals are exciting. I get into my staff and say, “Make them work.” That thrill of the hunt, you got to watch, you got to keep yourself in check and say, “It's the hunt but is it the right animal at the right season before I pull that trigger?”
Patrick Baldwin: You’re going back to integration. We talked about the payroll and the technician coming into the fold. You also said that customers don't like change. You brought on a technician and he's now on a more efficient route. Tim is not always going to be servicing off Tim’s old accounts when this business came into Hoffman's. The customer is going to see a new technician, they’re going to see a new label on the truck outside. What does that look like? How do you communicate that to the customers?
Bill Hoffman: The first thing we do is we always draft a letter between the original owner and myself and we both sign it. We usually get a nice picture. We’ll sometimes put the picture right in the letter and say, “I'm sure you know by now that so and so is finally retired. Chris or this person or their son is going to stay on with this.” We put this whole story together. It’s like, “We've been working together for years. We've been doing some of his work for him. We've known each other.”
We build this whole relationship type letter. It's a one-page letter and it says, “It's going to give you more accessibility for service. We're more available.” We try to put it all about the customer, “This guy is retiring. This girl is retiring. It's all about you now. You might see some new faces but all these people know each other. It's like the big Brady Bunch family now.” We've not had a lot of pushback if we do it that way.
We always get the owners to say, “Give me a list of those customers that you know. As soon as we show up, if it's not you in a green uniform, tell me who they are.” We start talking to those people. Most of them will say, “It’s about time. I thought he was going to retire five years ago. I can't believe that person would still come out of my crawlspace. I told him before, ‘Don't get in my crawlspace. You're going to get hurt.’” We would have people saying, “I can't believe he’s still doing the work.”
They're usually excited, especially these people that have had these customers for 30 years. They're like, “It's good. He's finally going to retire. Thank God. He never took a break. He never took a vacation before. Maybe he'll take his wife on a vacation.” They get proud that they're doing it. We say, “Here are the people on our team, call them up.” In the onboarding process, if you do that within the first couple of weeks, you'll be surprised at what customers are tolerable about.
If you tell them why you did this, “We don't do anything stupid. We're the big guy. They're the small guy. We had a relationship with this owner for years. They decide to trust you with us.” The customer is like, “That's great.” I'll say, “We've been in business for 32 years. I've been in the business for 40. We're a family business. We’re in the same area.” Most people say, “I know you guys.” It comes easily.
The onboarding with the customers, you never know what you got. Some companies we bought have boxes of index cards believe it or not. we have customers that have stuff on QuickBooks as their software. I've had software that I've never heard of. I didn't realize how many software packages were in this industry.
Paul Giannamore: No doubt. Way too many.
Bill Hoffman: Besides the onboarding of the customer as far as the relationship, the second onboarding is the database or lack of. I've never seen so many different variations of how people track customers, how they schedule people. We have a good process and only 1 or 2 I was lucky enough that they had the same software I did. Usually, I go and meet with the team and we have a few office staff that are good at adding customers quickly and onboarding them. We take whatever it is, a shoebox of customers.
We go back to old school, “Can you show me a schedule of what customers you're going to service this month?” The most important thing is these customers still have to be serviced in January. We take those customers and we start adding them into our system so we can schedule them and bill them. Usually, we can do this within a three-month period. We keep asking them for the next schedule, “How about next month? What's next month look like?”
We keep doing this and ask them if they have a computer system, “Let me run last January’s schedule. What did you do last January?” I'll be looking at customers and I'm like, “What about that guy?” “He calls me when he wants to.” “He's on a schedule every month.” “We have to call him every month.” I'm like, “Let's call him. Let's put him on a multi-program right now.” It's amazing. Customers are like, “I've been asking for that for a while.”
When we buy these businesses, we know that we're probably going to find 20% or 25% of the stuff that's not processed. As a small owner, I'm worried about doing the work tomorrow. The truck broke down. Customers get done and we'll get done. If not, they'll call me. Our job is the opposite. We want to send out renewables. We want the customers to get their frequencies when they're supposed to. We want everything mindless for the customer and us. Pest control is an inconvenience for everyone. We don't want to have to hassle them in getting our service.
Paul Giannamore: Do you find yourself marketing to formerly canceled customers of the acquisition targets?
Bill Hoffman: Yep. It's not just canceled customers because it's customers that they never put in the system correctly. Most of these small customers don't cancel it. They don't have onboarding processes or off-boarding processes. They just stop going. We’ll find stuff like, “This guy's credit card expired. Did you call him for a new one?” “That's a pretty good idea. Maybe we should do that.”
It’s understanding how these small businesses work. There's so much going on in their heads. They're not built for growth. They're built for sustaining what they got. Growing is harder work and doing everything right. Trying to retain customers and getting a new business is a whole different model than keeping what you got. If you're making money and you got money in your checkbook and you're paying everybody, that's what they want and that's what they're looking for.
Patrick Baldwin: It sounds like you've been almost like a big brother or helper along the years and giving them some extra business sense. Doing fifteen, do you find yourself learning things as you go?
Bill Hoffman: Yeah. Every one of these small companies has a niche. Our niche is finding smaller companies and onboarding their customers’ employees. These smaller companies all have a small niche in their own little respectable market. Every time we find these companies, we do find that there's something that they were doing that was unique that we can use for ours and it could be the smallest little detail. You can't stop learning from these smaller companies because you can't look down on them. They were successful in their own rights.
All these companies that are buying have second homes, shore homes, and vacations. I'm like, “I can't do any of that. I'm still trying to dump the money back into the business.” They didn't have an exit strategy. During the business, their businesses were extremely profitable for their own family. They were taking the trips and they have their second homes. I looked at their homes, I’m like, “Holy crap, my house is half the size.” You're selling me your business but all the money that you were making, which is okay, they were putting back into their personal life. That's why they got into the business.
In the end, we’re all doing okay. They have lots of personal wealth. Their businesses don't have a lot of wealth. What we find is, personally, they have a lot more wealth than their businesses are worth. On the opposite, my business has the wealth. I’m living in that nice little three-bedroom little rancher that me and my wife take care of. In the end, it's all the same. It's a matter of what you decide to do at that time.
Patrick Baldwin: You've had Hoffman's for over 30 years, 10 years before that with Western. If you had to start over again, would you start from customer number one on your own and build that from scratch or would you look at acquisitions to get the process started?
Bill Hoffman: I would look for a small acquisition. It doesn't have to be big. When I started the business, the first probably two years, I was working about five different jobs. I was a landscaper. I was working in a deli at night. I was doing everything I could to make ends meet because I started with no customers. I didn't have a company. I came from Western so I couldn't compete. I had a non-compete. I had to start from scratch.
It would have been nice to find that small $100,000 or $200,000 business that was ready to go. That allowed me to hire my first employee earlier. It took me a little longer to hire my first employee to get that second technician or get that office because you're building from scratch. In the first year, I did $60,000 in business. In the second year, it was $120,000. From there, I said, “I don't want to be a tech.” I was a branch manager at Western running a couple of million-dollar branches. I said, “I don't want to go backward. I didn't want to be a tech anymore. I got to build this business.”
In year two, I'm like, “That's it.” I sink in, come up with a business plan, grow the business, go get some more companies, go get some more businesses, and then start from there. I would like to have a small little 1 or 2 main operations that I could take on and then have a base where I could put that first employee on 2 or 3 years sooner.
I built commercial first. I was probably the opposite of small companies. My background was always commercial. When I worked for Western, I was in fumigation. I worked 70% commercial office compared to 70/30. Every company we look at is the opposite, there's 70% residential. My business was 70/30. Until I started acquiring these companies, everything I was acquiring was residential. That's why we're about 50/50. That's not because we grew a residential base, it’s because most of what we acquired was residential.
Patrick Baldwin: Are those residential customers that you're acquiring an easy grab to new commercial accounts?
Bill Hoffman: Yeah. There's a relationship between more residential clients. They will give you a more commercial base. These people all work somewhere. That's why we consistently go back and forth with this. You assume that your customers know that if you're doing their business that you do homes or vice versa, you have to keep telling that story. You have to keep telling your customers what you do and where you're at.
Customers assume that you're a residential business. You don't do large commercials. We do the largest commercial facilities in the area. We'll have a customer once in a while who says, “I realized that you're doing Lincoln Financial Field. I didn’t know you did commercials.” It's an assumption that we have. We're naive that we think that our customers know our business. They don't know our business. They don't know that we do mosquito work. They think that's a unique service. Some customers don't know you do termite work even though you're doing their spiders and ticks.
You have to remind customers what you do for a living so that your customers become your best salesman and your raving fans. 70% of our growth still comes from our customers referring other customers to us. There's a great opportunity for smaller companies to buy other small companies. Sometimes it’s a matter of two companies getting together and talking about who wants to stay in the game and who wants to get out and then you come up with that arrangement.
The lawyers aren't going to make it happen. The M&A people won't make it happen. You got to start with the conversation. You got to start with, “Does it seem right? Will it work tomorrow?” If you can make that work, everything else can be worked out as long as the synergist works. How fast you want to be paid.
That's usually not the deal-breaker. The deal-breaker is, “I don't like the way this guy is going to treat my customers,” or, “I don't like the way they're going to treat my employees.” That's the deal-breaker. The money is not the deal-breaker. You can always figure that out. There's a huge market for small companies that want to do this. I decided to do it because it's a great market for us. It's putting us in a situation where we're growing a business. We're attracting more people.
Selfishly, we don't have a problem with employees because we have so many people who want to come here because they're seeing everything we're doing. We have a lot of people applying. They’re like, “Where do you find your people?” You keep attracting people because they keep seeing all these moving parts and you’re like, “This company is on a move. Let me jump on this ship.” It can help companies that are struggling with finding people also to get a couple of companies that the synergist works.
Patrick Baldwin: That's good. Bill, I appreciate this and everything you've shared. This is not coming from a book. This is a real experience and you've lived it out. Thank you so much, Bill. I appreciate it.
Bill Hoffman: Patrick, thank you.
Patrick Baldwin: Have a good one.
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Paul Giannamore: Patrick, if I've learned anything as a bystander to guys growing their business through acquisitions, it's the ones who get out there and take the old-timers to breakfast and lunch are the ones that get deals done. We're contacted constantly by folks that sit back and wait for that lead. We often will send leads out. Oftentimes, there are opportunities that we're not going to be able to create value for the seller so we like to send those out.
You can't sit back and be opportunistic. You have to get out into the mix. You've got to do the types of things that Bill's doing. There is a tremendous amount of opportunity to create value for your firm. Doing the $100,000 to $500,000 in revenue acquisitions are not shopped. The big companies don't want to deal with them. You've got to have that pre-existing relationship. There are some ways to build that and that's what Bill talked about.
Patrick Baldwin: You have owners that are looking to sell. They say, “Paul, what can you do? I'm ready to retire.” “I don't have kids,” or, “I don't want to pass this to my kids,” or, “I don't want the headache.” “What can I sell it for? Who should I sell it to?” You take a step back and say, “We can't create value.” That's how you make your money at the end of the day, selling the businesses. What does that conversation look like?
Paul Giannamore: We create value by running competitive processes. If I don't think there's going to be a competitive process for one reason or another, it is hard to create value. Our firm has over thirteen people. We're the largest M&A advisor focused on the pest control industry. We have the resources. At the end of the day, there are so many small deals that we can't do them.
What will happen is we get calls. Let's say you've got a $500,000 shop. I'll make it up, in Des Moines, Iowa. I'm not going to be able to do much with a $500,000 pest control business in Des Moines, Iowa. However, I know a handful of people over there that are always looking to buy these things. I'll ask the guy who calls me, “I know 3 or 4 folks looking to buy these companies. Can I put you in contact?” I do that and I'm happy to do that. We do that all the time.
If there's anyone out there that wants to buy small companies, track us down, pest@potomaccompany.com. We'll put you on a distribution list to get leads. You can't sit back and wait for this. I've sent one lead to Des Moines, Iowa in the last 15 years. If you're out there and you want to buy, you've got to get out there and go into these meetings. These pest control meetings are important. That one-on-one of calling up the old-timer down the street and taking the guy out to lunch is the way to build a relationship. Ultimately, the small guys sell based on a relationship, that's what they end up doing. They feel comfortable that you're going to take care of their people.
Patrick Baldwin: Let me change topics. You were saying something to me earlier. One is switching away from the buy-side. If you are going to represent yourself, you're a smaller business, you don't know what's out there, there's a lot of rumors, we've talked about that in the past like the water cooler, 1X, 2X, 3X. With all this stuff, it’s something that caught your attention. Someone was making calls around and said, “This is what I want. This is what I demand from our business.”
Paul Giannamore: Something did catch my attention, Patrick. Here's the tale and it's one of the reasons why you should never put an asking price on a business if you're a seller. There's a seller out in the market with a small business, a couple of million-dollar businesses. He was calling around a lot of different folks saying, “I want $10 million for my $2 million business.” In and of itself, that is a ridiculous concept.
What ended up happening is no one wanted to talk to this guy because they viewed him as either insane or entirely ignorant as to what's going on in the world around him. He was leaving messages for a lot of different people and they're like, “I'm not even going to call this guy back. He sounds ridiculous.” A great way if you're a small seller to not even get a call back is to leave a voicemail specifying a completely ridiculous high price. It doesn't entice buyers to call you back.
Sellers often feel like they need to negotiate right out of the gate but that's an example of upfront posturing that destroys the process before it begins. We were talking about how this happens all the time. It was this one particular case that caught my attention. I know for a fact the guy doesn't want $10 million for his business but he thinks he needs to say those things because somehow, someway that's going to help him get a deal.
Patrick Baldwin: That is interesting. I'm always trying to wrap my head around the auction theory. When you said, “If someone's right out the gate asking for five times, it doesn't make sense.” It probably burns more bridges than it helps.
Paul Giannamore: It's almost like the guys have to take a step back. When you're selling something, it's like dating. You meet the girl, you take her out on that first date. You're not talking about when you're getting married or where you're going to live together. That scares the girl off. If the girl talks about it, it scares the guy off. You don't do those things. There's an acquisition mating dance so to speak.
Business owners sometimes always feel like they need to be negotiating because they think about, “It's going to be my negotiation skills that end up getting me the price.” It's not the way it works. When you've got an asset that is desirable by multiple parties, you got to play a little hard to get. Fake it a little bit. You don't have to come on that strong. Don't be the single mother of five at the bar and relax a little bit.
Patrick Baldwin: I love the analogies. Case in point. It's big on relationships when it comes to getting deals done. Bill Hoffman is doing a great job up there.
Paul Giannamore: I would say that at least 50% of the sellers in pest control, in general, will make dramatic mistakes based on relationships. As a buyer, it’s something important to focus on. I see it time and time. It's not a mistake for you. If you've built a relationship, that's exactly what you're focused on doing. Oftentimes, sellers will work against their own rational, best interest based on a relationship that they've established over the years.
It becomes easy to convince somebody that they have no need to talk to any other acquirer, especially if they don't understand how this game all works. It's easy to sit back and say, “I've got this desire. I want to buy a bunch of companies. I've got financing. I've got this and that. I've got the infrastructure.” Unless you get out there and talk to these people, it's probably not going to happen. You're probably going to be talking about it three years from now hoping that'll happen.
If you do anything at all and you're thinking about doing this, look around your local area. Don't go out to the big companies, look at the smaller ones. The big companies aren't going after them. Everyone's chasing scale now. Five years ago, Terminix would go out and buy the $500,000 guy. Terminix is not doing deals and they won't be doing deals. Orkin, they can to a lesser degree but still, they'll do it.
I don't see Rentokil out there buying $300,000 businesses. They don't do that. There will probably be a day when they do that again, Patrick, but they're not doing it now. You've got a window of opportunity while there's a tremendous amount of consolidation going on to go out and try to scoop up some of these small guys.
Patrick Baldwin: This is super helpful. Buy-side interests me and to see it practiced and performed. Bill is executing on these deals. Hats off to Bill and thank you so much for coming and sharing some of your secrets and tips there.
Paul Giannamore: We did a little buy-side course for Seth Garber over at Pest Daily. It was a while ago. Seth has that on Pest Daily. You can look that up. We'll do another one at some point here, Patrick. Until next week, Patrick.
Patrick Baldwin: Thanks. We'll see you.
Paul Giannamore: Take care.
Hoffman’s Exterminating
Pest@PotomacCompany.com
Pest Daily