Patrick Baldwin: It's been weeks since we had Tim Mulrooney on the episode. I've wanted to see what's happened in two weeks. A lot could happen.
Paul Giannamore: Patrick, as you know when we had Tim on, between the time we did the interview and the time that we published the episode, we had the fireside chat with Andy Ransom, the CEO of Rentokil, and Brett Ponton, the CEO of Terminix. They didn’t tell us a whole lot we didn't already know but it was certainly interesting to sit down and listen to the two of them talk about the transaction.
The only thing that's changed in my mind is I probably think that there's a greater chance of this transaction closing than I had thought when we recorded it. The more we researched the potential antitrust issues with national accounts, it's a non-issue now. If anything, that's where my mind has changed, so I fully expect this thing to go through.
Patrick Baldwin: Do I need to keep raising money to buy off whatever they carve out or should I let that go?
Paul Giannamore: It would be a good question. I'm not even sure what they'll be carving out, Patrick. You keep raising that money and have some dry powder in case there are some opportunities.
Patrick Baldwin: What about Cohen? They invited me. I felt like smiling for an hour. Cohen is a publicly-traded shop and they said, “Paul, you know the space like no other.” They deal in mergers and arbitrage plays.
Paul Giannamore: We did a merger and arbitrary session last week where we discussed the potential transaction with firms that are looking to take a bet on whether or not this thing's close and try to profit off the spread. The antitrust won’t be an impediment. Anything can happen in the market between now and then. Did you look at the market on Monday, the 24th of January 2022?
Patrick Baldwin: I looked at the market and it didn't look pretty.
Paul Giannamore: How's your portfolio?
Patrick Baldwin: Dry powder looks good right now. It’s quite a pullback. It depends on the time of day but it's better than it was this morning.
Paul Giannamore: Do you sell that Bitcoin crap?
Patrick Baldwin: I got out of a lot of Bitcoin. It was after we interviewed Teeka. It might have been right around when we published Teeka’s interview. I was not feeling so hot on Bitcoin. You said something about, “Winter is coming.” I've trusted Paul to this point so I took a lot out of crypto and I’m glad I did.
Paul Giannamore: I’m glad that you did as well.
Patrick Baldwin: Thank you.
Paul Giannamore: Patrick, this is effectively a show about nothing. We've got no guest in this episode.
Patrick Baldwin: It worked for Jerry Seinfeld.
Paul Giannamore: Let's see if it works for us.
Patrick Baldwin: During the interview with Tim Mulrooney, you've mentioned that it's the best time for Terminix franchisees to sell and I didn't see that coming and I don't know why. What's the thesis there?
Paul Giannamore: It's multifaceted in my mind. Number one, think about where valuations are. We did the supernova presentation in June or July of 2021. Refresh my memory. What was the actual full title? It was something about M&A in the late stages of the pest control consolidation boom. Is that what it was?
Patrick Baldwin: That’s it.
Paul Giannamore: My thought process is that we did that presentation in June or July of 2021 and we talked about how the particular market that we're in was extremely bullish for risk assets. We watched it. We watched transaction multiples in the space continue to increase throughout 2021. It hit another peak in Q4. For everyone out there, transaction multiples in Q4 2021 were the highest they've ever been in this industry. We expect to see them continue to ratchet up.
Coming into 2022, we've got a potentially difficult situation for risk assets. We've got a central bank now that if everyone sits back and thinks about what we've done since the beginning of COVID, we have created trillions of dollars in liquidity. We've done trillions of dollars in fiscal spend. We were sending checks out to folks, buying Bitcoin, GameStop, NASDAQ, S&P. The markets were on an absolute tear. We've got effectively negative real yields in the United States, and this was all done under the guise of the pandemic.
I am not one who likes any government intervention in markets. I know there are folks out there who think, “We have to do something.” At the end of the day, whenever the Federal Reserve takes an action like this, it has long-term consequences. The Fed can create a monetary base but one thing it can't do is influence where that goes. We've seen it go into the equity markets. We’ve seen it go into housing tremendously. We've got multiple bubbles all over the place.
They can create liquidity, they can create base money, they can't determine where it's ultimately allocated by market processes. At some point, this stuff will start to roll off. We're not going to continue to do trillions of dollars per annum in fiscal stimulus. At some point, the Fed has to get control of its balance sheet, which will be almost impossible for it to do, but that's what it will attempt to do.
2022 will be an interesting year from a risk asset and a market volatility perspective and you're seeing that. We saw the NASDAQ down almost 5% in the first half of the day today. Number one, it is a year where we're likely to see valuations rollover. We are starting to see that to a certain degree in pest control. Do you know that Rollins made a 52-week low on Friday? The bellwether in the industry is now at a 52-week low. From a timing perspective, valuations are right for the franchisees.
Secondly, we know that there's a lawsuit in federal court with regard to the potential breach of the license agreement. Everyone wants to make that go away. There's an incentive to alleviate that problem. Third, Rentokil probably doesn't want to be in a position where it's battling with franchisees, violation of license agreements, and so on and so forth. Fourth, there are always psychological incentives to do certain things.
In the last decade or so, every new CEO that came in wanted to try to repair the relationships with the franchisees, which have been on the rocks for a long time. Brett wants to do that. What I am thinking with regard to the franchises is not only from a valuation perspective but also a timing perspective. Prior to this transaction, there's been no other time in history like this to potentially sell one of the franchises for a ridiculous price. Some of them will pull the trigger on that.
Patrick Baldwin: Let’s say the Rentokil-Terminix transaction happens. Does the franchisee matter before or after that happens?
Paul Giannamore: I'm starting to get the feeling that valuations will be different the first half of the year than the second half of the year.
Patrick Baldwin: Is it because of the Rentokil-Terminix deal?
Paul Giannamore: No. I'm thinking about the broader pest control market. We're starting to see froth come off this market and we'll see that happen in 2022. The psychological desire and incentives to make these acquisitions prior to the Terminix-Rentokil merger. There will be a lot of pressure to try to get something done. If I were a franchisee, I would think long and hard about whether or not I want to stick it out.
Patrick Baldwin: You mentioned those deals in Q4 were the highest multiples ever. I don't want to necessarily associate them with any deal, in particular, one over the other. If you look back at the last quarter, what were the big deals that could shape the M&A market?
Paul Giannamore: For the Rentokil-Terminix merger, there weren't a lot of huge ones. There were a few in the low $100 million range. I have five deals that were $70 million to $150 million in North America, but there were tons of transactions in the $30 million, $40 million, $50 million range. It was a pretty good year. On Supernova, we talked about 2021 being by far the biggest year on record. We could say that I was correct although factually, probably not.
The Rentokil-Terminix merger was announced in December 2021. It's not going to close as pending regulatory approval so it won't close until 2022. Without regulatory approval, it would have closed in 2021. M&A spending in the industry would be over $2 billion. The year prior, it was $1.8 million to $1.9 million. In 2022, it's almost $9 billion in the industry. Quite frankly, when you think about spending, you've got to calculate it based on consummated transactions. We can't talk about pending or speculative closings because it's still far from closed.
Patrick Baldwin: It looks like 2022 is in shape enough. There were some deals that are still out there.
Paul Giannamore: We've had some roles because people are a lot less concerned about taxes. It's interesting because the mentality shifted as we got towards the end of 2021. From the middle of 2020, prior to the general election, all the way through Q3 when you were down in Puerto Rico with Phil and everyone down here during the filming, a lot of discussion about taxes.
Now, there's no one focused on increased taxes. Everyone's focused on the change in fiscal and monetary policy and what effects that's going to have on risk assets. When you blow up a bubble this big, at some point, it goes the other way. The question is not a question of if anymore. It’s more of a question of when. That's what folks are worried about.
Patrick Baldwin: You learned it first here. Paul, going back to episode 71, Seven Ways to Destroy the Value in Your Business, we got a lot of feedback and a few questions. I've boiled them down. You don't know what's coming. You see a lot of businesses come through looking to sell. You're looking at the balance sheet, the P&L, you don’t have a lot of cash, you’ve got a lot of debt. What are you looking for when it comes to yellow flags and red flags when it comes to terms of managing the financials of the business?
Paul Giannamore: What you're saying is if somebody comes to me and wants to go out into the market? Am I looking at financial statements? What am I looking at? What issues do we run into? First off, whenever I look at financial statements without fail, everyone always thinks their financials are in the worst shape no matter how well done they are. Everyone's always embarrassed about their books. It's like going to the doctor. He’s like, “Strip down.” You're like, “Do I have to take my clothes off?”
Patrick Baldwin: “It's so cold in here.”
Paul Giannamore: How many naked people does he see every single day?
Patrick Baldwin: Did I say just that?
Paul Giannamore: I mean, you wanted to make it a show about nothing so it reminds me of the shrinkage episode. It was in cold water. It was cold. Some of the financial statements are atrocious. For the most part, everyone's a little bit self-conscious about that. We've talked before about building financial capabilities internally. It's important if you're managing your own pest control business to become as financially literate as you possibly can.
It's not something that you should push off to an accountant or a CFO. If you are the owner of a pest control business, you’ve got to educate yourself on the numbers. That's an important thing to do. Many people abdicate that duty. It spans the gamut from an atrocious heap. I've seen a lot of pristine numbers here in the pest control space. The bare-bones basic is you want to get an accounting system that you understand whether it's Sage, Peachtree, QuickBooks, or what have you. Get a financial system. You should also spend a little bit of time understanding how the accounting system works. Spend some time on having a clean chart of accounts.
It's hard to look at trends in your own business when you're updating your financials on an annual basis and your accountants are doing it and throwing things in a P&L. For example, look at automobile expenses. Break that down into fuel and various components of what you would go into automobile expenses and make sure, year over year, you're putting the same expenses in those buckets. It’s the same thing with your revenue lines.
Doug Stevenson got too granular for me. What I mean by that is you would go into QuickBooks and he would have fifteen different residential service plans all broken out into his P&L. Some folks handle that through PestRoutes, PestPac, or ServSuite. He liked the financial systems to be granular. I'm not an accountant. I'm not talking about this from a tax reporting perspective. I'm talking about it more from a business intelligence perspective.
When you look at your revenue line and your P&L, at a bare minimum, it should tell me recurring residential services versus one time. It should tell me recurring commercial versus one time. It should tell me the wildlife, termite. You might have 3, 5, or 10 lines broken down in revenue but it's helpful for outsiders to look at your financial statements and build trends from that.
Also, in your cost structure, if you are consistent, year over year, month over month as to what goes on each line in the chart of accounts, it allows for a great comparison. In my mind, there's no better benchmarking out there than benchmarking against yourself. You should always be trying to improve your own business.
If you're going to focus on benchmarking a specific aspect of your business, go back and listen to Jarl’s episode where he talked about picking one particular aspect and benchmarking against world-class performers. For most people out there, it's benchmarking against yourself. That's what I do every day. That's what we do with our business. I'm not benchmarking against others. I'm looking at where we were historically and trying to, basis point by basis point, improve on it.
Patrick Baldwin: I did learn that. If I say basis point and not percentage, I sound smarter. Thanks to you and Tim. You know what episode number Jarl’s is because it's your favorite. You've danced around episode 26 in the great P&L giveaway. There is a template that does break down the chart of accounts.
Paul Giannamore: We do have that. It's bare-bones basic but it's a template folks can use and that's still available. Reach out to us at TheBuzz@PotomacCompany.com. I’ll say one final thing on that topic and you bring up a good topic. People always talk about managing your business as if you were going to sell it. To me, that's a goofball thing to say almost because if you want to manage your business correctly and you want to create value in your business, it doesn't matter if you're going to sell it or not. There's a right way to do things and a wrong way.
I almost think of the saying, “Manage it as if you were going to sell it,” as a crutch for saying, “An acquirer will see the most value in a business in a certain way so that's the way that I'm going to run it.” If an acquirer sees a lot of value in your business, that means you're running it right. There are some basic things you can do to get yourself organized. We're releasing this in the middle of the winter so everyone's planning. If you haven't taken a step back and thought about your financial systems and your accounting system, it’s a good thing to do.
Patrick Baldwin: I know you're down there in sunny San Juan. I don't even know you had a winter. It is winter here in Texas so thank you for rubbing that in.
Paul Giannamore: My pleasure.
Patrick Baldwin: Based on what you said, you told us, “You have clean books.” We didn't write off a lot if you will. We weren't overly expensing items. When it came to making EBITDA adjustments to sell and put it in the cim or the book, we pulled that out, and here it is. Moving on to the next way of value destruction or maybe confusion, is it bad to write off too much when it comes to filing your taxes and putting your P&L together? Is there one that scares you or alarms you?
Paul Giannamore: It depends. Am I an IRS auditor?
Patrick Baldwin: No.
Paul Giannamore: Everyone's got to make their personal decisions and this is certainly not tax advice. Purely from a selling-your-business perspective and dealing with guys like me and acquirers, I don't care. You could write off as much as you want. What you're saying by that is business owners tend to run personal items through their business.
Outside the question of tax compliance, does that make your business more or less desirable to an acquirer? No, it does not but it makes it a little bit more difficult. When we see books like 855 Bugs, we're like, “This is fantastic. We don't have to do a lot of extra work on reconstructing financial statements.”
From my perspective, I like it but it has zero bearing. By the time you go out to market, all those adjustments will have been done. For the acquirer, it's the same amount of work for them to go through it anyway. No, it doesn't. That's a great question because a lot of times people say, “I don't like to pay tons of taxes so I write a lot of things off through my business. Is that a problem if I want to sell?” That's probably the norm for most people. You guys are a little bit different than most people.
Patrick Baldwin: When you talk about the shame of exposing themselves via the P&L or the financials, that's one thing. It's like, “I'm ashamed. I write off so much because I don't want to pay more to Uncle Sam than I need to or what's necessary.” I'm glad to hear that.
Paul Giannamore: I once had a guy and we were sitting across the table from an Ernst & Young auditor and she said, “How come there's $100,000 and petty cash here on your P&L?” He looked her square in the eyes and said, “I'm not going to put hookers on a credit card, am I?”
Patrick Baldwin: This is also something that came out of the episode with Tim. Terminix’s top-line growth was stunted by a lack of human capital. I don't mean to throw Terminix under the bus here but there are limitations to how many people are able to get hired vehicles are bottlenecked right now. When it comes to limiting top-line growth as they're looking to potentially sell their business, does this still get the #COVID asterisk? Are the acquirers going to understand and recognize, “They didn't have enough trucks to run the routes. They couldn't get enough people to grow that business.” Are they going to make exceptions?
Paul Giannamore: You don't get the COVID benefit of the doubt. If I'm an acquirer, when I'm looking at financials, in 2020, we saw a big bump. Residential services dramatically increased. Everyone's home. In 2021, we started to see a commercial comeback. In 2021, we had an elevated level of pest control services. Demand in the US domestic market has changed due to a lot of these government policies. The question is, have we pulled future demand into the present? Will we end up seeing demand change?
The sophisticated buy-side folks are looking at it saying, “Yes, we will.” We're going to see demand roll-off. It's not because there are fewer bugs but as society continues to change as we pull out of COVID, people are making the assumption that that bump in demand will normalize and we'll see traditional normal growth rates in the industry.
To your point, which Tim made, Terminix had issues with attracting and retaining the appropriate amount of technicians to perform the services that were demanded. You don't get a pass for that. The acquirer is not looking at this saying, “Patrick and Bobby weren't able to meet demand so all of a sudden we’ll be able to do it.” The chances of a big company being able to be as nimble and maneuver as quickly as you guys are less. I have specific examples of that in transactions that were done in Q4 of 2020. I take it upon myself to track down acquirers and ask them specifically how different transactions have performed.
As we go through the process, I become intimate with the owners. No jokes, Patrick. I have become intimate with the company and now I get to see the acquisition. For my intellectual curiosity, I like to look across the 20 to 50 deals that we might do in a year and say, “Here are all the smoke we blew during the sell-side process. How much of it was real or not?” What happened after the deal got done? We saw deterioration in a lot of the acquisition targets' ability to meet demand and it certainly didn't improve under the big players. I'm not singling out any one of them. It’s all of them.
Patrick Baldwin: You're doing a twelve-month checkup and you're like, “Here's what the 12-month projections or 24-month projections were before you acquired the business. Did you perform to that level?”
Paul Giannamore: That's exactly what I'm doing. The deal closed on January 1st, 2021. December 31st comes by. “Mr. Acquirer, you established a business case when you made this acquisition. Did the business track to the business case or not? Where did the numbers go?” On our side, we are always doing forward projections at least two years out.
Did we get anywhere near those? Did we exceed those? It helps me to understand because the market is dynamic and we are working with our clients to make legitimate albeit aggressive projections so I need to know how these things perform. In basic terms, that's what we're doing. How did this business do post-closing? I'll be having that question with Terminix.
Patrick Baldwin: We'll see who it's with. You might be calling someone at Rentokil. When it comes to employee retention, what are the numbers? Is there a benchmark or is there a yellow flag?
Paul Giannamore: Patrick, I am laughing because this is apparently a bad episode. I just got a text message from one of our brothers in the pest control industry that says that he has an employee whose first language is not English. This is a North American pest control business. He said, “You can't have everyone write your email blast and read the title.” The title is, The Newest Addition to Our Service Will Certainly Blow Everyone. Are you even allowed to laugh at that, Patrick? I shouldn't look at my phone while we're recording. For real, it came over my text.
Patrick Baldwin: Hopefully, that didn’t get sent out. Hopefully, he's proofreading.
Paul Giannamore: He said it went out to thousands of customers.
Patrick Baldwin: Similar to what I asked you about the profit loss, yellow flags, and red flags, Mike Givlin said, “Nineteen of the twenty employees that were brought to us, had been there for less than a year. It’s a big red flag.” Is there a number that you're looking to present or a number that the acquirers are looking for? We know that employee retention ties into customer retention and they're buying that future cashflow. What number are you looking for when it comes to employee retention?
Paul Giannamore: There's no real rule of thumb there. In a lot of ways, you've got to take employee retention versus the actual age of the business. If that particular company had only been around for 1.5 years and 19 out of 20 employees were there for less than a year, that wouldn't have sounded so strange. The business has been around for over ten years and 95% of employees were hired in the last twelve months. That would have been a huge concern. It's hard to look at that from a quantitative perspective.
In 1964, Justice Potter Stewart said, “I shall not today attempt to further define the kinds of material I understand to be embraced within the shorthand description of hardcore pornography… but I know it when I see it.” With regard to retention rates, you know it when you see it. I don't want to get too quantitative with it. There's common sense here. Your residential customers build relationships with your technicians. The better you can retain a technician, the more likely you are to retain the customer. I don't get too hung up on the actual duration of the retention. It’s kind of like Mike Givlin with regard about pornography and crappy retention rates. He knows it when he sees it.
Patrick Baldwin: You put Mike Givlin and pornography together. It's beautiful.
Paul Giannamore: He knows it when he sees it.
Patrick Baldwin: This one hit me a ton of bricks earlier thinking about this. Switching over to compensation, we have an incentive structure coming up on an episode soon. Tip of the iceberg here. When it came time to do due diligence with Terminix, that was probably the number one thing. It’s like, “This is what so and so gets paid. This is our pay plan at Terminix. Is this good?” We spent a couple of hours between the meetings lining all this and if and this pay structure.
If I'm running a pest control business, do I need to look and see what the pay plan is for my competition? Do I need to look at how Terminix, Orkin, and Rentokil pay their people in town? I'm afraid if I'm looking to sell and I want employee retention, I want these employees to stick and I'm paying them 20%, 30% more than what the market demands, I feel not good about it.
Paul Giannamore: Every time a big publicly traded acquirer looks at a private transaction like Bugsdotcom, more times than not, they are compensating their employees more than you are. It might not be hourly rate or production numbers but when you start adding in all sorts of benefits and other regulatory issues at large companies have to deal with, I don't run into it often now. Oftentimes, we run into 1 or 2 favored employees who get paid a ridiculous amount of money.
You've got the business doing $5 million or $7 million a year and you've got one employee making $290,000 a year and another one making $300,000 a year. I'm not talking about the owners. I'm talking about people that have been around for a long time, people that are deemed to be important to the business. That's complicated. Acquirers aren’t going to buy your business if your head of sales is making $378,000 a year. That's probably not going to happen. However, with regard to your typical employees, office frontline, it's not usually that big of a deal. Most times, it goes the other way.
Why did Terminix do all that work on your business? The best way to lose employees when you acquire a business is to shortchange them. They want to make sure that they don't do that. This is a good topic for people that are out there making acquisitions. It is an extremely important topic to get granular on every single employee in the target company. What are they making as a base? What are they making as a bonus? What are their benefits?
Now that we're talking about Mike Givlin, one of the things he talked about in his episode is what written, verbal, or inferred deal is there between the owner and any particular employee? We ran into that a lot where an employee thought, “I was going to have an option to buy this business out.” That employee is important and gets super pissed off. We see it in the industry where parents sell businesses out to their kids. There's a lot of this stuff that goes on so you have to ask those questions pointedly to selling shareholders.
It's also important to the degree possible to harmonize pay plans with the rest of the business. You were at the fireside chat with Andy and Brett and one of the things that they talked about is the disparate pay plans between Terminix and Rentokil but also the disparate plans in their own businesses. Some of these companies have 25 different pay schemes out at the frontline level. Over time, you've got to do your best to harmonize those.
Patrick Baldwin: In our case, it wasn't what they were making but it was a concern of what they can make up to. The way that we teared up their pay plan and production commission doesn't match over in Terminix so they're not all the way up the ladder. That was a concern and something to think about. Here is another one, years ago, “Paul, we've got this logo that's specific to our brand and we even rebranded our business. What's important as far as service marks and trademarks?” It came a lot sooner than we were expecting to sell the business but we were always thinking, “What is it going to look like for exit years and years ahead?” We asked those questions sooner than later. Does it matter to get protection on our brand or our logo?
Paul Giannamore: I have dealt with this recently. Every time we get a preliminary evaluation client, we're starting to think about the future. One of the first things that I ask is, “Have you protected any of your trademarks?” Ninety-nine times out of one hundred, they haven't registered a trademark. If you're engaged in interstate commerce in the US, you can apply for trademark registration for your name, your service mark. Those are things that you should do.
Realistically, you're probably looking at maybe $1,500 a pop to get that done. You should do that. Is there a requirement? No. Over the last fifteen years, there have probably been five instances or so of transactions where the sellers were like, “We should have done that,” because it created a problem.
More times than not, it doesn't. For $1,500 bucks, it's a cheap insurance plan. How many Arrows, ABCs, and Excel Pest are there? The list goes on and on. Go out there and apply for a federal trademark if you can do it. Get a service mark, get your logo, and your trade name. All that stuff is protected. At least apply for it so you have protected your intellectual property and can transfer it to an acquirer. It doesn't become a problem but when it becomes a problem, it's a serious one.
Patrick Baldwin: I don’t want to be the guy with the phone capturing an accident or a train wreck but those five deals in the last couple of years, is that enough to kill a deal?
Paul Giannamore: No. We found solutions but sometimes those solutions cost more money than the $1,500 that you're paying people off. I'm selling my business but you happen to have trademarked that name and you're a multi-state operation. I've grown something into a valuable pest control business that I acquired like a private equity firm might want to grow nationally. They want to be able to use that trademark and they might want to be able to do it all the heck over the place. Now, it becomes expensive for me to go out and buy you off. We've had to see certain payola situations where guys are going to have to pay guys like you off to be able to use a trademark. It is cheap. If you can hire an attorney, call Mike Stanczyk. His office does it all the time. It cost less than $1,500.
Patrick Baldwin: Part two of that question. This came up twice. These are readers reaching out and they're saying, “We want to open up a new location. One office was five hours apart. One was at least eight hours apart in a different state.” It's funny how these both happened within the same week. “We want to open a separate office in a separate state and I want to use the brand. Is that possible? Should I do it? I'm thinking about maybe I sell this one branch and open this other branch. This is where I want to end up living for years and years. What do I do? What do I not do, Paul?”
Paul Giannamore: This question is a common one, especially in the LSD community, as The Mexican calls it.
Patrick Baldwin: I know what you're saying.
Paul Giannamore: He refers to LDS as LSD. A lot of the door knockers are in multiple states so this is a big one in that community but it's also an important one in the non-LSD community as it were. You're in the state of Texas, Patrick, and you want to have 855 Bugs in Oklahoma and you think, “It takes some chips off the table. We're going to get rid of Texas but I want to own and continue to operate in Oklahoma.”
Step number one would be to set up a little tiny holding company that holds the intellectual property and your operating businesses lease it. You might set up a single-member LLC that owns the name, 855 Bugs, and applies to the US Patent and Trademark Office to get a trademark or service mark. Now, the intellectual property is in an LLC and the operating businesses are leasing it from that.
Sometimes an acquirer wants the exclusive right to use that service mark in particular geography but they don't care, especially the big players. Rentokil is trying to get rid of brands, let alone buy new ones. There are a lot of times where you can negotiate a transaction whereby you sell the business, you retain that trademark, and you lease it to the acquirer. That would be a plain vanilla thing to do. Patrick, you are agreeing to not use it in that territory for the life of the restrictive covenant or the noncompete that you have in Texas.
You sell off Texas but you’ve got Oklahoma and you might have 855Bugs/gunslingers.com or whatever you guys use down in Texas. You get a URL for your business in Texas. You can do a similar 855Bugs-OK.com. You can probably pirate 90% of your Texas website but you can use that in Oklahoma.
A lot of times, guys don't want to spend the money on multiple websites. I get that. You can build one and do a carbon copy of it and change a lot of the important keywords. Further, that becomes an Oklahoma-centric website so you don't have both Texas as well as Oklahoma stuff in one. When somebody swoops in and buys your business in Texas, you can transfer that domain to them. The acquirer can own that domain but you still own the intellectual property and your LLC. You might have a leasing agreement with the acquirer and you fully own your business in Oklahoma.
Over time, as you grow, you might be in the state of Illinois, and you're like, “I'm going to go into Michigan.” The next thing you know, you’re XYZ pest is in Illinois and Michigan. It's using the same website. Now, you're going to Wisconsin but you decide you only want to sell half the business. Is it impossible to do it if you haven't planned ahead? No. People do it all the time. This is thinking about it in advance doing easy and inexpensive things to do now to save you a lot of trouble and heartache in the future.
We had that issue with Inspect-All Services, Brandon and Brian. I don't know if we published that aspect or their interview. I do know we talked about it. Remember, they owned that inspection business. They built a pest control business and it was all in one URL. It was clunky. There are certain things that they could have done. In fact, one of the brothers is in another state with an inspection business and a pest control business completely segregated. He did it. He met Stanczyk, who did the transaction with us and he executed that plan.
Patrick Baldwin: For advertising as I’m running this business, maybe I'm doing Yelp, email marketing, Google advertising, meeting with realtors, taking people to lunch, and all this. This goes way back to what you said, as far as breaking out in the P&L. I can track those expenses separately but what about the return? What about sourcing and attributing those sales back to the advertising expense? Does that matter in terms of an acquirer and how they look at it? Is Terminix looking to come in and be like, “This business grew a lot on Yelp so we're going to keep money into Yelp, Google, or fill in the blank.” Do they care how the business was advertising before they buy it?
Paul Giannamore: I don’t know if you should be worried about what an acquirer will think about that. It's a great way to get granular and measure returns on your investment. As a manager, one of your key roles is being an allocator of capital. We talked to Brett Ponton about that. As a CEO, you're setting strategy, you're organizing all the resources and capabilities of the firm, and you are allocating capital. We've got a certain finite amount of investment money. Where are we going to put it?
One of the best ways to determine where you should put that money is by measuring the returns on each of the different functions of the firm, particularly advertising and marketing. It's quite difficult to do it when you're small and you’re wearing a lot of hats. As businesses get bigger, I see a lot of firms after they get the $2 million mark, they start to get granular on, “Here's how much we've coded to the best of our ability all our inbound leads.” You can do that at any level. One customer from there, you can code that.
Where it starts to make sense is once you get $1 million or $2 million in revenue. If you look and say, “We spent $150,000 on Google AdWords. Here's how many leads we received. Here's how many of those leads we closed.” Going through that process can inform your return on that investment and you can do that with anything. It's not just Google. You can do that with any investment you make. You can calculate a return on your dollars invested. To answer your question, does an acquirer concern themselves with where the lead source is? For the most part, no.
One thing I've learned over the years is the more granular a management team can get on lead sources, cost of customer acquisition, customer retention, and doing these analyses above and beyond basic financial statements. When acquirers look at that, they say, “This management team knows what the hell they're doing. They understand how to quantitatively manage the business.”
If you're an owner and you can get your entire team or at least your management team into thinking about things from a financial perspective, if you could educate your managers on managing from a P&L, if you can educate your management team in calculating returns and do invested capital. That inspires confidence in the team that the acquirer is are building. Anytime we come across that, that's something we showcase in a sell-side process.
In one instance, it helps you when you're dealing with an acquirer but think about how much better your business is if your folks are financially literate and they're measuring returns. That's a hard thing to do. We can sit on the show and talk about all the myriad of things that everyone's supposed to do and I know that it's hard. It is difficult to get people to do those things or to even think about working with your team to get them to do that. It can be one of the longer-term goals that you have and that will improve your business but that might not be the first or second wave of things you do.
Patrick Baldwin: I'm glad we were able to catch up on some of these questions that have come in. I know we had guests, we've been in San Juan, and there's been a lot going on.
Paul Giannamore: In 2022, Patrick, I'm going to try to get back to The Commentary. I'm going to be interested in doing a little bit more Q&A. If I don't have the answer, which 9 times out of 10 I do not, I will find it. Send your questions.
Patrick Baldwin: Sign up for The Commentary.
Paul Giannamore: You can go to PotomacPest.com and you'll see sign-up boxes littered all over that place. In February 2022, we've got the massive valuation report going out. You have to be a subscriber to get it. If you're not, I'm not handing this out. You have to be a subscriber to the commentary to get this report. Go to PotomacPest.com and sign yourself up, and you'll get an opportunity to get it.
Patrick Baldwin: This is great, Paul. I appreciate you getting these questions answered, some from the audience and some for me because I was trying to wrap my head around some of this stuff. Thanks again.
Paul Giannamore: Good questions. Good work.
Patrick Baldwin: Good stuff. Have a great one.
Paul Giannamore: You too. Until next time.
