Patrick Lange on Selling Your Service Business – EP.293

(00:00:00) – Intro

(00:01:15) – From financial planner to HVAC broker

(00:05:28) – Why focus matters in business brokerage

(00:07:51) – The four drivers of business value

(00:14:52) – Private equity’s impact on HVAC deals

(00:17:32) – The challenge of selling one-person operations

(00:19:39) – Educating sellers on realistic valuations

(00:23:48) – Having the price conversation with sellers

(00:26:57) – Navigating earn-outs and deal structure

(00:32:03) – Managing seller transitions effectively

(00:34:36) – How sellers should diligence buyers

(00:37:06) – Know your business value now

Patrick Lange: So many people have no clue what their business is worth, right? They’re, they’re taking, and we talked about it earlier, they’re taking what somebody on the stage said or they heard the guy down the street sold for. My thing is, for most of my clients, their business is their biggest asset, and they’ve never sold it.

And so they don’t know what it’s worth. And so my thing, whether you’re gonna sell next week, next month, next year, ten years from now, you should always know what your business is worth. So if somebody comes up and makes you an offer that you’re in a position to say, “Yeah, it’s a great deal, I’ll take it,” or, “You’re not even close,” and you have something to build towards, right?

You look at your bank account because you wanna know what’s in there, but then what produces the bank account, they don’t have a clue what it’s worth. So my advice is get valuations done often so you have a realistic understanding of what you’re sitting on. And are you building it to be, to be enough?

And if you’re not, what do you need to do to that?

Alex Bridgeman: Patrick, thank you for coming on Think Like an Owner to talk about all about selling HVAC businesses and being a part of lots of different transactions. Rob and I are certainly excited to chat with you and hear about, you know, some of the things you’ve learned over such a long career so far Can you tell us a little bit, how’d you get into this business?

How’d you start? Why, why this particular niche? What brings you energy to this, this industry?

Patrick Lange: Yeah, absolutely. So thank you so much for having me on. I really appreciate that first. And so I’ve been a broker for a number of years. I’ve owned other businesses in the past, and kind of weird, I, I’d bought and sold other businesses, and I didn’t know what a business broker was.

I met a business broker, and they told me what they did, and I thought, “Wow, I’ve been doing that for myself. I didn’t know I could do that for other people.” So I became a broker, and the first y- few, several years, I sold everything Main Street, right? Bars and restaurants, gas stations, flower shops. You name it, I sold it.

I did a lot of swimming pool service businesses. I owned swimming pool service companies in the past, and so I was familiar with that industry as well. And we moved. I lived in Central Florida. I moved to North Florida, and there’s not the deal volume up north that there is in the central part of the state.

You know, in the central part of the state, Tampa, Sarasota, Fort Myers, there’s so many people moving there every day that if you had a decent listing, there was enough people moving there, they’d buy it. Well, in North Florida, it’s more remote, more rural, and so the volume wasn’t there. My oldest– No, my youngest son played baseball, and a, a parent on the baseball team heard what I did and said, “Hey, I have a heating and air company I want you to sell.”

I went to list it for them and decided instead of selling it, I’m gonna buy it. So I actually bought my own listing, which is like the kiss of death for a business broker. You shouldn’t be buying your own listing kind of thing. And I’ve bought three of my own listings now. But so I ran it, uh, bought the company, ran it for a few years, and I missed the brokerage world.

I missed putting deals together, peeling back the curtain, kind of what works, what doesn’t work in other businesses. And so I went to sell it, and we were a small company doing under two million dollars in sales. And when I went to sell it, I couldn’t find a lot of accurate data, and I thought, “Wow, as a broker, if I can’t find accurate data, what is a guy who’s been in a heating and air van for the last thirty years gonna find?”

He doesn’t stand a chance to find anything. If you were doing twenty million dollars in sales, well, they’d line up to help you, right? There’s all sorts of people. If you’re doing two million at the time or less, there wasn’t anybody that was helping you or anybody that was helping you with any consistency.

I’m based in Florida. We have an MLS system in Business Brokers of Florida, so we could look at companies that have sold, what multiple they sold for. Was it based off of a tax return or P&L? And so we were able to track a lot of this different data. And when I looked, they were selling all over the place.

So I ended up selling my company, and my son and daughter-in-law actually bought me out. They own the business today. That was probably seven years ago now. And I said, “I’m gonna switch my practice to just doing heating and air.” And since then, we’ve added plumbing and electric. The bulk of what we do is heating and air, but we do a few other trades as well.

And, and sold a company in Florida, then one in Georgia, and then Carolina, and then we just kind of exploded. And so there was really a need, and we were able to fill that need. And so that was the roundabout way, uh, I got in it. Been just over six and a half years now that we’ve been exclusively in the trades, and I sold my 172nd today.

So we’ve been fortunate to touch a lot of deals and help a lot of people. And yeah, so that’s how, kinda how we got here.

Alex Bridgeman: You mentioned pool service. We have a, a shareholder who owns and runs a pretty successful pool service business. Is that one you still own?

Patrick Lange: No. No, I sold that just before becoming a broker.

So I owned a financial planning company, sold that, and I joke many people have a midlife crisis and buy a Corvette. I traded in a suit and tie for flip-flops and a tank top, and so I bought this small little swimming pool route, and we ended up growing it fairly decently. We were doing 300 pools a week, and the problem was is I was in a, a fairly small area, and so we traveled.

So we covered a pretty big area. And so when we sold it, we had to sell it off in sections ’cause we were doing it in different towns, and nobody wanted to cover that big of an area. So that was kind of part of my education in the buying and selling. We bought some routes, sold some routes, and at the end, sold the entire thing in sections, so it was kind of a neat process.

Alex Bridgeman: I imagine there’s a lot of compounding benefits that come from focus. So instead of doing, you know, bars, restaurants, pool services, and heating and air, focusing on just heating and air, plumbing, electrical, which often have, of course, a lot of overlap, uh, in those spaces. I imagine there’s a lot of benefits that came from that.

Early on, did you– what, what did you see? And then now, you know, six years into that focus, what has become apparent to you about that degree of focus?

Patrick Lange: Yeah. Best decision for my business I could have made for a lot of different reasons. But the last business I sold that was not a heating and air company, I had sold a restaurant years ago, and the guys who bought it came to me and said, “Hey, you were good luck on our last restaurant.

I want– We wanna buy another restaurant. We want your help.” And I said, “Listen, guys, I, I sell restaurant. I don’t sell restaurants now. I sell heating and air companies, and I don’t know if I can add value.” And they’re like, “Come on, you were a good luck charm.” And it was weird. They already had it picked out. I called the broker who had it listed, and that broker just sold restaurants.

And so we met. They ended up buying it, but I added zero value. The other broker who was representing the restaurant was asking questions that I knew nothing about, right? I- He was asking about Pepsi machine leases and how things were delivered and what was frozen and what wasn’t, and, and I, I was like a deer in headlights, right?

I, I couldn’t add any value. And at that point, that day, I said, “I’ll never sell anything again that I can’t add value on.” Because I felt like I was getting paid for no reason. And, and I don’t have a problem getting paid, right? I enjoy making money, and I don’t think profit’s a bad word, but I think you just should deserve the, the revenue that you receive.

And at that point, and I had been selling heating and air now for a while, and I was thinking, “Wow, people come to me about heating and air, and I can talk about maintenance agreements and how things are treated, and what about inventory, and what about warranties, and what about callbacks?” And there’s all these things I can add value in licensing, and I couldn’t add any value there.

And so to me, it solidified to me the benefit of being a specialist in your trade and in your niche. And, and since then, that knowledge has continued to grow, and I really think it helps me do a much better job, not only for the sellers, but for buyers as well

Alex Bridgeman: Rob, any questions so far you want to bounce in?

Rob Southern: No. Well, really just about kind of your specialization in those areas. L-like, what are the drivers of value for those businesses? I imagine, you know, if someone comes to you and they, they want to sell their business and they, you know, their friend sold one and they think it’s worth X, and then you take a look and it’s like, “Well, here’s how you get X and here’s your situation, Y is more or less.”

What, what do you… What are the first couple of questions you ask or, or the most important drivers of value in those businesses?

Patrick Lange: Yeah, great question. And there’s really four things I preach anytime I get an opportunity to get on stage or I’m talking specifically to sellers, and it’s four things to focus on, and it’s not just heating and air.

To me, it’s, it’s any business and specifically any service business. And the one is, we call it getting out of the van, right? So where most, most tradespeople get stuck is they won’t get out of their own way. They have to be the best technician in the world. They don’t believe anybody else can do it as well as they can.

And so they cap their growth based on how many service calls they can run a day. And as they’re aging, they can run less and less, and revenue comes down as a decline as a result of that. And so, so it’s getting out of their way. And, and once again, we say getting out of the van, but it’s also so many other parts of the business, right?

We see people that they’re the only technician and they get stuck there for their entire career. And so they don’t really have a business, they have a good paying job. And there’s nothing wrong with that, as long as you understand that there’s not a lot of value when it’s time to sell. The next thing they seem to do is then they become the best salesman or the best, the bookkeeper or the best CSR.

And so, so they just move from one seat to another and never once bringing on other people to help with that. And so it’s delegating and growing through delegation. The second thing is clean books and records. Many treat… people treat their business like it’s their personal checking account, right?

They’re running every bill through there. Their accountant says, “We need to minimize taxes.” And so instead of doing it in a great way, they’re paying for beach houses and personal expenses. And then when they go to sell, they hand me a tax return of a business that’s been losing money for fifteen years, right?

And they expect to get paid for it, and they wink, wink, everyone does it, and somebody’s going to pay me for it. And the reality is they’re not going to pay you for it. They can’t prove the income, they’re not going to pay you for it. And if you’ve been, this is going to sound rude and it’s not intentional, but if you’ve been cheating the federal government risking going to jail for twenty years, as a buyer, how am I going to trust that what you’re telling me is true?

Right? When I can’t do anything to you, right? The federal government can put you in jail. I can’t do anything. So, so clean books and records and understanding what’s going in and what’s coming out of the business, many people don’t know. Part of it’s because they just don’t know any better and no one’s told them.

Part of it’s because they’re just trying to save taxes and not make any money on paper. And so clean books and records is the next thing The third thing is a business built on service and repair as opposed to just replacement, right? In, in, in heating and air and plumbing, you know, the big ticket items are getting a new unit, right?

And that’s where the, the big money’s at. But if you just installed an air conditioner today with a ten-year parts and labor warranty, you’ve probably just lost a customer for a few years, right? And if they call you, they’re not happy they’re calling you back. Change it to a garage door, right? If you put a new garage door at my house and I’ve got to call you next week because there’s an issue, I probably don’t like you, right?

So in theory, there shouldn’t be a call right away. I, I would believe that there’s gonna be ongoing maintenance and things that they should be doing, and so that maintenance is what delivers the customer experience, the customer loyalty. They’re often paying for their own loyalty, and it’s a sticky customer, right?

So if something breaks, they’re gonna call me because they’re part of a maintenance program. And so having a, a business that’s repeat revenue and, and, and relationships with a customer is worth a lot more money. The final thing we preach, and this is more of a what not to do than what to do, is it’s staying away from new construction.

In heating and air specifically, oftentimes new construction’s a race to the bottom, and most general contractors will slice their own mother’s throat to save fifty cents a square foot. They’re wanting you to put in the cheapest possible equipment that you can, but then you’ve got to stand behind it, right?

And so when the customer calls and says, “Hey, the air only blows good in half the house,” then you have to… What are you gonna say? “Well, we put the cheapest we could in ’cause that’s what the contractor wanted”? That’s not great for your business, right? And that contractor, if they find somebody else that’ll do it for twelve dollars cheaper, they fire you and they’re on to the next person.

And so there’s not loyalty there, and buyers know that. Business buyers know that. And so if the business is all coming from a few key contractors that you could lose in an instant, then there’s not as much value for that. So that, that’s the four things that we stress to focus on: get out of your own way, clean books and records, business built on service repair, and staying away from new construction, and those all lead to higher valuations and higher business.

Rob Southern: We look at all of those things in terms of revenue quality, the last three in particular, and we literally have a, a checkbox in our, in our buy box that’s, you know, is the owner on jobs? And it, it’s okay if the answer is yes some of the time, right? But if they’re essentially a full-time employee of the business or, or even part-time or, you know, they’re ten percent or fifteen percent of revenue, that kinda scares us.

But if they’re out there, you know, meeting, meeting homeowners and, you know, monitoring quality and, like, just engaged, like, that’s a great sign. So we just see it kind of the same way, I guess.

Patrick Lange: Yeah, and I, and I think the other part to that is, is it– a-and I preach this to s- to owners and eventually sellers, no one calls me and says, “Hey, I wanna buy a business.

I can work in the field for fifteen hours and then go home and do paperwork for six hours.” Right? I mean, you put yourself in a buyer’s shoes, would you buy your own job? Probably not, right? And so why would anybody else? And so, so putting yourself in their shoes, you know, adds to that and the, and kinda the why behind it, aside from the mathematical side.

Alex Bridgeman: It feels like the stakes for all these things are so much higher. As you pointed out, that buyers have gotten so much smarter about asking these questions, and there’s a, there’s been enough HVAC businesses purchased and owned and run for a long time that buyers kinda know what to ask for and what to see and look at.

Patrick Lange: Absolutely. Once– y- you know, you see a lot of private equity that’s entered the space, entered all the trades over the last few years, and I think they’ve brought a different level of knowledge when it comes to deals. And so they’ve helped that, where people have sold companies, and now they know what they were asked on everything they sold.

So now when they’re going to buy, they’re asking the same questions, right? They’re, they’re educating themselves, some by trial and error, some by being around educated people that have done it, and others, things like this, right? People are watching podcasts and listening to shows specifically talking about it and knowing what they should be looking for.

Rob Southern: You mentioned PE coming into the space. Do you look at your, you know, the industry that you serve as like it’s a nine-inning baseball game, and we’re in like the seventh or eighth inning? Or is this just a forever game and there’s new businesses being started, and so, like, the supply is constantly replenishing, and so there’s always gonna be demand?

Patrick Lange: No, I, I, I look at it as a combination of both, right? This has happened before. There’s been consolidation in the industry before, and if you follow private equity, it’s like they all follow one another. And so somebody gets super excited. I can remember when they first started getting the space, I– my day was full of phone calls of somebody saying, “Hey, I’m with so-and-so private equity group, and we have this thesis about buying into the trades, and we want…”

And, and I would get 15 of those same phone calls, like somebody got the same script, and we’re all excited about heating and air. It’s happened before. It kind of fizzles out, and it happens again, and history continues to repeat itself. We sell a lot of smaller companies, so smaller companies, in my opinion, got some of the benefit of big private equity players moving in because there’s been some increased value at the bottom end of the spectrum, but it hasn’t been as wild as it’s been at the top, right?

Private equity, most big private equity groups are not gonna buy a company doing a million dollars in sales. They’re wanting to buy a company doing a million dollars in EBITDA or net income, and so they haven’t been, hasn’t, hasn’t been as impacted, so the spike hasn’t been great, and in my opinion, the downfall won’t be as great.

But I think like anything else, things go up and down, and I think the acquisitions and the trades is no different. I sell on average of twenty to twenty-five companies a year, and probably Eight of those are big consolidators and private equity buyers, but the rest of the buyers are mom and pops buying other mom and pops.

It’s insurance guys who decide to leave insurance and get in the trades because their dad was a plumber, or somebody who attended a seminar by Cody Sanchez or somebody else that says everybody should be buying a boring business in the trade, and they’re doing it. So, so there’s all these different buyers in the marketplace, which I think is changing that a little bit, where before it was big consolidators buying, and that was it, where now there’s this mix in the market.

And we see a lot of kids whose parents sold out to private equity. The kids watch what they did, and so now the kids are doing it on a smaller scale, right? They’re buying up these smaller mom and pops and growing them to bigger companies because they were there for the growth of their parents’ business.

So we’re seeing a little bit of everything in the marketplace. Not sure if that answers your question or not, but it’s gonna go up and down. That’s always gonna happen. The question becomes: how big of a wave is it?

Rob Southern: Those smaller businesses, I, I assume sometimes you’re literally talking about, you know, one person and a van.

What is someone buying when they buy that, and why is the seller selling?

Patrick Lange: So usually, the one person in the van is selling because they’re done, right? They can’t climb in an attic anymore, and they can’t carry an air conditioner on the back anymore. So that’s the rationale for the sale. Those are by far the hardest business for me to sell because it’s not really a business, it’s a job, and they don’t sell for much money because a buyer takes all the risk.

Typically, the customers of those want to be able to call the owner on a Sunday night on their cell phone at eight o’clock and say, “You need to come fix my air conditioner.” And they’re typically cheap, right? Those customers are cheap because the one man, we call him in the heating and air space, Chuck in a truck, right?

It’s a one-guy operation, or Dan in a van. One, one-guy operation, and he has no overhead, right? So this guy could be making a lot of money- By giving stuff away, right? Because he doesn’t have an office and doesn’t have staff and doesn’t have all this overhead that somebody running a traditional business would have.

So where the problem is, is this guy could be making a hundred, two hundred, three hundred thousand dollars a year profit, but no one’s gonna pay him for that because when they come in, if they’ve got four or five employees and they’re buying him, well, they’ve got to raise prices instantly because they can’t afford to send their guy out there with insurance, with uniform, with all the things that they’ve got into it, and those customers oftentimes are cheap, and they’re gonna leave.

So they know that there’s gonna be some retention, but not what it would be if they were buying a bigger company. So it’s getting them to agree on price is the hardest part because the other Dan in the van, he’s not gonna buy him because he already has more work than he can handle, right? And he doesn’t want to hire anybody, so automatically he’s gone.

The bigger person that says, “Hey, when I pay, buy a new van, put a guy in it, give him insurance, give him benefits, give him training, we’ve got to double or triple the price, so we’re not gonna make anything close to what you’ve been making.” And so they’re gonna ba-base their price on what they think they’re gonna make moving forward

Alex Bridgeman: When you meet an owner who is thinking about selling but has one of the…

Or maybe is doing all four of the things you talked about not well, do you try to convince them to do these four things? And on, on a certain level, like can you really convince someone to make these changes or is it more of like self-driven, like they need to come to you wanting to improve their business?

Patrick Lange: So to, so to me it’s more education, right? Because I’m, I’m okay if, if you do everything wrong, and when you get to be 60 or 70 or whatever your retirement age is, but you understand there’s no value in your business. The reason we started doing… We do free valuations for anyone, and the reason we started doing it is giving back.

I can’t tell you how many kitchen tables I’ve sat at with somebody 65 years old, and I’ve got to tell them, “We joke about it, but your baby’s ugly,” right? You’ve spent your whole life building this, and there’s no value to it. You’ve done it wrong. Well, I’m okay having that conversation with you at 40 or 50, and you can say, “I’m okay with that,” or, “I’m gonna work harder and fix it.”

But when you’re 65 or 70, you may not have the runway to… left to fix it, or the energy or the gas in the tank, and that’ll rip your heart out when you say it to somebody that age that said they didn’t know. That nobody ever told them what buyers were looking for. Do that 200, 300, 400 times and, I mean, it’ll really rip your heart out, right?

And so, so we do the valuation, and I do shows like this purely to say, “Hey, here’s what you should focus on.” If you watch this and say, “I’m not gonna do that, that’s stupid, I don’t wanna do it,” whatever the case may be, “I don’t wanna do the work,” or whatever, then I’m okay with that. Don’t do it, right? Just understand when you go to retire that you’re gonna sell your van and your tools and you’re gonna walk away.

Just make sure you’re okay with that and you’re saving money in other vehicles so you’re able to fund your retirement. What I don’t want is people to say, “I didn’t know and nobody told me.” And so, so we educate them, and when we do evaluation, we’re asking how many maintenance agreements you have. We’re asking how much time you spend in the van.

We’re asking all these questions, and then we’re coming back and saying, “Here’s what it’s worth today. If you want to increase the value, you need to focus on these things here, and this is what’s gonna increase value. Now, if you take the playbook and go do it, great. We’ll help you sell your business down the road, and it’s gonna be worth a lot more money.

If you take it and say, ‘I’m not willing to do that,’ then great. Just understand it’s not gonna have as much value when you go.”

Rob Southern: I’m an optimist, and I love, like, creative problem-solving. Have you ever come across any solution to that problem where there’s, like, maybe there’s the, you know, kind of a platform business in the region.

There’s a chuck in a truck, you know, thirty, forty minutes out of their territory. Is there some creative way of like, they essentially hire them for a year, and then they transfer ownership, and they get to, you know, draw their dow-hours down and the phone number, you know. Like, is there a win-win, or is it really just sort of dead in the water?

Patrick Lange: No, no, there is win-wins like that. We’ve had… I’ve had– I have some buyers who will buy it, give them a chunk down and say, “Okay, we’ll also give you a percentage of revenue that comes from your customer base for the next couple of years.” That kind of thing works. The issue typically is you’ve got a seller who’s been making a lot of money, right?

They’re making two hundred, three hundred thousand dollars a year profit. And now I come to them and say, “Hey, they’re gonna offer you a hundred thousand dollars.” And they look at me like I’ve got two heads, right? You’re an idiot. I’m never gonna do that. But, but look at the risk the buyer has to take. And so, so it’s normally a buyer not being flexible as opposed to a seller not being willing to take the risk.

And so there are workarounds, right? Like you mentioned, stay and work. That works very well. The problem there oftentimes is they’re gonna raise the price, right? And now this seller is working for this company telling a customer, “We replaced that last year for fifty dollars, and now this year it’s two hundred and fifty.”

Right? And they don’t feel comfortable with that. And so it’s normally a seller problem, not a buyer or a market problem

Alex Bridgeman: How do you tend to have that price and value conversation, especially when the owner may have a friend who sold their business for some massive price and did really well?

Patrick Lange: Yeah. So, so a couple ways.

One, I tell people the reality is most of what they heard somebody sold their business for is a lie, right? I look at tax returns of people’s businesses all day long, and then I go to a trade show and somebody gets up on stage and said, “I sold my business for ten million dollars,” and I saw the transaction, and they’re a liar, right?

That, that’s just not accurate what they said. The other part to that is, is oftentimes when they sell for these crazy numbers, they’re holding a note and financing the entire thing, so they didn’t really get paid. It’s based on performance moving forward. They’re not saying that. Nobody brags about the bad deal they got, right?

At the end of the day, nobody’s gonna get up on stage and say, “Hey, I took all the risk. I held the note. It’s tied to performance. I may not see any of the money.” They get up and say, “I sold for ten million dollars.” Also, I can’t tell you how many businesses I sold where the staff thinks they know what the business sold, and they tell everybody in the market that it sold for ten million dollars, and it really sold for a million dollars, right?

So there’s all this storytelling that goes with it. So I’m telling them, “Listen, I’m gonna give you the facts. You may not like them, but I’m gonna be brutally honest and tell you what it’s worth in today’s market and why. And if somebody else said they got X amount of dollars for their business that’s the same size, have them show you the check Have them tell you this is really the, the reality.

And so it’s about numbers, right? And, and the reality to me, for most people, especially those who’ve been in the trades a long time, the number’s the easy part, right? It either makes mathematical sense or it doesn’t. You’re either gonna get paid this amount of money or you’re not. For many of them, it’s everything else that comes with it.

Do they have to stick around? Is there an earn-out? Are they asking you to finance it? Is it tied to future performance? All of these other parts that go with the deal that make it so much more complex that most people don’t even think about.

Rob Southern: S- uh, you know, two things real quick. First of all, like I would expect a buy side advisor or broker to say everything you just said.

I think it’s really interesting that you’re saying it as a, as a sell side, right, guy. It’s

Patrick Lange: the truth, right? At the end of the day, it’s, it’s the truth, really, and it’s numbers. Now, and I track comps, right? I have all the comp data to say, “Here’s really what it sold for,” right? Dude, I could blow smoke and tell you that I’m gonna get you more for your business, and then we’re gonna go to market, and it’s not gonna sell, and you’re gonna hate me anyways.

So I’d rather tell you now before we go to market with a business that’s not sellable than let’s tell each other stories about it, right? I mean, it’s, it’s not a great conversation. We probably look at eight to 10 sets of tax returns a week in doing valuations, and I probably list a business to two businesses a month So there’s a lot of people who don’t like my number that we look at.

Rob Southern: Yeah. Yeah. No, no one’s gonna… Uh, and it’s much easier talking about the headline number than the structure, for sure. On structure, what advice do you give sellers on earn-outs? You know, this kind of earn-out’s okay, stay away from this kind of earn-out. Like, what do you– ’cause some of them are probably not well set up for success, others are perfectly reasonable.

Patrick Lange: So first off, most people don’t even really know what an earn-out is, so it starts kind of with the education process of that. I’m not a f- I’m not a huge fan of earn-outs. As somebody who represents a lot of sellers, I’m not a huge fan of earn-outs, and the number one reason is the seller really has no control over the P&L after the, the closing date.

Right? If it’s an earn-out, and it’s a small one, I’m, I’m more likely to say I’m okay with one that’s tied to gross sales because many buyers are putting additional expenses onto the business when they first come in. And to have it tied to net income when you really can’t control the net income, and if that buyer pays himself a bonus or a management fee or all these other things that happen that aren’t currently on the business, I think it’s not fair to the seller.

Now, every buyer says to me, “I’m not gonna buy a business and write a big check to go lose money, do bad things.” And they’re, they’re accurate there. I believe that, right? But overall performance, there’s gonna be some bumps in the road when you take over the business, and to be able to have it go back to the seller and say, “It’s your fault because we lost some employees,” or, “We did things wrong.

We changed things,” I think is not fair. Where I’m, I’m okay with it is more of a earn-out/bonus structure, right? We’re gonna do everything, especially if the seller sticks around, the seller has some control. All right, we’re gonna tie it to this, and gross sales hit this, and if we do more, you get more money, right?

Then, then the interests are truly aligned. Not just we’re gonna punish you, but anything above that we get to keep. That’s not fair to me.

Rob Southern: Uh, yeah, we, we’ve talked a lot about gross sales-related earn-outs, but I also think the uncapped or, or at least like additional upside concept’s really important. And, and for me, y-you talk a lot about risk, right?

The buyer’s taking some risk. Well, you want the seller to accept some risk as well, and I think as long as there’s maybe an employee agreement, right? And it’s clear how they can influence the, the top line. One of my investors a long time ago, you know, he used the term zone of fairness, right? And like, let’s just figure out a structure that’s within the zone of fairness, and like, once we’re…

Once we both feel like we’re in that zone, like, let’s move on to the next, you know, issue. Um.

Patrick Lange: Yeah, absolutely. And I think, and I think that’s the reality. I see people come in and make offers, and it’s like fifty percent of it’s an earn-out, and it’s tied to hitting these crazy numbers that the seller has no control over.

And it’s like, well, how is that fair, right? In that zone of fairness, it’s not even in the ballpark of a zone of fairness, you know, kind of thing. And, and I, I agree that a buyer is taking risk, right? And I, and I agree with keeping the seller motivated, especially if the seller’s remaining on. I have a lot of deals where the seller’s gone in two weeks, right?

They, they don’t stick around. The transition’s short. The buyer has their own GM they’re gonna put in place. And so, so for the seller to be completely removed from the equation in two weeks and then say, “What it does twelve months from now is a, is an impact on you,” I think is challenging.

Alex Bridgeman: What kind of structures, kind of building on this conversation, have you found align incentives most closely with that kind of risk to both parties, but tightly within that zone of fairness?

If we’re, if we set earn-outs aside, have you found that seller notes do that and… or deferred payments or other mechanisms maybe offer unique ways to balance that risk?

Patrick Lange: Yeah, I think, I think seller notes do, right? Because if you have some of my money and I sell you my business, when you call me, I’m gonna answer your phone, right?

I mean, I, I’m gonna answer that because you’ve got my money, and I wanna make sure I’m gonna get it, and so I’m gonna help you wherever I can. I think when you start adding SBA financing in, it starts diluting that, right? Because if SBA is involved, then you’re in line behind SBA, and, and the beauty, in my opinion, of trades businesses, they typically generate a rot- a lot of revenue with very little assets.

And so in that scenario, if, if, God forbid, you failed, I’m in line behind the SBA on a three million dollar loan, and you’ve got two hundred thousand dollars of vehicles. I’m never… It’s an unsecured note, right? At the end of the day, that’s the reality of it. And so, so I think being aligned, as long as there’s some recourse, right?

Getting back a business that you failed is not a… if I… on a business that I don’t wanna own is not a good recourse for me. But if there’s other ways that I’m gonna get compensated as we move forward, then I think we’re all on the same page, and we’re all rowing the boat in the same direction

Alex Bridgeman: What have you found helps sellers transition best of, in the example of the seller is moving on and doing something different, going to a different project or side business that they love?

What have you seen buyers do that makes that transition smoothest and easiest for them?

Patrick Lange: A, a lot of things. I think having, um, cl- having clear expectations up front of what is expected from the seller and what they’re gonna do, and having a timeline in place. I think, I think many buyers think, “I want the seller to stick around for a long time.”

And the reality is, if I’m a buyer, I don’t, right? The reason the business is stuck where they are is because the guy running it. And if he stays there and I keep trying to change things, oftentimes he’s gonna push back on what I’m trying to change, and the employees are gonna go to him asking him stuff because that’s who they’ve gone to for twenty years.

So I think it makes for a confusing environment. So short term, clear expectations, and I think a buyer who, who shuts up when they come in and pays attention. Too often they come in and, you know, they wanna change all this stuff, and they’ve got no clue what they’re even doing. So I think coming in, shutting their mouth and listening and seeing what’s really working, what’s not working, giving the employees an opportunity to have a voice.

Because here’s the reality, the employees are the only one involved in the transaction that haven’t– don’t have a say in it, and they’re the biggest ones impacted by it, right? They went to work for you, and now you’ve come in and said, “Hey, I’m retiring, and now meet Steve, and Steve’s a great guy, and he’s gonna take care of you.”

But, you know, Steve hasn’t fed my family for the last fifteen years. You have, right? And so, so there’s, there’s all this concern there. And so I think somebody that comes in and can ease the concern, shut their mouth and pay attention to what’s working unless they have a lot of experience in coming in and buying this company.

You know, then there’s a confidence that comes in that, “Here’s what we’re gonna do. Here’s how it’s gonna do it. Here’s the impact it’s gonna be on you, and here’s how things are gonna be better for you.” Because they’re all scared that it’s gonna be worse. And so I think too often they come in and rock the ship.

And in a, in a service business like that, you’re buying the reputation and the employees. Well, if you run off the employees, you’re buying a reputation and nobody to do it. And so you need to make sure that, that what you’re buying is gonna stay there and be committed with you to help keeping the business going along.

Rob Southern: On that note, how do you advise sellers to diligence buyers, right? Because not all buyers are created equal or-

Patrick Lange: Yeah. So- …

Rob Southern: say money has faces, right? So…

Patrick Lange: Yeah. I, I’m a… I– Most brokers like to keep buyers and sellers away from one another until we close. I’m the exact opposite. A buyer requests information from us, signs the NDA, we see the proof of funds, we know a little bit about them, we give them the summary.

If they’re still interested, let’s get on a Zoom meeting right now with buyer and seller. Buyer’s gonna tell the seller their story, who they are, what they’ve done, what experience they have. The seller’s gonna tell them about the business. If it’s still a good fit after that, let’s have an in-person meeting.

And I’m telling the seller, listen, they’re dating, right? They’re not gonna come in and be a jerk right off the bat. So let’s get around them and see if we think it’s gonna be a good fit. Let’s see what their plan is of moving forward. Because here’s the reality, once you’ve cashed that check, it’s their baby to rock.

They can do whatever they wanna do, right? They own it now. So we try to do everything we can up front personality-wise to make sure what they’re thinking and what they’re gonna do or planning on doing is a good fit for everyone. Are there times when people pull a wool– the wool over our eyes? Yeah, I mean, occasionally.

But the reality is, through that process, they’re together enough through the due diligence, they’re gonna decide if they like each other or not and if it’s a good fit Does that answer your question?

Rob Southern: Yeah, it does. I think, you know, everything’s a people business at the end of the day, and the people buying your business matter.

Absolutely. And their motivations and their background and their experience. And another piece of that story, right, I sold my business for $10 million. Well, did you? But also, who did you sell it to, and what are they really going to do with it? You know, that matters. Well,

Patrick Lange: and, and I, I tell sellers, “Hey, if you’re gonna stay in the same town, go to the same church, still g- shop at the same grocery store, do you want to hide your face because of who you sold your employees to and your customers to?”

So let’s make sure we think they’re a good fit. There’s a… The beauty of the trades right now is there’s enough buyers in the marketplace. You don’t have to sell to a jerk if you’ve built a decent business. So let’s weed through and try not to sell to a jerk.

Alex Bridgeman: In closing, like, what have we not asked you that you spent a lot of time thinking about or advising sellers on that you’d love to share?

Patrick Lange: It’s a huge decision, right? At the end of the day, for many people… Now, for, for those who it’s an investment and they’ve run it for five years and they’re selling it, that, that’s not who I’m talking about. But, but the person who’s owned the business for 20 years, there’s no do-overs, right? You know, you can’t sell it and two weeks later say, “Well, I shouldn’t have done that.”

And emotionally walking away is a big thing. Many of my clients have been the heating and air guy. They’re taking care of the third generation of families oftentimes. So, so it’s a big deal, and understand that it’s a big deal. And make sure you’re really done. And then when you’re really done, make sure you’ve built a business that’s really sellable, so that when you walk away, you are done, and you understand what, what that looks like and, and what you’re getting in.

And I think, to me, it goes back to, go back to evaluation early. So many people have no clue what their business is worth, right? They’re, they’re taking… And we talked about it earlier. They’re taking what somebody on the stage said or they heard the guy down the street sold for. My thing is, for most of my clients, their business is their biggest asset they’ve never sold.

And so they don’t know what it’s worth. And so my thing, whether you’re gonna sell next week, next month, next year, 10 years from now, you should always know what your business is worth. So if somebody comes up and makes you an offer that you’re in a position to say, “Yeah, it’s a great deal, I’ll take it,” or, “You’re not even close,” and you have something to build towards, right?

You look at your bank account because you want to know what’s in there, but then what produces the bank account? They don’t have a clue what it’s worth. So my advice is get valuations done often, so you have a realistic understanding of what you’re sitting on. And are you building it to be, to be enough?

And if you’re not, what do you need to do to fix it?

Rob Southern: What about when owners are staying on? Like, what have you seen work in terms of the right kind of employee agreement or incentive structure? Not to mention relationship, but there’s this balance of like, if I’m buying a business and the owner has been operating it, and I, I want a GM, and essentially we’re gonna transition that owner into a GM.

I wanna give them as much autonomy as possible because I’m buying the business because it’s done well. At least we’re not gonna go buy poor performing businesses. But also, there’s this balance of autonomy versus control. I, I ultimately need to be the final decision maker. So what have you seen work well there?

Patrick Lange: Lots of conversations leading up to it, clear expectations, and working with one another through the process so that everybody knows, “Hey, this is, this is the part that I’m gonna be responsible for, and, and I, you know, I want you to know that these decisions are gonna be made by me.” The reality, what I have found is many owners that do stick on, there’s a lot of stuff they don’t wanna mess with, right?

They don’t like messing with insurance, and they don’t like messing with HR, and they don’t like messing with buying vehicles and getting insurance and all these other things. They wanna work with their guys and sell stuff. And oftentimes when you peel that other stuff back from them, they’re excited.

And so from a buyer’s perspective, finding out what the seller likes and doesn’t like and saying, “Hey, I know you like to do all the marketing, but we’re gonna have somebody do marketing. Are you gonna be okay with that?” Right? You know, at the end of the day, where does this all fit in into what you like doing in clear, honest conversations, and then financially being tied together, right?

That, that everybody participates in the upside on some level, and it gives the owner a reason to go in, because right now they get all the money, right? And so they’ve… There’s gotta be a reason for them to stick around and work and only get part of the money. Because even though they’re getting paid for it now, I’ve seen it where they sell the business, and then they’re mad because they’re only making two hundred.

Like, wait a minute, you just got paid ten million or two million or five million, whatever the figure is. They paid you for that. I know, but I’m still doing the work. I know, but that’s what you agreed to. Now you’re an employee getting paid that, and I think they don’t fully understand that. So making sure that you understand that it’s gonna be your name on the door still, but somebody else is gonna tell you pricing and what to do and whatever those things are that that new owner is gonna take care, take over.

Alex Bridgeman: Awesome. Patrick, thank you for sharing your time on the podcast. It’s been a ton of fun, and I’m, I’m grateful that you could share some time with us.

Patrick Lange: Yeah. Thank you so much for having me on. Hopefully, your, uh, viewers and listeners got value, and congratulations on all your success in doing it. I had a great time.

Alex Bridgeman: Thanks, Patrick. We appreciate it.

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