Tlao Cover Art 2023 Vector

Chris Hoffmann – Building Scale in Home Services – Ep.167

My guest, Chris Hoffman, is the President and CEO of Hoffman Brothers, a home services business based in St. Louis. Hoffman Brothers have scaled from $10 million in 2015 to over $100 million in revenue in 2023.

Episode Description

Episode 167: Alex Bridgeman (@aebridgeman) is joined by Chris Hoffman (Chris-Hoffman).

My guest, Chris Hoffman, is the President and CEO of Hoffman Brothers, a home services business based in St. Louis. Hoffman Brothers have scaled from $10 million in 2015 to over $100 million in revenue in 2023. We talk about how that journey happened, their experience building executive teams, investing in people through a training university they started for ongoing training, and investing activity for home services today.

We also talk about what perpetual non-private equity ownership enables them to do, including their unique strategy for managing cash investments and liquidity as a growing family office. This was a ton of fun for me and I hope you enjoy this conversation as well.

Listen weekly and follow the show on Apple Podcasts, Spotify, Google Podcasts, Stitcher, Breaker, and TuneIn.

Learn more about Alex and Think Like an Owner at

Clips From This Episode

What's the best business you've ever seen?

What strongly held belief have you changed your mind on?

Acquiring a School

Ravix Group — Ravix Group is the leading outsourced accounting, fractional CFO, advisory & orderly wind down, and HR consulting firm in Silicon Valley. Whether you are a startup, a mid-sized business, are ready to go public, or are a nonprofit, when it comes to finance, accounting and HR, Ravix will prepare you for the journey ahead. To learn more, please visit their website at

Hood & Strong, LLP — Hood & Strong is a CPA firm with a long history of working with search funds and private equity firms on diligence, assurance, tax services, and more. Hood & Strong is highly skilled in working with search funds, providing quality of earnings and due diligence services during the search, along with assurance and tax services post-acquisition. They offer a unique way to approach acquisition diligence and manage costs effectively. To learn more about how Hood & Strong can help your search, acquisition, and beyond, please email one of their partners Jerry Zhou at [email protected]

Oberle Risk Strategies– Oberle is the leading specialty insurance brokerage catering to search funds and the broader ETA community, providing complimentary due diligence assessments of the target company’s commercial insurance and employee benefits programs. Over the past decade, August Felker and his team have engaged with hundreds of searchers to provide due diligence and ultimately place the most competitive insurance program at closing. Given August’s experience as a searcher himself, he and his team understand all that goes into buying a business and pride themselves on making the insurance portion of closing seamless and hassle-free.

If you are under LOI, please reach out to August to learn more about how Oberle can help with insurance due diligence at Or reach out to August directly at [email protected].

Interested in sponsoring?

(00:03:38) – Hoffman Training University & NexStar

(00:08:26) – Enabling scale and revenue growth

(00:10:55) – Differences in PE-backed company structures

(00:14:25) – Retention and morale-boosting tactics

(00:17:59) – Leadership team composition

(00:21:17)- Surfacing high-performers & evaluating management teams

(0:28:53) – Using Search Firms to find talent

(00:30:25) – Choosing an Executive Search firm

(00:33:30) – Financial sponsor interest in the HVAC and Home Services market

(00:36:15) – Reasons Consolidators are failing

(00:38:41) – Debt, Public Equity Strategies & Fund Investing

(00:48:00) – Goals for the family office

(00:49:47) – Building new locations from scratch vs. acquiring existing companies

(00:55:37) – Acquiring a school

(00:58:53) – Changing strongly held beliefs

(00:59:54) – Chris’ favorite business

Alex Bridgeman: I’d love to talk all about the Hoffman training and university program that you’ve developed. It seems like a pretty exciting way to solve that kind of people in recruiting and talent function as the company grows. At what point in your growth trajectory did you start that program?

Chris Hoffman: Yes, so I think it’d be useful, just as an introduction, Alex, I think it’d be useful to maybe share a little bit about our story. And to do that, I’ll take you back to 1988 and just spend a few minutes telling my dad’s story and then fast forward to 2016 and really talk about the recent interval, recent period of time. So to start up, I’ll take you back to 1988. And my dad was a mechanical engineer working at Anheuser Busch; I’m sure you’ve had their products, Budweiser, Bud Light, Busch, the like. But one of the last projects he did there was working closely with a mechanical contractor to design an air conditioning solution for a number of their facilities. He really liked his exposure to heating and cooling. So, he decided to put in his notice at AB. And he enrolled in Rankin, which is a local trade school and enrolled in their evening program and then took a job working for a gentleman named Bob Lenton back in 1988. And he would- Robert would go on to buy Bob’s business that year. So he became the owner of about a four person heating and cooling shop after being the first engineer to graduate from this trade school program and jumping right into a service van. And in 1988, the trades weren’t always held in I think is high of a regard as they are held today. I think some people would have said he was crazy for doing that at the time. But he was an entrepreneur, he loved it, he had a ton of respect, and we as a family have a ton of respect for the work that our teams do in the trades. So fast forward to 2016, we joined an organization called Nexstar Network. And it’s a really remarkable and unique organization. I guess it would have been December 15 we joined, but it’s member owned, and it has members across the United States, Canada, and Australia. And these members, there’s roughly 750 of us, we share very openly all of our processes, our best practices, and we all pay dues and fees to this organization so that they can hire an amazing group of trainers. I think they’ve got 50 or 60 full time team members who are process focused experts, trainers, and the like. And they look out across a membership base, they identify who’s really excelling in different parts of their business. And then they take those lessons learned and those best practices back to the parent organization, and they update what I like to call a process playbook. So these processes touch every part of our business from how we answer phone calls to how we prioritize our service calls to how we dispatch those service calls, what we do in customers’ homes, our pricing tools. So when we got access to this playbook in 2015, we just started implementing with vigor. And we were excited about it because that playbook would launch what has turned out to be now our seventh consecutive year of over 30% organic growth. So as our business has sort of traversed the $10 million to now 110 million revenue sort of size spectrum, I really attribute this playbook and our ability to implement it well. I think that’s been a big driver of our success.

Alex Bridgeman: Yeah, I’ve heard about Nexstar before from a couple of previous podcast guests who work in HVAC and home services. It’s a pretty unique organization, to have like a consortium of operators all sharing practices playbooks. And it sounds like a lot of kind of financial, margin and some other financial data that comes into that, too.

Chris Hoffman: Yep, they have a survey every year that members can participate in; it’s called the peer profit comparison. So if you participate, and you sort of convert your financial results into their standardized format, upload, and then you get access to this peer profit comparison report that typically has a couple hundred participants every year, but it segments and benchmarks by trade, by size of business, by geography, sort of all the different financial characteristics that a company home service business is like ours.

Alex Bridgeman: I find these companies fascinating. Like any sort of data business like this, it’s definitely something up my alley. Have you seen businesses like Nexstar in other industries before? There must be others.

Chris Hoffman: There has to be, but I’ve asked this question. I’ll talk to other entrepreneurs in other spaces, and I’ll say that same thing. Oh, you just got to go find your Nexstar. And they’re like, I don’t know what you’re talking about. That doesn’t exist in our space. But I’ve come to, I think, learn that organizations like Nexstar are perhaps not quite as common as I originally thought.

Alex Bridgeman: Yeah, it’s pretty impressive. Well, let’s talk a little bit more about kind of that 10 to 110 revenue growth story that you described and alluded to. Within Nexstar and joining the program, are there certain parts of that program or certain decisions you made that have really enabled a lot more scale as you grew?

Chris Hoffman: Yeah, so Nexstar, they have a sort of member engagement ranking that every member gets sort of rated on their engagement with the organization. And engagement is measured by how many of sort of the core processes of Nexstar that a member has implemented in their business. And what we’ve learned and what’s clear, what has become very clear, is that there’s a strong positive correlation between member growth rates and their engagement within the Nexstar process playbook. So those members that are more engaged, embracing those processes, putting them in their business, have higher growth rates. It’s been a couple of years since I’ve looked; candidly, I think it was pre COVID. But at the time, I remember Nexstar, the sort of median Nexstar member was growing in the mid teens growth rates. So think 15, 16, 17% in an industry, if you just look at our industry classification code, that’s maybe growing at 5 or 6% per year. So certainly outperforming the universe of service contractors that exist in this space. I think it speaks to the effectiveness of the processes that Nexstar  follows. But more specifically to your question, there’s not really one magic bullet. I’ve been asked that question where it’s what’s the secret sauce that allows you to have sustained, high growth in this industry? And the reality is, it’s doing a bunch of small things right. It’s doing a bunch of the basic things well. All the processes that I alluded to and talking about Nexstar, it’s dialing that stuff in, being processed focused, and then lay on top of it a great culture, a great leadership development program, a great sort of talent development more broadly program and creating an awesome culture. I think process, culture, getting the right people and leaders in place, it’s all hard not, and not one of them, any one of those things is more important than the other. So you’ve got to be able to do them all and do them all well. And if you can, I think it can create some pretty remarkable results.

Alex Bridgeman: Yeah, well, I wanted to make sure we talk about the leadership program later on. But one thing I think that’s so interesting about Hoffman Brothers is being run by the family, there’s not a larger PE backer behind the business. When you look at, perhaps there’s some of these peers in Nexstar that you’re aware of or other entrepreneurship organizations like YPO or EO. But when you look at peers of yours who are backed by private equity or maybe even search fund, what differences do you spot either in structure or the way they make decisions or any other aspects of the business that you notice that are different from the way you run your business?

Chris Hoffman: Yeah, it’s been interesting that the universe of companies that are at scale, and I’ll say north of $100 million, in the HVAC, plumbing world, residential service has shrunk dramatically when I’m talking about independent companies, companies that aren’t owned by a consolidator or a private equity firm. And I think that’s created a unique opportunity for those businesses that are choosing to remain private, swimming against the current and not going left when everybody else is going right. And I think some of the ways that private ownership shows up in our business as we think about value creation over a completely different time horizon, when we think about investments in our business. We’re not time bound by fund life cycles. And we’re not always preparing for an exit every 36 or 48 or 60 months, which can lead to a set of short term decisions that sort of accompany that preparation to exit. And candidly, I think being privately held creates an opportunity for us as owners to create a better employee experience. When we think about how we define success in our business and who our stakeholders are that we’re trying to drive wins for, it includes our team members very prominently. And if you think about our journey from 10 to 110, not only do we create a great win for the organization with respect to our financial metrics and characteristics, but during that same time period, we went from not paying for health insurance to paying 100% of health insurance for team members in their entire family, so almost 18,000 per employee that I pay for family coverage, have a 401K match that we’ve significantly enhanced and improved over that time period. We give everybody 15 days of vacation on day one, nine paid holidays, we eliminate the 24 hour on call that typically accompanies our industry where folks are running calls at midnight, 1am, and 2am ,and then they have to get up for their call at 7am which was really disruptive to their home life when they’re working really hard during the day and then they get home with their family and they’re pulled away again. So we keep asking ourselves, how can we just continue to drive wins? And we added paid parental leave for new fathers and new mothers, I mean, I could go on. But we keep asking ourselves as we keep driving wins for this business, how do we be very clear around our ability to connect the wins that our business achieves with our ability as a business to drive wins for our team members. And I think we’ve connected those two dots together really, really strongly. And I think our team knows that when they work really hard and create exceptional outcomes for the organization, the organization is going to be there to take care of them. And I think that that commitment is largely a function of our private ownership and really family’s view of ownership, which is that we’re stewards of this business, and we’re going to put the interests of this organization and the team that’s driving that success ahead of our own personal interests as a shareholders and owners.

Alex Bridgeman: How do you feel like that’s affected retention, culture, morale, from boosting benefits and removing the 24 hour on call piece and any other aspects you’ve done to make life easier?

Chris Hoffman: Yeah, so we’ve seen a lot of talent get pushed towards us as a function of sort of the private equity game, there’s a lot of change that happens. And it creates turbulence in the team member experience at those organizations. So a lot of talent has been pushed towards us with it, which I think is helpful. But ask your question one more time; I want to make sure I answer it explicitly.

Alex Bridgeman: How has your investments in people and benefits impacted morale?

Chris Hoffman: Yeah, so we measure- we do a lot of engagement surveys, like a lot of organizations. Most recently, we just found out, about four weeks ago here in 2023, we just won another Best Place to Work award recognition in the Business Journal in St. Louis. And we purchase a lot of the data in connection with that. And we look at our engagement scores, we look at team member satisfaction, we look at the drivers of what’s causing folks to stay engaged. And this stuff matters a ton to people. If your solution to everything with your team is either solve it with money or solve it with something other than having a really purpose driven culture, I think you’re missing the opportunity to connect really deeply with your team members and galvanize the team around an exciting purpose. To that point, we think about, of course, we have to be phenomenal when it comes to pay and benefits. Those are sort of the building blocks, and we’re a top decile company. We’ve been very intentional about saying we’re going to be top of the market so we can get the very best talent. But then when you layer on top of that a really compelling purpose and values, which is what we’ve done, I think it makes the team really rally towards something greater or greater than just the paycheck, greater than just that service call they’re on. And when you can cultivate that kind of culture and there’s cultural consistency that comes from ownership consistency, I think that leads to, I think, really, really good outcomes when it comes to your people, retention, ability to hire. Our retention rate on a basis is in the mid to upper 80s, which is really strong in the trades. And I think it’s something that we’ve been pretty proud of.

Alex Bridgeman: Is there anything that surprised you going through all this data about retention and some of these changes?

Chris Hoffman: Typically when I see high turnover, more often than not, the answer isn’t pay, the answer isn’t benefits. We do exit interviews. And it’s a lot easier when you’re leaving a company and you don’t want to burn the bridge to say, oh, it’s just I got this other opportunity I can’t say no to, it’s closer to home, all these external factors. They don’t, what people don’t want to say is I really don’t like my leader. My leader doesn’t support me. I’m not connected. I’m not engaged. My company doesn’t care about me. No, but that’s a hard conversation to have. So in exit interviews, it’s really hard. It’s a lot easier for folks so say I’m leaving because I got this extra dollar an hour, I got this great opportunity over here, this is closer to home, all these external factors. The reality is when I look at engagement, the single biggest driver of people being engaged and loving their job, I think, it’s really how good of a job does their leader do keeping them engaged, getting them engaged, caring for them, developing them, investing in them. And that’s what I think the sort of secret sauce is, if you will. It’s having leaders that can create a consistent experience for your team.

Alex Bridgeman: Yeah, can you talk about your leadership team a little bit more? Because I imagine from 10 to 110 in revenue that the composition of your management team and your executive team must have gone through maybe a couple iterations throughout that process. Can you talk through some of those iterations and that growth?

Chris Hoffman: Yeah, sure. So back in 2015, we were a very flat organization. There’s 40 people on the bus. You have a manager meeting and you had everybody in the room in one meeting once a week. And disseminating information was easy. It was always easy to have personal relationships with everybody on the team. As we progressed over time, I think one of the things I wish I would have done a little bit sooner was invest earlier and more heavily in developing high potential folks or some of those existing leaders that were with us when we were at 10 million. Because it’s hard when your business is growing so quickly. You need leaders who can grow their capacity, their contribution as leaders just as quickly as the organization scaling so they don’t get left behind. And we haven’t always been able to do that. And it’s been it’s been challenging in different places. And it’s led to some tough conversations. Today, I’ve got my senior leadership team, folks that report directly to me or six folks, GM of our St. Louis operation, GM of our Nashville operation who’s our VP of new markets wearing the interim GM hat, and then to have our functional leaders, our CFO or CMO or CHROs, I think about the backgrounds of those leaders. One thing that’s been really cool is some folks on my leadership team have big degrees and MBAs and have a pedigree that looks great on a resume. Others started their career busting up concrete as a laborer on our underground team, had a high school GED but was committed to be the best at whatever role you put them in and had an insatiable desire to learn, strong intellectual curiosity, very charismatic, strong leader. So I’m proud to have a team that has folks that come from all different backgrounds. And I think what it shows in our business is we choose people for leadership roles based on merit and based on their contribution and their results, not what letter, what degrees they have, what background they have. And I think it’s just important for us to make sure that we’re spotting high potential talent and helping them realize their full potential as they grow. The last thing I’ll say on leadership is we have so many, you look today, I think there’s 60 people in our business who have a direct report, what we’ll call at least one direct report who’s in a leadership role. And I like to say that in large part, a team member’s experience of your company is a function of their experience with their direct manager. So if I have 60 different leaders that provide largely 60 somewhat different, unique experiences in working for them, how do I make sure that we as an organization, as an employer, can think about how we can be consistent in the way that we treat people, we coach people, we develop people. So we’ve spent a lot of time creating content and building a curriculum that we call the leadership foundation that we enroll all of our leaders in so that we can ensure that the culture and quality and reputation don’t become casualties on the side of the road as we continue to experience 30 plus percent organic growth each year.

Alex Bridgeman: What do you do to make sure that consistency with direct reports stays that way but also allows you to surface higher performers, so up and comers who are in one position but you think they have potential for leadership or just moving up? What systems within your process are designed to find those people?

Chris Hoffman: There’s a formal talent review process. But in particular, that process starts with your year end reviews, where we do- there’s a numerical rating process where we’re rating folks up against all of our values in addition to sort of rating folks against the metrics or KPIs that exist in their role. And then we get that picture, we get all those ratings, they go into a system that then gives us, as an organization, complete organization, wide visibility of all the different teams, and sometimes we have to normalize, you might have a manager who generally rates really easily or high, and you might have somebody who rates really difficult. So there’s a normalization process. But then we look out across our business at the end of those year interviews, and we can see who those folks are that are scoring really high that are super highly rated that are big impact players. And they might be somebody who’s working as a runner in their warehouse today, or they might be a mid level manager. But that helps us to say who are those folks that we need to make sure we don’t leave behind or that we’re not missing the opportunity to pull them up and give them more responsibility. But how we can do that as an organization is we have to standardize the way that we give feedback, the way that we evaluate folks, the way that we have tough conversations. And so we put a lot of tools in place around one on ones, these coaching cards, which basically take every one of our values, we have five of them, and distills each value into a one page document that shows what it means to demonstrate that value, not demonstrate that value, and what it looks like when that value is overdone. And those coaching cards give us sort of a common language in our business to understand what each of these values mean and how they show up every day. So, we just had to put in a lot of structure that allowed us to assess talent in a standardized way and create some consistency around the way we were promoting folks, recognizing folks, developing folks.

Alex Bridgeman: So within executive teams and CEOs I’ve talked with on the podcast, a lot of them will talk about how, at certain points in their business, their management team needed to expand or change somewhat, and someone who was great getting from 10 to 40 million in revenue isn’t going to be the person for getting to 100 and beyond. How do you evaluate on a quarterly or monthly or yearly basis how your management team is fitting and performing within the company and how do they fit with your broader ambitions as a company?

Chris Hoffman: Yeah, my leaders specifically?

Alex Bridgeman: Any of them. Like if you have a standard way of analyzing fit for your ambition.

Chris Hoffman: Yeah, here’s what I’ll say: I think where we’ve made mistakes before is you don’t want to hire, and this is any leadership role, you don’t want to hire for the person that you need today that’s good enough to do the job well just today. We know- we have now confidence in sort of the trajectory we’re on, we’re assuming success in the way that we invest in our business and make decisions in our business. And I think as a part of assuming success, we need to say okay, well, that means in five years, our organization could be two times the size it is today, three times the size it is today. So rather than hire the leader that’s going to do good enough today, let’s hire the leader that’s going to be an exceptional leader when our business is two or three times the complexity, size, scale that it is today. And let’s just invest more heavily earlier than we otherwise would in sort of bringing that talent into our business that we need to operate at the level we aspire to be. So what that means is sometimes when you don’t do that, there’s a lot of you have to say, okay, well, this is the person and here’s their skill set today, do they have the capacity to get where I need them to be, and if they have the capacity, let’s invest in them and get them there. But if they don’t have the capacity, and we say, you know what, despite all their best efforts, I don’t think they have the capacity to be the leader we need them to be in this role, so let’s treat them with dignity and respect and talk about what role they can be in, what seat on the bus is a better fit for their skills and for their contributions. But you just have to not back away from those conversations. Those conversations are super uncomfortable, and they’re never easy. But I used to say a good example of people focus in our business over done, that coaching and value that gets over done, people focus is one of our values. We say, oh, well, we’re letting that person stay in that role because we’re being people focused and giving them all the opportunity in the world to get better and grow. And I said, is that people focus? But what about the 30 people that work for them that are having a negative experience, are missing the opportunity to grow, advance, develop, build a more successful team or business because there’s a leader over them that’s not as effective as your organization requires. So those are just tough conversations that organizations that are most successful don’t shy away from. You have to be able to walk into those things head on and be honest with each other, with everybody on the team about what each of our limitations and strengths and skills and contributions can be.

Alex Bridgeman: There was a Stanford CEO panel from one of their search fund conferences a few years ago, and two of the folks, two the CEOs on the panel, Chris Hendrickson and Andrew Saltoun, were talking about the tier of manager that they were working on or looking to hire. And Andrew was running a business that was a couple of scales ahead of Chris’s. And one thing he did was he invited Chris to come see one of his managers at the larger business. And so you could look at how does this role look in the future? What’s the characteristics? What skills do they have? Knowing that maybe you can’t hire that person today, but you can at least have a peer to compare against and see, okay, I know what the future looks like at this scale point in my business; I need to have this type of manager with these skills and these experiences. Have you done anything like that to figure out- to make sure that this is in fact the person who not only can do the job today but is ready for your greater scale down the road? What are some ways you figure out is this actually the right person who can in fact get to that scale point?

Chris Hoffman: So when we’re hiring a senior leader into our business, someone director or above, we partner with some third parties who are great at providing sort of executive assessments. And they’re looking at a number of things in those assessments around cultural fit and also role fit within our organization. And they measure critical thinking ability. These assessments are accompanied by interviews. But ultimately, we like to sort of create a rigorous process on the front end to confirm we’re getting the right person, and we received those recommendations or not sometimes, not recommended, from those third parties, but we just try and spend a little bit of time, a little extra time on the front end. And maybe that means there’s three, four, or five, or six different interviews or discussions, and there’s four or six or eight hours of assessments that we put folks through, but we’ll spend the time on the front end. And then on occasion, we’ve hired folks through completely outsourced executive search firms who know our business well, who we’ve had some relationships with, and we’ve had some success finding great talent through those search firms.

Alex Bridgeman: How do you know when to use a search firm?

Chris Hoffman: Yeah, I wrestle with this because most- here’s how I think about it. Most folks aren’t- When you have an opening, and you post your job, I don’t think most folks are- the best talent in the market is out there looking for job postings on LinkedIn and applying to jobs. I think the best talent in the market is in a role where they’re kicking butt and creating value and doing great things. And sometimes those search firms, executive search firms, they’ve cultivated these sort of long standing open relationships with different executives where there’s just intermittent dialogue. And there’s always sort of a toe in the water, if you will, for some of these executives. So, you can access a subset of potential candidates that I don’t think you get when you just post your job on LinkedIn or whatnot or on different job boards. The other way that we try and get talent, if it’s not through an executive search firm, we outreach a lot. We look at businesses that we respect a ton, that we think are awesome. And whatever, if it’s a customer experience manager role, we look at organizations that are awesome at customer service and run really sophisticated call center CX operations and we will target those things, that should I get on LinkedIn, and my wife will make fun of me because I’ll be in bed at nine o’clock at night, like scrolling LinkedIn, dropping messages into people’s inboxes I think that could be a great candidate for an opening that we have. But that’s I think you get to get the best people by being proactive about recruiting. Every leader in our business is a recruiter is what we like to say.

Alex Bridgeman: I love that. I want to go just one layer deeper. How do you choose an executive search firm? Because if that hire- of course, the hires that they’re making and informing your decision on have a huge impact in your business, so I imagine you want a top tier search firm. But how do you go about evaluating a search firm?

Chris Hoffman: Yeah, so we’ve been- we were lucky in that the firm that we use for executive search, they have sort of a suite of different services they offer to middle market businesses. And we had a relationship with them through the sort of advisory board or fiduciary board facilitation practice. So they assist with- one person at that firm sits on our board, but they also facilitate our board and help with board preparation. So we had the benefit of having a firm that knew our business really well, had a relationship with our business, who also happened to have an executive search practice that was good and in the space that we were looking to hire. So I don’t know the answer to that question. But I do get nervous when you think about hiring a search firm, how do you know their credentials? Because everybody’s going to tell you they’ve got great candidates, and everyone’s going to tell you they can fill a role for you because they’re all great salespeople. But how the heck do you know who’s really good?

Alex Bridgeman: Yeah, that’s a big question that’s important to get right. It’s kind of like finding  an attorney or CPA, like some of these service providers, they have a high impact on your business, and it’s not always clear exactly how to best evaluate them.

Chris Hoffman: Yeah, that’s right.

Alex Bridgeman: Has Nexstar been helpful with any playbooks around evaluating not just service providers or not just search firms but any other service provider you might use?

Chris Hoffman: They have a network of strategic partners. And those generally are geared around like product specific vendors or some service providers. There’s some, I think, coaching and training strategic partners. But I don’t know that they do have a strategic partner in the executive search world. I will say this – in the home service space, it has become really competitive. I think it’s no secret how much interest there is among financial sponsors, among private equity firms to establish a foothold in the home service world. And as a result, the best operating talent, the folks, the operators, the GMs, the market presidents who are leading 30, 40, 50, 100 million dollar markets and locations for these consolidators, those folks are really well compensated, and they’re given a lot of upside. And so it’s just made it really tight on the leadership market. If you’re out there now looking for someone to come run your $10 or 20 or 30 million operation and who’s going to be a rockstar and a high performer, you’re competing against some of the biggest private equity players in the country who are in the home service space who are able to offer some really, really enticing compensation packages to these operators.

Alex Bridgeman: Yeah, we’ve talked before about interest from financial sponsors in HVAC and home services broadly. How have you seen that market change over the last kind of call it five years or so?

Chris Hoffman: I think we’re still in maybe the sixth inning of sort of the consolidation game and that the HVAC and plumbing world, you now have several players that are north of a billion dollars in revenue, you’re seeing enterprise values continue to rise, some of these large organizations have multibillion dollar enterprise values. There are more financial sponsors that want a foothold in this space than there are platform quality companies available for them to buy. And so what you’re seeing, particularly among high quality businesses that are at scale, is multiples have remained really strong in this space because there’s so few targets. It’s a supply and demand dynamic. There are so few quality platform quality assets out there in the marketplace that you’re still seeing transactions happening. In the last six months, there’s been transactions that are still at 20 times EBITDA up for those really high quality businesses that are out there. But I think you’re seeing some softening when you go downstream and you’re looking at the $10 million business or the $20 million business, the businesses between 750,000 of EBITDA and 2 million of EBITDA, I think you’re seeing some softening on willingness to pay downstream. But still, I mean, the math at the end of the day for these consolidators, they’re able to- they’re valued at 20 times, they should hypothetically be willing to pay right up to 20 times. They should be willing to pay 18 times and still agree, even for the small businesses. So I think some of these early consolidators are going to have really successful, amazing exits. But I also think what we haven’t seen yet in the industry is a noteworthy failure of significance. You haven’t seen a consolidator who’s had the wheels come off the bus where they’ve had turnover, leadership volatility, and leadership talent exit, a business unit fail. You haven’t seen a lot of those yet. But I think some of those may be in the making. Every one of these consolidators have a little bit different of a playbook. So we’re really focused on building depth to leadership talent, some are really focused on operating these businesses more efficiently, but some are just playing the multiple arbitrage game. And they were just buying a bunch of shit at 10 times, putting it all together, and hoping to sell it at 20 times before the music stopped. Well, guess what, the music stopped for a lot of these businesses. And I think there could be some folks here in the next 6 months or 12 months who don’t have such a successful story to tell.

Alex Bridgeman: When you say that there could be some consolidators fail at some point, where are some places you’ve seen consolidators maybe not fail but at least things go wrong? Like what are some reasons that consolidators have challenges and run into difficulties in their companies?

Chris Hoffman: Yeah, I think the dynamic that’s the biggest risk to a lot of the consolidators is this sort of owner centric, owner dependent organizations. And that happens even at when you get into $10 or 20 million businesses. So the example, the classic example is you have the owner sells his business. And he rolls, like most owners are required to do, rolls a significant piece of equity into the new entity, the new deal. And that owner is incentivized to keep everyone on board, focused on retention, focused on culture, focused on making things transition smoothly. Because there’s still a significant incentive for them to make sure that sort of everything goes well right up until that next transaction or bite. And I think what will be interesting is when a lot of those next bites start happening and you have original founder owners who are no longer in the cap table and certainly no longer showing up at the office or not at all a visible presence in the organization, and all sudden, you have a new ivy league MBA that got popped into the business, that’s the Michigan, the Midwest based business, nothing against ivy league MBAs, but you get the point. And there’s new leadership that’s bringing in new accountability, new pressures, new goals, aggressive budgets, and where’s founder Bob who I’ve known for 20 years, who’s been a staple of this place, he’s out of the picture. I think that’s where the challenge will really show up. Because at the end of the day, we’re still in a very labor constrained environment; the best skilled trades talent has options. They want to work for organizations that take really good care of them and that the purpose and the way they operate resonates with them. And when these founders are all nowhere to be found, and they’re taken out of the cap table, and it’s all new professional management that’s getting dropped in. I think a lot of these organizations, their metal is going to get tested. Can they keep leading these blue collar service businesses in a way that makes their business and employer of choice or are they not going to win over talent because of the way that they think about operating these businesses?

Alex Bridgeman: And debt certainly becomes the larger factor in those PE backed companies. How would you say your view your view of debt is different from your PE backed peers?

Chris Hoffman: Well, it’s funny, one of my favorite quotes, it’s made by Howard Marks, Howard Marks is a prolific, really brilliant investor, and he says, did you ever hear about the guy who’s eight feet tall but drowned crossing the river that’s four feet deep on average? And the idea is, you need to think about building your business that doesn’t survive when conditions are average. And we tend to look at average, but it’s built to survive when you cross that deepest point of the river. And so, when you over lever, I think you’re jeopardizing your ability to cross that river when it gets deepest, when things are most challenging, and things get tough. And as a private business, I don’t have access to outside capital when I do get to that deep point that I can get a step stool to make it across. So we have to make sure that the way we build our business is such that we’re going to survive when we cross that river, no matter how deep it gets and be prepared for sort of the worst of environments, which means, it generally means, we want to be very prudent users of debt. There’s good ways to use it. And there’s not good ways to use it. So we’re not completely debt averse when we think about growth capital and accessing capital to grow our business. But we’re certainly not super excited to sort of increase leverage on our balance sheet.

Alex Bridgeman: Sure, yeah. It’s a tool like anything else. How do you use debt as a tool and source of capital in a prudent way for what your goals are?

Chris Hoffman: Yeah, so I look at where do I have- where kind of least expensively access debt within my organization. So I think about where to start. The least expensive ways to access debt are secured facilities that are asset backed. So I can finance trucks. Trucks is where you can get some of the lowest rates because it’s the least risky for a bank because they’ve got the lien, they hold the title of the vehicle until their notes paid off. But as you think about, so say I exhaust all my sort of asset based lending, then also I’m stuck doing cash flow lending or enterprise value lending. And you just see the spread that banks will charge you, the premium, the risk premium goes up for those non asset based facility. So we kind of draw the line. We will use debt in connection with financing sort of senior secured bank debt, asset backed debt, because we can get the best pricing on that. So up until maybe a year ago, you could finance trucks at 2%, I was getting trucks at 2.1, 2.2%. We should be doing that all day because I think I could put that money to work elsewhere and get a better return than that 2%. Today, I would say, even in this interest rate environment, we’re financing our vehicles, and we’re choosing to do floating rate notes at this point, but we’re financing our vehicles, it’s so plus 150 there, so that might be six and a half percent. And after your interest tax shield, I kind of look at my true cost of debt; it maybe four and a half. And I still think that’s a low enough level at that least expensive tranche of debt you can access that we want to continue to do that.

Alex Bridgeman: What about areas for quick access to debt, so stuff like credit lines? Like where does that come in with your business?

Chris Hoffman: Yeah, so we do have a- at the end of the day, what I would recommend to small business operators is you want to ask for credit facilities when you don’t need them. So we want to put in lines of credit, we want to put in these facilities and ask when things are rosy, when we don’t need it, when we have no leverage. Because if you wait until you really need that facility to go to the bank and say hey, I need this facility by two weeks, that puts you in a different- puts you in a bad place, and you’re certainly not going to get the terms that you would have gotten had you asked for it when you didn’t need it. So yes, we put in as big of a facility as our bank will give us and then we tend not to use it very heavily. We’ll dip into it because I don’t want to carry cash on my balance sheet. So we sweep excess cash out of our organization every month. But then we kind of hover around zero, plus or minus a couple million bucks up and down on that line of credit but we don’t like to tap or get anywhere near full utilization on that line. The other way we think about it, I’ll give you an example, my father- I think a lot of folks in his generation had the mindset of debt is terrible, debt is bad, you stay away from it. And not only is debt bad- Not only is debt bad, but you got to keep this big cash bucket, this big cash reserve on the sidelines to make sure that you always have this rainy day fund ready to go. And I’ve kind of turned that a little bit on its head and said, what I think that generation was saying and what my dad was saying is, what you need is access to liquidity when you need it, you don’t necessarily need access to cash. And I said, well, let’s eliminate this cash drag on our balance sheet, because for years, we would keep this pool of cash that was, again, up until a year ago, yielding us near zero. So we kept this big pool of cash in the event we needed it, but it was a drag on our return. So we started saying let’s put this capital to work elsewhere, so we sort of have a sister investment vehicle, and part of that investment vehicle is a public equity strategy. And we have a facility, a credit facility against that public equity’s portfolio where we can draw on demand up to 65% of the value of that portfolio and so for plus one. So we’ve preserved liquidity while also eliminating the cash drag on our balance sheet, and then put that money to work. And so, that’s how we think about liquidity. We have facilities in place at several different places within our real estate business, within our operating business, within our investment company. But we never like to dip too deep in those facilities. Those are just giving us access to pools of liquidity when we need them, and so that we can be opportunistic when good investment opportunities arise.

Alex Bridgeman: And those investments, that public equity portfolio, is that primarily individual stocks or treasury ETFs or broad market ETFs? What kind of goes into that?

Chris Hoffman: Yeah, so there’s sort of two sets of activities that happen in there. The public equity strategy is all index oriented. And I would say 80% of our public equity exposure is just in a S&P 500 direct indexing tax harvesting strategy that sits with Goldman Sachs. And we like that strategy. Recent market volatility over the last several years through COVID has allowed the sort of tax loss harvesting feature to perform really well for us, but that’s predominantly on the public equity side, that’s what the strategy is. And then in that same vehicle, we participate across, in the alternative capital markets, across a number of different private investment opportunities, typically as a limited partner in a number of different funds. So I think everything from venture capital to life sciences to traditional lower middle market buyout or different real estate strategies. So just thinking of ways we can continue to diversify and strengthen our balance sheet as an enterprise so that we can continue to have stability across the global balance sheet and make investments in our operating business and in support of other growth initiatives.

Alex Bridgeman: And you mentioned a real estate piece as well. Does that real estate have any connection to Hoffman Brothers as a business? Or is this broad real estate investing?

Chris Hoffman: Yeah, so my brother and I made a decision, a lot of business operators, when the business does well, they distribute cash to shareholders, and then their shareholders kind of do their own thing with that liquidity. We’ve made a decision as an organization and as the two shareholders to say, you know what, we’re going to keep everything together. So when we sweep cash out of our operating business, we’re sort of keeping it on our combined balance sheet and making decisions together, investing together, saving together, preparing to weather the storm together. And so that’s the way we’ve thought about it. So when we distribute cash out of Hoffman Brothers, that goes into our sort of investment vehicle, or it goes into we have a real estate holding company that purchases predominantly Class B office properties. And we’ve got a couple of dozen tenants, roughly a half million square feet over there. But that’s been a way for us to be opportunistic, most of those properties we’ve acquired off market, so they weren’t brokered or being marketed. But we found good opportunities for us to acquire these buildings. The thing that makes real estate a little bit more attractive to us perhaps than a traditional buyer is that we have this business that has the capability to remedy any heating and cooling issues, plumbing issues, electrical issues. And so we can look at a property, at an opportunity, and see through a lot of the deferred maintenance or other things that might chase off a traditional buyer because we’re not scared of the 350 ton rooftop units that are 25 years old, if anything, that helps us negotiate a more attractive entry price point. And then we have the capacity to remedy that.

Alex Bridgeman: Yeah, I know we talked about family office structure, which we’re kind of diving into here. What would you say as a family office are your goals for your operation? Do you have a set vision for that that’s separate from the business?

Chris Hoffman: No, we have a couple of team members that work now outside of the operating business. But at the end of the day, all the activities that we’ve sort of begun to do outside of the operating business, those all take a backseat to continuing to perpetuate the success of Hoffman Brothers, the operating business. I think it is a benefit to Hoffman Brothers to have a really strong diversified balance sheet because it allows us to, when we need it, be able to move capital back into the organization, the operating business, when those opportunities arise for us to enter a new geography, to acquire a business, which we have not done yet. But I’d say those other activities, although they’re important in their advancing sort of our diversification goals and objectives, they’re really there and they really exist, in our view as shareholders, to be able to support the operating business and ensure that we can continue to pour heavily into that and sustain the trajectory that that organization is on. So as an example, we’ve used that line of credit at that investment vehicle to fund our new market when we went to Nashville. So we said, we built a $50 million top line business in about 36 months, and it took about a $3 million cash outlay to be able to fund the business to get to that point, to get to that scale. And that’s a good example of how we can sort of tap the facility available at that investment vehicle to make investments in the operating business without having to leave pools of cash in the operating business.

Alex Bridgeman: Yeah, I remember last time we also talked about the strategy of investing in acquiring companies within Hoffman Brothers. You just talked about kind of building one from scratch in a new location. How do you think about the two potential opportunities of building new locations from scratch versus acquiring also as a differentiated buyer because you’re not PE backed, you have a family office background or you’re a family run business, you’re not backed by a private equity buyer who’s going to turn the business over in the future? I bet those have interesting places to live within your organization.

Chris Hoffman: Yeah, I think we can offer a strategic alternative to traditional private equity for the right seller who sort of values our story and values what we bring to the table. But I will say we have not done any meaningful acquisitions in Hoffman Brothers, really near zero. We did one small asset purchase in 2015 of a plumbing business. But we haven’t done any meaningful acquisitions. And part of the reason we haven’t is it, candidly, is an organization that does not intend to sell but intends to remain private, just the math doesn’t pencil when these $10 million businesses with two of EBITDA, people are writing checks for $25 or 30 million for. The math doesn’t pencil as a buyer who would need to amortize all of that debt and return and pay all that debt back. It would pencil if I was completing these acquisitions with bluenotes, interest only payments, and just wanted to play the arbitrage game where I’ll go pay 10 times for some of these other smaller businesses, quickly add another 20 million of EBITDA, and then I’m going to go sell it for 20 times, but I’m just not playing that game. That’s a different game that we’re not playing as a private business. So acquisitions just haven’t made sense. Now, where it’s gotten interesting and where we’re having some interesting conversations today is how do we take sort of the success that we’ve been able to create within the verticals, the home service verticals that we’re in today, and translate that into some parallel home service verticals where really we’re interested in and pest control. We think we can do that organically very well. And we’re also having a conversation about another parallel service line with a potential seller who values us as an independent private organization and values what we could bring to the table and therefore is not just worried about purchase price maximization today, and candidly, those sellers are a better fit for us.

Alex Bridgeman: You mentioned like the math of a $3 million investment, creating a $50 million revenue business in Nashville. 15, oh, pardon me. I was like, wow.

Chris Hoffman: I wish; that would have been amazing. Shoot. Yeah, I do that all day. I’ll still do 15 all day, but 50, man.

Alex Bridgeman: So how replicable is that? Were there certain advantages you had in Nashville that allowed that return? Or do you feel like that’s something you could do across the Midwest and nationwide as you wanted to?

Chris Hoffman: Yeah, the constraint to continuing to enter new geographies. And we intend to; it’s on our roadmap. We have the next two locations identified that we think are a right fit for us, the right characteristics there. But at the end of the day, we can absolutely replicate that we have the playbook. I’m sitting today in our new shared services center where we’ve pulled together about 80 team members who support more than one location, provide all the different sorts of shared services that include our customer experience team and call center, inside sales function, IT, marketing, accounting back office. And so we have now this capability as we enter a new market where we can lean on this pooled resource, shared resource to do everything other than delivering the services to our customers. So it makes the lift to go into a new market a little bit lighter when really all you have to focus on in that new market is warehousing operations and delivery of services to customers. So we intend to keep doing that. The limitation is really just leadership talent. It takes a unique individual to go and execute at a high level on our operating playbook, who can be the visionary in that market, the recruiter, the champion. It just takes a real talented person to do it. And unfortunately, we, and I think most businesses, don’t have a bench of 20 folks like that, who are ready to go deploy into entering these new markets. And so that’s our constraint. I think the one thing that we can do that still gives us access to new geographies that maybe is a little bit lighter lift is we’re contemplating a spoke model around our two existing hubs. So we have St. Louis, we have Nashville. But if we were to open, say, in Jefferson City, Missouri, about two hours away, we could have a field manager level or department leader level local leader that could run that operation, don’t quite need as senior an executive to run sort of a spoke location. And then we could lean on the shared services pool for all those things I mentioned – accounting, marketing, all the back office stuff. And then also lean on the hub for all your logistical support, so your replenishments, your staging, your deliveries. So it sort of lessens sort of the investment needed to start to serve customers in these spoke markets. And you’re still getting access to all these new households in this new geography. But it’s a lower lift and a quicker path to profitability. And so we’re thinking about some of those spoke opportunities that we think we could deploy more near term then a third hub.

Alex Bridgeman: Yeah, and leaning into leadership a little bit more, you acquired a school, the school we’ve talked about here and there throughout this conversation. Can you talk about that acquisition and some of the development you’ve done around your university program?

Chris Hoffman: Yeah, yeah. So what we bought was the building that a school was in, it’s a 40,000 square foot building. It’s perfect. It’s set up with classrooms, a gymnasium, like a perfect setup for us to convert it into learning labs and sort of our intended use. But we bought that school, we hired an 11 year veteran from Teach for America, which is a great organization, educational organization. She was the local executive director of Teach for America in St. Louis, joined our team, dedicated some amazing trainers and tapping different internal resources, pulling them into HBU as needed. But under her leadership, we’re building HBU to really serve three different purposes. One, the first is to create a pipeline for entry level talent that wants to enter the trades, how do we sort of reduce the barriers of creating an opportunity for someone in our community to access these amazing jobs and careers we can offer? So we have a 20 week 100% paid pipeline where our graduates graduate and enter into a independent contributor role. The second bucket beneath HBU is, well, how do we take our team members, the folks that are already on our team, and continue to elevate and enhance their skills? So how do I take a professional who knows furnaces and air conditioners really well but wants to learn how to work on boilers and geothermal, how do I make sure I’m giving them those opportunities to continue to grow and advance? And then the third bucket beneath HBU is what we’ve already talked about, which is that leadership foundation curriculum and leadership and talent development. And so HBU sort of serves our business across those three sort of pillars, if you will. And we’re excited for the impact that that will continue to have as we grow.

Alex Bridgeman: What are some feeder sources for the school? Obviously, you have current employees who will go to the university. But do you have partnerships with like local colleges and universities to get them into the university as a way to enter the organization at a certain level?

Chris Hoffman: Yeah, that’s a great question. We’ve had a lot of success with some other entry level positions in our business. Like we have a runner position in our warehouse where it gives us the benefit of being able to observe sort of the soft skills of these team members for a period of time before we put them into the program. But we see small things like do they show up on time? Do they communicate really well? Are they reliable? Do they work hard? Are they ambitious? Do they want to learn and grow and do more? And that gives us a great sort of feeder pipeline. So we’ve had success pulling folks from our runner pool into the university, but we go to high school career fairs, different sort of job opportunities, sort of job activities or events throughout the community. But I would say really, where we’ve gotten most folks are referrals, somebody that you know at church, somebody that lives in your neighborhood, somebody- a friend’s kid who’s just finishing up high school and is looking for an entry point into the trades. And I think that referral network, I really think, has been probably the strongest. I think that most of our graduates I think have come from referrals.

Alex Bridgeman: That’s pretty impressive. Moving into closing questions, what belief or idea have you changed your mind on?

Chris Hoffman: We used to be a super strong promote from within organization. And I think in general, that’s a really good thing. And in particular, when you’re promoting into roles where you already have expertise and you already have knowledge. But we used to do that almost to a fault and almost to our own detriment. And what I’ve come to recognize is, particularly as your organization’s growing, and your unique set of skills that just doesn’t exist today in your organization, you really do have to look externally, as you start to cross these milestones as an organization with respect to size and complexity. And so I think I’ve shifted my belief around always relentlessly focused on promoting from within to you need to take a balanced approach and make sure that you’re meeting the needs of the business, first and foremost.

Alex Bridgeman: What’s the best business you’ve ever seen?

Chris Hoffman: Best business I’ve ever seen, I love this company, Dave and Dan Thrasher. They’re in this organization called Tugboat Institute, they are a foundation repair business, a story not too dissimilar from our own. I think those two brothers bought the business a little bit before we did. But I’ll just say this, because I want to respect their confidentiality, but their top line is multiple times what ours is, and they’ve just got an incredible, vertically integrated foundation repair business called Thrasher. And then they also own Support Works. So when I said they’re vertically integrated, they now also manufacture the peering technology that goes into their products or solutions that they’re selling to customers. They’re in Nebraska, and they’ve got an amazing office there. They’ve got an amazing team and amazing culture, and they’re also an organization that’s committed to purpose driven private ownership. But what a cool success story.

Alex Bridgeman: That’s awesome. You know I’m in Omaha, Nebraska, like I’m right in the state.

Chris Hoffman: So I literally think they’re in Omaha. Hold on, you got to wait for me to do this. Okay, they’re right there with you. You should look up- like their office that they built there’s insane. I mean, it looks like Google’s headquarters, but they’re a foundation repair business. But really a remarkable business and a cool story. To two great guys building a great business.

Alex Bridgeman: It’s always exciting to find these businesses that maybe you never heard of before, or like, yeah, I guess, obviously, somebody builds foundations, but you never really imagine like the companies and businesses behind that and the scale that they could be at. So it’s a surprise to realize, oh, that company has like half a billion dollars in revenue. I just thought it was concrete. There’s so much more to it. Well, thank you so much for coming on the podcast. I always enjoy our conversations together, and I hope for many more, I’ll hopefully get to St. Louis at some point or meet you at one of these conferences one day, but thanks for sharing a little bit of time today.

Chris Hoffman: Yeah, no, that’s great. I enjoyed it. Thanks a lot, Alex.

Related Episodes

Subscribe to our newsletter

Join small company investors, search funds, private equity firms, business owners, and entrepreneurs in reading the Think Like An Owner Newsletter.

Generic filters