My guest in this episode is Collin Hathaway. You might remember Collin from Episode 32 back in October 2020, which quickly became and has remained the most popular episode of Think Like An Owner. Collin joins me again to more deeply discuss lessons learned through his career of buying and building HVAC and plumbing businesses across the country.
Just like last time, this episode is filled with great stories, all centered around learning how to understand and work with people. Over the course of our conversation, we discussed Collin’s first business acquisition in Utah that went south fast, the current market for HVAC and plumbing businesses, consequences of higher prices for those companies both to investors and those operating, governance searchers should expect from investors, and how to build companies that enable talented team members to advance their careers. Enjoy.
Live Oak Bank – Live Oak Bank is a seasoned SMB lender providing SBA and conventional financing for search funds, independent sponsors, private equity firms, and individuals looking to acquire lower middle market companies. Live Oak has closed billions of dollars in SBA financing and is actively looking to help more small company investors across the country. If you are in the process of acquiring a company or thinking about starting a search, contact Lisa Forrest or Heather Endresen directly to start a conversation or go to www.liveoakbank.com/think.
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.
(Transcripts may contain a few typographical errors due to audio quality during the podcast recording.)
My guest in this episode is Collin Hathaway. You might remember Collin from Episode 32 back in October 2020, which quickly became and has remained the most popular episode of Think Like An Owner. Collin joins me again to more deeply discuss lessons learned through his career of buying and building HVAC and plumbing businesses across the country. Just like last time, this episode is filled with great stories, all centered around learning how to understand and work with people. Over the course of our conversation, we discussed Collin’s first business acquisition in Utah, which went south fast, the current market for HVAC and plumbing businesses, consequences of higher prices for those companies, both to investors and those operating, governance searchers should expect from investors and how to build companies that enable talented team members to advance their careers. Enjoy.
Thanks for coming on the podcast again, Collin, it’s great to see you. It was always fun recording our podcast and then getting to share the download numbers as we went. I think our download numbers as of today, November third are 4,321 downloads on our original and then 2,400 on a rerun. So I think I’d say you’re, well known and popular listener base. So first off, congrats on that one. We pulled a few folks who listened to our first episode for different questions. They might want to hear a bit more of it. And one that a couple of people brought up was hearing more about the Utah business that you had invested in. It sounded like it was a bit of an over rollercoaster. So I’d love to hear just a little bit more about that one.
Sure. And thank you again for having me. And I’ve learned a lot from you and from this podcast, I’ve listened to a bunch of the podcasts. And as you know, I was a little skeptical and I didn’t think anyone would wanna listen to my story. So it’s really neat and I appreciate it. A bunch of people has reached out. So thank you for the opportunity. It means a lot to me. So thank you. If I’m gonna talk about Utah means my kids probably won’t be able to listen to this one either since I get involved in a couple of swear words and some illicit drug use, but yeah, the background of that is it was 2010. I had bought one company so far, it was Bonney Plumbing in Sacramento and to set the stage in 2010. We were two years into the great recession and Skylight, my little fund sponsor model.
I made money in three ways. And I’m giving you this background because I think it’s important. I would charge a success-based fee when I closed the deal. So it could be 50 grand, it could be 200 grand and I was broke like no money and enough to pay rent, but not that much more than that and had a baby on the way. So it was not a great time in my history sky. So in terms of making money, there’s a success fee. There’s a management fee, which is charging 6% to 12% of EBITDA that you take directly from the company and pay yourself with. And then you would get profit units or synthetic carry. So once I returned investors’ capital plus some return like 6% or something, I would make 10% of everything above that or 12 or whatever. And over time that model changed.
I stopped taking success fees management fees got a little more robust and the carry went up. But the reason I mentioned it is because I was broke and I wasn’t sure my model would work. And in order for it to work, I had to make enough money to survive. And I think it’s important to understand because I hadn’t done a deal in two years, the management fees for my first deal were not enough to cover expenses. And I didn’t have any money. And I don’t think I fully appreciated that. And when you’re in that situation, do whatever you need to do. But I really had to find another deal. And my original funding source was my old mentor. And he didn’t have the money cuz of the recession and his firm was going through some real tumultuous times. So investing in my deal was just not a priority.
So I found this company in Utah that did mining services, which meant they would go out to mining like half the work or more would be going out to mining sites. So these is copper mines, gold mines, other mines. And they would work on the various pipes and valves and they would vulcanize rubber. So they’d take rubber, superheat it. And then the rubber goes inside those things. So they wouldn’t corrode the pipes it made. And then a part of the work was having the pipes and equipment sent to our shop in Utah. And we would do the work there. It made plumbing look white-collar, like working at Facebook. It was super gritty nasty. And one of the investors used the search one investor. I remember when I was trying to raise the money, said, why do you wanna own such a gritty business?
I said, oh, it’s really great. You can do all this cool stuff. And he passed. And I just think there was a lot of valuable insight in that and I just ignored it, but I ignored it partly because I just had to buy another company. So we found this company that was doing 2 million of EBITDA on like 6 million of sales. So the margins were credible and I ended up fundraising and I raised six and a half million dollars to buy the deal. I bought it, my old professor. He had a private equity firm and they were the biggest investors. And so many things went wrong with this deal. One, the diligence process was good, but the company was very basic. And so getting a lot of information was very hard. The financials checked out pretty well, but we also did some monitoring around safety and some other stuff.
And then we tried to do something cultural or like a character on this guy. And that’s what my investors who were in Utah were supposed to do. And the safety guy we hired that my investors found also went in and checked all the safety features, cuz safety’s a huge deal in the mining industry. And if you have a bad safety record, you basically got a business. So we bought this company and the guy said, I love what you’ve done with your first deal. I wanna be your partner. I wanna work for five years. And then I wanna go on an adult mission, which I didn’t understand what that is, but he was part of the LDS or Mormon community and wanted to go travel and spread the word. And I said that’s great. So we get a couple of years together and I’ll help hire GM.
It’ll be fine. We bought the company. And within like three days realized there was a huge problem. First of all, when you buy a company, the company’s supposed to deliver a certain amount of working capital, which is accounts receivable and inventory accounts payable. The guy had sucked all the AR out of the business and basically stopped paying bills, which is a big, no, no, you have a thing in your purchase agreement that says you can’t do that. And so we could immediately go after him for money, but he was my new partner. So he had to kind of balance that. I also quickly figured out that he would have committed fraud while some fraud on the money, but he also had forged OSHA records. So the safety records we had that the safety inspector had looked at were basically fraudulent. They were incorrect. And he did that because if he had reported his real safety record, he would’ve been kicked up the mines and the business would be zero.
And the third component was he was essentially buying off the buyers of the mines. So these mining sort supervisors have choices. Do they use it for maintenance? And he would go and buy them, guns, girls, gambling, trips, whatever they wanted. And that’s why I referred to it as like the hookers and blow sales strategy. And within a couple of weeks, I said to our board, which was my investment group. I said, yo, this is a really bad guy. He’s a really bad guy. He’s been lying. And I was a little more abrasive than I used to be. And they said, oh, you’re just being abrasive. You need to go back to San Francisco like we’ll handle it. And so they spent a little time with him and at the company and four days later, they called me and said, okay, you gotta come back. You’re totally right.
He’s a really bad guy. And right about that time, we had a huge accident on the mining site. One of our workers had used meth and then gone on the site and shot himself in the neck with sand, which is like a power washer that shoots dirt. And it’s meant to clean off metal. And thank God he used a sandblaster because it opened a huge wound in his neck, but it was so hot and there was so much pressure. It cauterized it. So he didn’t bleed out on the mine. And our safety director, who was the owner’s brother, literally threw him in a truck. It snuck him off the mine site and didn’t report it, which is like a huge federal offense. And they airlifted back to Salt Lake City and he survived and I called the owner and I said, Hey, we gotta tell the mine.
And he said, you can’t tell ’em we’re bought out of business. And I said, we have to tell him, he said, it’s your funeral. So I told him and we lost 40% of our revenue and got blackballed from that mine. And this is where I also realized that about the buyout strategy. That was the mind where he was buying off all the buyers. And so jobs that should have been a hundred grand. We were getting 250 grand. So all the profit was just. Like it was just like, the job was meant to be a hundred grand, but we had 150 grand of EBITDA that was getting generated by this buyout strategy. So we went from two of EBITDA and six of sales or six and a half of sales to three and a half of sales and zero EBITDA in 40 hours. That’s just the business side.
And then behind the scenes, there are all these other issues like staying in business. We had to basically create a new company, transfer the assets and get a break ticket record. And all our insurance companies are like, that’s this thing called mod washing, where you wash your EMOD, your experience modification rate. They’re like, that’s mod. Washing Isn’t illegal, but it’s not right. I said I understand we’re just gonna have to do it or we’re gonna go to business. And so we changed to a new company and all our insurance companies bailed. And we had one week to find insurance on a brand new company with no profit. And then to top it all off, we hired my original board with those investors who said, you need to hire a president. And I said, what about going through a process? This is before everything went down, we were trying to hire a president.
And they said, why don’t you just hire this guy? We know each other really well. And I said, we do a process, say, no, just hire this day. We know they had been on a mission together back in the day. And this is also like culturally, I just wasn’t part of the Mormon community. There was a bigger community. I was like outside looking in, I just didn’t understand what was going on. I was always like the last to learn something. So we hired this president and one of the guys on the board said, oh, and he’s got a little health issue, but it’s not material. I said, okay. It turns out he had leukemia. That was like near the terminal. And this guy is amazing. Like, I love this person, but like, that’s not great to hire a new president who has near-fatal cancer.
And you don’t know about it. And right after that happened, the whole board got fired at the investment firm. So I basically had like no board, a new president who walked into this giant storm. He’s got health problems. We created a new company. We have no profit. And I’m like spending four days a week in Utah. I still have PTSD whenever I fly into the Salt Lake City airport. So and to circle back on like the reason why you buy it like I was desperate and I made some bad decisions now at the time like the guy just lied. So like, I don’t know that we would’ve figured out some of this stuff if ever until we bought it. But I did know it was a cyclical business. When my prices go down, cotton prices go, now they don’t need maintenance. They just won’t don’t matter how good you are at selling or how good your product is.
They just won’t buy. I knew that I knew there was customer concentration. I knew there were some things about the business that was low grittier that I liked and I still bought it. And I did it because I had to try and make Skylight work. And I think in that respect like I probably would do it again, cuz it really did give me enough runway to survive long enough to then buy the third company, which was the wrench group, which created this big, huge plumbing conglomerate. But it was awful. I made so many mistakes and just really and unfortunately ended up selling it four years later to the general manager, we hired a different general manager and lost 65% of our money.
Where are some of the lessons that you learned from that experience? Or maybe even a better question would be, do you think it gave you credibility with future investors that they knew or could see that you had been through a really rough time and still managed to pull through it? Not breaking even, but you still managed to at least get the business to survive through all that change. Do you think that made you a better operator going onward?
So there were five individual investors in the private equity firm. And I think all of them gave me positive feedback or at least were grateful that I dug in and did my best to fix a very hard problem as best I could. And I was super transparent. I never lied. I told him everything bad that was going on. I told him everything I was doing to fix it. If you have feedback, if you have other ideas, I’m totally open to it. And I think it is really important. I always leave with bad. One of my current investors told me that I’m like the king of leading with bad information. I just would rather have anything neutral or negative. Get out there immediately with an explanation of how I’m handling it. I hate surprises. I get bad news all the time, but bad news. That’s a surprise is really hard for me.
And I just assume it’s hard for everybody else. So I’d rather they know out of that group, the larger equity firm has expressed interest in investing. Again, we haven’t done anything yet. And of the five individuals, three of them were in my next deal. The one that made all their money back and more and two just chose not to invest. One I don’t think it best anymore. One just said, I’m like gonna work with you again, which is understandable. And in terms of some of the learnings, I’ve talked about this before, as one of my issues with some of the search fund community or processes, there’s always a tendency to try and almost de-risk it to death. And in this particular case, there were some things that I should have accounted for the cyclicality, the customer concentration, all stuff that I knew, the fact that I didn’t know anything about this business, the fact that like when I’m the owner and my wife and I had dinner like it wasn’t really clicking.
Those are all things I should have thought through a little more, but the reality is the guy just lied and there’s no way to get around that. And in business, there’s just gonna be some times where things go bad. And, and one of my big investors said, I said, my goal is to never lose any money. And he said he’ll never do a deal. You gotta have some risk and turns out it lose his money. But I do think at some point you’ve gotta accept a certain amount of risk. The things that I’m most regretful about is there were the things that I knew about I just chose to overlook primarily because I was desperate, which is a bummer. I wish I could say, honestly, I wouldn’t do it again. But knowing where I was at that time and how badly I wanted Skylight to work. I don’t know that I honestly say I wouldn’t try and do something like that again, in that version of me at that time with that financial situation that I wouldn’t have tried to do something to make it work.
Yeah. That makes sense. So from that experience and the preceding years of investing in companies, what are some of the better methodologies you’ve had for sourcing companies and evaluating them that perhaps are partially built on that experience in Utah?
I spend a lot more time with the owner and listen to the spy about how I relate to them and get to know them. The other owner that I can think of as their first deal in what’s now called the Wrench Group was a Dallas-based air conditioning plumbing company. It was 2011. I was still broke and was coming out of the recession was still there. And so for people who didn’t live it, it was like three or four years of hell housing prices didn’t bottom out until 2012, the recession started in 2008. So it was a long slog. And I would say out of the ownership group of ranch group, which was four companies, four owners, the only owner that didn’t work was the first one. And there was just a certain approach to how he ran the business and how he talked and actually how he referred to certain people and would talk about them that, that didn’t jive with my personal belief system or didn’t make me super comfortable.
And so this is again where I overlooked it, cuz I needed to buy a third company and prove this out. And he’s the only owner of that group that left. He was gone within a year and could have seen it coming, should have seen it coming. And fortunately, in plumbing and air conditioning, I was a little bit better positioned and understood. They’re a little bit less sensitive to market cycles and owners. So you can actually make changes and keep them afloat. But now 13 years into this, I spend a lot more time with the owners. And if I just can’t get comfortable that I’d wanna spend a bunch of time with them or they talk about the phone test, if your phone rings, do you wanna pick up? And if I don’t want to pick up early in the process, like we’re probably not gonna do that investment.
Even if the owner’s leaving now, we still have problems at our current thing. The Flint Group, some owners have kept equity in our group, but all of them have basically retired or moved on, which was their intent. But we had one bad experience with one owner and it actually is tricky cuz he did pass the loan test and he was super great. And so was dinner with his wife and now the guy was a convicted felon and we chose to overlook that. And that turns out to be our worst deal. He explained it really well, but turns out that was a pretty dumb thing to overlook. So I think I’ve gotten a lot better, but I spend a lot more time on the culture, the financials and the in the business kind of elements of the companies. I feel pretty comfortable with the owners in these smaller companies, just set the tone of the culture of the companies.
They set the tone for how the business is gonna perform. And so I just spend a lot more time with them and really suss out what their intentions are, what their ethics are because even if they’re leaving and it’s a sales job, their job is to sell their company. So you’re getting like the very best version of them. And we’ve still had a few misses that were caused by sort of owner declarations that proved not to be true. But in general, the owners we’ve worked with this time around have been a lot. They’ve been really solid people. And with that, I think we’ve done better getting better companies.
This might not be a more very interesting question, but are there any red flags or things you look to avoid? If an owner talks about a certain subject or acts a certain way or shows you something about their business in a certain light, is there something that kind of sets off a spy sense in you?
I think the easiest one is how do they talk about people? And some examples of that would be, I’ve heard owners use racial slurs. I’ve heard owners refer to their employees in misogynistic ways. I’ve owners’ spouses pretty strong political beliefs one way or the other. And then the other thing is a lot of times, a lot of these folks that we’re dealing with or that smaller businesses, they haven’t gone through like media communications training. So they will actually tell you a ton of stuff about their companies without totally understanding the consequences of what they’re sharing business practices, ways in which they’re skirting, not even the law, but just skirting, maybe best practices or even ethical business practices. But then you have to assess. And sometimes what they’re doing is a little bit akin to what I did in Salt Lake and in Dallas, were you doing what you need to do to survive in a small business. And you just have to assess out if that’s something you’re comfortable with or you can fix. Sometimes they’re doing it just to be malicious or to cheat the system or to make more money. And that’s a lot harder for me to get comfortable with and usually ends up with us not working together.
You’ve been in HVAC and plumbing for a long time now. I’d love to hear more about how that space has become more or less popular over time. And what senses you look for when a space that you’re interested in or actively in is getting too frothy need to start looking for either new ways to find companies or just to leave and go find a different industry. That might be a bit more, more open.
Yeah, what’s happening in residential services right now is like nothing I’ve ever seen before the backdrop is when we sold Wrench in 2016, we sold for $200 million at a 9.2 X multiple. And we thought we had just killed it. It was beyond our, any expectations we had. It was wonderful. I still had not wanted to sell because I believed our companies were capable of growing substantially and turns out they actually all doubled in size in three years. And the company sold again for many multiples of 200 million. So it was very disappointing cuz that in that timeframe might also be kicked out of the business and had to go figure something else to do. But what’s happening now is crazy. And the Genesis is when we sold in 16, there were a bunch of buyers who didn’t win, they didn’t win the deal to get our company.
So what they did is they just went out and found a different company to start growing and expanding through acquisition and growing and all those private equity groups, there’s four or five of ’em ended up having a pretty successful run in exiting in 19 or 20. And then in that time, a bunch of other people said, oh my gosh, what’s happening here is it was really interesting. We should do it. And so more people came in in 18, 19, but specifically in 19 to 20, when the also rans from 2016 started exiting at huge prices. It started generating a ton of interest from private equity, not to mention the interest I think that some of the stuff’s generated from search funds and small business owners and people wanna buy a small business. And so the amount of money coming into our space is almost unheard of, except it’s actually not that unheard of.
Our industry has a history of rollups that tend to go really well. And then they implode. And when I got involved in 2008, I accidentally made an early move accidentally. I didn’t know the industry. So I didn’t know this was happening. And there hasn’t really been an implosion since then, but there’s been a long history of multiple rollups just imploding. So what’s happening now is more and more people are rushing in. And when we bought our company in Boston in December of last year, I had spent a week in January talking to lenders and brokers and investing anchors and private equity groups. Some wanted to buy us some wanted to loans, money, some wanted to help sell us. And I just listened and asked a ton of questions. And it just reminded me so much of 2007 saying things like these businesses are recession-proof.
Now, these businesses are actually recession-resistant. That’s much different. One requires a lot of work to make sure you keep your head above water. And the other one is safe. No matter what I hear things like, oh my gosh, there’s so much Lang loading fruit, which is like my least favorite business saying other than net, because it’s never really that lower fruity or Hey, it’s like clipping coupons. And I’m like, had I been in this business 13 years and I’ve yet to clip a fine, I just have to go work my off to make money. The market has changed. You know, multiples are always gonna be high. I had one lender say to me, what have you paid for your companies? And I told him, he said, gosh, I just wish you paid more for your company so I could loan you more money.
And I was like, what? That’s kind of like saying, I wish you paid more for your house so I could give you a bigger mortgage. That doesn’t make sense. The long reason it makes sense is if you bought a bigger house and then somebody, some greater fools pays even more than you paid for your house. And right now there are a plethora of greater fools and the multiple expansion is nuts. We bought a company in May of last year in ’20 in the same size company is now selling for 120% more than we paid. Not 20%, like 120% more, same dynamics, same size. And it doesn’t make any sense. The fundamentals of our industry have not changed. People can say, oh, the technology or we can buy materials better, but the assumptions are wrong. And they’re all predicated on there being someone to be end who will buy your company for a higher, multiple than you pay for it.
And if that goes away, this thing is gonna implode and what’s make it possible is that debt has never been cheaper or more available, which is also like 2007. Covenants are lighter, multiples of EBITDA you can borrow on. So people might have borrowed two times EBITDA or three times now it’s five times or six times. And when you do that, the price just goes up. You can pay more for a company so you can borrow more money. People are accepting lower returns on their investments. They’re not saying that at least, maybe not even to themselves, but if you are supposed to buy it for a hundred dollars and you buy it for $220, there’s a good chance. Your returns are gonna be lower. Now, maybe not. You can borrow so much debt that your, of returns to be okay. And I can explain how that works if you want, but more debt can cause more problems if you’re not operating right or interest rates go up.
So I think what’s happening is a lot of people are just accepting lower returns because you can’t put your money anywhere else and make money. The interest fee rate’s zero. So people are willing to accept a lower return. So they pay me off for a company and they’re just okay with that. And then there’s this sort of limiting effect. There are more people creating more groups like I created than I’ve ever seen. I mean, I think there’s like 40 or 50 consolidating plumbing and air conditioning groups. You know, when I started, there was like ARS American Residential Services, which was like a total disaster. And there was me. So with that competition prices go out. People have to make assumptions that I think they would not normally make maybe some of my Salt Lake esque assumptions, fool themselves, and hope there’s somebody at the end who will get them outta trouble. And I just think that’s a lot of risks and tends to lead to very poor outcomes in the long term.
Yeah. I’d be curious. What are some consequences of paying those higher multiples after you’ve acquired the business? Of course, there’s the greater potential for underperformance. You have more debt, but what are some more nuanced consequences of paying more for a business than you otherwise would have?
I think there are a couple of different things what’s interesting is because of the current ability to structure attractive debt, you actually can put more debt on a business and not have it necessarily be that much more dangerous right away, like in a normal loan, it used to be you took a $5 million loan. You had to pay a million dollars a year, 20% a year, 20% of by 5 million is million to pay that down as you get bigger or even sometimes if you don’t amortization of the loans goes down from 20% to 12 and a half to 10 to five in some cases to 1%. So in the one example, I gave earlier a 5 million loan, you have to pay a million a year. If you have 1% amortization, you’re paying 50 grand a year. So you can actually free up cash and do some other things that make it viable to use and to grow your business.
But I also think it just puts a lot of pressure on you as an investor to make sure everything goes really right. And what I think I’m seeing, what I think is happening. As we’ve bought companies, we are restructuring them. We’re adding overhead, we’re expanding the team. We’re improving management, we’re rolling out new processes. We’re just basically laying out our playbook and trying to execute on it. But when you do that, it takes a certain amount of time. And generally during that time costs go up, revenue may stay flat. EBITDA margins go down, but you have to have at least for our sort of philosophies, you gotta have the flexibility and the capital structure allow you to do that without putting yourself at risk. And I think if you pay a boatload of money for a company, your inclination to actually make some of those changes and take some chances or completely revamp your business is a lot lower because there’s risk associated with it.
And sometimes your EBITDA goes down. And when you paid 15 times for a plumbing company, you really can’t afford for the EBITDA to certainly not drop for very long. So I think what a lot of folks are doing is just amalgamating EBITDA, they’re buying a bunch of companies and then they’re just saying, gosh, if I can just hold it, I just need to hold it steady for long enough to maybe get a little bit of growth. But if I just add more companies, I can sell for an even bigger price and I’ve used a bunch of debt. So through financial engineering and just duct tape and then some jazz hands where you’re saying like, oh, I’m doing all this cool stuff, but you’re really not doing anything right now. The buyers come to the market. They don’t really care. They’re willing to overlook some stuff, akin to what I did in Salt Lake or even the first orange deal, just because they have to if they wanna buy a company and the same thing’s happening at venture capital.
I mean just read an article saying, you know, it’s more money than there’s ever been. And one of the VC guys said, well, you just can’t do as much diligence and you just have to pay more money or you’re gonna lose the deal. It’s probably true. It just usually doesn’t work out real well in the long term. And by the way, this is what I’m saying when I’m saying like I’m not very popular right now with this like I’m in the minority, the doom and gloom guy does not make for really exciting, happy art conversations.
That’s totally fine. Are you immune at all to higher prices in terms of just the experience you have running these companies, giving you any sort of advantage in a deal process or you’d have to pay the same prices, everyone else, regardless of the fact that you’ve been in this space for a long time and know it really well.
I think we pay competitive prices and I would say most of the time in the Flint Group, the newer thing I started two years ago, I think we’ve won because we have a very simple structure in which we use primarily cash and sometimes equity if they wanna stay in. But we have a simple structure that’s easy to understand. We do what we say we’re gonna do. And we close quickly. And for the right owners, I think we make a really compelling partner or a steward of their business. There are other owners who said, I don’t really care who I’m gonna, who I partner with. I’m just gonna sell for the max price. And we might actually be those people, but more often than not, we haven’t been, I think in the long run, our companies are gonna end up doing a lot better, but in certain situations how the companies perform after the owner sell is a lot less of a concern than how much money gets wired on the day of closing.
And that’s okay. It’s just a function of how the markets are reacting right now. And we’ve still managed to invest in six companies. And I think we talked, we had three or four or two and now we’re at six and we’re now at 90 million of revenue. And we’re really pleased because we think we have a chance to grow a hundred to 200% organically. And if that’s what we end up doing with the six, we have that’ll end up being a really great run for us. And we plan to do this for a really long time. So we’re thinking not so much, two years out or three years out seven, 10 years plus. I’m 43 now, this was a lot harder to start than I thought it was. I blacked out on how hard it was the first time around. It’s kinda like people, my people have more kids.
They just forget. I have no interest in trying to do this again. So I’d really like to make the most of this thing. And that’s also a little bit unique. Private equity groups will say, oh, we hold for five to seven years. And I used to say, oh, that means three. But we’ve seen companies get in and out of businesses in our space in as little as 18 months, which is crazy. You can’t really even find the bathroom in 18 months. So I don’t know what they’re doing other than just putting a bunch of things together, giving it to somebody else to deal with.
You mentioned also in the first episode that you spend a lot more time thinking through the terms of how you could be protected in terms of when you decide to sell or other control mechanisms within the company. Are you willing to share any more of those terms that you added or have added with the Flint Group, just to give yourself a little more protection or leverage within your group?
Yeah. I mean, I can talk about Flint, but also I think just how anyone looking to buy a company and raise money might want to think about it. When I first started the idea that I would have max protection and ultimate say over when we sold, it seemed like a cool idea to ask for. It’s just not viable. The reality is I had no money. I was putting no money into the deal. I was an unproven CEO or chairman, and I think it would’ve been silly for the investors to have agreed to that. And I didn’t ask for it at the time I was just trying to buy ’em and build them. I didn’t really worry too much about the exit. What happened with Wrench Group in 16 is that we had one majority investor. It was my old firm and they sold it because they wanted to show a good return and raise another fund, which is totally exogenous to me and how we’re performing it to the business.
And the reality is I have mixed feelings about it. I regret that we sold since then talking to them a little bit. I think they regret they sold. We had four of the best companies and four of the biggest markets in America with great leadership. We should have just kept them in, let it run. And that was proven out by the second sale old price three years later, but it also changed my whole life, 2011, 15 grand, the bank, and a baby and rental house and all this stuff. And then 2016 you sell it. And my whole life’s changed. I have a track record and I have money in the bank and I have the autonomy to go do what I want and I for, and then I had the time because I got kicked out of Ridge. So I wouldn’t own guardian roofing with my partners there if I hadn’t had that experience and the money.
And I don’t know that I would’ve raised the money for Flint. If I hadn’t had that exit. Because then I’d just be still in it. So everything works out like it’s supposed to. So I think for searchers or young people, it’s just unrealistic. Think you’re gonna have a ton of say on that. You’ll have some say, cuz you’re ultimately running the company or you’re in charge of it. And I think you have more influence in that role than you realize. I think as the chairman of the ranch crew we sold, I probably could have done a better job of charting the vision and staying involved in some capacity. And I just didn’t, I was also very burned out. So I think I was okay with just leaving, but I think I had a little bit more influence than I realized at the time with Flint Group, the way I structure it is a little different.
Some of it was just now I raised 30 million from 26 investors. So there are certain governance points you can make when you create a— we raise a 30 million fund and we have an operating company that’s a little wonky, but even if you just bought one company, if you have 26 investors, it’s really hard for any one investor to have too much sweat over what you decide to do, unless it’s one person putting in 90% of the money and then there are 25 more people with no money. So I had a pretty, not diluted, diversified investment group. And frankly, the goal was that we have an investment committee where there are three seats. Now it’s five seats. And I had one seat on the three-seat board and two seats on the five-seat board. So I made it so that I would basically have to get voted against by everyone to have something go against what I wanted.
And honestly, if they all blur it against me like it probably was worth the bigger discussion on why we were not aligned. And then I just picked people this turnaround too, who understood a lot of the people I’d been talking to for years about what I wanted to do and why I wish we held it longer. So we just picked a bunch of people who were a little less concerned with two and three year IRR and were much more concerned with how do we build a really great company that probably could generate a great cash return in seven, 10 years, but also that could just continue to grow and build forever and ever the richest people I know are usually the business owners who build companies over decades. So why would, if you just think, look at that model and say, gosh, that seems to work well.
That’s what we’re trying to replicate here versus trying to churn our business out in the next three years. And the other thing is I don’t necessarily need to show fantastic returns again immediately, cause I’m not trying to raise another private equity fund. I’m not trying to become a three every three years. I gotta raise more and more money to get a managed pieces from a private equity firm. I’m trying to build a great group of companies for a really long time. And there was some governance stuff in there about how I could be protected and some other stuff that I, I just don’t know if you can do that unless you have a little more experience and a little bit of a track record, which is not meant to say you shouldn’t try. I just, I wouldn’t even think about it early on.
If you’re gonna buy a business today with no track record, what, what points might you try to protect yourself with? Or where do you feel like a young person might have more leverage than they might think they do?
I think before you start worrying about the CYA part on how things could go bad if you’re really trying to buy a business and run it, you really just wanna make sure you raise the money and you find the company, you get a good structure and then you raise the money. I was a lot worried, less worried about how I was gonna get booted than actually just the first couple parts. And then I think maybe a little naively, I thought I’d just do a good job running in. Like it won’t really matter. And I think that proved out I didn’t get removed from any of the companies and they all did minus Utah. They all did pretty well. I think there’s a lot of friction in removing somebody trying to run a business. So unless you’re total tur or the business is tanking or worse, you’re both of those things.
The inclination, I think for most investors is just not to change management. Your investors might be living down the street from you, but more than likely, they’re like all over the country. And if you go away, what’s the next best option. At the very least, they have to go run a search process and hire a CEO or a GM. And we’re trying to hire two GMs right now and I’m spending like 10 hours a week on it. And it’s my full-time job. So if I’m some investor who has 250 grand in investment, I don’t wanna sign up to go run the GM hiring process or worse take over the company. So I don’t know that you have to worry you much about it’d be good. If you figured out some way of severance, if you have equity or carrier or profit units, you need to really understand the besting schedule.
I’ve seen some deals where that’s all at the end of four years, which the standard way would be over four years, you get 25% after one year and then you get 136 of the next 36 months. And there’s some other parameters you can have based on profit units, or carry. You can have time-based some other stuff, but you’d just wanna understand the ways in which you could lose that. And then you wanna have a good lawyer, make sure like you just terminate you for no reason without you getting something severance or some of the equity or whatnot. But again, if you’re really early on, I would spend not that much time on those things because the chances of you making one bajillion in this first deal is low, but you’re just getting in the game to get started. So you don’t have to, I had some advice.
It would be like don’t scratch and claw for the best possible terms. Just get it done. Don’t get hoed. Don’t give up on stuff that you should get pay structure, bonus, equity, if you’re getting equity, but you don’t need to maximize for the one time outcome in your first thing. My first deal, I had a management fee of 150 grand. It was 10% of EBITDA. So 1,000,007, so 170 grand, I got a hundred thousand dollars success bonus and I got 10% carry. So we owned 80% of the company. So I had 8% ownership, which is not like a recipe for a yacht around the Maldives. But I also bought a company six months out of business school when most people didn’t do it that best. So that model like you might wanna think about that model 150 grand management fees when you’re paying for all this stuff if you’re gonna go run it and your employee can make a salary pay for your insurance. Mine was bad. Cause I had 150 grand income wasn’t actually income, it was revenue and I was paying for all this other stuff. So I had a lot less grand at the end than I thought I would. But I just don’t know that you have to maximize your first deal. Don’t get greedy.
Do you think there’s a correct size or size range of companies to look to acquire when it’s your first acquisition?
It’s funny you ask that. Because I actually think about this. I would say 7 million of revenue. Ten’s better, but it kind of depends on how profitable the company is. I just think you gotta have enough cushion to be able to make mistakes. So if you’re gonna buy a $3 million company with 300 grand of SDE or seller’s discretionary earnings, which basically means it’s like enough to pay you and some extras leftover, that means the owner who probably wants to make as much money as possible, has only found a way to get 300 grand on the business that he’s run for like 20 years. So the chances of you making more money than him are almost zero right away. Now you could grow it and do some stuff, but like right away, you’re probably gonna make less money to get it or she did. Which is, I was like, oh, I can just do this better. But turns out like, no, they’re like way better operators than you are.
And they know all the tricks and you know, none of ’em. So the problem with that model is like maybe the right thing is to hire a salesperson or spend a hundred grand on marketing or hire a controller. Do you know where your faces are or a bookkeeper or something when you only have 300 grand a profit, if you’re gonna spend 150 grand on marketing and a bookkeeper, you’re gonna make 150 grand. There’s no other money. So the rub is like in those kinds of businesses, you have to grow out of it. You can’t squeeze more money. I mean you can, you guys, everyone listening might be way better at this than me. Guys and gals may figure out a way to do it. I just never figured out how to squeeze more money out. I’ve generally not made more money than the owners make. I generally just grow faster and then get back to the percentages they were before with a more scalable model. So I think you have to have enough money that a can’t just be paying for you. You can do that. It’s just harder and you’re probably gonna make less money than you think you’re gonna make.
Is there a point where a company is maybe too big for first acquisition or do you just wanna make that minimum hurdle and then whatever you can get out out of that on top is gravy.
I don’t know if there’s such a thing as a company that’s too big. I mean, I just heard about a guy who’s done really well, who put together six companies and bought this first deal. And part of his problem was that his original investors, it was like too big for them. So I, I don’t know that it’s too big in the terms of your ability to manage it. The reason people buy bigger companies is they can put more money to work and they’re easier to run. They already have a staff, they already have processes. They already have to go to market. They generally have marketing. Not always, but usually so they’re easier to run. I think making changes is a little harder or cumbersome, but the changes will have potentially bigger results. I think the bigger problem if you’re buying a bigger company is how do you raise the money?
When I came out of business school, my first deal was, I don’t remember it was six or 7 million. We raised a million, eight of equity initially and then got to like three and a half of equity. My second deal was all equity. The Utah deal was six and a half million. My third deal was probably seven or 8 million of equity. That then went up to like 20, by the end, it was like 20 or 23 million. But that was by 2015. So I’d been doing it for seven years and then Flint, we raised 30 million. I thought I could raise maybe 20. I had 45 million of interest and we settled on. So like right now, me personally, again with my experience, like, could I go raise a hundred million of equity? I don’t know, but when I was 29, I think whatever I raised was about what I could raise. So the deal had of fit in that brander.
Certainly. Yeah. I wanna ask about some of your companies and how you run them a little bit more. One thing you talked about last time was this example of a company you bought in Houston. And this one of the plumbers, Manny came to pick you up from the airport each time. And over the course of owning that business, you saw him grow in the company and he got married, bought a house. His income went way up and it was really successful. I’d be curious, just to hear a little bit more about how you design your or companies, such that folks in them can advance their careers within those companies. You can hold on to talented people and let them grow.
It’s funny. I checked on Manny. He had since left our Houston company, we now have another Houston company. So I need to reach out to him and see what he’s doing in terms of how we structure our companies. We believe we have a good model for growing organically. In some cases, a hundred percent. In some cases, it could be 400%. And what we try to do is be very transparent about our intentions for growth and what that’s gonna look like. And we will show our team. We’ll talk to them about it. Hey, if we get to this size, this is what we look like. The structure of the come deal changes at Flint, we’re moving every single one of our companies into bigger facilities. So there’s more office space, there’s more trading space. We just wanna start our first trading school in Portland.
And so we’re very intentional about explaining what the companies should look like if we’re able to execute and with that, what type of opportunities will arise both at the company that these folks are currently at and then also within Flint. So I’ll give you a couple of examples. I mean, well, and just at a high level, if you’re able to grow a company two or 300%, there are gonna be kinds of new jobs that never existed before that people can learn, grow into, get, it gives opportunity for career development, title advancement, pay raises at Guardian Roofing we have a, which is outside of Flint. One of our most important people swimming named Lauren was a customer service rep sitting at the front desk. When I bought the company, she’s now our inside operations manager. You know, her pay has increased significantly. Her responsibilities have increased significantly.
We’ve got her an executive coach. She’s got direct reports. She’s a fantastic person and a tremendous part of our company. And that’s been five years. She’s probably had four, five different jobs. That’s just one micro example, but we’re seeing it across all of our companies now. As the companies have started to grow and expand at Flint, we at our Seattle company, there are two different people. Who’s received promotions that’s while changing out most of the management team, we just hired at Flint corporate but we don’t have much overhead at Flint. We had me and Trevor and then with smart, our partner, our COO, and then we hired a VP of finance. And then we just hired a VP of people in training and the chief of staff, the VP of people in training was our recruiter in Portland, Oregon who just killed it. She was amazing, but she wasn’t only amazing at recruiting. She was super thoughtful about, Hey, why are we having trouble with this certain area? What can we do to change the dynamic around getting more people in, what are the licensing restrictions? What are some of these problems we’re having? So we promoted her and now she’s part of Flint Corporate.
There’s not a ton of Flint corporate jobs. That’s just one example where she moved from the local branch to Flint. But inside each company, the structure is there, if you wanna be in management, we’re gonna have new management positions available. If you’re a manager and want to be a VP of operations or a GM, we should have opportunities at this company down the road or at one of our other companies. And for the GMs who really shine, their potential is a role to become like a regional president, which is what we did at Wrench Group. So I just think it’s being very transparent and intentional, and then making sure you’re communicating with people about what their goals are, particularly in today’s environment. These Great Resignation folks are very tired. They’re very stressed. So for folks that mean a lot to us and who have real potential, we’re trying to be very smart and methodical about communicating about their role and what that role could look like down the line.
When you say great resignation, you just mean there are a lot more folks who are changing jobs or leaving roles, and that’s caused a lot of turmoil. What are some effects you’ve seen in your companies?
My gosh, I have never seen so many people changing jobs. We’ve been the benefactor. We have some tremendous leaders who spent part of COVID thinking about what they wanted their career and life to look like and realized they wanted to be part of a more entrepreneurial endeavor or try their hand at X, Y, or Z. And we’d managed to attract some pretty phenomenal people, some really fantastic leaders. On the flip side of it, the thing that I spend most of my time dealing with is both gotta keep kicked in. People leaving left and right, for reasons that aren’t always really apparent in some cases don’t make much sense. There’s one gentleman in particular, who I care immensely about, who left one of our companies told me he was bored and needed bigger challenges but also super burned out. And didn’t think he could go on.
And I said, gosh, that sounds awful. But I feel like he, it can only be like one of those things, are you bored? Or are you burned out? Like it didn’t make sense. And then left for a job that didn’t really pay much more money, just needed to change. And it was a big loss for our business and the guy’s fantastic. And I’d love to work with ’em again, but there’s just stuff like that happening all over the place. And I think people are extremely tired. They’re a little bit frustrated. They’ve had time to think about what they wanted to do with their lives. And it’s resulting in some changes that we just couldn’t have anticipated. And we’re doing our best to accommodate that. I mean, I saw that Bumble, the dating sites get over a week, paid off at PTO, which I thought was a really cool idea.
So at Guardian, we’re doing that between Christmas and New Year to reward everyone for being so awesome during the pandemic. And we brought like 35% this here. So everyone’s pretty, pretty look. What I didn’t realize, even though I should know, is this as the owner is like PTO means you’re paid. That’s a huge number. We’re paying these people to not work for a week. In addition to all their normal PTO, I was like, oh my gosh, that’s a lot of money. And my partner was like, well, do you not wanna do it? I’m like, no, we’re gonna do it. We said we do it. And I wanna do it. But for some reason in my head, I just thought it was free. It is not free, but it’s, that’s where it goes back to my financial acumen, not always being that great.
That’s awesome. What are you most excited about over the next year or two?
Work wise? There’s a lot of stuff we’re doing that I think to start to pay off our roofing company. We’ve grown from our goal is to get to 20 million in five years. We just did it. We hit the goal, but what’s very neat is we have the team in place. I mentioned Laura and some other people like we have the team in place to now grow to our goal is 45 million, you know, and it’s exciting. Because the first time around 20 million was just a whiteboard number. I would say the details of hitting 20 million were very weak. The goal was strong, but the details of how to get there were weak. Now we think we have a much better plan and a much high probability of doing it. Flint is the sixth plumbing air condition company. What’s neat is the company we’ve owned the longest in Portland, Oregon now has a fantastic team, great GM, great controller, great team underneath them.
And they’re doing the stuff that we know works 90% of the time. And they’re just starting into hockey sticks. I mean, I think they’re up like 40% this year. So we bought six companies over two years. And so each one of the companies is at various stages of their own sort of development and refurbishment and management team build-out. And sometimes when you’re in that, it can feel like you’re just not doing it right. But a lot of it just takes time. And I think I just forgot it. Like I said earlier, I think I blacked out on how hard it was when we built Wrench Group. Like we spent a lot of time between 2011 and 2013 working for those companies. And then they took off, most of the growth happened in the last two and a half years, so I just forgot.
And what’s neat is we’re now seeing that a couple of the companies that have been with us and working with us to roll out the right playbook and do the things right and get the right team in place. The hockey stick growth has started to happen. And that’s really exciting because it’s happening the right way. It’s sustainable, we’re protecting the culture. And because we don’t necessarily have a finite time frame for what it can mean. And some of these companies could grow significantly. Our Oregon company just moved from 9,000 square foot building to 25,000. I knew the building, I had approved the lease. I saw Getty built out. We moved in and three months later I visited and said, oh no, they said what’s wrong. I said we’re gonna run outta room. And we’d been in the building three months. It’s a five-year lease and we’re already gonna out of the room.
So we’re working on that. I love this industry. I love seeing what happens when we’re able to put great teams together. I would say the last year and a half has been really challenging just because we’ve had a lot of personnel phases as we move people around and expand the teams and change ’em. And sometimes we’re in the muck. It’s hard to remember the end goal. And what’s neat is we’re starting to see some of the benefits of that and winning is fun. And I feel like we’re starting to win and we’re doing it in a way that feels sustainable and that I always wanted to do it. So that’s super exciting.
That’s pretty cool. What idea over the last six months have you been really obsessed with?
I mean, the thing I think about the most is how do we get not just better at hiring, but how do we make hiring? Well, a part of every company’s culture I will put in a plug for a book called Who by Jeff smart. I now read a lot of books on audible reading them audio-wise, but I used to hate business books. I never read a degree. I wouldn’t be doing that stuff. I would read the cliff notes. So I wouldn’t have to read the book and I’m not sure that’s a good thing, but that’s reality. And then I read Who, and it is not like super fun reading, but it is really amazing, I think in terms of Craig and the methodology we’re hiring. But with that methodology comes a certain approach to hiring that I think my background at sales has helped me with part of hiring is creating relationships and selling the people on which you wanna do in your vision, not just hammering them and assessing them.
And in this environment, I think the people who are able to hire the best have a far better chance of winning, particularly in our types of businesses, like we don’t and have some amazing technology. We’re not creating Google and getting a monopoly. So we’re gonna have to do it with people, do it the old-fashioned way, just having the best teams. And so the thing I just think about a lot is like, how can we make hiring a core competency, not just at the Flint level or the GM level, but throughout our whole organization. I don’t know that we’re there yet. And I haven’t really figured it out, but that’s what I spent the most time thinking about.
What are some kernels of that or bits and pieces you’ve seen from either reading who or some of these other books on hiring or companies that hire really well? What are some pieces of those concepts that you’re thinking that might be able to apply at the Flint Group?
I mean, hiring, I think is just a process. It’s a process we use. If you follow it, it tends to act won’t necessarily guarantee you a great hire, but it will do a lot better job of siphoning up bad hires. So if you don’t become, a less person at hiring, if you just use the process, you will get benefit from it. And I don’t know what my hiring rate is, but, or my success rate is, but if it was 33% or 50, I think it’s now 65, 75, which is still sounds awful but is way better. It’s probably double as good as I used to be. So I think the process element is one thing and then I don’t know if it’s that you have to, this is what I’ve been thinking about. I’m trying to figure out, can you train the emotional element of hiring?
Can you train everyone in that or not? Because there are just some people who like, not just following the process, but they like learning about people and they appreciate going through someone’s experiences and what they can learn from that. And I think I’m one of those folks. I’m not sure that’s, everyone’s bailiwick, and I’m trying to figure out if you can actually like maybe you can’t take someone who’s at five in hiring and make them at 10, but can we make ’em like an eight or a seven and that’s what I’ve been trying to figure out or do you just need to find the people who are eight and their role is to hiring and I don’t really, really know yet, but it’s super important for the success of Flint and Guardian and all the stuff that I’m involved in.
I hope you manage to figure it out and we’ll do another episode when you do. Thanks for coming on the podcast. Again, this event was super fun. I always love chatting with you. So I’m glad you’re able to share a few more minutes with us for the show.
Oh, it’s so good to see you and talk to you. And I really appreciate you have been a life-changer for me and I’m really happy for you and really appreciate it.
Well, thank you. That’s very kind of you.
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Collin joins me again to more deeply discuss lessons learned through his career of buying and building HVAC and plumbing businesses across the country.