Buying a Plumbing Business with $2m EBITDA | Doug Johns Interview

Doug Johns, welcome back to Acquiring Minds. Thanks, Will. I'm excited to be a repeat guest. I have been looking forward to having you back on, Doug. We have talked, we've exchanged emails since your original appearance in September '22, and you always bring great perspective on, on our path, on this path of buying a business. So, we have a whole lot to cover today. Let's get right into it. Uh, but Doug, for those who didn't hear your first interview, please, please introduce yourself and your story.

Absolutely. We'll start from where I am sitting now. So, I'm nine quarters into owning a Mr. Rooter Plumbing franchise in Portland, Oregon, and Vancouver, Washington. Just one big territory that crosses a river. And I'm, I'm happy to be on this show, I suppose we'll call and share because so often we hear about people who've just bought. But nine quarters in, I think I'm getting a feeling for it. So, how'd I get into this seat? The high-speed version. I, I grew up as a military kid, moving around the nation, actually the world. And then I joined the Air Force myself. Uh, that was in the '90s. The world was a quiet place, and so my wife and I decided to get out and join the civilian world. I went through a program that puts Junior Military Officers into Fortune 500 companies and found myself at Campbell Soup as a brand manager for nine years. They generously put me through the Wharton Business School while I was there. And then I landed at a US manufacturer of fitness equipment called Precor, and I was there for 13 years doing a variety of primarily go-to-market roles, sales and marketing, and product management, customer service. Uh, thought I might retire there. I loved the organization, but we went through a, a sale process, and I chose not to join the acquirers. And while we were going through that process, I, I don't want to climb the ladder again. I mean, I, I do like big organizations, but wow, I've kind of been in the executive team for over a decade. I don't want to start over. And, uh, my wife and I just had loosely talked about buying a business over the course of the last few decades. Um, but we typed into Google, "How do you buy a business?" And thanks to the power of a search engine, you, I was introduced to Walker Dial's book and the Harvard Business Review guide, which, bizarrely, you know, that two years in business school, I'd never heard about this. You know, and how you actually buy a small business, even though I'd done M&A a couple of times in big businesses. And fast forward, we had about a nine-month process between the official start of our search and closing on the business, and bought this beautiful plumbing company, uh, which at, uh, at the time had been in operation since 1995, had 43 people on the day that we bought it, um, with was doing about 1.8 million in EBITDA. And we purchased that from the retiring owner and wife who had been running it for the last 20 years and slid into, you know, their roles here and, um, joined this team.

Fantastic. Thank you for that refresher, Doug. So, a couple things to, to highlight from your story, which we spent a lot of time on in your first interview, which will be linked to in the notes, and which I actually, which I actually re-aired, uh, last week, the holiday week, um, in, in preparation for this, because I wanted people to hear your episode as close, your first episode as close to this one as possible. Two things were: sizable business for a self-funded searcher, $1.8 million EBITDA. That is people, not revenue. Um, so that, that is, uh, worthy of mention. So, two was the fact that it's a franchise, or franchise resale. So, that was something that I, when, when you first came on, Doug, I hadn't given much attention to. Subsequent to your interview, I've talked to a lot of people who have applied the ETA model to franchising. But yours was one of the first, and, and you really went through the progression that so many people will, will now find familiar, which is kind of anti-franchise, or not interested. And then eventually, uh, when, when an opportunity presented itself, really kind of stress-testing it and looking at it and, and trying to poke holes in it and being unable to, and, and concluding, hey, this is a great business. Um, anything to add to that?

What I'll add is that, you know, nine quarters in, I'm still very pleased to be part of this franchise. And our franchisor is The Neighborly Company. I think it's different than a lot of franchises in that this is a large organization. They have, I think, 29 brands, 5,000 franchises. And so it's, it's a significant organization with good processes and, and a good understanding. Um, I found an interesting niche in all that large company experience that I've got. Uh, I enjoy navigating the leadership of the franchisor and, you know, working with the brand people there, working with the finance people there, to assist my business, but also to coach and assist with other franchisees. So, it's not something that's part of the, I guess, ROI of the investment, but from a personal satisfaction standpoint, I get to dabble in a, a big organization still. Second thing that I maybe didn't mention the first time about the franchise that I've really come to appreciate, though, is the peer groups. So, I've become close with four other Mr. Rooter owners of size. And every month, we send in our, our good market numbers, you know, how many jobs we did, close rates, all this, as well as our P&L information. And we consolidate that into a single benchmarking sheet. And each month, we go through each other's numbers, uh, compare, discuss, what can we do? And we have a list of projects that we're, you know, working on side by side, or someone else is running a project that I'm kind of interested in, and I watch how that's going to happen before I decide to implement. Amazing amount of value to have that openness in that peer group that I don't think I'd have outside of a franchise. Yeah. That said, yeah, you know, I love this one, but if the right business had come along that wasn't a franchise, I would have been pleased to do that too. So, I think both approaches are valid.

Yeah. And just to emphasize your point there about the kind of, um, information transmission that exists within a franchise network and how valuable that is. That's, that's not only something that, that people listening can benefit from if they buy a franchise and become, uh, a franchisee, but also on the outside looking in, through the FDD and other documentation, there's just a lot of information that you can learn about a franchise business or a larger franchise network before you, before you get serious about it. So, so it makes a lot of the research, uh, and kind of understanding of what the business looks like from a financial perspective, uh, way more accessible than in the rest of small business land, where everything is pretty opaque.

That's a really fair point. Uh, when I was going through the financials to do this acquisition, there had been a, a pretty rapid increase in the gross margin percentage over a three or four-year period, and the lenders were somewhat nervous about this. And I was able, through the FDD and some networking with franchisees, find out that that was at the high end of performance, but was replicated by others in this system. And so I could believe in that number as something that I could repeat. And when we get to how it has gone financially, in fact, nine quarters later, my gross margin's 0.2 higher percentage-wise than the previous owner's. We've been able to maintain it. Um, but I got that confidence because of the accessibility of information during the acquisition.

Well, thank you for the segue there, Doug. Let's, let's start, uh, with the, with the, with the dollar signs. This adventure, how does it look financially nine quarters in?

It looks really well. You know, this model works. And I, I feel like I should be starting talking about the team and the customers, but the reality is, you know, for this audience, we are here for economic gain. And I think it's important to hit right up front, does this model work? And, and in my case, we're basically following the textbook. So, I will, I'll share some, some stats, mostly percentages, because I think the absolute dollars are less relevant. Um, so again, nine quarters in, and everything I'll quote is, you know, thankfully we're recording this on the 2nd of January, so I've got a full 2023, uh, which is, which is really nice. So, when we purchased the business, the trailing 12 months of revenue had been 8.8 million, and our 2023, we finished at 10.5 million. So, that's a combined annual growth rate of 8%. Not enormous, but it hasn't gone backwards, and it's certainly healthy, and it's a sustainable growth rate. And I think that's the first, if the Hippocratic Oath applies to buying a business, first, do no harm. I'm quite pleased that in two years, we've actually grown the top line, you know, 8% uh, combined annual growth rate. Gross margin, which is my personal most important metric in a business. If, if you're able to maintain that, know that individual transaction margin, then you've got money to play with. If you're losing profitability at that individual sale level, you know, you're going to get squeezed. And I've, I've been on both sides of this in my business career. So, it's, it's the one that I focus on the most. And our gross margin is, you know, 0.2 percentage point points higher than, uh, the gross margin when we bought it. So, we've been able to maintain that, which I'm excited about. And I, I will use this as a pitch for home services. You know, material inflation over the last nine quarters has been absurd. You know, our parts costs have gone, I mean, during 2022, I raised prices six times. And also something I learned in previous stops in my career, if input costs go up, you just have to raise price. You, you can't worry about it. You got to drive to this gross margin percentage. Well, here we are. Um, the consumers have accepted our price increase every time. The percentage of calls that we close or sell is the exact same today as it was for the 12 months before I bought the business, even though we've raised price probably eight times over the course of the last nine quarters.

And Doug, can I stop you there and ask you why you think that is? Because surely some of your competitors have not been as comfortable as you raising prices. That's why businesses get squeezed in an inflationary environment. Because their inputs go up, but they don't have the confidence to raise prices then on the consumer. So, I assume your comp, some of your competitors are not raising prices on consumers, leaving you more expensive versus them. And yet, you, you still, none of your demand hasn't suffered. Why do you think that is?

Well, I'm going to express the difference between demand and margin. So, demand has suffered. Maybe we'll get into that a little bit later. But home services in 2023, the amount of work has declined. There was a massive bubble post-pandemic. So, yeah, uh, this year, we actually did 5% fewer jobs than we did in the previous year, even though, you know, our revenue went up and we held margin. But why are consumers willing to accept that price? This, uh, theoretical statement, but I, I believe in any industry, if your company is good enough, and you're presenting value, and you know who your consumer is, that you're able to raise price. And it's the number one fear that business people have is raising price. And those who fail to do it, um, lose. In particular, if you don't raise price during times where the entire media is suggesting prices should be going up, an inflationary period, when somebody's going to a restaurant and they see that their hamburger just went up 20%, that's the time to be raising your prices. A great, you have, you have cover from the media. And, and it's real. I mean, it's not, it's real trying to milk somebody here, right? But ultimately, a business needs to maintain a gross margin percentage that is the right healthy level, and you just got to go for it. Um, I will add that this particular industry of home services and service plumbing in, in specifically, has more insulation because the jobs that we get called out to do, somebody's going to have to do it. It's not optional, right? Yeah. And we'll get into that, uh, perhaps, of the consumer emotions of knowing they have a job that somebody has to do, and their fear that they might be taking advantage of. But this is not a luxury purchase. This is a necessity, which is one of the reasons I personally gravitated towards home services and pushed my life savings across the table to join the industry. It is, it is insulated.

Well, we're going to, we are going to spend quite a bit of time on what's going in home services, because yes, insulated, but also hurting, as you've already touched on. So, we'll, we'll spend some time there. But Doug, did you say everything you wanted to about the numbers?

And I think, no, let me, I went off on a tangent there. So, gross margin, we've held. And then this one, I think, is an interesting point, net income. Um, so, you take sales minus cost of goods, minus all the expenses, including depreciation and amortization, which is my favorite expense as an acquisition entrepreneur. You know, in the last two years, we've only made 2% net income. It's 2% of revenue. So, my taxes are really low because my taxable income is small relative to the sales. And that's a full 14 percentage points lower than the previous owner. So, on paper, that looks pretty miserable. But this is the way the model works, right? I've got six or seven percentage points there that's just depreciation amortization. It's a non-cash expense from the asset purchase style, and that's insulating the business and helping us build up cash because we're not having to pay taxes on, you know, on that part. And then, of course, I've got four points of, uh, interest expense from my SBA loan and, and seller note. Um, so, it looks percentage-wise like we're doing miserable. But then if you roll to EBITDA, uh, which I think is the more relevant, the seller had hit his all-time high in the 12 months, uh, before we bought it, and he was at 19%. And this year, we were at 15%. And if you, what's the difference in that? Well, investments that we've made in the business, you know, bringing on more headcount, kind of this classic J-curve that every searcher talks about, putting investments in so that we can zoom ahead. But 15% EBITDA on, you know, a business after nine quarters that's super stable, super healthy. And so, the, you know, the model, the model works. But the last piece of the model is ultimately cash-on-cash returns. And that's, that's what we're all here for. And we have generated cash. And I'm defining that as taking all the money that my wife and I have taken out of the business in compensation, um, plus just super simple, the change in the checking account balances of the business from day one until, uh, December 31st. And that total cash created is 188% of the cash that we put in. So, 1.8x. And if you annualize that, it's an 80% annual return cash on cash. Harvard Business Review red guide, Walker book, that's what they say.

Well, yep, it can work. But before everybody goes and runs out and does this, it still feels to me like it's paper earnings. You know, like, you came and looked outside my window here, my wife's still driving on a 2007 Honda Odyssey, right? And I've got a, I've got a 2004 Chevy Silverado. And we're living in a two-bedroom townhouse. You know, on paper, we're the 1%, but the, the fact is, on top of all that cash generated, you look at my balance sheet, I'm carrying $6.5 million of liabilities, you know, between all the debts and the additional vehicles I've had to buy for the, you know, the business. So, I'm, you know, completely satisfied with these results. You know, I, but I, I've got to warn folks, that's not money in your pocket yet. It's a long-term play. But the cash generated is, is profit that you could take out of the business.

That is correct. Because the, the business, the business's monthly ongoing profits will cover all of the expenses that are coming up monthly. So, you could take, you could take out a million dollars, but you choose not to, out of prudence, is the, is the deal.

Yes. Yeah. I want a strong balance sheet. And, uh, we might cover this later. I admittedly have taken, it's not a, not ashamed of it. We have taken money out of the business. Uh, the biggest tranche of that is buying back the shares. We purchased this through a ROBS rollover for business startups approach, and the C corporation bought back the shares from my 401k. And so, a, you know, round number, $600,000 went back into my 401k to buy that out. And so that's basically like right in my, that is right in myself, a very large check.

Okay. And, um, and when do you think that there, I don't know if there, this is a qualitative question or a quantitative question, but when do you think there's a tipping point where all of a sudden those paper gains feel like real gains, and you don't feel like, yeah, for me, that would be when I feel like I could sell the business and walk away with some financial gains, some significant financial gains. And right now, if I, you know, since the EBITDA has, um, has dropped about $100,000 in real dollar terms from when I bought it, if I found a buyer who was willing to pay the exact same multiple I did for the current EBITDA, and then I paid the transaction fees to a broker, and then I paid a little bit to the franchisor, I would still need to put a million dollars back in to cover all the liabilities on the balance sheet. And, you know, there's things on there that most searchers don't think about. But after, you know, after owning the business for this while, I've got a huge amount of paid time off that I would owe people if I sold the business. You know, it's a couple hundred grand in there because of how many employees we have. So, if I sold the business today for the same multiple, I'd have to write a million-dollar check to walk away free and clear. So, emotionally, I think I'll feel like this is stable when I could run the numbers and say, yeah, I could sell the business, and that sale would cover it, and I'd walk away with some money. I believe that's at least five years. Um, it's really going to look good, of course, at the end of the SBA term, at the 10-year point. Um, this is a long play game. And for us, so far, it's working really well, and I have confidence it'll continue to work well. But you cannot buy one of these businesses, unless you're one of the lucky searchers who buys something small and has a brilliant idea and is able to, you know, multiply the business to 3x. But, you know, here at the 8% respectable level, it's going to take us at least a half a decade before I think we could exit comfortably. I'm happy with that, but we are all in for a long time.

Yeah. Well, there's so much there, Doug. One thing, I just, top of mind is, you know, you, the size of your business is enviable when you bought it, 1.8 million in EBITDA. 1.8 million in EBITDA, okay, everybody. So, we always talk about kind of 2 million and below being like where private equity doesn't go. That's a very, um, imprecise threshold, but that's, whatever the number you hear bandied about. So, you were bumping, bumping right up against that. Very few of my guests have bought a business with so much, so that was cash flowing so much or so, so profitable. Um, and that's so, that's wonderful. Uh, at first blush, but there is, there is, I guess, a wrinkle to that, which is that it's probably going to be harder to grow. It's probably going to be slower growing. If you buy that $300,000 EBITDA business, fragile, like we know all the flaws to doing that, or, you know, all the all the dangers of doing that, but it's much easier to double that EBITDA than to double your EBITDA. Um, so, any, anything you want to respond to with that?

I think that's a fair observation. And yeah, I'm still, still in the camp of, buy the largest business that you can. Uh, I've, I've modified that a little bit from the books, though. Buy the largest business that you can purchase and responsibly operate. Um, you know, I, I would not, you know, if I had had investors and money and whatever, but I was my 30-year-old self, I would not have been ready to run this organization, uh, to lead it, to get the results that we've gotten so far, or even have the, uh, the time to do it. There's, you know, my wife and I are, we've got a 20-year-old and a 23-year-old. So, we can be all in on this. If I had even been 10 years ago, and I was trying to participate in youth sports and, you know, be there for all these events, um, I don't think I could be doing what I'm doing right now. This is a full-on, life-consuming job, even with managers. You know, we got 50, as of three new people started today, got 53 team members. They're amazing. I'm putting in 60 hours a week, and it's not in minutia, right? I'm not out turning wrenches. I'm, you know, I'm doing things that are very strategic. I'm working on pricing. I'm, I won't run the list, but I'm, I'm doing things that are high up the management pyramid. I'm putting in 60 hours a week. Yeah. And I love it. I absolutely love it. It is the best time I've had in my entire career, and it's been great for our family, and my wife's enjoying it, and for us as empty nesters to be doing this together and have something to work on and take care of the team that's here. I mean, this is the best thing that I have ever done professionally. But don't follow my path blindly.

Well, uh, I, I'm going to ask you to elaborate on your enthusiasm there, Doug, but before we do, I just want to make sure I don't lose my questions to what we were talking about before the, you're shoring up your balance sheet, which is why you haven't taken more money out of the business, which you probably could have. Why are you, are you just, is there a tactical reason that you're keeping, uh, big dollar amounts in the bank account versus paying down your loan faster? How, how does one decide that?

Yeah, I've debated that every couple of months for sure. Um, because with, right now, my SBA loan is around 11%. That'd be, you know, it started out at six. Um, so when, by the way, when the banks tell you you need a debt service coverage ratio of, you know, almost two, some of them say they're, I've certainly lived the importance of that. We're fine. We got plenty of cash to pay our loan. Everything is great. But, you know, that, uh, going from 6% to 11% is a, a pretty good shock to the system. Yeah. Back to why haven't I paid down that loan? Uh, I'd say two things, three things. One is, I just, I do like the security of having the cash there. If something bad happens, you know, I can drop a couple hundred grand on the problem. Um, number two, leverage does work. It's, you know, it's how we buy these businesses, but it's also, for example, I've got a fleet of over 40 vehicles. Um, I've got to buy in the last year, I've bought seven vehicles. I've put them all on financing. I could have bought them with cash, but ultimately, you want to spread that cash flow out. And the payments on seven vehicles is, you know, probably about the same as purchasing one vehicle outright. And then those vehicles are generating cash. So, you know, I believe in leverage, and so I'm using it. And then the third one, maybe a bit of ambition here, but I could imagine making additional acquisitions. And so I need to build up cash to be able to do that.

Great. Thank you, Doug. And then back to my question about when do you think the, the, um, the tipping point will be in terms of actually having real cash coming out of the business comfortably, etc.? Do you have a sense of when that will happen? You said, of course, at the end of 10 years, at the end of your loan, when you're, when you've paid off your whole loan, that's, that's a big giant huge obvious threshold for anybody who buys a business with an SBA loan. But, but I suspect it'll, it'll happen sooner than that. Do, do you have a sense of, of like, will year four, year seven be the, a magical year where there's this tipping point?

Yeah, my wife's going to be upset that you ask that question because now I'm going to go spend three hours in a spreadsheet trying to figure out when that point is going to be. Okay, so I'm going to start with one important caveat. Uh, I suppose for that listener out there, look, I do recognize that what we're talking about here is a guy sitting on top of a business that generates over a million dollars a year. And like, Will, I feel comfortable. Like, look, I'm, I happen to be born in the greatest nation of free people in the world at the right time in human history with the SBA program. Like, I am sitting in such a fortunate spot. So, I don't want to make it sound like I'm nervous or, uh, ungrateful, you know, when I've got all this cash floating around. But mathematically, I think after about five years, if we can continue this, uh, stable growth and maintain our margins, then we're going to be in a position where, uh, the amount of cash that the business is generating relative to all the liabilities, um, is going to feel more comfortable. And I'll have that psychological piece of knowing I could sell this business right now if I needed to, had to, wanted to, and I could walk away with, you know, some, uh, some comfort.

Great. Thank you, Doug. And I just want to, before we kind of move on, um, from the kind of the financial piece or the, the very, um, kind of quantitative, uh, aspect of all this, just a great quote you emailed me, um, which I think distills a lot of this from your words. "We love business ownership, and we sleep fine, but we also strongly advise the curious that this high-wire act is not suited for the dilettante or the weak of heart. For those who are capable, committed business leaders and fully comprehend the model, however, ETA is the ultimate life hack that grants access to what feels like a secret career and lifestyle hiding in plain sight." I think, Doug, I will make that the motto of Acquiring Minds. That was so concisely well put.

All right. Well, maybe I stumbled into some wisdom there. Okay. All right. Well, let's, let's hear then more about the qualitative aspect. So, you have said that you, you love this. It's the, it's the, the most fulfilling part of your career to date. Uh, tell, tell us more. What does life look like for you these days? How has it changed?

In so many ways, uh, both in our personal lives and, and at work. So, just in no particular order, I'll rattle off a few things we're really enjoying. One, just for me, as a leader and a business person, is autonomy and control. And anyone who's listening to this podcast has got to have some level of, uh, ego and think, hey, I can do things, I can get things done. And probably has had that career experience like, no, this idea is brilliant. You know, you may not have appreciated the 25 PowerPoint slides that you forced me to create to try and convince you of that, but we should really be doing this. You know, that's not my life anymore. And by the way, I had great organizations. Uh, so if any of my former team members are listening, that was an academic statement. But here, my managers and I, and we get together, we sit around this beautiful $150 Craigslist conference table that I bought. We discuss what needs to happen. And yes, we're going to go buy a new excavator. Okay, next week, we own a new excavator, right? There's no, it's so the, the speed, the control, the autonomy, uh, is invigorating, and it's fun. It's also high-stakes, you know, you might make the wrong call, but you know, who doesn't want to have their destiny, uh, you know, their hands on the wheel? So, I'm loving that part of it. Yep. The other piece, an additional piece that I really enjoy is being close to the team. And, and I've appreciated that in my previous leadership roles, all the way from the, you know, my military days up, up through my executive times. I don't know, it's just a little bit different when I'm the owner, and I can be with this team and kind of know that the direct efforts that we're making are impacting these folks' lives. And we have the, you know, the summer picnic, and they bring their kids, and we're playing cornhole. You know, it's kind of simple stuff. But, you know, I had, uh, just yesterday, I was in on New Year's Day, uh, doing some work, and we don't close. So, one of the technicians came in between jobs, and I was chatting him up, and he just kind of opened up about how much he enjoys this kind of work. And he had, this is one of the secrets, blue-collar doesn't mean uneducated. Um, you know, this fellow has a four-year college degree. He'd gone to school with the thought he was going to be a nurse, really, someone who wants to contribute and help others. And he got down that path and realized that kind of the administration of hospitals and the work life of the doctors and nurses was unattractive to him. And so he didn't choose that path, and he ended up doing something else, and eventually landed at us. And here we are, he's talking just about how he loves going into people's homes and solving their problems and taking care of them. But then at the end of the day, being done, finished with his work, he doesn't have any duties and going home and enjoying his family. And he went on with some really generous specifics about the leaders here, not me, but his supervisor, and how they take care of him. And that is the ultimate warm, you know, leadership piece. And like, wow, I'm, I'm working with these folks and doing my best to provide an environment where people enjoy being part of the team and, and love what they're doing. And collectively, we're doing work that matters and helps people. That's the biggest win.

Great. Thank you for that, Doug. And, and what about two, two parts to this question, but becoming part of the community? That's something that you and I spoke about a few weeks ago, that, uh, it, it, that's kind of one of the very, um, key differences between a corporate career and a small business career. Small business, you're, uh, you know, you're on Main Street. That's kind of another, another colloquialism for this path. Talk to me about that.

Very much so. And I suppose it's all maybe varied by industry or, or business type, but what I'm finding is that there's not a lot of separation between me and the business in any aspect, including out in public. And, okay, I could wear different clothes, but I pretty much wear my branded jacket, you know, and shirt everywhere we go.

And for those listening to the pod and not watching it on YouTube, Doug is in his Mr. Rooter shirt, as he was back in September 2022. So, I don't, I get the feeling this shirt doesn't come off.

No. Why not? I'm a simple guy. I've got three shirts now and two pairs of jeans, and that's all I need. Um, you know, the tech guys wear their black brooding t-shirts. I've got this, you know, red branded one. But, um, yeah, so our, our office, our main office is in, we're outside of Portland in a town of about 10,000 people. Um, our office is in a building that was constructed in 1862. It's been the plumbing shop for the last 20 years. We go to the same restaurant every Monday night at about the same time. We're seeing, seems like about a third of the people in the restaurant that night are the same every week. And, and I've had people come up to me, true stories, in the restaurant and ask me about their plumbing, which is a little awkward because I'm not a plumber. Um, but I can, I have no idea, guy, but I know a guy. I really know a guy. Yeah. Yeah. Um, we, we had a woman write in one of the Google reviews about meeting me in a restaurant. Oh, you know, so, and then, you know, the local trailing team from the high school is going to come by when you're a small business and say, hey, will you please, you know, sponsor our trip to the state capital for the championships? And the local, you know, baseball team's going to want you to put your name on a banner on the outfield fence. And, um, you know, the guy across the street who runs the auto shop that works on all of our trucks, like, I, I walk over there every Monday and personally hand him the check for last week's, you know, jobs, and we hang out for 20 minutes and talk about the weather, uh, or transmissions. And it's just a, and, uh, one, one more, a bit of this kind of small town nirvana, I guess, is we've chosen, uh, to rebuild a house that's 100 yards from our business. And I'm putting together the ultimate work-from-home lifestyle. So, we're, we're putting some money into the place and, uh, turn, it's a 75-year-old house, so we're, we're redoing a lot of it. But when it's done, I'm going to wake up in the morning, walk over to the shop, see the technicians before they dispatch for the day, walk around, have a presence, pat some guys on the back, congratulate them on things, fire them up, then go home and have breakfast, uh, and work out. So, it's a total lifestyle integration. I don't think everyone would want to go that path, but it's cool. And our neighbors, you know, previously I lived in Seattle, and every one of my neighbors was like, Microsoft, Amazon, you know, million-dollar homes, kind of deal. In my new neighborhood, uh, the guy next door runs a CNC machine in a factory. Uh, the one across the street, she cuts hair for a living in her garage. The guy across my back fence is an owner-operator trucker. Um, wonderful people, honestly. I know more of their names than I knew the names of my neighbors in my million-dollar house neighborhood. And, uh, they all just see us as plumbers. It's, hope I'm not posing as what I'm not, but it's, it's a really enjoyable kind of thing. I feel like a different part of society has opened up. I, I get a lot more like friendly looks and support walking around with the shirt on as a plumbing company on Earth than I did as an executive, that's for sure.

Well, this is, I find this just so fascinating, um, from your kind of personal story perspective, but also, I just feel like that you're tapping into, kind of, a profound truth about America that, kind of, two Americas that we all, uh, hear so much about, not necessarily red and blue, but blue-collar, white-collar, coastal, not. And, and I know you have, you're still liv, whatever, living on the West Coast, so, but, but, you know, however you want to frame the two Americas, you seem to have jumped from one to the other. And, and a lot of the, you know, in the former America, where there's maybe more money and, and, um, it's more corporate, it's also more alienated, at least your experience was, you don't know your neighbors' names. Now you do. And it also feels, it also feels a little bit like, you know, maybe-esque, which is a euphemism for old-fashioned. And I don't mean old-fashioned in a, in a derogatory way, derogatory way, I just mean like, I'm, it just, it's not a picture of America that you hear so much about anymore. That might be my own bias or my own ignorance that I'm not in those communities, and they're everywhere. I'm, you know, I'm, you know, I'm in DC suburb, San Francisco, so that just might be my own bias. But anyway, I, I, I love it. And, and I love that you're able to now speak to both of it, and how much you're enjoying, kind of, this discovery, for a better word, of, of another side of America. Anything to add to that?

I'll add two things. One is, there is, it is pretty humorous because many of you know my, my peer group from my previous employment and the people that I was spending a lot of time with, um, you know, we all went home during the pandemic and started learning how to use Microsoft Teams and, you know, doing these things. My peer group now is like, yeah, all those, you know, we never stopped working. You know, we were going into people's houses after the first week because their stuff still needed to be fixed, right? And it's like, hey, it's great if you guys want to work from home, but this is where the real work happens. There's, it's like a, a real, and it's a positive thing. I'm not telling you that there is a divide between, like, my blue-collar team members and their white-collar neighbors. I, I don't hear any us and them commentary. But there is some chuckling, like, oh, really? It must be really hard to work from home. You know, like, try turning a wrench. You know, it's okay, come out, you're, you're all right. Take the mask on and join off and join the world. But the second piece that I'll add is, make no mistake, there's money out here, right? And that's, that's the core of this whole ETA. I mean, ETA are all, they may not buy trades businesses, but ETA is definitely buying small businesses. And this is the secret good America hack. This is where the money is, you know, it's in business ownership. Um, I was a pretty senior executive flying around the world, eating at nice restaurants, and, you know, doing glamorous looking things. Even though I haven't cashed it out, I'm making more money now than I did then. And the guy down the street, um, I'm not going to name him, but who owns an independent HVAC shop that I've become friends with, that guy's owned that business for 25 years. He's got three houses, you know, and goes to work in jeans every day and drives a pickup truck. He's now, I am admittedly, when I talk about these other business owners, that is the, if you will, the, the elite of blue-collar. Right? This is totally different than the guy that's 10 houses down for me, that is a one-off plumber that is going in, isn't pricing his things right, is getting no benefits. He's got the feeling of freedom of being an individual owner-operator, but, um, he's not going to have anything when he stops working, or if he takes a vacation, he's not going to get paid. So, anybody who's listening to this phone call or this, this call, it's, we are still talking about being in a rarified strata, even in the blue-collar world.

Tell me a little bit about how some of these other SMB owners that you've met locally, become friends with, get, get the inbound from people wanting to buy their businesses, and how they react.

Yeah, that is, that is funny. I, um, so I've become a member of the Plumbing, Heating, and Cooling Contractors Association, which is, as you would imagine, a bunch of owners of these small businesses. And I like the concept of weighing into an industry. I'm also learning from it. Uh, last year, they had an event, and six of us went out to dinner at a, I'll generously call it a steakhouse, but this is a place, you know, that has a plywood door and one step above sawdust on the floor. So, we go in there, and we're getting these, you know, bone-in ribeyes. And the other five guys all came up in the trades. And I, I have to add, I have been, at least, you know, by the larger owners that I've met, I've been very well accepted. No one has said, oh, you know, now I don't walk in and say, let me tell you about my Wharton MBA, right? You know, I don't lead with any of that. I'm driving an old truck and wearing this shirt and jeans. But nonetheless, they ultimately know my background, and I've been very accepted because the, the trades people that I'm getting to know, they appreciate my business background. And they'll say, wow, I wish I had some of those skills to take my business to the next level, right? So, it's, it's been a nice thing. Anyway, we're sitting in there, and we got around to the topic. What we were talking about in that sawdust-on-the-floor steak restaurant was EBITDA multiples and private equity. Like, anybody who owns a trades business that makes more than $500,000 in EBITDA knows the game. They're getting emails all the time. They had heard the phrases like, we were sitting around laughing about, you know, youngsters coming in and talking about multiple arbitrage and dry powder and all these phrases that, you know, kind of get used in the PE world. They know all this stuff. They, they're like, the, maybe a, but they're like the prettiest girl to dance. She knows it, right? And so, um, they generally don't even respond. I get emails all the time, ridiculous ChatGPT written drivel that comes into me probably once a month from somebody looking to buy businesses. Obviously, I don't reply. But they do accept you. And which is a, a second, a side point to, to what I wanted to the point that you just made, but, just let's double-click on that. They do accept you even though you're not one of them. You didn't come up in the trades. They might not know that you have the Wharton pedigree and stuff like that, but they do see you as somebody who came from corporate. Probably they know that much about you. And yet, they still accept you. And why do you think that is? Why, why when they're kind of laughing at these, these inbound from these people who want to buy their business, you are at least, at least superficially that persona. So, so, and yet, you're sitting there joking with them about that very phenomenon. So, so why do they accept you?

Well, maybe I just have really low EQ and I don't realize they're making fun of me behind my back. But I think the reason that I feel accepted is, one, the people I'm interacting with are the ones that have solid businesses. You know, I'm, I'm not hanging out at the, uh, parts store talking about plumbing with a, a one-off guy, right? And I probably couldn't pull that off. I mean, as, hopefully, as a decent human being, I could do that, but we wouldn't have something to connect on. So, they are business owners. That's important. Yeah. But then the second one is, it's physically obvious that my wife and I are all in. We've moved into our community. We are at the business all the time. I'm wearing my logo, just like they wear their logos. And I've invested like, I, I've read the plumbing code. Like, I'm not a plumber. I don't try and pull that off, but I do know a lot about it now, right? I can, I can have industry-level discussions with anybody. And so, I think they can see that there's that commitment. I have sponsored, you know, local things. That's probably the difference. If I were a capital allocator, uh, and a hold co-master, which, hey, great for people who want to take that path, it's viable too, but I don't think I'd have these one-on-one interactions that would be as positive.

Doug, you characterized, uh, your integration in the community, or kind of the, this, this picture you painted of how, how integrated you are, as nirvana. And you, you made it clear that you really enjoy it. But, you know, you said it might not be for everybody. You know, there are, you know, there are the, the random approaches at the, the dinner table when you're out to, out to a meal with your wife. There's the local, the, the high.

School team wanting you to sponsor Stuff Etc. Um, so I, I, I just imagine I'm getting a feel of kind of of kind of being exposed a little bit, and, and, you know, that's kind of the nature of small town life anyway. Uh, a lot of people will say whether or not you're an SMB owner in the community. Um, but just say a little bit more so it's not too romanticized, because if it's, if you didn't like it, you might really not like it. Say, say more about people who need to understand truly what this, you know, what they're get signing up for if they move into a small town and buy a local business.

Yeah, and, and I don't want to take the small town piece too far. You know, I, I've got two and a half PE, two and a half million people on my market, Portland, Vancouver, nuts, where my particular shop is and where I'm spending my time is a small place. Yeah, but good clarification. Yeah, a couple of points to unpack there. One is the like buying one of these businesses. We already went through the numbers, and it's probably going to take, this is, you know, just short of a marriage in terms of the commitment. You know, you, you take on a, a job at a new company, and you decide you don't like it, you can be out of there in two weeks and got a new gig and two more, and that's just not possible with one of these acquisitions, um, without extreme pain, particularly for somebody who's further along and has a bunch of assets, right? I, the bank's got a, right, everything that my wife and I have accumulated over 50 years, um, we have to make this work. And so there's a, a level of pressure. Yes, it's fun, it's invigorating, but there is this looming, we must make this work. It's, there's no middle ground. And I have met people in on the trades side, um, who've acquired businesses that haven't had the results that we are. Um, I know one person who is a West Point graduate with a Harvard MBA, and his business has floundered, and he's not sure how to get out of it. And his partner even moved to a different part of the country where they want to live, but he feels like he can't leave, um, because the financial performance of the business has been so poor. And know the industry overall is really resilient, but individuals can fail. And so there's, you know, just no coming into this that there's that weight. There's also, um, an emotional weight of being, maybe this is just my approach, but being so personally tied to something, even as an executive where I had been there 13 years, and I cared greatly about the company. Ultimately, I could say, well, our results this year, you know, if that guy over in that division had done a better job, right? No, it's all on the owner. Total ownership in this case. And, uh, I'll give you an emotional example of this, being in a customer facing business that gets Google reviews. I, at least I open up that review and I feel like it's being written about me, even when, even when your name isn't actually included in the review, even when it's not in there. And, U, you know, I'll tell this story quickly. It's, uh, about the trades, but so many people are looking at it, it's instructive. So when we go into a home, we have an interesting situation. Um, we're selling something in service plumbing that the person needs, but doesn't want. Nobody woke up that day and said, oh, I hope I can spend $1,000 to fix this leaky pipe, right? We are dealing with a customer who underestimates the scope of their issue, like, oh, can't I just pour some Drano in here, right? Or, you know, a snake. They have no concept that there may be some clog 40 feet down the pipe that requires special tooling to remove. They have no anchor price reference because they haven't purchased this service maybe ever. Um, and there's no published prices out there. So they might think it's going to be $100, and it comes in at $600. Um, you're often dealing with, uh, emotions, and, uh, usually it's from the man. So many of the men, when we show up at the house, you're feeling emasculated because they can't fix this, right? Yeah. Um, they may, and it's not uncommon that he actually tried. My, my, uh, director of operations has a sign in his office. It says, I'm here to repair what, what your husband tried to fix. Right? Now, we don't, we don't say that to the customer, obviously, but, you know, this is emotionally charged. Um, you're going into someone's house who wasn't expecting anyone to be there. We see some really interesting things, right? So that person may feel exposed, vulnerable, embarrassed. So all this is what we're walking into, and then they're going to write a review about that experience. Um, and two different people, I, I'll read you to this. This is the exact same job done by the, uh, two different technicians, but for the same price. It's clearing a drain. And both of these, you know, they hit my phone as soon as the Google review was posted. Of course, I look at it right away. And so the, you know, the first one writes, my kitchen sink backed up this morning. I called Mr. Rutter, and they sent Colby out. He was amazing. He offered me the choices, and I went with the power flush. About 1 hour later, all my drains were clean and functioning like new. I highly recommend Mr. Rutter and Colby. This person spent $650 with us and we were there for an hour, and they are delighted, right? Mhm. The next day, same job, different technician, different home, but same price, same thing. And the guy writes, I really wish I was making this up. My drain clo, I called Mr. Rutter. According to my security cameras, he was on site for 1 hour and 13 minutes. In other words, to clean my pipe, Mr. Rutter charged $629.99 an hour. What can I say? They got me. Mr. Rutter will say correctly that they told me the cost, and I agreed to it. But I was out of town. My wife was alone. It was a Saturday, and I was rattled and anxious. Why would Mr. Rutter do this? Was it worth the loss of a customer for a one-time profit? I was a chump. My fault. Never again. So Saturday night, I'm out to dinner with my wife, rudely looking at my phone because it shakes. I read this. I am a scoundrel. Oh my gosh, am I taking advantage of this guy like that? Close $600 an hour. This is absurd. What, what kind of raging capitalist have I become, right? You know, this is, you're going to, as a small business owner, you're going to potentially, if you're exposed to consumers, you just, you know, it's hard not to think about that. Now, to finish that story out, I always just go back to the numbers, and I talk to my team about this every six months because they can get this kind of thing. 99% of customers are really happy. Right? We've got huge reviews, they're all great. But you get one of these guys, and it hits you emotionally. Well, you know, last year, our EBITDA percentage of sales was 15%. Over the last decade, the EBITDA percent of the S&P 500 goes between 18 and 20. The Russell 2000 smaller stocks was between 12 and 13. So I, all right, I know I'm running a business reasonably. And that person that we just went in to serve likely has their life savings put in the S&P 500 index fund, like most Americans, and they expect their retirement to be in companies that's making 18 to 20% EBITDA. We're making 15. So no, this isn't unreasonable. No, I'm not a, you know, capitalist overlord that's doing things wrong. And then I calm down and I move on. Anyway, long story, but interesting emotional side of, uh, of this. And, and Doug, that was actually a wonderful illustration, just gold.

Do you think though that you are developing a thicker skin? Have you seen that in yourself, or is it still, is two years still too soon?

I am, I am developing a thicker skin, and I'm trying to guard against that as well, because one of the risks, and I have seen this, is when the business owner immediately jumps to, now those customers are wrong. You know, so I'm trying to follow this balance. You know, I don't have a sign up in the shop that says the customer is always right, because that's a lie, right? Yeah. Um, but I, I do believe you should go in with the old Coby, uh, begin with, assume positive intent. Yeah. And the fact is, I can screw up, my guys screw up, we do 10,000 jobs a year, some of those we're going to make a mistake. Um, I might even have, and I had one that we fired. I had an employee who was, you know, prescribing solutions that were not required in order to get higher sales. And thankfully, we have such great data, we're able to see these anomalies and then coach them, monitor them, and ultimately fire them. Uh, um, so yeah, sometimes, often the customer is, sometimes the customer is right. Often the customer has a reasonable emotional reason for the way they respond. I mean, they're in a bad spot. And then a few times, you know, you get people trying to take advantage of you. I had, uh, last week, we had someone try and fake an accident with one of my trucks for an insurance claim. You know, they pulled up behind our truck, got out, hollered at the guy, said, get away from my house. Was not a customer, was like a next door neighbor. And then, uh, he started to back up because it was parallel parking, and she blared her horn and jumped out and said, you just hit my truck. Well, thankfully, we've got cameras, and it, we can prove that no, we didn't back into her car, but, you know, yeah, there's, you just deal with some wild stuff when you're out in the public. Yeah.

I, I always think of that as one of the, um, huge, huge differentiators between B2B businesses and B2C businesses. You know, we often times think about that in kind of financial terms, B2C is going to tend to be, you know, higher volume, etc., lower margin, whatever. B2B is more likely to be recurring and so on. But, but it's also like the quality of your customer. If you're dealing with a business person, it's going to be so much higher than if you're dealing with the general public. Uh, forgive me, everybody listening who's part of the general public, which is all of us, but let's be honest, a public public ain't pretty sometimes, particularly when you're going to someone's home. I had one of my top technicians got pushed down a flight of stairs last year by an, by an angry husband. Wow. He didn't like the price. Wow. Hope, hope he's okay. He was fine, um, shaken, but, you know, he was, he was physically fine. And, you know, we, we worked through that. But again, though, 99% of the people we serve are just delighted that we're there, and it's a wonderful experience. It's just those stories, you know, the story of the lady walking down the street and bringing cookies to the customer service representatives is is nice, but it's not perhaps as entertaining as some of the wild, wild negative ones.

Well, and one other just little small point to make here that I'm reminded of is if you're in a B2C business, um, one other way to think about it is, are you in a business where you're serving the consumer on your territory, or you're going into their territory? So if it's, you know, a retail store, you can kind of control the environment to a degree, which is great, but then you have the public entering your space, and, and there can be issues there, versus your business, Doug, where you're going into the consumer territory, namely their homes, and as we've just heard, there can be issues there as well. So pick your poison. Neither, neither great.

Okay, Doug, let's, let's move on here. There are a couple, um, uh, big, big topics I still want to get to. First is, um, just a little bit more on your lifestyle, or maybe more than a little bit. You've referred now to your wife a number of times. She's involved with you in the business. To what degree? Give us a picture of that in, in your, and kind of your, your partnership and what all that looks like.

Yeah, and she's not eager to jump on camera, or I would, you know, pull her, pull her over here. Um, so we've been together since I was 19 and she was 20, and now we're, you know, early 50s. So it's pretty hard for me to even remember a time before we were together. She has a master's degree in civil engineering and is a super capable lady. As we, uh, were looking at buying a business, she made the generous commitment to go back to community college and pick up an accounting certificate because we recognize that I've got strong finance skills, but I've never, you know, done accounting, and we didn't know what size business we were going to get. And just, you know, protecting and understanding the cash was so important. So we just committed to do that together, and she went back with a bunch of 20-year-olds to community college. So now her role in the business, um, in the first two years that we owned it, she worked maybe 20% you know, of the time. And we didn't repeat that story, but we continued to own our home in Seattle for two years and commuted down here. Um, I was physically on site for a little less than half the time, and I measured that so I could maintain my Washington residency. Um, but now that our kids are doing their things, uh, we're, we're here full-time. Anyway, during those first two years, she primarily did high-level financials, um, and what about four months ago, we lost our bookkeeper, and there's no backup. I mean, there's one other director of business operations here that can do it, but she's got duties. So now Georgina's been full-time bookkeeper while we find the right perfect fit. And what an amazing blessing to have her ability to step in and do that. Now, on the flip side, she already had her other duties plus that, and so for the last four months, you know, she's been working probably 10-hour days. And we, we've got great candidates here, we're going to get out of that soon. But when you're, even though 50 person is a big small company, it's not big enough that when you lose a key role, you got something to fill the gap.

What about this, this aspect of, uh, how much, how integrated this business has become in your identity and your day-to-day and moment to moment? And now Georgina being much more involved, only only serves to, you know, capture you more. Poor choice of words. It, it is true. Uh, we're, we're all in. I mean, when we go to dinner on Monday night at that tire restaurant I referenced, we pretty much talk about the business. Um, we've got other fun and exciting things in our lives too, but we, we designate that Monday, um, as a business dinner and discussion. Um, and when both of us are working full-time at something, I mean, it, it's a lot of what we talk about. Um, I know other, in fact, I know quite a few, um, husband-wife combos in these trades businesses. They, they often start that way, where you've got the technician, and then the wife answers the phone, and maybe the son becomes an apprentice, right? And the, and the family is that way. But even the bigger ones, um, I know quite a few married couples that are both in it. It doesn't have to be, obviously, I've got some friends where the wife is completely not involved, um, and maybe even does her own thing. But it's, it's pretty common. We like it, and maybe it's just, uh, the life stage thing that now we're, you know, in our early empty nester years, it gives us something mutually to to work on. And for me, it's a heck of a lot better than watching TV. So, you know, that's my personality. I'm a driven guy. I want to build stuff. I want to work on it. And so it's invigorating. But we, let me not make it sound, uh, like it's all, you know, the grind. Said, as, as my son would say, you know, I've probably taken, I, I probably took seven weeks of full-on vacation this year. And because we do have a management layer in place, um, and I could work a lot less if I just wanted things to coast, I would not feel comfortable with that because there's so much at stake, and I enjoy it. But to be clear, this 60 hours a week that you're putting in when you're not vacationing for seven weeks, yeah, is, is working on the business in kind of growth forward oriented as opposed to keeping things together with your bare hands.

100%. Yeah. No one needs me on a daily basis. Yeah. And so a lot of the things that I do on the business wouldn't have to physically be here either. You know, the first two years, like I said, I was physically present less than half the time. Yeah. Yeah. And great. We do have, admittedly, a, in a longer term vision of a couple of years from now, not putting in those kind of hours, um, and having, you know, doing a bit more traveling. And, uh, and I see a path to that, but we've got a couple more, uh, management roles to fill and develop and train before that can happen.

Is, uh, what I, I, this isn't a polished statement, but it's what I've been using with my team. This is currently a 50-person operation that runs like a 10-person shop, and we need to start running like a 100-person business. I, it's a, you know, the previous owner did a great job with culture and with the financials and taking care of customers, but he didn't even have a bookkeeper. I, he, there was only, you know, we've promoted multiple leaders of people from within in the last two years, and you can't see my whiteboard over here, but there's a, there's an org chart over here that we created 90 days in with a vision for what this org chart should look like in five years, and we're marching towards it, and people are excited because they're getting career progression and roles. But right now, I'm in the midst of building and coaching all that.

Well, and it also sounds like you might actually want to acquire some growth as well, which is correct. You know, starts the clock over because then you're on a new acquisition that you got to transition, grow, make sure everything is good. Yeah. I love doing this. So, you know, for people who love leadership and love business, this is a great path. Great.

Doug, two more big topics. One bigger than the other. Let's do the little one first, the ROBS. So this isn't going to be, um, super relevant for a lot of people, uh, but it's going to be extremely relevant for those who are considering ROBS. You, you touched on it briefly, but let's give just a couple minutes to your original ROBS structure and then how you bought your ROBS out. Because as I know from our exchanges over the last year and a half, that was something so esoteric that even your, your ROBS provider didn't quite know how to, to, to help you do that. But in doing so, it's allowed you to kind of surmount one of the reasons people don't like ROBS, which is your 401k owns the business or owns a material part of the business, and now that's no longer the case. Anyway, I'm getting ahead. Please, let, let's give a few minutes to this for the people who, who are ROBS curious.

Oh, very good. Okay. So, uh, the way the ROBS structure works is the acquirer creates a C corporation. That's an important component. Um, that C corporation then has a 401K. This is even before the asset purchase of the acquisition. The entrepreneurship, you know, acquisition entrepreneur puts in personal cash onto the balance sheet, and then sells shares to the 401K. So more cash goes on the balance sheet, and then that cash is used as the equity injection in the acquisition. Um, the beauty of that is to be able to tap money that usually you can't. We chose that path because I didn't want to liquidate every ounce of cash I had outside of my retirement fund. I, I wanted some safety and security. The downsides of that from my perspective were that as a C corporation, we're in a different tax style, and so if I take money out of the business, um, I was, you know, uh, paying tax on that, as well as the, the earnings of the business also under the ROBS structure, the C corporation is not allowed to do business with related businesses. So if I want to own real estate, I can't own real estate in a separate LLC and lease it back, and that's part of our, our plan. And then probably the biggest one is, if you want to take money out of the business, the percentage of the shares owned by the 401K, all, you know, that percentage of the dividend has to go into the 401K. So it kind of gets your cash locked up.

We, Doug, quick question. How much of the business is owned by the 401K at acquisition?

So in my case, we're very careful with this, and it was 49%. And I was advised by a person who does valuations for buybacks that going through the, the buyback process, you have to, uh, get an appraisal for the shares of the business, and you're going to sell the shares back. And if the shares are less than half of the total business, then they are less valuable because they don't have control. Why an investor come in and buy 49% of a company, um, and, you know, a private, you know, non-traded company, um, that would be a risky move? So I was advised that when it came time for valuation, those shares would be worth less than 49% of the total aggregate of the business, which would make my, the amount of cash I'd have to put in to buy the shares back lower. And thankfully, we had that advice, and we were in a financial position we could do it. I think most people who use ROBS, the prototypical is a guy who buys a Subway franchise, and it's 95% funded by the ROBS, and he just plans to, that's the only way he can do it. We were in a different spot. So we did buy it out. And the way that worked was, uh, in the first year of the business, I really stockpiled cash. We didn't buy vehicles, we really scrimped by, built up the balance sheet. Then we paid for a third-party valuation, um, of the ship, as required by the IRS, and we moved that amount of money into the 401K. The shares were retired, and then, uh, at that point, Georgina was the 100% owner of our C corporation because she owned the 51% previously. Now she owned the whole thing. And, and we converted to an S corporation, uh, so now we're a pass-through entity, like most searchers want to be. And so it worked out amazingly well for us. It was not nearly as simple as what it just sounded, and there was a lot of work to it.

And now, reflecting back, to be clear, the whole purpose of that exercise of using ROBS to begin with was to access capital that was in your name, but that you didn't really couldn't really access. It's locked up in your 401K, and because you didn't want to just deplete your liquid cash. So that's really, that's really what the risk you were trying to mitigate. So you go versus some of my other guests, the, the money in their 401K is the only, they, they need to go that route because that's the only capital that they have to access to, to that could afford the down payment on a business.

Absolutely. And I, I have a friend who has owned a business for about eight years that he used ROBS to finance almost the entire thing, and his business is, uh, about $8 million top line and similar margin percentage to mine. He can't exit at this point because, you know, his 401K owns a high percentage, and he's grown the business dramatically over eight years. And so the amount of cash he'd have to generate to buy it out, it just doesn't make sense, right? So it's, it's definitely a viable approach if it's the only, I mean, I'd rather own a business than not. So if someone has to use ROBS for a high percentage, great. We thankfully did not, although I'd say what we really did, because that cash that I kept on hand, I would have kept on hand anyway. So using the ROBS let us buy a bigger business than if we had just used the cash that we had on the outside. And as has been stated so many times, I think a bigger business that you can responsibly run is a safer play.

Okay, to close us out, Doug, although this has probably been a few minutes, let's hear about what's going on in Home Services to set the stage. As you've already kind of said in passing a number of times, Home Services is very appealing because at least, uh, at least reputationally, it's, it's, um, recession resistant, kind of steady, constant demand. It was particularly hot in the last few years as kind of private equity and now searchers have taken an interest, benefited from COVID. Um, and so I guess I haven't been paying close enough attention because my conversation with you, my conversation with John Wilson, uh, who's also very, has a big business in this space, everybody in Home Services is talking about how difficult it is now. Bloodbath is a word that's bandied, bandied about in the, in the Home Services world. So, and, and, and there are more reasons to like Home Services. They're fragmented, at least seemingly so. It's filled with very tiny operations where you can come in, get rid of the fax machine, throw in, you know, the whole kind of ETA playbook, is, is, um, seems well applied to Home Services businesses, which, which can kind of feel amateurish, and lots of room for tech, tech adoption, and so on. So what's it actually look like from the inside? Sure. And the John Wilson you referenced, that's from owned and operated?

Exactly. Yeah, yeah. He's tremendous. I'd love to meet him someday. I listen to all his stuff. Great.

Oh, good. Well, I'll introduce you guys. He's going to come on the pod here in a few weeks.

Oh, is he? Oh, he is. He's outstanding. Okay. So what's going on in Home Services, and then maybe we can talk about that, um, uh, Home Services being ripe and kind of easy conversion. There's some some fun details there.

Yeah. So first is a matter of context. We're talking about an industry that if it has a year of decline, line, those who are in it say it's a bloodbath, where I think many of us have had careers where we're in companies that might swing double digits on a regular basis, right? Um, right. So there is a relative to it. That said, yeah, Home Services isn't down. Um, I'll give you some numbers, but what has happened here in, you, there was such a pandemic boom. You had not only were people staying at home and noticing things were wrong with their home that they wanted to take care of, um, you also had people staying at home and now had time to have someone come in. You know, that that toilet in the basement in, in the rec room that, uh, backed up occasionally. Well, now because of Zoom, the guy's home all day. He's like, I can have somebody come in and take care of it, right? So there was, I think, some backlog that got taken care of, and then the government put a lot of money in a lot of people's pockets, um, and they weren't traveling. So like HVAC in particular, you know, a lot of people put in new, uh, air conditioning systems. They weren't taking a vacation that year. So fast forward to now, I, that kind of backlog is behind us. People are feeling a little more squeezed. And what we see is in HVAC, I, I looked at numbers of shipments of new units by manufacturers, which I think is a good industry proxy, and this year their shipments are down 15%. Mhm. So that's, that's a pretty big drop when companies had been seeing this, you know, kind of growth. Um, another proxy, you know, my sales were up 8% this year. That's my CAGR. My sales are up a little over 5% this year. I'm privy to numbers across the franchise, and I'm a couple of points ahead of the average, and that's 225 different plumbing companies, right? So that's kind of a slowdown. But then the, uh, the other proxy I look at is Home Depot. Is Home Depot represents the appetite for home improvement, not only in DIY, but many, many, many small contractors use Home Depot as their provider. And Home Depot same store sales are down 4% year to date, and it's the first decline in same store sales since 2009. So that's the, the overall tone, which of course was the Great Recession driven by a collapse of real estate. Absolutely. So not a horrible year to be compared to. So yes, it has slowed down. Uh, and another stat, um, lead cost for plumbing, you know, the cost of a Google click, um, I'm generally hearing is up 40 to 50% across the nation this year versus last year, and that's consistent with what I'm seeing. And so those who, you know, the smaller number of jobs and people fighting for those jobs are driving the cost of winning those jobs up. It's still a beautiful industry with a great financial model, but it is, it has slowed down, and that shakes out some people.

Doug, one of the things we hear about Home Services though is, you know, just all you got to do is just call people back. Like there are so, there basically, in other words, there are so many Home Services businesses that are ostensibly poorly run that if you just run yours, you run a tighter ship, you'll be able to outcompete 80% of your local market. First, and second, it, it's indicative of like, demand is just so strong for these services that that, you know, maybe the reason the the mom and pop isn't picking up, isn't returning your calls, is because they don't have to, they don't have time to, because demand is so strong. So are those, uh, are those characterizations inaccurate then?

Think those characterizations are accurate for a clever individual tradesperson who wants to build a business with about a million dollars in top line, which is nobody who's listening to this podcast. The industry, there's probably multiple segments, but I just, I think of it as two major segments. According to the IBISWorld report, there's 100,000 plumbing and HVAC companies in the United States of America. 50% of those have five or fewer employees. Right? So the, the median, the kind of the prototypical is that three-person, mom's answering the phone, dad and son are out in the truck, and they're doing jobs. Yeah. Nobody on this podcast wants to be that guy. That guy can step up and maybe get two or three more people, and he's got no debt, and he's going to make 150, 200 grand a year, and that sounds amazing, but that's not us, right? So then the other side of the industry, though, where most of the profitability and the volume is, is taken. So how does someone find a plumber? They go to Google and they type plumber near me. 70% of all Google clicks on the search engine results page go to the top three. So if you can't get in the top three, you're in the also-rans. Well, take my market of Portland, you know, two and a half million people. There's four or five home trade home service companies that are private equity backed that are bigger than me, and then there's a couple of plumbing shops that are maybe in about my size. So let's say between the 10 or 12 of us that are fighting for those top three. Do you think a guy that's got a $1 million business and doesn't have the the background to run sophisticated marketing techniques is going to be able to break in? The answer is no. So yes, I think you can grow to a certain point, but then it's, it's an absolute dogfight. The things that we're doing on, or that the best home services companies on Google are doing on Google are the equivalent of e-commerce businesses. You know, we're doing, I won't try and teach a lesson on it, but we're using target return on advertising spend bid strategies where we take conversion data from our CRM and feed that back into the Google AI. You know, just last week, I was uploading my customer list to Google so that it can use the profile of my previous customers to influence the bid strategy when people come in, you know, and bid in the future. Do you, do you think of even a $3 million shop is going to be doing that stuff? And it only takes a half a dozen in a market to be using these techniques to basically box out the, you know, the real, uh, awareness and volume. So I'm not dissuading anyone from joining this industry, but I will tell you that the sophistication, and I previously worked, you know, with SAP and Salesforce, I have never had the quality of data or the sophistication that I have right here.

This sounds like a kind of classic barbell, where you've got one end of the market where there's a dogfight, as you said, with big players, highly sophisticated. Lower end of the market, where very fragmented, lots of them, maybe they can make a a good living, but never grow beyond three or five people. And not, not much in the middle, which is, which is actually interesting for this audience, the Acquiring Minds audience, because it's in the middle where searchers are going to buy. Um, they're not going to buy a super big, highly sophisticated home services business, and they're not going to buy a two, three, four, five person plumbing business either. Home services business either. It's going to be in the middle. Um, and, and, you know, I think, I think maybe you said this to me, Doug, in one of our calls, that when you think about these fragmented markets, so this is applies to Home Services, but maybe it's, it's a good point to, to abstract out and think about any industry. When you think about, I'll take Home Services, think about Home Services and how fragmented it is, and you say, when I can do, I can do better than, you know, 50% of the market are really unsophisticated shops. I can do better than 50%. I can be in the 70th percentile of performance without, you know, working very hard at it. But really, if all, so much of the demand is based on the top three SERPs, search results in Google, those are who you're competing with. It's those, it's those really sophisticated players. You shouldn't consider the market the small guys, you should consider the market the big guys, because that's where you're going to get want to be wanting to get demand. And so, so if you just kind of in your own mind, kind of write off or don't think about the, the, the long tail of all these fragmented players and you think about what's left, in fact, what you're doing is entering into a very cutthroat, sophisticated, well-funded industry. Does, and, and does that sound like an industry that you searcher want to play in?

There's a lot of accuracy to that. I will perhaps tame it a little bit with, if a searcher can come in and buy a business that's got a long history and is, you know, you know, maybe of $700,000 in EBITDA, if it's been in that market, you know, for more than a decade existing, then I don't think the person needs to come in and be afraid that their business is going to evaporate. They just need to be aware that to double that is not so simple as sending out a couple of letters to unsuspecting other trades people and aggregating them into a rollup, right? I think that time is behind us now. Funny enough, you know, John Wilson, that you're going to have on, he's done a lot of acquisitions, he's got a, he's, and he's made a big beast, uh, of a company. He's also not in a super major metro market. So I think there's a, there is a difference there too. You're going to drop into LA, you're going to drop into Seattle, you're going to drop into DC. That's different, different, uh, total adjustable market, but certainly a different level of competitive set. Yeah. But it's a great space. And the whole buy then build ETA model is about getting something that is a going concern that's got scale. Scale doesn't have to be quite as big as mine, and then taking it from there. And you, I, I guess I'll close the thought on that of, you don't have to double these things in, in a year. I, we're growing 8% a year, maintaining gross margins, loving the people that we're working with, and we've had 180% return in nine quarters on the cash that we put in. It feels like cheating. This is amazing, right? So not everyone has to become a master of the universe and host a hold [Laughter] conference.

Excellent point. Um, and, and just close us out on, well, actually, two, two follow-ups. You, you keep saying that Home Services is a great industry, and so just forgive me if I missed it, but what is it that you like so much about it, if in fact it's, it's actually experiencing headwinds now? Is it just the kind of the nature of the work and, and person enjoy the industry?

Because I care about the work. I think it's meaningful. It's, it's honest. It's, you know, it's just good. It's helping. And so that's important to me. From an academic standpoint, though, we're talking about headwinds that plumbers in aggregate are up low single digit percentage this year, right? That's a great headwind. So, you know, I think just the numbers in Home Services work, um, overall, and it's amongst all the industries you could choose, this is a resilient one. And then, um, and then lastly, the whole separation, as sophisticated as my local players are, um, none of us is afraid that some big national player is going to come swooping in, or a website's going to take us out, or AI is going to arguably change our business in the next five years. Like this is, it is a beautiful fragmented space. And the fragmentation that's, that doesn't get mentioned enough, the fact that it's so fragmented means that there's information available and there's a playbook. There are so many people who know how to run an HVAC company, a plumbing company, an electrical company, a garage door company. There's no secrets because there's hundreds of thousands of them in, in aggregate. So you can learn from others and follow a playbook, whereas in, you know, big industry where there's two or three national players, you know, totally different. This is, yeah, the guy next door might not tell you what's happening, but you could talk to a guy three states away. All the playbook. Yeah.

That's a great point. And Doug, on the shift from hiring being a bottleneck to demand being a bottleneck, you've already touched on demand being a bottleneck, but one of the things that those of us who are not in the industry understood was that finding plumbers to hire was what was so, was so challenging about this business. This, this whole industry. And you too thought that, but it has turned out to be what we have been successful in hiring. In fact, I, I got to make the phone ring a little bit more because I've hired enough guys and I want to make sure I keep them all, you know, fully, uh, gainfully employed. It's not easy, but I, I will say that, uh, you can invest in it. So we invested in, I personally use Predictive Index, which is an assessment tool. We have a hiring process that would look at home in any Fortune 500 company, multiple rounds of interviews. We've just really, you know, put an effort in cultural fit as part of our hiring process. This is an an HR pod. So, you know, I'll stop there. But I suspect we have a, um, far more robust hiring process than most small businesses, to include demand generation for candidates. I'm spending thousands of dollars a month on Indeed and other places to get candidate flow. Most small businesses don't spend a penny there. And every time I turn those dollars on, I get candidates. So for a truly licensed trade person, it is harder, but we've got a bit of a flywheel going, and we've got enough reputation in town that we can make it happen.

Okay, sir. I think we hit on everything that I wanted to, at least given our time constraints. Anything that you wanted to make a, make sure that you had a chance to say?

Well, congratulations to anyone who listened to me this long. Uh, I appreciate your patience. You get the nugget at the end, but just, yeah, I was happy to come on and do this. I love the sharing in the ETA community, and when I was going through the search process and talking to people who were a couple of steps ahead, I, I've never experienced so much openness and so much sharing, and, you know, felt like it was worth coming on to give a report back, but I am just a data point, so, uh, listen to a lot of other voices too.

Well, I've loved having you back, Doug. I love our ongoing correspondence. Um, you, you're just so thoughtful in the way you approach things and draw on a lot of your own, uh, corporate experience and life experience. Just a great, great guest. Thank you for coming back. And I'll leave it there until next time. Thanks.

Well, I hope you enjoy that interview. Make sure you subscribe to the Acquiring Minds channel below. We are now publishing twice a week, so tons of new interviews and stories to come, stories that will help you along your own path to acquiring a business.