Bullseye Buying a $1m SDE Business in a Hot Industry | Peter Ciaverilla Interview

Pete Cavilla, welcome to Acquiring Minds.

Thank you. Happy to be here.

Pete, you bought an HVAC business, a pretty sizable business, for a self-funded Searcher. You've done very well with it. Uh, and it's, of course, in an industry that is one of the hottest for Searchers to be looking at, Searchers and all the way up into private equity. So we're going to spend time not only on your search but on your learnings from inside this white-hot industry. Let's start with some background on you, Pete, if you would please.

Yeah, my name is Pete Cavilla. I grew up in Ferndale, Michigan, which is a suburb of Detroit. Uh, after I graduated from Brother Rice High, I went to the University of Michigan. I studied industrial and operations engineering as an undergrad there. After I graduated, my first job out of college was working for a company called Urban Science. I worked in their office in Frankfurt, Germany, as a database programmer for three years. After I wrapped up there, I moved back to the US and went and did my MBA, also at the University of Michigan. When I graduated from an MBA program, I worked for KPMG for about five years as a Management Consultant. The group I was in was predominantly focused on IT work and some back-office functions and shared services and what have you. And then again, about the five-year mark, I ended up leaving KPMG and I dove in full-time to do a search to find a small business to acquire. And a little while later, ended up finding and acquiring Sharon Heating and Air Conditioning, which is an HVAC contractor in the Metro Detroit area. And we do predominantly, well, we have a mix of residential replacement and service work, and then a portion of commercial construction work as well.

Awesome. Great. Some follow-ups. Yes. Why did you pivot out of consulting or IT consulting and into, uh, HVAC business ownership? Why did you choose to do a search?

So there were a handful of reasons that contributed to it. One, and I should preface this by saying it wasn't me trying to buy an HVAC company specifically. That's what I ended up landing on. That was one of many industries that I looked at. I was pretty agnostic, and I can expound upon that a little bit more. But I just wanted to own a small business. I'd say there were a handful of things that were pushing me in this direction throughout the majority of my life. One was that, uh, my parents were pretty big on it, even though they themselves were not entrepreneurs. Especially my dad, I remember him telling me growing up, "It's really important," or he really strongly advised, "If you can, to be your own boss." I think as a very young kid, it was kind of tough to conceptualize that. But of course, as you start working more and getting, get into a little bit more into the, the corporate world and whatnot, you can start to see some of the advantages and weigh that out if it's a good path or not. So that was in the back of my mind. I had some family members. I had a grandfather that owned a small business, an uncle that owned a small business, so I was exposed to some family members that, uh, were in that realm. And then when I was growing up, I was a golf caddy as well. So I caddied at a local country club for a number of years and, and caddied for a lot of the members and some mentors there that I spoke with. They were a lot of small business owners themselves. And just talking with them, getting education from them, interacting with them, seeing some of the, I think, some of the benefits that went along with it. And it wasn't just the fact that they were playing golf at a country club, but clearly they had some discretion over their free time, some satisfaction and autonomy over the work they were doing. All these things together were always in the back of my mind. And then what kind of put it over the top was I, I'd met a friend in MBA school and, uh, my buddy Ron told me about search funds. And when I was telling him about this interest in these kind of small, unsexy type businesses that are important and people seem to be doing well with, but aren't talked about as much, and I had never had the type of passion or expertise or skill set to really feel comfortable betting on a startup. And I was also impatient enough not to want to wait so long to climb the ladder, uh, within an operation. So after I learned about traditional search funds and then dove a little bit more into ETA and whatnot, it, it clicked with me and was something that I was pretty adamant about pursuing. It was just a matter of finding the time to do it.

I feel like the image of you caddying at a, uh, country club. I feel like that's almost like a scene from a movie or something. I, I feel like the image of the young person, you know, with the golf clubs of the of the older, you know, guys who are all successful is like that germ of an idea moment. I, I feel like I, I know that image from somewhere. Like I've seen it in a movie or something.

Yeah, I should, I should add with the caddying thing, it probably was even more heavily influential because, so I went to undergrad, and that's how I paid for my school was a caddy scholarship. So it's something called the Evan Scholarship, which I know that sounds bizarre and unreal, but it, it exists, and people can give it a Google. It's, it's a fantastic program. If anyone's listening, they have kids that want to get into caddying or something like that. But anyway, it's, it's a scholarship for golf caddies, uh, that meet certain criteria, financial need, academics, and whatnot. And, uh, I think it's might be the largest privately funded scholarship in the country. I can double-check that. But, uh, either, either way, I lived in a house with a bunch of other caddies for four years. Obviously had a lot of involvement not just with them, but other alumni and, and people that donated to the program and whatnot. Once again, you're just constantly brushing up with these mentors and people that helped you out on the academic side through this program. And, and you just can't help but meet a lot of small business owners and get that type of influence through it.

Yeah, and just to be clear, Pete, because I, so clarify for me, because I'll circle back, uh, on this theme later. Your consulting was, was development? You said database? You were a database consultant, database developer? So are you, you have programming skills?

Yeah, I did. So my first three years, the company I worked for, I was pretty much a database programmer every single day. With the consulting aspect of that experience in those three years, it was mostly advising on how customers can use the proprietary software that the company produced and some of the different reporting features and other tools and whatnot that were available to them. It was semi-customizable software. So it was unlike, say, a Microsoft Office or something that comes out of the box and it's as is. Our our job was to, they had a certain set of features that were there, and then they would work with us to further manipulate the program to whatever interests or reporting or metrics and things that they needed. So that's what I did. So yeah, I, I spent most of my day programming SQL, which, as I say this, you'll probably have some people that are actual programmers listening to this, and they'll probably roll their eyes. I think most hardcore programmers and computer folks don't consider SQL a real programming language, or at least not like the, the stuff that's really cool that they're doing out in Silicon Valley. But it's needed, it's necessary, it's kind of dry. Um, but yeah, that's how I spent three years.

Okay, Pete. So you decide this, this is the path for you. Give us a sense of your criteria and then take us a little bit into your search story, because there are a couple of interesting details there I want to hear.

So the criteria side of it was honestly, I, I went with more of a kind of a spray and prey approach. And what I mean is that I, I, I looked. I didn't have certain industries that I was limiting myself to. What happened was I started looking at the traditional route of search funds and perhaps having somebody fund it. And that sounded really inviting at first. But as I thought a little bit about it more, the two main reasons why I ended up doing it, the, what people call the, the self-funded route, is that one, at, we were just at a time in my life personally where I, I didn't want to put myself in a position where I could theoretically move anywhere in the country. I wanted to have a much more tighter geographical focus. My wife and I were married, we had one child at the time when I started my search. We just didn't want to be miles or multiple states away from our families. We're both originally from Michigan. So what we did was we limited ourselves to the state of Michigan, thinking being that, you know, even if we end up somewhere that's not near our parents or near our core family members, it'll be within a couple hour drive. It's going to be a lot easier to see them and continue on with our families than if we lived, you know, halfway across the country. Um, so there was that aspect of it. And then the other part too, is I, I just thought about it a little bit more. I, I felt like that self-funded route was a little bit more inviting to me because I came really, um, eager on the whole notion of owning 51% and more of the company and having the true controlling interest in the acquisition. So those two things together made me pursue that route within the search. And then because I was relatively focused geographically, even with the whole state of Michigan, it's not an overly populous place, and there's only going to be so many targets out there. I felt like I had to be somewhat as agnostic in terms of industry. So, and I, I kind of went with the old playbook of, I just want it to be something that's a little bit, um, more old world, so to speak, something simple, something I could understand, something that wasn't overly technologically advanced. And, and but yet at the same time, had enough structure and size that it wouldn't require me to come in and have an immense depth of industry knowledge or something like that to be able to function well and succeed in the business.

Great. And so your, you said I heard you say spray and prey, but I also know that you used a buy-side advisor. So how did you, maybe tell us first about engaging the buy-side advisor, your decision to do that?

My view, and my wife and I teamed up on this because even though I was doing the searching, obviously it was going to affect both of us and our family. So we wanted to make sure we were on the same page. And my thought was, I wanted to give it a year, and then we could re-evaluate. But I wanted to put my foot on the gas as hard as I could for a year, leave my job, jump into it full-time, and exhaust every avenue possible so that we could get to close as quickly as possible. And I think everyone thinks that way, but we, we just felt that it made sense to use every resource possible. So I, of course, was doing my own proprietary search whenever I could. I was working with brokers whenever I could. And then the third element, we brought in several months in, I think maybe five, six months in or something like that, was we engaged one of the more prominent brokerages in Michigan, um, and they have buy-side services. So what, what that is, is they, you can hire them for sort of a monthly retainer fee, and then they'll also assist in looking for for deals on your behalf. And then of course, there's a fee at the time of close where, depending on the enterprise value, and I forget all the different parameters of structure, you pay them a, a success fee. But the idea is that you basically have a whole another team working on your behalf, bringing you deals. And there's going to be ones that they're reaching out within their broker network that they're going to find, maybe listings that you just didn't find as a broker, or it was a broker that didn't fall on your radar because they're out of state, but they happen to have a listing that's in your particular geography. And then they also just did a lot of cold calling and cold emailing and everything on on your behalf and then brought you leads. So again, we wanted to exhaust every avenue possible. So we felt like it was worth throwing in a little bit of money at this as well, just to bring us as many hits as we, as we could get.

And you want to give a shout out to who that was since they, they connected us?

Yes, I do. Uh, so they're called Calder Capital. They're based out of Grand Rapids, Michigan. They are, I mean, I, I'll plug them right now. They're an excellent brokerage in my opinion. There's plenty of good brokers out there, and there's plenty of not so good brokers out there, just like any other business. But I, I thought they, they definitely stood out. And again, I, what had happened was I had spoken to someone who used their buy-side services and started engaging with them because I'd seen a number of their listings and offerings that they had. And that was great, but I hadn't really even known that that was an option. It seems very obvious now, but someone else turned me on to it. I had some conversations with them and spoke to a number of referrals and success stories that they had. So, and, and they did bring me a lot of good leads in the time period. As it turned out, the company I ended up purchasing was through my own proprietary search. But, um, I'd say, uh, in the time span that I used them, they were probably turning up a lot better, um, leads and opportunities than I was doing on my own.

When you said it seems obvious in retrospect that they would have a buy-side advisor, or search, kind of a search retainer offering, because they're a brokerage, I'm surprised to hear you say that, only because I think they actually are differentiated that way. I think a lot of, most brokerages don't have a buy-side offering. I, I actually, having, for as long as I, as many interviews as I've had, it's rare that I come across buy-side advisor searchers who've used buy-side advisors. I think you see it a lot further up market. You go, and certainly private equity, there's a lot of shops that cater to private equity, but not to searchers, not to individuals. I, I just don't come across it very much. So I, I don't assume that every brokerage has that, has that service offer. I think that's a really good point.

So I agree with you. Most brokers probably don't. I think the reason I said that because, well, more broadly, I just hadn't considered that there's going to be buy-side advisory in general. I see it all the time now because you, it's going to be further up market, of course, and typically companies that not would not have been in the size range that I was looking. But there's plenty of advisors out there in the M&A world that are doing buy-side advisory, just not something I was thinking about it then. Made sense that why wouldn't that populate a little bit farther downstream? But, you know, to your point, I, I, they're the only one that I came across that I knew of. But I also, I felt like they stood out in a number of ways compared to some other brokerages. But, you know, as I say this, I'd be curious if I started searching around and across other brokerages and other geographies, at least one that specialized in other areas, if, if they have the same type of setup. But, um, so yeah, maybe at the area that I was looking, not as common. And maybe that's why it felt so valuable and useful to me was I, again, I was happy to take any, any support I could get. And I felt like relatively speaking, if it resulted in me buying a quality business, their fees were, in the long term, going to be a relatively small cost for what you could get out of it.

Another interesting point on that, Pete, is the other two guests that I've had who've used Calder, both coincidentally recently, um, were, were kept their W2s. And so they could justify the cost because it's a few grand a month. They have a couple of tiers. I don't know, don't quote me, but I think that the lowest tier, I think, forgive me, Calder, if I'm getting this wrong, is around two grand. Um, maybe they have a slightly more affordable option. Anyway, point is, that's $24,000 a year, whatever. So, so you, that's a lot of cost. Now, you can apply all of that retainer fee to your success fee when you complete a deal, when you transact a deal that they found for you. But still, you know, for Searchers, self-funded Searchers, that's not insignificant at all. And so it's, it's been guests who have retained their W2, decided that the opportunity cost of doing their own search was not worth it. So they make more money keeping their W2, paying Calder to do the search for them, and then when they find a deal, then they quit their W2 and jump into the business. You didn't have that. You were doing your own proprietary search and using Calder. So that was extra expensive for you. Um, and, and, and also, you know, didn't you think that you might step on each other's toes? That they, you know, the proprietary you were doing was going to bump up against the proprietary they were doing? As it happens, it didn't. You found your own deal. They didn't. And, and were they not bothered by that? Were they not like, hey, let us do the searching for you and you don't do any?

So that's a good question. And I had, I know this is an interesting point you make here, because I think I recall having this conversation with my wife. Had I known about their buy-side services, and I've told other people that I've spoken with since I bought my company, and they're asking questions about the process or advice or anything, I may well have just stayed at my job, had them do this on the side for me, and done exactly what you're talking about. Right? Keep your salary job, let them search. In the meantime, they're bringing you leads. And then even if it takes a little bit longer and it takes a couple years, if you're able to maintain your salary and you feel like this is an expense and you can cut some other cost or something like that that you can afford, and you can roll that, that those fees back into your success fee, then yeah, it's, it's to me, I think it's a really compelling offering for people that don't want to dump everything and, and take quite as big of a risk financially into going down the search path. So yeah, it certainly had I known at the time, and had I not found out about it six months or five months after I had already dove in, then I might have considered it. Um, it just, the way it worked out, I, I started working with them, talking to them a little bit, and then ended up finding out about it a little bit later. But I feel like that's part of that was a lot of things when I was going through my search was I, man, I wish I had known some of this stuff a few months earlier. And even though I had, like, so many other people, I called as many people as I could and reached out to alumni networks and friends and friends of friends and whatnot, and anyone that had gone down this path, it still is interesting and how much you end up learning the hard way. And I just think some of that is, it's just not a substitute for experience. Incidentally, I also didn't know about your podcast prior to me starting to search. That would have been helpful as well, because there's always a few things I'm learning on there that, again, post-closing, I go, man, that really would have been helpful.

Well, I appreciate that, Pete. But, but for me, what year was this that you're searching? Have you said?

So it was 2021. I started in, uh, I left in May of 2021.

Well, I wasn't yet podcasting, so you didn't miss out on it all.

All right, I'll sleep a little more soundly now. So that's good.

All right. So the other detail I wanted to say about your search is that you lived where while doing it?

My wife, daughter, and myself moved in with my folks. And they live in the west side of Michigan in a city called Rockford, which is just outside of Grand Rapids. So that was tied to everything like we were talking about before. After we had our first child, my wife transitioned to a full-time mom, and I was still working, of course. So when we did the search, we flip-flopped. She went back to working. She was able to find a remote job at the time, which I think we were still in some of the latter stages of the pandemic, so they were probably a lot more available then. So she went back, became the primary breadwinner for us and got us a paycheck and helped float with healthcare and everything like that so we could keep going. I spent my days mixed between full-time searching and then being full-time caregiver for our daughter. And then, as I said, we moved in with my parents. And it's interesting when I tell people that, I, it's kind of, there's some mixed of feelings on it. And I think most people go, "Oh my gosh, was that really tough? How was it moving back in with your parents? You haven't lived at home since you're 18. How did your wife take it living with her in-laws?" And everything. And, you know, for the most part, for me, it was, you know, my wife and I talk about it a fair amount. It was, it was a great time for us, just because we were new parents, we only had one child at the time. It was honestly helpful to have some in-home care with my folks there, uh, to pass off my daughter when I needed to, if I had to go to a meeting or jump on a call or something like that. There was a little bit of background support. Just being able to have the luxury of moving in with them and cut down on costs and everything was really, really helpful because again, like you're talking about, it's, it, there is opportunity cost here, and it made it a lot less stressful and felt a lot less, um, dire by by doing that because that just, it took a little bit of the pressure off. So I felt like I could think a little bit more soundly about the approach I was going through. So, and then just the other part too, is that I'm, we're fortunate that we have a relationship with my parents where we could do that, where we could move in. It wasn't an issue. My wife still gets along with her in-laws as well. So, I mean, we, we made it through to the other side of it. So it's kind of one of those things where if you can go through that year together and everyone's still happy and content and everything, then again, a lot of people don't have that option, whether it's just not having relatives or friends that they could move in with and do something like that, or being able to to get along in that way. So, not, not the original plan. And, and all things being equal, yeah, it would be nice to live on our own. Sure. But relatively speaking, a fairly small price to pay, um, to, yeah, for the result.

No, I think I, I, I, I love that you did that. And, you know, this is how family life used to be, pre-modern society that we live in. Everyone is completely atomized and families live far apart. So, um, nothing at all to apologize about. And it's kind of interesting because on the one hand, um, it allows you to be more conservative because you're, you're saving money and, and so on. The whole reason for doing it. So on the one hand, it's kind of a conservative option, or, or it's a prudent option to save money. But on the other hand, there is kind of a burning the boats, uh, element to it too, in the sense that if you let go of wherever you were living and then install yourselves into that, your parents' house, like there's definitely like, okay, we're doing this as a family. We're going all, we're reconfiguring our whole where we live, uh, while I do this search. It does put pressure on you, Pete, to make sure you find something and actually do it. Yeah. Right. As opposed to somebody maybe doing a part-time search. You know, so, so often in our world, there's a lot of search curious, search flirtation, part-time search, and, and, you know, the, and, and not really hardcore committing to it. This was a hardcore commitment to it. You quit your job, moved, moved your whole family into your parents' house. You were gonna do it, do this. Like, right? That is that what have represented in your own mind, or am I over?

It's 100% right. We were fairly committed to it. I, I mean, we made, even before this, we made some lifestyle choices that allowed us to get some flexibility. Like we purposely never bought a home prior to this because we didn't want to have have the anchor of a home and a marriage or having to sell it or something like that to be able to do something like this. We were renting a house and we put in our, I think at the time we were even month-to-month, and we just kind of gave notice and shipped out and did it. And it, it's not that you can't do it, of course, by by buying a home or making some other more permanent decisions or settling down, so to speak. But it just, to your point, it, it didn't feel that drastic because we just were a little bit less anchored and a little bit less settled. So it also made us eager to to get through the process and get it done, right? Because we did want to buy a home, we did want to settle in, we did want to put our roots down. We were having more kids. It's, it's, you don't want to be in limbo forever. But yeah, it, it certainly, I, I felt like it allowed us to really fully commit, dive in, give it an honest go of it for a little while. And if it didn't work out after a bit, that's fine. I could go back, I can get another job. It was the difference between retiring at 65 and 66 was going to make me lose too much sleep. And it's not like you couldn't try again in the future as circumstances change. So.

Well, that's great. Thank you for that. Let's hear about, I want to get into how you structured the deal, investor size of the deal. So let's, let's jump to the end of your search. Calder didn't end up finding you the business. You found it with your own proprietary outreach. Tell us, tell us how you, like the little story of finding the business, and then I want to get into the nuts and bolts of putting your deal together.

Yeah, like most people, I was doing a cold email campaign. So I was going through my list of companies and verifying them and cross-Googling, so to speak, and, and finding contact information. I ended up reaching out to Sharon, who of course was the owner and founder of Sharon's Heating and Air Conditioning, and sent her an email and got a response back from her son, who reached out to me and said, "Hey, we'd love to have a conversation." Well, they saw the website. He said, "Nice website. Would want to have a conversation." And sat down and started going back and forth. Support there. But yeah, it was, it was purely through cold outreach. And it was just good timing. She was at an age where she was looking to retire, was ready to move on, and was starting to vet buyers. And I know this because, of course, I'm sure she checked out other people besides myself, but even we were going through the back and forth, and, and I was submitting an LOI. They were waiting on a couple of other offers to come in before ultimately signing my LOI and then moving towards an acquisition and going through due diligence there. But it just was fortuitous timing. And again, from a numbers standpoint, you send out enough of these, you get enough people that some are kind of thinking about it, some just sold, some are already in discussions with someone, but eventually, I think you're given enough time and enough cracks at it, you're bound to find someone who was in the stage. So that's when I caught her. And it was, it was a, a good opportunity when I met her and got to know them a little bit better in person.

Little bit of an exception again here, Pete, that a lot of my the guests who are self-funded Searchers who tried proprietary, reflect back and think it wasn't a good use of their time. Often they'll do, they will have done proprietary outreach and blasted out emails and then found their deal on BizBuySell anyway. So it's like, and here you and here you were, uh, you were even paying for a buy-side advisor, and even with that, proprietary outreach worked in your case, and as we're going to hear, found you a pretty big business. So, so you're probably a proponent of proprietary outreach.

Yeah, I'm, I'm actually really interested to hear you say that because whenever I talk to someone, someone, and they're thinking about going the self-funded route, I tell them that really my only regret from my search was not spinning up and diving into my proprietary search immediately because I felt like all the best leads I had, for the most part, was through proprietary search or through the ones that I got with, uh, Calder helping on on the buy side. It's not that there weren't some good broker deals out there, but when you've restricted yourself to a fairly small geographic region, and I feel like most of the people I talk to that are looking at the self-funded route, that's one of their main motivations is, I want to stay in the Chicago area, I don't feel like leaving the West Coast or something like that. Well, that would be kind of big. But the point is, is that they're, they're searching in a, a smaller area. They, they need to have as big a volume as possible because simply going to brokers or, or looking at BizBuySell isn't going to offer enough. And I always tell them that when I, when I first started, I had got put on a potential deal through a connection of a former colleague at KPMG. Didn't work out, but I probably spent a couple months at the beginning continuing to vet this deal and checking it out. And it slowed down the, the initial startup of my own proprietary outreach. And then again, once I got that going, that's when I felt like I started having the most conversations, getting the, the most responses from owners, starting to get the most LOIs and LOIs sent out there. And again, I just felt like that's where the, the, the greatest volume of the good opportunities for me came from. Not that I didn't like having a well-polished broker deal put in front of me and having someone that could help facilitate the whole process, but from a numbers standpoint, I thought the proprietary thing was really good. And yeah, that's, interestingly enough, one of the first things I always tell self-funded Searchers. And now I'm very surprised to hear someone like yourself who talks to so many of them say that they didn't get much success on that.

Yeah, yeah, that is that is interesting. I, I, I feel like I, I mostly say, um, if, if pressed, I, I, I, I, I think one should explore all options because it's hard to find a good business. But if pressed, I say go with broker. Um, so I'm not hardcore about no proprietary outreach, but I've just heard enough times that people felt like it, it didn't, it was a lot of effort for very, very little in the way of of results. So good, good, good contrast here for people to hear between your experience and mine, or what I.

Yeah.

Okay. Tell us about Sharon's please. What, what had Sharon herself built in this business?

Sharon's was, or is, an HVAC company. At the time I bought it, it was about 50% residential services, 50% commercial construction. The company at the time, again, when I purchased it, had 60-something odd employees. It was maybe 65, 66, something like that employees total, and was doing about, I think it was a little under $12 million in revenue per year, so $11.5 million or something like that revenue per year. So in the HVAC world, it's a relatively big company as HVAC companies go, only because it's such a fragmented industry and there's so many companies that, that the vast majority of them are are just very, very small. Basically, what, what I think a lot of people in our industry would say like two guys and a truck or something like that. So, you know, someone that's essentially working for themselves, is an independent contractor, more or less. So when you go on, say, Google Maps and you look for HVAC contractor, mechanical contractor, something, you're going to see a bunch of companies pop up. And, uh, there's probably be a number of good ones, but a lot of them are going to have, you know, under 20 people, or even under 10 people or something like that. So it's, it just is an industry that lends itself to a lot of smaller businesses. So, you know, I'd say once you get north of 30, 40 people, you're starting to get into a, a, a fairly large scale. And then once you get into these larger companies or groups of companies where you have 100 plus people, you know, you're really in the, the big leagues, so to speak, of in terms of size as it relates to HVAC. Um, again, just for how small and fragmented the industry is.

Well, and Pete, I mean, I think, um, for any self-funded Searcher, industry aside, $11 million, almost $12 million in revenue, 65 employees, that's a big business. I, I have to assume that EBITDA on that is going to be over, easily over a million, assuming margins are going to be north of 10%. Can you share what margins and therefore EBITDA were?

Yeah, so the, well, I, I guess I put in terms of EBITDA, it was just over a million. It was like 1.06. So if you factor in a, let's just, it was probably about $1.1 million in EBITDA, just over a million in EBITDA. Um, and, which, which is decent margins, given the fact that we had this split between residential and commercial work. And as you might assume, the commercial construction side is going to have bigger projects, smaller margins, as opposed to the residential side, much, uh, much higher profit margins, but, you know, smaller ticket size.

Well, fantastic. Now I want to, well, we're going to dive deep into the kind of HVAC and this residential versus commercial mix and, and how what you've done with that and the profitability of those and so on. But how did you structure this deal? So how much equity did you have to bring? Well, sorry, having done a proprietary search, but this, but Sharon was already had the business on the market, you said? So she had a, she had a selling price?

No, she didn't. So this is, we had to come up with it on our own, or I came up with my own offer. She hadn't engaged a broker or anything. It wasn't officially on the market. She was just starting to actually seriously look at the offers that were coming her way and, and the outreach that was coming her way. I think if I remember correctly, when I saw, when her son replied back to my email, what happened was, I emailed Sharon, she forwarded the email to her son, and I, you know, so I was able to see the chain, uh, of, of their responses. And it was only a couple of them, but I, I think I specifically remember Sharon's words and emails was, "Wow, another one." So clearly she had been getting a number of offers and people starting outreach, having interest in in buying her company. And, and then I spoke with them, but it wasn't actively broker. She didn't have a set price or anything like that. I, I came up, I reviewed her numbers, got as much information as I could, and came up with my own offer price.

And how did you come up with that offer price? Give, give us the quick and dirty on that, and then how you presented it to her? Did you just give her a number, or did you explain, "Sharon, this is how I'm arriving at this number"?

I didn't give too much of an explanation. And my thought process there was that I want, wanted to present an offer of course, that I thought was fair and reasonable and was going to allow me to have success with the business, but also make sure that she was getting compensated for the company that she had established. My reasoning for not wanting to have any type of justification or explanation as to why was simply because I felt like then from a negotiation standpoint, if I'm telling them what the different factors are that would, that went into it, that they might try to counter offer or point certain things and say, "Well, actually, this is even better here than you think," or "This is on growth on some type of growth pattern." So that's why. So I just, I didn't feel it was, I didn't need to.

Was the can of worms? Well, I was gonna use a consulting cliché. I didn't need to show them how the sausage is made, right? I just wanted to say, "Here we go. Here's the offer," and, and have it just be that.

So the way I come up with it, or I came up with it, was that I, I model it out like so many other people. I had some, some my spreadsheet laid out. I had my modeling, and I just, I went through and kind of came up with an offer price that I felt like was going to, given some scenarios that I laid out with very, very modest growth targets and, and what the spread of my debt and equity and everything was going to look like, was going to be a return that I felt like I could bring this to whatever investors I was going to need to close this deal, would be enough of a return that they would be happy with how it projected and thought it was reasonable and allowed me to come up with a price from there. So I kind of backed into it saying that if I'm looking for a certain amount of return for myself and for my investors, and I'm planning on a couple different growth scenarios and just to kind of hedge my bets, how can I back into an offer price based off of today's current EBITDA amount? And that's, that's how I got to it.

And what was the return for investors that number that you were trying to hit?

I was targeting like right around 30% IRR. I, I felt like that's what, just reading and sort of the interest of the market and everything, it sort of come up with, you know, as I say this and I'm saying it out loud, like it's part of it is just me talking to as many people as I could, reading different publications, going on websites like searchfund.com and, and looking at different posts and everything else and getting a sense of all right, what for me to be able to gather the capital needed, what am I going to be able to, what type of return or structure am I going to have to present in order to to attract that and be able to close this deal? And then of course, the other side of it too, was was plugging in with some of the spreadsheets that I had from the lender that I worked with, which was Live Oak Bank, to make sure that I was putting together a purchase price that was going to have a very healthy debt or debt cover, debt service coverage ratio, so that, you know, if things did go a little bit sideways or we took a step backwards or something like that, that me, the company decreasing 5% in in profitability or something wasn't going to be the the death blow for me. So I wanted to make sure there was a margin of safety. I apologize, but that was the other part of it too, was that all right, do I have some comfort that we can slide a little bit if it comes to that and we'll be okay? And, and that third component. So first component, number one, was figuring out what you, you know, what your multiple would be based on the IRR you wanted to deliver to your third-party investors. Number two, was maintaining a comfortable DSCR, debt service coverage ratio, with your lender. And number three, was your own return on equity?

How much equity were you going to bring to this? Yourself personally, or for the deal as a whole?

No, no, yourself personally. Um, very little to none. So I ended up putting in a pretty small amount of my own personal cash of the equity that was brought to the table. I brought less than 5% of it. Um, most of my equity came from signing the personal guarantee on the loan, running the business, and, and bringing the deal to the investors. But, um, so in essence, I'm not, I'm not really getting paid much in terms of like preferred returns or anything right now. The lion's share of my equity is going to come, uh, after our, our debt, or our, our notes and the, um, investor equity is returned to them. And then once we, our, our deal, flips to that point, then I'll have a, a much more significant kind of preferred return, uh, setup.

Yeah, that's not different than most self-funded Searchers. That the, the big pop is going to be after they pay off their loan, after they pay back investors, and then if they, and then they can, you know, being whatever they are, 60, 70, 80% owners, um, if they don't want to reinvest that capital into the business, they can start taking a lot of that, that EBITDA and pocketing it. And then of course, if they choose to sell the business and they've got no debt to pay down, then there's a huge liquidity event for them. But not that we advocate no money down offers or any of that silliness on this podcast, let's be clear. You did buy a almost $12 million business without much money into the deal yourself. Yes. As a first-timer, that's pretty amazing.

You want to respond? It is. I think it's probably more of a credit to the, the institutions that are out there because I use the SBA 7A program, like so many self-funded Searchers do. So that, of course, was an avenue to a loan that, you know, I would have been nearly impossible to get otherwise. So that was a big help. Um, and the way our our structure worked was it was 85%...

What you're about to hear is I, I did heavily leverage this whole thing. So it was 85% SBA 7A loan, 10% of it was a kind of a standard seller note, 5% of it was a seller standby note. And then the remaining 5% of the purchase price came from equity, uh, from some from cash at close. So the 5% standby note is relevant because I don't know if some of the structure rules have changed since since I did my purchase, but at the time that if you did an SBA loan, the the max that you could have was 90% of the purchase price, or I think it was max $5 million, and 90% of the purchase price, whatever was higher. And that said, if you needed to bring 10% cash at close, they would allow 5% of that to be in the form of a seller standby note. And for those that are listening that don't know, a seller standby note is a seller note where you

cannot make any payments on it, interest or principal, until the senior debt obligation has been fully fulfilled. So, I have a seller standby note with Sharon for 5% of the value. It's accrues interest until I've paid off my primary loan to Live Oak Bank, but I'm not actually paying any cash on it right now, uh, on a monthly basis or annual basis. So, um, what it does is it just doesn't hamper cash flow. It doesn't hamper cash flow, and the bank allows you to use that as, uh, up to 5%, at least at the time of the, of the equity.

Couple of things to say there. You'll, you'll hear sometimes people refer to that standby note as, oh, it's, it's essentially equity. And I always found that confusing because it's not equity, it's, it's definitely debt. But what people mean by that is they're just kind of shanding that it can count towards your equity. So that 5% debt, when that additional 5% chunk of debt that's standby and that you're not going to have to pay on for however long you agree to, can count as 5% of the full 10% equity that you need to bring, leaving you with 5% of the total deal amount in cash that you need to bring.

One more point on the standby. Um, I'm used to hearing, Pete, that the standby are two-year standby, three-year standby, five-year standby, that it's more just tied to a calendar period of time as opposed to when you pay down your SBA loan. Because that means the seller ain't going to see that for 10 years potentially, since the SBA loan amortizes over 10 years, right? Two things: one, I hope the seller sees that money before 10 years, because that's certainly my goal. I'm not trying to, uh, stretch out the SBA payments the full 10 years. But yes, theoretically, um, in the way I kind of floated that was, I originally had, um, a 20% I, the deal I originally floated to Sharon was a 75% bank loan, 20% seller note, and then I would have had the 5% equity. Yeah, then the 5% equity.

The end. And or no, I think it was 70, 210. And then, and then I said, once I found out about the standby note and how that could work, I said to Sharon, I'll, I'll swap out. Do an extra 5% on the, the bank loan, so that she's basically getting an extra 5% cash at close, and then swap the other 5% to the standby note, which she was comfortable with. Saying, all right, I'll, I'll kind of take it out of one pocket and put it in the other. So I, I'll take a little bit more money up front if it means that you're going to have this note that's going to carry on a little bit longer. Um, and that was the way that Live Oak had it structured as well. At least that was their agreement and how the seller standby note was going to have to work. Again, I got lucky and that Sharon was okay with that structure and we were able to work it out. Um, but yeah, it, it certainly made a lot of years to close on a deal like this because it's not that I don't know, I probably could have found a way to raise the full 10% equity that I needed. It just would have tracked a little bit longer. It's that many more conversations that you have to have. Um, and from a fundraising standpoint, know, less is less. If you don't have to get as much money together, you don't have to have as many checks cut. It just moves a little bit faster.

Sure, for sure. And so, okay, so, um, back to the calculation of the multiple. So what did you propose to Sharon? So it was basically, um, almost exactly four times earnings, um, that I, that I bought the business for. So, okay, a little bit over 4 million bucks. Mhm. Yeah, I think the final purchase price was 4.3 million. So it's, and again, that was just a number that I've been reading all the literature out there, knowing what the typical range of purchases of businesses is, and me feeling like it was, once trying to work out this balance of, I want to make sure I'm offering the maximum kind of value and fair price to Sharon, at the same time making sure that I'm putting myself in a position where I'm able to get a return to investors and and make sure that the business is covering its its obligations and everything. And of course, Live Oak and any other bank is not really going to approve you for anything if they don't feel like that those ratios are healthy or whatever. So there's a vetting process there. And now, 2021, HVAC was not white hot like it is now, but it was probably starting to get some attention. And she had said, oh, wow, another one to her son when she forwarded your email on to him. So she was obviously seeing demand for her business.

Why did she choose you? Oh, I asked her this one time actually, a couple years ago, or maybe a year or two ago. And her, there were a couple things. One, well, this is what she told me, and then I'll, and then I'll tell you what I read between the lines. So what she told me was that she just liked that it was an individual buying it. She, as we had some conversations and spoke a little more, she felt comfortable with my background, what I was trying to do, and that, as cliched as it sounds, that I would be, you know, a good steward for the business and kind of carried on and and and carry on her name. She had said she'd received offers from even some competitors in the area, some larger companies and whatnot. And there was, she'd been doing it for a long time, she founded the company in 1981. She was in HVAC prior to that. And it's a relatively tight-knit world. Once you're, once you're in it, a lot of the people know each other's names and know the other companies. And even the technicians at the companies know the reputation of different businesses across the landscape and in your locality. And, you know, she had said that she just had offered some other company and she said, I'm not putting my name on, no, that business, or I don't want to work with him, or something like that. So, no, she had, she had some opinions about it. And, and I can understand it, right? It's, it's, it's, it's called Sharon, it's got her name on it, and she, and she'd been there for a long time. There were people at the company, I think she wanted to make sure they were taken care of. It's not someone like me comes in, it's not a guarantee by any means. But in any event, she felt comfortable.

As it happened, I also happened to look a lot like her grandson. Which I think, I don't think that was the reason she sold it to me, but it was like the first thing her son, her daughter, and her all said. Like, they saw my picture on my website, and then I showed up in person, I walked in, and Sharon said, wow, he looks a lot like Adam. So, um, and I guess he was a, a golfer, uh, as well, in in high school and college and stuff. So I, I, I think the caddying story on there, uh, made it even, even, uh, even closer to home. So there was that part of it. But no, it, it was just that she, she liked the idea of, I think, selling to an individual and and having some comfort that it was kind of, kind of carry on in a somewhat similar manner. But that was the part that she told me. I think the other part was that, um, there was, of course, like any of these, there was a little bit of hair on it. And I think there were just some, some situations with it that maybe some larger institutions might not have been comfortable with. Um, one is that it was actually a carve-out, so to speak. So they had just opened a second location, um, in Fayetteville, which is about an hour away from, from Westland, which is where, um, where our business is located. And they had opened another one. And really, the reason they opened it was her grandson was was going to start running a business, running the business. And, and I think it was sort of their exit plan, so to speak. And I could see how some other purchasers might have a concern about, well, even if she's an hour away, and, and in my opinion, if you're in, especially residentially focused HVAC, there's no reason for anyone at your company to be driving an hour to take on business. But regardless, um, I, I think some larger buyers, a private equity or something, might have some stronger feelings or be less flexible with having the former founder of the business still be in or near the industry or have her family people that used to be working at the company I bought now working an hour away in in a different locality. Um, so I think that was probably something that I, I don't know how much they explored it, but probably could have driven some people off. Um, and yeah, and if I had to guess, that was probably one of the main reasons that they, I don't know if they were for forced to sell to an individual like myself, but certainly had to consider it as opposed to going to some larger institutions.

Well, circling back up to the, to the other reason about what you look like, Pete, and your, and your caddying story. Um, one thing we also often hear, we admonish searchers to not overthink their website. Should it look like private equity? Should it not? Should, you know, should you even have your own personal website or whatever? And I think I think the consensus is like, certainly don't spend a lot, that much time on it. Don't try to overthink it. You know, you're going to encounter some, some owners that want to sell to private equity. So if you can project as private equity, that's a good thing. You're going to find other owners who don't want to sell to private equity, and so those people aren't going to like a private equity look. So you can't get in the mind of all of these owners. So just be yourself, ultimately. Um, but anyway, it sounds like your website really served you well. The little personal details there, really traveled into, into her head. I think it helped. I, I agree with everything you said there. I think, however, whatever path you're going down, whether you are traditionally funded, whether you're an individual searcher, whether you're a part of a larger private equity group or something like that, I think you just want to play to your differentiators, play to your strengths, whatever you want to call it. And yeah, I mean, when I spun up my search, or whatever, and came up with a name, I, I purposely didn't call it Capital or Partners or or anything like that, because I didn't have any capital, I didn't have any partners. I, I, I just wanted to make sure it was, was, uh, I didn't, I didn't have equity. So I, like, I didn't have any of those things. So I wanted to just try to, in so far as possible, send out this message that I'm kind of a, you know, average Joe, so to speak, and I want to go buy a business. But also having to balance that and demonstrate that I can actually close a transaction, I have some level of expertise and knowledge and business background, and that I'm not just, um, completely making up the whole scenario, even though you're kind of winging it along the way. Um, so, so that's what I did. And then, you know, I, I like you said, I kept it simple. I put my picture up there, or picture of myself, my wife, and my daughter at the time. So I figured if there was ever an opportunity to exploit my child for profit, this was going to be it. So, um, I took advantage of that as well.

Okay, uh, I want to hear about your, the, just the investor piece here. Um, there's an investor. Well, I want to hear just a little bit about the structure to make that super clear to people. And then just to tease where I'm going with this, there's an investor that we both know who you showed the deal and passed on it. So I want to understand kind of why. You may have already given us that answer, but to be clear, remind everybody, 80% SBA, 10% seller note, 5% standby. So you got to raise 5% of cash. Yeah. Uh, of, call it 4.3 million. So that is 215. Yeah, I think, yeah, I think with some of the fees and everything, whatever might have been a little more like 260,000 or something. But yeah, called a quarter million approximately. Yeah, a quarter million. And, and go circling back up to how much you brought to the deal, didn't you say you brought about 5% of the equity that needed? So 5% of the 5%? Yeah, it, it was like, sorry, it was a little closer to 10%. So close to 10% of the 10%. But I specifically, it was just using some cash that we had in the bank account. We didn't empty our 401k or anything. We didn't get into, um, emptying out any long-term investments or anything like that. We use just to, and, and the only reason we did that was just my thought was, we're already buying this thing, we're pretty much putting our life behind it for the foreseeable future. If we have some extra cash, why not get a little bit more equity? Because clearly we believe in it. So this is going to be the best return I'm going to get, probably on this money, or the worst. And at that point, it's not going to matter. So, um, so that was the thought there.

Okay, okay. And so what you, you, the equity that you raised, you did friends and family, but you also tried some professional to raise some professional people in the search ecosystem. How did that go? Tell us that about that. I did a very poor job of this. And whenever I have conversations with people, and especially the self-funded folks, because it's probably not as much of an issue with the, I would imagine, with the people that get investor backing up front, you know, the traditional searchers, so to speak, or the accelerators, because they already have that built in. But the reason I say I did a poor job of it was I, I kind of waited to the end to start having these conversations. And again, I, it seems so obvious and clear to me now, but at the time, my thought was, well, I don't need to worry about talking to investors prior to having a deal because how can I explain, how can I have a conversation with them about investing in a company that I don't have? You know, and it was so, was this chicken and egg thing? I never really figured out which was, I need investors to have a deal, but I can't get a deal unless I have investors. And, and I need to, if I don't have a deal, how can I talk to investors about it? And so on and so forth. And in hindsight, it's knowing what I know now, you can absolutely, there's an eco, there's a market for people that are comfortable investing in self-funded deals. You can reach out and find them. I happen to find most of them via searchfund.com and and just other personal connections. And, you know, you can just talk to them in hypotheticals and get a general idea of what they're looking for from an investment standpoint, right? And just, you can probably create your own list of what's important to them. But the, you know, main attributes that you would expect to to have on your list of hypothetical investors, what, what type of check size are they willing to write? What types of returns they looking for? Are there certain structures that they're looking for within within their their equity piece or how the deal is structured? Uh, are there certain industries that they're very interested in or certain industries that are a no-go? And, and just even having that would have made it a lot easier because I probably could have cobbled together, I don't know, 40, 50 people or something like that. And then just those criteria, you can start to filter down when you have something on the line and reach out and and gather this equity. I, I waited the last minute. I had a deal, I realized I was getting a lot closer to closing, and this was real, and then I had to start raising or having these initial conversations, presenting this company, uh, and also introducing myself for the first time. So it just, it made it a little bit tighter of a squeeze and more difficult than it had to be.

Okay. And the, and then you, you were passed on by one well-known self-funded searcher. Why didn't he like your deal? Yeah, I, I would say I was, I was passed on by more than one. Um, well, one that we both know who's a prolific investor. So yes. And I think the reason was it had to do with the probably the transition and and how that was set up, or rather not set up. And I think this ties back into again, why when they sold to me, in addition to that being a little bit of a carve-out, and I could see some institutional buyer having an issue with that with the purchase, Sharon, the seller, was very adamant about she didn't want to tell this to employees and start having these conversations until we basically ined it, right? So it makes it difficult to, you know, truly vet out your team. I mean, there's some faith and trust when you start looking through financials and going through everything else and the company history that everything's going to work well. But you're essentially ripping off the band-aid on day one. You don't know how the company's going to react. And most importantly, if you don't have a a guaranteed plan or a set structure for your upper management, then there's a lot of uncertainty there and there's risk, right? So I had to lay out and go through and talk to Sharon and and, uh, her son and daughter about who's going to be taking over what roles. And I, I basically made like a, a sort of a transition chart where I knew who was what, what they were all doing on the day-to-day, what their main responsibilities was, and how this was going to shift. And some of the stuff was going to go to me, and then some of the stuff was going to go to some people that they had earmarked at the company. But unfortunately, they were people I had never met, right? And so I think for a lot of investors looking at that and not seeing that one, I was going to be able to talk to them prior to getting in, and, and two, just not having a knowing that this transition plan had not been talked to them, even if they were super excited about it and wanted it, it just, it made it more difficult. And it, it presented an element of risk that is fair, right? I, I, I, I think the way I would describe it is that had I been given the opportunity to now to invest in my own deal, I probably would not have invested in it for this very reason. Yes, because it's, it's critical, right? Like, it's an industry where I'm not, not going to have the technical know-how to be in charge of service technicians and answer questions on the phone or installers and answer questions on the phone, right? You're going to need some time to understand that business. Now, Sharon and her children were absolutely on board for helping with the transition period. And the reason that I was comfortable with it, besides the fact that it was going to be me there, and I'm, you know, betting on myself and, and all that, you know, that's typical for any one of these deals, is that, you know, I, I felt comfortable that Sharon and her son and daughter would stay on as long as needed to help make sure that the transition was complete and that we were in a good space. But the, the question is, is that going to be a couple months or is that going to be a couple years? I mean, I don't think they're going to stay that long. So, well, how fast can you get this done? And can you make sure that you've, you're recreating whatever managerial structure was in place to at least kind of keep the status quo going and hopefully find ways to improve? And, and, and then how did that element of the transition go? So Sharon stayed on board for about two and a half months before transitioning out. Her daughter stayed on board for about three and a half months before transitioning out. And her son actually stayed on for about a year and a half before transitioning out. And so it went, it went pretty well. Um, the most difficult part for me, and this was one of the biggest heartburn for me early on with the the whole purchase and, and transition, was that I had to, so I was taking over a combination of some of Sharon and her daughter's duties that would just be what I would call sort of basic general management type functions, things that didn't require you to know the industry very well at all. Is just sort of the accounting and, and general what have you of running a business, working with insurance brokers and all the paperwork and, and all the fun stuff, right? That, that has to happen. And then Sharon was also the one that was leading up our, our residential installation crews. And I had to work with and transition a guy that they had identified at the company, sort of a young and up-and-comer, who ended up taking that over. But work with him in, in the sense of both, do you want the role, putting together an offer that was going to be something that he was okay with, that given the level of responsibility I was going to give him, and then having him sort of transition and having Sharon sort of train him to take over that job. So again, elements of complexity, and ended up working out. He's still my install manager today, does a great job. Um, and then I think the biggest benefit or, or surprising boon that came out of it was that her son stayed on as long as he did, because he was helping to run our commercial construction department, running our service department, wealth of knowledge, was a really good guy, um, provided all types of of valuable insights and, and was just kind of like a general glue guy that helped with, um, sort of advocating with a lot of the, the remaining employees. And, you know, again, it's tough to put a price on that, but it was really, really helpful. And I think helped, um, smooth out the whole transition process.

We're going to start getting into what operations has been like here. And I'm keeping my eye on the time, Pete. But, so at the end of the deal structure, how much of the business do you own? The end of all that, 91.26%. It's good to be a self-funded searcher. Now, now, Pete, speaking of, uh, the category of self-funded search, the most everybody listening, regular listeners will know that SDE, the bigger the better, typically. The sweet spot we consider 750 to a million SDE. Hard to find those businesses though. So, so, so many of my guests, so many self-funded searchers end up relaxing that requirement and go down to six and five and four, even, and even lower in SDE. You found one. And not only did you find one, you found one in an industry that ended up being the industry. It wasn't yet in 2021, but, but lucky you. And we'll get into whether or not private equity is knocking on your door every day at this point, and if you're going to go sell tomorrow, how do you think about size? Now, now that you've gone through the experience, did it feel like, wow, this is awesome if, if the business were, you know, half this size, it would have been a lot harder? Or maybe the, the business actually felt really big and scary? What, what would you say to people? Um, as somebody who's bought a business that was over a million dollars in SDE with 60 employees, 65 employees, $12 million almost in revenue. So I think if I had my brothers, I would have actually had a little bit smaller of a company in my mind's eye. I, when I thought about before I ever started searching and everything, I had this thing in my head of, oh yeah, I can see myself running a company with, I don't know, 15, 20, 30 people at it or something like that. I think just the size of it, it, it's intimidating, but it's also just more to manage, you know, and, and it's just more people, more, more issues and personnel things that are going to go along with it. For the most part, I've been pretty fortunate with all of it, and I'm also lucky to have an actual, you know, middle management structure, so that that helps it. But it's, um, I guess I'll never have that comparison point, at least not for the foreseeable future, in terms of what it'd be like to be a little something a little bit smaller. But the reason I was okay with it was me betting and hoping that all right, if it's bigger, it's going to be a little bit more robust. And my thought process was, well, yeah, I, I, it felt like it was going to be easier to connect and just sort of manage more tightly and, and become comfortable with the company that say had 20 people at it. But my other thought there was, well, if two employees leave within a month, that's 10% of your workforce is just walked off, right? So it, it, there's going to be some turnover in HVAC. And we, that's one of the main battles is making sure that you find and retain talent. I'm sure it's that way in every industry, of course, but we just know that somewhat in the skilled trades, there's a labor shortage. And, um, the revenue generators within the company, given that it's service-based, and, it, it feels a little bit less dire than when if you have a employee or two walk or something like that in a given month or get posted or something, it's all right, that's it, stay. So you got to find people to replace them. But it's not, um, quite as damaging as, you know, having a quarter of your staff walk out, and a quarter of your staff is four people or something like that. So, um, it is big and intimidating at first, but it feels somewhat consistent now. And the other part I'll add is that with us having a decent chunk of commercial construction, there is that many people, but between that and the guys that on the residential side, there's only about 15 people in in the office at any given time. Most of the people are out in the field working. So it's not like I'm standing in front of an audience every day. That, that part's pretty rare. So, but Pete, the fact that yes, it was intimidating, but you're used to it now, you know? And what you just said, it's not like you're addressing 65 people every morning. Getting through that, uh, initial intimidation, it sounds like it's only more complex, but big things are more complex. That doesn't necessarily seem like that much of a con. So it sounds like it's only good that, that you would say the bigger is, is better. All things being equal. Yeah, I'd probably say bigger is better because you're more robust, you're making more money, you hopefully have it more resources to then set yourself up to scale. The ifs, of course, that go along with it are, are, are you big for a good reason? Like, have you, has the company grown to that size sustainably? Has it, does it have the right foundation in place? Do you feel like you can keep scaling as you would expect? Like, there's been work that's had to go in even since I've got there about how do we arrange the 65 employees we have, because we, we've grown, our bottom line has grown since I started, which is great. The number of employees we have is pretty much flatlined since I've been there, but how they're allocated across different departments and who we have in place and whatnot has also changed a little bit. And some of that's just been out of necessity in terms of understanding how we have a structure that supports everything. But yeah, I, I think, you know, if you can keep growing and get bigger, then there's a reason that, you know, very large publicly company, publicly traded companies trade at incredibly high multiples compared to what I purchased, right? Like, there's, there's some comfort in that size and knowing that they can take a few bumps and, and maintain, usually.

Well, and this question is going to be a perfect segue to getting into HVAC and what you've done with the business, but you just talked about, uh, kind of the quality of revenue or how sustainably the business has been built. Does it have the right foundation? Um, you've come in and made some changes there. Where I'm going with this is, is this because the business was big enough, is this one of these where you were able to work on the business rather than in the business much quickly, much more quickly? So in other words, this adventure for you has been a lot of strategy as opposed to a lot of blocking and tackling. And most people think that the strategy stuff is the fun stuff, not only the fun stuff, but also the stuff where you get the most leverage from your time. I would agree with that. So that's another, yeah, you're 100% right. That's another advantage generally speaking of if you have a bigger company and you have some support structure in place, the hope is that you can operate on a, as more of a quote unquote CEO, right? Uh, and, and truly think in a strategic manner and try to think about some of the, the big ticket items or areas for improvement, right? Um, if you have to out of necessity spend the bulk of your day doing tactical activities, I understand they're important, and, and you can probably find time to chip away at some of these things, but it's, if you only have a limited amount of time to do it, it's just going to make it more difficult, right? And, and that's been a, a process even for me and myself, because early on, I felt like I was doing a lot of that, but some of it was almost out of by choice because you want to see how everything operates, how everything runs, understand what everyone's doing to a degree, and within reason, right? Like, I'm really good technicians take years to develop their skill in this trade, and I'm not gonna at any given point become a, a good HVAC technician. Like, I'm the last person in the world you probably want repairing your furnace, right? Even though I own an HVAC company. Um, but I at least want to understand how do our customers find us? What's interacting with the customers like? What does it, what does it look like for the technicians when they're talking to the customers? How are they handling the the workout in the field, even writing up their tickets and charging them? All these little minor things. So I think it was good to kind of be involved with that early on and, and necessary. Um, but yeah, every day that goes by, I'm always looking for opportunity to pull myself away from it. One, just to, like you said, hopefully get, hopefully find the time to spend on some of these things that I think will be, uh, more important and provide better return for the time that I'm putting in. And then two, just as a self-preservation thing, right? Where if I'm involved in stuff all the time, um, one, if I take time off, then things are coming to a halt, and I don't want that to be the case. And then two, just inherently, the business is less valuable if one person is, is that much more important than everyone else, right? The hope is that it's not there yet, but the hope is that if I'm struck by a bolt of lightning tomorrow, everything just carries on, right? Um, so that's, that's the ultimate goal.

Great. Thank you, Pete. Now, let, let's get into a little bit of HVAC, uh, HVAC strategic thinking. So, um, a big, a big, a big kind of, um, strategic question about your business, about Sharon's, um, in really any HVAC business, I guess, is the mix of residential versus commercial. Um, let's talk, let's talk about that, because that, that's really where you, I feel like you've, you've made a big shift in the business. So, yeah, when I bought the business, we were split about 50% residential to commercial construction work. And we're now, this year, we're probably going to be somewhere, depends how the last couple months of the year go, but it'll be somewhere around 65% residential to 35% commercial construction. And I'd say what's happened there is our revenues have gone down a little bit in commercial construction, but it's more been as a result of the growth of our residential side. And we kind of had this thesis when I was working on this with my investors prior to buying the company, that Sharon's had a really strong growth rate year-over-year on its residential revenue. And my view is, if we can keep going, and I, as I really dove into their numbers, it's anyone in the industry knows this, but it's, it's much more profitable. The, the typically speaking, the residential work is going to be much more profitable than the commercial construction work. So my thought was, even if Sharon's was to maintain that, know, 11 and a half million in revenue for the next five years, but that went from being 50/50 to like an 80/20 split, there should be an immense enhancement in, in the bottom line. So my view was, can we kind of slowly shift our revenue split and, and get to that? And, you know, we, it'll be three years this March, and that's, that's kind of happened. We, um, have been slowly trending that way. And it's mostly manifested itself, it's, it's worked out better. Um, notable exception in my second year, which I can talk about a little bit more. But, um, in any event, with that, that split, we, like, we pretty much have had that happen. Our revenue is basically, our top line has remained stagnant for almost three years, but our revenue, or our bottom line has been growing by a pretty healthy margin. And it's by shifting this business. So, um, what's nice is that we have been able to kind of reallocate some resources. So we've had some guys in commercial that we can move over to residential. And then, you know, we just had the, the structure and everything in place, like we talked about before, to be able to scale and continue to grow the residential side without having to really add much in the way of overhead. Congratulations on that. So, so, so you're still at between 11 and 12 million in revenue, but, uh, but EBITDA has grown to what? We'll see how this year shakes out, but my guess is we probably be somewhere around like 1.6, 1.7 million in EBITDA.

Okay, everybody listening, so, so, uh, put in whatever 20, 30, 40, 50 grand of his own money to now be, to, to be the 91% owner of a business doing 1.6, 1.7 in EBITDA. Very, very nice. Um, this point about residential being so much more appealing or higher margin than commercial. So higher margin, yes, but is it, I have to believe that there are cons to residential. I mean, aren't you, doesn't like going to be a, I assume much higher marketing expense? So doesn't that eat a lot, eat up a lot of that margin? The commercial business is much longer, so there's just less churn in the product, in the project. So your, your crews are going to the same projects for, I don't know, how, you know, I don't know anything about this world, weeks, months at a time. And so maybe just there's less, what do they call it, windshield time? There's less windshield time in commercial projects than in residential projects. I just have to believe there's that, there's something appealing to commercial despite the fact that it's lower margin. Yeah, there is. So I really like having it, and I've been, it's basically saved my butt, uh, in the second year of of owning the company. So I'm, I'm grateful for it. And it's, it's, I like having the mix. I know that for, you mentioned it before, the, the prospective buyers and the industry consolidators right now, the PE companies and large strategic buyers, they're pretty much only interested in the residential side. And, you know, I can talk about why they view that. But for me personally, as the one that owns a business and, or owns a lot and shares the business and runs it day-to-day, it's been great having the commercial. So like you said, the, the main difference is that the residential is going to be seasonal, typically speaking, in its demand, have seasonal spikes. And the commercial, the commercial is going to be more cyclical, right? So at least at the time, there's, there's plenty of building going on, there's work out there. And what's nice is that the commercial stuff kind of smooths out the, the seasonality that you get. So, um, during peak season, pretty much anyone who can do the work can make money in HVAC. There's so much demand, no one can keep up. You know, we could double in size and not keep up with the calls and everything. Um, but it's for these windows, you know, peak summer, peak winter, whatever, then there's the, the, the in-between seasons. And it's really nice to have that commercial revenue coming in, knowing that we were having this call today, I, I looked back at how our revenues went. And in our second year, we had a really mild winter followed by a really mild summer. And, you know, until I think you're a more sophisticated company that's really got some of its marketing strategies dialed in and you're leveraging the most out of your existing customer list, we weren't at the time. So our residential side suffered. So in my second year, we, our residential revenue dropped 26% from the prior year. Um, but our commercial, we had a great year commercially, and our commercial revenue was up 26%. So long story short was we, we grew, um, we still grew 11% in 2020, 23 compared to 2022 as a company, even having a, a really lousy residential year. Um, so that, that balance in business really helped and, and, you know, changed what would have been a really disappointing and, and pretty awful year for, for a company if we were just residential. And then we know through hearsay that other companies in our geography had that those same issues that, that we did, and they might have been 100% residentially focused, to flipping it to having a pretty strong year. So I, I, I'm thankful for it. It's helpful. And I, I view it as kind of a, for me personally, a bit of a differentiator, even though, you know, a lot of other companies in our industry really focus on one or the other.

Thank you for that, Pete. And now, now let's segue into private equity and its, its role in this industry, which we hear about constantly. Um, it's, and I'll just launch us into it by saying, it is interesting how PE is so attuned to the revenue mixes in its target businesses. As just one example, Jordan Dubin, whose episode will have aired by the time our, our conversation now is airing, he will have aired a couple weeks ago, um, is rolling up garage door businesses. And their criteria and rolling up them up and then will sell to a larger private equity company, in their criteria, because they, they are assuming that their, um, their own buyers will have the same criteria, is that the, a garage door business has to have 10% install or less revenue. So 90% or more needs to just be garage door servicing, no installation. Okay? So that, I'm talking about in that case, I'm talking about, uh, project versus service revenue. So that's a little different than residential versus commercial. But the point of it is that it's the same. It comes down to quality of revenue, type of customer. You've just made a, a really strong case for the value of having a mix there. So, so the revenue is a little bit, the revenue line is a little bit smoother, and, and, you know, the cyclicality helps with the seasonality and, and so on. But, um, but private equity, that maybe that's hurting you with private equity. Now, I don't even know if you want to sell, but maybe speak to that. And then let's just hear about what your, you who got in in 2021 as this industry was heating up, now it's so hot. What have you seen there? So I did not realize at the time when I bought the company that this was a, a very coveted industry for private equity. That was unknown to me. I had heard inklings here and there, but I didn't know it would be to the level it is right now, where there's articles everywhere and you're getting outreach all the time and everything. And it's, it is, um, it is hot. I don't know, for lack of a better term. They, they, I do get a fair amount of outreach. I usually, there's a few people reaching out to me at least, I don't know, this point, it seems like there's a new person every week almost. But, you know, several times a month, I'm having some, um, either buyers rep or investment bank or something like that reach out and they want to know more and they want to have a conversation. Um, so that was unexpected. That was just kind of blind luck. What drew me to the HVAC originally was mostly just knowing some people growing up in, in HVAC and, you know, people in the neighborhood and the hearsay of, you know, my mom say, oh, so and so has been HVAC, he makes a really nice living and works for himself, blah, blah, blah, and that type of thing. We, my my dad had a, his, the son of, of his colleagues was a private equity guy that left and bought a small HVAC company up in northern Michigan. And, you know, just hearing that story, even a few years before I started searching, I was like, well, that sounds nice. I know it's a, an essential industry and people always need it and that type of thing. Couldn't have predicted this with the private equity roll-up and whatnot. But yeah, what's interesting, like you're talking about with the revenue mix, is that hypothetically, if I were to try and start marketing and selling my company tomorrow, I think if you were to have my company and completely stripped out the commercial side, and let's say took out, dropped, which let's just say drops our EBITDA by 25% or something like that, I think we would be significantly more valuable in the eyes of private equity companies than if you had my same company with 25% larger bottom line right now. Um, but still having the commercial side. So literally, not only not only is your, are your earnings from commercial not worth anything to the private, private equity buyer, they're, they're worth less than nothing. They actually, the valuation of the business would be penalized for the presence of that, of that business, of that business line. That's the impression I get. I've had, I just have these cursory conversations because when I get some outreach, I, I have a half-hour drive home every day, so it's a good time to have these chats and just get an understanding of what's out there and everything. Now, I'm sure there's plenty of buyers that in the end will be flexible or, or willing to sort of overlook it or, or might have some value in it. Like I think about shop long enough, there'd be somebody that would, um, you know, either be willing to take it on or, or assign some type of value to it. But no, I, I, yeah, I think generally speaking, I, it seems like it's actually not only is it not helping, it might even be hurting a little bit and what our valuation would be to, um, some of these larger private equity buyers. So I understand some of the reasoning. What is fascinating to me is like, in the anecdote I just gave you, one, in a year where, you know, the weather doesn't cooperate, and we just have to be honest, like, you can market all you want, but this is not a, I know it's not a discretionary spend, but at the same time, it's also not a conspicuous spend, right? Like nobody, if they have a little extra change in their pocket, volunteers to swap out their furnace, usually, right? You don't, you don't get a bonus and then say, hey, guys.

I'm check out this new condenser in my backyard for my AC. You know, it's just not, it's a, it's a necessity. It's important. But, um, you really don't call us until something's broken or, um, you need something repaired or you need it replaced, right? So, I, I don't kid myself about that. And they're mechanical devices. They, we do best when people are in pain. So, usually when it's really cold or really hot, everybody makes more money. In the meantime, you can throw as much marketing dollars at it as you want, but if people's, if it's super mild, um, you're just not going to have the, the same revenue drivers. And in an off year, it's really nice to have that commercial. And the other side of it, too, is that in those same off years, and especially in those, you get a spring that's a little bit milder and lasts longer, same thing with a fall. We never, we don't have to do any either seasonal layoffs or, or pseudo layoffs where guys are getting 15, 20 hours a week because we don't have the business because we can send them to a commercial job site. We have that work going on in the background. They can do value-added work, still collect their paycheck, and, um, you know, we don't have to worry about them jumping ship somewhere or, or, you know, developing a, a bad employer relationship because we, for all intents and purposes, laid them off for two months. So, um, again, I feel like that, at least when I first got there, was a differentiator with our company, um, in terms of being able to offer that. And, uh, like I said, it's, it's, it's a mix. I'm happy to have, even if, you know, it's not quite seen that way from the, what some of the more deeper pocketed buyers would, would say.

And do you feel that their reason for being so insistent on a very, you know, very specific revenue mix, namely no commercial, all residential, or as much residential as possible, is because, similar to Jordan Duban, that, that, you know, small private equity shop is going to bundle a bunch of Sharon size HVAC businesses and then sell them to a larger private equity shop? And that larger private equity shop is going to, is going to also, you know, insist on on it being all residential? But, but I guess that just begs the question, like, who fundamentally is driving this, uh, purity of revenue? If, as you've so articulately and convincingly told us, that there's a lot of value to having a kind of a, there's a perfect mix here that that includes commercial, to be clear, that includes, you know, a certain percentage of commercial, why, why do they not see it the way the world, the way you do, the market, the way you do?

So, you're asking a question that I've kind of been asking. And I, I don't know where I'm going to get the answer. There's some higher power is, is making this decision, right? But there's, what you're setting up is like some type of Russian doll situation, right? Where you keep, in theory, selling these platforms to someone bigger who wants a similar-looking platform. Um, I don't know who's at the top of that food chain, or if ultimately someone's goal is to roll up a whole bunch of these and go public or something like that. I, I could speculate. But I, you know, in their defense, I will say this: when residential is working well, it works really well. And it's, it's fantastic. You get, you, you get paid immediately. There's no extension of the cash flow cycle like you sometimes get in commercial construction. Um, the profit margins are significantly higher. Um, yeah, you, you can acquire a whole bunch of customers and keep them a little bit stickier. So all that, that stuff works really well. And, and it is somewhat predictable in the sense of, yeah, the weather can maybe not cooperate, but, you know, pretty much every summer and every winter, at least for us up north that have a winter, um, there's, there's going to be huge spikes in, in demand, and you can really take advantage of that. Um, you know, if you go through a, I'm sure the commercial construction side of HVAC was not a pleasant place to be from say 2009 to 2013 or something like that, right? Sure. So I, I, I can understand how if people have a lot of exposure in that, that would be a concern. And the other side of it, too, is that you're, it's a little bit riskier in the sense of, you sign some big contract and your profit margin is a little bit thinner, and then if something goes sideways, you might be the one that eats it. So I, I know they don't like the exposure from a risk standpoint. And, you know, frankly speaking, there's just a lot of commercial construction that's probably not run very well. So if you're already at a somewhat thin margin and you're bidding really low just to quite to get more and more business, and then things are mismanaged, yeah, you could, you could really impact profitability. We've been lucky that our, our, our projects have gone well, they're run well, we, we have good managers there. I mean, I, I didn't share this part earlier, but part of the other reason I really like our commercial construction side is that for how much of our revenue it is, it takes up very little of my time and effort. I, I do some general management there. I visit our sites every so often, but our team is doing most of it, and I'm just handling some paperwork and weighing in on bids and numbers and everything in the background. So it's, it's not free, but it, it feels so much more low-touch compared to the efforts that have been put in on the residential side.

Well, you use some words in that, in that explanation, too, that that also crystallized for me kind of how PE might think about it, which is that rather than thinking, well, what, you know, this is all HVAC, and, you know, it's either HVAC on a building or it's HVAC on a house. Well, true, but they're probably thinking about it in terms of one is the Home Services category, and one is the construction category. And, and when you think about it that way, it's very different kind of industry dynamics, quality of revenue. And, and nobody likes construction, or at least private equity doesn't like construction, um, for the most part. So, um, maybe that's the answer. And, you know, it's all project-based revenue. Um, and whereas is residential, I don't know what you'd call it because it's, it's, it's not recurring revenue, um, but it's maybe, maybe somehow more systematic because you can figure out how many leads and, you know, if you know what the average temperature one summer is going to be, you can kind of, you can kind of proffer how many leads you're going to get a day, and then refine your funnel and know how many calls you're going to be, you know, outbound calls you're actually going to make, and so on. I don't know, maybe it becomes more formulaic than a project-based business on the construction than a construction-based business.

Yeah, I'd say the residential is more predictable. Is the, the word I would use. Like you can count on seasonality. And then if you're, if you're doing a good job too, you can get some recurring revenue out of it and, and, and preventative maintenance contracts and, and annual maintenance that goes into it. You're just not going to have that. You're right, commercial construction is 100% project-based. Um, you know, one thing that is nice for us as well that we leverage it is that we try to, as many of our commercial construction projects as possible, turn it over to our maintenance department afterwards. So if we just built a 75-unit apartment building, well, it's got 75 units that need, need annual maintenance or should receive annual maintenance. And the first thing we do, once we pass our final inspections and they open up the building, is we reach out to the building owner and put down a contract and say, you just spent hundreds of thousands or millions of dollars on this building. Um, here's a relatively small cost you could pay for us to come out every spring and summer or every spring and fall and do the preventative maintenance on your equipment and keep it going. And, you know, in theory, who knows it better than us, the people that put in the equipment and built the whole, you know, HVAC system for your, your new, uh, building. So we've been able to leverage that and get some of that out of it as well. But, um, you know, the other thing that comes to mind with all the, the people with the platform companies is that I don't think you're going to find as many ways to get these, um, synergies. I was waiting to use that word on this podcast. Um, you, you won't find a way to get these synergies, I think, across having multiple different commercial construction companies because I think there's just going to be a limit in how you can, you know, kind of utilize the same background functions. Like I know you could, in theory, have consolidated HR and finance functions and everything. But with the services, the residential side, you've got, you know, uh, software that can be leveraged across all of it. You can, um, probably get better advantage of larger spending power for the equipment that you have and parts and materials and everything. You can, um, share data really easily for how you're pricing different types of work and, um, the reporting and everything. So I, I, I understand the argument. Um, I just, what I don't understand is seeing virtually zero or negative value in a side of the business that is generating profit.

So, and Pete, as an insider to this industry, the ultimate insider owner now, do you understand why a, why PE, do you understand why PE likes HVAC so much? Yes. Why did it become, of all industries, why did it become the one that is just attracting so much capital?

So, yeah, I think a couple things come to mind. One is that, uh, it's, it's non-negotiable for the most part. Like, I, even if, even, yeah, essential. If you're, if you're hard up on cash or even unemployed and your furnace breaks in Michigan and it's the winter, you basically your options are death or get a furnace. You know, like there's, there's not really anywhere that you're going to go, um, besides getting it repaired. Now, maybe you'll shop around a little bit with companies and everything, but, and most people feel this way, or even stronger about AC. Frankly, people do not like to be hot. Um, so in any event, like, it's, it's an essential industry. So I could see that. I think there's maybe, I'm speculating here, but a little bit of a vacuum, um, for bringing people in that have structure and, and resources to do something that historically maybe people don't have the best experience with and do it well. Um, and what I mean there is that I think probably most people that have had to deal with contractors in some capacity, a lot of people have negative stories, right? Whether it's HVAC or plumbing or roofing, they, it feels like it's one of those deals like when you find a good one, people almost want to like go brag about it. They want to tell someone and refer people. Like, yeah, I had a, you know, an electrician came by and he didn't fleece me and he was really honest and did a good job, or like, you almost have to have an insider track. So if there's an opportunity to kind of bring some professionalism to an industry that sometimes doesn't have the best reputation, but it's still essential, like we said, and profitable, then I could see how they're drawn to that. And then I don't know, I think theoretically, if you have access to other industries that you could maybe do some of the cross-selling on, then maybe there's value there. Know hypothetically, if you had this HVAC platform and then you're bringing on plumbing and electric, and you have these home services, well, can you tie in the garage door so that you're more of a one-stop shop, or at least have the, the list of customers and leads that you can tie that into, or the roofing, or the window installation, or the lawn care, any of these things where you could say, all right, the same 10,000 people on this customer list that are going to be good candidates for AC, I can probably think of, you know, a dozen other industries just regarding their home alone that might be, you know, that might be a good opportunity.

Pete, let's start, start wrapping up here. What I want to, oh, oh, actually, one more operational question for you. The fact that you, this, your years as a database consultant, writing SQL queries, one, uh, guest who's been on a few times, Nick Hasca, does a good job in his businesses of using Google, I think it's called AppSheet, which is basically like Google's G Suite's no-code tool. And so he's built a lot of the workflows with some kind of no-code or light code, um, that now kind of run his businesses. Have you applied any of your kind of programming skills into this business operationally, or no?

Those skills are not being, there's no real use for them for the most part. No, I would say more of the skills tied to that, it's just been general IT knowledge. Like I'm the de facto IT department at our skill, or excuse me, at our company. And that's just from me having that background. And probably spent more time, and I haven't really done much with the coding, but I do a fair amount with like reporting and, and, and analyzing that data. So I'd say more of having a, you know, several years being a spreadsheet jockey in general, have been helpful. That's it. It's probably that way with a lot of small businesses. The coding thing hasn't come up. You know, the software that we use for our company, and a lot of companies use in our industry, is called ServiceTitan. That's sort of our, um, customer relationship management, slash enterprise resource planning, payment processor, and integrates with our accounting software and everything. Um, it, it has a lot of custom reports built in, or reports built in, and then reports that you can customize and everything. So it hasn't come up on the coding side, um, unfortunately, yet. I, I don't know if there's going to be a future where I'm adding value via SQL coding, uh, in HVAC, but I, I'll let you know if that day comes.

Okay. You bought a big business and you leveraged, I mean, you basically, to you, leveraged it as much as you could. I find it an interesting conversation around, I find the amount of debt used to be an interesting conversation, especially now that I'm, via Mind's Capital, more and more exposed to independent sponsor deals and more kind of private equity style deals where there's a lot less leverage in general, a lot more equity brought to the table for a deal. Um, but self-funded searchers, SBA searchers, often, um, kind of do max leverage. And you did max leverage. And on a sizable deal, is it, fine, answer the psychological question, how that feels? But also the free cash flow question. The more debt, the more debt service, the less cash you have to reinvest in the business. And so while it might let you, it might, a lot of leverage might give you a lower entry point into a business because you have to bring less to the table. That's why we like it. Um, maybe it doesn't let you grow as fast because you can't reinvest into the business nearly as much because you're prioritizing, because that money is going to debt service.

I, all, if I certainly, if I had a choice, I would not have liked to have used that much leverage. That was more of a means to an end, uh, in this being my first deal, not having very much cash on hand myself, and then not having the, this stable of people that were going to be comfortable that where I felt like, oh yeah, I can just raise, you know, $1 to $2 million relatively quickly and get this done. Um, there, there were plenty, especially in the first year or two, there were plenty of days where I fantasized about what it must be like to have an all-equity deal or significant equity because, ah, you know, for all, for all the reasons you talked about, right? Just the free cash flow thing. It's, it, it's a luxury to have that. And, um, you know, even if that meant putting up more money at, up front, I'm sure there are countless examples of people doing 100% equity equity deals and getting very healthy returns on them. And, and, you know, I could see an argument where maybe you even get better returns because now you do have the, the restrictor plate is off. You don't have this, um, cash flow suck that is going to be the, the interest payments and what have you, that, you know, allows you to start making maybe wiser investments or more aggressive moves or something like that. So I know I felt like early on, definitely for like the first year to year and a half, I was hyper-focused on cash flow. It's, it's stabilized a lot more since then. And I think once you get to a certain point and you've kind of got your war chest built up, it's not, obviously I'm paying attention to my cash flow now, but it's not something that keeps me up at night or anything. Um, but I, I will say, uh, the two things that I felt comfortable with going into was that one, I assume that Live Oak or any bank was not going to be willing to give me this loan if they didn't feel like there was a pretty healthy, um, coverage ratio there, right? So if they were comfortable with it and they were the ones handing off the loan, um, I felt like there would clearly was some vetting here. So there, there must be a margin of safety. And I'm not just making this up in my head, right? If, because there were other deals that I posed to my lender and other lenders and different companies and different industries, and they, they didn't like it, you know, because they, they just felt like it was, it was too slam. Where they had concerns about it. So they were pretty much on board with this. I didn't get a lot of pushback, really at all, from lenders. So I felt like, all right, it's going to be okay. Um, but yeah, I, you know, I'm very interested and eager to pay down the debt as quickly as possible, not just to, you know, realize the cash flow for me personally, but yeah, just to alleviate the business and find other ways to invest. Although I will say this, in our industry, it's not apparent to me, even if I had no debt obligation right now, where I'd be dumping all this money, um, for reinvestment, because there's not, that was one of the things I liked about it is that it's not a very capital-intensive business. So, you know, we, a big purchase for, for me is going to be to buy like a new work van for a technician, right? Even that, if you use a very mild form of financing with a dealership or something like that, or even if you paid upfront all cash, it's a $40,000 vehicle or something like that. I mean, it's not nothing, but at the same time, in the grand scheme of the size of the business, it, you know, that vehicle, you throw a technician in it, it's going to pay for itself in a, I don't know, a couple months, you know? So it, it, we don't have to, there's not anything for me where I go like, oh, I need to buy a million-dollar piece of machinery or something like that, or or need to make some huge R&D investment or something. So that, that is one nice thing. I don't feel like there's a huge opportunity cost specific to my industry.

Well, now that you brought up the van example, Pete, I have to ask, why aren't you buying 10 vans if they pay for themselves in two months?

If it was just a van, I would. You got to put the people in them, right? So it's, it's the difficulty in finding really good technicians and retaining them. And also, there is that concern, right? Like I, I don't want to overhire and then we don't have the demand to go along with it, and then I've got guys that are going to either not be getting, you know, a healthy paycheck for a period of time, or ever. You know, I don't want to develop a reputation as we're a company that hires people because I know there's other companies that do this. We hire people in advance and busy months, and then several months later say, sorry, we got nothing for you, or, yeah, you know, um, I, I can't keep you employed. I mean, I, I do feel that obligation. And part of it is because I, you know, do care about the people that are there and I want to see them work well. But there's also just as much my own selfish motivations that I, I want to make sure that as we are seen as an attractive employer, employer in an industry that is hard up on labor, and these are the revenue-generating employees, I, I want to make sure that we're doing just as good of a job for them so that people want to come work for us and we are getting referrals and things like that.

The, you said, uh, it, the debt service doesn't keep you up at night now. And, and you, and you've said to me in the pre-call that the personal guarantee, a fixation of so many self-funded searchers, also is not something that you really think about. I also heard you say earlier in the conversation that 2022 could have been a really hard year. This is where the, that your commercial revenue kind of saved you. But bringing all those together, have you had any, you haven't had any real scares despite being highly leveraged on a, on a big business that is subject to cyclicality and seasonality?

No, I haven't. I think the closest I've come is in the first six months or something like that, when we're just getting spun up and you have to make a couple payrolls here and there, and they give the bank gives you a certain amount of working capital along with your business loan. Um, I also had a line of credit as well, and I had to pull briefly from the line of credit knowing that, you know, there were some larger checks coming in and projects finishing up and stuff, and then that was quickly repaid. And then I think, you know, maybe a year in, something similar where again, with these commercial construction projects, they're another thing the private equity buyers probably don't like about the industry is you have something called retainage. Um, which typically, it can vary from state to state, but in Michigan, it's typically 10%. So that means, you know, at the end of the project, you're going to get 10% of that project revenue back in one lump sum once the project completes, right? So depending on your profit margins, that might be like all of your profit or a significant part of it. So, you know, you could have a 12-month project and you really don't yield all the profit till like month 13 or 14, something like that. And it's a great windfall when it happens, but that means for a little while, you're floating it. And, um, you know, so again, I'd say like in the first year, year and a half, there was a couple times that I had to pull on the, the line of credit just being safe and not wanting to make sure I know missed a payroll, something like that. But it's been, yeah, you know, close to a year and a half, I think, since I've really had to to look at that. So I've been fortunate just with the way it's worked out, um, and, and how business has gone since I've been there. Um, so I haven't had any major scares yet, but, you know, there's been a couple moments where I was like, all right, this is, this is not going to be a fun month. I'm going to have to, you know, take out this line of credit and I want to make sure I stay on top of things and, and make sure that certain checks don't come in late or anything like that. But, um, yeah, to date, it's not been, it's not been bad. I, there's all the, I think when I'm going through it, I'm sure, well, actually I shouldn't say I'm sure, I'm wondering if some other people, uh, who acquired these businesses are doing the same mental gymnastics that I am. I kind of make up these little hurdles in my head that I'm going to get by. And I'm like, all right, that's an indicator that things are going well. Probably like a lot of people, I was like, all right, can I get through the first hundred days, you know, and make sure that there's no mass exodus of employees or customers or something? And then, then in my mind, I'm like, all right, well, can I make it to the one-year mark? Because that shows that I've made it through a full 365 and season and everything. And I spoke at, I was a panelist at the ETA conference that U of's business school had a couple years ago, and the, uh, lady who helped me out from Live Oak, Lisa Forest, was there speaking on this panel with me. And she said that typically speaking, and the deals that she does and the 7A deals with self-funded searchers, she said that, you know, once companies get to like the two-year mark post-acquisition, it's like, well over 90% end up, you know, paying out their loan in entirety, don't default, never have any issue, or something like that. So then in my mind, now adding another one, I was like, all right, if I can make it to the two-year mark, then, you know, I'm in the clear. It's obviously not true, and I still, I'm not declaring victory by any means yet, but at least in my mind, I'm going like, all right, that's another kind of mini hurdle that I've, I've made up that I've cleared, you know, I'm at the two-year mark. I feel like it's gonna, I've got a chance here.

Well, all that said, Pete, you did buy a 11 to 12 million business, as I keep saying, and very leveraged, and first-time self-funded search, and you haven't had fetal position moments, you haven't had, you, you haven't had working capital freak-outs. I mean, you had a little bit, you know, but not nothing terrible. You're, you, you're at the risk of making the audience think you've had, you know, that you're basically crushing it, and that this has gone the way it's supposed to. And oh, and by the way, you've increased your EBITDA $600,000 a year. So disabuse us that this is super easy for you.

Yeah, it's, it's exceedingly difficult. And I have had fetal position moments. And there's been plenty of times where I've said, I probably made a huge mistake, or I regret this, or this is not what it's cracked up to be, or whatever, right? Um, and, you know, to be fair, I, I think if you're throwing around the term like, I'm going to be the CEO of a business, that sounds nice in that title. I think if you say, I'm going to be the owner of the largest HVAC company in the 13th most populous city and the 10th most populous state in the country, um, it's a little bit less sexy. But the point is, is that like, there's, it's, it's exactly the lifestyle you might think it is when I put it that way. Um, it's, it's had a lot of upside. Like, I'm, I'm really happy and I feel very fortunate with how it's gone so far, but there are plenty of moments that are difficult. And almost, you know, every single week and many days, like there's plenty of frustration and annoyance, right? I, I don't think I've had quite the moments yet where it's been like, I, I'm bugging out because I don't think that's going to work, or I, I'm afraid this thing isn't going to make it. But I'd say it's been a lot more of like frustration and anger and woe is me, like, how I can't believe this isn't going better, or I feel like I'm doing everything right and I'm running into these hurdles or these challenges. But I would imagine that's probably just every single business that anyone's tried to acquire and operate, that that people are going through something similar. Like, I said, I haven't had one of those, um, soul-crushing things happen to me yet. But for me, it's been more like death by a thousand cuts, where I just, at the end of a week, I might be exhausted because I've dealt with, you know, so many personnel issues, and I've had a few customers chirp at me, and then something went wrong with a supplier, and then a, you know, a, a cash flow thing happened here, and I'm waiting on a receivable that didn't come in. And, um, yeah, it's, it, it definitely has not been easy. I think it's, I'm glad you pointed this out because you're right, I don't want to make it seem like it's been a cakewalk the whole time. It's been quite the opposite. And, um, it's probably worth mentioning too, because it's not, uh, for those thinking about doing it, it doesn't, you know, there, there's plenty of challenge that goes along with it. And it's, um, it's not a get-rich-quick scheme by any means. It, it takes some time and, um, uh, you know, a fair amount of stress that goes along with it.

Well, last question for you, Pete. And speaking of getting rich, so you're 1.6 or 7 in EBITDA, you know, you, you can squint your eyes and see $2 million in EBITDA, which we always hear as, as a very favorable threshold. Then you become interesting to a whole universe of private equity companies. What, do you have a plan here to exit the business? Are you going to hold it forever, or keeping your options open?

I would say keeping my options open. Um, it's tough not to think about the exit part when you get as much outreach as you do right now. And that's, that's going to be most people in the HVAC industry. It's probably not for all the reasons we talked about before with our revenue mix and everything. I, I think until I probably got to like maybe an 80/20 mix or something, at least between residential and commercial, it's not going to be as lucrative as, um, some might think, just given what the buyers are looking for. But I do know that even if it was at our current ratio, let's just say 65/35, and we got big enough, and that residential piece was big enough, that there will be people that will probably be interested, then just just to have that, even if they wanted nothing to do with the commercial. But I don't have any, I don't have a concrete timeline laid out or anything yet to exit. It's probably something that is still, you know, at least a couple years down the road before exploring. But it, it, it is interesting because I feel like I have to explore it to a degree because I also don't want to be the guy that missed the boat, so to speak, with, yeah, all the action that's happening here. And I, not that it would be the end of the world, but it would be pretty frustrating to say, all right, I'm not going to sell my business, hold on for another five to 10 years, and then find out based on the interest and valuations multiples that are happening, say, seven, eight years from now, that I'm effectively getting the same price for a business that's 40% larger or something that I would have gotten five years before that, just because it's cooled off a little bit. So I do think about that, and you can't help but explore it a little bit. But I don't have a, a concrete timeline in place. Um, but yeah, I, I try to have those calls just for that reason.

Pete, anything you want to share that I didn't ask? We covered a lot of ground here.

Um, no, I, I, again, I think maybe I would just reemphasize the last point there, not the last point, but what we spoke on earlier is just that it, um, you know, these moments where I get to sit down and have a conversation like someone yourself, and you just give this kind of lengthy overview, um, it does sound fairly simple and easy. Um, I'm constantly making mistakes. It's incredibly stressful. It can be, um, you know, difficult on not just yourself, but the employees at the company, the, the people that interact with the business, obviously on your family, your spouse. It's, it's a lot of disruption. Things feel pretty steady now. It'll be three years for me in April, so, um, you know, so I feel like I'm at a pretty steady point now. But, um, I think it's, you know, for those that are interested in it, it can be a really fantastic route. Don't get me wrong. I just, um, you have to be realistic about the part that, um, there's a lot of, uh, uh, stress that goes into it. And I, I, I, I think it's just as important to emphasize that as it is the opportunity that that's there.

Great. Well, thank you. You for for highlighting that. Well, Pete, if other would be HVAC buyers or, or maybe, uh, people local to you or in somewhere in Michigan, want to reach out, um, how can they do that? Or and, and who, who's a good candidate to reach out to you?

I don't have a strong criteria there. I'm pretty much happy to have a conversation with anyone. Um, you know, I'd say broadly, if they're interested in entrepreneurship through acquisition, I'm, I'm open to having phone calls. I, I think I said it before, I have a commute home every day. I got some windshield time to kill. It's about a half hour. It's usually a good amount of time to kind of give some, whatever advice I can offer and lessons learned and mistakes I've made and everything. So, um, happy to chat with pretty much anyone, um, whether it's HVAC or just buying a business in general. I, I think you can find me really easily on LinkedIn. And I'll, I'll give you my profile link. Will, and if anyone just wants to reach out to me there and send a message, I'm happy to respond and, uh, set up some time.

Well, Pete, thanks for giving me so much of exactly that just now. Uh, congratulations, despite the fact that it's hard, congratulations on buying such a big business, uh, transitioning, succeeding, getting beyond, you know, day 100, day 365, year two, and so on, and, and, you know, shifting the revenue mix the way you wanted to, and now being at six and 17 EBITDA. It's, it's really quite an accomplishment. Uh, so thanks, Pete Cavilla. Thank you so much.

Well, I really enjoyed it. Appreciate it. I hope you enjoyed 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.