How to Buy a Big Plumbing Business (as a Non-Plumber) | Peter deBaptiste Interview

Peter Debaptiste, welcome to Acquiring Minds. Thanks for having me. Will: Excited to be here. Peter: You bought a plumbing business in South Florida, your home. Let's start off with some background on you, Peter. What was the path that led to you buying a plumbing business?

Peter: So, I'm happy to get into that and excited to be here. This, this podcast really helped me in my search. So I used to, uh, I used to run a lot and I would listen to back-to-back episodes when it first came out. So fantastic, excited to be here.

Will: Cool, really cool. All right, background. So I grew up in South Florida, um, born and raised down here. Lived some other places over the years. Uh, started my career in banking as a, uh, as a lower middle market lender. Um, so I was making loans from 1 to 15 million to, um, you know, mostly family-owned businesses down here. Um, not SBA, but kind of similar size type stuff. Um, um, to the search world. And, uh, after that, I worked for a company called Delivery Dudes for seven years. Uh, we were kind of a high-end Uber Eats, uh, South Florida-based. Um, and I started on the finance side of that business, uh, ended up as president, kind of running the corporate team. So we grew the business from, you know, probably 20-something employees to 125, uh, had a thousand driver contractors, um, you know, like Uber drivers or independent contractors. Um, learned a lot of lessons. We implemented EOS, we, you know, had a, a ton of challenges growing that business and, you know, fighting off competition with a thousand times our budget. Uh, ultimately, we, um, we cleaned the business up, we made it profitable, we really transitioned from a high-growth, cash-burning business to a, kind of more stable, profitable business, and we exited in 2021, uh, to a small, publicly traded competitor. And, uh, after that, kind of began my search.

Will: Great. And when you said you duked it out with competitors that had thou, a thousand times the budget, we're talking Uber and, I guess, Lyft. Does Lyft even do delivery? Is Lyft even around? I was never a Lyft user.

Peter: Of course, they are. My wife uses them. Yeah, I don't think they got into the food delivery space. So we were, yeah, Uber, GrubHub, um, oh, of course, yeah, the other, a lot of dollars. We were kind of the smaller, you know, we were all South Florida, um, you know, kind of the small guys. We were early entrants to the market, um, but never raised enough capital. And, you know, did great in the beginning. And then when the, when the big wave of competitors came in, really had to fight them off. And the growth, you know, that was once free or cheap, uh, kind of fell away. So, you know, we found ourselves in a position of, you know, burning millions of dollars a year with not a lot in the bank. And basically transitioned that from, you know, losing money to making money. Um, we had a pseudo-franchise business, not a pseudo-franchise business, we had a franchise business that was from the early days of the business, and really held us back from exiting. So we had to ultimately go and acquire back a bunch of these franchise markets. Um, so kind of got a taste of, you know, transaction stuff from that. Um, we rolled in all these old franchises, kind of packaged up the business, so it was finally in a place to, you know, to be sellable. Um, and we exited. The, the numbers, public, it was, it was 23 million. So it was a nice exit. Um, you know, my outcome wasn't life-changing, it was more of a, you know, transaction bonus size outcome, but allowed me to, you know, pursue the, the self-funded search journey.

Will: Thank you for, for that, for that additional color. Good for you guys for staring down Uber and, like you said, GrubHub and, um, DoorDash. Those are some fearsome competitors. I mean, I mean, I feel like there's no better example of huge quantities of venture capital leading to a bloodbath than in the restaurant delivery space.

Peter: Yeah, it was, it was a wild ride. So we were, we were definitely the little guys. We were the inexperienced guys. You know, we had a young, a young team, and we kind of slogged our way through it and came out okay at the other end.

Will: Really, really cool. Okay, well, you have this exit, and or you, you and the team exit, having kind, kind of survived this, this tribulation with these really fearsome competitors. What do you do next? It could have been any number of things, Peter. So searching for a small business to buy was not obvious. Connect the dots for us.

Peter: So I, probably a year before we exited, um, I had a close friend who's on the podcast shortly before me here, um, Morgan. And he moved back from California, um, with his soon-to-be wife, and, you know, was kind of settling down here. And he introduced me to this whole concept of search funds. He was interested in a traditional search and had kind of gotten, you know, a few months of networking and exploring ahead of, of me. And he introduced me to this concept, and I kind of said, man, that's, that sounds awesome. That sounds like a perfect fit for my background with some lending experience. You know, I didn't, neither of us were kind of traditional MBA type searchers, but, you know, I had the, I had the lending background, I had some operating experience, um, and I had a pretty good network down here. And so he and I ended up kind of, uh, pursuing a partnered search. This was probably 2020. And, uh, we started exploring a partnered search, and we were kind of getting along the ways. I have a feeling we would have ended up doing self-funded anyway, um, because we were both kind of geographically focused down here. So I don't know if we ever would have executed on that partner search. But right around that time, um, as we were getting more serious, COVID came around. COVID obviously had a huge impact on the food delivery space. Um, so Delivery Dudes, all of the sudden, went from a very challenging, um, journey where, you know, the exit prospects were limited, we had had a, a failed exit oper, or failed exit effort a couple years before, and all of a sudden we said, well, this, you know, business is picking up, this is our opportunity. And so I, you know, met with him and I said, listen, I got to, I got to stick, you know, stick with this, see this through. So I basically spent another year at Delivery Dudes tidying everything up, running the exit process. He went and searched, he acquired a home healthcare business down here, and I got a, you know, kind of got to tag along and learn about his process and see it from the outside. And all the while, I was, you know, I kind of knew that was my next chapter. Um, so once we sold the business, I think that was, I don't know, March of '21, something like that, um, I was working for the company that acquired us for six months, and, you know, kind of doing a little networking, drumming up a little bit of deal flow, knowing that, hey, at some point I'm going to break away and search. I didn't know if it was coming soon or not. And, uh, and, you know, thankfully I had that head start because the company that bought us fired all the founders after six months. And there was, there was my kick in the rear to go start searching.

Will: And just so we understand, so, so Morgan Macau is, is the friend, and he will have aired a few weeks prior to when people are listening to this. And Morgan introduces you to the concept of search. And you just, just, I always, I'm always curious, even though it's, it's almost always the same answer, I'm always curious to ask, what attracts people to it? What did you like so much about it? Especially given that you were in a zero to one startup, you hadn't been one of the founders, but you were there, you got to see a, you know, pure zero to one startup up close, and that, you know, that it, that it could be successful. So you, so if anything, I would imagine your takeaway from that experience was mostly positive about working in pure startups. So anyway, what, what, what do you, how do you respond?

Peter: Uh, I think for me, it's a little bit of, you know, personality fit. I was in that business, I was the president, um, next to, you know, the, what I would call like the visionary CEO. So I was always more of the execution guy. You know, I was the day-to-day. So I, you know, I never felt like I was going to come up with some brilliant idea or go build a software business from scratch. Um, I, I was attracted to the idea of taking over something existing. I liked boring businesses. That was my whole banking career. You know, so I just, it, it was attractive from, I think the skipping the zero to one part was attractive. The financial opportunity is attractive. The post-search opportunities to do it again or, you know, become an investor or what, you know, you have your, you know, your options open to you. Um, so I think it, it's just a, I don't know, it felt, felt like the right thing to do.

Will: Say more about the fact that you liked quote boring businesses, given your exposure to them as a lender into the SMB ecosystem. And maybe tell us a little bit more about, about that. You said it wasn't SBA, but it was similar, although not for acquisition, more for, I guess, growth equity or capex. Just talk to us about that experience and how it have formed your attraction to boring businesses.

Peter: Yeah, so I, I was a, I was a lower middle market lender for a bank called Comerica. They're, uh, they're, they're a big bank, but they're not necessarily a household name. Um, and we focused on mostly family-owned businesses. We did some, you know, kind of private equity-backed leverage buyout type deals, but I would say the, the bulk of our client list was kind of, um, established, boring, Mom and Pops. A lot of them were, were on second, third generation. A lot of manufacturers, distribution companies, not really search type companies. You know, they were companies that needed capital, right? By definition, they don't make enough money to pay off their debt, and they are in perpetual need of borrowing money from a bank if they're a banking client. So, kind of lousy search candidates. But I always found the coolest part was just seeing the inner workings of all these funky businesses. You know, I had like a, a drill bit manufacturer. I had a, you know, a frozen shrimp importer. I had, uh, the guy who sold the, you know, in Walgreens around the holidays where they would sell DVDs for like $3.99 each, like I had that guy as a client, right? So there's, it's just like all these cool businesses, and I was always just, it was just so interesting. Like, there's all these different ways to make money. Um, I felt that most of these operators were, you know, kind of like my peers, if you will. Like, they were people in the community that didn't, you know, it wasn't like you're meeting, uh, Jeff Bezos or something, right? It's just like the guy who sells DVDs in Walgreens and the guy makes a boatload of money and has a good lifestyle. And I always just found it just seemed approachable. Um, and the, uh, seeing businesses transition or fail to transition from generation to generation, I just kind of had this gut feel. And it wasn't like I had this grand vision from, you know, when I was fresh out of college working for the bank for four years, but I just noticed that like a lot of businesses, the second generation wasn't there or wasn't interested or whatever. And the general theme was that these aging owners had not really great exit paths. And it just, it just kind of sat with me as something that kind of stuck in the back of my head as as an opportunity. I just didn't know, I didn't really understand what it meant.

Will: Yeah, or what the opportunity was. Yes. So that, so that, a lot of elements of that are not search, but a lot are. I mean, that, that kind of falling in love with all of the, the weird and wonderful corners of the economy where these, where these businesses hide and thrive, is definitely a feature of, of search. Um, and, and, and the other stuff you said, the lack of succession and the approachability of it all. Um, so, so you are really primed, you were really primed to fall in love with search when, when Morgan, Morgan brought it to you. Um, and just for our kind of general business edification, the, the something that you said that I, I feel like I can learn from about you were lending into businesses, manufacturers, distributors that needed loans to keep going. Can you just say more about that so we can learn what that means?

Peter: Yeah, so, and so when I started searching, I pulled out my old files and I started going, oh, well, what about all these businesses that I know, you know, are these good acquisition opportunities? And I pulled out all my old loan files, which I probably shouldn't have, but I started, I started looking around. And what I realized was, just by simple virtue of the fact that these businesses were customers of the bank for 20 years, they were kind of not great businesses. These manufacturers and distributors, some of them are good businesses, some of them make money, but a lot of them were like, they were sitting on a $5 million line of credit that they were never able to pay off. And they made a couple hundred grand a year after paying off all this stuff and just never paid off the debt. And so some, we had plenty of businesses that really, you know, printed money and did well, but for the most part, you know, when I looked back at, oh, maybe I should go after some of, you know, some of these guys I know, um, from the old banking days, I, I realized they were asset heavy, you know, slim margin, and carried a lot of debt. So it was just kind of like, not really your search target stuff. You know, manufacturing, distribution as a, as a general thing, right? You have, um, in manufacturing, you have a ton of equipment, and a distribution, you have a ton of inventory, a ton of AR, and slim margins, right? So just by nature of that, kind of like a couple of things that you don't like in search. Yeah. And this concept of them carrying debt. So what they would do is they would just refinance the debt when it came due, kind of a perpetual refinancing cycle. I mean, if you're carrying a huge debt, doesn't it eventually gobble you up? Or no? Can you just kind of refinance in perpetuity as long as you're making interest payments?

Will: Well, there, there's two, there's two major kinds of debt, right? There's a, there's a term loan that you pay off, which is, you, you know, kind of like your acquisition loan, that we're familiar with. And then there's like a working capital line of credit. So yeah, a lot of these businesses had, you know, working capital lines of credit. Then there's nothing wrong with it, but you can have that in perpetuity. It's backed by collateral, it's used to finance your, you know, your AR and inventory as you're waiting to get paid by customers. But that, that can sit there forever. And a lot of them had, you know, had other loans that would just kind of refy, or they would buy something new and they would need money for it. So, yeah.

Will: Gotcha, gotcha. Great. Thank you for that, Peter. That's great. This is, uh, great prep. So, so, so Delivery Dudes exits. You, uh, are have been watching Morgan for the last year go through his search journey. You now have the time to turn your own sites on it. What does your search look like?

Peter: So my search was probably, so I think everybody got fired in September '21. Um, it was like three days before the birth of my child, which was just a real, a real nice, real nice thing. Um, and so I had, kind of, like I said, I had a little bit of deal flow. I had kind of done some networking. Um, but basically, you know, had my kid and kind of continued the, uh, you know, continued keeping that spin going. You know, once you get the deal flow going, you've really got to just put in a certain amount of effort every day and every week to keep it going. So, you know, didn't really take any breaks. Um, I, you know, I wasn't like cold call searching, right? So I didn't, I didn't need to work crazy hours. But, you know, I had my kid and just did your, kind of traditional self-funded search. I started off with a pretty big range. You know, I kind of said, I'm looking for, you know, two to 20 million of enterprise value. And, you know, industry agnostic, as long as it's in South Florida or can be run from South Florida. So I kind of set a wide range of of size and I set a wide range of industry. Um, I started looking at some e-commerce businesses, some, you know, some stuff that, you know, was a little bit less search typical stuff. And ultimately, kind of after the first few months, kind of wound my way back into traditional self-funded land, which is more of like the, you know, two to seven million of enterprise value. And, you know, uh, industry, a lot of trade businesses, a lot of, I don't know. So, kind of talked myself out of e-commerce in short, and software businesses, and stuff like that. Um, ended up back in traditional self-funded search land. Um, the economics when you go larger just seemed to kind of not as attractive. Um, it kind of felt like the outcome is maximized when you have like a, you know, a business that maxes out the SBA loan is when your peak economics are. And then if you buy bigger and bigger and bigger, your economics don't really go up as much. So I kind of just, I kind of crossed off the higher end of my range, crossed off some of the industries, and really started getting a little bit narrower into what I would call like guys and trucks businesses, where kind of like my sweet spot target.

Will: Peter, let me stop you there because I have a couple important follow-ups. This is great. First of all, so, so your initial range was was broad, two to 20, industry, you know, looking a lot of different industries, but that 20 number jumps out at me, $20 million of enterprise value. You were even contemplating that. So I guess, and so as listeners will know, the, you know, SBA loan maxes out at 5 million, and as you just put it, like, so typical range for self-funded searcher is going to be two to seven million in enterprise value. You were you were open to buying something three times that size. That's that's that's pretty big for us. And, um, so obviously you would have had, you would have raised equity, a considerable amount of equity. From how would you pull that off? How did you even envision pulling that off, even though you didn't go that path? Just like, what, how does somebody doing this for the first time even contemplate that?

Peter: Well, there, there is a, it's not quite as well-trodden as the SBA path, but there's a very well-trodden path of acquiring businesses in that size. It's a little bit of a, like a, a valley where there's less, less capital opportunity than the smaller or the bigger size of that. But there's, there's plenty of, people who lend in that space, right? So like, you know, when we did leverage buyouts at the bank, like we were in, in that, in that zone. Um, so I just, you know, I did, I did a little bit of networking through the search community and just kind of had enough, I felt like I had enough network where if I found a good deal that was 20 million, I would have been able to pull it off. Um, you know, the financing looks different. You got to raise, you know, you got to raise, um, either traditional bank debt, you know, with like a mezz debt, or you find like, uh, there's some funds that do blend with everything. Um, and then, you know, you probably on a little bit more institutional size, uh, check for equity. So that basically the nature of putting together a deal like that. I just, what I saw was that it, it shrank your, your ownership, shrank your control, and didn't seem like it was much better of an outcome.

Will: Well, that was the other profound thing I wanted you to elaborate on. So please do. I mean, and let me just, um, frame in, in for the audience. I mean, I haven't stress-tested this or modeled this myself, but what you said a few minutes ago, that looking at it purely, kind of, for the financial outcome for the searcher, that, you know, the, looking as a self-funded searcher of $2 to $7 million enterprise value using an SBA loan has, if you go up and you find a bigger, bigger business to take down, you know, the terms will change, the equity, the whole cap table will change, you'll have less equity, certainly, and the final outcome. But when you, when it all, when the story is over, and you've, let's say, exited the business, the final outcome to you is not necessarily that much more compelling, if at all, than just buying the smaller business to begin with. I think that's a really important insight because I think we just assume that the bigger the business you buy, the more likely you'll have a bigger outcome. You, searcher. So that, I just wanted to double-click on that. And you were about to readdress it, so please do. What, what more can you say to it?

Peter: Well, so that was kind of what, what I had learned by talking to people, what I had learned and seen in my banking days, and what I had been able to model. You've had, I think, what's the guy? Is it Robert Graham that does SG? Yeah, the guy who's like the absolute self-funded search, um, yeah, what, hold, he's he's holding the torch and charing, trying to make self-funded search the the dominant form of search, which I love. Um, but he's, you know, he's had a lot of, a lot of stories of outcomes where searchers are acquiring $20 million deals and owning 80% of the business. Um, I'm sure those outcomes are possible. I just found that the deal quantity, one, was really slim. I was geographically focused, South Florida, so, you know, very slim population of deals of that size. The multiples and the process was really competitive. So, mhm, you know, it's just, it's, it's a harder thing, right? It's the smaller, a lot of guys go for ultra small deals and they'll say, oh, just go buy something that does like 300,000 of EBITDA, get in the game, and you can have really high confidence that you'll be able to succeed, or that you'll be able to survive because, you know, you're paying a tiny multiple and you're in the day-to-day, and you can, you can have confidence that you're not going to screw it up. Versus if you're buying something that's like a $20 million business, you're paying a high multiple, you're leveraged to the gills, you got bank covenants, you got, you know, multiple institutional equity and debt partners that are going to be breathing down your neck if you screw something up. And you've got a management challenge that, you know, I felt like I was, um, you know, had a, had a little bit of experience that I could, that I could handle something of that scale, um, but I think the management challenges, you know, are real. If, if you don't have a management background, you try to go buy a business with, you know, 100 employees in it, you know, it's, it's a different, it's a different beast. And when you're starting at a high multiple, you have to grow in order to hit your outcomes, versus if you buy something a little bit smaller, all you have to do is maintain.

Will: Yeah, yeah. Another fantastic point. You kind of narrow your aperture after a while, let go of entertaining e-commerce, let go of looking, being open to a really big deal like the 20 million we're talking about. It kind of narrows to, I think you said, two to seven million. Pick us up from there.

Peter: So from there, I, uh, I got under LOI on a mulch blowing business. Mulch blowing, mulch blowing. How is that, how is that service? If anyone's looking for like a really good niche roll-up play, or even just, I don't even know if you need to roll it up, but it's not a business that was going to, you know, be a, a huge business, but man, it was, it was a good business. Um, this, I'm glad I didn't close it. Um, learned some, you know, some stuff about the seller close to the finish line that I didn't really love. Just some character issues got exposed. But anyway, I was under LOI in this mulching business for three months, took it almost to the finish line, had all the dead deal costs that you can imagine. And, um, you know, the guy just went, just went ghost at the end. We had a couple bumps in the road, and I think honestly what happened is he had a lot of debt on the business, he had, um, he had large bonuses promised to his employees at exit, he had the broker fees, and he was going to have to pay taxes. And he had to like recoup, you know, he had to pay taxes on all his assets that he had already written off. So I think he did the homework at the end and and said, wait a minute, why would I sell for whatever, if I'm making this much a year? By the time I pay off my taxes, my debt, my broker, my employee bonuses, he was going to earn like what he makes in a year and a half, maybe. So I, I think that's what happened. But there was some other stuff along the way, we don't really need to get into that side of it. But the business was, you know, it's a really interesting business. I would encourage searchers to, if you live in a community where there is that stuff, um, you know, like Florida, California's got plenty. I talked to some mulch blowing companies in California for diligence. Um, it's a cool business. So you basically have these large trucks, they're like the size of garbage trucks. Um, they're expensive. I think they're like $300,000. And you load up this truck filled with mulch, and then you have like a, you know, like a four-inch hose coming off the back of it, and you blast in mulch at HOAs, at golf courses, for playgrounds, at schools. And this business, um, had a lot of contractual revenue. So municipalities have all these playgrounds, all these parks and properties to maintain, so they have to blow and mulch every year. Schools do as well. And so you have a lot of recurring revenue, a lot of contractual revenue, and little bit of barrier to entry, right? It's hard for a little guy to buy a $400,000 truck. And it's like, if you're, it's a small line item for everybody. So if you're running a school, like when are you going to analyze the cost of your playground mulch? Never. So it was just a really, it was a, it was a cool business for those reasons.

Will: Yeah, that sounds great. And Peter, why is I, when I think of mulch, not having a green thumb, barely ever even pushing a lawnmower in my life, not, I'm not proud to say, but I think of spreading mulch. That's the verb I usually attach to mulch, not blowing mulch. So I guess when you're, when you have much more square footage you need to cover, you, you, the volume needs to be bigger, you got to use a truck, you, you don't just have the landscaper spread mulch over the playground.

Peter: Yeah, exactly. So picture a playground's a good example, but a country club is probably a better example. Think about how much mulch is around a country club. And if you're going to go and unpack bags of mulch and have, you know, a team of guys out there with wheelbarrows and rakes, if you do it with one of these big trucks, it just has this hose that's blowing out, you know, yeah, air-powered mulch, and you just spray it. And, you know, so there's a, there's a higher equipment cost, but the install cost is much lower. So it was a cool business. There's, you know, there were like three companies doing it in all of South Florida, and all three of the guys were like 68 years old. And so I was just, it was, it was a cool one. Um, not mulch blowing, everybody. Yeah, mulch blowing. Get into it. You're welcome for the idea.

Will: Okay, so that doesn't work out. At the last minute, in retrospect, you're glad it didn't. Then what?

Peter: So that one doesn't work out. Um, I always like when people give like real data points here. So I took that one almost to the finish line. We were probably, um, I don't know, we were like about to sign the APA and probably would have closed two weeks after that. My dead deal costs were probably $35,000. So for anyone who's looking for a reference point, yeah, that's, take a deal close to the finish line. That's, uh, I think that's in a normal range of where you end up. That's, that's real pain.

Will: Yeah, so that hurt. So you're $35,000 in. $35,000 in, and by the way, so are you feeling discouraged? What's, what's your headspace like, $35,000 poorer?

Peter: Yeah, it's not great. You know, first kid, we had moved into an expensive house, you know, a year before. And, you know, down to, you know, wife's on maternity leave, which is only partially paid. And, you know, so the line is, the line is pointed down. The airplane is flying in the sky, and there are trees at the bottom, and you're flying down towards the trees. So you really, you know, there's an end in sight, and you just made it a lot sooner, you know, by, by erasing that $35 grand. So, so that was, that was a tough one. But, but no, I, you know, I, I knew it was a possibility. I knew it was more than a possibility, I knew it was likely. Um, but I think the more likely outcome is you kill them early in diligence when your deal costs are like 5, 10, 15 grand, not so close to the end. So that hurt.

Will: Well, and just to, to say another little tip to the audience, which is maybe obvious, but also push out, once you got a, a deal you're working on, push out as long as you can spending money and assembling that deal team. There's kind of a sweet spot because obviously a lot of stuff on the deal, you, you're going to need third-party service providers to do for you, but kind of go as long as you can without starting to spend that money. So, and then if the deal looks bad, cut it as soon as you can so that you're not continuing to spend money. So.

Peter: Yep, exactly. And I did all the right things on that too. I did exactly what you described, but it just died at the end.

Will: Yeah, yeah. Thank you for sharing the number. Carry on.

Peter: All right, so mulch blowing deal died. I was still in the market, but I wasn't, you know, full bore searching. Um, you know, everybody says you got to keep your deal flow alive, you got to keep your deal flow alive. But, you know, you say that after spending 75 days of working on getting a deal across the finish line, you start to see the end, and you just, you know, your first weeks under, you're still, you're still drumming up deal, deal flow. But the closer and closer you get, you're like, ah, well, you know, this one seems pretty likely. Sure. So the deal flow slowed down a little bit, um, but, you know, picks back up. There's kind of like a, probably like a two-week or a month lag from when you start to pick it back up to when you really get stuff going. Looked at a bunch of other stuff and ended up on a call with a broker with a fencing company. And you, you know, he was kind of playing the quarterback and pushing me away. And then I think I impressed him on the call, and afterwards he goes, oh, well, I, you know, I got this plumbing business coming up. You know, but you're really, you know, you're really not going to be a fit for it. You know, for X, Y, and Z reasons, you don't have your license, and blah, blah, blah. And I said, come on, let me, let me take a look. So got to, got to take a look. Uh, took the seller out to dinner after a phone call or two, you know, after we had our kind of management call. Took the guy out to dinner, hit it off. Um, and, you know, and just to kind of tie it back to like the whole searcher pitch, like what I said to him is what I said to a lot of people is it's like, listen, like the reason I want to do this is because I want, I want the lifestyle that you had for your family. Like I took this guy out to dinner, he's talking about how he sent his kids to a good school and, you know, got to take his boat to the Bahamas, which is, you know, a Florida thing. And I was like, listen, like that's, that's my goal. Like I'm looking for a business that will allow me to send my kids to a good school and teach them how to go fishing in the Bahamas. And that I think is, you know, maybe that was, you know, the piece that the, you know, you're not hearing from the, the Stanford MBA who's moving out to Akron, Ohio to go buy Bob's HVAC shop. But that was real. And for that reason, I think the seller really liked me. Um, you know, so I made an offer. I was, you know, I think I was, I was tied for highest. Um, you know, so I didn't, it's not like I got him to take 10% less money for me, but I also had some structure on it, which we can, we can talk about. So I think I got away with some extra structure, if you will, because I was me. Um, I didn't find out till after closing. My first day with him, he pulled up his Outlook. He goes, you see all these folders on my inbox? Go, yeah. And he pulls up, there's like 22 folders. Goes, every one of these people made me an offer. Wow. So that, you know, that was a, it was, you know, it was a competitive, competitive deal. I didn't even hear about how competitive it was. Um, but I think a lot of them were like the, you know, a lot of them were the people who looked at the SIM and fired off an LOI. And he basically said, listen, you're the only one who took me to dinner. You're the only one who wasn't going to fire all my employees. You're the only one who I felt like would keep my kids working in the business. You know, and, and, you know, we had the relationship. So that was, it's a big thing. The whole, the whole pitch that comes with search, I think, is real. You know, you got to be able to connect with the seller. And, uh, and that, that happened.

Will: And Peter, just the thing that you said to him about what your vision was for the lifestyle that buying his business could afford you, what do you think resonated? Why, why did that resonate so much with him as opposed to, as you said, like a fancy MBA coming in and saying something different?

Peter: I don't know. I think everybody, I don't know. Nobody wants to sell to a guy that they don't know, right? You, if you think about somebody who's from your community, who shares your hobbies, who, you know, it's, it's somebody who's in your network, like relatability. You know, I don't, I don't know if we knew the same people or not, but like, yeah, it's somebody in your network who you can trust because they're in your community. And I think that's just a big piece of it, right? Other, the other people were, you know, private equity-backed rollups from out of state, or I think there were a couple local companies, but they were all going to basically press delete on his office. And, and so that, you know, that message played out. And, and yeah, yeah, the, the, the, it's kind of, it's the trust of somebody who's local in the community. So there's, there's kind of a trust element there, or implied trust element there. And also a continuity element. You, you, you, he saw in you a guy who's going to carry his business forward because this guy, Peter, has said to him that like, what you have, sir, is what I want.

Peter: Yeah, exactly. And that was, I mean, that was part of like, part of the diligence process. Always looking at a business. It was always a really quick, yes or no for me to just figure out what kind of life does the seller live? Like, does the guy live in a nice house? Like, does the guy have a cool boat? Does the guy have a bunch of debt? And I looked at some businesses that were on paper like making all this money, and you look up the owner, and the owner's got like, you know, tiny net worth. He's got like a car loan, a boat loan, loan, a mortgage. And, you know, I'm like, I'm like, how's this guy making, you know, whatever in earnings and doesn't have anything? So anyway, that was, that was like a nice little diligence piece is that this guy had, you know, kids went to private school, paid the kids college, had a, you know, Midnight Express boat, had a second condo in the, you know, in North Carolina. Just, you know, so you get some of those data points and you go, okay, whatever the numbers are, you know, there's something here. Um, and there's a lot of deals where the numbers show one thing and the sell, you know, not really, not really doing so hot.

Will: I love that, Pete. I mean, I've, I've had a guest or two say that, but it's not something that comes up often at all. And it's such a good, it is such a good kind of proxy to examine because fundamentally, the lifestyle of the seller owner founder is the final, is kind of the final, final, final indicator of how healthy this business is. And, you know, take, kind of stripping away all the financials and and whatever the numbers say and the tax returns and kind of that morass that we all try to untangle, net it all out, what, what kind of lifestyle has this, has this founder been able to afford him or herself with with this business? So it's a great, it's a great kind of qualitative, um, assessment, I think. So thank you for mentioning. So tell us, so the name of the business is, uh, Joe Cole Plumbing. And it's Joe himself that you're taking to dinner?

Peter: Yes, yep. So Joe is the founder. Joe had another partner. Um, so there were two, there were two sellers, um, which we'll talk about in a minute, adds a little, adds a little layer of complexity when doing the transition when you have two sellers to replace versus one. Um, but yeah, so it was Joe. He had, uh, he had his two sons in the business. They're still there. They still, they still do great. So they're kind of, they're kind of the leadership team now with me. Um, and I think that was a big selling point for him was they're, they're a little bit younger than me, not too far behind, but I think experience-wise and maybe, you know, capital-wise, he kind of said, you know, hey, this guy is going to, they're going to be in a, a learning environment with, you know, with this guy. So I think he looked and said, hey, these, he wants them to stick around in the business. I'm talking about me being, he, so Peter wants my kids to stick around in the business. Um, they're going to learn a lot from Peter. And, you know, it's the best way to, you know, move, move this thing forward. And that's a common, it's a common thing. I would say it was at least 50% of the businesses I looked at had a kid in the business. And it was always a question like, why isn't your kid buying this? Yep. Um, so they had to have a, they had to have a convincing answer. Um, but yeah, that was, that was the business.

Will: And can you give us some more data points on the business itself? Numbers?

Peter: Yep. Um, so business was, right now we have 35 employees. I think we're a little bit less than that at closing. Um, we are a, I would call kind of a higher-end plumbing contractor. Uh, uh, so size range, just, you know, in terms of, in terms of self-funded search, I will say self-funded search typically focuses on $500,000 to $1.5 million of EBITDA. And we are in that range. So you got that, you got the employee count and business model. Basically, we're a high-end plumbing shop. Um, we do a bunch of different stuff, but probably our two biggest lines of business are, we do ultra high-end residential construction. So Miami Beach custom homes on the water, $10 million and up. Um, we do the construction for those. So that starts with, you know, underground piping, up the walls, and installing the, you know, the high-end fixtures and crazy showers and stuff. Years later. So kind of large, long-term projects. And then we also do a ton of commercial service for national retailers and grocery stores. So the business was, um, you know, had a construction component, which most buyers dislike. I think that chased off some of the buyers, and I think it kind of pushed down the multiple into, you know, self-funded search range. Um, I was able to get comfortable with it, although like right before closing was when the headlines were just, it was, I closed June of 2022, and literally like May 15th, 2022, was like the beginning of a three-week roll right before I close. And every headline was, interest rates are going through the roof, construction's going to dry up, we're about to enter a recession. So I had a real, a real soul search to do. But yeah, so the business, um, you know, does service and construction, and it does service as well.

Will: Yep. Yeah. So we're about 50/50. And our service, like I said, is a little bit more, we do residential, but it's a little bit more commercial focused. So customers like Whole Foods, Marshalls, Lululemon, you know, kind of national retailers and grocery stores is, is kind of our bread and butter on the service side. And then we also do, you know, we do plenty of other stuff as well. You know, we do residential service, we do commercial construction, we do all, all the categories.

Will: No, okay. And is that common for a, uh, plumbing business to do all the categories? By all the categories, you, you basically can think about it in terms of, as you said, construction versus service. That's the one we often think about. But then also residential versus commercial. So there's kind of four categories there: residential service, residential construction, commercial service, commercial construction. Is it common for a, uh, plumbing shop to do all four, or, or is it typically focused in one or two of those buckets?

Peter: I've noticed, I think it's more common to do, you know, two of the buckets rather than four. Um, the business was definitely, you know, I would call it, it's diversified. Right? And it's a good thing in that revenue is stable. You don't have to worry as much about residential construction drying up because, you know, no line of business, no line of business is 90% of our business. Like I think that, you know, you know, the residential construction is like 30-something or 30, 35% of the business, right? So like, if we enter a recession and residential construction dries up, one, we're, we're in this like ultra high-end billionaire clientele, so it's kind of a little recession resistant. But two, even if that falls off, you're still only, you know, affecting a quarter of the business or a third of the business, right? So that's a, that's a good side to it. The downside to it is in order to make things scalable and fix.

Processes and and make things a little bit more organized, you know. You work, you work on a project to make something, uh, more streamlined or make a part of the business better. You're not really impacting all the business, you're only impacting a little piece of it. And each one of these four categories has some different elements to it. Um, so kind of pros and cons for many businesses under one roof. Yeah. Um, so pros and cons to it. Um, I think like, kind of your, what I would call, like the poster child, um, acquisition target for a lot of folks is a residential service-only plumbing business, or an HVAC business, or an electrical business. That's kind of what, you know, the, the target looks like. It's all service, and residential is a little bit more favored than commercial for the most part. But, you know, again, every deal is going to have some good and some bad in terms of your acquisition criteria. And so I just, you know, I looked at this and said, listen, it's got construction. Can I get comfortable with it? Can I get a bank comfortable with it? Um, I was able to do that. And, you know, I think it brought it into. I think without the construction component, it wouldn't have been in self-funded search zone. There would have been some, you know, some strategic buyer who was going to pay a crazy multiple for it.

Well, uh, so two things there. First, on your point about diversification and how they're kind of poster child of of the plumbing or HVAC or electrical business, is is going to be a consumer-focused or home services business, and how those have been really hot and really appealing for the last couple of years. But I have a couple of interviews coming up with people in those very, those very categories. Home services, plumbing, um, and it's, it's having a really hard time all of a sudden. I mean, it was the hottest thing for the last few years, and now it's, it's, it's getting really, really tight. And they don't, you know, if they're only in residential and only in residential service, um, it's actually, they're not able to kind of diversify away this challenging moment. They're just meaning it head on. Um, so this is kind of like your, kind of thesis, if you will, is playing out in real time here. Um, and then the other point you made about the, the multiple, like it, if it had it been all home services, uh, which has been so hot and appealing, it probably would have commanded a much higher multiple.

Can you share what the multiple was that you are the range of multiples that that you got your business for? Was? Yeah, so I, I'll do the range again, but, you know, most of the deals in this category or in our, you know, kind of self-funded zone trade for three to five X. Um, I was in that range. MH. And I think that if you're looking at, you know, a larger, more established, like a, you know, a plumbing company with 35 employees that was 100% service, um, you're definitely going over five X. Um, or at least you were in 2021 or '22, whatever. I, I don't have my dates. '22. Um, so, you know, definitely was, you know, I, I looked at, I looked at an HVAC deal of similar size, but they were 100% service. It was represented by an investment bank rather than a broker. And I called the guy and I was like, oh, you know, explain my whole search story. And he was like, listen, he's like, I'm expecting to get eight or nine X for this. Are you gonna play in that range? And I said, no. So wow. So there's definitely, you know, if you're looking in that space, I think a lot of people are, you know, you're looking for one, you're looking for something with a little bit of hair. You're not, you're not going to find something that's got, you know, a, you know, a million EBITDA already on ServiceTitan with a management team established and 100% service and all these processes in place. You're just not going to find it. You're either going to find something with some hair on it, um, or you're going to find something like I did with a construction component, or you're going to buy smaller, um, or you get lucky and you find, you know, you find the diamond in the rough where, you know, Bob and Bob and Sue really like you and don't put their business out to market. But I think, uh, you know, it's that home services space is a super competitive. I found that, you know, it was, if you went into the, the really hot category that checked all the boxes, you know, it just, it priced you out as as a searcher. And again, you could put together a deal and buy something at a premium multiple, but again, it's then you're forced to grow, um, in order to justify that multiple, and it just makes life a little bit harder.

I think what can you tell us about the structure of your deal to buy this? We, we keep talking about what larger deals could look like versus our end. So what, what did this particular deal look like? So I did a fairly common structure, um, but I did take advantage of the, the full standby seller note, um, thing where you can reduce your equity check. So I basically, uh, I was 85% SBA loan, um, 5% seller note that was being paid over time, and then a 5% seller note that was on full standby for the life of the loan. So no payments, just accruing interest for 10 years. That gets counted as SBA or gets counted as equity by the SBA. And then the remaining five or a little bit more than 5% was equity. So bought the business with, I think it was like 6% equity. Um, I was, you know, I was networked and kind of had a group warmed up to raise equity. But because I was able to get this full standby seller note, uh, I only needed a little bit. I was able to raise it from my dad. But, you know, went to him by choice, not because I had to. He had, he spent his career in real estate, institutional grade multifamily real estate brokerage. Um, so like, you know, he knows every property management company in South Florida. Right? So for buying a business that does commercial service, great. You know, great person to have on the team. Mhm. Gave him basically your standard self-funded search equity terms, which you can hear about from other people and see on search funder. But probably gave him more generous terms than I would have had to give another investor. But, um, so that was the, that was the structure. Usually when we use friends and family money, Peter, we give, we give them less generous terms than we would give to professional investor.

Great. Now, so 5% equity essentially, and and bringing bringing in capital from your father for the reasons you just described. But this means that you're going to retain a huge piece of the business. So is that, should I read into that? Was that kind of a philosophy that you had, or it just worked out that way? No, that was, um, you know, that was really a primary goal. Was I wanted to maintain as much ownership as I could. I wanted to maintain as much control as I could. In hindsight, I don't wish I did it differently. But that came with, you know, its own set of challenges. When you do use a lot of leverage, that means, you know, talking about the airplane flying towards the trees, the tree line is pretty high. You got to cover those debt payments. So your ability to one, to withstand shock and the J curve is, you know, is tighter. And two, the ability to invest in low-hanging fruit that costs you money now, but might benefit you later, is also a little bit, um, restricted. So, you know, I solved for the goal of of owning the maximum percent I could. Um, and, you know, I think that like, I wouldn't do it differently. I think my, I'm fine, I'm happy, I'm good with it. But I think it was something I didn't really think about. One, how nice it would be to chase after low-hanging fruit and have a little bit of a budget to do it. You come into these businesses and there's, it's just, there's opportunity. There's a ton of challenges, there's a ton of opportunity. And when you can't throw money at it because you got to just be, you know, you want to feel really comfortable in your first, you know, I'm 18 months in or 19 months in, you know, you, you can't throw money at stuff, you can't make a hire that you want to. Um, it's a little bit restrictive. And then the other thing when it comes to, you know, leverage that I didn't really think through is is the personal side. I'm, I wanted to maximize my ownership, so I said, oh, I can live off of, you know, minimum salary. You know, my wife works, um, and I said, oh, well, we can, you know, live off a little bit of, you know, kind of a model the salary that was based on my current lifestyle, not really thinking that, you know, over the next couple years of owning the business, here comes two kids and the expenses related to that. And then you got a new car, and then you got, you know, kids go to school and you got a nanny that you didn't have before. So all of a sudden, my salary that I modeled from my pre-kid lifestyle was like, oh, that was a little bit light. So anyway, um, I'm like, it's all good. Like I don't have any issues. You know, thankfully, nothing bad happened. And, you know, there was, there was plenty of cushion. Um, but, you know, I just found that I think I'm in a common spot for, you know, lifestyle where a lot of searchers are, um, kind of with young kids and all that stuff. So definitely, you know, would share some advice of one, be open to not maximizing leverage and maximizing ownership. Um, nothing wrong with raising money from outside people. It kind of would be nice sometimes to have, you know, if I had raised money from somebody who had other investments in the space or who had some industry knowledge, that'd be nice to have, um, kind of on your team. Uh, and two, you know, the whole concept of lifestyle creep, whether it's not really lifestyle creep, it's, uh, it's kid creep. You know, the, when you're chasing after maximum ownership, got to, you got to keep those other things in mind. So anyway, I'm, I'm sharing it as a cautionary tale, not that anything bad happened to me, but my cushion in terms of how deep the J curve could go was, you know, I thought I had room for EBITDA to fall by, whatever, you know, 30% or something. But then when you factored in, hey, my lifestyle got more expensive, I need to raise my salary. And, you know, the J curve, the J curve has stuff that's out of your control, and then the J curve has stuff that that's deliberate. You're, you're making decisions that are cost money now that make you money in the future. Um, so anyway, it just kind of, uh, it, you know, I would, I would advise thinking about that holistically. Having a little bit lower debt, you know, could allow you to execute a little bit faster, a little bit, you know, smarter on stuff.

Yeah, no, that was that was so important, Peter. Thank you for walking us through that. And it is a theme that that comes up, um, from time to time, although not that much. And I think for people doing this for the first time, including, you know, yours truly, thinking about this, like it's just the, it's just this reflexive, the more equity I can retain, the better. And I think that that is, um, something that you get beyond. It's, it's maybe a little bit naive, um, and and it, and it you can also kind of distill it to be to to this framework, which you hear people use in a lot of different contexts. Do I want to own 95% or 100% of a smaller pie, or 80% of a bigger pie, or 70% of a bigger pie? Um, and 70 and 80, and and and, you know, this is also actually can can get into self-funded versus traditional. But when you do that, when you're looking at that, you're, you're comparing, you know, owning 80, 90% of a business versus just 25. So there's a big delta in your ownership. So so that, let's put that aside. In your case, or in a self-funded searcher's case, we're just talking about 100 versus 90 versus 80 versus 70. You're still going to end, we're still talking about you, the searcher, ending up with a really big piece of the business, 70% maybe 80%. Um, so still means you're basically, it's not going to have any impact on your control. You are going to have investors, so you are going to be responsible for people's capital. So there is that element, and that's important, and that needs to be taken seriously. Um, but even in your case, you do have an investor and your father. And so so you do have somebody whose capital you're responsible for. Um, but yeah, again, just to to kind of distill, you know, 95 or 100% ownership, uh, is it worth that versus maybe 80, 70% ownership, but having an ultimately, you know, more oxygen, more ways to go after that low-hanging fruit, you know, and ultimately maybe a bigger exit. That's kind of the the way to think about it. And I'm not saying that it's wrong to do what you did, but you're feeling that you're now, you're in it, you're feeling that kind of tension between those two choices.

Yeah, and I think it's also, you know, you look at there's kind of this, the model is always, you buy a business, and as long as you maintain it, your outcome is still pretty awesome. Yeah. You pay off the debt, and then, you know, hopefully you grow. Even if you just grow with inflation, you have a pretty awesome outcome after, you know, five, seven, 10 years. Yeah. Um, but the, the other side of it is, you're buying a business that you're transitioning from one mindset, which is short or not short-term, but maximize profitability for an aging owner, and you're putting it into a mindset of maximized growth, um, you know, for future potential. And that takes spending money. And I think that was one of the things that I didn't realize was, it would be nice to have a little bit more, you know, spending room, although I don't know if I would have done anything differently, right? Cuz like I didn't, I didn't know enough to go out there and be like, oh, I'm going to invest in these three strategic areas and build out this team and do whatever. I just kind of grabbed stuff as I went. But I do think that's just, you know, advice for other searchers is, is if you're looking at something and you're saying, hey, I'm going to change this business, I'm going to improve it, I'm going to grow it aggressively, that's probably going to take money. And and, you know, money doesn't, it doesn't pay off now, right? Like you spend money now, you don't get the money back tomorrow, you get it back in a year and two years, three years. Um, so anyway, that's a nice, that's just a lesson that I want to share.

A great lesson. Thank you. Let's hear about your transition. So how did you, said you've been in now a year and a half, so how did the first six and 12 months look? Yep. Um, and I will say deliberately waited to, to do anything like this, cuz I just didn't want to be the guy who was like, six months in and naive and being like, oh, everything's so awesome. And, you know, I didn't want to jinx myself. Uh, so I feel like I'm definitely, you know, I'm through the honeymoon phase now, and I'm, you know, uh, you know, I've got some, I've got some, uh, I've got a couple notches on my belt and I've got, you know, some some feelings of confidence now that I, that I will survive. Um, and end of being humbled. Yeah. You know, being humbled, but also being, you know, now there's, you know, now I kind of know what I'm doing. So, um, transition. The, uh, the announcement day was hilarious or very, you know, scary as the buyer. So we closed, um, on whatever, June something, June 8th, 7th, and then the 8th, the next day was announcement day. So it's a construction component of the business. Everybody starts work at like 7:00 AM at the latest. And so everyone shows up to the office. All the employees show up to the office. All these guys go straight out to the job site. So none of these people come into the office on a regular basis. It's like a very rare occurrence. So everybody's going, what's going on? Everybody's coming into the office at 6:30. And so I'm on the highway at like 5:00 AM. And I go on an off-ramp from one highway to the other and just come to a grinding halt. And there was some horrendous accident on the highway, and I got stuck. Couldn't move an inch for like four hours. Whoa. And so the 30-something employees are in the shop for the first time in forever. Oh no. And the seller's calling me and going, hey, so, and I was like, hold on, it's got to clear up soon. I'm coming. Just keep them there. And then after three hours or whatever, he's like, listen, everybody's kind of wondering. I don't know if I made him stay there for three hours. But I was like, no, I got to get there. I want to be there. I got to meet everybody. And so he had to do the announcement without me there. So everyone sitting there and he's like, I sold to this guy. He's really great. You guys are gonna love him. He's not here. So he's stuck in traffic. You guys all made it.

But man, that must have been, what, you must have just been slamming your steering wheel. I mean, that would have been such an incredibly anxiety-inducing moment. Yeah, it was. Yeah, that was that was a stressful moment. But, you know, got to meet everybody over the first, you know, first few days or whatever. And, you know, I don't, I don't think in hindsight that it had as big of an impact as I felt like it was in that moment. Right? In that moment, you're like, oh my God, this is the end. Day one, it's over. Yeah. Yeah, I screwed up my very first five minutes. How did this happen? So that was announcement day. Um, transition from there was, um, it was challenging. So I came in, there were two sellers, um, both master plumbers, both worked a ton of hours, like each of these guys worked 100 hours a week, like actually, it was insane. And both master plumbers, both very good at their jobs. Um, and I knew I had to come in and replace guys that I couldn't replace like for like. Like I couldn't come in and be the plumbing expert on day one. Now, we had enough staff and we had a little bit of a management layer, like half of a management layer, I would call it. Um, and we had expert plumbers other than the sellers, but I knew that I couldn't come in and fill the job, right? So I had to hire to replace the one seller, um, and obviously, you're hiring somebody who doesn't own the business, so you're not going to get as good of a person. Um, and then I had to take over, um, you know, the seller's responsibility. He was basically, you know, running the show, and then the, uh, the other seller was in the field. So I hired the field guy, and then I replaced, um, Joe. So I came in and kind of immediately realized that I'm not going to be able to replace all of this stuff. I got to be able to delegate some of this. Um, won the plumbing expertise, I'm not going to be able to catch up. You know, I'm not going to be able to learn that in six months. Um, and two, the guy just, you know, both of these guys worked a 100 hours a week, like actually they were on call every weekend, 24/7 emergency service, like it was their cell phones. And so I, I like, I think I knew that before closing, but I don't think I understood what it meant, you know? So it was kind of like one of those, like I knew they were worked a lot, I knew there was this emergency service stuff, but I just didn't understand like how much they worked. And for me coming in, um, my commute is about 50 minutes each way, so basically like there's two hours in the car per day. So I've got, there's 10 hours a week that they didn't, you know, that they didn't have to worry about. And then I've got, you know, I've got young kids and my wife works, so like I got to be home. So it was a very quick, um, realization that I wasn't going to be able to come in and just take over his exact job. So I had to very quickly kind of reorganize. I had to hire a couple people, I had to delegate some stuff. Um, so thankfully I had a great relationship, uh, with the seller, the sellers, um, they're extremely helpful. They worked their asses off through the transition. You know, I could have seen a very different outcome, which I've heard plenty of people talk about on your show, where the sellers, you know, get their check and kind of coast. These guys did not do it. They did everything they could to ensure I was successful. So that was that was huge. Um, but yeah, had to, uh, had to make some changes quickly. Um, and but just

Peter, so so basically the answer was you had to hire quickly in more than you thought. I mean, 100 hours a week from each of these two people, that's 200 man hours to fill to replace. And they're high quality man hours because they're owners and they're expert plumbers. So it's really not hour for hour. It's probably whatever it's probably add it's to 200 hours divided by 40 is five people, but maybe you really need six people to replace what these guys are doing. Is that is that arithmetic working out? So these two gentlemen need to be replaced by about six people, you plus five others, something like that? Never thought about it that clearly, but yes, pretty pretty much. Um, no, so I had to, I think I budgeted for hiring one person. I had to hire two just to kind of scrape by. And then I spent quite a bit of time since I've since hired, you know, several more people that are true, kind of like office, um, you know, level people. But yeah, I definitely, you know, I had to hire a person that I wasn't planning on and I had to delegate, uh, a bunch of stuff to the team. So I had a couple people that really needed to level up. Um, and so it went, you know, it went pretty good. Um, I had a ton of support from the sellers, um, and I was able to, you know, have a lifestyle that wasn't going to get me, you know, divorced and miserable, you know, so I was able to, I was able to make it into, I still work, you know, a lot, but, you know, maybe I work 60 hours a week or 55. Um, I'm including my commute in that, right? So it's really maybe a little bit less than that. But, um, I was able to transition to a point where I was okay, and the business was okay. But it was just, you know, it was that, those are kind of the stories that you hear. And I think if I didn't have the support of the sellers, um, I would have been in a really tough spot.

And so you really, it was hard, but there was no, there, this was not a fetal transition. There were no fetal position moments. No, uh, the business was handed off in really good shape. The diligence that I was able to do on the construction business was limited based on, you know, their data. And so I took a big leap of faith in him telling me that there was a healthy backlog. And there was, thankfully. So the business was handed off in good shape. The sellers were super helpful. The transition worked fine. There were no fetal position moments. You know, there were plenty moments of fear, but, you know, I never got, I never got close to financial issues. I never had to worry about making payroll.

And let me and let me ask on that, because we, we when we were talking about how much equity you retained and the size of the loan, so even with you kind of maxing out what you could in terms of retaining ownership, which meant big loan, big loan payments, even with that, and with the discovery that you were going to have to hire more than you thought to replace the two owners, so that's the J curve that we have already talked about, you still felt like you had room, like you weren't, you never, you never worried about missing payroll or whatever? Yeah, I had, I had room. The deal, you know, even with, you know, talking about the leverage, the deal had plenty of wiggle room. You know, I had working capital was included in the deal, and I had a line of credit, you know, that was kind of the emergency fund. So yeah, financially, you know, I knew that profit was dipping in the J curve, but I didn't, never get close to the trees, or at least that close to the trees. But I will say there's, you know, there's been a couple times, you know, right now, everything's pretty cool, but like, there was a point where I was like, a year in, and I looked at the bank account and I was like, man, I have worked really hard, and that's the number that's in the bank account after a year. So, you know, that's, uh, that's, uh, you know, when when you and I spoke, I think I think I said, so somebody asked me, I was about a year in, and they go, oh man, how's it going? And I was like, yeah, you know, I, you know, you always have kind of a range of how you think things are going to go. And I go, yeah, things, you know, things have gone like seven out of 10 good. And then I paused for a second. I was like, what the hell am I talking about? Like, there's been so many like crazy external challenges or internal challenges, whatever, just like so much hard stuff, and so many things that have not gone my way. Plenty of stuff went well, so like, but I, I kind of revised it and I was like, things have gone five out of 10 good. And, you know, couple of things that we just talked about, the seller hours, but offset by incredible support from the sellers, and, you know, having to make, uh, transitions of who's responsible for what very early days, you know, where I wasn't able to, you know, execute the same level as the seller, you know, having to have other people pick up, um, that stuff, you know, you kind of lose some quality there, right? You're transitioning stuff from a seller to an employee, you're always going to have a little less performance. So, you know, some of that stuff. But I think one of the big things that, you know, the big negative, um, that I experienced was turnover. And I'll share a little piece of that that I just, I didn't grasp. And as a good piece of diligence, hope, you know, hopefully for somebody is, so I had two sellers to transition. So that in itself, high level of turnover. If you know, if you're managing that type of transition, what I didn't realize, um, you know, kind of right around when the deal went to market, um, they had turnover in two of the office staff. Now, there's like 12 office staff, or there were 10 when I bought it, or nine or something. So they had transitioned two of the office staff. They had turned over. Um, and by the time I closed, the two new people had been there for six months. But I didn't realize until quite a ways in that the two people who left, it was like a bookkeeper and a billing person. Those two people were just like a rockstar team, and they were running this show. They had been there for, you know, one was there for six years, one was there for 10. And the sellers replaced them with people who could fill the seat until they sold the business. Not that they made like a, you know, disastrous hire, but I had two people who were fairly new, and I didn't realize they're both, you know, not here anymore. One of them we fired, and one of them left on their own. But they were just like, they had two A players before, and those two A players got replaced with like C players. And I had no idea. You know, you come into this business, you can only rely on the people around and kind of say, hey, was this how stuff was going before? Cuz all you're trying to do is keep things running the same as before. Yeah. But so what I realized down the line was, yeah, I had to transition the two sellers, and I had to transition these two other people that I didn't even realize counted as turnover because it happened six months before I got there. But really, I lost two really important team members before I ever got there. Yeah. Um, so that was, you know, there's four people out of a office staff of call it 10. Um, then I'll give a little example of a mistake I made right after closing. I knew I had to replace the field guy. So it was like day one, we were like, all right guys, let's draft this job description. We got to get somebody in here. Um, and so put together a job description with the help of the sellers and the other people there. And we posted on Indeed. And Indeed, like pushes you to put a salary range. And I talked with them. I was like, oh, I don't know. And they were like, no, you should put a salary range. It's really high. It's really hard to find people of a certain caliber. And you need to put a salary range that shows that you're serious, right? To, you know, plumbers are hard to hire. And hiring like, you know, salaried supervisor level plumbers is even harder. And so they said, put a salary range on it. Put a salary range on it. Not realizing that the job description was pretty similar to somebody else who worked there. And, oh no, that our lead, our lead foreman, who was like, kind of our top hourly plumber, he had been promised over the last four years that he was going to get this job. I didn't know that. And so I put up this job posting with this huge salary on it. So everybody saw it. And the, you know, the lead foreman quit on a one-day notice because he was so pissed at the seller who promised him this job. I had no idea. And then the, uh, the other supervisor, the guy who wasn't the seller, um, he quit after a year. And, you know, it was just like one of those things that, what was I going to do? Like argue with the seller and be like, no, I shouldn't put a salary range on it. He said, listen, like, it's hard to find, it's hard to find plumbers. You got to put a salary range so you attract good candidates. But little did I know, there was all this backstory. And by putting the salary range, I was going to piss off two other important employees. So yeah, you know, they probably would have left anyway. Um, but just like little, you know, the little things that you don't know what mistakes you're making while you're in it. And so, you know, there's, you know, there's another couple employees that turned over in the first year. And so that just, it really makes things hard. The less stability you have, because you lose every person that walks out the door, you lose tribal knowledge. Exactly. You lose the history, you lose the knowledge of the jobs that were working on the customers. So, and and when the whole argument for search for like a, the types of service business where there's where your asset is the people, you know, it's not capex, it's not whatever, it's the people. When people with tribal institutional knowledge walk out the door, it's effectively you're losing some enterprise value. It's not, you can't just replace them like for like, because because they had a lot of of the value of the business that you bought was locked up in their heads. Yep. So that was a, that was a big challenge.

Peter, let me, let me, let's, try to try to codify a couple of the learnings there. I think, tell me if you agree with this. So on the one thing where the two office staff that you inherited but didn't realize that they were C players and that this pair of A players had left six months prior, maybe the the learning for the listener is in your diligence, ask a seller, have there been any, have who's exited the business in the last year? Yeah, it was that was a conversation in diligence. I just, I wouldn't have comprehended that how valuable they were. Bookkeeper and the person who had worked together for 10 years were just had this like rockstar show, and they had all this stuff that they did together. And the two people who came in after, to be fair, they probably didn't get the same attention and training that they deserved, cuz everybody knew that they were exiting. Not every, the sellers knew that they were exiting. Yeah. Um, but they just, you know, and they were hired in a hurry, I think. Yeah. Um, and they just weren't, they weren't as good as the team that left. And I didn't know who the team that left was. I just thought you were replaced your bookkeeper with another bookkeeper. Yeah. I just didn't realize that, you know, the 10-year bookkeeper was really awesome. Yeah. Okay. Well, and then on the other one, where you put the salary and the foreman who's been promised this role quits the next day. And I, I think this is probably more commonly known, is the learning there that you ask the seller, hey, have any promises been made? I mean, I know this is something that people talk about doing diligence. Do you think that, did you do anything like that? Do you think had you, it would have uncovered this problem? Hey, seller, hey, Joe, has any been anybody, any of the employee, any of the staff been promised anything that I should that I might run afoul of if I, if I'm unaware? I knew that he was grooming this guy for this type of role. Okay. I didn't realize that in this guy's eyes, he was he was being promised for years that this was coming. So whether or not I put the salary range, when he saw that job posting and it wasn't him, that would have done it.

Peter, one of the things that you said to me in our pre-call was that, um, these problems, you, you were actually sort of at home fixing these problems. I think these problems maybe you were referring to other problems. Do you recall that and what did you mean? I don't know what I meant. I think what I meant was was yeah, there were all these challenges along the way. Um, also, by the way, there was an employee who left maybe like a year before I got there, and the sellers didn't know, but he started another plumbing company. And over the course of my first year in business, he slowly but surely called on all of our biggest customers and started pulling them away. But it was again, it's like something that happened a year before I got there. How would you, you know, they wouldn't have even known to answer that question in diligence. But so yeah, I think what I meant was, there's challenges with this. Um, I had the background of seven years running a, you know, running a business, The Delivery Dudes, to be clear. Yep. Um, and so like, I'm familiar with with people issues. I'm familiar with the constant challenges that there, you know, in a given day, there's 100 issues and you can only fix 60 of them. You know, so I, none of this stuff was putting me in the fetal position. I think was maybe what I meant. Um, yeah. Yeah. And, you know, it's kind, you got to have, you got to have the the attitude of taking the good with the bad. And plenty of good stuff has happened along the way too. You know, like I said, I never, never had financial issues. You know, the business is growing, we're doing well. But, you know, you, you get punched in the face a lot, that's for sure.

Yeah. And you, and you already had some some scar tissue, some muscle built up there to just roll with those punches. Yep. But it's different. It's different when you got your personal guarantee on the line and you're, you're the owner rather than the employee. Yeah, of course.

Well, and I wonder if there's any part of your skill set that listeners might not have that they can somehow learn from or or maybe it's there isn't, and it's just you were at least with respect to your story, in the good position that you just had seven years of relevant experience, kind of operational people management experience. Just try, just trying to figure out where the listener can benefit from the fact that you were able to take this in stride better than somebody who's totally new to, you know, management. I think it helps in many ways. It also probably hurts in some ways. I came in and I was like, I know what this org chart is going to look like in three years. Like, I know how this, this business is going to grow. I've been through this before. I've taken a company from, you know, one layer of management to two. Um, yeah. And I came in and kind of said, I know the direction we're heading. I'm going to start marching in that direction, whereas in hindsight, maybe the better move would have been, I'm going to keep my head down and learn to be the seller. Even if I don't feel like I'm the plumbing expert, I should spend the next six months or year learning to do exactly what he did and focus on the day-to-day and don't be so strategic and don't think that, you know, you want to march on a three-year plan.

Really interesting. Couple other things from our pre-call, Peter, that I think the audience can benefit from. First of all, well, actually one, uh, connects to what you just said about about kind of rather than coming in as Mr. Mr. Strategy, kind of trying to be more like the seller and be more, you know, and learn the, learn the trade to the extent that you can really learn the business. You had said to me that the technical piece of these businesses is underappreciated. What, what did you mean? Like, how has it been being in a business that really is so technical, particularly as I understand it, commercial plumbing versus residential? Yeah, I think, um, I think if you're buying like a residential HVAC shop, I think well, I don't know about HVAC. If you're buying a residential plumbing shop, I think you can learn it pretty quickly. The service side of the business is fairly straightforward, you know, learnable in a shorter amount of time. We do a variety of work, um, and and I think a lot of companies do. But I think the thing that's underappreciated is, yeah, the, the technical component. Searchers buy plumbing and HVAC shops all the time. The technical component that is most likely worn by the seller, um, is stuff that you can't learn in six months. You know, there's examples, there's there's customer problems that only surface every five years, and the seller being able to answer a question and you not being able to answer a question can be a big deal. And so that, I think, is one of the things that, you know, the popularity of these industries among searchers is huge. Um, I didn't realize it. I thought it was learnable and hirable. Um, and it is, like things are things are good, and I've got a whole lot of answers. I probably know more about like technical weird plumbing, you know, troubleshooting than I do about like, you know, how to change the flapper on a toilet. Um, but, Mhm, there's there's definitely there's an element of the technical side that, you know, you got to be conscious of. You're replacing a seller who's got 40 years of plumbing experience with some, you know, 30-something year old kid who doesn't know. And that's a big gap in the eyes of your customers.

And, and so what are, so so what, what's the answer there? You're, you're obviously learning as much as you can as quickly as you can, hiring to fill the gap as much as you can, and is that basically the playbook and kind of marching forward with a confident face? Yep. It's, uh, I mean, it's all three. It's learning yourself, it's hiring people to support you, and it's having a good relationship with the seller. Yeah. And I still make that call, you know, when we've got tricky stuff, um, you know, they're there.

You mentioned earlier licensing. So how did that play out in, uh, yeah, how did you deal with that? What it look like? Let me rewind. I did want to share one thing. This guy on Twitter posted it, but I can't take credit for it, but I just like it. It resonated with me. I didn't, it came up recently on Twitter, and this kind of ties in the last two things we talked about, the the strategy guy and the technical thing. This guy, I forget who it was, I forget what his story was, but I think it was a guy who who bought a business and went bankrupt. And he posted his story on Twitter. I wish I remembered the guy's name so I could give him credit. But one of the things he said in this mile-long, you know, 100 post thing was, I thought I thought that the employees wanted a clear vision, thought that they wanted leadership and an opportunity to grow in their career. And what they really wanted was direct instruction from an expert in the business. H. And that hit home for me so much. And this guy, you know, this guy obviously landed in a different outcome than I did. Um, I've never heard anyone say it like that, but that I think was the absolute biggest lesson. I came from an environment of accountability, of people with a growth mindset and hungry people who hold themselves accountable and want to achieve. And you come into these, you know, this business that's in a so-called sleepy industry, and you, you know, you kind of go, yeah, I'm going to be this great leader, and we're all going to march forward together. And what you don't realize is, yes, that's a great outcome, but it takes a long time to create that that culture shift. And when you come in on day one and try to replace a seller who's providing direct instruction with his decades of industry expertise, and you try to replace it with strategy guy, um, that's a big, big shift. Um, and it's something that I had to kind of dial back. And that that dude's Twitter post really, really popped out. I'm sure I butchered it in my paraphrasing, but I think that was that was one of the big things on those two topics that kind of summarized my learnings.

That's great. Great call out. What was your question? Yeah, just a more, uh, in the weeds question. How did you deal with the license requirements of being the owner of a plumbing business and not having a license yourself? So there were employees who also had their license. Um, I transitioned to, it was actually the owner's son who's still an employee. The SBA requirement is, and I think it changed recently, but the SBA requirement when I was around was that the seller can work at the business and qualify the business for up to a year, and they can't qualify it after that. And my lender was like obsessed with the licensing issue, and reasonably so. Um, but I had four master plumbers in the business that I could access. Two were employees, two were the sellers. Um, and I transitioned the license on closing. And I had employment contracts, you know, with incentives to stick around. So I had plenty of structure on it. But the, the lender was all over it.

Wanted proof of licenses for all the people who weren't you know, the qualifier. Even, um, and anyway, so that was how I did it. I've heard of other people doing it with a, you know, third-party qualifier. Um, there are like retirees who will qualify, you know, three businesses and hang their license and earn a little side income. Depending on your state, um, there's different rules around it. Like Florida will let you qualify a few businesses as a license holder, but not like 20. Um, and you have to, I think you actually have to go to Tallahassee and like sit in front of the board of, it's like the Board of Professional Regulation. If you're a guy who's qualifying multiple businesses, you have to go explain in person why.

So anyway, there are like third-party people who will qualify businesses. Um, I think that's common in in several states. Um, and I think you can get away with having the seller qualify it as long as you have what the bank considers a credible plan to transition it to someone else. Now, once you close, what I've heard people say, and I don't really know if it's the truth, but like you can have the seller qualify the business for up to a year. And then once you close, like the bank is not going to default you if the seller keeps qualifying your business. So I've heard people say that like, yeah, you can, in a practical sense, as long as you convince the bank that you're going to switch it to someone else. In a practical sense, you can just have the seller keep qualifying the business. I don't know if that's, you know, how true that is, but I've heard other people say that.

My experience was just that I had another guy with the license and I transitioned to him. You had some working capital, uh, learnings. Remember what those were from our pre-all? Yeah. Um, and I think like, you know, in the grand scheme of things, like spreadsheet pre-closing, Peter probably would have thought these were a big deal. And post-closing, it's like, yeah, it's a factor, but like, is it, you know, is that's going to be like affect your odds of success by like a tiny little thing compared to everything else? Um, but I had working capital included in the deal.

The construction industry, I've talked with several Searchers who are looking at businesses that are in the industry or have a construction component. Um, the construction industry has funky working capital requirements. Um, you have one, you might get deposits, which are hard to analyze because a lot of times sellers just count it as revenue rather than counting it as a liability. Two, you have progress billings. So in our case, we do these big houses, they might take two, three years to finish. And so, so you're billing your customer, who's a GC, and you're billing them and saying, hey, I'm 40% complete with this job. So if you bill them 50%, like, are they going to fight you on it? Probably not, because they're getting paid more too as the GC, so they're motivated to be overbilled. Um, so there's an opportunity for overbilling. And then three, there's a, there's a thing called retainage, which adds even more complexity to it, but we don't need to get into the detailed stuff. But the progress billings is really the piece where buyer beware.

My my deal, like definitely I closed and we were overbilled, and I didn't really know until down the line that basically like, you know, there wasn't a lot of meat on the bone on some of these projects. Not that it was like gross, you know, it wasn't anything like fraud or it was just like, you know, natural behavior. And I had some protection, loose language in the APA that protected me, you know, if anything bad happened. But basically, like, as a buyer, how in the world are you going to go look at a house that's like halfway built with pipes sticking out of the ground and know if it's 40 or 50%? Yeah, totally. Like, you have no clue. So you're at the mercy of the seller. You know, I didn't even figure out which ones were overbilled and underbilled until six months in. I was just looking at, you know, the revenue in the first two months and I was like, man, like why, why aren't we doing much in sales? And it was because we had a couple projects that were billed ahead of where they actually were. So that was like a little blip in the radar. It wasn't, um, wasn't a big thing, but definitely opportunity for it to be a bigger thing for somebody else. Um, so be aware of construction and your lack of knowledge as a great.

Well, let's start wrapping up here, Peter. This has been, this has been just fantastic. What, um, what is your plan here? So my plan in the financial model, pre-buying the business was, um, the good case was basically double the business in five years and sell it. Um, I still am kind of treating that as plan A. Um, I very well may not sell it. Um, but going through my experience at Delivery Dudes of not being able to sell when you wanted to, was a very real lesson. And in my eyes, you kind of have to, you have to set the business up for exit in order to have the option. Like I'd hate to get down the line and not have the business be, you know, I'm sure it'll be sellable at anyway, but you know, not have it be maximized and then you only have one plan and that plan is to hang on. So I'm, I'm kind of treating that as plan A, even though it will, you know, very likely could become plan B.

Um, despite all the things that I've talked about, the challenges, like it is fun, it is gratifying, it is a very cool thing to do. Um, and if I find a way to dial back my hours a little bit, then by all means, like I'll hang on to this thing. It's a great, it's a fun challenge, it's cool, it's a, like, it's a, it's something different than you get in other jobs. And maybe it's plumbing specific, but like every single day you have people that have problems in their life, and every single day you are solving problems, and you are creating things that have physical like good and value to the world. And that, I think, is something that I didn't really see as tangible in anything else I did. Like, sure, Delivery Dudes, we were like delivering people food and cool, but there is something nice about every day you are solving people's problems for them. Yeah, you are creating, you are creating good in the world and something that is visible and lasting and all that stuff. So I love that element of it. It's a lot of fun. It's a lot of, I like, I, you know, you say like, you learn something new every day, like I learn 10 new things every day. It's, it's cool. There's always a challenge. Even the guys I've got around that have tons of experience, everybody, it's just like, you know, everybody's passionate about it. It's, it's something you can always keep learning out. So I really like the industry, love the business. I'm treating plan A as grow it and be able to sell it, and maybe I will, maybe I won't.

Okay, Peter, anything that we didn't get to? We, we sure got to a lot, but, um, maybe I overlooked something. Anything you want to tell the audience? I do think like, as a whole, the opportunity is just, I think it's crazy. You, so, you know how when you like go get your first big boy job and you get your own place and you just kind of like, oh, I can do whatever I want. Like, I can eat ice cream for breakfast. Like, I can drink a beer at 10:00 AM. Like, no one's going to stop me. You can do whatever you want. I just, for me, like, I think the search concept is exactly that. It's just like, if you told me that I could just go buy a 35-employee plumbing business with mostly other people's money and like, no one's going to stop you from doing that or ask questions like, why the hell are you doing this? And like, you can just, you can just do it. Like, no one's going to stop you. I just think that's like, for me, it was like that exact moment. I think it's just, I'm really passionate about the, the search space and I just think it's such a, it's such a crazy thing. Like, you can just go do that. No one's going to stop you. And so I don't know, I love, I'm really happy to, you know, have done this the podcast with you. I just think it's such a cool space. I think it's such a cool thing that we're seeing. I think it's really like, it's going to define the next generation of businesses, the way that this, this concept is growing. Um, and I just still like some days I wake up, I'm like, how in the world is this a possibility? Like, I maybe I need to like fly the American flag more, but it's just cool. You can do whatever you want.

No, that is so well put, Peter. I, I might actually clip that and put it on social media. Something I never do. Um, I, that's probably, I, I feel like I've tried to articulate that once or twice where part of my falling in love with this whole concept of buying a business was that it, um, all of a sudden, it just, it just expands the possibilities so much more. And I was somebody who came from kind of more zero to one entrepreneurship. And for some reason, this path of entrepreneurship makes me feel a sense of possibility more than starting from scratch entrepreneurship, which is maybe a bit counterintuitive because you'd think that a blank canvas means more opportunity. But, um, anyway, so I, I loved how you put that. Um, good, great note to end on. Yeah.

Well, and then to bring it back to maybe the more selfish financial world of that, like my joke or half joke with, uh, with my buddy Morgan, who was on your earlier podcast, is, uh, is eight figs or bust. Because that's, that's the next level of doing whatever the hell you want, right? Like, you can do whatever you want and buy a business, but, you know, you buy a business and have an eight-figure exit, then you can really do whatever you want. You know, you don't even have to work. Um, so that's kind of been the joke. And I think that's the, you know, for all the, uh, for all the philosophical stuff about search funds, like the financial outcome is, is a real possibility. And, you know, who knows if I'll hit, if I'll hit that. Maybe it'll, you know, maybe I'll hang on to the business for 20 years and I'll hit it, or maybe I'll get lucky or something. But it's, uh, you know, it's, it's cool. And I think that that's, you know, there's so many of those outcomes in the space. And, you know, hopefully, hopefully I, you know, land somewhere, maybe not in that world, but, you know, land somewhere nice along the way, uh, with the, uh, with the growth plan. So I think that that's, that should be the mantra of all the, uh, of all the Searchers. How do we feel about eight-figure or bust being the title of this episode, by the way? I love that.

Well, that's like, every phone call we, you know, I'll be talking to him on the drive home all the time. I'll be like, oh, I'm thinking about making this, thinking about making this big move. I'm going to hire these two people. It's going to drop my EBITDA back down to like below where it was at closing, but it's going to be this great investment. And I'll call him with the same stuff, right? Every time we're like thinking about making some like, you know, sort of risky investment in the business, it's always like, well, eight figs or bust. And it's, it's so childish. And it is half a joke. Like, that's how it's driving us, but it's, uh, it's funny. Yeah, it is. It's great. And I, uh, so I, I may well, I may well be using that in the in the title. That's just great. Great. We'll let everybody think I'm an [Laughter].

Uh, cool. How can people get in touch with you here, Peter? How do you prefer? Uh, oh gosh, I don't know. I'm, I'm a lurker on Twitter. I don't think I've ever posted, but you could probably find me there. I'm on Search Funder and you can, I don't know, whatever, everywhere, LinkedIn, Facebook, Instagram. I'm, I'm around.

All right, we'll do LinkedIn if nothing else. Peter De Baptist, thank you very much for for doing this. This has been a great interview. Thanks, Will. It's been fun. 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.