• November felt very slow

  • I reviewed 13 new deals and submitted 2 IOI’s

    • For reference, I reviewed 26 deals and submitted 5 IOI’s in October

  • There was a noticeable dip in the number of quality deals

• Exploring smaller deals

  • Despite my preference for deals with a minimum of $750K in EBITDA, I considered smaller deals this month

  • In industries like HVAC, where private equity is targeting sub-$1M EBITDA businesses, I'm open to acquiring below $750K.

• Multiples remain high

  • My “average” data this month is misleading. Although the average EBITDA multiple this month dropped to 4.2x EBITDA, that’s because I looked at much smaller deals.

  • Deals over $1M in EBITDA still exceeded 5x multiples on average

• Met with non-brokered HVAC business:

  • I engaged directly with an HVAC owner introduced by a friend

  • More details on that below…

• Background: The owner, in his 70s and eyeing retirement, has maintained a solid business that has room for growth. His company is smaller than my typical targets, but I was intrigued by its long history in the community and strong customer base.

• Initial Impressions: The owner and I hit it off on our initial call, so I agreed to drive a few hours to meet him in-person for a round of golf and dinner to review his financials.

• Financial Review & Owners’ Expectations: 

  • After a detailed look at his financials, it was clear to me the business was a bit smaller than he initially suggested and his price expectations were too high.

  • He wanted a 7x multiple (as the “low-end” of his range)

• My response:

  • I was transparent and told him that I wouldn’t be able to get to his price.

  • I offered to connect him with some HVAC-specific brokers I’ve built relationships with and mentioned that, in general, you can get a higher price if you are flexible on structure.

  • He asked if I was willing to put together a few “scenarios” he could review to better understand how the structure of the deal could affect price.

• Proposed Scenarios: In response, I presented three acquisition scenarios:

  1. Highest Purchase Price with Earn-Out: the earn-out I proposed was based on revenue targets, but even hitting those left him 40% below his initial price expectation.

  2. Moderate Price with Seller Financing: this scenario offered higher guaranteed pay but also required higher seller financing (~50% of purchase price).

  3. Lowest Price with Highest Immediate Cash: This was the most straightforward scenario, but was significantly below his asking price.

• Next Steps: I've communicated my stance clearly to the owner. I also followed up with transaction data / comps on 27 Florida HVAC businesses around his size that were sold in the last 3 years. While I don’t think we’re going to align on valuation, we’ve maintained a great rapport. I’ve also learned some valuable lessons through this process. It has reaffirmed to me the importance of patience and transparent communication in these discussions.

• Takeaways: This experience brought home for me some of the challenges of proprietary deal sourcing. Seller price expectations are often too high, and the investment in time and negotiation can exceed brokered deals. Still, though, the opportunity to directly engage with a business owner has been an invaluable experience.

• I submitted an Indication of Interest (IOI) for a pool service company this month with ~$2.2 million in revenue and ~$600k in adjusted EBITDA.

• Why I like pool service businesses generally:

  • it’s a fragmented market with a lot of small operators (so much so that people refer to a lot of operators as “one-polers,” which is basically a single guy in a truck).

  • reliable recurring revenue with high margins.

  • recession resilient given the specialized knowledge needed, time and effort required, and the predominately higher-income clientele.

  • Low capital intensity and year-round service demand in this geography.

What I liked about this business:

• The company owned its niche and was a clear market leader in its operating region.

• Had a strong reputation / good reviews.

• Demonstrated steady, consistent revenue growth.

• Had tenured employees and relatively low turnover. The office manager and repairman have over 10 years with the company, and service technicians average a tenure of 3.5 years

Concerns:

• Looks like they are currently operating at max capacity, averaging 90 pools per week per technician.

• Growth or staff turnover would necessitate quick hiring and additional vehicles.

• Revenue was split 50% recurring pool service and 50% repairs/parts sales, with recent repair demand boosted by a storm, raising questions about future sustainability of that repair revenue.

• Complicated financials could pose challenges for SBA financing.

I communicated to the broker that, unless acquired by a private equity-backed pool firm or someone that buys without SBA financing, the asking price is unlikely to be met until 2023 tax returns come back.

My offer was quite a bit lower than asking price, but reflected a price that could facilitate an immediate deal. While the broker acknowledged the validity of this assessment, the owner prefers to wait for the 2023 returns. So no deal for now!

• A “Pitch” and Likability only go so far…

  • I’ve worked pretty hard to nail a succinct pitch to business owners for why I’m a good fit to carry on the legacy of their business. But that doesn’t matter if they don’t get enough cash to retire!

  • Key takeaway: While a compelling pitch is important, it's critical to align it with the financial expectations of business owners. And if they’re expectations are wildly off - that’s ok. Just don’t spend too much time there…

• Trust the Process

  • November was my most challenging month of search yet. It was slow and deal quality was low. I’m not discouraged, but just being honest.

  • Key Takeaway: Embrace patience and persistence. Challenges are an inherent part of any journey. I’m focusing on what’s within my control and staying patient. Better and more fitting deals will come as long as I maintain my effort and trust in the process. Forcing outcomes isn't the strategy; it's about consistent work and faith that things will align in due time.

If you know any folks in Tampa I should connect with, I’d love an intro! Elise and I are not strangers to moving at this point, but it’s always helpful to get connected through mutual friends.

As always, thanks for your continued support. I hope everyone has a very happy holiday season!