COLLIN HATHAWAY - INVESTING AND OPERATING IN HOME SERVICES - EP. 32

My conversation with Collin Hathaway from Skylight Capital on:

- His focus on home services like HVAC and plumbing

- The operating playbook he's developed over time

- Some counterintuitive improvements he does in new acquisitions

I’ve been trying to get Collin on the podcast since our first conversation a year ago and I wish this episode could have been longer. Collin is a great, entertaining storyteller and I'm sure you'll get a lot of notes from his experience.

This was easily one of my favorite episodes so far, and is now the first episode I'm recommending folks listen to if they're new to Think Like an Owner. There's tidbits on finding acquisitions, reshaping teams, avoiding bad culture, and being a better steward. Enjoy!

Listen weekly and subscribe on iTunes, Spotify, Google Podcasts, Stitcher, Breaker, and TuneIn.



https://www.alexbridgeman.com/podcast/collin-hathaway-investing-and-operating-in-home-services-ep-32


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Interested in sponsoring? Send me an email at [redacted] Transcript:


Thanks, Collin, for joining. I've looking forward to having you here for quite a while so it's great to finally get you on the show. I'd love to hear about your background and what you're working on with Skylight Capital and Flint group and other projects.

Yeah, well, thanks for having me. Congrats on getting the podcast started. That's really awesome. I think it's a really good venue for folks like me and others to share their stories. You're also relentless, and dog-it which I appreciate and admire. For my background, yeah, I was born in Flint, Michigan, we moved to the Washington State, to the northwest, when I was two and a half. My dad was in real estate and had a chance to check out the Pacific Northwest. We had some family out here. I had a pretty normal childhood, loving family, went through the public school system in this gifted education program that they had at the time.

It's funny, now, that I have kids because we were in a very small subset of the public school system and I remember being in a fifth six split, which now people would go crazy over if you actually put your kid in a class that was... You'd think, "Hey, it's only half of the actual day goes to your kid," but it was awesome and really good for me. When I was in high school, my parents suggested/forced me to go to a private school in Seattle called Seattle Prep, and it was eye-opening. I was from the suburbs and I wouldn't say the school was particularly urban, but there was just connections to Seattle and downtown in areas of the city that I just had never heard of before. It was really eye-opening, too, because it was my first real exposure to people that had, maybe, money or knew their way around the city more than I did. Not just how to get places but who to contact and where to live and all this stuff.

Most of it, now, only has become more clear to me in terms of where they came from and what type of financial access their families had now that I'm a little older, but it was a great experience, I still have some of my best friends from going to high school there. I was a really good swimmer and my mom encouraged me to apply to Stanford even though I wasn't sure I wanted to stay on the west coast. I got in and was thrilled that I had the chance to go there. Went down to Stanford and it was pretty eye-opening again. It's 50% non-white. The people at Stanford are pretty amazing. There's a certain humility or feign humility that everyone has where you can walk up to an Olympian... or, I was acquaintances/friends with Chelsea Clinton and some other. It's not a name dropping thing, but it's just amazing who's walking around, and everyone pretends that they're just normal.

My first night in a dorm there, I walked around and walked into somebody's room and there was a laser light show playing and I started talking to the guy and while I was lifeguarding and working at Abercrombie and Fitch the summer before and weed whacking, he had been in the Amazon catching butterflies and, as a side project, built a laser that would go along with the music, so it was just incredible. It's also the first place where I get totally trounced in school. This would be a recurring theme for me. My academic progress peaked when I was about 17. I figured out very fast that I wasn't good at multivariable calculus or computer science.

I was pretty homesick, and then found a really great outlet in my fraternity, which also ended up being a place with lifelong friendships and a place where I got to grow as a leader. I became the fraternity president, and made all the mistakes that a lot of leaders make early in a leadership stint from sending negative nasty-gram emails that were too long and calling people out or making mistakes and doing it in a safe environment where I could get good feedback from friends, and maybe some bad feedback, but just feedback, and was really proud of that time in my life. I do know my parents had got extra insurance on themselves to me when I was the president, which now, as an older person, I understand because it's crazy to think of some of the things we did back then.

So, I graduated from college. At the time, it was 2000 so I probably interviewed at 12 places. I think I got 11 job offers. I thought it was because I was really awesome, it turns out, it's just because I had a heartbeat. Because, there were so many jobs, and everyone was starting companies and doing all this crazy stuff. I was hired to work as a tech analyst at CS First Boston with this guy, Frank Quattrone, who was pretty famous at the time for doing these huge tech deals. A week before training, I quit to join a telecom startup doing sales. I had a sales internship the summer before and I watched these guys get a fax... This is old school, 1999. They'd get a fax and would come in and say, "Oh, I just hit quota for the month." They'd get another fax come in and say, "Oh, I just hit President's Club." Then, they'd say, "Let's go to lunch." I was like, gosh, this job's awesome.

So, I got hired as a salesperson and it was not at all like that. Outside sales, 22 years old. My training consisted of giving me a computer, a cell phone, and a three by five notecard box set where I could write leads down on and I was told to hit my quota or I'd get fired. It also coincided pretty nicely with the.com bust, which meant that the stock options that I had received, which I thought would make me a bazillionaire ended up being worth slightly less than a bajillion. Like, 100% less than a bajillion. But, it was the best job I never want to do again. It was like a boiler room. There's two movies, Glengarry Glen Ross and Boiler Room that basically described my life.

No, coffee is for closers. I had a boss who was a frat guy from Arizona, and he just would scream and yell, and, "ABC's, always be closing." I was, "What is he talking about?" Then, "Act as if Hathaway. Act as if what? Act is if you know what you're doing?" I was, "I don't know what I'm doing." He'd use the word net net, which is one of my least favorite business-speak words. I said, "Well, what does that even mean? Like, plus-minus, plus-minus?" He was, "Fuck you, Hathaway." I was, "God, this job sucks." But, I ended up being pretty good at it. I became the third best salesperson at the company as a 22-year old and watched the company grow from 60 employees, when I started, to 300, back down to about 50, when I quit. Right before it went under, they blew through 200 million in about 18, 24 months.

My severance was that at 12 o'clock at night, I went back to my office and stole my office chair. I think we're past the statute of limitations. There's also 1 billion extra office chairs in the Bay Area in 2002, or whatever because everybody went out of business. So, I had that chair for about 15 years, until my wife made me get rid of it. I didn't know what I wanted to do, so I had an interim job and I applied to law school and that's where I figured out that my fraternity life seriously impaired my GPA. I was in the 43rd percentile at Stanford. Everybody, if you ask them, they say their kid's in the 98th percentile, so I was half of that. Or, I was actually less than half of that.

I got into two marginal law schools and two lawyers pulled me aside and said, "Hey, we're going to be candid with you. You'd be a very bad lawyer," which is true. If I'd gotten into the University of Washington Law School, I would be a very unhappy attorney right now, if I was still employed. So, a friend of mine called and said, "Hey, there's a private equity firm in San Francisco, they need a sourcing person, you should apply." I said, "Hey, I don't even know what that means. I don't even understand what you just said." He said, "Just apply for this job." I looked at their resumes, and everyone there had an MBA and I thought, "Okay, well, that'd be cool. Maybe I can work there for a few years and go back to business school."

So, I went to this firm called Alpine, I interviewed, I got the job. Within the first week, I screwed up this huge financial analysis. The founder who was 32, and had raised $54 million, came up to me and said, "This is awful. This is totally wrong." I said, "Yeah, pretty terrible. Sorry, I don't know what I'm doing." He said, "It's almost like you don't know the three financial statements." I said, "I don't." He said, "What do you mean?" I said, "What do you mean?" He said, "What do you mean?" I said, "What do you mean?" He said, "How'd you get a job here if you don't know the three financial statements?" I paused and looked at him said, "Well, you never asked. You asked if I was good on the phone, and I'm awesome." He looked at me and I looked at him and he walked away, and then I went and called my mom, almost crying, I said, "Mom, do you think I get my deposit back, I'm going to get fired?

Fortunately, at the time, they were worse at firing then they weren't hiring. So, I just kept my job and tucked in and learned the three financial statements and learned how micro-cap private equity worked, investing in sub $3 million EBITDA or operating profit businesses. It was a great experience. I learned a lot too, I worked 80 hours a week. When I wasn't working, I was out in San Francisco. I felt, just, personally very lonely, but also really learned a ton. There's no other experience, like just working a ton. I managed to get back into Stanford for business school, and very grateful for that. When I met my wife... I'd met her in college. She had found me highly undesirable when we first met. She had gone to the University of Washington. But, when we re-met before business school, she was mildly intrigued that I had been able to get back into Stanford Business School. We agreed to meet for a beer and talk about how I got into business school because she figured if I could get in, there was more than likely chance she could get in somewhere good, and we've been together ever since. That was a gift.

But, went back to Stanford, had a pretty good experience, and met some really amazing people, but also had a chance to pursue some of my entrepreneurial aspirations. I had said before I went to school that I wanted to move to Seattle. They asked what do you want to do 10 years down the road, I said, "Start a business, move to Seattle, and eventually run for office." And, two of those three things have happened. Not sure the third will ever happen due to family constraints and a little bit smaller ego than I used to have. So, it's still pretty big, but it's not as big as it used to be.

So, while I was there, I found a company that was for sale, that was doing 10 million of revenue and two of EBITDA and someone said, "Hey, will you send it to your old firm," and I said, "It's too small for them. Do you mind if I try and buy it?" He said, "Sure. Do you have money?" I said, "Oh, yeah, of course, I have money." So, I locked up this deal to buy it and then called my old boss and said, "Hey, I just locked up this deal. I have no money, I've no idea what I'm doing." He said, "Great. That's how I started." So, that deal ended up blowing up at the 11th hour when the woman who was selling to us to spend time with her husband, caught her husband cheating on her. That was a first and thankfully hasn't happened again.

But, that was the genesis of starting my little firm Skylight. Essentially, no one was targeting these small businesses. The idea was to build up a portfolio of companies, buy them at a reasonable price. At the time it was to apply a lot of financial leverage. So essentially, if you just didn't have to go bankrupt, you can make a lot of money. That has changed over time for me in terms of how I think about it. I convinced my girlfriend, who's now my wife, I had this foolproof plan to do this thing called Skylight. She somehow agreed. So, after school ended, we moved to San Francisco instead of Seattle so I could start out of Alpine's offices and started looking for companies.

Within six months of starting Skylight, I found a company in Sacramento called Bonney Plumbing, bought 80% stake in that company. It's a Residential Plumbing Company, been around for about 30 years. I remember my friends were like, "Why are you buying a plumbing company?" I said, "Well, it's close if something goes wrong and get there. I really trust the owners, and they're going to keep equity. So, it's great, we can work together." I said, "You guys all say a recession's coming, I'm pretty sure the toilets still break in a recession." They said, "That's the stupidest thesis I've ever heard." I was, "Yep, well, if I was really smart, I'd be at KKR or Facebook, but neither one has called so I'm just going to do it."

So, I bought Bonney, and three weeks later, Bear Stearns went under, and it was brutal. I remember someone calling me from Bonney saying, "Do we take a check or IOU from the state of California?" I said, "First of all, what are we doing, doing work for the state? And, second of all, no." But, it was eye-opening. Going into a blue-collar business. At the time, thinking I was the greatest thing since sliced bread. My approach has changed a little bit over the last 10 years. But, we made a lot of mistakes, but I changed the marketing strategy. At the time, the website was a one-page website with a coupon link that if you clicked on, went to an error page. I said, "Can we rebuild the website?" They said, "You know how to do that?" I was, "No, I don't know how to do that, but someone does."

I remember, at one point, I said, "What's your biggest problem?" They said, "Oh, our guys, dispatch from home, so they don't come in and get their equipment restocked enough." I said, "Okay, well, then we don't have their sheets for what they need until they come into the office, and then we're behind." I said, "All right, cool, so we're going to get everyone a fax machine," which is ridiculous now, but everyone had a landline. So, each night they'd fax their equipment needs into the shop. They said, "What do you mean?" I said, "It's going to go into computer with an E-fax." It was like Zoolander, they're, "In the computer?" I was, "Yeah, it's amazing." They're, "You're so smart." I said, "Oh, I know, I'm really smart."

So, it was stuff like that. We launched air conditioning, which didn't go that well but cut my teeth a little bit. Fast forward a couple years later, I had trouble getting more money from my original investor, so I raised six and a half million from another investor and bought a company in Utah, from a devout Mormon gentleman who was going to be my partner. It was my first experience with bad business. The gentleman was committing fraud, forging OSHA records, and using a hookers and blow sales strategy, which, for the record, does drive profit until it doesn't. So, it was awful. I had to move to Utah, I had to save this business. At the same time, my whole Board got fired by my biggest investor. Before they got fired, they helped me hire a president who had leukemia but didn't tell me. It's a case study in, just, everything that could go wrong, did go wrong. Oh, and we bought a company with customer concentration and high cyclicality. It was a disaster. But, I saved it, for the time being. We still ended up losing two-thirds of our money when we finally sold it five years later.

Did move to Seattle, we had a baby. It was March of 2011 and things were pretty dire. I was telling somebody, "I said it's not looking that good. I've got a three-month-old, I've got 15 grand in the bank, and a rental house." They said, "Oh, a rental house." I'm, "No, not investment property, a rental house because I have no money." So, I was going to quit and my wife said, "You seem really passionate about this and you seem like you could be really good at it. Why don't you give it six more months?" I really appreciate that because I did and three months later, I bought a HVAC and plumbing company with a different group of investors in Dallas called Berkeys. That was the start of what would eventually be called the Wrench Group.

So, 9 months after that, I bought a Houston company through the Dallas business, and they were all about 9 million, including our Sacramento business. Right around then, in 2012, I started to figure out how to apply some of the best practices in these home service businesses, and all of them just took off like a rocket. Sacramento grew from 9 to 23 million, and Dallas grew from 9 to 20, and Houston grew from 9 to 30. It really lucky because I had some great partners at the various businesses, but really had some good success during those years. Eventually, we added a third company to the Texas group in Phoenix that was 45 million. So, now we had 100,000,000 and 15 million of EBITDA, so that was crazy. Around 2015, my investor said, "Well, what do you think about selling?" The owners and I said, "No, we don't want to sell, we're growing really fast. We think we finally got this." They said, "Cool, so we're going to sell." We said, "What?" We added another company to the mix in Atlanta, so now we had 150 million, and we took it to market and sold for $200 million in[redacted]It was like, a four and a half times return net for investors and changed my life dramatically.

So, I felt very lucky, but was also pretty burned out by all the acquisitions and growth and travel. So, I added one more company to Wrench Group in Dallas and then I got pushed out by the new CEO, which was... I believe everything happens as it's supposed to. It sounds a little surreal, but it was good for me. In 2014, when I was 36, I had a heart attack. I had bad genes, high cholesterol, which we've known about since I was eight, but I also had an immense amount of stress caused by a disagreement with my biggest investor in the Texas group, and when we finally put that to rest and settled that, had the heart attack three weeks later.

So, at the time, I just wasn't really willing to be on the road three days a week, under the current circumstances. I had two little kids, and I didn't want to be traveling all over the country as a biz dev person for the new CEO. Well, he pushed me out, but I wasn't going to take any new role there. But, it was a blessing because I ended up meeting the owners of Guardian Roofing here outside Seattle. They were a $10 million-dollar roofing company with about 400 grand in profit. So, my wife and I bought 80% of that and we've now grown that to 15 million and about 1,000,005 of EBITDA.

Then, about a year and a half ago, I thought it'd be cool to go and do this plumbing and air conditioning thing again with a group so I tried to raise 20 million and had 45 million of interest in about two weeks. So, I settled on a $30 million fund. This time, set up the fund a little differently so that I had a lot more control over when we exited and also vetted the investors to make sure that they were on board for a longer hold. Part of that was because all the companies at the Wrench Group that we wanted to keep actually doubled in size, again, from 16 to 19 and the group that bought us sold again, for 750 million. So, I benefited from that, because I still had ownership in it. But, it sure would have been nice to have more ownership and be partners with the people that I've worked so hard to find and partner up with. It's called the Flint Group, it's the new thing I'm doing.

So far, we've had a decent amount of success, we've added four companies in Seattle, Portland, Vegas, and Denver. We have about 60 million in revenue and 6 of EBITDA, or 56 million revenue, and 6 of EBITDA. I also added a partner this time around, who's our COO, and he's just a fantastic operator, so I feel really lucky. But, live in Seattle, right by University of Washington, my kids are 9 and 8, married 12 years. I guess, that's my story.

So, you've built quite an expertise around home services and plumbing, HVAC. Obviously, that was your first company that you purchased, but was there something about the business model that, over the years, you've come to really appreciate?

I think, first of all, I just got really lucky. One of the things that I think I had the benefit from being in sales is, to me, nothing replaces just grit and tenacity. I remember sitting next to a guy who was looking for a company when Skylight was still pretty nascent and he spent a year working on this matrix, and "I'm going to look for these kind of companies with this owner and this and this and recurring revenue," and blah, blah, blah. Meanwhile, I was, "Man, I've talked to 100 owners, I've put in 20 offers, I've had 10 visits, I've done five LOIs that signed and I closed the deal." I just thought my way was better, because I get to see all kinds of different industries and take a lot of that bats and learn that this works better than this strategy, or this way of outlining an LOI or this works a lot better than sitting around theoretically thinking about it. So, I just got kind of, lucky on the plumbing and air conditioning thing.

But, since getting lucky, I think I've realized that there's a couple of different elements of it that are really attractive, which is that it's, A, it's really fragmented. So, 95, maybe 99% of plumbing and air conditioning companies have less than 1 million of revenue. A lot of our companies spend more than a million dollars a year on marketing. So, if things go bad or good, we have a lot more leeway to make mistakes and make new investments and change the trajectory of our company, that smaller companies just don't have. I think our business segment, it doesn't attract maybe a ton of great operators, it's a lot of small business people who've gotten into it because there were technicians. A lot of them are really good operators, but there's quite a few who aren't. So, at least, in our space, I like my chances of going head to head with Joe the Plumber every day, and coming out with at least a good track record of victory, versus me going up against a Zuckerberg or some finance maven, or hedge fund guy, and thinking I'm better. Because, as I've clearly indicated, my academic record would show I'm not much better. Then, there's just a huge market and it's also somewhat recession resistant.

So, we may never experienced the 300% growth of a tech company, but we're also not likely to get put out of business overnight by some new technology, which is pretty attractive. Initially, one of my goals was just, don't lose any money. It's not a good goal, as one of my investors said, "You'll never do anything if you're always so scared of losing someone's money." He's one of the guys who's in the Salt Lake deal, which, I guess, I appreciated since I did lose a chunk of his money. But, I think those are the elements I really like.

Frankly, I just like the element that we change people's lives while creating jobs. I'll give you an example. When I was working with the Houston company I used to get picked up, whenever I travel there, to the Doubletree Hotel at the Houston airport, which was Lux... I would get picked up by this guy named Manny and Manny was 20-years old and he was an apprentice plumber. So, he had to do three years of training before he could get his journeyman plumbers license. He was making 15 bucks an hour, which is 30 grand a year. He'd picked me up, and, the time we were together, we would chat in the mornings and I saw him become a journeyman plumber. He began making over 100 grand a year, he had a baby, he bought a house, he got married. It changed his life. Meanwhile, our company, Abacus, made money off of Manny. We were able to give him great health care so he could have the baby and not bankrupt himself. Everybody won in that deal.

So, if you look at our businesses, as we grow, we actually create a ton of jobs. We serve a lot of customers. Even though no one's psyched to call a plumber or HVAC technician, those are periods of crisis. If you ever had a water heater blow up or your air conditioning go out in Houston, you're pretty uncomfortable, and in some cases, it's actually very dangerous, and we go fix that problem for people quickly, and well and warranty it. So, it's a pretty nice business to be in and you do good work. You can feel pretty good about the work you put in everyday.

So, what do you look for in one of these companies today that is perhaps a little more nuanced than in your first deal?

I think at the time when I first started, I just didn't understand the importance of culture. I thought, you learn about it and I've been part of teams, and I've been the leader, but I mentioned this before, when I first started, a lot of this was financial engineering. You buy a company for $100, if you could put $80 of debt on it, and it doesn't go out of business, and you can sell it for the same price that you paid on the debt, you can make four or five times your money. But the reality is, I don't think that's the best investment philosophy, I also don't think it generates the best returns. What generates the best returns, and also is the best way to run a business, is to really focus on the culture of the company, and growing the business.

At least in these companies, the culture... I think it's for almost any company, but particularly in our sector, culture is really important. It usually starts with the top person, the man or woman running the company, or the GM or president running the company. A lot of times, now, whether the owner is staying or leaving, if the owner and their values don't match up with ours, it's a pretty quick pass, even if it's the greatest company ever. Because, even if they're leaving, more than likely, whatever values and tenants they have, it gets passed down to their team. Changing a culture is very hard. Our first investment had a situation where our culture degraded. We hired our first outside CEO, he had never been in a small business and the culture started to change.

Then, I had a heart attack and I just didn't visit for a while. When I came back to visit the company, I kept feeling like something was off and I couldn't figure out what it was. I was, "What is wrong?" On the fourth visit, I finally said, "Oh my gosh, the managers aren't very good and people are unhappy, and the culture has changed." Even though I tried to quickly change it, I terminated the CEO, we started moving the managers around, we had massive attrition, we had a story written in a newspaper about us doing some stuff incorrectly. Even though we were at fault for some of it, we paid a fine. They accused us of elder abuse, which is awful. Turns out that didn't stick, we didn't pull a permit so we could be paid a 1200 fine. But, the story got put in the paper and, at the time, the CEOs response was, to just ignore it. Not only was that damaging in the public's eye, but it was very damaging for our culture because everyone in our company knew what we believed in and what we stood for, and then we didn't stand up for ourselves.

It was a good lesson for me because it really deteriorated everyone's confidence in us and the culture of the business. So, the leadership of the company and the culture of the company is very important, again, even if the owners leaving. It's the first thing we look for. We look at the financial results and that kind of thing, but once we get beyond that, the first thing we assess is how strong is the culture and how strong is the leadership.

Again, you talked about with Manny, as an example, but when you acquire a company, there's a lot of things within the business, you shore up pretty quickly. I think you've mentioned PTO and health care before. Can you talk more about some of the things you do when you buy a company for the first time?

You mentioned the PTO. One of the things that we look at or ask about on the very first call with the owner when we're talking is, what type of health care do you offer? Generally, most of the companies that we end up buying offer pretty decent to good health care. I think that's a very easy barometer of how the company thinks about its team. I remember, there was a company we looked at buying here in Seattle, 10 years ago, and the gentleman was hiring convicted felons and not telling us, so that deal didn't work. But, I met with him a few years later, and his text, it was just a raggedy, old band. I said, "Hey, how'd you handle the recession? What'd you do?" He said, "Oh, easy, I made the guys pay for their own uniforms, and I cut health care." I said, "Oh, of course, you did." That's why your guys look like pirates. I didn't say the last part. But, you could just see that it attracted a much different type of employee and employees that were good left for places that cared about them.

So, when we buy a company, I just try and exert a little bit of empathy and say, okay, if I worked for this company, what would I be really happy about and what would I be less happy about? So, we're very big on sharing information from financial results to where we're headed, to goals we have. We look at the PTO policy, and one of the companies we recently purchased doesn't offer paid holidays, which is mind-boggling. So, our controller recently said, "Oh, I won't be in on Monday." I said, "Yeah, no kidding, it's Labor Day." He said, "Oh, no, that's not how it works here." I said, "What do you mean?" He said, "Oh, I have to take PTO on Labor Day because we're expected to be here." I said, "What, I don't understand?" He said, "No, that's just not a holiday." I carry around a small piece of paper, it's my little To-Do list, my old school Palm Pilot, and I wrote down PTO. So, we have to fix that, because that's crazy and it will not attract good people and it doesn't make any sense to me.

So we look at things like that. We look at pay structure, healthcare, and then we start shoring up the second-tier management. So generally, our first two hires are our controller and a recruiter. Then, we look at the facility. Oftentimes, the facilities are owned by the owners. We bought one building one time, and it ended up being a good investment, but we fell victim to the same issue I see over and over again, which is an owner buys a building, because it's a way to diversify, and it's a good real estate investment. But then, they stay in those buildings for far too long, because they own the building, and they want the rent.

So for us, we're looking to grow really quickly, and so we don't see ourselves staying in a facility for more than three years. So, you'll see a lot of really great businesses that are just in too tight at quarters. When they move, it feels like a huge risk, which is one of the reasons I think we end up being good partners, because some of the things the owners know they should do, we serve as a forcing function. So, we'll move them. Like, in Houston, we moved from 9000 square feet to 30 and our rent went up 2 or 3x, and the owner said, "Gosh, we'll never fill this place." Within three years, we were chockfull and the business had also grown from 9 million to 30 million.

It wasn't just because of the building. But, the building gave us room to hire managers and hire people and have a training room and do a bunch of things that we like to do that we just wouldn't have been able to accomplish had we been in the old building.

So, within these companies, what are the different segments that you pay attention to? So, for HVAC there's installation, there's service and maintenance. Is there a distribution of installation versus maintenance, you look for these companies or certain business models that you avoid, perhaps?

I wouldn't say we look for something specific. I know, generally, the back of the envelope math on what a good operating business will do in plumbing and HVAC, from a product mix, two-thirds or more of installation versus service on HVAC and the margins on sewer versus plumbing versus HVAC install, it used to be, I would look for an ideal fit and say, "Oh, this is what we want to buy." Now, after 12 years in the industry, it's a little less important, because I know we can get almost any company that's, I guess, decently well-positioned to the right metrics over time.

So, I would say we pay a little bit of less attention to what they're doing now versus what we think they can do in the future. What they're doing now and how they're performing is important. We still stick to companies that are 95%, or more residential versus commercial. Commercial work would be multifamily building, or a big office building or schools or that stuff. Partly just because it affects the balance sheet with how quickly those folks pay and partly because I think the know-how and knowledge is just different. Then, we stay out of construction for the same reason, but also just because of the cyclicality of it. So, there's a ton of businesses coming on the market now that have a big construction component, that have done really well through the last five, six years and that's just not that compelling for us. A lot of the service businesses originally were construction, or even commercial and switched just because they figured out that if they do work in those sectors, they may make a bunch of money on paper, but they never get paid. So, it becomes problematic in terms of offering some of the other things we talked about, that we like to see in companies. Hard to pay health care when you don't have any money.

Yeah, that is certainly very challenging. You mentioned a company going from 9 million to 30 million in revenue. What other things are you doing to allow that company to grow? Or, is this a structure that you can put in place and it just naturally grows, because it's a better functioning team, or are there things that, on top of that, you usually add to help grow it a little bit quicker?

It's organic growth, but it doesn't happen just on its own. One of the things you have to do is shore up the base of the business and usually, that means having the right leadership team in place and having the people who will be able to give you information. I can just talk about one of the companies we have in our Flint group, it's a $17 million company that was built from 1,000,005, over about 9 years. So, that's a tremendous amount of growth. But, the data that they were using to foster and develop that growth was pretty minimal. It was as simple as, we have this much money in the bank and we did this much in sales, and we're doing fine. It was, maybe, a little more complex, but not a ton. So, you weren't giving really good information to your employees. They certainly weren't sharing it with the managers to the degree that we would want to or even the technicians.

I'm thinking of our Houston company, one thing that we really emphasize is being good at change management. We grew our HVAC division in Houston from zero to 15 million in three and a half years. As part of that, we had four different HVAC managers. I have to give a ton of credit to my partner there, Alan, he was very good at change management. So, he protected the culture, he kept employees aware of what was going on, and also kept the energy very positive. But, our first HVAC manager made it to 2 million, our second manager made it to 5, our third made it to 8, and our forth got us to 15. It's like, the people you have now may not be the right person to get you to where you want to go, and to being able to assess that and then pull the trigger is really hard and unique.

So, I think it's fostering the ability to accept that our business is not going to be in a steady-state very often. Even our roofing company, Guardian Roofing, we have probably one of the best management teams and the best management meetings of any of our companies. Out of the 9 managers, 5 have been with us since I bought the company, and they're all in different roles. Then, we've hired four others. So, there's been quite a bit of change there, and everyone who could adapt and rise above has been promoted. Some of the folks who weren't the right fit or couldn't, have been moved to different jobs.

So, I think that's key. I think if you asked my old partner in Houston, one of the things I've heard him say, so I can indirectly quote him is, one of the things that I brought to the table or Skylight did was a real emphasis on hiring better and hiring in advance. So hiring, one example would be, we lost our plumbing operations manager. So, this was a $9 million plumbing company, so losing the top person in that role is a really big deal. Alan said, "Hey, we need to hire another plumbing guy." Basically, you pick a plumbing tech who's pretty good and you put them in management. I said, "Well, hold on, what about if we looked at hiring a GM. Someone who's good at business and processes and that kind of thing and then we add some service managers below him or her?" So, we actually ended up hiring a woman from Sacramento, with a finance and accounting background, who had grown a trucking company from 5 million to 120 million over a really long period of time. But, she was really great at numbers, process, and managing managers. I think he would point to that as a real change in our business from being a tech promotion business to then hiring people in roles that will change the dynamic of the company.

So, that's what we're trying to do now, is bringing in... We've had multiple people at Flint, owners, and GM say, "Well, I don't know who we should hire in XYZ role. I've never even heard of that role. I don't know what a good controller looks like." So, we're pretty involved in the job description, the layout, the interview process. Then, I'm very involved in the key hires and running that process. I think it's worked well. I'm still not perfect, I've made a bunch of bad hires, but I think the process we use tends to vet out a lot of the normal candidates that you might pass through, had you just run a standard process like I used to do. "Oh, I like them. They're great. They smile a lot. They seem perfect." That doesn't fly anymore.

You talked about, early in your career, your ideas for making money owning businesses was in large part from financial engineering. At least that's something you were thinking a lot about and you've changed your mind over the years on that. What did that look like, initially, and then how do you think about that today?

I just didn't know any better. So, I was presented with an idea that if you buy a company using this example... With a $100 company, and you use $90 of leverage, and you put $10 of your own money in and you can make it for five years and you pay down half the debt or $40 of debt, and you sell it with $50 of debt last and you sell it for 100 bucks... Sell it for 100, you pay off the 50 bucks, you have 50 bucks left and you only put in 10, you just made five times your money. That's a great investment. But, what no one really explained to me and which I didn't really understand until I was running a company that had a bunch of debt, was that debt is a double-edged sword. Debt is beneficial in the sense that you have to put less of your own money in, the interest is a tax shield, and it will cause you to have to have better financial reporting, because you have to report to the banks or the lenders, and you need to make sure you're covenant compliant.

But, I have spent more time than I'd like to admit dealing with covenant issues and the bank, when we didn't comply with their covenants. At least in our industry, there's just so much opportunity for growth and expansion. The fun stuff, when you're not sweating, buying two extra plumbing trucks, because it'll trip bank covenants. The reality is, it's kind of, dangerous when you're playing with 90% leverage or 60% leverage. If things don't go that well, you're in trouble and you might have to put more equity in anyways. So, at least, the way I thought about now is, I'm almost the leveraged buyout guy who doesn't really love leverage, but still seem to generate pretty good returns by operating better.

That's the part, I think, some people miss. I've talked to a bunch of search funds or other people who want to use senior debt and mezzanine debt, which is more expensive secondary debt. Like, a second lien on your house. I think it's fine, it'll juice returns if you do exactly what your model says, but I've never actually done what my model say, I usually screw something up. I've been fortunate, we've generally grown a lot faster than I predicted in my models. But, I've told our investors in Flint, I have 100% success rate at lowering EBITDA margins and they say, "Oh, you must mean raising." I say, "Well, not exactly." Usually, we tend to grow really fast and then EBITDA stays low for a while and then pops up after we started to build out the team and get our ducks in a row. If you're going to do that, you really can't afford to have hyper leverage, where you're just stuck in a corner, and you can't really make any operating decisions.

You're not going to move to a new facility, and spend a bunch of money on tenant improvements. You're not going to launch a new division and buy five trucks without the revenue when you're just dealing with debt covenants that are super tight every quarter of every month. So, I think that's been a big lesson for me. Even as we started Flint, I would say, we were under-leveraged for the first three deals, partly because I didn't really understand. I assumed there'd be some apocalypse, I didn't actually know that there would be a full-blown apocalypse.

Now, I think we're appropriately leveraged. But even that, I'd say we could be more leveraged at Flint if we wanted to be, but I just don't want to be. If you think about the cartoon where they're throwing stuff out of the car, trying to fix the car, and all these pieces are flying out. That's kind of, what we're doing right now, to get the engine right. While we do that, I just don't want to be sitting in front of the bankers saying like, "Sorry, sorry." Or, going back to investors saying, "Hey, we need some more money because I screwed up." It isn't the most efficient use of time, and it's not going to get us to what we really want, which is to build a really strong, successful lasting business that does really well.

Yeah, certainly. What have been the pieces in your businesses that have been flying off during the pandemic, and are you starting to put them back on now?

We're trying. The thing that's tricky in any small business is, when you reattach a piece or change a piece, it can take 12 to 18 months for it to really start working. So, whether it's changing the marketing, or the pay structure, or the pricing structure, or hiring new employees or launching a new division, you'd like to think that, oh, there's a three-month payback on that. I'm like, "Ah." Maybe I just don't do it right, but there's usually not a three-month payback. Building or rebuilding companies, getting them ready for very fast growth in our sector, it takes 3 to 12 months to do the work and then it can take another 12 to 18 months to see it pay off. Hopefully, it'll be a lot faster, but we're trying to give our leaders the grace, to say, "Hey, we're all in this together, as long as we do the right actions right now, that's more important than the right results, because the results will come. But, we're going to have to do the actions at some point."

I think a lot of the leaders think I'm a sandbagger, because I say, "I don't want as much growth next year, I want slower growth so that we can hit it and everyone will feel good." But, that's partly, also, because I know behind the scenes, we're doing all this other stuff. It's actually going to stymie growth. Initially, it's going to, "Wait, we have to integrate new employees and new managers." Well, that doesn't just happen overnight. We have to launch a new division. "Oh, that'll be great." I'm, "Oh, it'd be great, but it won't be great for a little bit. So, let's not plan for like the most rosy scenario. Let's plan for a reasonable scenario. Let's hit it. Let's get some momentum and then let's see where that takes us."

So, how do you find investors who have that patience to wait until things start working and using less leverage? What are the types of profiles for investors who you find fit, this type of work?

That's tricky. I've been fairly lucky in the sense that, over the last decade, I've managed to meet a fair number of people. Now, I have a bit of a track record. So, there's a certain lemming effect that makes finding investors hard. Everybody's interested in you, but nobody wants to be the first. So, you've just got to find the first person who wants to jump in. Our sector has become a little bit of the cute kid on the block now where everybody wants into it, so I think that's helped a little bit as well.

But, I think there's also a certain subset of investors who recognize that solving for IRR, or juicing the percentages of returns is not the same as actually getting cash back out of the business. Whether you look at Warren Buffett or some of the other folks, the reality is, the people who make the most money, they tend to hold their businesses for a lot longer periods of time. So, I think there's a certain subset of investors who are still looking for quick returns, or huge returns, like a VC-type investment. Then, there's others who just say, hey, I've done pretty well and I want to ensure that my long-term gains are higher. I think Flint and Skylight, I guess, to a lesser degree, has appealed to those type of investors. I was pretty explicit. Some of the investors that were interested in Flint just didn't pan out because I said, "Hey, you won't see $1 from us, except for tax distributions for seven years. We have no intention of doing anything for seven years. Maybe something will happen sooner, but don't plan on it."

That, it tends to self-select some people out of it. "Well, I only have five years left in my fund. Okay, well, it's probably not the right fit then." I think this time around, I was a little more judicious around solving for that, just, because, with Wrench, we effectively sold so Alpine, my old firm, could raise another fund. That was nothing that I could control. It was totally exogenous to me. It was the best-returning deal they'd ever done at the time. So, that's great. There is a huge fund and they got exactly what they wanted out of it and I, in turn, received a big exit and did really well. It's hard to Monday morning quarterback and say we shouldn't have sold except for now I can tell you that we were right, and we shouldn't have sold.

But, I just didn't want those exogenous factors to affect Flint the same way it did Wrench. I was pretty explicit, and, again, there's plenty out there. It's also, people who like the idea tend to have friends who might like the idea. I'd like to tell you that I'm really great and it was 100% me, but I think it was a pretty good idea and I had a track record and once a couple people decided it was a good idea, they told their friends and the capital base filled up pretty quickly. Sidebar, I have no idea how to do PowerPoint, so when I was vetting this idea with investors, they said, "Hey, will you send me something on this?" I sent them an attachment and we set up a call and they opened the attachment and they said, "Is this a picture of your whiteboard with you in the background?" I said, "Mm-hmm, yeah. Is this all you have? Yeah. Well, let me explain it to you." Then I explained it. They said, "I love this idea. Great." So, I eventually got a little more sophisticated than the whiteboard and I hired a consultant to do the PowerPoint because I still don't know how to do it. But, you don't have to know PowerPoint to raise money.

What advice would you have for somebody who is wanting to build a portfolio of small companies over time, in a similar vein as the way you've done? What would you tell them to do? Say, they're early 20s?

I think you just have to get started. Graham Weaver, who runs Alpine, gave me some good advice when I was in business school. I said, "I'm thinking about buying this company." He said, "What do you want to do long-term?" I said, "I want to have my own company that buys small businesses." He said, "Why not do it now?" I said, "Who's going to back me?" He said, "Well, I'll back you. And if not, you'll be able to find money." I was, "I don't even know what I'm doing." He said, "It doesn't matter, you've just got to start." We had a long talk about it and he said, "There's never a good time to do this. But, there is going to be a bad time." At the time, I was 29, I wasn't yet engaged. I didn't have kids or a mortgage. So, my downside at the time was pretty low. It seemed high to me. I ended up having a minor panic attack as I got out of business school because I was starting this business and I suddenly realized it may not work. You can't actually go back to business school as a fallback plan when you're getting out of business school.

But, he was right. There was never going to be a better time. The same thing applies me, if you have one kid, and you want to start it, "Ah, it's not a good time." Well, then you're going to have two kids, you have a mortgage, and a kid. There's never a great time to start this. So, I think, if you have the desire to do it, you learn as much you can and then some of it's just taking the plunge. One thing I see with search funds and some of the other folks who think they want to buy companies, is they just try and mitigate all the risk out of it. That's paralysis by analysis. At some point, you just got to plug your nose and jump. I think I have a little more risk tolerance than most. Now, you couple that with a little bit of grit and tenacity and a little bit of luck and that's a good thing, but you're never going to be able to solve all the risk out. Or, if you are, you're going to pay too much for the company.

Every one of the Flint companies has stuff that we just didn't know about before we bought it. It's all stuff that we can handle, especially now after 12 years of doing this, we can fix it all. But, if I waited around until all that was gone, I just wouldn't have ever bought anything. I was blessed, also, that I was young and stupid and overly confident. You are never so dumb, as right when you get out of business school, even though you think you're the bee's knees.

I like it. What class would you teach in college if it could be about any subject you wanted?

So, there's two classes I would teach. One would be, just, basic negotiation, partly because in this class that I took at business school, they made us go out and negotiate what seemed like pretty trite things, getting a hotel room cheaper, or two Big Macs for one. It drives my wife nuts, but when we go check in a hotel, I'll ask for free stuff. I do it all the time. Or, I'll write letters of thanks, or with critical feedback, and tell them what would help me feel better. It works all the time and she can't believe it. But, she also thinks it's a little annoying.

So, that was one part that was cool about negotiation. The other thing was, learning that you should always make the first offer. Part of that is important to me, because I just negotiated my comp package to start Skylight and my old mentor had led the negotiation, anchored really low, and I thought, "Oh, it's fine, we meet in the middle," and blah, blah, blah. Then two days later, I realized I should have started higher than my number and got a bigger number. So, I felt duped. Or, not duped, but I felt like, "Gosh, I should have taken this class a week earlier." Right now, actually, we're negotiating for a new property for one of our companies and my partner, RGM, and the real estate broker all told me that we cannot make an offer, we have to receive an offer from the landlord or receive what their bid is. I argued pretty vehemently that they were wrong and was told I was wrong, so it was three to one, and I just let them have it. But, I'm pretty sure I'm still right.

So, I would love to teach folks that. Then, the other thing that I took at business school, which I would love for more people to take, is a class called work and family, which is about the various challenges you're likely to run into as you get older and start a family and have a business and a career. At the time I was 28, maybe 29 and I took the class solely because I needed five units at a certain time and because I thought it would make me look good for my girlfriend, now wife. I was one of two males in the whole class of 30 people. It was eye-opening. Some of the things that these women had to think about as they approached their career and thought about having kids. A lot of them were exceptionally smart and bright and they were just thinking about things that I had never considered.

I've now seen it with my wife, who had an accounting major and MBA from Kellogg, and when we had kids pretty closely together, she had to make a lot of decisions and choices around her career. I think we came to the right outcome, but it was really hard. As she thinks about whether to reenter the workforce, it's just been interesting. I think it would be great for more people to be exposed to that, particularly men. I think more men would benefit from having access to this type of coursework, and also just thinking a little bit further ahead. I certainly benefited from it.

I like that answer. That's a good one. What's a belief you used to hold strongly that you've changed your mind on over the years?

It relates to the financial engineering we talked about earlier. I used to think that when you bought a company or structured a deal, the more complex equals the better. We used to do all kinds of funky things with preferred equity and structuring and all this stuff, to make an offer look better than it used to be. We'd even joke that it was the Jedi mind trick. Thinking back on it now, I'm almost embarrassed, partly because it was just naive because I tried a bunch of times, and lo and behold, the owners were pretty smart and they figured out the Jedi mind trick, and the deal would blow up. So, it's just a waste of time. If the goal is to build a good culture, it's also to foster a really good relationship with the people you're working with and tricking them, ostensibly, would not be the right way to do that.

So, I just like to keep it very simple. I remember someone, who's in the search committee, said, "Oh, your deal structures are very seller-friendly." I said, "What do you mean?" He said, "Oh, you give this point and this point, right off the bat. I said, "Well, that's interesting. But, you know what I solve for, is probability of close. If I like the company, I want to buy it. So, I want to make it very simple and fair and I want to increase the probability of closing." So, I just make it very simple and I set it up so that if owners keep equity, they have the same exact equity rights that most of my investors have, or I have, as an investor. I just think it works out way better. I think, again, if you're solving for what you're going to do after you buy the company, I think you have to buy the businesses right, but that doesn't always mean cheapest. It means buy it right with the right incentives, set up the right alignment, and then get to the fun part, and the part that actually generates the most value, which is building a good business.

So, if you futz around at the front end, and try and do all these tricks and this super complicated structure, it generally doesn't lend itself well to operating really well or creating a good partnership. I think sometimes people just miss the forest for the trees on that.

That's another great answer. What's the best business you've ever seen?

Well, I'm very partial to the HVAC and plumbing business, so that's an easy answer for me. I was thinking about this, for some reason these two businesses came to mind. The answer is related to why I love this business. I love just seeing different types of companies and the two companies I was thinking of, one made racking for canned goods. This is very big within the LDS or Mormon community where people have a year's worth of food. It's also big with people who want to have Armageddon prep. But, they created this racking system for a year's worth of food. It's funny, it got into Costco, and it was growing like crazy. I even saw it at somebody's house that I know. I was, "Oh my gosh."

So, I just thought it was so interesting. I never would think, "Hey, what would be a good business? I know, a canned food racking system for the apocalypse." So, I just thought that was pretty neat and also, just, telling of, there's so many different opportunities that I never would have you even conceived of.

The other one was this radar detection company. I think radar detectors are the gray area, of whether they're legal or not. But, this guy loved technology, and loved radar technology and created the best radar detector and bootstrapped it, and from scratch, essentially, created the best radar detector on the market, he fought off the government three times, which doesn't make for a really great buying potential, because there's a binary risk that suddenly the government might win and you go to zero. But, I just admire the guy so much, because he was super passionate about the product. He made the best product out there, the consumers loved it. He stuck to his guns that what he did was legal. Again, I didn't dig into this enough to figure out how legal or not it was. But, legal enough that he beat the government three times and grew that business to be very successful and create a very nice life for his family. I just thought it was so cool.

That is very cool. That is definitely one of my parts of investing in small companies and following people who do it, is the number of businesses that you come across that you never really knew existed before. Of course, somebody makes canning racking equipment, but you never really thought of that as someone's business. That's something that someone had built their entire lives and worked on. That's definitely a really fantastic part.

I love the 15 years to an overnight success. I would say, "Oh, you've built a great business. Wow, look at what it's done in the last year." You don't always see the 15 years of work they spent into or the tinkering they did or the thoughts they had or the experience they gained before that. It's pretty neat.

It is really neat. I'm going to let you go here. But, thank you so much for your time. This has been one of my favorite interviews so far. So, thank you so much. This has been fantastic.

Hey, thanks for the time. I really appreciate it.



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