Product-Market Fit in the Trades: 4x in 2.5 Years | Patrick Beal Interview

0:00 Pat Beal, welcome to Acquiring Minds. >> Thanks so much, Will. Great to be here. Thanks for having me. >> Pat, you bought a very small commercial HVAC business. Less than a million dollars in revenue. But, you have more than doubled it in the two years that you've owned it. We're going to hear how you've done that and what the trajectory is that you're on. But, let's start as always with some background on you first, please, Pat.

0:25 >> Sure. So, now, like you said, in the commercial HVAC refrigeration space, but it hasn't always been that that way. I started my journey as a mechanical engineer at Ohio State. And ended up building some startup companies with friends there. So, I've always been interested in entrepreneurship. and after that, jumped over, you know, graduated from Ohio State, jumped over to to General Motors, where I was working on some really cool concepts with a really young group of guys. but, the thing that kind of like the thing that I wasn't really getting my you know, wasn't scratching my itch with you if you will, was a lot of the projects we were working on were like, "Hey, this will be great, but it's going to be out in production like 15, 20 years." So, my patience wasn't really there.

1:09 ended up joining something that was a lot more fast-paced. So, I joined some technology startups in Columbus, where I switched from being a mechanical engineer into product management. I was working with engineering managers and engineering teams. I had a lot of fun doing that. but, then COVID hit and basically shut everything down in the Columbus area. I was working from home in my one-bedroom apartment by myself. I didn't really feel super fulfilled. So, I moved back up north to to our northeast Ohio, where my family's from.

1:39 and I did realize that when I made that move back to northeast Ohio, there wasn't those same opportunities to basically work in the office and be a part of a technology company really in in this area. And so, I started kind of thinking, you know, how can I get out from behind the Zoom calls every day and be a part of growing something bigger and that's when I really started to consider buying a business that was local to Northeast Ohio. So, it's been a long journey, but I wanted I do want to say that the thing that really got me into potentially purchasing a business was growing up, you know, we eat dinner together as a family and my dad was in the insurance business. And every night he would be like, "Yo, I I you know, guys, like just wait until you hear about this small business owner. He's doing this, this, or this." And I just thought that was super fascinating and probably put a bug in my ear as at an early age that this was something that people do and it was something that I could potentially do given the skill set that I developed over my short career so far. So, it was accumulation to kind of where I've gotten to today, but long story short, started in mechanical engineering, software, product management, turned HVAC, refrigeration business owner.

2:49 >> Pat, that story about your dad, I often wonder this with myself about my own interest in entrepreneurship. Was it that you were interested in all of those people or that you saw your dad's admiration for them? And so >> Yeah, that's a great question. >> were seeing the reflection of your dad. I remember my my own father saying early on to me about somebody in our local community that he admired and I remember him I remember it was the first time I'd heard the word. He said he's very My dad said of this guy, "He's very entrepreneurial." And I said, "What is that?" And we proceeded to have a conversation and and so I've often wondered if it was you know, chasing my dad's admiration that not Yeah, you get it.

3:35 >> Yeah, I'm I'm sure that's probably a part of it, Will. I just I always thought it was fascinating that people could could basically create something out of nothing or take something that like was existing, but maybe not completely optimized and and grow it. And also in my my dad and my whole family really was very much like anything is possible kind of mindset. You know, when I remember being in high school and my dad and you know, me and my siblings getting together like, "Oh, what are some of these business ideas we could do?" He He was an artist on the side. And so, we were like always setting up like you know, art show being at art shows and he was selling his artwork. so, we like we were kind of always around that like "Hey, if you have an idea, like go and make it happen" kind of mindset.

4:22 And I I think it was really that that probably stuck with me as a kid. It continued on to college like we in college like one of the startups that we created was a carpooling app to connect students that were traveling long distances together. And it wasn't even like a thought of like, "Should we do this?" It's just like, "What's do it and how do we do it?" And that's I think just how I was kind of raised. So, yeah, it was probably part admiration of like wanting to get that like I seeing my dad be so fascinated by these people, but also part of like him and my mom just pushing us to be like, "If you think something should exist, just go and do it. Like make it happen" kind of thing.

5:01 >> Totally. That's so cool that he was an insurance guy by day and artist by night. What a Yeah, what a what a superhero identity to have. >> kind of had his own entrepreneurial journey, too. Like in in when he was in high school and paying his way through college, like he was he would do odd jobs for people. He started a roofing company. So, like he has always had that entrepreneurial bug as well. And you know, he he ended up kind of I think scratching that itch through the sales route in the insurance world.

5:31 but even to this day like we're as a family like we're always talking about "Hey, like what if we could do this?" Or like, "Should this exist?" Or, "What about this concept?" Or, "I heard about this other thing." So, it's just kind of like I don't know. It's just always in our conversations whenever we're getting together, which is super fulfilling for me at least. >> Absolutely. How cool. Cool family therapist. >> Yeah, it's great. >> and so the idea of buying a business as opposed to starting something did you say where that came from?

6:01 >> Yeah, so I do remember early on my dad talking about a mechanical engineer that was buying pizza shops and I think that was kind of my first memory of like being able to potentially like acquire a business. I then was buying I was working kind of my my day jobs as in a software product manager role and I started buying single family homes for from real estate person purpose for real estate investment purposes. And that was kind of like a light bulb for me like oh you can actually like go and and purchase assets and you know potentially build your portfolio this way and and maybe even turn this into a profession. At one time I was actually considering like flipping houses as kind of like my full-time thing.

6:41 and then my buddy actually purchased a heating and cooling company down in Columbus, Ohio and successfully completed that. He was about six-ish months kind of ahead of my journey. And to see him go through that to purchase that business how that worked that was kind of like all these light bulbs going off. At the same time you have one of the software companies I was working at was actually undergoing an acquisition by a much larger or larger organization as well. So different scale, right? But the concept was pretty similar. So I was kind of my cup was filled up if you will by being involved in those like strategic conversations or like kind of you know whether it's purchasing a single family home or like being kind of somewhat involved in my buddy purchasing this business or kind of like hearing about how our business is going to be acquired and stuff like that. it got me thinking. So then I ended up reading the Harvard Business Review book on how to acquire a business. Saw that like this is definitely possible. started listening to your show well, shout out to Acquiring Minds.

7:45 And just started thinking about like, okay, how can I go about this and how can I potentially pursue something like this? So, I started my search probably pretty broad and I'm sure we'll talk about that. but I was like, yeah, this is definitely possible. Let's let's start like considering this as a career path. and luckily, I'm sure we'll talk about this too, but luckily my wife was super on board and she's like, you you this is a great path for you. You kind of got to pursue something like this and so far it's worked out.

8:13 >> Well, let's do here how you approach things. but because I feel like there's business buyer fit here. You were a mechanical engineer by education and then proceeded to have technical and sort of producty jobs and startup kind of dabbling in startups. that does seem to pair nicely with commercial commercial HVAC. So, were you looking for something that paired nicely with your mechanical engineering background? What were the criteria of your search?

8:45 >> Yeah, I I want to say that it was a super sophisticated search, but that wouldn't be truthful. So, I was interested in buying a business. My number one criteria was something that was going to be more or less in person cuz I was getting burned out by being on Zoom calls kind of non-stop. And it by being in person, that kind of constrained me to Northeast Ohio because that's kind of where I was starting the next chapter of my life.

9:09 I just had recently been married and we were going to plant our roots in the Northeast Ohio area. So, that was a big geography was a big part of it. and then I just started kind of talking to as many potential business owners as possible. So, to get those conversations, I talked to people in like the local chambers of commerce, commercial real estate agents that potentially knew businesses that were moving out of their lease because maybe the owner was retiring.

9:35 At the same time, my buddy's purchasing that HVAC business in Columbus, so I knew that that the trades were kind of more or less like a hotbed for acquisitions. I was kind of all over the place, and it just kind of was by happenstance that a trades business fell in my lap. So, I was talking to like commercial printing businesses, you know, painting businesses, signs businesses. I did like the trades a lot because, especially the commercial HVAC and refrigeration side as I got to know more and more of it.

10:07 Because I came from the like the B2B SaaS world, where you had that stability and that reoccurring revenue. And also working with a a more of like a business client was really interesting to me where where I rather than working with an individual or homeowner. so, I guess like I started compiling the criteria of my search as I was doing it. and by the way, I was like working my full-time job as this was happening. So, like there was a little bit of an element, Will, like if this didn't work out, like it's still going to be okay because I still had the financial stability of my the W-2 at the time.

10:41 But the thing I really loved about the business I ended up buying was it's B2B, which I was very used to in the B2B SaaS world. It had the element of the reoccurring revenue, which SaaS did as well. and also like the demand the the I as a product manager, I'm always thinking about product market fit. The product market fit is like perfect in the trades. It's like the demand just completely outweighs the supply. And I was like, if that is true, then I could really optimize a business in that kind of realm and and take it to the next level. So, I kept using the term like product market fit in the trade because working in some of the technology companies I was at, like product market fit was super hard to get to. Yeah.

11:24 And so, it's like, okay, this is something that has product market fit. We just have to optimize it, grow it, you know, add to it, and and we should be able to build a really solid company here. >> Well, you you just encapsulated very well one of the one of the big appeals of ETA is that you not just that the business already has revenue and and some stability and a lot of infrastructure and you're sort of starting on first or second base.

11:47 >> Yeah. >> But that the core problem for most that most entrepreneurs encounter, i.e. build something people want, has been solved. In the building something people want thing, if if you come from a sort of product tech entrepreneur background as you do, as I do, is very difficult. And in fact, YC, the the the acclaimed and prestigious what does YC even call itself? An incubator, I guess.

12:17 Their catchphrase, their mantra is build something people want. Point being that they're in the world of creating something from nothing, creating products, there's a lot of that that's A very hard and and B a lot of sort of people building things that that frankly there's no market demand for. So, so anyway, it is very appealing to be able to focus your energies as an entrepreneur on things other than figuring out if people want the darn thing.

12:51 >> Yeah, that's already like in the trades and especially in the commercial HVAC refrigeration, like that's already figured out, right? And it's the other thing I was looking at, too, is like this is not just product market fit today, like this is product market fit long-term even with all the dynamics around AI and the changing landscape in technology. So, maybe at some point that really like changes a bunch, but I don't really foresee the product market fit in many of the trades, especially in the trade I'm in, changing very much. If anything, like those tools enhance it.

13:21 And that was an element, Will, like as I was looking at my next career path, was like, okay, I stay in the software product management space. I really am unsure how AI is going to impact that career path long term. And I was like, I know in the trades, like I think that risk is pretty minimal around that. So, it just it seemed risky, but at the same time, like it also didn't seem risky >> Yeah.

13:47 >> because it was like, the product market fit is there, you know, it's really hard to disrupt this industry, you know, with the changing landscape of technology. So, this is a great opportunity to go build something. That's like a long way to put it, but those were the things that were going through my mind as I was going on kind of this search. >> What were the criteria the strict criteria? Did you >> My number one was like, something in Northeast Ohio.

14:10 >> Right. >> something that was going to have I needed cash I I did I needed cash flow because I was starting a family. I couldn't just jump into nothing, essentially. Something that was going to kind of >> Hey, would you be more specific there though? There that's a it's a wide range. >> Yeah, I I needed something that didn't necessarily meet the same salary and bonuses and all that stuff that I had before, but I needed I I me and my wife knew kind of our numbers for what our expenses were, and I needed to be able to pay myself at least something that was going to keep us going, right?

14:44 So, I was like, that was a part of my as I was starting to analyze more businesses, I was like, okay, can I buy this business and also be able to pay myself at least a little something, even though I I know I'm going to take a pretty significant pay cut, so that we can keep our lives moving. >> And what was that number? >> For me at the time, it was like $50,000. I was like, my expenses our expenses were super low. It was like, can I pay myself 50 grand and keep on going?

15:12 and I was able to do that with this business, which was great. So, it was like, North Northeast Ohio, so in that region, is it something cash flowing and can I pay myself at least $50,000 and does this business basically have product market fit and have kind of security when it comes to like not being crazily disrupted by AI in the future. >> Okay, great. Now, I'm jumping ahead a little bit, but I do want to double click on how you thought about commercial HVAC and and the how it's be it's a B2B >> Yep.

15:43 >> business as opposed to B2C which are the which are the trades businesses we hear about more often. The residential HVAC business is the home services which of course have been so popular for the last half decade or more. >> Yep. >> The So, commercial HVAC the quality of reve What what are those What do those customer relationships look like? I've heard you say I don't know if you said recurring or reoccurring. which is it and then like yeah, just kind of talk talk through the quality of revenue in a commercial HVAC business as as distinguished from residential HVAC which is basically a lead gen game and converting those leads and just you know duking it out on Google AdWords sort of thing.

16:30 >> Yeah, the one thing that I found fascinating about our business so far and mind you like there's going to be other stages that I'm sure we get to, but we've spent $0 on sales and marketing and the company as I bought it had $0 in sales and marketing. That was really fascinating me. And it's primarily because of a lot of it's a relationship game. So, for example, like in our business, we really focus on any kind of customer that has commercial refrigeration equipment and they also have HVAC equipment and most of the time that's restaurants, right? And so, our kind of target persona is a restaurant group or a corporate owned restaurant where they have a facilities team, maybe that's one or a handful of people and they manage 20, 30, 40 locations. And so, a lot of our business is coming from that. So, you know, some big accounts that we have that usually kind of roll up more or less into like one relationship with one team is like the Bob Evans of the world, which is a a bigger chain up in this area of the country, corporately owned Duncan Donuts, franch- large franchise groups that own Buffalo Wild Wings or Wingstop's or 7 Brews or things like that.

17:43 that's kind of our target persona. The way that revenue really works is you basically work with those sites and they all, for the most part, want to keep their equipment up to spec so that they don't have downtime, so that they have longevity of their equipment, they can reduce their expenses. And so, you they have preventive maintenance packages. So, those preventive maintenance packages might, you know, have us in the store two times a year or four times a year, but essentially you're taking care of all their equipment, making sure it's operating.

18:11 and if there's any additional service or install work that has to come from that, you're working then with that that group of facilities folks and bringing that to their attention, kind of more or less being a partner for them versus just being a contractor. and that's how the business is working. So, you you really set you you sell a preventive maintenance contract and that's where your reoccurring revenue comes from. Those maintenance contracts could be set up where they're paying you monthly or they're paying you quarterly or they're just paying you on a time of service, but you can count on that revenue. And then there's additional revenue that's gener- that could be generated from the service work or the install work that comes from that. So, it's it's >> And the those maintenance contracts, Pat, are they a material amount of revenue, though?

18:56 >> I wouldn't There's They're a decent amount, but I wouldn't say that that's going to be the majority of your revenue, right? Like the majority of your revenue is really going to come from the service and the install side. And so, kind of a rule of thumb that I've seen is for every $1 of maintenance contract you have, you should kind of expect about $3 of service and replacement work. So, that's that's probably a good way to think of it. when I bought the business, temperature control specifically, a large large One of the things that the former owner and team did was like they were very good at selling maintenance contracts and doing very high-quality maintenance, which is fantastic. and then that that all ultimately converts into the service work.

19:38 The one thing that we didn't have that we have started building is really a solid replacement {slash} install arm, where you can now get higher dollar value. That might be kind of like not I won't say one-off, but it's like you know, one specific project, higher dollar value to get that step change in revenue. But really like the meat and potatoes of the business is going to be from that's that that that maintenance contract that turns into the service work.

20:03 If that makes sense. >> Yeah. Okay. So, and just to repeat what you said, so what for one one of every $4, $1 or was it one of every $3? >> Yeah, but I the way I like to think of it is for every $1 of maintenance contract you have, you can more or less expect $3 of service replacement work. >> Okay. That's what I thought you said. So, in other words, 25% of your revenue excluding any installs.

20:32 >> Yeah. >> Kind of back of the envelope, 25% of your revenue is a nice true recurring contracted revenue. >> I would I would say so. >> not a ton, but 25% is a lot more than zero. That's great. Also, that that revenue converts into the service revenue. So, it's it's it punches above its weight because it maintains the relationship that then leads to the other revenue. So, it's >> Yeah, and it's not like >> strategically valuable revenue as well.

20:58 >> Yes, and it's not like you're creating service work for the sake of creating service work, right? It's these customers want their equipment to be maintained and to be operating so that they don't have the downtime, their employees have a better experience, all of the goodness that comes with having equipment that's working. And so it's it's it's great because the customer has that feeling of like we are truly taking care of them. But also like the business is is benefiting and succeeding from that as well, you know, as benefiting from that as well. So it's true it's kind of like that win-win situation.

21:32 And you there's not a feeling of there's never a feeling of like oh, like this is grimy or like you they don't really need that. It's like no, like there's true needs out there and if it wasn't for the preventative maintenance, this was going to be an overtime service call, you know, two or three weeks or three months down the road. So it's it's a really good like I really like to use the word partnership. It's not just like we show up and we, you know, fix stuff for you for you.

21:59 It's very much like we're on we're an extension of your team. We we are your partners. We give you the information for you to make good business decisions and that just feels that feels right. Like that feels like that's how you should do business. >> That's great, Pat. Well, I want to learn more about commercial HVAC. So we're going to return to it as I said why I jumped ahead. Back to the story. Tell us the the happenstance of how you did find this business.

22:25 >> Yep. So I was kind of going on my search. I had talked to a couple of business owners at this point in time. I was working as a product manager at a software business like I had mentioned and I was also kind of in the middle of like flipping houses. I got really into that and I'm still like super into house projects and stuff like that. But a gentleman had moved across the street from us.

22:48 his name was Rich and I was over his house one day kind of helping him renovate work on his house or renovate a couple things on his house. And just kind of out of the blue I kind of felt a tug and I was like, "Hey, this is a strange question, but any chance you know anyone trying to sell a business? And he looked at me, he's like, "Yeah, actually I do, but it's HVAC. You you probably don't care about that."

23:09 And I was like, "Huh? Like I I would I really care about. Like I I think that that would be really interesting to meet this individual." So, Rich ended up connecting me with the former owner of Temperature Control. His name's Steve. And Steve and I met up at a coffee shop. At the time, Steve is probably around like late like mid mid 60s, 65. He had run his business since 1985 and was just kind of looking towards like the next stage in his in his journey.

23:37 And he he had he had four technicians, a dispatcher, and then his wife was helping with the books as well. And gets talking about gets talking with Steve over coffee. And long story short, you know, I come home and I'm like, "Hey, you know, Alexis, my wife, I'm like, hey, I met this gentleman, his name's Steve. he owns this this commercial HVAC business." And she goes, "Really? Steve?" And she's like, "He's the guy that led helped lead this missions trip that I went on to Costa Rica a couple years back and he made me feel so comfortable when I was nervous going you know, out of the country."

24:14 I was like, "No way. Like what's the chances of of that kind of happening?" And it was in that moment that she kind of looked at me, and she was like, "I feel like this is a a meant to be kind of thing. Like you should really you should really pursue this." So, then over the course of the next many months, Steve and I would regularly meet for coffee and just kind of talk about the idea of me, you know, me buying the business from him. and yeah, it it just I couldn't have been more blessed with somebody to buy a business from because I feel like I've only I've only had a data point of one of buying one business so far, but I feel like that transition of the former owner to the new owner is so mission critical and it has been so Steve has been so graceful it has been so solid to work with him over that transition period and I think a large part of that is because of that previous context. Well, Steve's a great guy but also it seemed like we were like interwoven a little bit.

25:16 if I could add if I could add two, this was I didn't mention this in the pre-call Will but my first week at temperature control I was in the in a basement of Steve's cousin when we were replacing a an AC unit and I saw these duck decoys and I was like, "Hey, Dennis, where did you get these duck decoys?" And he's like, "Oh, there's this guy, you know, I used to work with him at Fisher Body. His name was was Bill and he taught me how to carve and these were some of his decoys.

25:52 And it turns out those are my grandfather's decoys in his basement. And so at the time I'm sitting there I'm very much like a person of faith and kind of like things happen for a reason. And I just felt like it was my grandfather who you know, I was really close with kind of like telling me like, "Hey, you're doing the right thing." So >> Yeah. >> Super cool. >> Wow. That's that's very powerful. Thanks for sharing that that extra story, Pat.

26:22 and and so when you you take Steve to coffee and then you guys proceed to meet a number of times over months. So it doesn't sound like this is this is like you quickly clicked into let me buy the business, let's start the process, let's kick off due diligence. It was an unfolding of over months as you sniffed each other each other out. That sounds a little crude. >> You were really just getting to know each other and seeing if there was a fit.

26:55 >> Yeah, no, we probably talked for good I would I would want to say we talked for a good 8 to 12 months before we actually finalized the acquisition of the business. And it was a a lot of those conversations were about what's your kind of philosophy on like leadership? Like here's some things that are happening in the business. He would be asking me like here's some things that are happening. Like how would you handle this situation? Because he too like he wanted to continue on the success of the business because he had spent so much time, you know, building it out, which I totally get. So it was a lot of brainstorming, a lot of collaboration, and I'm sure well, he was like he was feeling me out like this is some guy who has never owned a business before. You know, he is in the software space right now. He does like to work with his hands, mechanical engineer, so that probably gave me some credibility. I know his wife, so that probably gave me some credibility. But he was I'm sure trying to feel me feel me out say like could this be somebody that could take, you know, could jump in and help continue to take temperature control to the next level.

28:00 and I was also feeling him out too, right? Like I was like hey, how solid is the business? What kind of customers? I do remember, you know, he was telling me a lot of the customers' names. And so I was actually calling, you know, I'd call the customers and act like I was just a random person and be like hey, you know, who do you guys use for refrigeration work? And how are they doing? And they would all speak super highly of temperature control.

28:25 And so I was trying to do my diligence, you know, just to see if it was a solid run business. And all the diligence that I was doing even before I was looking deep into numbers led me to believe that even though it was small you know, the customers were really happy, the team that he had was really good. even though again it was small. And so I was trying to minimize my risk in those conversations as well before we actually made the jump in acquiring the business.

28:52 >> I suppose that because you had you were retaining your job, you weren't in a like a white heat to to move him toward close, nor him you, cuz he's got his business. He he doesn't need to sell it tomorrow. I I don't mean to press on this too much, but it it's a little bit different of a pattern where you guys kind of both were not didn't it doesn't feel like either of you felt a sense of urgency to make this happen. You it unfolded naturally, the relationship over some months, and then once everybody got comfortable, you you proceeded or consummated things. a little different than a searcher who's quit their job and is basically every day that ticks by is a day of lost income, and they really want to move into their next chapter as soon as they can.

29:39 >> Yep. I would I would 100% agree with that. We neither I nor he were super pressed, but we both knew we were kind of interested in something like this, and I would say Steve definitely was eyeing retiring. so we knew something was going to happen in the next 6 to 12 months, and we thought that there was a pretty high probability that this relationship that we had then started creating would potentially work out. a large part of those conversations as we got closer to the deal, started turning into like how could we make this happen, right? So we did get evaluation done on the business, and then we started talking about dynamics of what does the paperwork look like and what are the terms of the deal, and that was if we met let's say we met for about 12 months, that was a good like six that back six months of that was kind of just talking about like how the deal would actually work.

30:32 >> Yeah. Well, at the risk of nitpicking, Pat, I will say that your approach risked you guys not being on the same page. I mean, he may you may have found when when you started talking numbers that he was like, well, my business does, you know, 200 of SDE and I'd like $5 million for it. and so, you know, people who are doing this very systematically and, you know, they're always trying to they're always trying to learn as quickly as possible if the seller has reasonable expectations. And you took the risk that he didn't, but I'm I'm just pointing it out. I'm not >> No, it's a great I mean, it's true. Like it's very true. It's a good point.

31:10 if I was like really like very focused on like I need to find this business and this is the time frame I want to find it on and I'm and I'm and I don't have W-2 income coming in, I definitely would approach it a lot different. I did have some ballpark understanding of kind of where his numbers were at early on. So, like again, going back to some of my criteria, early on I knew that with his business I could probably still pay myself about $50,000 and and kind of go from there. And so, I didn't have all the details, but I knew enough to say, okay, this is probably a conversation worth, you know, continuing. but yeah, I I don't know if I would recommend my approach, to be honest. That's just how it necessarily unfolded for for me.

31:55 >> Yeah. And so, let's hear, Pat, the numbers of the business more specifically, please. >> Yeah, so when I when I bought it, the business was doing about, on average, about $900,000 $900,000 to a million in revenue. SDE was was about, you know, around like 120-ish, 120 to 150-ish. we did get a valuation done on the business. And so, his, Steve's books were really solid. his wife, Jenny's done an excellent job with his books.

32:27 And we we pulled in a broker. they did an they did an evaluation a business valuation for us. And the number that they kind of came up with and said the business was worth was about $370,000 based on other comparable deals. And so Steve and I kind of getting our coffee together, we just talked about that. We said, "Hey, does that seem reasonable to you?" You know, I asked him, he would ask me. And basically, long story short, where we settled on was he said, "Hey, if we don't get a broker involved or anything like that," he said, "I'll sell the business to you for $330,000."

33:04 I then came back and said, "Would you be interested in if I did 10% cash down and 90% is seller financing?" He was. and so I ended up buying the business on paper for that $330,000. I did a 10% cash down, 90% seller financing, and I had a 1-year, more or less a 1-year grace period. So, I wasn't 100% sure how the cash flows were all going to work. So, I said, "Give me at least a year to like get in the business and then I'll start paying on a monthly basis that owner's note after the first 12 months and we'll have that paid off in in 5 years."

33:40 the one thing that I really I I didn't fully understand and I didn't really know how to communicate effectively was the concept of working capital. So, I knew that there was some money that needed to be used to keep the business going. And so, what I ended up doing was pulling in $40,000 cash into the business to keep everything going because didn't really work out a concept of working capital. So, I would say that the final acquisition price really was about 370 and it's all, you know, that little bit of cash up front and then the seller note that I'm continuing to pay off today.

34:19 >> That was fantastic, Pat. Thank you for so much transparency. The working capital, that 40 grand, you so wisely, what you just said is that that should be considered effectively part of the purchase price even though it didn't go to him in your own it was really off of your own out of your own savings and onto the balance sheet of the business, correct? >> Yeah, that's how I would look at it for sure. Yeah. >> And and that 40 so in retrospect what what was $40,000 the right working capital number? What now that you're in the business, how do you think about working capital? What would have been the the right way to to structure it?

34:59 >> Yes, $40,000 was definitely not the right number. It was It was first those first couple of months was were very interesting. So we can kind of get into this too, but I actually was continuing to work my W-2 job after the business was closed. And so for those first handful of months, I was not able to pay myself, you know, to work in the business. primarily because the working capital crunch had me in a spot where I could I just couldn't afford to. it probably should have been closer to you know 80 to 100 and I would have been a lot more comfortable. but it it is like when you're buying this small and I'd be really interested to hear other people that have done this and have had a similar problem or maybe they didn't, but it's really difficult to communicate the concept of working capital because the thought process is you know I was the owner at that time and you know, I I did that you know, I did those jobs and I did that revenue and that should go to me, which I can understand that completely. but then you you do have a business that you're handing off or a machine that you're handing off that doesn't have any fuel in the tank.

36:13 Which makes it really really difficult. So yeah, it was way off. we we came up with that number because myself and then Jenny who's was Steve's wife, the bookkeeper, we thought that that was kind of like let's try it. Like we think that this was probably right. and then I >> Which number? The 40? >> The 40. We thought like the 40 would be right. >> >> >> Oh, so they did understand they did understand that there was going to need to be some some fuel in the tank.

36:41 >> Yes, but it was really difficult to for me at least to communicate as to why that fuel should be left in the tank by them. >> Right. >> Right. >> should pay for the fuel as opposed to you. >> which again, I can relate to, but I probably didn't handle that situation like from an like a true ETA perspective. Like I I didn't handle that situation right and I didn't communicate that appropriately as we were like closing on the deal. But I also at the same time I was I saw so much potential in the deal that I was okay with just doing what it took to get the deal done.

37:18 which maybe was naive looking back at it as it turned out, but yeah, I was just like okay, if I need to bring this $40,000 to the table, I'll do it. I just need to get in there and I can I can really make a big impact. That was kind of my my main focus. >> Well, let's revisit the other components of the deal. I I I don't think you should beat beat up on yourself here. I mean, so a 330 on call it call it 130 of FTE. You said it ranged from 120 to 150.

37:47 >> Yep. >> So call it let's say actually say let's say 135. 135 * 3 is exactly 400. >> Yep. >> And so he offered it to you for 330. >> Yep. >> So that's a what? 2 and 1/2 X? Is that right? Yeah, about 2 and 1/2 X. >> So that's a nice valuation. Now it does of course need to be a low valuation cuz it's a small fragile business. So you're you're not going to pay up for something like that. But still you didn't pay up. That's good. Also, it was 90% seller financed and he gave you a grace period of a of a year.

38:22 So, so or the loan was on standby for a year. >> Yep. >> over and then a 5-year amortization. So, 6 years in total for to pay off the full price, right? >> Yep. >> so, you brought you 10% of 330, so you brought $33,000 to the table that he got on day I mean, that's all he saw. >> one when I signed it, yep. Handed him the check, yep. >> $33,000 and then you brought another 40.

38:48 you're buying a a small and fragile business, but but you're also not I mean, I feel like this is a pretty mitigated deal structure. The the seller financing, was that personally guaranteed? >> That's another big part of the deal that we should probably hit on. So, I put up I had at the time I had a couple single-family home rental properties. And so, I basically put up as collateral enough property value to cover that on the the balance of that loan if need be. So, we did put we ended up putting liens on those properties.

39:28 but also I I felt reassured because God forbid something went awry, I'm not losing my house that I was living in, you know? I'm not losing the the assets that I was putting up were assets that I don't want to I don't want to lose those assets. But if worst-case scenario happened, like I'd still be able to, you know, gather myself and and move on and and still be okay. so, >> Well, that that is one of the benefits of buying small is that God forbid it just goes to zero, >> Yep.

40:01 >> depending on your balance sheet and everybody's situation is different, but you're more likely to be able to absorb an absolute failure >> Yes. >> than if you buy a, you know, max out your SBA loan and it's got, you know, 4 and 1/2 million dollars of SBA debt hanging over your head. >> And I also knew too that, you know, my monthly when it would hit, my monthly seller note, the business as is today without having to grow it, it would I would still be able to sustain that payment, no problem, and also pay myself at least $50,000. So, I was doing very simple simple numbers and and math on an Excel spreadsheet, but I felt pretty confident in that.

40:37 >> And Pat, but also talk to us about this period where you retained your W-2. >> Yes. >> That, of course, mitigates it a ton because you actually have income. You you have you still have a another source of income, one that is presumably a lot more than the 50 that you were going to pay yourself out of the business. but I also assume that you couldn't sustain that because in particularly in such a small business, people were going to need to see their new owner leader there. So, how how were you thinking about that?

41:10 >> The the plan was initially to leave the W-2 and start full-time in the business. So, I wasn't really ever accounting for having that W-2 income. But at the company I was at, I knew we were more or less in a transition period and potentially going to be acquired. And so, there was the the business itself was of that I was working at as a W-2 was changing and evolving. and temperature control was so small and kind of everything a lot of the day-to-day operations was run through the dispatcher.

41:46 So, I could be there and handle, you know, handle things and meet the team and be on site with the guys, but also in that at the time in that in that W-2 job, I was a lot of like a lot of sales. And so, I could bring my like what I was doing when I started was like bringing my laptop on service calls with guys and I'd be like, "Hey, I got to take this quick call." And I would jump on like a sales call in the van for the W-2 and then go back to the service call.

42:12 So, like the the goal was to never continue to really work that W-2. It just happens It was like happened to kind of work. but once I got to the 6-month point, or like basically I bought the business in May of '24, once I got to December of '24, I was like, we we've we've already grown too much that I I can't I can't do this. I was to basically like working in the W-2 I was working HVAC during the day, you know, working in the W-2 at night, and just kind of getting burnt out. I was like, the business is in a spot now where I can like really confidently sustain myself. So, let's move on from from the W-2 at that point.

42:53 >> Yeah. Well, you didn't plan it that way, and it was probably a desperate 6 or 7 months, but from a financial and cash flow perspective, it sure it sure did give you breathing room. You you I mean you had your salary. >> It It helped. >> and you didn't have to pull anything out of out of Sorry, what's the name of the business? >> True >> Temperature Control Majors. >> Temperature Control. >> Yep. >> You I mean you didn't have to take anything out of Temperature Control, so you could just be reinvesting what would have otherwise gone in your pocket that whole time.

43:23 >> Yep. It was It was nice. >> And the guys were cool with that. >> I don't >> They saw when you would take out your laptop on a on a service call, they weren't like, oh, who's this who's this new kid thinks he can, you know, moonlight you know, what what whatever their >> Yeah. >> notions might have been. It It How was that? >> It's such a good question. I I don't I don't know if if everybody on the team really knew, to be honest with you.

43:53 the thought might have been like, oh, yeah, Pat is just taking a call for something, or maybe they didn't care. I'm not sure. I never got pushback. I never received any questions. but really early on, and we can dive into this, too, but I made it a point to let these guys cuz we had we had four technicians, right? So, if one of those technicians left, it was not going to be good. And so, I really made it a point and continue to make it a point to have relate like relationships are everything in this business with your customers and also with your team.

44:26 And so, to have those relationships and let the team know like, "Hey, I got your back kind of no matter what." was a huge thing for me and also coming in and not being like, "Oh, I know everything." and like help me learn from you. help me understand what's broken and I'm here to help fix it. I'm here to help kind of build. I'm here to help, you know, help you guys make more money. that was my approach. I knew I needed to have solid relationships with the guys.

44:53 But going back to your initial question, like I don't I never received pushback. I never received anyone questioning. I don't know if they were amongst themselves, but it never became a problem while I was doing that. >> Great, Pat. Let's carry on now and hear about your ownership. So, we've kind of just heard about those first 7 months again. You closed in May 2024. It was December 2024 where you did break ties with your W-2 and go all you know, full-time in temperature control. Anything else to say about that transition period?

45:27 >> >> Yeah. >> Yeah, I I would say again, like having a former owner that is super supportive and helps with that transition was extremely beneficial for me. So, what I mean by that was we my first day, we got into a room, you know, there was four technicians, the former owner and the dispatcher at the time and introduce I get introduced to the team and kind of tell the team about, you know, why I'm here and why you know, why I'm excited about this and you know, I do remember telling the team like, "Hey, take a moment to look around this table and you know, remember this moment because a year from now, two years from now, five years from now, like you guys are going to be the the OG guys that you say like remember when.

46:12 and I really >> What a good line. >> Yeah, I just and and we actually had a a team meeting at the two-year mark just recently and I showed the picture of the team, you know, at the time and I was like, guys, remember when we were you know, remember when we were just the four of us in this room. So, super super cool, but yeah, I just my my approach was just to be kind of like just learn about the people, learn about what was working, learn about what wasn't working, but my approach was not like to change anything. And going back to having an owner, a former owner that was super helpful in that transition, you know, Steve came in was like, hey, I I really am confident in Pat. he's going to be great. He's going to be a great leader for you guys. He was definitely building me up, which I think reduced some of the potential pushback that I could have gotten cuz it's they'd be very easy for for the team to just perceive me as oh, who's this young guy that doesn't know what he's doing, you know. I think they saw early on I was super interested in learning about the operation, learning about them as individuals, learning about their goals, what they were trying to accomplish in the next one, two, three, four, five years and being a part of building something. So, that was that was what I really remember from early on and then diving into the weeds, I just saw a huge opportunity for follow-up. you know, the the business was running, you know, Steve at that time he you know, he was kind of just tired in his career and looking for the next thing. So, I'm sure things weren't perfectly optimized. and I just saw an opportunity to guys would send work back in the office and say, hey, you know, this customer needs this, this, and this and literally just to come part like put that together and and proposals and send that out in in a timely manner, and effectively communicate with the communicate with the customers, and even without growing the number of technicians, like we vastly grew the business.

48:05 So, it was early on, it was like a lot of like ride-alongs, learn about the trade, learn about the intricacies of the equipment, and then just meet the customers, communicate to them, and follow up on work. And that's the That was the main focus probably for the first 8 months to 8 to 12 months, without really changing any processes, systems, adding new people, or anything like that. And it worked out really well. so, then you start thinking >> Man, Pat, that's the that's the pattern that we hear about, and you you wonder if it's overstated, where the retiring owner is, you know, he's kind of taken his foot off the gas, so he's not hungry, and he's not chasing business, and all you got to do is kind of return phone calls, in in quotes, you know, just be more responsive to new and existing clients. And because the like going back to this point of product-market fit and demand, the demand is there, it's just not being it's just not being seized by the current owner, because they're not as hungry as they once were. And And so, if you just come in and start being more responsive, you can watch that revenue go up. Again, that picture can be overstated, but it sounds like in this case it was true, and it has has worked swimmingly.

49:21 >> It It has worked great. Yeah, like my my whole thought has been my our job at Temperature Control is to get you like you as a facilities manager, you know your business inside and out. Our job is to give you business information for you to make the right decision for your business. And that's all I was trying to do early on, and it it like it was working, and continues to work. and it was just that follow-up. Like this was not this was not like come in here and turn on a new website. This was not like come in here and toss like marketing dollars in.

49:57 It was literally just follow up on the existing work, build the relationships, and go from there. When I started, for example, like every This was crazy to me, but every new customer that would call us that wasn't a contracted customer, at the time the dispatcher would just say, "Nope, we're not taking on any new customers." And then just hang up. >> Oh, man. >> And I was like, "Whoa, what's what's going on?" So >> And did Steve Steve tell you this? Did he recognize that all the money that was being left on the table?

50:24 >> Steve was very transparent about that. Yeah, Steve was very transparent about you know, we're really capped on capacity. It's He was He would also tell me like it's very hard to find technicians. he would also tell me like, "I'm getting emails all the time for new work and install work, but we don't have capacity." And again, like no fault to Steve at all. He was just at a time at the time of his career that he wasn't interested in taking that on taking on that headache taking on the additional like burden that comes with that.

50:53 >> Yeah. >> I definitely was interested in that. >> Yeah. >> And so So yeah, he was That's That's one of the things that also kind of got me interested when we were having those coffee shop chats was you know, Steve would be like, "Yeah, we're 3 months behind on on our maintenances and we can't take on any more work." And again, I'm thinking product market fit, you know, like we just have to fulfill this capacity somehow fulfill this demand, and we'll be able to to figure it out.

51:20 The other thing I was thinking, too, Will, was I it is very It's hard to find technicians, right? But I was kind of placing a bet on you know, if you build the right culture, if you if you really focus on craftsmanship, you can you can really attract like really solid talent and also you like young talent that wants to sustain and be at the company long-term. And so that that has kind of proven to be >> Say more. Say more, Pat. You Yeah.

51:48 >> Yeah, like like nowadays in the trades and you've probably seen this and the listeners have probably seen this, but like the generation tool belt is is like a very real thing. Where you know, kids are opting not to go to college and you know, pursue a a career in the trades and get paid you know, really well to do it. And at the time the team that I had jumped into when I acquired the business was pretty young. I mean the average age of the technicians the former owner's son was probably in his late 30s, early 40s. The other technicians were in their 20s.

52:22 And everyone I was very fortunate. Everyone on the team was really interested in what they were doing. And my thought process was I bet some of these young guys have additional friends and colleagues that are interested in in building a career in the trades as well. And so if I don't treat them like a number, you know, if I pay them the right way cuz the technicians were pretty vastly underpaid or they were just underpaid. you know, if I can pay them the right way and and show them like a career development progression and this is not just a job, but this is like a career and you can actually make a great living doing this. And building a culture where you know, people want to hang out after work kind of thing.

53:05 You know, we'll we'll be okay. Like we'll be able to find technicians who will first tap into the the ecosystem of our existing team. And that's exactly what we've done. You know, we've we've built our team base off the referrals that came from the existing team. and there's also been an element too of like getting some talent that were just unhappy you know, working at some companies that were acquired by by larger private equity groups where they started to be treated a little bit more like a number. Like we have that very much like just small locally owned, you know, there's no other larger group in Chicago or Cincinnati telling us what to do. we have that tight knit bond.

53:43 And I think that's what that's what people want, you know. So, even though it's been hard to find technicians, when you have that and you're focused on like that kind of culture, if you will, it it it's gets a lot easier. That's what I've seen over the last 2 years. >> Really good stuff, Pat. And but interesting that the technicians are younger because we the generation tool belt, by the way, I hadn't heard that phrase, but of course I'm familiar with the concept that the the rising appeal of the trades.

54:12 But, I still thought it was very early days in in this trend and that so, meaning that most technicians today are still going to be on the older side. They're going to be basically in the same realm of age as as the owners themselves. That's That's the pattern that you see time and again with my guests who buy trades businesses. So, anyway, just a comment that that I'm interested that it it seems like maybe the trend of younger people getting into the trades, at least taking your business as one data point, is actually more mature than I thought it was. It's further along in that trend than I thought.

54:48 >> That's what I've That's specifically what I've seen, Will. In in every every young technician or or want-to-be technician that I interview, I do ask them. I say, "Hey, like help me give give me like a pulse. Give me a data point. Like are people in high school, are they pushing you into college?" And more and more of the answer I'm getting is is no. Which is super exciting. and and I think it's a great it's a great career path for them, as well. When I was in school, you know, however long ago, it was definitely like, "Yeah, you're you're going to college. Like there's no Like you're you're you're just going to go to college." But, it seems as though that that people are still pushing college, obviously, which is which is great.

55:28 but, it seems as though it's less and less of a absolute that you're going to college and more and more of a hey, yeah, like the the trades and working with your hands and moving atoms is actually a a lucrative career path for you. >> Well, as any any of the listeners will know, there's just there's there's just this confluence of factors contributing to that. AI is the the big one, but that is but one of many.

55:54 Pat, the speaking of this particular trade, of course licensing is usually a factor in trades businesses, not always, but certainly in an HVAC business. How did that How does that structure or what does that look like? >> Yeah, so that's that's a really important part of any kind of trade specific deal. Depends on your your state requirements are, right? But in the state of Ohio, you do need in a in my business, you need an HVAC license and a refrigeration license to do the work that we do.

56:21 the kind of the catch is you have to have 5 years of experience working under someone that is a license holder and show 5 years of permanent jobs in order to get that license. or there I believe there's also kind of a cut the line if you have an engineering background where you can test, I believe, after 3 years. but I didn't qualify for either of those, right? so I I had to again know that I was buying a business and we were going to be okay from the licensing standpoint. And Steve was grandfathered into having a HVAC and refrigeration license years ago.

56:56 and was super gracious on like understanding that this is obviously a need and that if I, you know, was to acquire this business, that he would let me use the license for that 5-year period to allow me to to go and test or or use it, you know, as long as I needed it essentially to go and test. and so that was a really big point of contact or point of of of conversation in those coffee chats was how that would work.

57:22 and I felt like it was kind of a good give and take because I had this 90% seller note that I owed him. But also I it'd be a lot harder for me to deliver that, too, if I didn't have that license, right? And he obviously wanted to see that 90% of that seller note. So, it was kind of like we were both benefiting from him being able to retire, step away. I could still use his license, and as a result of that, I could still make those payments to him, right? So, it was a it was a win-win in that regard. Today, we continue to use his HVAC and refrigeration license.

57:56 and I do hope to test next year for my license and see how that goes. but yeah, the licensing is a huge part of of this commercial HVAC and refrigeration business. >> A few things to call out on this, Pat, which is important. The fact that you didn't do an SBA loan here is what enabled this. Because if you were to do an SBA loan to buy this business, the current rules say that he to he I mean, the SBA doesn't want the previous owner to stay in the business.

58:32 So, he would have to be an owner of the business. He would have to roll some equity. T- for his license to remain in effect. I believe I have this right. I should know this. >> >> And if he was on the cap table, then it that also meant that he was going to have to personally guarantee your SBA loan. >> Mhm. >> Which this is a new rule change from last year, which effectively just kills that whole structure because some seller owner is not going to want to have to personally guarantee your have personal guarantee hanging over their head for your SBA loan.

59:13 >> Yep. >> So, this So, all of which to all to say that there is another subtle but powerful benefit to buying buying small when it comes to a trades business where there's a licensing thing. If you can buy so small and get such a such a structure as you did, 90% seller financing, that's rare no matter the business, big, small, everything in between. But if you can do it and you can completely avoid doing SBA at all, that simplify I mean that that simplifies the licensing thing dramatically. You're cuz there's nobody there's no body there, namely the SBA or SBA rules saying, "You can't do this." He can just So he is he a de facto not de facto, but sort of on paper employee of the business there.

59:58 >> it. You got it. Yep. >> But he's not being paid but you're not the paying him as an employee. You just have the the the the the seller note structure. >> got it. Yep. And and you hit on you hit on such a good point. One of the things about this deal of owner financing is like you you cut out so much hoops, so many hoops, if you will. Yeah. And like that conversation about the licensing, for example, that was one, you know, 30 to an hour long conversation over coffee.

60:27 So it was like, "Yeah, we can do that. We'll do that, you know, we're good." And and and we move on. so yeah, yeah, it was yeah, it was way I I I was so thankful that I didn't have to necessarily go through the the hoops of working with a bank or working with the SBA. And also for Steve's end, too, like there's you know, capital gains tax benefits of getting that payment over time versus just in one lump sum and and all the the things that come with that, too. But kind of along your your along the lines of buying small, you know, just transparently like I don't know if Steve had a ton of options, you know, on on like when you're that small, like it it's kind of tough to sell it to a group or private equity group. so like you you are willing to be a lot more creative in the deal terms. And I think that's probably why we were able to get to a point where he was okay with the 90% seller financing cuz maybe there wasn't a ton of options really available there outside of potentially just shutting the business down.

61:25 >> Yeah. I mean, and I hear that, although I'm a little I'm a little surprised at least in HVAC that he wouldn't have had some other buyer because as we know, private equity has just devoured the category. More on the residential side, but I'm sure on the commercial as well. And while a private equity certainly wouldn't buy a tiny business like this as their platform, you can see them being happy to buy it as just a little tack-on bolt-on.

61:50 But maybe not. Maybe it's even it's even too small for that. Don't know. but point remains. >> Yep. >> When seller doesn't have a lot of options, that benefits >> >> Yeah. >> guys as buyers. >> Yeah, totally. >> Needless to say. >> Yep. Yeah, you can you can just get more creative with how you want to structure the deal. And and and what that payment looks like and all those things. Yep. >> Yeah. And just to just to underline something that you've already said, but it's so important. If you that 90% seller financing, so effectively all of the enterprise value of this gentleman's sale was tied to your success. And your success is tied to his license. It it's just it's just such a mutually reinforcing skin in the game.

62:33 >> 100%. >> Because because of you know, there might off I mean often we hear about seller financing is 10% or 15, maybe 20%. And people act like that's enough of a enough skin in the game for the seller skin in the game or or or investment in your future that that's going to keep them really incentivized. And I've never felt that that's material enough for the seller to care that much. A little a little a little additional 10%. but 90% is basically effectively the whole enterprise value is tied to your >> to your success.

63:08 >> Yeah, now now if I did fail for whatever reason, he still would be basically have access to those properties that I was talking about. But but yeah, like he he wants to see the business be successful. And again, like I need access to that license. So it it's again a kind of a win-win situation. He he did also well, like he did stay on the you know the business for our goal was to basically stay on for that first year. Where I wasn't paying you know this the seller financing, he would stay on as an employee and I would pay him as an employee.

63:42 But we did get to I can't remember exactly what month market was at. But we got to a point in time where you Steve and I had a conversation and he's like you understand how to run this business now. And I was like yeah, I I I feel like I do. And then he went over he went down to part-time. And then ended up basically was saying like okay, we're good. You know, we're we feel pretty confident about this. And then he went completely you know, retired if you will. So it was supposed to be a full year with him being on. I do think he officially retired probably after the first seven or eight months. And went part-time after the first three or four months.

64:21 But again, he was great and you know, this is Pat to the team and also to our customers, you know, this is Pat. You know, he's going to be the main point of contact everything like that. Yeah. >> But Pat, didn't you need him as a technician given that you're doubling your business? Speaking of that capacity constraint. Now that you were saying yes to all this new business, where did you find the extra capacity to serve all that new business?

64:46 >> When I bought the business like I said, we were doing around 900,000 to a million. in my first two years we doubled the business on the revenue standpoint. And we went from four technicians to probably six. So there was like a lot of like unused capacity essentially. Like there was a lot of like a higher dollar value jobs that we could have been working on. And that all came from follow-up. And so it's it's not like we had to double the number of technicians necessarily in order to double number to double the revenue. At least for that first growth stint. If that probably is going to be different for future growth, but no, like he Steve was not a working technician. he he was more I would say like more so like a service manager if you will. but he had built the business in a way that a lot of the work flew through the dispatcher. And he was he was not necessarily involved in the day-to-day.

65:42 Which which excited again as a buyer I'm seeing that he's spending this time a lot of time in Florida. And the business is still running. I'm like oh okay like this is good. This is a good thing. >> Oh well and going back to buying small like if you can buying small kind of the key reason not to is because the business is fragile, but if there are if there are signs that in fact the business might not be as fragile as a typical really tiny business is.

66:11 In this case that that the owner is spending a lot of time in Florida. That's sure is a happy signal that this isn't maybe as fragile as fragile a business as it seems. >> So business might not be business might not have been optimized, but it shows sign of being able to run without the owner's involvement in everything. So again I'm like this is that's a good thing, right? So there there was a lot of like as I was getting more and more into learning about the business there was just a lot of like green lights where I was like this that's good. You know this other thing that's good. And I felt as though my risk again was fairly minimal. Like buying a buying a business this small is is not you're kind of buying a job. It's risky, you know?

66:51 But I saw a lot of green lights where I was like okay like there's some bones here that and there's a foundation here that we could really build off of for sure. >> And so you doubled the revenue in the first two years? >> Yep. So first two years we doubled the revenue and then if everything goes well the back half of this year, we should be on pace to triple the revenue in 3 years. >> Wow.

67:12 So, so you bought in May 20 closed in May 24, we just passed May 26, so you're you're at month 25-ish right now. And so revenue today is about 2 million. Your run rate is about 2 million. >> so so when I say we doubled the business, we did so last year we last year the calendar year of 2025, we closed about $2.5 million in revenue. And then this year 2026, we should do about 3. 3.5 to 3.6 million dollars in revenue.

67:42 >> Oh. >> Yep. >> So, okay. So by the end of this year, which will have been 2 and 1/2 years under your ownership. >> Yep. We'll we'll >> 2 and 1/2 years, you will have quadrupled if you're on track to have quadrupled revenue. From 900 to 3.6, is that >> My math has been wrong. Yeah, it'd be quadrupling. Yep. Cuz 2.6 is not quadrupling. Well, I feel silly. 2.7 would have been tripling the business.

68:13 >> Tripling. >> Yep. >> You're right. >> Yep. >> Wow. >> Yep. >> So now you've got >> Thanks for helping us just assume. Well, thanks for helping me realize that. >> >> Yep. >> now so let's let's just assume that you hit that big assumption. Still 6 more months to go, seven 6 and 1/2 more months to go. We're we're recording in mid-June. Yep. let's assume you get there though. That's a $3.6 million HVAC business. Another good reason for another kind of appeal of buying small is your business now 2 and 1/2 year at the end of this year, 2 and 1/2 years in is at the size where you would have searched and searched and searched and hopefully found a business at that size.

68:56 You would have had to take an SBA loan. You'd have all this personal guarantee that >> hanging over your head, understanding that your guy that your seller does have liens against your property, so it's not There's teeth in your loan as well in your seller financing loan. But still, so but instead, you grew yourself there and your loan payments are relatively de minimis >> Yeah. >> for a for a $3.6 million revenue business. And how how does profitability look? How do how do earnings look? How does that $50,000 a year salary you're going to pay yourself look?

69:29 >> Yeah, I still I've still kept my salary really low, to be honest with you. >> Okay. >> because my my mindset is just keep every I keep reinvesting in the business until like in just keep reinvesting in the business. And so the profitability obviously has scaled really nicely. we're we are in this zone now where I've you know, a lot of stories I hear is between this like $2 million and $3 million revenue mark in this trades business.

70:00 You you it's kind of called like owner's hell, if you will, where the owner was able to to do so much, right? So like I did take on like candidly, I took on a lot of work, you know, to get from 900,000 to, you know, the $2.5 million. I've had >> What do you mean took on a lot of work? >> Like when I say work, like it this is not passive, right? Like >> Yeah. >> Like like reviewing jobs, like even like scheduling jobs, making sure parts are on order, you know, making sure the fleet like the the the the fleet is is maintained and everything, you know, sales, operations, everything that comes with owning a business.

70:41 >> Yeah. >> You can from what I've seen so far as as the owner, you can kind of manage not in a 40-hour work week, maybe a 50- or 60-hour work week, but like you can kind of manage that up to about like $2 million, like more or less yourself. Like you you'll probably have some help in in the office. but as soon as you start hitting at least what I've seen is I've gone from like that two to like that three ish range, it really starts stuff starts to really get difficult and you have to build out the systems and the processes and get the right people in the right seats in order to to scale beyond. So, right now with that going back to your question about profitability, like right now I'm I'm trying to reinvest as much of that money as as as possible so that I can build the right seats, build the right roles, build the right systems, build the right processes so that we can scale well beyond that 3 million and hit five and then hit 10. So, when I went from 900,000 to 2.5, the profitability is awesome. You're like, "Oh man, like the this profitability is incredible." Like I I can't believe that I was able to to buy this business at that price point given where this profitability is at.

71:52 But now it's like, "Okay, let me spend some of that profitability, right? So I can maybe reduce that a little bit in hopes of continuing to grow." So, it's not I I again, maybe I was naive when I started this journey, but I kind of thought like everything was going to be extremely linear. You just you know, add more technicians, add more customers, the profitability always, you know, maintains in that like desired like 15 to 20% range and everything's good.

72:19 but it doesn't it doesn't really work like that, right? There there's ups and downs and kind of stages of growth from what I've seen. so in order to kind of get out of that owner's hell period, it's a lot of like reinvestment back in the business to get to 5 million and then ultimately get to 10 and beyond. >> Well, in a human capital business, it and services business, where there's no CapEx, it kind of in theory, it kind of should be linear.

72:47 You have more work and you need three more guys, you have so there's some upfront investment of the of the three guys, but really if you can deploy them on day one, they should sort of be generating 20% EBITDA of the revenue they generate from from day one. where the staging become And I'm oversimplifying dramatically like, you know, there's always kind of infrastructure costs of building an organization and maybe that's what you're talking about. >> I'm talking about.

73:16 >> Maybe may maybe we're talking about making a hire or two >> Correct. >> that are not revenue generating. >> Correct. >> They're you know, they're administrative. And so all of a sudden that's big expense with with it doesn't generate any net new revenue. >> That's That's exactly That's exactly what I'm talking about is like, yeah, building out like the right coordination roles, building out the right operations manager roles, also like thinking about like commercial account management and how do we go sell. Like all of those things are are more or less kind of in that overhead bucket that is that that's the investment I'm talking about. where a lot of that that Yep.

73:49 >> I'll let you go here pretty soon, Pat, but wanted to ask just two final questions. The learning the trade. So, we've heard you talk about, you know, kind of you learning. >> >> Yeah. >> but you're never going to learn and and that you want to get your own license. So, I guess you are going to learn some true hard skills here. You'll have to pass a test at least to get that to get that license yourself.

74:17 But what does it look like how much are you trying to learn and how has that been? And really put yourself in the shoes of a searcher who might themselves be considering buying a commercial HVAC business? >> Yeah. >> How how technical a journey has this been for you or how does it have to be for you, the new owner? >> Yeah, I've I've just learned by doing when it comes to the trade. day one when I started, I I didn't know much. I had done a little bit of research like about the refrigeration cycle leading up to day one, but still I was extremely novice.

74:55 I'm all I'm not an I'm not I wouldn't say I would be the best technician. I don't think it's actually good for the business if I was a technician. I think it's a competitive advantage that I'm not because I can think about the systems that are needed and and kind of like where we're going and the vision and all of those things that are needed from business ownership. So, I view it as a competitive advantage that I couldn't jump in a truck necessarily and, you know, solve every single problem that a customer has cuz my job is to to build that system, to recruit, to grow, to sell, things like that.

75:27 >> Yeah. >> I have learned a ton because when I when I first started, I was the person that was doing all the follow-up proposals. So, you know, call would come in from a tech. Hey Pat, you know, we got a cracked heat exchanger on this rooftop unit. You know, and basically from there is just asking questions to the guys like, "Hey, what does that mean? What what what does this involve? What's the ramifications if this doesn't get fixed?" And going on this job site with them, right? And doing ride-alongs. That was a huge part of beginning was just getting your hands on the equipment, asking a ton of questions, and learning.

76:00 And then also the I can't say this enough, but there's so much good content on YouTube. you know, shout out to this gentleman, his name's Chris. He runs a a channel called HVACR Videos. He records every single service call and he works primarily in commercial restaurants. And it's every call that we get. So, you know, for a long time there I'd watch a video a day just to understand, okay, this is how he approached it. These are the numbers that are important. And then simplifying it, right? So, like I'm a big fan of analogies and I've been able to more or less simplify the refrigeration cycle into a baseball field, which we don't have to get into, but just simplifying some of these complicated, you know, concepts so that I could understand it and then I could also teach people as well to get a basic baseline understanding. So, I would say by now I'm I'm pretty I'm pretty technical like technically competent, but I don't think I needed to be 100% technically competent leading into the business. Like I think I just needed to have a genuine interest in what we were doing, the product and the service that we were offering, and I could kind of learn from there. but you like to buy a business like this, you definitely do not have to be an expert technician. I think it's actually a competitive edge if you aren't an expert technician because you could take something that got to a point that I had bought temperature control at and like really build the structure around it to get it to that next level, if that makes sense.

77:28 >> Yeah. But you are going to try to get a license in your name. So, you will So, what will that look like? You will have to have some real level of technical competence to pull that that off, no? >> Yeah, definitely Well, good point. And and yes, definitely. A lot of that will from my mindset will be coming from the knowledge I have now, which will be useful, but then just putting together a study plan.

77:53 Like what One thing I was really good at growing up was school and tests. And so, I'll create some sort of structure together to to study, to learn as much about the test as possible, and to put that time in to pass that exam. so, yeah, that'll be an endeavor in itself. but I think my at least my initial gut feeling and the people I've talked to, well, that will be like a lot of book work in order to to to take and pass that exam.

78:20 >> Okay. Okay. I'll let you know in the future if if that's actually true or not. Okay, Pat. And then the other question was and actually I have yet another was about the an observation that you made in terms of the private equity presence in the HVAC market. And to to provide some some context, we all know that PE has gobbled up the trades, particularly HVAC, although although again, as I said earlier, we think about it mostly residential HVAC, but probably commercial HVAC as well.

78:59 And that what that has done is just made it more competitive to get business. I mean, PE, what it does is try to professionalize the businesses that it acquires, make them better. and so it would it would seem that all of this all of this PE money would make the would make the market less hospitable to a small guy like you, to a new guy like you, more more competitive. What are you finding? >> I do think from what I've seen today and the people I've talked to and just what I've seen on the street, private equity definitely started in the residential space and is definitely expanding into the commercial space.

79:42 you make an interesting point that it could on paper look like it'd be harder for somebody like me, but I don't want to put anyone down or anything like that, but I I feel like it's made it easier, to be honest. people like when you're in such a relationship business like we are in, you know, people want to have that relationship and they want to be able to to meet in person and to have to to know that they have somebody that they're going to be able to call or a group that they're going to be call able to call that has their back.

80:13 And while yes, private equity has gotten into the commercial space, I do I have seen that the operations for some of those private equity health companies seem to get clunky. their pricing seems to go up. And then their technician experience, so their customer experience seems to start declining. And then their technician experience also declines quite a bit because they don't have that like personal feel as much anymore. Like I've heard a lot in in interviews. You know, I just feel like a number. You know, they don't care about me.

80:47 And I kind of view all those things again as an advantage for us because we don't we don't have that same approach. So we are super relationship focused when it comes to all the technicians that work here. Everyone that works here for that matter and also all of our customers. And from what I've seen on the street is customers not being happy with some of those private equity owned companies and them coming to us because you know, we are representative of providing that high quality work that used to be you know, before private equity kind of came to the scene if that makes sense.

81:20 >> Yeah. It makes sense and you're not the first person I've heard say that. I guess a few weeks ago Hickory we the interview was with the the co-founders of Hickory residential HVAC and they have been at it for longer than you and they have acquired I can't remember what their aggregate revenue number is but it's large. and and so while they are rolling up HVAC, they are doing it with a long-term view. They're not looking to exit. Hence the name Hickory.

81:53 >> I like it. >> Like the tree? >> Yeah. >> And they mention in that interview that all of the the sort of fallout from private equity activity in this market is to their benefit because they can come in and offer a a counter narrative, a better experience both to customer and to technician etc. etc. All the stuff you said. >> Yeah. >> interesting. Exactly. I'm seeing the exact same thing in the commercial space in in this market. so yeah, the data point's very similar to to what Hickory shared with you for sure.

82:25 >> So final question Pat just again about the industry commercial HVAC. So, one thing that I noticed is that two of my recent and more impressive interviews, at least in terms of the trajectory of the of the entrepreneur, are Ling Tran and Steve Carroll of Kelso. Ling bought a commercial HVAC business. I believe it was commercial HVAC, yeah. >> He was He was primarily focused in refrigeration to start. Yep.

82:57 >> R- Okay. Okay, so refrigeration. And so, refrigeration obviously is not HVAC, but they often are serviced by are by the same companies will do both, as you guys do. >> Yeah, this is a good This is a really good point. So, very similar. but usually there's a company that will specialize in refrigeration. And when I talk about refrigeration, what I mean by that is walk-in coolers, walk-in freezers, ice machines, anything that's a for cold storage, usually a food.

83:25 the components in a refrigeration system, while very similar to HVAC, are slightly different. And so, there there are a lot of from what I've seen, there's a lot of HVAC companies that want to get into refrigeration work. there's there is a difference though between companies that start in refrigeration and expand into HVAC. From what I've seen, it's a lot easier to expand or take on HVAC is well. The the refrigeration piece is just a little bit more, you know, it's just a little bit more it's a little bit more unique. it does definitely has different components in it. There's also an element to of, you know, you have a customer like a restaurant, their walk-in freezer goes down at 11:00 p.m. Like, you got it you got to be there. Like, they got 10,000, 20,000, 30,000 dollars of product in there. Like, you got to be there. So, there's an element of definitely of urgency there. Whereas, if you're working on a retail space that has one rooftop go down, but they have 15 rooftop units, you know, they might not even know that that unit's down.

84:31 So, there is definitely a sense of >> We're talking HVAC. We're talking the unit the HVAC unit on >> Yeah, an HVAC building. So, like there's definitely still a sense of urgency in HVAC, obviously, but in refrigeration, it's definitely it's a lot more of like, "Hey, we need you here like right now." >> Which is then that's a more strategic better >> Totally. >> place to be as a provider. Of course of course it does mean though that you are you need to be prepared to be deployed at all hours.

84:58 >> Yes, but but also like there are from what I've seen, there's a lot fewer folks that specialize in refrigeration. So, it be kind of becomes like your Trojan horse. Like, we'll start working on your refrigeration equipment. Oh, by the way, you know, we can work on your exhaust fans, your makeup air, all your all your HVAC and rooftop units, as well. >> Okay. >> But but yeah, so Ling Ling started by buying a commercial refrigeration business, specifically like working at the grocery stores and stuff like that.

85:24 >> And now he services Whole Foods, and I think he knows what's the Whole Foods founder's name? I'd know it if you said it, but I think he knows him personally. >> Personally. >> I I I So, so Ling and Ling bought very small. He I think he I think he jokes in his interview that it was 300,000 of SDE on paper, but really it was more like 150, which is right in your range, actually. And and today, as I as indicated by my Whole Foods comment, Ling has built a major business, which does I I I think, you know, kind of high mid-to-high single digits mid-to-high seven figures of EBITDA every year.

86:09 and that's just that business. I I I I think Ling's got a lot more going on these days. And he's done that in probably, as I recall 10 to 15 year Yeah, 10 to 15 >> bought in 2012-ish around that time. >> Yeah, exactly. Exactly. So, just an incredible outcome and you know, it's early days. I mean, he's not yet 50. then Steve Carroll of Kelso bought I think it was commercial HVAC as well. Anyway, the point it was an it was an SBA acquisition. It wasn't as small as you guys you and Lang. but it was it was SBA small and today has acquired a number of other lots of other HVAC businesses or commercial HVAC businesses around the country.

86:56 And he's at Kelso Industries is now at a billion dollars of revenue. So, it was my first time using the B word on Acquiring Minds. So, I'll easy for you one of my guests. Yeah, it's incredible. So, long long-winded intro to my question about this industry. both of these guys are basically in HVAC refrigeration on the commercial side. you and I have talked a number of times today about the product market fit here.

87:28 You've said how the demand well outweighs the supply. It's a vast market. Basically, any any any commercial building has an HVAC unit. Any restaurant has a refrigeration unit on top of that. so, is this as juicy a market as all of these data points would suggest? >> I'm very very very bullish on the commercial HVAC and refrigeration market, for sure. I do think that there's so much more juice to squeeze in the product market fit kind of just going back to that theme. Like the product market fit is endless in the commercial HVAC and refrigeration space.

88:04 Specifically, in my mind the refrigeration space. Yeah, I I just I I think that it's still early I I think that there's there's always going to be a need for some for this type of work. People are always going to have to have their food cold, their steak cold, or you know, warm in the wintertime. it just comes down to like, can you build the right culture? Can you build the right systems? Can you you know, recruit the right way to fulfill the demand in the market? And if you can do that, I I I think you can jump a lot of the hurdles that some other businesses have that struggle with product market fit.

88:41 So I I Yeah, I Will, I think that there's a huge potential in the commercial HVAC and refrigeration space long-term. obviously there's a potential like for a business like us down the line to add additional trades. But I don't even think we have to think about that really anytime soon because there's so much more juice to squeeze in our market just in commercial HVAC and refrigeration, for sure. >> Let's end it there. Pat Beall, great interview. Thanks for sharing so transparently.

89:11 Congratulations on your pivot in into this and and how you went about it slightly unconventionally or at least the size of the business and how you structured everything and your success so far, which is really impressive and and promising for the future. >> Yeah. >> Thanks for joining us. >> Thanks for having us on, Will. I really appreciate it and thanks for everything you're doing for the ETA community. >> Hope you enjoyed that interview. Don't forget to subscribe to the Acquiring Minds newsletter. We send an email for every episode with an introduction to the interview, a link to the video version on YouTube, and soon key takeaways, numbers, and more essentials from the interview for those of you who don't have time to listen or watch it.

89:51 Subscribe at acquiringminds.co. You'll also find all our webinars there on the website, both those we have coming up and recordings of past webinars. At this point, there are over 30 webinar recordings, a wealth of information on all the technical nitty-gritty of buying a business. AcquiringMinds.co.