EP 84: How to Sell a HVAC Company for Maximum Value with Patrick Lange of the Business Modification Group

Transcript

Ed Mysogland 00:35
HVAC companies, that is probably one of the hottest markets there is these days in in the buying and selling world. And today, that's the topic we're going to address. The value and the sale of HVAC companies. I've been I've had Patrick Lange of the business modification group on on my radar for a while and you know what the guy was, the guy was just willing to come on and visit and what a great visit. He was. I mean, not only not only was this episode, so informative for those, either thinking about selling HVAC companies or those that are buying, you know, he just provided an awful lot of information about, you know, just the mechanics of how this industry works. And the second thing is just what a good guy he was, I mean, just just totally transparent, totally open, you know, a guy of abundance mentality, and we need more of those kinds of people out there. And, and he, you know, he's that's what he does. He's, he's, he's a specialist, He's a specialist in selling HVAC companies across the country. And, you know, it's funny. So some of my colleagues are like, What in the world? You putting them on your podcast? Aren't you in the same industry? Yeah, well, that's, that's the beauty of this guy. You know, he was, he's a, he's an abundance guy, there's so much work for all of us. And I consider him now a resource. So if if we get into a jam, or, you know, we're struggling with questions on the people we serve, I totally believe that. Now, he is a phone call away to help us out. And he'll help the audience out to I'm 100% certain that he is, he is that kind of guy. And and, and so the business modification group, like I said, is they specialize in that. And Patrick was a was an entrepreneur, so he knows in the industry, so he knows, he knows how this game is played. He knows the process from from start to finish. And that's what makes him a great deal guy. So I hope you enjoy my conversation with Patrick Lange, of the business modification group. Well, welcome to the show. Patrick,

Patrick Lange 03:01
thank you so much for having me. I'm excited to be here.

Ed Mysogland 03:04
I've been waiting a long time to get you on. I'm looking forward to this. One of the things that I started to talk about and I didn't do it justice, in the introduction is the business modification group. So if you don't mind, can you talk a little bit about your practice and and how you're serving this HVAC community?

Patrick Lange 03:24
Yeah, absolutely. So my my company business modification group, we specialize in the sale and acquisition of heating and air companies nationwide. We help those who are looking to acquire companies as well as those who were looking to retire or move on to something different, we help them find suitable buyers value the company and go to market.

Ed Mysogland 03:46
So how did you find yourself in that space?

Patrick Lange 03:49
It's kind of a long, long story, actually. So I've been a business broker for a number of years and and I broke the business broker rule and I actually bought a heating and air company I had listed for sale so so I had been a broker had no industry experience in heating and air, bought a heating and air company ran it for two years, and realized that I missed brokering and heating and air route wasn't really my passion where we're doing deals and business brokering was so when I went to go sell the company, I couldn't find any information to help me if I couldn't find somebody give me a lot of data. I couldn't find a lot of comps couldn't, couldn't find a lot of information. We were a smaller company now certainly for the companies that we're doing 10 $20 million with plenty of people lining up to help but that on the smaller companies, which is what we were I couldn't find any information. So long story short there my son actually into buying me out so my office is still inside of his office. I'm around the business all day every day. And I decided to to change my business just to working with heating and air and I to me, it seemed to make sense if I was selling flower shops, liquor stores and heating and air today. I didn't If you'd like I could add value to all of them. And so I thought by doing just heating and air, understanding the nature of the business, understanding the the good and the bad of the industry, it would put me in a better spot to be able to help people. So that was seven years ago, I guess. I switched my practice I based in Florida. And initially it was just in Florida, and then I sold some in Florida and Georgia and then Georgia and the Carolinas, and then end up going nationwide.

Ed Mysogland 05:29
Good for you. Well, I'll tell you what, I'd have you know, there's a there's a number of requests for episodes. And I would probably say in the top, top three is HVAC. So So I guess that's where I want to start is, you know, what is the current state of the industry? I mean, that, because I know that there's, there's kind of two to two parallel paths, you've got your residential and your commercial. So I guess it's a great time to be you in this space. So can you can you give kind of just you know, what's going on with the industry?

Patrick Lange 06:05
Yeah, absolutely. So there's been a lot of outside icon financial buyer interests, whether it's private equity groups, or others sponsored type of buyers that have taken over the market over the last couple of years. And there's, there's a lot of different reasons, the fragmentation of the industry, kind of recession resistant. People saw that during COVID, everybody that was at home still wanted their air conditioners working. And so most companies remained profitable when many businesses were struggling. And so I think a lot of financial buyers saw that and saw it as an opportunity and started to get into the space. And so probably three quarters of the deals I've done the last two years were involving some type of financial buyer, whether it was a private equity group, or a heating and air person, man or woman that was backed by a financial buyer, or multifamily or family offices. So there's definitely been a lot of interest in the last couple years.

Ed Mysogland 07:07
But Well, the funny thing is that there's such a, you know, everybody seems to be talking about owning an HVAC company. And so, you know, I'm, I'm from the strip, I'm, I guess I'm from the standpoint of, yeah, I'm not certain, I would guess I'm curious to know, from a from the complexity of it, you know, what are the what are the factors like, that you evaluate, you know, an HVAC shop? I mean, because I think that, that people, and this is just my opinion on the on the ones that we've seen, you know, I think that there's a lot more than the buyers really understand until they're in it. And so, I so long question to the, you know, the extremely long questions, you know, what are these? What are these factors that people are evaluating before they get into it? Yeah, absolutely. Well, the

Patrick Lange 08:03
first one is, most parts of the country, most states require a license. State of Florida, for example, you've got to be in the business for three years before you can even sit for the exam. So so there's licensing requirements in every state, and there's a couple of states that don't have them. But now, major municipalities within those states are creating their own licensing. So there's licensing issues. The other thing is, it's a people business. You know, at the end of the day, you're dealing with technicians, you're dealing with suppliers, you're dealing with customers. So it's a an extremely Labor intensive industry of em. And finding quality talent right now is a challenge you look at so many industries have an employee or worker shortage, and Heating and Air is definitely one of them. And so that's, that's another thing they look at now, from a buyer's perspective and educated buyers perspective, there's they're looking at different things within the business, how much of it is commercial versus residential, because it really is a different business, serving a commercial customer versus a regular homeowner. How much of the revenue comes from construction, there's a lot of growth taking place across the country, a lot of heating and air companies are making money and heating an air. Most buyers are scared to death of new construction, they're worried about the next collapse of the real estate market. And so they're scared of that. So do they have their long term maintenance agreements in place? Are there customers that that are paying for their own loyalty with these maintenance agreements? Are their employees been there a long time so there's there really is a lot of moving parts in the industry?

Ed Mysogland 09:36
Yep. Yeah. And, and it's funny because the commercial HVAC world up here in Indiana, is we I mean, these commercial outfits are totally sucking the, the any available staff from from, you know, competitors or or whomever that they can get to, to fuel their job. And, you know, it's not uncommon, that, that we're seeing, you know, a $5.05 to $15 an hour jump in their hourly wage. And it's really interesting, because we get targeted a lot to, hey, do we have any HVAC companies and, and it's just from the standpoint of look, it's easier to buy the help than it is to the is to go out and recruit? And are you seeing that across the country? Or is this just the kind of anomaly where I'm at?

Patrick Lange 10:37
No, absolutely. And I think that's what's helped drive the acquisitions is just that, you know, they can go into a market and buy 20 employees, rather than trying to go recruit 20 employees. And so definitely, and we'll see buyers, if there's not a lot of employees, or a lot of employee tenure, they won't look at that business, because that's a large part of what they're requiring.

Ed Mysogland 11:04
Yeah. And that moves over to valuation. And, you know, from, from an appraisal standpoint, being a guy that that values companies a lot. It just seems as though the the investment behavior is so is bordering on irrational on people that are acquiring these types of companies. And, and again, it's just, I get it from a competition standpoint, I guess. That's where I'd like to focus. My next question is, you know, are you seeing people overpaying for deals right now? And if so, you know, when are they going to come? When is it going to come down? And what? What is the, what is the consequences of the overpayment?

Patrick Lange 11:54
So great question. And the the short answer is, absolutely, I see people overpaying. And it's two different types of buyers. However, if you're already in the heating and air business, and you're doing 500 million or a billion dollars a year in sales, you can afford to potentially overpay a little bit because of what you're gonna get into savings and cost of goods, insurance, all these other things. There's, there's a, you know, economies of scale there. And so for those people to do it, it makes more mathematical sense. Where I see the hazard is somebody trying to get into the business, to just starting out overpaying. Because they're not going to be able to have cheaper cost of goods, they're not going to be able to lower costs on these things. Because that's their first entry into the market. And so that's where I see the danger, right? Now, the question about when do I see it coming down? You know, unfortunately, my crystal ball works half as well as anybody else's. But the reality is, it has to happen soon, because because of all the pressures outside the interest rates, bank issues, employee issues, all these things that are happening, are absolutely going to have an impact on the sale of heating and air.

Ed Mysogland 13:11
Yeah, I agree. You know, the funny thing is, like, especially you alluded to the, the, you know, the buyers were, this is their first entry into entrepreneurship. And they got, they got wrapped up in the competition with competing with some of these others that are growing through acquisition. And, and, and they ended up being the winner. Because, you know, just by virtue of being willing to pay probably more than they should have, I guess my question is, how most of them are funded by the SBA. I'm just curious to know, you know, how, how they some of these deals got penciled out, you know, how, how did they manage to, to get that level of funding as an individual buyer? And, again, it's, this is Crystal Ball stuff, but it just, it just seemed so, so atypical for a government agency to throw that much money at, at this type of business. Do you guys sit down? You're way too?

Patrick Lange 14:13
Yeah, great question. And so a lot of the deals where I've seen people overpay, they weren't SBA deals. I do a lot with a lot of banks, and they've got a division that lands just on heating and air. So they know the market and know that segment extremely well. And it wasn't, it wasn't nearly as challenging, obviously, to get a deal at 3% interest as it is at 8% interest and making a cash flow, right. And so in those environments, when SBA is involved, I've seen the seller have to be more creative and be willing to take some risks and hold a bigger note and put things on standby kind of stuff. So So that's part of it. The other part where I've seen this overpaying is these guys that worked for huge private equity firms. They were buying up Heating and Air companies, they saw it on their side. And they've gone on their own, got a little bit of backing from people they knew in the industry. And now they're out buying it. And so, so oftentimes there's not bank financing in place. It's it's done through investor financing. Yeah.

Ed Mysogland 15:22
Yeah, it's, uh, you know, and the and the other side, you know, if I'm a bank, I mean, I know that this industry is not going away anytime soon. So, you know, the, the, the likelihood if I have to, to retake it, or put it into receivership, or whatever I have to do, chances are I'm going to recover some of them some of some of whatever I have outstanding. So I do I do understand, I do understand that. It's just one of those funny things where, and I'm certain you've seen him too, where it's like, oh, my gosh, do you know how much how much leverage you're putting on top of yourself? And, you know, welcome to you know, welcome to small business ownership, you know,

Patrick Lange 16:05
yeah, you know, it

Ed Mysogland 16:07
is it is what

Patrick Lange 16:10
led me to cut you off there. Sorry about that. But the you're absolutely correct. No, you're good. One of the reasons, one of the reasons I bought a heating and air company is a smarter man than me told me one time, you know, I've lived in Florida my whole life, and I don't know, a man brave enough to tell his wife in the summer, he's not fixing the air conditioner. You know, that's, that's it's not anymore. And so. So that's one of the things one of the one of the good things about the industry. But I think you're right, you know, with this leverage that people are putting on there, and I kind of preach to buyers, is, you know, if you overpay, you're going to be chasing your tail the entire time. And many of these companies have had great years, the last few years, people were home for COVID, they were investing money, there's plenty of money going around. So it may be on an inflated number of not what the business normally is going to do. And now you overpay on that. And you're setting yourself up for a bigger challenge than you should.

Ed Mysogland 17:10
Yeah, and and the funny thing is that, you know, it all works out in the end. I mean, we were just talking earlier, I mean, SBA has a little less than 2% default rate. So, you know, you may not make as much money. But you know, it doesn't seem as though that there's as as much of a default alarm that I'm that I'm making it seem but just like so just as a as an appraisal guy, I sit there and just cringe when, at some of these, some of these valuations that I've seen, you know, it's like, wow, and that is a lot of money for you to be risking, but such as life, I mean, that that gives that gives you a mere reason to get up in the morning. All right, so. So one of the things, I guess I want to now focus on the owner of the of the company, you know, how, you know, what are the the typical challenges that they face and selling a company like this? You know, we all know that the guy that has M has, you know, health problems and things like that, but I guess I'm looking at, you know, is there a way to prepare? Is there are there things that, that the HVAC owners should be sensitive to that, you know, these are the hot buttons that any buyer is going to be examining?

Patrick Lange 18:38
Yeah, absolutely. So, so I preach every time I get to that there's four things that they should focus on. And many of these owners are technicians turned owners, so they great Heating and Air people but never had any business training or business knowledge. They've just got up and gone to work everyday and taking care of people fed their family made some money and done a great job. But nobody ever said, Hey, this is what a buyer is looking for. And so I try to spend as much time as I can, educating those people on that because they don't know where to go for that information. And it's four basic things. One is, is focusing your business on service and repair, building relationships with your customers that they call you, as opposed to calling somebody else. The second thing is staying away from new construction. Once again, buyers are scared of new construction and won't pay much money for it. So I tell people to stay away from it. Not that you can't be in the business and make money doing construction. But if the ultimate goal is to sell, they're not going to pay you the most money for a business focused on new construction. So don't focus on that. The third one is to get themselves out of a van. So many businesses, the owner is the entire business and they don't really have a business they have a high paying job. And nobody calls me saying hey, I want to work in the sun for for 14 hours a day, and then go home and do paperwork, and so putting people and putting those systems in place, so that they can do that. And then the fourth thing, which probably should be the first thing is cleaning up their books and records. As you know, Ed, and you look at tax returns all day, every day. Everybody likes to be creative when it comes tax time. And, and I, I jokingly say you can't get paid to steal twice, you can't steal from the federal government and expect somebody else to write you a check for it. And so, so cleaning those things up. So I, if somebody will do those four things and continue to grow their business, they'll absolutely have a big payday, and they will have a problem finding a buyer to buy their business. Yeah,

Ed Mysogland 20:44
I agree. So when you're when you're working with these types of buyers, I guess I'm looking at, you know, I've always I've always looked at the buyer pool is you have your individuals, you have your strategics and you have private equity. I mean, are are those the same buckets of buyers that you're seeing as buyers for a cheap HVAC shops? Yep. Exactly. And, and are is their investment thesis or the you know, the reason in the end, what they're willing to pay differ depending? Like, for example, I'm saying the financial buyers tend to be the lowest, the lowest pain ones, strategics and private equity are kind of a toss up, depending on where the economies of scale are. I mean, are you seeing like the, I guess, where I'm headed? Is the investment behavior of the three buckets? Do they? Do they differ on how they approached the opportunity? And it may be based on size? But how do they how do they approach

Patrick Lange 21:46
it? Yeah, absolutely. There is. And so on some level, because the market has been so strong the last few years, in order to buy a company, many of these buyers are having to go above where they would normally be willing to go from a multiple or from a transaction standpoint. But definitely I have a lot of people that will look at a business and say I love the business, there's no way we can get close to that asking price. And that same week, I'll have three offers at or above x. So yeah, there's definitely a difference. Imagine their theory and their math. And science has something to do with it. Location has something to do with it. And I can tell you an operator, a regular operator, that's fine, that's growing through acquisitions is not going to pay nearly what the others because they know what, what bad days look like in bad months. And so they understand that entire side of it as well.

Ed Mysogland 22:50
Well, the Yeah, and one of the things that these different types of buyers, I guess, from from where I'm sitting, I'm just curious to know, how it's not so much. You know, the motivation behind why they're there buying tends to be to be the driving factor. But, but from a if I'm a business owner, you know, how do I how do I expose the business to those different types of buyers? Without anchoring myself to a lower value? I mean, I know up here, like some of the larger deals, you know, we seldom put an asking price on it just because every everybody's going, you know, we'll do the valuation work on the back on the front end. But you know, we go to market without an asking price is that is that the best way to to make sure that you're exposing it to all three buckets of buyers for maximum value? Or she's just, yeah, yeah, here's my number. Let's see who's gonna who's going to I don't say fight but who, who doesn't make sense for

Patrick Lange 24:04
ya, you know, what I see a lot of successful brokers like you go to market without an ask, that's never been something that I've done. I'm I'm a lot of my deals are smaller deals. And, and so with those people, that I want to make sure that, that when an offer comes in, they understand what they're saying yes or no to. And so by doing the value of front end and saying, here's, here's the range, we believe that it's going to sell in and here's the why behind it. Are you okay? They're not because if you're not, there's no sense going through market, you know, how much work it is how much how emotional it is dealing with buyers and sellers and all the process that goes through that. So so my preference has been to set the price and go to market, potentially, but do are we losing something that some But he may have been willing to pay more. I think that could that potentially could happen. But but by me doing it and air all day, every day looking at these deals, looking at the numbers tracking it so well, I'd like to believe. And I'm pretty darn confident that where we're going to market is where we're supposed to be.

Ed Mysogland 25:22
And, you know,

Patrick Lange 25:24
I'm also, I'm going to cut you off there, I'm also not the broker that says, it's a $1 million business, let's price it at 10 million and see if we can get somebody to buy it. I want to, I want both sides walking away, feeling that they got a fair deal. And this is somebody's legacy that they're taking over. And I want them to be able to feel comfortable about the buyer to call the seller and say, Hey, Mrs. Smith had a question. And I want the buyer to be willing to answer the phone. Because if, if it became this brutal negotiation of somebody had to lose, I think you lose some of that. And so all of that ties into my rationale whether it's right or wrong, that's, that's what, you know, I want everybody to to leave his friends, and think that I made too much money in the transaction. And so if that happens, and everybody's okay.

Ed Mysogland 26:16
Well, you know, and I'm with you, and I'm glad, and I'm glad you said and often, oftentimes, yeah, oftentimes, you bump into a situation where, you know, this is the behavior of an investment bank, as opposed to a business brokerage. And to me, I, I'm, I'm in your camp, I think it's, it's better to go to market, you know, this is, this is what pencils out this is, this is the deal, and, and we can make the numbers work. And we all understand that hat, the numbers have to work in order for it, you know, to get a successful deal. So, so being elusive of the asking price to me, I I'm with you, I think it's a I don't think you're doing yourself a favor, because the first question is, how much are they looking for? So why don't we? Why don't we just cross that bridge right now? You know?

Patrick Lange 27:06
Yeah, it's on the front page of every every summary, I send out said, Here's what the asking price is. And It either makes sense, or it doesn't. And it has to make mathematical sense for both sides. And if it does, let's keep talking. And if it doesn't, it's just not the right deal for you. Yep. So

Ed Mysogland 27:27
earlier, we were talking about books and records. So on financial performance, I know we bumped into COVID, I think there's kind of everybody kind of got their arms around with, alright, this kind of stress tested the business. And that's, and that's a good thing. You know, these either extremely high highs, or extremely low lows, we recognize 20 and 21 are probably outliers, either good or bad. And so we just carved them out. But when you look at your at the financial performance, you know, what are I mean, are you are you taking? Look, these are all the data points of all the companies I've sold? And this is how you stack up against them? And are there any particular KPIs that you're sitting there going? Yeah, this if you if you're going to track something, this is what you need to be tracking?

Patrick Lange 28:17
Yeah, couple of things. First, is going to be gross profit. With with COVID, and supply chain issues and equipment costs have gone up drastically. And many owners I've seen haven't kept pace with those, those rise in prices. So tracking their their gross profit to make sure that they're charging what they shouldn't be charging, because then at the end of the day, it all falls down to the bottom line anyways. And so that net income, as well as a breakdown of revenue from from service versus repair, and installation, as well as any new construction exposure. Once again, we're trying to minimize that or eliminate that. And then how many maintenance agreements are in place? is another thing. And we're also seeing now direct correlation to online Google reviews. So buyers, your when they get the packet for me, one of the first place they're going is Google and saying, what's the general public saying about them? publicly?

Ed Mysogland 29:23
Yeah. Yeah, it's funny. We just we just had my home. We just had our HVAC service. And I'm telling you that, you know, they were, you know, they were right on us. As far as Google reviews give us the stars. I mean, that guy wasn't I don't think he was out of the driveway. And, and we were getting that Which to me by where I'm heading with it is, is the technology side, it seems it seems as though those folks that that have that streamline process are I have to assume that they're they're more valuable. Just just by virtue of its streamlined, it's there's a process rather than, hey, I get back to the shop, and, oh, I gotta contact Edie and see if he'll give us a Google review, let me drop him an email or quick call instead, you know, here's a text, here's the link, you know, give us five stars, how was Tyler, he was a good, you know, all the all those all those prompts, that that reduce the friction for them to get the Google reviews because I agree with you, I do believe that there's a direct correlation to premium pricing, premium value, as well as premium pricing when you when you have 1000, Google, you know, five star reviews on Google.

Patrick Lange 30:39
Perfect. So. So yes, it does make the business more valuable with those systems in place, because then it allows somebody within no industry experience, if there's a system there for them to buy and plug right into and many are doing that with technology will CRM systems and those types of things, to be able to make sure that Google reviews getting sent out and when when the technicians on your way to your house, they you get a text saying Here comes Jim, he likes long walks on the beach and spending time with his wife, and you know, that kind of stuff. And it's all funny. Yeah, it's all automated. And, and so those investments in those interest in those businesses have a big impact. And it translates directly to the bottom line. Many of the, I'm gonna say this politely, many of the older owners that are that are pure technical guys don't do any of that stuff, and don't think it's important. And think it's a waste of time and money. And those are where people with no industry experience and come in with some technological experience, can buy a company like that often buy it cheaper, because they're not getting the profit potential that they could be getting, if they had these systems in place, and able to grow that business rapidly. So those are some of those success stories on the buyer side.

Ed Mysogland 31:59
Yeah, you know, what, and it's funny, and you and those, those businesses without websites, those businesses, though, all those types of businesses that are out there, you know, that are lacking technology, you know, those are prime targets for for the folks that can bring some technology, and they they get wonderful, wonderful deals as a result of it, because they can immediately bring efficiencies and, and, and a different a different skill set, you know, to amplify, you know, the the growth of the business and subsequently value. Dependency, you know, it's funny, you know, we always talk about, you know, the business owner kind of being being the guy, when there's, when there's this many when there's such a demand for this type of work. Meaning employees, you know, if to me, it seems like the risk increases with with, you know, though, with those employees being flight risk, so I guess I'm curious to know, have you seen any, any means that these business owners have been able to retain the talent, because that's a direct, you know, that will be a direct relationship to their value.

Patrick Lange 33:29
The ones that I see that do the best job at it typically train their own employees in house, so they hire for attitude and train for aptitude, they bring somebody in with no industry experience whatsoever. And they either through a, a school, they have in their own business, train them through the to become a technician, or send them off to other schools. But that seems to be the biggest sticking point, because now that technician hasn't been at 10 Other companies and doesn't have anything to compare it to, he hasn't been around the, the this place thinks guy and I'm going over to this company, because they're a lot better kind of stuff, you know, they haven't been exposed to all that, or the bad habits that come with it. And that young guy typically is what it is, or girl is, they'll normally not have a career path someplace else. And they're able to bring him in often at 12 or $15 an hour. And within a couple of years, they can be making $100,000 a year. And so they've given them something they've changed their life. And so that's what I've seen work best across the board.

Ed Mysogland 34:39
Nice and, you know, it's funny you say that because we I know a number of companies within within, in our market area that are trying to do the same thing that will bring you in, we're going to teach you we're going to you know, just like you said grow you into our business and I think that's a I think that's A fabulous way to do it. The the priorities. This is, you know, if I'm a if I'm a HVAC guy, and you just sit there and you're like, oh my gosh, not another, another guy with a podcast telling me another thing I need to do. So having having said that, what are some of the, what are some of the priorities that HVAC companies should spend their time on? If they're gonna focus on on doing something? What should it be?

Patrick Lange 35:36
Yeah, you know, once again, I go back to the four things that I said before, I think the easiest one to start with, and the one that has the biggest impact is cleaning up their books. And that's something that they can do in house, stop having the business stop treating the business, like your personal checking account. And that's not just heating and air, that's any business. You know, I mean, I think that that's so often we get ingrained in us that minimizing taxes is the ultimate goal, when it's time to sell, that's not the ultimate goal. And so that's where I would start getting themselves, the next would probably, if they're a small company, getting themselves out of the van, because you can only fix so many air conditioners. And once again, if you're doing it all, you don't have a business, you have a job. And so that would be next, staying away from the construction. And then and then focusing on service repair and maintenance agreements. But cleaning up the books, where is really the biggest impact in you, you could probably testify to that in all the businesses you look at if you have a clean set of tax returns, versus a Where's Waldo of trying to find where the profit was in my ex wives, mothers condo that I'm paying for in Florida and all these crazy things that they run through. And so that would really start.

Ed Mysogland 37:01
Yeah, you know, and the funny thing is, and we didn't even talk multiples, and I know, multiples change. You know, but I tried to explain to the business owner, like, you know, just let's just say you have a four multiple, I mean, look for just for the sake of argument, you know, when you when you increase your profitability by 20%, that's that you get four turns on that 20% versus worrying about the valuation multiple that, you know, everybody shows up here. And they're telling me, you know, what the multiples are, and I'm sitting here saying, like you, why don't you stop worrying about the multiples and start worrying about your books and records? Because that's going to make a greater impact than, then certainly these multiples, so I'm assuming I'm pontificating, but I'm assuming you're in the same camp with that.

Patrick Lange 37:55
Yeah, absolutely. Just, you know, putting that into real numbers, let's assume that they're, you know, they're saving. They're, they're being creative with $100,000 of income, that could be profit, you know, maximum, they're saving $38,000 on that, use your for multiple, if they would sold it, it would be $400,000. So, so they're 400,000 to save 38,000 in taxes. I mean, it's just mathematically it never made sense to do it that way. But once again, I think it's been ingrained in us that save taxes, save taxes, save taxes, instead of be profitable, be profitable, be profitable.

Ed Mysogland 38:36
Do you think that exit planning that Exit Planning works? Well, in HVAC? I personally, I don't want to say I don't I think I was the point of the question. I, I keep on seeing, you know, those industries where there's a lot of market where there's, you know, there where there is, hey, I know that there's a market for my business. It seems as though there's not a whole lot of planning that that happens. Do you do? Do you find that the same? In the HVAC space? Yeah, I

Patrick Lange 39:10
do. But I think, I think by not planning people are leaving so much money on the table. We know we're talking multiples. I've sold in the last 12 months, I've sold some companies for a two time multiple. And I've sold to companies for 13 times. We're talking millions and millions of dollars of difference in what they're putting in their bank account at the end of that sale. And one because he was around people who were telling him, here's what you need to focus on, here's what buyers want, here's how you have to do it. And the other one didn't know anything existed and just assume that he heard these other people getting 10 Time multiples and so he was too and so I think there's not a lot of it and there's not enough of it that takes place. But there should be If, and I think people are leaving lots of money on the table by not doing.

Ed Mysogland 40:07
I, I do agree. And I The funny thing is that I saw, I saw the Pepperdine private capital markets survey for the for the first quarter. And the survey said that 70% of the people that sold their business had done zero Exit Planning. I mean, just went to the market. They said, Yeah, yeah, today's the day. And, to me, that is just astounding. And I totally agree with you that, you know, if if nothing better, you know, have that exploratory conversation with you and say, hey, you know, what, what does this look like, you know, if I go to market, you know, and I'm certain you have enough data points that you can say, Yeah, this, you know, this is kind of where, what, what the market, how it's gonna behave toward your particular business. I mean, I gotta believe that you do that all the all the time,

Patrick Lange 40:58
all day, and I go to every heating and air across the country, and I stand on a stage and I say, I don't care if you want to retire. 10 years from now, call me now. And let's start looking at your numbers, even if you don't do business with me understand what buyers are looking for. Because the reality is you and I both know, for most people, it's the biggest sale of their life. And for most people, they've never done a present work. So if you've got the biggest sale of your life, and you've never done it before, it would make sense to me to spend 10 minutes with somebody and say, Hey, what is it worth? And what would it be worth a couple of years from now just ask those two questions. And, and we can steer them in enough in the right direction that it would have been the best 10 minutes of their life. Because if they would just listen to a little bit of it three years from now, five years from now, it's going to be worth so much more, you will never do business with us.

Ed Mysogland 41:50
Yeah, no, I agree. I in fact, I was, I was on a similar stage. And I said, Here's what you're up against. Let's look at these professional buyers right now that are just out looking for deals just like you, they'd look at 100 sims or for our audience, that that's the marketing information that that people like us give to qualified buyers. So you have at least 100 Sims that they've reviewed, they've made seven offers to get one deal. So just going into the sale process, if I'm a seller, I've got somebody that has 100 reps over me, like, I mean, that has have looked at have act actively engaged with a seller. So that seller is so woefully outgunned when they hit the market. And, and that's how they take it on the chin. And they and they just don't know what they, they, they're glad that they sold, but they have no idea how much money they just left on the table. Because those guys, the people that are looking at him are professional buyers. And they know, they know, they know what they're doing. And they know the hot buttons, because they have the reps behind them to do it. So I'm with you, my friend.

Patrick Lange 43:01
Yeah, and I got three more No, I couldn't agree more, you know, what these professional buyers, these your Harvard MBAs CPAs they can do more with a spreadsheet than that I have any clue. And they know my sellers numbers better than my seller. And so I tell them, You're gonna go pick a fight with somebody who spent the last 12 years in school analyzing financial data. And in his in his, like you said they've looked at more tax returns in the last two weeks than most of my sellers ever have in their life. And now you're gonna go get an argument on how much business how much your business is worth, and how much money you're making.

Ed Mysogland 43:42
And the only and the only leverage you have Mr. Seller is that you, you have the business. But they have the they have the checkbook to get you out of there. And then and you know, and we, unfortunately, especially with the aging demographic, especially in these HVAC businesses, you know, these people are aging, aging out. And the last thing you want, you know, I've broken and I'm certain you have to, I've broken a lot of hearts with with value. This is what the value of this is the likely selling price of your business. They say, Oh, hell, I'll go back I'm gonna keep it for a while. And then all of a sudden health we've got a health situation. And now all of a sudden that bit that value has gone just right out the door because of all the things you've already mentioned as far as you know, being part of the business not getting out of the truck. There's nothing we can do you know you but you just don't want that value penalty if it can be avoided. So

Patrick Lange 44:42
sad. I I joke and I it is a video I did a YouTube video on it. It's called your baby's ugly. And I did it just because it helps take my mind off the you know, sitting across the table from somebody saying, hey, you've spent your entire life building this and there's No value, this baby of yours, nobody wants. And that's if you would have called me 10 years ago, I could have saved you from home this or called somebody. And even if it's not me just call somebody. So you know, what you're building potentially can have value. And it's sad to have to sit and have those conversations. And so that's kind of my, my mission is to at least get people the information, so I don't have to keep having as many of them.

Ed Mysogland 45:30
100%. And now and again, you know it? Yeah, folks like you do it. Right. Yeah. And that's that, to me is is, is really is really the big, the biggest difference is that, you know, this is this is a consultative process. I mean, the chemistry may not work between you and me. But the bottom line is you need you need before you go to the market, you've got to educate yourself on what you're looking at. And it does, and it may hurt your feelings. And that value may not correlate to your retirement plans. But nevertheless, at least you know, what your look what, what, what's going to happen. All right, you got time for a couple more questions. Absolutely. All right. So we haven't talked, we talked a little bit about customers residential versus commercial. But I guess, I guess, how do you diversify your clientele? I mean, who? What's the best way to do that? I mean, is it is it look, steer clear from the end, you've said it a couple times to steer clear from new construction. So that's one way to to, to diversify your customer base is not to engage in, in those large new construction projects, but any other ways are in and I'm speaking for you and I may be totally off. But any other ways that that you get if I'm a seller, what do I need to diversify in order to make it more appealing?

Patrick Lange 47:03
The reality is, diversification is typically not very beneficial when selling your heating and air business, buyers love simplicity. And the same thing over and over again, so many people would think well be good to have some commercial and good to have residential. Well, the reality of that is now you've got a technician who has to be trained in different things. So we've already realized it's hard to get technicians now try to find one who can fix refrigeration, and Mrs. Smith's air conditioner house. And that's, that's two different animals, oftentimes, also, the way the business model is set up, you know, if your focus is on commercial, oftentimes you have to be 24 hour company, and, and many times respond in under an hour to, you know, if a restaurant is got $100,000 of food in their freezer, they can't wait till tomorrow and tough it out till you get there, they need somebody there to fix it immediately. And so, so, so they're different business models. And really buyers love the simplicity, they're all of one all commercial and doing that extremely well are all residential and doing that extremely well. Now, there are certain scenarios where commercial bleed over into residential where it's a small unit on an office kind of stuff. So it's really residential equipment, we'll classify it as commercial, but it's really just residential equipment on a commercial building, and so that doesn't take away from value. But certainly diversification does. Again, so I guess

Ed Mysogland 48:40
I want to wrap it up a little bit from a, from a success story. And I guess I'm, I'm interested in, in one of those, one of those Pinnacle type deals that you know, and, and we have some of those, and I guess I'm just curious, you specialising in the space, I'm curious to know, you know, what, what is at the top of the heap of you know, what, this was a great, great deal. And can you give me the story behind it?

Patrick Lange 49:11
Yeah, so I, I had a seller who was actually a buyer of mine. He owned a size Heating and Air company and when I would list small Heating and Air companies in his area, he would potentially buy him. So he bought two or three companies from me. And we and this happened over years, a number of years. And he would always pick my brain about what do you see in the market? What should I do with this? How about that? And he was always inquisitive, always asking, you know, where's the market add what what about this? What is a buyer think of this? And, and he said, You know, I'm probably still five years off from selling but if, if the numbers ever get stupid, call me. And I said okay. And then and then he III, the market kept heating up. So this was probably six years ago, initially, maybe seven years ago, something along those lines. And then I listed a bigger company by him. And he saw the listing and called me and said, Wow, that seems a little overpriced. And I said, Well, you know, you and I were talking about the market getting stupid, you know, keep an eye on it. So a buyer called me to buy the other listing and said, Listen, it's a little small, if you have something else there x size, and this was a strategic buyer, backed by private equity, doing a billion dollars a year in heating and air probably at the time. And they said, if, if you have anything within this parameters, we'd be interested in Nice, well, I've got something within those parameters, but it's going to take a lot of money to buy it. And, and they said, Well, you know, what's a lot of money? And I said, Well, I think if you've probably you've probably looked into the 11 or 12, time multiple, and they're like, Wow, we'll do it. So I called them up and said, Hey, you said it, but ever got stupid, it's stupid. And he said, what is that? And I said, they agreed to a 12 time multiple. He said, I tell you what, if they'll go to 13, they can own it. And they did. And they bought the company out and retired early on what I would think is a pretty crazy multiple for me, the company was doing about a million and a quarter in net earnings. So it wasn't a huge company. Wow. But but he was able to certainly cash a very nice check. Wow.

Ed Mysogland 51:37
And and the the multiple you're referring to that that's on on net or even

Patrick Lange 51:43
on seller discretionary earnings on SD? No,

Ed Mysogland 51:49
no way. That is insane. You know, the funny thing is, yeah, I was telling you that I wanted to, to to

Patrick Lange 51:57
meet a a

Ed Mysogland 52:02
my friend Marsha Barnes of valve and meter who specializes in in this kind of work in marketing of, of HVAC companies. And she had that she, she had asked me about about multiples that and I always assume it's EBIT da when it gets that high, but SD that. What a crazy wonderful opera. You know what, great for you great for him. I just, I didn't I've never seen st a multiple Veski that high. What, uh, what, uh, oh, my gosh, good. Good for you and good for him. Yeah, they wanted to know how they do it.

Patrick Lange 52:44
Yeah, well, they're still pretty big. So they're doing okay, it was a it was a good deal for them.

Ed Mysogland 52:50
Oh, my goodness, good. Good. Good for them. For everybody

Patrick Lange 52:55
to read. They all left happy.

Ed Mysogland 52:57
So that's, that's all that matters. So my my last question, I've asked it for all 85 episodes now that, you know, what's the one piece of advice that you give listeners that would have the most immediate impact on their business? And so I don't want to speak for me to speak for you. I'm assuming you're gonna go back to the four things that you mentioned. If you're a seller, right, so you got something you've been hold? Yep. If you're a seller Are you are you holding out? For for the grand finale?

Patrick Lange 53:32
No, I wish I should have I should have put that one in my back pocket. No, I think you're a seller. That that's those are the things that I would do. It's so simple, but people aren't doing it. And that's why I keep preaching it preaching and preaching it, because it's easy to do. But it's also easy not to do. And so if they would do it, and I think if so, and then a little nugget for buyers is is Don't get emotional. And worry about missing a deal. I think I see people overpay because they're afraid there's not going to be another one. There's a lot of heating and air companies out there and a lot of them come up for sale and don't overpay for something. Because you're afraid that somebody else is going to get it. It needs to make mathematical sense for you. So on both of them, it's kind of watched the numbers but from a different angle, I guess. Yeah.

Ed Mysogland 54:27
Well, that's a good one. So my next question is, I shouldn't say my next question, but it is a question is what's the best way we can we can connect with you?

Patrick Lange 54:36
Yeah, absolutely. So I'm active. I my website, of course, business modification. group.com. I'm active on LinkedIn, on Facebook, on YouTube. I've got a YouTube channel where I do little minute to minute videos on buying and selling in the heating and air space and things to look at so so reach out any of those areas. I'm happy to help any way I can.

Ed Mysogland 55:02
Well, we will have all of that in the show notes and, and especially the your baby's ugly video.

Patrick Lange 55:14
It's on there.

Ed Mysogland 55:15
Make sure we've got that one. Right. Patrick, I, like I told you, from the get go that this is one of those industries that everybody is dying to talk about. And I and I'm so grateful that we had the chance to chat your your every, every bit of every bit as good as I'd hoped you'd be. So thank you for, for taking your time and helping the audience.

Patrick Lange 55:41
Hey, thank you for having me. I really appreciate the opportunity. I mean that if anybody if I can help anybody, reach out if there's anything I can do, even if you're 10 years off from retirement, I'm happy to point you in the right direction. And I'd love an opportunity to help so thank you for letting me come on. I had a great time.

Ed Mysogland 56:00
Well, it was it was a great time and I look forward to getting down to Florida meeting in person well these days. So thanks again.

Patrick Lange 56:08
Absolutely. Thank you have a fantastic day.

Ed Mysogland 56:11
You too, my friend.