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The Sharpest Tool™

Patrick Lange Part 2 | How to Successfully Acquire or Sell a Home Services Business

Patrick Lange is an experienced HVAC business broker heading up The Business Modification Group. Coming from a unique background in financial planning and owning an HVAC business himself, Patrick shares why you shouldn’t fear focusing on one area of expertise as well as how to sell or acquire a new business.

Josh Smith (00:03):

Hello, everyone. Welcome back to the sharpest tool where we take the sting out of marketing with everything that we're bringing to the table. My name is Josh Smith. I am your host. And today I have the special opportunity to bring Patrick Lang back into the booth here today for actually our second video recorded podcast episodes. So we're really excited to have you back, Patrick, welcome back to

Patrick Lange (00:23):

The podcast. Thank you so much for having me. It's a pleasure to be here for those

Josh Smith (00:26):

Who missed our first episode, Patrick has got an, uh, he's an experienced HVAC specific business broker with the business modification group. Patrick has got a unique background in financial planning has even owned his own HVAC business himself. And so this is our second episode, like I mentioned with Patrick, if you missed the first part, you'd definitely want to go give it a listen, but Patrick, give us a bit about the kind of elevator pitch from the first episode. Just so everybody who hasn't listened to it knows who you are, where you came from

Patrick Lange (00:50):

A quick history of me, I guess we'll call it. I had owned a financial planning company for my early part of my adult life. And I sold that and got into the service businesses, bought a swimming pool service company initially, and then became a business broker. And through that process eventually focused my practice just on selling heating and air. But along the way, I did buy a heating and air company, ran it for two years and now my son runs it today. So that's the snapshot of me from episode one.

Josh Smith (01:16):

There we go. Short, sweet to the point. You definitely want to dive in more. If you haven't listened to it, there's a lot of great nuggets in there, but today I actually want to focus on your current business, the business modification group. So tell the listeners who might've missed the last episode a bit about that particular venture.

Patrick Lange (01:32):

I am a business broker who just sells heating and air companies across the country. When I initially started out, I was just in Florida, then it became kind of the Southeast. And then through articles I write for different industry publications, safety, insider, ACR, HR news, those type of things. They spread around the country. And so I decided, well, maybe something I could take nationwide. And so for probably the last year, I have been selling companies all around the country and in the last three years, I've sold more heating and air companies than anybody. So it's kind of a joke and kind of a brag best when you're the only one kind of doing it. A lot of brokers, a lot of great brokers out there who sell heating and air, but I exclusively do that. And I think that that kind of makes a difference both for me as well as for my clients. Yeah, definitely.

Josh Smith (02:14):

You know, I know I've heard in the broker world, you know, there's a lot of people who are nervous about losing out on opportunities if they go niche. Uh, is, is there any validity to that and what's been your experience with,

Patrick Lange (02:25):

Yeah, that's been my fear about every business forever on my whole life. I've always hear a niche niche niche, and I've never done it, pure fear. Um, it's been the best thing that for me, from my business perspective, and now that I look back, I think really for my client perspective, when I was selling bars, restaurants, convenience stores, if you came to me with a flower shop, I couldn't add any value because it had nothing to do with liquor license or how many seats are in a restaurant. So I was limited on the value I could provide. I feel that now by focusing, just on selling heating and air and obviously owning a heating and air company as well, that I think it allows me to deliver more value to you. And so it was my biggest fear, best decision I've made. And I think it benefits not only me and my business, but my, my client's businesses as well.

Josh Smith (03:10):

Let's talk a little bit about some of the things maybe you've learned since going niche and how we can potentially cross apply it to a home service business owner. A lot of them have line extensions, right? You have your HVAC, plumbing, electrical companies, and that's not to say that you can't do those well, but there's probably a specific path that you got to take in order to do those well, versus just having a solid focus in one area. What are some of the best things that you've learned about since going in more of a niche direction and what are some of the things that you would like advice you would give somebody who's thinking, man, I got to diversify myself since you've been there in that, in that world.

Patrick Lange (03:45):

Well, I think the biggest thing is educating yourself, you know, because the more value delivered to the customer and that's whether you own a heating and air company or a plumbing company or an electrical company, or you're selling them, I think the more value delivered, the more people seek you out. And so, and it takes time. You know, initially I was telling people I only sell heating and air company and I sold three or four and then it became 10 or 12 and then it became 20 or 30. And so each one that I sell, I learned a little bit more in that education process allows me to once again, help my clients more, but it allows me to get around more people were just doing that as well. I think, sure. I think success leaves clues in any industry. And, and I think in the trades, it does even more.

Patrick Lange (04:26):

I mean, it's incredible the people that I've met and you and I talked prior to recording this about industry names that we know that are giving back. And there's so many different ways that people do back, whether it's through groups, whether to organizations like yours, whether it's through a podcast like this. So I there's so many places for people to find information. And so that's, that's all I do. That's when I listened to a podcast that's heating and air related. When I read a magazine it's heating and air related, when I'm at an event it's heating and air related. So I immersed myself in that and that would be my advice for whatever Nick house is going, looking at, going to. And I think once again, success leaves, clues, find those people and listen as much as you can.

Josh Smith (05:04):

Yeah. Being an expert. There's something to say about being an expert in whatever you're doing. If it's turning a wrench around, uh, you know, for pipes and if you're a plumber or if it's a, you know, fixing HVAC units, being an expert, there's a need for expertise. And, uh, I think so often we take the Jack of all trades mentality.

Patrick Lange (05:21):

The little bit I did sell selling. And in my use my business as the example, I was scared that there's not enough heating and air companies sell or, or any niche at that point. I mean, I was just selling whatever, whatever anybody would let me sell. And so, but I realized that there are, and I think there is a need for an expert just like, um, I'm not going to call a plumber to fix my air conditioner. I'm a call heating and air guy or girl, and same thing. I'm not going to call a heating and air person to fix my plumbing. Unless obviously they offer multiple trades in their business. That's different, but I'm saying, that's the moment of call. I'm not going to go to my attorney to do my taxes. I'm going to go to my accountant to do my taxes. And that was the approach I've taken and knock on wood. I've been blessed that it's been successful. Yeah.

Josh Smith (06:04):

Yeah, absolutely. You mentioned you were for a while, you know, and I don't know, is this still the case that you are the only broker who solely focuses on HVAC or have you found other players come into the market? Yeah.

Patrick Lange (06:14):

There's others that are starting to pop up and there's another competitor. I wouldn't even call them competitor. There's another, there's another company based in Florida that does all traits. So they do plumbing, heating and air and electrical where I just do heating and air. As far as I know, I'm the only heating and air of one night. I see a lot of people focusing on it, trying to get into that space now, because I think they see that there's a lot of activity. Sure. I think COVID amplifies that you look at the trades once again, we've we talked in the last episode that my wife and I have done with that a lot, but we always have cold air in the summertime. And so I think during down economic times, people still want the air conditioner to work. And, and so, so I think other brokers are seeing that opportunity and going after that market, but nobody that exclusively does that I'm aware of.

Josh Smith (06:59):

Let's talk a bit about somebody who wants to sell their business. All right, are they, that's part of their exit strategy. They want to build their business app, get it, make it attractive to people so they can have a private equity firm come in and purchase it or another HVAC company coming to purchase it. What are some of the steps that they need to take today? If they haven't already taken them to give them the best opportunity at getting what they ultimately want for the company when they sell?

Patrick Lange (07:23):

I think there's four things to focus on. And if you focus on those four things, you'll have a very sellable business, whether it's to a competitor, to somebody wanting to get in the industry, or like you've mentioned a private equity group. And the first thing is clean books and records stop treating your business like your personal bank account. And you're running all these expenses through it. And the theory has always been trying to save taxes, trying to save taxes, trying to save taxes. Well, you can't pay to steal twice as what I tell people, you can't cheat the government and expect somebody to write you a check for that. So you have to make the decision. Is it better for me to save money on taxes or might you get a higher, multiple down the road? And I can tell you mathematically, the answer is pay the taxes and claim the income, and then you'll be able to get that money down the road.

Patrick Lange (08:02):

So clean books and records taking yourself out of the truck, because if you're the only, as they call Chuck in the town, you're the only guy out turning wrenches. You don't have a business, you have a well-paying job and fantastic, great for you. You're making great income, but don't think your exit strategy is going to be somebody selling it because that's not what people are looking to buy. Third thing is focusing on service. And so service over new construction buyers are scared to death of new construction, especially during market ups and downs. And so the more service that you focus on that your business focuses on, the better it's going to be in the final thing is maintenance agreements and deepening that customer relationship. So I see a lot of companies that are offering multiple trades, doing it very well now, where it's a heating and air and plumbing company. And so they'll have a maintenance agreement that covers the plumbing and the heating and air. If they're just heating an air related, just heating an air focus, but getting into customer's homes more often delivering a better relationship with that customer, which leads to longterm profitability.

Josh Smith (08:56):

Yeah. I want to dive into that first piece a little bit, because you mentioned obviously clean books and records, and there are some things that you've seen that are not so clean when it comes to it. What are some of those things that you see that maybe a business owner does knowingly or unknowingly that you've seen lead to a problem for investors who actually purchase

Patrick Lange (09:16):

A lot of personal expenses run through the books. So paying for a husband or wife's one push payment as an example. So they're claiming it as a business expense and making a $2,000 a month payment. Well, that's not necessary for the business to run. And so they want to say, well, we're going to add that back in to what the profit is. Well, buyers doesn't see it that way all the time. So paying for vacations, paying for all the dinners. Um, and so all of these expenses that are technically business related and the IRS may frown upon them and may not, but using that as an adduction, but then when it comes time to Excel, expecting somebody to pay you back for that stuff, that's that Kate, that paid steal twice. Now

Josh Smith (09:59):

Let me bring it a little more practically, something like a vacation. Um, well what would you consider to be a clean book for an expense, like a vacation or an expense

Patrick Lange (10:09):

And listed in there. So if you're going to the AHR expo in Florida next year, and you, then you turn it into a two week trip at Disney. Yeah. You can't, if you're writing off the Disney trip, tickets, chances are, that's a gray area. And so those are the types of things that sellers say, well, the business just paid for it and it really wasn't a business expense. So I should get paid

Josh Smith (10:30):

Back. It was meals and entertainment.

Patrick Lange (10:33):

That's exactly it. So once again, I understand that as a business owner, I've been self-employed since I was 23 years old. And so I, I have been creative over the years with something maybe more than I should have, but at the same point in time, I wasn't trying to sell a business. And so the least amount of personal expenses that you can have in there, the better off going through.

Josh Smith (10:52):

So as a business broker, um, when somebody is getting ready to sell and that you connect seller with a buyer, what's the process look like for auditing the business?

Patrick Lange (11:01):

Well, the reality is that starts prior to finding that buyer. So when I meet with somebody, the first thing we do is go through the numbers through the books and typically go through three years of tax returns. Normally the bank is going to want to see three years of records. And so we'll get that together ahead of time. All questions answered. If there is an add back that may be a business expense that you have with the new owner, wouldn't have, we may look at adding that back in. And so, so we'll do that ahead of time. That starts then, then typically once an offer has been made and accepted, there's a lot of steps through that. But once we're at that point where it's accepted, they're going to have, what's called a due diligence period in most contracts will state. If they find anything they don't like and due diligence, they can walk away.

Patrick Lange (11:39):

And so they'll ask often for tax returns, usually three years of tax returns, usually P and L, um, to correspond does a tax return match, the P and L. And they'll also ask for bank statements. And so to make sure that what you're claiming on the tax return that on the P and L is actually what's happening in the bank. So that's typically from the financial side, that's where it is now a buyer who's experienced in the trades. They may ask to see what a CRM, whether it's housecall pro or service Titan or something else that they're using, they may ask for access to that, to look at ticket, volume, ticket pricing, that type of stuff, but from a normal buyer off the street, just looking at the numbers tax and terms P and L and then bank, state.

Josh Smith (12:19):

Yeah. I've even heard it too. And experiences that we've had dealing with business owners who are having investors come in or selling their business. They, they, if you're steeped in any kind of marketing, they look at the marketing and they look at do a whole full analysis on how your lead costs are, because what they're looking for is they're trying to see, okay, if we buy this business, they already have an idea where we want to take it. Right. And so they're saying, okay, is this set up to go where we want to take it? Um, has that been your experience as well as some of the deals,

Patrick Lange (12:45):

You know, on the higher end deals with more complex buyers? Absolutely. Okay. You know, and so I sell anything from a, you know, a company new in $500,000 a year in sales. So I'm doing 50 million in sales. And so it depends on where that buyer is. Is it a private equity buyer? Is it business experience? Is it an industry insider? That's looking to kind of gobble up some competitors or get to a marketplace. So at the higher end, the market, absolutely. They're going to look at everything I'm, they'll bring in. I did the deal in Atlanta a few months ago, they brought in 26 accountants and worked on COVID remotely. And so they were going through everything and put together a spreadsheet. My eyes were rolled in the back and it was spreadsheets, but absolutely they can be as in-depth, as you can possibly imagine, it's a big deal. And if you're expecting to get a big payday, you have to expect a little bit of work involved as well.

Josh Smith (13:36):

Yeah. So I, I know there's a new tax plan and like financing situation, the new tax plan has capital gains to like 40%. Right. That's supposedly coming in, how is that affecting all? This could be

Patrick Lange (13:47):

Huge impact. Obviously what happens in Washington, they talk about typically for a year before anything actually does happen. Yeah. But the reality is if you're looking to sell your business and the last I read, and this could be different now for people with income over a million dollars. Yeah. So that doesn't affect everybody. But if you're looking at having a higher income and selling a business, you can lose 40% of the capital gains tax, where right now it's only 20%. So that's a huge, huge impact. And that coupled with money being so cheap right now. And so I think that's driving some of the sales as well is because heating and air company, if you own a business, write down and you want to buy another one, I've got banks, that'll do with no money down finance over 10 years. And so you could buy companies with very little if nothing out of pocket. And so that's driving some of that sales as well, but, but the fear from a change in Washington at this point, I guess it hasn't even been, been solidified. Who's going to be president at this point, but based on what I've read that the capital gain rate is actually going to go to 40%.

Josh Smith (14:48):

Yeah. Also another thing that you've seen, you've been on the financial planning side, as well as the brokerage side. Um, so I'm sure these are some of the conversations that you have with business owners. Is there anything in the business brokerage world where if I'm selling my business and then I take in $3 million for the sale, it like you do with a house, you sell a house and you can roll those funds into kind of a new, another business or another investment. Is there something somewhere that happens there,

Patrick Lange (15:12):

There is much more complex. And you're talking about a 10 41 exchange for real estate. It's much more complex than that. It does exist. But the reality is most people, when they come to me, they're dumb. They're not looking to go start another venture someplace and they've got to sign non-compete agreements. So yeah. So if they were going to get back in the space, they'd have to do it 50 miles away or something like that. And the reality is most successful heating and air companies took a long time to get there. It didn't happen overnight. And so the thought to any of them to go start over again, doesn't make sense. So yeah, I've never, I've never had that happen with any of the sales that I've done. It does exist more complex. And once again, most of my sellers are going to retire to the thought of rolling into another business, but

Josh Smith (15:58):

Yeah, yeah. Yeah. So for people who are positioning themselves to buy, or maybe we've, you've sparked a, you know, a thought or an interest in them, and they're like, you know what? I think I actually want to continue to grow. And one of those ways I want to grow is through a merger or acquisition, right? What are for somebody who's new to that space? And they're thinking, well, I need to start finding a company that I can acquire, that I can roll into my business or continue to expand that way. What are some of the things and steps that they should take to actually go about finding a business that would be suitable for them?

Patrick Lange (16:27):

Great question. And, and, and I talk about this a lot and it's not normal for a broker to say this, but make don't buy anything until your ducks are in a row in your own business. So many people think, and I'm sure you see it in the marketing side, they've got all these other problems. And they think if we have more leads coming in that fixed, oh yeah, that's not the fix. So they can have a business that, that everything's falling apart all around. They think, well, if I just buy another one, it's got employees, it's got everything. I'll buy that and bring that in furthest from the truth. Now you just escalated your headaches and now you've taken on debt and now you've got more employees and they've got all these other problems. So make sure your house is in order first. And you've got systems in place in your own business before you're taking on somebody.

Patrick Lange (17:07):

Else's that's the first step. Second thing is once you determine, yes, my business is at a point where I'm ready to grow is take a look at location. Are you looking at moving to another town and starting a new, complete different market, or are you trying to expand within your own area? Um, seeing what, what kind of systems you have and, and really it all comes down to systems because if you could duplicate what you're doing now, someplace else, and maybe being another location is okay, but if you don't have great systems in place, and either of those, the company you're going to run and traveling back and forth between two headaches. So determining where that location is going to be, and then size, I see people want to get much bigger than, so they're doing a million dollars in sales and they want to buy companies doing 2 million.

Patrick Lange (17:47):

Well, it takes a different mentality to go from a million to two minutes. And so buying somebody have that mentality may that may not be the answer for a while and say, by somebody equal or lower than yours, if you're doing a million by another company doing a million, because they're focused, they're having the same problems you're having or have had to get to where you are. And the, the companies that are a little less. So if you're doing 3 million, you buy one doing a million, you know what it took to get you from a million to 50. And so that would be the other thing is location and size. Um, you know, as far as that, and then what can you afford? And so are you going to use financing? Are you, you know, what is it going to affect cashflow? How are you going to do it? Those would be the kinds of things I would look at first and then start looking at what's on the market. And does it fit into what you're looking for

Josh Smith (18:31):

For a seller? What are some of the things that, um, I know we mentioned some of the four things that people really need to focus on to get their ducks in a row, but three pieces of advice that you might have for somebody who's looking to sell,

Patrick Lange (18:42):

Make sure you really want to sell. Um, when I sold my financial planning company, which was the first business that I sold on my own was the hardest emotional and financial decision I've ever had. You're walking away from what you fed your family with and paid all your bills with, for many people your entire life. So make sure you really want to sell. I've had sellers come to me. And then in the process they realize, oh my gosh, I'm not ready. And so I would make sure you're ready to make that decision. And then once you're ready to make that decision, understand that you have an impact on who buys your business. So just because somebody comes along and says, they want to buy it doesn't mean you have to let them buy it. Um, here, hear all the talk of private equity, this and all these other buyers that you don't have to sell to anybody.

Patrick Lange (19:24):

So what we do, and some brokers are different, but what I like to do in my business is when a buyer comes to the table, we first do a phone call and make sure we ironed out the number side of it. Let's sit down in person. Can you get along? This is going to be a good fit. They're taking over your legacy. Something, once again, you spent your entire life building. Are you okay with them taking it over? And are they good with you? Because I think in order for a good deal to be done, everybody should leave the closing tables friends. And they're going to have questions that you're going to be able to answer. You're going to want to see your customers and your employees taken care of. So make sure that's a good fit. The other thing is though, also take a look.

Patrick Lange (20:00):

Is there somebody in house that can buy it? We do a lot of deals in and help facilitate a lot of deals where people will come to me and they'll say, they want to sell it. I'll say, what do you have a family, Rebecca, buy it. Well, my son wants to buy it, but he doesn't have the money. We're able to get creative and structure some things to happen. Or I've had a great guy or girl who's been with me for years and she'd be a perfect person to take it out. I've never done it. So, so we try to put that together first, if there's somebody who's familiar with your business, that has helped you get to where you are and we can help them take it over. Fantastic. Let's look at that first, then start interviewing these other buyers.

Josh Smith (20:34):

The really, really solid advice. I know that that could be a really is the most challenging thing is you've people don't have that next what's next, you know, in mind. And so they may see this little nest egg, but they don't have this vision that goes above and beyond the business itself. And so that's, I, I imagine where a lot of the heartache comes into play now.

Patrick Lange (20:52):

And back to that personal expenses, you know, you're talking about the creative accounting, well, what does the business really pay for? If you sat down and looked at it, if you get this check and I always ask people the first time I meet, what does the chair need to say for you to walk away? What's the dollar figure gotta be. I've had some people that, that are so way out in left field. There's nothing I can do for, I'm not a miracle worker. I can get it sold. I can get it sold for a fair market value and, and make this a great transaction for you. But I can't get you some crazy multiple because that's what you need. So identifying what you need and then is it realistic? And so that's why I asked that question. If we're close, if I looking at numbers, think that's a million dollar business and I meet with them.

Patrick Lange (21:30):

And I say, what does checking the same for you to walk away? And they say $10 million. That happens a lot. I happens all the time. I say, I'm not your guy. I can't do that. I'm not going to put a listing out there just for the sake of putting it out there. It's not sellable at that price. And you're basing what, what you want the business to generate by what you need. You need to take care of what you need first, and then we can sell your business. And so, so understanding that's helpful. I love that.

Josh Smith (21:55):

Well, Patrick, this has been really, really helpful, again, round two with you in the booth. So I really appreciate your time and all the knowledge and the expertise that you've been dropping on the sharpest tool. So thank you for your time.

Patrick Lange (22:05):

Thank you for letting me come in. I really enjoyed it. It's been a pleasure. Awesome.

Josh Smith (22:08):

And for, um, anybody who wants to find out more about, you know, your business, where could they find you?

Patrick Lange (22:12):

Obviously my website business modification, group.com. I'm on LinkedIn. I'm on Facebook. So you can call me directly my number (352) 440-4604. Happy to answer any questions that I can help out in any way. Awesome,

Josh Smith (22:25):

Patrick. Well, thank you again. Appreciate it. Thank you. And for everybody listening, wherever you might be listening at, if you found today's episode, particularly helpful, definitely share it around. You might know somebody who's thinking about selling the business and potentially acquiring an HVAC business in this world. So definitely share this around. There's a lot of really good information here and definitely open up the podcast app, wherever you might be listening at Spotify or iTunes, or if you're watching us now on YouTube, definitely the, some comments hit that like button, give that subscribe button, a nice tab and leave a review. So more people can continue to find the sharpest tool and show the episode again with all of your friends, your family, from all of us here at scorpion and the sharpest tool. We will talk to you next time. Thanks.

Speaker 3 (23:09):

[inaudible].

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