Owned and Operated #90 - Listener Q&A: HVAC Pricing Strategies and Plumbing Business Valuations

Straight From the Audience.
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In this episode, John and Jack address two listener questions. The first question comes from an HVAC business owner facing weeks of fully booked schedules. Jack recommends expanding the team, while John proposes a strategic increase in prices. The second question revolves around valuing a plumbing company and the potential risks associated with acquiring a new construction business.

Have a question you’d like to have answered on Owned and Operated? Send a DM to John or Jack or email us here info@ownedandoperated.com.

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John Wilson: @WilsonCompanies on Twitter
Jack Carr: @TheHVACJack on Twitter

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John Wilson, CEO of Wilson Companies

Jack Carr, CEO of Rapid HVAC

Owned and Operated Episode #90 Transcript

John Wilson: I'm John Wilson. Welcome to Owned and Operated. Twice a week, we talk about home service businesses, and if you're a home service entrepreneur, then this is going to be the show for you. We talk about our own business in residential plumbing, HVAC, and electric, and we also talk about business models that we just find interesting.

Let's get into it.

If you like what we talk about on our social media, on Twitter, on this podcast, then you should be signed up for our newsletter. Go to ownedandoperated. com where every Friday we break down our business, we break down insights, things we're learning, things we're working on, and it's good stuff. Check it out, ownedandoperated. com.

Alright, today on Owned and Operated, Jack brought some user submitted questions. If you have a question that you want to ask Jack and I, DM it. We would love to answer it on air. was fun. So, we had two questions from listeners that we deep dove into. Check it out.

Welcome back to Owned and Operated Jack.

Jack Carr: What's going on, John?

John Wilson: Dude. I'm about to kick it up in Denver. So that is what's going on. I'm about to go ski the heck out of Brack.

Jack Carr: I think I'm one of the only people in Tennessee. So I have the pegboard on my wall, in my garage, and I have a wall of skis. That's the only thing I don't like about Tennessee. I love Tennessee. Tennessee's an amazing

John Wilson: Just like nothing to ski?

Jack Carr: There's nothing to ski. I have to go way up east coast like Vermont, or fly back out west.

John Wilson: We had some snowshoe. How close is like snowshoe to you? West Virginia.

Jack Carr: I don't know. West Virginia is generally, I'm sure I can fly there. It's like maybe 3 4 hours. To be honest, I don't know Is snowshoe. good?

John Wilson: No, but it's like small Appalachia.

Jack Carr: Yeah, see, that's my problem. I was spoiled. My wife and I met at like Lake Tahoe skiing, and so. That's what we used to do, was ski, ski, ski, epic pass, 10 days, hit all the mountain resorts.

John Wilson: I don't know why you're not going out to Denver with me,

Jack Carr: Because of negative temperatures here in Nashville

John Wilson: I do feel weird, I do feel weird leaving in game time.

I'm gonna be still a very active participant from the lift.

Jack Carr: You're like the team owner sitting there from your box seats. At game time. You don't have to be at the game, you can still be at the game. I'm like, quarterback right now. If I'm not at the game, the team's not playing.

John Wilson: Yeah, I am fortunate that I'm able to leave during game time.

Jack Carr: You earned it though. Right? That's what happens. But yeah, I get it

John Wilson: Yeah, you hope. You hope I earned it. Well, yeah. Sick, dude. Alright, so you've got the episode concept for today.

Jack Carr: So we're hitting the episode a little bit differently today. We get Q& A a lot from different people, right? We're on Twitter. We have this platform and so I had two different people reach out to me really recently. They asked me a question. I answered the question. I said, whatever the answer was but I thought it would be a cool concept to hear your answer because I think I know what you would say and I gave people that merged answer. But I am genuinely curious if that's what you would have said.

So I'm not going to give away the names on these obviously. So the first Q& A, I will ask you the question, you answer, and then I'll tell you what I said to him or her. So the first question is this person owns an HVAC company. They do HVAC and radiant heat flooring. An interesting mix. They are currently booked out three to four weeks on everything. And the problem and the question was how do they increase sales with that situation?

Ha ha ha.

So they have enough sales, they have enough, but their lead time, they're booked out too far.

What's the answer?

John Wilson: Is it new construction?

Jack Carr: The person says it's not, but I'm confused at how radiant floor work is and installs is not kind of at least remodel. They get plenty of opportunities for changeouts, but I think the problem is they're struggling to get those changeouts. See, I'm giving you the answer. They would like more changeouts. They have the opportunities. I don't think they close on enough opportunities in that area

John Wilson: Okay. What's the business size?

Jack Carr: Two million.

John Wilson: A year.

Jack Carr: Yeah.

John Wilson: Okay. There's like two things at work here. It's one thing at work. There's an answer.

Jack Carr: There's an answer. I gave them. Just one.

John Wilson: Okay. There's an answer and like it impacts everything and that's price. So is that the answer you gave? Okay, i'll explain my side.

Jack Carr: That's awesome. Go for it.

John Wilson: So here's the deal. In order to maximize your business, being booked out is bad. Last episode Jack and I talked about hey it's zero degrees next week, it's negatives. Imagine if we were booked out. And we weren't able to serve our customers next week because we were booked out on these projects.

So being booked out gives businesses comfort usually. Yeah. it gives them security. I know that I am busy.

Probably not maximizing. And people do that and they like it. They like this idea that they know that they're set for the next month, so they don't have to think about it.

That's usually like, exactly what I hear is, I don't have to think about it. So they don't have to get better at marketing, they don't have to get better at anything that involves thinking. They just get to go execute.

Jack Carr: That's exactly what he said, by the way.

John Wilson: Literally hundreds of people I've talked to everyone says the same three four words. I don't have to think about it. Price is the answer

Jack Carr: So your answer is increase price

John Wilson: So price is a moving target

Jack Carr: Mhm.

John Wilson: How about that? And It should move and fluctuate according to your available capacity. In an ideal scenario, you have same day or next day availability to install across the board. And the question that I'm going to get when I say that to someone who's booked out a month is great.

How do I get there?

You don't get there by speeding it up. You get there by selling less jobs, which people don't like. But you sell those jobs for more. If your close rate's 100%, your price is too low. If you're booked out for a month, your price is too low. People are willing to wait a month for you to come and solve their problem.

Instead of any common sense person in the world who would want it done soon. Like, we're in the emergency driven business here. Someone's waiting a month for you. You're not charging enough money. This is a price question.

Jack Carr: So that's interesting. So we came to the same conclusion, right? I had the same theory, same conclusion.

The difference is what I said is I said you don't have enough installers. So if you had more installers working on the thing that opens you up, to now being able to sell next days or two days or one weeks, away which would then give you more jobs. And then the answer was, but then how, what about my security? Like the guys feeling like, Hey, I have a month that's all booked up. And I said guess what? You need to implement the three day call board. Forcing yourself to drive and own the traffic to your business, which will then also skyrocket growth so that was my answer was you don't have enough people doing whatever that's taking so long

If it's installation work more installers if it's high end specialty service work more high end specialty service techs who can handle that so that your service portion can speed up and then the whole process can collapse on itself.

So maybe a week out

John Wilson: But also price.

if they're literally waiting a month, You are just too cheap.

Jack Carr: Yeah.

John Wilson: Like, you're the discount carrier.

Jack Carr: The only reason I don't think I went with price is I thought that in a world, we don't do radiant floors, I don't know if you guys do radiant floors in a world where, like, if you were only doing radiant floors and you were the radiant floor guys If you guys are the only ones in town doing radiant floors get more people don't like if the price is right the other thing is you raise prices and people just I'm just not gonna do radiant floors.

They're not necessary I don't know both a mix of both

John Wilson: I'm not, I don't have much to say on like project remodel type work, but I was changeouts.

Like, what I think most people should do if they want to increase sales is not do project or model type work. So this is back to basically price, but if we think about like a day how much can, does install crew get you a day?

Jack Carr: Get like generate nothing

John Wilson: Yeah. No, no, No. Like how much revenue do they complete for you in a day?

Jack Carr: Oh, like completion, not sold revenue?

My install crews, based on our salesperson, is probably doing maybe like 40 to 60 a week.

John Wilson: Okay.

Let's say nine grand a day. Okay. so nine grand a day. How long does a radiant floor job take? I think a month? Two weeks? A week? Okay.

Jack Carr: Probably a week I guess you have a board

John Wilson: So how many of those can you sell for 40, 000? I really don't know

Jack Carr: I don't know either.


John Wilson: That's the math

Jack Carr: Yeah.

John Wilson: To be mathing. It's an opportunity cost. What we found in remodels, and new work, is, like, hey, I want to increase sales. Great. You have to kill. Like, I killed a three, four million dollar a year P& L last year. Which is a lot for the size of our business. But it was because I was driving four grand of revenue a week per tech, out of that business.

Like, we should be driving four grand of revenue a day per tech.

So we were off by eighty percent. And this is back to price, but like, what can you sell a day for? In plumbing or HVAC or electric. And if you're doing week long projects or two week long projects, you have to price it at the same price that you would sell an HVAC swap out day for.

Because that's the choice you're making. You're choosing to run this big project that you will likely get significantly less per day revenue on a per employee basis than just a swap out. And if that's the case, then what are you doing?

Jack Carr: Yep.

John Wilson: So if you want to increase your revenue, stop doing low revenue shit.

Jack Carr: Fair enough.

John Wilson: And then you pivot that out by increasing your price on the things you do want. So that way you don't create a huge backlog.

Jack Carr: Yeah.

John Wilson: And then if you have not enough of a backlog, then you reduce your price. Price should be a,

Jack Carr: A bit of a moving target. Just out of curiosity I know there's different people. They do like dollar plus one, right? When the board's empty to your normal margin you want to hit

What you're feeling on like dollar plus one?

John Wilson: Yeah, so this is something that we're being challenged to do right now. I know that it's probably the right decision. So, what he's basically saying is how low are you willing to go if you have nothing on the schedule. The answer is somewhat low. Break even probably.

Because the reality is a no profit day is better than a no revenue day. You keep your team going. You hit breakeven, maybe breakeven is 35 percent gross margin.

And you were still able to contribute to your overhead.

Jack Carr: So when we say dollar plus one you refer to it as all overhead included plus one dollar, correct?

John Wilson: Yeah. Basically.

Jack Carr: Yeah, so wherever your margin is at the end of the day, which ours I think is somewhere around like 31 or 32. That's our salesperson's bottom dollar. We don't drop below that. We stay at that 32 and only if the schedule is dead dead. Otherwise, we try to stay around 40 and then up to 60 when it's absolutely slammed.

John Wilson: Yeah, we feel the same way. We're trying to figure out a way to process that. Like make it a process, because there's just so many people involved. Don't have a good answer for it, but a sitting install crew is much worse than a break even install crew. So that's something that we're really working on getting nailed down right now.

Jack Carr: I think that's a good answer too. I'm glad we arrived at the same way, same point in different ways, and I don't think either of those is the correct answer without the other one. Awesome. I love that.

John Wilson: If you're a home service entrepreneur that's just starting out, or is early on in the journey, and you haven't broken the five million dollar revenue mark, we've got an event for you. This spring in Cleveland, March 19th to the 21st, we're hosting an event at my office. It's going to be awesome. Honestly, some of the most impactful visits of my career have been visits to companies that were larger than we were, that we could take lessons from, and see how they're doing stuff.

Like get a behind the scenes look, how are they structuring warehouse? How are they thinking about call center? Can I talk to their managers? Can I understand what their KPIs are? We're going to dive into all that stuff. We are here to help people get above 5 million in revenue. So join us in Akron, Ohio, March 19th to the 21st for a breaking 5 million event.

Love to see you there. Details are owned and operated dot com.

Jack Carr: You brought up actually a great segue into my next question.

So question number two was someone came to me with a business that they wanted some advice on.

You actually might know this person because they said that you talked to him for a little bit,

John Wilson: Did I hate the business?

Jack Carr: You actually didn't even, you responded once and then didn't respond after that, which I'm guessing is because you hated the business.

John Wilson: That could be, or whoever this is that's listening, one, I apologize. Two, I do get a lot of DMs, and it is very complicated. Like, I barely respond to my emails to people that I have to respond to, let alone my DMs.

Jack Carr: Yeah, I'm pretty terrible at it too.

So this person has under contract working on documents I believe it was a 7 million dollar plumbing co. 60 percent was told 60 percent new construction, 40

John Wilson: I spoke in depth with this individual.

Jack Carr: 40 percent

John Wilson: I'd like to correct the record. I responded at least 10 times to this round of thinking.

I've got receipts.

Jack Carr: Yeah, right. and then the broker then came forward and shifted, or the owner then came forward and shifted and said, actually, it's really like 1 7th or 1 8th of the business is actual service and the rest is new construction. The question is, what's your feeling on valuation on something like that?

So 1. 5 in EBITDA, seven in revenue, gross revenue, but it's an 80, 20 or 90, 10, give or take. What would you value this business at? Cause that's what the real question is.

It's plumbing co 7 million, 1. 5 net bad split towards construction.

Where are you at? If you had to, cause I know you don't want to, but if you had to.

John Wilson: Alright. I'll answer this question without answering this question. There is a plumbing company in Columbus, Ohio right now. It's 100 percent new construction. 10 percent off from this company. Doing 5 to 6 million of sales, so relatively close. They're asking 1. 3 million. And the seller is willing to seller finance 50 percent of it

Jack Carr: So that's a note from the bank of 750, 000, which at today's rate is give or take about 12, 000 in debt finance per month that person has to pay, which I want 8 million, or did you say 8 million? 6 million in gross

John Wilson: Receive it, and like I wouldn't touch that with a 10 foot pole So they're asking 25 percent gross revenue because I think when you think about purchase price In home services, and you can call me any number of things, and please know that I don't care. Most of it is like unsophisticated, which I'm fine with.

I've been called much worse even just today. I believe that revenue to purchase price is a valuable metric. And when I think about purchasing a business uh, most it it's like, is it inflated EBITDA? That's how I, like, can figure out if it's inflated EBITDA. Like, if it's a 3, 000, 000 plumbing company, and they're claiming 700, 000 EBITDA, or a million EBITDA, and they're like a million EBITDA, I read it was four times, so they're asking 4, 000, 000 for a 3, 000, 000 plumbing company, that's 130 percent of revenue.

That's insanity for a 3 million plumbing company. So I usually feel pretty comfortable at 50 percent of annual revenue for a purchase price. So that's a number that I like.

Jack Carr: Even in construction?

John Wilson: No.

That's for service businesses. For construction Construction, like 20 percent starts to make sense to me.

Jack Carr: That's exactly what I said.

I said maybe I look at it like, 10 percent of if it's net,

it's 10 percent of revenue and then a two X would be 20 percent of revenue, which we're at the exact same point at 2x tops.

But the only other thing I added to that is I would not take bank debt on this.

No way, no how would catch me taking bank debt

John Wilson: Well, that's if a bank even lends. You know, you're gonna be hard pressed to find a bank to lend on construction in 2024.

Jack Carr: Yeah and, my issue, right, I just don't want, said rev share. Get seller financing in a RevShare model that way they're sharing the risk if it hits hard whether it's you know, you lose key clients, right? You're working with GC's who know the person maybe 20 of them, right? You lose two, three of them.

That's 10 percent right off the top day one just because this person left Part two they share in the risk. So I like revShare construction companies

John Wilson: For perspective, I've been in this industry my whole life. I remember 2009. This is like talking about buying a home builder in 2009. To me that's what buying a new construction company is right now. We are in the shittiest environment where most of them are coasting off of a few years of good.

They know that the game is up and they're attempting to sell. That's the one in Columbus. They're attempting to sell before everything goes away 'cause it will go away.

Jack Carr: Yep.

John Wilson: Whenever I have a real sour spot. For new construction, and I always have, and I would say that I'm right. I think it's good for a couple years, and then it's bad for more, but even when it's good, it's not that good.

So when, we look at a deal that has new construction any level of new construction, we underwrite the new construction side of the business to zero. We assume it is completely gone. Because it, might as well be in our minds. Because if we don't kill it, then the economy will kill it. In this case we're not talking about a 7 million dollar a year company, we're talking about a 1.

And when you put it in that perspective, what makes sense for the purchase price of a 1 million dollar plumbing company?

Jack Carr: And so with that, on the back end, there's a, that kind of a second part to the question that I'm curious about. What is your belief on building a service company out of a construction company like that?

John Wilson: Yeah. So we did this three times now.

And my takeaway is it takes a lot longer than you think.

Jack Carr: Mhm. Yep.

John Wilson: And this is from someone that's done it three times and literally grew up in this industry and knows a lot about the industry. So it takes a lot longer than you think. It's not a month. It's probably more like two to three years.

And maybe longer if you genuinely have no idea what you're doing. And it's going to take a lot more cash than you think it's going to.

Jack Carr: Yeah, I think someone else who's trying this told me it's essentially building a new startup on the back of your old startup. Cause you don't have a CRM system like service titan. You're using some kind of project management software. The techs don't transfer over.

Install techs aren't service techs and the ones that I've looked at have had terrible reviews if they try to do a little bit of service because they don't realize that.

So they have like a 3. 5 stars with 50 reviews and they're a 10 million dollar company,

John Wilson: And there's no cash to do it.

The cash cycle doesn't make sense. So like in a new construction company, your overhead might be 15%. There's no overhead. You've got some project managers, you have Betty in the office, and you can run that way up to like $20 million.

You don't need anything. Some PMs and an accountant, and your gross profit is very low. So, Let's say 20, 25, 30 percent is your gross profit. And on top of that, your payment terms are shit. You get paid 30, 60, 90, 120 days from whoever the GC is.

If you get paid so that's a big part of why overhead is so low is because it literally has to be . So there's no gross margin. There's no infrastructure. There's no people and like it takes people to grow a service company and the cash flow is very slow So that's why I say it takes more cash than you think it does you basically a million a half EBITDA of new construction assume that doesn't exist cause it might not, and when you go to launch a service business on top of that, or grow a service business on top of that, the overhead from the service department is going to be like 40%.

When that business is used to 15,

Jack Carr: Mm hmm.

John Wilson: It's gonna be a huge shock to the system. Like you're going to need CSRs, you're going to need marketing, you're going to need software, you're going to need stuff that business literally cannot afford. And when you go to pay it, you're going to be waiting 90 days to get paid.

So like you're not gonna have the cash there to do it.

Jack Carr: Yeah, it almost has to be self sustaining right at the gate.

John Wilson: It does. Yeah, it's tough. It is a tough gig so go into it with a lot of cash

Jack Carr: Let me ask you one question. Is there any benefit though? Right a ten million dollar just round numbers a ten million dollar construction plumbing company all wrapped trucks in a medium sized town does have a decent brand though which it is helpful that rather than starting something new, I will give it that, that's the only reason I've been enticed previously is you're starting off with a solid city known brand name, right?

And the minute that they start offering the service of individual services and get really acquainted to that, I think that helps. More so than buying, I mean, the alternative, but still super difficult.

John Wilson: I think it helps. with lead flow. Does it help with the lead flow you want? I don't know. It might be like GC's friends or the GC's house. That's what we see a lot is like yeah, we get calls but like the calls are like your builder's house

Jack Carr: Yeah well, what I'm saying is right the minute that you turn on you need seven touches. They need to see you seven times before they go with their company or whatever crazy stuff that is. Now you turn on PPC, they've seen your truck in the town.

10 times, 15 times. It's the friend of the friend and, they didn't go to Benjamin plumber whatever this time.

John Wilson: I think it could give a little bit of a boost.

The thing I would just be the most cautious about is EBITDA is not cash flow

Jack Carr: Cash flow is not really cash flow.

John Wilson: Yeah, like you can't expect to build a service company off construction company easily It's going to take years And it's going to be a slog, and you're going to need more cash than you think.

Jack Carr: That's fair

John Wilson: Like, you just are. it's possible Like, we're wrapping it up right now. We're two years and a month into our electric transition. And, it's not done.

Like, we're close. But man, it was tough.

Jack Carr: Could you have done it without the other cashflow from your other businesses feeding into

John Wilson: No it would've bankrupted us a hundred percent.

Jack Carr: Nice idea, Very difficult.

Nine out of ten. Nine out of ten. Eight out ten.

John Wilson: Potentially 10 out of 10. and this was my third one in an industry that I've very literally grew up in.

Jack Carr: Yep.

John Wilson: I don't know how people who don't know anything about this. And maybe they will come in and do it and be smarter than I am. Maybe. I do struggle to believe it.

Jack Carr: Yeah, we have a mutual friend that's doing it in HVAC and seeming to work, but he said it's a nightmare.

John Wilson: 2 and a half years of intense pain.

Jack Carr: Intense pain. Yeah,

John Wilson: Yeah.

Jack Carr: Accurate.

Make sure if you're, Avoid and or buy extremely right. Do not go into it paying these crazy multiples 4x, 5x on a million, EBITDA doesn't apply here.

Really doesn't

John Wilson: Yeah. you know, five, even three times, three, four times only applies to 100 percent service organizations.

Service or replacement. There, you are buying a construction company, which like, throughout history, usually trades for assets. When I've watched, like, new construction plumbing companies go for sale, they literally just auction because there is no value. There's nothing to buy, like, what do you buy? Jimmy from the builder's, you know, phone number, and he's gonna be fired in a month? Like, there's nothing there. And everyone say it's relationship, but it's not.

Yeah. It's a builder you know.

Jack Carr: Mm hmm.

John Wilson: So yeah, nothing to buy. Usually we see auctions.

So if you want to go buy a plumbing company, just go to an auction. You can get it for, a hundred bucks. Yeah.

Jack Carr: Talking new constructions. Great with you, John.

John Wilson: I just like have such an opinion.

Jack Carr: Yeah. You said it on the last episode too, on the the weather one about how just killing 4 million of your business was a hard thing to do, but it was the right choice. And I that, should speak volumes to people that are potentially buying construction companies.

There's other people out there literally killing a four million dollar P&L.

John Wilson: Yeah. in order to run a

Jack Carr: good business

In order to run a good service business.

Anywho, sweet, we got answers. Good Q&A. Um, I kinda like this segment. I think we'll continue if you guys do have questions.

John Wilson: Yeah, if you got user submitted stuff, let's do it. Sounds like fun. Thanks for tuning in to Owned and Operated. Make sure you check out ownandoperated. com. Sign up for the newsletter. And check out our event in March. The Breaking 5 Million Workshop. Sweet.

Thanks for tuning in to Owned and Operated, the podcast for home service entrepreneurs. If you enjoyed today's episode, please hit the like button and subscribe to the podcast. If you have any questions or topics you'd like us to cover, feel free to reach out. You can find me on Twitter at at Wilson companies.

I'll see you next time.

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