2319 - Essential Insights for Home Services Business Owners with Commonwealth M&A's Joseph Bergin

0:04Well, hey, Thoughtful Leader. Welcome to the Thoughtful Entrepreneur. On this show, I interview purpose-driven founders, experts, and change makers who are making a real impact in the world. Want to be a guest? Simple. Go to upmyinfluence.com and click podcast. I'd love to promote your story to our audience of over 100 ,000 and across over 2 ,300 daily episodes and counting. Want to get booked on other great shows like this? Simple. Go to podverified.com and get your free guest authority score. Thousands of hosts are looking for high quality guests and Podverified connects you the right way. Now let's dive into today's episode.

0:58With us right now, Joseph Bergen. Joseph You're the co-founder of Commonwealth M &A. You're found on the web at CommonwealthMN, the letter N, A.com. We have that link in the show notes. Joseph, it's great to have you. Thanks, Josh, for having me. I'm excited. Yeah, for sure. Hey, before we get going and talking about your superpowers, I love just finding out what leaders are into in their private, personal lives, things that they're geeking out on or hobbies or things that they're kind of experiencing. What's a you? What's been big in your life lately? Well, I wish there was time to geek out on stuff because I am, you know, I consider myself a geek on a lot of topics.

1:41But I have a three-year-old and a one-year-old, two girls at home. So the majority of the time has been spent with them, corralling them. You know, I think we've watched Monsters, Inc., what, 50 times in the last week. So if you have any questions on that topic, I'm geeking out and an expert on that. a lot of milana a lot of pixar yeah that's that's pretty much the extent of it these days sure what what are the what are the favorite scenes from monsters inc i love the scene uh the sushi scene when they're at the restaurant when mike has his his girlfriend and the and boo the child comes in and everyone freaks out um my daughter just loves it absolutely loves it my three-year-old i think all of us now who have had kids at that age uh remember uh you know what those movies were for whatever reason you know we had this is back in the day we had uh snow white on dvd and that was there was the one scene toward the beginning where it's a little scary where snow white's running through the woods and the trees get all spooky you know that was always the one where we're like oh you know he had to get through that one but then after that there's there's no scary there's not overly any overly scary parts of monsters inc is there no no okay No, she absolutely loves it.

2:52No. Good, good, good. Well, Joseph, share with me what Commonwealth is, what you do. Yeah. So I think put super simply, what we do and what our mission statement is as a company is we try to transform decades of hard work into the deal of an individual's lifetime. So how we do that, we are a sell-side M &A advisory firm. So we help businesses with call it, you know, between five and a hundred million dollars of revenue. We help business owners exit their businesses. So we do that through a structured process. We spend a lot of time preparing that business for sale, positioning the business as best as possible, performing buyer research to identify who we think the highest paying buyers are out in the market.

3:38We then, you know, take the business out, negotiate the transaction and ultimately shepherd it through diligence into closing. So it's a six to nine month process. It's a long, long process, but that's our primary function at Commonwealth M &A. Yeah. Well, talk about the types of companies that you work with, because it seems like you specialize in SMBs and maybe companies that might be on the even smaller side. And is that - Yeah, absolutely. Absolutely. So we're industry agnostic. We will represent pretty much any industry, although we are quick to turn something away if we just don't think we're most equipped for it.

4:17For whatever reason, we've carved out this really great niche in home services. So HVAC, plumbing, electrical, roofing, landscaping. And I think a lot of that is a function of the size and types of buyers that we work with. Both me and my co-founder come from the trades. We grew up in blue collar families. We really appreciate and respect working with those types of owners. I think it's just we found ourselves into this niche because it's where we are creating the most value. Yeah, well, we'll talk about for just a moment, you know, a services company and what's unique about that and who's buying those companies?

4:58Why are those great companies to buy? Do you mind just kind of giving us a picture of like, you know, what it's like to work in that space? And I'll try not to ramble because I am so passionate about these types of businesses. And I think the market is really starting to appreciate how great these businesses are. Yes. Yes. Yes, I've heard. So there's a ton of M &A activity in this space. And all of that is really a function of what's happening in private equity. So private equity are establishing platform businesses all over the country and then going out and trying to add on and tie together a lot of these smaller mom and pop HVAC plumbing electrical type businesses.

5:35And what makes it attractive to private equity, like I said, I think they discovered how great of an industry this is, is one, how resilient it is through economic cycles. I think nowadays, I know my generation for sure is not living without air conditioning, right? So if something happens to my HVAC system, I'm paying someone to come out and fix it. Two, it tends to be very highly recurring revenue. So a lot of what you see in the software industry that makes that so attractive and valuable is almost as equally applicable to the HVAC industry, right? These systems need serviced year in and year out.

6:10You see a lot of these companies pushing maintenance contracts. It's a way to really boost that ARR or that annual recurring revenue. So it's a little bit like a software business, but it's a trade. And then in addition to that, this is happening in a lot of industries, but mostly the trade, finding highly qualified skilled employees is incredibly difficult. And that's why, you know, expanding through acquisition makes the most sense for private equity, because as part of an acquisition, you know, you might be acquiring 20 to 25 technicians that who knows how long that that would take to fill organically at an existing platform.

6:47So that's really the fuel behind the M &A engine within private equity in this industry. Right. So, you know, the value is that the talent that you're after because training is tough yep uh so your backgrounds uh you know in in png um and so why going to m &a so it was j and j very similar i'm sorry i'm sorry not brector gamble johnson johnson the other big cpg conglomerate yeah i absolutely loved my time at j and j and could have saw myself staying there for you know 40 to 50 years it was a fantastic experience got to work with a ton of incredibly smart people. I think for me, you know, I mentioned that my family, the blue collar background, we grew up in the trades, you know, from a family of small business owners, there was always something missing in that corporate experience in terms of ownership of my own company.

7:41And, you know, when me and my co-founder were brainstorming this idea of Commonwealth M &A, to me, it was the perfect combination of skill sets between me and my partner, my co-founder. But in addition, you know, I used to do M &A at J &J. I used to work in the trades as a kid all through high school and college. So it was a perfect blend of skill sets, right? The ability to communicate well with our clients, but then also able to speak the language of private equity when they're acquiring these businesses. I thought there was a lot of value that we could add as Commonwealth M &A to that process.

8:15Yeah. If you are advising, and I would imagine you've had these conversations maybe a little bit early, you know, with a, you know, services-based company. And they say, well, you know, look, I don't want to sell today, but I do in maybe three to five years. What should I be doing today so that I can really have a great exit? So let me first of all say that that's the best client that there possibly is. They're thinking ahead and they're preparing. And those types of situations are where we're able to derive the most value in a transaction. I'd say there's a lot of things, but that time for preparation buys you time to fix a lot of things that will become valuable in a transaction.

9:01I'd say first and foremost, it's hard to do this. Start to think about your business as a cashflow producing asset instead of a job. So what that means is try to remove yourself from the day-to-day and empower your employees because a lot of our sophisticated buyers, they aren't interested in necessarily running the business day to day. They want to own the business and sharing the economics of that business. But a self-sustaining machine as a company is going to trade for a much higher valuation than a business that's fully dependent upon the owner. One way of saying that buyers don't want to buy a job, they want to buy a business, right?

9:34Number two, and this is common, especially in SMBs, is get the books cleaned up, right? If you're not on top of your numbers, you know find a new cpa to help you get on top of your numbers ensure that you're accounting for this is a little technical you're accounting for things on a gap basis as best as you can not on a cash basis try to remove the personal expenses just explaining that just for a second what that means yeah so i think that the most simple example is in revenue so you know cash basis revenue you would record your revenue whenever you're paid for your services right that would include things like deposits you're reporting as revenue for future work What the buyers want to see is an accrual basis of accounting, meaning you earn the revenue when the activity is actually completed.

10:17So you might accept a deposit for future work, but you're not recognizing that as revenue on your books until you actually go out and complete the work. It's incredibly important. You know, if we see a company that comes to us that is on cash basis, we try to get them switched to accrual before we go out to market. It does cost some time. But it's financials are everything in these transactions. Obviously, the owner dependency is a big thing, but the financials are equally as important. I have seen, and maybe you have some observation on this, I've seen a lot of the services-based companies really trying to encourage consumers to get on a monthly recurring service plan.

10:58Obviously, that's dependable income for the company. Any observations on that? Is my assumption correct that that's a big push? Yeah, 100 % correct. And investors like that? 100 % correct. And especially after it comes under private equity ownership, you can bet that that's a model that will be pursued. And the reason for that is yes, obviously the annual recurring revenue is great. But really where the value comes, if you think about a service, you know, a field service business, whether it's HVAC plumbing or electrical, it's another touch point with that consumer to be in the home, right? A lot of these HVAC businesses also have plumbing businesses.

11:32They might take a peek at the water heater while they're there. Mention to the consumer, hey, just so you're aware, this water heater is on its last leg. We can swap it out today for X price. So those monthly recurring, well, yes, it's monthly recurring revenue, which is incredibly important. I think more critically, it offers an additional connection between that business and their customer to potentially provide incremental service that otherwise wouldn't have been completed. Okay. Okay. So can you tell me a bit maybe about the current environment, the current investor environment? And if you can contrast this maybe to years past, like where are investors today?

12:15Yeah, absolutely. So where we play in the lower middle market, like the size range that I described, SMBs, you know, five to 75 to$100 million in revenue. I can, we haven't really felt any reduction in activity, in M &A activity versus years past. That is not what I've heard and have researched and understand that's happening in the large scale transactions. And I think there's a few reasons for that. Number one, I think it's mostly a supply and demand dynamic that's at play. Number one, private equities have raised record amounts of dry powder. So money that's on the sidelines ready for them to deploy.

12:50Coming out of COVID, they weren't really investing. We've reached record highs as it relates to how much money from private equity is able to be deployed into businesses. I think the environment we're in right now with, call it higher than, well, it's historically probably average interest rates, but higher than the last 10 to 15 years interest rates. We've seen a lot of activity come down market. So a lot of large private equity firms that are chasing$1 to$2 billion deals are coming down market, competing with mid-market firms, and mid-market firms are now coming down market into the SMB world.

13:22So from our perspective, there's a lot of buyers out there with a lot of deep pockets. So from our perspective, especially in home services, we have not felt any type of debt versus prior years. I think in addition to that as well, I described this whole model around private equity and the platforms and add-ons. That dynamic is occurring across a variety of industries. And the only businesses that really qualify for that add-on definition are SMBs. So those are three drivers from my perspective that are really keeping transactions active at the level that we play at. So for those that are listening to our conversation and they may or may not be ready for a conversation with you, I don't know if you're contributing thought, if you're creating resources online, you know, what, I guess, what is available for the general public from the work that Commonwealth does?

14:20Yeah. So first I would encourage you to, you know, check our website and LinkedIn. We're constantly posting content there for consumption. Otherwise, I mean, there's, there's so much, you know, so many podcasts that are out there around M &A and SMB. It's a really hot topic right now, especially with the wealth transfer that's on the horizon, you know, that people talk about, the baby boomers are the primary owners of these businesses that we're selling. And there's a lot of interest about who's going to eventually own those businesses and what does that process look like? So there's endless opportunities to learn online about this topic.

14:55Yeah. Okay. So your website, CommonwealthMNA.com. Well, let me ask you this question. How might someone know that they should reach out to you? Who might not be a good fit? And that's a very important question. And, you know, again, kind of what their next steps and kind of what those initial conversations might look and sound like. Yeah, absolutely. So first of all, I'd say I'd encourage everyone to reach out. Number one, you know, we founded this business to help business owners and whether or not that's an ideal client for us to take on in an official capacity is one thing. But if we can help any business owner, we'll do that through a conversation.

15:34Number two, I'd say our ideal client as it relates to, you know, sell side advisory or from an M &A perspective is probably within that range that I discussed, you know, between five to a hundred million dollars in revenue, which is a wide bucket. We understand that. And it doesn't matter to us how far away you think that goal is, because we're willing to work with business owners over the long term. I described those are actually the situations where we're able to create the most value when we can really prepare a business for sale over a period of two to three years. Those are the types of businesses we love working with.

16:08Yeah. And first, what do you typically talk about in a first call? First call is high level. We always want to understand the story of the business, why you founded it, where you're at today from a revenue perspective, what's bothering you, what's really great about the business, what's bad about the business, what are your goals from a valuation perspective, and then we can help you triangulate whether or not that's realistic based on the financial profile of your business. And how do you, like, where does Commonwealth get their clients from? Like, how are you growing? Yeah, it's, you know, now we've been out this for three years.

16:46A lot of it's coming from former clients, which is the best possible introduction you can have. It's really through connections. It's all been word of mouth. We don't do any advertising. Now we are strategically small. We're only doing, you know, maybe four, three to four transactions a year. But it's been all to date. It's been all referral based, all through relationships, all through our prior clients that we've represented through the process. Excellent. All right. CommonwealthMNA.com. Joseph Bergen, again, you're the co-founder. Thank you so much for the conversation. Appreciate it. Thank you so much for joining us.

17:24Absolutely. Thanks, Josh.

17:30If you've enjoyed this conversation, I'd love to invite you to share your message with the world at podverified.com, where thousands of podcast hosts and thoughtful guests are connecting the right way. Podverified helps match you with the right stages for your level of authority. No more wasting time on brand new shows that just aren't a fit. Your guest authority score is free, and so are your first two podcast matches. Come hang out with me there. I'd love to learn more about your business, support your mission, and help promote you far and wide. Just head to www.podverified.com to get started.

18:13And of course, if you'd like to be a guest right here on The Thoughtful Entrepreneur, just go to upmyinfluence.com and click on podcast. Thanks for being a part of this movement. We rise by lifting others.