Why I Joined ARS
Let’s talk about the background of the sale. How long did you think about selling?
I thought about selling for a number of years, but unfortunately, I thought I built my business so large that I didn’t know who I was going to sell it to. A lot of the value of our businesses are traditionally based on where your ads were in the Yellow Pages, how many years you had been in business and how many trucks you operated. I had several offers from private individuals over the years, but their prices were way too low, and the residual value after the sale was non-existent.
When I started talking to the consolidators, however, I recognized it was based on income strength — how much profit could be recognized and reported on a public company’s financial statements. That’s what Wall Street investors look at.
Consolidation is going to have a big affect on those companies that are thinking about selling because now consolidators are paying two to three times the traditional market value of a company and they do it in the form of stock in a publicly traded company. It also is stimulating for those who have not thought about selling or who have ignored putting in place an exit strategy.
What were some of the key items that made your company attractive to buy?
Volume and profits are what the consolidators are after. They want to have lots of volume and lots of good profits. And also it has to be a clean company — you can’t have any legal problems; they do an extensive search on any kind of legal issues, matters that may have happened in the past.
Location is also important. If they have already purchased most of the market share, they may not pay you the same. Consolidation will take place in a couple of rounds. In the first round, consolidators are going to pay more because they’re going to walk into a city that does not have any of their companies and they are going to pay more to create a hub. Round two is going to happen a year or two or three from now, in which consolidators already have an establishment and they own a lot of the market share, but they can bring you in as a tuck-in company. They may not pay as much for that. So if you’re not profitable now, you may be considered later as a tuck-in company.
Did using such techniques as flat rate pricing, extensive customer service for your techs and an incentive pay system, play a significant role?
I believe the key factor in the first meeting we had was the fact that they were very, very impressed with our customer service, facilities design and how clean we kept it. Our philosophies on dealing with techs contributed, too. And that, I believe, would raise the price of any company.
Could you describe, in general, how the sale was negotiated; the period of time, anything you had to change or demonstrate?
Our company is different than most of the people who are approached because we also have a marketing company and our name is well-known. We were approached early on by almost all of the consolidators. We talked at first, a number was thrown out and it wasn’t favorable. And because the consolidators were busy and we were busy, we put the issue aside for months. Then I received a phone call from a consolidator, “...we need you, we want you, can you be here in a few days to make the deal happen? Could you fly to Houston with the intention of making it happen?” And I said, “OK.” I went there and within about an hour we struck a deal.
Can you just talk in general terms of how these deals typically work?
The way I understand it to be, it could be all stock, all cash or a combination of stock and cash. I took an all-stock approach, because: 1) I felt I had enough money in the bank to hold me over for a while and 2) I believe the stock value is going to increase. I know others that have taken half and half — they were a little bit leery about what the new public company was going to do and so forth.
You have to remember that if the company is paying two to three times over the value of the company, then the stock certainly has some room to go down before you would want to unload. Now, the stock is restricted, some of it can’t be sold right away. Usually it takes two to three months, or more, after the sale to sell it. Then you can only sell a portion of it, about one–third of it, and then the next year you can sell probably another third, and then the same again for the following year. Each consolidator has its own policy on that.
What’s your new role in the company?
Consolidators are interested in buying up both your customers and your management. They certainly want the management to stay on. I now take a role as general manager and I watch and control both of my former companies.
Are your functions as general manager pretty much the same? What’s different, if anything, than being president of your own company?
The only change I’ve noticed since we’ve sold is that ARS has issued a new drug policy that is more stringent than the one we had. And other very minor changes. In fact, the sale was pretty non-exciting, nothing really happened. It wasn’t until three or four days later, when I received a Federal Express envelope with a stock certificate in it, that I realized that was the whole transaction.
Are you going to be continuing with the Maio Marketing System?
Yes, even more so. Again, ARS wants to continue educating the industry as much as they can, certainly including training on answering the phone and taking care of your techs. There will be some copyrighted ARS forms and so forth that will not be allowed to be copied, but the general items, absolutely.
What were some of the fears that you had in dealing with the consolidators, or even selling in general?
Certainly, with an all-stock deal, one fear is that the stock would crumble to nothing. Then you have nothing and you can’t sell it.
Another fear I had was just how much of a role they were going to play in making me an employee. I’ve never been an employee of any company, I’ve never had a job before. This was the only job I’ve had for 22 years. Our company is 32 years old. My dad ran it for 10 years prior to me, so I don’t know much more than what I’ve been doing. And as it turns out, it’s similar to being in an association, if you’ve ever served on a board of an association or a religious group. You have to deal with other personalities. Typically, the personalities that we’re dealing with now are 50 business owners who used to run multi-million-dollar companies. They have strong opinions and egos, and we have to put those aside and come up with best practices. Similar to an association, you are there to make the organization better. We’re here now to make the company better. I hope we will raise our earnings per share and have Wall Street respond favorably to it.
How are your goals different as the general manager of one of several companies that have been consolidated under ARS?
Even though my interest was always to make profit, make as much as I could, now there’s even more of a reason. I watch things even more closely now. While I may have someone to answer to now, I also want to see profits up from each company and work harder than I’ve ever worked because now my stock value could multiply at a growth rate that I am not accustomed to.
How did your organization react to news of the sale?
When I announced the completion of the deal in our marketing company, somewhat of a step-child to the service and repair company, the employees stood up and offered a standing ovation because now they were going to have more equipment, better financing and things that a small company couldn’t offer. We announced it in our main office and there was absolutely no change, we have not lost one employee. In fact, the management was actually kind of excited because now there’s a new focus and a new direction.
What about the effect on your techs?
The effect on techs was positive because they are now going to be offered a medical program that was unavailable from a small business, and also future stock options.
What about customer service policies and dealing with customers?
We don’t see any change at all. If anything, the consolidator now is able to negotiate lemon law policies with equipment, so if the equipment ever goes bad and we’ve been out twice to service it, we can pull it out and get full reimbursement. The company also offers a 364–day guarantee within the first year, regardless of what was done in your home or business. If a customer is not happy, their money is fully refunded. These were things we weren’t able to do as a small business.
What’s the effect on the administrative staff in the office, the people who do the accounting and payroll?
Probably most of the changes are in accounting. We’re being scrutinized because we are a public company and accounting practices are being changed to parallel general accounting standards. So our administrative staff is taking on a lot more work. There are a lot more forms that need to be filled out and they need to be submitted in a more timely manner than ever.
So what you’re saying is basically the consolidation company lets you run the business as you ran it, with the exception of some of their national policies?
The consolidators believe that they are purchasing a top quality company, so they don’t want to get in and mess around with it. They typically don’t want to change the name right away. They generally don’t want to do anything different. Their goal is to establish their best practices as a nationwide company. So they’re pulling their top-notch companies in and they’re asking questions, such as what’s the best thing you have offer? Then they review it as they formulate a policy handbook on best practices. We have noticed very, very little change.
If someone were looking at the decision to sell, what would you give as advantages and disadvantages?
The disadvantages would include the fact that you would not be able to call the shots, do what you want, sleep in when you want and so forth. The main advantage to selling is that you finally have an exit strategy. If the business has been around for some time and you are not really sure where to go with it, here’s a choice. The beauty behind selling is that your money, if you take it in stock, can increase as the stock value goes up. And you don’t have to claim it on your income tax until you sell it. And when you do sell it, it becomes a capital gain, which is taxed at a lower rate than ordinary income.
Usually the problem you have as a business owner is that for every dollar you make, at least 50 cents is taxed away. So it’s very hard to get ahead. But with an all-stock transaction, every point that the company stock moves up, your net worth grows — and at a much faster rate. It’s similar to a retirement program. It multiplies at a non-taxable amount until you take it out.
What advice would you give to individuals who are not profitable now, but would sure like to sell sometime in the future?
They should immediately recognize their costs and adjusts them. They are probably going to have to switch to a flat rate system of some sort in order to charge their customers properly. Secondly, they want to review all of their management procedures and the way they handle their techs, their office people, what they pay them, how they review them and the motivation they have. The next thing they’re going to want to do is take a look at their assets, unload some of the things that are more of an anchor and invest in better techniques and equipment.
Training is the key. Companies that operate on narrow profits could easily become profitable in less than a year just by implementing incentive pay. But that’s just the first step. They need to allocate money for training. I believe at least two weeks out of the year a tech is going to have to go away for training. That raises the value of a company.
How do you see the industry changing in the future as the consolidation movement continues? What would be your advice to smaller, medium-size and larger companies?
There is always going to be room for the smaller companies. I believe the mid-size companies are going to be the ones that are going to have a tougher time in competing with the consolidators. In a city where a consolidator comes in and has 200 service trucks and you’ve been running eight or 10, it’ll be tougher. They’re going to purchase most of the advertising, they’re going to purchase most of the techs available and you might still be around but your profits aren’t going to be the same.
The smaller contractors with one to three trucks, I don’t think there’s going to be too much concern. There’s always going to be a niche for a tech who wants to work for a small company; there’s always going to be a customer who wants to get a better price and deal with a smaller company than one that’s nationally recognized.
The larger companies, I think they’re going to be able to compete also with the consolidator. Because they’re going to try to find whatever weaknesses a consolidator has and they’re going to try to snare that market.
All right, let’s take a look at where you’re going to be five years from now.
I hope to still be involved in the company, working and teaching the industry. One of the beauties of working with ARS was that they (unlike some public companies that keep things confidential because they are publicly owned) want to help the industry, teach the industry how to do it better. They realized their No. 1 competition is the guy who doesn’t know his costs, is still charging $20 an hour and rough on employees. And they felt that by allowing Maio Marketing to continue to teach in the industry, to help the industry with better, newer ways, that it raises the level of competition. Second, it is somewhat like a farm for those companies that have become successful. They have an exit strategy where they can possibly sell, if they want to sell, to this consolidator or a different one. And that just helps the entire industry.
Any general words of advice to those in the industry?
The reason I sold to ARS is I felt that I reached the top of my career. From here, a good move forward is to join a company that is committed to the growth of the industry and to have enough foresight to build a company to a billion dollars in the next year. The move so far, looking back, is positive. I should have done it sooner when the stock prices were lower. Of course, that’s what we always say, “ ... should of, could of, would of done it.”
For the industry, I only wish that you have an opportunity to join a consolidator. If you are looking for an exit strategy, I hope you are lucky enough that your business is sufficiently profitable so you can be offered an opportunity to be part of something that’s going to be very, very big.