Are there opportunities for the small shop operators in this consolidation frenzy?

The 10–15 truck operation cranking out $1.5 to $2 million in sales is a hot ticket these days. Consolidating companies - American Residential Service ( ARS), Group Maintenance America (GroupMAC), Service Expert, among others - are gobbling up these companies and paying the owners lots of money and stock shares.

But as a small independent contractor this whole thing might make you a bit nervous. Will the big shops eat you for lunch? Are there opportunities for the small shop operators in this buying frenzy? Armed with these questions, I called a few folks. Here’s what I learned …

“Often a person starts up his own business as a result of being treated poorly by a former employer,” comments Alan Sielbeck, CEO of Service Experts Inc. “No benefits, dead-end job. He sees that opening his own shop is the only way he can move up the ladder. This person is usually smart and ambitious. Often an excellent technician or salesman. His business takes off, he adds a few trucks and soon he is juggling all kinds of responsibilities.

“At this point, he might wish he could simplify things. He likes the sales part of his job, or maybe the technical aspects, but he doesn’t want to do everything. That person might find a position with a larger company. He can focus his skills on the tasks he enjoys.”

If your company is a big pain in the neck, would you be better off working for someone else? Maybe. You could join forces with another team. I asked a friend the other day, “Why do you stay in business? You hate it! You aren’t making any money. Why do you continue?” He responded, “Because I will feel like a failure if I quit.” Our self-worth can be so tied up with what we do that it clouds our vision. It is OK to stop doing things that don’t work.

I heard from a fellow who sold his company to Roto Rooter. “I am treated like a pariah at the supply house counter. Other contractors consider me a traitor for selling out.” He sold his company. So what? When you buy a car, are you required to own it forever? Isn’t your company a vehicle that provides a living for you and your employees? If it isn’t pleasing, you can sell it. This is America! If the consolidators are offering you a better business vehicle, you might want to check into it.

Should You Sell? Could You Sell? Frank Blau has suggested that the only reason you would consider selling your company is that you aren’t making enough money. Is that true? Would you love your company if it delivered $150,000 to your pocket every year? If so, you really don’t want to sell. You just want to make a living commensurate with the headache and risk.

If your company is generating net earnings (owner’s compensation and after tax profits) in the 15–20 percent of sales range, you may attract a purchase offer. “If you do want to sell your company, and you are not currently profitable … get profitable. Join a ‘best practices’ group and put the operating systems in place,” advises Sielbeck.

Consolidators love cash cows! They don’t purchase assets. They can buy trucks. Your customer list isn’t worth much. Customer loyalty? Fuggeddabboutit. There are many formulas for establishing the selling price of a company, but every one is based on earnings.

A small company without solid earnings is of no interest to consolidators. If you are not profitable now, you won’t be profitable later … unless you change. Philosopher Jim Rohn says, “Until you change, nothing will change for you.” Get a mentor. Call Frank Blau and do what he tells you to do.

If you get really profitable, then you can choose to sell … or not. If you are struggling to stay afloat, they might still be interested in YOU. But not your trucks, inventory and “good will.”

Report from the front lines: I met Jim Willburn of Jarrell Plumbing, Houston, TX, through Contractors 2000. He got turned on to Michael Gerber, author of The E-Myth. Gerber’s message is, “The only reason to create a business is to be able to leave the business. Your business isn’t your life. It should serve your life.”

Jim was inspired. He set a goal to sell his company within 5 years, at a price that would allow him to retire comfortably. He beat that goal by about a year and a half when he sold his company to GroupMAC last spring.

Jim and his wife Mary Ellen are having a great time. So far, there have been few changes in the day to day operations. The Willburns will remain on as managers for the next few years. Jim told me, “We are having more fun than we have ever had!”

Jim admits to having a bit of post-sale anxiety, but it vanished when he attended a meeting of GroupMAC company presidents. “The contractors are incredible. It’s an honor to have such bright, progressive business people as colleagues. I know that if I need help all I have to do is pick up the phone.”

Another friend, Carmine Iapaluccio, sold his plumbing and heating company to Service Experts. Carmine’s company acts as a “hub” service center. He actively pursues small shop operators, looking for service techs and managers, sometimes entire companies, to facilitate the rapidly expanding company.

Carmine is a sharp businessman. He was very successful as an independent but loves playing the bigger game offered by a consolidator. “My work is so much fun. I will try to incorporate one new small company every quarter into our service ‘hub.’ We are just completing a training center. We’ll have intensive training programs for all our employees, including a new, one-week ‘boot camp’ indoctrination for all new hires. It would have taken too much time and money to take my company to this level as an independent contractor.”

Carmine keeps his eye on Service Experts’ stock prices. “The focus is not just on profits. We work to make the stock value increase. Every day I fax in the numbers for our service center. It’s very competitive, but we support each other. I would not want to turn in below-target numbers for a week straight. But if I did, I know that the other managers would rush to the rescue. I could count on their help to find and fix the problem. And I would do the same for them. As shareholders, we are in this together.”

Get Specialized! Sielbeck says that Service Experts is not a “do-everything” contracting company. “Eighty percent of our revenue comes from HVAC service and replacement. HVAC work totals $24 billion in sales, industry wide. We want to target that market.”

If you want to maintain a successful independent small shop … find a niche. The consolidators will be calling you to perform specialty jobs: hydronic heat, water treatment, tub lining, cisterns and water collection, back-flow, indoor air quality, remodeling.

The most comfortable heating systems in the world, radiant floors, are not mentioned in any consolidator’s game plan. Isn’t that interesting? Why don’t you take advantage of that opportunity, while it exists.

And remember, this industry is very fragmented. I’ve heard that there are maybe 100,000 contractors in the country. Perhaps 75 percent or more of these contractors have three or less trucks. The small shop will remain the predominant provider of plumbing and heating services. The consolidation of waste haulers has been the model for this current consolidation movement. Although it seems like every waste hauler has been consolidated, 90 percent of waste haulers are still independent contractors.

So, if you want to remain independent - go for it. The big companies will not run you out of town. Also, independents could band together to exercise buying muscle, without relinquishing ownership.

Before you join up, ask yourself a couple of questions…

1. What’s in it for me? Remember the saying, “If it sounds to good too be true, it probably is?” The consolidation movement is still so new that only a few cracks are showing. I am interested in seeing if consolidators maintain realistic selling prices. Or, will they cut costs, specifically wages and benefits, to become the low-cost providers? All involved say that selling prices to consumers will be respectably high. But, “high prices” in one area of the country can be “chicken feed” in another. And will the dollars flow through to the employees? Will the stock shares become blue chip or cow chip? No guarantees.

2. Could I work for someone else? Most contractors I know are fiercely independent. Not really interested in anyone telling them what to do. Do you play well with others? Sielbeck says the most important element in a successful alliance is a match in philosophy. If you buy into their game, and agree with the way they are playing, you will be fine. If you can deal with having a boss. And if you can deal with letting go of your company. Iapaluccio admitted, “This decision to sell is very psychological. This company is like ‘my baby’ and it was pretty emotional when I decided to sell!”

I know the industry is changing at warp speed. But I embrace these changes. The old rules weren’t so great: Good ol’ boys, going rate of $50 an hour and 2 percent net profits. Consumer opinion that plumbers are sloppy, butt-crack flashing rip-off artists. No respect, no training and no future. It’s time for a revolution. Passivity will bring disaster. If you are not up to doing it on your own, go out for the team.