Episode information
Episode Number: 45
Date: July 29, 2024
Duration: 24:01
Host: Justin Deese
Website: JustinDeese.com
Contact: Justin@JustinDeese.com
Guest: Patrick Ritter
Website: theleappartners.com
Summary
In this episode, we are joined by Patrick Ritter, the CFO of Leap Partners, to delve into the world of private equity in the home services industry. Patrick shares his extensive experience in acquisitions, the strategies that private equity groups use to evaluate businesses, and how maintaining a strong company culture can be a significant advantage. We discuss the journey of Leap Service Partners and the parallels between home security and home services. Patrick offers practical advice for business owners about evaluating their businesses, understanding profitability, and the importance of planning for a potential sale or partnership before it becomes necessary. Get ready for insightful and actionable tips to transform your business approach!
Takeaways
1. Importance of Accurate Financial Statements:
Properly structured financial statements with clear margins by department are crucial for evaluating business performance.
2. Role of Company Culture:
A strong company culture plays a critical role in business success and can significantly impact both operational efficiency and acquisition desirability.
3. Seamless Acquisition Process:
Leap Partners prides itself on a smooth acquisition process, emphasizing the need for early preparation and clear communication.
4. Understanding EBITDA:
Knowing your EBITDA is essential for business valuation and improving long-term profitability.
5. Involvement of Private Equity:
Private equity groups are not only about providing capital but also bringing valuable operational experience and strategic guidance.
Chapters
Introduction – [00:00]
Welcome and Guest Introduction – [00:04]
Journey of Leap Partners – [01:03]
Importance of Company Culture – [06:30]
Evaluating Home Service Businesses – [11:03]
Understanding EBITDA – [12:40]
Preparing for Acquisition – [15:11]
Conclusion and Closing Thoughts – [18:25]
Keywords
Plumbing, HVAC, Air Conditioning, Electrical, Contractor, Freedom Blueprint Podcast, Justin Deese, Kristen Deese, Private Equity, Business Acquisition, Company Culture, Business Valuation, CFO Insights, Leap Partners, Home Services Industry, Financial Statements, EBITDA, Business Growth, Strategic Planning
Transcript
Justin Deese (00:04.357)
Welcome to Freedom Blueprint podcast. We are hanging out today with Patrick Ritter from Leap Service Partners. And you probably recognize the name Leap Service Partners. That is the private equity group that Paradise Home Services we partnered with last year. And I know since that's happened, you know, I get a lot of questions about the process and I just get a lot of questions about how it all works. And I thought, man, having Patrick on who is the CFO.
is good because you're the numbers guy behind all of it. So, Patrick, welcome, man.
Patrick Ritter (00:40.362)
Good to be here. Thank you, Justin. The only thing that can make this better is to be back at the beach with you guys like we were a few months ago.
Justin Deese (00:47.397)
It's only a plane ride away, man. It's not that far. So anytime you're ready, come on. Hey, listen, the weather right now is pretty nice. So Patrick, tell us a little bit about, so Leap Service Partners, can you tell us a little bit about that journey for you?
Patrick Ritter (01:03.85)
Sure, happy to. So Leap Service Partners is really kind of a second run of what a team previously did in the home security alarm space. So my co -founder, John Cirasulo and I worked together for 12 years in the security alarm business here in Nashville, a company called ADS Security and private equity backed. Our owner decided to sell back right before COVID, good timing. And after that,
The team kind of went their separate ways in a lot of respects and never could really find happiness. So John and I decided to get back together. And in 2021, we started evaluating basically any home services business you could imagine from landscaping to pest control to roofing to you name it a dozen or more. And, man, we landed that HVAC plumbing and electrical repair is a really, really hot spot.
100 % penetration rate. Everybody needs it and wants it. Lots of smaller companies that it was just ripe for acquisition and very much a similar space to what we had been in in home security because it was still technicians and tools and trucks. So John and I formed LEAT back in late 2021. And eventually we got the fair amount of the band back together from our old company.
And we had done 40 some acquisitions previously in security. So we got us, I don't know, six or eight of us back together that had done this before. And we're rocking. We're a little over two years in now and we're having a lot of fun.
Justin Deese (02:44.037)
Yeah. So, so one of the things that instantly connected us with, with you guys was that the story was similar where I used to own another company and we sold everybody kind of went their different ways. And just like you guys, we made a phone call and we're like, let's get the band back together. And that was one of the big things I feel like that drew all of us together, which was, I don't know, it makes it a lot of fun. Cause then you're even though you're newer, you're not. And I think that's sometimes such a competitive advantage because.
The widget may have changed, but how you all kind of roll with the flow is very similar.
Patrick Ritter (03:19.658)
same playbook, you know, doing acquisitions, providing mostly residential, some commercial service and, you know, great customer service, great repeat business. And as you said, the team already knows each other. So we shorten that learning curve by many years.
Justin Deese (03:38.981)
That's pretty exciting. So, so what about the home service businesses like the home service space made you guys really want to stick with that.
Patrick Ritter (03:49.386)
It was actually, it was what we knew and we knew that it wasn't going to be disrupted by, you know, the latest technology. You know, a lot of people in Nashville area, they want to pivot to healthcare and other things. And that's great. There's a lot of money to be made in healthcare and other technology spaces, but it's a little bit black box. Everybody can relate to your air conditioner or your water heater or whatever in your house going out. So everybody can relate to it. And it's.
just very similar to what we had done in the past.
Justin Deese (04:22.405)
Very good. So, as role as the CFO of the Leap Service Partners, what is kind of your primary responsibility right now?
Patrick Ritter (04:35.21)
Yeah. So, so in my role has evolved some in the early days, you know, we didn't have a controller of VP of finance in yet. So I was out working with the branches, doing month in close and financial reporting. My role has fortunately evolved to where we have a really, really strong back office team in place and a great controller and VP of finance so that I can do what I love. And so my day, Justin, a lot of my day is spent working on acquisitions.
you know, reviewing financial statements, working with my partners on pulling offers together and moving quickly in evaluating opportunities. The other thing that I really, really love is working with our branch operations. So we now have 17 branches. I'll be on the road the next couple of days doing what we call deep dives with the branches, working with general managers, trying to figure out, you know, where the financials are good, where we need to make improvements, what other pieces of technology we should
we should implement and really hearing from the people in the field, because an old friend of ours saying is, the people closest to the work know the most about it. So my role now is much more working out in the field and helping our field teams just kill it.
Justin Deese (05:54.853)
And so I, you know, I had, John Cirasula, the CEO, he was on a few episodes ago and, and a lot of the, the topic that we talked about kind of centered around culture. And I think what you just said is a really good example of, of a good culture and how the culture with leap is so good as, you know, as the CFO of a private equity group, typically you're not thinking about that role being a boots on the ground. Let me communicate with the branch level so that we can better.
drive the business and that's exactly what it is that you're doing. I think that's pretty fantastic.
Patrick Ritter (06:30.858)
Yeah, I appreciate that. And I think that that's where we're different from. There are a lot of other companies out buying HVAC and plumbing and electrical businesses. We are private equity backed, but we are also operators and working with the field teams. And we want, it's more than just bringing money to the table. You know, there's a lot of awesome groups out there. PE gets a bad name.
I know a lot of good people in this space. There's some unique ones too, but there's still a lot of good ones. But you have to bring more than money to the table because all these funds have deep pockets. We try to make sure that we can bring the team. We can bring the back office team. We can bring some new technology. And we can bring the experience of having built up a company that was maybe
20 some million in revenue when John and I got there to, you know, 100 million or so when we exited. So we've, we've, we've built a company before and we know what the growing pains are to get to, you know, a large scale.
Justin Deese (07:43.269)
Yeah, I think a lot of times when people think about private equity, I think they, they automatically assume a couple of things. One is that they're only buying big businesses. And I think that too, they think of, someone coming in and just rearranging the entire business from a day -to -day perspective. And, and I've, I've said this on multiple podcasts, but I think it's probably, worth repeating a and probably, worth you verifying what I'm saying, but.
from a day -to -day operation, you guys are not disruptive in any way towards the branches. Is that an accurate statement?
Patrick Ritter (08:21.386)
that is certainly the goal. We want to do what you need us to help with. We want to stay out of the way. What we really want to do is just like we have here. I mean, we've learned so much from you, Justin and Chris, and we want to take the good things out of each acquisition and share it across the branch network so we can all learn from each other. So we have a playbook that we go by on certain things.
Justin Deese (08:44.965)
Yeah.
Patrick Ritter (08:50.57)
But there's a whole lot of other things where we have flexibility, where the general managers are just learning from each other every day.
Justin Deese (08:58.085)
Well, and I'll tell you, we have what we call leap forward meetings. So we call them leap forward meetings and all the branch managers we meet every, every, every other week. And it really gives us an opportunity to kind of dig in with each other and talk about whatever's going on, you know, whatever challenges or opportunities or sharing. And it's been a really good, it's been a really great thing. I've been a part of a lot of best practice groups, but there's a whole different level that happens when you're comparing apples to apples. So.
As I'm talking to maybe one of the other branches, there's not a lot of, there's no ego involved. Like if you're winning or losing, it's, it's out there. You're, you're bare -necked out there.
Patrick Ritter (09:36.426)
Yep. And you're not competing with each other for business, but you are absolutely competing with each other because I see the friendly competition and the messages shooting across.
Justin Deese (09:49.797)
we there's, there's a lot of days where there's text messages back and forth about what, wait a minute, what did you close? Cause you, you should be behind me, not in front of me. And so now that there definitely has a, and again, I think that ties back to culture too.
Patrick Ritter (09:58.602)
That's right.
Patrick Ritter (10:04.298)
And that's one of the selling points is that culture. I mean, we, one of the guys calls it a band of brothers, a brotherhood. I'm no longer on an island, call it what you want, but it does really make a difference when they're, they're a lot of good industry groups out there. I mean, you're part of some of them, some are other branches are part of others, but sometimes I feel like there's a little bit of guarded nature at times. Cause you don't, who's in the room. You don't want to share at least.
You're never competing with anybody. We're all on the same team. We all have equity in the same leap business so that we're incented to help each other grow the business.
Justin Deese (10:43.045)
Yeah, agreed. So let me ask you this. So for anybody listening who's sitting out there thinking, you know what, I haven't really thought about selling, but if I wanted to, you know, step one for most business owners when you're selling anything is how do I even know what, what it's worth?
Patrick Ritter (11:03.722)
Yeah, so we have a very, very easy process, I'll say, and we don't want to put you through a lot of motions of going getting your CPA involved and digging up things. We say, okay, send us three years of QuickBooks financial statements, because 99 % of the world is running QuickBooks, right? Three years of QuickBooks, let us take a quick look. Let's jump on the phone. I'll probably have a few questions for you and add back, send.
you know, owner compensation and things like that. And then, you know, after we have those questions answered, we, you know, obviously we've had a discussion and we make sure it's a good fit first before we jump to the numbers side. But, you know, once, once we get a good view on the numbers within a few days, we can come back and say, Justin, you know, here's what we view your three years profitability like, and here's a framework of what an offer might look like. So no strings attached, no formalities. Let's look at your financials for a
a minute and then then we'll touch base on what it might look like if we were to do a partnership.
Justin Deese (12:08.933)
Easy, seamless, not so much pressure.
Patrick Ritter (12:13.418)
That's the goal.
Justin Deese (12:15.045)
So obviously another term that you hear thrown around a lot when it comes to private equity is EBITDA. And I think for most of us, well, for people that are not really involved with private equity, that's not a term that's used all that often. We certainly never used it beforehand. So can you give us what the, kind of an overview of what EBITDA even means?
Patrick Ritter (12:40.746)
Yeah. EBITDA EBITDA. What does this mysterious thing mean? I'll boil it down for you. It essentially means your bottom line profit with a few ad backs. Impro dressing up your bottom line profit is how some people have framed it. It's your bottom line. Add back your, most of the time, I'm just going to kind of boil it down. Most of the time, what I see in smaller businesses is add back your depreciation and your interest.
and any other ad backs. The technical term, if you really want to know it is earnings before interest, taxes, depreciation and amortization. Most of the time, what we see is bottom line profit plus depreciation interest and any other ad backs, you know, personal benefits, maybe you bought a meal or two on the company, things like that. We want to make sure you get credit for, for all of that so that we really have a true picture of EBITDA.
post acquisition, how much profit would be there for future buyer.
Justin Deese (13:52.005)
So really is anyone listening in if they're trying to figure it out, because that is the term that's used a lot when you're talking about evaluation. And I think for most small businesses, it's profitability that they're thinking about. So really the difference is going to be your, I mean, the big difference, I don't know, is there a percentage difference that you normally see between your net profit and your EBITDA?
Patrick Ritter (14:15.306)
It's hard to say. It just all depends on, you know, accelerated depreciation. If you have any debt on the business and you have interest, it would be really hard to gauge percentage difference.
Justin Deese (14:26.373)
But so if, if I am listening to this and I want to find out more and I'm thinking, yeah, you know what? I want to get a better understanding of it. I don't need to have that number to have the conversation, right?
Patrick Ritter (14:38.89)
No, no, you just three years of QuickBooks financials and we can sketch it out in usually an hour or so.
Justin Deese (14:48.453)
Awesome. So what are, so, okay. So what are some things if again, so now I'm looking at evaluation. What are some things that business owners that are interested in selling might want to kind of put on their radar earlier rather than later if they're interested in an exit or selling or partnership or any of that good stuff.
Patrick Ritter (15:11.402)
I think the, the structure of how you have your financial statements is, is critical. And fortunately with your wife, Kristen and her background and Mandy, I mean, you guys had a, had a really well laid out financial statement that made it easy to analyze. But if, if you're, if you really want to maximize your valuation, I would make sure that you can track, margins by department.
You know, we're going to want to know if you're doing HVAC change outs, we're going to know what your margin is in change outs versus service. If you're doing plumbing, we'll also want to know what the margins are in the various departments. If you're doing residential new construction, which we have a whole lot of hesitation about RNC for, you know, a lot of, a lot of the industry might dabble in it and that's okay, but not too much of it. There are a lot of people that can't really keel out that residential new construction.
from the rest of their traditional change out and service business. And that can be problematic at times.
Justin Deese (16:16.165)
Which I want to add this, even if you're not in a position where you want to think about, you know, an exit strategy or the future or any anger stuff. I think what Patrick said, you need to be doing anyways. You need to separate out, the different departments and what you're doing to, to understand your business a little bit better. There's, there's a lot of times where, as, as people start digging into their numbers, they, they think they're re they're doing really well in one department and they are just tanking in another.
And the easiest way to know the difference is if you just break them out on a regular basis. And then as you're doing evaluations, it's super easy for you to look at it and go, you know what our installation, our, our new HVAC installation department is not hitting its numbers. Where's the problem there, whether it's labor or hours or pricing or whatever the case may be. So.
Patrick Ritter (17:06.026)
And this industry has great technology with ServiceTitan and Housecall Pro and pick your platform to be able to do that much better than some other industries I've seen. And there's an old saying in the acquisition world about a lot of times the seller knows their business better the day they sell it than they did many years before when they were running it. And that's somewhere you don't want to find yourself. And one of the other things I'll say is,
By having that information, it's not always what you're doing, it's what you're not doing. And we used to come up with a stop doing list. And sometimes the stop doings was certain types of customers that everybody loved. We wanted to go chase them. But really when you got busy with the data, you weren't really making any money on them. They were a big distraction to the business. So knowing the margins by segment will obviously help you figure out what to stop doing.
Justin Deese (18:03.141)
Yeah, I think that's a fantastic point.
Justin Deese (18:11.525)
Good. Well, I know that you have a ton to do and a bunch of businesses to go evaluate. But before we go, what are some what are some kind of closing thoughts you might have for anybody listing?
Patrick Ritter (18:25.802)
So I would say if you think that on down the road, you may be looking to exit your business, don't wait too long. We have seen plenty of people that waited until retirement day or they had some sort of life event. And most buyers, whether it's Leap or somebody else, most buyers are gonna want you to stick around for a little while. You're the one that has the great relationship with your team. You know the customer base.
They're going to want you to stick around to maintain some continuity of the business. So don't wait too long to explore your options until you're, you know, it's, it's time to time to go to the beach or go fishing. Explore that early on so that there is, there's room for a transition period.
Justin Deese (19:10.725)
That's a, that's a great piece of advice. And one of those things where, just like the other, I wish everybody would do it because it's, it's hard to see. And I know being in the acquisition side, you see this a lot, somebody that's poured 30, 40 years into a business and they get all the way down and something happens and it's, they don't get what they could have gotten for it by just being prepared and.
You know, that's, that's part of the challenge with tactical versus strategic in our, in our space is, you know, a lot of guys are just, they're technicians that started a business and there's a lot of the strategic side that they don't, you don't know what you don't know sometimes. And that's, that's part of the hard, hard part. But, Patrick, thank you so much for coming and hanging out. If someone wanted to get a little bit more information on you or, evaluation of a business, how could they reach you?
Patrick Ritter (20:08.426)
Sure. So contact information's on our website, the elite partners .com. You can find me on LinkedIn. Be happy to come out and visit with you. I actually didn't mention this earlier, Justin, but I mean, I grew up in the trades. My dad was industrial maintenance, kind of jack of all trades. So we were always working on something. So I'm right at home going to visit plumbing shop or HVAC shop. And I know enough to be dangerous. My skills are a little rusty, but I still feel right at home.
being in the trade. So I don't really see myself as a numbers guy as much as I do. I'm just a home services guy and I'd love to connect by lunch and see if we can do a partnership.
Justin Deese (20:51.109)
Fantastic. And actually everything he said as far as how to connect with Patrick, I'll make sure to put in the show notes so it's easy to get in connection with him and Patrick, man, appreciate it.
Patrick Ritter (21:01.258)
Thank you, Justin.