When the Hunter Becomes the Hunted

October 9, 2020 |  

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Tom Farinacci II built Houston Green Leaf up to 35 employees when he solid it to Grounds Control, a national landscaping company, for around four times EBITDA.

Along the way, Farinacci grew by making two critical acquisitions, so he has been on both sides of a deal and brings both perspectives to this interview. Some macro themes should pop for an inspiring value builder, including:

  • Pick a quiet corner: There’s nothing glamorous about cutting lawns, but in part, that is the magic of what Farinacci built. He started pushing a lawnmower at 15, and by age 45, he had built a company that was attractive to a national acquirer. Operating in the least glamorous corners of the economy are often where the most money is made. In Farinacci’s case, he was earning EBITDA margins of around 15% a year.

 

  • Location matters: Both when Farinacci made acquisitions and when Green Leaf itself was acquired; the location was important. Farinacci bought businesses dominant in specific neighborhoods, and Green Leaf was acquired in part because they had a substantial chunk of the Houston market — a large and growing megacity.

 

  • Humility: From a relatively young age, Farinacci had a number he wanted to sell his business for. Farinacci knew that if he could accumulate that much money, he could invest it and do what he loves, which is spending time with his kids and coaching his son’s football team. Farinacci avoided the trap of moving the yards sticks so many of us fall into when, instead of celebrating the achievement of a goal, we pick an even higher goal. Farinacci hit his number and had the discipline to sell.

There’s plenty more to take away from Farinacci’s interview, including:

  • How to structure an acquisition
  • How vendor financing can be used to acquire a business
  • What to look for when vetting a potential acquirer
  • How to pick an M&A advisor

Around 90% of Farinacci’s revenue was recurring thanks to long terms service contracts. Service contracts are one of nine subscription models you can use to transform your business from the transaction business model to an annuity business. We’ll help you discover your recurring revenue stream using The Automatic Customer Builder, the tool that underpins module 5 of The Value Builder System™. Complete module 1 right now by getting your Value Builder Score.

Our guest

Tom was born in 1975 in Cleveland Ohio, moved with his family in 1978 to Houston, Texas in a southeast suburb of Clear Lake City. He attended Sam Houston State University in Huntsville Texas from 1993-1997 and received a bachelor’s degree in the Landscape Architecture field. In 1998 he started his second landscaping business Pro Design Landscape and quickly grew in the residential landscaping market. In 2001 he acquired his father’s landscape business that he sold to him in 1998 and then joined forces to build the company to a higher level. In 2012 Tom decided to do a major acquisition to have a significantly large market share in the area and acquired Greenleaf Enterprises Inc. In 2017 still growing and did another acquisition of Riverstone Landscape and growing to 10 crews with 35 full-time employees. After 30 years of working in the landscaping field and working towards and meeting all of the goals, Tom sold Greenleaf Enterprises Inc in 2020. He is currently investing in commercial real estate and willing to work in the consulting field for any service businesses to help them troubleshoot any problems prepare for peak efficiency to get any business ready for maximum production or ready for a timely exit from the field. www.linkedin.com/in/tom-farinacci

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Transcript

John Warrillow:

Okay, so what are the numbers on your companies dashboard? My guess is you look at your company’s revenue and profitability, which are two great metrics to track, but there are another eight key drivers of the value of your company that go well beyond just revenue and profitability that are the things that acquirers want to know about. Going and getting your Value Builder Score will help you look at your business through the lens of an acquirer. Takes about 15 minutes to do. Go to valuebuilder.com to get your score.

John Warrillow:

Oftentimes on the show, we talk to people who have leveraged technology, even built technology companies, and they make for fantastic stories, oftentimes selling for incredible multiples. While those stories are interesting, I think you and I both know they don’t make up the bulk of the economy. The grassroots of the business market is made up more of people like my next guest, Tom Farinacci, who built a landscaping business to 35 employees, and when he’d reached his magic number, he decided to sell.

John Warrillow:

Couple things to be on the lookout for in this episode. Number one, I think it’s an overriding theme, which is that in a lot of cases, the quietest corners of the economy are where you can make a lot of money. One’s that aren’t picked over by competitive interests, that are effectively not glamorous businesses, but ones that can often be some of the most lucrative. Think also about the location of your company. As you’ll hear in Tom’s story, it was both important in terms of the companies he acquired, along with why he was acquired himself. And finally, I want you to listen for the humility in Tom’s voice. You’ll learn that when he reached his number, he decided to sell, even though what many of us do is move the yardsticks when we reach a goal. Instead of just achieving and celebrating that, we move the yardsticks. In Farinacci’s case, he did not do that. He sold his business for a specific reason. He will tell you that and all of the details about his acquisitions as well as his being acquired. Here to tell you the story is Tom Farinacci.

John Warrillow:

Tom Farinacci, welcome to Built to Sell Radio.

Tom Farinacci II:

Well, thank you, John. Appreciate it.

John Warrillow:

Yeah. So, tell me a little bit about this company Houston Green Leaf. You guys were a landscape company? You did landscaping, is that right?

Tom Farinacci II:

Yes, sir. We did a variety of landscape in the fact of we did residential with commercial, and we did do a lot of construction and installations as well. Some new installations. We did a lot of, I would say, reconstruction installations is where we specialized in, as well.

John Warrillow:

Got it. What proportion of your business was residential versus commercial?

Tom Farinacci II:

I would probably say at the time when we did sell, we were only about 30% residential. The 70% was commercial. Kind of give you a scope of it. The residential, we were doing approximately around 400 yards weekly. That’s just the 30%, and we had a ginormous amount of commercial in the aspect of different customers. So, for regular maintenance from retail centers to hospitals to condominiums.

John Warrillow:

And what proportion of your business, again when you sold, was these regular maintenance contracts coming in once a week, cutting the lawn, doing the leaves, whatever, versus the one-off construction stuff?

Tom Farinacci II:

Probably the breakdown of it, which was very key for me, I would almost say probably 90% of it was reoccurring income or residual income that came in weekly.

John Warrillow:

Got it.

Tom Farinacci II:

The other 10% was the extra bonus of when we did some extra work.

John Warrillow:

Why did you do the 10%? Why not go all in reccurring revenue? What was the thinking about retaining that 10%?

Tom Farinacci II:

Part of the really the reason of the 10% was we weren’t actually actively going out and looking for new installs. A lot of it was the existing customers that wanted additional enhancements. When he had an HOA, we had plenty of HOAs where they wanted to go ahead and redo the design work of the entrances or residential.

John Warrillow:

What’s an HOA?

Tom Farinacci II:

Homeowners Association.

John Warrillow:

Okay.

Tom Farinacci II:

So, you’re mowing their basic green spaces at their parks, their subdivision entrances and stuff like that. And-

John Warrillow:

And what made you guys unique? Like why would someone choose Houston Green Leaf? I mean, there’s a lot of landscape companies out there. Why would they choose you guys over someone else?

Tom Farinacci II:

Yeah. There’s so many of them out there, and that’s the one thing is it’s competition. They’re a dime a dozen out here.

John Warrillow:

Yeah.

Tom Farinacci II:

But what pushed us, I think, was our responsiveness when a new potential customer would call, we would get on it fairly quickly. And when I say “fairly quickly,” we would have a phone call back within probably six hours and have someone back out on their property within 24 hours. And that goes a long way-

John Warrillow:

And this was responsiveness to customer issues or when a new customer would call you for assistance?

Tom Farinacci II:

New customer. New customer would call. See the key is, and I think in this line of business, if you do good business and you do good work, you should be able to keep this customer. And as long as your work is top peak and we’re not having any issues, you should be able to maintain these customers and just keep slowly building on it. So, the key was as long as we could acquire and get these new customers, and then word-of-mouth, I’ve always said is your best advertisement or your worst enemy. If you do good work, it’s your best advertisement. You shouldn’t have to market too much more because people are going to say, “Hey, I know a great guy. You want to give Green Leaf a call.” And that’s where we got the majority of our work from.

John Warrillow:

You were 30/70 residential/commercial. Commercial jobs, I got to imagine they get bidded out a lot.

Tom Farinacci II:

Absolutely, they do. They surely do. That’s where it’s a very competitive market. I’ve been blessed with being in the business almost 30 years where I did the bigger commercial bids to where we were right in the perfect sweet spot to hopefully pick up a lot of these contracts. Some of them, they’re just too much of a lost cause or they’re just so, they want to bottom line. And you’re in business to make money, you’re not in business to break even, so that was a very tough part in this line of business to be sure you get to be profitable enough on those commercial bids.

John Warrillow:

Yeah, I mean, that’s where I was going next. What was your overall profitability on a percentage basis? What was able to flow to the bottom line? What’s the percentage at the top line?

Tom Farinacci II:

I would probably say close to around a 20% to sometimes 25%. Sometimes we got 30% on some of these profits. It just really did vary because each job is different and when you [crosstalk 00:07:58]-

John Warrillow:

Tom, can I just interrupt, just to make sure I’m clear. When you say 20%, are you referring to gross margin, like on a job or are you referring to the end of the year when you got your tax return done, your profitability?

Tom Farinacci II:

Gross margin. Profitability was probably more closer to around a 15%.

John Warrillow:

Okay.

Tom Farinacci II:

At the end of the year is where you’re at.

John Warrillow:

That would make sense.

Tom Farinacci II:

Yeah, obviously you’re trying to shoot, on each job you want to shoot higher, a 30% or so because you have so much overhead that’s going to just take those numbers down at the end of the year for your tax return.

John Warrillow:

And the guys and gals doing the work in the field, the actual mowing and raking and so forth, are those employees or are they subcontractors? How did you work that?

Tom Farinacci II:

No, they were all strictly employees and paid on time and a half when they did go over 40. I had very few subcontractors that I used in this line of business. We did pretty much everything in house.

John Warrillow:

Got it. I know that you built this company through acquisition. You made a couple of acquisitions. Can we talk about those? Maybe describe the first one, like how did it come about?

Tom Farinacci II:

The first one was more smaller when you’re just trying to grow a little bit. I kind of got, I would say lackadaisical and then I’d get the itch, “We need to grow.” Another famous friend of mine that does very successful work had a great quote, “If you’re not growing, you’re dying.” And I thought that was, that’s a great point. You should be always trying to grow and expand. So, I decided the easiest way to grow the business instead of one by one was to do some acquisitions, by taking a chunk and getting all of sudden an instant presence into a neighborhood or an area of town that you weren’t in otherwise or had a tough time breaking into otherwise.

Tom Farinacci II:

So, around 2012, I decided to take a giant leap of faith and do an acquisition, and the company name at that time was Green Leaf Enterprises, and I did decide to go ahead, take over their name. Because actually, they were the bigger entity at that time and it was almost I was going to triple my business overnight with this acquisition. So, it was a real big leap of faith. A high risk, obviously for me, but I’m glad I did it because it got me going in the right direction to where after that acquisition was done, I had instant presence in areas that I never did and the business just kept growing more and more after that.

John Warrillow:

So, as you looked at making this acquisition, what was it about the company that you liked? What made it strategic for you? Beyond just the size, what else made it interesting?

Tom Farinacci II:

Yeah. Not necessarily the size. For me, it was location purposes, trying to get in certain areas that I was not or you could try to get into certain areas, but then since this business is based on hourly employees, time is money. And then to go over there to drive for a couple of properties and then drive back into your area where you need to go, it was not being efficient. But now that doing this acquisition, all of a sudden, I had a multiple of properties in that area, which made it great to where I could grow and have so much more prospects or people.

John Warrillow:

And why acquire and not just blitz that market? Like identify a geographic market and blitz it with advertising, cut everybody down on price and just basically acquire that business? Why buy a company as opposed to kind of going and compete to win those customers?

Tom Farinacci II:

Well, for me, it was a no-brainer. To me, it was just an easier path of going ahead and acquiring instead of trying to go one by one and trying to break into those certain areas that you would like to get into, and spend all the money on marketing. Why spend the money on the marketing on a hope that you’re going to get new work, when you could acquire and all of a sudden you have that work instantaneously?

John Warrillow:

Yeah. Well said. How did you go about ensuring that those contracts would transfer over to you, both the residential and commercial contracts? Because when you acquire a company, obviously [crosstalk 00:12:40], you hope that those customers stay loyal. What did you do to try and keep them sticky?

Tom Farinacci II:

The best thing was that we did give them a notification letter, but the notification letter did state that the past owner was going to stay on board as part of the team. However, nothing else was really going to change. All the integral parts of the business from management to the employees, we weren’t going to change the crews. Some of these customers like the same crew foreman and that could be an issue, so we weren’t going to change any of that aspect. We were just going to add to and add more customer in around the area. That was a big key factor, I think because some people would like to stay with a service business that they know and they trust, but when there’s always change, there’s always apprehension that they might change things up.

Tom Farinacci II:

So, I tried to not change much in the service part at all with that acquisition, and it worked out fabulously. I don’t this we lost, we lost very few, maybe 1 to 2% on that acquisition.

John Warrillow:

Wow.

Tom Farinacci II:

It was great.

John Warrillow:

How did you value the company for the purposes of that acquisition? Was it a multiple of SDE or profitability or EBITDA? How did you kind of come up with a value in your head of what to pay?

Tom Farinacci II:

It was more of a profitability and when I did this purchase. But on the background, I had to put a price on the areas that he was in compared to where I was not in to where how much would I had to spend, as we talked about earlier, on marketing, on trying to get out there and blitz those areas? So, it was based a little bit on his profitability. The actual customers that he had too. At this time in ’12, I was very heavy on residential. I was probably 80% on residential, 85%. He had the majority of the commercial, so this is what kind of tipped the scales for me to where I was willing to pay a little bit more to now really bust into the commercial market and be able to take off on that.

Tom Farinacci II:

So, there was a few factors on that acquisition to where it wasn’t slowly on EBITDA. It was more on his profitability, where he was, how much would I have to actually dump into the company for marketing in order to get to where he was at. So, there was a few factors that [crosstalk 00:15:26].

John Warrillow:

What multiple of EBITDA did you pay?

Tom Farinacci II:

On that one, it was right at, I think, three to three and a half.

John Warrillow:

Got it. Got it. Curious to know how did you retain employees? I’d imagine, and again, I don’t know this to be the case, but I’d imagine every Tom, Dick and Harry with a lawnmower thinks he can be or she can be a lawn care person. And so what did you do to, A, ensure they didn’t steal your customers and B, retain them? Are those issues that you thought about?

Tom Farinacci II:

Oh, absolutely. In this line of business down here, especially in the Houston area market, it is tough to find some loyal employees. They’ll definitely leave you if they get a higher offer on compensation. With these new ones, what I did to earn the new employees respect on this acquisition was I actually went out there and worked with them side by side a little bit. Got to know them, talked to them a little bit, find out about their family, make them seem a little bit more that you care, and I think that went a long way with a few of the guys with that acquisition to where I think five key guys ended up staying with me from ’12 from that first acquisition, that first major acquisition that we did. So training-

John Warrillow:

How many employees did you have? When you acquired that business, how many new employees were you taking on effectively?

Tom Farinacci II:

At that time, I took on another 12 to 14, if I believe, and I had currently around 10. So, it was, and here’s, this was a very interesting part because you have the old company, which at that time was Designer, but I decided to take Green Leaf’s name. And you had the old company Designer employees now having to mesh with Green Leaf employees. They had a little bit different idealism on how to do work or how to complete work. So, that was all a very interesting part of the acquisition of trying to get these guys meshed together, acquainted, and work together as one solid team.

John Warrillow:

I bet. I bet. Listen, I’d love to dig in a little bit more on the Green Leaf acquisition. So, it was three to three and a half times EBITDA. How did you structure that? Was it like 100% cash upfront or was there a portion that was paid over time? How was that kind of structured?

Tom Farinacci II:

I was blessed at that time. We structured that to where I did get, have a bank loan for that and then he did also owner finance to me a bit of that money with some down payment as well. That was structured over a seven-year term.

John Warrillow:

I see. What proportion was owner financed?

Tom Farinacci II:

That’s a good question. I think the owner finance part was roughly 30%.

John Warrillow:

Got it. So, for those folks doing an acquisition, if they’re thinking in their head like, “How would I get this money?” So, a bank loaned you a portion?

Tom Farinacci II:

Correct.

John Warrillow:

Did you have to give them a personal guarantee for that?

Tom Farinacci II:

Absolutely.

John Warrillow:

Yeah.

Tom Farinacci II:

Yes. I don’t think banks do it any other way.

John Warrillow:

I don’t think so either. Okay. So, the bank lends the money but you’re on the hook personally.

Tom Farinacci II:

Absolutely.

John Warrillow:

And then the owner effectively lends you money to buy their company effectively? In this case, it was about 30%.

Tom Farinacci II:

Correct.

John Warrillow:

And you’re paying that over a seven-year term.

Tom Farinacci II:

Mm-hmm (affirmative).

John Warrillow:

And so in a lot of ways, I guess that makes that former owner somewhat motivated to stick around and make sure it’s successful because they want to get their money, right?

Tom Farinacci II:

Yes, to a point. I think he knew this was an interesting one because it was a local acquisition, so I was really his competitor. So, he knew who I was, he knew my work ethic, he felt comfortable enough that, “Well, I’m just not going to take this and just run it into the ground.” I was already in the business and just acquiring and trying to grow. So, he felt comfortable enough on that to, I think, I can’t speak for him, but I think that’s the reason why he went ahead and decided to go to sell to me.

John Warrillow:

Did he stick around for the seven years?

Tom Farinacci II:

No. No, he was gone. He went away pretty quickly. He was, I would say he was probably gone after about three months. It was quick.

John Warrillow:

And what impact did that have on the company?

Tom Farinacci II:

Not too much. Like I said, I wanted to try to earn the respect of the current employees. I didn’t have any jump ship. It was to where you got to get a comfort level with them to be sure that they’re okay with it. It was a little bit of a change because they had a different location to drive to, which wasn’t too far, but it’s change. Nevertheless, it’s change and you’re going under a new boss. So, I think with those things that where I was trying to make the employees feel more comfortable, it worked out good and it didn’t have any effect when the old owner had left.

John Warrillow:

Got it. And were you able to pay the seven years, whatever the payout associated with his sale price?

Tom Farinacci II:

Oh yeah, absolutely. It was actually paid out early. We were done after four, I think, with everything.

John Warrillow:

Oh, that’s great.

Tom Farinacci II:

Yeah.

John Warrillow:

Help me understand something. Acquiring a company, it’s obviously a huge asset. It requires that you put up a personal guarantee for a bank loan. What was your … how did you get comfortable with that amount of debt? Did you tell your spouse? Was that like a conversation you guys had?

Tom Farinacci II:

Yeah, that was super tough because like I said, it was a huge leap of faith. Here I am, I’m going to take a personal guarantee. Yes, I do know the business, but I’m going to go into some severe amount of debt right off the bat and man, I hope this works. And it was a huge leap of faith, but most business owners are risk takers, but they got to be calculated risk takers in order to [crosstalk 00:22:12]-

John Warrillow:

But how did you get comfortable with it personal? What was your … I’m serious, did you tell your spouse? Did you have the discussion? What was their reaction?

Tom Farinacci II:

Absolutely.

John Warrillow:

How did you get comfortable with it?

Tom Farinacci II:

Yeah, absolutely. My wife of now almost 20 years, when I talked to her, it was a huge conversation, but she’s such a great partner that she said, “Look, you know the business, you know what you’re doing, it’s nothing really new, you’re just growing. You’re going to have a huge growing pain immediately over night. You’ll be able to handle it.” And I think she was a very driving motivation factor for that to say, “You know what? We’re going to do this. We’re going to take this leap of faith and we’re going to grow and we’re going to triple over night and we’re going to keep going.” And that’s exactly what we did. We kept going after that.

John Warrillow:

And to be clear, does she work in the company?

Tom Farinacci II:

No, she does not as a matter of fact. No, she has her own separate job that she does and yeah, she’ll get some general background on what’s going on with work, but other than that, we’re just concentrating on family and running around with three kiddos.

John Warrillow:

Oh, nice. So, how did the second acquisition work? I’d be particularly interested if you did anything differently the second time around?

Tom Farinacci II:

No, the second acquisition, it was nice because it was a smaller acquisition. It wasn’t something to triple again. So, this second acquisition was a strategic part for me that eventually I wanted to make an exit in this line of business, but I wasn’t there yet to where my goal was I wanted to sell out to a nationwide company. I wanted a nationwide company to come in and have a major instant presence in a major city like Houston, Texas. And I wasn’t there at that time before the second acquisition. I was there for only, with seven crews, around 25 guys, and I said, “No, I need to grow a little bit more.” So, the second acquisition was they had three crews and an additional, I think, close to a dozen men, 10 to a dozen men on.

Tom Farinacci II:

And once again, this was extremely strategic on commercial customers because this is where I was trying to drive now, trying to wane out a little bit of the residential, push a lot more towards commercial because you are a lot more marketable if you have commercial customers compared to those residentials.

John Warrillow:

Why?

Tom Farinacci II:

I think there’s a strategic move on that where it’s basic of if you have one crew, you’re much more efficient where if that crew did one start and stop and worked at one giant HOA compared to 25 start and stops, driving around, you’re just not as efficient. So, your bottom line profit is actually higher on those commercial ones as long as you get them bid out correctly.

John Warrillow:

Got it. So, you figured if, I’m paraphrasing, that by picking up more commercial business you’d be more attractive to an acquirer?

Tom Farinacci II:

Absolutely. Absolutely are in this line of business. Correct.

John Warrillow:

That’s helpful for sure. So, you go in and buy this smaller company. Again, similar deal. Was it a similar multiple of EBITDA or different?

Tom Farinacci II:

Yes. No, it was pretty much the same structure. This one was very smooth as well. This one I was not nearly nervous about and this one I did not have to go to the bank to finance as well. So, it worked out very well and all it did was just expand where I was, expanded my presence out there and it worked out perfectly. It worked out beautifully the second acquisition.

John Warrillow:

Similar multiples? Kind of three to three and a half?

Tom Farinacci II:

Yes. Yes. Exactly.

John Warrillow:

And the seller taking some financing back?

Tom Farinacci II:

No, he did not take any financing back.

John Warrillow:

Okay.

Tom Farinacci II:

So, we were able to pay this out.

John Warrillow:

Got it. Got it. That’s helpful for sure. So, you had this idea that you wanted to sell. What was … was that something that you … because a lot of people think, “I don’t really want to sell. I’m going to hand the kids the business or I’m going to go out boots first, as they say.” What was motivating you to want to sell or build to sell, effectively?

Tom Farinacci II:

The biggest driving factor for me was spending more time with my family, especially while my kids are young. Life is too short here. In the blink of an eye, you have, if you do have kiddos, or a lot of us have kiddos, in the blink of an eye they’re five and a blink of an eye they’re 15, and time flies by so quick. I did not ever want to have to say, “Man, I wish I was there for that” or “I wish I could have made it for this.” And that was getting to eat on me a little bit to where I wanted to go ahead and exit out of this company and that was a big driving factor. Just more family time to spend more time.

John Warrillow:

And in retrospect, now that you’ve had a bit of time to reflect on that, were you missing those events or was it more just kind of in your head? Do you know what I mean? Were you actually missing key events being an owner?

Tom Farinacci II:

It was wanting to be more involved with my kids. Now, not necessarily missing key events as for games. I pretty much made all of the games, but being more involved even. Like I wanted to coach. I would love to coach my kids. But that’s a very driving factor of having the time to do it and cutting off. I didn’t have that as much. So, now I have that time for … I love it. I’m drawing up football plays now for my boy. Different stuff like that. But and I was truly blessed to where, at my age, where I could say, “I’m ready to exit. I’m ready to spend some more time with my family and then I can eventually move onto some other things.”

John Warrillow:

So, that’s helpful. Let’s get into the actual sale itself. So, you make the decision to sell. What was the next step?

Tom Farinacci II:

The next step was obviously finding the right broker. There’s multiple different brokers out there in how they approach trying to sell your business. So, at that time, I think I interviewed four different brokers. There was one that just stood out above the rest and I liked his approach.

John Warrillow:

What made him stand out?

Tom Farinacci II:

The company’s name was Gilbert & Pardue, and when I met with Matt Gilbert on this, what made it stand out was the information that they would put forward and they would kind of go and actually headhunt for you. Not just necessarily take the listing and stick it on a website and say, “Well, we’ll wait until someone calls us.” He had a network of people, business capitalists that would possibly invest, and he had a lot of different avenues to go about to put this business out on the market. And that’s what I really appreciated about working with GaP business advisors.

John Warrillow:

Great. So, Matt was saying, “Hey, look, I’m going to market this thing. I’m not just going to be passive and let.”

Tom Farinacci II:

Absolutely.

John Warrillow:

Got it. So, what was the next step there? I mean, did he market it? Did you get sort of multiple people interest? What was that like?

Tom Farinacci II:

What was great about this is then I kind of went through a financial overview number one with his team to even see. So many people are saying, “Yeah, I want out and I’m going to sell my business.” Well, I think the percentage is very low, many 1% that when you finally look at the numbers then you’re going to say, “Okay, yes, this company’s worth something.” Compared to so many other businesses that are like, “Oh, you got to boost these numbers up to even make it marketable.”

Tom Farinacci II:

So, I did go through that with Matt. That came out very well. And then what they did is I kind of went through an interview with their team on a confidential business overview. And this was, I think a big driving factor of what probably sold the company was a booklet per se or information packet of probably over 30, 35 different pages, colored pages, information, all the financial numbers, what we did. It was a great information tool that he used and handed out to certain companies after, of course, he got a nondisclosure.

John Warrillow:

How big are you at this point, Tom? Like how much revenue, how many employees? What’s the size that [crosstalk 00:31:38]-

Tom Farinacci II:

Currently, at the time of sale, I was right at 10 crews and over 35 full-time employees.

John Warrillow:

Okay, so this is a reasonably significant business, just to give folks the scope. So, you’re 35 or so employees. He puts together this offering memorandum or this deck that describes what you do. Then what happens? What’s the next step?

Tom Farinacci II:

Oh, obviously, he did put out one-page teasers, which kind of, he floated those out into circulation with his different avenues, and we ended up getting quite a few people interested. And then with that, I had at that time probably, I’d had three or four different offers and there were some driving factors of why I didn’t go with those first three, and then the fourth one just seemed to be right to where we could sell out.

John Warrillow:

Okay. So, give me the range. If you can, give me a range of kind of multiples between the four offers? Sort of what was the low end and what was the sort of high end?

Tom Farinacci II:

The multiple wasn’t necessarily the primary driving factor.

John Warrillow:

Okay.

Tom Farinacci II:

But this multiple was, I think right around a four, three and a half to four was the multiple.

John Warrillow:

Okay.

Tom Farinacci II:

But the driving factor as well was how the structure of payment of was going to be. I did not, I was not really necessarily willing to owner finance a huge chunk of it, depending on who the potential buyer was or if he was already in the line of business. The same scenario when I’d acquired before. I think he felt comfortable with me because I was in the line of business. So, those were some of the driving factors of who I decided to go with in the end.

John Warrillow:

The three offers that you did not decide to go with, I’m assuming that the proportion of owner financing was relatively high? Is that what made the decision unattractive?

Tom Farinacci II:

No. One was a gentleman who was not ever in this line of business, had the finances for it. But in general, well-being of my employees, I want the business to succeed obviously, and keep going.

John Warrillow:

Sure.

Tom Farinacci II:

So, that was a huge roadblock for me for that one. The other gentleman was not in the line of business as well, but then he wanted a significant amount of owner finance as well, and I think he was kind of just struggling with trying to get the bank loans for it. So, those are a couple of them that I remember off hand. And then the final offer one was a gentleman that was in the line of business and the finances were right to where I only had, at that time, I was only going to owner finance I think around 15%.

John Warrillow:

One five?

Tom Farinacci II:

Mm-hmm (affirmative).

John Warrillow:

Got it.

Tom Farinacci II:

Yeah.

John Warrillow:

And that’s the one you ultimately went with?

Tom Farinacci II:

Yes sir.

John Warrillow:

Yeah. How do you structure the interest rate on that? Because I mean, man, interest rates are so low right now.

Tom Farinacci II:

Right.

John Warrillow:

What was the interest rate that you got on the portion that you financed, albeit a small portion?

Tom Farinacci II:

I think that interest rate was at five five.

John Warrillow:

Oh, okay. So, not … I mean, not bad relative to [crosstalk 00:35:26] what you get at the bank right now.

Tom Farinacci II:

No. Yeah, exactly. Exactly. So, I think it was right around five five. It was a fair amount, I believe a fair amount.

John Warrillow:

Yeah. Yeah. That’s helpful. How would you describe the next step, the kind of diligence phase where you’ve agreed but there’s a query that they’ve got to kind of check you guys out?

Tom Farinacci II:

This was an interesting deal because the potential buyer at that time came in in February of this year. It was early February if I remember correctly, and he did his diligence. What sold it once again was with Gilbert & Pardue, this confidential business overview that they did. It basically shows, it lays everything out of what our company does, the financials. From him reviewing that, and then he did fly down from South Carolina, and we did have a meeting, and showed him the facility and of course the operations, what was going on. I think he felt a comfort there to where he was ready to go ahead and proceed and move on it.

John Warrillow:

Got it. If you could do one thing differently through the whole sale process, what might you have a mulligan on or a do-over?

Tom Farinacci II:

My biggest hangup when I was putting this business up for sale, because of the competitiveness of your competitors was I was very leery to sell to someone local. Even though, yes, of course, they signed a nondisclosure and then you open up your books, and you basically opened up your books to whatever your contracts amounts are or what you’re mowing around. So, that was a big hangup for me, so originally, I did tell my broker, “I don’t want you to market this anywhere local.”

Tom Farinacci II:

Now, looking back, I maybe probably would have changed that and said, “Okay, open it up to everyone in the market to see what we could get out there.” Because it did take a while to sell. We had the business up for sale for close to two years by the time it closed.

John Warrillow:

Wow.

Tom Farinacci II:

Yeah.

John Warrillow:

Okay. What was that like, the two-year stretch?

Tom Farinacci II:

It was actually fine. My business was not a business in distress. My business was making great money, I was just ready to move on. I wanted to spend more time with the kiddos and do something maybe more in a consulting role to where I have more free time and it was fine. I didn’t really stress out about it too much because the business was making profitable margins and we were just trucking along.

John Warrillow:

And were you worried at all that either your employees would find out or your customers would find out that the business was for sale?

Tom Farinacci II:

Yeah, that’s always a big, big factor because once again, here you have change and you have these now 35 employees, and a lot of them were like family to me. I knew their kids’ names and you try to have a little bit of intricate part with your employees. That is a tough thing to keep under wraps. I did eventually share with my office employees, the ones that are working inside of the office that what the scenario was approximately once we did have it under contract. It was supposed to originally close April 1st, so I did let them know by beginning of March what was going to be happening, and they all seemed to be okay and on board with it because I wasn’t going to just dump them and leave. Obviously, I was going to be there to be sure the transition time was going to be good for them.

Tom Farinacci II:

But we did not tell any field employees at that time, nor did we tell any customers.

John Warrillow:

And what was their reaction when you did tell them?

Tom Farinacci II:

The employees, it’s always a sense of apprehension. What’s next? Who is the new owner? What is going to happen? But we did not, from what I can remember, I don’t think we lost one employee, which was a true blessing. Customer-wise, we sent out a notification letter and with that I think we lost a few, couple, four or five residentials, that’s about it. We did not lose any commercials right off the bat there. As a matter of fact, some of my old time residentials, residential customers I had for 25, 28 years called me and said, “You know, Tom, I’m so proud of you. I remember when you were so young and you had that drive and you had that vision, and you made it a reality that you sold, and congratulations to you.”

Tom Farinacci II:

And that made me feel really good at heart because it’s been a long road. It’s been 30 years that I’ve been in this business, and I had a vision, and I actually completed it.

John Warrillow:

Well, I’m looking at you on screen and those who are watching Tom on YouTube will know this, that 30 years, you must have started pretty young.

Tom Farinacci II:

Yes, I did.

John Warrillow:

I’m guessing you were a teenager.

Tom Farinacci II:

Yes, I was.

John Warrillow:

Pushing a lawnmower.

Tom Farinacci II:

I was pushing a lawnmower at 15 years old. Yes, sir. And that’s what somebody told me. Hey, I’m 45 years old and blessed enough to say I’m kind of semi-retired, but yeah, I had that drive ever since I was young to go out there. There’s always a way to make a dollar if you’re willing to work. If you can work and you got two able hands to do it, you can do it.

John Warrillow:

Yep.

Tom Farinacci II:

It can be done and I’m a true testament to that.

John Warrillow:

Yes, you are. For sure. I’d love to just sort of spend a minute on life after the sale. So, remind me when the deal closed?

Tom Farinacci II:

The deal closed . This was an interesting one because the deal closed June 1st. Originally, it was supposed to close April 1st, and then COVID hit.

John Warrillow:

Right.

Tom Farinacci II:

So, this was kind of a new for all of us, the broker, the buyer, the seller. What are we doing here? We were blessed enough as a maintenance company, we were listed as essential, to go ahead and keep working for the safety and maintenance of properties. So, the potential new buyer did want to come back down to just do another re-visit and couldn’t at that time because of COVID. April, very few people were flying.

John Warrillow:

Yep.

Tom Farinacci II:

So, that April 1st got pushed to May 1st. COVID was still blowing up, so that May 1st got finally pushed to June 1st. And after June 1st, the new owner said, “Okay, this is going to happen. We’re going to make this go.” He was a little apprehensive too because he didn’t know what the COVID effects were going to be financially for us as the business. It didn’t affect us one bit, thank goodness because like I said, 90% of it was regularly scheduled maintenance. The grass was growing in Houston, Texas. You got to cut it every week.

John Warrillow:

Yeah, it’s outside as well, which is [crosstalk 00:43:08]-

Tom Farinacci II:

And it’s outside as well.

John Warrillow:

Yeah.

Tom Farinacci II:

And we still had PPE for our guys wearing masks and wearing gloves. At that time, we were having them wear gloves. And so that worked out okay to where we finally did close on June 1st.

John Warrillow:

Got it. So, it’s been almost four months. We’re recording this at the end of September. What has been the most surprising thing for you in those four months? I’m thinking in particular about sort of emotions you may have felt that you weren’t sort of expecting over the last four months.

Tom Farinacci II:

Emotionally detached from it, yes. I was ready. Some people may have apprehension, I’m sure there has been in the past of people that sold their company and they have just a huge emotional attachment to it, “Oh my gosh, I built this from ground zero.” Which is what I did, but I had a plan implemented really from day one. This is where I want to go and I want to get to the point to where I built a company to where I can turn in, cash in, and sell out to a nationwide company and then move onto something else.

Tom Farinacci II:

So, I already had it in my head that way. On the emotional side, I think I didn’t have any apprehension as for that. A little different for me because I always had my office at my shop location and now that the new owner is leasing that property, I got out of my office over there. So, I was so used to going to a place as an office to where now I’m in a home office. So, this is a little different for me. Yeah.

John Warrillow:

Maybe I should interview your spouse about how she likes having Tom around that much?

Tom Farinacci II:

Yeah. She says, “You got to go back to work, find something.”

John Warrillow:

“Get out of my house.”

Tom Farinacci II:

That’s exactly right, yeah. No, so it’s a little different for me on that aspect too because you got three kiddos coming in and out, or someone comes to the door, dogs are barking, and a few more distractions. So, a little bit different for me, but I do have some plans in the future of where I’m going to go to hopefully I get out of this home office back into another office of mine.

John Warrillow:

Did you have … you mentioned a couple of times that it was your goal to build a business to where it would be attractive to a national acquirer. Did you have a number that you wanted to build your business to that when you achieved that sort of financial number that you were going to sell it? Was that part of your thinking? There was a number in your head?

Tom Farinacci II:

Yeah. Yeah, I just kind of had a set number. I did have a set number in my head and it was to the fact of how big … I was on the cusp of having to bring in another general manager if I grew a little bit more and I didn’t know if I necessarily wanted to take on that extra obstacle. So, I got it to the point to where all the intricacies of the business was basically running itself. I could go away for two to three weeks if I wanted to, the business was going to run itself. So, I got to that point to where I was like, “Okay, I think this is the right medium for me to now go ahead and sell out and then the new perspective owner, if he wants to build it more, bring in another general manager and take this even higher and beyond, he can.”

Tom Farinacci II:

So, that was kind of a driving factor for me with that. I mean, that’s where we got to 10 crews, 35 guys. It was the sweet spot for me to go ahead and sell out.

John Warrillow:

That’s helpful. And the number in your mind, what did that represent? Like if you were to achieve an exit that ticked that box on that number? I guess where I’m going with this is sort of why was that important? What did that number represent to you?

Tom Farinacci II:

The number represented to me to where I, if I had enough money to where I could take some of this money, reinvest, which is what I’m doing into commercial real estate, I already have some other commercial real estate properties, to where I could take a little bit more of that, invest into those, and bring residual income in every month from those properties to where I could do a little extra side work. As for consulting, I wouldn’t mind doing a lot of consulting for service businesses, help them, and still have all that free time to do what I want to do with my family and my kids and my wife.

John Warrillow:

Got it.

Tom Farinacci II:

That was a big driving factor.

John Warrillow:

That’s super helpful. I know people are going to want to reach out. What’s the best way for them to do that? Is there a website you can send people to or do you take LinkedIn connections? What’s-

Tom Farinacci II:

I do have a LinkedIn and I do have a LinkedIn connection. It’s under Tom Farinacci. And also on an email, I’ll open my email out to you as well. It’s Tom, T-O-M, dot Farinacci, F as in Frank A-R-I-N-A-C-C-I @outlook.com.

John Warrillow:

That’s great. Tom, thanks for doing this.

Tom Farinacci II:

Yes, sir. I appreciate it. Thank you for having me.

John Warrillow:

Oh my gosh, my pleasure.

 

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