Navigating Mergers and Acquisitions in the Roofing Industry - PODCAST TRANSCRIPT

Editor's note: The following is the transcript of a live interview with Trent Cotney from Adams and Reese, Bobby Mesmer of RMG Erectors and Constructors, Stephanie TsaTsos and Mike Blumenfeld of MAB Corporate Advisors. You can read the interview below, listen to the podcast or watch the webinar!

Heidi J Ellsworth: And it's a moment. My name is Heidi Ellsworth and this is Coffee Conversations from RoofersCoffeeShop. I am very excited about this conversation today. In fact, it's somewhat of a repeat from last year because it was so popular that we wanted to talk again this year because trust me, it has not slowed down. We wanted to talk about mergers and acquisitions and of course our friends at Adams and Reese and our very dear friend, Trent Cotney brought it all together once again this year. Trent, thank you for being back on the show this year and for sponsoring this Coffee Conversations. It's so important for the industry.

Trent Cotney: Thank you, Heidi. I'm looking forward to today. It's going to be an interesting conversation.

Heidi J Ellsworth: It is. It always is. And we have a whole new panel this year. So before we get into introductions, let's do a little bit of housekeeping. This is being recorded, and it will be available within the next 24 hours. Please share it. This is the kind of information that will help businesses make good decisions and really help the industry overall. We want to have these kind of conversations, so please share it.

Also, we want you to be part of this conversation. Please use the chat. It is open. Megan Ellsworth, our award-winning producer is behind the scenes chatting with you and getting you links as we go through this conversation. So please, let us know who you are, where you're from and what kind of business you have. Commercial, residential, metal, roofing, a combination of both. Let us know. We want to be able to have you as part of that chat as we go along.

So again, a very special thank you to Adams and Reese who is always on the forefront of helping contractors being their advocate. And we know being led by Trent Cotney, that makes everybody feel a lot safer and more comfortable every night. So, Trent, with that, can you please introduce yourself and tell us a little bit about Adams and Reese?

Trent Cotney: Sure. Trent Cotney, I am a partner and construction team leader at Adams and Reese. I focus my practice on representing contractors and trades throughout the industry. Obviously in roofing, I serve as general counsel for NRCA Western States and about 15 other associations. Adams and Reese has hundreds of lawyers, 20 locations, coast-to-coast. On this topic in particular, we have a very large M&A team and I often get involved from the standpoint of high-end construction and advising on that element of it. So happy to be here and thank you again for having us.

Heidi J Ellsworth: Yeah. Trent, you've been through a lot of mergers and acquisitions.

Trent Cotney: Yes, absolutely.

Heidi J Ellsworth: A lot of experience. So we'll get to that. Next I would like to introduce the rest of our esteemed panel. I'm very excited to introduce Bobby Mesmer to his first Coffee Conversations, but definitely not last. Bobby, welcome.

Bobby Mesmer: Hi, how are you Heidi? Thank you. And thanks to the other panelists that I'm here with. This is great today.

Heidi J Ellsworth: Ah, it's so awesome. Can you please introduce yourself and tell us a little bit about your company?

Bobby Mesmer: Yeah. I am the CEO of RMG Erectors and Constructors. We've been in business for about 24 years now. We are the world's largest pre-engineered erection company and soon to be one of the world's only pre-engineered erectors slash componentized manufacturers in the world who control the entire process from engineering and inception all the way through to final warranty.

We're growing extremely rapidly as a company, so we have a lot of insight and growth and are prepping ourselves for potential acquisition sale down the road. And over the years I've sold two other companies that I have formed and started and right now we are a billion-dollar valuation company. So we've really set the mold in our market segment and through what we're doing and changed and we're just excited to be here and share our knowledge and what we can do and helping everybody in the sense of acquisitions and sale and how to get yourself there since we've been through it firsthand in several occasions.

Heidi J Ellsworth: I love it. And you know what, Bobby, this is the first time we've really brought our worlds together between RoofersCoffeeShop and MetalCoffeeShop. You are the premier erecting company out there for metal buildings and so we're very proud today to have you here and also as an influencer on MetalCoffeeShop. So thank you so much.

We are also, I'm very excited to introduce Stephanie. Stephanie has joined RoofersCoffeeshop ecosystem recently and we've been so inspired by her and I'm so excited to be here. Stephanie, can you introduce yourself and tell us a little bit about your company?

Stephanie Tsatsos: Absolutely and thank you Heidi and thank you for the warm welcome. It's just been great to be a part of all of the groups that you've introduced me to and the Rufus community. So, Stephanie Tsatsos, I've been working with entrepreneurs for almost two decades, which is crazy to think and work with companies from all industries and all different sizes from solo entrepreneurs to fast-growing, scaling tech companies to establish family businesses and it's my passion to help companies grow.

So my part in this conversation, I always partner with the entrepreneur who is looking to either grow the business or potentially might not have an exit on the radar, but wants to prepare the business. And I implement EOS, which stands for Entrepreneurial Operating System and many folks have partnered with implementers and are running on EOS and are seeing what that can do for their business. But it is my core focus. It's all I do now today, and work with clients nationally, live on the West Coast and just enjoy helping companies get traction with EOS. Thank you for including me today.

Heidi J Ellsworth: Oh, love it, love it. So excited to have you here. We are huge EOS fans here at RoofersCoffeeShop, so super exciting.

And finally, I am really excited to welcome Mike Blumenfeld. Mike, I met you at a trade show and was blown away with what you and Jim are doing with Omnia, so please introduce yourself and let us know about Omnia and all of your activities.

Mike Blumenfeld: Okay, great. Thanks Heidi. Thanks for having me. I'm super excited to be here. I have been doing investing and helping entrepreneurs my entire life and career. I spent about 23 years on Wall Street, and in a moment of midlife crisis about 11 years ago, I put out my own shingle and opened MAB Corporate Advisors, which is an Atlanta-based mergers and acquisitions advisory practice. Our big claim to fame was in 2016, we sourced and closed the biggest acquisition in flooring and interior finishes. It was called Artisan Design Group. It was two companies out of Texas that merged together with the goal of doing a buy and build strategy and kind of rolling out the market, if you will. We did 23 acquisitions for them on the buy side over the next five years and grew the company. It started at a hundred million in 2016. It is now a 2.2 billion dollar company.

It's changed hands once over the seven years we've been doing it. And just to give you an idea of how things can work when you do it with the right partners, the original investors there have realized in unrealized returns of about 12 times on their invested capital since the original transaction. So that worked really well. As that was slowing down, I decided to look at other avenues of building materials that might make sense to do something similar. Stumbled upon roofing, got excited about the possibilities there. Spent a year trying to meet people in the roofing industry and seeing private equity firms and contractors and whatnot. I ultimately ended up sponsoring the Best of Success show at the end of 2022 where I met my partner Jim Zeminski. Jim is a 40-year veteran of the space. Most people know him. If you don't know him, he's done everything in building materials from selling windows to building and selling a giant siding company.

And he also ran Able Mr. Roof out of Columbus, Ohio for seven years, taking it from 100 million to 200 million. He and I partnered in a company called BZR Advisors. We both saw what was going on in the space and we thought with his background and my background together, we had a pretty good formula for selling a private equity partner on how we think this should be done. We subsequently held a pretty decent-sized process where we interviewed with a lot of different private equity partners, potential partners. We ultimately chose CCMP out of New York and created Omnia Exterior Solutions.

Omnia is a corporate entity where we'll be buying all different kinds of roofing and contracting companies. We started with our first deal in May of last year. We've done seven since then, and we've got three more under LOI. So Omnia is the corporate entity and we expect to do, we'll probably do at least as many acquisitions this year as we've done to date. So, we're excited about the space and I look forward, our goal is to really help educate folks on how the process works, what PE looks for when they're looking at companies like this and how they value your business.

Heidi J Ellsworth: Excellent. Thank you. Jim is amazing and I can say several of the Omnia companies are also our club members, so thank you for that. It is amazing. So let's get started. First of all, I want to say thank you, everyone in the chat. Good morning. I'm seeing you all there and it's just great to have you in here. Please, comments, questions as we go along. We're going to set some of the groundwork right now and we're going to start with Mr. Trent Cotney. Trent, what are you seeing with current market trends driving the M&A activities in the roofing industry? I mean, it was crazy last year. Tell us, is it just as crazy or even more this year?

Trent Cotney: Yeah, so it's kind of interesting. Last year was nuts, right? I mean, that's where we really saw the crust and I didn't really know what 2024 would look like, primarily because of increased interest rates and cost of money has gone up. But I got to tell you, I haven't really seen a slow-down. I mean everything's a go, at least what I have seen. A lot of consolidation. I think you're starting to see a little bit of a shift in the buyers that are out there at this point. I think a lot of the low-hanging fruit has already been grabbed. So I think there's a different type of buyer than I maybe saw in '23, but overall, I think it's still a very, very strong market.

Heidi J Ellsworth: Yeah. Mike, you seeing the same thing?

Mike Blumenfeld: Yeah, I think this all started with HVAC being a huge success, and then you had PE firms looking for the next HVAC and you had one of the original roll-ups trade in '23. So, I think things got really frothy in '23, which there was a lot of demand and not as much supply out there. What we've seen this year is a lot more companies coming to market, so some of them are hiring advisors, so we get inbound calls of people who are looking to do something and have hired someone to help them do something. The reality is, depending on whose numbers you use, there's 40 to 60,000 independent roofing companies out there. I think really only about 130 some odd have traded hands or joined partners so far. So there's still a lot to be done and a lot of runway, and there's still a lot of interest out there.

Heidi J Ellsworth: Yeah. And Bobby, what are you seeing on the metal side in your world?

Bobby Mesmer: Yeah, the business is strong. I mean, the economy is strong with it, and if you know how to go and get the work, the work is out there to get. So anybody who's looking to scale a company or grow a company, there's plenty of work out there. You just have to be willing to go after it and increase your market. That's what we're seeing. And from an investment standpoint, it's interesting because being in this business basically all my life and now having this business for 24 years, I remember a time where banks and investors didn't want to touch construction. It was literally, it was the devil's curse. Nobody wanted to go near it. And now to see what's going on in the market and that equity and private equity and venture capital are out there for construction because they see the value of a good ran company, that's exciting.

It's exciting in the business, it's exciting for everybody and it's exciting for people who are looking to start a business because it means that if you're going to do it correctly, it means that you have a future. And then if you scale correctly, you have the ability to sell, right? So yeah, I mean there's plenty of work. It's really, the market is good for that. And different market segments. We're a national company, so year over year we see different trends in different areas where the North East will be extremely busy, but the North Central will be dead slow. But we're seeing consistency right now throughout the country in its work, in the work areas. So you just have to be willing to go get it.

Heidi J Ellsworth: Yeah. Wow. And Stephanie, as you're working with contractors and companies out there, what are you seeing? I mean, are they talking about, do you hear a lot of talk about I'm getting into position?

Stephanie Tsatsos: They are. They are. And it would kind of echo what everyone has shared is just that there's a lot of interest in the industry coming from private equity. And I had one company that was probably a midsize roofing company, fairly decent size. They said they're getting 40 to 50 outreaches a month from the industry. And so there's a lot of interest and it's for those very reasons. Yeah, it's just a healthy space. And so lots of really positive activity.

Heidi J Ellsworth: It's funny, when you say that I get emails because people think we're a roofing company, so I'm getting emails all the time saying, "Oh, do you want to sell? Will you talk to us?" All of this kind of stuff. I'm like, "You should do a little bit of research and see who you're talking to first." And I hear a lot of people who are getting that same thing.

Bobby Mesmer: Lure them in Heidi, tell them. Be like, "Come on. Yeah, I'm ready to sell. Let's go."

Heidi J Ellsworth: Bring it in, let's go.

Stephanie Tsatsos: That is definitely out there too.

Mike Blumenfeld: I'll cross you off my list, Heidi.

Heidi J Ellsworth: Okay.

Mike Blumenfeld: I think realistically-

Heidi J Ellsworth: Mike, I've been waiting for that phone call.

Mike Blumenfeld: Yeah, there's just so many. It's really different than any space I've ever worked in in that there's so many different groups. Not only are there 28 private equity firms that already own something in roofing, you've got probably at least that many, if not double that amount of advisory firms who realize that private equity is interested in the space. So they're calling these guys, they're calling contractors. You've got people that work at the private equity firms calling the contractors directly and then you have certain folks who all they do is make introductions and get a limited amount of financial information and try to pair you up with somebody and they're calling all these folks as well. So, it really creates a snowstorm and it's one of the few areas that's working right now as Trent alluded to, with the rising cost of interest rates, roofing and contracting in general is recession-resistant, particularly roofing.

I mean, if you've got a leaky roof, you got to fix it. So they private equity raised a ton of money in '20 and '21 and those that haven't put it to work, they typically have to give it back to their investors. So they're looking for things that are recession-resistant that they can buy in this high interest rate environment and still make work. And roofing is something that everybody has zeroed in on as this is recession-resistant, this makes sense, let's go after this.

Bobby Mesmer: It's never going to stop raining.

Heidi J Ellsworth: It's never going to stop raining.

Mike Blumenfeld: Another [inaudible 00:17:28] is undefeated as some of our members say.

Heidi J Ellsworth: And the weather's only getting more wild. So there's more. I mean, right now, I'm sure there's people on this call right now who are looking out their windows going, "Holy cow," with the storms that are going through the Midwest. Trent, as you are representing contractors and having them come and talk to you. We wanted to talk about what kind of buyers are out there because we keep talking about private equity, which everybody knows about, but I don't know if everyone really understands the different types of opportunities, buyers that are out there. What are you seeing?

Trent Cotney: Yeah, so it's all over the board, and I think the reason why roofing is so attractive is for the same reasons that we've kind of heard, there's relatively low barriers to entry. I mean, there are some barriers. Depending on where you're working, there's licensure and other things and it's easily scalable and it's resilient and strong. So it's an attractive option for a lot of people that are trying to get into the market. So you see private equity, everything from venture capital to growth equity to buyouts to you name it.

One of the things that I've started seeing a lot more of here recently is consolidation. And that is where contractors are looking to add onto their existing geographic range or they're looking to add on complementary type businesses or they're looking to expand in some form or fashion. And then what we've always had, obviously in any construction business, there's still a large portion of companies that are generational. So you'll have what I call business succession planning type activity, where it's a transfer to either an existing employee or owner or maybe the next generation and figuring out how to kind of navigate that.

But as we said, everything's on fire right now. It hasn't changed. It's still incredibly busy. And honestly, I'm not seeing really a slowdown in any area in the US. I think it's pretty much strong everywhere.

Heidi J Ellsworth: And Bobby, we talked about this the other day, but I think this is so interesting that you are actually looking to purchase companies right now. And so there are a lot of different types of buyout options.

Bobby Mesmer: Yeah, there are, and it depends on which way you're going. So as a company, we're in a scaling mode, so we're trying to scale up in the next 36 to 48 months, we want to be a billion dollars in gross revenue. That's our goal, and we're on track to hit that. But in order to do that, and we're setting that tone because we're also in a sell mode with where we're going because we want to sell in the next eight years, we know that. That's our track. But at the same time, it's also the way we're setting ourselves up. So we're in an acquisition mode to help us with the sell that we're going to do. And so it's a strategy. And so we're looking at other companies to supplement ourselves to say, "All right, we're going to go and we're going to cherry-pick and acquire these companies." And what are we acquiring them for? You have to be realistic. We're really acquiring their contracts and their assets, which is their employee base.

We're bringing them into the fold, they're working with a much bigger company. So yeah, we're moving in that direction ourselves. So it's funny because working on both sides of the fence to line yourself up for sale, but then you're also acquiring, people are like, "Wait a minute, what are you doing? Why would you do that?" But there is a good strategy if you have that ability to do that within your organization. It really creates sustainability. And I think Trent and Mike would agree with that. It depends on where you're going and what you're doing.

And that succession that Trent talks about, that's an important thing too, because sometimes you get to the point where you don't want to make, that's where you have to consult with people like Trent and Mike. You got to talk to people and have an understanding and say, "Hey, here's where I'm at. Where should I go? What should I do? Should I scale up a little bit? Or does it make sense for me just to unload now?" There's a lot to consider. There really is.

Heidi J Ellsworth: Yeah. So, Mike.

Mike Blumenfeld: Yeah, I would just say I'd agree with that. I think every private equity group out there has a different strategy and different goal in mind. So if you look at Omnia, for example, our partners at CCMP, they're going to exit in three to five years. They're a year into it. So now it's in two to four years, they're going to exit. It'll be similar to an SRS model. So I think everybody's familiar with SRS. Home Depot just announced they were buying them a couple of weeks ago, but SRS has been owned by four different private equity firms during their history and they built a huge company.

But when you look at the three big distributors, they each do it a different way. SRS does a private equity model. ABC is privately owned and Beacon is a public company that trades on the exchange. So they all approach it in a different way. They all still do a buy and build strategy. And the same thing with private equity firms. Some of our competitors plan on not doing a transaction for 10 to 15 years. They're trying to build a much larger scale company. So everybody will have a different view about what they want to do. The common themes are they think they can build scale, they think they can find synergies and they can integrate these companies and sell it for a multiple of what they invested into it. So that's what they're all ultimately trying to do.

Heidi J Ellsworth: So really, just to kind of put a definition on this, you could be getting offers from a roofing company two counties over who wants to expand, or two states, who knows, who wants to expand into your area with no private equity in there. It's just an expansion model. And then you also have the private equity where you're going to have to make some decisions there on how that model works too, Mike. And so there's things to be thinking about and getting advisors and Stephanie, as you're looking at that from planning situation with a company, you really need be able to talk about all the different ways that you might sell or that exit planning.

Stephanie Tsatsos: Yeah. And I think what's really important is that you've got the right team because it's a big decision, a once in a lifetime decision likely for many entrepreneurs. So people on the other side of the table might do this many times throughout their career, but it's a once in a lifetime decision on the other side.

So I think the team is important. Folks like those that we've got on the call would be really important. And then there are a lot of things you want to do in the business to help prepare for organic growth. And that's the kind of work that I do that helps if that exit is on the horizon helps prepare the business for it.

Heidi J Ellsworth: Or if they even want to just have the business prepared.

Stephanie Tsatsos: I was just going to say, a lot of times companies will go through this process and they'll be like, "Gosh," kicking themselves. I should have done this years ago. Why did I wait? And so do it now. Get your business healthy now. Whatever system you're using, use a system, get it healthy now. You won't regret it.
Heidi J Ellsworth: And so Stan Robinson, good morning Stan, just sent a note and says, "I have 40 emails foldered in my inbox," with people sending him emails. So I want to-

Stephanie Tsatsos: Oh boy.

Heidi J Ellsworth: Go ahead.

Stephanie Tsatsos: Oh no, sorry, go ahead.

Heidi J Ellsworth: Oh, I was going to say I want to share this slide that Mike sent over because I think this is going to be something that everybody is going to be really looking at and talking about of how do we take this to that next step. So Mike, how should I think about selling my business? We just talked about that. Can you talk through this slide a little bit?

Mike Blumenfeld: Absolutely. I won't do it the justice that my partner Jim does because he created this formula, but essentially, everybody's formula is different for themselves. So if you look at this, what everybody hears about is the multiple of the selling price of the business. And if you sell your business, chances are, you're going to get a really good price and you're going to make a lot of money on that front end, but it really depends on what your goals are for you and your people that work with you and helped you get there. So when we talk about multiple and selling price, everybody has a different model that they use and the prices are sometimes drastically different from different buyers. So whatever you assign to that is a percentage. And then the next thing you're thinking about is, well, what's the expected multiple or sell price on the next term?

So what we're referring to there is, like I mentioned, our partners at CCNP, they're probably going to exit in two to four years. So how much are they going to make on that? As part of our model, everybody's invested in Omnia stock. So everybody that does a deal with Omnia rolls 25% of their proceeds into shares, they're the exact same shares that CCMP owns. They're all one class of stock. So there's not different stock for different people. We all own the same thing. We also provide options or performance shares to keep employees of those organizations. Because we want them to be owners as well. And we want everybody in the organization who's a key person to have skin in the game. When we think about that second multiple, it's kind of like I mentioned with my flooring deal, ADG, those guys have realized an unrealized gains of 12 times on their money.

The first group that did the deal sold it in two years and made three times their money. So that money was realized return in two years’ time. So that's kind of what we're talking about here is what does that next turn of the business look like? Because most private equity firms are going to have an exit strategy. And it's going to revolve doing another deal to either a bigger private equity firm, or in SRS's case, a public company.

And then the last slide is something a lot of people don't think about. I mean the last bucket here, and it's really, really important. And that's who are you going to be working with and living with for the next three to five years? Is this going to be one of those private equity firms that's going to call you every month and ask you why you used 30 paper clips this month where you only needed 25 last month? Are they going to be that much into your business? Because some people have a model like that. Some people are trying to build scale, cut costs, leverage suppliers, get the most EBITDA they can as quickly as they can and flip it. They're not really building businesses.

And that's one of the biggest problems that some people have seen. And that's why some of the froth has come out of the industry is because some of the other first groups that came to market really didn't integrate these companies. They didn't build an integrated company, they just accumulated a lot of partners that were part of it, but they couldn't push a button and say, "Hey, tell me what the financials look like for the organization." That sort of thing. And it's also what the culture of that environment is. We've seen lots of entrepreneurs sell their businesses and go get on a boat in Florida and leave the business to run, who cares? And the people that are there running these businesses are devastated because they didn't get anything in the deal and they're required to run this business. So we saw a lot of folks leave some of these initial roll-ups because they weren't happy. And that's a real key for us.

Certain firms are so busy building scale, they don't really get to know the people or build a culture. And we really focus on the only way to become part of Omnia is to talk to Jim or I, and we're the first gatekeepers. And if we don't think you fit culturally, I don't care how good your business is, you're not going to be part of Omni. We're looking for people who are interested to collaborate, who want to learn, who are curious, who don't think, they're all successful. And the way you do something in Florida may be different than somebody who does it in California, but you might be able to learn something new from the way that person does it and you might be able to benefit from it. And that's what we're trying to build. Everybody's formula, you can put in what's important to you here and then help you determine which partner makes the most sense for you. If you're 68 years old and want to quit, your multiple or selling price is going to be a whole lot higher percentage than the rest.

Heidi J Ellsworth: Sorry, I didn't mean to interrupt you.

Mike Blumenfeld: No problem.

Heidi J Ellsworth: I was just like, that is so important. I think that last box of 50% of what you want to do, where you're at in your career, where are your employees and what they're doing and Bobby, I know you, when you're looking to acquire in your segment, you're more absorbing the businesses.

Bobby Mesmer: Yeah. So for me it's more you're absorbing that. So I mean, we still look at things very much the same way. I mean, we approach it, we try to follow a model of private equity because we know that it works, but because it's a private purchase, it's a company buying a company, the factors change a lot. But we still look for a lot of the same things, the milestones that we want to see, the finances that we want to see, the way you operate your company. We still hit all of those, right? And you have to, because you have to know that you're making a sound investment. So it's very key critical of the certain points.

And again, and I would say to everybody listening, don't get overwhelmed by this. This is a lot of information. Don't get overwhelmed by this. This is where you need to bring in experts who will deal with this for you. This is a once in a lifetime thing. The first company that I sold 15 years ago, I had no idea I was selling it. For me, a big box company, walked through my door and was like, "Hey, we want to buy you." And I'm like, "I'm not for sale." And it was another company that I had started to support this company and I was like, "It's not for sale." And we ultimately ended up selling it, but I had no idea what I was doing. And I'll admit to you, I was terrified, because I'm like, here's this multi-billion dollar organization walking through my door. I think they're going to manhandle me and pound me into dust and I have no idea where to go.

And so for everybody who's listening out there, I think that you need to understand that you have to bring professionals in. And that's what we did. And it made me learn a lot, which then ultimately led to 10 years after that, I sell another company that I had started outside of this company. And so total, I ended up selling over 300 million dollars between two companies, but by the second one, I was a lot smarter. I knew exactly what was going on, I knew what to do. I knew all the language, I knew everything, but I still brought in the same trusted professionals. I certainly didn't handle it on my own. And I think the key thing is, and this goes back to some of Stephanie's stuff is, everybody who's looking to sell, you have to set yourself up to sell. You have to be prepared for it.

A lot of these companies that are out there, especially if we're talking about say roofing companies in this particular sense, these are very independently owned, independently operated companies and a lot of people don't understand or see the value in the proper way to set up your company when you are looking to sell. Because it takes time, because somebody like Mike coming through the door who wants to buy you is looking three years back, five years back, looking at what you did, looking at where every dollar is being spent. I love the paperclip analogy because as things start to run, those questions pop up and you're like, seriously? Yeah, these guys are money counters, man. They want to know what their ROI is. That's the purpose of the purchase. And so setting up appropriately from the start, having a controller in your business, most companies, they don't see the value in the controller.

They're still handling the books themselves and they don't see the value in paying $20,000 or $30,000 a year for an outside accountant to do reviewed financial statements for them and to make sure that their books are set up to make sure that they're operating right, that they're not just taking dividend out of the company and using it as more or less a piggy bank. That's not how you operate a company. And these private equity guys are not going to, it's not sit well with them when you get to that point of sale because you're just not set up right. And it hurts you as a business owner because if you're trying to maximize your sale price, you're not going to be able to do that because you can't maximize an EBITDA because you're not set up for sale.

Bypassing taxes, that's a whole 'nother thing. Everybody looks, small businesses, I don't want to pay taxes, I don't want to pay taxes. Well, the mindset in that is, look, nobody wants to pay taxes, but the proper mindset is the more taxes I pay, that's the more money I made. And that's what you want to show. And the banks want to see that. The private equity guys want to see that. They want to see that you made money and you pay taxes.

And so you have to make sure that you are setting that tone for where you want to go. And it takes more than just six months, eight months, 12 months and Mike said it. It doesn't matter how much money you make or you're making, oh, I'm turning a 30% EBITDA revenue. Well, who cares if your books don't show it properly. It doesn't mean anything to anybody at that point.

Heidi J Ellsworth: That is so true, and I keep thinking, and we've got some great comments in here of understanding what you're getting into. So Trent, I want to come back to you. We talked about this last year, and we really talked about you're seeing it, you're seeing the good, the bad and the ugly with contractors getting good deals, bad deals and really ugly deals. So can you fair warning to everyone out there of what you're seeing and what they should really be watching out for?

Trent Cotney: Yeah, absolutely. So first off, Bobby, Stephanie and Mike are speaking the truth and feel very fortunate to be on this panel because I think our listeners are getting a real-world understanding of how things work. And to echo what Bobby said, most contractors are out there regardless of whether you're roofing, HVAC, structural, doesn't matter what it is, you're out there doing the same thing that I did running a business, right? You're trying to make payroll and you're trying to keep the lights on and you're not as concerned about making yourself look pretty for a potential investor. So the analogy I like to give is, and how do you know this? I had a 2012 Jeep Wrangler that I absolutely love, I took it off-road, it had a lot of rust on it, it was a mess, but it was time to trade it in last year.

So went through the process of cleaning it up, right? I got rid of the rust, put some Rust-Oleum on it, vacuumed the dog hair, did all that stuff to make it look as nice as it could so that when I went to go trade it in, I would get the best value. And that analogy holds true here as well. So the biggest surprise to anyone that is going to sell your business is how awful the due diligence process is. And let me explain what I mean by that. It's awful if you don't prepare, but if you take the time, and Stephanie was mentioning this earlier, if you take the time to really prepare yourself, regardless of whether you want to sell or not and make yourself look like a professional business, it will be much easier. So let me unpack that a little bit. I'm surprised, basic stuff, corporate governance documents, your bylaws, your meeting minutes, your corporate book, do you have that stuff? And you'd be surprised how many very large contractors don't even have that.

Your lease agreements, we spent almost a week and a half trying to hunt titles down for equipment, insurance policies, applicator agreements. So some of you may be doing systems that you've done for 20 years and can't even put your hands on an applicator agreement. They will ask for that, right? If you are in storm or restoration, there's usually a separate due diligence checklist that goes through all of your marketing and advertising to make sure it's compliant.

We just got done with a significant round of analysis of 1009s, everything from 1099 sales reps to labor, sub labor dominates construction. So understanding how that's used, are you paying people in cash, you'd be surprised how that takes so many contractors off guard. It delays the process and it makes it very frustrating. So my advice for listeners is regardless of whether you have any interest in selling whatsoever, make your business look pretty, because you never know what happens. You could go out tomorrow and get hit by a bus and somebody's got to pick it up and either sell it or do something with it. So it goes beyond just maintaining P&Ls and balance sheets. It's about running your business like a business and making it look attractive to others that are out there.

Bobby Mesmer: And Trent, I would just say to that, it's just good business operation. It cleans up the operation. It helps, by being as clean as you're talking about, it makes you, forget about the sell. It makes you a better business operator, even in the sense of when you have to apply for just simply credit with somebody, you're a roofing contractor, you need credit. It makes you better able to operate and it makes you better when you submit a set of financials to ask for a million-dollar credit line with ABC Supply or somebody, they're more inclined to give it to you because you look like you know what you're doing. Perception is everything, everybody.

Trent Cotney: Right.

Heidi J Ellsworth: Yeah, it's so true. And you know what? We're hearing the same thing in the chat where we have Dylan Crow, Dylan, thank you. Just everybody, Renovate Robotics, it's very cool. The next robot on the roof. But he said, one suggestion I thought of that is common in the venture capital industry. Spend a lot of time conducting references on the investors, partners you might work with, speak with people they've invested in, ask for intros. It goes right with the next slide too.

Do your research. I'm just telling you right now, in the roofing industry, everybody knows everybody. It's not six degrees, it's three degrees. So if you're trying to see how it's worked for other people, that is the perfect opportunity. And obviously this panel and Stan pounding into dust is all of their seller's fears, that whole thing. And that goes to this too. Talk to your managers, talk to the owners, managers, talk to the owners. I mean, I love this slide, Mike. This is really getting prepared.

Mike Blumenfeld: Yeah, these are tips just to really, you're getting married, for a short period of time, you're going to be partners with these people. You're going to have to live with who you choose, and the biggest mistake you can make is picking the wrong group. It doesn't matter how much money you get. I was at another event recently where somebody was there on a panel who had sold his business, and worked with a partner two years. He was miserable that entire time, and he left two years after the deal was up, his non-compete was up. He opened up another shop with a partner who used to work with him at the other place, used that guy's name and within two weeks they had 30 people call him from that business trying to come back to them and work with them. Because everybody was miserable there. They picked the wrong partner.

Get references. We give everybody that wants to do a deal with us with the name of everybody that's part of our deal. Call them, ask them questions. Talk to your distributor contacts, in confidence. Just start a conversation. Hey, what do you think about private equity in the space? What's the good part of it, what's the bad part of it? Who do you like working with? Who do you not like working with? One of the things Jim did that was pure genius for us is when we were just getting started, instead of talking to a bunch of contractors, we went and talked to manufacturers. We went and talked to distributors. What do you like about what's happening with private equity in this space? What do you don't like? How can we be better partners? It doesn't have to be one plus one equals two for us and zero for you.

It needs to be one plus one equals three, and we each get one and a half. You need to be collaborative with these folks, and not everybody does it that way. We've heard stories where guys built scale, immediately went to a distributor and said, if you don't match our best deal that we have from this guy, we're going across the street. And you know what? That doesn't always work. Some people, all three companies are great, but they're not always great in your geographic area. So you may be dealing with the best distributor who does the best for you in your area, and you can't switch because you won't be able to get things done.

Heidi J Ellsworth: I think it's so important. And Stephanie, I just want to make sure we catch this because I know with our business at EOS, we have our leadership team and we've had all these conversations. We've had the conversations of what's going to happen, what if we get approached, what do we want to do? I mean, we did a lot of what if planning and, again, going to this, for managers, talk with your owners, understand what the goals are of the business and this is a key part of the VTOs.

Stephanie Tsatsos: That was right where I was headed. It's super, super, super important to kind of do those multiple, the scenario planning, if this, then that. And then get your leadership team super clear on what is that plan if this, then that, right? So love to hear that you're incorporating that in your VTO Heidi.

Mike Blumenfeld: I would add that...

Heidi J Ellsworth: Go ahead, Mike.

Mike Blumenfeld: I would tell your management team, the biggest fear people have is their employees finding out, oh, we're for sale. Everybody's going to leave because employee's biggest fear is what happens to my job? Do I get paid differently? Will I get fired? All that sort of thing. And there's certain PE firms that go about it that way. They're trying to cut costs and trim the fat immediately. That's not our model, but that's a lot of folks model. I think the more knowledge your employees have about what you're trying to do and why you're trying to do it, the better it'll be for your business and the better it'll be for your deal. One of the reasons Trent talks about diligence being so awful is because most owners don't tell anybody and they don't have a whole lot of help. So, you're trying to run your business and sell your business at the same time and you're being stretched too thin.

And the biggest mistake you can make, and that I've seen made is owners take their eye off the ball of the business because they're trying to sell it, and they end up hitting a downturn in the business and all of a sudden, all the buyers are like, "Well, what's wrong with your business? We don't want to buy it now. There's clearly a problem." Well, the problem is, the owner's spending 40 hours a week getting paper together to send to Trent's team or up in the data room. And I think to add on to what he said, go hire, and Bobby said, hire a professional accounting group that knows what they're doing when it comes to generally accepted accounting principles. Most people use their accountant that does their personal taxes. He looks at their books, he rubber stamps them, he tells them how to not pay taxes. And it creates an unreasonable expectation of what your earnings number really is.

I've seen so many people that do it that way. Most people use cash basis accounting instead of accrual. You need to use accrual. That's step number one. Step number two is have somebody professional look at your books. You really have to do that, and get an idea of what your true number is, because an accountant is going to tell you what it is, but they're not going to tell you what it's going to look like under gap. And that number is going to change drastically. I heard about a deal today. We talked to these folks a long time ago. We didn't choose to move forward with them. They thought they had six and a half million dollars in earnings. The quality of earnings that was done on their transaction came back with a two and a half. It could be that different.

Bobby Mesmer: And it goes to, and I'm going to echo all that. So number one, a couple parts, I think Stan in the comments said, "Pounding in the dust is all the seller's fear." You got to remove that fear, first of all, because the private equity groups who are coming in to buy you are not looking to hurt you. And that's the perception. You got to get rid of that perception. If they want to buy you, they see a value in you. They're walking through the door because there's some kind of value that they see. So you need to keep that in mind. Don't shortchange yourself and be like, "Oh my God, these guys are here to destroy me." And that tends to be the common conception.

I talked to a company the other day about buying them, and immediately the conversation ended within 30 seconds of the conversation, because as it started, it's like, "Okay, look, let's just get the front end stuff out of the way. What's your total annual revenue?" "We're three million dollars a year." "And has that been consistent?" "Yeah, we've been doing that for the last five years." "Okay, what do you think your company's worth?" "Oh, my accountant told me I should be able to get 30 million dollars for this company."

And I'm like, "Okay, well, how much, what's your EBITDA?" And they're like, "What's my what?" And I'm like, "Well, what's your EBITDA? How much money do you make before you have to pay taxes? Where are you at?" "Oh, I probably make, I don't know, $500,000. The company makes 500 grand before I got to pay taxes." Well, at a 10 multiplier, you're worth five million. Where are you coming up with 30?

And my point with that is, again, it's misconception. Number one, you're overvaluing what you believe that you're worth, and that's where the people believe they're getting pounded in the dust by somebody who's really just given them facts of the way that the valuation of your company really is, or what it really is. You're not being pounded in the dust. There is a factual matter of what your company is actually worth. And it's numbers. It's nothing more than numbers. And so then that extends upon why you should be dealing with the proper accounting firms. And Mike, I echo Mike extensively with that. Get rid of your accountant who's just a tax guy.

If you have in your mindset that you want to sell in the next five to 10 years, find an accounting firm out there who, there's plenty of accounting firms who have a buy/sell side and they will start to line you up over the next couple years, bringing your books into place like Mike talked about, setting you up on the proper schedules that you should be set up on and maximizing your earnings to maximize your sale. Keep in mind, nobody's here to help you in this. The misconception of being pounded in the dust is because people think their company is worth this when probably half the time it's worth this based on what the actual books and the revenues actually show.

Heidi J Ellsworth: Oh, go ahead Stephanie.

Stephanie Tsatsos: Well, no, I love that Bobby. And the other thing I would add too is just that misconception that if private equity does buy, that people are losing their jobs or that oftentimes they're buying the people, they're buying the culture. That's a beautiful thing, and they recognize that and their role is to help you scale that company. And so your vision that you've shared with your employees, they're helping you bring in the capital to help you get there. So I think oftentimes in this process, of course, it makes a ton of sense that there's going to be a lot of anxiety from your employees, but you cannot over communicate with your employees. So over communicate to the extent that you can. And oftentimes, it's a good thing for the business. And this leads me into some of the things that I do in EOS.

And listen, there are lots of business operating systems. We are one of many. I personally think we're the best just because we are simple and we are complete. But really it's about every business has a million issues. If you can clean up your business, and clean up your business just because it makes it easier to manage and more fun, not because you're necessarily prepping for a sale, it will become an easier business to manage. You're going to have more fun with your people, and the end result is yes, you'll likely be a more valuable and attractive company if you do go down that road.

So there are six key components that when a company implements EOS that really we focus on strengthening and potentially setting you up for this process. And the first is vision. So, vision is very simply getting your leadership team and the rest of your company really clear on where the company's headed long and short term and how you plan to get there and telling them often. So you cannot over communicate your vision. Your people need to know where you're headed because if they know where you're headed and their role in getting you there, they're that more jazzed to do it. And so getting clear on the vision and then sharing that with everybody.

People component, this is huge. This is the biggest opportunity to help with our businesses that we support. And that's making sure that you've got the right structure to get you where you're headed in that vision, and then getting the right people in the right seats. Because a lot of times you'll have the right people, you love them, they fit the culture, but they might be in the wrong seat, and hopefully you can get them in a different seat. And sometimes you've got high performing people, maybe you've got this incredible head of sales, but they're just doing damage culturally.

And sometimes there are tough decisions that we need to make in this process, but right people, right seat, you got to have both. Data, this component is super important, both if you are thinking about a sale, but even if you're just, to help you get traction, to the extent that you can get clear on what those handful of numbers your team needs to be looking at every week to know that you're on or off track, super, super important. And then getting everybody in your company aligned to a measurable, everybody should have a number, and they should know what that is. Not only will it give you visibility into how the company is doing, but people love to feel like they're a part of this journey with you. And so that measurable is important. Issues, huge. Every company has them. We all struggle with our issues, and it's easy to get caught in the day-to-day and just end up sweeping them under the rug.

But clean up your issues, especially if you're prepping for a sale. But just to make your business easier to manage. With EOS, and Heidi, you know this, you're a huge fan. Those issues, they land somewhere on a list. It is all about having an open, honest culture where everyone can raise their hand and say, "We've got an issue, and let's solve this as a team and make it go away forever." So that's the issues component, super helpful, super important. Process, makes a ton of sense, if you're thinking about potentially an exit. But again, just to make your business run more smoothly, we take a really simple approach, really simple entrepreneurial approach. It's let's get clear on what the major core processes are, document 20% of the steps and get everybody following those processes so that anywhere you look in the company, those processes are being followed. And again, if you've got that documented, that's going to go a long way if a buyer is looking at your company.

And then traction, all of this is about bringing the vision down to the ground and getting execution, getting your team on a weekly basis looking at where are we at? Are we on or off track to hit the number, and holding people accountable. And so we do that by living in what we call a 90-day world, which is all about being laser-focused on the quarter to hit that annual target. And then meeting weekly as a leadership team to again, just build accountability, hold people accountable for their part in getting the company there. And so all the work we do is about strengthening these six key components. It's fun work. It will make your company easier to manage, but again, it will put you in a great position if this is something you're thinking about in the future.

Heidi J Ellsworth: And it kind of goes back to exactly what Stan just said, keeping culture within the staff is super important to my entire staff. We have found that the EOS or whatever system you want, whatever kind of leadership you want, builds culture and then puts into place all the steps that you need to be ready, be ready. You don't know in this environment what's going on. This is the fastest hour. I know I say this all the time, but this really honestly was the fastest hour I think I've ever spent. Trent, some key takeaways for everybody out there listening on what they should be doing for M&A's and what they should be doing with all these emails and phone calls and everything that are coming in, what's your recommendations?

Trent Cotney: Yeah. So the first thing that you've got to do is get your mind right. And I'm guilty of that myself, of own businesses. I've sold businesses, and they always say, owners make horrible employees. I didn't know what they meant by that until I became an employee, but the idea is make sure that you've got the right mindset and that you're ready to sell.

And then the next thing is surround yourself with great people like we got today, right? I mean, you've got to have good advisors that are walking you through the process, regardless of whether it's accounting or legal or it's appraisers or it's EOS, whatever it might be to help you walk through the process. Those are going to be the people that you can rely on during the transaction. As was discussed before, if you're getting these inquiries, take a look at them, do your due diligence in advance, kind of look at things, see whether or not it makes sense to communicate with them. If so, then ask the right questions. It should be a mutual negotiation, not a one-sided. And that's kind of how you need to look at it.

Heidi J Ellsworth: Exactly. Wow. We did have a question come in that I think's really important. Darcy started Elite Roofing in '91. "I'm a minority company. I'm thinking about selling. How can I get someone to look at my business? I want to know what to do." Well, Darcy, this is the group. So we will connect you and I am going to say that on RoofersCoffeeShop, we have Consulting Connections where you can get free 30 minute consultation with Trent. You can get a free 30-minute consultation with Stephanie. I can connect you with Bobby and Mike, Mike's already answered. He would love to visit with you about things.

And not self-serving, but I'm just going to say in the RoofersCoffeeShop world, we have a lot of resources that we'll bring to you to help you connect and find out what you want to do and your goals and how to get there. So congratulations on your business and hopefully, we'll be tracking and seeing how you do. Everyone on the panel, thank you so much. I will say this deck is available. There are free resources for EOS. More than happy to talk about that, and again, with Stephanie. But most of all, I want to thank Adams and Reese for sponsoring this. So amazing. Thank you to all of you on the panel. You guys are just, what great wisdom. Thank you so much.

Trent Cotney: Thank you.

Mike Blumenfeld: Thanks for having us.

Stephanie Tsatsos: Absolutely. Thank you.

Heidi J Ellsworth: Thank you. And thank you all for listening. Hey, I do want to let you know on the 24th we're going to have Trent back here for an RLW, and it's going to be on Sub Cruise. So if we're talking about getting your business positioned, Sub Cruise is probably one of the biggest things you need to be looking at as Trent was saying, 1099. So please register and register and join us for that upcoming RLW on the 24th at 11 o'clock.

Also, our next Coffee Conversations is going to be on customer data. So, we all know when we talk to Alexa, our information is being taken somewhere in the net and then we're getting ads coming back at us. How is that working in the roofing industry? How can contractors actually help their customers with a better customer experience? By having the right data ahead of time. That's going to be the conversation, I'm so excited about it. So we will be seeing you all. Again, thank you everybody for being here. Thank you for the day. We will have this available within 24 hours. Share it to everyone, and have a wonderful day. Thank you all for being here.